UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, ~~2008~~2009

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

For the transition period from to

Commission file number: 001-32330

JER INVESTORS TRUST INC.

(Exact name of registrant as specified in its charter)


Maryland		75-3152779
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1650 Tysons Blvd., Suite 1600
McLean, Virginia		22102
(Address of principal executive offices)		(Zip Code)

(703) 714-8000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Common Stock, $0.01 par value

Name of each exchange on which registered

New York Stock Exchange (NYSE)

Securities registered pursuant to Section 12(g) of the Act:

None

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x¨ No ¨x

Indicate by check mark ifwhether ~~disclosure~~the ~~of delinquent~~registrant ~~filers~~has ~~pursuant~~submitted toelectronically ~~Item 405~~and posted ofon ~~Regulation~~its ~~S-K~~corporate isWeb ~~not~~site, ~~contained~~if ~~herein~~any, ~~and~~every ~~will~~Interactive ~~not~~Date File required to be ~~contained,~~submitted and posted pursuant to ~~the~~Rule ~~best~~405 of ~~the~~Regulation ~~registrant’s~~S-T ~~knowledge,~~(§ in232.405 ~~the~~of ~~definitive~~this ~~proxy~~chapter) orduring ~~information~~the ~~statements~~preceding ~~incorporated~~12 bymonths ~~reference~~(or infor ~~Part~~such ~~III of~~shorter ~~this~~period ~~Form~~that ~~10-K~~the registrant orwas ~~any~~required ~~amendment~~ to ~~this~~submit ~~Form~~and ~~10-K~~post such files). Yes ¨ No ¨ (Not Applicable)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

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

The aggregate market value of the registrant’s 25,~~232~~323,~~130~~861 shares of voting common stock, par value of $0.01 per share, held by non-affiliates of the registrant as of June 30, ~~2008~~2009 was $~~140~~1,~~624~~863,~~203~~ 351 based upon the closing price of $630.0035 per share on the ~~New~~OTC ~~York Stock~~Bulletin ~~Exchange~~Board ~~composite tape~~ on such date. As of ~~March~~November 30, ~~2009~~2010, the registrant had issued and outstanding 45,~~987~~831,~~994~~029 shares of common stock, with a par value $0.01 per share and trading price of $0.05 per share. The aggregate market value of the registrants 5,831,029 shares of common stock on November 30, 2010 was $291,551.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement for the registrant’s 2008 Annual Meeting of Stockholders (the “2008 Proxy Statement”), to be filed within 120 days after the end of the registrant’s fiscal year ended December 31, 2008, are incorporated by reference into Part III of this Annual Report on Form 10-K.

INDEX

		Page
PART I
ITEM 1.	BUSINESS	1	1
ITEM 1A.	RISK FACTORS	32	31
ITEM 1B.	UNRESOLVED STAFF COMMENTS	59	56
ITEM 2.	PROPERTIES	59	56
ITEM 3.	LEGAL PROCEEDINGS	59	56
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	59	56
PART II
ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	60	57
ITEM 6.	SELECTED FINANCIAL DATA	64	60
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	65	61
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	~~101~~	94
ITEM 8.	CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	~~106~~	99
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	~~106~~	99
ITEM 9A.	CONTROLS AND PROCEDURES	~~106~~	99
ITEM 9B.	OTHER INFORMATION	~~106~~	99
PART III
ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE	~~107~~	100
ITEM 11.	EXECUTIVE COMPENSATION	~~107~~	100
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	~~107~~	106
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS AND DIRECTOR INDEPENDENCE	~~107~~	107
ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	~~107~~	110
PART IV
ITEM 15.	EXHIBITS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULES	~~108~~	112

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K contains forward-looking statements within the meaning of The Private Securities Litigation Reform Act of 1995. Such statements are subject to various risks and uncertainties, including without limitation, statements relating to the performance of the investments of JER Investors Trust Inc. (the “Company”) and the Company’s liquidity and financing needs. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “endeavor,” “seek,” “anticipate,” “estimate,” “overestimate,” “underestimate,” “believe,” “could,” “project,” “predict,” “continue” or other similar words or expressions. Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Although the Company believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, the Company’s actual results and performance could differ materially from those set forth in the forward-looking statements. Factors that could have a material adverse effect on the Company’s operations and future prospects include, but are not limited to:

•

changes in economic conditions generally and in the commercial real estate mortgage finance, real estate and capital markets specifically;

•

the success or failure of our efforts to implement our current business strategy;

•

legislative and regulatory changes (including changes to laws governing the taxation of real estate investment trusts or REITs);

• JER Commercial Debt Advisors, LLC remaining as our external manager and remaining affiliated with the J.E. Robert Company, Inc. including our ability to pay our external manager base management fees and reimbursement of expenses;

•

the availability of, and our ability to retain, qualified personnel;

• availability of capital to us, ~~particularly~~and our ability to raise capital ~~given~~since the delisting of our ~~pending~~common stock from the New York Stock Exchange (“NYSE”) ~~delisting~~and the cessation of quotation of our common stock on the OTC Bulletin Board;

• our ability to maintain, or replace existing or enter into new financing arrangements;

•

the performance and financial condition of borrowers;

•

the actions of our competitors and our ability to respond to those actions;

•

the performance of our assets, including our collection of interest and principal payments thereupon;

• our ability to maintain adequate liquidity, including satisfying margin call and debt repayment requirements and meeting distribution requirements to maintain our REIT status;

•

our ability to comply with financial covenants of our debt instruments;

• the effect of receiving a “going concern” qualification in our auditors’ report on our ~~2008~~2009 consolidated financial statements;

•

changes in interest rates and interest rate spreads, including credit spreads;

• changes in generally accepted accounting principles , or GAAP, or interpretations thereof;

•

market trends;

•

policies and rules applicable to REITs;

• our ability to obtain regular cash flows from the assets securing our collateralized debt obligations, or CDOs, which in turn is dependent upon the compliance with interest coverage and over-collateralization coverage tests within each CDO, among other factors;

•

rating agency downgrades adversely affecting securities owned by us, including securities owned by us in our CDOs;

• ~~rating~~application ~~agency~~and ~~downgrades~~interpretation ~~adversely~~of ~~affecting~~the ~~securities~~rules ~~owned~~and byregulations ~~us,~~of ~~including~~the ~~securities~~Investment ~~owned~~Company byAct usof in1940, ~~our~~as ~~CDOs~~amended, or the Investment Company Act;

• ~~application~~other ~~and~~factors ~~interpretation~~as ofmay ~~the~~be ~~rules~~detailed ~~and~~from ~~regulations~~time ofto ~~the~~time ~~Investment~~in ~~Company~~our ~~Act~~public ofannouncements ~~1940,~~and asfilings ~~amended~~with the Securities and Exchange Commission, or the ~~Investment Company Act~~SEC; ~~and~~

• ~~other~~the ~~factors~~impact asof ~~may~~payment bedefaults ~~detailed~~on ~~from~~capital ~~time~~calls toissued ~~time~~by inthe ~~our~~JER ~~public~~US ~~announcements~~Debt ~~and~~Co-Investment ~~filings~~Vehicle, ~~with~~L.P. (the ~~Securities~~“US ~~and~~Debt ~~Exchange~~Fund”); ~~Commission, or the SEC.~~and

~~When~~• ~~considering~~the ~~forward-looking~~impact ~~statements,~~of ~~you~~ongoing ~~should~~payment ~~keep~~defaults in ~~mind~~our ~~the~~interest ~~risk~~rate ~~factors~~swap ~~and~~obligations ~~other~~to ~~cautionary~~National ~~statements~~Australia ~~in this~~Bank ~~annual~~Limited ~~report and in other reports of~~ (the ~~Company~~“NAB ~~filed~~Note ~~with~~Payable”) ~~the Securities~~ and ~~Exchange~~our ~~Commission~~$70.3 ~~Readers~~million ~~are cautioned not to place undue reliance on any~~ of ~~these~~junior ~~forward-looking~~subordinated ~~statements,~~notes ~~which~~due ~~reflect~~in ~~management’s~~2037 ~~views as of~~ (the ~~date~~ ~~of this annual report. The~~ “~~Risk~~Junior ~~Factors”~~Subordinated ~~and other factors noted throughout this report could cause our actual results to differ significantly from those contained in any forward-looking statement~~Notes”).

When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this annual report. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect management’s views as of the date of this annual report. The “Risk Factors” and other factors noted throughout this report could cause our actual results to differ significantly from those contained in any forward-looking statement.

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance or achievements. The Company is under no duty to update any of the forward-looking statements after the date of this annual report to conform these statements to actual results.

The Company filed a Form 15 with the SEC on March 31, 2010, which provided notice of the suspension of its duty to file reports under Section 15(d) of the Securities Exchange Act of 1934, or the Exchange Act. This Annual Report on Form 10-K is being filed to satisfy the Company’s reporting obligations under Section 15(d) of the Exchange Act for its fiscal year ended December 31, 2009. The Company does not intend to file further periodic or other reports with the SEC for so long as its duty to file such reports is suspended pursuant to Section 15(d) and Rule 12h-3 promulgated pursuant thereto.

This Annual Report on Form 10-K is being filed by the Company subsequent to its due date due to financial and logistical constraints. The information contained in this report is presented as of the date indicated herein, unless otherwise stated, and does not reflect the Company’s financial or operating performance subsequent to December 31, 2009.

iii

PART I

ITEM 1. BUSINESS (amounts in thousands, except for share and per share data and as otherwise noted)

General

JER Investors Trust Inc. is a specialty finance company organized by J.E. Robert Company, Inc. (the “J.E Robert Company”), primarily to originate and acquire real estate debt securities and loans and fee interests in net leased real estate assets. We were formed in April 2004, and we completed our initial public offering in July 2005. We are externally managed and advised by JER Commercial Debt Advisors LLC (our manager), an affiliate of J.E. Robert Company. J.E. Robert Company and its affiliates is a real estate investment management firm. We ~~capitalize~~depend on the knowledge and substantial resources of J.E. Robert Company and its affiliates ~~and~~ ~~attempt~~ to ~~take~~manage ~~advantage~~a portfolio of commercial real estate structured finance ~~products by investing primarily in loans and debt securities that we believe will yield the highest risk-adjusted returns~~investments. Our ~~target~~investment portfolio ~~investments~~includes ~~include~~ commercial real estate structured finance products such as commercial mortgage backed securities (commonly known as CMBS), mezzanine loans and ~~B-Note~~ participations in ~~mortgage loans, as well as~~ whole ~~commercial~~ mortgage loans~~, loans to real estate companies, preferred equity, and net leased real estate~~. ~~Although we have not done so to date, we may also invest in residential mortgages and related securities.~~ We ~~pursue a selective investment strategy, targeting specific transactions based on an analysis of debt structure and taking into account the underlying real estate and borrower credit risk. We~~ are organized and conduct our operations in a manner intended to allow us to qualify as a real estate investment trust, or REIT, for federal income tax purposes.

J.E. Robert Company was founded in 1981 to provide expertise to public and private financial institutions in resolving real estate loan workout situations. Since its founding, the firm has been active in numerous facets of the commercial real estate debt markets, including sourcing, due diligence, valuation, acquisition, asset management and disposition. J.E. Robert Company primarily conducts its real estate investment management activities on a global basis through a series of private equity funds, which we refer to as the JER Funds.

Since 1991, J.E. Robert Company has served as the special servicer or asset manager on numerous securitized pools of non-performing and performing commercial loans. The primary function of the special servicer is to manage any loans that default or become delinquent at their maturity. Accordingly, the special servicer function is critical with respect to maximizing the return of principal and interest from the underlying loans. J.E. Robert Company currently has ~~the~~ ~~highest~~a special servicer ratings of “~~CSS1~~CSS2+” and “~~strong~~Strong” from Fitch Investors Service, Inc. and Standard & Poor’s rating services, respectively. J.E. Robert Company is ~~currently~~ the special servicer for 21 of the 26 CMBS pools in which we have ~~made~~invested ~~investments~~ as of December 31, ~~2008~~2009.

~~During~~Since the second half of 2007 and continuing through ~~the first quarter of~~ 2009, severe credit and liquidity issues ~~in the subprime residential lending and single family housing sectors~~ negatively impacted the asset-backed and corporate fixed income markets~~, as well as the equity securities of financial institutions, homebuilders and real estate companies~~. AsRisk ~~the severity of residential sector issues increased, nearly all securities markets experienced decreased liquidity and greater risk~~ premiums ~~as concerns about the outlook~~ for ~~the~~these ~~U.S.~~products ~~and world~~reached ~~economies increased. These concerns continue and risk premiums in many capital markets remain~~ at or near all- time highs with liquidity extremely low or non-existent compared to historical standards ~~or virtually non-existent~~. As a result, many commercial real estate finance and financial services industry participants, including us, ~~have~~ reduced or eliminated new investment activity until the capital markets become more stable, the macroeconomic outlook becomes clearer and market liquidity increases. In this environment, we ~~are~~have been focused on actively managing credit risk and maintaining liquidity to the extent possible however, current market conditions make it extremely difficult and challenging.

The value of our real estate securities and loans are influenced by changes in spreads, which measure the yield demanded by the market on securities and loans relative to a specific benchmark, generally a risk free rate of return for a comparable term. Credit spreads applicable to our targeted investments will periodically fluctuate based on changes in supply and demand, the availability of financing for such investments, ~~and~~projected credit losses, and other market factors. We expect demand to vary based on investor perception of the associated credit risk in current underwriting practices, the ratings provided by the rating agencies, the availability and terms of financing for such investments and investor assessment of the current and future real estate market fundamentals. Demand may be further influenced by investor expectations regarding the ability to finance these assets, currently or in the future.

expect demand to vary based on investor perception of the associated credit risk in current underwriting practices, the ratings provided by the rating agencies, the availability and terms of financing for such investments and investor assessment of the current and future real estate market fundamentals. Demand may be further influenced by investor expectations regarding the ability to finance these assets, currently or in the future.

Going Concern

~~Our~~We ~~independent~~are ~~registered~~in ~~public~~default ~~accounting~~of ~~firm,~~our ~~Ernst &~~payment ~~Young~~obligations ~~LLP,~~under ~~has concluded that substantial doubt exists about~~ our ~~ability~~ISDA toMaster ~~continue as a going concern~~Agreement, ~~and~~dated ~~has~~as ~~included~~of ~~an explanatory paragraph to describe this uncertainty in its unqualified audit report on our~~ December 31 1, ~~2008~~2004 ~~consolidated~~(as ~~financial~~subsequently ~~statements~~amended) ~~included~~with inNational ~~this~~Australia ~~Annual~~Bank ~~Report~~Limited on(the ~~Form 10-K.~~“NAB ~~Our~~Note Payable”) ~~unrestricted~~and ~~cash~~the ~~balance as of March 27, 2009 was~~ $470.03 million ~~and~~of ~~our repurchase~~junior ~~agreement~~subordinated ~~borrowings~~notes ~~were~~due ~~$13.4~~in ~~million.~~2037 ~~Our~~(“the ~~repurchase~~Junior ~~agreement~~Subordinated ~~requires~~Notes”). usAs toa ~~repay~~result ~~principal~~ of ~~$0.8~~these ~~million~~defaults, ~~per month through November 2009 with~~ the ~~remaining~~current ~~balance~~level of ~~$7.4~~available ~~million due in December 2009. In February 2009~~cash, wethe ~~were notified~~redirection ~~that $2.2 million~~ of cash flow from ~~CDO~~our IIcollateralized ~~that~~debt obligations ~~would~~(“CDO”) I ~~otherwise be paid to us as holders of junior notes payable~~ and ~~preferred shares of CDO~~ II, ~~would~~declines bein ~~redirected~~cash toflow ~~pay~~from ~~down~~our ~~principal on senior notes payable of~~ non-CDO IICMBS asinvestments, athe ~~result~~redirection of ~~CDO II~~cash ~~failing~~flows tofrom ~~satisfy~~assets ~~certain~~serving ~~over-collateralization~~as ~~coverage~~collateral ~~tests~~under ~~due~~our ~~primarily~~JPMorgan torepurchase ~~recent~~agreement ~~rating~~facility ~~agency~~and ~~downgrades~~the ~~on certain CMBS investments that serve as collateral for CDO II~~$3.3 ~~We received approximately $28~~ million of ~~net~~unfunded capital ~~cash~~commitments ~~flow~~related ~~from~~to ~~CDO~~our II investment in ~~2008.~~the ~~The~~US ~~conditions~~Debt ~~described~~Fund, ~~above~~there ~~led~~is ~~to the~~ substantial doubt ~~regarding~~about ~~the~~our ~~Company’s~~ ability to continue as a going concern.

WeCurrently, ~~did~~our ~~not~~primary ~~include~~source ~~any~~of ~~adjustments~~liquidity tois ~~the~~from ~~consolidated~~our ~~financial~~non-CDO ~~statements~~CMBS ~~included~~investments. We are no longer receiving current distributions from our retained interests in ~~this~~CDO ~~Annual~~I ~~Report~~and onCDO ~~Form~~II, ~~10-K~~and we do not expect to receive ~~reflect~~distributions from such CDO’s for the ~~possible~~foreseeable future, ~~effects~~if ~~that~~at ~~may~~all. ~~result~~In ~~from~~addition, our Limited Partner interest in the ~~uncertainty~~US ofDebt ~~our~~Fund ~~ability~~investment is not expected to ~~continue~~generate asany aliquidity ~~going concern~~to ~~because~~us in the next year as we ~~believe~~anticipate that distributions wefrom ~~can~~the ~~continue~~US Debt Fund will be retained by the US Debt Fund to ~~generate~~reduce ~~cash~~our ~~basis~~unfunded ~~operating~~capital ~~income~~call inobligations ~~excess~~for ofthe ~~operating~~foreseeable ~~expenses,~~future. ~~and~~As ~~that~~a result, we ~~have~~are ~~adequate~~focused ~~liquidity~~on seeking to ~~continue~~preserve toliquidity ~~fund~~by minimizing our ~~operations~~non-CDO ~~and~~cash operating costs to the ~~interest~~extent possible, primarily by (i) ceasing management fee payments onto our ~~borrowing~~external ~~arrangements. However~~manager effective December 2009, weafter ~~may~~significantly ~~not~~reducing ~~have~~such ~~sufficient~~cash ~~liquidity~~payments from April 2009 to ~~fund~~November ~~unexpected~~2009, ~~margin~~(ii) filing ~~calls~~a orForm 15 towith ~~repay~~the ~~principal~~SEC ~~debt~~on ~~amortization~~March 31, 2010 and ~~maturities~~ceasing ~~due~~to ~~later~~be inan ~~calendar~~SEC ~~year~~reporting ~~2009.~~company Inwhich ~~response~~will reduce administrative costs, weand ~~have~~(iii) effective ~~undertaken~~January 1, or2010, ~~expect~~discontinuing topayments ~~commence~~currently ~~the~~due ~~following~~on ~~efforts:~~our NAB Note Payable and Junior Subordinated Notes.

•Should ~~Discontinuing~~our ~~payment~~lenders ofunder ~~quarterly~~the ~~dividends~~Junior ~~and~~Subordinated ~~replacing~~Notes itor ~~with~~the ~~payment~~NAB ofNote anPayable ~~annual~~demand ~~dividend~~immediate repayment of our obligations to ~~the~~them, ~~extent~~we ~~required~~will tolikely ~~satisfy~~be ~~REIT~~unable ~~dividend~~to ~~requirements~~pay such obligations. In ~~addition~~such event, we may have to recapitalize, refinance our obligations, sell some or all of our assets at prices below current estimated fair value or seek to reorganize under Chapter 11 or liquidate under Chapter 7 of the ~~extent~~United States Bankruptcy Code. If we ~~are~~reorganized ~~required~~under toChapter ~~make~~11 aor ~~dividend~~liquidated ~~payment~~under ~~with~~Chapter ~~respect~~7 toof ~~2009~~the United States Bankruptcy Code, weit ~~may~~is ~~elect~~expected tothat ~~pay~~our upcommon tostockholders ~~90%~~would not recover any value and unsecured creditors, including holders of ~~such~~the ~~dividends~~Junior inSubordinated ~~stock~~Notes and NAB Note Payable, would receive little, if any, value in ~~accordance~~relation ~~with~~to ~~Internal~~the ~~Revenue~~outstanding ~~Service~~principal ~~(“IRS”)~~amounts ~~Revenue~~of ~~Procedure~~our ~~2008-68~~unsecured debt.

•The Wefollowing ~~expect~~table toidentifies ~~reduce~~quarterly ~~operating~~cash ~~costs,~~receipts ~~primarily~~from our ~~general~~investments ~~and~~from ~~administrative~~January 1, ~~costs~~2009 ~~including~~to ~~possible~~September 30, ~~modifications~~2010 to(all amounts ~~our~~in ~~management~~table ~~agreement;~~are unaudited).

• We will seek to restructure terms of our recourse indebtedness including extension of scheduled maturity dates and/or modification of near-term interest payment requirements; and


	For the Three Months Ending								For the Twelve Months Ending December 31, 2009		For the Three Months Ending
	March 31, 2009		June 30, 2009		September 30, 2009		December 31, 2009		For the Twelve Months Ending December 31, 2009		March 31, 2010			June 30, 2010		September 30, 2010
Non-CDO CMBS currently held by JRT	$	4,973	$	2,128	$	1,858	$	1,223	$	10,182	$	994		$	588		567
Non-CDO CMBS sold in March 2010		1,934		1,839		1,795		1,730		7,298		6,886	⁽¹⁾		—		—
CDO I retained interest		650		449		—		—		1,099		—			—		—
CDO II retained interest		1,380		—		—		—		1,380		—			—		—
US Debt Fund		—		—		—		—		—		—			—		—

Total	$	8,937	$	4,416	$	3,653	$	2,953	$	19,959	$	7,880		$	588	$	567

•(1) IfIncludes ~~necessary,~~proceeds ~~pursue~~from ~~sales~~sale of ~~selected~~these ~~assets~~bonds of $5.5 ~~However,~~million ~~the~~and ~~market~~interest ~~for~~payments ~~selling~~of ~~the~~$1.4 ~~assets~~million, wecompared ~~currently~~to ~~own~~a isDecember ~~extremely~~31, ~~limited~~2009 toestimated ~~nonexistent~~fair value of $6.4 million.

NoAs ~~assurance~~illustrated ~~can~~above, beour ~~given~~cash ~~that~~receipts wehave ~~will~~declined besignificantly ~~successful~~over in2009 ~~achieving any of these steps collectively or individually.~~and ~~Should~~2010 ~~our~~and ~~repurchase~~we ~~agreement~~expect ~~lender~~that ~~demand immediate repayment of all of~~ our ~~obligations,~~cash wereceipts will ~~likely~~continue ~~be unable~~ to ~~pay~~decline ~~such~~as ~~obligations~~delinquencies ~~absent~~and ~~asset~~special ~~sales.~~servicing Intransfers ~~such~~on ~~event,~~loans weunderlying ~~may have to recapitalize, refinance~~ our ~~obligations,~~CMBS ~~sell~~investments ~~some~~continue ~~or all of our assets at prices below current estimated fair value or seek~~ to ~~reorganize under Chapter 11 of the United States Bankruptcy Code~~increase.

Our Historical Investment Strategy

Our strategy is to hold a diversified portfolio of commercial real estate debt investments, including investment and non-investment grade CMBS, mezzanine loans, B-Notes, whole commercial mortgage loans, first

mortgage loan participations and net leased real estate assets. We also intended to invest in preferred equity and loans to real estate companies. Although we have not done so to date, we may also invest in residential mortgages and related securities. Our strategy is to maximize the difference between the yields on our investments and the cost of financing these investments. We actively manage our assets with goals of generating cash available for distribution, facilitating capital appreciation and providing attractive total returns to our stockholders.

We invest in commercial real estate structured finance products that provide rates of return that we believe are appropriate taking into account the underlying real estate and credit risk. Our investments generally are secured, directly or indirectly, by individual real estate properties or pools of properties that generally provide loan to value ratios in the range of approximately 60% to 95% at the time we acquire or originate them.

We seek to finance our investments through a variety of techniques including repurchase agreements, secured and unsecured credit facilities, CDOs, and other structured financings, to the extent available, we employ a match-funded debt strategy through the use of hedging instruments such as interest rate swaps, caps, or a combination thereof which allows us to reduce the impact of changing interest rates on our cash flow and earnings. As of December 31, 2008, due to a significant reduction in our repurchase agreement borrowings outstanding, we had interest rate swaps with $200.8 million of notional amount in exceed of our floating rate indebtedness. As a result, we may determine that it is necessary to terminate some or all of these interest rate swaps at potentially unfavorable terms. During the fourth quarter of 2008, we terminated $6.5 million of interest rate swaps, recognizing a realized loss of $1.5 million. On February 23, 2009, we terminated an interest rate swap with a notional amount of $19.5 million at a cost of $3.3 million compared to a December 31, 2009 fair value interest rate swap liability of $3.7 million. On March 2, 2009, we terminated four interest rate swaps and replaced them with a new seven-year fixed rate-for-fixed rate swap agreement under which we will pay the counterparty a fixed monthly payment of approximately $0.4 million from March 3, 2009 through March 3, 2016, with the first such payment on April 3, 2009.

We pursue investments where we believe cash flows have been mispriced, including the purchase of discounted securities in sectors that have fallen out of favor due to economic pressures, regulatory issues or illiquidity. We acquire assets primarily for income. Through our management agreement with JER Commercial Debt Advisors LLC, our manager, we draw on J.E. Robert Company’s and its affiliates’ expertise and significant business relationships with participants in the real estate securities industry to enhance our access to these investments, which may not be broadly marketed.

We seek to broadly diversify our portfolio by asset type, tenant, tenant industry, location and servicer. We believe that diversification reduces the risk of capital loss and also enhances the terms of our financing.

Currently, due to our liquidity position, we are unable to pursue our investment strategy. Should our liquidity improve we may, in the future, continue to execute on our historical investment strategy.

Our Investment Guidelines

Our board of directors has adopted the following guidelines for our investments and borrowings, and we will follow such guidelines unless waived or changed, subject to approval by the board of directors:

•

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

•

no investment shall be made that would cause us to be regulated as an investment company under the Investment Company Act;

•

no more than 20% of our equity, determined as of the date of each investment, shall be invested in any single asset unless waived by our independent board of directors;

•

our debt-to-equity ratio, calculated based on total liabilities divided by stockholders’ equity (excluding the effects of accumulated other comprehensive income (loss)), generally shall be between approximately four-to-one and six-to-one, depending on the characteristics of our portfolio;

•

we shall not co-invest with our manager or any of its affiliates unless our investment committee determines that (i) the co-investment is otherwise in accordance with these investment guidelines and (ii) the terms of the co-investment are at least as favorable to us as to our manager or the affiliate (as applicable) making such co-investment; and

•

no more than 10% of our equity, determined as of the date of an investment, shall be invested in assets located outside of the United States or in non-U.S. dollar denominated securities.

~~Targeted~~Currently, ~~Investments~~we are outside of the targeted debt-to-equity ratio due to negative changes in fair value related to our investments in CMBS and real estate loans thereby lowering our stockholders equity. Since we do not meet the targeted threshold due to market-based changes, no waiver of the guidelines by the board of directors is necessary.

~~Our~~Targeted ~~investment~~Investments ~~program~~and ~~focuses~~Current onInvestment ~~the~~Portfolio ~~following real estate products:~~

Our investment program historically focused on the following real estate products:

•

investment and non-investment grade CMBS;

•

mezzanine loans;

• ~~B-Notes~~mortgage loans; and

• ~~mortgage~~net ~~loans;~~leased real estate assets.

•Although ~~net~~we ~~leased~~have not done so to date, we may also invest in B-Notes, bridge loans, preferred equity, loans to real estate companies, residential mortgages and related securities. Various types of real property or ownership interests in entities that own real property serve as the underlying collateral for our investments, including retail property, office buildings, industrial properties, apartments, condominiums, specialty-use real estate assets; including healthcare facilities, educational facilities, hotels and land. We have no current plans to invest in non-U.S. denominated securities although we may do so in the future.

•Currently, ~~bridge~~due ~~loans;~~to our liquidity and capital position, we are unable to pursue acquisitions of our targeted investments. Should our liquidity and/or capitalization improve we may, in the future, continue to execute on our historical investment strategy.

•3 ~~preferred equity; and~~

• loans to real estate companies.

Although we have not done so to date, we may also invest in residential mortgages and related securities. Various types of real property or ownership interests in entities that own real property will serve as the underlying collateral for our investments, including retail property, offices, industrial properties, apartments, condominiums, specialty-use real estate assets including healthcare facilities, educational facilities, hotels and land. We have provided or may in the future provide loans to all kinds of borrowers, including corporations, partnerships, individuals and special purpose entities. We have no current plans to invest in non-U.S. denominated securities but may decide to invest in such securities in the future. Currently, due to our liquidity position, we are unable to pursue our investment strategy. Should our liquidity improve we may, in the future, continue to execute on our historical investment strategy.

Although we intend to invest as described herein, our actual investment allocations depend on changing market conditions. As a result, we cannot predict with any certainty the percentage of our assets that will be invested in each category at any given time.

Many of these asset classes may also be suitable investments for one or more of the private equity funds managed by J.E. Robert Company and its affiliates, which we refer to as JER Funds, or other existing or future investment entities controlled by J.E. Robert Company and its affiliates, giving rise to potential conflicts of interest.

J.E. Robert Company and its affiliates currently manage and invest in other real estate-related investment entities. Our chairman and chief executive officer and two members of our board and each of our executive officers also serve as officers of our manager and other J.E. Robert Company affiliates. Certain senior officers of J.E. Robert Company, some of whom are also our officers and directors, and their affiliates beneficially own all of the outstanding membership interests of our manager. In addition, affiliates of J.E. Robert Company, in their capacity as general partners of the JER Funds, selectively make investments in a wide range of commercial real estate equity and debt investments for various JER Funds.

As of December 31, ~~2008~~2009, our investments consisted of the following:

	December 31, 2008										Weighted Average
	December 31, 2009														Weighted Average
	Face Amount/Cost Basis(1)		AmortizedCost			Fair Value			% of TotalInvestments(2)		CouponRate(3)			LossAdjustedYield
	Face Amount/CapitalContributions(1)			AmortizedCost				Fair Value			% of TotalInvestments(2)				CouponRate(3)			Loss AdjustedYield
	($ in millions)
CMBS not financed by CDOs	$	423,599		$	10,322			$	11,173			5.7	%			5.2	%		63.9	%(4)
CMBS financed by CDO I	$	418,748	$	~~76,886~~	34,548	$	~~76,886~~		~~18.6~~41,036	%	~~4.9~~	%20.8	%	~~30.6~~	~~%(4)~~	4.9	%		40.0	%(4)
CMBS financed by CDO II		~~888~~863,~~873~~941		~~102,271~~	30,231		~~103,324~~		~~25.0~~33,802	%	~~5.2~~	%17.1	%	~~36.9~~	~~%(4)~~	5.2	%		52.7	%(4)
CMBS not financed by CDOs		449,732		41,590			42,432		10.3	%	5.2	%		43.3	%(4)
Total CMBS(5)		1,706,288			75,101				86,011			43.6	%			5.1	%		48.3	%
Total CMBS(5)		1,757,353		220,747			222,642		53.9	%	5.1	%		35.6	%
Real estate loans, financed by CDO II		268,455			268,190				111,085			56.4	%			3.5	%		3.5	%
Real estate loans, held for investment(6)		273,990		273,724			189,980		45.9	%	4.0	%		4.0	%
Investment in US Debt Fund(6)		4,829			65				65			0.0	%			N/A			N/A
Investments in unconsolidated joint ventures:
Total	$	1,979,572		$	343,356			$	197,161			100.0	%			4.9	%		13.3	%
US Debt Fund		843		843			843		0.2	%	N/A			N/A
Total	$	2,032,186	$	495,314		$	413,465		100.0	%	5.0	%		18.1	%

(1) ~~For~~Represents ~~investments~~cash incontributed ~~unconsolidated~~to ~~joint~~the ~~ventures~~US Debt Fund.

⁽²⁾	Based on fair value.

⁽³⁾	Based on face amount.

(4) Loss adjusted yields for our CMBS investments reflect the impact of estimated future losses on underlying collateral and are the basis on which we record interest income on such investments in our GAAP financial statements ~~in accordance with guidance provided by EITF 99-20~~.

(5) Amortized cost has been reduced from original cost primarily due to the recognition of cumulative impairments ofand ~~$769.9~~basis ~~million~~writedowns ~~during~~since ~~the~~acquisition ~~year~~through ~~ended~~ December 31, ~~2008~~2009.

(6) ~~Real~~Amortized ~~estate~~cost ~~loans~~has ~~are~~been ~~financed~~reduced byfrom ~~CDO~~original IIcost primarily due to the allocation of net loss, dilution and penalty interest related to our Limited Partner interest in the US Debt Fund for the twelve months ended December 31, 2009.

The weighted average loss adjusted yield represents the expected yield to maturity by investment type based on the amortized cost of such investments at December 31, ~~2008~~2009.

We may change our investment strategy and policies without a vote of our stockholders. We may acquire assets from our manager or its affiliates, including securities issued by our manager or its affiliates, ~~upon~~subject to approval of all of our independent directors., ~~These~~and such transactions ~~must~~complying ~~also comply~~ with our general investment guidelines.

CMBS

We ~~invest~~have invested in commercial mortgage backed securities, or CMBS, which are typically pass-through certificates created by the securitization of a single mortgage loan or a pool of mortgage loans that are collateralized by commercial real estate properties. We have historically invested in “first-loss” tranches and non-investment grade CMBS bonds~~, capitalizing on our manager’s ability to price and manage the underlying real estate risk~~. Typically, the more senior classes are entitled to priority distributions from the trust’s income to make required interest and principal payments on such tranches. Losses from expected amounts to be received on the mortgage pool are borne by the most subordinate classes, which receive payments only after the more senior classes have received all principal and/or interest which they are entitled.

The securitization process is governed by one or more of the rating agencies (Fitch, Moody’s and Standard & Poor’s), which determine the respective bond class sizes, generally based on a sequential payment structure. Bonds that are rated from AAA to BBB by the rating ~~agencies~~ agencies are considered “investment grade.” Bond classes that are subordinate to the BBB class are considered “non-investment grade.” The respective bond class sizes in a securitization are determined based on the review of the ~~underlying~~ underlying collateral by the rating agencies. The payments received from the underlying loans are used to make the payments on the CMBS. Based on the sequential payment priority, the risk of nonpayment for AAA-rated CMBS is lower than the risk of

non-payment for non-investment grade CMBS bonds. Accordingly, the AAA-rated class is typically sold at a lower yield compared to the non-investment grade classes, which are sold at higher yields. We have historically invested primarily in the BBB and non-investment grade CMBS classes.

Each securitization typically requires the owner of the most subordinate CMBS class to appoint a special servicer. The primary function of the special servicer is to manage any loans that default prior to maturity or become delinquent at maturity. Accordingly, the special servicer function is critical with respect to maximizing the return of principal and interest from the underlying loans for the CMBS bonds.

An affiliate of our manager, J.E. Robert Company, has been a special servicer since 1991, and has been engaged as special servicer or asset manager on numerous securitized transactions. Typically, the governing documents of a securitization require that the special servicer be approved by one or more of the rating agencies. J.E. Robert Company currently is a highly rated special servicer based on ratings issued by Fitch and S&P, based on analyses of its staff expertise, reviews of its policies and procedures and evaluations of the quality of its resolution results. With respect to those securitization transactions where we control the non-investment grade CMBS and have the right to appoint the special servicer, we have appointed J.E. Robert Company as special servicer. J.E. Robert Company is the special servicer for 21 of the 26 CMBS pools in which we have invested as of December 31, 2009.

Following is a summary of our CMBS investments as of December 31, 2009:


Security Description			December 31, 2009 ($ in thousands)
	Face Amount		Amortized Cost		Gross Unrealized				Estimated Fair Value		Weighted Average
	Face Amount		Amortized Cost		Gains		Losses		Estimated Fair Value		Coupon			Yield⁽⁴⁾			Term (yrs)
CMBS not financed by CDOs⁽¹⁾⁽³⁾	$	423,599	$	10,322	$	851	$	—	$	11,173		5.2	%		63.9	%		5.9
CMBS financed by CDO I⁽²⁾		418,748		34,548		6,488		—		41,036		4.9	%		40.0	%		7.0
CMBS financed by CDO II⁽²⁾		863,941		30,231		3,571		—		33,802		5.2	%		52.7	%		7.8

	$	1,706,288	$	75,101	$	10,910	$	—	$	86,011		5.1	%		48.3	%		7.2

⁽¹⁾	Fair values of CMBS not financed by CDOs are accounted for as available for sale securities and thereby subject to potential other than temporary impairment charges. Since the acquisitions of these CMBS securities, the amortized costs have been adjusted to reflect impairment charges recorded.

⁽²⁾

Fair values of CMBS financed by CDOs are accounted for using the FVO and are not subject to other than temporary impairment charges as changes in fair value are recorded as a component of other gains (losses) in the consolidated statement of operations. During the twelve months ended December 31, 2009, we recorded $96.0 million of reductions in the amortized cost basis of CMBS assets financed by CDOs.

⁽³⁾	Includes CMBS investments financed via repurchase agreements which had a fair value of $10.9 million, and total borrowings outstanding of $7.0 million at December 31, 2009.

⁽⁴⁾	Yield is based on amortized cost.

During the year ended December 31, 2009, we made no investments in CMBS.

~~agencies.~~As ~~The~~of ~~payments~~December 31, ~~received~~2009, ~~from~~ the ~~underlying~~mortgage loans ~~are~~in ~~used to make~~ the ~~payments~~underlying oncollateral ~~the~~pools ~~CMBS. Based on the sequential payment priority, the risk of nonpayment~~ for ~~AAA-rated~~ all CMBS iswere ~~lower~~secured ~~than~~by ~~the~~properties ~~risk~~ of ~~non-payment for non-investment grade bonds. Accordingly,~~ the ~~AAA-rated~~types ~~class~~and ~~is typically sold~~ at ~~a lower yield compared to~~ the ~~non-investment~~locations ~~grade~~identified ~~classes,~~below: which are sold at higher yields. We have historically invested primarily in the BBB and non-investment grade CMBS classes but may seek to invest in investment grade CMBS as opportunities present themselves.


Location⁽¹⁾	December 31, 2009			Property Type⁽¹⁾	December 31, 2009
California		15.5	%	Office		32.8	%
New York		11.8	%	Retail		30.3	%
Texas		7.0	%	Residential⁽²⁾		15.6	%
Florida		5.8	%	Hospitality		7.1	%
Virginia		4.5	%	Industrial		5.4	%
Other⁽³⁾		54.6	%	Other⁽³⁾		8.0	%
Re-REMIC⁽⁴⁾		0.8	%	Re-REMIC⁽⁴⁾		0.8	%

Total		100.0	%	Total		100.0	%

An(1) ~~affiliate~~Percentages ofare ~~our~~based ~~manager, J.E. Robert Company, has been a special servicer since 1991, and has been engaged as special servicer or asset manager~~ on ~~numerous~~ ~~securitized transactions. Typically,~~ the ~~governing~~unpaid ~~documents~~principal balance of ~~a securitization require that~~ the ~~special~~underlying ~~servicer~~loans bein ~~approved~~our byCMBS ~~one or more of the rating agencies~~investments. ~~J.E.~~Classifications ~~Robert~~are ~~Company currently has the highest special servicer ratings from Fitch and S&P,~~ based on ~~analyses of its staff expertise, reviews of its policies and procedures and evaluations of~~ the ~~quality~~National ofCouncil its resolution results. With respect to those securitization transactions where we control the non-investment grade CMBS and have the right to appoint the special servicer, we have appointed J.E. Robert Company as special servicer. J.E. Robert Company is currently the special servicer for 21 of ~~the~~Real 26Estate ~~CMBS~~Investment ~~pools~~Fiduciaries’ in(“NCREIF”) ~~which~~standard ~~we have made investments as of December 31, 2008~~categories.

⁽²⁾	Residential primarily consists of multi-family apartment buildings, mobile home parks, and student housing.

⁽³⁾	No other individual state or property type comprises more than 4.0% of the total as of December 31, 2009.

⁽⁴⁾	The Company’s investment in a Re-REMIC backed by CMBS from 41 previous conduit securitizations is not included in the above categories due to the stratification information on the original loan collateral not being meaningful.

As of December 31, 2009, our CMBS investments were financed through CDO’s and repurchase agreements as follows. For the CMBS investments financed via repurchase agreements, total borrowings outstanding at December 31, 2009 were $7.0 million.


	As of December 31, 2009 ($ in thousands)
Financing Source	Face Amount		Amortized Cost		Fair Value		Unrealized Gain (Loss)
CDOs	$	1,282,689	$	64,779	$	74,838	$	10,059
Repurchase agreement⁽¹⁾		378,375		10,179		10,927		748
Unlevered		45,224		143		246		103

	$	1,706,288	$	75,101	$	86,011	$	10,910

⁽¹⁾	On March 30, 2010, the Company sold certain non-CDO CMBS investments which served as collateral for our repurchase agreement with a face amount of $152.9 million for $5.5 million, and repaid in full the repurchase agreement, which is no longer in effect.

Real Estate Loans (consisting of mezzanine loans and mortgage loans)

Mezzanine Loans

We ~~originate~~have originated and ~~invest~~invested in mezzanine loans (including mezzanine construction loans) to owners of real property encumbered by first lien mortgages, in which case our mezzanine loans generally are secured by junior liens on the subject properties and/or by liens on the partnership or membership interests in the borrower’s property-owning entities. Subject to negotiated contractual restrictions, the mezzanine lender generally has the right, following foreclosure, to become the sole indirect owner of the property subject to the lien of the primary mortgagor and the liens of senior mezzanine lenders, if any. Mezzanine debt can also be either junior or senior, denoting the collateral priority that may apply.

We structure our mezzanine loans so that we receive a stated fixed or variable interest rate on the loan. Our mezzanine loans may have prepayment lockouts, origination fees, deferred interest, penalties, exit fees, minimum profit hurdles and other mechanisms to protect and enhance returns in the event of premature repayment.

As of December 31, 2008, we held mezzanine loans with an amortized cost basis of $226.6 million.

B-Notes

We may invest in B-Notes generated from structured transactions that may or may not be rated by a recognized rating agency. B-Notes are junior participations in a first mortgage loan on a single property or group of related properties. The senior participation is known as an “A-Note.” An individual loan may have multiple B-Notes. 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, but in most instances are contractually limited in rights and remedies in the event of a default. The B-Note is subordinate to the A-Note by virtue of a contractual or intercreditor arrangement between the A-Note lender and the B-Note lender. For the B-Note lender to actively pursue its available remedies (if any), it must, in most instances, purchase the A-Note, or maintain its performing status in the event of a default on the B-Note. The B-Note lender may in some instances require a security

~~interest~~We inhave ~~the~~structured ~~stock~~our ormezzanine ~~partnership~~loans ~~interests~~so ofthat ~~the~~we ~~borrower~~receive asa ~~part~~stated offixed ~~the~~or ~~transaction.~~variable interest Ifrate on the ~~B-Note~~loan. ~~holder~~Our ~~can~~mezzanine ~~obtain~~loans ~~a security interest, it~~ may ~~be able~~have toprepayment ~~accelerate~~lockouts, ~~gaining~~origination ~~control~~fees, ofdeferred ~~the~~interest, ~~underlying property~~penalties, ~~subject~~exit tofees, ~~the~~minimum ~~rights~~profit ofhurdles ~~the A-Note holder. Both A-Notes~~ and ~~B-Notes~~other ~~are~~mechanisms ~~senior~~ to ~~the~~protect ~~mezzanine~~and ~~debt~~enhance ~~tranches~~returns ~~described above, though B-Notes may be junior to another junior participation~~ in the ~~first~~event ~~mortgage~~of ~~loan.~~premature repayment.

~~B-Notes~~As ~~share~~of ~~certain~~December 31, ~~credit characteristics with subordinated CMBS~~2009, inwe ~~that~~held ~~both~~mezzanine ~~reflect~~loans ~~an interest in a first mortgage and are subject to more credit risk~~ with ~~respect~~an toamortized ~~the~~cost ~~underlying mortgage collateral than the corresponding senior securities or the A-Notes. As opposed to a typical CMBS secured by a large pool of mortgage loans~~basis, ~~B-Notes~~ ~~typically~~face ~~are~~amount ~~secured by a single property or single portfolios of properties,~~ and ~~the~~fair ~~associated~~value ~~credit risk is concentrated in that single property or single portfolios~~ of ~~properties~~$226. ~~B-Notes also share certain credit characteristics with~~4 ~~second mortgages~~million, ~~in that both are subject to more credit risk with respect to the underlying mortgage collateral than the corresponding first mortgage or the A-Note~~$226.6 Wemillion ~~may acquire B-Notes in negotiated transactions with the originators on large single~~ and ~~portfolio~~$85.9 ~~private debt placements~~million, ~~as well as in the secondary market~~respectively. ~~The~~As ~~B-Note market grew substantially through 2007 in connection with the expansion~~ of ~~the~~December 31, ~~securitization market~~2009, ~~and~~all ~~J.E.~~of ~~Robert~~our ~~Company~~mezzanine ~~and~~loans ~~its affiliates~~ have ~~established~~ ~~relationships~~been ~~with~~contributed ~~many~~to of the ~~primary~~CDO ~~originators~~II ofcollateral ~~B-Note products, which we believe gives us access to investment opportunities from these parties when lending markets return to normal historical levels~~pool.

As of December 31, 2008, we hold no investments in B-Notes.

Mortgage Loans

We ~~originate~~have originated and ~~invest~~invested in mortgage loans or participations in mortgage loans that we ~~originate~~originated directly or that we ~~purchase~~purchased from various sellers, including investment banks, life insurance companies, commercial banks, brokers and other owners. These loans are generally secured by commercial or residential properties in the United States ~~in which we believe we can achieve attractive risk adjusted returns~~. These loans typically have maturities ranging from one to ten years. ~~We may also acquire portfolios of performing mortgages at a discount where we believe we can achieve appropriate risk adjusted returns.~~

As of December 31, ~~2008~~2009, we held first mortgage loan participations with an amortized cost basis, face amount and fair value of $4741.8 million, $41.8 million and $25.1 million, respectively. As of December 31, 2009, all of our first mortgage loan participations have been contributed to the CDO II collateral pool.

~~Net~~The ~~Leased~~following ~~Real~~table ~~Estate~~sets ~~Assets~~forth information regarding our real estate loans as of December 31, 2009:

We invest in net leased real property and also consider larger transactions involving portfolios of net leased assets, taking into account concentration issues with tenants and the residual value of the underlying assets. We also may buy mortgage loans secured by real estate under long-term leases to credit worthy tenants. These generally include portfolios of amortizing mortgage loans or mortgage loans in which some residual risk exists at the end of the term of the loan. These portfolios may include geographically diverse tenants and borrowers.


	As of December 31, 2009 ($ in thousands)
Description	Unpaid Principal Balance		Amortized Cost		Carrying Value		Unrealized Gain/(Loss)			Weighted Average Effective Interest Rate Based on Amortized Cost			Range of Maturity Dates⁽²⁾
Real estate loans, held for investment/ financed by CDO II⁽¹⁾
First mortgage loan participations	$	41,807	$	41,807	$	25,138	$	(16,669	)		5.4	%	February 2011 - February 2012
Mezzanine loans		226,648		226,383		85,947		(140,436	)		3.2	%	November 2010 - June 2012

	$	268,455	$	268,190	$	111,085	$	(157,105	)		3.5	%

~~Bridge~~(1) ~~Loans~~Carrying value based on fair value.

We(2) ~~may~~Loans ~~offer~~have ~~bridge~~extension ~~loans~~options towhich ~~borrowers~~could ~~who~~extend ~~are~~maturity ~~seeking~~dates ~~short-term capital typically~~ to beNovember ~~used~~2010 into anJune ~~acquisition of real estate~~2012. ~~The~~On ~~bridge~~November ~~loans~~2, we2010, ~~originate will predominantly be secured by first mortgage liens on~~ the ~~property~~Company ~~and~~received ~~contemplate~~ a ~~takeout~~discounted ~~with~~payoff ~~the~~of ~~borrower~~$7.0 million, ~~using~~including ~~the~~accrued ~~proceeds~~interest, ofon a ~~conventional~~real ~~mortgage loan~~estate ~~to repay our bridge~~ loan. Wewith ~~may~~a ~~also~~face ~~receive~~amount ~~origination fees~~ and ~~other~~fair ~~deferred~~value ~~compensation~~of in$10.0 ~~connection~~million ~~with~~and ~~our bridge loans~~$5.6 ~~We believe providing these bridge loans leads to future investment opportunities for us~~million, ~~including mortgage loans~~respectively, ~~mezzanine~~at ~~debt~~December ~~and~~31, ~~preferred equity investments~~2009.

~~Preferred~~As ~~Equity~~of December 31, 2009, the real estate loans were secured directly or indirectly by properties of the types and at the locations identified below:

We may make preferred equity investments in property-owning entities, generally in situations where the borrower’s capital structure does not allow for secured mezzanine financing because of restrictions imposed by senior lenders or other debt covenants. These investments are unsecured. Although preferred equity holders do not have priority relative to creditors, preferred equity holders have a prior claim relative to the common equity


Location⁽¹⁾	December 31, 2009			Property Type⁽¹⁾	December 31, 2009
New York		17.3	%	Hospitality		61.6	%
Hawaii		15.5	%	Office		22.9	%
California		13.9	%	Multi-use		10.0	%
Texas		7.7	%	Retail		5.5	%
Florida		6.5	%
Puerto Rico		4.5	%
Georgia		4.4	%
Other⁽²⁾		30.2	%

		100.0	%			100.0	%

⁽¹⁾	Percentages are based on the unpaid principal balance of the underlying loans.

⁽²⁾	No other individual state comprises more than 4.0% of the total as of December 31, 2009.

onAs ~~cash~~of ~~flow and/or capital event proceeds~~December 31, ~~and often have covenant protections~~2009, ~~such~~all asof ~~negative~~the ~~pledges~~Company’s ~~and~~real ~~overall~~estate ~~debt~~loans ~~limitations,~~were tofinanced ~~protect their~~by ~~equity~~CDO ~~position~~II. ~~These~~Our ~~investments~~mezzanine ~~are~~loans generally ~~priced~~are insecured aby ~~manner similar to~~ a ~~mezzanine investment~~pledge, ~~though~~directly ~~often~~or ~~with~~indirectly, ~~a premium because~~ of the ~~lack of collateral. Should an event of default occur, preferred~~ equity ~~holders~~interests ~~have~~in the ~~right~~borrower’s ~~to replace junior equity holders to become the primary owner of the~~ property-owning ~~subject to the lien of the primary mortgage~~entities. Like true owners, preferred equity investors have the option to support the loan during temporary cash flow shortfalls and dilute other common equity holders. We may also be able to negotiate special voting rights to help mitigate risks.

~~Loans~~During tothe ~~Real~~year ~~Estate Companies~~ended December 31, 2009, we made no investments in real estate loans.

WeDuring ~~may~~the ~~also~~year ~~make~~ended ~~loans~~December 31, ~~to real estate-related operating companies~~2009, ~~including~~we ~~REITs.~~received ~~These~~repayments ~~investments may take the form~~ of ~~secured debt, unsecured debt and other hybrid instruments such as convertible debt~~$5.5 ~~Corporate~~million ~~mezzanine~~of ~~loans~~principal ~~may~~balances ~~finance,~~on ~~among~~certain ~~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~~loans.

Investments in Joint Ventures and Funds

On December 11, 2007, we and JER Fund IV, an investment fund managed by the J.E. Robert Company, entered into a limited partnership agreement pursuant to which we and JER Fund IV agreed to co-manage a private equity fund, known as JER US Debt Co-Investment Vehicle, L.P. (the “US Debt Fund”). The California Public Employees’ Retirement System (“CalPERS”) committed $200.0 million, and we and JER Fund IV each committed $10.0 million to the US Debt Fund. We ~~may~~account ~~also~~for ~~invest~~our investment in ~~joint~~the ~~ventures~~US orDebt ~~funds~~Fund ~~that~~under ~~invest~~the ~~primarily~~equity inmethod of accounting. As of December 31, 2009, we had made $4.8 million of capital contributions to the ~~investments~~US ~~described~~Debt ~~above~~Fund. During the year ended December 31, 2009, we failed to fund $3.3 million of capital contributions called by the US Debt Fund’s general partner. As a result of these payment defaults, pursuant to the LPA, we were charged interest and incurred 25% dilution to our capital balance. The estimated fair value of this investment giving consideration to the impact of the capital call payment defaults was approximately $0.1 million at December 31, 2009. In addition, effective January 1, 2010, we are no longer receiving our portion of the management fee from the US Debt Fund due to this ongoing payment default.

~~Our~~The US Debt Fund invests in loans secured, directly or indirectly, by real estate, including, B-Notes, mezzanine loans and whole mortgage loans, and also in preferred equity, CMBS and CMBS-related products such as CMBX and credit default swaps (the “Targeted Investments”). Excluded investments from the US Debt Fund include non-performing loans, fee-simple ownership interests in real estate, single family residential mortgages and related securities (sub-prime, conforming, jumbo or Alt-A), whole loans originated directly by us or JER Fund IV, and net leased real estate assets.

~~CMBS.~~Subsequent ~~Following~~to isDecember 31, a2009, we ~~summary~~incurred $0.1 million of interest related to these unfunded capital calls and approximately $2.7 million of distributions were withheld related to our ~~CMBS~~limited ~~investments~~partnership interest in the US Debt Fund. As a result, our unfunded capital call balance is $0.7 million as of ~~December~~September 3130, ~~2008:~~2010.

Security Description	FaceAmount		December 31, 2008 ($ in thousands)
			AmortizedCost		Gross Unrealized				EstimatedFair Value		Weighted Average
					Gains		Losses				Coupon		Yield(3)		Term(yrs)
CMBS financed by CDO I(1)	$	418,748	$	76,886	$	—	$	—	$	76,886	4.9	%	30.6	%	8.7
CMBS financed by CDO II(1)		888,873		102,271		1,053		—		103,324	5.2	%	36.9	%	8.4
CMBS not financed by CDOs(2)		449,732		41,590		842		—		42,432	5.2	%	43.3	%	7.5
	$	1,757,353	$	220,747	$	1,895	$	—	$	222,642	5.1	%	35.6	%	8.3

Net Leased Real Estate Assets

~~(1)~~We ~~Fair~~have ~~values~~invested ofin ~~CMBS~~net ~~financed~~leased byreal ~~CDOs~~property ~~are~~involving ~~based~~portfolios onof ~~SFAS~~net ~~No.~~leased ~~157~~assets, ~~and~~taking ~~accounted~~into ~~for~~account ~~using~~concentration ~~the~~issues ~~fair~~with tenants ~~value election pursuant to SFAS No. 159 as of January 1, 2008~~ and ~~are~~the ~~not~~residual ~~subject to other than temporary impairment charges as changes in fair~~ value ~~are recorded as a component~~ of ~~other gains (losses) in~~ the ~~consolidated~~underlying ~~statement of operations~~assets. ~~During~~As ~~the~~of ~~year ended~~ December 31, ~~2008~~2009, ~~the~~we ~~Company~~held ~~recorded~~no ~~$606.8~~net ~~million~~leased ofreal ~~reductions~~estate ~~in the amortized cost basis of CMBS assets financed by CDOs pursuant to EITF 99-20 and SFAS No~~investments. ~~159.~~

~~(2)~~Other ~~Fair values of CMBS not financed by CDOs are based on SFAS No~~investments. ~~157~~We ~~and~~had ~~accounted~~no ~~for as available for sale securities pursuant to SFAS No. 115 and EITF 99~~B-20Notes, ~~and~~bridge ~~thereby~~loans, ~~subject~~preferred ~~to potential other than temporary impairment charges. As a result of recording other than temporary impairment charges during 2008~~equity, ~~the~~or ~~amortized~~loans ~~costs of these CMBS securities have been written down~~ to ~~their~~real ~~estimated~~estate ~~fair~~companies ~~value~~ at December 31, ~~2008~~2009. ~~Subsequent to December 31, 2008, unrealized gains/losses, if any, that are not other than temporary impairment will be included in other comprehensive income (loss).~~

~~(3)~~Capital ~~Yield~~and isLeverage ~~based~~Policies ~~on amortized cost.~~

~~During~~Our financing strategy has historically focused on the ~~year~~use ~~ended~~of ~~December 31~~match-funded, ~~2008~~non-recourse financing structures such as CDOs. Prior to contributing assets to a CDO, we ~~made~~typically nofinanced ~~investments~~assets inthrough ~~CMBS~~short-term repurchase agreements. In addition, we sought to match fund our assets with like-kind debt (i.e., fixed-rate assets are financed with fixed-rate debt or floating rate debt that has been swapped to fixed rate payments, and floating-rate assets are financed with floating-rate debt), through the use of hedges such as interest rate swaps and caps, or through a combination of these strategies. This strategy was designed to reduce the impact of changing interest rates on our cash flows and earnings.

AsCollateralized ofDebt Obligations. At December 31, ~~2008~~2009, ~~the~~we ~~mortgage~~had ~~loans in~~ the ~~underlying~~following ~~collateral pools for all CMBS were~~CDO ~~secured~~Notes byPayable ~~properties~~($ ofin ~~the~~thousands) ~~types and at the locations identified below~~outstanding:

Location(1)	Percent ofTotal		Property Type(1)		Percent ofTotal
Bond Class	Outstanding FaceAmount of NotesPayable at December 31,2009			Fair Value ofNotesPayable atDecember 31,2009			Weighted AverageInterest Rate atDecember 31,2009(3)			Weighted AverageLife of Notes(years)
California	15.4	%	Office		31.7	%
CDO I(1)	$	265,286		$	32,926			3.60	%		6.7
New York	11.9	%	Retail		30.7	%
CDO II(2)		690,327			84,307			1.22	%		7.3
Texas	6.5	%	Residential(2)		15.4	%
Total	$	955,613		$	117,233			1.88	%		7.1
Florida	5.8	%	Hospitality		7.2	%
Virginia	4.6	%	Industrial		5.2	%
Other(3)	55.0	%	Other(3)		9.0	%
Re-REMIC(4)	0.8	%	Re-REMIC(4)		0.8	%
Total	100.0	%	Total		100.0	%

(1) ~~Percentages~~Represents ~~are~~current ~~based on the unpaid principal~~ balance of ~~the~~$118.2 ~~underlying~~million ~~loans~~of infloating ~~our~~rate ~~CMBS~~notes ~~investments~~and $147.1 ~~Classifications~~million ~~are~~of ~~based~~fixed onrate ~~the~~notes ~~National~~with ~~Council~~weighted ofaverage ~~Real~~interest ~~Estate~~rates ~~Investment~~of ~~Fiduciaries’~~0.6% ~~(“NCREIF”)~~and ~~standard~~6.0%, ~~categories~~respectively.

(2) ~~Residential~~Represents ~~primarily~~current ~~consists~~balance of ~~multi-family~~$640.9 ~~apartment~~million ~~buildings,~~of ~~mobile~~floating ~~home~~rate ~~parks,~~notes and ~~student~~$49.4 ~~housing~~million of fixed rate notes with weighted average interest rates of 0.9% and 5.8%, respectively.

(3) NoBased ~~other~~on ~~individual~~face ~~state~~amount ~~or property type comprises more than 4.0%~~ of ~~the~~CDO ~~total~~Notes ~~as of December 31, 2008~~Payable.

~~(4)~~CDO ~~The~~II ~~Company’s~~has ~~investment~~a inreplenishment acollateral ~~Re-REMIC~~pool ~~backed~~of byup ~~CMBS~~to $275.0 million that would allow reinvestment of proceeds from 41real ~~previous~~estate ~~conduit~~loans ~~securitizations~~that isare ~~not~~paid ~~included~~off inwithin five years from the ~~above~~closing ~~categories~~of ~~due~~the transaction, subject to the ~~stratification~~replenishment ~~information~~collateral onmeeting certain criteria outlined in the ~~original~~CDO II indenture and satisfaction of certain other requirements. During the twelve months ended December 31, 2009, we contributed no CMBS or real estate loan interests as collateral ~~not~~to ~~being~~CDO ~~meaningful~~II and CDO II received $5.5 million of real estate loan repayments on CDO II real estate loan collateral. At December 31, 2009 the CDO II replenishment pool balance was $6.8 million which is reflected as restricted cash on our consolidated balance sheets.

AsThe terms of our CDOs include certain over-collateralization and interest ~~December 31,~~coverage ~~2008~~tests, ~~our~~which ~~CMBS~~are ~~investments~~used ~~were~~primarily ~~financed~~to ~~through~~determine ~~CDO’s~~whether and ~~repurchase~~to ~~agreements~~what extent principal and interest paid on the debt securities and other assets that serve as ~~follows.~~collateral ~~For~~underlying the ~~CMBS~~CDO ~~investments~~may ~~financed~~be ~~via~~used ~~repurchase~~to ~~agreements~~pay principal and interest on the notes payable and preferred shares issued by the CDOs. In each of our CDOs, ~~total~~in ~~borrowings~~the ~~outstanding~~event atthat ~~December 31~~either test is not satisfied, ~~2008~~interest ~~were~~and ~~$16~~principal that would otherwise be payable on certain of the junior tranches of notes payable and preferred shares issued by the CDOs and retained by us may be redirected to repay principal on certain senior tranches of notes payable issued by the CDOs.1 Therefore, failure to satisfy the coverage tests could adversely affect cash flows received by us from our ~~million~~retained interests in the CDOs and thereby our liquidity and operating results.

	As of December 31, 2008 ($ in thousands)
Financing Source	FaceAmount		AmortizedCost		Fair Value		UnrealizedGain (Loss)
CDOs	$	1,307,621	$	179,157	$	180,210	$	1,053
Repurchase agreement		383,927		39,331		40,167		836
Unlevered		65,805		2,259		2,265		6
	$	1,757,353	$	220,747	$	222,642	$	1,895

As a result of ratings agency downgrades relating to its CMBS collateral, CDO II has failed certain of its over-collateralization tests since February 2009. Such failures have continued, and are expected to continue for the foreseeable future. As a result of the failure of these over-collateralization coverage tests (i) certain interest payments normally scheduled to be allocated to the holders of the junior notes payable and preferred shareholders of CDO II were redirected to the holders of the senior notes payable, and (ii) any available principal proceeds were redirected to the holders of the senior notes payable. Consequently, we will not receive any cash flow distributions on the junior notes payable and preferred share investments retained by us and/or our affiliates in CDO II until such time, if ever, that the over-collateralization coverage tests are complied with. Even if the over-collateralization coverage tests are eventually complied with, our ability to obtain regular cash payments from the assets securing CDO II is dependent upon CDO II continuing to meet interest coverage and over-collateralization coverage tests. If the February through December 2009 over-collateralization coverage tests for CDO II had not failed, we would have received approximately $16.7 million in additional distributions during 2009. During 2008, we received $28.0 million of net cash distributions from CDO II.

~~Real~~CMBS ~~Estate~~downgrades ~~Loans.~~generally ~~The~~do ~~following~~not ~~table~~affect ~~sets~~the ~~forth~~over-collateralization ~~information~~coverage ~~regarding~~test ~~our~~applicable ~~real estate~~to ~~loans~~collateral asin CDO I, unless such collateral is downgraded to “CC” or below. As of December 31, 2009, ~~2008:~~19 CMBS bonds underlying CDO I were downgraded to “CC” or lower, causing certain cash payments from such downgraded

	As of December 31, 2008 ($ in thousands)
Description	UnpaidPrincipalBalance		AmortizedCost		CarryingValue		UnrealizedGain/(Loss)			Weighted AverageEffective InterestRate Based onAmortized Cost		Range of Current Maturity Dates(2)
Real estate loans, held for investment(1)
First mortgage loan participations	$	47,077	$	47,077	$	28,555	$	(18,522	)	4.1	%	February 2010 - February 2011(3)
Mezzanine loans		226,913		226,647		161,425		(65,222	)	4.0	%	May 2009 - November 2009
	$	273,990	$	273,724	$	189,980	$	(83,744	)	4.0	%

(1) Carrying value based on fair value in accordance with SFAS No. 157.

(2) Loans have extension options which could extend maturity dates to November 2010 to June 2012.

(3) Reflects loan modifications and extensions completed subsequent to December 31, 2008.

As CMBS bonds normally scheduled to be allocated to us as the holder of ~~December 31,~~the ~~2008~~junior notes payable and preferred shares of CDO I, ~~the~~to ~~mortgage~~be ~~loans~~redirected into the ~~underlying~~holders ~~collateral~~of ~~pools~~the ~~for~~senior ~~all~~notes ~~real~~payable ~~estate~~of CDO I. ~~loans~~These ~~were~~bond ~~secured~~downgrades, bycombined ~~properties~~with ofdeclining cash flows from the ~~types~~CMBS underlying CDO I, reduced the cash flow available to us on our retained CDO I preferred shares and atwe have not received payments from CDO I since July 2009. For the ~~locations~~twelve months ~~identified~~ended ~~below:~~December 31, 2009, we received $1.1 million from our retained interests in CDO I, compared with $3.0 million for the twelve months ending December 31, 2008.

Location(1)	December 31,2008		Property Type(1)	December 31,2008
Real estate loans, held for investment			Real estate loans, held for investment
New York	17.9	%	Hospitality	60.4	%
Hawaii	15.0	%	Office	22.4	%
California	12.4	%	Multi-use	11.7	%
Texas	7.6	%	Retail	5.5	%
Florida	6.5	%	Multifamily	0.0	%
Puerto Rico	6.4	%	Healthcare	0.0	%
Georgia	5.4	%
Other(2)	28.8	%
	100.0	%		100.0	%

The redirection of such cash flow is not expected to impact the GAAP or tax treatment to us of the individual assets and liabilities related to the CDOs as we consolidate both CDOs on our balance sheet. While we believe our December 31, 2009 balance sheet reflects the fair value of the individual CDO related assets and liabilities, we believe the estimated economic value of our combined retained interest in the CDOs is less than the difference between the estimated fair values of the assets and liabilities, determined in accordance with GAAP. We estimate there is little, if any, economic value of our retained interests in the CDOs. We are no longer receiving distributions from our retained interests in CDO I and CDO II, and we do not expect to receive distributions from such CDOs for the foreseeable future, if at all.

~~(1)~~In ~~Percentages~~June ~~are~~2010, ~~based~~an event of default occurred on CDO I due to the ~~unpaid~~failure to pay interest on the Class B-1 notes and Class B-2 notes. This was due to the continuing decline in cash flow from CMBS held by CDO I and the redirection of cash flow from CMBS bonds downgraded below “CC” to the Class A notes. Following the event of default, the Trustee determined that potential proceeds from a sale and liquidation of CDO I collateral would not be sufficient to pay in full the sum of principal and accrued interest, all administrative expenses, the collateral administration fee, any termination payment related to the interest rate swap and the holders of 66 2/3% of the aggregate note balance of all the classes of notes then outstanding agree with such determination. As such, the collateral will be held until such time as the sale and liquidation of the underlying ~~loans~~collateral can satisfy the required cash payments or 66 2/3% of the aggregate note balance of all the classes of notes then outstanding direct the sale and liquidation of the collateral. In either case, we do not expect to receive any proceeds from our retained interests in CDO I from such a liquidation.

~~(2)~~In NoSeptember ~~other~~2010, an ~~individual~~event ~~state~~of ~~comprises~~default ~~more~~occurred ~~than~~on 5CDO II due to the failure to pay interest on the Class A notes and Class B notes.0 This was due primarily to the continuing declines in cash flow received from CMBS held by CDO II. As a result of this default, the Trustee will be required to determine if potential proceeds from a sale and liquidation of CDO II collateral would be sufficient to pay in full the sum of principal and accrued interest, all administrative expenses, the collateral administration fee, any termination payment related to the interest rate swap and the holders of 66 2/3% of the ~~total~~aggregate note balance of all the classes of notes then outstanding agree with such determination. If not, the collateral will be held until such time as the sale and liquidation of ~~December~~the 31underlying collateral can satisfy the required cash payments or 66 2/3% of the aggregate note balance of all the classes of notes then outstanding direct the sale and liquidation of the collateral. In either case, we ~~2008~~do not expect to receive any proceeds from our retained interests in CDO II from such a liquidation.

AsWith respect to CDO II, we have been appointed as its advancing agent. In this capacity, we may be required to make interest advances to CDO II in the event that the sum of ~~December~~interest proceeds and principal proceeds collected during the related due period are insufficient to remit the interest that is due and payable to the Class 31A Notes and Class B Notes in accordance with the priority of payments of CDO II (the amount of such insufficiency, ~~2008~~an “Interest Shortfall”). We will be entitled to recover any previously unreimbursed interest advances made by it, ~~all~~together with interest thereon, first, from interest proceeds and second if applicable, from principal proceeds, senior to any payments of interest or principal to the ~~Company’s~~noteholders and ~~real~~senior ~~estate~~to ~~loans~~any ~~were~~payments ~~financed~~of byfees, expenses or hedge payments of CDO II, only to the extent that such recovery would not trigger an additional Interest Shortfall to the Class A Notes or Class B Notes. ~~Our~~In ~~mezzanine~~the ~~loans~~event ~~generally~~that we determine that such interest advances are ~~secured~~nonrecoverable interest advances, we would be entitled to recovery of any previously unreimbursed interest advances made by aus, ~~pledge~~together with interest thereon, without regards to whether such recovery would trigger additional ~~directly~~Interest orShortfalls. ~~indirectly,~~As of ~~the~~December 31, ~~equity~~2009, ~~interests~~we have not advanced funds to CDO II for any Interest Shortfalls in ~~the~~our ~~borrower’s~~capacity ~~property-owning~~as ~~entities~~advancing agent.

During the year ended December 31, 2008, we made no investments in real estate loans.

During the year ended December 31, 2008, we received repayments of $8.5 million related to outstanding principal balances on certain real estate loans. In addition, we sold three real estate loans and consensually terminated the right to repurchase three real estate loans in connections with the termination of a repurchase agreement with Goldman Sachs Mortgage Company (“Goldman Sachs Facility”), all of which were previously classified as held for sale, with a face amount of $234.9 million and an unamortized cost basis of $232.4 million for $139.9 million. We recorded a $92.5 million realized loss in connection with the sales and transfers of these loans.

Net Leased Real Estate Assets. On December 22, 2006, we acquired a portfolio of six net leased real estate assets for an aggregate purchase price of $38.8 million through a sale-leaseback transaction and on June 29, 2007, the Company acquired an additional six net leased real estate assets for an aggregate purchase price of $38.7 million, increasing its total cost basis to $77.5 million. On October 30, 2007, we sold a 50% interest in the entity that owns all twelve net leased real estate assets (the “Joint Venture”) for $39.2 million. The sale resulted in no gain or loss to us. Subsequent to the sale of the 50% interest in the Joint Venture, we accounted for our remaining interest in the Joint Venture using the equity method of accounting. At December 31, 2007, our 50% share of the entity that owns the real estate assets including equity in earnings and distributions was $39.6 million and is included in investments in unconsolidated joint ventures on our consolidated balance sheets. In April 2008, we sold our remaining 50% interest in the Joint Venture for $39.4 million, which approximates cost basis. As of December 31, 2008, the Company no longer has any investment in net leased real estate assets.

Investment in US Debt Fund. On December 11, 2007, we and JER Fund IV, an investment fund managed by the J.E. Robert Company, entered into a limited partnership agreement pursuant to which we and JER Fund IV agreed to co-manage a new private equity fund, known as JER US Debt Co-Investment Vehicle, L.P. (the “US Debt Fund”). The California Public Employees’ Retirement System (“CalPERS”) committed $200.0 million, and we and JER Fund IV each committed $10.0 million to the US Debt Fund. We account for our investment in the US Debt Fund under the equity method of accounting. As of December 31, 2008, we had made $3.4 million of capital contributions to the US Debt Fund. On March 2, 2009, we funded a $0.9 million capital call to the US Debt Fund, reducing our remaining unfunded capital commitment to $5.7 million.

OnRepurchase ~~December 4,~~Agreements. ~~2008,~~To ~~we,~~the ~~JER~~extent ~~Fund~~available IVin ~~and~~the ~~CalPERS~~market, ~~entered~~we ~~into~~also anuse ~~amendment to the US Debt~~short-term ~~Fund’s~~financing, ~~amended~~in ~~and restated limited partnership agreement (~~the ~~“LPA”)~~form ~~with~~of ~~CalPERS~~repurchase ~~extending~~agreements, ~~the~~and USmay ~~Debt~~use ~~Fund’s~~bridge ~~commitment~~loans ~~period~~and ~~for~~bank anwarehousing ~~additional one year period~~facilities, ~~from~~as ~~December 11,~~an ~~2008~~intermediary tostep ~~December 11,~~prior ~~2009. In addition, pursuant~~ to the ~~amendment,~~implementation ~~the~~of USlong-term ~~Debt~~match-funded ~~Fund’s~~financing. ~~general~~Leverage ~~partner~~has ishistorically ~~not~~been ~~required~~utilized byfor the ~~LPA~~sole purpose toof ~~allocate~~financing ~~new~~our ~~investment~~portfolio. ~~opportunities~~Our tocharter ~~the~~and USbylaws ~~Debt~~do ~~Fund. Finally,~~not limit the ~~amendment~~amount ~~provides~~of ~~that~~indebtedness ~~commencing~~we oncan ~~December 11~~incur, ~~2008 through~~ and ~~including~~our ~~December 11,~~board ~~2009,~~of ~~the~~directors ~~management~~has ~~fee~~discretion ~~payable~~to bydeviate ~~CalPERS~~from toor ~~the~~change USour ~~Debt~~leverage ~~Fund’s~~policy ~~general~~at ~~partner~~any ~~shall~~time. beAs ~~calculated~~of ~~to (i)~~December ~~include~~31, ~~CalPERS’~~2009, ~~pro-rata~~we had ~~share~~$7.0 ofmillion ~~the~~ outstanding ~~principal~~under ~~balance~~a onshort-term ~~the~~repurchase USagreement ~~Debt Fund’s revolving credit facility~~ with ~~WestLB~~JPMorgan AGSecurities, ~~New~~Inc. ~~York Branch and~~ (ii“JPMorgan”) ~~exclude~~, ~~CalPERS’~~which ~~pro-rata~~is ~~share~~secured ofby ~~unrestricted~~certain ~~cash~~of ~~and~~our ~~cash~~non-CDO ~~equivalents~~CMBS ~~held by the US Debt Fund~~investments.

~~The~~On ~~US Debt Fund invests in loans secured~~March 30, ~~directly or indirectly~~2010, bythe ~~real~~Company ~~estate,~~sold ~~including,~~certain Bnon-~~Notes,~~CDO ~~mezzanine~~CMBS ~~loans~~investments ~~and~~which ~~whole~~served ~~mortgage~~as ~~loans,~~collateral ~~and~~for ~~also in~~our ~~preferred~~repurchase ~~equity,~~agreement ~~CMBS~~with ~~and~~a face ~~CMBS-related~~amount ~~products~~of ~~such~~$152.9 asmillion ~~CMBX~~for ~~and~~$5.5 ~~credit default swaps (the “Targeted Investments”)~~million. ~~Excluded~~Proceeds ~~investments~~ from the USsale ~~Debt~~were ~~Fund~~used ~~include~~to ~~non-performing~~repay ~~loans,~~all ~~fee-simple~~outstanding ~~ownership~~balances ~~interests~~under inour ~~real~~repurchase ~~estate~~agreement, ~~single~~ ~~family~~which ~~residential~~is ~~mortgages~~no ~~and~~longer ~~related~~in ~~securities (sub-prime, conforming, jumbo or Alt-A), whole loans originated directly by us or JER Fund IV, and net leased real estate assets~~effect.

~~Other~~Note ~~investments~~Payable. WeOn March 3, 2009, we entered into an agreement with our counterparty to terminate and replace four interest rate swaps which had noa ~~B-Notes,~~$245.1 ~~bridge~~million ~~loans,~~ending ~~preferred~~notional ~~equity~~amount and a $29.7 million fair value liability based on the present value of future cash flows before the credit valuation adjustment as of February 27, or2009, ~~loans~~in toexchange ~~real~~for ~~estate~~a ~~companies~~new seven-year pay-fixed receive-fixed interest rate swap (the “NAB Note Payable”). We initially recorded this new agreement at ~~December 31~~fair value, ~~2008~~and have classified it as a note payable on the date of the transaction as the new agreement no longer meets the definition of a derivative. We did not elect the fair value option for the NAB Note Payable.

~~Capital~~On July 14, 2009, October 7, 2009 and ~~Leverage~~December 7, ~~Policies~~2009, we amended the agreement with our counterparty thereby reducing the July 2009 through January 2010 monthly payments due under the NAB Note Payable from approximately $0.4 million to $0.1 million and resulting in an aggregate deferral in payments of approximately $2.6 million during such seven month period. In addition, the Amendment provides that commencing in February 2010, through and including September 2010, our monthly payments under the NAB Note Payable shall be increased from approximately $0.5 million to approximately $0.7 million, thereby providing for the repayment of the deferred amount over the eight month period following January 2010.

~~Our~~On ~~financing~~January 4, ~~strategy focuses~~2010, onwe ~~the~~failed ~~use~~to make a payment of ~~match-funded~~$0.1 ~~financing~~million, ~~structures~~on ~~such~~which aswe ~~CDOs,~~received ~~although~~notice itfrom isour ~~unclear~~counterparty ~~when~~on January 5, if2010. ~~ever,~~Upon the ~~market~~occurrence ~~for~~of ~~CDO~~the ~~financing~~event ~~structures~~of ~~will~~default, ~~re-emerge.~~the ~~Prior~~counterparty tohas ~~contributing~~the ~~assets~~right to adesignate ~~CDO,~~an weEarly ~~typically~~Termination ~~financed~~Date ~~assets~~(as ~~through short-term~~defined ~~repurchase~~in ~~agreements.~~the InSwap ~~addition,~~Agreement) wefollowing ~~seek~~notice to ~~match~~the ~~fund~~Company. ~~our~~Upon ~~assets~~an ~~with~~Early ~~like-kind~~Termination ~~debt~~Date, we would become obligated to pay the counterparty (i) the $0.e.1 million originally due on January 4, ~~fixed-rate~~2010 ~~assets~~plus ~~are~~interest ~~financed~~on ~~with~~such ~~fixed-rate~~amount ~~debt~~to orthe ~~floating~~Early ~~rate~~Termination ~~debt~~Date, ~~that~~and ~~has~~(ii) either ~~been~~the ~~swapped~~market tovalue ~~fixed~~of ~~rate~~a ~~payments,~~swap ~~and~~agreement ~~floating-rate~~providing the ~~assets~~counterparty ~~are~~with ~~financed~~the ~~with~~economic ~~floating-rate~~equivalent ~~debt)~~of the remaining payments due by us or, ~~through~~if such value is not determinable, the ~~use~~value of ~~hedges~~the ~~such~~counterparty’s loss as ~~interest~~determined ~~rate~~by ~~swaps~~the ~~and~~counterparty. ~~caps~~On April 13, or2010, ~~through~~we awere ~~combination~~notified ofby ~~these~~the counterparty ~~strategies.~~that ~~This~~it ~~strategy~~had isdesignated ~~designed~~April 19, to2010 ~~reduce~~as the ~~impact~~Early ofTermination ~~changing~~Date at which time the termination value under the agreement, including accrued interest, ~~rates~~was on$29.0 million. Although our ~~cash~~obligations ~~flows~~under the NAB Note Payable have ~~and~~not ~~earnings~~yet been accelerated, we would not have sufficient liquid assets available to pay such obligations if such obligations were to be accelerated.

~~Collateralized~~Junior ~~Debt~~Subordinated ~~Obligations~~Debentures and Notes. ToOn ~~the~~April 9, ~~extent~~2007, ~~available~~we inissued $60.0 million of trust preferred securities (“TRUPs”) through our unconsolidated subsidiary, JERIT TS Statutory Trust I (the ~~market~~“Trust”), wein ~~believe~~a ~~that~~private ~~CDO~~transaction ~~financing~~exempt ~~structures~~from ~~are an~~registration ~~appropriate~~under ~~financing~~the ~~vehicle~~Securities ~~for~~Act ~~our~~of ~~targeted~~1933, ~~asset~~as ~~classes~~amended, ~~because~~or ~~they~~the ~~enable~~Securities usAct. Concurrently, we issued $61.9 million in junior subordinated debentures to ~~lock~~the Trust and made a $1.9 million common equity investment in the Trust. The junior subordinated debentures had a ~~long~~30-year term ~~cost~~ending April 2037, were redeemable at par on or after April 30, 2012 and paid distributions at a fixed rate of ~~funds~~7.2%, excluding amortization of fees and ~~minimize~~expenses, for the ~~risk~~first ~~that~~five weyears ~~will~~ending ~~have~~April 2012, toand, ~~refinance~~thereafter, ~~our~~at ~~liabilities~~a ~~prior~~floating torate ~~the~~of ~~maturities~~three month LIBOR plus 225 basis points, excluding amortization of ~~our~~fees ~~investments~~and expenses. AtThe assets of the Trust consisted solely ~~December~~of the $61.9 million of junior subordinated notes concurrently issued by us, with terms that mirror the TRUPs. On May 3129, ~~2008~~2009, we ~~had~~entered ~~the~~into ~~following~~(i) an ~~CDO~~agreement ~~notes~~with ~~payable~~two (holders of our TRUPs, with an aggregate liquidation amount of $56.3 million into ~~thousands):~~exchange such TRUPs for $70.3 million

Bond Class	OutstandingNotesPayable atDecember 31,2008		Fair Value ofNotesPayable atDecember 31,2008		WeightedAverageInterestRate atDecember 31,2008		WeightedAverageLife ofNotes
CDO I(1)	$	266,223	$	60,789	3.7	%	6.7
CDO II(2)		708,303		150,906	1.4	%	7.3
Total	$	974,526	$	211,695	2.0	%	7.1

(1) Represents $119.2 million of floating and $147.0 million of fixed rate notes with a weighted average interest rate of 0.9% and 6.0%, respectively.

(2) Represents $661.3 million of floating and $47.0 million of fixed rate notes with a weighted average interest rate of 1.1% and 5.8%, respectively.

~~and~~aggregate ~~preferred~~principal ~~shares~~amount of junior subordinated notes due 2037 (the “Junior Subordinated Notes”) issued by ~~the~~us, ~~CDOs.~~(ii) a Inletter ~~each~~agreement ofwith ~~our~~one ~~CDOs~~such holder, resulting in the issuance ~~event~~of ~~that~~307,203 ~~either~~unregistered ~~test~~shares isof ~~not~~our ~~satisfied,~~common ~~interest~~stock and ~~principal~~certain cash payments to that ~~would~~holder ~~otherwise~~in ~~be payable~~connection onwith ~~certain~~the ofexchange described above, (iii) an agreement with the ~~junior~~other ~~tranches~~such ofholder, ~~notes~~providing ~~payable~~for ~~and~~certain ~~preferred~~cash ~~shares~~payments ~~issued~~to bythat holder in connection with the ~~CDOs~~exchange ~~and~~described ~~retained~~above, by(iv) an usagreement ~~may~~with bea ~~redirected~~third toholder ~~repay~~of ~~principal~~our onTRUPs ~~certain~~with ~~senior~~an ~~tranches~~aggregate liquidation amount of ~~notes~~$3.7 ~~payable~~million ~~issued~~to byexchange ~~the~~such ~~CDOs.~~TRUPs ~~Therefore~~for 541,906 ~~failure~~unregistered toshares ~~satisfy~~of our common stock and ~~the~~certain ~~coverage~~cash ~~tests~~payments, ~~could~~and ~~adversely~~(v) a ~~affect~~registration ~~cash~~rights ~~flows~~agreement ~~received~~with bythose usholders ~~from~~receiving shares of our ~~retained~~common ~~interests~~stock in the ~~CDOs~~exchanges ~~and~~described ~~thereby~~above ~~our~~providing ~~liquidity~~for ~~and~~certain ~~operating~~piggyback ~~results~~registration rights with respect to such shares.

~~CMBS~~All ~~downgrades~~$60.0 ~~generally~~million doof ~~not~~TRUPs ~~affect~~and ~~the~~accrued ~~over-collateralization~~distributions ~~coverage~~due ~~test~~thereon ~~applicable~~were tocancelled ~~collateral~~or insatisfied ~~our~~as ~~2005~~of ~~CDO~~December 31, or2009 ~~CDO~~in I,conjunction with ~~unless~~these ~~such collateral is downgraded to “CC” or below~~exchanges. ~~However,~~We ~~with respect~~made toaggregate ~~our~~cash ~~2006~~payments ~~CDO, or CDO II, collateral interests representing the majority~~ of ~~the face amount of downgraded CMBS are considered to be impaired for purposes of the over-collateralization coverage tests~~$0.8 ~~Collateral interests~~million, ~~including~~issued ~~CMBS~~849, ~~which~~109 ~~have~~shares aof ~~realized~~restricted ~~loss,~~stock ~~are~~and ~~also considered impaired~~$70.3 ~~For~~million ~~CDO II, failure~~ of ~~the~~Junior ~~over-collateralization~~Subordinated ~~coverage~~Notes ~~test~~to ~~occurs~~satisfy ~~generally~~our ~~when~~obligations on the ~~test~~TRUPs ~~results~~in ~~fall~~connection ~~below~~with ~~ranges between 100% and 140%, depending on~~ the ~~class~~exchanges ofdescribed ~~CDO II notes payable.~~above Asand ~~of December 31, 2008, due primarily to additional CMBS bond rating downgrades, CDO II could withstand approximately $184 million of incremental reductions to~~ the ~~face~~satisfaction ~~value~~ of ~~collateral~~our ~~interests~~distribution ~~before failing certain of the over-collateralization coverage tests~~obligations.

OnThe ~~February 5,~~newly ~~2009,~~issued ~~Moody’s~~Junior ~~announced~~Subordinated ~~that~~Notes itaccrue ~~was~~interest ~~revising~~at ~~its~~a ~~loss~~rate ~~methodology for CMBS~~of ~~and~~0.5% ~~reviewing~~annually ~~its~~through ~~outstanding~~April 29, ~~ratings~~2012 onor ~~all~~such ~~conduit~~earlier ~~and~~date ~~fusion~~as ~~CMBS~~we ~~issued~~elect in(the ~~2006,~~“Modification ~~2007 and 2008~~Period”). ~~Moody’s~~If ~~also~~the ~~announced~~Modification ~~that~~Period itends ~~expects~~earlier tothan ~~downgrade~~April 29, ~~low-rated~~2012, ~~investment~~we ~~grade~~are ~~bonds~~obligated ~~and~~to ~~non-investment~~pay ~~grade~~interest ~~bonds~~at bya anfixed ~~average~~rate of ~~five~~7.2% ~~to six~~annually ~~grades.~~from ~~Since~~such ~~its~~date ~~announcement~~through April 29, ~~Moody’s~~2012. ~~has~~Thereafter, ~~downgraded~~we ~~eight~~are ~~securitization~~obligated ~~transactions~~to ~~that~~pay ~~serve~~interest asat a ~~portion~~variable ofrate ~~the~~equal ~~collateral~~to ~~pool~~LIBOR ~~for~~plus ~~CDO II~~2.25% Asannually. aDuring ~~result~~the ofModification ~~these downgrades~~Period, ~~among~~we ~~other,~~are subject to certain ~~over-collateralization~~restrictions, ~~coverage~~including ~~tests~~limitations on our ~~for~~ability ~~CDO~~to IIpay ~~failed~~dividends ~~with~~on ~~respect~~shares of our common stock, provided, however, that we shall be permitted to pay dividends to the ~~February~~extent ~~2009~~necessary ~~distribution~~to ~~date~~satisfy ~~and~~REIT ~~are~~dividend ~~projected~~requirements. toThe ~~continue~~Indenture contains customary events of default, including those relating to ~~fail~~nonpayment ~~for~~of ~~the~~principal ~~foreseeable~~or ~~future~~interest when due, and defaults based on events of bankruptcy and insolvency.

AsOn ~~a result of the failure of certain over-collateralization coverage tests (i)~~February ~~certain~~1, ~~interest~~2010, ~~payments~~we ~~normally~~failed ~~scheduled~~ to bemake ~~allocated~~an tointerest ~~the~~payment ~~notes payable and preferred shareholders~~ of ~~CDO~~$0.1 IImillion ~~were~~on ~~reallocated to~~ the ~~holders~~Junior ofSubordinated ~~the~~Notes ~~senior notes payable,~~ and ~~(ii) any~~did ~~available~~not ~~principal~~cure ~~proceeds~~such ~~were~~default ~~reallocated~~within to the ~~holders~~permitted ofgrace ~~the senior notes payable~~period. ~~Consequently,~~During wethe ~~will~~continuance ~~not~~of ~~receive~~an ~~any~~event ~~cash~~of ~~flow~~default, ~~distributions on~~ the ~~junior~~Trustee ~~notes~~or ~~payable~~holders ~~and preferred share investments~~of ~~retained~~not byless usthan ~~and/or~~25% ~~our~~aggregate ~~affiliates~~principal inamount ~~CDO~~of ~~II until such time, if ever,~~ the ~~over-collateralization~~Junior ~~coverage~~Subordinated ~~tests~~Notes ~~are~~have ~~complied with. Even if~~ the ~~over-collateralization~~right ~~coverage~~to ~~tests~~accelerate ~~are eventually complied with,~~ our ~~ability~~obligation to ~~obtain~~pay ~~regular~~the ~~cash payments~~principal ~~from~~amount ~~the~~and ~~assets~~accrued ~~securing~~interest ~~CDO~~on IIthe isJunior ~~dependent~~Subordinatd ~~upon~~Notes. ~~CDO~~We IIhave ~~continuing~~not toreceived ~~meet~~notice ~~interest~~from ~~coverage~~the ~~and~~Trustee or ~~over-collateralization~~the ~~coverage~~holders ~~tests.~~of If the ~~February~~Junior ~~2009~~Subordinated ~~over-collateralization~~Notes ~~coverage~~accelerating ~~tests~~such ~~for~~obligations. ~~CDO~~Upon IIan ~~had~~acceleration ~~not~~of ~~failed~~payments, we would ~~have received~~become ~~approximately~~obligated to pay $170.04 million into ~~interest~~the ~~distributions~~holders ~~and~~of $1the Notes.2 ~~million~~We indo ~~preferred~~not ~~share~~have ~~distributions~~sufficient onliquid ~~February 25,~~assets ~~2009.~~available ~~During~~to ~~2008,~~pay weour obligations ~~received~~under ~~approximately~~the ~~$28~~Junior ~~million~~Subordinated ofNotes ~~net~~if ~~cash~~such ~~distributions~~obligations ~~from~~were ~~CDO II~~to be accelerated.

~~While~~As ~~the~~a ~~redirection~~result of ~~cash~~our ~~began~~defaults ~~with~~ under the ~~February 25,~~Junior ~~2009~~Subordinated ~~distribution~~Notes ~~date,~~and ~~the~~NAB ~~redirection~~Note ofPayable, ~~such~~our ~~cash~~lenders ismay ~~not~~accelerate ~~expected to impact~~ the ~~GAAP~~maturity ~~or tax treatment to us~~ of ~~the~~such ~~individual~~debt, ~~assets~~requiring ~~and~~us ~~liabilities related~~ to ~~the~~immediately ~~CDOs~~repay asall weoutstanding ~~consolidate both CDOs on our balance sheet~~principal. ~~While~~If we ~~believe~~are ~~our~~unable ~~balance~~to ~~sheet~~make ~~reflects~~such ~~the~~payments, ~~fair~~our ~~value~~lenders ofcould ~~the~~force ~~individual~~us ~~CDO~~to ~~related~~sell assets ~~and liabilities, we~~ ~~believe~~or ~~the~~force ~~estimated~~us ~~economic~~into ~~value~~bankruptcy. Any of ~~our~~these ~~combined~~events ~~retained~~would ~~interest~~likely inhave ~~the~~a ~~CDOs~~material isadverse ~~less~~effect ~~than~~on the ~~difference~~price ~~between~~of ~~the~~our ~~estimated~~common ~~fair~~stock ~~values~~and of the ~~assets~~Company’s ~~and~~ability ~~liabilities,~~to ~~determined~~continue inas ~~accordance~~a ~~with~~going ~~GAAP~~concern. WeTo ~~estimate~~date, ~~the~~we ~~economic~~have ~~value~~not ofbeen ~~the CDOs~~notified byof ~~discounting~~any ~~future~~principal accelerations ~~projected~~or ~~cash~~other ~~flows~~remedies onlisted ~~our retained interests in such CDOs~~above.

~~Repurchase~~Reverse ~~Agreements.~~Stock ToSplit ~~the~~and ~~extent available~~Stock Dividend. All figures in this paragraph reflect the ~~market,~~1-for-10 wereverse ~~also~~stock ~~use~~split ~~short-term~~effected ~~financing,~~by inus ~~the~~on ~~form~~February 20, of2009. ~~repurchase~~On ~~agreements~~December 16, ~~and~~2008, ~~may~~our ~~use~~board ~~bridge~~of ~~loans~~directors ~~and~~approved ~~bank~~the ~~warehousing~~declaration ~~facilities,~~of asa antotal ~~intermediary~~common ~~step~~stock ~~prior~~dividend toof ~~the~~$8.80 ~~implementation~~per share, consisting of ~~long-term~~a ~~match-funded~~regular ~~financing.~~quarterly ~~Leverage~~dividend ~~will~~on beour ~~utilized~~common stock of $3.00 per common share for the ~~sole~~quarter ~~purpose~~ending ofDecember 31, ~~financing~~2008 ~~our~~as ~~portfolio.~~well ~~Our~~as ~~charter~~a ~~and~~special ~~bylaws~~2008 dodividend ~~not~~of ~~limit~~$5.80 per common share (together the ~~amount~~“2008 ofYear ~~indebtedness~~End weDividend”). ~~can~~The ~~incur,~~2008 ~~and~~Year ~~our~~End ~~board~~Dividend ofwas payable ~~directors~~in ~~has~~a ~~discretion~~combination toof ~~deviate~~cash ~~from~~and orshares ~~change~~of our ~~leverage~~common ~~policy~~stock. atThe ~~any time.~~2008 AsYear ofEnd ~~December 31,~~Dividend ~~2008,~~consisted weof ~~had~~approximately $162.13 million ~~outstanding~~in ~~under~~cash aand ~~short-term~~2,397,891 ~~repurchase~~(as ~~agreement~~adjusted) ~~with~~shares ~~JPMorgan~~of ~~Securities,~~common ~~Inc.,~~stock ~~JPMorgan,~~and ~~which~~was ispaid ~~secured~~on byJanuary 30, ~~certain~~2009 ofto ~~our~~common stockholders ~~CMBS~~of ~~investments~~record ~~and~~on ~~matures in~~ December 30, ~~2009~~2008.

On February 13, 2009, the board of directors approved the declaration of a 1-for-10 reverse stock split effective February 20, 2009. As of November 30, 2010, 5,831,029 shares were outstanding after the impact of the

~~During~~ stock ~~the~~dividend ~~first~~and ~~quarter~~reverse ofstock ~~2009,~~split. weAll ~~made~~share ~~$2.8~~and ~~million~~per ofshare ~~scheduled~~amounts ~~principal~~included ~~amortization~~in ~~payments~~this ~~and the~~Annual ~~outstanding~~Report ~~balance~~on ~~was~~Form ~~reduced~~10-K have been restated to ~~$13.4~~reflect ~~million~~the as1-for-10 ofreverse ~~March~~stock 24split effected by us on February 20, 2009, unless otherwise noted.

IfThere wewere ~~default~~no individends ~~the~~declared ~~payment~~during ~~of interest or principal on any debt, breach any representation or warranty in connection with any borrowing or violate any covenant in any loan document, our lender may accelerate~~ the ~~maturity~~twelve ofmonths ~~such debt, requiring us to immediately repay all outstanding principal. If we are~~ended unable to make such payments, our lender could force us to sell our securities or foreclose on our assets pledged as collateral to such lender. The lender could also sue us or force us into bankruptcy. Any of these events would likely have a material adverse effect on the price of our common stock. As of December 31, ~~2008, we were in compliance with all covenants and requirements under our repurchase agreement, collateralized debt obligations and junior subordinated debentures~~2009.

~~Junior~~Common ~~Subordinated~~Stock ~~Debentures.~~Delisting Inby ~~April~~the ~~2007,~~New weYork ~~issued~~Stock ~~$60~~Exchange (“NYSE”).0 ~~million~~On ofMarch 26, 2009, ~~trust~~we ~~preferred~~received ~~securities~~written ~~through~~notice ~~our~~from ~~unconsolidated subsidiary (~~the ~~“Trust”).~~NYSE ~~Concurrently,~~that we ~~issued~~were ~~$61.9~~not ~~million~~ in ~~junior~~compliance ~~subordinated~~with ~~debentures~~the NYSE’s continued listing standards applicable to ~~the~~us ~~Trust~~requiring ~~and~~that ~~made~~we maintain a 30-day trailing average global equity market capitalization of at least $115.90 million. The NYSE permanently suspended trading of our common ~~equity~~stock ~~investment~~prior into the ~~Trust.~~market ~~The~~open ~~trust~~on ~~preferred~~April 1, ~~securities~~2009. ~~have~~Since aApril 1, ~~30-year~~2009 ~~term~~through ~~ending~~ April ~~2037~~5, ~~are~~2010, ~~redeemable~~our atcommon ~~par~~stock was quoted on the over-the-counter bulletin board, or ~~after~~OTC BB, ~~April 30~~under the ticker symbol of JERT. Thereafter, ~~2012~~we have been and are currently ~~pay~~quoted ~~distributions~~on atthe aPink ~~fixed~~Sheets ~~rate~~under ofthe 7ticker symbol JERT.~~2%.~~

Reverse Stock Split and Stock Dividend. All figures in this paragraph reflect the 1-for-10 reverse stock split effected by us on February 20, 2009. On December 16, 2008, our board of directors approved the declaration of a total common stock dividend of $8.80 per share, consisting of a regular quarterly dividend on our common stock of $3.00 per common share for the quarter ending December 31, 2008 as well as a special 2008 dividend of $5.80 per common share (together the “2008 Year End Dividend”). The 2008 Year End Dividend was payable in a combination of cash and shares of our common stock. The 2008 Year End Dividend consisted of approximately $2.3 million in cash and 2,397,891 (as adjusted) shares of common stock and was paid on January 30, 2009 to common stockholders of record on December 30, 2008.

On February 13, 2009, the board of directors approved the declaration of a 1-for-10 reverse stock split effective February 20, 2009. As of March 27, 2009, 4,987,994 shares were outstanding after the impact of the stock dividend and reverse stock split. All share and per share amounts included in this Annual Report on Form 10-K have been restated to reflect the 1-for-10 reverse stock split effected by us on February 20, 2009, unless otherwise noted.

Common Stock Delisting by the New York Stock Exchange (“NYSE”). On March 26, 2009, we received written notice from the NYSE that we were not in compliance with the NYSE’s continued listing standards applicable to us requiring that we maintain a 30-day trailing average global equity market capitalization of at least $15.0 million (this standard has temporarily been lowered from $25.0 million through June 30, 2009). The NYSE will permanently suspend trading of our common stock prior to the market open on April 1, 2009. As of April 1, 2009, the trading of the Company’s common stock will occur on the over-the-counter, or OTC, market. As a result, we expect that the liquidity and market price of our common stock may decline.

Credit and Interest Rate Risk Management

Our assets are exposed to various levels of credit risk, depending on the nature of the underlying assets and the nature and level of credit enhancements supporting such assets. We originate or purchase mortgage and mezzanine loans that meet minimum credit standards, such as debt service coverage standards established by us. We review and monitor interest rate risk, credit risk and other risks of loss associated with each investment and our investment portfolio. In addition, we seek to diversify our portfolio of assets to avoid undue geographic, issuer, industry and certain other types of concentrations. ~~The risk management staff of J.E. Robert Company, which implements and monitors our interest rate risk management program, is overseen by the head of risk management for J.E. Robert Company.~~ We have established a surveillance committee to monitor the overall investment portfolio risk and review loss provision levels.

Our profitability may be adversely affected during any period as a result of changing interest rates. Our interest rate risk management strategy is intended to mitigate the negative effects of major interest rate changes. We seek to reduce our interest rate risk from borrowings both through hedging activities and by attempting to structure the key terms of our borrowings to generally correspond (in the aggregate for the entire portfolio, and not on an asset-by-asset basis) to the interest rate and maturity parameters of our assets.

We have utilized financial instruments, primarily interest rate swaps, in order to limit the effects of fluctuations in interest rates on our cash flow and earnings. The use of these types of derivatives to hedge interest-earning assets and/or interest-bearing liabilities carries certain risks, including the risk that losses on a hedge position will reduce the funds available for payments to holders of securities and that such losses may exceed the amount invested in such instruments. A hedge may not perform its intended purpose of offsetting losses. At times, we may have interest rate swap maturities or notional balances that do not correspond with outstanding floating rate debt balances, debt maturity dates or amounts. Moreover, with respect to certain of the instruments used as hedges, we are exposed to the risk that the counterparties with which we trade may cease making markets and quoting prices in such instruments, which may render us unable to enter into an offsetting transaction with respect to an open position. In addition, these derivatives contain certain credit risks to the extent that our counterparties are unable to fulfill their obligations under the terms of the applicable agreements. We seek to minimize this risk by limiting our counterparties to major financial institutions with acceptable credit ratings and monitoring positions with individual counterparties. If we anticipate that the income from such hedging transaction could adversely affect our compliance with the REIT qualification requirements, we may conduct part or all of our hedging activities through a corporate subsidiary that will be fully subject to federal corporate income taxation (a taxable REIT subsidiary).

WeThe ~~seek~~following totable ~~reduce~~presents our pay-fixed interest rate ~~risk~~swaps ~~from~~related ~~borrowings~~to ~~both through~~ hedging ~~activities and by attempting to structure the key terms of~~ our ~~borrowings to~~ ~~generally~~floating-rate ~~correspond~~CDO ~~(in~~notes ~~the~~payable ~~aggregate~~as ~~for~~of ~~the entire portfolio~~December 31, ~~and~~2009 ~~not~~($ onin ~~an asset-by-asset basis~~thousands): ~~to the interest rate and maturity parameters of our assets.~~

We intend to utilize a variety of financial instruments, including interest rate swaps, caps, options, floors and other interest rate exchange contracts, in order to limit the effects of fluctuations in interest rates on our cash flow and earnings. The use of these types of derivatives to hedge interest-earning assets and/or interest-bearing liabilities carries certain risks, including the risk that losses on a hedge position will reduce the funds available for payments to holders of securities and that such losses may exceed the amount invested in such instruments. A hedge may not perform its intended purpose of offsetting losses. At times, we may have interest rate swap maturities or notional balances that do not correspond with outstanding floating rate debt balances, debt maturity dates or amounts. Moreover, with respect to certain of the instruments used as hedges, we are exposed to the risk that the counterparties with which we trade may cease making markets and quoting prices in such instruments, which may render us unable to enter into an offsetting transaction with respect to an open position. In addition, these derivatives contain certain credit risks to the extent that our counterparties are unable to fulfill their obligations under the terms of the applicable agreements. We seek to minimize this risk by limiting our counterparties to major financial institutions with acceptable credit ratings and monitoring positions with individual counterparties. If we anticipate that the income from such hedging transaction could adversely affect our compliance with the REIT qualification requirements, we may conduct part or all of our hedging activities through a corporate subsidiary that will be fully subject to federal corporate income taxation (a taxable REIT subsidiary).


Trade Date	Effective Date	Termination Date	CDO	Initial Notional Balance		Notional Balance at December 31, 2009		Ending Notional Balance		Fair Value at December 31, 2009⁽¹⁾			Pay-Fixed Interest Rate			Asset/ Liability at December 31, 2009		Location on the Balance Sheet at December 31, 2009
October 2005	November 2005	June 2015	CDO I⁽²⁾	$	109,977	$	109,977	$	5,697	$	(10,868	)		4.9	%		Liability		Interest rate swap agreements related to CDOs, at fair value

September 2006	October 2006	August 2016	CDO II		386,324		266,206		219,929		(27,409	)		5.1	%		Liability		Interest rate swap agreements related to CDOs, at fair value

				$	496,301	$	376,183	$	225,626	$	(38,277	)

(1) The ~~following~~settlement ~~table~~amount ~~presents~~of our ~~pay-fixed~~ interest rate ~~swaps~~swap ~~related~~liabilities towas ~~our~~$(38.3) ~~CDOs~~million ~~and~~as ~~current~~of ~~short-term~~December ~~and~~31, ~~anticipated~~2009. ~~future~~This ~~indebtedness~~liability is partially offset by a $32 credit valuation adjustment as of December 31, ~~2008~~2009 due to the requirement to incorporate a credit valuation allowance for our CDO’s and ~~2007,~~our ~~respectively~~counterparty’s ($credit inrating ~~thousands):~~to arrive at fair value of the interest rate swap.

Trade Date	Effective Date	Entity	TerminationDate	InitialNotionalBalance		Notional Balance atDecember 31,				EndingNotionalBalance		Fair Value atDecember 31,						Pay-FixedInterestRate
						2008		2007				2008(4)			2007
October 2005	November 2005(1)	CDO I	June 2015	$	109,977	$	109,977	$	109,977	$	5,697	$	(17,545	)	$	(4,107	)	4.9	%
September 2006	October 2006(2)	CDO II	August 2016		386,324		303,126		340,047		219,929		(49,551	)		(12,860	)	5.1	%
September 2006	October 2009(2)	JER Investors Trust Inc.	August 2016(8)		—		—		—		80,071		(3,536	)		(1,056	)	5.2	%
February 2007	October 2007(2)	JER Investors Trust Inc.	October 2014(8)		—		83,198		46,277		85,024		(7,490	)		(3,719	)	5.1	%
January 2007	November 2007(3)(6)	JER Investors Trust Inc.	December 2016(8)		100,000		40,000		100,000		40,000		(6,209	)		(6,185	)	5.3	%
February 2007	November 2007(5)	JER Investors Trust Inc.	June 2008		45,000		—		45,000		—		—			(2,079	)	5.0	%
February 2007	November 2007(3)(7)	JER Investors Trust Inc.	February 2017(9)		26,000		19,500		26,000		19,500		(3,714	)		(1,244	)	5.1	%
March 2007	November 2007(3)	JER Investors Trust Inc.	January 2017(8)		40,000		40,000		40,000		40,000		(3,939	)		(1,631	)	5.0	%
				$	707,301	$	595,801	$	707,301	$	490,221	$	(91,984	)	$	(32,881	)

⁽²⁾

In October 2010, the counterparty terminated this interest rate swap related to our CDO I financing. In accordance with the ISDA master agreement, October 15, 2010 was designated as the Early Termination Date at which time the amount payable under the agreement, including accrued interest, was $18.6 million.

(1) Swap related to our CDO I financing and is reflected at fair value with the change in value subsequent to December 31, 2007 recorded in other gains (losses) on the consolidated statement of operations due to our election to account for this swap using the FVO effective January 1, 2008.

(2) Swaps related to our CDO II financing and is reflected at fair value with the change in value subsequent to December 31, 2007 recorded in other gains (losses) on the consolidated statement of operations due to our election to account for these swaps using the FVO effective January 1, 2008.

(3) Swaps related to our current and future anticipated financings were intended to hedge future long-term floating rate debt and is not considered probable as of December 31, 2008 and as a result, the fair value at December 31, 2008 of $(13.9) million has been recorded in other gains (losses) in the consolidated statement of operations during the year ended December 31, 2008.

(4) The settlement amount of our interest rate swap liabilities was $(110.7) million as of December 31, 2008. This liability is partially offset by a $18.7 million credit valuation adjustment as of December 31, 2008 due to the SFAS No. 157 requirement to incorporate a credit valuation allowance for our and our counterparty’s credit rating to arrive at fair value.

(5) In connection with the sale of a real estate loan in June 2008 and repayment of the related floating rate financing, we terminated a swap with an initial notional balance of $45.0 million and paid swap termination costs of $1.4 million.

(6) In connection with the sale of a real estate loan in September 2008 and repayment of the related floating rate financing, we partially terminated $60.0 million of notional balance on a swap with an initial notional balance of $100.0 million and paid swap termination costs of $4.0 million.

(7) In connection with the transfer of real estate loans classified as held for sale and repayment of the related floating rate financing, we partially terminated $6.5 million of notional balance on a swap with an initial notional balance of $26.0 million and paid swap termination costs of $1.5 million.

(8) On February 27, 2009, we agreed to terminate these interest rate swaps and replace them with a new seven-year fixed rate-for-fixed rate swap agreement. We are obligated to pay a fixed monthly payment amount of $0.4 million to National Australia Bank Limited from March 2009 through March 2016, with such payments commencing in April 2009.

(9) The counterparty terminated this swap on February 23, 2009. We paid the counterparty $3.3 million in connection with the termination.

Investment Process

Currently, due to our liquidity and capital position, we are unable to pursue our investment strategy. Should our liquidity ~~improve~~and wecapitalization ~~may,~~improve in the future, ~~continue~~we tomay ~~execute~~resume on our historical investment strategy.

In making investment and management decisions on our behalf, our manager utilizes a carefully formulated strategy that begins with the sourcing of potential investments. We typically focus on investments from sources where J.E. Robert Company and its affiliates have a strategic advantage or a direct relationship with the counterparty. Our investment strategy is based on a very selective and disciplined approach that integrates J.E. Robert Company and its affiliates’ due diligence capabilities and detailed asset underwriting process as well as their substantial experience in successfully structuring complex investments with multiple real estate, financial, and legal issues.

Our Investment Committee. Our investment committee is comprised of ~~Mark Weiss, our president and a member of our board of directors,~~ Keith Belcher, ~~vice chairman of our board of directors and~~ executive vice president, ~~Tae-Sik~~J. ~~Yoon~~Michael McGillis, our ~~executive~~Chief ~~vice~~Financial ~~president~~Officer, Daniel Ward, our secretary, and Frank Small, managing director of the US funds business of the J.E. Robert Company. Our investment committee has authority delegated by our board of directors to authorize transactions consistent with our investment guidelines. Any transaction deviating in a material way from these guidelines must be approved by our board of directors unless otherwise delegated by the board. In addition, transactions above a certain size must be approved by the Global Investment Committee of the J.E. Robert Company (the “Global Investment Committee”). Members of the Global Investment Committee include Joseph E. Robert, chief executive officer of the J.E. Robert Company, Mark Weiss, our president and member of the board of directors, Tae-Sik Yoon, our executive vice president, Daniel Ward, our secretary, Keith Belcher, vice chairman of our board of directors and executive vice president, Marcelo Horcel, managing director of Latin American investment management of the J.E. Robert Company and Alex Gilbert, managing director of US investment management of the J.E. Robert Company.

~~The~~Although investment activities are not being pursued at this time, the following is a description of our manager’s activities during each stage of the investment process:

Sourcing Potential Investment Opportunities. We believe our manager’s relationship with J.E. Robert Company provides us with a unique pipeline of investment opportunities. J.E. Robert Company has developed an extensive network of relationships in its 25-year history in the real estate business and seeks to source transactions for us through its network of relationships with commercial and investment banks, opportunity funds, institutional investors, operating partners, borrowers and brokerage companies. J.E. Robert Company’s staff of investment and asset management professionals have been very active in sourcing proprietary investment opportunities over the past ~~fifteen~~twenty years. The sellers ~~are~~have been comprised primarily of investment banks, commercial banks and insurance companies. Because J.E. Robert Company and its affiliates have been active in the CMBS sector since the early 1990s and have established relationships with many of the issuers of CMBS through prior investments, partnerships and management activity, our manager is well positioned to pursue new issue opportunities on our behalf.

Screening and Pursuit of Potential Transactions. All of our investments are screened prior to committing underwriting resources and are reviewed by our investment committee for conformity to our investment guidelines and overall suitability, including consideration of regulatory and portfolio risk management implications. A CMBS investment opportunity initially is screened based on the analysis of the asset composition of the underlying loan pool. Our manager utilizes a stress test analysis with respect to the debt service capacity of the assets and their ultimate ability to be refinanced. Based on the stress test results as well as our manager’s review of the specific product types and property locations, a preliminary loan loss estimate is derived, which is then evaluated against the proposed bond structure. Other factors that our manager considers include the reputation of the underwriters and issuers, the quality of the loan underwriting, the quality of the respective borrowers and the adequacy of the related loan documents. Once the transaction is screened, the purchase parameters are bid and negotiated, and our formal due diligence process is initiated.

In14 considering whether to acquire or make a loan investment, our manager performs certain due diligence tasks that reasonably may be expected to provide relevant and material information as to the value of the loan and whether we should acquire or originate the debt. In determining the price of a loan, our manager reviews and

~~analyzes~~including ~~some~~consideration ~~or all~~ of aregulatory ~~number~~and ofportfolio ~~factors,~~risk ~~depending~~management ~~upon their expected materiality to the transaction~~implications. ~~These~~A ~~factors~~CMBS ~~may~~investment ~~include~~opportunity ~~market~~initially ~~conditions (market~~is ~~interest~~screened ~~rates,~~based ~~the~~on ~~availability of refinancing and economic, demographic, geographic, tax, legal and other factors). They may also include~~ the ~~yield~~analysis ~~to maturity~~ of the ~~loan,~~asset ~~the~~composition ~~liquidity~~ of the underlying loan, ~~the~~pool. ~~extent~~Our ofmanager ~~subordinate~~utilizes ~~capital,~~a ~~the limitations~~stress ontest ~~the~~analysis ~~obligations of the seller~~ with respect to the ~~loan,~~debt service capacity of the ~~rate~~assets and ~~timing~~their ofultimate ~~payments~~ability to be ~~made~~refinanced. ~~with~~Based ~~respect~~on to the ~~loan,~~stress ~~the~~test ~~underlying~~results ~~property~~as ~~securing~~well ~~the~~as ~~loan,~~our ~~the~~manager’s ~~risk~~review of ~~adverse fluctuations in~~ the specific ~~market~~product ~~values~~types ofand ~~the underlying~~ property aslocations, a ~~result~~preliminary ofloan ~~economic~~loss orestimate ~~political~~is ~~events or governmental regulations~~derived, ~~the~~which ~~historical~~is ~~performance~~then ~~and~~evaluated ~~other~~against ~~attributes of~~ the ~~borrower~~proposed orbond ~~property~~structure. ~~manager~~Other ~~responsible~~factors ~~for managing the underlying property, relevant laws limiting actions~~ that ~~may~~our bemanager ~~taken~~considers ~~with~~include ~~respect~~the toreputation ~~loans~~of ~~secured~~the byunderwriters ~~real~~and ~~property~~issuers, the orquality ~~other~~of ~~ownership~~the ~~interests~~loan underwriting, ~~and~~the ~~limitations~~quality onof ~~recourse against~~ the respective borrowers ~~following~~and ~~realization on~~ the ~~collateral,~~adequacy ~~risks~~ of ~~timing~~the ~~with~~related ~~respect to~~ loan ~~prepayments,~~documents. ~~risks associated~~Once ~~with~~the ~~geographic~~transaction ~~concentration~~is ofscreened, ~~underlying~~the ~~assets,~~purchase ~~environmental~~parameters ~~risks,~~are ~~pending~~bid and ~~threatened litigation~~negotiated, ~~other liens~~ and ~~other~~our ~~issues~~formal ~~relating~~due todiligence ~~title,~~process ~~a prior history of defaults by affiliated parties on similar and dissimilar~~is ~~obligations and other factors~~initiated.

In considering whether to acquire or make a loan investment, our manager performs certain due diligence tasks that reasonably may be expected to provide relevant and material information as to the value of the loan and whether we should acquire or originate the debt. In determining the price of a loan, our manager reviews and analyzes some or all of a number of factors, depending upon their expected materiality to the transaction. These factors may include market conditions (market interest rates, the availability of refinancing and economic, demographic, geographic, tax, legal and other factors). They may also include the yield to maturity of the loan, the liquidity of the loan, the extent of subordinate capital, the limitations on the obligations of the seller with respect to the loan, the rate and timing of payments to be made with respect to the loan, the underlying property securing the loan, the risk of adverse fluctuations in the market values of the underlying property as a result of economic or political events or governmental regulations, the historical performance and other attributes of the borrower or property manager responsible for managing the underlying property, relevant laws limiting actions that may be taken with respect to loans secured by real property or other ownership interests, limitations on recourse against the borrowers following realization on the collateral, risks of timing with respect to loan prepayments, risks associated with geographic concentration of underlying assets, environmental risks, pending and threatened litigation, other liens and other issues relating to title, a prior history of defaults by affiliated parties on similar and dissimilar obligations and other factors.

Due Diligence. Our manager subjects potential transactions to rigorous analysis to optimize pricing and structuring. Our manager relies on the personnel provided to it by J.E. Robert Company to conduct due diligence on our behalf. Neither we nor our manager have a dedicated full-time staff to diligence our investments. From a real estate perspective, the due diligence includes, but is not limited to:

•

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

•

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

•

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

•

reviewing local submarket rental and sales comparables;

•

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

•

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

•

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

•

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

•

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

•

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

As15 a result of the real estate review, a cash flow forecast for each collateral property is prepared and a valuation is assigned. The performance of the respective loan is then forecast and individual loan losses are projected with regard to some CMBS issuances, in particular on non-investment grade CMBS, which are priced on a risk adjusted basis. These calculations are affected by the securitization structure, which is evaluated, modeled and reviewed in order to evaluate the bond level cash flows. Sensitivity analysis is performed in consideration of differing levels and timing of loan losses, variances in the timing of loan payoffs or prepayments, loan extension scenarios and with respect to changing interest rates. In all cases, we consider the potential impact on the risk profile of our investment portfolio and the impact on cash flow after we implement financing at the company level, whether in the form of a CDO or some other debt instrument. Where certain assets within a securitization are deemed to constitute an excessive risk, they are either appropriately priced for, or the subject assets are rejected from the pool or further structured to mitigate the risk to us.

~~Investment~~As ~~Committee~~a ~~Participation.~~result ~~Following~~of ~~investment~~the ~~screening~~real ~~and~~estate ~~initial due diligence~~review, ~~our investment~~a ~~committee~~cash ~~reviews~~flow ~~all~~forecast ~~potential~~for ~~transactions~~each tocollateral ~~consider~~property ~~REIT~~is prepared and ~~Investment~~a ~~Company~~valuation ~~Act~~is ~~compliance~~assigned. ~~issues~~The asperformance ~~well~~of asthe ~~pricing,~~respective ~~structuring,~~loan ~~real~~is ~~estate~~then forecast and ~~borrower~~individual ~~risk,~~loan ~~financing~~losses ~~capability,~~are ~~hedging~~projected ~~and~~with ~~portfolio~~regard ~~risk~~to ~~management. Although~~some weCMBS ~~receive~~bond ~~legal~~issuances, ~~advice~~ in ~~connection~~particular ~~with~~on ~~the~~non-investment ~~acquisition~~grade ofCMBS ~~assets~~bonds, ~~for~~ which ~~there~~are ispriced ~~uncertainty~~on ~~with~~a risk ~~respect~~adjusted tobasis. ~~the~~These ~~REIT~~calculations ~~rules~~are ~~and~~affected ~~Investment~~by ~~Company~~the ~~Act~~securitization ~~treatment~~structure, wewhich dois ~~not~~evaluated, ~~receive~~modeled aand ~~legal~~reviewed ~~opinion~~ in ~~connection~~order ~~with~~to ~~each~~evaluate ~~acquisition. Following~~the ~~execution~~bond oflevel acash ~~terms~~flows. ~~agreement~~Sensitivity ~~with~~analysis ~~the~~is ~~counterparty,~~performed ~~the~~in ~~investment~~consideration ~~committee~~of ~~supervises~~differing ~~final~~levels ~~due~~and timing ~~diligence~~of toloan ~~the~~losses, ~~extent~~variances ~~applicable.~~in ~~Upon~~the ~~completion~~timing of ~~due~~loan ~~diligence~~payoffs or prepayments, loan extension scenarios and ~~prior~~with respect to ~~making~~changing ~~any~~interest ~~binding~~rates. ~~debt~~In ~~commitments~~all ~~or investments~~cases, ~~our investment~~we ~~committee~~consider ~~considers~~ the potential impact on the risk profile of ~~any~~our ~~material~~investment ~~findings~~portfolio and the impact on ~~the~~cash ~~transaction’s~~flow ~~risk~~after ~~profile.~~we ~~Some~~implement ~~investments~~financing ~~may~~at bethe ~~presented~~company tolevel, whether in the ~~Global~~form ~~Investment~~of ~~Committee~~a ~~and/~~CDO or ~~our~~some ~~independent~~other ~~board~~debt ofinstrument. ~~directors~~Where ~~for~~certain ~~consideration.~~assets ~~All completed~~within ~~transactions~~a securitization are ~~then~~deemed ~~reported~~ to ~~our~~constitute ~~board~~an ofexcessive ~~directors.~~risk, ~~Our~~they ~~independent~~are ~~directors~~either appropriately ~~must~~priced ~~unanimously~~for, ~~approve~~or ~~any~~the ~~transactions~~subject ~~with~~assets ~~and~~are ~~acquisitions~~rejected from the pool or ~~sales~~further structured to ~~affiliates~~mitigate ofthe ~~J.E.~~risk ~~Robert~~to ~~Company~~us.

~~Closing.~~Investment ~~The~~Committee ~~CMBS~~Participation. ~~closing~~Following ~~process~~investment isscreening ~~extensive~~and initial due diligence, our investment committee reviews all potential transactions to ~~the~~consider ~~documentation~~REIT ~~associated~~and ~~with~~Investment ~~the~~Company ~~bond~~Act ~~issuance,~~compliance ~~including~~issues ~~the~~as ~~loan~~well ~~sale~~as ~~agreement~~pricing, ~~the various~~structuring, ~~trust~~real ~~documents~~estate and ~~the~~borrower ~~associated~~risk, ~~servicing~~financing ~~agreement~~capability, hedging and portfolio risk management. ~~Included~~Although we receive legal advice in connection with the ~~servicing~~acquisition ~~documentation~~of assets for which there is uncertainty with respect to the ~~pooling~~REIT rules and ~~servicing~~Investment ~~agreement~~Company Act treatment, ~~which~~we ~~governs~~do ~~the~~not ~~responsibilities~~receive ofa ~~the~~legal ~~special~~opinion ~~servicer.~~in Jconnection with each acquisition.E. ~~Robert~~Following ~~Company~~execution ~~has~~of ~~established~~a terms ~~relationships~~agreement with ~~counsel~~the ~~and~~counterparty, ~~has~~the ~~streamlined~~investment committee supervises final due diligence to the ~~closing~~extent ~~process~~applicable. inUpon ~~order~~completion of due diligence and prior to ~~minimize~~making ~~the~~any ~~associated~~binding ~~cost~~debt commitments or investments, ~~while~~our ~~achieving~~investment committee considers the ~~requisite~~impact ~~document~~of ~~provisions~~any material findings on the transaction’s risk profile. Some investments may be presented to our independent board of directors for consideration. All completed transactions are then reported to our board of directors. Our independent directors must unanimously approve any transactions with and acquisitions from or sales to affiliates of J.E. Robert Company.

Closing. The CMBS closing process is extensive due to the documentation associated with the CMBS bond issuance, including the loan sale agreement, the various trust documents and the associated servicing agreement. Included in the servicing documentation is the pooling and servicing agreement, which governs the responsibilities of the special servicer. J.E. Robert Company has established relationships with counsel and has streamlined the closing process in order to minimize the associated cost, while achieving the requisite document provisions.

Non-CMBS closings are completed to the extent possible on our own standard documentation, but many debt investments are made on documents specific to that transaction. Those documents are negotiated by our manager with the support of the general counsel and legal staff of our manager and outside counsel. Funding controls are in place with our chief financial officer to ensure that no funding takes place until all documents are executed and security interests perfected.

Asset Management

Our manager, JER Commercial Debt Advisors, LLC (the “manager”) (with the assistance of J.E. Robert Company as special servicer where appropriate) performs the following asset management functions for us:

Investment Monitoring. Our manager actively monitors and manages our investments. Surveillance on each investment is performed on an ongoing basis as updated collateral information is obtained, typically including property operating statements and rent rolls. This information is analyzed and compared against ~~original~~prior ~~underwriting forecasts. For example, a negative variance in net~~ operating ~~income or in occupancy, among other factors, may result in the asset being placed on a “watch list~~periods.” Submarket trends and physical site inspections are also reviewed and evaluated with regard to future performance. Our surveillance committee formally reviews the portfolio on a quarterly basis to consider any watch list assets and determine any appropriate actions and reserve adjustments. Throughout the surveillance process, asset management steps are taken as warranted in order to maximize the return on the investment.

Cash Collections. To the extent possible, we enter into cash collection and lock box agreements.

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

~~Recovery~~16 ~~Strategies. To the extent a default occurs with respect to an investment, our manager is responsible for recommending and implementing the appropriate recovery strategy in order to produce the~~

~~highest~~current ~~net~~market ~~present value recovery~~information. ~~This~~When ~~may~~appropriate, ~~include~~our ~~demand~~manager ~~for~~also ~~payment,~~conducts ~~forbearance,~~an ~~modification,~~investigation ~~compromise, deed-in-lieu~~ of ~~foreclosure,~~the ~~foreclosure~~borrower ~~and litigation.~~to ~~Typically,~~identify aother ~~number~~potential sources of ~~alternatives~~recovery, ~~can~~including ~~then~~other benon-real ~~compared~~estate collateral onand aguarantees. ~~net~~Our ~~present~~manager ~~value~~then ~~basis~~is ~~and~~responsible ~~consideration~~for ~~given~~reviewing to the ~~risks~~collateral ~~related~~operating tostatements ~~executing~~on ~~each~~an ~~alternative.~~ongoing Webasis ~~believe that our manager’s real estate operating~~ and ~~distressed debt~~within ~~workout~~the ~~management~~market ~~experience put us~~ in aorder ~~strong position~~ to ~~manage~~accurately ~~defaults~~track orasset ~~other~~value ~~problems~~and ~~that~~cash ~~may~~flow ~~arise with our investments~~performance.

Recovery Strategies. To the extent a default occurs with respect to an investment, our manager is responsible for recommending and implementing the appropriate recovery strategy in order to produce the highest net present value recovery. This may include demand for payment, forbearance, modification, compromise, deed-in-lieu of foreclosure, foreclosure and litigation. Typically, a number of alternatives can then be compared on a net present value basis and consideration given to the risks related to executing each alternative. We believe that our manager’s real estate operating and distressed debt workout management experience put us in a strong position to manage defaults or other problems that may arise with our investments.

The Management Agreement

We are party to a management agreement with JER Commercial Debt Advisors LLC, our manager and an affiliate of the J.E. Robert Company, pursuant to which our manager provides the day-to-day management of our operations.

Management Services

The management agreement requires our manager to oversee our business affairs in conformity with the policies and the investment guidelines that are approved and monitored by our board of directors. Our manager operates under the direction of our board of directors. Our manager is responsible for (i) our purchase and sale of real estate securities and other real estate-related assets, (ii) management of our real estate, including arranging for acquisitions, sales, financing, leases, maintenance and insurance, (iii) the purchase, sale and servicing of mortgages for us, and (iv) providing us with investment advisory services. Our manager is responsible for our day-to-day operations and performs (or causes to be performed) services and activities relating to our assets and operations as may be appropriate, including, without limitation, the following:

•

serving as our consultant with respect to formulation of investment criteria and preparation of policy guidelines by our board of directors;

•

counseling us in connection with policy decisions to be made by our board of directors;

•

investigating, analyzing and selecting potential investment opportunities for us;

•

making decisions concerning the evaluation, purchase, negotiation, structuring, monitoring, and disposition of our investments, including the accumulation of assets for securitization; however, the board of directors will review all investments where an affiliate or related party is involved. Additionally, from time to time the manager may present certain investments to the board of directors for approval either because of the size of the investment, the parties involved or some other term or feature of the investment;

•

evaluating, recommending and approving all decisions regarding any financings, securitizations, hedging activities or borrowings undertaken by us;

• arranging for the issuance of mortgage backed securities from pools of mortgage loans or mortgage backed securities owned by us, when available;

•

making available to us its knowledge and experience with respect to real estate, real estate related assets and real estate operating companies;

•

engaging and supervising, on our behalf and at our expense, independent contractors that provide real estate brokerage, legal, accounting, transfer agent, registrar and leasing services, master servicing, special servicing, mortgage brokerage, securities brokerage, banking, investment banking and other financial services and such other services as may be required relating to our investments or potential investments;

•17 ~~engaging and supervising, on our behalf and at our expense, other service providers to us; and~~

• providing certain general management services to us relating to our day-to-day operations and administration (including, e.g., communicating with the holders of our equity and debt securities as

~~required~~• toengaging ~~satisfy the reporting~~ and ~~other requirements of any governing bodies or agencies and to maintain effective relations with these holders~~supervising, ~~causing~~on ~~us to qualify to do business in all applicable jurisdictions, complying with all regulatory requirements applicable to us in respect of~~ our ~~business~~behalf ~~activities, including preparing all financial statements required under applicable regulations~~ and ~~contractual~~at ~~undertakings~~our ~~and all reports and documents~~expense, ifother ~~any,~~service ~~required~~providers ~~under the Exchange Act, and causing us~~ to ~~comply with all applicable laws)~~us; and

~~Our~~• ~~manager~~providing ~~has~~certain ~~not~~general ~~assumed~~management ~~any~~services ~~responsibility~~to ~~other~~us ~~than~~relating to ~~render~~our ~~the~~day-to-day ~~services~~operations ~~called for under the management agreement~~ and isadministration ~~not~~(including, ~~responsible~~e.g., ~~for~~communicating ~~any~~with ~~action~~the holders of our ~~board~~equity ofand ~~directors~~debt insecurities ~~following~~as orrequired ~~declining~~ to ~~follow~~ ~~its~~satisfy ~~advice~~the orreporting ~~recommendations. Our manager, its directors~~ and ~~its~~other ~~officers~~requirements ~~are~~of ~~not liable to us,~~ any ~~subsidiary~~governing ofbodies ~~ours, our directors, our stockholders~~ or ~~any~~agencies ~~subsidiary’s stockholders for acts performed in accordance with~~ and ~~pursuant~~ to ~~the~~maintain ~~management~~effective ~~agreement,~~relations ~~except~~with bythese ~~reason of acts constituting bad faith~~holders, ~~willful~~causing ~~misconduct,~~us ~~gross~~to ~~negligence,~~qualify ~~or reckless disregard of their duties under the management agreement. We have agreed~~ to ~~indemnify~~do ~~our~~business ~~manager~~in ~~and~~all ~~J.E.~~applicable ~~Robert Company~~jurisdictions, ~~and~~complying ~~their respective directors and officers~~ with ~~respect to~~ all ~~expenses,~~regulatory ~~losses,~~requirements ~~damages,~~applicable ~~liabilities,~~to ~~demands,~~us ~~charges~~in ~~and~~respect ~~claims~~of ~~arising~~our ~~from~~business ~~acts not constituting bad faith~~activities, ~~willful~~including ~~misconduct,~~preparing ~~gross~~all ~~negligence,~~financial orstatements ~~reckless~~required ~~disregard~~under ~~of their~~applicable ~~respective~~regulations ~~duties, performed in good faith in accordance with~~ and ~~pursuant~~contractual toundertakings ~~the management agreement~~ and ~~the related services agreement. Our manager has agreed to indemnify us, our directors and officers with respect to~~ all ~~expenses,~~reports ~~losses, damages, liabilities, demands, charges~~ and ~~claims arising from acts of our manager not constituting bad faith~~documents, ~~willful~~if ~~misconduct~~any, ~~gross~~required ~~negligence or reckless disregard of its duties~~ under the ~~management~~Exchange ~~agreement.~~Act, ~~Our~~and ~~manager~~causing ~~carries~~us ~~errors~~to ~~and omissions~~comply ~~and~~with ~~other~~all ~~customary~~applicable ~~insurance~~laws).

~~J.E.~~Our manager ~~Robert~~has ~~Company,~~not ~~through~~assumed any responsibility other than to render the services called for under the management agreement and is not responsible for any action of our board of directors in following or declining to follow its advice or recommendations. Our manager, ~~provides~~its directors and its officers are not liable to us, ~~key~~any ~~personnel~~subsidiary ~~whose~~of ~~primary responsibility~~ours, isour directors, our stockholders or any subsidiary’s stockholders for acts performed in accordance with and pursuant to ~~provide~~the management ~~services~~agreement, toexcept ~~us.~~by reason ~~These~~of ~~persons~~acts ~~devote~~constituting asbad ~~much~~faith, willful misconduct, gross negligence, or reckless disregard of their ~~time~~duties tounder ~~our~~the management asagreement. We have agreed to indemnify our ~~board~~manager ofand J.E. Robert Company, and their respective directors ~~reasonably~~and officers ~~deems~~with ~~necessary~~respect to all expenses, losses, damages, liabilities, demands, charges and ~~appropriate~~claims arising from acts constituting bad faith, ~~commensurate~~willful misconduct, gross negligence, or reckless disregard of their respective duties, performed in good faith in accordance with and pursuant to the management agreement and the related services agreement. Our manager has agreed to indemnify us, our ~~level~~directors and officers with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts of ~~activity~~our manager not constituting bad faith, willful misconduct, gross negligence or reckless disregard of its duties under the management agreement. Our manager carries errors and omissions and other customary insurance.

J.E. Robert Company, through our manager, provides to us key personnel whose responsibility is to provide management services to us. These persons devote as much of their time to our management as our board of directors reasonably deems necessary and appropriate, commensurate with our level of activity.

Pursuant to a services agreement among us, our manager and J.E. Robert Company, J.E. Robert Company has agreed to provide our manager with the personnel, services and resources as needed by our manager to enable it to carry out its obligations and responsibilities under the management agreement. Pursuant to the management agreement, J.E. Robert Company is not liable to us or our manager for any acts or omissions performed in accordance with and pursuant to the agreement except by reason of acts constituting bad faith, willful misconduct, gross negligence or reckless disregard for its duties. Our manager is not significantly capitalized and does not have its own facilities or employees separate from J.E. Robert Company.

Management Agreement Term and Termination Rights

The management agreement (i) had an initial term of two years from June 4, 2004, (ii) was automatically renewed for ~~two~~ one-year terms until June 4, ~~2008,~~2010 ~~(iii) was automatically renewed through June 4, 2009~~ and (iviii) will be automatically renewed for one-year terms thereafter unless terminated by either us or our manager. The management agreement does not limit ~~the~~ the number of renewal terms. Our manager must be provided 180 days prior notice of any termination without cause or non-renewal of the agreement and under those circumstances will be paid a termination fee, within ninety days of termination, equal to to four times the sum of our manager’s base management fees and incentive fees for the 12-month period preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination. In In addition, following any termination of the management agreement, we must pay our manager all compensation accruing to the date of termination. We also may not assign the management agreement in whole or in part to a third party without the ~~written~~ written consent of our manager.

In addition, if we decide to terminate the management agreement without cause due to fees that our independent directors have determined to be unfair, our manager may agree to perform its management services at fees our independent directors determine to be fair, and the management agreement will not terminate. Our

1918

manager may give us notice that it wishes to renegotiate the fees, in which case we and our manager must negotiate in good faith, and if we cannot agree on a revised fee structure at the end of our 180 day notice period, the agreement will terminate, and we must pay the termination fees described above.

We may also terminate the management agreement with 60 days’ prior notice for cause, which is defined as (i) our manager’s fraud or gross negligence, (ii) our manager’s willful noncompliance with the management agreement, (iii) the commencement of any proceeding relating to our manager’s bankruptcy or insolvency or a material breach of any provision of the management agreement, uncured for a period of 60 days or (iv) a change in control of our manager. Our manager may at any time assign certain duties under the management agreement to any affiliate of our manager provided that our manager shall remain liable to us for the affiliate’s performance.

Management Fees and Incentive Compensation

The management fee is payable monthly in arrears in cash, and the incentive fee is payable quarterly in arrears in cash. The base management fee and incentive fee are intended to reimburse J.E. Robert Company for providing personnel to our manager to satisfy our manager’s obligation to provide certain services to us. Our manager and J.E. Robert Company may also be entitled to certain expense reimbursements as described below. Expense reimbursements to our manager or J.E. Robert Company are made monthly.

Base Management Fee. We ~~have~~are ~~paid~~obligated to pay our manager a base management fee monthly in arrears in an amount equal to 1/12 of the sum of (i) 2.0% of the first $400 million of our equity, (ii) 1.5% of our equity in excess of $400 million and up to $800 million and (iii) 1.25% of our equity in excess of $800 million. For purposes of calculating the base management fee, our equity equals the month-end value, computed in accordance with generally accepted accounting principles, of our stockholders’ equity, adjusted to exclude the effect of any unrealized gains, losses or other items that do not affect realized net income. ~~Our~~On ~~manager~~July 20, ~~uses~~2009, October 7, 2009 and December 9, 2009, the ~~proceeds~~Company ~~from~~and its ~~management~~Manager ~~fee~~entered ininto ~~part~~amendments to ~~pay~~the ~~compensation~~management toagreement ~~J.E.~~whereby ~~Robert~~the Company. ~~The~~agreed, ~~J.E.~~effective ~~Robert~~as of ~~Company~~April 1, ~~uses~~2009, ~~such~~that ~~proceeds,~~during inthe ~~part~~months of April 2009 through January 2010, (i) it was not be required to ~~compensate~~make ~~officers~~any payments of base management fees and/or ~~employees~~incentive ~~provided~~fees tootherwise usdue byand payable under the Management Agreement in excess ~~J.E.~~of ~~Robert~~$75 ~~Company~~per ~~through~~month ~~our~~and ~~manager~~(ii) any ~~who,~~Fees ~~notwithstanding~~accruing ~~that~~and ~~certain~~otherwise payable under the Management Agreement in excess of ~~them~~$75 ~~also~~per ~~are~~month ~~our~~shall ~~officers,~~be ~~receive~~deferred noand ~~cash~~due ~~compensation~~and ~~directly~~payable ~~from~~by ~~us.~~it Weto ~~have~~the inManager on such date after January 2010 as the ~~past~~Company and ~~may~~the Manager ~~continue~~shall mutually agree in ~~the~~writing. ~~future~~Since toin ~~award~~December ~~grants~~2009, ~~pursuant~~we have not made any payments to the ~~Incentive~~manager ~~Plan~~ related to ~~such~~base ~~officers~~management ~~and~~or ~~employees~~incentive asfees ~~well~~although aswe ~~officers~~continue ~~and~~to ~~employees~~accrue offees Jto the extent incurred.E During the year ended December 31, 2009, we incurred $4.2 ~~Robert~~million ~~Company~~in ~~subject~~base tomanagement fees in accordance with the ~~discretion~~terms of our ~~compensation~~management ~~committee~~agreement, of which $1.8 million was paid in cash and ~~approval~~$2.4 bymillion ~~our~~is ~~board~~reflected in due to affiliates as of ~~directors~~December 31, 2009.

~~During~~Our manager uses the ~~year~~proceeds ~~ended~~from ~~December 31~~its management fee in part to pay compensation to J.E. Robert Company. The J.E. Robert Company uses such proceeds, ~~2008~~in part, weto ~~incurred~~compensate $6officers and employees provided to us by J.7E. ~~million~~Robert inCompany ~~base~~through ~~management~~our ~~fees~~manager who, notwithstanding that certain of them also are our officers, receive no cash compensation directly from us. We have in ~~accordance~~the ~~with~~past awarded grants pursuant to the ~~terms~~Incentive Plan to such officers and employees as well as officers and employees of J.E. Robert Company subject to the discretion of our ~~management~~compensation ~~agreement.~~committee and approval by our board of directors.

Incentive Compensation. Our manager is entitled to receive quarterly incentive compensation pursuant to the terms of the management agreement with us. The purpose of the incentive compensation is to provide an additional incentive for our manager to achieve and exceed targeted levels of Funds From Operations and to increase our stockholder value. Historically, our manager has been entitled to receive quarterly incentive compensation in an amount equal to the product of:

(i) 25% of the dollar amount by which

(a) our Funds From Operations per share of common stock for such quarter (before calculation of the incentive fee but after taking into account the Base Management fee) exceed

~~(b)~~19 an amount equal to (A) the weighted average prices per share of our common stock in all offerings by us multiplied by (B) the greater of (1) 2.25% or (2) .875% plus one fourth of the 10-year U.S. treasury rate (as defined below) for such quarter

multipliedTable byof Contents

(b) an amount equal to (A) the weighted average prices per share of our common stock in all offerings by us multiplied by (B) the greater of (1) 2.25% or (2) .875% plus one fourth of the 10-year U.S. treasury rate (as defined below) for such quarter multiplied by

(ii) the weighted average number of shares of common stock outstanding in such quarter.

“Funds From Operations” means net income (computed in accordance with generally accepted accounting principles (“GAAP”)), excluding gains (or losses) from debt restructuring, gains (or losses) from sales of property and unrealized depreciation and/or appreciation, plus depreciation and amortization on real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. Funds From Operations does not represent cash generated from operating activities in accordance with GAAP, and it should not be considered to be an alternative to net income as an indication of our performance or to cash flows as a measure of our liquidity or our ability to make distributions to stockholders. Pursuant to the calculation formula, if Funds From Operations increases and the weighted average share price and shares of Common Stock outstanding remain constant, the incentive fee will increase.

Effective January 1, 2008, we adopted the fair value option (“FVO”) to measure all of our financial assets and liabilities associated with our CDO I and II financings at fair value to provide a consistent balance sheet presentation of the fair value of both the assets and liabilities associated with these financings. Our balance sheet reflects the fair value of the CDO I and II assets and liabilities as of January 1, 2008, and unrealized gains (or losses) on such assets and liabilities have been recorded on our income statement beginning with the quarter ending March 31, 2008. On March 6, 2008, we and our manager amended the definition of Funds From Operations in the management agreement to exclude the impact of unrealized depreciation and/or appreciation so that our adoption of the FVO does not alter the intended mechanism used to calculate the incentive fees payable to the manager.

During the year ended December 31, 2009, we incurred no incentive management fees in accordance with the terms of the management agreement.

Reimbursement of Expenses. We pay all of our operating expenses. The expenses required to be paid by us include, but are not limited to, transaction costs related to the acquisition, disposition and financing of our investments, legal and auditing fees and expenses, the compensation and expenses of our independent directors, the costs associated with our establishment and maintenance of any credit facilities and other indebtedness (including commitment fees, legal fees, closing costs and similar expenses), expenses associated with other securities offerings by us, expenses relating to the payment of dividends, costs incurred by personnel of J.E. Robert Company for travel on our behalf, costs associated with any computer software or hardware that is used primarily for us, all taxes and license fees and all insurance costs incurred by us. In addition, we pay to our manager allocable overhead reimbursements for our pro rata portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of J.E. Robert Company and its affiliates required for our operations.

In November 2006, effective retroactively to January 1, 2006, the independent members of our board of directors approved an amendment to the management agreement to provide that in 2007 and in each calendar year thereafter, subject to approval by the independent members of the board of directors, the allocable overhead reimbursement will be $0.5 million multiplied by the sum of (a) one plus (b) the percentage increase in the Consumer Price Index (the “CPI”) for the applicable year over the CPI for the calendar year 2006. During the year ended December 31, 2009, overhead reimbursements incurred were approximately $0.5 million, of which $39 was included in due to affiliates on our consolidated balance sheet at December 31, 2009. Our manager may also be paid or reimbursed for the costs of providing other services that outside professionals or consultants otherwise would provide on our behalf. If such services are provided by our manager, the reimbursement for such services will be no greater than what management believes would be paid to outside professionals, consultants or other third parties on an arm’s length basis.

~~“Funds~~In ~~From~~addition, ~~Operations”~~under ~~means~~the ~~net~~management ~~income~~agreement, ~~(computed~~our inmanager ~~accordance~~may ~~with~~engage ~~generally~~J.E. ~~accepted~~Robert Company or its affiliates to perform certain legal, accounting, ~~principles~~due ~~(“GAAP”))~~diligence, ~~excluding~~asset ~~gains~~management, ~~(or~~securitization, ~~losses)~~property ~~from~~management, ~~debt~~brokerage, ~~restructuring~~loan servicing, ~~gains~~leasing (and other services that outside professionals or ~~losses)~~outside ~~from~~consultants ~~sales~~otherwise ofwould perform ~~property~~on ~~and~~our ~~unrealized~~behalf. ~~depreciation~~J.E. Robert Company and/ its affiliates may be reimbursed or ~~appreciation~~paid for the cost of performing such tasks, ~~plus~~provided ~~depreciation~~that such costs and ~~amortization~~reimbursements are no greater than those that would be paid to outside professionals or consultants on ~~real~~an ~~estate~~arm’s-length ~~assets~~basis. In addition, ~~and after~~our ~~adjustments~~manager is reimbursed for ~~unconsolidated~~any ~~partnerships~~expenses ~~and~~incurred ~~joint~~in ~~ventures~~contracting with third parties. ~~Funds~~In ~~From~~addition, ~~Operations~~each CMBS securitization requires that a special servicer be appointed by the purchaser controlling the most subordinated non-investment grade class of securities. As our manager does not ~~represent~~have ~~cash~~special ~~generated~~servicer ~~from~~status, ~~operating~~it ~~activities~~has appointed J.E. Robert Company as the special servicer when we have acquired a controlling interest in ~~accordance~~the ~~with~~most subordinated ~~GAAP~~non-investment grade class of a CMBS securitization. J.E. Robert Company received $9.1 million in fees as special servicer during the year ended December 31, ~~and~~2009 itas ~~should~~a ~~not~~special beservicer ~~considered~~on tothe beCMBS anissuances ~~alternative~~where we own the first-loss position. All fees due to ~~net~~J.E. ~~income~~Robert Company as anspecial servicer are paid either by the securitization vehicle or the borrower and not directly by us, and such fees are consistent with traditional, well established market standards and ~~indication~~are set as part of ~~our~~the ~~performance~~arm’s-length ornegotiation to ~~cash~~acquire ~~flows~~such asCMBS abonds ~~measure~~from the issuer. However, because we generally own the first loss position in these same CMBS issuances, payment of ~~our~~special ~~liquidity~~servicing orfees ~~our~~to ~~ability~~J.E. Robert Company may reduce the amounts available to ~~make~~pay ~~distributions~~us and other CMBS bondholders pursuant to ~~stockholders~~the terms of the applicable CMBS trusts.

Effective January 1, 2008, we adopted SFAS 159, The Fair Value Option for Financial Assets and Liabilities—Including an Amendment of SFAS No. 155, which permits entities to measure at fair value certain financial assets and liabilities (the “Designated Accounts”). Our balance sheet will reflect the fair value of the Designated Accounts as of January 1, 2008, and unrealized gains (or losses) on such Designated Accounts will be recorded on our income statement beginning with the quarter ending March 31, 2008. On March 6, 2008, we and our manager amended the definition of Funds From Operations in the management agreement to exclude the impact of unrealized depreciation and/or appreciation so that our adoption of SFAS No. 159 does not alter the intended mechanism used to calculate the incentive fees payable to the manager.

Pursuant to the calculation formula, if Funds From Operations increases and the weighted average share price and shares of Common Stock outstanding remain constant, the incentive fee will increase.

During the year ended December 31, 2008, we incurred no incentive management fees in accordance with the terms of the management agreement.

Reimbursement of Expenses. We pay all of our operating expenses. The expenses required to be paid by us include, but are not limited to, transaction costs related to the acquisition, disposition and financing of our investments, legal and auditing fees and expenses, the compensation and expenses of our independent directors, the costs associated with our establishment and maintenance of any credit facilities and other indebtedness (including commitment fees, legal fees, closing costs and similar expenses), expenses associated with other securities offerings by us, expenses relating to the payment of dividends, costs incurred by personnel of J.E. Robert Company for travel on our behalf, costs associated with any computer software or hardware that is used primarily for us, all taxes and license fees and all insurance costs incurred by us. In addition, we pay to our manager allocable overhead reimbursements for our pro rata portion of rent, telephone, utilities, office furniture, equipment, machinery and other office, internal and overhead expenses of J.E. Robert Company and its affiliates required for our operations.

In November 2006, effective retroactively to January 1, 2006, the independent members of the board of directors approved an amendment to the management agreement to provide that in 2007 and in each calendar year thereafter, subject to approval by the independent members of the board of directors, the allocable overhead reimbursement will be $0.5 million multiplied by the sum of (a) one plus (b) the percentage increase in the Consumer Price Index (the “CPI”) for the applicable year over the CPI for the calendar year 2006. For each of the years ended December 31, 2008, 2007 and 2006, overhead reimbursements were approximately $0.5 million. Our manager may also be paid or reimbursed for the costs of providing other services that outside professionals or consultants otherwise would provide on our behalf. If such services are provided by our manager, the reimbursement for such services will be no greater than what management believes would be paid to outside professionals, consultants or other third parties on an arm’s length basis. In accordance with the provisions of our management agreement, we recorded reimbursements for overhead and other services provided by our manager aggregating $0.6 million during the year ended December 31, 2008.

In addition, under the management agreement, our manager may engage J.E. Robert Company or its affiliates to perform certain legal, accounting, due diligence, asset management, securitization, property management, brokerage, loan servicing, leasing and other services that outside professionals or outside consultants otherwise would perform on our behalf. J.E. Robert Company and its affiliates may be reimbursed or

paid for the cost of performing such tasks, provided that such costs and reimbursements are no greater than those that would be paid to outside professionals or consultants on an arm’s-length basis. In addition, our manager is reimbursed for any expenses incurred in contracting with third parties. In addition, each CMBS securitization requires that a special servicer be appointed by the purchaser controlling the most subordinated non-investment grade class of securities. As our manager does not have special servicer status, it appoints J.E. Robert Company or another entity that has special servicer status as the special servicer whenever we acquire a controlling interest in the most subordinated non-investment grade class of a CMBS securitization. J.E. Robert Company earned $4.2 million in fees as special servicer during the year ended December 31, 2008 as a special servicer on the CMBS issuances where we own the first-loss position. All fees due to J.E. Robert Company as special servicer are paid either by the securitization vehicle or the borrower and not directly by us, and such fees are consistent with traditional, well established market standards and are set as part of the arm’s-length negotiation to acquire such CMBS bonds from the issuer. However, because we generally own the first loss position in these same CMBS issuances, payment of special servicing fees to J.E. Robert Company may reduce the amounts available to pay us pursuant to the terms of the applicable CMBS trusts.

Except as set forth above regarding reimbursable expenses, our manager is responsible for all costs related to the performance of its duties under the management agreement, including the employment compensation of J.E. Robert Company personnel who perform services for us pursuant to the management agreement.

Incentive Awards. All figures in the following ~~discussion~~ discussion reflect the 1-for-10 reverse stock split effected by us on February 20, 2009. On the date of consummation of the private placement in June 2004, we granted 33,500 shares of common stock to our manager and an aggregate of 600 shares of of restricted stock to our three independent directors pursuant to the incentive plan. Subsequent to the private placement, ~~Frank~~in ~~Caufield~~July ~~and~~2004, ~~James~~two ~~Kimsey~~new independent directors joined our board of directors and ~~in July 2004 and~~ each was granted 200 shares of restricted stock. As of December 31, ~~2008~~2009, we had granted an aggregate of 4,000 shares of restricted stock and 2,805 deferred ~~shares~~share units to our independent directors pursuant to the incentive plan, all of which ~~1,403~~have ~~deferred~~fully ~~share units remain unvested~~vested. In May 2006, ~~Mark Weiss,~~ our former president, was awarded 6,000 restricted shares of common stock and 15,000 stock options on our common stock subject to vesting over five years. During 2007, we granted 13,700 restricted shares to certain officers and employees of an affiliate of our manager. In the sole discretion of the compensation committee of our board of directors, we may from time to time grant additional equity incentive awards pursuant to the incentive plan. These awards provide a means of performance-based compensation in order to provide an additional incentive for our manager, officers, employees of J.E. Robert Company and our directors to enhance the value of our common stock in addition to the base management fee and incentive fee. These awards described above were made pursuant to the incentive plan and are subject to the maximum number of shares available for issuance (11115,~~500~~000 shares) under the incentive plan. As of December 31, ~~2008~~2009, 5647,~~900~~475 shares have been issued, net of forfeitures, under the incentive plan.

Conflicts of Interest in Our Relationship with Our Manager and J.E. Robert Company

Our chairman and chief executive officer, Joseph E. Robert, Jr., also serves as chairman and chief executive officer of J.E. Robert Company and, at the time of our formation when our management agreement, incentive compensation plan and other organizational matters were approved for us, Mr. Robert was our sole stockholder and our sole director. As a result, these matters were not negotiated at arm’s length and their terms, including fees payable to our manager, may not be as favorable to us as if they had been negotiated with an unaffiliated third party.

J.E. Robert Company and its affiliates currently manage and invest in other real estate-related investment entities. Our chairman and chief executive officer and ~~two other members of our board and~~ each of our executive officers also serve as officers of our manager and other J.E. Robert Company affiliates. Certain senior officers of J.E. Robert Company, some of whom are also our officers and directors, and their affiliates beneficially own all of the outstanding membership interests of our manager. In addition, affiliates of J.E. Robert Company, in their capacity as general partners of the JER Funds, selectively make investments in a wide range of commercial real estate equity and debt assets for various JER Funds.

2221

manager and other J.E. Robert Company affiliates. Certain senior officers of J.E. Robert Company, some of whom are also our officers, and their affiliates beneficially own all of the outstanding membership interests of our manager. In addition, affiliates of J.E. Robert Company, in their capacity as general partners of the JER Funds, selectively invests in a wide range of commercial real estate equity and debt investments for various JER Funds.

We have adopted certain policies that are designed to eliminate or minimize certain potential conflicts of interest. Our board of directors has established investment guidelines, and our independent directors have approved these investment guidelines. Except with respect to the allocation of investments made pursuant to J.E. Robert Company’s conflicts policy in effect with respect to us and JER Funds, we are not permitted to invest in joint ventures with our manager or its affiliates unless the investment is (i) made in accordance with the above guidelines and (ii) approved by all of the independent members of our board of directors. In addition, we are not permitted to (i) consummate any transaction that would involve the acquisition by us of an asset in which our manager or any of its affiliates has an ownership interest, or the sale by us of an asset to our manager or any of its affiliates, (ii) under circumstances where our manager is subject to an actual or potential conflict of interest because it is manages both us and any other person with which we have a contractual relationship, take any action constituting the granting to such person of a waiver, forbearance or other relief, or the enforcement against such person of remedies, under or with respect to the applicable contract or (iii) make a loan to any affiliate of our manager, unless such transaction or action is approved by all independent members of our board.

While we ~~intend~~targeted ~~to target~~ primarily conduit ~~commercial mortgage backed securities~~CMBS, mezzanine loans, net leased real estate, ~~bridge loans,~~ B-Notes, ~~preferred equity, loans to real estate companies,~~ mortgage loans and ~~residential mortgages and~~ related securities, JER Funds seek to invest in direct ownership of real estate, non-conduit ~~commercial mortgage backed securities~~CMBS, equity securities, preferred equity and high yield debt (typically with equity participation). The investments we intend to pursue may overlap with the investment objectives of JER Funds. J.E. Robert Company has developed a conflicts policy in an effort to provide fair treatment of us and JER Funds with respect to investment allocation. Acting reasonably and in good faith, J.E. Robert Company will determine if any real estate debt products sourced for either JER Funds or us meet both our own and JER Funds investment objectives, taking into account such considerations as risk/return objectives, nature of the investment focus of each entity, leverage and other restrictions, tax and regulatory issues, expected holding periods, current pay or accrual features, product and geographic concentration, the relative sources of capital and any other consideration deemed relevant by J.E. Robert Company. We and JER Funds may both acquire any such overlapping investments subject to the applicable provisions of the conflicts of interest policy. If there is an overlap on a particular investment, J.E. Robert Company will allocate the investment opportunity equally between us and JER Funds wherever reasonably practicable. Where J.E. Robert Company determines that an equal allocation is not reasonably practicable, it will allocate that investment in a manner that it determines in good faith to be fair and reasonable. J.E. Robert Company will also apply the foregoing allocation procedures between us and any future companies or vehicles or other entities it controls with which we have overlapping investment objectives. J.E. Robert Company may alter these policies at any time without notice to or input from us or our stockholders.

OnIn ~~December 11,~~connection ~~2007,~~with wethe ~~and~~formation ~~JER~~of ~~Fund~~CDO IVII in October 2006, anone ~~investment~~of ~~fund~~our ~~managed~~wholly byowned subsidiaries entered into a collateral administration agreement with J.E. Robert Company, ~~entered~~pursuant ~~into~~to awhich ~~limited~~J.E. ~~partnership~~Robert ~~agreement~~Company ~~pursuant~~has agreed to ~~which~~advise wea wholly owned subsidiary on certain matters regarding the collateral interests and ~~JER~~other ~~Fund~~eligible IVinvestments ~~agreed~~securing the notes payable issued by CDO II. J.E. Robert Company will receive fees in return for such services. J.E. Robert Company is eligible to ~~co-manage~~receive two fees payable on a ~~new~~monthly ~~private~~basis, ~~equity~~with ~~fund,~~the ~~known~~senior asfee ~~JER~~equal USto ~~Debt~~1/12 ~~Co-Investment~~of ~~Vehicle~~0.075% of the Monthly Asset Amount, ~~L.P.~~as (defined in the ~~“US~~CDO ~~Debt~~II ~~Fund”).~~indenture, ~~The~~and ~~California~~the ~~Public~~subordinate ~~Employees’~~fee ~~Retirement~~equal ~~System~~to ~~committed~~1/12 ~~$200.~~of 0.05% ~~million~~of ~~and~~the weMonthly ~~and~~Asset ~~JER~~Amount, ~~Fund~~as IVdefined in the CDO II indenture, each ~~committed~~fee ~~$10~~payable with different priorities as set forth in the applicable indenture.0 ~~million~~This toagreement was approved by the USindependent ~~Debt~~members ~~Fund~~of our board of directors. On ~~March~~For the year ended December 231, 2009, we ~~funded~~incurred a $0.9 million ~~capital~~in ~~call~~collateral administration fees pursuant to the USagreement ~~Debt~~which ~~Fund~~are included in general and administrative expenses in the accompanying consolidated statement of operations. Since the February 2009 distribution date, ~~reducing~~J.E. ~~our~~Robert ~~remaining~~Company ~~unfunded~~has ~~capital~~not ~~commitment~~been entitled to $5receive the subordinate collateral administration fee, and will not be entitled to receive such fee until certain over-collateralization coverage tests are again complied with, among other tests.~~7 million.~~

~~The~~22 US Debt Fund invests in loans secured, directly or indirectly, by real estate, including, B-Notes, mezzanine loans and whole mortgage loans, and also in preferred equity, CMBS and CMBS-related products such as CMBX and credit default swaps (the “Targeted Investments”). Excluded investments from the US Debt Fund include non-performing loans, fee-simple ownership interests in real estate, single family residential mortgages and related securities (sub-prime, conforming, jumbo or Alt-A), whole loans originated directly by us or JER Fund IV, and net leased real estate assets.

During the year ended December 31, 2008, we received repayments on loans to affiliated borrowers aggregating $8.5 million. At December 31, 2008, loans to affiliated entities had an unamortized cost basis of $82.3 million, an unpaid principal balance of $82.6 million and carrying value of $54.0 million. During the year ended December 31, 2007, we invested in a first mortgage loan participation with a cost basis of $30.0 million,

~~and~~On ~~two~~December 11, ~~mezzanine~~2007, ~~loan~~we ~~participations~~and ~~with~~JER aFund ~~cost basis of $49.4 million~~IV, ~~where~~ an ~~affiliate~~investment offund ~~the~~managed ~~manager~~by ~~held~~J.E. aRobert Company, ~~controlling~~entered ~~equity~~into ~~interest~~a inlimited ~~the borrower.~~partnership ~~During~~agreement ~~the~~pursuant ~~year~~to ~~ended~~which ~~December 31, 2006,~~ we ~~invested~~and inJER ~~mezzanine~~Fund ~~loans~~IV ~~totaling~~agreed ~~$65.0~~to ~~million~~co-manage ~~where~~a anprivate ~~affiliate~~equity offund, ~~the~~known ~~manager~~as ~~held~~JER aUS ~~controlling~~Debt ~~equity~~Co-Investment ~~interest~~Vehicle, inL.P. (the ~~borrower~~“US Debt Fund”). The ~~acquisition~~California ofPublic Employees’ ~~these~~Retirement ~~loans~~System tocommitted ~~affiliated borrowers~~$200.0 ~~was~~million ~~approved~~and bywe ~~the~~and ~~independent~~JER ~~members~~Fund ofIV ~~our~~each ~~board~~committed of$10.0 ~~directors~~million asto ~~required~~the byUS ~~our~~Debt ~~investment guidelines~~Fund.

As of December 31, 2009, we had made capital contributions of $4.8 million in the US Debt Fund, which is reflected in investments in unconsolidated joint ventures on our consolidated balance sheets. During the year ended December 31, 2009, we failed to fund $3.3 million of capital contributions called by the US Debt Fund’s general partner. As a result of the payment defaults, pursuant to the LPA we were charged penalty interest and incurred 25% dilution to our capital balance. In addition, effective January 1, 2010, we are no longer receiving our portion of the management fee from the US Debt Fund due to this ongoing payment default.

The US Debt Fund invests in loans secured, directly or indirectly, by real estate, including, B-Notes, mezzanine loans and whole mortgage loans, and also in preferred equity, CMBS and CMBS-related products such as CMBX and credit default swaps (the “Targeted Investments”). Excluded investments from the US Debt Fund include non-performing loans, fee-simple ownership interests in real estate, single family residential mortgages and related securities (sub-prime, conforming, jumbo or Alt-A), whole loans originated directly by us or JER Fund IV, and net leased real estate assets.

During the year ended December 31, 2009, we received repayments on loans to affiliated borrowers aggregating $0.3 million. At December 31, 2009, loans to affiliated entities had an unpaid principal balance of $81.3 million, an unamortized cost basis of $81.1 million, and carrying value of $21.9 million. The acquisition of these loans to affiliated borrowers was approved by the independent members of our board of directors as required by our investment guidelines.

We are permitted to invest in debt securities or loans relating to real estate assets where JER Funds have an equity interest, subject to our conflict policies. However, in the event of a default under that indebtedness, we must either give control of the foreclosure or restructuring process to other unaffiliated holders of that debt or transfer decision making power to an unaffiliated entity.

In addition to JER Funds, J.E. Robert Company may also engage in additional real estate-related management and investment opportunities that may also compete with us for investments. J.E. Robert Company applies the foregoing allocation procedures among us and any other investments it controls with which we have overlapping investment objectives. However, so long as the management agreement is in effect, J.E. Robert Company has agreed not to raise, sponsor or advise any new investment fund, company or vehicle (including any REIT) that invests primarily in conduit CMBS and other related loan products in the United States.

~~The management~~Each ~~compensation~~CMBS ~~structure~~securitization requires that wea ~~have~~special ~~agreed~~servicer tobe ~~with~~appointed ~~our~~by ~~manager~~the ~~may~~purchaser ~~also~~controlling ~~cause~~the ~~our~~most subordinated non-investment grade class of securities. Because the manager todoes ~~invest~~not inhave ~~high~~special ~~risk~~servicer ~~investments~~status, it has appointed J.E. InRobert ~~addition~~Company, toan ~~its~~affiliate ~~base~~of ~~management~~the ~~fee~~manager, ~~our~~as ~~manager~~the isspecial ~~entitled~~servicer towhen ~~receive~~we ~~incentive~~have ~~compensation~~acquired ~~based~~a controlling interest in ~~part~~the most subordinated ~~upon~~non-investment ~~our~~grade ~~achievement~~class of ~~targeted~~a ~~levels~~CMBS ofsecuritization. ~~Funds~~J.E. ~~From~~Robert ~~Operations,~~Company asis ~~described~~also ~~above~~entitled ~~under~~to ~~“The~~receive ~~Management~~additional ~~Agreement-~~fees ~~Management~~in ~~Fees~~the ~~and~~future ~~Incentive~~based ~~Compensation.”~~on Inthe ~~evaluating~~collections ~~investments~~received ~~and~~against ~~other~~loans ~~management~~that ~~strategies,~~were ~~the~~managed ~~opportunity to~~in ~~earn~~special ~~incentive~~servicing ~~compensation~~and ~~based~~subsequently onreturned ~~Funds~~to the ~~From~~master ~~Operations~~servicer. ~~may~~All ~~lead~~fees ~~our~~due ~~manager~~ to ~~place~~J.E. ~~undue~~Robert ~~emphasis~~Company onas special servicer are paid either by the ~~maximization~~applicable ofsecuritization ~~Funds~~vehicles ~~From~~or ~~Operations~~the atborrower and not directly by the ~~expense~~Company ofand ~~other~~such ~~criteria~~fees are consistent with traditional, ~~such~~well established market standards and are set as ~~preservation~~part of ~~capital,~~the inarms-length ~~order~~negotiations to ~~achieve~~acquire ~~increased incentive~~such ~~compensation.~~CMBS ~~Investments~~bonds ~~with~~from ~~higher~~the ~~yield~~issuer. ~~potential~~However, ~~are~~because we generally ~~riskier~~own orthe ~~more~~first ~~speculative~~loss position in these same CMBS issuances, payment of special servicing fees to J.E. ~~This~~Robert Company ~~could~~may ~~result~~reduce inthe ~~increased~~amounts ~~risk~~available to pay us pursuant to the ~~value~~terms of ~~our~~the ~~invested~~applicable ~~portfolio~~CMBS trusts.

The management compensation structure that we have agreed to with our manager may also cause our manager to invest in high risk investments. In addition to its base management fee, our manager is entitled to

receive incentive compensation based in part upon our achievement of targeted levels of Funds From Operations, as described above under “The Management Agreement-Management Fees and Incentive Compensation.” In evaluating investments and other management strategies, the opportunity to earn incentive compensation based on Funds From Operations may lead our manager to place undue emphasis on the maximization of Funds From Operations at the expense of other criteria, such as preservation of capital, in order to achieve increased incentive compensation. Investments with higher yield potential are generally riskier or more speculative. This could result in increased risk to the value of our invested portfolio.

Our manager is authorized to follow very broad investment guidelines and has great latitude within those guidelines in determining the types of assets it may decide are proper investments for us. Our directors periodically review our investment guidelines and our investment portfolio. However, our board does not review each proposed investment. In addition, in conducting periodic reviews, the directors rely primarily on information provided to them by our manager. Furthermore, transactions entered into by our manager may be difficult or impossible to unwind by the time they are reviewed by our directors.

Employees/Services Agreement with J.E. Robert Company

Neither we nor our manager has any employees. We and our manager have entered into a services agreement with J.E. Robert Company to provide our manager with the personnel, services and resources necessary for our manager to perform its obligations and responsibilities under the management agreement, including due diligence, asset management and credit risk management. No employee of J.E. Robert Company will dedicate all of his or her time to us.

In connection with CDO II, one of our wholly owned subsidiaries entered into a collateral administration agreement with J.E. Robert Company, pursuant to which J.E. Robert Company has agreed to advise a wholly owned subsidiary on certain matters regarding the collateral interests and other eligible investments securing the notes issued in the CDO. J.E. Robert Company will receive fees in return for such services. J.E. Robert Company have historically receive two fees payable on a monthly basis, with the first fee equal to 1/12 of 0.075% of the Monthly Asset Amount, as defined in the CDO II indenture, and the second fee equal to 1/12 of 0.05% of the Monthly Asset Amount, as defined in the CDO II indenture agreement, each fee payable with different priorities as set forth in the applicable indenture. This agreement was approved by the independent members of our board

of directors. For the year ended December 31, 2008, we incurred $1.5 million in collateral administration fees pursuant to the agreement which are included in general and administrative expenses in the accompanying consolidated statement of operations. Since the February 2009 distribution date, J.E. Robert Company has not been entitled to receive the subordinate collateral administration fee, and will not again be entitled to receive such fee until certain over-collateralization coverage tests are again complied with.

Competition

We are subject to significant competition in seeking investments. We compete with many other companies for investments, including other REITs, insurance companies, investment firms and other investors. In the current market, many of our traditional competitors have reduced their appetite for investments and we have seen new competitors enter the field in order to take advantage of dislocations in the lending market. Some of our competitors have greater resources than we do, and we may not be able to compete successfully for investments.

Compliance With The Americans With Disabilities Act Of 1990

Properties that we acquire, and the properties underlying our investments, are required to meet federal requirements related to access and use by disabled persons as a result of the Americans with Disabilities Act of 1990. In addition, a number of additional federal, state and local laws may require modifications to any properties we purchase, or may restrict further renovations of our properties, with respect to access by disabled persons. Noncompliance with these laws or regulations could result in the imposition of fines or an award of damages to private litigants. Additional legislation could impose additional financial obligations or restrictions with respect to access by disabled persons. If required changes involve greater expenditures than we currently anticipate, or if the changes must be made on a more accelerated basis, our ability to make expected distributions could be adversely affected.

Compliance With Federal, State And Local Environmental Laws

Properties that we acquire, and the properties underlying our investments, are subject to various federal, state and local environmental laws, ordinances and regulations. Under these laws, ordinances and regulations, a current or previous owner of real estate (including, in certain circumstances, a secured lender that succeeds to ownership or control of a property) may become liable for the costs of removal or remediation of certain hazardous or toxic substances or petroleum product releases at, on, under or in its property. These laws typically impose cleanup responsibility and liability without regard to whether the owner or control party knew of or was responsible for the release or presence of the hazardous or toxic substances. The costs of investigation, remediation or removal of these substances may be substantial and could exceed the value of the property. An owner or control party of a site may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site. Certain environmental laws also impose liability in connection with the handling of or exposure to materials containing asbestos. These laws allow third parties to seek recovery from owners of real properties for personal injuries associated with materials containing asbestos. Our operating costs and the values of these assets may be adversely affected by the obligation to pay for the cost of complying with existing environmental laws, ordinances and regulations, as well as the cost of complying with future legislation, and our income and ability to make distributions to our stockholders could be affected adversely by the existence of an environmental liability with respect to our properties. We endeavor to ensure our properties are in compliance in all material respects with all federal, state and local laws, ordinances and regulations regarding hazardous or toxic substances or petroleum products.

~~Operating~~24 ~~Policies and Strategies~~

~~subject~~remediation toor ~~regulation~~removal asof anthese ~~investment~~substances ~~company~~may ~~under~~be ~~the~~substantial ~~Investment~~and ~~Company~~could ~~Act~~exceed ~~because~~the wevalue doof ~~not~~the ~~meet~~property. ~~the~~An ~~definition~~owner or control party of ana ~~investment~~site ~~company~~may ~~under~~be ~~the~~subject to common law claims by third parties ~~Investment~~based ~~Company~~on ~~Act,~~damages ~~including~~and ~~Section 3(~~costs resulting from environmental contamination emanating from a~~)(1)(C)~~ site. ~~From~~Certain ~~time~~environmental tolaws ~~time~~also impose liability in connection with the ~~past,~~handling weof ~~have~~or ~~relied~~exposure ~~on,~~to ~~and~~materials wecontaining asbestos. These laws allow third parties to seek recovery from owners of real properties for personal injuries associated with materials containing asbestos. Our operating costs and ~~our~~the ~~subsidiaries~~values of these assets may ~~from~~be ~~time~~adversely affected by the obligation to ~~time~~pay infor the ~~future~~cost ~~rely~~of complying onwith existing environmental laws, ~~the~~ordinances ~~exclusion~~and ~~from~~regulations, ~~investment~~as ~~company~~well ~~status~~as ~~provided~~the ~~by Section 3(c)(5)(C)~~cost of ~~the~~complying ~~Investment~~with ~~Company~~future ~~Act~~legislation, (and ~~Section 3~~our ~~(c)(6)~~income ~~if,~~and ~~from~~ability ~~time~~to make distributions to ~~time,~~our westockholders ~~engaged~~could inbe affected adversely by the existence of an environmental liability with respect to our ~~real~~properties. ~~estate~~We ~~business~~endeavor ~~through~~to ~~one~~ensure our properties are in compliance in all material respects with all federal, state and local laws, ordinances and regulations regarding hazardous or ~~more~~toxic ~~majority-owned~~substances ~~subsidiaries)~~or petroleum products.

Operating Policies and Strategies

We conduct our operations so that we are not required to register as an investment company under the Investment Company Act of 1940, as amended, which we refer to as the Investment Company Act. We are not subject to regulation as an investment company under the Investment Company Act because we do not meet the definition of an investment company under the Investment Company Act, including Section 3(a)(1)(C). From time to time in the past, we have relied on, and we and our subsidiaries may from time to time in the future rely on, the exclusion from investment company status provided by Section 3(c)(5)(C) of the Investment Company Act (and Section 3(c)(6) if, from time to time, we engaged in our real estate business through one or more majority-owned subsidiaries).

Section 3(a)(1)(C):

Section 3(a)(1)(C) of the Investment Company Act defines an investment company as any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value of the issuer’s total assets (exclusive of government securities and cash items) on an unconsolidated basis. Excluded from the term “investment securities,” among other things, are U.S. government securities and securities issued by majority owned subsidiaries that are not themselves investment companies and are not relying on the exception from definition of investment company in Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act. Because we are a holding company that conducts its businesses through subsidiaries, this means that the securities issued by our subsidiaries, if any, that rely on the exception from the definition of “investment company” in Section 3(c)(1) or 3(c)(7) of the Investment Company Act, together with any other investment securities we may own, may not have a combined value in excess of 40% of the value of our total assets on an unconsolidated basis. This requirement limits the types of businesses in which we may engage through our subsidiaries.

A majority of our subsidiaries rely on exceptions and exemptions from the Investment Company Act. These exceptions and exemptions limit the types of assets these subsidiaries may purchase. For instance, CDO I and CDO II rely on the exemption from the Investment Company Act provided by Rule 3a-7 thereunder, which is available for certain structured financing vehicles. This exemption limits the ability of these CDOs to sell their assets and reinvest the proceeds from asset sales. Our subsidiary that ~~invests~~ invested in net lease properties and certain other subsidiaries rely on the exception from the definition of “investment company” provided by Sections 3(c)(5)(C) and possibly Section 3(c)(6) and of the Investment Company Act, which except companies that primarily invest in real estate, mortgages and certain other qualifying real estate assets. These exceptions limit the ability of these entities to invest in many types of real estate related assets and their holding companies. We believe that we are not an investment company because we satisfy the 40% test of Section 3(a)(1)(C). We must monitor our holdings to ensure that the value of our investment securities do not exceed 40% of our respective total assets (exclusive of government securities and cash items) on an unconsolidated basis. Our subsidiaries that engage in operating businesses, if any, are not limited by the Investment Company Act.

If the combined value of the investment securities issued by our subsidiaries that rely on the exception provided by Section 3(c)(1) or 3(c)(7) of the Investment Company Act, together with any other investment securities we may own, exceeds 40% of our total assets on an unconsolidated basis, we may be deemed to be an investment company. If we fail to maintain an exemption, exception or other exclusion from registration as an investment company, we could, among other things, be required either (a) to substantially change the manner in which we conduct our operations to avoid being required to register as an investment company or (b) to register as an investment company, either of which could have an adverse effect on us and the market price of our securities. If we were required to register as an investment company under the Investment Company Act, we would become subject to substantial regulation with respect to our capital structure (including our ability to use leverage), management, operations, transactions with affiliated person (as defined by the Investment Company Act), portfolio composition including restrictions with respect to diversification and industry concentration and other matters.

Section 3(c)(5)(C):

From time to time in the past, we have relied on the exception provided by Section 3(c)(5)(C) of the Investment Company Act. We may from time to time in the future rely on this exception. Section 3(c)(5)(C) as interpreted by the staff of the SEC, would require us to invest at least 55% of our assets in “mortgages and other liens on and interests in real estate” (“Qualifying Real Estate Assets”) and at least 80% of our assets in Qualifying Real Estate Assets plus real estate related assets (“Real Estate Related Assets”). Therefore, when we rely on the 3(c)(5)(C) exception, the assets that we acquire are limited by the provisions of the Investment Company Act and the rules and regulations promulgated under the Investment Company Act. In addition, we may not issue redeemable securities.

interpreted by the staff of the SEC, would require us to invest at least 55% of our assets in “mortgages and other liens on and interests in real estate” (“Qualifying Real Estate Assets”) and at least 80% of our assets in Qualifying Real Estate Assets plus real estate related assets (“Real Estate Related Assets”). Therefore, when we rely on the 3(c)(5)(C) exception, the assets that we acquire are limited by the provisions of the Investment Company Act and the rules and regulations promulgated under the Investment Company Act. In addition, we may not issue redeemable securities.

We invest in CMBS securities backed by pools of loans secured by first or, less often, junior mortgages. The pool of mortgages generally is administered by a trustee, a master servicer and a special servicer. Although each plays an important role in administering the pool of mortgages, the trustee and the master servicer generally exercise ministerial functions, whereas the duties of the special servicer include, among other things, monitoring the mortgage loans in the CMBS pool, evaluating defaulted mortgage loans with a view toward developing a plan to maximize the recovery on such loans, foreclosing upon or working out defaulted mortgage loans and recommending and implementing a plan that details whether and how to sell, and negotiating the sale of distressed properties acquired through foreclosure or otherwise working out such loans. The most subordinate class of a CMBS issuance is in the first loss position and is referred to as the “controlling class” because the holder of the majority of that class has the right to hire and remove the special servicer and to provide instructions to the special servicer with respect to the foreclosure/workout of defaulted mortgage loans. In addition, if the special servicer for any reason does not follow the instructions of the holder of a majority of the controlling class with respect to the foreclosure or workout of a defaulted mortgage loan, the majority holder of such class has the unilateral right to acquire the mortgage out of the pool and foreclose upon the mortgage itself.

On the date of issuance, the controlling class of a CMBS issuance generally is the “NR” or “not rated” class. After issuance, however, should the outstanding principal balance of the NR class erode by more than 75% of its initial face amount, the rights originally exercised by the NR class, as the controlling class, are automatically transferred to the holder of a majority of the next more senior class, and this process repeats with each class all the way up the capital structure. This self executing mechanism is intended to ensure that the class of CMBS that is then most “at risk” for losses has the control and discretion necessary to protect its interest, including the rights of foreclosure on the underlying mortgages.

In order to ensure that we are able to exercise the rights of the controlling class, we generally acquire 100% of the NR, B and BB classes of a CMBS issuance. In fact, the NR, B and BB classes often are sold as a “block transaction” because of the extensive due diligence that must be conducted in order for the purchaser of these classes of CMBS to evaluate the risks and to model the profitability of an investment in such classes of CMBS. We view our investment in the subordinate classes of a CMBS issuance as a single real estate investment, even though for rating agency reasons, the subordinate classes of a CMBS issuance may be divided into multiple classes. In addition, even though the subordinate CMBS may be divided into multiple classes, all of the subordinate classes are typically paid the same coupon based on the weighted average coupon of the underlying mortgage loans. Thus, the only material difference in the non-investment grade classes is the level of subordination. Where we acquire 100% of the controlling classes of a CMBS issuance and 100% of sequentially contiguous non-investment grade classes of the same CMBS issuance, we have the same legal and economic experience as if we had purchased the pool of mortgages underlying the CMBS and partially capitalized such purchase by issuing the investment grade classes of CMBS. Consequently, in addition to the controlling class, we consider each non-investment grade class that we acquire that is senior to the controlling class to be a Qualifying Real Estate Asset, provided that (i) we acquire 100% of such a class and 100% of the respective controlling class (ii) each such class is sequentially contiguous with the controlling class and (iii) each such class is entitled to exercise all rights of the initial controlling class, including foreclosure rights, if it becomes the controlling class. For example, if we acquire 100% of the NR class of a CMBS issuance and 100% of the B and BB classes of the CMBS issuance, we will treat each such class as a Qualifying Real Estate Asset.

~~Neither~~26 the SEC nor its staff has published guidance stating that CMBS are Qualifying Real Estate Assets. When we or any of our subsidiaries rely on Section 3(c)(5)(C), we generally intend to satisfy the requirements of

~~Section 3(c)(5)(C)~~though byfor ~~investing~~rating atagency ~~least~~reasons, ~~55%~~the subordinate classes of ~~our~~a ~~assets~~CMBS inissuance may be divided into multiple classes. In addition, even though the subordinate CMBS ~~that~~may be divided into multiple classes, all of the subordinate classes are ~~Qualifying~~typically ~~Real~~paid ~~Estate~~the ~~Assets~~same ascoupon ~~described~~based inon the ~~preceding~~weighted ~~paragraphs~~average coupon of the underlying mortgage loans. IfThus, the only material difference in the non-investment grade classes is the level of subordination. Where we ~~transfer~~acquire ~~part~~100% orof ~~all~~the controlling classes of ~~any~~a CMBS issuance and 100% of sequentially contiguous non-investment grade classes of the same CMBS issuance, we have the same legal and economic experience as if we had purchased the pool of mortgages underlying the CMBS and partially capitalized such purchase by issuing the investment grade classes of CMBS. Consequently, in addition to the controlling class, we ~~will~~consider noeach ~~longer~~non-investment ~~treat~~grade class that ~~class~~we oracquire ~~any~~that ~~class~~is senior to the ~~that~~controlling class asto be a Qualifying Real Estate Asset., Inprovided ~~addition~~that ~~from~~(i) we ~~time~~acquire to100% ~~time,~~of wesuch ~~may~~a ~~acquire~~class ~~other~~and ~~real~~100% ~~estate~~of ~~investments~~the ~~that~~respective ~~are~~controlling ~~Qualifying~~class ~~Real Estate~~(ii) each ~~Assets,~~such class is sequentially contiguous with the controlling class and (iii) each such asclass ~~real~~is ~~estate~~entitled ~~assets~~to exercise all rights of the initial controlling class, ~~mortgages~~including ~~and~~foreclosure ~~agency~~rights, orif ~~privately~~it ~~issued~~becomes ~~whole~~the ~~pool~~controlling ~~certificates~~class. For example, if we acquire 100% of the NR class of a CMBS issuance and ~~may~~100% ~~treat~~of ~~other~~the B and BB classes of the CMBS issuance, we will treat each such class as a Qualifying Real Estate ~~Assets~~Asset.

Neither the SEC nor its staff has published guidance stating that CMBS are Qualifying Real Estate Assets. When we or any of our subsidiaries rely on Section 3(c)(5)(C), we generally intend to satisfy the requirements of Section 3(c)(5)(C) by investing at least 55% of our assets in CMBS that are Qualifying Real Estate Assets as described in the preceding paragraphs. If we transfer part or all of any such class, we will no longer treat that class or any class senior to that class as a Qualifying Real Estate Asset. In addition from time to time, we may acquire other real estate investments that are Qualifying Real Estate Assets, such as real estate assets, mortgages and agency or privately issued whole pool certificates, and may treat other classes of CMBS as Qualifying Real Estate Assets.

The staff of the SEC has not defined Real Estate Related Assets. Based on existing staff pronouncements, we view Real Estate Related Assets more broadly than Qualifying Real Estate Assets. Real Estate Related Assets generally would include noncontrolling debt and equity securities issued by companies engaged in real estate business, such as REITs, and agency and privately issued partial pool certificates that are not otherwise treated as Qualifying Real Estate Assets, including interests in a CMBS issuance acquired by us that does not satisfy the requirements set forth above. In accordance with SEC Staff guidance, we currently treat certain senior real estate mezzanine loans as Qualifying Real Estate Assets. We currently consider all other real estate mezzanine loans that we acquire to be Real Estate Related Assets, although we may treat these assets as Qualifying Real Estate Assets if the SEC or its staff expresses a view that such assets are Qualifying Real Estate Assets.

With respect to our investment in B-Notes, we take the position that B-Notes are Qualifying Real Estate Assets or Qualifying B Notes, where (i) the B-Note is a participation interest in a mortgage loan that is fully secured by real property; (ii) we have the right to receive a proportionate share of the interest and the principal payments made on the mortgage loan by the borrower, and that our returns on the B-Note are based on such payments; (iii) we invest in the B-Note only after performing the same type of due diligence and credit underwriting procedures that we would perform if we were underwriting the underlying mortgage loan; (iv) we have approval rights in connection with any material decisions pertaining to the administration and services of the loan and with respect to any material modification to the loan agreements; and (v) in the event that the loan becomes non-performing, we have effective control over the remedies relating to the enforcement of the mortgage loan, including ultimate control of the foreclosure process, by having the right to: (a) appoint the special servicer to manage the resolution of the loan; (b) advise, direct or approve the actions of the special servicers; (c) terminate the special servicer at any time with or without cause; (d) cure the default so that the mortgage loan is no longer non-performing; and (e) purchase the corresponding A-Note at par plus accrued interest, thereby acquiring the entire mortgage loan.

If we fail to own a sufficient amount of Qualifying Real Estate Assets or Real Estate Related Assets to satisfy the requirements of Section 3(c)(5)(C) and could not rely on any other exemption or exclusion under the Investment Company Act, we could be characterized as an investment company.

We27 are in the process of applying for no-action relief with respect to controlling classes and sequentially contiguous classes of CMBS. If the SEC’s staff does not grant us no-action relief or grants us relief on terms different than our analysis, we may be required to either (i) change the manner in which we conduct our operations to avoid being required to register as an investment company or (ii) register as an investment company, either of which could have a materially adverse effect on us and the market price of our common stock.

Market/Interest Rate Risk Management

To the extent consistent with our election to qualify as a REIT, we follow an interest rate risk management strategy intended to mitigate the effects of major interest rate changes on our cash flows and earnings. We seek to minimize our interest rate risk from borrowings by attempting to structure the key terms of our borrowings to generally correspond to the key terms of our assets.

Hedging Activities

We have entered into interest rate swap agreements to attempt to reduce the interest rate risk on our indebtedness. For a further description, see “Management’s Discussion & Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures About Market Risk.” In the future, we may enter into similar arrangements to protect our investment portfolio from interest rate fluctuations and other changes in market conditions. These transactions may include interest rate swaps, the purchase or sale of interest rate collars, caps or floors, options, mortgage derivatives and other hedging instruments. These instruments may be used to hedge as much of the interest rate risk as our manager determines is in our best interest, given the cost of such instruments and the need to maintain our status as a REIT. In general, income from hedging transactions does not constitute gross income for purposes of the 75% or 95% REIT gross income tests. To the extent, however, that we enter into other types of hedging transactions, any income or gain that we derive from those transactions is likely to be treated as non-qualifying for purposes of both of the REIT gross income tests. If we were to terminate an interest rate swap prior to maturity the gain, if any, realized from the termination would be excluded from gross income for purposes of the REIT gross income tests. Our manager may elect to have us bear a level of interest rate risk that could otherwise be hedged when it believes, based on all relevant facts, that bearing such risk is advisable.

enter into similar arrangements to protect our investment portfolio from interest rate fluctuations and other changes in market conditions. These transactions may include interest rate swaps, the purchase or sale of interest rate collars, caps or floors, options, mortgage derivatives and other hedging instruments. These instruments may be used to hedge as much of the interest rate risk as our manager determines is in the best interest of our stockholders, given the cost of such instruments and the need to maintain our status as a REIT. In general, income from hedging transactions does not constitute qualifying income under current law for purposes of the REIT gross income requirements. To the extent, however, that we enter into a hedging transaction to reduce interest rate risk on indebtedness incurred to acquire or carry real estate assets or to manage foreign currency risk with respect to income that is otherwise qualifying income for purposes of the REIT gross income requirements and we satisfy certain identification requirements with respect to such transaction, any income or gain that we derive from the transaction would be excluded from gross income for purposes of the REIT gross income tests. If we were to terminate an interest rate swap prior to maturity the gain, if any, realized from the termination would be excluded from gross income for purposes of the REIT gross income tests. Our manager may elect to have us bear a level of interest rate risk that could otherwise be hedged when it believes, based on all relevant facts, that bearing such risk is advisable.

Disposition Policies

Our manager evaluates our asset portfolio on a regular basis to determine if it continues to satisfy our investment criteria. Subject to certain restrictions applicable to REITs and/or certain of the financing vehicles we employ (CDOs), we may sell our investments and use the proceeds of any sale for debt reduction, additional acquisitions or working capital purposes.

Equity Capital Policies

Subject to applicable law, our board of directors has the authority, without further stockholder approval, to issue additional authorized common stock and preferred stock or otherwise raise capital, including through the issuance of senior securities, in any manner and on the terms and for the consideration it deems appropriate, including in exchange for property. Our existing stockholders, and purchasers of common stock, have no preemptive right to purchase additional shares issued in any offering, and any offering might cause significant dilution of your investment. We may in the future issue common stock in connection with acquisitions or investments.

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

Conflicts of Interest Policies

Except with respect to the allocation of investments made pursuant to J.E. Robert Company’s conflicts policy in effect with respect to us and the JER Funds, and other than with regard to the US Debt Fund, we are not permitted to invest in joint ventures with our manager or its affiliates unless the investment is (i) made in accordance with the investment guidelines described elsewhere in this report and (ii) approved by all of the independent members of our board of directors. In addition, we are not permitted to (i) consummate any transaction that would involve the acquisition by us of an asset in which our manager or any of its affiliates has an ownership interest, or the sale by us of an asset to our manager or any of its affiliates, (ii) under circumstances where our manager is subject to an actual or potential conflict of interest because it manages both us and any other person with which we have a contractual relationship, take any action constituting the granting to such person of a waiver, forbearance or other relief, or the enforcement against such person of remedies, under or with respect to the applicable contract, or (iii) make a loan to any affiliate of our manager, unless such transaction or action is approved by all independent members of our board. For a further description of our conflicts of interest policies, see “Conflicts of Interest in our Relationship with our Manager.”

2928

accordance with the investment guidelines described elsewhere in this report and (ii) approved by all of the independent members of our board of directors. In addition, we are not permitted to (i) consummate any transaction that would involve the acquisition by us of an asset in which our manager or any of its affiliates has an ownership interest, or the sale by us of an asset to our manager or any of its affiliates, (ii) under circumstances where our manager is subject to an actual or potential conflict of interest because it manages both us and any other person with which we have a contractual relationship, take any action constituting the granting to such person of a waiver, forbearance or other relief, or the enforcement against such person of remedies, under or with respect to the applicable contract, or (iii) make a loan to any affiliate of our manager, unless such transaction or action is approved by all independent members of our board. For a further description of our conflicts of interest policies, see “Conflicts of Interest in our Relationship with our Manager.”

Interested Director, Officer and Employee Transactions

We have adopted a policy that, unless the action is approved by a majority of the ~~disinterested~~independent directors and is not otherwise prohibited by law, we will not:

•

acquire from or sell to any of our directors, officers or employees, or any entity in which one of our directors, officers or employees has an economic interest of more than five percent or a controlling interest, or acquire from or sell to any affiliate of any of the foregoing, any of our assets or other property;

•

make any loan to or borrow from any of the foregoing persons; or

•

engage in any other transaction with any of the foregoing persons.

However, our by-laws do not prohibit any of our directors, officers, employees or agents, in their personal capacity or in a capacity as an affiliate, employee or agent of any other person, or otherwise, from having business interests and engaging in business activities similar to or in addition to or in competition with those of or relating to us.

Pursuant to Maryland law, a contract or other transaction between a company and a director or between the company and any other corporation or other entity in which a director serves as a director or has a material financial interest is not void or voidable solely on the grounds of the common directorship or interest, the presence of that director at the meeting at which the contract or transaction is authorized, approved or ratified or the counting of the director’s vote in favor thereof if (1) the material facts relating to the common directorship or interest and as to the transaction are disclosed to the board of directors or a committee of the board, and the board or committee in good faith authorizes the transaction or contract by the affirmative vote of a majority of disinterested directors, even if the disinterested directors constitute less than a quorum, (2) the material facts relating to the common directorship or interest of the transaction are disclosed to the stockholders entitled to vote thereon, and the transaction is approved in good faith by vote of the stockholders, or (3) the transaction or contract is fair and reasonable to the company at the time it is authorized, ratified or approved.

Policies with Respect to Other Activities

We have not engaged in trading, underwriting or agency distribution or sale of securities of other issuers and do not intend to do so. We have not in the past, but we may in the future, invest in the securities of other issuers for the purpose of exercising control over such issuers. At all times, we make investments in a manner as to qualify as a REIT, and we expect to continue to do so unless , because of circumstances or changes in the Internal Revenue Code or the regulations of the U.S. Department of the Treasury, our board of directors determines that it is no longer in our best interest to qualify as a REIT. We make investments in such a way that we are not treated as an investment company under the Investment Company Act. We also intend to furnish our stockholders with annual reports containing consolidated financial statements audited by our independent registered public accountants and with quarterly reports containing unaudited consolidated financial statements for each of the first three quarters of each fiscal year.

Future Revisions in Policies and Strategies

Our board of directors has approved the operating policies and the strategies set forth in this report. The board of directors has the power to modify or waive these policies and strategies without the consent of our stockholders to the extent that the board of directors (including a majority of our independent directors) determines that a modification or waiver is in the best interest of our stockholders. Among other factors, developments in the market that either affect the policies and strategies mentioned herein or that change our assessment of the market may cause our board of directors to revise our policies and strategies.

Corporate Governance ~~and Internet Address~~

We emphasize the importance of professional business conduct and ethics through our corporate governance initiatives. Our board of directors consists of a majority of independent directors; the audit committee of our board of directors are composed exclusively of independent directors. We have adopted corporate governance guidelines and a code of business conduct and ethics, ~~nominating~~which delineate our standards for our officers and directors and employees of J.E. Robert Company with respect to their dealings with us. We make available our code of business conduct and ethics, senior officer code of ethics, corporate governance guidelines and the charter of the audit committee on our Web site at www.jerinvestorstrust.com.

~~corporate~~ITEM ~~governance, and compensation committees of our board of directors are composed exclusively of independent directors~~1A. WeRISK ~~have~~FACTORS ~~adopted~~(in ~~corporate governance guidelines and a code of business conduct and ethics~~thousands, ~~which~~except ~~delineate~~per ~~our~~share ~~standards for our officers and directors and employees of J.E. Robert Company with respect to their dealings with us.~~ data)

Our internet address is http://www.jer.com. We make available, free of charge through a link on our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports, if any, as filed with the SEC as soon as reasonably practicable after such filing.

Our site also contains our code of business conduct and ethics, senior officer code of ethics and corporate governance guidelines, and the charters of the audit committee, nominating and corporate governance committee and compensation committee of our board of directors.

ITEM 1A. RISK FACTORS

Risks Relating to Our Ability to Continue as a Going Concern

Our current financial condition raises substantial doubt regarding our ability to continue as a going concern. However, our consolidated financial statements are presented on a going concern basis.

Our consolidated financial statements are presented in this report on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. As a result of our ~~current~~continuing ~~available~~payment ~~cash~~defaults related to our ISDA Master Agreement, ~~the~~dated ~~redirection~~as of ~~cash~~December 1, ~~flow~~2004 ~~from~~(as ~~CDO~~subsequently ~~II,~~amended) with National Australia Bank Limited (the “NAB Note Payable”) and the ~~December~~$70.3 ~~2009~~million ~~maturity~~of junior subordinated notes due in 2037 (“Junior Subordinated Notes”), limited sources of ~~our~~operating ~~repurchase~~cash ~~agreement~~flow, ~~with~~and ~~JPMorgan~~limited cash and other liquid assets available to satisfy such obligations, there is substantial doubt about our ability to continue as a going concern. While we have prepared our consolidated financial statements on a going concern basis, if we are unable to successfully ~~extend~~cure ~~the~~existing ~~maturity~~defaults ~~date~~on ofborrowings, restructure ~~our~~the ~~repurchase~~terms ~~agreement~~of our borrowings, reduce operating expenses, sell assets, or receive additional funding, our ability to continue as a going concern may be impacted. In addition, should our ~~repurchase~~lenders ~~agreement~~on ~~lender~~defaulted ~~demand~~borrowings ~~immediate~~seek to accelerate repayment of ~~all of our obligations under~~ such ~~agreement~~borrowings, we will likely be unable to pay such obligations. In such event, we may have to recapitalize, refinance our obligations, sell some or all of our assets or seek to reorganize under Chapter 11 or liquidation under Chapter 7 of the United States Bankruptcy Code. In addition, our ability to continue as a going concern will be dependent upon our ongoing asset performance and our ability to generate positive operating cash flow. No assurance can be given that we will be successful in achieving any of these steps or restructuring these arrangements on acceptable terms. Therefore, we may not be able to realize our assets and settle our liabilities in the ordinary course of business adversely impacting amounts actually realized relative to our financial statements. InIf ~~addition,~~we ~~our~~reorganized ~~ability~~under toChapter ~~continue~~11 asor aliquidated ~~going~~under ~~concern~~Chapter ~~will~~7 beof ~~dependent upon~~the ~~our~~United ~~ongoing~~States ~~asset~~Bankruptcy ~~performance~~Code, ~~and~~it is expected that our ~~ability~~common tostockholders ~~generate~~would ~~positive~~not ~~operating~~recover ~~cash~~any ~~flow.~~value Noand ~~assurance~~unsecured creditors, ~~can~~including beholders ~~given~~of ~~that~~the weJunior ~~will~~Subordinated beNotes ~~successful~~and inNAB ~~achieving~~Note Payable, would receive little value, if any, ofin ~~these~~relation ~~steps~~to orthe ~~restructuring~~outstanding ~~these~~principal ~~arrangements~~amounts onof ~~acceptable~~the ~~terms~~Company’s unsecured debt. The Company’s consolidated financial statements included in this Annual Report on Form 10-K do not reflect any adjustments that might specifically result from the outcome of this uncertainty.

Risks Relating to Our Business

We may not be able to access financing on favorable terms, or at all, which could adversely affect our ability to execute our business plan.

We expect to finance our assets over the long-term through a variety of means, including credit facilities, issuance of collateralized debt obligations (“CDO) and other structured financings. Our ability to execute this strategy depends on various conditions in the markets that are beyond our control, including liquidity and credit spreads. We cannot assure you that these markets will remain an efficient source of long-term financing for our assets. In fact, at the current time, the CDO market remains effectively closed. If our strategy is not viable, we will have to find alternative forms of long-term financing for our assets, as secured revolving credit facilities and repurchase facilities may not accommodate long-term financing. This could subject us to more recourse indebtedness and the risk that debt service on less efficient forms of financing would require a larger portion of our cash flows, thereby reducing cash available for distribution to our stockholders, funds available for operations as well as for future business opportunities. In today’s challenging credit and liquidity environment, match funding our assets and liabilities is more difficult than recent past experience.

Deterioration of market conditions has recently and may continue to negatively impact our business, results of operations and financial condition, including liquidity.

The market in which we operate is affected by a number of factors that are largely beyond our control but can nonetheless have a potentially significant, negative impact on us. These factors include, among other things:

•

interest rates and credit spreads;

•

the availability of credit, including the price, terms and conditions under which it can be obtained;

•

the quality, pricing and availability of suitable investments;

•

the ability to obtain accurate market-based valuations;

•

default rates on both commercial and residential mortgages and the amount of the related losses;

•

the actual and perceived state of the real estate markets, market for dividend-paying stocks and public capital markets generally;

• general market conditions including, but not limited to, unemployment rates, consumer spending; ~~and~~

• the attractiveness of other types of investments relative to investments in real estate or REITs generally.; and

~~Changes~~• inrating ~~these~~agencies ~~factors~~downgrades ~~are difficult to predict, and a change in one factor can affect other factors. For example, during 2007, economic issues involving subprime residential mortgages had a significant adverse impact~~ on ~~the overall mortgage securities and resecuritization markets including the value of our~~ CMBS ~~investments, real estate loans as well as the availability and cost of short-term and long-term financing for commercial real estate related investments~~bonds. We do not currently know the full extent to which the current market disruption will affect us or the markets in which we operate, and we are unable to predict its length or ultimate severity. If the challenging conditions continue, we may experience further tightening of liquidity, impairment charges and increased margin requirements as well as additional challenges in raising capital and obtaining investment financing on attractive terms.

32Changes in these factors are difficult to predict, and a change in one factor can affect other factors.

A prolonged economic slowdown, a lengthy or severe recession, or declining real estate values could harm our operations.

We believe the risks associated with our business are more severe during periods of economic slowdown or recession if these periods are accompanied by declining real estate values. Declining real estate values would likely reduce the level of new mortgage loan originations, since borrowers often use increases in the value of their existing properties to support the purchase of or investment in additional properties. Borrowers may also be less able to pay principal and interest on our loans if the real estate economy weakens. Further, declining real estate values significantly increase the likelihood that we will incur losses on our loans in the event of default because the value of our collateral may be insufficient to cover our basis in the loan. Any sustained period of increased payment delinquencies, foreclosures or losses could adversely affect both our net interest income from loans in our portfolio as well as our ability to originate, finance, sell and securitize loans, which would significantly harm our revenues, results of operations, financial condition, liquidity, business prospects and our ability to make distributions to the stockholders.

We ~~may~~do not beknow ~~able~~what toimpact ~~access~~the ~~financing~~Dodd-Frank onAct ~~favorable~~will ~~terms,~~have oron ~~at all, which could adversely affect~~ our ~~ability to execute our~~ business ~~plan~~.

WeOn ~~expect~~July 21, to2010, ~~finance~~the ~~our~~United ~~assets~~States ~~over~~enacted the ~~long~~Dodd-~~term~~Frank ~~through~~Wall aStreet ~~variety~~Reform ofand ~~means,~~Consumer ~~including credit~~Protection ~~facilities,~~Act ~~issuance~~(the of“Act”). ~~CDOs~~The ~~and~~Act ~~other~~affects ~~structured~~almost ~~financings.~~every ~~Our~~aspect ~~ability~~of tothe ~~execute~~U.S. ~~this~~financial ~~strategy~~services industry, ~~depends~~including oncertain ~~various~~aspects ~~conditions~~of in the markets ~~that~~in ~~are~~which ~~beyond~~we ~~our control, including liquidity and credit spreads~~operate. WeThe ~~cannot~~Act ~~assure~~may ~~you~~impose ~~that these~~new ~~markets~~regulations ~~will~~on ~~remain~~us anand ~~efficient~~how ~~source~~we ofconduct ~~long-term financing for~~ our ~~assets~~business. InFor ~~fact~~example, at the ~~current~~Act ~~time,~~will ~~the~~impose ~~CDO~~additional ~~market~~disclosure ~~remains~~requirements ~~effectively~~for ~~closed.~~public Ifcompanies ~~our~~and ~~strategy~~generally require isissuers ~~not~~or ~~viable,~~originators weof ~~will~~asset-backed ~~have~~securities to ~~find~~retain ~~alternative~~at ~~forms~~least five percent of ~~long-term financing~~the ~~for~~credit ~~our~~risk ~~assets,~~associated aswith ~~secured~~the ~~revolving~~securitized ~~credit~~assets. ~~facilities~~Importantly, ~~and~~many ~~repurchase~~key ~~facilities~~aspects ~~may~~of ~~not~~the ~~accommodate~~changes ~~long-term~~imposed ~~financing.~~by ~~This~~the ~~could~~Act ~~subject~~will usbe toestablished ~~more~~by ~~recourse~~various regulatory ~~indebtedness~~bodies and ~~the~~other ~~risk~~groups ~~that~~over ~~debt~~the ~~service~~next onseveral ~~less~~years. ~~efficient~~As ~~forms~~a ~~of financing~~result, ~~would~~we ~~require~~do anot ~~larger~~know ~~portion~~how ofsignificantly ~~our~~the ~~cash~~Act ~~flows,~~will ~~thereby~~affect ~~reducing~~us. ~~cash~~It ~~available~~is ~~for~~possible ~~distribution~~that tothe ~~our~~Act ~~stockholders~~could, ~~funds~~among ~~available~~other ~~for~~things, ~~operations~~increase asour ~~well~~costs asof ~~for~~operating ~~future~~as ~~business~~a ~~opportunities.~~public Incompany, ~~today’s challenging credit and~~impose ~~liquidity~~restrictions ~~environment,~~on ~~match~~our ~~funding~~ability ~~our~~to securitize assets and ~~liabilities~~reduce isour ~~more~~investment ~~difficult~~returns ~~than~~on ~~recent~~securitized ~~past experience~~assets.

Under our repurchase agreements, we may be required to post significant amounts of cash collateral to satisfy our margin requirements and scheduled amortization due to lower collateral values or declines in advances rates from lenders or to repurchase securities upon the occurrence of certain events.

We finance certain of our investments with repurchase agreements that are subject to margin calls. Under the terms of the repurchase agreements, the value of assets underlying the debt is marked-to-market by the counterparty at its discretion, as frequently as on a daily basis. If the value of the underlying asset declines, the counterparty has the ability to require us to post additional margin—cash or other liquid collateral—to compensate for the decline in value of the asset. (Conversely, if the value of the underlying asset increases, a ~~portion of the margin we previously posted may be~~ returned to us.) During the year ended December 31, 2008, such margin calls and scheduled amortization totaled $135.4 million, comprised of $25.4 million related to the decrease in advance rates from lenders, $107.2 million related to the decline in value of underlying collateral in the investments and $2.8 million related to scheduled amortization payments under our repurchase agreement with JPMorgan. Subsequent to December 31, 2008 and through March 30, 2009, there have been $2.8 million of scheduled amortization payments. Given the current volatility in the capital markets, we cannot predict changes in the market value of collateral and potential margin call requirements.

We32 are subject to margin calls at any time, and being forced to post additional margin could adversely affect our business in a number of ways. Posting additional margin would decrease our cash available to make other, higher yielding investments (thereby decreasing our return on equity) or to satisfy other obligations, including future margin calls. In addition, in periods of increased market volatility, we may need to hold increased levels of cash to support potential margin calls which could lower our economic return. Further, under certain of our

~~repurchase~~portion ~~agreements, the counterparty may have a right, exercisable upon the occurrence~~ of ~~certain events relating to~~ the ~~“repo~~margin ~~market”~~we orpreviously ~~the “securities~~posted ~~market,” to terminate the facility, in which event we~~ may be ~~obligated~~returned to ~~immediately repurchase all securities then held by the counterparty~~us.) IfDuring ~~we do not have~~ the ~~funds~~year ~~available~~ended December 31, ~~or otherwise elect not~~2009, tosuch ~~satisfy any future~~ margin calls orand ~~repurchase~~scheduled ~~assets~~amortization ~~upon~~totaled ~~termination,~~$9.1 ~~we could be forced to sell one or more investments at a loss~~million. ~~Moreover~~On March 30, 2010, we ~~may~~sold beour ~~unable,~~interest in ~~light~~$152.9 million of ~~market~~face ~~conditions~~amount orof ~~other~~CMBS ~~factors,~~for toproceeds ~~sell~~of ~~sufficient~~$5.5 ~~assets~~million. to$4.8 ~~satisfy~~million ~~the~~of ~~margin~~proceeds ~~or repurchase~~from ~~requirements within~~ the ~~timeframe~~sale ~~required~~were byused ~~the~~to ~~applicable counterparties~~repay, ~~which~~in ~~would~~full, ~~entitle~~amounts ~~them~~outstanding, toincluding ~~seize~~accrued ~~the~~interest, ~~underlying~~on ~~assets and seek payment from us for any shortfall between the value of~~ our ~~obligation to the counterparty and~~repurchase ~~the~~agreement ~~value~~with ofJ.P. ~~the~~Morgan ~~asset~~Securities ~~surrendered~~Inc.

Repurchase agreement financing subjects us to margin calls at any time, and being forced to post additional margin could adversely affect our business in a number of ways. Posting additional margin would decrease our cash available to make other, higher yielding investments (thereby decreasing our return on equity) or to satisfy other obligations, including future margin calls. In addition, in periods of increased market volatility, we may need to hold increased levels of cash to support potential margin calls which could lower our economic return. Further, under certain of our repurchase agreements, the counterparty may have a right, exercisable upon the occurrence of certain events relating to the “repo market” or the “securities market,” to terminate the facility, in which event we may be obligated to immediately repurchase all securities then held by the counterparty. If we do not have the funds available, or otherwise elect not, to satisfy any future margin calls or repurchase assets upon termination, we could be forced to sell one or more investments at a loss. Moreover, we may be unable, in light of market conditions or other factors, to sell sufficient assets to satisfy the margin or repurchase requirements within the timeframe required by the applicable counterparties, which would entitle them to seize the underlying assets and seek payment from us for any shortfall between the value of our obligation to the counterparty and the value of the asset surrendered.

If the counterparty to our repurchase agreement becomes insolvent or otherwise defaults on its obligation to resell the underlying securities back to us at the end of the transaction term, we may lose money on such repurchase transaction.

We finance a ~~meaningful~~ portion of our investments with a repurchase ~~agreement~~agreements, which is a financing ~~facilities~~facility with counterparties through which particular assets are financed as discrete “transactions.” Under the terms of such transaction, we sell an asset to the counterparty for a specified price and concurrently agree to repurchase the same ~~security~~asset from our counterparty at a later date. We make periodic payments to the counterparty during the term of the repurchase agreement serving as the equivalent of paying interest to the counterparty in return for extending financing to us. If the counterparty becomes insolvent or otherwise defaults on its obligation to resell the ~~securities~~asset back to us, we may fail to recover the full value of our asset that is financed with the repurchase agreement, and thereby incur a loss on the repurchase transaction. Any realized losses we incur on ~~our~~ repurchase ~~agreement~~agreements will adversely affect our earnings, and thus our cash available for distribution to our stockholders.

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

When we obtain financing, lenders may impose restrictions on us that affect our ability to incur additional debt, our ability to make distributions to stockholders and our flexibility to determine our operating policies. Loan documents we execute may contain negative covenants that, among other things, limit the amount of leverage that we may employ, require that we maintain certain interest and fixed charge coverage ratios, require that we maintain a certain minimum tangible net worth, limit our recourse indebtedness, limit our ability to distribute more than a certain amount of our funds from operations and require us to hedge our interest rate exposure. ~~At December 31, 2008, we were in compliance with all covenants and requirements under our repurchase agreements.~~ If we are not in compliance with any of our covenants, there can be no assurance that our lenders would waive such non-compliance ~~in the future~~ and any such non-compliance could have a material adverse effect on us.

Investor demand for commercial real estate CDOs has been substantially curtailed.

The recent turmoil in the structured finance markets, ~~in particular the sub-prime residential loan market,~~ has negatively impacted the credit markets generally, and, as a result, investor demand for commercial real estate CDOs has been substantially curtailed. InWe ~~recent years, we~~ have relied to a substantial extent on CDO financings to obtain long-term match funded financing for our investments. Until the market for commercial real estate CDOs recovers, we ~~may~~will be unable to utilize CDOs to finance our investments and we may need to utilize less favorable sources of financing to finance our investments on a long-term basis. There can be no assurance as to when demand for commercial real estate CDOs will return or the terms of such securities investors will demand or whether we will be able to issue CDOs to finance our investments on terms beneficial to us.

3433

We investments ~~expect~~and we may need to ~~incur~~utilize ~~significant~~less ~~debt~~favorable sources of financing to finance our investments, ~~which~~on ~~may~~a ~~subject~~long-term usbasis. There can be no assurance as to ~~increased~~when ~~risk~~or ofwhether ~~loss~~demand ~~and~~for commercial ~~reduce~~real ~~cash~~estate ~~available~~CDOs ~~for~~will ~~distributions~~return or the terms of such securities investors will demand or whether we will be able to issue CDOs to finance our ~~stockholders~~investments on terms beneficial to us.

We ~~intend~~have toincurred ~~leverage~~significant ~~our~~debt ~~assets~~to ~~through~~finance ~~borrowings,~~our ~~generally through the use of bank credit facilities~~investments, ~~repurchase~~which ~~agreements,~~has ~~the issuance of collateralized debt obligation transactions, or CDOs,~~ and ~~long-term~~may ~~corporate~~continue ~~indebtedness.~~to ~~The~~subject ~~percentage~~us ~~of leverage varies depending on our ability~~ to ~~obtain~~increased ~~credit~~risk ~~facilities and the lender’s estimate~~ of ~~the~~loss ~~stability of the portfolio’s cash flow~~ and ~~the~~reduce ~~market value of the underlying collateral. Our return on our investments and~~ cash available for ~~distribution~~distributions to our stockholders ~~may be reduced to the extent that changes in market conditions cause the cost of our financing to increase relative to the income that can be derived from the assets acquired~~. ~~As of December 31, 2008, we had outstanding indebtedness with a cost basis totaling $974.5~~ million related to the CDO issuances in October 2006 and November 2005 and $16.1 million outstanding under our repurchase agreements and $61.9 million of junior subordinated debentures outstanding. See “Capital and Leverage Policies” for a discussion of CDOs and repurchase agreement financing arrangements.

~~Our~~We ~~debt~~have ~~service~~leveraged ~~payments~~our ~~reduce~~assets ~~cash~~through ~~available~~borrowings, ~~for~~generally ~~distribution~~through ~~to stockholders.~~the ~~For~~use ~~the~~of ~~year~~bank ~~ended~~credit ~~December 31~~facilities, ~~2008~~repurchase agreements, ~~$65.8~~the ~~million~~issuance of collateralized debt ~~service~~obligation transactions, ~~excluding~~or ~~principal~~CDOs, ~~repayments~~ and ~~margin~~long-term ~~calls,~~corporate ~~was~~indebtedness. ~~paid~~The ~~primarily~~percentage ~~related~~of toleverage ~~our~~varies ~~repurchase~~depending ~~agreements,~~on ~~CDOs~~our ~~and~~ability ~~junior~~to ~~subordinated~~obtain ~~debentures.~~credit ~~Principal~~facilities and ~~scheduled~~ ~~amortization~~the ~~repayments~~lender’s onestimate ~~our~~of ~~repurchase~~the stability ~~agreements~~of ~~resulting~~the ~~from~~portfolio’s ~~declines~~cash inflow and the ~~estimated~~market value of the underlying collateral. Our return on our investments and ~~lower~~cash ~~advance~~available ~~rates~~for ~~from~~distribution ~~lenders~~to onour ~~such~~stockholders ~~collateral~~has ~~aggregated~~been ~~$135.4~~and ~~million~~may continue to be reduced to the extent that changes in market conditions cause the ~~year~~cost ~~ended~~of our financing to increase relative to the income that can be derived from the assets acquired. As of December 31, ~~2008 and~~2009, ~~scheduled~~we ~~amortization~~had ~~payments~~outstanding ~~were~~indebtedness with a face amount totaling $2955.86 million ~~from~~related ~~January 1,~~to CDO ~~2009~~issuances ~~through~~in ~~March 30,~~October ~~2009.~~2006 Weand ~~may~~November ~~not~~2005, be$7.0 ~~able~~million tooutstanding ~~meet~~under our ~~debt~~repurchase ~~service~~agreements, ~~obligations~~$59.0 ~~including~~million ~~periodic~~of ~~margin~~Junior ~~calls~~Subordinated ~~and,~~Notes tooutstanding ~~the~~and ~~extent~~a ~~that~~$10.8 wemillion ~~cannot,~~note wepayable ~~risk~~resulting from the ~~loss~~ termination of ~~some~~four orinterest ~~all~~rate swaps ofduring ~~our~~2009. ~~assets~~See to“Capital ~~foreclosure~~and orLeverage ~~sale~~Policies” tofor ~~satisfy~~a ~~our~~discussion ~~debt~~of ~~obligations~~financing arrangements.

~~While~~Our wedebt ~~have~~service payments ~~historically~~reduce ~~maintained~~cash ~~target debt-~~available for distribution to~~-equity~~ ~~ratios~~stockholders. ofFor ~~between~~the ~~approximately~~year ~~two-to-one~~ended ~~and~~December 31, ~~three-to-one~~2009, ~~and~~$74.1 ~~currently~~million ~~operate~~of ~~with~~debt aservice ~~targeted~~was ~~debt-to-equity~~paid ~~ratio~~primarily ofrelated ~~four-~~to~~-one~~ toour ~~six-to-one~~repurchase agreements, ~~our~~CDOs ~~governing~~and ~~documents~~junior ~~contain~~subordinated nodebentures. ~~limitation~~Scheduled amortization repayments on ~~the~~our ~~amount~~repurchase ofagreements ~~debt~~aggregated we$9.1 ~~may~~million ~~incur~~during the year ended December 31, 2009 and ~~our~~subsequent ~~board~~to ofDecember 31, ~~directors~~2009, ~~may~~we ~~change~~sold ~~our~~certain ~~debt~~CMBS ~~policy~~investments atand ~~any~~used ~~time~~the ~~without~~proceeds ~~stockholder~~to ~~approval.~~repay Inall ~~addition,~~outstanding repurchase weagreement borrowings. We may ~~leverage~~not ~~individual~~be ~~assets~~able orto ~~portfolios~~meet ofour ~~assets~~debt atservice ~~substantially~~obligations ~~higher~~including ~~levels~~periodic ~~than~~margin ~~four-to-one~~calls and, ~~six-~~to~~-one~~ ~~debt-to-equity ratios.~~the ~~Incurring~~extent ~~debt~~that ~~could~~we ~~subject~~cannot, uswe risk the loss of some or all of our assets to ~~many~~foreclosure ~~risks,~~or ~~including~~sale ~~the~~to ~~risks~~satisfy ~~that:~~our debt obligations.

While we currently operate with a targeted debt-to-equity ratio of four-to-one to six-to-one, our governing documents contain no limitation on the amount of debt we may incur, and our board of directors may change our debt policy at any time without stockholder approval. In addition, we may leverage individual assets or portfolios of assets at substantially higher levels than four-to-one and six-to-one debt-to-equity ratios. Incurring debt could subject us to many risks, including the risks that:

•

our cash flow from operations may be insufficient to make required payments of principal and interest, resulting in the loss of some or all of our assets to foreclosure or sale in order to satisfy our debt obligations;

•

our debt may increase our vulnerability to adverse economic and industry conditions;

•

we may be required to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing funds available for operations, future business opportunities, dividends or other purposes;

•

the terms of any refinancing may not be as favorable as the terms of the debt being refinanced; and

•

the use of leverage could adversely affect our ability to make distributions to our stockholders and the market price of our common stock.

A decrease in the value of the assets financed with repurchase agreements, some of which may be recourse to the company, may lead to margin calls that we will have to satisfy. We may not have the funds available to satisfy these margin calls, and be forced to sell assets to satisfy such debt obligations.

In June 2010, an event of default occurred on CDO I due to the failure to pay interest on the Class B-1 notes and Class B-2 notes. This was due to the continuing decline in cash flow from CMBS held by CDO I and the

redirection of cash flow from CMBS bonds downgraded below “CC” to the Class A notes. Following the event of default, the Trustee determined that potential proceeds from a sale and liquidation of CDO I collateral would not be sufficient to pay in full the sum of principal and accrued interest, all administrative expenses, the collateral administration fee, any termination payment related to the interest rate swap and the holders of 66 2/3% of the aggregate note balance of all the classes of notes then outstanding agree with such determination. As such, the collateral will be held until such time as the sale and liquidation of the underlying collateral can satisfy the required cash payments or 66 2/3% of the aggregate note balance of all the classes of notes then outstanding direct the sale and liquidation of the collateral. In either case, we do not expect to receive any proceeds from our retained interests in CDO I from such a liquidation.

In September 2010, there was an event of default on CDO II due to the failure to pay interest on the Class A notes and Class B notes. This was due primarily to the continuing declines in cash flow received from CMBS held by CDO II. As a result of this default, the Trustee will be required to determine if potential proceeds from a sale and liquidation of CDO II collateral would be sufficient to pay in full the sum of principal and accrued interest, all administrative expenses, the collateral administration fee, any termination payment related to the interest rate swap and the holders of 66 2/3% of the aggregate note balance of all the classes of notes then outstanding agree with such determination. If not, the collateral will be held until such time as the sale and liquidation of the underlying collateral can satisfy the required cash payments or 66 2/3% of the aggregate note balance of all the classes of notes then outstanding direct the sale and liquidation of the collateral. In either case, we do not expect to receive any proceeds from our retained interests in CDO II from such a liquidation.

Interest rate fluctuations could reduce our ability to generate income on our investments and may cause losses.

Our primary interest rate exposures relate to our floating rate loans and variable-rate debt, as well as our interest rate swaps that we utilize for hedging purposes. Changes in interest rates will affect our net interest income, which is the difference between the interest income we earn on our interest-earning investments and the interest expense we incur in financing these investments. Changes in the level of interest rates also may affect our ability to originate and acquire assets, the value of our assets and our ability to realize gains from the disposition of assets. Changes in interest rates may also affect borrower default rates. In a period of rising interest rates, our interest expense could increase, while the interest we earn on our fixed-rate debt investments would not change, adversely affecting our profitability.

Our operating results depend in large part on differences between the income from our assets, net of credit losses, and our financing costs. We anticipate that, in most cases, for any period during which our assets are not match-funded, the income from such assets will respond more slowly to interest rate fluctuations than the cost of our borrowings. Consequently, changes in interest rates, particularly short-term interest rates, may significantly influence our net income. Increases in these rates will tend to decrease our net income and the market value of our fixed rate assets. At December 31, 2009, our interest rate swaps mitigate the impact of an interest rate increase on net earnings and cash flows although interest rate fluctuations resulting in our interest expense exceeding interest income would result in operating losses for us.

Interest rate changes will also affect the fair value of our CMBS investments, real estate loans and derivatives. We do not hedge against potential fair value changes as we generally seek to hold investments to maturity.

If credit spreads widen before we obtain long-term match funded financing for our assets, the value of our assets may suffer and we may earn lower returns on our equity invested.

We had historically priced our assets based on our assumptions about future levels of credit spreads for longer term fixed rate financing of those assets. We had historically expected to obtain longer term financing for these assets at a spread over a certain benchmark, such as the yield on United States Treasury bonds, swaps, or

~~income, which is the difference between the interest income we earn on our interest-earning investments and the interest expense we incur in financing these investments~~LIBOR. ~~Changes~~If in the ~~level~~spread ofthat ~~interest~~investors ~~rates~~will ~~also~~pay ~~may~~over ~~affect our ability to originate and acquire assets,~~ the ~~value~~benchmark ofwidens ~~our assets~~ and ~~our ability to realize gains from~~ the ~~disposition of assets. Changes in interest~~ rates ~~may~~we ~~also~~charge ~~affect borrower~~on ~~default rates. In a period of rising interest rates,~~ our ~~interest~~loans ~~expense~~or ~~could increase, while~~ the ~~interest~~income we ~~earn~~generate onfrom our ~~fixed-rate~~other ~~debt~~assets ~~investments~~are ~~would~~ not ~~change,~~increased ~~adversely affecting our profitability. Based on our cost basis~~accordingly, aswe ofmay ~~December 31,~~experience ~~2008,~~a ~~44.6%~~material ofadverse ~~our~~effect ~~investments~~on ~~had fixed rate terms and 24.3% of~~ our ~~debt~~income had fixed rate terms (approximately 30.4% reflecting the effect of pay fixed interest rate swaps outstanding at December 31, 2008). At December 31, 2008, the Company had $275.0 million of floating rate assets and ~~$796.6~~returns ~~million~~on ofequity ~~floating~~as ~~rate~~well ~~debt~~as ~~all~~a ~~tied~~reduction ~~to LIBOR, resulting~~ in ~~net~~the ~~floating~~economic ~~rate~~value ~~liabilities~~ of ~~$521.6~~the million. This exposure has been hedged with $595.8 million of pay fixed interest rate swaps based on notional balances in effect at December 31, 2008 thereby reducing exposure to interest rate fluctuations to approximately $74.2 million of net assets. ~~See~~that ~~“Capital~~we ~~and~~have ~~Leverage Policies”~~originated ~~and~~or ~~“Capital and Interest Rate Risk Management~~acquired.”

~~Our~~We ~~operating~~may ~~results~~not ~~depend~~be inable ~~large~~to ~~part~~acquire oneligible ~~differences between~~securities ~~the income from our assets, net of credit losses,~~ and/or ~~our~~loans ~~financing~~for ~~costs.~~future WeCDO ~~anticipate that~~issuances, inor ~~most~~may ~~cases, for any period during which our assets are~~ not ~~match-funded,~~be ~~the~~able ~~income~~to ~~from~~issue ~~such~~CDO ~~assets~~securities ~~will~~on ~~respond~~attractive ~~more~~terms ~~slowly~~that toclosely ~~interest~~match ~~rate fluctuations~~fund ~~than~~ the ~~cost~~duration of our assets ~~borrowings.~~and ~~Consequently~~liabilities, ~~changes~~which inmay ~~interest~~require ~~rates,~~us ~~particularly~~to ~~short-term~~seek ~~interest~~more ~~rates,~~costly ~~may~~financing ~~significantly~~for ~~influence~~ our ~~net~~investments ~~income.~~or ~~Increases in these rates will tend~~ to ~~decrease~~liquidate ~~our net income and the market value of our fixed rate~~ assets. ~~Interest rate fluctuations resulting in our interest expense exceeding interest income would result in operating losses for us.~~

AtWe intend ~~December 31~~to finance our real estate securities and loans on a long-term basis, ~~2008~~such as through the issuance of CDOs, to the extent such financing is available. Prior to the issuance of our ~~interest~~CDOs, ~~rate~~we ~~swaps~~finance ~~substantially~~our ~~mitigate~~investments with relatively short-term credit facilities. We use these short-term facilities to finance the ~~impact~~acquisition of anreal ~~interest~~estate ~~rate~~securities ~~increase~~until ona ~~net~~sufficient ~~earnings~~quantity ~~and~~of ~~cash~~securities ~~flows~~is ~~although~~accumulated, ~~changes~~at inwhich ~~interest~~time ~~rates~~we ~~will~~refinance ~~generally~~these ~~impact~~facilities ~~our~~with ~~net~~CDO ~~income~~issuances. To the extent ~~All~~available ofin ~~our~~the ~~floating~~market, ~~rate~~we ~~assets~~expect ~~and~~to ~~liabilities~~follow ~~are~~a ~~tied~~similar process to ~~USD-LIBOR~~finance orour afuture ~~different~~growth. ~~applicable~~As ~~base~~a ~~rate~~result, we are subject to the risk that we will not be able to acquire, induring ~~some~~the ~~cases~~period that our short-term facilities are available, a sufficient amount of eligible securities to ~~certain~~maximize ~~caps~~the orefficiency ~~limitations.~~of ~~The~~a ~~following~~CDO ~~table~~issuance. ~~shows~~We also bear the ~~estimated~~risk ~~change~~that inwe ~~net~~will ~~income~~not be able to obtain short-term credit facilities or may not be able to renew any short-term credit facilities after they expire should we find it necessary to extend our short-term credit facilities to allow more time to seek and acquire the necessary eligible securities for a 12long term financing. Inability to renew our short-~~month~~term ~~period~~credit facilities may require us to seek more ~~based~~costly onfinancing ~~changes~~for our investments or to liquidate assets. In addition, conditions in the ~~applicable~~capital ~~USD-LIBOR~~markets ~~rates~~may ~~applied~~make the issuance of a CDO unavailable or less attractive to ~~floating~~us ~~rate~~when we do have a sufficient pool of collateral. If we are unable to issue a CDO to finance these assets, ~~liabilities~~we ~~and~~may ~~interest~~be ~~rate~~required ~~swaps~~to ~~outstanding~~seek asother forms of ~~December 31~~potentially less attractive financing, ~~2008:~~hold the assets without financing, or otherwise to liquidate the assets. In fact, at this time the CDO market is effectively closed and there are no financing options available for assets we own on an unleveraged basis.

LIBOR Rate Change (Basis Points)		Estimated Increase (Decrease)in Net Income Over 12Months at December 31, 2008(1)(2)(3)
		(in thousands)
-150		$ (371)
-50		(371)
50		371
150		1,113

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

The terms of the CDOs that we have issued and may issue in the future generally provide that the principal amount of assets must exceed the principal balance of the related bonds by a certain amount. This excess collateral requirement is commonly referred to as “over-collateralization.” The CDO terms provide that, if certain delinquencies or losses exceed the specified levels based on rating agencies’ (1or the financial guaranty insurer’s, if applicable) ~~Estimated~~analyses of the characteristics of the assets pledged to collateralize the bonds, the required level of over-collateralization may be increased or may be prevented from decreasing as would otherwise be permitted if losses or delinquencies did not exceed those levels. Other tests (~~decrease~~based on delinquency levels or other criteria) inmay restrict our ability to receive net income ~~over~~from ~~next~~assets ~~twelve~~pledged ~~months~~to ~~does~~secure ~~not~~CDOs. ~~consider~~We cannot assure you that the ~~impact~~performance oftests ~~SFAS~~will Nobe satisfied. ~~159~~Nor ~~adoption,~~can ~~effective~~we ~~January~~assure 1you, ~~2008~~in advance of completing negotiations with the rating agencies or ~~any~~other key transaction parties on our possible future ~~changes~~CDO infinancings, ~~advance~~of ~~rates~~the actual terms of the delinquency tests, over-collateralization terms, cash flow release mechanisms or other significant factors regarding the calculation of net income to us. Failure to obtain favorable terms with regard to these matters may materially and ~~spreads~~adversely onaffect ~~borrowing~~our ~~arrangements~~net income and/or our free cash flow.

~~(2)~~The Asfailure ~~a result of the interest rate swap restructurings and terminations subsequent~~ to ~~December~~comply ~~31,~~with ~~2008,~~CDO ~~the~~coverage ~~estimated~~tests ~~increase~~has ~~(decrease)~~had ina ~~net~~negative ~~income~~impact ~~over the next twelve months at December 31, 2008 based~~ on ~~interest~~our ~~rate~~cash ~~changes of (150), (50), 50 and 150 basis points is $543, $543, $(543) and $(1,628), respectively~~flow.

~~(3)~~The Atterms ~~December~~of 31both of our CDOs include coverage tests, ~~2008~~including over-collateralization and interest coverage tests, used primarily to determine whether and to what extent principal and interest proceeds on the 1underlying collateral debt securities and other assets may be used to pay principal of and interest on the subordinate classes of bonds and preferred shares in the applicable CDO. In the event the coverage tests are not satisfied, interest and principal that would otherwise be payable on the subordinate classes of bonds and preferred shares may be re-~~month~~directed ~~LIBOR~~to ~~rate~~pay ~~was~~principal ~~approximately~~on 44the ~~basis~~senior ~~points~~bond classes. ~~This~~Therefore, ~~analysis~~failure isto ~~presented~~satisfy ~~assuming~~the ~~LIBOR~~coverage ~~will~~tests ~~exceed~~could 0adversely ~~basis~~affect ~~points~~cash flows received by us from the CDOs and thereby our liquidity and operating results. As of

If December 31, ~~credit~~2009, ~~spreads~~we ~~widen~~were ~~before~~not wein ~~obtain~~compliance ~~long-term~~with ~~match~~certain ~~funded~~CDO ~~financing~~II ~~for~~coverage ~~our~~tests ~~assets~~and as a result, ~~the~~we ~~value~~are ofno ~~our~~longer ~~assets~~receiving ~~may suffer~~any regular cash payments from CDO II and we ~~may~~do ~~earn~~not ~~lower~~expect ~~returns~~to receive onany ~~our~~regular ~~equity~~cash ~~invested~~payments from CDO I or II for the foreseeable future.

We price our assets based on our assumptions about future levels of credit spreads for longer term fixed rate financing of those assets. We expect to obtain longer term financing for these assets at a spread over a certain benchmark, such as the yield on United States Treasury bonds, swaps, or LIBOR. If the spread that investors will pay over the benchmark widens and the rates we charge on our loans or the income we generate from our other assets are not increased accordingly, we may experience a material adverse effect on our income and returns on equity as well as a reduction in the economic value of the assets that we have originated or acquired.

We may not be able to acquire eligible securities and/or loans for future CDO issuances, or may not be able to issue CDO securities on attractive terms that closely match fund the duration of our assets and liabilities, which may require us to seek more costly financing for our investments or to liquidate assets.

We intend to finance our real estate securities and loans on a long-term basis, such as through the issuance of CDOs, to the extent such financing is available. Prior to the issuance of our CDOs, we finance our investments with relatively short-term credit facilities. We use these short-term facilities to finance the acquisition of real estate securities until a sufficient quantity of securities is accumulated, at which time we refinance these facilities with CDO issuances. To the extent available in the market, we expect to follow a similar process to finance our future growth. As a result, we are subject to the risk that we will not be able to acquire, during the period that our short-term facilities are available, a sufficient amount of eligible securities to maximize the efficiency of a CDO issuance. We also bear the risk that we will not be able to obtain short-term credit facilities or may not be able to renew any short-term credit facilities after they expire should we find it necessary to extend our short-term credit facilities to allow more time to seek and acquire the necessary eligible securities for a long term financing. Inability to renew our short-term credit facilities may require us to seek more costly financing for our investments or to liquidate assets. In addition, conditions in the capital markets may make the issuance of a CDO unavailable or less attractive to us when we do have a sufficient pool of collateral. If we are unable to issue a CDO to finance these assets, we may be required to seek other forms of potentially less attractive financing or otherwise to liquidate the assets. In fact, at this time the CDO market is effectively closed.

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

The terms of the CDOs that we have issued and intend to issue in the future generally provide that the principal amount of assets must exceed the principal balance of the related bonds by a certain amount. This excess collateral requirement is commonly referred to as “over-collateralization.” The CDO terms provide that, if certain delinquencies or losses exceed the specified levels based on rating agencies’ (or the financial guaranty insurer’s, if applicable) analyses of the characteristics of the assets pledged to collateralize the bonds, the required level of over-collateralization may be increased or may be prevented from decreasing as would otherwise be permitted if losses or delinquencies did not exceed those levels. Other tests (based on delinquency levels or other criteria) may restrict our ability to receive net income from assets pledged to secure CDOs. 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 on our future CDO financings, of the actual terms of the delinquency tests, over-collateralization terms, cash flow release mechanisms or other significant factors regarding the calculation of net income to us. Failure to obtain favorable terms with regard to these matters may materially and adversely affect our net income and/or our free cash flow. If our assets fail to perform as anticipated, our over-collateralization or other credit enhancement expense associated with our CDO financings will increase.

The failure to comply with CDO coverage tests has a negative impact on our cash flow.

The terms of both of our CDOs include coverage tests, including over-collateralization and interest coverage tests, used primarily to determine whether and to what extent principal and interest proceeds on the underlying

collateral debt securities and other assets may be used to pay principal of and interest on the subordinate classes of bonds in the applicable CDO. In the event the coverage tests are not satisfied, interest and principal that would otherwise be payable on the subordinate classes may be re-directed to pay principal on the senior bond classes. Therefore, failure to satisfy the coverage tests could adversely affect cash flows received by us from the CDOs and thereby our liquidity and operating results. As of December 31, 2008, none of the collateral debt securities or other assets in the applicable CDOs is in a condition that would cause expedited amortization.

We may be required to repurchase loans that we have sold to indemnify holders of our CDOs.

If any of the loans we originate or acquire and sell or securitize do not comply with representations and warranties that we make about certain characteristics of the loans, the borrowers and the underlying properties, the terms of CDO I and CDO II require us, and the terms of any future CDOs will likely require us, to repurchase those loans (including from a trust vehicle used to facilitate a structured financing of the assets through CDOs) or replace them with substitute loans. In addition, in the case of loans that we have sold instead of retained, we may be required to indemnify purchasers for losses or expenses incurred as a result of a breach of a representation or warranty. Repurchased loans typically require a significant allocation of working capital to carry on our books, and our ability to borrow against such assets is limited. Any significant repurchases or indemnification payments could materially and adversely affect our financial condition and operating results.

An increase in prepayment rates could adversely affect yields on our investments.

The value of our assets may be affected by prepayment rates on mortgage loans. Prepayment rates on mortgage loans are influenced by changes in interest rates and a variety of economic, geographic and other factors beyond our control, and consequently, prepayment rates cannot be predicted with certainty. In periods of declining mortgage interest rates, prepayments on mortgage loans generally increase. If general interest rates decline as well, we are likely to reinvest the proceeds of prepayments received during these periods in assets yielding less than the mortgage loans that were prepaid. In addition, the market value of the mortgage loan assets may, because of the risk of prepayment, benefit less than other fixed-income securities from declining interest rates. Conversely, in periods of rising interest rates, prepayments on mortgage loans generally decrease, in which case we would not have the prepayment proceeds available to invest in assets with higher yields. Under certain interest rate and prepayment scenarios, we may fail to recoup fully our cost of certain investments purchased at a premium to face value.

Our hedging transactions may limit our gains, result in losses or limit our free cash flow.

We intend to use derivative instruments, including forwards, futures, swaps and options, in our risk management strategy to limit the effects of changes in interest rates on our operations. The value of our forwards, futures and swaps may fluctuate over time in response to changing market conditions, and will tend to change inversely with the value of our liabilities that we intend to hedge. Hedges are sometimes ineffective because the correlation between changes in value of the underlying investment and the derivative instrument is less than was expected when the hedging transaction was undertaken. Since a substantial portion of our hedging activity is intended to cover the period between origination or purchase of loans using short term financing vehicles and obtaining permanent fixed-rate financing for those loans, unmatched losses in our hedging program may occur when the planned permanent fixed rate financing fails to occur, we sell the underlying asset, or if the hedge proves to be ineffective. Realized losses on hedge positions will reduce cash available for distribution to stockholders and such losses may exceed amounts invested in these instruments.

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

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

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

We are subject to significant competition and we may not compete successfully.

We are subject to significant competition in acquiring investments. We compete with many other companies, such as other REITs, insurance companies and other investors, including funds and companies affiliated with the J.E. Robert Company. Although the current market environment has led many of our traditional competitors to reduce their demand for investments we have seen new competitors enter the field to take advantage of dislocations in the lending market and perceived attractive returns. Some of our competitors have greater resources than us, and we may not be able to compete successfully for investments.

Maintenance of our Investment Company Act exemption imposes limits on our operations.

We conduct our operations so as not to become regulated as an investment company under the Investment Company Act. We believe that there are a number of exemptions under the Investment Company Act that may be applicable to us. The assets that we may acquire, therefore, are limited by the provisions of the Investment Company Act and the rules and regulations promulgated under the Investment Company Act. In addition, we could, among other things, be required either (a) to change the manner in which we conduct our operations to avoid being required to register as an investment company or (b) to register as an investment company, either of which could adversely affect us and the market price for our stock.

Risks Related to Our Investments

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

We own assets directly or indirectly secured by real estate and may own real estate directly. Real estate investments will be subject to various risks, including:

•

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

•

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

•

adverse changes in national and local economic and market conditions and credit performance of tenants;

•

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

•

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

•

the potential for uninsured or underinsured property losses.

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

The mortgage loans in which we invest and the mortgage loans underlying the mortgage backed securities in which we invest are subject to risks of delinquency, foreclosure and loss, which could result in losses to us.

Commercial mortgage loans are secured by multifamily or commercial property and are subject to risks of delinquency and foreclosure, and risks of loss of interest and principal. 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 the risks particular to real property described above, as well as, among other things:

•

tenant mix;

•

success of tenant businesses;

•

property management decisions;

•

property location and condition;

•

competition from comparable types of properties;

•

changes in specific industry segments;

•

declines in regional or local real estate values, or rental or occupancy rates; and

•

increases in interest rates, real estate tax rates and other operating expenses.

In the event of any default under a mortgage loan held directly by us, we will bear a risk of loss of interest and principal to the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage loan, which could have a material adverse effect on our cash flow from operations and limit amounts available for distribution to our stockholders. In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to that borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. Foreclosure of a mortgage loan can be an expensive and lengthy process that could have a substantial negative effect on our anticipated return on the foreclosed mortgage loan.

~~CMBS~~39 evidence interests in, or are secured by, a single commercial mortgage loan or a pool of commercial mortgage loans. Accordingly, the mortgage backed securities we invest in are subject to all of the risks of the underlying mortgage loans. For our 26 CMBS investments, 21 are investments in conduit issuances between 2004 and 2007 in which JRT owns the first-loss position. For the 21 first-loss CMBS positions which are collateralized by approximately 3,500 loans with an aggregate outstanding principal balance of approximately $48 billion, the 60 day delinquency rate based on the most recent remittance reports as of December 31, 2008 was 0.83%. As of March 27, 2009, including transfers and returns subsequent to December 31, 2008, 104 loans totaling approximately $1.2 billion are being managed by the Special Servicer, which is an affiliate of the J.E Robert Company. Of the $1.2 billion of loan balances in special servicing, 33 loans totaling $251.4 million are current, 6 loans totaling $40.6 million has been foreclosed upon and 65 loans totaling $862.9 million are delinquent and are in monetary default. The balance of the 71 loans that are either delinquent or have been foreclosed represent approximately 1.9% of the total loan balance collateralizing the 21 related CMBS investments in which the Company has an interest.

With respect to our CMBS investments where we are not in the first-loss position, one of our CMBS investments is in a Re-Remic which is collateralized by multiple bond classes from individual securitizations that

~~were~~Since ~~issued from 1997 to 2003. As of the most recent remittance report as of~~ December 31, 2008, ~~the~~we ~~total~~have ~~underlying~~seen ~~loan~~a ~~pool~~significant ~~principal~~increase ~~balance collateralizing~~in ~~the individual securitizations totals approximately $10.2 billion with delinquent loans representing approximately 4.3% of the outstanding pool balance. 3 of our~~ CMBS ~~investments are in the BB, BB+ and BBB~~60-day ~~classes of trusts issued~~and ~~between~~greater ~~2005~~delinquencies and ~~2007~~CMBS ~~and as of the most recent remittance reports as of December 31, 2008, the total outstanding principal balance of these~~ loan ~~pools serving as~~ collateral ~~for~~entering ~~the~~our ~~trusts~~CMBS ~~was~~special ~~approximately~~servicing $9portfolio.5 ~~billion,~~The ~~with~~following ~~delinquent~~table ~~loans representing~~identifies 43trends ~~basis points of the outstanding pool balance. One of our CMBS investments is~~ in ~~the~~delinquency ~~BB-~~rates, ~~class~~special ofservicing arates, ~~trust~~realized ~~that~~losses ~~was~~appraisal ~~issued~~reductions ~~in 1998~~ and asprojected oflosses ~~the~~on ~~most~~our ~~recent remittance report as of December 31, 2008, the outstanding balance of the~~real estate loan ~~pool serving as~~ collateral ~~for~~underlying ~~the~~our ~~trust~~“first-loss” ~~was~~CMBS ~~approximately $373 million, with delinquent loans representing 5~~portfolio.1% ~~of the outstanding pool balance.~~


	December 31, 2008			September 30, 2009			December 31, 2009			March 31, 2010⁽¹⁾			June 30, 2010⁽¹⁾			September 30, 2010⁽¹⁾
	(unaudited)			(unaudited)			(unaudited)			(unaudited)			(unaudited)			(unaudited)
CMBS Portfolio
Total CMBS investments		26			26			26			25			25			25
Face amount of CMBS investments	$	1,757,354		$	1,717,495		$	1,706,288		$	1,512,373		$	1,477,733		$	1,363,247
CMBS investments in which JRT owns the first-loss position		21			21			21			19			19			19
Face amount of first-loss CMBS investments	$	1,651,790		$	1,628,104		$	1,616,897		$	1,423,683		$	1,389,163		$	1,277,988
Face amount of collateral pool for first-loss CMBS investments	$	47,729,268		$	46,988,003		$	46,166,110		$	40,558,585		$	40,077,056		$	39,699,611

Credit Statistics on Collateral Pool for First-Loss CMBS Investments
60-day+ delinquency amount	$	392,963		$	1,500,596		$	1,543,098		$	2,645,776		$	3,044,466		$	3,240,308
60-day+ delinquency rate		0.8	%		3.2	%		3.3	%		6.5	%		7.6	%		8.2	%

Special servicing amount	$	713,515		$	3,388,698		$	3,107,147		$	4,598,153		$	4,487,474		$	4,699,261
Special servicing rate		1.5	%		7.2	%		6.7	%		11.3	%		11.2	%		11.8	%

Realized losses to date	$	3,404		$	27,206		$	37,575		$	53,561		$	112,341		$	195,011
Appraisal reductions to date	$	19,010		$	395,556		$	474,033		$	650,888		$	1,176,671		$	1,246,161

Projected losses over life of collateral pool	$	964,107		$	1,686,918		$	1,658,918		$	2,025,503		$	2,052,987		$	2,491,627
Projected loss rate over life of collateral pool		2.0	%		3.6	%		3.6	%		5.0	%		5.1	%		5.8	%

⁽¹⁾	On March 30, 2010, the Company sold its interest in two non-CDO CMBS investments in which it held the first-loss position. In one of these investments, the Company retained other CMBS bond classes which were not in the first-loss position.

Our investments in subordinated commercial mortgage backed securities could subject us to increased risk of 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 provided by the borrower, if any, and then by the “first loss” subordinated security holder. In the event of default and the exhaustion of any equity support, reserve fund, letter of credit and any classes of securities junior to those in which we invest, we 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 securities, the securities in which we invest may effectively become the “first loss” position behind the more senior securities, which may result in significant losses to us.

The prices of lower credit quality securities are generally less sensitive to interest rate changes than more highly rated investments, but more sensitive to adverse economic downturns or individual issuer developments. A projection of or actual economic downturn, for example, could cause a decline in the price of lower credit quality securities because the ability of obligors of ~~mortgages~~ mortgages underlying mortgage backed securities to make principal and interest payments or to refinance may be impaired. In this case, existing credit support in the securitization structure may be insufficient to protect us against loss of our principal on these securities. As of December 31, ~~2008~~2009, $~~185~~86.10 million, or approximately 3743.37%, of the ~~cost~~fair ~~basis~~value of our investment portfolio consisted of non-investment grade subordinated CMBS.

Investment in non-investment grade CMBS may be illiquid, may have a higher risk of default, and may not produce current returns.

The CMBS securities in which we invest are generally non-investment grade, which means that nationally recognized statistical rating organizations rate them below the top four investment-grade rating categories (i.e., “AAA” through “BBB”), and are sometimes referred to as “junk bonds.” Non-investment grade CMBS bonds and preferred shares tend to be less liquid, may have a higher risk of default and may be more difficult to value. Non-investment grade securities usually provide a higher yield than do investment grade securities, but with the higher return comes greater risk of default. In addition, the fair value of these securities may change as interest rates change over time. Economic recessions or downturns may cause defaults or losses on collateral securities to increase. Non-investment grade securities are considered speculative, and their capacity to pay principal and interest in accordance with the terms of their issue is not ensured.

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

Investments in mezzanine loans take the form of subordinated loans secured by second mortgages on the underlying property or loans secured by a pledge of the ownership interests in the entity that directly or indirectly owns the property. These types of investments involve a higher degree of risk than a senior mortgage loan because the investment may become unsecured as a result of foreclosure by the senior lender. In certain cases, borrowers may be able to make an accrual election whereby they forego making cash interest payments in exchange for accruing interest at a higher rate resulting in a mismatch in taxable income, cash flow from operations and cash available for distributions to shareholders. In the event of a bankruptcy of the entity providing the pledge of its ownership interests as security, we may not have full recourse to the assets of the property owning entity, or the assets of the entity may not be sufficient to satisfy our mezzanine loan. If a borrower defaults on our mezzanine loan or debt senior to our loan, or in the event of a borrower bankruptcy, our mezzanine loan will be satisfied only after the senior debt is paid in full. As a result or accrual elections, bankruptcy and borrower defaults, we may not recover some or all of our investment, which could result in losses. In addition, mezzanine loans may have higher loan to value ratios than conventional mortgage loans, resulting in less equity in the property and increasing the risk of loss of principal. As of December 31, 2009, $111.1 million, or approximately 56.3%, of the fair value of our portfolio consisted of mezzanine loans.

because the investment may become unsecured as a result of foreclosure by the senior lender. In certain cases, borrowers may be able to make an accrual election whereby they forego making cash interest payments in exchange for accruing interest at a higher rate resulting in a mismatch in taxable income, cash flow from operations and cash available for distributions to shareholders. In the event of a bankruptcy of the entity providing the pledge of its ownership interests as security, we may not have full recourse to the assets of the property owning entity, or the assets of the entity may not be sufficient to satisfy our mezzanine loan. If a borrower defaults on our mezzanine loan or debt senior to our loan, or in the event of a borrower bankruptcy, our mezzanine loan will be satisfied only after the senior debt is paid in full. As a result or accrual elections, bankruptcy and borrower defaults, we may not recover some or all of our investment, which could result in losses. In addition, mezzanine loans may have higher loan to value ratios than conventional mortgage loans, resulting in less equity in the property and increasing the risk of loss of principal. As of December 31, 2008, $226.6 million, or approximately 45.7%, of the cost basis of our portfolio consisted of mezzanine loans.

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

A B-Note is a mortgage loan typically (i) secured by a first mortgage on a single large commercial property or group of related properties and (ii) subordinated to an A-Note secured by the same first mortgage on the same collateral. As a result, if a borrower defaults, there may not be sufficient funds remaining for B-Note holders after payment to the A-Note holders. B-Notes reflect similar credit risks to comparably rated commercial mortgage backed securities. However, since each transaction is privately negotiated, B-Notes can vary in their structural characteristics and risks. For example, the rights of holders of B-Notes to control the process following a borrower default may be limited in certain investments. We cannot predict the terms of each B-Note investment. The higher risks associated with our subordinate position in our B-Note investments could subject us to increased risk of losses. As of December 31, 2008, we had no B-Note investments.

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

We may provide bridge loans secured by first lien mortgages on a property to borrowers who are typically seeking short-term capital to be used in an acquisition or renovation of real estate. The borrower has usually identified an undervalued asset that has been under-managed or is located in a recovering market. If the market in which the asset is located fails to recover according to the borrower’s projections, or if the borrower fails to improve the quality of the asset’s management or the value of the asset, the borrower may not receive a sufficient return on the asset to satisfy the bridge loan, and we may not recover some or all of our investment. As of December 31, 2008, we had no bridge loan investments.

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

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

We may make preferred equity investments. Preferred equity investments are subordinate to debt financing and are not secured. Should the issuer default on our investment, we would only be able to proceed against the entity that issued the preferred equity in accordance with the terms of the preferred security, and not any property owned by the entity. Furthermore, in the event of bankruptcy or foreclosure, we would only be able to recoup our investment after any lenders to the entity are paid. As a result, we may not recover some or all of our investment, which could result in losses. As of December 31, 2008, we had no preferred equity investments.

Investments in REIT debt securities are subject to specific risks relating to the particular REIT issuer of the securities and to the general risks of investing in subordinated real estate securities, which may result in losses to us.

We may invest in REIT debt securities. Investments in REIT debt securities involve special risks relating to the particular REIT issuer of the securities, including the financial condition and business outlook of the issuer. Investments in REIT debt securities are subject to the inherent risks associated with real estate-related investments discussed in this report, including the risks described above with respect to mortgage loans and mortgage backed securities and similar risks, including:

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

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

• risks generally incident to interests in real property; and

• risks specific to the type and use of a particular commercial property.

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

• limited liquidity in the secondary trading market;

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

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

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

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

• issuer non-compliance with REIT requirements which if not met, may limit cash flow available to the issuer to service our indebtedness; and

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

These risks may adversely affect the value of outstanding REIT debt securities and the ability of the issuers thereof to repay principal and interest or make dividend payments, which could reduce our ability to make distributions to our stockholders. At December 31, 2008, we had no investments in REIT debt securities.

Investments in net lease properties may generate losses.

We invest in net leased real estate assets. The value of our investments and the income from our investments in net lease properties will depend upon the ability of the applicable tenant to meet its lease obligations and to maintain the property under the terms of the lease. If a tenant fails to meet its lease obligations or becomes unable to so maintain a property, we will be subject to all risks associated with owning real estate. In addition, under many net leases the owner of the property retains certain obligations with respect to the property, including among other things, the responsibility for maintenance and repair of the property, to provide adequate parking, maintenance of common areas and compliance with other affirmative covenants in the lease. If we were to fail to meet these obligations, the applicable tenant could abate rent or terminate the applicable lease, which may result in a loss of our capital invested in, and anticipated profits from, the property. In addition, we may find it difficult to lease property to new tenants that may have been suited to the particular needs of a former tenant. As of December 31, 2008, we had no investments in joint ventures.

We may not have control over certain of our loans and investments.

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

•

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

•

acquire only a participation in an underlying investment;

•

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

•

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

Therefore, we may not be able to exercise control over the loan or investment with regards to the potential mismatch of equity in earnings and cash distributions from certain investments. As such, there may be instances whereby earnings from such investments are withheld from distribution to satisfy working capital needs, margin requirements or ~~repurchase~~debt ~~securities~~repayments, ~~upon~~among ~~the occurrence of certain~~ other events.

We41 ~~may make investments in non-U.S. dollar denominated securities, which subject us to currency rate exposure and the uncertainty of foreign laws and markets.~~

WeTable may purchase CMBS denominated in foreign currencies. We expect that our exposure, if any, would be principally to the British pound and the euro. A change in foreign currency exchange rates may have an adverse impact on returns on our non-dollar denominated investments. Although we may hedge our foreign currency risk, subject to the REIT income qualification tests, we may not be able to do so successfully and may incur losses on these investments as a result of exchange rate fluctuations. Investments in foreign countries also subject us to risks of multiple and conflicting tax laws and regulations and political and economic instability abroad, which could adversely affect our receipt of interest income on these investments. At December 31, 2008, we had no investments in non-US dollar denominated securities. Contents

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

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

Credit ratings assigned to our investments are subject to ongoing evaluation and we cannot assure you that the ratings currently assigned to our investments will not be downgraded or that they accurately reflect the risks associated with those investments.

Some of the debt securities in which we invest are rated by S&P, Moody’s and/or Fitch. Rating agencies rate these investments based upon their assessment of the perceived safety of the receipt of principal and interest payments from the issuers of such debt securities. Credit ratings assigned by the rating agencies may not fully reflect the true risks of an investment in such securities. Also, rating agencies may fail to make timely adjustments to credit ratings based on recently available data or changes in economic outlook or may otherwise fail to make changes in credit ratings in response to subsequent events, so that our investments may in fact be better or worse than the ratings indicate. We try to reduce the impact of the risk that a credit rating may not accurately reflect the risks associated with a particular debt security by not relying solely on credit ratings as the indicator of the quality of an investment. We make our acquisition decisions after factoring in other information, such as the discounted value of a security’s projected future cash flows. However, our assessment of the quality of an investment may also prove to be inaccurate and we may incur credit losses in excess of our initial expectations.

44Credit rating agencies may also change their methods of evaluating credit risk and determining ratings on securities backed by real estate loans and securities. These changes have increased in frequency over the past year and in the future may occur quickly and often. For example, during 2009, credit rating agencies downgraded original ratings on nearly all conduit and fusion CMBS issued in 2005 to 2007. These downgrades have had a material adverse affect on our business, financial condition, liquidity and results of operations.

reflect the true risks of an investment in such securities. Also, rating agencies may fail to make timely adjustments to credit ratings based on recently available data or changes in economic outlook or may otherwise fail to make changes in credit ratings in response to subsequent events, so that our investments may in fact be better or worse than the ratings indicate. We try to reduce the impact of the risk that a credit rating may not accurately reflect the risks associated with a particular debt security by not relying solely on credit ratings as the indicator of the quality of an investment. We make our acquisition decisions after factoring in other information, such as the discounted value of a security’s projected future cash flows. However, our assessment of the quality of an investment may also prove to be inaccurate and we may incur credit losses in excess of our initial expectations.

Credit rating agencies may also change their methods of evaluating credit risk and determining ratings on securities backed by real estate loans and securities. These changes have increased in frequency over the past year and in the future may occur quickly and often. For example, Moody’s recently announced that it was revising its loss methodology for CMBS and reviewing its outstanding ratings on all conduit and fusion CMBS issued in 2006, 2007 and 2008. Moody’s subsequently downgraded eight securitization transactions that serve as a portion of the collateral for CDO II. On February 19, 2009, Fitch downgraded most notes payable tranches of CDO II, in addition to previous downgrades of certain notes payable tranches of CDO I. The commercial real estate mortgage finance, real estate and capital markets’ ability to understand and absorb these changes, and the impact to the securitization market in general, are difficult to predict, and such downgrades could have a material adverse effect on our business, financial condition, liquidity and results of operations.

Rating agency downgrades have and may continue to adversely affect our cash flows.

The terms of our CDOs include certain over-collateralization and interest coverage tests, which are used primarily to determine whether and to what extent principal and interest paid on the debt securities and other assets that serve as collateral underlying the CDOs may be used to pay principal and interest on the various classes of notes payable issued by the CDOs. In the event these tests are not satisfied, interest and principal that would otherwise be payable on certain of the junior tranches of notes payable issued by the CDOs is instead redirected to pay principal on certain senior tranches of notes payable issued by the CDOs.

ToWith ~~date,~~respect ~~rating agency downgrades have not generally affected the over-collateralization coverage tests applicable~~ to ~~collateral in~~ CDO I, ~~which~~ ~~is not affected unless its collateral is downgraded to CC or below. However, there can be no assurance that continued adverse developments in the mortgage markets and further~~ rating agency downgrades ~~will~~of ~~not~~collateral ~~cause~~below ~~the~~“CC” ~~cash~~requires ~~flows~~redirection ~~that otherwise would have been payable to us, as the holder~~ of ~~certain~~cash ~~junior~~flow ~~tranches~~from ofsuch ~~notes~~downgraded bonds ~~payable issued by CDO I,~~ to ~~instead~~more ~~be redirected to pay principal and interest on the most~~ senior ~~tranches of notes payable issued by~~ CDO I, ~~which~~Notes ~~are owned by third parties~~Payable. ~~As a result, such downgrades could have a material adverse effect on our liquidity and results of operations.~~

Certain over-collateralization coverage tests failed with respect to the February 2009 determination date for CDO II as a result of recent ratings downgrades and other ratings actions that have occurred since December 31, 2008. As a result, on the February 25, 2009 distribution date, approximately $2.2 million of cash from CDO II that otherwise would have been payable to us, as the holder of certain junior tranches of notes payable and preferred shares issued by CDO II, were instead redirected to pay principal and interest on certain senior tranches of notes payable issued by CDO II, which are owned by third parties. We expect that such coverage tests will continue to fail for the foreseeable future.

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

4542

In addition, the terms of our repurchase agreement with JPMorgan provide that we are subject to margin calls based on JPMorgan’s perceived value of their collateral. Declines in perceived values of collateral could be a result of factors including, but not limited to, ratings downgrades of such collateral and changes to financial performance or perceived value of loans underlying such collateral.

Insurance on mortgage loans and real estate securities collateral may not cover all losses.

There are certain types of losses, generally of a catastrophic nature, such as earthquakes, floods, hurricanes, terrorism or acts of war that may be uninsurable or not economically insurable. Inflation, changes in building codes and ordinances, environmental considerations and other factors, including terrorism or acts of war, also might make the insurance proceeds insufficient to repair or replace a property if it is damaged or destroyed. Under these circumstances, the insurance proceeds received might not be adequate to restore our economic position with respect to the affected real property.

As a result of the events of September 11, 2001, insurance companies are limiting and excluding coverage for acts of terrorism in insurance policies. As a result, we may suffer losses from acts of terrorism that are not covered by insurance. In addition, the mortgage loans that are secured by certain of our properties contain customary covenants, including covenants that require us to maintain property insurance in an amount equal to the replacement cost of the properties. There can be no assurance that the lenders under our mortgage loans will not take the position that exclusions from our coverage for losses due to terrorist acts is a breach of a covenant that, if uncured, could allow the lenders to declare an event of default and accelerate repayment of the mortgage loans.

Many of our investments are illiquid and we may not be able to vary our portfolio in response to changes in economic and other conditions.

The real estate securities that we purchase in connection with privately negotiated transactions are not registered under the relevant securities laws, resulting in a prohibition against their transfer, sale, pledge or other disposition except in a transaction that is exempt from the registration requirements of, or is otherwise in accordance with, those laws. A majority of the mortgage backed securities that we purchase are traded in private, unregistered transactions and are therefore subject to restrictions on resale or otherwise have no established trading market. As a result, our ability to vary our portfolio in response to changes in economic and other conditions may be relatively limited and may, at times, require us to sell such investments at a loss. The ~~B-Notes,~~ mezzanine, ~~bridge~~ and mortgage loans we originate or purchase are particularly illiquid investments due to their short life, their potential unsuitability for securitization and the greater difficulty of recovery in the event of a borrower’s default.

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

Our investment policy allows us to invest up to 20% of our equity in any individual investment unless waived by our board of directors. As a result, our portfolio may be concentrated in a small number of assets, increasing the risk of loss to us and our stockholders if a default or other problem arises.

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

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

~~When~~43 we acquire net leased properties directly, there may be environmental problems associated with the property of which we were unaware. The presence of hazardous substances may adversely affect an owner’s

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

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

Investment properties we have acquired and the properties underlying our investments are required to comply with the Americans with Disabilities Act and fire, safety and other regulations, which may require us or them to make unintended expenditures that adversely impact their ability to make interest payments to us and our ability to pay dividends to stockholders.

Any properties we have acquired directly, and the properties underlying our investments, are required to comply with the Americans with Disabilities Act, or the ADA. The ADA has separate compliance requirements for “public accommodations” and “commercial facilities,” but generally requires that buildings be made accessible to people with disabilities. Compliance with the ADA requirements could require removal of access barriers and non-compliance could result in imposition of fines by the U.S. Government or an award of damages to private litigants, or both. While the tenants to whom we lease properties are obligated by law to comply with the ADA provisions, and we expect under our leases will be obligated to cover costs associated with compliance, if required changes involve greater expenditures than anticipated, or if the changes must be made on a more accelerated basis than anticipated, the ability of these tenants to cover costs could be adversely affected and we could be required to expend our own funds to comply with the provisions of the ADA, which could adversely affect our results of operations and financial condition and our ability to make distributions to stockholders. In addition, we are required to operate our properties in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and bodies and become applicable to our targeted investment properties and properties underlying our investments. We may be required to make substantial capital expenditures to comply with those requirements and these expenditures could have a material adverse effect on our ability to make distributions to our stockholders. Further, required compliance with these rules and regulations by the owners of the properties underlying our investments may reduce their funds available to make interest payments to us.

We may be adversely affected by unfavorable economic changes in geographic areas where the properties underlying our investments may be concentrated.

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

4744

Risks Relating to Our Management and our Relationship with Our Manager and J.E. Robert Company and its Affiliates

We are dependent upon our manager and certain key personnel of J.E. Robert Company provided to us through our manager and may not find a suitable replacement if our manager terminates the management agreement or such key personnel are no longer available to us.

Neither we nor our manager have any employees. All of our officers are employees of J.E. Robert Company. We have no separate facilities and are completely reliant on our manager and J.E. Robert Company, which has significant discretion as to the implementation of our operating policies and strategies. Pursuant to a services agreement among us, our manager and J.E. Robert Company, our manager relies on J.E. Robert Company to provide our manager with the personnel, services and resources as needed by our manager to enable it to carry out its obligations and responsibilities under the management agreement. Our manager is not significantly capitalized and does not have its own facilities or employees separate from J.E. Robert Company. Mr. Joseph E. Robert, Jr. is the sole stockholder of J.E. Robert Company as of the date hereof. Mr. Robert beneficially owns a majority of the membership interests of our manager, and as a result, Mr. Robert is in a position to control the policies, decision making and operations of our manager. WeSince April 2009, we have paid the manager less than the agreed upon contractual base management fee or nothing at all. As a result, we are subject to the risk that our manager will terminate the management agreement and that no suitable replacement will be found to manage us. We believe that ~~our~~we ~~success depends~~are dependent, to a significant extent, upon the experience of certain of J.E. Robert Company’s executive officers, whose continued service is not guaranteed. If our manager terminates the management agreement or key officers leave our manager, we may be unable to execute our business plan.

There are conflicts of interest in our relationship with J.E. Robert Company and its affiliates, including with our manager, which could result in decisions that are not in the best interests of our stockholders.

Our chairman and chief executive officer and ~~two other members of our board of directors and~~ each of our executive officers also serve as officers of our manager and other J.E. Robert Company affiliates. Certain senior officers of J.E. Robert Company, some of whom are also our officers and directors, and their affiliates beneficially own all of the outstanding membership interests of our manager. J.E. Robert Company, and affiliates of J.E. Robert Company currently manage and invest in other real estate-related investment entities. The personnel provided to us through our manager are not required to devote a specific amount of time to our business. At the time of our formation when our management agreement, incentive plan, conflicts policy and other organizational matters were approved for us, Mr. Robert, was the sole stockholder of J.E. Robert Company, was our sole stockholder and our sole director. As a result, these matters were not negotiated at arm’s length, and their terms, including fees payable to our manager, may not be as favorable to us as if they had been negotiated with an unaffiliated third party. In addition, we may enter into transactions in the future with J.E. Robert Company and its affiliates that may result in conflicts of interest. In addition, we have agreed to indemnify J.E. Robert Company and our manager and their respective directors and officers with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts not constituting bad faith, willful misconduct, gross negligence, or reckless disregard of their respective duties, performed in good faith in accordance with and pursuant to the management agreement and the related services agreement.

Termination of our management agreement would be costly.

Termination of the management agreement with our manager without cause or non-renewal of the management agreement is costly. The management agreement renews automatically each year and we must give our manager 180 days prior notice of any termination or non-renewal and pay a termination fee, within 90 days of termination, equal to four times the sum of the base management fee and the incentive fee for the 12-month period preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination. We also must pay the termination fee if we fail to renew the agreement upon expiration of the initial term or subsequent terms. In addition, following any termination of the management agreement, we must pay our manager all compensation accruing to the date of the termination. These provisions increase the effective cost to us of terminating or electing not to renew the management agreement, thereby adversely affecting our ability to terminate our manager without cause, even if we believe the manager’s performance is not satisfactory.

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agreement, we must pay our manager all compensation accruing to the date of the termination. These provisions increase the effective cost to us of terminating or electing not to renew the management agreement, thereby adversely affecting our ability to terminate our manager without cause, even if we believe the manager’s performance is not satisfactory.

Our investment opportunities may be limited by the conflicts of interest policy of J.E. Robert Company, which manages or co-manages private equity funds with investment objectives that overlap with ours, and by the terms of the US Debt Fund.

Our manager is an affiliate of J.E. Robert Company, which also manages other private equity funds through other management companies. Two of these funds, JER Fund IV and the US Debt Fund (for which we serve as co-manager with JER Fund IV), have overlapping investment objectives with us. JER Fund IV invests in a wide range of commercial real estate equity and debt assets, including direct ownership of real estate, non-conduit commercial mortgage backed securities, equity securities, preferred equity and high yield debt (typically with equity participation). The US Debt Fund invests in loans secured, directly or indirectly, by real estate, including B-Notes, mezzanine loans and whole mortgage loans, and also in preferred equity, CMBS and CMBS-related products such as CMBX and credit default swaps (collectively, “Targeted Investments”). We target primarily conduit commercial mortgage backed securities, mezzanine loans, net leased real estate, ~~bridge loans, B-Notes, preferred equity, corporate loans~~ and commercial mortgage loans. Because J.E. Robert Company makes investment decisions for us through our manager and for these other funds through certain of its other subsidiaries, there may be conflicts of interest at J.E. Robert Company as to which investment opportunities are allocated to each of fund.

We must abide by the terms of the conflicts of interest policy developed by J.E. Robert Company with respect to conflicts of interest among us, JER Fund IV and the US Debt Fund. To the extent that specific investment opportunities are determined by J.E. Robert Company to be suitable for and advantageous to each of these funds, J.E. Robert Company will allocate the opportunities equally among the funds wherever reasonably practicable. Where J.E. Robert Company determines that an equal allocation is not reasonably practicable (but subject to the required allocation of Targeted Investments to the ~~U.S.~~US Debt Fund under the ~~U.S.~~ US Debt Fund Limited Partnership Agreement), it will allocate that investment in a manner that it determines in good faith to be fair and reasonable, including solely to JER Fund IV or the US Debt Fund. Therefore, the J.E. Robert Company conflicts policy may at times prevent us from acquiring a 100% interest or even a partial interest in certain attractive investments.

The J.E. Robert Company conflicts policy permits us to own debt securities and loans relating to real estate assets in which JER Fund IV or the ~~U.S.~~US Debt Fund owns an equity position, but in order to prevent different funds managed by J.E. Robert Company from holding opposing interests in a foreclosure or workout, in the event of a default in respect of such debt, all foreclosure and ~~workout~~ workout decisions are required to be made by a co-investor in such debt that is unaffiliated with the J.E. Robert Company, if there is one, or, if not, then by a servicer unaffiliated with the J.E. Robert Company. Therefore, we may be required to ~~delegate~~ delegate the authority to assert our rights in respect of debt securities or loans relating to real estate in a foreclosure or workout situation to a third party, which would not necessarily have the same interests as us in or be as effective as us at at resolving such foreclosure or workout.

J.E. Robert Company will apply the foregoing allocation procedures to us and any other investment funds, companies, vehicles or other entities that it controls or manages in the future with which we have overlapping investment objectives. J.E. Robert Company may alter its conflicts of interest policy at any time without notice to or input from us or our stockholders. The conflicts policy may make it difficult for us to avoid the registration requirements of the Investment Company Act or to satisfy the REIT requirements of the tax laws. It may also cause us to forego desirable investment opportunities and may limit our ability to refocus our investment strategy, if required.

We46 may invest in mortgage loans, mezzanine loans or B-Notes where a JER Fund owns all or a portion of the equity in the underlying borrower, and as a result, we will not have the typical control, approval, consent or other rights we generally obtain in such investments.

We may invest in mortgage loans, mezzanine loans or B-Notes where a JER Fund owns all or a portion of the equity in the underlying borrower~~. In these transactions~~, weand ~~will~~as bea ~~deemed an affiliate of the applicable borrower. As such~~result, we will ~~generally~~ not behave ~~able~~the ~~to obtain~~ typical control, approval, consent or other rights with respect to certain material matters such as loan modifications, forgiveness of debt or foreclosure. These control, approval, consent and other rights will instead be exercised by a third party co-investor, which may result in recoveries by us that are less than what we ~~would~~generally ~~realize~~obtain in ~~the~~such ~~event we had our typical control, approval, consent and other rights~~investments.

With the unanimous consent of our independent directors and subject to compliance with certain other internal requirements applicable to these types of affiliate transactions, we may invest in mortgage loans, mezzanine loans or B-Notes where a JER Fund owns all or a portion of the equity in the underlying borrower. In these transactions, we will be deemed an affiliate of the applicable borrower. As such, we will generally not be able to obtain typical control, approval, consent or other rights with respect to certain material matters such as loan modifications, forgiveness of debt or foreclosure. These control, approval, consent and other rights will instead be exercised by a third party co-investor, which may result in recoveries by us that are less than what we would realize in the event we had our typical control, approval, consent and other rights.

Mr. Joseph E. Robert, Jr. has significant control over our company and will influence decisions regarding our operations and our business.

Mr. Joseph Robert, Jr. is our chairman and chief executive officer and the ~~chairman and chief~~ executive ~~officer~~chairman of our manager. As of the date hereof, Mr. Robert beneficially owns a majority of the membership interests of our manager and approximately 9.8.4% of our common stock. As a result, Mr. Robert has significant control over us, particularly our management. Mr. Robert may exercise his influence over us and make decisions with which you may disagree.

Our board of directors has approved very broad investment guidelines for our manager and does not approve each investment decision made by our manager.

Our manager is authorized to follow very broad investment guidelines. Our directors will periodically review our investment guidelines and our investment portfolio. However, our board does not review each proposed investment. In addition, in conducting periodic reviews, the directors will rely primarily on information provided to them by our manager. Furthermore, transactions entered into by our manager may be difficult or impossible to unwind by the time they are reviewed by the directors. Our manager has great latitude within the broad investment guidelines in determining the types of assets it may decide are proper investments for us.

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

We may change our investment strategy at any time without the consent of our stockholders, which could result in our making investments that are different from, and possibly riskier than, the investments described in this report. A change in our investment strategy may also increase our exposure to interest rate, credit market and real estate market fluctuations.

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

Our board of directors determines our operational policies and may amend or revise our policies, including our policies with respect to our REIT status, acquisitions, growth, operations, indebtedness, capitalization and distributions or approve transactions that deviate from these policies, without a vote of, or notice to, our stockholders. Operational policy changes could adversely affect the market price of our common stock and our ability to make distributions to our stockholders.

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Risks Related to Our Organization and Structure

Maryland takeover statutes may prevent or make difficult a change of control of our company that could be in the interests of our stockholders.

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

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any person who beneficially owns 10% or more of the voting power of the outstanding voting stock of the corporation’s shares; or

•

an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation.

A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction by which he otherwise would have become an interested stockholder.

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

•

80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation, voting together as a single voting group; and

•

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

The business combination statute may discourage others from trying to acquire control of a corporation and increase the difficulty of consummating any offer, including potential acquisitions that might involve a premium price for the common stock of that corporation or otherwise be in the interest of the stockholders of that corporation.

We have exempted by charter provision all business combinations from the application of this statute and consequently, the five-year prohibition and the super-majority vote requirements described above will not apply to any business combination between any other party and us. However, we may, by charter amendment approved by our board of directors and our stockholders, opt into the business combination provisions of Maryland law in the future.

We also have opted out of the “control share” provisions of Maryland law that provide that “control shares” of our company (defined as shares that, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”) have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares. However, we may, by amendment to our by-laws, opt in to the control share provisions of Maryland law in the future without stockholder approval, which could inhibit a third party from making or completing an acquisition of us that is in the interests of our stockholders.

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Our authorized but unissued common and preferred stock may prevent a change in our control.

Our charter authorizes us to issue additional authorized but unissued shares of our common stock or preferred stock. In addition, our board of directors may classify or reclassify any unissued shares of common stock or preferred stock and may set the preferences, rights and other terms of the classified or reclassified shares. As a result, our board may issue additional common and preferred shares and may establish a series of preferred stock with terms that could delay or prevent a transaction or a change in control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.

The requirements of the Investment Company Act impose limits on our operations.

We conduct our operations so that we are not required to register as an investment company under the Investment Company Act of 1940, as amended, which we refer to as the Investment Company Act. We are not subject to regulation as an investment company under the Investment Company Act because we do not meet the definition of an investment company under the Investment Company Act, including Section 3(a)(1)(C). From time to time in the past, and in the future we may, have relied on, and certain of our subsidiaries may from time to time rely on, the exclusion from investment company status provided by Section 3(c)(5)(C) of the Investment Company Act (and Section 3(c)(6) if, from time to time, we engaged in our real estate business through one or more majority-owned subsidiaries).

The assets that we acquire, therefore, are limited by the provisions of the Investment Company Act and the rules and regulations promulgated under the Investment Company Act. If we were deemed to be an investment company for purposes of the Investment Company Act and could not rely on any exemption or exclusion under the Investment Company Act, we would be subject to regulation as an investment company. This risk is greater to the extent that we invest in pools of CMBS that contain some real estate related notes. The characterization of us as an investment company would require us to either (i) change the manner in which we conduct our operations to avoid being required to register as an investment company or (ii) to register as an investment company. We cannot assure you that we would be able to complete any required dispositions or acquisitions of assets, or deleveraging, on favorable terms, or at all. Consequently, any modification of our business plan, including selling certain investments necessary to repay amounts outstanding under our repurchase agreements or provide us with additional liquidity could have a material adverse effect on our ability to maintain our investment company exemption. Further, if we were determined to be an unregistered investment company, we would be subject to monetary penalties and injunctive relief in an action brought by the SEC, we may be unable to enforce contracts with third parties and third parties could seek to obtain rescission of transactions undertaken during the period it was established that we were an unregistered investment company. Finally, because affiliate transactions are prohibited under the Investment Company Act, failure to maintain our exemption would force us to terminate our management agreement, services agreement and all other agreements with affiliates. Any of these results would be likely to have a material adverse effect on our business, our financial results and our ability to make distributions to stockholders. We are in the process of applying for no-action relief with respect to the characterization of certain of our assets as qualifying real estate assets for purposes of the requirements of Section 3(c)(5)(C). We cannot assure you that such no-action relief will be granted or that it will be granted on the terms requested. See “Operating Policies and Strategies—Investment Company Act Considerations” in this report.

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

Under Maryland law generally, a director’s actions will be upheld if he or she performs his or her duties in good faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like position would use under similar circumstances. Our charter authorizes us to indemnify our directors and officers for actions taken by them in those capacities to the maximum extent permitted by Maryland law. In addition, our charter limits the liability of our directors and officers to us and our stockholders for money damages, except for liability resulting from:

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

•

active and deliberate dishonesty by the director or officer that was established by a final judgment as being material to the cause of action adjudicated.

As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist. Our by-laws require us to indemnify each director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made a party by reason of his or her service to us. In addition, we may be obligated to fund the defense costs incurred by our directors and officers.

Our charter contains provisions that make removal of our directors difficult, which could make it difficult for our stockholders to effect changes to our management.

Our charter provides that a director may only be removed with cause upon the affirmative vote of holders of two-thirds of the votes entitled to be cast in the election of directors. Vacancies may be filled by the board of directors. This requirement makes it more difficult to change our management by removing and replacing directors and may prevent changes in control of our company that are in the interest of our stockholders.

Risks Related to Our Taxation as a REIT

Our failure to qualify as a REIT would result in higher taxes and reduced cash available for distribution to our stockholders.

We operate in a manner intended to ~~qualify~~allow as a REIT for federal income tax purposes. Although we do not intend to request a ruling from the Internal Revenue Service (the IRS) as to our REIT status, in January 2009, we received the opinion of Skadden, Arps, Slate, Meagher & Flom LLP with respect to our qualification as a REIT. Investors should be aware, however, that opinions of counsel are not binding on the IRS or any court. The opinion of Skadden, Arps, Slate, Meagher & Flom LLP represents only the view of our counsel based on our counsel’s review and analysis of existing law and on certain representations as to factual matters and covenants made by us ~~and our manager, including representations relating~~ to ~~the~~qualify ~~values of our assets and the sources of our income. The opinion is expressed~~ as of the date issued and will not cover subsequent periods. Counsel has no obligation to advise us or the holders of our common stock of any subsequent change in the matters stated, represented or assumed, or of any subsequent change in applicable law. Furthermore, both the validity of the opinion of Skadden, Arps, Slate, Meagher & Flom LLP, and our continued qualification as a REIT ~~will~~for ~~depend~~federal ~~on our satisfaction of certain asset,~~ income, ~~organizational, distribution,~~tax ~~stockholder ownership and other requirements on a continuing basis, the results of which will not be monitored by Skadden, Arps, Slate, Meagher & Flom LLP~~purposes. Our ability to satisfy the asset tests depends upon our analysis of the fair market values of our assets, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the REIT income and quarterly asset requirements also depends upon our ability to successfully manage the composition of our income and assets on an ongoing basis. Moreover, the proper classification of an instrument as debt or equity for federal income tax purposes, and the tax treatment of participation interests that we hold in mortgage loans and mezzanine loans, may be uncertain in some circumstances, which could affect the application of the REIT qualification requirements as described below. Accordingly, there can be no assurance that the IRS will not contend that our interests in subsidiaries or other issuers will not cause a violation of the REIT requirements. If we were to fail to qualify as a REIT in any taxable year, we would be subject to federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates, and distributions to stockholders would not be deductible by us in computing our taxable income. Any such corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our stockholders, which in turn could have an adverse impact on the value of our common stock. Unless entitled to relief under certain Internal Revenue Code provisions, we also would be disqualified from taxation as a REIT for the four taxable years following the year during which we ceased to qualify as a REIT.

53Dividends payable by REITs do not qualify for the reduced tax rates.

Dividends payable by REITs do not qualify for the reduced tax rates under recently enacted tax legislation.

Legislation enacted in 2003, as amended, generally reduces the maximum tax rate for dividends payable to domestic stockholders that are individuals, trusts and estates from 38.6% to 15% (through 2010). Dividends payable by REITs, however, are generally not eligible for the reduced rates. Although this legislation does not adversely affect the taxation of REITs or dividends paid by REITs, the more favorable rates applicable to regular corporate dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common stock.

REIT distribution requirements could adversely affect our liquidity position and ability to execute our business plan.

We generally must distribute annually at least 90% of our net taxable income, excluding any net capital ~~gain~~gains, in order for corporate income tax not to apply to earnings that we distribute. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under federal tax laws. We intend to make distributions to our stockholders to comply with the requirements of the Internal Revenue Code. However, differences in timing between the recognition of taxable income and the actual receipt of cash could require us to sell assets or borrow funds on a short-term or long-term basis to meet the 90% distribution requirement of the Internal Revenue Code. Certain of our assets may generate substantial mismatches between taxable income, GAAP net income (loss) and available cash flow. For example, in 2008, we generated estimated taxable income of $32.0 million, compared to a GAAP net loss of $254.2 million, and $36.4 million of net cash provided by operating activities (per our statement of cash flows). As a result, the requirement to distribute a substantial portion of our net taxable income could cause us to: (i) sell assets in adverse market conditions, (ii) borrow on unfavorable terms (iii) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt, in order to comply with REIT requirements or (iv) declare dividends payable in cash and shares of our common stock. In addition, any capital losses related to the sales of our investments may not reduce ordinary taxable income and corresponding distribution requirements to shareholders. Capital losses may only be used to offset capital gains; however, such capital losses may be carried forward to future years to offset future capital gains.

amount specified under federal tax laws. Although we intend to make distributions to our stockholders to comply with the requirements of the Internal Revenue Code, we may, from time to time, generate taxable income greater than our net cash provided by operations. For example, we may be required to accrue income from mortgage loans, mortgage backed securities, CDOs, and other types of debt securities or interests in debt securities before we receive any payments of interest or principal on such assets. In addition, we may be required to report taxable income for certain investments in excess of the economic income we ultimately realize from them due to the accrual of market discount or original issue discount. Finally, we may be required to report income in excess of amounts received by the CDOs in which we invest even though we may be unable to receive corresponding cash distributions from those CDOs in respect of those amounts. During the twelve months ended December 31, 2009, we generated an ordinary tax loss of $14.5 million, compared to a GAAP net loss of $76.8 million and $33.7 million of net cash provided by operations (per our statement of cash flows).

As a result, we may find it difficult to satisfy the REIT distribution requirements in certain circumstances. In particular, where we experience differences in timing between the recognition of taxable income and the net cash provided by operations, the requirement to distribute a substantial portion of our taxable income could cause us to: (i) sell assets in adverse market conditions, (ii) borrow on unfavorable terms, (iii) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt or (iv) make a taxable distribution of our shares as part of a distribution in which shareholders may elect to receive shares or (subject to a limit measured as a percentage of the total distribution) cash, in order to comply with REIT requirements. In addition, any capital losses related to the sales of our investments may not reduce ordinary taxable income and corresponding distribution requirements to shareholders. Capital losses may only be used to offset capital gains; however, such capital losses may be carried forward to future years to offset future capital gains.

We have in the past chosen, and may in the future choose, to pay dividends in our own stock, in which case you may be required to pay income taxes in excess of the cash dividends you receive.

We have in the past distributed, and may in the future distribute, taxable dividends that are payable in cash and shares of our common stock at the election of each stockholder. Under IRS Revenue Procedure 2009-15, amplified and superseded IRS Revenue Procedure 2010-12, up to 90% of any such taxable dividend for taxable years 2008 ~~and~~through ~~2009~~2011 could be payable in our stock. Taxable stockholders receiving such dividends will be required to include the full amount of the dividend as ordinary income to the extent of our current and accumulated earnings and profits for United States federal income tax purposes. As a result, a U.S. stockholder may be required to pay income taxes with respect to such dividends in excess of the cash dividends received. If a U.S. stockholder sells the stock it receives as a dividend in order to pay this tax, the sales proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our stock at the time of the sale. Furthermore, with respect to non-U.S. stockholders, we may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in stock. In addition, if a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our common stock.

Further, while Revenue ~~Procedure~~ Procedures 2009-15 ~~applies~~and 2010-12 apply only to taxable dividends payable in cash or stock inwith respect to the taxable years 2008 ~~and~~through ~~2009~~2011, it is unclear whether and to what extent we will be able to pay taxable dividends in cash and stock in later years. Moreover, various aspects of such a taxable cash/stock dividend are uncertain and have not yet been addressed by the IRS. No assurance can be given that the IRS will not impose additional requirements in the future with respect to taxable cash/stock dividends, including on a retroactive basis, or assert that the requirements for such taxable cash/stock dividends have not been met.

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stock in later years. Moreover, various aspects of such a taxable cash/stock dividend are uncertain and have not yet been addressed by the IRS. No assurance can be given that the IRS will not impose additional requirements in the future with respect to taxable cash/stock dividends, including on a retroactive basis, or assert that the requirements for such taxable cash/stock dividends have not been met.

The stock ownership limit imposed by the Internal Revenue Code for REITs and our charter may restrict our business combination opportunities.

In order for us to maintain our qualification as a REIT under the Internal Revenue Code, not more than 50% in value of our outstanding stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities) at any time during the last half of each taxable year following our first year. Our charter, with certain exceptions, authorizes our board of directors to take the actions that are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of directors, no person may own more than 9.8% of the aggregate value of our outstanding capital stock. Our board may grant an exemption in its sole discretion, subject to such conditions, representations and undertakings as it may determine. The ownership limits imposed by the tax law are based upon direct or indirect ownership by “individuals,” but only during the last half of a tax year. The ownership limits contained in our charter key off of the ownership at any time by any “person,” which term includes entities. These ownership limitations in our charter are common in REIT charters and are intended to provide added assurance of compliance with the tax law requirements, and to minimize administrative burdens. However, these ownership limits might also delay or prevent a transaction or a change in our control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.

Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.

Even if we remain qualified for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes, such as mortgage recording taxes. Any of these taxes would decrease cash available for distribution to our stockholders. In addition, in order to meet the REIT qualification requirements, or to avert the imposition of a 100% tax that applies to certain gains derived by a REIT from dealer property or inventory, we may hold some of our assets through taxable subsidiary corporations. Such subsidiaries will be subject to corporate level income tax at regular rates.

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

To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. We may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. Thus, compliance with the REIT requirements may hinder our ability to make certain attractive investments.

Complying with REIT requirements may force us to liquidate otherwise attractive investments.

To qualify as a REIT, we must 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, including certain mortgage loans and mortgage backed securities. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25% of the value of our total securities can be represented by securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT status and suffering adverse tax consequences. As a result, we may be required to liquidate from our portfolio otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.

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comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT status and suffering adverse tax consequences. As a result, we may be required to liquidate from our portfolio otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.

Liquidation of assets may jeopardize our REIT status.

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

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

The REIT provisions of the Internal Revenue Code may limit our ability to hedge our operations. ~~Under~~Any ~~current~~income ~~law,~~from ~~any~~a ~~income~~hedging ~~that~~transaction we enter ~~generate~~into ~~from derivatives~~to ormanage ~~other~~risk ~~transactions~~of ~~intended~~interest torate ~~hedge~~changes ~~our~~with ~~interest~~respect ~~rate~~to borrowings made or ~~foreign~~to ~~currency~~be ~~risks~~made ~~will~~to ~~generally~~acquire beor ~~treated~~carry asreal ~~nonqualifying~~estate assets does not constitute gross income for purposes of the ~~REIT~~75% or 95% REIT gross income ~~test~~tests. ~~unless~~To ~~specified~~the ~~requirements~~extent ~~are~~that ~~met~~we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both of the REIT gross income tests. As a result of these rules, we may have to limit our use of hedging techniques that might otherwise be advantageous, which could result in greater risks associated with interest rate or other changes in hedged items than we would otherwise incur.

The “taxable mortgage pool” rules may increase the taxes that we or our stockholders may incur, and may limit the manner in which we effect future securitizations.

Certain of our securitizations have resulted in the creation of taxable mortgage pools for federal income tax purposes. As a REIT, so long as we own 100% of the equity interests in a taxable mortgage pool, we generally would not be adversely affected by the characterization of the securitization as a taxable mortgage pool. Certain categories of stockholders, however, such as foreign stockholders eligible for treaty or other benefits, stockholders with net operating losses, and certain tax-exempt stockholders that are subject to unrelated business income tax, could be subject to increased taxes on a portion of their dividend income from us that is attributable to the taxable mortgage pool. In addition, to the extent that our stock is owned by tax-exempt “disqualified organizations,” such as certain government-related entities and charitable remainder trusts that are not subject to tax on unrelated business income, we may incur a corporate level tax on a portion of our income from the taxable mortgage pool. In that case, we may reduce the amount of our distributions to any disqualified organization whose stock ownership gave rise to the tax. Moreover, we would be precluded from selling equity interests in these securitizations to outside investors, or selling any debt securities issued in connection with these securitizations that might be considered to be equity interests for tax purposes. These limitations may prevent us from using certain techniques to maximize our returns from securitization transactions.

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

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

Risks Related to Trading of our Common Stock

Our Common Stock ~~will~~is no longer be traded on the NYSE~~, which is expected to decrease its liquidity~~.

On March 26, 2009, we received written notice from the NYSE that we were not in compliance with the NYSE’s continued listing standards applicable to us requiring that we maintain a 30-day trailing average global equity market capitalization of at least $15.0 million ~~(this standard has temporarily been lowered from $25~~.0 ~~million through June 30, 2009).~~ The NYSE ~~will~~ permanently ~~suspend~~suspended trading of our common ~~stock prior to the market open on April 1, 2009. As of~~ ~~April 1, 2009, the trading of the Company’s common stock will occur on the over-the-counter, or OTC, market.~~

~~The~~53 delisting of our common stock may reduce its liquidity and market price compared to its liquidity and market price traded on the NYSE, as well as, our ability to attract new capital, retain, attract and motivate our directors and officers, and to compensate our manager, all of whom may receive equity awards from us as compensation.

stock prior to the market open on April 1, 2009. Since April 1, 2009 through April 5, 2010, our common stock was quoted on the over-the-counter bulletin board, or OTC BB, under the ticker symbol of JERT. Thereafter, we have been and are currently quoted on the Pink Sheets under the ticker symbol JERT.

The delisting of our common stock has reduced its liquidity and market price compared to its liquidity and market price traded on the NYSE, as well as, our ability to attract new capital, retain, attract and motivate our directors and officers, and to compensate our manager, all of whom may receive equity awards from us as compensation.

We no longer file reports with the SEC.

On March 31, 2010, we filed a Form 15 with the SEC and ceased to be an SEC reporting company. Since we are no longer an SEC reporting company, the information contained in previously filed SEC reports is not current and circumstances may have changed significantly since the dates of such filings.

In addition, this Annual Report on Form 10-K is being filed by the Company subsequent to its due date due to financial and logistical constraints. The information contained in this report is presented as of the date indicated herein, unless otherwise stated, and does not fully reflect the Company’s financial or operating performance subsequent to December 31, 2009.

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

On July 13, 2005, we completed an initial public offering of our common stock. ~~While~~We ~~there has been active trading in our common stock since the initial public offering on the NYSE, we~~ cannot assure you that there will be an active trading market in our common stock ~~will~~since beit ~~sustained~~was asdelisted ~~our~~from ~~stock will begin trading on~~ the ~~OTC~~NYSE ~~market~~ on April 1, 2009. Even if an active trading market for our common stock ~~continues~~evolves, the market price of our common stock may be highly volatile and be subject to wide fluctuations. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. If the market price of our common stock declines significantly, you may be unable to resell your shares at or above the purchase price you paid to acquire them. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common shares include:

•

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

•

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

•

increases in market interest rates or credit spreads that lead purchasers of our shares to demand a higher yield;

•

changes in market valuations of similar companies; for example, although we do not currently invest in the sub-prime residential mortgage market, recent events in this market could adversely impact, among other items, the value of our stock, our ability to borrow monies, our liquidity, the overall mortgage lending market and the value of our assets;

•

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

•

additions or departures of key management personnel;

•

actions by institutional stockholders;

•

speculation in the press or investment community;

•

application and interpretation of the rules and regulations of the Investment Company Act; and

•

general market and economic conditions.

We54 ~~have not established a minimum distribution payment level and we cannot assure you of our ability to make distributions in the future.~~

We expect to make distributions to our stockholders in amounts such that we distribute all or substantially all of our taxable income in each year, subject to certain adjustments. We have not established a minimum distribution payment level, and our ability to make distributions may be adversely affected by the risk factors

~~described~~We inhave ~~this~~not ~~report,~~established ~~including the possibility of~~ a ~~downturn~~minimum indistribution ~~our~~payment ~~operating~~level ~~results~~ and ~~financial~~we ~~performance,~~cannot ~~lack~~assure ofyou ~~liquidity or a decline in the value~~ of our ~~asset~~ability portfolio. All distributions will be made at the discretion of our board of directors and will depend on our earnings and cash flow, our financial condition, maintenance of our REIT status and other factors as our board of directors may deem relevant from time to ~~time. We may not be able to~~ make distributions in the future. In addition, some of our distributions may include a return of capital. To the extent that we decide to make distributions in excess of taxable income, such distributions would generally be considered a return of capital for federal income tax purposes.

We expect to make distributions to our stockholders in amounts such that we distribute all or substantially all of our taxable income, if any, in each year, subject to certain adjustments. We have not established a minimum distribution payment level, and our ability to make distributions may be adversely affected by the risk factors described in this report, including a downturn in our operating results and financial performance, lack of liquidity or a decline in the value of our asset portfolio. All distributions, if any, will be made at the discretion of our board of directors and will depend on our earnings and cash flow, our financial condition, maintenance of our REIT status and other factors as our board of directors may deem relevant from time to time. We did not generate taxable income in 2009 and therefore did not declare any dividends in 2009. We may not be able to generate taxable income or make distributions in the future. In addition, some of our distributions may include a return of capital. To the extent that we decide to make distributions in excess of taxable income, such distributions would generally be considered a return of capital for federal income tax purposes.

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

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

5855

ITEM 1B.

UNRESOLVED STAFF COMMENTS

There are no unresolved staff comments.

ITEM 2.

PROPERTIES

J.E. Robert Company leases its principal executive and administrative offices, from which it provides services to our manager pursuant to the management agreement and the services agreement, at 1650 Tysons Blvd, Suite 1600, McLean, Virginia 22102; tel: (703) 714-8000. J.E. Robert Company and its affiliates lease additional offices in ~~New York,~~ California, Illinois, ~~Connecticut~~New York, Texas, the United Kingdom, ~~Brazil,~~and ~~Russia~~the ~~and~~Czech ~~Mexico~~Republic.

ITEM 3.

LEGAL PROCEEDINGS

The Company is not party to any legal proceedings.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

NoThe ~~matters~~Company’s ~~were~~Annual ~~submitted~~Meeting toof aStockholders ~~vote~~was ofheld ~~our~~on ~~security~~Monday, ~~holders~~June 28, ~~during~~2010, in McLean, Virginia, at which the ~~fourth~~following ~~quarter~~matters were submitted to a vote of ~~2008.~~the stockholders:

59a) Votes regarding the election of the persons named below as Directors for a term expiring in 2010 were as follows:


Director	For		Withheld		Total
Joseph E. Robert, Jr.		2,397,542		738,531		3,136,073
Daniel J. Altobello		2,398,475		737,598		3,136,073
Peter D. Linneman		2,418,141		717,932		3,136,073

PART II

ITEM 5.

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

On March 26, 2009, we received written notice from the NYSE that we were not in compliance with the NYSE’s continued listing ~~standards~~ standards applicable to us requiring that we maintain a 30-day trailing average global equity market capitalization of at least $15.0 million ~~(this standard has temporarily been lowered from $25~~.0 ~~million through June 30, 2009).~~ The NYSE ~~will~~ permanently ~~suspend~~ suspended trading of our common stock prior to the market open on April 1, 2009. Since ~~As of~~ April 1, 2009, ~~the~~through ~~trading~~April 5, of2010, ~~the~~our ~~Company’s~~ common stock ~~will~~was ~~occur~~quoted on the over-the-counter bulletin board, or OTC BB, ~~market~~under the ticker symbol of JERT. Thereafter, we have been and are currently quoted on the Pink Sheets under the ticker symbol JERT.

The following table sets forth, for the periods indicated, the high, low and last sale prices in dollars on the NYSE, the OTC BB and the Pink Sheets for our common stock and the distributions we declared with respect to the periods indicated, adjusted for our 1-for-10 reverse stock split effected February 20, 2009.

	High		~~Low~~	Low		~~DividendsDeclaredPer Share~~		DividendsDeclaredPer Share
Third Quarter 2005	$	190.00	$	180.00		$	3.00
First Quarter 2007	$	215.40		$	166.40			$	4.40
Fourth Quarter 2005		185.10		158.40			3.33
Second Quarter 2007		193.30			144.60				4.49
First Quarter 2006		181.10		159.30			3.33
Third Quarter 2007		151.90			80.00				4.50
Second Quarter 2006		167.00		148.50			3.60
Fourth Quarter 2007		135.30			83.80				11.00	(1)
Third Quarter 2006		172.50		149.30			4.00
First Quarter 2008		112.00			75.10				—
Fourth Quarter 2006		215.70		169.00			7.20	(1)
Second Quarter 2008		92.80			62.30				6.00
First Quarter 2007		215.40		166.40			4.40
Third Quarter 2008		77.30			42.60				3.00
Second Quarter 2007		193.30		144.60			4.49
Fourth Quarter 2008		54.50			8.50				8.80	(2)
Third Quarter 2007		151.90		80.00			4.50
First Quarter 2009		10.60			0.65				—
Fourth Quarter 2007		135.30		83.80			11.00	(2)
Second Quarter 2009		0.78			0.28				—
First Quarter 2008		112.00		75.10			—
Third Quarter 2009		0.75			0.28				—
Second Quarter 2008		92.80		62.30			6.00
Fourth Quarter 2009		0.75			0.08				—
Third Quarter 2008		77.30		42.60			3.00
Fourth Quarter 2008		54.50		8.50			8.80	(3)

(1) Includes a special cash dividend of $36.0050 per share of common stock.

(2) Includes a special ~~cash~~ dividend of $65.5080 per share of common stock.

~~(3)~~As ~~Includes~~of aNovember 30, ~~special~~2010, ~~dividend~~there ofwere ~~$5.80~~approximately ~~per~~124 shareholders ~~share~~ of ~~common stock~~record.

As of March 24, 2009, there were approximately 143 shareholders of record.

Before our common stock was listed on the NYSE, shares of our common stock were eligible for trading on the Private Offering, Resales and Trading through Automated Linkages Market of the National Association of Securities Dealers, Inc., the PORTAL Market. Individuals and institutions that sold shares of our common stock before our common stock was listed on the New York Stock Exchange were not obligated to report their sales to the PORTAL Market. Therefore, the last sales price that was reported on the PORTAL Market may not have been reflective of sales of our common stock that occurred and were not reported.

The table below reflects the high and low prices for trades of our shares on the PORTAL Market known to us for each of the quarterly periods indicated, adjusted for our 1-for-10 reverse stock split effected February 20, 2009.

Quarter	High		Low		DividendsDeclaredPer Share
First Quarter 2005(1)	$	152.50	$	150.00	$	2.50
Second Quarter 2005(1)	$	150.00	$	149.00	$	3.00

(1) The high and low prices for trades of our shares on the PORTAL Market for the first and second quarter of 2005 reflect the impact of the 1-for-10 reverse stock split effected on February 20, 2009.

Dividends

We intend to ~~continue to~~ declare distributions on our common stock only as necessary to satisfy REIT requirements. No assurance, however, can be given as to the amounts or timing of future distributions, ~~in particular the payment of regular quarterly distributions,~~ as such distributions are subject to the discretion of our board of directors and will depend on a number of factors including; our actual results of operations; restrictions under Maryland law; the timing of the investment of our equity capital; the amount of our net cash provided by operating activities; our financial condition; our debt service requirements including margin calls and scheduled principal amortization on repurchase agreements; our capital expenditure requirements; our taxable income, if any; the annual distribution requirements under the REIT provisions of the Internal Revenue Code; our operating expenses; and other factors our board of directors deems relevant.

Issuer Purchases of Equity Securities

During the year ended December 31, ~~2008~~2009, the Company did not purchase any shares of its equity securities registered pursuant to Section 12(b) of the ~~Securities~~ Exchange Act ~~of 1934~~.

Securities Authorized for Issuance Under Equity Compensation Plans

In June 2007, we issued to each of our five independent directors 200 shares of restricted common stock pursuant to the terms of the restricted stock grant in our Amended Nonqualified Stock Option and Incentive Award Plan (the “Amended Plan”). One half of the restricted stock granted to each of these directors vested as of the date of grant and the second half vested in June 2008. The issuance of these 1,000 shares was not registered under the Securities Act in reliance on the exemption from registration provided by Section 4(2) thereof. As of December 31, ~~2008~~2009, we have granted an aggregate of 4,000 shares of restricted stock and 2,805 deferred ~~stock~~share units to our independent directors.

In April 2007, certain of our officers and employees of an affiliate of the manager were awarded 12,450 restricted shares of common stock pursuant to the terms of the restricted stock agreement in our Nonqualified Stock Option and Incentive Awards plan (the “Plan”). These shares are subject, in each case, to vesting over three years. 50% of these shares vest ratably over three years, subject to continued employment with affiliates of our Manager. The remaining 50% of these shares vest subject to continued employment with affiliates of our Manager and graded vesting commencing in March 2008 based on achievement of certain market conditions. As of December 31, ~~2008~~2009, ~~300~~5,525 of these restricted shares had been forfeited and 23,~~025~~925 have vested.

In July 2007, we granted 1,250 shares of restricted stock to an employee of an affiliate of our manager. As of December 31, ~~2008~~2009, ~~417~~834 of these shares have vested.

In May 2006, we granted ~~Mark Weiss,~~ our former president, 6,000 restricted shares of common stock and 15,000 stock options on our common stock under the Plan. These 6,000 shares were not registered under the Securities Act in reliance on the exemption from registration provided by Section 4(2) thereof. With respect to the restricted shares of common stock, 50% of these shares ~~vest~~vested ratably over five years, subject to continued employment with affiliates of our manager. The remaining 50% of these shares ~~vest~~vested subject to continued employment with affiliates of our manager and graded vesting commencing in June 2009 based on achievement of certain conditions. As of December 31, ~~2008~~2009, 1,~~200~~800 ofrestricted ~~these~~ shares ~~had~~have vested. ~~The~~On ~~issuance~~July 15, of2009, ~~these~~our 6former president resigned from his position with our manager and 4,~~000~~200 shares ~~was~~of ~~not~~our ~~registered~~common ~~under~~stock and the ~~Securities~~options ~~Act~~to inpurchase ~~reliance~~15,000 onshares ~~the~~of ~~exemption~~our ~~from~~common ~~registration~~stock ~~provided by~~were ~~Section 4(2) thereof~~forfeited.

61The following table sets forth our securities available for future issuance under our equity compensation plans as of December 31, 2009:


Plan Category	Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights		Weighted- Average Exercise Price of Outstanding Options, Warrants and Rights		Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in the First Column)
Equity compensation plans approved by security holders :
The Plan		—	$	—		—
The Amended Plan		2,805		N/A		131,465
Equity compensation plans not approved by security holders		N/A		N/A		N/A

Total		2,805	$	—		131,465

As of December 31, 2009, we had a total of 5,831,029 shares of common stock issued and outstanding.

The following table sets forth our securities available for future issuance under our equity compensation plans as of December 31, 2008:

Plan Category	Number ofSecurities tobe IssuedUponExercise ofOutstandingOptions,Warrantsand Rights	Weighted-AverageExercisePrice ofOutstandingOptions,Warrantsand Rights		RemainingAvailable forFutureIssuanceUnder EquityCompensationPlans(ExcludingSecuritiesReflected inthe FirstColumn)
Equity compensation plans approved by security holders :
The Plan	15,000	$	177.50	—
The Amended Plan	2,805		N/A	131,465
Equity compensation plans not approved by security holders	N/A		N/A	N/A
Total	15,000	$	177.50	131,465

As of December 31, 2008, we had a total of 2,590,104 shares of common stock issued and outstanding adjusted for the effect of the February 2009 reverse stock split, and as of March 27, 2009 have 4,987,994 shares of common stock issued and outstanding adjusted for both the stock dividend and reverse stock split as outlined in the table below.

Shares at December 31, 2008		25,901,035
Shares adjusted for February 2009 reverse stock split		2,590,104
Additional shares of existing common stock issued as a result of the 2008 year end stock dividend on January 30, 2009		23,978,905
Shares adjusted for reverse stock split		2,397,891
Adjusted diluted shares of existing common stock outstanding (non-GAAP)		4,987,994

Performance Graph

Set forth below is a line graph comparing the cumulative total stockholder return on shares of our Common Stock with the cumulative total return of the SNL Finance REIT Index and the Russell 2000 Stock Index. The period shown commences on July 15, 2005, the date that our Common Stock was registered under Section 12 of the Securities Exchange Act of 1934, and ends on December 31, ~~2008~~2009, the end of our last fiscal year. The graph assumes an investment of $100 on July 15, 2005 and the reinvestment of any dividends. The stock price performance shown on the graph is not necessarily indicative of future price performance. The information included in the graph and table below was obtained from SNL Financial LC, Charlottesville, Va.© ~~2009~~2010.

LOGO

In accordance with the rules of the SEC, this section entitled “Performance Graph” shall not be incorporated by reference into any of our future filings under the Securities Act or the Exchange Act, and shall not be deemed to be soliciting material or to be filed under the Securities Act or the Exchange Act.

6359

ITEM 6. SELECTED FINANCIAL DATA (Amounts are presented in thousands, except for per share data) and as otherwise noted)

The information presented below is only a summary and does not provide all the information contained in our historical consolidated financial statements and related notes. You should read it in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical consolidated financial statements, including the related notes included elsewhere in this report.

	For the Year Ended December 31,												~~For the PeriodfromInception(April 19, 2004)ThroughDecember 31,2004~~
	2008			2007			2006			2005
	2009			2008			2007			2006			2005
Consolidated Income Statement Data:
Total revenue	$	~~108~~62,~~117~~320		$	~~134~~108,~~641~~117		$	74134,~~010~~641		$	3674,~~418~~010		$	336,~~540~~418
Expenses:
Interest expense		5226,~~989~~731			7552,~~984~~989			2675,~~662~~984			526,~~926~~662			—5,926
Management fees, affiliate		64,~~725~~151			76,~~331~~725			7,~~631~~331			57,~~604~~631			15,~~864~~604
General and administrative		7,037			7,648			7,262			4,512			7,575
Incentive fees, affiliate		—			—			826			—			—
Incentive fees, affiliate		—			826			—			—			—
Depreciation and amortization of real estate assets		—			—			1,128			23			—
Depreciation and amortization of real estate assets		—			1,128			23			—			—
General and administrative		7,010			7,037			7,648			7,262			4,512
Total expenses		6637,~~751~~892			9266,~~917~~751			4192,~~578~~917			1641,~~042~~578			916,~~439~~042
Other gains (losses)
Unrealized loss on financial assets financed with CDOs		(~~454~~171,~~232~~689	)		—(454,232	)		—			—			—
Unrealized gain, net, on CDO related financial liabilities		~~438~~115,~~046~~395			—438,046			—			—			—
Loss on interest rate swaps		(1723,~~238~~232	)		—(17,238	)		—			—			—
Loss on impairment of CMBS		(~~163~~26,~~017~~496	)		(4163,~~434~~017	)		(~~719~~4,434	)		—(719	)		—
Unrealized gain (loss), net, on real estate loans held for sale		~~13,866~~—			(13,866	)		—(13,866	)		—			—
Unrealized gain (loss) on non-CDO interest rate swaps		(13,516	)		—			—			—			—
Unrealized gain (loss) on non-CDO related interest rate swaps		13,860			(13,516	)		—			—			—
Unrealized loss due to hedge ineffectiveness		—			~~(361~~—	)		—(361	)		5—			—5
Loss on sale of real estate loans held for sale		(92,541	)		—			—			(821	)		—
Gain on exchange and cancellation of TRUPs		3,175			—			—			—			—
Loss on termination of non-CDO related interest rate swaps		(6,885	)		—			—			—			—
Loss on sale of real estate loans held for sale		—			(92,541	)		—			—			(821	)
Total other gains (losses)		(295,517	)		(18,661	)		(719	)		(816	)		—
Loss on termination of interest rate swaps		(12,280	)		(6,885	)		—			—			—
Net (loss) income	$	(254,151	)	$	23,063		$	31,713		$	19,560		$	(5,899	)
Total other gains (losses)		(101,267	)		(295,517	)		(18,661	)		(719	)		(816	)
Net (loss) income	$	(76,839	)	$	(254,151	)	$	23,063		$	31,713		$	19,560
(Losses) earnings per share:
Basic	$	(9814.7557	)	$	8(98.9775	)	$	128.3597		$	1012.7935		$	(610.2079	)
Diluted	$	(9814.7557	)	$	8(98.9775	)	$	128.3497		$	1012.7934		$	(610.2079	)
Weighted average number of common shares outstanding:
Basic		25,~~574~~274			2,~~570~~574			2,~~569~~570			12,~~812~~569			~~951~~1,812
Diluted		25,~~576~~274			2,~~572~~574			2,~~570~~572			12,~~812~~570			~~951~~1,812
Other Data:
Dividends declared per common share	$	~~17.80~~—		$	2417.4080		$	1824.1040		$	618.3310		$	—6.33
	As of December 31,
	2008			2007			2006			2005			2004
	2009			2008			2007			2006			2005
Selected Consolidated Balance Sheet Data:
Cash and cash equivalents	$	~~8,357~~668		$	878,~~556~~357		$	~~143~~87,~~443~~556		$	~~151~~143,~~706~~443		$	1151,~~177~~706
Restricted cash		16,~~149~~874			61,~~687~~149			836,~~085~~687			~~108~~83,085			—108
CMBS financed by CDOs, at fair value		~~180~~74,~~210~~838			~~562~~180,~~056~~210			~~747~~562,~~087~~056			~~304~~747,~~984~~087			—304,984
CMBS not financed by CDOs, at fair value		4211,~~432~~173			~~155~~42,~~384~~432			43155,~~116~~384			~~111~~43,~~880~~116			~~167~~111,~~070~~880
Real estate loans, held for investment, at fair value at December 31, 2008 and amortized cost at December 31, 2007, 2006, 2005 and 2004, respectively		189,980			274,734			287,845			81,696			29,865
Real estate loans, held for investment, at fair value at December 31, 2009 and 2008 and amortized cost at December 31, 2007, 2006 and 2005, respectively		111,085			189,980			274,734			287,845			81,696
Real estate loans, held for sale, at lower of cost or fair value		—			~~221,599~~—			—221,599			—			—
Real estate assets, net		—			—			~~38,740~~—			—38,740			—
Investment in unconsolidated joint ventures		~~843~~65			~~40,764~~843			—40,764			—			—
Total assets		~~434~~210,~~801~~515			1434,~~376,181~~801			1,~~367~~376,~~961~~181			~~659~~1,~~176~~367,961			~~199~~659,~~679~~176
Dividends payable		~~2,274~~—			282,~~391~~274			1828,~~523~~391			818,~~477~~523			—8,477
CDO notes payable, at fair value at December 31, 2008; face amount at December 31, 2007, 2006, 2005 and 2004, respectively		211,695			974,578			974,578			266,255			—
CDO notes payable, at fair value at December 31, 2009 and 2008; face amount at December 31, 2007, 2006 and 2005, respectively		117,233			211,695			974,578			974,578			266,255
Repurchase agreements		166,~~108~~966			~~261~~16,~~864~~108			—261,864			—			~~39,200~~—
Junior subordinated debentures		61,860			61,860			—			—			—
Junior subordinated notes		59,028			—			—			—			—
Total liabilities		388,438			1,365,383			997,980			278,606			40,890
Junior subordinated debentures		—			61,860			61,860			—			—
Stockholders’ equity		46,363			10,798			369,981			380,570			158,789
Notes payable		10,837			500			—			—			—
Total liabilities		237,622			388,438			1,365,383			997,980			278,606
Stockholders’ equity (deficit)		(27,107	)		46,363			10,798			369,981			380,570

6460

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Amounts are presented in thousands except for share and per share data and as otherwise noted)

The following should be read in conjunction with the consolidated financial statements and notes included herein. Amounts are presented in thousands except for share and per share data and as otherwise noted.

General

JER Investors Trust Inc. is a specialty finance company organized by J.E. Robert Company primarily to ~~originate~~invest ~~and~~in ~~acquire~~ real estate debt securities and loans and fee interests in net leased real estate assets. We were formed in April 2004 and we completed our initial public offering in July 2005. We are externally managed and advised by JER Commercial Debt Advisors LLC (our “manager”), an affiliate of J.E. Robert Company. J.E. Robert Company and its affiliates is a real estate investment management firm. We ~~capitalize~~depend on the knowledge and substantial resources of J.E. Robert Company and ~~its~~our affiliates attempt to take advantage of commercial real estate structured finance products. We invest primarily in loans and debt securities ~~that~~and weour ~~believe will yield high risk-adjusted returns. Our~~ target investments include commercial real estate structured finance products such as commercial mortgage backed securities (commonly known as CMBS), mezzanine loans and B-Note participations in mortgage loans, as well as whole commercial mortgage loans, loans to real estate companies, preferred equity, and net leased real estate. Although we have not to date, we may also invest in single-family residential mortgages and related securities. We pursue a selective investment strategy, targeting specific transactions based on an analysis of debt structure and taking into account the underlying real estate and borrower credit risk. We are organized and conduct our operations in a manner intended to qualify as a real estate investment trust, or REIT, for federal income tax purposes.

J.E. Robert Company was founded in 1981 to provide expertise to public and private financial institutions in resolving real estate loan workout situations. Since ~~its~~our founding, the firm has been active in numerous facets of the commercial real estate debt markets, including sourcing, due diligence, valuation, acquisition, asset management and disposition. J.E. Robert Company primarily conducts ~~its~~our real estate investment management activities on a global basis through a series of private equity funds, which we refer to as the JER Funds.

We are organized and conduct our operations to allow us to qualify as a real estate investment trust (“REIT”) for ~~Federal~~ federal income tax purposes. As a REIT, among other restrictions and limitations, we will generally not be subject to ~~Federal~~federal income tax on that portion of our taxable income, if any, that is distributed to stockholders if we distribute at least 90% of our REIT taxable income to our stockholders by the due date of our federal income tax return and comply with various other requirements.

Trends

~~During~~Since the second half of 2007 and continuing through ~~the first quarter of~~ 2009, severe credit and liquidity issues incontinue ~~the~~to ~~subprime residential lending and single family housing sectors~~ negatively ~~impacted~~impact the asset-backed and corporate fixed income markets, as well as the equity securities of financial institutions, homebuilders and real estate companies. AsDuring ~~the~~this ~~severity of residential sector issues increased~~time, nearly all securities markets experienced decreased liquidity and greater risk premiums as concerns about the outlook for the U.S. and world economies increased. As the U.S. economy has slowed, we have experienced greater delinquencies and worsening credit performance from the assets underlying our CMBS and real estate loan portfolios. These concerns continue and risk premiums in many capital markets remain at or near all-time highs with liquidity extremely low compared to historical standards or virtually non-existent. As a result, many commercial real estate finance and financial services industry participants, including us, have reduced or eliminated new investment activity until the capital markets become more stable, the macroeconomic outlook becomes clearer and market liquidity increases. In this environment, we are focused on actively managing credit risk and maintaining liquidity to the extent possible,. ~~however~~However, current market conditions as well as our current liquidity condition, make itthis extremely difficult and challenging.

~~The~~More ~~value~~recently, due primarily to the impact of ~~our~~the ~~real~~US ~~estate~~Treasury programs, specifically the Public-Private Investment Program ~~securities~~(“PPIP”) and ~~loans~~Term ~~are~~Asset-Backed ~~influenced~~Securities byLoan ~~changes~~Facility in(“TALF”), AAA CMBS credit spreads have tightened. However, ~~which~~given ~~measure~~that ~~the~~our ~~yield~~CMBS ~~demanded~~portfolio byis ~~the~~generally ~~market~~not onhighly ~~securities~~rated, and ~~loans~~therefore ~~relative~~not toeligible afor ~~specific~~these ~~benchmark~~programs, ~~generally~~we have anot ~~risk~~seen ~~free~~valuations ~~rate~~or availability of financing improve for our CMBS investments.

6561

ofGoing ~~return~~Concern: ~~for~~We aare ~~comparable~~in ~~term.~~default ~~Credit~~of ~~spreads~~our ~~applicable~~payment toobligations under our ~~targeted~~ISDA ~~investments~~Master Agreement, ~~will~~dated ~~periodically~~as ~~fluctuate~~of ~~based~~December 1, on2004 ~~changes~~(as insubsequently ~~supply~~amended) ~~and~~with ~~demand,~~National Australia Bank Limited (the ~~availability~~ “NAB Note Payable”) and the $70.3 million of ~~financing~~junior ~~for~~subordinated ~~such~~notes ~~investments~~due ~~and~~in ~~other~~2037 ~~market~~(“the ~~factors~~Junior Subordinated Notes”). WeAs ~~expect~~a ~~demand~~result toof ~~vary~~these ~~based~~defaults, onthe ~~investor~~current ~~perception~~level of available cash, the ~~associated~~redirection ~~credit~~of ~~risk~~cash inflow ~~current~~from ~~underwriting~~CDO I ~~practices~~and II, ~~the~~declines ~~ratings~~in ~~provided~~cash byflow ~~the~~from ~~rating~~our ~~agencies~~non-CDO CMBS investments, the ~~availability~~ ~~and~~redirection ~~terms~~ of ~~financing~~cash ~~for~~flows ~~such~~from ~~investments~~assets serving as collateral under our JPMorgan repurchase agreement facility and ~~investor~~the ~~assessment~~$3.3 million of ~~the~~unfunded ~~current~~capital ~~and~~commitments ~~future~~related ~~real~~to ~~estate~~our ~~market~~investment ~~fundamentals.~~in ~~Demand~~the ~~may~~US beDebt ~~further~~Fund, ~~influenced~~there byis ~~investor~~substantial ~~expectations~~doubt ~~regarding~~about ~~the~~our ability to ~~finance~~continue ~~these~~as ~~assets, currently~~a orgoing ~~in the future~~concern.

~~Going Concern: Our independent registered public accounting firm~~Currently, ~~Ernst &~~our ~~Young~~primary ~~LLP,~~source ~~has concluded~~of ~~that~~liquidity ~~substantial~~is ~~doubt~~from ~~exists about~~ our ~~ability~~non-CDO toCMBS ~~continue~~investments. asWe aare ~~going~~no ~~concern,~~longer ~~and~~receiving ~~has~~current ~~included~~distributions anfrom our ~~explanatory~~retained ~~paragraph~~interests ~~to describe this uncertainty~~ in ~~its~~CDO ~~unqualified~~I ~~audit~~and ~~report~~CDO ~~on our December 31~~II, ~~2008~~and ~~consolidated~~we ~~financial statements~~do ~~included~~not inexpect ~~this~~to ~~Annual~~receive ~~Report~~distributions onfrom ~~Form 10-K.~~such ~~Our~~CDO’s ~~unrestricted~~for ~~cash~~the ~~balance~~foreseeable ~~as of March 27~~future, ~~2009~~if ~~was~~at $4all.0 ~~million~~In ~~and~~addition, our ~~repurchase~~Limited ~~agreement~~Partner ~~borrowings~~interest ~~were~~in ~~$13.4~~the ~~million.~~US ~~Our~~Debt ~~repurchase~~Fund ~~agreement~~investment ~~requires~~is usnot expected to generate ~~repay~~any ~~principal of~~liquidity ~~$0.8~~to ~~million~~us ~~per~~in ~~month~~the ~~through~~next ~~November~~year ~~2009~~as ~~with~~we ~~the~~anticipate ~~remaining~~that ~~balance~~future ofdistributions ~~$7.4~~from ~~million~~the ~~due~~US inDebt ~~December~~Fund ~~2009.~~will Inbe ~~February~~retained ~~2009,~~by wethe ~~were~~US ~~notified~~Debt ~~that~~Fund ~~$2.2~~to ~~million~~reduce ofour ~~cash~~unfunded ~~flow~~capital ~~from~~call ~~CDO~~obligations IIfor ~~that~~the ~~would~~foreseeable ~~otherwise~~future. beAs ~~paid~~a toresult, uswe asare focused ~~holders~~on ofseeking ~~junior notes~~to ~~payable~~preserve ~~and~~liquidity ~~preferred~~by ~~shares~~minimizing ofour non-CDO ~~II,~~cash ~~would~~operating becosts ~~redirected~~ to ~~pay~~the ~~down~~extent ~~principal~~possible, onprimarily ~~senior~~by ~~notes~~(i) ceasing ~~payable~~management offee ~~CDO~~payments IIto asour aexternal ~~result~~manager ofeffective ~~CDO~~December II2009, ~~failing~~after tosignificantly ~~satisfy~~reducing ~~certain~~such cash ~~over-collateralization~~payments ~~coverage~~from ~~tests~~April ~~due~~2009 ~~primarily~~ to ~~recent~~November ~~rating~~2009, ~~agency downgrades~~(ii) filing ona ~~certain~~Form ~~CMBS~~15 ~~investments~~with ~~that~~the ~~serve~~Securities asand ~~collateral~~Exchange ~~for~~Commission ~~CDO~~(the ~~II.~~“SEC”) Weon ~~received~~March 31, ~~approximately~~2010 ~~$28~~and ~~million~~ceasing ofto ~~net~~be ~~cash~~an ~~flow~~SEC ~~from~~reporting ~~CDO~~company IIwhich inwill ~~2008.~~reduce ~~The~~administrative ~~conditions~~costs, and ~~described~~(iii) effective ~~above~~January 1, ~~led~~2010, todiscontinuing ~~the~~payments ~~substantial~~currently ~~doubt~~due ~~regarding~~on ~~the~~our ~~Company’s~~NAB ~~ability to~~Note ~~continues~~Payable asand aJunior ~~going~~Subordinated ~~concern~~Notes.

WeShould ~~did~~our ~~not~~lenders ~~include~~under ~~any~~the ~~adjustments~~Junior toSubordinated Notes or the ~~consolidated~~NAB ~~financial~~Note ~~statements~~Payable ~~included~~demand inimmediate ~~this~~repayment ~~Annual Report~~of onall ~~Form~~of ~~10-K~~our obligations, we will likely be unable to ~~reflect~~pay ~~the~~such ~~possible~~obligations. ~~future~~In ~~effects~~such ~~that~~event, we may have ~~result~~to ~~from~~recapitalize, ~~the~~refinance ~~uncertainty~~our ofobligations, ~~our~~sell ~~ability~~some toor ~~continue~~all asof aour ~~going~~assets ~~concern~~at ~~because~~prices webelow ~~believe~~current ~~that~~estimated wefair ~~can~~value ~~continue~~or seek to ~~generate~~liquidate ~~cash~~or ~~basis~~reorganize ~~operating~~under ~~income~~Chapter in7 ~~excess~~or ofChapter ~~operating expenses~~11, ~~and~~respectively, ~~that~~of wethe ~~have~~United ~~adequate~~States ~~liquidity~~Bankruptcy toCode. ~~continue~~If towe reorganized ~~fund~~under ~~our~~Chapter ~~operations~~11 ~~and~~or ~~the~~liquidated ~~interest~~under ~~payments~~Chapter on7 ~~our~~of ~~borrowing~~the ~~arrangements.~~United ~~However~~States Bankruptcy Code, weit ~~may~~is ~~not~~expected ~~have~~that ~~sufficient~~our ~~liquidity~~common tostockholders ~~fund~~would ~~unexpected~~not ~~margin~~recover ~~calls~~any orvalue toand ~~repay~~unsecured ~~principal~~creditors, ~~debt amortization~~including ~~and~~holders ~~maturities~~of ~~due~~the ~~later~~Junior inSubordinated ~~calendar~~Notes ~~year~~and NAB ~~2009.~~Note InPayable, ~~response~~would receive little, weif ~~have~~any, ~~undertaken~~value orin ~~expect~~relation to ~~commence~~the outstanding principal amounts of the ~~following~~Company’s ~~efforts:~~unsecured debt.

•The ~~Discontinuing~~following ~~payment~~table ofidentifies quarterly ~~dividends~~cash ~~and~~receipts ~~replacing~~from itour ~~with~~investments ~~payment~~from ~~of an annual dividend to the extent required to satisfy REIT dividend requirements. In addition~~January 1, to2009 ~~the extent we are required~~ to ~~make a dividend payment with respect to 2009~~September 30, we2010 ~~may~~(all ~~elect~~amounts ~~to pay up to 90% of such dividends~~ in ~~stock~~table inare ~~accordance with Internal Revenue Service (“IRS”~~unaudited) ~~Revenue Procedure 2008-68~~.

• We expect to reduce operating costs, primarily our general and administrative costs including possible modifications to our management agreement;


	For the Three Months Ending								For the Twelve Months Ending December 31, 2009		For the Three Months Ending
	March 31, 2009		June 30, 2009		September 30, 2009		December 31, 2009		For the Twelve Months Ending December 31, 2009		March 31, 2010			June 30, 2010		September 30, 2010
Non-CDO CMBS currently held by JRT	$	4,973	$	2,128	$	1,858	$	1,223	$	10,182	$	994		$	588		567
Non-CDO CMBS sold in March 2010		1,934		1,839		1,795		1,730		7,298		6,886	⁽¹⁾		—		—
CDO I retained interest		650		449		—		—		1,099		—			—		—
CDO II retained interest		1,380		—		—		—		1,380		—			—		—
US Debt Fund		—		—		—		—		—		—			—		—

Total	$	8,937	$	4,416	$	3,653	$	2,953	$	19,959	$	7,880		$	588	$	567

•(1) WeIncludes ~~will~~proceeds ~~seek~~from tosale ~~restructure~~of ~~terms~~these bonds of ~~our~~$5.5 ~~recourse~~million ~~indebtedness~~and ~~including~~interest ~~extension~~payments of ~~scheduled~~$1.4 ~~maturity~~million, ~~dates~~compared ~~and/or~~to ~~modification~~a ofDecember ~~near-term~~31, ~~interest~~2009 ~~payment~~estimated ~~requirements;~~fair ~~and~~value of $6.4 million.

•62 ~~If necessary, pursue sales of selected assets. However, the market for selling the assets we currently own is extremely limited to nonexistent.~~

No assurance can be given that we will be successful in achieving any of these steps collectively or individually. Should our repurchase agreement lender demand immediate repayment of all of our obligations, we will likely be unable to pay such obligations absent asset sales. In such event, we may have to recapitalize, refinance our obligations, sell some or all of our assets at prices below current estimated fair value or seek to reorganize under Chapter 11 of the United States Bankruptcy Code.

Credit Market, Spreads and Valuation: The credit markets have experienced a severe dislocation beginning in the second half of 2007 and continuing and accelerating in 2008. This has resulted in significant spread widening on virtually all credit and structured finance products which has caused de-leveraging throughout the

~~financial~~As ~~services~~noted ~~sector as a whole and~~above, inour ~~particular,~~cash ~~the~~receipts ~~commercial~~have ~~real~~declined ~~estate~~significantly ~~market.~~over ~~The~~2009 ~~spread~~and ~~widening~~2010 ~~has~~and ~~a direct inverse relationship with~~we ~~valuations~~expect ofthat our ~~investments~~cash soreceipts aswill ~~spreads~~continue ~~increase,~~to ~~valuations~~ decline. ~~The impact has been greater on the longer-term fixed rate assets~~ as ~~the~~delinquencies ~~duration~~and ofspecial ~~these~~servicing ~~assets~~transfers ison ~~longer~~loans ~~than~~underlying ~~shorter~~our ~~term~~CMBS ~~floating~~investments ~~rate~~continue ~~assets.~~to ~~An example of this spread widening is evidenced by trends in the CMBS market~~increase.

~~Beginning~~Credit inMarket, Spreads and Valuation: Since the second half of 2007 and continuing through ~~2008~~2009, the ~~Company~~credit ~~has~~markets ~~seen~~ experienced a severe dislocation, with significant spread widening ofon virtually all credit ~~spreads~~and instructured ~~both~~finance ~~the~~products. ~~subordinate~~This ~~CMBS~~has ~~market~~caused ~~which~~a ~~includes~~de-leveraging ~~bonds~~throughout ~~rated~~the ~~BB+~~financial ~~through~~services NRsector ~~classes,~~as a whole and, in particular, the ~~investment~~commercial ~~grade~~real ~~tranches~~estate ~~of BBB- and above~~market. InThe ~~2008,~~spread ~~new~~widening ~~issue CMBS volume~~ has ~~been~~ a ~~small~~direct ~~fraction~~inverse ofrelationship ~~the~~with ~~amount~~valuations of ~~issuance~~our ininvestments ~~2006~~so ~~and~~as ~~2007. Credit~~ spreads onincrease, ~~recent~~values ~~secondary~~decline. ~~market~~The ~~trades,~~impact ~~which~~has ~~have also~~ been ~~very~~greater ~~limited,~~on ~~for~~the ~~typical BBB~~longer-term ~~CMBS~~fixed ~~bonds,~~rate ~~are~~assets ~~estimated~~as tothe ~~exceed~~duration ~~5,000~~of ~~basis~~these ~~points~~assets asis oflonger ~~December 31,~~than ~~2008~~shorter ~~compared~~term tofloating ~~approximately 900~~rate ~~basis~~assets. ~~points~~An asexample of ~~December 31,~~this ~~2007~~spread widening ~~and~~is ~~approximately~~evidenced 95by ~~basis~~trends ~~points~~in asthe ofCMBS ~~December 31~~market, ~~2006.~~primarily ~~Additionally,~~on ~~the~~subordinate ~~Company~~CMBS ~~has~~and ~~seen~~mezzanine ~~significant widening of credit spreads on real estate~~ loans, ~~including~~which ~~B-Notes,~~constitute ~~mezzanine~~nearly ~~loans~~all ~~and whole~~of ~~loans~~our assets.

This credit market dislocation has had a substantial effect on market participants. These disruptions have led to, among other things, a significant ~~decline~~declines in the fair value of many mortgage related investment securities, as well as a significant contraction in short-term and long-term funding sources. As a result, many investment vehicles indicate difficulty valuing certain of their holdings and/or obtaining sustainable long-term sources of capital to adequately finance their businesses. ~~As a result, we cannot predict further changes in the market value of collateral and potential margin call requirements, if any under our repurchase agreement facilities.~~

Since ~~September~~December 3031, 2008, we have seen a significant increase in CMBS ~~loan collateral~~ ~~entering~~60-day ~~our CMBS special servicing portfolio. The CMBS special servicing portfolio balance was $303.5 million, $713.5 million~~ and ~~$1.2~~greater ~~billion~~delinquencies ~~at September 30, 2008, December 31, 2008~~ and ~~March 27,~~CMBS ~~2009,~~loan ~~respectively.~~collateral ~~Due~~entering ~~to the continued tightening of credit, declining real estate values, worsening macro-economic environment, in conjunction with the significant increase in~~ our CMBS special servicing portfolio,. weThe ~~increased~~following ~~our~~table ~~loan~~identifies ~~loss~~trends ~~projections~~in ~~associated~~delinquency ~~with the real estate loan collateral underlying our “first-loss” CMBS portfolio~~rates, ~~which~~special ~~represented~~servicing ~~approximately 3~~rates,~~500~~ ~~loans~~realized ~~with an unpaid principal balance of approximately $48 billion at December 31, 2008. As of December 31, 2008, we increased projected future loan~~ losses ~~from $862.7 million to $964.1 million. In addition~~, weappraisal ~~accelerated~~reductions ~~the~~and projected ~~timing of these~~ losses~~, with most of the loss increase projected to occur in 2009 and 2010. This increase in loss projections~~ ~~results~~on inour ~~lower~~real ~~projected~~estate ~~future~~loan ~~cash~~collateral ~~flows~~underlying ~~from~~ our “first-loss” CMBS ~~investments, and, in part, caused us to recognize a $33~~portfolio.3 million impairment charge during the three months ended December 31, 2008. Such loss reserves may be increased in the future in the event that collateral performance and macroeconomic conditions deteriorate.

CMBS and Other Debt Issuance: In 2008, US CMBS transactions totaling approximately $12.1 billion were priced. This compares to total US CMBS issuances during the 2007 of approximately $230.2 billion. This decrease is a direct result of the dramatic slowdown in the pace of lending by CMBS originators. In fact, given that virtually no new loans have been originated for securitization in the last four to six months, we don’t anticipate any significant new issue CMBS securitization activity until the second half of 2009, at the earliest.


	December 31, 2008			September 30, 2009			December 31, 2009			March 31, 2010⁽¹⁾			June 30, 2010⁽¹⁾			September 30, 2010⁽¹⁾
	(unaudited)			(unaudited)			(unaudited)			(unaudited)			(unaudited)			(unaudited)
CMBS Portfolio
Total CMBS investments		26			26			26			25			25			25
Face amount of CMBS investments	$	1,757,354		$	1,717,495		$	1,706,288		$	1,512,373		$	1,477,733		$	1,363,247
CMBS investments in which JRT owns the first-loss position		21			21			21			19			19			19
Face amount of first-loss CMBS investments	$	1,651,790		$	1,628,104		$	1,616,897		$	1,423,683		$	1,389,163		$	1,277,988
Face amount of collateral pool for first-loss CMBS investments	$	47,729,268		$	46,988,003		$	46,166,110		$	40,558,585		$	40,077,056		$	39,699,611

Credit Statistics on Collateral Pool for First-Loss CMBS Investments
60-day+ delinquency amount	$	392,963		$	1,500,596		$	1,543,098		$	2,645,776		$	3,044,466		$	3,240,308
60-day+ delinquency rate		0.8	%		3.2	%		3.3	%		6.5	%		7.6	%		8.2	%

Special servicing amount	$	713,515		$	3,388,698		$	3,107,147		$	4,598,153		$	4,487,474		$	4,699,261
Special servicing rate		1.5	%		7.2	%		6.7	%		11.3	%		11.2	%		11.8	%

Realized losses to date	$	3,404		$	27,206		$	37,575		$	53,561		$	112,341		$	195,011
Appraisal reductions to date	$	19,010		$	395,556		$	474,033		$	650,888		$	1,176,671		$	1,246,161

Projected losses over life of collateral pool	$	964,107		$	1,686,918		$	1,658,918		$	2,025,503		$	2,052,987		$	2,491,627
Projected loss rate over life of collateral pool		2.0	%		3.6	%		3.6	%		5.0	%		5.1	%		5.8	%

~~The~~(1) ~~slow~~On ~~down~~March in30, ~~originations~~2010, ~~has~~the ~~also~~Company ~~resulted~~sold inits ainterest ~~substantial reduction of new opportunities~~ in ~~the mezzanine,~~two Bnon-~~note~~CDO ~~mortgage~~CMBS ~~loan,~~investments ~~bridge~~in ~~loan,~~which ~~preferred~~it ~~equity~~held ~~and~~the ~~non~~first-~~investment~~loss ~~grade CMBS markets~~position. AsIn ~~originations~~one ~~at traditional high leverage lenders and the volume~~ of ~~real~~these ~~estate transactions generally have each continued to decline~~investments, ~~new investment~~the ~~opportunities~~Company inretained ~~this~~other ~~sector~~CMBS ~~have~~bond ~~been~~classes ~~reduced~~which ~~accordingly.~~were ~~We believe market supply will~~ not ~~increase significantly until stability~~ in the ~~real~~first-loss ~~estate lending market returns~~position.

~~Competition:~~63 Recently, as a result of volatile market conditions, we have seen competitors leave the market and other competitors enter the market. In the short to medium term, we expect market participants to be impacted by continued market volatility. Over the long-term, we expect to face increased competition for our targeted investments. However, over the long-term, we believe borrowers need a full range of financing options to make acquisitions, particularly on larger assets where substantial equity commitments are required.

~~Financing~~CMBS ~~Environment:~~and ~~Primarily~~Other asDebt aIssuance: ~~result~~During ofthe ~~spread~~twelve ~~widening,~~months weended ~~and~~December 31, ~~other market participants~~2009, ~~have~~total ~~experienced~~U.S. ~~significant~~CMBS ~~margin~~issuances ~~call~~totaled ~~activity~~$3.0 onbillion ~~our~~compared ~~repurchase~~to ~~agreement~~approximately ~~facilities~~$12.1 ~~based~~billion ~~upon~~and ~~fair~~$230.2 ~~market~~billion, ~~value~~respectively, ~~determinations~~during of the ~~underlying~~twelve ~~collateral.~~months ~~Concurrent~~ended ~~with~~December 31, ~~decreases~~2008 inand ~~value~~2007, ~~the~~with ~~availability~~2007 ofrepresenting ~~short~~the tohistoric ~~medium-term~~peak ~~financing has~~year ~~become~~of ~~extremely~~CMBS ~~limited~~issuances. This ~~reduction~~decrease inis ~~availability~~a ofdirect ~~financing~~result ~~has~~of ~~been~~the ~~compounded~~dramatic byslowdown in the ~~elimination~~pace of ~~several~~lending ~~key~~by ~~lenders~~CMBS inoriginators. ~~the~~We ~~market~~do ~~through~~not ~~the~~anticipate ~~much~~any ~~publicized~~significant ~~mergers,~~new ~~bankruptcies,~~issue ~~conservertorships~~CMBS ~~and~~securitization ~~liquidations~~activity in the ~~financial~~ ~~services~~near ~~sector~~future.

~~From~~The aslow ~~long-term~~down ~~debt~~in ~~perspective,~~originations ~~the~~has ~~ability~~also toresulted ~~leverage~~in ~~our~~a ~~assets~~substantial orreduction ~~potential~~of ~~assets~~new ~~through~~opportunities ~~offerings~~in ~~of commercial~~the ~~real~~mezzanine, ~~estate~~B-note ~~debt~~mortgage ~~obligations~~loan, bridge ~~(“CRE~~loan, ~~CDO”)~~preferred isequity ~~effectively~~and non-~~existent~~investment grade CMBS markets. ~~The~~As ~~current~~originations ~~state~~at oftraditional ~~the~~high ~~CMBS~~leverage lenders and ~~CRE~~the ~~CDO~~volume ~~markets~~of ~~could~~real estate transactions generally have aeach ~~negative~~continued ~~impact~~to ondecline, ~~our~~new ~~leveraged~~investment ~~returns~~opportunities ~~and~~in ~~our~~this sector ~~ability~~have tobeen ~~successfully~~reduced ~~match-fund~~accordingly. ~~liabilities associated~~We ~~with~~believe ~~our~~market ~~investments~~supply will not increase significantly until stability in the real estate lending market returns.

Competition: Recently, as a result of volatile market conditions, we have seen competitors leave the market and other competitors enter the market. In the short to medium-term, we expect market participants to be impacted by continued market volatility. Over the long-term, we expect to face increased competition for our targeted investments. However, over the long-term, we believe borrowers need a full range of financing options to make acquisitions, particularly on larger assets where substantial equity commitments are required.

During 2009, many peers of our manager formed new commercial mortgage REITs which completed public offerings. Some of these may compete against us in the future. Given the limited liquidity and capital available to us, we do not expect to acquire additional investments for the foreseeable future.

Financing Environment: Primarily as a result of declining collateral values, we and other market participants have experienced significant margin call activity on our repurchase agreement facilities since 2007. Concurrent with decreases in value, the availability of short to medium-term financing has become extremely limited. This reduction in availability of financing has been compounded by the elimination of several key lenders in the market through the much publicized mergers, bankruptcies, conservertorships and liquidations in the financial services sector.

From a long-term debt perspective, the ability to leverage our assets or potential assets through offerings of commercial real estate debt obligations (“CRE CDO”) is effectively non-existent. The current state of the CMBS and CRE CDO markets has had a negative impact on our leveraged returns and our ability to successfully match-fund liabilities associated with our investments.

Issuances of Common Stock

~~All~~On ~~share~~December 16, ~~and~~2008, ~~per~~we ~~share~~declared ~~amounts~~a ~~have~~dividend ~~been~~of ~~restated~~$8.80 to ~~reflect~~be ~~the~~paid ~~1-for-10 reverse stock split effected by us~~ on ~~February~~January 2030, 2009. InPursuant ~~June~~to ~~2004,~~the weapplicable ~~sold~~prospectus 1supplement,~~150,000~~ ~~shares~~shareholders had the option of ~~common~~electing either cash or stock inwith atotal ~~private~~cash ~~placement offering~~payments ~~for~~by ~~net~~us ~~proceeds~~not ofto ~~approximately~~exceed $~~160~~2.13 million. ~~Additionally,~~As wea ~~issued~~result ~~33,500~~of ~~shares~~shareholder ofelections, ~~common~~we ~~stock~~paid toshareholders ~~our~~$2.3 ~~manager~~million and anissued ~~aggregate~~23,978,905 ~~of 600~~ shares of ~~restricted~~ common stock toon ~~our~~January 30, ~~independent~~2009. ~~directors~~On ~~pursuant~~February 13, to2009, ~~our~~we ~~Nonqualified~~declared ~~Stock~~a ~~Option~~1-for-10 ~~and~~reverse ~~Incentive~~stock ~~Plan~~split ~~(the~~which ~~“Plan”)~~was ateffective ~~the~~February 20, ~~time~~2009. ofAs ~~the closing~~ of ~~the private placement. In July 2004~~December 31, ~~when James Kimsey and Frank Caufield joined our Board of Directors~~2009, we ~~issued~~had ~~each~~a total of ~~them 2~~5,~~000~~831,029 ~~additional~~ shares of ~~restricted~~ common stock ~~pursuant~~issued toand ~~the Plan~~outstanding.

InDuring ~~July 2005,~~ the ~~Securities~~twelve ~~and~~months ~~Exchange~~ended ~~Commission (“SEC”) declared effective our registration statement on Form S-11 (No.~~December ~~333-122802) (the “Registration Statement”) relating to (a) our initial public offering (the “IPO”) of up to 1~~31,~~383,203~~ ~~shares of common stock~~2009, ~~including~~in ~~183,203~~connection ~~shares~~with ~~of common stock pursuant to an over-allotment option granted to~~ the ~~underwriters~~exchange and ~~(b) the~~cancellation ~~offering by selling stockholders~~ of ~~21,350~~our ~~shares of common stock through the underwriters. On July 19~~TRUPs, ~~2005,~~ we issued ~~a total of 1~~849,~~200,000 shares of~~109 ~~common stock in the IPO, at a price to the public of $177.50 per share. We did not receive any proceeds from the sale by the selling stockholders of 21,350~~ shares of unregistered common stock~~, at a price to the public of $177~~.50 ~~per share.~~

InOn ~~August~~March 26, ~~2005~~2009, we received written notice from the ~~underwriters~~NYSE ~~exercised~~that ~~their~~we ~~option~~were not in compliance with the NYSE’s continued listing standards applicable to ~~purchase~~us anrequiring ~~additional~~that ~~183,203~~we ~~shares~~maintain ofa ~~common~~30-day ~~stock~~trailing average global equity market capitalization of at least $~~177~~15.500 ~~to cover over-allotments~~million. The NYSE permanently suspended trading of our common ~~net~~stock ~~proceeds~~prior to usthe market open on ~~the~~April 1, ~~sale~~2009. ofSince April 1,~~200,000~~ ~~shares~~2009 inthrough ~~the~~April 5, ~~IPO~~2010, ~~and~~our ~~the~~common ~~183,203~~stock ~~pursuant~~was toquoted on the over-~~allotment~~the-counter ~~option~~bulletin ~~was~~board, ~~$226.4~~or ~~million~~OTC ~~after~~BB, ~~deducting~~under the ~~underwriting~~ticker ~~discount~~symbol ~~and~~of ~~offering expenses~~JERT. ~~The~~Thereafter, ~~net~~we ~~proceeds~~have ofbeen and are currently quoted on the ~~IPO~~Pink ~~were~~Sheets ~~primarily~~under ~~used to~~the ~~pay~~ticker ~~down~~symbol ~~indebtedness~~JERT.

~~During~~64 2007, we granted 13,700 shares of restricted stock to certain officers and employees of an affiliate of our manager, of which 300 shares have been forfeited. In May 2006, we granted Mark Weiss, our president, 6,000 shares of restricted stock and 15,000 stock options on our common stock. As of December 31, 2008, we had granted an aggregate of 4,000 shares of restricted stock and 2,805 shares of deferred stock units to our current and former independent directors.

On December 16, 2008, we declared a dividend of $8.80 for the three months ended December 31, 2008 to be paid on January 30, 2009. Pursuant to the prospectus supplement, shareholders had the option of electing either cash or stock with total cash payments not to exceed $2.3 million. As a result of shareholder elections, we paid shareholders $2.3 million and issued 23,978,905 shares of common stock on January 30, 2009. On February 13, 2009, we declared a 1-for-10 reverse stock split which was effective February 20, 2009. As of December 31, 2008, we had a total of 2,590,104 shares of common stock issued and outstanding adjusted for the affect of the February 2009 reverse stock split, and as of March 27, 2009 there were 4,987,994 shares of common stock issued and outstanding adjusted for both the stock dividend and reverse stock split as outlined in the table below.

Shares at December 31, 2008		25,901,035
Shares adjusted for February 2009 reverse stock split		2,590,104
Additional shares of existing common stock issued as a result of the 2008 year end stock dividend on January 30, 2009		23,978,905
Shares adjusted for reverse stock split		2,397,891
Adjusted diluted shares of existing common stock outstanding (non-GAAP)		4,987,994

On March 26, 2009, we received written notice from the NYSE that we were not in compliance with the NYSE’s continued listing standards applicable to us requiring that we maintain a 30-day trailing average global equity market capitalization of at least $15.0 million (this standard has temporarily been lowered from $25.0 million through June 30, 2009). The NYSE will permanently suspend trading of our common stock prior to the market open on April 1, 2009. As of April 1, 2009, the trading of the Company’s common stock will occur on the over-the-counter, or OTC, market.

Critical Accounting Policies

Our most critical accounting policies relate to our ability to continue as a going concern, investment consolidation, revenue recognition, securities valuation and impairment, ~~loan loss provisions,~~ derivative accounting and income taxes. Each of these items involves estimates that require management to make judgments that are subjective in nature. We rely on J.E. Robert Company and its affiliates’ experience and analysis of historical and current market data in order to arrive at what we believe to be reasonable estimates. Under different conditions, we could report materially different amounts using these critical accounting policies.

Going Concern: A fundamental principle of the preparation of financial statements in accordance with GAAP is the assumption that an entity will continue in existence as a going concern, which contemplates continuity of operations and the realization of assets and settlement of liabilities occurring in the ordinary course of business. This principle is applicable to all entities except for entities in liquidation or entities for which liquidation appears imminent. In accordance with this requirement, our policy is to prepare our consolidated financial statements on a going concern basis unless we intend to liquidate our assets or have no other alternative but to liquidate our assets. As a result of the outstanding payment defaults on our NAB Note Payable and Junior Subordinated Notes, the current level of available cash, the redirection of cash flow from CDO I and CDO II, ~~and~~declines ~~the~~in ~~December~~cash ~~2009~~flow ~~maturity~~from our non-CDO CMBS investments, the redirection of cash flow from assets serving as collateral under our JPMorgan repurchase agreement facility, and unfunded capital commitments related to our investment in the US Debt Fund, there is substantial doubt about our ability to continue as a going concern. While we have prepared our consolidated financial statements on a going concern basis, if we are unable to successfully ~~extend~~cure our payment defaults on the ~~maturity~~NAB ~~date~~Note ofPayable ~~our~~and ~~repurchase~~Junior ~~agreement~~Subordinated ~~borrowings~~Notes, reduce operating expenses, sell assets or receive additional funding, our ability to continue as a going concern may be impacted. Therefore, we may not be able to realize our assets and settle our liabilities in the ordinary course of business. Our consolidated financial statements included in this Form 10-K do not reflect any adjustments that might specifically result from the outcome of this uncertainty.

Investment Consolidation. For each investment we make, we evaluate the underlying entity that issued the securities we acquired or to which we made a loan in order to determine the appropriate accounting. We refer to guidance in ASC Section 860-10-40, Transfers to Qualifying Special Purpose Entities” ASC 810-10, Consolidation, in performing our analysis. ASC 810-10 addresses consolidation of certain entities in which voting rights are not effective in identifying an investor with a controlling financial interest. An entity is considered a variable interest entity (“VIE”) and subject to consolidation if the investors either do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support, are unable to direct the entity’s activities, or are not exposed to the entity’s losses or entitled to its residual returns. Variable interest entities within the scope of ASC 810-10 are required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest entity is determined to be the party that absorbs a majority of the entity’s expected losses, its expected returns, or both.

69Our ownership of the subordinated classes of CMBS from a single issuer gives us the right to control the foreclosure/workout process on the underlying loans (“Controlling Class CMBS”). ASC 810-10 has certain scope exceptions, one of which provides that an enterprise that holds a variable interest in a qualifying special-purpose entity (“QSPE”) does not consolidate that entity unless that enterprise has the unilateral ability to cause the entity to liquidate. ASC 860-10-40 provides the requirements for an entity to be considered a QSPE. To maintain the QSPE exception, the trust must continue to meet the QSPE criteria both initially and in subsequent periods. A trust’s QSPE status can be impacted in future periods by activities of its transferor(s) or other involved parties, including the manner in which certain servicing activities are performed. To the extent our CMBS investments were issued by a trust that meets the requirements to be considered a QSPE, we record the investments at the purchase price paid. To the extent the underlying trusts are not QSPEs, we follow the guidance set forth in ASC 810-10 as the trusts would be considered VIEs.

~~guidance~~We inhave ~~SFAS~~analyzed ~~No. 140,~~the ~~Accounting~~governing ~~for~~pooling ~~Transfers~~ and ~~Servicing~~servicing ofagreements ~~Financial~~for ~~Assets~~each ~~and Extinguishments~~ of ~~Liabilities,~~our subordinated ~~and~~class ~~FIN~~CMBS ~~46(R), Consolidation~~investments ofand ~~Variable~~believe ~~Interest~~the ~~Entities,~~terms inare ~~performing~~consistent ~~our~~with ~~analysis.~~industry ~~FIN~~standards ~~46(R)~~and ~~addresses~~ the ~~application~~QSPE ofcriteria. ~~Accounting~~However, ~~Research~~there ~~Bulletin~~is ~~No. 51,~~uncertainty ~~“Consolidated~~with ~~Financial~~respect ~~Statements,”~~ to ~~certain~~QSPE ~~entities~~treatment indue ~~which~~to ~~voting rights~~ongoing ~~are~~review ~~not~~by ~~effective~~accounting instandard ~~identifying~~setters, anpotential actions ~~investor~~by ~~with~~various aparties ~~controlling~~involved ~~financial~~with ~~interest.~~the AnQSPE, ~~entity~~as isdiscussed ~~considered~~above, aas ~~variable~~well ~~interest~~as ~~entity~~varying ~~(“VIE”)~~ and ~~subject~~evolving tointerpretations ~~consolidation~~of ~~under FIN 46(R) if~~ the ~~investors~~QSPE ~~either~~criteria. doIn ~~not~~June ~~have sufficient~~2009, ~~equity at risk for~~ the ~~entity~~FASB toissued ~~finance~~guidance ~~its~~thereby ~~activities~~(i) removing ~~without~~the ~~additional~~concept ~~subordinated~~of ~~financial~~a ~~support,~~qualifying ~~are~~special ~~unable to direct the~~ purpose entity’s ~~activities,~~(SPE) orand ~~are~~eliminates ~~not exposed to~~ the ~~entity’s~~exception ~~losses~~for orqualifying ~~entitled~~SPEs tofrom ~~its residual returns. Variable interest entities within~~ the ~~scope~~consolidation ofguidance. ~~FIN~~We ~~46(R)~~may ~~are~~be required to beadopt ~~consolidated~~this byguidance ~~their~~on ~~primary~~January 1, ~~beneficiary.~~2010 ~~The~~and ~~primary~~are ~~beneficiary~~currently ofevaluating athe ~~variable~~impact ~~interest~~on ~~entity~~our isconsolidated ~~determined~~financial tostatements, however, bewe ~~the~~currently ~~party~~believe that ~~absorbs~~the apresentation ~~majority~~ of ~~the entity’s~~our ~~expected~~consolidated ~~losses,~~financial ~~its~~statements ~~expected~~may ~~returns,~~prospectively orchange ~~both~~significantly upon adoption.

Our ownership of the subordinated classes of CMBS from a single issuer gives us the right to control the foreclosure/workout process on the underlying loans (“Controlling Class CMBS”). FIN 46(R) has certain scope exceptions, one of which provides that an enterprise that holds a variable interest in a qualifying special-purpose entity (“QSPE”) does not consolidate that entity unless that enterprise has the unilateral ability to cause the entity to liquidate. SFAS No. 140 provides the requirements for an entity to be considered a QSPE. To maintain the QSPE exception, the trust must continue to meet the QSPE criteria both initially and in subsequent periods. A trust’s QSPE status can be impacted in future periods by activities of its transferor(s) or other involved parties, including the manner in which certain servicing activities are performed. To the extent our CMBS investments were issued by a trust that meets the requirements to be considered a QSPE, we record the investments at the purchase price paid. To the extent the underlying trusts are not QSPEs, we follow the guidance set forth in FIN 46(R) as the trusts would be considered VIEs.

We have analyzed the governing pooling and servicing agreements for each of our subordinated class CMBS investments and believe the terms are consistent with industry standards and the QSPE criteria. However, there is uncertainty with respect to QSPE treatment due to ongoing review by accounting standard setters, potential actions by various parties involved with the QSPE, as discussed above, as well as varying and evolving interpretations of the QSPE criteria under SFAS No. 140. Future guidance from the standard setters may require us to consolidate CMBS trusts in which we have invested. In September 2008, the FASB issued exposure drafts which could amend FIN 46(R) and SFAS No. 140. The current exposure drafts contemplate the removal of the QSPE scope exception. We will closely monitor any developments in this area and assess the impact of any such amendments to our financial statements.

The non-investment grade and unrated tranches of the CMBS owned by us provide credit support to the more senior classes of the related securitizations. Cash flow from the underlying mortgages is generally allocated first to the senior tranches, with the most senior tranches having a priority right to the cash flow. Any remaining cash flow is allocated, generally, among the other tranches in order of their relative seniority. To the extent there are defaults and unrecoverable losses on the underlying mortgages resulting in reduced cash flows, the remaining unrated and lowest rated CMBS classes will bear such losses in order of their relative subordination.

70The table below details information about our CMBS investments, including the purchase date, the face amount of the total CMBS issuance, the original and current face amounts of our CMBS investments, and the amortized cost, net of impairment charges, of our CMBS investments as of December 31, 2009 and 2008, respectively:


CMBS Trust	Investment Date	Total Original Face Amount of CMBS Issuance		Original Face Amount of Investment		Face Amount as of December 31,				Amortized Cost⁽¹⁾ as of December 31,
CMBS Trust	Investment Date	Total Original Face Amount of CMBS Issuance		Original Face Amount of Investment		2009		2008		2009		2008
MACH One 2004-1	July 2004	$	643,261	$	50,637	$	31,724	$	47,897	$	1,510	$	5,191
CSFB 1998-C1⁽²⁾	August 2004		2,482,942		12,500		12,500		12,500		3,512		4,256
CSFB 2004-C4	November 2004		1,138,077		52,976		42,976		43,098		2,821		6,580
MLMT 2004-BPC1	November 2004		1,242,650		76,986		48,518		48,547		5,346		9,251
JPMCC 2004-C3	December 2004		1,517,410		81,561		59,849		63,154		2,410		11,248
JPMCC 2005-CIBC11	March 2005		1,800,969		70,035		59,926		64,914		3,552		8,942
BACM 2005- 1	April 2005		2,322,091		84,663		72,163		72,163		7,372		13,621
LB UBS 2005-C2⁽²⁾	April 2005		1,942,131		7,000		4,500		4,500		949		1,752
CSFB 2005-C2	May 2005		1,614,084		82,261		61,695		65,697		—		3,128
LB UBS 2005-C3	June 2005		2,060,632		39,335		39,335		39,335		172		2,917
JPMCC 2005-CIBC12	July 2005		2,167,039		70,429		70,099		70,405		—		5,289
JPMCC 2005-LDP4	September 2005		2,677,075		90,352		86,321		90,352		4,164		10,428
MSCI 2005-IQ10	October 2005		1,546,863		55,274		55,274		55,274		2,393		6,883
MLMT 2005 CK I1	December 2005		3,073,749		96,066		88,537		96,066		6,220		11,754
MSC 2006 HQ8	March 2006		2,731,231		105,707		105,707		105,707		5,590		13,315
JPMCC 2006-CIBC15	June 2006		2,118,303		71,493		71,984		71,493		—		5,829
CGCMT 2006-C4	June 2006		2,263,536		84,395		83,339		84,395		3,310		10,974
MSCI 2006- HQ9	August 2006		2,565,238		81,338		79,677		81,338		5,647		10,399
MLMT 2006- C2	August 2006		1,542,697		60,067		55,987		60,067		81		9,951
JPMCC 2006- LDP8	September 2006		3,066,028		107,158		107,158		107,158		5,909		15,279
CD 2006- CD3	October 2006		3,571,361		110,713		106,439		110,713		2,804		11,513
MSCI 2007- HQ11⁽³⁾	February 2007		2,417,647		89,530		88,895		88,895		4,332		11,109
GCCFC 2007- GG9⁽²⁾	March 2007		6,575,924		34,167		34,167		34,167		3,021		6,185
JPMCC 2007- LDP10	March 2007		5,331,517		151,616		151,616		151,616		153		15,643
WAMU 2007- SL3⁽²⁾	June 2007		1,284,473		6,500		6,500		6,500		896		1,465
JPMCC 2007- LDP12⁽³⁾	August 2007		2,310,556		81,402		81,402		81,403		2,937		7,845

Total		$	62,007,484	$	1,854,161	$	1,706,288	$	1,757,354	$	75,101	$	220,747

(1) The ~~table~~decline ~~below~~in ~~details~~amortized ~~information~~cost ~~about~~from ~~our~~December ~~CMBS investments~~31, ~~including~~2008 ~~the~~to ~~purchase~~December ~~date~~31, ~~the~~2009 ~~face amount~~is ofdue ~~the~~primarily ~~total~~to ~~CMBS issuance,~~ the ~~original~~recognition ~~and current face amounts~~ of ~~our~~impairments ~~CMBS~~totaling ~~investments,~~$21.9 million and ~~the~~basis ~~amortized~~writedowns ~~cost~~totaling of$96.0 ~~our~~million ~~CMBS~~during ~~investments~~the astwelve ofmonths ended December 31, ~~2008 and 2007, respectively:~~ 2009.

	Investment Date	Total Face Amountof CMBS Issuance		OriginalFaceAmount ofInvestment		CurrentFaceAmount ofInvestment		Amortized Cost(1) as of
CMBS Trust								December 31,2008		December 31,2007
MACH One 2004-1	July 2004	$	643,261	$	50,637	$	47,897	$	5,191	$	19,672
CSFB 1998-C1(2)	August 2004		2,482,942		12,500		12,500		4,256		9,565
CSFB 2004-C4	November 2004		1,138,077		52,976		43,098		6,580		22,575
MLMT 2004-BPC1	November 2004		1,242,650		76,986		48,547		9,251		26,174
JPMCC 2004-C3	December 2004		1,517,410		81,561		63,154		11,248		35,800
JPMCC 2005-CIBC11	March 2005		1,800,969		70,035		64,914		8,942		33,761
BACM 2005-1	April 2005		2,322,091		84,663		72,163		13,621		41,630
LB UBS 2005-C2(2)	April 2005		1,942,131		7,000		4,500		1,752		4,328
CSFB 2005-C2	May 2005		1,614,084		82,261		65,697		3,128		37,695
LB UBS 2005-C3	June 2005		2,060,632		39,335		39,335		2,917		17,626
JPMCC 2005-CIBC12	July 2005		2,167,039		70,429		70,405		5,289		33,793
JPMCC 2005-LDP4	September 2005		2,677,075		90,352		90,352		10,428		48,731
MSCI 2005-IQ10	October 2005		1,546,863		55,274		55,274		6,883		30,694
MLMT 2005 CK11	December 2005		3,073,749		96,066		96,066		11,754		51,689
MSC 2006 HQ8	March 2006		2,731,231		105,707		105,707		13,315		62,181
JPMCC 2006-CIBC15	June 2006		2,118,303		71,493		71,493		5,829		37,436
CGCMT 2006-C4	June 2006		2,263,536		84,395		84,395		10,974		50,759
MSCI 2006- HQ9	August 2006		2,565,238		81,338		81,338		10,399		48,577
MLMT 2006-C2	August 2006		1,542,697		60,067		60,067		9,951		38,249
JPMCC 2006- LDP8	September 2006		3,066,028		107,158		107,158		15,279		64,231
CD 2006-CD3	October 2006		3,571,361		110,713		110,713		11,513		62,616
MSCI 2007- HQ11	February 2007		2,417,647		89,530		88,895		11,109		58,401
GCCFC 2007- GG9(2)	March 2007		6,575,924		34,167		34,167		6,185		31,061
JPMCC 2007- LDP10	March 2007		5,331,517		151,616		151,616		15,643		85,343
WAMU 2007- SL3(2)	June 2007		1,284,473		6,500		6,500		1,465		5,746
JPMCC 2007- LDP12	August 2007		2,310,556		81,402		81,402		7,845		39,554
Total		$	62,007,484	$	1,854,161	$	1,757,353	$	220,747	$	997,887

(1) The decline in amortized cost from December 31, 2007 to December 31, 2008 is due primarily the recognition of previously unrealized losses and other than temporary impairment of $769.9 million during the year ended December 31, 2008, which included $280.5 million of unrealized losses at January 1, 2008 upon the adoption of SFAS No. 159.

⁽²⁾	Represents an investment where we have only invested in the classes that are senior to “first-loss” CMBS bonds issued by the trust.

~~Our~~(3) ~~maximum~~On ~~carrying~~March ~~value~~30, ~~exposure~~2010, towe ~~loss~~sold ascertain anon-CDO ~~result~~CMBS ofinvestments ~~our~~which ~~investment~~served ~~in these securities totaled $220.7 million and $997.9 million~~ as ~~of December 31,~~collateral ~~2008~~for ~~and 2007, respectively. However, we have reduced~~ our ~~maximum~~repurchase ~~economic~~agreement ~~loss~~with ~~exposure~~a ~~through~~face ~~the~~amount ~~use~~ of ~~non-recourse~~$152.9 ~~and~~million ~~partial recourse financing vehicles~~ for ~~these investments~~$5.5 million.

~~The~~Our ~~financing~~maximum ~~structures~~carrying wevalue ~~offer~~exposure to ~~our~~loss ~~borrowers~~as ona ~~certain~~result of our ~~loans~~investment ~~involve~~in these ~~the~~securities ~~creation~~totaled of$86.0 ~~entities~~million ~~that~~and ~~could~~$222.6 bemillion ~~deemed~~as ~~VIEs~~of ~~and~~December 31, ~~therefore, could~~2009 beand ~~subject~~2008, ~~to FIN 46(R)~~respectively. WeHowever, we have ~~evaluated~~reduced ~~these~~our ~~entities~~maximum ~~and~~economic ~~have~~loss ~~concluded~~exposure ~~that~~through ~~none~~the use of ~~them~~non-recourse ~~are~~financing ~~VIEs~~vehicles ~~that~~for ~~are~~these ~~subject~~investments financed toby ~~consolidation under FIN 46(R)~~CDOs.

71The financing structures we offer to our borrowers on certain of our loans involve the creation of entities that could be deemed VIEs. We have evaluated these entities and have concluded that none of them are VIEs that are subject to consolidation.

~~Table~~In November 2005 and October 2006, we issued two CDOs through wholly owned subsidiaries as more fully discussed in Liquidity and Capital Resources . We have accounted for these transactions as financings, and the anticipated variability of ~~Contents~~each CDO’s results are absorbed by us as the holder of the non-investment grade notes and preferred shares of such CDOs. We concluded that consolidation of both CDOs is required as a consequence of this exposure.

In ~~November~~April ~~2005~~2007, ~~and~~we ~~October~~created ~~2006,~~a wetrust ~~issued~~subsidiary ~~two~~for ~~CDOs~~the ~~through~~purpose ~~wholly~~of ~~owned~~issuing ~~subsidiaries~~TRUPs. asThe ~~more~~trust ~~fully discussed~~is inconsidered ~~Liquidity~~a VIE and ~~Capital~~it ~~Resources.~~was ~~The~~determined ~~Company~~that ~~has~~we ~~accounted~~are ~~for~~not ~~transactions~~the asprimary ~~financings~~beneficiary ~~and~~of the ~~anticipated~~trust ~~variability~~as ofwe ~~each~~do ~~CDO’s~~not ~~results~~hold ~~are~~a ~~absorbed~~variable byinterest in the ~~Company~~trust. asAccordingly, the ~~holder~~trust ofis accounted for using the ~~non-investment~~equity ~~grade~~method ~~notes~~of accounting. ~~The~~In May 2009, we entered into an agreement ~~Company~~to ~~concluded~~exchange ~~that~~and ~~consolidation~~cancel ofall ~~both~~TRUPs ~~CDOs~~issued isthrough ~~required~~this assubsidiary aand ~~consequence~~we ofintend to dissolve this ~~exposure~~subsidiary in the future. See Liquidity and Capital Resources—Junior Subordinated Debentures and Notes for additional information.

In ~~April~~December 2007, we ~~created~~entered into an agreement to invest up to $10.0 million into a ~~trust~~fund, defined as the JER US Debt Co-Investment ~~subsidiary~~Vehicle, ~~for~~L.P. (the ~~purpose~~“US ofDebt ~~issuing~~Fund”), ~~trust~~established ~~preferred~~to ~~securities.~~buy ~~The~~loans ~~trust~~secured, isdirectly ~~considered~~or aindirectly, ~~VIE~~by ~~under~~commercial ~~FIN~~real ~~46(R)~~estate, ~~and~~including itB-Notes, ~~was~~mezzanine ~~determined~~loans ~~that~~and wewhole ~~are~~mortgage ~~not~~loans, ~~the~~and ~~primary~~also ~~beneficiary~~in ofpreferred ~~the~~equity, ~~trust~~CMBS and CMBS-related products such as weCMBX. doThe ~~not~~US ~~hold~~Debt aFund ~~variable~~is ~~interest~~not inconsidered ~~the~~a ~~trust~~VIE. Accordingly, the ~~trust~~US Debt Fund is accounted for using the equity method of accounting. ~~See~~Although ~~Liquidity~~the ~~and~~US ~~Capital~~Debt ~~Resources-~~Fund ~~Junior~~is ~~Subordinated~~not ~~Debentures~~a ~~for~~VIE, ~~additional~~we ~~information~~determined that these entities should not be consolidated given the rights afforded to the other partners in those entities.

In October 2007, we sold a 50% interest in the entity that owns all twelve of our net leased real estate assets, forming a joint venture with an unrelated third party. The joint venture was not considered a VIE under FIN 46(R) and we accounted for our investment in the joint venture under the equity method of accounting. In April 2008, the Company sold its remaining 50% interest in the joint venture for $39.4 million which approximated cost basis.

In December 2007, we entered into an agreement to invest up to $10.0 million into a fund, defined as the JER US Debt Co-Investment Vehicle, L.P. (the “US Debt Fund”), established to buy loans secured, directly or indirectly, by commercial real estate, including B-Notes, mezzanine loans and whole mortgage loans, and also in preferred equity, CMBS and CMBS-related products such as CMBX and credit default swaps. Excluded investments for the US Debt Fund include non-performing loans, fee-simple ownership interests in real estate, single family residential mortgages and related securities (sub-prime, conforming, jumbo or Alt-A), whole loans originated directly by us or an affiliate of our Manager and net leased real estate assets. The US Debt Fund is not considered a VIE under FIN 46(R). Accordingly, the US Debt Fund is accounted for using the equity method of accounting. As of December 31, 2008 and 2007, we had invested $3.4 million and $1.2 million, respectively, in the US Debt Fund.

Although the entity that owns the net leased real estate assets and the US Debt Fund are not VIE’s under FIN 46(R), we determined that these entities should not be consolidated under EITF 04-5 given the rights afforded to the other partners in those entities.

We determine if our real estate loans should be accounted for as loans, real estate investments or equity method joint ventures in accordance with AICPA Practice Bulletin No. 1 on acquisition, development or construction (“ADC”) arrangements. To date, we have accounted for all of our arrangements as loans based on the guidance set forth in the Practice Bulletin.

We acquire participating interests in commercial real estate first mortgage loans and mezzanine loans. When we initially invest in loan participations, they are evaluated ~~under SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities,~~ to determine whether the participation interest meets the definition of a debt security. To the extent a

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Filing Compare · JER Investors Trust Inc