UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, ~~2006~~2008

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

For the transition period from to .

Commission File No. 001-33050

~~CBRE~~ REALTY FINANCE, ~~INC.~~ CORPORATION

(Exact name of registrant as specified in its charter)

Maryland

30-0314655

(State or other jurisdiction

incorporation or organization)

(I.R.S. Employer of

Identification No.)

185 Asylum Street, ~~37th~~31st Floor, Hartford, CT 06103

(Address of principal executive offices - zip code)

(860) 275-6200

(Registrant’s telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, $.01 Par Value		~~New~~Over-the-Counter ~~York~~Bulletin ~~Stock Exchange~~Board

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 ¨ 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 Act. Yes ¨ 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 ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the 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, or a non-accelerated filer. or a small reporting company. See ~~definition~~the definitions of “large accelerated filer,” ~~and~~ “~~non-~~accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨ Accelerated ~~Filer~~filer ¨ x Non-accelerated filer x¨ Smaller reporting company ¨

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

As of March 2312, ~~2007~~2009, there were 30,~~731~~936,~~342~~533 shares of the Registrant’s common stock outstanding. The aggregate market value of common stock held by non-affiliates of the registrant ~~(30,056,067 shares)~~ at ~~February~~June 2830, ~~2007~~2008, was $~~391~~101,~~029~~421,~~432~~864. The aggregate market value was calculated by using the price at which our common stock was last sold, which was $133.0144 per share on ~~February~~June 2830, ~~2007~~2008.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s Proxy Statement for the ~~2007~~2009 Annual Stockholders’ Meeting towhich beare ~~held~~expected ~~June 6, 2007 and~~ to be filed within 120 days after the close of the Registrant’s fiscal year are incorporated by reference into Part III of this Annual Report on Form 10-K.

~~CBRE~~ REALTY FINANCE, ~~INC.~~CORPORATION

INDEX

		PAGE
PART I
1.	Business	1
1A.	Risk Factors	1912
1B.	Unresolved Staff Comments	4830
2.	Properties	4830
3.	Legal Proceedings	4831
4.	Submission of Matters to a Vote of Security Holders	4831
PART II
5.	Market for Registrant’s Common Equity and Related Stockholders Matters and Issuer Purchases of Equity Securities	4932
6.	Selected Financial Data	5134
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	5336
7A.	Quantitative and Qualitative Disclosures about Market Risk	6951
8.	Financial Statements and Supplemental Data	7353
9.	Changes in and Disagreements with Accountants on Accounting and Financial ~~Disclosure~~Disclosures	~~105~~86
9A.	Controls and Procedures	~~105~~86
9B.	Other Information	~~105~~86
PART III
10.	Directors, Executive Officers of the Registrant and Corporate Governance	~~106~~87
11.	Executive Compensation	~~106~~87
12.	Security Ownership of Certain Beneficial Owners and Management and Related Stock Matters	~~106~~87
13.	Certain Relationships and Related Transactions, and Director Independence	~~106~~87
14.	Principal Accountant Fees and Services	~~106~~87
PART IV
15.	Exhibits and Financial Statement Schedules	~~107~~88
	SIGNATURES

PART I

ITEM 1.

BUSINESS

General

Realty Finance Corporation, formerly known as CBRE Realty Finance, Inc., ~~or the Company,~~ was organized in Maryland on May 10, 2005, as a commercial real estate specialty finance company focused on originating and acquiring whole loans, bridge loans, subordinate interests in whole loans, or B Notes, commercial mortgage-backed securities, or CMBS, and mezzanine loans, primarily in the United States. Unless the context requires otherwise, all references to “we,” “our,” and ~~joint~~“us” ~~venture~~in ~~interests~~this annual report mean Realty Finance Corporation, a Maryland corporation, our wholly-owned and majority-owned subsidiaries and our ownership in ~~entities~~joint ~~that~~venture ~~own~~assets ~~commercial~~and real estate projects. As of December 31, ~~primarily~~ 2008, we also own interests in seven joint venture assets, two of which are consolidated in the ~~United~~consolidated ~~States~~financial statements. We commenced operations on June 9, 2005. We are a holding company ~~that~~and ~~conducts~~conduct our business through wholly-owned or majority-owned subsidiaries.

WeHistorically, ~~are~~we have been externally managed and advised by CBRE Realty Finance Management, LLC, our Manager, an indirect subsidiary of CB Richard Ellis Group, Inc., or CBRE, and a direct subsidiary of CBRE Melody & Company, or CBRE/|Melody. As of December 31, ~~2006~~ 2008, CBRE|Melody also owned an approximately 4.65% interest in the outstanding shares of our common stock. In addition, certain of our executive officers and directors ~~and~~owned ~~certain~~an ~~executive~~approximately ~~officers~~2.5% ~~and~~interest ~~directors~~in the outstanding shares of our common stock. The management agreement expired by its terms on December 31, 2008. The expiration of the management agreement ended our affiliation with CBRE and its affiliates. As a result, subsequent to December 31, 2008, we have internalized the operations historically performed by our Manager into our company through the direct hiring of the employees previously employed by our Manager and replacing other functions previously performed or facilitated by CBRE/|Melody, ~~owned~~such anas payroll ~~approximately~~and 4other back office functions, and obtaining standalone insurance coverage.2% ~~interest~~As ina ~~the~~result ~~outstanding~~of ~~shares~~the termination of the management agreement, we will no longer pay any management fees. However, such fees will generally be replaced by costs that had historically been absorbed by our ~~common~~Manager, ~~stock~~primarily compensation and benefit costs. No fees were paid by us in connection with the expiration of the management agreement.

WeOn ~~have~~November 4, ~~elected~~2008, tothe ~~qualify~~30 totrading-day beaverage ~~taxed~~market ascapitalization aof ~~real~~our ~~estate~~common ~~investment~~stock ~~trust,~~fell orbelow ~~REIT~~$25 million, ~~for~~resulting U.in S.the ~~federal~~permanent delisting ~~income~~of ~~tax~~our ~~purposes~~common ~~commencing~~stock ~~with~~from ~~our~~the ~~taxable~~New ~~year ended~~York ~~December 31~~Stock Exchange, ~~2005~~or NYSE. AsOur acommon ~~REIT,~~stock wehas ~~generally~~since ~~will~~been ~~not~~traded bethrough ~~subject~~normal tobrokerage U.channels S.on ~~federal~~the ~~income~~OTC ~~tax~~Bulletin onBoard, ~~that~~or ~~portion~~the ofOTCBB. ~~income~~The ~~that~~OTCBB is ~~distributed~~an toelectronic, ~~stockholders~~regulated ifquotation atservice ~~least~~that displays ~~90%~~real-time ofquotes, ~~the~~last-sale ~~our~~prices, ~~REIT~~and ~~taxable~~volume ~~income~~information isfor ~~distributed~~over-the-counter toequity ~~our~~securities ~~stockholders.~~issued ~~We conduct~~by ~~our~~companies ~~operations~~that soare assubject to ~~not~~periodic befiling ~~regulated~~requirements aswith ~~an investment company under~~ the ~~Investment~~Securities ~~Company~~and ~~Act~~Exchange ~~of 1940~~Commission, asor ~~amended~~the SEC, or ~~the~~other regulatory ~~1940 Act~~authority.

AsOn of December 318, ~~2006~~2008, the ~~net~~NYSE ~~carrying~~filed ~~value~~a Form 25 with the SEC to delist our common stock from trading on the NYSE and to deregister our common stock under the Securities and Exchange Act of 1934, as amended, or the Exchange Act, which became effective on March 9, 2009. Given that we have fewer than 300 holders of record of our ~~investments~~common ~~was~~stock, ~~approximately~~we $1will voluntarily choose to become a non-reporting company, which would suspend our obligation to file periodic reports with the SEC pursuant to the Exchange Act.4 ~~billion~~Our ~~including~~board ~~origination~~of ~~costs~~directors ~~and~~has elected to file Form 15 with the SEC on or around March 16, 2009 to effectuate this change. Eliminating our requirement to make further SEC filings will permit us to reduce expenses associated with compliance efforts as well as listing fees, professional fees, insurance and ~~net~~other ofadministrative ~~repayments~~costs. Currently, ~~and~~we ~~sales~~do not believe the benefits of ~~partial~~being ~~interests~~a inperiodic ~~loans~~reporting company and ~~CMBS~~continuing to make SEC filings justify these significant costs. Upon the filing of the Form 15, ~~with~~we awill ~~weighted~~no ~~average spread~~longer be obligated to 30file periodic reports with the SEC, including Forms 10-~~day~~K, ~~LIBOR~~10-Q ofand ~~329~~8-K. ~~basis~~As ~~points~~a ~~for~~result, management anticipates that our ~~floating~~shares ~~rate~~of ~~investments~~common stock will not be eligible to be traded on the OTCBB and will instead be traded solely on the Pink OTC Markets, or the Pink Sheets. However, we can make no assurances that any broker will make a ~~weighted~~market ~~average~~in ~~yield~~our ofcommon 6stock.~~95%~~ ~~for~~The Pink Sheets is a centralized quotation service that collects and publishes market maker quotes in real time, primarily through its web site, http://www.pinksheets.com. We intend to continue to release unaudited quarterly earnings reports and audited annual financial statements by posting on our ~~fixed~~website ~~rate~~as ~~investments~~well as on the OTC Disclosure and News Service.

~~Our~~We ~~objective~~have iselected to ~~grow~~qualify ~~our~~to ~~portfolio~~be ~~and~~taxed ~~provide~~as ~~attractive~~a ~~total~~real ~~returns~~estate toinvestment trust, or REIT, for U. S. federal income tax purposes commencing with our ~~investors~~taxable ~~over~~year ended ~~time~~December 31, ~~through~~2005. As a ~~combination~~REIT, ofwe ~~dividends~~generally ~~and~~will ~~capital~~not ~~appreciation~~be subject to U. ~~Our~~S. ~~business~~federal ~~primarily~~income ~~focuses~~tax on ~~originating,~~that ~~acquiring,~~portion ~~investing~~of ~~in, financing~~income ~~and~~that ~~managing~~is adistributed ~~diversified~~to ~~portfolio~~stockholders if at least 90% of ~~commercial~~the ~~real~~our ~~estate~~REIT ~~related~~taxable ~~loans~~income ~~and~~is ~~securities~~distributed to our stockholders. ~~Our~~We conduct ~~initial~~our operations so as to not be regulated as an investment ~~focus~~company isunder onthe ~~opportunities~~Investment inCompany ~~North~~Act ~~America~~of 1940, as amended, or the 1940 Act. We also conduct business through our wholly-owned taxable REIT subsidiary, or TRS, RFC TRS, Inc.

We In ~~capitalize~~July on2007, ~~both~~when ~~the~~concerns ~~market~~over ~~knowledge~~the ~~and~~sub-prime ~~insight~~residential ~~provided~~markets bybegan ~~CBRE’s~~impacting ~~domestic~~liquidity and valuations ~~global~~in ~~reach,~~the ~~origination capabilities, broad range of~~ commercial real estate ~~services~~market, ~~servicing~~we ~~platform~~suspended ~~and~~new ~~access~~investment ~~to existing~~activity ~~business~~due ~~relationships,~~to ~~as well as~~ the ~~broad~~uncertainty ~~commercial~~about ~~real~~our ~~estate~~ability ~~experience~~to ofsecure ~~our~~short-term ~~management~~financing ~~team.~~under Werepurchase ~~source~~agreements ~~our~~and ~~investments~~long-term financing through ~~two~~the ~~primary~~use ~~channels:~~of ~~our~~collateralized ~~unique~~debt obligations, ~~relationship~~or ~~with~~CDOs. ~~the~~Although ~~CBRE/Melody~~we ~~origination~~do ~~system,~~not ~~which~~have weany ~~refer to~~direct assub-prime ~~the~~exposure ~~affiliated~~or ~~CBRE~~direct ~~system,~~exposure ~~and~~to the ~~origination~~single ~~capabilities~~family ofmortgage ~~our management team~~market, ~~including~~the ~~their~~factors ~~relationships~~described ~~with~~above ~~borrowers,~~have ~~sellers~~resulted ofin ~~whole~~substantially ~~loans,~~reduced ~~various~~mortgage ~~financial~~loan ~~institutions~~originations and ~~other financial intermediaries~~securitizations, and ~~which~~caused wemore ~~refer~~generalized tocredit ~~as our~~market ~~internal~~dislocations ~~origination~~and ~~system.~~a Ofsignificant ~~our~~contraction ~~approximately~~in $1available credit.4 ~~billion of~~As ~~investments~~a ~~held~~result, asmost offinancial ~~December 31,~~industry ~~2006~~participants, ~~approximately~~including ~~51.7%~~commercial ~~was~~real ~~sourced~~estate ~~through~~lenders ~~the~~and ~~affiliated~~investors, ~~CBRE~~continue ~~system. We expect approximately 40%~~ to ~~60%~~find ofit ~~annual~~difficult ~~production~~ to beobtain ~~sourced~~cost-effective ~~through~~debt ~~the~~capital ~~affiliated CBRE system. In addition, with respect~~ to ~~most~~finance ofnew ~~our~~investment ~~investments,~~activity weor ~~utilize CBRE’s market insight and other services~~ to ~~assist~~refinance ~~our~~maturing ~~underwriting~~debt.

InDuring ~~pursuing~~2008 ~~our~~and ~~objectives~~into 2009, ~~our~~the ~~Manager~~global capital ~~leverages~~markets ~~the~~continued to experience tremendous volatility and ~~infrastructure~~a wide-ranging lack of ~~CBRE~~liquidity. The impact of the global credit crisis on our sector has been acute. Transaction volume has declined significantly, credit spreads for all forms of mortgage debt have reached all-time highs, issuance levels of commercial mortgage backed securities, or CMBS, have ground to a halt, and other forms of financing from the ~~investment~~debt ~~experience~~markets have been dramatically curtailed. Financial institutions still hold significant inventories of unsold loans and CMBS, creating a further overhang on the markets. The continuing dislocation in the debt capital markets, coupled with a slowdown in the U.S. economy, has already reduced property valuations and is impacting real estate fundamentals. These developments can and have impacted the performance of our ~~management~~existing ~~team~~portfolio of assets. Furthermore, the volatility in the capital markets has caused stress to all financial institutions and, our business is ~~including:~~dependent upon these counterparties for, among other things, financing and interest rate derivatives. As we await the credit and capital markets to improve and stabilize, our primary focus has been securing our liquidity by paying down and terminating outstanding short-term repurchase agreements and managing our existing portfolio of assets to minimize credit risks where possible. The current credit and capital market environment remains unstable and we continue to review and analyze the impact on potential avenues of liquidity. We expect credit and capital market conditions to continue to be challenging throughout 2009 and into 2010.

•During 2008, we undertook a process of evaluating strategic and operational initiatives assisted by our financial advisor, Goldman Sachs & Co., or Goldman Sachs. Based on the continued decline in the capital and credit markets which has had a severe adverse impact on our valuations and our ability to obtain financing, management concluded that a sale of our company, merger or other business combination, capital investment or other strategic alternatives at the present time was either not available or was not in the best interest of stockholders. We will continue to explore and evaluate future opportunities as they present themselves, however, our primary focus will remain on maximizing the value of our current $1.2 billion investment portfolio and non-recourse long-term financing in place through our two CDOs. As a result of the rapidly changing and evolving markets that continue to create challenges in our industry and in the general economy, we are experiencing the following: (i) no loan originations or other investment activity, (ii) lower operating margins due to lack of scale, (iii) reduced access to ~~product~~capital, if at all, and ~~market~~if ~~information~~such ~~resulting~~capital ~~from~~is ~~CBRE’s~~available ~~broad~~at ~~relationships~~significantly increased ~~with~~costs, ~~real~~(iv) an ~~estate~~increase ~~owners~~in non-performing loans and ~~developers~~watch list assets, ~~financial~~(v) reduced ~~institutions~~operating cash flows due to breach of CDO covenants and ~~tenants;~~reduced asset base, and (vi) reduced cash available for distribution to stockholders, particularly as our portfolio is reduced by scheduled maturities, prepayments and non-performing loans. Our $1.2 billion investment portfolio has decreased by approximately 26% from December 31, 2007 based on these factors. On December 17, 2008, we announced that our board of directors suspended the quarterly cash dividend in order to increase our liquidity and maintain our financial flexibility.

As we continue to assess the impact of the credit and capital markets on our long-term business strategy, we have been focused on actively managing our existing investment portfolio. As of December 31, 2008, the net carrying value of our investments was approximately $1.2 billion, including origination costs and fees

- 1 -

• and ~~CBRE’s~~net ~~market~~of ~~knowledge~~repayments and ~~insights~~sales ~~gained~~of bypartial ~~the~~interests ~~scope~~in loans and ~~expertise~~CMBS, with a weighted average spread to 30-day LIBOR of ~~its~~311 ~~mortgage~~basis ~~origination~~points for our floating rate investments and a weighted average yield of 7.12% for our fixed rate investments. Our portfolio is comprised solely of commercial real estate debt and equity investments with no sub-prime exposure. We have long-term financing in place through our first CDO issuance, ~~investment~~which ~~sales~~provides approximately $508.5 million of financing with an average cost of 30-day LIBOR plus 50.6 basis points and our second CDO issuance which provides $853.2 million of financing with an average cost of 90-day LIBOR plus 40.6 basis points. Our CDOs contain reinvestment periods of five years during which we can use the proceeds of loan repayments to fund new investments. As of December 31, ~~leasing~~2008, ~~property~~we ~~management~~had approximately 2.3 years and ~~valuation,~~3.3 ~~industry~~years ~~specialists~~remaining in our reinvestment period for our first and ~~research~~second ~~divisions~~CDO, asrespectively. ~~well~~Reinvestment asis ~~its~~not ~~mature~~permitted ~~infrastructure;~~during periods that we are not in compliance with our CDO covenants.

•Liquidity is a ~~market~~measure ~~leading~~of ~~origination~~our ~~platform~~ability ~~through~~to ~~CBRE/Melody~~meet potential cash requirements, ~~the~~including ~~mortgage~~ongoing ~~origination~~commitments to repay borrowings, fund loans and ~~servicing~~other ~~subsidiary~~investments, ofpay ~~CBRE~~dividends, fund debt service and ~~one~~for ofother ~~the~~general corporate ~~largest~~purposes. ~~real~~On ~~estate~~December 31, ~~intermediaries~~2008, inwe ~~the~~had Uapproximately $23.S1 million of unrestricted cash and cash equivalents., ~~with~~We ~~113~~have ~~originators~~long-term financing for 100% of our encumbered portfolio in 36place ~~offices~~through ~~throughout~~our ~~the~~existing UCDOs and mortgage loans.S. asOur primary sources of ~~December~~funds 31for short-term liquidity requirements, ~~2006~~including working capital, distributions, if any, debt service and additional investments, if any, consist of (i) cash flow from operations; (ii) proceeds from our existing CDOs; (iii) proceeds from principal and interest payments on our unencumbered investments; (iv) proceeds from potential loan and asset sales; and, to a lesser extent; (v) new financings or additional securitization or CDO offerings and (vi) proceeds from additional common or preferred equity offerings. We believe these sources of funds will be sufficient to meet out short-term liquidity requirements.

•Due ato ~~seasoned~~continued ~~management~~market ~~team~~turbulence, ~~with~~we ~~significant~~do ~~experience~~not anticipate having the ability in ~~buying~~the near term to access equity capital through the public or private markets or debt capital through warehouse lines, ~~manufacturing~~new CDO issuances, or new trust preferred issuances. We continue to explore equity and ~~financing~~other ~~commercial~~capital ~~real~~raising ~~estate~~options ~~investments,~~as ~~with~~well anas ~~average~~other ofstrategic ~~over~~alternatives 20as ~~years~~they ofpresent ~~experience~~themselves; however, in ~~all~~the event ~~aspects~~we ofare ~~real~~not ~~estate~~able ~~lending~~to successfully secure financing, ~~investment~~we will rely on existing cash on hand, ~~management~~cash flows from operations, ~~finance~~principal payments on our investments, ~~underwriting~~and proceeds from asset and loan sales, ~~origination~~if any, ~~risk~~to ~~management~~satisfy these requirements. If we (i) are unable to renew, ~~capital~~replace ~~markets~~or expand our sources of financing, (ii) are unable to execute asset and ~~structured~~loan ~~finance;~~sales in a timely manner or to receive anticipated proceeds therefrom or (iii) fully utilize available cash, it may have an adverse effect on our business, results of operations and ability to make distributions to our stockholders.

•Our current and future borrowings may require us, among other restrictive covenants, to keep uninvested cash on hand, to maintain a certain portion of our ~~Advisory~~assets ~~Council~~free from liens and to secure such borrowings with our assets. These conditions could limit our ability to do further borrowings. If we are unable to make required payments under such borrowings, breach any representation or warranty in any loan document or violate any covenant contained in a loan document, our lenders may accelerate the maturity of our debt or require us to pledge more collateral. If we are unable to pay off our borrowings in such a situation, (i) we may need to prematurely sell the assets securing such debt, (ii) the lenders could accelerate the debt and foreclose on our assets that isare ~~made~~pledged upas collateral to such lenders, (iii) such lenders could force us into bankruptcy, (iv) such lenders could force us to take other actions to protect the value of 23their ~~CBRE~~collateral ~~executives~~and (v) our other debt financings could become immediately due and ~~key~~payable. ~~CBRE/Melody~~Any ~~originators~~such ~~from~~event ~~around~~would have a material adverse effect on our liquidity, the Uvalue of our common stock and the ability to make distributions to our stockholders.S.

~~Our~~The ~~relationship~~majority ~~with~~of ~~CBRE~~our ~~and~~investments are pledged as collateral for our ~~ability~~CDO bonds and the income generated from these investments is used to ~~capitalize~~fund oninterest obligations ~~its~~of ~~relationships,~~our ~~market~~CDO ~~knowledge~~bonds and the remaining income, ~~reputation~~if any, ~~infrastructure~~is retained by us. Our CDO bonds contain interest coverage and ~~expertise~~asset ~~provides~~overcollateralization covenants that must be met in order for us to receive such payments. If we fail our interest ~~with~~coverage ~~the~~or ~~ability~~asset toovercollateralization ~~identify~~covenants in either of our CDOs, ~~underwrite~~all ~~and~~cash ~~evaluate~~flows ~~investment~~from ~~opportunities~~the CDO (including interest on the bonds we own, distributions on our common and preferred equity and our subordinated management fee) would be diverted to repay ~~execute~~principal and interest on ~~such~~the ~~investments~~outstanding ~~quickly~~CDO bonds and ~~effectively~~we ~~and~~would ~~manage~~not ~~our~~receive ~~assets~~any residual payments until the CDO was back in compliance with such tests. We were in compliance with all such covenants as of December 31, 2008. In ~~addition~~the event of a breach of our CDO covenants that we could not cure in the near term, we ~~believe~~would ~~that~~be required to fund interest on trust preferred securities and other expenses (including compensation expenses) through (i) cash on hand, (ii) income from any CDO not in default, (iii) sale of unencumbered assets or (iv) accessing debt or equity capital markets, if available. We have the ~~market~~ability ~~insight~~to ~~gained~~cure defaults, which would resume normal payments to us, by ~~CBRE~~purchasing ~~through~~non-performing loans out of our CDOs. However, we may not have sufficient liquidity available to do so at such time. In some cases, collateral may be continuing to pay interest but may be considered a defaulted interest for the ~~scope~~purpose ~~and~~of the covenant calculations, such ~~expertise~~as our CMBS in our 2006 CDO, or CDO I, which are considered defaulted interests for the purpose of ~~its~~covenant ~~investment~~calculation ~~sales~~if any rating agency downgrade occurs. To the extent noncompliance continues for an extended period of time, ~~mortgage~~our ~~banking~~ability to continue as a going concern may be jeopardized. At December 31 2008, ~~leasing~~our most restrictive covenants on our CDOs had an interest coverage ratio of 2.21x and 1.22x for CDO I and our 2007 CDO, ~~property~~CDO ~~management~~II, respectively, compared to minimum requirements of 1.21x and ~~research~~1.09x. ~~divisions~~At ~~throughout~~December 31, ~~its~~2008, ~~broad~~our ~~geographic~~most ~~network~~restrictive ~~should~~covenants ~~allow~~on usour CDOs had an asset overcollateralization ratio of 1.15x and 1.10x for CDO I and CDO II, respectively, compared to ~~anticipate~~minimum ~~market~~requirements ~~trends~~of ~~while~~1.12x ~~giving~~and us1.10x. ~~direct~~If ~~access~~we experience an additional $15 million or $500,000 in reductions of collateral in CDO I or CDO II, respectively, due to ~~targeted~~further investment ~~opportunities~~ losses or other factors, we will fail the overcollateralization test for the respective CDO.

We On ~~are~~February 25, 2009, we were notified by the CDO I trustee that we failed the overcollateralization test for CDO I on the February 25, 2009 payment date and, as a ~~comprehensive~~result, ~~provider~~future ofnet ~~real~~cash ~~estate~~flows ~~financing~~from ~~solutions~~CDO ~~capable~~I, ofincluding ~~financing~~approximately $488,000 due on the ~~most~~February 25, 2009 payment date, will be diverted to pay down principal of senior ~~capital~~bond ~~positions~~holders rather than asbeing ~~well~~paid asto ~~subordinate~~us ~~interests~~until ~~and~~such ~~equity~~time ~~participations~~the covenant is back in compliance, if ever. WeAs ~~capitalize~~of February 27, 2009, CDO II was in compliance with the overcollateralization test, however, if an additional $0.5 million in defaults occur, CDO II will also breach the overcollateralization covenant. Management believes it is likely that CDO II will fail the overcollateralization test at some point in 2009, which will result in the cash flows of CDO II (including interest on the ~~opportunity~~bonds we own, distributions on our common and preferred equity and our subordinated management fee) being diverted to ~~offer~~pay ~~innovative~~down principal of senior bond holders, eliminating residual cash inflows paid to us. With both CDOs out of compliance with overcollateralization covenants, we will have minimal incoming cash flows from our primary business and ~~customized~~there ~~financing~~is ~~solutions~~no assurance when or if we will be able to ~~borrowers~~regain compliance with these covenants. ~~Our~~As ~~management~~discussed ~~team~~further ~~has~~in ~~substantial~~“Management’s Discussion ~~experience~~and Analysis of Financial Condition and Results of Operations—Related-Party Transactions,” the breach of the overcollateralization covenant in ~~responding~~either toCDO ~~unique~~provides ~~borrowing~~MBIA ~~needs~~Insurance Corporation, or MBIA, the controlling class of CDO byII ~~customizing~~bondholders, ~~financial~~the ~~products~~ability ~~that~~to ~~are~~terminate ~~tailored~~the existing collateral management agreement, as amended, and to ~~meet~~remove us as the ~~borrowers~~collateral manager of CDO II. We have incurred significant losses since our inception and may incur additional losses in the future as we continue to navigate the difficult issues in the credit and real estate markets. With minimal incoming cash flows, management’s ~~business~~plans ~~objectives~~to fulfill short-term capital requirements include (i) use of $23.1 ~~The~~million ~~combination~~of cash on hand as of ~~flexibility~~December 31, ~~service~~2008 ~~and~~to afund ~~principal~~operating ~~investor~~expenses, ~~relationship~~(ii) senior ~~should~~collateral ~~produce~~management ~~long~~fees, (iii) reduction in administrative costs, as a result of becoming a non-~~term~~reporting company, (iv) reduction in employee headcount, and (v) sale ~~advantageous~~of ~~relationships~~our unencumbered 1515 Market Street LLC joint venture interest, if possible under current market conditions. We believe these sources of funds will be sufficient to meet our liquidity requirements for usat least the next 12 months. We continue to seek and explore partnerships and new business opportunities; however, there is no assurance that such partnerships or business opportunities will be available on favorable terms or at all.

~~Through~~- at2 least the initial term of our management agreement among us, CBRE and our Manager, or our management agreement, our Manager will be solely dedicated to the operations of our company. As of December 31, 2006, all of the employees of our Manager are fully dedicated to the operations of our Manager. Through at least the initial term of our management agreement, we will serve as the exclusive investment vehicle, subject to certain exceptions, sponsored by CBRE that focuses primarily on the acquisition and financing of commercial real estate-~~related~~ ~~loans, structured finance debt investments and CMBS.~~

Unless the context requires otherwise, all references to “we,” “our,” and “us” in this annual report mean CBRE Realty Finance, Inc., a Maryland corporation, and our wholly owned subsidiaries.

~~The~~As ~~following~~of ~~chart~~December 31, ~~illustrates~~2008, ~~the~~our ~~structure~~investment ~~and~~portfolio ~~ownership~~ of ~~our~~approximately ~~company~~$1.2 asbillion ofin ~~December 31~~assets, ~~2006~~including onorigination acosts ~~fully-diluted~~and ~~basis~~fees, and ~~the~~net ~~management~~of ~~relationship~~repayments, ~~between~~sales ~~our~~of ~~Manager~~partial interests in loans, and ~~us.~~loan loss reserves and charge offs, consisted of the following:

(1) Excludes shares of common stock beneficially owned by Mr. Ray Wirta, our chairman, and Mr. Michael Melody, one of our directors, and includes 3,779,595 shares of common stock owned by certain other officers, directors and other employees of CBRE and CBRE/Melody and our Manager.


							Weighted Average
Security Description	Carrying Value			Number of Investments	Percent of Total Investments		Coupon		Yield to Maturity		LTV
	(In thousands)
Whole loans⁽¹⁾	$	843,934		38	61.3	%	5.28	%	5.09	%	72	%
B Notes		218,427		11	15.9	%	5.42	%	5.76	%	52	%
Mezzanine loans		247,437		12	18.0	%	6.36	%	6.38	%	53	%
CMBS		54,620		67	4.0	%	4.76	%	7.20	%	—
Joint venture investments⁽²⁾		11,231		7	0.8	%	—		—		—

Total investments	$	1,375,649		135	100.0	%
Loan loss reserve		(141,065	)

Total investments, net	$	1,234,584

(21) ~~The~~Includes ~~remainder~~originated iswhole ~~owned~~loans, inacquired ~~the~~whole ~~aggregate~~loans ~~by our executive officers~~ and ~~certain~~bridge ~~executives or other employees of CBRE/Melody~~loans.

⁽²⁾	Includes our equity investment in two limited liability companies which are deemed to be VIEs and which we consolidate in our financial statements because we are deemed to be the primary beneficiary of these VIEs under FIN 46R.

The following chart illustrates the structure and ownership of our company during the year ended December 31, 2008 and the management relationship between our Manager and us. The management agreement expired by its terms on December 31, 2008.

LOGO

⁽¹⁾	Excludes shares of common stock beneficially owned by Mr. Ray Wirta, chairman of our board of directors.

⁽²⁾	The remainder is owned in the aggregate by our CEO and certain other employees of CBRE\|Melody

Our Business Strategy

~~Our~~Historically, our business strategy ishas been to~~, over~~ ~~time,~~ generate a diversified portfolio of commercial real estate investments and leverage these investments to produce attractive total returns to our stockholders. WeAs ~~believe~~we ~~that~~continue weto ~~have~~assess ~~access~~the impact toof ~~many~~the ~~investment~~credit and ~~finance~~capital ~~opportunities that~~markets ~~emerge~~on ~~from~~our long-term business strategy, we have been focused on actively managing our ~~affiliation~~existing ~~with~~investment ~~CBRE~~portfolio. We ~~source~~have ~~our~~not ~~investments~~entered ~~through~~into ~~two~~a ~~primary~~new ~~channels:~~investment ~~the~~since ~~affiliated~~July ~~CBRE~~2007. ~~system~~As ~~and~~of December 31, 2008, the net carrying value of our ~~internal~~investments ~~origination~~was ~~system~~approximately $1.2 Webillion, ~~believe~~including ~~that~~origination ~~the~~costs ~~relationships~~and fees and ~~the~~net ~~market~~of ~~insight~~repayments ~~provided~~and bysales ~~our~~of ~~affiliation with~~partial ~~CBRE~~interests ~~combined~~in loans and CMBS, with ~~the~~a ~~broad~~weighted ~~experience~~average spread to 30-day LIBOR of 311 basis points for our ~~management~~floating ~~team~~rate ~~allow~~investments usand toa ~~anticipate~~weighted ~~market~~average ~~trends~~yield ~~and~~of ~~provide~~7.12% afor ~~wide~~our ~~variety~~fixed rate investments. Our portfolio is comprised solely of ~~products~~commercial toreal aestate ~~diverse~~debt ~~borrower~~and ~~base~~equity ininvestments ~~multiple~~with ~~asset~~no ~~classes~~sub-prime exposure. ~~This~~We ~~enables~~have uslong-term tofinancing ~~adjust~~in place through our ~~investment~~first ~~strategy to~~CDO ~~take~~issuance, ~~advantage~~which provides approximately $508.5 million of ~~market~~financing ~~opportunities~~with ~~and~~an ~~structure~~average cost of 30-day LIBOR plus 50.6 basis points and our second CDO issuance, which provides $853.2 million of financing ~~products~~with inan ~~order~~average tocost of ~~meet~~90-day LIBOR plus 40.6 basis points. Our CDOs contain reinvestment periods of five years during which we can use the ~~needs~~proceeds of loan repayments to fund new investments. As of December 31, 2008, we had approximately 2.3 years and 3.3 years remaining in our ~~borrower~~reinvestment ~~clients~~period for our first and second CDO, respectively.

InThe ~~each financing~~ability ~~transaction~~to wemanage ~~undertake,~~our wecredit ~~seek~~and toreal ~~control~~estate asrisks ~~much~~is a ofcritical ~~the~~component ~~capital~~of ~~structure~~our ~~as possible~~success. We ~~generally~~actively ~~seek~~manage toour ~~accomplish~~portfolio ~~this~~by ~~through~~using ~~the~~our ~~direct~~management ~~origination~~team’s ofexpertise ~~whole~~in ~~loans~~understanding ~~and other investments,~~ the ~~ownership~~risk ofcharacteristics ~~which permits a wide variety~~ of ~~syndication~~an investment and, ~~securitization~~wherever ~~executions.~~possible, Byproactively ~~providing~~managing athe ~~single~~credit ~~source~~risk of investments ~~financing~~in toour aportfolio. ~~borrower,~~We wegenerate ~~intend~~income toprincipally ~~streamline~~from the ~~lending~~spread ~~process,~~between ~~give~~the ~~greater~~yields ~~certainty~~on toour ~~the~~assets ~~borrower~~ and ~~retain~~ the ~~portion~~cost of ~~the~~our ~~capital~~borrowing ~~structure~~and ~~that will~~hedging ~~generate~~activities. ~~what~~Future wedistributions ~~believe to be the most attractive~~ and ~~appropriate~~capital ~~total~~appreciation ~~returns~~are ~~based~~not ~~on our risk assessment of the investment~~guaranteed.

~~We intend~~During to2008, ~~diligently~~we ~~grow~~undertook a process of evaluating strategic and ~~manage~~operational ~~our~~initiatives ~~portfolio~~assisted ~~with~~by Goldman Sachs. Based on the ~~objective~~continued ofdecline ~~providing~~in ~~attractive~~the capital ~~total~~and ~~returns~~credit tomarkets which has had a severe adverse impact on our ~~investors~~valuations ~~through~~and our ability to obtain financing, management concluded that a ~~combination~~sale of ~~dividends~~our ~~and~~company, merger or other business combination, capital ~~appreciation~~investment or other strategic alternatives at the present time was either not available or was not in the best interest of stockholders. We ~~generate~~will ~~income~~continue ~~principally~~to ~~from~~explore ~~the~~and ~~spread~~evaluate ~~between~~future ~~the yields~~opportunities onas they present themselves, however, our ~~assets~~primary ~~and~~focus will remain on maximizing the ~~cost~~value of our ~~borrowing~~current $1.2 billion investment portfolio and ~~hedging~~non-recourse ~~activities~~long-term financing in place through our two CDOs. ~~Future~~As ~~distributions~~a result of the rapidly changing and ~~capital~~evolving ~~appreciation~~markets that continue to create challenges in our industry and in the general economy, we are ~~not~~experiencing ~~guaranteed~~the following: (i) no loan originations or other investment activity, ~~however~~(ii) lower operating margins due to lack of scale, (iii) reduced access to capital, if at all, and weif ~~have~~such ~~only~~capital ~~limited~~is ~~operating~~available at ~~history~~significantly increased costs, (iv) an increase in non-performing loans and ~~REIT~~watch ~~experience~~list ~~upon~~assets, ~~which~~(v) reduced ~~you~~operating ~~can~~cash flows due to breach of CDO covenants and a reduced asset base anand (vi) reduced cash available for ~~assessment~~distribution ofto stockholders, particularly as our ~~ability~~portfolio is reduced by scheduled maturities, prepayments and non-performing loans. Our $1.2 billion investment portfolio has decreased by approximately 26% from December 31, 2007 based on these factors. On December 17, 2008, we announced that our board of directors suspended the quarterly cash dividend in order to ~~achieve~~increase our ~~objectives~~liquidity and maintain our financial flexibility.

~~Our~~- ~~ability~~3 to- manage our real estate risk is a critical component of our success. We actively manage and maintain the credit quality of our portfolio by using our management team’s expertise in structuring and repositioning investments to improve the quality and yield on managed investments as well as the information sources of our affiliation with CBRE.

Our Financing Strategy

General Policies. WeOur financing strategy historically focused on the use of match-funded financing structures. This means that we seek to match the maturities and/or repricing schedules of our financial obligations with those of our investments to minimize the risk that we have to refinance our liabilities prior to the maturities of our assets and to reduce the impact of changing interest rates on earnings. As of December 31, 2008, 100% of our encumbered portfolio was match-funded. Over the long-term, we intend to finance the acquisition of our investments primarily by borrowing against or “leveraging” our existing portfolio and using the proceeds to acquire ~~additional~~ additional investments; however, given current credit and capital market conditions, such financing is currently unavailable to us. We may, if available, from time to time utilize proceeds from equity and/or debt offerings or other forms of debt financing. Our leverage policy permits us to leverage up to 80% of the total value of our assets. ~~We anticipate our overall leverage will be between 70% and 80% of the total value of our assets; but our actual leverage will depend on our mix of assets.~~ Our charter and bylaws do not limit the amount of indebtedness we can incur, and our board of directors has discretion to deviate from or change our indebtedness policy at ~~any~~anytime. ~~time~~As of December 31, 2008, 98% of our assets by carrying value are levered. We use leverage for the sole purpose of financing our portfolio and not for the purpose of speculating on changes in interest rates. Our financing strategy focuses on the use of match-funded financing structures. This means that we seek to match the maturities and/or repricing schedules of our financial obligations with those of our investments to minimize the risk that we have to refinance our liabilities prior to the maturities of our assets and to reduce the impact of changing interest rates on earnings.

Warehouse Facilities. WeOver the long-term, we seek to use short-term financing, in the form of warehouse facilities. Warehouse lines are typically collateralized loans made to ~~investors~~borrowers who invest in securities and loans that in turn pledge the resulting securities and loans to the warehouse lender. As of December 31, ~~2006~~2008, we ~~had~~did ~~outstanding~~not ~~obligations~~have ~~under~~a ~~three~~facility ~~master~~in ~~repurchase~~place ~~agreements~~that ~~totaling~~allowed ~~$433.4~~for additional ~~million~~short-term ~~with~~borrowings. As a ~~weighted~~result ~~average~~on ~~borrowing~~the ~~rate~~continued dislocation in the capital and credit markets, it is unlikely that any form of 6warehouse facilities will be available to us in the near-term.~~04%.~~

Collateralized Debt Obligations. ~~For~~We ~~longer~~intend to use long-term ~~funding~~financing, wein ~~intend~~the toform ~~utilize~~of securitization structures, particularly CDOs, as well as other match-funded financing structures, if available. We believe CDO financing structures are an appropriate financing vehicle for our targeted real estate asset classes, because they will enable us to obtain long-term match-funded cost of funds and minimize the risk that we have to refinance our liabilities prior to the maturities of our investments while giving us the flexibility to manage credit risk and, subject to certain limitations, to take advantage of profit opportunities. As of December 31, ~~2006~~2008, we had ~~capitalized~~issued ~~our~~two ~~first~~ CDO ~~subsidiary~~transactions ~~with~~totaling approximately $471.254 billion, which provide attractive long-term financing. As a result on the continued dislocation in the capital and credit markets, there have been virtually no ~~million~~new ofCDO ~~common~~issuances and ~~preferred~~we ~~equity~~are unable to predict when the market will return, to what degree underwriting standards will change and ~~held~~whether ~~$44.25~~or ~~million~~not ofwe ~~debt~~will inhave ~~our~~access ~~CDO~~to ~~subsidiary~~such markets.

Term Debt. We may explore term financing from bank lenders that is secured by commercial real estate loans, securities or properties. We anticipate using secured leverage to enhance returns on investments. However, there is no assurance that such financing will be available.

Preferred Equity. We may explore financing from preferred equity. We anticipate using any preferred equity proceeds to preserve our liquidity and enhance returns on investments. However, there is no assurance that such financing will be available.

Our Investment Portfolio

Our investments target the following asset classes:

•

Whole loans;

•

Subordinated interests in first mortgage real estate loans, or B Notes;

• Mezzanine loans related to commercial real estate that is senior to the borrower’s equity position but subordinated to other third-party financing; and

• Commercial mortgage-backed securities, or CMBS~~; and~~.

•As ~~Joint~~of ~~venture~~December 31, ~~investments~~2008, ~~including~~our ~~joint~~investment ~~venture~~portfolio ~~interests~~(excluding inour ~~entities~~direct ~~that own~~ real estate assets) of approximately $1.2 billion in assets, ~~preferred~~including ~~equity~~origination costs and ~~other~~fees, ~~higher-yielding~~and ~~structured~~net ~~debt~~of repayments, sales of partial interests in loans, and ~~equity~~loan ~~products.~~loss reserves and charge offs consisted of the following:

As of December 31, 2006, our investment portfolio of approximately $1.4 billion in assets consisted of the following:


							Weighted Average
Security Description	Carrying Value			Number of Investments	Percent of Total Investments		Coupon		Yield to Maturity		LTV
	(In thousands)
Whole loans⁽¹⁾	$	843,934		38	61.3	%	5.28	%	5.09	%	72	%
B Notes		218,427		11	15.9	%	5.42	%	5.76	%	52	%
Mezzanine loans		247,437		12	18.0	%	6.36	%	6.38	%	53	%
CMBS		54,620		67	4.0	%	4.76	%	7.20	%	—
Joint venture investments⁽²⁾		11,231		7	0.8	%	—		—		—

Total investments	$	1,375,649		135	100.0	%
Loan loss reserve		(141,065	)

Total investments, net	$	1,234,584

						Weighted Average
Security Description	CarryingValue		Number ofInvestments	Percent of TotalInvestments		Coupon		Yield toMaturity		Loan to Value,or LTV
	(In thousands)
Whole loans(1)	$	729,364	30	53.3	%	6.86	%	6.63	%	67	%
B Notes		150,655	7	11.0	%	9.50	%	9.52	%	76	%
Mezzanine loans		210,855	11	15.4	%	9.53	%	9.16	%	76	%
CMBS		222,333	52	16.2	%	6.29	%	7.47	%	—
Joint venture investments(2)		56,402	7	4.1	%	—		—		—
Total	$	1,369,609	107	100.0	%

⁽¹⁾	Includes originated whole loans, acquired whole loans and bridge loans.

(2) Includes our equity investment in two limited liability companies which are deemed to be variable interest entities, or VIEs, which we consolidate in our audited financial statements because we are deemed to be the primary beneficiary of these VIEs under Financial Accounting ~~Standard~~Standards Board Interpretation No. 46R, or FIN 46R.

Our investment guidelines require us to maintain a geographically diverse portfolio of assets. Our ~~initial~~ investment focus is on opportunities in North America. Our board of directors may change these guidelines or ~~initial~~ investment focus at any time without the approval of our stockholders. As of December 31, ~~2006~~2008, our investment portfolio (excluding our direct real estate assets) consisted of assets primarily located in four regions of the U.S., as defined by the National Council of Real Estate Investment Fiduciaries, or NCREIF, with approximately ~~28.0~~29% of our investments located in the East, approximately ~~21.0~~10% in the South, approximately ~~38.0~~48% in the West and approximately ~~8.0~~7% in the Midwest. The remaining ~~5.0~~6% of our investments ~~are~~were located throughout the U.S. and Aruba.

The following is a more detailed description of each of our target asset classes:

Whole Loans. WeCommercial ~~originate commercial~~ mortgage loans, or whole loans, ~~which~~ are structured to either permit us to retain the entire loan, or to sell or securitize the lower yielding senior portions of the loans and retain the higher yielding subordinate investment or to contribute the entire loan to our CDOs. Typically, borrowers of these loans are institutions and well-capitalized real estate operating companies and investors. These loans are secured by commercial real estate assets in a variety of industries with a variety of characteristics. We ~~anticipate that the typical investment size for our commercial mortgage loans will range between $5 and $100 million. We~~ expect to originate both fixed and floating rate loans ~~with maturities generally ranging from three to ten years~~ and we expect to hold these investments to maturity. Our primary focus initially is commercial properties in the office, retail, hotel, industrial and apartment sectors.

~~We also acquire seasoned loans in the secondary market secured by single assets and portfolios of performing and sub~~-~~performing~~ ~~loans,~~4 ~~originated by third~~-~~party~~ lenders such as banks, life insurance companies and other owners. These loans are secured by commercial properties throughout the U.S. and have maturities ranging between two and ten years. The typical investment size of these loans range up to $100 million, primarily on a fixed rate basis.

If we anticipate selling the senior portion of our commercial mortgage loans, we will fund the purchase of the loan either through or jointly with our TRS. In instances where we originate or purchase the commercial mortgage loans jointly with our TRS, we will retain the subordinate portion for our own account and our TRS will sell the senior portion. If we purchase the commercial mortgage loans through our TRS, the TRS will sell the subordinate piece of the loan to us at fair market value determined based on arms length dealing, and the TRS will sell the senior piece to third parties. Our TRS will be subject to corporate income tax on any taxable gain recognized by it on the sale of loans to us or to third parties and on its other taxable income. If we anticipate holding a commercial mortgage loan for our own account, we will generally fund the purchase of the loan without funding by our TRS. We and our TRS use warehouse facilities to provide short-term funding for our third-party loan purchases.

Subject to maintaining our qualification as a REIT, we also offer bridge loans to borrowers who are seeking short-term capital (that is, less than five years) to be used in the acquisition, construction or redevelopment of a property. Typically, the borrower has identified a property in a favorable market that it believes to be poorly managed or undervalued. Bridge financing enables the borrower to secure short-term financing while improving the property and avoid burdening it with restrictive long-term debt. The bridge loans we originate will be predominantly secured by first mortgage liens on the property. We anticipate that the typical investment size for bridge loans will range between $10 million and $50 million, typically on a floating rate basis.

We expect the stated maturity of our bridge loans to range from one year to five years, and we expect to hold these investments to maturity. We believe our bridge loans will lead to additional financing opportunities in the future, as bridge facilities are often a first-step toward permanent financing or a sale.

As of December 31, 2006, we had invested $729.4 million on a carrying value basis, or 53.3% of our total investments in whole loans, $3.7 million of which are bridge loans and $189.4 million of which are seasoned loans. None of the whole loans or seasoned loans we made investments in were in default at the time of purchase or were in default as of December 31, 2006. However, we may in the future invest in whole loans or seasoned loans that may be in default.

~~Subordinate Interests in Whole Loans (B Notes). We purchase from third parties~~Historically, ~~and may retain from whole loans~~ we ~~originate~~have ~~and~~also ~~securitize~~acquired orseasoned ~~sell,~~loans ~~subordinate~~in ~~interests~~the ~~referred~~secondary tomarket ~~as B Notes. B Notes are loans~~ secured by asingle ~~first~~assets ~~mortgage~~ and ~~subordinated to a senior interest, referred to as an A Note. The~~ ~~subordination~~portfolios of aperforming ~~B Note~~and issub-performing ~~generally~~loans ~~evidenced~~originated by ~~a co~~third-~~lender~~party or participation agreement between the holders of the related A Note and the B Note. In some instances, the B Note lender may require a security interest in the stock or partnership interests of the borrower as part of the transaction. B Note lenders ~~have~~such ~~the same obligations, collateral and borrower~~ as ~~the A Note lender~~banks, ~~but~~life ~~typically~~insurance ~~are~~companies subordinated in recovery upon a default. B Notes share certain credit characteristics with second mortgages, in that both are subject to the greater credit risk with respect to the underlying mortgage collateral than the corresponding first mortgage or A Note. If we originate first mortgage loans, we may divide them, securitizing or selling the A Note and ~~keeping~~other ~~the B Note for investment~~owners. InThese instances where we divide a first mortgage loan, we will fund the origination of the loan either through or jointly with our TRS. If we originate the first mortgage loan jointly with our TRS, we will retain the B Note for investment and our TRS will sell the A Note. If we originate the first mortgage loans ~~through~~are ~~our~~secured TRS, the TRS will sell the B Note to us for investment at fair market value determined based on arms length dealing, and the TRS will sell the A Note to a third party. We may also pay our TRS a fee for the origination services provided by itcommercial ~~for~~properties ~~the~~throughout ~~B Notes we acquire for our loan portfolio. Any fee we pay to our TRS for loan origination will be market-based and consistent with fees that would be earned with~~ the ~~origination of mortgage loans on behalf of third parties~~U. ~~Our TRS will be subject to corporate income tax on any taxable gain recognized by it on the sale of B Notes or A Notes to us or to third parties and on its other taxable income~~S. ~~We believe that the B Note market will continue to grow with the expansion of the commercial mortgage securitization market.~~

~~When~~If we ~~acquire~~anticipate ~~and/or~~selling ~~originate~~the ~~B Notes,~~senior weportion ~~may~~of ~~earn~~our ~~income~~commercial onmortgage ~~the investment~~loans, inwe ~~addition~~would seek to ~~the~~fund ~~interest payable on~~ the Bpurchase ~~Note, in the form~~ of ~~fees charged to~~ the ~~borrower~~loan ~~under~~either ~~that~~through, ~~note~~or ~~(currently~~jointly with, ~~approximately~~our 0TRS.~~25%~~ toIn 1%instances ofwhere ~~the~~we ~~note~~originate ~~amount)~~ or bypurchase ~~receiving~~the ~~principal~~commercial ~~payments~~mortgage inloans ~~excess~~jointly ofwith ~~the~~our ~~discounted~~TRS, ~~price (below par value)~~ we ~~paid~~will toretain ~~acquire~~ the ~~note.~~ ~~When~~subordinate weportion ~~originate~~for aour ~~B Note~~own ~~out~~account ofand aour ~~whole~~TRS ~~loan~~will ~~and~~seek ~~then~~to sell the ~~A Note~~senior ~~through~~portion. ~~our~~If ~~TRS,~~ we ~~will~~purchase ~~have~~the tocommercial mortgage ~~allocate~~loans ~~the~~through ~~basis~~our inTRS, the ~~whole~~TRS ~~loan~~will tosell the ~~two~~subordinate ~~(or~~piece ~~more)~~of ~~components~~the loan to ~~reflect~~us ~~the~~at fair market value ofdetermined ~~the~~based ~~new~~on ~~instruments. Our~~arms ~~TRS~~length ~~may~~dealing, ~~realize~~and athe ~~profit~~TRS onwill ~~the~~seek ~~sale~~to ifsell the ~~allocated~~senior ~~value~~piece isto ~~below~~third ~~the sale price~~parties. Our TRS will be subject to corporate income tax on any taxable gain recognized by it on ~~such~~the ~~sales~~sale asof ~~well~~loans asto us or to third parties and on its other taxable income. If we anticipate holding a commercial mortgage loan for our own account, we will generally seek to fund the purchase of the loan without funding by our TRS. We and our TRS intend to use warehouse facilities, if available, to provide short-term funding for our third-party loan purchases.

~~Our~~Subject ~~ownership~~to ofmaintaining aour ~~B Note~~qualification ~~with~~as ~~controlling~~a ~~class rights may~~REIT, inwe ~~the~~historically ~~event~~have ~~the~~also ~~financing~~offered ~~fails~~bridge loans to ~~perform~~borrowers ~~according~~who toare ~~its~~seeking ~~terms,~~short-term ~~cause~~capital us(that is, toless ~~elect to~~than ~~pursue~~five ~~our~~years) ~~remedies~~to asbe ~~owner~~used ofin the ~~B Note~~acquisition, ~~which~~construction ~~may~~or ~~include~~redevelopment ~~foreclosure~~of ~~on,~~a orproperty. ~~modification of~~Typically, the ~~note.~~borrower Inhas ~~some~~identified ~~cases~~a ~~the~~property ~~owner~~in ofa ~~the~~favorable ~~A Note~~market ~~may~~that beit ~~able~~believes to ~~foreclose~~be poorly managed or ~~modify~~undervalued. Bridge financing enables the ~~note~~borrower ~~against~~to ~~our~~secure ~~wishes~~short-term asfinancing ~~holder~~while ofimproving the Bproperty ~~Note~~and avoid burdening it with restrictive long-term debt. AsThe ~~a result,~~bridge ~~our~~loans ~~economic~~we ~~and~~originate ~~business~~will ~~interests~~be ~~may~~predominantly ~~diverge~~secured ~~from~~by ~~the~~first ~~interests~~mortgage ofliens on the ~~holders~~property ofand ~~the~~we expect Ato ~~Note~~hold these investments to maturity. ~~These~~We ~~divergent~~believe ~~interests~~our ~~among~~bridge ~~the~~loans ~~holders~~will oflead ~~each~~to ~~investment~~additional ~~may~~financing ~~result~~opportunities in ~~conflicts~~the offuture, ~~interest~~as bridge facilities are often a first-step toward permanent financing or a sale.

WeAs ~~anticipate~~of ~~that~~December 31, ~~the~~2008, ~~typical~~we ~~investment~~had ~~size~~invested ~~for~~$843.9 ~~B Notes~~million ~~generally~~on ~~range~~a ~~between~~carrying ~~$10 million~~value ~~and~~basis, ~~$50 million.~~or ~~B Notes~~61% ~~generally have~~of ~~terms~~our ~~matching~~total ~~those~~investments in whole loans. None of the whole loans ~~loan~~we ofmade ~~which~~investments ~~they~~in ~~are~~were ain ~~part,~~default ~~typically~~at ~~three~~the totime ~~ten~~of ~~years~~purchase. ~~and~~However, we ~~invest~~may in ~~both~~the ~~fixed~~future ~~and~~invest ~~floating~~in ~~rate~~whole loans. Weor ~~expect~~seasoned toloans ~~hold~~that ~~B Notes~~may tobe ~~their~~in ~~maturity~~default. WeAs ~~generally~~of ~~structure~~December 31, or2008, ~~acquire~~two ~~B Notes~~ whole loan investments with ~~unilateral~~an ~~foreclosure~~aggregate ~~rights~~carrying value of $57.5 million were on ~~the~~our ~~underlying~~watch ~~mortgage~~list and one whole loan and two bridge loans totaling $20.6 million were non-performing, which are described further in Item 7 “Management’s Discussion and Analysis of Financial Condition— Risk Management” of this report.

AsSubordinate ofInterests ~~December~~in Whole Loans (B 31Notes). Historically, ~~2006~~we have purchased from third parties and have retained, and in the future may retain, from whole loans we ~~had~~originated ~~invested~~and ~~$150~~securitized or sold, subordinate interests referred to as B Notes.7 ~~million~~B Notes onare loans secured by a ~~carrying~~first mortgage and subordinated to a ~~value~~senior ~~basis~~interest, referred to as an A Note. The subordination of a B Note is generally evidenced by a co-lender or 11participation agreement between the holders of the related A Note and the B Note.0% In some instances, the B Note lender may require a security interest in the stock or partnership interests of ~~our~~the ~~total~~borrower ~~investments~~as part of the transaction. B Note lenders have the same obligations, collateral and borrower as the A Note lender, but typically are subordinated in recovery upon a default. B Notes share certain credit characteristics with second mortgages, in that both are subject to the greater credit risk with respect to the underlying mortgage collateral than the corresponding first mortgage or A Note. If we originate first mortgage loans, we may divide them, securitizing or selling the A Note and keeping the B Note for investment. In instances where we divide a first mortgage loan, we will fund the origination of the loan either through or jointly with our TRS. If we originate the first mortgage loan jointly with our TRS, we will retain the B Note for investment and our TRS will sell the A Note. If we originate the first mortgage loans through our TRS, the TRS will sell the B Note to us for investment at fair market value determined based on arms length dealing, and the TRS will sell the A Note to a third party. We may also pay our TRS a fee for the origination services provided by it for the B Notes we acquire for our loan portfolio. Any fee we pay to our TRS for loan origination will be market-based and consistent with fees that would be earned with the origination of mortgage loans on behalf of third parties. Our TRS will be subject to corporate income tax on any taxable gain recognized by it on the sale of B Notes or A Notes to us or to third parties and on its other taxable income.

~~Mezzanine~~When ~~Financing.~~we Weacquire ~~invest~~and/or originate B Notes, we may earn income on the investment, in ~~mezzanine~~addition ~~loans~~to ~~that~~the ~~are~~interest payable on the B Note, in the form of ~~senior~~fees charged to the borrower’s ~~common~~under ~~and~~that ~~preferred~~note ~~equity~~or by receiving principal payments in, ~~and~~excess ~~subordinate~~of tothe adiscounted ~~first~~price ~~mortgage~~(below ~~loan~~par ~~on,~~value) awe ~~property~~paid to acquire the note. ~~These~~When ~~loans~~we ~~are~~originate ~~secured~~a byB Note ~~pledges~~out of ~~ownership~~a ~~interests~~whole loan and then sell the A Note through our TRS, we will have to allocate the basis in the whole loan to the two (or inmore) ~~part,~~components into ~~entities~~reflect ~~that~~the ~~directly~~fair ormarket ~~indirectly~~value ~~own~~of the ~~real~~ ~~property~~new instruments.

~~Mezzanine~~Our ~~loans~~TRS may ~~have~~realize ~~elements~~a ofprofit ~~both~~on ~~debt and equity instruments, offering~~ the ~~fixed~~sale ~~returns~~if in the ~~form~~allocated ofvalue ~~interest payments~~is ~~and~~below ~~principal~~the ~~payments~~sale ~~associated~~price. ~~with~~Our ~~senior~~TRS ~~debt,~~will ~~while~~be ~~providing~~subject ~~lenders an opportunity~~ to ~~participate~~corporate inincome ~~the~~tax ~~capital~~on ~~appreciation of a borrower, if~~ any, ~~through~~taxable angain ~~equity~~recognized ~~interest.~~by ~~Due~~it toon ~~their~~such ~~higher~~sales ~~risk~~as ~~profile,~~well ~~and often less restrictive covenants,~~ as ~~compared to senior loans, mezzanine loans generally earn a higher return than senior secured loans. Mezzanine loans also may include a “put” feature, which permits the holder to sell~~ its ~~equity~~other ~~interest back to~~taxable ~~the borrower at a price determined though an agreed upon formula~~income.

6 Our ownership of a B Note with controlling class rights may, in the event the financing fails to perform according to its terms, cause us to elect to pursue our remedies as owner of the B Note, which may include foreclosure on, or modification of, the note. In some cases the owner of the A Note may be able to foreclose or modify the note against our wishes as holder of the B Note. As a result, our economic and business interests may diverge from the interests of the holders of the A Note. These divergent interests among the holders of each investment may result in conflicts of interest. We expect to hold B Notes to their maturity. We generally structure or acquire B Notes with unilateral foreclosure rights on the underlying mortgage.

As of December 31, 2008, we had invested $218.4 million on a carrying value basis, or 16% of our total investments in B Notes. As of December 31, 2008, one B-Note with a loan balance of $42.8 million is non-performing, which is described further in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Management” of this report.

Mezzanine Financing. Historically, we have invested in mezzanine loans that are senior to the borrower’s common and preferred equity in, and subordinate to a first mortgage loan on, a property. These loans are secured by pledges of ownership interests, in whole or in part, in entities that directly or indirectly own the real property.

Mezzanine loans may have elements of both debt and equity instruments, offering the fixed returns in the form of interest payments and principal payments associated with senior debt, while providing lenders an opportunity to participate in the capital appreciation of a borrower, if any, through an equity interest. Due to their higher risk profile, and often less restrictive covenants, as compared to senior loans, mezzanine loans generally earn a higher return than senior secured loans. Mezzanine loans also may include a “put” feature, which permits the holder to sell its equity interest back to the borrower at a price determined through an agreed upon formula.

We historically have structured our mezzanine loans so that we receive a stated fixed or variable interest rate on the loan. In addition, at times we may also receive a percentage of gross revenues and a percentage of the increase in the fair market value of the property securing the loan, payable upon maturity, refinancing or sale of the property. Our mezzanine loans also generally have prepayment lockouts, penalties, minimum profit hurdles and other mechanisms to protect and enhance returns in the event of premature repayment. Mezzanine loans have maturities that match the maturity of the related mortgage loan but may have shorter or longer terms. We expect to hold these investments to maturity. We expect to hold certain of our mezzanine investments in our TRS.

As of December 31, 2008, we had invested $247.4 million on a carrying value basis, or 18% of our total investments in mezzanine financing. As of December 31, 2008, one mezzanine investment with a loan balance of $18.0 million was on our watch list and two mezzanine loans aggregating $65.0 million are non-performing, which is described further in Item 7 “Management’s Discussion and Analysis of Financial Condition— Risk Management” of this report.

Commercial Mortgage-Backed Securities. Historically, we have acquired CMBS that are created when commercial loans are pooled and securitized. These securities may or may not be rated investment grade by rating agencies. We expect a majority of our CMBS investments to be rated by at least one nationally-recognized rating agency, and to consist of securities that are part of a capital structure or securitization where the rights of such class to receive principal and interest are subordinated to senior classes but senior to the rights of lower rated classes of securities. We intend to invest in CMBS that will yield high current interest income and where we consider the return of principal to be likely.

- 5 -

We structure our mezzanine loans so that we receive a stated fixed or variable interest rate on the loan as well as a percentage of gross revenues and a percentage of the increase in the fair market value of the property securing the loan, payable upon maturity, refinancing or sale of the property. Our mezzanine loans also have prepayment lockouts, penalties, minimum profit hurdles and other mechanisms to protect and enhance returns in the event of premature repayment.

These investments will typically range in size from $10 to $50 million and have terms from two to ten years. Mezzanine loans have maturities that match the maturity of the related mortgage loan but may have shorter or longer terms. We expect to hold these investments to maturity. We expect to hold certain of our mezzanine investments in our TRS.

As of December 31, 2006, we had invested $210.9 million on a carrying value basis, or 15.4% of our total investments in mezzanine financing.

Commercial Mortgage-Backed Securities. We acquire CMBS that are created when commercial loans are pooled and securitized. These securities may or may not be rated investment grade by rating agencies. We also originate CMBS from pools of commercial loans we assemble, in which event we expect to retain the more junior interests. We expect a majority of our CMBS investments to be rated by at least one nationally-recognized rating agency, and to consist of securities that are part of a capital structure or securitization where the rights of such class to receive principal and interest are subordinated to senior classes but senior to the rights of lower rated classes of securities. We intend to invest in CMBS that will yield high current interest income and where we consider the return of principal to be likely.

CMBS are generally pass-through certificates that represent beneficial ownership interests in common law trusts whose assets consist of defined portfolios of one or more commercial mortgage loans. CMBS are secured by or evidenced by ownership interests in a single commercial mortgage loan or a pool of mortgage loans secured by commercial properties. They are typically issued in multiple tranches whereby the more senior classes are entitled to priority distributions from the trust’s income to make specified interest and principal payments on such tranches. Losses and other shortfalls from expected amounts to be received on the mortgage pool are borne by the most subordinate classes, which receive payments only after the more senior classes have received all principal and/or interest to which they are entitled.

The yields on CMBS depend on the timely payment of interest and principal due on the underlying mortgage loans and defaults by the borrowers on such loans may ultimately result in deficiencies and defaults on the CMBS. In the event of a default, the trustee for the benefit of the holders of CMBS has recourse only to the underlying pool of mortgage loans and, if a loan is in default, to the mortgaged property securing such mortgage loan. After the trustee has exercised all of the rights of a lender under a defaulted mortgage loan and the related mortgaged property has been liquidated, no further remedy will be available. However, holders of relatively senior classes of CMBS will be protected to a certain degree by the structural features of the securitization transaction within which such CMBS were issued, such as the subordination of the relatively more junior classes of the CMBS. Historically, we have invested in investment grade and subordinate classes of CMBS, including BBB-rated, BB-rated, B-rated and non-rated classes. We expect to hold CMBS securities to maturity.

WeAs ~~generally~~of ~~invest~~December 31, in2008, ~~investment~~we ~~grade~~had ~~and~~invested ~~subordinate~~$54.6 ~~classes~~million ofon ~~CMBS,~~a ~~including~~carrying ~~BBB-rated~~value basis, ~~BB-rated,~~ ~~B-rated~~or ~~and~~4% ~~non-rated~~of ~~classes.~~our Wetotal ~~anticipate~~investments ~~that~~in CMBS. During the ~~size~~year ofended December 31, a2008, ~~typical~~11 ~~investment~~of inour 67 CMBS byinvestments uswere ~~will~~downgraded beand ~~between~~one ~~$5 million~~was ~~and~~upgraded ~~$50 million,~~by ~~primarily~~nationally onrecognized astatistical ~~fixed~~rating ~~rate~~agencies, ~~basis.~~such Weas ~~expect~~Standard ~~the~~and ~~stated~~Poor’s ~~maturity~~Rating ofService ~~our~~and ~~CMBS~~Fitch ~~securities~~Ratings and Moody’s Investors Services, ~~investments~~Inc. ~~range~~Throughout ~~from~~2008 ~~several~~and ~~months~~2009, tothe upCMBS tomarket 15has ~~years.~~experienced Wesignificant ~~expect~~declines toin ~~hold~~value ~~CMBS~~and ~~securities~~significantly tolower ~~maturity~~trading volumes.

AsJoint Venture Investments. In 2007, we elected to discontinue seeking new joint venture investments in favor of ~~December 31~~focusing on our core whole loan, ~~2006~~B-notes, weMezzanine and CMBS investments. We continue to actively manage our ~~had~~existing ~~invested~~joint ~~$222~~venture portfolio.3 ~~million~~Our onjoint aventure ~~carrying~~investment ~~value~~holdings ~~basis~~involve the development, redevelopment or ~~16.2%~~re-tenanting of ~~our~~all ~~total~~or ~~investments~~a portion of the real estate assets in ~~CMBS.~~the 9retail, office, industrial and multifamily sectors.9% ofThese ~~our~~investments were ~~CMBS~~expected to initially provide a low current dividend or yield, ~~based~~or onno ~~carrying~~current ~~value~~dividend or yield, ~~has~~on ~~been~~our ~~upgraded~~invested ~~and~~equity ~~none~~compared ~~has~~to ~~been~~the ~~downgraded~~dividend byor ~~nationally~~yield ~~recognized~~that ~~statistical~~is ~~rating~~projected ~~agencies,~~upon ~~such~~stabilization ~~as Standard~~of ~~and~~the ~~Poor’s~~underlying ~~Rating~~real ~~Service~~estate assets. Therefore, ~~Fitch~~these assets ~~Ratings~~are ~~and~~likely ~~Moody’s~~to ~~Investors~~have ~~Services,~~a ~~Inc~~dilutive effect on our cash flows and results of operations.

~~Joint~~As ~~Venture~~of ~~Investments. We~~December 31, ~~seek~~2008, towe ~~exploit~~had ~~the~~invested approximately ~~capital~~$77.9 ~~imbalance~~million in ~~the middle-market~~ joint venture ~~equity~~investments ~~market~~which, byafter ~~acquiring~~recognition ~~equity~~of ~~interests~~depreciation, inoperating ~~entities~~losses ~~that~~and ~~own real estate~~impairments, ~~providing~~have ~~financing~~a ~~through~~carrying ~~preferred~~value ~~equity~~of ~~investments~~$11.2 onmillion, aor ~~co-investment~~1% ~~basis~~of ~~with~~our ~~real estate~~total ~~operating~~investments. ~~companies~~Included ~~and~~in ~~acquiring~~this ~~higher-yielding~~total ~~structured~~is ~~debt~~our ~~and~~ equity investment ~~securities.~~in Wetwo ~~anticipate~~limited liability companies that ~~the~~are ~~typical~~deemed ~~investment~~to ~~size~~be ofVIEs ~~our~~that ~~joint~~we ~~venture~~consolidate ~~investments~~in ~~will~~our ~~range~~audited ~~between~~financial $5statements ~~and~~because ~~$15 million.~~we Weare ~~expect~~deemed to ~~hold~~be ~~our~~the ~~private equity~~primary ~~investments~~beneficiary ~~for~~of athese ~~four~~VIEs tounder ~~five~~FIN ~~year period~~46R.

7Other Real Estate-Related Investments. We also may make investments in other types of commercial real estate assets. These may include acquisitions of real property, net leased property, distressed and stressed debt securities, RMBS, CDOs and equity and debt issued by REITs, other real estate companies or repurchase of our own CDO bonds that are outstanding. We have authority to issue our common stock or other equity or debt securities in exchange for property. Subject to gross income and asset tests necessary for REIT qualification, we may also invest in securities of other REITs, or other entities engaged in real estate activities or securities of other issuers, including for the purpose of exercising control over such entities.

We make joint venture investments in entities that directly or indirectly own commercial real estate. Joint venture investments are not secured, but holders have priority relative to common equity holders on cash flow distributions and proceeds of capital events. In addition, preferred holders can often enhance their position and protect their equity position with covenants that limit the entity’s activities and grant us the right to control the property after default. Occasionally, the first mortgage on a property prohibits additional liens and a joint venture structure provides an attractive financing alternative. With joint venture investments, we may become a special limited partner or member in the ownership entity and may be entitled to take certain actions, or cause liquidation, upon a default. Joint venture investments typically are more highly leveraged, with loan-to-value ratios of 85% to 95%.

Certain of our joint venture investments will involve the development, redevelopment or re-tenanting of all or a portion of the real estate assets owned by the joint venture. These investments will initially provide a low current dividend or yield, or no current dividend or yield, on our invested equity compared to the dividend or yield that is projected upon stabilization of the underlying real estate assets. Therefore, these assets may have a dilutive effect on our cash flows and results of operations in the short to intermediate term. If these investments perform according to our expectations, they would be accretive to our cash flow and results of operations once the underlying assets of the joint venture investment are stabilized (which can occur over a six-month to two-year period) or are sold or refinanced (which can occur over a one to four year period). However, there can be no assurance as to the successful performance of these joint venture investments.

As of December 31, 2006, we had invested $56.4 million on a carrying value basis, or 4.1% of our total investments in joint venture investments, which includes our equity investment in two limited liability companies. They are deemed to be VIEs which we consolidate in our audited financial statements because we are deemed to be the primary beneficiary of these VIEs under FIN 46R.

Other Real Estate-Related Investments. We also may make investments in other types of commercial real estate assets. These may include acquisitions of real property, net leased property, distressed and stressed debt securities, RMBS, CDOs and equity and debt issued by REITs or other real estate companies. We have authority to issue our common stock or other equity or debt securities in exchange for property. Subject to gross income and asset tests necessary for REIT qualification, we may also invest in securities of other REITs, or other entities engaged in real estate activities or securities of other issuers, including for the purpose of exercising control over such entities.

Some of these investments may be equity interests in properties with no stated maturity or redemption date, or long-term leasehold interests with expiration dates as long as 40 years beyond the date of our investment. We expect that we would hold these investments for between several months and up to ten years, depending upon the risk profile of the investment and our investment rationale. The timing of our sale of these investments, or of their repayment, is frequently tied to certain events involving the underlying property, such as new tenants or superior financing.

As of December 31, 2006, we had one investment in other real estate-related investments. The investment was in a CDO bond with a carrying value of $4.8 million, which we included in our CMBS carrying amount of $222.3 million.

Sourcing Potential Investment Opportunities

We recognize that investing in our targeted asset classes iscan ~~highly~~be very competitive under normal market conditions, and that we compete with many mortgage REITs, other specialty finance companies, private equity and other discretionary funds and other lenders for profitable investment opportunities. Given this potentially competitive environment, when and if we are actively make new investments, it is important for us to have access to the broadest supply of new investment and finance opportunities, which we refer to as our gross origination flow, so that we can be highly selective in those opportunities that we decide to pursue. WeOur ~~source~~management team’s deep experience in all aspects of real estate lending, investment, capital markets and management provides us with a valuable origination system. Over the years, our management team has developed extensive relationships with borrowers, sellers of whole loans, various financial institutions and other financial intermediaries throughout the U.S. These relationships provide us with a broad range of investment and finance opportunities, including ~~through~~seasoned ~~two~~loans, ~~primary~~purchased ~~channels:~~securities ~~the~~and ~~affiliated~~private ~~CBRE~~equity. ~~system~~The depth and ~~our~~diversity ~~internal~~of these relationships will provide us with investment and finance opportunities across all major product types and markets. As we continue to monitor the ~~origination~~credit ~~system~~and capital markets, to the extent we are able to start making new investments, we will seek to leverage our experience and relationships to create new sourcing opportunities and partnerships.

Affiliated CBRE System. We believe that CBRE/Melody has one of the strongest and most active origination systems in the U.S. CBRE/Melody’s 113 originators are located throughout the major markets and their primary goal is to find the best capital source for their borrowers and clients. CBRE/Melody generated more than $20.7 billion of mortgage loans, joint venture equity, bridge loans, construction loans, net leased finance, whole loan dispositions and other combined real estate transactions in approximately 1,300 transactions in 2006. We believe our affiliation with CBRE and CBRE/Melody is an advantage for us in sourcing, analyzing and managing investments across all of our product types. All of our Manager’s investment professionals have direct and substantial interaction

with sales, leasing and financing brokers within CBRE and CBRE/Melody. As a result, we are introduced to numerous investment opportunities. The volume of potential investments originated through this affiliation allows us to be highly selective about those opportunities we seek to pursue in order to meet our financial and operating objectives. Of our approximately $1.4 billion of investments held as of December 31, 2006, approximately 51.7% was sourced through the affiliated CBRE system.

Our Internal Origination System. Our management team’s deep experience in all aspects of real estate lending, investment, capital markets and management also provides us with a valuable origination system. Over the years, our management team has developed extensive relationships with borrowers, sellers of whole loans, various financial institutions and other financial intermediaries throughout the U.S. These relationships provide us with a broad range of investment and finance opportunities, including seasoned loans, purchased securities and private equity. The depth and diversity of these relationships will provide us with investment and finance opportunities across all major product types and markets.

Our Investment Process

~~Our~~While ~~Manager~~we are not currently making any new investments, our process for evaluating potential investment opportunities employs an active five-step investment process consisting of:

Information Research. ~~Our~~We ~~Manager~~ continuously ~~monitors~~monitor the property, credit and capital markets to adjust ~~its~~our investment strategy seeking to optimize the performance of our portfolio. We believe we have strong research capabilities ~~due~~through ~~to the resources and activities of CBRE. We have~~ access to ~~all property~~ market ~~and economic~~ data ~~research~~ ~~produced~~supplied by ~~CBRE~~third ~~and~~party ~~provided to its clients~~services. In addition, we have direct access to CBRE’s leasing, sales, property management, appraisal and industry specialists, which provides us with additional market and property specific information. We have developed a proprietary database to capture this information and provide our management team with a very effective tool for refining its investment strategies and goals. Our Advisory Council’s input enables us to monitor trends in the marketplace, the financing products available in the market and current borrowers’ needs and demands. We utilize the information provided by CBRE and its affiliates and our Advisory Council as well as a variety of independent sources to refine our strategy. Some of the key elements we generally focus on are:

•

fundamental supply and demand characteristics of markets;

•

performance characteristics of all property types;

•

overall capital flows;

• macro-economic trends and local market;

•

demographic trends;

•

quotes on various structures and products;

•

market makers and leaders;

•

default rates;

•

cap rates; and

•

sales information.

~~Once~~- we6 ~~identify our~~- target markets and borrowers/partners in those markets, we conduct a second level of research including: detailed information on the borrower/partner, leasing and sales comparables by product type in each market, recent financing quotes and market specific capital flows. This approach allows us to focus on investment opportunities that are best for us and fall within our investment guidelines. To limit due diligence costs, all potential investments that fall within our investment guidelines are reviewed by our investment committee, prior to the decision to pursue such an investment, for overall compatibility with our investment portfolio.

Screening and Pursuit of Potential Transactions. When we have identified a potential transaction, we analyze it to determine if the particular investment meets our stated objectives. Each product team, which is headed by a member of our senior management, reviews the potential investment to determine its risk/return profile and how it would fit within our overall portfolio. Our goal is to quickly determine if we should pursue a potential investment. To make the determination at this stage requires a comprehensive review of the materials provided by the borrower concerning itself and its assets, quick analysis of the market in which the investment is located and our own modeling of the property’s projected financial performance.

Should a product team determine that the investment opportunity warrants continued review and resources, the investment is placed on our “Pipeline Report.” Once placed on the report, the product team will prepare a written summary of the transaction for the investment committee. The purpose of the brief is to introduce the opportunity to the investment committee and seek its initial guidance. The brief will include review of the following elements:

• the borrower’s reputation, credit and payment performance;

Once we identify our target markets and borrowers/partners in those markets, we conduct a second level of research including: detailed information on the borrower/partner, leasing and sales comparables by product type in each market, recent financing quotes and market specific capital flows. This approach allows us to focus on investment opportunities that are best for us and fall within our investment guidelines. All potential investments that fall within our investment guidelines are reviewed by our investment committee, prior to the decision to pursue such an investment, for overall compatibility with our investment portfolio.

Screening and Pursuit of Potential Transactions. When we have identified a potential transaction, we analyze it to determine if the particular investment meets our stated objectives. We review the potential investment to determine its risk/return profile and how it would fit within our overall portfolio. Our goal is to quickly determine if we should pursue a potential investment. To make the determination at this stage requires a comprehensive review of the materials provided by the borrower concerning itself and its assets, quick analysis of the market in which the investment is located and our own modeling of the property’s projected financial performance.

When we identify an investment opportunity that warrants continued review and resources, we will prepare a written summary of the transaction for the investment committee. The purpose of the brief is to introduce the opportunity to the investment committee and seek its initial guidance. The brief will include review of the following elements:

•

the borrower’s reputation, credit and payment performance;

•

an initial review of the asset, including market analysis, property valuation, risk assessment and physical examination;

•

consideration of environmental, structural and zoning factors;

•

the proposed transaction structure;

•

initial financial modeling; and

•

initial REIT and 1940 Act compliance.

We believe that this approach allows us to be responsive to ~~the~~ prospective borrowers, clients and partners while enabling us to stay focused on which potential investments will best help us accomplish our goals. Once the investment ~~committee~~ committee agrees to place the prospective investment ~~on its “Pipeline Report~~,” ~~the~~we ~~product team~~ will then begin a more detailed and thorough underwriting and due diligence.

Thorough Underwriting and Due Diligence. Following the decision to pursue an investment, each potential transaction, whether a single asset or a portfolio of assets, is subject to a review of the underlying real estate collateral, the borrower and the associated debt/equity structure. ~~Our~~We ~~Manager~~conduct ~~has developed~~ a rigorous and disciplined review approach that allows us to determine whether a prospective investment can achieve our targeted returns. From a real estate perspective, the due diligence includes, but is not limited to:

•

conducting a thorough analysis, regardless of the recourse nature of a loan, of the borrower’s investment history, reputation, credit history, investment focus and expertise;

•

making site visits to assess the economic viability of the collateral including tenant and overall property viability;

•

reviewing submarket supply and demand and existing and planned competitive properties;

•

reviewing local submarket rental and sales comparables;

•

reviewing issuer and third party valuations and appraisals of the property, if applicable, and the LTV ratio with respect to the collateral;

•

performing in-depth legal, accounting, environmental, zoning, structural analyses of the property and borrower;

•

reviewing the level and stability of cash flow from the underlying collateral to service the mortgage debt;

•

analyzing the availability of capital for refinancing by the borrower if the loan does not fully amortize;

•

reviewing loan documents to determine the lender’s rights, including personal guarantees, additional collateral, default covenants and other remedies as well as the lender’s rights under any intercreditor agreements; and

•

making appropriate modifications to reflect the underlying collateral and borrower credit risk, including requiring letters of credit or other liquid instruments to ensure timely payments and loan to value ratios appropriate for the yield.

Additionally, all investments are considered in the context of their risk and yield profile, reviewing such factors as match-funding and hedging efficiency and overall concentration considerations, such as investment size, product type, tenants, borrower, sector, floating vs. fixed rates and maturity. Our focus is on risk management and understanding the impact of any investment on our investment portfolio prior to closing.

As a result of this extensive real estate review, a cash flow forecast for each collateral property is prepared, and a valuation is assigned. The performance of the respective investment is then forecasted to derive the projected return. Sensitivity analyses are performed in consideration of differing levels of the property’s cash flow, loan losses, variances in the timing of loan payoffs or prepayments, loan extension scenarios and changing interest rates. In all cases, we consider the potential impact on the risk profile of our investment portfolio and the impact on cash flow after we implement financing at the company level, whether in the form of a CDO or some other debt instrument.

10Upon completion of due diligence, we consider the impact of any material findings on the transaction’s risk profile. Once final due diligence is substantially complete, the investment professionals prepare and submit a final investment committee brief to the investment committee.

Investment Committee Approval. The investment committee will review the final investment committee brief and decide to approve or decline the investment. Should the investment be approved, we will move to close the investment or financing with the assistance of legal, accounting, tax and other specialists appropriate for that particular investment.

All transactions are reported to our board of directors. When we make new investments, our investment committee consults with our board of directors and the executive committee of our board of directors to understand and take advantage of the latest available market information and trends. The majority vote (which must include the affirmative vote of our chief executive officer) of all members of our investment committee is required to approve all investments and dispositions, including investments and dispositions of up to $25 million (except for (i) investments and dispositions having credit ratings of “A” or better by a major rating agency, such threshold will be up to $50 million and (ii) with respect to aggregate CMBS investments of up to $15 million having credit ratings of “B” or better and consistent with our operating guidelines, only two members of the investment committee must approve the investment; however, the majority vote of all members of our investment committee will be required to approve aggregate CMBS investments over $15 million). Separate approvals by our executive committee and our board of

- 7 -

~~Upon~~ directors ~~completion~~are not required under the following circumstances. Our executive committee, which consists of ~~due~~Messrs. ~~diligence~~Ray Wirta, our ~~product~~chairman, ~~team~~and ~~considers~~Kenneth J. Witkin, our chief executive officer, president and a director, has the ~~impact~~authority delegated by our board of ~~any~~directors ~~material~~to ~~findings~~authorize ontransactions consistent with our investment guidelines and must approve, by a majority vote (which must include the ~~transaction’s~~affirmative ~~risk~~vote ~~profile.~~of ~~Once~~the ~~final~~independent ~~due~~director), ~~diligence~~investments isand ~~substantially~~dispositions ~~complete,~~aggregating ~~the~~greater ~~investment~~than ~~professionals~~$25 ~~prepare~~million and ~~submit~~up to $50 million (except for investments and dispositions having credit ratings of “A” or better by a ~~final~~major ~~investment~~rating agency, ~~committee~~such ~~brief~~threshold will be greater than $50 million and up to $75 million). A majority of the ~~investment~~members ~~committee~~of our board of directors must approve all investments and dispositions greater than such amounts identified above.

~~Investment Committee Approval~~Closing. The ~~investment~~closing ~~committee~~process ~~will~~is ~~review~~extensive due to the ~~final~~documentation ~~investment~~associated ~~committee~~with ~~brief~~all ~~prepared~~of byour ainvestment ~~product~~products. ~~team~~Non-CMBS ~~and~~closings are ~~decide~~completed, to ~~approve or decline~~ the ~~investment.~~extent ~~Should the investment be approved~~possible, ~~the~~on ~~product~~our ~~team~~own ~~will~~standard ~~move~~documentation. toThose ~~close~~documents ~~the~~are ~~investment~~negotiated orby ~~financing~~us with the ~~assistance~~support of ~~legal,~~one ~~accounting,~~of ~~tax~~our ~~and~~executive ~~other~~vice ~~specialists~~presidents ~~appropriate~~and ~~for~~outside ~~that particular investment~~counsel.

All transactions are reported to our board of directors. Our investment committee consults regularly with our board of directors, the executive committee of our board of directors, our Advisory Council and various CBRE and CBRE/Melody professionals to understand and take advantage of the latest available market information and trends. The majority vote (which must include the affirmative vote of our chief executive officer) of all members of our investment committee is required to approve all investments and dispositions, including investments and dispositions of up to $25 million (except for (i) investments and dispositions having credit ratings of “A” or better by a major rating agency, such threshold will be up to $50 million and (ii) with respect to aggregate CMBS investments of up to $15 million having credit ratings of “B” or better and consistent with our operating guidelines, only two members of the investment committee must approve the investment; however, the majority vote of all members of our investment committee will be required to approve aggregate CMBS investments over $15 million). Separate approvals by our executive committee and our board of directors are not required under these circumstances. Our executive committee, which consists of Messrs. Ray Wirta, our chairman, Michael Melody, a director, David Marks, a director, and Keith Gollenberg, our chief executive officer and president, has the authority delegated by our board of directors to authorize transactions consistent with our investment guidelines and must approve, by a majority vote (which must include the affirmative vote of the independent director), investments and dispositions aggregating greater than $25 million and up to $50 million (except for investments and dispositions having credit ratings of “A” or better by a major rating agency, such threshold will be greater than $50 million and up to $75 million). A majority of the members of our board of directors must approve all investments and dispositions greater than such amounts identified above.

Closing. The closing process is extensive due to the documentation associated with all of our investment products. Non-CMBS closings are completed, to the extent possible, on our own standard documentation, but CMBS and many direct high yield debt investments are on documents specific to that transaction. Those documents are negotiated by our Manager with the support of one of our executive vice presidents and outside counsel. Closing of joint venture or mezzanine investments are similar to the non-CMBS closings noted above. With respect to those investments, because we are investing with a local real estate partner, or are secured by that partner’s interest in the owning entity, there are some documents that will be specific to that transaction.

Asset Management and Servicing

With respect to managing the investments made by us, ~~our Manager~~ (with the assistance of GEMSA Loan Services, L.P., or GEMSA, a joint venture between CBRE|Melody and GE Capital Real Estate) or a third party (as servicer where appropriate) seeks to address the following issues:

• Investment Monitoring. ~~Our~~We ~~Manager~~ actively ~~monitors~~monitor and ~~manages~~manage our investments. Our ~~Manager’s~~ asset managers have been trained to identify asset level risks early and to take measures to mitigate those concerns when possible. Our management team reviews our portfolio quarterly on a formal basis and more frequently, on an informal basis, to consider any “early watch list,” or “watch list,” or “non-performing” assets and determine any appropriate actions and reserve strategies. Assets are managed aggressively through maturity.

•

Cash Collections. When we originate a new loan, we evaluate whether it is appropriate to require a lock box agreement (or cash management account), based on certain criteria, such as the debt service coverage ratio, LTV ratio and quality of sponsorship. As determined appropriate, we will require the borrower to establish a cash management account at a commercial bank acceptable to us. Tenants will be required to deposit all rents, revenues and receipts with respect to the property into the cash management account. Generally, the debt service, loan escrows and reserves are paid from this account, and any balance remaining is remitted to the borrower.

• Collateral Valuation. ~~Our~~We ~~Manager~~are is responsible for determining the value of the collateral property, including an analysis of the condition of the property, existing tenant base, current information and comparable market rents, occupancy and sales. When appropriate, ~~our~~we also conduct an investigation of the borrower to identify other potential sources of recovery, including other non-real estate collateral and guarantees. Our Manager is also ~~conducts~~responsible for reviewing the collateral operating statements on an ongoing basis and within the market in order to accurately track asset value and its cash flow performance.

11• Recovery Strategies. To the extent a default is realized with respect to an investment, we are responsible for recommending and implementing the appropriate recovery strategy in order to produce the highest present value recovery. Our management team’s real estate operating and distressed debt workout management experience put us in a strong position to manage problems that may arise. We may also utilize a special servicer, to manage, modify and resolve loans and other investments that fail to perform under the terms of the loan agreement, note, indenture, or other governing documents. Special servicers are most frequently employed in connection with whole loans, B Notes and first-loss classes of CMBS. For the years ended December 31, 2008, 2007 and 2006, we paid or had payable an aggregate of approximately $250,000, $251,000 and $82,000, respectively, in fees to GEMSA in its capacity as a special servicer to our company.

investigation of the borrower to identify other potential sources of recovery, including other non-real estate collateral and guarantees. Our Manager is also responsible for reviewing the collateral operating statements on an ongoing basis and within the market in order to accurately track asset value and its cash flow performance.

• Recovery Strategies. To the extent a default is realized with respect to an investment, our Manager is responsible for recommending and implementing the appropriate recovery strategy in order to produce the highest present value recovery. Our management team’s real estate operating and distressed debt workout management experience put us in a strong position to manage problems that may arise. We may also utilize a special servicer, which in some instances, where appropriate, may be an affiliate of us, CBRE or CBRE/Melody (including GEMSA), to manage, modify and resolve loans and other investments that fail to perform under the terms of the loan agreement, note, indenture, or other governing documents. Special servicers are most frequently employed in connection with whole loans, B Notes and first-loss classes of CMBS. For the year ended December 31, 2006 and the period May 10, 2005 (inception) through December 31, 2005, we paid or had payable an aggregate of approximately $82,000 and $2,000, respectively, in fees to GEMSA in its capacity as a special servicer to our company.

Our Operating Policies

Our Investment and Borrowing Guidelines. We have adopted general guidelines for our investments and borrowings to the effect that:

•

no investment will be made that would cause us to fail to qualify as a REIT for U.S. federal income tax purposes;

•

no investment will be made that would cause us to be regulated as an investment company under the 1940 Act;

•

no more than 25% of our equity, determined as of the date of such investment, will be invested in any single asset;

•

no more than 25% of our equity, determined as of the date of such investment, will be invested in any single borrower;

•

our leverage will generally not exceed 80% of the value of our assets, in the aggregate;

•

the majority vote (which must include the affirmative vote of our chief executive officer) of all members of our investment committee will be required to approve all investments and dispositions, including investments and dispositions of up to $25 million (except for (i) investments and dispositions having credit ratings of “A” or better by a major rating agency, such threshold will be up to $50 million and (ii) with respect to aggregate CMBS investments of up to $15 million having credit ratings of “B” or better and consistent with our operating guidelines, only two members of the investment committee must approve the investment; however, the majority vote of all members of our investment committee will be required to approve aggregate CMBS investments over $15 million); the majority vote (which must include the affirmative vote of the independent director) of our executive committee will be required to approve investments and dispositions aggregating greater than $25 million and up to $50 million (except for investments and dispositions having credit ratings of “A” or better by a major rating agency, such threshold will be greater than $50 million and up to $75 million); and a majority of our board of directors must approve all investments and dispositions greater than such amounts identified above; and

•

we will maintain a portfolio of geographically diverse assets.

~~Our Manager is required to seek the approval of a majority of the independent members of our board of directors before we engage in a material transaction with our Manager or any of its affiliates.~~ These investment guidelines may be changed by our board of directors without the approval of our stockholders.

In addition:

• we will monitor all multiple asset types, sector markets, and tranches to identify attractive total return investments.;

• our asset allocation will be determined by market conditions and driven by exploitable market inefficiencies on either the asset or structuring side or both.; and

•

we will emphasize the following investment themes:

• high quality investments carefully screened and selected from our ~~numerous~~ origination channels.;

•- ~~disciplined~~8 ~~asset selection and bottom~~-up ~~underwriting.~~

•Table use of asset and liability structuring to lock-in attractive total returns and to minimize risk.Contents

•

disciplined asset selection and bottom-up underwriting;

•

use of asset and liability structuring to lock-in attractive total returns and to minimize risk; and

•

hands on asset management and exit strategy/realization monitoring.

Credit Risk Management. We are exposed to various levels of credit and special hazard risk depending on the nature of our underlying assets and the nature and level of credit enhancements supporting our assets. WeHistorically, ~~originate~~we have originated or ~~purchase~~purchased mortgage loans that meet minimum debt service coverage standards established by us. ~~Our~~We ~~Manager and our executive vice presidents~~ review and monitor credit risk and other risks of loss associated with each investment. In addition, ~~our~~we ~~Manager seeks~~ seek to diversify our portfolio of assets to avoid undue geographic, issuer, industry and certain other types of concentrations. Our board of directors monitors the overall portfolio risk and reviews levels of provision for loss.

Interest Rate Risk Management. To the extent consistent with maintaining our qualification as a REIT, we follow an interest rate risk management policy intended to mitigate the negative effects of major interest rate changes. We minimize our interest rate risk from borrowings by attempting, if possible, to structure the key terms of our borrowings to generally correspond to the interest rate term of our assets.

~~Total~~Hedging ~~Return Swaps~~Activities. ~~Subject~~We toengage ~~maintaining~~in ~~our~~hedging ~~REIT~~transactions ~~qualification,~~to ~~we may~~protect ~~finance certain of~~ our ~~bank~~investment ~~loan~~portfolio from ~~assets~~interest ~~using~~rate ~~total~~fluctuations ~~return~~and ~~swaps.~~other ~~Total~~changes ~~return~~in ~~swaps~~market ~~allow~~conditions. anThese ~~investor~~transactions tomay ~~gain~~include ~~exposure~~interest torate answaps, ~~underlying~~the ~~loan~~purchase ~~without~~or ~~actually~~sale ~~owning~~of ~~the~~interest ~~loan.~~rate ~~In these swaps~~collars, ~~the~~caps ~~total~~or ~~return~~floors, ~~(interest~~options, ~~fees~~mortgage derivatives and ~~capital gains/losses~~other onhedging aninstruments. These ~~underlying~~instruments ~~loan)~~may isbe ~~paid~~used to anhedge ~~investor~~as inmuch ~~exchange~~of ~~for~~the ainterest ~~floating~~ rate ~~payment.~~risk ~~The~~as ~~investor~~we ~~pays~~determine ais ~~fraction~~in of the ~~value~~best interest of ~~the~~our ~~total~~stockholders, ~~amount~~given of the ~~loan~~cost ~~that~~of issuch ~~referenced~~hedges inand the ~~swap~~need asto ~~collateral~~maintain ~~posted~~our ~~with~~qualification ~~the~~as ~~swap counterparty~~a REIT. ~~The~~We ~~total~~may ~~return~~from ~~swap,~~time ~~therefore,~~to istime aenter into ~~leveraged~~interest ~~investment~~rate inswap ~~the~~agreements ~~underlying~~to ~~loan.~~offset ~~Our~~the ~~ability~~potential toadverse ~~invest~~effects inof ~~total~~rising ~~return~~interest ~~swaps,~~rates ~~other~~under ~~than~~certain ~~through~~short-term ~~our~~repurchase ~~TRS,~~agreements. We may beelect ~~severely~~to ~~limited~~have byus ~~the~~bear ~~REIT~~a ~~qualification~~level ~~requirements~~of ~~because~~interest ~~total return~~rate ~~swaps~~risk ~~generally~~that ~~will~~could ~~not~~otherwise be ~~considered~~hedged ~~qualifying~~when ~~assets~~it believes, ~~and~~based ~~will~~on ~~not~~all ~~produce~~relevant ~~qualifying~~facts, ~~income~~that ~~for~~bearing ~~purposes~~such ofrisk ~~the~~is ~~REIT income and asset tests~~advisable.

~~Hedging~~Disposition ~~Activities~~Policies. We ~~engage~~evaluate ~~in hedging transactions to protect~~ our ~~investment~~ asset portfolio ~~from~~on ~~interest~~a ~~rate~~regular ~~fluctuations~~basis ~~and~~to ~~other~~determine ~~changes~~if init ~~market~~continues ~~conditions.~~to ~~These~~satisfy ~~transactions~~our ~~may~~investment ~~include~~criteria. ~~interest rate~~Subject ~~swaps,~~to ~~the~~certain ~~purchase~~restrictions orapplicable ~~sale~~to ~~of interest rate collars~~REITs, ~~caps~~we ~~or floors, options, mortgage derivatives and other hedging instruments. These instruments~~ may because ~~used~~us to ~~hedge~~sell ~~as much of the interest rate risk as~~ our ~~Manager~~investments ~~determines~~opportunistically isand inuse the ~~best interest~~proceeds of ~~our~~any ~~stockholders, given the cost of~~ such ~~hedges~~sale ~~and the need to maintain our qualification as a REIT. We may from time to time enter into interest rate swap agreements to offset the potential adverse effects of rising interest rates~~for ~~under~~debt ~~certain short-term repurchase agreements. Our Manager may elect to have us bear a level of interest rate risk that could otherwise be hedged when it believes~~reduction, ~~based~~additional onacquisitions ~~all~~or ~~relevant~~working ~~facts,~~capital ~~that bearing such risk is advisable~~purposes.

Disposition Policies. Although there are no current plans to dispose of properties or other assets within our portfolio, other than certain assets held in our TRS, our Manager evaluates our asset portfolio on a regular basis to determine if it continues to satisfy our investment criteria. Subject to certain restrictions applicable to REITs, our Manager may cause us to sell our investments opportunistically and use the proceeds of any such sale for debt reduction, additional acquisitions or working capital purposes.

Equity Capital Policies. Subject to applicable law, our board of directors has the authority, without further stockholder approval, to issue additional authorized common stock and preferred stock or otherwise raise capital, including through the issuance of trust preferred securities or senior securities, in any manner and on the terms and for the consideration it deems appropriate, including in exchange for property. We may also raise funds through the retention of cash flow (subject to provisions in the Internal Revenue Code concerning distribution requirements and the taxability of undistributed REIT taxable income). In the event that our board of directors determines to raise additional equity capital, it has the authority, without stockholder approval, to issue additional common stock, preferred stock, trust preferred securities or other senior securities in any manner and on such terms and for such consideration as it deems appropriate, at any time. Our existing stockholders and potential investors will have no preemptive right to additional shares issued in any offering, and any offering might cause a dilution of investment. We may in the future issue common stock in connection with acquisitions.

13We may, under certain circumstances, repurchase our common stock in the open market or through private transactions with our stockholders, if those purchases are approved by our board of directors. Our board of directors has no present intention of causing us to repurchase any shares, and any action would only be taken in conformity with applicable federal and state laws and the applicable requirements for qualifying as a REIT, for so long as our board of directors concludes that we should remain a REIT. We also have the authority to offer equity or debt securities in exchange for property.

We may, under certain circumstances, repurchase our common stock in private transactions with our stockholders, if those purchases are approved by our board of directors. Our board of directors has no present intention of causing us to repurchase any shares, and any action would only be taken in conformity with applicable federal and state laws and the applicable requirements for qualifying as a REIT, for so long as the board of directors concludes that we should remain a REIT. We also have the authority to offer equity or debt securities in exchange for property.

Other Policies. We intend to operate in a manner that will not subject us to regulation under the 1940 Act. Subject to gross income and asset tests necessary for REIT qualification, we may invest in securities of other REITs, other entities engaged in real estate activities or securities of other issuers, including for the purpose of exercising control over such entities. We may engage in the purchase and sale of investments. We also may make loans to third parties. We will not underwrite the securities of other issuers.

Future Revisions in Policies and Strategies. Our board of directors has approved the investment policies, the operating policies and other strategies ~~set~~of ~~forth~~our ~~in this prospectus~~company. Our board of directors has the power to modify or waive these policies and strategies, ~~or amend the management agreement with our Manager,~~ without the consent of our stockholders to the extent that ~~the~~our board of directors (including a majority of our independent directors) determines that such modification or waiver is in our best interest orand the best interest of our stockholders. Among other factors, developments in the market that either affect the policies and strategies mentioned herein or which change our assessment of the market may cause our board of directors to revise its policies and strategies. However, if such modification or waiver involves the relationship of, or any transaction between, us and our Manager or any affiliate of our Manager, the approval of a majority of our independent directors is also required.

Competition

~~Our~~ Over the long-term, growth in our net income depends, in large part, on our ~~Manager’s~~ ability to originate and acquire structured investments with spreads over our borrowing costs. In originating and acquiring these investments, ~~our~~we ~~Manager competes~~compete with other commercial mortgage REITs, specialty finance companies, savings and loan associations, banks, mortgage brokers, insurance companies, mutual funds, institutional investors, private investment ~~banks~~funds, investment banking firms, other lenders, governmental bodies and other entities. In addition, there are numerous commercial REITs with asset acquisition objectives similar to ours, and others may be organized in the future. The effect of the existence of additional REITs may be to increase competition for the available supply of commercial real estate finance products suitable for purchase by us. Some of our anticipated competitors are significantly larger than us, have access to greater capital and other resources and may have other advantages over us.

Conflicts of ~~Interests~~Interest

We ~~are entirely~~have ~~dependent~~not ~~upon~~adopted ~~our~~a ~~Manager~~policy ~~for~~that expressly prohibits our ~~day-to-day~~directors, ~~management~~officers, ~~and~~security doholders ~~not~~or ~~have~~affiliates from having a direct or indirect pecuniary interest in any ~~independent~~investment ~~officers.~~to ~~Ray~~be ~~Wirta,~~acquired ~~our~~or ~~chairman,~~disposed isof ~~the~~by ~~vice~~us ~~chairman~~or any of ~~CBRE~~our ~~and~~subsidiaries ~~Michael~~or ~~Melody,~~in ~~one~~any transaction to which we or any of our ~~directors,~~subsidiaries is ~~the~~a ~~vice~~party ~~chairman~~or ofhas ~~CBRE/Melody~~an interest. ~~Our chairman,~~Nor ~~chief~~do ~~executive~~we ~~officer,~~have ~~chief~~a ~~financial~~policy ~~officer~~that expressly ~~and~~prohibits ~~executive~~any ~~vice~~such ~~presidents~~persons ~~also~~from ~~serve~~engaging asfor ~~officers~~their own account in business activities of ~~our~~the ~~Manager.~~types Asconducted aby ~~result,~~us. weHowever, our ~~Manager,~~code ~~our~~of ~~executive~~business ~~officers~~conduct and ethics contain a conflict of interest policy that prohibits our directors, officers and ~~CBRE~~employees ~~may~~from ~~face~~engaging ~~conflicts~~in ofany ~~interests~~transaction ~~because~~that ~~of our~~involves ~~relationships~~an ~~with~~actual ~~each~~or ~~other.~~apparent ~~These~~conflict ~~conflicts~~of ~~include~~interest ~~the~~with ~~following:~~us.

•Our ~~The~~board ~~management~~of directors ~~agreement~~has ~~between~~adopted usa ~~and~~policy ~~our~~that ~~Manager~~a ~~was~~majority ~~negotiated~~of ~~between~~our ~~related~~board ~~parties,~~of ~~and~~directors ~~the~~will ~~terms,~~be ~~including~~independent ~~fees payable~~directors, ~~may~~and ~~not~~that bea asmajority ~~favorable~~of toour usindependent asdirectors ifmust itmake ~~had~~any ~~been~~determinations ~~negotiated~~on ~~with~~our anbehalf ~~unaffiliated~~with ~~third~~respect ~~party.~~to ~~The interests of these officers and directors in~~ the ~~affairs~~relationships ofor ~~CBRE~~transactions that ~~and~~present ~~CBRE/Melody,~~a ~~respectively, may~~ conflict ~~from~~of ~~time~~interest tofor ~~time~~our ~~with~~directors ~~our~~or ~~interests.~~officers;

• CBRE or its affiliates provide various services to our company, including but not limited to, the provision of certain research, appraisal and servicing activities for which CBRE and its affiliates are provided market rate fees. Although such arrangements are approved by a majority of our independent directors, they are negotiated among related parties.

• We have not adopted a policy that expressly prohibits our directors, officers, security holders or affiliates from having a direct or indirect pecuniary interest in any investment to be acquired or disposed of by us or any of our subsidiaries or in any transaction to which we or any of our subsidiaries is a party or has an interest. Nor do we have a policy that expressly prohibits any such persons from engaging for their own

account in business activities of the types conducted by us. However, our code of business conduct and ethics contain a conflict of interest policy that prohibits our directors, officers and employees from engaging in any transaction that involves an actual or apparent conflict of interest with us.

• The compensation we pay to our Manager consists of both a base management fee that is not tied to our performance and an incentive management fee that is based entirely on our performance. The risk of the base management fee component is that it may not provide sufficient incentive to our Manager to seek to achieve attractive returns to us. The risk of incentive management fee component is that it may cause our Manager to place undue emphasis on the maximization of short-term net income at the expense of other criteria, such as preservation of capital, in order to achieve a higher incentive fee. Investments with higher yield potential are generally riskier or more speculative. This could result in increased risk to the value of our investment portfolio.

• Our Manager does not assume any responsibility beyond the duties specified in the management agreement and will not be responsible for any action of our board of directors in following or declining to follow its advice or recommendations. Our Manager and its officers, managers, employees and affiliates will not be liable to us, our directors or our stockholders for, and we have agreed to indemnify them for all claims and damages arising from, acts or omissions performed in good faith in accordance with and pursuant to the management agreement, except by reason of acts constituting bad faith, willful misconduct, gross negligence, or reckless disregard of their duties under the management agreement. As a result, we could experience poor performance or losses for which our Manager would not be liable.

Conflicts of Interests Resolution Policies

We have implemented several policies, through board action and through the terms of our constituent documents and of our agreements with CBRE, to help address potential conflicts of interest:

• Our board of directors has adopted a policy that a majority of our board of directors will be independent directors, and that a majority of our independent directors must make any determinations on our behalf with respect to the relationships or transactions that present a conflict of interest for our directors or officers.

• Our board of directors has adopted a policy that decisions concerning our management agreement with our Manager, including termination, renewal and enforcement thereof, or concerning any acquisition of assets from CBRE or its affiliates or other participation in any transactions with CBRE or its affiliates outside of the management agreement must be reviewed and approved by a majority of our independent directors.

• Our management agreement provides that our determinations to terminate the management agreement for cause or because the management fees are unfair to us or because of a change in control of our Manager will be made by a majority vote of our independent directors.

• Our independent directors will periodically review the general investment standards established for our Manager under the management agreement.

• Our management agreement with our Manager provides that our Manager may not assign certain duties under the management agreement, except to certain of its affiliates, without the approval of a majority of our independent directors.

Management Agreement

WePrior ~~have~~to the expiration of the management agreement on December 31, 2008, we had entered into a management agreement with our Manager that ~~provides~~ provided for the day-to-day management of our operations. The management agreement ~~requires~~ required our Manager to manage our business affairs in conformity with the policies and the investment guidelines that are approved and monitored by our board of directors. Our Manager’s role as manager iswas under the supervision and direction of our board of directors.

~~The~~- ~~initial~~9 ~~term of the management agreement expires on December 31, 2008 and will be automatically renewed for a one~~-~~year~~ term each anniversary date thereafter. After the initial term, our independent directors will review our Manager’s performance annually and our management agreement may be terminated annually based upon (i) unsatisfactory performance that is materially detrimental to us (as determined by (1) affirmative vote of at least two thirds of our independent directors, or (2) a vote of the holders of at least a majority of the outstanding shares of our common stock), or (ii) a determination by our independent directors that the compensation payable to

~~our~~Pursuant ~~Manager~~to ~~are~~the ~~not~~management ~~fair~~agreement, ~~subject to~~ our Manager’s ~~right~~was entitled to ~~prevent~~receive ~~such~~ a ~~compensation~~base ~~termination by accepting a mutually acceptable reduction of~~ management ~~fees. A termination~~ fee, incentive ~~will~~compensation beand ~~paid~~reimbursement toof ~~our~~certain ~~Manager~~expenses ~~upon~~as ~~such~~described ~~termination.~~in Wethe ~~may also terminate our~~ management agreement. ~~with~~The 60following ~~days’~~table ~~prior~~summarizes ~~written~~the ~~notice~~fees ~~from~~and ~~our~~expenses ~~board~~payable ofto ~~directors,~~our ~~without~~Manager ~~payment~~pursuant ofto athe ~~termination fee, for cause, as defined in our~~ management agreement.

Pursuant to the management agreement, our Manager is entitled to receive a base management fee, incentive compensation and, in certain circumstances, a termination fee and reimbursement of certain expenses as described in the management agreement. The following table summarizes the fees and expenses payable to our Manager pursuant to the management agreement.


Fee		Summary Description
*Base Management Fee*		Payable monthly in arrears in an amount equal to 1/12^th of the sum of (i) 2.0% of the first $400 million of our gross stockholders’ equity (as defined in the management agreement), or equity, (ii) 1.75% of our equity in an amount in excess of $400 million and up to $800 million and (iii) 1.50% of our equity in excess of $800 million. Our Manager used the proceeds from its management fee in part to pay compensation to its officers and employees who, notwithstanding that certain of them also are our officers, received no cash compensation directly from us during the term of the management agreement.

*Incentive Fee*		Payable quarterly in an amount equal to the product of: • 25% of the dollar amount by which • our Funds From Operations (as defined in the management agreement) (after the base management fee and before incentive compensation) per share of our common stock for such quarter (based on the weighted average number of shares outstanding for such quarter) • exceeds an amount equal to • the weighted average of the price per share of our common stock in our June 2005 private offering, our October 2006 initial public offering, or IPO, and the prices per share of our common stock in any subsequent offering by us, in each case at the time of issuance thereof, multiplied by the greater of • 2.25% or • 0.75% plus one-fourth of the Ten Year Treasury Rate (as defined in the management agreement) for such quarter; • multiplied by the weighted average number of shares of our common stock outstanding during such quarter.

*Expenses*		Payable monthly in arrears to our Manager for all documented expenses incurred by our Manager on our behalf. The expenses include all operating and administrative expenses incurred by the employees of our Manager.

Fee		Summary Description
Base Management Fee		Payable monthly in arrears in an amount equal to 1/12th of the sum of (i) 2.0% of the first $400 million of our gross stockholders’ equity (as defined in the management agreement), or equity, (ii) 1.75% of our equity in an amount in excess of $400 million and up to $800 million and (iii) 1.50% of our equity in excess of $800 million. Our Manager uses the proceeds from its management fee in part to pay compensation to its officers and employees who, notwithstanding that certain of them also are our officers, receive no cash compensation directly from us.
Incentive Fee		Payable quarterly in an amount equal to the product of: • 25% of the dollar amount by which • our Funds From Operations (as defined in the management agreement) (after the base management fee and before incentive compensation) per share of our common stock for such quarter (based on the weighted average number of shares outstanding for such quarter) • exceeds an amount equal to • the weighted average of the price per share of our common stock in our June 2005 private offering and the prices per share of our common stock in any subsequent offering by us, in each case at the time of issuance thereof, multiplied by the greater of • 2.25% or • 0.75% plus one-fourth of the Ten Year Treasury Rate (as defined in the management agreement) for such quarter;
		• multiplied by the weighted average number of shares of our common stock outstanding during such quarter.
Termination Fee		Payable upon termination without cause or non-renewal of the management agreement in an amount equal to three times the sum of the annual base management fee and the annual incentive compensation earned by our Manager during the previous 12-month period immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination.
Expenses		Payable monthly in arrears to our Manager for all documented expenses incurred by our Manager on our behalf. The expenses include all operating and administrative expenses incurred by the employees of our Manager.

For the twelve months ended December 31, 2008, 2007 and the 2006, our Manager had earned base management fees of approximately $5.1 million, $7.7 million and $6.5 million, respectively. We did not accrue or pay any incentive fees through December 31, 2008.

16The management agreement with our Manager expired by its terms on December 31, 2008. The expiration of the management agreement ends our affiliation with CBRE and affiliates of CBRE effective December 31, 2008. On December 15, 2008, we, our Manager and CBRE|Melody entered into a Termination (the “Termination Agreement”) of the Amended and Restated Management Agreement. In addition to terminating the Amended and Restated Management Agreement, dated April 29, 2008, and acknowledging certain survival provisions in the Amended Management Agreement, the parties to the Termination Agreement acknowledged and/or agreed, among other things, that (i) the termination of the Amended Management Agreement will be effective as of December 31, 2008, (ii) there will be no termination fee in connection with the Termination Agreement, (iii) the Manager will make payment to us for certain accrued bonuses, (iv) we will make a payment to the Manager of (x) the final installment of the base management fee earned or accrued by our Manager as of December 31, 2008, (y) the reimbursement of CBRE’s operating expenses, and (z) the reimbursement of certain 2008 personnel bonuses, each on or before February 15, 2009, and (v) we will hire all employees of the Manager effective January 1, 2009.

For the twelve months ended December 31, 2006 and the period from June 9, 2005, the date we commenced operations, through December 31, 2005, our Manager had earned base management fees of approximately $6.5 million and $3.2 million, respectively. We did not accrue or pay any incentive fees through December 31, 2006.

Our Distribution Policy

U.S. federal income tax law requires that a REIT distribute annually at least 90% of its net taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain.

In order to maintain our REIT qualification and to generally not be subject to U.S. federal income and excise tax, we intend to make ~~regular quarterly~~ distributions of all or substantially all of our net taxable income to holders of our common stock. On December 17, 2008, we announced that our board of directors suspended the quarterly cash dividend in order to maintain our financial flexibility. Any future distributions we make will be at the discretion of our board of directors and will depend upon, among other things, our actual results of operations. These results and our ability to pay distributions will be affected by various factors, including the net interest and other income from our portfolio, our operating expenses and any other expenditure.

To the extent that our cash available for distribution is less than 90% of our net taxable income, we may consider various funding sources to cover any such shortfall, including ~~borrowing under our warehouse facilities,~~ selling certain of our assets ~~or using a portion of the net proceeds we receive in this offering or future offerings~~. Our distribution policy enables us to review the alternative ~~funding~~ funding sources available to us from time to time.

Exclusion From Regulation Under the 1940 Act

We conduct our operations so that we are not required to register as an investment company. Under Section 3(a)(1) of the 1940 Act, a company is not deemed to be an “investment company” if:

•

it neither is, nor holds itself out as being, engaged primarily, nor proposes to engage primarily, in the business of investing, reinvesting or trading in securities; or

•

it neither is engaged nor proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and does not own or propose to acquire “investment securities” having a value exceeding 40% of the value of its total assets on an unconsolidated basis, or the 40% Test. “Investment securities” excludes U.S. government securities and securities of majority-owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of investment company under Section 3(c)(1) or Section 3(c)(7) of the 1940 Act.

Because we are a holding company that will conduct our businesses through wholly-owned or majority-owned subsidiaries, the securities we own that have been issued by our subsidiaries that are excepted from the definition of “investment company” under Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, together with any other investment securities we may own, may not have a combined value in excess of 40% of the value of our total assets on an unconsolidated basis. This requirement limits the types of businesses in which we may engage through our subsidiaries.

~~CBRE~~RFC ~~Realty Finance~~ Holdings, LLC, our subsidiary that holds, through wholly-owned subsidiaries, substantially all of our real- estate-related securities, intends to be exempt from 1940 Act regulation under either Section 3(c)(5)(C) and/or Section 3(c)(6) of the 1940 Act. With respect to this subsidiary, at least 55% of its portfolio (directly or ~~indirectly through its wholly-owned~~ subsidiaries) must consist of qualifying real estate assets (which, in general, must consist of whole mortgage loans and other liens on and interests in real estate, B Notes and CMBS with unilateral foreclosure rights on the underlying mortgages and certain whole pool CMBS) and another 25% of its portfolio must consist of qualifying real estate assets or other real estate-related assets.

~~Based on no~~-~~action~~ ~~letters~~10 issued by the Staff of the Securities and Exchange Commission, or the SEC, we classify our investments in whole loans as qualifying real estate assets, as long as the loans are “fully secured” by an interest in real estate. That is, if the loan-~~to-value~~ ratio of the loan is equal to or less than 100%, then we consider the loan a qualifying real estate asset. We do not consider loans with loan-to-value ratios in excess of 100% to be qualifying real estate assets that come within the 55% basket, but only real estate-related assets that come within the 25% basket. With respect to our investments in B Notes, we take the position that B Notes are qualifying real estate assets that come within the 55% basket, or Qualifying B Notes, where we have the unilateral right to (i) instruct the

~~servicer~~indirectly tothrough ~~foreclose~~its onwholly-owned ~~a defaulted mortgage loan, (ii~~subsidiaries) ~~replace~~ ~~the~~must ~~servicer~~consist inof ~~the~~qualifying ~~event~~real ~~the~~estate ~~servicer~~assets (which, in ~~its discretion~~general, ~~elects~~must ~~not~~consist ~~to foreclose on such a loan, and (iii) purchase the A Note in the event~~ of awhole ~~default on the~~ mortgage ~~loan~~loans and other ~~foreclose~~liens on ~~the~~and ~~loan.~~interests Wein ~~note~~real ~~that~~estate, ~~the~~certain ~~SEC Staff has not provided any guidance on the treatment of~~ B Notes ~~for Section 3(c)(5)(C) purposes~~ and ~~any~~ ~~such~~CMBS ~~guidance~~with ~~may~~unilateral ~~require~~foreclosure usrights toon ~~adjust~~the ~~our~~underlying Bmortgages ~~Note~~and ~~investment~~certain ~~strategy.~~whole Wepool ~~will~~CMBS) ~~treat our mezzanine loans~~ and ~~our~~at ~~current~~least ~~CMBS~~another ~~investments as real estate-related assets that come within the~~ 25% ~~basket.~~of ~~Our~~its ~~joint~~portfolio ~~venture~~must ~~investments~~consist ~~may~~of ~~constitute~~ qualifying real estate assets or ifother wereal ~~have~~estate-related ~~the right to approve certain major decisions affecting the joint venture~~assets.

~~The~~Based ~~treatment~~on no-action letters issued by the Staff of ~~other~~the Securities and Exchange Commission, or the SEC Staff, we classify our investments in whole loans as qualifying real estate assets, ~~and~~as long as the loans are “fully secured” by an interest in real estate~~-related~~. ~~assets~~That is, ~~based~~if on the ~~characteristics~~loan-to-value ratio of the ~~underlying~~loan ~~collateral~~at ~~and~~ the ~~particular~~time ~~type~~ of ~~loan~~purchase ~~including~~or origination ~~whether~~is weequal ~~have~~to ~~foreclosure~~or ~~rights~~less ~~with~~than ~~respect~~100%, tothen ~~those~~we ~~securities~~consider ~~or loans~~the ~~that~~loan ~~have~~a ~~underlying~~qualifying real estate ~~collateral~~asset. ~~Because~~We ~~this~~do ~~subsidiary~~not ~~intends~~consider loans with loan-to-value ~~rely~~ratios onat ~~Section 3(c)(5)(C)~~the ~~and/or~~time ~~Section 3(c)(6)~~of ~~for~~purchase ~~its~~or ~~1940~~origination ~~Act~~in ~~exemption,~~excess ~~our~~of ~~investment~~100% ~~therein~~to ~~will~~be ~~not~~qualifying ~~constitute~~real anestate ~~“investment~~assets that ~~security”~~come ~~for~~within ~~purposes~~the of55% basket, but only real estate-related assets that come within the 4025% ~~Test~~basket. WeWith ~~believe~~respect ~~that~~to ~~CBRE~~our ~~Realty~~investments ~~Finance~~in ~~TRS,~~B ~~Inc.~~Notes, ~~our~~based ~~TRS~~on an SEC staff no-action letter, a B Note is ~~exempted~~a ~~from~~qualifying ~~1940~~real ~~Act~~estate ~~regulation~~asset ~~under~~that ~~Section 3~~comes within the 55% basket, or Qualifying B Notes, where, among other conditions, (ci) we have approval rights in connection with any material decisions pertaining to the administration and servicing of the relevant mortgage loan and with respect to any material modification to the relevant loan agreements, and (7ii) ofin the ~~1940~~event ~~Act.~~that ~~Therefore~~the relevant mortgage loan becomes non-performing, ~~our~~we ~~investment~~have ineffective ~~our~~control ~~TRS~~over ~~will~~the ~~constitute~~remedies ~~an “investment~~relating ~~security”~~to ~~for~~the ~~purposes~~enforcement of the ~~40%~~loan, ~~Test.~~including ~~Our~~ultimate ~~CDO~~control ~~subsidiary~~of isthe foreclosure aprocess ~~QRS,~~by ~~that~~having isthe ~~expected~~right to: be(a) appoint ~~exempted~~the ~~under~~special servicer to manage the ~~1940~~resolution ~~Act~~of ~~under~~the ~~Section~~loan, (b) 3advise, direct or approve the action of the special servicer, (c) terminate the special servicer at any time with or without cause, (5d)~~(C).~~ cure ~~Additionally~~the default so that the loan is no longer non-performing, weand ~~expect~~(e) purchase tothe ~~form~~A ~~separate~~Note ~~subsidiaries~~at ~~for~~par ~~each~~plus ~~additional CDO~~accrual orinterest, ~~other~~thereby ~~securitizations~~acquiring wethe ~~sponsor~~entire mortgage loan. We ~~expect~~will ~~that~~treat ~~each~~certain ~~such~~mezzanine ~~subsidiary~~loans ~~will~~(Tier ~~rely~~1 mezzanine onloans) ~~the~~as ~~exception~~qualifying ~~provided~~real byestate ~~Section 3~~assets where, among other conditions, we (ci) exercise ongoing control over management of the underlying property, (5ii)~~(C)~~ have the right to readily cure a default or 3purchase the mortgage loan in the event of a default on the mortgage loan, and (ciii)~~(7)~~ have ~~under~~the right to foreclose on the ~~1940~~collateral ~~Act~~and through our ownership in the property-owning entity become the owner of the underlying property. We will treat our other mezzanine loans and our current CMBS investments as real estate-related assets that come within the 25% basket.

Our joint venture investments may constitute qualifying real estate assets if we have the right to approve certain major decisions affecting the joint venture. Our direct real estate assets will be qualifying real estate assets. The treatment of other investments as qualifying real estate assets and real estate-related assets is based on the characteristics of the underlying collateral and the particular type of loan including whether we have foreclosure rights with respect to those securities or loans that have underlying real estate collateral. Because RFC Holdings, LLC intends to rely on Section 3(c)(5)(C) and/or Section 3(c)(6) for its 1940 Act exemption, our investment therein will not constitute an “investment security” for purposes of the 40% Test. We believe that RFC TRS, Inc., our TRS, is exempted from 1940 Act regulation under Section 3(c)(7) of the 1940 Act. Therefore, our investment in our TRS will constitute an “investment security” for purposes of the 40% Test. Our CDO subsidiaries are each a QRS, that is expected to be exempted under the 1940 Act under Section 3(c)(5)(C). Additionally, we expect to form separate subsidiaries for each additional CDO or other securitizations we sponsor. We expect that each such subsidiary will rely on the exception provided by Section 3(c)(5)(C) or 3(c)(7) under the 1940 Act.

We have not received, nor have we sought, a no-action letter from the Securities and Exchange Commission, or the SEC, regarding how our investment strategy fits within the exclusions from regulation under the 1940 Act that we and our subsidiaries are using. To the extent that the SEC provides more specific guidance regarding the treatment of assets as qualifying real estate assets or real estate-related assets, we may be required to adjust our investment strategy accordingly. Any additional guidance from the SEC could provide additional flexibility to us, or it could further inhibit our ability to pursue the investment strategy we have chosen.

If we or our subsidiaries fail to maintain our exclusions or exemptions from the 1940 Act, we would become subject to substantial regulation with respect to our capital structure (including our ability to use leverage), management, operations, transactions with affiliated persons (as defined in the 1940 Act), and portfolio composition, including restrictions with respect to diversification and industry concentration and other matters. Compliance with the 1940 Act will, accordingly, limit our ability to make certain investments.

Our Formation and Structure

We were organized as a Maryland corporation in May 2005 and completed a private offering of our common stock in June 2005 in which we raised net proceeds of approximately $282.5 million. CBRE, through one of its affiliates, purchased from us 1,100,000 shares of our common stock in the private offering, representing 5.1% of our common stock on a fully-diluted basis as of December 31, 2005. Certain of our executive officers and directors and certain executive officers and directors of CBRE and CBRE/|Melody purchased 964,101 shares of our common stock in that offering, representing 4.5% of our common stock on a fully-diluted basis as of December 31, 2005. Additionally, certain other employees of CBRE and CBRE/|Melody purchased 732,114 shares of our common stock in that offering, representing 3.4% of our common stock on a fully-diluted basis as of December 31, 2005. Upon completion of our June 2005 private offering, we granted to our Manager, its employees and certain of its related persons 565,087 shares of restricted stock and options to purchase 813,600 shares of our common stock with an exercise price of $15.00 per share, representing 6.5% of our common stock on a fully-diluted basis as of December 31, 2005. Additionally, 34,913 shares of restricted stock and options to purchase 186,400 shares of our common stock were made available for issuance to our Manager or to employees or other related parties of our Manager as directed by our Manager. Upon completion of our June 2005 private offering, we granted to our directors 2,668 shares of restricted stock in the aggregate.

~~Our~~ Prior to the expiration of the management agreement on December 31, 2008, our investment activities ~~are~~were managed by our Manager and, through it, by CBRE and CBRE/|Melody,. ~~which~~The weManager ~~consider~~was toalso ~~be our promoters, and are~~ supervised by our investment committee and board of directors. Ray Wirta, vice chairman and director of CBRE and chairman of our Manager, is our chairman. ~~Michael Melody, the executive managing director of our Manager and vice chairman of CBRE/Melody, is one of our directors.~~

CB Richard Ellis

CBRE (NYSE: CBG), an S&P 500 company, is the largest global commercial real estate services firm, based on 2006 revenue, offering a full range of services to owners, lenders, occupiers and investors in office, retail, industrial, multi-family and other commercial real estate. As of December 31, 2006, excluding affiliate and partner offices, CBRE operated in over 300 offices worldwide with over 24,000 employees. CBRE’s business is focused on several service competencies, including tenant representation, property/agency leasing, property sales, development services, commercial mortgage origination and servicing, capital markets (equity and debt) solutions, commercial property and corporate facilities management, valuation, proprietary research and real estate investment management. CBRE is a leader in many of the local markets in which it operates, including New York, Los Angeles, Chicago, London and Paris. CBRE has a well-balanced, highly diversified client base that includes approximately 85 of the Fortune 100 companies.

CBRE Melody & Company

CBRE/Melody, a wholly-owned subsidiary of CBRE, is one of the largest originators of commercial real estate loans in the U.S. based on origination volume. CBRE/Melody originates and services commercial mortgage loans primarily through relationships established with investment banks, commercial banks, specialty lenders, insurance companies, pension funds and governmental agencies. As of December 31, 2006, including affiliate and partner offices, CBRE/Melody operated in 36 offices nationwide with approximately 307 employees, including 113 originators. CBRE’s mortgage loan origination and servicing operations are conducted exclusively through CBRE/Melody.

Staffing

WePrior ~~are~~to the expiration of the management agreement on December 31, 2008, we were managed by our Manager pursuant to the management agreement between our Manager and us. ~~All~~Our ofManager ~~our~~had ~~executive~~16 ~~officers are~~ employees ofas ~~our Manager or one or more~~ of ~~its~~December 31, ~~affiliates.~~2008 ~~All~~that ofwere ~~the employees of our Manager are~~ fully dedicated to the operations of our Manager. ~~Through~~All atof ~~least~~our ~~the~~executive ~~initial~~officers ~~term~~were employees of ~~the management agreement,~~ our Manager isas ~~solely dedicated to the operations~~ of ~~our~~December 31, ~~company~~2008. InOn ~~addition~~January 1, we2009 ~~have~~all ~~reasonable~~employees ~~access to the investment professionals~~ of ~~each~~our ~~of CBRE and CBRE/Melody. Our~~ Manager ~~had~~became 29our employees as part of ~~December 31,~~the ~~2006~~internalization.

Available Information

Our internet address is www.~~cbrerealtyfinance~~realtyfinancecorp.com. We make available, free of charge, on or through the “SEC Filings” section of our website, 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, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. Also posted on our website, and available in print upon request to our Investor Relations Department, are the charters of our Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee, and our Code of Business Conduct and Ethics, which governs our directors, officers and employees. Within the time period required by the Securities and Exchange Commission ~~and the New York Stock Exchange~~, we will post on our website any amendment to our Code of Business Conduct and Ethics and any waiver applicable to our senior financial officers, and our executive officers or directors. In addition, information concerning purchases and sales of our equity securities by our directors and Section 16 reporting officers is also posted on our website. You can also read and copy the materials we file with the Securities and Exchange Commission at its Public Reference Room at 100 F Street, NE, Washington, DC 20549 (1-800-SEC-0330). The Securities and Exchange Commission maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding the issuers that file electronically with the Securities and Exchange Commission.

Our investor relations representative can be contacted by telephone: (860) 275-6200, or at our principal executive office, which is located at 185 Asylum Street, ~~37th~~31st Floor, Hartford, CT 06103, Attention: Investor Relations ~~Officer~~.

~~ITEM~~- ~~1A.~~11 ~~RISK~~- ~~FACTORS~~

An investment in our common stock involves a high degree of risk. Before making an investment decision, you should carefully consider the following risk factors, together with the other information contained in this Annual Report on Form 10-K. If any of the risks discussed in this Annual Report on Form 10-K occurs, our business, financial condition, liquidity and results of operations could be materially and adversely affected. If this were to happen, the price of our common stock could decline significantly and you could lose all or a part of your investment.

ITEM 1A.

RISK FACTORS

An investment in our common stock involves a high degree of risk. Before making an investment decision, you should carefully consider the following risk factors, together with the other information contained in this Annual Report on Form 10-K. If any of the risks discussed in this Annual Report on Form 10-K occurs, our business, financial condition, liquidity, results of operations and ability to make distributions to our stockholders could be materially and adversely affected. If this were to happen, the price of our common stock could decline significantly and you could lose all or a part of your investment.

Risks Related To Our Business

WeRating ~~have~~agency adowngrades ~~limited~~and ~~operating~~impairment ~~history~~of ~~and~~certain ~~limited~~of ~~experience~~our ~~operating~~loan asinvestments ahave ~~REIT~~ and we may ~~not~~continue ~~be able~~ to ~~successfully~~adversely ~~operate~~affect our ~~business~~cash ~~or generate sufficient revenue to make or sustain dividends to stockholders~~flows.

WeThe ~~have~~terms aof ~~limited~~our ~~operating~~CDOs ~~history~~include ~~and~~certain ~~limited~~overcollateralization ~~experience~~and ~~operating~~interest ascoverage atests, ~~REIT.~~which We are ~~subject~~used primarily to ~~all~~determine ofwhether ~~the~~and ~~business~~to ~~risks~~what ~~and~~extent ~~uncertainties~~principal ~~associated~~and ~~with~~interest ~~any~~paid ~~new~~on ~~business, including~~ the ~~risk~~debt ~~that~~securities weand ~~will~~other ~~not~~assets ~~achieve~~that ~~our~~serve ~~investment objectives~~ as ~~described~~collateral inunderlying ~~this 10-K and that~~ the ~~value~~CDOs ofmay ~~your~~be ~~investment~~used ~~could decline substantially. Our ability~~ to ~~achieve~~pay ~~attractive total~~principal ~~returns~~and tointerest ~~our~~on ~~stockholders~~the isvarious ~~dependent~~classes onof ~~our~~notes ~~ability~~payable ~~both~~issued toby ~~generate~~the ~~sufficient~~CDOs. ~~cash~~In ~~flow~~the toevent ~~pay~~these antests ~~attractive~~are ~~dividend~~not satisfied, interest and toprincipal ~~achieve~~that ~~capital~~would ~~appreciation,~~otherwise ~~and~~be wepayable ~~cannot~~on ~~assure~~certain ~~you~~of wethe ~~will~~junior dotranches ~~either.~~of ~~There~~notes ~~can~~payable beissued noby ~~assurance~~the ~~that~~CDOs weare ~~will be~~instead ~~able~~redirected to ~~generate~~pay ~~sufficient~~principal ~~revenue~~on ~~from~~certain ~~operations~~senior totranches ~~pay~~of ~~our~~notes ~~operating~~payable ~~expenses~~issued ~~and~~by ~~make~~the ~~distributions to stockholders~~CDOs.

~~The~~Certain ~~U.S. federal~~overcollateralization ~~income~~coverage ~~tax~~tests ~~laws~~failed ~~impose~~with ~~numerous~~respect ~~constraints~~to on the ~~operations~~February of2009 ~~REITs.~~determination ~~Our~~date ~~Manager’s~~for ~~limited~~CDO ~~experience~~I inas ~~managing~~ a ~~portfolio~~result of ~~assets~~recent rating ~~under~~downgrades ~~such~~that ~~constraints~~have ~~may~~occurred ~~hinder~~since ~~its~~December 31, ~~ability~~2008 toand ~~achieve~~certain ~~our~~loan ~~investment~~loss ~~objective.~~reserves Inor ~~addition, maintaining~~impairments recognized in our ~~REIT~~portfolio. ~~qualification~~As ~~limits~~a result, on the ~~types~~February 25, of2009 ~~investments~~payment wedate, ~~are~~approximately ~~able~~$488,000 toof ~~make.~~cash ~~Our~~from ~~investors~~CDO ~~did~~I ~~not~~that otherwise ~~acquire~~would anhave ~~interest~~been inpayable ~~CBRE~~to us, ~~CBRE/Melody~~(i) as orthe ~~their~~holder ~~subsidiaries~~of ~~through~~certain ~~our~~junior ~~October~~tranches ~~2006~~of ~~initial~~notes ~~public~~payable ~~offering,~~and orpreferred ~~our~~shares ~~IPO.~~issued Weby ~~can~~CDO ~~offer no~~I ~~assurance~~and ~~that~~(ii) in ~~our~~respect ~~Manager~~of ~~will~~the ~~replicate~~subordinate ~~CBRE’s~~collateral ormanagement ~~CBRE/Melody’s~~fees, ~~historical~~were ~~success~~instead orredirected ~~our~~to ~~management~~pay principal ~~team’s~~and ~~success~~interest inon ~~its~~certain ~~previous~~senior ~~endeavors,~~tranches ~~and~~of wenotes ~~caution~~payable ~~you~~issued ~~that~~by ~~our~~CDO ~~investment~~I, ~~returns~~which ~~could~~are beowned ~~substantially~~by ~~lower~~third ~~than~~parties. ~~the returns~~We ~~achieved~~expect bythat ~~those~~such ~~funds~~coverage ortests ~~previous~~will ~~endeavors~~continue to fail for the foreseeable future.

WeThe ~~are~~failures ~~dependent~~of ~~upon~~the ~~our~~overcollateralization ~~Manager~~coverage ~~and~~tests ~~certain~~under ~~key~~CDO ~~personnel~~I ofpermit ~~CBRE~~MBIA, ~~and~~as ~~CBRE/Melody~~controlling ~~provided to~~class usof ~~through~~CDO ~~our~~II ~~Manager~~bondholders, ~~and~~to ~~may~~terminate ~~not~~the ~~find~~existing collateral amanagement ~~suitable~~agreement ~~replacement~~and ifto ~~our~~remove ~~Manager~~us ~~terminates~~as the ~~management~~collateral ~~agreement~~manager orof ~~such~~CDO ~~key~~II. ~~personnel~~If ~~are~~that nohappens, ~~longer~~we ~~available~~will tolose usthe collateral management fees.

WeTo ~~have~~date, norating ~~employees.~~agency ~~Our~~downgrades ~~officers~~or ~~are~~impairment ~~employees~~ of our ~~Manager.~~loan Weinvestments have nonot ~~separate~~affected ~~facilities~~the ~~and~~overcollateralization ~~are~~coverage ~~completely~~tests ~~reliant~~applicable ~~on our Manager, which has significant discretion as~~ to ~~the~~CDO ~~implementation of our operating policies and strategies~~II. ~~We depend on the diligence~~However, ~~skill~~if ~~and~~an ~~network~~additional ~~of business contacts of the management of our Manager, and, through our Manager, of CBRE and CBRE/Melody~~$0.5 ~~The management~~million ~~team~~in ofdefaults ~~our Manager evaluates~~occur, ~~negotiates,~~CDO ~~structures,~~II ~~closes~~will ~~and~~also ~~monitors~~breach ~~our investments. We believe that our success depends on the continued service of the management team of our Manager, including Keith Gollenberg, Michael Angerthal,~~its ~~James~~overcollateralization ~~Evans, Paul Martin and Thomas Podgorski~~tests. ~~The~~Management ~~departure~~believes of any of the members of the management of our Manager, or a significant number of the investment professionals of our Manager could have a material adverse effect on our performance. We are also subject to the risk that ~~our~~it ~~Manager~~is ~~will~~likely ~~terminate the management agreement and~~ that noCDO ~~suitable~~II ~~replacement~~ will befail ~~found~~such totest ~~manage~~at ~~us.~~some Wepoint ~~can~~in ~~offer~~2009, nowhich ~~assurance that our Manager~~ will ~~remain~~result ~~our~~in ~~external~~the ~~manager~~cash orflows ~~that~~of weCDO ~~will~~II ~~continue to~~being ~~have~~diverted ~~access~~ to ~~our~~pay ~~Manager’s,~~principal ~~CBRE’s or CBRE/Melody’s principals~~ and ~~professionals~~interest oron ~~their information or deal flow. If our Manager terminates~~ the ~~management~~most ~~agreement,~~senior ~~key~~tranches ~~officers~~of ~~leave our Manager or we do not have access to~~notes ~~CBRE’s~~payable orissued ~~CBRE/Melody’s~~by ~~principals~~CDO ~~and professionals or their information or deal flow, we may be unable to execute our business plan~~II.

~~Termination~~Apart from overcollateralization and interest coverage tests, the operative documents of ~~our~~the ~~management~~CDOs ~~agreement~~provide for certain events of default, occurrence of which would beentitle ~~costly~~a senior class or classes of notes payable to accelerate the notes payable of such CDO and, depending upon the circumstances, require a liquidation of the collateral under then-current market conditions, which could result in higher levels of losses on the collateral and the notes payable of such CDO than might otherwise occur.

~~Termination~~Because ofwe ~~the~~have ~~management~~not ~~agreement~~entered ~~with~~into ~~our~~any ~~Manager without~~new ~~cause~~investments issince ~~difficult~~July ~~and~~2007, ~~costly.~~almost ~~The~~all ~~management~~of ~~agreement~~our ~~provides~~income ~~that~~in it2008 ~~may~~came ~~only~~from becash ~~terminated~~flows ~~without~~from ~~cause following the initial period annually (i) upon the affirmative vote of at least two-thirds of~~ our ~~independent~~CDOs. ~~directors,~~Failures ~~or (ii) by a vote~~ of the ~~holders~~overcollateralization ofcoverage attests ~~least~~would aseriously ~~majority~~curtail ~~of the outstanding shares of~~ our ~~common~~liquidity ~~stock,~~and jeopardize ~~based upon (1) unsatisfactory performance by~~ our ~~Manager~~ability ~~that is materially detrimental~~ to ussupport ~~or (2) a determination that~~ the ~~compensation~~ ~~payable~~CDOs toand our ~~Manager~~other isassets. ~~not~~While ~~fair,~~we ~~subject~~had toapproximately ~~our Manager’s right to prevent such a termination by accepting a mutually acceptable reduction of management fees~~$23.1 ~~Our~~million ~~Manager will be provided 180 days’ prior notice~~ of ~~any~~unrestricted ~~such termination~~cash and ~~will~~cash beequivalent ~~paid~~as ~~a termination fee equal to the amount~~ of ~~three~~December 31, ~~times~~2008, ~~the sum of the annual base management fee~~ and ~~the~~believe ~~annual~~we ~~incentive~~have ~~compensation~~sufficient ~~earned~~cash byto meet our ~~Manager~~liquidity ~~during~~requirements for the next 12~~-month~~ ~~period immediately preceding the date of termination~~months, ~~calculated~~significant asreduction ofin ~~the~~cash ~~end~~flows offrom ~~the~~our ~~most~~CDOs ~~recently~~could ~~completed~~force ~~fiscal~~us ~~quarter prior~~ to ~~the~~reduce ~~date~~staff ofand ~~termination. These provisions may increase the effective cost to us of terminating the management agreement, thereby~~ adversely ~~affecting~~impact our ~~ability~~ tobusiness ~~terminate our Manager without cause~~operations.

20Our CDOs would continue to generate taxable income for us despite the fact that if in the future we are not receiving cash distributions on our equity and subordinated note holdings from these CDOs. Should this occur, taxable income would continue to be recognized on each underlying investment in the relevant CDO. We would continue to be required to distribute 90% of our REIT taxable income (determined with regard to the dividends paid deduction and excluding net capital gain) from these transactions to continue to qualify as a REIT, despite the fact that we are not receiving cash distributions on our equity and subordinated note holdings from these CDOs.

There can be no assurance that the actions of the U.S. government, Federal Reserve and other governmental and regulatory bodies for the purpose of stabilizing the financial markets, or market response to those actions, will achieve the intended effect, our business may not benefit from these actions and further government or market developments could adversely impact us.

Since mid-2007, and particularly during the second half of 2008, the financial services industry and securities markets generally were materially and adversely affected by significant declines in the values of nearly all asset classes and by a serious lack of liquidity. This was initially triggered by declines in the values of subprime mortgages, but spread to all mortgage and real estate asset classes, to leveraged bank loans and to nearly all assets classes, including equities. The global markets have been characterized by substantially increased volatility and short-selling and an overall loss of investor confidence, initially in the financial institutions, but more recently in companies in a number of other industries and in the broader markets. The decline in asset values has caused increases in margin calls for investors, requirements that derivatives counterparties post additional collateral and redemptions by mutual and hedge fund investors, all of which have increased the downward pressure on asset values and outflows of client funds across the financial services industry. In addition, the increased redemptions and unavailability of credit have required hedge funds and others to rapidly reduce leverage, which has increased volatility and further contributed to the decline of asset values.

In response to the financial issues affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, the Emergency Economic Stabilization Act of 2008, or the EESA, was signed into law on October 3, 2008. The EESA authorizes the U.S. Secretary of Treasury to create a Troubled Asset Relief Program, or TARP, to purchase from financial institutions up to $700 billion of residential or commercial mortgages and any securities, obligations, or other instruments that are based on, or related to, such mortgages, that in each case was originated or issued on or before March 14, 2008. EESA also provides for a program that would allow companies to insure their troubled assets. As of February 19, 2009, the U.S. Treasury had announced the establishment of the following programs under TARP: the Capital Purchase Program, or CPP, the Target Investment Program, or TIP, the Systematically Significant Failing Institutions Program, or SSFIP, the Asset Guarantee Program, or AGP, the Auto Industry Financing Program, or AIFP, and the Homeowner Affordability and Stability Plan, or HASP, which is partially financed by TARP.

In addition, the American Recovery and Reinvestment Act of 2009, or ARRA, was signed into law on February 17, 2009. ARRA includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health and education needs. ARRA also imposes certain new executive compensation and corporate expenditure limits on all current and future TARP recipients.

These can be no assurance that the EESA, TARP or other programs will have a beneficial impact on the financial markets, including current extreme levels of volatility. To the extent the market does not respond favorably to these new initiatives or these new initiatives do not function as intended, our business may not receive the anticipated positive impact from the legislation. In addition, the U.S. Government, Federal Reserve and other governmental and regulatory bodies have taken or are considering taking other actions to address the financial crisis. We cannot predict whether or when such actions may occur or what impact, if any, such actions could have on our business, results of operations and financial condition.

The continuing dislocation in the sub-prime mortgage sector and securitization markets, and the current weakness in the broader financial markets, could adversely affect us and our ability to fund our business, which could result in increases in our borrowing costs, reduction in our liquidity and reductions in the value of the investments in our portfolio.

- 12 -

InThe ~~addition,~~continuing ~~our~~dislocation ~~Manager~~in ~~may~~the ~~terminate~~sub-prime ~~the~~mortgage ~~management~~sector ~~agreement~~and ~~(i) upon~~securitization 60markets, ~~days’~~and ~~prior~~the ~~written~~current ~~notice~~weakness ~~to us~~ in the ~~event~~broader wefinancial ~~default~~markets, incould ~~the~~adversely ~~performance~~affect orour ~~observation~~ability ofto ~~any~~enter ~~material~~into ~~term,~~new ~~condition~~repurchase agreements or ~~covenant~~obtain other forms of financing. Recent developments in the ~~management~~market ~~agreement~~ for amany ~~period~~types of 60mortgage ~~days~~products ~~after~~have ~~such~~resulted ~~written~~in ~~notice~~reduced liquidity orfor ~~(ii) in~~these ~~the~~assets. ~~event~~Although wethis ~~become~~reduction ~~regulated~~in asliquidity ~~an “investment~~has ~~company”~~been ~~under~~most ~~the~~acute ~~1940~~with ~~Act.~~regard Into ~~the~~sub-prime ~~event~~assets, ~~that~~there ~~the~~has ~~management~~been ~~agreement~~an isoverall ~~terminated~~reduction byin ~~our~~liquidity ~~Manager~~across asthe acredit ~~result~~spectrum of ~~default~~mortgage byproducts. ~~us,~~This wecould ~~are~~potentially ~~required~~limit our ability to ~~pay~~finance our ~~Manager~~investments aand ~~termination~~operations, ~~fee~~increase ~~equal~~our tofinancing ~~the~~costs ~~amount~~and/or ofreduce ~~three~~our ~~times~~liquidity. ~~the~~If ~~sum of~~major ~~the~~market ~~annual~~participants ~~base~~continue ~~management~~to ~~fee~~fail and withdraw from the ~~annual~~market, ~~incentive~~it ~~compensation~~could ~~earned~~negatively byimpact ~~our~~the ~~Manager~~marketability ~~during~~of ~~the~~all ~~12-month~~fixed ~~period~~income securities, ~~immediately~~and ~~preceding~~this could reduce the ~~date~~value of the ~~termination~~securities in our portfolio, ~~calculated~~thus asreducing ofour ~~the~~net ~~end~~book ofvalue. ~~the~~Furthermore, ~~most~~if ~~recently~~we ~~completed~~are ~~fiscal~~unable ~~quarter~~to ~~prior~~ obtain new financings, we could be forced to ~~the~~sell ~~date~~our ofinvestments ~~termination~~at a time when prices are depressed. If Nothis ~~termination~~were ~~fee~~to isoccur, ~~payable~~it bycould prevent us iffrom complying with the ~~management~~REIT ~~agreement~~asset isand ~~terminated~~income ~~because~~tests wenecessary ~~have~~to ~~become~~fulfill ~~regulated~~our asREIT anqualification ~~investment~~requirements ~~company~~or ~~under~~could cause us not to qualify for an exemption from the 1940 Act, and otherwise materially harm our results of operation, financial outlook and our ability to make distributions to our stockholders.

~~The~~In ~~base~~addition, ~~management~~should ~~fee~~we ~~payable~~enter into toany new repurchase agreements, the liquidity in our ~~Manager~~portfolio ismay ~~payable~~also ~~regardless~~be adversely affected by possible margin calls under any such repurchase agreements. Repurchase agreements often allow the lender, to varying degrees, to determine a new market value of the collateral to reflect current market conditions. If the lender determines that the value of the collateral has decreased, it may initiate a margin call and require us to either post additional collateral to cover such decrease or repay a portion of the outstanding borrowing, subject to commercially reasonable business standards, on minimal notice as it has in the past. A significant increase in margin calls as a result of spread widening could harm our ~~performance~~liquidity, results of operation, financial condition, business prospects, and our ability to make distributions to our stockholders. Additionally, in order to obtain cash to satisfy a margin call, we may be required to liquidate assets at a disadvantageous time, which could cause us to incur further losses and adversely affect our results of operations, financial condition, and may impair our ability to make distributions to our stockholders

~~Our Manager~~We ismay ~~entitled~~not tobe ~~receive~~able ato ~~base~~access ~~management~~financing ~~fee~~sources ~~that is based~~ on ~~the~~favorable ~~amount of our equity (defined in the management agreement as the month-end value~~terms, ~~computed in accordance with U.S. generally accepted accounting principles,~~ or ~~GAAP,~~at ~~of our stockholders’ equity~~all, ~~adjusted~~which to exclude the effect of any unrealized gains, losses or other items that do not affect realized net income), regardless of the performance of our portfolio. For example, we will pay our Manager a base management fee for a specific period despite the fact that we experienced a net loss during the same period. Our Manager’s entitlement to substantial non-performance based compensation might reduce its incentive to devote its time and effort to seeking profitable opportunities for our portfolio. This in turn could adversely affect our ability to ~~make~~execute ~~distributions to~~ our ~~stockholders~~business plan.

We have not entered into any new investments since July 2007. To the extent we are able to restart our lending activities, we intend to finance our assets over the long-term through a variety of means, including warehouse lines, repurchase agreements, credit facilities, issuance of CMBS, CDOs and other structured financings. Our ~~incentive~~ability to execute this strategy will depend on various conditions in the ~~fee~~markets for financing in this manner which are beyond our control, including lack of liquidity and greater credit spreads. We cannot assure you that these markets will provide an efficient source of long-term financing for our assets. Currently, they do not. If our strategy is not viable, we will have to attempt to find alternative forms of long-term financing for our assets, as secured revolving credit facilities and repurchase facilities, if available, may ~~induce~~not accommodate long-term financing. This could subject us to more recourse indebtedness and the risk that debt service on less efficient forms of financing would require a larger portion of our ~~Manager~~cash flows, thereby reducing cash available for distribution to ~~make~~stockholders, funds ~~certain~~available ~~investments~~for operations as well as for future business opportunities. Due to the current state of the credit and capital markets, ~~including~~we ~~speculative~~expect ~~investments~~the availability of repurchase agreements, which we historically have used to finance loan originations that will ultimately be packaged in CDO offerings, will be limited throughout at least 2009.

~~Our~~Failure ~~Manager’s entitlement~~ to ~~an incentive~~procure ~~fee~~adequate ~~may~~capital cause it to invest in high risk investments. In addition to its base management fee, our Manager is entitled to receive incentive compensation based in part upon our achievement of targeted levels of funds from operations (defined in the management agreement as the net income, computed in accordance with GAAP, excluding gains (losses) from debt restructuring and ~~gains (or losses) from sales of property, plus depreciation and amortization on real estate assets and non-cash~~ ~~equity~~funding ~~compensation~~would ~~expense,~~adversely ~~and~~affect ~~after~~our ~~adjustments~~results ~~for unconsolidated partnerships~~ and ~~joint ventures; provided~~may, ~~that the foregoing calculation of funds from operations shall be adjusted to exclude one-time events pursuant to changes~~ in ~~GAAP~~turn, ~~and may~~negatively beaffect ~~adjusted to exclude other non-cash charges after discussion between our Manager and~~ the ~~independent~~market ~~directors~~price ~~and approval by a majority~~ of ~~the~~shares ~~independent directors in the case~~ of ~~non-cash~~our ~~charges).~~common Instock ~~evaluating investments~~ and ~~other management strategies, the opportunity to earn incentive compensation based on funds from operations may lead~~ our ~~Manager~~ability to ~~place~~distribute ~~undue emphasis on the maximization of funds from operations at the expense of other criteria, such as preservation of capital, in order to achieve higher incentive compensation~~dividends. Investments with higher yield potential are generally riskier or more speculative. This could result in increased risk to the value of our invested portfolio. Additionally, because certain non-cash expenses are added to funds from operations, this measurement may result in higher compensation payable to our Manager for incentive fees than would otherwise be payable if we were using a GAAP measurement for compensation purposes.

~~Our~~We ~~Manager~~depend ~~manages~~upon the availability of adequate funding and capital for our ~~portfolio~~operations. ~~pursuant~~As a REIT, we are required to ~~very~~distribute ~~broad~~annually ~~investment~~at ~~guidelines~~least 90% of our net taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain, to our ~~board~~stockholders ofand ~~directors~~are ~~does~~therefore not ~~approve~~able ~~each~~to ~~investment~~retain ~~decision~~significant amounts of our earnings for new investments. However, RFC TRS, ~~made~~Inc., our TRS, is able to retain (and likely will retain) earnings for investment in new capital, subject to the REIT requirements which place a limitation on the relative value of TRS stock and securities owned by a REIT. The failure to secure acceptable financing could reduce our ~~Manager~~taxable income, ~~which~~as ~~may~~our ~~result~~investments would no longer generate the same level of net interest income due to the lack of funding or increase in funding costs. A reduction in our ~~making~~net ~~riskier~~income ~~investments~~would have an adverse effect on our liquidity and our ability to make distributions to our stockholders. We cannot assure you that any, or sufficient, funding or capital will be available to us in the future on terms that are acceptable to us. Therefore, in the event that we cannot obtain sufficient funding on acceptable terms, there may be a negative impact on the market price of our common stock and our ability to make distributions to stockholders.

Our ~~Manager~~reserves isfor ~~authorized~~loan tolosses ~~follow~~may ~~very~~prove ~~broad investment guidelines. While our directors periodically review our investment guidelines and our investment portfolio~~inadequate, ~~they~~which docould ~~not~~have review all of our proposed investments and are only required to approve investments or dispositions that exceed $50 million (or $75 million for investments and dispositions having credit ratings of “A” or better by a ~~major~~material ~~rating~~adverse ~~agency),~~effect ~~subject to certain limited exceptions. In addition, in conducting periodic reviews, our directors may rely primarily~~ on ~~information~~ provided to them by our Manager. Furthermore, our Manager may use complex strategies and transactions entered into by our Manager that may be difficult or impossible to unwind by the time they are reviewed by our directors. Our Manager has great latitude within the broad investment guidelines in determining the types of assets it may decide are proper investments for us. Decisions made and investments entered into by our Manager may not fully reflect your best interests. In addition, our board of directors may change the investment guidelines at any time without the approval of our stockholders.

21 We maintain and regularly evaluate financial reserves in accordance with generally accepted accounting principles, or GAAP. Our reserves reflect management’s judgment of the probability and severity of losses. We cannot be certain that our judgment will prove to be correct and that reserves will be adequate over time to reflect losses due to unanticipated adverse changes in the economy or events adversely affecting specific assets, borrowers, industries in which our borrowers operate or markets in which our borrowers or their properties are located. If our reserves for credit losses prove inadequate, we could suffer losses which would have a material adverse effect on our financial performance, the market price of our common stock and our ability to make distributions to our stockholders.

Higher loan loss reserves are expected if economic conditions do not improve.

If the decline in the U.S. economy does not stabilize and reverse in 2009, we will likely experience significant increases in loan loss reserves, potential defaults and asset impairment charges in 2009. Borrowers may also be less able to pay principal and interest on loans if the economy continues to weaken and they continue to experience financial stress. Declining real property values also would increase loan-to-value ratios on our loans and, therefore, weaken our collateral coverage and increase the likelihood of higher loan loss reserves. Any sustained period of increased defaults and foreclosures would adversely affect our interest income, financial condition, business prospects and our cash flows.

Loan loss reserves are particularly difficult to estimate in a turbulent economic environment.

Our loan loss reserves are evaluated on a quarterly basis. Our determination of loan loss reserves requires us to make certain estimates and judgments, which are particularly difficult to determine during a recession where commercial real estate credit has been nearly shut off and commercial real estate transactions have dramatically decreased. Our estimates and judgments are based on a number of factors, including projected cash flows from the collateral securing our commercial real estate loans, loan structure, including the availability of reserves and recourse guarantees, likelihood of repayment in full at the maturity of a loan, potential for a refinancing market coming back to commercial real estate in the future and expected market discount rates for varying property types. If our estimates and judgments are not correct, our results of operations and financial condition could be severely impacted.

Our financial condition and results of operation will depend on our ability to manage future growth effectively.

Our ability to achieve our investment objective depends on our ability to grow, which depends, in turn, on our management team and its ability to identify and invest in securities that meet our investment criteria as well as on our access to financing on acceptable terms. Our ability to grow is also dependent upon our ability to successfully hire, train, supervise and manage employees. We may not be able to manage growth effectively or to achieve growth at all. Any failure to manage our future growth effectively could have a material adverse effect on our business, financial condition results of operations and ability to make distributions to stockholders.

We may experience reductions in portfolio income which would reduce our ability to make distributions over time.

We have not made a new investment since July 2007. Due to our status as a REIT, we are required to distribute at least 90% of our REIT taxable income to stockholders. We may experience declines in the size of the investment portfolio over time. A reduction in the size of our portfolio would also result in reduced income available for distribution and thereby lessen our ability to make distributions to our stockholders. On December 17, 2008, we announced that our board of directors suspended the quarterly cash dividend in order to maintain our financial flexibility.

- 13 -

Our ability to retain and attract key personnel is critical to our success and our future growth.

Our success depends on our ability to retain our senior management and the other members of our management team and recruit additional qualified personnel. However, we may not succeed in retaining current personnel or recruiting additional personnel, as the market for qualified professionals in our industry is extremely competitive and costly. Members of our senior management possess substantial experience and expertise in investing, asset management and finance, and have significant relationships with our customers and other institutions which are the source of many of our investment opportunities. Therefore, if members of our management join competitors or form competing companies, it could result in the loss of investment opportunities, which could have a material adverse effect on our results of operations. Efforts to retain or attract professionals may result in significant additional expenses, which could adversely affect our business. However, the lack of liquidity could force us to reduce staff, which could negatively impact our business operations.

We may not be able to successfully complete securitization transactions.

In addition to issuing senior securities to raise capital as described above, we may in the future, to the extent consistent with REIT requirements, seek to securitize certain investments to generate cash for funding new investments, although we do not expect the markets for CDOs to be available in the near-term. This would involve creating a special-purpose vehicle, contributing a pool of our assets to the entity, and selling interests in the entity on a non-recourse basis to purchasers (who we would expect to be willing to accept a lower interest rate to invest in investment grade loan pools). We would retain all or a portion of the equity in the securitized pool of portfolio investments. When and if we are able to invest again, we expect we would initially finance our investments with relatively short-term credit facilities. We would use these short-term facilities to finance the acquisition of securities until a sufficient quantity of securities is accumulated, at which time we would attempt to refinance these facilities through a securitization, such as a CDO issuance, or other long-term financing, if available. As a result, we are subject to the risk that we may not be able to acquire, during the period that our short-term facilities are available, a sufficient amount of eligible securities to maximize the efficiency of a CDO issuance, if available. We also bear the risk that we may not be able to obtain short-term credit facilities or may not be able to renew any short-term credit facilities after they expire should we find it necessary to extend our short-term credit facilities to allow more time to seek and acquire the necessary eligible securities for a long-term financing. The inability to secure new short-term credit facilities may require us to seek more costly financing for our investments or to liquidate assets. In addition, conditions in the capital markets may make the issuance of a CDO impractical at all or when we do have a sufficient pool of collateral. The inability to securitize our portfolio would hurt our performance and ability to grow our business. At the same time, the securitization of our portfolio investments might expose us to losses, as the residual portfolio investments in which we do not sell interests will tend to be riskier and more likely to generate losses. For example, we are currently receiving no cash flow from our equity and subordinate debt interests and our subordinated management fees in CDO I because certain overcollateralization coverage tests have been triggered in such CDO.

We leverage our investments, which may adversely affect our return on our investments and may reduce cash available for distribution to our stockholders.

We leverage our investments through borrowings, generally through the use of warehouse facilities, bank credit facilities, repurchase agreements, secured loans, securitizations, including the issuance of CDOs, loans to entities in which we hold, directly or indirectly, interests in pools of assets, and other borrowings. Our charter contains no limitations on our use of leverage. As of December 31, 2008, our outstanding indebtedness with respect to leveraged investments was $1.4 billion, secured by 61 loans and 67 CMBS investments with an aggregate carrying value of approximately $1.2 billion, representing 87% of our assets by carrying value. At December 31, 2008, our leverage ratio was 6.8 times. The percentage of leverage varies depending on our ability to obtain credit facilities and the lender’s and rating agencies’ estimate of the stability of the investments’ cash flow. We intend to continue to use leverage to acquire all of our investments consistent with the policy described above, although our board of directors may alter this policy at any time. Our return on our investments and cash available for distribution to our stockholders may be reduced to the extent that changes in market conditions increase the cost of our financing relative to the income that can be derived from the assets acquired. Our debt service payments will reduce cash flow available for distributions to stockholders. We may not be able to meet our debt service obligations and, to the extent that we cannot, we risk the loss of some or all of our assets to foreclosure or sale to satisfy the obligations. In addition, if a property or properties are mortgaged to secure payment of indebtedness and we are unable to meet required mortgage payments, the mortgage securing the property could be foreclosed upon by, or the property could be otherwise transferred to the mortgagee with a consequent loss of asset value and income to us and our stockholders. We leverage certain of our assets through warehouse agreements. A decrease in the value of these assets may lead to margin calls which we will have to satisfy. We may not have the funds available to satisfy any such margin calls and may have to sell assets at a time when we might not otherwise choose to do so.

Future credit facility providers, if any, may require us to maintain a certain amount of cash uninvested or set aside unlevered assets sufficient to maintain a specified liquidity position which would allow us to satisfy our collateral obligations. As a result, we may not be able to leverage our assets as fully as we would choose, which could reduce our return on assets. In the event that we are unable to meet these collateral obligations, our financial condition and ability to make distributions could deteriorate rapidly.

We may change our operational policies without stockholder consent, which may adversely affect the market price of our common stock and our ability to make distributions to our stockholders.

Our board of directors determines our operational policies and may amend or revise our policies, including our policies with respect to our REIT qualification, acquisitions, growth, operations, indebtedness, capitalization, distributions and conflicts of interest or approve transactions that deviate from these policies, without a vote of, or notice to, our stockholders. In May 2007, we decided to no longer pursue equity real estate investments through joint ventures arrangements, and to instead concentrate solely on our core investment areas. Operational policy changes could adversely affect the market price of our common stock and our ability to make distributions to our stockholders.

We may change our investment strategy and asset allocation without stockholder consent, which may result in riskier investments.

We may change our investment strategy or asset allocation, including the percentage of assets that may be invested in each class, or in the case of securities, in a single issuer, at any time without the consent of our stockholders, which could result in our making investments that are different from, and possibly riskier than, the investments described ~~in this prospectus~~herein. A change in our investment strategy may increase our exposure to interest rate risk, default risk and real estate market fluctuations, all of which could adversely affect the market price of our common stock and our ability to make distributions to you. Furthermore, a change in our asset allocation could result in our making investments in instrument categories different from those described inherein. ~~this~~In ~~prospectus~~May 2007, we decided to no longer pursue equity real estate investments through joint ventures arrangements, and to instead concentrate solely on the fixed-income arena. Operational policy changes could adversely affect the market price of our common stock and our ability to make distributions to our stockholders.

~~There~~Liquidity ~~are~~in ~~conflicts~~the ofcapital ~~interest~~markets inis essential to our ~~relationship~~businesses ~~with~~and future growth and we rely on external sources to finance significant portion of our ~~Manager,~~operations. ~~which~~We ~~could~~have ~~result~~limited inliquidity ~~decisions~~and ~~that~~we ~~are~~may ~~not~~be required to pursue certain measures in ~~the~~order ~~best~~to ~~interests~~maintain ofor ~~our~~enhance ~~stockholders~~liquidity.

WeLiquidity ~~are~~is ~~entirely~~essential ~~dependent~~to ~~upon~~ our ~~Manager~~business ~~for~~and our ~~day-~~ability to~~-day~~ ~~management~~grow and doto ~~not~~fund ~~have~~existing ~~any independent officers~~obligations. Our ~~chairman,~~liquidity ~~chief~~may ~~executive~~be ~~officer, chief~~impaired ~~financial~~by ~~officer~~an ~~and~~inability ~~executive~~to ~~vice~~access secured ~~presidents also serve as officers~~ and/or ~~directors~~unsecured ofdebt ~~our Manager~~markets, ~~CBRE~~an ~~and/or~~inability ~~CBRE/Melody.~~to Inaccess ~~addition,~~funds ~~one~~from of our ~~other~~subsidiaries, ~~directors~~an isinability ~~affiliated~~to ~~with~~sell ~~our~~assets ~~Manager, CBRE and/~~or ~~CBRE/Melody.~~redeem Asour ~~a result~~investments, ~~our management~~or ~~agreement~~unforeseen ~~with~~outflows ~~our~~of ~~Manager~~cash ~~was~~or ~~negotiated~~collateral. ~~between~~This ~~related~~situation ~~parties~~may ~~and~~arise ~~its~~due ~~terms,~~to ~~including~~circumstances ~~fees~~that ~~payable,~~we may ~~not~~ be asunable ~~favorable~~ to uscontrol, such as ifa itgeneral ~~had~~market ~~been~~disruption ~~negotiated~~or ~~with~~ an ~~unaffiliated~~operational problem that affects third ~~party.~~parties Inor ~~addition~~us, weor ~~may~~even ~~enter~~by ~~into transactions~~the inperception ~~the~~among ~~future~~market ~~with~~participants ~~CBRE~~that we, ~~CBRE/Melody~~ or ~~their~~other ~~affiliates~~market ~~that~~participants, ~~may~~are ~~result~~experiencing ingreater aliquidity ~~conflict of interest~~risk.

We ~~may~~depend ~~compete~~on ~~with~~external ~~future investment~~financing ~~entities~~to fund the growth of our business mainly because one of the requirements for ~~access~~the toInternal ~~CBRE~~Revenue ~~and~~Code for a REIT is that it distributes 90% of its ~~affiliates~~taxable income to its shareholders, including taxable income where we do not receive corresponding cash. Our access to equity or debt financing

~~Through~~- at14 least the initial term of our management agreement, our company is the exclusive investment vehicle, subject to certain exceptions, sponsored by CBRE or its affiliates that focuses primarily on the acquisition and finance of real estate-~~related~~ loans, structured finance debt investments and CMBS. However, there can be no assurance that CBRE or its affiliates will not sponsor other investment vehicles in the future. If any such investment vehicles have an investment focus similar to our focus, we may be competing for access to the benefits that we expect our relationship with CBRE and its affiliates to provide to us.

We leverage our investments, which may adversely affect our return on our investments and may reduce cash available for distribution to our stockholders.

~~acquired.~~depends ~~Our~~on ~~debt~~the ~~service~~willingness ~~payments~~of ~~will~~third ~~reduce~~parties ~~cash~~to ~~flow~~make ~~available~~equity ~~for~~investments ~~distributions~~in tous ~~stockholders.~~and Weprovide ~~may~~us ~~not~~with becorporate ~~able~~level todebt. ~~meet~~It ~~our~~also ~~debt~~depends ~~service obligations~~on ~~and,~~conditions toin the capital ~~extent~~markets ~~that~~generally. weCompanies ~~cannot,~~in ~~we risk~~ the ~~loss~~real ofestate ~~some~~industry, orincluding ~~all~~us, ofare ~~our~~currently ~~assets~~experiencing, toand ~~foreclosure~~have orat ~~sale~~times tohistorically ~~satisfy~~experienced, ~~the~~limited ~~obligations.~~availability Inof ~~addition~~capital, ifand anew ~~property~~capital orsources ~~properties~~may ~~are~~not ~~mortgaged~~be toavailable ~~secure~~on ~~payment~~acceptable terms. ofOur ~~indebtedness~~ability ~~and we are unable~~ to ~~meet~~raise ~~required~~capital ~~mortgage~~could ~~payments,~~be ~~the~~impaired ~~mortgage~~if ~~securing~~ the ~~property~~capital ~~could~~markets behave ~~foreclosed~~a ~~upon~~negative ~~by,~~perception orof ~~the~~our ~~property~~long-term ~~could~~and beshort-term ~~otherwise~~financial ~~transferred~~prospects toor the ~~mortgagee~~prospects ~~with~~for amortgage ~~consequent~~REITs ~~loss of asset value~~ and ~~income~~the tocommercial usreal ~~and~~estate ~~our~~market ~~stockholders~~generally. We cannot ~~leverage~~be certain ofthat ~~our~~sufficient ~~assets~~funding ~~through~~or ~~warehouse~~capital ~~agreements.~~will Abe ~~decrease~~available to us in the ~~value~~future ofon ~~these~~terms ~~assets~~that ~~may~~are ~~lead~~acceptable to ~~margin~~us. ~~calls~~If ~~which~~ we ~~will~~cannot ~~have~~obtain tosufficient ~~satisfy.~~funding Weon ~~may~~acceptable ~~not~~terms, ~~have~~we ~~the~~will ~~funds~~not ~~available~~be able to ~~satisfy~~grow ~~any~~our ~~such~~business, ~~margin~~which ~~calls~~would ~~and~~likely have ~~may~~a ~~have~~negative toimpact ~~sell assets~~on atthe amarket ~~time~~price ~~when~~of weour ~~might~~common ~~not~~stock ~~otherwise~~and ~~choose~~our ability to domake sodistributions to our stockholders.

~~Further~~In addition, ~~credit~~the liquidity ~~facility~~in ~~providers~~our portfolio may ~~require~~also usbe adversely affected by possible margin calls under any future repurchase agreements. Repurchase agreements generally allow the counterparties, to ~~maintain~~varying degrees, to determine a ~~certain amount~~new market value of ~~cash~~the collateral ~~uninvested~~to orreflect ~~set~~current ~~aside~~market ~~unlevered~~conditions. ~~assets~~If ~~sufficient~~such tocounterparties ~~maintain~~determine athat ~~specified~~the ~~liquidity~~value ~~position~~of ~~which~~the ~~would~~collateral ~~allow~~has decreased, it may initiate a margin call and require us to ~~satisfy~~either ~~our~~post additional collateral ~~obligations~~to cover such decrease or repay a portion of the outstanding borrowing. AsA significant increase in margin calls as a result of spread widening could harm our liquidity, weresults ~~may~~of ~~not~~operation, befinancial ~~able~~condition, tobusiness ~~leverage~~prospects, and our ~~assets~~ability asto ~~fully~~make asdistributions weto ~~would~~our ~~choose~~stockholders. Additionally, ~~which~~in ~~could~~order ~~reduce~~to ~~our~~obtain ~~return~~cash onto ~~assets.~~satisfy Ina ~~the~~margin ~~event~~call, ~~that~~ we ~~are~~may ~~unable~~be required to ~~meet~~liquidate ~~these~~assets ~~collateral~~at ~~obligations~~a disadvantageous time, which could cause us to incur further losses and adversely affect our ~~financial~~results of operations, financial condition, ~~could~~and ~~deteriorate~~may ~~rapidly~~impair our ability to maintain our current level of dividends.

It is difficult to predict when conditions in our business will improve. We ~~may~~expect ~~not~~that bethe ~~able~~adverse circumstances and trends in our business and securities will continue through at least the remainder of 2009, and will begin to ~~access~~improve ~~financing~~thereafter ~~sources~~only onas ~~favorable~~the ~~terms~~credit markets and overall economy improve. There can be no assurance as tow whether the credit markets and economy will improve in 2009, orand ateven ~~all~~if they do improve, ~~which~~whether ~~could~~they ~~adversely~~will ~~affect~~improve early enough in 2009 to impact our business and securities favorably in that same year. Continued disruption in the global credit markets or further deterioration in those markets may have a material adverse effect on our ability to ~~execute~~repay or refinance our ~~business~~borrowings ~~plan~~and our ability to grow our business.

WeCurrently, ~~intend~~we tohave ~~finance~~limited ~~our~~liquidity. ~~assets~~As ~~over the long-term through a variety~~ of ~~means~~December 31, ~~including warehouse lines~~2008, ~~repurchase~~our ~~agreements,~~cash ~~credit~~balance ~~facilities, issuance~~was of$23.1 ~~CMBS,~~million. ~~CDOs~~We ~~and~~may ~~other~~be ~~structured~~required ~~financings. Our ability~~ to ~~execute~~pursue ~~this~~certain ~~strategy~~measures ~~will depend on various conditions~~ in order ~~the~~to ~~markets~~maintain ~~for~~or ~~financing~~enhance ~~in this manner which are beyond~~ our ~~control~~liquidity, including ~~lack~~seeking ofthe ~~liquidity~~extension ~~and~~or ~~greater~~replacement ~~credit spreads.~~of Weour ~~cannot~~debt ~~assure~~facilities, ~~you~~potentially ~~that~~selling ~~these~~assets ~~markets~~at ~~will~~unfavorable ~~remain~~prices anand/or ~~efficient~~reducing ~~source of long-term financing for~~ our ~~assets~~operating expenses. IfThe ~~our~~CDOs ~~strategy~~are issubject ~~not viable, we will have~~ to ~~find~~structural inflexibility ~~alternative~~with ~~forms~~little ofor ~~long-term~~no ~~financing~~ability ~~for~~on our ~~assets,~~part as ~~secured~~holders ~~revolving credit~~of ~~facilities~~junior ~~and~~notes ~~repurchase~~payable ~~facilities~~and ~~may~~preferred ~~not~~shares ~~accommodate~~in ~~long-term~~the ~~financing.~~CDOs ~~This~~to ~~could~~effect ~~subject~~sales usof toassets ~~more~~held ~~recourse~~in ~~indebtedness and~~ the ~~risk~~CDOs ~~that~~to ~~debt~~raise ~~service~~capital onfor ~~less~~our ~~efficient~~liquidity ~~forms~~needs. ofWe ~~financing~~cannot ~~would~~assure ~~require~~you athat ~~larger~~we ~~portion~~will ~~of our cash~~be ~~flows,~~successful ~~thereby~~in ~~reducing~~measures ~~cash available for distribution~~ to ~~you,~~improve ~~funds~~our ~~available for operations as well as for future business opportunities~~liquidity.

For information about our available sources of funds, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and the notes to the consolidated financial statements in this Annual Report on Form 10-K.

The recent downturn in the credit markets has increased the cost of borrowing and has made financing difficult to obtain, which has negatively impacted our business, and may have a material adverse effect on us.

During 2008, the sub prime residential lending and single family housing markets began to experience accelerating default rates, declining real estate values and increasing backlog of housing supply. The residential sector issues quickly spread more broadly into the asset-backed, corporate and other credit and equity markets. Since the sub prime meltdown, volatility and risk premiums in most credit and equity markets have increased dramatically while liquidity has decreased. These issues have continued throughout 2008 and into the beginning of fiscal 2009. Increasing concerns regarding the U.S. and world economic outlook, such as large asset write-downs at banks, rising oil prices, declining business and consumer confidence and increased unemployment, are compounding these issues and risk premiums in most capital markets remain near historical all-time highs. Although we do not have any direct sub prime exposure or direct exposure to the single family mortgage market, the factors described above have resulted in substantially reduced commercial mortgage loan originations and securitizations, and are precipitating more generalized credit market dislocations and a significant contraction in available credit. As a result, most financial industry participants, including commercial real estate lenders and investors, are finding it difficult to obtain cost-effective debt capital to finance new investment activity or to refinance maturing debt.

Due to these conditions, the commercial real estate finance market has experienced higher volatility and less liquidity despite continued relatively strong credit performance across the sector. Credit has become more expensive and difficult to obtain for the Company and its competitors. The cost of financing as well as overall market-demanded risk premiums in commercial lending have increased. Most lenders are imposing more stringent restrictions on the terms of credit and there is a general reduction in the amount of credit available in the markets in which we conduct business. The negative impact on the tightening of the credit markets, further declines in real estate values in the U.S. and continuing credit and liquidity concerns may have a material adverse effect on us. Additionally, there is no assurance that the increased financing costs, financing with increasingly restrictive terms or the increase in risk premiums that are demanded by investors will not have a material impact on our future profitability measures. However, we expect that a portion of the impact of increased capital costs will be offset by increased yields on newly-originated assets, particularly if assets in our existing commercial real estate CDOs are repaid.

Lenders may require us to enter into restrictive covenants relating to our operations.

When we obtain financing, lenders could impose restrictions on us that would affect our ability to incur additional debt, our capability to make distributions to stockholders and our flexibility to determine our operating policies. Loan documents we execute will contain negative covenants that may limit, among other things, our ability to repurchase stock, distribute more than a certain amount of our funds from operations, and employ leverage beyond certain amounts. For example, though we have legal title to our assets and have all of the risks and rewards of ownership, under ~~the~~a typical master repurchase ~~agreements for the DB Warehouse Facilities~~agreement, the lender ~~has~~would have a security interest in certain assets as collateral for our obligation under the related borrowings. Accordingly, we ~~are~~ would be prohibited, among other things, tofrom ~~take~~ taking any action which would directly or indirectly impair or adversely affect the lender’s security interest the underlying securities or loans, to transfer any interest in the underlying loans to any person other than the lender, to modify in any material respect or terminate any of our organizational documents or to create or permit any lien or encumbrance on the underlying securities or loans.

If we issue senior securities we will be exposed to additional restrictive covenants and limitations on our operative flexibility, which could adversely affect our ability to pay dividends.

If we decide and the markets allow us to issue senior securities in the future, it is likely that they will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Holders of senior securities may be granted specific rights, including but not limited to: the right to hold a perfected security interest in certain of our assets, the right to accelerate payments due under the indenture, rights to restrict dividend payments, and rights to require approval to sell assets. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock. We, and indirectly our stockholders, will bear the cost of issuing and servicing such securities.

The warehouse agreements and credit facilities that we use to finance our investments may require us to provide additional collateral.

We use credit facilities, when available, including warehouse agreements, to finance our investments. If the market value of the loans or securities pledged or sold by us to a funding source decline in value, we may be required by the lending institution to provide additional collateral or pay down a portion of the funds advanced. For example, under ~~the~~a ~~$400.0~~typical ~~million~~ master repurchase agreement ~~with Deutsche Bank AG~~, ~~Cayman Islands Branch, or~~ the ~~DB Warehouse Facility, the~~ lender may, by notice to us, require us to transfer to the lender cash or additional collateral acceptable by the lender in its sole and absolute discretion not later than one business day after such notice was given. We may not have the funds available to pay down our debt, which could result in defaults. Posting additional collateral to support our credit facilities will reduce our liquidity and limit our ability to leverage our assets. In the event we do not have sufficient liquidity to meet such requirements, lending institutions can accelerate our indebtedness, increase interest rates and terminate our ability to borrow. Such a situation would likely result in a rapid deterioration of our financial condition and possibly necessitate a filing for protection under the U.S. Bankruptcy Code.

23- 15 -

Further, credit facility providers may require us to maintain a certain amount of cash uninvested or set aside unlevered assets sufficient to maintain a specified liquidity position which would allow us to satisfy our collateral obligations. As a result, we may not be able to leverage our assets as fully as we would choose, which could reduce our return on assets. In the event that we are unable to meet these collateral obligations, our financial condition could deteriorate rapidly.

~~If our~~Investor ~~Manager~~demand ~~ceases~~for tocommercial bereal ~~our~~estate ~~manager~~CDOs ~~pursuant~~has tobeen ~~the~~substantially ~~management agreement, financial institutions providing our credit facilities may not provide future financing to us~~curtailed.

The ~~financial~~turmoil ~~institutions~~in ~~that~~the structured finance ~~our~~markets ~~investments~~has negatively ~~pursuant~~impacted tothe ~~our~~ credit ~~facilities~~markets generally, and, ~~our~~as ~~warehouse~~a ~~agreements~~result, ~~may~~investor ~~require~~demand ~~that~~for ~~our~~commercial ~~Manager remain~~real ~~our~~estate ~~manager~~CDOs ~~pursuant~~has tobeen ~~the~~substantially ~~management agreement~~curtailed. IfIn ~~our~~recent ~~Manager~~years, ~~ceases~~we tohave ~~be our manager~~relied, itto ~~could~~a ~~constitute~~substantial anextent, ~~event~~on ofCDO ~~default~~financings ~~and~~to ~~each~~obtain ofmatch ~~the~~funded financing ~~financial~~for ~~institutions~~our ~~under~~investments. ~~these~~Until ~~credit~~the ~~facilities~~market ~~would~~for ~~have~~commercial ~~the~~real ~~right~~estate toCDOs ~~terminate~~recovers, ~~their facility~~we ~~and~~may ~~their~~be ~~obligation~~unable to ~~advance~~utilize ~~funds~~CDOs to ~~us to~~ finance our ~~future~~ investments. ~~If our Manager ceases to be our manager for any reason~~ and we ~~are~~may ~~unable~~need to ~~obtain~~utilize ~~financing~~less ~~under~~favorable ~~these~~sources orof ~~replacement~~financing ~~credit~~to ~~facilities,~~finance our ~~growth~~investments ~~may~~on bea ~~limited~~long-term basis. ~~Our~~There DBcan ~~Warehouse~~be ~~Facility~~no ~~and~~assurance ~~two~~as ~~facilities~~to ~~with~~when ~~Banc~~demand offor ~~America~~commercial ~~Securities,~~real ~~LLC,~~estate ~~and~~CDOs ~~Bank~~will ofreturn ~~America, N.A.,~~ or the ~~Bank~~terms of ~~America~~such ~~Warehouse~~securities ~~Facilities,~~investors dowill ~~not~~demand ~~provide~~or ~~that~~whether ~~the~~we ~~dissolution~~will ofbe ~~the~~able ~~relationship~~to ~~between~~issue usCDOs ~~and~~to finance our ~~Manager would~~investments ~~constitute~~on anterms ~~event~~beneficial ~~of default under such facilities~~to us.

Our financial condition and results of operation will depend on our ability to manage future growth effectively.

Our ability to achieve our investment objective depends on our ability to grow, which depends, in turn, on the management team of our Manager and its ability to identify and invest in securities that meet our investment criteria as well as on our access to financing on acceptable terms. Our ability to grow is also dependent upon our Manager’s ability to successfully hire, train, supervise and manage new employees. We may not be able to manage growth effectively or to achieve growth at all. Any failure to manage our future growth effectively could have a material adverse effect on our business, financial condition and results of operations.

We operate in a highly competitive market for investment opportunities.

A number of entities compete with us to make the types of investments that we plan to make. We compete with other REITs, public and private funds, commercial and investment banks and commercial finance companies. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. Several other REITs have recently raised, or are expected to raise, significant amounts of capital, and may have investment objectives that overlap with ours, which may create competition for investment opportunities. Some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we can offer no assurance that we will be able to identify and make investments that are consistent with our investment objective.

Failure to procure adequate capital and funding would adversely affect our results and may, in turn, negatively affect the market price of shares of our common stock and our ability to distribute dividends.

We depend upon the availability of adequate funding and capital for our operations. As a REIT, we are required to distribute annually at least 90% of our net taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain, to our stockholders and are therefore not able to retain significant amounts of our earnings for new investments. However, CBRE Realty Finance TRS, Inc., our TRS, is able to retain (and likely will retain) earnings for investment in new capital, subject to the REIT requirements which place a limitation on the relative value of TRS stock and securities owned by a REIT. The failure to secure acceptable financing could reduce our taxable income, as our investments would no longer generate the same level of net

interest income due to the lack of funding or increase in funding costs. A reduction in our net income would have an adverse effect on our liquidity and our ability to make distributions to our stockholders. We cannot assure you that any, or sufficient, funding or capital will be available to us in the future on terms that are acceptable to us. Therefore, in the event that we cannot obtain sufficient funding on acceptable terms, there may be a negative impact on the market price of our common stock and our ability to distribute dividends.

If we issue senior securities we will be exposed to additional restrictive covenants and limitations on our operative flexibility, which could adversely affect our ability to pay dividends.

If we decide to issue senior securities in the future, it is likely that they will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Holders of senior securities may be granted specific rights, including but not limited to: the right to hold a perfected security interest in certain of our assets, the right to accelerate payments due under the indenture, rights to restrict dividend payments, and rights to require approval to sell assets. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock. We, and indirectly our stockholders, will bear the cost of issuing and servicing such securities.

We may not be able to successfully complete securitization transactions.

In addition to issuing senior securities to raise capital as described above, we may in the future, and to the extent consistent with the REIT requirements, seek to securitize certain of our portfolio investments to generate cash for funding new investments. This would involve creating a special-purpose vehicle, contributing a pool of our assets to the entity, and selling interests in the entity on a non-recourse basis to purchasers (who we would expect to be willing to accept a lower interest rate to invest in investment grade loan pools). We would retain all or a portion of the equity in the securitized pool of portfolio investments. We will initially finance our investments with relatively short-term credit facilities. We will use these short-term facilities to finance the acquisition of securities until a sufficient quantity of securities is accumulated, at which time we intend to refinance these facilities through a securitization, such as a CDO issuance, or other long-term financing. As a result, we are subject to the risk that we may not be able to acquire, during the period that our short-term facilities are available, a sufficient amount of eligible securities to maximize the efficiency of a CDO issuance. We also bear the risk that we may not be able to obtain short-term credit facilities or may not be able to renew any short-term credit facilities after they expire should we find it necessary to extend our short-term credit facilities to allow more time to seek and acquire the necessary eligible securities for a long-term financing. The inability to renew our short-term credit facilities may require us to seek more costly financing for our investments or to liquidate assets. In addition, conditions in the capital markets may make the issuance of a CDO impractical when we do have a sufficient pool of collateral. The inability to securitize our portfolio could hurt our performance and ability to grow our business. At the same time, the securitization of our portfolio investments might expose us to losses, as the residual portfolio investments in which we do not sell interests will tend to be riskier and more likely to generate losses.

The use of CDO financings with over-collateralization requirements may have a negative impact on our cash flow.

We expect that the terms of CDOs we may issue will generally provide that the principal amount of assets must exceed the principal balance of the related bonds by a certain amount, commonly referred to as “over-collateralization.” We anticipate that the CDO terms will provide that, if certain delinquencies and/or losses exceed the specified levels based on the analysis by the rating agencies (or any financial guaranty insurer) of the characteristics of the assets collateralizing the bonds, the required level of over-collateralization may be increased or may be prevented from decreasing as would otherwise be permitted if losses or delinquencies did not exceed those levels. Other tests (based on delinquency levels or other criteria) may restrict our ability to receive net income from assets collateralizing the obligations. We cannot assure you that the performance tests will be satisfied. In advance of completing negotiations with the rating agencies or other key transaction parties on our future CDO financings, we cannot assure you of the actual terms of the CDO delinquency tests, over-collateralization terms, cash flow release mechanisms or other significant factors regarding the calculation of net income to us. Failure to obtain favorable terms with regard to these matters may materially and adversely affect the availability of net income to us. If our assets fail to perform as anticipated, our over-collateralization or other credit enhancement expense associated with our CDO financings will increase.

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 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 (including from a trust vehicle used to facilitate a structured financing of the assets through CDOs) 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 materially and adversely affect our financial condition, ~~and~~ operating results, and ability to make distributions to stockholders.

Lack of diversification in number of investments increases our dependence on individual investments.

If we acquire larger loans or property interests, our portfolio will be concentrated in a smaller number of assets, increasing the risk of loss to stockholders if a default or other problem arises.

In a period of rising interest rates, our interest expense could increase while the interest we earn on our fixed-rate assets would not change, which would adversely affect our profitability.

Our operating results depend in large part on differences between the income from our assets, net of credit losses, and financing costs. We anticipate that, in most cases, for any period during which our assets are not match-funded, the income from such assets will respond more slowly to interest rate fluctuations than the cost of our borrowings. Consequently, changes in interest rates, particularly short-term interest rates, may significantly influence our net income. Increases in these rates will tend to decrease our net income and market value of our assets. Interest rate fluctuations resulting in our interest expense exceeding our interest income would result in operating losses for us and may limit or eliminate our ability to make distributions to our stockholders.

If credit spreads widen before we obtain long-term financing for our assets, the value of our assets may suffer.

WeTo the extent we are able to restart our lending activities, as we have not entered into any new investments since July 2007, we price our assets based on our assumption about future credit spreads for financing those assets. We have obtained and will attempt to obtain in the future longer term financing for our assets using structured ~~structure~~ financing techniques. Such issuance entail interest rates set at a spread over a certain benchmark, such as the yield on United States Treasury obligations, swaps or LIBOR. If the spread that investors are paying on our current structured finance vehicle and will pay on future structured finance vehicles we may engage in over the benchmark widens and the rates we are charging or will charge on our securitized assets are not increased accordingly, this may reduce our income or cause losses and affect our ability to make distributions to stockholders.

We may not be able to renew the total return swaps that we may enter into, which could adversely impact our leveraging strategy.

We may leverage certain of our investments through the use of total return swaps. We may wish to renew many of the swaps, which are for specified terms, as they mature. However, there is a limited number of providers of such swaps, and there is no assurance the initial swap providers will choose to renew the swaps, and—if they do not renew—that we would be able to obtain suitable replacement providers. Providers may choose not to renew our total return swaps for a number of reasons, including:

• increases in the provider’s cost of funding;

• insufficient volume of business with a particular provider;

• a desire by our company to invest in a type of swap that the provider does not view as economically attractive due to changes in interest rates or other market factors; or

• the inability of our company and a provider to agree on terms.

Furthermore, our ability to invest in total return swaps, other than through a TRS, may be severely limited by the REIT qualification requirements because total return swaps are not qualifying assets and do not produce qualifying income for the purposes of the REIT asset and income tests.

Hedging against interest rate exposure may adversely affect our earnings, which could reduce our cash available for distribution to our stockholders.

We may pursue various hedging strategies to seek to reduce our exposure to losses from adverse changes in interest rates. Our hedging activity will vary in scope based on the level and volatility of interest rates, the type of assets held, and other changing market conditions. Interest rate hedging may fail to protect or could adversely affect us because, among other things:

•

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

•

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

•

the duration of the hedge may not match the duration of the related liability;

•

the amount of income that a REIT may earn from hedging transactions (other than through TRSs) to offset interest rate losses is limited by U.S. federal tax provisions governing REITs;

•

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

•

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

Our hedging activity may adversely affect our earnings, which could reduce our cash available for distribution to our stockholders.

Declines in the market values of our investments may adversely affect periodic reported results and credit availability, which may reduce earnings and, in turn, cash available for distribution to our stockholders.

A portion of our assets ~~are~~is classified for accounting purposes as “~~available-for-sale~~trading.” Changes in the market values of ~~those~~these assets will be directly charged or credited to ~~stockholders”~~earnings ~~equity.~~and As a ~~result, a~~ decline in ~~values~~value ~~may~~reduces ~~reduce~~ the book value of our assets. ~~Moreover, if the decline in value of an available-for-sale security is other than temporary, such decline will reduce earnings.~~

A decline in the market value of our assets may adversely affect us particularly in instances where we have borrowed money based on the market value of those assets. If the market value of those assets declines, the lender may require us to post additional collateral to support the loan. If we were unable to post the additional collateral, we would have to sell the assets at a time when we might not otherwise choose to do so. A reduction in credit available may reduce our earnings and, in turn, cash available for distribution to our stockholders.

If- we16 ~~fail~~- ~~to achieve adequate operating cash flow, our ability to make distributions will be adversely affected.~~

As a REIT, we must distribute annually at least 90% of our net taxable income to our stockholders, determined without regard to the deduction for dividends paid and excluding net capital gain. Our ability to make and sustain cash distributions is based on many factors, including the return on our investments, operating expense levels and certain restrictions imposed by Maryland law. Some of the factors are beyond our control and a change in any such factor could affect our ability to pay future dividends. No assurance can be given as to our ability to pay distributions.

If we fail to achieve adequate operating cash flow, our ability to make distributions will be adversely affected.

As a REIT, we must distribute annually at least 90% of our net taxable income to our stockholders, determined without regard to the deduction for dividends paid and excluding net capital gains. Our ability to make and sustain cash distributions is based on many factors, including the return on our investments, operating expense levels and certain restrictions imposed by Maryland law. Some of the factors are beyond our control and a change in any such factor could affect our ability to pay future dividends. No assurance can be given as to our ability to pay distributions to stockholders.

We may suffer a loss if a borrower defaults on a non-recourse loan or on a loan that is not secured by underlying real estate.

In the event of a default by a borrower on a non-recourse loan, we will only have recourse to the real estate-related assets collateralizing the loan. For this purpose, we consider loans made to special purpose entities formed solely for the purpose of holding and financing particular assets to be non-recourse loans. If the underlying collateral value is below the loan amount, we will suffer a loss. Conversely, we sometimes make loan investments that are unsecured or are secured by equity interests in the borrowing entities. These loans are subject to the risk that other lenders may be directly secured by the real estate assets of the borrower. In the event of a default, those collateralized lenders would have priority over us with respect to the proceeds of a sale of the underlying real estate.

In cases described above, we may lack control over the underlying asset collateralizing our loan or the underlying assets of the borrower prior to a default, and as a result, their value may be reduced by acts or omissions by owners or managers of the assets.

We may suffer a loss if a borrower or guarantor defaults on recourse obligations under our loans.

We sometimes obtain individual or corporate guarantees from borrowers or their affiliates, which guarantees are not secured. In cases where guarantees are not fully or partially secured, we typically rely on financial covenants from borrowers and guarantors which are designed to require the borrower or guarantor to maintain certain levels of creditworthiness. Where we do not have recourse to specific collateral pledged to satisfy such guarantees or recourse loans, we will only have recourse as an unsecured creditor to the general assets of the borrower or guarantor, some or all of which may be pledged to satisfy other lenders. There can be no assurance that a borrower or guarantor will comply with its financial covenants, or that sufficient assets will be available to pay amounts owed to us under our loans and guarantees. As a result of these factors, we may suffer losses which could have a material adverse effect on our financial performance, the market prices of our securities and our ability to pay dividends.

We may suffer a loss in the event of a default or bankruptcy of a borrower, particularly in cases where the borrower has incurred debt that is senior to our loan.

If a borrower defaults on our loan but does not have sufficient assets to satisfy our loan, we may suffer a loss of principal or interest. In the event of a borrower bankruptcy, we may not have full recourse to the assets of the borrower, or the assets of the borrower may not be sufficient to satisfy our loan. In addition, certain of our loans are subordinate to other debt of the borrower. If a borrower defaults on our loan or on debt senior to our loan, or in the event of a borrower bankruptcy, our loan will be satisfied only after the senior debt. Where debt senior to our loan exists, the presence of intercreditor arrangements may limit our ability to amend our loan documents, assign our loans, accept prepayments, exercise our remedies (through “standstill” periods) and control decisions made in bankruptcy proceedings relating to borrowers. Bankruptcy and borrower litigation can significantly increase the time needed for us to acquire underlying collateral in the event of a default, during which time the collateral may decline in value. In addition, there are significant costs and delays associated with the foreclosure process.

We are subject to the risk that provisions of our loan agreements may be unenforceable.

Our rights and obligations with respect to our loans are governed by written loan agreements and related documentation. It is possible that a court could determine that one or more provisions of a loan agreement are unenforceable, such as a loan prepayment provision or the provisions governing our security interest in the underlying collateral. If this were to happen with respect to a material asset or group of assets we could be adversely affected.

We are subject to the risks associated with loan participations, such as less than full control rights.

Some of our assets are participation interests in loans or co-lender arrangements in which we share the rights, obligations and benefits of the loan with other lenders. We may need the consent of these parties to exercise our rights under such loans, including rights with respect to amendment of loan documentation, enforcement proceedings in the event of default and the institution of, and control over, foreclosure proceedings. Similarly, a majority of the participants may be able to take actions to which we object but to which we will be bound if our participation interest represents a minority interest. We may be adversely affected by this lack of full control.

Increases in interest rates during the term of a loan may adversely impact a borrower’s ability to repay a loan at maturity or to prepay a loan.

If interest rates increase during the term of our loan, a borrower may not be able to obtain the necessary funds to repay our loan at maturity through refinancing. Increasing interest rates may hinder a borrower’s ability to refinance our loan because the underlying property cannot satisfy the debt service coverage requirements necessary to obtain new financing or because the value of the property has decreased. If a borrower is unable to repay our loan at maturity, we could suffer a loss and we will not be able to reinvest proceeds in assets with higher interest rates. As a result, our financial performance and the market prices of our securities could be materially adversely affected.

We manage our portfolio pursuant to very broad investment guidelines and our board of directors does not approve each investment decision made by us, which may result in our making riskier investments.

To the extent we are able to restart our lending activities, as we have not entered into any new investments since July 2007, we are authorized to follow very broad investment guidelines. While our board of directors periodically review our investment guidelines and our investment portfolio, they do not review all of our proposed investments and are only required to approve investments or dispositions that exceed $50 million (or $75 million for investments and dispositions having credit ratings of “A” or better by a major rating agency), subject to certain limited exceptions. In addition, in conducting periodic reviews, our directors may rely primarily on information provided to them by us. Furthermore, we may use complex strategies and transactions that may be difficult or impossible to unwind by the time they are reviewed by our directors. We have great latitude within the broad investment guidelines in determining the types of assets we may decide are proper investments for us. Decisions made and investments entered into by us may not fully reflect your best interests. In addition, our directors may change the investment guidelines at any time without the approval of our stockholders.

Maintenance of our 1940 Act exemption imposes limits on our operations.

We intend to conduct our operations so as not to become regulated as an investment company under the 1940 Act. Because we are a holding company that will conduct our businesses through subsidiaries, the securities issued by our subsidiaries that are excepted from the definition of “investment company” under Section 3(c)(1) or Section 3(c)(7) of the 1940 Act, together with any other investment securities we may own, may not have a combined value in excess of 40% of the value of our total assets on an unconsolidated basis. This requirement limits the types of businesses in which we may engage through our subsidiaries. If we or our subsidiaries fail to maintain our exceptions or exemptions from the 1940 Act, we could, among other things, be required either (a) to change the manner in which we conduct our operations to avoid being required to register as an investment company or (b) to register as an investment company, either of which could have an adverse effect on our business and the market price for our common stock.

In addition, certain of our wholly owned subsidiaries intend to qualify for an exemption from registration under Section 3(c)(5)(C) of the 1940 Act, which generally means that at least 55% of each of their portfolios must be comprised of qualifying assets and 80% of each of their portfolios must be comprised of qualifying ~~assets and real estate-related assets under the 1940 Act. To comply with~~ these regulations, we may from time to time buy or originate whole loans, B Notes, where we have the unilateral right to (i) instruct the servicer to foreclose on a defaulted mortgage loan, (ii) replace the servicer in the event the servicer, in its discretion, elects not to foreclose on such a loan, and (iii) purchase the A Note in the event of a default on the mortgage loan and foreclose on the loan, and other qualifying assets. Although we intend to monitor our portfolio periodically and prior to each acquisition, there can be no assurance that we will be able to maintain this exemption from registration. Further, we may not be able to invest in sufficient qualifying and/or real estate-related assets and future revisions of the 1940 Act or further guidance from the SEC Staff may cause us to lose our exemption or force us to re-evaluate our portfolio and our business strategy. Such changes may prevent us from operating our business successfully.

As- ~~part~~17 of- its duties under the management agreement, our Manager periodically evaluates our assets, and also evaluates prior to an acquisition or origination the structure of each prospective investment, to determine whether the investment will be a qualifying asset for purposes of maintaining our exemption or exclusion from registration under the 1940 Act, and will consult with counsel when necessary. Failure to maintain this exemption or exclusion would require us to significantly restructure our business plan. For example, because affiliate transactions are prohibited under the 1940 Act, failure to maintain our exemption or exclusion would force us to terminate our management agreement and all other agreements with affiliates, which could have a material adverse effect on our ability to operate our business. If the management agreement is terminated, it could constitute an event of default under our credit facilities and financial institutions would have the right to terminate their facilities and their obligation to advance funds to us to finance our future investments. In addition, we may not be able to identify a replacement manager on favorable terms or at all.

Rapid changes in the values of our other real estate related investments may make it more difficult for us to maintain our qualification as a REIT or exemption from the 1940 Act.

If the market value or income potential of real estate related investments declines as a result of increased interest rates, prepayment rates or other factors, we may need to increase our real estate investments and income and/or liquidate our non-qualifying assets in order to maintain our REIT qualification or exemption from the 1940 Act. If the decline in real estate asset values and/or income occurs quickly, this may be especially difficult to accomplish. This difficulty may be exacerbated by the illiquid nature of many of our non-real estate assets. We may have to make investment decisions that we otherwise would not make absent the REIT and 1940 Act considerations.

We are highly dependent on information systems and third parties, and systems failures could significantly disrupt our business, which may, in turn, negatively affect the market price of our common stock and our ability to pay dividends.

Our business is highly dependent on communications and information systems. Any failure or interruption of our systems could cause delays or other problems in our securities trading activities, which could have a material adverse effect on our operating results and negatively affect the market price of our common stock and our ability to pay dividends.

assets and real estate-related assets under the 1940 Act. To comply with these regulations, we may from time to time buy or originate whole loans, certain B Notes, mezzanine loans, and other qualifying assets. We will treat certain B Notes as qualifying real estate assets if, among other conditions, (i) we have approval rights in connection with any material decisions pertaining to the administration and servicing of the relevant mortgage loan and with respect to any material modification to the relevant loan agreements, and (ii) in the event that the relevant mortgage loan becomes non-performing, we have effective control over the remedies relating to the enforcement of the loan, including ultimate control of the foreclosure process by having the right to: (a) appoint the special servicer to manage the resolution of the loan, (b) advise, direct or approve the action of the special servicer, (c) terminate the special servicer at any time with or without cause, (d) cure the default so that the loan is no longer non-performing, and (e) purchase the A Note at par plus accrual interest, thereby acquiring the entire mortgage loan. We will treat certain mezzanine loans (Tier 1 mezzanine loans) as qualifying real estate assets, if, among other conditions, we (i) exercise ongoing control rights over the management of the underlying property, (ii) have the right to readily cure a default or purchase the mortgage loan, and (iii) have the right to foreclose on the collateral and, through our ownership in the property-owning entity become the owner of the underlying property. Although we intend to monitor our portfolio periodically and prior to each acquisition, there can be no assurance that we will be able to maintain this exemption from registration. Further, we may not be able to invest in sufficient qualifying and/or real estate-related assets and future revisions of the 1940 Act or further guidance from the SEC Staff may cause us to lose our exemption or force us to re-evaluate our portfolio and our business strategy. Such changes may prevent us from operating our business successfully.

We periodically evaluate our assets, and also evaluate prior to an acquisition or origination the structure of each prospective investment, to determine whether the investment will be a qualifying asset for purposes of maintaining our exemption or exclusion from registration under the 1940 Act, and will consult with counsel when necessary. Failure to maintain this exemption or exclusion would require us to significantly restructure our business plan.

Rapid changes in the values of our other real estate-related investments may make it more difficult for us to maintain our qualification as a REIT or exemption from the 1940 Act.

If the market value or income potential of real estate-related investments declines as a result of increased interest rates, prepayment rates or other factors, we may need to increase our real estate investments and income and/or liquidate our non-qualifying assets in order to maintain our REIT qualification or exemption from the 1940 Act. If the decline in real estate asset values and/or income occurs quickly, this may be especially difficult to accomplish. This difficulty may be exacerbated by the illiquid nature of many of our non-real estate assets. We may have to make investment decisions that we otherwise would not make absent the REIT and 1940 Act considerations.

We face risks related to securities litigation that could have a material adverse effect on our business, financial condition and results of operations. We may face additional litigation in the future that could also harm our business.

On October 30, 2007, a putative class action lawsuit was commenced in the United States District Court for the District of Connecticut against our company, our former chief financial officer and our former chief executive officer seeking remedies under the Securities Act of 1933, as amended. Amended complaints filed on March 25, 2008 and May 6, 2008 added our chairman and the underwriters that participated in our October 2006 initial public offering as additional defendants. The underwriters have since been dropped from the suit by voluntary dismissal filed by the plaintiffs with the court in December 2008. The plaintiffs allege that the registration statement and prospectus relating to the initial public offering contained material misstatements and material omissions. Specifically, the plaintiffs allege that management had knowledge of certain loan impairments and did not properly disclose or record such impairments in the financial statements. The plaintiffs seek to represent a class of all persons who purchased or otherwise acquired common stock that is traceable to our initial public offering in September 2006 and seek damages in an unspecified amount. On July 29, 2008, we filed a Motion to Dismiss the putative class action suit with the federal district court for the District of Connecticut. Following oral arguments in November 2008, the plaintiffs filed a second amended complaint on December 22, 2008. We have since filed a revised Motion to Dismiss the second amended complaint, and are awaiting the court’s ruling on that motion.

In addition, on January 15, 2008 and February 7, 2008, we received complaints from an attorney representing two stockholders, alleging that certain officers and directors of our company knowingly violated generally accepted accounting principles for certain of our assets. The stockholders demanded that we take action to recover from such directors and officers the amount of damages sustained by us as a result of the misconduct alleged therein and to correct deficiencies in our internal controls and accounting practices that allowed the misconduct to occur. In response to the letters from stockholders’ counsel, our board of directors appointed a special committee to investigate the allegations set forth in the letters. On July 10, 2008, the special committee reported its findings to our board of directors and recommended that no further action be taken. Our board of directors has adopted the committee’s recommendation unanimously.

We believe that the allegations and claims against us and our directors, former chief financial officer and former chief executive officer are without merit and we intend to contest these claims vigorously. An adverse resolution of the action could have a material adverse effect on our financial condition and results of operations in the period in which the lawsuits and claims are resolved. We are not presently able to estimate potential losses to us, if any, related to these lawsuits and claims.

Adverse changes in general economic conditions have adversely affected our business.

Our success is dependent upon economic conditions in the U.S. generally, and in the geographic areas in which a substantial number of our investments are located. The recent adverse changes in national economic conditions and in the economic conditions of the regions in which we conduct substantial business have had an adverse effect on real estate values and our financial performance, the market prices of our securities and our ability to pay dividends.

In a recession or under other adverse economic conditions like the current credit crisis, non-earning assets and write-downs are likely to increase as debtors fail to meet their payment obligations. For example, our non-performing loans have increased materially through 2008, particularly in the third quarter. Although we maintain reserves for credit losses and an allowance for doubtful accounts in amounts that we believe are sufficient to provide adequate protection against potential write-downs in our portfolio, these amounts could prove to be insufficient.

As discussed in the preceding risk factors, the current credit crisis has contributed to a downgrading of our credit ratings. This downgrade and adverse market conditions generally have increased our funding costs, decreased our net investment income and limited our access to the capital markets. Further, this downgrade could result in a decision by the lenders under our existing bank credit facilities not to extend such credit facilities after their expiration. Such results have had a material adverse effect on our financial performance and the market prices of our securities.

We are required to make a number of judgments in applying accounting policies and different estimates and assumptions in the application of these policies could result in changes to our reporting of financial condition and results of operations.

Material estimates that are particularly susceptible to significant change relate to the determination of the reserve for loan losses, the effectiveness of derivatives and other hedging activities, the fair value of certain financial instruments (debt obligations, loan assets, securities, derivatives, and privately held investments), deferred income tax assets or liabilities, share-based compensation, and accounting for acquisitions, including the fair value determinations and the analysis of goodwill impairment. While we have identified those accounting policies that are considered critical and have procedures in place to facilitate the associated judgments, different assumptions in the application of these policies could result in material changes to our reports of financial condition and results of operations.

Quarterly results may fluctuate and may not be indicative of future quarterly performance.

Our quarterly operating results could fluctuate; therefore, you should not rely on past quarterly results to be indicative of our performance in future quarters. Factors that could cause quarterly operating results to fluctuate include, among others, variations in our investment origination volume, variations in the timing of prepayments, the degree to which we encounter competition in our markets and general economic conditions.

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We may incur losses as a result of ineffective risk management processes and strategies.

We seek to monitor and control our risk exposure through a risk and control framework encompassing a variety of separate but complementary financial, credit, operational, compliance and legal reporting systems, internal controls, management review processes and other mechanisms. While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, those techniques and the judgments that accompany their application cannot anticipate every economic and financial outcome or the specifics and timing of such outcomes. Thus, we may, in the course of our activities, incur losses. Recent market conditions have involved unprecedented dislocations and highlight the limitations inherent in using historical data to manage risk.

The models that we use to assess and control our risk exposures reflect assumptions about the degrees of correlation or lack thereof among prices of various asset classes or other market indicators. In times of market stress or other unforeseen circumstances, such as those which occurred during 2008, previously uncorrelated indicators may become correlated, or conversely previously correlated indicators may move in different directions. These types of market movements have at times limited the effectiveness of our hedging strategies and have caused us to incur significant losses, and they may do so in the future. These changes in correlation can be exacerbated where other market participants are using risk models with assumptions or algorithms that are similar to ours. In these and other cases, it may be difficult to reduce our risk positions due to the activity of other market participants or widespread market dislocations, including circumstances where asset values are declining significantly or no market exists for certain assets. To the extent that we make investments directly through various of our businesses in securities, including private equity, that do not have an established liquid trading market or are otherwise subject to restrictions on sale or hedging, we may not be able to reduce our positions and therefore reduce our risk associated with such positions.

We operate in a highly competitive market for investment opportunities.

A number of entities compete with us to make the types of investments that we have historically made. To the extent we are able to restart our lending activities, as we have not entered into any new investments since July 2007, we compete with other REITs, public and private funds, commercial and investment banks and commercial finance companies. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. Several other REITs may have investment objectives that overlap with ours, which may create competition for investment opportunities. Some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more relationships than us. We cannot assure you that the competitive pressures we face will not have a material adverse effect on our business, financial condition and results of operations. Also, as a result of this competition, we may not be able to take advantage of attractive investment opportunities from time to time, and we can offer no assurance that we will be able to identify and make investments that are consistent with our investment objective.

Terrorist attacks and other acts of violence or war may affect the market for our common stock, the industry in which we conduct our operations and our profitability.

Terrorist attacks may harm our results of operations and your investment. We cannot assure you that there will not be further terrorist attacks against the U.S. or U.S. businesses. These attacks or armed conflicts may directly impact the property underlying our asset-based securities or the securities markets in general. Losses resulting from these types of events are uninsurable.

More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the U.S. and worldwide financial markets and economy. Adverse economic conditions could harm the value of the property underlying our asset-backed securities or the securities markets in general which could harm our operating results and revenues and may result in the volatility of the value of our securities.

Risks Related To Our Investments

We may not realize gains or income from our investments.

We seek to generate both current income and capital appreciation. However, the securities we invest in may not appreciate in value and, in fact, may decline in value, and the debt securities we invest in may default on interest and/or principal payments. Accordingly, we may not be able to realize gains or income from our investments. Any gains that we do realize may not be sufficient to offset any other losses we experience. Any income that we realize may not be sufficient to offset our expenses.

We have incurred substantial impairment of our assets and may incur significant impairments in the future.

Due to a variety of factors, including current adverse market conditions affecting the real estate market, we have incurred substantial impairments of our assets. These impairments have resulted in significant losses. For the year ended December 31, 2008, we recorded approximately $126.5 million in loan loss provisions and $46.2 in impairment losses related to certain of our investments. For the year ended December 31, 2007, we recorded approximately $19.6 million in loan loss provisions and $62.4 million in impairment losses related to certain of our investments. Our assets may suffer additional impairments in the future causing us to recognize significant losses. If we are unsuccessful in renegotiating, selling or otherwise resolving assets that are currently nonperforming or that we expect will become nonperforming, we may experience loss of principal or reduced income available for distributions. Investors and lenders alike could lose confidence in the quality and value of our assets. These impairments, or the perception that these impairments may occur, can depress our stock price, harm our liquidity and materially adversely impact our results of operations. We may be forced to sell substantial assets at a time when the market is depressed in order to support or enhance our liquidity. Despite our need to sell substantial assets, we may be unable to make such sales on favorable terms or at all, further materially damaging our liquidity and operations. If we are unable to maintain adequate liquidity as a result of these impairments or otherwise, you could lose some or all of your investment.

Our real estate investments are subject to risks particular to real property.

We own assets secured by real estate, interests in joint ventures that do own real estate, and in the future and may own real estate directly. Real estate investments will be subject to various risks, including:

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acts of God, including earthquakes, floods and other natural disasters, which may result in uninsured losses;

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•

acts of war or terrorism, including the consequences of terrorist attacks, such as those that occurred on September 11, 2001;

• adverse changes in national and local economic and market conditions, including the credit and securitization markets;

•

changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances;

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costs of remediation and liabilities associated with environmental conditions such as indoor mold; and

•

the potential for uninsured or under-insured property losses.

If any of these or similar events occurs, it may reduce our return from an affected property or investment and reduce or eliminate our ability to make distributions to stockholders.

Our assets may include high yield and subordinated corporate securities that have greater risks of loss than secured senior loans and if those losses are realized, it could adversely affect our earnings, which could adversely affect our cash available for distribution to our stockholders.

We invest in high yield and subordinated securities. However, we do not have any specific policy with respect to allocations in high yield and subordinated securities and our charter contains no limitations on the percentage we may invest in these assets. These investments involve a higher degree of risk than long-term senior secured loans. First, the high yield securities may not be secured by mortgages or liens on assets. Even if secured, these high yield securities may have higher loan-to-value ratios than a senior secured loan. Furthermore, our right to payment and the security interest may be subordinated to the payment rights and security interests of the senior lender. Therefore, we may be limited in our ability to enforce our rights to collect these loans and to recover any of the loan balance through a foreclosure of collateral.

Certain of these high yield and subordinated securities may have an interest only payment schedule, with the principal amount remaining outstanding and at risk until the maturity of the obligation. We do not have any policy regarding the maximum term (maturity) on these assets. In this case, a borrower’s ability to repay its obligation may be dependent upon a liquidity event that will enable the repayment of the obligation.

In addition to the above, numerous other factors may affect a company’s ability to repay its obligation, including the failure to meet its business plan, a downturn in its industry or negative economic conditions. A deterioration in a company’s financial condition and prospects may be accompanied by deterioration in the collateral for the obligation. Losses in our high yield and subordinated securities could adversely affect our earnings, which could adversely affect cash available for distribution to our stockholders.

High yield and subordinated securities from highly leveraged companies may have a greater risk of loss which, in turn, could adversely affect cash available for distribution to our stockholders.

Leverage may have material adverse consequences to the companies in which we will hold investments. These companies may be subject to restrictive financial and operating covenants. The leverage may impair these companies’ ability to finance their future operations and capital needs. As a result, these companies’ flexibility to respond to changing business and economic conditions and to business opportunities may be limited. A leveraged company’s income and net assets will tend to increase or decrease at a greater rate than if borrowed money were not used. As a result, leveraged companies have a greater risk of loss. Losses on our investments could adversely affect our earnings, which could adversely affect cash available for distribution to our stockholders.

We ~~invest~~retain ~~in the~~ equity ~~securities~~interests of ~~CDOs~~CDO issuances and such ~~investments~~interests involve ~~various~~ significant risks, including that CDO equity receives distributions from the CDO only if the CDO generates enough income to first pay the holders of its debt securities and its expenses.

We ~~invest~~retain ~~in the~~ equity ~~securities~~ interests of ~~CDOs~~CDO issuances. However, we do not have any specific policy with respect to allocations in CDOs and our charter contains no limitations on the percentage we may invest in this asset class. A CDO is a special purpose vehicle that purchases collateral (such as real estate-related investments, bank loans or asset-backed securities) that is expected to generate a stream of interest or other income. The CDO issues various classes of securities that participate in that income stream, typically one or more classes of debt instruments and a class of equity securities. The equity is usually entitled to all of the income generated by the CDO after the CDO pays all of the interest due on the debt securities and its expenses. However, there will be little or no income available to the CDO equity if there are defaults by the issuers of the underlying collateral and those defaults exceed a certain amount. In that event, the value of our investment in the CDOs equity could decrease substantially. In addition, the equity securities of CDOs are generally illiquid, and because they represent a leveraged investment in the CDO’s assets, the value of the equity securities will generally have greater fluctuations than the values of the underlying collateral.

We may enter into warehouse agreements in connection with CDOs and if the investment in the CDO is not consummated, the warehoused collateral will be sold and we must bear any loss resulting from the purchase price of the collateral exceeding the sale price.

In connection with CDOs that ~~our~~we ~~Manager~~structure, ~~structures~~when ~~for~~markets uspermit, we expect to enter into warehouse agreements with investment banks or other financial institutions, pursuant to which the institution will initially finance the purchase of the collateral that will be transferred to the CDO. ~~Our~~We ~~Manager~~ will select the collateral. If the CDO transaction is not consummated, the institution ~~would~~may liquidate the warehoused collateral and we would have to pay any amount by which the original purchase price of the collateral exceeds its sale price, subject to negotiated caps, if any, on our exposure. In addition, regardless of whether the CDO transaction is consummated, if any of the warehoused collateral is sold before the consummation, we will have to bear any resulting loss on the sale. The amount at risk in connection with the warehouse agreements supporting our investments in CDOs, generally is the amount that we have agreed to invest in the equity securities of the CDO. Although we would expect to complete the CDO transaction within about three to nine months after the warehouse agreement is signed, we cannot assure you that we would in fact be able to complete any such transaction, or complete it within the expected time period.

Technical interpretations of GAAP may result in certain loans and securities acquired by us and repurchase transactions entered into by us being reported on our financial statements net instead of the current gross presentation.

We have certain CMBS and loan investments, or the collateral assets, purchased from a counterparty that are financed via a repurchase agreement with the same counterparty. We believe that in accordance with FASB Concept Statement No. 6, or CON 6, “Elements of Financial Statements,” we are entitled to obtain the future economic benefits of the collateral assets and are obligated under the repurchase agreement. Therefore, currently, we record the collateral assets and the related financing gross on our balance sheet, and the corresponding interest income and interest expense gross on our income statement. In addition, any change in fair value of the CMBS included in the collateral assets, is reported through other comprehensive income since these are classified as available for sale securities in accordance with FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” or SFAS 115.

However, an alternate view could be taken that in a transaction where assets are acquired from and financed under a repurchase agreement with the same counterparty, the acquisition may not qualify as a sale from the seller’s perspective. In such a case, the seller may be required to continue to consolidate the assets sold to us. Under this view, we would be precluded from presenting the assets gross on our balance sheet and would instead treat our net investment in such assets as a derivative. Under this view, the interest rate swaps entered into by us to hedge our interest rate exposure with respect to these transactions would no longer qualify for hedge accounting, but would be marked to market through the income statement.

This potential change would not affect the economics of the transactions but would affect how the transactions are reported in our financial statements. If we were to apply this view to our transactions, for the year ended December 31, 2006 and for the period May 10, 2005 (inception) through December 31, 2005, the change in net income per common diluted share would be immaterial and our total assets and total liabilities would each be reduced by $14.9 million and $51.4 million, respectively.

Increases in interest rates could negatively affect the value of our investments, which could result in reduced earnings or losses and negatively affect the cash available for distribution to our stockholders.

We invest indirectly in mortgage loans by purchasing ~~MBS~~CMBS. Under a normal yield curve, an investment in ~~MBS~~CMBS will decline in value if long-term interest rates increase. Declines in market value may ultimately reduce earnings or result in losses to us, which may negatively affect cash available for distribution to our stockholders.

A significant risk associated with our investment in ~~MBS~~CMBS is that both long-term and short-term interest rates will increase significantly. If long-term rates increased significantly, the market value of these ~~MBS~~CMBS would decline and the duration and weighted average life of the investments would increase. We could realize a loss if the securities were sold. At the same time, an increase in short-term interest rates would increase the amount of interest owed on the warehouse agreements we may enter into in order to finance the purchase of ~~MBS~~CMBS.

Market values of our investments may decline without any general increase in interest rates for a number of reasons, such as increases in defaults, increases in voluntary prepayments for those investments that are subject to prepayment risk, market illiquidity and widening of credit spreads.

~~Some~~- of20 ~~our~~- ~~portfolio investments are recorded at fair value as determined in good faith by our management and, as a result, there is uncertainty as to the value of these investments.~~

Some of our portfolio investments are in the form of securities that are not publicly traded. The fair value of securities and other investments that are not publicly traded is not readily determinable. We value these investments quarterly at fair value as determined in good faith by our management using internal pricing models and input from counterparties and reported to our board of directors. Because such valuations are inherently uncertain, may fluctuate over short periods of time and may be based on estimates, our determinations of fair value may differ

~~materially~~Some ~~from~~of ~~the~~our ~~values~~portfolio ~~that~~investments ~~would~~are ~~have~~recorded ~~been~~at ~~used~~fair ifvalue aas ~~ready~~determined ~~market~~in ~~for~~good ~~these~~faith ~~securities~~by ~~existed.~~us ~~The~~and, ~~value~~as ofa ~~our common stock could be adversely~~result, ~~affected~~there ifis ~~our~~uncertainty ~~determinations~~as ~~regarding~~to the ~~fair~~ value of these investments ~~were materially higher than the values that we ultimately realize upon their disposal~~.

~~Negative~~Some ~~covenants~~of ~~contained~~our portfolio investments are in ~~our~~the ~~repurchase~~form ~~agreements~~of ~~increase~~securities ~~the~~that ~~possibility~~are not publicly traded. The fair value of securities and other investments that weare ~~will~~not bepublicly ~~unable~~traded tois ~~maintain~~not ~~adequate~~readily ~~capital~~determinable. We value these investments quarterly at fair value as determined in good faith by our management using a variety of industry accepted techniques and ~~funding~~report the results to our board of directors. Because such valuations are inherently uncertain, may fluctuate over short periods of time and may ~~reduce~~be ~~cash~~based ~~available~~on estimates, our determinations of fair value may differ materially from the values that would have been used if a ready market for ~~distribution~~these securities existed. The value of our common stock could be adversely affected if our determinations regarding the fair value of these investments were materially higher than the values that we ultimately realize upon their disposal.

WeNegative ~~obtain a significant portion of our funding through the use of repurchase facilities. Certain of our repurchase agreements include negative~~ covenants~~, that~~ ~~if breached, may cause transactions to be terminated early. The repurchase agreements for our repurchase facilities do not include substantive provisions other than those~~ contained in ~~the standard master~~ repurchase ~~agreement~~agreements asincrease ~~published by~~ the ~~Bond~~ ~~Market~~possibility Association. The occurrence of an event of default or termination event would give our counterparty the option to terminate all repurchase transactions existing with us and make any amount due by us to the counterparty payablethat ~~immediately. If~~ we ~~are~~will ~~required~~be ~~to terminate outstanding repurchase transactions and are~~ unable to ~~negotiate~~maintain ~~more~~adequate ~~favorable~~capital and funding ~~terms,~~and ~~cash will be negatively impacted. This~~ may reduce ~~the~~cash ~~amount of capital~~ available for ~~investing and/or may negatively impact our ability to distribute dividends~~distribution. ~~In addition, we may have to sell assets at a time when we might not otherwise choose to do so.~~

We historically have obtained a significant portion of our funding for new investments through the use of repurchase facilities. Any future repurchase agreements may include negative covenants that, if breached, may cause transactions to be terminated early. The occurrence of an event of default or termination event could give our counterparty the option to terminate all repurchase transactions existing with us and make any amount due by us to the counterparty payable immediately. If we were required to terminate outstanding repurchase transactions and were unable to negotiate more favorable funding terms, cash would be negatively impacted. This would reduce the amount of capital available for investing and/or could negatively impact our ability to make distributions to our stockholders. In addition, we could have to sell assets at a time when we might not otherwise choose to do so.

A prolonged economic slowdown, a recession or declining real estate values could impair our investments and harm our operating results.

We believe the risks associated with our business will be more severe during periods of economic slowdown or recession if these periods are accompanied by declining real estate values. Declining real estate values will likely reduce our level of, or halt our making of, new mortgage loan originations, since borrowers often use increases in the value of their existing properties to support the purchase or investment in additional properties. Borrowers may also be less able to pay principal and interest on our loans if the real estate economy weakens. Further, declining real estate values 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 cost on 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 originate, sell and securitize loans, which would significantly harm our revenues, results of operations, financial condition, business prospects and our ability to make distributions to you. Beginning in 2007, there was significant volatility in the capital markets and, as a result, we have not entered into a new investment since July 2007. We believe we are currently in a period of economic slowdown and that such conditions will likely persist through at least the remainder of 2009.

We may be adversely affected by unfavorable economic changes in geographic areas where properties that we may acquire are concentrated.

Adverse conditions in the areas where the properties underlying our investments are located (including business layoffs or downsizing, industry slowdowns, changing demographics and other factors) and local real estate conditions (such as oversupply of, or reduced demand for, office and industrial properties) may have an adverse effect on the value of the properties underlying our investments. A material decline in the demand or the ability of tenants to pay rent for office and industrial space in these geographic areas may result in a material decline in our cash available for distribution.

Joint investments could be adversely affected by our lack of sole decision-making authority and reliance upon a co-venturer’s financial conditions.

We co-invest with third parties through partnerships, joint ventures, co-tenancies or other entities, acquiring non-controlling interests in, or sharing responsibility for managing the affairs of, a property, partnership, joint venture, co-tenancy or other entity. Therefore, we will not be in a position to exercise sole decision-making authority regarding that property, partnership, joint venture or other entity. Investments in partnerships, joint ventures, or other entities may involve risks not present were a third party not involved, including the possibility that our partners, co-tenants or co-venturers might become bankrupt or otherwise fail to fund their share of required capital contributions. Additionally, our partners or co-venturers might at any time have economic or other business interests or goals which are inconsistent with our business interests or goals. These investments may also have the potential risk of impasses on decisions such as a sale, because neither we nor the partner, co-tenant or co-venturer would have full control over the partnership or joint venture. Consequently, actions by such partner, co-tenant or co-venturer might result in subjecting properties owned by the partnership or joint venture to additional risk. In addition, we may in specific circumstances be liable for the actions of our third-party partners, co-tenants or co-venturers.

32 Although our existing joint venture agreements do not contain such provisions, and we have suspended new investments in joint ventures, we may in the future enter into joint venture agreements that contain terms in favor of our partners that may have an adverse effect on the value of our investments in the joint ventures. For example, we may be entitled under a particular joint venture agreement to an economic share in the profits of the joint venture that is smaller than our ownership percentage in the joint venture, our partner may be entitled to a specified portion of the profits of the joint venture before we are entitled to any portion of such profits and our partner may have rights to buy our interest in the joint venture, to force us to buy the partner’s interest in the joint venture or to compel the sale of the property owned by such joint venture. These rights may permit our partner in a particular joint venture to obtain a greater benefit from the value or profits of the joint venture than us, which may have an adverse effect on the value of our investment in the joint venture and on our financial condition and results of operations.

Although our existing joint venture agreements do not contain such provisions, we may in the future enter into joint venture agreements that contain terms in favor of our partners that may have an adverse effect on the value of our investments in the joint ventures. For example, we may be entitled under a particular joint venture agreement to an economic share in the profits of the joint venture that is smaller than our ownership percentage in the joint venture, our partner may be entitled to a specified portion of the profits of the joint venture before we are entitled to any portion of such profits and our partner may have rights to buy our interest in the joint venture, to force us to buy the partner’s interest in the joint venture or to compel the sale of the property owned by such joint venture. These rights may permit our partner in a particular joint venture to obtain a greater benefit from the value or profits of the joint venture than us, which may have an adverse effect on the value of our investment in the joint venture and on our financial condition and results of operations.

Liability relating to environmental matters may impact the value of properties that we may acquire or the properties underlying our investments.

Under various U.S. federal, state and local laws, an owner or operator of real property may become liable for the costs of removal of certain hazardous substances released on its property. These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances.

If we acquire properties directly, there may be environmental problems associated with the property of which we were unaware. The presence of hazardous substances may adversely affect an owner’s ability to sell real estate or borrow using real estate as collateral. To the extent that an owner of a property underlying one of our debt investments becomes liable for removal costs, the ability of the owner to make debt payments to us may be reduced, which in turn may adversely affect the value of the relevant mortgage asset held by us and our ability to make distributions to stockholders.

If we acquire any properties, the presence of hazardous substances on a property may adversely affect our ability to sell the property and we may incur substantial remediation costs, thus harming our financial condition. In addition, although our leases, if any, will generally require our tenants to operate in compliance with all applicable laws and to indemnify us against any environmental liabilities arising from a tenant’s activities on the property, we nonetheless would be subject to strict liability by virtue of our ownership interest for environmental liabilities created by such tenants, and we cannot ensure you that any tenants we might have would satisfy their indemnification obligations under the applicable sales agreement or lease. The discovery of material environmental liabilities attached to such properties could have a material adverse effect on our results of operations and financial condition and our ability to make distributions to our stockholders.

Our hedging transactions may not completely insulate us from interest rate risk.

Subject to maintaining our qualification as a REIT, we engage in certain hedging transactions to limit our exposure to changes in interest rates and we ~~may also hedge against the decline in the values of our portfolio position, and therefore may expose ourselves to risks associated with such transactions. We may conduct certain of our~~ hedging activity in our TRS for REIT qualification purposes. We utilize instruments such as forward contracts and interest rate swaps, caps, collars and floors to seek to hedge against mismatches between the cash flows on our assets and the interest payments on our liabilities or fluctuations in the relative values of our portfolio positions, in each case resulting from changes in market interest rates. Hedging against a decline in the values of our portfolio positions does not eliminate the possibility of fluctuations in the values of such positions or prevent losses if the values of such positions decline. However, such hedging can establish other positions designed to gain from those same developments, thereby offsetting the decline in the value of such portfolio positions. Such hedging transactions may also ~~limit the opportunity for gain if the values of the portfolio positions should increase. Moreover, it may not be possible to hedge against an interest rate fluctuation that~~ ~~is so generally anticipated that we are not able to enter into a hedging transaction at an acceptable price.~~

~~Our~~- ~~board~~21 ~~of directors will be responsible for approving the types of hedging instruments we may use, absolute limits on the notional amount and term of a hedging instrument and parameters for the credit~~-~~worthiness~~ of

hedge ~~counterparties.~~against ~~The~~the ~~portfolio~~decline ~~managers~~in ~~responsible~~the ~~for~~values ~~each~~ of our ~~targeted~~portfolio ~~asset~~position, ~~classes~~and ~~will~~therefore bemay ~~responsible~~expose ~~for~~ourselves ~~executing~~to ~~transactions~~risks ~~and~~associated with ~~our~~such transactions. We may ~~finance~~conduct ~~and~~certain ~~capital~~of ~~market~~our ~~professionals,~~hedging ~~document~~activity ~~the~~in ~~transactions,~~our ~~monitor~~TRS ~~the~~for ~~valuation~~REIT qualification purposes. We may utilize instruments such as forward contracts and ~~effectiveness~~interest ofrate ~~the~~swaps, ~~hedges~~caps, collars and ~~provide~~floors ~~reports~~to ~~concerning~~seek ~~our~~to ~~hedging~~hedge ~~activities~~against ~~and~~mismatches between the ~~valuation~~cash flows on our assets and ~~effectiveness~~the ofinterest payments on our ~~hedges,~~liabilities toor fluctuations in the ~~audit committee~~relative values of our ~~board~~portfolio ofpositions, ~~directors~~in noeach ~~less~~case ~~often~~resulting ~~than~~from ~~quarterly~~changes in market interest rates. WeHedging ~~expect~~against toa ~~engage~~decline ~~experienced~~in ~~third~~the ~~party~~values ~~advisors~~of toour ~~provide~~portfolio positions usdoes ~~with~~not ~~assistance~~eliminate the possibility of fluctuations in the ~~identification~~values of ~~interest~~such ~~rate~~positions ~~risks,~~or prevent losses if the ~~analysis~~values of such positions decline. However, ~~selection~~such ~~and~~hedging ~~timing~~can ofestablish ~~risk~~other ~~protection~~positions designed to gain from those same ~~strategies~~developments, thereby offsetting the ~~administration~~decline ~~and~~in ~~negotiation~~the value of ~~hedge~~such ~~documentation,~~portfolio ~~settlement~~positions. orSuch ~~disposition~~hedging transactions may also limit the opportunity for gain if the values of ~~hedges~~the portfolio positions should increase. Moreover, ~~compliance~~it ~~with~~may not be possible to hedge ~~accounting~~against ~~requirements~~an ~~and~~interest ~~measurement~~rate offluctuation ~~hedge~~that ~~effectiveness~~is ~~and~~so ~~valuation~~generally anticipated that we are not able to enter into a hedging transaction at an acceptable price.

~~The~~Our ~~success~~board of ~~our~~directors ~~hedging transactions~~ will ~~depend~~be onresponsible ~~our~~for ~~Manager’s~~approving ~~ability~~the totypes ~~correctly predict movements~~ of ~~interest~~hedging ~~rates.~~instruments ~~Therefore, while~~ we may ~~enter~~use, ~~into~~absolute ~~such~~limits ~~transactions~~on tothe ~~seek~~notional toamount ~~reduce~~and ~~interest~~term ~~rate~~of ~~risks,~~a ~~unanticipated~~hedging ~~changes~~instrument inand ~~interest~~parameters ~~rates~~for ~~may~~the ~~result~~credit-worthiness inof hedge ~~poorer~~counterparties. ~~overall~~Management ~~investment~~is ~~performance~~responsible ~~than~~for ifexecuting wetransactions ~~had~~with ~~not~~our ~~engaged~~finance inand ~~any~~capital ~~such~~market ~~hedging~~professionals, ~~transactions.~~documenting Inthe ~~addition~~transactions, monitoring the ~~degree of~~valuation ~~correlation~~and ~~between~~effectiveness ~~price movements~~ of the ~~instruments~~hedges, ~~used~~and inproviding areports concerning our hedging ~~strategy~~activities and ~~price~~the ~~movements~~valuation inand ~~the~~effectiveness ~~portfolio~~of ~~positions~~our ~~being~~hedges, ~~hedged~~to ~~may~~the ~~vary.~~audit ~~Moreover,~~committee ~~for~~of aour ~~variety~~board of ~~reasons,~~directors weno ~~may~~less ~~not~~often ~~seek~~than quarterly. We expect to ~~establish~~engage aexperienced ~~perfect~~third ~~correlation~~party ~~between such~~advisors ~~hedging~~to ~~instruments~~provide ~~and~~us with assistance in the identification ~~portfolio~~of ~~holdings~~interest ~~being~~rate ~~hedged.~~risks, ~~Any~~the ~~such~~analysis, ~~imperfect~~selection ~~correlation~~and ~~may~~timing ~~prevent~~of usrisk ~~from~~protection ~~achieving~~strategies, the ~~intended~~administration and negotiation of hedge ~~and~~documentation, ~~expose~~settlement usor todisposition ~~risk~~of hedges, compliance with hedge accounting requirements and measurement of ~~loss~~hedge effectiveness and valuation.

The success of our hedging transactions will depend on our ability to correctly predict movements of interest rates. Therefore, while we may enter into such transactions to seek to reduce interest rate risks, unanticipated changes in interest rates may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions being hedged may vary. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the portfolio holdings being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss.

Hedging instruments often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities and involve risks and costs.

The cost of using hedging instruments increase as the period covered by the instrument increases and during periods of rising and volatile interest rates. We may increase our hedging activity and thus increase our hedging costs during periods when interest rates are volatile or rising and hedging costs have increased.

In addition, hedging instruments involve risk since they often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities. Consequently, there are no requirements with respect to record keeping, financial responsibility or segregation of customer funds and positions. Furthermore, the enforceability of agreements underlying derivative transactions may depend on compliance with applicable statutory and commodity and other regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. The business failure of a hedging counterparty with whom we enter into a hedging transaction will most likely result in a default. Default by a party with whom we enter into a hedging transaction may result in the loss of unrealized profits and force us to cover our resale commitments, if any, at the then current market price. Although generally we will seek to reserve the right to terminate our hedging positions, it may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty, and we may not be able to enter into an offsetting contract in order to cover our risk. We cannot assure you that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in losses.

Consequently, there are no requirements with respect to record keeping, financial responsibility or segregation of customer funds and positions. Furthermore, the enforceability of agreements underlying derivative transactions may depend on compliance with applicable statutory and commodity and other regulatory requirements and, depending on the identity of the counterparty, applicable international requirements. The business failure of a hedging counterparty with whom we enter into a hedging transaction will most likely result in a default. Default by a party with whom we enter into a hedging transaction may result in the loss of unrealized profits and force us to cover our resale commitments, if any, at the then current market price. Although generally we will seek to reserve the right to terminate our hedging positions, it may not always be possible to dispose of or close out a hedging position without the consent of the hedging counterparty, and we may not be able to enter into an offsetting contract in order to cover our risk. We cannot assure you that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in losses.

Prepayments can adversely affect the yields on our investments.

The yield of our assets may be affected by the rate of prepayments differing from our projections. Prepayments on debt instruments, where permitted under the debt documents, are influenced by changes in current interest rates and a variety of economic, geographic and other factors beyond our control, and consequently, such prepayment rates cannot be predicted with certainty. In periods of declining interest rates, prepayments on mortgages, and loans generally increase. If we are unable to invest the proceeds of such prepayments received at similar yields, the yield on our portfolio will decline. In addition, we may acquire assets at a discount or premium and if the asset does not repay when expected, our anticipated yield may be impacted. Under certain interest rate and prepayment scenarios we may fail to recoup fully our cost of acquisition of certain investments.

The mortgage loans we ~~invest~~originate inand acquire and the mortgage loans underlying the mortgage and asset-backed securities we ~~invest~~originate inand acquire are subject to delinquency, foreclosure and loss, which could result in losses to us.

We ~~invest~~originate inand acquire commercial mortgage loans. However, we do not have any specific policy with respect to allocations in commercial mortgage loans and our charter contains no limitations on the percentage we may invest in this ~~asset~~product ~~class~~type. Commercial mortgage loans are secured by ~~multifamily~~multi-family or commercial ~~property~~ properties 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 a single family residential property. The ability of a borrower to pay the principal of and interest on a loan secured by an income-producing property typically is dependent primarily upon the successful operation of such property rather than upon the exercise 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 expense or limit rents that may be charged, any need to address environmental contamination at the property, the occurrence of any uninsured casualty 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, changes in governmental rules, regulations and fiscal policies, including environmental legislation, acts of God, terrorism, social unrest and civil disturbances.

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 pay principal of and interest on a loan secured by an income-producing property typically is dependent primarily upon the successful operation of such 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 expense or limit rents that may be charged, any need to address environmental contamination at the property, the occurrence of any uninsured casualty 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, changes in governmental rules, regulations and fiscal policies, including environmental legislation, acts of God, terrorism, social unrest and civil disturbances.

In the event of any default under a mortgage loan held directly by us, we will bear a risk of loss of principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage loan, which could have a material adverse effect on our cash flow from operations. In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law.

Foreclosure of a mortgage loan can be an expensive and lengthy process which could have a substantial negative effect on our anticipated return on the foreclosed mortgage loan. Accordingly, the CMBS we invest in are subject to all of the risks of the underlying mortgage loans.

The B Notes ~~in which~~ we originate ~~invest~~and acquire may be subject to additional risks relating to the privately negotiated structure and terms of the transaction, which may result in losses to us.

We ~~invest~~originate inand acquire B Notes. However, we do not have any specific policy with respect to allocations in B Notes and our charter contains no limitations on the percentage we may invest in this ~~asset~~product ~~class~~type. B Notes are mortgage loans that are typically (i) secured by a first mortgage on a single large commercial property or group of related properties and (ii) subordinated to an A Note secured by the same first mortgage on the same collateral. As a result, if a borrower defaults, there may not be sufficient funds remaining for B Note owners after payment to the A Note owners. B Notes reflect similar credit risks to comparably rated CMBS. However, since each transaction is privately negotiated, B Notes can vary in their structural characteristics and risks. For example, the rights of holders of B Notes to control the process following a borrower default may be limited in certain investments. We cannot predict the terms of each B Note investment. Further, B Notes typically are secured by a single property, and so reflect the increased risks associated with a single property compared to a pool of properties. B Notes also are less liquid than CMBS, thus we may be unable to dispose of underperforming or non-performing investments. The higher risks associated with our subordinate position in our B Note investments could subject us to increased risk of losses.

~~Investment in non~~-~~conforming~~ ~~and~~22 ~~non~~-~~investment~~ ~~grade loans may involve increased risk of loss.~~

Except in rare instances, loans we may acquire or originate will not conform to conventional loan criteria applied by traditional lenders and will not be rated or will be rated as non-investment grade (for example, for investments rated by Moody’s Investors Service, ratings lower than Baa3, and for Standard & Poor’s, BBB—or below). The non-investment grade ratings for these loans typically result from the overall leverage of the loans, the lack of a strong operating history for the properties underlying the loans, the borrowers’ credit history, the properties’ underlying cash flow or other factors. As a result, loans we originate or acquire may have a higher risk of default and loss than conventional loans. Any loss we incur may reduce distributions to stockholders and adversely affect the value of our common stock. We currently anticipate investing primarily in unrated or non-investment grade assets. There are no limits on the percentage of unrated or non-investment grade assets we may hold in our portfolio.

not be sufficient funds remaining for B Note owners after payment to the A Note owners. B Notes reflect similar credit risks to comparably rated CMBS. However, since each transaction is privately negotiated, B Notes can vary in their structural characteristics and risks. For example, the rights of holders of B Notes to control the process following a borrower default may be limited in certain investments. We cannot predict the terms of each B Note investment. Further, B Notes typically are secured by a single property, and so reflect the increased risks associated with a single property compared to a pool of properties. B Notes also are less liquid than CMBS, thus we may be unable to dispose of underperforming or non-performing investments. The higher risks associated with our subordinate position in our B Note investments could subject us to increased risk of losses.

Investment in non-conforming and non-investment grade loans may involve increased risk of loss.

Except in rare instances, loans we may acquire or originate will not conform to conventional loan criteria applied by traditional lenders and will not be rated or will be rated as non-investment grade (for example, for investments rated by Moody’s Investors Service, ratings lower than Baa3, and for Standard & Poor’s, BBB-, or below). The non-investment grade ratings for these loans typically result from the overall leverage of the loans, the lack of a strong operating history for the properties underlying the loans, the borrowers’ credit history, the properties’ underlying cash flow or other factors. As a result, loans we originate or acquire may have a higher risk of default and loss than conventional loans. Any loss we incur may reduce distributions to stockholders and adversely affect the value of our common stock. We currently anticipate investing primarily in unrated or non-investment grade assets. There are no limits on the percentage of unrated or non-investment grade assets we may hold in our portfolio.

Investments in mezzanine loans involve greater risks of loss than senior loans secured by income producing properties.

We ~~invest~~originate inand acquire mezzanine loans. However, we do not have any policy with respect to allocations in mezzanine loans and our charter contains no limitations on the percentage we may invest in this asset class. Investments in mezzanine loans take the form of subordinated loans secured by second mortgages on the underlying property or loans secured by a pledge of the ownership interests in the entity that directly or indirectly owns the property. These types of investments involve a higher degree of risk than a senior mortgage loan because the investment may become unsecured as a result of foreclosure by the senior lender. In the event of a bankruptcy of the entity providing the pledge of its ownership interests as security, we may not have full recourse to the assets of the property owning entity, or the assets of the entity may not be sufficient to satisfy our mezzanine loan. If a borrower defaults on our mezzanine loan or debt senior to our loan, or in the event of a borrower bankruptcy, our mezzanine loan will be satisfied only after the senior debt is paid in full. As a result, we may not recover some or all of our investment, which could result in losses. In addition, mezzanine loans may have higher loan to value ratios than conventional mortgage loans, resulting in less equity in the property and increasing the risk of loss of principal.

We evaluate the collectibility of both interest and principal of each of our loans, if circumstances warrant, to determine whether they are impaired. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the existing contractual terms. When a loan is impaired, the amount of the loss accrual is calculated by comparing the carrying amount of the investment to the value determined by discounting the expected future cash flows at the loan’s effective interest rate or, as a practical expedient, to the value of the collateral if the loan is collateral dependent. There can be no assurance that our estimates of collectible amounts will not change over time or that they will be representative of the amounts we actually collect, including amounts we would collect if we chose to sell these investments before their maturity. If we collect less than our estimates, we will record charges which could be material.

Bridge loans involve a greater risk of loss than traditional mortgage loans.

We provide bridge loans secured by first lien mortgages on a property to borrowers who are typically seeking short-term capital to be used in an acquisition or renovation of real estate. The borrower has usually identified an undervalued asset that has been under-managed or is located in a recovering market. If the market in which the asset is located fails to recover according to the borrower’s projections, or if the borrower fails to improve the quality of the asset’s management or the value of the asset, the borrower may not receive a sufficient return on the asset to satisfy the bridge loan, and we may not recover some or all of our investment.

In addition, owners usually borrow funds under a conventional mortgage loan to repay a bridge loan. We may therefore be dependent on a borrower’s ability to obtain permanent financing to repay our bridge loan, which could depend on market conditions and other factors. Bridge loans are also subject to risks of borrower defaults, bankruptcies, fraud, losses and special hazard losses that are not covered by standard hazard insurance. In the event of any default under bridge loans held by us, we bear the risk of loss of principal and non-payment of interest and fees to the extent of any deficiency between the value of the mortgage collateral and the principal amount of the bridge loan. To the extent that we suffer such losses with respect to our investments in bridge loans, the value of our company and the price of our common stock may be adversely affected.

Preferred equity investments involve a greater risk of loss than traditional debt financing.

We may make preferred equity investments. However, we do not have any specific policy with respect to allocations in preferred equity investments and our charter contains no limitations on the percentage we may invest in this asset class. Preferred equity investments are subordinate to debt financing and are not secured. Should the issuer default on our investment, we would only be able to proceed against the entity that issued the preferred equity in accordance with the terms of the preferred security, and not any property owned by the entity. Furthermore, in the event of bankruptcy or foreclosure, we would only be able to recoup our investment after any lenders to the entity are paid. As a result, we may not recover some or all of our investment, which could result in losses.

Loans to owners of net lease properties may generate losses.

We may make loans to owners of net leased real estate assets. The value of our investments and the income from our investments in loans to owners of net lease properties, if any, will depend upon the ability of the applicable tenant to meet its obligations to maintain the property under the terms of the net lease. If a tenant fails or becomes unable to so maintain a property, the borrower would have difficulty making its required loan payments to us. In addition, under many net leases the owner of the property retains certain obligations with respect to the property, including among other things, the responsibility for maintenance and repair of the property, to provide adequate parking, maintenance of common areas and compliance with other affirmative covenants in the lease. If the borrower were to fail to meet these obligations, the applicable tenant could abate rent or terminate the applicable lease, which may result in a loss of our capital invested in, and anticipated profits from, the property to the borrower and the borrower would have difficulty making its required loan payments to us. In addition, the borrower may find it difficult to lease property to new tenants that may have been suited to the particular needs of a former tenant.

Our investments in subordinated loans and subordinated CMBS are generally in the “second loss” position and therefore subject to losses.

We intend to acquire subordinated loans and invest in subordinated ~~MBS~~CMBS. In the event a borrower defaults on a loan and lacks sufficient assets to satisfy our loan, we may suffer a loss of principal or interest. In the event a borrower declares bankruptcy, we may not have full recourse to the assets of the borrower, or the assets of the borrower may not be sufficient to satisfy the loan. In addition, certain of our loans may be subordinate to other debt of the borrower. If a borrower defaults on our loan or on debt senior to our loan, or in the event of a borrower bankruptcy, our loan will be satisfied only after the senior debt is paid in full. Where debt senior to our loan exists, the presence of intercreditor arrangements may limit our ability to amend our loan documents, assign our loans, accept prepayments, exercise our remedies (through “standstill periods”) and control decisions made in bankruptcy proceedings relating to borrowers.

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, then by a cash reserve fund or letter of credit, if any, and then by the “first loss” subordinated security holder and then by the “second loss” subordinated security holder. In the event of ~~default and the exhaustion of any equity support, reserve fund, letter of credit and any classes of securities junior to those in which we invest, we will~~ 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 MBS, the securities in which we invest may effectively become the “first loss” position behind the more senior securities, which may result in significant losses to us. The prices of lower credit quality securities are generally less sensitive to interest rate changes than more highly rated investments, but more sensitive to adverse economic downturns or individual issuer developments. A projection of an economic downturn, for example, could cause a decline in the price of lower credit quality securities because the ability of obligors of mortgages underlying MBS to make principal and interest payments may be impaired. In such event, existing credit support in the securitization structure may be insufficient to protect us against loss of our principal on these securities.

~~An economic downturn could increase the risk of loss on our investments in subordinated mortgage~~-~~backed~~ ~~securities.~~23 ~~The prices of lower credit~~-~~quality~~ securities, such as the subordinated mortgage-backed securities in which we plan to invest, are generally less sensitive to interest rate changes than more highly rated investments, but are more sensitive to adverse economic downturns or individual property developments. An economic downturn or a projection of an economic downturn could cause a decline in the price of lower credit quality securities because the ability of obligors of mortgages underlying mortgage-backed securities to make principal and interest payments may be impaired. In such event, existing credit support to a securitized structure may be insufficient to protect us against loss of our principal on these securities.

default and the exhaustion of any equity support, reserve fund, letter of credit and any classes of securities junior to those in which we invest, we will 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 CMBS, the securities in which we invest may effectively become the “first loss” position behind the more senior securities, which may result in significant losses to us. The prices of lower credit quality securities are generally less sensitive to interest rate changes than more highly rated investments, but more sensitive to adverse economic downturns or individual issuer developments. A projection of an economic downturn, for example, could cause a decline in the price of lower credit quality securities because the ability of obligors of mortgages underlying CMBS to make principal and interest payments may be impaired. In such event, existing credit support in the securitization structure may be insufficient to protect us against loss of our principal on these securities.

An economic downturn could increase the risk of loss on our investments in subordinated mortgage-backed securities. The prices of lower credit-quality securities, such as the subordinated mortgage-backed securities in which we invest, are generally less sensitive to interest rate changes than more highly rated investments, but are more sensitive to adverse economic downturns or individual property developments. An economic downturn or a projection of an economic downturn could cause a decline in the price of lower credit quality securities because the ability of obligors of mortgages underlying mortgage-backed securities to make principal and interest payments may be impaired. In such event, existing credit support to a securitized structure may be insufficient to protect us against loss of our principal on these securities.

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

Subject to maintaining our qualification as a REIT, part of our investment strategy involves entering into derivative contracts that could require us to fund cash payments in the future under certain circumstances, e.g. , the early termination of the derivative agreement caused by an event of default or other early termination event, or the decision by a counterparty to request margin securities it is contractually owed under the terms of the derivative contract. The amount due would be equal to the unrealized loss of the open swap positions with the respective counterparty and could also include other fees and charges. These economic losses will be reflected in our financial results of operations, and our ability to fund these obligations will depend on the liquidity of our assets and access to capital at the time, and the need to fund these obligations could adversely impact our financial condition.

Our investments in debt securities are subject to specific risks relating to the particular issuer of the securities and to the general risks of investing in subordinated real estate securities.

Our investments in debt securities involve special risks. REITs generally are required to invest substantially in real estate or real estate-related assets and are subject to the inherent risks associated with real estate-related investments discussed ~~in this prospectus~~herein. Our investments in debt are subject to the risks described above with respect to mortgage loans and ~~MBS~~CMBS and similar risks, including:

•

risks of delinquency and foreclosure, and risks of loss in the event thereof;

•

the dependence upon the successful operation of and net income from real property;

•

risks generally incident to interests in real property; and

•

risks that may be presented by the type and use of a particular commercial property.

Debt securities are generally unsecured and may also be subordinated to other obligations of the issuer. We may also invest in debt securities that are rated below investment grade. As a result, investments in debt securities are also subject to risks of:

•

limited liquidity in the secondary trading market;

•

substantial market price volatility resulting from changes in prevailing interest rates;

•

subordination to the prior claims of banks and other senior lenders to the issuer;

•

the operation of mandatory sinking fund or call/redemption provisions during periods of declining interest rates that could cause the issuer to reinvest premature redemption proceeds in lower yielding assets;

•

the possibility that earnings of the debt security issuer may be insufficient to meet its debt service; and

•

the declining creditworthiness and potential for insolvency of the issuer of such debt securities during periods of rising interest rates and economic downturn.

These risks may adversely affect the value of outstanding debt securities and the ability of the issuers thereof to repay principal and interest.

We may make investments in non-U.S. dollar denominated securities, which subject us to currency rate exposure and the uncertainty of foreign laws and markets.

We may purchase CMBS denominated in foreign currencies. We expect that our exposure, if any, would be principally to the British pound and the Euro. A change in foreign currency exchange rates may have an adverse impact on returns on our non-dollar denominated investments. Although we may hedge our foreign currency risk subject to the REIT income qualification tests, we may not be able to do so successfully and may incur losses on these investments as a result of exchange rate fluctuations. Investments in foreign countries also subject us to risks of multiple and conflicting tax laws and regulations and political and economic instability abroad, which could adversely affect our receipt of interest income on these investments.

The lack of liquidity in our investments may adversely affect our business.

We have made investments, and expect to make additional investments in securities that are not publicly traded. A portion of these securities may be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly traded securities. The illiquidity of our investments may make it difficult for us to sell such investments if the need arises. In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have previously recorded our investments. In addition, we may face other restrictions on our ability to liquidate an investment in a business entity to the extent that we ~~or our Manager has or~~ could be attributed with material non-public information regarding such business entity.

Our due diligence may not reveal all of a borrower’s liabilities and may not reveal other weaknesses in its business.

Before investing in a company or making a loan to a borrower, we assess the strength and skills of such entity’s management and other factors that we believe are material to the performance of the investment. In making the assessment and otherwise conducting customary due diligence, we rely on the resources available to us and, in some cases, an investigation by third parties. This process is particularly important and subjective with respect to newly organized entities because there may be little or no information publicly available about the entities. There can be no assurance that our due diligence processes will uncover all relevant facts or that any investment will be successful.

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Risks Related To Our Trading

~~There~~Our ~~may~~common ~~not~~stock behas anbeen ~~active~~delisted ~~market~~from ~~for~~the ~~our~~NYSE ~~common~~and ~~stock,~~we ~~which~~will ~~may~~shortly ~~cause~~be ~~our~~ineligible ~~common stock~~ to ~~trade~~be attraded aon ~~discount~~the ~~and~~OTCBB ~~make~~which itwould ~~difficult~~severely todecrease ~~sell~~its ~~the common stock you own~~liquidity.

~~Prior~~On toNovember 4, 2008, the 30 trading-day average market capitalization of our ~~IPO~~common ~~there~~stock ~~was~~fell nobelow ~~public~~$25 ~~market~~million, ~~for~~resulting in the permanent delisting of our common stock. ~~Our~~from ~~IPO~~the ~~price~~NYSE. ~~for~~On November 10, 2008, our common stock ~~was~~began ~~determined~~trading ~~by negotiations~~through ~~between~~normal brokerage channels on the ~~underwriter~~OTCBB. The OTCBB is an electronic, regulated quotation service that displays real-time quotes, last-sale prices, and ~~us.~~volume Weinformation ~~cannot~~for ~~assure~~over-the-counter ~~you~~equity securities issued by companies that are subject to periodic filing requirements with the SEC or other regulatory authority. However, if we deregister our ~~IPO~~common ~~price~~stock ~~will~~from ~~correspond~~the Exchange Act and suspend our obligation to ~~the~~file ~~price~~periodic atreports ~~which~~with the SEC, our common stock will ~~trade~~become inineligible to be traded on the ~~public~~OTCBB ~~market~~and ~~subsequent~~will be forced to ~~our~~trade ~~IPO~~on orPink ~~that~~Sheets. While the ~~price~~trading of our ~~shares~~common ~~available~~stock toon the ~~public~~OTCBB or the Pink Sheets ~~market~~does ~~will~~not ~~reflect~~affect our ~~actual~~business ~~financial~~operations, ~~performance~~the trading volume and liquidity of our common stock may be adversely impacted.

NoWe ~~assurance~~have ~~can~~not beestablished ~~given~~a minimum distribution and payment level and we cannot assure you of our ability to: make distributions in the future.

•We ~~The~~have ~~likelihood~~not established ~~that~~a anminimum ~~actual~~distribution ~~market~~payment ~~for~~level, and our ~~common~~ability ~~stock~~to make distributions may be adversely affected by the risk factors described herein. All distributions will ~~develop~~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 other factors as our board of directors may deem relevant from time to time. We may not be able to make distributions in the future, or we may reduce our distributions as compared to historical levels; particularly if our revenues decline due to a reduction in our total assets from repayments, asset sales or credit losses. In addition, some of our distributions may include a return of capital. To the extent that we decide to make distributions in excess of our current and accumulated tax earnings and profits, such distributions would generally be considered a return of capital for federal income tax purposes. A return of capital is not taxable, but it has the effect of reducing the holder’s basis in its investment.

• The liquidity of any such market;

• The ability of our stockholders to sell their common stock; or

• The price our stockholders may obtain for their common stock.

The market price and trading volume of our common stock may be volatile.

The market price of our common stock may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. If the market price of our common stock declines significantly, you may be unable to resell your shares at or above the initial public offering price or the price you paid in the market. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include:

•

actual or anticipated variations in our quarterly operating results or distributions;

•

changes in our funds from operations or earnings estimates or publication of research reports about us or the real estate or specialty finance industry;

•

increases in market interest rates that lead purchasers of our shares of common stock to demand a higher yield;

•

changes in market valuations of similar companies;

•

adverse market reaction to any increased indebtedness we incur in the future;

• additions or departures of our ~~Manager’s~~ key personnel;

•

actions by institutional stockholders;

•

hostile merger and acquisition activities such as unsolicited hostile offers or dissident nomination of director slates;

•

speculation in the press or investment community; and

• general market and economic conditions, including the current state of the credit and capital markets.

Broad market fluctuations could negatively impact the market price of our common stock.

The stock market has experienced extreme price and volume fluctuations that have affected the market price of many companies in industries similar or related to ours and that have been unrelated to these companies’ operating performances. These broad market fluctuations could reduce the market price of our common stock. Furthermore, our operating results and prospects may be below the expectations of public market analysts and investors or may be lower than those of companies with comparable market capitalizations, which could lead to a material decline in the market price of our common stock.

Future offerings of debt securities, which would rank senior to our common stock upon our liquidation, and future offerings of equity securities, which would dilute our existing stockholders and may be senior to our common stock for the purposes of dividend and liquidating distributions, may adversely affect the market price of our common stock.

In the future, we may attempt to increase our capital resources by making offerings of debt or additional offerings of equity securities. Upon liquidation, holders of our debt securities and shares of preferred stock, if any, and lenders with respect to other borrowings will receive a distribution of our available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing stockholders or reduce the market price of our common stock, or both. Our preferred stock, if issued, could have a preference on liquidating distributions or a preference on dividend payments that could limit our ability to make a dividend distribution to the holders of our common stock. Sales of substantial amounts of our common stock (including shares of our common stock issued pursuant to our incentive plan), or the perception that these sales could occur, could have a material adverse effect on the price of our common stock. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, holders of our common stock bear the risk of our future offerings reducing the market price of our common stock and diluting their stock holdings in us.

Your interest in us may be diluted if we issue additional shares.

Existing stockholders do not have preemptive rights to any common stock issued by us in the future. Therefore, you may experience dilution of their equity investment if we sell additional common stock in the future, sell securities that are convertible into common stock or issue shares of common stock, including shares issued as incentive compensation under our management agreement, or options exercisable for shares of common stock.

Future sales of shares of our common stock may depress the price of our shares.

We cannot predict the effect, if any, of future sales of our common stock or the availability of shares for future sales on the market price of our common stock. Any sales of a substantial number of our shares in the public market, or the perception that sales might occur, may cause the market price of our shares to decline.

We- ~~have~~25 ~~not~~- ~~established a minimum distribution and payment level and we cannot assure you of our ability to make distributions in the future.~~

We expect to make quarterly distributions to our stockholders in amounts such that we distribute all or substantially all of our taxable income in each year, subject to certain adjustments. We have not established a minimum distribution payment level, and our ability to make distributions may be adversely affected by the risk factors described in this prospectus. 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 other factors as our board of directors may deem relevant from time to time. We may not be able to make distributions in the future. In addition, some of our distributions may include a return of capital. To the extent that we decide to make distributions in excess of our current and accumulated tax earnings and profits, such distributions would generally be considered a return of capital for federal income tax purposes. A return of capital is not taxable, but it has the effect of reducing the holder’s basis in its investment.

An increase in market interest rates may have an adverse effect on the market price of our common stock.

One of the factors that investors may consider in deciding whether to buy or sell shares of our common stock is our distribution rate as a percentage of our share price relative to market interest rates. If the market price of our common stock is based primarily on the earnings and return that we derive from our investments and income with respect to our investments and our related distributions to stockholders, and not from the market value of the investments themselves, then interest rate fluctuations and capital market conditions will likely affect the market price of our common stock. For instance, if market rates rise without an increase in our distribution rate, the market price of our common stock could decrease as potential investors may require a higher distribution yield on our common stock or seek other securities paying higher distributions or interest. In addition, rising interest rates would result in increased interest expense on our variable rate debt, thereby adversely affecting cash flow and our ability to service our indebtedness and pay distributions.

Risks Related To Our Organization and Structure

Our charter and bylaws and the provisions of Maryland law contain provisions that may inhibit potential acquisition bids that you and other stockholders may consider favorable, and the market price of our common stock may be lower as a result.

Our charter and bylaws and the provisions of Maryland law contain provisions that may have an anti-takeover effect and inhibit a change in our board of directors. These provisions include the following:

•

There are ownership limits and restrictions on transferability and ownership in our charter. In order to qualify as a REIT for each taxable year beginning after December 31, 2005, not more than 50% of the value of our outstanding stock may be owned, directly or constructively, by five or fewer individuals during the second half of any calendar year and our shares must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year. Our charter generally prohibits any person from beneficially or constructively owning more than 9.8% by number or value, whichever is more restrictive, of our outstanding shares of common stock or more than 9.8% by number or value, whichever is more restrictive, of the outstanding shares of any class or series of our capital stock, subject to important exceptions. This restriction may:

•

discourage a tender offer or other transactions or a change in the composition of our board of directors or control that might involve a premium price for our shares or otherwise be in the best interests of our stockholders; or

•

result in shares issued or transferred in violation of such restrictions being automatically transferred to a trust for a charitable beneficiary and thereby resulting in a forfeiture of ownership of the additional shares.

•

Our charter permits our board of directors to issue stock with terms that may discourage a third party from acquiring us. Our charter permits our board of directors to amend the charter without stockholder approval to increase the total number of authorized shares of stock or the number of shares of any class or series and to issue common or preferred stock, having preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications, or terms or conditions of redemption as determined by our board. Thus, our board could authorize the issuance of stock with terms and conditions that could have the effect of discouraging a takeover or other transaction in which holders of some or a majority of our shares might receive a premium for their shares over the then-prevailing market price of our shares.

•

Maryland Control Share Acquisition Act. Maryland law provides that “control shares” of a corporation acquired in a “control share acquisition” will have no voting rights except to the extent approved by a vote of two-thirds of the votes eligible to be cast on the matter under the Maryland Control Share Acquisition Act. “Control shares” means voting shares of stock that, if aggregated with all other shares of stock owned by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power: one-tenth or more but less than one-third, one-third or more but less than a majority, or a majority or more of all voting power. A “control share acquisition” means the acquisition of control shares, subject to certain exceptions.

If voting rights or control shares acquired in a control share acquisition are not approved at a stockholders’ meeting or if the acquiring person does not deliver an acquiring person statement as required by the Maryland Control Share Acquisition Act, then subject to certain conditions and limitations, the issuer may redeem any or all of the control shares for fair value. If voting rights of such control shares are approved at a stockholders’ meeting and the acquiror becomes entitled to vote a majority of the shares of stock entitled to vote, all other stockholders may exercise appraisal rights. Our bylaws contain a provision exempting acquisitions of our shares from the Maryland Control Share Acquisition Act. However, our board of directors may amend our bylaws in the future to repeal or modify this exemption, in which case any control shares of our company acquired in a control share acquisition will be subject to the Maryland Control Share Acquisition Act.

limitations, the issuer may redeem any or all of the control shares for fair value. If voting rights of such control shares are approved at a stockholders’ meeting and the acquiror becomes entitled to vote a majority of the shares of stock entitled to vote, all other stockholders may exercise appraisal rights. Our bylaws contain a provision exempting acquisitions of our shares from the Maryland Control Share Acquisition Act. However, our board of directors may amend our bylaws in the future to repeal or modify this exemption, in which case any control shares of our company acquired in a control share acquisition will be subject to the Maryland Control Share Acquisition Act.

•

Business Combinations. Under Maryland law, “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:

•

any person who beneficially owns ten percent or more of the voting power of the corporation’s shares; or

•

an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of ten percent or more of the voting power of the then outstanding voting stock of the corporation.

A person is not an ~~interested~~ interested stockholder under the statute if the board of directors approved in advance the transaction by which such person otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board of directors.

After the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:

•

eighty percent of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and

•

two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder.

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These super-majority vote requirements do not apply if the corporation’s common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares.

The statute permits various exemptions from its provisions, including business combinations that are exempted by the board of directors prior to the time that the interested stockholder becomes an interested stockholder. Our board of directors has adopted a resolution which provides that any business combination between us and any other person is exempted from the provisions of the Act, provided, that the business combination is first approved by the board of directors. This resolution, however, may be altered or repealed in whole or in part at any time. If this resolution is repealed, or the board of directors does not otherwise approve a business combination, this statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer.

•

Our charter and bylaws contain other possible anti-takeover provisions. Our charter and bylaws contain other provisions that may have the effect of delaying, deferring or preventing a change in control of us or the removal of existing directors and, as a result, could prevent our stockholders from being paid a premium for their common stock over the then-prevailing market price.

•

Maryland law allows a staggered board without a stockholder vote. Maryland law permits a public Maryland corporation that meets certain requirements to add certain anti-takeover provisions to its charter without a stockholders vote, including a classified or staggered board of directors.

Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit your recourse in the event of actions not in your best interests.

Our charter limits the liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from:

•

actual receipt of an improper benefit or profit in money, property or services; or

•

a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to the cause of action adjudicated.

In addition, our charter authorizes us to obligate our company to indemnify our present and former directors and officers for actions taken by them in those capacities to the maximum extent permitted by Maryland law. Our bylaws require us to indemnify each present or former director or officer, to the maximum extent permitted by Maryland law, in the defense of any proceeding to which he or she is made, or threatened to be made, a party by reason of his or her service to us. In addition, we may be obligated to fund the defense costs incurred by our directors and officers.

Our access to confidential information may restrict our ability to take action with respect to some investments, which, in turn, may negatively affect the potential return to stockholders.

We, ~~directly or through our Manager,~~ may obtain confidential information about the companies in which we have invested or may invest. If we do possess confidential information about such companies, there may be restrictions on the ability to dispose of, increase the amount of, or otherwise take action with respect to an investment in those companies. Our management of investment funds could create a conflict of interest to the extent ~~our~~we ~~Manager~~are is aware of inside information concerning potential investment targets. We will implement compliance procedures and practices designed to ensure that inside information is not used for making investment decisions on behalf of the funds and to monitor funds invested. We cannot assure you, however, that these procedures and practices will be effective. In addition, this conflict and these procedures and practices may limit the freedom of ~~our~~us ~~Manager~~ to make potentially profitable investments, which could have an adverse effect on our operations. These limitations imposed by access to confidential information could therefore negatively affect the potential market price of our common stock and the ability to distribute dividends.

Tax Risks

Complying with REIT requirements may cause us to forego otherwise attractive opportunities.

To qualify as a REIT for U.S. federal income tax purposes, we must continually satisfy various tests regarding the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. In order to meet these tests, we may be required to forego investments we might otherwise make. Thus, compliance with the REIT requirements may hinder our investment performance.

Our qualification as a REIT and exemption from U.S. federal income tax with respect to certain assets may be dependent on the accuracy of legal opinions rendered to or statements by the issuers of securities in which we invest.

When purchasing securities, we may rely on opinions of counsel for the issuer of such securities, or statements made in related offering documents, for purposes of determining whether such securities represent debt or equity securities for U.S. federal income tax purposes, and therefore to what extent those securities constitute REIT real estate assets for purposes of the REIT asset tests and produce income which qualifies under the 75% REIT gross income test. In addition, when purchasing CDO equity, we may rely on opinions of counsel regarding the qualification of the CDO for exemption from U.S. corporate income tax and the qualification of interests in such CDO as debt for U.S. federal income tax purposes. The inaccuracy of any such opinions or statements may adversely affect our REIT qualification and result in significant corporate-level tax.

Certain financing activities may subject us to U.S. federal income tax and increase the tax liability of our stockholders and limit the manner in which we effect securitizations.

We have and ~~will~~may ~~likely~~ continue to enter into transactions that will result in us or a portion of our assets being treated as a “taxable mortgage pool” for U.S. federal income tax purposes. Specifically, we have and may in the future continue to securitize whole loans, B Notes, mezzanine loans or CMBS assets that we acquire and such securitizations will likely result in us owning interests in a taxable mortgage pool. We have and ~~expect~~may to enter into such transactions at the REIT level. We are taxed at the highest corporate income tax rate on a portion of the income arising from a taxable mortgage pool that is allocable to the percentage of our stock held by “disqualified organizations,” which are generally certain cooperatives, governmental entities and tax-exempt organizations that are exempt from tax on unrelated business taxable income. To the extent that common stock owned by “disqualified organizations” is held in record name by a broker/dealer or other nominee, the broker/dealer or other nominee would be liable for the corporate level tax on the portion of our excess inclusion income allocable to the common stock held by the broker/dealer or other nominee on behalf of the “disqualified organizations.” We expect that disqualified organizations will own our shares. Because this tax would be imposed on us, all of our investors, including investors that are not disqualified organizations, would bear a portion of the tax cost associated with the classification of us or a portion of our assets as a taxable mortgage pool. A regulated investment company (“RIC”) or other pass-through entity owning our common stock in record name will be subject to tax at the highest corporate tax rate on any excess inclusion income allocated to their owners that are disqualified organizations.

43In addition, if we realize excess inclusion income and allocate it to stockholders, this income cannot be offset by net operating losses of our stockholders. If the stockholder is a tax-exempt entity and not a disqualified organization, then this income would be fully taxable as unrelated business taxable income under Section 512

- 27 -

~~organizations,”~~of ~~which~~the ~~are~~Internal ~~generally~~Revenue ~~certain cooperatives, governmental entities and tax-exempt organizations that are exempt from tax on unrelated business taxable income~~Code. ToIf the ~~extent~~stockholder ~~that common stock owned by “disqualified organizations”~~ is ~~held in record name by~~ a ~~broker/dealer~~foreign ~~or other nominee~~person, ~~the~~it ~~broker/dealer or other nominee~~ would be ~~liable~~subject ~~for~~to ~~the~~U.S. ~~corporate~~federal ~~level~~income tax withholding on ~~the~~ ~~portion~~this ofincome ~~our~~without reduction ~~excess~~or ~~inclusion~~exemption ~~income~~pursuant ~~allocable~~ to ~~the~~any ~~common~~otherwise ~~stock~~applicable ~~held~~income bytax ~~the~~treaty. ~~broker/dealer~~If orthe ~~other~~stockholder ~~nominee~~is ona ~~behalf~~REIT, ofRIC, ~~the~~common ~~“disqualified~~trust ~~organizations.”~~fund, Weor ~~expect~~other ~~that~~pass-through ~~disqualified~~entity ~~organizations~~its ~~will~~allocable ~~own~~share of our ~~shares.~~excess ~~Because~~inclusion ~~this tax~~income ~~would~~could be ~~imposed~~considered onexcess ~~us,~~inclusion income ~~all~~ of ~~our~~such ~~investors~~entity. Accordingly, ~~including~~such investors ~~that~~should ~~are~~be ~~not~~aware ~~disqualified~~that ~~organizations, would bear~~ a significant portion of ~~the~~our ~~tax~~income ~~cost~~may ~~associated~~be ~~with~~considered ~~the~~excess ~~classification~~inclusion ofincome. usFinally, orif awe ~~portion~~fail ofto ~~our~~qualify ~~assets~~ as a REIT, our taxable mortgage pool. ~~A regulated~~securitizations ~~investment company or other pass-through entity owning our common stock in record name~~ will be treated ~~subject~~as toseparate ~~tax~~taxable atcorporations ~~the~~for ~~highest~~U.S. ~~corporate~~federal ~~tax rate on any excess inclusion~~ income ~~allocated~~tax ~~to their owners that are disqualified organizations~~purposes.

In addition, if we realize excess inclusion income and allocate it to stockholders, this income cannot be offset by net operating losses of our stockholders. If the stockholder is a tax-exempt entity and not a disqualified organization, then this income would be fully taxable as unrelated business taxable income under Section 512 of the Internal Revenue Code. If the stockholder is a foreign person, it would be subject to U.S. federal income tax withholding on this income without reduction or exemption pursuant to any otherwise applicable income tax treaty. If the stockholder is a REIT, a regulated investment company, RIC, common trust fund, or other pass-through entity its allocable share of our excess inclusion income could be considered excess inclusion income of such entity. Accordingly, such investors should be aware that a significant portion of our income may be considered excess inclusion income. Finally, if we fail to qualify as a REIT, our taxable mortgage pool securitizations will be treated as separate taxable corporations for U.S. federal income tax purposes.

Failure to qualify as a REIT would subject us to U.S. federal income tax, which would reduce the cash available for distribution to our stockholders.

We operate in a manner that is intended to cause us to qualify as a REIT for U.S. federal income tax purposes. However, the U.S. federal income tax laws governing REITs are extremely complex, and interpretations of the U.S. federal income tax laws governing qualification as a REIT are limited. Qualification as a REIT requires us to meet various tests regarding the nature of our assets and our income, the ownership of our outstanding stock, and the amount of our distributions on an ongoing basis. While we operate in such a way as to qualify as a REIT, given the highly complex nature of the rules governing REITs, the ongoing importance of factual determinations, and the possibility of future changes in our circumstances, no assurance can be given that we will so qualify for any particular year.

If we fail to qualify as a REIT in any calendar year and we do not qualify for certain statutory relief provisions, we would be required to pay U.S. federal income tax on our taxable income. We might need to borrow money or sell assets in order to pay that tax. Our payment of income tax would decrease the amount of our income available for distribution to our stockholders. Furthermore, if we fail to maintain our qualification as a REIT and we do not qualify for certain statutory relief provisions, we no longer would be required to distribute substantially all of our net income to our stockholders. Unless our failure to qualify as a REIT were eligible for relief under U.S. federal tax laws, we could not re-elect to qualify as a REIT until the fifth calendar year following the year in which we failed to qualify.

Even if we qualify as a REIT for U.S. federal income tax purposes, we may be required to pay some federal, state and local taxes on our income or ~~property~~ property and, in certain cases, a 100% penalty tax in the event we sell property, including mortgage loans, as a dealer or if a TRS of ours, including ~~CBRE~~RFC ~~Realty Finance~~ TRS, Inc., enters into agreements with us on a basis that is determined to be other than an arm’s-length basis. In addition, any TRS we own, including ~~CBRE~~RFC ~~Realty Finance~~ TRS, Inc., will be required to pay federal, state and local income taxes on its taxable income, including income from the sale of any loans that we do not hold in our portfolio, as well as an other applicable taxes.

Failure to make required distributions would subject us to tax, which would reduce the cash available for distribution to our stockholders.

In order to qualify as a REIT, we must distribute to our stockholders, each calendar year, at least 90% of our net taxable income, determined without regard to the deduction for dividends paid and excluding net capital gain. To the extent that we satisfy the 90% distribution requirement, but distribute less than 100% of our taxable income, we will be subject to U.S. federal corporate income tax on our undistributed income. In addition, we will incur a 4% nondeductible excise tax on the amount, if any, by which our distributions in any calendar year are less than the sum of:

the extent that we satisfy the 90% distribution requirement, but distribute less than 100% of our taxable income, we will be subject to U.S. federal corporate income tax on our undistributed income. In addition, we will incur a 4% nondeductible excise tax on the amount, if any, by which our distributions in any calendar year are less than the sum of:

•

85% of our ordinary income for that year;

•

95% of our capital gain net income for that year; and

•

100% our undistributed taxable income from prior years.

We intend to distribute our net taxable income to our stockholders in a manner intended to satisfy the 90% distribution requirement and to avoid both corporate income tax and the 4% nondeductible excise tax. However, there is no requirement that taxable REIT subsidiaries distribute their after-tax net income to their parent REIT or their stockholders and ~~CBRE~~RFC ~~Realty Finance~~ TRS, Inc., our TRS, may determine not to make any distributions to us.

Our taxable income may substantially exceed our net income as determined based on generally accepted accounting principles, or GAAP, because, for example, realized capital losses will be deducted in determining our GAAP net income, but may not be deductible in computing our taxable income. In addition, we may invest in assets that generate taxable income in excess of economic income or in advance of the corresponding cash flow from the assets, referred to as phantom income. For example, we may invest in debt instruments or notes whose face value may exceed its issue price as determined for U.S. federal income tax purposes (“original issue discount,” or OID), such that we will be required to include in our income a portion of the OID each year that the instrument is held before we receive any corresponding cash. Although some types of phantom income are excluded to the extent they exceed 5% of our REIT taxable income in determining the 90% distribution requirement, we will incur corporate income tax and the 4% nondeductible excise tax with respect to any phantom income items if we do not distribute those items on an annual basis. As a result of the foregoing, we may generate less cash flow than taxable income in a particular year. In that event, we may be required to use cash reserves, incur debt, or liquidate non-cash assets at rates or times that we regard as unfavorable in order to satisfy the distribution requirement and to avoid corporate income tax and the 4% nondeductible excise tax in that year.

Dividends payable by REITs do not qualify for the reduced tax rates.

Tax legislation enacted in 2003 reduced the maximum U.S. federal tax rate on certain corporate dividends paid to individuals and other non-corporate taxpayers to 15% (through 2010). Dividends paid by REITs to these stockholders are generally not eligible for these reduced rates. Although this legislation does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to non-REIT corporate dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common stock.

Liquidation of assets may jeopardize our REIT qualification.

To continue to qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate our mortgage loan and preferred equity investments to repay obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any resultant gain if we sell assets that are treated as dealer property or inventory.

The stock ownership diversification rules applicable to REITs under the Internal Revenue Code and the stock ownership limitation imposed by our charter may inhibit market activity in our common stock and may restrict our business combination opportunities in which our stockholders might receive a premium for their shares.

In order for us to qualify as a REIT for each taxable year beginning after December 31, 2005, no more than 50% in value of our outstanding capital stock may be owned, directly or indirectly, by five or fewer individuals at any time during the last half of any calendar year. “Individuals” for this purpose include natural persons, private foundations, some employee benefit plans and trusts, and some charitable trusts. Our charter generally prohibits any person from directly or indirectly owning more than 9.8% by number or value, whichever is more restrictive, of our outstanding shares of common stock or more than 9.8% by number or value, whichever is more restrictive, of the outstanding shares of any class or series of our capital stock, subject to important exceptions.

This ownership limitation could have the effect of discouraging a takeover or other transaction in which holders of our common stock might receive a premium for their shares over the then prevailing market price or which holders might believe to be otherwise in their best interests.

- 28 -

Our ownership of and relationship with our TRS is limited and a failure to comply with the limits may jeopardize our REIT qualification and may result in the application of a 100% excise tax.

A REIT may own up to 100% of the stock of one or more TRSs. A TRS may earn income that would not be qualifying income if earned directly by the parent REIT. Both the subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS. A corporation of which a TRS directly or indirectly owns more than 35% of the voting power or value of the stock will automatically be treated as a TRS. Overall, no more than 25% (20% for tax years commencing before January 1, 2009) of the value of a REIT’s assets may consist of stock or securities of one or more TRSs. A TRS will pay federal, state and local income tax at regular corporate rates on any net taxable income that it earns. In addition, the TRS rules limit the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is subject to an appropriate level of corporate taxation. The rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis.

Our TRS, ~~CBRE~~RFC ~~Realty Finance~~ TRS, Inc., will pay federal, state and local income tax on its taxable income, and its after-tax net income is available for distribution to us but is not required to be distributed to us. The aggregate value of the TRS stock and securities owned by us will be less than 25% (20% for tax years commencing before January 1, 2009) of the value of our attractive total assets (including the TRS stock and securities). Furthermore, we will monitor the value of our investments in TRSs for the purpose of ensuring compliance with the rule that no more than 25% (20% for tax years commencing before January 1, 2009) of the value of our assets may consist of TRS stock and securities (which is applied at the close of each calendar quarter). In addition, we scrutinize all of our transactions with TRSs for the purpose of ensuring that they are entered into on arm’s-length terms in order to avoid incurring the 100% excise tax described above. The value of the securities of that we hold in our TRSs may not be subject to precise valuation. Accordingly, there can be no complete assurance that we will be able to comply with the 25% (or 20%) limitation discussed above or to avoid application of the 100% excise tax discussed above.

Complying with REIT requirements may limit our ability to hedge effectively.

The REIT provisions of the Internal Revenue Code ~~substantially~~ limit our ability to hedge our investments. Except to the extent provided by Treasury regulations, (i) for transactions entered into on or prior to July 30, 2008, any income from a hedging transaction we enter into in the normal course of our business primarily to manage risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made, or ordinary obligations incurred or to be incurred, to acquire or carry real estate assets, ~~which~~including isgain ~~clearly~~from ~~identified~~the sale asor ~~specified~~disposition inof ~~Treasury~~such ~~regulations~~a ~~before~~transaction, ~~the~~will ~~close~~not constitute gross income for purposes of the ~~day~~95% ongross ~~which~~income ittest ~~was acquired,~~(and ~~originated,~~will orgenerally constitute non-qualifying income for purposes of the 75% gross income test) and (ii) for transactions entered into after July 30, ~~including~~2008, ~~gain~~any income from a hedging transaction where the ~~sale~~instrument hedges interest rate risk on liabilities used to carry or ~~disposition~~acquire real estate or hedges risk of ~~such~~currency afluctuations ~~transaction,~~with ~~will~~respect ~~not~~to ~~constitute~~any ~~gross~~item of income ~~for~~or ~~purposes~~gain ofthat would be qualifying income under the REIT 75% or 95% gross income ~~test~~tests ~~(and~~ will ~~generally~~be ~~constitute~~excluded ~~non-qualifying~~from gross income for purposes of the REIT 75% and 95% gross income ~~test~~tests. To qualify under either (i) or (ii) of the preceding sentence, the hedging transaction must be clearly identified as specified in Treasury regulations before the close of the day on which it was acquired, originated or entered into. To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both of the gross income tests. As a result, we might have to limit our use of advantageous hedging techniques or implement those hedges through ~~CBRE Realty Finance~~ RFC TRS, Inc. This could increase the cost of our hedging activities or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear.

The tax on prohibited transactions will limit our ability to engage in transactions, including certain methods of securitizing mortgage loans, that would be treated as sales for U.S. federal income tax purposes.

A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, but including mortgage loans, held primarily for sale to customers in the ordinary course of business. We might be subject to this tax if we were to sell or securitize loans in a manner that was treated as a sale of the loans for U.S. federal income tax purposes. Therefore, in order to avoid the prohibited transactions tax, we may choose not to engage in certain sales of loans and may limit the structures we utilize for our securitization transactions even though such sales or structures might otherwise be beneficial for us.

It may be possible to reduce the impact of the prohibited transaction tax and the holding of assets not qualifying as real estate assets for purposes of the REIT asset tests by conducting certain activities, holding non-qualifying REIT assets or engaging in CDO transactions through our TRSs, subject to certain limitations as described below. To the extent that we engage in such activities through TRSs, the income associated with such activities may be subject to full corporate income tax.

We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our common stock.

At any time, the U.S. federal income tax laws or regulations governing REITs or the administrative interpretations of those laws or regulations may be amended. We cannot predict when or if any new U.S. federal income tax law, regulation or administrative interpretation, or any amendment to any existing U.S. federal income tax law, regulation or administrative interpretation, will be adopted, promulgated or become effective and any such law, regulation or interpretation may take effect retroactively. We and our stockholders could be adversely affected by any such change in, or any new, U.S. federal income tax law, regulation or administrative interpretation.

If we make distributions in excess of our current and accumulated earnings and profits, those distributions will be treated as a return of capital, which will reduce the adjusted basis of your stock, and to the extent such distributions exceed your adjusted basis, you may recognize a capital gain.

Unless you are a tax-exempt entity, distributions that we make to you generally will be subject to tax as ordinary income to the extent of our current and accumulated earnings and profits as determined for U.S. federal income tax purposes. If the amount we distribute to you exceeds your allocable share of our current and accumulated earnings and profits, the excess will be treated as a return of capital to the extent of your adjusted basis in your stock, which will reduce your basis in your stock but will not be subject to tax. To the extent the amount we distribute to you exceeds both your allocable share of our current and accumulated earnings and profits and your adjusted basis, this excess amount will be treated as a gain from the sale or exchange of a capital asset.

Forward-Looking Information

This report includes certain statements that may be deemed to be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. We intend such forward-looking statements to be covered by the safe harbor provisions for ~~froward~~forward-looking statements contained in Section 27A of the Securities Act and Section 21E of the Exchange Act. In some cases, you can identify forward looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “project,” “should,” “will” and “would” or the negative of these terms or other comparable terminology.

The forward-looking statements are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us or are within our control. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider these risks along with the following factors that could cause actual results to vary from our forward-looking statements:

•

our future operating results;

- 29 -

•

our business operations and prospects;

•

general volatility of the securities markets in which we invest and the market price of our common stock;

•

changes in our business strategy;

• ~~availability,~~the ~~terms~~effect of trading on the OTCBB and/or ~~deployment~~the ofPink ~~capital~~Sheets;

• availability, terms and deployment of ~~qualified~~short-term ~~personnel~~and long-term capital;

47• availability and retention of qualified personnel;

~~Table~~• our ability to effectively internalize the management function of ~~Contents~~our business and operate as an internally managed company;

• changes in our industry, interest rates, the debt securities, credit and capital markets, the general economy or the commercial finance and real estate markets specifically;

• ~~the~~unanticipated ~~performance~~increases in financing and ~~financial~~other ~~condition~~costs, ofincluding ~~borrowers~~a ~~and~~rise ~~corporate~~in ~~customers~~interest rates, or requirements for additional collateral;

•

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

•

increased rates of default and/or decreased recovery rates on our investments;

• ~~increased~~our ~~prepayments~~ability to satisfy complex rules in order for us to qualify as a REIT for U.S. federal income tax purposes and qualify for our exemption under the Investment Company Act of 1940, as amended, and the ~~mortgage~~ability of certain of our subsidiaries to qualify as REITs and ~~other~~certain ~~loans~~our ~~underlying~~subsidiaries to qualify as taxable REIT subsidiaries for U.S federal income tax purposes, and our ~~mortgage-backed~~ability orand ~~other~~the ~~asset-backed~~ability ~~securities~~of our subsidiary to operate effectively with the limitations imposed by these rules;

• ~~changes~~risk inof ~~governmental~~structured ~~regulations,~~finance ~~tax rates and similar matters~~investments;

• ~~legislative~~the performance and ~~regulatory~~financial ~~changes~~condition ~~(including~~of ~~changes~~borrowers toand ~~laws~~corporate ~~governing the taxation of REITs)~~customers;

•

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

•

increased prepayments of the mortgage and other loans underlying the company’s investments;

•

status of the class action lawsuit;

•

potential derivative stockholder claims and any future litigation that may arise;

•

the ultimate resolution of our six non-performing loans totaling $128.4 million and our three watch list loans totaling $75.5 million;

•

the monetization of our joint venture investments;

•

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

•

the degree and nature of our competition;

• the ~~adequacy~~ability ofto ~~our~~come ~~cash~~back ~~reserves~~into ~~and~~compliance ~~working~~with ~~capital;~~the ~~and~~covenants under CDO I;

• the ~~timing~~ability ofto ~~cash~~maintain ~~flows,~~compliance ifwith ~~any,~~the ~~from~~covenants ~~our~~under ~~investments.~~CDO II;

•

whether the company remains as collateral manager of CDO II;

•

working capital;

•

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

•

available liquidity;

•

other factors, which are beyond the company’s control; and

•

other factors discussed under the heading “Risk Factors” in our Annual Report on form 10-K for the year ended December 31, 2008.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of future events, new information or otherwise.

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

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

Our principal office is located at City Place 1, 185 Asylum Street, ~~37th~~31st Floor, Hartford, CT 06103 and our telephone number is (860) 275-6200. We believe that our office facilities are suitable and adequate for our business as it is conducted. Our website is located at http://www.~~cbrerealtyfinance~~realtyfinancecorp.com . The information found on, or otherwise accessible through, our website is not incorporated into, and does not form a part of, this ~~prospectus~~annual report or any other report or document we file with or furnish to the SEC.

- 30 -

ITEM 3.

LEGAL PROCEEDINGS

AsOn October 30, 2007, a putative class action lawsuit was commenced in the United States District Court for the District of ~~December~~Connecticut against our company, our former chief financial officer and our former chief executive officer seeking remedies under the Securities Act of 1933, as amended. Amended complaints filed on March 3125, ~~2006~~2008 and May 6, we2008 added our chairman and the underwriters that participated in our October 2006 initial public offering as additional defendants. The underwriters have since ~~were~~been ~~not~~dropped ~~involved~~from the suit by voluntary dismissal filed by the plaintiffs with the court in ~~any~~December 2008. The plaintiffs allege that the registration statement and prospectus relating to the initial public offering contained material ~~litigation~~misstatements and ~~nor~~material omissions. Specifically, tothe plaintiffs allege that management’s had knowledge, isof ~~any~~certain ~~material~~loan ~~litigation~~impairments ~~threatened~~and ~~against~~did usnot properly disclose or record such impairments in the financial statements. The plaintiffs seek to represent a class of all persons who purchased or otherwise acquired common stock that is traceable to our ~~Manager~~initial public offering in September 2006 and seek damages in an unspecified amount. On July 29, 2008, we filed a Motion to Dismiss the putative class action suit with the federal district court for the District of Connecticut. Following oral arguments in November 2008, the plaintiffs filed a second amended complaint on December 22, 2008 and voluntarily dismissed the action against the underwriters. We have since filed a revised Motion to Dismiss the second amended complaint, and are awaiting the court’s ruling on that motion.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

48- 31 -

PART II

ITEM 5.

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

Our common stock began trading on the ~~New York Stock Exchange (“~~NYSE”) on September 27, 2006 under the symbol “CBF.” AsOn ~~of March~~November 234, ~~2007~~2008, the ~~reported~~30 ~~closing~~trading-day average ~~sale~~market ~~price~~capitalization ~~per~~of ~~share~~our common stock fell below $25 million, resulting in the permanent delisting of our common stock onfrom the ~~NYSE~~New ~~was~~York ~~$13~~Stock Exchange.40 ~~and~~On weNovember 10, ~~had 30~~2008,~~731,342~~ ~~shares of~~ our common stock ~~issued~~began ~~and~~trading ~~outstanding~~through normal brokerage channels on the OTCBB. The OTCBB is an electronic, regulated quotation service that ~~were~~displays ~~held~~real-time byquotes, ~~approximately~~last-sale 51prices, ~~holders~~and ofvolume ~~record.~~information ~~The~~for ~~table~~over-the-counter ~~below~~equity ~~sets~~securities issued by companies that are subject to periodic filing ~~forth~~requirements with the ~~quarterly~~SEC ~~high~~or ~~and~~other ~~low~~regulatory ~~closing~~authority. ~~sales~~While ~~prices~~the oftrading on our common stock on the ~~NYSE~~OTCBB ~~since~~does ~~our~~not ~~initial~~affect ~~public~~our ~~offering~~business ~~and~~operations, the ~~distributions~~trading ~~paid~~volume byand usliquidity ~~with~~of ~~respect~~our tocommon ~~the~~stock ~~periods~~may ~~indicated~~be adversely impacted.

Quarter Ended	High		Low
September 30, 2006	$	15.60	$	14.50
December 31, 2006	$	18.39	$	14.70

As of March 10, 2009, the reported closing sale price per share of common stock on the OTCBB was $0.06 and we had 30,936,533 shares of our common stock issued and outstanding held by approximately 32 holders of record. The table below sets forth the quarterly high and low closing sales prices of our common stock on the NYSE and OTCBB since our initial public offering and the distributions paid by us with respect to the periods indicated.

~~There~~NYSE had been no public trading market for our common stock prior to our October 2006 initial public offering. Shares of our common stock issued to qualified institutional buyers in connection with our June 2005 private offering were eligible for trading in the PORTAL (SM) Market, or PORTAL, a subsidiary of the NASDAQ Stock Market, Inc., which permits secondary sales of eligible unregistered securities to qualified institutional buyers in accordance with Rule 144A under the Securities Act. The following table shows the high and low sales prices for our common stock for each quarterly period since our common stock was eligible for trading on PORTAL through September 27, 2006:

	High Sales Price		Low Sales Price
Quarter/Period Ended	High		Low
June 9, 2005 through September 30, 2005	$	15.00	$	15.00
September 30, 2006	$	15.60	$	14.50
October 1, 2005 through December 31, 2005	$	15.00	$	15.00
December 31, 2006	$	18.39	$	14.70
January 1, 2006 through March 31, 2006	$	15.00	$	15.00
March 31, 2007	$	16.86	$	12.88
April 1, 2006 through June 30, 2006	$	15.00	$	15.00
June 30, 2007	$	13.49	$	11.89
July 1, 2006 through September 27, 2006		*		*
September 30, 2007	$	12.69	$	4.25
December 31, 2007	$	7.37	$	3.78
March 31, 2008	$	6.27	$	3.00
June 30, 2008	$	4.50	$	3.44
September 30, 2008	$	3.64	$	0.91
October 1, 2008 – November 7, 2008	$	1.20	$	0.38
OTCBB
Period Ended	High		Low
November 10, 2008 – December 31, 2008	$	0.44	$	0.11

*There Tohad been no public trading market for our ~~knowledge,~~common nostock ~~trades~~prior to our October 2006 initial public offering. Shares of our common stock ~~occurred~~issued onto qualified institutional buyers in connection with our June 2005 private offering were eligible for trading in the PORTAL ~~during~~(SM) ~~this~~Market, ~~period~~or PORTAL, a subsidiary of the NASDAQ Stock Market, Inc., which permits secondary sales of eligible unregistered securities to qualified institutional buyers in accordance with Rule 144A under the Securities Act. From June 9, 2005 through September 27, 2006, the high and low sales prices for our common stock was $15.00 per share.

The information above regarding PORTAL prices may not be complete since we have access only to information regarding trades reported by the underwriters and not trades reported by other broker-dealers. Moreover, broker-dealers are not required to report all trades to PORTAL.

Distributions

We have elected to be taxed as a REIT for U.S. federal income tax purposes commencing with our taxable year ended on December 31, 2005. U.S. federal income tax law requires that a REIT distribute with respect to each year at least 90% of its REIT taxable income, determined without regard to the deduction for dividends paid and excluding any net capital gain. We will not be required to make distributions with respect to income derived from the activities conducted through ~~CBRE~~RFC ~~Realty Finance~~ TRS, Inc., our TRS, that are not distributed to us. To the extent our TRS’s income is not distributed and is instead reinvested in the operations of our TRS, the value of our equity interest in our TRS will increase. The aggregate value of the securities that we hold in our TRS may not exceed 20% of the total value of our gross assets. Distributions from our TRS to us will qualify for the 95% gross income test, but will not qualify for the 75% gross income test. Therefore, distributions from our TRS to us in no event will exceed 25% of our gross income with respect to any given taxable year.

To satisfy the requirements to qualify as a REIT and generally not be subject to U.S. federal income and excise tax, we intend to make regular quarterly distributions of all or substantially all of our net income to holders of our common stock out of assets legally available ~~therefor~~. Any future distributions we make will be at the discretion of our board of directors and will depend upon our earnings and financial condition, maintenance of REIT qualification, applicable provisions of the Maryland General Corporation Law, and such other factors as our board of directors deems relevant.

49The following table shows the distributions declared in 2006, 2007 and 2008:


Record Date	Payment Date	Cash Distribution Declared per Share
April 14, 2006	April 25, 2006	$	0.17
June 30, 2006	July 17, 2006	$	0.18
September 18, 2006	October 11, 2006	$	0.28
December 29, 2006	January 16, 2007	$	0.19
March 30, 2007	April 16, 2007	$	0.21
June 29, 2007	July 16, 2007	$	0.21
September 28, 2007	October 15, 2007	$	0.17
December 31, 2007	January 15, 2008	$	0.21
March 31, 2008	April 14, 2008	$	0.15
June 30, 2008	July 17, 2008	$	0.10
September 30, 2008	October 17, 2008	$	0.05

On December 17, 2008, we announced that our board of directors suspended the quarterly cash dividend in order to maintain our financial flexibility.

To the extent that our cash available for distribution is less than 90% of our REIT taxable income, we may consider various funding sources to cover any such shortfall, including borrowings, selling certain of our assets or future offerings. Our distribution policy enables us to review the alternative funding sources available to us from time to time.

- 32 -

The following table ~~shows~~summarizes ~~the~~information, ~~distributions~~as ~~declared~~of inDecember 31, ~~2005~~2008, ~~and~~relating ~~2006:~~to our equity compensation plans pursuant to which shares of our common stock or other equity securities may be granted from time to time.

Record Date	Payment Date	Cash DistributionDeclared per Share
Plan category	(a)Number of securitiesto be issued uponexercise of outstandingoptions, warrants andrights	(b)Weighted averageexercise price ofoutstandingoptions, warrantsand rights		(c)Number of securitiesremaining available forfuture issuance underequity compensationplans (excludingsecurities reflected incolumn (a))
October 28, 2005	November 15, 2005	$	0.06
Equity compensation plans approved by security holders (1)	855,868	$	14.37	165,416
December 28, 2005	January 13, 2006	$	0.13
Equity compensation plans not approved by security holders	N/A		N/A	N/A
April 14, 2006	April 25, 2006	$	0.17
Total	855,868	$	14.37	165,416
June 30, 2006	July 17, 2006	$	0.18
September 18, 2006	October 11, 2006	$	0.28
December 29, 2006	January 17, 2007	$	0.19

To the extent that our cash available for distribution is less than 90% of our REIT taxable income, we may consider various funding sources to cover any such shortfall, including borrowing under our warehouse facilities, selling certain of our assets or future offerings. Our distribution policy enables us to review the alternative funding sources available to us from time to time.

The following table summarizes information, as of December 31, 2006, 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 securitiesto be issued uponexercise of outstandingoptions, warrants andrights	(b)Weighted averageexercise price ofoutstandingoptions, warrantsand rights		(c)Number of securitiesremaining available forfuture issuance underequity compensationplans (excludingsecurities reflected incolumn (a))
Equity compensation plans approved by security holders (1)	875,233	$	15.00	468,645
Equity compensation plans not approved by security holders	N/A		N/A	N/A
Total	875,233	$	15.00	468,645

⁽¹⁾	Includes information related to our 2005 equity incentive plan.

~~SALE~~Recent OFSales ~~UNREGISTERED~~of ~~AND~~Unregistered ~~REGISTERED~~Securities ~~SECURITIES; USE OF PROCEEDS FROM REGISTERED SECURITIES~~

~~Unregistered~~We ~~Sales~~issued 0, 357,700 and 134,000 shares of our common stock in 2008, 2007 and 2006, respectively, for stock-based compensation in connection with our 2005 equity incentive plan. We also issued options to purchase shares of 0, 136,000 and 95,400 shares of our common stock in 2008, 2007 and 2006, respectively. The options have a term of five years from the date of grant and become exercisable in three equal annual installments beginning on the first anniversary of the date of the grant. These transactions were not registered under the Securities Act of 1933, as amended, pursuant to the exemption contemplated by Section 4(2) thereof for transactions not involving a public offering.

On- ~~June 9,~~33 ~~2005,~~- we completed our private offering of 20,000,000 shares of our common stock pursuant to Rule 144A, Regulation D and Regulation S under the Securities Act, resulting in gross proceeds of $300.0 million and net proceeds of approximately $282.5 million, which were used primarily to fund investments. Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Banc of America Securities LLC and Citigroup Global Markets Inc. served as the initial purchasers/placement agents in the private offering.

We issued 134,000 and 567,755 shares of our common stock in 2006 and 2005, respectively, for stock-based compensation in connection with our 2005 equity incentive plan. We also issued options to purchase 95,400 shares and 813,600 shares of our common stock in 2006 and 2005, respectively, with an exercise price of $15.00 per share. The options have a term of five years from the date of grant and become exercisable in three equal annual installments beginning on the first anniversary of the date of the grant. These transactions were not registered under the Securities Act of 1933, pursuant to the exemption contemplated by Section 4(2) thereof for transactions not involving a public offering.

Use of Proceeds from Sale of Registered Securities

On September 27, 2006, the SEC declared effective our Registration Statement on Form S-11 (File No. 333-132186) relating to our IPO. The offering date was September 27, 2006. Our IPO was underwritten by Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Wachovia Capital Markets, LLC, and Citigroup Global Markets Inc. acting as joint book-running managers, and JMP Securities, acting as co-manager. We sold 11,012,624 shares of our common stock at a price of $14.50 per share, which includes the exercise in full of the underwriters’ option to purchase an additional 1,436,429 shares of common stock. Of these shares, 9,945,020 were sold by us and 1,067,604 were sold by selling stockholders. Net proceeds from both our IPO and the over-allotment option, after underwriting discounts and commissions of $8.7 million and other offering expenses of $2.4 million, were $133.2 million, which we received on October 3, 2006. None of the underwriting discounts and commissions or offering expenses were incurred or paid, directly or indirectly, to directors or officers of ours or their associates or to persons owning 10% or more of our common stock or to any affiliates of ours. There has been no material change in our planned use of proceeds from our IPO as described in our final prospectus filed with the SEC pursuant to Rule 424(b).

ITEM 6.

SELECTED FINANCIAL DATA

Summary Consolidated Financial Information

The following table presents summary ~~historical~~ consolidated financial information for the year ended December 31, 2008, 2007, 2006 and for the period May 10 (inception) through December 31, 2005. Since the information presented below is only a summary and does not provide all of the information contained in our historical consolidated financial statements, including the related notes, you should read it in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our ~~historical~~ consolidated financial statements, including the related notes, included in Item 8.

	For the Year EndedDecember 31, 2006			For the Period May 10, 2005 (inception) through December 31, 2005
	For the YearEndedDecember 31, 2008			For the YearEndedDecember 31, 2007			For the YearEndedDecember 31, 2006			For the PeriodMay 10, 2005(inception) throughDecember 31, 2005
	(in thousands, except per share and share data)
Consolidated Income Statement Data:
Revenues:
Revenues:
Investment income	$	100,522		$	129,416		$	64,631		$	9,342
Investment income	$	64,631		$	9,342
Property operating income		4,439			4,005			3,076			—
Property operating income		6,100			—
Other income		976			4,609			3,322			3,057
Other income		3,322			3,057
Total revenues		105,937			138,030			71,029			12,399
Total revenue		74,053			12,399
Expenses:
Expenses:
Interest expense		82,036			92,157			40,546			2,664
Interest expense		42,181			2,664
Management fees		5,059			7,695			6,515			3,158
Management fees		6,515			3,158
Property operating expenses		3,270			2,662			1,685			—
Property operating expenses		3,110			—
Other general and administrative expenses (including $770, $1,292, $3,867 and $1,770, respectively, of stock-based compensation)		16,478			9,351			10,404			5,549
Other general and administrative expenses (including $3,867 and $1,770, respectively, of stock-based compensation)		10,404			5,549
Depreciation and amortization		1,121			1,398			529			—
Depreciation and amortization		1,532			—
Provision for loan losses		126,504			19,650			—			—
Total expenses		63,742			11,371
Loss on impairment of assets		5,966			7,764			—			—
Gain on sale of investment		258			—
Total expenses		240,434			140,677			59,679			11,371
Gain on derivatives		3,552			24
Gain (loss) on sale of investment		(2,021	)		(500	)		258			—
Income (loss) from continuing operations before equity in net income of unconsolidated joint ventures		14,121			1,052
Gain (loss) on financial instruments		20,834			(1,668	)		3,634			24
Equity in net income (loss) of unconsolidated joint ventures		(453	)		—
Income (loss) from continuing operations before equity in net loss of unconsolidated joint ventures and discontinued operations		(115,684	)		(4,815	)		15,242			1,052
Net income before minority interest		13,668			1,052
Equity in net loss of unconsolidated joint ventures		(39,863	)		(5,721	)		(453	)		—
Minority interest		(75	)		—
Income (loss) before minority interest and discontinued operations		(155,547	)		(10,536	)		14,789			1,052
Net income	$	13,743		$	1,052
Minority interest		(689	)		(132	)		(75	)		—
Weighted-average number of common stock outstanding:
Income (loss) from continuing operations		(154,858	)		(10,404	)		14,864			1,052
Basic		22,688,444			20,000,000
Discontinued operations
Diluted		22,837,282			20,108,317
Operating results from discontinued operations		(2,896	)		(5,633	)		(1,121	)		—
Earnings per share of common stock:
Loss on impairment of asset held for sale		(6,057	)		(54,729	)		—			—
Basic	$	0.61		$	0.05
Gain on sale of investment		6,780			—			—			—
Diluted	$	0.60		$	0.05
Loss from discontinued operations		(2,173	)		(60,362	)		(1,121	)		—
Dividends declared per share of common stock	$	0.82		$	0.19
Net income (loss)	$	(157,031	)	$	(70,766	)	$	13,743		$	1,052
Basic earnings per share
Income (loss) from continuing operations	$	(5.07	)	$	(0.34	)	$	0.66		$	0.05
Loss from discontinued operations		(0.07	)		(1.99	)		(0.05	)		—
Net income (loss)	$	(5.14	)	$	(2.33	)	$	0.61		$	0.05
Diluted earnings per share
Income (loss) from continuing operations	$	(5.07	)	$	(0.34	)	$	0.65		$	0.05
Loss from discontinued operations		(0.07	)		(1.99	)		(0.05	)		—
Net income (loss)	$	(5.14	)	$	(2.33	)	$	0.60		$	0.05
Weighted average shares of common stock outstanding
Basic weighted average common shares outstanding		30,553			30,287			22,688			20,000
Diluted weighted average common shares and common share equivalents outstanding		30,553			30,287			22,837			20,108
Dividends per common share	$	0.30		$	0.80		$	0.82		$	0.19

51- 34 -

	As ofDecember 31, 2006			As ofDecember 31, 2005
	As ofDecember 31, 2008				As ofDecember 31, 2007		As ofDecember 31, 2006		As ofDecember 31, 2005
	(in thousands)
Consolidated Balance Sheet Data:(1)
Consolidated Balance Sheet Data:
Total investments, net	$	1,369,609		$	538,068
Cash and equivalents	$	23,133			$	25,954	$	17,933	$	49,377
Total assets	$	1,522,689		$	623,718
Total investments, net(1)	$	1,234,584			$	1,664,210	$	1,369,609	$	538,068
Debt-repurchase obligations	$	433,438		$	304,825
Total assets	$	1,402,943			$	2,069,299	$	1,522,689	$	623,718
Mortgages payable	$	52,194		$	25,001
Debt-repurchase obligations	$	—			$	144,183	$	433,438	$	304,825
Junior subordinated deferrable interest debentures held by trusts that issued trust preferred securities	$	50,000		$	—
Mortgages payable	$	54,964			$	54,899	$	52,194	$	25,001
Bonds payable	$	508,500		$	—
Junior subordinated deferrable interest debentures held by trusts that issued trust preferred securities (at fair value in 2008 only)	$	8,375			$	50,000	$	50,000	$	—
Total liabilities	$	1,110,006		$	343,651
Bonds payable ($124,292 at fair value in 2008 only)	$	949,292			$	1,339,500	$	508,500	$	—
Minority interest	$	813		$	436
Total liabilities	$	1,184,535			$	1,855,820	$	1,110,006	$	343,651
Stockholders’ equity	$	411,870		$	279,631
Minority interest	$	(21	)		$	663	$	813	$	436
Stockholders’ equity	$	218,429			$	212,816	$	411,870	$	279,631

(1) ~~Aggregates~~Includes ~~our~~(i) loans and other lending investments, net; ~~CMBS,~~(ii) atcommercial ~~fair~~mortgage ~~value;~~backed ~~and real estate~~securities, ~~net~~(iii) ~~line~~investments ~~items~~in ~~from~~unconsolidated ~~our balance sheet. The real estate, net represents two~~ joint ~~venture investments as of December 31~~ventures, ~~2006~~ (~~one as of December 31, 2005~~iv) that are considered VIEs that we consolidate under Financial Accounting Standard Board Interpretation No. 46R, or FIN 46R, because we are deemed to be the primary beneficiary of the VIEs. These interests are reflected on our balance sheet separately as real estate, net ~~of $66,277 as of December 31, 2006~~ and ~~$31,923~~(v) asour oftwo ~~December~~consolidated 31VIEs, ~~2005, mortgage indebtedness of $52,194 as of December 31, 2006 and $25,001 as of December 31, 2005 and minority interest of $813 as of December 31, 2006 and $436 as of December 31, 2005,~~ with ~~other~~assets ~~amounts of $2,085 as of December 31, 2006~~ and ~~$1,803~~liabilities asreported ofon ~~December~~a ~~31, 2005,~~ net, ~~in relevant other balance sheet line items which in the aggregate net out to $15,355 as of December 31, 2006 and $8,289 as of December 31, 2005~~basis. ~~We disclose the net amount above in the consolidated balance sheet data under total investments, net.~~

52- 35 -

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

WeRealty ~~are~~Finance aCorporation, ~~commercial~~formerly ~~real~~known ~~estate~~as ~~specialty~~CBRE ~~finance~~Realty ~~company~~Finance, Inc., was organized in Maryland on May 10, 2005, ~~that~~as is a commercial real estate specialty finance company focused on originating, and acquiring whole loans, ~~investing~~bridge loans, subordinate interests in whole loans, ~~financing~~or B Notes, commercial mortgage-backed securities, or CMBS, and ~~managing~~mezzanine loans, aprimarily ~~diversified~~in ~~portfolio~~the ofUnited ~~commercial~~States. ~~real~~Unless ~~estate-related~~the ~~loans~~context ~~and~~requires ~~securities~~otherwise, ~~including~~all ~~whole~~references ~~loans~~to “we,” ~~subordinate~~“our,” ~~interests~~and “us” in ~~whole~~this ~~loans,~~annual ~~which~~report wemean ~~refer~~Realty toFinance asCorporation, Ba ~~Notes~~Maryland corporation, our ~~commercial~~wholly-owned ~~mortgage~~and majority-~~back~~owned ~~securities,~~subsidiaries ~~which~~and weour ~~refer~~ownership toin asjoint ~~CMBS,~~venture ~~mezzanine~~assets ~~loans~~and real estate projects. As of December 31, 2008, we also own interests in seven joint venture ~~investments~~assets, two of which are consolidated in the consolidated financial statements. We commenced operations on June 9, 2005. We are a holding company and ~~other~~conduct ~~real~~our ~~estate~~business orthrough ~~real~~wholly-owned ~~estate~~or majority-~~related~~owned ~~investments~~subsidiaries.

WeHistorically, ~~are~~we ahave ~~holding~~been ~~company that conducts its businesses through wholly-owned or majority-owned subsidiaries. We are~~ externally managed and advised by CBRE Realty Finance Management, LLC, ~~which we refer to as~~ our Manager, an indirect subsidiary of CB Richard Ellis Group, Inc., ~~which~~or ~~we refer to as~~ CBRE, and a direct subsidiary of CBRE Melody & Company, ~~which~~or weCBRE|Melody. ~~refer~~As of December 31, 2008, CBRE|Melody also owned an approximately 4.5% interest in the outstanding shares of our common stock. In addition, certain of our executive officers and directors owned an approximately 2.5% interest in the outstanding shares of our common stock. The management agreement expired by its terms on December 31, 2008. The expiration of the management agreement ended our affiliation with CBRE and its affiliates. As a result, subsequent to asDecember 31, 2008, we have internalized the operations historically performed by our Manager into our company through the direct hiring of the employees previously employed by our Manager and replacing other functions previously performed or facilitated by CBRE/|Melody, such as payroll and other back office functions, and obtaining standalone insurance coverage. As a result of the termination of the management agreement, we will no longer pay any management fees. However, such fees will generally be replaced by costs that had historically been absorbed by our Manager, primarily compensation and benefit costs. No fees were paid by us in connection with the expiration of the management agreement.

WeOn ~~have~~November 4, ~~elected~~2008, tothe be30 ~~taxed~~trading-day asaverage amarket ~~real~~capitalization ~~estate~~of ~~investment~~our ~~trust,~~common orstock ~~REIT,~~fell ~~for~~below ~~U.S.~~$25 ~~federal~~million, ~~income~~resulting ~~tax~~in ~~purposes~~the ~~commencing~~permanent delisting ~~with~~of our ~~taxable~~common ~~year~~stock ~~ended December 31,~~from ~~2005.~~the ~~Accordingly,~~New weYork ~~generally~~Stock ~~will~~Exchange, ~~not~~or beNYSE. ~~subject~~Our tocommon U.stock S.has ~~federal~~since ~~income~~been ~~taxes~~traded ifthrough wenormal ~~meet~~brokerage ~~certain~~channels ~~organizational~~on ~~and~~the ~~operational~~OTC ~~requirements~~Bulletin Board, ~~including~~or athe ~~requirement~~OTCBB. toThe ~~distribute~~OTCBB atis ~~least~~an ~~90%~~electronic, ofregulated ~~our~~quotation ~~net~~service ~~taxable income~~that ~~(determined~~displays ~~without~~real-time ~~regard~~quotes, tolast-sale ~~the~~prices, ~~dividends paid deduction~~ and ~~excluding~~volume ~~net~~information ~~capital~~for ~~gains)~~over-the-counter toequity ~~our~~securities ~~stockholders.~~issued ~~However,~~by wecompanies ~~have~~that aare ~~taxable~~subject ~~REIT subsidiary, which we refer~~ to asperiodic ~~our~~filing ~~TRS,~~requirements ~~which~~with ~~will~~the ~~incur~~Securities ~~federal, state~~ and ~~local~~Exchange ~~taxes~~Commission, onor the ~~taxable income~~SEC, ~~from~~or ~~their~~other regulatory ~~activities~~authority.

~~Our~~On ~~objective~~December 8, is2008, the NYSE filed a Form 25 with the SEC to ~~grow~~delist our ~~portfolio~~common ~~and~~stock ~~provide~~from ~~attractive~~trading ~~total~~on ~~returns~~the NYSE and to deregister our ~~investors~~common ~~over~~stock ~~time~~under the Securities and Exchange Act of 1934, as amended, or the Exchange Act, which became effective on March 9, 2009. Given that we have fewer than 300 holders of record of our common stock, we voluntarily ~~through~~choose to become a ~~combination~~non-reporting ofcompany, ~~dividends~~which ~~and~~would ~~capital~~suspend ~~appreciation~~our obligation to file periodic reports with the SEC pursuant to the Exchange Act. Our ~~business~~board ~~primarily~~of ~~focuses~~directors has elected to file Form 15 with the SEC on ~~originating~~or around March 16, ~~acquiring~~2009 to effectuate this change. Eliminating our requirement to make further SEC filings will permit us to reduce expenses associated with compliance efforts as well as listing fees, ~~investing~~professional infees, ~~financing~~insurance and ~~managing~~other administrative costs. Currently, we do not believe the benefits of being a ~~diversified~~periodic ~~portfolio~~reporting company and continuing to make SEC filings justify these significant costs. Upon the filing of ~~commercial~~the ~~real~~Form ~~estate~~15, ~~related~~we ~~loans~~will no longer be obligated to file periodic reports with the SEC, including Forms 10-K, 10-Q and ~~securities~~8-K. ~~Our~~As ~~initial~~a result, management anticipates that our shares of common stock will not be eligible to be traded on the OTCBB and will instead be traded on the Pink OTC Markets, or the Pink Sheets. However, we can make no assurances ~~investment~~that ~~focus~~any broker will make a market in our common stock. The Pink Sheets is ona ~~opportunities~~centralized quotation service that collects and publishes market maker quotes in ~~North~~real ~~America~~time, primarily through its web site, http://www.pinksheets.com. We intend to continue to release unaudited quarterly earnings reports and audited annual financial statements by posting information on our website as well as on the OTC Disclosure and News Service.

We have ~~invested,~~elected onto qualify to be taxed as a ~~relative~~real ~~value~~estate ~~basis~~investment trust, inor ~~transactions~~REIT, infor aU. ~~variety~~S. offederal income tax purposes commencing with our taxable year ~~markets~~ended ~~and~~December 31, ~~secured~~2005. byAs ~~many~~a ~~different~~REIT, ~~property~~we ~~types~~generally will not be subject to U. WeS. ~~have~~federal ~~also~~income ~~focused~~tax on that portion of income that is distributed to stockholders if at least 90% of the our ~~investments~~REIT intaxable ~~markets~~income ~~and~~is ~~transactions~~distributed ~~where~~to weour ~~believe~~stockholders. weWe conduct ~~have~~our anoperations ~~advantage~~so ~~due~~as to ~~knowledge~~not ~~and~~be ~~insight~~regulated ~~provided~~as byan ~~our~~investment ~~affiliation~~company ~~with~~under ~~CBRE~~the Investment Company Act of 1940, as amended, or the 1940 Act. We also conduct business through our wholly-owned taxable REIT subsidiary, or TRS, RFC TRS, Inc.

We In ~~believe~~July ~~that~~2007, wewhen ~~have~~concerns ~~access~~over tothe ~~many~~sub-prime ~~investment~~residential markets began impacting liquidity and valuations ~~finance~~in ~~opportunities~~the ~~that~~commercial ~~emerge~~real ~~from~~estate ~~our~~market, ~~affiliation~~we ~~with~~suspended ~~CBRE.~~new Weinvestment ~~source~~activity ~~our~~due ~~investments~~to ~~through two~~the ~~primary~~uncertainty ~~channels:~~about our ~~unique~~ability ~~relationship~~to ~~with~~secure short-term financing under repurchase agreements and long-term financing through the ~~CBRE/Melody~~use ~~origination~~of ~~system~~collateralized debt obligations, ~~which~~or CDOs. Although we ~~refer~~do tonot ashave ~~the~~any ~~affiliated~~direct ~~CBRE~~sub-prime ~~system;~~exposure ~~and~~or ~~the~~direct ~~origination~~exposure ~~capabilities~~to ofthe ~~our~~single ~~management~~family ~~team~~mortgage market, ~~including~~the ~~their~~factors ~~relationships~~described ~~with~~above ~~borrowers,~~have ~~sellers~~resulted ~~of whole~~in ~~loans~~substantially ~~and~~reduced ~~various~~mortgage ~~financial~~loan ~~institutions~~originations and ~~other~~securitizations, and ~~financial~~caused ~~intermediaries,~~more ~~which~~generalized wecredit ~~refer~~market todislocations asand ~~our~~a ~~internal~~significant ~~origination~~contraction ~~system~~in available credit. ~~The~~As ~~combination~~a ofresult, ~~these~~most ~~systems~~financial ~~allows~~industry usparticipants, toincluding ~~consider~~commercial areal ~~high~~estate ~~volume~~lenders ofand ~~investment~~investors, ~~opportunities~~continue ~~which~~to ~~allow~~find usit difficult to obtain cost-effective debt capital to befinance ~~highly~~new ~~selective~~investment ~~about~~activity ~~which~~or ~~opportunities~~to werefinance ~~pursue~~maturing debt.

InDuring ~~each~~2008, ~~financing~~the ~~transaction~~global wecapital markets ~~undertake,~~continued weto ~~seek~~experience totremendous ~~control~~volatility asand ~~much~~a wide-ranging lack of liquidity. The impact of the ~~capital~~ ~~structure~~global ascredit ~~possible~~crisis on our sector has been acute. WeTransaction ~~generally~~volume ~~seek~~has todeclined ~~accomplish~~significantly, ~~this~~credit ~~through~~spreads ~~the~~for ~~direct~~all ~~origination~~forms of ~~whole~~mortgage debt ~~loans~~have ~~and~~reached ~~other~~all-time ~~investments~~highs, ~~the~~issuance ~~ownership~~levels of ~~which~~commercial ~~permits~~mortgage backed securities, or CMBS, have ground to a ~~wide~~halt, ~~variety~~and other forms of ~~syndication~~financing ~~and~~from ~~securitization~~the ~~executions~~debt markets have been dramatically curtailed. ByFinancial ~~providing~~institutions astill hold ~~single~~significant ~~source~~inventories of ~~financing~~unsold toloans aand ~~borrower~~CMBS, wecreating ~~intend~~a tofurther ~~streamline~~overhang on the ~~lending~~markets. ~~process~~The continuing dislocation in the debt capital markets, ~~give~~coupled ~~greater~~with ~~certainty~~a toslowdown in the ~~borrower~~U.S. economy, has already reduced property valuations and ~~retain~~is impacting real estate fundamentals. These developments can and have impacted the ~~portion~~performance of our existing portfolio of assets. Furthermore, the ~~capital~~volatility ~~structure~~in ~~that~~the ~~will~~capital ~~generate~~markets ~~what~~has wecaused ~~believe~~stress to beall ~~the~~financial ~~most~~institutions ~~attractive~~ and, our business is ~~appropriate~~dependent ~~total~~upon ~~returns~~these ~~based~~counterparties onfor, ~~our~~among ~~risk~~other ~~assessment~~things, offinancing ~~the~~and ~~investment~~interest rate derivatives. ~~Providing~~As awe ~~broad~~await ~~array~~the ofcredit ~~financing~~and ~~solutions~~capital ~~combined~~markets ~~with~~to improve and stabilize, our ~~access~~primary tofocus ahas ~~national~~been ~~network~~securing ofour ~~relationships~~liquidity by paying down and terminating ~~information~~outstanding ~~allows~~short-term usrepurchase agreements and managing our existing portfolio of assets to ~~target~~minimize credit risks where possible. The current credit and ~~adjust~~capital ~~our~~market ~~investment focus~~environment ~~depending~~remains ~~upon~~unstable ~~how~~and we ~~view~~continue ~~markets~~to review and ~~property~~analyze the ~~types~~impact inon ~~various~~potential ~~geographic~~avenues ~~regions~~of liquidity. We expect credit and capital market conditions to continue to be challenging throughout 2009 and into 2010.

~~Because~~During of2008, ~~the~~we ~~high~~undertook ~~relative~~a ~~valuation~~process of ~~debt instruments~~evaluating instrategic and operational initiatives assisted by our financial advisor, Goldman Sachs & Co., or Goldman Sachs. Based on the ~~current~~continued ~~market~~decline in the capital and acredit ~~generally~~markets ~~increasing~~which ~~interest~~has ~~rate~~had ~~environment,~~a wesevere ~~have~~adverse ~~managed~~impact on our ~~exposure~~valuations and our ability to ~~interest~~obtain ~~rate~~financing, ~~changes~~management concluded that ~~could~~a ~~affect~~sale of our ~~liquidity~~company, merger or other business combination, capital investment or other strategic alternatives at the present time was either not available or was not in the best interest of stockholders. We ~~generally~~will ~~match~~continue to explore and evaluate future opportunities as they present themselves, however, our ~~assets~~primary focus will remain on maximizing the value of our current $1.2 billion investment portfolio and ~~liabilities~~non-recourse long-term financing in ~~terms~~place through our two CDOs. As a result of ~~base~~the ~~interest~~rapidly changing and evolving markets that continue to create challenges in our industry and in the general economy, ~~rates~~we are experiencing the following: (~~generally~~i) no ~~30-day~~loan ~~LIBOR~~originations or other investment activity, (ii) lower operating margins due to lack of scale, (iii) reduced access to capital, if at all, and ~~expected~~if ~~duration.~~such Wecapital ~~closed~~is ~~our~~available ~~first~~at ~~collateralized~~significantly increased ~~debt~~costs ~~obligation~~(iv) an increase in non-performing loans and watch list assets, or(v) reduced operating cash flows due to breach of CDO covenants and a reduced asset base, ~~issuance~~and ~~which~~(vi) reduced ~~enabled~~cash usavailable for distribution to stockholders, ~~secure~~particularly ~~term~~as ~~financing~~our portfolio is reduced by scheduled maturities, prepayments and ~~match~~non-performing ~~fund~~loans. Our $1.2 billion investment portfolio has decreased by approximately 26% from December 31, 2007 based on these factors. On December 17, 2008, we announced that our ~~assets~~board ~~and~~of ~~liabilities~~directors suspended the quarterly cash dividend in order to ~~achieve~~increase our ~~financing~~liquidity and ~~return objectives~~maintain our financial flexibility.

53As we continue to assess the impact of the credit and capital markets on our long-term business strategy, we have been focused on actively managing our existing investment portfolio. As of December 31, 2008, the net carrying value of our investments was approximately $1.2 billion, including origination costs and fees and net of repayments and sales of partial interests in loans and CMBS, with a weighted average spread to 30-day LIBOR of 311 basis points for our floating rate investments and a weighted average yield of 7.12% for our fixed rate investments. Our portfolio is comprised solely of commercial real estate debt and equity investments with no sub-prime exposure. We have long-term financing in place through our first CDO issuance, which provides approximately $508.5 million of

- 36 -

As financing with an average cost of ~~December 31,~~30-day ~~2006,~~LIBOR weplus ~~held~~50.6 ~~investments~~basis ofpoints ~~approximately~~and our second CDO issuance which provides $1853.42 ~~billion,~~million ~~including~~of ~~origination~~financing with an average ~~costs~~cost ~~and~~of ~~fees,~~90-day ~~and~~LIBOR ~~net~~plus 40.6 basis points. Our CDOs contain reinvestment periods of ~~repayments~~five ~~and~~years ~~sales~~during which we can use the proceeds of ~~partial~~loan ~~interests~~repayments into ~~loans~~fund new investments. As of December 31, ~~2006~~2008, we had approximately 2.3 years and 3.3 years remaining in our ~~investment~~reinvestment ~~portfolio~~period ~~consisted~~for ofour ~~the~~first ~~following~~and ~~(dollars~~second CDO, respectively. Reinvestment is not permitted during periods that we are not in ~~thousands):~~compliance with our CDO covenants.

						Weighted Average
Security Description	CarryingValue		Number ofInvestments	Percent of TotalInvestments		Coupon		Yield toMaturity		LTV
	(In thousands)
Whole loans(1)	$	729,364	30	53.3	%	6.86	%	6.63	%	67	%
B Notes		150,655	7	11.0	%	9.50	%	9.52	%	76	%
Mezzanine loans		210,855	11	15.4	%	9.53	%	9.16	%	76	%
CMBS		222,333	52	16.2	%	6.29	%	7.47	%	—
Joint venture investments(2)		56,402	7	4.1	%	—		—		—
Total	$	1,369,609	107	100.0	%

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund loans and other investments, pay dividends, fund debt service and for other general corporate purposes. On December 31, 2008, we had approximately $23.1 million of unrestricted cash and cash equivalents. We have long-term financing for 100% of our encumbered portfolio in place through our existing CDOs and mortgage loans. Our primary sources of funds for short-term liquidity requirements, including working capital, distributions, if any, debt service and additional investments, if any, consist of (i) cash flow from operations; (ii) proceeds from our existing CDOs; (iii) proceeds from principal and interest payments on our unencumbered investments; (iv) proceeds from potential loan and asset sales; and, to a lesser extent; (v) new financings or additional securitization or CDO offerings and (vi) proceeds from additional common or preferred equity offerings. We believe these sources of funds will be sufficient to meet out short-term liquidity requirements.

Due to continued market turbulence, we do not anticipate having the ability in the near term to access equity capital through public or private markets or debt capital through warehouse lines, new CDO issuances, or new trust preferred issuances. We continue to explore equity and other capital raising options as well as other strategic alternatives as they present themselves; however, in the event we are not able to successfully secure financing, we will rely on existing cash on hand, cash flows from operations, principal payments on our investments, and proceeds from asset and loan sales if any, to satisfy these requirements. If we (i) are unable to renew, replace or expand our sources of financing, (ii) are unable to execute asset and loan sales in a timely manner or to receive anticipated proceeds therefrom or (iii) fully utilize available cash, it may have an adverse effect on our business, results of operations and ability to make distributions to our stockholders.

Our current and future borrowings may require us, among other restrictive covenants, to keep uninvested cash on hand, to maintain a certain portion of our assets free from liens and to secure such borrowings with our assets. These conditions could limit our ability to do further borrowings. If we are unable to make required payments under such borrowings, breach any representation or warranty in any loan document or violate any covenant contained in a loan document, our lenders may accelerate the maturity of our debt or require us to pledge more collateral. If we are unable to pay off our borrowings in such a situation, (i) we may need to prematurely sell the assets securing such debt, (ii) the lenders could accelerate the debt and foreclose on our assets that are pledged as collateral to such lenders, (iii) such lenders could force us into bankruptcy, (iv) such lenders could force us to take other actions to protect the value of their collateral and (v) our other debt financings could become immediately due and payable. Any such event would have a material adverse effect on our liquidity, the value of our common stock and the ability to make distributions to our stockholders.

The majority of our investments are pledged as collateral for our CDO bonds and the income generated from these investments is used to fund interest obligations of our CDO bonds and the remaining income, if any, is retained by us. Our CDO bonds contain interest coverage and asset overcollateralization covenants that must be met in order for us to receive such payments. If we fail our interest coverage or asset overcollateralization covenants in either of our CDOs, all cash flows from the CDOs (including interest on the bonds we own, distributions on our common and preferred equity and our subordinate management fees) would be diverted to repay principal and interest on the outstanding CDO bonds and we would not receive any residual payments until the CDO was back in compliance with such tests. We were in compliance with all such covenants as of December 31, 2008. In the event of a breach of our CDO covenants that we could not cure in the near term, we would be required to fund interest on trust preferred securities and other expenses (including compensation expenses) through (i) cash on hand, (ii) income from any CDO not in default, (iii) sale of unencumbered assets or (iv) accessing debt or equity capital markets, if available. We have the ability to cure defaults, which would resume normal payments to us, by purchasing non-performing loans out of our CDOs. However, we may not have sufficient liquidity available to do so at such time. In some cases, collateral may be continuing to pay interest but may be considered a defaulted interest for the purpose of the covenant calculations, such as our CMBS in our 2006 CDO, or CDO I, which are considered defaulted interests for the purpose of covenant calculation if any rating agency downgrade occurs. To the extent noncompliance continues for an extended period of time, our ability to continue as a going concern may be jeopardized. At December 31 2008, our most restrictive covenants on our CDOs had an interest coverage ratio of 2.21x and 1.22x for CDO I and CDO II, respectively, compared to minimum requirements of 1.21x and 1.09x. At December 31, 2008, our most restrictive covenants on our CDOs had an asset overcollateralization ratio of 1.15x and 1.10x for CDO I and our 2007 CDO, or CDO II, respectively, compared to minimum requirements of 1.12x and 1.10x. If we experience an additional $15,050 or $500 in reductions of collateral in CDO I or CDO II, respectively, due to further investment losses or other factors, we will fail the overcollateralization test for the respective CDO.

On February 25, 2009, we were notified by the CDO I trustee that we failed the overcollateralization test for CDO I on the February 25, 2009 payment date and, as a result, future net cash flows from CDO I, including approximately $488,000 due on the February 25, 2009 payment date, will be diverted to pay down principal of senior bond holders rather than being paid to us until such time the covenant is back in compliance, if ever. As of February 27, 2009, CDO II was in compliance with the overcollateralization test, however, if an additional $0.5 million in defaults occur, CDO II will also breach the overcollateralization covenant. Management believes it is likely that CDO II will fail the overcollateralization test at some point in 2009, which will result in the cash flows of CDO II being diverted to pay down principal of senior bond holders, eliminating residual cash inflows paid to us. With both CDOs out of compliance with overcollateralization covenants, we will have minimal incoming cash flows from our primary business and there is no assurance when or if we will be able to regain compliance with these covenants. As discussed further in “—Related Party Transactions,” the breach of the overcollateralization covenant in either CDO provides MBIA Insurance Corporation, or MBIA, the controlling class of CDO II bondholders, the ability to terminate the existing collateral management agreement, as amended, and to remove us as the collateral manager of CDO II. We have incurred significant losses since our inception and may incur additional losses in the future as we continue to navigate the difficult issues in the credit and real estate markets. With minimal incoming cash flows, management’s plans to fulfill short-term capital requirements include (i) use of $23.1 million of cash on hand as of December 31, 2008 to fund operating expenses, (ii) senior collateral management fees, (iii) reduction in administrative costs, as a result of becoming a non-reporting company, (iv) reduction in employee headcount, and (v) sale of our unencumbered 1515 Market Street LLC joint venture interest, if possible under current market conditions. We believe these sources of funds will be sufficient to meet our liquidity requirements for at least the next 12 months. We continue to seek and explore partnerships and new business opportunities; however, there is no assurance that such partnerships or business opportunities will be available on favorable terms or at all.

As of December 31, 2008, our investment portfolio of approximately $1.2 billion in assets, including origination costs and fees, and net of repayments and sales of partial interests in loans, consisted of the following:


							Weighted Average
Security Description	Carrying Value			Number of Investments	Percent of Total Investments		Coupon		Yield to Maturity		LTV
	(In thousands)
Whole loans⁽¹⁾	$	843,934		38	61.3	%	5.28	%	5.09	%	72	%
B Notes		218,427		11	15.9	%	5.42	%	5.76	%	52	%
Mezzanine loans		247,437		12	18.0	%	6.36	%	6.38	%	53	%
CMBS		54,620		67	4.0	%	4.76	%	7.20	%	—
Joint venture investments⁽²⁾		11,231		7	0.8	%	—		—		—

Total investments		1,375,649		135	100.0	%
Loan loss reserve		(141,065	)

Total investments, net	$	1,234,584

⁽¹⁾	Includes originated whole loans, acquired whole loans and bridge loans.

(2) Includes our equity investment in two limited liability companies which are deemed to be VIEs and which we consolidate in our ~~audited~~ financial statements because we are deemed to be the primary beneficiary of these VIEs under FIN 46R.

~~The Company~~- ~~expects~~37 ~~approximately~~- 40% to 60% of annual production to be sourced though the affiliated CBRE system. The following table depicts our investment activity for 2005 and 2006 and the percentage of such investment activity sourced through the affiliated CBRE System (dollars in millions):

	2006			2005
Total Investments (1)	$	1,041.3		$	571.2
Percentage Sourced though Affiliated CBRE System		62.6	%		26.5	%
Percentage Sourced through Internal Origination System		4.9	%		24.0	%

(1) 2005 was a partial year with investment activity commencing on June 9, 2005.

Outlook

Our business strategy of originating and acquiring investments is affected by general U.S. commercial real estate fundamentals and the overall U.S. economic environment. Further, our strategy is influenced by the specific characteristics of the underlying real estate assets that serve as collateral for our investments. We have designed our strategy to be flexible so that we can adjust our investment activities and portfolio weightings given changes in the U.S. commercial real estate capital and property markets and the U.S. economy.

We believe that the real estate business is influenced by a number of general economic and specific real estate factors. Those factors include, among other things, the level and direction of interest rates, capital flows, job creation, income levels and new supply of real estate properties. We believe most of these are moving in a positive direction. The U.S. economy turned in another solid performance in 2006 and grew at a surprisingly strong 3.5% rate in the fourth quarter, up from a 2.0% rate in the third quarter. The U.S. economy has experienced little economic spillover effects from the slowdown in the U.S. housing market. The monetary policy decisions of the Federal Open Market Committee, or FOMC, in 2006 were intended to foster sustainable economic expansion and to promote a return to low and stable inflation. In that regard, the economic outlook for 2007 and 2008 appears favorable. The U.S. economy has been producing new jobs at a positive pace, income levels are increasing and new supply of space is being constrained by a variety of costs, including increased costs of new construction. Our general view is that most commercial real estate product classes should continue to perform well given the current economic environment and real estate fundamentals.

~~While~~Outlook interest rates rose in 2006, they are still at historically low levels. The yield curve indicates that interest rates will likely decline in the future. Although rising interest rates can have a negative effect on the broad economy and the real estate markets, we do not believe that we will experience a sizeable or swift increase in interest rates over the next few years. Due to our focus on making floating rate investments and swapping fixed interest rates for floating interest rates on borrowings, our portfolio should continue to perform well in an increasing interest rate environment. We note that even though interest rates have increased recently, the commercial real estate debt market has experienced very low default rates and we expect this trend to continue. The Federal Reserve policymakers have not raised rates since June 2006 and have indicated a likelihood that rates will remain the same in the near future.

~~Capital~~Our ~~flows~~historical tobusiness ~~real~~strategy ~~estate~~of ~~increased in~~originating ~~2005~~ and ~~2006~~acquiring ~~and~~investments ~~are~~is ~~likely~~affected toby ~~continue~~general ~~to grow in 2007~~U.S. Ascommercial ~~an asset class,~~ real estate ~~continues~~fundamentals toand ~~appeal~~the tooverall aU.S. ~~broad~~economic ~~mix~~environment. ofFurther, ~~investors~~our ~~having~~strategy ais ~~diverse~~influenced ~~set~~by ofthe ~~investment~~specific characteristics ~~objectives~~of ~~including~~the ~~current~~underlying ~~yield and capital appreciation. We believe that~~ real estate ~~continues~~assets tothat ~~look~~serve ~~attractive~~as tocollateral ~~investors~~for onour ~~both an absolute basis and relative to alternative~~ investments. ~~The~~We ~~increased capital flows~~ have ~~resulted~~designed inour ~~increased~~strategy ~~competition~~to ~~and~~be ~~lower~~flexible ~~spreads~~so inthat ~~2005~~we ~~and~~can ~~most~~adjust ~~of 2006 on debt instruments but also have reduced~~ our ~~cost~~investment ofactivities ~~funds.~~and ~~The~~portfolio ~~capital~~weightings ~~flows~~given ~~have~~changes ~~driven~~in ~~values higher as capitalization rates have declined. During~~ the ~~second half of 2006 we have seen spreads moderate on debt instruments~~U. ~~These capital flows will likely~~S. ~~continue~~commercial ~~even~~real asestate ~~interest~~capital ~~rates~~and ~~moderate.~~property ~~Over~~markets ~~time,~~and ~~we expect that capitalization rates will likely follow but lag~~ the ~~increase~~U.S. ~~in long-term interest rates~~economy.

Beginning in the third quarter of 2007, the global economy was impacted by the deterioration of the U.S. sub-prime residential mortgage market and the weakening of the U.S. housing markets, both of which have become much worse than many economists had predicted. The ~~following~~significant ~~discussion~~increase ~~related~~in tothe ~~our~~foreclosure activity ~~consolidated~~and ~~financial~~rising ~~statements~~interest ~~should~~rates bein ~~read~~mid-2007 depressed housing prices further as problems in ~~conjunction~~the ~~with~~sub-prime markets spread to the other mortgage markets. The well-publicized problems in the residential markets spread to other financial ~~statements~~markets, causing ~~appearing~~corporate credit spreads (or cost of funds) to widen dramatically. Banks and other lending institutions started to tighten lending standards and restrict credit. The structured credit markets, including the CMBS and CDO markets, have seized up as investors have shunned the asset class due to sub-prime and transparency worries. In particular, the short-term, three to five year floating rate debt market has effectively shut down and as the turmoil continues to spread, almost all fixed income capital markets have been negatively impacted and liquidity in ~~Item 8~~these markets remains severely limited. While delinquencies in the commercial real estate markets remain low, the lack of ~~this~~liquidity ~~Annual~~in ~~Report~~the onCMBS ~~Form~~and 10other commercial mortgage markets is negatively impacting sales and financing activity. We are unable to predict how long these trends will continue and what long-Kterm impact they may have on the market.

Even if legislative or regulatory initiatives or other efforts successfully stabilize and add liquidity to the financial markets, we likely will need to modify our strategies, businesses or operations, and we may incur increased capital requirements and constraints or additional costs in order to satisfy new regulatory requirements or to compete in a changed business environment. It is uncertain what effects recently enacted or future legislation or regulatory initiatives will have on us. Given the volatile nature of the current market disruption and the uncertainties underlying efforts to mitigate or reverse the disruption, we may not timely anticipate or manage existing, new or additional risks, contingencies or developments, including regulatory developments and trends in new products and services, in the current or future environment. Our failure to do so could materially and adversely affect our business, financial condition, results of operations and prospects.

During 2008, the global capital markets continued to experience tremendous volatility and a wide-ranging lack of liquidity. The impact of the global credit crisis on our sector has been acute. Transaction volume has declined significantly, credit spreads for all forms of mortgage debt have reached all-time highs, issuance levels of CMBS have ground to a halt, and other forms of financing from the debt markets have been dramatically curtailed. Financial institutions still hold significant inventories of unsold loans and CMBS, creating a further overhang on the markets. We believe that the continuing dislocation in the debt capital markets, coupled with a slowdown in the U.S. economy, has already reduced property valuations and is impacting real estate fundamentals. These developments can impact and have impacted the performance of our existing portfolio of assets. Furthermore, the volatility in the capital markets has caused stress to all financial institutions and, our business is dependent upon these counterparties for, among other things, financing and interest rate derivatives. As we await the credit and capital markets to improve and stabilize, our primary focus has been securing our liquidity by paying down and terminating outstanding short-term repurchase agreements and managing our existing portfolio of assets to minimize credit risks where possible. The current credit and capital market environment remains unstable and we continue to review and analyze the impact on potential avenues of liquidity. We expect credit and capital market conditions to continue to be challenging throughout 2009.

During 2008, we undertook a process of evaluating strategic and operational initiatives with Goldman Sachs. Based on the continued decline in the capital and credit markets which has had a severe adverse impact on our valuations and our ability to obtain financing, management concluded that a sale of our company, merger or other business combination, capital investment or other strategic alternatives at the present time was either not available or was not in the best interest of stockholders. We will continue to explore and evaluate future opportunities as they present themselves, however, our primary focus will remain on maximizing the value of our current $1.2 billion investment portfolio and non-recourse long-term financing in place through our two CDOs.

In the short-term, we believe the current environment of rapidly changing and evolving markets will provide increasing challenges to our industry, our company and the general economy. Due to the uncertainties in the capital and credit markets, we are experiencing the following: (i) no loan originations or other investment activity, (ii) lower operating margins due to lack of scale, (iii) reduced access to capital, if at all, and if such capital is available at significantly increased costs, (iv) an increase in non-performing loans and watch list assets, (v) reduced operating cash flows due to breach of CDO covenants and (vi) reduced cash available for distribution to stockholders, particularly as our portfolio is reduced by scheduled maturities, prepayments and non-performing loans. Our $1.2 billion investment portfolio has decreased by approximately 26% from December 31, 2007 based on these factors.

Due to our status as a REIT, we are required to distribute at least 90% of our REIT taxable income to stockholders. As our loans are repaid and/or we sell our loans, if we do not begin lending again, we will experience declines in the size of the investment portfolio over time. Net losses and a reduction in the size of our investment portfolio would also result in reduced taxable income and cash available for distribution and a lower dividend as compared to historical standards. As a result of these factors, on December 17, 2008, we announced that our board of directors suspended the quarterly dividend in order to maintain our financial flexibility.

Our CDOs contain reinvestment periods of five years during which we can use the proceeds of loan repayments, if any, to fund new investments. As of December 31, 2008, we have approximately 2.3 years and 3.3 years remaining in our reinvestment period for our first and second CDOs, respectively. The volume of any new investment activity, if any, would be substantially lower than our historical production levels. Reinvestment is not permitted during periods that we are not in compliance with our CDO covenants.

As of December 31, 2008, we had approximately $23.1 million of unrestricted cash and cash equivalents. We have long-term financing for 100% of our encumbered portfolio in place through our existing CDOs and mortgage loans. In order to effectively match-fund our investment portfolio, we aggressively reduced amounts under our former repurchase facility with Wachovia from $217.0 million at September 30, 2007 to being fully repaid in June 2008. We expect the availability of warehouse lines, which we had historically used to finance loan originations that were ultimately packaged in CDO offerings, will be limited in the near to medium-term due to reduced liquidity in the CDO market and a lesser appetite for new CDO issuances. As we await the recovery of these traditional avenues of liquidity, we are considering several alternative equity and debt capital raising options, as well as analyzing our fundamental business model.

Results of Operations

Comparison of the year ended December 31, ~~2006~~2008 to the ~~period~~year ~~from~~ended ~~May 10, 2005 (inception) through~~ December 31, ~~2005~~2007

Revenues

Investment income is generated on our whole loans and bridge loans, subordinate interests in whole loans, mezzanine loans and CMBS investments. Investment income ~~increased~~decreased by $5528.39 million to $64100.65 million for the year ended December 31, ~~2006~~2008, from $9129.34 million for the ~~period~~year ~~May 10,~~ended ~~2005 (inception) through~~ December 31, ~~2005~~2007, asdriven ~~the~~primarily ~~overall~~by ~~investment portfolio increased to $1.4 billion at~~lower ~~December 31,~~interest ~~2006,~~rates ~~from~~earned ~~$538.1~~on ~~million~~floating atrate ~~December 31,~~loans ~~2005.~~indexed ~~Specifically,~~to ~~the increase for the year ended December 31~~LIBOR, ~~2006~~a ~~was~~lower ~~generated~~average byinvestment ~~our~~portfolio ~~whole~~balance ~~loans~~and ~~($21.1~~a ~~million),~~greater Bnumber ~~Notes~~of ~~($12.3~~non-performing ~~million), mezzanine~~ loans ~~($12.7~~in ~~million) and~~2008 ~~CMBS~~compared ~~($9.2~~to ~~million)~~2007.

~~Real~~- ~~estate~~38 ~~operating~~- income increased by $6.1 million to $6.1 million for the year ended December 31, 2006, from none for the period May 10, 2005 (inception) through December 31, 2005, which primarily represents rental income from our two consolidated joint ventures.

OtherTable incomeof increased by $0.3 million to $3.3 million for the year ended December 31, 2006, from $3.0 million for the period May 10, 2005 (inception) through December 31, 2005, which represents interest earned on cash balances primarily from overnight repurchase investments. Contents

Property operating income increased by $0.4 million to $4.4 million for the year ended December 31, 2008, from $4.0 million for the year ended December 31, 2007, which primarily represents an increase in rental income from our consolidated Loch Raven joint venture.

Other income decreased by $3.6 million to $1.0 million for the year ended December 31, 2008, from $4.6 million for the year ended December 31, 2007. The reduction in other income, which represents interest earned on cash balances primarily from overnight repurchase investments, is the result of lower interest rates.

Expenses

Interest expense ~~increased~~decreased by $3910.51 million to $4282.20 million for the year ended December 31, ~~2006~~2008, from $292.72 million for the ~~period~~year ~~May 10, 2005~~ended ~~(inception) through~~ December 31, ~~2005,~~2007. The primary components of ~~which~~interest expense included $2251.69 million ~~represents~~of interest on our CDO ~~financing~~financings, ~~which~~$17.2 ~~had~~million aattributable ~~weighted average spread~~ to ~~30-day~~hedging ~~LIBOR of 51 basis points (or 5.86%)~~activities, $121.51 million ~~represents~~of interest on borrowings on our warehouse facilities, ~~which had a weighted average spread to 30-day LIBOR of 69 basis points (or 6.04%),~~ $21.7 million ~~represents~~of interest on our consolidated ~~real~~Loch ~~estate~~Raven joint venture ~~mortgages~~mortgage, and $14.71 million ~~represents~~of interest on our trust preferred securities. The ~~remaining~~primary ~~balance~~reason infor ~~interest~~the ~~expense~~decrease is ~~comprised~~due ofto ~~$1.1~~lower ~~million of net swap~~ interest ~~income~~rates ~~related~~on tovariable ~~our~~rate ~~derivative~~debt ~~contracts,~~in ~~$0.5~~2008 compared ~~million~~to of2007 ~~deferred~~and ~~interest~~lower ~~expense~~outstanding ~~related~~debt tounder ashort-term ~~development~~warehouse ~~project~~facilities, ~~$1.2~~offset ~~million~~in ~~of amortization~~part ofby ~~deferred~~higher ~~financing~~average ~~costs~~outstanding ~~related,~~debt ~~primarily,~~resulting tofrom the ~~closing~~issuance of our ~~warehouse~~second ~~facilities and our~~ CDO ~~financing~~in ~~and~~April ~~$0.4 million~~ of ~~servicing fees~~2007.

55Management fees decreased by $2.6 million to $5.1 million for the year ended December 31, 2008, from $7.7 million for the year ended December 31, 2007. The reduced fees are a result of a decline in our stockholder’s equity primarily attributable to impairments and loan loss provisions. The management fees, expense reimbursements, formation costs and the relationship between our former Manager, our affiliates and us are discussed further in “—Related Party Transactions.”

Property operating expenses increased by $0.6 million to $3.3 million for the year ended December 31, 2008, from $2.7 million for the year ended December 31, 2007, which primarily represents an increase in rental expenses from our Loch Raven consolidated joint venture.

General and administrative expenses increased by $7.1 million to $16.5 million for the year ended December 31, 2008, from $9.4 million for December 31, 2006. The largest components of the increase were $3.0 million increase in consulting fees incurred in connection with our evaluation of strategic alternatives, $2.8 million increase in legal fees due to costs associated with non-performing loans, proxy defense, investigation expense for derivative stockholder claims and the class action lawsuit and $1.6 million of compensation expense related to the severance and retention plan for employees of our Manager.

Depreciation and amortization expenses decreased by $0.3 million to $1.1 million for the year ended December 31, 2008 from $1.4 million for the year ended December 31, 2007, which primarily represents depreciation and amortization from our consolidated Loch Raven joint venture. The decrease is the result of certain intangible assets capitalized upon acquisition becoming fully amortized during 2007 and the first quarter of 2008.

Loss on impairment of assets

Loss on impairment of long-lived assets decreased $1.8 million to $6.0 million for the year ended December 31, 2008 from $7.8 million for the year ended December 31, 2007. Loss on impairment of long-lived assets of $6.0 million for the year ended December 31, 2008 is attributable to an impairment of the long-lived assets of the Loch Raven property. In the third quarter of 2008, management made a decision to no longer fund operating deficits at the Loch Raven property based on (i) the property’s current and forecasted operating performance, (ii) lack of liquidity in the credit markets that make refinancing more difficult, (iii) declines and expected declines in commercial real estate valuations and (iv) the general expectation of a prolonged economic slow down that would adversely impact the performance and value of the property. The decision to no longer fund operating deficits will put us in default with the non-recourse first mortgage on the property, which will likely result in the senior lender foreclosing on the property. Management determined that the change in strategy indicated that the carrying amount of Loch Raven long-lived assets may not be fully recoverable. Based our current estimate of undiscounted cash flows over the expected life of the investment, we determined that the carrying value of the Loch Raven long-lived assets was not fully recoverable. As a result of this assessment, we recorded an impairment loss of $6.0 million for the year ended December 31, 2008 based on the difference between the carrying value of the long-lived assets and their estimated fair value. Loss on impairment of asset of $7.8 million for the year ended December 31, 2007 resulted from a loss realized upon foreclosure of the Monterey property in the second quarter of 2007.

Provision for loan losses

The provision for loan losses increased to $126.5 million for the year ended December 31, 2008 from $19.7 million for the year ended December 31, 2007. The loan loss reserve in 2008 is due to several non-performing loans and watch list assets, where management estimated the loans may not be fully recoverable, reflecting current adverse market conditions and specific facts and circumstances for each loan, as discussed further in “-Risk Management”

Loss on sale of investment

Loss on sale of investment increased by $1.5 million to $2.0 million for the year ended December 31, 2008 from $0.5 million for the year ended December 31, 2007. The loss in 2008 is related to the sale of a whole loan. The loss in 2007 is related to the sale of a CMBS investment.

Gain on financial instruments

Gain on financial instruments increased by $22.5 million to $20.8 million for the year ended December 31, 2008 from a loss of $1.7 million for the year ended December 31, 2007. The increase is due to the adoption of SFAS 159 on January 1, 2008 which resulted in us recording certain assets and liabilities at fair value with the corresponding changes in fair value being recorded in the statement of operations.

During the year ended December 31, 2008, the CMBS and CDO markets continued to experience widening of credit spreads, resulting in a decrease in the fair value of CMBS which we hold as investments and decreases in the fair value of our CDO bonds and junior subordinated debenture liabilities. The fair value of our CMBS investments decreased, resulting in a loss of $181.2 million for the year ended December 31, 2008. The fair value of our liabilities related to CDO bonds and junior subordinated debentures decreased, resulting in gains of $261.0 million and $18.1 million, respectively, for the year ended December 31, 2008. The fair value of liabilities associated with derivative instruments decreased during the year ended December 31, 2008 resulting in an unrealized loss of $69.0 million.

Equity in net loss of unconsolidated joint ventures

Equity in net loss of unconsolidated joint ventures increased by $34.1 million to $39.9 million for the year ended December 31, 2008 from $5.7 million for the year ended December 31, 2007. The increase in the equity in net loss of unconsolidated joint ventures for the year ended December 31, 2008 is due primarily to a $7.3 million impairment loss on the Prince George’s Station Retail LLC joint venture, $0.8 million impairment loss on the 32 Leone Lane joint venture investment, $2.0 million impairment loss on the Nordhoff joint venture investment, $15.1 million impairment loss on the KS-CBRE Shiraz LLC joint venture and a $9.0 million impairment loss on the KS-CBRE GS LLC joint venture. In the third quarter of 2008, the second largest tenant of the Prince George’s Station Retail LLC property terminated their lease. The lease termination, combined with increasing credit concerns over the property’s largest tenant, who has since declared bankruptcy, indicated that the carrying amount of long-lived assets may not be fully recoverable and an impairment loss of $7.3 million was recorded, bringing the carrying value of our investment to zero. A $0.8 million loss was recognized on our 32 Leone Lane joint venture investment, bringing the carrying value of our investment to zero, where it was determined that the carrying value of long-lived assets of the joint venture were no longer recoverable due to management’s expectations that the sponsor will be unable to successfully lease or sell the 100% vacant building under current market conditions, necessitating a write down to fair value. The $2.0 million impairment loss

- 39 -

~~Management~~ on ~~fees~~the ~~increased~~Nordhoff byjoint ~~$3.4~~venture ~~million~~was torecorded ~~$6.5~~in ~~million~~the ~~for~~second ~~the~~quarter ~~year~~and ~~ended~~fourth ~~December 31,~~quarter ~~2006,~~of ~~from $3.1~~2008 ~~million~~when ~~for~~it was determined that the ~~period~~carrying ~~May 10,~~value ~~2005~~of ~~(inception)~~long-lived assets ~~through~~of ~~December 31,~~the ~~2005,~~joint ~~$2.5~~venture ~~million~~were ~~was~~no ~~attributable~~longer torecoverable, ~~the~~necessitating ~~fact~~a ~~that~~write ~~the~~down ~~2006~~to ~~reporting~~fair ~~period~~value. ~~was~~Impairment ~~for~~losses ~~four~~of ~~full~~$15.1 ~~quarters,~~million and $09.70 million ~~was~~for ~~attributable~~KS-CBRE toShiraz ~~the~~LLC ~~additional~~and ~~equity raised~~KS-CBRE ~~through~~GS ~~our~~LLC, ~~October~~respectively, ~~2006~~were ~~initial~~recognized ~~public~~in ~~offering,~~the orfourth ~~our~~quarter ~~IPO~~of 2008, ~~and~~reducing ~~$0.2~~the ~~million~~carrying ~~attributable~~value of each investment to zero, based on continued weakening of the ~~management~~credit ~~fee~~and ~~charged~~real onestate ~~our~~markets ~~trust~~that ~~preferred~~has ~~securities~~resulted ~~from~~in ~~July 27,~~significant ~~2006~~declines toin ~~September 27,~~commercial ~~2006,~~real ~~which~~estate ~~represents~~valuations ~~fees~~that ~~paid~~we oranticipate will make it very ~~payable~~difficult to ~~our~~sell ~~Manager~~or ~~under~~refinance ~~our~~the ~~management~~underlying ~~agreement~~properties at values in excess of the senior first mortgage obligations.

~~Real~~Operating ~~estate~~results ~~operating expenses increased by $3.1 million to $3.1 million for the~~from ~~year~~discontinued ~~ended~~operations ~~December 31, 2006, from none for the period May 10, 2005 (inception) through December 31, 2005, which primarily represents operating expenses from our two consolidated joint ventures.~~

~~General~~Operating ~~and~~results ~~administrative expenses increased by $4.9 million to $10.4 million for the year ended December 31, 2006,~~ from ~~$5.5~~discontinued ~~million~~operations ~~for~~consist ~~the period~~primarily ~~May 10, 2005 (inception) through December 31, 2005,~~ of ~~which~~rental ~~the increase was attributable to $2.6 million from professional fees~~income, ~~insurance,~~rental ~~and~~expenses ~~general overhead costs, $1.1 million from purchase~~ and ~~acquisition investment~~interest ~~activity, offset by a decrease in formation costs of $0.9 million which represent direct organizational, administrative and consulting~~ expenses ~~incurred~~attributable ~~prior~~ to ~~May 10,~~rental ~~2005 related to establishing our structure and~~ operations. ~~Of these costs, $0.4 million were reimbursed to an affiliate~~ of ~~our Manager~~Springhouse, ~~CBRE/Melody,~~Rodgers ~~from~~Forge ~~the proceeds of our June 2005 private offering. Stock-based compensation expenses increased $2.1 million for the year ended December 31, 2006. This represents the cost of restricted stock~~ and ~~options~~Monterey ~~granted~~properties toduring ~~our Manager, our executive officers and directors and certain persons related to our Manager. The restricted stock for our independent directors vest one year from~~ the ~~date of grant and for all other grantees will vest equally over a three-~~year ~~period. The shares of restricted stock receive dividends as declared and paid. The compensation expense recorded for the year~~ ended December 31, ~~2006~~2008 ~~represents a ratable portion of the expense based on the fair value of these shares~~ and ~~options over their vesting period~~2007.

Loss on impairment of assets held for sale – discontinued operations

Loss on impairment of assets held for sale of $6.1 million for the year ended December 31, 2008 represents an impairment of the Springhouse property. In the third quarter of 2008, management made a decision to market the Springhouse property for sale, resulting in classification of assets and liabilities as “held for sale” as of December 31, 2008 and results from operations classified as “discontinued operations” for all periods presented. Based on management’s commitment to sell the property and the resulting held for sale classification, we have recorded the long-lived assets of Springhouse at estimated fair value less costs to sell, which resulted in an impairment loss of $6.1 million for the year ended December 31, 2008. Loss on impairment of assets held for sale of $54.7 million for the year ended December 31, 2007 represents impairment of the Rodgers Forge and Monterey properties. Subsequent to foreclosure of the Monterey and Rodgers Forge properties, there was significant deterioration in the Baltimore area and metropolitan DC area condominium markets as well as a severe dislocation of the capital and credit markets precipitated by the sub-prime lending crisis. As a result of these events, management determined that its original plans to convert the Rodgers Forge and Monterey properties to condominiums were no longer viable and that the properties may be impaired. Based on the management estimate of future undiscounted cash flows as apartment properties, the long-lived assets of the Rodgers Forge and Monterey properties were no longer fully recoverable. Impairment losses of $17.7 million and $37.0 million, respectively, on the Rodgers Forge and Monterey properties were determined based on the difference between the carrying values of the long-lived assets and their estimated fair market values. The estimated fair market values were based on discounted cash flow projections which assumed the properties were sold when stabilized and were supported by third party offers to purchase the Rodgers Forge property and an independent third party appraisal for the Monterey property.

Gain on sale of investment – discontinued operations

During the year ended December 31, 2008, we sold our interest in Rodgers Forge and Monterey and recognized gains of $3.6 million and $3.2 million, respectively, related to the sale of these properties.

Comparison of the year ended December 31, 2007 to the year ended December 31, 2006

Revenues

Investment income is generated on our whole loans and bridge loans, subordinate interests in whole loans, mezzanine loans and CMBS investments. Investment income increased by $64.8 million to $129.4 million for the year ended December 31, 2007, from $64.6 million for the year ended December 31, 2006, as the overall average investment portfolio increased to $1.5 billion December 31, 2007, from $922.0 million for the year ended December 31, 2006. Specifically, the primary components of the increase for the year ended December 31, 2007 was generated by our whole loans ($36.1 million), B Notes ($5.6 million), mezzanine loans ($10.4 million) and CMBS ($10.0 million).

Property operating income increased by $0.9 million to $4.0 million for the year ended December 31, 2007, from $3.1 million for the year ended December 31, 2006, which primarily represents the inclusion of twelve months of rental income for the Loch Raven joint venture, which was acquired on March 28, 2006.

Other income increased by $1.3 million to $4.6 million for the year ended December 31, 2007, from $3.3 million for the year ended December 31, 2006, which represents interest earned on cash balances primarily from overnight repurchase investments.

Expenses

Interest expense increased by $51.6 million to $92.2 million for the year ended December 31, 2007, from $40.5 million for the year ended December 31, 2006. The primary components of interest expense included $65.3 million of interest on our CDO financings, $18.5 million of interest on borrowings on our warehouse facilities, $1.5 million of interest on our consolidated real estate joint venture mortgages, and $4.1 million of interest on our trust preferred securities. The primary reason for the increase in 2007 was due to higher average outstanding debt resulting from the issuance of our second CDO in 2007.

Management fees increased by $1.2 million to $7.7 million for the year ended December 31, 2007, from $6.5 million for December 31, 2006. The increase is due primarily to an increased average equity balance from which management fees are derived, due to additional equity raised through our October 2006 initial public offering.

Property operating expenses increased by $1.0 million to $2.7 million for the year ended December 31, 2007, from $1.7 million for December 31, 2006, which primarily represents operating expenses from our Loch Raven joint venture investment. The increase is due primarily to the inclusion of twelve months of expenses for the Loch Raven joint venture, which was acquired on March 28, 2006.

General and administrative expenses decreased by $1.0 million to $9.4 million for the year ended December 31, 2007, from $10.4 million for December 31, 2006. The largest component of the decrease was stock-based compensation expense, which decreased $2.6 million from the prior period driven by a lower stock price at December 31, 2007 from which the fair value of unvested restricted stock and options is derived. Offsetting the overall decrease was an increase in professional fees of approximately $1.1 million which increased primarily due to implementation of Section 404 of the Sarbanes Oxley Act of 2002 and having a full year of public company reporting requirements.

The management fees, expense reimbursements, formation costs and the relationship between our Manager, our affiliates and us are discussed further in “—Related Party Transactions.”

Depreciation and amortization expenses increased by $10.59 million to $1.54 million for the year ended December 31, ~~2006,~~2007 from ~~none~~$0.5 million for the ~~period~~year ~~May 10,~~ended ~~2005 (inception) through~~ December 31, ~~2005~~2006, which primarily represents depreciation and amortization from our ~~two~~Loch ~~consolidated~~Raven joint ~~ventures~~venture investment. The increase is due primarily to the inclusion of twelve months of expenses for the Loch Raven joint venture, which was acquired on March 28, 2006.

~~Gains~~Loss on ~~derivatives~~impairment of assets

~~Gains~~Loss on ~~derivatives~~impairment of loan increased ~~by $3.6 million~~ to $37.68 million for the year ended December 31, ~~2006,~~2007 from ~~none~~$0 for the ~~period~~year ~~May 10,~~ended ~~2005 (inception) through~~ December 31, ~~2005~~2006. ~~The~~After ~~$3.6~~taking ~~million~~control ~~was~~and apossession ~~realized~~of ~~gain~~the ~~related~~Monterey toproperty, management estimated the ~~termination~~fair value of ~~interest~~the ~~rate~~Monterey ~~swaps~~property inat the ~~conjunction~~date ~~with~~of ~~our~~foreclosure ~~CDO~~and ~~transaction~~concluded ~~and~~the carrying value exceeded the ~~sale~~estimated fair value of annet Aassets ~~note~~acquired inand, ~~the~~as ~~first~~a ~~quarter~~result, an impairment of ~~2006~~$7.8 million was recorded.

~~Gains~~- on40 ~~sale~~- ~~of investments~~

Gains on sale of investments increased by $0.3 million to $0.3 million for the year ended December 31, 2006, of which $0.4 million was a realized gain related to the sale of a CMBS investment and $0.1 million was a realized loss related to the sale of an A note.

Risk Management

Non-Performing Loans

Non-performing loans include all loans on non-accrual status and repossessed real estate collateral. The company transfers loans to non-accrual status at such time as: (1) management determines the borrower is incapable of curing, or has ceased efforts towards curing the cause of a default; (2) the loan becomes 90 days delinquent; (3) the loan has a maturity default; or (4) the net realizable value of the loan’s underlying collateral approximates our carrying value of such loan. Interest income is recognized only upon actual cash receipt for loans on non-accrual

~~status.~~Provision Asfor ~~of December 31, 2006, our non-performing loans consisted of one mezzanine~~ loan ~~with~~losses an aggregate carrying value of $31.8 million, or 2.09% of total assets, compared to none at December 31, 2005, and no repossessed real estate collateral. Management believes there is adequate collateral to support the book value of the asset.

AsThe ofprovision ~~March 20,~~for ~~2007,~~loan welosses ~~have~~increased ~~funded~~to ~~approximately~~ $419.37 million tofor ~~protect our mezzanine loan position in~~ the ~~non-performing~~year ~~loan.~~ended ~~The~~December 31, ~~funds~~2007 ~~were used~~from to$0 ~~cure~~for the ~~default~~year onended ~~the senior loan~~December 31, ~~pay~~2006. ~~real~~The ~~estates~~loan ~~taxes,~~loss asreserve ~~well~~in as2007 ~~pay~~is ~~for~~due ~~attorney and appraisal services provided~~ to ~~us.~~three Weloans ~~may~~that ~~expend~~are ~~additional~~either on ~~sums~~the ~~going~~watch-list ~~forward~~or toare ~~protect our investment~~non-performing, ~~although~~where ~~there~~management isestimated nothe ~~guarantee~~loans ~~we will do so. Furthermore, we~~ may ~~expend~~not ~~additional~~be ~~funds~~fully ifrecoverable ~~and~~based ~~when we foreclose~~ on ~~the~~current ~~asset,~~market toconditions ~~take~~and ~~control~~specific offacts ~~the asset, to complete construction,~~ and~~/or~~ tocircumstances ~~otherwise~~for ~~operate the asset, in~~ each ~~case, until disposition of the asset, although there is no guarantee we will do so~~loan.

Gains (losses) on sale of investments

Losses on sale of investments changed by $0.8 million to a loss of $0.5 million for the year ended December 31, 2007, from a gain of $0.3 million for the year ended December 31, 2006. The loss in 2007 is related to the sale of a loan investment.

Gains (losses) on financial instruments

Loss on financial instruments changed by $5.3 million to a loss of $1.7 million for the year ended December 31, 2007 from a gain of $3.6 million for the year ended December 31, 2006. The $3.6 million was a realized gain related to the termination of interest rate swaps in conjunction with our first CDO transaction and the sale of an A note in the first quarter of 2006. $1.7 million realized of the realized losses in 2007 was due to a terminated interest rate swap that was settled in connection with the sale of a loan investment that was being hedged.

Operating results from discontinued operations

Operating results from discontinued operations consist primarily of rental income, rental expenses and interest expenses attributable to rental operations of Rodgers Forge and Monterey properties that were consolidated by us after the properties were foreclosed upon in May of 2007.

Loss on impairment of assets held for sale

Subsequent to foreclosure of the Monterey and Rodgers Forge properties, there was significant deterioration in the Baltimore area and metropolitan DC area condominium markets as well as a severe dislocation of the capital and credit markets precipitated by the sub-prime lending crisis. As a result of these events, management determined that its original business plans to convert the Rodgers Forge and Monterey properties to condominiums were no longer viable and that the properties may be impaired. Based on the management estimate of future undiscounted cash flows as apartment properties, the long-lived assets of the Rodgers Forge and Monterey properties were no longer fully recoverable. Impairment losses of $17.7 million and $37.0 million, respectively, on the Rodgers Forge and Monterey properties were determined based on the difference between the carrying values of the long-lived assets and their estimated fair market values. The estimated fair market values were based on discounted cash flow projections which assumed the properties were sold when stabilized and were supported by third party offers to purchase the Rodgers Forge property and an independent third party appraisal for the Monterey property.

Risk Management

As of December 31, 2008, we had the following watch list and non-performing loans (in thousands):


Investment Type	Classification	Net Loan Balance⁽¹⁾		% of Total Assets
Whole Loan	Watch⁽²⁾	$	10,500	0.7	%
Whole Loan	Watch		47,000	3.3	%
Mezzanine Loan	Watch		18,000	1.3	%
B-Note	Non-Performing⁽⁴⁾		42,830	3.0	%
Mezzanine Loan	Non-Performing⁽⁴⁾		40,000	2.8	%
Whole Loan	Non-Performing		11,000	0.8	%
Bridge Loan	Non-Performing⁽³⁾		7,500	0.5	%
Mezzanine Loan	Non-Performing		25,000	1.8	%
Bridge Loan	Non-Performing⁽³⁾		2,123	0.2	%

Total		$	203,953	14.4	%

(1)	At December 31, 2008, we had loan loss reserves of $139,690 against these assets out of our total loan loss reserves of $141,065.

(2)	Subsequent to December 31, 2008 this loan became non-performing.

(3)	Investments are with the same sponsor.

(4)	Investments are with the same sponsor.

Watch List Assets

We conduct a quarterly comprehensive credit review, resulting in an individual risk classification being assigned to each asset. ~~This review is designed to enable management to evaluate and proactively manage asset-specific credit issues~~ and identify credit trends on a portfolio-wide basis as an “early warning system.” As of December 31, 2006, we had one asset on its credit watch list, excluding the one asset included in non-performing loans above, with an aggregate carrying value of $19.7 million, or 1.28% of total assets

AsThe offirst ~~March 20,~~watch ~~2007,~~list weasset ~~have~~is ~~funded~~a ~~approximately~~ $110.75 million towhole ~~protect our~~loan ~~mezzanine~~secured ~~loan~~by ~~position~~a inmixed ~~the~~use ~~watch~~industrial ~~list~~and ~~asset~~commercial facility located in Windsor, Connecticut. The ~~funds~~borrower ~~were~~determined ~~used~~that tothe ~~cure~~primary business occupying the ~~default~~facility onwas not economically feasible and has engaged a broker to sell the ~~senior~~building. ~~loan~~In June 2008, ~~pay~~we ~~real~~received ~~estates~~payment ~~taxes~~of $2.0 million from the borrower, aswhich ~~well~~included asa $1.5 ~~pay~~million ~~for~~reduction ~~attorney~~of ~~and~~principal ~~appraisal~~to ~~services~~$10.5 ~~provided~~million and $0.5 million to usreplenish interest reserves, in exchange for the removal of a personal guaranty. WeThe ~~may~~borrower ~~expend~~has ~~additional~~since ~~sums~~triggered ~~going~~personal ~~forward~~ recourse pursuant to ~~protect~~the ~~our~~exculpation ~~investment,~~provisions ~~although~~in the ~~there~~loan isdocuments. noIn ~~guarantee~~November we2008, ~~will~~the dointerest soreserve balance was fully depleted. ~~Furthermore,~~Management weconcluded ~~may~~that ~~expend~~no ~~additional~~loan ~~funds~~loss ifreserve ~~and~~was ~~when~~necessary weat ~~foreclose~~this time based on the ~~asset,~~estimated tofair ~~take~~market ~~control~~value of the ~~asset,~~underlying tocollateral ~~complete~~from ~~construction,~~a ~~and/or~~recent third toparty ~~otherwise~~appraisal. ~~operate~~If the ~~asset,~~ inborrower ~~each~~is ~~case,~~not ~~until~~successful ~~disposition~~in oflocating a buyer for the ~~asset~~building at an adequate price, ~~although~~or ~~there~~at isall, nosuch ~~guarantee~~an weadverse ~~will~~event docould sohave an adverse impact on our ability to recover our loan balance. In December 2008, we initiated foreclosure proceedings.

The second watch list asset is a $47.0 million whole loan secured by an office building located in San Francisco, California. The building has a below market occupancy rate and does not fully cover debt service obligations, requiring the borrower to contribute significant capital. The loan was current as of December 31, 2008 and January and February 2009 interest payments were received. The loan matured on March 9, 2009 without payment and therefore is in default. If we foreclose on the property, given current market conditions where it is difficult to sell and finance commercial real estate properties at reasonable levels, we may not be able to fully recover the loan balance. Based on the Company’s internal valuation of the collateral, at this time the range of potential losses is between $0 and $11.0 million.

The third watch list asset is a $18.0 million mezzanine loan for a specialty retail development located in Tennessee. Our loan originally matured on December 1,

- 41 -

2008 and the senior construction loan matured on December 24, 2008 and both were extended until January 24, 2009, at which time they went into maturity default. Construction on the project has halted as the lending group and borrower negotiate long-term financing and capitalization for the project. We believe it will be difficult for the borrower to find permanent financing given current credit market conditions. Currently, the project has a construction funding budget deficit that will be required to complete tenant improvements and the borrower is working closely with the lending group to obtain the remaining funding requirements. Based on our consideration of the difficulty under current market conditions of (i) resuming and completing construction, (ii) obtaining additional capital required, (iii) negotiating an extension of the current capital structure at reasonable terms, (iv) obtaining permanent financing for the property and (v) operating a specialty retail property during a prolonged economic downturn that severely impacts leisure travel, we believe there is substantial doubt about our ability to recover our loan balance. Based on these uncertainties and management’s inability to reasonably predict recovery upon restructuring or assumption of the collateral, we recorded a loan loss reserve against the balance of this loan in the fourth quarter of 2008 to reduce the net carrying value to $0.

Subsequent to December 31, 2008, we added a $32.0 million whole loan secured by seven office buildings in Albany, New York and Rochester, New York to the watch list. The buildings have been under performing compared to original underwriting expectations, resulted in the borrower having to fund cash operating deficits. As a result of current and projected operating deficits, management expects it may have to restructure the loan to provide the borrower some relief on interest payments and concluded that a $1.4 million reserve was necessary at this time.

Non-Performing Loans

Non-performing loans include all loans on non-accrual status. We transfer loans to non-accrual status at such time as: (1) management determines the borrower is incapable of curing, or has ceased efforts towards curing the cause of a default; (2) the loan becomes 90 days delinquent; or (3) the loan has a maturity default. Interest income is recognized only upon actual cash receipt for loans on non-accrual status.

The $42.8 million B-Note investment classified as non-performing had a maturity default on December 1, 2007 and is secured by a class A parcel of land in New York City that is intended to be developed into a mixed use retail and residential site. The B-Note was originally due on October 1, 2007 and was extended for 60 days with the sponsor funding an additional $150.0 million of cash equity. Interest on the loan has been paid through December 31, 2007 at the contractual rate. As of December 31, 2008, we have initiated foreclosure proceedings on the collateral of our loan. At the current time, the lending group is conducting an appraisal of the site and, if the appraisal indicates the value of the site does not support our position in the capital structure, we will lose our ability to control foreclosure and voting rights over major decisions. The value of the loan is dependent on several factors that are outside of our control, such as the ultimate use of the project, the timing of completion and negotiations with potential tenants, and adverse events not currently anticipated could have a material impact on the value of the underlying collateral and ultimate realization of our loan balance. Based on our consideration of (i) the current state of the credit and capital markets, (ii) the long duration of the maturity default and (iii) the time and expense associated with foreclosure proceedings, we continue to carry a loan loss reserve against the balance of this loan to reduce the net carrying value to $0.

The $40.0 million mezzanine loan had a maturity default on February 9, 2008 and is collateralized by four class A office properties located in New York City. The sponsor of this investment is also the sponsor of the $42.8 million B-Note investment discussed above. In April 2008, the borrower and lending group for the properties reached a consensual sale agreement that will allow the properties to be sold in an orderly fashion. The consensual sale agreement expired in February 2009. Based on the negotiated sales prices of three of the four class A office properties prior to the expiration of the agreement, we will not recover any of our loan balance, therefore we continue to carry a loan loss reserve against the balance of this loan to reduce the net carrying value to $0.

The $11.0 million whole loan is secured by a mixed use office and industrial facility located in Phoenix, Arizona. The facility has been 100% vacant for greater than two years and interest reserves were fully depleted in April 2008. In November 2008, the borrower notified us that it will no longer be making interest payments and we expect to assume possession of the collateral from the borrower by deed-in-lieu of foreclosure. Management obtained an independent, third party appraisal of the collateral value of this property which indicated that the fair value of the collateral, net of expected selling costs, was less than our historical carrying value. As a result, we have a loan loss reserve against the balance of this loan to reduce the net carrying value to the estimated net realizable value of $6.2 million.

The $7.5 million bridge loan is secured by development rights to build an office building in the Washington, DC area. The loan matures in April 2009, interest reserves were depleted in April 2008 and subsequent interest payments have been deferred until the maturity date of the loan. The borrower is in the process of completing predevelopment activities and obtaining necessary regulatory approvals to start construction. The borrower is exploring alternative uses of the site, including student housing. At December 31, 2008, based on the continued decline of the credit markets, which we believe makes it very difficult to obtain financing on projects of this nature, combined with the growing concern of a prolonged economic slowdown that is making it more difficult to execute long-term lease commitments, we concluded that the significance of these uncertainties raises substantial doubt about our ability to recover our loan balance. Based on these uncertainties and management’s inability to reasonably predict recovery upon (i) pursuit of a personal guaranty from the borrower or (ii) assumption of the collateral, we continue to carry a loan loss reserve against the balance of this loan to reduce the net carrying value to $0.

The $25.0 million mezzanine loan is secured by an interest in an apartment complex in New York City. The borrower notified us in July 2008 that it will cease servicing the debt and has requested significant modifications to the outstanding loans in order to continue its involvement with the property. Management is currently in the process of negotiating with the borrower, however, the ultimate outcome remains uncertain. Given the continued adverse market conditions that have negatively impacted commercial real estate valuations and the ability to refinance and based on our assessment of the current fair value of the underlying collateral, we believe there is significant uncertainty about our ability to recoup our loan balance in the event of sale or foreclosure. As a result, we continue to carry a loan loss reserve against the balance of this loan to reduce the net carrying value to $0.

The $2.1 million bridge loan is secured by development rights to build a mixed use office, retail and hotel facility in the Miami, Florida area. The borrower is in the process of obtaining construction financing for the development and completing other predevelopment activities. The loan matured on November 2008 and the borrower has communicated to us that it is unable to repay the loan. At December 31, 2008, based on the continued decline of the credit markets, which we believe makes it very difficult to obtain financing on projects of this nature, combined with the growing concern of a prolonged economic slowdown that is making it more difficult to execute long-term lease commitments, management concluded that the significance of these uncertainties raises substantial doubt about our ability to recover our loan balance. Based on these uncertainties and management’s inability to reasonably predict recovery upon (i) pursuit of a personal guaranty from the sponsor or (ii) assumption of the collateral, we continue to carry a loan loss reserve against the balance of this loan to reduce the net carrying value to $0.

Loan Loss Reserve

As of December 31, 2008 and 2007, our loan loss reserve was $141.1 million and $19.7 million, respectively. Management estimated the loan loss reserve based on consideration of current economic conditions and trends, the intent and wherewithal of the sponsors, the quality and estimated value of the underlying collateral and other factors.

Liquidity and Capital Resources

Overview

Liquidity is a measurement of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund loans and other investments, pay dividends, fund debt service and for other general ~~business~~corporate ~~needs~~purposes. ~~Our~~On ~~primary sources of funds for short-term liquidity, including working capital, distributions and additional investments consist of (i)~~December funds raised from our June 2005 private offering and our IPO; (ii) funds raised from our July 2006 issuance of trust preferred securities (iii) cash flow from operations; (iv) borrowings under our two master repurchase agreements with Deutsche Bank AG31, ~~Cayman Islands Branch~~2008, ~~which~~ we ~~refer~~had toapproximately ~~as the DB Warehouse Facility, and two master repurchase agreements with Bank of America, N~~$23.A.1 ~~and~~million ~~Banc~~ of ~~America~~ ~~Securities~~unrestricted LLC, or Bank of America, which we refer to as the Bank of America Warehouse Facilities and one master repurchase agreement with Wachovia Bank, N.A., which we refer to as the Wachovia Warehouse Facility; (v) proceeds from our CDO or other forms of financing or additional securitizations or CDO offerings; (vi) proceeds from additional common or preferred equity offerings or offerings of trust preferred securities; and (vii) proceeds from principal payments on our investments. We believe these sources of funds will be sufficient to meet our short-term liquidity requirements.

~~Our ability to meet our long~~-~~term~~ ~~liquidity~~42 ~~requirements will be subject to obtaining additional debt financing and equity capital in addition to the sources designated for our short~~-~~term~~ liquidity requirements. If we are unable to renew, replace or expand our sources of financing on substantially similar terms, it may have an adverse effect on our business, results of operations and ability to make distributions to our stockholders. Depending on market conditions, we expect that our borrowings will be in the range of 70% and 80% of the carrying value of our total assets. Our borrowings may require us, among other restrictive covenants, to keep uninvested cash on hand, maintain a certain portion of our assets free from liens and to secure such borrowings with our assets. These conditions would limit our ability to do further borrowings. If we are unable to make required payments under such borrowings, breach any representation or warranty in the loan documents or violate any covenant contained in a loan document, our lender may accelerate the maturity of our debt or require us to pledge more collateral. If we are unable to pay off our borrowings in such a situation, the lender could foreclose on our assets that are pledged as collateral to such lender or such lender could force us into bankruptcy. Any such event would have a material adverse effect on our liquidity and the value of our common stock.

To qualify as a REIT under the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, we must distribute annually at least 90% of our taxable income. These distribution requirements limit our ability to retain earnings and thereby replenish or increase capital for operations. However, we believe that our capital resources and access to financing will provide us with financial flexibility at levels sufficient to meet current and anticipated liquidity requirements, including funding new investments, paying distributions to our stockholders and servicing our debt obligations.

cash and cash equivalents. We have long-term financing for 100% of our encumbered portfolio in place through our existing CDOs and mortgage loans. Our primary sources of funds for short-term liquidity requirements, including working capital, distributions, if any, debt service and additional investments, if any, consist of (i) cash flow from operations; (ii) proceeds from our existing CDOs; (iii) proceeds from principal and interest payments on our unencumbered investments; (iv) proceeds from potential loan and asset sales; and, to a lesser extent; (v) new financings or additional securitization or CDO offerings and (vi) proceeds from additional common or preferred equity offerings. We believe these sources of funds will be sufficient to met our short-term liquidity requirements.

Due to continued market turbulence, we do not anticipate having the ability in the near term to access equity capital through the public or private markets or debt capital through warehouse lines, new CDO issuances, or new trust preferred issuances. We continue to explore equity and other capital raising options as well as other strategic alternatives as they present themselves; however, in the event we are not able to successfully secure financing, we will rely on existing cash on hand, cash flows from operations, principal payments on our investments, and proceeds from asset and loan sales, if any, to satisfy these requirements. If we (i) are unable to renew, replace or expand our sources of financing, (ii) are unable to execute asset and loan sales in a timely manner or to receive anticipated proceeds therefrom or (iii) fully utilize available cash, it may have an adverse effect on our business, results of operations and ability to make distributions to our stockholders.

The majority of our investments are pledged as collateral for our CDO bonds and the income generated from these investments is used to fund interest obligations of our CDO bonds and the remaining income, if any, is retained by us. Our CDO bonds contain interest coverage and asset overcollateralization covenants that must be met in order for us to receive such payments. If we fail our interest coverage or asset overcollateralization covenants in either of our CDOs, all cash flows from the CDO (including interest on the bonds we own, distributions on our common and preferred equity and our subordinate management fees) would be diverted to repay principal and interest on the outstanding CDO bonds and we would not receive any residual payments until the CDO was back in compliance with such tests. We were in compliance with all such covenants as of December 31, 2008. In the event of a breach of our CDO covenants that we could not cure in the near term, we would be required to fund interest on trust preferred securities and other expenses (including compensation expenses) through (i) cash on hand, (ii) income from any CDO not in default, (iii) sale of unencumbered assets or (iv) accessing debt or equity capital markets, if available. We have the ability to cure defaults, which would resume normal payments to us, by purchasing non-performing loans out of our CDOs. However, we may not have sufficient liquidity available to do so at such time. In some cases, collateral may be continuing to pay interest but may be considered a defaulted interest for the purpose of the covenant calculations, such as our CMBS in our 2006 CDO, or CDO I, which are considered defaulted interests for the purpose of covenant calculation if any rating agency downgrade occurs. To the extent noncompliance continues for an extended period of time, our ability to continue as a going concern may be jeopardized. At December 31 2008, our most restrictive covenants on our CDOs had an interest coverage ratio of 2.21x and 1.22x for CDO I and CDO II, respectively, compared to minimum requirements of 1.21x and 1.09x. At December 31, 2008, our most restrictive covenants on our CDOs had an asset overcollateralization ratio of 1.15x and 1.10x for CDO I and our 2007 CDO, or CDO II, respectively, compared to minimum requirements of 1.12x and 1.10x. If we experience an additional $15,050 or $500 in reductions of collateral in CDO I or CDO II, respectively, due to further investment losses or other factors, we will fail the overcollateralization test for the respective CDO.

On February 25, 2009, we were notified by the CDO I trustee that we failed the overcollateralization test for CDO I on the February 25, 2009 payment date and, as a result, future net cash flows from CDO I, including approximately $488,000 due on the February 25, 2009 payment date, will be diverted to pay down principal of senior bond holders rather than being paid to us until such time the covenant is back in compliance, if ever. As of February 27, 2009, CDO II was in compliance with the overcollateralization test, however, if an additional $0.5 million in defaults occur, CDO II will also breach the overcollateralization covenant. Management believes it is likely that CDO II will fail the overcollateralization test at some point in 2009, which will result in the cash flows of CDO II being diverted to pay down principal of senior bond holders, eliminating residual cash inflows paid to us. With both CDOs out of compliance with overcollateralization covenants, we will have minimal incoming cash flows from our primary business and there is no assurance when or if we will be able to regain compliance with these covenants. As discussed further in “—Related Party Transactions,” the breach of the overcollateralization covenant in either CDO provides MBIA the controlling class of CDO II bondholders, the ability to terminate the existing collateral management agreement, as amended, and to remove us as the collateral manager of CDO II. We have incurred significant losses since our inception and may incur additional losses in the future as we continue to navigate the difficult issues in the credit and real estate markets. With minimal incoming cash flows, management’s plans to fulfill short-term capital requirements include (i) use of $23.1 million of cash on hand as of December 31, 2008 to fund operating expenses, (ii) senior collateral management fees, (iii) reduction in administrative costs, as a result of becoming a non-reporting company, (iv) reduction in employee headcount, and (v) sale of our unencumbered 1515 Market Street LLC joint venture interest, if possible under current market conditions. We believe these sources of funds will be sufficient to meet our liquidity requirements for at least the next 12 months. We continue to seek and explore partnerships and new business opportunities; however, there is no assurance that such partnerships or business opportunities will be available on favorable terms or at all.

Due to our status as a REIT, we are required to distribute at least 90% of our REIT taxable income to stockholders. As our loans are repaid and/or we sell our loans, if we do not begin lending again, we will experience declines in the size of the investment portfolio over time. Net losses and a reduction in the size of our investment portfolio would also result in reduced taxable income and cash available for distribution and a lower dividend as compared to historical standards. As a result of these factors, on December 17, 2008, we announced that our board of directors suspended the quarterly cash dividend in order to maintain our financial flexibility.

As of December 31, 2008, we had approximately $23.1 million of unrestricted cash and cash equivalents. We have long-term financing for 100% of our encumbered portfolio in place through our existing CDOs and mortgage loans. In order to effectively match-fund our investment portfolio, we have aggressively reduced amounts under our former repurchase facility with Wachovia from $217.0 million at September 30, 2007 to being fully repaid in June 2008. We expect the availability of warehouse lines, which we had historically used to finance loan originations that were ultimately packaged in CDO offerings, will be limited in the near to medium term due to reduced liquidity in the CDO market and a lesser appetite for new CDO issuances. As we await the recovery of these traditional avenues of liquidity, we are considering several alternative equity and debt capital raising options, as well as analyzing our fundamental business model.

Capitalization

Our authorized capital stock consists of 150,000,000 shares of capital stock, $0.01 par value per share, of which we have authorized the issuance of up to 100,000,000 shares of common stock, par value $0.01 per shares, and 50,000,000 shares of preferred stock, par value $0.01 per share. As of December 31, 2008 and December 31, 2007, 30,823,200 and 30,920,225 shares, respectively, of our common stock were issued and outstanding and no shares of our preferred stock were issued and outstanding.

On June 9, 2005, we completed our private offering of 20,000,000 shares of common stock resulting in gross proceeds of $300.0 million and net proceeds of approximately $282.5 million, which were used primarily to fund investments.

On- ~~September 27,~~43 ~~2006,~~- we priced our IPO of common stock, with public trading of our common stock commencing on September 28, 2006. We sold 11,012,624 shares of our common stock in our IPO at a price of $14.50 per share, which includes the exercise in full of the underwriters’ option to purchase an additional 1,436,429 shares of common stock. Of these shares, 9,945,020 were sold by us and 1,067,604 were sold by selling stockholders. Net proceeds from both our IPO and the over allotment option, after underwriting discounts and commissions of approximately $8.7 million and other offering expenses of approximately $2.4 million, were approximately $133.2 million, which we received on October 3, 2006. The net proceeds were used to repay debt on the Wachovia Warehouse Interim Facility (as defined below). The shares are included in the outstanding share count as of September 30, 2006 with the net proceeds recorded as contra equity (Common stock subscriptions receivable) on the balance sheet.

As of December 31, 2006, 656,122 shares of restricted common stock, net of forfeitures, and options to purchase 875,233 shares of common stock, net of forfeitures, with an exercise price of $15.00 per share, have been issued under our 2005 equity incentive plan. These restricted shares and options have a vesting period of three years from the date of grant (except with respect to 2,668 restricted shares which vested one year from the date of grant).

On March 7, 2007, 130,200 shares of restricted stock and options to purchase 66,500 shares of the our common stock with an exercise price of $13.08 per share were issued to certain employees of the our Manager under the 2005 equity incentive plan. Options granted under the 2005 equity incentive plan are exercisable at the fair market value on the date of the grant and, expire five years from the date of the grant, subject to termination of employment, are not transferable other than at death, and are exercisable ratably over a three year period commencing one year from the date of the grant.

Warehouse Lines

DB Warehouse Facility

On August 30, 2005, we entered into two facilities with Deutsche Bank AG, Cayman Islands Branch that provided $650.0 million of aggregate borrowing capacity.

We have a $400.0 million master repurchase agreement, or the DB Warehouse Facility, which had an initial repurchase date of August 29, 2006. Our TRS is also a party to this agreement and we and our TRS are jointly and severally liable thereunder. The repurchase date shall automatically be extended for an additional day on a daily basis, without any action required to be taken by the lender or us, unless the lender delivers to us in writing a termination notice of such daily automatic extension feature. In such event, the repurchase date shall be the day 364 days after the date of the written termination notice. Advances under this facility bear interest only, which is reset monthly, with a pricing spread of 50 basis points over 30-day LIBOR. Based on our investment activities, this facility provides for an advance rate of up to 90% based upon the collateral provided under a borrowing based calculation. This facility finances our whole loan originations and acquisitions. As of December 31, 2006, the outstanding balance under this facility was approximately $14.3 million with a current weighted average interest rate of 5.85%. As of December 31, 2006, we had approximately $385.7 million of additional capacity under this facility to fund future investments. The borrowings under this facility are collateralized by the following investments (dollars in thousands):

Investment Type		Numberof Loans		Carrying Value
Whole Loans		1		$	16,000

On September 27, 2006, we priced our initial public offering, or IPO, of common stock, with public trading of our common stock commencing on September 28, 2006. We ~~also~~sold ~~had~~11,012,624 shares of our common stock in our IPO at a price of $~~250~~14.050 per share, which includes the exercise in full of the underwriters’ option to purchase an additional 1,436,429 shares of common stock. Of these shares, 9,945,020 were sold by us and 1,067,604 were sold by selling stockholders. Net proceeds from both our IPO and the over allotment option, after underwriting discounts and commissions of approximately $8.7 million ~~repurchase~~and ~~agreement~~other offering expenses of approximately $2.4 million, were approximately $133.2 million, which ~~terminated~~we received on ~~November~~October 293, 2006 and used to repay debt.

~~The~~On DBMarch 7, ~~Warehouse~~2007, ~~Facility~~130,200 ~~contains~~shares ~~certain~~of ~~covenants,~~restricted ~~the~~stock ~~most~~and ~~restrictive~~options ofto ~~which~~purchase ~~are~~66,500 ~~requirements~~shares ~~that~~of weour ~~maintain~~common astock ~~minimum~~with ~~tangible~~an ~~net~~exercise ~~worth~~price of no ~~less than~~ $~~125~~13.008 ~~million,~~per share awere ~~minimum~~issued ~~debt~~to ~~service~~certain ~~coverage~~employees of ~~not~~our ~~less~~Manager ~~than~~under ~~1.5~~the to2005 1equity inincentive ~~the~~plan. ~~aggregate,~~Options agranted ~~ratio~~under ofthe ~~indebtedness-to-tangible~~2005 ~~net~~Equity ~~worth~~Incentive ~~not~~Plan toare ~~exceed~~exercisable ~~3.5~~at tothe 1,fair ~~and~~market ~~minimum~~value ~~cash~~on orthe ~~marketable~~date ~~securities~~ of ~~not~~the ~~less~~grant ~~than~~and, ~~(i) $10.0 million~~expire ~~for~~five ayears ~~debt-to-book~~from ~~ratio~~the ~~above~~date of 2the togrant, 1;subject ~~(ii) $5.0 million for a debt-~~to~~-book~~ ~~equity~~termination ~~ratio~~of ~~between~~employment, 1are tonot 1transferable ~~and~~other 2than toat 1;death, and ~~(iii) $3.0~~are ~~million~~exercisable ~~for~~ratably over a ~~debt-to-book~~three ~~equity~~year ~~ratio~~period ofcommencing ~~below~~one 1year tofrom 1.the Wedate ~~were in compliance with all covenants and restrictions as~~ of ~~December 31,~~the ~~2006~~grant.

~~Bank~~In August 2007, 60,000 shares of ~~America~~restricted ~~Warehouse~~stock ~~Facilities~~were issued to certain of our officers under the 2005 Equity Incentive Plan.

In ~~January~~September ~~and February~~2007, ~~2006~~75,000 weshares ~~entered into two facilities with Banc~~ of ~~America~~restricted ~~Securities,~~stock ~~LLC~~ and ~~Bank~~options of America N.A., or the Bank of America Warehouse Facilities, that provided $450.0 million of aggregate borrowing capacity. We have a $200.0 million master repurchase agreement, which has an initial repurchase date of (1) January 26, 2007 or (2) the date on which a second CDO transaction sponsored by us closes. The repurchase date shall be extended for up to ~~two~~purchase ~~additional 364-day periods following the initial repurchase date at the buyer’s sole discretion~~24,000 ~~provided~~shares ~~that, if we intend to extend the repurchase date, (i) the buyer agrees to such extension within 30 days~~ of ~~receipt of~~ our ~~written~~common ~~notice~~stock ~~to extend the repurchase date, which shall have been delivered to the lender at least 90 days but no more than 120 days prior to the initial repurchase date and (ii)~~ with ~~respect to the second extension, no default or~~ an ~~event~~exercise ofprice ~~default (as defined in the repurchase agreement) has occurred or be continuing. In such event, the maturity date shall be the day 364 days after the date~~ of ~~the written termination notice~~$5.89 Onper January 25, 2007 the repurchase date was extended until the earliest of (a) April 15, 2007 or (b) the date on which a second CDO transaction sponsored by us closes. Advances under this facility bearshare ~~interest~~were ~~only,~~issued ~~which is reset monthly, with a range of pricing spreads of 50~~ to ~~170 basis points over 30-day LIBOR. Based on~~ our ~~investment~~newly ~~activities,~~hired ~~this~~president ~~facility provides for an advance rate of between 55%~~ and ~~95%~~chief ~~based~~executive ~~upon~~officer ~~the collateral provided~~ under ~~a borrowing based calculation. This facility finances our origination or acquisition of whole loans, subordinate mortgage interests and CMBS. As of December 31, 2006,~~ the ~~outstanding~~2005 ~~balance~~Equity ~~under~~Incentive ~~this facility was approximately $57~~Plan.3 million with a current weighted average interest rate of 6.16%. As of December 31, 2006, we had approximately $142.7 million of additional capacity under this facility to fund future investments. The borrowings under this facility are collateralized by the following investments (dollars in thousands):

Investment Type	Numberof Investments	Carrying Value
Subordinated Debt	1	$	20,000
CMBS	11	$	48,438

In December 2007, 92,500 shares of restricted stock and options to purchase 45,500 shares of our common stock with an exercise price of $5.34 per share were issued to certain employees of our Manager under the 2005 Equity Incentive Plan.

InWarehouse ~~addition,~~Facilities we have a $250.0 million master repurchase agreement, which has a repurchase date of February 12, 2007. This repurchase date shall be extended for up to two additional 364-day periods following the initial repurchase date at the buyer’s sole discretion, provided that, if we intend to extend the repurchase date, (i) the buyer agrees to such extension within 30 days of receipt of our written notice to extend the repurchase date, which shall have been delivered to the lender at least 90 days but no more than 120 days prior to the initial repurchase date and (ii) with respect to the second extension, no default or an event of default (as defined in the repurchase agreement) has occurred or be continuing. Our TRS is also a party to this agreement and we and our TRS are jointly and severally liable thereunder. Advances under this facility bear interest only, which is reset monthly, with a range of pricing spreads of 50 to 120 basis points over 30-day LIBOR. Based on our investment activities, this facility provides for an advance rate of between 55% and 92.5% based upon the collateral provided under a borrowing base calculation. This facility finances whole loan originations and acquisitions. As of December 31, 2006, nothing was outstanding under this facility.

59We have historically financed our portfolio of securities and loans through the use of repurchase agreements. Currently, we have no warehouse facilities in place that will allow future borrowings. Below is a description of our warehouse line in place as of December 31, 2007.

The Bank of America Warehouse Facilities contain certain covenants, the most restrictive of which are requirements that we maintain a minimum tangible net worth of no less than $250.0 million, a minimum debt service coverage of not less than 1.5 to 1 in the aggregate, a ratio of total liability to total assets greater than 0.80 to 1.0, and minimum cash and marketable securities of not less than $10.0 million. We were in compliance with all covenants and restrictions as of December 31, 2006.

Wachovia Warehouse Facility

In August ~~July~~ 2006, we entered into a ~~mortgage~~master ~~loan~~repurchase ~~purchase~~ agreement with Wachovia Bank, N.A., or Wachovia, that provided $~~175.0~~300,000 ~~million~~ of aggregate borrowing capacity,. This facility previously financed our origination or ~~the~~acquisition ~~Wachovia~~of ~~Warehouse~~whole ~~Interim~~loans, ~~Facility~~subordinate mortgage interests and CMBS. ~~The~~As ~~borrowings~~of December 31, 2007, the outstanding balance under this facility ~~were~~was ~~paid~~approximately ~~off~~$144.2 onmillion ~~October 4~~with a weighted average borrowing rate of 6.28%. In June 2008, ~~2006~~we repaid our remaining obligations and terminated the facility ~~was~~and ~~terminated~~there is no balance outstanding as of December 31, 2008.

InCDO ~~August~~Bonds ~~2006,~~Payable we entered into a master repurchase agreement with Wachovia Bank, N.A., or the Wachovia Warehouse Facility, that provided $300.0 million of aggregate borrowing capacity. On December 15, 2006 and February 8, 2007, the aggregate borrowing capacity was increased to $500.0 million and $700.0 million, respectively, and the increase period expires on May 1, 2007. After the expiration of the increase period the maximum borrowing capacity will be $300.0 million. The Wachovia Warehouse Facility has an initial fixed repurchase date of August 24, 2009, which may be extended for a period not to exceed 364 days upon our written request to the buyer at least 30 days, but no more than 60 days, prior to the initial repurchase date, if (i) no default or event of default (as defined in the repurchase agreement) has occurred or continuing and (ii) upon our payment to the buyer of a certain extension fee. Based on our investment activities, this facility provides for an advance between 50% and 95% based upon the collateral provided under a borrowing based calculation. Advances under this facility bear interest only, which is reset monthly, with a range of pricing spreads from 20 to 200 basis points over 30-day LIBOR. As of December 31, 2006, the outstanding balance under this facility was approximately $361.8 million with a weighted average borrowing rate of 6.03%. As of December 31, 2006, we had $138.2 million of capacity under this facility to fund future investments. The borrowings under this facility were collateralized by the following investments (dollars in thousands):

Investment Type	Number of Investments	Carrying Value
Whole Loans	9	$	290,898
Subordinated Debt	2	$	65,344
CMBS	12	$	56,591

On March 28, 2006, we closed on our CDO I issuance and retained the entire BB rated J Class with a face amount of $24.0 million for $19.2 million, retained the entire B-rated K Class with a face amount of $20.3 million for $14.2 million and also retained the non-rated common and preferred shares of CDO I, which issued the CDO bonds with a face amount of $47.3 million for $51.7 million. We issued and sold CDO bonds with a face amount of $508.5 million in a private placement to third parties. The proceeds of the CDO issuance were used to repay substantially all of the outstanding principal balance of our then existing two warehouse facilities with an affiliate of Deutsche Bank Securities Inc. of $343.6 million and all of the outstanding principal balance of our then existing warehouse facilities with the Bank of America Securities, LLC of $16.3 million at closing. The CDO bonds are collateralized by real estate debt investments, consisting of B Notes, mezzanine loans, whole loans and CMBS investments, which are recorded in our unaudited condensed consolidated balance sheet at December 31, 2008. As of December 31, 2008, prior to our internalization, our Manager was the collateral manager for our CDO subsidiary and did not receive any fees in connection therewith. Effective January 1, 2009, we have assumed the role as collateral manager. CDO I is not a qualified special purpose entity (“QSPE”) as defined under FASB Statement No. 140, (“SFAS 140”) “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” due to certain permitted activities of CDO I that are not consistent with activities of a QSPE permitted under SFAS 140, such as having the ability to sell impaired securities and acquire replacement securities with the proceeds at the discretion of the collateral administrator. CDO I is consolidated in our financial statements and we have accounted for the CDO I transaction as a financing. The collateral assets that we transferred to CDO I are reflected in our balance sheet. The bonds issued to third parties are reflected as debt on our balance sheet. As of December 31, 2008, CDO bonds of $508.5 million were outstanding, with a weighted average interest rate of 0.98%.

~~The~~ In March 2007, Wachovia ~~Warehouse~~acted ~~Facility~~as ~~contains~~the ~~certain~~exclusive ~~covenants,~~structurer ~~the~~and ~~most~~placement ~~material~~agent ofwith respect to our CDO II totaling $1,000 million which ~~are~~priced on March 2, 2007, and ~~requirements~~closed ~~that~~on weApril 2, ~~maintain~~2007. aWe ~~minimum~~sold ~~tangible~~$880.0 ~~net~~million ~~worth~~of bonds with an average cost of no90-day ~~less~~LIBOR ~~than~~plus 40.6 basis points and retained 100% of the ~~sum~~equity interests in our CDO subsidiary that issued the CDO notes consisting of ~~$250~~preferred and common shares.0 ~~million,~~The notes issued by our CDO subsidiary are secured initially by a ~~ratio~~portfolio of ~~total~~whole ~~liability~~loans, toB ~~total~~Notes, ~~assets~~mezzanine ~~greater~~loans ~~than~~and 0CMBS.80 As of December 31, 2008, prior to ~~1.0~~our ~~(for~~internalization, our Manager was the ~~$300.0~~collateral ~~million~~manager ~~Wachovia~~for ~~Warehouse~~our ~~Facility)~~CDO subsidiary and ~~75%~~does not receive any fees in connection therewith. Effective January 1, 2009, we have assumed the role as collateral manager, however, the controlling class of bond holders may, at their discretion, reassign the ~~net~~collateral ~~proceeds~~manager ofif we breach CDO covenants discussed below. We acted as the ~~issuance~~advancing byagent usin ofconnection ~~any~~with ~~capital~~the ~~stock~~issuance of ~~any~~the ~~class~~CDO ~~and~~notes. ~~minimum~~CDO ~~cash~~II ~~and~~is ~~marketable~~not ~~securities~~a QSPE as defined under SFAS 140 due to certain permitted activities of CDO II that are not consistent ~~less~~with ~~than~~activities ~~$10.0~~of ~~million.~~a ~~Additionally~~QSPE permitted under SFAS 140, such as having the ability to sell impaired securities and acquire replacement securities with the proceeds at nothe ~~time~~discretion ~~shall~~of the collateral administrator. CDO II is consolidated ~~interest~~in our ~~coverage~~financial ~~ratio~~statements byand uswe account for the ~~immediately~~CDO ~~preceding fiscal~~II ~~quarter~~transaction beas ~~less~~a ~~than 1~~financing.3 The collateral assets that we transferred to 1CDO II are reflected in our balance sheet.0 ~~during~~The ~~the~~bonds ~~fiscal~~issued ~~quarters~~to ~~ending~~third parties are reflected as debt on our balance sheet. As of December 31, ~~2006~~2008, ~~and~~CDO ~~March 31,~~II ~~2007.~~bonds Weof ~~are~~$853.2 inmillion ~~compliance~~were outstanding, with ~~all~~a ~~covenants~~weighted ~~and~~average ~~restrictions~~interest asrate of 5.11%. As of December 31, ~~2006~~2008, we had a $75.0 million revolver available with $48.2 million of borrowing outstanding and $26.8 million of remaining capacity. The revolver is available to fund future funding commitments on loans.

~~Accounting~~The ~~Treatment~~majority of our investments are pledged as collateral for ~~Certain~~our ~~Investments~~CDO ~~Financed~~bonds and the income generated from these investments is used to fund interest obligations of our CDO bonds and the remaining income, if any, is retained by us. Our CDO bonds contain interest coverage and asset overcollateralization covenants that must be met in order for us to receive such payments. If we fail our interest coverage or asset overcollateralization covenants in either of our CDOs, all cash flows from the CDO (including interest on the bonds we own, distributions of our common and preferred equity and our subordinate management fees) would be diverted to repay principal and interest on the outstanding CDO bonds and we would not receive any residual payments until the CDO was back in compliance with ~~Repurchase~~such ~~Agreements~~tests. We were in compliance with all such covenants as of December 31, 2008. In the event of a breach of our CDO covenants that we could not cure in the near term, we would be required to fund interest on trust preferred securities and other expenses (including compensation expenses) through (i) cash on hand, (ii) income from any CDO not in default, (iii) sale of unencumbered assets or (iv) accessing debt or equity capital markets, if available. We have the ability to cure defaults, which would resume normal payments to us, by purchasing non-performing loans out of our CDOs. However, we may not have sufficient liquidity available to do so at such time. In some cases, collateral may be continuing to pay interest but may be considered a defaulted interest for the purpose of the covenant calculations, such as our CMBS in CDO I, which are considered defaulted interests for the purpose of covenant calculation if any rating agency downgrade occurs. To the extent noncompliance continues for an extended period of time, our ability to continue as a going concern may be jeopardized. At December 31 2008, our most restrictive covenants on our CDOs had an interest coverage ratio of 2.21x and 1.22x for CDO I and CDO II, respectively, compared to minimum requirements of 1.21x and 1.09x. At December 31, 2008, our most restrictive covenants on our CDOs had an asset overcollateralization ratio of 1.15x and 1.10x for CDO I and CDO II, respectively, compared to minimum requirements of 1.12x and 1.10x. If we experience an additional $15,050 or $500 in reductions of collateral in CDO I or CDO II, respectively, due to further investment losses or other factors, we will fail the overcollateralization test for the respective CDO.

We- ~~have~~44 ~~certain~~- CMBS and loan investments, or the collateral assets, purchased from counterparties that are financed through a repurchase agreement with the same counterparty. We believe that in accordance with FASB Concept Statement No. 6, or CON 6, “Elements of Financial Statements,” we are entitled to obtain the future

On February 25, 2009, we were notified by the CDO I trustee that we failed the overcollateralization ~~economic~~test ~~benefits~~for ofCDO I on the ~~collateral~~February 25, ~~assets~~2009 payment date and, weas ~~are~~a ~~obligated~~result, ~~under~~future net cash flows from CDO I, including approximately $488,000 due on the ~~repurchase~~February 25, ~~agreement.~~2009 ~~Therefore~~payment date, wewill ~~currently~~be ~~record~~diverted to pay down principal of senior bond holders rather than being paid to us until such time the ~~collateral~~covenant ~~assets~~is ~~and~~back in compliance, if ever. As of February 27, 2009, CDO II was in compliance with the overcollateralization test, however, if an additional $0.5 million in defaults occur, ~~related~~CDO ~~financing~~II ~~gross~~will onalso ~~our~~breach ~~balance~~the ~~sheet~~overcollateralization covenant. Management believes it is likely that CDO II will fail the overcollateralization test at some point in 2009, ~~and~~which will result in the ~~corresponding~~cash ~~interest~~flows ~~income~~of ~~and~~CDO ~~interest~~II ~~expense~~being ~~gross~~diverted onto ~~our~~pay ~~income~~down principal ~~statement~~of senior bond holders, eliminating residual cash inflows paid to us. InWith ~~addition~~both CDOs out of compliance with overcollateralization covenants, ~~any~~we ~~change~~will have minimal incoming cash flows from our primary business and there is no assurance when or if we will be able to regain compliance with these covenants. As discussed further in ~~fair~~“—Related ~~value~~Party Transactions,” the breach of the ~~CMBS~~overcollateralization ~~included~~covenant in either CDO provides MBIA, the controlling class of CDO II bondholders, the ability to terminate the existing collateral ~~assets~~management agreement, isas ~~reported~~amended, ~~through~~and ~~other comprehensive~~to ~~income~~remove us as the collateral manager of CDO II. We have incurred significant losses since ~~these~~our ~~are~~inception ~~classified~~and may incur additional losses in the future as ~~available~~we ~~for~~continue ~~sale~~to ~~securities~~navigate the difficult issues in ~~accordance~~the ~~with~~credit ~~FASB~~and ~~Statement~~real Noestate markets. With minimal incoming cash flows, management’s plans to fulfill short-term capital requirements include (i) ~~115~~use of $23.1 million of cash on hand as of December 31, or2008 ~~SFAS~~to ~~115~~fund operating expenses, ~~“Accounting~~(ii) senior ~~for~~collateral ~~Certain~~management ~~Investments~~fees, (iii) reduction in ~~Debt~~administrative costs, as a result of becoming a non-reporting company, (iv) reduction in employee headcount, and (v) sale ~~Equity~~of ~~Securities~~our unencumbered 1515 Market Street LLC joint venture interest, if possible under current market conditions.” We believe these sources of funds will be sufficient to meet our liquidity requirements for at least the next 12 months. We continue to seek and explore partnerships and new business opportunities; however, there is no assurance that such partnerships or business opportunities will be available on favorable terms or at all.

Collateralized Debt Obligations

For longer-term funding, we intend to utilize securitization structures, particularly CDOs, as well as other match-funded financing structures. CDOs are multiple class debt securities, or bonds, secured by pools of assets, such as whole loans, B Notes, mezzanine loans, CMBS and REIT debt. We believe CDO financing structures are an appropriate financing vehicle for our targeted real estate asset classes, because they will enable us to obtain long-term cost of funds and minimize the risk that we have to refinance our liabilities prior to the maturities of our investments while giving us the flexibility to manage credit risk.

Deutsche Bank Securities Inc. acted as the exclusive structurer and placement agent with respect to a CDO transaction totaling approximately $600.0 million, which closed on March 28, 2006. We retained 100% of the equity interests in our CDO subsidiary that issued the CDO notes consisting of preference and common shares as well as 100% of the non-rated debt tranches. The notes issued by our CDO subsidiary are secured initially by a portfolio of whole loans, B Notes, mezzanine loans and CMBS. Our Manager acted as the collateral manager for our CDO subsidiary but did not receive any fees in connection therewith. We acted as the advancing agent in connection with the issuance of the CDO notes. As of December 31, 2006, our CDO subsidiary is leveraged as follows:

		Carrying Amount at 12/31/06			Stated Maturity		Interest Rate			Weighted Average Expected Life (years)
CDO I Bonds		$	508,500		3/25/2046		5.86	%		7.6

In March 2007, Wachovia Bank N.A., acted as the exclusive structurer and placement agent with respect to our second CDO transaction totaling $1.0 billion, which priced on March 2, 2006, and is expected to close on April 2, 2007. We intend to sell $880.0 million of bonds with an average cost of 90-day LIBOR plus 40.5 basis points and retain 100% of the equity interests in our CDO subsidiary that issued the CDO notes consisting of preference and common shares. The notes issued by our CDO subsidiary will be secured initially by a portfolio of whole loans, B Notes, mezzanine loans and CMBS. Our Manager will act as the collateral manager for our CDO subsidiary but will not receive any fees in connection therewith. We are the advancing agent in connection with the issuance of the CDO notes. In connection with the CDO transaction, we terminated 24 and partially unwound five effective cash flow hedges, or interest rate swaps with a total notional amount of approximately $398.4 million.

Mortgage Indebtedness

On December 14, 2005, Springhouse, one of our consolidated joint ~~venture~~ventures, ~~Springhouse Apartments, LLC,~~ obtained a $26.2 million mortgage loan in ~~connection~~conjunction with the acquisition of real estate located in Prince George’s County, Maryland. The loan is ~~collateralized by the aforementioned property, is~~ guaranteed by Bozzuto ~~and~~ Associates , Inc., or Bozzuto, our joint venture partner, ~~matures~~has ona maturity date of December 14, 2008, and bears interest at 30-day LIBOR plus 1.75%. As of December 31, ~~2006~~2008 and ~~December 31~~2007, ~~2005,~~ the outstanding balance was $25.68 million. The loan is secured by the Springhouse property and ~~$25~~there is no recourse to us.0 ~~million~~We are currently in the process of marketing the Springhouse property for sale and the loan, ~~respectively~~which matured on December 14, at2008, is in default. In the event we are unable to sell the property in a ~~rate~~short period of ~~7.10%~~time, we will be unable to satisfy the obligation of the mortgage and ~~6.12%~~may be required to (i) pay default interest after the maturity default, ~~respectively~~(ii) contribute additional capital to facilitate an extension and protect our interest, (iii) pay significant extension fees or (iv) seek financing from a different lender, which may not be available. We may also lose the property through foreclosure by the first mortgage holder. The occurrence of any of these events could further impair our position.

61On March 28, 2006, Loch Raven, one of our consolidated joint ventures, obtained a $29.2 million mortgage loan in conjunction with the acquisition of real estate located in Baltimore, Maryland. The loan is guaranteed by Bozzuto, our joint venture partner, matures on April 10, 2010, and bears interest at a fixed rate of 5.96%. The lender has exercised a call option on the note and the loan is now due on April 9, 2009. As of December 31, 2008 and 2007 the outstanding balance was $29.2 million. The loan is secured by the Loch Raven property and there is no recourse to us. As discussed in Note 3, in the third quarter of 2008, management made a decision to no longer fund operating deficits at the Loch Raven property, which will likely result in the first mortgage holder foreclosing on our position. We do not expect further losses as the net carrying value of Loch Raven assets and liabilities, including the mortgage payable, is less than zero after reflecting the impairment of long-lived assets recorded in 2008.

~~Table~~On May 4, 2007, we assumed a $36.3 million mortgage loan in conjunction with the Rodgers Forge foreclosure. As of ~~Contents~~December 31, 2007, we were in technical default of certain covenants in this loan. The loan had a maturity date of April 16, 2009 and bore interest equal to one-half of one percent (0.50%) above the Prime Rate. As of December 31, 2007, the outstanding balance was $36.3 million, which is included in liabilities held for sale in the consolidated balance sheet. Subsequent to December 31, 2007, we sold the Rodgers Forge property and paid off the mortgage loan in full.

On ~~March~~May 289, ~~2006~~2007, ~~our~~we ~~consolidated~~assumed ~~joint venture, Loch Raven Village Apartments-II, LLC, obtained~~ a $29103.2 9 million mortgage loan in ~~connection~~conjunction with the ~~acquisition~~Monterey offoreclosure. ~~real~~As ~~estate~~of ~~located~~December 31, ~~in Baltimore~~2007, ~~Maryland.~~we ~~The~~were ~~loan~~in default isof ~~collateralized~~certain bycovenants ~~the~~in ~~aforementioned~~this ~~property,~~loan. isThe ~~guaranteed~~loan byhad ~~Bozzuto~~a ~~and~~maturity ~~Associates~~date ~~Inc.,~~of ~~our joint venture partner, matures on April~~February 1, ~~2009,~~2008 and ~~bears~~bore interest at asix-month ~~fixed~~LIBOR ~~rate~~plus ~~of 5~~3.~~96%~~25. As of December 31, ~~2006~~2007, the outstanding balance was $26104.60 million, which is included in liabilities held for sale in the consolidated balance sheet. Subsequent to December 31, 2007, we sold the Monterey property and the buyer assumed the mortgage in full.

In January of 2008, we sold the Rodgers Forge property and paid off the $36.3 million mortgage loan in full. In March of 2008, we sold the Monterey property and the buyer assumed the $104.0 million mortgage loan in full.

Junior Subordinated Debentures

In July 2006, we completed the issuance of $50.0 million in unsecured trust preferred securities through a newly formed Delaware statutory trust, ~~CBRE~~RFC ~~Realty Finance~~ Trust I, or(“RFCT ~~CRFT~~ I”), which is one of our wholly-owned subsidiaries. The securities bear interest at a fixed rate of 8.10% for the first ten years ending July 2016. Thereafter the rate will float based on the 90-day LIBOR plus 249 basis points. The base management fee that we pay to our Manager pursuant to the management agreement is based on gross stockholders’ equity which our board of directors had previously determined to include the trust preferred securities. WeAs ~~paid~~ a ~~base~~result ~~management~~of ~~fee~~a onresolution ~~the~~of ~~trust~~our ~~preferred~~board ~~securities to the Manager from July 26, 2006 to September 27, 2006 in the amount~~ of ~~approximately $0.2 million. However~~directors, beginning September 28, 2006, we no longer pay such a fee on trust preferred securities to ~~the~~our Manager.

~~CRFT~~RFCT I issued $1.55 million aggregate liquidation amount of common securities, representing 100% of the voting common stock of ~~CRFT~~RFCT I to us for a total purchase price of $1.55 million. ~~CRFT~~RFCT I used the proceeds from the sale of trust preferred securities and the common securities to purchase our junior subordinated notes. The terms of the junior subordinated notes match the terms of the trust preferred securities. The notes are subordinate and junior in right of payment to all present and future senior indebtedness and certain other financial obligations. We realized net proceeds from the offering of approximately $48.8 million.

Contractual Obligations

The table below summarizes our contractual obligations as of December 31, ~~2006~~2008. The table excludes contractual commitments related to our derivatives, which we discuss in “Qualitative and Quantitative Disclosures about Market Risk,” and the incentive fee payable under the management agreement that we have with our Manager, which we discuss in “—Related Party Transactions ” because those contracts do not have fixed and determinable payments.

	Contractual commitments (in thousands) Payments due by period
	Contractual commitments(in thousands)Payments due by period
	Total		Less than1 year		1 - ~~3 years~~3years		3 - 5years		More than5 years
CDO I bonds payable	$	508,500	$	—	$	—	$	—	$	508,500
Wachovia Warehouse Facility		361,798		361,798		—		—		—
CDO II bonds payable		853,200		—		—		—		853,200
Bank of America Warehouse Facilities		57,304		57,304		—		—		—
Mortgage payable(1)		54,964		54,964		—		—		—
DB Warehouse Facility		14,336		14,336		—		—		—
Mortgage payable(1)		52,194		—		52,194		—		—
Trust preferred securities		50,000		—		—		—		50,000
Base management fees(2)		8,234		8,234		—		—		—
Total	$	1,466,664	$	54,964	$	—	$	—	$	1,411,700
Total	$	1,052,366	$	441,672	$	52,194	$	—	$	558,500

⁽¹⁾	Non-recourse to us.

~~(2)~~- ~~Calculated~~45 ~~only~~- ~~for the next 12 months based on our current gross stockholders’ equity, as defined in our management agreement.~~

Off-Balance Sheet Arrangements

As of December 31, ~~2006~~2008 and 2007, we had approximately $4111.04 million and $53.1 million, respectively, of equity interest in five joint ventures as described in Note 710 to our consolidated financial statements for the year ended December 31, ~~2006~~2008, included elsewhere in this Annual Report on Form 10-K. ~~As of December 31, 2005, we had no off-balance sheet arrangements.~~

Dividends

To qualify as a REIT, we must pay annual dividends to our stockholders of at least 90% of our net taxable income, determined before taking into consideration the dividends paid deduction and net capital gains. We intend to continue to pay regular quarterly dividends to our stockholders to the extent required to meet REIT requirements. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, which would only be paid out of available cash to the extent permitted under our secured credit facilities, we must first meet both our operating requirements and scheduled debt service on our warehouse lines and other debt payable. On December 17, 2008, we announced that our board of directors suspended the quarterly cash dividend in order to maintain our financial flexibility.

Related Party Transactions

Management Agreement

OnUpon completion of our June 9, 2005 private offering, we entered into a management agreement with our Manager, which ~~provides for~~was ansubsequently ~~initial~~amended ~~term~~and ~~through~~restated ~~December~~on April 3129, 2008, ~~with~~was ~~automatic~~further ~~one-year~~amended ~~extension~~on ~~options~~October 13, ~~for~~2008 ~~each anniversary date thereafter~~ and ishas ~~subject~~expired toby ~~certain~~its ~~termination~~own ~~rights.~~terms ~~After~~on ~~the~~December 31, ~~initial term~~2008, ~~our~~pursuant ~~independent~~to ~~directors~~which ~~will review~~ our Manager’s ~~performance~~provided ~~annually~~for ~~and~~ the day-to-day management ~~agreement~~of ~~may~~our beoperations ~~terminated~~and ~~subject~~received tosubstantial ~~certain~~fees ~~termination~~in connection ~~rights~~therewith. ~~Our~~The ~~executive~~management ~~officers~~agreement ~~own~~required ~~approximately~~our ~~26.1% of the~~ Manager. Weto ~~pay~~manage our ~~Manager~~business anaffairs ~~annual~~in ~~management~~conformity ~~fee~~with ~~monthly~~the inpolicies ~~arrears equal~~and tothe ~~1/12th~~investment ofguidelines ~~the~~that ~~sum~~are ofapproved ~~(i) 2.0%~~and ofmonitored by our ~~gross~~board ~~stockholders’~~of ~~equity~~directors. ~~(as~~Ray ~~defined~~Wirta, inour ~~the~~chairman, ~~management~~is ~~agreement),~~the orvice ~~equity,~~chairman of ~~the~~CBRE, ~~first~~Kenneth ~~$400~~J.0 ~~million~~Witkin, of our ~~equity~~chief executive officer and ~~(ii) 1.75%~~president and one of our ~~gross~~directors, ~~stockholders’~~is ~~equity~~the inexecutive anmanaging ~~amount~~director ~~in excess~~ of ~~$400.0~~our ~~million~~Manager and upMichael ~~to $800~~J.0 ~~million~~Melody, ~~and~~one ~~(iii) 1.5%~~ of our ~~gross~~former ~~stockholders’~~directors, ~~equity in~~is ~~excess~~the ofvice ~~$800.0~~chairman ~~million~~in CBRE/Melody. ~~Additionally,~~As ~~from~~of ~~July~~December 2631, ~~2006~~2008, ~~to September~~Mr. ~~27,~~Wirta ~~2006,~~does wenot ~~considered~~hold ~~the~~an ~~outstanding~~economic ~~trust~~interest ~~preferred~~in ~~securities~~our asManager ~~part~~and ofMessrs. ~~gross~~Witkin ~~stockholders’~~and Melody ~~equity~~and incertain ~~calculating~~of ~~the~~our ~~base~~other ~~management~~former ~~fee.~~executive ~~Our~~officers ~~Manager uses~~indirectly ~~the proceeds~~hold ~~from~~an ~~its~~economic ~~management~~interest ~~fee~~ in ~~part~~our toManager. Our ~~pay~~chairman ~~compensation~~and tochief ~~its~~executive ~~officers~~officer and ~~employees~~president ~~who, notwithstanding that certain of them~~ also ~~are~~serve ~~our~~as officers, ~~receive~~and/or nodirectors ~~cash~~of ~~compensation~~our ~~directly from us~~Manager. ~~For~~As ~~the~~a ~~year ended December 31~~result, ~~2006 and~~ the ~~period~~management ~~from~~agreement ~~June 9,~~between ~~2005~~us ~~through~~and ~~December 31,~~our ~~2005,~~Manager wewas ~~paid~~negotiated ~~approximately~~between ~~$6.3~~related ~~million~~parties, and ~~$2.7~~the ~~million~~terms, ~~respectively~~including fees payable, tomay ~~our~~not ~~Manager~~have ~~for~~been ~~the~~as ~~base~~favorable ~~management~~to ~~fee~~us ~~under~~as ~~the~~if ~~management~~it ~~agreement.~~had Asbeen ~~of December 31,~~negotiated ~~2006,~~with ~~$0.7~~an ~~million~~unaffiliated ofthird ~~management~~party. ~~fees~~Our ~~were~~executive ~~accrued~~officers and ~~constituted~~directors ~~the~~owned ~~management~~approximately ~~fee~~9.8% ~~payable~~of on our ~~balance~~Manager ~~sheet~~at December 31, 2008.

~~In addition~~Historically, towe ~~the~~have ~~base~~paid ~~management fee,~~ our Manager ~~may~~an ~~receive~~annual ~~quarterly~~management ~~incentive~~fee ~~compensation.~~monthly ~~The~~in ~~purpose~~arrears ofequal ~~the~~to ~~incentive~~1/12th ~~compensation~~of isthe ~~provide~~sum anof ~~additional~~(i) 2.0% ~~incentive~~of ~~for~~ our ~~Manager~~gross stockholders’ toequity ~~achieve targeted levels of Funds From Operations~~ (as defined in the management agreement) ~~(after~~, ~~the~~or ~~base~~equity, ~~management~~of ~~fee~~the ~~and~~first ~~before~~$400.0 ~~incentive~~million ~~compensation)~~of ~~and to increase~~ our ~~stockholder~~equity, ~~value~~(ii) 1.75% ~~Our~~of ~~Manager~~our ~~may~~gross ~~receive~~stockholders’ ~~quarterly~~equity ~~incentive compensation~~ in an amount ~~equal~~in toexcess ~~the product~~ of~~: (i) twenty-five~~ ~~percent~~$400.0 ~~(25%) of~~million ~~the~~and ~~dollar~~up ~~amount~~to by$800.0 ~~which~~million and (Aiii) ~~our~~1.5% ~~Funds From Operations (after the base management fee and before the incentive fee) per share~~ of our ~~common~~gross ~~stock~~stockholders’ ~~for~~equity ~~such~~in ~~quarter~~excess ~~(based on the weighted average number~~ of ~~shares~~$800.0 ~~outstanding~~million. ~~for~~Additionally, ~~such~~from ~~quarter) exceeds (B)~~July an26, ~~amount~~2006 ~~equal~~ to ~~(1)~~September ~~the~~27, ~~weighted~~2006, ~~average~~we ofconsidered the ~~price~~outstanding ~~per~~trust ~~share~~preferred ofsecurities ~~our~~as ~~common~~part ~~stock in our June 2005 private offering and the prices per share~~ of ~~our~~gross ~~common~~stockholders’ ~~stock~~ equity in ~~any subsequent~~calculating ~~offerings (including our IPO), multiplied by (2)~~ the ~~greater~~base ofmanagement ~~(a) 2~~fee.~~25%~~ orOur ~~(b) 0.75%~~Manager ~~plus~~used ~~one-fourth of~~ the proceeds ~~Ten~~from ~~Year~~its ~~Treasury~~management ~~Rate~~fee ~~(as~~in ~~defined~~part into ~~the~~pay ~~management~~compensation ~~agreement)~~to ~~for~~its ~~such~~officers ~~quarter,~~and ~~multiplied~~employees. byFor ~~(ii)~~ the ~~weighted~~ ~~average~~years ~~number~~ended ofDecember 31, ~~shares~~2008 ofand ~~our~~2007, ~~common~~respectively, ~~stock~~we ~~outstanding~~paid ~~during~~$5.4 ~~the~~million ~~such quarter~~and $7.8 Wemillion ~~will~~to ~~record~~our ~~any~~Manager ~~incentive~~for ~~fees~~the asbase a management fee ~~expense~~under inthis ~~the~~agreement. ~~period~~As ~~when earned and when payments~~ of ~~such~~December 31, ~~amounts~~2008 ~~have become probable~~ and ~~reasonably estimable~~2007, inrespectively, ~~accordance~~$0.2 ~~with~~million ~~the~~and ~~management agreement~~$0.5 Nomillion ~~amounts~~of ~~had~~management ~~been~~fees ~~paid or~~ were ~~payable for incentive compensation under the management agreement as of December 31, 2006 and December 31, 2005~~accrued.

In addition to the base management fee, our Manager was eligible to receive quarterly incentive compensation. The purpose of the incentive compensation was to provide an additional incentive for our Manager to achieve targeted levels of Funds From Operations (as defined in the management agreement) (after ~~also~~the ~~provides~~base ~~that~~management wefee ~~will~~and ~~reimburse~~before incentive compensation) and to increase our stockholder value. Our Manager ~~for~~was ~~various~~eligible ~~expenses~~to ~~incurred~~receive quarterly incentive compensation in an amount equal to the product of: (i) twenty-five percent (25%) of the dollar amount by which (A) our ~~Manager~~Funds orFrom ~~its~~Operations ~~affiliates~~(after ~~for~~the ~~documented~~base ~~expenses~~management fee and before the incentive fee) per share of our ~~Manager~~common orstock ~~its~~for ~~affiliates~~such ~~incurred~~quarter (based on ~~our~~the ~~behalf,~~weighted ~~including~~average ~~but~~number ~~not~~of ~~limited~~shares outstanding for such quarter) exceeds (B) an amount equal to ~~costs~~(1) the ~~associated~~weighted ~~with~~average ~~formation~~of ~~and~~the ~~capital~~price per ~~raising~~share ~~activities~~of ~~and~~our ~~general~~common stock in our June 2005 private offering and ~~administrative~~the ~~expenses~~prices per share of our common stock in any subsequent offerings (including our IPO), multiplied by (2) the greater of (a) 2.25% ~~Without~~or ~~regard~~(b) 0.75% toplus one-fourth of the ~~amount~~Ten Year Treasury Rate (as defined in the management agreement) for such quarter, multiplied by (ii) the weighted average number of ~~compensation~~shares of our common stock outstanding during the such quarter. We record any incentive fees as a management ~~received~~fee ~~under~~expense in the period when earned and when payments of such amounts have become probable and reasonably estimable in accordance with the management agreement. As of December 31, 2008 and 2007, respectively, no amounts were paid or were payable to our Manager for the incentive management fee under this agreement.

63 The management agreement also provided that we would reimburse our Manager for various expenses incurred by our Manager or its affiliates for documented expenses of our Manager or its affiliates incurred on our behalf, including but not limited to costs associated with formation and capital raising activities and general and administrative expenses. Without regard to the amount of compensation received under the management agreement, our Manager was responsible for the salaries and bonuses of its officers and employees. As of December 31, 2008 and 2007, respectively, $0.2 million and $0.1 million of expense reimbursements were accrued and are included in other liabilities.

Pursuant to the management agreement, after April 30, 2008, CBRE and CBRE Melody & Company may compete with us with respect to the acquisition and finance of real estate-related loans, structured finance debt investments and CMBS. In addition, we were responsible for severance of all employees of our Manager, including certain of our then executive officers, an obligation that we estimated would not exceed $2.9 million.

The management agreement with our Manager expired by its terms on December 31, 2008. The expiration of the management agreement ends our affiliation with CBRE and affiliates of CBRE effective December 31, 2008. On December 15, 2008, we, our Manager and CBRE|Melody entered into the “Termination Agreement”. In addition to terminating the Amended and Restated Management Agreement, dated April 29, 2008, and acknowledging certain survival provisions in the Amended Management Agreement, the parties to the Termination Agreement acknowledged and/or agreed, among other things, that (i) the termination of the Amended Management Agreement will be effective as of December 31, 2008, (ii) there will be no termination fee in connection with the Termination Agreement, (iii) the Manager will make payment to us for certain accrued bonuses, (iv) we will make a payment to the Manager of (x) the final installment of the base management fee earned or accrued by our Manager as of December 31, 2008, (y) the reimbursement of CBRE’s operating expenses, and (z) the reimbursement of certain 2008 personnel bonuses, each on or before February 15, 2009, and (v) we will hire all employees of the Manager effective January 1, 2009.

Collateral Management Agreements

In connection with the closing of CDO I on March 28, 2006, the CDO I issuer, RFC CDO 2006-1 Ltd., entered into a collateral management agreement with our Manager (the “2006 Collateral Management Agreement”). Pursuant to this agreement, our Manager had agreed to provide certain advisory and administrative services in relation to the collateral debt securities and other eligible investments securing the CDO notes. This collateral management agreement provides for a senior collateral management fee, payable monthly in accordance with the priority of payments as set forth in the indenture, equal to 1/12 of 0.10% per annum of the net outstanding portfolio balance, and an additional subordinate collateral management fee, payable monthly in accordance with the priority of payments as set forth in the indenture, equal to 1/12 of 0.15% per annum of the net outstanding portfolio balance. Net outstanding portfolio balance is the sum of the (i) aggregate principal balance of the collateral debt securities, excluding defaulted securities, (ii) aggregate principal balance of all principal proceeds held as cash and eligible investments in certain

- 46 -

~~our~~accounts, ~~Manager~~and is(iii) with ~~responsible~~respect ~~for~~to the ~~wages~~defaulted ~~and~~securities, ~~salaries~~the ofcalculation ~~its~~amount ~~officers~~of ~~and~~such ~~employees~~defaulted securities. ~~For~~Effective March 28, 2006, the collateral ~~year~~manager ~~ended~~agreed ~~December 31,~~to ~~2006~~remit ~~and~~to us the ~~period~~collateral ~~from May 10,~~management ~~2005~~fees ~~(inception)~~that ~~through~~it is entitled to receive. At December 31, ~~2005~~2008, we ~~paid~~owned orall ~~had~~of ~~payable~~the ~~$0.8~~non-investment ~~million~~grade bonds, preferred equity and $0equity in CDO I.5 ~~million,~~The ~~respectively,~~senior tocollateral ~~our~~management fee ~~Manager~~and ~~for~~the ~~expense~~subordinate ~~reimbursements,~~collateral ofmanagement ~~which~~fee $0is allocated to us.~~1 million~~ ~~were~~As ~~accrued~~of December 31, 2008 and ~~are~~2007, ~~included~~we indid ~~other liabilities~~not onreimburse our ~~balance~~Manager ~~sheet~~for asany ofexpenses ~~December 31,~~to ~~2006~~our Manager under such collateral management agreement.

~~For~~On ~~the period prior to May~~December 1017, ~~2005 (inception)~~2008, we ~~reimbursed expenses~~entered tointo an ~~affiliate~~Assignment ofand Assumption Agreement with our Manager, ~~CBRE/Melody,~~(the ~~$1.3~~“2006 ~~million,~~Assignment ~~including~~Agreement”) $0in connection with CDO I.9 ~~million~~Pursuant ofto ~~costs~~the ~~associated~~2006 ~~with~~Assignment ~~capital~~Agreement, ~~raising~~our ~~activities~~Manager agreed to assign and ~~$0.4~~delegate ~~million~~to us all of ~~expenses~~its ~~relating~~rights toand ~~our~~obligations ~~formation~~under the 2006 Collateral Management Agreement, effective on January 1, 2009.

~~GEMSA~~We ~~Servicing~~will receive the senior collateral management fee and the subordinated collateral management fee if we are in compliance with the interest coverage and overcollateralization coverage tests under CDO I. However, we will receive only the senior collateral management fee if we are not in compliance with the interest coverage and overcollateralization coverage tests under CDO I.

~~GEMSA~~In ~~Loan~~connection ~~Services~~with the closing of CDO II on April 2, L2007, the CDO II issuer, RFC CDO 2007-1 Ltd.P, entered into a collateral management agreement with our Manager (the “2007 Collateral Management Agreement”). Pursuant to this agreement, ~~which~~our weManager had agreed to provide certain advisory and administrative services in relation to the collateral debt securities and other eligible ~~refer~~investments securing the CDO II notes. This collateral management agreement provides for a senior collateral management fee, payable monthly in accordance with the priority of payments as set forth in the indenture, equal to 1/4 of 0.15% per annum of the net outstanding portfolio balance, and an additional subordinate collateral management fee, payable monthly in accordance with the priority of payments as ~~GEMSA~~set forth in the indenture, equal to 1/4 of 0.20% per annum of the net outstanding portfolio balance. Net outstanding portfolio balance is ~~utilized~~the bysum usof the (i) aggregate principal balance of the collateral debt securities, excluding defaulted securities, (ii) aggregate principal balance of all principal proceeds held as acash ~~loan~~and ~~servicer~~eligible investments in certain accounts, and (iii) with respect to the defaulted securities, the calculation amount of such defaulted securities. ~~GEMSA~~The collateral manager agreed to remit to us the collateral management fees that it is aentitled ~~joint~~to ~~venture~~receive. ~~between~~At ~~CBRE/Melody~~December 31, 2008, we owned all of the non-investment grade bonds, preferred equity and GEequity ~~Capital~~in ~~Real~~the ~~Estate~~CDO. ~~GEMSA~~The issenior acollateral ~~rated~~management ~~master~~fee and ~~primary~~the ~~servicer~~subordinate collateral management fee are allocated to us. ~~Our~~As ~~fees~~of December 31, 2008 and 2007, we did not reimburse our Manager for ~~GEMSA’s~~any ~~services~~expenses ~~are~~to atour ~~market~~Manager ~~rates~~under such collateral management agreement.

~~For~~On December 12, 2008, RFC CDO 2007-1 Ltd. entered into an Amendment Number One to the ~~year~~Collateral ~~ended~~Management ~~December 31~~Agreement (the “Amendment”) with CBRE Realty Finance Management, ~~2006~~LLC, and us as the “collateral ~~period~~manager” ~~May 10~~and consented to by MBIA Insurance Corporation, ~~2005~~as controlling class of CDO II bondholders (~~inception~~“MBIA”). ~~through~~The ~~December 31,~~Amendment ~~2005,~~establishes wethree ~~paid~~additional orcollateral ~~had~~manager ~~payable~~termination anevents which may be enforced in ~~aggregate~~the sole discretion of ~~approximately~~MBIA. ~~$82,000~~The ~~and~~first ~~$2,000,~~additional ~~respectively,~~termination event relates to ~~GEMSA~~the indeparture ~~connection~~of ~~with~~certain ~~its~~key ~~loan~~persons ~~servicing~~from the collateral manager (or a successor thereof), while the second additional termination event is predicated on the continuing satisfaction of a ~~part~~collateral coverage test established by the Amendment. The third additional termination event relates to the continuing satisfaction of a particular collateral coverage test under our ~~portfolio~~CDO I. ~~Such~~In ~~fees~~addition, ~~were~~the atcollateral ~~market~~manager ~~rates~~has agreed to (i) cause the trustee of the CDO I and the trustee of the CDO II to provide certain additional reports concerning the above-noted tests to MBIA and (ii) pay the trustee of the CDO II a monthly fee for performing such additional reporting services.

On December 17, 2008, we entered into an Assignment and Assumption Agreement with our Manager (the “2007 Assignment Agreement”) in connection with CDO II. Pursuant to the 2007 Assignment Agreement, our Manager agreed to assign and delegate to us all of its rights and obligations under the 2007 Collateral Management Agreement, effective on January 1, 2009.

We will receive the senior collateral management fee and the subordinated collateral management fee if we are in compliance with the interest coverage and overcollateralization coverage tests under CDO II. However, we will receive only the senior collateral management fee if we are not in compliance with the interest coverage and overcollateralization coverage tests under CDO II.

Affiliates

InAs ~~connection with our June 2005 private offering, we entered into a license agreement with CBRE and one~~ of ~~its affiliates pursuant to which they granted us a non-exclusive~~ December 31, ~~royalty-free license to use the name “CBRE.” Under this agreement~~2008, wean ~~have~~affiliate aof ~~right to use the “CBRE” name, as long as~~ our Manager, orCBRE ~~one~~Melody of ~~its~~ ~~affiliates~~Texas, ~~remains~~LP ~~our manager~~ and ~~our~~its ~~manager remains an affiliate of CBRE. Other than with respect to this limited license~~principals, weowned ~~have no legal right to the “CBRE” name~~1.1 million ~~CBRE~~shares ~~has~~(which ~~the~~were ~~right~~purchased toin ~~terminate~~our ~~the~~June ~~license~~2005 ~~agreement~~private ifoffering) ~~its affiliate~~of ~~is no longer acting as~~ our ~~manager.~~common Instock, ~~the~~300,000 ~~event~~shares ~~the~~of ~~management~~restricted ~~agreement~~common ~~is terminated~~stock, and wehad ~~would~~options ~~be required~~ to ~~change~~purchase ~~our~~an ~~name~~additional to500,000 ~~eliminate~~shares ~~the use~~ of ~~the~~common ~~words “CBRE~~stock.”

AsGEMSA ofServicing December 31, 2006, an affiliate of the Manager, CBRE Melody of Texas, LP and its principals, owned 1,100,000 shares of our common stock (which were purchased in our June 2005 private offering), 300,000 shares of restricted common stock, and had options to purchase an additional 500,000 shares of common stock.

GEMSA Loan Services, L.P., which we refer to as GEMSA, is utilized by us as a loan servicer. GEMSA is a joint venture between CBRE|Melody and GE Capital Real Estate. GEMSA is a rated master and primary servicer. Our fees for GEMSA’s services are at what we believe to be market rates. For the years ended December 31, 2008 and 2007, we paid or had payable an aggregate of approximately $0.3 million to GEMSA in connection with its loan servicing of a part of our portfolio.

CBRE License Agreement

In connection with our June 2005 private offering, we entered into a license agreement with CBRE and one of its affiliates pursuant to which they granted us a non-exclusive, royalty-free license to use the name “CBRE.” Other than with respect to this limited license, we have no legal right to the “CBRE” name. After the management agreement expired by its terms on December 31, 2008, we changed our name and no longer have the right to use the “CBRE” mark in our name or in the name of any of our subsidiaries.

Torto Wheaton Research License Agreement

Torto Wheaton Research, or TWR, is a wholly-owned subsidiary of CBRE that provides research products and publications to us under a license agreement. The cost of this license agreement is at what we believe to be market rates. For the years ended December 31, 2008 and 2007, we paid or had payable an aggregate of approximately $0.1 million in licensing fees to TWR in connection with the license agreement.

Funds from Operations

Funds from Operations, or FFO, which is a non-GAAP financial measure, is a widely recognized measure of REIT performance. We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts, or NAREIT, which may not be comparable to FFO reported by other REITs that do not compute FFO in accordance with the NAREIT definition, or that interpret the NAREIT definition differently than we do. The revised White Paper on FFO approved by the Board of Governors of NAREIT in April 2002 defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales of properties, plus real estate related depreciation and amortization and after adjustments for unconsolidated/uncombined partnerships and joint ventures. We present FFO because we consider it an important supplemental measure of our operating performance and believe that it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs. We also use FFO as one of several criteria to determine performance-based equity bonuses for members of our senior management team. FFO is intended to exclude GAAP historical cost depreciation and amortization of real estate and related assets, which assumes that the value of real estate assets diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. Because FFO excludes depreciation and amortization unique to real estate, gains and losses from property dispositions and extraordinary items, ~~it provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, interest costs,~~ providing perspective not immediately apparent from net income. We consider gains and losses on the sale of debt investments to be a normal part of its recurring operations and therefore does not exclude such gains or losses while arriving at FFO. FFO does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income (determined in accordance with GAAP), as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make cash distributions.

64- 47 -

~~FFO~~ it ~~for~~provides ~~the~~a performance measure that, when compared year ~~ended~~over ~~December 31~~year, ~~2006~~reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, interest costs, providing perspective not immediately apparent from net income. We consider gains and losses on the ~~period~~sale ~~May 10,~~of ~~2005~~debt ~~(inception)~~investments ~~through~~to be a normal part of its recurring operations and therefore does not exclude such gains ~~December 31,~~or ~~2005~~losses ~~are~~while arriving at FFO. FFO does not represent cash generated from operating activities in accordance with GAAP and should not be considered as ~~follows~~an alternative to net income (~~dollars~~determined in ~~thousands~~accordance with GAAP):, as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make cash distributions.

	For the Year EndedDecember 31, 2006			For the Period May 10, 2005 (inception) through December 31, 2005
Funds from operations:
Net income	$	13,743		$	1,052
Adjustments:
Depreciation		1,141			—
Gain (losses) from debt restructuring		—			—
Gain (losses) from sale of property		—			—
Funds from discontinued operations		—			—
Real estate depreciation and amortization—unconsolidated ventures		2,027			—
Funds from operations(1)	$	16,911		$	1,052
Cash flows provided by operating activities	$	7, 925		$	4, 752
Cash flows used in investment activities	$	(860,191	)	$	(564,998	)
Cash flows provided by financing activities	$	820,822		$	609,623

FFO for the years ended December 31, 2008, 2007 and 2006 are as follows (dollars in thousands):

(1) FFO for the period May 10, 2005 (inception) through December 31, 2005 includes one-time inception costs of $931.


	For the Year Ended December 31, 2008			For the Year Ended December 31, 2007			For the Year Ended December 31, 2006
Funds from operations:
Net income (loss)	$	(157,031	)	$	(70,766	)	$	13,743
Adjustments:
Gain from sale of property – discontinued operations		(6,780	)		—			—
Real estate depreciation and amortization – wholly-owned		49
Real estate depreciation and amortization – consolidated joint ventures		745			1,233			489
Real estate depreciation and amortization – unconsolidated joint ventures		5,624			10,391			2,027
Real estate depreciation and amortization – discontinued operations		476			838			1,003

Funds from operations	$	(156,917	)	$	(58,304	)	$	17,262

Cash flows provided by operating activities	$	12,648		$	29,407		$	7,925
Cash flows provided by (used in) investment activities	$	123,863		$	(542,090	)	$	(860,191	)
Cash flows provided by (used in) financing activities	$	(139,331	)	$	521,165		$	820,822

Critical Accounting Policies

Our critical accounting policies are those that have the most impact on the reporting of our financial condition and results of operations and those requiring significant judgments and estimates. We believe that our judgments and assessments are consistently applied and produce financial information that fairly presents our results of operations. Our most critical accounting policies concern our accounting for investments, accounting for derivatives, accounting for FIN 46R and valuation of ~~our~~ investments, ~~revenue~~CDOs, ~~recognition and~~junior ~~derivative~~subordinated ~~valuation~~securities and ~~are as follows~~derivatives.

Loans and Other Lending Investments

Loans held for investment are intended to be held to maturity and, accordingly, are carried at amortized cost, including unamortized loan origination costs and fees, and net of repayments and sales of partial interests in loans, unless such loan or investment isare deemed to be impaired. At such time as we invest in ~~joint~~real ~~venture~~estate ~~and other interests that allow us to participate in a percentage of the underlying property’s cash flows from operations and proceeds from a sale or refinancing~~loans, we ~~must~~ determine whether such investment should be accounted for as a loan, real estate investment, or equity method joint venture in accordance with AICPA Practice Bulletin No. 1 on acquisition, development , and construction, or (ADC,) arrangements.

65We evaluate our assets on a regular basis to determine if they continue to satisfy our investment criteria. Subject to certain restrictions applicable to REITs and to maintain our exclusion from regulation as an investment company, we may sell investments opportunistically and use the proceeds of any such sales for debt reduction, additional acquisitions or working capital purposes.

Specific valuation allowances are established for impaired loans based on the fair value of collateral on an individual loan basis. The fair value of the collateral is determined by an evaluation of operating cash flow from the property during the projected holding period, and estimated sales value computed by applying an expected capitalization rate to the stabilized net operating income of the specific property, less selling costs, discounted at market discount rates. If upon completion of the valuation, the fair value of the underlying collateral securing the impaired loan is less than the net carrying value of the loan, an allowance is created with a corresponding charge to the provision for loan losses. The allowance for each loan is maintained at a level we believe is adequate to absorb probable losses. As of December 31, 2006, no impairment has been identified and no valuation allowance has been established.

Our Manager evaluates our assets on a regular basis to determine if they continue to satisfy our investment criteria. Subject to certain restrictions applicable to REITs and to maintain our exclusion from regulation as an investment company, we sell our investments opportunistically and use the proceeds of any such sales for debt reduction, additional acquisitions or working capital purposes.

Variable Interest Entities

In December 2003, ~~Financial Accounting Standards Board Interpretation, or FIN, No. 46R “Consolidation of Variable Interest Entities,”~~ or FIN 46R, was issued as a modification of FIN No. 46 “Consolidation of Variable Interest Entities.” FIN 46R, which became effective in the first quarter of 2004, clarified the methodology for determining whether an entity is a Variable Interest Entity, or VIE and the methodology for assessing who is the primary beneficiary of a VIE. VIEs are defined as entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. If an entity is determined to be a VIE, it must be consolidated by the primary beneficiary. The primary beneficiary is the enterprise that absorbs the majority of the entity’s expected losses, receives a majority of the entity’s expected residual returns, or both. Generally, expected losses and expected residual returns are the expected negative and positive variability, respectively, in the fair value of the variable interest entities’ net assets.

When we make an investment, we assess whether we have a variable interest in a VIE and, if so, whether we are the primary beneficiary of the VIE. These analyses require considerable judgment in determining the primary beneficiary of a VIE since they involve subjective probability weighting of various cash flow scenarios. Incorrect assumptions or estimates of future cash flows may result in an inaccurate determination of the primary beneficiary. The result could be the consolidation of an entity acquired or formed in the future that would otherwise not have been consolidated or the non-consolidation of such an entity that would otherwise have been consolidated.

~~FIN~~We ~~46R~~have ~~has certain~~evaluated ~~scope~~our ~~exceptions,~~investments ~~one of which provides that an enterprise that holds a variable interest~~ in ~~a qualifying special-purpose entity~~CMBS, orloans ~~QSPE, does not consolidate that entity unless that enterprise has unilateral ability to cause the entity to liquidate. SFAS No. 140 “Accounting for Transfers~~ and ~~Servicing~~other oflending ~~Financial~~investments, ~~Assets~~ and ~~Extinguishments~~joint ofventure ~~Liabilities,”~~interests ~~or SFAS 140, provides the requirements for an entity~~ to bedetermine ~~considered~~whether athey ~~QSPE.~~are Tovariable ~~maintain~~interests ~~the QSPE exception, the entity must continue to meet the QSPE criteria both initially and~~ in ~~subsequent periods~~VIEs. AnFor ~~entity’s~~each ~~QSPE~~of ~~status~~the ~~can be impacted in future periods by activities by its transferor(s) or other involved parties~~investments, ~~including~~we ~~the~~have ~~manner~~evaluated ~~in which~~the ~~certain~~sufficiency ~~servicing~~of ~~activities are performed. To~~ the ~~extent~~entities’ ~~our~~equity ~~CMBS~~investment ~~investments~~at ~~were~~risk ~~issued by an entity that meets the requirements~~ to beabsorb ~~considered~~expected ~~a QSPE~~losses, weand ~~record~~whether ~~the~~as ~~investments~~a ~~at purchase price paid. To the extent the underlying entities are not QSPEs~~group, wedoes ~~follow~~ the ~~guidance~~equity ~~set~~have ~~forth in FIN 46R as~~ the ~~entities~~characteristics ~~would~~of bea ~~considered~~controlling ~~VIEs~~financial interest.

WeFIN ~~have~~46R ~~analyzed~~has ~~the~~certain ~~governing~~scope ~~pooling and~~exceptions, ~~servicing~~one ~~agreements~~of ~~for~~which ~~each~~provides ofthat ~~our~~an ~~CMBS~~enterprise ~~investments~~that ~~and~~holds ~~believe~~a variable interest in a qualifying special-purpose entity (“QSPE”) does not consolidate that ~~the~~entity ~~terms~~unless ~~are~~that ~~industry~~enterprise ~~standard~~has ~~and~~unilateral ~~are~~ability ~~consistent~~to ~~with~~cause the ~~QSPE~~entity ~~criteria~~to liquidate. ~~However~~SFAS No. 140 (“SFAS 140”) “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” ~~there~~provides isthe ~~uncertainty~~requirements ~~with~~for ~~respect~~an entity to be considered a QSPE. ~~treatment~~To ~~due~~maintain the QSPE exception, the entity must continue to ~~ongoing~~meet ~~review~~the byQSPE ~~accounting~~criteria both initially and in subsequent periods. An entity’s QSPE ~~standard~~status ~~rulemakers,~~can ~~potential~~be ~~actions~~impacted in future periods by ~~various~~activities ~~parties~~by its transferor(s) or other involved ~~with~~parties, including the ~~QSPE,~~manner asin ~~discussed~~which ~~above,~~certain asservicing ~~well~~activities asare ~~varying~~performed. ~~and~~To ~~evolving~~the ~~interpretations~~extent ofour CMBS investments were issued by an entity that meets the ~~QSPE~~requirements ~~criteria~~to ~~under~~be ~~SFAS~~considered ~~140.~~a ~~Additionally~~QSPE, ~~accounting~~we ~~standard~~record ~~rulemakers~~the ~~continue~~investments ~~to review~~at purchase price paid. To the ~~FIN~~extent ~~46R~~the ~~provisions~~underlying ~~related~~entities toare not QSPEs, we follow the ~~computations~~guidance ~~used~~set toforth ~~determine~~in FIN 46R as the ~~primary~~entities ~~beneficiary~~would ofbe aconsidered ~~VIE~~VIEs.

We have ~~identified~~analyzed ~~one mezzanine~~the ~~loan~~governing aspooling aand ~~variable~~servicing ~~interest~~agreements infor aeach ~~VIE~~of ~~and~~its ~~has~~CMBS ~~determined~~investments and believe that wethe terms are ~~not~~industry standard and are consistent with the ~~primary~~QSPE ~~beneficiary~~criteria. ofHowever, ~~this~~there ~~VIE~~is ~~and~~uncertainty aswith ~~such~~respect to QSPE treatment due to ongoing review by accounting standard setters, potential actions by various parties involved with the ~~VIE~~QSPE, ~~should~~as ~~not~~discussed beabove, ~~consolidated~~as inwell ~~our~~as ~~consolidated~~varying and ~~financial~~evolving ~~statements~~interpretations of the QSPE criteria under SFAS 140. ~~Our~~Additionally, ~~maximum~~the ~~exposure~~standard setters continue to ~~loss~~review ~~would~~the ~~not exceed~~FIN 46R provisions related to the ~~carrying~~computations ~~amount~~used ofto ~~this~~determine ~~investment~~the primary beneficiary of ~~$40.3~~a ~~million~~VIE. Our maximum exposure to loss, ~~including CMBS,~~ as a result of our investments in these ~~VIEs~~CMBS investments was $~~262~~54.6 million and $279 million as of December 31, ~~2006~~2008 and 2007, respectively.

66- 48 -

WeThe ~~have~~financing ~~determined~~structures, including loans and other lending investments, that ~~two~~we offer to borrowers on certain of our ~~joint~~loans ~~venture~~involve ~~investments~~the ~~are~~creation ~~VIEs~~of inentities ~~which~~that wecould ~~are~~be deemed toVIEs beand, ~~the primary~~therefore, ~~beneficiary~~could ~~and~~be ~~under~~subject to FIN 46R. We have ~~consolidated~~identified ~~these~~one ~~investments~~mezzanine loan as ~~real~~a ~~estate~~variable ~~investments.~~interest ~~The~~in ~~primary~~a ~~effect~~VIE ofand ~~the~~have ~~consolidation~~determined ~~is the requirement~~ that we ~~reflect~~are not the ~~gross~~primary beneficiary ~~real~~of ~~estate~~this ~~assets~~VIE and ~~the~~as ~~gross~~such ~~mortgage~~the ~~loan~~VIE ~~payable~~should ~~of these~~not ~~entities~~be consolidated in our consolidated financial statements. The loan is for a mixed use development project. Our maximum exposure to loss would not exceed the carrying amount of this investment of $0.

~~Valuation~~We have determined that two of our joint venture investments are VIEs in which we are deemed to be the primary beneficiary and ~~Impairment~~under FIN 46R have consolidated these investments. The primary effect of ~~Commercial~~the ~~Mortgage-Backed~~consolidation ~~Securities~~is that we reflect the real estate assets, mortgage loan payable, property operating revenue, and property operating expenses related to these entities in our consolidated financial statements.

~~CMBS~~Fair ~~are~~Value ~~classified~~Measurements as available-for-sale securities and are carried on our balance sheet at fair value. As a result, changes in fair value are recorded as a balance sheet adjustment to accumulated other comprehensive income, which is a component of stockholders’ equity, rather than through our income statement. Estimated fair values are based on market prices from a third party that actively participate in the CMBS market. We also use a discounted cash flow model that utilizes prepayment and loss assumptions based upon historical experience, economic factors and the characteristics of the underlying cash flow in order to substantiate the fair value of the securities. The assumed discount rate is based upon the yield of comparable securities. We also may, under ~~certain~~SFAS ~~circumstances,~~157 ~~adjust these valuations based on our knowledge of the securities~~ and ~~the~~SFAS ~~underlying~~159 collateral. These valuations are subject to significant variability based on market conditions, such as interest rates and credit spreads. Changes in market conditions, as well as changes in the assumptions or methodology used to determine fair value, could result in a significant increase or decrease in the recorded amount of our investment. As fair value estimates may vary to some degree, we must make certain judgments and assumptions about the appropriate price used to calculate the fair values for financial reporting purposes. Different judgments and assumptions could result in different valuations. If available-for-sale securities were classified as trading securities, there could be substantially greater volatility in earnings from period-to-period as these investments would be marked to market and any reduction in the value of the securities versus the previous carrying value would be considered an expense on our income statement.

InWe ~~accordance~~apply ~~with~~the ~~Emerging~~provisions ~~Issues~~of ~~Task~~SFAS ~~Force~~No. 157, orwhich ~~EITF,~~establishes ~~99-20~~a fair value hierarchy, wegiving ~~also~~the ~~assess~~highest ~~whether~~priority ~~unrealized~~to ~~losses~~quoted onprices ~~securities,~~in ifactive ~~any,~~markets ~~reflect~~and the alowest ~~decline~~priority into ~~value which~~unobservable data. SFAS 157 is ~~other~~applicable ~~than~~to ~~temporary~~our ~~and~~CMBS, ~~accordingly~~derivatives, ~~write~~collateralized ~~the~~debt ~~impaired~~obligations, ~~security~~junior ~~down~~subordinated tonotes ~~its~~and ~~value~~collateral ~~through~~dependent ~~earnings~~loans. ~~For~~We ~~example,~~also aapply ~~decline~~the inprovisions ~~value~~of isSFAS ~~deemed~~No. 159, which allows us to bemeasure ~~other~~certain ~~than~~financial ~~temporary~~assets ifand itfinancial isliabilities ~~probable~~at ~~that~~fair wevalue. ~~will~~We behave ~~unable~~elected toSFAS ~~collect~~159 for all ~~amounts~~CDO ~~due according~~bonds tobelow AAA rating at the ~~contractual~~date ~~terms~~of issuance, $50 million of ajunior ~~security~~subordinated ~~which~~debentures ~~was~~and ~~not~~all ~~impaired~~CMBS investments rated below AAA at the date of acquisition. ~~Temporary~~Our ~~declines~~intent inis ~~value~~to hold CMBS, derivatives, CDO bonds and junior subordinated notes to maturity, therefore we believe the unrealized gains and losses are generally ~~result~~not reflective of the economic consideration we expect to be realized from holding them to maturity but rather are a product of short-term fluctuations in fair value due to changes in ~~market~~credit ~~factors,~~spreads ~~such~~and asother market conditions. Our CDO bonds are in compliance with all interest ~~rates~~coverage and over collateralization tests at December 31, or2008, ~~from~~therefore ~~certain~~we ~~macroeconomic~~believe ~~events~~our underlying investment portfolio will generate sufficient cash flows to repay our CDO bonds and as a result, ~~including~~we would not expect to ultimately realize the current unrealized gains on these securities. Our CMBS portfolio has experienced below market ~~disruptions~~credit defaults, minimal downgrades and ~~supply~~no adverse changes in cash flows, ~~which~~therefore dowe expect the majority of these unrealized losses will not ~~directly~~be ~~impact~~realized ~~our~~as we have the ability and intent to ~~collect~~hold ~~amounts~~these ~~contractually~~investments ~~due~~to maturity. ~~Significant~~For ~~judgment~~derivative instruments, we plan to hold these instruments until maturity at which their fair value will be zero, preventing current unrealized losses from being realized. Our expectation of the ultimate realization of unrealized gains and losses is ~~required~~based inon ~~this~~our ~~analysis~~current estimates and outlook. ToA ~~date~~prolonged continuation of current market conditions, nofurther ~~such~~deterioration ~~write-downs~~of real estate market or other market factors outside of our control could have ~~been~~a ~~made~~significant impact on whether we will ultimately realize unrealized gains or losses on financial instruments.

At December 31, 2008, 4% of our assets and 20% of our liabilities were measured at fair value using unobservable inputs.

Valuation and Accounting for CMBS

CMBS are classified as trading securities as of December 31, 2008, in connection with the adoption of SFAS 159 and available-for-sale securities at December 31, 2007 and are carried on our balance sheet at fair value. Prior to the adoption of Statement of Financial Accounting Standards No. 159 on January 1, 2008 when CMBS were classified as held for sale, in accordance with Emerging Issues Task Force, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets,” or EITF Issue 99-20, we assessed whether unrealized losses on securities, if any, reflect a decline in value which is other than temporary and, accordingly, writes the impaired security down to its value through earnings. For example, a decline in value is deemed to be other than temporary if it is probable that we will be unable to collect all amounts due according to the contractual terms of a security which was not impaired at acquisition. Temporary declines in value generally result from changes in market factors, such as market interest rates, or from certain macroeconomic events, including market disruptions and supply changes, which do not directly impact our ability to collect amounts contractually due. Additionally, for an impairment to be temporary, we must demonstrate the intent and ability to hold the investments through at least their anticipated recovery period. Significant judgment is required in this analysis. No such write-downs were made through December 31, 2007.

Our primary basis for estimating fair values for CMBS is using indicative prices from third parties that actively participate in the CMBS market. We receive non-binding quotes from established financial institutions, which may range from one to four quotes for each investment, and select a fair value using the quotes received based on a methodology that is applied on a consistent basis each reporting period. These quotations are subject to significant variability based on market conditions, such as interest rates, liquidity, trading activity and credit spreads. We generally do not adjust values from broker quotes received. In the event we are unable to obtain any quotes from market participants or if in our judgment we believe quotes received are inaccurate, we estimate fair value using internal models that consider, among other things, the CMBX index, expected cash flows, known and expected defaults and rating agency reports. Changes in market conditions, as well as changes in the assumptions or methodology used to determine fair value, could result in a significant increase or decrease in the recorded amount of our investment. As of December 31, 2008 and 2007, $4.3 million and $0 CMBS investments were valued using internal models, respectively. Significant judgment is involved in valuations and different judgments and assumptions used in management’s valuation could result in different valuations. As the severe dislocation in the real estate and credit markets continues and worsens, resulting in illiquidity, our estimates of fair value will continue to have significant volatility. Since there are no active markets for our CMBS investments, we classify the investment as Level 3 under the SFAS 157 fair value hierarchy. If our estimate of fair value at December 31, 2008 changed by 5%, our net loss for the year ended December 31, 2008 would change by approximately $2.7 million.

Derivative Instruments

We recognize all derivatives on the balance sheet at fair value. On January 1, 2008, we adopted SFAS 159 for several financial instruments, including certain CDO bonds, which are the instruments for which we seek to minimize interest rate risk through hedging activities. Because certain CDO bonds are recorded at fair value, all interest rate swaps outstanding at January 1, 2008 no longer qualify for hedge accounting and subsequent changes in fair value are recorded as a component of income from continuing operations.

Derivatives that do not qualify, or are not designated as hedge relationships, must be adjusted to fair value through income. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the balance sheet as either an asset or liability. To the extent hedges are effective, a corresponding amount, adjusted for swap payments, is recorded in accumulated other comprehensive income within stockholders’ equity. Amounts are then reclassified from accumulated other comprehensive income to the income statement in the period or periods the hedged forecasted transaction affects earnings. Ineffectiveness, if any, is recorded in the income statement. We periodically review the effectiveness of each hedging transaction, which involves estimating future cash flows, at least quarterly as required by SFAS Statement No. 133, or SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by FASB Statement No. 138 “Accounting for Certain Derivative Instruments and Hedging Activities of an Amendment of FASB 133” and FASB Statement No. 149 “Amendment of Statement 133 on Derivative Instrument and Hedging Activities.” Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, will be considered fair value hedges under SFAS 133. We currently have no fair value hedges outstanding. Fair values of derivatives are subject to significant variability based on changes in interest rates. The results of such variability could be a significant increase or decrease in our derivative assets, derivative liabilities, book equity, and/or earnings.

To estimate the fair values of derivative instruments, we use a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. For the valuation of derivative instruments, standard market conventions and techniques such as discounted cash flow analysis, option-pricing models, replacement cost, and termination cost are used to determine fair value. The values are also adjusted to reflect nonperformance and credit risk. Significant judgment is involved in valuations and different judgments and assumptions used in management’s valuation could result in different valuations.

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Valuation of CDO bonds and Junior Subordinated Notes

Estimated fair values for CDO bonds and junior subordinated debentures are based on independent valuations. Currently, there is not an active market for our CDO bonds or our junior subordinated debentures and the independent appraiser estimates fair value using a valuation model that considers, among other things, (i) anticipated cash flows (ii) current market credit spreads, such as CMBX, (iii) known and anticipated credit issues of underlying collateral (iv) term and reinvestment period and (v) market transactions of similar securities. When available, management will compare fair values estimated by the independent appraiser to third party quotes and transactions of identical or similar securities, however, such information is not available on a consistent basis. Estimates of fair value are subject to significant variability based on market conditions, such as interest rates and credit spreads. Changes in market conditions, as well as changes in the assumptions or methodology used to determine fair value, could result in a significant increase or decrease in the recorded amount of our fair value. Significant judgment is involved in valuations and different judgments and assumptions used in management’s valuation could result in different valuations. If our estimate of fair value of CDO bonds at December 31, 2008 changed by 5%, our net loss for the year ended December 31, 2008 would change by approximately $6.2 million. If our estimate of fair value of Junior Subordinated Notes at December 31, 2008 changed by 5%, our net loss for the year ended December 31, 2008 would change by approximately $0.4 million.

Revenue Recognition

Interest income on loan investments is recognized over the life of the investment using the effective interest method. Fees received in connection with loan commitments are deferred until the loan is funded and are then recognized over the term of the loan as an adjustment to yield. Fees on commitments that expire unused are recognized at expiration.

Income recognition is ~~generally~~ suspended for debt investments when receipt of income is not reasonably assured at the earlier of (i) management determining the ~~date~~borrower atis ~~which~~incapable ~~payments~~of ~~become~~curing, 90or ~~days~~has ~~past~~ceased ~~due~~efforts ortowards ~~when,~~curing inthe ~~our~~cause ~~opinion,~~of a default; ~~full~~(ii) the ~~recovery~~loan ofbecoming ~~income~~90 ~~and~~days ~~principal~~delinquent; ~~becomes~~or ~~doubtful~~(iii) the loan having a maturity default. Income recognition is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. While income recognition is suspended, interest income is recognized only upon actual receipt.

Interest income on CMBS is recognized using the effective interest method as required by EITF 99-20. Under EITF 99-20 management estimates, at the time of purchase, the future expected cash flows and determines the effective interest rate based on these estimated cash flows and ~~our~~the purchase ~~prices~~ price. ~~On a quarterly basis, these estimated cash flows are updated and a revised yield is calculated based on the current amortized cost of the investment.~~ In estimating these cash flows, there are a number of assumptions that are subject to uncertainties and contingencies., ~~These~~including ~~include~~ the rate and timing of principal payments (including prepayments, repurchases, defaults and liquidations), the pass through or coupon rate and interest rate fluctuations. In addition, interest payment shortfalls due to delinquencies on the underlying mortgage loans, and the timing of and magnitude of credit losses on the mortgage loans underlying the securities have to be estimated. These uncertainties and contingencies are difficult to predict and are subject to future events that may impact management’s estimates and ~~our~~the amount of interest income recognized.

67If the current period cash flow estimates are lower than the previous period, and fair value is less than the carrying value of CMBS, we will write down the CMBS to fair market value and record the impairment charge in the current period earnings. After taking into account the effect of the impairment charge, income is recognized using the market yield for the security used in establishing the write down.

Loan Loss Reserves

The expenses for possible credit losses in connection with debt investments represents the increase in the allowances for possible credit losses to the level that management estimates to be adequate considering delinquencies, loss experience and collateral quality. Other factors considered relate to geographic trends and project diversification, the size of the portfolio and current economic conditions.

We must periodically evaluate loans for possible impairment. Loans and other investments are considered impaired, for financial reporting purposes, when it is deemed probable that we will be unable to collect all amounts due according to the contractual terms of the original agreement, or, for loans acquired at a discount credit quality when it is deemed probable that we will be unable to collect as anticipated.

Specific valuation allowances are established for impaired loans based on the fair value of collateral on an individual loan basis. The fair value of the collateral may be determined by (i) independent appraisal, (ii) internal company models, (iii) market bids or (iv) a combination of these methods. Valuation of collateral and the resulting loan loss reserve is based on assumptions such as expected operating cash flows, expected capitalization rates, estimated time the property will be held, discount rates and other factors. Significant judgment is required both in determining impairment and in estimating the resulting loss allowance. Changes in market conditions, as well as changes in the assumption or methodology used to determine fair value, could result in a significant change in the recorded amount in our investment. Further, if actual results are not consistent with the Company’s assumptions and judgments used in estimating future cash flows and asset fair values, the Company may be exposed to losses greater than those estimated and such differences could be material to the results of operations.

If upon completion of the valuation, the fair value of the underlying collateral securing the impaired loan is less than the net carrying value of the loan, an allowance is created with a corresponding charge to the provision for loan losses. As of December 31, 2008, we have a loan loss reserve of $141.1 million. If our estimate of the fair value of collateral for collateral dependent loans increased or decreased by 5% at December 31, 2008, our net loss for the year ended December 31, 2008 would change by approximately $0.3 million.

Impairment of Long-Lived Assets

We evaluate potential impairments of long-lived assets, including assets held for development and real estate, in accordance with FASB Statement of Financial Accounting Standards 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” or SFAS 144. SFAS 144 establishes procedures for the review of recoverability and measurement of impairment, if necessary, of long-lived assets held and used by an entity. SFAS 144 requires that assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. We would be required to recognize an impairment loss if the carrying amount of long-lived assets is not recoverable based on their undiscounted cash flows. If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be exposed to impairment losses that could be material to the results of operations.

In the third quarter of 2008, management made a decision to market the Springhouse property for sale, resulting in classification of assets and liabilities as “held for sale” as of December 31, 2008 and results from operations classified as “discontinued operations” for all periods presented. Based on management’s commitment to sell the property and the resulting held for sale classification, we have recorded the long-lived assets of Springhouse at estimated fair value less costs to sell, which resulted in an impairment loss of $6,057 for the year ended December 31, 2008.

In the third quarter of 2008, management made a decision to no longer fund operating deficits at the Loch Raven property based on (i) the property’s current and forecasted operating performance, (ii) lack of liquidity in the credit markets that make refinancing more difficult, (iii) declines and expected declines in commercial real estate valuations and (iv) the general expectation of a prolonged economic slow down that would adversely impact the performance and value of the property. The decision to no longer fund operating deficits put us in default with the non-recourse first mortgage on the property, which will likely result in the senior lender foreclosing on our position. Management determined that the change in strategy indicated that the carrying amount of Loch Raven long-lived assets may not be fully

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If recoverable. ~~the~~Based ~~current~~on ~~period~~our ~~cash~~current ~~flow~~estimate ~~estimates~~of ~~are~~undiscounted ~~lower~~cash ~~than~~flows over the ~~previous~~expected ~~period,~~life ~~and~~of ~~fair~~the ~~value~~investment, iswe ~~less~~determined ~~than~~ that the carrying value of ~~CMBS,~~the Loch weRaven ~~will~~long-lived ~~write~~assets ~~down~~was ~~the~~not ~~CMBS~~fully torecoverable. ~~fair~~As ~~market~~a ~~value~~result ~~and~~of ~~record~~this ~~the~~assessment, ~~impairment~~we ~~charge~~recorded inan ~~the~~impairment ~~current~~loss ~~period~~of ~~earnings.~~$6 ~~After~~million ~~taking~~for ~~into account~~ the ~~effect~~year ofended ~~the~~December 31, ~~impairment~~2008 ~~charge,~~based ~~income~~on isthe ~~recognized~~difference ~~using~~between the ~~market~~carrying ~~yield for~~value of the ~~security~~long-lived assets ~~used~~and intheir ~~establishing~~estimated ~~the~~fair ~~write-down~~value.

Reserve for Possible Credit Losses

The expense for possible credit losses in connection with debt investments represents the increase in the allowance for possible credit losses to the level that management estimates to be adequate considering delinquencies, loss experience and collateral quality. Other factors considered relate to geographic trends and project diversification, the size of the portfolio and current economic conditions.

We must periodically evaluate each of these loans for possible impairment. Loans and other investments are considered impaired, for financial reporting purposes, when it is deemed probable that we will be unable to collect all amounts due according to the contractual terms of the original agreement, or, for loans acquired at a discount for credit quality when it is deemed probable that we will be unable to collect as anticipated. Significant judgment is required both in determining impairment and in estimating the resulting loss allowance. Changes in market conditions, as well as changes in the assumption or methodology used to determine fair value, could result in a significant change in the recorded amount in our investment. As of December 31, 2006, one mezzanine loan is 30 days delinquent with respect to the scheduled payments of interest. All other loans are current with respect to scheduled payments of principle and interest. No impairment has been identified and no valuation allowance has been established.

Manager Compensation

The former management agreement ~~provides~~provided for the payment of a base management fee to our Manager and an incentive fee if our financial performance exceeds certain benchmarks. The base management fee and the incentive fee are accrued and expensed during the period for which they are calculated and earned.

Derivative Instruments

We recognize all derivatives on the balance sheet at fair value. Derivatives that do not qualify, or are not designated as hedge relationships, must be adjusted to fair value through income. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, arc considered cash flow hedges. Cash flow hedges are accounted for by recording the fair value of the derivative instrument on the balance sheet as either an asset or liability. To the extent hedges are effective, a corresponding amount, adjusted for swap payments, is recorded in accumulated other comprehensive income within stockholders’ equity. Amounts are then reclassified from accumulated other comprehensive income to the income statement in the period or periods the hedged forecasted transaction affects earnings. Ineffectiveness, if any, is recorded in the income statement. We periodically review the effectiveness of each hedging transaction, which involves estimating future cash flows, at least quarterly as required by SFAS Statement No. 133, or SFAS 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by FASB Statement No. 138 “Accounting for Certain Derivative Instruments and Hedging Activities of an Amendment of FASB 133” and FASB Statement No. 149 “Amendment of Statement 133 on Derivative Instrument and Hedging Activities.” Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, will be considered fair value hedges under SFAS 133. We currently have no fair value hedges outstanding. Fair values of derivatives are subject to significant variability based on changes in interest rates. The results of such variability could be a significant increase or decrease in our derivative assets, derivative liabilities, book equity, and/or earnings.

Stock-Based Payment

We have issued restricted shares of common stock and options to purchase common stock, or equity awards, to our directors, our Manager, employees of our ~~manager~~Manager and other related persons. We account for stock-based compensation related to these equity awards using the fair value based methodology under FASB Statement No. 123(R), or SFAS 123(R), “Share Based Payment” and EITF 96-18 “Accounting for Equity Instruments that are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services.” Compensation cost for restricted stock and stock options issued is initially measured at fair value at the grant date, remeasured at subsequent dates to the extent the awards are unvested, and amortized into expense over the vesting period on a straight-line basis.

68ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services.” Compensation cost for restricted stock and stock options issued is initially measured at fair value at the grant date, remeasured at subsequent dates to the extent the awards are unvested, and amortized into expense over the vesting period on a straight-line basis.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Market Risk

Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices, equity prices and real estate values. The primary market risks that we are exposed to are real estate risk, interest rate risk, market value risk and prepayment risk.

Real Estate Risk

Commercial mortgage assets, commercial property values and net operating income derived from such properties are subject to volatility and may be affected adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which may be adversely affected by industry slowdowns and other factors), local real estate conditions (such as an oversupply of housing, retail, industrial, office or other commercial space); changes or continued weakness in specific industry segments; construction quality, age and design; demographic factors; retroactive changes to building or similar codes; and increases in operating expenses (such as energy costs). In the event that net operating income from such properties decreases, a borrower may have difficulty repaying our loans, which ~~could~~ could result in losses to us. In addition, decreases in property values reduce the value of the collateral and the potential proceeds available to a borrower to repay our loans, which could also cause us to suffer losses. Even when the net operating income is sufficient to cover the related property’s debt service, there can be no assurance that this will continue to be the case in the future.

Interest Rate Risk

Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. A hypothetical 100 basis point increase in interest rates along the entire interest rate curve for the year ended December 31, 2006 and the period May 10, 2005 through December 31, 2005 would have increased our net interest expense by approximately $2.5 million and $0.1 million, respectively, and increased our investment income by approximately $3.0 million and $0.3 million, respectively.

69A hypothetical 100 basis point increase in interest rates along the entire interest rate curve for the year ended December 31, 2008 would have increased our net interest expense by approximately $4.8 million, and increased our investment income by approximately $6.8 million. In 2008, due primarily to the uncertainty in the credit markets, there was significant volatility in interest rates and we expect this volatility to continue in 2009.

~~Table~~Our operating results will depend in large part on differences between the income from our loans and our borrowing costs. We generally match the interest rates on our loans with like-kind debt, so that fixed rate loans are financed with fixed rate debt and floating rate loans are financed with floating rate debt, directly or through the use of ~~Contents~~interest rate swaps or other financial instruments. The objective of this strategy is to minimize the impact of interest rate changes on our net interest income. Currently most of our borrowings, with the exception of the two most junior classes of our CDO bonds (aggregating $44.25 million) and one of our consolidated joint venture mortgages payable of $25.8 million are variable-rate instruments, based on 30-day LIBOR.

Our operating results will depend in large part on differences between the income from our loans and our borrowing costs. We generally match the interest rates on our loans with like-kind debt, so that fixed rate loans are financed with fixed rate debt and floating rate loans are financed with floating rate debt, directly or through the use of interest rate swaps or other financial instruments. The objective of this strategy is to minimize the impact of interest rate changes on our net interest income. Currently most of our borrowings, with the exception of the two most junior classes of our CDO bonds (aggregating $44.25 million) and one of our consolidated joint venture mortgages payable of $26.6 million are variable-rate instruments, based on 30-day LIBOR.

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

We invest in CMBS, which are designated as ~~available-for-sale~~trading on our balance sheet. The majority of our CMBS investments ~~are~~is fixed rate securities and is partially financed with floating rate debt. In order to minimize the exposure to interest rate risk we utilize interest rate swaps to convert the floating rate debt to fixed rate debt, which matches the fixed interest rate of the CMBS. ~~All CMBS are partially financed (65% advance rate) with a warehouse line that bears interest at a rate of 30-day LIBOR plus 125 basis points.~~

As of December 31, ~~2006~~2008, we have 3221 interest rate swap agreements and three basis swap agreements outstanding with aan ~~total~~aggregate current notional value of $~~696~~909.3 9 million and $89.8 million, respectively, to hedge our exposure on forecasted outstanding LIBOR-based debt. The market value of these interest rate swaps and basis swaps is dependent upon existing market interest rates and swap spreads, which change over time. If there were a 100 basis point decrease in forward interest rates at December 31, 2008, the fair value of these interest rate swaps and basis swaps and our net income for the year ended December 31, 2008 would have decreased by approximately $3241.70 million ~~at December 31, 2006~~. If there were a 100 basis point increase in forward interest rates at December 31, 2008, the fair value of these interest rate swaps and basis swaps and our net income for the year ended December 31, 2008 would have increased by approximately $3038.74 million ~~at December 31, 2006~~.

~~One~~Our ofhedging ~~our~~transactions ~~consolidated~~using ~~joint~~derivative instruments also involve certain additional risks such as counterparty credit risk, the enforceability of ~~ventures~~hedging ~~entered~~contracts ~~into~~and anthe risk that unanticipated and significant changes in interest ~~rate~~rates ~~cap~~will ~~with~~cause a ~~notional~~significant ~~amount~~loss of ~~$25~~basis in the contract.0 ~~million~~The ~~with~~counterparty ato ~~strike~~our ~~price~~derivative ofarrangements ~~4.16%~~are Deutsche Bank AG, and aWachovia. ~~maturity~~The ~~date~~severe issues in the credit markets have significantly raised concerns over counter party credit risk, even with those counter parties long thought to be safe due to their size, history and reputation. As of December 1531, ~~2007~~2008, we believe our counterparty credit risk is minimal given that we are in a net liability position for each counterparty that we have open hedging transactions with. As a result, we do not anticipate that any counterparty will fail to meet their obligations. We will continue to closely monitor our hedge positions and consider counterparty credit risk, however, there can be no assurance that we will be able to adequately protect against the foregoing risks and will ultimately realize an economic benefit that exceeds the related amounts incurred in connection with engaging in such hedging strategies.

~~Our~~- ~~hedging~~51 ~~transactions~~- using derivative instruments also involve certain additional risks such as counterparty credit risk, the enforceability of hedging contracts and the risk that unanticipated and significant changes in interest rates will cause a significant loss of basis in the contract. The counterparty to our derivative arrangements are Credit Suisse International and Deutsche Bank AG, with a senior unsecured debt credit rating of Aa3 by Moody’s with which we and our affiliates may also have other financial relationships. As a result, we do not anticipate that the counterparty will fail to meet their obligations. There can be no assurance that we will be able to adequately protect against the foregoing risks and will ultimately realize an economic benefit that exceeds the related amounts incurred in connection with engaging in such hedging strategies.

We utilize interest rate swaps to limit interest rate risk. Derivatives are used for hedging purposes rather than speculation. We do not enter into financial instruments for trading purposes. The following table sets forth our derivative instruments as of December 31, 2006:

Type of Hedge	NotionalAmount		SwapRate		Trade Date	MaturityDate	EstimatedValue atDecember 31,2006
Pay-Fixed Swap	$	9,100	5.1320	%	2/15/2006	2/17/2012	$	(167	)
Pay-Fixed Swap		183,172	5.0550	%	3/16/2006	10/25/2011		(168	)
Pay-Fixed Swap		16,100	5.0850	%	3/16/2006	3/1/2011		(213	)
Pay-Fixed Swap		26,951	5.1930	%	3/28/2006	4/13/2016		(340	)
Pay-Fixed Swap		2,000	5.3710	%	4/12/2006	6/16/2016		(52	)
Pay-Fixed Swap		1,500	5.3910	%	5/1/2006	6/5/2012		(31	)
Pay-Fixed Swap		2,350	5.5610	%	5/3/2006	6/5/2017		(100	)
Pay-Fixed Swap		44,736	5.6630	%	5/12/2006	5/25/2018		(1,855	)
Pay-Fixed Swap		2,970	5.3440	%	6/8/2006	7/5/2012		(55	)
Pay-Fixed Swap		5,000	5.4290	%	6/12/2006	7/5/2016		(154	)
Pay-Fixed Swap		7,500	5.6100	%	6/20/2006	7/5/2016		(335	)
Pay-Fixed Swap		7,200	5.6900	%	6/23/2006	7/5/2016		(366	)
Pay-Fixed Swap		32,300	5.5240	%	7/7/2006	7/11/2011		(767	)
Pay-Fixed Swap		2,900	5.5910	%	7/11/2006	7/5/2018		(135	)
Pay-Fixed Swap		67,500	5.2720	%	8/2/2006	9/1/2011		(1,006	)
Pay-Fixed Swap		21,250	5.2900	%	8/2/2006	9/5/2011		(304	)
Pay-Fixed Swap		26,200	5.3590	%	8/7/2006	9/6/2016		(664	)
Pay-Fixed Swap		22,150	5.1910	%	8/17/2006	9/1/2011		(221	)
Pay-Fixed Swap		36,075	5.1710	%	9/19/2006	9/25/2011		(220	)
Pay-Fixed Swap		22,200	5.0920	%	9/19/2006	10/1/2011		(127	)
Pay-Fixed Swap		26,469	5.0900	%	9/19/2006	10/1/2011		(150	)
Pay-Fixed Swap		13,770	5.0570	%	9/21/2006	10/1/2015		(40	)
Pay-Fixed Swap		2,125	4.9290	%	9/22/2006	10/1/2011		3
Pay-Fixed Swap		2,125	5.0850	%	9/25/2006	10/1/2016		3
Pay-Fixed Swap		4,250	5.2450	%	10/13/2006	11/1/2016		(69	)
Pay-Fixed Swap		26,350	5.1150	%	10/19/2006	11/1/2011		(180	)
Pay-Fixed Swap		5,100	5.2040	%	10/19/2006	11/1/2016		(67	)
Pay-Fixed Swap		10,200	5.0080	%	10/30/2006	11/1/2011		(21	)
Pay-Fixed Swap		13,388	4.9150	%	11/2/2006	12/1/2011		28
Pay-Fixed Swap		4,016	5.1330	%	11/6/2006	12/1/2015		(34	)
Pay-Fixed Swap		28,151	4.9470	%	12/15/2006	10/25/2011		95
Pay-Fixed Swap		21,250	4.9840	%	12/28/2006	1/1/2012		(27	)
LIBOR Cap		25,000	4.1575	%	12/15/2005	12/15/2007		255
Total	$	721,348					$	(7,484	)


Type of Hedge	Notional Amount		Swap Rate		Trade Date	Maturity Date	Termination Value at December 31, 2008
Pay-Fixed Swap	$	149,541,563	5.055	%	03/16/06	10/25/11	$	(10,164,355	)
Pay-Fixed Swap		44,736,359	5.663	%

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•Table use of asset and liability structuring to lock-in attractive total returns and to minimize risk.Contents

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OtherTable incomeof increased by $0.3 million to $3.3 million for the year ended December 31, 2006, from $3.0 million for the period May 10, 2005 (inception) through December 31, 2005, which represents interest earned on cash balances primarily from overnight repurchase investments. Contents

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