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

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

Introduction
We are a real estate finance company that specializes in credit sensitive financial products. To date, our investment programs have focused on loans and securities backed by commercial real estate assets. We invest for our own account directly on our balance sheet and for third-parties through a series of investment management vehicles. From the inception of our finance business in 1997 through September 30, 2012, we have completed approximately $12.1 billion of commercial real estate investments. We conduct our operations as a real estate investment trust, or REIT, for federal income tax purposes. We are traded on the New York Stock Exchange, or NYSE, under the symbol "CT", and are headquartered in New York City.

Sale of Investment Management Platform
On September 27, 2012, we announced our entry into a definitive purchase and sale agreement, or Purchase Agreement, with an affiliate, which we refer to as the Purchaser, of The Blackstone Group L.P., which we refer to as Blackstone. Pursuant to the Purchase Agreement, the Purchaser will acquire our investment management and special servicing businesses, operated through our subsidiary, CT Investment Management Co., LLC, or CTIMCO, and our related private investment fund co-investments for $20.6 million. The Purchaser will also purchase for $10.0 million, or $2.00 per share, 5,000,000 shares of our class A common stock that will represent approximately 17.1% of our common stock outstanding following consummation of the transactions contemplated by the Purchase Agreement, which we refer to as the Transactions. The Purchase Agreement also contemplates that we will enter into a new management agreement pursuant to which a Blackstone affiliate, which we refer to as the New CT Manager, will manage Capital Trust, Inc. following the consummation of the Transactions. Pursuant to the new management agreement, the New CT Manager will manage Capital Trust, Inc. in accordance with investment guidelines and policies approved by our board of directors. Stephen D. Plavin, Geoffrey G. Jervis and Thomas C. Ruffing will continue to serve in their current executive management roles post-transaction. Consummation of the Transactions is subject to customary closing conditions, including the approval of the Transactions by the affirmative vote of the holders of a majority of the outstanding shares of common stock at a special meeting of shareholders that will be called to approve the Transactions. W. R. Berkley and its affiliated entities, holders of approximately 15.9% of our class A common stock, have entered into a voting agreement to support the transaction.

If the Transactions are consummated, we will pay a $2.00 per share special cash dividend to holders of our class A common stock, which will be payable as soon as practicable following closing of the Transactions to shareholders of record as of the close of business on November 12, 2012.

In accordance with NYSE procedures, from November 7, 2012 through the special dividend payment date, our class A common stock will trade with "due-bills" representing an assignment of the right to receive the special dividend. Our class A common stock will not trade ex-dividend until the first business day after the special dividend payment date. Shareholders who sell their shares on or before the special dividend payment date will not be entitled to receive the special dividend.

The sources of funds for the special dividend will be cash on hand prior to the Transactions and the proceeds from the sale of CTIMCO and our private investment fund co-investments. The Purchaser will not receive the special dividend given that its investment in our class A common stock will close after the special dividend record date.

Following the Transactions, we will continue to own our existing cash balances (as reduced to fund expenses of the Transactions and the special dividend), our interest in CT Legacy REIT (as defined below), our carried interest in CT Opportunity Partners I, LP, as well as our retained subordinate interests in our three CT CDOs.

March 2011 Restructuring
On March 31, 2011, we restructured, amended, or extinguished all of our outstanding recourse debt obligations, which we refer to as our March 2011 restructuring. Our March 2011 restructuring involved: (i) the contribution of certain of our legacy assets to a newly formed subsidiary, CT Legacy REIT Mezz Borrower, Inc., or CT Legacy REIT, (ii) the assumption of our legacy repurchase obligations by CT Legacy REIT, and (iii) the extinguishment of the remainder of our recourse obligations, our senior credit facility and junior subordinated notes. The restructuring was financed with a new $83.0 million mezzanine loan obtained by CT Legacy REIT from an affiliate of Five Mile Capital, and the issuance of equity interests in the common stock of CT Legacy REIT to the former lenders under our senior credit facility and our former junior subordinated noteholders, as well as to an affiliate of Five Mile Capital.

Following the completion of our March 2011 restructuring, we no longer have any recourse debt obligations, and retain unencumbered ownership of 100% of (i) our investment management platform, CT Investment Management Co., LLC, (ii) our co-investment in CT Opportunity Partners I, LP, (iii) our residual ownership interests in three of the CDOs that we issued, CT CDOs I, II, and IV, and (iv) our tax-basis net operating losses. Furthermore, we have a 52% equity interest in the common stock of CT Legacy REIT. Our economic interest in CT Legacy REIT is, however, subject to (i) the secured notes, which are non-recourse obligations that are collateralized by certain of our retained equity interests in the common stock of CT Legacy REIT, (ii) incentive awards that provide for the participation in amounts earned from our retained equity interests in the common stock of CT Legacy REIT, and (iii) the subordinate class B common stock of CT Legacy REIT owned by our former junior subordinate noteholders. In addition to our interest in the common stock of CT Legacy REIT, we also own 100% of its outstanding class A preferred stock.

Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires our management to make estimates and assumptions with regard to the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Actual results could differ from these estimates. There have been no material changes to our Critical Accounting Policies described in our annual report on Form 10-K filed with the Securities and Exchange Commission on February 14, 2012.

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

Our consolidated balance sheets separately present: (i) our direct assets and liabilities, (ii) the direct assets and liabilities of CT Legacy REIT, and (iii) the assets and liabilities of consolidated securitization vehicles. Assets of all consolidated VIEs can generally only be used to satisfy the obligations of those VIEs, and the liabilities of consolidated VIEs are non-recourse to us. Similarly, the following discussion separately describes (i) our direct assets and liabilities, (ii) the direct assets and liabilities of CT Legacy REIT, and
(iii) the assets and liabilities of consolidated securitization vehicles.

Beginning in the first quarter of 2012, CT Legacy REIT no longer consolidates one of its subsidiaries, CT Legacy Asset, LLC, or CT Legacy Asset, and instead accounts for its net equity investment in CT Legacy Asset on a fair value basis. See Note 1 to our consolidated financial statements for additional discussion.

Discussion of Operations
We include below in our discussion of operations: (i) an overview of the operations of our parent company, Capital Trust, Inc., including its wholly-owned investment management subsidiary, CTIMCO, (ii) a discussion of the consolidated balance sheet and operating results of Capital Trust, Inc. prepared in accordance with GAAP, (iii) a discussion of the adjusted balance sheet of Capital Trust, Inc., and (iv) a discussion of CT Legacy REIT.

We believe that our adjusted balance sheet provides meaningful information to consider, in addition to our consolidated balance sheet prepared in accordance with GAAP. This adjusted measure helps us to evaluate our financial position and performance without the effects of certain transactions and GAAP adjustments that are not necessarily indicative of our current investment portfolio, operations, capitalization, or equity.

See section III below for a presentation and discussion of our adjusted balance sheet.

I. Capital Trust, Inc.

Investment Management Overview
We act as an investment manager for ourselves and third-parties and as special servicer for certain of our loan investments, as well as for third-parties. The table below details investment management and special servicing fee revenue generated by CTIMCO for the nine months ended September 30, 2012 and 2011 (in thousands):

        Investment Management Revenues
                                  September 30, 2012       September 30, 2011
        Fees generated as:
        Public company manager                 $1,856                   $1,244
        Private equity manager                  4,741                    4,927
        CDO collateral manager                    433                      598
        Special servicer                        6,558                    2,242
        Total fees                            $13,588                   $9,011

        Eliminations (1)                       (3,256 )                 (1,876 )

        Total fees, net                       $10,332                   $7,135

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

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

· CT Opportunity Partners I, LP, or CTOPI, is no longer investing capital (its investment period expired in September 2012). The fund held its final closing in July 2008 with $539.9 million in total equity commitments from 28 institutional and individual investors. We have a $25.0 million commitment to invest in the fund, of which $10.2 million is currently funded. Subsequent to the investment period expiration, our obligation to fund additional capital to CTOPI is limited. The fund targeted opportunistic investments in commercial real estate, specifically high yield debt, equity and hybrid instruments, as well as non-performing and sub-performing loans and securities. We earn base management fees of 1.3% per annum of invested capital, as well as net incentive management fees of 17.7% of profits after a 9% preferred return and a 100% return of capital. As of September 30, 2012, CTOPI has invested $491.5 million in 39 transactions, of which $212.8 million remains outstanding.

· CT High Grade Partners II, LLC, or CT High Grade II, is no longer investing capital (its investment period expired in May 2011). The fund closed in June 2008 with $667 million of commitments from two institutional investors. The fund targeted senior debt opportunities in the commercial real estate sector and did not employ leverage. We earn a base management fee of 0.40% per annum on invested capital. In conjunction with the transfer of interests from one of CT High Grade II's investors to the other in April 2012, we made a $2.8 million (0.44%) co-investment in CT High Grade II. As of September 30, 2012, CT High Grade II has invested $588.1 million in 33 transactions, of which $551.1 million remains outstanding.

· CT High Grade MezzanineSM, or CT High Grade I, is no longer formally investing capital (its investment period officially expired in July 2008), however we have continued investing the "high grade" strategy through CT High Grade I on a non-discretionary basis since the end of the CT High Grade II investment period in May 2011. The separate account closed in November 2006, with a single, related party institutional investor committing $250 million, which was subsequently increased to $350 million in July 2007. As a result of the re-opening of the platform in May 2011 and the reinvesting of certain realized assets, as of September 30, 2012, we have invested $594.0 million for this account. This separate account has a single investor, W. R. Berkley Corporation, or WRBC, which is our largest shareholder and designates an appointee to our board of directors. CT High Grade I targets lower LTV subordinate debt investments without leverage and invested $420.9 million in 12 transactions during its initial investment period, as well as $173.1 million in five transactions since the platform was re-opened in May 2011. We generally earn management fees of 0.25% per annum on invested capital for substantially all of CT High Grade I's investments. As of September 30, 2012, $273.3 million of these investments remain outstanding.

· CT Large Loan 2006, Inc., or CT Large Loan, is no longer investing capital (its investment period expired in May 2008). The fund closed in May 2006 with total equity commitments of $325 million from eight institutional investors. In light of the performance of this fund, we do not charge the full management fee of 0.75% per annum of fund assets (capped at 1.5% on invested equity), and instead voluntarily capped our fee at $805,000 per annum.

The table below provides additional information regarding the three private equity funds and one separate account we managed as of September 30, 2012.

Investment Management Mandates, as of September 30, 2012
(in millions)
                                                                                         Base          Incentive
                                   Total         Total Capital         Co-            Management       Management
                     Type      Investments(1)     Commitments      Investment %           Fee             Fee
Investing:
CT High Grade I    Sep. Acc.        $298           $581  (2)           -%          0.25% (Assets)(3)       N/A

Liquidating:
CTOPI                Fund           $213           $540             4.63%  (4)      1.28% (Assets)         (5)
CT High Grade II     Fund           $551           $667             0.44%  (6)      0.40% (Assets)         N/A
CT Large Loan        Fund           $172           $325                -%  (7)     0.75% (Assets)(8)       N/A

(1) Represents total investments, on a cash basis, as of period-end.
(2) CT High Grade I ultimately closed with capital commitments of $350 million. Subsequent to the expiration of the CT High Grade I investment period, we continued to invest on behalf of WRBC under the CT High Grade I platform on a non-discretionary basis, bringing WRBC's total allocated capital to $581 million as of September 30, 2012.
(3) We generally earn fees equal to 0.25% per annum of invested capital, however due to the non-discretionary nature of this investment vehicle, in certain cases we earn fees which may be greater or less than 0.25% per annum.
(4) We have committed to invest $25.0 million in CTOPI.
(5) CTIMCO earns net incentive management fees of 17.7% of profits after a 9% preferred return on capital and a 100% return of capital, subject to a catch-up. We have allocated 45% of the CTOPI incentive management fees to our employees as long-term performance awards.
(6) In conjunction with the transfer of interests from one of CT High Grade II's investors to the other in April 2012, we purchased a 0.44% interest in CT High Grade II for $2.8 million, representing a $2.9 million capital commitment.
(7) We have co-invested on a pari passu, asset by asset basis with CT Large Loan.
(8) Capped at 1.5% of equity. In light of the performance of this fund, we do not charge the full management fee, and instead we have voluntarily capped our fee at $805,000 per annum.

As of September 30, 2012, we held co-investments in two of the private equity funds that we manage, CTOPI and CT High Grade II. These investments totaled $18.7 million as of September 30, 2012, and were recorded as equity investments in unconsolidated subsidiaries on our consolidated balance sheet. Our investment in CTOPI includes a $5.9 million incentive allocation to CTIMCO as the general partner of CTOPI, however our ability to ultimately collect these incentive allocations is contingent upon the performance of CTOPI's current and future investments. Accordingly, we have deferred recognition of income from such incentive allocations and have recognized an equivalent $5.9 million unearned revenue liability as a component of accounts payable, accrued expenses and other liabilities on our consolidated balance sheet. See Note 4 to our consolidated financial statements for additional discussion.

Originations
We have historically allocated investment opportunities between our balance
sheet and investment management vehicles based upon our assessment of risk and
return profiles, the availability and cost of capital, and applicable regulatory
restrictions associated with each opportunity. Currently, we are originating
investments only for our investment management business, which are summarized in
the table below for the nine months ended September 30, 2012 and for the year
ended December 31, 2011.

           Originations(1)
           ($ in millions)         Nine months ended       Year ended
                                   September 30, 2012   December 31, 2011
                                        #  /   $            #   /   $

           Investment management        6  / $123           11  / $219

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

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

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

Investment in CT Legacy REIT
Following the completion of our March 2011 restructuring, we retained a 52% equity interest in the class A common stock of CT Legacy REIT, comprised of 4.4 million shares of class A-1 common stock and 775,000 shares of class A-2 common stock. Also, in April 2011, we purchased 118,651 shares of class B common stock of CT Legacy REIT for an average price of $1.20 per share. The outstanding common stock of CT Legacy REIT is comprised of 4.4 million shares of class A-1 common stock, 5.6 million shares of class A-2 common stock, and 1.5 million shares of class B common stock. We also own 100% of the outstanding class A preferred stock of CT Legacy REIT, which initially entitles us to cumulative preferred dividends of $7.5 million per annum. These dividends will be reduced in January 2013 to the greater of (i) 2.5% of certain of CT Legacy REIT's assets, and (ii) $1.0 million per annum. As a result of our consolidation of CT Legacy REIT, these shares of class A preferred stock are not represented on our financial statements.

The following table details the allocation of CT Legacy REIT's adjusted equity by class of common stock, and Capital Trust Inc.'s aggregate investment in the common stock of CT Legacy REIT on an adjusted basis as of September 30, 2012. The adjusted equity balance is used to evaluate our investment in CT Legacy REIT because it excludes from GAAP equity items which are not indicative of our economic interests in the recovery of our legacy portfolio. See section III below for a presentation of CT Legacy REIT's adjusted balance sheet.

  Capital Trust, Inc.'s Investment in CT Legacy REIT as of September 30, 2012
  (in thousands)

  CT Legacy REIT total adjusted assets (at fair value) (1)              $116,245
  CT Legacy REIT total adjusted liabilities (1)                             (625 )

  Total CT Legacy REIT adjusted equity (1)                              $115,620

  CT Legacy REIT equity:
  Allocable to Class A-1 common stock                                    $43,551
  Allocable to Class A-2 common stock                                     64,749
  Allocable to Class B common stock                                        7,195
  Allocable to Class B preferred stock                                       125

                                                                        $115,620

  Capital Trust, Inc. ownership by class:
  Class A-1 common stock                                                     100 %
  Class A-2 common stock                                                      14 %
  Class B common stock (2)                                                     8 %

  Capital Trust, Inc. adjusted equity allocation:
  Class A-1 common stock                                                 $43,551
  Class A-2 common stock                                                   8,951
  Class B common stock (2)                                                   583

  Total Capital Trust investment in CT Legacy REIT                       $53,085

(1) See section III below for a presentation and discussion of CT Legacy REIT's adjusted balance sheet. See Note 12 to our consolidated financial statements for discussion of the discounted cash flow valuation of CT Legacy Asset, the largest asset of CT Legacy REIT.
(2) The class B common stock is a subordinate class that entitles its holders to receive approximately 25% of the dividends that would otherwise be payable to the class A-1 common stock, after aggregate cash distributions of $50.0 million have been paid to all other classes of common stock.

Our $53.1 million interest in the common stock of CT Legacy REIT is subject to
(i) the secured notes, which are collateralized by certain of our equity interests in the common stock of CT Legacy REIT, and (ii) incentive awards that provide for the participation in amounts earned from our retained equity interests in the common stock of CT Legacy REIT.

The following table details our interest in CT Legacy REIT's adjusted equity, net of the secured notes and management incentive awards as of September 30, 2012 (in thousands):

        Capital Trust, Inc.'s Net Investment in CT Legacy REIT as of
        September 30, 2012


        Gross investment in CT Legacy REIT (1)                    $53,085
        Secured notes, including prepayment premium (2)           (11,059 )
        Management incentive awards plan, fully vested
        (3)                                                        (7,805 )

        Investment in CT Legacy REIT, net                         $34,221

(1) Gross investment in CT Legacy REIT is calculated on an adjusted basis as detailed in the preceding table. See section III below for a presentation and discussion of CT Legacy REIT's adjusted balance sheet.
(2) Includes the full potential prepayment premium on secured notes, as described below. We carry this liability at its amortized basis of $8.3 million on our balance sheet as of September 30, 2012. The remaining interest and prepayment premium will be recognized, as applicable, over the term of the secured notes as a component of interest expense.
(3) Assumes full payment of the management incentive awards plan, as described below, based on the hypothetical GAAP liquidation value of CT Legacy REIT as of September 30, 2012. We periodically accrue a payable for the management incentive awards plan based on the vesting schedule for the awards and continued employment of the award recipients. As of September 30, 2012, our balance sheet includes $4.0 million in accounts payable and accrued expenses for the management incentive awards plan.

Secured Notes

In conjunction with our March 2011 restructuring and the corresponding satisfaction of our senior credit facility and junior subordinated notes, wholly-owned subsidiaries issued secured notes to these former creditors, which . . .