SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________

FORM 10-Q

(Mark One)

(X)

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

For the quarterly period ended ~~June~~September 30, 2013

( )

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 001-32039

CapLease, Inc.
(Exact name of registrant as specified in its charter)

	Maryland		52-2414533
	(State or Other Jurisdiction of		(I.R.S. Employer Identification No.)
	Incorporation or Organization)

	1065 Avenue of the Americas, New York, NY		10018
	(Address of Principal Executive Offices)		(ZIP Code)

	Registrant’s Telephone Number, Including Area Code:		(212) 217-6300

_______________

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

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes ☒ No ☐

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

Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Smaller reporting company ☐ ~~(Do not check if a smaller reporting company)~~

(Do not check if a 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 ☒

As of ~~August~~October 731, 2013, there were 88,845,604 shares of common stock of CapLease, Inc., $0.01 par value per share, outstanding (“Common Stock”).

CapLease, Inc.

Index to Form 10-Q

Page PART I. FINANCIAL INFORMATION 2 Item 1. Financial Statements 2 Consolidated Balance Sheets as of June 30, 2013 (unaudited) and December 31, 2012 2 Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended June 30, 2013 and 2012 3 Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the Three and Six Months Ended June 30, 2013 and 2012 4 Consolidated Statement of Changes in Equity (unaudited) for the Six Months Ended June 30, 2013 5 Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2013 and 2012 6 Notes to Consolidated Financial Statements (unaudited) 7 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 39 Item 3. Quantitative and Qualitative Disclosures About Market Risk 53 Item 4. Controls and Procedures 56 PART II. OTHER INFORMATION 56 Item 1. Legal Proceedings 56 Item 1A. Risk Factors 57 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 57 Item 3. Defaults Upon Senior Securities 57 Item 4. Mine Safety Disclosures 57 Item 5. Other Information 58 Item 6. Exhibits 58 SIGNATURES 59

		Page

PART I. FINANCIAL INFORMATION		2
Item 1.	Financial Statements	2
	Consolidated Balance Sheets as of September 30, 2013 (unaudited) and December 31, 2012	2
	Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2013 and 2012	3
	Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the Three and Nine Months Ended September 30, 2013 and 2012	4
	Consolidated Statement of Changes in Equity (unaudited) for the Nine Months Ended September 30, 2013	5
	Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 30, 2013 and 2012	6
	Notes to Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	47

PART II. OTHER INFORMATION		47

Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3.	Defaults Upon Senior Securities	48
Item 4.	Mine Safety Disclosures	48
Item 5.	Other Information	48
Item 6.	Exhibits	48

SIGNATURES		49

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CapLease, Inc. and Subsidiaries

Consolidated Balance Sheets

As of ~~June~~September 30, 2013 (unaudited) and December 31, 2012

(Amounts in thousands, except share and per share amounts)	As Of ~~June~~September 30, 2013			As Of December 31, 2012
Assets
Real estate investments, net	$	1,~~628~~626,~~482~~713		$	1,541,416
Loans held for investment, net		2423,~~061~~839			26,972
Commercial mortgage-backed securities		5859,~~859~~774			62,318
Cash and cash equivalents		2452,~~618~~035			30,177
Other assets		8689,~~000~~434			89,560
Total Assets	$	1,~~822~~851,~~020~~795		$	1,750,443
Liabilities and Equity
Mortgages on real estate investments	$	~~991~~995,~~483~~326		$	1,012,075
Credit agreements		99128,~~457~~899			67,655
Secured term loan		6360,~~045~~654			72,417
Convertible senior notes		19,210			19,210
Other long-term debt		30,930			30,930
Total Debt Obligations		1,~~204~~235,~~125~~019			1,202,287
Intangible liabilities on real estate investments		32,~~887~~375			33,032
Accounts payable and other liabilities		2732,~~113~~016			27,926
Dividends and distributions payable		10,138			8,826
Total Liabilities		1,~~274~~309,~~263~~548			1,272,071
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, 100,000,000 shares authorized:
Series A cumulative redeemable preferred, liquidation preference $25.00 per share, 1,832,000 and 3,447,182 shares issued and outstanding, respectively		39,363			79,776
Series B cumulative redeemable preferred, liquidation preference $25.00 per share, 2,941,073 shares issued and outstanding		71,665			71,665
Series C cumulative redeemable preferred, liquidation preference $25.00 per share, 1,700,000 and 0 shares issued and outstanding, respectively		39,689		–
Common stock, $0.01 par value, 500,000,000 shares authorized, 88,845,604 and 73,658,045 shares issued and outstanding, respectively		888			737
Additional paid in capital		~~395~~388,~~445~~036			325,824
Accumulated other comprehensive loss		(297	)		(666	)
Accumulated other comprehensive income (loss)		1,056			(666	)
Total Stockholders' Equity		~~546~~540,~~753~~697			477,336
Non-controlling interest in consolidated subsidiaries		1,~~004~~550			1,036
Total Equity		~~547~~542,~~757~~247			478,372
Total Liabilities and Equity	$	1,~~822~~851,~~020~~795		$	1,750,443

See notes to consolidated financial statements.

CapLease, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

For the Three Months Ended June 30,

For the Six Months Ended June 30,

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

(Amounts in thousands, except per share amounts)

2013

2012

2013

2012

Revenues:

Rental revenue

37,~~237~~421

3335,~~697~~137

72109,~~536~~956

66101,~~678~~815

Interest income from loans and securities

1,~~481~~580

21,~~091~~921

34,~~392~~971

46,~~106~~026

Tenant reimbursements

67,~~249~~107

34,~~556~~552

1219,~~239~~346

711,~~387~~939

Other revenue

~~159~~168

~~352~~182

~~311~~479

~~511~~693

Total revenues

4546,~~126~~276

3941,~~696~~792

88134,~~478~~752

78120,~~682~~473

Expenses:

Interest expense

16,~~210~~796

16,~~965~~723

3249,~~507~~303

3350,~~943~~666

Property expenses

910,~~266~~062

67,~~615~~209

1828,~~340~~402

1320,~~032~~242

Gain on derivatives

)

–

)

–

General and administrative expenses

32,~~170~~650

2,~~863~~754

68,~~313~~963

58,~~851~~604

General and administrative expenses-stock based compensation

995

~~907~~830

12,~~770~~764

12,~~611~~441

Merger-related costs

21,~~421~~067

–

23,~~421~~488

–

Depreciation and amortization expense on real property

12,~~607~~976

1112,~~898~~166

2437,~~633~~609

2335,~~712~~878

Other expenses

–

16930

–

32962

Total expenses

44,~~664~~551

3940,~~264~~612

85130,~~979~~529

78118,~~181~~793

Other gains:

Gain on investment

–

300

–

~~709~~1,009

Gain on extinguishment of debt, net

–

~~9,000~~

–

11,012

Total other gains

–

~~9,000~~300

–

1112,~~721~~021

Income from continuing operations

~~462~~1,725

91,~~432~~480

24,~~499~~223

1213,~~222~~701

Discontinued operations:

Loss from discontinued operations

–

(~~634~~6

)

–

(1,~~366~~372

)

Loss on investment

–

~~(15,229~~

)

–

(15,229

)

Total discontinued operations

–

(~~15,863~~6

)

–

(16,~~595~~601

)

Net income (loss) before non-controlling interest in consolidated subsidiaries

~~462~~1,725

(61,~~431~~474

)

24,~~499~~223

(42,~~373~~900

)

Non-controlling interest in consolidated subsidiaries

185

811

1723

Net income (loss)

~~467~~1,727

(61,~~413~~479

)

24,~~507~~234

(42,~~356~~877

)

Dividends allocable to preferred shares

(3,~~254~~240

)

(2,~~453~~731

)

(610,~~791~~032

)

(46,~~081~~812

)

Net loss allocable to common stockholders

(21,~~787~~513

)

(81,~~866~~252

)

(45,~~284~~798

)

(89,~~437~~689

)

Income (loss) per common share, basic:

Income (loss) from continuing operations

(0.0302

)

(0.1102

)

(0.0507

)

0.1210

Loss from discontinued operations

–

~~(0.24~~

)

–

(0.25

)

Net loss per common share, basic

(0.0302

)

(0.1302

)

(0.0507

)

(0.1315

)

Weighted average common shares outstanding, basic

8788,~~975~~846

66,767

8284,~~111~~381

66,~~540~~616

Income (loss) per common share, diluted:

Income (loss) from continuing operations

(0.0302

)

(0.1102

)

(0.0507

)

0.1210

Loss from discontinued operations

–

~~(0.24~~

)

–

(0.25

)

Net loss per common share, diluted

(0.0302

)

(0.1302

)

(0.0507

)

(0.1315

)

Weighted average common shares outstanding, diluted

88,~~104~~975

66,767

8284,~~240~~510

66,~~540~~616

Dividends declared per common share

0.0775

0.~~065~~070

0.~~155~~233

0.~~130~~200

Dividends declared per preferred A share

0.~~50781~~42318

0.50781

1.~~01563~~43880

1.~~01563~~52344

Dividends declared per preferred B share

0.~~52344~~43620

0.~~50017~~52344

1.~~04688~~48307

01.~~50017~~02361

Dividends declared per preferred C share

0.~~45313~~37760

$ –

–

01.~~85590~~23351

$ –

–

See notes to consolidated financial statements.

CapLease, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(Amounts in thousands)	2013			2012			2013			2012
Net income (loss) before non-controlling interest in consolidated subsidiaries	$	~~462~~1,725		$	(61,~~431~~474	)	$	24,~~499~~223		$	(42,~~373~~900	)
Other comprehensive income (loss):
Change in fair value of securities available for sale		~~(126~~1,354	)		~~1,247~~919			71,361			67,~~457~~376
Change in fair value of derivatives		92(137	)	–				92(45	)	–
Reclassification of derivative items into earnings		~~131~~141			~~(71~~40	)		~~265~~406			~~(18~~22	)
Other comprehensive income		97			1,176			364			6,439
Realized loss on derivatives		(5	)	–			–			–
Comprehensive income (loss)		559			(5,255	)		2,863			2,066
Other comprehensive income		1,353			959			1,722			7,398
Comprehensive (income) loss attributable to non-controlling interests		(1	)		11			(5	)		(4	)
Comprehensive income		3,078			2,433			5,945			4,498
Comprehensive income (loss) attributable to CapLease, Inc.	$	558		$	(5,244	)	$	2,858		$	2,062
Comprehensive income attributable to non-controlling interests		2			5			11			23
Comprehensive income attributable to CapLease, Inc.	$	3,080		$	2,438		$	5,956		$	4,521

See notes to consolidated financial statements.

CapLease, Inc. and Subsidiaries

Consolidated Statement of Changes in Equity

(Unaudited)

(in thousands)

Stockholders' Equity

Preferred Stock

Common Stock at Par

Additional Paid-In Capital

Accumulated Other Comprehensive Income (Loss)

Retained Earnings

Non-controlling Interest

Total Equity

Balance at December 31, 2012

151,441

737

325,824

(666

)

$ –

–

1,036

478,372

Incentive stock plan compensation expense

–

12,~~770~~764

–

12,~~770~~764

Incentive stock plan grants issued and forfeited

–

)

–

Net income

–

24,~~507~~234

–

24,~~507~~234

Non-controlling interest in consolidated subsidiaries

–

(811

)

(811

)

Issuance of common stock

–

150

86,~~373~~368

–

86,~~523~~518

Repurchase of common stock

–

)

(1,141

)

–

(1,143

)

Issuance of preferred stock

39,689

–

39,689

Repurchase of preferred stock

(40,413

)

–

(40,413

)

Dividends declared-preferred

–

(45,~~278~~790

)

–

(24,~~507~~234

)

–

(610,~~785~~024

)

Dividends declared-common

–

(1319,~~100~~986

)

–

(1319,~~100~~986

)

Distributions declared-operating partnership units

–

(24

)

(24

)

Contributions from noncontrolling interest

–

561

Increase in fair value of securities available for sale

–

Distributions declared-operating partnership units

–

(36

)

(36

)

Increase (decrease) in fair value of derivatives

–

Increase in fair value of securities available for sale

–

1,361

–

1,361

Reclassification of derivative items into earnings

–

265

–

265

Decrease in fair value of derivatives

–

(45

)

–

(45

)

Realized gain on derivative (due to ineffectiveness)

–

Reclassification of derivative items into earnings

–

406

–

406

Balance at June 30, 2013

150,717

888

395,445

(297

)

–

1,004

547,757

Balance at September 30, 2013

150,717

888

388,036

1,056

$ –

1,550

542,247

See notes to consolidated financial statements.

CapLease, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands)

	For the Six Months Ended June 30,
	For the Nine Months Ended September 30,
	2013			2012
Operating activities
Net income (loss)	$	24,~~507~~234		$	(42,~~356~~877	)
Adjustments to reconcile net income (loss) to cash provided by operating activities:
Depreciation and amortization		2437,~~413~~189			2436,~~315~~434
Stock based compensation		12,~~770~~764			12,~~611~~441
Amortization of above and below market leases		(~~903~~1,301	)		(~~385~~612	)
Loss on investments	–				14,~~521~~220
(Gain) on derivatives		(5	)	–
(Gain) on extinguishment of debt, net	–				(11,012	)
Non-controlling interest in consolidated subsidiaries		(811	)		(1723	)
Straight-lining of rents		1,~~738~~435			811,~~051~~261
Amortization of discounts/premiums, and origination fees/costs, net		(~~255~~374	)		(~~227~~331	)
Amortization of debt issuance costs, leasing commissions and fair market value of debt issued or assumed		12,~~455~~289			1,~~129~~921
Changes in operating assets and liabilities:
Other assets		~~3,854~~706			(914,~~280~~364	)
Accounts payable and other liabilities		13,~~653~~408			16,~~432~~230
Deposits and escrows		1			1
Net cash provided by operating activities		3650,~~220~~340			2543,~~783~~289
Investing activities
Principal received from borrowers		23,~~996~~262			35,~~804~~401
Repayments of commercial mortgage-backed securities		3,636			2,912
Proceeds from sale of securities	–				3,744
Repayments of commercial mortgage-backed securities		4,150			3,671
Proceeds from sale of real estate investments	–				9,611
Purchases of real estate investments		(6670,~~306~~543	)		(8687,~~450~~970	)
Real estate improvements, additions and construction in progress		(1721,~~294~~052	)		(1229,~~586~~893	)
Leasing commission costs		(2,~~178~~467	)		(13,~~279~~601	)
Purchases of furniture, fixtures, equipment and leasehold improvements		(~~597~~620	)		(15	)
Net cash used in investing activities		(7987,~~743~~270	)		(8499,~~003~~052	)
Financing activities
Borrowings from mortgages on real estate investments		1423,~~806~~312			3968,~~900~~580
Repayments of mortgages on real estate investments		(6469,~~733~~356	)		(3843,~~906~~507	)
Borrowings from credit agreements		4373,000			5378,056
Repayments on credit agreements		(11,~~199~~757	)		(59100,~~339~~627	)
Repayments on secured term loan		(911,~~373~~763	)		(812,~~468~~042	)
Debt issuance costs		(~~598~~1,127	)		(23,~~422~~451	)
Common stock issued, net of offering costs		86,~~523~~518		–
Common stock repurchased		(1,143	)	–
Preferred stock issued, net of offering costs		39,689			4856,~~317~~570
Preferred stock repurchased		(40,413	)	–
Distributions to non-controlling interest		(24	)		(20	)
Contributions from noncontrolling interest		561		–
Dividends paid on common and preferred stock		(18,571	)		(11,903	)
Distributions to noncontrolling interest		(36	)		(30	)
Net cash provided by financing activities		37,964			20,215
Dividends paid on common and preferred stock		(28,697	)		(18,754	)
Net decrease in cash and cash equivalents		(5,559	)		(38,005	)
Net cash provided by financing activities		58,788			24,795
Net increase (decrease) in cash and cash equivalents		21,858			(30,968	)
Cash and cash equivalents at beginning of period		30,177			71,160
Cash and cash equivalents at end of period	$	2452,~~618~~035		$	3340,~~155~~192
Supplemental disclosure of cash flow information
Cash paid for interest expense	$	3247,~~162~~935		$	3349,~~557~~265
Capitalized interest on development properties		~~568~~619		–	443
Distributions declared but not paid		12			10
Net change in accrued construction expenditures		635		–
Dividends declared but not paid		10,126			6,968
Distributions declared but not paid		12			11
Dividends declared but not paid		10,126			7,521
Supplemental disclosure of noncash operating, investing and financing information
Value of in-place leases and above-market leases acquired	$	12,546		$	6,725
Value of below-market leases acquired		933		–
Mortgage notes payable assumed on properties acquired		29,427		–
Mortgage note payable-notional amount repurchased	–				11,000

See notes to consolidated financial statements.

CapLease, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share amounts; totals may not add due to rounding)

~~June~~September 30, 2013 (unaudited)

1. Organization and Business

CapLease, Inc. (“CapLease” and collectively with its majority-owned subsidiaries, the “Company”) is a real estate investment trust, or REIT, that primarily owns and manages a diversified portfolio of single tenant commercial real estate properties subject to long-term leases to high credit quality tenants. Many of the properties the Company owns are subject to a net lease, or a lease that requires the tenant to pay all or substantially all property operating expenses, such as utilities, real estate taxes, insurance and routine maintenance.

The Company’s tenants are primarily large public companies or their significant operating subsidiaries and governmental entities with investment grade credit ratings, defined as a published senior unsecured credit rating of BBB-/Baa3 or above from one or both of Standard & Poor’s (“S&P”) and Moody’s Investors Service (“Moody’s”). The Company also implies an investment grade credit rating for tenants that are not publicly rated by S&P or Moody’s but (i) are 100% owned by an investment grade parent, (ii) for which it has obtained a private investment grade rating from either S&P or Moody’s, (iii) for which it has evaluated the creditworthiness of the tenant and estimated a credit rating that is consistent with an investment grade rating from S&P or Moody’s, or (iv) are governmental entity branches or units of another investment grade rated governmental entity.

In addition to its portfolio of owned properties, the Company has a modest portfolio of first mortgage loans and other debt investments on single tenant properties.

The Company has invested in certain owned properties that are leased primarily but not exclusively by one tenant. The Company has also invested in certain owned properties which were previously leased by one tenant but as a result of lease non-renewals have now become multi-tenant properties. The Company expects these types of properties will continue to comprise a portion of its portfolio for the foreseeable future.

CapLease conducts its business through a variety of subsidiaries. CapLease owns most of its owned properties through its predecessor and operating partnership, Caplease, LP (the “Operating Partnership”). CapLease is the indirect sole general partner of, and owns approximately 99.8% of the common equity of, the Operating Partnership.

The accompanying consolidated financial statements and related notes of the Company have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in the financial statements prepared under GAAP have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These financial statements should be read in conjunction with the Company’s consolidated financial statements for the fiscal year ended December 31, 2012 and notes thereto, included in the Company’s Form 10-K filed with the SEC on February 21, 2013.

2. Merger Agreement

On May 28, 2013, CapLease, and certain subsidiaries of CapLease, including the Operating Partnership, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with American Realty Capital Properties, Inc., a Maryland corporation (“ARCP”), ARC Operating Partnership, L.P., a Delaware limited partnership and the operating partnership of ARCP (the “ARCP Operating Partnership”), and Safari Acquisition, LLC, a Delaware limited liability company and wholly owned subsidiary of ARCP (“Merger Sub”). The Merger Agreement provides for (i) the merger of CapLease with and into Merger Sub (the “Merger”), with Merger Sub surviving as a wholly owned subsidiary of ARCP, and (ii) the merger of the Operating Partnership with and into ARCP Operating Partnership, with ARCP Operating Partnership surviving (the “Partnership Merger” and, together with the Merger, the “Mergers”). The Board of Directors of CapLease has unanimously approved the Merger Agreement, the Mergers and the other transactions contemplated by the Merger Agreement, ~~directed that the Merger~~ and the ~~other transactions contemplated by the Merger Agreement be submitted for consideration at a meeting of the~~ holders of CapLease’s common stock, ~~and~~have ~~resolved~~approved ~~to recommend that~~ the ~~holders of CapLease common stock vote in favor of the~~ Merger and the other transactions contemplated by the Merger Agreement.

CapLease, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share amounts; totals may not add due to rounding)

~~June~~September 30, 2013 (unaudited)

Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each outstanding share of CapLease common stock, other than shares owned by ARCP, CapLease or any of their respective wholly owned subsidiaries, will be converted into the right to receive $8.50 in cash without interest (the “Common Merger Consideration”). Each outstanding share of CapLease preferred stock, other than shares owned by ARCP, CapLease or any of their respective wholly owned subsidiaries, will be converted into the right to receive an amount in cash, without interest, equal to the sum of $25.00 plus all accrued and unpaid dividends on such shares up to, but excluding, the closing date of the Merger. The CapLease preferred stock consists of (i) 8.125% Series A Cumulative Redeemable Preferred Stock, (ii) 8.375% Series B Cumulative Redeemable Preferred Stock and (iii) 7.25% Series C Cumulative Redeemable Preferred Stock. In addition, in connection with the Partnership Merger, each outstanding unit of equity ownership of the Operating Partnership other than units owned by CapLease or any wholly owned subsidiary of CapLease will be converted into the right to receive $8.50 in cash, without interest.

The Merger Agreement provides that, immediately prior to the Effective Time, any outstanding shares of restricted stock held by any employee of the Company on the closing date of the Merger will become fully vested and will have the right to receive the Common Merger Consideration. The Merger Agreement also provides that, immediately prior to the Effective Time, any outstanding performance share unit awards held by any employee of the Company on the closing date of the Merger will become fully earned and settled as to 100% of the target number of shares of CapLease common stock, and all shares of CapLease common stock outstanding as a result of such settlement will have the right to receive the Common Merger Consideration.

Consummation of the Mergers is subject to various conditions, including, among other things, the approval by CapLease’s stockholders of the Merger, and the absence of any law, order or injunction prohibiting the consummation of the Mergers3. Summary ~~Moreover, each party’s obligation to consummate the Mergers is subject to certain other conditions, including the accuracy~~ of ~~the~~Significant ~~other~~Accounting ~~party’s~~Policies ~~representations and warranties (subject to customary qualifications) and the other party’s material compliance with its covenants and agreements contained in the Merger Agreement.~~

~~ARCP~~Basis ~~and CapLease have made certain customary representations and warranties to each other in the Merger Agreement. CapLease has also made certain covenants relating to the conduct~~ of ~~its~~Presentation ~~business between the date of the Merger Agreement~~ and ~~the~~Principles ~~closing~~ of ~~the Merger and other matters, including the “go-shop” and “no-shop” covenants described below.~~Consolidation

AsThe ~~permitted~~accompanying ~~pursuant~~consolidated tofinancial ~~the~~statements ~~“go-shop”~~include ~~provisions of~~ the ~~Merger~~assets, ~~Agreement~~liabilities, ~~CapLease~~and ~~conducted~~results anof ~~extensive~~operations ~~marketing process to solicit alternative acquisition proposals from third parties for a 40 day period beginning immediately upon execution~~ of the ~~Merger Agreement on May 28, 2013 (the “Go Shop Period”)~~Company. ~~During~~Results ~~the~~of Gooperations ~~Shop~~of ~~Period~~properties ~~which~~acquired ~~expired~~are onincluded ~~July~~in ~~7, 2013 (~~the ~~“No~~Consolidated ~~Shop~~Statements ~~Period Start Date”), CapLease was authorized to and with the assistance~~ of ~~its~~Operations ~~financial advisor, Wells Fargo Securities, LLC, did initiate, solicit and encourage alternative acquisition proposals~~ from ~~third~~the ~~parties,~~date ~~including by providing non-public information to a variety~~ of ~~third parties. However, such actions did not result in any alternative~~ acquisition ~~proposals~~. ~~Starting~~All onsignificant ~~the~~intercompany ~~No Shop Period Start Date~~transactions, ~~the~~balances ~~Go Shop Period expired~~ and ~~CapLease~~accounts ~~became~~have ~~subject~~been toeliminated ~~customary~~in “no-shop” covenants which prohibit CapLease from soliciting alternative acquisition proposals from third parties, but permit it to respond to any unsolicited alternative acquisition proposal that meets certain conditionsconsolidation.

~~The~~References ~~Merger Agreement also includes certain termination rights for both ARCP and CapLease and provides that,~~ in ~~connection~~these ~~with~~financial ~~the~~statements ~~termination~~to of the ~~Merger~~Company’s ~~Agreement,~~carrying ~~under~~amount ~~specified~~or ~~circumstances,~~value ~~CapLease~~of ~~may~~an beasset ~~required~~or toliability ~~pay~~means ~~ARCP~~such aasset’s ~~termination~~or ~~fee~~liability’s ofbook ~~$21,000~~value ~~and~~reported ~~reimburse~~on ~~ARCP~~the Company’s ~~transaction~~Consolidated ~~expenses~~Balance Sheet in anaccordance ~~amount~~with ~~equal to $4,000~~GAAP.

8Accounting for Real Estate

~~CapLease~~Real estate held for investment is carried on the Company’s Consolidated Balance Sheets at historical cost to the Company, ~~Inc~~less accumulated depreciation, amortization and impairment charges. Depreciation and ~~Subsidiaries~~amortization are determined by the straight-line method over the remaining estimated economic useful lives of the properties. The Company generally depreciates building and building improvements over periods not exceeding 40 years. Direct costs incurred in acquiring completed properties that meet the classification of a business for accounting purposes are charged to operations as incurred. Expenditures for maintenance and repairs of owned properties are also charged to operations as incurred. Significant renovations which extend the useful life of the properties are capitalized.

~~Notes to Consolidated Financial Statements~~8

~~(Dollar amounts in thousands~~CapLease, ~~except~~Inc. ~~per~~and ~~share amounts; totals may not add due to rounding)~~Subsidiaries

~~June~~Notes ~~30,~~to ~~2013~~Consolidated ~~(unaudited)~~Financial Statements

~~3. Summary~~(Dollar ofamounts ~~Significant~~in ~~Accounting~~thousands, ~~Policies~~except per share amounts; totals may not add due to rounding)

~~Basis~~September of30, ~~Presentation~~2013 ~~and Principles of Consolidation~~(unaudited)

The ~~accompanying~~Company ~~consolidated~~reviews ~~financial~~its ~~statements~~owned ~~include~~real properties for impairment whenever events or changes in circumstances indicate that the ~~assets~~carrying amount of the asset may not be recoverable. The evaluation includes estimating and reviewing anticipated future undiscounted cash flows to be derived from the asset. If such cash flows are less than the asset’s net carrying value, ~~liabilities~~an impairment charge is recognized to earnings to the extent by which the asset’s carrying value exceeds the estimated fair value. Estimating future cash flows is highly subjective and includes an evaluation of factors such as the anticipated cash flows from the property, which may include rent from current leases in place and ~~results~~projected future leases, estimated capital expenditures, and an estimate of ~~operations~~proceeds to be realized upon sale of the property. The Company’s estimates could differ materially from actual results. ~~Results~~The ofCompany ~~operations~~has ofdetermined that the significant inputs used to evaluate its owned properties ~~acquired~~for ~~are~~impairment ~~included~~primarily rely on Level 3 inputs in accordance with the ~~Consolidated~~fair ~~Statements~~value ofmeasurement ~~Operations~~topic ~~from~~in the ~~date~~applicable ofaccounting ~~acquisition~~guidance as described in Note 8 below. ~~All~~The ~~significant~~Company ~~intercompany~~did ~~transactions~~not recognize any impairment losses on long-lived assets during the nine months ended September 30, ~~balances~~2013. ~~and~~The ~~accounts~~Company ~~have~~did ~~been~~not ~~eliminated~~recognize inany ~~consolidation~~impairment losses on long-lived assets during the nine months ended September 30, 2012, although it did recognize a loss on sale of one real property during the nine months ended September 30, 2012. See Note 7.

~~References~~Assets and liabilities of properties that meet various held for sale criteria, including that it is probable that a sale will occur within 12 months, are presented separately in ~~these~~the ~~financial~~Consolidated ~~statements~~Balance toSheets, with assets and liabilities being separately stated. The operating results of properties held for sale and those that have been sold are reflected as discontinued operations in the Consolidated Statements of Operations. Properties that the Company’s ~~carrying~~has ~~amount~~determined orto ~~value~~classify ofas anheld ~~asset~~for orsale ~~liability~~are ~~means~~also ~~such~~required ~~asset’s~~to orbe ~~liability’s~~simultaneously ~~book~~reviewed ~~value~~for ~~reported~~impairment and carried on the Company’s Consolidated Balance ~~Sheet~~Sheets inat ~~accordance~~the ~~with~~lower ~~GAAP~~of net carrying value or estimated fair value.

~~Accounting~~The ~~for~~Company ~~Real~~is ~~Estate~~required under GAAP to allocate the purchase price of rental real estate acquired to the following based on estimated fair values on the acquisition date:

~~Real~~● ~~estate~~acquired ~~held~~tangible ~~for investment is carried on the Company’s Consolidated Balance Sheets at historical cost to the Company~~assets, ~~less~~consisting ~~accumulated~~of ~~depreciation~~land, amortization and impairment charges. Depreciation and amortization are determined by the straight-line method over the remaining estimated economic useful lives of the properties. The Company generally depreciates building and ~~building~~ improvements; over periods not exceeding 40 years. Direct costs incurred in acquiring completed properties that meet the classification of a business for accounting purposes are charged to operations as incurred. Expenditures for maintenance and ~~repairs of owned properties are also charged to operations as incurred. Significant renovations which extend the useful life of the properties are capitalized.~~

~~The~~● ~~Company~~identified ~~reviews~~intangible ~~its~~assets ~~owned real properties for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The evaluation includes estimating~~ and ~~reviewing anticipated future undiscounted cash flows to be derived from the asset. If such cash flows are less than the asset’s net carrying value~~liabilities, anconsisting ~~impairment~~of ~~charge~~above-market ~~is recognized to earnings to the extent by which the asset’s carrying value exceeds the estimated fair value. Estimating future cash flows is highly subjective~~ and ~~includes~~below-market ~~an evaluation of factors such as the anticipated cash flows from the property~~leases, ~~which may include rent from current leases~~ in -place ~~and projected future~~ leases, ~~estimated capital expenditures,~~ and antenant ~~estimate of proceeds to be realized upon sale of the property~~relationships. The Company’s estimates could differ materially from actual results. The Company has determined that the significant inputs used to evaluate its owned properties for impairment primarily rely on Level 3 inputs in accordance with the fair value measurement topic in the applicable accounting guidance as described in Note 8 below. The Company did not recognize any impairment losses on long-lived assets during the six months ended June 30, 2013. The Company did not recognize any impairment losses on long-lived assets during the six months ended June 30, 2012, although it did recognize a loss on sale of one real property during the quarter ended June 30, 2012. See Note 7.

~~Assets~~The ~~and~~fair ~~liabilities~~value of ~~properties~~tangible ~~that~~and ~~meet~~intangible ~~various~~assets ~~held~~acquired ~~for~~is ~~sale~~considered ~~criteria,~~to ~~including~~be ~~that~~a itLevel is3 ~~probable~~input ~~that~~in aaccordance ~~sale~~with ~~will~~the ~~occur~~fair ~~within~~value 12measurement ~~months,~~topic ~~are presented separately~~ in the ~~Consolidated~~applicable ~~Balance~~accounting ~~Sheets,~~guidance ~~with~~as ~~assets~~described ~~and~~in ~~liabilities~~Note ~~being~~8 ~~separately stated~~below. ~~The~~In ~~operating~~estimating ~~results~~the offair ~~properties~~value ~~held~~of ~~for~~the ~~sale~~tangible and ~~those~~intangible ~~that~~assets ~~have~~acquired, ~~been~~the ~~sold~~Company ~~are~~considers ~~reflected~~information asobtained ~~discontinued~~about ~~operations~~each inproperty ~~the~~as ~~Consolidated~~a ~~Statements~~result of ~~Operations.~~its ~~Properties~~due ~~that~~diligence ~~the~~activities ~~Company~~and ~~has~~other ~~determined~~market todata, ~~classify~~and utilizes various valuation methods, such as ~~held~~estimated ~~for~~cash ~~sale~~flow ~~are~~projections ~~also~~utilizing ~~required~~appropriate todiscount beand ~~simultaneously~~capitalization ~~reviewed~~rates, ~~for~~estimates ~~impairment~~of replacement costs, and ~~carried~~available onmarket information. The fair value of the ~~Company’s~~tangible ~~Consolidated~~assets ~~Balance~~of ~~Sheets~~an atacquired property considers the ~~lower~~value of ~~net~~the ~~carrying~~property ~~value~~as orif ~~estimated~~it ~~fair~~were vacant (the “dark value”).

~~The~~Above-market and below-market lease values for acquired properties are recorded based on the present value of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease and (ii) management’s estimate of fair market lease rates for each corresponding in-place lease. Fair market lease rates are measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market rate renewal options for below-market leases. In computing present value, the Company isconsiders ~~required~~the ~~under~~costs ~~GAAP~~which would need to ~~allocate~~be invested to achieve the ~~purchase~~fair ~~price~~market lease rates. The Company uses a discount rate which reflects the risks associated with the leases acquired. The capitalized above-market lease values are amortized as a reduction of base rental ~~real~~revenue ~~estate~~over ~~acquired~~the toremaining term of the ~~following~~respective ~~based~~leases, onand ~~estimated~~the ~~fair~~capitalized below-market lease values onare amortized as an increase to base rental revenue over the ~~acquisition~~remaining ~~date:~~initial terms plus the terms of any below-market renewal options of the respective leases.

●Other intangible assets acquired ~~tangible~~include ~~assets,~~amounts ~~consisting~~for in-place lease values and tenant relationship values which are based on management’s evaluation of ~~land~~the specific characteristics of each tenant’s lease and the Company’s overall relationship with the respective tenant. Factors considered by management in its analysis of in-place lease values include estimates of the dark value of the property, ~~building~~carrying costs during the hypothetical expected time it would take management to find a tenant to lease the space for the existing lease term (a “lease-up period”) considering current market conditions, and ~~improvements;~~costs to execute similar leases. Management estimates carrying costs, including such factors as real estate taxes, insurance and other operating expenses during the expected lease-up period, considering current market conditions and costs to execute similar leases. In estimating costs to execute similar leases, management considers leasing commissions and other related expenses. Characteristics considered by management in estimating the value of tenant relationships include the nature and extent of the Company’s existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals. The value of in-place leases is amortized as a component of depreciation expense over the remaining initial terms of the respective leases. The value of tenant relationship intangibles, if any, is amortized as a component of depreciation expense over the anticipated life of the relationships. Through September 30, 2013, the Company has assigned no value to tenant relationships on any of its acquisitions.

~~● identified intangible assets and liabilities, consisting of above-market and below-market leases, in-place leases and tenant relationships.~~9

~~The~~CapLease, fair value of tangible and intangible assets acquired is considered to be a Level 3 input in accordance with the fair value measurement topic in the applicable accounting guidance as described in Note 8 belowInc. ~~In estimating the fair value of the tangible~~ and intangible assets acquired, the Company considers information obtained about each property as a result of its due diligence activities and other market data, and utilizes various valuation methods, such as estimated cash flow projections utilizing appropriate discount and capitalization rates, estimates of replacement costs, and available market information. The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant (the “dark value”).Subsidiaries

9Notes to Consolidated Financial Statements

~~CapLease~~(Dollar amounts in thousands, ~~Inc.~~except ~~and~~per ~~Subsidiaries~~share amounts; totals may not add due to rounding)

~~Notes~~September to30, ~~Consolidated~~2013 ~~Financial Statements~~(unaudited)

~~(Dollar~~For ~~amounts~~property inacquisitions ~~thousands~~where the Company assumes existing mortgage debt, ~~except~~the ~~per~~debt ~~share~~is ~~amounts;~~recorded ~~totals~~at ~~may~~its ~~not~~estimated ~~add~~fair ~~due~~value, tobased ~~rounding)~~on management’s estimate of current borrowing rates available for comparable financing. The Company amortizes any discount or premium as part of interest expense on the related debt using the effective interest method.

~~June~~Development ~~30, 2013 (unaudited)~~Activities

~~Above-market~~Project costs and ~~below-market~~expenses, ~~lease~~which ~~values~~include ~~for~~interest ~~acquired~~expense, ~~properties~~associated ~~are~~with ~~recorded based on~~ the ~~present~~development, ~~value~~construction ~~of the difference between (i) the contractual amounts to be paid pursuant to each in-place lease~~ and ~~(ii) management’s estimate of fair market~~ lease ~~rates for each corresponding in~~-~~place~~up ~~lease.~~of ~~Fair~~a ~~market~~real ~~lease~~estate ~~rates~~project are ~~measured~~capitalized ~~over~~as aconstruction ~~period~~in ~~equal~~progress. toOnce the ~~remaining~~development ~~term of the lease for above-market leases~~ and ~~the~~construction ~~initial~~of ~~term plus~~ the ~~term~~building ofis ~~any~~substantially ~~below-market rate renewal options for below-market leases. In computing present value~~completed, the ~~Company~~amounts ~~considers~~capitalized ~~the~~to ~~costs~~construction ~~which~~in ~~would~~progress ~~need~~are totransferred ~~be invested~~ to ~~achieve~~(i) ~~the~~land ~~fair~~and ~~market~~(ii) ~~lease~~buildings ~~rates.~~and ~~The Company uses a discount rate which reflects the risks associated with the leases acquired~~improvements. ~~The~~As ~~capitalized~~required ~~above-market~~by ~~lease~~GAAP, ~~values are amortized as a reduction of base rental revenue over~~ the ~~remaining~~Company ~~term~~computes ofinterest ~~the~~expense ~~respective~~on ~~leases, and~~ the ~~capitalized~~full ~~below-market~~amount ~~lease~~it ~~values~~has ~~are~~invested ~~amortized~~in ~~as an increase to base rental revenue over~~ the ~~remaining~~project, ~~initial~~whether ~~terms~~or ~~plus~~not ~~the~~such ~~terms~~investment ofis ~~any~~externally ~~below-market renewal options of the respective leases~~financed.

~~Other~~Loan intangible assets acquired include amounts for in-place lease values and tenant relationship values which are based on management’s evaluation of the specific characteristics of each tenant’s lease and the Company’s overall relationship with the respective tenant. Factors considered by management in its analysis of in-place lease values include estimates of the dark value of the property, carrying costs during the hypothetical expected time it would take management to find a tenant to lease the space for the existing lease term (a “lease-up period”) considering current market conditions, and costs to execute similar leases. Management estimates carrying costs, including such factors as real estate taxes, insurance and other operating expenses during the expected lease-up period, considering current market conditions and costs to execute similar leases. In estimating costs to execute similar leases, management considers leasing commissions and other related expenses. Characteristics considered by management in estimating the value of tenant relationships include the nature and extent of the Company’s existing business relationships with the tenant, growth prospects for developing new business with the tenant, the tenant’s credit quality and expectations of lease renewals. The value of in-place leases is amortized as a component of depreciation expense over the remaining initial terms of the respective leases. The value of tenant relationship intangibles, if any, is amortized as a component of depreciation expense over the anticipated life of the relationships. Through June 30, 2013, the Company has assigned no value to tenant relationships on any of its acquisitions.Investments

~~For~~The ~~property~~Company ~~acquisitions~~classifies ~~where~~its ~~the~~loans ~~Company~~as ~~assumes~~long-term ~~existing~~investments, ~~mortgage~~as ~~debt,~~its strategy is to hold the ~~debt~~loans isfor ~~recorded~~the atforeseeable ~~its~~future ~~estimated~~or ~~fair~~until ~~value,~~maturity. ~~based~~Loan investments are carried on ~~management’~~the Company's ~~estimate~~Consolidated ofBalance ~~current~~Sheet ~~borrowing~~at ~~rates~~amortized ~~available~~cost ~~for~~(unpaid ~~comparable~~principal ~~financing.~~balance ~~The~~adjusted ~~Company~~for ~~amortizes~~unearned ~~any~~ discount or premium asand ~~part~~loan origination fees), net of ~~interest~~any ~~expense~~allowance onfor ~~the~~loan ~~related~~losses. ~~debt~~Unearned discounts or premiums and loan origination fees are amortized as a component of interest income using the effective interest method over the life of the loan.

~~Development~~From ~~Activities~~time to time, the Company may determine to sell a loan in which case it must reclassify the asset as held for sale. Loans held for sale are carried at lower of cost or estimated fair value. The Company did not sell any of its loan investments during the nine months ended September 30, 2013, and, as of September 30, 2013, the Company has not classified any of its loans as held for sale. The Company also did not sell any of its loan investments during the nine months ended September 30, 2012.

~~Project~~The ~~costs~~Company ~~and~~evaluates ~~expenses,~~its ~~which~~loan ~~include~~investments ~~interest~~for ~~expense,~~possible ~~associated~~impairment ~~with~~on ~~the~~a ~~development,~~quarterly ~~construction~~basis. The Company’s impairment analysis includes both a general reserve component and ~~lease~~an asset-upspecific ofcomponent. aThe ~~real~~general ~~estate~~reserve ~~project~~component ~~are~~covers ~~capitalized~~performing asloans ~~construction~~and in ~~progress.~~accordance ~~Once~~with relevant accounting guidance an allowance for loan losses is recorded when (i) available information as of each balance sheet date indicates that it is probable a loss has occurred in the ~~development~~portfolio and ~~construction~~(ii) the amount of the ~~building~~loss can be reasonably estimated. Actual loan losses are then charged against the allowance when management believes that uncollectibility of a loan balance is ~~substantially~~confirmed. ~~completed~~Subsequent recoveries, ~~the~~if ~~amounts~~any, ~~capitalized~~are credited to ~~construction~~the allowance. Significant judgment is required in ~~progress~~determining ~~are~~reserve ~~transferred~~balances tofor ~~(i)~~the ~~land~~performing loan portfolio, including estimates of the likelihood of default and ~~(ii)~~lease ~~buildings~~rejection given the credit characteristics of the tenant, and ~~improvements~~estimates of stressed collateral values and potential bankruptcy claim recoveries. AsThese ~~required~~estimates byare ~~GAAP,~~highly ~~the~~subjective ~~Company~~and ~~computes~~could ~~interest~~differ ~~expense~~materially onfrom ~~the~~actual ~~full~~results. ~~amount~~As itof ~~has~~September ~~invested~~30, in2013, the ~~project,~~Company ~~whether~~has ora ~~not~~general ~~such~~loan ~~investment~~loss isreserve ~~externally~~of ~~financed~~$500. See Note 5.

~~Loan~~The ~~Investments~~asset-specific component of the loan loss impairment analysis relates to specific loans where the Company has deemed it probable that it will not be able to collect all amounts due according to the contractual terms of the loan. Any resulting loan specific loss is measured based on the present value of expected future cash flows from the loan or the fair value of the loan collateral, if the loan is collateral dependent. Significant judgment is required in determining any resulting loan specific loss, including factors such as the status of the loans (i.e., current or actual or expected payment or other defaults), the credit quality of the underlying tenants, the present value of expected future cash flows on the loans, the fair value of any collateral, and the amount and status of any senior debt. These estimates are highly subjective and could differ materially from actual results. The Company’s accounting policy is to continue to accrue interest income on specific impaired loans as long as it concludes it is likely to collect it. As of September 30, 2013, the Company did not have any asset-specific loan loss reserves.

The Company classifies its loans as long-term investments, as its strategy is to hold the loans for the foreseeable future or until maturity. Loan investments are carried on the Company's Consolidated Balance Sheet at amortized cost (unpaid principal balance adjusted for unearned discount or premium and loan origination fees), net of any allowance for loan losses. Unearned discounts or premiums and loan origination fees are amortized as a component of interest income using the effective interest method over the life of the loan.10

~~From time to time~~CapLease, ~~the Company may determine to sell a loan in which case it must reclassify the asset as held for sale~~Inc. ~~Loans held for sale are carried at lower of cost or estimated fair value. The Company did not sell any of its loan investments during the six months ended June 30, 2013,~~ and, ~~as of June 30, 2013, the Company has not classified any of its loans as held for sale. The Company also did not sell any of its loan investments during the six months ended June 30, 2012.~~ Subsidiaries

10Notes to Consolidated Financial Statements

~~CapLease~~(Dollar amounts in thousands, ~~Inc.~~except ~~and~~per ~~Subsidiaries~~share amounts; totals may not add due to rounding)

~~Notes~~September to30, ~~Consolidated~~2013 ~~Financial Statements~~(unaudited)

~~(Dollar~~Commercial ~~amounts~~Mortgage-Backed ~~in thousands, except per share amounts; totals may not add due to rounding)~~Securities

~~June~~The 30Company classifies all of its securities investments as “available for sale” for financial accounting purposes. Under GAAP, ~~2013~~securities classified as “available for sale” are carried on the Consolidated Balance Sheet at fair value with the net unrealized gains or losses included in Accumulated Other Comprehensive Income (~~unaudited~~Loss), a component of Stockholders’ Equity on the Company’s Consolidated Balance Sheet.

~~The~~Any ~~Company~~premiums ~~evaluates~~or ~~its~~discounts ~~loan investments for possible impairment~~ on asecurities ~~quarterly~~are ~~basis.~~amortized ~~The~~as ~~Company’s impairment analysis includes both~~ a ~~general reserve~~ component and an asset-specific component. The general reserve component covers performing loans and in accordance with relevant accounting guidance an allowance for loan losses is recorded when (i) available information as of ~~each~~interest ~~balance~~income ~~sheet~~using ~~date indicates that it is probable a loss has occurred in~~ the ~~portfolio~~effective ~~and~~interest ~~(ii) the amount of the loss can be reasonably estimated~~method. Actual loan losses are then charged against the allowance when management believes that uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Significant judgment is required in determining reserve balances for the performing loan portfolio, including estimates of the likelihood of default and lease rejection given the credit characteristics of the tenant, and estimates of stressed collateral values and potential bankruptcy claim recoveries. These estimates are highly subjective and could differ materially from actual results. As of June 30, 2013, the Company has a general loan loss reserve of $500. See Note 5.

The ~~asset-specific~~Company ~~component~~estimates offair ~~the~~value ~~loan~~on ~~loss~~all ~~impairment~~securities ~~analysis~~investments ~~relates~~quarterly tobased ~~specific~~on ~~loans~~a ~~where~~variety ~~the~~of ~~Company~~inputs. ~~has~~Under ~~deemed~~applicable itaccounting ~~probable~~guidance, ~~that~~securities itwhere ~~will~~the ~~not~~fair bevalue ~~able~~is toless ~~collect~~than ~~all amounts due according to~~ the ~~contractual~~Company’s ~~terms~~cost ofare ~~the~~deemed ~~loan.~~“impaired,” ~~Any~~and, ~~resulting~~therefore, ~~loan~~must ~~specific~~be ~~loss is~~ measured ~~based~~for on“other-than-temporary ~~the~~impairment.” ~~present~~If ~~value~~an ofimpaired ~~expected~~security ~~future~~(i.e., ~~cash flows from the loan or the~~ fair value ofbelow ~~the~~cost) ~~loan~~is ~~collateral,~~intended ifto ~~the~~be ~~loan~~sold isor ~~collateral~~required ~~dependent.~~to ~~Significant~~be ~~judgment~~sold isprior ~~required~~to inexpected ~~determining~~recovery ~~any~~of ~~resulting~~the ~~loan~~impairment ~~specific~~ loss, ~~including factors such as~~ the ~~status~~full amount of the ~~loans~~loss ~~(i.e.,~~must ~~current~~be orcharged ~~actual~~to orearnings ~~expected~~as ~~payment or~~ other-than-temporary ~~defaults)~~impairment. Otherwise, ~~the~~impairment ~~credit~~losses ~~quality~~on of the ~~underlying~~security ~~tenants,~~must ~~the~~be ~~present~~further ~~value~~analyzed offor ~~expected~~separation ~~future~~into ~~cash~~two ~~flows~~categories: on(i) ~~the~~credit ~~loans,~~losses ~~the~~and ~~fair~~(ii) ~~value~~losses ofdue ~~any~~to ~~collateral,~~factors ~~and~~other ~~the~~than ~~amount~~credit. ~~and~~The ~~status~~portion ofwhich ~~any~~is ~~senior~~considered ~~debt.~~credit ~~These~~loss ~~estimates~~is ~~are~~charged ~~highly~~to ~~subjective~~earnings ~~and~~as ~~could~~other-than-temporary ~~differ~~impairment. ~~materially~~The ~~from~~portion ~~actual~~which ~~results.~~is ~~The~~due ~~Company’s~~to ~~accounting~~other ~~policy~~factors is tonot ~~continue~~charged to ~~accrue~~earnings. ~~interest~~Also, ~~income~~if onthe ~~specific~~security ~~impaired~~is ~~loans~~classified as ~~long~~available asfor itsale, ~~concludes~~the itnon-credit isportion ~~likely~~of tothe ~~collect~~impairment ~~it.~~loss Asis ofcharged ~~June~~to ~~30,~~other ~~2013~~comprehensive income (loss), ~~the~~a ~~Company~~component ~~did~~of ~~not~~equity ~~have~~on ~~any~~the ~~asset-specific~~Company’s ~~loan~~Consolidated ~~loss~~Balance ~~reserves~~Sheet.

~~Commercial~~In ~~Mortgage~~estimating credit or other-~~Backed~~than-temporary ~~Securities~~impairment losses, management considers a variety of factors including (1) the financial condition and near-term prospects of the credit, including credit rating of the security and the underlying tenant and an estimate of the likelihood, amount and expected timing of any default, (2) whether the Company expects to hold the investment for a period of time sufficient to allow for anticipated recovery in fair value, (3) the length of time and the extent to which the fair value has been below cost, (4) current market conditions, (5) expected cash flows from the underlying collateral and an estimate of underlying collateral values, and (6) subordination levels within the securitization pool. These estimates are highly subjective and could differ materially from actual results. The Company had no other-than-temporary impairment losses on securities charged to the Statement of Operations during the nine months ended September 30, 2013. The Company also had no other-than-temporary impairment losses on securities charged to the Statement of Operations during the nine months ended September 30, 2012.

~~The~~Deferred ~~Company~~Fees ~~classifies~~and all of its securities investments as “available for sale” for financial accounting purposes. Under GAAP, securities classified as “available for sale” are carried on the Consolidated Balance Sheet at fair value with the net unrealized gains or losses included in Accumulated Other Comprehensive Income (Loss), a component of Stockholders’ Equity on the Company’s Consolidated Balance Sheet. Costs

~~Any~~In ~~premiums~~connection with its leasing efforts, the Company may incur primarily two types of costs: (i) allowances paid to the tenant or ~~discounts~~on its behalf for the construction of leasehold improvements, or tenant improvement allowances, and (ii) commissions paid to leasing brokers, or leasing commissions. Tenant improvement allowances are initially capitalized as part of “Construction in progress” and then transferred to “Building and improvements” at completion and depreciated on ~~securities~~a straight-line basis over periods not exceeding 40 years. Leasing commissions are ~~amortized~~capitalized as “Deferred leasing costs” (a component of ~~interest~~“Other ~~income~~assets” ~~using~~on the ~~effective~~Company’s ~~interest~~Consolidated ~~method~~Balance Sheet) and amortized on a straight-line basis over the term of the related lease.

~~The~~In ~~Company~~accordance ~~estimates~~with ~~fair value on all securities investments quarterly based on a variety of inputs. Under~~ applicable accounting guidance, ~~securities where~~ the ~~fair~~Company ~~value~~defers ~~is less than~~ the ~~Company’s~~recognition ~~cost~~of ~~are~~fees ~~deemed “impaired,”~~ and, ~~therefore,~~expenses ~~must~~associated bewith ~~measured~~the ~~for~~origination ~~“other-than-temporary~~of ~~impairment.”~~its Ifloans anheld ~~impaired~~for ~~security (i~~investment.~~e.,~~ ~~fair~~These ~~value~~items ~~below~~include ~~cost)~~lender isfee ~~intended~~income, torate belock ~~sold~~income, ordirect ~~required~~loan toorigination becosts, ~~sold~~certain ~~prior~~legal ~~to expected recovery of the impairment loss~~expenses, ~~the~~insurance ~~full amount of the loss must be charged to earnings as other-than-temporary impairment. Otherwise~~costs, ~~impairment~~rating ~~losses~~agency onfees ~~the security must be further analyzed for separation into two categories: (i) credit losses~~ and ~~(ii)~~certain ~~losses due to factors~~ other ~~than credit~~expenses. ~~The~~Net ~~portion~~deferred ~~which~~fees isand ~~considered~~costs ~~credit~~are ~~loss~~presented ~~is charged to earnings~~ as ~~other-than-temporary~~an ~~impairment.~~offset ~~The~~to ~~portion~~the ~~which~~carrying isamount ~~due~~of toloans ~~other~~held ~~factors~~for isinvestment ~~not~~on ~~charged~~the toCompany’s ~~earnings.~~Consolidated ~~Also,~~Balance ifSheet ~~the~~and ~~security~~are isrecognized ~~classified~~ as ~~available~~an ~~for~~adjustment ~~sale,~~to the ~~non-credit~~effective ~~portion~~yield ofover the ~~impairment~~life ~~loss is charged to other comprehensive income (loss), a component~~ of ~~equity on~~ the ~~Company’s~~related ~~Consolidated Balance Sheet~~asset.

InThe ~~estimating~~Company ~~credit~~also ordefers ~~other-than-temporary~~the ~~impairment~~recognition ~~losses, management considers a variety~~ of ~~factors~~expenses ~~including~~associated ~~(1)~~with the ~~financial~~issuance ~~condition and near-term prospects~~ of ~~the~~its ~~credit,~~debt ~~including~~obligations. ~~credit~~These ~~rating~~items ofinclude ~~the~~placement ~~security~~fees, ~~and~~lender ~~the~~fees, ~~underlying~~legal ~~tenant and an estimate of the likelihood~~expenses, ~~amount~~broker fees and ~~expected~~certain ~~timing~~other ofexpenses. ~~any~~Deferred ~~default,~~debt ~~(2)~~issuance ~~whether~~costs ~~the~~are ~~Company~~presented ~~expects~~as ~~to hold the investment for~~ a ~~period~~component of ~~time~~“Other ~~sufficient~~assets” toon ~~allow~~the ~~for~~Company’s ~~anticipated~~Consolidated ~~recovery~~Balance inSheet ~~fair~~and ~~value,~~are ~~(3)~~recognized ~~the~~as ~~length~~an ofadjustment ~~time and the extent~~ to ~~which~~ the ~~fair~~effective ~~value~~financing ~~has~~rate ~~been~~over ~~below cost, (4) current market conditions, (5) expected cash flows from~~ the ~~underlying~~term ~~collateral and an estimate~~ of ~~underlying collateral values, and (6) subordination levels within~~ the ~~securitization~~related ~~pool.~~debt ~~These estimates are highly subjective and could differ materially from actual results~~obligation. ~~The~~Upon ~~Company had no other-than-temporary impairment losses on securities charged to~~ the ~~Statement~~retirement of ~~Operations during~~ the ~~six~~related ~~months~~debt ~~ended June 30~~obligation, ~~2013.~~any ~~The~~unamortized ~~Company~~debt ~~also~~issuance ~~had~~costs noare ~~other-than-temporary impairment losses on securities~~ charged tooff ~~the~~as ~~Statement~~a component of ~~Operations~~gain ~~during~~or ~~the~~loss ~~six~~on ~~months~~extinguishment ~~ended~~of ~~June 30, 2012~~debt.

CapLease, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share amounts; totals may not add due to rounding)

~~June~~September 30, 2013 (unaudited)

~~Deferred~~Costs ~~Fees~~incurred in connection with debt obligations that have been modified or restructured are subject to the provisions of FASB ASC 470-50, Debt -- Modification and ~~Costs~~Extinguishment. If the terms of the modified debt instrument are deemed to be substantially different (i.e., a 10 percent or greater difference in the present value of cash flows between instruments), the original debt is deemed extinguished and all unamortized financing costs associated with the extinguished debt are charged to earnings in the current period. If the cash flows are deemed to be not substantially different, the original debt is deemed modified and the unamortized financing costs and any additional costs between the borrower and lender in connection with the modification are capitalized and amortized into interest expense over the remaining term of the related debt instrument, and other related costs of the modification are expensed.

InRisk ~~connection~~Management with its leasing efforts, the Company may incur primarily two types of costs: (i) allowances paid to the tenant or on its behalf for the construction of leasehold improvements, or tenant improvement allowances, and (ii) commissions paid to leasing brokers, or leasing commissions. Tenant improvement allowances are initially capitalized as part of “Construction in progress” and then transferred to “Building and improvements” at completion and depreciated on a straight-line basis over periods not exceeding 40 years. Leasing commissions are capitalized as “Deferred leasing costs” (a component of “Other assets” on the Company’s Consolidated Balance Sheet) and amortized on a straight-line basis over the term of the related lease. Transactions

InThe ~~accordance~~Company may enter into risk management transactions as part of its overall portfolio financing strategy. These transactions are intended to manage the Company’s exposure to changes in interest rates associated with ~~applicable~~its ~~accounting~~present ~~guidance~~or expected future debt obligations. As of September 30, 2013, the Company ~~defers~~was ~~the~~party ~~recognition~~to ofa ~~fees~~single ~~and~~risk ~~expenses~~management ~~associated~~transaction ~~with~~to manage its exposure to changes in interest rates under the ~~origination~~loan agreement with Bank of ~~its~~Oklahoma ~~loans~~which ~~held~~is ~~for~~a ~~investment~~floating rate borrowing facility. ~~These~~See ~~items~~Note ~~include~~13. ~~lender~~The ~~fee~~Company ~~income,~~accounts for the interest rate ~~lock~~swap ~~income~~agreement in accordance with FASB ASC Topic 815, ~~direct~~Derivatives ~~loan~~and ~~origination~~Hedging ~~costs~~(“Topic 815”). In accordance with Topic 815, ~~certain~~the ~~legal~~agreement ~~expenses~~is carried on the Company’s Consolidated Balance Sheets at its fair value, ~~insurance~~as ~~costs~~an asset if fair value is positive, ~~rating~~or ~~agency~~as ~~fees~~a ~~and~~liability ~~certain~~if ~~other~~fair ~~expenses~~value is negative. ~~Net~~If ~~deferred~~the ~~fees~~interest ~~and~~rate ~~costs~~swap ~~are~~is ~~presented~~designated as ana ~~offset~~cash toflow hedge, the ~~carrying~~effective ~~amount~~portion of ~~loans~~the ~~held~~interest ~~for~~rate ~~investment~~swap’s change in fair value is reported as a component of Other Comprehensive Income (Loss) on the Company’s Consolidated Balance ~~Sheet~~Sheets; ~~and~~the ~~are~~ineffective portion, if any, is recognized asdirectly anin ~~adjustment~~earnings. toThe fixed rate interest rate payments that the ~~effective~~Company ~~yield~~makes ~~over~~pursuant to the ~~life~~swap agreement are recognized as a component of interest expense on the ~~related~~Company’s ~~asset~~Consolidated Statements of Operations.

The Company ~~also~~has ~~defers~~been ~~the~~party ~~recognition~~to ofother ~~expenses~~risk ~~associated~~management ~~with~~transactions in the ~~issuance~~past ~~of its debt obligations. These items include placement fees, lender fees, legal expenses, broker fees~~ and ~~certain~~these ~~other~~transactions ~~expenses.~~continue ~~Deferred~~to ~~debt~~impact ~~issuance costs are presented as a component of “Other assets” on~~ the Company’s ~~Consolidated~~current ~~Balance~~results ~~Sheet~~through ~~and~~amortization ~~are~~of ~~recognized as an adjustment to~~ the effective ~~financing~~portion ~~rate~~under ~~over~~GAAP ~~the term~~ of the ~~related~~realized ~~debt~~gains ~~obligation.~~and ~~Upon~~losses ~~the~~on ~~retirement~~these oftransactions ~~the~~into ~~related~~interest ~~debt~~expense ~~obligation,~~on ~~any~~the ~~unamortized~~Company’s ~~debt~~Consolidated ~~issuance~~Statements ~~costs are charged off as a component~~ of ~~gain~~Operations. orSee ~~loss~~Note ~~on extinguishment of debt~~13.

~~Costs~~Cash ~~incurred in connection with debt obligations that have been modified or restructured are subject to the provisions of FASB ASC 470-50, Debt -- Modification~~ and ~~Extinguishment.~~Cash If the terms of the modified debt instrument are deemed to be substantially different (i.e., a 10 percent or greater difference in the present value of cash flows between instruments), the original debt is deemed extinguished and all unamortized financing costs associated with the extinguished debt are charged to earnings in the current period. If the cash flows are deemed to be not substantially different, the original debt is deemed modified and the unamortized financing costs and any additional costs between the borrower and lender in connection with the modification are capitalized and amortized into interest expense over the remaining term of the related debt instrument, and other related costs of the modification are expensed. Equivalents

~~Risk~~The ~~Management~~Company ~~Transactions~~defines cash equivalents as highly liquid investments purchased with maturities of three months or less at date of purchase. From time to time, the Company’s account balance held at financial institutions exceeds Federal Depository Insurance Corporation (“FDIC”) insurance coverage and, as a result, there is a concentration of credit risk related to the balance on deposit in excess of FDIC insurance coverage. The Company believes that the risk of loss is not significant.

~~The~~Revenue Company may enter into risk management transactions as part of its overall portfolio financing strategy. These transactions are intended to manage the Company’s exposure to changes in interest rates associated with its present or expected future debt obligations. As of June 30, 2013, the Company was party to a single risk management transaction to manage its exposure to changes in interest rates under the loan agreement with Bank of Oklahoma which is a floating rate borrowing facility. See Note 13. The Company accounts for the interest rate swap agreement in accordance with FASB ASC Topic 815, Derivatives and Hedging (“Topic 815”). In accordance with Topic 815, the agreement is carried on the Company’s Consolidated Balance Sheets at its fair value, as an asset if fair value is positive, or as a liability if fair value is negative. Since the interest rate swap is designated as a cash flow hedge, the effective portion of the interest rate swap’s change in fair value is reported as a component of Other Comprehensive Income (Loss) on the Company’s Consolidated Balance Sheets; the ineffective portion, if any, is recognized directly in earnings. The fixed rate interest rate payments that the Company makes pursuant to the swap agreement are recognized as a component of interest expense on the Company’s Consolidated Statements of Operations. Recognition

The Company ~~has~~recognizes ~~been~~rental ~~party~~revenue toon ~~other~~real ~~risk~~estate ~~management~~on ~~transactions~~a straight-line basis over the non-cancelable term of the lease. The excess of straight-line rents over base rents under the lease is included in “Accrued rental income” on the ~~past~~Company’s Consolidated Balance Sheet and ~~these~~any ~~transactions~~excess ~~continue~~of tobase ~~impact~~rents over the straight-line amount is included as “Deferred rental income” on the Company’s ~~current~~Consolidated ~~results~~Balance ~~through~~Sheet. ~~amortization~~The ofCompany’s leases also generally require the ~~effective~~tenants ~~portion~~to ~~under~~pay ~~GAAP~~directly ofor reimburse the ~~realized~~Company ~~gains~~for occupancy and ~~losses~~operating oncosts ~~these~~of ~~transactions~~the ~~into~~properties, ~~interest~~or ~~expense~~in oncertain cases reimburse the Company’s ~~Consolidated~~for ~~Statements~~increases ofin ~~Operations.~~certain ~~See~~operating ~~Note~~costs 13and real estate taxes above their base year costs. The Company recognizes such income in the period the related expenses are incurred.

~~Cash~~Interest income from loans, securities, and ~~Cash~~structuring ~~Equivalents~~fees receivable is recognized on the accrual basis of accounting. Interest income from securities (including interest-only strips) is recognized over the life of the investment using the effective interest method. The cost basis of interest-only strips is adjusted to reflect any prepayments from underlying assets, using the initial yield-to-maturity at the purchase date. The Company has adopted the cost-recovery method, in which all receipts are applied to reduce the Company’s cost basis, on a limited number of its securities investments.

The Company defines cash equivalents as highly liquid investments purchased with maturities of three months or less at date of purchase. From time to time, the Company’s account balance held at financial institutions exceeds Federal Depository Insurance Corporation (“FDIC”) insurance coverage and, as a result, there is a concentration of credit risk related to the balance on deposit in excess of FDIC insurance coverage. The Company believes that the risk of loss is not significant.12

12CapLease, Inc. and Subsidiaries

~~CapLease,~~Notes ~~Inc.~~to ~~and~~Consolidated ~~Subsidiaries~~Financial Statements

~~Notes~~(Dollar toamounts ~~Consolidated~~in ~~Financial~~thousands, ~~Statements~~except per share amounts; totals may not add due to rounding)

~~(Dollar~~September ~~amounts in thousands~~30, ~~except~~2013 ~~per share amounts; totals may not add due to rounding~~(unaudited)

~~June~~On 30occasion, ~~2013~~the ~~(unaudited)~~Company may consider a loan to be non-performing and place the loan on non-accrual status when there is sufficient doubt as to the ultimate ability to collect interest on the loan. While on non-accrual status, the loan is accounted for on either a cash basis, in which case interest income is recognized only upon actual receipt, or on a cost-recovery basis based upon management’s judgment as to the collectibility of the investment.

~~Revenue~~Income ~~Recognition~~Taxes

~~The~~CapLease ~~Company~~has ~~recognizes~~made ~~rental~~an ~~revenue~~election onto ~~real~~qualify, ~~estate~~and onbelieves ait ~~straight-line~~is ~~basis~~operating ~~over~~so ~~the~~as ~~non-cancelable~~to ~~term~~qualify, ofas ~~the~~a ~~lease.~~REIT ~~The~~for ~~excess~~federal ofincome ~~straight-line~~tax ~~rents~~purposes. ~~over~~As ~~base~~such, ~~rents~~it ~~under~~will ~~the~~generally ~~lease~~not isbe ~~included~~subject into ~~“Accrued~~federal ~~rental~~ income” tax on ~~the~~that ~~Company’s~~portion ~~Consolidated~~of ~~Balance~~its ~~Sheet~~taxable ~~and~~income ~~any~~that ~~excess~~is ofdistributed ~~base~~to ~~rents~~stockholders ~~over~~if ~~the~~it ~~straight-line~~distributes ~~amount~~at isleast ~~included~~90% asof ~~“Deferred~~its ~~rental~~taxable income” onto ~~the~~its ~~Company’s~~stockholders ~~Consolidated~~by ~~Balance~~prescribed ~~Sheet.~~dates ~~The~~and ~~Company’s~~complies ~~leases~~with ~~also~~various ~~generally~~other ~~require~~requirements. ~~the~~From ~~tenants~~time to ~~pay~~time, ~~directly or reimburse~~ the Company ~~for~~may ~~occupancy~~conduct ~~and~~a ~~operating~~portion ~~costs~~ of ~~the~~its ~~properties,~~business orthrough ina ~~certain~~taxable ~~cases~~REIT ~~reimburse~~subsidiary ~~the~~(“TRS”), ~~Company for increases in certain operating costs~~ and ~~real~~the ~~estate~~income ~~taxes~~from ~~above~~the ~~their~~activities ~~base~~of ~~year~~the ~~costs.~~TRS ~~The~~is ~~Company~~subject ~~recognizes~~to ~~such~~federal ~~income~~and instate ~~the~~taxation ~~period~~at the ~~related~~applicable ~~expenses~~corporate ~~are incurred~~rates.

~~Interest~~Earnings ~~income~~per from loans, securities, and structuring fees receivable is recognized on the accrual basis of accounting. Interest income from securities (including interest-only strips) is recognized over the life of the investment using the effective interest method. The cost basis of interest-only strips is adjusted to reflect any prepayments from underlying assets, using the initial yield-to-maturity at the purchase date. The Company has adopted the cost-recovery method, in which all receipts are applied to reduce the Company’s cost basis, on a limited number of its securities investments. Share

OnAs ~~occasion~~required by GAAP, the Company ~~may~~presents ~~consider~~both abasic ~~loan~~and todiluted beearnings ~~non-performing~~per ~~and~~share ~~place~~(“EPS”). ~~the~~Basic ~~loan~~EPS onexcludes ~~non-accrual~~dilution ~~status~~and ~~when~~is ~~there~~computed isby ~~sufficient~~dividing ~~doubt~~net asincome (loss) allocable to common stockholders by the ~~ultimate~~weighted ~~ability~~average tonumber ~~collect~~of ~~interest~~shares onoutstanding for the ~~loan~~period. ~~While~~Diluted onearnings ~~non-accrual~~per ~~status,~~share reflects the ~~loan~~potential isdilution ~~accounted~~that ~~for~~could onoccur ~~either~~if asecurities ~~cash~~or ~~basis,~~other incontracts ~~which~~to ~~case~~issue ~~interest~~common ~~income~~stock iswere ~~recognized~~exercised ~~only~~or ~~upon~~converted ~~actual~~into ~~receipt~~common stock, where such exercise or onconversion would result in a ~~cost-recovery~~lower ~~basis~~EPS ~~based~~amount. ~~upon~~For ~~management~~the 2013 periods, the Company’s ~~judgment~~computation of diluted EPS includes 128,900 shares of common stock, which represents the target number of shares of common stock associated with outstanding performance share unit awards. As described in Note 2 above, the performance share unit awards will become fully earned and settled as to 100% of the ~~collectibility~~target number of shares of common stock on the ~~investment~~closing date of the Merger, and all such settled shares will have the right to receive the Common Merger Consideration. The Company’s computation of diluted earnings per share does not include shares of common stock that may be issued in the future upon conversion of the convertible senior notes issued in October 2007, as the impact would not be dilutive. The number of weighted average common shares not included was 1,697,595 for each of the three and nine months ended September 30, 2013, and 3,093,759 for each of the three and nine months ended September 30, 2012.

~~Income~~The ~~Taxes~~following summarizes the Company’s EPS computations for the three and nine months ended September 30, 2013 and September 30, 2012 (in thousands, except per share amounts):

CapLease has made an election to qualify, and believes it is operating so as to qualify, as a REIT for federal income tax purposes. As such, it will generally not be subject to federal income tax on that portion of its taxable income that is distributed to stockholders if it distributes at least 90% of its taxable income to its stockholders by prescribed dates and complies with various other requirements. From time to time, the Company may conduct a portion of its business through a taxable REIT subsidiary (“TRS”), and the income from the activities of the TRS is subject to federal and state taxation at the applicable corporate rates.

	For the three months ended September 30,						For the nine months ended September 30,
	2013			2012			2013			2012
Net loss allocable to common stockholders	$	(1,513	)	$	(1,252	)	$	(5,798	)	$	(9,689	)
Weighted average number of common shares outstanding, basic		88,846			66,767			84,381			66,616
Weighted average number of common shares outstanding, diluted		88,975			66,767			84,510			66,616
Net loss per share, basic	$	(0.02	)	$	(0.02	)	$	(0.07	)	$	(0.15	)
Net loss per share, diluted	$	(0.02	)	$	(0.02	)	$	(0.07	)	$	(0.15	)
Non-vested shares included in weighted average number of shares outstanding above		1,137			1,520			1,137			1,520

~~Earnings~~Recently ~~per~~Issued ~~Share~~Accounting Pronouncements

AsIn ~~required by GAAP~~May 2011, the ~~Company~~Financial ~~presents~~Accounting ~~both~~Standards ~~basic~~Board ~~and~~(“FASB”) ~~diluted~~issued ~~earnings~~new ~~per~~accounting ~~share~~guidance ~~(“EPS”).~~ASU 2011-04, ~~Basic~~Amendments ~~EPS~~to ~~excludes~~Achieve ~~dilution~~Common Fair Value Measurement and isDisclosure ~~computed~~Requirements byin ~~dividing~~U.S. ~~net~~GAAP ~~income~~and ~~(loss)~~IFRSs, ~~allocable~~which toamends ~~common~~various ~~stockholders~~sections byof ~~the~~Accounting ~~weighted~~Standards ~~average~~Codification ~~number~~(“ASC”) of820 ~~shares~~and ~~outstanding~~changes ~~for~~the wording used to describe the ~~period.~~requirements ~~Diluted~~in ~~earnings~~U.S. ~~per~~GAAP ~~share~~for ~~reflects~~measuring ~~the~~fair ~~potential~~value ~~dilution~~and ~~that~~for ~~could~~disclosing ~~occur~~information ifabout ~~securities~~fair orvalue ~~other~~measurements ~~contracts~~in order to ~~issue~~improve ~~common~~consistency ~~stock~~in ~~were~~the ~~exercised~~application orand ~~converted~~description ~~into~~of ~~common~~fair ~~stock,~~value ~~where~~between ~~such~~U.S. ~~exercise~~GAAP orand ~~conversion~~International ~~would~~Financial ~~result~~Reporting inStandards a(“IFRS”). ~~lower~~ASU ~~EPS~~2011-04 ~~amount.~~clarifies ~~For~~how the ~~2013~~concepts ~~periods,~~of ~~the~~highest ~~Company’s~~and ~~computation~~best ofuse ~~diluted~~and ~~EPS~~valuation ~~includes~~premise ~~128,900~~in ~~shares~~a offair ~~common~~value ~~stock,~~measurement ~~which~~are ~~represents~~relevant only when measuring the ~~target~~fair ~~number~~value of ~~shares~~nonfinancial ofassets ~~common~~and ~~stock~~are ~~associated~~not ~~with~~relevant ~~outstanding~~when ~~performance~~measuring ~~share~~the ~~unit~~fair ~~awards.~~value Asof ~~described~~financial inassets ~~Note~~or 2of ~~above~~liabilities. In addition, the ~~performance~~guidance ~~share~~expanded ~~unit~~the ~~awards~~disclosures ~~will~~for ~~become~~the ~~fully~~unobservable ~~earned~~inputs ~~and~~for ~~settled~~Level as3 tofair ~~100%~~value ofmeasurements, ~~the~~requiring ~~target~~quantitative ~~number~~information ofto ~~shares~~be ofdisclosed ~~common~~related ~~stock~~to on (1) the ~~closing~~valuation ~~date~~processes ofused, (2) the ~~Merger,~~sensitivity ~~and~~of ~~all~~the ~~such~~fair ~~settled~~value ~~shares~~measurement ~~will~~to ~~have~~changes ~~the~~in ~~right~~unobservable toinputs ~~receive~~and the ~~Common~~interrelationships ~~Merger~~between ~~Consideration.~~those ~~The~~unobservable ~~Company’s~~inputs, ~~computation~~and (3) use of ~~diluted~~a ~~earnings~~nonfinancial ~~per~~asset ~~share~~in ~~does~~a ~~not~~way ~~include~~that ~~shares~~differs offrom ~~common~~the ~~stock~~asset’s ~~that~~highest ~~may~~and bebest ~~issued~~use. inThe ~~the~~revised ~~future~~guidance ~~upon~~is ~~conversion~~effective offor ~~the~~interim ~~convertible~~and ~~senior~~annual ~~notes~~periods ~~issued~~beginning inafter ~~October 2007~~December 15, as2011 ~~the~~and ~~impact~~early ~~would~~application ~~not~~by bepublic ~~dilutive.~~entities ~~The~~is ~~number~~prohibited. ofASU ~~weighted~~2011-04 ~~average~~is ~~common~~to ~~shares~~be ~~not~~applied ~~included~~prospectively. ~~was~~The ~~1,697,595~~Company’s ~~for~~adoption ~~each~~ of ~~the~~this ~~three~~ASU ~~and~~for ~~six~~the ~~months~~reporting period ended ~~June~~March 3031, ~~2013~~2012, ~~and~~as 3required,~~093,759~~ ~~for~~did ~~each~~not ofhave ~~the~~a ~~three~~material ~~and~~effect ~~six~~on ~~months~~the ~~ended~~Company’s ~~June~~consolidated ~~30,~~financial ~~2012~~statements.

CapLease, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share amounts; totals may not add due to rounding)

~~June~~September 30, 2013 (unaudited)

~~The~~In ~~following~~June 2011, ~~summarizes~~the FASB issued new accounting guidance ASU 2011-05, Presentation of Comprehensive Income, which amends various sections of ASC 220 and allows an entity the ~~Company’s~~option ~~EPS~~to ~~computations~~present ~~for~~the total of comprehensive income, the ~~three~~components of net income, and ~~six~~the ~~months~~components ~~ended~~of ~~June~~other 30comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, ~~2013~~an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and ~~June~~a 30total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in ASU 2011-05 do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 should be applied retrospectively. For public entities, ~~2012~~the (amendments in ~~thousands~~ASU 2011-05 are effective for fiscal years, ~~except~~and ~~per~~interim ~~share~~periods ~~amounts):~~within those years, beginning after December 15, 2011. The Company elected early adoption of this ASU for the reporting period ended December 31, 2011, as permitted by the ASU. The Company’s adoption of this ASU did not have a material effect on the Company’s consolidated financial statements.

	For the three months ended June 30,						For the six months ended June 30,
	2013			2012			2013			2012
Net loss allocable to common stockholders	$	(2,787	)	$	(8,866	)	$	(4,284	)	$	(8,437	)
Weighted average number of common shares outstanding, basic		87,975			66,767			82,111			66,540
Weighted average number of common shares outstanding, diluted		88,104			66,767			82,240			66,540
Net loss per share, basic	$	(0.03	)	$	(0.13	)	$	(0.05	)	$	(0.13	)
Net loss per share, diluted	$	(0.03	)	$	(0.13	)	$	(0.05	)	$	(0.13	)
Non-vested shares included in weighted average number of shares outstanding above		1,137			1,571			1,137			1,571

In December 2011, the FASB issued new accounting guidance ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standard Update No. 2011-05, which amends various sections of ASC 220-10. The amended sections indefinitely defer the effective date of the presentation of reclassification adjustments out of accumulated other comprehensive income on the components of net income and other comprehensive income, which ASU 2011-05 would require. All other requirements of ASU 2011-05 are unaffected by this new guidance. For public entities, the amendments in ASU 2011-12 are effective concurrent with ASU 2011-05, for fiscal years and interim periods within those years, beginning after December 15, 2011. The Company elected to adopt this ASU for the reporting period ended December 31, 2011, as it is required to be adopted concurrently with ASU 2011-05. The Company’s adoption of this ASU did not have a material effect on the Company’s consolidated financial statements.

~~Recently~~In ~~Issued~~December ~~Accounting~~2011, ~~Pronouncements~~the FASB issued new accounting guidance ASU No. 2011-11, Balance Sheet (ASC Topic 210): Disclosures about Offsetting Assets and Liabilities. ASU No. 2011-11 creates new disclosure requirements about the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments. The changes to the ASC as a result of this update are effective for periods beginning on or after January 1, 2013 (January 1, 2013 for the Company) and must be shown retrospectively for all comparative periods presented. The Company’s adoption of this ASU for the reporting period ended March 31, 2013, as required, did not have a material effect on the Company’s consolidated financial statements.

In ~~May~~ December 2011, the ~~Financial Accounting Standards Board (“~~FASB”) issued new accounting guidance ASU No. 2011-0410, ~~Amendments~~Derecognition toof ~~Achieve~~in ~~Common~~Substance ~~Fair~~Real ~~Value~~Estate ~~Measurement~~– ~~and~~a ~~Disclosure~~Scope ~~Requirements in U.S. GAAP and IFRSs~~Clarification, which amends ~~various sections of Accounting Standards Codification (“~~ASC”) ~~820~~Topic ~~and~~360, ~~changes~~Property, ~~the~~Plant ~~wording used to describe the requirements in U.S. GAAP for measuring fair value~~ and ~~for disclosing information about fair value measurements in order to improve consistency in the application and description of fair value between U~~Equipment.S. ASU ~~GAAP and International Financial Reporting Standards (“IFRS”)~~No. ~~ASU~~ 2011-0410 ~~clarifies~~states ~~how~~that ~~the~~when ~~concepts~~an ofinvestor ~~highest~~ceases ~~and~~to ~~best~~have ~~use~~a ~~and~~controlling ~~valuation~~financial ~~premise~~interest in aan ~~fair~~entity ~~value~~that ~~measurement~~is ~~are~~in-substance ~~relevant~~real ~~only~~estate ~~when~~as ~~measuring~~a ~~the~~result ~~fair value~~ of ~~nonfinancial~~a ~~assets~~default ~~and~~on ~~are~~the ~~not~~entity’s ~~relevant~~nonrecourse ~~when~~debt, ~~measuring~~ the ~~fair~~investor ~~value~~should ofapply ~~financial assets or of liabilities. In addition,~~ the guidance ~~expanded~~under ~~the~~ASC ~~disclosures~~Subtopic ~~for~~360-20, ~~the~~Property, ~~unobservable~~Plant ~~inputs~~and ~~for~~Equipment ~~Level~~– 3Real ~~fair~~Estate ~~value~~Sales ~~measurements,~~to ~~requiring~~determine ~~quantitative~~whether ~~information~~ to bederecognize ~~disclosed~~the ~~related~~entity’s toassets (~~1) the~~including ~~valuation~~real ~~processes used, (2~~estate) ~~the~~ ~~sensitivity~~and ofliabilities (including the ~~fair~~nonrecourse ~~value~~debt). The ~~measurement~~changes to ~~changes in unobservable inputs and~~ the ~~interrelationships~~ASC ~~between~~as ~~those~~a ~~unobservable~~result ~~inputs, and (3) use~~ of athis ~~nonfinancial~~update ~~asset~~are ineffective aprospectively ~~way~~for ~~that~~deconsolidation ~~differs~~events ~~from~~occurring ~~the~~during ~~asset’s~~fiscal ~~highest~~years, and ~~best~~interim ~~use.~~periods ~~The~~within ~~revised~~those ~~guidance~~years, isbeginning ~~effective~~on ~~for~~or ~~interim and annual periods beginning~~ after ~~December~~June 15, ~~2011~~2012 ~~and~~(January ~~early~~1, ~~application~~2013 byfor ~~public~~the ~~entities is prohibited~~Company). ~~ASU 2011-04 is to be applied prospectively.~~ The Company’s adoption of this ASU for the reporting period ended March 31, ~~2012~~2013, as required, did not have a material effect on the Company’s consolidated financial statements.

In June 2011, the FASB issued new accounting guidance ASU 2011-05, Presentation of Comprehensive Income, which amends various sections of ASC 220 and allows an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in ASU 2011-05 do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011-05 should be applied retrospectively. For public entities, the amendments in ASU 2011-05 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company elected early adoption of this ASU for the reporting period ended December 31, 2011, as permitted by the ASU. The Company’s adoption of this ASU did not have a material effect on the Company’s consolidated financial statements. 14

~~In December 2011~~CapLease, the FASB issued new accounting guidance ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standard Update NoInc. 2011-05, which amends various sections of ASC 220-10. The amended sections indefinitely defer the effective date of the presentation of reclassification adjustments out of accumulated other comprehensive income on the components of net income and other comprehensive income, which ASU 2011-05 would require. All other requirements of ASU 2011-05 are unaffected by this new guidance. For public entities, the amendments in ASU 2011-12 are effective concurrent with ASU 2011-05, for fiscal years and interim periods within those years, beginning after December 15, 2011. The Company elected to adopt this ASU for the reporting period ended December 31, 2011, as it is required to be adopted concurrently with ASU 2011-05. The Company’s adoption of this ASU did not have a material effect on the Company’s consolidated financial statements.Subsidiaries

14Notes to Consolidated Financial Statements

~~CapLease~~(Dollar amounts in thousands, ~~Inc.~~except ~~and~~per ~~Subsidiaries~~share amounts; totals may not add due to rounding)

~~Notes~~September to30, ~~Consolidated~~2013 ~~Financial Statements~~(unaudited)

In July 2012, the FASB issued new accounting guidance ASU 2012-02, Intangibles – Goodwill and Other (~~Dollar~~Topic ~~amounts~~250): inTesting ~~thousands~~Indefinite-Lived Intangible Assets for Impairment, ~~except~~which ~~per~~amends ~~share~~various ~~amounts;~~sections ~~totals~~of ~~may~~ASC ~~not~~350. ~~add~~The ~~due~~amendments update guidance with respect to ~~rounding)~~annual impairment testing of indefinite-lived intangible assets. The standards update is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, and early adoption is permitted. The Company’s adoption of this ASU for the reporting period ended March 31, 2013, as required, did not have a material effect on the Company’s consolidated financial statements.

~~June~~In 30February 2013, the FASB issued new accounting guidance ASU No. 2013-02, ~~(unaudited)~~Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, an amendment to FASB ASC Topic 220. ASU No. 2013-02 requires disclosure of amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present either on the face of the statement of operations or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts not reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. This ASU is effective prospectively for fiscal and interim periods beginning after December 15, 2012. The Company’s adoption of this ASU for the reporting period ended March 31, 2013, as required, did not have a material effect on the Company’s consolidated financial statements.

In December 2011, the FASB issued new accounting guidance ASU No. 2011-11, Balance Sheet (ASC Topic 210): Disclosures about Offsetting Assets and Liabilities. ASU No. 2011-11 creates new disclosure requirements about the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments. The changes to the ASC as a result of this update are effective for periods beginning on or after January 1, 2013 (January 1, 2013 for the Company) and must be shown retrospectively for all comparative periods presented. The Company’s adoption of this ASU for the reporting period ended March 31, 2013, as required, did not have a material effect on the Company’s consolidated financial statements.Reclassifications

InCertain ~~December~~prior ~~2011,~~year ~~the~~amounts FASB issued new accounting guidance ASU No. 2011-10, Derecognition of in Substance Real Estate – a Scope Clarification, which amends ASC Topic 360, Property, Plant and Equipment. ASU No. 2011-10 states that when an investor ceases to have abeen ~~controlling~~reclassified financial interest in an entity that is in-substance real estate as a result of a default on the entity’s nonrecourse debt, the investor should apply the guidance under ASC Subtopic 360-20, Property, Plant and Equipment – Real Estate Sales to ~~determine~~conform ~~whether~~ to ~~derecognize~~ the ~~entity’s~~current ~~assets (including real estate) and liabilities (including the nonrecourse debt)~~presentation. ~~The~~ ~~changes~~There towas ~~the~~no ~~ASC~~effect ~~as a result of this update are effective prospectively for deconsolidation events occurring during fiscal years, and interim periods within those years, beginning~~ on ornet ~~after~~income ~~June 15, 2012~~ (~~January 1, 2013 for the Company~~loss)~~. The~~ ~~Company’s~~or ~~adoption~~equity ofrelated ~~this~~to ~~ASU~~these ~~for the reporting period ended March 31, 2013, as required, did not have a material effect on the Company’s consolidated financial statements~~reclassifications.

In July 2012, the FASB issued new accounting guidance ASU 2012-02, Intangibles – Goodwill and Other (Topic 250): Testing Indefinite-Lived Intangible Assets for Impairment, which amends various sections of ASC 3504. Real ~~The~~Estate ~~amendments~~Investments update guidance with respect to annual impairment testing of indefinite-lived intangible assets. The standards update is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, and early adoption is permitted. The Company’s adoption of this ASU for the reporting period ended March 31, 2013, as required, did not have a material effect on the Company’s consolidated financial statements.

InReal ~~February~~estate ~~2013,~~held ~~the~~for ~~FASB~~investment ~~issued~~and ~~new~~related ~~accounting~~intangible ~~guidance~~liabilities ~~ASU~~consisted ~~No. 2013-02, Reporting~~ of ~~Amounts~~the ~~Reclassified~~following ~~Out~~at ofSeptember ~~Accumulated Other Comprehensive Income~~30, ~~an amendment to FASB ASC Topic 220. ASU No.~~ 2013~~-02~~ requires disclosure of amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present either on the face of the statement of operations or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts not reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. This ASU is effective prospectively for fiscal and ~~interim periods beginning after~~ December ~~15, 2012. The Company’s adoption of this ASU for the reporting period ended March~~ 31, ~~2013, as required, did not have a material effect on the Company’s consolidated financial statements.~~2012:

Reclassifications

	Sep 30, 2013			Dec 31, 2012
	Unaudited
Real estate investments:
Land	$	235,282		$	219,059
Building and improvements		1,544,258			1,410,767
Construction in progress, land		6,426			5,635
Construction in progress, building and improvements		6,651			47,113
Intangible assets		183,939			171,393
Less: Accumulated depreciation and amortization		(349,843	)		(312,551	)
Real estate investments, net	$	1,626,713		$	1,541,416
Intangible liabilities on real estate investments:
Intangible liabilities	$	46,884		$	47,908
Less: Accumulated amortization		(14,509	)		(14,876	)
Intangible liabilities on real estate investments, net	$	32,375		$	33,032

~~Certain~~Except ~~prior~~for ~~year~~the ~~amounts~~speculative ~~have~~development ~~been~~project ~~reclassified~~described tobelow, ~~conform~~the toCompany did not make any real estate acquisitions during the ~~current~~quarter ~~presentation~~ended September 30, 2013. ~~There~~In ~~was~~addition noto ~~effect~~the onspeculative ~~net~~development ~~income~~project, ~~(loss)~~the orCompany ~~equity~~also ~~related~~continued to ~~these~~fund ~~reclassifications~~the build-to-suit project described below during the quarter ended September 30, 2013.

15Leasing Activity

~~CapLease~~During January 2013, ~~Inc~~Bob’s Stores, LLC, the sole tenant at the Company’s 88,420 square foot retail property located in Randolph, Massachusetts, exercised its right to extend the lease for five additional years, until January 31, 2019. The lease extension commences February 1, 2014 and ~~Subsidiaries~~the rental rate is $9.76 per square foot. The tenant’s obligations under the foregoing lease are guaranteed by various subsidiaries of CVS Caremark Corporation.

~~Notes to Consolidated Financial Statements~~15

~~(Dollar amounts in thousands~~CapLease, ~~except~~Inc. ~~per~~and ~~share amounts; totals may not add due to rounding)~~Subsidiaries

~~June~~Notes ~~30,~~to ~~2013~~Consolidated ~~(unaudited)~~Financial Statements

~~4. Real~~(Dollar ~~Estate~~amounts ~~Investments~~in thousands, except per share amounts; totals may not add due to rounding)

~~Real~~September ~~estate held for investment and related intangible liabilities consisted of the following at June~~ 30, 2013 ~~and December 31, 2012:~~(unaudited)

	Jun 30, 2013			Dec 31, 2012
	Unaudited
Real estate investments:
Land	$	235,282		$	219,059
Building and improvements		1,543,880			1,410,767
Construction in progress, land		1,875			5,635
Construction in progress, building and improvements		486			47,113
Intangible assets		183,939			171,393
Less: Accumulated depreciation and amortization		(336,980	)		(312,551	)
Real estate investments, net	$	1,628,482		$	1,541,416
Intangible liabilities on real estate investments:
Intangible liabilities	$	46,884		$	47,908
Less: Accumulated amortization		(13,997	)		(14,876	)
Intangible liabilities on real estate investments, net	$	32,887		$	33,032

During July 2013, the Company entered into a multi-year lease of 19,345 square feet at the multi-tenant office building at 1299 Farnam Street in Omaha, NE.

During August 2013, the ~~quarter~~Company ~~ended~~entered ~~June~~into ~~30,~~a one-year lease commencing in November 2013, of the 764,177 square foot warehouse property located in Fort Wayne, IN. The lease is with The Procter & Gamble Manufacturing Company ~~acquired~~and also includes a tenant option to extend for an additional five years. The annual rental rate during the ~~following~~one ~~properties:~~year term is $2.75 per square foot.

Month Acquired

Tenant or Guarantor

Location

Purchase Price

Lease Expires

Net Rentable Square Feet

May

Teva Pharmaceuticals Industries Limited

41 Moores Road, Malvern, PA

49,650

October 2022

187,653

June

Con-Way Freight, Inc. (1)

2211 Old Earhart Road, Ann Arbor, MI

43,900

May 2023

196,057

Development Activities

~~________________~~During June 2013, the Company entered into an agreement to construct a distribution warehouse in Columbia, SC on a build-to-suit basis for a large private company tenant. The new build-to-suit project has an estimated total investment of $22,033. Construction activity and funding of the project commenced during June 2013. The Company will fund all of the project costs from cash on hand and other sources of available liquidity.

During August 2013, the Company entered into an agreement with a major Texas-based developer to develop a 150,000 square foot speculative office building in The Woodlands, TX, adjacent to and part of the same development as an existing office building owned by the Company and purchased in 2012. Costs of the project which are budgeted to be $33,987 are scheduled to be funded by equity contributions from the Company and its developer partner, and $17,000 of advances during the construction period under a development loan entered into with Amegy Bank. All equity contributions are scheduled to be borne as follows: the Company, 90%; and the developer, 10%; except for cost overruns, which will be borne 50% each. Because the Company has a controlling financial interest in the investment, it consolidates the investment for financial accounting purposes. The Company has an option to purchase, and the developer the option to sell to the Company, in each case at fair market value, the developer’s interest in the project upon (1i) Assubstantial completion of ~~June~~the project and (ii) leases being entered into for 95% of the square footage of the project. Construction activity and funding of the project commenced during the quarter ended September 30, 2013,. ~~approximately~~The ~~22%~~Company will fund its share of the ~~property~~project ~~was~~costs ~~leased~~from tocash ~~six~~on hand and other ~~tenants~~sources of available liquidity.

InThe ~~addition~~table tobelow ~~the~~details ~~above properties acquired during~~ the ~~quarter, the~~ Company’s ~~also~~investment ~~agreed~~in toits ~~construct~~pending adevelopment ~~distribution~~projects ~~warehouse~~as ~~for~~of aSeptember ~~large private company tenant and in connection with such build-to-suit agreement~~30, ~~purchased the land on which the warehouse is being constructed~~2013. The ~~Company~~information ~~also~~included ~~substantially~~in ~~completed~~ the ~~construction~~table ofbelow ~~the~~represents ~~warehouse~~management’s ~~for~~estimates ~~Vitamin~~and ~~Shoppe~~expectations ~~Inc.~~at ~~during~~September ~~the quarter ended June~~ 30, 2013. Awhich ~~summary~~are ofsubject ~~the~~to change. The Company’s ~~build-to-suit~~disclosures ~~projects,~~regarding ~~including~~certain ~~their~~projections ~~status~~or asestimates of ~~June~~completion ~~30,~~dates ~~2013,~~may isnot ~~included~~reflect ~~below.~~actual results.

Lease Extension

Location

Tenant

Property

Type

Approximate

Square Feet

Lease

Term

(years)

Percent

Owned

Investment

through

9/30/13

Estimated

Remaining Investment

Estimated

Total

Investment

Estimated

Completion

Date

Columbia, SC

Large private company

Warehouse

450,000

10.5⁽¹⁾

100%

7,426

14,632

22,033

Q1 2014

The Woodlands, TX

N/A – speculative development

Office building

150,000

N/A

90%

5,660

28,352

33,987

Q3 2014

~~During~~ (1) the six months ended June 30, 2013, Bob’s Stores, LLC, the sole tenant at the Company’s 88,420 square foot retail property located in Randolph, Massachusetts, exercised its right to extend the lease for five additional years, until January 31, 2019. The lease ~~extension~~is ~~commences~~in ~~February~~force 1,and ~~2014~~rent and the ~~rental rate is $9~~10.765 ~~per~~year ~~square foot. The tenant’s obligations under the foregoing~~ lease ~~are~~term ~~guaranteed~~will bycommence ~~various~~upon ~~subsidiaries~~substantial completion of ~~CVS~~the ~~Caremark Corporation~~building.

~~Development Activities~~16

~~During June 2013~~CapLease, ~~the Company entered into an agreement to construct a distribution warehouse on a build-to-suit basis for a large private company tenant~~Inc. ~~The new build-to-suit project has an estimated total investment of $22,033. Construction activity~~ and ~~funding of the project commenced during the second quarter of 2013. The Company will fund all of the project costs from cash on hand and other sources of available liquidity.~~Subsidiaries

~~During~~Notes ~~August 2012, the Company entered into an agreement~~ to ~~construct~~Consolidated aFinancial distribution warehouse on a build-to-suit basis for Vitamin Shoppe Industries, Inc. with an estimated total investment of $21,698. Construction activity and funding of the project commenced during the third quarter of 2012, and was substantially completed during the quarter ended June 30, 2013. During the quarter ended June 30, 2013, the Company’s investment in the Vitamin Shoppe project was transferred from construction in progress to (i) land and (ii) buildings and improvements. Statements

16(Dollar amounts in thousands, except per share amounts; totals may not add due to rounding)

~~CapLease~~September 30, ~~Inc.~~2013 ~~and Subsidiaries~~(unaudited)

~~Notes~~The toamount ~~Consolidated~~of ~~Financial~~the ~~Statements~~“Investment” as of September 30, 2013, includes capitalized interest of $50, including imputed interest on equity funded by the Company in accordance with GAAP of $25 for the Columbia, SC project and $25 for The Woodlands, TX project. The “Estimated Remaining Investment” and “Estimated Total Investment” are based on project budgets and therefore do not include any amounts of imputed interest under GAAP.

~~(Dollar~~Straight-Line ~~amounts~~Rent ~~in thousands, except per share amounts; totals may not add due to rounding)~~Adjustment

~~June~~As described under “Revenue Recognition” in Note 2 above, the Company recognizes rental revenue from its owned properties on a straight-line basis as required by relevant accounting guidance. The impact of the straight-line rent adjustment on rental revenue is recorded on the Company’s Consolidated Balance Sheet through accrued rental income. Amounts for accrued rental income as of September 30, 2013 ~~(unaudited)~~and December 31, 2012, were as follows:

The table below details the Company’s investment in the June 2013 development project as of June 30, 2013. The information included in the table below represents management’s estimates and expectations at June 30, 2013 which are subject to change. The Company’s disclosures regarding certain projections or estimates of completion dates may not reflect actual results.

	Sep 30, 2013		Dec 31, 2012
	Unaudited
Accrued Rental Income	$	33,708	$	35,144

Location

Tenant

Property Type

Approximate Square Feet

Lease Term (years)

Investment through 6/30/13

Estimated Remaining Investment

Estimated Total Investment

Estimated Completion Date

Columbia, SC

Large private company

Warehouse

450,000

10.5(1)

2,674

19,359

22,033

Q1 2014

Accrued rental income is included in “Other assets” on the Company’s Consolidated Balance Sheet. See Note 9.

~~(1)~~Depreciation ~~The lease is in force~~ and ~~rent~~Amortization ~~and the 10.5 year lease term will commence upon substantial completion of the building.~~Expense

~~Straight-Line~~Depreciation ~~Rent~~expense ~~Adjustment~~and amortization of intangible assets and liabilities on real estate investments for the three and nine months ended September 30, 2013 and September 30, 2012, were as follows:

As described under “Revenue Recognition” in Note 2 above, the Company recognizes rental revenue from its owned properties on a straight-line basis as required by relevant accounting guidance. The impact of the straight-line rent adjustment on rental revenue is recorded on the Company’s Consolidated Balance Sheet through accrued rental income and deferred rental income. Amounts for accrued rental income and deferred rental income as of June 30, 2013 and December 31, 2012, were as follows:

	For the three months ended September 30,				For the nine months ended September 30,
	2013		2012		2013		2012
Depreciation on real estate (included in depreciation and amortization expense)	$	9,803	$	8,574	$	28,257	$	24,930
Amortization of in-place leases (included in depreciation and amortization expense)		2,946		3,479		8,746		10,653
Amortization of above-market leases (included as a reduction of rental revenue)		114		319		290		1,027
Amortization of below-market leases (included as an increase to rental revenue)		512		547		1,591		1,640

	Jun 30, 2013		Dec 31, 2012
	Unaudited
Accrued Rental Income	$	33,405	$	35,144
Deferred Rental Income		-		-

As of September 30, 2013, the Company’s weighted average amortization period on intangible assets was 7.5 years, and the weighted average amortization period on intangible liabilities was 24.5 years.

~~Accrued~~Scheduled ~~rental~~amortization ~~income~~on isexisting ~~included~~intangible inassets ~~“Other~~and ~~assets”~~liabilities on ~~the~~real ~~Company’s~~estate ~~Consolidated~~investments ~~Balance~~as ~~Sheet.~~of ~~See~~September ~~Note~~30, 9.2013, was as follows:

Depreciation and Amortization Expense

	Intangible Assets		Intangible Liabilities
3 months ending December 31, 2013	$	3,060	$	512
2014		12,239		2,048
2015		11,580		1,772
2016		9,994		1,707
2017		7,284		1,525
Thereafter		27,281		24,812
Total	$	71,436	$	32,375

~~Depreciation expense and amortization of intangible assets and liabilities on real estate investments for the three and six months ended June 30, 2013 and June 30, 2012, were as follows:~~17

	For the three months ended June 30,				For the six months ended June 30,
	2013		2012		2013		2012
Depreciation on real estate (included in depreciation and amortization expense)	$	9,459	$	8,252	$	18,454	$	16,356
Amortization of in-place leases (included in depreciation and amortization expense)		2,928		3,555		5,800		7,174
Amortization of above-market leases (included as a reduction of rental revenue)		99		348		176		708
Amortization of below-market leases (included as an increase to rental revenue)		532		547		1,079		1,093

CapLease, Inc. and Subsidiaries

AsNotes ofto ~~June~~Consolidated ~~30,~~Financial ~~2013, the Company’s weighted average amortization period on intangible assets was 7.7 years, and the weighted average amortization period on intangible liabilities was 24.6 years.~~Statements

17(Dollar amounts in thousands, except per share amounts; totals may not add due to rounding)

~~CapLease~~September 30, ~~Inc.~~2013 ~~and Subsidiaries~~(unaudited)

~~Notes~~Owned toProperty ~~Consolidated~~Investment ~~Financial~~and ~~Statements~~Financing Strategy

~~(Dollar~~Nearly ~~amounts~~all of the Company’s owned properties are subject to financing and have been pledged as collateral to the Company’s lender that has provided the applicable financing. Many of these properties are owned and financed on a long-term basis with fixed rate, non-recourse debt. Each property is owned through a separate and distinct special purpose entity, or SPE, with the property and the related lease or leases on the property generally representing the sole assets of the SPE and the sole collateral available to the Company’s lender in ~~thousands~~the event the Company defaults on the debt that finances the property. Also see Note 10. Certain of the Company’s owned properties are pledged to Wells Fargo Bank, ~~except~~N.A., ~~per~~as ~~share~~lender ~~amounts;~~under ~~totals~~the ~~may~~revolving ~~not~~credit ~~add~~agreement ~~due~~described at Note 10, to ~~rounding)~~secure the Company’s borrowings from time to time outstanding thereunder. These properties are otherwise unencumbered and the related debt can be repaid and the lender’s lien released at any time without payment of a penalty or premium to the lender.

~~June~~5. Loans ~~30,~~Held ~~2013~~for ~~(unaudited)~~Investment

~~Scheduled~~Loans ~~amortization~~held onfor ~~existing~~investment ~~intangible~~at ~~assets~~September 30, 2013 and ~~liabilities~~December on31, ~~real~~2012, ~~estate~~are summarized in the following table. These investments asconsist predominantly of ~~June~~mortgage loans on properties subject to leases to investment grade tenants. As of September 30, 2013, the weighted average credit rating of the underlying tenants was asBBB+ ~~follows:~~from Standard & Poor’s. As of September 30, 2013, none of the Company’s loans held for investment were on non-accrual status or past due 90 days or more.

	Intangible Assets			Intangible Liabilities
	Sep 30, 2013			Dec 31, 2012
6 months ending December 31, 2013	$	6,120		$	1,024
	Unaudited
2014		12,239			2,048
Principal	$	28,099		$	31,329
2015		11,580			1,772
Discount		(3,703	)		(3,797	)
2016		9,994			1,707
Cost basis		24,396			27,532
2017		7,284			1,525
Allowance for loan losses		(500	)		(500	)
Thereafter		27,281			24,812
Carrying amount of loans		23,896			27,032
Total	$	74,496		$	32,887
Deferred origination fees, net		(57	)		(60	)
Total	$	23,839		$	26,972

~~Owned~~As ~~Property~~of ~~Investment~~September 30, 2013, the Company’s loan investments carried interest rates ranging from 5.28% to 7.24%. As of December 31, 2012, the Company’s loan investments carried interest rates ranging from 5.28% to 9.32%. During May 2013, the mortgage loan on the property in Wilmington, DE leased to Hercules Incorporated matured and ~~Financing~~was ~~Strategy~~paid in full. At September 30, 2013 and December 31, 2012, the weighted average effective interest rate on the Company’s loan investments, as measured against its cost basis, was 6.6% and 6.9%, respectively.

~~Nearly~~The ~~all of the~~ Company’s ~~owned~~loan ~~properties~~portfolio ~~are~~is ~~subject~~comprised toprimarily ~~financing~~of ~~and~~fully ~~have~~amortizing ~~been~~or ~~pledged~~nearly asfully ~~collateral~~amortizing tofirst ~~the~~mortgage ~~Company’s~~loans ~~lender~~on ~~that~~commercial ~~has~~real ~~provided~~estate ~~the~~leased ~~applicable~~to ~~financing~~a single tenant. ~~Many~~Payments of ~~these~~debt ~~properties~~service ~~are~~on ~~owned~~the ~~and~~Company’s ~~financed~~loans onis, ain ~~long-term~~substantially ~~basis~~all ~~with fixed rate~~cases, ~~non-recourse~~funded ~~debt.~~directly ~~Each~~by ~~property~~rent ispayments ~~owned~~paid ~~through~~into a ~~separate~~lockbox ~~and~~account ~~distinct~~by ~~special~~the ~~purpose~~underlying ~~entity,~~tenant. ~~or SPE~~Therefore, ~~with~~ the ~~property~~Company’s ~~and~~monitoring ~~the~~of ~~related lease or leases on~~ the ~~property~~credit ~~generally~~quality ~~representing~~of ~~the~~its ~~sole~~loans ~~assets~~held offor ~~the~~investment ~~SPE~~is ~~and~~focused ~~the~~primarily ~~sole~~on ~~collateral~~an ~~available~~analysis toof the ~~Company’s~~tenant, ~~lender~~including inreview ~~the~~of ~~event~~tenant ~~the~~credit ~~Company~~ratings ~~defaults~~(including onchanges ~~the~~in ~~debt~~ratings) ~~that~~and ~~finances~~other ~~the~~measures ~~property.~~of ~~Also~~tenant ~~see~~credit ~~Note~~quality, ~~10.~~trends ~~Certain~~in of the ~~Company~~tenant’s ~~owned~~industry ~~properties~~and ~~are~~general ~~pledged~~economic ~~to Wells Fargo Bank~~conditions, ~~N.A.,~~and asan ~~lender~~analysis ~~under~~of ~~the~~measures ~~revolving~~of ~~credit~~collateral ~~agreement~~coverage, ~~described~~such atas ~~Note~~an ~~10,~~estimate toof ~~secure~~ the ~~Company~~loan’s ~~borrowings~~loan-to-value ~~from~~(LTV) ~~time~~ratio to(principal ~~time~~amount outstanding ~~thereunder.~~divided ~~These~~by ~~properties~~estimated ~~are~~value ~~otherwise~~of ~~unencumbered and~~ the ~~related~~property) ~~debt can be repaid~~ and ~~the~~its ~~lender’s~~remaining ~~lien~~term ~~released~~until ~~at any time without payment of a penalty or premium to the lender~~maturity.

~~5. Loans Held for Investment~~ 18

~~Loans held for investment at June 30~~CapLease, ~~2013~~Inc. and December 31, 2012, are summarized in the following table. These investments consist predominantly of mortgage loans on properties subject to leases to investment grade tenants. As of June 30, 2013, the weighted average credit rating of the underlying tenants was BBB+ from Standard & Poor’s. As of June 30, 2013, none of the Company’s loans held for investment were on non-accrual status or past due 90 days or more. Subsidiaries

	Jun 30, 2013			Dec 31, 2012
	Unaudited
Principal	$	28,350		$	31,329
Discount		(3,732	)		(3,797	)
Cost basis		24,618			27,532
Allowance for loan losses		(500	)		(500	)
Carrying amount of loans		24,118			27,032
Deferred origination fees, net		(57	)		(60	)
Total	$	24,061		$	26,972

Notes to Consolidated Financial Statements

As(Dollar ofamounts ~~June~~in 30thousands, ~~2013,~~except ~~the~~per ~~Company’s~~share ~~loan~~amounts; ~~investments~~totals ~~carried~~may ~~interest~~not ~~rates~~add ~~ranging~~due ~~from 5.28%~~ to 7.24%. As of December 31, 2012, the Company’s loan investments carried interest rates ranging from 5.28% to 9.32%. During May 2013, the mortgage loan on the property in Wilmington, DE leased to Hercules Incorporated matured and was paid in full. At June 30, 2013 and December 31, 2012, the weighted average effective interest rate on the Company’s loan investments, as measured against its cost basis, was 6.6% and 6.9%, respectively.rounding)

~~The~~September Company’s loan portfolio is comprised primarily of fully amortizing or nearly fully amortizing first mortgage loans on commercial real estate leased to a single tenant. Payments of debt service on the Company’s loans is30, in2013 substantially all cases, funded directly by rent payments paid into a lockbox account by the underlying tenant. Therefore, the Company’s monitoring of the credit quality of its loans held for investment is focused primarily on an analysis of the tenant, including review of tenant credit ratings (~~including changes in ratings~~unaudited) and other measures of tenant credit quality, trends in the tenant’s industry and general economic conditions, and an analysis of measures of collateral coverage, such as an estimate of the loan’s loan-to-value (LTV) ratio (principal amount outstanding divided by estimated value of the property) and its remaining term until maturity.

18The following table is a summary of the Company’s loans held for investment by credit category with the credit ratings of the underlying tenants presented as of each applicable balance sheet date:

CapLease, Inc. and Subsidiaries

	Carry Value
Credit rating (1)	9/30/13			12/31/12
	(unaudited)
Investment grade rating of A- or A3 and above	$	5,247		$	5,301
Investment grade rating of below A- or A3		19,149			19,761
Non-investment grade rating		-			2,470
General loan loss reserve		(500	)		(500	)
	$	23,896		$	27,032

~~Notes~~(1) toReflects ~~Consolidated~~the ~~Financial~~underlying ~~Statements~~tenant's or lease guarantor's actual or implied senior unsecured credit rating from S&P or equivalent rating if rated only by Moody's.

~~(Dollar~~As ~~amounts~~of September 30, 2013, the Company has a general loan loss reserve of $500, reflecting management’s estimate of losses that have probably occurred in ~~thousands~~its mortgage loan portfolio. The loan loss reserve was established at December 31, ~~except~~2008, ~~per~~and ~~share~~to ~~amounts;~~date ~~totals~~the ~~may~~Company has not ~~add~~had ~~due~~any toactual ~~rounding)~~losses charged against the allowance.

During the nine months ended September 30, 2012, the Company received net proceeds of $709 in satisfaction of the outstanding balance of its loan to the franchise lending venture. The amount received is included in “Gain on investment” in the Company’s Consolidated Statements of Operations. The Company previously recorded aggregate losses of $1,432 related to this investment, including $444 during the quarter ended June 30, ~~2013~~2009 ~~(unaudited)~~and $988 during the quarter ended June 30, 2011.

~~The~~6. Commercial ~~following~~Mortgage-Backed ~~table~~Securities ~~is a summary of the Company’s loans held for investment by credit category with the credit ratings of the underlying tenants presented as of each applicable balance sheet date:~~

	Carry Value
Credit rating (1)	6/30/13			12/31/12
	(unaudited)
Investment grade rating of A- or A3 and above	$	5,264		$	5,301
Investment grade rating of below A- or A3		19,354			19,761
Non-investment grade rating		-			2,470
General loan loss reserve		(500	)		(500	)
	$	24,118		$	27,032

As of September 30, 2013, the Company classifies all of its commercial mortgage-backed securities as “available for sale” for financial accounting purposes and carries those securities on the Consolidated Balance Sheet at fair value with the net unrealized gains or losses included in Accumulated Other Comprehensive Income (Loss), a component of Stockholders’ Equity on the Company’s Consolidated Balance Sheet.

~~(1)~~A ~~Reflects~~detailed ~~the~~schedule ~~underlying~~of ~~tenant's~~the ~~or lease guarantor'~~Company’s ~~actual~~securities orinvestments ~~implied~~at ~~senior~~each ~~unsecured~~of ~~credit~~September ~~rating~~30, ~~from~~2013 ~~S&P~~and orDecember ~~equivalent~~31, ~~rating~~2012 ~~if rated only by Moody's.~~follows:

As of June 30, 2013, the Company has a general loan loss reserve of $500, reflecting management’s estimate of losses that have probably occurred in its mortgage loan portfolio. The loan loss reserve was established at December 31, 2008, and to date the Company has not had any actual losses charged against the allowance.

	Face Amount (1)				Cost Basis				Fair Value
Description	Sep 30, 2013		Dec 31, 2012		Sep 30, 2013		Dec 31, 2012		Sep 30, 2013		Dec 31, 2012
	Unaudited				Unaudited				Unaudited
Certificated Mortgage Loan (with Alcatel-Lucent USA Inc. as tenant in Highlands Ranch, CO) (rated B-)	$	22,286	$	23,487	$	22,502	$	23,741	$	21,471	$	21,675
Certificated Mortgage Loan (with CVS Corporation as tenant / multi-property) (rated BBB+)		15,703		16,216		15,703		16,216		17,060		18,689
Certificated Mortgage Loan (with Koninklijke Ahold, N.V. as tenant / multi-property) (rated BBB)		5,687		6,546		5,739		6,616		6,369		7,534
BACM 2006-4, Class H (rated D)		4,000		4,000	–		–			100		60
BACMS 2002-2, Class V-1 (7-Eleven, Inc.) (rated AA-)		761		714		683		625		683		625
BACMS 2002-2, Class V-2 (Sterling Jewelers) (not rated)		1,162		1,090		1,020		933		1,021		935
CALFS 1997-CTL1, Class D (rated B-)		1,613		2,550		1,613		2,550		1,533		2,423
CMLBC 2001-CMLB-1, Class H (rated B-)		11,907		11,907		7,476		7,321		7,144		5,954
CMLBC 2001-CMLB-1, Class J (rated D)		6,383		6,383		101		362		1,277		1,213
NLFC 1999-LTL-1, Class X (IO) (rated AAA)		3,097		3,474		3,097		3,474		3,117		3,210
Total	$	72,598	$	76,368	$	57,933	$	61,838	$	59,774	$	62,318

~~During~~ (1) ~~the~~Reflects ~~six~~face ~~months ended June 30~~amount, ~~2012~~or, ~~the Company received net proceeds of $709~~ in ~~satisfaction of~~ the ~~outstanding~~case ~~balance~~ of ~~its loan to~~ the ~~franchise~~NLFC ~~lending~~1999-LTL-1 ~~venture.~~Class ~~The~~X ~~amount received is included in “Gain~~ (~~loss~~IO) ~~on investments~~bond, ~~net”~~amortized ~~in the Company’s Consolidated Statements of Operations~~cost. ~~The Company previously recorded aggregate losses of $1,432 related to this investment, including $444 during the quarter ended June 30, 2009 and $988 during the quarter ended June 30, 2011.~~

~~6. Commercial~~All ~~Mortgage-Backed~~credit ~~Securities~~ratings in the above table are as of September 30, 2013.

As of June 30, 2013, the Company classifies all of its commercial mortgage-backed securities as “available for sale” for financial accounting purposes and carries those securities on the Consolidated Balance Sheet at fair value with the net unrealized gains or losses included in Accumulated Other Comprehensive Income (Loss), a component of Stockholders’ Equity on the Company’s Consolidated Balance Sheet.19

~~A detailed schedule of the Company’s securities investments at each of June 30~~CapLease, ~~2013~~Inc. and ~~December 31, 2012 follows:~~Subsidiaries

	Face Amount (1)				Cost Basis				Fair Value
Description	Jun 30, 2013		Dec 31, 2012		Jun 30, 2013		Dec 31, 2012		Jun 30, 2013		Dec 31, 2012
	Unaudited				Unaudited				Unaudited
Certificated Mortgage Loan (with Alcatel-Lucent USA Inc. as tenant in Highlands Ranch, CO) (rated B-)	$	22,286	$	23,487	$	22,520	$	23,741	$	20,412	$	21,675
Certificated Mortgage Loan (with CVS Corporation as tenant / multi-property) (rated BBB+)		15,876		16,216		15,876		16,216		17,391		18,689
Certificated Mortgage Loan (with Koninklijke Ahold, N.V. as tenant / multi-property) (rated BBB)		5,687		6,546		5,747		6,616		6,386		7,534
BACM 2006-4, Class H (rated D)		4,000		4,000	–		–			60		60
BACMS 2002-2, Class V-1 (7-Eleven, Inc.) (rated AA-)		745		714		663		625		663		625
BACMS 2002-2, Class V-2 (Sterling Jewelers) (not rated)		1,137		1,090		990		933		991		935
CALFS 1997-CTL1, Class D (rated B-)		1,735		2,550		1,735		2,550		1,631		2,423
CMLBC 2001-CMLB-1, Class H (rated B-)		11,907		11,907		7,424		7,321		7,144		5,954
CMLBC 2001-CMLB-1, Class J (rated D)		6,383		6,383		166		362		1,021		1,213
NLFC 1999-LTL-1, Class X (IO) (rated AAA)		3,250		3,474		3,250		3,474		3,159		3,210
Total	$	73,006	$	76,368	$	58,371	$	61,838	$	58,859	$	62,318

Notes to Consolidated Financial Statements

(1)Dollar ~~Reflects~~amounts ~~face~~in ~~amount~~thousands, ~~or,~~except inper ~~the~~share ~~case~~amounts; oftotals ~~the~~may ~~NLFC~~not ~~1999-LTL-1~~add ~~Class~~due Xto ~~(IO~~rounding) ~~bond, amortized cost.~~

~~All~~September ~~credit ratings in the above table are as of June~~ 30, 2013. (unaudited)

19The Company evaluated each of its securities for other-than-temporary impairment at September 30, 2013, and determined that no other-than-temporary impairment charges on its securities were appropriate.

~~CapLease~~Unrealized gains and losses on securities at September 30, ~~Inc.~~2013 and ~~Subsidiaries~~December 31, 2012, included as a component of Accumulated Other Comprehensive Income (Loss) on the Company’s Consolidated Balance Sheet, consisted of the following, and did not include any other-than-temporary impairment charges:

Notes to Consolidated Financial Statements

	Sep 30, 2013			Dec 31, 2012
	Unaudited
Unrealized gains on securities available for sale	$	3,284		$	4,304
Unrealized losses on securities available for sale		(1,443	)		(3,824	)

~~(Dollar~~The ~~amounts~~following intable ~~thousands,~~summarizes ~~except~~the ~~per~~Company’s ~~share~~securities ~~amounts;~~in ~~totals~~an ~~may~~unrealized ~~not~~loss ~~add~~position ~~due~~as toof ~~rounding)~~September 30, 2013.

June 30, 2013 (unaudited)

Aggregate

Fair Value

Aggregate

Unrealized

Loss

Number of

Securities

In unrealized loss position 12 or more consecutive months

30,148

1,443

The ~~Company~~credit ~~evaluated~~rating ~~each~~on ofall ~~its~~3 securities in a continuous unrealized loss position for ~~other-~~more than~~-temporary~~ ~~impairment~~12 atmonths ~~June~~as of September 30, 2013,was B- and ~~determined~~those securities have a weighted average maturity of approximately 6.0 years. The Company believes that nonone of the unrealized losses on investment securities are other-than-temporary ~~impairment~~because ~~charges~~management onexpects ~~its~~the Company will receive all contractual principal and interest related to these investments. In addition, the Company did not have the intent to sell the securities ~~were~~or ~~appropriate~~believe it would be required to sell them as of September 30, 2013.

~~Unrealized~~At ~~gains~~September ~~and losses on securities at June~~ 30, 2013 and December 31, 2012, ~~included~~the asweighted aaverage ~~component~~effective ofinterest ~~Accumulated~~rate ~~Other~~(yield ~~Comprehensive~~to ~~Income~~maturity ~~(Loss)~~ on ~~the~~adjusted ~~Company’s~~cost ~~Consolidated~~basis) ~~Balance~~on ~~Sheet,~~securities ~~consisted~~was ofapproximately ~~the~~8.8% ~~following,~~ and ~~did~~8.4%, ~~not include any other-than-temporary impairment charges:~~respectively.

	Jun 30, 2013			Dec 31, 2012
	Unaudited
Unrealized gains on securities available for sale	$	3,069		$	4,304
Unrealized losses on securities available for sale		(2,582	)		(3,824	)

7. Assets Sold and Discontinued Operations

~~The~~Nine ~~following~~Months ~~table~~Ended ~~summarizes~~September ~~the Company’s securities in an unrealized loss position as of June~~ 30, 2013.

		Aggregate Fair Value				Aggregate Unrealized Loss				Number of Securities
In unrealized loss position 12 or more consecutive months		$	32,346			$	2,582				4

The Company did not sell any assets during the nine months ended September 30, 2013, and has not classified any assets as held for sale as of September 30, 2013.

~~Credit~~Nine ~~ratings~~Months onEnded ~~the~~September ~~4 securities in a continuous unrealized loss position for more than 12 months as of June~~ 30, 2013, range from AAA to B- with a weighted average of B and those securities have a weighted average maturity of approximately 6.0 years. The Company believes that none of the unrealized losses on investment securities are other-than-temporary because management expects the Company will receive all contractual principal and interest related to these investments. In addition, the Company did not have the intent to sell the securities or believe it would be required to sell them as of June 30, 2013. 2012

AtThe ~~June~~Company ~~30,~~sold ~~2013~~the ~~and~~following ~~December~~investments ~~31,~~during ~~2012,~~ the ~~weighted~~nine ~~average~~months ~~effective~~ended ~~interest~~September ~~rate (yield to maturity on adjusted cost basis) on securities was approximately 8.6% and 8.4%~~30, ~~respectively.~~2012:

7During July, the Company sold two securities investments. ~~Assets~~ ~~Sold~~The $2,379 face amount of Class A bonds and ~~Discontinued~~$2,000 face amount of Class B bonds in the CapLease 2005 CDO transaction were sold for total sales proceeds of $3,744, and the Company recognized a gain on investment during the quarter ended September 30, 2012 of $300. The gain is included as a component of “Gain on investment” in the Company’s Consolidated Statement of Operations. The aggregate carrying amount of the securities sold was $3,444 as of June 30, 2012.

~~Six~~During ~~Months~~June, ~~Ended~~the ~~June~~Company sold the vacant Johnston, Rhode Island property to the former tenant at the building. As part of the sale, the Company also settled its litigation with the former tenant regarding its end-of-lease surrender obligations. The Company sold the property for a cash purchase price of $9,750, before transaction expenses. The Company recognized a loss on such sale during the nine months ended September 30, ~~2013~~2012, of $15,229. The loss is included as a component of discontinued operations under the caption “Loss on investment” on the Company’s Consolidated Statement of Operations. The operating results of the sold property have been reclassified as a component of discontinued operations for all periods presented.

~~The Company did not sell any assets during the six months ended June 30, 2013, and has not classified any assets as held for sale as of June 30, 2013.~~ 20

~~Six~~CapLease, ~~Months~~Inc. ~~Ended~~and ~~June 30, 2012~~Subsidiaries

~~The~~Notes ~~Company sold one investment during the six months ended June 30, 2012. During June 2012, the Company sold the vacant Johnston, Rhode Island property~~ to the former tenant at the building. As part of the sale, the Company also settled its litigation with the former tenant regarding its end-of-lease surrender obligations. The Company sold the property for a cash purchase price of $9,750, before transactions expenses. The Company recognized a loss on such sale during the quarter ended June 30, 2012, of $15,229. The loss is included as a component of discontinued operations under the caption “Loss on investments” on the Company’s Consolidated ~~Statement~~Financial ~~of Operations. The operating results of the sold property have been reclassified as a component of discontinued operations for all periods presented.~~ Statements

~~8. Fair~~(Dollar ~~Value~~amounts in thousands, except per share amounts; totals may not add due to rounding)

~~The~~September ~~Company~~30, is2013 ~~required to disclose fair value information about all of its financial instruments~~ (~~as defined under prevailing accounting guidance~~unaudited), whether or not these instruments are measured at fair value on the Company’s Consolidated Balance Sheet. Under such guidance, substantially all of the Company’s assets and liabilities other than its owned property investments are classified as financial instruments.

208. Fair Value

~~CapLease~~The Company is required to disclose fair value information about all of its financial instruments (as defined under prevailing accounting guidance), ~~Inc~~whether or not these instruments are measured at fair value on the Company’s Consolidated Balance Sheet. Under such guidance, substantially all of the Company’s assets and ~~Subsidiaries~~liabilities other than its owned property investments are classified as financial instruments.

~~Notes~~The Company estimates that the fair values of cash and cash equivalents, other assets, accounts payable and other liabilities, and dividends and distributions payable approximate their carrying values due to ~~Consolidated~~the ~~Financial~~short-term ~~Statements~~maturities of these items.

~~(Dollar~~The ~~amounts~~carrying ~~in thousands~~amounts, ~~except~~notional ~~per~~or ~~share~~face amounts; ~~totals~~and ~~may~~estimated ~~not~~fair ~~add~~values ~~due~~of tothe ~~rounding~~Company’s other financial instruments (as defined under GAAP) at September 30, 2013 and December 31, 2012, are as follows:

June 30, 2013 (unaudited)

	Carrying Amount				Notional Amount				Estimated Fair Value
	9/30/2013		12/31/2012		9/30/2013		12/31/2012		9/30/2013		12/31/2012
	Unaudited				Unaudited				Unaudited
Assets:
Loans held for investment	$	23,896	$	27,032	$	28,099	$	31,329	$	26,483	$	31,303
Commercial mortgage-backed securities		59,774		62,318		72,598		76,368		59,774		62,318
Liabilities:
Mortgages on real estate investments	$	995,326	$	1,012,075	$	994,326	$	1,010,754	$	1,039,454	$	1,072,963
Credit agreements		128,899		67,655		128,899		67,655		128,899		67,655
Secured term loan		60,654		72,417		60,654		72,417		61,538		68,750
Convertible senior notes		19,210		19,210		19,210		19,210		19,208		19,202
Other long-term debt		30,930		30,930		30,930		30,930		26,775		29,736
Derivative liabilities		45		–		30,853		–		45		-

The ~~Company~~fair ~~estimates~~values ~~that~~indicated ~~the~~above ~~fair~~are ~~values~~indicative of ~~cash~~the interest rate and ~~cash~~credit ~~equivalents~~spread environment as of September 30, ~~other~~2013 ~~assets~~and December 31, ~~accounts~~2012, ~~payable~~respectively, and ~~other~~may ~~liabilities~~not take into consideration the effects of subsequent changes in interest rates, ~~and~~credit ~~dividends~~spreads and ~~distributions~~ratings ~~payable~~of ~~approximate~~the ~~their~~underlying ~~carrying~~tenants ~~values~~on ~~due~~the related leases. The methodologies used and key assumptions made to ~~the~~estimate ~~short-term~~fair ~~maturities~~values ofare ~~these~~as ~~items.~~follows:

~~The~~Loans ~~carrying~~held ~~amounts,~~for ~~notional~~investment— orThe ~~face amounts and estimated~~ fair ~~values~~value of the Company’s ~~other~~fixed-rate ~~financial~~loan ~~instruments~~portfolio ~~(as~~is ~~defined~~estimated ~~under~~with ~~GAAP)~~a atdiscounted ~~June~~cash 30flow analysis, ~~2013~~utilizing scheduled cash flows and ~~December~~discount ~~31,~~rates ~~2012,~~estimated ~~are~~by asmanagement ~~follows:~~to approximate those that a willing buyer and seller might use.

		Carrying Amount				Notional Amount				Estimated Fair Value
		6/30/2013		12/31/2012		6/30/2013		12/31/2012		6/30/2013		12/31/2012
Assets:		Unaudited				Unaudited				Unaudited
	Loans held for investment	$	24,118	$	27,032	$	28,350	$	31,329	$	26,605	$	31,303
	Commercial mortgage-backed securities		58,859		62,318		73,006		76,368		58,859		62,318
	Derivative assets		97	–			31,000	–			97	–
Liabilities:
	Mortgages on real estate investments	$	991,483	$	1,012,075	$	990,442	$	1,010,754	$	1,037,984	$	1,072,963
	Credit agreements		99,457		67,655		99,457		67,655		99,457		67,655
	Secured term loan		63,045		72,417		63,045		72,417		63,266		68,750
	Convertible senior notes		19,210		19,210		19,210		19,210		19,204		19,202
	Other long-term debt		30,930		30,930		30,930		30,930		26,754		29,736

Commercial mortgage-backed securities— The fair values of the securities reflect management’s best estimate and require a considerable amount of judgment and assumptions. Management evaluates a variety of inputs and then estimates fair value based on those inputs. The primary inputs evaluated by management are broker quotations, collateral values, subordination levels, and liquidity of the security.

~~The~~Credit ~~fair~~agreements— ~~values~~Management ~~indicated~~believes ~~above~~that ~~are indicative of~~ the stated interest rate ~~and~~(which ~~credit~~floats ~~spread~~based ~~environment~~on asshort-term ofinterest ~~June~~rates) ~~30,~~approximates ~~2013~~market ~~and~~rates ~~December~~(when ~~31,~~compared ~~2012,~~to ~~respectively,~~similar ~~and~~credit ~~may~~facilities ~~not~~with ~~take~~similar ~~into~~credit ~~consideration~~risk). ~~the~~As ~~effects of subsequent changes in interest rates~~such, ~~credit~~the ~~spreads~~fair ~~and~~value ~~ratings~~ of ~~the~~these ~~underlying~~obligations ~~tenants~~is onestimated ~~the~~to ~~related~~be ~~leases.~~equal ~~The methodologies used and key assumptions made~~ to ~~estimate~~the ~~fair~~outstanding ~~values~~principal ~~are as follows:~~amount.

~~Loans~~Mortgages ~~held~~on ~~for~~real ~~investment~~estate investments and secured term loan — The fair value of mortgages payable on real estate investments and the ~~Company’s~~secured ~~fixed-rate~~term loan ~~portfolio~~ is estimated ~~with~~using a discounted cash flow analysis, ~~utilizing~~based ~~scheduled~~on ~~cash~~management’s ~~flows~~estimates ~~and~~of ~~discount~~market interest rates. ~~estimated~~For bymortgages ~~management~~where tothe ~~approximate~~Company ~~those~~has ~~that~~an aearly ~~willing~~prepayment ~~buyer~~right, ~~and~~management ~~seller~~also ~~might~~considers ~~use~~the prepayment amount to evaluate the fair value.

~~Commercial~~Convertible ~~mortgage-backed~~senior ~~securities—~~notes —The fair ~~values~~value ofis ~~the~~estimated ~~securities~~using ~~reflect management’s best estimate and require~~ a ~~considerable~~discounted ~~amount~~cash offlow ~~judgment~~analysis, ~~and assumptions. Management evaluates a variety of inputs and then estimates fair value~~ based on ~~those inputs. The primary inputs evaluated by~~ management’s ~~are~~estimates ~~broker~~of ~~quotations,~~market ~~collateral~~interest ~~values~~rates, ~~subordination levels,~~ and ~~liquidity~~indications of ~~the~~market ~~security~~yields, where available.

Credit agreements— Management believes that the stated interest rate (which floats based on short-term interest rates) approximates market rates (when compared to similar credit facilities with similar credit risk). As such, the fair value of these obligations is estimated to be equal to the outstanding principal amount.21

Mortgages on real estate investments and secured term loan — The fair value of mortgages payable on real estate investments and the secured term loan is estimated using a discounted cash flow analysis CapLease, ~~based on management’s estimates of market interest rates~~Inc. ~~For~~and ~~mortgages where the Company has an early prepayment right, management also considers the prepayment amount to evaluate the fair value.~~Subsidiaries

~~Convertible~~Notes ~~senior~~to ~~notes~~Consolidated ~~—The~~Financial ~~fair value is estimated using a discounted cash flow analysis, based on management’s estimates of market interest rates, and indications of market yields, where available.~~ Statements

~~Other~~(Dollar ~~long-term~~amounts ~~debt—~~in ~~The~~thousands, ~~fair~~except ~~value~~per ofshare ~~the~~amounts; ~~Company’s~~totals ~~other~~may ~~long-term~~not ~~debt~~add isdue ~~estimated~~to ~~using a discounted cash flow analysis, based on management’s estimates of market interest rates.~~ rounding)

OnSeptember ~~January 1~~30, ~~2008,~~2013 ~~the Company adopted accounting guidance~~ (~~codified at FASB ASC 820~~unaudited) that defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. The guidance does not impose any new requirements around which assets and liabilities are to be measured at fair value, and instead applies to asset and liability balances required or permitted to be measured at fair value under existing accounting pronouncements.

21Other long-term debt— The fair value of the Company’s other long-term debt is estimated using a discounted cash flow analysis, based on management’s estimates of market interest rates.

~~CapLease,~~Derivative ~~Inc~~liabilities— This instrument represents a hedging and risk management transaction involving an interest rate swap. It has been valued by reference to market quotations and ~~Subsidiaries~~counterparty credit risks.

~~Notes~~On January 1, 2008, the Company adopted accounting guidance (codified at FASB ASC 820) that defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. The guidance does not impose any new requirements around which assets and liabilities are to ~~Consolidated~~be ~~Financial~~measured ~~Statements~~at fair value, and instead applies to asset and liability balances required or permitted to be measured at fair value under existing accounting pronouncements.

~~(Dollar~~The ~~amounts~~guidance inapplies ~~thousands~~principally to the Company’s securities investments, ~~except~~all ~~per~~of ~~share~~which ~~amounts;~~are ~~totals~~classified ~~may~~as ~~not~~available ~~add~~for ~~due~~sale for accounting purposes and, as such, are measured at fair value on a recurring basis on the Company’s financial statements. The guidance also applies to ~~rounding)~~the Company’s derivative transactions which, as of September 30, 2013, comprised a single interest rate swap transaction that the Company entered into during the nine months ended September 30, 2013. See Note 13.

~~June~~FASB ~~30,~~ASC ~~2013~~820 ~~(unaudited)~~establishes a valuation hierarchy based on the transparency of inputs used in the valuation of an asset or liability. Classification is based on the lowest level of inputs that is significant to the fair value measurement. The valuation hierarchy contains three levels:

~~The~~● ~~guidance~~Level ~~applies~~1 ~~principally~~– toQuoted prices are available in active markets for identical assets or liabilities at the reporting date. As of September 30, 2013, the Company’s has not classified any of its securities ~~investments,~~or ~~all~~its one outstanding derivative transaction as Level 1. ● Level 2 – Pricing inputs other than quoted prices included within Level 1 that are observable for substantially the full term of ~~which~~the asset or liability. Level 2 assets include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities that are not active; and inputs other than quoted prices that are observable, such as models or other valuation methodologies. As of September 30, 2013, the Company has classified three securities in total as ~~available~~Level ~~for~~2: ~~sale~~two ~~for~~certificated ~~accounting~~mortgage ~~purposes~~loans (one with CVS Corporation as underlying tenant and the other with Koninklijke Ahold, N.V. as ~~such~~underlying tenant) and its sole remaining generic commercial mortgage-backed security investment (BACM 2006-4, ~~are~~Class ~~measured~~H), atas ~~fair~~Level ~~value~~2. onThe amajority ~~recurring~~of ~~basis~~the oninputs used to estimate the fair value of the Company’s ~~financial~~derivatives ~~statements~~fall within Level 2 of the fair value hierarchy. The ~~guidance~~Company ~~also~~does ~~applies~~utilize credit valuation adjustments in estimating the fair value of derivatives, and such credit valuation adjustments utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2013, the Company’s assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative ~~transactions~~positions ~~which~~and determined that the credit valuation adjustments are not significant to the overall valuation of the derivatives. Therefore, the Company has also classified its one outstanding derivative transaction as of ~~June~~September 30, 2013, ~~comprised~~as Level 2 in the fair value hierarchy. ● Level 3 – Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. These valuations require a considerable amount of judgment and assumptions. As of September 30, 2013, the Company has classified all of its securities that are backed primarily by single ~~interest~~tenant loan collateral, other than the CVS and Ahold backed certificated loans discussed above, as Level 3. The valuation technique utilized by management is a discounted cash flow analysis. Management evaluates a variety of inputs to estimate the applicable discount rate. ~~swap~~The ~~transaction~~primary ~~that~~inputs evaluated by management in estimating the discount rate are broker quotations (observable), collateral values (observable), subordination levels (observable), and liquidity of the security (unobservable). These inputs are the factors employed by management and to its knowledge other parties in determining where to price actual transactions. The Company’s ~~entered~~securities ~~into~~available ~~during~~for sale that are classified as Level 3 are unique in that in most cases the ~~quarter~~Company ~~ended~~owns ~~June~~the 30entire bond class. As a result, ~~2013~~the broker quotes obtained by the Company reflect expected pricing rather than actual trades and may also reflect transactions in inactive markets. ~~See~~Therefore, ~~Note~~the 13Company believes Level 3 is the appropriate classification in the fair value hierarchy for the Company’s available for sale securities.

FASB ASC 820 establishes a valuation hierarchy based on the transparency of inputs used in the valuation of an asset or liability. Classification is based on the lowest level of inputs that is significant to the fair value measurement. The valuation hierarchy contains three levels:22

●CapLease, ~~Level~~Inc. 1and ~~– Quoted prices are available in active markets for identical assets or liabilities at the reporting date.~~Subsidiaries

AsNotes ofto ~~June~~Consolidated ~~30,~~Financial ~~2013, the Company has not classified any of its securities or its one outstanding derivative transaction as Level 1.~~Statements

●(Dollar ~~Level~~amounts 2in –thousands, ~~Pricing~~except ~~inputs~~per ~~other~~share than quoted prices included within Level 1 that are observable for substantially the full term of the asset or liability. Level 2 assets include quoted prices for similar assets or liabilities in active marketsamounts; ~~quoted~~totals ~~prices~~may ~~for identical or similar assets or liabilities that are~~ not ~~active;~~add ~~and~~due ~~inputs~~to ~~other than quoted prices that are observable, such as models or other valuation methodologies.~~rounding)

AsSeptember ~~of June~~ 30, 2013, ~~the Company has classified three securities in total as Level 2: two certificated mortgage loans~~ (~~one with CVS Corporation as underlying tenant and the other with Koninklijke Ahold, N.V. as underlying tenant~~unaudited) ~~and its sole remaining generic commercial mortgage-backed security investment (BACM 2006-4, Class H), as Level 2.~~

The ~~majority~~table ofbelow ~~the~~presents ~~inputs used to estimate~~ the fair value of the Company’s ~~derivatives~~securities ~~fall~~investments ~~within~~and ~~Level 2 of~~ the fair value ~~hierarchy. The Company does utilize credit valuation adjustments in estimating the fair value~~ of ~~derivatives, and such credit valuation adjustments utilize Level 3 inputs, such as estimates of current credit spreads to evaluate~~ the ~~likelihood~~outstanding ofderivative ~~default~~transaction ~~by itself and its counterparties. However,~~ as of ~~June~~September 30, 2013, ~~the~~aggregated ~~Company~~by ~~assessed~~ the ~~significance~~level ofin the ~~impact~~fair ofvalue ~~the~~hierarchy ~~credit~~within ~~valuation~~which ~~adjustments~~those onmeasurements ~~the overall valuation of its derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of the derivatives~~fall. ~~Therefore, the Company has also classified its one outstanding derivative transaction as of June 30, 2013, as Level 2 in the fair value hierarchy.~~

● Level 3 – Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. These valuations require a considerable amount of judgment and assumptions.

	Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at September 30,2013
Assets
Securities available for sale	$	–	$	23,529	$	36,245	$	59,774

Liabilities
Derivative liabilities	$	–	$	45	$	–	$	45

AsA of50 ~~June~~basis ~~30,~~point ~~2013,~~(or ~~the~~0.50%) ~~Company~~change ~~has~~in ~~classified all of its securities that are backed primarily by single tenant loan collateral, other than~~ the ~~CVS~~discount ~~and~~rate ~~Ahold backed certificated loans discussed above, as Level 3. The valuation technique~~ utilized ~~by management is a discounted cash flow analysis. Management evaluates a variety of inputs~~ to estimate ~~the~~fair ~~applicable~~value ~~discount~~would ~~rate.~~result ~~The~~in ~~primary~~a ~~inputs~~change ~~evaluated by management~~ in ~~estimating~~ the ~~discount~~fair ~~rate~~value ~~are broker quotations (observable), collateral values (observable), subordination levels (observable), and liquidity~~ of ~~the security (unobservable). These inputs are the factors employed by management and to its knowledge other parties in determining where to price actual transactions. The Company’s~~ securities ~~available for sale~~ that are classified as Level 3 ~~are~~of ~~unique~~approximately in$744 ~~that~~as inof ~~most~~September ~~cases the Company owns the entire bond class. As a result~~30, ~~the broker quotes obtained by the Company reflect expected pricing rather than actual trades and may also reflect transactions in inactive markets~~2013. ~~Therefore, the Company believes Level 3 is the appropriate classification in the fair value hierarchy for the Company’s available for sale securities.~~

2223

CapLease, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(Dollar amounts in thousands, except per share amounts; totals may not add due to rounding)

~~June~~September 30, 2013 (unaudited)

The following table ~~below~~summarizes ~~presents~~ the ~~fair~~change ~~value~~in of the ~~Company’s~~fair ~~securities~~value ~~investments~~for ~~and~~Level ~~the~~3 ~~fair~~items ~~value~~for of the ~~outstanding~~three ~~derivative~~and ~~transaction~~nine asmonths ofended ~~June~~September 30, 2013, ~~aggregated~~and bySeptember ~~the~~30, ~~level~~2012: ~~in the fair value hierarchy within which those measurements fall.~~

	Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Balance at June 30,2013
	Three months ended September 30,						Nine months ended September 30,
Assets
Securities available for sale	2013			2012			2013			2012
Securities available for sale	$	–		$	23,838		$	35,021		$	58,859
Beginning balance	$	35,021		$	37,246		$	36,034		$	32,829
Derivative assets	–				97		–				97
Gains (losses) included in net income (loss):
Included in interest income		84			72			264			228
Gains (losses) included in other comprehensive income		1,480			544			2,724			6,713
Purchases, sales, issuances and settlements (net)		(340	)		(4,081	)		(2,777	)		(5,989	)
Transfers in (out) of Level 3	–			–			–			–
Ending balance	$	36,245		$	33,781		$	36,245		$	33,781

~~A 50 basis point (or 0~~9.~~50%)~~ Other ~~change~~Assets ~~in the discount rate utilized to estimate fair value would result in a change in the fair value of securities that are classified as Level 3 of approximately $731 as of June 30, 2013.~~

~~The~~Other ~~following~~assets ~~table~~as ~~summarizes~~of ~~the~~September ~~change in the fair value for Level 3 items for the three and six months ended June~~ 30, 2013 and ~~June~~December 3031, 2012:, consisted of the following:

	Three months ended June 30,						Six months ended June 30,
	Sep 30, 2013			Dec 31, 2012
Securities available for sale	2013			2012			2013			2012
	Unaudited
Beginning balance	$	34,722		$	37,077		$	36,034		$	32,829
Receivables and accrued interest	$	9,630		$	8,713
Gains (losses) included in net income (loss):
Prepaid expenses and deposits		2,035			1,798
Included in interest income		102			90			180			156
Mortgage lender reserve accounts		28,861			30,758
Gains (losses) included in other comprehensive income		1,073			496			1,244			6,169
Restricted cash		402			413
Purchases, sales, issuances and settlements (net)		(876	)		(417	)		(2,437	)		(1,908	)
Amounts held by servicer		1,053			932
Transfers in (out) of Level 3	–			–			–			–
Accrued rental income		33,708			35,144
Ending balance	$	35,021		$	37,246		$	35,021		$	37,246
Debt issuance costs, net		5,492			5,775
Deferred leasing costs, net		6,559			4,699
Investment in statutory trust		930			930
Other		764			398
Total	$	89,434		$	89,560

~~9. Other~~Mortgage ~~Assets~~lender reserve accounts represent cash on deposit with the lender on the Company’s owned properties to fund future debt service or other future property related costs such as taxes and insurance, repairs and maintenance, tenant improvement allowances and other re-tenanting costs.

~~Other~~10. Debt ~~assets~~Obligations ~~as of June 30, 2013 and December 31, 2012, consisted of the following:~~

	Jun 30, 2013		Dec 31, 2012
	Unaudited
Receivables and accrued interest	$	10,053	$	8,713
Prepaid expenses and deposits		1,418		1,798
Mortgage lender reserve accounts		25,707		30,758
Restricted cash		302		413
Amounts held by servicer		1,330		932
Derivative assets		97		-
Accrued rental income		33,405		35,144
Debt issuance costs, net		5,474		5,775
Deferred leasing costs, net		6,497		4,699
Investment in statutory trust		930		930
Other		787		398
Total	$	86,000	$	89,560

Credit Agreements

~~Mortgage~~Credit ~~lender~~Agreement ~~reserve accounts represent cash on deposit~~ with ~~the~~Wells ~~lender~~Fargo ~~on the Company’s owned properties to fund future debt service or other future property related costs such as taxes and insurance~~Bank, ~~repairs and maintenance, tenant improvement allowances and other re-tenanting costs~~N.A.

23During June 2012, the Company entered into a senior secured revolving credit agreement with Wells Fargo Bank, N.A. The agreement authorizes the Company to borrow up to $100,000 from time to time from Wells Fargo Bank. This credit agreement is the Company’s primary short-term borrowing facility.

~~CapLease~~During June 2013, ~~Inc~~the Company entered into an amendment to the credit agreement with Wells Fargo Bank. The amendment temporarily increases the Company’s aggregate borrowing capacity under the revolving credit agreement to up to $150,000 (from up to $100,000). The additional $50,000 in aggregate borrowing capacity will remain available to the Company until December 21, 2013, provided that the Company may extend the increased capacity for an additional six months until June 21, 2014, subject to the payment of an extension fee and ~~Subsidiaries~~the satisfaction of certain other routine conditions.

~~Notes to Consolidated Financial Statements~~24

~~(Dollar amounts in thousands~~CapLease, ~~except~~Inc. ~~per~~and ~~share amounts; totals may not add due to rounding)~~Subsidiaries

~~June~~Notes ~~30,~~to ~~2013~~Consolidated ~~(unaudited)~~Financial Statements

~~10. Debt~~(Dollar ~~Obligations~~amounts in thousands, except per share amounts; totals may not add due to rounding)

~~Credit~~September ~~Agreements~~30, 2013 (unaudited)

~~Credit~~The ~~Agreement~~credit agreement with Wells Fargo ~~Bank~~is for a three year term scheduled to mature on June 28, N2015, although the Company has an option to extend the term for one additional year subject to the payment of an extension fee and the satisfaction of certain other routine conditions.A The Company is obligated to pay interest on its borrowings pursuant to the agreement at a floating rate of LIBOR plus 275 basis points. The Company may select a one month, three month or six month interest period for its LIBOR-based borrowings.

~~During~~As ~~June 2012~~of September 30, 2013, the collateral pool consisted of 21 real properties: the 11 Kroger grocery store properties the Company ~~entered~~owns ~~into~~located ain ~~senior~~GA, ~~secured~~TN ~~revolving~~and ~~credit~~KY, ~~agreement~~the ~~with~~two ~~Wells~~multi-tenant ~~Fargo~~properties ~~Bank~~the Company owns in Omaha, NNE, the property the Company owns in Columbus, OH leased to Abbott Laboratories, the property the Company owns in Bloomington, IN leased to Baxter International, Inc.A, the property the Company owns in Louisville, KY leased to Michelin North America, Inc., ~~The~~the ~~agreement~~two ~~authorizes~~properties the Company owns in Englewood, CO (one leased to ~~borrow~~Comcast upCorporation and the other to ~~$100~~Pulte Mortgage LLC),~~000~~ ~~from~~the ~~time~~property the Company owns in Plano, TX leased to ~~time~~Capital ~~from~~One ~~Wells~~Financial ~~Fargo~~Corporation, ~~Bank~~the property the Company owns in Ashland, VA leased to Vitamin Shoppe Industries Inc. ~~This~~and ~~credit~~the ~~agreement~~property isthe Company owns in Malvern, PA leased to Teva Pharmaceuticals Industries Limited. Advance rates on these properties are generally equal to 60% or 65%, depending on the property, of the lender’s as-is appraised value. The Company is authorized to add additional real estate properties to the collateral pool over time subject to the lender’s ~~primary~~approval ~~short-term~~of ~~borrowing~~the ~~facility~~property, and the Company has done so and expects to continue to do so as it adds additional real estate properties and as mortgage debt matures on properties the Company currently owns. The Company is also authorized to remove assets provided it repays any associated borrowings at par.

~~During June 2013, the Company entered into an amendment to the credit agreement with Wells Fargo Bank.~~ The ~~amendment temporarily increases the~~ Company’s ~~aggregate~~borrowings ~~borrowing~~are ~~capacity~~a ~~under~~recourse ~~the revolving credit agreement to up to $150~~obligation,~~000~~ ~~(from~~and upCapLease tohas ~~$100,000).~~guaranteed ~~The~~all ~~additional~~obligations ~~$50,000 in aggregate borrowing capacity will remain available to the Company for a period~~ of ~~six~~its ~~months~~various ~~until~~subsidiaries ~~December 21, 2013, provided~~ that ~~the~~act ~~Company~~as ~~may~~borrowers ~~extend~~under the ~~increased~~agreement ~~capacity~~and ~~for~~own ~~an additional six months until June 21, 2014, subject to~~ the ~~payment~~real ofproperty anthat ~~extension~~comprises ~~fee and~~ the ~~satisfaction~~initial ofcollateral ~~certain other routine conditions~~pool.

The ~~credit~~Company ~~agreement~~made ~~with~~various ~~Wells~~customary ~~Fargo~~representations isand ~~for~~warranties aand ~~three~~affirmative ~~year~~and ~~term~~negative ~~scheduled~~covenants topursuant ~~mature on June 28, 2015, although the Company has an option~~ to ~~extend~~ the ~~term~~credit ~~for~~agreement, ~~one~~and ~~additional~~agreed ~~year subject~~ to ~~the~~various ~~payment~~customary ofevents ~~an extension fee and the satisfaction~~ of ~~certain other routine conditions~~defaults. The Company isalso ~~obligated~~agreed to ~~pay~~various ~~interest~~financial oncovenants ~~its~~which ~~borrowings~~it ~~pursuant~~is required to ~~the~~be ~~agreement~~in atcompliance awith ~~floating~~during ~~rate~~the term of ~~LIBOR~~the ~~plus~~credit ~~275 basis points~~agreement. The ~~Company~~principal ~~may~~financial ~~select~~covenants aare ~~one~~as ~~month, three month or six month interest period for its LIBOR-based borrowings.~~follows:

As● ofMaximum ~~June 30, 2013, the collateral pool consisted of 19 real properties~~Leverage: ~~the~~The ~~11 Kroger grocery store properties the~~ Company’s ~~owns~~total ~~located~~indebtedness individed ~~GA,~~by ~~TN and KY,~~ the ~~two~~capitalized ~~multi-tenant~~value ~~properties~~of ~~the~~its ~~Company~~portfolio ~~owns~~based inon ~~Omaha,~~an ~~NE, the property the Company owns in Columbus, OH leased to Abbott Laboratories, the property the Company owns in Bloomington, IN leased to Baxter International, Inc~~8.,0% ~~the~~capitalization ~~property~~rate ~~the~~may ~~Company~~not ~~owns~~exceed in77% ~~Louisville,~~initially ~~KY leased to Michelin North America, Inc., the two properties the Company owns in Englewood, CO (one leased to Comcast Corporation~~ and ~~the~~declining ~~other~~ to ~~Pulte Mortgage LLC) and the property the Company owns in Plano, TX leased to Capital One Financial Corporation. Advance rates on these properties are generally equal to 60~~70% ~~or 65%, depending on the property, of the lender’s as-is appraised value. The Company is authorized to add additional real estate properties to the collateral pool~~ over ~~time subject to~~ the ~~lender’s~~agreement approval of the property, and the Company has done so and expects to continue to do so as it adds additional real estate properties and as mortgage debt matures on properties the Company currently ownsterm. ~~The Company is also authorized to remove assets provided it repays any associated borrowings at par.~~

● Minimum Fixed Charge Coverage: The Company’s ~~borrowings~~adjusted ~~are~~EBITDA a(as ~~recourse~~defined ~~obligation,~~in ~~and~~the ~~CapLease~~credit ~~has~~agreement) ~~guaranteed~~divided ~~all~~by ~~obligations~~its fixed charges (basically interest expense, principal payments, net of ~~its~~principal ~~various~~received, ~~subsidiaries~~and ~~that~~preferred ~~act~~dividends) asmay ~~borrowers~~not ~~under~~be less than 100% initially increasing to 105% over the agreement term. For this purpose, EBITDA excludes non-recurring gains and ~~own~~losses ~~the~~and ~~real~~stock-based ~~property~~compensation ~~that~~and ~~comprises~~is adjusted to remove the ~~initial~~impact ~~collateral~~of ~~pool~~straight-line rents.

~~The~~● ~~Company~~Minimum ~~made~~Debt ~~various~~Yield: ~~customary~~The ~~representations~~Company’s ~~and~~total ~~warranties~~net ~~and~~operating ~~affirmative~~income ~~and~~(as ~~negative~~defined ~~covenants~~in ~~pursuant to~~ the credit agreement,) ~~and~~divided ~~agreed~~by tototal ~~various~~liabilities ~~customary~~may ~~events~~not ofbe ~~defaults.~~less ~~The~~than ~~Company~~9% ~~also~~initially ~~agreed~~increasing to ~~various~~9.75% ~~financial~~over ~~covenants~~the ~~which~~agreement itterm. ~~will~~For bethis ~~required~~purpose, tototal benet inoperating ~~compliance~~income ~~with~~includes ~~during~~interest ~~the~~income ~~term~~on of the ~~credit~~Company’s ~~agreement.~~loans ~~The~~and ~~principal~~securities ~~financial~~and ~~covenants~~rental revenues are asadjusted ~~follows:~~to remove the impact of straight-line rents.

● ~~Maximum~~Minimum ~~Leverage~~Interest Coverage Ratio: The Company’s ~~total~~adjusted ~~indebtedness~~EBITDA divided by ~~the~~interest ~~capitalized~~expense ~~value~~may ofnot ~~its~~be ~~portfolio~~less ~~based~~than ~~on an 8.0~~140% ~~capitalization rate may not exceed 77%~~ initially ~~and~~increasing ~~declining~~ to 70150% over the agreement term.

● Minimum ~~Fixed~~Tangible ~~Charge~~Net ~~Coverage~~Worth: The Company’s ~~adjusted~~tangible ~~EBITDA~~net ~~(as~~worth ~~defined in the credit agreement) divided by its fixed charges~~ (basically ~~interest~~stockholders’ ~~expense,~~equity ~~principal~~before ~~payments,~~accumulated ~~net~~depreciation ~~of principal received,~~ and ~~preferred dividends~~amortization) may not be less than ~~100~~85% ~~initially~~of ~~increasing~~such totangible ~~105%~~net ~~over~~worth ~~the~~as ~~agreement~~of ~~term.~~June ~~For this purpose~~29, ~~EBITDA~~2012 ~~excludes~~plus ~~non-recurring~~80% ~~gains~~of ~~and~~net ~~losses~~proceeds ~~and~~of ~~stock-based~~any ~~compensation~~future ~~and~~equity ~~is adjusted to remove the impact of straight-line rents~~issuances.

24● Maximum Dividends: Cash dividends to CapLease shareholders may not exceed the greater of (i) the amount required to maintain REIT status and avoid the payment of income or excise tax and (ii) 95% of adjusted funds from operations (as defined in the credit agreement). For this purpose, funds from operations excludes non-recurring gains and losses.

~~CapLease, Inc. and Subsidiaries~~25

~~Notes~~CapLease, toInc. ~~Consolidated~~and ~~Financial Statements~~Subsidiaries

~~(Dollar~~Notes ~~amounts~~to inConsolidated ~~thousands,~~Financial ~~except per share amounts; totals may not add due to rounding)~~Statements

~~June~~(Dollar 30amounts in thousands, ~~2013~~except ~~(unaudited~~per share amounts; totals may not add due to rounding)

●September ~~Minimum~~30, ~~Debt~~2013 ~~Yield: The Company’s total net operating income~~ (~~as defined in the credit agreement~~unaudited) divided by total liabilities may not be less than 9% initially increasing to 9.75% over the agreement term. For this purpose, total net operating income includes interest income on the Company’s loans and securities and rental revenues are adjusted to remove the impact of straight-line rents.

●As ~~Minimum~~of ~~Interest~~September ~~Coverage~~30, ~~Ratio:~~2013, ~~The~~the Company’s ~~adjusted~~was ~~EBITDA~~in ~~divided~~compliance bywith ~~interest expense may not be less than 140% initially increasing to 150% over~~ the ~~agreement~~above ~~term~~financial covenants.

●Credit ~~Minimum~~Agreement ~~Tangible~~with ~~Net~~KeyBank Worth: The Company’s tangible net worth (basically stockholders’ equity before accumulated depreciation and amortization) may not be less than 85% of such tangible net worth as of June 29, 2012 plus 80% of net proceeds of any future equity issuancesN.A.

●During ~~Maximum~~October ~~Dividends:~~2012, ~~Cash~~the ~~dividends~~Company toentered ~~CapLease~~into ~~shareholders~~a ~~may~~senior ~~not~~secured ~~exceed~~credit ~~the~~agreement ~~greater~~with ofKeyBank ~~(i)~~National ~~the~~Association, ~~amount~~pursuant ~~required~~ to ~~maintain~~which ~~REIT~~KeyBank ~~status~~made ~~and~~a ~~avoid~~$10,000 term loan to the ~~payment~~Company. ofThe ~~income~~proceeds orof ~~excise~~the ~~tax~~term ~~and~~loan ~~(ii)~~were ~~95%~~utilized ofto ~~adjusted~~repay ~~funds~~in ~~from~~full ~~operations~~and ~~(as~~terminate ~~defined~~a inpredecessor ~~the~~senior secured credit agreement). ~~For~~with ~~this~~Wells ~~purpose~~Fargo Bank, ~~funds~~N.A., ~~from~~entered ~~operations~~into ~~excludes~~in ~~non-recurring~~July ~~gains and losses~~2010.

AsThe ofcredit ~~June~~agreement 30with KeyBank is for a three year term scheduled to mature on October 12, ~~2013~~2015, although the Company ~~was~~has two successive options to extend the maturity date, in ~~compliance~~each ~~with~~case for one additional year, subject to the ~~above~~payment ~~financial~~of ~~covenants~~an extension fee and the satisfaction of certain other routine conditions. The Company is obligated to pay interest on its borrowings pursuant to the agreement at a floating rate of LIBOR plus 300 basis points. The Company may select a one month, two month or three month interest period for its LIBOR-based borrowings.

~~Credit~~The ~~Agreement~~collateral ~~with~~pool consists principally of fully amortizing mortgage notes on various real properties owned by the Company. Debt service on those notes is funded directly by rent paid by the tenant, and is expected to fully amortize the outstanding principal balance of the KeyBank Nloan over the loan term.A.

~~During~~The ~~October 2012, the~~ Company’s ~~entered~~borrowings ~~into~~are a ~~senior~~recourse ~~secured credit agreement with KeyBank National Association~~obligation, ~~pursuant~~and toCapLease ~~which~~has ~~KeyBank~~guaranteed ~~made~~all aobligations ~~$10,000~~of ~~term~~its ~~loan~~subsidiary tothat ~~the~~acts ~~Company.~~as ~~The~~borrower ~~proceeds~~under of the ~~term~~agreement ~~loan were utilized to repay in full~~ and ~~terminate~~owns athe ~~predecessor~~notes ~~senior~~that ~~secured~~comprise ~~credit~~the ~~agreement~~collateral ~~with Wells Fargo Bank, N~~pool.~~A., entered into in July 2010.~~

The ~~credit~~Company ~~agreement~~made ~~with~~various ~~KeyBank~~customary isrepresentations ~~for~~and awarranties ~~three~~and ~~year~~affirmative ~~term~~and ~~scheduled~~negative tocovenants ~~mature~~pursuant onto ~~October~~the ~~12,~~credit ~~2015~~agreement, ~~although~~and ~~the~~agreed ~~Company~~to ~~has~~various ~~two~~customary ~~successive~~events ~~options~~of todefaults. ~~extend~~The ~~the~~Company ~~maturity~~also ~~date,~~agreed into ~~each~~various ~~case~~financial ~~for~~covenants ~~one~~which ~~additional~~it ~~year,~~is ~~subject~~required to ~~the~~be ~~payment~~in ofcompliance anwith ~~extension~~during ~~fee and~~ the ~~satisfaction~~term of ~~certain~~the ~~other~~credit ~~routine conditions~~agreement. The ~~Company~~financial iscovenants, ~~obligated~~as towell ~~pay~~as ~~interest~~the onrepresentations ~~its~~and ~~borrowings~~warranties, ~~pursuant~~affirmative toand ~~the~~negative ~~agreement~~covenants, atand aevents ~~floating~~of ~~rate~~default, ofclosely ~~LIBOR~~conform ~~plus~~to ~~300~~those ~~basis~~included ~~points.~~in ~~The~~the Company’s ~~may~~senior ~~select~~secured acredit ~~one~~agreement ~~month,~~with ~~two~~Wells ~~month~~Fargo ordescribed ~~three month interest period for its LIBOR-based borrowings~~above.

~~The~~As ~~collateral pool consists principally~~ of ~~fully~~September ~~amortizing~~30, ~~mortgage~~2013, ~~notes on various real properties owned by~~ the Company. ~~Debt~~was ~~service~~in oncompliance ~~those~~with ~~notes is funded directly by rent paid by~~ the ~~tenant,~~financial ~~and~~covenants isunder ~~expected to fully amortize~~ the ~~outstanding principal balance of the~~ KeyBank ~~loan~~credit ~~over the loan term~~agreement.

~~The~~Borrowings ~~Company’s borrowings are a recourse obligation,~~ and ~~CapLease~~collateral ~~has~~carry ~~guaranteed~~values ~~all~~related ~~obligations~~to ofthe ~~its~~Company’s ~~subsidiary~~credit ~~that~~agreements ~~acts~~ as ~~borrower~~of ~~under~~September ~~the~~30, ~~agreement~~2013 and ~~owns~~December ~~the~~31, ~~notes~~2012, ~~that~~were ~~comprise~~as ~~the collateral pool.~~follows:

The Company made various customary representations and warranties and affirmative and negative covenants pursuant to the credit agreement, and agreed to various customary events of defaults. The Company also agreed to various financial covenants which it will be required to be in compliance with during the term of the credit agreement. The financial covenants, as well as the representations and warranties, affirmative and negative covenants, and events of default, closely conform to those included in the Company’s senior secured credit agreement with Wells Fargo described above.

	At September 30, 2013				At December 31, 2012
	Borrowings		Collateral Carry Value		Borrowings		Collateral Carry Value
	Unaudited		Unaudited
Wells Fargo Bank Credit Agreement
Owned properties	$	121,000	$	247,101	$	58,056	$	133,530
KeyBank Credit Agreement
Loans held for investment		1,347		2,150		1,414		2,277
Intercompany mortgage loans on CapLease properties		4,929		7,179		6,410		9,765
Commercial mortgage-backed securities		1,622		3,117		1,776		3,210
Total	$	128,898	$	259,547	$	67,656	$	148,782

AsFor ofthe ~~June~~three and nine months ended September 30, 2013 and September 30, 2012, the ~~Company~~following ~~was~~interest inrates ~~compliance~~applied with ~~the~~respect ~~financial~~to ~~covenants under~~ the ~~KeyBank~~Company’s credit agreement. borrowings:

	For the three months ended September 30,						For the nine months ended September 30,
	2013			2012			2013			2012
	(unaudited)			(unaudited)			(unaudited)			(unaudited)

Weighted average effective financing rate		3.9	%		4.9	%		3.9	%		4.2	%
One-Month LIBOR rate		0.18	%		0.24	%		0.20	%		0.25	%

~~CapLease, Inc. and Subsidiaries~~26

~~Notes~~CapLease, toInc. ~~Consolidated~~and ~~Financial Statements~~Subsidiaries

~~(Dollar~~Notes ~~amounts~~to inConsolidated ~~thousands,~~Financial ~~except per share amounts; totals may not add due to rounding)~~Statements

~~June~~(Dollar 30amounts in thousands, ~~2013~~except ~~(unaudited~~per share amounts; totals may not add due to rounding)

~~Borrowings~~September ~~and collateral carry values related to the Company’s credit agreements as of June~~ 30, 2013 ~~and December 31, 2012, were as follows:~~(unaudited)

	At June 30, 2013				At December 31, 2012
	Borrowings		Collateral Carry Value		Borrowings		Collateral Carry Value
Wells Fargo Bank Credit Agreement	Unaudited		Unaudited
Owned properties	$	91,000	$	179,210	$	58,056	$	133,530
KeyBank Credit Agreement
Loans held for investment		1,443		2,193		1,414		2,277
Intercompany mortgage loans on CapLease properties		5,277		8,023		6,410		9,765
Commercial mortgage-backed securities		1,737		3,159		1,776		3,210
Total	$	99,457	$	192,585	$	67,656	$	148,782

Mortgage Notes on Real Estate Investments

~~For~~The ~~the~~Company ~~three~~has ~~and~~financed ~~six~~many ~~months~~of ~~ended~~its ~~June~~owned ~~30,~~real ~~2013~~properties ~~and~~with ~~June~~first ~~30,~~mortgage ~~2012,~~debt. ~~the~~The ~~following~~Company’s ~~interest~~mortgage ~~rates~~notes ~~applied~~payable ~~with~~are ~~respect~~summarized toin the ~~Company’s~~following ~~credit agreement borrowings~~table:

	For the three months ended June 30,						For the six months ended June 30,
	Sep 30, 2013						Dec 31, 2012
	2013			2012			2013			2012
Property Description	Face Amount of Debt			Carry Value of Debt			Face Amount of Debt			Carry Value of Debt			Coupon			Effective Financing Rate (1)			Maturity Date
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
	Unaudited			Unaudited
Weighted average effective financing rate		3.9	%		4.2	%		4.2	%		4.1	%
Abbott Laboratories, Waukegan, IL	$	13,753		$	13,753		$	14,056		$	14,056			5.11	%		5.2	%	Aug 2015
One-Month LIBOR rate		0.20	%		0.24	%		0.20	%		0.26	%
Aetna Life Insurance Company, Fresno, CA		16,043			16,043			16,043			16,043			5.63	%		5.7	%	Dec 2016
Allstate Insurance Company, Charlotte, NC		18,926			18,926			19,156			19,156			5.68	%		5.7	%	Jan 2016
Allstate Insurance Company, Roanoke, VA		20,149			20,149			20,394			20,394			5.68	%		5.8	%	Jan 2016
AMEC plc, Houston, TX		15,820			16,060			15,977			16,284			5.85	%		5.3	%	Apr 2016
Aon Corporation, Glenview, IL		56,043			56,043			57,522			57,522			5.23	%		5.8	%	Nov 2014
AT&T Services, Inc./MetroPCS Communications, Inc., Richardson, TX		20,306			20,306			20,546			20,546			4.60	%		4.8	%	Jun 2022
Becton, Dickinson and Company, San Antonio, TX		10,000			10,000		–			–				3.95	%		4.2	%	Apr 2023
Breinigsville, PA (Nestle); Fort Wayne, IN (Vacant); and Lathrop, CA (Del Monte)		105,287			105,287			105,305			105,305			6.32	%		6.8	%	Feb 2014
Bunge North America, Inc., Fort Worth, TX		6,262			6,262			6,262			6,262			5.45	%		5.6	%	May 2017
Cadbury Holdings Limited, Whippany, NJ		31,287			31,287			31,848			31,848			5.26	%		5.3	%	Mar 2015
Cadbury Holdings Limited, Whippany, NJ		834			834			1,227			1,227			5.26	%		6.5	%	Mar 2015
Capital One Financial Corporation, Plano, TX	–			–				18,767			18,767			5.24	%		5.3	%	N/A
Choice Hotels International, Inc., Silver Spring, MD	–			–				25,189			25,189			5.30	%		5.3	%	N/A
Cimarex Energy Company, Tulsa, OK		30,853			30,853			17,688			17,688		LIBOR+275			Floats			Jul 2018
Con-Way Freight, Inc. , Ann Arbor, MI		29,488			29,305		–			–				4.00	%		4.1	%	Sep 2022
Cooper Tire & Rubber Company, Franklin, IN		17,090			17,090			17,355			17,355			5.54	%		5.8	%	May 2021
County of Yolo, California, Woodland, CA		10,332			10,332			10,332			10,332			5.68	%		5.8	%	Feb 2017
Crozer-Keystone Health System, Ridley Park, PA		2,417			2,417			2,662			2,662			5.40	%		6.0	%	Apr 2019
CVS Caremark Corporation, Randolph, MA		7,018			7,018			7,275			7,275			5.40	%		6.4	%	Jan 2014
Exelis, Inc. (formerly ITT Corporation), Herndon, VA		38,356			38,356			39,014			39,014			5.33	%		5.4	%	Jun 2015
Exelis, Inc. (formerly ITT Corporation), Herndon, VA		1,613			1,613			2,233			2,233			5.33	%		6.4	%	Jun 2015
Farmers Group, Inc., Simi Valley, CA		25,620			25,620			25,620			25,620			5.81	%		5.9	%	Jan 2017
Farmers New World Life Insurance Company, Mercer Island, WA		29,259			29,259			29,538			29,538			5.69	%		5.7	%	Jan 2016
General Motors Financial Company, Inc., Arlington, TX		25,700			25,545			26,128			25,947			5.28	%		5.5	%	Sep 2017
Invesco Holding Co. Ltd., Denver, CO		43,700			43,700			43,700			43,700			6.03	%		6.1	%	Jul 2016
Johnson Controls, Inc., Largo, FL		16,200			16,200			16,200			16,200			5.48	%		5.5	%	Jan 2017
Koninklijke Ahold, N.V., Levittown, PA		13,404			13,404			13,588			13,588			6.05	%		6.1	%	Jul 2016
Lowes Companies, Inc., Aliso Viejo, CA		40,193			40,193			40,681			40,681			5.10	%		5.4	%	Jul 2015
Lowes Companies, Inc., New Orleans, LA		8,117			8,689			8,330			8,938			5.57	%		4.8	%	Aug 2030
Lowes Companies, Inc., New Orleans, LA		7,259			7,634			7,454			7,854			5.32	%		4.7	%	Aug 2030
Lowes Companies, Inc., New Orleans, LA		410			449			420			462			5.93	%		4.8	%	Aug 2030
Omnicom Group, Inc., Irving, TX	–			–				12,144			12,144			5.24	%		5.3	%	N/A
Pearson Plc., Lawrence, KS		15,236			15,236			15,404			15,404			5.84	%		6.0	%	May 2016
Praxair, Inc., The Woodlands, TX		22,440			22,440			22,440			22,440			3.70	%		3.9	%	Aug 2022
Tiffany & Co., Parsippany, NJ		56,000			56,000			56,655			56,655			5.33	%		5.3	%	Oct 2015
Time Warner Cable Enterprises LLC, Milwaukee, WI		17,500			17,500			17,500			17,500			5.55	%		5.6	%	Dec 2016
Time Warner Cable Enterprises LLC, Milwaukee, WI		1,819			1,819			1,991			1,991			6.18	%		6.8	%	Dec 2016
Time Warner Cable Enterprises LLC, Milwaukee, WI		1,464			1,464			1,910			1,910			5.83	%		6.8	%	Dec 2015
TJX Companies, Inc., Philadelphia, PA		67,537			67,537			68,118			68,118			5.57	%		5.6	%	Mar 2016
T-Mobile USA, Inc., Nashville, TN		10,336			10,336			10,456			10,456			5.59	%		5.7	%	Dec 2016
United States Government (DEA), Birmingham, AL		10,615			10,615			10,751			10,751			5.23	%		5.4	%	Sep 2015
United States Government (EPA), Kansas City, KS		17,216			17,216			18,180			18,180			3.23	%		3.8	%	Mar 2023
United States Government (FBI), Albany, NY		10,137			10,137			10,137			10,137			5.50	%		5.7	%	Nov 2016
United States Government (FBI), Birmingham, AL		17,719			17,719			17,946			17,946			5.23	%		5.3	%	Sep 2015
United States Government (NIH), N. Bethesda, MD		54,996			54,996			56,281			56,281			5.32	%		5.6	%	Sep 2015
United States Government (SSA), Austin, TX		5,069			5,069			5,134			5,134			5.23	%		5.5	%	Sep 2015
United States Government (VA), Ponce, PR		2,812			2,853			3,367			3,428			7.30	%		6.4	%	Apr 2016
Walgreen Co., Portsmouth, VA		2,166			2,237			2,306			2,390			7.20	%		6.2	%	Jul 2018
WorleyParsons Limited, Houston, TX		19,525			19,525			19,525			19,525			4.00	%		4.3	%	Jan 2023
Total	$	994,326		$	995,326		$	1,010,754		$	1,012,075

26(1) The effective financing rate is the Company’s approximate borrowing cost, including the effect of hedge gains or losses and other deferred financing costs associated with the related borrowing.

~~CapLease, Inc. and Subsidiaries~~27

~~Notes~~CapLease, toInc. ~~Consolidated~~and ~~Financial Statements~~Subsidiaries

~~(Dollar~~Notes ~~amounts~~to inConsolidated ~~thousands,~~Financial ~~except per share amounts; totals may not add due to rounding)~~Statements

~~June~~(Dollar 30amounts in thousands, ~~2013~~except ~~(unaudited~~per share amounts; totals may not add due to rounding)

~~Mortgage~~September ~~Notes~~30, on2013 ~~Real Estate Investments~~(unaudited)

~~The~~During August 2012, the Company ~~has~~extended ~~financed~~the ~~many~~mortgage ofdebt ~~its~~on ~~owned~~the ~~real~~Breinigsville, PA, Lathrop, CA and Fort Wayne, IN properties ~~with~~for ~~first~~up ~~mortgage~~to ~~debt~~five years inclusive of one 18-month extension option and two one year extension options. The face amount of the note and the note coupon of 6.32% were not modified by the extension. Pursuant to the extension option provisions of the note, the Company’s ~~mortgage~~may ~~notes~~not ~~payable~~extend ~~are~~the ~~summarized~~loan inmaturity date beyond August 2015 unless it has fully leased the Fort Wayne, IN property. The extension option rights if exercised also require the Company to make the following ~~table~~principal payments on the note:

	Jun 30, 2013				Dec 31, 2012
Property Description	Face Amount of Debt		Carry Value of Debt		Face Amount of Debt		Carry Value of Debt		Coupon			Effective Financing Rate (1)			Maturity Date
	Unaudited		Unaudited
Abbott Laboratories, Waukegan, IL	$	13,854	$	13,854	$	14,056	$	14,056		5.11	%		5.2	%	Aug 2015
Aetna Life Insurance Company, Fresno, CA		16,043		16,043		16,043		16,043		5.63	%		5.7	%	Dec 2016
Allstate Insurance Company, Charlotte, NC		19,002		19,002		19,156		19,156		5.68	%		5.7	%	Jan 2016
Allstate Insurance Company, Roanoke, VA		20,230		20,230		20,394		20,394		5.68	%		5.8	%	Jan 2016
AMEC plc, Houston, TX		15,871		16,134		15,977		16,284		5.85	%		5.3	%	Apr 2016
Aon Corporation, Glenview, IL		56,537		56,537		57,522		57,522		5.23	%		5.8	%	Nov 2014
AT&T Services, Inc./MetroPCS Communications, Inc., Richardson, TX		20,385		20,385		20,546		20,546		4.60	%		4.8	%	Jun 2022
Becton, Dickinson and Company, San Antonio, TX		10,000		10,000		–		–		3.95	%		4.2	%	Apr 2023
Breinigsville, PA (Nestle); Fort Wayne, IN (Vacant); and Lathrop, CA (Del Monte)		105,287		105,287		105,305		105,305		6.32	%		6.8	%	Feb 2014
Bunge North America, Inc., Fort Worth, TX		6,262		6,262		6,262		6,262		5.45	%		5.6	%	May 2017
Cadbury Holdings Limited, Whippany, NJ		31,473		31,473		31,848		31,848		5.26	%		5.3	%	Mar 2015
Cadbury Holdings Limited, Whippany, NJ		967		967		1,227		1,227		5.26	%		6.5	%	Mar 2015
Capital One Financial Corporation, Plano, TX		–		–		18,767		18,767		5.24	%		5.3	%	N/A
Choice Hotels International, Inc., Silver Spring, MD		–		–		25,189		25,189		5.30	%		5.3	%	N/A
Cimarex Energy Company, Tulsa, OK		22,493		22,493		17,688		17,688		LIBOR+275			Floats		Jul 2018
Con-Way Freight, Inc. , Ann Arbor, MI		29,616		29,427		–		–		4.00	%		4.1	%	Sep 2022
Cooper Tire & Rubber Company, Franklin, IN		17,177		17,177		17,355		17,355		5.54	%		5.8	%	May 2021
County of Yolo, California, Woodland, CA		10,332		10,332		10,332		10,332		5.68	%		5.8	%	Feb 2017
Crozer-Keystone Health System, Ridley Park, PA		2,501		2,501		2,662		2,662		5.40	%		6.0	%	Apr 2019
CVS Caremark Corporation, Randolph, MA		7,104		7,104		7,275		7,275		5.40	%		6.4	%	Jan 2014
Exelis, Inc. (formerly ITT Corporation), Herndon, VA		38,583		38,583		39,014		39,014		5.33	%		5.4	%	Jun 2015
Exelis, Inc. (formerly ITT Corporation), Herndon, VA		1,824		1,824		2,233		2,233		5.33	%		6.4	%	Jun 2015
Farmers Group, Inc., Simi Valley, CA		25,620		25,620		25,620		25,620		5.81	%		5.9	%	Jan 2017
Farmers New World Life Insurance Company, Mercer Island, WA		29,350		29,350		29,538		29,538		5.69	%		5.7	%	Jan 2016
General Motors Financial Company, Inc., Arlington, TX		25,842		25,678		26,128		25,947		5.28	%		5.5	%	Sep 2017
Invesco Holding Co. Ltd., Denver, CO		43,700		43,700		43,700		43,700		6.03	%		6.1	%	Jul 2016
Johnson Controls, Inc., Largo, FL		16,200		16,200		16,200		16,200		5.48	%		5.5	%	Jan 2017
Koninklijke Ahold, N.V., Levittown, PA		13,465		13,465		13,588		13,588		6.05	%		6.1	%	Jul 2016
Lowes Companies, Inc., Aliso Viejo, CA		40,354		40,354		40,681		40,681		5.10	%		5.4	%	Jul 2015
Lowes Companies, Inc., New Orleans, LA		8,189		8,773		8,330		8,938		5.57	%		4.8	%	Aug 2030
Lowes Companies, Inc., New Orleans, LA		7,325		7,708		7,454		7,854		5.32	%		4.7	%	Aug 2030
Lowes Companies, Inc., New Orleans, LA		413		454		420		462		5.93	%		4.8	%	Aug 2030
Omnicom Group, Inc., Irving, TX		–		–		12,144		12,144		5.24	%		5.3	%	N/A
Pearson Plc., Lawrence, KS		15,291		15,291		15,404		15,404		5.84	%		6.0	%	May 2016
Praxair, Inc., The Woodlands, TX		22,440		22,440		22,440		22,440		3.70	%		3.9	%	Aug 2022
Tiffany & Co., Parsippany, NJ		56,215		56,215		56,655		56,655		5.33	%		5.3	%	Oct 2015
Time Warner Cable Enterprises LLC, Milwaukee, WI		17,500		17,500		17,500		17,500		5.55	%		5.6	%	Dec 2016
Time Warner Cable Enterprises LLC, Milwaukee, WI		1,877		1,877		1,991		1,991		6.18	%		6.8	%	Dec 2016
Time Warner Cable Enterprises LLC, Milwaukee, WI		1,614		1,614		1,910		1,910		5.83	%		6.8	%	Dec 2015
TJX Companies, Inc., Philadelphia, PA		67,726		67,726		68,118		68,118		5.57	%		5.6	%	Mar 2016
T-Mobile USA, Inc., Nashville, TN		10,376		10,376		10,456		10,456		5.59	%		5.7	%	Dec 2016
United States Government (DEA), Birmingham, AL		10,660		10,660		10,751		10,751		5.23	%		5.4	%	Sep 2015
United States Government (EPA), Kansas City, KS		17,559		17,559		18,180		18,180		3.23	%		3.8	%	Mar 2023
United States Government (FBI), Albany, NY		10,137		10,137		10,137		10,137		5.50	%		5.7	%	Nov 2016
United States Government (FBI), Birmingham, AL		17,794		17,794		17,946		17,946		5.23	%		5.3	%	Sep 2015
United States Government (NIH), N. Bethesda, MD		55,425		55,425		56,281		56,281		5.32	%		5.6	%	Sep 2015
United States Government (SSA), Austin, TX		5,090		5,090		5,134		5,134		5.23	%		5.5	%	Sep 2015
United States Government (VA), Ponce, PR		3,000		3,048		3,367		3,428		7.30	%		6.4	%	Apr 2016
Walgreen Co., Portsmouth, VA		2,214		2,289		2,306		2,390		7.20	%		6.2	%	Jul 2018
WorleyParsons Limited, Houston, TX		19,525		19,525		19,525		19,525		4.00	%		4.3	%	Jan 2023
Total	$	990,442	$	991,483	$	1,010,754	$	1,012,075

●

$7,500 during the first extension option term;

~~(1)~~● ~~The effective financing rate is the Company’s approximate borrowing cost~~$7,500 ~~including~~during the ~~effect~~second ofextension ~~hedge~~option ~~gains~~term; ~~or losses~~ and ~~other deferred financing costs associated with the related borrowing.~~

27● $5,000 during the third extension option term.

~~CapLease~~Since the terms of the extended loan are deemed for financial accounting purposes to be not substantially different to the original loan, ~~Inc~~the Company accounted for the extension as a modification on its financial statements. See “Deferred Fees and ~~Subsidiaries~~Costs” under Note 3 above. Total transaction costs incurred in connection with the extension were $1,626, including $710 of fees paid to the lender to obtain the extension and expenses paid on the lender’s behalf which were added to debt issuance costs for the loan and increase the Company’s effective financing rate of the loan. The remaining $916 of advisory costs related to the extension were charged to earnings during the quarter ended September 30, 2012.

~~Notes~~The mortgage notes in the above table are non-recourse to ~~Consolidated~~the ~~Financial~~Company ~~Statements~~subject to limited non-recourse exceptions and are secured by the respective properties and an assignment of the relevant leases on the properties. See Note 4 regarding the separate and distinct nature of the Company’s SPEs. The Company’s book value before accumulated depreciation and amortization on owned properties encumbered with mortgage debt aggregated $1,599,217 at September 30, 2013, and $1,627,788 at December 31, 2012.

~~(Dollar~~The ~~amounts~~Company has classified its loan agreement related to the Cimarex Energy Co. property in ~~thousands~~Tulsa, ~~except~~OK ~~per~~as ~~share~~a ~~amounts;~~component ~~totals~~of ~~may~~“Mortgages ~~not~~on ~~add~~real ~~due~~estate investments” on the Company’s Consolidated Balance Sheet. The Company entered into the loan agreement with Bank of Oklahoma during July 2011, to ~~rounding~~initially provide construction financing of approximately one-half of the project costs related to the development of the property and subsequently, upon completion of construction, provide term financing of the Company’s investment in the property. During the construction period, interest only was payable by the Company to the lender each month at a rate equal to the prevailing one month LIBOR rate plus 300 basis points (subject to a 4.00% floor).

~~June~~During the nine months ended September 30, 2013, ~~(unaudited)~~the construction loan was converted to a floating rate term loan bearing interest calculated monthly at a rate equal to the one month LIBOR rate plus 275 basis points and maturing in July 2018. Final funding of the loan which increased the total amount advanced under the loan to $31,000 also occurred during the nine months ended September 30, 2013. During the term loan period, in addition to monthly payments of interest, the Company is also obligated to pay principal to the lender based on a 25-year amortization period. Subject to customary non-recourse exceptions, the lender’s recourse in the event of a default of the loan is limited to the property and the other assets of the Company’s joint venture entity that owns the property.

~~During~~Also ~~August~~during ~~2012,~~ the ~~Company~~nine ~~extended~~months ~~the~~ended ~~mortgage~~September ~~debt on the Breinigsville~~30, PA2013, ~~Lathrop,~~the CACompany ~~and~~entered ~~Fort~~into ~~Wayne,~~a INswap ~~properties~~agreement ~~for~~with upBank ~~to five years inclusive~~ of ~~one~~Oklahoma ~~18-month~~related ~~extension~~to ~~option and two one year extension options. The face amount of~~ the ~~note~~debt ~~and~~on the ~~note~~Cimarex ~~coupon of 6~~property.~~32%~~ ~~were~~The ~~not~~swap ~~modified~~agreement byis ~~the~~structured ~~extension. Pursuant~~ to fix the ~~extension~~interest ~~option~~rate ~~provisions~~payable ofon the ~~note, the~~ Company’s ~~may~~borrowings ~~not~~under ~~extend~~ the loan ~~maturity~~agreement ~~date~~with ~~beyond~~Bank ~~August~~of ~~2015~~Oklahoma ~~unless~~at ~~it has fully leased the Fort Wayne, IN property~~4.10% ~~The~~annually ~~extension~~during ~~option rights if exercised also require~~ the ~~Company~~full tofive ~~make~~year ~~the~~term ~~following~~loan ~~principal~~period. ~~payments~~See onNote ~~the~~13. ~~note:~~

●Loan ~~$7,500~~Agreement ~~during~~for ~~the~~The ~~first~~Woodlands, ~~extension~~TX ~~option~~Development ~~term;~~Project

●During August 2013, the Company entered into a loan agreement with Amegy Bank National Association related to the speculative office building project described at Note 4 above. The loan agreement provides that the lender will advance up to $717,~~500~~000 to fund project costs during the ~~second~~construction ~~extension~~period ~~option~~beginning ~~term;~~after the full $17,000 of equity is contributed by the Company and its developer partner. The lender has also agreed to advance another $6,800 of loan proceeds upon the satisfaction of certain leasing and debt service conditions.

~~● $5,000 during the third extension option term.~~28

~~Since the terms of the extended loan are deemed for financial accounting purposes to be not substantially different to the original loan~~CapLease, ~~the Company accounted for the extension as a modification on its financial statements~~Inc. ~~See “Deferred Fees~~ and Costs” under Note 3 above. Total transaction costs incurred in connection with the extension were $1,626, including $710 of fees paid to the lender to obtain the extension and expenses paid on the lender’s behalf which were added to debt issuance costs for the loan and increase the Company’s effective financing rate of the loan. The remaining $916 of advisory costs related to the extension were charged to earnings during the quarter ended September 30, 2012. Subsidiaries

~~The~~Notes ~~mortgage notes in the above table are non-recourse~~ to ~~the~~Consolidated ~~Company~~Financial subject to limited non-recourse exceptions and are secured by the respective properties and an assignment of the relevant leases on the properties. See Note 4 regarding the separate and distinct nature of the Company’s SPEs. The Company’s book value before accumulated depreciation and amortization on owned properties encumbered with mortgage debt aggregated $1,598,903 at June 30, 2013, and $1,627,788 at December 31, 2012.Statements

~~The~~(Dollar ~~Company~~amounts ~~has classified its loan agreement related to the Cimarex Energy Co. property~~ in ~~Tulsa~~thousands, OKexcept asper ashare ~~component~~amounts; oftotals ~~“Mortgages~~may onnot ~~real~~add ~~estate~~due ~~investments” on the Company’s Consolidated Balance Sheet. The Company entered into the loan agreement with Bank of Oklahoma during July 2011,~~ to initially provide construction financing of approximately one-half of the project costs related to the development of the property and subsequently, upon completion of construction, provide term financing of the Company’s investment in the property. During the construction period, interest only was payable by the Company to the lender each month at a rate equal to the prevailing one month LIBOR rate plus 300 basis points (subject to a 4.00% floorrounding).

~~During~~September ~~the quarter ended June~~ 30, 2013, the construction loan was converted to a floating rate term loan bearing interest calculated monthly at a rate equal to the one month LIBOR rate plus 275 basis points and maturing in July 2018. During the term loan period, in addition to monthly payments of interest, the Company is also obligated to pay principal to the lender based on a 25-year amortization period. Final funding of the loan which will increase the outstanding principal balance of the loan to $31,000 is expected to occur during the third quarter of 2013. Subject to customary non-recourse exceptions, the lender’s recourse in the event of a default of the loan is limited to the property and the other assets of the Company’s joint venture entity that owns the property. (unaudited)

~~Also~~The ~~during~~loan ~~the~~with ~~quarter~~Amegy ~~ended~~Bank ~~June~~is 30for a three year term scheduled to mature on August 19, ~~2013~~2016, although the Company ~~entered~~has ~~into~~successive aoptions ~~swap~~to ~~agreement~~extend ~~with~~the ~~Bank~~term offor ~~Oklahoma~~one ~~related~~additional year each subject to the ~~debt~~payment onof an extension fee and the ~~Cimarex~~satisfaction ~~property.~~of ~~The~~certain ~~swap~~debt ~~agreement~~service isand ~~structured~~other toconditions. ~~fix~~Until the scheduled maturity date in August 2016, interest ~~rate~~only will be payable to the lender on outstanding borrowings at a floating rate of LIBOR plus a LIBOR spread. The LIBOR spread will be 295 basis points until the property achieves debt service coverage of 1.40 to 1.00, at which point it will be 225 basis points. The Company’s may select a one month, three month or six month interest period for its LIBOR-based borrowings. Liability for the obligations under the loan agreement ~~with~~is ~~Bank~~limited ofto ~~Oklahoma~~the atCompany’s 4special-purpose subsidiary that owns and is developing the property.~~10%~~ ~~annually~~As ~~during~~of September 30, 2013, the ~~full~~Company ~~five~~had ~~year~~not ~~term~~borrowed any amounts under the loan ~~period.~~agreement ~~See~~with ~~Note~~Amegy 13Bank.

Secured Term Loan

During December 2007, the Company completed a secured term loan with KBC Bank, N.V. The Company transferred a pool of assets into a wholly-owned special purpose entity, called CapLease 2007-STL LLC, and issued debt to the lender secured by the assets in the pool. The Company retained all of the equity in the special purpose entity and, therefore, is entitled to all residual cash after the payment of scheduled principal and interest on the debt. The lender’s debt is structured to be senior to the Company’s equity. For example, all principal payments on the assets transferred to the SPE will be paid to the lender until the secured term loan is repaid in full. The Company is in a first loss position in the event of a payment default or loss on any of the SPE assets.

28The interest coupon on the loan is fixed at 5.81% annually until the loan matures in January 2018. The Company’s effective financing rate on the loan is approximately 6.0% annually (inclusive of hedge and closing costs). The loan is non-recourse to the Company, subject to limited non-recourse exceptions.

~~CapLease~~Amounts related to the secured term loan as of September 30, ~~Inc.~~2013, ~~and~~were ~~Subsidiaries~~as follows:

Notes to Consolidated Financial Statements

	Borrowings		Collateral Carry Value
Loans held for investment	$	14,308	$	20,289
Intercompany mortgage loans on CapLease properties		11,067		23,017
Commercial mortgage-backed securities		35,279		46,533
Total	$	60,654	$	89,839

~~(Dollar~~Convertible ~~amounts~~Senior ~~in thousands, except per share amounts; totals may not add due to rounding)~~Notes

~~June~~During October 2007, CapLease issued $75,000 principal amount of 7.50% convertible senior notes due 2027. As of September 30, 2013, ~~(unaudited)~~CapLease had $19,210 principal amount of convertible senior notes outstanding. The notes represent general unsecured recourse obligations of CapLease and rank equally in right of payment with all of its other existing and future obligations that are unsecured and unsubordinated.

The ~~interest~~notes ~~coupon~~are scheduled to mature on ~~the~~October 1, ~~loan~~2027, isunless ~~fixed~~earlier atconverted, 5redeemed or repurchased.~~81%~~ ~~annually~~Holders ~~until~~were ~~the~~entitled ~~loan~~to ~~matures~~require inCapLease ~~January~~to ~~2018.~~repurchase ~~The~~their ~~Company’s~~notes, ~~effective~~in ~~financing~~whole ~~rate~~or in part, on October 1, 2012 (the ~~loan~~“initial isput ~~approximately~~date”), ~~6.0~~for a cash price equal to 100% ~~annually~~of ~~(inclusive~~the principal amount of ~~hedge~~the notes to be repurchased, plus any accrued and ~~closing~~unpaid ~~costs).~~interest, ~~The~~and ~~loan~~remaining isnote ~~non-recourse~~holders may require CapLease to ~~the~~repurchase ~~Company~~their notes on subsequent put dates of October 1, ~~subject~~2017 toand ~~limited~~October ~~non-recourse~~1, ~~exceptions~~2022, at the same price.

~~Amounts~~CapLease ~~related~~has the right to redeem the ~~secured~~notes ~~term~~in ~~loan~~whole asor in part, for cash at any time or from time to time. The redemption price will be 100% of ~~June~~the ~~30,~~principal ~~2013~~amount of the notes to be redeemed, ~~were~~plus asany ~~follows:~~accrued and unpaid interest.

			Collateral
	Borrowings		Carry Value
Loans held for investment	$	14,532	$	20,512
Intercompany mortgage loans on CapLease properties		12,899		24,849
Commercial mortgage-backed securities		35,614		45,880
Total	$	63,045	$	91,241

~~Convertible~~CapLease, ~~Senior~~Inc. ~~Notes~~and Subsidiaries

~~During~~Notes ~~October~~to ~~2007,~~Consolidated ~~CapLease~~Financial issued $75,000 principal amount of 7.50% convertible senior notes due 2027. As of June 30, 2013, CapLease had $19,210 principal amount of convertible senior notes outstanding. The notes represent general unsecured recourse obligations of CapLease and rank equally in right of payment with all of its other existing and future obligations that are unsecured and unsubordinated. Statements

~~The~~(Dollar ~~notes~~amounts ~~are scheduled to mature on October 1, 2027, unless earlier converted, redeemed or repurchased. Holders were entitled to require CapLease to repurchase their notes,~~ in ~~whole or in part~~thousands, onexcept ~~October~~per 1,share ~~2012~~amounts; ~~(the~~totals ~~“initial~~may ~~put~~not ~~date”),~~add ~~for~~due ~~a cash price equal~~ to 100% of the principal amount of the notes to be repurchased, plus any accrued and unpaid interest, and remaining note holders may require CapLease to repurchase their notes on subsequent put dates of October 1, 2017 and October 1, 2022, at the same price. rounding)

~~CapLease~~September ~~has the right to redeem the notes in whole or in part~~30, ~~for~~2013 ~~cash at any time or from time to time. The redemption price will be 100% of the principal amount of the notes to be redeemed, plus any accrued and unpaid interest.~~(unaudited)

The Company recorded interest expense on the convertible senior notes for the three and ~~six~~nine months ended ~~June~~September 30, 2013 and ~~June~~September 30, 2012 as follows:

	For the three months ended June 30,				For the six months ended June 30,
	For the three months ended September 30,				For the nine months ended September 30,
	2013		2012		2013		2012
Interest expense paid or accrued at stated interest rate of 7.5%	$	~~357~~361	$	~~650~~657	$	~~715~~1,076	$	1,~~305~~963
Convertible senior notes issuance costs expensed as a component of interest expense		-		59		1		~~113~~172
Interest expense at the nonconvertible debt incremental borrowing rate of 2.5%		-		164		-		~~321~~485
Total convertible senior notes interest expense	$	~~357~~361	$	~~873~~880	$	~~716~~1,077	$	12,~~739~~620

For financial accounting purposes and because the notes may be converted into equity in the future, the Company was required to bifurcate the proceeds from the original issuance of the notes between a liability component and an equity component and record interest expense on the liability component at the Company’s estimated nonconvertible debt borrowing rate on the date of issue. The liability component was initially recorded at a discount from the principal amount of the notes and was subsequently accreted back to the principal amount over the expected useful life of the notes as interest expense at the estimated nonconvertible debt borrowing rate was recorded. As of the initial put date of October 1, 2012, the liability component of the notes had accreted back to the full principal amount of the notes and, therefore, during the three and ~~six~~nine months ended ~~June~~September 30, 2013, the Company was no longer recording interest expense beyond the stated interest rate on the notes.

The carry value of the equity component of the convertible senior notes was $6,189 at each of ~~June~~September 30, 2013 and December 31, 2012, and is included as a component of “Additional paid in capital” on the Company’s Consolidated Balance Sheet.

29The holders may convert their notes into cash, shares of CapLease common stock, or any combination thereof, at CapLease’s option, under certain circumstances, including in connection with certain change of control events defined in the note indenture (each, a “change of control”) or a transaction that results in CapLease’s common stock or other securities into which the notes are convertible not being approved for listing on a U.S. national securities exchange (a “termination of trading”). Upon conversion, if CapLease does not elect otherwise, it will settle its conversion obligation in shares of its common stock.

The conversion rate for each $1 principal amount of notes is 88.3704 shares of CapLease’s common stock, ~~Inc~~which is equivalent to a conversion price of approximately $11.32 ~~and~~per ~~Subsidiaries~~share. As of September 30, 2013, the if-converted value of the convertible senior notes is less than the principal amount of the notes. The conversion rate will be adjusted for certain events, including in the event CapLease makes any quarterly cash dividend in excess of $0.20 per share.

~~Notes~~The toconvertible ~~Consolidated~~senior ~~Financial~~notes ~~Statements~~are convertible into CapLease common stock at the option of the holders in connection with the closing of the Merger described in Note 2 above.

~~(Dollar~~Trust ~~amounts~~Preferred ~~in thousands, except per share amounts; totals may not add due to rounding)~~Securities

~~June~~In December 2005, the Operating Partnership issued $30,000 ~~2013~~in ~~(unaudited)~~aggregate principal amount of fixed/floating rate preferred securities through its wholly-owned subsidiary, Caplease Statutory Trust I. The trust preferred securities represent an unsecured subordinated recourse debt obligation of the Company and require quarterly interest payments calculated at a fixed interest rate equal to 7.68% per annum through January 30, 2016, and subsequently at a variable interest rate equal to LIBOR plus 2.60% per annum. The securities must be redeemed on January 30, 2036, and may be redeemed, in whole or in part, at par, at the Company’s option, at any time. The Company’s effective financing rate on the trust preferred securities, inclusive of deferred issuance costs, is approximately 7.7% per annum.

The holders may convert their notes into cash, shares of CapLease common stock, or any combination thereof, at CapLease’s option, under certain circumstances, including in connection with certain change of control events defined in the note indenture (each, a “change of control”) or a transaction that results in CapLease’s common stock or other securities into which the notes are convertible not being approved for listing on a U.S. national securities exchange (a “termination of trading”). Upon conversion, if CapLease does not elect otherwise, it will settle its conversion obligation in shares of its common stock. 30

~~The conversion rate for each $1 principal amount of notes is 88.3704 shares of~~ CapLease~~’s common stock~~, ~~which is equivalent to a conversion price of approximately $11~~Inc.32 ~~per~~and share. As of June 30, 2013, the if-converted value of the convertible senior notes is less than the principal amount of the notes. The conversion rate will be adjusted for certain events, including in the event CapLease makes any quarterly cash dividend in excess of $0.20 per share.Subsidiaries

~~The~~Notes ~~convertible~~to ~~senior~~Consolidated ~~notes~~Financial ~~are convertible into CapLease common stock at the option of the holders in connection with the closing of the Merger described in Note 2 above.~~ Statements

~~Trust~~(Dollar ~~Preferred~~amounts ~~Securities~~in thousands, except per share amounts; totals may not add due to rounding)

InSeptember ~~December 2005, the Operating Partnership issued $~~30,~~000~~ in2013 aggregate principal amount of fixed/floating rate preferred securities through its wholly-owned subsidiary, Caplease Statutory Trust I. The trust preferred securities represent an unsecured subordinated recourse debt obligation of the Company and require quarterly interest payments calculated at a fixed interest rate equal to 7.68% per annum through January 30, 2016, and subsequently at a variable interest rate equal to LIBOR plus 2.60% per annum. The securities must be redeemed on January 30, 2036, and may be redeemed, in whole or in part, at par, at the Company’s option, at any time. The Company’s effective financing rate on the trust preferred securities, inclusive of deferred issuance costs, is approximately 7.7% per annum. (unaudited)

Scheduled Principal Payments on Debt Obligations

Scheduled principal amortization and balloon payments for all of the Company’s outstanding debt obligations as of ~~June~~September 30, 2013, for the next five years and thereafter are as follows:

	Scheduled Amortization		Balloon Payments		Total
6 months ending December 31, 2013	$	15,112	$ –		$	15,112
3 months ending December 31, 2013	$	7,864	$	–	$	7,864
2014		35,~~057~~780		165,666		~~200~~201,~~723~~446
2015		2829,~~886~~639		~~348~~378,373		~~377~~408,~~259~~012
2016		1819,~~886~~661		272,614		~~291~~292,~~500~~275
2017		1314,~~237~~059		100,721		~~113~~114,~~958~~780
Thereafter		36,~~361~~963		~~168~~172,~~171~~679		~~204~~209,~~532~~642
Total	$	~~147~~143,~~539~~966	$	1,~~055~~090,~~545~~053	$	1,~~203~~234,~~084~~019

11. Gain ~~(loss)~~ on extinguishment of debt

The Company had no gain or loss on extinguishment of debt during the ~~six~~nine months ended ~~June~~September 30, 2013.

The Company had net gain on extinguishment of debt of $11,012 during the ~~six~~nine months ended ~~June~~September 30, 2012, primarily comprised of $9,000 of gain on the repurchase for $2,000 (including transaction costs) of an $11,000 first mortgage note on certain Company owned properties.

During the ~~six~~nine months ended ~~June~~September 30, 2012, the Company repaid at par the outstanding mortgage debt on the properties owned in Columbus, Ohio (leased to Abbott Laboratories) and Bloomington, Indiana (leased to Baxter International, Inc.), and refinanced the mortgage debt on the property owned in Kansas City, Kansas (leased to the United States Government (EPA)). These transactions resulted in net gain on debt extinguishment of $2,012, including primarily gain of $2,392 on the reversal of the remaining unamortized balance of the fair value adjustment on the debt repaid on the EPA property, and losses of $196 from the charge-off of deferred hedge and other costs associated with the debt repaid on all three properties.

30The net gain on debt extinguishment for the 2012 periods is included as a component of “Other gains” under the caption “Gain on extinguishment of debt, net” in the Company’s Consolidated Statements of Operations.

~~CapLease, Inc~~12. Accounts payable and ~~Subsidiaries~~other liabilities

~~Notes~~Accounts topayable ~~Consolidated~~and ~~Financial~~other ~~Statements~~liabilities as of September 30, 2013 and December 31, 2012 consisted of the following:

(Dollar amounts in thousands, except per share amounts; totals may not add due to rounding)

	Sep 30, 2013		Dec 31, 2012
	Unaudited
Accounts payable and other liabilities	$	16,497	$	13,045
Accrued interest		4,824		4,499
Accrued expenses		4,700		5,460
Derivative liabilities		45	–
Unearned rental income		5,950		4,922
Total	$	32,016	$	27,926

~~June~~13. Risk ~~30,~~Management ~~2013~~Transactions ~~(unaudited)~~

~~The~~As ~~net~~part ~~gain~~of onits ~~debt~~financing ~~extinguishment~~strategy, ~~for~~ the ~~2012~~Company ~~periods~~may isuse ~~included~~interest asrate aswap ~~component~~transactions ofto ~~“Other~~manage ~~gains”~~its ~~under~~exposure ~~the~~to ~~caption~~changes ~~“Gain~~in ~~(loss)~~interest onrates ~~extinguishment~~associated ofwith its present or expected future debt, ~~net”~~obligations. inDuring the ~~Company’s~~first ~~Consolidated~~three ~~Statements~~months of ~~Operations~~2013 and all of 2012, the Company had no open interest rate swap positions.

~~12. Accounts payable and other liabilities~~ 31

~~Accounts payable and other liabilities as of June 30~~CapLease, ~~2013~~Inc. and ~~December 31, 2012 consisted of the following:~~Subsidiaries

	Jun 30, 2013		Dec 31, 2012
	Unaudited
Accounts payable and other liabilities	$	11,640	$	13,045
Accrued interest		4,364		4,499
Accrued expenses		5,783		5,460
Unearned rental income		5,326		4,922
Total	$	27,113	$	27,926

Notes to Consolidated Financial Statements

~~13. Risk~~(Dollar ~~Management~~amounts ~~Transactions~~in thousands, except per share amounts; totals may not add due to rounding)

AsSeptember ~~part of its financing strategy~~30, the Company may use interest rate swap transactions to manage its exposure to changes in interest rates associated with its present or expected future debt obligations. During the first three months of 2013 ~~and all of 2012, the Company had no open interest rate swap positions.~~ (unaudited)

During ~~the~~May ~~second quarter of~~ 2013, the Company entered into a single swap agreement with Bank of Oklahoma related to the financing of the Cimarex Energy property in Tulsa, OK. Pursuant to the agreement, the Company agreed to make fixed rate interest payments to the Bank of Oklahoma at an annual rate of 4.10% on a notional amount of debt expected to match the principal amount outstanding under the loan agreement with Bank of Oklahoma. Also pursuant to the swap, the Bank of Oklahoma agreed to make floating rate interest payments to the Company on an equivalent notional amount at the one month LIBOR rate plus 275 basis points. The initial notional amount was $31,000, and the notional amount as of September 30, 2013 was $30,853.

The Company entered into the interest rate swap agreement described above for risk management purposes. The Company’s objective in entering into the interest rate swap agreement is to manage its exposure to interest rate movements on its loan agreement with Bank of Oklahoma. The Company’s strategy for the swap is to fix at an attractive rate the amount of interest expense the Company pays on the outstanding debt.

The interest rate swap is designated as a cash flow hedge under Topic 815. Accordingly, the effective portion of changes in the fair value of the swap are recorded as a component of Other Comprehensive Income (Loss) on the Company’s Consolidated Balance Sheets, and the ineffective portion, if any, is recognized directly in earnings. See Note 3 under the heading “Risk Management Transactions.”

As of ~~June~~September 30, 2013, the Company had one outstanding interest rate swap transaction. The swap had a negative fair value of $45 as of September 30, 2013, and hence is classified as part of “~~Other~~Accounts ~~assets~~payable and other liabilities” on the Company’s Consolidated Balance Sheet ~~with a fair value of $97~~. ~~$92~~All of the unrealized ~~gain~~losses on the swap ~~during~~as ~~the~~of ~~quarter~~September ~~ended June~~ 30, 2013 ~~was~~were deemed effective and, therefore, deferred in Other Comprehensive Income (Loss). See Note 17. ~~The remaining~~ $5 ~~fair~~of ~~value adjustment was classified as~~ hedge ineffectiveness ~~and~~gain ~~reclassified~~from ~~as “Gain on derivatives” on~~ the ~~Company’s~~second ~~Consolidated~~quarter ~~Statement~~ of ~~Operations~~2013, was reversed during the ~~three~~quarter ~~and six months~~ ended ~~June~~September 30, 2013. ~~The hedge ineffectiveness was driven by a change in the funding schedule of the Company’s borrowings from the Bank of Oklahoma.~~

31As of September 30, 2013, the Company had $740 of net realized losses on derivatives deferred on the Company’s Consolidated Balance Sheet as a component of Accumulated Other Comprehensive Income (Loss) related to prior interest rate swaps for certain of the Company’s long-term debt issuances. These losses will be reclassified to the Company's Consolidated Statements of Operations as additional interest expense over the term of the related debt. Within the next twelve months, the Company estimates that $509 of realized losses on derivatives will be reclassified to earnings.

~~CapLease,~~The ~~Inc.~~Company ~~and~~classifies ~~Subsidiaries~~the cash flows from derivatives as a financing activity on the Consolidated Statements of Cash Flows.

~~Notes~~14. Commitments toand ~~Consolidated~~Contingencies ~~Financial Statements~~

~~(Dollar~~The ~~amounts~~Company inis ~~thousands~~committed to fund $22,033 ~~except~~of ~~per~~project ~~share~~costs ~~amounts;~~related ~~totals~~to ~~may~~the ~~not~~Columbia, ~~add~~SC ~~due~~development toproject ~~rounding)~~described at Note 4 above. As of September 30, 2013, the Company had funded $4,063 of such commitment.

~~June~~The 30Company is committed to fund approximately $15,300 ~~2013~~of project costs related to the speculative development project in The Woodlands, TX (~~unaudited~~90% of total project equity; see Note 4 above). As of September 30, 2013, the Company had funded $4,691 of such commitment.

As an owner of ~~June~~commercial ~~30,~~real ~~2013~~estate, the Company ~~had~~is ~~$876~~subject ofto ~~net~~potential ~~realized~~environmental ~~losses~~costs. onAt ~~derivatives~~September ~~deferred~~30, on2013, the Company’s ~~Consolidated~~was ~~Balance~~not ~~Sheet~~aware ~~as a component~~ of ~~Accumulated~~any ~~Other~~environmental ~~Comprehensive~~concerns ~~Income~~that ~~(Loss)~~would ~~related~~have toa ~~prior~~material ~~interest~~adverse ~~rate~~effect ~~swaps~~on ~~for certain of~~ the Company’s long-term debt issuances. These losses will be reclassified to the Company's Consolidated Statements of Operations as additional interest expense over the term of the related debt. Within the next twelve monthsbusiness, ~~the~~results ~~Company estimates that $521~~ of ~~realized~~operations ~~losses~~or onfinancial ~~derivatives will be reclassified to earnings~~condition.

The Company ~~classifies~~is involved from time to time in litigation arising in the ~~cash~~ordinary ~~flows~~course ~~from~~of ~~derivatives~~business. asThe Company is not currently involved in any matter which management believes will have a ~~financing~~material ~~activity~~adverse effect on the ~~Consolidated~~Company’s ~~Statements~~business, results of ~~Cash~~operations ~~Flows~~or financial condition. However, periodic settlements and/or professional or other fees and expenses related to any matter could have an adverse impact on our results of operations in the quarterly or annual period in which they are recognized.

~~14. Commitments~~The ~~and~~Company ~~Contingencies~~is party to four lawsuits related to the Merger transaction described in Note 2 above.

The Company is committed to fund $22,033 of project costs related to the Columbia, SC development project described at Note 4 above. As of June 30, 2013, the Company had funded $2,603 of such commitment.32

~~As an owner of commercial real estate~~CapLease, ~~the Company is subject to potential environmental costs~~Inc. Atand ~~June 30, 2013, the Company was not aware of any environmental concerns that would have a material adverse effect on the Company’s business, results of operations or financial condition.~~Subsidiaries

~~The~~Notes ~~Company is involved from time~~ to ~~time~~Consolidated inFinancial litigation arising in the ordinary course of business. The Company is not currently involved in any matter which management believes will have a material adverse effect on the Company’s business, results of operations or financial condition. However, periodic settlements and/or professional or other fees and expenses related to any matter could have an adverse impact on our results of operations in the quarterly or annual period in which they are recognized. Statements

~~The~~(Dollar ~~Company~~amounts isin ~~party~~thousands, toexcept ~~three~~per ~~lawsuits~~share ~~related~~amounts; tototals ~~the~~may ~~Merger~~not ~~transaction~~add ~~described~~due into ~~Note 2 above.~~ rounding)

~~CapLease,~~September ~~its directors~~30, and certain of its subsidiaries, including the Operating Partnership, as well as ARCP, the ARCP Operating Partnership and Merger Sub, have been named as defendants in a putative class action lawsuit in connection with the proposed Merger, styled Mizani v. CapLease, Inc., No. 651986/2013, in the Supreme Court of the State of New York, New York County. The complaint alleges, among other things, that the Merger Agreement was the product of breaches of fiduciary duty by CapLease’s directors because the Merger does not provide for full and fair value for CapLease’s stockholders, the Merger was not the result of a competitive bidding process, the Merger Agreement contains coercive deal protection measures, and the Merger Agreement and the Merger were approved as a result of improper self-dealing by certain defendants who would receive certain alleged employment compensation benefits and continued employment pursuant to the Merger Agreement. The complaint also alleges that CapLease, ARCP, the ARCP Operating Partnership and Merger Sub aided and abetted the directors’ alleged breaches of fiduciary duty. The plaintiff seeks, among other things, to enjoin completion of the Merger. The Company believes that the allegations of the complaint are without merit and that it has substantial meritorious defenses to the claims set forth in the complaint.(unaudited)

On June 4, 2013, CapLease, its directors, and certain of its subsidiaries, including the Operating Partnership, as well as ARCP, the ARCP Operating Partnership and Merger Sub, ~~have~~were ~~been~~ named as defendants in a putative class action ~~and derivative~~ lawsuit in connection with the proposed Merger, styled ~~Tarver~~Mizani v. CapLease, Inc., No. ~~24Cl3004176~~651986/2013, in the ~~Circuit~~Supreme Court of the State of ~~Maryland~~New York, ~~Baltimore~~New ~~City~~York County. The complaint alleges, among other things, that the Merger Agreement was the product of breaches of fiduciary duty by CapLease’s directors because the Merger does not provide for full and fair value for CapLease’s stockholders, the Merger ~~Agreement contains coercive deal protection measures, the Merger~~ was not the result of a competitive bidding process, the Merger Agreement contains coercive deal protection measures, and the Merger Agreement and the Merger were approved as a result of improper self-dealing. ~~The~~by ~~complaint~~certain ~~also~~defendants ~~alleges~~who ~~that~~would ~~CapLease,~~receive certain ofalleged ~~its~~employment ~~subsidiaries,~~compensation ~~including~~benefits and continued employment pursuant to the ~~Operating~~Merger ~~Partnership~~Agreement. The complaint also alleges that CapLease, ARCP, the ARCP Operating Partnership and Merger Sub aided and abetted the directors’ alleged breaches of fiduciary duty. The plaintiff seeks, among other things, to enjoin completion of the Merger. ~~The Company believes that the allegations of the complaint are without merit and that it has substantial meritorious defenses to the claims set forth in the complaint.~~

On June 25, 2013, CapLease, its directors, and certain of its subsidiaries, including the Operating Partnership, as well as ARCP, the ARCP Operating Partnership and Merger Sub, ~~have~~were ~~been~~ named as defendants in a putative class action and derivative lawsuit in connection with the proposed Merger, styled ~~Carach~~Tarver v. CapLease, Inc., No. ~~651986/2013~~24Cl3004176, in the ~~Supreme~~Circuit Court of the State of ~~New York~~Maryland, ~~New~~Baltimore ~~York County~~City. The complaint alleges, among other things, that the Merger Agreement was the product of breaches of fiduciary duty by CapLease’s directors because the Merger does not provide for full and fair value for CapLease’s stockholders, the ~~directors~~Merger ~~failed~~Agreement tocontains ~~take~~coercive ~~steps~~deal toprotection ~~maximize~~measures, the ~~value~~Merger ofwas ~~CapLease~~not orthe ~~properly~~result ~~value~~of ~~CapLease,~~a ~~failed~~competitive tobidding ~~protect against various alleged conflicts of interest~~process, and ~~failed~~the toMerger ~~fully~~Agreement ~~disclose~~and ~~material~~the ~~information~~Merger ~~concerning~~were ~~the~~approved ~~process~~as ~~that~~a ~~led~~result toof ~~the~~improper ~~Merger~~self-dealing. The complaint also alleges that ~~the~~CapLease, certain ~~subsidiaries~~ of ~~CapLease~~its subsidiaries, including the Operating Partnership, ~~and~~ ARCP, the ARCP Operating Partnership and Merger Sub aided and abetted the directors’ alleged breaches of fiduciary duty. The plaintiff seeks, among other things, to enjoin completion of the Merger. ~~The~~and ~~Company~~declaratory ~~believes~~relief, ~~that~~including rescission of the ~~allegations~~Merger ofAgreement. On July 17, 2013, the plaintiff filed an amended complaint ~~are~~in ~~without~~which ~~merit~~he preserved his existing claims and added additional claims that itthe ~~has~~Preliminary ~~substantial~~Proxy ~~meritorious~~Statement ~~defenses~~filed by CapLease on July 2, 2013 failed to fully disclose material information concerning the ~~claims~~process ~~set~~that ~~forth~~led into the ~~complaint~~Merger.

32On July 3, 2013, CapLease, its directors, and certain of its subsidiaries, including the Operating Partnership, as well as ARCP, the ARCP Operating Partnership and Merger Sub, have been named as defendants in a putative class action and derivative lawsuit in connection with the proposed Merger, styled Carach v. CapLease, Inc., No. 651986/2013, in the Supreme Court of the State of New York, New York County. The complaint alleges, among other things, that the Merger Agreement was the product of breaches of fiduciary duty by CapLease’s directors because the Merger does not provide for full and fair value for CapLease’s stockholders, the directors failed to take steps to maximize the value of CapLease or properly value CapLease, failed to protect against various alleged conflicts of interest, and failed to fully disclose material information concerning the process that led to the Merger. The complaint also alleges that the certain subsidiaries of CapLease, including the Operating Partnership, and ARCP, the ARCP Operating Partnership and Merger Sub aided and abetted the directors’ alleged breaches of fiduciary duty. The plaintiff seeks, among other things, to enjoin completion of the Merger and declaratory relief, including rescission of the Merger Agreement.

On August 9, 2013, the parties filed a joint motion to stay the Tarver action in the Circuit Court of the State of Maryland, Baltimore City. Also on August 9, 2013, the plaintiff in the Carach action filed an amended complaint. The amended complaint preserved the claims in the plaintiff’s prior complaint and added additional claims that the Definitive Proxy Statement filed by CapLease on July 31, ~~Inc~~2013 failed to fully disclose material information concerning the process that led to the Merger. On August 22, 2013, the Supreme Court of the State of New York, New York County entered an agreed order consolidating the Mizani and ~~Subsidiaries~~Carach actions, appointing co-lead interim class counsel for plaintiffs, and providing for limited expedited recovery, which has now been completed. Plaintiffs also designated the amended complaint in the Carach action as the operative complaint in the consolidated action. On September 23, 2013, all defendants filed motions to dismiss the amended complaint. The Company believes that the allegations of the operative complaint, like those of the complaints in each of the underlying actions, are without merit and that it has substantial meritorious defenses to the claims set forth in the complaint.

~~Notes to Consolidated Financial Statements~~33

~~(Dollar amounts in thousands~~CapLease, ~~except~~Inc. ~~per~~and ~~share amounts; totals may not add due to rounding)~~Subsidiaries

~~June~~Notes ~~30,~~to ~~2013~~Consolidated ~~(unaudited)~~Financial Statements

~~15. Stockholders’~~(Dollar ~~Equity~~amounts in thousands, except per share amounts; totals may not add due to rounding)

~~Authorized~~September ~~Capital~~30, ~~Stock;~~2013 ~~Issued and Outstanding Capital Stock~~(unaudited)

~~CapLease’s~~On ~~authorized~~October ~~capital~~8, ~~stock~~2013, ~~consists~~CapLease, ofits ~~500~~directors,~~000,000~~ ~~shares~~and certain of ~~common~~its ~~stock~~subsidiaries, ~~par~~including ~~value~~the ~~$0.01~~Operating ~~per share~~Partnership, ~~and~~as ~~100~~well as ARCP,~~000,000~~ ~~shares~~the ofARCP ~~preferred~~Operating ~~stock,~~Partnership ~~par~~and ~~value~~Merger ~~$0.01~~Sub, ~~per~~were ~~share.~~named Asas ofdefendants ~~June~~in ~~30,~~a ~~2013,~~putative ~~CapLease~~class ~~had~~action ~~issued~~lawsuit ~~and~~styled ~~outstanding~~Poling 88v. CapLease,~~845~~ Inc.,~~604~~ ~~shares~~in ofthe ~~common~~Circuit ~~stock,~~Court ~~1,832,000~~for ~~shares~~Baltimore ofCity, 8Maryland.~~125%~~ ~~Series~~The Alawsuit ~~cumulative~~was ~~redeemable~~filed ~~preferred~~on ~~stock,~~behalf ~~2,941,073~~of ~~shares~~a putative class of holders of CapLease’s 8.375% Series B ~~cumulative~~Cumulative ~~redeemable~~Redeemable ~~preferred~~Preferred ~~stock,~~Stock and ~~1,700,000 shares of~~ 7.25% Series C ~~cumulative~~Cumulative ~~redeemable~~Redeemable ~~preferred~~Preferred ~~stock~~Stock. The ~~terms~~complaint ofalleges, among other things, that the ~~Company’s~~Merger ~~three~~Agreement ~~series~~violates ofthe Articles Supplementary governing the preferred ~~stock~~shares ~~are~~by ~~described~~effecting a redemption of those shares in ~~the~~advance ~~Notes~~of tothe ~~Consolidated~~redemption ~~Financial~~date ~~Statements~~set ~~included~~out in the Articles Supplementary. The complaint alleges breaches of contract and fiduciary duty. The plaintiff seeks, among other things, to enjoin completion of the Merger. The Company’s ~~Annual~~believes ~~Report~~that onthe ~~Form~~allegations ~~10-K~~of ~~for~~the Poling complaint are without merit and that it has substantial meritorious defenses to the ~~fiscal~~claims ~~year~~set ~~ended~~forth ~~December~~in ~~31,~~the ~~2012~~complaint.

~~See Note 2 above for a discussion of the treatment of the CapLease common stock and preferred stock in the Merger~~15. Stockholders’ Equity

Authorized Capital Stock; ~~Issuances~~Issued ~~During~~and ~~Periods~~Outstanding ~~Presented~~Capital Stock

~~During~~CapLease’s ~~the~~authorized ~~six~~capital ~~months~~stock ~~ended~~consists ~~June~~of 30500,000,000 ~~2013~~shares of common stock, ~~CapLease~~par ~~issued~~value an$0.01 ~~aggregate~~per ofshare, 6and 100,~~434~~000,~~391~~000 shares of ~~common~~preferred stock, ~~through~~par ~~its~~value ~~“at~~$0.01 ~~the~~per ~~market~~share. ~~offering”~~As ~~program~~of ~~with~~September ~~Cantor~~30, ~~Fitzgerald~~2013, atCapLease anhad ~~average~~issued ~~price~~and outstanding 88,845,604 shares of ~~$5.94~~common ~~per~~stock, ~~share~~1,832,000 ~~and~~shares ~~for~~of ~~aggregate~~8.125% ~~net~~Series ~~proceeds~~A ofcumulative ~~$37~~redeemable preferred stock,~~425.~~ ~~The~~2,941,073 ~~Company~~shares ~~used~~of ~~the~~8.375% ~~proceeds~~Series toB ~~repay~~cumulative aredeemable ~~portion~~preferred ofstock, ~~the~~and ~~mortgage~~1,700,000 ~~debt~~shares ~~obligations~~of ~~that~~7.25% ~~were~~Series ~~prepaid~~C ~~during~~cumulative ~~April~~redeemable ~~2013~~preferred stock. ~~During~~The terms of the ~~six~~Company’s ~~months~~three ~~ended~~series ~~June~~of ~~30,~~preferred ~~2012,~~stock ~~CapLease~~are ~~did~~described ~~not~~in ~~issue~~the ~~any~~Notes ~~shares~~to ofConsolidated ~~common~~Financial ~~stock~~Statements orincluded ~~preferred~~in ~~stock~~the ~~through~~Company’s ~~its~~Annual ~~“at~~Report on Form 10-K for the ~~market~~fiscal ~~offering”~~year ~~program~~ended December 31, 2012.

~~During~~See ~~April~~Note ~~2013,~~2 ~~CapLease~~above ~~issued~~for ~~8,625,000 shares of common stock in~~ a ~~public~~discussion ~~offering at a price to the public~~ of ~~$5.97 per share, and raised net proceeds of $49,097, after~~ the ~~underwriting~~treatment ~~discount and offering expenses. The Company used $31,171~~ of the ~~proceeds~~CapLease tocommon ~~fund~~stock ~~a portion of the purchase price for the property acquisitions made by the Company during the quarter ended June 30, 2013,~~ and ~~$17,926~~preferred ofstock ~~the~~in ~~proceeds to repay a portion of~~ the ~~mortgage debt obligations that were prepaid during April 2013~~Merger.

~~During~~Stock ~~March~~Issuances 2013, CapLease made restricted stock and performance unit awards representing an aggregate of 443,900 shares of common stock (assuming payout of the performance units at the target level) to its executive officers, other employees and directors pursuant to the Company’s stock incentive plan. During ~~March~~Periods 2012, CapLease made restricted stock awards representing an aggregate of 497,700 shares of common stock to its executive officers, other employees and directors pursuant to the Company’s stock incentive plan. As of June 30, 2013, the Company had made awards aggregating 4,686,905 shares of common stock under the stock plan, all in the form of restricted stock awards and performance share units to executive officers, other employees and directors of the Company (see Note 16 below).Presented

During the ~~six~~nine months ended ~~June~~September 30, 2013, CapLease issued 1an aggregate of 6,~~700~~434,~~000~~391 shares of ~~7.25%~~common ~~Series~~stock Cthrough ~~cumulative~~its ~~redeemable~~“at ~~preferred~~the ~~stock.~~market ~~The~~offering” ~~Company~~program ~~received~~with ~~aggregate~~Cantor ~~net~~Fitzgerald, ~~proceeds~~at inan ~~the~~average ~~offerings~~price of $~~39,689,~~5.94 ~~after~~per ~~the~~share, ~~underwriting~~and ~~discount~~for ~~and~~aggregate ~~estimated~~net ~~offering~~proceeds ~~expenses~~of $37,425. The ~~net~~Company ~~proceeds~~used ~~from~~ the ~~offerings~~proceeds ~~were utilized~~ to ~~redeem~~repay a portion of the ~~outstanding~~mortgage ~~shares~~debt ofobligations ~~the~~that ~~Company’s~~were 8prepaid during April 2013.~~125%~~ During the nine months ended September 30, 2012, CapLease issued an aggregate of 196,207 shares of Series A preferred stock, ~~800~~and 140,~~182~~913 shares of ~~which~~Series ~~were~~B ~~redeemed~~preferred ~~during~~stock ~~February~~through ~~and~~its ~~815~~“at the market offering” program with Cantor Fitzgerald,~~000~~ ~~shares~~at an average price of ~~which~~$25.13 ~~were~~per ~~redeemed~~share ~~during~~of ~~April~~Series A preferred stock and $26.06 per share of Series B preferred stock, and for aggregate net proceeds of $8,431, including accrued dividends of $117.

33During April 2013, CapLease issued 8,625,000 shares of common stock in a public offering at a price to the public of $5.97 per share, and raised net proceeds of $49,097, after the underwriting discount and offering expenses. The Company used $31,171 of the proceeds to fund a portion of the purchase price for the property acquisitions made by the Company during the second quarter of 2013, and $17,926 of the proceeds to repay a portion of the mortgage debt obligations that were prepaid during April 2013.

During March 2013, CapLease made restricted stock and performance unit awards representing an aggregate of 443,900 ~~Inc~~shares of common stock (assuming payout of the performance units at the target level) to its executive officers, other employees and directors pursuant to the Company’s stock incentive plan. During March 2012, CapLease made restricted stock awards representing an aggregate of 497,700 shares of common stock to its executive officers, other employees and ~~Subsidiaries~~directors pursuant to the Company’s stock incentive plan. As of September 30, 2013, the Company had made awards aggregating 4,686,905 shares of common stock under the stock plan, all in the form of restricted stock awards and performance share units to executive officers, other employees and directors of the Company (see Note 16 below).

~~Notes~~During the nine months ended September 30, 2013, CapLease issued 1,700,000 shares of 7.25% Series C cumulative redeemable preferred stock. The Company received aggregate net proceeds in the offerings of $39,689, after the underwriting discount and estimated offering expenses. The net proceeds from the offerings were utilized to ~~Consolidated~~redeem ~~Financial~~a ~~Statements~~portion of the outstanding shares of the Company’s 8.125% Series A preferred stock, 800,182 shares of which were redeemed during February and 815,000 shares of which were redeemed during April.

~~(Dollar amounts in thousands, except per share amounts; totals may not add due to rounding)~~34

~~June 30~~CapLease, ~~2013~~Inc. ~~(unaudited)~~and Subsidiaries

~~Share~~Notes ~~Repurchase~~to ~~Programs~~Consolidated Financial Statements

~~During~~(Dollar ~~August~~amounts ~~2011, the Company announced that its Board of Directors has approved a share repurchase program authorizing the Company to repurchase~~ in ~~the aggregate up to $20~~thousands,~~000~~ ofexcept ~~its~~per ~~outstanding common stock. In addition, during January 2013, the Company announced that its Board of Directors has approved a~~ share ~~repurchase~~amounts; ~~program~~totals ~~authorizing~~may the Company to repurchase the full amount of its outstanding 8.125% Series A preferred stock. The programs permit the Company to purchase shares through a variety of methods, including in the open market or through privately negotiated transactions, in accordance with applicable securities laws. They do not ~~obligate~~add ~~the~~due ~~Company~~ to make any repurchases at any specific time or situation. The timing and extent to which the Company repurchases its shares will depend upon a variety of factors, including market conditions, the Company’s liquidity, and regulatory requirements. rounding)

~~The~~September ~~Company did not make any common stock repurchases through the above program during the six months ended June~~ 30, 2013. ~~As of June 30, 2013, the Company had remaining authorization to repurchase up to $13,264 through the above program.~~ (unaudited)

AsShare ~~disclosed~~Repurchase above, the Company made repurchases of 800,182 shares of 8.125% Series A preferred stock during February 2013, and repurchases of another 815,000 shares of 8.125% Series A preferred stock during April 2013.Programs

During ~~December~~August ~~2012~~2011, the ~~compensation~~Company ~~committee~~announced ofthat ~~the~~its Board of Directors ofhas ~~CapLease~~approved ~~adopted~~a ~~resolutions~~share ~~authorizing~~repurchase ~~employees~~program ofauthorizing the Company to ~~surrender~~repurchase ~~shares~~in the aggregate up to $20,000 of its outstanding common stock. toIn addition, during January 2013, the Company toannounced ~~satisfy~~that ~~tax~~its ~~withholding~~Board ~~obligations~~of inDirectors ~~connection~~has ~~with~~approved a share repurchase program authorizing the ~~vesting~~Company to repurchase the full amount of ~~restricted~~its ~~stock~~outstanding ~~awards~~8.125% ~~and~~Series ~~performance~~A ~~share~~preferred ~~units~~stock. ~~awarded~~The ~~under~~programs permit the Company’s ~~stock~~to ~~incentive~~purchase ~~plan.~~shares ~~During~~through ~~March~~a ~~2013~~variety of methods, ~~various~~including ~~employees~~in ofthe open market or through privately negotiated transactions, in accordance with applicable securities laws. They do not obligate the Company ~~surrendered~~to anmake ~~aggregate~~any ofrepurchases ~~186,832~~at any specific time or situation. The timing and extent to which the Company repurchases its shares atwill depend upon a ~~price~~variety of ~~$6.12~~factors, ~~per~~including ~~share~~market inconditions, ~~accordance~~the ~~with~~Company’s ~~the~~liquidity, ~~foregoing~~and ~~program~~regulatory requirements.

~~Dividends~~The Company did not make any common stock repurchases through the above program during the nine months ended September 30, 2013. As of September 30, 2013, the Company had remaining authorization to repurchase up to $13,264 through the above program.

~~The~~As ~~following~~disclosed ~~table~~above, ~~summarizes~~ the ~~dividend~~Company ~~history~~made onrepurchases of 800,182 shares of ~~CapLease~~8.125% ~~common~~Series A preferred stock ~~for~~during ~~the~~February ~~periods~~2013, ~~indicated~~and repurchases of another 815,000 shares of 8.125% Series A preferred stock during April 2013.

Quarter Ended

Record Date

Payment Date

Dividend Per Share

Total Amount

12/31/2011

12/30/2011

1/17/2012

0.065

4,308

3/31/2012

4/2/2012

4/16/2012

0.065

4,340

6/30/2012

6/29/2012

7/16/2012

0.065

4,340

9/30/2012

9/28/2012

10/15/2012

0.070

4,674

12/31/2012

1/15/2013

0.075

5,524

3/31/2013

4/4/2013

4/15/2013

0.0775

6,217

6/30/2013

6/28/2013

7/15/2013

0.0775

6,886

During December 2012, the compensation committee of the Board of Directors of CapLease adopted resolutions authorizing employees of the Company to surrender shares of common stock to the Company to satisfy tax withholding obligations in connection with the vesting of restricted stock awards and performance share units awarded under the Company’s stock incentive plan. During March 2013, various employees of the Company surrendered an aggregate of 186,832 shares at a price of $6.12 per share in accordance with the foregoing program.

34Dividends

The following table summarizes the dividend history on shares of CapLease, ~~Inc.~~common ~~and~~stock ~~Subsidiaries~~for the periods indicated.

Notes to Consolidated Financial Statements

Quarter

Ended

Record

Date

Payment

Date

Dividend

Per Share

Total

Amount

12/31/2011

12/30/2011

1/17/2012

0.065

4,308

3/31/2012

4/2/2012

4/16/2012

0.065

4,340

6/30/2012

6/29/2012

7/16/2012

0.065

4,340

9/30/2012

9/28/2012

10/15/2012

0.070

4,674

12/31/2012

1/15/2013

0.075

5,524

3/31/2013

4/4/2013

4/15/2013

0.0775

6,217

6/30/2013

6/28/2013

7/15/2013

0.0775

6,886

9/30/2013

9/23/2013

10/15/2013

0.0775

6,886

~~(Dollar amounts in thousands, except per share amounts; totals may not add due to rounding)~~35

~~June 30~~CapLease, ~~2013~~Inc. ~~(unaudited)~~and Subsidiaries

~~The~~Notes ~~following~~to ~~table~~Consolidated ~~summarizes~~Financial ~~the dividend history on shares of CapLease Series A preferred stock for the periods indicated.~~Statements

Quarter Ended

Record Date

Payment Date

Dividend Per Share

Total Amount

12/31/2011

12/30/2011

1/17/2012

0.5078125

1,627

3/31/2012

4/2/2012

4/16/2012

0.5078125

1,627

6/30/2012

6/29/2012

7/16/2012

0.5078125

1,627

9/30/2012

9/28/2012

10/15/2012

0.5078125

1,727

12/31/2012

1/15/2013

0.5078125

1,751

3/31/2013

4/4/2013

4/15/2013

0.5078125

930

6/30/2013

6/28/2013

7/15/2013

0.5078125

930

(Dollar amounts in thousands, except per share amounts; totals may not add due to rounding)

~~The~~September ~~following~~30, ~~table~~2013 ~~summarizes the dividend history on shares of CapLease Series B preferred stock for the periods indicated.~~(unaudited)

Quarter Ended

Record Date

Payment Date

Dividend Per Share

Total Amount

6/30/2012

6/29/2012

7/16/2012

0.5001740

1,000

9/30/2012

9/28/2012

10/15/2012

0.5234375

1,121

12/31/2012

1/15/2013

0.5234375

1,539

3/31/2013

4/4/2013

4/15/2013

0.5234375

1,539

6/30/2013

6/28/2013

7/15/2013

0.5234375

1,539

The following table summarizes the dividend history on shares of CapLease Series A preferred stock for the periods indicated.

The following table summarizes the dividend history on shares of CapLease Series C preferred stock for the periods indicated.

Quarter

Ended

Record

Date

Payment

Date

Dividend

Per Share

Total

Amount

12/31/2011

12/30/2011

1/17/2012

0.5078125

1,627

3/31/2012

4/2/2012

4/16/2012

0.5078125

1,627

6/30/2012

6/29/2012

7/16/2012

0.5078125

1,627

9/30/2012

9/28/2012

10/15/2012

0.5078125

1,727

12/31/2012

1/15/2013

0.5078125

1,751

3/31/2013

4/4/2013

4/15/2013

0.5078125

930

6/30/2013

6/28/2013

7/15/2013

0.5078125

930

9/30/2013

9/23/2013

10/15/2013

0.4231771

775

Quarter Ended

Record Date

Payment Date

Dividend Per Share

Total Amount

3/31/2013

4/4/2013

4/15/2013

0.4027778

685

6/30/2013

6/28/2013

7/15/2013

0.4531250

770

The following table summarizes the dividend history on shares of CapLease Series B preferred stock for the periods indicated.

16. Stock Based Compensation

Quarter

Ended

Record

Date

Payment

Date

Dividend

Per Share

Total

Amount

6/30/2012

6/29/2012

7/16/2012

0.5001740

1,000

9/30/2012

9/28/2012

10/15/2012

0.5234375

1,121

12/31/2012

1/15/2013

0.5234375

1,539

3/31/2013

4/4/2013

4/15/2013

0.5234375

1,539

6/30/2013

6/28/2013

7/15/2013

0.5234375

1,539

9/30/2013

9/23/2013

10/15/2013

0.4361979

1,283

The ~~Company~~following ~~adopted~~table asummarizes ~~stock incentive plan for its employees and directors during March 2004 in connection with its initial public offering. On June 12, 2013, CapLease’s common stockholders approved amendments to~~ the ~~stock~~dividend ~~incentive~~history ~~plan~~on ~~which, among other things, increased by 3,100,000~~ shares, ~~to 8,223,000 shares, the number~~ of ~~shares~~CapLease ~~authorized~~Series ~~under~~C ~~the~~preferred ~~plan. As of June 30, 2013, the Company had made awards aggregating 4,686,905 shares of common~~ stock ~~under~~for the ~~stock~~periods ~~plan, all in the form of restricted stock awards and performance share units to executive officers, other employees and directors of the Company~~indicated. ~~As of June 30, 2013, the Company had not awarded any options or stock appreciation rights under the stock plan.~~

Pursuant to the Merger Agreement and as described at Note 2 above, all restricted stock awards and performance share units awards are scheduled to become fully vested (or in the case of performance share units fully earned and settled at 100% of the target number of shares) and will have the right to receive the Merger Consideration.

Quarter

Ended

Record

Date

Payment

Date

Dividend

Per Share

Total

Amount

3/31/2013

4/4/2013

4/15/2013

0.4027778

685

6/30/2013

6/28/2013

7/15/2013

0.4531250

770

9/30/2013

9/23/2013

10/15/2013

0.3776042

642

3516. Stock Based Compensation

The Company adopted a stock incentive plan for its employees and directors during March 2004 in connection with its initial public offering. On June 12, 2013, CapLease’s common stockholders approved amendments to the stock incentive plan which, ~~Inc~~among other things, increased by 3,100,000 shares, to 8,223,000 shares, the number of shares authorized under the plan. As of September 30, 2013, the Company had made awards aggregating 4,686,905 shares of common stock under the stock plan, all in the form of restricted stock awards and ~~Subsidiaries~~performance share units to executive officers, other employees and directors of the Company. As of September 30, 2013, the Company had not awarded any options or stock appreciation rights under the stock plan.

~~Notes~~Pursuant to ~~Consolidated~~the ~~Financial~~Merger ~~Statements~~Agreement and as described at Note 2 above, all restricted stock awards and performance share units awards are scheduled to become fully vested (or in the case of performance share units fully earned and settled at 100% of the target number of shares) and will have the right to receive the Common Merger Consideration.

~~(Dollar amounts in thousands, except per share amounts; totals may not add due to rounding)~~36

~~June 30~~CapLease, ~~2013~~Inc. ~~(unaudited)~~and Subsidiaries

ANotes ~~summary~~to ofConsolidated ~~the~~Financial ~~Company’s activity under the stock plan from January 1, 2012 through the six months ended June 30, 2013, is presented below:~~Statements

	Number of Shares
Stock Based Awards at January 1, 2012		3,751,575
Restricted Stock Awards Granted During the Year Ended December 31, 2012		497,700		(1)
Restricted Stock Awards Forfeited During the Year Ended December 31, 2012		(6,270	)
Stock Based Awards at January 1, 2013		4,243,005
Restricted Stock Awards Granted During the Period Ended June 30, 2013		315,000		(2)
Performance Share Units Granted During the Period Ended June 30, 2013		128,900		(3)
Stock Awards at June 30, 2013		4,686,905

(Dollar amounts in thousands, except per share amounts; totals may not add due to rounding)

~~(1)~~September ~~Shares~~30, ~~are scheduled to vest between March~~ 2013 and March 2015, but will generally be forfeited if the recipient either terminates his employment with the Company or ceases to be a member of CapLease’s Board of Directors at any time prior to the vesting date. Vesting of an aggregate of 262,725 shares is also subject to satisfaction of objective and subjective performance criteria, to be determined by CapLease’s Compensation Committee. Shares are also subject to accelerated vesting in the Merger as described above.(unaudited)

~~(2)~~A ~~Shares~~summary ~~are~~of ~~scheduled to vest between March 2014 and March 2016, but will generally be forfeited if~~ the ~~recipient either terminates his employment with the~~ Company ~~or ceases to be a member of CapLease~~’s ~~Board~~activity ofunder ~~Directors~~the atstock ~~any~~plan ~~time~~from ~~prior~~January to1, ~~the~~2012 ~~vesting~~through ~~date.~~the ~~Shares~~nine ~~are~~months ~~also~~ended ~~subject~~September to30, ~~accelerated~~2013, ~~vesting~~is inpresented ~~the Merger as described above.~~below:

(3) Performance share units are tied to the target number of shares of common stock listed and are scheduled to cliff vest after a three year performance period if performance objectives are achieved. Any actual payout of shares is dependent entirely upon the relative total shareholder return of the Company compared against a peer group over the performance period. Payout will not occur until the end of the performance period and will range from 0% to 200% of the target number of shares, with payout beginning at 50% of the target number of shares at total shareholder return of the Company at the 25th percentile of the peer group. Units are also subject to acceleration and settlement in the Merger as described above.

	Number of Shares
Stock Based Awards at January 1, 2012		3,751,575
Restricted Stock Awards Granted During the Year Ended December 31, 2012		497,700	(1)
Restricted Stock Awards Forfeited During the Year Ended December 31, 2012		(6,270	)
Stock Based Awards at January 1, 2013		4,243,005
Restricted Stock Awards Granted During the Period Ended September 30, 2013		315,000	(2)
Performance Share Units Granted During the Period Ended September 30, 2013		128,900	(3)
Stock Awards at September 30, 2013		4,686,905

A(1) ~~summary~~Shares are scheduled to vest between March 2013 and March 2015, but will generally be forfeited if the recipient either terminates his employment with the Company or ceases to be a member of CapLease’s Board of Directors at any time prior to the ~~status~~vesting date. Vesting of ~~restricted~~an ~~stock~~aggregate ~~awards~~of 262,725 shares is also subject to satisfaction of objective and subjective performance ~~share~~criteria, ~~units~~to ~~from~~be ~~January~~determined 1,by ~~2012~~CapLease’s ~~through~~Compensation ~~the~~Committee. ~~six~~Shares ~~months~~are ~~ended~~also ~~June~~subject ~~30,~~to ~~2013,~~accelerated isvesting ~~presented~~in ~~below:~~the Merger as described above.

	Shares Awarded Under Plan				Shares Priced Under GAAP			Weighted Average Fair Value
Nonvested at January 1, 2012		1,606,017				1,081,617		$	4.91
Current period restricted stock awards		497,700				322,550			4.08
Prior period restricted stock awards	N/A					257,760			4.08
Vested - previously restricted stock awards		(577,757	)	(1)		(577,757	)		5.26
Forfeited - previously restricted stock awards		(6,270	)			(6,270	)		5.80
Nonvested at January 1, 2013		1,519,690				1,077,900			4.26
Current period restricted stock awards		315,000				315,000			6.12
Prior period restricted stock awards	N/A					305,990			6.12
Current period performance share units		128,900				128,900			8.36
Vested - previously restricted stock awards		(697,406	)	(2)		(697,406	)		4.35
Nonvested at June 30, 2013		1,266,184				1,130,384			5.69

(2)

Shares are scheduled to vest between March 2014 and March 2016, but will generally be forfeited if the recipient either terminates his employment with the Company or ceases to be a member of CapLease’s Board of Directors at any time prior to the vesting date. Shares are also subject to accelerated vesting in the Merger as described above.

(13) ~~Includes~~Performance ~~231,288~~share units are tied to the target number of shares ~~vested~~of ascommon stock listed and are scheduled to cliff vest after a ~~result~~three year performance period if performance objectives are achieved. Any actual payout of shares is dependent entirely upon the relative total shareholder return of the Company compared against a peer group over the performance ~~criteria~~period. ~~being~~Payout ~~satisfied~~will not occur until the end of the performance period and will range from 0% to 200% of the target number of shares, with payout beginning at 50% of the target number of shares at total shareholder return of the Company at the 25th percentile of the peer group. Units are also subject to acceleration and settlement in the Merger as described above.

~~(2)~~A ~~Includes~~summary ~~396,885~~of ~~shares~~the ~~vested~~status asof arestricted ~~result~~stock ofawards and performance ~~criteria~~share ~~being~~units ~~satisfied.~~from January 1, 2012 through the nine months ended September 30, 2013, is presented below:

For restricted stock awards, the Company uses the closing stock price on the grant date as its estimate of the fair value of the award. For performance share units, the Company uses a Monte Carlo simulation analysis to estimate the fair value of the award.

	Shares Awarded Under Plan				Shares Priced Under GAAP			Weighted Average Fair Value
Nonvested at January 1, 2012		1,606,017				1,081,617		$	4.91
Current period restricted stock awards		497,700				322,550			4.08
Prior period restricted stock awards		N/A				257,760			4.08
Vested - previously restricted stock awards		(577,757	)	(1)		(577,757	)		5.26
Forfeited - previously restricted stock awards		(6,270				(6,270	)		5.80
Nonvested at January 1, 2013		1,519,690				1,077,900			4.26
Current period restricted stock awards		315,000				315,000			6.12
Prior period restricted stock awards	N/A					305,990			6.12
Current period performance share units		128,900				128,900			8.36
Vested - previously restricted stock awards		(697,406	)	(2)		(697,406	)		4.35
Nonvested at September 30, 2013		1,266,184				1,130,384			5.69

	(1)	Includes 231,288 shares vested as a result of performance criteria being satisfied.
	(2)	Includes 396,885 shares vested as a result of performance criteria being satisfied.

~~CapLease~~For restricted stock awards, ~~Inc~~the Company uses the closing stock price on the grant date as its estimate of the fair value of the award. ~~and~~For ~~Subsidiaries~~performance share units, the Company uses a Monte Carlo simulation analysis to estimate the fair value of the award.

~~Notes to Consolidated Financial Statements~~37

~~(Dollar amounts in thousands~~CapLease, ~~except~~Inc. ~~per~~and ~~share amounts; totals may not add due to rounding)~~Subsidiaries

~~June~~Notes ~~30,~~to ~~2013~~Consolidated ~~(unaudited)~~Financial Statements

~~The~~(Dollar ~~Company~~amounts ~~has made certain of the restricted stock awards with vesting dependent upon satisfaction of performance criteria to be determined~~ in ~~the future. For such awards~~thousands, ~~applicable~~except ~~accounting~~per ~~guidance~~share ~~provides~~amounts; ~~that~~totals ~~despite~~may ~~the award having been granted, it is~~ not ~~valued~~add ~~for~~due ~~financial~~to accounting purposes and expense related thereto does not commence until performance criteria have been established. “Prior period restricted stock awards” in the above table represent restricted stock awards made in a prior period but which have been valued for financial accounting purposes in the current period when the CapLease Compensation Committee determined the performance criteria.rounding)

AsSeptember ~~of June~~ 30, 2013, ~~the Company had $5,371 of restricted stock awards and performance share units~~ (~~fair value at the grant dates~~unaudited) expected to be charged to the Company’s Consolidated Statements of Operations ratably over the remaining vesting period (through March 2016) assuming vesting criteria are satisfied. In addition, as of June 30, 2013, the Company has not yet commenced expense accrual related to the following number of restricted stock awards because the applicable performance criteria have not yet been determined: 48,225 shares of restricted stock awarded in 2010, and 87,575 shares of restricted stock awarded in 2012.

17The Company has made certain of the restricted stock awards with vesting dependent upon satisfaction of performance criteria to be determined in the future. ~~Other~~ ~~Comprehensive~~For ~~Income~~such ~~(Loss)~~awards, applicable accounting guidance provides that despite the award having been granted, it is not valued for financial accounting purposes and expense related thereto does not commence until performance criteria have been established. “Prior period restricted stock awards” in the above table represent restricted stock awards made in a prior period but which have been valued for financial accounting purposes in the current period when the CapLease Compensation Committee determined the performance criteria.

~~Comprehensive~~As ~~income~~of ~~(loss)~~September is30, ~~defined~~2013, ~~under GAAP as~~ the ~~change~~Company inhad ~~equity~~$4,377 of arestricted ~~business~~stock ~~enterprise~~awards ~~during a period from transactions~~ and ~~other~~performance ~~events~~share ~~and~~units ~~circumstances,~~(fair ~~excluding~~value ~~those~~at ~~resulting~~the ~~from~~grant ~~investments~~dates) byexpected ~~and distributions~~ to ~~owners,~~be ~~and~~charged isto ~~presented in~~ the Company’s Consolidated Statements of ~~Comprehensive~~Operations ~~Income~~ratably ~~(Loss).~~over ~~For~~ the ~~Company’s~~remaining ~~purposes,~~vesting ~~comprehensive~~period ~~income~~ (~~loss)~~through ~~represents~~March ~~net income (loss~~2016) ~~before~~assuming ~~non-controlling~~vesting ~~interest~~criteria inare ~~consolidated~~satisfied. ~~subsidiaries~~In addition, as ~~presented~~of inSeptember 30, 2013, the Company’s ~~Consolidated~~has ~~Statements~~not yet commenced expense accrual related to the following number of ~~Operations,~~restricted ~~adjusted~~stock ~~for~~awards ~~unrealized~~because ~~gains~~the orapplicable ~~losses~~performance oncriteria ~~securities~~have ~~available~~not ~~for~~yet ~~sale~~been ~~and~~determined: ~~derivatives~~48,225 ~~and~~shares ~~amortization~~ of ~~realized~~restricted ~~losses~~stock onawarded ~~derivatives~~in ~~reclassified~~2010, ~~into~~and ~~interest~~87,575 ~~expense.~~shares of restricted stock awarded in 2012.

~~GAAP also divides comprehensive income (loss) into “net income (loss)” and “other comprehensive income (loss)~~17.” Other comprehensive income (loss) is defined as revenues, expenses, gains and losses that under GAAP are included in comprehensive income (loss) but excluded from net income (loss). Other comprehensive income (loss) is a component of Stockholders’ Equity and is shown on the Company’s Consolidated Statements of Changes in Equity (fourth column). The following table summarizes the Company’s Accumulated Other Comprehensive Income (Loss) ~~as reported on the Consolidated Statements of Changes in Equity.~~

	Jun 30, 2013			Dec 31, 2012
	Unaudited
Net unrealized gains on securities available for sale	$	487		$	480
Net unrealized gains on derivatives		92			-
Net realized losses on derivatives		(876	)		(1,146	)
Accumulated other comprehensive loss	$	(297	)	$	(666	)

Comprehensive income (loss) is defined under GAAP as the change in equity of a business enterprise during a period from transactions and other events and circumstances, excluding those resulting from investments by and distributions to owners, and is presented in the Company’s Consolidated Statements of Comprehensive Income (Loss). For the Company’s purposes, comprehensive income (loss) represents net income (loss) before non-controlling interest in consolidated subsidiaries, as presented in the Company’s Consolidated Statements of Operations, adjusted for unrealized gains or losses on securities available for sale and derivatives, and amortization of realized losses on derivatives reclassified into interest expense.

18GAAP also divides comprehensive income (loss) into “net income (loss)” and “other comprehensive income (loss). ~~Non-Controlling~~” ~~Interests~~Other comprehensive income (loss) is defined as revenues, expenses, gains and losses that under GAAP are included in comprehensive income (loss) but excluded from net income (loss). Other comprehensive income (loss) is a component of Stockholders’ Equity and is shown on the Company’s Consolidated Statements of Changes in Equity (fourth column). The following table summarizes the Company’s Accumulated Other Comprehensive Income (Loss) as reported on the Consolidated Statements of Changes in Equity.

During June 2006, CapLease’s Operating Partnership issued 263,157 units of limited partnership to an unaffiliated third party. All of these units were issued as partial consideration for the Company’s acquisition of a real property in June 2006 from the third party. During June 2008, the units of limited partnership became redeemable by the holder, at its option, on the basis of one unit for either one share of CapLease common stock or cash equal to the fair market value of a share of common stock at the time of the redemption. The units of limited partnership do not have a liquidation preference. During September 2008, the holder redeemed 107,131 units for the same number of shares of CapLease common stock. As of June 30, 2013, the Operating Partnership had issued and outstanding 156,026 units of limited partnership. Each unit will be converted into the right to receive $8.50 in cash, without interest, in the Merger.

	Sep 30, 2013			Dec 31, 2012
	Unaudited
Net unrealized gains on securities available for sale	$	1,841		$	480
Net unrealized loss on derivatives		(45	)		-
Net realized losses on derivatives		(740	)		(1,146	)
Accumulated other comprehensive income (loss)	$	1,056		$	(666	)

Cash distributions by the Operating Partnership are paid in the following priority: first, to the non-controlling interest holders until such holders receive the amount they would have received if the holders’ units of limited partnership interest were converted to an equal number of shares of CapLease common stock, and then, to CapLease18. ~~As a result, since July 2006, at the same time CapLease has paid a cash dividend to its common stockholders, the non~~ Non-~~controlling~~Controlling ~~interest~~Interests ~~holders have been paid a cash dividend of the same amount per limited partnership unit.~~

37During June 2006, CapLease’s Operating Partnership issued 263,157 units of limited partnership to an unaffiliated third party. All of these units were issued as partial consideration for the Company’s acquisition of a real property in June 2006 from the third party. During June 2008, the units of limited partnership became redeemable by the holder, at its option, on the basis of one unit for either one share of CapLease common stock or cash equal to the fair market value of a share of common stock at the time of the redemption. The units of limited partnership do not have a liquidation preference. During September 2008, the holder redeemed 107,131 units for the same number of shares of CapLease common stock. As of September 30, 2013, the Operating Partnership had issued and outstanding 156,026 units of limited partnership. Each unit will be converted into the right to receive $8.50 in cash, without interest, in the Merger.

Cash distributions by the Operating Partnership are paid in the following priority: first, to the non-controlling interest holders until such holders receive the amount they would have received if the holders’ units of limited partnership interest were converted to an equal number of shares of CapLease common stock, ~~Inc~~and then, to CapLease. ~~and~~As ~~Subsidiaries~~a result, since July 2006, at the same time CapLease has paid a cash dividend to its common stockholders, the non-controlling interest holders have been paid a cash dividend of the same amount per limited partnership unit.

~~Notes to Consolidated Financial Statements~~38

~~(Dollar amounts in thousands~~CapLease, ~~except~~Inc. ~~per~~and ~~share amounts; totals may not add due to rounding)~~Subsidiaries

~~June~~Notes ~~30,~~to ~~2013~~Consolidated ~~(unaudited)~~Financial Statements

~~19. Rental~~(Dollar ~~Income~~amounts in thousands, except per share amounts; totals may not add due to rounding)

~~The~~September Company is the landlord to tenants under operating leases with expiration dates ranging from 2013 to 2030. The minimum rental amounts due under the leases are generally subject to scheduled fixed increases. The leases generally also require that the tenants pay for or reimburse the Company for the occupancy and operating costs of the properties, or in certain cases reimburse the Company for increases in certain operating costs and real estate taxes above their base year costs. Approximate future minimum rents to be received over the next five years and thereafter for non-cancelable operating leases in effect at June 30, 2013, ~~are as follows:~~ (unaudited)

6 months ending December 31, 2013	$	70,204
2014		138,581
2015		135,968
2016		126,330
2017		102,510
Thereafter		383,996
Total	$	957,589

19. Rental Income

20The Company is the landlord to tenants under operating leases with expiration dates ranging from 2013 to 2030. ~~Pro~~ ~~Forma~~The ~~Condensed~~minimum ~~Consolidated~~rental ~~Income~~amounts ~~Statements~~due under the leases are generally subject to scheduled fixed increases. The leases generally also require that the tenants pay for or reimburse the Company for the occupancy and operating costs of the properties, or in certain cases reimburse the Company for increases in certain operating costs and real estate taxes above their base year costs. Approximate future minimum rents to be received over the next five years and thereafter for non-cancelable operating leases in effect at September 30, 2013, are as follows:

The accompanying unaudited Pro Forma Condensed Consolidated Income Statements are presented as if, at January 1, 2012, the Company acquired all real properties purchased during the six months ended June 30, 2013 and that meet the classification of a business for financial accounting purposes. Earnings per share are presented using the weighted average shares outstanding during the relevant periods. In management's opinion, all adjustments necessary to reflect the effects of the above transactions have been made.

3 months ending December 31, 2013	$	34,653
2014		140,423
2015		135,829
2016		126,330
2017		102,510
Thereafter		383,996
Total	$	923,741

~~The unaudited~~ 20. Pro Forma Condensed Consolidated Income Statements are not necessarily indicative of what the actual results of operations would have been assuming the acquisition transactions had occurred at the date indicated above, nor do they purport to represent our future results of operations.

	For the three months ended June 30,						For the six months ended June 30,
	2013			2012			2013			2012
Total revenues	$	46,518		$	42,092		$	92,266		$	83,474
Income (loss) from continuing operations		771			10,153			3,530			13,665
Net loss allocable to common stockholders		(2,473	)		(8,145	)		(3,248	)		(6,994	)
Income (loss) per basic and diluted common share from continuing operations		(0.03	)		0.12			(0.04	)		0.14
Net loss per basic and diluted common share		(0.03	)		(0.12	)		(0.04	)		(0.11	)

The accompanying unaudited Pro Forma Condensed Consolidated Income Statements are presented as if, at January 1, 2012, the Company acquired all real properties purchased during the nine months ended September 30, 2013 and that meet the classification of a business for financial accounting purposes. Earnings per share are presented using the weighted average shares outstanding during the relevant periods. In management's opinion, all adjustments necessary to reflect the effects of the above transactions have been made.

~~21. Subsequent~~The ~~Events~~unaudited Pro Forma Condensed Consolidated Income Statements are not necessarily indicative of what the actual results of operations would have been assuming the acquisition transactions had occurred at the date indicated above, nor do they purport to represent our future results of operations.

New Leases

	For the three months ended September 30,						For the nine months ended September 30,
	2013			2012			2013			2012
Total revenues	$	46,072		$	44,188		$	138,334		$	127,661
Income (loss) from continuing operations		1,837			2,201			5,377			15,874
Net loss allocable to common stockholders		(1,401	)		(531	)		(4,644	)		(7,516	)
Income (loss) per basic common share from continuing operations		(0.02	)		(0.01	)		(0.06	)		0.14
Net loss per basic common share		(0.02	)		(0.01	)		(0.06	)		(0.11	)
Income (loss) per diluted common share from continuing operations		(0.02	)		(0.01	)		(0.05	)		0.14
Net loss per diluted common share		(0.02	)		(0.01	)		(0.05	)		(0.11	)

~~During August 2013, the Company entered into a one-year lease commencing in November 2013 of the 764,177 square foot warehouse property located in Fort Wayne, IN~~21. Subsequent ~~The~~Events lease is with The Procter & Gamble Manufacturing Company and also includes a tenant option to extend for an additional five years. The annual rental rate during the one year term is $2.75 per square foot.

~~During~~On ~~July~~November 5, 2013, the ~~Company~~Mergers ~~also~~were ~~entered~~completed, ~~into~~and athe ~~multi-year~~separate ~~lease~~existences of ~~19,345~~CapLease ~~square~~and ~~feet at~~ the ~~multi-tenant~~Operating ~~office~~Partnership ~~building at 1299 Farnam Street in Omaha, NE~~ceased.

38On November 5, 2013, in connection with the Mergers, the ARCP Operating Partnership, as successor by merger to the Operating Partnership, and various of the Company’s subsidiaries, entered into an amendment to the Company’s senior secured revolving credit agreement with Wells Fargo Bank, National Association, pursuant to which the ARCP Operating Partnership assumed the obligations of the Operating Partnership under the credit agreement, and ARCP and Merger Sub assumed the obligations of CapLease under the credit agreement. As a result of the amendment, CapLease and the Operating Partnership have no further obligations under the credit agreement.

~~Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations~~ 39

~~The following discussion should be read in conjunction with the consolidated financial statements and the notes to those financial statements~~CapLease, ~~included elsewhere in this filing~~Inc. Except where otherwise indicated or where the context is clear, the portfolio statistics in Item 2 of this Form 10-Q represent or are calculated from our carry value for financial reporting purposes before depreciation and ~~amortization. With respect to our loan portfolio, we have adjusted our carry value to exclude a $0.5 million general loss reserve.~~ Subsidiaries

~~When~~Notes we use the term “we,” “us,” “our” or “the Company” we mean CapLease, Inc. and its majority-owned subsidiaries. All interests in our properties are held through special purpose entities which are separate and distinct legal entities. References in Item 2 of this Form 10-Q to ~~our~~Consolidated ~~“Single~~Financial ~~Tenant Owned Property Portfolio” include those properties we own which are leased primarily but not exclusively by one tenant but do not include our two multi-tenant properties.~~ Statements

~~Pending~~(Dollar ~~Merger~~amounts in thousands, except per share amounts; totals may not add due to rounding)

~~See~~September ~~Note 2 of the consolidated financial statements included in this Form 10-Q for a discussion of the pending merger transaction to which CapLease~~30, Inc. and certain of its subsidiaries are parties. Under the terms of the merger agreement, stockholders of CapLease, Inc. will receive $8.50 in cash for each outstanding share of CapLease, Inc. common stock they own. Shares of each series of CapLease, Inc.’s preferred stock, including its Series A, Series B and Series C preferred stock, will be converted in the merger into the right to receive the sum of $25.00 in cash per share plus an amount equal to any accrued and unpaid dividends up to but excluding the closing date of the merger. The merger transaction is expected to close during the third quarter of 2013, although closing is subject to various conditions, including the approval of the merger by CapLease’s common stockholders, and therefore, we cannot provide any assurance that the merger will close in a timely manner or at all. (unaudited)

~~Our~~On ~~ability~~November to5, ~~execute~~2013, onin ~~our~~connection ~~business~~with ~~plan~~the ~~could~~Mergers, beCapLease, ~~adversely~~the ~~impacted~~Operating byPartnership, ~~operating~~ARCP, ~~restrictions~~the ~~included~~ARCP inOperating ~~the~~Partnership ~~merger~~and ~~agreement~~Deutsche ~~with~~Bank ~~American~~Trust ~~Realty~~Company ~~Capital~~Americas, ~~Properties~~a New York banking corporation, ~~Inc~~entered into a supplemental indenture related to the Company’s convertible senior notes. Pursuant to the supplemental indenture, (~~“ARCP”~~i), ~~including~~ARCP ~~restrictions~~assumed onall ~~acquiring~~of ~~new~~the ~~assets~~Company’s ~~and~~obligations ~~raising~~under ~~additional~~the ~~capital.~~convertible Wesenior ~~have~~notes ~~incurred~~ and ~~will~~(ii) ~~incur~~the aARCP ~~variety~~Operating Partnership assumed all of ~~merger~~the ~~related~~Operating ~~costs~~Partnership’s ~~which~~obligations ~~while~~under ~~not~~the ~~recurring~~convertible insenior ~~nature~~notes. ~~will~~As ~~not~~a beresult ~~recoverable~~of ifthe foregoing, the ~~merger~~Company ishas ~~not~~no ~~consummated.~~further obligations with respect to the convertible senior notes.

~~Overview~~On November 5, 2013, in connection with the Mergers, the Operating Partnership, the ARCP Operating Partnership and The Bank of New York Mellon as successor-in-trust to JP Morgan Chase Bank, National Association, entered into a supplemental indenture related to the Company’s trust preferred securities. Pursuant to the supplemental indenture, the ARCP Operating Partnership assumed all of the Company’s obligations under the trust preferred securities. As a result of the foregoing, the Company has no further obligations with respect to the trust preferred securities.

WeOn ~~are~~November a5, ~~REIT~~2013, ~~that~~in ~~primarily~~connection ~~owns~~with ~~and~~the ~~manages~~Mergers, aARCP ~~diversified~~paid ~~portfolio~~in offull ~~single~~the ~~tenant~~outstanding ~~commercial~~balance ~~real~~under ~~estate~~the ~~properties~~Company's credit ~~subject~~agreement towith ~~long-term~~KeyBank ~~leases~~N.A. toAs ~~high~~a ~~credit~~result ~~quality tenants. Many~~ of the ~~properties we own are subject to a net lease~~repayment, ~~or a lease that requires~~ the ~~tenant~~KeyBank tocredit ~~pay~~agreement ~~all~~has orbeen ~~substantially all property operating expenses~~terminated, ~~such~~and asthe ~~utilities,~~Company ~~real~~has ~~estate~~no ~~taxes,~~further ~~insurance~~obligations ~~and routine maintenance~~thereunder.

Our tenants are primarily large public companies or their significant operating subsidiaries and governmental entities with investment grade credit ratings, defined as a published senior unsecured credit rating of BBB-/Baa3 or above from one or both of S&P and Moody’s. We also imply an investment grade credit rating for tenants that are not publicly rated by S&P or Moody’s but (i) are 100% owned by an investment grade parent, (ii) for which we have obtained a private investment grade rating from either S&P or Moody’s, (iii) for which we have evaluated the creditworthiness of the tenant and estimated a credit rating that is consistent with an investment grade rating from S&P or Moody’s, or (iv) are governmental entity branches or units of another investment grade rated governmental entity. 40

AsItem ~~of June 30, 2013, we had an approximately $~~2.0 ~~billion~~Management’s ~~investment~~Discussion ~~portfolio, comprised almost entirely of owned properties. The owned property portfolio comprises approximately 13.1 million square feet~~ and ~~includes~~Analysis ~~a variety~~ of ~~office,~~Financial ~~warehouse,~~Condition ~~retail~~ and ~~other~~Results property types. We own 74 properties in 27 states leased to 44 different tenants across our Single Tenant Owned Property Portfolio. In addition to the owned property portfolio, we have a modest portfolio of ~~first mortgage loans and other debt investments on single tenant properties.~~ Operations

WeThe ~~have~~following ~~invested~~discussion inshould ~~certain~~be ~~owned~~read ~~properties~~in ~~that~~conjunction ~~are~~with ~~leased~~the ~~primarily~~consolidated ~~but~~financial ~~not~~statements ~~exclusively~~and bythe ~~one~~notes ~~tenant.~~to Wethose ~~have~~financial ~~also~~statements, ~~invested~~included elsewhere in ~~certain~~this ~~owned~~filing. ~~properties~~Except ~~which~~where ~~were~~otherwise ~~previously~~indicated ~~leased~~or bywhere ~~one~~the ~~tenant~~context ~~but~~is asclear, athe ~~result~~portfolio statistics in Item 2 of ~~lease~~this ~~non~~Form 10-~~renewals~~Q ~~have~~represent ~~now~~or ~~become~~are ~~multi-tenant~~calculated ~~properties.~~from Weour ~~expect~~carry ~~these~~value ~~types~~for offinancial ~~properties~~reporting ~~will~~purposes ~~continue~~before todepreciation ~~comprise~~and aamortization. ~~portion~~With ofrespect to our loan portfolio, ~~for~~we ~~the~~have ~~foreseeable~~adjusted ~~future~~our carry value to exclude a $0. 5 million general loss reserve.

39When we use the term “we,” “us,” “our” or “the Company” we mean CapLease, Inc. and its majority-owned subsidiaries. All interests in our properties are held through special purpose entities which are separate and distinct legal entities. References in Item 2 of this Form 10-Q to our “Single Tenant Owned Property Portfolio” include those properties we own which are leased primarily but not exclusively by one tenant but do not include our two multi-tenant properties.

Our main business objective is to generate stable, long-term and attractive returns based on the spread between the yields generated by our assets and the cost of financing our portfolio. We believe that our focus on assets leased to high credit quality tenants subject to long-term leases will provide us with a stable and predictable stream of cash flows that will support our business and the payment of dividends to our stockholders for the foreseeable future. Merger

~~The~~On ~~principal~~November ~~sources~~5, of2013, ~~our~~we ~~revenues~~closed ~~are rental income on~~ our ~~owned~~merger ~~real~~with ~~properties~~American ~~and~~Realty ~~interest~~Capital ~~income~~Properties, ~~from~~Inc. ~~our debt investments~~ (~~commercial~~“ARCP”), ~~real estate mortgage loans~~ and ~~mortgage-backed~~the ~~securities).~~separate Inexistences ~~order~~of ~~to grow our revenues~~CapLease, ~~we will be primarily dependent on our ability to add new assets to our portfolio~~Inc. ~~During~~and ~~the~~its ~~year~~operating ~~ended~~partnership, ~~December 31~~Caplease, ~~2012~~LP, weceased. ~~grew~~Each ~~our~~share ~~investment portfolio with approximately $190 million~~ of ~~real~~CapLease, ~~property~~Inc. ~~acquisitions~~common ~~and~~stock ~~new~~was ~~build-to-suit~~converted ~~commitments,~~in ~~and~~the ~~for~~merger ~~2013,~~into wethe ~~have~~right ~~added~~to receive $~~115~~8.650 ~~million~~in ofcash. ~~real~~Each ~~property~~share ~~acquisition~~of ~~and~~all ~~build-to-suit~~series ~~commitments~~of ~~through June 30~~CapLease, ~~2013~~Inc.’s ~~However~~preferred stock, ~~execution~~including ofits ~~our~~Series ~~growth~~A, ~~strategy~~Series isB ~~dependent~~and ~~upon~~Series ~~various~~C ~~factors~~preferred ~~beyond~~stock, ~~our~~were ~~control,~~converted ~~including~~in ~~competitive~~the ~~and~~merger ~~market~~into ~~conditions,~~the asright ~~well~~to asreceive the ~~merger~~sum ~~agreement~~of ~~restrictions discussed above~~$25.00 ~~Therefore,~~in wecash ~~cannot~~per ~~provide~~share ~~any~~plus ~~assurance~~an asamount equal to ~~whether,~~any ~~when~~accrued and atunpaid ~~what~~dividends ~~yields~~up ~~and~~to ~~other~~but ~~terms~~excluding wethe ~~will~~closing bedate ~~able~~of tothe ~~grow our investment portfolio~~merger.

WeApplication ~~are also intensely focused on growing revenues by re-letting vacant space within our portfolio. As~~ of ~~June~~Critical ~~30,~~Accounting 2013, the occupancy rate in our owned property portfolio was 91.1%. During the third quarter of 2013, we have entered into leases with respect to 783,522 square feet of vacant space in our portfolio. See Note 21 of the consolidated financial statements included in this Form 10-Q. We continue to actively market vacant space in our portfolio for lease. Policies

~~The~~A ~~average~~summary ~~remaining~~of ~~lease term on~~ our ~~owned~~critical ~~properties~~accounting policies is ~~approximately~~included 7in ~~years, and we have some leases that are scheduled to mature during 2013 and the next several years. See the “Lease Expirations” table at “Item 1. Business” of~~ our Annual Report on Form 10-K for the ~~fiscal~~ year ended December 31, 2012. Wein ~~are~~Management’s ~~subject~~Discussion ~~to the risk that our tenants do not renew their leases at maturity~~ and ~~that~~Analysis ~~we are unable to promptly re-let the property, or that the terms~~ of ~~renewal~~Financial orCondition ~~re-letting~~and ~~may~~Results ~~be less favorable to us than the current lease terms, any~~ of ~~which could result in a reduction in our revenues and an increase in our property operating costs~~Operations. There Wehave ~~cannot~~been ~~provide~~no ~~any~~significant ~~assurance~~changes as to ~~when~~those ~~and~~policies onduring ~~what terms we will be able to re-let properties that are or may become vacant in our portfolio~~2013.

~~The~~Third ~~principal~~Quarter sources of our expenses are interest expense on our assets financed, depreciation expense on our real properties, general and administrative expenses and property expenses (net of tenant reimbursements). Our credit agreements with Wells Fargo Bank and KeyBank, as well as the loan agreement with Bank of Oklahoma for the Tulsa, OK build-to-suit property, are floating rate debt and, therefore, the interest expense we pay is expected to increase if interest rates, in particular LIBOR rates, increase. During the second quarter of 2013, weTransaction entered into a fixed rate interest rate swap agreement with respect to our loan agreement with Bank of Oklahoma. The Company’s strategy for the swap is to fix at an attractive rate the amount of interest expense the Company pays on the outstanding debt. Summary

WeThe ~~rely~~following onsummarizes ~~leverage to allow us to invest in a greater number of assets and enhance~~ our ~~asset~~significant ~~returns.~~transactions ~~Our~~during ~~overall~~the ~~portfolio~~three ~~leverage,~~months ~~expressed~~ended ~~as a percentage of our total debt to our total assets before depreciation and amortization on owned properties and with other minor adjustments, was approximately 58% as of June~~ September 30, 2013. Our leverage ratios by portfolio asset type as of June 30, 2013 were approximately 56% for our owned properties and 64% for our debt investments. See “Liquidity and Capital Resources—Debt Obligations and Leverage Computations” below for information about our use of leverage ratios and how we compute them. We have substantially reduced our leverage levels over the past several years, and expect our leverage levels to continue to decline in the future primarily through scheduled principal amortization on our debt and lower or no leverage on new asset acquisitions.

WeNew ~~have~~Investment financed many of our owned properties with long-term, fixed rate, non-recourse debt. Through non-recourse debt, we seek to limit the overall company exposure in the event we default on the debt to the amount we have invested in the asset or assets financed. We have also pledged certain of our owned properties to Wells Fargo Bank as lender under a recourse revolving credit agreement, in order to provide us with an immediate source of liquidity through borrowings thereunder. Transactions

We● ~~have~~During ~~various~~August ~~debt~~2013, ~~obligations~~we ~~that~~entered ~~are~~into ~~scheduled~~an toagreement ~~mature~~with ~~over~~a ~~the~~major ~~next~~Texas-based ~~several~~developer ~~years.~~to Wedevelop ~~will~~a ~~be required to repay~~150,000 ~~refinance~~square orfoot ~~extend~~speculative ~~our~~office ~~debt~~building ~~obligations~~in atThe m

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