Edgar Filing: CAPITAL TRUST INC

Filed Pursuant to Rule 424(b)(3)
Registration Nos. 333-111261
333-106970

The information in this preliminary prospectus supplement is not complete and
may be changed. Two registration statements relating to these securities have
been filed with the Securities and Exchange Commission and have become
effective. This prospectus supplement and the accompanying prospectuses are
not an offer to sell these securities and are not soliciting an offer to buy
these securities in any jurisdiction where the offer or sale is not permitted.

PROSPECTUS SUPPLEMENT (Subject to Completion) Issued July 16, 2004
(To Prospectus dated December 29, 2003
and Prospectus dated July 21, 2003)

3,500,000 Shares

[CAPITAL TRUST LOGO]

CLASS A COMMON STOCK

----------------

Capital Trust, Inc. is offering 1,363,289 shares of its class A common stock.
The selling shareholders are offering 2,136,711 shares of our class A common
stock. We will not receive any proceeds from the sale of shares by the selling
shareholders.
----------------

Our shares of class A common stock are listed for trading on the New York
Stock Exchange under the symbol "CT." The last reported sale price of our
class A common stock on July 13, 2004 was $26.58 per share.
----------------

Investing in our class A common stock involves risks. See "Risk Factors"
beginning on page S-7 of this prospectus supplement.
----------------

PRICE $ A SHARE
----------------

Underwriting Proceeds
Price to Discounts and Proceeds to Selling
Public Commissions to Us Shareholders
-------- ------------- -------- ------------

Per share ................................. $ $ $ $
Total ..................................... $ $ $ $

We have granted the underwriters the right to purchase up to an additional
525,000 shares to cover over-allotments.

The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities or determined if this prospectus
supplement or either accompanying prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.

Morgan Stanley & Co. Incorporated expects to deliver the shares to the
purchasers on July , 2004.
----------------

MORGAN STANLEY

BEAR, STEARNS & CO. INC.

JEFFERIES & COMPANY, INC.

JMP SECURITIES

July , 2004

TABLE OF CONTENTS

PROSPECTUS SUPPLEMENT

PAGE
----

About this Prospectus Supplement ........................................ ii
Prospectus Supplement Summary ........................................... S-1
Risk Factors ............................................................ S-7
Cautionary Statement Regarding Forward-Looking Statements ............... S-21
Use of Proceeds ......................................................... S-22
Selling Shareholders .................................................... S-23
Price Range of Class A Common Stock and Dividend Policy ................. S-24
Historical and Pro Forma Capitalization ................................. S-25
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... S-26
Business ................................................................ S-40
Federal Income Tax Considerations ....................................... S-47
Underwriting ............................................................ S-62
Legal Matters ........................................................... S-65
Experts ................................................................. S-65
Where You Can Find More Information ..................................... S-65
Index to Financial Statements .......................................... F-1

PROSPECTUS DATED DECEMBER 29, 2003

Prospectus Summary ....................................................... 1
Risk Factors ............................................................. 5
Use of Proceeds .......................................................... 16
Price Range of Class A Common Stock ...................................... 16
Dividend Policy .......................................................... 17
Ratio of Earnings to Fixed Charges ....................................... 17
Selected Financial Data .................................................. 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business ................................................................. 37
Management ............................................................... 42
Principal Shareholders ................................................... 45
Description of Capital Stock ............................................. 47
Description of Debt Securities ........................................... 54
Federal Income Tax Considerations ........................................ 59
Plan of Distribution ..................................................... 72
Legal Matters ............................................................ 74
Experts .................................................................. 74
About this Prospectus .................................................... 74
Where You Can Find More Information ...................................... 74

PROSPECTUS DATED JULY 21, 2003

Note Regarding Forward-Looking Statements ................................ i
Prospectus Summary ....................................................... 1
Risk Factors ............................................................. 2
Use of Proceeds .......................................................... 10
Selected Financial Data .................................................. 11
Selling Shareholders ..................................................... 12
Plan of Distribution ..................................................... 15
Description of Our Stock ................................................. 18
Legal Matters ............................................................ 24
Experts .................................................................. 24
Where You Can Find More Information ...................................... 24

ABOUT THIS PROSPECTUS SUPPLEMENT

Unless the context otherwise indicates, references in this prospectus
supplement or the accompanying base prospectuses to "we," "us," "our" or
"Capital Trust" refer to Capital Trust, Inc., a Maryland corporation and its
subsidiaries, but not our third-party managed funds.

This prospectus supplement supplements two different prospectuses, which are
separately included as part of two different registration statements. The
prospectus dated December 29, 2003, which is a part of Registration Statement
No. 333-111261 and which we refer to as the company prospectus, relates to the
offering of class A common stock by us. The prospectus dated July 21, 2003,
which is a part of the Registration Statement No. 333-106970 and which we
refer to as the selling shareholder prospectus, relates to the offering of
common stock by the selling shareholders. We refer collectively to the company
prospectus and the selling shareholder prospectus as the "accompanying
prospectuses."

This document has three parts. The first part is the prospectus supplement,
which describes the specific terms of this offering and also adds to and
updates information contained in the accompanying prospectuses and the
documents incorporated by reference. The second and third parts are the two
accompanying prospectuses, which give more general information, some of which
may not apply to this offering. TO THE EXTENT THERE IS A CONFLICT BETWEEN THE
INFORMATION CONTAINED IN THIS PROSPECTUS SUPPLEMENT, THE INFORMATION CONTAINED
IN THE ACCOMPANYING PROSPECTUSES OR THE INFORMATION CONTAINED IN ANY DOCUMENT
INCORPORATED BY REFERENCE HEREIN OR THEREIN, THE INFORMATION CONTAINED IN THE
MOST RECENTLY DATED DOCUMENT SHALL CONTROL.

It is important for you to read and consider all information contained in
this prospectus supplement and each accompanying prospectus, including the
documents incorporated by reference herein and therein, in making your
investment decision. You should also read and consider the information in the
documents we have referred you to in "Where You Can Find More Information."

You should rely only on the information contained, incorporated or deemed
incorporated by reference in this prospectus supplement and the accompanying
prospectuses. We have not authorized anyone to give any information or to make
any representation not contained, incorporated or deemed incorporated by
reference in this prospectus supplement or the applicable accompanying
prospectuses in connection with the offering of shares of class A common stock
in this offering. You should not assume that the information contained in this
prospectus supplement and the accompanying prospectuses is correct as of any
date after the respective dates of this prospectus supplement and the
accompanying prospectuses, even though this prospectus supplement and the
accompanying prospectuses are delivered or these shares of common stock are
offered or sold on a later date.

This prospectus supplement is not, and neither of the accompanying
prospectuses are, an offer to sell any security other than the class A common
stock and they are not soliciting an offer to buy any security other than the
class A common stock. This prospectus supplement is not, and neither of the
accompanying prospectuses are, an offer to sell this class A common stock to
any person, and they are not soliciting an offer from any person to buy the
class A common stock, in any jurisdiction where the offer or sale to that
person is not permitted.

PROSPECTUS SUPPLEMENT SUMMARY

This summary highlights information contained elsewhere in this prospectus
supplement and the accompanying prospectuses. This summary does not contain
all the information that you should consider before investing in our class A
common stock. This prospectus supplement and the accompanying prospectuses
contain forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from the results anticipated in these
forward-looking statements. You should read this entire prospectus supplement
and the accompanying prospectuses carefully, including the risk factors and
financial statements.

The per share information presented in this prospectus supplement and the
accompanying prospectuses has been adjusted to give effect to the one for
three reverse stock split of our outstanding shares of class A common stock
effected on April 2, 2003 as though the reverse stock split was in effect for
all periods presented.

CAPITAL TRUST, INC.

We are a fully integrated, self-managed finance and investment management
company that specializes in credit-sensitive structured financial products. We
invest in loans, debt securities and related instruments for our own account
and on behalf of funds that we manage. To date, our investment programs have
focused on loans and securities backed by income-producing commercial real
estate assets with the objective of achieving attractive risk-adjusted returns
with low volatility. We conduct our operations to qualify as a real estate
investment trust, or REIT, for federal income tax purposes, and will elect
REIT status when we file our federal tax return for 2003 in the fourth quarter
of 2004. We generally intend to distribute each year substantially all of our
taxable income, which does not necessarily equal net income as calculated in
accordance with generally accepted accounting principles, to our shareholders
so as to comply with the REIT provisions of the Internal Revenue Code. We have
declared dividends of $0.45 per share for each of the first and second
quarters of 2004.

Since we commenced our finance business in July 1997 and through June 30,
2004, we have completed over $3.6 billion of real estate-related investments
in 123 separate transactions both directly and on behalf of our managed funds.
Our investment strategies are designed to generate high current returns
coupled with substantial downside protection. We implement these strategies by
applying a disciplined, rigorous process founded on four key elements:

o intense credit underwriting;

o creative financial structuring;

o efficient use of leverage; and

o aggressive asset management.

Our real estate investments take various forms, but are generally debt
investments that are subordinate to third-party financing and senior to the
owner/operator's equity position and, therefore, represent "mezzanine"
capital. Our current investment programs emphasize mezzanine loans, junior
interests in first mortgage loans, known as B Notes, and subordinate tranches
of commercial mortgage-backed securities, known as CMBS. We employ leverage to
enhance returns on equity, but seek to minimize interest rate exposure by
matching the duration and interest rate index of our assets and liabilities
and by using derivatives to hedge risk. Our objective is to create leveraged
portfolios of high-yield structured investments that are diversified and have
limited exposure to changes in interest rates. Since we commenced our finance
business in 1997 and through June 30, 2004, approximately 60% of our
investments, and those of our managed funds, have been fully realized and our
loss experience for this period has totaled less than 1% of our investments.

We make investments both for our own balance sheet and for funds that we
manage on behalf of institutional and high net worth individual investors. As
of March 31, 2004, our balance sheet assets totaled $465.8 million, comprised
primarily of loans receivable, mortgage-backed securities and co-investments
in our managed funds. We currently manage, through our wholly-owned
subsidiary, CT Investment Management Co, LLC, two private equity funds, CT
Mezzanine Partners II LP and CT Mezzanine Partners III, Inc., which we refer
to as Fund II and Fund III, respectively. During Fund II's two-year investment
period, which expired in April 2003, Fund II invested $1.2 billion in 40
separate transactions. As of March 31, 2004, Fund II had $432.9 million of
outstanding investments, all of which were performing. Fund III held its final
closing in August 2003, raising a total of $425 million of equity commitments.
As of March 31, 2004, Fund III had

S-1

closed 11 investments, totaling $319.5 million, all of which were performing
and $268.4 million of which were outstanding at March 31, 2004. With leverage,
we are seeking to originate over $1 billion of investments for Fund III during
its two-year investment period which expires in June 2005.

Our balance sheet investments generate net interest income, while our
investment management business produces co-investment income, base management
fees, and, if certain profit thresholds are exceeded, incentive management
fees representing our share of the funds' profits. Commercial real estate
investment opportunities that meet Fund III's duration, size and leveraged
return parameters are allocated to Fund III and other opportunities are
allocated to our balance sheet.

Our business strategy is to continue to grow our balance sheet investments
and our third-party assets under management. We expect the growth of our
business to be driven primarily by the following activities:

o we will continue to make balance sheet commercial real estate mezzanine
investments;

o we will expand our investment management business through additional
offerings of subsequent CT Mezzanine Partners funds; and

o we may pursue other balance sheet and investment management businesses
that leverage our core skills in credit underwriting and financial
structuring.

As we continue to grow our business, we seek to create the most efficient
capital structure for our activities. Our success in the development and
implementation of liability structures that offer attractive economic terms
while affording us the necessary flexibility to execute our investment
programs has and is expected to continue to be an integral factor in our
business growth. We believe the use of structured products, such as the CDO-1
transaction discussed below, represents a major improvement in the way we
finance our business and we expect to continue to develop other structured
products that will become a more important, permanent portion of our capital
structure in the future.

RECENT DEVELOPMENTS

On May 11, 2004, we closed on the initial tranche of a direct public
offering to designated controlled affiliates of W. R. Berkley Corporation,
which we refer to as Berkley. We issued 1,310,000 shares of our class A common
stock and stock purchase warrants to purchase 365,000 shares of our class A
common stock for a total purchase price of $30.7 million. On June 21, 2004, we
closed on the second tranche of the direct public offering and issued an
additional 325,000 shares of our class A common stock for a total purchase
price of $7.6 million. The warrants have an exercise price of $23.40 per share
and expire on December 31, 2004. Pursuant to a director designation right
granted to Berkley in the transaction, we appointed Joshua A. Polan to our
board of directors.

In June and July of 2004, CT Investment Management Co. was approved as a
Special Servicer by Fitch Ratings, Standard & Poor's and Moody's Investors
Service. These approvals allow CT Investment Management Co. to act as a named
Special Servicer for CMBS and B Note investments. As Special Servicer, we
believe CT Investment Management Co. will be able to increase the control it
has in managing certain portions of its portfolio while potentially generating
additional fee income. Approval from the agencies was based upon, among other
things, our experience in managing and working out problem assets, our
established asset management policies and procedures and our technology
systems. We believe the ability to be a Special Servicer improves the asset
management of our existing portfolio, and facilitates our planned increase in
our CMBS and B Note investment activity.

On June 29, 2004, we priced a $320.8 million issue of collateralized debt
obligations, commonly known as CDOs. We intend to use the net proceeds from
the private placement to acquire a portfolio of B Notes and mezzanine loans
and to refinance certain of our existing balance sheet assets. The following
related transactions, which together we call the CDO-1 transaction, are all
scheduled to close on July 20, 2004:

o we will purchase a $251.2 million portfolio of 40 floating rate B Notes
and one mezzanine loan from GMAC Commercial Mortgage Corporation;

o we will contribute those assets, along with $72.9 million of existing B
Notes, mezzanine loans and subordinate CMBS from our own balance sheet,
to Capital Trust RE CDO 2004-1, our consolidated wholly-owned subsidiary
that we call the Issuer;

o the Issuer will issue $320.8 million of floating rate CDOs secured by its
assets;

S-2

o the Issuer will sell all of the $252.8 million of CDOs that are rated
investment grade to a group of institutional investors; and

o we will acquire and retain all of the $68.1 million of unrated and below
investment grade CDOs in addition to all of the Issuer's $3.2 million of
equity.

The CDO-1 transaction provides us with a number of significant benefits,
including:

o increasing our balance sheet interest earning assets by $251.2 million, a
61% increase compared to March 31, 2004;

o creating non-recourse financing at an all-in borrowing cost to us that is
significantly lower than the cost of our existing sources of debt
capital;

o obtaining long-term, floating rate financing that matches both the
interest rate index and duration of our assets;

o extending the useful life of the financing through a four year
reinvestment period during which principal proceeds from the initial CDO
assets can be reinvested in qualifying replacement assets; and

o establishing us as a CDO issuer and collateral manager, which we believe
will facilitate our issuance of additional CDOs in the future.

The closing of this offering is not contingent upon completion of the CDO-1
transaction.
----------------

We were incorporated in Maryland on April 7, 1998 as a successor to a
business trust organized in 1966. We commenced our balance sheet finance
business in July 1997 and our investment management business in March 2000.
Our principal executive offices are located at 410 Park Avenue, 14th Floor,
New York, New York 10022, and our telephone number is (212) 655-0220. Our
website address is www.capitaltrust.com. Information included or referred to
on our website is not incorporated by reference nor is it otherwise a part of
this prospectus supplement or the accompanying prospectuses.

S-3

THE OFFERING

ISSUER. . . . . . . . . . . . . . . . . . . . . . . . Capital Trust, Inc.

CLASS A COMMON STOCK OFFERED BY US. . . . . . . . . . 1,363,289 shares

CLASS A COMMON STOCK OFFERED BY THE
SELLING SHAREHOLDERS . . . . . . . . . . . . . . . . 2,136,711 shares

CLASS A COMMON STOCK TO BE OUTSTANDING AFTER
THIS OFFERING . . . . . . . . . . . . . . . . . . . 11,800,343 shares

USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . We intend to use the net
proceeds to us from the
sale of the shares of
our class A common stock
for general corporate
purposes, including
funding our balance
sheet investment
activity, our capital
commitments to Fund III
and any future
investment funds, the
repayment of
indebtedness, including
our convertible junior
subordinated debentures
and our credit facility,
working capital and
potential business
acquisitions. We will
not receive any proceeds
from the sale of
2,136,711 shares of our
class A common stock by
the selling
shareholders.

NEW YORK STOCK EXCHANGE SYMBOL. . . . . . . . . . . . CT

RISK FACTORS. . . . . . . . . . . . . . . . . . . . . You should carefully
consider all of the
information in this
prospectus supplement
and the accompanying
prospectuses. In
particular, you should
evaluate the information
set forth under "Risk
Factors" beginning on
page S-7 of this
prospectus supplement
before deciding whether
to invest in our class A
common stock.

Unless we specifically provide otherwise, all share information in this
prospectus supplement is as of June 30, 2004, assumes that the underwriters do
not exercise their over-allotment option, excludes 365,000 shares of our class
A common stock issuable upon the exercise of warrants issued to Berkley,
465,833 shares of our class A common stock issuable upon the exercise of
options outstanding as of June 30, 2004 under our amended and restated 1997
long-term incentive stock plan with a weighted average exercise price of
$19.62 per share, 85,002 shares of our class A common stock issuable upon the
exercise of options outstanding as of June 30, 2004 under our amended and
restated 1997 non-employee director stock plan with a weighted average
exercise price of $27.65 per share, 218,818 shares of our class A common stock
issued to John R. Klopp on July 15, 2004 pursuant to our employment agreement
with him and, except for the shares to be sold in this offering upon
conversion of convertible trust preferred securities, 2,136,711 shares of our
class A common stock issuable upon the conversion of our convertible trust
preferred securities outstanding as of June 30, 2004 and remaining outstanding
after completion of this offering.

S-4

SUMMARY FINANCIAL DATA

The following selected consolidated financial data as of and for each of the
years ended December 31, 2003, 2002, 2001, 2000 and 1999 was derived from our
historical consolidated financial statements included in our Annual Reports on
Form 10-K for each of the years presented. The following selected consolidated
financial data as of and for each of the three months ended March 31, 2004 and
2003 was derived from our historical consolidated financial statements
included in our Quarterly Reports on Form 10-Q for both of the three month
periods presented, which, in the opinion of our management, have been prepared
on the same basis as our audited consolidated financial statements and reflect
all adjustments, consisting of normal recurring adjustments, necessary for a
fair presentation of our results of operations and financial position for such
periods. Results for the three month periods ended March 31, 2004 and 2003 are
not necessarily indicative of results that may be expected for the entire
year.

Certain reclassifications have been made to all periods presented to reflect
the application of Financial Accounting Standards Board Interpretation No. 46R
on January 1, 2004 following the adoption of which we no longer consolidate CT
Convertible Trust I, the entity which had purchased our junior subordinated
debentures and issued convertible trust common and preferred securities.

We began to conduct our operations to qualify as a REIT for federal income
tax purposes in the 2003 fiscal year, and will elect REIT status for the 2003
fiscal year when we file our 2003 federal tax return in the fourth quarter of
2004. This election should result in a material reduction of our tax liability
for 2003 and subsequent periods. As a result, our income tax expense and net
income after tax for 2003 and subsequent periods will not be comparable to our
income tax expense and net income after tax for periods prior to 2003. Prior
to March 8, 2000, we did not serve as investment manager for any funds under
management and only our historical financial data as of and for the years
ended December 31, 2003, 2002, 2001 and 2000 reflects the operating results
for our investment management business. For these reasons, we believe that the
following summary consolidated financial data for the year ended December 31,
1999 is not indicative of our current business.

You should read the following information together with "Risk Factors,"
"Capitalization," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and the
notes thereto included elsewhere in this prospectus supplement.

THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------------------- -----------------
2003 2002 2001 2000 1999 2004 2003
------- -------- ------- ------- -------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

STATEMENT OF OPERATIONS DATA:
REVENUES:
Interest and investment income......................... $38,577 $ 47,655 $68,200 $88,875 $ 90,223 $ 9,026 $ 9,048
Income/(loss) from equity investments in affiliated
funds................................................. 1,526 (2,534) 2,991 1,530 -- 394 785
Advisory and investment banking fees................... -- 2,207 277 3,920 17,772 -- --
Management and advisory fees from funds................ 8,020 10,123 7,664 373 -- 2,084 1,376
------- -------- ------- ------- -------- ------- -------
Total revenues........................................ 48,123 57,451 79,132 94,698 107,995 11,504 11,209
------- -------- ------- ------- -------- ------- -------
OPERATING EXPENSES:
Interest expense....................................... 19,575 34,184 42,856 52,418 53,349 5,069 4,728
General and administrative expenses.................... 13,320 13,996 15,382 15,439 17,345 2,938 3,704
Depreciation and amortization.......................... 1,057 992 909 902 345 274 232
Net unrealized (gain)/loss on derivative securities and
corresponding hedged risk on CMBS..................... -- (21,134) 542 -- -- -- --
Net realized (gain)/loss on sale of fixed assets,
investments and settlement of derivative securities... -- 28,715 -- 64 (35) -- --
Provision for/(recapture of) allowance for possible
credit losses......................................... -- (4,713) 748 5,478 4,103 -- --
------- -------- ------- ------- -------- ------- -------
Total operating expenses.............................. 33,952 52,040 60,437 74,301 75,107 8,281 8,664
------- -------- ------- ------- -------- ------- -------
Income/(loss) before income tax expense................ 14,171 5,411 18,695 20,397 32,888 3,223 2,545
Income tax expense..................................... 646 15,149 9,325 10,636 15,812 141 --
------- -------- ------- ------- -------- ------- -------
NET INCOME / (LOSS) 13,525 (9,738) 9,370 9,761 17,076 3,082 2,545
Less: Preferred stock dividend and dividend requirement -- -- 606 1,615 2,375 -- --
------- -------- ------- ------- -------- ------- -------
Net income/(loss) allocable to common stock............ $13,525 $ (9,738) $ 8,764 $ 8,146 $ 14,701 $ 3,082 $ 2,545
======= ======== ======= ======= ======== ======= =======
PER SHARE INFORMATION:
Net income/(loss) per share of common stock:
Basic............................................... $ 2.27 $ (1.62) $ 1.30 $ 1.05 $ 2.07 $ 0.47 $ 0.46
======= ======== ======= ======= ======== ======= =======
Diluted............................................. $ 2.23 $ (1.62) $ 1.12 $ 0.99 $ 1.65 $ 0.46 $ 0.46
======= ======== ======= ======= ======== ======= =======
Dividends declared per share of common stock........... $ 1.80 $ -- $ -- $ -- $ -- $ 0.45 $ 0.45
======= ======== ======= ======= ======== ======= =======
Weighted average shares of common stock outstanding:
Basic............................................... 5,947 6,009 6,722 7,724 7,111 6,583 5,515
======= ======== ======= ======= ======== ======= =======
Diluted............................................. 10,288 6,009 12,041 9,897 14,575 6,730 5,539
======= ======== ======= ======= ======== ======= =======

AS OF DECEMBER 31, AS OF MARCH 31,
------------------------------------------------------ -------------------
2003 2002 2001 2000 1999 2004 2003
-------- -------- -------- -------- -------- -------- --------

BALANCE SHEET DATA:
Total assets...................................... $399,926 $387,759 $683,451 $649,043 $832,459 $465,803 $387,252
Total liabilities................................. 303,909 303,703 580,823 490,377 673,919 366,166 306,879
Shareholders' equity.............................. 96,017 84,056 102,628 158,666 158,540 99,637 80,373

S-5

UNAUDITED PRO FORMA BALANCE SHEET

The unaudited pro forma balance sheet as of March 31, 2004 gives effect to
the CDO-1 transaction, which is scheduled to close on July 20, 2004, and the
direct public offering to Berkley, which we closed in two tranches on May 11
and June 21, 2004, respectively, and are fully described under the caption
"Prospectus Supplement Summary--Recent Developments" beginning on page S-40.
The closing of this offering is not contingent upon completion of the CDO-1
transaction. The pro forma information is presented for illustrative purposes
only and does not necessarily indicate the amount of our assets, liabilities
and shareholders' equity that would have been recorded on our balance sheet as
of March 31, 2004 had the CDO-1 transaction and direct public offering to
Berkley closed as of that date.

You should read the following information together with "Prospectus
Supplement Summary--Summary Financial Data," "Risk Factors," "Capitalization,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the consolidated financial statements and the notes thereto
included elsewhere in this prospectus supplement.

PRO FORMA
MARCH 31, PRO FORMA MARCH 31,
2004 ADJUSTMENTS 2004
--------- ----------- ---------
(UNAUDITED)
(IN THOUSANDS)

ASSETS
Cash and cash equivalents................................................................. $ 23,124 $ -- $ 23,124
Available-for-sale securities, at fair value.............................................. 16,801 -- 16,801
Commercial mortgage-backed securities available-for-sale, at fair value................... 199,784 -- 199,784
Loans receivable, net of $6,672 reserve for possible credit losses at March 31, 2004 ..... 190,806 251,208 442,014
Equity investment in CT Mezzanine Partners I LLC, CT Mezzanine Partners II LP, CT MP II
LLC and CT Mezzanine Partners III, Inc. ................................................ 21,967 -- 21,967
Deposits and other receivables............................................................ 5 -- 5
Accrued interest receivable............................................................... 3,425 -- 3,425
Deferred income taxes .................................................................... 4,181 -- 4,181
Prepaid and other assets.................................................................. 5,710 5,347 11,057
-------- -------- --------
Total assets............................................................................... $465,803 $256,555 $722,358
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses..................................................... $ 8,637 $ -- $ 8,637
Credit facilities......................................................................... 64,700 (26,372) 38,328
Collateralized debt obligations........................................................... -- 252,778 252,778
Repurchase obligations.................................................................... 194,333 (8,110) 186,223
Step up convertible junior subordinated debentures ....................................... 92,367 -- 92,367
Deferred origination fees and other revenue............................................... 2,832 -- 2,832
Interest rate hedge liabilities........................................................... 3,297 -- 3,297
-------- -------- --------
Total liabilities.......................................................................... 366,166 218,296 584,462
-------- -------- --------
Shareholders' equity:
Class A common stock, $0.01 par value, 100,000 shares authorized, 6,572 and 8,207 shares
issued and outstanding at March 31, 2004 and March 31, 2004, as adjusted, respectively . 66 16 82
Restricted class A common stock, $0.01 par value, 64 shares issued and outstanding at
March 31, 2004 ......................................................................... 1 -- 1
Additional paid-in capital................................................................ 143,359 38,243 181,602
Unearned compensation..................................................................... (1,371) -- (1,371)
Accumulated other comprehensive loss...................................................... (31,190) -- (31,190)
Accumulated deficit....................................................................... (11,228) -- (11,228)
-------- -------- --------
Total shareholders' equity................................................................. 99,637 38,259 137,896
-------- -------- --------
Total liabilities and shareholders' equity................................................. $465,803 $256,555 $722,358
======== ======== ========

S-6

RISK FACTORS

An investment in our class A common stock involves various risks. You should
carefully consider the following risk factors in conjunction with the other
information contained and incorporated by reference into this prospectus
supplement and the accompanying prospectuses before purchasing our class A
common stock. If any of the risks discussed in this prospectus supplement
actually occur, our business, operating results, prospects and/or financial
condition could be adversely impacted. This could cause the market price of
our class A common stock to decline and could cause you to lose all or part of
your investment.

In connection with the forward-looking statements that appear in this
prospectus supplement and the accompanying prospectuses, you should also
carefully review the cautionary statement referred to under "Cautionary
Statement Regarding Forward-Looking Statements."

RISKS RELATED TO OUR INVESTMENT PROGRAM

OUR EXISTING LOANS AND INVESTMENTS EXPOSE US TO A HIGH DEGREE OF RISK
ASSOCIATED WITH INVESTING IN COMMERCIAL REAL ESTATE-RELATED ASSETS.

Real estate historically has experienced significant fluctuations and cycles
in performance that may result in reductions in the value of our real estate-
related investments. The performance and value of our loans and investments
once originated or acquired by us depends on many factors beyond our control.
The ultimate performance and value of our investments is subject to the
varying degrees of risk generally incident to the ownership and operation of
the commercial properties which collateralize or support our investments. The
ultimate performance and value of our loans and investments depends upon the
commercial property owner's ability to operate the property so that it
produces cash flows needed to pay the interest and principal due to us on our
loans and investments. Revenues and cash flows may be adversely affected by:

o changes in national economic conditions;

o changes in local real estate market conditions due to changes in national
or local economic conditions or changes in local property market
characteristics;

o competition from other properties offering the same or similar services;

o changes in interest rates and in the availability of mortgage financing;

o the ongoing need for capital improvements, particularly in older
structures;

o changes in real estate tax rates and other operating expenses;

o adverse changes in governmental rules and fiscal policies, civil unrest,
acts of God, including earthquakes, hurricanes and other natural
disasters, acts of war or terrorism, which may decrease the availability
of or increase the cost of insurance or result in uninsured losses;

o adverse changes in zoning laws;

o the impact of present or future environmental legislation and compliance
with environmental laws; and

o other factors that are beyond our control and the control of the
commercial property owners.

In the event that any of the properties underlying our loans or investments
experiences any of the foregoing events or occurrences, the value of, and
return on, such investments, our profitability and the market price of our
class A common stock would be negatively impacted.

WE MAY CHANGE OUR INVESTMENT STRATEGY WITHOUT SHAREHOLDER CONSENT WHICH MAY
RESULT IN RISKIER INVESTMENTS THAN OUR CURRENT INVESTMENTS.

As part of our strategy, we may seek to expand our investment activities
beyond real estate-related investments. We may change our investment
activities at any time without the consent of our shareholders, which could
result in our making investments that are different from, and possibly riskier
than, our current real estate investments. New investments we may make outside
of our area of expertise may not perform as well as our current portfolio of
real estate investments.

S-7

WE ARE EXPOSED TO THE RISKS INVOLVED WITH MAKING SUBORDINATED INVESTMENTS.

Our investments involve the risks attendant to investments consisting of
subordinated loan positions. In many cases, management of our investments and
our remedies with respect thereto, including the ability to foreclose on or
direct decisions with respect to the collateral securing such investments, is
subject to the rights of senior lenders and the rights set forth in inter-
creditor or servicing agreements.

WE MAY NOT BE ABLE TO OBTAIN THE LEVEL OF LEVERAGE NECESSARY TO OPTIMIZE OUR
RETURN ON INVESTMENT.

Our return on investment depends, in part, upon our ability to grow our
balance sheet portfolio of invested assets and those of our funds through the
use of leverage at interest rates that are lower than the interest rates
earned on our investments. We generally obtain leverage through bank credit
facilities, repurchase agreements and other borrowings. Our ability to obtain
the necessary leverage on attractive terms ultimately depends upon the quality
of the portfolio assets that are being pledged and our ability to maintain
interest coverage ratios meeting prevailing market underwriting standards
which vary according to lenders' assessments of our and our funds'
creditworthiness and the terms of the borrowings. Our failure to obtain and/or
maintain leverage at desired levels, or to obtain leverage on attractive
terms, could have a material adverse effect on our performance or that of our
funds. Moreover, we are dependent upon a few lenders to provide the primary
credit facilities for our origination or acquisition of loans and investments.
Our ability to obtain financing through collateralized debt obligations is
subject to conditions in the debt capital markets, which may be adverse from
time to time, that affect the level of investor demand for such securities,
which are impacted by factors beyond our control.

WE ARE SUBJECT TO THE RISKS OF HOLDING LEVERAGED INVESTMENTS.

Leverage creates an opportunity for increased return on equity, but at the
same time creates other risks. For example, leveraging magnifies changes in
the net worth of our funds. We and our funds will leverage assets only when
there is an expectation that leverage will enhance returns, although we cannot
assure you that the use of leverage will prove to be beneficial. Increases in
credit spreads in the market generally may adversely affect the market value
of our investments. Because borrowings under our credit facilities are secured
by our investments, the borrowings available to us may decline if the market
value of our investments decline. Moreover, we cannot assure you that we and
our funds will be able to meet debt service obligations and, to the extent
such obligations are not met, there is a risk of loss of some or all of our
and their assets through foreclosure or a financial loss if we or they are
required to liquidate assets at a commercially inopportune time to satisfy our
debt obligations.

OUR SUCCESS DEPENDS ON THE AVAILABILITY OF ATTRACTIVE INVESTMENTS AND OUR
ABILITY TO IDENTIFY, STRUCTURE, CONSUMMATE, MANAGE AND REALIZE RETURNS ON
ATTRACTIVE INVESTMENTS.

Our operating results are dependent upon the availability of, as well as our
ability to identify, structure, consummate, manage and realize returns on,
credit-sensitive investment opportunities. In general, the availability of
desirable credit sensitive investment opportunities and, consequently, our
balance sheet returns and our funds' investment returns, will be affected by
the level and volatility of interest rates, by conditions in the financial
markets, by general economic conditions, by the market and demand for credit-
sensitive investment opportunities, and by the supply of capital for such
investment opportunities. We cannot assure you that we will be successful in
identifying and consummating investments which satisfy our rate of return
objectives or that such investments, once consummated, will perform as
anticipated.

In addition, notwithstanding the fact that we earn base management fees
based upon committed capital during the investment period, if we are not
successful in investing all available equity capital for our funds, the
potential revenues we earn, including base management fees that are charged on
the amount of invested assets after the investment period and incentive
management fees, will be reduced. We may expend significant time and resources
in identifying and pursuing targeted investments, some of which may not be
consummated.

S-8

THE REAL ESTATE INVESTMENT BUSINESS IS HIGHLY COMPETITIVE. OUR SUCCESS DEPENDS
ON OUR ABILITY TO COMPETE WITH OTHER PROVIDERS OF CAPITAL FOR REAL ESTATE
INVESTMENTS.

Our business is highly competitive. We compete for attractive investments
with traditional lending sources, such as insurance companies and banks, as
well as other REITs, specialty finance companies and private equity funds with
similar investment objectives, which may make it more difficult for us to
consummate our target investments. Many of our competitors have greater
financial resources than us, which provides them with greater operating
flexibility.

OUR LOANS AND INVESTMENTS MAY BE SUBJECT TO FLUCTUATIONS IN INTEREST RATES
WHICH MAY NOT BE ADEQUATELY PROTECTED, OR PROTECTED AT ALL, BY OUR HEDGING
STRATEGIES.

Our current balance sheet investment program emphasizes loans with
"floating" interest rates to protect against fluctuations in interest rates.
We do, however, from time to time make fixed rate loans and purchase fixed
rate securities, which are subject to the risk of fluctuations in interest
rates. Depending on market conditions, fixed rate assets may become a greater
portion of our new loan originations. In such cases, we may employ various
hedging strategies to limit the effects of changes in interest rates,
including engaging in interest rate swaps, caps, floors and other interest
rate derivative products. No strategy can completely insulate us or our funds
from the risks associated with interest rate changes and there is a risk that
they may provide no protection at all. Hedging transactions involve certain
additional risks such as counterparty risk, the legal enforceability of
hedging contracts, the early repayment of hedged transactions and the risk
that unanticipated and significant changes in interest rates may cause a
significant loss of basis in the contract and a change in current period
expense. We cannot assure you that we will be able to enter into hedging
transactions or that such hedging transactions will adequately protect us or
our funds against the foregoing risks. In addition, cash flow hedges which are
not perfectly correlated with a variable rate financing will impact our
reported income as gains, and losses on the ineffective portion of such hedges
will be recorded.

OUR LOANS AND INVESTMENTS MAY BE ILLIQUID WHICH WILL CONSTRAIN OUR ABILITY TO
VARY OUR PORTFOLIO OF INVESTMENTS.

Our real estate investments are relatively illiquid. Such illiquidity may
limit our ability to vary our portfolio or our funds' portfolios of
investments in response to changes in economic and other conditions.
Illiquidity may result from the absence of an established market for
investments as well as the legal or contractual restrictions on their resale.
In addition, illiquidity may result from the decline in value of a property
securing one of our or our funds' investments. We cannot assure you that the
fair market value of any of the real property serving as security will not
decrease in the future, leaving our or our funds' investments under-
collateralized or not collateralized at all, which could impair the liquidity
and value, as well as our return on such investments.

WE MAY NOT HAVE CONTROL OVER CERTAIN OF OUR LOANS AND INVESTMENTS.

Our ability to manage our portfolio of loans and investments may be limited
by the form in which they are made. In certain situations, we or our funds
may:

o acquire investments subject to rights of senior classes and servicers
under inter-creditor or servicing agreements;

o acquire only a participation in an underlying investment;

o co-invest with third parties through partnerships, joint ventures or
other entities, thereby acquiring non-controlling interests; or

o rely on independent third party management or strategic partners with
respect to the management of an asset.

S-9

or business interests or goals which are inconsistent with ours and those of
our funds, or may be in a position to take action contrary to our or our
funds' investment objectives. In addition, we and our funds may, in certain
circumstances, be liable for the actions of our third party partners or co-
venturers.

WE MAY NOT ACHIEVE OUR TARGETED RATE OF RETURN ON OUR INVESTMENTS.

We originate or acquire investments based on our estimates or projections of
overall rates of return on such investments, which in turn are based on, among
other considerations, assumptions regarding the performance of assets, the
amount and terms of available financing to obtain desired leverage and the
manner and timing of dispositions, including possible asset recovery and
remediation strategies, all of which are subject to significant uncertainty.
In addition, events or conditions that we have not anticipated may occur and
may have a significant effect on the actual rate of return received on an
investment.

We are currently experiencing a low interest rate environment which
negatively impacts our ability to originate or acquire investments that
produce rates of returns similar to existing investments that were added to
our portfolio during a higher interest rate environment. As we acquire or
originate investments for our balance sheet portfolio, whether as new
additions or as replacements for maturing investments, there can be no
assurance that we will be able to originate or acquire investments that
produce rates of return comparable to rates on our existing investments.

The commercial mortgage and mezzanine loans we originate or acquire and the
commercial mortgage loans underlying the CMBS in which we invest are subject
to delinquency, foreclosure and loss, which could result in losses to us.

Our commercial mortgage and mezzanine loans are secured by commercial
property and are subject to risks of delinquency and foreclosure, and risks of
loss that are greater than similar risks associated with loans made on the
security of single-family residential property. The ability of a borrower to
repay a loan secured by an income-producing property typically is dependent
primarily upon the successful operation of the property rather than upon the
existence of independent income or assets of the borrower. If the net
operating income of the property is reduced, the borrower's ability to repay
the loan may be impaired. Net operating income of an income-producing property
can be affected by, among other things: tenant mix, success of tenant
businesses, property management decisions, property location and condition,
competition from comparable types of properties, changes in laws that increase
operating expenses or limit rents that may be charged; any need to address
environmental contamination at the property; changes in national, regional or
local economic conditions and/or specific industry segments; declines in
regional or local real estate values and declines in regional or local rental
or occupancy rates; increases in interest rates, real estate tax rates and
other operating expenses; and changes in governmental rules, regulations and
fiscal policies, including environmental legislation, acts of God, terrorism,
social unrest and civil disturbances.

OUR INVESTMENTS IN SUBORDINATED CMBS ARE SUBJECT TO LOSSES.

In general, losses on an asset securing a mortgage loan included in a
securitization will be borne first by the equity holder of the property, then
by a cash reserve fund or letter of credit, if any, and then by the most
junior 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 may not be able to recover all of our
investment in the securities we purchase. In addition, if the underlying
mortgage portfolio has been overvalued by the originator, or if the values
subsequently decline and, as a result, less collateral is available to satisfy
interest and principal payments due on the related mortgage-backed securities,
the securities in which we invest may incur significant losses.

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 and underlying borrower 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 borrowers
of the mortgages underlying the mortgage-backed securities 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.

S-10

WE MAY EXPERIENCE SIGNIFICANT REDUCTIONS IN NET INCOME IF THE IMPAIRMENTS ON
OUR CMBS INVESTMENTS ARE DEEMED TO BE "OTHER-THAN-TEMPORARY".

The current fair value of certain of our CMBS investments is less than their
recorded amortized cost. Since our CMBS investments are accounted for as
available-for-sale securities, we have reduced our shareholders equity by an
amount equal to the difference between the amortized cost and the fair value
by taking a charge to other comprehensive income. As of March 31, 2004, these
unrealized losses totaled $28.6 million. Under generally accepted accounting
principles, if there are significant changes in the future to the expected
cash flows from a particular investment due to prepayment or credit loss
experience, the investment will have incurred an other-than-temporary
impairment. If that occurs, we will be required to write down the investment
to its fair value and take a charge to income equal to the unrealized loss,
recognizing an offsetting increase to other comprehensive income with equity
remaining unchanged. If we recognize other-than-temporary impairments on our
CMBS investments that have experienced significant reductions in fair value,
the resulting write-downs could result in significant reductions of our net
income for the period in which the other-than-temporary impairment is
recognized.

WE MAY INVEST IN TROUBLED ASSETS THAT ARE SUBJECT TO A HIGHER DEGREE OF
FINANCIAL RISK.

We may make investments in non-performing or other troubled assets that
involve a higher degree of financial risk. We cannot assure you that our
investment objectives will be realized or that there will be any return on our
investment. Furthermore, investments in properties subject to work-out
conditions or under bankruptcy protection laws may, in certain circumstances,
be subject to additional potential liabilities that could exceed the value of
our original investment, including equitable subordination and/or disallowance
of claims or lender liability.

WE MAY NOT BE ABLE TO ACQUIRE ELIGIBLE INVESTMENTS FOR A COLLATERALIZED DEBT
OBLIGATION ISSUANCE, OR MAY NOT BE ABLE TO ISSUE COLLATERALIZED DEBT
OBLIGATION SECURITIES ON ATTRACTIVE TERMS, WHICH MAY REQUIRE US TO UTILIZE
MORE COSTLY FINANCING FOR OUR INVESTMENTS.

We intend to capitalize on opportunities to finance certain of our
investments on a non-recourse, long-term basis, such as through the issuance
of collateralized debt obligations. During the period that we are acquiring
these investments, we intend to finance our purchases through our credit and
repurchase obligation facilities. We use these facilities to finance our
acquisition of investments until we have accumulated a sufficient quantity of
investments, at which time we may refinance these lines through a
securitization, such as a collateralized debt obligation issuance, or other
types of long-term financing. As a result, we are subject to the risk that we
will not be able to acquire a sufficient amount of eligible investments to
maximize the efficiency of a collateralized debt obligation issuance. In
addition, conditions in the capital markets may make the issuance of
collateralized debt obligations less attractive to us when we do have a
sufficient pool of collateral. If we are unable to issue a collateralized debt
obligation to finance these investments, we may be required to utilize other
forms of potentially less attractive financing.

WE MAY NOT BE ABLE TO FIND SUITABLE REPLACEMENT INVESTMENTS IN COLLATERALIZED
DEBT OBLIGATIONS WITH REINVESTMENT PERIODS.

Some collateralized debt obligations have periods where principal proceeds
received from assets securing the collateralized debt obligation can be
reinvested for a defined period of time, commonly referred to as a
reinvestment period. Our ability to find suitable investments during the
reinvestment period that meet the criteria set forth in the collateralized
debt obligation documentation and by rating agencies may determine the success
of our collateralized debt obligation investments. Our potential inability to
find suitable investments may cause, among other things, interest
deficiencies, hyper-amortization of the senior collateralized debt obligation
liabilities and may cause us to reduce the life of our collateralized debt
obligations and accelerate the amortization of certain fees and expenses.

THE USE OF COLLATERALIZED DEBT OBLIGATION FINANCINGS WITH OVER-
COLLATERALIZATION AND INTEREST COVERAGE REQUIREMENTS MAY HAVE A NEGATIVE
IMPACT ON OUR CASH FLOW.

The terms of collateralized debt obligations will generally provide that the
principal amount of investments must exceed the principal balance of the
related bonds by a certain amount and that interest income exceeds interest
expense by a certain amount. We anticipate that the collateralized debt
obligation

S-11

terms will provide that, if certain delinquencies and/or losses or other
factors cause a decline in collateral or cash flow levels, the cash flow
otherwise payable on our investment may be redirected to repay classes of CDOs
senior to ours until the issuer or the collateral is in compliance with the
terms of the governing documents. Other tests (based on delinquency levels or
other criteria) may restrict our ability to receive net income from assets
pledged to secure collateralized debt obligations. We cannot assure you that
the performance tests will be satisfied. Nor can we assure you, in advance of
completing negotiations with the rating agencies or other key transaction
parties as to the actual terms of the delinquency tests, over-
collateralization and interest coverage terms, cash flow release mechanisms or
other significant factors upon which net income to us will be calculated.
Failure to obtain favorable terms with regard to these matters may adversely
affect the availability of net income to us. If our investments fail to
perform as anticipated, our over-collateralization, interest coverage or other
credit enhancement expense associated with our collateralized debt obligation
financings will increase.

WE MAY BE REQUIRED TO REPURCHASE LOANS THAT WE HAVE SOLD OR TO INDEMNIFY
HOLDERS OF OUR COLLATERALIZED DEBT OBLIGATIONS.

If any of the loans we originate or acquire and sell or securitize through
collateralized debt obligations do not comply with representations and
warranties that we make about certain characteristics of the loans, the
borrowers and the underlying properties, we may be required to repurchase
those loans or replace them with substitute loans. In addition, in the case of
loans that we have sold instead of retained, we may be required to indemnify
persons for losses or expenses incurred as a result of a breach of a
representation or warranty. Repurchased loans typically require a significant
allocation of working capital to carry on our books, and our ability to borrow
against such assets is limited. Any significant repurchases or indemnification
payments could adversely affect our financial condition and operating results.

THE IMPACT OF THE EVENTS OF SEPTEMBER 11, 2001 AND THE RESULTING EFFECT ON
TERRORISM INSURANCE EXPOSE US TO CERTAIN RISKS.

The terrorist attacks on September 11, 2001 disrupted the U.S. financial
markets, including the real estate capital markets, and negatively impacted
the U.S. economy in general. Any future terrorist attacks, the anticipation of
any such attacks, and the consequences of any military or other response by
the U.S. and its allies may have a further adverse impact on the U.S.
financial markets and the economy generally. We cannot predict the severity of
the effect that such future events would have on the U.S. financial markets,
the economy or our business.

In addition, the events of September 11 created significant uncertainty
regarding the ability of real estate owners of high profile assets to obtain
insurance coverage protecting against terrorist attacks at commercially
reasonable rates, if at all. With the enactment of the Terrorism Risk
Insurance Act of 2002, insurers must make terrorism insurance available under
their property and casualty insurance policies through the end of 2004, which
may be extended by the Secretary of the Treasury through the end of 2005, but
this legislation does not regulate the pricing of such insurance. The absence
of affordable insurance coverage may adversely affect the general real estate
lending market, lending volume and the market's overall liquidity and may
reduce the number of suitable investment opportunities available to us and the
pace at which we are able to make investments. If the properties that we
invest in are unable to obtain affordable insurance coverage, the value of
those investments could decline and in the event of an uninsured loss, we
could lose all or a portion of our investment.

The economic impact of any future terrorist attacks could also adversely
affect the credit quality of some of our loans and investments. Some of our
loans and investments will be more susceptible to the adverse effects than
others, such as hotel loans, which may experience a significant reduction in
occupancy rates following any future attacks. We may suffer losses as a result
of the adverse impact of any future attacks and these losses may adversely
impact our results of operation.

S-12

RISKS RELATED TO OUR INVESTMENT MANAGEMENT BUSINESS

BECAUSE WE COMMENCED OUR INVESTMENT MANAGEMENT BUSINESS IN 2000, WE ARE
SUBJECT TO RISKS AND UNCERTAINTIES ASSOCIATED WITH DEVELOPING AND OPERATING A
NEW BUSINESS, AND WE MAY NOT ACHIEVE FROM THIS NEW BUSINESS THE INVESTMENT
RETURNS THAT WE EXPECT.

Our investment management business commenced in 2000 and, therefore, has a
limited track record of proven results upon which to predict our future
performance. We will encounter risks and difficulties as we proceed to develop
and operate our investment management business. In order to achieve our goals
as an investment manager, we must:

o manage our funds successfully by investing a majority of our funds'
capital in suitable investments that meet the funds' specified investment
criteria;

o actively manage the assets in our portfolios in order to realize targeted
performance;

o incentivize our management and professional staff to the task of
developing and operating the investment management business; and

o structure, sponsor and capitalize future funds and other investment
products under our management that provide investors with attractive
investment opportunities.

If we do not successfully develop and operate our investment management
business to achieve the investment returns that we or the market anticipates,
the market price of our class A common stock could decline.

WE MAY PURSUE FUND MANAGEMENT OPPORTUNITIES RELATED TO OTHER CLASSES OF
INVESTMENTS WHERE WE DO NOT HAVE PRIOR INVESTMENT EXPERIENCE.

We may expand our fund management business to the management of private
equity funds involving other investment classes where we do not have prior
investment experience. We may find it difficult to attract third party
investors without a performance track record involving such investments. Even
if we attract third party investments, there can be no assurance that we will
be successful in deploying the capital to achieve targeted returns on the
investments.

WE FACE SUBSTANTIAL COMPETITION FROM ESTABLISHED PARTICIPANTS IN THE PRIVATE
EQUITY MARKET AS WE OFFER MEZZANINE AND OTHER FUNDS TO THIRD PARTY INVESTORS.

We face significant competition from large financial and other institutions
that have proven track records in marketing and managing private equity
investment funds and otherwise have a competitive advantage over us because
they have access to pre-existing third party investor networks into which they
can channel competing investment opportunities. If our competitors offer
investment products that are competitive with the mezzanine and other fund
investments offered by us, we will find it more difficult to attract investors
and to capitalize our mezzanine and other funds.

OUR FUNDS ARE SUBJECT TO THE RISK OF DEFAULTS BY THIRD PARTY INVESTORS ON
THEIR CAPITAL COMMITMENTS.

The capital commitments made by third party investors to our funds represent
unsecured promises by those investors to contribute cash to the funds from
time to time as investments are made by the funds. Accordingly, we are subject
to general credit risks that the investors may default on their capital
commitments. If defaults occur, we may not be able to close loans and
investments we have identified and negotiated, which could materially and
adversely affect the funds' investment program or make us liable for breach of
contract, in either case to the detriment of our franchise in the private
equity market.

RISKS RELATED TO OUR COMPANY

WE ARE DEPENDENT UPON OUR SENIOR MANAGEMENT TEAM TO DEVELOP AND OPERATE OUR
BUSINESS.

Our ability to develop and operate our business depends to a substantial
extent on the experience, relationships and expertise of our senior management
and key employees. We cannot assure you that these individuals will remain in
our employ. The employment agreement with our chief executive officer,
John R. Klopp, expires on December 31, 2008, unless further extended. The loss
of the services of our senior management and key employees could have a
material adverse effect on our operations.

S-13

THERE MAY BE CONFLICTS BETWEEN THE INTERESTS OF OUR INVESTMENT FUNDS AND US.

We are subject to a number of potential conflicts between our interests and
the interests of our managed investment funds. Although we have agreed to
offer Fund III the first opportunity to invest in investment opportunities
which have characteristics and projected leveraged returns which meet Fund
III's investment and return objectives, we are subject to potential conflicts
of interest in the allocation of investment opportunities between our balance
sheet and our managed funds. In addition, we may make investments that are
senior or junior to, participations in, or have rights and interests different
from or adverse to, the investments made by our managed funds. Our interests
in such investments may conflict with the interests of our managed funds in
related investments at the time of origination or in the event of a default or
restructuring of the investment. In the event a default occurs with respect to
such an investment, the directors of Fund III appointed by us have agreed to
recuse themselves from any vote of the board of Fund III concerning such
investment and our co-sponsor's controlled advisor to Fund III will assume and
perform our asset management responsibility with respect to such investment.
Finally, our officers and employees may have conflicts in allocating their
time and services among us and our managed funds.

OUR BALANCE SHEET PORTFOLIO CONTINUES TO HAVE CONCENTRATIONS IN MARK-TO-MARKET
MORTGAGE-BACKED SECURITIES WHICH SUBJECTS US TO GREATER VARIATIONS IN EQUITY
AND INCOME AS WE RECORD BALANCE SHEET GAINS AND LOSSES ON SUCH ASSETS.

Our venture agreement with affiliates of Citigroup Alternative Investments,
LLC placed restrictions on our ability to originate new mezzanine loan
investments for our balance sheet during the investment period for Fund II
which resulted in our balance sheet portfolio becoming more concentrated in
longer term fixed rate mortgage-backed securities that had been originated
prior to 2000. We have adopted accounting policies under which such securities
are recorded as available-for-sale and changes in the market value will impact
either or both shareholders' equity or net income depending on the
characterization of the change in market value. If a reduction in market value
is deemed to be other than temporary, generally due to a change in the credit
risk, the reduction in value will be recorded as a reduction of net income. If
any of the available-for-sale securities are sold, the resulting gain or loss
will be recorded through the income statement. All other changes in market
value will impact shareholders equity only.

While the restrictions on our balance sheet investment activities diminished
when the investment period for Fund II ended and we have begun making new
investments for our own account, there can be no assurance that the
concentration in mark-to-market mortgage-backed securities will be reduced in
the near term through new originations. In an environment of relatively low
interest rates, there is also a higher risk that our existing non-mark-to-
market loans will pay off early. To the extent our balance sheet remains
concentrated in mark-to-market assets, we will remain subject to potential
swings in equity and income as we record gains and losses on such assets on
our balance sheet. If interest rates fluctuate and significantly affect the
market value of such mark-to-market assets, the corresponding reductions or
increases in our equity and income may be significant.

WE MUST MANAGE OUR PORTFOLIO IN A MANNER THAT ALLOWS US TO RELY ON AN
EXCLUSION FROM REGISTRATION UNDER THE INVESTMENT COMPANY ACT OF 1940 IN ORDER
TO AVOID THE CONSEQUENCES OF REGULATION UNDER THAT ACT.

We rely on an exclusion from registration as an investment company afforded
by Section 3(c)(5)(C) of the Investment Company Act of 1940. Under this
exclusion, we are required to maintain, on the basis of positions taken by the
SEC staff in interpretive and no-action letters, a minimum of 55% of the value
of the total assets of our portfolio in "mortgages and other liens on and
interests in real estate." We refer to this category of investments herein as
"Qualifying Interests." In addition, we must maintain an additional minimum of
25% of the value of our total assets in Qualifying Interests or other real
estate-related assets. Because registration as an investment company would
significantly affect our ability to engage in certain transactions or to
organize ourselves in the manner we are currently organized, we intend to
maintain our qualification for this exclusion from registration. In the past,
when required due to the mix of assets in our balance sheet portfolio, we have
purchased pools of whole loan residential mortgage-backed securities that we
treat as Qualifying Interests based on SEC staff positions. Investments in
such pools of whole loan residential mortgage-backed securities may not
represent an optimum use of our investable capital when compared to the
available investments we target pursuant to our investment strategy. We
continue to analyze our investments and may acquire other pools of whole loan
mortgage-backed securities when and if required for compliance

S-14

purposes. In addition, certain of our investments in subordinated CMBS have
terms which we believe allows them to be categorized as Qualifying Interests,
including rights to cure any defaults on senior CMBS classes, rights to
acquire such senior classes in the event of a default or special servicing
rights to service defaulted mortgage loans, including rights to control the
oversight and management of the resolution of such mortgage loans by workout
or modification of loan provisions, foreclosure, deed in lieu of foreclosure
or otherwise, and to control decisions with respect to the preservation of the
collateral generally, including property management and maintenance decisions.
We have not obtained an exemptive order or a no-action letter or other form of
interpretive guidance from the SEC or its staff supporting our position, and,
therefore, any decision by the SEC or its staff which advances a position to
the contrary would require us to no longer treat these investments in
subordinated CMBS as Qualifying Interests.

If our portfolio does not comply with the requirements of the exclusion we
rely upon, we could be forced to alter our portfolio by selling or otherwise
disposing of a substantial portion of the assets that are not Qualifying
Interests or by acquiring a significant position in assets that are Qualifying
Interests. Altering our portfolio in this manner may have a material adverse
effect on our investments if we are forced to dispose of or acquire assets in
an unfavorable market.

WE MAY EXPAND OUR FRANCHISE THROUGH BUSINESS ACQUISITIONS AND THE RECRUITMENT
OF FINANCIAL PROFESSIONALS, WHICH MAY PRESENT ADDITIONAL COSTS AND OTHER
CHALLENGES AND MAY NOT PROVE SUCCESSFUL.

Our business plan contemplates expansion of our franchise into complementary
investment strategies involving other credit-sensitive structured financial
products. We may undertake such expansion through business acquisitions or the
recruitment of financial professionals with experience in other products. We
may also expend a substantial amount of time and capital pursuing
opportunities to expand into complementary investment strategies that we do
not consummate. The expansion of our operations could place a significant
strain on our management, financial and other resources. Our ability to manage
future expansion will depend upon our ability to monitor operations, maintain
effective quality controls and significantly expand our internal management
and technical and accounting systems, all of which could result in higher
operating expenses and could adversely affect our current business, financial
condition and results of operations.

We cannot assure you that we will be able to identify and integrate
businesses or professional teams we acquire to pursue complementary investment
strategies and expand our business. Moreover, any decision to pursue expansion
into businesses with complementary investment strategies will be in the
discretion of our management and may be consummated without prior notice or
shareholder approval. In such instances, shareholders will be relying on our
management to assess the relative benefits and risks associated with any such
expansion.

RISKS RELATING TO THIS OFFERING

BECAUSE A LIMITED NUMBER OF SHAREHOLDERS, INCLUDING MEMBERS OF OUR MANAGEMENT
TEAM, OWN A SUBSTANTIAL NUMBER OF OUR SHARES, DECISIONS MADE BY THEM MAY BE
DETRIMENTAL TO YOUR INTERESTS.

By virtue of their direct and indirect share ownership, John R. Klopp, a
director and our president and chief executive officer, Craig M. Hatkoff, a
director and former officer, and other shareholders indirectly owned by trusts
for the benefit of our chairman of the board, Samuel Zell, have the power to
significantly influence our affairs and are able to influence the outcome of
matters required to be submitted to shareholders for approval, including the
election of our directors, amendments to our charter, mergers, sales of assets
and other acquisitions or sales. The influence exerted by these shareholders
over our affairs might not be consistent with the interests of some or all of
our other shareholders. We cannot assure you that these shareholders will not
exercise their influence over us in a manner detrimental to your interests. As
of June 30, 2004, these shareholders collectively own and control 2,480,805
shares of our class A common stock representing approximately 28.9% of our
outstanding class A common stock. This concentration of ownership may have the
effect of delaying or preventing a change in control of our company, including
transactions in which you might otherwise receive a premium for your class A
common stock, and might negatively affect the market price of our class A
common stock.

Berkley owns 1,635,000 shares of our class A common stock and may purchase
an additional 365,000 shares upon the exercise of warrants, which assuming the
exercise of the warrants, represents 23.1% of our outstanding class A common
stock. The conversion of the outstanding convertible trust preferred
securities

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held by Vornado Realty, L.P. and JPMorgan Chase Bank, as trustee for the GMAM
Investment Funds Trust and the GMAM Group Pension Trust II, could result in
other significant concentrated holdings of our class A common stock. Following
this offering, Vornado Realty, L.P. may acquire 1,424,474 shares of our class
A common stock and JPMorgan Chase Bank, as trustee for the GMAM Investment
Funds Trust and the GMAM Group Pension Trust II, may acquire 49,856 and
662,381 shares, respectively, of our class A common stock. An officer of
Berkley and a person associated with the General Motor's pension trusts serve
on our board of directors and, therefore, have the power to significantly
influence our affairs. Through their significant ownership of our class A
common stock, assuming for this purpose the trust preferred securities were
converted, these security holders may have the ability to influence the
outcome of matters submitted for shareholder approval.

SOME PROVISIONS OF OUR CHARTER AND BYLAWS AND MARYLAND LAW MAY DETER TAKEOVER
ATTEMPTS, WHICH MAY LIMIT THE OPPORTUNITY OF OUR SHAREHOLDERS TO SELL THEIR
SHARES AT A FAVORABLE PRICE.

Some of the provisions of our charter and bylaws and Maryland law discussed
below could make it more difficult for a third party to acquire us, even if
doing so might be beneficial to our shareholders by providing them with the
opportunity to sell their shares at a premium to the then current market
price.

Issuance of Preferred Stock Without Shareholder Approval. Our charter
authorizes our board of directors to authorize the issuance of up to
100,000,000 shares of preferred stock and up to 100,000,000 shares of class A
common stock. Our charter also authorizes our board of directors, without
shareholder approval, to classify or reclassify any unissued shares of our
class A common stock and preferred stock into other classes or series of stock
and to amend our charter to increase or decrease the aggregate number of
shares of stock of any class or series that may be issued. Our board of
directors, therefore, can exercise its power to reclassify our stock to
increase the number of shares of preferred stock we may issue without
shareholder approval. Preferred stock may be issued in one or more series, the
terms of which may be determined without further action by shareholders. These
terms may include preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions,
qualifications or terms or conditions of redemption. The issuance of any
preferred stock, however, could materially adversely affect the rights of
holders of our class A common stock and, therefore, could reduce its value. In
addition, specific rights granted to future holders of our preferred stock
could be used to restrict our ability to merge with, or sell assets to, a
third party. The power of our board of directors to issue preferred stock
could make it more difficult, delay, discourage, prevent or make it more
costly to acquire or effect a change in control, thereby preserving the
current shareholders' control.

Advance Notice Bylaw. Our bylaws contain advance notice procedures for the
introduction of business and the nomination of directors. These provisions
could discourage proxy contests and make it more difficult for you and other
shareholders to elect shareholder-nominated directors and to propose and
approve shareholder proposals opposed by management.

Maryland Takeover Statutes. We are subject to the Maryland Business
Combination Act which could delay or prevent an unsolicited takeover of us.
The statute substantially restricts the ability of third parties who acquire,
or seek to acquire, control of us to complete mergers and other business
combinations without the approval of our board of directors even if such
transaction would be beneficial to shareholders. "Business combinations"
between such a third party acquiror or its affiliate and us are prohibited for
five years after the most recent date on which the acquiror or its affiliate
becomes an "interested shareholder." An "interested shareholder" would be any
person who beneficially owns 10 percent or more of our shareholder voting
power or an affiliate or associate of ours who, at any time within the two-
year period prior to the date interested shareholder status is determined, was
the beneficial owner of 10 percent or more of our shareholder voting power. If
our board of directors approved in advance the transaction that would
otherwise give rise to the acquiror or its affiliate attaining such status,
such as the issuance of shares of our class A common stock to Berkley, the
acquiror or its affiliate would not become an interested shareholder and, as a
result, it could enter into a business combination with us. Our board of
directors could choose not to negotiate with an acquirer if the board
determined in its business judgment that considering such an acquisition was
not in our strategic interests. Even after the lapse of the five-year
prohibition period, any business combination with an interested shareholder
must be recommended by our board of directors and approved by the affirmative
vote of at least:

o 80% of the votes entitled to be cast by shareholders; and

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o two-thirds of the votes entitled to be cast by shareholders other than
the interested shareholder and affiliates and associates thereof.

The super-majority vote requirements do not apply if the transaction
complies with a minimum price requirement prescribed by the statute.

The statute permits various exemptions from its provisions, including
business combinations that are exempted by the board of directors prior to the
time that an interested shareholder becomes an interested shareholder. Our
board of directors has exempted any business combination involving family
partnerships controlled separately by John R. Klopp and Craig M. Hatkoff, and
a limited liability company indirectly controlled by a trust for the benefit
of Samuel Zell and his family. As a result, these persons and Berkley may
enter into business combinations with us without compliance with the super-
majority vote requirements and the other provisions of the statute.

We are subject to the Maryland Control Share Acquisition Act. With certain
exceptions, the Maryland General Corporation Law provides that "control
shares" of a Maryland corporation acquired in a control share acquisition have
no voting rights except to the extent approved by a vote of two-thirds of the
votes entitled to be cast on the matter, excluding shares owned by the
acquiring person or by our officers or directors who are our employees, and
may be redeemed by us. "Control shares" are voting shares which, if aggregated
with all other shares owned or voted by the acquirer, would entitle the
acquirer to exercise voting power in electing directors within one of the
specified ranges of voting power. A person who has made or proposes to make a
control share acquisition, upon satisfaction of certain conditions, including
an undertaking to pay expenses, may compel our board to call a special meeting
of shareholders to be held within 50 days of demand to consider the voting
rights of the "control shares" in question. If no request for a meeting is
made, we may present the question at any shareholders' meeting.

If voting rights are not approved at the shareholders' meeting or if the
acquiring person does not deliver the statement required by Maryland law,
then, subject to certain conditions and limitations, we may redeem any or all
of the control shares, except those for which voting rights have previously
been approved for fair value. If voting rights for control shares are approved
at a shareholders' meeting and the acquirer may then vote a majority of the
shares entitled to vote, then all other shareholders may exercise appraisal
rights. The fair value of the shares for purposes of these appraisal rights
may not be less than the highest price per share paid by the acquirer in the
control share acquisition. The control share acquisition statute does not
apply to shares acquired in a merger, consolidation or share exchange if we
are a party to the transaction, nor does it apply to acquisitions approved or
exempted by our charter or bylaws. We have exempted certain holders identified
in our bylaws from this statute which exemptions extend to Berkley, family
partnerships controlled separately by John R. Klopp and Craig M. Hatkoff, and
a limited liability company indirectly controlled by a trust for the benefit
of Samuel Zell and his family.

We are also subject to the Maryland Unsolicited Takeovers Act which permits
our board of directors, among other things, to elect on our behalf to stagger
the terms of directors, to increase the shareholder vote required to remove a
director and to provide that shareholder-requested meetings may be called only
upon the request of shareholders entitled to cast at least a majority of the
votes entitled to be cast at the meeting. Such an election would significantly
restrict the ability of third parties to wage a proxy fight for control of our
board of directors as a means of advancing a takeover offer. If an acquirer
was discouraged from offering to acquire us, or prevented from successfully
completing a hostile acquisition, you could lose the opportunity to sell your
shares at a favorable price.

SHARES ELIGIBLE FOR SALE IN THE NEAR FUTURE MAY CAUSE THE MARKET PRICE FOR OUR
CLASS A COMMON STOCK TO DECLINE.

Sales of a substantial number of shares of our class A common stock in the
public market following this offering, or the perception that these sales
could occur, may depress the market price for our class A common stock. These
sales could also impair our ability to raise additional capital through the
sale of our equity securities in the future.

The number and timing of shares of class A common stock available for sale
in the public market is limited by restrictions under federal securities laws
and under agreements that we and each of our executive officers and directors
and each of the selling shareholders have entered into with the underwriters
of this offering. Those agreements restrict these persons from selling,
pledging or otherwise disposing of their shares,

S-17

subject to specified exceptions, for a period of 90 days after the date of
this prospectus without the prior written consent of Morgan Stanley & Co.
Morgan Stanley & Co. may, however, in its sole discretion, release all or any
portion of the common stock from the restrictions of the lockup agreements.
Upon completion of this offering we will have outstanding 11,800,343 shares of
class A common stock. Of these shares, 7,807,036 shares, including the
3,500,000 shares sold in this offering are freely tradeable. Subject to any
restrictions pursuant to other agreements or under applicable law, the
remaining 3,993,307 shares will be eligible for sale in the public market at
various times commencing 90 days from the date of this prospectus supplement.
In addition, following this offering, 550,835 shares of common stock may be
issued pursuant to the exercise of stock options that are outstanding.

THE MARKET VALUE OF OUR CLASS A COMMON STOCK MAY BE ADVERSELY AFFECTED BY MANY
FACTORS.

As with any public company, a number of factors may adversely influence the
price of our class A common stock, many of which are beyond our control. These
factors include:

o the level of institutional interest in us;

o the perception of REITs generally and REITs with portfolios similar to
ours, in particular, by market professionals;

o the attractiveness of securities of REITs in comparison to other
companies; and

o the market's perception of our growth potential and potential future cash
dividends.

AN INCREASE IN MARKET INTEREST RATES MAY LEAD PROSPECTIVE PURCHASERS OF OUR
CLASS A COMMON STOCK TO EXPECT A HIGHER DIVIDEND YIELD, WHICH WOULD ADVERSELY
AFFECT THE MARKET PRICE OF OUR CLASS A COMMON STOCK.

One of the factors that will influence the price of our class A common stock
will be the dividend yield on our stock (distributions as a percentage of the
price of our stock) relative to market interest rates. An increase in market
interest rates may lead prospective purchasers of our class A common stock to
expect a higher dividend yield, which would adversely affect the market price
of our class A common stock.

YOUR ABILITY TO SELL A SUBSTANTIAL NUMBER OF SHARES OF OUR CLASS A COMMON
STOCK MAY BE RESTRICTED BY THE LOW TRADING VOLUME HISTORICALLY EXPERIENCED BY
OUR CLASS A COMMON STOCK.

Although our class A common stock is listed on the New York Stock Exchange,
the daily trading volume of our shares of class A common stock has
historically been lower than the trading volume for certain other companies.
As a result, the ability of a holder to sell a substantial number of shares of
our class A common stock in a timely manner without causing a substantial
decline in the market of the shares, especially by means of a large block
trade, may be restricted by the limited trading volume of the shares of our
class A common stock.

WE CANNOT ASSURE YOU THAT OUR PROPOSED CDO-1 TRANSACTION WILL BE CONSUMMATED.

The closing of this offering is not contingent upon completion of the CDO-1
transaction, which is expected to occur prior to the closing of this offering.
The CDO-1 transaction is subject to a number of closing conditions that are
outside of our control. If we do not close the CDO-1 transaction, we will not
receive any of the benefits we expect to receive from that transaction and our
ability to issue other CDOs in the future may be adversely impacted.

RISKS RELATED TO OUR REIT STATUS

OUR CHARTER DOES NOT PERMIT ANY INDIVIDUAL TO OWN MORE THAN OVER 2.5% OF OUR
CLASS A COMMON STOCK, AND ATTEMPTS TO ACQUIRE OUR CLASS A COMMON STOCK IN
EXCESS OF THE 2.5% LIMIT WOULD BE VOID WITHOUT THE PRIOR APPROVAL OF OUR BOARD
OF DIRECTORS.

S-18

acquisition of less than 2.5% of our outstanding class A common stock by an
individual or entity could cause an individual to own constructively in excess
of 2.5% of our outstanding class A common stock, and thus be subject to the
charter's ownership limit. There can be no assurance that our board of
directors, as permitted in the charter, will increase this ownership limit in
the future. Any attempt to own or transfer shares of our class A common stock
in excess of the ownership limit without the consent of our board of directors
will be void, and will result in the shares being transferred by operation of
law to a charitable trust, and the person who acquired such excess shares will
not be entitled to any distributions thereon or to vote such excess shares.

Our charter contains a provision that exempts certain of our officers,
directors and their related persons from this ownership limit and we increased
the limit for William R. Berkley to 6.0% and for one other major shareholder
of Berkley identified to us to 4.0%. The 2.5% ownership limit may have the
effect of precluding a change in control of us by a third party without the
consent of our board of directors, even if such change in control would be in
the interest of our shareholders or would result in a premium to the price of
our class A common stock (and even if such change in control would not
reasonably jeopardize our REIT status). The ownership limit exemptions and the
reset limits granted to date would limit our board of directors' ability to
reset limits in the future and at the same time maintain compliance with the
REIT qualification requirement prohibiting ownership of more than 50% of our
class A common stock by five or fewer individuals.

THERE ARE NO ASSURANCES THAT WE WILL BE ABLE TO PAY DIVIDENDS IN THE FUTURE.

We intend to pay quarterly dividends and to make distributions to our
shareholders in amounts such that all or substantially all of our taxable
income in each year, subject to certain adjustments, is distributed. This,
along with other factors, should enable us to qualify for the tax benefits
accorded to a REIT under the Internal Revenue Code. All distributions will be
made at the discretion of our board of directors and will depend on our
earnings, our financial condition, maintenance of our REIT status and such
other factors as our board of directors may deem relevant from time to time.
There are no assurances that we will be able to pay dividends in the future.
In addition, some of our distributions may include a return of capital, which
would reduce the amount of capital available to operate our business.

RECENT TAX LEGISLATION MAY HAVE NEGATIVE CONSEQUENCES FOR REITS.

Recent tax legislation allows certain corporations to pay dividends that
qualify for a reduced tax rate in the hands of certain shareholders. This
legislation generally does not apply to REITs. Although the legislation does
not adversely affect the tax treatment of REITs, it may cause investments in
non-REIT corporations to become relatively more desirable. As a result, the
capital markets may be less favorable to REITs, such as ourselves, when they
seek to raise equity capital, and the prices at which REIT equity securities
trade, including our class A common stock, may decline or underperform non-
REIT corporations.

WE WILL BE DEPENDENT ON EXTERNAL SOURCES OF CAPITAL TO FINANCE OUR GROWTH.

As with other REITs, but unlike corporations generally, our ability to
finance our growth must largely be funded by external sources of capital
because we generally will have to distribute to our shareholders 90% of our
taxable income in order to qualify as a REIT, including taxable income where
we do not receive corresponding cash. Our access to external capital will
depend upon a number of factors, including general market conditions, the
market's perception of our growth potential, our current and potential future
earnings, cash distributions and the market price of our class A common stock.

IF WE DO NOT MAINTAIN OUR QUALIFICATION AS A REIT, WE WILL BE SUBJECT TO TAX
AS A REGULAR CORPORATION AND FACE A SUBSTANTIAL TAX LIABILITY. OUR TAXABLE
REIT SUBSIDIARIES WILL BE SUBJECT TO INCOME TAX.

We expect to operate so as to qualify as a REIT under the Internal Revenue
Code. However, qualification as a REIT involves the application of highly
technical and complex Internal Revenue Code provisions for which only a
limited number of judicial or administrative interpretations exist. Even a
technical or inadvertent mistake could jeopardize our REIT status.
Furthermore, new tax legislation, administrative guidance or court decisions,
in each instance potentially with retroactive effect, could make it more
difficult or impossible for us to qualify as a REIT. If we fail to qualify as
a REIT in any tax year, then:

o we would be taxed as a regular domestic corporation, which under current
laws, among other things, means being unable to deduct distributions to
shareholders in computing taxable income and being subject to federal
income tax on our taxable income at regular corporate rates;

S-19

o any resulting tax liability could be substantial, could have a material
adverse effect on our book value and could reduce the amount of cash
available for distribution to shareholders; and

o unless we were entitled to relief under applicable statutory provisions,
we would be required to pay taxes, and thus, our cash available for
distribution to shareholders would be reduced for each of the years
during which we did not qualify as a REIT.

Income from our fund management business is expected to be realized by one
of our taxable REIT subsidiaries and, accordingly, will be subject to income
tax.

COMPLYING WITH REIT REQUIREMENTS MAY CAUSE US TO FOREGO OTHERWISE ATTRACTIVE
OPPORTUNITIES.

In order to qualify as a REIT for federal income tax purposes, we must
continually satisfy tests concerning, among other things, our sources of
income, the nature of our investments in commercial real estate and related
assets, the amounts we distribute to our shareholders and the ownership of our
stock. We may also be required to make distributions to shareholders at
disadvantageous times or when we do not have funds readily available for
distribution. Thus, compliance with REIT requirements may hinder our ability
to operate solely on the basis of maximizing profits.

COMPLYING WITH REIT REQUIREMENTS MAY FORCE US TO LIQUIDATE OR RESTRUCTURE
OTHERWISE ATTRACTIVE INVESTMENTS.

In order to qualify as a REIT, we must also ensure that at the end of each
calendar quarter, at least 75% of the value of our assets consists of cash,
cash items, government securities and qualified REIT real estate assets. The
remainder of our investments in securities cannot include more than 10% of the
outstanding voting securities of any one issuer or 10% of the total value of
the outstanding securities of any one issuer. In addition, no more than 5% of
the value of our assets can consist of the securities of any one issuer. If we
fail to comply with these requirements, we must dispose of a portion of our
assets within 30 days after the end of the calendar quarter in order to avoid
losing our REIT status and suffering adverse tax consequences.

COMPLYING WITH REIT REQUIREMENTS MAY FORCE US TO BORROW TO MAKE DISTRIBUTIONS
TO SHAREHOLDERS.

From time to time, our taxable income may be greater than our cash flow
available for distribution to shareholders. If we do not have other funds
available in these situations, we may be unable to distribute substantially
all of our taxable income as required by the REIT provisions of the Internal
Revenue Code. Thus, we could be required to borrow funds, sell a portion of
our assets at disadvantageous prices or find another alternative. These
options could increase our costs or reduce our equity.

THE "TAXABLE MORTGAGE POOL" RULES MAY LIMIT THE MANNER IN WHICH WE EFFECT
FUTURE SECURITIZATIONS.

Certain of our future securitizations could be considered to result in the
creation of taxable mortgage pools for federal income tax purposes. Since we
conduct our operations to qualify as a REIT, so long as we own 100% of the
equity interests in a taxable mortgage pool, we would not be adversely
affected by the characterization of the securitization as a taxable mortgage
pool (assuming that we do not have any shareholders who might cause a
corporate income tax to be imposed upon us by reason of our owning a taxable
mortgage pool). We would be precluded, however, from selling to outside
investors equity interests in such securitizations or from selling any debt
securities issued in connection with such securitizations that might be
considered to be equity interests for tax purposes. These limitations will
preclude us from using certain techniques to maximize our returns from
securitization transactions. If the securitization vehicles in which we
participate were considered a taxable mortgage pool, shareholders who are tax-
exempt and shareholders who are not United States persons may be required to
pay tax on their share of any excess inclusion income.

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CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS

This prospectus supplement and the accompanying prospectuses, including the
information incorporated by reference herein and therein, as well as other
oral and written statements made in press releases and otherwise by or on our
behalf, contain forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These statements predict or describe our
future operations, our business plans, our business and investment strategies
and portfolio management and the performance of our investments and funds
under management, and do not relate solely to historical matters. You can
generally identify forward-looking statements by the use of words such as
"believes," "expects," "may," "will," "should," "could," "seeks,"
"approximately," "intends," "plans," "objectives," "goals," "projects,"
"estimates," "anticipates," "continues to," "designed to," "foreseeable
future," "scheduled" and similar words. Because these statements reflect our
current views concerning future events and are based on current assumptions,
they involve risks, uncertainties and other factors which may lead to actual
results or effects that are materially different from those anticipated or
contemplated in the forward-looking statements. Some, but not all, of the
factors that may cause these differences include, but are not limited to:

o the general political, economic and competitive conditions in the United
States;

o the level and volatility of prevailing interest rates and credit spreads,
adverse changes in general economic conditions and real estate markets,
the deterioration of credit quality of borrowers and the risks associated
with the ownership and operation of real estate;

o a significant compression of the spreads of the interest rates earned on
interest-earning assets over the interest rates paid on interest-bearing
liabilities that adversely affects operating results;

o adverse developments in the availability of desirable loan and investment
opportunities and the ability to obtain and maintain targeted levels of
leverage and borrowing costs;

o adverse changes in local market conditions, competition, increases in
operating expenses and uninsured losses affecting a property owner's
ability to cover operating expenses and the debt service on financing
provided by us;

o the recognition of unrealized losses on our CMBS investments that are
deemed "other-than-temporary;"

o the failure of our CDO-1 transaction to close in the form and manner
contemplated on July 20, 2004;

o authoritative generally accepted accounting principles or policy changes
from such standard-setting bodies as the Financial Accounting Standards
Board and the Securities and Exchange Commission; and

o those items discussed in the "Risk Factors" section of this prospectus
supplement and in other information incorporated by reference into this
prospectus supplement or the accompanying prospectuses.

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We caution you not to place undue
reliance on these forward-looking statements. All written and oral forward-
looking statements attributable to us or persons acting on our behalf are
qualified in their entirety by these cautionary statements. Moreover, unless
we are required by law to update these statements, we will not necessarily
update or revise any forward-looking statements included or incorporated by
reference in this prospectus supplement or the accompanying prospectuses after
the date hereof, either to conform them to actual results or to changes in our
expectations.

S-21

USE OF PROCEEDS

We estimate that the net proceeds to us from this offering will be
approximately $33.2 million at an assumed offering price of $26.58 per share,
the last reported sale price of our class A common stock on the NYSE composite
transaction tape on July 13, 2004, or approximately $46.4 million if the
underwriters exercise their over-allotment option in full, after deducting
underwriting discounts and commissions and expenses of this offering. We will
not receive any proceeds from the sale of 2,136,711 shares of our class A
common stock by the selling shareholders. We intend to use the net proceeds
for general corporate purposes, including funding our balance sheet investment
activity, our capital commitments to Fund III and any future investment funds,
the repayment of indebtedness, including our convertible junior subordinated
debentures and our credit facility, working capital and potential business
acquisitions.

As of March 31, 2004, we had outstanding borrowings under our credit
facility of $64,700,000. Our credit facility provides for asset specific
borrowings that bear interest at specified spreads over LIBOR, which spreads
depend upon the perceived risk of the pledged assets. Based upon borrowings in
place at March 31, 2004, the effective borrowing rate on the credit facility
was LIBOR plus 2.86%, or 3.96%. Our credit facility matures on July 16, 2005.
As of March 31, 2004, we had outstanding borrowings under repurchase
obligations of $194,333,000, which bear interest at specified spreads over
LIBOR that depend upon the perceived risk of the assets subject to the
repurchase obligations. Based upon borrowings in place at March 31, 2004, the
average effective rate on the repurchase obligations was LIBOR plus 1.34%, or
2.44%.

As of March 31, 2004, we have $89,742,000 aggregate liquidation amount of
variable step up convertible trust preferred securities outstanding that were
issued by our consolidated statutory trust subsidiary, CT Convertible Trust I.
The underlying convertible junior subordinated debentures bear interest at 10%
per annum, which increases by 0.75% per annum on October 1, 2004 and each
October 1 thereafter. If the quarterly dividend paid on a share of our class A
common stock multiplied by four and divided by $21.00 is in excess of the
interest rate in effect at that time, then the holders are entitled to be paid
additional interest at that rate. The convertible trust preferred securities
are redeemable by us, in whole or in part, on or after September 30, 2004. The
convertible trust preferred securities mature on September 30, 2018. Following
the conversion of the convertible trust preferred securities owned by EOP
Operating Limited Partnership and JPMorgan Chase Bank, as trustee for the GMAM
Investment Funds Trust and the GMAM Group Pension Trust II in connection with
their sale of class A common stock in this offering, there will remain
outstanding $44,871,000 aggregate liquidation amount of convertible trust
preferred securities which are convertible into 2,136,711 shares of common
stock based upon a $21.00 conversion price.

Our management will have considerable discretion in the application of the
net proceeds of this offering and may spend the net proceeds in a manner and
at times other than as set forth above. As a result, you will not have the
opportunity, as part of your investment decision, to assess how and when the
net proceeds will be used.

Pending such uses, the net proceeds may be invested in interest-bearing
accounts and short-term interest-bearing securities that are consistent with
our qualification as a REIT.

S-22

SELLING SHAREHOLDERS

The following table sets forth information with respect to the selling
shareholders' beneficial ownership of our class A common stock as of June 30,
2004 and after giving effect to this offering. We will not receive any
proceeds from the sale of our class A common stock by the selling
shareholders. All of the shares of class A common stock beneficially owned by
the selling shareholders are issuable upon conversion of variable step up
convertible trust preferred securities issued by CT Convertible Trust I.
Applicable percentage ownership set forth in the following table is based upon
8,300,343 shares of class A common stock outstanding as of June 30, 2004 and
11,800,343 shares of class A common stock outstanding after completion of this
offering. If the underwriters exercise their over-allotment option in full,
the number of shares outstanding immediately after completion of this offering
will be 12,325,343.

SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR TO SHARES TO BE OWNED AFTER THE
NAME THE OFFERING OFFERED OFFERING
----------------------------------------------------------------------- ------------------- ------------ -----------------
NUMBER PERCENT NUMBER PERCENT
--------- ------- ------- -------

EOP Operating Limited Partnership (1).................................. 1,424,474 14.6% 1,424,474 0 0%
JPMorgan Chase Bank, as trustee for the GMAM Investment Funds Trust (2) 99,713 1.2% 49,857 49,856 0.4%
JPMorgan Chase Bank, as trustee for GMAM Group Pension Trust II (2).... 1,324,761 13.8% 662,380 662,381 5.1%

---------------
(1) Samuel Zell, chairman of our board of directors, serves as chairman of the
board of trustees of Equity Office Properties Trust, the managing general
partner of EOP Operating Limited Partnership. Thomas E. Dobrowski, who
serves as one of our directors, is a trustee of Equity Office Properties
Trust. Sheli Z. Rosenberg, who served as one of our directors until her
resignation in April 2004, is also a trustee of Equity Office Properties
Trust.
(2) General Motors Investment Management Corporation serves as investment
manager to these pension trusts. Thomas E. Dobrowski, who serves as one of
our directors, is a managing director of General Motors Investment
Management Corporation. First Plaza Group Trust, a pension trust managed by
General Motors Investment Management Corporation, is an investor in Fund II
and Fund III.

S-23

PRICE RANGE OF CLASS A COMMON STOCK AND DIVIDEND POLICY

Our class A common stock is listed for trading on the New York Stock
Exchange under the symbol "CT." The table below sets forth, for the calendar
quarters indicated, the reported high and low sale prices of the class A
common stock as reported on the NYSE composite transaction tape:

HIGH LOW DIVIDENDS
----- ----- ---------

2002
First Quarter........................................................................................ 17.25 15.00 --
Second Quarter....................................................................................... 15.60 14.10 --
Third Quarter........................................................................................ 15.75 13.35 --
Fourth Quarter....................................................................................... 15.93 12.72 --

2003
First Quarter........................................................................................ 18.75 13.35 0.45
Second Quarter....................................................................................... 19.62 14.49 0.45
Third Quarter........................................................................................ 20.99 18.60 0.45
Fourth Quarter....................................................................................... 23.40 19.71 0.45

2004.................................................................................................
First Quarter........................................................................................ 26.10 22.50 0.45
Second Quarter....................................................................................... 27.25 23.00 0.45
Third Quarter (through July 13, 2004) ............................................................... 27.55 26.15 N/A

The last reported sale price of the class A common stock on July 13, 2004 as
reported on the NYSE composite transaction tape was $26.58. As of July 13,
2004, there were 1,322 holders of record of the class A common stock. By
including persons holding shares in broker accounts under street names,
however, we estimate that there were approximately 3,100 holders of record of
our class A common stock as of July 13, 2004.

Although in recent years we have not paid dividends, with our decision to
elect to be taxed as a REIT, we began paying dividends on our class A common
stock in the first quarter of 2003 and have paid quarterly dividends since
then.

We generally intend to distribute each year substantially all of our taxable
income (which does not necessarily equal net income as calculated in
accordance with generally accepted accounting principles) to our shareholders
so as to comply with the REIT provisions of the Internal Revenue Code. We
intend to make dividend distributions quarterly and, if necessary for REIT
qualification purposes, we may need to distribute any taxable income remaining
after the distribution of the final regular quarterly dividend each year,
together with the first regular quarterly dividend payment of the following
taxable year or, at our discretion, in a special dividend distributed prior
thereto. Our dividend policy is subject to revision at the discretion of our
board of directors. All distributions will be made at the discretion of our
board of directors and will depend on our taxable income, our financial
condition, our maintenance of REIT status and other factors as our board of
directors deems relevant.

Distributions to shareholders will generally be subject to tax as ordinary
income, although a portion of the distributions may be designated by us as
capital gain or may constitute a tax-free return of capital. Annually, our
transfer agent will furnish to each of our shareholders a statement of
distributions paid during the preceding year and their characterization as
ordinary income, capital gains or return of capital.

Our ability to pay distributions in the future and the amounts of any such
distributions will depend upon a number of factors, including those discussed
under the caption "Risk Factors."

S-24

HISTORICAL AND PRO FORMA CAPITALIZATION

The following table sets forth our historical capitalization as of March 31,
2004 and a pro forma capitalization as of March 31, 2004, giving effect to the
CDO-1 transaction, which is scheduled to close on July 20, 2004, and the
direct public offering to Berkley, which we closed in two tranches on May 11
and June 21, 2004, respectively, and are fully described under the caption
"Prospectus Supplement Summary -- Recent Developments" beginning on page S-40,
as adjusted to give effect to the sale of the 1,363,289 shares of our class A
common stock offered by us at an assumed offering price of $26.58 per share,
equal to the last reported sale price of our class A common stock on the NYSE
on July 13, 2004 and the 2,136,711 shares of class A common stock offered by
the selling shareholders pursuant to this prospectus supplement and the
application of the estimated net proceeds received by us from this offering,
after deduction of underwriting discounts and commissions and estimated
offering expenses. We will not receive any of the proceeds from the sale of
2,136,711 shares of our class A common stock by the selling shareholders. The
closing of this offering is not contingent upon completion of the CDO-1
transaction. The pro forma information is presented for illustrative purposes
only and does not necessarily indicate the amount of our assets, liabilities
and shareholders' equity that would have been recorded on our balance sheet as
of March 31, 2004 had the CDO-1 transaction and direct public offering to
Berkley closed as of that date.

You should read the following information together with "Prospectus
Supplement Summary -- Summary Financial Data," "Risk Factors" and the
consolidated financial statements and the notes thereto included elsewhere in
this prospectus supplement.

AS OF MARCH 31, 2004
-------------------------------------
PRO FORMA
HISTORICAL PRO FORMA AS ADJUSTED
---------- --------- -----------
(IN THOUSANDS)

CASH AND CASH EQUIVALENTS................................................................. $ 23,124 $ 23,124 $ 23,124
======== ======== ========
SHORT-TERM DEBT
Current maturities of repurchase obligations............................................. $156,139 $144,953 $144,953
-------- -------- --------
Total short-term debt.................................................................... $156,139 $144,953 $144,953
-------- -------- --------
LONG-TERM DEBT
Credit facilities........................................................................ $ 64,700 $ 38,328 $ 25,085
Repurchase obligations (1) .............................................................. 38,194 41,270 21,270
Collateralized debt obligations.......................................................... -- 252,778 252,778
Convertible junior subordinated debentures (2) .......................................... 92,367 92,367 46,184
-------- -------- --------
Total long-term debt .................................................................... 195,261 424,743 345,317
-------- -------- --------
SHAREHOLDERS' EQUITY (3)
Class A common stock, $0.01 par value, 100,000 authorized; 6,572 and 8,502 issued and
outstanding, historical and as adjusted, respectively (4).............................. $ 66 $ 82 $ 117
Class A restricted common stock, $0.01 par value, 64 shares issued and outstanding....... 1 1 1
Additional paid-in capital............................................................... 143,359 181,602 260,993
Unearned compensation.................................................................... (1,371) (1,371) (1,371)
Accumulated other comprehensive loss .................................................... (31,190) (31,190) (31,190)
Accumulated deficit...................................................................... (11,228) (11,228) (11,228)
-------- -------- --------
Total shareholders' equity .............................................................. 99,637 137,896 217,322
-------- -------- --------
TOTAL CAPITALIZATION (5) ................................................................. $294,898 $562,639 $562,639
======== ======== ========

---------------
(1) Repurchase obligations which were extended subsequent to March 31, 2004
past March 31, 2005 have been characterized as long-term debt.
(2) Upon application of FIN 46R effective January 1, 2004, we no longer
consolidate the statutory trust which holds the convertible trust preferred
securities. Consequently, the underlying convertible junior subordinated
debentures are presented as liabilities.
(3) In addition to the class A common stock listed in the foregoing table, we
are authorized to issue 100,000,000 shares of preferred stock, par value
$0.01 per share, although no shares of such class are currently
outstanding. See "Description of Capital Stock" in the company prospectus.
(4) Does not include 550,835 shares of class A common stock subject to
outstanding options under our amended and restated 1997 long-term incentive
stock plan and amended and restated 1997 non-employee director stock plan
at June 30, 2004. As of June 30, 2004, there were a total of 8,300,343
shares of class A common stock and restricted class A common stock
outstanding.
(5) Total capitalization includes long-term debt and shareholders' equity.

S-25

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

INTRODUCTION

We are a fully integrated, self-managed finance and investment management
company that specializes in credit-sensitive structured financial products. To
date, our investment programs have focused on loans and securities backed by
income-producing commercial real estate assets. Since we commenced our finance
business in July 1997 and through June 30, 2004, we have completed $3.6
billion of real estate-related investments in 123 separate transactions. In
December 2002, our board of directors authorized an election to be taxed as a
REIT for the 2003 tax year.

Currently, we make balance sheet investments for our own account and manage
a series of private equity funds on behalf of institutional and individual
investors. Our investment management business commenced in March 2000.
Pursuant to a venture agreement, we have co-sponsored three funds with
Citigroup Alternative Investments LLC: CT Mezzanine Partners I LLC, CT
Mezzanine Partners II LP and CT Mezzanine Partners III, Inc., which we refer
to as Fund I, Fund II and Fund III, respectively.

As described under the caption, "Critical Accounting Policies" below,
certain reclassifications have been made to reflect the application of
Financial Accounting Standards Board Interpretation No. 46R on January 1, 2004
following the adoption of which we no longer consolidate CT Convertible Trust
I, the entity which had purchased our junior subordinated debentures and
issued convertible trust common and preferred securities.

BALANCE SHEET OVERVIEW

At March 31, 2004, we had four investments in Federal Home Loan Mortgage
Corporation Gold securities with a face value of $15,989,000. The securities
bear interest at a fixed annual rate of 6.5% of the face value. We purchased
the securities at a net premium and have $127,000 of the premium remaining to
be amortized over the remaining lives of the securities. After premium
amortization, the securities bore interest at a blended annual rate of 6.09%
as of March 31, 2004. As of March 31, 2004, the securities were carried at a
market value of $16,801,000, a $685,000 unrealized gain to their amortized
cost.

We held twenty-one investments in fourteen separate issues of commercial
mortgage-backed securities with an aggregate face value of $251,880,000 at
March 31, 2004. A total of $41,367,000 face value of the commercial mortgage-
backed securities earn interest at a variable rate which averages the London
Interbank Offered Rate, or LIBOR, plus 3.17% (4.26% at March 31, 2004). The
remaining $210,512,000 in face value commercial mortgage-backed securities
earn interest at fixed annual rates averaging 7.70% of the face value. We
purchased the commercial mortgage-backed securities at discounts and, as of
March 31, 2004, the remaining discount to be amortized into income over the
remaining lives of the securities was $23,517,000. At March 31, 2004, with
discount amortization, the commercial mortgage-backed securities earn interest
at a blended annual rate of 8.51% of the face value less the unamortized
discount. As of March 31, 2004, the securities were carried at market value of
$199,784,000, reflecting a $28,578,000 unrealized loss to their amortized
cost.

During the three months ended March 31, 2004, we purchased or originated one
property mezzanine loan for $23,500,000 and one B Note for $9,000,000,
received partial repayments on nine mortgage and property mezzanine loans
totaling $1,908,000, and one property mezzanine loan and one B Note totaling
$16,853,000 were satisfied and repaid. At March 31, 2004, we had outstanding
loans receivable totaling approximately $197.5 million.

At March 31, 2004, we had fourteen performing loans receivable with a
current carrying value of $194,440,000. One of the loans for $48,913,000 bears
interest at a fixed annual rate of interest of 11.99%. The thirteen remaining
loans, totaling $145,527,000, bear interest at a variable rate of interest
averaging LIBOR plus 5.72% (7.04% at March 31, 2004 including LIBOR floors).
One mortgage loan receivable with an original principal balance of $8,000,000
reached maturity on July 15, 2001 and has not been repaid with respect to
principal and interest. In December 2002, the loan was written down to
$4,000,000 through a

S-26

charge to the allowance for possible credit losses. Since the write-down, we
have received proceeds of $962,000 reducing the carrying value of the loan to
$3,038,000. In accordance with our policy for revenue recognition, income
recognition has been suspended on this loan and for the three months ended
March 31, 2004, $225,000 of potential interest income has not been recorded.
All other loans are performing in accordance with their terms.

At March 31, 2004, we had investments in funds of $21,967,000, including
$6,322,000 of unamortized costs that were capitalized in connection with
entering into our venture agreement with Citigroup Alternative Investments LLC
and the commencement of the related fund business. These costs are being
amortized over the lives of the funds and the venture agreement and are
reflected as a reduction in income/(loss) from equity investments in funds.

We utilize borrowings under a committed credit facility, along with
repurchase obligations, to finance our balance sheet assets.

At March 31, 2004, we had outstanding borrowings under our credit facility
of $64,700,000, and had unused potential credit of $85,300,000, an amount of
available credit that we believe provides us with adequate liquidity for our
short-term needs over the next 12-month period. The credit facility provides
for advances to fund lender-approved loans and investments made by us. Our
borrowings under the credit facility are secured by pledges of assets owned by
us, and bear interest at specified spreads over LIBOR, which spreads vary
based upon the perceived risk of the pledged assets. The credit facility
provides for margin calls on asset-specific borrowings in the event of asset
quality and/or market value deterioration as determined under the credit
facility. The credit facility contains customary representations, warranties,
covenants, conditions and events of default. Based upon borrowings in place at
March 31, 2004, the effective rate on the credit facility was LIBOR plus 1.55%
(2.64% at March 31, 2004). As of March 31, 2004, we had capitalized costs of
$1,115,000 that are being amortized over the remaining life of the facility
(15.5 months at March 31, 2004). After amortizing these costs to interest
expense, the all-in effective borrowing cost on the facility as of March 31,
2004 was 3.96% based upon the amount currently outstanding on the credit
facility.

At December 31, 2003, we had borrowed $11,651,000 under a $75 million term
redeemable securities contract. This term redeemable securities contract
expired on February 28, 2004 and was repaid by refinancing the previously
financed assets under our credit facility.

In the first quarter of 2004, we entered another repurchase obligation with
an existing provider in connection with the purchase of a loan. This
repurchase agreement comes due monthly and has a current maturity date in May
2004.

At March 31, 2004, we had total outstanding repurchase obligations of
$194,333,000. Based upon advances in place at March 31, 2004, the blended rate
on the repurchase obligations is LIBOR plus 0.95% (2.04% at March 31, 2004).
We had capitalized costs of $127,000 as of March 31, 2004, which are being
amortized over the remaining lives of the repurchase obligations. After
amortizing these costs to interest expense based upon the amount currently
outstanding on the repurchase obligations, the all-in effective borrowing cost
on the repurchase obligations as of March 31, 2004 was 2.44%. We expect to
enter into new repurchase obligations at their maturity or settle the
repurchase obligations with the proceeds from the repayment of the underlying
financed asset.

We were party to two cash flow interest rate swaps with a total notional
value of $109 million as of March 31, 2004. These cash flow interest rate
swaps effectively convert floating rate debt to fixed rate debt, which is
utilized to finance assets that earn interest at fixed rates. We received a
rate equal to LIBOR (1.10% at March 31, 2004) and pay an average rate of
4.24%. The market value of the swaps at March 31, 2004 was a liability of
$3,297,000, which is recorded as interest rate hedge liabilities and as
accumulated other comprehensive loss on our balance sheet.

We currently have $92,524,000 aggregate principal amount of our outstanding
convertible junior subordinated debentures. The convertible junior
subordinated debentures are convertible into shares of class A common stock,
in increments of $1,000 in liquidation amount, at a conversion price of $21.00
per share and are redeemable by us, in whole or in part, on or after
September 30, 2004.

S-27

Distributions on the outstanding convertible junior subordinated debentures
are payable quarterly in arrears on each calendar quarter-end. The convertible
junior subordinated debentures bear interest at 10% through September 30,
2004. The interest rate increases by 0.75% on October 1, 2004 and on each
October 1 thereafter. If the quarterly dividend paid on a share of our class A
common stock multiplied by four and divided by $21.00 is in excess of the
interest rate in effect at that time, then the holders are entitled to be paid
additional interest at that rate.

In 2000, we announced an open market share repurchase program under which we
may purchase, from time to time, up to 666,667 shares of our class A common
stock. Since that time the authorization has been increased by the board of
directors to purchase cumulatively up to 2,366,923 shares of class A common
stock. In March 31, 2004 we had 666,339 shares remaining authorized for
repurchase under the program.

At June 30, 2004, we had 8,300,343 shares of our class A common stock
outstanding.

INVESTMENT MANAGEMENT OVERVIEW

We operated principally as a balance sheet investor until the start of our
investment management business in March 2000 when we entered into a venture
with affiliates of Citigroup Alternative Investments to co-sponsor and invest
capital in a series of commercial real estate mezzanine investment funds
managed by us. Pursuant to the venture agreement, we have co-sponsored with
Citigroup Alternative Investments Fund I, Fund II and Fund III. We have
capitalized costs of $6,322,000, net, from the formation of the venture and
the Funds that are being amortized over the remaining anticipated lives of the
Funds and the related venture agreement.

Fund I commenced its investment operations in May 2000 with equity capital
supplied solely by Citigroup Alternative Investments (75%) and us (25%). From
May 11, 2000 to April 8, 2001, the investment period for the fund, Fund I
completed $330 million of total investments in 12 transactions. On
January 31, 2003, we purchased from an affiliate of Citigroup Alternative
Investments its interest in Fund I and began consolidating the operations of
Fund I in our consolidated financial statements.

Fund II had its initial closing on equity commitments on April 9, 2001 and
its final closing on August 7, 2001, ultimately raising $845.2 million of
total equity commitments, including $49.7 million (5.9%) and $198.9 million
(23.5%) from us and Citigroup Alternative Investments, respectively. Third-
party private equity investors, including public and corporate pension plans,
endowment funds, financial institutions and high net worth individuals, made
the balance of the equity commitments. During its two-year investment period,
which expired on April 9, 2003, Fund II invested $1.2 billion in 40 separate
transactions. Fund II utilizes leverage to increase its return on equity, with
a target debt-to-equity ratio of 2:1. Total capital calls during the
investment period were $329.0 million. CT Investment Management Co. LLC, our
wholly-owned taxable REIT subsidiary, acts as the investment manager to Fund
II and receives 100% of the base management fees paid by the fund. As of
April 9, 2003, the end of the Fund II investment period, CT Investment
Management Co. began earning annual base management fees of 1.287% of invested
capital. Based upon Fund II's invested capital at March 31, 2004, the date
upon which the calculation for the next quarter is based, CT Investment
Management Co. will earn base management fees of $522,000 for the quarter
ending June 30, 2004.

We and Citigroup Alternative Investments, through our collective ownership
of the general partner, are also entitled to receive incentive management fees
from Fund II if the return on invested equity is in excess of 10% after all
invested capital has been returned. The Fund II incentive management fees are
split equally between Citigroup Alternative Investments and us. We intend to
pay 25% of our share of the Fund II incentive management fees as long-term
incentive compensation to our employees. No such incentive fees have been
earned at March 31, 2004 and as such, no amount has been accrued as income for
such potential fees in our financial statements. The amount of incentive fees
to be received in the future will depend upon a number of factors, including
the level of interest rates and the fund's ability to generate returns in
excess of 10%, which is in turn impacted by the duration and ultimate
performance of the fund's assets. Potential incentive fees received as Fund II
winds down could result in significant additional income from operations in
certain periods during which such payments can be recorded as income. If Fund
II's assets were sold and liabilities were settled on April 1, 2004 at the
recorded book value, net of the allowance for possible credit

S-28

losses, and the fund equity and income were distributed, we would record
approximately $7.0 million of incentive income.

We do not anticipate making any additional equity contributions to Fund II
or its general partner. Our net investment in Fund II and its general partner
at March 31, 2004 was $11.6 million. As of March 31, 2004, Fund II had 22
outstanding loans and investments totaling $432.9 million, all of which were
performing in accordance with the terms of their agreements.

On June 2, 2003, Fund III effected its initial closing on equity commitments
and on August 8, 2003, its final closing, raising a total of $425.0 million in
equity commitments. Our equity commitment is $20.0 million (4.7%) and
Citigroup Alternative Investments' equity commitment is $80.0 million (18.8%),
with the balance made by third-party private equity investors. From the
initial closing through March 31, 2004, we have made equity investments in
Fund III of $4,000,000. As of March 31, 2004, Fund III had ten outstanding
loans and investments totaling $268.4 million, all of which were performing in
accordance with the terms of their agreements.

CT Investment Management Co. receives 100% of the base management fees from
Fund III calculated at a rate equal to 1.42% per annum of committed capital
during Fund III's two-year investment period, which expires June 2, 2005, and
1.42% of invested capital thereafter. Based upon Fund III's $425.0 million of
total equity commitments, CT Investment Management Co. will earn annual base
management fees of $6.0 million during the investment period. We and Citigroup
Alternative Investments are also entitled to receive incentive management fees
from Fund III if the return on invested equity is in excess of 10% after all
invested capital has been returned. We will receive 62.5% and Citigroup
Alternative Investments will receive 37.5% of the total incentive management
fees. We expect to distribute a portion of our share of the Fund III incentive
management fees as long-term incentive compensation to our employees.

THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO THREE MONTHS ENDED MARCH 31,
2003

We reported net income of $3,082,000 for the three months ended March 31,
2004, an increase of $537,000 from the net income of $2,545,000 for the three
months ended March 31, 2003. This increase was primarily the result of a
reduction in general and administrative costs due to reduced employee
compensation and reduced legal expenses.

Interest and related income from loans and other investments amounted to
$9,018,000 for the three months ended March 31, 2004, a decrease of $11,000
from the $9,029,000 amount for the three months ended March 31, 2003. Average
interest-earning assets increased from approximately $354.4 million for the
three months ended March 31, 2003 to approximately $385.3 million for the
three months ended March 31, 2004. The average interest rate earned on such
assets decreased from 10.3% for the three months ended March 31, 2003 to 9.4%
for the three months ended March 31, 2004. During the three months ended
March 31, 2003, we recognized $367,000 in additional income on the early
repayment of loans. Without this additional interest income, the earning rate
for the 2003 period would have been 9.9%. LIBOR rates averaged 1.1% for the
three months ended March 31, 2004 and 1.3% for the three months ended March 31,
2003, a decrease of 0.2%. The remaining decrease in rates was due to the
addition of B Notes to our portfolio in 2004, which generally carry lower
interest rates than mezzanine loans and the repayment of two fixed rates loans
which earned interest at rates in excess of the average for the portfolio.

We utilize our existing credit facility and repurchase obligations to
finance our interest-earning assets. Interest and related expenses on secured
debt amounted to $2,636,000 for the three months ended March 31, 2004, an
increase of $341,000 from the $2,295,000 amount for the three months ended
March 31, 2003. The increase in expense was due to an increase in the amount
of average interest-bearing liabilities outstanding from approximately
$205.9 million for the three months ended March 31, 2003 to approximately
$218.8 million for the three months ended March 31, 2004, and an increase in
the average rate on interest-bearing liabilities from 4.5% to 4.8% for the
same periods. The increase in the average rate is substantially due to an
increase in the rate paid on repurchase agreements, which increased from 2.2%
for the three months ended March 31, 2003 to 2.6% for the three months ended
March 31, 2004. This increase in rates was the result of a increase in
mezzanine loans and B Notes financed with repurchase obligations that

S-29

carry higher interest rates than available-for-sale investments, for which the
amount financed with repurchase obligations decreased from the levels of the
prior year.

We also utilize the convertible junior subordinated debentures to finance
our interest-earning assets. During the three months ended March 31, 2004 and
2003, we recognized $2,433,000 of expenses related to the convertible junior
subordinated debentures, as the terms of the debt were the same in both
periods.

Other revenues increased $306,000 from $2,180,000 for the three months ended
March 31, 2003 to $2,486,000 for the three months ended March 31, 2004. The
increase is primarily due to the management fees charged to Fund III in 2004,
as Fund III did not begin its investment period until June 2003. This was
partially offset by a decrease in the earnings from Fund II, due to lower
levels of investment in 2004 as the fund is no longer investing in new assets,
and the reclassification of earnings from Fund I to other income statement
captions as it is now a consolidated entity.

General and administrative expenses decreased $766,000 to $2,938,000 for the
three months ended March 31, 2004 from $3,704,000 for the three months ended
March 31, 2003. The decrease in general and administrative expenses was
primarily due to reduced employee compensation and legal expenses. We employed
an average of 25 employees during the three months ended March 31, 2004 and
the three months ended March 31, 2003. We had 23 full-time employees at
March 31, 2004.

We intend to make an election to be taxed as a REIT under Section 856(c) of
the Internal Revenue Code commencing with the tax year ending December 31,
2003. As a REIT, we generally are not subject to federal income tax. To
maintain qualification as a REIT, we must distribute at least 90% of our REIT
taxable income to our shareholders and meet certain other requirements. If we
fail to qualify as a REIT in any taxable year, we will be subject to federal
income tax on our taxable income at regular corporate rates. We may also be
subject to certain state and local taxes on our income and property. Under
certain circumstances, federal income and excise taxes may be due on our
undistributed taxable income. At March 31, 2004, we were in compliance with
all REIT requirements and as such, have only provided for income tax expense
on taxable income attributed to our taxable REIT subsidiaries during the three
months ended March 31, 2004.

YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002

We reported net income of $13,525,000 for the year ended December 31, 2003,
an increase of $23,263,000 from the net loss of $9,738,000 for the year ended
December 31, 2002. This increase was primarily the result of certain
transactions in 2002 which reduced net income, including the settlement of
three cash flow hedges resulting in a $6.7 million charge to earnings, the
write-down of deferred tax assets as a result of our decision to elect REIT
status for 2003, the write-down of a loan in Fund I which caused a loss from
equity investments in funds and the inability to utilize capital losses
generated in 2002 to reduce current taxes. Also contributing to the increase
in net income was the reduction in income taxes in 2003 in connection with our
decision to elect REIT status. These increases were partially offset by a
recapture of a portion of the allowance for possible credit losses in 2002.

Interest and related income from loans and other investments amounted to
$38,524,000 for the year ended December 31, 2003, a decrease of $9,003,000
from the $47,527,000 amount for the year ended December 31, 2002. Average
interest-earning assets decreased from approximately $473.7 million for the
year ended December 31, 2002 to approximately $356.8 million for the year
ended December 31, 2003. The average interest rate earned on such assets
increased from 9.9% in 2002 to 10.7% in 2003. During the year ended
December 31, 2003 and December 31, 2002, we recognized $2.8 million and
$4.8 million, respectively, in additional income on the early repayment of
loans and investments. Without this additional interest income, the earning
rate for the 2003 period would have been 9.9% versus 9.6% for the 2002 period.
LIBOR rates averaged 1.2% for the year ended December 31, 2003 and 1.8% for
the year ended December 31, 2002, a decrease of 0.6%. The portion of our
average assets that earn interest at fixed rates did not decrease
proportionately to the decrease in assets that earn interest at variable rates
in 2003, which served to offset the decrease in earnings from the decrease in
the average LIBOR rate.

We utilize our existing credit facility, the term redeemable securities
contract, and repurchase obligations to finance our interest-earning assets.

S-30

Interest and related expenses on secured debt amounted to $9,845,000 for the
year ended December 31, 2003, a decrease of $8,124,000 from the $17,969,000
amount for the year ended December 31, 2002. The decrease in expense was due
to a decrease in the amount of average interest-bearing liabilities
outstanding from approximately $260.0 million for the year ended December 31,
2002 to approximately $193.8 million for the year ended December 31, 2003, and
a decrease in the average rate on interest-bearing liabilities from 6.9% to
5.1% for the same periods. The decrease in the average rate is substantially
due to the decrease in swap levels and rates and the increased use of
repurchase agreements as a percentage of total debt in the 2003 period at
lower spreads to LIBOR than the credit facilities utilized in 2002.

We also utilize the capital provided by the outstanding step up convertible
junior subordinated debentures to finance our interest-earning assets. During
the year ended December 31, 2003 and 2002, we recognized $9,730,000 and
$16,192,000, respectively, of net expenses related to its outstanding step up
convertible junior subordinated debentures. This amount consisted of
distributions to the holders totaling $9,252,000 and $14,887,000,
respectively, and amortization of discount and origination costs totaling
$478,000 and $1,305,000, respectively, during the year ended December 31, 2003
and 2002. The decrease in the distribution amount and amortization of discount
and origination costs resulted from the elimination of the distributions and
discount and fees on the non-convertible amount of the convertible trust
preferred securities, which was redeemed on September 30, 2002.

Other revenues decreased $325,000 from $9,924,000 for the year ended
December 31, 2002 to $9,599,000 for the year ended December 31, 2003. In 2002,
Fund I increased its allowance for possible credit losses by establishing a
specific reserve for the single non-performing loan it was carrying. The loss
from equity investments in funds during the year ended December 31, 2002 was
primarily due to this additional expense. On January 31, 2003, we purchased
from affiliates of Citigroup Alternative Investments their 75% interest in
Fund I and began consolidating the operations of Fund I into our consolidated
financial statements, which further reduced earnings from equity investments
in Funds. On January 1, 2003, the general partner of Fund II (owned by
affiliates of us and Citigroup Alternative Investments) voluntarily reduced by
50% the management fees charged to Fund II for the remainder of the investment
period due to a lower than expected level of deployment of Fund II's capital.
This, along with the reduction in income when we began charging management
fees on invested capital for Fund II, partially offset by the management fees
charged to Fund III, reduced our management and advisory fees from funds by
$2.1 million for the period. Also in 2002, we earned a $2.0 million fee from
our final advisory assignment.

General and administrative expenses decreased $676,000 to $13,320,000 for
the year ended December 31, 2003 from $13,996,000 for the year ended
December 31, 2002. The decrease in general and administrative expenses was
primarily due to reduced employee compensation. We employed an average of 25
employees during the year ended December 31, 2003 and 27 during the year ended
December 31, 2002. We had 23 full-time employees at June 30, 2004.

During the year ended December 31, 2002, we recaptured $4,713,000 of our
previously established allowance for possible credit losses. We deemed this
recapture necessary due to the substantial reduction in the loan portfolio and
a general reduction in the default risk of the loans remaining based upon
current conditions. At December 31, 2003, we believe that the reserve of
$6,672,000 is adequate based on the existing loans in our balance sheet
portfolio.

We intend to make an election to be taxed as a REIT under Section 856(c) of
the Internal Revenue Code commencing with the tax year ending December 31,
2003. As a REIT, we generally are not subject to federal income tax. To
maintain qualification as a REIT, we must distribute at least 90% of our REIT
taxable income to our shareholders and meet certain other requirements. If we
fail to qualify as a REIT in any taxable year, we will be subject to federal
income tax on our taxable income at regular corporate rates. We may also be
subject to certain state and local taxes on our income and property. Under
certain circumstances, federal income and excise taxes may be due on our
undistributed taxable income. At December 31, 2003, we were in compliance with
all REIT requirements and as such, have only provided for income tax expense
on taxable income attributed to our taxable REIT subsidiaries in 2003.

S-31

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

We reported a net loss allocable to shares of class A common stock of
$9,738,000 for the year ended December 31, 2002, a decrease of $18,502,000
from our net income allocable to shares of class A common stock of $8,764,000
for the year ended December 31, 2001. This decrease was primarily the result
of the inability to utilize capital losses generated in 2002 to reduce current
taxes, the write-down of deferred tax assets as a result of our decision to
elect REIT status for 2003, the settlement of three cash flow hedges resulting
in a $6.7 million charge to earnings, the write-down of a loan in Fund I which
caused a loss from equity investments in funds and decreased net interest
income from loans and other investments. These decreases were partially offset
by increased advisory and investment management fees, a recapture of the
allowance for possible credit losses and the elimination of the preferred
stock dividend.

Interest and related income from loans and other investments amounted to
$47,527,000 for the year ended December 31, 2002, a decrease of $20,278,000
from the $67,805,000 amount for the year ended December 31, 2001. Average
interest earning assets decreased from approximately $570.6 million for the
year ended December 31, 2001 to approximately $473.7 million for the year
ended December 31, 2002. The average interest rate earned on such assets
decreased from 11.8% in 2001 to 9.9% in 2002. During the year ended
December 31, 2002, we recognized $1.6 million in additional income on the
early repayment of loans, while during the year ended December 31, 2001, we
recognized $4.8 million in additional income on the early repayment of loans.
Without this additional interest income, the earning rate for the year ended
December 31, 2002 would have been 9.6% versus 11.0% for the year ended
December 31, 2001. LIBOR rates averaged 1.8% for the year ended December 31,
2002 and 3.9% for the year ended December 31, 2001, a decrease of 2.1%. Since
substantial portions of our assets earned interest at fixed rates, the
decrease in the average earning rate did not correspond to the full decrease
in the average LIBOR rate.

Interest and related expenses on secured debt amounted to $17,969,000 for
the year ended December 31, 2002, a decrease of $8,269,000 from the
$26,238,000 amount for the year ended December 31, 2001. The decrease in
expense was due to a decrease in the amount of average interest bearing
liabilities outstanding from approximately $321.8 million for the year ended
December 31, 2001 to approximately $260.0 million for the year ended
December 31, 2002 and a decrease in the average rate paid on interest bearing
liabilities from 8.2% to 6.9% for the same periods. The decrease in the
average rate was substantially due to the increased use of repurchase
obligations for debt financing in the year ended December 31, 2002 at lower
spreads to LIBOR than those obtainable under the credit facilities utilized in
the year ended December 31, 2001 and the decrease in the average LIBOR rate.
Due to the decrease in total debt, the percentage of debt that was swapped to
fixed rates in the year ended December 31, 2002 increased, partially
offsetting the previously discussed decreases in floating rates.

During the years ended December 31, 2002 and 2001, we recognized $16,192,000
and $16,508,000, respectively, of net expenses related to our outstanding step
up convertible junior subordinated debentures. This amount consisted of
distributions to the holders totaling $14,887,000 and $15,709,000,
respectively, and amortization of discount and origination costs totaling
$1,305,000 and $799,000, respectively, during the years ended December 31,
2002 and 2001. On April 1, 2002, in accordance with the terms of the
securities, the blended rate on such securities increased from 10.16% to
11.21%. On October 1, 2002, after redemption of the non-convertible amount of
the step up convertible junior subordinated debentures, the rate on such
securities was 10.00%. The increase in the amortization of discount and
origination costs resulted from the recognition of the unamortized discount
and fees on the non-convertible amount expensed upon redemption of the non-
convertible amount on September 30, 2002.

During the year ended December 31, 2002, other revenues decreased $1,403,000
to $9,924,000 from $11,327,000 in the year ended December 31, 2001. During the
second quarter of 2001, Fund II commenced operations, which accounted for
approximately $2.6 million of additional management and advisory fees in the
year ended December 31, 2002. We also recognized $2.0 million from our final
advisory assignment. These increases were offset by the write-down of a
$26.0 million investment in Fund I, which decreased our income from equity
investments in funds by approximately $6.0 million.

General and administrative expenses decreased $1,386,000 to $13,996,000 for
the year ended December 31, 2002 from $15,382,000 for the year ended
December 31, 2001. The decrease in general and

S-32

administrative expenses was primarily due to reduced executive compensation.
We employed an average of 27 employees during both the year ended December 31,
2002 and the year ended December 31, 2001. We had 26 full-time employees and
one part-time employee at December 31, 2002.

For the year ended December 31, 2002 and 2001, we accrued income tax expense
of $15,149,000 and $9,325,000, respectively, for federal, state and local
income taxes. The increase from 49.9% to 280.0% in the effective tax rate was
primarily due to capital losses being generated in 2002 that were not
deductible for tax purposes in that year and the reduction in deferred tax
assets due to the uncertainty of use in the future. In December 2002, when we
decided to elect REIT status for 2003, we wrote down our deferred tax asset to
$1.6 million, due to our inability to utilize the recorded tax benefits in the
future. The remaining $1.6 million deferred tax asset relates to future
reversals of taxable income in subsidiaries which will be taxable REIT
subsidiaries.

The preferred stock dividend and dividend requirement arose from previously
issued and outstanding shares of class A preferred stock. Dividends accrued on
these shares at a rate of 9.5% on a per share price of $8.07. In 1999,
1,982,275 shares of our class A preferred stock were converted into an equal
number of shares of our class A common stock thereby reducing the number of
outstanding shares of class A preferred stock to 2,106,944 and the dividend
requirement to $1,615,000. In 2001, the remaining shares of our class A
preferred stock were repurchased thereby eliminating the dividend requirement.

LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2004, we had $23,124,000 in cash. Our primary sources of
liquidity for 2004 are expected to be cash on hand, cash generated from
operations, principal and interest payments received on loans and investments,
additional borrowings under our credit facility and repurchase obligations and
proceeds from the sale of securities. We closed the Berkley transaction in two
tranches on May 11 and June 21, 2004, and raised gross proceeds of $30.7
million and $7.6 million, respectively. We believe these sources of capital
are adequate to meet future cash requirements for the remainder of 2004. We
expect that during 2004, we will use a significant amount of our available
capital resources to satisfy capital contributions required pursuant to our
equity commitments to Fund III and to originate new loans and investments for
our balance sheet. We intend to continue to employ leverage on our balance
sheet assets to enhance our return on equity.

We experienced a net increase in cash of $14,386,000 for the three months
ended March 31, 2004, compared to a net increase of $990,000 for the three
months ended March 31, 2003. Cash provided by operating activities during the
three months ended March 31, 2004 was $502,000, compared to $1,849,000 during
the same period of 2003. For the three months ended March 31, 2004, cash used
in investing activities was $45,469,000, compared to cash provided of
$21,393,000 during the same period in 2003. The change was primarily due to
our new loan and investment activity totaling $67.5 million for the three
months ended March 31, 2004. We financed the new investment activity with
additional borrowings under our credit facility, term redeemable securities
contract and repurchase obligations. This accounted for substantially all of
the change in the net cash activity from financing activities.

We experienced a net decrease in cash of $1,448,000 for the year ended
December 31, 2003, compared to a net decrease of $1,465,000 for the year ended
December 31, 2002. Cash provided by operating activities during the year ended
December 31, 2003 was $13,532,000, compared to $23,988,000 used during the
same period of 2002 as we generated a net loss of $9.7 million and used
$23.6 million of cash to settle a fair value hedge in 2002. For the year ended
December 31, 2003, cash provided by investing activities was $5,716,000,
compared to $301,336,000 during the same period in 2002 as we experienced
lower levels of loan and investment repayments in the year ended December 31,
2003 than in the year ended December 31, 2002 and we began making new loans
and investments for our balance sheet in the year ended December 31, 2003. We
utilized the cash received on loan repayments in both periods to reduce
borrowings under our credit facilities and our term redeemable securities
contract that, together with the net proceeds from the private placement of

S-33

1,075,000 shares of our class A common stock in June 2003, accounted for
substantially all of the change in the net cash used in financing activities
from $278,813,000 in the year ended December 31, 2002 to $20,696,000 in the
year ended December 31, 2003.

At March 31, 2004, we had outstanding borrowings under our credit facility
of $64,700,000, and outstanding repurchase obligations totaling $194,333,000.
The terms of these agreements are described above under the caption "Balance
Sheet Overview". At March 31, 2004, we had pledged assets that enable us to
borrow an additional $25.4 million and had $232.6 million of credit available
for the financing of new and existing unpledged assets pursuant to these
sources of financing.

The following table sets forth information about our contractual obligations
as of December 31, 2003:

PAYMENT DUE BY PERIOD
----------------------------------------------------------

CONTRACTUAL OBLIGATIONS LESS THAN MORE THAN
------------------------ TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
-------- --------- --------- --------- ---------
(IN THOUSANDS)

LONG-TERM DEBT OBLIGATIONS
Credit Facility..................................................... $ 38,868 $ -- $38,868 $ -- $ --
Repurchase Obligations.............................................. 146,894 142,644 4,250 -- --
Term redeemable securities contract................................. 11,651 11,651 -- -- --
Convertible junior subordinated debentures.......................... 89,742 -- -- -- 89,742
OPERATING LEASE OBLIGATIONS.......................................... 4,338 971 1,924 1,443 --
COMMITMENT TO FUND III (1)........................................... 17,200 17,200 -- -- --
-------- -------- ------- ------ -------
TOTAL................................................................ $308,693 $172,466 $45,042 $1,443 $89,742
======== ======== ======= ====== =======

---------------
(1) Fund III's investment period continues until June 2005 at which time our
equity commitment to the fund expires. While we do not believe that all of
the equity commitment will be called by December 31, 2004, we have
presented it as such as it could be called by then.

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements.

IMPACT OF INFLATION

Our operating results depend in part on the difference between the interest
income earned on our interest-earning assets and the interest expense incurred
in connection with our interest-bearing liabilities. Changes in the general
level of interest rates prevailing in the economy in response to changes in
the rate of inflation or otherwise can affect our income by affecting the
spread between our interest-earning assets and interest-bearing liabilities,
as well as, among other things, the value of our interest-earning assets and
our ability to realize gains from the sale of assets and the average life of
our interest-earning assets. Interest rates are highly sensitive to many
factors, including governmental monetary and tax policies, domestic and
international economic and political considerations, and other factors beyond
our control. We employ the use of correlated hedging strategies to limit the
effects of changes in interest rates on our operations, including engaging in
interest rate swaps to minimize our exposure to changes in interest rates.
There can be no assurance that we will be able to adequately protect against
the foregoing risks or that we will ultimately realize an economic benefit
from any hedging contract into which we enter.

S-34

CRITICAL ACCOUNTING POLICIES

Changes in management judgment, estimates and assumptions could have a
material effect on our consolidated financial statements. Management has the
obligation to ensure that its policies and methodologies are in accordance
with generally accepted accounting principles. During 2003, management
reviewed and evaluated its critical accounting policies and believes them to
be appropriate. Our accounting policies are described in Note 4 to our
consolidated financial statements. The following is a summary of our
accounting policies that we believe are those most likely to be affected by
management judgments, estimates and assumptions.

SECURITIES AVAILABLE-FOR-SALE

We have designated our investments in CMBS and certain other securities as
available-for-sale. Available-for-sale securities are carried at estimated
fair value with the net unrealized gains or losses reported as a component of
accumulated other comprehensive income/(loss) in shareholders' equity. Many of
these investments are relatively illiquid and their values must be estimated
by management. In making these estimates, management utilizes market prices
provided by dealers who make markets in these securities, but may, under
certain circumstances, adjust these valuations based on management's judgment.
Changes in the valuations do not affect our reported income or cash flows, but
impact shareholders' equity and, accordingly, book value per share.

Management must also assess whether unrealized losses on securities reflect
a decline in value that is other than temporary and, accordingly, write-down
the impaired security to its fair value, through a charge to earnings. We have
assessed our securities to first determine whether there is an indication of
possible other than temporary impairment and then where an indication exists
to determine if other than temporary impairment did in fact exist. We expect a
full recovery from our securities and did not recognize any other than
temporary impairment. Significant judgment of management is required in this
analysis that includes, but is not limited to, making assumptions regarding
the collectibility of the principal and interest, net of related expenses, on
the underlying loans.

Income on these securities available-for-sale is recognized based upon a
number of assumptions that are subject to uncertainties and contingencies.
Examples of these include, among other things, the rate and timing of expected
principal payments, including prepayments, repurchases, defaults and
liquidations, the pass-through or coupon rate and interest rate fluctuations.
Additional factors that may affect our reported interest income on our
mortgage-backed securities include interest payment shortfalls due to
delinquencies on the underlying mortgage loans and the timing and magnitude of
credit losses on the mortgage loans underlying the securities that are a
result of the general condition of the real estate market, including
competition for tenants and their related credit quality, and changes in
market rental rates. These uncertainties and contingencies are difficult to
predict and are subject to future events which may alter our assumptions.

We adopted Emerging Issues Task Force 99-20, "Recognition of Interest Income
and Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets" on January 1, 2001. In accordance with this guidance, on a
quarterly basis, when significant changes in estimated cash flows from the
cash flows previously estimated occur due to actual prepayment and credit loss
experience, we calculate a revised yield based on the current amortized cost
of the investment, including any other than temporary impairments recognized
to date, and the revised cash flows. The revised yield is then applied
prospectively to recognize interest income.

Prior to January 1, 2001, we recognized income from these beneficial
interests using the effective interest method, based on an anticipated yield
over the projected life of the security. Changes in the anticipated yields
were calculated due to revisions in our estimates of future and actual credit
losses and prepayments. Changes in anticipated yields resulting from credit
loss and prepayment revisions were recognized through a cumulative catch-up
adjustment at the date of the change which reflected the change in income from
the security from the date of purchase through the date of change in the
anticipated yield. The new yield was then used prospectively to account for
interest income. Changes in yields from reduced estimates of losses were
recognized prospectively.

S-35

LOANS RECEIVABLE

We purchase and originate commercial mortgage and mezzanine loans to be held
as long-term investments. Management must periodically evaluate each of these
loans for possible impairment. Impairment is indicated when it is deemed
probable that we will not be able to collect all amounts due according to the
contract terms of the loan. If a loan is determined to be permanently
impaired, we would write-down the loan through a charge to the reserve for
possible credit losses. Given the nature of our loan portfolio and the
underlying commercial real estate collateral, significant judgment of
management is required in determining permanent impairment and the resulting
charge to the reserve which includes, but is not limited to, making
assumptions regarding the value of the real estate which secures the mortgage
loan.

IMPAIRMENT OF SECURITIES

In accordance with Statement of Financial Accounting Standards No. 115, when
the estimated fair value of a security classified as available-for-sale has
been below amortized cost for a significant period of time and we conclude
that we no longer have the ability or intent to hold the security for the
period of time over which we expect the values to recover to amortized cost,
the investment is written-down to its fair value. The resulting charge is
included in income, and a new cost basis established. Additionally, under
Emerging Issues Task Force 99-20, when significant changes in estimated cash
flows from the cash flows previously estimated occur due to actual prepayment
and credit loss experience and the present value of the revised cash flows
using the current expected yield is less than the present value of the
previously estimated remaining cash flows, adjusted for cash receipts during
the intervening period, an other than temporary impairment is deemed to have
occurred. Accordingly, the security is written down to fair value with the
resulting change being included in income and a new cost basis established. In
both instances, the original discount or premium is written-off when the new
cost basis is established.

After taking into account the effect of the impairment charge, income is
recognized under Emerging Issues Task Force 99-20 or Statement of Financial
Accounting Standards No. 91, as applicable, using the market yield for the
security used in establishing the write-down.

REVENUE RECOGNITION

The most significant sources of our revenue come from our lending
operations. For our lending operations, we reflect income using the effective
yield method, which recognizes periodic income over the expected term of the
investment on a constant yield basis. We believe our revenue recognition
policies are appropriate to reflect the substance of the underlying
transactions.

PROVISION FOR LOAN LOSSES

Our accounting policies require that an allowance for estimated credit
losses be reflected in our financial statements based upon an evaluation of
known and inherent risks in our mortgage and mezzanine loans. While we have
experienced minimal actual losses on our lending investments, we consider it
prudent to reflect provisions for loan losses on a portfolio basis based upon
our assessment of general market conditions, our internal risk management
policies and credit risk rating system, industry loss experience, our
assessment of the likelihood of delinquencies or defaults, and the value of
the collateral underlying our investments. Actual losses, if any, could
ultimately differ from these estimates.

RISK MANAGEMENT AND FINANCIAL INSTRUMENTS

We utilize derivative financial instruments as a means to help to manage our
interest rate risk exposure on a portion of our variable rate debt obligations
through the use of cash flow hedges. The instruments utilized are generally
either pay fixed swaps or LIBOR-based interest rate caps, which are widely
used in the industry and typically entered into with major financial
institutions. Our accounting policies generally reflect these instruments at
their fair value with unrealized changes in fair value reflected in
"Accumulated other comprehensive income" on our consolidated balance sheets.
Realized effects on cash flows are generally recognized currently in income.
In December 2002, we entered into two new cash flow hedge contracts. The

S-36

following table summarizes the notional value and fair value of our derivative
financial instruments at March 31, 2004:

NOTIONAL INTEREST
HEDGE TYPE VALUE RATE MATURITY FAIR VALUE
------ --------------- ----------- -------- -------- -----------

Swap Cash Flow Hedge $85,000,000 4.2425% 2015 $(2,584,000)
Swap Cash Flow Hedge 24,000,000 4.2325% 2015 (713,000)

On December 31, 2003, the derivative financial instruments were reported at
their fair value as interest rate hedge assets and the increase in the fair
value of the cash flow swaps of $168,000 was deferred into other comprehensive
loss and will be released to earnings over the remaining lives of the swaps.
We believe the amount of the hedges' ineffectiveness is immaterial and,
therefore, it is reported as a component of interest expense.

INCOME TAXES

Our financial results generally do not reflect provisions for current or
deferred income taxes on our REIT taxable income. We believe that we have and
intend to continue to operate in a manner that will continue to allow us to be
taxed as a REIT and, as a result, we do not expect to pay substantial
corporate-level taxes (other than taxes payable by our taxable REIT
subsidiaries). Many of the REIT requirements, however, are highly technical
and complex. If we were to fail to meet these requirements, we would be
subject to federal income tax.

NEW ACCOUNTING STANDARDS

In September 2000, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
statement is applicable for transfers of assets and extinguishments of
liabilities occurring after June 30, 2001. We adopted the provisions of this
statement as required for all transactions entered into on or after January 1,
2001. Our adoption of Statement of Financial Accounting Standards No. 140 did
not have a significant impact on us.

On January 1, 2001, we adopted Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by Statement of Financial Accounting Standards No. 137 and Statement
of Financial Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities." Statement of Financial Accounting
Standards No. 133, as amended, establishes accounting and reporting standards
for derivative instruments. Specifically, Statement of Financial Accounting
Standards No. 133 requires an entity to recognize all derivatives as either
assets or liabilities in the consolidated balance sheets and to measure those
instruments at fair value. Additionally, the fair value adjustments will
affect either shareholders' equity or net income depending on whether the
derivative instrument qualifies as a hedge for accounting purposes and, if so,
the nature of the hedging activity. As of January 1, 2001, the adoption of the
new standard resulted in an adjustment of $574,000 to accumulated other
comprehensive loss.

In the case of the fair value hedge, we hedged the component of interest
rate risk that can be directly controlled by the hedging instrument, and it is
this portion of the hedge assets that was being recognized in earnings. Mark
to market on non-hedged available for sale securities and the non-hedged
aspect of CMBS are reported in accumulated other comprehensive income.
Financial reporting for hedges characterized as fair value hedges and cash
flow hedges are different. For those hedges characterized as a fair value
hedge, the changes in fair value of the hedge and the hedged item are
reflected in earnings each quarter. In the case of the fair value hedge, we
hedged the component of interest rate risk that can be directly controlled by
the hedging instrument, and it was this portion of the hedged assets that is
recognized in earnings. The non-hedged balance is classified as an available-
for-sale security consistent with Statement of Financial Accounting Standards
No. 115, and was reported in accumulated other comprehensive income. For those
hedges characterized as cash flow hedges, the unrealized gains/losses in the
fair value of these hedges were reported on the balance sheet with a
corresponding adjustment to either accumulated other comprehensive income or
to earnings, depending on the type of hedging relationship. We discontinued
our fair value hedge

S-37

transaction in 2002. In accordance with Statement of Financial Accounting
Standards No. 133, on December 31, 2003, the derivative financial instruments
were reported at their fair value as interest rate hedge assets of $168,000.

We are exposed to credit loss in the event of non-performance by the
counterparties to the interest rate swap and cap agreements, although we do
not anticipate such non-performance. The counterparties would bear the
interest rate risk of such transactions as market interest rates increase.

In July 2001, the SEC released Staff Accounting Bulletin No. 102, "Selected
Loan Loss Allowance and Documentation Issues." Staff Accounting Bulletin 102
summarizes certain of the SEC's views on the development, documentation and
application of a systematic methodology for determining allowances for loan
and lease losses. Our adoption of Staff Accounting Bulletin 102 did not have a
significant financial impact on us.

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" and Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets." Statement of Financial Accounting Standards No. 141 requires the
purchase method of accounting to be used for all business combinations
initiated after June 30, 2001. Statement of Financial Accounting Standards No.
141 also addresses the initial recognition and measurement of goodwill and
other intangible assets acquired in business combinations and requires
intangible assets to be recognized apart from goodwill if certain tests are
met. Statement of Financial Accounting Standards No. 142 requires that
goodwill not be amortized, but instead, be measured for impairment at least
annually, or when events indicate that there may be an impairment. We adopted
the provisions of both statements, as required, on January 1, 2002, which did
not have a significant financial impact on us.

In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." Statement of Financial Accounting Standards
No. 144 provides new guidance on the recognition of impairment losses on long-
lived assets to be held and used or to be disposed of, and also broadens the
definition of what constitutes a discontinued operation and how the results of
a discontinued operation are to be measured and presented. Statement of
Financial Accounting Standards No. 144 requires that current operations prior
to the disposition of corporate tenant lease assets and prior period results
of such operations be presented in discontinued operations in our consolidated
statements of operations. The provisions of Statement of Financial Accounting
Standards No. 144 are effective for financial statements issued for fiscal
years beginning after December 15, 2001, and must be applied at the beginning
of a fiscal year. We adopted the provisions of this statement on January 1,
2002, as required, which did not have a significant financial impact on us.

In November 2002, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," an interpretation of Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies," Statement of Financial Accounting Standards No. 57, "Related
Party Disclosures," Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments" and a rescission of
Financial Accounting Standards Board Interpretation No. 34, "Disclosure of
Indirect Guarantees of Indebtedness of Others, an Interpretation of Statement
of Financial Accounting Standards No. 5." It requires that upon issuance of a
guarantee, the guarantor must recognize a liability for the fair value of the
obligation it assumes under that guarantee regardless of whether the guarantor
receives separately identifiable consideration, such as a premium. The new
disclosure requirements are effective December 31, 2002. Our adoption of
Interpretation No. 45 did not have a material impact on our consolidated
financial statements, nor do we expect that it will have a material impact on
us in the future.

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disclosure requirements took effect almost immediately and are required for
all financial statements initially issued after January 31, 2003. In December
2003, the Financial Accounting Standards Board issued a revision of
Interpretation No. 46, Interpretation No. 46R, to clarify the provisions of
Interpretation No. 46. The application of Interpretation No. 46R is effective
for public companies, other than small business issuers, after March 15, 2004.
We have evaluated all of our investments and other interests in entities that
may be deemed variable interest entities under the provisions of
Interpretation No. 46 and have concluded that no additional entities need to
be consolidated.

In evaluating Interpretation No. 46R, we concluded that we could no longer
consolidate CT Convertible Trust I, the entity which had purchased our step up
convertible junior subordinated debentures and issued company-obligated,
mandatory redeemable, convertible trust common and preferred securities.
Capital Trust, Inc. had issued the convertible junior subordinated debentures
and had purchased the convertible trust common securities. The consolidation
of CT Convertible Trust I resulted in the elimination of both the convertible
junior subordinated debentures and the convertible trust common securities
with the convertible trust preferred securities being reported on our balance
sheet after liabilities but before equity and the related expense being
reported on the income statement below income taxes and net of income tax
benefits. After the deconsolidation, we report the convertible junior
subordinated debentures as liabilities and the convertible trust common
securities as other assets. The expense from the payment of interest on the
debentures is reported as interest and related expenses on convertible junior
subordinated debentures and the income received from our investment in the
common securities is reported as a component of interest and related income.
We have elected to restate prior periods for the application of Interpretation
46R. The restatement was effected by a cumulative type change in accounting
principle on January 1, 2002. There was no change to previously reported net
income as a result of such restatement.

In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". This
statement establishes standards for the classification and measurement of
certain financial instruments with characteristics of both liabilities and
equity. The statement is effective for financial instruments entered into and
modified after May 31, 2003 and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. It is to be implemented by
reporting the cumulative effect of a change in an accounting principle of
financial instruments created before the issuance date of the statement and
still existing at the beginning of the interim period of adoption. The
implementation of the statement did not have a material impact on us.

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BUSINESS

OVERVIEW

We are a fully integrated, self-managed finance and investment management
company that specializes in originating and managing credit-sensitive
structured financial products. Our investment programs are executed directly
for our own account and for third-party funds that we manage. Through June 30,
2004, our activities have been focused exclusively in the commercial real
estate mezzanine market where we have originated, both directly and on behalf
of our managed funds, over $3.6 billion of investments since 1997 and
established ourselves as a leader in that sector. We are organized and conduct
our operations to qualify as a real estate investment trust, or REIT, for
federal income tax purposes and generally will not be subject to federal
income tax if we comply with the applicable income, asset, distribution and
organizational requirements of a REIT.

RECENT DEVELOPMENTS

During fiscal year 2003, we began to conduct our operations to qualify as a
REIT and will elect REIT status when we file our federal tax return for 2003
in the fourth quarter of 2004. With our decision to elect to be taxed as a
REIT requiring us to distribute substantially all of our taxable income, we
began paying dividends on our class A common stock in the first quarter of
2003 and have paid quarterly dividends of $0.45 per share since then.

With the expiration of the Fund II investment period in April 2003, we
resumed our balance sheet investment program. During 2003, we originated or
purchased loans and securities for our balance sheet totaling $156.1 million.
From January 1, 2004 to June 30, 2004, we originated or acquired for our
balance sheet $83.5 million of investments.

On June 2, 2003, Fund III effected its initial closing on equity commitments
and on August 8, 2003 its final closing, raising a total of $425.0 million in
equity commitments. From the initial closing through March 31, 2004, we have
made equity investments in Fund III of $4.0 million and have capitalized costs
totaling $914,000, which are being amortized over the remaining anticipated
life of Fund III. As of March 31, 2004, Fund III had closed eleven
investments, totaling $319.5 million, of which $268.4 million remains
outstanding at March 31, 2004. From March 31, 2004 to June 30, 2004, we have
originated or purchased $202.0 million of loans for Fund III.

On May 11, 2004, we closed on the initial tranche of a direct public
offering to Berkley. We issued 1,310,000 shares of our class A common stock
and stock purchase warrants to purchase 365,000 shares of our class A common
stock for a total purchase price of $30.7 million. On June 21, 2004, we closed
on the second tranche of the direct public offering and issued an additional
325,000 shares of our class A common stock for a total purchase price of
$7.6 million. The warrants have an exercise price of $23.40 per share and
expire on December 31, 2004. Pursuant to a director designation right granted
to Berkley, we appointed Joshua A. Polan to our board of directors.

In June and July of 2004, CT Investment Management Co. was approved as a
Special Servicer by Fitch Ratings, Standard & Poor's and Moody's Investors
Service. These approvals allow CT Investment Management Co. to act as a named
Special Servicer for CMBS and B Note investments. As Special Servicer, CT
Investment Management Co. will increase the control it has in managing
certain portions of its portfolio while potentially generating additional fee
income. Approval from the agencies was based upon, among other things, our
experience in managing and working out problem assets, our established asset
management policies and procedures and our technology systems. We believe our
ability to be a Special Servicer improves the asset management of our existing
portfolio, and facilitates our planned increase in our CMBS and B Note
investment activity.

On June 29, 2004, we priced a $320.8 million issue of collateralized debt
obligations, commonly known as CDOs, that have been privately offered to
institutional investors. In connection with the private offering, at the
scheduled July 20, 2004 closing, we will close on a series of related
transactions pursuant to which:

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o we will purchase a $251.2 million portfolio of floating rate B Notes and
mezzanine loans from GMAC Commercial Mortgage Corporation;

o we will contribute those assets, along with $72.9 million of B Notes,
mezzanine loans and subordinate CMBS from our own portfolio, to Capital
Trust RE CDO 2004-1 Ltd, our wholly-owned subsidiary that we call the
Issuer;

o the Issuer will issue $320.8 million of floating rate CDOs secured by the
Issuer's assets;

o the Issuer will sell all of the $252.8 million of CDOs that are rated
investment grade to third-party investors; and

o we will acquire and retain all of the $68.1 million of unrated and below
investment grade rated notes in addition to ownership of all of the
Issuer's $3.2 million of equity.

Taken together, we refer to these related transactions as the CDO-1
transaction.

We will consolidate the Issuer into our financial statements, with the
entity's investments shown as loans receivable and the investment grade notes
held by third-parties shown as direct liabilities on our balance sheet. As a
result of the CDO-1 transaction, our balance sheet assets will increase by
$251.2 million and we will record $252.8 million of CDOs as liabilities at the
time of the closing.

The GMAC Commercial Mortgage assets comprise 40 floating rate B Notes and
one mezzanine loan with an aggregate balance of $251.2 million. The assets
contributed by us consist of seven B Notes, mezzanine loans and subordinate
CMBS with an aggregate balance of $72.9 million. Together, the Issuer's
initial portfolio represents a combination of large-and small-balance
commercial real estate mezzanine investments, ranging in size from $575,489 to
$31.9 million with an average balance of $6.8 million and a weighted average
remaining contractual life of 19.9 months. Excluding CMBS, senior mortgage
debt secured by the underlying properties totals $1.7 billion and the initial
portfolio has a weighted average last dollar loan-to-value ratio of 68.2%
based on third-party appraisals. All the assets but one are floating rate,
with a weighted average rate of LIBOR plus 4.59%.

The Issuer will issue 10 classes of CDOs that will be rated AAA to NR with a
total face amount of $320.8 million and final maturity of July 2039. The
governing documents provide for a four year reinvestment period, commencing at
closing, during which principal proceeds from the repayment, amortization and
sale of assets may be reinvested in qualifying replacement B Notes, mezzanine
loans and subordinate CMBS based upon criteria agreed upon with the rating
agencies. In certain circumstances, including the failure of interest coverage
and over-collateralization tests, reinvestment may be suspended and principal
proceeds will be used to amortize the CDOs sequentially in order of seniority
until the Issuer or its collateral is brought back into compliance with the
applicable test(s). Subsequent to the end of the reinvestment period,
principal proceeds will be directed to repay the senior-most class of CDOs
outstanding at that time. The CDOs will be callable at par at the Issuer's
option commencing two years after the closing. The weighted average rate on
the investment grade CDOs will be LIBOR plus 0.62%.

The CDO-1 transaction provides us with a number of significant benefits
including:

o increasing our balance sheet interest earning assets by $251.2 million, a
61% increase compared to March 31, 2004;

o creating long-term, non-recourse financing at an all-in borrowing cost
that is significantly lower than our existing sources of debt capital;

o obtaining long term, floating rate financing that matches both the
interest rate index and duration of our assets;

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o establishing us as a CDO issuer and collateral manager, which we believe
will facilitate our issuance of additional CDOs in the future.

PLATFORM

We are a fully integrated, self-managed company that, as of June 30, 2004,
has 23 full-time employees, all based in New York City. Our senior management
team has an average of 18 years of experience in the fields of real estate,
credit, capital markets and structured finance. Around this team of
professionals, we have developed a platform to originate and manage portfolios
of credit-sensitive structured products. Founded on our long-standing
relationships with borrowers, brokers and first mortgage providers, our
extensive origination network produces multiple investment opportunities from
which we select only those transactions that we believe exhibit a compelling
risk/return profile. Once a transaction that meets our parameters is
identified, we apply a disciplined process founded on four elements:

o intense credit underwriting;

o creative financial structuring;

o efficient use of leverage; and

o aggressive asset management.

The first element, and the foundation of our past and future success, is our
expertise in credit underwriting. For each prospective investment, an in-house
underwriting team is assigned to perform a ground-up analysis of all aspects
of credit risk. Our rigorous underwriting process is embodied in our
proprietary credit policies and procedures that detail the due diligence steps
from initial client contact through closing. Input and approval is required
from our finance, capital markets, credit and legal teams, as well as from
various third-parties including our credit providers.

Creative financial structuring is the second critical element in our
process. Based upon our underwriting, we strive to create a customized
structure for each investment that has the necessary real estate credit,
interest rate and other applicable protections while meeting the varying needs
of our borrowers and partners. We believe our demonstrated ability to
structure solutions for our customers gives us a distinct competitive
advantage in our market place.

The prudent use of leverage is the third integral element of our platform.
Leverage can increase returns on equity and enhance portfolio diversification,
but can also increase risk. We control this financial risk by actively
managing our capital structure, seeking to match the duration and interest
rate index of our assets and liabilities and, where appropriate, employing
hedging instruments such as interest rate swaps, caps and other interest rate
exchange agreements. Our objective is to minimize interest rate risk and
optimize the difference between the yield on our assets and the cost of our
liabilities to create net interest spread. We pursue innovative debt financing
alternatives, such as our use of collateralized debt obligations to finance
our balance sheet investments, to achieve our objectives.

The final element of our platform is aggressive asset management. We pride
ourselves on our active style of managing our portfolios. From closing an
investment through its final repayment, our dedicated asset management team is
in constant contact with our borrowers, monitoring performance of the
collateral and enforcing our rights as necessary. Our designation as a rated
Special Servicer will allow us to exercise more direct control over certain of
our CMBS and B Note investments.

By adhering to these four key elements that define our platform, from July
1997 through June 30, 2004, we have originated over $3.6 billion of real
estate-related investments in 123 separate transactions, both directly and on
behalf of our managed funds, and limited the loss experience of our investment
portfolios to less than 1.0%.

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BUSINESS MODEL

Our business model is designed to produce a unique mix of net interest
spread from our balance sheet investments and fee income from our investment
management operations. Our goal is to deliver a stable, growing stream of
earnings from these two complementary activities.

Our current balance sheet investment program focuses on structured
commercial real estate debt investments, including B Notes, subordinate CMBS,
and small-balance (under $15 million) mezzanine loans. As of March 31, 2004,
our interest-earning balance sheet assets (excluding cash, fund investments
and other assets) totaled $407.4 million and had a weighted average
unleveraged yield of 8.8%. Our interest-bearing liabilities as of that date,
including the convertible junior subordinated debentures, total $351.4 million
and had a weighted average interest rate cost of 4.8%.

We currently manage two private equity funds, CT Mezzanine Partners II LP
and CT Mezzanine Partners III, Inc. Both funds were formed to specialize in
making large-balance commercial real estate mezzanine loans. Fund II made $1.2
billion of investments in 40 separate transactions during its contractual
investment period that commenced in April 2001 and ended in April 2003. As of
March 31, 2004, Fund II's remaining investments aggregate $432.9 million, all
of which were performing. Fund III held its initial closing in June 2003 and
its final closing in August 2003, raising a total of $425 million of committed
equity capital. With leverage, we expect to make over $1 billion of
investments during Fund III's investment period, which expires in June of
2005. We have made co-investments in Fund II and Fund III, and our wholly-
owned taxable REIT subsidiary, CT Investment Management Co., is the manager of
both funds. In addition to our pro-rata share of income as a co-investor, we
earn base management fees and performance-oriented incentive management fees
from each fund. We allocate commercial real estate investment opportunities to
Fund III that meet the fund's duration, size and leveraged return parameters.
Our investment management activities are described further under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".

We operate our business to qualify as a REIT for federal income tax
purposes. Our primary objective in deciding to elect REIT status was to pay
dividends to our shareholders on a tax-efficient basis. We manage our balance
sheet investments to produce a portfolio that meets the asset and income tests
necessary to maintain our REIT qualification and otherwise conduct our
investment management business through our wholly-owned subsidiary, CT
Investment Management Co., which is subject to federal income tax.

INVESTMENT STRATEGIES

Since 1997, our investment programs have focused on various strategies
designed to take advantage of investment opportunities that have developed in
the commercial real estate mezzanine sector. These investment opportunities
have been created largely by the evolution and growing importance of
securitization in the real estate capital markets. With approximately $2.1
trillion outstanding as of 2003, U.S. commercial real estate debt is a large
and dynamic market that had traditionally been dominated by institutional
lenders such as banks, insurance companies and thrifts making first mortgage
loans for retention in their own portfolios. Securitized debt has captured an
increasing share of this market, growing from less than 5% of the total amount
outstanding in 1990 to approximately 18% by year-end 2003. More important,
according to industry estimates, CMBS now accounts for roughly 40% of annual
new originations with domestic CMBS issuance in 2003 exceeding $77.9 billion.
In addition, many traditional lenders have adopted CMBS standards in their
portfolio lending programs, further extending the influence of securitization
in the market.

The essence of securitization is risk segmentation, whereby whole mortgage
loans (or pools of loans) are split into multiple classes and sold to
different buyers based on their risk tolerance and return requirements. The
most senior classes, which have the lowest risk and therefore the lowest
return, are rated investment grade (AAA through BBB-) by the credit rating
agencies. The junior classes, which are subordinate to the senior debt but
senior to the owner/operator's common equity investment, command a higher
yield. These "mezzanine" tranches may carry sub-investment grade ratings or no
rating at all.

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Depending on our assessment of relative value, our real estate mezzanine
investments may take a variety of forms including:

o Property Mezzanine Loans -- These are secured property loans that are
subordinate to a first mortgage loan, but senior to the owner's equity. A
mezzanine loan is evidenced by its own promissory note and is typically
made to the owner of the property-owning entity, which is typically the
senior loan borrower. It is not secured by the first mortgage on the
property, but by a pledge of the mezzanine borrower's ownership interest
in the property-owning entity. Subject to negotiated contractual
restrictions, the mezzanine lender has the right, following foreclosure,
to become the sole indirect owner of the property, subject to the lien of
the first mortgage.

o B Notes -- These are loans evidenced by a junior participation in a first
mortgage against one or more properties; the senior participation is
known as an A Note. Although a B Note may be evidenced by its own
promissory note, it shares a single borrower and mortgage with the A Note
and is secured by the same collateral. B Note lenders have the same
obligations, collateral and borrower as the A Note lender and in most
instances are contractually limited in rights and remedies in the case of
a default. The B Note is subordinate to the A Note by virtue of a
contractual arrangement between the A Note lender and the B Note lender.
For the B Note lender to actively pursue a full range of remedies, it
must, in most instances, purchase the A Note.

o Subordinate CMBS -- These commercial mortgage-backed securities are the
junior classes of securitized pools of multiple first mortgage loans.
Cash flows from the underlying mortgages are aggregated and allocated to
the different classes in accordance with their priority ranking,
typically ranging from the AAA rated through the unrated, first-loss
tranche. Administration and management of the pool are performed by a
trustee and servicers, who act on behalf of all holders in accordance
with contractual agreements. Our investments generally represent the
subordinated tranches ranging from the BBB rated through the unrated
class.

o Corporate Mezzanine Loans -- These are investments in or loans to real
estate-related operating companies, including REITs. Such investments may
take the form of secured debt, preferred stock and other hybrid
instruments such as convertible debt. Corporate mezzanine loans may
finance, among other things, operations, mergers and acquisitions,
management buy-outs, recapitalizations, start-ups and stock buy-backs
generally involving real estate and real estate-related entities.

o First Mortgage Loans -- These are secured property loans evidenced by a
first mortgage which is senior to any mezzanine financing and the owner's
equity. These loans are typically bridge loans for equity holders who
require interim financing until permanent financing can be obtained. Our
first mortgage loans are generally not intended to be permanent in
nature, but rather are intended to be of a relatively short duration,
with extension options as deemed appropriate, and typically require a
balloon payment of principal at maturity. We may also originate and fund
first mortgage loans in which we intend to sell the senior tranche,
thereby creating a property mezzanine loan.

We finance single properties, multiple property portfolios and operating
companies, with our investment typically representing the portion of the
capital structure ranging between 50% and 85% of underlying collateral value.
Our objective is to create portfolios which are diversified by investment
format, property type and geographic market. The following graphs illustrate
the diversification achieved from July 1997 through June 30, 2004 in the
origination of our investment portfolios.

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[GRAPHIC OMITTED]

Property Type

Office 41%
Hotel 19%
Retail 17%
Multifamily 6%
Other 3%
Mixed Use 14%

[GRAPHIC OMITTED]

Geographic Location

Northeast 38%
Southeast 14%
Southwest 7%
West 18%
Midwest 3%
Diversified 20%

[GRAPHIC OMITTED]

Investment Type

Property Mezzanine 54%
Corporate Mezzanine 12%
First Mortgage 9%
CMBS 17%
B Note 8%

If carefully underwritten and structured, we believe that portfolios of real
estate mezzanine investments can produce attractive risk-adjusted returns when
compared to both senior debt and direct equity ownership.

BUSINESS PLAN

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o we will continue to make commercial real estate mezzanine investments for
our balance sheet;

o we will expand our investment management business through additional
offerings of subsequent CT Mezzanine Partners funds; and

o we may pursue other balance sheet and investment management businesses
that leverage our core skills in credit underwriting and financial
structuring.

COMPETITION

We are engaged in a highly competitive business. We compete for loan and
investment opportunities with numerous public and private real estate
investment vehicles, including financial institutions, mortgage banks, pension
funds, opportunity funds, REITs and other institutional investors, as well as
individuals. Many competitors are significantly larger than us, have well-
established operating histories and may have greater access to capital and
other resources. In addition, the investment management industry is highly
competitive and there are numerous well-established competitors possessing
substantially greater financial, marketing, personnel and other resources than
us. We compete with other investment management companies in attracting
capital for funds under management.

GOVERNMENT REGULATION

Our activities, including the financing of our operations, are subject to a
variety of federal and state regulations. In addition, a majority of states
have ceilings on interest rates chargeable to certain customers in financing
transactions.

EMPLOYEES

As of June 30, 2004, we had 23 full-time employees. None of our employees
are covered by a collective bargaining agreement and we consider the
relationship with our employees to be good.

PROPERTIES

Our principal executive and administrative offices are located in
approximately 11,885 square feet of office space leased at 410 Park Avenue,
14th Floor, New York, New York 10022 and our telephone number is (212) 655-
0220. The lease for such space expires in June 2008. We believe that this
office space is suitable for our current operations for the foreseeable
future.

LEGAL PROCEEDINGS

We are not a party to any material litigation or legal proceedings, or to
our knowledge, any threatened litigation or legal proceedings, which, in our
opinion, individually or in the aggregate, would have a material adverse
effect on our results of operations or financial condition.

S-46

FEDERAL INCOME TAX CONSIDERATIONS

The following is a discussion of the material United States federal income
tax considerations associated with our decision to elect to be taxed as a REIT
and with the ownership of our class A common stock. The following discussion
is not exhaustive of all possible tax considerations that may be relevant to
the REIT election or with the ownership of our class A common stock. Moreover,
the discussion contained herein does not address all aspects of taxation that
may be relevant to you in light of your personal tax circumstances, including,
for example, certain types of shareholders subject to special treatment under
federal income tax laws, including insurance companies, tax-exempt
organizations, except to the extent discussed under the caption "Taxation of
Tax-Exempt Shareholders", financial institutions, broker-dealers, and foreign
corporations and persons who are not citizens or residents of the United
States, except to the extent discussed under the caption "Taxation of Non-U.S.
Shareholders".

The statements in this discussion are based upon, and qualified in their
entirety by, current provisions of the Internal Revenue Code, existing,
temporary, and currently-proposed, Treasury Regulations promulgated under the
Internal Revenue Code, existing administrative rulings and practices of the
Internal Revenue Service and judicial decisions. We cannot give you any
assurances that future legislative, administrative or judicial actions or
decisions, which may be retroactive in effect, will not affect the accuracy of
any of the statements contained herein.

You are urged to consult your own tax advisor regarding the specific tax
consequences to you of the ownership and sale of stock in an entity electing
to be taxed as a real estate investment trust, including the federal, state,
local, foreign and other tax consequences of such ownership and sale, as well
as potential changes in the applicable tax laws. This summary is based on the
facts and applicable law as of the date hereof.

TAX CONSEQUENCES OF REIT ELECTION

Prior to January 1, 2003, all of our income was subject to income taxes that
we paid, and our shareholders recognized income only to the extent that we
paid a dividend from current or accumulated earnings and profits. Following
the election, we generally will be taxable only on our undistributed income,
and our shareholders generally will be taxable on the income distributed to
them. However, because the operations of our wholly-owned subsidiary, CT
Investment Management Co., are of a nature and scope that would cause us to
fail to qualify as a real estate investment trust, it will be treated and
operate as a taxable REIT subsidiary. As a result, CT Investment Management
Co. will be directly taxed on its income, so that only its after-tax income
will be available for reinvestment or for distribution to our shareholders. In
general, any of the after-tax income of CT Investment Management Co.
distributed to our shareholders will be includable in our shareholders'
taxable income and will be subject to a second level of tax. We may own an
interest in one or more taxable REIT subsidiaries, in addition to CT
Investment Management Co.

In accordance with our decision to be taxed as a REIT, we will make a formal
election to be so taxed under Section 856 of the Internal Revenue Code,
commencing with our taxable year beginning January 1, 2003. The sections of
the Internal Revenue Code and Treasury Regulations applicable to qualification
and operation as a real estate investment trust are technical and complex.
Although we believe that we will be organized and will operate in a manner
necessary to satisfy the requirements for taxation as a real estate investment
trust under the Internal Revenue Code, many of which are discussed below, we
cannot assure you that the REIT will be able to so operate for all periods
following the election.

TAXATION OF A REIT

If we qualify as a real estate investment trust, the REIT generally will not
be subject to federal corporate income taxes on net income currently
distributed to shareholders. The benefit of this tax treatment is that it
substantially eliminates the "double taxation" resulting from the taxation at
both the corporate and shareholder levels that generally results from owning
stock in a corporation. Accordingly, income generated

S-47

by us generally will be subject to taxation solely at the shareholder level
upon distribution. We will, however, be required to pay certain federal income
taxes, including in the following circumstances:

o We will be subject to federal income tax at regular corporate rates on
taxable income, including net capital gain, that we do not distribute to
shareholders during, or within a specified time period after, the
calendar year in which such income is earned.

o We will be subject to the "alternative minimum tax" on our undistributed
items of tax preference.

o We will be subject to a 100% tax on net income from certain sales or
other dispositions of property that we hold primarily for sale to
customers in the ordinary course of business (known as "prohibited
transactions").

o If we fail to satisfy the 75% gross income test or the 95% gross income
test, both described below, but nevertheless qualify as a real estate
investment trust, we will be subject to a 100% tax on an amount equal to
the gross income attributable to the greater of the amount by which we
fail the 75% or 95% gross income test multiplied by a fraction intended
to reflect our profitability.

o If we have net income from the sale or other disposition of "foreclosure
property," which is held primarily for sale to customers in the ordinary
course of business, or other nonqualifying income from foreclosure
property, we will be required to pay tax at the highest corporate rate on
this income. In general, foreclosure property is property acquired
through foreclosure after a default on a loan secured by the property or
on a lease of the property.

o If we acquire an asset from a corporation which is not a REIT in a
transaction in which the basis of the asset in our hands is determined by
reference to the basis of the asset in the hands of the transferor
corporation, and we subsequently sell the asset within ten years, then
under Treasury Regulations, we would be required to pay tax at the
highest regular corporate tax rate on this gain to the extent the fair
market value of the asset exceeds our adjusted tax basis in the asset, in
each case, determined as of the date on which we acquired the asset. The
results described in this paragraph assume that we will elect this
treatment in lieu of an immediate tax when the asset is acquired. We will
also be subject to such tax liability for all of our assets that were
held as of January 1, 2003.

o We will generally be subject to tax on the portion of any "excess
inclusion" income derived from an investment in residual interests in
real estate mortgage investment conduits to the extent our stock is held
by specified tax exempt organizations not subject to tax on unrelated
business taxable income.

o If we fail to distribute during the calendar year at least the sum of (i)
85% of our real estate investment trust ordinary income for such year,
(ii) 95% of our real estate investment trust capital gain net income for
such year, and (iii) any undistributed taxable income from prior periods,
we will pay a 4% excise tax on the excess of such required distribution
over the amount actually distributed to shareholders.

o We may elect to retain and pay income tax on some or all of our long-term
capital gain, as described below.

o We may be subject to a 100% excise tax on transactions with our taxable
REIT subsidiary not conducted on an arm's-length basis.

REQUIREMENTS FOR QUALIFICATION AS A REIT

INTRODUCTION

In order to qualify as a real estate investment trust for federal income tax
purposes, we must elect to be treated as a REIT and must satisfy certain
statutory tests relating to, among other things, sources of our income, the
nature of our assets, the amount of our distributions, and the ownership of
our stock.

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The Internal Revenue Code defines a REIT as a corporation, trust or
association:

(1) that is managed by one or more trustees or directors;

(2) that issues transferable shares or transferable certificates of
beneficial ownership to its owners;

(3) that would be taxable as a regular corporation, but for its election
to be taxed as a REIT;

(4) that is not a financial institution or an insurance company under
the Internal Revenue Code;

(5) that is owned by 100 or more persons;

(6) in which not more than 50% in value of the outstanding stock is
owned, actually or constructively, by five or fewer individuals, as
defined in the Internal Revenue Code to include some entities,
during the last half of each year; and

(7) that meets other tests, described below, regarding the nature of its
income and assets, and the amount of its distributions.

The Internal Revenue Code provides that conditions (1) to (4) above must be
met during the entire year and that condition (5) above must be met during at
least 335 days of a year of twelve months, or during a proportionate part of a
shorter taxable year. Conditions (5) and (6) above do not apply to the first
taxable year for which an election is made to be taxed as a REIT.

Our amended and restated charter provides for restrictions regarding
ownership and transfer of our stock. These restrictions are intended to assist
us in satisfying the share ownership requirements described in conditions (5)
and (6) above. These stock ownership and transfer restrictions are described
in the company prospectus under the caption "Description of Capital Stock --
Certain Provisions of Maryland Law and Our Charter and Bylaws -- REIT
Qualification Restrictions on Ownership and Transfer." These restrictions,
however, may not ensure that we will, in all cases, be able to satisfy the
share ownership requirements described in conditions (5) and (6) above. If we
fail to satisfy these share ownership requirements, our status as a REIT would
terminate. If, however, we comply with the rules contained in applicable
Treasury Regulations that require us to determine the actual ownership of our
shares and we do not know, or would not have known through the exercise of
reasonable diligence, that we failed to meet the requirement described in
condition (6) above, we would not be disqualified as a REIT.

In addition, a corporation may not qualify as a REIT unless its taxable year
is the calendar year. We have and will continue to have a calendar taxable
year.

A corporation that is a "qualified REIT subsidiary" is not treated as a
corporation separate from its parent real estate investment trust for federal
income tax purposes. All assets, liabilities and items of income, deduction,
and credit of a qualified REIT subsidiary are treated as the assets,
liabilities and items of income, deduction and credit of the real estate
investment trust. A qualified REIT subsidiary is a corporation, all of the
capital stock of which is owned by a real estate investment trust and for
which no election has been made to treat it as a "taxable REIT subsidiary" as
discussed below. Thus, in applying the requirements described in this section,
any qualified REIT subsidiary that we may own in the future will be ignored
and all assets, liabilities and items of income, deduction and credit of such
subsidiary will be treated as our assets, liabilities, and items of income,
deduction and credit.

A REIT will be deemed to own its proportionate share (based upon its share
of the capital of the partnership) of the assets of a partnership in which it
is a partner and will be deemed to be entitled to the income of the
partnership attributable to such share. In addition, the assets and income of
the partnership attributed to a REIT shall retain their same character as in
the hands of the partnership for purposes of determining whether the REIT
satisfied the income and asset tests described below.

A real estate investment trust may own up to 100% of the stock of one or
more taxable REIT subsidiaries. A taxable REIT subsidiary may earn income that
would not be REIT qualifying income, as

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described below, if earned directly by the parent real estate investment
trust. Both the subsidiary and the real estate investment trust must jointly
elect to treat the subsidiary as a taxable REIT subsidiary. Overall, not more
than 20% of the value of the real estate investment trust's assets may consist
of securities of one or more taxable REIT subsidiaries. A taxable REIT
subsidiary will pay tax at regular corporate rates on any income that it
earns. There is a 100% excise tax imposed on transactions involving a taxable
REIT subsidiary and its parent real estate investment trust that are not
conducted on an arm's-length basis. Our wholly owned subsidiary, CT Investment
Management Co. serves as our exclusive manager and subject to the supervision
of our board of directors is responsible for our day-to-day operations
pursuant to a management agreement. We believe the compensation, expense
reimbursement and other terms of the management agreement are comparable to
those that could be obtained from unrelated parties on an arm's-length basis.

We and CT Investment Management Co. have made a taxable REIT subsidiary
election with respect to CT Investment Management Co. CT Investment Management
Co. will pay corporate income tax on its taxable income and its after-tax net
income will be available for reinvestment and for distribution to us as its
parent. We may own interests in one or more taxable REIT subsidiaries other
than CT Investment Management Co.

INCOME TESTS

General

A REIT must satisfy annually two tests regarding the sources of its gross
income in order to maintain its real estate investment trust status. First, at
least 75% of a REIT's gross income, excluding gross income from certain
"dealer" sales, for each taxable year generally must consist of defined types
of income that the REIT derives, directly or indirectly, from investments
relating to real property or mortgages on real property or temporary
investment income. We refer to this test as the 75% gross income test.
Qualifying income for purposes of the 75% gross income test generally
includes:

o interest from debt secured by mortgages on real property or on interests
in real property;

o "rents from real property" (as defined below);

o dividends or other distributions on, and gain from the sale of, shares in
other real estate investment trusts;

o gain from the sale or other disposition of real property; and

o amounts, other than amounts the determination of which depends in whole
or in part on the income or profits of any person, received as
consideration for entering into agreements to make loans secured by
mortgages on real property or on interests in real property or agreements
to purchase or lease real property.

Second, at least 95% of the REIT's gross income, excluding gross income from
certain "dealer" sales, for each taxable year generally must consist of income
that is qualifying income for purposes of the 75% gross income test, as well
as dividends, other types of interest and gain from the sale or disposition of
stock or securities. We refer to this test as the 95% gross income test.

Interest from Debt Secured by Mortgages on Real Property or on Interests in
Real Property

For these purposes, the term "interest" generally does not include any
interest of which the amount received depends on the income or profits of any
person. An amount will generally not be excluded from the term "interest,"
however, if such amount is based on a fixed percentage of receipts or sales.

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directly our proportionate share of the income of the REMIC, which would
generally include non-qualifying income for purposes of the 75% gross income
test. In addition, if we receive interest income with respect to a mortgage
loan that is secured by both real property and other property and the
principal amount of the loan exceeds the fair market value of the real
property on the date we purchased the mortgage loan, interest income on the
loan will be apportioned between the real property and the other property,
which apportionment would cause us to recognize income that is not qualifying
income for purposes of the 75% gross income test.

In general, and subject to the exceptions in the preceding paragraph, the
interest, original issue discount, and market discount income that we derive
from investments in mortgage-backed securities and mortgage loans will be
qualifying interest income for purposes of both the 75% and the 95% gross
income tests. It is possible, however, that interest income from a mortgage
loan may be based in part on the borrower's profits or net income, which would
generally disqualify such interest income for purposes of both the 75% and the
95% gross income tests.

We may acquire construction loans or mezzanine loans that have shared
appreciation provisions. To the extent interest on a loan is based on the cash
proceeds from the sale or value of property, income attributable to such
provision would be treated as gain from the sale of the secured property,
which generally should qualify for purposes of the 75% and 95% gross income
tests. There is some uncertainty as to whether mezzanine loans constitute
qualifying assets for purposes of the 75% asset test described below and
result in qualifying income for purposes of the 75% gross income test. A
Revenue Procedure and private letter rulings issued by the Internal Revenue
Service to other taxpayers indicate that, in certain circumstances, mezzanine
loans secured by interests in a partnership or limited liability company,
substantially all of the assets of which represent interests in real estate,
constitute qualifying assets and result in qualifying income. However, we may
not rely on private letter rulings issued to other taxpayers. We believe that
our mezzanine loans constitute qualifying assets and result in qualifying
income. If our mezzanine loans are determined not to constitute qualifying
assets and do not result in qualifying income for purposes of these tests, our
ability to elect or maintain REIT status will be jeopardized.

We may employ, to the extent consistent with the REIT provisions of the
Internal Revenue Code, forms of securitization of our assets under which a
"sale" of an interest in a mortgage loan occurs, and a resulting gain or loss
is recorded on our balance sheet for accounting purposes at the time of sale.
In a "sale" securitization, only the net retained interest in the securitized
mortgage loans would remain on our balance sheet. We may elect to conduct
certain of our securitization activities, including such sales, through one or
more taxable subsidiaries, or through qualified REIT subsidiaries, formed for
such purpose. To the extent consistent with the REIT provisions of the
Internal Revenue Code, such entities could elect to be taxed as real estate
mortgage investment conduits or financial asset securitization investment
trusts.

If we fail to satisfy one or both of the 75% or 95% gross income tests for
any year, we may still qualify as a REIT if we are entitled to relief under
the Internal Revenue Code. Generally, we may be entitled to relief if:

o our failure to meet the gross income tests was due to reasonable cause
and not due to willful neglect;

o we attach a schedule of the sources of our income to our federal income
tax return; and

o any incorrect information on the schedule was not due to fraud with the
intent to evade tax.

It is not possible to state whether in all circumstances we would be
entitled to rely on these relief provisions. If these relief provisions do not
apply to a particular set of circumstances, we would not qualify as a REIT. As
discussed above under the caption "--Taxation of a REIT," even if these relief
provisions apply, and we retain our status as a REIT, a tax would be imposed
with respect to our income that does not meet the gross income tests. We may
not always be able to maintain compliance with the gross income tests for REIT
qualification despite frequently monitoring our income.

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Foreclosure Property

Net income realized by us from foreclosure property would generally be
subject to tax at the maximum federal corporate tax rate. Foreclosure property
includes real property and related personal property that is acquired by us
through foreclosure following a default on indebtedness owed to us that is
secured by the property and for which we make an election to treat the
property as foreclosure property.

Prohibited Transaction Income

Any gain realized by us on the sale of any property, other than foreclosure
property, held as inventory or otherwise held primarily for sale to customers
in the ordinary course of business will be prohibited transaction income and
subject to a 100% penalty tax. This prohibited transaction income may also
adversely affect our ability to satisfy the gross income tests for
qualification as a REIT. Whether property is held as inventory or primarily
for sale to customers in the ordinary course of a trade or business depends on
all the facts and circumstances surrounding the particular transaction. While
the Treasury Regulations provide standards which, if met, would not result in
prohibited transaction income, we may not be able to meet these standards in
all circumstances.

Hedging Transactions

We may enter into hedging transactions with respect to one or more of our
assets or liabilities. Our hedging transactions could take a variety of forms,
including interest rate swaps or cap agreements, options, futures contracts,
forward rate agreements or similar financial instruments. To the extent that
we enter into hedging transactions to reduce our interest rate risk on
indebtedness incurred to acquire or carry real estate assets, any income or
gain from the disposition of hedging transactions should be qualifying income
for purposes of the 95% gross income test, but not the 75% gross income test.

RENTS FROM REAL PROPERTY

Rent that a REIT receives from real property that it owns and leases to
tenants will qualify as "rents from real property" if the following conditions
are satisfied:

o First, the rent must not be based, in whole or in part, on the income or
profits of any person. An amount will not fail to qualify as rent from
real property solely by reason of being based on a fixed percentage, or
percentages, of sales and receipts.

o Second, neither a REIT nor any direct or indirect owner of 10% or more of
its stock may own, actually or constructively, 10% or more of the tenant
from which the REIT collects the rent.

o Third, all of the rent received under a lease will not qualify as rents
from real property unless the rent attributable to the personal property
leased in connection with the real property constitutes no more than 15%
of the total rent received under the lease.

o Finally, a REIT generally must not operate or manage its real property or
furnish or render services to its tenants, other than through an
"independent contractor" who is adequately compensated and from whom the
REIT does not derive revenue. The REIT may provide services directly,
however, if the services are "usually or customarily rendered" in
connection with the rental of space for occupancy only and are not
otherwise considered rendered "primarily for the occupant's convenience."
In addition, the REIT may render, other than through an independent
contractor, a de minimis amount of "non-customary" services to the
tenants of a property as long as the REIT's income from such services
does not exceed 1% of its gross income from the property.

Although no assurances can be given that either of the income tests will be
satisfied in any given year, we anticipate that our operations will allow us
to meet each of the 75% gross income test and the 95% gross income test. Such
belief is premised in large part on our expectation that substantially all of
the amounts received by us will qualify as interest from debt secured by
mortgages on real property or on interests in real property.

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ASSET TESTS

A REIT also must satisfy the following four tests relating to the nature of
its assets at the close of each quarter of its taxable year:

o First, at least 75% of the value of a REIT's total assets must consist of
cash or cash items, including receivables, government securities, "real
estate assets," or qualifying temporary investments. We refer to this
test as the "75% asset test."

o Second, no more than 25% of the value of a REIT's total assets may be
represented by securities other than those that are qualifying assets for
purposes of the 75% asset test. We refer to this test as the "25% asset
test."

o Third, of the investments included in the 25% asset test, the value of
the securities of any one issuer (other than a "taxable REIT subsidiary")
that a REIT owns may not exceed 5% of the value of the REIT's total
assets, and a REIT may not own 10% or more of the total combined voting
power or 10% or more of the total value of the securities of any issuer
(other than a "taxable REIT subsidiary").

o Fourth, while a REIT may own up to 100% of the stock of a corporation
that elects to be treated as a "taxable REIT subsidiary" for federal
income tax purposes, at no time may the total value of a REIT's stock in
one or more taxable REIT subsidiaries exceed 20% of the value of the
REIT's gross assets.

We expect that any mortgage-backed securities, real property and temporary
investments that we acquire will generally be qualifying assets for purposes
of the 75% asset test, except to the extent that less than 95% of the assets
of a real estate mortgage investment conduit in which we own an interest
consists of "real estate assets." Mortgage loans, including distressed
mortgage loans, construction loans, bridge loans and mezzanine loans also will
generally be qualifying assets for purposes of the 75% asset test to the
extent that the principal balance of each mortgage loan does not exceed the
value of the associated real property.

We anticipate that we may securitize certain mortgage loans which we
originate or acquire, in which event we will likely retain certain of the
subordinated and interest only classes of mortgage-backed securities which may
be created as a result of such securitization. The securitization of mortgage
loans may be accomplished through one or more real estate mortgage investment
conduits established by us or, if a non-real estate mortgage investment
conduit securitization is desired, through one or more qualified REIT
subsidiaries or taxable subsidiaries established by us. The securitization of
the mortgage loans through either one or more real estate mortgage investment
conduits or one or more qualified REIT subsidiaries or taxable subsidiaries
should not affect our qualification as a REIT or result in the imposition of
corporate income tax under the taxable mortgage pool rules. Income realized by
us from a real estate mortgage investment conduit securitization could,
however, be subject to a 100% tax as a "prohibited transaction." Such
prohibited transactions are discussed above under the caption "--Income
Tests--Prohibited Transaction Income."

We intend to operate so that we will not acquire any assets that would cause
us to violate any of the asset tests. If, however, we should fail to satisfy
any of the asset tests at the end of a calendar quarter, we would not lose our
real estate investment trust status if (i) we satisfied the asset tests at the
end of the close of the preceding calendar quarter and (ii) the discrepancy
between the value of our assets and the asset test requirements arose from
changes in the market values of our assets and was not wholly or partly caused
by the acquisition of one or more nonqualifying assets. If we did not satisfy
the condition described in clause (ii) of the preceding sentence, we could
still avoid disqualification as a real estate investment trust by eliminating
any discrepancy within 30 days after the close of the calendar quarter in
which the discrepancy arose.

DISTRIBUTION REQUIREMENTS

Each taxable year, a REIT must distribute dividends to its shareholders in
an amount at least equal to 90% of the REIT's "real estate investment trust
taxable income," computed without regard to the dividends

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paid deduction and the REIT's net capital gain or loss. Certain items of
noncash income are excluded from this requirement.

A REIT must make such distributions in the taxable year to which they
relate, or in the following taxable year if the REIT declares the distribution
before it timely files its federal income tax return for such year and pays
the distribution on or before the first regular distribution date after such
declaration. Further, if a REIT fails to meet the 90% distribution requirement
as a result of an adjustment to its tax returns by the Internal Revenue
Service, the REIT may, if the deficiency is not due to fraud with intent to
evade tax or a willful failure to file a timely tax return, and if certain
other conditions are met, retroactively cure the failure by paying a
deficiency dividend (plus interest) to its shareholders.

A REIT will be subject to federal income tax on its taxable income,
including net capital gain, that it did not distribute to its shareholders.
Furthermore, if a REIT fails to distribute during a calendar year, or, in the
case of distributions with declaration and record dates falling within the
last three months of the calendar year, by the end of the January following
such calendar year, at least the sum of:

o 85% of the REIT's real estate investment trust ordinary income for such
year;

o 95% of the REIT's real estate investment trust capital gain income for
such year; and

o any of the REIT's undistributed taxable income from prior periods;

the REIT will be subject to a 4% nondeductible excise tax on the excess of
such required distribution over the amount actually distributed. If the REIT
elects to retain and pay income tax on the net capital gain that it receives
in a taxable year, the REIT will be deemed to have distributed any such amount
for the purposes of the 4% excise tax described in the preceding sentence.

We intend to make distributions to our holders of class A common stock in a
manner that will allow us to satisfy the distribution requirements described
above. It is possible that, from time to time, our pre-distribution taxable
income may exceed our cash flow and we may have difficulty satisfying the
distribution requirements. We intend to monitor closely the relationship
between our pre-distribution taxable income and our cash flow and intend to
borrow funds or liquidate assets in order to overcome any cash flow shortfalls
if necessary to satisfy the distribution requirements imposed by the Internal
Revenue Code. It is possible, although unlikely, that we may decide to
terminate our REIT status as a result of any such cash shortfall. Such a
termination would have adverse consequences to our shareholders. The
consequences are described above under the caption "--Taxation of a REIT."

RECORDKEEPING REQUIREMENTS

A REIT must maintain records of information specified in applicable Treasury
Regulations in order to maintain its qualification as a real estate investment
trust. In addition, in order to avoid a monetary penalty, a REIT must request
on an annual basis certain information from its shareholders designed to
disclose the actual ownership of the REIT's outstanding stock. We intend to
comply with these recordkeeping requirements.

OWNERSHIP REQUIREMENTS

For a REIT to qualify as a real estate investment trust, shares of the REIT
must be held by a minimum of 100 persons for at least 335 days in each taxable
year after the REIT's first taxable year. Further, at no time during the
second half of any taxable year after the REIT's first taxable year may more
than 50% of the REIT's shares be owned, actually or constructively, by five or
fewer "individuals." As of the date hereof, we satisfy the requirement that we
not be closely held as described in the foregoing sentence. Our class A common
stock is held by 100 or more persons. Our amended and restated charter
contains ownership and transfer restrictions designed to prevent violation of
these requirements. The provisions of the amended and restated charter
restricting the ownership and transfer of our class A common stock are
described in the

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company prospectus under the caption "Description of Capital Stock--Certain
Provisions of Our Charter and Bylaws and of Maryland Law--REIT Qualification
Restrictions on Ownership and Transfer."

EARNINGS AND PROFITS

In order for us to qualify as a REIT, on or before the end of the 2003 tax
year (the first year to which our election to be taxed as a REIT relates), we
must have distributed to our shareholders an amount equal to any earnings and
profits accumulated from years in which we were taxed as a regular
corporation. We have been treated as a regular corporation subject to Federal
income taxes for the years 1997 through 2002. Any distribution made by us to
satisfy this requirement will be treated as taxable income by the shareholders
and we generally will not be permitted to include such amounts when computing
our dividends paid deduction. If we were found to have miscalculated our
earnings and profits accumulated from years in which we were a regular
corporation, our ability to qualify as a REIT could be jeopardized. We
believe, as of January 1, 2003, we have no accumulated earnings or profits
from any non-REIT qualifying tax year for which we were taxed as a regular
corporation as a result of losses we triggered in December 2002.

FAILURE TO QUALIFY

If a REIT fails to qualify as a real estate investment trust in any taxable
year, and no relief provisions applied, the REIT would be subject to federal,
state and local income tax, including any applicable alternative minimum tax,
on its taxable income at regular corporate rates. In calculating a REIT's
taxable income in a year in which it did not qualify as a real estate
investment trust, the REIT would not be able to deduct amounts paid out to its
shareholders. In fact, the REIT would not be required to distribute any
amounts to its shareholders in such taxable year. In such event, to the extent
of the REIT's current and accumulated earnings and profits, all distributions
to shareholders would be taxable as ordinary income. Moreover, subject to
certain limitations under the Internal Revenue Code, corporate shareholders
might be eligible for the dividends received deduction. Unless the REIT
qualified for relief under specific statutory provisions, the REIT would be
disqualified from taxation as a real estate investment trust for the four
taxable years following the year in which it ceased to qualify as a real
estate investment trust. We cannot predict whether, in all circumstances, we
would qualify for such statutory relief.

TAXABLE MORTGAGE POOLS

An entity, or a portion of an entity, may be classified as a taxable
mortgage pool, or TMP, under the Internal Revenue Code if (1) substantially
all of its assets consist of debt obligations or interests in debt
obligations, (2) more than 50% of those debt obligations are real estate
mortgages or interests in real estate mortgages as of specified testing dates,
(3) the entity has issued debt obligations (liabilities) that have two or more
maturities, and (4) the payments required to be made by the entity on its debt
obligations (liabilities) "bear a relationship" to the payments to be received
by the entity on the debt obligations that it holds as assets. Financing
arrangements entered into, directly or indirectly, by us could give rise to
TMPs, with the consequences described in the next paragraph. Such financing
arrangements include the CDO transaction and may include additional
collateralized debt obligation transactions we enter into in the future.

Where an entity, or a portion of an entity, is classified as a TMP, it is
generally treated as a taxable corporation for federal income tax purposes.
Special rules apply, however, in the case of a TMP that is a REIT, a portion
of a REIT, or a disregarded subsidiary of a REIT. In that event, the TMP is
not treated as a corporation that is subject to corporate income tax, and the
TMP classification does not directly affect the tax status of the REIT.
Rather, the consequences of the TMP classification would, in general, except
as described below, be limited to the shareholders of the REIT. Although the
Treasury Department has not yet issued regulations to govern the treatment of
shareholders, a portion of the REIT's income from the TMP arrangement, which
might be non-cash accrued income, could be treated as "excess inclusion
income." Moreover, the REIT's excess inclusion income would be allocated among
its shareholders. A shareholder's share of excess inclusion income (i) would
not be allowed to be offset by any net operating losses otherwise available to
the shareholder, (ii) would be subject to tax as unrelated business taxable
income in the hands of most types of shareholders that are otherwise generally
exempt from federal income tax, and (iii) would result

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in the application of U.S. federal income tax withholding at the maximum rate
(30%) (and any otherwise available rate reductions under income tax treaties
would not apply), to the extent allocable to most types of foreign
shareholders. To the extent that excess inclusion income were allocated to a
tax-exempt shareholder of a REIT that is not subject to unrelated business
income tax (such as government entities), the REIT would be taxable on this
income at the highest applicable corporate tax rate (currently 35%). Tax-
exempt investors, foreign investors and taxpayers with net operating losses
should carefully consider the tax consequences described above and should
consult their tax advisors.

TAXATION OF TAXABLE U.S. SHAREHOLDERS

TAXABLE U.S. SHAREHOLDER

As used herein, the term "Taxable U.S. Shareholder" means a holder of our
class A common stock that, for United States federal income tax purposes, is:

o a citizen or resident of the United States;

o a corporation, partnership, or other entity created or organized in or
under the laws of the United States or any state or political subdivision
thereof;

o an estate, the income of which from sources without the United States is
includible in gross income for United States federal income tax purposes
regardless of its connection with the conduct of a trade or business
within the United States; or

o any trust with respect to which a United States court is able to exercise
primary supervision over the administration of such trust and one or more
United States persons have the authority to control all substantial
decisions of the trust.

For any taxable year in which we qualify as a REIT, amounts distributed to
Taxable U.S. Shareholders will be taxed as follows.

DISTRIBUTIONS GENERALLY

Distributions made to our Taxable U.S. Shareholders out of current or
accumulated earnings and profits, and not designated as a capital gain
dividend, will be taken into account by such shareholder as ordinary income
and will not, in the case of a corporate shareholder, be eligible for the
dividends received deduction. To the extent that we make a distribution with
respect to holders of our class A common stock that is in excess of our
current or accumulated earnings and profits, the distribution will be treated
by a Taxable U.S. Shareholder first as a tax-free return of capital, reducing
the shareholder's tax basis in the class A common stock, and any portion of
the distribution in excess of the shareholder's tax basis in the class A
common stock will then be treated as gain from the sale of such class A common
stock. Dividends declared by us in October, November, or December of any year
payable to a shareholder of record on a specified date in any such month shall
be treated as both paid by us and received by shareholders on December 31 of
such year, provided that the dividend is actually paid by us during January of
the following calendar year. Taxable U.S. Shareholders may not include on
their federal income tax returns any of our tax losses.

CAPITAL GAIN DIVIDENDS

Dividends to Taxable U.S. Shareholders that properly are designated by us as
capital gain dividends will be treated by such shareholders as long-term
capital gain, to the extent that such dividends do not exceed our actual net
capital gain, without regard to the period for which the shareholders have
held our class A common stock. Taxable U.S. Shareholders that are corporations
may be required, however, to treat up to 20% of particular capital gain
dividends as ordinary income. Capital gain dividends, like regular dividends
from a real estate investment trust, are not eligible for the dividends
received deduction for corporations.

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RETAINED CAPITAL GAINS

A REIT may elect to retain, rather than distribute, its net long-term
capital gain received during the tax year. To the extent designated in a
notice from the REIT to its shareholders, the REIT will pay the income tax on
such gains and Taxable U.S. Shareholders must include their proportionate
share of the undistributed net long-term capital gain so designated in their
income for the tax year. Each Taxable U.S. Shareholder will be deemed to have
paid its share of the tax paid by the REIT, which tax will be credited or
refunded to such shareholder.

PASSIVE ACTIVITY LOSS AND INVESTMENT INTEREST LIMITATIONS

Distributions, including deemed distributions of undistributed net long-term
capital gain, from us and gain from the disposition of our class A common
stock will not be treated as passive activity income, and, therefore, Taxable
U.S. Shareholders who are subject to the passive loss limitation rules of the
Internal Revenue Code will not be able to apply any passive activity losses
against such income. Distributions from us, to the extent they do not
constitute a return of capital, generally will be treated as investment income
for purposes of the investment income limitation on deductibility of
investment interest. However, net capital gain from the disposition of our
class A common stock or capital gain dividends, including deemed distributions
of undistributed net long-term capital gains, generally will be excluded from
investment income.

SALE OF CLASS A COMMON STOCK

Upon the sale of our class A common stock, a Taxable U.S. Shareholder
generally will recognize gain or loss equal to the difference between the
amount realized on such sale and the holder's tax basis in the class A common
stock sold. To the extent that the class A common stock is held as a capital
asset by the Taxable U.S. Shareholder, the gain or loss will be a long-term
capital gain or loss if the class A common stock has been held for more than a
year, and will be a short-term capital gain or loss if the class A common
stock has been held for a shorter period. In general, however, any loss upon a
sale of the class A common stock by a Taxable U.S. Shareholder who has held
such class A common stock for six months or less, after applying certain
holding period rules, will be treated as a long-term capital loss to the
extent that distributions from us were required to be treated as long-term
capital gain by that holder.

TAXATION OF TAX-EXEMPT SHAREHOLDERS

Tax-exempt entities, including qualified employee pension and profit sharing
trusts and individual retirement accounts, which we refer to as exempt
organizations, generally are exempt from federal income taxation. Exempt
organizations are subject to tax, however, on their unrelated business taxable
income, or UBTI. UBTI is defined as the gross income derived by an exempt
organization from an unrelated trade or business, less the deductions directly
connected with that trade or business, subject to certain exceptions. While
many investments in real estate generate UBTI, the Internal Revenue Service
has issued a ruling that dividend distributions from a REIT to an exempt
employee pension trust do not constitute UBTI, provided that the shares of the
REIT are not otherwise used in an unrelated trade or business of the exempt
employee pension trust. Based on that ruling, amounts distributed to exempt
organizations generally should not constitute UBTI. However, if an Exempt
Organization finances its acquisition of class A common stock with debt, a
portion of its income from a REIT will constitute UBTI pursuant to the "debt-
financed property" rules.

In addition, in certain circumstances, a pension trust that owns more than
10% of the stock of a REIT will be required to treat a percentage of the
dividends paid by the REIT as UBTI based upon the percentage of the REIT's
income that would constitute UBTI to the shareholder if received directly by
it. This rule applies to a pension trust holding more than 10% (by value) of
our class A common stock only if (i) the percentage of the income from us that
is UBTI (determined as if we were a pension trust) is at least 5% and (ii) we
are treated as a "pension-held REIT." We do not expect to qualify as a
"pension-held REIT" and have covenanted not to become one in connection with
our prior convertible trust preferred financing.

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TAXATION OF NON-U.S. SHAREHOLDERS

GENERAL

The rules governing United States federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships, foreign trusts
and certain other foreign shareholders, which we refer to as Non-U.S.
Shareholders, are complex and no attempt is made herein to provide more than a
general summary of such rules. This discussion does not consider the tax rules
applicable to all Non-U.S. Shareholders and, in particular, does not consider
the special rules applicable to U.S. branches of foreign banks or insurance
companies or certain intermediaries. Non-U.S. shareholders should consult with
their own tax advisors to determine the impact of federal, state, local and
foreign tax laws with regard to the election, including any reporting and
withholding requirements.

ORDINARY DIVIDENDS

Distributions to Non-U.S. Shareholders that are not attributable to gain
from sales or exchanges by a REIT of United States real property interests and
are not designated by a REIT as capital gain dividends (or deemed
distributions of retained capital gains) will be treated as ordinary dividends
to the extent that they are made out of current or accumulated earnings and
profits of the REIT. Any portion of a distribution in excess of current and
accumulated earnings and profits of the REIT will not be taxable to a Non-U.S.
Shareholder to the extent that such distribution does not exceed the adjusted
basis of the shareholder in the REIT's stock, but rather will reduce the
adjusted basis of such shares. To the extent that the portion of the
distribution in excess of current and accumulated earnings and profits exceeds
the adjusted basis of a Non-U.S. Shareholder in our class A common stock, such
excess generally will be treated as gain from the sale or disposition of the
class A common stock and will be taxed as described below.

WITHHOLDING

Dividends paid to Non-U.S. Shareholders may be subject to U.S. withholding
tax. If an income tax treaty does not apply and the Non-U.S. Shareholder's
investment in the REIT's stock is not effectively connected with a trade or
business conducted by the Non-U.S. Shareholder in the United States (or if a
tax treaty does apply and the investment in the stock is not attributable to a
United States permanent establishment maintained by the Non-U.S. Shareholder),
ordinary dividends (i.e., distributions out of current and accumulated
earnings and profits) will be subject to a U.S. withholding tax at a 30% rate,
or, if an income tax treaty applies, at a lower treaty rate. Because we
generally cannot determine at the time that a distribution is made whether or
not it will be in excess of earnings and profits, we intend to withhold on the
gross amount of each distribution at the 30% rate (or lower treaty rate)
(other than distributions subject to the 35% FIRPTA withholding rules
described below). To receive a reduced treaty rate, a Non-U.S. Shareholder
must furnish us or our paying agent with a duly completed Form 1001 or Form W-
8BEN (or authorized substitute form) certifying such holder's qualification
for the reduced rate. Generally, a Non-U.S. Shareholder will be entitled to a
refund from the IRS to the extent the amount withheld by us from a
distribution exceeds the amount of United States tax owed by such shareholder.

In the case of a Non-U.S. Shareholder that is a partnership or a trust, the
withholding rules for a distribution to such a partnership or trust will be
dependent on numerous factors, including (1) the classification of the type of
partnership or trust, (2) the status of the partner or beneficiary, and (3)
the activities of the partnership or trust. Non-U.S. Shareholders that are
partnerships or trusts are urged to consult their tax advisors regarding the
withholding rules applicable to them based on their particular circumstances.

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establishment maintained by the Non-U.S. Shareholder generally are subject to
U.S. federal income tax on a net income basis at regular graduated rates. In
the case of Non-U.S. Shareholders that are corporations, any effectively
connected ordinary dividends or ordinary dividends attributable to a United
States permanent establishment maintained by the Non-U.S. Shareholder may, in
certain circumstances, be subject to an additional branch profits tax at a 30%
rate, or lower rate specified by an applicable income tax treaty.

CAPITAL GAIN DIVIDENDS

For any year in which we qualify as a REIT, distributions that are
attributable to gain from sales or exchanges by us of United States real
property interests will be taxed to a Non-U.S. Shareholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980, which
is commonly referred to as FIRPTA. Under FIRPTA, distributions attributable to
gain from sales of United States real property are taxed to a Non-U.S.
Shareholder as if such gain were effectively connected with a United States
trade or business. Non-U.S. Shareholders thus would be taxed at the regular
capital gain rates applicable to Taxable U.S. Shareholders (subject to the
applicable alternative minimum tax and a special alternative minimum tax in
the case of nonresident alien individuals). Distributions subject to FIRPTA
also may be subject to a 30% branch profits tax in the hands of a corporate
Non-U.S. Shareholder not otherwise entitled to treaty relief or exemption.

WITHHOLDING

Under FIRPTA, a REIT is required to withhold 35% of any distribution that is
designated as a capital gain dividend or which could be designated as a
capital gain dividend and is attributable to gain from the disposition of a
United States real property interest. Moreover, if a REIT designates
previously made distributions as capital gain dividends, subsequent
distributions (up to the amount of the prior distributions so designated) will
be treated as capital gain dividends for purposes of FIRPTA withholding.

SALE OF CLASS A COMMON STOCK

A Non-U.S Shareholder generally will not be subject to United States federal
income tax under FIRPTA with respect to gain recognized upon a sale of our
class A common stock, if less than 50% of our assets during a prescribed
testing period consist of interests in real property located within the United
States (excluding interests in real property solely in the capacity as a
creditor) or we are a "domestically-controlled REIT." A domestically-
controlled REIT generally is defined as a real estate investment trust in
which at all times during a specified testing period less than 50% in value of
the stock was held directly or indirectly by non-U.S. persons. Although
currently it is anticipated that we will be a domestically-controlled REIT,
and, therefore, that the sale of class A common stock will not be subject to
taxation under FIRPTA, there can be no assurance that we will, at all relevant
times, be a domestically-controlled REIT. If we are not a domestically-
controlled REIT, a Non-U.S. Shareholder's sale of our stock will generally not
be subject to tax under FIRPTA if (a) the stock is treated as "regularly
traded" on an established securities market and (b) the seller held 5% or less
of our stock at all times during a specified testing period. If the gain on
the sale of our class A common stock were subject to taxation under FIRPTA, a
Non-U.S. Shareholder would be subject to the same treatment as Taxable U.S.
Shareholders with respect to such gain (subject to the applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals). In addition, a purchaser of our class A common stock from
a Non-U.S. Shareholder subject to taxation under FIRPTA generally would be
required to deduct and withhold a tax equal to 10% of the amount realized by a
Non-U.S. Shareholder on the disposition. Any amount withheld would be
creditable against the Non-U.S. Shareholder's FIRPTA tax liability.

Even if gain recognized by a Non-U.S. Shareholder upon the sale of our class
A common stock is not subject to FIRPTA, such gain generally will be taxable
to such shareholder if:

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will be taxed on his or her net gain from the sale at regular graduated
U.S. federal income tax rates. In the case of a Non-U.S. Shareholder that
is a corporation, such shareholder may be subject to an additional branch
profits tax at a 30% rate, unless an applicable income tax treaty
provides for a lower rate and the shareholder demonstrates its
qualification for such rate; or

o the Non-U.S. Shareholder is a nonresident alien individual who holds our
class A common stock as a capital asset and was present in the United
States for 183 days or more during the taxable year and certain other
conditions apply, in which case the Non-U.S. Shareholder will be subject
to a 30% tax on capital gains.

ESTATE TAX CONSIDERATIONS

The value of our class A common stock owned, or treated as owned, by a Non-
U.S. Shareholder who is a nonresident alien individual at the time of his or
her death will be included in the individual's gross estate for United States
federal estate tax purposes, unless otherwise provided in an applicable estate
tax treaty.

INFORMATION REPORTING AND BACKUP WITHHOLDING

A REIT is required to report to its shareholders and to the IRS the amount
of distributions paid during each tax year, and the amount of tax withheld, if
any. These requirements apply even if withholding was not required with
respect to payments made to a shareholder. In the case of Non-U.S.
Shareholders, the information reported may also be made available to the tax
authorities of the Non-U.S. Shareholder's country of residence, if an
applicable income tax treaty so provides.

Backup withholding generally may be imposed on certain payments to
shareholders unless the shareholder (i) furnishes certain information, or (ii)
is otherwise exempt from backup withholding.

A shareholder who does not provide a REIT with his or her correct taxpayer
identification number also may be subject to penalties imposed by the IRS. In
addition, the REIT may be required to withhold a portion of capital gain
distributions to any shareholders who fail to certify their non-foreign status
to the REIT.

You should consult your own tax advisor regarding your qualification for an
exemption from backup withholding and the procedure for obtaining an
exemption. Backup withholding is not an additional tax. Rather, the amount of
any backup withholding with respect to a distribution to a shareholder will be
allowed as a credit against such holder's United States federal income tax
liability and may entitle the Taxable U.S. Shareholder to a refund, provided
that the required information is furnished to the IRS.

In general, backup withholding and information reporting will not apply to a
payment of the proceeds of the sale of our class A common stock by a Non-U.S.
Shareholder by or through a foreign office of a foreign broker effected
outside of the United States; provided, however, that foreign brokers having
certain connections with the United States may be obligated to comply with the
backup withholding and information reporting rules. Information reporting (but
not backup withholding) will apply, however, to a payment of the proceeds of a
sale of our class A common stock by foreign offices of certain brokers,
including foreign offices of a broker that:

o is a United States person;

o derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States; or

o is a "controlled foreign corporation" for United States tax purposes.

Information reporting will not apply in the above cases if the broker has
documentary evidence in its records that the holder is a Non-U.S. Shareholder
and certain conditions are met, or the Non-U.S. Shareholder otherwise
establishes an exemption.

S-60

Payment to or through a United States office of a broker of the proceeds of
a sale of our class A common stock is subject to both backup withholding and
information reporting unless the shareholder certifies in the manner required
that he or she is a Non-U.S. Shareholder and satisfies certain other
qualifications under penalties of perjury or otherwise establishes an
exemption.

STATE AND LOCAL TAX

The discussion herein concerns only the United States federal income tax
treatment likely to be accorded to a REIT and its shareholders. No
consideration has been given to the state and local tax treatment of such
parties. The state and local tax treatment may not conform to the federal
treatment described above. As a result, you should consult your own tax
advisor regarding the specific state and local tax consequences of the REIT
Election and ownership and sale of our class A common stock.

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UNDERWRITING

Under the terms and subject to the conditions in an underwriting agreement
dated the date of this prospectus supplement, the underwriters named below,
for whom Morgan Stanley & Co. Incorporated, Bear, Stearns & Co. Inc.,
Jefferies & Company, Inc. and JMP Securities LLC are acting as
representatives, have severally agreed to purchase, and we and the selling
shareholders have agreed to sell to them, the number of shares of our class A
common stock indicated below:

UNDERWRITER NUMBER OF SHARES
----------- ----------------

Morgan Stanley & Co. Incorporated ...........................
Bear, Stearns & Co. Inc. ....................................
Jefferies & Company, Inc. ...................................
JMP Securities LLC ..........................................
Conifer Securities, LLC .....................................
---------
Total ...................................................... 3,500,000

The expenses of this offering, not including the underwriting discount and
commissions, are estimated to be approximately $1.0 million. All of the
expenses of this offering incurred by or on behalf of us will be paid pro rata
based on the number of shares sold in this offering among us and the selling
shareholders, except for any expenses of the selling shareholders' separate
attorneys, which will be paid by the selling shareholders.

The underwriters are offering the shares of class A common stock subject to
their acceptance of the shares from us and the selling shareholders and
subject to prior sales. The underwriting agreement provides that the
obligation of the several underwriters to pay for and accept delivery of the
shares of class A common stock offered by this prospectus supplement and
accompanying prospectuses are subject to the approval of certain legal matters
by their counsel and to other conditions. The underwriters are obligated to
take and pay for all of the shares offered by this prospectus supplement if
any such shares are purchased. However, the underwriters are not required to
take or pay for the shares of class A common stock covered by the
underwriters' over-allotment option described below.

The underwriters initially propose to offer part of the shares of class A
common stock directly to the public at the public offering price listed on the
cover page of this prospectus supplement and part to certain dealers at a
price that represents a concession not in excess of $ per share under the
public offering price. After the initial offering of the shares, the offering
price and other selling terms may from time to time be varied by the
underwriters.

We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus supplement, to purchase up to an aggregate of
525,000 additional shares of class A common stock from us at the public
offering price listed on the cover page of this prospectus supplement, less
underwriting discount and commissions. The underwriters may exercise this
option solely for the purpose of covering over-allotments, if any, made in
connection with the offering of the shares offered by this prospectus
supplement. An over-allotment occurs when the underwriters sell more shares of
our class A common stock than are shown on the cover of this prospectus. To
the extent the option is exercised, each underwriter will become obligated,
subject to specified conditions, to purchase approximately the same percentage
of the additional shares of class A common stock as the number listed next to
the underwriter's name in the preceding table bears to the total number of
shares listed next to the names of all underwriters in the preceding table.

The following table shows the per share and total public offering price,
underwriting discount and commissions and proceeds, before expenses to us and
to the selling shareholders. The amounts below are shown assuming no exercise
and full exercise of the over-allotment option to purchase 525,000 additional
shares of our class A common stock.

TOTAL
---------------------------
NO EXERCISE FULL EXERCISE
PER SHARE OF OPTION OF OPTION
--------- ----------- -------------

Public offering price.................................................. $ $ $
Underwriting discount and commissions.................................. $ $ $
Underwriting discount allowed by the selling shareholders.............. $ $ $
Proceeds, before expenses, to us....................................... $ $ $
Proceeds, before expenses, to the selling shareholders................. $ $ $

S-62

The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
our class A common stock offered by them.

Shares of our class A common stock are listed on the New York Stock Exchange
under the symbol "CT."

We have agreed that, without the prior written consent of Morgan Stanley &
Co. Incorporated, on behalf of the underwriters, we will not, from the date of
this prospectus supplement through 90 days after the date of this prospectus
supplement:

o offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of our class A common stock or any
securities convertible into or exercisable or exchangeable for shares of
our class A common stock; or

o enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of our
shares of class A common stock,

whether any transaction described above is to be settled by delivery of shares
of our class A common stock or such other securities, in cash or otherwise.

The restrictions described in the immediately preceding paragraph do not
apply to:

o the sale of shares of our class A common stock to the underwriters;

o the issuance by us of shares of our class A common stock upon the
exercise, conversion or exchange of options, warrants or other
convertible or exchangeable securities outstanding on the date of this
prospectus supplement;

o grants of stock options or warrants pursuant to the terms of a plan in
effect on the date of this prospectus supplement provided that any option
or warrant issued may not be exercised during the 90-day lock up period;
or

o grants of restricted stock pursuant to the terms of a plan or agreement
in effect on the date of this prospectus supplement provided that any
such stock does not vest during the 90-day lock up period or the
recipient of such stock agrees not to transfer such stock during the 90-
day lock up period.

The selling shareholders, other than the EOP Operating Limited Partnership
which is selling all of its shares of class A common stock in this offering,
our executive officers and directors and certain of our shareholders,
including Berkley, have agreed that they will not without, in each case, the
prior written consent of Morgan Stanley & Co. Incorporated, on behalf of the
underwriters, from the date of this prospectus supplement through 90 days
after the date of this prospectus supplement:

o enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of shares
of common stock of class A common stock,

whether any transaction described above is to be settled by delivery of our
shares or other securities, in cash or otherwise.

The restrictions described in the immediately preceding paragraph relating
to the selling shareholders, our executive officers and directors and our
shareholders do not apply to:

o the acquisition of any shares of our class A common stock in the open
market after the closing of this offering; or

o the transfer of any shares of our class A common stock for estate
planning purposes, provided that transferee agrees to the restrictions
described above. To the extent Berkley does transfer any shares of our
class A common stock among its controlled affiliates, it may be required
to report such changes under the Securities Exchange Act of 1934.

In addition, the restrictions above relating to Berkley do not apply to:

S-63

o the transfer of any shares of our class A common stock among its
controlled affiliates; or

o the transfer of that number of shares of our class A common stock and
other voting stock such that after such transfer Berkley owns just less
than 20% of our outstanding class A common stock and other voting stock.

In order to facilitate this offering of the class A common stock, the
underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the class A common stock. Specifically, the underwriters
may sell more shares than they are obligated to purchase under the
underwriting agreement, creating a short position. A short sale is "covered"
if the short position is no greater than the number of shares available for
purchase by the underwriters under the over-allotment option. The underwriters
can close out a covered short sale by exercising the over-allotment option or
purchasing shares in the open market. In determining the source of shares to
close out a covered short sale, the underwriters will consider, among other
things, the open market price of shares compared to the price available under
the over-allotment option. The underwriters may also sell shares in excess of
the over-allotment option, creating a "naked" short position. The underwriters
must close out any naked short position by purchasing shares in the open
market. A naked short position is more likely to be created if the
underwriters are concerned that there may be downward pressure on the price of
the class A common stock in the open market after pricing that could adversely
affect investors who purchase in this offering. In addition, to stabilize the
price of the class A common stock, the underwriters may bid for, and purchase,
our class A common stock in the open market. Finally, the underwriters may
reclaim selling concessions allowed to a dealer for distributing the class A
common stock in this offering, if the underwriters repurchase shares
previously distributed by such dealer to cover short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the common stock above independent market
levels. The underwriters are not required to engage in these activities, and
may end any of these activities at any time. These transactions may be
effected on the New York Stock Exchange or otherwise.

A prospectus supplement or accompanying prospectuses in electronic format
may be made available on the websites maintained by one or more of the
underwriters. Other than the prospectus supplement or accompanying
prospectuses in electronic format, the information on any of these websites
and any other information contained on a website maintained by an underwriter
or syndicate member is not part of this prospectus supplement or accompanying
prospectuses.

We and the selling shareholders have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act of
1933.

From time to time the underwriters and their affiliates have provided,
continue to and may in the future provide investment banking, lending,
financial advisory and other financial services for us. The underwriters and
their affiliates may in the future receive customary fees from their services.
Morgan Stanley & Co. Incorporated, Bear, Stearns & Co. Inc. and Conifer
Securities, LLC or their affiliates have acted for us and our funds as
follows:

o Morgan Stanley & Co. Incorporated or its affiliates are lenders to
Capital Trust, Fund II and Fund III;

o Bear, Stearns & Co. Inc. or its affiliates and a funding conduit managed
by an affiliate of Bear, Stearns & Co. Inc. are lenders to Capital Trust
and Fund III and are counterparties to a swap agreement with Capital
Trust;

o Morgan Stanley & Co. Incorporated acted as the lead manager and Bear,
Stearns & Co. Inc. acted as a co-manager for our CDO-1 transaction; and

o Conifer Securities, LLC served as our placement agent in connection with
our private placement of 1,075,000 shares of our class A common stock
which closed in June 2003. The chairman of our board of directors, Samuel
Zell, serves as a trustee of a trust that owns less than 5% of Conifer
Securities, LLC.

If we reduce such indebtedness with the proceeds from this offering, these
affiliates of the underwriters will receive their proportionate share of any
amounts repaid. If on the date that we enter into the underwriting agreement,
it appears that 10% or more of our net proceeds would be so paid to affiliates
of the underwriters, this offering will be conducted in accordance with
Conduct Rule 2710(c)(8) of the National Association of Securities Dealers,
Inc.

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LEGAL MATTERS

The validity of the shares of class A common stock offered hereby will be
passed upon for us by Venable LLP, Baltimore, Maryland. Certain other matters
in connection with the offering of securities by this prospectus supplement
will be passed upon for us by Paul, Hastings, Janofsky & Walker LLP. Martin L.
Edelman, who serves as one of our directors, is of counsel to Paul, Hastings,
Janofsky & Walker LLP. Certain legal matters related to this offering will be
passed upon for the underwriters by O'Melveny & Myers LLP, San Francisco,
California.

EXPERTS

The consolidated financial statements of Capital Trust appearing in Capital
Trust Annual Report (Form 10-K) for the year ended December 31, 2003, have
been audited by Ernst & Young LLP, independent registered public accounting
firm, as set forth in their report thereon included therein and included and
incorporated herein by reference. Such consolidated financial statements are
included and incorporated herein by reference in reliance upon such report
given on the authority of such firm as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any materials we have filed
with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the Public Reference Room. The SEC also maintains a web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information concerning issuers that file electronically with the SEC,
including us. Our class A common stock is listed and traded on the New York
Stock Exchange. These reports, proxy statements and other information are also
available for inspection at the offices of the New York Stock Exchange, 20
Broad Street, New York, NY 10005. We also maintain an internet site at
www.capitaltrust.com that contains information concerning us. The information
contained or referred to on our website is not incorporated by reference in
this prospectus supplement or the accompanying prospectuses and is not a part
of this prospectus supplement or the accompanying prospectuses.

We have filed with the SEC a registration statement on Form S-3 under the
Securities Act of 1933 to register the common stock being offered in this
prospectus supplement and the company prospectus by us and a second
registration statement on Form S-3 registering the securities being offered by
the selling shareholder in this prospectus supplement and the selling
shareholder prospectus. This prospectus supplement and the accompanying
prospectuses, which form part of the registration statements, do not contain
all of the information set forth in the registration statements or the
exhibits and schedules to the registration statements. For further information
regarding us and the class A common stock offered in this prospectus
supplement and the accompanying prospectuses, please refer to the registration
statements and the documents filed or incorporated by reference as exhibits to
the registration statements. You may obtain the registration statements and
their exhibits from the SEC as indicated above or from us. Statements
contained in this prospectus supplement, the accompanying prospectuses or any
additional prospectus supplement as to the contents of any contract or other
document that is filed or incorporated by reference as an exhibit to the
registration statements are not necessarily complete and we refer you to the
full text of the contract or other document filed or incorporated by reference
as an exhibit to the registration statements.

The SEC allows us to "incorporate by reference" the information we file with
the SEC, which means that we can disclose important information to you by
referring you to those filed documents. The information incorporated by
reference is considered to be part of this prospectus supplement, and
information that we file later with the SEC will automatically update and
supersede this information.

The following documents, which have been filed with the SEC (File No. 001-
14788), are incorporated herein by reference:

S-65

o our annual report on Form 10-K for the year ended December 31, 2003;

o amendment no. 1 to our annual report on Form 10-K/A for the year ended
December 31, 2003;

o our quarterly report on Form 10-Q for the quarter ended March 31, 2004;
and

o our current reports on Form 8-K filed with the SEC on July 10, 2003
(including any amendment or report filed for the purpose of updating the
description of our class A common stock contained therein), May 11, 2004
and June 14, 2004.

All documents subsequently filed by us with the SEC pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934
after the date of this prospectus supplement and prior to the termination of
this offering are deemed incorporated by reference into this prospectus
supplement and a part hereof from the date of filing of those documents. Any
statement contained in the accompanying prospectuses or any document
incorporated by reference herein shall be deemed to be amended, modified or
superseded for the purposes of this prospectus supplement to the extent that a
statement contained in this prospectus supplement, any additional prospectus
summary or a later document that is or is considered to be incorporated by
reference herein amends, modifies or supersedes such statement. Any statements
so amended, modified or superseded shall not be deemed to constitute a part of
this prospectus supplement, except as so amended, modified or superseded.

We will provide without charge to each person to whom this prospectus
supplement is delivered, upon written or oral request of such person, a copy
of any or all of the documents referred to above which have been or may be
incorporated by reference into this prospectus supplement. Requests for such
documents should be directed to Capital Trust, Inc., 410 Park Avenue, 14th
Floor, New York, New York 10022, Attention: Investor Relations (Telephone:
(212) 655-0220).

S-66

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Auditors .......................................... F-2
Audited Financial Statements
Consolidated Balance Sheets as of December 31, 2003 and 2002 ............ F-3
Consolidated Statements of Operations for the years ended December 31,
2003, 2002 and 2001.................................................... F-4
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 2003, 2002 and 2001................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31,
2003, 2002 and 2001.................................................... F-6
Notes to Consolidated Financial Statements .............................. F-7
Consolidated Balance Sheets as of March 31, 2004 (unaudited) and
December 31, 2003 (audited)............................................ F-40
Consolidated Statements of Income for the three months ended March 31,
2004 and 2003 (unaudited).............................................. F-41
Consolidated Statements of Changes in Shareholders' Equity for the three
months ended March 31, 2004 and 2003 (unaudited)....................... F-42
Consolidated Statements of Cash Flows for the three months ended
March 31, 2004 and 2003 (unaudited).................................... F-43
Notes to Consolidated Financial Statements (unaudited) .................. F-44

F-1

REPORT OF INDEPENDENT AUDITORS

The Board of Directors
Capital Trust, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheets of Capital
Trust, Inc. and Subsidiaries (the "Company") as of December 31, 2003 and 2002,
and the related consolidated statements of operations, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company
at December 31, 2003 and 2002, and the consolidated results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States.

/s/ Ernst & Young LLP

New York, New York
February 17, 2004

F-2

CAPITAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2003 AND 2002
(IN THOUSANDS, EXCEPT PER SHARE DATA)

2003 2002
-------- --------

ASSETS
Cash and cash equivalents .............................. $ 8,738 $ 10,186
Available-for-sale securities, at fair value ........... 20,052 65,233
Commercial mortgage-backed securities available-for-
sale, at fair value .................................. 158,136 155,780
Loans receivable, net of $6,672 and $4,982 reserve for
possible credit losses at December 31, 2003 and
December 31, 2002, respectively ..................... 177,049 116,347
Equity investment in CT Mezzanine Partners I LLC ("Fund
I"), CT Mezzanine Partners II LP ("Fund II"),
CT MP II LLC ("Fund II GP") and CT Mezzanine
Partners III, Inc. ("Fund III") (together "Funds") .. 21,988 28,974
Deposits and other receivables ......................... 345 431
Accrued interest receivable ............................ 3,834 4,422
Interest rate hedge assets ............................. 168 --
Deferred income taxes .................................. 3,369 1,585
Prepaid and other assets ............................... 6,247 4,801
-------- --------
Total assets ............................................ $399,926 $387,759
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses .................. $ 11,041 $ 9,068
Credit facilities ...................................... 38,868 40,000
Term redeemable securities contract .................... 11,651 --
Repurchase obligations ................................. 146,894 160,056
Step up convertible junior subordinated debentures ..... 92,248 91,770
Deferred origination fees and other revenue ............ 3,207 987
Interest rate hedge liabilities ........................ -- 1,822
-------- --------
Total liabilities ....................................... 303,909 303,703
======== ========
Shareholders' equity:
Class A 9.5% cumulative convertible preferred stock,
$0.01 par value, $0.26 cumulative annual
dividend, no shares authorized, issued or outstanding
at December 31, 2003 and 2002 ("class A
preferred stock") ................................... -- --
Class B 9.5% cumulative convertible non-voting
preferred stock, $0.01 par value,
$0.26 cumulative annual dividend, no shares
authorized, issued or outstanding
at December 31, 2003 and 2002 ("class B preferred
stock" and together with class A preferred stock,
"preferred stock") .................................. -- --
Class A common stock, $0.01 par value, 100,000 shares
authorized, 6,502 and 5,405 shares issued and
outstanding at December 31, 2003 and 2002,
respectively ("class A common stock") ............... 65 54
Class B common stock, $0.01 par value, 100,000 shares
authorized, no shares issued and outstanding
at December 31, 2003 and 2002
("class B common stock") ............................ -- --
Restricted class A common stock, $0.01 par value, 34
and 100 shares issued and outstanding at December 31,
2003 and December 31, 2002, respectively ("restricted
class A common stock" and together with
class A common stock and class B common
stock, "common stock") .............................. -- 1
Additional paid-in capital ............................. 141,402 126,919
Unearned compensation .................................. (247) (320)
Accumulated other comprehensive loss ................... (33,880) (28,988)
Accumulated deficit .................................... (11,323) (13,610)
-------- --------
Total shareholders' equity .............................. 96,017 84,056
-------- --------
Total liabilities and shareholders' equity .............. $399,926 $387,759
======== ========

See accompanying notes to consolidated financial statements.

F-3

CAPITAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)

2003 2002 2001
----------- ---------- -----------

Income from loans and other investments:
Interest and related income............................................................ $ 38,524 $ 47,527 $ 67,805
Less: Interest and related expenses on secured debt.................................... (9,845) (17,969) (26,238)
Less: Interest and related expenses on step up
convertible junior subordinated debentures.......................................... (9,730) (16,192) (16,508)
----------- ---------- -----------
Income from loans and other investments, net......................................... 18,949 13,366 25,059
----------- ---------- -----------
Other revenues:
Management and advisory fees from affiliated Funds managed............................. 8,020 10,123 7,664
Income/(loss) from equity investments in Funds......................................... 1,526 (2,534) 2,991
Advisory and investment banking fees................................................... -- 2,207 277
Other interest income.................................................................. 53 128 395
----------- ---------- -----------
Total other revenues................................................................. 9,599 9,924 11,327
=========== ========== ===========
Other expenses:
General and administrative............................................................. 13,320 13,996 15,382
Other interest expense................................................................. -- 23 110
Depreciation and amortization.......................................................... 1,057 992 909
Net unrealized (gain)/loss on derivative securities and corresponding hedged risk on
CMBS securities...................................................................... -- (21,134) 542
Net realized loss on sale of fixed assets, investments and settlement of derivative
securities........................................................................... -- 28,715 --
Provision for/(recapture of) allowance for possible credit losses...................... -- (4,713) 748
----------- ---------- -----------
Total other expenses................................................................. 14,377 17,879 17,691
----------- ---------- -----------
Income before income taxes............................................................. 14,171 5,411 18,695
Provision for income taxes.............................................................. 646 15,149 9,325
----------- ---------- -----------
Net income/(loss)...................................................................... 13,525 (9,738) 9,370
Less: Preferred stock dividend.......................................................... -- -- 606
----------- ---------- -----------
Net income/(loss) allocable to common stock............................................ $ 13,525 $ (9,738) $ 8,764
=========== ========== ===========
Per share information:
Net earnings/(loss) per share of common stock
Basic................................................................................ $ 2.27 $ (1.62) $ 1.30
=========== ========== ===========
Diluted ............................................................................. $ 2.23 $ (1.62) $ 1.12
=========== ========== ===========
Dividends declared per share of common stock .......................................... $ 1.80 $ -- $ --
=========== ========== ===========
Weighted average shares of common stock outstanding
Basic................................................................................ 5,946,718 6,008,731 6,722,106
=========== ========== ===========
Diluted.............................................................................. 10,287,721 6,008,731 12,041,368
=========== ========== ===========

See accompanying notes to consolidated financial statements.

F-4

CAPITAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS)

RESTRICTED
CLASS A CLASS B CLASS A CLASS B CLASS A ADDITIONAL
COMPREHENSIVE PREFERRED PREFERRED COMMON COMMON COMMON PAID-IN
INCOME/(LOSS) STOCK STOCK STOCK STOCK STOCK CAPITAL
------------- --------- --------- ------- ------- ---------- ----------

Balance at January 1, 2001 ........... $ 8 $ 13 $63 $ 9 $ 1 $181,697
Net income ........................... $ 9,370 -- -- -- -- -- --
Transition adjustment for recognition
of derivative financial instruments . -- -- -- -- -- -- --
Unrealized loss on derivative
financial instruments, net of
related income taxes ................ (2,963) -- -- -- -- -- --
Unrealized loss on available-for-sale
securities, net of related income
taxes ............................... (16,220) -- -- -- -- -- --
Issuance of warrants to purchase
shares of class A common stock ...... -- -- -- -- -- -- 3,276
Issuance of class A common stock unit
awards .............................. -- -- -- -- -- -- 625
Issuance of restricted class A common
stock ............................... -- -- -- -- -- 1 1,024
Restricted class A common stock
earned .............................. -- -- -- -- -- -- --
Vesting of restricted class A common
stock to unrestricted class A common
stock ............................... -- -- -- 1 -- (1) --
Dividends paid on preferred stock .... -- -- -- -- -- -- --
Repurchase and retirement of shares
of stock previously outstanding ..... -- (8) (13) (3) (9) -- (49,692)
-------- --- ---- --- --- --- --------
Balance at December 31, 2001 ......... $ (9,813) -- -- 61 -- 1 136,930
========
Net loss ............................. $ (9,738) -- -- -- -- -- --
Unrealized gain on derivative
financial instruments, net of
related income taxes ................ 1,715 -- -- -- -- -- --
Unrealized loss on available-for-sale
securities, net of related income
taxes ............................... (794) -- -- -- -- -- --
Issuance of class A common stock unit
awards .............................. -- -- -- -- -- -- 313
Issuance of restricted class A common
stock ............................... -- -- -- -- -- 1 399
Restricted class A common stock
earned .............................. -- -- -- -- -- -- --
Vesting of restricted class A common
stock to unrestricted class A common
stock ............................... -- -- -- 1 -- (1) --
Repurchase and retirement of shares
of class A common stock previously
outstanding ......................... -- -- -- (8) -- -- (10,723)
-------- --- ---- --- --- --- --------
Balance at December 31, 2002 ......... $ (8,817) -- -- 54 -- 1 126,919
========
Net income ........................... $ 13,525 -- -- -- -- -- --
Unrealized gain on derivative
financial instruments, net of
related income taxes ................ 1,990 -- -- -- -- -- --
Unrealized loss on available-for-sale
securities, net of related income
taxes ............................... (6,882) -- -- -- -- -- --
Issuance of restricted class A common
stock ............................... -- -- -- -- -- -- 356
Restricted class A common stock
earned .............................. -- -- -- -- -- -- --
Sale of shares of class A common
stock under stock option agreement .. -- -- -- -- -- -- 281
Cancellation of restricted class A
common stock ........................ -- -- -- -- -- -- (192)
Vesting of restricted class A common
stock to unrestricted class A common
stock ............................... -- -- -- 1 -- (1) --
Repurchase and retirement of shares
of class A common stock previously
outstanding ......................... -- -- -- (1) -- -- (946)
Repurchase of warrants to purchase
shares of class A common stock ...... -- -- -- -- -- -- (2,132)
Dividends declared on class A common
stock ............................... -- -- -- -- -- -- --
Shares redeemed in one for three
reverse stock split ................. -- -- -- -- -- -- (8)
Shares of class A common stock issued
in private offering ................. -- -- -- 11 -- -- 17,124
-------- --- ---- --- --- --- --------
Balance at December 31, 2003 ......... $ 8,633 $-- $ -- $65 $-- $-- $141,402
======== === ==== === === === ========

ACCUMULATED
OTHER
UNEARNED COMPREHENSIVE ACCUMULATED
COMPENSATION INCOME/(LOSS) DEFICIT TOTAL
------------ ------------- ----------- --------

Balance at January 1, 2001 ........... $ (468) $(10,152) $(12,505) $158,666
Net income ........................... -- -- 9,370 9,370
Transition adjustment for recognition
of derivative financial instruments . -- (574) -- (574)
Unrealized loss on derivative
financial instruments, net of
related income taxes ................ -- (2,963) -- (2,963)
Unrealized loss on available-for-sale
securities, net of related income
taxes ............................... -- (16,220) -- (16,220)
Issuance of warrants to purchase
shares of class A common stock ...... -- -- -- 3,276
Issuance of class A common stock unit
awards .............................. -- -- -- 625
Issuance of restricted class A common
stock ............................... (1,025) -- -- --
Restricted class A common stock
earned .............................. 910 -- -- 910
Vesting of restricted class A common
stock to unrestricted class A common
stock ............................... -- -- -- --
Dividends paid on preferred stock .... -- -- (737) (737)
Repurchase and retirement of shares
of stock previously outstanding ..... -- -- -- (49,725)
------- -------- -------- --------
Balance at December 31, 2001 ......... (583) (29,909) (3,872) 102,628
Net loss ............................. -- -- (9,738) (9,738)
Unrealized gain on derivative
financial instruments, net of
related income taxes ................ -- 1,715 -- 1,715
Unrealized loss on available-for-sale
securities, net of related income
taxes ............................... -- (794) -- (794)
Issuance of class A common stock unit
awards .............................. -- -- -- 313
Issuance of restricted class A common
stock ............................... (400) -- -- --
Restricted class A common stock
earned .............................. 663 -- -- 663
Vesting of restricted class A common
stock to unrestricted class A common
stock ............................... -- -- -- --
Repurchase and retirement of shares
of class A common stock previously
outstanding ......................... -- -- -- (10,731)
------- -------- -------- --------
Balance at December 31, 2002 ......... (320) (28,988) (13,610) 84,056
Net income ........................... -- -- 13,525 13,525
Unrealized gain on derivative
financial instruments, net of
related income taxes ................ -- 1,990 -- 1,990
Unrealized loss on available-for-sale
securities, net of related income
taxes ............................... -- (6,882) -- (6,882)
Issuance of restricted class A common
stock ............................... (356) -- -- --
Restricted class A common stock
earned .............................. 237 -- -- 237
Sale of shares of class A common
stock under stock option agreement .. -- -- -- 281
Cancellation of restricted class A
common stock ........................ 192 -- -- --
Vesting of restricted class A common
stock to unrestricted class A common
stock ............................... -- -- -- --
Repurchase and retirement of shares
of class A common stock previously
outstanding ......................... -- -- -- (947)
Repurchase of warrants to purchase
shares of class A common stock ...... -- -- -- (2,132)
Dividends declared on class A common
stock ............................... -- -- (11,238) (11,238)
Shares redeemed in one for three
reverse stock split ................. -- -- -- (8)
Shares of class A common stock issued
in private offering ................. -- -- -- 17,135
------- -------- -------- --------
Balance at December 31, 2003 ......... $ (247) $(33,880) $(11,323) $ 96,017
======= ======== ======== ========

See accompanying notes to consolidated financial statements.

F-5

CAPITAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
(IN THOUSANDS)

2003 2002 2001
--------- --------- ---------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss)........................................................................... $ 13,525 $ (9,738) $ 9,370
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
Deferred income taxes.................................................................... (1,784) 8,178 (1,044)
Provision for/(recapture of) provision for possible credit losses........................ -- (4,713) 748
Depreciation and amortization............................................................ 1,057 992 909
Loss/(income) from equity investments in Funds........................................... (1,526) 2,534 (2,991)
Net gain on sales of CMBS and available-for-sale securities.............................. -- (711) --
Cash paid on settlement of fair value hedge.............................................. -- (23,624) --
Unrealized loss on hedged and derivative securities...................................... -- 2,561 542
Restricted class A common stock earned................................................... 237 663 910
Amortization of premiums and accretion of discounts on loans and investments, net........ (1,277) (2,365) (2,853)
Accretion of discount on term redeemable securities contract............................. -- 680 3,897
Accretion of discounts and fees on convertible trust preferred securities, net........... 478 1,305 799
Changes in assets and liabilities:
Deposits and other receivables........................................................... 86 761 (981)
Accrued interest receivable.............................................................. 3,126 192 2,627
Prepaid and other assets................................................................. (1,471) (26) 1,659
Deferred origination fees and other revenue.............................................. 2,165 (462) (961)
Accounts payable and accrued expenses.................................................... (1,084) (215) 138
--------- --------- ---------
Net cash provided by/(used in) operating activities......................................... 13,532 (23,988) 12,769
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities............................................... -- (39,999) (257,877)
Principal collections on and proceeds from sales of available-for-sale securities........ 43,409 131,347 103,038
Purchases of CMBS........................................................................ (6,157) -- --
Principal collections on and proceeds from sale of CMBS.................................. -- 67,880 --
Principal collections on certificated mezzanine investments.............................. -- -- 22,379
Origination and purchase of loans receivable............................................. (99,600) -- (13,319)
Principal collections on loans receivable................................................ 87,210 136,246 112,585
Equity investments in Funds.............................................................. (9,931) (5,973) (35,599)
Return of capital from Funds............................................................. 10,758 11,840 28,942
Purchases of equipment and leasehold improvements........................................ (26) (5) (183)
Purchase of remaining interest in Fund I................................................. (19,947) -- --
--------- --------- ---------
Net cash provided by/(used in) investing activities......................................... 5,716 301,336 (40,034)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase obligations..................................................... 55,672 179,861 251,503
Repayment of repurchase obligations...................................................... (68,834) (167,685) (120,192)
Proceeds from credit facilities.......................................................... 104,015 118,500 191,870
Repayment of credit facilities........................................................... (129,232) (199,711) (244,300)
Repayment of notes payable............................................................... -- (977) (891)
Repayment of convertible trust preferred securities...................................... -- (60,258) --
Proceeds from term redeemable securities contract........................................ 20,000 35,816 --
Repayment of term redeemable securities contract......................................... (8,349) (173,628) --
Sale of shares of class A common stock under stock option agreement...................... 281 -- --
Dividends paid on class A preferred stock................................................ -- -- (737)
Dividends paid on class A common stock................................................... (8,297) -- --
Repurchase of warrants to purchase shares of class A common stock........................ (2,132) -- --
Proceeds from sale of shares of class A common stock..................................... 17,135 -- --
Repurchase and retirement of shares of common and preferred stock previously outstanding. (955) (10,731) (49,725)
--------- --------- ---------
Net cash provided by/(used in) financing activities......................................... (20,696) (278,813) 27,528
--------- --------- ---------
Net increase/(decrease) in cash and cash equivalents......................................... (1,448) (1,465) 263
Cash and cash equivalents at beginning of year............................................... 10,186 11,651 11,388
--------- --------- ---------
Cash and cash equivalents at end of year..................................................... $ 8,738 $ 10,186 $ 11,651
========= ========= =========

See accompanying notes to consolidated financial statements.

F-6

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

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

We are a finance and investment management company that specializes in
originating and managing credit sensitive structured financial products. We
will continue to make, for our own account and as investment manager for the
account of funds under management, loans and debt-related investments in
various types of commercial real estate assets and operating companies.

On April 2, 2003, our charter was amended and restated and then further
amended to eliminate from our authorized stock the entire 100,000,000 shares
of our authorized but unissued class B common stock and to effect a one (1)
for three (3) reverse stock split of our class A common stock. Fractional
shares resulting from the reverse stock split were settled in cash at a rate
of $16.65 multiplied by the percentage of a share owned after the split.

All per share information concerning the computation of earnings per share,
dividends per share, authorized stock, and per share conversion and exercise
prices reported in the accompanying consolidated interim financial statements
and these notes to consolidated financial statements have been adjusted as if
the amendments to our charter were in effect for all fiscal periods and as of
all balance sheet dates presented.

2. REIT ELECTION

In December 2002, our board of directors authorized our election to be taxed
as a real estate investment trust ("REIT") for the 2003 tax year. We will
continue to make, for our own account and as investment manager for the
account of funds under management, credit sensitive structured financial
products including loans and debt-related investments in various types of
commercial real estate.

In view of our election to be taxed as a REIT, we have tailored our balance
sheet investment program to originate or acquire loans and investments to
produce a portfolio that meets the asset and income tests necessary to
maintain qualification as a REIT. In order to accommodate our REIT status, the
legal structure of future investment funds we sponsor may be different from
the legal structure of our existing investment funds.

In order to qualify as a REIT, five or fewer individuals may own no more
than 50% of our common stock. As a means of facilitating compliance with such
qualification, shareholders controlled by John R. Klopp and Craig M. Hatkoff
and trusts for the benefit of the family of Samuel Zell each sold 166,666
shares of class A common stock to an institutional investor in a transaction
that closed on February 7, 2003. Following this transaction, our largest five
individual shareholders own in the aggregate less than 50% of the class A
common stock.

3. APPLICATION OF NEW ACCOUNTING STANDARD

In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, "Consolidation of Variable Interest Entities," an
interpretation of Accounting Research Bulletin 51. Interpretation No. 46
provides guidance on identifying entities for which control is achieved
through means other than through voting rights, and how to determine when and
which business enterprise should consolidate a variable interest entity. In
addition, Interpretation No. 46 requires that both the primary beneficiary and
all other enterprises with a significant variable interest in a variable
interest entity make additional disclosures. The transitional disclosure
requirements took effect almost immediately and are required for all financial
statements initially issued after January 31, 2003. In December 2003, the
Financial Accounting Standards Board issued a revision of Interpretation No.
46, Interpretation No. 46R, to clarify the provisions of Interpretation No.
46. The application of Interpretation No. 46R is effective for public
companies, other than small business issuers, after March 15, 2004. We have
evaluated all of our investments and other interests in entities that may be
deemed

F-7

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. APPLICATION OF NEW ACCOUNTING STANDARD -- (CONTINUED)

variable interest entities under the provisions of Interpretation No. 46 and
have concluded that no additional entities need to be consolidated.

4. VENTURE WITH CITIGROUP ALTERNATIVE INVESTMENTS LLC

On March 8, 2000, we entered into a venture with affiliates of Citigroup
Alternative Investments LLC pursuant to which they agreed, among other things,
to co-sponsor and invest capital in a series of commercial real estate
mezzanine investment funds managed by us. Pursuant to the venture agreement,
which was amended in 2003, we have co-sponsored three funds with Citigroup
Alternative Investments; CT Mezzanine Partners I LLC, CT Mezzanine Partners II
LP and CT Mezzanine Partners III, Inc., which we refer to as Fund I, Fund II
and Fund III, respectively.

Fund I was formed in March 2000. An affiliate of Citigroup Alternative
Investments and our wholly-owned subsidiary, as members thereof, made capital
commitments of up to $150 million and $50 million, respectively. During its
investment period, Fund I made approximately $330 million of investments. In
January 2003, we purchased the 75% interest in Fund I held by an affiliate of
Citigroup Alternative Investments for a purchase price of approximately
$38.4 million (including the assumption of liabilities), equal to the book
value of the fund. On January 31, 2003, we began consolidating the balance
sheet and operations of Fund I in our consolidated financial statements.

Fund II was formed in April 2001. Fund II effected its final closing on
third-party investor equity commitments in August 2001. Fund II had total
equity commitments of $845.2 million including $49.7 million made by us and
$198.9 million made by affiliates of Citigroup Alternative Investments. Third-
party private equity investors made the remaining equity commitments. During
its investment period (April 9, 2001 to April 9, 2003), Fund II made
approximately $1.2 billion of investments.

Fund III was formed in June 2003. Fund III effected its final closing on
third-party investor equity commitments in August 2003. Fund III has total
equity commitments of $425 million including $20 million made by us and
$80 million made by affiliates of Citigroup Alternative Investments. Third-
party private equity investors made the remaining equity commitments. Through
December 31, 2003, Fund III made approximately $213 million of investments.

Our wholly-owned subsidiary, CT Investment Management Co., LLC, serves as
the exclusive investment manager to Fund I, Fund II and Fund III.

In connection with entering into the venture agreement and formation of Fund
I, we issued to affiliates of Citigroup Alternative Investments warrants to
purchase 1,416,667 shares of class A common stock. In

F-8

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4. VENTURE WITH CITIGROUP ALTERNATIVE INVESTMENTS LLC -- (CONTINUED)

connection with the closings on third-party investor equity commitments to
Fund II, we issued to affiliates of Citigroup Alternative Investments warrants
to purchase 1,426,155 shares of our class A common stock. In total, we had
issued warrants to purchase 2,842,822 shares of our class A common stock. The
warrants had a $15.00 per share exercise price and were exercisable until
expiration on March 8, 2005. We capitalized the value of the warrants at
issuance and they are being amortized over the anticipated lives of the Funds.
In January 2003, we purchased all of the outstanding warrants for $2.1 million.
We had no further obligations to issue additional warrants to Citigroup at
December 31, 2003.

5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

Our consolidated financial statements include our accounts and the accounts
of our wholly-owned subsidiaries, CT Investment Management Co. (as described
in Note 3), CT-F1, LLC (direct member and equity owner of Fund I), CT-F2-LP,
LLC (limited partner of Fund II), CT-F2-GP, LLC (direct member and equity
owner of Fund II GP), CT-BB Funding Corp. (finance subsidiary for three
mezzanine loans), CT Convertible Trust I (as described in Note 13), CT LF
Funding Corp. (finance subsidiary for all of our CMBS securities), CT BSI
Funding Corp. and VIC, Inc., which together with us wholly owns Victor Capital
Group, L.P. and VCG Montreal Management, Inc. All significant intercompany
balances and transactions have been eliminated in consolidation.

REVENUE RECOGNITION

Interest income for our loans and investments is recognized over the life of
the investment using the effective interest method and recognized on the
accrual basis.

Fees received in connection with loan commitments, net of direct expenses,
are deferred until the loan is advanced 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. Exit fees are also recognized over the estimated
term of the loan as an adjustment to yield.

Income recognition is generally suspended for loans at the earlier of the
date at which payments become 90 days past due or when, in the opinion of
management, a full recovery of income and principal becomes doubtful. Income
recognition is resumed when the loan becomes contractually current and
performance is demonstrated to be resumed.

Fees from investment management services are recognized when earned on an
accrual basis. Fees from professional advisory services are generally
recognized at the point at which all Company services have been performed and
no significant contingencies exist with respect to entitlement to payment.
Fees from asset management services are recognized as services are rendered.

CASH AND CASH EQUIVALENTS

We classify highly liquid investments with original maturities of three
months or less from the date of purchase as cash equivalents. At December 31,
2003 and 2002, a majority of the cash and cash equivalents consisted of
overnight investments in commercial paper. We had no bank balances in excess
of federally insured amounts at December 31, 2003 and 2002. We have not
experienced any losses on our demand deposits, commercial paper or money
market investments.

AVAILABLE-FOR-SALE SECURITIES AND COMMERCIAL MORTGAGE-BACKED SECURITIES
("CMBS")

We have designated our investments in commercial mortgage-backed securities
and certain other securities as available-for-sale. Available-for-sale
securities are carried at estimated fair value with the net

F-9

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

unrealized gains or losses reported as a component of accumulated other
comprehensive income/(loss) in shareholders' equity. Many of these investments
are relatively illiquid and management must estimate their values. In making
these estimates, management utilizes market prices provided by dealers who
make markets in these securities, but may, under certain circumstances, adjust
these valuations based on management's judgment. Changes in the valuations do
not affect our reported income or cash flows, but impact shareholders' equity
and, accordingly, book value per share.

Management must also assess whether unrealized losses on securities reflect
a decline in value that is other than temporary, and, accordingly, write the
impaired security down to its fair value, through a charge to earnings. We
have assessed our securities to first determine whether there is an indication
of possible other than temporary impairment and then where an indication
exists to determine if other than temporary impairment did in fact exist. We
expect a full recovery from our securities and did not recognize any other
than temporary impairment. Significant judgment of management is required in
this analysis that includes, but is not limited to, making assumptions
regarding the collectibility of the principal and interest, net of related
expenses, on the underlying loans.

Income on these available-for-sale securities is recognized based upon a
number of assumptions that are subject to uncertainties and contingencies.
Examples of these include, among other things, the rate and timing of
principal payments, including prepayments, repurchases, defaults and
liquidations, the pass-through or coupon rate and interest rate fluctuations.
Additional factors that may affect our reported interest income on our
mortgage-backed securities include interest payment shortfalls due to
delinquencies on the underlying mortgage loans and the timing and magnitude of
credit losses on the mortgage loans underlying the securities that are a
result of the general condition of the real estate market, including
competition for tenants and their related credit quality, and changes in
market rental rates. These uncertainties and contingencies are difficult to
predict and are subject to future events that may alter the assumptions.

We adopted Emerging Issues Task Force 99-20, "Recognition of Interest Income
and Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets" on January 1, 2001. In accordance with this guidance, on a
quarterly basis, when significant changes in estimated cash flows from the
cash flows previously estimated occur due to actual prepayment and credit loss
experience, we calculate a revised yield based on the current amortized cost
of the investment, including any other-than-temporary impairments recognized
to date, and the revised cash flows. The revised yield is then applied
prospectively to recognize interest income.

IMPAIRMENT OF AVAILABLE-FOR-SALE SECURITIES AND CMBS

In accordance with Statement of Financial Accounting Standards No. 115, when
the estimated fair value of a security classified as available-for-sale has
been below amortized cost for a significant period of time and we conclude
that we no longer have the ability or intent to hold the security for the
period of time over which we expect the values to recover to amortized cost,
the investment is written down to its fair value. The resulting charge is
included in income, and a new cost basis established. Additionally, under
Emerging Issues Task Force 99-20, when significant changes in estimated cash
flows from the cash flows previously estimated occur due to actual prepayment
and credit loss experience and the present value of the revised cash flows
using the current expected yield is less than the present value of the
previously estimated remaining cash flows, adjusted for cash receipts during
the intervening period, an other-than-temporary impairment is deemed to have
occurred. Accordingly, the security is written down to fair value with the
resulting change being included in income and a new cost basis established. In
both instances, the original discount or premium is written off when the new
cost basis is established.

F-10

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

LOANS RECEIVABLE AND RESERVE FOR POSSIBLE CREDIT LOSSES

We purchase and originate commercial mortgage and mezzanine loans to be held
as long-term investments. Management must periodically evaluate each of these
loans for possible impairment. Impairment is indicated when it is deemed
probable that we will not be able to collect all amounts due according to the
contractual terms of the loan. If a loan were determined to be permanently
impaired, we would write down the loan through a charge to the reserve for
possible credit losses. Given the nature of our loan portfolio and the
underlying commercial real estate collateral, significant judgment of
management is required in determining permanent impairment and the resulting
charge to the reserve, which includes but is not limited to making assumptions
regarding the value of the real estate that secures the mortgage loan.

Our accounting policies require that an allowance for estimated credit
losses be reflected in our financial statements based upon an evaluation of
known and inherent risks in our mortgage and mezzanine loans. While we have
experienced minimal actual losses on our lending investments, management
considers it prudent to reflect provisions for loan losses on a portfolio
basis based upon our assessment of general market conditions, our internal
risk management policies and credit risk rating system, industry loss
experience, our assessment of the likelihood of delinquencies or defaults, and
the value of the collateral underlying our investments. Actual losses, if any,
could ultimately differ from these estimates.

SALES OF REAL ESTATE

We comply with the provisions of the FASB's Statement of Financial
Accounting Standards No. 66, "Accounting for Sales of Real Estate."
Accordingly, the recognition of gains is deferred until such transactions have
complied with the criteria for full profit recognition under the statement.

EQUITY INVESTMENTS IN FUND I, FUND II, CT MP II LLC (WHICH WE REFER TO AS FUND
II GP) AND FUND III (WHICH TOGETHER WE REFER TO AS FUNDS)

As the Funds are not majority owned or controlled by us, we do not
consolidate the Funds in our consolidated financial statements. We account for
our interest in the Funds on the equity method of accounting. As such, we
report a percentage of the earnings of the Funds equal to our ownership
percentage on a single line item in the consolidated statement of operations
as income from equity investments in the Funds.

DERIVATIVE FINANCIAL INSTRUMENTS

In the normal course of business, we use a variety of derivative financial
instruments to manage, or hedge, interest rate risk. These derivative
financial instruments must be effective in reducing its interest rate risk
exposure in order to qualify for hedge accounting. When the terms of an
underlying transaction are modified, or when the underlying hedged item ceases
to exist, all changes in the fair value of the instrument are marked-to-market
with changes in value included in net income each period until the derivative
instrument matures or is settled. Any derivative instrument used for risk
management that does not meet the hedging criteria is marked-to-market with
the changes in value included in net income.

We use interest rate swaps to effectively convert variable rate debt to
fixed rate debt for the financed portion of fixed rate assets. The
differential to be paid or received on these agreements is recognized as an
adjustment to the interest expense related to debt and is recognized on the
accrual basis.

We have also used interest rate caps to reduce our exposure to interest rate
changes on investments. We would have received payments on an interest rate
cap if the variable rate for which the cap was purchased exceed a specified
threshold level and would have recorded an adjustment to the interest income
related to the related earning asset. We had no interest rate caps in place at
December 31, 2003.

F-11

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

To determine 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 majority of financial instruments
including most derivatives, long-term investments and long-term debt, 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. All methods of assessing fair value result in a general
approximation of value, and such value may never actually be realized.

The swap and cap agreements are generally held-to-maturity and we do not use
derivative financial instruments for trading purposes.

EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET

Equipment and leasehold improvements, net, are stated at original cost less
accumulated depreciation and amortization. Depreciation is computed using the
straight-line method based on the estimated lives of the depreciable assets.
Amortization is computed over the remaining terms of the related leases.

Expenditures for maintenance and repairs are charged directly to expense at
the time incurred. Expenditures determined to represent additions and
betterments are capitalized. Cost of assets sold or retired and the related
amounts of accumulated depreciation are eliminated from the accounts in the
year of sale or retirement. Any resulting profit or loss is reflected in the
consolidated statement of operations.

DEFERRED FINANCING COSTS

The deferred financing costs which are included in other assets on our
consolidated balance sheets include issuance costs related to our debt and are
amortized using the straight-line method which is similar to the results of
the effective interest method.

ACCOUNTING FOR STOCK-BASED COMPENSATION

We comply with the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation". Statement of Financial Accounting Standards No. 123
encourages the adoption of a new fair-value based accounting method for
employee stock-based compensation plans. Statement of Financial Accounting
Standards No. 123 also permits companies to continue accounting for stock-
based compensation plans as prescribed by Accounting Principles Board Opinion
No. 25. However, companies electing to continue accounting for stock-based
compensation plans under Accounting Principles Board Opinion No. 25, must make
pro forma disclosures as if we adopted the cost recognition requirements under
Statement of Financial Accounting Standards No. 123. We have continued to
account for stock-based compensation under Accounting Principles Board Opinion
No. 25. Accordingly, no compensation cost has been recognized for the
incentive stock plan or the director stock plan in the accompanying
consolidated statements of operations as the exercise price of the stock
options granted thereunder equaled the market price of the underlying stock on
the date of the grant.

Pro forma information regarding net income and net earnings per common share
has been estimated at the date of the grant using the Black-Scholes option-
pricing model based on the following assumptions for the years ended
December 31, 2002 and 2001 (no options were granted during the year ended
December 31, 2003):

2002 2001
---- ----

Risk-free interest rate ......................................... 4.30% 4.75%
Volatility ...................................................... 25.0% 25.0%
Dividend yield .................................................. 0.0% 0.0%
Expected life (years) ........................................... 5.0 5.0

F-12

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because our employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in our
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of our employee stock options. Weighted average fair
value of each stock option granted during the years ended December 31, 2002
and 2001 were $1.64 and $1.47, respectively.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Our pro
forma information for the years ended December 31, 2003, 2002 and 2001 is as
follows (in thousands, except for net earnings (loss) per share of common
stock):

2003 2002 2001
----------------------- ----------------------- -----------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- ---------

Net income ....................................... $13,525 $13,280 $(9,738) $(10,038) $9,370 $9,043
Net earnings per share of common stock:
Basic ........................................... $ 2.27 $ 2.23 $ (0.54) $ (0.56) $ 0.43 $ 0.42
Diluted ......................................... $ 2.23 $ 2.21 $ (0.54) $ (0.56) $ 0.37 $ 0.36

The pro forma information presented above is not representative of the
effect stock options will have on pro forma net income or earnings per share
for future years.

INCOME TAXES

Our financial results generally do not reflect provisions for current or
deferred income taxes on our REIT taxable income. Management believes that we
have and intend to continue to operate in a manner that will continue to allow
us to be taxed as a REIT and, as a result, do not expect to pay substantial
corporate-level taxes (other than taxes payable by our taxable REIT
subsidiaries). Many of these requirements, however, are highly technical and
complex. If we were to fail to meet these requirements, we would be subject to
Federal income tax.

COMPREHENSIVE INCOME

Effective January 1, 1998, we adopted the FASB's Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No.
130"). The statement changes the reporting of certain items currently reported
in the shareholders' equity section of the balance sheet and establishes
standards for reporting of comprehensive income and its components in a full
set of general-purpose financial statements. Total comprehensive income/(loss)
was $8,633,000, ($8,817,000) and ($9,813,000) for the years ended December 31,
2003, 2002 and 2001, respectively. The primary component of comprehensive
income other than net income was the unrealized gain/(loss) on derivative
financial instruments and available-for-sale securities, net of related income
taxes. At December 31, 2003, accumulated other comprehensive loss is comprised
of unrealized losses on CMBS of $34,809,000 and unrealized gains on cash flow
swaps of $168,000 offset by unrealized gains on available-for-sale securities
of $761,000 netting to a total of $33,880,000.

EARNINGS PER SHARE OF COMMON STOCK

Earnings per share of common stock are presented based on the requirements
of the FASB's Statement of Accounting Standards No. 128 ("SFAS No. 128").
Basic EPS is computed based on the income applicable to common stock (which is
net income or loss reduced by the dividends on the preferred stock) divided by
weighted average number of shares of common stock outstanding during the
period. Diluted EPS is based on

F-13

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

the net earnings applicable to common stock plus, if dilutive, dividends on
the preferred stock and interest paid on convertible trust preferred
securities, net of tax benefit, divided by weighted average number of shares
of common stock and potentially dilutive shares of common stock that were
outstanding during the period. At December 31, 2003, potentially dilutive
shares of common stock include convertible trust preferred securities,
dilutive common stock options. At December 31, 2002, potentially dilutive
shares of common stock include convertible trust preferred securities,
dilutive common stock warrants and options and future commitments for stock
unit awards. At December 31, 2001, potentially dilutive shares of common stock
include the convertible preferred stock, convertible trust preferred
securities, dilutive common stock warrants and options and future commitments
for stock unit awards.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.

RECLASSIFICATIONS

Certain reclassifications have been made in the presentation of the 2002 and
2001 consolidated financial statements to conform to the 2003 presentation.

SEGMENT REPORTING

We have established two reportable segments beginning January 1, 2003. We
have an internal information system that produces performance and asset data
for its two segments along service lines.

The Balance Sheet Investment segment includes all of our activities related
to direct loan and investment activities (including direct investments in
Funds) and the financing thereof.

The Investment Management segment includes all of our activities related to
investment management services provided to us and funds under management and
includes our taxable REIT subsidiary, CT Investment Management Co., and its
subsidiaries.

Prior to January 1, 2003, we managed our operations as one segment,
therefore separate segment reporting is not presented for 2002 and 2001, as
the financial information for that segment is the same as the information in
the consolidated financial statements.

NEW ACCOUNTING PRONOUNCEMENTS

F-14

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

Financial Accounting Standards No. 133 requires an entity to recognize all
derivatives as either assets or liabilities in the consolidated balance sheets
and to measure those instruments at fair value. Additionally, the fair value
adjustments will affect either shareholders' equity or net income depending on
whether the derivative instrument qualifies as a hedge for accounting purposes
and, if so, the nature of the hedging activity. As of January 1, 2001, the
adoption of the new standard resulted in an adjustment of $574,000 to
accumulated other comprehensive loss.

In the case of the fair value hedge, we hedged the component of interest
rate risk that can be directly controlled by the hedging instrument, and it is
this portion of the hedge assets that was being recognized in earnings. Mark
to market on non-hedged available for sale securities and non-hedged aspect of
CMBS are reported in accumulated in other comprehensive income. Financial
reporting for hedges characterized as fair value hedges and cash flow hedges
are different. For those hedges characterized as a fair value hedge, the
changes in fair value of the hedge and the hedged item are reflected in
earnings each quarter. In the case of the fair value hedge, we hedged the
component of interest rate risk that can be directly controlled by the hedging
instrument, and it was this portion of the hedged assets that is recognized in
earnings. The non-hedged balance is classified as an available-for-sale
security consistent with Statement of Financial Accounting Standards No. 115,
and was reported in accumulated other comprehensive income. For those hedges
characterized as cash flow hedges, the unrealized gains/losses in the fair
value of these hedges were reported on the balance sheet with a corresponding
adjustment to either accumulated other comprehensive income or to earnings,
depending on the type of hedging relationship. We discontinued our fair value
hedge transaction in 2002. In accordance with Statement of Financial
Accounting Standards No. 133, on December 31, 2003, the derivative financial
instruments were reported at their fair value as interest rate hedge assets of
$168,000.

In July 2001, the SEC released Staff Accounting Bulletin No. 102, "Selected
Loan Loss Allowance and Documentation Issues." Staff Accounting Bulletin No.
102 summarizes certain of the SEC's views on the development, documentation
and application of a systematic methodology for determining allowances for
loan and lease losses. Our adoption of Staff Accounting Bulletin No. 102 did
not have a significant impact on us.

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" and Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets." Statement of Financial Accounting Standards No. 141 requires the
purchase method of accounting to be used for all business combinations
initiated after June 30, 2001. Statement of Financial Accounting Standards No.
141 also addresses the initial recognition and measurement of goodwill and
other intangible assets acquired in business combinations and requires
intangible assets to be recognized apart from goodwill if certain tests are
met. Statement of Financial Accounting Standards No. 142 requires that
goodwill not be amortized but instead be measured for impairment at least
annually, or when events indicate that there may be an impairment. We adopted
the provisions of both statements, as required, on January 1, 2002, which did
not have a significant impact on us.

F-15

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

5. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)

Standards No. 144 are effective for financial statements issued for fiscal
years beginning after December 15, 2001, and must be applied at the beginning
of a fiscal year. We adopted the provisions of this statement on January 1,
2002, as required, which did not have a significant financial impact on us.

In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others," an
interpretation of Financial Accounting Standards Board Statement of Financial
Accounting Standards No. 5, "Accounting for Contingencies," Statement of
Financial Accounting Standards No. 57, "Related Party Disclosures," Statement
of Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments" and rescission of Financial Accounting Standards Board
Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of
Others, an Interpretation of Statement of Financial Accounting Standards No.
5." It requires that upon issuance of a guarantee, the guarantor must
recognize a liability for the fair value of the obligation it assumes under
that guarantee regardless of whether the guarantor receives separately
identifiable consideration, such as a premium. The new disclosure requirements
are effective December 31, 2002. Our adoption of Interpretation No. 45 did not
have a material impact on our consolidated financial statements, nor is it
expected to have a material impact in the future.

F-16

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. AVAILABLE-FOR-SALE SECURITIES

At December 31, 2003, our available-for-sale securities consisted of the
following (in thousands):

GROSS
UNREALIZED
AMORTIZED -------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ----- ------ ----------

Federal Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due
September 1, 2031.................................................................... $ 2,368 $ 89 $-- $ 2,457
Federal Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due
September 1, 2031.................................................................... 8,418 269 -- 8,687
Federal Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due
September 1, 2031.................................................................... 721 28 -- 749
Federal Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due April 1,
2032................................................................................. 7,784 375 -- 8,159
------- ---- --- -------
$19,291 $761 $-- $20,052
======= ==== === =======

We purchased the securities due September 1, 2031 on September 28, 2001 at a
premium to yield 6.07% with an anticipated average life of 5.15 years with
financing provided by the seller through a repurchase agreement.

We purchased the security due April 1, 2032 in March 2002 at a discount with
seller provided financing through a repurchase agreement.

At December 31, 2002, our available-for-sale securities consisted of the
following (in thousands):

GROSS
UNREALIZED
AMORTIZED --------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ------ ------ ----------

Federal Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due
September 1, 2031................................................................... $ 6,513 $ 213 $-- $ 6,726
Federal Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due
September 1, 2031................................................................... 31,017 936 -- 31,953
Federal Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due
September 1, 2031................................................................... 1,770 60 -- 1,830
Federal Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due April
1, 2032............................................................................. 23,698 1,026 -- 24,724
------- ------ --- -------
$62,998 $2,235 $-- $65,223
======= ====== === =======

We sold three securities due September 1, 2031 in June 2002 with an
amortized cost of $75,006,000 for $75,358,000 resulting in a total gain of
$352,000.

7. COMMERCIAL MORTGAGE-BACKED SECURITIES

We acquire rated and unrated subordinated investments in public and private
CMBS issues.

Because of a decision to sell a held-to-maturity security in 1998, we
transferred all of our investments in commercial mortgage-backed securities
from held-to-maturity securities to available-for-sale and continue to
classify the CMBS as such.

During the year ended December 31, 1998, we purchased $36,509,000 face
amount of interests in three CMBS issued by a financial asset securitization
investment trust for $36,335,000. In April 2001, we received $1.4 million of
additional discount from the issuer of the securities in settlement of a
dispute with the issuer.

F-17

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. COMMERCIAL MORTGAGE-BACKED SECURITIES -- (CONTINUED)

In May 2002, we received full satisfaction of $36,509,000. In connection with
the early payoff, we recognized an additional $370,000 of unamortized discount
as additional interest income in 2002.

On March 3, 1999, through our then newly formed wholly-owned subsidiary, CT-
BB Funding Corp., we acquired a portfolio of fixed rate "BB" rated CMBS from
an affiliate of a then existing credit facility lender. The portfolio, which
is comprised of 11 separate issues with an aggregate face amount of
$246.0 million, was purchased for $196.9 million. In connection with the
transaction, an affiliate of the seller provided three-year term financing for
70% of the purchase price at a floating rate above the London Interbank
Offered Rate, or LIBOR, and entered into an interest rate swap for the full
duration of the portfolio securities thereby providing a hedge for interest
rate risk. The financing was provided at a rate that was below the current
market for similar financings and, as such, we reduced the carrying amounts of
the assets and the debt by $10.9 million to adjust the yield on the debt to
current market terms. In June 2002, three sales of CMBS in two issues were
completed. The securities, which had a basis of $31,012,000 including
amortization of discounts, were sold for $31,371,000 resulting in a net gain
of $359,000.

During the year ended December 31, 2003, we purchased $6,542,000 face amount
of interests in two CMBS issues for $6,157,000.

At December 31, 2003, ten CMBS issues with an aggregate market value of
$128.9 million and unrealized losses of $35.0 million have been in an
unrealized loss position for greater than twelve months. We believe that these
market value losses are temporary. We do not expect any actual losses in the
classes of the bonds that we hold and expect the value of the individual bonds
will increase as currently delinquent loans are resolved and the bonds
approach maturity.

At December 31, 2003, we have CMBS totaling $158,136,000 of which
$153,136,000 earn interest (including the accretion of the discounted purchase
price) at fixed rates averaging 11.88% of the book value and $5,000,000 earn
interest at variable rates averaging LIBOR plus 2.95% (4.11% at December 31,
2003). The CMBS mature at various dates from August 2004 to December 2014.
At December 31, 2003, the expected average life for the CMBS portfolio is 7.8
years.

8. LOANS RECEIVABLE

We have classified our loans receivable into the following general
categories:

o First Mortgage Loans -- These are single-property secured loans evidenced
by a primary first mortgage and senior to any mezzanine financing and the
owner's equity. These loans are bridge loans for equity holders who
require interim financing until permanent financing can be obtained. Our
first mortgage loans are generally not intended to be permanent in
nature, but rather are intended to be of a relatively short-term
duration, with extension options as deemed appropriate, and typically
require a balloon payment of principal at maturity. We may also originate
and fund permanent first mortgage loans in which we intend to sell the
senior tranche, thereby creating a property mezzanine loan (as defined
below).

o Property Mezzanine Loans -- These are single-property secured loans which
are subordinate to a primary first mortgage loan, but senior to the
owner's equity. A mezzanine loan is evidenced by its own promissory note
and is typically made to the owner of the property-owning entity (i.e.
the senior loan borrower). It is not secured by the first mortgage on the
property, but by a pledge of all of the mezzanine borrower's ownership
interest in the property-owning entity. Subject to negotiated contractual
restrictions, the mezzanine lender has the right, following foreclosure,
to become the sole indirect owner of the property subject to the lien of
the primary mortgage.

o B Notes -- These are loans evidenced by a junior participation in a first
mortgage against a single property; the senior participation is known as
an A Note. Although a B Note may be evidenced by its

F-18

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. LOANS RECEIVABLE -- (CONTINUED)

own promissory note, it shares a single borrower and mortgage with the A
Note and is secured by the same collateral. B Note lenders have the same
obligations, collateral and borrower as the A Note lender and in most
instances are contractually limited in rights and remedies in the case of
a default. The B Note is subordinate to the A Note by virtue of a
contractual arrangement between the A Note lender and the B Note lender.
For the B Note lender to actively pursue a full range of remedies, it
must, in most instances, purchase the A note.

o Corporate Mezzanine Loans -- These are investments in or loans to real
estate-related operating companies, including REITs. Such loan
investments take the form of secured debt and may finance, among other
things, operations, mergers and acquisitions, management buy-outs,
recapitalizations, start-ups and stock buy-backs generally involving real
estate and real estate-related entities.

At December 31, 2003 and 2002, our loans receivable consisted of the
following (in thousands):

2003 2002
-------- --------

First mortgage loans .................................... $ 12,672 $ 15,202
Property mezzanine loans ................................ 106,449 98,268
B Notes ................................................. 64,600 --
Corporate mezzanine loans ............................... -- 7,859
-------- --------
183,721 121,329
Less: reserve for possible credit losses ................ (6,672) (4,982)
-------- --------
Total loans ............................................ $177,049 $116,347
======== ========

In connection with our purchase of the Fund I interest held by an affiliate
of Citigroup Alternative Investments in January 2003, we recorded additional
loans receivable of $50,034,000 and recorded a $1,690,000 increase to the
reserve for possible credit losses on the acquisition date. The assets were
recorded at their carrying value from Fund I, which approximated the market
value on the acquisition date.

One first mortgage loan with an original principal balance of $8,000,000
reached maturity on July 15, 2001 and has not been repaid with respect to
principal and interest. In December 2002, the loan was written down to
$4,000,000 through a charge to the allowance for possible credit losses.
During the year ended December 31, 2003, we received proceeds of $731,000
reducing the carrying value of the loan to $3,269,000. In accordance with our
policy for revenue recognition, income recognition has been suspended on this
loan and for the years ended December 31, 2003, 2002 and 2001, $912,000,
$958,000 and $1,144,000, respectively, of potential interest income has not
been recorded.

During the year ended December 31, 2003, we purchased or originated three
property mezzanine loans for $35,000,000 and six B Notes for $64,600,000,
received partial repayments on eight mortgage and property mezzanine loans
totaling $18,449,000 and received three property mezzanine loans satisfactions
and one other loan satisfaction totaling $68,761,000. We have no outstanding
loan commitments at December 31, 2003.

At December 31, 2003, the weighted average interest rate in effect,
including amortization of fees and premiums, for our performing loans
receivable were as follows:

First mortgage loan ........................ 10.51%
Property mezzanine loans ................... 10.14%
B Notes .................................... 6.62%
------
Total Loans............................... 8.90%
======

At December 31, 2003, $119,405,000 (66%) of the aforementioned performing
loans bear interest at floating rates ranging from LIBOR plus 235 basis points
to LIBOR plus 900 basis points. The remaining $61,046,000 (34%) of loans bear
interest at fixed rates ranging from 11.62% to 11.67%.

F-19

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. LOANS RECEIVABLE -- (CONTINUED)

The range of maturity dates and weighted average maturity at December 31,
2003 of our performing loans receivable was as follows:

WEIGHTED
AVERAGE
RANGE OF MATURITY DATES MATURITY
--------------------------- ---------

First mortgage loans ................ December 2004 11 Months
Property mezzanine loans ............ July 2005 to July 2009 55 Months
B Notes ............................. January 2006 to August 2008 47 Months
Total Loans ......................... December 2004 to July 2009 50 Months

At December 31, 2003, there are two loans secured by office buildings in New
York City to a related group of borrowers totaling $61.0 million or
approximately 15.4% of total assets. For the year ended December 31, 2003,
total gross revenues, total operating expenses and net income before capital
improvements on the three buildings total $61.1 million, $25.5 million and
$35.6 million, respectively (unaudited). There are no other loans to a single
borrower or to related groups of borrowers that exceed ten percent of total
assets. Approximately 48% of all performing loans are secured by properties in
New York. Approximately 45% of all performing loans are secured by office
buildings. These credit concentrations are adequately collateralized as of
December 31, 2003.

In connection with the aforementioned loans, at December 31, 2003 and 2002,
we have deferred origination fees, net of direct costs of $828,000 and
$160,000, respectively, that are being amortized into income over the life of
the loan. At December 31, 2003 and 2002, we have also recorded $86,000 and
$1,694,000, respectively, of exit fees, which will be collected at the loan
pay-off. These fees are recorded as interest income on a basis to realize a
level yield over the life of the loans.

As of December 31, 2003, performing loans totaling $170,451,000 are pledged
as collateral for borrowings on our credit facility, repurchase agreements and
term redeemable securities contract.

We have established a reserve for possible credit losses on loans receivable
as follows (in thousands):

2003 2002 2001
------ -------- -------

Beginning balance.................................................................................. $4,982 $ 13,695 $12,947
Provision for (recapture of) allowance for possible credit losses................................. -- (4,713) 748
Additional reserve established with Fund I purchase............................................... 1,690 -- --
Amounts charged against reserve for possible credit losses........................................ -- (4,000) --
------ -------- -------
Ending balance..................................................................................... $6,672 $ 4,982 $13,695
====== ======== =======

9. EQUITY INVESTMENT IN FUNDS

FUND I

As part of the venture with Citigroup Alternative Investments, as described
in Note 3, we held an equity investment in Fund I during the years ended
December 31, 2003, 2002 and 2001. The activity for our equity investment in
Fund I for the years ended December 31, 2003, 2002 and 2001 is as follows (in
thousands):

2003 2002 2001
------- -------- --------

Beginning balance................................................................................ $ 6,609 $ 21,087 $ 21,638
Capital contributions to Fund I................................................................. -- -- 25,331
Company portion of Fund I income / (loss)....................................................... 143 (4,345) 2,934
Distributions from Fund I....................................................................... -- (10,133) (28,816)
Purchase of remaining fund equity............................................................... (6,752) -- --
------- -------- --------
Ending balance................................................................................... $ -- $ 6,609 $ 21,087
======= ======== ========

F-20

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. EQUITY INVESTMENT IN FUNDS -- (CONTINUED)

As of December 31, 2002, Fund I had loans outstanding totaling $50,237,000,
all of which were performing in accordance with the terms of the loan
agreements. One loan for $26.0 million, which was in default and for which the
accrual of interest had been suspended, was written down to $212,000 and
distributed pro-rata to the members in December 2002. Upon receipt of our
share of the loan with a face amount of $6,500,000, we disposed of the asset.

On January 31, 2003, we purchased from an affiliate of Citigroup Alternative
Investments its 75% interest in Fund I for $38.4 million (including the
assumption of liabilities). As of January 31, 2003, we began consolidating the
operations of Fund I in our consolidated financial statements.

For the years ended December 31, 2003, 2002 and 2001, we received $17,000,
$530,000 and $765,000, respectively, of fees for management of Fund I.

FUND II

We had equity investments in Fund II during the years ended December 31,
2003, 2002 and 2001. We account for Fund II on the equity method of accounting
as we have a 50% ownership interest in the general partner of Fund II. The
activity for our equity investment in Fund II for the years ended December 31,
2003, 2002 and 2001 is as follows (in thousands):

2003 2002 2001
-------- ------- ------

Beginning balance.................................................................................. $ 12,277 $ 7,024 $ --
Capital contributions to Fund II.................................................................. 5,459 5,150 7,097
Company portion of Fund II income................................................................. 2,144 1,810 54
Distributions from Fund II........................................................................ (10,671) (1,707) (127)
-------- ------- ------
Ending balance..................................................................................... $ 9,209 $12,277 $7,024
======== ======= ======

As of December 31, 2003, Fund II has loans and investments outstanding
totaling $517,591,000, all of which are performing in accordance with the
terms of the loan agreements.

For the years ended December 31, 2003, 2002 and 2001, we received
$3,904,000, $8,089,000 and $5,884,000, respectively, of fees for management of
Fund II.

FUND II GP

Fund II GP serves as the general partner for Fund II. Fund II GP is owned
50% by us and 50% by Citigroup.

We had equity investments in Fund II GP during the years ended December 31,
2003, 2002 and 2001. The activity for our equity investment in Fund II GP is
as follows (in thousands):

2003 2002 2001
------ ------ ------

Beginning balance..................................................................................... $3,499 $2,675 $ --
Capital contributions to Fund II GP.................................................................. 757 823 2,671
Company portion of Fund II GP income................................................................. (786) 1 4
Distributions from Fund II GP........................................................................ -- -- --
------ ------ ------
Ending balance........................................................................................ $3,470 $3,499 $2,675
====== ====== ======

In addition, we earned $600,000, $1,505,000 and $1,015,000 of consulting
fees from Fund II GP during the years ended December 31, 2003, 2002 and 2001,
respectively. At December 31, 2002 and 2001, we had receivables of $380,000
and $1,015,000, respectively, from Fund II GP, which is included in prepaid
and other assets.

F-21

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. EQUITY INVESTMENT IN FUNDS -- (CONTINUED)

In accordance with the limited partnership agreement of Fund II, Fund II GP
may earn incentive compensation when certain returns are achieved for the
limited partners of Fund II, which will be accrued if and when earned.

FUND III

On June 2, 2003, Fund III, our third commercial real estate mezzanine
investment fund co-sponsored with affiliates of Citigroup Alternative
Investments, effected its initial closing. Fund III commenced its investment
operations immediately following the initial closing and on June 27, 2003,
July 17, 2003 and August 8, 2003, respectively, Fund III effected its second,
third and final closings resulting in total equity commitments in Fund III of
$425.0 million. The equity commitments made to Fund III by us and affiliates
of Citigroup Alternative Investments are $20.0 million and $80.0 million,
respectively.

The activity for our equity investment in Fund III is as follows (in
thousands):

2003
------

Beginning balance ..................................................... $ --
Capital invested ..................................................... 2,800
Costs capitalized .................................................... 914
Company portion of Fund III income ................................... 25
Amortization of capitalized costs .................................... (88)
Dividends received from Fund III ..................................... (88)
------
Ending balance ........................................................ $3,563
======

As of December 31, 2003, Fund III has loans and investments outstanding
totaling $182,315,000, all of which are performing in accordance with the
terms of the loan agreements.

Based upon the $425.0 million aggregate equity commitments made at the
initial and subsequent closings, during the investment period of Fund III, we
will earn annual investment management fees of $6.0 million through the
service of our subsidiary, CT Investment Management Co., as investment manager
to Fund III. During the year ended December 31, 2003, we received $3,500,000
of fees for management of Fund III.

INVESTMENT COSTS CAPITALIZED

In connection with entering into the venture agreement and related fund
business, we capitalized certain costs, including the cost of warrants issued
and legal costs incurred in negotiating and concluding the venture agreement
with Citigroup Alternative Investments. These costs are being amortized over
the expected life of the fund business and related venture agreement (10
years). The activity for these investment costs for the years ended
December 31, 2003, 2002 and 2001 is as follows (in thousands):

2003 2002 2001
------ ------ ------

Beginning balance...................................................... $6,589 $7,443 $4,373
Costs capitalized..................................................... -- -- 3,776
Amortization of capitalized costs..................................... (844) (854) (706)
------ ------ ------
Ending balance......................................................... $5,745 $6,589 $7,443
====== ====== ======

F-22

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. EQUIPMENT AND LEASEHOLD IMPROVEMENTS

At December 31, 2003 and 2002, equipment and leasehold improvements, net,
are summarized as follows (in thousands):

PERIOD OF
DEPRECIATION OR
AMORTIZATION 2003 2002
--------------- ------ ------

Office and computer equipment................................... 1 to 3 years $ 566 $ 554
Furniture and fixtures.......................................... 5 years 146 146
Leasehold improvements.......................................... Term of leases 388 388
------ ------
1,100 1,088
Less: accumulated depreciation.................................. (808) (698)
------ ------
$ 292 $ 390
====== ======

Depreciation and amortization expense on equipment and leasehold
improvements, which are computed on a straight-line basis totaled $124,000,
$138,000 and $203,000 for the years ended December 31, 2003, 2002 and 2001,
respectively. Equipment and leasehold improvements are included at their
depreciated cost in prepaid and other assets in the consolidated balance
sheets.

11. LONG-TERM DEBT

CREDIT FACILITY

Effective June 27, 2003, we entered into a new credit agreement with a
commercial lender who has been providing credit to us since June 8, 1998.

The credit facility in effect for the year ended December 31, 2002, provided
for a $100 million line of credit. In connection with the Company's purchase
of the Fund I interest held by affiliates of Citigroup Alternative Investments
in January 2003, the Company assumed the obligations under the credit facility
entered into by Fund I. There were outstanding borrowings of $24,084,000 on
the date of acquisition. The lender for the Fund I credit facility was the
same as the lender for our outstanding credit facility and thus the two
facilities were combined for reporting purposes with the line of credit being
increased to $150 million.

On June 27, 2003, we formally combined under one facility the outstanding
borrowings of the two facilities and extended the maturity of the $150 million
credit facility for two additional years to July 16, 2005, with an automatic
nine month amortizing extension option, if not otherwise extended. We incurred
an initial commitment fee of $1,425,000 upon the signing of this new agreement
which is being amortized over the remaining term of the agreement.

The credit facility provides for advances to fund lender-approved loans and
investments made by us, which we refer to as "funded portfolio assets". Our
obligations under the credit facility are secured by pledges of the funded
portfolio assets acquired with advances under the credit facilities.

Borrowings under the credit facility bears interest at specified rates over
LIBOR, which rates may fluctuate, based upon the credit quality of the funded
portfolio assets. This facility is also subject to a minimum usage fee if
average borrowings for a quarter are less than a threshold amount. The credit
facility provides for margin calls on asset-specific borrowings in the event
of asset quality and/or market value deterioration as determined under the
credit facility. The credit facility contains customary representations and
warranties, covenants and conditions and events of default. The credit
facilities also contain a covenant obligating us to avoid undergoing an
ownership change that results in John R. Klopp or Samuel Zell no longer
retaining their senior offices and directorships with us and practical control
of our business and operations.

F-23

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. LONG-TERM DEBT -- (CONTINUED)

At December 31, 2003, we have borrowed $38,868,000 under the credit facility
at an average interest rate of LIBOR plus 1.50% (2.62% at December 31, 2003).
On December 31, 2003, the unused amount of potential credit under the
remaining credit facility was $111,132,000. Assuming no additional utilization
under the credit facility and including the amortization of fees paid and
capitalized over the term of the credit facility, the all-in effective
borrowing cost was 4.58% at December 31, 2003. We have pledged assets of
$78,022,000 as collateral for the borrowing against such credit facility.

TERM REDEEMABLE SECURITIES CONTRACT

In connection with the purchase of our BB CMBS portfolio as previously
described in Note 6, an affiliate of the seller provided financing for 70% of
the purchase price, or $137.8 million, at a floating rate of LIBOR plus 50
basis points pursuant to a term redeemable securities contract. This rate was
below the market rate for similar financings, and, as such, a discount on the
term redeemable securities contract was recorded to reduce the carrying amount
by $10.9 million (which has been amortized to $679,000), which had the effect
of adjusting the yield to current market terms. The debt had a three-year term
that expired in February 2002.

On February 28, 2002, we entered into a new term redeemable securities
contract. The current term redeemable securities contract was utilized to
finance certain of the assets that were previously financed with a maturing
credit facility and term redeemable securities contract. The term redeemable
securities contract, which allows for a maximum financing of $75 million, is
recourse to us and has a two-year term with an automatic one-year amortizing
extension option, if not otherwise extended. We incurred an initial commitment
fee of $750,000 upon the signing of the term redeemable securities contract
and we pay interest at specified rates over LIBOR. The new term redeemable
securities contract contains customary representations and warranties,
covenants and conditions and events of default. This term redeemable
securities contract expired on February 28, 2004 and was repaid with the
financed assets being financed under the credit facility.

At December 31, 2003, we have borrowed $11,651,000 under the term redeemable
securities contract at an average interest rate of LIBOR plus 1.91% (3.06% at
December 31, 2003). On December 31, 2003, the unused amount of potential
credit under the term redeemable securities contract was $63,349,000. Assuming
no additional utilization under the term redeemable securities contract and
including the amortization of fees paid and capitalized over the term of the
term redeemable securities contract, the all-in effective borrowing cost was
6.41% at December 31, 2003. We have pledged assets of $17,957,000 as
collateral for the borrowing against such term redeemable securities contract.

REPURCHASE OBLIGATIONS

At December 31, 2003, we were obligated to five counterparties under
repurchase agreements.

The repurchase obligation with the first counterparty, an affiliate of a
securities dealer, was utilized to finance CMBS securities. At December 31,
2003, we have sold CMBS assets with a book and market value of $151,964,000
and have a liability to repurchase these assets for $88,365,000 that is non-
recourse to us. This repurchase obligation had an original one-year term that
expired in February 2003 and was extended twice to February 2005. The
liability balance bears interest at specified rates over LIBOR based upon each
asset included in the obligation.

The repurchase obligation with the second counterparty, a securities dealer,
arose in connection with the purchase of Federal Home Loan Mortgage
Corporation Gold available-for-sale securities. At December 31, 2003, we have
sold such assets with a book and market value of $20,052,000 and have a
liability to repurchase these assets for $19,461,000. This repurchase
agreement comes due monthly and has a current maturity date in March 2004. The
liability balance bears interest at LIBOR.

F-24

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. LONG-TERM DEBT -- (CONTINUED)

The repurchase obligation with the third counterparty, a securities dealer,
was entered into on May 28, 2003 pursuant to the terms of a master repurchase
agreement and provides us with the right to finance up to $50,000,000, which
was upsized to $100,000,000 in August 2003, by selling specific assets to the
counterparty. To December 31, 2003, the master repurchase agreement has been
utilized in connection with the purchase of five loans during 2003. At
December 31, 2003, we have sold loans with a book and market value of
$53,197,000 and have a liability to repurchase these assets for $16,982,000.
The master repurchase agreement terminates on June 1, 2004, with an automatic
nine-month amortizing extension option, if not otherwise extended, and bears
interest at specified rates over LIBOR based upon each asset included in the
obligation.

The repurchase obligations with the fourth counterparty, a securities
dealer, were entered into during the third quarter of 2003 in connection with
the purchase of a loan and CMBS securities. At December 31, 2003, we have sold
a loan and CMBS with a book and market value of $9,950,000 and have a
liability to repurchase these assets for $8,210,000. The repurchase agreements
are matched to the term of the underlying loan and CMBS that mature between
August 2004 and January 2005 and bear interest at specified rates over LIBOR
based upon each asset included in the obligation.

The repurchase obligation with the fifth counterparty, a securities dealer,
was entered into during 2003 in connection with the purchase of a loan. At
December 31, 2003, we have sold a loan with a book and market value of
$16,325,000 and have a liability to repurchase this asset for $13,876,000.
This repurchase agreement comes due monthly and has a current maturity date in
March 2004.

The average borrowing rate in effect for all the repurchase obligations
outstanding at December 31, 2003 was LIBOR plus 0.99% (2.15% at December 31,
2003). Assuming no additional utilization under the repurchase obligations and
including the amortization of fees paid and capitalized over the term of the
repurchase obligations, the all-in effective borrowing cost was 2.65% at
December 31, 2003.

12. DERIVATIVE FINANCIAL INSTRUMENTS

On January 1, 2001, we adopted Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by Statement of Financial Accounting Standards No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities." Statement
of Financial Accounting Standards No. 133, as amended, establishes accounting
and reporting standards for derivative instruments. Specifically Statement of
Financial Accounting Standards No. 133 requires an entity to recognize all
derivatives as either assets or liabilities in the consolidated balance sheets
and to measure those instruments at fair value. Additionally, the fair value
adjustments will affect either shareholders' equity or net income depending on
whether the derivative instrument qualifies as a hedge for accounting purposes
and, if so, the nature of the hedging activity. As of January 1, 2001, the
adoption of the new standard resulted in an adjustment of $574,000 to
accumulated other comprehensive loss and other liabilities.

In the normal course of business, we are exposed to the effect of interest
rate changes. We limit these risks by following established risk management
policies and procedures including those for the use of derivatives. For
interest rate exposures, derivatives are used primarily to align rate
movements between interest rates associated with our loans and other financial
assets with interest rates on related debt financing, and manage the cost of
borrowing obligations.

We do not use derivatives for trading or speculative purposes. Further, we
have a policy of only entering into contracts with major financial
institutions based upon their credit ratings and other factors. When viewed in
conjunction with the underlying and offsetting exposure that the derivatives
are designed to hedge, we have not sustained a material loss from those
instruments, nor do we anticipate any material adverse effect on our net
income or financial position in the future from the use of derivatives.

F-25

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. DERIVATIVE FINANCIAL INSTRUMENTS -- (CONTINUED)

To manage interest rate risk, we may employ options, forwards, interest rate
swaps, caps and floors or a combination thereof depending on the underlying
exposure. To reduce overall interest cost, we use interest rate instruments,
typically interest rate swaps, to convert a portion of our variable rate debt
to fixed rate debt. Interest rate differentials that arise under these swap
contracts are recognized as interest expense over the life of the contracts.

Financial reporting for hedges characterized as fair value hedges and cash
flow hedges are different. For those hedges characterized as a fair value
hedge, the changes in fair value of the hedge and the hedged item are
reflected in earnings each quarter. In the case of the fair value hedges, we
are hedging the component of interest rate risk that can be directly
controlled by the hedging instrument, and it is this portion of the hedged
assets that is recognized in earnings. The non-hedged balance is classified as
an available-for-sale security consistent with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," and is reported in accumulated other comprehensive income.
For those hedges characterized as cash flow hedges, the unrealized gains/
losses in the fair value of these hedges are reported on the balance sheet
with a corresponding adjustment to either accumulated other comprehensive
income or to earnings, depending on the type of hedging relationship.

We undertook the fair value hedge to sustain the value of our CMBS holdings.
This fair value hedge, when viewed in conjunction with the fair value of the
securities, was intended to sustain the value of those securities as interest
rates rise and fall. During the twelve months ended December 31, 2001, we
recognized a loss of $5,479,000 for the decrease in the value of the swap
which was substantially offset by a gain of $4,890,000 for the change in the
fair value of the securities attributed to the hedged risk resulting in a
$589,000 charge to unrealized loss on derivative securities on the
consolidated statement of operations. During the period from January 1, 2002
to December 20, 2002, we recognized a loss of $16,234,000 for the decrease in
the value of the swap which was substantially offset by a gain of $15,924,000
for the change in the fair value of the securities attributed to the hedged
risk resulting in a $310,000 charge to unrealized loss on derivative
securities on the consolidated statement of operations. In conjunction with
the sale of the CMBS previously discussed in Note 5, in order to maintain the
effectiveness of the hedge, we reduced the maturity of the fair value hedge
from December 2014 to November 2009 and recognized a realized gain for the
payments received totaling $940,000. On December 23, 2002, in order to
eliminate accumulated earnings and profits in anticipation of our election of
REIT status for tax purposes, the fair value hedge was settled resulting in a
realized loss of $23.6 million.

We utilize cash flow hedges in order to better control interest costs on
variable rate debt transactions. Interest rate swaps that convert variable
payments to fixed payments, interest rate caps, floors, collars, and forwards
are considered cash flow hedges. During the period from January 1, 2002 to
December 20, 2002 and during the year ended December 31, 2001, the fair value
of the cash flow swaps decreased by $3.3 million and $2.9 million,
respectively, which was deferred into other comprehensive loss until the cash
flow hedges were settled on December 23, 2002 and the settlement amount of
$6.7 million was recorded as a charge to earnings.

During the period from January 1, 2002 to December 20, 2002 and during the
year ended December 31, 2001, we recognized a loss of $62,000 and a gain of
$47,000, respectively for the change in time value for qualifying interest
rate hedges. The time value is a component of fair value that must be
recognized in earnings, and is shown in the consolidated statement of
operations as unrealized loss on derivative securities. When the interest rate
cap was settled on December 23, 2002, we recognized a realized loss of $51,000
on the consolidated statement of operations.

In December 2002, we entered into two new cash flow hedge contracts. The
following table summarizes the notional value and fair value of our derivative
financial instruments at December 31, 2003.

F-26

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. DERIVATIVE FINANCIAL INSTRUMENTS -- (CONTINUED)

INTEREST
HEDGE TYPE NOTIONAL VALUE RATE MATURITY FAIR VALUE
----- --------------- -------------- -------- -------- ----------

Swap.......................... Cash Flow Hedge $85,000,000 4.2425% 2015 $118,000
Swap.......................... Cash Flow Hedge 24,000,000 4.2325% 2015 50,000

On December 31, 2003, the derivative financial instruments were reported at
their fair value as interest rate hedge assets and the increase in the fair
value of the cash flow swaps of $168,000 was deferred into other comprehensive
loss and will be released to earnings over the remaining lives of the swaps.
The amount of the hedges' ineffectiveness is immaterial and reported as a
component of interest expense.

Over time, the unrealized gains and losses held in accumulated other
comprehensive income will be reclassified to earnings. This reclassification
is consistent with the timing of when the hedged items are also recognized in
earnings. Within the next twelve months, we estimate that $3.1 million
currently held in accumulated other comprehensive loss will be reclassified to
earnings, with regard to the cash flow hedges.

13. CONVERTIBLE JUNIOR SUBORDINATED DEBENTURES

On July 28, 1998, we sold 8.25% step up convertible junior subordinated
debentures in the aggregate principal amount of $154,650,000 to CT Convertible
Trust I, referred to as the "Trust". The Trust then privately placed and
originally issued 150,000 8.25% step up convertible trust preferred securities
(liquidation amount $1,000 per security) with an aggregate liquidation amount
of $150 million to third parties. The convertible trust preferred securities
represented an undivided beneficial interest in the assets of the Trust that
consisted solely of the step up convertible junior subordinated debentures
that were concurrently sold and originally issued to the Trust. The common
interest in the Trust was sold to us for $4,650,000.

Payments of interest on the step up convertible junior subordinated
debentures were payable quarterly in arrears on each calendar quarter-end and
equal the amounts necessary for the payment of distributions on the
convertible trust preferred securities. Distributions were payable only to the
extent payments were made in respect to the convertible debentures.

We received $145,207,000 in net proceeds, after original issue discount of
3% from the liquidation amount of the convertible trust preferred securities
and transaction expenses, pursuant to the above transactions, which were used
to pay down our credit facilities. The convertible trust preferred securities
were initially convertible into shares of class A common stock at an initial
rate of 85.47 shares of class A common stock per $1,000 principal amount of
the convertible debentures held by the Trust (which was equivalent to a
conversion price of $35.10 per share of class A common stock).

On May 10, 2000, we modified the terms of the step up convertible junior
subordinated debentures canceling the original underlying convertible
debentures and new 8.25% step up convertible junior subordinated debentures in
the aggregate principal amount of $92,524,000 and new 13% step up non-
convertible junior subordinated debentures in the aggregate principal amount
of $62,126,000 were issued to the Trust. In connection with the modification,
the then outstanding convertible trust preferred securities were canceled and
new variable step up convertible trust preferred securities with an aggregate
liquidation amount of $150,000,000 were issued to the holders of the canceled
securities in exchange therefore. The liquidation amount of the new
convertible trust preferred securities was divided into $89,742,000 of
convertible amount and $60,258,000 of non-convertible amount, the
distribution, redemption and, as applicable, conversion terms of which,
mirrored the interest, redemption and, as applicable, conversion terms of the
new convertible debentures and the new non-convertible debentures,
respectively, held by the Trust.

Payments of interest on the new step up convertible junior subordinated
debentures are payable quarterly in arrears on each calendar quarter-end and
are equal to the distributions made on the new convertible trust preferred
securities. Distributions on the new convertible trust preferred securities
are payable only to the extent payments are made in respect to the new
debentures. The new step up convertible junior subordinated

F-27

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. CONVERTIBLE JUNIOR SUBORDINATED DEBENTURES -- (CONTINUED)

debentures initially bore a blended coupon rate of 10.16% per annum which rate
was to vary as the proportion of outstanding convertible amount to the
outstanding non-convertible amount changes and step up in accordance with the
coupon rate step up terms applicable to the convertible amount and the non-
convertible amount.

The convertible amount bore a coupon rate of 8.25% per annum through
March 31, 2002 and increased on April 1, 2002 to the greater of (i) 10.00% per
annum, increasing by 0.75% on October 1, 2004 and on each October 1 thereafter
or (ii) a percentage per annum equal to the quarterly dividend paid on a share
of common stock multiplied by four and divided by $21.00. The convertible
amount is convertible into shares of class A common stock, in increments of
$1,000 in liquidation amount, at a conversion price of $21.00 per share. The
convertible amount is redeemable by us, in whole or in part, on or after
September 30, 2004.

Prior to redemption, the non-convertible amount bore a coupon rate of 13.00%
per annum. On September 30, 2002, the non-convertible debentures were redeemed
in full, utilizing additional borrowings from the credit facility and
repurchase agreements, resulting in a corresponding redemption in full of the
related non-convertible amount of convertible trust preferred securities. In
connection with the redemption transaction, we expensed the remaining
unamortized discount and fees on the redeemed non-convertible amount resulting
in $586,000 of additional expense for the year ended December 31, 2002.

For financial reporting purposes, in accordance with Financial Accounting
Standards Board Interpretation No. 46, "Consolidation of Variable Interest
Entities," we are not treating the Trust as our subsidiary and, accordingly,
the accounts of the Trust are not included in our consolidated financial
statements. Intercompany transactions between the Trust and us have not been
eliminated in our consolidated financial statements.

14. SHAREHOLDERS' EQUITY

AUTHORIZED CAPITAL

We have the authority to issue up to 200,000,000 shares of stock, consisting
of (i) 100,000,000 shares of class A common stock and (ii) 100,000,000 shares
of preferred stock. The board of directors is generally authorized to issue
additional shares of authorized stock without shareholder approval.

COMMON STOCK

Class A common stock are voting shares entitled to vote on all matters
presented to a vote of shareholders, except as provided by law or subject to
the voting rights of any outstanding preferred stock. Holders of record of
shares of class A common stock on the record date fixed by our board of
directors are entitled to receive such dividends as may be declared by the
board of directors subject to the rights of the holders of any outstanding
preferred stock.

PREFERRED STOCK

In 2001, we had outstanding two classes of preferred stock, class A 9.5%
cumulative convertible voting preferred Stock and the class B 9.5% cumulative
convertible non-voting preferred stock. In December 2001, following the
repurchase of all of the outstanding shares of preferred stock (as discussed
below), we amended our charter to eliminate from authorized capital the
previously designated class A preferred stock and class B preferred stock and
increase the authorized shares of preferred stock to 100,000,000.

COMMON AND PREFERRED STOCK TRANSACTIONS

In March 2000, we commenced an open market stock repurchase program under
which we were initially authorized to purchase, from time to time, up to
666,667 shares of class A common stock. Since that time the authorization has
been increased by the board of directors to purchase up to 2,366,934 shares of
class A

F-28

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. SHAREHOLDERS' EQUITY -- (CONTINUED)

common stock. As of December 31, 2003, we had purchased and retired, pursuant
to the program, 1,700,584 shares of class A common stock at an average price
of $13.13 per share (including commissions).

We have no further obligations to issue additional warrants to affiliates of
Citigroup Alternative Investments at December 31, 2003. The value of the
warrants at the issuance dates, $4,636,000, was capitalized and is being
amortized over the anticipated lives of the fund business venture with
affiliates of Citigroup Alternative Investments. On January 31, 2003, we
purchased all of the outstanding warrants to purchase 2,842,822 shares of
class A common stock for $2,132,000.

In two privately negotiated transactions closed in April 2001, we
repurchased for $29,138,000, 210,234 shares of class A common stock, 506,944
shares of class B common stock, 506,130 shares of class A preferred Stock and
758,037 shares of class B preferred stock. In addition, in a privately
negotiated transaction closed in August 2001, we repurchased for $20,896,000,
66,667 shares of class A common stock, 411,451 shares of class B common stock,
253,065 shares of class A preferred stock and 589,713 shares of class B
preferred stock. We have repurchased all of our previously outstanding
preferred stock and eliminated the related dividend.

On June 18, 2003, we issued 1,075,000 shares of class A common stock in a
private placement. Thirty-two separate investors, led by certain institutional
clients advised by Lend Lease Rosen Real Estate Securities, LLC, purchased the
shares. We received net proceeds of $17.1 million after payment of offering
expenses and fees to Conifer Securities, LLC, our placement agent.

EARNINGS PER SHARE

The following table sets forth the calculation of Basic and Diluted EPS for
the years ended December 31, 2003 and 2002:

YEAR ENDED DECEMBER 31, 2003 YEAR ENDED DECEMBER 31, 2002
------------------------------------- -------------------------------------
PER SHARE PER SHARE
NET INCOME SHARES AMOUNT NET LOSS SHARES AMOUNT
----------- ---------- --------- ------------ --------- ---------

Basic EPS:
Net earnings / (loss) allocable to common stock .. $13,525,000 5,946,718 $2.27 $(9,738,000) 6,008,731 $(1.62)
===== =======
Effect of Dilutive Securities:
Options outstanding for the purchase of
common stock.................................... -- 67,581 -- --
Convertible trust preferred securities
exchangeable for shares of common stock......... 9,452,000 4,273,422 -- --
----------- ---------- ------------ ---------
Diluted EPS:
Net earnings / (loss) per share of common stock
and assumed conversions......................... $22,977,000 10,287,721 $2.23 $(9,738,000) 6,008,731 $(1.62)
=========== ========== ===== ============ ========= =======

F-29

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. SHAREHOLDERS' EQUITY -- (CONTINUED)

The following table sets forth the calculation of Basic and Diluted EPS for
the year ended December 31, 2001:

YEAR ENDED DECEMBER 31, 2001
-------------------------------------
PER SHARE
NET INCOME SHARES AMOUNT
----------- ---------- ---------

Basic EPS:
Net earnings allocable to common stock.................................................... $ 8,764,000 6,722,106 $1.30
=====
Effect of Dilutive Securities:
Options outstanding for the purchase of common stock...................................... -- 32,144
Warrants outstanding for the purchase of common stock..................................... -- 140,316
Future commitments for stock unit awards for the issuance of common stock................. -- 16,667
Convertible trust preferred securities exchangeable for shares of common stock............ 4,120,000 4,273,504
Convertible preferred stock............................................................... 606,000 856,631
----------- ----------
Diluted EPS:
Net earnings per share of common stock and assumed conversions............................ $13,490,000 12,041,368 $1.12
=========== ========== =====

15. GENERAL AND ADMINISTRATIVE EXPENSES

General and administrative expenses for the years ended December 31, 2003,
2002 and 2001 consist of (in thousands):

2003 2002 2001
------- ------- -------

Salaries and benefits.............................................................................. $ 8,306 $ 9,276 $11,082
Professional services.............................................................................. 2,127 1,806 1,545
Other.............................................................................................. 2,887 2,914 2,755
------- ------- -------
Total.............................................................................................. $13,320 $13,996 $15,382
======= ======= =======

16. INCOME TAXES

The Company intends to make an election to be taxed as a REIT under
Section 856(c) of the Internal Revenue Code, as amended, commencing with the
tax year ending December 31, 2003. As a REIT, we generally are not subject to
federal income tax. To maintain qualification as a REIT, we must distribute at
least 90% of our REIT taxable income to our shareholders and meet certain
other requirements. If we fail to qualify as a REIT in any taxable year, we
will be subject to federal income tax on our taxable income at regular
corporate rates. We may also be subject to certain state and local taxes on
our income and property. Under certain circumstances, federal income and
excise taxes may be due on our undistributed taxable income. At December 31,
2003, we were in compliance with all REIT requirements.

During the year ended December 31, 2003, we recorded $646,000 of income tax
expense for income that was attributable to taxable REIT subsidiaries. Our
effective tax rate for the year ended December 31, 2003 attributable to our
taxable REIT subsidiaries was 107.9%. The difference between the U.S. federal
statutory tax rate of 35% and the effective tax rate was primarily state and
local taxes, net of federal tax benefit, and compensation in excess of
deductible limits.

We have federal net operating loss carryforwards as of December 31, 2003 of
approximately $12.4 million. Such net operating loss carryforwards expire
through 2021. Due to an ownership change in January 1997 and another prior
ownership change, a substantial portion of the net operating loss
carryforwards are limited for federal income tax purposes to approximately
$1.4 million annually. Any unused portion of such annual limitation can be
carried forward to future periods. We also have federal capital loss
carryforwards as of December 31, 2003 of approximately $29.4 million that
expire in 2007. The

F-30

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16. INCOME TAXES -- (CONTINUED)

utilization of these carryforwards would not reduce federal income taxes but
would reduce required distributions to maintain REIT status.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for tax reporting purposes.

As we are operating in a manner to meet the qualifications to be taxed as a
REIT for federal income tax purposes during the 2003 tax year, we do not
expect we will be liable for income taxes or taxes on "built-in gain" on our
assets at the federal level or in most states in future years, other than on
our taxable REIT subsidiary. Accordingly, we eliminated substantially all of
our deferred tax liabilities other than that related to our taxable REIT
subsidiary at December 31, 2002. The amounts for 2003 relate only to
differences related to taxable earnings of our taxable REIT subsidiaries.

The components of the net deferred tax assets are as follows (in thousands):

DECEMBER 31,
-----------------
2003 2002
------ --------

Fund II incentive management fees recognized for tax
purposes
not recorded for book.................................... $3,230 $ --
Net operating loss carryforward ........................... -- 4,849
Capital loss carryforward ................................. -- 13,573
Reserves on other assets and for possible credit losses ... -- 2,689
Other ..................................................... 279 (2,858)
------ --------
Deferred tax assets ....................................... 3,509 18,253
Valuation allowance ....................................... (140) (16,668)
------ --------
$3,369 $ 1,585
====== ========

We recorded a valuation allowance to reserve a portion of our net deferred
assets in accordance with Statement of Financial Accounting Standards No. 109.
Under Statement of Financial Accounting Standards No. 109, this valuation
allowance will be adjusted in future years, as appropriate. However, the
timing and extent of such future adjustments cannot presently be determined.

Prior to 2003, we filed a consolidated federal income tax return as a C-
corporation. The provision for income taxes for the years ended December 31,
2002 and 2001 is comprised as follows (in thousands):

2002 2001
------- ------

Current
Federal................................................. $ 4,199 $6,076
State................................................... 1,311 2,239
Local................................................... 1,409 2,054
Deferred
Federal................................................. 5,152 (732)
State................................................... 1,483 (72)
Local................................................... 1,595 (240)
------- ------
Provision for income taxes ................................. $15,149 $9,325
======= ======

F-31

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

16. INCOME TAXES -- (CONTINUED)

The reconciliation of income tax computed at the U.S. federal statutory tax
rate (35%) to the effective income tax rate for the years ended December 31,
2002 and 2001 are as follows (in thousands):

2002 2001
---------------- -------------
$ % $ %
-------- ----- ------ ----

Federal income tax at statutory rate ......................................................... $ 1,894 35.0% $6,543 35.0%
State and local taxes, net of federal tax benefit ............................................ 3,768 69.7% 2,588 13.9%
Utilization of net operating loss carryforwards .............................................. (490) (9.1)% (490) (2.6)
Capital loss carryforwards not recognized due to uncertainty
of utilization.............................................................................. 10,304 190.4% -- --%
Compensation in excess of deductible limits .................................................. 502 9.3% 642 3.4%
Reduction of net deferred tax liabilities .................................................... (2,783) (51.4)% -- --%
Other ........................................................................................ 1,954 36.1% 42 0.2%
-------- ----- ------ ----
$ 15,149 280.0% $9,325 49.9%
======== ===== ====== ====

17. EMPLOYEE BENEFIT PLANS

EMPLOYEE 401(K) AND PROFIT SHARING PLAN

In 1999, we instituted a 401(k) and profit sharing plan that allows eligible
employees to contribute up to 15% of their salary into the plan on a pre-tax
basis, subject to annual limits. We have committed to make contributions to
the plan equal to 3% of all eligible employees' compensation subject to annual
limits and may make additional contributions based upon earnings. Our
contribution expense for the years ended December 31, 2003, 2002 and 2001, was
$103,000, $110,000 and $196,000, respectively.

1997 LONG-TERM INCENTIVE STOCK PLAN

Our 1997 amended and restated long-term incentive stock plan permits the
grant of nonqualified stock option, incentive stock option, restricted stock,
stock appreciation right, performance unit, performance stock and stock unit
awards. A maximum of 147,001 shares of class A common stock may be issued
during the fiscal year 2004 pursuant to awards under the incentive stock plan
and the director stock plan (as discussed below) in addition to the shares
subject to awards outstanding under the two plans at December 31, 2003. The
maximum number of shares that may be subject to awards to any employee during
the term of the plan may not exceed 333,334 shares and the maximum amount
payable in cash to any employee with respect to any performance period
pursuant to any performance unit or performance stock award is $1.0 million.

Incentive stock options shall be exercisable no more than ten years after
their date of grant and five years after the grant in the case of a 10%
shareholder and vest over a period of three years with one-third vesting at
each anniversary date. Payment of an option may be made with cash, with
previously owned class A common stock, by foregoing compensation in accordance
with performance compensation committee or compensation committee rules or by
a combination of these.

Restricted stock may be granted under the long-term incentive stock plan
with performance goals and periods of restriction as the board of directors
may designate. The performance goals may be based on the attainment of certain
objective and/or subjective measures. In 2003, 2002 and 2001, we issued 17,500
shares, 25,125 shares and 75,927 shares, respectively, of restricted stock.
12,707 shares were canceled in 2003 and 20,791 shares were canceled in 2001
upon the resignation of employees prior to vesting. The shares of restricted
stock issued in 2003 vest one-third on each of the following dates: February 1,
2004, February 1, 2005 and February 1, 2006. The shares of restricted stock
issued in 2002 vest one-third on each of the following dates: February 1,
2003, February 1, 2004 and February 1, 2005. The shares of restricted stock
issued in 2001 vest one-third on each of the following dates: February 1,
2002, February 1, 2003 and

F-32

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

17. EMPLOYEE BENEFIT PLANS -- (CONTINUED)

February 1, 2004. We also granted 17,361 shares of performance based
restricted stock in 1999, which were canceled in 2002.

The long-term incentive stock plan also authorizes the grant of stock units
at any time and from time to time on such terms as shall be determined by the
board of directors or administering compensation committee. Stock units shall
be payable in class A common stock upon the occurrence of certain trigger
events. The terms and conditions of the trigger events may vary by stock unit
award, by the participant, or both.

The following table summarizes the activity under the long-term incentive
stock plan for the years ended December 31, 2003, 2002 and 2001:

WEIGHTED
OPTIONS EXERCISE PRICE AVERAGE EXERCISE
OUTSTANDING PER SHARE PRICE PER SHARE
----------- ----------------- ----------------

Outstanding at January 1, 2001.............................................. 473,016 $12.375 -- $30.00 21.11
Granted in 2001............................................................ 151,512 $ 13.50 -- $16.50 13.85
Canceled in 2001........................................................... (47,446) $12.375 -- $30.00 20.50
--------- ------
Outstanding at December 31, 2001............................................ 577,082 $12.375 -- $30.00 $19.26
Granted in 2002............................................................ 97,340 $15.90 15.90
Canceled in 2002........................................................... (17,172) $12.375 -- $18.00 13.79
--------- ------
Outstanding at December 31, 2002............................................ 657,250 $12.375 -- $30.00 $18.51
Exercised in 2003.......................................................... (18,445) $12.375 -- $18.00 15.20
Canceled in 2003........................................................... (121,337) $12.375 -- $30.00 18.51
--------- ------
Outstanding at December 31, 2003............................................ 517,468 $12.375 -- $30.00 $19.09
========= ======

At December 31, 2003, 2002 and 2001, options to purchase 417,730, 435,669
and 337,225 shares, respectively, were exercisable. At December 31, 2003, the
outstanding options have various remaining contractual lives ranging from 2.00
to 8.09 years with a weighted average life of 5.59 years. The following table
presents the options outstanding and exercisable at December 31, 2003 within
price ranges:

RANGE FOR TOTAL TOTAL
EXERCISE PRICES OPTIONS OPTIONS
PER SHARE OUTSTANDING EXERCISABLE
----------------------------------------------------------------- ----------- -----------

$12.375 -- $15.00................................................ 142,788 105,613
$ 15.01 -- $18.00................................................ 249,122 186,559
$ 18.01 -- $21.00................................................ -- --
$ 21.01 -- $24.00................................................ -- --
$ 24.01 -- $27.00................................................ 33,334 33,334
$ 27.01 -- $30.00................................................ 92,224 92,224
------- -------
Total............................................................ 517,468 417,730
======= =======

1997 NON-EMPLOYEE DIRECTOR STOCK PLAN

Our 1997 amended and restated non-employee director stock plan permits the
grant of nonqualified stock option, restricted stock, stock appreciation
right, performance unit, performance stock and stock unit awards. A maximum of
147,001 shares of class A common stock may be issued during the fiscal year
2004 pursuant to awards under the director stock plan and the long-term
incentive stock plan, in addition to the shares subject to awards outstanding
under the two plans at December 31, 2003.

F-33

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

17. EMPLOYEE BENEFIT PLANS -- (CONTINUED)

The board of directors shall determine the purchase price per share of class
A common stock covered by nonqualified stock options granted under the
director stock plan. Payment of nonqualified stock options may be made with
cash, with previously owned shares of class A common stock, by foregoing
compensation in accordance with board rules or by a combination of these
payment methods. Stock appreciation rights may be granted under the plan in
lieu of nonqualified stock options, in addition to nonqualified stock options,
independent of nonqualified stock options or as a combination of the
foregoing. A holder of stock appreciation rights is entitled upon exercise to
receive shares of class A common stock, or cash or a combination of both, as
the board of directors may determine, equal in value on the date of exercise
to the amount by which the fair market value of one share of class A common
stock on the date of exercise exceeds the exercise price fixed by the board on
the date of grant (which price shall not be less than 100% of the market price
of a share of class A common stock on the date of grant) multiplied by the
number of shares in respect to which the stock appreciation rights are
exercised.

Restricted stock may be granted under the director stock plan with
performance goals and periods of restriction as the board of directors may
designate. The performance goals may be based on the attainment of certain
objective and/or subjective measures. The director stock plan also authorizes
the grant of stock units at any time and from time to time on such terms as
shall be determined by the board of directors. Stock units shall be payable in
shares of class A common stock upon the occurrence of certain trigger events.
The terms and conditions of the trigger events may vary by stock unit award,
by the participant, or both.

The following table summarizes the activity under the director stock plan
for the years ended December 31, 2003, 2002 and 2001:

WEIGHTED
OPTIONS EXERCISE PRICE AVERAGE EXERCISE
OUTSTANDING PER SHARE PRICE PER SHARE
----------- -------------- ----------------

Outstanding at January 1, 2001................................................. 85,002 $ 18.00-$30.00 27.65
Granted in 2001............................................................... -- $ -- --
------ ------
Outstanding at December 31, 2001............................................... 85,002 $18.00-$30.00 27.65
Granted in 2002............................................................... -- $ -- --
------ ------
Outstanding at December 31, 2002............................................... 85,002 $18.00-$30.00 27.65
Granted in 2003............................................................... -- $ -- --
------ ------
Outstanding at December 31, 2003............................................... 85,002 $18.00-$30.00 $27.65
====== ======

At December 31, 2003, 2002 and 2001, all of the options outstanding were
exercisable. At December 31, 2003, the outstanding options have a remaining
contractual life of 3.54 years to 4.08 years with a weighted average life of
3.98 years. 16,668 of the options are priced at $18.00 and the remaining
68,334 are priced at $30.00.

18. FAIR VALUES OF FINANCIAL INSTRUMENTS

The Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the statement of financial condition, for which
it is practicable to estimate that value. In cases where quoted market prices
are not available, fair values are based upon estimates using present value or
other valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and the estimated future cash
flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could
not be realized in immediate settlement of the instrument. Statement of
Financial Accounting Standards No. 107 excludes certain financial instruments
and all non-financial instruments from our disclosure requirements.
Accordingly, the aggregate fair value amounts do not represent the underlying
value of we.

F-34

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

18. FAIR VALUES OF FINANCIAL INSTRUMENTS -- (CONTINUED)

The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:

Cash and cash equivalents: The carrying amount of cash on hand and money
market funds is considered to be a reasonable estimate of fair value.

Available-for-sale securities: The fair value was determined based upon the
market value of the securities.

Commercial mortgage-backed securities: The fair value was obtained by
obtaining quotes from a market maker in the security.

Loans receivable, net: The fair values were estimated by using current
institutional purchaser yield requirements for loans with similar credit
characteristics.

Interest rate cap agreement: The fair value was estimated based upon the
amount at which similar financial instruments would be valued.

Credit facility: The credit facilities are at floating rates of interest for
which the spread over LIBOR is at rates that are similar to those in the
market currently. Therefore, the carrying value is a reasonable estimate of
fair value.

Repurchase obligations: The repurchase obligations, which are generally
short-term in nature, bear interest at a floating rate and the book value is a
reasonable estimate of fair value.

Term redeemable securities contract: The fair value was estimated based upon
the amount at which similar privately placed financial instruments would be
valued.

Convertible trust preferred securities: The fair value was estimated based
upon the amount at which similar privately placed financial instruments would
be valued.

Interest rate swap agreements: The fair values were estimated based upon the
amount at which similar financial instruments would be valued.

The carrying amounts of all assets and liabilities approximate the fair
value except as follows (in thousands):

DECEMBER 31, 2003 DECEMBER 31, 2002
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE

-------- -------- -------- --------
Financial Assets:
Loans receivable ................................................................... $183,721 $191,395 $121,329 $127,348
Convertible trust preferred securities ............................................. 89,466 94,874 88,988 88,988

19. SUPPLEMENTAL SCHEDULE OF NON-CASH AND FINANCING ACTIVITIES

Interest paid on our outstanding debt for 2003, 2002 and 2001 was
$18,980,000, $32,293,000 and $38,290,000, respectively. Income taxes paid by
us in 2003, 2002 and 2001 were $2,454,000, $8,275,000 and $11,583,000,
respectively.

20. TRANSACTIONS WITH RELATED PARTIES

We entered into a consulting agreement, dated as of January 1, 1998, with
one of our directors. The consulting agreement had an initial term of one
year, which was subsequently extended to December 31, 2002 and then allowed to
expire. Pursuant to the agreement, the director provided consulting services
for us including new business identification, strategic planning and
identifying and negotiating mergers, acquisitions,

F-35

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

20. TRANSACTIONS WITH RELATED PARTIES -- (CONTINUED)

joint ventures and strategic alliances. During each of the years ended
December 31, 2002 and 2001, we incurred expenses of $96,000 in connection with
this agreement.

Effective January 1, 2000, we entered into a consulting agreement with
another director. The consulting agreement had an initial term of two years
that expired on December 31, 2002. Under this agreement, the consultant was
paid $15,000 per month for which the consultant provided services for us
including serving on the management committees for Fund I and Fund II and any
other tasks and assignments requested by the chief executive officer.
Effective January 1, 2003, we entered into a new consulting agreement with the
director with a term of two years that expires on December 31, 2004. Under the
new agreement, the consultant is paid $10,000 per month for which the
consultant provides services for us including serving on the management
committees for Fund I and Fund II, serving on the board of directors of Fund
III, and any other tasks and assignments requested by the chief executive
officer. During the years ended December 31, 2003, 2002 and 2001, we incurred
expenses of $120,000, $180,000 and $180,000, respectively in connection with
these agreements.

We pay Equity Group Investments, L.L.C. and Equity Risk Services, Inc.,
affiliates under common control of the chairman of the board of directors, for
certain corporate services provided to us. These services include consulting
on insurance matters, risk management, and investor relations. During the
years ended December 31, 2003, 2002 and 2001, we incurred $48,000, $57,000 and
$100,000, respectively, of expenses in connection with these services.

We pay Global Realty Outsourcing, Inc., a company in which we have an equity
investment and on whose board of directors our president and chief executive
officer serves, for consulting services relating to monitoring assets and
evaluating potential investments. During the years ended December 31, 2003,
2002 and 2001, we incurred $147,000, $13,000 and $30,000, respectively, of
expenses in connection with these services.

21. COMMITMENTS AND CONTINGENCIES

LEASES

We lease premises and equipment under operating leases with various
expiration dates. Minimum annual rental payments at December 31, 2003 are as
follows (in thousands):

YEARS ENDING DECEMBER 31:
-------------------------

2004 ................................................................ $ 971
2005 ................................................................ 962
2006 ................................................................ 962
2007 ................................................................ 962
2008 ................................................................ 481
Thereafter .......................................................... --
-------
$4,338
=======

Rent expense for office space and equipment amounted to $902,000, $899,000
and $852,000 for the years ended December 31, 2003, 2002 and 2001,
respectively.

LITIGATION

In the normal course of business, we are subject to various legal
proceedings and claims, the resolution of which, in management's opinion, will
not have a material adverse effect on our consolidated financial position or
our results of operations.

F-36

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

21. COMMITMENTS AND CONTINGENCIES -- (CONTINUED)

EMPLOYMENT AGREEMENTS

We have an employment agreement with our chief executive officer that
provided for an initial five-year term of employment that ended July 15, 2002.
The agreement has been automatically extended twice for one-year terms, and
currently ends on July 15, 2004, and contains extension options that extend
the agreement for additional one-year terms automatically unless terminated by
either party by April 17, 2004. The employment agreement currently provides
for an annual base salary of $600,000, subject to calendar year cost of living
increases at the discretion of the board of directors. The chief executive
officer is also entitled to annual incentive cash bonuses to be determined by
the board of directors based on individual performance and our profitability
and is a participant in our long-term incentive stock plan and other employee
benefit plans.

22. SEGMENT REPORTING

We have established two reportable segments beginning January 1, 2003. We
have an internal information system that produces performance and asset data
for our two segments along service lines.

The Balance Sheet Investment segment includes all of our activities related
to direct loan and investment activities (including direct investments in
Funds) and the financing thereof.

The Investment Management segment includes all of our activities related to
investment management services provided us and third-party funds under
management and includes our taxable REIT subsidiary, CT Investment Management
Co., and its subsidiaries.

F-37

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

22. SEGMENT REPORTING -- (CONTINUED)

The following table details each segment's contribution to the Company's
overall profitability and the identified assets attributable to each such
segment for the year ended and as of December 31, 2003, respectively (in
thousands):

BALANCE SHEET INVESTMENT INTER-SEGMENT
INVESTMENT MANAGEMENT ACTIVITIES TOTAL
------------- ---------- ------------- --------

Income from loans and other investments:
Interest and related income ............................................ $ 38,246 $ -- $ -- $ 38,246
Less: Interest and related expenses .................................... (9,845) -- -- (9,845)
-------- ------- -------- --------
Income from loans and other
investments, net ..................................................... 28,401 -- -- 28,401
-------- ------- -------- --------
Other revenues:
Management and advisory fees ........................................... -- 11,259 (3,239) 8,020
Income/(loss) from equity investments in Funds ......................... 2,312 (786) -- 1,526
Other interest income .................................................. 29 185 (161) 53
-------- ------- -------- --------
Total other revenues.................................................. 2,341 10,658 (3,400) 9,599
-------- ------- -------- --------
Other expenses:
General and administrative ............................................. 3,214 10,106 -- 13,320
Management fees paid ................................................... 3,239 -- (3,239) --
Other interest expense ................................................. 161 -- (161) --
Depreciation and amortization 845 212 -- 1,057
-------- ------- -------- --------
Total other expenses.................................................. 7,459 10,318 (3,400) 14,377
-------- ------- -------- --------
Income before income taxes and
distributions and amortization on convertible trust preferred
securities ........................................................... 23,283 340 -- 23,623
Provision for income taxes .............................................. -- 646 -- 646
-------- ------- -------- --------
Income before distributions and
amortization on convertible trust preferred securities ............... 23,283 (306) -- 22,977
Distributions and amortization on convertible trust preferred
securities ........................................................... 9,452 -- -- 9,452
------------- ---------- ------------- --------
Net income allocable to class A common stock ........................... $ 13,831 $ (306) $ -- $ 13,525
======== ======= ======== ========
Total Assets ........................................................... $387,727 $24,151 $(14,734) $397,144
======== ======= ======== ========

All revenues were generated from external sources within the United States.
The Investment Management segment earned fees of $3,239,000 for management of
the Balance Sheet Investment segment for the year ended December 31, 2003,
which is reflected as offsetting adjustments to other revenues and other
expenses in the Inter-Segment Activities column in the tables above.

Prior to January 1, 2003, we managed our operations as one segment;
therefore separate segment reporting is not presented for 2002 and 2001, as
the financial information for that segment is the same as the information in
the consolidated financial statements.

F-38

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

23. RISK FACTORS

Our assets are subject to various risks that can affect results, including
the level and volatility of prevailing interest rates and credit spreads,
adverse changes in general economic conditions and real estate markets, the
deterioration of credit quality of borrowers and the risks associated with the
ownership and operation of real estate. Any significant compression of the
spreads of the interest rates earned on interest-earning assets over the
interest rates paid on interest-bearing liabilities could have a material
adverse effect on our operating results as could adverse developments in the
availability of desirable loan and investment opportunities and the ability to
obtain and maintain targeted levels of leverage and borrowing costs. Adverse
changes in national and regional economic conditions, including acts of
terrorism, can have an effect on real estate values increasing the risk of
undercollateralization to the extent that the fair market value of properties
serving as collateral security for our assets are reduced. Numerous factors,
such as adverse changes in local market conditions, competition, increases in
operating expenses and uninsured losses, can affect a property owner's ability
to maintain or increase revenues to cover operating expenses and the debt
service on the property's financing and, consequently, lead to a deterioration
in credit quality or a loan default and reduce the value of our assets. In
addition, the yield to maturity on our CMBS assets are subject to the default
and loss experience on the underlying mortgage loans, as well as by the rate
and timing of payments of principal. If there are realized losses on the
underlying loans, we may not recover the full amount, or possibly, any of our
initial investment in the affected CMBS asset. To the extent there are
prepayments on the underlying mortgage loans as a result of refinancing at
lower rates, our CMBS assets may be retired substantially earlier than their
stated maturities leading to reinvestment in lower yielding assets. There can
be no assurance that our assets will not experience any of the foregoing risks
or that, as a result of any such experience, we will not suffer a reduced
return on investment or an investment loss.

24. SUMMARY OF QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following is a summary of the unaudited quarterly results of operations
for the years ended December 31, 2003, 2002 and 2001 (in thousands except per
share data):

MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------

2003
----
Revenues ..................................................................... $11,139 $10,652 $14,517 $ 11,537
Net income ................................................................... $ 2,545 $ 2,586 $ 4,786 $ 3,608
Net income per share of common stock:
Basic....................................................................... $ 0.46 $ 0.46 $ 0.74 $ 0.55
Diluted..................................................................... $ 0.46 $ 0.46 $ 0.66 $ 0.54
2002
----
Revenues ..................................................................... $13,886 $16,579 $16,843 $ 9,695
Net income ................................................................... $ 1,573 $ 1,117 $ 1,553 $(13,981)
Net income per share of common stock:
Basic $ 0.25 $ 0.18 $ 0.26 $ (2.53)
Diluted..................................................................... $ 0.24 $ 0.18 $ 0.25 $ (2.53)
2001
----
Revenues ..................................................................... $19,180 $19,849 $20,824 $ 18,807
Net income ................................................................... $ 1,724 $ 2,675 $ 2,899 $ 2,072
Preferred stock dividends .................................................... $ 404 $ 125 $ 77 $ --
Net income per share of common stock:
Basic....................................................................... $ 0.18 $ 0.38 $ 0.44 $ 0.33
Diluted..................................................................... $ 0.18 $ 0.30 $ 0.34 $ 0.29

F-39

CAPITAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

MARCH 31, 2004 AND DECEMBER 31, 2003
(IN THOUSANDS)

MARCH 31, DECEMBER 31,
2004 2003
--------- ------------
UNAUDITED AUDITED

ASSETS
Cash and cash equivalents ......................... $ 23,124 $ 8,738
Available-for-sale securities, at fair value ...... 16,801 20,052
Commercial mortgage-backed securities available-
for-sale, at fair value........................... 199,784 158,136
Loans receivable, net of $6,672 reserve for
possible credit losses at March 31, 2004 and
December 31, 2003................................. 190,806 177,049
Equity investment in CT Mezzanine Partners I LLC
("Fund I"), CT Mezzanine Partners II LP
("Fund II"), CT MP II LLC ("Fund II GP")
and CT Mezzanine Partners III, Inc.
("Fund III") (together "Funds")................... 21,967 21,988
Deposits and other receivables .................... 5 345
Accrued interest receivable ....................... 3,425 3,834
Interest rate hedge assets ........................ -- 168
Deferred income taxes ............................ 4,181 3,369
Prepaid and other assets .......................... 5,710 6,247
-------- --------
Total assets ....................................... $465,803 $399,926
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses ............. $ 8,637 $ 11,041
Credit facilities ................................. 64,700 38,868
Term redeemable securities contract ............... - 11,651
Repurchase obligations ............................ 194,333 146,894
Step up convertible junior subordinated debentures 92,367 92,248
Deferred origination fees and other revenue ....... 2,832 3,207
Interest rate hedge liabilities ................... 3,297 --
-------- --------
Total liabilities .................................. 366,166 303,909
-------- --------
Shareholders' equity:
Class A common stock, $0.01 par value, 100,000
shares authorized, 6,572 and 6,502 shares
issued and outstanding at March 31, 2004 and
December 31, 2003, respectively ("class A
common stock").................................... 66 65
Restricted class A common stock, $0.01 par value,
64 and 34 shares issued and outstanding at
March 31, 2004 and December 31, 2003,
respectively ("restricted class A common stock"
and together with class A common stock, "common
stock")........................................... 1 --
Additional paid-in capital ........................ 143,359 141,402
Unearned compensation ............................. (1,371) (247)
Accumulated other comprehensive loss .............. (31,190) (33,880)
Accumulated deficit ............................... (11,228) (11,323)
-------- --------
Total shareholders' equity ......................... 99,637 96,017
-------- --------
Total liabilities and shareholders' equity ......... $465,803 $399,926
======== ========

See accompanying notes to unaudited consolidated financial statements.

F-40

CAPITAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

2004 2003
---------- ----------

Income from loans and other investments:
Interest and related income ........................ $ 9,018 $ 9,029
Less: Interest and related expenses on secured debt 2,636 2,295
Less: Interest and related expenses on step up
convertible junior subordinated debentures ....... 2,433 2,433
---------- ----------
Income from loans and other investments, net...... 3,949 4,301
---------- ----------
Other revenues:
Management and advisory fees from Funds 2,084 1,376
Income/(loss) from equity investments in Funds ..... 394 785
Other interest income .............................. 8 19
---------- ----------
Total other revenues.............................. 2,486 2,180
---------- ----------
Other expenses:
General and administrative ......................... 2,938 3,704
Depreciation and amortization ...................... 274 232
Provision for/(recapture of) allowance for possible
credit losses .................................... -- --
---------- ----------
Total other expenses.............................. 3,212 3,936
---------- ----------
Income before income ............................... 3,223 2,545
Provision for income taxes ......................... 141 --
---------- ----------
Net income allocable to common stock ................ $ 3,082 $ 2,545
========== ==========
Per share information:
Net earnings per share of common stock
Basic............................................. $ 0.47 $ 0.46
========== ==========
Diluted .......................................... $ 0.46 $ 0.46
========== ==========
Weighted average shares of common stock outstanding
Basic............................................. 6,583,412 5,515,484
========== ==========
Diluted........................................... 6,730,074 5,539,446
========== ==========
Dividends declared per share of common stock ........ $ 0.45 $ 0.45
========== ==========

See accompanying notes to unaudited consolidated financial statements.

F-41

CAPITAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2004, AND 2003
(IN THOUSANDS)
(UNAUDITED)

RESTRICTED ACCUMULATED
CLASS A CLASS A ADDITIONAL OTHER
COMPREHENSIVE COMMON COMMON PAID-IN UNEARNED COMPREHENSIVE ACCUMULATED
INCOME/(LOSS) STOCK STOCK CAPITAL COMPENSATION INCOME/(LOSS) DEFICIT TOTAL
------------- ---------- ------- ---------- ------------ ------------- ----------- -------

Balance at
January 1, 2003 ... $ 162 $ 3 $126,809 $ (320) $(28,988) $(13,610) $84,056
Net income ......... $ 2,545 -- -- -- -- -- 2,545 2,545
Unrealized loss on
derivative
financial
instruments ....... (436) -- -- -- -- (436) -- (436)
Unrealized loss on
available-for-sale
securities ........ (342) -- -- -- -- (342) -- (342)
Sale of shares of
class A common
stock under stock
option agreement .. -- -- -- 4 -- -- -- 4
Cancellation of
restricted class A
common stock ...... -- -- -- (192) 192 -- -- --
Vesting of
restricted class A
common stock to
unrestricted class
A common stock .... -- 2 (2) -- -- -- -- --
Restricted class A
common stock
earned ............ -- -- -- -- 66 -- -- 66
Repurchase of
warrants to
purchase shares of
class A common
stock ............. -- -- -- (2,132) -- -- -- (2,132)
Repurchase and
retirement of
shares of class A
common stock
previously
outstanding ....... -- (2) -- (944) -- -- -- (946)
Dividends declared
on class A common
stock ............ -- -- -- -- -- -- (2,442) (2,442)
Shares redeemed in
one for three
reverse stock
split ............ -- (108) (1) 109 -- -- -- --
------- ----- --- -------- ------- -------- -------- -------
Balance at March 31,
2003 .............. $ 1,767 $ 54 $-- $123,654 $ (62) $(29,766) $(13,507) $80,373
======= ===== === ======== ======= ======== ======== =======
Balance at
January 1, 2004 ... $ 65 $-- $141,402 $ (247) $(33,880) $(11,323) $96,017
Net income ......... $ 3,082 -- -- -- -- -- 3,082 3,082
Unrealized loss on
derivative
financial
instruments ....... (3,465) -- -- -- -- (3,465) -- (3,465)
Unrealized gain on
available-for-sale
securities ........ 6,155 -- -- -- -- 6,155 -- 6,155
Issuance of
restricted class A
common stock ...... -- -- 1 1,199 (1,200) -- -- --
Sale of shares of
class A common
stock under stock
option agreement .. -- 1 -- 673 -- -- -- 674
Vesting of
restricted class A
common stock to
unrestricted class
A common stock .... -- -- -- -- -- -- -- --
Restricted class A
common stock
earned ............ -- -- -- -- 161 -- -- 161
Revaluation of
restricted class A
common stock ..... -- -- -- 85 (85) -- -- --
Dividends declared
on class A common
stock ............ -- -- -- -- -- -- (2,987) (2,987)
------- ----- --- -------- ------- -------- -------- -------
Balance at March 31,
2004 .............. $ 5,772 $ 66 $ 1 $143,359 $(1,371) $(31,190) $(11,228) $99,637
======= ===== === ======== ======= ======== ======== =======

See accompanying notes to unaudited consolidated financial statements.

F-42

CAPITAL TRUST, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(IN THOUSANDS)
(UNAUDITED)

2004 2003
--------- --------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................ $ 3,082 $ 2,545
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred income taxes................................ (812) (170)
Depreciation and amortization........................ 274 232
Loss/(income) from equity investments in Funds....... (394) (785)
Restricted class A common stock earned............... 161 66
Amortization of premiums and accretion of discounts
on loans and investments, net ..................... (380) (136)
Accretion of discounts and fees on convertible trust
preferred securities or convertible step up junior
subordinated debentures, net ....................... 119 119
Changes in assets and liabilities, net:
Deposits and other receivables....................... 340 407
Accrued interest receivable.......................... 410 4,235
Prepaid and other assets............................. 528 236
Deferred origination fees and other revenue.......... (375) (147)
Accounts payable and accrued expenses................ (2,451) (4,753)
--------- --------
Net cash provided by operating activities ............. 502 1,849
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of commercial mortgage-backed securities... (35,037) --
Principal collections on available-for-sale
securities ........................................ 3,157 18,046
Origination and purchase of loans receivable......... (32,500) --
Principal collections and proceeds from sale of loans
receivable ........................................ 18,761 28,902
Equity investments in Funds.......................... (1,200) (6,216)
Return of capital from Funds......................... 1,366 609
Purchase of remaining interest in Fund I............. -- (19,946)
Purchases of equipment and leasehold improvements.... (16) (2)
--------- --------
Net cash provided by (used in) investing activities ... (45,469) 21,393
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase obligations................. 54,596 134
Repayment of repurchase obligations.................. (7,157) (19,695)
Proceeds from credit facilities...................... 39,500 21,000
Repayment of credit facilities....................... (13,668) (40,617)
Proceeds from term redeemable securities contract.... -- 20,000
Repayment of term redeemable securities contract..... (11,651) --
Dividends paid on class A common stock............... (2,941) --
Sale of shares of class A common stock under stock
option agreement .................................. 674 4
Repurchase and retirement of shares of class A common
stock previously outstanding ...................... -- (946)
Repurchase of warrants to purchase shares of class A
common stock ...................................... -- (2,132)
--------- --------
Net cash provided by (used in) financing activities ... 59,353 (22,252)
--------- --------
Net increase (decrease) in cash and cash equivalents ... 14,386 990
Cash and cash equivalents at beginning of year ......... 8,738 10,186
--------- --------
Cash and cash equivalents at end of period ............. $ 23,124 $ 11,176
========= ========

See accompanying notes to unaudited consolidated financial statements.

F-43

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

1. PRESENTATION OF FINANCIAL INFORMATION

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

We are a finance and investment management company that specializes in
originating and managing credit sensitive structured financial products. We
make, for our own account and as investment manager for the account of funds
under management, loans and debt-related investments in various types of
commercial real estate assets and operating companies.

The accompanying unaudited consolidated interim financial statements have
been prepared in accordance with accounting principles generally accepted in
the United States for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States for complete financial statements. The
accompanying unaudited consolidated interim financial statements should be
read in conjunction with the financial statements and the related management's
discussion and analysis of financial condition and results of operations filed
with our Annual Report on Form 10-K for the fiscal year ended December 31,
2003. In our opinion, all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair presentation have been included. The
results of operations for the three months ended March 31, 2004, are not
necessarily indicative of results that may be expected for the entire year
ending December 31, 2004.

The accompanying unaudited consolidated interim financial statements include
our accounts and our wholly-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation. Our
accounting and reporting policies conform in all material respects to
accounting principles generally accepted in the United States. Certain prior
period amounts have been reclassified to conform to current period
classifications.

2. APPLICATION OF NEW ACCOUNTING STANDARD

F-44

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

2. APPLICATION OF NEW ACCOUNTING STANDARD -- (CONTINUED)

reported as interest and related expenses on convertible junior subordinated
debentures and the income received from our investment in the common
securities is reported as a component of interest and related income. We have
elected to restate prior periods for the application of Interpretation 46R.
The restatement was effected by a cumulative type change in accounting
principle on January 1, 2002. There was no change to previously reported net
income as a result of such restatement.

3. USE OF ESTIMATES

4. AVAILABLE-FOR-SALE SECURITIES

At March 31, 2004, our available-for-sale securities consisted of the
following (in thousands):

GROSS
UNREALIZED
AMORTIZED -------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ----- ------ ----------

Federal Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due
September 1, 2031.................................................................... $ 2,229 $ 92 $-- $ 2,321
Federal Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due
September 1, 2031.................................................................... 6,533 218 -- 6,751
Federal Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due
September 1, 2031.................................................................... 451 18 -- 469
Federal Home Loan Mortgage Corporation Gold, fixed rate interest at 6.50%, due April 1,
2032................................................................................. 6,903 357 -- 7,260
------- ---- --- -------
$16,116 $685 $-- $16,801
======= ==== === =======

5. COMMERCIAL MORTGAGE-BACKED SECURITIES

During the quarter ended March 31, 2004, we purchased three investments in
two issues of commercial mortgage-backed securities. The securities had a face
value of $36,367,000 and were purchased at a discount for $35,037,000.

At March 31, 2004, we held twenty-one investments in fourteen separate
issues of commercial mortgage-backed securities with an aggregate face value
of $251,880,000 at March 31, 2004. $41,367,000 face value of the commercial
mortgage-backed securities earn interest at a variable rate which averages the
London Interbank Offered Rate, or LIBOR, plus 3.17% (4.26% at March 31, 2004).
The remaining commercial mortgage-backed securities, $210,512,000 face value,
earn interest at fixed rates averaging 7.70% of the face value. We purchased
the commercial mortgage-backed securities at discounts. As of March 31, 2004,
the remaining discount to be amortized into income over the remaining lives of
the securities was $23,517,000. At March 31, 2004, with discount amortization,
the commercial mortgage-backed securities earn interest at a blended rate of
8.51% of the face value less the unamortized discount. As of March 31, 2004,
the securities were carried at market value of $199,784,000, reflecting a
$28,578,000 unrealized loss to their amortized cost.

F-45

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. LOANS RECEIVABLE

At March 31, 2004 and December 31, 2003, the our loans receivable consisted
of the following (in thousands):

MARCH 31, DECEMBER 31,
2004 2003
--------- ------------

First mortgage loans ............................... $ 11,990 $ 12,672
Property mezzanine loans ........................... 116,838 106,449
B Notes ............................................ 68,650 64,600
-------- --------
197,478 183,721
Less: reserve for possible credit losses ........... (6,672) (6,672)
-------- --------
Total loans ....................................... $190,806 $177,049
======== ========

One first mortgage loan with an original principal balance of $8,000,000
reached maturity on July 15, 2001 and has not been repaid with respect to
principal and interest. In December 2002, the loan was written down to
$4,000,000 through a charge to the allowance for possible credit losses. Since
the December 2002 write-down, we received proceeds of $962,000 reducing the
carrying value of the loan to $3,038,000. In accordance with our policy for
revenue recognition, income recognition has been suspended on this loan and
for the three months ended March 31, 2004 and $225,000 of potential interest
income has not been recorded. All remaining loans are performing in accordance
with the terms of the loan agreements.

During the three months ended March 31, 2004, we purchased or originated one
property mezzanine loan for $23,500,000 and one B Note for $9,000,000,
received partial repayments on nine mortgage and property mezzanine loans
totaling $1,908,000 and one property mezzanine loan and one B Note totaling
$16,853,000 were satisfied and repaid. We have no outstanding loan commitments
at March 31, 2004.

At March 31, 2004, the weighted average interest rate in effect, including
amortization of fees and premiums, for our performing loans receivable were as
follows:

First mortgage loan ................................. 10.51%
Property mezzanine loans ............................ 9.11%
B Notes ............................................. 6.60%
Total Loans ....................................... 8.28%

At March 31, 2004, $145,527,000 (75%) of the aforementioned performing loans
bear interest at floating rates ranging from LIBOR plus 235 basis points to
LIBOR plus 900 basis points. The remaining $48,913,000 (25%) of loans bear
interest at a fixed rate of 11.67%.

7. LONG-TERM DEBT

CREDIT FACILITY

At March 31, 2004, we have borrowed $64,700,000 under a $150 million credit
facility at an average borrowing rate (including amortization of fees incurred
and capitalized) of 3.96%. We pledged assets of $115,974,000 as collateral for
the borrowing against such credit facility. On March 31, 2004, the unused
amount of potential credit under the remaining credit facility was
$85,300,000.

REPURCHASE OBLIGATIONS

At March 31, 2004, we were obligated to five counterparties under repurchase
agreements.

The repurchase obligation with the first counterparty, an affiliate of a
securities dealer, was utilized to finance commercial mortgage-backed
securities. At March 31, 2004, we have sold commercial mortgage-backed
securities with a book and market value of $189,154,000 and have a liability
to repurchase these assets for $118,709,000 that is non-recourse to us. This
repurchase obligation had an original one-year

F-46

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. LONG-TERM DEBT -- (CONTINUED)

term that expired in February 2003 and was extended twice to February 2005.
The liability balance bears interest at specified rates over LIBOR based upon
each asset included in the obligation.

The repurchase obligation with the second counterparty, a securities dealer,
arose in connection with the purchase of Federal Home Loan Mortgage
Corporation Gold available-for-sale securities. At March 31, 2004, we have
sold such assets with a book and market value of $16,801,000 and have a
liability to repurchase these assets for $16,354,000. This repurchase
agreement comes due monthly and has a current maturity date in June 2004. The
liability balance bears interest at LIBOR.

The repurchase obligation with the third counterparty, a securities dealer,
was entered into on May 28, 2003 pursuant to the terms of a master repurchase
agreement and provides us with the right to finance up to $50,000,000, which
was upsized to $100,000,000 in August 2003, by selling specific assets to the
counterparty. Through March 31, 2004, the master repurchase agreement has been
utilized in connection with the purchase of five loans. At March 31, 2004, we
have sold loans with a book and market value of $53,141,000 and have a
liability to repurchase these assets for $33,944,000. The master repurchase
agreement terminates on June 1, 2004, with an automatic nine-month amortizing
extension option, if not otherwise extended, and bears interest at specified
rates over LIBOR based upon each asset included in the obligation.

The repurchase obligations with the fourth counterparty, a securities
dealer, were entered into during 2003 in connection with the purchase of
commercial mortgage-backed securities. At March 31, 2004, we have sold
commercial mortgage-backed securities with a book and market value of
$5,000,000 and have a liability to repurchase these assets for $4,250,000. The
repurchase agreements are matched to the term of the commercial mortgage-
backed securities, which have an extended maturity in August 2007, and bear
interest at specified rates over LIBOR based upon each asset included in the
obligation.

The repurchase obligation with the fifth counterparty, a securities dealer,
was entered into in connection with the purchase of two loans. At March 31,
2004, we have sold loans with a book and market value of $25,326,000 and have
a liability to repurchase these assets for $21,076,000. This repurchase
agreement comes due monthly and has a current maturity date in May 2004.

The average borrowing rate in effect for all the repurchase obligations
outstanding at March 31, 2004 was LIBOR plus 0.95% (2.04% at March 31, 2004).
Assuming no additional utilization under the repurchase obligations and
including the amortization of fees paid and capitalized over the term of the
repurchase obligations, the all-in effective borrowing cost was 2.44% at
March 31, 2004.

TERM REDEEMABLE SECURITIES CONTRACT

F-47

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

8. DERIVATIVE FINANCIAL INSTRUMENTS

The following table summarizes the notional value and fair value of our
derivative financial instruments at March 31, 2004. The notional value
provides an indication of the extent of our involvement in these instruments
at that time, but does not represent exposure to credit, interest rate or
foreign exchange market risks.

INTEREST
HEDGE TYPE NOTIONAL VALUE RATE MATURITY FAIR VALUE
----- --------------- -------------- -------- -------- -----------

Swap..................................................... Cash Flow Hedge $85,000,000 4.2425% 2015 $(2,584,000)
Swap..................................................... Cash Flow Hedge 24,000,000 4.2325% 2015 (713,000)

On March 31, 2004, the derivative financial instruments were reported at
their fair value as interest rate hedge liabilities of $3,297,000.

9. EARNINGS PER SHARE

The following table sets forth the calculation of Basic and Diluted EPS:

THREE MONTHS ENDED MARCH 31, 2004 THREE MONTHS ENDED MARCH 31, 2003
----------------------------------- -----------------------------------
PER SHARE PER SHARE
NET INCOME SHARES AMOUNT NET LOSS SHARES AMOUNT
---------- --------- --------- ---------- --------- ---------

Basic EPS:
Net earnings per share of common stock .............. $3,082,000 6,583,412 $0.47 $2,545,000 5,515,484 $0.46
===== =====
Effect of Dilutive Securities
Options outstanding for the purchase of common stock . -- 120,560 -- 23,962
Stock units outstanding convertible to shares of
common stock........................................ -- 26,102 -- --
---------- --------- ---------- ---------
Diluted EPS:
Net earnings per share of common stock and
assumed conversions................................ $3,082,000 6,730,074 $0.46 $2,545,000 5,539,446 $0.46
========== ========= ===== ========== ========= =====

10. INCOME TAXES

We intend to make an election to be taxed as a Real Estate Investment Trust,
or REIT, under Section 856(c) of the Internal Revenue Code commencing with the
tax year ending December 31, 2003. As a REIT, we generally are not subject to
federal income tax. To maintain qualification as a REIT, we must distribute at
least 90% of our REIT taxable income to our shareholders and meet certain
other requirements. If we fail to qualify as a REIT in any taxable year, we
will be subject to federal income tax on our taxable income at regular
corporate rates. We may also be subject to certain state and local taxes on
our income and property. Under certain circumstances, federal income and
excise taxes may be due on our undistributed taxable income. At March 31,
2004, we were in compliance with all REIT requirements.

During the three months ended March 31, 2004, we recorded $141,000 of income
tax expense for income that was attributable to taxable REIT subsidiaries. Our
effective tax rate for the year ended December 31, 2003 attributable to our
taxable REIT subsidiaries was 48.1%. The difference between the U.S. federal
statutory tax rate of 35% and the effective tax rate was primarily state and
local taxes, net of federal tax benefit.

F-48

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. COMMITMENTS AND CONTINGENCIES

John R. Klopp serves as our chief executive officer and president pursuant
to an employment agreement entered into on July 15, 1997, which will terminate
effective July 15, 2004, the effective date of his new employment agreement
that was entered into as of February 24, 2004. The new employment agreement
provides for Mr. Klopp's employment through December 31, 2008 (subject to
earlier termination under certain circumstances).

Under the new employment agreement, Mr. Klopp will receive a base salary and
is eligible to receive annual performance compensation awards of cash and
restricted shares of common stock. In addition, as of the effective date of
the new agreement, Mr. Klopp will receive an initial award of 218,818 shares
of restricted class A common stock which vest over the term of the contract
and a performance compensation award tied to the amount of cash we receive, if
any, as incentive management fees from CT Mezzanine Partners III, Inc. The
agreement provides for severance payments under certain circumstances and
contains provisions relating to non-competition during the term of employment,
protection of our confidential information and intellectual property, and non-
solicitation of our employees, which provisions extend for 24 months following
termination in certain circumstances.

12. DIVIDENDS

In order to maintain its election to qualify as a REIT, we must currently
distribute, at a minimum, an amount equal to 90% of its REIT taxable income
and must distribute 100% of its REIT taxable income to avoid paying corporate
federal income taxes. We expect to distribute all of our REIT taxable income
to our shareholders. Because REIT taxable income differs from cash flow from
operations due to non-cash revenues or expenses, in certain circumstances, we
may be required to borrow to make sufficient dividend payments to meet this
anticipated dividend threshold.

On March 19, 2004, we declared a dividend of approximately $2,986,000, or
$0.45 per share of common stock applicable to the three-month period ended
March 31, 2004, payable on April 15, 2004 to shareholders of record on
March 31, 2004.

13. EMPLOYEE BENEFIT PLANS

1997 LONG-TERM INCENTIVE STOCK PLAN

During the three months ended March 31, 2004, we did not issue any options
to acquire shares of class A common stock. In the first quarter of 2004 we
issued 17,500 shares of restricted stock. The shares of restricted stock
issued in 2004 are split into two grants. One-half of the shares issued in
2004 vest one-third on each of the following dates: February 1, 2005,
February 1, 2006 and February 1, 2007. The remaining one-half are performance
based and vest on February 1, 2008 if the total return to shareholders exceeds
13% during the period from January 1, 2004 to December 31, 2007.

The following table summarizes the option activity under the incentive stock
plan for the quarter ended March 31, 2004:

WEIGHTED
OPTIONS EXERCISE PRICE AVERAGE EXERCISE
OUTSTANDING PER SHARE PRICE PER SHARE
----------- ----------------- ----------------

Outstanding at January 1, 2004................ 517,468 $12.375 -- $30.00 $19.09
Granted in 2004.............................. -- -- --
Exercised in 2004............................ (47,522) $12.375 -- $18.00 14.16
Canceled in 2004............................. (1,668) $ 15.00 -- $15.90 15.30
------- ------
Outstanding at March 31, 2004................. 468,278 $12.375 -- $30.00 $19.60
======= ======

F-49

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

13. EMPLOYEE BENEFIT PLANS -- (CONTINUED)

At March 31, 2004, 430,884 of the options are exercisable. At March 31,
2004, the outstanding options have various remaining contractual exercise
periods ranging from 1.75 to 7.85 years with a weighted average life of 5.24
years.

14. SUPPLEMENTAL DISCLOSURES FOR CONSOLIDATED STATEMENTS OF CASH FLOWS

Interest paid on our outstanding debt and convertible junior subordinated
debentures during the three months ended March 31, 2004 and 2003 was
$4,812,000 and $4,716,000, respectively. We paid income taxes during the three
months ended March 31, 2004 and 2003 of $113,000 and $1,193,000, respectively.

15. SEGMENT REPORTING

We have established two reportable segments beginning January 1, 2003. We
have an internal information system that produces performance and asset data
for our two segments along service lines.

The Balance Sheet Investment segment includes all of our activities related
to direct loan and investment activities (including direct investments in
Funds) and the financing thereof.

F-50

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15. SEGMENT REPORTING -- (CONTINUED)

The following table details each segment's contribution to our overall
profitability and the identified assets attributable to each such segment for
the three months ended and as of March 31, 2004, respectively (in thousands):

BALANCE SHEET INVESTMENT INTER-SEGMENT
INVESTMENT MANAGEMENT ACTIVITIES TOTAL
------------- ---------- ------------- --------

Income from loans and other investments:
Interest and related income ............................................ $ 9,018 $ -- $ -- $ 9,018
Less: Interest and related expenses on credit facilities, term
redeemable securities contract and repurchase obligations............. 2,636 -- -- 2,636
Less: Interest and related expenses on convertible junior subordinated
debentures............................................................ 2,433 -- -- 2,433
-------- ------- ------- --------
Income from loans and other investments, net.......................... 3,949 -- -- 3,949
-------- ------- ------- --------
Other revenues:
Management and advisory fees ........................................... -- 2,779 (695) 2,084
Income/(loss) from equity investments in Funds ......................... 487 (93) -- 394
Other interest income .................................................. 4 109 (105) 8
-------- ------- ------- --------
Total other revenues.................................................. 491 2,795 (800) 2,486
-------- ------- ------- --------
Other expenses:
General and administrative ............................................. 1,194 2,439 (695) 2,938
Other interest expense ................................................. 105 -- (105) --
Depreciation and amortization .......................................... 211 63 -- 274
-------- ------- ------- --------
Total other expenses.................................................. 1,510 2,502 (800) 3,212
-------- ------- ------- --------
Income before income taxes ............................................ 2,930 293 -- 3,223
Provision for income taxes .............................................. -- 141 -- 141
-------- ------- ------- --------
Net income allocable to class A common stock ........................... $ 2,930 $ 152 $ -- $ 3,082
======== ======= ======= ========
Total Assets ........................................................... $452,682 $19,370 $(6,249) $465,803
======== ======= ======= ========

All revenues were generated from external sources within the United States.
The Balance Sheet Investment segment paid the Investment Management segment
fees of $695,000 for management of the segment and $105,000 for inter-segment
interest, which is reflected as offsetting adjustments to other revenues and
other expenses in the Inter-Segment Activities column in the table above.

F-51

CAPITAL TRUST, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

15. SEGMENT REPORTING -- (CONTINUED)

The following table details each segment's contribution to our overall
profitability attributable to each such segment for the three months ended
March 31, 2003 (in thousands):

BALANCE SHEET INVESTMENT INTER-SEGMENT
INVESTMENT MANAGEMENT ACTIVITIES TOTAL
------------- ---------- ------------- ------

Income from loans and other investments:
Interest and related income .............................................. $9,029 $ -- $ -- $9,029
Less: Interest and related expenses on credit facilities, term redeemable
securities contract and repurchase obligations.......................... 2,295 -- -- 2,295
Less: Interest and related expenses on convertible junior subordinated
debentures.............................................................. 2,433 -- -- 2,433
------ ------ ------- ------
Income from loans and other investments, net............................ 4,301 -- -- 4,301
------ ------ ------- ------
Other revenues:
Management and advisory fees ............................................. -- 2,535 (1,159) 1,376
Income/(loss) from equity investments in Funds ........................... 731 54 -- 785
Other interest income .................................................... 11 8 -- 19
------ ------ ------- ------
Total other revenues.................................................... 742 2,597 (1,159) 2,180
------ ------ ------- ------
Other expenses:
General and administrative ............................................... 1,941 2,922 (1,159) 3,704
Depreciation and amortization ............................................ 199 33 -- 232
------ ------ ------- ------
Total other expenses.................................................... 2,140 2,955 (1,159) 3,936
------ ------ ------- ------
Income before income taxes .............................................. 2,903 (358) -- 2,545
Provision for income taxes ................................................ -- -- -- --
------ ------ ------- ------
Net income allocable to class A common stock ............................. $2,903 $ (358) $ -- $2,545
====== ====== ======= ======

All revenues were generated from external sources within the United States.
The Balance Sheet segment paid the Investment Management segment fees of
$1,159,000 for management of the segment, which is reflected as offsetting
adjustments to other revenues and other expenses in the Inter-Segment
Activities column in the table above.

16. SUBSEQUENT EVENT

On May 11, 2004, we closed on the initial tranche of a direct public
offering of our class A common stock and stock purchase warrants to designated
controlled affiliates of W. R. Berkley Corporation. We issued 1,310,000 shares
of our class A common stock and warrants to purchase an additional 365,000
shares for a total purchase price of $30,654,000. The warrants have an
exercise price of $23.40 per share and expire on December 31, 2004. On June 21,
2004, we closed on the second tranche of the direct public offering and issued
an additional 325,000 shares of class A common stock for a total purchase
price of $7,605,000.

F-52

PROSPECTUS

$300,000,000

CAPITAL TRUST, INC.

Class A Common Stock, Preferred Stock, Debt Securities and Warrants

We may offer by this prospectus:

o Class A common stock

o Preferred stock

o Debt securities

o Warrants to purchase class A common stock

o Warrants to purchase preferred stock

We will provide the specific terms of these securities in supplements to
this prospectus when we offer these securities. You should read this
prospectus and the supplements carefully before you invest.

Our class A common stock is listed for trading on the New York Stock
Exchange under the symbol "CT."

INVESTING IN THE SECURITIES COVERED BY THIS PROSPECTUS INVOLVES RISKS. SEE
"RISK FACTORS" BEGINNING ON PAGE 5.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

THIS PROSPECTUS MAY NOT BE USED TO SELL SECURITIES UNLESS ACCOMPANIED BY A
PROSPECTUS SUPPLEMENT.

The date of this prospectus is December 29, 2003

You should rely only on the information contained or incorporated by
reference in this prospectus. We have not authorized anyone to provide you
with information different from that contained or incorporated by reference in
this prospectus. The information contained or incorporated by reference in
this prospectus is accurate only as of the date of this prospectus, regardless
of the time of delivery of this prospectus or any sale of securities covered
by this prospectus.

Unless the context otherwise indicates, references in this prospectus to
"we," "us," "our" or "Capital Trust" refer to Capital Trust, Inc., a Maryland
corporation.

TABLE OF CONTENTS

PAGE
----

Prospectus Summary ...................................................... 1
Risk Factors ............................................................ 5
Use of Proceeds ......................................................... 16
Price Range of Class A Common Stock ..................................... 16
Dividend Policy ......................................................... 17
Ratio of Earnings to Fixed Charges ...................................... 17
Selected Financial Data ................................................. 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations ........................................................... 20
Business ................................................................ 37
Management .............................................................. 42
Principal Shareholders .................................................. 45
Description of Capital Stock ............................................ 47
Description of Debt Securities .......................................... 54
Federal Income Tax Considerations ....................................... 59
Plan of Distribution .................................................... 72
Legal Matters ........................................................... 74
Experts ................................................................. 74
About this Prospectus ................................................... 74
Where You Can Find More Information ..................................... 74

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, including the information incorporated into it by
reference, includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements predict or describe our future
operations, our business plans and strategies and the performance of our
investments and funds under management, and do not relate solely to historical
matters. You can generally identify forward-looking statements by the use of
words such as "believes," "expects," "may," "will," "should," "could,"
"seeks," "approximately," "intends," "plans," "objectives," "estimates,"
"anticipates," "continue" and similar words. Because these statements reflect
our current views concerning future events and are based on current
assumptions, they involve risks, uncertainties and other factors which may
lead to actual results or effects that are materially different from those
contemplated in the forward-looking statements. Some, but not all, of the
factors that may cause these differences are discussed in the "Risk Factors"
section of this prospectus and in other information incorporated by reference
into this prospectus.

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We caution you not to place undue
reliance on these forward-looking statements. All written and oral forward-
looking statements attributable to us or persons acting on our behalf are
qualified in their entirety by these cautionary statements. Moreover, unless
we are required by law to update these statements, we will not necessarily
update any of these statements after the date of this prospectus, either to
conform them to actual results or to changes in our expectations.

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all the information that you should consider
before investing in our securities. This prospectus contains forward-looking
statements that involve risks and uncertainties. Our actual results could
differ materially from the results anticipated in these forward-looking
statements. You should read the entire prospectus carefully, including the
risk factors and financial statements.

The per share information presented in this prospectus has been adjusted to
give effect to the one for three reverse stock split of our outstanding shares
of class A common stock effected on April 2, 2003 as though the reverse stock
split was in effect for all periods presented.

OUR COMPANY

Since we commenced our finance business in 1997, we have completed $3.2
billion of real estate-related investments in 110 separate transactions. Our
investment strategies are designed to generate high current returns coupled
with substantial downside protection. We implement these strategies by
applying a disciplined, rigorous process founded on four key elements:

o intense credit underwriting;

o creative financial structuring;

o efficient use of leverage; and

o aggressive asset management.

Our real estate investments take various forms, but generally are
subordinate to third-party financing and senior to the owner/operator's equity
position, and therefore represent "mezzanine" capital. Our current investment
programs emphasize mezzanine loans, junior interests in first mortgage loans,
known as B Notes, and subordinate tranches of commercial mortgage-backed
securities, known as CMBS. We employ leverage to enhance returns on equity,
but seek to minimize interest rate exposure by matching the duration and
interest rate index of our assets and liabilities and by using derivatives to
hedge risk. Our objective is to create leveraged portfolios of high-yield
structured investments that are diversified and interest rate neutral. Since
1997, approximately 60% of our investments have been fully realized and our
loss experience has totaled less than 1% of our investments.

We make investments both for our own balance sheet and for funds that we
manage on behalf of institutional and high net worth individual investors. As
of September 30, 2003, our balance sheet assets totaled $393 million,
comprised primarily of loans receivable, mortgage-backed securities and co-
investments in our managed funds. We currently manage two private equity
funds, CT Mezzanine Partners II LP and CT Mezzanine Partners III, Inc., which
we refer to as Fund II and Fund III, respectively. During its investment
period, which expired in April 2003, Fund II invested $1.2 billion in 40
separate transactions. As of September 30, 2003, Fund II had $608 million of
outstanding investments, all of which were performing. Fund III held its final
closing in August 2003, raising a total of $425 million of equity commitments.
With leverage, we are seeking to make over $1 billion of investments for Fund
III during its two-year investment period that expires in June 2005. Our
balance sheet investments generate net interest income, while our investment
management activity produces co-investment income, base management fees, and,
if certain profit thresholds are exceeded, incentive management fees
representing our share of the fund's profits.

Our business strategy is to continue to grow our balance sheet investments
and our third-party assets under management. We are a recognized leader in the
commercial real estate mezzanine sector and are

actively seeking to expand our franchise by adding complementary investment
strategies which leverage our core skills in credit underwriting and financial
structuring.

SUMMARY FINANCIAL DATA

The following table sets forth our summary consolidated financial data:

o as of and for each of the nine month periods ended September 30, 2003 and
2002; and

o as of and for each of the years ended December 31, 2002, 2001 and 2000.

The summary consolidated financial data as of and for each of the years
ended December 31, 2002, 2001 and 2000 was derived from our historical
consolidated financial statements included in our Annual Reports on Form 10-K
for the years ended December 31, 2002 and 2001. The following summary
historical consolidated financial data as of and for each of the nine month
periods ended September 30, 2003 and 2002 were derived from our unaudited
consolidated financial statements included in our Quarterly Report on Form 10-
Q for the nine months ended September 30, 2003, which, in the opinion of our
management, have been prepared on the same basis as our audited consolidated
financial statements and reflect all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of our results of
operations and financial position for such periods. Results for the nine month
periods ended September 30, 2003 and 2002 are not necessarily indicative of
results that may be expected for the entire year.

You should read the following information together with the information
contained under the captions "Risk Factors," "Ratio of Earnings to Fixed
Charges," "Selected Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements and the notes thereto incorporated by reference into this
prospectus.

NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- -----------------
2002 2001 2000 2003 2002
-------- ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

STATEMENT OF OPERATIONS DATA:
REVENUES:
Interest and investment income............................................... $ 47,207 $67,728 $88,433 $29,430 $38,095
Income/(loss) from equity investments in affiliated Funds.................... (2,534) 2,991 1,530 1,085 (618)
Advisory and investment banking fees......................................... 2,207 277 3,920 -- 2,207
Management and advisory fees from Funds...................................... 10,123 7,664 373 5,793 7,624
-------- ------- ------- ------- -------
Total revenues.............................................................. 57,003 78,660 94,256 36,308 47,308
-------- ------- ------- ------- -------
OPERATING EXPENSES AND OTHER SOURCES OF CHARGES TO INCOME:
Interest expense............................................................. 17,992 26,348 36,931 7,369 14,043
General and administrative expenses.......................................... 13,996 15,382 15,439 10,497 11,390
Depreciation and amortization................................................ 992 909 902 781 744
Net unrealized (gain)/loss on derivative securities and corresponding hedged
risk on CMBS Securities.................................................... (21,134) 542 -- -- 2,776
Net realized (gain)/loss on sale of fixed assets, investments and settlement
of derivative securities................................................... 28,715 -- 64 -- (1,651)
Provision for/(recapture of) allowance for possible credit losses............ (4,713) 748 5,478 -- (2,963)
-------- ------- ------- ------- -------
Total operating expenses and other sources of changes
to income................................................................. 35,848 43,929 58,814 18,647 24,339
-------- ------- ------- ------- -------
Income/loss before income tax expense and distributions and amortization on
Convertible Trust Preferred Securities..................................... 21,155 34,731 35,442 17,661 22,969
Income tax expense........................................................... 22,438 16,882 17,760 655 11,540
-------- ------- ------- ------- -------
Income/(loss) before distributions and amortization on Convertible Trust
Preferred Securities....................................................... (1,283) 17,849 17,682 17,006 11,429
Distributions and amortization on Convertible Trust Preferred Securities, net
of income tax benefit...................................................... 8,455 8,479 7,921 7,089 7,186
-------- ------- ------- ------- -------
NET INCOME/(LOSS)........................................................... (9,738) 9,370 9,761 9,917 4,243
Less: Preferred Stock dividend and dividend
requirement............................................................... -- 606 1,615 -- --
-------- ------- ------- ------- -------
Net income/(loss) allocable to class A common stock......................... $ (9,738) $ 8,764 $ 8,146 9,917 4,243
======== ======= ======= ======= =======
PER SHARE INFORMATION:
Net income/(loss) per share of class A common stock:
Basic....................................................................... $ (1.62) $ 1.30 $ 1.05 $ 1.69 $ 0.69
======== ======= ======= ======= =======
Diluted:.................................................................... $ (1.62) $ 1.12 $ 0.99 $ 1.67 $ 0.68
======== ======= ======= ======= =======
Weighted average shares of class A common stock outstanding:
Basic....................................................................... 6,009 6,722 7,724 5,859 6,174
======== ======= ======= ======= =======
Diluted:.................................................................... 6,009 12,041 9,897 10,183 6,243
======== ======= ======= ======= =======

AS OF DECEMBER 31, AS OF SEPTEMBER 30,
------------------------------- -------------------
2002 2001 2000 2003 2002
-------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)

BALANCE SHEET DATA:
Total assets............................................................. $384,976 $678,800 $644,392 $392,766 $440,396
Total liabilities........................................................ 211,932 428,231 338,584 206,013 250,196
Convertible Trust Preferred Securities................................... 88,988 147,941 147,142 89,346 88,869
Shareholders' equity..................................................... 84,056 102,628 158,666 97,407 101,331

OTHER DATA:

NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------
2002 2001 2000 1999 1998 2003 2002
----- ----- ----- ----- ----- ----- -----
(UNAUDITED)

Ratio of Earnings to Fixed Charges..................................... 1.63x 1.80x 1.64x 1.80x 1.66x 2.22x 1.94x

RISK FACTORS

An investment in our securities involves various risks. You should carefully
consider the following risk factors in conjunction with the other information
contained and incorporated by reference into this prospectus before purchasing
our securities. If any of the risks discussed in this prospectus actually
occur, our business, operating results, prospects and/or financial condition
could be harmed. This could cause the market prices of our securities to
decline and could cause you to lose all or part of your investment.

In connection with the forward-looking statements that appear in this
prospectus, you should also carefully review the cautionary statement referred
to under "Cautionary Statement Regarding Forward-Looking Statements."

RISKS RELATED TO OUR INVESTMENT PROGRAM

OUR EXISTING LOANS AND INVESTMENTS EXPOSE US TO A HIGH DEGREE OF RISK
ASSOCIATED WITH INVESTING IN COMMERCIAL REAL ESTATE-RELATED ASSETS.

Real estate historically has experienced significant fluctuations and cycles
in value that may result in reductions in the value of real estate-related
investments. The performance and value of our loans and investments once
originated or acquired by us depends on many factors beyond our control. The
ultimate performance and value of our investments is subject to the varying
degrees of risk generally incident to the ownership and operation of the
commercial properties which collateralize or support our investments. The
ultimate performance and value of our loans and investments depends upon the
commercial property owner's ability to operate the property so that it
produces the revenues and cash flows needed to pay the interest and principal
due to us on our loans and investments. Revenues and cash flows may be
adversely affected by:

o changes in national economic conditions,

o changes in local real estate market conditions due to changes in national
or local economic conditions or changes in neighborhood characteristics,

o competition from other properties offering the same or similar services,

o changes in interest rates and in the availability of mortgage financing,

o the impact of present or future environmental legislation and compliance
with environmental laws,

o the ongoing need for capital improvements, particularly in older
structures,

o changes in real estate tax rates and other operating expenses,

o adverse changes in zoning laws, and

o other factors that are beyond our control and the control of the
commercial property owners.

WE MAY CHANGE OUR INVESTMENT STRATEGY WITHOUT SHAREHOLDER CONSENT WHICH MAY
RESULT IN RISKIER INVESTMENTS THAN OUR CURRENT INVESTMENTS.

As part of our strategy, we may seek to expand our investment activities
beyond real estate-related investments. We may change our investment strategy
at any time without the consent of our shareholders, which could result in our
making investments that are different from, and possibly riskier than, our
current real estate investments. New investments we may make outside of our
area of expertise may not perform as well as our current portfolio of real
estate investments.

WE ARE EXPOSED TO THE RISKS INVOLVED WITH MAKING SUBORDINATED INVESTMENTS.

Our investments involve the additional risks attendant to investments
consisting of subordinated loan positions. In many cases, management of our
investments and our remedies with respect thereto, including the ability to
foreclose on or direct decisions with respect to the collateral securing such
investments, is subject to the rights of senior lenders and the rights set
forth in inter-creditor or servicing agreements.

WE MAY NOT BE ABLE TO OBTAIN THE LEVEL OF LEVERAGE NECESSARY TO OPTIMIZE OUR
RETURN ON INVESTMENT. IF WE DO INCUR SIGNIFICANT LEVERAGE, WE WILL BE SUBJECT
TO THE RISKS OF HOLDING LEVERAGED INVESTMENTS.

Our return on investment depends, in part, upon our ability to grow our
balance sheet portfolio of invested assets and those of our funds through the
use of leverage obtained generally through bank credit facilities, repurchase
agreements and other borrowings. Our ability to obtain the necessary leverage
on attractive terms ultimately depends upon the quality of pledgable portfolio
assets and our ability to maintain interest coverage ratios meeting prevailing
market underwriting standards which vary according to lenders' assessments of
our and our funds' creditworthiness and the terms of the borrowings. The
failure to obtain and/or maintain leverage at desired levels, or to obtain
leverage on attractive terms, could have a material adverse effect on our and
our funds' performance. Moreover, we are dependent upon a few lenders to
provide the primary credit facilities for our origination or acquisition of
loans and investments.

Leverage creates an opportunity for increased net income, but at the same
time creates other risks. For example, leveraging magnifies changes in the net
worth of our funds. We expect that we and our funds will leverage assets only
when there is an expectation that leverage will enhance returns, although we
cannot assure you that the use of leverage will prove to be beneficial. Where
pledged assets are marked-to-market, a decline in market value may require us
to pledge additional collateral to secure our borrowings. Moreover, we cannot
assure you that we and our funds will be able to meet debt service obligations
and, to the extent such obligations are not met, there is a risk of loss of
some or all of our and their assets through foreclosure or a financial loss if
we or they are required to liquidate assets at a commercially inopportune time
to satisfy our debt obligations.

OUR SUCCESS DEPENDS ON THE AVAILABILITY OF ATTRACTIVE INVESTMENTS AND OUR
ABILITY TO IDENTIFY, STRUCTURE, CONSUMMATE, MANAGE AND REALIZE RETURNS ON
ATTRACTIVE INVESTMENTS.

Our operating results are dependent upon the availability of, as well as our
ability to identify, structure, consummate, manage and realize returns on,
credit-sensitive investment opportunities. In addition, notwithstanding the
fact that we earn base management fees based upon committed capital during the
investment period, if we are not successful in investing all available equity
capital for our funds, it will reduce the potential revenues we earn including
base management fees that are charged on the amount of invested assets after
the investment period and incentive management fees. We may expend significant
time and resources in identifying and consummating targeted investments.

In general, the availability of desirable credit sensitive investment
opportunities, and consequently our balance sheet returns and our funds'
investment returns, will be affected by the level and volatility of interest
rates, by conditions in the financial markets, by general economic conditions
and by the market and demand for credit-sensitive investment opportunities. We
cannot assure you that we will be successful in identifying and consummating
investments which satisfy our rate of return objectives or that such
investments, once consummated, will perform as anticipated.

THE REAL ESTATE INVESTMENT BUSINESS IS HIGHLY COMPETITIVE. OUR SUCCESS DEPENDS
ON OUR ABILITY TO COMPETE WITH OTHER PROVIDERS OF CAPITAL FOR REAL ESTATE
INVESTMENTS.

Our business is highly competitive. We compete for attractive investments
with traditional lending sources, such as insurance companies and banks, as
well as private equity funds with similar investment objectives sponsored by
other firms, which may make it more difficult for us to consummate our target
investments. In recent years, other REITs have also begun offering loans and
other investments that compete with our products. Many of our competitors have
greater financial resources than us, which provides them with greater
operating flexibility.

OUR LOANS AND INVESTMENTS MAY BE SUBJECT TO FLUCTUATIONS IN INTEREST RATES
WHICH MAY NOT BE ADEQUATELY PROTECTED, OR PROTECTED AT ALL, BY OUR HEDGING
STRATEGIES.

Our current investment program emphasizes loans with "floating" interest
rates to protect against fluctuations in interest rates. However, we do from
time to time make fixed rate loans and purchase fixed rate securities. In such
cases, we may employ various hedging strategies to limit the effects of
changes in interest rates, including engaging in interest rate swaps, caps,
floors and other interest rate exchange contracts. No strategy can completely
insulate us or our funds from the risks associated with interest rate changes
and there is a risk that they may provide no protection at all. Hedging
transactions involve certain additional risks such as the legal enforceability
of hedging contracts, the early repayment of hedged transactions and the risk
that unanticipated and significant changes in interest rates may cause a
significant loss of basis in the contract and a change in current period
expense. We cannot assure you that we will be able to enter into hedging
transactions or that such hedging transactions will adequately protect us or
the funds against the foregoing risks. In addition, cash flow hedges which are
not perfectly correlated with a variable rate financing will impact our
reported income as gains and losses on the ineffective portion of such hedges
will be recorded.

OUR LOANS AND INVESTMENTS MAY BE ILLIQUID WHICH WILL CONSTRAIN OUR ABILITY TO
VARY OUR PORTFOLIO OF INVESTMENTS.

Real estate investments are relatively illiquid. Such illiquidity may limit
our ability to vary our portfolio or our funds' portfolios of investments in
response to changes in economic and other conditions. Illiquidity may result
from the absence of an established market for investments as well as the legal
or contractual restrictions on their resale. In addition, illiquidity may
result from the decline in value of a property securing one of our or our
funds' investments. We cannot assure you that the fair market value of any of
the real property serving as security will not decrease in the future, leaving
our or our funds' investment under-collateralized or not collateralized at
all, which could impair the liquidity and value, as well as our return on such
investments.

WE MAY NOT HAVE CONTROL OVER CERTAIN OF OUR LOANS AND INVESTMENTS.

Our ability to manage our portfolio of loans and investments may be limited
by the form in which they are made. In certain situations, we or our funds
may:

o acquire investments subject to rights of senior classes and servicers
under inter-creditor or servicing agreements,

o acquire only a participation in an underlying investment,

o co-invest with third parties through partnerships, joint ventures or
other entities, thereby acquiring non-controlling interests, or

o rely on independent third party management or strategic partners with
respect to the management of an asset.

Therefore, we may not be able to exercise control over the loan or
investment. Such financial assets may involve risks not present in investments
where senior creditors, servicers or third party controlling investors are not
involved. Our rights to control the process following a borrower default may
be subject to the rights of senior creditors or servicers whose interests may
not be aligned with ours. A third party partner or co-venturer may have
financial difficulties resulting in a negative impact on such asset, may have
economic or business interests or goals which are inconsistent with ours and
those of our funds, or may be in a position to take action contrary to our or
our funds' investment objectives. In addition, we and our managed funds may,
in certain circumstances, be liable for the actions of our third party
partners or co-venturers.

WE MAY NOT ACHIEVE OUR TARGETED RATE OF RETURN ON OUR INVESTMENTS.

and timing of dispositions, including possible asset recovery and remediation
strategies, all of which are subject to significant uncertainty. In addition,
events or conditions that have not been anticipated may occur and may have a
significant effect on the actual rate of return received on an investment.

We are currently confronted with a low interest rate environment which
negatively impacts our ability to originate or acquire investments that
produce rates of returns similar to existing investments that were added to
our portfolio during a higher interest rate environment. As we acquire or
originate investments for our balance sheet portfolio, whether as new
additions or as replacements for maturing investments, there can be no
assurance that we will be able to originate or acquire investments that
produce rates of return comparable to rates on existing investments.

THE COMMERCIAL MORTGAGE AND MEZZANINE LOANS WE ORIGINATE OR ACQUIRE AND THE
COMMERCIAL MORTGAGE LOANS UNDERLYING THE CMBS IN WHICH WE INVEST ARE SUBJECT
TO DELINQUENCY, FORECLOSURE AND LOSS, WHICH COULD RESULT IN LOSSES TO US.

Our commercial mortgage and mezzanine loans are secured by commercial
property and are subject to risks of delinquency and foreclosure, and risks of
loss that are greater than similar risks associated with loans made on the
security of single-family residential property. The ability of a borrower to
repay a loan secured by an income-producing property typically is dependent
primarily upon the successful operation of 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, 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.

OUR INVESTMENTS IN SUBORDINATED CMBS ARE SUBJECT TO LOSSES.

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 mortgage-backed securities 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.

WE MAY INVEST IN TROUBLED ASSETS WHICH ARE SUBJECT TO A HIGHER DEGREE OF
FINANCIAL RISK.

We may make investments in non-performing or other troubled assets that
involve a higher degree of financial risk. We cannot assure you that our
investment objectives will be realized or that there will be any return on
investment. Furthermore, investments in properties operating in work-out modes
or under bankruptcy protection laws may, in certain circumstances, be subject
to additional potential liabilities that could exceed the value of an
investor's original investment, including equitable subordination and/or
disallowance of claims or lender liability.

THE IMPACT OF THE EVENTS OF SEPTEMBER 11, 2001 AND THE RESULTING EFFECT ON
TERRORISM INSURANCE EXPOSE US TO CERTAIN RISKS.

In addition, the events of September 11 created significant uncertainty
regarding the ability of real estate owners of high profile assets to obtain
insurance coverage protecting against terrorist attacks at commercially
reasonable rates, if at all. With the enactment of the Terrorism Risk
Insurance Act of 2002, insurers must make terrorism insurance available under
their property and casualty insurance policies through the end of 2004 (which
may be extended by the Secretary of the Treasury through the end of 2005), but
this legislation does not regulate the pricing of such insurance. The absence
of affordable insurance coverage may adversely affect the general real estate
lending market, lending volume and the market's overall liquidity and may
reduce the number of suitable investment opportunities available to us and the
pace at which we are able to make investments. If the properties that we
invest in are unable to obtain affordable insurance coverage, the value of
those investments could decline and in the event of an uninsured loss, we
could lose all or a portion of our investment.

RISKS RELATED TO OUR INVESTMENT MANAGEMENT BUSINESS

Our investment management business commenced in 2000 and therefore has a
limited track record of proven results upon which to evaluate our performance.
We will encounter risks and difficulties as we proceed to develop and operate
our investment management business. In order to achieve our goals as an
investment manager, we must:

o manage our funds successfully by investing a majority of our fund capital
in suitable investments that meet the funds' specified investment
criteria,

o incentivize our management and professional staff to the task of
developing and operating the investment management business,

o structure, sponsor and capitalize future funds and other investment
products under our management that provide investors with attractive
investment opportunities, and

o convince third party investors that an investment in our future funds
will meet their investment objectives and will generate attractive
returns.

If we do not successfully develop and operate our investment management
business to achieve the investment returns that we or the market anticipates,
the market price of our securities could decline.

WE MAY PURSUE FUND MANAGEMENT OPPORTUNITIES RELATED TO OTHER CLASSES OF
INVESTMENTS WHERE WE DO NOT HAVE PRIOR INVESTMENT EXPERIENCE.

third party investors without a performance track record involving such
investments. Even if we attract third party investment, there can be no
assurance that we will be successful in deploying the capital to achieve
targeted returns on investment.

WE FACE SUBSTANTIAL COMPETITION FROM ESTABLISHED PARTICIPANTS IN THE PRIVATE
EQUITY MARKET AS WE OFFER MEZZANINE AND OTHER FUNDS TO THIRD PARTY INVESTORS.

We face significant competition from established Wall Street investment
banking firms and large financial institutions which have proven track records
in marketing and managing private equity investment funds and are otherwise
competitively advantaged because they have access to pre-existing third party
investor networks into which they can channel competing investment
opportunities. If our competitors offer investment products that are
competitive with the mezzanine and other fund investments offered by us, we
will find it more difficult to attract investors and to capitalize our
mezzanine and other funds.

OUR FUNDS ARE SUBJECT TO THE RISK OF DEFAULTS BY THIRD PARTY INVESTORS ON
THEIR CAPITAL COMMITMENTS.

The capital commitments made by third party investors to our funds represent
promises by those investors to contribute cash to the funds from time to time
as investments are made by the funds. We are therefore subject to general
credit risks that the investors may default on their capital commitments. If
defaults occur, we may not be able to close loans and investments we have
identified and negotiated, which could materially and adversely affect the
fund's investment program or make us liable for breach of contract, in either
case to the detriment of our franchise in the private equity market.

RISKS RELATED TO OUR COMPANY

WE ARE DEPENDENT UPON OUR SENIOR MANAGEMENT TEAM TO DEVELOP AND OPERATE OUR
BUSINESS.

Our ability to develop and operate our business depends to a substantial
extent on the experience, relationships and expertise of our senior management
and key employees. We cannot assure you that these individuals will remain in
our employ. The employment agreement with our chief executive officer, John R.
Klopp, expires in 2004, unless further extended. The loss of the services of
our senior management and key employees could have a material adverse effect
on our operations.

OUR BALANCE SHEET PORTFOLIO CONTINUES TO BE CONCENTRATED IN MARK-TO-MARKET
MORTGAGE-BACKED SECURITIES WHICH SUBJECTS US TO GREATER SWINGS IN EQUITY AND
INCOME AS WE RECORD BALANCE SHEET GAINS AND LOSSES ON SUCH ASSETS.

Our venture agreement with affiliates of Citigroup Alternative Investments,
LLC placed restrictions on our ability to originate new mezzanine loan
investments for our balance sheet during the investment period for Fund II
which resulted in our balance sheet portfolio becoming more concentrated in
longer term fixed rate mortgage-backed securities. We have adopted accounting
policies under which such securities are recorded as available-for-sale and
changes in the market value will impact either or both shareholders' equity or
net income depending on the characterization of the change in market value. If
a reduction in market value is deemed to be other than temporary, generally
due to a change in the credit risk, the reduction in value will be recorded as
a reduction of net income. If any of the available-for-sale securities are
sold, the resulting gain or loss will be recorded through the income
statement. All other changes in market value will impact shareholders equity
only.

While the restrictions on our balance sheet investment activities diminished
when the investment period for Fund II ended and we have begun making new
investments for our own account, there can be no assurance that the
concentration in mark-to-market mortgage-backed securities will be reduced in
the near term through new originations. In an environment of lower interest
rates, there is also a higher risk that our existing non-mark-to-market loans
will pay off early. To the extent our balance sheet remains concentrated in
mark-to-market assets, we will remain subject to potential swings in equity
and income as we record gains and losses on such assets on our balance sheet.
If interest rates fluctuate and significantly affect the market value of such
mark-to-market assets, the corresponding reductions or increases in equity and
income may be significant.

WE MUST MANAGE OUR PORTFOLIO AND THE PORTFOLIOS OF OUR FUNDS IN A MANNER THAT
ALLOWS US TO RELY ON AN EXCLUSION FROM REGISTRATION UNDER THE INVESTMENT
COMPANY ACT OF 1940 IN ORDER TO AVOID THE CONSEQUENCES OF REGULATION UNDER
THAT ACT.

We rely on an exclusion from registration as an investment company afforded
by Section 3(c)(5)(C) of the Investment Company Act of 1940. Under this
exclusion, we are required to maintain, on the basis of positions taken by the
SEC staff in interpretive and no-action letters, a minimum of 55% of the value
of the total assets of our portfolio in "mortgages and other liens on and
interests in real estate." We refer to this category of investments herein as
"Qualifying Interests." In addition, we must maintain an additional minimum of
25% of the value of our total assets in Qualifying Interests or other real
estate-related assets. Because registration as an investment company would
significantly affect our ability to engage in certain transactions or to
organize ourselves in the manner as we currently do, we intend to maintain our
qualification for this exclusion from registration. In the past, when required
due to the mix of assets in our balance sheet portfolio, we have purchased
pools of whole loan residential mortgage-backed securities that we treat as
Qualifying Interests based on SEC staff positions. Investments in such pools
of whole loan residential mortgage-backed securities may not represent an
optimum use of our investable capital when compared to the available
investments we target pursuant to our investment strategy. We continue to
analyze our investments and may acquire other pools of whole loan mortgage-
backed securities when and if required for compliance purposes.

WE MAY EXPAND OUR FRANCHISE THROUGH BUSINESS ACQUISITIONS AND THE RECRUITMENT
OF FINANCIAL PROFESSIONALS, WHICH MAY PRESENT ADDITIONAL CHALLENGES AND MAY
NOT PROVE SUCCESSFUL.

Our business plan contemplates expansion of our franchise into complementary
investment strategies involving other credit-sensitive structured financial
products and we may undertake such expansion through business acquisitions or
the recruitment of financial professionals with experience in other products.
We could expend a substantial amount of time and capital pursuing
opportunities to expand into complementary investment strategies that we do
not consummate. The expansion of our operations could place a significant
strain on our management, financial and other resources. Our ability to manage
future expansion will depend upon our ability to monitor operations, maintain
effective quality controls and significantly expand our internal management
and technical and accounting systems, all of which could result in higher
operating expenses and could adversely affect our current business, financial
condition and results of operations.

We cannot assure you that we will be able to identify and integrate
complementary investment strategies and expand our business. Moreover, any
decision to pursue complementary investment strategies or acquisition
opportunities will be in the discretion of our management and may be
consummated without prior notice or shareholder approval. In such instances,
shareholders will be relying on our management to assess the relative benefits
and risks associated with any such expansion or acquisition.

RISKS RELATING TO OUR CLASS A COMMON STOCK

BECAUSE A LIMITED NUMBER OF SHAREHOLDERS, INCLUDING MEMBERS OF OUR MANAGEMENT
TEAM, OWN A SUBSTANTIAL NUMBER OF OUR SHARES, DECISIONS MADE BY THEM MAY BE
DETRIMENTAL TO YOUR INTERESTS.

exercise their influence over us in a manner detrimental to your interests. As
of the date hereof, these shareholders collectively own and control 2,171,479
shares of our class A common stock representing approximately 33.2% of our
outstanding class A common stock. This concentration of ownership may have the
effect of delaying or preventing a change in control of our company, including
transactions in which you might otherwise receive a premium for your class A
common stock, and might affect the market price of our class A common stock.

The conversion of the outstanding convertible trust preferred securities
held by EOP Operating Limited Partnership, Vornado Realty, L.P., and JPMorgan
Chase Bank, as trustee for the General Motors Employe Global Group Pension
Trust and the GMAM Group Pension Trust II, could result in other significant
concentrated holdings of class A common stock. EOP Operating Limited
Partnership, Vornado Realty, L.P. and JPMorgan Chase Bank, as trustee for the
General Motors Employe Global Group Pension Trust and the GMAM Group Pension
Trust II, may each acquire 1,424,474 shares of our class A common stock.
Officers, directors and other related persons of these securityholders serve
on our board of directors and therefore have the power to significantly
influence our affairs. If these persons acquire a significant ownership
position, they may acquire the ability to influence the outcome of matters
submitted for shareholder approval.

SOME PROVISIONS OF OUR CHARTER AND BYLAWS, AND MARYLAND LAW MAY DETER TAKEOVER
ATTEMPTS, WHICH MAY LIMIT THE OPPORTUNITY OF OUR SHAREHOLDERS TO SELL THEIR
SHARES AT A FAVORABLE PRICE.

Issuance of Preferred Stock Without Shareholder Approval. Our charter
authorizes our board of directors to authorize the issuance of up to
100,000,000 shares of preferred stock and up to 100,000,000 shares of class A
common stock. Our charter also authorizes our board of directors, without
shareholder approval, to classify or reclassify any unissued shares of our
class A common stock and preferred stock into other classes or series of stock
and to increase the aggregate number of shares of stock of any class or series
that may be issued. Our board of directors therefore can exercise its power to
reclassify our stock to increase the number of shares of preferred stock we
may issue without shareholder approval. Preferred stock may be issued in one
or more series, the terms of which may be determined without further action by
shareholders. These terms may include preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends or other
distributions, qualifications or terms or conditions of redemption. The
issuance of any preferred stock, however, could materially adversely affect
the rights of holders of our class A common stock, and therefore could reduce
its value. In addition, specific rights granted to future holders of preferred
stock could be used to restrict our ability to merge with, or sell assets to,
a third party. The power of the board of directors to issue preferred stock
could make it more difficult, delay, discourage, prevent or make it more
costly to acquire or effect a change in control, thereby preserving the
current shareholders' control.

shareholder and, as a result, it could enter into a business combination with
us. Our board of directors could choose not to negotiate with an acquirer if
the board determined in its business judgment that considering such an
acquisition was not in our strategic interests. Even after the lapse of the
five-year prohibition period, any business combination with an interested
shareholder must be recommended by our board of directors and approved by the
affirmative vote of at least:

o 80% of the votes entitled to be cast by shareholders and

o two-thirds of the votes entitled to be cast by shareholders other than
the interested shareholder and affiliates and associates thereof.

The super-majority vote requirements do not apply if the transaction
complies with a minimum price requirement prescribed by the statute.

The statute permits various exemptions from its provisions, including
business combinations that are exempted by the board of directors prior to the
time that an interested shareholder becomes an interested shareholder. Our
board of directors has exempted any business combination involving family
partnerships controlled separately by John R. Klopp and Craig M. Hatkoff, and
a limited liability company indirectly controlled by a trust for the benefit
of Samuel Zell and his family. As a result, these persons may enter into
business combinations with us without compliance with the super-majority vote
requirements and the other provisions of the statute.

RISKS RELATED TO OUR REIT STATUS

For the purpose of preserving our qualification as a REIT for federal income
tax purposes, our charter prohibits direct or constructive ownership by any
individual of more than 2.5% of the lesser of the total number or value of the
outstanding shares of our class A common stock as a means of preventing
ownership of more than 50% of our class A common stock by five or fewer
individuals. The charter's constructive ownership rules are complex and may
cause the outstanding class A common stock owned by a group of related
individuals or entities to be deemed to be constructively owned by one
individual. As a result, the acquisition of less than 2.5% of our outstanding
class A common stock by an individual or entity could cause an individual to
own constructively in excess of 2.5% of our outstanding class A common stock,
and thus be subject to the charter's ownership limit. There can be no
assurance that our board of directors, as permitted in the charter, will
increase this ownership limit in the future. Any attempt to own or transfer
shares of our class A common stock in excess of the ownership limit without
the consent of our board of directors will be void, and will result in the
shares being transferred by operation of law to a charitable trust, and the
person who acquired such excess shares will not be entitled to any
distributions thereon or to vote such excess shares.

After reviewing the top five shareholders treated as individuals for REIT
qualification purposes, our board of directors fixed the ownership limit at
2.5%. Our charter contains a provision that would exempt certain of our
officers, directors and related persons from this ownership limit. Pursuant to
this exemption, the top five such officers, directors and related persons
collectively hold 41.2% of our outstanding shares of class A common stock as
of the date hereof.

The 2.5% ownership limit may have the effect of precluding a change in
control of us by a third party without the consent of our board of directors,
even if such change in control would be in the interest of our shareholders or
would result in a premium to the price of our class A common stock (and even
if such change in control would not reasonably jeopardize our REIT status).

THERE ARE NO ASSURANCES THAT WE WILL BE ABLE TO PAY DIVIDENDS IN THE FUTURE.

RECENT TAX LEGISLATION MAY HAVE NEGATIVE CONSEQUENCES FOR REITS.

Recent tax legislation allows certain corporations to pay dividends that
qualify for a reduced tax rate in the hands of certain shareholders. This
legislation generally does not apply to REITs. Although the legislation does
not adversely affect the tax treatment of REITs, it may cause investments in
non-REIT corporations to become relatively more desirable. As a result, the
capital markets may be less favorable to REITs when they seek to raise equity
capital and the prices at which REIT equity securities, including our class A
common stock, trade may decline or underperform non-REIT corporations.

WE WILL BE DEPENDENT ON EXTERNAL SOURCES OF CAPITAL TO FINANCE OUR GROWTH.

o any resulting tax liability could be substantial, could have a material
adverse effect on our book value and could reduce the amount of cash
available for distribution to shareholders; and

Income from our fund management business is expected to be realized by one
of our taxable REIT subsidiaries, and accordingly will be subject to income
tax.

COMPLYING WITH REIT REQUIREMENTS MAY CAUSE US TO FOREGO OTHERWISE ATTRACTIVE
OPPORTUNITIES.

COMPLYING WITH REIT REQUIREMENTS MAY FORCE US TO LIQUIDATE OR RESTRUCTURE
OTHERWISE ATTRACTIVE INVESTMENTS.

In order to qualify as a REIT, we must also ensure that at the end of each
calendar quarter, at least 75% of the value of our assets consists of cash,
cash items, government securities and qualified REIT real estate assets. The
remainder of our investment in securities cannot include more than 10% of the
outstanding voting securities of any one issuer or 10% of the total value of
the outstanding securities of any one issuer. In addition, no more than 5% of
the value of our assets can consist of the securities of any one issuer. If we
fail to comply with these requirements, we must dispose of a portion of our
assets within 30 days after the end of the calendar quarter in order to avoid
losing our REIT status and suffering adverse tax consequences.

COMPLYING WITH REIT REQUIREMENTS MAY FORCE US TO BORROW TO MAKE DISTRIBUTIONS
TO SHAREHOLDERS.

USE OF PROCEEDS

Unless otherwise indicated in a prospectus supplement, we intend to use the
net proceeds from the offering of securities under this prospectus for general
corporate purposes, including funding our investment activity, repayment of
indebtedness, working capital and potential business acquisitions.

We have from time to time engaged in, and expect to continue to pursue,
discussions with respect to possible business acquisitions. While we have no
present commitments or agreements with respect to any material acquisitions,
we are actively investigating acquisitions of firms engaged in businesses that
we believe will complement our existing business, including firms engaged in
commercial loan origination, loan servicing, mortgage banking, real estate
acquisitions, specialty finance, structured products and advisory services. We
cannot assure you that any such transactions can be successfully negotiated or
completed or that any business acquired can be efficiently integrated with our
ongoing operations. We cannot assure you that the net proceeds from the
offering will be sufficient to fund any acquisitions identified by us and that
we will not need to obtain additional funds through borrowings under our
credit facility or through other loans or financing arrangements.

Pending such uses, the net proceeds may be invested in interest-bearing
accounts and short-term interest-bearing securities that are consistent with
our qualification as a REIT.

PRICE RANGE OF CLASS A COMMON STOCK

HIGH LOW
------ ------

2001
First Quarter ............................................... $14.55 $12.30
Second Quarter .............................................. 19.50 12.33
Third Quarter ............................................... 19.50 15.00
Fourth Quarter .............................................. 17.28 14.10
2002
First Quarter ............................................... 17.25 15.00
Second Quarter .............................................. 15.60 14.10
Third Quarter ............................................... 15.75 13.35
Fourth Quarter .............................................. 15.93 12.72
2003
First Quarter ............................................... 18.75 13.35
Second Quarter .............................................. 19.62 14.49
Third Quarter ............................................... 20.99 18.60
Fourth Quarter (through December 16, 2003) .................. 23.40 19.71

The last reported sale price of the class A common stock on December 16,
2003 as reported on the NYSE composite transaction tape was $23.05. As of
December 16, 2003, there were 305 holders of record of the class A common
stock. By including persons holding shares in broker accounts under street
names, however, we estimate our shareholder base to be approximately 1,200 as
of December 16, 2003.

DIVIDEND POLICY

Although in recent years we have not paid dividends, with our decision to
elect to be taxed as a REIT, we began paying dividends on our class A common
stock in the first quarter of 2003.

We generally intend to distribute substantially all of our taxable income
each year (which does not ordinarily equal net income as calculated in
accordance with generally accepted accounting principles) to our shareholders
so as to comply with the REIT provisions of the Internal Revenue Code. We
intend to make dividend distributions quarterly and, if necessary for REIT
qualification purposes, we may need to distribute any taxable income remaining
after the distribution of the final regular quarterly dividend each year
together with the first regular quarterly dividend payment of the following
taxable year or, at our discretion, in a special dividend distributed prior
thereto. Our dividend policy is subject to revision at the discretion of our
board of directors. All distributions will be made at the discretion of our
board of directors and will depend on our taxable income, our financial
condition, our maintenance of REIT status and other factors as our board of
directors deems relevant.

Our ability to pay dividends in the future and the amounts of any dividends
will depend upon a number of factors, including those discussed under the
caption "Risk Factors."

The following table sets forth the amounts of cash dividends paid per share
of class A common stock for the periods indicated in 2003 and the shares of
class A common stock outstanding:

2003 DIVIDEND SHARES TOTAL
---- PER SHARE OUTSTANDING DISTRIBUTED
---------- ----------- -------------

First Quarter......................................................................... 0.45/share 5,426,188 $2,441,784.45
Second Quarter........................................................................ 0.45/share 6,500,734 $2,925,330.30
Third Quarter......................................................................... 0.45/share 6,509,067 $2,929,080.15

RATIO OF EARNINGS TO FIXED CHARGES

The following table sets forth our ratio of earnings to fixed charges for
the periods indicated. For the purpose of calculating the ratio of earnings to
fixed charges, "earnings" consist of income before income taxes and fixed
charges, and "fixed charges" consist of interest on all indebtedness,
amortized premiums, discounts and capitalized expenses related to indebtedness
and preference security dividend requirements.

NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------
2002 2001 2000 1999 1998 2003 2002
----- ----- ----- ----- ----- ----- -----
(UNAUDITED)

Ratio of Earnings to Fixed Charges..................................... 1.63x 1.80x 1.64x 1.80x 1.66x 2.22x 1.94x

SELECTED FINANCIAL DATA

The following table sets forth our selected consolidated financial data:

o as of and for each of the nine month periods ended September 30, 2003 and
2002; and

o as of and for each of the years ended December 31, 2002, 2001, 2000, 1999
and 1998.

The following selected consolidated financial data as of and for each of the
years ended December 31, 2002, 2001, 2000, 1999 and 1998 was derived from our
historical consolidated financial statements included in our Annual Reports on
Form 10-K for the years ended December 31, 2002, 2001, 2000 and 1999. The
following selected consolidated financial data as of and for each of the nine
month periods ended September 30, 2003 and 2002 were derived from our
unaudited consolidated financial statements included in our Quarterly Report
on Form 10-Q for the nine months ended September 30, 2003, which, in the
opinion of our management, have been prepared on the same basis as our audited
consolidated financial statements and reflect all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of our results
of operations and financial position for such periods. Results for the nine
month periods ended September 30, 2003 and 2002 are not necessarily indicative
of results that may be expected for the entire year.

Prior to March 8, 2000, we did not serve as investment manager for any funds
under management and only our historical financial data as of and for the
years ended December 31, 2002, 2001 and 2000 and as of and for the nine month
periods ended September 30, 2003 and 2002 reflects the operating results from
our investment management business. For these reasons, we believe that, except
for the information for the years December 31, 2002, 2001 and 2000 and the
nine month periods ended September 31, 2003 and 2002, the following selected
consolidated financial data is not indicative of our current business.

You should read the following information together with "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and the notes thereto
incorporated by reference into this prospectus.

NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------- -----------------
2002 2001 2000 1999 1998 2003 2002
-------- ------- ------- -------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

STATEMENT OF OPERATIONS DATA:
REVENUES:
Interest and investment income......................... $ 47,207 $67,728 $88,433 $ 89,839 $63,594 $29,430 $38,095
Income/(loss) from equity investments in affiliated
Funds................................................ (2,534) 2,991 1,530 -- -- 1,085 (618)
Advisory and investment banking fees................... 2,207 277 3,920 17,772 10,311 -- 2,207
Management and advisory fees from Funds................ 10,123 7,664 373 -- -- 5,793 7,624
-------- ------- ------- -------- ------- ------- -------
Total revenues........................................ 57,003 78,660 94,256 107,611 74,265 36,308 47,308
-------- ------- ------- -------- ------- ------- -------
OPERATING EXPENSES AND OTHER SOURCES OF
CHARGES TO INCOME:
Interest expense....................................... 17,992 26,348 36,931 39,791 27,665 7,369 14,043
General and administrative expenses.................... 13,996 15,382 15,439 17,345 17,045 10,497 11,390
Depreciation and amortization.......................... 992 909 902 345 249 781 744
Net unrealized (gain)/loss on derivative securities and
corresponding hedged risk on CMBS Securities......... (21,134) 542 -- -- -- -- 2,776
Net realized (gain)/loss on sale of fixed assets,
investments and settlement of derivative securities.. 28,715 -- 64 (35) -- -- (1,651)
Provision for/(recapture of) allowance for possible
credit losses........................................ (4,713) 748 5,478 4,103 3,555 -- (2,963)
-------- ------- ------- -------- ------- ------- -------
Total operating expenses and other sources of
charges to income................................. 35,848 43,929 58,814 61,549 48,514 18,647 24,339
-------- ------- ------- -------- ------- ------- -------
Income/loss before income tax expense and distributions
and amortization on Convertible Trust Preferred
Securities........................................... 21,155 34,731 35,442 46,062 25,751 17,661 22,969
Income tax expense..................................... 22,438 16,882 17,760 22,020 9,367 655 11,540
-------- ------- ------- -------- ------- ------- -------
Income/(loss) before distributions and amortization on
Convertible Trust Preferred Securities............... (1,283) 17,849 17,682 24,042 16,384 17,006 11,429
Distributions and amortization on Convertible Trust
Preferred Securities, net of income tax benefit...... 8,455 8,479 7,921 6,966 2,941 7,089 7,186
-------- ------- ------- -------- ------- ------- -------
NET INCOME/(LOSS)................................... (9,738) 9,370 9,761 17,076 13,443 9,917 4,243
Less: Preferred Stock dividend and dividend
requirement....................................... -- 606 1,615 2,375 3,135 -- --
-------- ------- ------- -------- ------- ------- -------
Net income/(loss) allocable to class A common stock... $ (9,738) $ 8,764 $ 8,146 $ 14,701 $10,308 9,917 4,243
======== ======= ======= ======== ======= ======= =======
PER SHARE INFORMATION:
Net income/(loss) per share of class A common stock:
Basic................................................. $ (1.62) $ 1.30 $ 1.05 $ 2.07 $ 1.70 $ 1.69 $ 0.69
======== ======= ======= ======== ======= ======= =======
Diluted:.............................................. $ (1.62) $ 1.12 $ 0.99 $ 1.65 $ 1.32 $ 1.67 $ 0.68
======== ======= ======= ======== ======= ======= =======
Weighted average shares of class A common stock
outstanding:
Basic............................................... 6,009 6,722 7,724 7,111 6,070 5,859 6,174
======== ======= ======= ======== ======= ======= =======
Diluted:............................................ 6,009 12,041 9,897 14,575 10,208 10,183 6,243
======== ======= ======= ======== ======= ======= =======

AS OF
AS OF DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------ -------------------
2002 2001 2000 1999 1998 2003 2002
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS)

BALANCE SHEET DATA:
Total assets...................................... $384,976 $678,800 $644,392 $827,808 $766,438 $392,766 $440,396
Total liabilities................................. 211,932 428,231 338,584 522,925 472,207 206,013 250,196
Convertible Trust Preferred Securities............ 88,988 147,941 147,142 146,343 145,544 89,346 88,869
Shareholders' equity.............................. 84,056 102,628 158,666 158,540 148,687 97,407 101,331

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

You should read the following discussion together with our consolidated
financial statements and the notes thereto incorporated by reference in this
prospectus. Historical results are not necessarily indicative of our future
financial position or results of operations.

INTRODUCTION

We are a fully integrated, self-managed finance and investment management
company that specializes in credit-sensitive structured financial products. To
date, our investment programs have focused on loans and securities backed by
income-producing commercial real estate assets. Since we commenced our finance
business in 1997, we have completed $3.2 billion of real estate-related
investments in 110 separate transactions. In December 2002, our board of
directors authorized an election to be taxed as a REIT for the 2003 tax year.

Currently, we make balance sheet investments for our own account and manage
a series of private equity funds on behalf of institutional and individual
investors. Our investment management business commenced in March 2000.
Pursuant to a venture agreement, we have co-sponsored three funds with
Citigroup Alternative Investments, LLC; CT Mezzanine Partners I LLC, CT
Mezzanine Partners II LP and CT Mezzanine Partners III, Inc., which we refer
to as Fund I, Fund II and Fund III, respectively.

BALANCE SHEET OVERVIEW

At September 30, 2003, we had four investments in Federal Home Loan Mortgage
Corporation Gold securities with a face value of $22,632,000. The securities
bear interest at a fixed rate of 6.5% of the face value. We purchased the
securities at a net premium and have $174,000 of the premium remaining to be
amortized over the remaining lives of the securities. After premium
amortization, the securities bore interest at a blended rate of 6.04% as of
September 30, 2003. As of September 30, 2003, the securities were carried at a
market value of $23,633,000, an $827,000 unrealized gain to their amortized
cost.

We held eighteen investments in twelve separate issues of commercial
mortgage-backed securities with an aggregate face value of $215,512,000 at
September 30, 2003. $5,000,000 face value of the commercial mortgage-backed
securities bear interest at a variable rate which averages LIBOR + 2.95%
(4.07% at September 30, 2003). The remaining $210,512,000 face value of the
commercial mortgage-backed securities bear interest at fixed rates averaging
7.64% of the face value. We purchased the fixed rate commercial mortgage-
backed securities at discounts. As of September 30, 2003, the remaining
discount to be amortized into income over the remaining lives of the
securities was $23,025,000. After discount amortization, the fixed rate
securities bore interest at a blended rate of 11.55% as of September 30, 2003.
As of September 30, 2003, the securities were carried at market value of
$160,937,000, reflecting a $31,550,000 unrealized loss to their amortized
cost.

On January 31, 2003, we purchased Citigroup Alternative Investments' 75%
interest in Fund I for a purchase price of approximately $38.4 million,
including the assumption of liabilities, equal to the book value of the fund.
In conjunction with the purchase, we began consolidating the balance sheet and
operations of Fund I in our consolidated financial statements including four
loans receivable totaling $50.0 million and $24.1 million of borrowings under
a credit facility.

In addition to those acquired with the purchase of Citigroup Alternative
Investments' interest in Fund I, we have originated or purchased seven new
loans since December 31, 2002 totaling $73.3 million and have no future
commitments under any existing loans. We have received full satisfaction of
four loans totaling $68.8 million and partial repayments on eight loans
totaling $4.9 million in the nine months ended September 30, 2003. At
September 30, 2003, we had outstanding loans receivable totaling approximately
$171.0 million.

At September 30, 2003, we had twelve performing loans receivable with a
current carrying value of $167,695,000. Two of the loans, totaling
$73,273,000, bear interest at a fixed blended rate of interest of

11.92%. The ten remaining loans, totaling $94,422,000, bear interest at a
variable rate of interest averaging LIBOR + 6.50% (7.94% at September 30, 2003
including LIBOR floors). One mortgage loan receivable with an original
principal balance of $8,000,000 reached maturity on July 15, 2001 and has not
been repaid with respect to principal and interest. In December 2002, the loan
was written down to $4,000,000 through a charge to the allowance for possible
credit losses. During the quarter ended September 30, 2003, we received
proceeds of $731,000 reducing the carrying value of the loan to $3,269,000. In
accordance with our policy for revenue recognition, income recognition has
been suspended on this loan and for the nine months ended September 30, 2003,
$684,000 of potential interest income has not been recorded. All other loans
are performing in accordance with their terms.

At September 30, 2003, we had investments in funds of $23,997,000, including
$6,809,000 of unamortized costs which were capitalized in connection with the
formation of the funds. These costs are being amortized over the lives of the
funds and are reflected as a reduction in income/(loss) from equity
investments in funds.

We utilize borrowings under a committed credit facility and a term
redeemable securities contract, along with repurchase obligations to finance
our balance sheet assets.

At September 30, 2003, after assumption of the debt in conjunction with the
purchase of Citigroup Alternative Investments' interests in Fund I, we were
party to two credit facilities with a commercial lender that provided for a
total of $150 million of credit. On June 27, 2003, we formally combined under
one facility the outstanding borrowings under the two facilities and extended
the maturity of the combined $150 million credit facility for two additional
years to July 16, 2005 on substantially the same terms. At September 30, 2003,
we had outstanding borrowings under the credit facility of $33,000,000, and
had unused potential credit of $117,000,000, an amount of available credit
that we believe provides us with adequate liquidity for our short-term needs.
The credit facility provides for advances to fund lender-approved loans and
investments made by us. Borrowings under the credit facility are secured by
pledges of assets owned by us. Borrowings under the credit facility bear
interest at specified rates over LIBOR, which rates may fluctuate, based upon
the credit quality of the pledged assets. The credit facility provides for
margin calls on asset-specific borrowings in the event of asset quality and/or
market value deterioration as determined under the credit facility. The credit
facility contains customary representations and warranties, covenants and
conditions and events of default. We pay interest on the facility at specified
rates over LIBOR based upon each asset included in the obligation. Based upon
advances in place at September 30, 2003, the effective rate on the credit
facility was LIBOR + 2.25% (3.37% at September 30, 2003). As of September 30,
2003, we had capitalized costs of $1,332,000 which are being amortized over
the remaining life of the facility (21.5 months at September 30, 2003). After
amortizing these costs to interest expense, the all-in effective borrowing
cost on the facility as of September 30, 2003 was 5.59% based upon the amount
currently outstanding on the credit facility.

On September 30, 2003, we were party to a term redeemable securities
contract which provides for $75 million of financing for portfolio assets. The
term redeemable securities contract has a two-year term, maturing in February
2004, with an automatic one-year amortizing extension option, if not otherwise
extended. We had borrowings against the term redeemable securities contract of
$12,089,000 at September 30, 2003. We pay interest on the term redeemable
securities contract at specified rates over LIBOR based upon each asset
included in the obligation. Based upon advances in place at September 30,
2003, the blended rate on the term redeemable securities contract is LIBOR +
1.91% (3.03% at September 30, 2003). As of September 30, 2003, we had
capitalized costs of $164,000 which are being amortized over the remaining
life of the term redeemable securities contract (5 months at September 30,
2003). After amortizing these costs to interest expense, the all-in effective
borrowing cost on the facility as of September 30, 2003 was 6.26% based upon
the amount currently outstanding on the term redeemable securities contract.

In May 2003, we entered into a new master repurchase agreement with a
securities dealer that provided for $50,000,000 of financing, which was
increased to $100,000,000 in August 2003. As of September 30, 2003, we had
utilized the master repurchase agreement to finance the purchase of four loans
during the second and third quarters of 2003.

In the third quarter of 2003, we entered into another repurchase obligation
in connection with the purchase of a loan and commercial mortgage-backed
securities. In connection with the foregoing, at September 30, 2003, we had
sold a loan and commercial mortgage-backed securities with a book and market
value of $9,950,000 and had a liability to repurchase these assets for
$8,210,000. The repurchase agreements are matched to the term of the
underlying loan and commercial mortgage-backed securities that mature between
August 2004 and January 2005 and bear interest at specified rates over LIBOR
based upon each asset included in the obligation.

At September 30, 2003, we had total outstanding repurchase obligations of
$146,922,000. Based upon advances in place at September 30, 2003, the blended
rate on the repurchase obligations is LIBOR + 1.06% (2.17% at September 30,
2003). We had capitalized costs of $494,000 as of September 30, 2003, which
are being amortized over the remaining life of the repurchase obligations.
After amortizing these costs to interest expense based upon the amount
currently outstanding on the repurchase obligations, the all-in effective
borrowing cost on the repurchase obligations as of September 30, 2003 was
2.67%. We expect to enter into new repurchase obligations at their maturity.

We were party to two cash flow interest rate swaps with a total notional
value of $109 million as of September 30, 2003. These cash flow interest rate
swaps effectively convert floating rate debt to fixed rate debt, which is
utilized to finance assets which earn interest at fixed rates. We received
LIBOR flat (1.12% at September 30, 2003) and pay an average rate of 4.24%. The
market value of the swaps at September 30, 2003 was a liability of $838,000,
which is recorded as interest rate hedge liabilities and accumulated other
comprehensive loss on our balance sheet.

We currently have $89,742,000 aggregate liquidation amount of variable step
up convertible trust preferred securities outstanding which were issued by our
consolidated statutory trust subsidiary, CT Convertible Trust I. The
convertible trust preferred securities represent an undivided beneficial
interest in the assets of the trust that consist solely of the $92,524,000
aggregate principal amount of our outstanding 8.25% step up convertible junior
subordinated debentures. The terms of the securities mirror the interest,
redemption and conversion terms of the convertible debentures held by the
trust. The convertible trust preferred securities are convertible into shares
of class A common stock, in increments of $1,000 in liquidation amount, at a
conversion price of $21.00 per share and are redeemable by us, in whole or in
part, on or after September 30, 2004.

Distributions on the outstanding convertible trust preferred securities are
payable quarterly in arrears on each calendar quarter-end and correspond to
the payments of interest made on the debentures, the sole assets of the trust.
Distributions are payable only to the extent payments are made in respect to
the debentures. The convertible trust preferred securities bear interest at
10% through September 30, 2004. The interest rate increases by 0.75% on
October 1, 2004 and on each October 1 thereafter. If the quarterly dividend
paid on a share of our class A common stock multiplied by four and divided by
$21.00 is in excess of the interest rate in effect at that time, then the
holders are entitled to be paid additional interest at that rate.

On September 30, 2002, we redeemed $60,258,000 aggregate liquidation amount
of the convertible trust preferred securities that bore a coupon rate of
13.00% per annum through the date of redemption.

In March 2003, we repurchased 66,427 shares of class A common stock under
the open market share repurchase program from a former employee at a price of
$14.25 per share. After the repurchase, we had purchased and retired, pursuant
to the program, 1,700,584 shares of class A common stock at an average price
of $13.13, including commissions and had 666,339 shares remaining authorized
for repurchase under the program.

In 2001 and 2002, in connection with the organization of Fund I and Fund II,
we issued to affiliates of Citigroup Alternative Investments warrants to
purchase 2,842,822 shares of class A common stock. At December 31, 2002, all
such warrants were exercisable at $15.00 per share exercise price until
March 8, 2005.

In January 2003, we purchased all of the warrants outstanding from the
affiliates of Citigroup Alternative Investments for $2.1 million.

On June 18, 2003, we issued 1,075,000 shares of class A common stock in a
private placement to thirty-two separate investors, led by certain
institutional clients advised by Lend Lease Rosen Real Estate Securities, LLC.
Net proceeds to us were $17.1 million after payment of offering costs and fees
to Conifer Securities, LLC, our placement agent.

At September 30, 2003, we had 6,509,067 shares of our class A common stock
outstanding.

INVESTMENT MANAGEMENT OVERVIEW

We operated principally as a balance sheet investor until the start of our
investment management business in March 2000 when we entered into a venture
with affiliates of Citigroup Alternative Investments to co-sponsor and invest
capital in a series of commercial real estate mezzanine investment funds
managed by us. Pursuant to the venture agreement, we and Citigroup Alternative
Investments have co-sponsored Fund I, Fund II and Fund III. We have
capitalized costs of $6,809,000, net, from the formation of the Funds that are
being amortized over the remaining anticipated lives of the Funds.

Fund I commenced its investment operations in May 2000 with equity capital
supplied solely by us (25%) and Citigroup Alternative Investments (75%). From
May 11, 2000 to April 8, 2001, the investment period for the fund, Fund I
completed $330 million of total investments in 12 transactions. On
January 31, 2003, we purchased from affiliates of Citigroup Alternative
Investments their 75% interest in Fund I for $38.4 million, including the
assumption of liabilities. As of January 31, 2003, we began consolidating the
operations of Fund I in our consolidated financial statements.

Fund II had its initial closing on equity commitments on April 9, 2001 and
its final closing on August 7, 2001, ultimately raising $845.2 million of
total equity commitments, including $49.7 million (5.9%) and $198.9 million
(23.5%) from us and Citigroup Alternative Investments, respectively. The
balance of the equity commitments were made by third-party private equity
investors, including public and corporate pension plans, endowment funds,
financial institutions and high net worth individuals. During its two-year
investment period, which expired on April 9, 2003, Fund II invested $1.2
billion in 40 separate transactions. Fund II utilizes leverage to increase its
return on equity, with a target debt-to-equity ratio of 2:1. Total capital
calls during the investment period were $329.0 million. On January 1, 2003,
the general partner of Fund II, which is owned by affiliates of us and
Citigroup Alternative Investments, voluntarily reduced the management fees for
the remainder of the investment period by 50% due to a lower than expected
level of deployment of Fund II's capital. CT Investment Management Co. LLC,
our wholly-owned taxable REIT subsidiary, acts as the investment manager to
Fund II and receives 100% of the base management fees paid by the fund. As of
April 9, 2003, the end of the Fund II investment period, CT Investment
Management Co. began earning annual base management fees of 1.287% of invested
capital. Based upon Fund II's invested capital at September 30, 2003, the date
upon which the calculation for the next quarter is based, CT Investment
Management Co. will earn base management fees of $718,000 for the quarter
ending December 31, 2003.

We and Citigroup Alternative Investments, through our collective ownership
of the general partner, are also entitled to receive incentive management fees
from Fund II if the return on invested equity is in excess of 10% after all
invested capital has been returned. The Fund II incentive management fees are
split equally between us and Citigroup Alternative Investments. We intend to
pay 25% of our share of the Fund II incentive management fees as long-term
incentive compensation to our employees. No such incentive fees have been
earned at September 30, 2003 and as such, no amount has been accrued as income
for such potential fees in our financial statements. The amount of incentive
fees to be received in the future will depend upon a number of factors,
including the level of interest rates and the fund's ability to generate
returns in excess of 10%, which is in turn impacted by the duration and
ultimate performance of the fund's assets. Potential incentive fees received
as Fund II winds down could result in significant additional income from
operations in certain periods during which such payments can be recorded as
income. If Fund II's assets were sold and liabilities were settled on
October 1, 2003 at the recorded book value, net of the allowance for possible
credit losses, and the fund equity and income were distributed, we would
record approximately $4.7 million of incentive income.

Since December 31, 2002, we have made equity contributions to Fund II of
$5.5 million and equity contributions to Fund II's general partner of
$757,000. We do not anticipate making any additional equity contributions to
Fund II or its general partner. Our net investment in Fund II and its general
partner at September 30, 2003 was $15.2 million. As of September 30, 2003,
Fund II had 27 outstanding loans and investments totaling $607.8 million, all
of which were performing in accordance with the terms of their agreements.

On June 2, 2003, Fund III effected its initial closing on equity commitments
and on August 8, 2003, its final closing, raising a total of $425.0 million in
equity commitments. We and Citigroup Alternative Investments made equity
commitments of $20.0 million (4.7%) and $80.0 million (18.8%), respectively,
with the balance made by third-party private equity investors. From the
initial closing through September 30, 2003, we have made equity investments in
Fund III of $2,000,000 and have capitalized costs totaling $903,000, which are
being amortized over the remaining anticipated life of Fund III. As of
September 30, 2003, Fund III had closed five investments, totaling
$148.5 million, of which $146.6 million remains outstanding at September 30,
2003.

CT Investment Management Co. receives 100% of the base management fees from
Fund III calculated at a rate equal to 1.42% per annum of committed capital
during Fund III's two-year investment period, which expires June 2, 2005, and
1.42% of invested capital thereafter. Based upon Fund III's $425.0 million of
total equity commitments, CT Investment Management Co. will earn annual base
management fees of $6.0 million during the investment period. We and Citigroup
Alternative Investments are also entitled to receive incentive management fees
from Fund III if the return on invested equity is in excess of 10% after all
invested capital has been returned. We and Citigroup Alternative Investments
will receive 62.5% and 37.5%, respectively, of the total incentive management
fees. We expect to distribute a portion of our share of the Fund III incentive
management fees as long-term incentive compensation to our employees.

RESULTS OF OPERATIONS

NINE MONTH AND THREE MONTH PERIODS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE
MONTH AND THREE MONTH PERIODS ENDED SEPTEMBER 30, 2002

We reported net income of $9,917,000 for the nine months ended September 30,
2003, an increase of $5,674,000 from our net income of $4,243,000 for the nine
months ended September 30, 2002. This increase was primarily the result of a
reduction in income taxes in 2003 in connection with our REIT election, the
elimination of the net unrealized loss on derivative securities and the
corresponding hedged risk on commercial mortgage-backed securities by settling
the fair value hedge in December 2002 and entering into a new cash flow hedge,
and the increase in income from equity investments in funds. These increases
were partially offset by a recapture of the allowance for possible credit
losses, an advisory fee earned, sales of investments and the reduction of the
maturity of fair value hedges resulting in net gains, all of which occurred in
2002 and did not recur in 2003. Other offsets to the increase included a
reduction in management and advisory fees from funds and a reduction in net
income from loans and investments.

We reported net income of $4,786,000 forthe three months ended September 30,
2003, an increase of $3,233,000 from our income of $1,553,000 for the three
months ended September 30, 2002. This increase was primarily the result of a
reduction in income taxes in 2003 with the REIT election and an increase in
net income from loans and investments. These increases were partially offset
by a reduction in income from equity investments in funds and an advisory fee
earned in 2002, which did not recur in 2003.

Interest and related income from loans and other investments amounted to
$29,384,000 for the nine months ended September 30, 2003, a decrease of
$8,607,000 from the $37,991,000 amount for the nine months ended September 30,
2002. Average interest-earning assets decreased from approximately
$505.0 million for the nine months ended September 30, 2002 to approximately
$358.3 million for the nine months ended September 30, 2003. The average
interest rate earned on such assets increased from 10.1% in the nine months
ended September 30, 2002 to 11.0% in the nine months ended September 30, 2003.
During the nine months ended September 30, 2003 and September 30, 2002, we
recognized $2,804,000 and $1,490,000, respectively, in additional income on
the early repayment of loans and investments. Without this additional interest
income, the earning rate for the nine months ended September 30, 2003 would
have been

9.9% versus 9.7% for the nine months ended September 30, 2002. LIBOR rates
averaged 1.2% for the nine months ended September 30, 2003 and 1.8% for the
nine months ended September 30, 2002, a decrease of 0.6%. The portion of our
average assets that earn interest at fixed-rates did not decrease
proportionately to the decrease in assets that earn interest at variable rates
in the nine months ended September 30, 2003, which served to offset the
decrease in earnings resulting from the decrease in the average LIBOR rate.

Interest and related income from loans and other investments amounted to
$11,757,000 for the three months ended September 30, 2003, an increase of
$721,000 from the $11,036,000 amount for the three months ended September 30,
2002. Average interest-earning assets decreased from approximately
$404.1 million for the three months ended September 30, 2002 to approximately
$369.4 million for the three months ended September 30, 2003. The average
interest rate earned on such assets increased from 10.8% in the nine months
ended September 30, 2002 to 12.6% in the nine months ended September 30, 2003.
During the three months ended September 30, 2003 and September 30, 2002, we
recognized $2,437,000 and $1,120,000, respectively, in additional income on
the early repayment of loans and investments. Without this additional interest
income, the earning rate for the nine months ended September 30, 2003 would
have been 10.0% versus 9.7% for the nine months ended September 30, 2002.
LIBOR rates averaged 1.1% for the three months ended September 30, 2003 and
1.8% for the three months ended September 30, 2002, a decrease of 0.7%. The
portion of our average assets that earn interest at fixed rates did not
decrease proportionately to the decrease in assets that earn interest at
variable rates in the nine months ended September 30, 2003, which served to
offset the decrease in earnings resulting from the decrease in the average
LIBOR rate.

We utilize our credit facility, our term redeemable securities contract and
our repurchase obligations to finance our interest-earning assets.

Interest and related expenses amounted to $7,369,000 for the nine months
ended September 30, 2003, a decrease of $6,651,000 from the $14,020,000 amount
for the nine months ended September 30, 2002. The decrease in expense was due
to a decrease in the amount of average interest-bearing liabilities
outstanding from approximately $279.5 million for the nine months ended
September 30, 2002 to approximately $206.1 million for the nine months ended
September 30, 2003 and a decrease in the average rate on interest-bearing
liabilities from 6.7% to 4.8% for the same periods. The decrease in the
average rate is substantially due to the decrease in swap levels and rates and
the increased use of repurchase agreements as a percentage of total debt in
the nine months ended September 30, 2003 at lower spreads to LIBOR than the
credit facilities utilized in the nine months ended September 30, 2002.

Interest and related expenses amounted to $2,616,000 for the three months
ended September 30, 2003, a decrease of $1,141,000 from the $3,757,000 amount
for the three months ended September 30, 2002. The decrease in expense was due
to a decrease in the average rate on interest-bearing liabilities from 8.8%
for the three months ended September 30, 2002 to 5.0% for the three months
ended September 30, 2003, partially offset by an increase in the amount of
average interest-bearing liabilities outstanding from approximately
$169.9 million to approximately $207.2 million. The decrease in the average
rate is substantially due to the decrease in swap levels and rates and the
increased use of repurchase agreements as a percentage of total debt in the
three months ended September 30, 2003 at lower spreads to LIBOR than the
credit facilities utilized in the three months ended September 30, 2002.

We also utilize our outstanding convertible trust preferred securities to
finance our interest-earning assets. During the nine months ended September 30,
2003 and 2002, we recognized $7,089,000 and $7,186,000, respectively, of net
expenses related to our outstanding convertible trust preferred securities.
This amount consisted of distributions to the holders totaling $6,731,000 and
$12,195,000, respectively, and amortization of discount and origination costs
totaling $358,000 and $1,186,000, respectively, during the nine months ended
September 30, 2003 and 2002. In the nine months ended September 30, 2002, this
total was partially offset by a tax benefit of $6,195,000. Due to our election
to be taxed as a REIT, there is no tax benefit for the expense in the nine
months ended September 30, 2003. The decrease in the distribution amount and
amortization of discount and origination costs resulted from the elimination
of the distributions and discount and fees on the $60.3 million non-
convertible amount, which was redeemed on September 30, 2002.

During the three months ended September 30, 2003 and 2002, we recognized
$2,363,000 and $2,669,000, respectively, of net expenses related to our
outstanding convertible trust preferred securities. This amount consisted of
distributions to the holders totaling $2,244,000 and $4,184,000, respectively,
and amortization of discount and origination costs totaling $119,000 and
$786,000, respectively, during the three months ended September 30, 2003 and
2002. In the three months ended September 30, 2002, this total was partially
offset by a tax benefit of $2,301,000. Due to our election to be taxed as a
REIT, there is no tax benefit for the expense in the three months ended
September 30, 2003. The decrease in the distribution amount and amortization
of discount and origination costs resulted from the elimination of the
distributions and discount and fees on the non-convertible amount, which was
redeemed on September 30, 2002.

Other revenues decreased $4,044,000 from $10,968,000 for the nine months
ended September 30, 2002 to $6,924,000 for the nine months ended September 30,
2003. During the nine months ended September 30, 2002, we sold investments and
reduced the maturity of our fair value hedge, which resulted in a gain of
$1,651,000 and earned a $2.0 million fee from our final advisory assignment.
On January 1, 2003, the general partner of Fund II, which is owned by
affiliates of us and Citigroup Alternative Investments, voluntarily reduced by
50% the management fees charged to Fund II for the remainder of the investment
period due to a lower than expected level of deployment of the fund's capital.
This, along with the reduction in income when we began charging management
fees on invested capital for Fund II, partially offset by the management fees
charged to Fund III, reduced our management and advisory fees from funds by
$1.8 million for the nine months ended September 30, 2003. In the nine months
ended September 30, 2002, Fund I increased its allowance for possible credit
losses by establishing a specific reserve for the single non-performing loan
it was carrying. The loss from equity investments in funds during the nine
months ended September 30, 2002 was primarily due to this additional expense.

Other revenues decreased $3,047,000 from $5,807,000 for the three months
ended September 30, 2002 to $2,760,000 for the three months ended September 30,
2003. The decrease in other revenue was primarily the result of a $2.0 million
fee earned from our final advisory assignment in the three months ended
September 30, 2002 and the decrease in income from equity investments in
funds.

General and administrative expenses decreased $893,000 to $10,497,000 for
the nine months ended September 30, 2003 from $11,390,000 for the nine months
ended September 30, 2002 and decreased $178,000 to $3,804,000 for the three
months ended September 30, 2003 from $3,982,000 for three months ended
September 30, 2002. The decrease in general and administrative expenses was
primarily due to reduced employee compensation. We employed an average of 25
employees during the nine months ended September 30, 2003 and 27 during the
nine months ended September 30, 2002. We had 25 full-time employees at
September 30, 2003.

During the nine months ended September 30, 2002, we recaptured $2,963,000 of
our previously established allowance for possible credit losses. We deemed
this recapture necessary due to the substantial reduction in the loan
portfolio and a general reduction in the default risk of the loans remaining
based upon current conditions. At September 30, 2003, we believe that our
reserve of $6,672,000 is adequate based on the existing loans in our balance
sheet portfolio.

In accordance with our decision to be taxed as a REIT, we will make a formal
election to be so taxed under Section 856(c) of the Internal Revenue Code of
1986, as amended, commencing with the tax year ending December 31, 2003. As a
REIT, we generally are not subject to federal income tax. To maintain our
qualification as a REIT, we must distribute at least 90% of our REIT taxable
income to our shareholders and meet certain other requirements. If we fail to
qualify as a REIT in any taxable year, we will be subject to federal income
tax on our taxable income at regular corporate rates. We may also be subject
to certain state and local taxes on our income and property. Under certain
circumstances, federal income and excise taxes may be due on our undistributed
taxable income. At September 30, 2003, we were in compliance with all REIT
qualification requirements and as such, have only provided for income tax
expense on taxable income attributed to our taxable REIT subsidiaries in 2003.
Please refer to the discussion under the caption "Risk Factors -- Risks
Related to Our REIT Election" which explains the risks of failing to comply
with REIT qualification requirements.

YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

Interest and related income from loans and other investments amounted to
$47,079,000 for the year ended December 31, 2002, a decrease of $20,254,000
from the $67,333,000 amount for the year ended December 31, 2001. Average
interest earning assets decreased from approximately $570.6 million for the
year ended December 31, 2001 to approximately $473.7 million for the year
ended December 31, 2002. The average interest rate earned on such assets
decreased from 11.8% in 2001 to 9.9% in 2002. During the year ended
December 31, 2002, we recognized $1.6 million in additional income on the
early repayment of loans, while during the year ended December 31, 2001, we
recognized $4.8 million in additional income on the early repayment of loans.
Without this additional interest income, the earning rate for the year ended
December 31, 2002 would have been 9.6% versus 11.0% for the year ended
December 31, 2001. LIBOR rates averaged 1.8% for the year ended December 31,
2002 and 3.9% for the year ended December 31, 2001, a decrease of 2.1%. Since
substantial portions of our assets earn interest at fixed-rates, the decrease
in the average earning rate did not correspond to the full decrease in the
average LIBOR rate.

Interest and related expenses amounted to $17,969,000 for the year ended
December 31, 2002, a decrease of $8,269,000 from the $26,238,000 amount for
the year ended December 31, 2001. The decrease in expense was due to a
decrease in the amount of average interest bearing liabilities outstanding
from approximately $321.8 million for the year ended December 31, 2001 to
approximately $260.0 million for the year ended December 31, 2002 and a
decrease in the average rate paid on interest bearing liabilities from 8.2% to
6.9% for the same periods. The decrease in the average rate is substantially
due to the increased use of repurchase obligations for debt financing in the
year ended December 31, 2002 at lower spreads to LIBOR than those obtainable
under the credit facilities utilized in the year ended December 31, 2001 and
the decrease in the average LIBOR rate. Due to the decrease in total debt, the
percentage of debt that has been swapped to fixed rates in the year ended
December 31, 2002 increased, partially offsetting the previously discussed
decreases in floating rates.

During the years ended December 31, 2002 and 2001, we recognized $8,455,000
and $8,479,000, respectively, of net expenses related to our outstanding
convertible trust preferred securities. This amount consisted of distributions
to the holders totaling $14,439,000 and $15,237,000, respectively, and
amortization of discount and origination costs totaling $1,305,000 and
$799,000, respectively, during the years ended December 31, 2002 and 2001.
This was partially offset by a tax benefit of $7,289,000 and $7,557,000 during
the years ended December 31, 2002 and 2001, respectively. On April 1, 2002, in
accordance with the terms of the securities, the blended rate on such
securities increased from 10.16% to 11.21%. On October 1, 2002, after
repayment of the non-convertible amount of the convertible trust preferred
securities, as discussed above, the rate on such securities was 10.00%. The
increase in the amortization of discount and origination costs resulted from
the recognition of the unamortized discount and fees on the non-convertible
amount expensed upon repayment of the non-convertible amount on September 30,
2002.

the year ended December 31, 2002. We also recognized $2.0 million from our
final investment banking assignment. These increases were offset by the write-
down of a $26 million loan in Fund I, which decreased income from equity
investments in funds by approximately $6 million.

General and administrative expenses decreased $1,386,000 to $13,996,000 for
the year ended December 31, 2002 from $15,382,000 for year ended December 31,
2001. The decrease in general and administrative expenses was primarily due to
reduced executive compensation. We employed an average of 27 employees during
both the year ended December 31, 2002 and the year ended December 31, 2001. We
had 26 full-time employees and one part-time employee at December 31, 2002.

During the year ended December 31, 2002, we recaptured $4,713,000 of our
previously established allowance for possible credit losses. We deemed this
recapture necessary due to the substantial reduction in the loan portfolio and
a general reduction in the default risk of the loans remaining based upon
current conditions. After the recapture, we believe that the reserve is
adequate based on the existing loans in our balance sheet portfolio.

For the year ended December 31, 2002 and 2001, we accrued income tax expense
of $22,438,000 and $16,882,000, respectively, for federal, state and local
income taxes. The increase from 48.6% to 106.1% in the effective tax rate was
primarily due to capital losses being generated in 2002 that were not
deductible for tax purposes in that year and the reduction in deferred tax
assets due to the uncertainty of use in the future. In December 2002, when we
decided to elect REIT status for 2003, we wrote down our deferred tax asset to
$1.6 million, due to our inability to utilize the recorded tax benefits in the
future. The remaining $1.6 million deferred tax asset relates to future
reversals of taxable income in subsidiaries which will be taxable REIT
subsidiaries.

The preferred stock dividend and dividend requirement arose from previously
issued and outstanding shares of class A preferred stock. Dividends accrued on
these shares at a rate of 9.5% per annum on a per share price of $2.69. In the
third quarter of 1999, 5,946,825 shares of class A preferred stock were
converted into an equal number of shares of class A common stock thereby
reducing the number of outstanding shares of class A preferred stock to
6,320,833 and the dividend requirement to $1,615,000 per annum. In the year
ended December 31, 2001, the remaining shares of class A preferred stock were
repurchased thereby eliminating the dividend requirement.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

We reported net income allocable to shares of class A common stock of
$8,764,000 for the year ended December 31, 2001, an increase of $618,000 from
the net income allocable to shares of class A common stock of $8,146,000 for
the year ended December 31, 2000. This increase was primarily the result of
increased income from equity investments in the funds and related investment
management and consulting fees, reduced preferred stock dividends and a
reduction in the provision for possible credit losses offset by decreased
advisory and investment banking fees and decreased net interest income from
loans and other investments.

Interest and related income from loans and other investments amounted to
$67,333,000 for the year ended December 31, 2001, a decrease of $20,352,000
from the $87,685,000 amount for the year ended December 31, 2000. Average
interest earning assets decreased from approximately $681.5 million for the
year ended December 31, 2000 to approximately $570.6 million for the year
ended December 31, 2001. The average interest rate earned on such assets
decreased from 12.8% in 2000 to 11.8% in 2001. During the year ended
December 31, 2001, we recognized $4.8 million in additional interest income on
the early repayment of loans, while during the year ended December 31, 2000,
we recognized $4.7 million in additional interest income on the early
repayment of loans. Without this additional interest income and after
adjustment of the 2000 rates for the effect of recognizing net swap payments
in interest expense rather than interest income, the earning rate for the year
ended December 31, 2001 would have been 11.0% versus 12.2% for the year ended
December 31, 2000. The decrease in such core-earning rate was due to a
decrease in the average LIBOR rate from 6.41% for the year ended December 31,
2000 to 3.88% for the year ended December 31, 2001 for the assets earning
interest based upon a variable rate.

Interest and related expenses amounted to $26,238,000 for the year ended
December 31, 2001, a decrease of $10,474,000 from the $36,712,000 amount for
the year ended December 31, 2000. The decrease in expense was due to a
decrease in the amount of average interest bearing liabilities outstanding
from approximately $393.2 million for the year ended December 31, 2000 to
approximately $321.8 million for the year ended December 31, 2001 and a
decrease in the weighted average rate paid on interest bearing liabilities
from 9.2% to 8.2% for the same periods, after adjustment of the 2000 rates for
the effect of recognizing net swap payments in interest expense rather than
interest income. The decrease in the weighted average rate was not consistent
with the decrease in the average LIBOR rate for the same periods due to a
change in the mix of interest bearing liabilities. In 2001, a higher
percentage of the interest bearing liabilities were at a fixed rate, after
adjusting for interest rate swaps, which, in the current low LIBOR rate
environment, were at higher rates than the rates for variable rate interest-
bearing liabilities.

During the years ended December 31, 2001 and 2000, we recognized $8,479,000
and $7,921,000, respectively, of net expenses related to our outstanding
convertible trust preferred securities. This amount consisted of distributions
to the holders totaling $15,237,000 and $14,246,000, respectively, and
amortization of discount and origination costs totaling $799,000 and $799,000,
respectively, during the years ended December 31, 2001 and 2000. This was
partially offset by a tax benefit of $7,557,000 and $7,124,000 during the
years ended December 31, 2001 and 2000, respectively. The terms of the
convertible trust preferred securities were modified effective May 10, 2000
which resulted in the blended rate on such securities increasing on that date
from 8.25% to 10.16% which accounted for the increase in expense in the year
ended December 31, 2001.

During the year ended December 31, 2001, other revenues increased $4,756,000
to $11,327,000 from $6,571,000 in the year ended December 31, 2000. During the
second quarter of 2000, Fund I commenced operations and during the second
quarter of 2001, Fund II commenced operations. This increase in other revenue
is due to increased revenue from the funds, including management and advisory
income in addition to the return on investment in the funds, partially offset
by a reduction in advisory and investment banking fees.

Investment management and consulting fees from funds under management has
increased significantly since the closing of Fund II. We earned $5,884,000 of
investment management fees from Fund II and $1,015,000 of consulting fees from
the general partner of Fund II in 2001. These additional fees accounted for
the majority of the increase in investment management and consulting fees from
2000 to 2001.

For the year ended December 31, 2001 and 2000, we had earned $2,991,000 and
$1,530,000, respectively, on our equity investment in the funds. The increase
in income in 2001 versus 2000 was due primarily to the increased level of
investment in the funds offset by the suspension of interest on a Fund I
asset.

General and administrative expenses remained relatively consistent amounting
to $15,382,000 for the year ended December 31, 2001 versus $15,439,000 for
year ended December 31, 2000. In the year ended December 31, 2000, as we
transitioned to our new investment management business, we incurred one-time
expenses of $2.1 million that were included in general and administrative
expenses. We employed an average of 27 employees during the year ended
December 31, 2001 verses an average of 24 employees during the year ended
December 31, 2000. We had 28 full-time employees and one part-time employee at
December 31, 2001.

The decrease in the provision for possible credit losses from $5,478,000 for
the year ended December 31, 2000 to $748,000 for the year ended December 31,
2001 was due to the decrease in average earning assets as previously
described. We did not add to the reserve for possible credit losses during the
second, third or fourth quarter of 2001 as we believed that the reserve was
adequate based on the existing loans and investments in our balance sheet
portfolio.

For the year ended December 31, 2001 and 2000, we accrued income tax expense
of $16,882,000 and $17,760,000, respectively, for federal, state and local
income taxes. The decrease from 50.1% to 48.6% in the effective tax rate was
primarily due to higher levels of compensation in excess of deductible limits
in the prior year.

In the third quarter of 1999, 5,946,825 shares of class A preferred stock
were converted into an equal number of shares of class A common stock thereby
reducing the number of outstanding shares of class A preferred stock to
6,320,833 and the dividend requirement to $1,615,000 per annum. In 2001, the
remaining shares of class A preferred stock were repurchased thereby
eliminating the dividend requirement.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2003, we had $10,179,000 in cash. Our primary sources of
liquidity for 2004 are expected to be cash on hand, cash generated from
operations, principal and interest payments received on loans and investments,
additional borrowings under our credit facilities and any proceeds that we
receive from the sale of securities pursuant to this prospectus. We believe
these sources of capital are adequate to meet future cash requirements during
2004. We expect that during 2004, we will use a significant amount of our
available capital resources to satisfy capital contributions required pursuant
to our equity commitments to Fund III and to originate new loans and
investments for our balance sheet. We intend to continue to employ leverage on
our balance sheet assets to enhance our return on equity.

We experienced a net decrease in cash of $7,000 for the nine months ended
September 30, 2003, compared to a net decrease of $2,920,000 for the nine
months ended September 30, 2002. Cash provided by operating activities during
the nine months ended September 30, 2003 was $10,524,000, compared to
$4,630,000 provided during the same period of 2002. For the nine months ended
September 30, 2003, cash provided by investing activities was $12,766,000,
compared to $255,943,000 during the same period in 2002 as we experienced
lower levels of loan and investment repayments in the nine months ended
September 30, 2003 than the nine months ended September 30, 2002 and began
making new loans and investments for our balance sheet in the nine months
ended September 30, 2003. We utilized the cash received on loan repayments in
both periods to reduce borrowings under our credit facilities and our term
redeemable securities contract that along with the proceeds from the private
placement of 1,075,000 shares of class A common stock in June 2003 accounted
for substantially all of the change in the net cash used in financing
activities from $263,493,000 in the nine months ended September 30, 2002 to
$23,297,000 in the nine months ended September 30, 2003.

We experienced a net decrease in cash of $1,465,000 for the year ended
December 31, 2002, compared to a net increase of $263,000 for the year ended
December 31, 2001. Cash used by operating activities during the year ended
December 31, 2002 was $23,988,000, compared to $12,769,000 provided during the
year ended December 31, 2001. For the year ended December 31, 2002, cash
provided by investing activities was $301,336,000, compared to $40,034,000
used in investing activities during the year ended December 31, 2001 as we
experienced significant loan and investment repayments in both years but
purchased significant levels of available-for-sale securities in 2001
principally for Investment Company Act compliance purposes. We received full
satisfaction of three loans totaling $90.0 million and partial repayments on
five loans totaling $46.2 million in 2002. We utilized the cash received on
loan repayments in both years to reduce borrowings under our credit facilities
and entered into repurchase obligations to finance the purchase of available-
for-sale securities in 2001 which accounted for the majority of the change in
the net cash provided by financing activities from $27,528,000 in 2001 to the
$278,813,000 of cash used in financing activities in 2002.

During the investment periods for Fund I and Fund II, we generally did not
originate or acquire loans or commercial mortgage-backed securities directly
for our own balance sheet portfolio. Now that the Fund II investment period
has ended, we are originating loans and investments for our own account as
permitted by the provisions of Fund III. We expect to use our available
working capital to make contributions to Fund III or any other funds sponsored
by us as and when required by the equity commitments made by us to such funds.
If repayments of our existing balance sheet loans and investments increase
significantly before excess capital is invested in new funds, or otherwise
accretively deployed, we may experience a reduction in revenues and lower
earnings until offsetting revenues are derived from funds under management or
other sources. For the remainder of 2003 and in 2004, we do not expect a
decrease in total assets, as we expect to purchase or originate additional
balance sheet assets during this period.

At September 30, 2003, we had outstanding borrowings under the credit
facility of $33,000,000, outstanding borrowings on the term redeemable
securities contract of $12,089,000 and outstanding repurchase

obligations totaling $146,922,000. The terms of these agreements are described
in the Balance Sheet Overview section of this Management Discussion and
Analysis. At September 30, 2003, we had pledged assets that enable us to
borrow an additional $25.3 million and $230.2 million of credit available for
the financing of new and existing unpledged assets pursuant to these
facilities.

The following table sets forth information about our contractual obligations
as of December 31, 2002:

PAYMENT DUE BY PERIOD
----------------------------------------------------------
CONTRACTUAL OBLIGATIONS LESS THAN MORE THAN
----------------------- TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
-------- --------- --------- --------- ---------
(IN THOUSANDS)

LONG-TERM DEBT OBLIGATIONS
Credit Facilities................................................... $ 40,000 $ -- $40,000 $ -- $ --
Repurchase Obligations.............................................. 160,056 160,056 -- -- --
Convertible Trust Preferred Securities.............................. 89,742 -- -- -- 89,742
OPERATING LEASE OBLIGATIONS.......................................... 4,966 844 1,837 1,828 457
COMMITMENT TO FUND II (1)............................................ 36,682 36,682 -- -- --
-------- -------- ------- ------ -------
TOTAL................................................................ $331,446 $197,582 $41,837 $1,828 $90,199
======== ======== ======= ====== =======

---------------
(1) Fund II's investment period ended in April 2003 at which time our equity
commitment to the fund expired. We made a $20 million commitment to Fund
III that expires when the fund's investment period ends in June 2005.

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements.

IMPACT OF INFLATION

Our operating results depend in part on the difference between the interest
income earned on our interest-earning assets and the interest expense incurred
in connection with our interest-bearing liabilities. Changes in the general
level of interest rates prevailing in the economy in response to changes in
the rate of inflation or otherwise can affect our income by affecting the
spread between our interest-earning assets and interest-bearing liabilities,
as well as, among other things, the value of our interest-earning assets and
our ability to realize gains from the sale of assets and the average life of
our interest-earning assets. Interest rates are highly sensitive to many
factors, including governmental monetary and tax policies, domestic and
international economic and political considerations, and other factors beyond
our control. We employ the use of correlated hedging strategies to limit the
effects of changes in interest rates on our operations, including engaging in
interest rate swaps and interest rate caps to minimize our exposure to changes
in interest rates. There can be no assurance that we will be able to
adequately protect against the foregoing risks or that we will ultimately
realize an economic benefit from any hedging contract into which we enter.
Please refer to the discussion under the caption "Risk Factors -- Risks
Related To Our Business" which addressed the risks associated with our hedging
strategy.

CRITICAL ACCOUNTING POLICIES

Changes in these estimates and assumptions could have a material effect on
our consolidated financial statements. Management has the obligation to ensure
that its policies and methodologies are in accordance with GAAP. During 2003,
management reviewed and evaluated its critical accounting policies and
believes them to be appropriate. Our accounting policies are described in Note
3 to our consolidated financial statements. The following is a summary of our
accounting policies that we believe are the most affected by management
judgments, estimates and assumptions:

SECURITIES AVAILABLE FOR SALE

We have designated our investments in commercial mortgage-backed securities
and certain other securities as available for sale. Securities available for
sale are carried at estimated fair value with the net unrealized gains or
losses reported as a component of accumulated other comprehensive income/
(loss) in shareholders' equity. Many of these investments are relatively
illiquid and their values must be estimated by management. In making these
estimates, management generally utilizes market prices provided by dealers who
make markets in these securities, but may, under certain circumstances, adjust
these valuations based on management's judgment. Changes in the valuations do
not affect our reported income or cash flows, but impact shareholders' equity
and, accordingly, book value per share.

Management must also assess whether unrealized losses on securities reflect
a decline in value which is other than temporary, and, accordingly, write the
impaired security down to its fair value, through a charge to earnings.
Significant judgment of management is required in this analysis which
includes, but is not limited to, making assumptions regarding the
collectibility of the principal and interest, net of related expenses, on the
underlying loans.

Income on these securities available for sale is recognized based upon a
number of assumptions that are subject to uncertainties and contingencies.
Examples of these include, among other things, the rate and timing of
principal payments, including prepayments, repurchases, defaults and
liquidations, the pass-through or coupon rate and interest rate fluctuations.
Additional factors that may affect our reported interest income on our
mortgage-backed securities include interest payment shortfalls due to
delinquencies on the underlying mortgage loans and the timing and magnitude of
credit losses on the mortgage loans underlying the securities that are a
result of the general condition of the real estate market, including
competition for tenants and their related credit quality, and changes in
market rental rates. These uncertainties and contingencies are difficult to
predict and are subject to future events which may alter the assumptions.

We adopted Emerging Issues Task Force 99-20, "Recognition of Interest Income
and Impairment on Purchased and Retained Beneficial Interests in Securitized
Financial Assets" on January 1, 2001. We recognize interest income from our
purchased beneficial interests in securitized financial interests, other than
beneficial interests of high credit quality, sufficiently collateralized to
ensure that the possibility of credit loss is remote, or that cannot
contractually be prepaid or otherwise settled in such a way that we would not
recover substantially all of our recorded investment, in accordance with this
guidance. Accordingly, on a quarterly basis, when significant changes in
estimated cash flows from the cash flows previously estimated occur due to
actual prepayment and credit loss experience, we calculate a revised yield
based on the current amortized cost of the investment, including any other-
than-temporary impairments recognized to date, and the revised cash flows. The
revised yield is then applied prospectively to recognize interest income.

For other mortgage-backed and related mortgage securities, we account for
interest income under Statement of Financial Accounting Standards 91, using
the effective interest method which includes the amortization of discount or
premium arising at the time of purchase and the stated or coupon interest
payments.

MORTGAGE LOANS

contractual terms of the loan. If a loan is determined to be permanently
impaired, we would write down the loan through a charge to the reserve for
possible credit losses. Given the nature of our loan portfolio and the
underlying commercial real estate collateral, significant judgment of
management is required in determining permanent impairment and the resulting
charge to the reserve which includes but is not limited to making assumptions
regarding the value of the real estate which secures the mortgage loan.

DEFERRED FINANCING

The deferred financing cost which is included in other assets on our
consolidated balance sheets include issuance costs related to our debt and are
amortized using the straight line method which method is similar to the
results of the effective interest method.

IMPAIRMENT OF SECURITIES

In accordance with Statement of Financial Accounting Standards 115, when the
estimated fair value of a security classified as available-for-sale has been
below amortized cost for a significant period of time and we conclude that we
no longer have the ability or intent to hold the security for the period of
time over which we expect the values to recover to amortized cost, the
investment is written down to its fair value. The resulting charge is included
in income, and a new cost basis established. Additionally, under Emerging
Issues Task Force 99-20, when significant changes in estimated cash flows from
the cash flows previously estimated occur due to actual prepayment and credit
loss experience and the present value of the revised cash flows using the
current expected yield is less than the present value of the previously
estimated remaining cash flows, adjusted for cash receipts during the
intervening period, an other-than-temporary impairment is deemed to have
occurred. Accordingly, the security is written down to fair value with the
resulting change being included in income and a new cost basis established. In
both instances, the original discount or premium is written off when the new
cost basis is established.

After taking into account the effect of the impairment charge, income is
recognized under Emerging Issues Task Force 99-20 or Statement of Financial
Accounting Standards 91, as applicable, using the market yield for the
security used in establishing the write-down.

Our consolidated financial statements include all of our accounts and the
accounts of all of our majority-owned and controlled subsidiaries. The
preparation of financial statements in accordance with Generally Accepted
Accounting Principles requires management to make judgments, estimates and
assumptions in certain circumstances that affect amounts reported in the
accompanying consolidated financial statements.

REVENUE RECOGNITION

The most significant sources of our revenue come from our lending
operations. For our lending operations, we reflect income using the effective
yield method, which recognizes periodic income over the expected term of the
investment on a constant yield basis. Management believes our revenue
recognition policies are appropriate to reflect the substance of the
underlying transactions.

PROVISION FOR LOAN LOSSES

Our accounting policies require that an allowance for estimated credit
losses be reflected in our financial statements based upon an evaluation of
known and inherent risks in our mortgage and mezzanine loans. While we have
experienced minimal actual losses on our lending investments, management
considers it prudent to reflect provisions for loan losses on a portfolio
basis based upon our assessment of general market conditions, our internal
risk management policies and credit risk rating system, industry loss
experience, our assessment of the likelihood of delinquencies or defaults, and
the value of the collateral underlying our investments. Actual losses, if any,
could ultimately differ from these estimates.

RISK MANAGEMENT AND FINANCIAL INSTRUMENTS

We utilize derivative financial instruments only as a means to help to
manage our interest rate risk exposure on a portion of our variable-rate debt
obligations, through the use of cash flow hedges. The

instruments utilized are generally either pay-fixed swaps or LIBOR-based
interest rate caps which are widely used in the industry and typically entered
into with major financial institutions. Our accounting policies generally
reflect these instruments at their fair value with unrealized changes in fair
value reflected in "Accumulated other comprehensive income" on our
consolidated balance sheets. Realized effects on cash flows are generally
recognized currently in income.

INCOME TAXES

NEW ACCOUNTING STANDARDS

In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements." In June 2000, the SEC staff amended
Staff Accounting Bulletin 101 to provide registrants with additional time to
implement Staff Accounting Bulletin 101. We adopted Staff Accounting Bulletin
101, as required, in the fourth quarter of fiscal 2000. The adoption of Staff
Accounting Bulletin 101 did not have a material financial impact on our
financial position or results of operations.

In March 2000, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation." We were required to adopt
Financial Interpretation Number 44 effective July 1, 2000 with respect to
certain provisions applicable to new awards, exchanges of awards in a business
combination, modifications to outstanding awards and changes in grantee status
that occur on or after that date. Financial Interpretation Number 44 addresses
practice issues related to the application of Accounting Practice Bulletin
Opinion No. 25, "Accounting for Stock Issued to Employees." The initial
adoption of Financial Interpretation Number 44 did not have a significant
impact on us.

On January 1, 2001, we adopted Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended by Statement of Financial Accounting Standards No. 137 and Statement
of Financial Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities." Statement of Financial Accounting
Standards No. 133, as amended, establishes accounting and reporting standards
for derivative instruments. Specifically Statement of Financial Accounting
Standards No. 133 requires an entity to recognize all derivatives as either
assets or liabilities in the consolidated balance sheets and to measure those
instruments at fair value. Additionally, the fair value adjustments will
affect either shareholders' equity or net income depending on whether the
derivative instrument qualifies as a hedge for accounting purposes and, if so,
the nature of the hedging activity. As of January 1, 2001, the adoption of the
new standard resulted in an adjustment of $574,000 to accumulated other
comprehensive loss.

comprehensive income. For those hedges characterized as cash flow hedges, the
unrealized gains/losses in the fair value of these hedges are reported on the
balance sheet with a corresponding adjustment to either accumulated other
comprehensive income or in earnings, depending on the type of hedging
relationship. In accordance with Statement of Financial Accounting Standards
No. 133, on December 31, 2002, the derivative financial instruments were
reported at their fair value as interest rate hedge liabilities of $1,822,000.

In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" and Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets." Statement of Financial Accounting Standards No. 141 requires the
purchase method of accounting to be used for all business combinations
initiated after June 30, 2001. Statement of Financial Accounting Standards No.
141 also addresses the initial recognition and measurement of goodwill and
other intangible assets acquired in business combinations and requires
intangible assets to be recognized apart from goodwill if certain tests are
met. Statement of Financial Accounting Standards No. 142 requires that
goodwill not be amortized but instead be measured for impairment at least
annually, or when events indicate that there may be an impairment. We adopted
the provisions of both statements, as required, on January 1, 2002 which did
not have a significant impact on us.

In November 2002, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others," an interpretation of Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies," Statement of Financial Accounting Standards No. 57, "Related
Party Disclosures," Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments" and rescission of
Financial Accounting Standards Board Interpretation No. 34, "Disclosure of
Indirect Guarantees of Indebtedness of Others, an Interpretation of Statement
of Financial Accounting Standards No. 5." It requires that upon issuance of a
guarantee, the guarantor must recognize a liability for the fair value of the
obligation it assumes under that guarantee regardless of whether the guarantor
receives separately identifiable consideration, such as a premium. The new
disclosure requirements are effective December 31, 2002. Our adoption of
Financial Interpretation Number 45 did not have a material impact on our
consolidated financial statements, nor is it expected to have a material
impact in the future.

In January 2003, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Interpretation No. 46, "Consolidation of Variable
Interest Entities," an interpretation of Accounting Research Bulletin 51.
Financial Interpretation Number 46 provides guidance on identifying entities
for which control is achieved through means other than through voting rights,
and how to determine when and which business enterprise should consolidate a
variable intent entity. In addition, Financial Interpretation Number 46

requires that both the primary beneficiary and all other enterprises with a
significant variable interest in a variable intent entity make additional
disclosures. The transitional disclosure requirements took effect almost
immediately and are required for all financial statements initially issued
after January 31, 2003. We have evaluated all of our investments and other
interests in entities that may be deemed variable interest entities under the
provisions of Financial Interpretation Number 46. We have concluded that no
additional entities need to be consolidated.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The principal objective of our asset/liability management activities is to
maximize net interest income, while minimizing levels of interest rate risk.
Net interest income and interest expense are subject to the risk of interest
rate fluctuations. To mitigate the impact of fluctuations in interest rates,
we use interest rate swaps to effectively convert fixed rate assets to
variable rate assets for proper matching with variable rate liabilities and
variable rate liabilities to fixed rate liabilities for proper matching with
fixed rate assets. Each derivative used as a hedge is matched with an asset or
liability with which it has a high correlation. The swap agreements are
generally held-to-maturity and we do not use derivative financial instruments
for trading purposes. We use interest rate swaps to effectively convert
variable rate debt to fixed rate debt for the financed portion of fixed rate
assets. The differential to be paid or received on these agreements is
recognized as an adjustment to the interest expense related to debt and is
recognized on the accrual basis.

The following table provides information about our financial instruments
that are sensitive to changes in interest rates at September 30, 2003. For
financial assets and debt obligations, the table presents cash flows to the
expected maturity and weighted average interest rates based upon the current
carrying values. For interest rate swaps, the table presents notional amounts
and weighted average fixed pay and variable receive interest rates by
contractual maturity dates. Notional amounts are used to calculate the
contractual cash flows to be exchanged under the contract. Weighted average
variable rates are based on rates in effect as of the reporting date.

EXPECTED MATURITY DATES
---------------------------------------------------------------------------
2003 2004 2005 2006 2007 THEREAFTER TOTAL FAIR VALUE
------- -------- ------- ------- ------- ---------- -------- ----------
(IN THOUSANDS)

ASSETS:
Available-for-Sale Securities
Fixed Rate $ 2,145 $ 8,087 $ 5,126 $ 3,012 $ 1,768 $ 2,494 $ 22,632 $ 23,633
Average interest rate 6.04% 6.04% 6.04% 6.04% 6.04% 6.04% 6.04%
Commercial Mortgage-Backed Securities
Fixed Rate -- -- -- $ 7,811 $ 135 $202,566 $210,512 $155,937
Average interest rate -- -- -- 9.90% 8.19% 11.64% 11.56%
Variable Rate -- $ 5,000 -- -- -- -- $ 5,000 $ 5,000
Average interest rate -- 4.07% -- -- -- -- 4.07%
Loans Receivable
Fixed Rate -- -- -- -- $24,195 $ 49,078 $ 73,273 $ 84,268
Average interest rate -- -- -- -- 11.78% 11.98% 11.92%
Variable Rate $10,968 $ 6,923 $12,654 $ 915 $14,452 $ 51,835 $ 97,747 $ 96,133
Average interest rate 9.71% 3.02% 6.94% 6.58% 8.92% 7.70% 7.67%
LIABILITIES:
Credit Facilities
Variable Rate -- -- $33,000 -- -- -- $ 33,000 $ 33,000
Average interest rate -- -- 5.59% -- -- -- 5.59%
Term Redeemable Securities Contract
Variable Rate -- $ 12,089 -- -- -- -- $ 12,089 $ 12,089
Average interest rate -- 6.26% -- -- -- -- 6.26%
Repurchase Obligations
Variable Rate $22,909 $120,053 $ 3,960 -- -- -- $146,922 $146,922
Average interest rate 1.10% 2.99% 2.12% -- -- -- 2.67%
Convertible Trust Preferred Securities
Fixed Rate -- -- -- $89,742 -- -- $ 89,742 $ 89,346
Average interest rate -- -- -- 10.58% -- -- 10.58%
Interest Rate Swaps
Notional amounts -- -- -- -- -- $109,000 $109,000 $ (838)
Average fixed pay rate -- -- -- -- -- 4.24% 4.24%
Average variable receive rate -- -- -- -- -- 1.12% 1.12%

BUSINESS

OVERVIEW

We are a finance and investment management company that specializes in
originating and managing credit-sensitive structured financial products. Our
investment programs are executed directly for our own account and for third-
party funds that we manage. To date, our activities have been focused
exclusively in the commercial real estate mezzanine market where we have
originated over $3.2 billion of investments since 1997 and established
ourselves as a leader in that sector. We are organized and conduct our
operations to qualify as a REIT for federal income tax purposes.

PLATFORM

We are a fully integrated, self-managed company that has 25 full-time
employees, all based in New York City. Our senior management team has an
average of 18 years of experience in the fields of real estate, credit,
capital markets and structured finance. Around this team of professionals, we
have developed an entire platform to originate and manage portfolios of
credit-sensitive structured products. Founded on our long-standing
relationships with borrowers, brokers and first mortgage providers, our
extensive origination network produces multiple investment opportunities from
which we select only those transactions which we believe exhibit a compelling
risk/return profile. Once a transaction that meets our parameters is
identified, we apply a disciplined process founded on four elements:

o intense credit underwriting,

o creative financial structuring,

o efficient use of leverage, and

o aggressive asset management.

The first element, and the foundation of our past and future success, is our
expertise in credit underwriting. For each prospective investment, an in-house
underwriting team is assigned to perform a ground-up analysis of all aspects
of credit risk and we reject any transaction that does not meet our standards.
Our rigorous underwriting process is embodied in our proprietary credit
policies and procedures that detail the due diligence steps from initial
client contact through closing. Input and approval is required from our
finance, capital markets, credit and legal teams, as well as from various
third-parties including our credit providers.

Creative financial structuring is the second critical element in our
process. Based upon our underwriting, we strive to create a customized
structure for each investment that minimizes our downside risk while
preserving the flexibility needed by our borrower. Typical structural features
in our real estate investments include bankruptcy-remote vehicles, springing
guarantees and cash flow controls that are implemented when collateral
performance drops below certain levels.

The prudent use of leverage is the third integral element of our platform.
Leverage can increase returns on equity and portfolio diversification, but can
also increase risk. We control this financial risk by actively managing our
capital structure, seeking to match the duration and interest rate index of
our assets and liabilities and, where appropriate, employing hedging
instruments such as interest rate swaps, caps and other interest rate exchange
agreements. Our objective is to minimize interest rate risk and optimize the
difference between the yield on our assets and the cost of our liabilities to
create net interest spread.

By adhering to these four key elements that define our platform, we have
limited the loss experience of our investment portfolios to less than 1.0%
since 1997.

BUSINESS MODEL

Our current balance sheet investment program focuses on structured
commercial real estate debt investments, including B Notes, subordinate CMBS,
and small-balance (under $15 million) mezzanine loans. As of September 30,
2003, our interest-earning balance sheet assets (excluding cash, fund
investments and other assets) total $355.5 million and had a weighted average
unleveraged yield of 10.2%. Our interest-bearing liabilities as of that date
total $192.0 million and had a weighted average interest rate cost of 3.4%.

We currently manage two private equity funds, Fund II and Fund III, that
specialize in making large-balance commercial real estate mezzanine loans.
Fund II made $1.2 billion of investments in 40 separate transactions during
its contractual investment period which commenced in April of 2001 and ended
in April of 2003. As of September 30, 2003, Fund II's remaining investments
aggregate $607.9 million, all of which were performing. Fund III held its
initial closing in June 2003 and its final closing in August 2003, ultimately
raising $425 million of committed equity capital. With leverage, we expect to
make over $1 billion of investments during Fund III's investment period (which
expires in June of 2005). We have made co-investments in Fund II and Fund III,
and our wholly-owned taxable REIT subsidiary, CT Investment Management Co.,
LLC, acts as the manager of both funds. In addition to our pro-rata share of
income as a co-investor, we earn base management fees and performance-oriented
incentive management fees from each fund. Our investment management activities
are described further under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations".

Commencing in 2003, we are operating our business to qualify as a REIT for
federal income tax purposes. Our objective in deciding to elect REIT status is
to pay dividends to our shareholders on a tax-efficient basis. We manage our
balance sheet investments to produce a portfolio that meets the asset and
income tests necessary to maintain our REIT qualification and otherwise
conduct our investment management business through our wholly-owned
subsidiary, CT Investment Management Co., which is subject to federal income
tax.

INVESTMENT STRATEGIES

Since 1997, our investment programs have focused on various strategies
designed to take advantage of investment opportunities that have developed in
the commercial real estate mezzanine sector. These investment opportunities
have been created largely by the evolution and growing importance of
securitization in the real estate capital markets. With approximately $2
trillion outstanding, U.S. commercial real estate debt is a large and dynamic
market that had traditionally been dominated by institutional lenders such as
banks, insurance companies and thrifts making first mortgage loans for
retention in their own portfolios. Securitized debt has captured an increasing
share of this market, growing from less than 5% of total outstandings in 1990
to approximately 20% by year-end 2002. More importantly, CMBS now accounts for
roughly 40% of annual new originations with domestic CMBS issuance in 2003
expected to exceed $75 billion. In addition, many traditional lenders have
adopted CMBS standards in their portfolio lending programs, further extending
the influence of securitization in the market.

The essence of securitization is risk segmentation, whereby whole mortgage
loans (or pools of loans) are split into multiple classes and sold to
different buyers based on their risk appetite and return requirements. The
most senior classes, which have the lowest risk and therefore the lowest
return, are rated investment grade (AAA through BBB-) by the credit rating
agencies. The junior classes, which are subordinate to the senior debt but
senior to the owner/operator's common equity investment, command a higher
yield. These "mezzanine" tranches may carry sub-investment grade ratings or no
rating at all.

Depending on our assessment of relative value, our real estate mezzanine
investments may take a variety of forms including:

o Property Mezzanine Loans - These are single-property secured loans which
are subordinate to a primary first mortgage loan, but senior to the
owner's equity. A mezzanine loan is evidenced by its

own promissory note and is typically made to the owner of the property-
owning entity (i.e. the senior loan borrower). It is not secured by the
first mortgage on the property, but by a pledge of all of the mezzanine
borrower's ownership interest in the property owner. Subject to
negotiated contractual restrictions, the mezzanine lender has the right,
following foreclosure, to become the sole indirect owner of the property
subject to the lien of the primary mortgage.

o B Notes - These are loans evidenced by a junior participation in a first
mortgage against a single property; the senior participation is known as
an A Note. Although a B Note may be evidenced by its own promissory note,
it shares a single borrower and mortgage with the A Note and is secured
by the same collateral. B Note lenders have the same obligations,
collateral and borrower as the A Note lender and in most instances are
contractually limited in rights and remedies in the case of a default.
The B Note is subordinate to the A Note by virtue of a contractual
arrangement between the A Note lender and the B Note lender. For the B
Note lender to actively pursue a full range of remedies, it must, in most
instances, purchase the A note.

o Subordinate CMBS - These are the junior classes of securitized pools of
first mortgage loans. Cash flows from the underlying mortgages are
aggregated and allocated to the different classes in accordance with
their priority ranking, typically from AAA through the unrated, first-
loss tranche. Administration and management of the pool are performed by
a trustee and servicers, who act on behalf of all holders in accordance
with contractual agreements. Our investments generally represent the
subordinated tranches ranging from BBB through the unrated class.

o Preferred Equity Interests - These are senior equity investments in
property-owning entities. Preferred equity holders have a first claim on
cash flow and/or capital event proceeds relative to the common equity
partner. Following an event of default, preferred equity holders have the
right to squeeze out the other equity holders to become the primary owner
of the property subject to the lien of the primary mortgage. Like true
owners, preferred equity investors have the option to support the loan
during temporary cash flow shortfalls.

o Corporate Mezzanine Loans - These are investments in or loans to real
estate-related operating companies, including REITs. Such investments may
take the form of secured debt, preferred stock and other hybrid
instruments such as convertible debt. Corporate mezzanine loans may
finance, among other things, operations, mergers and acquisitions,
management buy-outs, recapitalizations, start-ups and stock buy-backs
generally involving real estate and real estate-related entities.

We finance single properties, multiple property-portfolios and operating
companies, with our investment typically representing the portion of the
capital structure ranging between 50% and 85% of underlying collateral value.
Our objective is to create portfolios which are diversified by investment
format, property type and geographic market. The following charts illustrate
the diversification achieved to date in the origination of our investment
portfolios.

[GRAPHIC OMITTED]

Investment Format

Property Mezzanine 50%
Corporate Mezzanine 12%
First Mortgage 11%
CMBS 18%
Preferred Equity 2%
B Note 7%

[GRAPHIC OMITTED]

Property Type

Office 44%
Hotel 13%
Retail 19%
Multifamily 7%
Other 2%
Mixed Use 15%

[GRAPHIC OMITTED]

Geographic Market

Northeast 42%
Southeast 13%
Southwest 8%
West 18%
Midwest 3%
Diversified 16%

If carefully underwritten and structured, we believe that portfolios of real
estate mezzanine investments can produce superior risk-adjusted returns when
compared to both senior debt and direct equity ownership.

BUSINESS PLAN

Our business plan is to grow our balance sheet investments and our third-
party assets under management. We intend to continue our commercial real
estate investment programs and actively seek to expand our franchise by
pursuing complementary investment strategies involving other credit-sensitive
structured products that leverage our core skills in credit underwriting and
financial structuring. We may expand through business acquisitions or the
recruitment of finance professionals with experience in other products.

COMPETITION

We are engaged in a highly competitive business. We compete for loan and
investment opportunities with numerous public and private real estate
investment vehicles, including financial institutions, mortgage banks, pension
funds, opportunity funds, REITs and other institutional investors, as well as
individuals. Many competitors are significantly larger than us, have well-
established operating histories and may have access to greater capital and
other resources. In addition, the investment management industry is highly
competitive and there are numerous well-established competitors possessing
substantially greater financial, marketing, personnel and other resources than
us. We compete with other investment management companies in attracting
capital for funds under management.

GOVERNMENT REGULATION

EMPLOYEES

As of September 30, 2003, we had 25 full-time employees. None of our
employees are covered by a collective bargaining agreement and management
considers the relationship with its employees to be good.

PROPERTIES

LEGAL PROCEEDINGS

We are not a party to any material litigation or legal proceedings, which,
in the opinion of management, would have a material adverse effect on our
results of operations or financial condition.

MANAGEMENT

DIRECTORS

The names, ages as of December 1, 2003, and existing positions of our
directors are as follows:

NAME AGE OFFICE OR POSITION HELD
---- --- -----------------------

Samuel Zell .............. 62 Chairman of the Board of Directors
Jeffrey A. Altman ........ 37 Director
Thomas E. Dobrowski ...... 60 Director
Martin L. Edelman ........ 62 Director
Gary R. Garrabrant ....... 46 Director
Craig M. Hatkoff ......... 49 Director
John R. Klopp ............ 49 Director, Chief Executive Officer, President
Henry N. Nassau .......... 49 Director
Sheli Z. Rosenberg ....... 61 Director
Steven Roth .............. 62 Director
Lynne B. Sagalyn ......... 56 Director

The name, principal occupation, selected biographical information and the
period of service as a director of each of the directors are set forth below.

Samuel Zell has been the chairman of our board of directors since 1997.
Mr. Zell is chairman of Equity Group Investments, L.L.C., a privately-held
corporate investment firm. He is chairman of the board of trustees of Equity
Residential, a REIT specializing in the ownership and management of multi-
family housing, and of Equity Office Properties Trust, a REIT specializing in
the ownership and management of office buildings. He also serves as chairman
of the board of Anixter International Inc., a provider of integrated network
and cabling systems; Manufactured Home Communities, Inc., a REIT specializing
in the ownership and management of manufactured home communities; Angelo &
Maxies, Inc., an owner and operator of restaurants; and iDine Rewards Network,
Inc., an administrator of consumer loyalty rewards programs. Additionally, he
serves as chairman and chief executive officer of Danielson Holding
Corporation, a holding company that offers a variety of insurance products and
financial services.

Jeffrey A. Altman has been a director since 1997. Mr. Altman is the sole
managing partner of Owl Creek Asset Management, L.P., a manager of distressed
securities and value equities hedge funds, which he founded in February 2002.
Mr. Altman previously served since November 1996 as a senior vice president of
Franklin Mutual Advisers, Inc., formerly Heine Securities Corporation, a
registered investment adviser, and a vice president of Franklin Mutual Series
Fund Inc., a mutual fund with assets in excess of $20 billion, advised by
Franklin Mutual Advisers. From August 1988 to October 1996, Mr. Altman was an
analyst with Franklin Mutual Advisers.

Thomas E. Dobrowski has been a director since 1998. Mr. Dobrowski is the
managing director of Real Estate and Alternative Investments for General
Motors Asset Management, an investment manager for several pension funds of
General Motors Corporation and its subsidiaries, as well as for several third
party clients. Mr. Dobrowski is a trustee of Equity Office Properties Trust
and a director of Manufactured Home Communities.

Martin L. Edelman has been a director since 1997. Mr. Edelman has been of
counsel to Paul, Hastings, Janofsky & Walker LLP, and prior thereto Battle
Fowler LLP, each a law firm that has provided services to us, since 1993.
Mr. Edelman was a partner with Battle Fowler LLP from 1972 to 1993. Mr. Edelman
served as president of Chartwell Leisure Inc., an owner and operator of hotel
properties, from January 1996 until it was sold in March 1998. He has been a
director of Cendant Corporation and a member of that corporation's executive
committee since November 1993. Mr. Edelman also serves as a director of Acadia
Realty Trust, Ashford Hospitality Trust and Hanover Direct, Inc.

Gary R. Garrabrant has been a director since 1997. Mr. Garrabrant was our
vice chairman from February 1997 until July 1997. Mr. Garrabrant has been
chief executive officer of Equity International Properties, Ltd.,

a privately-held company which invests in real estate companies and properties
outside the United States, since September 2002 having previously served as
its chief investment officer since July 1998. Mr. Garrabrant is executive vice
president of Equity Group Investments and joined Equity Group Investments as
senior vice president in January 1996. Mr. Garrabrant is a director of Equity
International Properties, Fondo de Valores Inmobiliarios, a publicly-held
Latin American real estate company, and various Equity International
Properties' portfolio companies.

Craig M. Hatkoff has been a director since 1997. From 1997 to 2000,
Mr. Hatkoff served as our vice chairman. Mr. Hatkoff is chairman of Turtle
Pond Publications LLC, which is active in children's publishing and
entertainment, and is a private investor in other entrepreneurial ventures.
Mr. Hatkoff was a founder and a managing partner of Victor Capital Group, L.P.
from 1989 until our acquisition of Victor Capital in July 1997. Mr. Hatkoff
was a managing director and co-head of Chemical Realty Corporation, the real
estate investment banking arm of Chemical Banking Corporation, from 1982 until
1989. From 1978 to 1982, Mr. Hatkoff was the head of new product development
in Chemical Bank's Real Estate Division, where he previously served as a loan
officer.

John R. Klopp has been a director since 1997, and our chief executive
officer and president since 1997 and 1999, respectively. Mr. Klopp was a
founder and a managing partner of Victor Capital from 1989 until the
acquisition of Victor Capital by us in July 1997. Mr. Klopp was a managing
director and co-head of Chemical Realty Corporation from 1982 until 1989. From
1978 to 1982, Mr. Klopp held various positions with Chemical Bank's Real
Estate Division, where he was responsible for originating, underwriting and
monitoring portfolios of construction and permanent loans.

Henry N. Nassau has been a director since 2003. Mr. Nassau was the chief
operating officer of Internet Capital Group, Inc., an internet holding
company, from December 2002 until June 2003 having previously served as
managing director, general counsel and secretary since May 1999. Since
September 2003, Mr. Nassau has been a partner at the law firm, Dechert LLP.
Mr. Nassau was previously a partner at Dechert LLP from September 1987 to May
1999 and was chair of the firm's Business Department from January 1988 to May
1999. At Dechert LLP, Mr. Nassau engages in the practice of corporate law,
concentrating on mergers and acquisitions, public offerings, private equity,
and venture capital financing.

Sheli Z. Rosenberg has been a director since 1997. Ms. Rosenberg is the
retired chief executive officer and president of Equity Group Investments. She
was a principal of the law firm Rosenberg & Liebentritt P.C. from 1980 until
September 1997. Ms. Rosenberg is a director of Manufactured Home Communities,
CVS Corporation, a drugstore chain, Cendant Corporation and Ventas, Inc. She
is also a trustee of Equity Residential and Equity Office Properties Trust.

Steven Roth has been a director since 1998. Mr. Roth has been chairman of
the board of trustees and chief executive officer of Vornado Realty Trust
since May 1989 and chairman of the executive committee of the board of Vornado
Realty Trust since April 1980. Since 1968, he has been a general partner of
Interstate Properties, a real estate and investment company, and, more
recently, he has been managing general partner. On March 2, 1995, he became
chief executive officer of Alexander's, Inc., a real estate company. Mr. Roth
is also a director of Alexander's, Inc.

Lynne B. Sagalyn has been a director since 1997. Dr. Sagalyn is Professor of
Real Estate Development and Planning at the University of Pennsylvania, with
appointments at both the Department of City Planning and the Wharton School's
Real Estate Department. From 1992 until her appointments at the University of
Pennsylvania in 2004, Dr. Sagalyn served as a professor and the Earl W. Kazis
and Benjamin Schore Director of the MBA Real Estate Program and Milstein
Center for Real Estate at the Columbia University Graduate School of Business.
She also serves on the faculty of the Weimer School for Advanced Studies in
Real Estate and Land Economics. Dr. Sagalyn is a director of United Dominion
Realty Trust, a self-administered REIT in the apartment communities sector and
a board member of J.P. Morgan U.S. Real Estate Income and Growth Fund and has
served on the New York City Board of Education Chancellor's Commission on the
Capital Plan.

EXECUTIVE AND SENIOR OFFICERS

The following sets forth the positions, ages as of December 1, 2003 and
selected biographical information for our executive and senior officers who
are not directors.

Jeremy FitzGerald, age 40, has served as a managing director since 1997.
Ms. FitzGerald is responsible for originating, structuring and negotiating
high yield investments. Prior to that time, she served as a principal of
Victor Capital Group and had been employed in various positions at such firm
since May 1990. She was previously employed in various positions at
PaineWebber Incorporated.

Peter S. Ginsberg, age 41, has served as a managing director since 2003.
Mr. Ginsberg is responsible for originating, structuring and negotiating high
yield investments. He has been employed by us in various positions since 1997.
He was previously employed as a senior associate at a New York City law firm
focusing on real estate finance and investments.

Geoffrey G. Jervis, age 32, has served as our vice president of capital
markets since 2003. He has been employed by us in various positions since
1999. Mr. Jervis is responsible for our capital markets activities that
include the structuring, marketing and management of our and our funds' under
management equity and liability structures. Prior to joining us, Mr. Jervis
was the Chief of Staff to the New York City Economic Development Corporation
under the Giuliani Administration.

Brian H. Oswald, age 42, has served as our chief financial officer since
2003. Mr. Oswald joined us in 1997 as our director of finance and accounting
and chief accounting officer. Prior to joining us, Mr. Oswald was employed for
10 years at KPMG Peat Marwick where he held various positions, including
senior manager in the financial institutions group. After leaving KPMG, he was
employed as the president of a savings and loan association, director of
financial reporting and subsidiary accounting for a $1.5 billion bank and
corporate controller for an international computer software company. Mr. Oswald
is a Certified Public Accountant and Certified Management Accountant.

Stephen D. Plavin, age 44, has served as our chief operating officer since
1998. Prior to that time, Mr. Plavin was employed for fourteen years with the
Chase Manhattan Bank and its securities affiliate, Chase Securities Inc.
Mr. Plavin held various positions within the real estate finance unit of
Chase, including the management of: loan origination and execution, loan
syndications, portfolio management, banking services and real estate owned
sales. He served as a managing director responsible for real estate client
management for Chase's major real estate relationships and in 1997 he became
co-head of Global Real Estate for Chase. Mr. Plavin serves as a director of
Omega Healthcare Investors, Inc., a skilled nursing real estate
investment trust.

Thomas C. Ruffing, age 42, has served as our director of asset management
since 2001. Mr. Ruffing is responsible for the asset management of our
investment portfolios. Prior to joining us in 2001, Mr. Ruffing was employed
by JP Morgan Chase serving in its real estate and lodging investment banking
group since 1990. In various roles at the bank, his responsibilities included
structured corporate real estate finance transactions, major asset property
sales, and the restructuring and workout of problem real estate loans.

PRINCIPAL SHAREHOLDERS

The following table sets forth as of December 1, 2003, certain information
with respect to the beneficial ownership of our class A common stock, after
adjustment for the one (1) for three (3) reverse stock split effected on
April 2, 2003, by:

o each person known to us to be the beneficial owner of more than 5% of our
outstanding class A common stock,

o each director and "named executive officer" within the meaning of Item
402(a)(3) of Regulation S-K currently employed by us, and

o all of our directors and executive officers as a group.

Such information (other than with respect to our directors and executive
officers) is based on a review of statements filed with the Commission
pursuant to Sections 13(d), 13(f) and 13(g) of the Securities Exchange Act of
1934 with respect to our class A common stock.

PERCENTAGE OF
NAME OF BENEFICIAL OWNER NUMBER OF SHARES SHARES OUTSTANDING
------------------------ BENEFICIALLY OWNED (1) BEFORE OFFERING
---------------------- ------------------

Veqtor Finance Company, L.L.C.
(2)............................ 897,429 13.7%
EOP Operating Limited
Partnership (3)................ 1,424,474(4) 17.9
Vornado Realty, L.P. (5) ........ 1,424,474(4) 17.9
JPMorgan Chase Bank, as trustee
for General Motors Employe
Global Group Pension Trust (6). 99,713(7) 1.5
JPMorgan Chase Bank, as trustee
for GMAM Group Pension Trust II
(6)............................ 1,324,761(8) 16.9
Stichting Pensioenfonds ABP (9) . 459,566 7.0
Jeffrey A. Altman ............... -- --
Thomas E. Dobrowski ............. --(10) --
Martin L. Edelman ............... 37,093(11) *
Gary R. Garrabrant .............. 88,566(11)(12) 1.4
Craig M. Hatkoff ................ 668,819(13)(14) 10.2
John R. Klopp ................... 813,564(13)(14) 12.1
Henry N. Nassau ................. 10,684(15) *
Brian H. Oswald ................. 51,131(16) *
Stephen D. Plavin ............... 154,445(16) 2.3
Sheli Z. Rosenberg .............. 151,899(11)(17) 2.3
Steven Roth ..................... --(18) --
Lynne B. Sagalyn ................ 20,426(11) *
Samuel Zell ..................... 77,092(11)(19) 1.2
All executive officers and
directors as a group (13
persons)....................... 2,069,119 29.6%

---------------
* Represents less than 1%.
(1) The number of shares are those beneficially owned, as determined under
the rules of the SEC, and such information is not necessarily
indicative of beneficial ownership for any other purpose. Under such
rules, beneficial ownership includes any shares as to which a person
has sole or shared voting power or investment power and any shares
which the person has the right to acquire within 60 days through the
exercise of any option, warrant or right, through conversion of any
security or pursuant to the automatic termination of a power of
attorney or revocation of a trust, discretionary account or similar
arrangement.
(2) Zell General Partnership, Inc. is the sole managing member of Veqtor
Finance Company, L.L.C. The sole shareholder of Zell General
Partnership is The Sam Investment Trust, a trust established for the
benefit of the family of Sam Zell. Chai Trust Company L.L.C. serves as
trustee of The Sam Investment Trust. Veqtor Finance Company, L.L.C. is
located at c/o Equity Group Investments, L.L.C., Two North Riverside
Plaza, Chicago, Illinois 60606.

(3) Beneficial ownership information is based on a statement filed pursuant
to Section 13(d) of the Securities Exchange Act of 1934 by EOP
Operating Limited Partnership. The address of EOP Operating Limited
Partnership is Two North Riverside Plaza, Chicago, Illinois 60606.
(4) Represents shares which may be obtained upon conversion of $29,914,000
in convertible amount of variable step up convertible trust preferred
securities issued by our consolidated Delaware statutory business trust
subsidiary, CT Convertible Trust I.
(5) Beneficial ownership information is based on a statement filed pursuant
to Section13(d) of the Securities Exchange Act of 1934 by Vornado
Realty, L.P. The address of Vornado Realty is c/o Vornado Realty Trust,
Park 80 West, Plaza II, Saddle Brook, New Jersey 07663.
(6) Each trust is a pension trust formed pursuant to the laws of the State
of New York for the benefit of certain employee benefit plans of
General Motors Corporation, its subsidiaries and unrelated employers.
These shares may be deemed to be owned beneficially by General Motors
Investment Management Corporation, a wholly-owned subsidiary of General
Motors. General Motors Investment Management Corporation is registered
as an investment adviser under the Investment Advisers Act of 1940.
General Motors Investment Management Corporation's principal business
involves investment advice and investment management services with
respect to the assets of certain employee benefit plans of General
Motors, its subsidiaries and unrelated employers and with respect to
the assets of certain direct and indirect subsidiaries of General
Motors and associated entities. General Motors Investment Management
Corporation is serving as investment manager with respect to these
shares and in that capacity it has the sole power to direct the trustee
as to the voting and disposition of these shares. Because of the
trustee's limited role, beneficial ownership of the shares by the
trustee is disclaimed.
(7) Represents shares which may be obtained upon conversion of $2,093,980
in convertible amount of variable step up convertible trust preferred
securities issued by our consolidated Delaware statutory business trust
subsidiary, CT Convertible Trust I.
(8) Represents shares which may be obtained upon conversion of $27,820,020
in convertible amount of variable step up convertible trust preferred
securities issued by our consolidated Delaware statutory business trust
subsidiary, CT Convertible Trust I.
(9) Beneficial ownership information is based on a statement filed pursuant
to Section 13(d) of the Securities Exchange Act of 1934 by Stichting
Pensioenfonds ABP and other information available to us as of the date
of this prospectus. The address of Stichting Pensioenfonds ABP is c/o
ABP Investments US, Inc., 666 Third Avenue, 2nd floor, New York, NY
10017-3904.
(10) Does not include the shares that may be deemed beneficially owned by
General Motors Investment Management Corporation, as to which Mr.
Dobrowski disclaims beneficial ownership.
(11) In the case of Mr. Zell, Mr. Edelman, Mr. Garrabrant, Ms. Rosenberg and
Dr. Sagalyn, includes 12,092 shares obtainable by each upon conversion
of vested stock units. In the case of Mr. Zell, Mr. Edelman, Mr.
Garrabrant and Dr. Sagalyn, includes 40,000, 25,001, 11,667 and 8,334
shares issuable upon the exercise of vested stock options.
(12) Includes the 64,807 shares owned by GRG Investment Partnership LP, a
family partnership for which Mr. Garrabrant serves as the general
partner.
(13) Includes, in the case of Mr. Hatkoff, the 610,044 shares owned by CMH
Investment Partnership LP, a family partnership for which Mr. Hatkoff
serves as a general partner. Includes, in the case of Mr. Klopp,
600,044 shares owned by JRK Investment Partnership LP, a family
partnership for which Mr. Klopp serves as general partner.
(14) Includes 180,558 and 47,223 shares issuable upon the exercise of vested
stock options held by each of Messrs. Klopp and Hatkoff. Includes 9,876
shares for Mr. Klopp that are the subject of restricted stock awards
for which he retains voting rights. Includes for Mr. Hatkoff 5,552
shares that may be obtained upon conversion of vested stock units.
(15) Includes 684 shares obtainable upon conversion of vested stock units.
Includes 400 shares held by Mr. Nassau's two sons.
(16) Includes 35,002 and 44,445 shares issuable upon the exercise of vested
stock options held by Mr. Oswald and Mr. Plavin, respectively. Includes
3,734 and 10,000 shares for Mr. Oswald and Mr. Plavin, respectively,
that are the subject of restricted stock awards for which they retain
voting rights.
(17) Includes 139,807 shares owned by Rosenberg-CT General Partnership, for
which Ms. Rosenberg serves as a general partner.
(18) Does not include the shares that may be deemed beneficially owned by
Vornado Realty, L.P., as to which Mr. Roth disclaims beneficial
ownership.
(19) Does not include the shares that may be deemed beneficially owned by
Equity Office Properties Trust, as to which Mr. Zell disclaims
beneficial ownership.

DESCRIPTION OF CAPITAL STOCK

The following is a summary of our class A common stock and preferred stock,
the general terms and provisions of warrants to purchase our common stock or
preferred stock to which any prospectus supplement may relate and provisions
of our charter and bylaws and specific provisions of the Maryland General
Corporation Law containing the material terms of our class A common stock and
preferred stock. As summaries, they are qualified in their entirety by
reference to the Maryland General Corporation Law, to our charter and bylaws
and any form of warrant and warrant agreement applicable to a particular
warrant.

GENERAL

Under our charter, we may issue up to 200,000,000 shares of stock comprised
of the following:

o 100,000,000 shares of class A common stock, par value $.01 per share; and

o 100,000,000 shares of preferred stock, par value $.01 per share.

As of the date of this prospectus, 6,536,345 shares of class A common stock
were issued and outstanding and no shares of preferred stock were designated
as a particular class or series or are outstanding. Under Maryland law, our
shareholders generally are not liable for our debts or obligations. The class
A common stock is listed on the New York Stock Exchange under the symbol "CT".

No warrants to purchase either class A common stock or preferred stock were
issued or outstanding as of the date of this prospectus.

Our charter authorizes our board of directors, without shareholder approval,
to:

o classify and reclassify any unissued shares of our class A common stock
and preferred stock into other classes or series of stock, and

o amend our charter to increase or decrease the aggregate number of shares
of stock of any class or series that may be issued.

We believe that the power to issue additional shares of our class A common
stock or preferred stock, increase the aggregate number of shares of stock of
any class or series that we have the authority to issue and to classify or
reclassify unissued shares of our class A common or preferred stock and
thereafter to issue the classified or reclassified shares of stock provides us
with increased flexibility in structuring possible future financings and
acquisitions and in meeting other needs which might arise. These actions can
be taken without shareholder approval, unless shareholder approval is required
by applicable law or the rules of any stock exchange or automated quotation
system on which our securities may be listed or traded.

Prior to the issuance of shares of each class or series, the board is
required by Maryland law and by our charter to set, subject to our charter
restrictions on ownership and transfers of our stock, the terms, preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms or conditions of
redemption for each class or series. Thus, the board could authorize the
issuance of shares of preferred stock with terms and conditions which could
have the effect of delaying, deferring or preventing a transaction or a change
in control of our company that might involve a premium price for holders of
our class A common stock or otherwise be in their best interest.

CLASS A COMMON STOCK

Holders of our class A common stock are entitled to receive dividends when
authorized by our board of directors and declared by us out of assets legally
available for the payment of dividends. They are also entitled to share
ratably in our assets legally available for distribution to our shareholders
in the event of our liquidation, dissolution or winding up, after payment of,
or adequate provision for, all of our known debts and liabilities. These
rights are subject to the preferential rights of any other class or series of
our stock. All shares of class A common stock have equal dividend and
liquidation rights.

no cumulative voting in the election of our directors and our directors are
elected by a plurality of the votes cast, so the holders of a simple majority
of the outstanding class A common stock, voting at a shareholders meeting at
which a quorum is present, can elect all of the directors nominated for
election at the meeting. Holders of our class A common stock have no exchange,
sinking fund, redemption or appraisal rights and have no preemptive rights to
subscribe for any of our securities. Because holders of class A common stock
do not have preemptive rights, we may issue additional shares of stock that
may reduce each shareholder's proportionate voting and financial interest in
our company. Rights to receive dividends on our class A common stock may be
restricted by the terms of any future classified and issued shares of our
preferred stock.

Under Maryland law, a Maryland corporation generally cannot dissolve, amend
its charter, merge, sell all or substantially all of its assets, engage in a
share exchange or engage in similar transactions outside the ordinary course
of business unless approved by the affirmative vote of shareholders holding at
least two-thirds of the shares entitled to vote on the matter. However, a
Maryland corporation may provide in its charter for approval of these matters
by a lesser percentage, but not less than a majority of all of the votes
entitled to be cast on the matter. Our charter provides for approval of these
matters by a majority of all votes entitled to be cast on the matter.

PREFERRED STOCK

GENERAL

We are authorized to issue 100,000,000 shares of preferred stock. As of the
date of this prospectus, no shares of preferred stock are outstanding. Our
board of directors has the authority, without further action by the
shareholders, to authorize us to issue shares of preferred stock in one or
more series and to fix the number of shares, dividend rights, conversion
rights, voting rights, redemption rights, liquidation preferences, sinking
funds, and any other rights, preferences, privileges and restrictions
applicable to each such series of preferred stock. The issuance of preferred
stock could have the effect of making an attempt to gain control of us more
difficult by means of a merger, tender offer, proxy contest or otherwise. The
preferred stock, if issued, would have a preference on dividend payments that
could affect our ability to make dividend distributions to the common
shareholders. The preferred stock will, when issued, be duly authorized, fully
paid and non-assessable.

A prospectus supplement relating to any series of preferred stock being
offered will include specific terms relating to the offering. They will
include, where applicable:

o the title and stated value of the preferred stock;

o the number of shares of the preferred stock offered, the liquidation
preference per share and the offering price of the preferred stock;

o the dividend rate(s), period(s) and/or payment date(s) or method(s) of
calculation thereof applicable to the preferred stock;

o whether dividends will be cumulative or non-cumulative and, if
cumulative, the date from which dividends on the preferred stock shall
accumulate;

o the procedures for an auction and remarketing, if any, of the preferred
stock;

o the provisions for a sinking fund, if any, for the preferred stock;

o any voting rights of the preferred stock;

o the provisions for redemption, if applicable, of the preferred stock;

o any listing of the preferred stock on any securities exchange;

o the terms and conditions, if applicable, upon which the preferred stock
will be convertible into or exchangeable for our class A common stock,
preferred stock or other securities including the conversion price or the
manner of calculating the conversion price and conversion period;

o if appropriate, a discussion of federal income tax consequences
applicable to the preferred stock;

o any limitations on direct or beneficial ownership and restrictions on
transfer, in each case as may be appropriate to assist us in qualifying
as a REIT or otherwise;

o the priority of the preferred stock with all series of preferred stock
ranking on a parity with each other unless otherwise specified in the
charter and will rank senior to class A common stock with respect to
payment of dividends and distribution of assets upon liquidation; and

o any other specific terms, preferences, rights, limitations or
restrictions on the preferred stock.

CONVERSION OR EXCHANGE

The terms, if any, on which the preferred stock may be convertible into or
exchangeable for our class A common stock, preferred stock or other securities
will be stated in the prospectus supplement relating to the preferred stock.
The terms will include provisions as to whether conversion or exchange is
mandatory, at the option of the holder or at our option, and may include
provisions pursuant to which the number of shares of our class A common stock
or other securities to be received by the holders of preferred stock would be
subject to adjustment.

DESCRIPTION OF WARRANTS

We may issue warrants for the purchase of common stock or preferred stock.
Warrants may be issued independently or together with any offered securities
and may be attached to or separate from such securities. Each series of
warrants will be issued under a separate warrant agreement we will enter into
with a warrant agent specified in the agreement. The warrant agent will act
solely as our agent in connection with the warrants of that series and will
not assume any obligation or relationship of agency or trust for or with any
holders or beneficial owners of warrants.

A prospectus supplement relating to any series of warrants being offered
will include specific terms relating to the offering. They will include, where
applicable:

o the title of the warrants;

o the aggregate number of warrants;

o the price or prices at which the warrants will be issued;

o the currencies in which the price or prices of the warrants may be
payable;

o the designation, amount and terms of the offered securities purchasable
upon exercise of the warrants;

o the designation and terms of the other offered securities, if any, with
which the warrants are issued and the number of warrants issued with the
security;

o if applicable, the date on and after which the warrants and the offered
securities purchasable upon exercise of the warrants will be separately
transferable;

o the price or prices at which, and currency or currencies in which, the
offered securities purchasable upon exercise of the warrants may be
purchased;

o the date on which the right to exercise the warrants shall commence and
the date on which the right shall expire;

o the minimum or maximum amount of the warrants which may be exercised at
any one time;

o information with respect to book-entry procedures, if any;

o if appropriate, a discussion of federal income tax consequences; and

o any other material term of the warrants, including terms, procedures and
limitations relating to the exchange and exercise of the warrants.

TRANSFER AGENT AND REGISTRAR

Our transfer agent and registrar is American Stock Transfer & Trust Company
located in Brooklyn, New York.

CERTAIN PROVISIONS OF OUR CHARTER AND BYLAWS AND OF MARYLAND LAW

REIT QUALIFICATION RESTRICTIONS ON OWNERSHIP AND TRANSFER

Our charter contains restrictions on the number of shares of our stock that
a person may own. No individual may acquire or hold, directly or indirectly,
in excess of 2.5% in value or number of our outstanding stock or our
outstanding common stock unless they receive an exemption from our board of
directors.

Our charter further prohibits any person from owning shares of our stock
that would result in our being "closely held" under Section 856(h) of the
Internal Revenue Code or otherwise cause us to fail to qualify as a REIT and
any person from transferring shares of our stock if the transfer would result
in our stock being owned by fewer than 100 persons. Any person who acquires or
intends to acquire shares of our stock that may violate any of these
restrictions, or who is the intended transferee of shares of our stock which
are transferred to the trust, as described below, is required to give us
immediate written notice and provide us with such information as we may
request in order to determine the effect of the transfer on our status as a
REIT. The above restrictions will not apply if our board of directors
determines that it is no longer in our best interests to continue to qualify
as a REIT.

Our board of directors, in its sole discretion, may exempt a person from, or
modify, these limits, subject to such terms, conditions, representations and
undertakings as it may determine. Our charter provides for, and our board of
directors has granted, limited exemptions to certain persons who directly or
indirectly own our stock, including officers, directors and shareholders
controlled by them or trusts for the benefit of their families.

Any attempted transfer of our stock which, if effective, would result in
violation of the above limitations, will cause the number of shares causing
the violation, rounded to the nearest whole share, to be automatically
transferred to a trust for the exclusive benefit of one or more charitable
beneficiaries designated by us and the proposed transferee will not acquire
any rights in the shares. The automatic transfer will be deemed to be
effective as of the close of business on the business day, as defined in our
charter, prior to the date of the transfer. The shares transferred to the
trust will generally be selected so as to minimize the aggregate value of
shares transferred to the trust. Shares of our stock held in the trust will be
issued and outstanding shares. The proposed transferee will not benefit
economically from ownership of any shares of stock held in the trust, will
have no rights to dividends and no rights to vote or other rights attributable
to the shares of stock held in the trust. The trustee of the trust will have
all voting rights and rights to dividends or other distributions with respect
to shares held in the trust. These rights will be exercised for the exclusive
benefit of the charitable beneficiaries. Any dividend or other distribution
paid prior to our discovery that shares of stock have been transferred to the
trust will be paid by the recipient to the trustee upon demand. Any dividend
or other distribution authorized but unpaid will be paid when due to the
trustee. Any dividend or distribution paid to the trustee will be held in
trust for the charitable beneficiaries. Subject to Maryland law, the trustee
will have the authority to rescind as void any vote cast by the proposed
transferee prior to our discovery that the shares have been transferred to the
trust and to recast the vote in accordance with the desires of the trustee
acting for the benefit of the charitable beneficiaries. However, if we have
already taken irreversible corporate action, then the trustee will not have
the authority to rescind and recast the vote. If necessary to protect our
status as a REIT, we may establish additional trusts with distinct trustees
and charitable beneficiaries to which shares may be transferred.

Within 20 days of receiving notice from us that shares of our stock have
been transferred to the trust, the trustee will sell the shares to a person
designated by the trustee, whose ownership of the shares will not violate the
above ownership limitations. Upon the sale, the interest of the charitable
beneficiaries in the shares sold will terminate and the trustee will
distribute the net proceeds of the sale to the proposed transferee and to the
charitable beneficiaries as follows. The proposed transferee will receive the
lesser of (i) the price paid

by the proposed transferee for the shares or, if the proposed transferee did
not give value for the shares in connection with the event causing the shares
to be held in the trust, such as a gift, devise or other similar transaction,
the market price, as defined in our charter, of the shares on the day of the
event causing the shares to be held in the trust and (ii) the price received
by the trustee from the sale or other disposition of the shares. Any net sale
proceeds in excess of the amount payable to the proposed transferee will be
paid immediately to the charitable beneficiaries. If, prior to our discovery
that shares of our stock have been transferred to the trust, the shares are
sold by the proposed transferee, then the shares shall be deemed to have been
sold on behalf of the trust and, to the extent that the proposed transferee
received an amount for the shares that exceeds the amount he was entitled to
receive, the excess shall be paid to the trustee upon demand.

In addition, shares of our stock held in the trust will be deemed to have
been offered for sale to us, or our designee, at a price per share equal to
the lesser of (i) the price per share in the transaction that resulted in the
transfer to the trust, or, in the case of a devise or gift, the market price
at the time of the devise or gift and (ii) the market price on the date we, or
our designee, accept the offer. We will have the right to accept the offer
until the trustee has sold the shares. Upon a sale to us, the interest of the
charitable beneficiaries in the shares sold will terminate and the trustee
will distribute the net proceeds of the sale to the proposed transferee.

All certificates representing shares of our stock issued in the future will
bear a legend referring to the restrictions described above.

Every owner of more than such percentage as may from time to time be
established by our board of directors, or such lower percentage as required by
the Internal Revenue Code or the regulations promulgated thereunder, of our
stock, within 30 days after the end of each taxable year, is required to give
us written notice, stating his name and address, the number of shares of each
class and series of our stock which he beneficially owns and a description of
the manner in which the shares are held. Each such owner shall provide us with
such additional information as we may request in order to determine the
effect, if any, of its beneficial ownership on our status as a REIT and to
ensure compliance with the ownership limits. In addition, each shareholder
shall, upon demand, be required to provide us with such information as we may
request in good faith in order to determine our status as a REIT and to comply
with the requirements of any taxing authority or governmental authority or to
determine such compliance.

These ownership limits could delay, defer or prevent a transaction or a
change in control that might involve a premium price for the class A common
stock or otherwise be in the best interest of the shareholders.

BUSINESS COMBINATIONS

Under Maryland law, "business combinations" between a Maryland corporation
and an interested shareholder or any affiliate of an interested shareholder
are prohibited for five years after the most recent date on which the
interested shareholder becomes an interested shareholder. 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 shareholder is defined
as:

o any person who beneficially owns 10% or more of the voting power of the
corporation's shares; or

o an affiliate or associate of the corporation who, at any time within the
two-year period prior to the date interested shareholder status is
determined, was the beneficial owner of 10% or more of the voting power
of the corporation.

A person is not an interested shareholder under the statute if the board of
directors approved in advance the transaction by which he or she otherwise
would have become an interested shareholder. However, in approving a
transaction, our 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.

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

o 80% of the votes entitled to be cast by holders of outstanding shares of
voting stock of the corporation; and

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

These super-majority vote requirements do not apply if the corporation's
common shareholders 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 shareholder 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 shareholder became an interested shareholder. Our
board of directors has adopted resolutions which exempt Veqtor Finance
Company, L.L.C., JRK Investment Partnership LP and CMH Investment Partnership
LP from the five-year prohibition and the super-majority vote requirement. The
business combination statute may discourage others from trying to acquire
control of us and may increase the difficulty of consummating any offer
relating to the same.

CONTROL SHARE ACQUISITIONS

Maryland law provides that "control shares" of a Maryland corporation
acquired in a "control share acquisition" have no voting rights except to the
extent approved by a vote of two-thirds of the votes entitled to be cast on
the matter. A control share acquisition means the acquisition of control
shares, subject to certain exceptions. Shares owned by the acquiror or by
officers or directors of the target corporation who are also employees are
excluded from shares entitled to vote on the matter. Control shares are voting
shares of stock which, 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:

o one-tenth or more but less than one-third;

o one-third or more but less than a majority; or

o a majority or more of all voting power.

Control shares do not include shares the acquiror is entitled to vote as a
result of having previously obtained shareholder approval.

A person who has made or proposes to make a control share acquisition may
compel the board of directors of the corporation to call a special meeting of
shareholders to be held within 50 days of demand to consider the voting rights
of the shares. The right to compel the calling of a special meeting is subject
to the satisfaction of certain conditions, including an undertaking to pay the
expenses of the meeting. If no request for a meeting is made, the corporation
may itself present the question at any shareholders meeting.

If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute,
then the corporation may redeem for fair value any or all of the control
shares, except those for which voting rights have previously been approved.
The right of the corporation to redeem control shares is subject to certain
conditions and limitations. Fair value is determined, without regard to the
absence of voting rights for the control shares, as of the date of the last
control share acquisition by the acquiror or of any meeting of shareholders at
which the voting rights of the shares are considered and not approved. If
voting rights for control shares are approved at a shareholders meeting and
the acquiror becomes entitled to vote a majority of the shares entitled to
vote, all other shareholders may exercise appraisal rights. The fair value of
the shares as determined for purposes of appraisal rights may not be less than
the highest price per share paid by the acquiror in the control share
acquisition.

The control share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if the corporation is a party to the
transaction, or to acquisitions approved or exempted by the charter or bylaws
of the corporation.

MARYLAND UNSOLICITED TAKEOVERS ACT

The Maryland Unsolicited Takeovers Act applies to any Maryland corporation
that has a class of securities registered under the Securities Exchange Act of
1934 and at least three independent directors. Pursuant to such act, the board
of directors of any Maryland corporation fitting such description, without
obtaining shareholder approval and notwithstanding a contrary provision in its
charter or bylaws, may elect to:

o classify the board;

o increase the required shareholder vote to remove a director to two-thirds
of all the votes entitled to be cast by the shareholders generally in the
election of directors; and

o require that a shareholder requested special meeting need be called only
upon the written request of the shareholders entitled to cast a majority
of all the votes entitled to be cast at the meeting.

Additionally, the board may provide that:

o the number of directors may be fixed only by a vote of the board of
directors,

o each vacancy on the board of directors, including a vacancy resulting
from the removal of a director by the shareholders, may be filled only by
the affirmative vote of a majority of the remaining directors in office,
even if the remaining directors do not constitute a quorum; and

o any director elected to fill a vacancy will hold office for the full
remainder of the term, rather than until the next election of directors.

The Maryland Unsolicited Takeovers Act does not limit the power of a
corporation to confer on the holders of any class or series of preferred stock
the right to elect one or more directors. We currently have more than three
independent directors and have a class of securities registered under the
Securities Exchange Act of 1934 and therefore our board of directors could
elect to provide for any of the foregoing provisions. As of the date hereof,
our board of directors has not made any such election.

ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS

Our bylaws provide that with respect to an annual meeting of shareholders,
nominations of individuals for election to the board of directors and the
proposal of business to be considered by shareholders may be made only:

o pursuant to our notice of the meeting;

o by or at the direction of the board of directors; or

o by a shareholder who was a shareholder of record both at the time of
giving of notice and at the time of the annual meeting, who is entitled
to vote at the meeting and who has complied with the advance notice
procedures of the bylaws.

With respect to special meetings of shareholders, only the business
specified in our notice of the meeting may be brought before the meeting.
Nominations of individuals for election to the board of directors at a special
meeting may only be made:

o pursuant to our notice of the meeting;

o by or at the direction of the board of directors; or

o provided that the board of directors has determined that directors will
be elected at the meeting, by a shareholder who is a shareholder of
record both at the time of giving of notice and at the time of the
special meeting and who is entitled to vote at the meeting and has
complied with the advance notice provisions of the bylaws.

DESCRIPTION OF DEBT SECURITIES

The following description contains general terms and provisions of the debt
securities to which any prospectus supplement may relate. The particular terms
of the debt securities offered by any prospectus supplement and the extent, if
any, to which such general provisions may not apply to the debt securities so
offered will be described in the prospectus supplement relating to such debt
securities. For more information, please refer to the senior indenture we will
enter into with a trustee to be selected, relating to the issuance of the
senior notes, and the subordinated indenture we will enter into with a trustee
to be selected, relating to issuance of the subordinated notes. Forms of these
documents are filed as exhibits to the registration statement, which includes
this prospectus.

As used in this prospectus, the term indentures refers to both the senior
indenture and the subordinated indenture. The indentures will be qualified
under and governed by the Trust Indenture Act. As used in this prospectus, the
term trustee refers to either the senior trustee or the subordinated trustee,
as applicable.

The following are summaries of material provisions anticipated to be
included in the senior indenture and the subordinated indenture. As summaries,
they do not purport to be complete or restate the indentures in their entirety
and are subject to, and qualified in their entirety by reference to, all
provisions of the indentures and the debt securities. We urge you to read the
indentures applicable to a particular series of debt securities because they,
and not this description, define your rights as the holders of the debt
securities. Except as otherwise indicated, the terms of the senior indenture
and the subordinated indenture are identical.

GENERAL

Each prospectus supplement will describe the following terms relating to a
series of notes:

o the title;

o any limit on the amount that may be issued;

o whether or not such series of notes will be issued in global form, the
terms and who the depository will be;

o the maturity date(s);

o the annual interest rate(s), which may be fixed or variable, or the
method for determining the rate(s) and the date(s) interest will begin to
accrue, the date(s) interest will be payable and the regular record dates
for interest payment dates or the method for determining such date(s);

o the place(s) where payments shall be payable;

o our right, if any, to defer payment of interest and the maximum length of
any such deferral period;

o the date, if any, after which, and the price(s) at which, such series of
notes may, pursuant to any optional redemption provisions, be redeemed at
our option, and other related terms and provisions;

o the date(s), if any, on which, and the price(s) at which we are
obligated, pursuant to any mandatory sinking fund provisions or
otherwise, to redeem, or at the holder's option to purchase, such series
of notes and other related terms and provisions;

o the denominations in which such series of notes will be issued, if in
other than denominations of $1,000 and any integral multiple thereof;

o any mandatory or optional sinking fund or similar provisions;

o the currency or currency units of payment of the principal of, premium,
if any, and interest on the notes;

o any index used to determine the amount of payments of the principal of,
premium, if any, and interest on the notes and the manner in which such
amounts shall be determined;

o the terms pursuant to which such notes are subject to defeasance;

o the terms and conditions, if any, pursuant to which such notes are
secured; and

o any other terms, which terms shall not be inconsistent with the
indentures.

The notes may be issued as original issue discount securities. An original
issue discount security is a note, including any zero-coupon note, which:

o is issued at a price lower than the amount payable upon its stated
maturity and

o provides that upon redemption or acceleration of the maturity, an amount
less than the amount payable upon the stated maturity, shall become due
and payable.

United States federal income tax consequences applicable to notes sold at an
original issue discount will be described in the applicable prospectus
supplement. In addition, United States federal income tax or other
consequences applicable to any notes which are denominated in a currency or
currency unit other than United States dollars may be described in the
applicable prospectus supplement.

Under the indentures, we will have the ability, in addition to the ability
to issue notes with terms different from those of notes previously issued,
without the consent of the holders, to reopen a previous issue of a series of
notes and issue additional notes of that series, unless the reopening was
restricted when the series was created, in an aggregate principal amount
determined by us.

CONVERSION OR EXCHANGE RIGHTS

The terms, if any, on which a series of notes may be convertible into or
exchangeable for our class A common stock, preferred stock or other securities
will be described in the prospectus supplement relating to that series of
notes. The terms will include provisions as to whether conversion or exchange
is mandatory, at the option of the holder or at our option, and may include
provisions pursuant to which the number of shares of our class A or other
class of common stock, preferred stock or other securities to be received by
the holders of the series of notes would be subject to adjustment.

CONSOLIDATION, MERGER OR SALE

The indentures do not contain any covenant which restricts our ability to
merge or consolidate, or sell, convey, transfer or otherwise dispose of all or
substantially all of their assets. However, any successor or acquirer of such
assets must assume all of our obligations under the indentures or the notes,
as appropriate.

EVENTS OF DEFAULT UNDER THE INDENTURE

The following are events of default under the indentures with respect to any
series of notes issued:

o failure to pay the principal, or premium, if any, when due;

o failure to pay interest when due and such failure continues for 90 days
and the time for payment has not been extended or deferred;

o failure to observe or perform any other covenant contained in the notes
or the indentures, other than a covenant specifically relating to another
series of notes, and such failure continues for 90 days after we receive
notice from the trustee or holders of at least 25% in aggregate principal
amount of the outstanding notes of that series;

o certain events of bankruptcy, insolvency or reorganization; and

o any other event of default described in the applicable prospectus
supplement.

If an event of default with respect to notes of any series occurs and is
continuing, the trustee or the holders of at least 25% in aggregate principal
amount of the outstanding notes of that series, by notice in writing to us,
and to the trustee if notice is given by such holders, may declare the unpaid
principal of, premium, if any, and accrued interest, if any, due and payable
immediately. The trustee may withhold notice to the holders of notes of any
default or event of default, except a default or event of default relating to
the payment of principal or interest, if it determines that withholding such
notice is in the holders' interest.

The holders of a majority in principal amount of the outstanding notes of an
affected series may waive any default or event of default with respect to such
series and its consequences, except a continuing default or events of default
in the payment of principal, premium, if any, or interest on the notes of such
series.

Any such waiver shall cure such default or event of default.

Subject to the terms of the indentures, if an event of default under an
indenture shall occur and be continuing, the trustee will be under no
obligation to exercise any of its rights or powers under such indenture at the
request or direction of any of the holders of the applicable series of notes,
unless such holders have offered the trustee reasonable indemnity. The holders
of a majority in principal amount of the outstanding notes of any series will
have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the trustee, or exercising any trust or
power conferred on the trustee, with respect to the notes of that series,
provided that:

o it is not in conflict with any law or the applicable indenture;

o the trustee may take any other action deemed proper by it which is not
inconsistent with such direction; and

o subject to its duties under the Trust Indenture Act, the trustee need not
take any action that might involve it in personal liability or might be
unduly prejudicial to the holders not involved in the proceeding.

A holder of the notes of any series will only have the right to institute a
proceeding under the indentures or to appoint a receiver or trustee, or to
seek other remedies if:

o the holder has given written notice to the trustee of a continuing event
of default with respect to that series;

o the holders of at least 25% in aggregate principal amount of the
outstanding notes of that series have made written request, and such
holders have offered reasonable indemnity to the trustee to institute
such proceedings as trustee; and

o the trustee does not institute such proceeding, and does not receive from
the holders of a majority in the aggregate principal amount of the
outstanding notes of that series other conflicting directions within 60
days after such notice, request and offer.

These limitations do not apply to a suit instituted by a holder of notes if
we default in the payment of the principal, premium, if any, or interest on,
the notes.

We will periodically file statements with the trustee regarding our
compliance with certain of the covenants in the indentures.

MODIFICATION OF INDENTURE; WAIVER

We and the trustee may change an indenture without the consent of any
holders with respect to certain matters, including:

o to fix any ambiguity, defect or inconsistency in such indenture; and

o to change anything that does not materially adversely affect the
interests of any holder of notes of any series.

In addition, under the indentures, the rights of holders of a series of
notes may be changed by us and the trustee with the written consent of the
holders of at least a majority in aggregate principal amount of the
outstanding notes of each series that is affected. However, we can make the
following changes only with the consent of each holder of any outstanding
notes affected:

o extending the fixed maturity of such series of notes;

o changing any of our obligations to pay additional amounts;

o reducing the principal amount, reducing the rate of or extending the time
of payment of interest, or any premium payable upon the redemption of any
such notes;

o reducing the amount of principal of an original issue discount security
or any other note payable upon acceleration of the maturity thereof;

o changing currency in which any note or any premium or interest is
payable;

o impairing the right to enforce any payment on or with respect to any
note;

o adversely changing the right to convert or exchange, including decreasing
the conversion rate or increasing the conversion price of, such note, if
applicable;

o in the case of the subordinated indenture, modifying the subordination
provisions in a manner adverse to the holders of the subordinated notes;

o if the notes are secured, changing the terms and conditions pursuant to
which the notes are secured in a manner adverse to the holders of the
secured notes;

o reducing the percentage in principal amount of outstanding notes of any
series, the consent of whose holders is required for modification or
amendment of the applicable indenture or notes or for waiver of
compliance with certain provisions of the applicable indenture or for
waiver of certain defaults;

o reducing the requirements contained in the applicable indenture for
quorum or voting;

o changing any of our obligations to maintain an office or agency in the
places and for the purposes required by the indentures; or

o modifying any of the above provisions.

FORM, EXCHANGE, AND TRANSFER

The notes of each series will be issuable only in fully registered form
without coupons and, unless otherwise specified in the applicable prospectus
supplement, in denominations of $1,000 and any integral multiple thereof. The
indentures will provide that notes of a series may be issuable in temporary or
permanent global form and may be issued as book-entry securities that will be
deposited with, or on behalf of, The Depository Trust Company or another
depository named by us and identified in a prospectus supplement with respect
to such series.

At the option of the holder, subject to the terms of the indentures and the
limitations applicable to global securities described in the applicable
prospectus supplement, notes of any series will be exchangeable for other
notes of the same series, in any authorized denomination and of like tenor and
aggregate principal amount.

Subject to the terms of the indentures and the limitations applicable to
global securities described in the applicable prospectus supplement, notes may
be presented for exchange or for registration of transfer, duly endorsed or
with the form of transfer endorsed, duly executed if so required by us or the
security registrar, at the office of the security registrar or at the office
of any transfer agent designated by us for such purpose. Unless otherwise
provided in the notes to be transferred or exchanged, we will not require a
service charge for any registration of transfer or exchange, but we may
require payment of any taxes or other governmental charges. The security
registrar and any transfer agent initially designated by us for any notes will
be named in the applicable prospectus supplement. We may at any time designate
additional transfer agents or rescind the designation of any transfer agent or
approve a change in the office through which any transfer agent acts, except
that we will be required to maintain a transfer agent in each place of payment
for the notes of each series.

If the notes of any series are to be redeemed, we will not be required to:

o issue, register the transfer of, or exchange any notes of that series
during a period beginning at the opening of business 15 days before the
day of mailing of a notice of redemption of any such notes that may be
selected for redemption and ending at the close of business on the day of
such mailing; or

o register the transfer of or exchange any notes so selected for
redemption, in whole or in part, except the unredeemed portion of any
such notes being redeemed in part.

INFORMATION CONCERNING THE TRUSTEE

The trustee, other than during the occurrence and continuance of an event of
default under an indenture, undertakes to perform only such duties as are
specifically described in the indentures and, upon an event of default under
an indenture, must use the same degree of care as a prudent person would
exercise or use in the conduct of his or her own affairs. Subject to this
provision, the trustee is under no obligation to exercise any of the powers
given it by the indentures at the request of any holder of notes unless it is
offered reasonable security and indemnity against the costs, expenses and
liabilities that it might incur. The trustee is not required to spend or risk
its own money or otherwise become financially liable while performing its
duties unless it reasonably believes that it will be repaid or receive
adequate indemnity.

PAYMENT AND PAYING AGENTS

Unless otherwise indicated in the applicable prospectus supplement, payment
of the interest on any notes on any interest payment date will be made to the
person in whose name such notes or one or more predecessor securities are
registered at the close of business on the regular record date for such
interest.

Principal of and any premium and interest on the notes of a particular
series will be payable at the office of the paying agents designated by us,
except that unless otherwise indicated in the applicable prospectus
supplement, interest payments may be made by check mailed to the holder.
Unless otherwise indicated in such prospectus supplement, the corporate trust
office of the trustee in the City of New York will be designated as our sole
paying agent for payments with respect to notes of each series. Any other
paying agents initially designated by us for the notes of a particular series
will be named in the applicable prospectus supplement. We will be required to
maintain a paying agent in each place of payment for the notes of a particular
series.

All moneys paid by us to a paying agent or the trustee for the payment of
the principal of or any premium or interest on any notes which remains
unclaimed at the end of two years after the principal, premium or interest has
become due and payable will be repaid to us, and the holder of the security
may then look only to us for payment.

GOVERNING LAW

The indentures and the notes will be governed by and construed in accordance
with the laws of the State of New York except to the extent that the Trust
Indenture Act shall be applicable.

SUBORDINATION OF SUBORDINATED NOTES

The subordinated notes will be unsecured and will be subordinate and junior
in priority of payment to certain of our other indebtedness to the extent
described in a prospectus supplement. The subordinated indenture does not
limit the amount of subordinated notes which we may issue, nor does it limit
us from issuing any other secured or unsecured debt.

FEDERAL INCOME TAX CONSIDERATIONS

TAX CONSEQUENCES OF REIT ELECTION

TAXATION OF A REIT

o We will be subject to the "alternative minimum tax" on our undistributed
items of tax preference.

o We may elect to retain and pay income tax on some or all of our long-term
capital gain, as described below.

o We may be subject to a 100% excise tax on transactions with our taxable
REIT subsidiary not conducted on an arm's-length basis.

REQUIREMENTS FOR QUALIFICATION AS A REIT.

INTRODUCTION

The Internal Revenue Code defines a REIT as a corporation, trust or
association:

(1) that is managed by one or more trustees or directors;

(2) that issues transferable shares or transferable certificates of
beneficial ownership to its owners;

(3) that would be taxable as a regular corporation, but for its election
to be taxed as a REIT;

(4) that is not a financial institution or an insurance company under the
Internal Revenue Code;

(5) that is owned by 100 or more persons;

(6) in which not more than 50% in value of the outstanding stock is
owned, actually or constructively, by five or fewer individuals, as defined
in the Internal Revenue Code to include some entities, during the last half
of each year; and

(7) that meets other tests, described below, regarding the nature of its
income and assets, and the amount of its distributions.

The Internal Revenue Code provides that conditions (1) to (4) must be met
during the entire year and that condition (5) must be met during at least 335
days of a year of twelve months, or during a proportionate part of a shorter
taxable year. Conditions (5) and (6) do not apply to the first taxable year
for which an election is made to be taxed as a REIT.

Our amended and restated charter provides for restrictions regarding
ownership and transfer of our stock. These restrictions are intended to assist
us in satisfying the share ownership requirements described in conditions (5)
and (6) above. These stock ownership and transfer restrictions are described
above under the caption "Description of Capital Stock -- Certain Provisions of
Maryland Law and Our Charter and Bylaws -- REIT Qualification Restrictions on
Ownership and Transfer." These restrictions, however, may not ensure that we
will, in all cases, be able to satisfy the share ownership requirements
described in conditions (5) and (6) above. If we fail to satisfy these share
ownership requirements, our status as a REIT would terminate. If, however, we
comply with the rules contained in applicable Treasury Regulations that
require us to determine the actual ownership of our shares and we do not know,
or would not have known through the exercise of reasonable diligence, that we
failed to meet the requirement described in condition (6) above, we would not
be disqualified as a REIT.

In addition, a corporation may not qualify as a REIT unless its taxable year
is the calendar year. We have and will continue to have a calendar taxable
year.

A real estate investment trust may own up to 100% of the stock of one or
more taxable REIT subsidiaries. A taxable REIT subsidiary may earn income that
would not be REIT qualifying income, as described below, if earned directly by
the parent real estate investment trust. Both the subsidiary and the real
estate investment trust must jointly elect to treat the subsidiary as a
taxable REIT subsidiary. Overall, not more than 20% of the value of the real
estate investment trust's assets may consist of securities of one or more
taxable REIT subsidiaries. A taxable REIT subsidiary will pay tax at regular
corporate rates on any income that it earns. There is a 100% excise tax
imposed on transactions involving a taxable REIT subsidiary and its parent
real estate investment trust that are not conducted on an arm's-length basis.
Our wholly owned subsidiary, CT Investment Management Co. serves as our
exclusive manager and subject to the supervision of our board of directors is
responsible for our day-to-day operations pursuant to a management agreement.
We

believe the compensation, expense reimbursement and other terms of the
management agreement are comparable to those that could be obtained from
unrelated parties on an arm's-length basis.

INCOME TESTS

General

o interest from debt secured by mortgages on real property or on interests
in real property;

o "rents from real property" (as defined below);

o dividends or other distributions on, and gain from the sale of, shares in
other real estate investment trusts;

o gain from the sale or other disposition of real property; and

Interest from Debt Secured by Mortgages on Real Property or on Interests in
Real Property

Any amount includable in gross income by us with respect to a regular or
residual interest in a real estate mortgage investment conduit, or REMIC, is
generally treated as interest on an obligation secured by a mortgage on real
property for purposes of the 75% gross income test. If, however, less than 95%
of the assets of a real estate mortgage investment conduit consist of real
estate assets, we will be treated as receiving directly our proportionate
share of the income of the REMIC, which would generally include non-qualifying
income for purposes of the 75% gross income test. In addition, if we receive
interest income with respect to a mortgage loan that is secured by both real
property and other property and the principal amount of the loan exceeds the
fair market value of the real property on the date we purchased the mortgage
loan, interest income on the loan will be apportioned between the real
property and the other property, which apportionment would cause us to
recognize income that is not qualifying income for purposes of the 75% gross
income test.

or net income, which would generally disqualify such interest income for
purposes of both the 75% and the 95% gross income tests.

o our failure to meet the gross income tests was due to reasonable cause
and not due to willful neglect;

o we attach a schedule of the sources of our income to our federal income
tax return; and

o any incorrect information on the schedule was not due to fraud with the
intent to evade tax.

It is not possible to state whether in all circumstances we would be
entitled to rely on these relief provisions. If these relief provisions do not
apply to a particular set of circumstances, we would not qualify as a REIT. As
discussed above under the caption "--Taxation of a REIT", even if these relief
provisions apply, and we retain our status as a REIT, a tax would be imposed
with respect to our income that does not meet the gross income tests. We may
not always be able to maintain compliance with the gross income tests for REIT
qualification despite frequently monitoring our income.

Foreclosure Property

Prohibited Transaction Income

standards which, if met, would not result in prohibited transaction income, we
may not be able to meet these standards in all circumstances.

Hedging Transactions

RENTS FROM REAL PROPERTY

Rent that a REIT receives from real property that it owns and leases to
tenants will qualify as "rents from real property" if the following conditions
are satisfied,

o Second, neither a REIT nor any direct or indirect owner of 10% or more of
its stock may own, actually or constructively, 10% or more of the tenant
from which the REIT collects the rent.

ASSET TESTS

A REIT also must satisfy the following four tests relating to the nature of
its assets at the close of each quarter of its taxable year.

DISTRIBUTION REQUIREMENTS

Each taxable year, a REIT must distribute dividends to its shareholders in
an amount at least equal to:

o 90% of the REIT's "real estate investment trust taxable income," computed
without regard to the dividends paid deduction and the REIT's net capital
gain or loss; and

o certain items of noncash income.

o 85% of the REIT's real estate investment trust ordinary income for such
year;

o 95% of the REIT's real estate investment trust capital gain income for
such year; and

o any of the REIT's undistributed taxable income from prior periods,

RECORDKEEPING REQUIREMENTS

OWNERSHIP REQUIREMENTS

EARNINGS AND PROFITS

FAILURE TO QUALIFY

If a REIT fails to qualify as a real estate investment trust in any taxable
year, and no relief provisions applied, the REIT would be subject to federal
income tax, including any applicable alternative minimum tax, on its taxable
income at regular corporate rates. In calculating a REIT's taxable income in a
year in which it did not qualify as a real estate investment trust, the REIT
would not be able to deduct amounts paid out to its shareholders. In fact, the
REIT would not be required to distribute any amounts to its shareholders in
such taxable year. In such event, to the extent of the REIT's current and
accumulated earnings and profits, all

distributions to shareholders would be taxable as ordinary income. Moreover,
subject to certain limitations under the Internal Revenue Code, corporate
shareholders might be eligible for the dividends received deduction. Unless
the REIT qualified for relief under specific statutory provisions, the REIT
would be disqualified from taxation as a real estate investment trust for the
four taxable years following the year in which it ceased to qualify as a real
estate investment trust. We cannot predict whether, in all circumstances, we
would qualify for such statutory relief.

TAXATION OF TAXABLE U.S. SHAREHOLDERS

TAXABLE U.S. SHAREHOLDER

As used herein, the term "Taxable U.S. Shareholder" means a holder of our
class A common stock that, for United States federal income tax purposes, is:

o a citizen or resident of the United States;

o a corporation, partnership, or other entity created or organized in or
under the laws of the United States or any state or political subdivision
thereof;

For any taxable year in which we qualify as a REIT, amounts distributed to
Taxable U.S. Shareholders will be taxed as follows.

DISTRIBUTIONS GENERALLY

CAPITAL GAIN DIVIDENDS

RETAINED CAPITAL GAINS

be deemed to have paid its share of the tax paid by the REIT, which tax will
be credited or refunded to such shareholder.

PASSIVE ACTIVITY LOSS AND INVESTMENT INTEREST LIMITATIONS

SALE OF CLASS A COMMON STOCK

TAXATION OF TAX-EXEMPT SHAREHOLDERS

TAXATION OF NON-U.S. SHAREHOLDERS

GENERAL

companies or certain intermediaries. Non-U.S. shareholders should consult with
their own tax advisors to determine the impact of federal, state, local and
foreign tax laws with regard to the election, including any reporting and
withholding requirements.

ORDINARY DIVIDENDS

WITHHOLDING

If an income tax treaty does not apply, ordinary dividends that are
effectively connected with the conduct of a trade or business within the
United States by a Non-U.S. Shareholder (and, if a tax treaty applies,
ordinary dividends that are attributable to a United States permanent
establishment maintained by the Non-U.S. Shareholder) are exempt from U.S.
withholding tax. In order to claim such exemption, a Non-U.S. Shareholder must
provide us or our paying agent with a duly completed Form W-8ECI (or
authorized substitute form) certifying such holder's exemption. However,
ordinary dividends exempt from U.S. withholding tax because they are
effectively connected or are attributable to a United States permanent
establishment maintained by the Non-U.S. Shareholder generally are subject to
U.S. federal income tax on a net income basis at regular graduated rates. In
the case of Non-U.S. Shareholders that are corporations, any effectively
connected ordinary dividends or ordinary dividends attributable to a United
States permanent establishment maintained by the Non-U.S. Shareholder may, in
certain circumstances, be subject to an additional branch profits tax at a 30%
rate, or lower rate specified by an applicable income tax treaty.

CAPITAL GAIN DIVIDENDS

provisions of the Foreign Investment in Real Property Tax Act of 1980, which
is commonly referred to as FIRPTA. Under FIRPTA, distributions attributable to
gain from sales of United States real property are taxed to a Non-U.S.
Shareholder as if such gain were effectively connected with a United States
trade or business. Non-U.S. Shareholders thus would be taxed at the regular
capital gain rates applicable to Taxable U.S. Shareholders (subject to the
applicable alternative minimum tax and a special alternative minimum tax in
the case of nonresident alien individuals). Distributions subject to FIRPTA
also may be subject to a 30% branch profits tax in the hands of a corporate
Non-U.S. Shareholder not otherwise entitled to treaty relief or exemption.

WITHHOLDING

SALE OF CLASS A COMMON STOCK

Even if gain recognized by a Non-U.S. Shareholder upon the sale of our class
A common stock is not subject to FIRPTA, such gain generally will be taxable
to such shareholder if:

o an income tax treaty does not apply and the gain is effectively connected
with a trade or business conducted by the Non-U.S. Shareholder in the
United States (or, an income tax treaty applies and the gain is
attributable to a United States permanent establishment maintained by the
Non-U.S. Shareholder), in which case, unless an applicable treaty
provides otherwise, a Non-U.S. Shareholder will be taxed on his or her
net gain from the sale at regular graduated U.S. federal income tax
rates. In the case of a Non-U.S. Shareholder that is a corporation, such
shareholder may be subject to an additional branch profits tax at a 30%
rate, unless an applicable income tax treaty provides for a lower rate
and the shareholder demonstrates its qualification for such rate; or

ESTATE TAX CONSIDERATIONS

INFORMATION REPORTING AND BACKUP WITHHOLDING

Backup withholding generally may be imposed on certain payments to
shareholders unless the shareholder (i) furnishes certain information, or (ii)
is otherwise exempt from backup withholding.

o is a United States person;

o derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States; or

o is a "controlled foreign corporation" for United States tax purposes.

STATE AND LOCAL TAX

PLAN OF DISTRIBUTION

We may sell class A common stock, preferred stock or any series of debt
securities being offered by this prospectus in one or more of the following
ways from time to time:

o through underwriters or dealers;

o through agents;

o directly to purchasers; or

o through a combination of any of these methods of sale.

An underwriter or agent involved in the offer and sale of the securities
will be named in the applicable prospectus supplement. If underwriters are
used in the sale, the securities will be acquired by the underwriters for
their own account and resold in one or more transactions, including negotiated
transactions, and if agents are used the securities will be offered and sold
through such firms acting as our agents in one or more transactions, including
negotiated transactions. The securities may be offered and sold through
underwriters and agents at:

o fixed prices, which may be changed;

o prices related to the prevailing market prices at the time of sale; or

o negotiated prices.

We also may, from time to time, authorize underwriters acting as our agents
to offer and sell the securities upon the terms and conditions as are set
forth in the applicable prospectus supplement. In connection with the sale of
securities, underwriters may be deemed to have received compensation from us
in the form of underwriting discounts or commissions and may also receive
commissions from purchasers of securities for whom they may act as agent.
Underwriters may sell securities to or through dealers, and these dealers may
receive compensation in the form of discounts, concessions or commissions from
the underwriters or commissions from the purchasers for whom they may act as
agent, or both. The applicable prospectus supplement will disclose:

o any underwriting compensation we pay to underwriters or agents in
connection with the offering of securities and

o any discounts, concessions or commissions allowed or reallowed by
underwriters to participating dealers.

Under the Securities Act of 1933, underwriters, dealers and agents
participating in the distribution of the securities may be deemed to be
underwriters and any discounts and commissions received by them and any profit
realized by them on resale of the securities may be deemed to be underwriting
discounts and commissions.

If indicated in the applicable prospectus supplement, we will authorize
dealers acting as our agents to solicit offers by institutions to purchase
securities at the offering price set forth in that prospectus supplement under
delayed delivery contracts providing for payment and delivery on the dates
stated in the prospectus supplement. Each contract will be for an amount not
less than, and the aggregate principal amount of securities sold under
contracts will be not less nor more than, the respective amounts stated in the
applicable prospectus supplement. Institutions with whom contracts, when
authorized, may be made include commercial and savings banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions, and other institutions but will in all cases be subject to our
approval. Contracts will not be subject to any conditions except:

o the purchase by an institution of the securities covered by its contracts
will not at the time of delivery be prohibited under the laws of any
jurisdiction in the United States to which the institution is subject,
and

o if the securities are being sold to underwriters, we will have sold to
them the total principal amount of the securities less the principal
amount of the securities covered by contracts.

Agents and underwriters will have no responsibility in respect of the
delivery or performance of contracts.

Unless a prospectus supplement states otherwise, the obligations of
underwriters to purchase any series of securities will be subject to certain
conditions precedent and the underwriters will be obligated to purchase all of
such series of securities, if any are purchased.

We may agree to indemnify underwriters, dealers and agents against civil
liabilities, including liabilities under the Securities Act and to make
contribution to them in connection with those liabilities. Underwriters and
agents may be customers of, engage in transactions with, or perform services
for us and our affiliates in the ordinary course of business.

Direct sales to investors or our shareholders may be accomplished through
subscription offerings or through shareholder purchase rights distributed to
shareholders. In connection with subscription offerings or the distribution of
shareholder purchase rights to shareholders, if all of the underlying
securities are not subscribed for, we may sell any unsubscribed securities to
third parties directly or through underwriters or agents. In addition, whether
or not all of the underlying securities are subscribed for, we may
concurrently offer additional securities to third parties directly or through
underwriters or agents. If securities are to be sold through shareholder
purchase rights, the shareholder purchase rights will be distributed as a
dividend to the shareholders for which they will pay no separate
consideration. The prospectus supplement with respect to the offer of
securities under shareholder purchase rights will set forth the relevant terms
of the shareholder purchase rights, including:

o whether class A common stock, preferred stock, or warrants for those
securities will be offered under the shareholder purchase rights;

o the number of those securities or warrants that will be offered under the
shareholder purchase rights;

o the period during which and the price at which the shareholder purchase
rights will be exercisable;

o the number of shareholder purchase rights then outstanding;

o any provisions for changes to or adjustments in the exercise price of the
shareholder purchase rights; and

o any other material terms of the shareholder purchase rights.

Each series of securities will be a new issue of securities and will have no
established trading market other than our class A common stock which is listed
on the NYSE. Any shares of our class A common stock sold pursuant to a
prospectus supplement will be listed on the NYSE, subject to official notice
of issuance. Any underwriters to whom we sell securities for public offering
and sale may make a market in the securities, but such underwriters will not
be obligated to do so and may discontinue any market making at any time
without notice. The securities, other than the class A common stock, may or
may not be listed on a national securities exchange.

To facilitate the offering of the securities, certain persons participating
in the offering may engage in transactions that stabilize, maintain, or
otherwise affect the price of the securities. This may include over-allotments
or short sales of the securities, which involves the sale by persons
participating in the offering of more securities than we sold to them. In
these circumstances, these persons would cover the over-allotments or short
positions by making purchases in the open market or by exercising their
over-allotment option. In addition, these persons may stabilize or maintain
the price of the debt securities by bidding for or purchasing debt securities
in the open market or by imposing penalty bids, whereby selling concessions
allowed to dealers participating in the offering may be reclaimed if
securities sold by them are repurchased in connection with stabilization
transactions. The effect of these transactions may be to stabilize or maintain
the market price of the securities at a level above that which might otherwise
prevail in the open market. These transactions may be discontinued at any
time.

LEGAL MATTERS

The validity of the securities offered hereby will be passed upon for us by
Venable LLP, Baltimore, Maryland. Certain other matters in connection with the
offering of securities by this prospectus will be passed upon for us by Paul,
Hastings, Janofsky & Walker LLP. Martin L. Edelman, who serves as one of our
directors, is of counsel to Paul, Hastings, Janofsky & Walker LLP.

EXPERTS

The consolidated financial statements of Capital Trust and subsidiaries
appearing in Capital Trust's Annual Report on Form 10-K for the year ended
December 31, 2002, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon included therein and
incorporated herein by reference. Such consolidated financial statements are
incorporated herein by reference in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.

ABOUT THIS PROSPECTUS

This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission using a "shelf" registration process. Under
this shelf process, we may sell any combination of the securities described in
this prospectus in one or more offerings up to a total dollar amount of
proceeds of $300,000,000. This prospectus provides you with a general
description of the securities we may offer. Each time we sell securities, we
will provide a prospectus supplement that will contain specific information
about the terms of the securities being offered and of the offering. The
prospectus supplement may also add, update or change information contained in
this prospectus. You should read both this prospectus and any prospectus
supplement together with additional information described under the heading
"Where You Can Find More Information" before purchasing any securities.

WHERE YOU CAN FIND MORE INFORMATION

We have filed with the SEC a registration statement on Form S-3 under the
Securities Act of 1933 to register the securities being offered in this
prospectus. This prospectus, which is part of the registration statement, does
not contain all of the information set forth in the registration statement or
the exhibits and schedules to the registration statement. For further
information regarding us and our securities, please refer to the registration
statement and the documents filed or incorporated by reference as exhibits to
the registration statement. You may obtain the registration statement and its
exhibits from the SEC as indicated above or from us. Statements contained in
this prospectus or any prospectus supplement as to the contents of any
contract or other document that is filed or incorporated by reference as an
exhibit to the registration statement are not necessarily complete and we
refer you to the full text of the contract or other document filed or
incorporated by reference as an exhibit to the registration statement.

The SEC allows us to "incorporate by reference" the information we file with
the SEC, which means that we can disclose important information to you by
referring you to those filed documents. The information incorporated by
reference is considered to be part of this prospectus, and information that we
file later with the SEC will automatically update and supersede this
information.

The following documents, which have been filed with the SEC (File No. 001-
14788), are incorporated herein by reference:

o Our annual report on Form 10-K for the year ended December 31, 2002;

o Our quarterly reports on Form 10-Q for the fiscal quarters ended March 31,
2003, June 30, 2003 and September 30, 2003; and

o Our current reports on Form 8-K filed with the SEC on April 2, 2003,
May 19, 2003, July 10, 2003 (including any amendment or report filed for
the purpose of updating the description of our class A common stock
contained therein), August 18, 2003 and November 13, 2003.

All documents subsequently filed by us with the SEC pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934
after the date of this prospectus and prior to the termination of the offering
are deemed incorporated by reference into this prospectus and a part hereof
from the date of filing of those documents. Any statement contained in any
document incorporated by reference shall be deemed to be amended, modified or
superseded for the purposes of this prospectus to the extent that a statement
contained in this prospectus, any prospectus supplement or a later document
that is or is considered to be incorporated by reference herein amends,
modifies or supersedes such statement. Any statements so amended, modified or
superseded shall not be deemed to constitute a part of this prospectus, except
as so amended, modified or superseded.

We will provide without charge to each person to whom this prospectus is
delivered, upon written or oral request of such person, a copy of any or all
of the documents referred to above which have been or may be incorporated by
reference into this prospectus. Requests for such documents should be directed
to Capital Trust, Inc., 410 Park Avenue, 14th Floor, New York, New York 10022,
Attention: Investor Relations (Telephone: (212) 655-0220).

Filed Pursuant to Rule 424(b)(3)
================================================================================

PROSPECTUS

CAPITAL TRUST, INC.
8,276,019 Shares of Class A Common Stock

----------------

All of the shares of our class A common stock covered by this prospectus are
beneficially owned by the selling shareholders listed in the section of this
prospectus called "Selling Shareholders." A description of such securities is
set forth in the section of this prospectus called "Description of Our Stock."

This prospectus relates to the offer and sale by the selling shareholders of
up to 8,276,019 shares of class A common stock. Each of the selling
shareholders may sell any or all of its shares covered by this prospectus from
time to time in one or more types of transactions, which may include block
transactions or involve brokers who act as agents for the seller or the buyer,
effected:

o on the New York Stock Exchange or any national securities exchange or
quotation service on which the shares of class A common stock may be
listed or quoted at the time of sale;

o in the over-the-counter market; or

o otherwise than on a national securities exchange or quotation service or
in the over-the-counter market or through the writing of options relating
to such shares.

All shares covered by this prospectus may be sold at fixed prices, at
prevailing market prices at the time of sale, at varying prices determined at
the time of sale or at negotiated prices. Further details regarding the
distribution of the shares covered by this prospectus may be found in this
prospectus in the section entitled "Plan of Distribution."

We have issued 4,002,597 shares of class A common stock to certain of the
selling shareholders and may issue up to 4,273,422 additional shares of class
A common stock to other selling shareholders upon the conversion of our
outstanding convertible trust preferred securities. We are filing the
registration statement of which this prospectus is a part to fulfill our
contractual obligations to the holders of the securities discussed above.

We will not receive any proceeds from the sales effected by the selling
shareholders. We have agreed to bear all expenses related to this offering,
other than underwriting discounts and commissions and any transfer taxes on
the shares of stock that the selling shareholders are offering.

Our class A common stock is listed for trading on the New York Stock
Exchange under the symbol "CT." On July 18, 2003, the last reported sale price
of our class A common stock on the New York Stock Exchange was $19.75.

----------------

INVESTING IN THE SECURITIES COVERED BY THIS PROSPECTUS INVOLVES RISKS. SEE
"RISK FACTORS" BEGINNING ON PAGE 2.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

THE DATE OF THIS PROSPECTUS IS JULY 21, 2003.

================================================================================

You should rely only on the information contained in this prospectus or
referred to in this prospectus. We have not authorized anyone to provide you
with information different from that contained in this prospectus. The
information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or any
sale of the shares of stock covered by this prospectus.

Unless the context otherwise indicates, references in this prospectus to
"we," "us," "our" or "Capital Trust" refer to Capital Trust, Inc., a Maryland
corporation.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus, including the information incorporated into it by
reference, includes forward-looking statements. These statements predict or
describe our future operations as a REIT, the effects of our reverse stock
split, our business plans and strategies, and do not relate solely to
historical matters. We have identified forward-looking statements contained
and incorporated by reference into this prospectus using words such as
"believes," "expects," "may," "will," "should," "seeks," "approximately,"
"intends," "plans," "estimates," "anticipates" and similar words. Because
these statements reflect our current views concerning future events, they
involve risks, uncertainties and assumptions which may lead to actual results
that are materially different from those contemplated in the forward-looking
statements. Some, but not all, of the factors that may cause these differences
are discussed in the "Risk Factors" section of this prospectus and in other
information incorporated by reference into this prospectus.

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements.

PROSPECTUS SUMMARY

This summary highlights some of the information in this prospectus. It is
not a substitute for the detailed information and financial statements
appearing elsewhere in, or incorporated by reference into, this prospectus.
This prospectus contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from the results
anticipated in these forward-looking statements. You should read the entire
prospectus carefully, including the risk factors and financial statements.

OUR COMPANY

We are an investment management and real estate finance company positioned
to take advantage of high-yielding lending and investment opportunities in
commercial real estate and related assets. We make investments, for our own
portfolio and as an investment manager for funds we manage, in various types
of income-producing commercial real estate. Our current investment program
emphasizes senior and junior commercial mortgage loans, direct equity
investments and subordinated interests in commercial mortgage-backed
securities. Pursuant to our current business strategy, we seek to manage our
portfolio of loans and other assets so that a majority of our investments are
subordinate to third-party financing but senior to the owner/operator's equity
position and therefore represent "mezzanine" capital. We are organized and
conduct our operations to qualify as a real estate investment trust (REIT) for
federal income tax purposes.

We are the co-sponsor and exclusive investment manager of CT Mezzanine
Partners II LP, or Fund II, a commercial real estate mezzanine investment fund
which originated approximately $1.2 billion in investments. Our business
strategy is to continue to expand our investment management business by
sponsoring other commercial real estate funds focused on investments obtained
from mezzanine and other financing. We believe that these funds will generate
additional investment management fees and incentive compensation tied to the
performance of their portfolios of investments. We continue to manage our
existing portfolio of balance sheet assets originated prior to the
commencement of our investment management business and are positioned to
selectively add to our balance sheet investments by investing in a diverse
array of real estate and investment management/finance-related assets and
enterprises, including operating companies.

In December 2002, our board of directors authorized our election to be taxed
as a REIT for the 2003 tax year. We will continue to make for our own account
and as investment manager for the account of funds under management, loans and
debt related investments in various types of commercial real estate and
related assets, and, to the extent necessary, we will tailor our balance sheet
investment program to originate or acquire loans and investments to produce a
portfolio that meets the asset and income tests necessary to maintain our
qualification as a REIT. In order to accommodate our REIT status, the legal
structure of future investment funds we sponsor may be different from the
legal structure of our existing investment funds.

We were incorporated in Maryland on April 7, 1998 as a successor to a
business trust organized in the 1960s and our principal executive offices are
located at 410 Park Avenue, 14th Floor, New York, New York 10022, and our
telephone number is (212) 655-0220.

SECURITIES THAT MAY BE OFFERED

This prospectus relates to the offer and sale from time to time of (i) up to
4,002,597 shares of class A common stock currently held by certain of the
individuals and entities listed under the "Selling Shareholders" section of
this prospectus and (ii) up to 4,273,422 additional shares of class A common
stock which may be issued to other selling shareholders upon the conversion of
our outstanding convertible trust preferred securities.

We will not receive any cash proceeds from the sale by the selling
shareholders of the class A common stock to which this prospectus relates.

RISK FACTORS

An investment in our class A common stock involves various risks. You should
carefully consider the following risk factors in conjunction with the other
information contained and incorporated by reference into this prospectus
before purchasing our class A common stock. If any of the risks discussed in
this prospectus actually occur, our business, operating results, prospects
and/or financial condition could be harmed. This could cause the market price
of our class A common stock to decline and could cause you to lose all or part
of your investment.

RISK FACTORS RELATED TO OUR BUSINESS

o manage our mezzanine funds successfully by investing a majority of our
fund capital in suitable investments that meet the funds' specified
investment criteria,

o incent our management and professional staff to the task of developing
and operating the investment management business,

o structure, sponsor and capitalize future real estate related funds and
other investment products under our management that provide investors
with attractive investment opportunities, and

o convince third party investors that an investment in our future funds
will meet their investment objectives and will generate attractive
returns.

There can be no assurance that we will successfully develop and operate our
investment management business to achieve the investment returns we expect.

OUR SUCCESS IN DEVELOPING AND OPERATING THE INVESTMENT MANAGEMENT BUSINESS
WILL DEPEND IN PART ON THE DEMAND FOR REAL ESTATE RELATED INVESTMENT
OPPORTUNITIES SUCH AS THOSE PROVIDED BY OUR MEZZANINE FUNDS AND OTHER REAL
ESTATE RELATED FUNDS AND OTHER INVESTMENT PRODUCTS.

Our ability to develop, operate and sustain our investment management
business will depend in part on the strength of the market for private equity
investments generally and the demand for real estate related private equity
investments in particular. Markets for real estate related investments can be
materially and adversely affected by factors beyond our control, including
volatility in the global capital markets, adverse changes in general economic
conditions, an unfavorable market for real estate and competition from other
investment opportunities available to third party investors.

WE WILL FACE SUBSTANTIAL COMPETITION FROM ESTABLISHED PARTICIPANTS IN THE
PRIVATE EQUITY MARKET AS WE OFFER THE MEZZANINE AND OTHER REAL ESTATE RELATED
FUNDS TO THIRD PARTY INVESTORS.

We are a recent entrant into the investment management business. As we offer
our mezzanine and other real estate related funds as investment opportunities
to third party investors, we will face significant competition from
established Wall Street investment banking firms and large financial
institutions which have proven track records in marketing and managing private
equity investment funds and are otherwise competitively advantaged because
they have access to pre-existing third party investor networks into which they
can channel competing investment opportunities. If our competitors offer
investment products that are competitive with the mezzanine and other fund
investments offered by us, we will find it more difficult to attract investors
and to capitalize our mezzanine and other real estate related funds.

OUR SUCCESS IN DEPLOYING OUR MEZZANINE FUNDS' CAPITAL TO ORIGINATE OR ACQUIRE
A TARGETED PORTFOLIO OF ASSETS WILL DEPEND ON THE AVAILABILITY OF, AND THE
DEGREE OF COMPETITION FOR, ATTRACTIVE INVESTMENTS.

Our operating results will be dependent upon the availability of, as well as
our ability to identify, consummate, manage and realize, high yielding real
estate investment opportunities. If we are not successful in investing all
available equity capital for our funds, it will reduce the potential revenues
we earn following our funds' investment period when our management fee base
shifts from the amount of capital commitments to the amount of invested
assets. We may expend significant time and resources in identifying and
consummating targeted investments. In general, the availability of desirable
high yielding real estate opportunities and, consequently, our funds'
investment returns will be affected by the level and volatility of interest
rates, by conditions in the financial markets and by general economic
conditions. No assurance can be given that we will be successful in
identifying and consummating investments which satisfy our rate of return
objectives or that such investments, once consummated, will perform as
anticipated. We will be engaged in a competitive business and will be
competing for attractive investments with traditional lending sources as well
as existing funds, or funds formed in the future, with similar investment
objectives.

OUR LOANS AND INVESTMENTS WILL EXPOSE US TO A HIGH DEGREE OF RISK ASSOCIATED
WITH INVESTING IN COMMERCIAL REAL ESTATE RELATED ASSETS.

Real estate historically has experienced significant fluctuations and cycles
in value that may result in reductions in the value of real estate related
investments. The performance and value of our loans and investments once
originated or acquired by us will depend on many factors beyond our control.
The ultimate performance and value of our investments will be subject to the
varying degrees of risk generally incident to the ownership and operation of
the commercial property which collateralize or support our investments. The
ultimate performance and value of our loans and investments depends upon the
commercial property owner's ability to operate the property so that it
produces the revenues and cash flow needed to pay the interest and principal
due to us on the loans and investments. Revenues and cash flow may be
adversely affected by:

o changes in national economic conditions,

o changes in local real estate market conditions due to changes in national
or local economic conditions or changes in neighborhood characteristics,

o competition from other properties offering the same or similar services,

o changes in interest rates and in the availability of mortgage financing
on favorable terms,

o the impact of present or future environmental legislation and compliance
with environmental laws,

o the ongoing need for capital improvements (particularly in older
structures),

o changes in real estate tax rates and other operating expenses,

o adverse changes in zoning laws, and

o other factors that are beyond our control and the control of the
commercial property owners.

In the event that any of the properties underlying our loans and investments
experience any of the foregoing events or occurrences, the value of, and
return on, such investments would be negatively impacted.

OUR BALANCE SHEET ASSET PORTFOLIO CONTINUES TO BE CONCENTRATED IN MARK-TO-
MARKET MORTGAGE BACKED SECURITIES AND RELATED HEDGES WHICH SUBJECTS US TO
GREATER SWINGS IN EQUITY AND INCOME AS WE RECORD BALANCE SHEET GAINS AND
LOSSES ON SUCH ASSETS.

Our venture agreement with affiliates of Citigroup Inc. placed restrictions
on our ability to originate new mezzanine loan investments for our balance
sheet during the investment period for Fund II which resulted in our balance
sheet portfolio becoming more concentrated in longer term fixed rate mortgage
backed securities.

We have adopted accounting policies under which such securities are recorded
as available-for-sale and changes in the market value will impact either or
both shareholders' equity or net income depending on the characterization of
the change in market value. If a reduction in market value is deemed to be
permanent (generally due to a change in the credit risk), the reduction in
value will be recorded as a reduction of net income. If any of the available-
for-sale securities are sold, the resulting gain or loss will be recorded
through the income statement. All other changes in market value will impact
shareholders equity only.

While the restrictions on our balance sheet investment activities diminished
when the investment period for Fund II ended and we have begun making new
mezzanine loan investments for our balance sheet, there can be no assurance
that the concentration in mark-to-market mortgage backed securities will be
reduced in the near term through new originations. In an environment of lower
interest rates, there is also a higher risk that our existing non-mark-to-
market loans will pay off early. To the extent our balance sheet remains
concentrated in mark-to-market assets, we will remain subject to potential
swings in equity and income as we record gains and losses on such assets on
our balance sheet which will be partially offset by unrealized gains and
losses on hedges. If interest rates fluctuate and affect significantly the
market value of such mark-to-market assets the corresponding reductions or
increases in equity and income may be significant.

WE MAY NOT ACHIEVE OUR TARGETED RATE OF RETURN ON OUR INVESTMENTS.

We will originate or acquire investments based on our estimates or
projections of overall rates of return on such investments, which in turn are
based on, among other considerations, assumptions regarding the performance of
assets, the amount and terms of available financing and the manner and timing
of dispositions, including possible asset recovery and remediation strategies,
all of which are subject to significant uncertainty. In addition, events or
conditions that have not been anticipated may occur and may have a significant
effect on the actual rate of return received on an investment.

We are currently confronted with a low interest rate environment which
negatively impacts our ability to originate or acquire investments that
produce rates of returns similar to existing investments that were added to
our portfolio during a higher interest rate environment. As we acquire or
originate investments for our balance sheet portfolio (whether as new
additions or as replacements for maturing investments), there can be no
assurance that we will be able to originate or acquire investments that
produce rates of return comparable to rates on existing investments.

Our return on investment will depend, in part, upon our ability to grow our
funds' portfolio of invested assets through the use of leverage. Our ability
to obtain the necessary leverage on attractive terms will ultimately depend
upon our ability to maintain interest coverage ratios meeting prevailing
market underwriting standards which will vary according to lenders'
assessments of our and our funds' creditworthiness and the terms of the
borrowings. The failure to obtain and/or maintain leverage at desired levels,
or to obtain leverage on attractive terms, could have a material adverse
effect on our funds' performance. Moreover, we are dependent upon a few
lenders to provide the primary credit facilities for our origination or
acquisition of loans and investments.

Leverage creates an opportunity for increased net income, but at the same
time creates risks. For example, leveraging magnifies changes in the net worth
of our funds. We expect that our funds will leverage assets only when there is
an expectation that leverage will enhance returns, although there can be no
assurance that the use of leverage will prove to be beneficial. Where pledged
assets are marked-to-market, a decline in market value may require us to
pledge additional collateral to secure our borrowings. Moreover, there can be
no assurance that our funds will be able to meet their debt service
obligations and, to the extent that they cannot, they risk the loss of some or
all of their assets or a financial loss if they are required to liquidate
assets at a commercially inopportune time.

WE ARE DEPENDENT UPON OUR SENIOR MANAGEMENT TEAM TO DEVELOP AND OPERATE OUR
BUSINESS.

Our ability to develop and operate our business depends to a substantial
extent on the experience, relationships and expertise of our senior management
and key employees. There can be no assurance that these individuals will
remain in our employ. The employment agreement with our chief executive
officer, John R. Klopp, expires in 2004, unless further extended. The loss of
the services of our senior management and key employees could have a material
adverse effect on our operations.

WE WILL BE EXPOSED TO THE RISKS INVOLVED WITH MAKING SUBORDINATED INVESTMENTS.

Our investments will involve the additional risks attendant to investments
consisting of subordinated loan positions. In many cases, management of our
investments and our remedies with respect thereto, including the ability to
foreclose on the collateral securing such investments, will be subject to the
rights of senior lenders and the rights as set forth in certain intercreditor
agreements.

OUR LOANS AND INVESTMENTS MAY BE SUBJECT TO FLUCTUATIONS IN INTEREST RATES
WHICH MAY NOT BE ADEQUATELY PROTECTED, OR PROTECTED AT ALL, BY OUR HEDGING
STRATEGIES.

Our current investment program emphasizes loans with "floating" interest
rates to protect against fluctuations in interest rates. However, we may from
time to time make fixed rate loans. In such cases, we may employ various
hedging strategies to limit the effects of changes in interest rates,
including engaging in interest rate swaps, caps, floors and other interest
rate exchange contracts. No strategy can completely insulate us or the funds
from the risks associated with interest rate changes and there is a risk that
they may provide no protection at all. Hedging transactions involve certain
additional risks such as the legal enforceability of hedging contracts, the
early repayment of hedged transactions and the risk that unanticipated and
significant changes in interest rates may cause a significant loss of basis in
the contract and a change in current period expense. There can be no assurance
that we will be able to enter into hedging transactions or that such hedging
transactions will adequately protect us or the funds against the foregoing
risks. In addition, cash flow hedges which are not perfectly correlated with a
variable rate financing will impact our income as gains and losses on the
ineffective portion of such hedges will be recorded.

OUR LOANS AND INVESTMENTS MAY BE ILLIQUID WHICH WILL CONSTRAIN OUR ABILITY TO
VARY OUR PORTFOLIO OF INVESTMENTS.

Real estate investments are relatively illiquid. Such illiquidity may limit
our ability to vary our portfolio or our funds' portfolio of investments in
response to changes in economic and other conditions. Illiquidity may result
from the absence of an established market for investments as well as the legal
or contractual restrictions on their resale. In addition, illiquidity may
result from the decline in value of a property securing one of the funds'
investments. There can be no assurance that the fair market value of any of
the real property serving as security will not decrease in the future, leaving
our or our funds' investment under-collateralized or not collateralized at
all.

WE MAY INVEST IN TROUBLED ASSETS WHICH ARE SUBJECT TO A HIGHER DEGREE OF
FINANCIAL RISK.

We may make investments in non-performing or other troubled assets that
involve a higher degree of financial risk and there can be no assurance that
our investment objectives will be realized or that there will be any return on
investment. Furthermore, investments in properties operating in work-out modes
or under bankruptcy protection laws may, in certain circumstances, be subject
to additional potential liabilities that could exceed the value of an
investor's original investment, including equitable subordination and/or
disallowance of claims or lender liability.

WE MAY NOT HAVE CONTROL OVER CERTAIN OF OUR LOANS AND INVESTMENTS.

Our ability to manage our portfolio of loans and investments will be subject
to the form in which they are made. In certain situations, we or our funds
may:

o acquire only a minority interest,

o co-invest with third parties through partnerships, joint ventures or
other entities, thereby acquiring non-controlling interests,

o rely on independent third party management or strategic partners with
respect to the management of an asset, or

o acquire only a participation in an asset underlying an investment.

Therefore, we may not be able to exercise control over the loan or
investment. Such financial assets may involve risks not present in investments
where third party controlling investors or third parties are not involved. For
example, a third party partner or co-venturer may have financial difficulties
resulting in a negative impact on such asset, may have economic or business
interests or goals which are inconsistent with ours and those of the funds, or
may be in a position to take action contrary to the funds' investment
objectives. In addition, our funds may, in certain circumstances, be liable
for the actions of its third party partners or co-venturers.

OUR MEZZANINE AND OTHER FUNDS WILL BE SUBJECT TO THE RISK OF DEFAULTS BY THIRD
PARTY INVESTORS ON THEIR CAPITAL COMMITMENTS.

The capital commitments made by third party investors to our mezzanine and
other funds represent promises by those investors to contribute cash to the
funds from time to time as investments are made by the funds. We will
therefore be subject to general credit risks that the investors may default on
their capital commitments. If defaults occur, we may not be able to close
loans and investments we have identified and negotiated, which could
materially and adversely affect the fund's investment program or make us
liable for breach of contract, in either case to the detriment of our
franchise in the private equity market.

If our portfolio did not comply with the requirements of the exclusion we
rely upon, we could be forced to alter our portfolio by selling or otherwise
disposing of a substantial portion of the assets that are not Qualifying
Interests or by acquiring significant position in assets that are Qualifying
Interests. Altering our portfolio in this manner may have a material adverse
effect on our investment if we are forced to dispose of or acquire assets in
an unfavorable market.

RISK FACTORS RELATED TO OUR STOCK

BECAUSE A LIMITED NUMBER OF SHAREHOLDERS, INCLUDING MEMBERS OF OUR MANAGEMENT
TEAM, OWN A SUBSTANTIAL NUMBER OF OUR SHARES, DECISIONS MADE BY THEM MAY BE
DETRIMENTAL TO YOUR INTERESTS.

exercise their influence over us in a manner detrimental to your interests. As
of the date hereof, these shareholders collectively own and control 2,171,479
shares of our class A common stock representing approximately 33.4% of our
outstanding class A common stock. This concentration of ownership may have the
effect of delaying or preventing a change in control of our company and might
affect the market price of our class A common stock.

The conversion of the outstanding convertible trust preferred securities
held by EOP Operating Limited Partnership, Vornado Realty, L.P., and JP Morgan
Chase Bank, as trustee for the General Motors Employe Global Group Pension
Trust and the GMAM Group Pension Trust II could result in other significant
concentrated holdings of class A common stock. EOP Operating Limited
Partnership, Vornado Realty, L.P. and JP Morgan Chase Bank, as trustee for the
General Motors Employe Global Group Pension Trust and the GMAM Group Pension
Trust II may each acquire 1,424,474 shares of our class A common stock.
Officers, directors or other related persons of these securityholders serve on
our board of directors and therefore have the power to significantly influence
our affairs. If these securityholders acquire a significant ownership
position, they may acquire the ability to influence the outcome of matters
submitted for shareholder approval.

SOME PROVISIONS OF OUR CHARTER AND BYLAWS AND MARYLAND LAW MAY DETER TAKEOVER
ATTEMPTS, WHICH MAY LIMIT THE OPPORTUNITY OF OUR SHAREHOLDERS TO SELL THEIR
SHARES AT A FAVORABLE PRICE.

Some of the provisions of our charter and bylaws and Maryland law discussed
below could make it more difficult for a third party to acquire us, even if
doing so might be beneficial to our shareholders, by providing them with the
opportunity to sell their shares at a premium to the then current market
price.

Issuance of Preferred Stock Without Shareholder Approval. Our charter
authorizes our board of directors to authorize the issuance of up to
100,000,000 shares of preferred stock and up to 100,000,000 shares of common
stock. Our charter also authorizes our board of directors, without shareholder
approval, to classify or reclassify any unissued shares of our common stock
and preferred stock into other classes or series of stock and to increase the
aggregate number of shares of stock of any class or series that may be issued.
The board therefore has the power to increase the number of shares of
preferred stock we may issue without shareholder approval. Preferred stock may
be issued in one or more series, the terms of which may be determined without
further action by shareholders. These terms may include preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications or terms or conditions of redemption. No shares of
preferred stock are currently outstanding and we have no present plans for the
issuance of any preferred stock. The issuance of any preferred stock, however,
could materially adversely affect the rights of holders of our common stock,
and therefore could reduce its value. In addition, specific rights granted to
future holders of preferred stock could be used to restrict our ability to
merge with, or sell assets to, a third party. The power of the board of
directors to issue preferred stock could make it more difficult, delay,
discourage, prevent or make it more costly to acquire or effect a change in
control, thereby preserving the current shareholders' control.

Maryland Takeover Statutes. We are subject to the Maryland Business
Combination Act which might enable our management to resist an unsolicited
takeover of our company. The statute substantially restricts the ability of
third parties who acquire, or seek to acquire, control of our company to
complete mergers and other business combinations without the approval of our
board of directors even if such transaction would be beneficial to
shareholders. "Business combinations" between such a third party acquiror and
our company are prohibited if the acquiror becomes an "interested shareholder"
by obtaining beneficial ownership of 10 percent or more of shareholder voting
power. If our board of directors approved in advance the transaction that
would otherwise give rise to the acquiror attaining such status, the acquiror
would not become an interested shareholder and, as a result, it could enter
into a business combination with us. Our board of directors could choose not
to negotiate with an acquirer if the board determined in its business judgment
that considering such an acquisition was not in the strategic interests of our
company. Even after the lapse of the

five-year prohibition period, any business combination with an interested
shareholder must be recommended by our board of directors and approved by the
affirmative vote of at least:

o 80% of the votes entitled to be cast by shareholders and

o two-thirds of the votes entitled to be cast by shareholders other than
the interested shareholder and affiliates and associates thereof.

The super-majority vote requirements do not apply if the transaction
complies with a minimum price requirement prescribed by the statute.

Our board of directors has exempted any business combination involving
family partnerships controlled separately by John R. Klopp and Craig M.
Hatkoff and a limited liability company indirectly controlled by a trust for
the benefit of Samuel Zell and his family. As a result, the persons described
above may enter into business combinations with us without compliance with the
super-majority vote requirements and the other provisions of the statute.

We are also subject to the Maryland Unsolicited Takeovers Act which permits
our board of directors, among other things, to elect on our company's behalf
to stagger the terms of directors, to increase the shareholder vote required
to remove a director and to provide that shareholder-requested meetings may be
called only upon the request of shareholders entitled to cast at least a
majority of the votes entitled to be cast at the meeting. Such an election
would significantly restrict the ability of third parties to wage a proxy
fight for control of our board of directors as a means of advancing a takeover
offer. If an acquirer was discouraged from offering to acquire us, or
prevented from successfully completing a hostile acquisition, you could lose
the opportunity to sell your shares at a favorable price.

RISK FACTORS RELATED TO OUR REIT ELECTION

OUR CHARTER DOES NOT PERMIT OWNERSHIP OF OVER 2.5% OF OUR CLASS A COMMON STOCK
BY INDIVIDUALS, AND ATTEMPTS TO ACQUIRE OUR COMMON STOCK IN EXCESS OF THE 2.5%
LIMIT WOULD BE VOID WITHOUT THE PRIOR APPROVAL OF OUR BOARD OF DIRECTORS.

For the purpose of preserving our REIT qualification, our charter would
prohibit direct or constructive ownership by any individual of more than 2.5%
of the lesser of the total number or value of the outstanding shares of our
class A common stock as a means of preventing ownership of more than 50% of
our class A common stock by five or fewer individuals. The charter's
constructive ownership rules are complex and may cause the outstanding class A
common stock owned by a group of related individuals or entities to be deemed
to be constructively owned by one individual. As a result, the acquisition of
less than 2.5% of our outstanding class A common stock by an individual or
entity could cause an individual to own constructively in excess of 2.5% of
our outstanding class A common stock, and thus be subject to the charter's
ownership limit. The ownership limit was established following a review of the
aggregate ownership of the top five direct or constructive individual
shareholders. There can be no assurance that our board of directors, as
permitted in the charter, will increase this ownership limit in the future.
Any attempt to own or transfer shares of our class A common stock in excess of
the ownership limit without the consent of our board of directors shall be
void, and will result in the shares being transferred by operation of law to a
charitable trust, and the person who acquired such excess shares will not be
entitled to any distributions thereon or to vote such excess shares.

After reviewing the top five shareholders treated as individuals for REIT
qualification purposes, our board of directors fixed the ownership limit at
2.5%. The charter contains a provision that would exempt certain of our
officers and directors and related persons from the ownership limit. Based on
the number of shares outstanding on the date hereof, this exemption would
permit these top five shareholders collectively to hold up to 40.9% of our
outstanding shares of class A common stock.

The 2.5% ownership limit may have the effect of precluding a change in
control of Capital Trust by a third party without the consent of our board of
directors, even if such change in control would be in the interest of our
stockholders (and even if such change in control would not reasonably
jeopardize our REIT status).

THERE ARE NO ASSURANCES OF OUR ABILITY TO PAY DIVIDENDS IN THE FUTURE.

We intend to pay quarterly dividends and to make distributions to our
shareholders in amounts such that all or substantially all of our taxable
income in each year, subject to certain adjustments, is distributed. This,
along with other factors, should enable us to qualify for the tax benefits
accorded to a REIT under the Internal Revenue Code. We have not established a
dividend policy providing for the payment of specific dividends at regular
intervals. All distributions will be made at the discretion of our board of
directors and will depend on our earnings, our financial condition,
maintenance of our REIT status and such other factors as our board of
directors may deem relevant from time to time. There are no assurances as to
our ability to pay dividends in the future. In addition, some of our
distributions may include a return of capital.

One of the factors that will influence the price of our class A common stock
will be the dividend yield on our stock (distributions as a percentage of the
price of our stock) relative to market interest rates. An increase in market
interest rates may lead prospective purchasers of our common stock to expect a
higher dividend yield, which would adversely affect the market price of our
class A common stock.

RECENT TAX LEGISLATION MAY HAVE NEGATIVE CONSEQUENCES FOR REITS.

Recent tax legislation allows certain corporations to pay dividends that
qualify for a reduced tax rate in the hands of certain shareholders. This
legislation generally does not apply to REITs. Although the legislation does
not adversely affect the tax treatment of REITs, it may cause investments in
non-REIT corporations to become relatively more desirable. As a result, the
capital markets may be less favorable to REITs when they seek to raise equity
capital, and the prices at which REIT equity securities trade may decline or
underperform non-REIT corporations.

WE WILL BE DEPENDENT ON EXTERNAL SOURCES OF CAPITAL TO FINANCE OUR GROWTH.

As with other REITs, but unlike corporations generally, our ability to
finance our growth must largely be funded by external sources of capital
because we generally will have to distribute to our shareholders 90% of our
taxable income in order to qualify as a REIT (including taxable income where
we do not receive corresponding cash). Our access to external capital will
depend upon a number of factors, including general market conditions, the
market's perception of our growth potential, our current and potential future
earnings, cash distributions and the market price of our stock.

IF WE DO NOT MAINTAIN OUR QUALIFICATION AS A REIT, WE WILL BE SUBJECT TO TAX
AS A REGULAR CORPORATION AND FACE A SUBSTANTIAL TAX LIABILITY.

o any resulting tax liability could be substantial, could have a material
adverse effect on our book value and could reduce the amount of cash
available for distribution to shareholders; and

COMPLYING WITH REIT REQUIREMENTS MAY CAUSE US TO FOREGO OTHERWISE ATTRACTIVE
OPPORTUNITIES.

In order to qualify as a REIT for federal income tax purposes, we must
continually satisfy tests concerning, among other things, our sources of
income, the nature of our investments in commercial real estate and related
assets, the amounts we distribute to our shareholders and the ownership of our
stock. We may also be required to make distributions to shareholders at
disadvantageous times or when we do not have funds readily available for
distribution. The REIT provisions of the tax code may substantially limit our
ability to hedge our financial assets and related borrowings. Thus, compliance
with REIT requirements may hinder our ability to operate solely on the basis
of maximizing profits.

COMPLYING WITH REIT REQUIREMENTS MAY FORCE US TO LIQUIDATE OR RESTRUCTURE
OTHERWISE ATTRACTIVE INVESTMENTS.

In order to qualify as a REIT, we must also ensure that at the end of each
calendar quarter, at least 75% of the value of our assets consists of cash,
cash items, government securities and qualified REIT real estate assets. The
remainder of our investment in securities cannot include more than 10% of the
outstanding voting securities of any one issuer or 10% of the total value of
the outstanding securities of any one issuer. In addition, no more than 5% of
the value of our assets can consist of the securities of any one issuer. If we
fail to comply with these requirements, we must dispose of a portion of our
assets within 30 days after the end of the calendar quarter in order to avoid
losing our REIT status and suffering adverse tax consequences.

COMPLYING WITH REIT REQUIREMENTS MAY FORCE US TO BORROW TO MAKE DISTRIBUTIONS
TO SHAREHOLDERS.

USE OF PROCEEDS

We will not receive any proceeds from the sale of any securities covered by
this prospectus by the selling shareholders.

SELECTED FINANCIAL DATA

The following selected financial data has been derived from the Company's
historical financial statements as of and for the years ended December 31,
2002, 2001, 2000, 1999, and 1998. The per share information presented has been
adjusted to give effect to the one (1) for three (3) reverse stock split of
the Company's outstanding shares of class A common stock as though the reverse
stock split was in effect for all periods presented. Prior to March 8, 2000,
the Company did not serve as investment manager for any funds under management
and therefore only the historical financial information, as of and for the
years ended December 31, 2002, 2001and 2000 reflect operating results from its
investment management business. For these reasons, the Company believes that,
except for the information for the years ended December 31, 2002, 2001 and
2000, the following information is not indicative of the Company's current
business.

YEARS ENDED DECEMBER 31,
------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)

STATEMENT OF OPERATIONS DATA:
REVENUES:
Interest and investment income........................................... $ 47,207 $ 67,728 $ 88,433 $ 89,839 $ 63,954
Income / (loss) from equity investments in affiliated Funds.............. (2,534) 2,991 1,530 -- --
Advisory and investment banking fees..................................... 2,207 277 3,920 17,772 10,311
Management and advisory fees from Funds.................................. 10,123 7,664 373 -- --
-------- -------- -------- -------- --------
Total revenues.......................................................... 57,003 78,660 94,256 107,611 74,265
-------- -------- -------- -------- --------
OPERATING EXPENSES:
Interest expense......................................................... 17,992 26,348 36,931 39,791 27,665
General and administrative expenses...................................... 13,996 15,382 15,439 17,345 17,045
Depreciation and amortization............................................ 992 909 902 345 249
Net unrealized (gain) / loss on derivative securities and corresponding
hedged risk on CMBS Securities......................................... (21,134) 542 -- -- --
Net realized (gain) / loss on sale of fixed assets, investments and
settlement of derivative securities.................................... 28,715 -- 64 (35) --
Provision for / (recapture of) allowance for possible credit losses...... (4,713) 748 5,478 4,103 3,555
-------- -------- -------- -------- --------
Total operating expenses................................................ 35,848 43,929 58,814 61,549 48,514
-------- -------- -------- -------- --------
Income / (loss) before income tax expense and distributions and
amortization on Convertible Trust Preferred Securities................. 21,155 34,731 35,442 46,062 25,751
Income tax expense....................................................... 22,438 16,882 17,760 22,020 9,367
-------- -------- -------- -------- --------
Income / (loss) before distributions and amortization on Convertible
Trust Preferred Securities............................................. (1,283) 17,849 17,682 24,042 16,384
Distributions and amortization on Convertible Trust Preferred Securities,
net of income tax benefit.............................................. 8,455 8,479 7,921 6,966 2,941
-------- -------- -------- -------- --------
NET INCOME / (LOSS)...................................................... (9,738) 9,370 9,761 17,076 13,443
Less: Preferred Stock dividend and dividend requirement.................. -- 606 1,615 2,375 3,135
-------- -------- -------- -------- --------
Net income / (loss) allocable to Common Stock............................ $ (9,738) $ 8,764 $ 8,146 $ 14,701 $ 10,308
======== ======== ======== ======== ========
PER SHARE INFORMATION:
Net income / (loss) per share of Common Stock:
Basic................................................................. $ (1.62) $ 1.30 $ 1.05 $ 2.07 $ 1.70
======== ======== ======== ======== ========
Diluted............................................................... $ (1.62) $ 1.12 $ 0.99 $ 1.65 $ 1.32
======== ======== ======== ======== ========
Weighted average shares of Common Stock outstanding:
Basic................................................................. 6,009 6,722 7,724 7,111 6,070
======== ======== ======== ======== ========
Diluted............................................................... 6,009 12,041 9,897 14,575 10,208
======== ======== ======== ======== ========
AS OF DECEMBER 31,
------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Total assets............................................................. $384,976 $678,800 $644,392 $827,808 $766,438
Total liabilities........................................................ 211,932 428,231 338,584 522,925 472,207
Convertible Trust Preferred Securities................................... 88,988 147,941 147,142 146,343 145,544
Shareholders' equity..................................................... 84,056 102,628 158,666 158,540 148,687

SELLING SHAREHOLDERS

As discussed elsewhere in this prospectus, the selling shareholders are
individuals or entities who or which either hold shares of our class A common
stock or may acquire the same upon the conversion of certain convertible trust
preferred securities and, as discussed under the caption "Plan of
Distribution" below, may include certain of their pledgees, donees,
transferees or other successors-in-interest who receive shares as a gift,
pledge, partnership distribution or other non-sale related transfer. The
following table sets forth, as of the date of this prospectus:

o the name of each selling shareholder;

o the number of shares of class A common stock beneficially owned by each
selling shareholder;

o the number of shares of class A common stock that may be offered for the
account of each selling shareholder; and

o the number and percentage of shares of class A common stock that will be
beneficially owned by each selling shareholder following the offering to
which this prospectus relates.

The information with respect to ownership after the offering assumes the
sale of all of the shares offered and no purchases of additional shares. We
have set forth in the footnotes to the table additional information regarding
the selling shareholders and their shares, including the nature of any
position, office or other material relationship that a selling shareholder has
had with Capital Trust or any of our affiliates within the past three years.
The selling shareholders may offer all or part of the shares covered by this
prospectus at any time or from time to time.

For purposes of the table below, the number of shares "beneficially owned"
are those beneficially owned as determined under the rules of the SEC. Such
information is not necessarily indicative of beneficial ownership for any
other purpose. Under such rules, beneficial ownership includes any shares as
to which a person has sole or shared voting power or investment power and any
shares for which the person has the right to acquire such power within 60 days
through the exercise of any option, warrant or right, through conversion of
any security or pursuant to the automatic termination of a power of attorney
or revocation of a trust, discretionary account or similar arrangement.

TOTAL NUMBER OF
TOTAL NUMBER OF SHARES OF CLASS A TOTAL NUMBER OF PERCENTAGE OF
SHARES OF CLASS A COMMON STOCK SHARES OF CLASS A SHARES OF CLASS A
COMMON STOCK THAT MAY BE COMMON STOCK COMMON STOCK
BENEFICIALLY OFFERED FOR THE TO BE BENEFICIALLY TO BE BENEFICIALLY
OWNED PRIOR ACCOUNT OF THE OWNED AFTER OWNED AFTER
NAME TO THIS OFFERING SELLING SHAREHOLDER THIS OFFERING THIS OFFERING
---- ---------------- ------------------- ------------- -------------

Veqtor Finance Company, L.L.C. (1) .......... 897,429 897,429 -- --%
CMH Investment Partnership LP (2) ........... 610,444(8) 610,444 -- --%
GRG Investment Partnership LP (3) ........... 64,807(9) 64,807 -- --%
JRK Investment Partnership LP (4) ........... 600,044(10) 600,044 -- --%
Rosenberg-CT General Partnership (5) ........ 139,807(11) 139,807 -- --%
EOP Operating Limited Partnership ........... 1,424,474(12) 1,424,974 -- --%
Vornado Realty, L.P. ........................ 1,424,474(12) 1,424,974 -- --%
JPMorgan Chase Bank, as trustee for General
Motors Employe Global Group Pension Trust
(6)........................................ 99,713(13) 99,713 -- --%
JPMorgan Chase Bank, as trustee for GMAM
Group Pension Trust II (6)................. 1,324,761(14) 1,324,761 -- --%
Stichting Pensioenfonds ABP ................. 590,066 590,066 -- --%
Samstock, L.L.C. (7) ........................ 25,000 25,000 -- --%
WIG LP ...................................... 37,000 37,000 -- --%
Verna Harrah Trust .......................... 50,000 50,000 -- --%
HHS Partnership ............................. 15,000 15,000 -- --%
Jerry Markowitz and Maria Markowitz ......... 15,000 15,000 -- --%
Barbara Clements Heller Revocable Trust ..... 30,000 30,000 -- --%
Jerome Blank Irrevocable Trust .............. 18,000 18,000 -- --%
Bernard Osher Trust ......................... 60,000 60,000 -- --%
Prism Partners I LP ......................... 70,000 70,000 -- --%
Fred Stein .................................. 15,000 15,000 -- --%
Sharon B Zell Family Trust .................. 25,000 25,000 -- --%
JW Family Trust ............................. 12,500 12,500 -- --%
Richard F. Levy ............................. 10,000 10,000 -- --%
Kenneth D. Tuchman .......................... 5,000 5,000 -- --%
Harvey R. Heller ............................ 13,500 13,500 -- --%
Ramius Capital Croup, LLC ................... 22,500 22,500 -- --%
Portside Growth& Opportunity Fund Ltd ....... 22,500 22,500 -- --%
Santa Fe Art Foundation ..................... 15,000 15,000 -- --%
Diane Buchanan Wilsey ....................... 50,000 50,000 -- --%
SMS Trust ................................... 55,800 55,800 -- --%
ADS 1212 Trust .............................. 18,600 18,600 -- --%
You Lucky Dog Trust ......................... 18,600 18,600 -- --%
Prima Associates, LP ........................ 10,000 10,000 -- --%
The Alpha Fund .............................. 10,000 10,000 -- --%
Gaston Caperton ............................. 12,000 12,000 -- --%
John Pritzker ............................... 6,000 6,000 -- --%
Herb Lau and Carol Lau ...................... 1,000 1,000 -- --%
Mellon Bank NA, Custodian for the Public
Employee Retirement System of Idaho........ 200,000 200,000 -- --%
Boston Safe Deposit and Trust Company, as
Trustee of the Raytheon Combined DB/DC
Master Trust............................... 29,900 29,900 -- --%
Boston Safe Deposit and Trust Company, as
Trustee of the Raytheon Master Pension
Trust...................................... 85,100 85,100 -- --%
WHI Growth Fund, LP ......................... 90,000 90,000 -- --%
Shoshana Foundation Inc. .................... 2,000 2,000 -- --%
Granite Fund I LLC .......................... 50,000 50,000 -- --%

---------------

(1) Zell General Partnership, Inc., or Zell GP, is the sole managing member
of Veqtor Finance Company, L.L.C. The sole shareholder of Zell GP is the
Sam Investment Trust, a trust established for the benefit of the family
of Samuel Zell, our chairman of the board. Chai Trust Company, L.L.C.
serves as trustee of the Sam Investment Trust.

(2) Craig M. Hatkoff, our former vice chairman and a member of our board of
directors, is the sole general partner of CMH Investment Partnership LP.

(3) Gary R. Garrabrant, a member of our board of directors, is the sole
general partner of GRG Investment Partnership L.P.

(4) John R. Klopp, our president and chief executive officer and a member of
our board of directors, is the sole general partner of JRK Investment
Partnership LP.

(5) Sheli Z. Rosenberg, a member of our board of directors, and Burton X.
Rosenberg are the sole general partners of Rosenberg-CT General
Partnership.

(6) Each trust is a pension trust formed pursuant to the laws of the State of
New York for the benefit of certain employee benefit plans of General
Motors Corporation, or GM, its subsidiaries and unrelated employers.
These shares may be deemed to be owned beneficially by General Motors
Investment Management Corporation, or GMIMCo, a wholly-owned subsidiary
of GM. GMIMCo is registered as an investment adviser under the Investment
Advisers Act of 1940. GMIMCo's principal business is providing investment
advice and investment management services with respect to the assets of
certain employee benefit plans of GM, its subsidiaries and unrelated
employers, and with respect to the assets of certain direct and indirect
subsidiaries of GM and associated entities. GMIMCo is serving as
investment manager with respect to these shares and in that capacity it
has the sole power to direct the trustee as to the voting and disposition
of these shares. Because of the trustee's limited role, beneficial
ownership of the shares by the trustee is disclaimed.

(7) SZ Investments, L.L.C., or SZI, is the sole member of Samstock, L.L.C.
The sole manager of SZI is Zell GP.

(8) Excludes 18,000 shares of class A common stock owned by Craig M. Hatkoff,
141,667 shares issuable upon the exercise of vested stock options and
11,924 shares issuable upon conversion of vested stock units held by
Mr. Hatkoff.

(9) Excludes 30,710 shares of class A common stock which may be obtained upon
conversion of vested stock units held by Gary R. Garrabrant, and 35,000
shares of class A common stock issuable upon exercise of vested stock
options held by Mr. Garrabrant.

(10) Excludes 69,259 shares of class A common stock owned by John R. Klopp,
29,630 shares of class A common stock subject to an unvested restricted
stock grant, and 424,999 shares issuable upon exercise of vested stock
options held by Mr. Klopp.

(11) Excludes 30,710 shares of class A common stock which may be obtained upon
conversion of vested stock units held by Sheli Z. Rosenberg.

(12) Represents shares which may be obtained upon conversion of $29,914,000 in
convertible amount of Variable Step Up Convertible Trust Preferred
Securities issued by our company's consolidated Delaware statutory
business trust subsidiary, CT Convertible Trust I

(13) Represents shares which may be obtained upon conversion of $2,093,980 in
convertible amount of Variable Step Up Convertible Trust Preferred
Securities issued by our company's consolidated Delaware statutory
business trust subsidiary, CT Convertible Trust I.

(14) Represents shares which may be obtained upon conversion of $27,820,020 in
convertible amount of Variable Step Up Convertible Trust Preferred
Securities issued by our company's consolidated Delaware statutory
business trust subsidiary, CT Convertible Trust I.

PLAN OF DISTRIBUTION

We are registering shares of class A common stock on behalf of the selling
shareholders. As used in this section of the prospectus, the term "selling
shareholders" includes the selling shareholders named in the table above and
any of their pledgees, donees, transferees or other successors-in-interest who
receive shares offered hereby from a selling shareholder as a gift, pledge,
partnership distribution or other non-sale related transfer and who
subsequently sell any of such shares after the date of this prospectus.

All costs, expenses and fees in connection with the registration of the
shares offered hereby will be borne by Capital Trust. Underwriting discounts,
brokerage commissions and similar selling expenses, if any, attributable to
the sale of the securities covered by this prospectus will be borne by the
respective selling shareholders.

The selling shareholders may sell under this prospectus the shares of class
A common stock which are outstanding or are issuable upon conversion of the
convertible trust preferred securities at different times. The selling
shareholders will act independently of us in making decisions as to the
timing, manner and size of each sale. The sales may be made on the New York
Stock Exchange or any national securities exchange or quotation system on
which the shares of class A common stock may be listed or quoted at the time
of sale, in the over-the-counter market or other than in such organized and
unorganized trading markets, in one or more transactions, at:

o fixed prices, which may be changed;

o prevailing market prices at the time of sale;

o varying prices determined at the time of sale; or

o negotiated prices.

The shares may be sold by one or more of the following methods in addition
to any other method permitted under this prospectus:

o a block trade in which the broker-dealer so engaged may sell the shares
as agent, but may position and resell a portion of the block as principal
to facilitate the transaction;

o a purchase by a broker-dealer as principal and resale by such broker-
dealer for its own account;

o an ordinary brokerage transaction or a transaction in which the broker
solicits purchasers;

o a privately negotiated transaction;

o an underwritten offering;

o securities exchange or quotation system sale that complies with the rules
of the exchange or quotation system;

o through the writing of options relating to such shares; or

o through a combination of the above methods of sale.

In connection with sales of the shares of class A common stock, any selling
shareholder may:

o enter into and cover hedging transactions with broker-dealers, that may
in turn engage in short sales of the shares of class A common stock in
the course of hedging the positions they assume;

o sell short and deliver shares of class A common stock to close out the
short positions; or

o loan or pledge shares of class A common stock to broker-dealers that in
turn may sell the shares.

We have been advised by the selling shareholders that they have not, as of
the date of this prospectus, entered into any agreements, understandings or
arrangements with underwriters or broker-dealers regarding the sale of their
shares, nor have we been advised that there is an underwriter or broker-dealer
acting as of the date of this prospectus in connection with the proposed sale
of the shares by the selling shareholders.

The selling shareholders may effect such transactions by selling the shares
covered by this prospectus directly to purchasers, to or through broker-
dealers, which may act as agents for the seller and buyer or principals, or to
underwriters who acquire shares for their own account and resell them in one
or more transactions. Such broker-dealers or underwriters may receive
compensation in the form of discounts, concessions, or commissions from the
selling shareholders and/or the purchasers of the shares covered by this
prospectus for whom such broker-dealers may act as agents or to whom they sell
as principal, or both (which compensation as to a particular broker-dealer
might be in excess of customary commissions) and such discounts, concessions,
or commissions may be allowed or re-allowed or paid to dealers.

The selling shareholders and any broker-dealers that participate with the
selling shareholders in the sale of the shares covered by this prospectus may
be deemed to be "underwriters" within the meaning of Section 2(a)(11) of the
Securities Act, and any commissions received by such broker-dealers and any
profit on the resale of the shares sold by them while acting as principals
might be deemed to be underwriting discounts or commissions under the
Securities Act.

The selling shareholders and any broker-dealer that may be deemed to be
"underwriters" within the meaning of Section 2(a)(11) of the Securities Act
will be subject to the prospectus delivery requirements of the Securities Act.
We will make copies of this prospectus available to the selling shareholders
and have informed them of their obligation to deliver copies of this
prospectus to purchasers at or before the time of any sale of the shares. Such
requirement may be satisfied by delivery through the facilities of the New
York Stock Exchange pursuant to Rule 153 under the Securities Act.

We have informed the selling shareholders that the anti-manipulation
provisions of Regulation M promulgated under the Securities Exchange Act of
1934, may apply to their sales in the market.

The selling shareholders also may resell all or a portion of their shares in
open market transactions in reliance upon Rule 144 under the Securities Act,
or any other available exemption from required registration under the
Securities Act, provided they meet the criteria and conform to the
requirements of such exemption.

We will file a supplement to this prospectus, if required, pursuant to Rule
424(b) under the Securities Act upon being notified by a selling shareholder
that any material arrangements have been entered into with a broker-dealer for
the sale of shares through a block trade, special offering, exchange or
secondary distribution or a purchase by a broker-dealer. Such supplement will
disclose:

o the name of each such selling shareholder and of the participating
broker-dealer(s);

o the number of shares involved;

o the price at which such shares were sold;

o the commissions paid or discounts or concessions allowed to such broker-
dealer(s), where applicable;

o that such broker-dealer(s) did not conduct any investigation to verify
the information set out or incorporated by reference in this prospectus;
and

o other facts material to the transaction.

In addition, upon receiving notice from a selling shareholder that a donee,
pledgee or transferee or other successor-in-interest intends to sell more than
500 shares covered by this prospectus, we will file a supplement to this
prospectus pursuant to Rule 424(b) under the Securities Act to identify the
non-sale transferee.

We have agreed with the selling shareholders to keep the registration
statement of which this prospectus is a part effective until all shares are
sold by the selling shareholders or all unsold shares are immediately saleable
without restriction (including without volume limitations) and without
registration under the Securities Act.

The selling shareholders are not restricted as to the price or prices at
which they may sell their shares. Sales of such shares may have an adverse
effect on the market price of the securities, including the market price of
the class A common stock. Moreover, the selling shareholders are not
restricted as to the number of

shares that may be sold at any time, and it is possible that a significant
number of shares could be sold at the same time, which may have an adverse
effect on the market price of the class A common stock.

We will bear all costs, expenses and fees in connection with the
registration of the shares. We have agreed to indemnify and hold the selling
shareholders harmless against certain liabilities under the Securities Act
that could arise in connection with the sale by the selling shareholders of
the shares. The selling shareholders will bear all commissions and discounts,
if any, attributable to the sales of the shares. The selling shareholders may
agree to indemnify any broker-dealer or agent that participates in
transactions involving sales of the shares against certain liabilities,
including liabilities arising under the Securities Act.

DESCRIPTION OF OUR STOCK

The following description of our common and preferred stock, provisions of
our charter and bylaws and specific provisions of the Maryland General
Corporation Law are only summaries, and are qualified in their entirety by
reference to the Maryland General Corporation Law and to our charter and
bylaws which are filed as exhibits to our registration statement on Form S-3
of which this prospectus is a part.

GENERAL

Under our charter, we may issue up to 200,000,000 shares of stock comprised
of the following:

o 100,000,000 shares of class A common stock, par value $.01 per share; and

o 100,000,000 shares of preferred stock, par value $.01 per share.

As of the date hereof, 6,500,734 shares of class A common stock were issued
and outstanding and no shares of preferred stock were designated as a
particular class or series or are outstanding. Under Maryland law, our
shareholders generally are not liable for our debts or obligations. The class
A common stock is listed on the New York Stock Exchange under the symbol "CT".

COMMON STOCK

All shares of class A common stock covered by this prospectus are, or upon
their issuance will be, duly authorized, fully paid and nonassessable. Holders
of our common stock are entitled to receive dividends when authorized by our
board of directors out of assets legally available for the payment of
dividends. They are also entitled to share ratably in our assets legally
available for distribution to our shareholders in the event of our
liquidation, dissolution or winding up, after payment of, or adequate
provision for, all of our known debts and liabilities. These rights are
subject to the preferential rights of any other class or series of our stock.
All shares of class A common stock have equal dividend and liquidation rights.

Subject to our charter restrictions on ownership and transfer of our stock,
each outstanding share of class A common stock is entitled to one vote on all
matters to be submitted to a vote of the shareholders. There is no cumulative
voting in the election of our directors and our directors are elected by a
plurality of the votes cast, so the holders of a simple majority of the
outstanding class A common stock, voting at a shareholders meeting at which a
quorum is present, can elect all of the directors nominated for election at
the meeting. Holders of our common stock have no exchange, sinking fund,
redemption or appraisal rights and have no preemptive rights to subscribe for
any of our securities. Because holders of common stock do not have preemptive
rights, we may issue additional shares of stock that may reduce each
shareholder's proportionate voting and financial interest in our company.
Rights to receive dividends on our class A common stock may be restricted by
the terms of any future classified and issued shares of our preferred stock.

POWER TO RECLASSIFY SHARES OF OUR STOCK AND TO INCREASE THE NUMBER OF SHARES
OF OUR STOCK

Our charter authorizes our board of directors, without shareholder approval,
to:

o classify and reclassify any unissued shares of our common stock and
preferred stock into other classes or series of stock, and

o increase or decrease the aggregate number of shares of stock of any class
or series that may be issued.

Prior to the issuance of shares of each class or series, the board is
required by Maryland law and by our charter to set, subject to our charter
restrictions on transfers of stock, the terms, preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends or
other distributions, qualifications and terms or conditions of redemption for
each class or series. Thus, the board could authorize the issuance of shares
of preferred stock with terms and conditions which could have the effect of
delaying, deferring or preventing a transaction or a change in control of our
company that might involve a premium price for holders of our common stock or
otherwise be in their best interest.

POWER TO ISSUE ADDITIONAL SHARES OF COMMON STOCK AND PREFERRED STOCK

We believe that the power to issue additional shares of our common stock or
preferred stock, increase the aggregate number of shares of stock of any class
or series that we have the authority to issue and to classify or reclassify
unissued shares of our common or preferred stock and thereafter to issue the
classified or reclassified shares provides us with increased flexibility in
structuring possible future financings and acquisitions and in meeting other
needs which might arise. These actions can be taken without shareholder
approval, unless shareholder approval is required by applicable law or the
rules of any stock exchange or automated quotation system on which our
securities may be listed or traded. Although we have no present intention of
doing so, we could issue a class or series of stock that could delay, defer or
prevent a transaction or a change in control of our company that might involve
a premium price for holders of common stock or otherwise be in their best
interest.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for all of the securities covered by this
prospectus is American Stock Transfer & Trust Company located in Brooklyn, New
York.

CERTAIN PROVISIONS OF MARYLAND LAW AND OUR CHARTER AND BYLAWS

REIT QUALIFICATION RESTRICTIONS ON OWNERSHIP AND TRANSFER

Our charter contains restrictions on the number of shares of our stock that
a person may own. No individual may acquire or hold, directly or indirectly,
in excess of 2.5% in value or number of our stock unless they receive an
exemption from our board of directors.

Our charter further prohibits (a) any person from owning shares of our stock
that would result in our being "closely held" under Section 856(h) of the
Internal Revenue Code or otherwise cause us to fail to qualify as a REIT and
(b) any person from transferring shares of our stock if the transfer would
result in our stock being owned by fewer than 100 persons. Any person who
acquires or intends to acquire shares of our stock that may violate any of
these restrictions, or who is the intended transferee of shares of our stock
which are transferred to the Trust, as defined below, is required to give us
immediate written notice and provide us with such information as we may
request in order to determine the effect of the transfer on our status as a
REIT. The above restrictions will not apply if our board of directors
determines that it is no longer in our best interests to continue to qualify
as a REIT.

Our board of directors, in its sole discretion, may exempt a person from, or
modify, these limits, subject to such terms, conditions, representations and
undertakings as it may determine. Our board of directors has granted limited
exemptions to certain persons who directly or indirectly own our stock,
including officers and directors and shareholders controlled by them or trusts
for the benefit of their families.

Any attempted transfer of our stock which, if effective, would result in
violation of the above limitations, will cause the number of shares causing
the violation (rounded to the nearest whole share) to be automatically
transferred to a trust, which we refer to as the Trust, for the exclusive
benefit of one or more charitable beneficiaries, which we refer to as the
Charitable Beneficiary, and the proposed transferee will not acquire any
rights in the shares. The automatic transfer will be deemed to be effective as
of the close of business on the business day (as defined in our charter) prior
to the date of the transfer. The shares transferred to the Trust will
generally be selected so as to minimize the aggregate value of shares
transferred to the Trust. Shares of our stock held in the Trust will be issued
and outstanding shares. The proposed

transferee will not benefit economically from ownership of any shares of stock
held in the Trust, will have no rights to dividends and no rights to vote or
other rights attributable to the shares of stock held in the Trust. The
trustee of the Trust will have all voting rights and rights to dividends or
other distributions with respect to shares held in the Trust. These rights
will be exercised for the exclusive benefit of the Charitable Beneficiary. Any
dividend or other distribution paid prior to our discovery that shares of
stock have been transferred to the Trust will be paid by the recipient to the
Trustee upon demand. Any dividend or other distribution authorized but unpaid
will be paid when due to the Trustee. Any dividend or distribution paid to the
Trustee will be held in trust for the Charitable Beneficiary. Subject to
Maryland law, the Trustee will have the authority (i) to rescind as void any
vote cast by the proposed transferee prior to our discovery that the shares
have been transferred to the Trust and (ii) to recast the vote in accordance
with the desires of the Trustee acting for the benefit of the Charitable
Beneficiary. However, if we have already taken irreversible corporate action,
then the Trustee will not have the authority to rescind and recast the vote.
If necessary to protect our status as a REIT, we may establish additional
Trusts with distinct Trustees and Charitable Beneficiaries to which shares may
be transferred.

Within 20 days of receiving notice from us that shares of our stock have
been transferred to the Trust, the Trustee will sell the shares to a person
designated by the Trustee, whose ownership of the shares will not violate the
above ownership limitations. Upon the sale, the interest of the Charitable
Beneficiary in the shares sold will terminate and the Trustee will distribute
the net proceeds of the sale to the proposed transferee and to the Charitable
Beneficiary as follows. The proposed transferee will receive the lesser of (i)
the price paid by the proposed transferee for the shares or, if the proposed
transferee did not give value for the shares in connection with the event
causing the shares to be held in the Trust (e.g., a gift, devise or other
similar transaction), the Market Price (as defined in our charter) of the
shares on the day of the event causing the shares to be held in the Trust and
(ii) the price received by the Trustee from the sale or other disposition of
the shares. Any net sale proceeds in excess of the amount payable to the
proposed transferee will be paid immediately to the Charitable Beneficiary.
If, prior to our discovery that shares of our stock have been transferred to
the Trust, the shares are sold by the proposed transferee, then (i) the shares
shall be deemed to have been sold on behalf of the Trust and (ii) to the
extent that the proposed transferee received an amount for the shares that
exceeds the amount he was entitled to receive, the excess shall be paid to the
Trustee upon demand.

In addition, shares of our stock held in the Trust will be deemed to have
been offered for sale to us, or our designee, at a price per share equal to
the lesser of (i) the price per share in the transaction that resulted in the
transfer to the Trust (or, in the case of a devise or gift, the Market Price
at the time of the devise or gift) and (ii) the Market Price on the date we,
or our designee, accept the offer. We will have the right to accept the offer
until the Trustee has sold the shares. Upon a sale to us, the interest of the
Charitable Beneficiary in the shares sold will terminate and the Trustee will
distribute the net proceeds of the sale to the proposed transferee.

All certificates representing shares of our stock issued in the future will
bear a legend referring to the restrictions described above.

Every owner of more than such percentage as may from time to time be
established by our board of directors (or such lower percentage as required by
the Internal Revenue Code or the regulations promulgated thereunder) of our
stock, within 30 days after the end of each taxable year, is required to give
us written notice, stating his name and address, the number of shares of each
class and series of our stock which he beneficially owns and a description of
the manner in which the shares are held. Each such owner shall provide us with
such additional information as we may request in order to determine the
effect, if any, of his beneficial ownership on our status as a REIT and to
ensure compliance with the ownership limits. In addition, each shareholder
shall upon demand be required to provide us with such information as we may
request in good faith in order to determine our status as a REIT and to comply
with the requirements of any taxing authority or governmental authority or to
determine such compliance.

These ownership limits could delay, defer or prevent a transaction or a
change in control that might involve a premium price for the common stock or
otherwise be in the best interest of the stockholders.

BUSINESS COMBINATIONS

Under Maryland law, "business combinations" between a Maryland corporation
and an interested shareholder or an affiliate of an interested shareholder are
prohibited for five years after the most recent date on which the interested
shareholder becomes an interested shareholder. 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 shareholder is defined as:

o any person who beneficially owns 10% or more of the voting power of the
corporation's shares; or

o 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 10% or more of the voting power of the then outstanding voting stock
of the corporation.

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

o 80% of the votes entitled to be cast by holders of outstanding shares of
voting stock of the corporation; and

Our board of directors has adopted resolutions which exempt Veqtor Finance
Company, L.L.C., JRK Investment Partnership LP and CMH Investment Partnership
LP from the five-year prohibition and the super-majority vote requirement. The
business combination statute may discourage others from trying to acquire
control of us and may increase the difficulty of consummating any offer
relating to the same.

CONTROL SHARE ACQUISITIONS

Maryland law provides that "control shares" of a Maryland corporation
acquired in a "control share acquisition" have no voting rights except to the
extent approved by a vote of two-thirds of the votes entitled to be cast on
the matter. A control share acquisition means the acquisition of control
shares, subject to certain exceptions. Shares owned by the acquiror, by
officers of the target corporation or by directors of the target corporation
who are also employees are excluded from shares entitled to vote on the
matter. Control shares are voting shares of stock which, 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:

o one-tenth or more but less than one-third;

o one-third or more but less than a majority; or

o a majority or more of all voting power.

Control shares do not include shares the acquiror is entitled to vote as a
result of having previously obtained shareholder approval.

The control share acquisition statute does not apply (a) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction, or (b) to acquisitions approved or exempted by the charter or
bylaws of the corporation.

MARYLAND UNSOLICITED TAKEOVERS ACT

o classify the board;

o increase the required shareholder vote to remove a director to two-thirds
of all the votes entitled to be cast by the shareholders generally in the
election of directors; and

Additionally, the board could provide that:

o the number of directors may be fixed only by a vote of the board of
directors,

o each vacancy on the board of directors (including a vacancy resulting
from the removal of a director by the shareholders) may be filled only by
the affirmative vote of a majority of the remaining directors in office,
even if the remaining directors do not constitute a quorum; and

o any director elected to fill a vacancy will hold office for the full
remainder of the term, rather than until the next election of directors.

The Maryland Unsolicited Takeovers Act does not limit the power of a
corporation to confer on the holders of any class or series of preferred stock
the right to elect one or more directors. We currently have more than three
independent directors and therefore our board of directors could elect to
provide for any of the foregoing provisions. As of the date of this
prospectus, our board of directors has not made any such election.

ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS

o pursuant to our notice of the meeting;

o by or at the direction of the board of directors; or

o pursuant to our notice of the meeting;

o by or at the direction of the board of directors; or

LEGAL MATTERS

Venable, Baetjer and Howard, LLP, Baltimore, Maryland, will give its opinion
as to the legality of the shares offered hereby.

EXPERTS

The consolidated financial statements of Capital Trust Inc. and subsidiaries
appearing in Capital Trust Inc. and subsidiaries' Annual Report on Form 10-K
for the year ended December 31, 2002, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included therein
and incorporated herein by reference. Such consolidated financial statements
are incorporated herein by reference in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy any materials we have filed
with the SEC at the SEC's public reference rooms. The SEC also maintains a web
site (http://www.sec.gov) that contains reports, proxy statements and other
information concerning us. Please call the SEC at 1-800-SEC-0330 for
information concerning the operations of the public reference rooms or visit
the SEC at the following locations:

Public Reference Room Midwest Regional Office
450 Fifth Street Citicorp Center
Room 1024 500 West Madison Street
Washington, D.C. 20549 Suite 1400
Chicago, Illinois 60661-2511

We have filed with the SEC a registration statement on Form S-3 under the
Securities Act to register the securities to be sold in this offering. This
prospectus, which is part of the registration statement, does not contain all
of the information set forth in the registration statement or the exhibits and
schedules to the registration statement. For further information regarding
Capital Trust and our securities, please refer to the registration statement
and the documents filed as exhibits to the registration statement.

The SEC allows us to "incorporate by reference" the information we file with
it, which means that we can disclose important information to you by referring
you to those filed documents. The information incorporated by reference is
considered to be part of this prospectus, and information that we file later
with the SEC will automatically update and supersede this information.

The following documents, which have been filed with the SEC, are hereby
incorporated by reference:

o Our current report on Form 8-K filed on May 19, 2003 (File No. 001-
14788);

o Our quarterly report on Form 10-Q for the fiscal quarter ended March 31,
2003 filed on May 15, 2003 (File No. 001-14788);

o Our definitive proxy statement on Schedule 14A filed on April 30, 2003
(File No. 001-14788);

o Our current report on Form 8-K filed on April 2, 2003 (File No. 001-
14788);

o Our annual report on Form 10-K for the year ended December 31, 2002 filed
on March 28, 2003 (File No. 001-14788);

o Our definitive proxy statement on Schedule 14A filed on March 3, 2003
(File No. 001-14788);

o Our preliminary proxy statement on Schedule 14A filed on February 14,
2003 (File No. 001-14788); and

o The description of our class A common stock contained in our current
report on Form 8-K filed on July 10, 2003 (File No. 001-14788), including
any amendment or report filed for the purpose of updating that
description.

All other reports and documents subsequently filed by us with the SEC
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act
after the date of this prospectus and prior to the termination of the offering
are deemed incorporated by reference into this prospectus and a part hereof
from the date of filing of those documents. Any statement contained in any
document incorporated by reference shall be deemed to be modified or
superseded for the purposes of this prospectus to the extent that a statement
contained in a later document modifies or supersedes such statement. Any
statements so modified or superseded shall not be deemed to constitute a part
of this prospectus, except as modified or superseded.

We will provide without charge to each person to whom this prospectus is
delivered, upon written or oral request of such person, a copy of any or all
of the documents referred to above which have been or may be incorporated by
reference into this prospectus (other than the exhibits to such documents).
Requests for such documents should be directed to Capital Trust, Inc., 410
Park Avenue, 14th Floor, New York, New York 10022, Attention: Investor
Relations (telephone: (212) 655-0220).

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You should rely only on the information incorporated or contained in this
prospectus or any supplement. We have not authorized anyone else to provide
you with different or additional information. This prospectus is not an offer
to sell to -- nor is it seeking an offer to buy these securities from -- any
person in any jurisdiction in which it is illegal or impermissible to make an
offer or solicitation. You should not assume that the information in this
prospectus or any supplement is accurate as of any date other than the date on
the front of those documents.

TABLE OF CONTENTS

PAGE
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Note Regarding Forward-Looking Statements....................... i
Prospectus Summary.............................................. 1
Risk Factors.................................................... 2
Use of Proceeds................................................. 10
Selected Financial Data......................................... 11
Selling Shareholders............................................ 12
Plan of Distribution............................................ 15
Description of Our Stock........................................ 18
Legal Matters................................................... 24
Experts......................................................... 24
Where You Can Find More Information............................. 24

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8,276,019 SHARES OF
CLASS A COMMON STOCK

CAPITAL TRUST, INC.

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PROSPECTUS
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July 21, 2003

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