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

Introduction

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

Current Market Conditions

During 2008, the general economic environment deteriorated precipitously, leaving the U.S economy and many economies around the world in a state of severe economic recession. In addition, the global capital markets continued to be in a severe state of crisis. The impact on commercial real estate has been a combination of: (i) decreased, and expected further decreases, in property level cash flows and (ii) lack of capital, both debt and equity, to allow for markets to function in an orderly manner. Transaction volume has declined significantly, credit spreads for all forms of mortgage debt reached all-time highs, issuance levels of commercial mortgage backed securities, or CMBS, 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. These factors have combined to create significant decreases in property values and have and will continue to impact the performance of our existing portfolio of assets. Furthermore, the volatility in the capital markets has caused severe stress to all financial institutions and our business is dependent upon these counterparties for, among other things, financing and interest rate derivatives.

Restructuring of Our Debt Obligations

On March 16, 2009, we consummated a restructuring of substantially all of our recourse debt obligations with certain of our secured and unsecured creditors pursuant to the amended terms of our secured credit facilities, our senior unsecured credit agreement, and certain of our trust preferred securities.

Secured Credit Facilities

In connection with the restructuring, we amended our secured, recourse credit facilities with: (i) JPMorgan Chase Bank, N.A., JPMorgan Chase Funding Inc. and J.P. Morgan Securities Inc., or collectively JPMorgan, (ii) Morgan Stanley Bank, N.A., or Morgan Stanley, and (iii) Citigroup Financial Products Inc. and Citigroup Global Markets Inc., or collectively Citigroup. We collectively refer to JPMorgan, Morgan Stanley and Citigroup as the participating secured lenders. Further, as part of the restructuring, we also entered into an agreement to terminate our secured, recourse facility with Goldman Sachs Mortgage Company, or Goldman Sachs. We had previously, on February 25, 2009, terminated our secured financing with UBS Real Estate Securities Inc., or UBS.

Specifically, on March 16, 2009, we entered into separate amendments to the respective master repurchase agreements with JPMorgan, Morgan Stanley and Citigroup. Pursuant to the terms of each such agreement, we repaid the balance outstanding with each participating secured lender by an amount equal to three percent (3%) of the current outstanding principal amount due under its existing secured, recourse credit facility, $17.7 million in the aggregate, and further amended the terms of each such facility, without any change to the collateral pool securing the debt owed to each participating secured lender, to provide the following:

· Maturity dates were modified to one year from the March 16, 2009 effective date of each respective agreement, which maturity dates may be extended further for two one-year periods. The first one-year extension option is exercisable by us so long as the outstanding balance as of the first extension date is less than or equal to a certain amount, which is a reduction of twenty percent (20%), including the upfront payment described above, of the outstanding principal amount from the date of the amendments, and no other defaults or events of default have occurred and are continuing, or would be caused by such extension. The second one-year extension option is exercisable by each participating secured lender in its sole discretion.

· We agreed to pay each participating secured lender periodic amortization as follows: (i) mandatory payments, payable monthly in arrears, in an amount equal to sixty-five (65%) (subject to adjustment in the second year) of the net interest income generated by each such lender's collateral pool, and (ii) one hundred percent (100%) of the principal proceeds received from the repayment of assets in each such lender's collateral pool. In addition, under the terms of the amendment with Citigroup, we agreed to pay Citigroup an additional quarterly amortization payment equal to the lesser of: (x) Citigroup's then outstanding senior secured credit facility balance or (y) the product of (i) the total cash paid (including both principal and interest) during the period to our senior unsecured credit facility in excess of an amount equivalent to LIBOR plus 1.75% based upon a $100.0 million facility amount, and (ii) a fraction, the numerator of which is Citigroup's then outstanding senior secured credit facility balance and the denominator is the total outstanding secured indebtedness of the participating secured lenders.

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

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

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

· We eliminated the cash margin call provisions and amended the mark-to-market provisions so that future changes in collateral value will be determined based upon changes in the performance of the underlying real estate collateral in lieu of the previous provisions which were based on market spreads. Beginning six months after the date of execution of the agreements, each collateral pool will be valued monthly on this basis. If the ratio of a participating secured lender's total outstanding secured credit facility balance to total collateral value exceeds 1.15x the ratio calculated as of the effective date of the amended agreements, we will be required to liquidate collateral in order to return to compliance with the prescribed loan to collateral value ratio or post other collateral to bring the ratio back into compliance.

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

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

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

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

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

· require us to maintain a minimum amount of liquidity, as defined, of $7.0 million in 2009 and $5.0 million thereafter;

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

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

Pursuant to the restructuring, the interest rates on our secured borrowings will remain the same as those in effect as of December 31, 2008. In exchange for maintenance of these historic rates, on March 16, 2009 we issued, or irrevocably committed to issue as of such date, JPMorgan, Morgan Stanley and Citigroup warrants to purchase 3,479,691 shares of our class A common stock at an exercise price of $1.79 per share, which is equal to the closing bid price on the New York Stock Exchange on March 13, 2009. The warrants will become exercisable on March 16, 2012 and expire on March 16, 2019, and may be exercised through a cashless exercise.

The warrants were issued, or irrevocably committed to be issued, in reliance upon the exemption provided in Section 4(2) of the Securities Act of 1933, as amended, and the safe harbor of Rule 506 under Regulation D. Any certificates representing such securities will contain restrictive legends preventing sale, transfer or other disposition, unless registered under the Securities Act of 1933. No form of general solicitation or general advertising was conducted in connection with the issuance.

The foregoing descriptions of the amendments to the secured credit facilities with the participating secured lenders, the amendment to the senior unsecured credit facility and the warrant agreement with respect to the warrants are qualified in their entirety by reference to Exhibits 10.49b, 10.46d and 10.69, respectively, to this Form 10-K.

On March 16, 2009, we also entered into an agreement to terminate the master repurchase agreement with Goldman Sachs, pursuant to which we satisfied the indebtedness due under the Goldman Sachs secured credit facility. Specifically, we: (i) pre-funded certain required advances of approximately $2.4 million under one loan in the collateral pool, (ii) paid Goldman Sachs $2.6 million to effect a full release to us of another loan, and (iii) transferred all of the other assets that served as collateral for Goldman Sachs to Goldman Sachs for a purchase price of $85.7 million as payment in full for the balance remaining under the secured credit facility. Goldman Sachs agreed to release us from any further obligation under the secured credit facility. The foregoing description is qualified in its entirety by reference to Exhibit 10.47e to this Form 10-K.

Previously, on February 25, 2009, we entered into a satisfaction, termination and release agreement with UBS pursuant to which the parties terminated their right, title, interest in, to and under a master repurchase agreement. We consented to the transfer to UBS, and UBS unconditionally accepted and retained all of our rights, title and interest in a loan financed under the master repurchase agreement in complete satisfaction of all of our obligations, including all amounts due thereunder. The foregoing description is qualified in its entirety by reference to Exhibit 10.71 to this Form 10-K.

We are currently in negotiations with Lehman Brothers to resolve the $18.0 million outstanding balance under our secured, recourse credit facility with such firm, which finances a single asset.

Senior Unsecured Credit Agreement

On March 16, 2009, we entered into an amended and restated senior unsecured credit agreement governing our $100.0 million term loan from WestLB AG, New York Branch, participant and administrative agent, Fortis Capital Corp., Wells Fargo Bank, N.A., JPMorgan Chase Bank, N.A., Morgan Stanley Bank, N.A. and Deutsche Bank Trust Company Americas, which we collectively refer to as the senior unsecured lenders. Pursuant to the amended and restated senior unsecured credit agreement, we and the senior unsecured lenders agreed to:

· Extend the maturity date of the senior unsecured credit agreement to be co-terminus with the maturity date of the secured credit facilities with the participating secured lenders (as they may be further extended until March 16, 2012, as described above);

· Increase the cash interest rate under the senior unsecured credit agreement to LIBOR plus 3.0% per annum (from LIBOR plus 1.75%), plus an accrual rate of 7.20% per annum less the cash interest rate;

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

· Pledge our unencumbered collateralized debt obligation interests and provide a negative pledge with respect to certain other assets; and

· Replace all existing financial covenants with substantially identical covenants and default provisions to those described above in the participating secured credit facilities.

The foregoing description is qualified in its entirety by reference to the amended and restated credit agreement filed as Exhibit 10.70 to this Form 10-K.

Trust Preferred Securities

On March 16, 2009, we reached an agreement with Taberna Preferred Funding V, Ltd., Taberna Preferred Funding VI, Ltd., Taberna Preferred Funding VIII, Ltd. and Taberna Preferred Funding IX, Ltd., or collectively Taberna, to issue new junior subordinated notes in exchange for $50.0 million face amount of trust preferred securities issued through our statutory trust subsidiary CT Preferred Trust I held by affiliates of Taberna, which we refer to as the Trust I Securities, and $53.1 million face amount of trust preferred securities issued through our statutory trust subsidiary CT Preferred Trust II held by affiliates of Taberna, which we refer to as the Trust II Securities. We refer to the Trust I Securities and the Trust II Securities together as the Trust Securities. The Trust Securities were backed by and recorded as junior subordinated debentures issued by us with terms that mirror the Trust Securities.

Pursuant to the exchange agreement dated March 16, 2009, by and among us and Taberna, we issued $118.6 million aggregate principal amount of new junior subordinated notes due on April 30, 2036 (an amount equal to 115% of the current aggregate face amount of the Trust Securities being exchanged). The interest rate payable under the new subordinated notes is 1% per annum from March 16, 2009, through and including April 29, 2012, which we refer to as the modification period. After the modification period, the interest rate will revert to a blended rate equal to that which was previously payable under the notes underlying the Trust Securities, a fixed rate of 7.23% per annum through and including April 29, 2016 and thereafter a floating rate, reset quarterly, equal to three month LIBOR plus 2.44% until maturity. The new junior subordinated notes will be contractually senior to the remaining trust preferred securities, will mature on April 12, 2036 and will be freely redeemable by us at par at any time. The new junior subordinated notes contain a covenant that through April 30, 2012, subject to certain exceptions, we may not declare or pay dividends or distributions on, or redeem, purchase or acquire any of our equity interests (other than remaining trust preferred securities not exchanged) except to the extent necessary to maintain our status as a REIT. Except for the foregoing, the new junior subordinated notes contain substantially similar provisions as the Trust Securities. The foregoing description is qualified in its entirety by reference to the Exchange Agreement filed as Exhibit 10.72 to this Form 10-K.

As part of the agreement with Taberna, we also agreed to pay $750,000 to cover third party fees and costs incurred in connection with the exchange transaction.

Current Period Financial Statement Impact

While the restructuring of our debt obligations was finalized subsequent to December 31, 2008 and the amendments to the respective agreements and termination of our facility with UBS were executed in the first quarter of 2009, certain elements of the transaction require us to amend the presentation of certain items in our consolidated financial statements for the fiscal year ended December 31, 2008. Specifically, the aggregate $140.4 million (face value) of loans sold to Goldman Sachs and UBS have been reclassified under the consolidated balance sheet classification, loans held-for-sale, and a valuation allowance of $48.3 million, reflecting the difference between the carrying value of the loans and the sale price, was recorded on the consolidated statement of operations.

Originations

We have historically allocated opportunities between our balance sheet and investment management vehicles based upon our assessment of the availability and relative cost of capital, the risk and return profiles of each investment and applicable regulatory requirements. The restructuring of our obligations due our secured and unsecured lenders has consequences for our historical business in that the new covenants we agreed to require us to effectively cease our balance sheet investment activities and not to incur any further indebtedness unless used to retire the debt due our lenders. Going forward, until these covenants are eliminated through the repayment or refinancing of the restructured debt obligations, we will continue to carry out investment activities for our investment management vehicles, consistent with our previous strategies and investment mandates for each respective vehicle.

Notwithstanding the combined capabilities of our platform in 2008, we decided to continue a defensive posture with respect to investment originations in light of the continued market volatility. The table below summarizes our gross originations and the allocation of opportunities between our balance sheet and the investment management business for the years ended December 31, 2008 and December 31, 2007.

           Originations(1)
           (in millions)              Year ended          Year ended
                                   December 31, 2008   December 31, 2007
           Balance sheet(2)                      $48              $1,454
           Investment management                 426               1,011
            Total originations                  $474              $2,465

(1) Includes total commitments, both funded and unfunded, net of any related purchase discounts.
(2) Includes $0 and $315 million of participations sold recorded on our balance sheet relating to participations that we sold to CT Large Loan 2006, Inc. for the years ended December 31, 2008 and December 31, 2007, respectively.

Our balance sheet investments include CMBS and commercial real estate debt and related instruments, or Loans, which we collectively refer to as our Interest Earning Assets.

Originations of Interest Earning Assets for our balance sheet for the years ended December 31, 2008 and December 31, 2007 are detailed in the table below:

  Balance Sheet Originations
  (in millions)       Year ended December 31, 2008            Year ended December 31, 2007
                                               Rating /                                Rating /
                  Originations(1)   Yield(2)    LTV(3)    Originations(1)   Yield(2)    LTV(3)
  CMBS                       $1       41.39%     BB+               $111        8.92%      BB
  Loans(4)                   47        9.16%    53.3%             1,343        7.67%    64.4%
  Total /
  Weighted
  Average                   $48        9.70%                     $1,454        7.77%

(1) Includes total commitments, both funded and unfunded.
(2) Yield on floating rate originations assumes LIBOR at December 31, 2008 and December 31, 2007, of 0.44% and 4.60%, respectively.
(3) Weighted average ratings at origination are based on the lowest rating published by Fitch Ratings, Standard & Poor's or Moody's Investors Service for each security and exclude $36.4 million of unrated equity investments in collateralized debt obligations originated in 2007. No unrated securities were originated in 2008. Loan to Value (LTV) is based on third party appraisals received by us when each loan was originated.
(4) Includes $0 and $315 million of participations sold recorded on our balance sheet relating to participations that we sold to CT Large Loan 2006, Inc. for the year ended December 31, 2008 and the year ended December 31, 2007, respectively.

The table below shows our Interest Earning Assets as of December 31, 2008 and December 31, 2007. In any period, the ending balance of Interest Earning Assets will be impacted not only by new balance sheet originations, but also by repayments, advances, sales and losses, if any.

          Interest Earning Assets
          (in millions)               December 31, 2008       December 31, 2007
                                    Book Value   Yield(1)   Book Value   Yield(1)
          CMBS                          $852        6.87%       $877        7.35%
          Loans                        1,791        4.09%      2,258        7.80%
          Total / Weighted Average    $2,643        4.99%     $3,135        7.67%

(1) Yield on floating rate assets assumes LIBOR at December 31, 2008 and December 31, 2007, of 0.44% and 4.60%, respectively. For $37.9 million face value ($37.5 million book value) of CMBS investments, calculations use an effective rate based on cash received.

In some cases our loan originations are not fully funded at closing, creating an obligation for us to make future fundings, which we refer to as Unfunded Loan Commitments. Typically, Unfunded Loan Commitments are part of construction and transitional loans. As of December 31, 2008, we had nine Unfunded Loan Commitments totaling $54.2 million. Of the total gross Unfunded Loan Commitments, $44.0 million will only be funded when and/or if the borrower meets certain performance hurdles with respect to the underlying collateral. As a result of the restructuring of our debt obligations described in Note 22 to the consolidated financial statements, one loan with an Unfunded Loan Commitment of $30.6 million as of December 31, 2008 was sold on March 16, 2009, in conjunction with the termination of one of our repurchase agreements. After giving effect to the settlement of this transaction, we have Unfunded Loan Commitments of $23.6 million. Although generally provided for in the terms of our restructured debt obligations, our ability to fund these remaining Unfunded Loan Commitments will be contingent upon our having sufficient liquidity available to us after required payments to our creditors. In the past, we were able to rely on our lenders to fund a portion of these commitments, and, subject to the recent restructuring, we no longer have that ability.

In addition to our investments in Interest Earning Assets, we have two equity investments in unconsolidated subsidiaries as of December 31, 2008. These represent our equity co-investments in private equity funds that we manage, CT Mezzanine Partners III, Inc., or Fund III, and CT Opportunity Partners I, LP, or CTOPI. The table below details the carrying value of those investments, as well as related capitalized costs.

               Equity Investments
               (in thousands)            December 31,    December 31,
                                             2008            2007
               Fund III                         $597           $923
               CTOPI                           1,782            (60 )
               Capitalized costs/other             4            114
                Total                         $2,383           $977

Asset Management

We actively manage our balance sheet portfolio and the assets held by our investment management vehicles. While our investments are primarily in the form of debt, which generally means that we have limited influence over the operations of the collateral securing our portfolios, we are aggressive in exercising the rights afforded to us as a lender. These rights may include collateral level budget approvals, lease approvals, loan covenant enforcement, escrow/reserve management/collection, collateral release approvals and other rights that we may negotiate.

During the fourth quarter of 2008, one loan with an outstanding balance of $45.0 million was fully repaid. In addition, four loans with an aggregate outstanding balance of $60.1 million as of year end were extended on modified terms at current market interest rates on existing principal balances, and twelve loans with an aggregate outstanding balance of $344.5 million were extended pursuant to the terms of their corresponding loan agreements.

The table below details our loss experience with balance sheet Interest Earning Assets for the years ended December 31, 2008 and December 31, 2007, and the percentage of non-performing loans as of December 31, 2008 and December 31, 2007. Non-performing loans include loans which are on non-accrual status as well as those where we have foreclosed upon the underlying collateral and therefore own an equity interest in real estate. Commencing in the fourth quarter of 2008, we classified certain of our loans as Watch List Loans. These investments are currently performing loans that we actively monitor and manage to mitigate the risk of potential future non-performance.

Portfolio Performance(1)
(in millions, except for number of investments)             December 31, 2008     December 31, 2007
Interest earning assets                                               $2,643                $3,135
Losses
Principal balance                                                        $10                    $-
Percentage of interest earning assets                                    0.4 %                   -

Non performing loans
Non-accrual loans, net(2)                                                $24                    $6
Number of investments                                                      5                     1
Percentage of interest earning assets                                    0.9 %                 0.2 %

Real estate owned, net(3)                                                $10                    $-
Number of investments                                                      1                     -
Percentage of interest earning assets                                    0.4 %                   -

Watch List Loans
Principal balance                                                       $377                   N/A
Percentage of interest earning assets                                   14.3 %                 N/A

(1) Portfolio statistics exclude loans classified as held-for-sale.
(2) As of December 31, 2008, includes five loans with an aggregate principal . . .