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SL GREEN REALTY CORP. FORM 10-K TABLE OF CONTENTS

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



FORM 10-K


ý

 

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

For the fiscal year ended December 31, 2008

OR

o

 

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: 1-13199

SL GREEN REALTY CORP.
(Exact name of registrant as specified in its charter)



Maryland
(State or other jurisdiction of
incorporation or organization)
  13-3956755
(I.R.S. Employer Identification No.)

420 Lexington Avenue, New York, NY 10170
(Address of principal executive offices—Zip Code)

(212) 594-2700
(Registrant's telephone number, including area code)



         SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

Title of Each Class   Name of Each Exchange on Which Registered
Common Stock, $0.01 par value   New York Stock Exchange
7.625% Series C Cumulative Redeemable
Preferred Stock, $0.01 par value,
$25.00 mandatory liquidation preference
  New York Stock Exchange
7.875% Series D Cumulative Redeemable
Preferred Stock, $0.01 par value,
$25.00 mandatory liquidation preference
  New York Stock Exchange

         SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None

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

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

         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 ý    No o

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

         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 "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
(Do not check if a smaller reporting company)
  Smaller reporting company o

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

         As of February 18, 2009, there were 57,258,756 shares of the Registrant's common stock outstanding. The aggregate market value of the common stock, held by non-affiliates of the Registrant (53,458,234 shares) at June 30, 2008 was $4.4 billion. The aggregate market value was calculated by using the closing price of the common stock as of that date on the New York Stock Exchange.


DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the Registrant's Proxy Statement for its 2009 Annual Stockholders' Meeting to be to be filed within 120 days after the end of the Registrant's fiscal year, are incorporated by reference into Part III of this Annual Report on Form 10-K.



SL GREEN REALTY CORP.
FORM 10-K
TABLE OF CONTENTS

10-K PART AND ITEM NO.

PART I

   

1.

 

Business

 
3

1.A

 

Risk Factors

 
10

1.B

 

Unresolved Staff Comments

 
26

2.

 

Properties

 
27

3.

 

Legal Proceedings

 
37

4.

 

Submission of Matters to a Vote of Security Holders

 
37

PART II

   

5.

 

Market for Registrant's Common Equity, Related Stockholders Matters and Issuer Purchases of Equity Securities

 
38

6.

 

Selected Financial Data

 
40

7.

 

Management's Discussion and Analysis of Financial Condition and Results of Operation

 
42

7A.

 

Quantitative and Qualitative Disclosures about Market Risk

 
68

8.

 

Financial Statements and Supplementary Data

 
70

9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 
138

9A.

 

Controls and Procedures

 
138

9B.

 

Other Information

 
138

PART III

   

10.

 

Directors, Executive Officers and Corporate Governance of the Registrant

 
139

11.

 

Executive Compensation

 
139

12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 
139

13.

 

Certain Relationships and Related Transactions and Director Independence

 
139

14.

 

Principal Accounting Fees and Services

 
139

PART IV

   

15.

 

Exhibits, Financial Statements and Schedules

 
140

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PART I

ITEM 1.    BUSINESS

General

        SL Green Realty Corp. is a self-managed real estate investment trust, or REIT, with in-house capabilities in property management, acquisitions, financing, development, construction and leasing. We were formed in June 1997 for the purpose of continuing the commercial real estate business of S.L. Green Properties, Inc., our predecessor entity. S.L. Green Properties, Inc., which was founded in 1980 by Stephen L. Green, our Chairman, had been engaged in the business of owning, managing, leasing, acquiring and repositioning office properties in Manhattan, a borough of New York City, or Manhattan.

        On January 25, 2007, we completed the acquisition, or the Reckson Merger, of all of the outstanding shares of common stock of Reckson Associates Realty Corp., or Reckson, pursuant to the terms of the Agreement and Plan of Merger, dated as of August 3, 2006, as amended, the Merger Agreement, among SL Green, Wyoming Acquisition Corp., or Wyoming, Wyoming Acquisition GP LLC, Wyoming Acquisition Partnership LP, Reckson and Reckson Operating Partnership, L.P., or ROP. Pursuant to the terms of the Merger Agreement, each of the issued and outstanding shares of common stock of Reckson were converted into (i) $31.68 in cash, (ii) 0.10387 of a share of the common stock, par value $0.01 per share, of SL Green and (iii) a prorated dividend in an amount equal to approximately $0.0977 in cash. We also assumed an aggregate of approximately $226.3 million of Reckson mortgage debt, approximately $287.5 million of Reckson convertible public debt and approximately $967.8 million of Reckson public unsecured notes. As a result of the Reckson Merger, ROP is a subsidiary of our operating partnership.

        On January 25, 2007, we completed the sale, or Asset Sale, of certain assets of ROP pursuant to an asset purchasing venture led by certain of Reckson's former executive management, or the Buyer, for a total consideration of approximately $2.0 billion. SL Green caused ROP to transfer the following assets to the Buyer in the Asset Sale: (1) certain real property assets and/or entities owning such real property assets, in either case, of ROP and 100% of certain loans secured by real property, all of which are located in Long Island, New York; (2) certain real property assets and/or entities owning such real property assets, in either case, of ROP located in White Plains and Harrison, New York; (3) all of the real property assets and/or entities owning 100% of the interests in such real property assets, in either case, of ROP located in New Jersey; (4) the entity owning a 25% interest in Reckson Australia Operating Company LLC, Reckson's Australian management company (including its Australian licensed responsible entity), and other related entities, and ROP and ROP subsidiaries' rights to and interests in, all related contracts and assets, including, without limitation, property management and leasing, construction services and asset management contracts and services contracts; (5) the direct or indirect interest of Reckson in Reckson Asset Partners, LLC, an affiliate of RSVP and all of ROP's rights in and to certain loans made by ROP to Frontline Capital Group, the bankrupt parent of RSVP, and other related entities, which will be purchased by a 50/50 joint venture with an affiliate of SL Green; (6) a 50% participation interest in certain loans made by a subsidiary of ROP that are secured by four real property assets located in Long Island, New York; and (7) 100% of certain loans secured by real property located in White Plains and New Rochelle, New York.

        As of December 31, 2008, we owned the following interests in commercial office properties in the New York Metro area, primarily in midtown Manhattan, a borough of New York City, or Manhattan. Our investments in the New York Metro area also include investments in Brooklyn, Queens, Long

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Island, Westchester County, Connecticut and New Jersey, which are collectively known as the Suburban assets:

Location
  Ownership   Number of
Properties
  Square Feet   Weighted
Average
Occupancy(1)
 

Manhattan

  Consolidated properties     21     13,782,200     97.5 %

  Unconsolidated properties     8     9,429,000     95.4 %

Suburban

  Consolidated properties     28     4,714,800     89.0 %

  Unconsolidated properties     6     2,941,700     93.8 %
                     

        63     30,867,700        
                     

(1)
The weighted average occupancy represents the total leased square feet divided by total available square feet.

        As of December 31, 2008, our Manhattan properties were comprised of fee ownership (22 properties), including ownership in condominium units, leasehold ownership (five properties) and operating sublease ownership (two properties). Pursuant to the operating sublease arrangements, we, as tenant under the operating sublease, perform the functions traditionally performed by landlords with respect to its subtenants. We are responsible for not only collecting rent from subtenants, but also maintaining the property and paying expenses relating to the property. As of December 31, 2008, our Suburban properties were comprised of fee ownership (33 properties), and leasehold ownership (one property). We refer to our Manhattan and Suburban office properties collectively as our portfolio.

        We also own investments in eight retail properties encompassing approximately 400,212 square feet, two development properties encompassing approximately 363,000 square feet and two land interests. In addition, we manage three office properties owned by third parties and affiliated companies encompassing approximately 1.0 million rentable square feet.

        As of December 31, 2008, we also owned approximately 12.48% of the outstanding common stock of Gramercy Capital Corp. (NYSE: GKK), or Gramercy, as well as all the units of the Class B limited partner interest in Gramercy's operating partnership.

        Our corporate offices are located in midtown Manhattan at 420 Lexington Avenue, New York, New York 10170. As of December 31, 2008, our corporate staff consisted of approximately 325 persons, including 259 professionals experienced in all aspects of commercial real estate. We can be contacted at (212) 594-2700. We maintain a website at www.slgreen.com. On our website, you can obtain, free of charge, a copy of our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as practicable after we file such material electronically with, or furnish it to, the Securities and Exchange Commission, or the SEC. We have also made available on our website our audit committee charter, compensation committee charter, corporate governance and nominating committee charter, code of business conduct and ethics and corporate governance principles. You can also read and copy any materials we file with the SEC at its Public Reference Room at 100 F Street, NE, Washington, DC 20549 (1-800-SEC-0330). The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.

        Unless the context requires otherwise, all references to "we," "our" and "us" in this annual report means SL Green Realty Corp., a Maryland corporation, and one or more of its subsidiaries, including SL Green Operating Partnership, L.P., a Delaware limited partnership, or the operating partnership, and the predecessors thereof, or the SL Green Predecessor, or, as the context may require, SL Green Realty Corp. only or SL Green Operating Partnership, L.P. only and "S.L. Green Properties" means

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S.L. Green Properties, Inc., a New York corporation, as well as the affiliated partnerships and other entities through which Stephen L. Green has historically conducted commercial real estate activities.

Corporate Structure

        In connection with our initial public offering, or IPO, in August 1997, our operating partnership received a contribution of interests in real estate properties as well as a 95% economic, non-voting interest in the management, leasing and construction companies affiliated with S.L. Green Properties. We refer to this management entity as the "Service Corporation." We are organized so as to qualify and have elected to qualify as a REIT under the Internal Revenue Code of 1986, as amended, or the Code.

        Substantially all of our assets are held by, and all of our operations are conducted through, our operating partnership. We are the sole managing general partner of, and as of December 31, 2008, were the owner of approximately 96.06% of the economic interests in, our operating partnership. All of the management and leasing operations with respect to our wholly-owned properties are conducted through SL Green Management LLC, or Management LLC. Our operating partnership owns a 100% interest in Management LLC.

        In order to maintain our qualification as a REIT while realizing income from management, leasing and construction contracts with third parties and joint venture properties, all of these service operations are conducted through the Service Corporation. We, through our operating partnership, own 100% of the non-voting common stock (representing 95% of the total equity) of the Service Corporation. Through dividends on our equity interest, we expect to receive substantially all of the cash flow from the Service Corporation's operations. All of the voting common stock of the Service Corporation (representing 5% of the total equity) is held by a Company affiliate. This controlling interest gives the affiliate the power to elect all directors of the Service Corporation. Since July 1, 2003, we have consolidated the operations of the Service Corporation into our financial results. Effective January 1, 2001, the Service Corporation elected to be taxed as a taxable REIT subsidiary.

Business and Growth Strategies

        Our primary business objective is to maximize total return to stockholders through growth in funds from operations and appreciation in the value of our assets during any business cycle. We seek to achieve this objective by assembling a high quality portfolio of office properties in the New York Metro area and capitalizing on current opportunities in both the Manhattan and Suburban office markets through: (i) property acquisitions (directly or through joint ventures)—acquiring office properties at a significant discount to replacement cost and with fully escalated in-place rents at a discount to current market rents which provide attractive initial yields and the potential for cash flow growth, as well as properties with significant vacancies; (ii) property repositioning—repositioning acquired retail and commercial office properties that are under-performing through renovations, active management and proactive leasing; (iii) property dispositions; (iv) integrated leasing and property management; and (v) structured finance investments primarily in the New York Metro area. Generally, we focus on properties that are within a ten-minute walk of midtown Manhattan's primary commuter stations.

        Property Acquisitions.    We acquire properties for long term appreciation and earnings growth (core assets) or for shorter term holding periods where we attempt to create significant increases in value which, when sold, result in capital gains that increase our investment capital base (non-core assets). In acquiring core and non-core properties, directly or through joint ventures with the highest quality institutional investors, we believe that we have the following advantages over our competitors: (i) senior management's average 22 years of experience as a full-service, fully-integrated real estate company focused on the office market in Manhattan; (ii) the ability to offer tax-advantaged structures to sellers

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through the exchange of ownership interests as opposed to solely cash transactions; and (iii) the ability to close a transaction quickly despite complicated ownership structures.

        Property Repositioning.    We apply our management's experience in enhancing property cash flow and value by renovating and repositioning properties to be among the best in their sub-markets. Many of the retail and commercial office buildings we own or acquire are located in or near sub-market(s) which are undergoing major reinvestment and where the properties in these markets have relatively low vacancy rates compared to other sub-markets. Because the properties feature unique architectural design, large floor plates or other amenities and functionally appealing characteristics, reinvestment in them provides us an opportunity to meet market needs and generate favorable returns.

        Property Dispositions.    We continuously evaluate our properties to identify which are most suitable to meet our long-term earnings growth objectives and contribute to increasing portfolio value. Properties that no longer meet our earnings objectives are identified as non-core holdings, and are targeted for sale to create investment capital. We believe that we will be able to re-deploy capital generated from the disposition of non-core holdings into property acquisitions or investments in high-yield structured finance investments, which will provide enhanced future capital gain and earnings growth opportunities.

        Leasing and Property Management.    We seek to capitalize on our management's extensive knowledge of the Manhattan and Suburban marketplace and the needs of the tenants therein by continuing a proactive approach to leasing and management, which includes: (i) use of in-depth market research; (ii) utilization of an extensive network of third-party brokers; (iii) use of comprehensive building management analysis and planning; and (iv) a commitment to tenant satisfaction by providing high quality tenant services at affordable rental rates. We believe proactive leasing efforts have contributed to average occupancy rates in our portfolio consistently exceeding the market average.

        Structured Finance.    We seek to invest in high-yield structured finance investments. These investments generally provide high current returns and, in certain cases, a potential for future capital gains. These investments may also serve as a potential source of real estate acquisitions for us. These investments include both floating rate and fixed rate investments. Our floating rate investments serve as a natural hedge for our unhedged floating rate debt. We expect that our structured finance investments will generally not exceed more than 8% of our total market capitalization. We may make structured finance investments, subject to certain limitations, where Gramercy has determined that such investments do not fit its investment profile or where investments represent the refinancing of one of our existing investments or in connection with the sale of one of our properties. We hold a 12.48% non-controlling interest in Gramercy. Gramercy is managed by GKK Manager LLC, an affiliate of ours. Structured finance investments include first mortgages, mortgage participations, subordinate loans, bridge loans and preferred equity investments.

Competition

        The leasing of real estate is highly competitive, especially in the Manhattan office market. Although currently no other publicly traded REITs have been formed primarily to acquire, own, reposition and manage Manhattan commercial office properties, we may in the future compete with such other REITs. We compete for tenants with landlords and developers of similar properties located in our markets primarily on the basis of location, rent charged, services provided, and the design and condition of our properties. In addition, we face competition from other real estate companies including other REITs that currently invest in markets other than or in addition to Manhattan, private real estate funds, domestic and foreign financial institutions, life insurance companies, pension trusts, partnerships, individual investors and others that may have greater financial resources or access to capital than we do or that are willing to acquire properties in transactions which are more highly leveraged or are less attractive from a financial viewpoint than we are willing to pursue.

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Manhattan Office Market Overview

        Manhattan is by far the largest office market in the United States, containing more rentable square feet than the next five largest central business district office markets combined. The properties in our portfolio are concentrated in some of Manhattan's most prominent Midtown locations.

        Manhattan has a total inventory of 395.0 million square feet, including 241.3 million square feet in Midtown. Based on current construction activity, we estimate that Midtown Manhattan will have approximately 1.8 million square feet of new construction becoming available in the next two years, approximately 2.3% of which is pre-leased. This will add approximately 0.6% to Manhattan's total inventory.

General Terms of Leases in the Midtown Manhattan Markets

        Leases entered into for space in the midtown Manhattan markets typically contain terms which may not be contained in leases in other U.S. office markets. The initial term of leases entered into for space in excess of 10,000 square feet in the midtown markets generally is seven to ten years. The tenant often will negotiate an option to extend the term of the lease for one or two renewal periods of five years each. The base rent during the initial term often will provide for agreed upon periodic increases over the term of the lease. Base rent for renewal terms, and base rent for the final years of a long-term lease (in those leases which do not provide an agreed upon rent during such final years), often is based upon a percentage of the fair market rental value of the premises (determined by binding arbitration in the event the landlord and the tenant are unable to mutually agree upon the fair market value).

        In addition to base rent, the tenant generally will also pay its pro rata share of increases in real estate taxes and operating expenses for the building over a base year. In some leases, in lieu of paying additional rent based upon increases in building operating expenses, the tenant will pay additional rent based upon increases in the wage rate paid to porters over the porters' wage rate in effect during a base year, increases in the consumer price index over the index value in effect during a base year, or a fixed percentage increase over base rent.

        Electricity is most often supplied by the landlord either on a sub-metered basis or rent inclusion basis (i.e., a fixed fee is included in the rent for electricity, which amount may increase based upon increases in electricity rates or increases in electrical usage by the tenant). Base building services other than electricity (such as heat, air conditioning and freight elevator service during business hours, and base building cleaning) typically are provided at no additional cost, with the tenant paying additional rent only for services which exceed base building services or for services which are provided other than during normal business hours.

        In a typical lease for a new tenant, the landlord will deliver the premises with all existing improvements demolished and any asbestos abated. The landlord also typically will provide a tenant improvement allowance, which is a fixed sum that the landlord makes available to the tenant to reimburse the tenant for all or a portion of the tenant's initial construction of its premises. Such sum typically is payable as work progresses, upon submission of invoices for the cost of construction. However, in certain leases (most often for relatively small amounts of space), the landlord will construct the premises for the tenant.

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Occupancy

        The following table sets forth the weighted average occupancy rates at our office properties based on space leased as of December 31, 2008, 2007 and 2006:

 
  Percent Occupied as of December 31,  
Property
  2008   2007   2006  

Same-Store Properties(1)

    95.2 %   95.0 %   97.5 %

Manhattan Properties

    96.7 %   96.6 %   97.0 %

Unconsolidated Joint Venture Properties

    95.0 %   95.2 %   97.0 %

Portfolio

    95.2 %   95.5 %   97.0 %

(1)
Same-Store Properties for 2008 represents 40 of our 49 consolidated properties owned by us at January 1, 2007 and still owned by us at December 31, 2008, inclusive of the Reckson assets acquired January 25, 2007.

Rent Growth

        We estimate that rents in place, at December 31, 2008, in our Manhattan and Suburban consolidated properties are approximately 20.2% and 14.4%, respectively, below current market asking rents. We estimate that rents in place at December 31, 2008 in our Manhattan and Suburban properties owned through unconsolidated joint ventures are approximately 25.0% and 6.7%, respectively, below current market asking rents. These comparative measures were approximately 37.4% and 19.1% at December 31, 2007 for the consolidated properties and 47.5% and 11.2% for the unconsolidated joint venture properties. As of December 31, 2008, 40.2% and 21.7% of all leases in-place in our consolidated properties and unconsolidated joint venture properties, respectively, are scheduled to expire during the next five years. There can be no assurances that our estimates of current market rents are accurate, that market rents currently prevailing will not erode in the future or that we will realize any rent growth. However, we believe the degree that rents in the current portfolio are below market provides a potential for long-term internal growth.

Industry Segments

        We are a REIT that acquires, owns, repositions, manages and leases commercial office and retail properties in the New York Metro area and have two reportable segments, real estate and structured finance investments. Our investment in Gramercy and its related earnings are included in the structured finance segment. We evaluate real estate performance and allocate resources based on earnings contribution to income from continuing operations.

        At December 31, 2008, our real estate portfolio was primarily located in one geographical market, namely, the New York Metro area. The primary sources of revenue are generated from tenant rents and escalations and reimbursement revenue. Real estate property operating expenses consist primarily of security, maintenance, utility costs, real estate taxes and ground rent expense (at certain applicable properties). As of December 31, 2008, one tenant in our portfolio contributed approximately 9.4% of our portfolio annualized rent. No other tenant contributed more than 5.8% of our portfolio annualized rent. In addition, no property contributed in excess of 8.0% of our consolidated revenue for 2008. Portfolio annualized rent includes our consolidated annualized revenue and our share of joint venture annualized revenue. In addition, no single borrower accounted for more than 10.0% of the revenue earned on structured finance investments at December 31, 2008.

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Employees

        At December 31, 2008, we employed approximately 1,045 employees, over 260 of whom were managers and professionals, approximately 721 of whom were hourly-paid employees involved in building operations and approximately 64 of whom were clerical, data processing and other administrative employees. There are currently three collective bargaining agreements which cover the workforce that services substantially all of our properties.

Acquisitions

        In 2008, we limited our investment activity by design. During 2008, we acquired a fee position and a retail redevelopment property for an aggregate purchase price of $62.8 million.

Dispositions

        During 2008, we sold four properties for gross contract prices of $792.0 million. We realized gains of approximately $442.3 million and incentive distributions of approximately $25.0 million on the sales of these properties, which encompassed 1.7 million square feet.

Structured Finance

        During 2008, we originated approximately $238.5 million in structured finance and preferred equity investments (net of discount), inclusive of accretion of discount and pay-in-kind interest. There were also approximately $197.0 million in sales, repayments and participations in 2008. In addition, we recorded approximately $98.9 million of loan loss reserves, primarily against our non-New York City structured finance investments.

        Due to current market conditions, we recognized a loss on our investment in Gramercy of approximately $147.5 million. As of December 31, 2008, we held 6,219,370 shares, or approximately 12.48% of Gramercy's common stock representing a total investment at net book value of approximately $8.0 million. We do not currently expect to invest additional funds into Gramercy.

Offering/Financings

        In 2008, we repurchased approximately $262.6 million of our convertible bonds, realizing gains on early extinguishment of debt of approximately $88.5 million.

        We also closed on mortgage financings at four properties totaling approximately $496.0 million.

        In 2008, we purchased and settled approximately $300.0 million, or 3.3 million shares of our common stock, at an average price of approximately $90.49 per share pursuant to our stock repurchase program, which expired on December 31, 2008.

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Item 1A.    Risk Factors

Declines in the demand for office space in New York City, and in particular, in midtown Manhattan, as well as our Suburban markets, including Westchester County, Connecticut, New Jersey and Long Island, resulting from general economic conditions could adversely affect the value of our real estate portfolio and our results of operations and, consequently, our ability to service current debt and to pay dividends to stockholders.

        Most of our commercial office properties are located in midtown Manhattan. As a result, our business is dependent on the condition of the New York City economy in general and the market for office space in midtown Manhattan, in particular. Weakness in the New York City economy could materially reduce the value of our real estate portfolio and our rental revenues, and thus adversely affect our ability to service current debt and to pay dividends to stockholders. The Manhattan vacancy rate continues to rise and is expected to exceed 10% by the end of 2009. We could also be impacted by weakness in our Suburban markets, including Westchester County, Connecticut, New Jersey and Long Island.

We may be unable to renew leases or relet space as leases expire.

        When our tenants decide not to renew their leases upon their expiration, we may not be able to relet the space. Even if tenants do renew or we can relet the space, the terms of renewal or reletting, including the cost of required renovations, may be less favorable than current lease terms. Over the next five years, through the end of 2013, leases will expire on approximately 40.2% and 21.7% of the rentable square feet at our consolidated properties and unconsolidated joint venture properties, respectively. As of December 31, 2008, approximately 7.2 million and 2.5 million square feet are scheduled to expire by December 31, 2013 at our consolidated properties and unconsolidated joint venture properties, respectively, and these leases currently have annualized escalated rental income totaling approximately $305.9 million and $120.8 million, respectively. If we are unable to promptly renew the leases or relet this space at similar rates, our cash flow and ability to service debt and pay dividends to stockholders would be adversely affected.

The expiration of long term leases or operating sublease interests could adversely affect our results of operations.

        Our interest in six of our commercial office properties is through either long-term leasehold or operating sublease interests in the land and the improvements, rather than by a fee interest in the land. Unless we can purchase a fee interest in the underlying land or extend the terms of these leases before their expiration, we will lose our right to operate these properties and our interest in the improvements upon expiration of the leases, which would significantly adversely affect our results of operations. These properties are 673 First Avenue, 420 Lexington Avenue, 461 Fifth Avenue, 711 Third Avenue, 625 Madison Avenue and 1185 Avenue of the Americas. The average remaining term of these long-term leases, including our unilateral extension rights on each of the properties, is approximately 34 years. Pursuant to the operating sublease arrangements, we, as tenant under the operating sublease, perform the functions traditionally performed by landlords with respect to our subtenants. We are responsible for not only collecting rent from our subtenants, but also maintaining the property and paying expenses relating to the property. Our share of annualized escalated rents of these properties at December 31, 2008 totaled approximately $227.2 million, or 21.8%, of our share of total portfolio annualized revenue associated with these properties. We have the ability to acquire the fee position at 461 Fifth Avenue for a fixed price on a specific date.

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Our results of operations rely on major tenants, including in the financial services sector, and insolvency, bankruptcy or receivership of these and other tenants could adversely affect our results of operations.

        Giving effect to leases in effect as of December 31, 2008 for consolidated properties and unconsolidated joint venture properties as of that date, our five largest tenants, based on square footage leased, accounted for approximately 22.7% of our share of portfolio annualized rent, and, other than three tenants, Citigroup Inc. (and its affiliates), Viacom International Inc. and Credit Suisse Securities (USA) LLC who accounted for approximately 9.4%, 4.6% and 5.8% of our share of portfolio annualized rent, respectively, no tenant accounted for more than 2.2% of that total. In addition, the financial services sector accounted for approximately 41.0% of our total annualized revenues and 39.0% of our square feet leased of our portfolio. This sector is currently experiencing significant turmoil which has resulted in significant job losses. Of our 30 largest tenants based on square feet leased, which accounted for approximately 47.2% of our share of portfolio annualized rent, 60.0% (inclusive of lease guarantors) carry an investment grade credit rating. If current economic conditions persist or deteriorate, we may experience increases in past due accounts, defaults, lower occupancy and reduced effective rents, particularly in respect of our financial service tenants. Our business would be adversely affected if any of our major tenants or any other tenants became insolvent, declared bankruptcy, are put into receivership or otherwise refused to pay rent in a timely fashion or at all.

Adverse economic and geopolitical conditions in general and the Northeastern commercial office markets in particular could have a material adverse effect on our results of operations, financial condition and our ability to pay dividends to stockholders.

        Our business may be affected by the unprecedented volatility and illiquidity in the financial and credit markets, the general global economic recession, and other market or economic challenges experienced by the U.S. economy or real estate industry as a whole. Our business may also be adversely affected by local economic conditions, as substantially all of our revenues are derived from our properties located in the Northeast, particularly in New York, Westchester County and Connecticut. Because our portfolio consists primarily of commercial office buildings (as compared to a more diversified real estate portfolio) located principally in Manhattan, if economic conditions persist or deteriorate, then our results of operations, financial condition and ability to service current debt and to pay distributions to our stockholders may be adversely affected by the following, among other potential conditions:

        These conditions, which could have a material adverse effect on our results of operations, financial condition and ability to pay distributions, may continue or worsen in the future.

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There can be no assurance that the actions of the U.S. government, Federal Reserve and other governmental and regulatory bodies for the purpose of stabilizing the financial markets, or market response to those actions, will achieve the intended effect, our business may not benefit from these actions and further government or market developments could adversely impact us.

        In response to the financial issues affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, the Emergency Economic Stabilization Act of 2008, or the EESA, was enacted in October 2008. The EESA authorized the U.S. Secretary of Treasury to create a Troubled Asset Relief Program, or TARP, to, among other things, purchase from financial institutions up to $700 billion of residential or commercial mortgages and any securities, obligations, or other instruments that are based on, or related to, such mortgages, that in each case was originated or issued on or before March 14, 2008. The ESSA also provides for a program that would allow companies to insure their troubled assets. The U.S. Treasury has announced the establishment of the following programs under TARP: the Capital Purchase Program, the Targeted Investment Program, the Systemically Failing Institutions Program and the Asset Guarantee Program.

        In addition, the American Recovery and Reinvestment Act of 2009, or ARRA, was signed into law on February 17, 2009. ARRA includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health and education needs. ARRA also imposes certain new executive compensation and corporate expenditure limits on all current and future TARP recipients.

        There can be no assurance that these programs will have a beneficial impact on the financial markets, generally, or on our business in particular. In addition, the U.S. Government, Federal Reserve and other governmental and regulatory bodies have taken or are considering taking other actions to address the financial crisis. We cannot predict whether or when such actions may occur or what impact, if any, such actions could have on our business, results of operations and financial condition.

We may suffer adverse consequences if our revenues decline since our operating costs do not necessarily decline in proportion to our revenue.

        We earn a significant portion of our income from renting our properties. Our operating costs, however, do not necessarily fluctuate in relation to changes in our rental revenue. This means that our costs will not necessarily decline even if our revenues do. Our operating costs could also increase while our revenues do not. If our operating costs increase but our rental revenues do not, we may be forced to borrow to cover our costs, we may incur losses and we may not have cash available for distributions to our stockholders.

We face risks associated with property acquisitions.

        We may acquire individual properties and portfolios of properties, including large portfolios that could significantly increase our size and alter our capital structure. Our acquisition activities and their success may be exposed to the following risks:

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        We may acquire properties subject to liabilities and without any recourse, or with only limited recourse, with respect to unknown liabilities. As a result, if a liability were asserted against us based upon those properties, we might have to pay substantial sums to settle it, which could adversely affect our cash flow. Unknown liabilities with respect to properties acquired might include:

Competition for acquisitions may reduce the number of acquisition opportunities available to us and increase the costs of those acquisitions.

        We plan to continue to acquire properties as we are presented with attractive opportunities. We may face competition for acquisition opportunities with other investors, particularly private investors who can incur more leverage, and this competition may adversely affect us by subjecting us to the following risks:

We rely on eight large properties for a significant portion of our revenue.

        As of December 31, 2008, eight of our properties, 420 Lexington Avenue, 220 East 42nd Street, One Madison Avenue, 485 Lexington Avenue, 1185 Avenue of the Americas, 1221 Avenue of the Americas, 1515 Broadway and 388/390 Greenwich Street, accounted for approximately 46% of our portfolio annualized rent, including our share of joint venture annualized rent, and no single property accounted for more than approximately 7% of our portfolio annualized rent, including our share of joint venture annualized rent. Our revenue and cash available for distribution to our stockholders would be materially adversely affected if the ground lease for the 420 Lexington Avenue or 1185 Avenue of the Americas property were terminated for any reason or if one or all of these properties were materially damaged or destroyed. Additionally, our revenue and cash available for distribution to

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our stockholders would be materially adversely affected if our tenants at these properties experienced a downturn in their business which may weaken their financial condition and result in their failure to timely make rental payments, defaulting under their leases or filing for bankruptcy.

The continuing threat of terrorist attacks may adversely affect the value of our properties and our ability to generate cash flow.

        There may be a decrease in demand for space in New York City because it is considered at risk for future terrorist attacks, and this decrease may reduce our revenues from property rentals. In the aftermath of a terrorist attack, tenants in the New York City area may choose to relocate their business to less populated, lower-profile areas of the United States that are not as likely to be targets of future terrorist activity. This in turn would trigger a decrease in the demand for space in the New York City area, which could increase vacancies in our properties and force us to lease our properties on less favorable terms. As a result, the value of our properties and the level of our revenues could materially decline.

A terrorist attack could cause insurance premiums to increase significantly.

        We maintain "all-risk" property and rental value coverage (including coverage regarding the perils of flood, earthquake and terrorism) within two property insurance portfolios and liability insurance. The first property portfolio maintains a blanket limit of $600.0 million per occurrence for the majority of the New York City properties in our portfolio with a sub-limit of $450.0 million for acts of terrorism. The second portfolio maintains a limit of $600.0 million per occurrence, including terrorism, for a few New York City properties and the majority of the Suburban properties. Both property policies expire on December 31, 2009. Additional coverage may be purchased on a stand-alone basis for certain assets. The liability policies cover all our properties and provide limits of $200.0 million per property. The liability policies expire on October 31, 2009.

        In October 2006, we formed a wholly-owned taxable REIT subsidiary, Belmont Insurance Company, or Belmont, to act as a captive insurance company and be one of the elements of our overall insurance program. Belmont was formed in an effort to, among other reasons, stabilize to some extent the fluctuations of insurance market conditions. Belmont is licensed in New York to write Terrorism, NBCR (nuclear, biological, chemical, and radiological), General Liability and D&O coverage.

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        As long as we own Belmont, we are responsible for its liquidity and capital resources, and the accounts of Belmont are part of our consolidated financial statements. If we experience a loss and Belmont is required to pay under its insurance policy, we would ultimately record the loss to the extent of Belmont's required payment. Therefore, insurance coverage provided by Belmont should not be considered as the equivalent of third-party insurance, but rather as a modified form of self-insurance.

        TRIA, which was enacted in November 2002, was renewed on December 31, 2007. Congress extended TRIA, now called TRIPRA (Terrorism Risk Insurance Program Reauthorization and Extension Act of 2007) until December 31, 2014. The law extends the federal Terrorism Insurance Program that requires insurance companies to offer terrorism coverage and provides for compensation for insured losses resulting from acts of foreign and domestic terrorism. Our debt instruments, consisting of mortgage loans secured by our properties (which are generally non-recourse to us), mezzanine loans, ground leases and our 2007 unsecured revolving credit facility, contain customary covenants requiring us to maintain insurance. There can be no assurance that the lenders or ground lessors under these instruments will not take the position that a total or partial exclusion from "all-risk" insurance coverage for losses due to terrorist acts is a breach of these debt and ground lease instruments that allows the lenders or ground lessors to declare an event of default and accelerate repayment of debt or recapture of ground lease positions. In addition, if lenders insist on full coverage for these risks and prevail in asserting that we are required to maintain such coverage, it could result in substantially higher insurance premiums.

        We have a 45% interest in the property at 1221 Avenue of the Americas, where we participate with The Rockefeller Group Inc., which carries a blanket policy providing $1.0 billion of "all-risk" property insurance, including terrorism coverage, and a 49.9% interest in the property at 100 Park Avenue, where we participate with Prudential, which carries a blanket policy of $500.0 million of "all-risk" property insurance, including terrorism coverage. We own One Madison Avenue, which is under a triple net lease with insurance provided by the tenant, Credit Suisse Securities (USA) LLC, or CS. We monitor the coverage provided by CS to make sure that our asset is adequately protected. We own 388 and 390 Greenwich Street, which is leased on a triple net basis to Citigroup, N.A, which provides insurance coverage directly. We monitor all triple net leases to ensure that tenants are providing adequate coverage. Although we consider our insurance coverage to be appropriate, in the event of a major catastrophe, such as an act of terrorism, we may not have sufficient coverage to replace certain properties.

Our dependence on smaller and growth-oriented businesses to rent our office space could adversely affect our cash flow and results of operations.

        Many of the tenants in our properties are smaller, growth-oriented businesses that may not have the financial strength of larger corporate tenants. Smaller companies generally experience a higher rate of failure than large businesses. Growth-oriented firms may also seek other office space, including Class A space, as they develop. Dependence on these companies could create a higher risk of tenant defaults, turnover and bankruptcies, which could adversely affect our distributable cash flow and results of operations.

Debt financing, financial covenants, degree of leverage, and increases in interest rates could adversely affect our economic performance.

Scheduled debt payments could adversely affect our results of operations.

        The total principal amount of our outstanding consolidated indebtedness was approximately $5.6 billion as of December 31, 2008, consisting of approximately $1.4 billion under our 2007 unsecured

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revolving credit facility, $1.5 billion under our senior unsecured notes, $100.0 million under our junior subordinated deferrable interest debentures and approximately $2.6 billion of non-recourse mortgage loans on seventeen of our properties. In addition, we could increase the amount of our outstanding indebtedness in the future, in part by borrowing under our 2007 unsecured revolving credit facility, which had $55.5 million available for draw as of December 31, 2008. Our 2007 unsecured revolving credit facility matures in June 2011 and has a one-year as-of-right extension option. As of December 31, 2008, the total principal amount of non-recourse indebtedness outstanding at the joint venture properties was approximately $4.4 billion, of which our proportionate share was approximately $1.9 billion. Cash flow could be insufficient to pay distributions at expected levels and meet the payments of principal and interest required under our current mortgage indebtedness, 2007 unsecured revolving credit facility, senior unsecured notes, debentures and indebtedness outstanding at our joint venture properties.

        If we are unable to make payments under our 2007 unsecured revolving credit facility, all amounts due and owing at such time shall accrue interest at a rate equal to 4% higher than the rate at which each draw was made. If a property is mortgaged to secure payment of indebtedness and we are unable to meet mortgage payments, the mortgagee could foreclose on the property, resulting in loss of income and asset value. Foreclosure on mortgaged properties or an inability to make payments under our 2007 unsecured revolving credit facility would have a negative impact on our financial condition and results of operations.

        We may not be able to refinance existing indebtedness, which in all cases requires substantial principal payments at maturity. In 2009, approximately $200.0 million of corporate indebtedness, and $823.1 million of debt on our unconsolidated joint venture properties will mature. There are no debt maturities in 2009 on our consolidated properties. We have an as-of-right extension option on $625.0 million of our unconsolidated joint venture debt included in the 2009 maturities. At the present time, we intend to exercise extension options or refinance the debt associated with our properties on or prior to their respective maturity dates. If any principal payments due at maturity cannot be refinanced, extended or paid with proceeds of other capital transactions, such as new equity capital, our cash flow will not be sufficient in all years to repay all maturing debt. At the time of refinancing, prevailing interest rates or other factors, such as the possible reluctance of lenders to make commercial real estate loans, may result in higher interest rates. Increased interest expense on the refinanced debt would adversely affect cash flow and our ability to service debt and make distributions to stockholders.

Financial covenants could adversely affect our ability to conduct our business.

        The mortgages and mezzanine loans on our properties contain customary negative covenants that limit our ability to further mortgage the property, to enter into new leases or materially modify existing leases, and to discontinue insurance coverage. In addition, our 2007 unsecured revolving credit facility contains customary restrictions and requirements on our method of operations. Our 2007 unsecured revolving credit facility and senior unsecured bonds also require us to maintain designated ratios of total debt-to-assets, debt service coverage and unencumbered assets-to-unsecured debt. These restrictions could adversely affect our results of operations and our ability to make distributions to stockholders.

Rising interest rates could adversely affect our cash flow.

        Advances under our 2007 unsecured revolving credit facility and certain property-level mortgage debt bear interest at a variable rate. These variable rate borrowings totaled approximately $1.6 billion at December 31, 2008. In addition, we could increase the amount of our outstanding variable rate debt in the future, in part by borrowing under our 2007 unsecured revolving credit facility, which had $55.5 million available for draw as of December 31, 2008. Borrowings under our 2007 unsecured revolving credit facility bear interest at a spread equal to the 30-day LIBOR, plus 90 basis points. As of

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December 31, 2008, borrowings under our 2007 unsecured revolving credit facility and junior subordinated deferrable interest debentures totaled $1.4 billion, and $100.0 million, respectively, and bore interest at 3.58% and 5.61%, respectively. We may incur indebtedness in the future that also bears interest at a variable rate or may be required to refinance our debt at higher rates. Accordingly, increases in interest rates above that which we anticipated based upon historical trends could adversely affect our ability to continue to make distributions to stockholders. At December 31, 2008, a hypothetical 100 basis point increase in interest rates along the entire interest rate curve would increase our annual interest costs by approximately $15.3 million and would increase our share of joint venture annual interest costs by approximately $7.4 million.

Failure to hedge effectively against interest rate changes may adversely affect results of operations.

        The interest rate hedge instruments we use to manage some of our exposure to interest rate volatility involve risk, such as the risk that counterparties may fail to honor their obligations under these arrangements. In addition, these arrangements may not be effective in reducing our exposure to interest rate changes. Failure to hedge effectively against interest rate changes may adversely affect our results of operations.

No limitation on debt could adversely affect our cash flow.

        Our organizational documents do not contain any limitation on the amount of indebtedness we may incur. As of December 31, 2008, assuming the conversion of all outstanding units of the operating partnership into shares of our common stock, our combined debt-to-market capitalization ratio, including our share of joint venture debt of approximately $1.9 billion, was approximately 81.0%. We have historically targeted a debt-to-market capitalization less than this. However, due to the significant decrease in our stock price we are currently operating in excess of that threshold. We are currently undertaking steps aimed at reducing our debt. Any changes that increase our debt to market capitalization percentage could be viewed negatively by investors. As a result, our stock price could decrease. Our market capitalization is variable and does not necessarily reflect the fair market value of our assets at all times. We also consider factors other than market capitalization in making decisions regarding the incurrence of indebtedness, such as the purchase price of properties to be acquired with debt financing, the estimated market value of our properties upon refinancing and the ability of particular properties and our business as a whole to generate cash flow to cover expected debt service.

Structured finance investments could cause us to incur expenses, which could adversely affect our results of operations.

        We owned mezzanine loans, junior participations and preferred equity interests in 29 investments with an aggregate book value of approximately $747.9 million at December 31, 2008. Such investments may or may not be recourse obligations of the borrower and are not insured or guaranteed by governmental agencies or otherwise. In the event of a default under these obligations, we may have to realize upon our collateral and thereafter make substantial improvements or repairs to the underlying real estate in order to maximize the property's investment potential. Borrowers may contest enforcement of foreclosure or other remedies, seek bankruptcy protection against such enforcement and/or bring claims for lender liability in response to actions to enforce their obligation to us. Relatively high loan-to-value ratios and declines in the value of the property may prevent us from realizing an amount equal to our investment upon foreclosure or realization. In addition, under the origination agreement with Gramercy, we are precluded from making certain types of structured finance investments.

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        We maintain and regularly evaluate financial reserves to protect against potential future losses. Our reserves reflect management's judgment of the probability and severity of losses. We cannot be certain that our judgment will prove to be correct and that reserves will be adequate over time to protect against potential future losses because of unanticipated adverse changes in the economy or events adversely affecting specific properties, assets, tenants, borrowers, industries in which our tenants and borrowers operate or markets in which our tenants and borrowers or their properties are located. We believe the increase in our non-performing loans has been driven by the worsening economy and the seizure of the credit markets, which have adversely impacted the ability of many of our borrowers to service their debt and refinance our loans to them at maturity. We have significantly increased our provision for loan losses in 2008 based upon the performance of our assets and conditions in the financial markets and overall economy, which deteriorated precipitously in the fourth quarter of 2008. If our reserves for credit losses prove inadequate, we could suffer losses which would have a material adverse affect on our financial performance, the market prices of our securities and our ability to pay dividends.

Joint investments could be adversely affected by our lack of sole decision-making authority and reliance upon a co-venturer's financial condition.

        We co-invest with third parties through partnerships, joint ventures, co-tenancies or other entities, acquiring non-controlling interests in, or sharing responsibility for managing the affairs of, a property, partnership, joint venture, co-tenancy or other entity. Therefore, we will not be in a position to exercise sole decision-making authority regarding that property, partnership, joint venture or other entity. Investments in partnerships, joint ventures, or other entities may involve risks not present were a third party not involved, including the possibility that our partners, co-tenants or co-venturers might become bankrupt or otherwise fail to fund their share of required capital contributions. Additionally, our partners or co-venturers might at any time have economic or other business interests or goals, which are inconsistent with our business interests or goals. These investments may also have the potential risk of impasses on decisions such as a sale, because neither we nor the partner, co-tenant or co-venturer would have full control over the partnership or joint venture. Consequently, actions by such partner, co-tenant or co-venturer might result in subjecting properties owned by the partnership or joint venture to additional risk. In addition, we may in specific circumstances be liable for the actions of our third-party partners, co-tenants or co-venturers. As of December 31, 2008, our unconsolidated joint ventures owned 19 properties and we had an aggregate cost basis in the joint ventures totaling approximately $1.0 billion. As of December 31, 2008, our share of joint venture debt totaled approximately $1.9 billion.

Our joint venture agreements may contain terms in favor of our partners that could have an adverse effect on the value of our investments in the joint ventures.

        Each of our joint venture agreements has been individually negotiated with our partner in the joint venture and, in some cases, we have agreed to terms that are favorable to our partner in the joint venture. For example, our partner may be entitled to a specified portion of the profits of the joint venture before we are entitled to any portion of such profits and our partner may have rights to buy our interest in the joint venture, to force us to buy the partner's interest in the joint venture or to compel the sale of the property owned by such joint venture. These rights may permit our partner in a particular joint venture to obtain a greater benefit from the value or profits of the joint venture than us, which could have an adverse effect on the value of our investment in the joint venture and on our financial condition and results of operations. We may also enter into similar arrangements in the future.

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We are subject to possible environmental liabilities and other possible liabilities.

        We are subject to various federal, state and local environmental laws. These laws regulate our use, storage, disposal and management of hazardous substances and wastes and can impose liability on property owners or operators for the clean-up of certain hazardous substances released on a property and any associated damage to natural resources without regard to whether the release was legal or whether it was caused by the property owner or operator. The presence of hazardous substances on our properties may adversely affect occupancy and our ability to develop or sell or borrow against those properties. In addition to potential liability for clean-up costs, private plaintiffs may bring claims for personal injury, property damage or for similar reasons. Various laws also impose liability for the clean-up of contamination at any facility (e.g., a landfill) to which we have sent hazardous substances for treatment or disposal, without regard to whether the materials were transported, treated and disposed in accordance with law.

We may incur significant costs complying with the Americans with Disabilities Act and similar laws.

        Our properties may be subject to other risks relating to current or future laws including laws benefiting disabled persons, and other state or local zoning, construction or other regulations. These laws may require significant property modifications in the future for which we may not have budgeted and could result in fines being levied against us. The occurrence of any of these events could have an adverse impact on our cash flows and ability to make distributions to stockholders.

        Under the Americans with Disabilities Act, or ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. Additional federal, state and local laws also may require modifications to our properties, or restrict our ability to renovate our properties. We have not conducted an audit or investigation of all of our properties to determine our compliance. If one or more of our properties is not in compliance with the ADA or other legislation, then we would be required to incur additional costs to bring the property into compliance. We cannot predict the ultimate amount of the cost of compliance with ADA or other legislation. If we incur substantial costs to comply with the ADA and any other legislation, our financial condition, results of operations and cash flow and/or ability to satisfy our debt service obligations and to pay dividends to our stockholders could be adversely affected.

Our charter documents and applicable law may hinder any attempt to acquire us, which could discourage takeover attempts and prevent our stockholders from receiving a premium over the market price of our stock.

Provisions of our articles of incorporation and bylaws could inhibit changes in control.

        A change of control of our company could benefit stockholders by providing them with a premium over the then-prevailing market price of our stock. However, provisions contained in our articles of incorporation and bylaws may delay or prevent a change in control of our company. These provisions, discussed more fully below, are:

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Our board of directors is staggered into three separate classes.

        The board of directors of our company is divided into three classes. The terms of the class I, class II and class III directors expire in 2010, 2011 and 2009, respectively. Our staggered board may deter changes in control because of the increased time period necessary for a third party to acquire control of the board.

We have a stock ownership limit.

        To remain qualified as a REIT for federal income tax purposes, not more than 50% in value of our outstanding capital stock may be owned by five or fewer individuals at any time during the last half of any taxable year. For this purpose, stock may be "owned" directly, as well as indirectly under certain constructive ownership rules, including, for example, rules that attribute stock held by one family member to another family member. In part, to avoid violating this rule regarding stock ownership limitations and maintain our REIT qualification, our articles of incorporation prohibit ownership by any single stockholder of more than 9.0% in value or number of shares of our common stock. Limitations on the ownership of preferred stock may also be imposed by us.

        The board of directors has the discretion to raise or waive this limitation on ownership for any stockholder if deemed to be in our best interest. To obtain a waiver, a stockholder must present the board and our tax counsel with evidence that ownership in excess of this limit will not affect our present or future REIT status.

        Absent any exemption or waiver, stock acquired or held in excess of the limit on ownership will be transferred to a trust for the exclusive benefit of a designated charitable beneficiary, and the stockholder's rights to distributions and to vote would terminate. The stockholder would be entitled to receive, from the proceeds of any subsequent sale of the shares transferred to the charitable trust, the lesser of: the price paid for the stock or, if the owner did not pay for the stock, the market price of the stock on the date of the event causing the stock to be transferred to the charitable trust; and the amount realized from the sale.

        This limitation on ownership of stock could delay or prevent a change in control.

We have a stockholder rights plan.

        We adopted a stockholder rights plan which provides, among other things, that when specified events occur, our stockholders will be entitled to purchase from us a newly created series of junior preferred shares, subject to our ownership limit described above. The preferred share purchase rights are triggered by the earlier to occur of (1) ten days after the date of a public announcement that a person or group acting in concert has acquired, or obtained the right to acquire, beneficial ownership of 17% or more of our outstanding shares of common stock or (2) ten business days after the commencement of or announcement of an intention to make a tender offer or exchange offer, the consummation of which would result in the acquiring person becoming the beneficial owner of 17% or more of our outstanding common stock. The preferred share purchase rights would cause substantial dilution to a person or group that attempts to acquire us on terms not approved by our board of directors.

Debt may not be assumable.

        We have approximately $3.0 billion in unsecured corporate debt. This debt may be unassumable by a potential purchaser and may be subject to significant prepayment penalties.

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Maryland takeover statutes may prevent a change of control of our company, which could depress our stock price.

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

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

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

        In addition, Maryland law provides that "control shares" of a Maryland corporation acquired in a "control share acquisition" will have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares of stock owned by the acquiror, by officers of the target corporation or by directors who are employees of the corporation, under the Maryland Control Share Acquisition Act. "Control shares" means voting shares of stock that, if aggregated with all other shares of stock owned by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power: (i) one-tenth or more but less than one-third, (ii) one-third or more but less than a majority, or (iii) a majority or more of all voting power. A "control share acquisition" means the acquisition of ownership of, or the power to direct the exercise of voting power with respect to, issued and outstanding control shares, subject to certain exceptions.

        We have opted out of these provisions of the Maryland General Corporation Law, or the MGCL, with respect to business combinations and control share acquisitions by resolution of our board of directors and a provision in our bylaws, respectively. However, in the future, our board of directors may reverse its decision by resolution and elect to opt in to the MGCL's business combination provisions, or amend our bylaws and elect to opt in to the MGCL's control share provisions.

        Additionally, Title 8, Subtitle 3 of the MGCL permits our board of directors, without stockholder approval and regardless of what is provided in our charter or bylaws, to implement takeover defenses, some of which we do not have. Such takeover defenses, if implemented, may have the effect of

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inhibiting a third party from making us an acquisition proposal or of delaying, deferring or preventing a change in our control under circumstances that otherwise could provide our stockholders with an opportunity to realize a premium over the then-current market price.

Future issuances of common stock and preferred stock could dilute existing stockholders' interests.

        Our articles of incorporation authorize our board of directors to issue additional shares of common stock and preferred stock without stockholder approval. Any such issuance could dilute our existing stockholders' interests. Also, any future series of preferred stock may have voting provisions that could delay or prevent a change of control.

Changes in market conditions could adversely affect the market price of our common stock.

        As with other publicly traded equity securities, the value of our common stock depends on various market conditions, which may change from time to time. Among the market conditions that may affect the value of our common stock are the following:

        The market value of our common stock is based primarily upon the market's perception of our growth potential and our current and potential future earnings and cash dividends. Consequently, our common stock may trade at prices that are higher or lower than our net asset value per share of common stock. If our future earnings or cash dividends are less than expected, it is likely that the market price of our common stock will diminish.

Market interest rates may have an effect on the value of our common stock.

        If market interest rates go up, prospective purchasers of shares of our common stock may expect a higher distribution rate on our common stock. Higher market interest rates would not, however, result in more funds for us to distribute and, to the contrary, would likely increase our borrowing costs and potentially decrease funds available for distribution. Thus, higher market interest rates could cause the market price of our common stock to go down.

There are potential conflicts of interest between us and Mr. Green.

        There is a potential conflict of interest relating to the disposition of the property contributed to us by Stephen L. Green, and his family. Mr. Green serves as the chairman of our board of directors and is an executive officer. As part of our formation, Mr. Green contributed appreciated property, with a net book value of $73.5 million, to the operating partnership in exchange for units of limited partnership interest in the operating partnership. He did not recognize any taxable gain as a result of the contribution. The operating partnership, however, took a tax basis in the contributed property equal to that of the contributing unitholder. The fair market value of the property contributed by him exceeded his tax basis by approximately $34.0 million at the time of contribution. The difference between fair market value and tax basis at the time of contribution represents a built-in gain. If we sell a property in a transaction in which a taxable gain is recognized, for tax purposes the built-in gain would be allocated solely to him and not to us. As a result, Mr. Green has a conflict of interest if the sale of a property, which he contributed, is in our best interest but not his.

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        There is a potential conflict of interest relating to the refinancing of indebtedness specifically allocated to Mr. Green. Mr. Green would recognize gain if he were to receive a distribution of cash from the operating partnership in an amount that exceeds his tax basis in his partnership units. His tax basis includes his share of debt, including mortgage indebtedness, owed by our operating partnership. If our operating partnership were to retire such debt, then he would experience a decrease in his share of liabilities, which, for tax purposes, would be treated as a distribution of cash to him. To the extent the deemed distribution of cash exceeded his tax basis, he would recognize gain.

Limitations on our ability to sell or reduce the indebtedness on specific mortgaged properties could adversely affect the value of the stock.

        We have agreed to restrictions relating to future transactions involving 673 First Avenue. During the period of time that these restrictions apply, our ability to manage or use this property in a manner that is in our overall best interests may be impaired. In particular, these restrictions could preclude us from participating in major transactions otherwise favorable to us if a disposition of this restricted asset is required. These restrictions may also inhibit a change in control of our company even though a disposition or change in control might be in the best interests of the stockholders.

        Specifically, we have agreed not to sell our interest in 673 First Avenue until August 20, 2009 without the approval of unitholders holding at least 75% of the units issued in consideration for this property. The current gross carrying value of the commercial real estate of this property totaled approximately $49.8 million at December 31, 2008. We have also agreed not to reduce the mortgage indebtedness (approximately $32.4 million at December 31, 2008), other than pursuant to scheduled amortization, on 673 First Avenue until one year prior to its maturity date without the same consent. In addition, we are obligated to use commercially reasonable efforts to refinance this mortgage prior to its maturity date in an amount not less than the principal amount outstanding on the maturity date. With respect to 673 First Avenue, Mr. Green controls at least 75% of the units whose approval is necessary. Finally, during this period, we may not incur debt secured by this property if the amount of our new debt would exceed the greater of 75% of the value of the property securing the debt or the amount of existing debt being refinanced plus associated costs. The maturity date for the mortgage loan for 673 First Avenue is February 11, 2013.

        In addition, on May 15, 2002, we acquired the property located at 1515 Broadway, New York, New York. Under a tax protection agreement established to protect the limited partners of the partnership that transferred 1515 Broadway to us, we have agreed not to take certain action that would adversely affect the limited partners' tax positions before December 31, 2011. We also acquired the property located at 220 East 42nd Street, New York, New York, on February 13, 2003. We have agreed not to take certain action that would adversely affect the tax positions of certain of the partners who held interests in this property prior to the acquisition for a period of seven years after the acquisition. We also acquired the property located at 625 Madison Avenue, New York, New York, on October 19, 2004 and have agreed not to take certain action that would adversely affect the tax positions of certain of the partners who held interests in this property prior to the acquisition, for a period of seven years after the acquisition.

        In connection with future acquisitions of interests in properties, we may agree to similar restrictions on our ability to sell or refinance the acquired properties with similar potential adverse consequences.

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We face potential conflicts of interest.

Members of management may have a conflict of interest over whether to enforce terms of agreements with entities in which senior management, directly or indirectly, has an interest.

        Through Alliance Building Services, or Alliance, First Quality Maintenance, L.P., or First Quality, provides cleaning, extermination and related services, Classic Security LLC provides security services, Bright Star Couriers LLC provides messenger services, and Onyx Restoration Works provides restoration services with respect to certain properties owned by us. Alliance is owned by Gary Green, a son of Stephen L. Green, the chairman of our board of directors. Our company and our tenants accounted for approximately 28% of Alliance's 2008 estimated total revenue. The contracts pursuant to which these services are provided are not the result of arm's length negotiations and, therefore, there can be no assurance that the terms and conditions are not less favorable than those which could be obtained from third parties providing comparable services. In addition, to the extent that we choose to enforce our rights under any of these agreements, we may determine to pursue available remedies, such as actions for damages or injunctive relief, less vigorously than we otherwise might because of our desire to maintain our ongoing relationship with the individual involved.

Members of management may have a conflict of interest over whether to enforce terms of senior management's employment and noncompetition agreements.

        Stephen Green, Marc Holliday, Gregory F. Hughes, Andrew Levine and Andrew Mathias entered into employment and noncompetition agreements with us pursuant to which they have agreed not to actively engage in the acquisition, development or operation of office real estate in the New York City metropolitan area. For the most part, these restrictions apply to the executive both during his employment and for a period of time thereafter. Each executive is also prohibited from otherwise disrupting or interfering with our business through the solicitation of our employees or clients or otherwise. To the extent that we choose to enforce our rights under any of these agreements, we may determine to pursue available remedies, such as actions for damages or injunctive relief, less vigorously than we otherwise might because of our desire to maintain our ongoing relationship with the individual involved. Additionally, the non-competition provisions of these agreements despite being limited in scope and duration, could be difficult to enforce, or may be subject to limited enforcement, should litigation arise over them in the future. Mr. Green has interests in two properties in Manhattan, which are exempt from the non-competition provisions of his employment and non-competition agreement.

Our failure to qualify as a REIT would be costly.

        We believe we have operated in a manner to qualify as a REIT for federal income tax purposes and intend to continue to so operate. Many of these requirements, however, are highly technical and complex. The determination that we are a REIT requires an analysis of factual matters and circumstances. These matters, some of which may not be totally within our control, can affect our qualification as a REIT. For example, to qualify as a REIT, at least 95% of our gross income must come from designated sources that are listed in the REIT tax laws. We are also required to distribute to stockholders at least 90% of our REIT taxable income excluding capital gains. The fact that we hold our assets through the operating partnership and its subsidiaries further complicates the application of the REIT requirements. Even a technical or inadvertent mistake could jeopardize our REIT status. Furthermore, Congress and the Internal Revenue Service, which we refer to as the IRS, might make changes to the tax laws and regulations, and the courts might issue new rulings that make it more difficult, or impossible, for us to remain qualified as a REIT.

        If we fail to qualify as a REIT, we would be subject to federal income tax at regular corporate rates. Also, unless the IRS grants us relief under specific statutory provisions, we would remain disqualified as a REIT for four years following the year we first failed to qualify. If we failed to qualify as a REIT, we would have to pay significant income taxes and would therefore have less money

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available for investments or for distributions to stockholders. This would likely have a significant adverse effect on the value of our securities. In addition, the REIT tax laws would no longer require us to make any distributions to stockholders.

Previously enacted tax legislation reduces tax rates for dividends paid by non-REIT corporations.

        Under certain previously enacted tax legislation, the maximum tax rate on dividends to individuals has generally been reduced from 38.6% to 15% (from January 1, 2003 through December 31, 2010). The reduction in rates on dividends is generally not applicable to dividends paid by a REIT except in limited circumstances that we do not contemplate. Although this legislation does not adversely affect the taxation of REITs or dividends paid by REITs, the favorable treatment of regular corporate dividends could cause investors who are individuals to consider stock of non-REIT corporations that pay dividends as relatively more attractive than stocks of REITs. It is not possible to determine whether such a change in perceived relative value has occurred or what the effect, if any, this legislation has had or will have in the future on the market price of our stock.

We are dependent on external sources of capital.

        Because of distribution requirements imposed on us to qualify as a REIT, it is not likely that we will be able to fund all future capital needs, including acquisitions, from income from operations. We therefore will have to rely on third-party sources of capital, which may or may not be available on favorable terms or at all. Our access to third-party sources of capital depends on a number of things, including the market's perception of our growth potential and our current and potential future earnings. In addition, we anticipate having to raise money in the public equity and debt markets with some regularity and our ability to do so will depend upon the general conditions prevailing in these markets. At any time conditions may exist which effectively prevent us, and REITs in general, from accessing these markets. Moreover, additional equity offerings may result in substantial dilution of our stockholders' interests, and additional debt financing may substantially increase our leverage. Due to the current financial crisis and the lack of liquidity in the market, such capital may not be available.

We face significant competition for tenants.

        The leasing of real estate is highly competitive. The principal means of competition are rent charged, location, services provided and the nature and condition of the facility to be leased. We directly compete with all lessors and developers of similar space in the areas in which our properties are located. Demand for retail space has been impacted by the recent bankruptcy of a number of retail companies and a general trend toward consolidation in the retail industry, which could adversely affect the ability of our company to attract and retain tenants.

        Our commercial office properties are concentrated in highly developed areas of midtown Manhattan and certain Suburban central business districts, or CBD's. Manhattan is the largest office market in the United States. The number of competitive office properties in Manhattan and CBD's in which our Suburban properties are located (which may be newer or better located than our properties) could have a material adverse effect on our ability to lease office space at our properties, and on the effective rents we are able to charge.

Loss of our key personnel could harm our operations.

        We are dependent on the efforts of Stephen L. Green, the chairman of our board of directors and an executive officer, Marc Holliday, our chief executive officer, Andrew Mathias, our president and chief investment officer and Gregory F. Hughes, our chief operating officer and chief financial officer. These officers have employment agreements which expire in December 2009, January 2010, December 2010, and December 2009, respectively. A loss of the services of any of these individuals could adversely affect our operations.

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Our business and operations would suffer in the event of system failures.

        Despite system redundancy, the implementation of security measures and the existence of a Disaster Recovery Plan for our internal information technology systems, our systems are vulnerable to damages from any number of sources, including computer viruses, unauthorized access, energy blackouts, natural disasters, terrorism, war and telecommunication failures. Any system failure or accident that causes interruptions in our operations could result in a material disruption to our business. We may also incur additional costs to remedy damages caused by such disruptions.

Compliance with changing regulation applicable to corporate governance and public disclosure may result in additional expenses, affect our operations and affect our reputation.

        Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002 and new SEC regulations and New York Stock Exchange rules, are creating uncertainty for public companies. These new or changed laws, regulations and standards are subject to varying interpretations in many cases due to their lack of specificity, and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities. In particular, our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal controls over financial reporting and our external auditors' audit of that assessment has required the commitment of significant financial and managerial resources. In addition, it has become more difficult and more expensive for us to obtain director and officer liability insurance. We expect these efforts to require the continued commitment of significant resources. Further, our directors, chief executive officer and chief financial officer could face an increased risk of personal liability in connection with the performance of their duties. As a result, we may have difficulty attracting and retaining qualified directors and executive officers, which could harm our business. If our efforts to comply with new or changed laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice, our reputation may be harmed.

Forward-Looking Statements May Prove Inaccurate

        See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations—Forward-looking Information" for additional disclosure regarding forward-looking statements.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

        As of December 31, 2008, we did not have any unresolved comments with the staff of the SEC.

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ITEM 2.    PROPERTIES

The Portfolio

        As of December 31, 2008, we owned or held interests in 21 consolidated and eight unconsolidated commercial office properties encompassing approximately 13.8 million rentable square feet and 9.4 million rentable square feet, respectively, located primarily in midtown Manhattan. Certain of these properties include at least a small amount of retail space on the lower floors, as well as basement/storage space. As of December 31, 2008, our portfolio also included ownership interests in 28 consolidated and six unconsolidated commercial office properties located in Brooklyn, Queens, Long Island, Westchester County, Connecticut and New Jersey, or the Suburban assets, encompassing approximately 4.7 million rentable square feet and 2.9 million rentable square feet, respectively. As of December 31, 2008, our portfolio also included eight consolidated and unconsolidated retail properties encompassing approximately 400,212 square feet, two development properties encompassing approximately 363,000 square feet and two land interests.

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        The following table sets forth certain information with respect to each of the Manhattan and Suburban office and retail properties in the portfolio as of December 31, 2008:

Manhattan Properties
  Year Built/
Renovated
  SubMarket   Approximate
Rentable
Square Feet
  Percentage
of Portfolio
Rentable
Square
Feet
(%)
  Percent
Leased(%)
  Annualized
Rent
($'s)(1)
  Percentage of
Portfolio
Annualized
Rent
(%)(2)
  Number
of
Tenants
  Annualized
Rent Per
Leased
Square
Foot($)(3)
  Annualized
Net Effective
Rent Per
Leased
Square Foot
($)(4)
 

CONSOLIDATED PROPERTIES

                                                 

"Same Store"(14)

                                                           

19 West 44th Street

   
1916
 

Midtown

   
292,000
   
0
   
97.9
   
13,027,548
   
1
   
59
   
45.59
   
42.43
 

220 East 42nd Street

    1929   Grand Central     1,135,000     4     99.7     47,530,260     5     31     42.62     40.29  

28 West 44th Street

    1919/2003   Midtown     359,000     1     99.6     15,623,136     1     71     44.48     40.16  

317 Madison Avenue

    1920/2004   Grand Central     450,000     1     92.0     21,408,564     2     86     48.74     41.45  

420 Lexington Ave (Graybar)(5)

    1927/1999   Grand Central North     1,188,000     4     96.8     63,289,608     6     225     47.47     40.94  

461 Fifth Avenue(6)

    1988   Midtown     200,000     1     95.4     14,702,820     1     19     75.22     70.28  

485 Lexington Avenue

    1956/2006   Grand Central North     921,000     3     98.5     48,737,352     5     21     52.99     45.14  

555 West 57th Street(7)

    1971   Midtown West     941,000     3     99.1     29,813,244     3     14     30.47     29.23  

609 Fifth Avenue

    1925/1990   Rockefeller Center     160,000     1     100.0     13,082,364     1     19     81.68     81.12  

625 Madison Avenue

    1956/2002   Plaza District     563,000     2     97.6     40,070,292     4     28     73.83     70.36  

673 First Avenue(7)

    1928/1990   Grand Central South     422,000     1     99.7     15,711,768     1     9     35.08     32.12  

711 Third Avenue(7)(8)

    1955   Grand Central North     524,000     1     93.3     23,261,772     2     17     45.11     40.28  

750 Third Avenue

    1958/2006   Grand Central North     780,000     3     97.2     37,788,192     4     26     49.52     45.23  

120 West 45th Street

    1998   Midtown     440,000     1     99.0     24,766,608     2     26     56.20     56.22  

810 Seventh Avenue

    1970   Times Square     692,000     2     84.3     38,549,352     4     36     60.97     60.56  

919 Third Avenue

    1970   Grand Central North     1,454,000     5     99.9     80,192,064     4     15     55.26     51.01  

1185 Avenue of the Americas

    1969   Rockefeller Center     1,062,000     3     98.9     70,133,220     7     20     65.45     58.98  

1350 Avenue of the Americas

    1966   Rockefeller Center     562,000     2     96.0     31,459,104     3     40     56.45     54.37  
                                                 
 

Subtotal/Weighted Average

    12,145,000     39     97.2   $ 629,147,268     56     762              
                                                 

Adjustments

                                                           

1 Madison Avenue

    1960/2002   Park Avenue South     1,176,900     4     99.8     61,630,188     6     3     52.50     52.30  

331 Madison Avenue

    1923   Grand Central     114,900     0     100.0     4,755,708     0     19     41.07     40.77  

333 West 34th Street

    1954/2000   Penn Station     345,400     1     100.0     14,897,340     1     1     44.02     43.93  
                                                 
 

Subtotal/Weighted Average

    1,637,200     5     99.8     81,283,236     7     23              

Total/Weighted Average Consolidated Properties(9)

    13,782,200     44     97.5     710,430,504     63     785              
                                                 

UNCONSOLIDATED PROPERTIES

                                                 

"Same Store"

                                                           

100 Park Avenue—50%

    1950/1980   Grand Central South     834,000     3     81.1     39,922,656     2     34     58.05     42.33  

521 Fifth Avenue—50.1%

    1929/2000   Grand Central     460,000     1     94.4     23,932,800     1     46     53.73     51.44  

800 Third Avenue—42.95%

    1972/2006   Grand Central North     526,000     2     98.7     28,512,732     1     26     54.42     51.97  

1221 Avenue of the Americas—45%

    1971/1997   Rockefeller Center     2,550,000     8     93.5     151,154,196     7     21     63.99     62.92  

1515 Broadway—55%

    1972   Times Square     1,750,000     6     95.4     87,783,168     6     10     53.80     48.05  
                                                 
 

Subtotal/Weighted Average

    6,120,000     20     92.8     331,305,552     17     137              
                                                 

Adjustments

                                                           

388 & 390 Greenwich Street—50.6%(13)

    1986-1990   Downtown     2,635,000     9     100.0     99,225,000     5     1     37.66     37.66  

1745 Broadway—32.3%

    2003   Midtown     674,000     2     100.0     36,781,656     1     1     57.06     57.06  
                                                 
 

Subtotal/Weighted Average

              3,309,000     11     100.0   $ 136,006,656     6     2              

Total/Weighted Average Unconsolidated Properties(10)

    9,429,000     31     95.4   $ 467,312,208     23     139              

Manhattan Grand Total/Weighted Average

    23,211,200     75     96.7   $ 1,177,742,712           924              

Manhattan Grand Total—SLG share of Annualized Rent

                    $ 905,514,851     86                    

Manhattan Same Store Occupancy %—Combined

    18,265,000     79     95.8                                
                                                 

Suburban Properties

                                                 

CONSOLIDATED PROPERTIES

                                                 

Adjustments

                                                           

1100 King Street—1 International Drive(14)

    1983-1986   Rye Brook, Westchester     90,000     0     100.0     2,375,316     0     1     26.39     26.34  

1100 King Street—2 International Drive(14)

    1983-1986   Rye Brook, Westchester     90,000     0     79.4     1,924,008     0     3     28.01     19.99  

1100 King Street—3 International Drive(14)

    1983-1986   Rye Brook, Westchester     90,000     0     79.9     1,982,808     0     4     27.59     26.50  

1100 King Street—4 International Drive(14)

    1983-1986   Rye Brook, Westchester     90,000     0     96.9     2,790,012     0     10     30.98     28.80  

1100 King Street—5 International Drive(14)

    1983-1986   Rye Brook, Westchester     90,000     0     79.9     1,925,748     0     8     26.82     22.28  

1100 King Street—6 International Drive(14)

    1983-1986   Rye Brook, Westchester     90,000     0     100.0     2,715,792     0     4     28.47     26.87  

520 White Plains Road(14)

    1979   Tarrytown, Westchester     180,000     1     92.4     4,167,012     1     9     25.88     25.51  

115-117 Stevens Avenue(14)

    1984   Valhalla, Westchester     178,000     1     67.5     3,310,212     1     14     26.44     23.79  

100 Summit Lake Drive(14)

    1988   Valhalla, Westchester     250,000     1     78.4     5,714,148     1     7     29.22     29.17  

200 Summit Lake Drive(14)

    1990   Valhalla, Westchester     245,000     1     95.7     6,475,452     1     9     28.47     28.54  

500 Summit Lake Drive(14)

    1986   Valhalla, Westchester     228,000     1     81.0     4,566,312     1     3     24.74     24.44  

140 Grand Street(14)

    1991   White Plains, Westchester     130,100     0     91.0     3,499,116     1     8     36.45     30.40  

360 Hamilton Avenue(14)

    2000   White Plains, Westchester     384,000     1     100.0     13,152,612     1     14     35.13     32.01  

399 Knollwood Road

    1986   White Plains, Westchester     145,000     1     97.3     3,625,584     1     45     25.95     21.76  
                                                 
 

Westchester, NY Subtotal

    2,280,100     7     88.9     58,224,132     8     139              

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  Year Built/
Renovated
  SubMarket   Approximate
Rentable
Square Feet
  Percentage
of Portfolio
Rentable
Square
Feet
(%)
  Percent
Leased(%)
  Annualized
Rent
($'s)(1)
  Percentage of
Portfolio
Annualized
Rent
(%)(2)
  Number
of
Tenants
  Annualized
Rent Per
Leased
Square
Foot($)(3)
  Annualized
Net Effective
Rent Per
Leased
Square Foot
($)(4)
 

1 Landmark Square(14)

    1973/1984   Stamford, Connecticut     312,000     1     81.9     8,250,804     1     51     34.26     33.20  

2 Landmark Square(14)

    1973/1984   Stamford, Connecticut     46,000     0     78.6     1,043,700     0     11     30.51     28.72  

3 Landmark Square(14)

    1973/1984   Stamford, Connecticut     130,000     0     97.0     3,515,136     0     13     27.83     28.01  

4 Landmark Square(14)

    1973/1984   Stamford, Connecticut     105,000     0     80.9     2,295,564     0     13     29.57     35.24  

5 Landmark Square(14)

    1973/1984   Stamford, Connecticut     61,000     0     99.8     879,528     0     12     15.87     15.64  

6 Landmark Square(14)

    1973/1984   Stamford, Connecticut     172,000     1     78.3     2,946,324     0     5     22.99     22.51  

7 Landmark Square

    2007   Stamford, Connecticut     36,800     0     10.8     258,696     0     1     65.00     65.00  

300 Main Street

    2002   Stamford, Connecticut     130,000     0     94.6     1,997,436     0     20     16.56     16.22  

680 Washington Boulevard(14)

    1989   Stamford, Connecticut     133,000     1     100.0     5,071,392     0     5     38.50     38.46  

750 Washington Boulevard(14)

    1989   Stamford, Connecticut     192,000     1     98.5     6,490,068     1     9     35.40     31.80  

1010 Washington Boulevard

    1988   Stamford, Connecticut     143,400     1     67.3     3,847,788     0     19     30.07     29.43  

1055 Washington Boulevard(14)

    1987   Stamford, Connecticut     182,000     1     84.9     5,325,720     1     20     33.08     30.28  

500 West Putnam Avenue

    1973   Greenwich, Connecticut     121,500     0     83.2     3,560,136     0     10     39.64     32.21  
                                                 
 

Connecticut Subtotal

    1,764,700     6     84.9     45,482,292     3     189              
                                                 

55 Corporate Drive, NJ

    1987/1999   Bridgewater, New Jersey     670,000     2     100.0     21,812,124     1     1     32.56     32.56  
                                                 

Total/Weighted Average Consolidated Properties(11)

    4,714,800     15     89.0     125,518,548     12     329              

UNCONSOLIDATED PROPERTIES

                                                           

Adjustments

                                                           

The Meadows—25%

    1981   Rutherford, New Jersey     582,100     2     83.3     12,266,486     1     57     26.10     18.06  

16 Court Street—35%

    1928   Brooklyn, New York     317,600     1     77.8     8,323,980     0     61     39.92     39.49  

Jericho Plaza—20.26%

    1980   Jericho, New York     640,000     2     97.6     21,358,068     0     36     34.91     34.61  

One Court Square—30%

    1987   Long Island City, New York     1,402,000     5     100.0     51,082,644     1     1     36.45     36.45  
                                                 

Total/Weighted Average Unconsolidated Properties(12)

    2,941,700     10     93.8   $ 93,031,178     2     155              
                                                 

Grand Total/Weighted Average

    30,867,700     100     95.2   $ 1,396,292,438           1,408              

Grand Total—SLG share of Annualized Rent

                    $ 1,040,094,174     100                    
                                                 

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RETAIL, DEVELOPMENT & LAND
  Year
Built/
Renovated
  SubMarket   Approximate
Rentable
Square Feet
  Percentage of
Portfolio
Rentable
Square Feet
(%)
  Percent Leased
(%)
  Annualized Rent
($'s)(1)
  Percentage of
Portfolio
Annualized Rent
(%)(2)
  Number
of
Tenants
  Annualized
Rent Per
Leased
Square
Foot(3)
  Annualized
Net Effective
Rent Per
Leased Square
Foot(4)
 
125 Chubb Way     2008   Lyndhurst, NJ     278,000     37                          
141 Fifth Avenue—50%     1879   Flat Iron     21,500     3     100.0     2,018,820     3     4     97.44     93.83  
150 Grand Street     1962/2001   White Plains     85,000     11     17.5     387,720     1     3          
1551-1555 Broadway—10%     1890   Times Square     25,600     3     100.0         N/A     N/A          
1604 Broadway—63%     1912/2001   Times Square     29,876     4     100.0     4,596,312     8     3     146.08     153.85  
180-182 Broadway—50%     1902   Cast Iron/Soho     70,580     9     66.8     1,110,108     1     19     31.29     15.73  
21-25 West 34th Street—50%     1920/1930   Herald Square/Penn Station     30,100     4     100.0     5,875,128     8     1     196.24     195.19  
27-29 West 34th Street—50%     1904   Herald Square/Penn Station     41,000     5     100.0         N/A     N/A          
379 West Broadway—45%     1853/1987   Cast Iron/Soho     62,006     8     100.0     3,270,084     4     6     52.74     51.85  
717 Fifth Avenue—32.75%     1958/2000   Midtown/Plaza District     119,550     16     79.1     19,118,328     46     7     169.17     159.92  
2 Herald Square—55%       Herald Square/Penn Station     N/A     N/A     N/A     9,000,000     13     1          
885 Third Avenue—55%       Midtown/Plaza District     N/A     N/A     N/A     11,095,000     16     1          
                                                 
Total/Weighted Average
    Retail/Development Properties
    763,212     100     N/A   $ 56,471,500     100     45              

(1)
Annualized Rent represents the monthly contractual rent under existing leases as of December 31, 2008 multiplied by 12. This amount reflects total rent before any rent abatements and includes expense reimbursements, which may be estimated as of such date. Total rent abatements for leases in effect as of December 31, 2008 for the 12 months ending December 31, 2009 are approximately $2.3 million for our consolidated properties and $12.3 million for our unconsolidated properties.

(2)
Includes our share of unconsolidated joint venture annualized rent calculated on a consistent basis.

(3)
Annualized Rent Per Leased Square Foot represents Annualized Rent, as described in footnote (1) above, presented on a per leased square foot basis.

(4)
Annual Net Effective Rent Per Leased Square Foot represents (a) for leases in effect at the time an interest in the relevant property was first acquired by us, the remaining lease payments under the lease from the acquisition date divided by the number of months remaining under the lease multiplied by 12 and (b) for leases entered into after an interest in the relevant property was first acquired by us, all lease payments under the lease divided by the number of months in the lease multiplied by 12, and, in the case of both (a) and (b), minus tenant improvement costs and leasing commissions, if any, paid or payable by us and presented on a per leased square foot basis. Annual Net Effective Rent Per Leased Square Foot includes future contractual increases in rental payments and therefore, in certain cases, may exceed Annualized Rent Per Leased Square Foot.

(5)
We hold an operating sublease interest in the land and improvements.

(6)
We hold a leasehold interest in this property.

(7)
Includes a parking garage.

(8)
We hold a leasehold mortgage interest, a net sub-leasehold interest and a co-tenancy interest in this property.

(9)
Includes approximately 12.5 million square feet of rentable office space, 1.0 million square feet of rentable retail space and 0.3 million square feet of garage space.

(10)
Includes approximately 8.8 million square feet of rentable office space, 0.5 million square feet of rentable retail space and 0.1 million square feet of garage space.

(11)
Includes approximately 4.4 million square feet of rentable office space and 0.3 million square feet of rentable retail space.

(12)
Includes approximately 2.9 million square feet of rentable office space.

(13)
The rent per square foot is presented on a triple-net basis.

(14)
The Same-Store properties include properties owned by us on January 1, 2007 and still owned by us at December 31, 2008 and also include the Reckson properties which were acquired on January 25, 2007.

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        Historical Occupancy.    We have historically achieved consistently higher occupancy rates in our Manhattan portfolio in comparison to the overall Midtown markets, as shown over the last five years in the following table:

 
  Percent of
Manhattan
Portfolio
Leased(1)
  Occupancy Rate of
Class A
Office Properties
In The Midtown
Markets(2)(3)
  Occupancy Rate of
Class B
Office Properties
in the Midtown
Markets(2)(3)
 

December 31, 2008

    96.7 %   90.8 %   92.1 %

December 31, 2007

    96.6 %   94.1 %   93.5 %

December 31, 2006

    97.0 %   95.7 %   93.7 %

December 31, 2005

    96.7 %   94.4 %   92.5 %

December 31, 2004

    96.0 %   93.0 %   91.0 %

(1)
Includes space for leases that were executed as of the relevant date in our wholly-owned and joint venture properties in Manhattan owned by us as of that date.

(2)
Includes vacant space available for direct lease and sublease. Source: Cushman & Wakefield.

(3)
The term "Class B" is generally used in the Manhattan office market to describe office properties that are more than 25 years old but that are in good physical condition, enjoy widespread acceptance by high-quality tenants and are situated in desirable locations in Manhattan. Class B office properties can be distinguished from Class A properties in that Class A properties are generally newer properties with higher finishes and obtain the highest rental rates within their markets.

        Leases in our Manhattan portfolio, as at many other Manhattan office properties, typically have an initial term of seven to ten years, compared to typical lease terms of five to ten years in other large U.S. office markets. For the five years ending December 31, 2013, the average annual rollover at our Manhattan consolidated and unconsolidated properties is approximately 1.0 million square feet and 0.3 million square feet, respectively, representing an average annual expiration rate of 6.9% and 3.8%, respectively, per year (assuming no tenants exercise renewal or cancellation options and there are no tenant bankruptcies or other tenant defaults).

        The following tables set forth a schedule of the annual lease expirations at our Manhattan consolidated and unconsolidated properties, respectively, with respect to leases in place as of

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December 31, 2008 for each of the next ten years and thereafter (assuming that no tenants exercise renewal or cancellation options and that there are no tenant bankruptcies or other tenant defaults):

Manhattan Consolidated Properties
Year of Lease Expiration
  Number
of
Expiring
Leases
  Square
Footage
of
Expiring
Leases
  Percentage
of
Total
Leased
Square
Feet (%)
  Annualized
Rent
of
Expiring
Leases(1)
  Annualized
Rent
Per
Leased
Square
Foot of
Expiring
Leases(2)
 

2009(3)

    123     1,052,879     7.61 % $ 52,176,852   $ 49.56  

2010

    121     769,152     5.56     37,787,076     49.13  

2011

    111     847,277     6.13     44,069,088     52.01  

2012

    108     965,194     6.98     41,956,764     43.47  

2013

    97     1,166,750     8.44     57,536,448     49.31  

2014

    38     736,466     5.32     33,604,488     45.63  

2015

    46     580,710     4.20     27,819,528     47.91  

2016

    40     964,962     6.98     50,632,248     52.47  

2017

    58     1,787,035     12.92     91,868,232     51.41  

2018 & thereafter

    91     4,959,930     35.86     272,979,780     55.04  
                       

Total/weighted average

    833     13,830,355     100.00 % $ 710,430,504   $ 51.37  
                       

(1)
Annualized Rent of Expiring Leases represents the monthly contractual rent under existing leases as of December 31, 2008 multiplied by 12. This amount reflects total rent before any rent abatements and includes expense reimbursements, which may be estimated as of such date. Total rent abatements for leases in effect as of December 31, 2008 for the 12 months ending December 31, 2009, are approximately $2.1 million for the properties.

(2)
Annualized Rent Per Leased Square Foot of Expiring Leases represents Annualized Rent of Expiring Leases, as described in footnote (1) above, presented on a per leased square foot basis.

(3)
Includes 90,793 square feet of month-to-month holdover tenants whose leases expired prior to December 31, 2008.

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Manhattan Unconsolidated Properties
Year of Lease Expiration
  Number
of
Expiring
Leases
  Square
Footage
of
Expiring
Leases
  Percentage
of
Total
Leased
Square
Feet (%)
  Annualized
Rent
of
Expiring
Leases(1)
  Annualized
Rent
Per
Leased
Square
Foot of
Expiring
Leases(2)
 

2009(3)

    23     155,898     1.75 % $ 7,831,764   $ 50.24  

2010

    21     413,381     4.63     21,290,556     51.50  

2011

    9     150,116     1.68     6,729,336     44.83  

2012

    17     115,743     1.30     6,275,364     54.22  

2013

    10     881,822     9.87     52,918,188     60.01  

2014

    15     231,108     2.59     19,482,600     84.30  

2015

    15     1,489,468     16.68     76,856,160     51.60  

2016

    7     209,736     2.35     16,254,612     77.50  

2017

    5     154,846     1.73     7,933,621     51.24  

2018 & thereafter

    31     2,493,389     27.92     152,515,007     61.17  
                       

Sub-Total/weighted average

    153     6,295,507     70.50     368,087,208   $ 58.47  
                               

    2 (4)   2,634,670     29.50     99,225,000        
                         

Total

    155     8,930,177     100.00 % $ 467,312,208        
                         

(1)
Annualized Rent of Expiring Leases represents the monthly contractual rent under existing leases as of December 31, 2008 multiplied by 12. This amount reflects total rent before any rent abatements and includes expense reimbursements, which may be estimated as of such date. Total rent abatements for leases in effect as of December 31, 2008 for the 12 months ending December 31, 2009 are approximately $12.3 million for the joint venture properties.

(2)
Annualized Rent Per Leased Square Foot of Expiring Leases represents Annualized Rent of Expiring Leases, as described in footnote (1) above, presented on a per leased square foot basis.

(3)
Includes 12,486 square feet of month-to-month holdover tenants whose leases expired prior to December 31, 2008.

(4)
Represents Citigroup's 13-year net lease at 388-390 Greenwich Street. The current net rent is $37.66 per square foot with annual CPI escalation.

        Leases in our Suburban portfolio, as at many other suburban office properties, typically have an initial term of five to ten years. For the five years ending December 31, 2013, the average annual rollover at our Suburban consolidated and unconsolidated properties is approximately 0.5 million square feet and 0.2 million square feet, respectively, representing an average annual expiration rate of 11.7% and 6.0% respectively, per year (assuming no tenants exercise renewal or cancellation options and there are no tenant bankruptcies or other tenant defaults).

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        The following tables set forth a schedule of the annual lease expirations at our Suburban consolidated and unconsolidated properties, respectively, with respect to leases in place as of December 31, 2008 for each of the next ten years and thereafter (assuming that no tenants exercise renewal or cancellation options and that there are no tenant bankruptcies or other tenant defaults):

Suburban Consolidated Properties
Year of Lease Expiration
  Number
of
Expiring
Leases
  Square
Footage
of
Expiring
Leases
  Percentage
of
Total
Leased
Square
Feet (%)
  Annualized
Rent
of
Expiring
Leases(1)
  Annualized
Rent
Per
Leased
Square
Foot of
Expiring
Leases(2)
 

2009(3)

    72     395,758     9.55 % $ 10,492,956   $ 26.51  

2010

    59     540,472     13.05     16,516,968     30.56  

2011

    71     806,870     19.48     23,595,996     29.24  

2012

    37     260,234     6.28     8,144,400     31.30  

2013

    34     422,895     10.21     13,580,208     32.11  

2014

    19     236,600     5.71     6,841,440     28.92  

2015

    17     250,042     6.04     7,798,776     31.19  

2016

    13     283,262     6.84     7,810,488     27.57  

2017

    10     86,592     2.09     2,673,600     30.88  

2018 & thereafter

    14     859,622     20.75     28,063,716     32.65  
                       

Total/weighted average

    346     4,142,347     100.00 % $ 125,518,548   $ 30.30  
                       

(1)
Annualized Rent of Expiring Leases represents the monthly contractual rent under existing leases as of December 31, 2008 multiplied by 12. This amount reflects total rent before any rent abatements and includes expense reimbursements, which may be estimated as of such date. Total rent abatements for leases in effect as of December 31, 2008 for the 12 months ending December 31, 2009, are approximately $0.2 million for the properties.

(2)
Annualized Rent Per Leased Square Foot of Expiring Leases represents Annualized Rent of Expiring Leases, as described in footnote (1) above, presented on a per leased square foot basis.

(3)
Includes 129,713 square feet of month-to-month holdover tenants whose leases expired prior to December 31, 2008.

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Suburban Unconsolidated Properties
Year of Lease Expiration
  Number
of
Expiring
Leases
  Square
Footage
of
Expiring
Leases
  Percentage
of
Total
Leased
Square
Feet (%)
  Annualized
Rent
of
Expiring
Leases(1)
  Annualized
Rent
Per
Leased
Square
Foot of
Expiring
Leases(2)
 

2009(3)

    30     154,674     5.75 % $ 5,150,165   $ 33.30  

2010

    23     180,469     6.70     5,356,236     29.68  

2011

    26     143,629     5.34     4,294,032     29.90  

2012

    21     241,633     8.98     8,332,956     34.49  

2013

    17     85,941     3.19     2,618,620     30.47  

2014

    13     199,031     7.39     6,788,520     34.11  

2015

    8     40,037     1.49     1,226,424     30.63  

2016

    5     64,112     2.38     2,044,656     31.89  

2017

    7     59,178     2.20     2,317,733     39.17  

2018 & thereafter

    10     1,523,201     56.58     54,901,836     36.04  
                       

Total/weighted average

    160     2,691,905     100.00 % $ 93,031,178   $ 34.56  
                       

(1)
Annualized Rent of Expiring Leases represents the monthly contractual rent under existing leases as of December 31, 2008 multiplied by 12. This amount reflects total rent before any rent abatements and includes expense reimbursements, which may be estimated as of such date. Total rent abatements for leases in effect as of December 31, 2008 for the 12 months ending December 31, 2009, are approximately $0.1 million for the joint venture properties.

(2)
Annualized Rent Per Leased Square Foot of Expiring Leases represents Annualized Rent of Expiring Leases, as described in footnote (1) above, presented on a per leased square foot basis.

(3)
Includes 20,750 square feet of month-to-month holdover tenants whose leases expired prior to December 31, 2008.

        At December 31, 2008, our portfolio was leased to approximately 1,408 tenants, which are engaged in a variety of businesses, including professional services, financial services, media, apparel, business services and government/non-profit. The following table sets forth information regarding the leases with

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respect to the 30 largest tenants in our portfolio, based on the amount of square footage leased by our tenants as of December 31, 2008:

Tenant(1)
  Properties   Remaining
Lease
Term
in Months(2)
  Total
Leased
Square
Feet
  Percentage
of
Aggregate
Portfolio
Leased
Square
Feet (%)
  Percentage
of
Aggregate
Portfolio
Annualized
Rent (%)
 

Citigroup, N.A. 

 

388 & 390 Greenwich Street, 485
Lexington Avenue, 750 Third Avenue,
800 Third Avenue, 333 West 34th Street,
750 Washington Blvd & Court Square

    144     4,789,646     13.2 %   9.4 %

Viacom International Inc. 

 

1515 Broadway

    137     1,287,611     5.0 %   4.6 %

Credit Suisse Securities (USA), LLC

 

1 Madison Avenue

    144     1,138,143     4.3 %   5.8 %

Sanofi-Aventis

 

55 Corporate Drive, NJ

    172     670,000     1.6 %   1.0 %

Morgan Stanley & Co., Inc. 

 

1221 Avenue of the Americas, 2 Jericho Plaza & 4 Landmark Square

    120     652,311     3.3 %   2.0 %

Random House, Inc. 

 

1745 Broadway

    114     644,598     2.6 %   1.1 %

Debevoise & Plimpton, LLP

 

919 Third Avenue

    156     586,528     2.6 %   1.7 %

Omnicom Group

 

220 East 42nd Street, 420 Lexington Avenue
& 485 Lexington Avenue

    100     577,840     1.6 %   2.2 %

Societe Generale

 

1221 Avenue of the Americas

    57     486,663     2.1 %   1.3 %

The McGraw Hill Companies, Inc. 

 

1221 Avenue of the Americas

    135     420,329     1.6 %   1.0 %

Advance Magazine Group

 

750 Third Avenue & 485 Lexington Avenue

    146     342,720     1.0 %   1.3 %

Verizon

 

120 West 45th Street, 1100 King Street
Bldgs 1&2, 1 Landmark Square, 2
Landmark Square & 500 Summit Lake
Drive

    36     315,618     0.6 %   0.8 %

C.B.S. Broadcasting, Inc. 

 

555 West 57th Street

    105     286,037     0.7 %   1.0 %

Polo Ralph Lauren Corporation

 

625 Madison Avenue

    132     269,269     1.1 %   1.5 %

Schulte, Roth & Zabel LLP

 

919 Third Avenue

    150     263,186     1.0 %   0.7 %

New York Presbyterian Hospital

 

555 West 57th Street & 673 First Avenue

    152     262,448     0.6 %   0.8 %

The Travelers Indemnity Company

 

485 Lexington Avenue & 2 Jericho Plaza

    92     250,857     0.9 %   1.1 %

The City University of NY—CUNY

 

555 West 57th Street & 28 West 44th Street

    87     229,044     0.6 %   0.8 %

BMW of Manhattan

 

555 West 57th Street

    43     227,782     0.4 %   0.5 %

Vivendi Universal US Holdings

 

800 Third Avenue

    14     226,105     0.8 %   0.5 %

Sonnenschein, Nath & Rosenthal

 

1221 Avenue of the Americas

    109     191,825     0.9 %   0.5 %

D.E. Shaw and Company L.P. 

 

120 West 45th Street

    99     187,484     0.8 %   1.1 %

Amerada Hess Corp. 

 

1185 Avenue of the Americas

    228     182,529     0.8 %   1.0 %

Fuji Color Processing Inc. 

 

200 Summit Lake Drive

    51     165,880     0.3 %   0.4 %

King & Spalding

 

1185 Avenue of the Americas

    202     159,858     0.7 %   0.9 %

National Hockey League

 

1185 Avenue of the Americas

    167     148,216     0.8 %   1.1 %

New York Hospitals Center/ Mount Sinai

 

625 Madison Avenue & 673 First Avenue

    153     146,917     0.4 %   0.6 %

Banque National De Paris

 

919 Third Avenue

    91     145,834     0.6 %   0.8 %

News America Incorporated

 

1185 Avenue of the Americas

    143     144,567     0.8 %   1.1 %

Draft Worldwide

 

919 Third Avenue

    59     141,260     0.6 %   0.8 %
                         

Total Weighted Average(3)

              15,541,105     52.2 %   47.2 %
                         

(1)
This list is not intended to be representative of our tenants as a whole.

(2)
Lease term from December 31, 2008 until the date of the last expiring lease for tenants with multiple leases.

(3)
Weighted average calculation based on total rentable square footage leased by each tenant.

Environmental Matters

        We engaged independent environmental consulting firms to perform Phase I environmental site assessments on our portfolio, in order to assess existing environmental conditions. All of the Phase I

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assessments met the ASTM Standard. Under the ASTM Standard, a Phase I environmental site assessment consists of a site visit, an historical record review, a review of regulatory agency data bases and records, and interviews with on-site personnel, with the purpose of identifying potential environmental concerns associated with real estate. These environmental site assessments did not reveal any known environmental liability that we believe will have a material adverse effect on our results of operations or financial condition.

ITEM 3.    LEGAL PROCEEDINGS

        As of December 31, 2008, we were not involved in any material litigation nor, to management's knowledge, is any material litigation threatened against us or our portfolio other than routine litigation arising in the ordinary course of business or litigation that is adequately covered by insurance.

        On December 6, 2006, the company announced that it and Reckson Associates Realty Corp. had reached an agreement in principal with the plaintiffs to settle the previously disclosed class action lawsuits relating to the SL Green/Reckson merger. The settlement, which has been executed by all parties, and was approved by the New York court, provides (1) for certain contingent profit sharing participations for Reckson stockholders relating to specified assets, none of which are owned by us, (2) for potential payments to Reckson stockholders of amounts relating to Reckson's interest in contingent profit sharing participations in connection with the sale of certain Long Island industrial properties in a prior transaction, none of which are owned by us, and (3) for the dismissal by the plaintiffs of all actions with prejudice and customary releases of all defendants and related parties.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        No matters were submitted to a vote of our stockholders during the fourth quarter ended December 31, 2008.

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

        Our common stock began trading on the New York Stock Exchange, or the NYSE, on August 15, 1997 under the symbol "SLG." On February 18, 2009, the reported closing sale price per share of common stock on the NYSE was $13.42 and there were approximately 446 holders of record of our common stock. The table below sets forth the quarterly high and low closing sales prices of the common stock on the NYSE and the distributions paid by us with respect to the periods indicated.

 
  2007   2008  
Quarter Ended
  High   Low   Dividends   High   Low   Dividends  

March 31

  $ 156.10   $ 131.81   $ 0.70   $ 98.77   $ 76.78   $ 0.7875  

June 30

  $ 143.47   $ 122.78   $ 0.70   $ 100.74   $ 82.55   $ 0.7875  

September 30

  $ 133.35   $ 101.61   $ 0.70   $ 92.23   $ 63.65   $ 0.7875  

December 31

  $ 123.28   $ 89.43   $ 0.7875   $ 62.74   $ 11.36   $ 0.3750  

        If dividends are declared in a quarter, those dividends will be paid during the subsequent quarter. We expect to continue our policy of distributing our taxable income through regular cash dividends on a quarterly basis, although there is no assurance as to future dividends because they depend on future earnings, capital requirements and financial condition. See Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations—Dividends" for additional information regarding our dividends.

Units

        At December 31, 2008, there were 2,339,853 units of limited partnership interest of the operating partnership outstanding. These units received distributions per unit in the same manner as dividends per share were distributed to common stockholders.

Issuer Purchases of Equity Securities

        In March 2007 our board of directors approved a stock repurchase plan under which we can buy up to $300.0 million shares of our common stock. This plan expired on December 31, 2008. As of December 31, 2008, we purchased and settled approximately $300.0 million, or 3.3 million shares of our common stock, at an average price of $90.49 per share.

Sale of Unregistered and Registered Securities; Use of Proceeds from Registered Securities

        During the years ended December 31, 2008, 2007 and 2006, we issued none, 343,412 and 223,361 shares of common stock, respectively, to holders of units of limited partnership in the operating partnership upon the redemption of such units pursuant to the partnership agreement of the operating partnership. The issuance of such shares was exempt from registration under the Securities Act, pursuant to the exemption contemplated by Section 4(2) thereof for transactions not involving a public offering. The units were converted into an equal number of shares of common stock.

        We issued 128,956, 435,583 and 102,826 shares of our common stock in 2008, 2007 and 2006, respectively, for deferred stock-based compensation in connection with employment contracts and other compensation-related grants.

        See Notes 14 and 16 to the Consolidated Financial Statements in Item 8 for a description of our stock option plan and other compensation arrangements.

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        The following table summarizes information, as of December 31, 2008, relating to our equity compensation plans pursuant to which shares of our common stock or other equity securities may be granted from time to time.

Plan category
  Number of securities
to be issued
upon exercise
of outstanding
options, warrants
and
rights
  Weighted
average
exercise
price of
outstanding
options,
warrants and
rights
  Number of securities
remaining available
for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
 
 
  (a)
  (b)
  (c)
 

Equity compensation plans approved by security holders(1)

    937,706   $ 61.33     5,538,500 (2)

Equity compensation plans not approved by security holders

      $      
               
 

Total

    937,706   $ 61.33     5,538,500  
               

(1)
Includes information related to our 2005 Amended and Restated Stock Option and Incentive Plan and Amended 1997 Stock Option and Incentive Plan, as amended.

(2)
Balance is after reserving for shares to be issued under our 2005 Long-Term Outperformance Compensation Program.

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ITEM 6.    SELECTED FINANCIAL DATA

        The following table sets forth our selected financial data and should be read in conjunction with our Financial Statements and notes thereto included in Item 8, "Financial Statements and Supplementary Data" and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Form 10-K.

        In connection with this Annual Report on Form 10-K, we are restating our historical audited consolidated financial statements as a result of Statement of Financial Accounting Standards No. 144, or SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." During the periods presented below, we classified properties as held for sale and, in compliance with SFAS No. 144, have reported revenue and expenses from these properties as discontinued operations, net of minority interest, for each period presented in our Annual Report on Form 10-K. This reclassification had no effect on our reported net income or funds from operations.

        We are also providing updated summary selected financial information, which is included below reflecting the prior period reclassification as discontinued operations of the property classified as held for sale during 2008.

 
  Year Ended December 31,  
Operating Data
  2008   2007   2006   2005   2004  
 
  (In thousands, except per share data)
 

Total revenue

  $ 1,116,861   $ 1,017,149   $ 469,854   $ 350,368   $ 257,995  
                       

Operating expenses

    229,712     209,420     102,548     77,541     60,194  

Real estate taxes

    127,130     121,594     62,915     45,935     34,171  

Ground rent

    31,494     32,389     20,150     19,250     15,617  

Interest

    281,766     251,537     89,394     71,752     55,899  

Amortization of deferred finance costs

    6,436     15,893     4,424     4,461     3,275  

Depreciation and amortization

    217,624     175,171     62,523     46,670     34,539  

Loan loss and other investment reserves

    115,882                  

Marketing, general and administration

    120,886     105,044     65,741     44,215     30,279  
                       

Total expenses

    1,130,930     911,048     407,695     309,824     233,974  

Equity in net income of unconsolidated joint ventures

    59,961     46,765     40,780     49,349     44,037  

Minority interests

    (13,262 )   (23,173 )   (9,657 )   (5,366 )   (4,098 )
                       

Income before gains on sale

    32,630     129,693     93,282     84,527     63,960  

Gain on early extinguishment of debt

    88,541                  

Loss on equity investment in marketable securities

    (147,489 )                

Gain on sale of properties/partial interests

    103,014     31,509     3,451     11,550     22,012  
                       

Income from continuing operations

    76,696     161,202     96,733     96,077     85,972  

Discontinued operations (net of minority interest)

    333,063     499,208     123,986     61,342     123,458  
                       

Net income

    409,759     660,410     220,719     157,419     209,430  

Preferred dividends and accretion

    (19,875 )   (19,875 )   (19,875 )   (19,875 )   (16,258 )
                       

Income available to common stockholders

  $ 389,884   $ 640,535   $ 200,844   $ 137,544   $ 193,172  
                       

Net income per common share—Basic

  $ 6.72   $ 10.90   $ 4.50   $ 3.29   $ 4.93  
                       

Net income per common share—Diluted

  $ 6.69   $ 10.78   $ 4.38   $ 3.20   $ 4.75  
                       

Cash dividends declared per common share

  $ 2.7375   $ 2.89   $ 2.50   $ 2.22   $ 2.04  
                       

Basic weighted average common shares outstanding

    57,996     58,742     44,593     41,793     39,171  
                       

Diluted weighted average common shares and common share equivalents outstanding

    60,598     61,885     48,495     45,504     43,078  
                       

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  As of December 31,  
Balance Sheet Data
  2008   2007   2006   2005   2004  
 
  (In thousands)
 

Commercial real estate, before accumulated depreciation

  $ 8,201,789   $ 8,622,496   $ 3,055,159   $ 2,222,922   $ 1,756,104  

Total assets

    10,984,353     11,430,078     4,632,227     3,309,777     2,751,881  

Mortgage notes payable, revolving credit facilities, term loans, unsecured notes and trust preferred securities

    5,516,373     5,623,082     1,815,379     1,542,252     1,150,376  

Minority interests

    622,742     714,407     127,893     99,061     75,064  

Stockholders' equity

    3,911,736     3,826,875     2,394,883     1,459,441     1,347,880  

 

 
  Year Ended December 31,  
Other Data
  2008   2007   2006   2005   2004  
 
  (In thousands)
 

Funds from operations available to common stockholders(1)

  $ 374,974   $ 357,957   $ 223,634   $ 189,513   $ 162,377  

Funds from operations available to all stockholders(1)

    374,974     357,957     223,634     189,513     162,377  

Net cash provided by operating activities

    384,552     406,705     225,644     138,398     164,458  

Net cash used in investment activities

    396,219     (2,334,337 )   (786,912 )   (465,674 )   (269,045 )

Net cash provided by financing activities

    (99,846 )   1,856,418     654,342     315,585     101,836  

(1)
Funds From Operations, or FFO, is a widely recognized measure of REIT performance. We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts, or NAREIT, which may not be comparable to FFO reported by other REITs that do not compute FFO in accordance with the NAREIT definition, or that interpret the NAREIT definition differently than we do. The revised White Paper on FFO approved by the Board of Governors of NAREIT in April 2002 defines FFO as net income (loss) (computed in accordance with generally accepted accounting principles, or GAAP), excluding gains (or losses) from debt restructuring and sales of properties, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. We present FFO because we consider it an important supplemental measure of our operating performance and believe that it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITS, particularly those that own and operate commercial office properties. We also use FFO as one of several criteria to determine performance-based bonuses for members of our senior management. FFO is intended to exclude GAAP historical cost depreciation and amortization of real estate and related assets, which assumes that the value of real estate assets diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. Because FFO excludes depreciation and amortization unique to real estate, gains and losses from property dispositions and extraordinary items, it provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, interest costs, providing perspective not immediately apparent from net income. FFO does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income (determined in accordance with GAAP), as an indication of our financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make cash distributions.

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

        SL Green Realty Corp., or the company, a Maryland corporation, and SL Green Operating Partnership, L.P., or the operating partnership, a Delaware limited partnership, were formed in June 1997 for the purpose of combining the commercial real estate business of S.L. Green Properties, Inc. and its affiliated partnerships and entities. We are a self-managed real estate investment trust, or REIT, with in-house capabilities in property management, acquisitions, financing, development, construction and leasing. Unless the context requires otherwise, all references to "we," "our" and "us" means the company and all entities owned or controlled by the company, including the operating partnership.

        The following discussion related to our consolidated financial statements should be read in conjunction with the financial statements appearing in Item 8 of this Annual Report on Form 10-K.

        On January 25, 2007, we completed the acquisition, or the Reckson Merger, of all of the outstanding shares of common stock of Reckson Associates Realty Corp., or Reckson, pursuant to the terms of the Agreement and Plan of Merger, dated as of August 3, 2006, as amended, the Merger Agreement, among SL Green, Wyoming Acquisition Corp., or Wyoming, Wyoming Acquisition GP LLC, Wyoming Acquisition Partnership LP, Reckson and Reckson Operating Partnership, L.P. or ROP. Pursuant to the terms of the Merger Agreement, each of the issued and outstanding shares of common stock of Reckson were converted into the right to receive (i) $31.68 in cash, (ii) 0.10387 of a share of the common stock, par value $0.01 per share, of SL Green and (iii) a prorated dividend in an amount equal to approximately $0.0977 in cash. We also assumed an aggregate of approximately $226.3 million of Reckson mortgage debt, approximately $287.5 million of Reckson convertible public debt and approximately $967.8 million of Reckson public unsecured notes.

        On January 25, 2007, we completed the sale, or Asset Sale, of certain assets of ROP to an asset purchasing venture led by certain of Reckson's former executive management, or the Buyer, for a total consideration of approximately $2.0 billion. SL Green caused ROP to transfer the following assets to the Buyer in the Asset Sale: (1) certain real property assets and/or entities owning such real property assets, in either case, of ROP and 100% of certain loans secured by real property, all of which are located in Long Island, New York; (2) certain real property assets and/or entities owning such real property assets, in either case, of ROP located in White Plains and Harrison, New York; (3) all of the real property assets and/or entities owning 100% of the interests in such real property assets, in either case, of ROP located in New Jersey; (4) the entity owning a 25% interest in Reckson Australia Operating Company LLC, Reckson's Australian management company (including its Australian licensed responsible entity), and other related entities, and ROP and ROP subsidiaries' rights to and interests in, all related contracts and assets, including, without limitation, property management and leasing, construction services and asset management contracts and services contracts; (5) the direct or indirect interest of Reckson in Reckson Asset Partners, LLC, an affiliate of Reckson Strategic Venture Partners, LLC, or RSVP, and all of ROP's rights in and to certain loans made by ROP to Frontline Capital Group, the bankrupt parent of RSVP, and other related entities, which were purchased by a 50/50 joint venture with an affiliate of SL Green; (6) a 50% participation interest in certain loans made by a subsidiary of ROP that are secured by four real property assets located in Long Island, New York; and (7) 100% of certain loans secured by real property located in White Plains and New Rochelle, New York.

        Beginning in the third quarter of 2007, the sub-prime residential lending and single family housing markets in the U.S. began to experience significant default rates, declining real estate values and increasing backlog of housing supply, and other lending markets experienced higher volatility and decreased liquidity resulting from the poor credit performance in the residential lending markets. The residential sector capital markets issues quickly spread more broadly into the asset-backed commercial

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real estate, corporate and other credit and equity markets. These factors have resulted in substantially reduced mortgage loan originations and securitizations, and caused more generalized credit market dislocations and a significant contraction in available credit. As a result, most financial industry participants, including commercial real estate owners, operators, investors and lenders continue to find it extremely difficult to obtain cost-effective debt capital to finance new investment activity or to refinance maturing debt. In the few instances in which debt is available, it is at a cost much higher than in the recent past.

        Credit spreads on commercial mortgages (i.e., the interest rate spread over given benchmarks such as LIBOR or U.S. Treasury securities) are significantly influenced by: (a) supply and demand for such mortgage loans; (b) perceived risk of the underlying real estate collateral cash flow; and (c) capital markets execution for the sale or financing of such commercial mortgage assets. In the case of (a), the number of potential lenders in the marketplace and the amount of funds they are willing to devote to commercial mortgage assets will impact credit spreads. As liquidity increases, spreads on equivalent commercial mortgage loans will decrease. Conversely, a lack of liquidity will result in credit spreads increasing. During periods of volatility, such as the markets are currently experiencing, the number of lenders participating in the market may change at an accelerated pace.

        For existing loans, when credit spreads widen, the fair value of these existing loans decreases. If a lender were to originate a similar loan today, such loan would carry a greater credit spread than the existing loan. Even though a loan may be performing in accordance with its loan agreement and the underlying collateral has not changed, the fair value of the loan may be negatively impacted by the incremental interest foregone from the widened credit spread. Accordingly, when a lender wishes to sell or finance the loan, the reduced value of the loan will impact the total proceeds that the lender will receive.

        The recent credit crisis has put many borrowers, including some of our borrowers, on our structured finance portfolio under increasing amounts of financial and capital distress. For the year ended December 31, 2008, we recorded a gross provision for loan losses of approximately $98.9 million primarily related to non-New York City structured finance investments.

        The New York City real estate market has seen an increase in the direct vacancy rate as well as an increase in the amount of sublease space on the market. We expect that the total vacancy rate in Manhattan will continue to rise in 2009. This directly impacts a landlord's ability to increase rents and may also result in a landlord needing to reduce its rents and provide a longer free rent period or a greater tenant improvement allowance in order to attract a tenant to rent the space. Property sales have slowed down to a trickle, primarily due to a lack of financing for purchasers due to tighter lending standards and the other factors noted above.

        New York City sales activity in 2008 decreased by approximately $27.4 billion when compared to 2007, as total volume only reached approximately $20.4 billion. In 2007, 16 transactions were consummated at prices in excess of $1,000.00 per square foot, including three deals that closed in the fourth quarter of 2007. This compares to only four such deals in 2008.

        Leasing activity for Manhattan, a borough of New York City, totaled approximately 19.1 million square feet compared to approximately 23.6 million square feet in 2007. Of the total 2008 leasing activity in Manhattan, the Midtown submarket accounted for approximately 13.0 million square feet, or 67.9%. As a result, Midtown's overall vacancy increased from 5.8% in 2007 to 8.5% in 2008.

        Overall asking rents for direct space in Midtown decreased from $77.57 at year-end 2007 to $72.08 at year-end 2008, a decrease of 7.1%. The decrease in rents has been driven by the financial crisis. Management believes that rental rates will continue to decrease during 2009.

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        During 2008, minimal new office space was added to the Midtown office inventory. In a supply-constrained market, there is only 1.8 million square feet under construction in Midtown as of year-end and which becomes available in the next two years, 2.3% of which is already pre-leased.

        We saw significant fluctuations in short-term interest rates, although they still remain low compared to historical levels. The 30-day LIBOR rate ended 2008 at 0.44%, a 416 basis point decrease from the end of 2007. Ten-year US Treasuries ended 2008 at 2.21%, a 182 basis point decrease from the end of 2007.

        Our activities for 2008 included:

        As of December 31, 2008, we owned the following interests in commercial office properties in the New York Metro area, primarily in midtown Manhattan, a borough of New York City, or Manhattan. Our investments in the New York Metro area also include investments in Brooklyn, Queens, Long Island, Westchester County, Connecticut and New Jersey, which are collectively known as the Suburban assets:

Location
  Ownership   Number of Properties   Square Feet   Weighted Average Occupancy(1)  

Manhattan

  Consolidated properties     21     13,782,200     97.5 %

  Unconsolidated properties     8     9,429,000     95.4 %

Suburban

 

Consolidated properties

   
28
   
4,714,800
   
89.0

%

  Unconsolidated properties     6     2,941,700     93.8 %
                     

        63     30,867,700        
                     

(1)
The weighted average occupancy represents the total leased square feet divided by total available rentable square feet.

        We also own investments in eight retail properties encompassing approximately 400,212 square feet, two development properties encompassing approximately 363,000 square feet and two land

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interests. In addition, we manage three office properties owned by third parties and affiliated companies encompassing approximately 1.0 million rentable square feet.

        As of December 31, 2008, we also owned approximately 12.48% of the outstanding common stock of Gramercy Capital Corp. (NYSE: GKK), or Gramercy, as well as all the units of the Class B limited partner interest in Gramercy's operating partnership. See Item 8 Financial Statements, Note 6.

Critical Accounting Policies

        Our discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, and contingencies as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We evaluate our assumptions and estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

        On a periodic basis, our management team assesses whether there are any indicators that the value of our real estate properties, including joint venture properties and assets held for sale, and structured finance investments may be impaired. If the carrying amount of the property is greater than the estimated expected future cash flow (undiscounted and without interest charges for consolidated properties and discounted for unconsolidated properties) of the asset or sales price, impairment has occurred. We will then record an impairment loss equal to the difference between the carrying amount and the fair value of the asset. We do not believe that the value of any of our rental properties or development properties was impaired at December 31, 2008 and 2007.

        A variety of costs are incurred in the acquisition, development and leasing of our properties. After determination is made to capitalize a cost, it is allocated to the specific component of a project that is benefited. Determination of when a development project is substantially complete and capitalization must cease involves a degree of judgment. Our capitalization policy on our development properties is guided by SFAS No. 34 "Capitalization of Interest Cost" and SFAS No. 67 "Accounting for Costs and Initial Rental Operations of Real Estate Projects." The costs of land and building under development include specifically identifiable costs. The capitalized costs include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes, salaries and related costs and other costs incurred during the period of development. We consider a construction project as substantially completed and held available for occupancy upon the completion of tenant improvements, but no later than one year from cessation of major construction activity. We cease capitalization on the portions substantially completed and occupied or held available for occupancy, and capitalize only those costs associated with the portions under construction.

        In accordance with SFAS 141, "Business Combinations," we allocate the purchase price of real estate to land and building and, if determined to be material, intangibles, such as the value of above-, below-, and at-market leases and origination costs associated with the in-place leases. We depreciate the amount allocated to building and other intangible assets over their estimated useful lives, which generally range from three to 40 years and from one to 14 years, respectively. The values of the above- and below-market leases are amortized and recorded as either an increase (in the case of below-market

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leases) or a decrease (in the case of above-market leases) to rental income over the remaining term of the associated lease, which range from one to 14 years. The value associated with in-place leases are amortized over the expected term of the associated lease, which includes an estimated probability of the lease renewal, and its estimated term, which range from one to 14 years. If a tenant vacates its space prior to the contractual termination of the lease and no rental payments are being made on the lease, any unamortized balance of the related intangible will be written off. The tenant improvements and origination costs are amortized as an expense over the remaining life of the lease (or charged against earnings if the lease is terminated prior to its contractual expiration date). We assess fair value of the leases based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions that may affect the property.

        We account for our investments in unconsolidated joint ventures under the equity method of accounting in cases where we exercise significant influence, but do not control these entities and are not considered to be the primary beneficiary under FIN 46R. We consolidate those joint ventures where we are considered to be the primary beneficiary, even though we do not control the entity. In all these joint ventures, the rights of the minority investor are both protective as well as participating. Unless we are determined to be the primary beneficiary, these rights preclude us from consolidating these investments. These investments are recorded initially at cost, as investments in unconsolidated joint ventures, and subsequently adjusted for equity in net income (loss) and cash contributions and distributions. Any difference between the carrying amount of these investments on our balance sheet and the underlying equity in net assets is amortized as an adjustment to equity in net income (loss) of unconsolidated joint ventures over the lesser of the joint venture term or 10 years. Equity income (loss) from unconsolidated joint ventures is allocated based on our ownership interest in each joint venture. When a capital event (as defined in each joint venture agreement) such as a refinancing occurs, if return thresholds are met, future equity income will be allocated at our increased economic percentage. We recognize incentive income from unconsolidated real estate joint ventures as income to the extent it is earned and not subject to a clawback feature. Distributions we receive from unconsolidated real estate joint ventures in excess of our basis in the investment are recorded as offsets to our investment balance if we remain liable for future obligations of the joint venture or may otherwise be committed to provide future additional financial support. None of the joint venture debt is recourse to us.

        Rental revenue is recognized on a straight-line basis over the term of the lease. The excess of rents recognized over amounts contractually due pursuant to the underlying leases are included in deferred rents receivable on the accompanying balance sheets. We establish, on a current basis, an allowance for future potential tenant credit losses, which may occur against this account. The balance reflected on the balance sheet is net of such allowance.

        Interest income on structured finance investments is recognized over the life of the investment using the effective interest method and recognized on the accrual basis. Fees received in connection with loan commitments are deferred until the loan is funded and are then recognized over the term of the loan as an adjustment to yield. Anticipated exit fees, whose collection is expected, are also recognized over the term of the loan as an adjustment to yield. Fees on commitments that expire unused are recognized at expiration.

        Income recognition is generally suspended for structured finance investments at the earlier of the date at which payments become 90 days past due or when, in the opinion of management, a full

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recovery of income and principal becomes doubtful. Income recognition is resumed when the loan becomes contractually current and performance is demonstrated to be resumed.

        We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our tenants to make required rent payments. If the financial condition of a specific tenant were to deteriorate, resulting in an impairment of its ability to make payments, additional allowances may be required.

        The expense for possible credit losses in connection with structured finance investments is the charge to earnings to increase the allowance for possible credit losses to the level that we estimate to be adequate considering delinquencies, loss experience and collateral quality. Other factors considered relate to geographic trends and product diversification, the size of the portfolio and current economic conditions. Based upon these factors, we establish the provision for possible credit losses by loan. When it is probable that we will be unable to collect all amounts contractually due, the investment is considered impaired.

        Where impairment is indicated, a valuation allowance is measured based upon the excess of the recorded investment amount over the net fair value of the collateral, as reduced by selling costs. Any deficiency between the carrying amount of an asset and the net sales price of repossessed collateral is charged to expense. In 2008, we recorded approximately $45.8 million in loan loss reserves. No reserve for impairment was required at December 31, 2007.

        Structured finance investments held for sale are carried at the lower of cost or fair market value using available market information obtained through consultation with dealers or other originators of such investments as well as discounted cash flow models. During the year ended December 31, 2008, we redesignated loans with a gross carrying value of $121.2 million from structured finance investments to assets held for sale. We recorded a mark-to-market adjustment of approximately $53.1 million against these investments.

        In the normal course of business, we use a variety of derivative instruments to manage, or hedge, interest rate risk. We require that hedging derivative instruments be effective in reducing the interest rate risk exposure that they are designated to hedge. This effectiveness is essential for qualifying for hedge accounting. Some derivative instruments are associated with an anticipated transaction. In those cases, hedge effectiveness criteria also require that it be probable that the underlying transaction occurs. Instruments that meet these hedging criteria are formally designated as hedges at the inception of the derivative contract.

        To determine the fair values of derivative instruments, we use a variety of methods and assumptions that are based on market conditions and risks existing at each balance sheet date. For the majority of financial instruments including most derivatives, long-term investments and long-term debt, standard market conventions and techniques such as discounted cash flow analysis, option-pricing models, replacement cost, and termination cost are used to determine fair value. All methods of assessing fair value result in a general approximation of value, and such value may never actually be realized.

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Results of Operations

        The following comparison for the year ended December 31, 2008, or 2008, to the year ended December 31, 2007, or 2007, makes reference to the following: (i) the effect of the "Same-Store Properties," which represents all properties owned by us at January 1, 2007 and at December 31, 2008 and total 40 of our 49 consolidated properties, inclusive of the Reckson assets (January 2007), representing approximately 69.2% of our share of annualized rental revenue, and the effect of the "Acquisitions," which represents all properties or interests in properties acquired in 2007, namely, 300 Main Street, 399 Knollwood (all January 2007), 333 West 34th Street, 331 Madison Avenue and 48 East 43rd Street (April), 1010 Washington Avenue, CT, and 500 West Putnam Avenue, CT (June), and 180 Broadway and One Madison Avenue (August) and (iii) "Other," which represents corporate level items not allocable to specific properties, the Service Corporation and eEmerge. There were no acquisitions of commercial office properties in 2008. Assets classified as held for sale, are excluded from the following discussion.

Rental Revenues (in millions)
  2008   2007   $ Change   % Change  

Rental revenue

  $ 777.3   $ 665.7   $ 111.6     16.8 %

Escalation and reimbursement revenue

    123.6     109.5     14.1     12.9  
                   
 

Total

  $ 900.9   $ 775.2   $ 125.7     16.2 %
                   

Same-Store Properties

  $ 765.3   $ 691.4   $ 73.9     12.6 %

Acquisitions

    130.0     77.9     52.1     66.9  

Other

    5.6     5.9     (0.3 )   (5.1 )
                   
 

Total

  $ 900.9   $ 775.2   $ 125.7     16.2 %
                   

        Occupancy in the Same-Store Properties increased from 95.0% at December 30, 2007 to 95.2% at December 31, 2008. The increase in the Acquisitions is primarily due to owning these properties for a period during the year in 2008 compared to a partial period or not being included in 2007. This includes the Reckson properties.

        At December 31, 2008, we estimated that the current market rents on our consolidated Manhattan properties and consolidated Suburban properties were approximately 20.2% and 14.4% higher, respectively, than then existing in-place fully escalated rents. Approximately 8.1% of the space leased at our consolidated properties expires during 2009. We believe that occupancy rates at the Same-Store Properties will remain relatively unchanged in 2009.

        The increase in escalation and reimbursement revenue was due to the recoveries at the Acquisitions ($0.9 million) and the Same-Store Properties ($13.4 million). The increase in recoveries at the Same-Store Properties was primarily due to operating expense escalations ($9.0 million) and electric reimbursement ($3.7 million) and was primarily offset by decreases in real estate tax recoveries ($0.7 million).

Investment and Other Income (in millions)
  2008   2007   $ Change   % Change  

Equity in net income of unconsolidated joint ventures

  $ 60.0   $ 46.8   $ 13.2     28.2 %

Investment and preferred equity income

    119.1     91.0     28.1     30.9  

Other income

    96.9     150.9     (54.0 )   (35.8 )
                   
 

Total

  $ 276.0   $ 288.7   $ (12.7 )   (4.4 )%
                   

        The increase in equity in net income of unconsolidated joint ventures was primarily due to higher net income contributions from 388 Greenwich Street ($6.4 million), 1515 Broadway ($11.4 million),

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1250 Broadway ($1.7 million), 521 Fifth Avenue ($1.5 million), 2 Herald Square ($1.9 million), One Madison Avenue ($1.0 million), Mack-Green ($1.9 million), 800 Third Avenue ($1.3 million) and 885 Third Avenue ($3.7 million). This was partially offset by lower net income contributions primarily from our investments in 100 Park which was under redevelopment ($3.3 million), Gramercy ($9.9 million) and 16 Court Street ($1.0 million). Occupancy at our joint venture properties decreased from 95.2% in 2007 to 95.0% in 2008. At December 31, 2008, we estimated that current market rents at our Manhattan and Suburban joint venture properties were approximately 25.0% and 6.7% higher, respectively, than then existing in-place fully escalated rents. Approximately 3.8% of the space leased at our joint venture properties expires during 2009.

        Investment and preferred equity income increased during the current period. The weighted average investment balance outstanding and weighted average yield were $816.9 million and 10.5%, respectively, for 2008 compared to $717.1 million and 10.3%, respectively, for 2007. During 2008, we sold approximately $99.7 million of structured finance investments and realized net gains of approximately $9.3 million. We also settled the RSVP investment which resulted in a gain of approximately $6.9 million. No structured finance investments were sold in 2007.

        The decrease in other income was primarily due to an incentive distribution earned in 2007 upon the sale of One Park Avenue (approximately $77.2 million) and One Madison Clocktower (approximately $5.1 million) as well as a decrease in fee income earned by GKK Manager LLC, an affiliate of ours and the external manager of Gramercy (approximately $3.1 million). This was partially offset by an incentive distribution earned in 2008 upon the sale of 1250 Broadway ($25.0 million) and an advisory fee earned by us in connection with Gramercy closing its acquisition of AFR ($6.6 million). The reduction in fee income from GKK Manager LLC, was primarily due to us waiving our rights to receive incentive fees and CDO Management fees since July 2008. In addition, in 2008 we returned approximately $5.1 million of incentive fees to Gramercy pursuant to a written agreement.

Property Operating Expenses (in millions)
  2008   2007   $ Change   % Change  

Operating expenses

  $ 229.7   $ 209.4   $ 20.3     9.7 %

Real estate taxes

    127.1     121.6     5.5     4.5  

Ground rent

    31.5     32.4     (0.9 )   (2.8 )
                   
 

Total

  $ 388.3   $ 363.4   $ 24.9     6.9 %
                   

Same-Store Properties

  $ 348.5   $ 325.1   $ 23.4     7.2 %

Acquisitions

    24.3     20.8     3.5     16.8  

Other

    15.5     17.5     (2.0 )   (11.4 )
                   
 

Total

  $ 388.3   $ 363.4   $ 24.9     6.9 %
                   

        Same-Store Properties operating expenses increased approximately $18.7 million. There were increases in payroll expenses ($3.8 million), contract maintenance and repairs and maintenance ($2.1 million), utilities ($8.4 million), insurance ($1.0 million), ground rent expense ($0.3 million) and other miscellaneous expenses ($3.1 million), respectively.

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        The increase in real estate taxes was primarily attributable to the Same-Store Properties ($4.7 million) due to higher assessed property values and the Acquisitions ($0.8 million).

Other Expenses (in millions)
  2008   2007   $ Change   % Change  

Interest expense

  $ 288.2   $ 267.4   $ 20.8     7.8 %

Depreciation and amortization expense

    217.6     175.2     42.4     24.2  

Loan loss and other investment reserves

    115.9         115.9     100.0  

Marketing, general and administrative expense

    120.9     105.0     15.9     15.1  
                   
 

Total

  $ 742.6   $ 547.6   $ 195.0     35.6 %
                   

        The increase in interest expense was primarily attributable draw downs on our 2007 unsecured revolving credit facility which were done in response to uncertainty in the financial sector. The weighted average interest rate decreased from 5.66% for the year ended December 31, 2007 to 5.24% for the year ended December 31, 2008. As a result of the new investment activity in 2007 and drawing down on our 2007 unsecured revolving credit facility in 2008, the weighted average debt balance increased from $4.7 billion as of December 31, 2007 to $5.7 billion as of December 31, 2008.

        In 2008, we recorded approximately $98.9 million in loan loss reserves primarily against our non-New York City structured finance investments. During the fourth quarter of 2008, we entered into an agreement with Gramercy which, among other matters, obligates Gramercy and us to use commercially reasonable efforts to obtain the consents of certain lenders of Gramercy and its subsidiaries to a potential internalization. We also expensed our approximately $14.9 million investment in GKK Manager LLC.

        Marketing, general and administrative expenses, or MG&A, represented 10.8% of total revenues in 2008 compared to 10.3% in 2007. During the fourth quarter, we and certain of our employees agreed to cancel, without compensation, certain employee stock options as well as a portion of our 2006 long-term outperformance plan. These cancellations resulted in a non-cash charge of approximately $18.0 million. MG&A for 2008 includes personnel hired by GKK Manager LLC in connection with the AFR acquisition which added approximately $4.3 million to MG&A. MG&A for 2008 also includes a non-recurring expense of approximately $2.0 million for costs incurred in connection with the pursuit of redevelopment projects.

        Due to market conditions, we recognized a loss on our investment in Gramercy of approximately $147.5 million. In addition, we repurchased approximately $262.6 million of our convertible bonds in 2008 and realized approximately $88.5 million of gains due to the early extinguishment of debt.

        The following comparison for the year ended December 31, 2007, or 2007, to the year ended December 31, 2006, or 2006, makes reference to the following: (i) the effect of the "Same-Store Properties," which represents all properties owned by us at January 1, 2006 and at December 31, 2007 and total 12 of our 53 consolidated properties, representing approximately 31.0% of our share of annualized rental revenue, (ii) the effect of the "Acquisitions," which represents all properties or interests in properties acquired in 2006, namely, 25-27 and 29 West 34PthP Street (January), 521 Fifth Avenue (March), 609 Fifth Avenue (June), 717 Fifth Avenue (September), 485 Lexington (December) and in 2007, namely, 300 Main Street, 399 Knollwood, and the Reckson assets (January), 333 West 34th Street, 331 Madison Avenue and 48 East 43rd Street (April), 1010 Washington Avenue, CT, and 500 West Putnam Avenue, CT (June), and 180 Broadway and One Madison Avenue (August) and

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(iii) "Other," which represents corporate level items not allocable to specific properties, the Service Corporation and eEmerge. Assets classified as held for sale, are excluded from the following discussion.

Rental Revenues (in millions)
  2007   2006   $ Change   % Change  

Rental revenue

  $ 665.7   $ 302.0   $ 363.7     120.4 %

Escalation and reimbursement revenue

    109.5     53.9     55.6     103.2  
                   
 

Total

  $ 775.2   $ 355.9   $ 419.3     117.8 %
                   

Same-Store Properties

  $ 392.1   $ 321.8   $ 70.3     21.9 %

Acquisitions

    377.2     25.4     351.8     1,385.0  

Other

    5.9     8.7     (2.8 )   (32.2 )
                   
 

Total

  $ 775.2   $ 355.9   $ 419.3     117.8 %
                   

        Occupancy in the Same-Store Properties decreased from 97.3% at December 31, 2006 to 97.1% at December 31, 2007. This was offset by increases in rental rates on new leases signed in 2007.

        At December 31, 2007, we estimated that the current market rents at our consolidated Manhattan properties and consolidated Suburban properties were approximately 37.4% and 19.1% higher, respectively, than then existing in-place fully escalated rents. We believe that rental rates will moderate during 2008. Approximately 4.8% of the space leased at our consolidated properties expires during 2008. We believe that occupancy rates will moderate at the Same-Store Properties in 2008.

        The increase in the Acquisitions is primarily due to owning these properties for a period during 2007 compared to a partial period or not being included in 2006.

        The increase in escalation and reimbursement revenue was due to the recoveries at the Same-Store Properties ($2.9 million) and the Acquisitions ($53.6 million). The increase in recoveries at the Same-Store Properties was primarily due to electric reimbursements ($1.7 million), and operating expense escalations ($2.4 million) which were partially offset by a reduction in recoveries from real estate tax escalations ($1.2 million).

Investment and Other Income (in millions)
  2007   2006   $ Change   % Change  

Equity in net income of unconsolidated joint ventures

  $ 46.8   $ 40.8   $ 6.0     14.7 %

Investment and preferred equity income

    91.0     61.4     29.6     48.2  

Other income

    150.9     52.6     98.3     186.9  
                   
 

Total

  $ 288.7   $ 154.8   $ 133.9     86.5 %
                   

        The increase in equity in net income of unconsolidated joint ventures was primarily due to increased net income contributions from Gramercy ($6.1 million), 2 Herald Square ($4.1 million), 885 Third Avenue ($3.5 million), One Court Square ($1.3 million) and 800 Third Avenue ($2.3 million). This was partially offset by lower net income contributions from our investments in 521 Fifth Avenue which was under redevelopment ($1.4 million), 485 Lexington Avenue which is wholly-owned since December 2006 ($1.0 million), 1745 Broadway ($2.7 million), 100 Park Avenue which is under redevelopment ($2.3 million), 1221 Avenue of the Americas due to planned vacancy ($1.6 million) and the Mack-Green joint venture ($2.1 million). Occupancy at our joint venture same-store properties decreased from 96.1% in 2006 to 93.1% in 2007 primarily due to the redevelopment at 100 Park Avenue and the planned vacancy at 1221 Avenue of the Americas. At December 31, 2007, we estimated that current market rents at our Manhattan and Suburban unconsolidated joint venture properties were approximately 47.5% and 11.2% higher, respectively, than then existing in-place fully escalated rents. Approximately 6.2% of the space leased at our unconsolidated joint venture properties expires during 2008.

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        The increase in investment and preferred equity income was primarily due to higher outstanding balances during the current period. The weighted average investment balance outstanding and weighted average yield were $717.1 million and 10.3%, respectively, for 2007 compared to $398.5 million and 10.3%, respectively, for 2006.

        The increase in other income was primarily due to an incentive distribution earned in 2007 upon the sale of One Park Avenue (approximately $77.2 million) and Five Madison Avenue-the Clock Tower ($5.1 million), other incentive distributions and asset management fees ($1.9 million) as well by fee income earned by GKK Manager LLC, an affiliate of ours and the external manager of Gramercy (approximately $12.6 million) and the Service Corporation ($3.2 million). This was offset by an incentive distribution earned in 2006 ($5.0 million).

Property Operating Expenses (in millions)
  2007   2006   $ Change   % Change  

Operating expenses

  $ 209.4   $ 102.5   $ 106.9     104.3 %

Real estate taxes

    121.6     62.9     58.7     93.3  

Ground rent

    32.4     20.2     12.2     60.4  
                   
 

Total

  $ 363.4   $ 185.6   $ 177.8     95.8 %
                   

Same-Store Properties

  $ 188.4   $ 161.8   $ 26.6     16.4 %

Acquisitions

    157.5     9.3     148.2     1,593.6  

Other

    17.5     14.5     3.0     20.7  
                   
 

Total

  $ 363.4   $ 185.6   $ 177.8     95.8 %
                   

        Same-Store Properties operating expenses, excluding real estate taxes ($0.1 million), increased approximately $8.8 million. There were increases in repairs, maintenance and payroll expenses ($1.9 million), utilities ($5.2 million), ground rent expense ($3.1 million) and other miscellaneous expenses ($0.5 million), respectively. This was partially offset by a decrease in insurance costs ($1.9 million).

        The increase in real estate taxes was primarily attributable to the Acquisitions ($60.5 million). This was partially offset by a reduction in real estate taxes at the Same-Store properties ($0.1 million) and due to properties that were sold and other ($0.5 million).

Other Expenses (in millions)
  2007   2006   $ Change   % Change  

Interest expense

  $ 267.4   $ 93.8   $ 173.6     185.1 %

Depreciation and amortization expense

    175.2     62.5     112.7     180.3  

Marketing, general and administrative expense

    105.0     65.7     39.3     59.8  
                   
 

Total

  $ 547.6   $ 222.0   $ 325.6     146.7 %
                   

        The increase in interest expense was primarily attributable to borrowings associated with new investment activity, primarily the Reckson Merger, and the funding of ongoing capital projects and working capital requirements as well as the write-off for exit fees, make-whole payments and the write-off of unamortized deferred financing costs in connection with the early redemption of unsecured notes and loans ($9.1 million). The weighted average interest rate decreased from 5.93% for the year ended December 31, 2006 to 5.66% for the year ended December 31, 2007. As a result of the new investment activity, the weighted average debt balance increased from $1.95 billion as of December 31, 2006 to $4.7 billion as of December 31, 2007.

        Marketing, general and administrative expense represented 10.0% of total revenues in 2007 compared to 13.3% in 2006. The increase in actual cost is primarily due to higher compensation costs due to increased hiring primarily as a result of the Reckson Merger as well as the amended and restated employment agreements entered into with certain of our executive officers in 2007.

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Liquidity and Capital Resources

        We are currently experiencing a global economic downturn and credit crunch. As a result, many financial industry participants, including commercial real estate owners, operators, investors and lenders continue to find it extremely difficult to obtain cost-effective debt capital to finance new investment activity or to refinance maturing debt. In the few instances in which debt is available, it is at a cost much higher than in the recent past.

        We currently expect that our principal sources of working capital and funds for acquisition and redevelopment of properties, tenant improvements and leasing costs and for structured finance investments will include:

        Cash flow from operations is primarily dependent upon the occupancy level of our portfolio, the net effective rental rates achieved on our leases, the collectability of rent and operating escalations and recoveries from our tenants and the level of operating and other costs. Additionally, we believe that our joint venture investment programs will also continue to serve as a source of capital for acquisitions.

        We believe that our sources of working capital, specifically our cash flow from operations, borrowings available under our 2007 unsecured revolving credit facility, cash on hand and our ability to access private and public debt and equity capital, are adequate for us to meet our short-term and long-term liquidity requirements for the foreseeable future.

Cash Flows

        The following summary discussion of our cash flows is based on our consolidated statements of cash flows in "Item 8. Financial Statements" and is not meant to be an all-inclusive discussion of the changes in our cash flows for the periods presented below.

        Cash and cash equivalents were $726.9 million and $46.0 million at December 31, 2008 and December 31, 2007, respectively, representing an increase of $680.9 million. The increase was a result of the following increases and decreases in cash flows (in thousands):

 
  Year ended December 31,  
 
  2008   2007   Increase (Decrease)  

Net cash provided by operating activities

  $ 384,552   $ 406,705   $ (22,153 )

Net cash used in investing activities

  $ 396,219   $ (2,334,337 ) $ 2,730,556  

Net cash provided by financing activities

  $ (99,846 ) $ 1,856,418   $ (1,956,264 )

        Our principal source of operating cash flow is related to the leasing and operating of the properties in our portfolio. Our properties provide a relatively consistent stream of cash flow that provides us with resources to pay operating expenses, debt service and fund quarterly dividend and distribution payment requirements. At December 31, 2008, our portfolio was 95.2% occupied. Our

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structured finance and joint venture investments also provide a steady stream of operating cash flow to us.

        Cash is used in investing activities to fund acquisitions, redevelopment projects and recurring and nonrecurring capital expenditures. We selectively invest in new projects that enable us to take advantage of our development, leasing, financing and property management skills and invest in existing buildings that meet our investment criteria. In the first quarter of 2007, we acquired Reckson for approximately $4.0 billion which included the assumption of approximately $1.5 billion of consolidated debt and the issuance of approximately $1.0 billion of common stock. During the year ended December 31, 2008, when compared to the year ended December 31, 2007, we used cash primarily for the following investing activities (in thousands):

Acquisitions of real estate

  $ (4,120,567 )

Capital expenditures and capitalized interest

    38,613  

Escrow cash-capital improvements/acquisition deposits

    137,961  

Joint venture investments

    (777,267 )

Distributions from joint ventures

    (375,787 )

Proceeds from sales of real estate

    814,934  

Structured finance and other investments

    (413,357 )

Proceeds from asset sale

    1,964,914  

        We generally fund our investment activity through property-level financing, our 2007 unsecured revolving credit facility, term loans, unsecured notes, construction loans and, from time to time, we issue common and preferred stock. During the year ended December 31, 2008, when compared to the year ended December 31, 2007, the following financing activities provided the funds to complete the investing activity noted above (in thousands):

Proceeds from our debt obligations

  $ 2,818,706  

Repayments under our debt obligations

    (1,413,266 )

Repurchases of common stock

    1,267  

Minority interest in other partnerships and other financing activities

    534,708  

Dividends and distributions paid

    14,849  

Capitalization

        As of December 31, 2008, we had 57,043,835 shares of common stock, 2,339,853 units of limited partnership interest in our operating partnership, 6,300,000 shares of our 7.625% Series C cumulative redeemable preferred stock, or Series C preferred stock and 4,000,000 shares of our 7.875% Series D cumulative redeemable preferred stock, or Series D preferred stock, outstanding.

        In March 2007, our board of directors approved a stock repurchase plan under which we can buy up to $300.0 million shares of our common stock. This plan expired on December 31, 2008. As of December 31, 2008, we purchased and settled approximately $300.0 million, or 3.3 million shares of our common stock, at an average price of $90.49 per share.

Rights Plan

        We adopted a shareholder rights plan which provides, among other things, that when specified events occur, our common stockholders will be entitled to purchase from us a newly created series of junior preferred shares, subject to our ownership limit described below. The preferred share purchase rights are triggered by the earlier to occur of (1) ten days after the date of a purchase announcement that a person or group acting in concert has acquired, or obtained the right to acquire, beneficial ownership of 17% or more of our outstanding shares of common stock or (2) ten business days after

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the commencement of or announcement of an intention to make a tender offer or exchange offer, the consummation of which would result in the acquiring person becoming the beneficial owner of 17% or more of our outstanding common stock. The preferred share purchase rights would cause substantial dilution to a person or group that attempts to acquire us on terms not approved by our board of directors.

Dividend Reinvestment and Stock Purchase Plan

        We filed a registration statement with the SEC for our dividend reinvestment and stock purchase plan, or DRIP, which was declared effective on September 10, 2001. The DRIP commenced on September 24, 2001. We registered 3,000,000 shares of common stock under the DRIP.

        During the years ended December 31, 2008 and 2007, we issued approximately 4,300 and 108,000 shares of our common stock and received approximately $0.3 million and $13.8 million of proceeds from dividend reinvestments and/or stock purchases under the DRIP, respectively. DRIP shares may be issued at a discount to the market price.

2003 Long-Term Outperformance Compensation Program

        Our board of directors adopted a long-term, seven-year compensation program for certain members of senior management. The program, which measured our performance over a 48-month period (unless terminated earlier) commencing April 1, 2003, provided that holders of our common equity were to achieve a 40% total return during the measurement period over a base share price of $30.07 per share before any restricted stock awards were granted. Plan participants would receive an award of restricted stock in an amount between 8% and 10% of the excess total return over the baseline return. At the end of the four-year measurement period, 40% of the award will vest on the measurement date and 60% of the award will vest ratably over the subsequent three years based on continued employment. Any restricted stock to be issued under the program will be allocated from our 2005 Stock Option and Incentive Plan (as defined below), which was previously approved through a stockholder vote in May 2002. In April 2007, the Compensation Committee determined that under the terms of the 2003 Outperformance Plan, as of March 31, 2007, the performance hurdles had been met and the maximum performance pool of $22,825,000, taking into account forfeitures, was established. In connection with this event, approximately 166,312 shares of restricted stock (as adjusted for forfeitures) were allocated under the 2005 Stock Option and Incentive Plan. These awards are subject to vesting as noted above. We record the expense of the restricted stock award in accordance with SFAS 123-R. The fair value of the award on the date of grant was determined to be $3.2 million. Forty percent of the value of the award was amortized over four years and the balance will be amortized at 20% per year over five, six and seven years, respectively, such that 20% of year five, 16.67% of year six, and 14.29% of year seven will be recorded in year one. Compensation expense of $0.2 million, $0.4 million and $0.65 million related to this plan was recorded during the years ended December 31, 2008, 2007 and 2006, respectively.

2005 Long-Term Outperformance Compensation Program

        In December 2005, the compensation committee of our board of directors approved a long-term incentive compensation program, the 2005 Outperformance Plan. Participants in the 2005 Outperformance Plan will share in a "performance pool" if our total return to stockholders for the period from December 1, 2005 through November 30, 2008 exceeds a cumulative total return to stockholders of 30% during the measurement period over a base share price of $68.51 per share. The size of the pool was to be 10% of the outperformance amount in excess of the 30% benchmark, subject to a maximum dilution cap equal to the lesser of 3% of our outstanding shares and units of limited partnership interest as of December 1, 2005 or $50.0 million. In the event the potential performance pool reached this dilution cap before November 30, 2008 and remained at that level or higher for 30

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consecutive days, the performance period was to end early and the pool would be formed on the last day of such 30 day period. Each participant's award under the 2005 Outperformance Plan would be designated as a specified percentage of the aggregate performance pool to be allocated to him or her assuming the 30% benchmark is achieved. Individual awards would be made in the form of partnership units, or LTIP Units, that may ultimately become exchangeable for shares of our common stock or cash, at our election. LTIP Units would be granted prior to the determination of the performance pool; however, they were only to vest upon satisfaction of performance and other thresholds, and were not entitled to distributions until after the performance pool was established. The 2005 Outperformance Plan provides that if the pool was established, each participant would also be entitled to the distributions that would have been paid on the number of LTIP Units earned, had they been issued at the beginning of the performance period. Those distributions were to be paid in the form of additional LTIP Units.

        After the performance pool was established, the earned LTIP Units are to receive regular quarterly distributions on a per unit basis equal to the dividends per share paid on our common stock, whether or not they are vested. Any LTIP Units not earned upon the establishment of the performance pool were to be automatically forfeited, and the LTIP Units that are earned are subject to time-based vesting, with one-third of the LTIP Units earned vesting on November 30, 2008 and each of the first two anniversaries thereafter based on continued employment. On June 14, 2006, the Compensation Committee determined that under the terms of the 2005 Outperformance Plan, as of June 8, 2006, the performance period had accelerated and the maximum performance pool of $49,250,000, taking into account forfeitures, was established. Individual awards under the 2005 Outperformance Plan are in the form of partnership units, or LTIP Units, in our operating partnership, that, subject to certain conditions, are convertible into shares of the Company's common stock or cash, at our election. The total number of LTIP Units earned by all participants as a result of the establishment of the performance pool was 490,475 and are subject to time-based vesting.

        The cost of the 2005 Outperformance Plan (approximately $8.0 million, subject to adjustment for forfeitures) will continue to be amortized into earnings through the final vesting period in accordance with SFAS 123-R. We recorded approximately $3.9 million, $2.1 million and $2.0 million of compensation expense during the years ended December 31, 2008, 2007 and 2006, respectively, in connection with the 2005 Outperformance Plan.

2006 Long-Term Outperformance Compensation Program

        On August 14, 2006, the compensation committee of our board of directors approved a long-term incentive compensation program, the 2006 Outperformance Plan. Participants in the 2006 Outperformance Plan will share in a "performance pool" if our total return to stockholders for the period from August 1, 2006 through July 31, 2009 exceeds a cumulative total return to stockholders of 30% during the measurement period over a base share price of $106.39 per share. The size of the pool will be 10% of the outperformance amount in excess of the 30% benchmark, subject to a maximum award of $60 million. The maximum award will be reduced by the amount of any unallocated or forfeited awards. In the event the potential performance pool reaches the maximum award before July 31, 2009 and remains at that level or higher for 30 consecutive days, the performance period will end early and the pool will be formed on the last day of such 30 day period. Each participant's award under the 2006 Outperformance Plan will be designated as a specified percentage of the aggregate performance pool. Assuming the 30% benchmark is achieved, the pool will be allocated among the participants in accordance with the percentage specified in each participant's participation agreement. Individual awards will be made in the form of partnership units, or LTIP Units, that, subject to vesting and the satisfaction of other conditions, are exchangeable for a per unit value equal to the then trading price of one share of our common stock. This value is payable in cash or, at our election, in shares of common stock. LTIP Units will be granted prior to the determination of the performance pool;

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however, they will only vest upon satisfaction of performance and time vesting thresholds under the 2006 Outperformance Plan, and will not be entitled to distributions until after the performance pool is established. Distributions on LTIP Units will equal the dividends paid on our common stock on a per unit basis. The 2006 Outperformance Plan provides that if the pool is established, each participant will also be entitled to the distributions that would have been paid had the number of earned LTIP Units been issued at the beginning of the performance period. Those distributions will be paid in the form of additional LTIP Units. Thereafter, distributions will be paid currently with respect to all earned LTIP Units that are a part of the performance pool, whether vested or unvested. Although the amount of earned awards under the 2006 Outperformance Plan (i.e. the number of LTIP Units earned) will be determined when the performance pool is established, not all of the awards will vest at that time. Instead, one-third of the awards will vest on July 31, 2009 and each of the first two anniversaries thereafter based on continued employment.

        In the event of a change in control of our company on or after August 1, 2007 but before July 31, 2009, the performance pool will be calculated assuming the performance period ended on July 31, 2009 and the total return continued at the same annualized rate from the date of the change in control to July 31, 2009 as was achieved from August 1, 2006 to the date of the change in control; provided that the performance pool may not exceed 200% of what it would have been if it was calculated using the total return from August 1, 2006 to the date of the change in control and a pro rated benchmark. In either case, the performance pool will be formed as described above if the adjusted benchmark target is achieved and all earned awards will be fully vested upon the change in control. If a change in control occurs after the performance period has ended, all unvested awards issued under our 2006 Outperformance Plan will become fully vested upon the change in control.

        The cost of the 2006 Outperformance Plan (approximately $9.6 million, subject to adjustment for forfeitures) will be amortized into earnings through the final vesting period in accordance with SFAS 123-R. We recorded approximately $12.2 million, $2.5 million and $1.1 million of compensation expense during the years ended December 31, 2008, 2007 and 2006, respectively, in connection with the 2006 Outperformance Plan. During the fourth quarter of 2008, we and certain of our employees, including our executive officers, mutually agreed to cancel a portion of the 2006 Outperformance Plan. This charge of approximately $9.2 million is included in the compensation expense above.

Amended and Restated 2005 Stock Option and Incentive Plan

        Subject to adjustments upon certain corporate transactions or events, up to a maximum of 6,000,000 shares, or the Fungible Pool Limit, may be granted as options, restricted stock, phantom shares, dividend equivalent rights and other equity-based awards under the amended and restated 2005 Stock Option and Incentive Plan, or the 2005 Plan. At December 31, 2008, approximately 4.5 million shares of our common stock, calculated on a weighted basis, were available for issuance under the 2005 Plan, or 6.5 million shares if all shares available under the 2005 Plan were issued as five-year options.

Deferred Stock Compensation Plan for Directors

        Under our Independent Director's Deferral Program, which commenced July 2004, our non-employee directors may elect to defer up to 100% of their annual retainer fee, chairman fees and meeting fees. Unless otherwise elected by a participant, fees deferred under the program shall be credited in the form of phantom stock units. The phantom stock units are convertible into an equal number of shares of common stock upon such directors' termination of service from the board of directors or a change in control by us, as defined by the program. Phantom stock units are credited to each non-employee director quarterly using the closing price of our common stock on the applicable dividend record date for the respective quarter. Each participating non-employee director's account is also credited for an equivalent amount of phantom stock units based on the dividend rate for each quarter.

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        During the year ended December 31, 2008, approximately 7,000 phantom stock units were earned. As of December 31, 2008, there were approximately 22,513 phantom stock units outstanding.

Employee Stock Purchase Plan

        On September 18, 2007, our board of directors adopted the 2008 Employee Stock Purchase Plan, or ESPP, to encourage our employees to increase their efforts to make our business more successful by providing equity-based incentives to eligible employees. The ESPP is intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code of 1986, as amended, and has been adopted by the board to enable our eligible employees to purchase our shares of common stock through payroll deductions. The ESPP became effective on January 1, 2008 with a maximum of 500,000 shares of the common stock available for issuance, subject to adjustment upon a merger, reorganization, stock split or other similar corporate change. We filed a registration statement on Form S-8 with the Securities and Exchange Commission with respect to the ESPP. The common stock will be offered for purchase through a series of successive offering periods. Each offering period will be three months in duration and will begin on the first day of each calendar quarter, with the first offering period having commenced on January 1, 2008. The ESPP provides for eligible employees to purchase the common stock at a purchase price equal to 85% of the lesser of (1) the market value of the common stock on the first day of the offering period or (2) the market value of the common stock on the last day of the offering period. The ESPP was approved by our stockholders at our 2008 annual meeting of stockholders. As of December 31, 2008, approximately 4,900 shares of our common stock had been issued under the ESPP.

Market Capitalization

        At December 31, 2008, borrowings under our mortgage loans, 2007 unsecured revolving credit facility, senior unsecured notes, and trust preferred securities (including our share of joint venture debt of approximately $1.9 billion) represented 81.0% of our combined market capitalization of approximately $9.4 billion (based on a common stock price of $25.90 per share, the closing price of our common stock on the New York Stock Exchange on December 31, 2008). Market capitalization includes our consolidated debt, common and preferred stock and the conversion of all units of limited partnership interest in our operating partnership, and our share of joint venture debt. This ratio has increased significantly compared to 2007 primarily due to the significant decrease in our stock price in 2008.

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Indebtedness

        The table below summarizes our consolidated mortgage debt, 2007 unsecured revolving credit facility, senior unsecured notes and trust preferred securities outstanding at December 31, 2008 and 2007, respectively (dollars in thousands).

 
  December 31,  
Debt Summary:
  2008   2007  

Balance

             

Fixed rate

  $ 3,953,268   $ 4,607,144  

Variable rate—hedged

    60,000     160,000  
           
 

Total fixed rate

    4,013,268     4,767,144  
           

Variable rate

    1,427,677     764,011  

Variable rate—supporting variable rate assets

    175,428     191,927  
           
 

Total variable rate

    1,603,105     955,938  
           

Total

  $ 5,616,373   $ 5,723,082  
           

Percent of Total Debt:

             
 

Total fixed rate

    71.5 %   83.3 %
 

Variable rate

    28.5 %   16.7 %
           

Total

    100.0 %   100.0 %
           

Effective Interest Rate for the Year:

             
 

Fixed rate

    5.37 %   5.35 %
 

Variable rate

    4.05 %   6.57 %
           

Effective interest rate

    5.24 %   5.66 %
           

        The variable rate debt shown above bears interest at an interest rate based on 30-day LIBOR (0.44% and 4.60% at December 31, 2008 and 2007, respectively). Our consolidated debt at December 31, 2008 had a weighted average term to maturity of approximately 7.0 years.

        Certain of our structured finance investments, totaling approximately $175.4 million, are variable rate investments which mitigate our exposure to interest rate changes on our unhedged variable rate debt at December 31, 2008.

Mortgage Financing

        As of December 31, 2008, our total mortgage debt (excluding our share of joint venture debt of approximately $1.9 billion) consisted of approximately $2.3 billion of fixed rate debt, including hedged variable rate debt, with an effective weighted average interest rate of approximately 5.95% and approximately $274.0 million of variable rate debt with an effective weighted average interest rate of approximately 5.25%.

Corporate Indebtedness

2007 Unsecured Revolving Credit Facility

        We have a $1.5 billion unsecured revolving credit facility, or the 2007 unsecured revolving credit facility. We increased the capacity under the 2007 unsecured revolving credit facility by $300.00 million in January 2007, by an additional $450.0 million in June 2007 and by an additional $250.0 million in October 2007. The 2007 unsecured revolving credit facility bears interest at a spread ranging from 70 basis points to 110 basis points over the 30-day LIBOR, based on our leverage ratio. As of

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December 31, 2008, the spread was 90 basis points. This facility matures in June 2011 and has a one-year extension option. The 2007 unsecured revolving credit facility also requires a 12.5 to 20 basis point fee on the unused balance payable annually in arrears. The 2007 unsecured revolving credit facility had approximately $1.4 billion outstanding at December 31, 2008. Availability under the 2007 unsecured revolving credit facility was further reduced at December 31, 2008 by the issuance of approximately $22.0 million in letters of credit and by a defaulted lender's unfunded committed amount of approximately $33.4 million. The 2007 unsecured revolving credit facility includes certain restrictions and covenants (see restrictive covenants below).

Term Loans

        We had a $325.0 million unsecured term loan, which was scheduled to mature in August 2009. This unsecured term loan bore interest at a spread ranging from 110 basis points to 140 basis points over the 30-day LIBOR. The unsecured term loan was repaid and terminated in March 2007.

        We had a $200.0 million five-year non-recourse term loan, secured by a pledge of our ownership interest in 1221 Avenue of the Americas. The loan was scheduled to mature in May 2010. This term loan had a floating rate of 125 basis points over the current 30-day LIBOR rate. The secured term loan was repaid and terminated in June 2007.

        In January 2007, we closed on a $500.0 million unsecured bridge loan, which matures in January 2010. This term loan bore interest at a spread ranging from 85 basis points to 125 basis points over the 30-day LIBOR, based on our leverage ratio. This unsecured bridge loan was repaid and terminated in June 2007.

        In December 2007, we closed on a $276.7 million ten-year term loan which carried an effective fixed interest rate of 5.19%. This loan was secured by our interest in 388 and 390 Greenwich Street. This secured term loan, which was scheduled to mature in December 2017, was repaid and terminated in May 2008.

Senior Unsecured Notes

        The following table sets forth our senior unsecured notes and other related disclosures by scheduled maturity date as of December 31, 2008 (in thousands):

Issuance
  Face Amount   Coupon
Rate(4)
  Term
(in Years)
  Maturity  

March 26, 1999(1)

  $ 200,000     7.75 %   10     March 15, 2009  

January 22, 2004(1)

    150,000     5.15 %   7     January 15, 2011  

August 13, 2004(1)

    150,000     5.875 %   10     August 15, 2014  

March 31, 2006(1)

    275,000     6.00 %   10     March 31, 2016  

June 27, 2005(1)(2)

    185,098     4.00 %   20     June 15, 2025  

March 26, 2007(3)

    589,800     3.00 %   20     March 30, 2027  
                         

    1,549,898                    

Net discount

    (13,950 )                  
                         

  $ 1,535,948                    
                         

(1)
Assumed as part of the Reckson Merger.

(2)
Exchangeable senior debentures which are callable after June 17, 2010 at 100% of par. In addition, the debentures can be put to us, at the option of the holder at par plus accrued and unpaid interest, on June 15, 2010, 2015 and 2020 and upon the occurrence of certain change of control transactions. As a result of the Reckson Merger, the adjusted exchange rate for the debentures is

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(3)
In March 2007, we issued $750.0 million of these convertible bonds. Interest on these notes is payable semi-annually on March 30 and September 30. The notes have an initial exchange rate representing an exchange price that is at a 25.0% premium to the last reported sale price of our common stock on March 20, 2007, or $173.30. The initial exchange rate is subject to adjustment under certain circumstances. The notes are senior unsecured obligations of our operating partnership and are exchangeable upon the occurrence of specified events, and during the period beginning on the twenty-second scheduled trading day prior to the maturity date and ending on the second business day prior to the maturity date, into cash or a combination of cash and shares of our common stock, if any, at our option. The notes are redeemable, at our option, on and after April 15, 2012. We may be required to repurchase the notes on March 30, 2012, 2017 and 2022, and upon the occurrence of certain designated events. The net proceeds from the offering were approximately $736.0 million, after deducting estimated fees and expenses. The proceeds of the offering were used to repay certain of our existing indebtedness, make investments in additional properties, and make open market purchases of our common stock and for general corporate purposes. In 2008 we repurchased approximately $160.2 million of these bonds and realized net gains on early extinguishment of debt of approximately $70.2 million.

(4)
Interest on the senior unsecured notes is payable semi-annually with principal and unpaid interest due on the scheduled maturity dates.

        On April 27, 2007, the $50.0 million 6.0% unsecured notes scheduled to mature in June 2007 and the $150.0 million 7.20% unsecured notes scheduled to mature in August 2007, assumed as part of the Reckson Merger, were redeemed.

Junior Subordinate Deferrable Interest Debentures

        In June 2005, we issued $100.0 million of Trust Preferred Securities, which are reflected on the balance sheet at December 31, 2007 as Junior Subordinate Deferrable Interest Debentures. The proceeds were used to repay our unsecured revolving credit facility. The $100.0 million of junior subordinate deferrable interest debentures have a 30-year term ending July 2035. They bear interest at a fixed rate of 5.61% for the first 10 years ending July 2015. Thereafter, the rate will float at three month LIBOR plus 1.25%. The securities are redeemable at par beginning in July 2010.

Restrictive Covenants

        The terms of our 2007 unsecured revolving credit facility and senior unsecured notes include certain restrictions and covenants which limit, among other things, the payment of dividends (as discussed below), the incurrence of additional indebtedness, the incurrence of liens and the disposition of assets, and which require compliance with financial ratios relating to the minimum amount of tangible net worth, the minimum amount of debt service coverage, the minimum amount of fixed charge coverage, the maximum amount of unsecured indebtedness, the minimum amount of unencumbered property debt service coverage and certain investment limitations. The dividend restriction referred to above provides that, except to enable us to continue to qualify as a REIT for Federal income tax purposes, we will not during any four consecutive fiscal quarters make distributions with respect to common stock or other equity interests in an aggregate amount in excess of 95% of funds from operations for such period, subject to certain other adjustments. As of December 31, 2008 and 2007, we were in compliance with all such covenants.

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Market Rate Risk

        We are exposed to changes in interest rates primarily from our floating rate borrowing arrangements. We use interest rate derivative instruments to manage exposure to interest rate changes. A hypothetical 100 basis point increase in interest rates along the entire interest rate curve for 2008 and 2007, would increase our annual interest cost by approximately $15.3 million and $9.2 million and would increase our share of joint venture annual interest cost by approximately $7.4 million and $6.9 million, respectively.

        We recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged asset, liability, or firm commitment through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value is immediately recognized in earnings.

        Approximately $4.0 billion of our long-term debt bears interest at fixed rates, and therefore the fair value of these instruments is affected by changes in the market interest rates. The interest rate on our variable rate debt and joint venture debt as of December 31, 2008 ranged from LIBOR plus 62.5 basis points to LIBOR plus 275 basis points.

Contractual Obligations

        Combined aggregate principal maturities of mortgages and notes payable, 2007 unsecured revolving credit facility, senior unsecured notes and bonds (net of discounts), trust preferred securities, our share of joint venture debt, including as-of-right extension options, estimated interest expense, and our obligations under our capital lease, air rights and ground leases, as of December 31, 2008 are as follows (in thousands):

 
  2009   2010   2011   2012   2013   Thereafter   Total  

Property Mortgages

  $ 28,124   $ 134,252   $ 266,223   $ 159,538   $ 451,272   $ 1,551,948   $ 2,591,357  

Revolving Credit Facility

                1,389,067             1,389,067  

Trust Preferred Securities

                        100,000     100,000  

Senior Unsecured Notes

    200,000         150,000             1,185,949     1,535,949  

Capital lease

    1,416     1,451     1,555     1,555     1,555     47,204     54,736  

Ground leases

    31,953     31,512     29,388     28,638     28,638     578,636     728,765  

Estimated interest expense

    273,225     256,493     210,836     172,361     158,602     739,274     1,810,791  

Joint venture debt

    55,265     459,944     171,285     34,192     1,677     1,211,270     1,933,633  
                               

Total

  $ 589,983   $ 883,652   $ 829,287   $ 1,785,351   $ 641,744   $ 5,414,281   $ 10,144,298  
                               

Off-Balance Sheet Arrangements

        We have a number of off-balance sheet investments, including joint ventures and structured finance investments. These investments all have varying ownership structures. Substantially all of our joint venture arrangements are accounted for under the equity method of accounting as we have the ability to exercise significant influence, but not control over the operating and financial decisions of these joint venture arrangements. Our off-balance sheet arrangements are discussed in Note 5, "Structured Finance Investments" and Note 6, "Investments in Unconsolidated Joint Ventures" in the accompanying financial statements. Additional information about the debt of our unconsolidated joint ventures is included in "Contractual Obligations" above.

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Capital Expenditures

        We estimate that for the year ending December 31, 2009, we will incur, approximately $93.8 million of capital expenditures (including tenant improvements and leasing commissions) on existing wholly-owned properties and our share of capital expenditures at our joint venture properties will be approximately $28.1 million. We expect to fund these capital expenditures with operating cash flow, additional property level mortgage financings, and cash on hand. Future property acquisitions may require substantial capital investments for refurbishment and leasing costs. We expect that these financing requirements will be met in a similar fashion. We believe that we will have sufficient resources to satisfy our capital needs during the next 12-month period. Thereafter, we expect our capital needs will be met through a combination of cash on hand, net cash provided by operations, borrowings, potential asset sales or additional equity or debt issuances.

Dividends

        We expect to pay dividends to our stockholders based on the distributions we receive from the operating partnership primarily from property revenues net of operating expenses or, if necessary, from working capital or borrowings.

        To maintain our qualification as a REIT, we must pay annual dividends to our stockholders of at least 90% of our REIT taxable income, determined before taking into consideration the dividends paid deduction and net capital gains. We intend to continue to pay regular quarterly dividends to our stockholders. Based on our current annual dividend rate of $1.50 per share, we would pay approximately $85.9 million in dividends to our common stockholders on an annual basis. Before we pay any dividend, whether for Federal income tax purposes or otherwise, which would only be paid out of available cash to the extent permitted under our unsecured revolving credit facility, we must first meet both our operating requirements and scheduled debt service on our mortgages and loans payable. We reduced our annual dividend from $3.15 in 2008 in order to conserve liquidity.

Related Party Transactions

        Through Alliance Building Services, or Alliance, First Quality Maintenance, L.P., or First Quality, provides cleaning, extermination and related services, Classic Security LLC provides security services, Bright Star Couriers LLC provides messenger services, and Onyx Restoration Works provides restoration services with respect to certain properties owned by us. Alliance is owned by Gary Green, a son of Stephen L. Green, the chairman of our board of directors. First Quality also provides additional services directly to tenants on a separately negotiated basis. In addition, First Quality has the non-exclusive opportunity to provide cleaning and related services to individual tenants at our properties on a basis separately negotiated with any tenant seeking such additional services. First Quality leases 26,800 square feet of space at 70 West 36th Street pursuant to a lease that expires on December 31, 2015. We received approximately $75,000 in rent from Alliance in 2007. We sold this property in March 2007. We paid Alliance approximately $15.1 million, $14.8 million and $13.6 million for three years ended December 31, 2008, respectively, for these services (excluding services provided directly to tenants).

        Nancy Peck and Company leases 1,003 square feet of space at 420 Lexington Avenue under a lease that ends in August 2015. Nancy Peck and Company is owned by Nancy Peck, the wife of Stephen L. Green. The rent due under the lease is $35,516 per year. From February 2007 through December 2008, Nancy Peck and Company leased 507 square feet of space at 420 Lexington Avenue pursuant to a lease which provided for annual rental payments of approximately $15,210. Prior to February 2007, Nancy

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Peck and Company leased 2,013 square feet of space at 420 Lexington Avenue, pursuant to a lease that expired on June 30, 2005 and which provided for annual rental payments of approximately $66,000. The rent due pursuant to that lease was offset against a consulting fee of $11,025 per month an affiliate paid to her pursuant to a consulting agreement, which was canceled in July 2006.

        S.L. Green Management Corp. receives property management fees from certain entities in which Stephen L. Green owns an interest. The aggregate amount of fees paid to S.L. Green Management Corp. from such entities was approximately $353,500 in 2008, $297,100 in 2007 and $205,000 in 2006.

        Sonnenblick-Goldman Company, or Sonnenblick, a nationally recognized real estate investment banking firm, provided mortgage brokerage services to us. Mr. Morton Holliday, the father of Mr. Marc Holliday, was a Managing Director of Sonnenblick at the time of the financings. In 2007, our 1604-1610 Broadway joint venture paid approximately $146,500 to Sonnenblick in connection with obtaining a $27.0 million first mortgage and we paid $759,000 in connection with the refinancing of 485 Lexington Avenue. In 2008, our 1250 Broadway joint venture paid approximately $1.7 million to Sonnenblick in connection with the sale of 1250 Broadway.

        In 2007, we paid a consulting fee of $525,000 to Stephen Wolff, the brother-in-law of Marc Holliday, in connection with our aggregate investment of $119.1 million in the joint venture that owns 800 Third Avenue and approximately $68,000 in connection with our acquisition of 16 Court Street for $107.5 million.

        Our related party transactions with Gramercy are discussed in Note 13, "Related Party Transactions" in the accompanying financial statements. Management has evaluated its investment in Gramercy in accordance with notice 2008-234 issued by the joint SEC Office of the Chief Accountant and the FASB Staff which provided further guidance on fair value accounting. Management evaluated (1) the length of time and the extent to which the market value of our investment in Gramercy has been less than cost, (2) the financial condition and near-term prospects of Gramercy, the issuer, and (3) the intent and ability of SL Green, the holder, to retain its investment for a period of time sufficient enough to allow for anticipated recovery. Based on this evaluation, we recognized a loss on our investment in Gramercy of approximately $147.5 million in the fourth quarter of 2008.

        We maintain "all-risk" property and rental value coverage (including coverage regarding the perils of flood, earthquake and terrorism) within two property insurance portfolios and liability insurance. The first property portfolio maintains a blanket limit of $600.0 million per occurrence for the majority of the New York City properties in our portfolio with a sub-limit of $450.0 million for acts of terrorism. The second portfolio maintains a limit of $600.0 million per occurrence, including terrorism, for a few New York City properties and the majority of the Suburban properties. Both property policies expire on December 31, 2009. Additional coverage may be purchased on a stand-alone basis for certain assets. The liability policies cover all our properties and provide limits of $200.0 million per property. The liability policies expire on October 31, 2009.

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        In October 2006, we formed a wholly-owned taxable REIT subsidiary, Belmont Insurance Company, or Belmont, to act as a captive insurance company and be one of the elements of our overall insurance program. Belmont was formed in an effort to, among other reasons; stabilize to some extent the fluctuations of insurance market conditions. Belmont is licensed in New York to write Terrorism, NBCR (nuclear, biological, chemical, and radiological), General Liability and D&O coverage.

        As long as we own Belmont, we are responsible for its liquidity and capital resources, and the accounts of Belmont are part of our consolidated financial statements. If we experience a loss and Belmont is required to pay under its insurance policy, we would ultimately record the loss to the extent of Belmont's required payment. Therefore, insurance coverage provided by Belmont should not be considered as the equivalent of third-party insurance, but rather as a modified form of self-insurance.

        TRIA, which was enacted in November 2002, was renewed on December 31, 2007. Congress extended TRIA, now called TRIPRA (Terrorism Risk Insurance Program Reauthorization and Extension Act of 2007) until December 31, 2014. The law extends the federal Terrorism Insurance Program that requires insurance companies to offer terrorism coverage and provides for compensation for insured losses resulting from acts of foreign and domestic terrorism. Our debt instruments, consisting of mortgage loans secured by our properties (which are generally non-recourse to us), mezzanine loans, ground leases and our 2007 unsecured revolving credit facility, contain customary covenants requiring us to maintain insurance. There can be no assurance that the lenders or ground lessors under these instruments will not take the position that a total or partial exclusion from "all-risk" insurance coverage for losses due to terrorist acts is a breach of these debt and ground lease instruments that allows the lenders or ground lessors to declare an event of default and accelerate repayment of debt or recapture of ground lease positions. In addition, if lenders insist on full coverage for these risks and prevail in asserting that we are required to maintain such coverage, it could result in substantially higher insurance premiums.

        We have a 45% interest in the property at 1221 Avenue of the Americas, where we participate with The Rockefeller Group Inc., which carries a blanket policy providing $1.0 billion of "all-risk" property insurance, including terrorism coverage, and a 49.9% interest in the property at 100 Park Avenue, where we participate with Prudential, which carries a blanket policy of $500.0 million of "all-risk" property insurance, including terrorism coverage. We own One Madison Avenue, which is

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under a triple net lease with insurance provided by the tenant, Credit Suisse Securities (USA) LLC, or CS. We monitor the coverage provided by CS to make sure that our asset is adequately protected. We own 388 and 390 Greenwich Street, which is leased on a triple net basis to Citigroup, N.A., which provides insurance coverage directly. We monitor all triple net leases to ensure that tenants are providing adequate coverage. Although we consider our insurance coverage to be appropriate, in the event of a major catastrophe, such as an act of terrorism, we may not have sufficient coverage to replace certain properties.

Funds from Operations

        Funds From Operations, or FFO, is a widely recognized measure of REIT performance. We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts, or NAREIT, which may not be comparable to FFO reported by other REITs that do not compute FFO in accordance with the NAREIT definition, or that interpret the NAREIT definition differently than we do. The revised White Paper on FFO approved by the Board of Governors of NAREIT in April 2002 defines FFO as net income (loss) (computed in accordance with Generally Accepted Accounting Principles, or GAAP), excluding gains (or losses) from debt restructuring and sales of properties, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. We present FFO because we consider it an important supplemental measure of our operating performance and believe that it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, particularly those that own and operate commercial office properties.

        We also use FFO as one of several criteria to determine performance-based bonuses for members of our senior management. FFO is intended to exclude GAAP historical cost depreciation and amortization of real estate and related assets, which assumes that the value of real estate assets diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. Because FFO excludes depreciation and amortization unique to real estate, gains and losses from property dispositions and extraordinary items, it provides a performance measure that, when compared year over year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, interest costs, providing perspective not immediately apparent from net income. FFO does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income (determined in accordance with GAAP), as an indication of our financial performance or to cash flow from operating activities (determined in accordance with GAAP) as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make cash distributions.

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        FFO for the years ended December 31, 2008, 2007 and 2006 are as follows (in thousands):

 
  Year Ended December 31,  
 
  2008   2007   2006  

Net income available to common stockholders

  $ 389,884   $ 640,535   $ 200,844  

Add:

                   
 

Depreciation and amortization

    217,624     175,171     62,523  
 

Minority interest

    13,262     23,173     9,657  
 

FFO from discontinued operations

    3,500     30,062     44,982  
 

FFO adjustment for unconsolidated joint ventures

    40,266     20,635     34,049  
 

Loss on equity investment in marketable securities

    147,489          

Less:

                   
 

Income from discontinued operations

    2,034     (17,458 )   (30,010 )
 

Gain on sale of discontinued operations

    (335,097 )   (481,750 )   (93,976 )
 

Gain on sale of joint venture property/ partial interest

    (103,014 )   (31,509 )   (3,451 )
 

Depreciation on non-rental real estate assets

    (974 )   (902 )   (984 )
               

Funds from Operations—available to common stockholders

    374,974     357,957     223,634  

Dividends on convertible preferred shares

             
               

Funds from Operations—available to all stockholders

  $ 374,974   $ 357,957   $ 223,634  
               

Cash flows provided by operating activities

  $ 384,552   $ 406,705   $ 225,644  

Cash flows used in investing activities

  $ 396,219   $ (2,334,337 ) $ (786,912 )

Cash flows provided by financing activities

  $ (99,846 ) $ 1,856,418   $ 654,342  

Inflation

        Substantially all of the office leases provide for separate real estate tax and operating expense escalations as well as operating expense recoveries based on increases in the Consumer Price Index or other measures such as porters' wage. In addition, many of the leases provide for fixed base rent increases. We believe that inflationary increases may be at least partially offset by the contractual rent increases and expense escalations described above.

Recently Issued Accounting Pronouncements

        The Recently Issued Accounting Pronouncements are discussed in Note 2, "Significant Accounting Policies-Recently Issued Accounting Pronouncements" in the accompanying financial statements.

Forward-Looking Information

        This report includes certain statements that may be deemed to be "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Such forward-looking statements relate to, without limitation, our future capital expenditures, dividends and acquisitions (including the amount and nature thereof) and other development trends of the real estate industry and the Manhattan, Westchester County, Connecticut, Long Island and New Jersey office markets, business strategies, and the expansion and growth of our operations. These statements are based on certain assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in Section 27A of the Act and Section 21E of the Exchange Act. Such statements are subject to a number of assumptions, risks and uncertainties which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by these forward-looking statements. Forward-looking statements are generally identifiable by the use of the words "may," "will," "should," "expect," "anticipate," "estimate," "believe," "intend," "project," "continue," or the negative of these words, or other similar

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words or terms. Readers are cautioned not to place undue reliance on these forward-looking statements. Among the factors about which we have made assumptions are:

        We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of future events, new information or otherwise.

        The risks included here are not exhaustive. Other sections of this report may include additional factors that could adversely affect the Company's business and financial performance. Moreover, the Company operates in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on the Company's business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

        See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations—Market Rate Risk" for additional information regarding our exposure to interest rate fluctuations.

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        The table below presents principal cash flows based upon maturity dates of our debt obligations and structured finance investments and the related weighted-average interest rates by expected maturity dates, excluding extension options, as of December 31, 2008 (in thousands):

 
   
  Long-Term Debt    
  Structured Finance Investments  
Date
  Fixed Rate   Average
Interest Rate
  Variable
Rate
  Average
Interest Rate
  Amount   Weighted
Yield
 

2009

  $ 226,750     5.28 % $ 1,374     3.80 % $ 138,209     9.14 %

2010

    132,779     5.23 %   129,473     3.75 %   164,676     11.55 %

2011

    453,461     5.10 %   1,351,829     3.92 %       %

2012

    29,845     5.04 %   1,692     6.22 %       %

2013

    332,536     5.02 %   118,737     6.22 %       %

Thereafter

    2,837,897     3.86 %       %   444,998     9.68 %
                           

Total

  $ 4,013,268     3.86 % $ 1,603,105     3.92 % $ 747,883 (1)   9.99 %
                           

Fair Value

  $ 3,002,800         $ 1,474,100                    
                                   

(1)
Our structured finance investments had an estimated fair value ranging between $408.0 million and $612.0 million at December 31, 2008.

        The table below presents the gross principal cash flows based upon maturity dates of our share of our joint venture debt obligations and the related weighted-average interest rates by expected maturity dates as of December 31, 2008 (in thousands):

 
  Long Term Debt  
Date
  Fixed Rate   Average
Interest Rate
  Variable
Rate
  Average
Interest Rate
 

2009(1)

  $ 438     4.44 % $ 398,576     4.08 %

2010

    29,955     4.44 %   86,239     4.54 %

2011

    1,702     4.41 %   169,583     4.97 %

2012

    13,330     4.40 %   20,862     3.98 %

2013

    1,677     4.40 %       %

Thereafter

    1,203,175     4.02 %   8,095     3.51 %
                   

Total

  $ 1,250,277     4.31 % $ 683,355     4.30 %
                   

Fair Value

  $ 1,053,200         $ 639,600        
                       

(1)
Included in this item is $343,750 based on the contractual maturity date of the debt on 1515 Broadway. This loan has a one-year as-of-right extension option.

        The table below lists all of our derivative instruments, which are hedging variable rate debt, including joint ventures, and their related fair value as of December 31, 2008 (in thousands):

 
  Asset Hedged   Benchmark Rate   Notional
Value
  Strike
Rate
  Effective
Date
  Expiration
Date
  Fair
Value
 

Interest Rate Swap

  Credit facility   LIBOR   $ 60,000     4.364 %   1/2007     5/2010   $ (2,703 )

Interest Rate Swap

  Anticipated debt   10-Year Treasury     105,000     4.910 %   12/2009     12/2019     (18,586 )

Interest Rate Swap

  Anticipated debt   10-Year Treasury     100,000     4.705 %   12/2009     12/2019     (15,998 )

Interest Rate Cap

  Mortgage   LIBOR     128,000     6.000 %   1/2007     2/2009