Northstar Realty Finance 10K 2007 Annual report

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

FORM 10-K

(Mark One)
ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
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: 001-32330

NorthStar Realty Finance Corp.
(Exact Name of Registrant as Specified in its Charter)

Maryland (State or other Jurisdiction of Incorporation or Organization)		11-3707493 (I.R.S. Employer Identification No.)
399 Park Avenue, 18th Floor New York, New York (Address of Principal Executive Offices)		10022 (Zip Code)
(212) 547-2600 (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
Preferred Stock, $0.01 par value 8.75% Series A Cumulative Redeemable		New York Stock Exchange
Preferred Stock, $0.01 par value 8.25% Series B Cumulative Redeemable		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 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 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. ý

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

Large accelerated filer ý

Accelerated filer o

Non-accelerated filer o

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

The aggregate market value of the registrant's voting and non-voting common equity held by non-affiliates of the registrant as of June 29, 2007, was $761,138,837. As of February 28, 2008, the registrant had issued and outstanding 61,964,259 shares of common stock, par value $0.01 per share.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement for the registrant's 2008 Annual Meeting of Stockholders (the "2008 Proxy Statement"), to be filed within 120 days after the end of the registrant's fiscal year ending December 31, 2007, are incorporated by reference into this Annual Report on Form 10-K in response to Part III, Items 10, 11, 12, 13 and 14.

INDEX

		Page
PART I
Item 1.	Business	4
Item 1A.	Risk Factors	17
Item 1B.	Unresolved Staff Comments	46
Item 2.	Properties	47
Item 3.	Legal Proceedings	50
Item 4.	Submission of Matters to a Vote of Security Holders	50
PART II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	51
Item 6.	Selected Financial Data	53
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	55
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	78
Item 8.	Financial Statements and Supplementary Data	82
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	151
Item 9A.	Controls and Procedures	151
Item 9B.	Other Information	152
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	153
Item 11.	Executive Compensation	153
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	153
Item 13.	Certain Relationships and Related Transactions and Directors Independence	153
Item 14.	Principal Accountant Fees and Services	153
PART IV
Item 15.	Exhibits and Financial Statement Schedules	154

FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among other things, the operating performance of our investments and financing needs. Forward-looking statements are generally identifiable by use of forward-looking terminology such as "may," "will," "should," "potential," "intend," "expect," "seek," "anticipate," "estimate," "believe," "could," "project," "predict," "continue" or other similar words or expressions. Forward-looking statements are not guarantees of performance and are based on certain assumptions, discuss future expectations, describe plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Our ability to predict results or the actual effect of plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from those forward looking statements. We are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results.

Factors that could have a material adverse effect on our operations and future prospects are set forth in "Risk Factors" in this Annual Report on Form 10-K beginning on page 14. The factors set forth in the Risk Factors section could cause our actual results to differ significantly from those contained in any forward-looking statement contained in this report.

PART I

Item 1. Business

Our Company

We are an internally-managed real estate finance company that focuses primarily on originating and acquiring commercial real estate debt, commercial real estate securities and net lease properties. We conduct our operations so as to qualify as a real estate investment trust, or a REIT, for federal income tax purposes. We invest in those areas of commercial real estate finance that enable us to leverage our real estate investment expertise, utilize our broad capital markets knowledge, and capitalize on our ability to employ innovative financing structures. We do not lend to or have any direct exposure to the single family housing sector.

We believe that our three principal business lines are complementary to each other due to their overlapping sources of investment opportunities, common reliance on real estate fundamentals and ability to utilize innovative and diverse sources of debt financing to match-fund our investments and enhance returns. In the past, we accessed equity capital from the public markets to fund our growth. During 2007, we began emphasizing raising equity capital from private sources to fund new investments in investment vehicles managed by us and with a minority co-investment by us. By accessing private capital we aim to diversify our sources of equity capital, reduce reliance on the public equity markets, and expect to increase returns on our invested equity by generating management fee income.

We allocate capital to our business lines in such a way as to seek to diversify our credit risk and optimize our returns. Our primary objectives are to produce attractive risk-adjusted returns and to generate predictable cash flow for distribution to our stockholders.

We rely on the normal functioning of credit and equity markets to finance and grow our business. During the second half of 2007, severe credit and liquidity issues in the subprime residential lending and single family housing sectors negatively impacted the asset-backed and corporate fixed income markets, as well as the equity securities of financial institutions, homebuilders and real estate companies. As the severity of residential sector issues increased, nearly all securities markets experienced decreased liquidity and greater risk premiums as concerns about the outlook for the U.S. and world economic growth increased. These concerns continue and risk premiums in many capital markets remain at or near all-time highs with liquidity extremely low compared to historical standards or virtually non-existent. As a result, most commercial real estate finance and financial services industry participants, including us, have curtailed new investment activity until the capital markets become more stable, the macroeconomic outlook becomes clearer and market liquidity increases. In this environment we are focused on actively managing portfolio credit, generating and recycling liquidity from existing assets and optimizing corporate overhead. We believe that our match-funding discipline and long-term flexible liability structure will enable us to continue to generate attractive returns and stable cash flow during this period of difficult capital markets and weak economic conditions.

Real Estate Debt

Overview

We focus on originating, structuring and acquiring senior and subordinate debt investments secured primarily by commercial and multifamily properties, including first lien mortgage loans, which are also referred to as senior mortgage loans, junior participations in first lien mortgage loans, which are often referred to as B-notes, second lien mortgage loans, mezzanine loans and preferred equity interests in borrowers who own such properties. We generally hold these instruments for investment, but we will sometimes syndicate portions of loans to maximize risk adjusted returns, manage credit exposure and generate liquidity.

Through our origination offices located in New York, NY, Dallas, TX, and Los Angeles, CA, we have built a franchise with a reputation for providing capital to high quality real estate investors who

want a responsive and flexible balance sheet lender. Given that we are a lender who does not generally seek to sell or syndicate the full amount of the loans we originate, we are able to maintain flexibility in how we structure loans that meet the unique needs of our borrowers. For example, we can make a loan to a borrower that provides for an increase in loan proceeds over the loan term if the borrower increases the value of the collateral property. Typical Commercial Mortgage-Backed Securities, or CMBS, and other conduit securitization lenders cannot generally provide these types of loans because of constraints within their funding structures and because they usually originate loans with the intent to sell them to third parties and relinquish control. Additionally, our centralized investment organization enables senior management to review potential new loans early in the origination process which, unlike many large institutional lenders with several levels of approval required to commit to a loan, allows us to respond quickly and provide a high degree of certainty to our borrowers that we will close a loan on terms substantially similar to those initially proposed. We believe that this level of service has enhanced our reputation in the marketplace and will generate increasing business from repeat customers.

Our average funded loan size was $17.3 million as of December 31, 2007.

The collateral underlying our real estate debt investments generally consists of income-producing real estate assets, properties that require some capital investment to increase cash flows, or assets undergoing repositionings or conversions, and may involve vertical construction or unimproved land. We seek to make real estate debt investments that offer the most attractive risk-adjusted returns and evaluate the risk based upon our underwriting criteria, sponsorship and the pricing of comparable investments. We historically accessed the asset-backed markets to match-fund our real estate debt investments with term debt liabilities that are sold under the N-Star brand, which is the name we use to identify our company as the sponsor. Brand is important because our frequent term debt issuances and strong credit performance allowed us to create Commercial Real Estate ("CRE") term debt transactions, which have been structured as CDOs. These term debt transactions are flexible financing structures that typically permit us to re-invest proceeds from asset repayments for a five-year period after issuance with no repayment of the term debt, subject to certain criteria. Thereafter, the term debt is repaid when the underlying assets pay off. Investors in term debt transactions want to be comfortable the sponsor has strong investment skills because they cannot approve the reinvestment of assets. In addition to these term debt financings we have utilized credit facilities and secured term financings to finance real estate debt investments.

Targeted Investments

Our real estate debt investments typically have the following characteristics:

•: terms of two to ten years inclusive of any extension options;
•: collateral in the form of a first mortgage or a subordinate interest in a first mortgage on real property, a pledge of ownership interests in a real estate owning entity or a preferred equity investment in a real estate owning entity;
•: investment amounts of $5 million to $200 million;
•: floating interest rates priced at a spread over LIBOR or fixed interest rates;
•: an interest rate cap or other hedge to protect against interest rate volatility; and
•: an intercreditor agreement that outlines our rights relative to other investors in the capital structure of the transaction and that typically provides us with a right to cure any defaults to the lender of those tranches senior to us and, under certain circumstances, to purchase senior tranches.

Investment Process for Real Estate Debt

We employ a standardized investment and underwriting process that focuses on a number of factors in order to ensure each investment is being evaluated appropriately, including:

•: macroeconomic conditions that may influence operating performance;
•: fundamental analysis of the underlying real estate collateral, including tenant rosters, lease terms, zoning, operating costs and the asset's overall competitive position in its market;
•: real estate market factors that may influence the lending and/or economic performance of the collateral;
•: the operating expertise and financial strength of the sponsor or borrower;
•: real estate and leasing market conditions affecting the asset;
•: the cash flow in place and projected to be in place over the term of the loan;
•: the appropriateness of estimated costs associated with rehabilitation or new construction;
•: a valuation of the property, our investment basis relative to its value and the ability to liquidate an investment through a sale or refinancing of the underlying asset;
•: review of third-party reports including appraisals, engineering and environmental reports;
•: physical inspections of properties and markets; and
•: the overall structure of the investment and the lenders' rights in the loan documentation.

We actively monitor property-level performance of the collateral underlying our debt investments through our asset management group. We regularly review updated information such as budgets, operating statements, rent rolls, major tenant lease signings, renewals, expirations and modifications. We also monitor for changes in property management, borrower's and sponsor's financial condition, timing and funding of distributions from reserves and capital accounts or future funding draws, real estate market conditions, sales of comparable and competitive properties, occupancy and asking rents at competitive properties and financial performance of major tenants.

Our real estate lending professionals may originate and structure debt investments directly with borrowers or may acquire loans from third parties. In the past we emphasized direct origination of our debt investments because this allows us a greater degree of control in loan structuring, provides us the opportunity to create subordinate interests in the loan, if desired, that meet our risk-return objectives, allows us to maintain a more direct relationship with our borrowers and to earn origination and other fees. Although the majority of our debt investments are directly originated, we expect that current difficult credit market conditions may present more opportunities to acquire real estate debt investments at attractive prices from third-party originators who are motivated by liquidity issues or are exiting the business.

At December 31, 2007 we held the following real estate debt investments (dollars in thousands):

December 31, 2007		Carrying Value(1)		Allocation by Investment Type		Average Fixed Rate		Average Spread Over LIBOR		Number of Investments
Whole loans, floating rate		$	1,082,399	53.9	%	—	%	3.09	%	59
Whole loans, fixed rate			80,371	4.0		10.17		—		10
Subordinate mortgage interests, floating rate			158,347	7.9		—		3.72		13
Mezzanine loans, floating rate			505,227	25.3		—		4.59		16
Mezzanine loan, fixed rate			157,092	7.8		11.16		—		16
Other loans—floating			16,653	0.8		—		1.60		2
Other loans—fixed			6,933	0.3		5.53		—		1

	Total/Weighted average	$	2,007,022	100.0	%	10.67	%	3.56	%	117

(1): Approximately $1.3 billion of these investments serve as collateral for our three term debt transactions backed by real estate loans and the balance is financed under other borrowing facilities. We have future

funding commitments, which are subject to certain conditions that borrowers must meet to qualify for such fundings, totaling $564.5 million related to these investments, of which we expect that a minimum of $284.1 million will be funded within our existing term debt transactions and require no additional capital from us.

: The following charts display our loan portfolio by collateral type and by geographic location:

Loan Portfolio by Collateral Type

Loan Portfolio by Geographic Location

Real Estate Securities

Overview

We invest in, create and manage portfolios of primarily investment grade commercial real estate debt securities, which we have financed by issuing term debt. Beginning in July 2007, our new real estate securities investments have been conducted principally in the NorthStar Real Estate Securities Opportunity Fund, or the "Securities Fund," of which we are the manager, general partner and 30.0% limited partner at December 31, 2007. We receive base management fees ranging from 1.0% to 2.0% per annum on third-party capital, and are entitled to annual incentive management fees ranging from 20.0% to 25.0% of the increase in the Securities Fund's net asset value in excess of an 8.0% per annum return. Base and incentive fees vary depending on the investor capital lockup periods. Other than in connection with making new investments to fill previously issued term debt following repayment of assets in these transactions, we intend to conduct all of our new securities investment activities in the Securities Fund or in vehicles similar to the Securities Fund to minimize the amount of securities we hold on balance sheet. This fund format also allows us to utilize long and short investment strategies that would not be efficient to conduct on-balance sheet and in our REIT structure.

Our managed commercial real estate debt securities include CMBS, fixed income securities issued by REITs, credit-rated tenant loans and term debt transactions backed primarily by commercial real estate securities. Most of our securities investments have explicit ratings assigned by at least one of the three leading nationally-recognized statistical rating agencies (Moody's Investors Service, Standard & Poor's and Fitch Ratings, generally referred to as "rating agencies") and generally are not insured or otherwise guaranteed. In addition to these securities, our investment grade term debt issuances may also be backed by bank loans to REITs and real estate operating companies, and real estate whole loans or subordinate debt investments such as B-Notes and mezzanine loans.

We seek to mitigate credit risk through credit analysis, subordination and diversification. Within the Securities Fund we may also utilize credit default swaps and credit-linked indices such as the CMBX to hedge long positions or to take net short positions on commercial real estate fixed income securities. The CMBS we invest in are generally junior in right of payment of interest and principal to one or more senior classes, but benefit from the support of one or more subordinate classes of securities or other form of credit support within a securitization transaction. The senior unsecured REIT debt securities we invest in reflect comparable credit risk. Credit risk refers to each individual

borrower's ability to make required interest and principal payments on the scheduled due dates. We believe that these securities offer attractive risk-adjusted returns with reasonable long-term principal protection under a variety of default and loss scenarios. While the expected yield on these securities is sensitive to the performance of the underlying assets, the more subordinated securities and certain other features of a securitization, in the case of mortgage backed securities, and the issuer's underlying equity and subordinated debt, in the case of REIT securities, are designed to bear the first risk of default and loss. The real estate securities portfolios of our investment grade term debt issuances are diversified by asset type, industry, location and issuer. We further minimize credit risk by monitoring the real estate securities portfolios of our investment grade term debt issuances and the underlying credit quality of their holdings.

Our general financing strategy focuses on the use of match-funded structures. This means that we seek to align the maturities of our debt obligations with the maturities of our investments in order to minimize the risk of being forced to refinance our liabilities prior to the maturities of our assets, as well as to reduce the impact of fluctuating interest rates on earnings. In addition, we generally match interest rates on our assets with like-kind debt, so that fixed rate assets are financed with fixed rate debt and floating rate assets are financed with floating rate debt, directly or through the use of interest rate swaps, caps or other financial instruments or through a combination of these strategies. Our investment grade term debt issuances utilize interest rate swaps to minimize the mismatch between their fixed rate assets and floating rate liabilities.

As a result of our focus on attractive risk/return opportunities in higher credit quality investments, the average rating of our securities investments was Baa2/BBB (investment grade) as of December 31, 2007. In addition, our securities portfolio has an average investment of approximately $5 million as of December 31, 2007. We believe that the high degree of overall diversification and investment grade quality within our portfolio provides a very stable and longer term base of cash flows that is complementary to our other businesses.

Our Real Estate Securities Investments

The various types of securities backed by real estate assets that we invest in, including CMBS, fixed income securities issued by REITs and real estate term debt transactions, are described in more detail below.

CMBS. CMBS securities, or commercial mortgage backed securities, are, generally, securities backed by obligations (including certificates of participation in obligations) that are principally secured by mortgages on real property or interests therein having a multifamily or commercial use, such as regional malls, other retail space, office buildings, industrial or warehouse properties, hotels, apartment buildings, nursing homes and senior living centers, and may include, without limitation, CMBS conduit securities, CMBS credit tenant lease securities and CMBS large loan securities. The properties are primarily located in the United States, although we may in the future also invest in CMBS backed by properties located in Europe, Asia and other non-U.S. locations that are a growing segment of the market. The loan collateral is held in a trust that issues securities in the form of various classes of debt secured by the cash flows from the underlying loans. The securities issued by the trust have varying levels of priority in the allocation of cash flows from the pooled loans and are rated by one or more of the rating agencies. These ratings reflect the risk characteristics of each class of CMBS and range from "AAA" to "CCC". Any losses realized on defaulted loans are absorbed first by the most junior, lowest-rated bond classes. Typically, all principal received on the loans is allocated first to the most senior outstanding class of bonds and then to the next class in order of seniority.

REIT Fixed Income Securities: REIT fixed income securities include both secured and unsecured debt issued by REITs. REITs own a variety of property types with a large number of companies focused on the office, retail, multifamily, industrial, healthcare and hotel sectors. In addition, several REITs focus on the ownership of self-storage properties and triple-net lease properties. Certain REITs are

more diversified in nature, owning properties across various asset classes. Both REIT secured and unsecured debt typically have credit ratings issued by one or more rating agencies. Currently, the majority of such notes issued by REITs are rated investment-grade. The majority of our long-term investments in REIT fixed income securities will be in REIT unsecured debt. We may also invest in junior unsecured debt or preferred equity of REITs.

Commercial Real Estate Term Debt Transactions: Commercial real estate term debt transactions, or CRE term debt transactions, are debt obligations typically collateralized by a combination of CMBS and REIT unsecured debt. CRE term debt transactions may also include real estate whole loans and other asset-backed securities as part of their underlying collateral, although this is less common in the market. A CRE term debt transaction is a special-purpose vehicle that finances the purchase of CMBS, REIT debt and other assets by issuing liabilities rated by rating agencies and equity in private securities offerings.

Underwriting Process for Real Estate Securities

Our underwriting process for real estate securities is focused on evaluating both the real estate risk of the underlying assets and the structural protections available to the particular class of securities in which we are investing. We believe that even when a security such as a CMBS or a REIT bond is backed by a diverse pool of properties, risk cannot be evaluated purely by statistical or quantitative means. Properties backing loans with identical debt service coverage ratios or loan-to-value ratios can have very different risk characteristics depending on their location, lease structure and physical condition. Our underwriting process seeks to identify those factors that may lead to an increase or decrease in credit quality over time.

Our underwriting process for the acquisition of real estate securities backed by a single loan or a small pool of large loans includes: (1) review of the rent roll and historical operating statements in order to evaluate the stability of the underlying property's cash flow; (2) utilization of our network of relationships with real estate investors and other professionals to identify market and sub-market trends in order to assess the property's competitive position within its market; and (3) evaluation of the loan's structural protections and intercreditor rights.

When evaluating a CMBS pool backed by a large number of loans, we combine real estate analysis on individual loans with stress testing of the portfolio under various sets of default and loss assumptions. First, we identify a sample of loans in the pool which are subject to individual analysis. This sample typically includes the largest 10 to 15 loans in the pool, loans selected for risk characteristics such as low debt service coverage ratios, unusual property type or location in a weak market, and a random sample of small to medium sized loans in the pool. The loans in the sample are analyzed based on the available information, as well as any additional market or property level information that we are able to obtain. Each loan in the sample is assigned a risk rating, which affects the default assumptions for that loan in our stress test. A loan with the lowest risk rating is assumed to default and suffer a loss whereas loans with better risk ratings are assigned a lower probability of default. The stress tests we run allow us to determine whether the bond class in which we are investing would suffer a loss under the stressed assumptions. We invest only in securities in which we expect to recover our invested capital even if the underlying loans experience significant stress.

REIT securities are evaluated based on the quality, type and location of the property portfolio, the capital structure and financial ratios of the company, and management's track record, operating expertise and strategy. We also evaluate the REIT's debt covenants. Our investment decision is based on the REIT's ability to withstand financial stress, as well as more subjective criteria related to the quality of management and of the property portfolio.

Similar to our real estate debt investments we have principally accessed the asset-backed markets to match-fund our securities investments with term debt financing.

The first four term debt issuances in our securities business were accounted for as off-balance sheet financings. This means that rather than consolidate the assets and investment grade notes we sold on our balance sheet we account for our equity in the financing as an available for sale security. For example, if we financed $100 of assets by issuing $80 of term debt notes, we would show our interest as a $20 available for sale security on our balance sheet. N-Star VII, our fifth securities term debt issuance, is accounted for as an on-balance sheet financing.

A summary of the collateral and term debt notes for our off-balance sheet at December 31, 2007 is provided below.

		Collateral—December 31, 2007						Term Notes—December 31, 2007
Issuance		Date Closed	Par Value of Collateral		Weighted Average Interest Rate		Weighted Average Expected Life (years)	Outstanding Term Notes(1)		Weighted Average Interest Rate at 12/31/07		Stated Maturity
N-Star I(2)		8/21/03	$	320,583	6.58	%	4.64	$	301,406	6.24	%	8/01/2038
N-Star II		7/01/04		335,301	6.24		4.73		306,110	5.75		6/01/2039
N-Star III		3/10/05		404,772	6.30		5.20		358,892	5.84		6/01/2040
N-Star V		9/22/05		495,971	5.87		7.09		456,319	5.07		9/05/2045

	Total		$	1,556,627	6.21	%	5.59	$	1,422,727	5.66	%

(1): Includes only notes held by third parties.
(2): We have an 83.3% interest.

The following charts display our CMBS assets under management by vintage and our on balance sheet securities assets under management by asset type.

CMBS AUM by Vintage

On Balance Sheet Securities AUM

Net Lease

Overview

Our net lease strategy is to invest primarily in office, industrial, retail and healthcare-related properties across the United States that are net leased long term to corporate tenants. Net lease properties are typically leased to a single tenant who agrees to pay basic rent, plus all taxes, insurance and operating expenses arising from the use of the leased property. We may also invest in properties that are leased to tenants for which we are responsible for some of the operating expenses. At the end of the lease term, the tenant typically has a right to renew the lease at market rates or to vacate the property with no further ongoing obligation. Accordingly, we generally target properties that are located in primary or secondary markets with strong demand fundamentals, and that have a property design and location that make them suitable and attractive for alternative tenants.

We believe that the majority of net lease investors who acquire office, industrial and retail properties are primarily focused on assets leased to investment-grade tenants with lease terms of 15 years or longer. In our experience, there is a more limited universe of investors with the real estate and capital markets expertise necessary to underwrite net lease assets with valuations that are more closely linked to real estate fundamentals than to tenant credit. We believe that well-located, general purpose real estate with flexible design characteristics can maintain or increase in value when re-leasing opportunities arise. By leveraging our relationships and employing our combination of real estate and corporate credit skills to identify and invest in sectors of the net lease market where less liquidity exists, we expect to generate risk-adjusted returns superior to those arising from more traditional net lease investment strategies. We originate net lease property investments through intermediaries, our proprietary network of property owners, developers, corporate tenants and tenant representative brokers.

In May 2006, we entered into a joint venture with Chain Bridge Capital LLC to invest in senior housing and healthcare-related net leased assets, called Wakefield. Healthcare real estate has typically attracted less capital than more traditional commercial real estate such as office and industrial properties, due to the more complex operating issues associated with the business, such as public and private sources of revenue and the Federal, State and Local regulatory environment. The management team of our partner has significant experience investing in a wide variety of healthcare properties, ranging from low-acuity assisted living facilities to higher-acuity skilled nursing facilities. The CEO of our partner has successfully formed and been a senior manager of several healthcare-focused companies. Wakefield seeks out opportunities to acquire individual assets or portfolios of assets from local or regionally-focused owner/operators with established track records and in markets where barriers to entry exist. The assets are typically purchased from and leased back to private operators under long-term net leases. We believe that our partner provides us a competitive advantage in this sector because of its management team's extensive relationships in the industry and their knowledge of and experience in operating, owning and lending to healthcare-related assets.

As of December 31, 2007, our Wakefield joint venture had approximately $695.5 million of assisted care living facilities with an average remaining lease term of 9.7 years and $4.8 million of loan investments. Wakefield is a consolidated joint venture and as of December 31, 2007, we and our partner had $196.8 million and $12.7 million of equity, respectively. While we continue to find attractive net lease investments in the core commercial real estate property types, we plan to continue to seek out opportunities to venture with experts in other real estate asset classes.

Underwriting Process for Net Lease Investments

Our ability to maximize the risk-adjusted returns available from investing capital in net lease properties depends, in part, on our ability to underwrite and monitor tenant credit, real estate market and property fundamentals. The comprehensive analysis is important to assessing the particular merits of a given investment. We conduct detailed tenant credit analyses to assess, among other things, the potential for credit deterioration and lease default risk. This analysis is also employed to measure the adequacy of landlord protection mechanisms incorporated into the underlying lease. Our underwriting process includes sub-market and property-level due diligence in order to understand downside investment risks, including quantifying the costs associated with tenant defaults and releasing scenarios. We also evaluate stress scenarios to understand refinancing risk. We incorporate the information obtained through the due diligence process into an investment memorandum, which includes base case and downside financial models to support investment recommendations.

Our Net Lease Investments

At December 31, 2007 we held the following net lease investments (dollars in thousands):

Type of Property		Number of Properties	Carrying Value		Percentage of Aggregate Carrying Value
Healthcare		115	$	682,338	58.8	%
Office/Flex		18		342,619	29.6
Retail		13		83,276	7.2
Investment in unconsolidated joint venture-office/flex(1)		3		25,252	2.2
Distribution center		1		25,903	2.2

	Total	150	$	1,159,388	100.0	%

(1): Our investment in the unconsolidated joint venture is $7.8 million.

LandCap Investment

On October 5, 2007, we entered into a joint venture with Whitehall Street Global Real Estate Limited Partnership 2007, to form LandCap Partners, which we refer to as LandCap. LandCap will opportunistically invest in single family residential land through land loans, lot option agreements and select land purchases. The venture is managed by professionals who have extensive experience in the single family housing sector. We have sole discretion with respect to funding our portion of any investment decisions relating to LandCap and have made no investments to date.

Middle-Market Corporate Lending

In March 2007, we entered into a joint venture with Monroe Capital, LLC, or "Monroe," a Chicago-based firm that originates, acquires and finances middle-market and broadly syndicated corporate loans. The key principals at Monroe have an average of 20 years industry experience and have successfully conducted their lending and asset management business as a team since 1999. Monroe's underwriting process, its disciplined focus on credit, and its strategy of financing its loans through securitized non-recourse, match-funded vehicles make Monroe's business a complementary extension of our existing lending business.

Under the terms of the venture, we provide equity support to secure a flexible warehouse facility to fund the venture's lending business. We also acquired 40% of the equity issued in Monroe's first securitization, or CLO, for $17.4 million that match-funded approximately $400 million of the venture's loan portfolio. We also own just under 50% of the existing management business that originates, structures and syndicates middle-market corporate loans and provides asset management services for the warehouse assets and the CLOs sponsored by Monroe.

At December 31, 2007, we held the following middle-market corporate loans (dollars in thousands):

December 31, 2007	Carrying Value(1)		Allocation by Investment Type		Average Spread Over LIBOR/Prime		Number of Investments
First lien note	$	421,973	92.3	%	2.96	%	100
Second lien note		35,166	7.7		6.02		8

Total/Weighted average	$	457,139	100.0	%	3.19	%	108

(1): All of these investments serve as collateral for the joint venture's financing arrangements, with approximately $366.8 million and $90.3 million of these investments serving as collateral for our MC Facility and our MC VFCC Facility, respectively, and we have future funding commitments totaling $14.3 million related to these investments.

Business Strategy

Our primary objectives are to make real estate-related investments that increase our franchise value and produce attractive risk-adjusted returns, and to generate predictable cash flow for distribution to our stockholders. In addition to our primary business objectives we will also opportunistically seek to expand our finance business by targeting related sectors, such as middle-market corporate lending. We believe that we derive a competitive advantage from the combination of our real estate, credit underwriting and capital markets expertise, which enables us to manage credit risk across our business lines as well as to structure and finance our assets efficiently. We will also seek to conduct certain new investment activities, where possible, in managed vehicles capitalized primarily with private capital sources rather than with 100% of our equity capital. If we are successful in raising these managed vehicles, we believe that these structures could provide a higher return on our invested equity capital due to the management and incentive fees that may be generated, and would broaden our sources of capital so that we would be less reliant on the public equity markets to grow our business.

We believe that our complementary core businesses provide us with the following synergies that enhance our competitive position:

Sourcing Investments. CMBS, purchased real estate debt and net leased properties are often sourced from the same originators. We can offer a single source of financing by purchasing or originating a rated senior interest for our real estate securities portfolio and an unrated junior interest for our real estate debt portfolio.

Credit Analysis. Real estate debt interests are usually marketed to investors prior to the issuance of CMBS backed by rated senior interests secured by the same property. By participating in both sectors, we can utilize our underwriting resources more efficiently and enhance our ability to underwrite the securitized debt.

Flexible Asset-Backed and Secured Term Financing. We believe our experience and reputation as an issuer and manager of term debt transaction financings, our credit track record and our relationships with major money-center banks should provide us preferential access to match-funded financing for our real estate securities, real estate debt and net lease investments.

Capital Allocation. Through our participation in these three principal businesses and the fixed income markets generally, we benefit from market information that enables us to make more informed decisions with regard to the relative valuation of financial assets and capital allocation.

Our investment process for all of our investing activities is centralized. We have a formal investment committee comprised of senior management representing each major discipline within the company, including investments, legal, tax, accounting, capital markets and portfolio management. The investment committee meets on a weekly basis to review proposed investments early in the process to ensure that key structural, pricing and collateral due diligence issues are identified up-front, and to also formally approve investments for funding. Preliminary screening memoranda and formal investment committee documents are prepared and distributed in advance of the meetings. All professionals are invited to attend the weekly meetings and to participate throughout the process. Real estate debt investments below a pre-established threshold require the approval of our chief executive officer, chief financial officer and head of our real estate debt business. All real estate debt investments above a pre-established threshold and 100%-owned net lease investments require a majority vote of the investment committee. Real estate securities investments above a pre-established threshold require the formal approval of our Chief Executive Officer and the head of our real estate securities business. Additionally, investments made in our joint ventures typically require approval of a subset of our investment committee.

Financing Strategy

We access a wide range of secured and unsecured debt and public and private equity capital sources to fund our investment activities and asset growth. Since our IPO in 2004, we have completed public preferred and common equity offerings raising $647.8 million of aggregate net proceeds. We also raised over $81.0 million of private capital for our Securities Fund. Additionally, in June 2007, we raised corporate debt capital by issuing $172.5 million of 7.25% exchangeable senior notes. We have also raised $286.3 million of long-term, subordinated debt capital that is equity-like in nature due to its 30-year term and relatively few covenants. We also maintain a $100.0 million unsecured credit facility that we use as a source of back-up liquidity.

We seek to access diverse short and long-term funding sources that enable us to deliver attractive risk-adjusted returns to our shareholders while match-funding our investments to minimize interest rate and maturity risk. This means we finance assets with debt having like-kind interest rate benchmarks (fixed or floating) and similar maturities.

Our real estate debt and securities businesses have typically used warehouse and secured credit facilities with major financial institutions to initially fund investments until a sufficient pool of assets was accumulated to efficiently execute a term debt transaction, which in the past has been structured as a CRE CDO. More recently, we have used a term facility to complement term debt transaction financing to match-fund our assets.

In a term debt transaction, rated bonds are issued and backed by pools of securities or loan collateral originated or acquired by us. The bonds are non-recourse and the interest in the collateral is used to service the interest on the rated bonds. After a reinvestment period, which is typically five years, principal from collateral payoffs is used to amortize the notes, so there is no maturity risk. We sell all of the investment-grade rated term debt transaction bonds, and retain the non-investment grade classes as our "equity" interest in the financing. Term debt transactions provide low cost financing because the most senior bond classes are rated "AAA/Aaa" by the rating agencies. For example, approximately 68.8% of the notes issued in our real estate securities term debt transactions were rated "AAA/Aaa" by at least one of the rating agencies at the time of the initial issuance.

Net lease investments are generally match-funded with non-recourse first mortgage debt representing approximately 75% to 80% of the total value of the investment. We seek to match the term of the financing with the remaining lease term.

Currently, there is very little liquidity in the asset-backed, real estate, corporate and most other major debt markets due to issues precipitated by the subprime residential lending industry.

Consequently, the ABS markets are currently unattractive or unavailable to most issuers who have therefore greatly reduced new investment activity. We believe that in the longer term liquidity and attractive pricing could return to the ABS markets, but that in the near term new financing sources must be developed in order to attractively finance new investment activity. We believe these sources will include term loans from financial institutions and life companies, more restrictive ABS structures which may not permit reinvestment from asset repayments, and financing provided by motivated sellers of assets. We believe that our credit track record and our reputation with lenders and in the asset-backed markets could enable us to develop alternative sources of debt financing while the capital markets remain unattractive or unavailable.

Hedging Strategy

We use derivatives primarily to manage interest rate risk exposure. These derivatives are typically in the form of interest rate swap agreements and the primary objective is to minimize the interest rate risks associated with our investing and financing activities. The counterparties of these arrangements are major financial institutions with which we may also have other financial relationships.

Creating an effective strategy for dealing with interest rate movements is complex and no strategy can completely insulate us from risks associated with such fluctuations. There can be no assurance that our hedging activities will have the intended impact on our results. A more detailed discussion of our hedging policy is provided in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources."

Regulation

We are subject, in certain instances, to supervision and regulation by state and federal governmental authorities and may be subject to various laws and judicial and administrative decisions imposing various requirements and restrictions, which, among other things: (1) regulate credit granting activities; (2) establish maximum interest rates, finance charges and other fees we can charge our customers; (3) require disclosures to customers; (4) govern secured transactions; and (5) set collection, foreclosure, repossession and claims-handling procedures and other trade practices. Although most states do not regulate commercial finance, certain states impose limitations on interest rates and other charges and on certain collection practices and creditor remedies and require licensing of lenders and financiers and adequate disclosure of certain contract terms. We are also required to comply with certain provisions of the Equal Credit Opportunity Act that are applicable to commercial loans.

We believe that we are not, and intend to conduct our operations so as not to become, regulated as an investment company under the Investment Company Act. We have been, and intend to continue to rely on current interpretations of the staff of the Securities and Exchange Commission in an effort to continue to qualify for an exemption from registration under the Investment Company Act. For more information on the exemptions that we utilize, see "Item 1A—Risk Factors—Maintenance of our Investment Company Act exemption imposes limits on our operations."

Certain of our subsidiaries will apply to be registered investment advisors under the Investment Advisors Act of 1940, or the "Investment Advisors Act" and, as such, may be supervised by the Securities and Exchange Commission. The Investment Advisors Act requires registered investment advisors to comply with numerous obligations, including record-keeping requirements, operational procedures and disclosure obligations. Such subsidiaries may also be registered with various states and thus, subject to the oversight and regulation of such states' regulatory agencies.

We have elected and expect to continue to make an election to be taxed as a REIT under Section 856 through 860 of the Code. As a REIT, we must currently distribute, at a minimum, an amount equal to 90% of our taxable income. In addition, we must distribute 100% of our taxable income to avoid paying corporate federal income taxes. REITs are also subject to a number of organizational and operational requirements in order to elect and maintain REIT status. These requirements include specific share ownership tests and assets and gross income composition tests. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate tax rates. Even if we qualify for taxation as a REIT, we may be subject to state and local income taxes and to federal income tax and excise tax on our undistributed income.

In the judgment of management, existing statutes and regulations have not had a material adverse effect on our business. However, it is not possible to forecast the nature of future legislation, regulations, judicial decisions, orders or interpretations, nor their impact upon our future business, financial condition, results of operations or prospects.

Competition

We are subject to significant competition in seeking real estate investments. We compete with many third parties engaged in real estate investment activities including other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, private institutional funds, hedge funds, private opportunity funds, investment banking firms, lenders, governmental bodies and other entities. In addition, there are other REITs with asset investment objectives similar to ours and others may be organized in the future. Some of these competitors, including larger REITs, have substantially greater financial resources than we do and generally may be able to accept more risk. They may also enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies.

Competition may limit the number of suitable investment opportunities offered to us. It may also result in higher prices, lower yields and a narrower spread of yields over our borrowing costs, making it more difficult for us to acquire new investments on attractive terms.

Employees

At December 31, 2007, we had 82 employees. We believe we have a good relationship with our employees and our employees are not represented by collective bargaining agreements.

Corporate Governance and Internet Address

We emphasize the importance of professional business conduct and ethics through our corporate governance initiatives. Our Board of Directors consists of a majority of independent directors; the audit, nominating/corporate governance, and compensation committees of our Board of Directors are composed exclusively of independent directors. We have adopted corporate governance guidelines and a code of business conduct and ethics, which delineate our standards for our officers, directors and employees.

Our internet address iswww.nrfc.com. The information on our website is not incorporated by reference in this Annual Report on Form 10-K. We make available, free of charge through a link on our site, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports, if any, as filed with the SEC as soon as reasonably practicable after such filing. Our site also contains our code of business conduct and ethics, code of ethics for senior financial officers, corporate governance guidelines, and the charters of our audit committee, nominating/corporate governance committee and compensation committee of our Board of Directors. Within the time period required by the rules of the SEC and the NYSE, we will post on our

website any amendment to our code of business conduct and ethics and our code of ethics for senior financial officers as defined in the code.

Item 1A. Risk Factors

Our business is subject to a number of risks that are substantial and inherent in our business. This section describes some of the more important risks that we face, any of which could have a material adverse effect on our business, financial condition, results of operations and future prospects. The risk factors set forth in this section could cause our actual results to differ significantly from those contained in this Annual Report on Form 10-K. In connection with the forward-looking statements that appear in this Annual Report on Form 10-K, you should carefully review the factors discussed below and the cautionary statements referred to under "Forward-Looking Statements."

Risks Related to Our Businesses

The recent downturn in the credit markets has increased the cost of borrowing and has made financing difficult to obtain, which has negatively impacted our business, and may have a material adverse effect on us.

During 2007, the subprime residential lending and single family housing markets began to experience accelerating default rates, declining real estate values and increasing backlog of housing supply. The residential sector issues quickly spread more broadly into the asset-backed, corporate and other credit and equity markets even though underlying fundamentals outside of the residential sector continued to show relatively strong performance and credit metrics. Since the subprime meltdown, volatility and risk premiums in most credit and equity markets have increased dramatically while liquidity has decreased. These issues have continued into the beginning of fiscal 2008. Increasing concerns regarding the U.S. and world economic outlook, such as large asset write-downs at banks, rising oil prices, declining business and consumer confidence and increased unemployment, are compounding these issues and risk premiums in most capital markets remain near historical all-time highs. Although we do not have any direct subprime exposure or direct exposure to the single family mortgage market, the factors described above have resulted in substantially reduced commercial mortgage loan originations and securitizations, and are precipitating more generalized credit market dislocations and a significant contraction in available credit. As a result, most financial industry participants, including commercial real estate lenders and investors, are finding it difficult to obtain cost-effective debt capital to finance new investment activity or to refinance maturing debt.

Due to these conditions, the commercial real estate finance market has experienced higher volatility and less liquidity despite continued relatively strong credit performance across the sector. Credit has become more expensive and difficult to obtain for the Company and its competitors'. The cost of financing as well as overall market-demanded risk premiums in commercial lending have increased. Most lenders are imposing more stringent restrictions on the terms of credit and there is a general reduction in the amount of credit available in the markets in which we conduct business. The negative impact on the tightening of the credit markets, further declines in real estate values in the U.S. and continuing credit and liquidity concerns may have a material adverse effect on us. Additionally, there is no assurance that the increased financing costs, financing with increasingly restrictive terms or the increase in risk premiums that are demanded by investors will not have a material impact on our future profitability measures. However, we expect that a portion of the impact of increased capital costs will be offset by increased yields on newly-originated assets, particularly as assets in our existing term debt transactions are repaid.

Liquidity in the capital markets is essential to our businesses and future growth and we rely on external sources to finance a significant portion of our operations.

Liquidity is essential to our businesses and our ability to grow and to fund existing obligations. A primary source of liquidity for us has been the equity and debt capital markets, including issuing common equity, perpetual preferred equity, trust preferred securities and convertible senior notes. We depend on external financing to fund the growth of our business mainly because one of the requirements of the Internal Revenue Code of 1986, as amended, for a REIT is that it distributes 90% of its taxable income to its shareholders, including taxable income where we do not receive corresponding cash. Our access to equity or debt financing depends on the willingness of third parties to make equity investments in us and provide us with corporate level debt. It also depends on conditions in the capital markets generally. Companies in the real estate industry, including us, are currently experiencing, and have at times historically experienced, limited availability of capital, and new capital sources may not be available on acceptable terms. Our ability to raise capital could be impaired if the capital markets have a negative perception of our long-term or short-term financial prospects or the prospects for mortgage REITs and the commercial real estate market generally. We cannot assure stockholders that sufficient funding or capital will be available to us in the future on terms that are acceptable to us. If we cannot obtain sufficient funding on acceptable terms, we will not be able to grow our business, which would likely have a negative impact on the market price of our common stock and our ability to pay dividends to our shareholders.

For information about our available sources of funds, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources" and the notes to the consolidated financial statements in this Annual Report on Form 10-K.

Our liquidity position could be adversely affected if we were unable to complete additional term debt transactions on favorable terms or at all.

We have completed nine term debt transactions in our commercial lending portfolio and in our real estate securities portfolio through which we have raised $3.9 billion of third party debt to pay down our borrowings under our credit facilities and created additional liquidity under our credit facilities for use in funding our investments. There is currently no availability of liquidity through the issuance of new term debt transactions due to investor concerns surrounding the real estate markets, the asset-backed markets and the issues surrounding the overall credit markets generally, among other things. Our business strategy has depended on our ability to match-fund new investments through the issuance of new term debt transactions. If we are not able to issue new term debt transactions, or are unable to do so on terms that we find economically justifiable, we may be unable to operate our business utilizing this business strategy and our ability to increase our assets under management, and therefore our ability to increase our earnings, could be severely restricted. A prolonged downturn in the asset-backed securities market will cause us to seek alternative sources of potentially less attractive financing, may cause us to liquidate assets at prices that could result in significant losses to us and may require us to further adjust our business plan accordingly. In turn, this could have a material adverse effect on our business and results of operations.

Our ability to complete additional term debt transactions will depend on, among other things:

•: the extent that the capital markets generally, and the asset-backed securities market in particular, suffer disruptions;
•: disruptions in the credit quality and performance of our loan or securities portfolios, particularly that portion which has been previously securitized and serves as collateral for existing term debt, which could reduce or eliminate investor demand for our term debt in the future;

•: any material downgrades or withdrawal of ratings given to securities previously issued in our term debt transactions which could reduce demand for our term debt; and
•: structural changes imposed by the rating agencies or investors may reduce the leverage we are able to obtain, increase the cost and otherwise adversely affect the efficiency of our term debt issued transactions.

At December 31, 2007, we had a total of $545.4 million of assets that were not match-funded with term debt. These assets consisted of $457.1 million of corporate loan investments, which are financed under credit facilities that we refer to as the MC Facility and the MC VFCC Facility, and $88.3 million of real estate debt investments, which are financed under a credit facility that we refer to as the JP facility. In addition, at December 31, 2007 our Securities Fund had $212.8 million of assets under a warehouse agreement, which was also not match-funded with term debt.

If we are unable to generate sufficient funds or obtain financing for future capital commitments, we may not be able to repay indebtedness or fund our other liquidity needs, which could have a material adverse effect on us.

At December 31, 2007, we had future funding commitments of $564.5 million related to the real estate debt investments we held and $14.3 million related to our corporate loan portfolio in our Monroe Capital joint venture. Our ability to fund future capital commitments will depend, to a certain extent, on general economic, financial, competitive and other factors that may be beyond our control. We cannot assure you that our business will generate sufficient cash flow from operations, that we will be able to raise funds in the capital markets or that future borrowings will be available to us in an amount sufficient to enable us to fund our liquidity needs. Our inability to fund future commitments may cause borrowers to take legal action against us, which could have a material adverse effect on us. However, as of December 31, 2007, we believe our cash flows from operations, available cash and cash equivalents and available borrowings will be adequate to meet our future liquidity needs. For more information on our contractual commitments, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations and Commitments" and the notes to the consolidated financial statements in this Annual Report on Form 10-K.

We retain the subordinate classes of bonds in the term debt transactions that we have issued, which entails certain risks.

The subordinate classes of bonds that we retain in the term debt transactions that we have issued represent leveraged investments in the underlying assets. Distributions on subordinate classes of bonds are generally made only after payment of interest on, and principal of, the senior bond classes. Although generally there is no interest or principal due on the subordinate classes of bonds, distributions may be made to holders of the subordinate classes of bonds on each payment date after all of the other required payments are made on each payment date. There can be no assurance that after making required payments on the senior bond classes there will be any remaining funds available to pay us. Accordingly, our subordinate classes of bonds may not be paid in full and we may be subject to a loss of all of our interest in the event that payments are not made on the underlying assets or losses are incurred with respect to the underlying assets.

Additionally, the terms of the term debt transactions issued by us include, and may in the future include, coverage tests, including over-collateralization tests, which are used primarily to determine whether and to what extent principal and interest proceeds on the underlying collateral debt securities and other assets may be used to pay principal of, and interest on, the subordinate classes of bonds in the term debt transactions. In the event the coverage tests are not satisfied, interest and principal that would otherwise be payable on the subordinate classes we hold may be re-directed to pay principal on the senior bond classes. Therefore, our failure to satisfy the coverage tests could adversely affect our

operating results and cash flows. Certain coverage tests (based on delinquency levels or other criteria) may also restrict our ability to receive net income from assets pledged to secure the term debt transactions. We cannot assure you, in advance of completing negotiations with the rating agencies or other key transaction parties on any potential future term debt transactions, the actual terms of the delinquency tests, over-collateralization terms, cash flow release mechanisms or other significant factors regarding the calculation of net income distributable to us. Failure to obtain favorable terms with regard to these matters may materially and adversely affect the availability of net income distributable to us. If our assets fail to perform as anticipated, our over-collateralization or other credit enhancement expense associated with our term debt transactions will increase.

If we are unable to extend or renew our existing warehouse and secured facilities, our results of operations, financial condition and business could be significantly harmed.

Warehouse and credit facilities are critical to our business. If we are unable to extend or renew our existing warehouse and secured credit facilities, our results of operations, financial condition and business could be significantly harmed. In particular, the Securities Fund warehouse agreement will expire on May 1, 2008. Additionally, the MC Facility will expire on March 31, 2008 and the MC VFCC Facility, if not extended by the lender, will expire on July 29, 2008. Although we are working to extend or renew these agreements on acceptable terms, failure to extend or renew these agreements or to obtain another source of funding for the assets could significantly harm our financial condition. In the case of the Securities Fund, the bank could liquidate some or all of the assets on its books and trigger a $75 million loss of warehouse deposits to the Securities Fund, of which we own 30%. In the case of the MC Facility, the bank could sell the loans on the MC Facility and retain our equity used to support the MC Facility, which is approximately $16 million, and in the case of the MC VFCC Facility, the bank could also sell the loans on the MC VFCC Facility and retain our equity used to support the MC VFCC Facility, which is approximately $20.2 million, as well as seek recourse under a $25 million guaranty that we have provided to the lender, but in each case only in the event that proceeds from a sale are not sufficient to cover the loans. No assurance can be given that we will be able to extend or renew our existing warehouse and secured facilities, or obtain other financing on terms that are acceptable, if at all. If we are unable to obtain financing on acceptable terms, it could have a material impact on our results of operations.

The repurchase agreements and bank credit facilities and warehouse lines that we use to finance our investments may require us to provide additional collateral.

We use bank credit facilities and warehouse lines, including repurchase agreements, to finance some of our investments. Although our primary credit facility in our real estate debt business is not subject to margin calls based on credit spread widening, if the market value of the loans pledged by us to a funding source decline in value, we may be required by the lending institution to provide additional collateral or pay down a portion of the funds advanced. We may not have the funds available to pay down our debt, which could result in defaults. Posting additional collateral to support our credit facilities will reduce our liquidity and limit our ability to leverage our assets. In the event we do not have sufficient liquidity to meet such requirements, lending institutions can accelerate our indebtedness, increase interest rates and terminate our ability to borrow. Such a situation would likely result in a rapid deterioration of our financial condition and solvency.

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

When we obtain financing, lenders impose restrictions on us that affect our ability to incur additional debt, our capability to make distributions to stockholders and our flexibility to determine our operating policies. Loan documents we execute may contain negative covenants that, among other things, limit the amount of leverage that we may employ, require that we maintain certain interest and fixed charge coverage ratios, require that we maintain a certain minimum tangible net worth, limit our

recourse indebtedness, limit our ability to distribute more than a certain amount of our funds from operations and require us to hedge our interest rate exposure. At December 31, 2007, the Company was in compliance with all debt covenants under its borrowings with the exception of its tangible net worth covenant for which the Company obtained a one-time waiver from its lending institutions. If we are not in compliance with any of our covenants, there can be no assurance that our lenders would waive such non-compliance in the future and any such non-compliance could have a material adverse effect on us.

Our warehouse and secured facilities may limit our ability to make investments.

Our warehouse and secured facility providers have the right to review the potential investment for which they are providing financing. We may be unable to obtain the consent of our warehouse and secured facility providers to make investments that we believe are favorable to us. In the event that our warehouse and secured facility providers do not consent to the inclusion of the potential asset in or under the warehouse and secured facility, we may be unable to obtain alternate financing for that investment. Our warehouse provider's consent rights with respect to our warehouse and secured facility may limit our ability to execute our business strategy. Further, our credit facility warehouse providers retain discretion over their obligation to fund and require us to maintain a certain amount of cash uninvested or set aside unlevered assets sufficient to maintain a specified liquidity position in order to satisfy our collateral obligations. As a result, we may not be able to leverage our assets as fully as we would choose, which could reduce our return on assets. In the event that we are unable to meet these collateral obligations, our financial condition could deteriorate rapidly.

The mortgage loans we originate and invest in and the commercial mortgage loans underlying the mortgage-backed securities we invest in are subject to risks of delinquency, foreclosure, loss and bankruptcy of the borrower under the loan. If the borrower defaults, it may result in losses to us.

Mortgage loans are secured by real estate and are subject to risks of delinquency, foreclosure, loss and bankruptcy of the borrower. The ability of a borrower to repay a loan secured by real estate is dependent primarily upon the successful operation of such property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower's ability to repay the loan may be impaired. Net operating income of a property can be affected by, among other things:

•: tenant mix;
•: success of tenant businesses;
•: property management decisions;
•: property location and condition;
•: property operating costs, including insurance premiums, real estate taxes and maintenance costs;
•: competition from comparable types of properties;
•: changes in governmental rules, regulations and fiscal policies;
•: changes in laws that increase operating expense or limit rents that may be charged;
•: any need to address environmental contamination at the property;
•: the occurrence of any uninsured casualty at the property;
•: changes in national, regional or local economic conditions and/or specific industry segments;
•: declines in regional or local real estate values;
•: declines in regional or local rental or occupancy rates;

•: increases in interest rates;
•: real estate tax rates and other operating expenses;
•: acts of God;
•: social unrest and civil disturbances;
•: terrorism; and
•: increases in costs associated with renovation and/or construction.

Any one or a combination of these factors may cause a borrower to default on a loan or to declare bankruptcy. If a default or bankruptcy occurs and the underlying asset value is less than the loan amount, we will suffer a loss.

Additionally, we may suffer losses in the following instances, which could have a material adverse effect on our financial performance, the market price of our stock and our ability to pay dividends:

•: If the value of real property or other assets securing our loans deteriorates. The majority of our real estate loans are fully or substantially non-recourse. In the event of a default by a borrower on a non-recourse loan, we will only have recourse to the real estate-related assets (including escrowed funds and reserves) collateralizing the loan. For this purpose, we consider loans made to special purpose entities formed solely for the purpose of holding and financing particular assets to be non-recourse loans. We sometimes also make loans that are secured by equity interests in the borrowing entities or by investing directly in the owner of the property. There can be no assurance that the value of the assets securing our loans will not deteriorate over time due to factors beyond our control, including acts or omissions by owners or managers of the assets. Mezzanine loans are subject to the additional risk that other lenders may be directly secured by the real estate assets of the borrowing entity.
•: If a borrower or guarantor defaults on recourse obligations under our loans. We sometimes obtain individual or corporate guarantees, which are not secured, from borrowers or their affiliates. In cases where guarantees are not fully or partially secured, we typically rely on financial covenants from borrowers and guarantors which are designed to require the borrower or guarantor to maintain certain levels of creditworthiness. Where we do not have recourse to specific collateral pledged to satisfy such guarantees or recourse loans, we will only have recourse as an unsecured creditor to the general assets of the borrower or guarantor, some or all of which may be pledged to satisfy other lenders. There can be no assurance that a borrower or guarantor will comply with its financial covenants, or that sufficient assets will be available to pay amounts owed to us under our loans and guarantees.
•: Our due diligence may not reveal all of a borrower's liabilities and may not reveal other weaknesses in its business. Before making a loan to a borrower, we assess the strength and skills of such entity's management and other factors that we believe are material to the performance of the investment. This process is particularly important and subjective with respect to newly organized entities because there may be little or no information publicly available about the entities. In making the assessment and otherwise conducting customary due diligence, we rely on the resources available to us and, in some cases, an investigation by third parties. There can be no assurance that our due diligence processes will uncover all relevant facts or that any investment will be successful.
•: In the event of a default or bankruptcy of a borrower, particularly in cases where the borrower has incurred debt that is senior to our loan. If a borrower defaults on our loan and the mortgaged real estate or other borrower assets collateralizing our loan are insufficient to satisfy our loan, we may suffer a loss of principal or interest. In the event of a borrower bankruptcy, we may not have full recourse to the assets of the borrower, or the assets of the borrower may not be

sufficient to satisfy our loan. In addition, certain of our loans are subordinate to other debt of the borrower. If a borrower defaults on our loan or on debt senior to our loan, or in the event of a borrower bankruptcy, our loan will be satisfied only after the senior debt. Bankruptcy and borrower litigation can significantly increase the time needed for us to acquire underlying collateral in the event of a default, during which time the collateral may decline in value. In addition, there are significant costs and delays associated with the foreclosure process.

•: If our reserves for losses prove inadequate, it could have a material adverse effect on us. We regularly evaluate financial reserves, if any, to protect against potential future losses. While we have in many of our loans asset-specific credit protection, including cash reserve accounts, cash deposits and letters of credit which we require that our borrowers fund and/or post at the closing of a transaction in accounts in which we have a security interest, such protections may not be sufficient to protect against all losses. As of December 31, 2007, we have not accumulated any loan loss reserves. We cannot be certain that our future reserves, if any, will be adequate over time to protect against potential future losses because of unanticipated adverse changes in the economy or events adversely affecting specific assets, borrowers, industries in which our borrowers operate or markets in which our borrowers or their properties are located.
•: If provisions of our loan agreements are unenforceable. Our rights and obligations with respect to our loans are governed by written loan agreements and related documentation. It is possible that a court could determine that one or more provisions of a loan agreement are unenforceable, such as a loan prepayment provision or the provisions governing our security interest in the underlying collateral.
•: If the risks associated with loan participations and intercreditor arrangements provide us with inadequate control rights. Some of our assets are participating interests in loans in which we share the rights, obligations and benefits of the loan with other participating lenders. Some of our assets are interests in subordinated loans which are subject to intercreditor arrangements with senior and/or junior lenders. The presence of intercreditor arrangements may limit our ability to amend our loan documents, assign our loans, accept prepayments, exercise our remedies (through "standstill" periods) and control decisions made in bankruptcy proceedings relating to borrowers. Similarly, a majority of the participating lenders may be able to take actions to which we object but to which we will be bound. We may be adversely affected by such lack of full control.

The subordinate mortgage notes, participation interests in mortgage notes, mezzanine loans and preferred equity investments we originate and invest in may be subject to risks relating to the structure and terms of the transactions, as well as subordination in bankruptcy, and there may not be sufficient funds or assets remaining to satisfy our investments, which may result in losses to us.

We focus on originating, structuring and acquiring senior and subordinate debt investments secured primarily by commercial and multifamily properties, including first lien mortgage loans, junior participations in first lien mortgage loans, which are often referred to as B-notes, second lien mortgage loans, mezzanine loans and preferred equity interests in borrowers who own such properties. These investments may be subordinate to other debt on commercial property and are secured by subordinate rights to the commercial property or by equity interests in the commercial entity. If a borrower defaults or declares bankruptcy, after senior obligations are met, there may not be sufficient funds or assets remaining to satisfy our subordinate interests. Because each transaction is privately negotiated, subordinate investments can vary in their structural characteristics and lender rights. Our rights to control the default or bankruptcy process following a default will vary from transaction to transaction. The subordinate investments that we originate and invest in may not give us the right to demand foreclosure as a subordinate real estate debtholder. Furthermore, the presence of intercreditor agreements may limit our ability to amend our loan documents, assign our loans, accept prepayments,

exercise our remedies and control decisions made in bankruptcy proceedings relating to borrowers. Bankruptcy and borrower litigation can significantly increase the time needed for us to acquire underlying collateral in the event of a default, during which time the collateral may decline in value. In addition, there are significant costs and delays associated with the foreclosure process.

We are subject to risks associated with construction lending, such as declining real estate values, cost over-runs and delays in completion.

Our loan assets include loans made to developers to construct prospective projects. The primary risks to us of construction loans are the potential for cost over-runs, particularly given the recent increased costs of raw materials, the developer's failing to meet a project delivery schedule and the inability of a borrower to sell or refinance the project at completion and repay our loan due to declining real estate values. These risks could cause us to have to fund more money than we originally anticipated in order to complete the project. We may also suffer losses on our loans if the borrower is unable to sell the project or refinance our loan.

We invest in CMBS securities, including "first loss" and other subordinate securities, which entail certain risks.

CMBS securities, or collateralized mortgage backed securities, are, generally, securities backed by obligations (including certificates of participation in obligations) that are principally secured by mortgages on real property or interests therein having a multifamily or commercial use, such as regional malls, other retail space, office buildings, industrial or warehouse properties, hotels, apartment buildings, nursing homes and senior living centers, and may include, without limitation, CMBS conduit securities, CMBS credit tenant lease securities and CMBS large loan securities. We invest in a variety of CMBS securities, including CMBS which are subject to the first risk of loss if any losses are realized on the underlying mortgage loans. CMBS securities entitle the holders thereof to receive payments that depend primarily on the cash flow from a specified pool of commercial or multi-family mortgage loans. Consequently, CMBS securities will be affected by payments, defaults, delinquencies and losses on the underlying commercial mortgage loans. Because issuers of CMBS securities have no significant assets other than the underlying commercial real estate loans and because of the significant credit risks inherent in the underlying collateral, credit risk is a correspondingly important consideration with respect to the related CMBS securities.

Additionally, CMBS securities are subject to particular risks, including lack of standardized terms and payment of all or substantially all of the principal only at maturity rather than regular amortization of principal. Additional risks may be presented by the type and use of a particular commercial property. Special risks are presented by hospitals, nursing homes, hospitality properties and certain other property types. Commercial property values and net operating income are subject to volatility, which may result in net operating income becoming insufficient to cover debt service on the related mortgage loan. The repayment of loans secured by income-producing properties is typically dependent upon the successful operation of the related real estate project rather than upon the liquidation value of the underlying real estate. Furthermore, the net operating income from and value of any commercial property are subject to various risks. The exercise of remedies and successful realization of liquidation proceeds relating to CMBS securities may be highly dependent on the performance of the servicer or special servicer. Expenses of enforcing the underlying mortgage loans (including litigation expenses) and expenses of protecting the properties securing the mortgage loans may be substantial. Consequently, in the event of a default or loss on one or more mortgage loans contained in a securitization, we may not recover our investment.

Our investments in REIT securities are subject to risks relating to the particular REIT issuer of the securities and to the general risks of investing in senior unsecured real estate securities, which may result in losses to us.

In addition to general economic and market risks, our investments in REIT securities involve special risks relating to the particular issuer of the securities, including the financial condition and business outlook of the issuer. REITs generally are required to substantially invest in real estate or real estate-related assets and are subject to the inherent risks associated with real estate-related investments.

Our investments in REIT securities and other senior unsecured debt are also subject to the risks described above with respect to mortgage loans and mortgage-backed securities and similar risks, including risks of delinquency and foreclosure, the dependence upon the successful operation of, and net income from, real property, risks generally related to interests in real property, and risks that may be presented by the type and use of a particular commercial property.

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

•: limited liquidity in the secondary trading market;
•: substantial market price volatility resulting from changes in prevailing interest rates and real estate values;
•: subordination to the prior claims of banks and other senior lenders to the REIT;
•: the operation of mandatory sinking fund or redemption provisions during periods of declining interest rates that could cause the issuer to reinvest redemption proceeds in lower yielding assets;
•: the possibility that earnings of the REIT may be insufficient to meet its debt service and distribution obligations;
•: the declining creditworthiness and potential for insolvency of the issuer during periods of rising interest rates, declining real estate values and economic downturns;
•: rating agency credit rating downgrades negatively impacting value of securities; and
•: covenants not being sufficient to protect investors from the adverse credit impact of merger and acquisition transactions and increased leverage of the REIT.

These risks may adversely affect the value of outstanding REIT securities we hold and the ability of the issuers thereof to repay principal and interest or make distributions.

Investments in net lease properties may generate losses.

The value of our investments and the income from our investments in net lease properties may be significantly adversely affected by a number of factors, including:

•: national, state and local economic conditions;
•: real estate conditions, such as an oversupply of or a reduction in demand for real estate space in an area;
•: the perceptions of tenants and prospective tenants of the quality, convenience, attractiveness and safety of our properties;
•: competition from comparable properties;
•: the occupancy rate of, and the rental rates charged at, our properties;
•: the ability to collect on a timely basis all rent from tenants;
•: the effects of any bankruptcies or insolvencies of tenants;
•: the expense of re-leasing space;
•: changes in interest rates and in the availability, cost and terms of mortgage funding;

•: the impact of present or future environmental legislation and compliance with environmental laws;
•: cost of compliance with the Americans with Disabilities Act of 1990, or ADA;
•: adverse changes in governmental rules and fiscal policies;
•: civil unrest;
•: acts of nature, including earthquakes, hurricanes and other natural disasters (which may result in uninsured losses);
•: acts of terrorism or war;
•: adverse changes in zoning laws; and
•: other factors which are beyond our control.

We may not be able to relet or renew leases at the properties held by us on terms favorable to us.

We are subject to the risks that upon expiration or earlier termination of leases for space located at our properties the space may not be relet or, if relet, the terms of the renewal or reletting (including the cost of required renovations or concessions to tenants) may be less favorable than current lease terms. Any of these situations may result in extended periods where there is a significant decline in revenues or no revenues generated by a property. If we are unable to relet or renew leases for all or substantially all of the space at these properties, if the rental rates upon such renewal or reletting are significantly lower than expected, or if our reserves for these purposes prove inadequate, we will experience a reduction in net income and may be required to reduce or eliminate distributions to our stockholders.

Lease defaults or terminations or landlord-tenant disputes may adversely reduce our income from our net lease property portfolio.

Lease defaults or terminations by one or more of our significant tenants may reduce our revenues unless a default is cured or a suitable replacement tenant is found promptly. In addition, disputes may arise between the landlord and tenant that result in the tenant withholding rent payments, possibly for an extended period. These disputes may lead to litigation or other legal procedures to secure payment of the rent withheld or to evict the tenant. Any of these situations may result in extended periods during which there is a significant decline in revenues or no revenues generated by a property. If this were to occur, it could adversely affect our results of operations.

Environmental compliance costs and liabilities associated with our properties or our real estate related investments may materially impair the value of our investments.

Under various federal, state and local laws, ordinances and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up certain hazardous substances released at the property, and may be held liable to a governmental entity or to third parties for property damage and for investigation and cleanup costs incurred by such parties in connection with the contamination. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and the costs it incurs in connection with the contamination. The presence of contamination or the failure to remediate contamination may adversely affect the owner's ability to sell or lease real estate or to borrow using the real estate as collateral. The owner or operator of a site may be liable under common law to third parties for damages and injuries resulting from environmental contamination emanating from the site. We may experience environmental liability arising from conditions not known to us.

We may invest in real estate, or mortgage loans secured by real estate, with environmental problems that materially impair the value of the real estate. There are substantial risks associated with such an investment. We have only limited experience in investing in real estate with environmental liabilities.

Uninsured losses or losses in excess of our insurance coverage could adversely affect our financial condition and our cash flows.

Although we believe our net leased assets and properties collateralizing our loan and securities investments are adequately covered by insurance, there are certain types of losses, generally of a catastrophic nature, such as earthquakes, floods, hurricanes, terrorism or acts of war that may be uninsurable or not economically insurable. Inflation, changes in building codes and ordinances, environmental considerations and other factors, including terrorism or acts of war, also might make the insurance proceeds insufficient to repair or replace a property if it is damaged or destroyed. Under such circumstances, the insurance proceeds received might not be adequate to restore our economic position with respect to the affected real property. Any uninsured loss could result in both loss of cash flow from, and the asset value of, the affected property.

As a result of the events of September 11, 2001, insurance companies are limiting and charging significant premiums to cover acts of terrorism in insurance policies. As a result, although we, our tenants and our borrowers may carry terrorism insurance, we may suffer losses from acts of terrorism that are not covered by insurance. In addition, the mortgage loans which are secured by certain of our properties contain customary covenants, including covenants that require us to maintain property insurance in an amount equal to the replacement cost of the properties, which may increase the cost of obtaining the required insurance.

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

Our investments are relatively illiquid and, therefore, our ability to sell and purchase properties, securities and debt promptly in response to a change in economic or other conditions will be limited. The Internal Revenue Code also places limits on our ability to sell properties held for fewer than four years. These considerations could make it difficult for us to dispose of properties, even if a disposition were in the best interests of our stockholders. In addition, a majority of the mortgage backed securities, REIT securities and real estate debt that we originate or purchase in connection with privately negotiated transactions will not be registered under the relevant securities laws, resulting in a prohibition against their transfer, sale, pledge or other disposition except in a transaction that is exempt from the registration requirements of, or is otherwise in compliance with, those laws. As a result, our ability to vary our portfolio in response to changes in economic and other conditions may be relatively limited, which may result in losses to us.

We may make investments in assets with lower credit quality, which will increase our risk of losses.

Most of our securities investments have explicit ratings assigned by at least one of the three leading nationally-recognized statistical rating agencies. However, we may invest in unrated securities, enter into net leases with unrated tenants or participate in unrated or distressed mortgage loans. An economic downturn, for example, could cause a decline in the price of lower credit quality investments and securities because the ability of obligors of net leases and mortgages, including mortgages underlying mortgage-backed securities, to make rent or principal and interest payments may be impaired. If this were to occur, existing credit support in the securitization structure may be insufficient to protect us against loss of our principal on these investments and securities. We have not established

and do not currently plan to establish any investment criteria to limit our exposure to these risks for future investments.

We have no established investment criteria limiting the geographic concentration of our investments in real estate debt, real estate securities or net lease properties. If our investments are concentrated in an area that experiences adverse economic conditions, our investments may lose value and we may experience losses.

Certain loans and securities in which we invest may be secured by a single property or properties in one geographic location. Additionally, net lease properties that we may acquire may also be located in a geographic cluster. These current and future investments carry the risks associated with significant geographical concentration. We have not established and do not plan to establish any investment criteria to limit our exposure to these risks for future investments. As a result, properties underlying our investments may be overly concentrated in certain geographic areas, and we may experience losses as a result. A worsening of economic conditions in the geographic area in which our investments may be concentrated could have an adverse effect on our business, including reducing the demand for new financings, limiting the ability of customers to pay financed amounts and impairing the value of our collateral.

Interest rate fluctuations may reduce the spread we earn on our interest-earning investments and may reduce our net income.

Although we seek to match-fund our assets and mitigate the risk associated with future interest rate volatility, we are primarily subject to interest rate risk prior to match-funding our investments and because we do not hedge our retained equity interest in our floating rate term debt transactions. To the extent a term debt transaction has floating rate assets, our earnings will generally increase with increases in floating interest rates, and decrease with declines in floating interest rates. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.

Our interest rate risk sensitive assets, liabilities and related derivative positions are generally held for non-trading purposes. As of December 31, 2007, a hypothetical 100 basis point increase in interest rates applied to our variable rate assets would increase our annual interest income by approximately $21.4 million offset by an increase in our interest expense of approximately $17.3 million on our variable rate liabilities. Similarly, a hypothetical 100 basis point decrease in interest rates would decrease our annual interest income by the same net amount.

Our investments in real estate securities, mortgage notes, mezzanine loans, participation interests in mortgage and mezzanine loans and preferred equity investments are subject to changes in credit spreads and if spreads widen, the value of our loan and securities portfolios would decline, as had happened during 2007.

Our investments in real estate securities are subject to changes in credit spreads. The value of these securities is dependent upon the yield demanded on these securities by the market based on the underlying credit. Excessive supply of these securities combined with reduced demand will generally cause the market to require a higher yield on these real estate securities, resulting in the use of a higher, or "wider," spread over the benchmark rate to value such securities. Under such conditions, the value of our securities portfolio would tend to decline. Such changes in the market value of our portfolio may adversely affect our net equity or cash flow directly through their impact on unrealized gains or losses on available-for-sale securities, and therefore our ability to realize gains on such securities, or indirectly through their impact on our ability to borrow and access capital.

The value of our investments in mortgage loans, mezzanine loans, participation interests in mortgage and mezzanine loans and preferred equity investments are also subject to changes in credit spreads. The majority of the assets we invest in are floating rate based on a market credit spread to

LIBOR. The value of the asset is dependent upon the yield demanded by the market based on its credit. The value of our portfolio would tend to decline should the market require a higher yield on such assets, resulting in the use of a higher spread over the benchmark rate. Any credit or spread losses incurred with respect to our debt portfolio would affect us in the same way as similar losses on our real estate securities portfolio as described above.

Our hedging transactions may limit our gains and could result in losses.

To limit the effects of changes in interest rates on our operations, we may employ hedging strategies, including engaging in interest rate swaps, caps, floors and other interest rate exchange contracts as well as engaging in short sales of securities or of future contracts. The use of these types of derivatives to hedge our assets and liabilities carries certain risks, including the risks that:

•: losses on a hedge position will reduce the cash available for distribution to stockholders;
•: losses may exceed the amount invested in such instruments;
•: a hedge may not perform its intended use of offsetting losses on an investment;
•: the counterparties with which we trade may cease making markets and quoting prices in such instruments, which may render us unable to enter into an offsetting transaction with respect to an open position; and
•: the counterparties with which we trade may experience business failures, which would most likely result in a default. Default by such counterparty may result in the loss of unrealized profits, which were expected to offset losses on our assets. Such defaults may also result in a loss of income on swaps or caps, which income was expected to be available to cover our debt service payments.

Our Board of Directors adopted a general policy with respect to the use of derivatives which generally allows us to use derivatives where appropriate, but does not set forth specific policies and procedures. Our results of operations may be adversely affected during any period as a result of the use of derivatives. If we anticipate that the income from any such hedging transaction will not be qualifying income for REIT income test purposes, we may conduct some or all of our hedging activities through a corporate subsidiary that would be subject to corporate income taxation.

Our portfolio is leveraged, which may adversely affect our return on our investments and may reduce cash available for distribution on our securities.

We leverage our portfolio through borrowings, generally through the use of bank credit facilities, warehouse lines, repurchase agreements, mortgage loans on real estate, securitizations, including the issuance of term debt transactions, and other borrowings. The type and percentage of leverage varies depending on our ability to obtain credit facilities or warehouse lines and the lender's estimate of the stability of the portfolio's cash flow. However, we do not restrict the amount of indebtedness that we may incur. Our return on our investments and cash available for distribution to our stockholders may be reduced to the extent that changes in market conditions cause the cost of our financing to increase relative to the income that can be derived from the assets acquired. Moreover, we may have to incur more recourse indebtedness.

We may change our investment strategy without stockholder consent and make riskier investments.

We may change our investment strategy at any time without the consent of our stockholders, which could result in our making investments that are different from, and possibly riskier than, the investments described in this Annual Report on Form 10-K. A change in our investment strategy may increase our exposure to interest rate and real estate market fluctuations.

Credit ratings assigned to our investments are subject to ongoing evaluations and we cannot assure you that the ratings currently assigned to our investments will not be downgraded.

Some of our investments are rated by Moody's Investors Service, Fitch Ratings and/or Standard & Poor's, Inc. The credit ratings on these investments are subject to ongoing evaluation by credit rating agencies, and we cannot assure you that any such rating will not be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant. If rating agencies assign a lower-than-expected rating or reduce, or indicate that they may reduce, their ratings of our investments in the future, the value of these investments could significantly decline, which may have an adverse affect on our financial condition.

We are subject to significant competition, and we may not be able to compete successfully for investments.

We are subject to significant competition for attractive investment opportunities from other real estate investors, some of which have greater financial resources than us, including publicly traded REITs, private REITs, investment banking firms, private institutional funds, hedge funds and private opportunity funds. We may not be able to compete successfully for investments.

Risks Relating to Investments in Healthcare Assets

We have limited experience with owning and operating senior housing and healthcare facilities.

In May 2006, we entered into a joint venture with Chain Bridge Capital LLC to invest in senior housing and healthcare-related net leased assets, called "Wakefield." As of December 31, 2007, we owned 94.0% of Wakefield and consolidated the venture in our financial statements. Although the principals of Chain Bridge have extensive experience owning and investing in senior and assisted living facilities, this is a new business for us with risks that differ from those to which we have been subject historically. There can be no assurance that we have the skills needed to run this business profitably.

The senior living industry is highly competitive and we expect it to become more competitive.

The senior living industry is highly competitive, and we expect that it may become more competitive in the future. The operators of the facilities we own or lend to compete with numerous other companies that provide long-term care alternatives such as home healthcare agencies, life care at home, facility-based service programs, retirement communities, convalescent centers and other independent living, assisted living and skilled nursing providers, including not-for-profit entities. In general, regulatory and other barriers to competitive entry in the independent living and assisted living segments of the senior living industry are not substantial, although there are generally barriers to the development of skilled nursing facilities. Consequently, our operators may encounter increased competition that could limit their ability to attract new residents, raise resident fees or expand their businesses, which could adversely adverse effect our revenues and earnings.

Operators of independent care, assisted living and memory care facilities must comply with the rules and regulations of governmental reimbursement programs such as Medicare or Medicaid, licensing and certification requirements, fraud and abuse regulations and are subject to new legislative developments.

The healthcare industry is highly regulated by federal, state and local licensing requirements, facility inspections, reimbursement policies, regulations concerning capital and other expenditures, certification requirements and other laws, regulations and rules. Any failure to comply with such laws, requirements and regulations could affect our operators' ability to operate the facilities that we own or finance. Healthcare operators are subject to federal and state laws and regulations that govern financial and other arrangements between healthcare providers. These laws prohibit certain direct and indirect payments or fee-splitting arrangements between healthcare providers that are designed to induce or

encourage the referral of patients to, or the recommendation of, a particular provider for medical products and services. They also require compliance with a variety of safety, health, staffing and other requirements relating to the design and conditions of the licensed facility and quality of care provided. These regulations may also enable the regulatory agency to place liens on the property which may be senior to our secured position. Possible sanctions for violation of these laws and regulations include loss of licensure or certification, the imposition of civil monetary and criminal penalties, and potential exclusion from the Medicare and Medicaid programs. Failure of our operators to comply with these rules or regulations could have an adverse effect on our financial condition or results of operations.

In addition, this area of the law currently is subject to intense scrutiny. Additional laws and regulations may be enacted or adopted that could require changes in the design of the properties and our joint venture's operations and thus increase the costs of these operations.

State law may limit the availability of certain types of healthcare facilities for our acquisition or development and may limit our ability to replace obsolete properties.

Certificate-of-Need laws may impose investment barriers for us. Some states regulate the supply of some types of retirement facilities, such as skilled nursing facilities or assisted living facilities, through Certificate-of-Need laws. A Certificate-of-Need typically is a written statement issued by a state regulatory agency evidencing a community's need for a new, converted, expanded or otherwise significantly modified retirement facility or service which is regulated pursuant to the state's statutes. These restrictions may create barriers to entry or expansion and may limit the availability of properties for our acquisition or development. In addition, we may invest in properties which cannot be replaced if they become obsolete unless such replacement is approved or exempt under a Certificate-of-Need law.

The bankruptcy, insolvency or financial deterioration of our facility operators could significantly delay our ability to collect unpaid rents or require us to find new operators.

Our financial position and our ability to make distributions to our stockholders may be adversely affected by financial difficulties experienced by any of our major operators, including bankruptcy, insolvency or a general downturn in the business, or in the event any of our major operators do not renew or extend their relationship with us as their lease terms expire.

We are exposed to the risk that our operators may not be able to meet their obligations, which may result in their bankruptcy or insolvency. Although our leases and loans provide us the right to terminate an investment, evict an operator, demand immediate repayment and other remedies, the bankruptcy laws afford certain rights to a party that has filed for bankruptcy or reorganization. An operator in bankruptcy may be able to restrict our ability to collect unpaid rents or interest during the bankruptcy proceeding.

Our operators are faced with increased litigation and rising insurance costs that may affect their ability to make their lease or mortgage payments.

In some states, advocacy groups have been created to monitor the quality of care at healthcare facilities, and these groups have brought litigation against operators. Also, in several instances, private litigation by patients has succeeded in winning very large damage awards for alleged abuses. The effect of this litigation and potential litigation has been to materially increase the costs incurred by our operators for monitoring and reporting quality of care compliance. In addition, the cost of liability and medical malpractice insurance has increased and may continue to increase so long as the present litigation environment affecting the operations of healthcare facilities continues. Continued cost increases could cause our operators to be unable to make their lease or mortgage payments, potentially decreasing our revenue and increasing our collection and litigation costs. Moreover, to the extent we

are required to take back the affected facilities, our revenue from those facilities could be reduced or eliminated for an extended period of time.

Risks Related to the Investment Management Business

The organization and management of our Funds may create conflicts of interest.

As we expand our business, in addition to managing the assets of our term debt transactions, our intention as a company is to establish and manage off-balance-sheet funds. In July 2007, we formed our Securities Fund, in which we intend to prospectively conduct our real estate securities investment business. We are the manager, and have a combined general partner and limited partner interest of 30% in the Securities Fund, at December 31, 2007.

The Securities Fund, along with new funds we may establish, which together are referred to as our "Funds," will hold assets that we determine should be acquired by the vehicles and doing so may create conflicts of interest, including between investors in these funds and our shareholders. Although as a company we will seek to make these decisions in a manner that we believe is fair and consistent with the operative legal documents governing these investment vehicles, the transfer or allocation of these assets may give rise to investor dissatisfaction or litigation or regulatory enforcement actions. Appropriately dealing with conflicts of interest is complex and difficult and our reputation as a company could be damaged if we fail, or appear to fail, to deal appropriately with one or more potential or actual conflicts of interest. Regulatory scrutiny of, or litigation in connection with, conflicts of interest would have a material adverse effect on our reputation which would materially adversely affect our business and our ability to attract investors for future vehicles.

Difficult market conditions can adversely affect our Funds in many ways, including by reducing the ability of our Funds to raise or deploy capital and by reducing the value or performance of the investments made by our Funds, and could materially reduce our revenue and results of operations.

If economic conditions are unfavorable, our Funds may not perform well and we may not be able to raise money for our Funds. A general market downturn, or a specific market dislocation as is the case with the current dislocation in the credit markets, may cause the revenue and results of operations of our Funds to decline by causing:

•: the net asset value of the assets under management to decrease, lowering management fees;
•: lower investment returns, reducing incentive income; and
•: investor redemptions, resulting in lower fees.

Furthermore, while difficult market conditions may increase opportunities to make certain distressed asset investments, such conditions also increase the risk of default with respect to investments held by our Funds. Our Funds may also be adversely affected by difficult market conditions if they fail to predict the adverse effect of such conditions on particular investments, resulting in a significant reduction in the value of those investments.

The creation and management of investment vehicles will require us to register with the SEC as an investment adviser under the Investment Advisers Act and subject us to costs and constraints that we are not currently subject to.

A consequence of creating and managing investment vehicles, including term debt vehicles, is that we will be required to register with the SEC as an investment adviser under the Investment Advisers Act. Registered investment advisers must establish policies and procedures for their operations and make regulatory filings. The Investment Advisers Act and the rules and regulations under this Act generally grant the SEC broad administrative powers, including, in some cases, the power to limit or

restrict doing business for failure to comply with such laws and regulations. These laws and regulations have increased, and could further increase, our expenses and require us to devote substantial time and effort to legal and regulatory compliance issues. In addition, the regulatory environment in which investment advisors operate changes frequently and regulations have increased significantly in recent years. We may be adversely affected as a result of new or revised legislation or regulations or by changes in the interpretation or enforcement of existing laws and regulations.

We may use capital to preserve the existence of our Funds.

Our existing Fund is, and our new Funds may be, subject to mark-to-market volatility and may at times be subject to margin calls or require other financial assistance from us. We have, and may in the future, provide all or a portion of the capital necessary to preserve our Funds, including by satisfying margin calls if the Funds are not able to meet such obligations without our assistance or by providing credit or credit support.

Our results of operations may be dependent on the performance of our Funds and the performance of our Funds will impact our ability to raise capital for future funds.

Poor performance of our Funds will make it difficult for us to retain or attract investors to our Funds and to grow our business. The performance of each fund we manage is subject to some or all of the following risks:

•: Limited operating history. The entities comprising our existing fund were recently organized and do not have an operating history upon which prospective investors can evaluate their likely performance. The past performance of the principals of our existing fund, or any new funds, will not be necessarily indicative of the future results of the Funds. There can be no assurance that our existing fund or new funds, if any, will achieve their investment objectives.
•: Investors in our existing fund and, likely, our new funds, may redeem their investments after a stated lock-up period or elect to remove us as manager of the Funds at any time without cause upon approval of 50% of the limited partners of our Funds. Investors in our existing fund are, and investors in our future funds will likely be, able to redeem their investments on an annual or quarterly basis, subject to the applicable Fund's specific redemption provisions, and remove us as manager of the Funds without cause upon approval of 50% of the limited partners in the Fund (excluding us). Investors may decide to move their capital away from our funds to other investments or remove us as manager of the Funds for any number of reasons in addition to poor investment performance. Factors which could result in investors leaving our Funds include changes in interest rates which make other investments more attractive, changes in investor perception regarding the Fund's focus or alignment of interest, unhappiness with changes in or broadening of a Fund's investment strategy, changes in our reputation, and departures or changes in responsibilities of key investment professionals. In a declining financial market, the pace of redemptions and consequent reduction in our assets under management could accelerate. The decrease in our Funds' revenues that would result from significant redemptions in our Funds may have a material effect on our business by reducing our management fees and incentive income, and could result in significant reputational damage as well. If we were removed as a manager of any fund, we would no longer be entitled to receive management or incentive fees, which may have a material effect on our business, and such removal could also cause significant reputational damage to us.
•: Valuation methodologies for certain assets in our Funds may be subject to significant subjectivity and the values of assets established pursuant to such methodologies may never be realized, which could result in significant losses for our Funds. There are no readily-ascertainable market prices for illiquid investments in our Funds. The value of the investments of our Funds will be determined

periodically by us based on the fair value of such investments. The fair value of investments is determined using a number of methodologies, which are described in the existing Fund's valuation policies. These policies are based on a number of factors, including the nature of the investment, the expected cash flows from the investment, bid or ask prices provided by third parties for the investment, the length of time the investment has been held, the trading price of securities, restrictions on transfer and other recognized valuation methodologies. The methodologies we may use in valuing individual investments will be based on a variety of estimates and assumptions specific to the particular investments, and actual results related to the investment therefore often vary materially as a result of the inaccuracy of such assumptions or estimates.

•: Risks in using prime brokers and custodians. Our Funds will depend on the services of prime brokers and custodians to carry out certain securities transactions. In the event of the insolvency of a prime broker and/or custodian, our Funds might not be able to recover equivalent assets in full as they will rank among the prime broker and custodian's unsecured creditors in relation to assets which the prime broker or custodian borrows, lends or otherwise uses. In addition, the Funds' cash held with a prime broker or custodian will not be segregated from the prime broker's or custodian's own cash, and the Funds will therefore rank as unsecured creditors in relation thereto.

Risks Related to Middle-Market Corporate Lending

In addition to the risks associated with investing in real estate debt and real estate securities, through our joint venture with Monroe Capital, we have made middle-market loans to borrowers outside of the real estate industry, including highly leveraged borrowers.

In March 2007, we entered into a joint venture with Monroe Capital Holdco, LLC, or "Monroe," which serves as a platform for originating middle-market loans. The joint venture, which we refer to as "Monroe Capital" or the "joint venture," has commenced making senior and subordinate secured loans to middle-market corporations, including middle-market loans to highly leveraged borrowers. As of December 31, 2007, we owned a 95% controlling interest in the joint venture and consolidated it in our financial statements. This type of lending is very competitive and requires skills that differ from those we have developed through investing in real estate debt, net lease properties and real estate securities and there can be no assurance that we will be successful in this business. In addition, to the extent we lend to borrowers that have high levels of debt relative to the amount of their equity capital, there is a heightened risk of loss and the additional rate of interest that we earn on these loans may not fully compensate us for the additional risk.

Loans to middle-market borrowers are subject to a number of significant risks including the following:

•: Middle-market businesses may have limited financial resources and may not be able to repay the loans we make to them. Our strategy for this business includes providing financing to borrowers that typically is not readily available to them. While we believe that this provides an attractive opportunity for us to generate profits, this may make it difficult for the borrowers to repay their loans to us upon maturity. A borrower's ability to repay its loan may be adversely affected by numerous factors, including the failure to meet its business plan, a downturn in its industry or negative economic conditions.
•: Middle-market businesses typically have narrower product lines and smaller market shares than large businesses. Because our target borrowers are smaller businesses, they will tend to be more vulnerable to competitors' actions and market conditions, as well as general economic downturns. In addition, these borrowers may face intense competition, including competition

from companies with greater financial resources, more extensive development, manufacturing, marketing and other capabilities and a larger number of qualified managerial and technical personnel.

•: There is generally little or no publicly available information about these businesses. Because we expect that these loans will be made to privately owned businesses, we expect that there will generally be little or no publicly available operating and financial information about our potential borrowers. As a result, we will rely on our JV partners and our officers to perform due diligence investigations of these borrowers, their operations and their prospects. We may not learn all of the material information we need to know regarding these businesses through our investigations.
•: Middle-market businesses generally have less predictable operating results. We expect that these borrowers may have significant variations in their operating results, may from time to time be parties to litigation, may be engaged in rapidly changing businesses with products subject to a substantial risk of obsolescence, may require substantial additional capital to support their operations, to finance expansion or to maintain their competitive position, may otherwise have a weak financial position or may be adversely affected by changes in the business cycle, all of which will adversely impact our ability to be repaid.
•: Middle-market businesses are more likely to be dependent on one or two persons. Typically, the success of middle-market business also depends on the management talents and efforts of one or two persons or a small group of persons. The death, disability or resignation of one or more of these persons could have a material adverse impact on these borrowers and, in turn, their ability to repay us.
•: Middle-market businesses are likely to have greater exposure to economic downturns than larger businesses. We expect that these borrowers will have fewer resources than larger businesses and will not have the benefit of real estate to provide to us as collateral and that an economic downturn is more likely to have a material adverse effect on them. If one of these borrowers is adversely impacted by an economic downturn, its ability to repay our loan would be diminished.
•: Middle-market businesses may have limited operating histories. While we intend to target stable companies with proven track records, we may make loans to new companies that meet our other investment criteria. Borrowers with limited operating histories will be exposed to all of the operating risks that new businesses face and may be particularly susceptible to, among other risks, market downturns, competitive pressures and the departure of key executive officers.

Monroe Capital uses credit facilities to finance its investments. If Monroe Capital is unable to securitize its loans or is required to post additional collateral to support its credit facilities, it could have a material adverse effect on our results of operations.

Monroe Capital uses credit facilities to finance its loan investments. If Monroe Capital is not able to securitize its loans, or is unable to extend or renew its existing credit facilities on terms that it finds economically justifiable, Monroe Capital will most likely be unable to operate its business and increase its assets under management, and therefore its ability to increase its earnings, could be severely restricted. Additionally, if the market value of the loans pledged or sold by Monroe Capital to a funding source decline in value, Monroe Capital may provide additional collateral or pay down a portion of the funds advanced. Monroe Capital may not have the funds available to pay down its debt, which could result in defaults. Posting additional collateral to support its credit facilities will reduce Monroe Capital's liquidity and limit its ability to leverage its assets. In the event Monroe Capital does not have sufficient liquidity to meet such requirements, lending institutions can accelerate certain

indebtedness and terminate its ability to borrow. Such a situation could have a material adverse effect on our results of operations.

Monroe Capital's liquidity position could be adversely affected if it is unable to complete additional collateralized loan transactions on favorable terms, or at all, which could have a material adverse effect on our results of operations.

Monroe Capital depends on the availability of the leveraged loan markets to create additional liquidity under its credit facilities for use in funding new loans. There is currently limited liquidity, if any, in the leveraged loan markets due to investor concerns surrounding the overall credit markets, among other things. These concerns have materially impacted investor demand for such transactions. If Monroe Capital is not able to issue new collateralized loan transactions, or is unable to do so on terms that it finds economically justifiable, it will be unable to operate its business utilizing this strategy and its ability to increase its assets under management, and therefore its ability to increase earnings, could be severely restricted. A prolonged downturn in the leveraged loan markets will cause Monroe Capital to seek alternative sources of potentially less attractive financing, may cause it to liquidate assets at prices that could result in significant losses to the joint venture and may require it to further adjust its business plan. In turn, this could have a material adverse effect on our results of operations.

Risks Related to Residential Land Investments

In addition to the risks associated with investing in real estate debt and real estate securities, we have recently formed a joint venture with Whitehall Street Global Real Estate Limited Partnership 2007 that may make residential land investments in strategic markets throughout the United States, including loans to homebuilders secured by first priority liens and short term mezzanine financing and land option contracts.

In order to continue to expand our business, we have recently entered into the Land Cap joint venture with Whitehall Street Global Real Estate Limited Partnership 2007, which will opportunistically invest in single family residential land through land loans, lot option agreements and land purchases. Although the venture is managed by professionals who have extensive experience in the single family housing sector housing sector, this type of lending is very competitive and requires skills that differ from those we have developed through investing in commercial real estate debt, net lease properties and real estate securities and there can be no assurance that we will be successful in this business. The joint venture is managed by a team of professionals with experience in the homebuilding and single family housing sector. In addition, to the extent we lend to residential homebuilders that have high levels of debt relative to the amount of their equity capital, there is a heightened risk of loss and the additional rate of interest that we earn on these loans may not fully compensate us for the additional risk. Although the U.S. homebuilding industry as a whole is experiencing a significant and sustained decrease in demand for new homes and an oversupply of new and existing homes available for sale, we believe that investments in residential land may provide an attractive opportunity for us to generate profits. Nonetheless, in addition to the risks associated with the continuing decline of the homebuilding industry as a whole, the residential homebuilding industry is substantially impacted by additional risks, including fluctuations in market value of undeveloped land, large amounts of buildable lots and housing inventories as a result of changing economic and market conditions, seasonality and adverse weather conditions, raw material and labor shortages, price fluctuations, government regulation, including delays or refusals from government agencies to grant necessary licenses, permits and approvals, and product liability litigation and warranty claims that arise in the ordinary course of business. Any of these risks could materially affect a homebuilder borrower's business and its ability to repay the loans we make to it.

Risks Related to International Investments

Any non-U.S. investments we may make would be subject to various risks associated with investments and operations in foreign countries, which could adversely impact our results.

We may make investments internationally. These investments involve special risks compared with investing exclusively in the United States and our future results could be materially adversely affected by a variety of factors, including:

•: fluctuations in currency exchange rates;
•: exchange rate controls;
•: tariffs or other trade protection measures and import or export licensing requirements;
•: potentially negative consequences from changes in tax laws;
•: interest rates;
•: the need to comply with a broader array of regulatory and licensing requirements, the failure of which could result in fines, penalties or business suspensions;
•: unexpected changes in regulatory requirements;
•: differing labor regulations;
•: requirements relating to withholding taxes on remittances and other payments by subsidiaries;
•: the costs and difficulties of managing international operations and strategic partnership alliances;
•: restrictions on our ability to own or operate subsidiaries, make investments or acquire new businesses in various jurisdictions;
•: potential political instability and the actions of foreign governments; and
•: restrictions on our ability to repatriate dividends from our subsidiaries.

If we expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. However, any of these factors could materially adversely affect our international operations and, consequently, our operating results.

Difficulty of enforcing legal rights may negatively affect the results of our non-U.S. investments.

It may be difficult to obtain judgments or enforce contractual or other legal rights in certain foreign countries. For example, legal proceedings in certain jurisdictions may take many years longer to complete than similar proceedings in the United States or other more developed countries. In addition, once a judgment is obtained in a foreign country, it may be difficult to enforce or collect the judgment for a variety of reasons.

The inability to successfully defend claims from taxing authorities related to our current or acquired properties could adversely affect our operating results and financial position.

We may be required to interpret the income tax laws and rulings in each of the taxing jurisdictions in which we make foreign investments. Due to the subjectivity of tax laws between those jurisdictions as well as the subjectivity of factual interpretations, our estimates of income tax liabilities may differ from actual payments or assessments. Claims from taxing authorities related to these differences could have an adverse impact on our operating results and financial position.

Investing internationally will mean that we may make investments in non-U.S. dollar denominated investments, which will be subject to currency rate exposure and the uncertainty of foreign laws and markets, which may adversely impact our returns on non-dollar denominated investments.

We may purchase and originate real estate investments and CMBS denominated in foreign currencies. We expect that our exposure, if any, would be principally to the British Pound and the Euro. A change in foreign currency exchange rates may adversely impact returns on our non-dollar denominated investments when we convert those returns to U.S. dollars for purposes of our financial reporting and if we convert the foreign currency back into U.S. dollars. We may hedge our foreign currency risk, subject to the REIT income qualification tests. However, we may not be able to do so successfully and may incur losses on these investments as a result of exchange rate fluctuations.

Risks Related to Our Company

Our ability to operate our business successfully would be harmed if key personnel with long-standing business relationships terminate their employment with us.

Our future success depends, to a significant extent, upon the continued services of our key personnel, including certain of our executive officers and Mr. Hamamoto in particular. For instance, the extent and nature of the experience of our executive officers and nature of the relationships they have developed with real estate developers and financial institutions are critical to the success of our business. Our executive officers have significant real estate investment experience. We cannot assure you of their continued employment with us. The loss of services of certain of our executive officers could harm our business and our prospects.

Our Board of Directors has adopted certain incentive plans to create incentives that will allow us to retain and attract the services of key employees. One of these plans is referred to as our Outperformance Plan. In order for the Outperformance Plan to have any value and for awards to be made to employees under the Outperformance Plan, the company's total return to shareholders must exceed certain levels. If these levels are not achieved, we will ultimately not grant any awards under this plan to members of our management or other of our employees who provide services to us. As a result of not achieving such levels and potentially as a result of the decline in our stock price, which has an impact on equity awards previously granted to our employees, we may be unable to motivate and retain our management and these other employees. Our inability to motivate and retain these individuals could also harm our business and our prospects. Additionally, competition for experienced real estate professionals could require us to pay higher wages and provide additional benefits to attract qualified employees, which could result in higher compensation expenses to us.

If our risk management systems are ineffective, we may be exposed to material unanticipated losses.

We continue to refine our risk management techniques, strategies and assessment methods. However, our risk management techniques and strategies may not fully mitigate the risk exposure of our operations in all economic or market environments, or against all types of risk, including risks that we might fail to identify or anticipate. Any failures in our risk management techniques and strategies to accurately quantify such risk exposure could limit our ability to manage risks in our operations or to seek adequate risk-adjusted returns. See "Business—Business Strategy".

The use of estimates and valuations may be different from actual results, which could have a material effect on our consolidated financial statements.

We make various estimates that affect reported amounts and disclosures. Broadly, those estimates are used in measuring the fair value of certain financial instruments, including financial instruments under SFAS No. 159 "Fair Value Option for Financial Assets and Financial Liabilities," accounting for

goodwill, establishing provisions for potential losses that may arise from loans that we make and potential litigation liability. Recent market volatility has made it extremely difficult to value certain of our real estate securities and term debt equity. Subsequent valuations, in light of factors then prevailing, may result in significant changes in the values of these securities in future periods. In addition, at the time of any sales and settlements of these securities, the price we ultimately realize will depend on the demand and liquidity in the market at that time and may be materially lower than our estimate of their current fair value. Estimates are based on available information and judgment. Therefore, actual values and results could differ from our estimates and that difference could have a material effect on our consolidated financial statements.

We are highly dependent on information systems, and systems failures could significantly disrupt our business.

As a financial services firm, our business is highly dependent on communications and information systems. Any failure or interruption of our systems could cause delays or other problems in our activities, which could have a material adverse effect on our financial performance, the market price of our stock and our ability to pay dividends.

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

We conduct our operations so that we are not required to register as an investment company under the Investment Company Act of 1940, as amended, or the Investment Company Act. Section 3(a)(1)(C) of the Investment Company Act defines as an investment company any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value of the issuer's total assets (exclusive of government securities and cash items) on an unconsolidated basis. Excluded from the term "investment securities," among other things, are securities issued by majority owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of investment company in Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act. Because we are a holding company that conducts its businesses through subsidiaries, the securities issued by our subsidiaries that rely on the exception from the definition of "investment company" in Section 3(c)(1) or 3(c)(7) of the Investment Company Act, together with any other investment securities we may own directly, may not have a combined value in excess of 40% of the value of our total assets on an unconsolidated basis. This requirement limits the types of businesses in which we may engage through these subsidiaries.

We believe that neither our operating partnership nor the subsidiary REIT through which we hold the substantial majority of our investments are investment companies because each of them satisfy the 40% test of Section 3(a)(1)(C). We must monitor their holdings to ensure that the value of their investment securities does not exceed 40% of their respective total assets (exclusive of government securities and cash items) on an unconsolidated basis. Certain of our other subsidiaries do not satisfy the 40% test, but instead rely on exceptions and exemptions from registration as an investment company under the Investment Company Act that either limits the types of assets these subsidiaries may purchase or the manner in which these subsidiaries may acquire and sell assets. For instance, certain of our term debt transactions rely on the exemption from registration as an investment company under the Investment Company Act provided by Rule 3a-7 thereunder, which is available for certain structured financing vehicles. This exemption limits the ability of these term debt transactions to sell their assets and reinvest the proceeds from asset sales. Our subsidiary that invests in net lease properties relies on the exception from the definition of "investment company" provided by Sections 3(c)(6) and 3(c)(5)(C) of the Investment Company Act, and certain of our other term debt transactions similarly rely on the 3(c)(5)(C) exception from the definition of "investment company." These provisions exempt companies that primarily invest in real estate, mortgages and certain other qualifying real estate assets. When a term debt transaction relies on the exception from the definition

of "investment company" provided by 3(c)(5)(C) of the Investment Company Act, the term debt transaction is limited in the types of real estate related assets that it could invest in. Our subsidiaries that engage in operating businesses and satisfy the 40% test are also not subject to the Investment Company Act.

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

Maryland takeover statutes may prevent a change of our control. This 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, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as any person who beneficially owns 10% or more of the voting power of the corporation's shares or an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation. A person is not an interested stockholder under the statute if the Board of Directors approved in advance the transaction by which he otherwise would have become an interested stockholder. However, in approving a transaction, the Board of Directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.

After the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the Board of Directors of the corporation and approved by the affirmative vote of at least 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder.

These super-majority vote requirements do not apply if the corporation's common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form previously paid by the interested stockholder for its shares.

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. The statute permits various exemptions from its provisions, including business combinations that are exempted by the Board of Directors prior to the time that the interested stockholder becomes an interested stockholder. Pursuant to the statute, our Board of Directors has exempted any business combinations (a) between us and NorthStar Capital Investment Corp. ("NCIC"), or any of its affiliates and (b) between us and any person, provided that any such business combination is first approved by our Board of Directors (including a majority of our directors who are not affiliates or associates of such person). Consequently, the five-year prohibition and the super-majority vote requirements do not apply to business combinations between us and any of them. As a result, such parties may be able to enter into business combinations with us that may not be in the best interest of our stockholders, without compliance with the supermajority vote requirements and the other provisions in the statute.

Our authorized but unissued common and preferred stock and other provisions of our charter and bylaws may prevent a change in our control.

Our charter authorizes us to issue additional authorized but unissued shares of our common stock or preferred stock and authorizes our board, without stockholder approval, to amend our charter to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we have the authority to issue. In addition, our Board of Directors may classify or reclassify any unissued shares of common stock or preferred stock and may set the preferences, rights and other terms of the classified or reclassified shares. Our board could establish a series of common stock or preferred stock that could delay or prevent a transaction or a change in control that might involve a premium price for the common stock or otherwise be in the best interest of our stockholders.

Our charter and bylaws also contain other provisions that may delay or prevent a transaction or a change in control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.

Maryland law also allows a corporation with a class of equity securities registered under the Securities Exchange Act of 1934, as amended, or the Securities Exchange Act, and at least three independent directors to elect to be subject, by provision in its charter or bylaws or a resolution of its Board of Directors and notwithstanding any contrary provision in the charter or bylaws, to a classified board, unless its charter prohibits such an election. Our charter contains a provision prohibiting such an election to classify our board under this provision of Maryland law. This makes the company more vulnerable to a change in control. If our stockholders voted to amend this charter provision and to classify our Board of Directors, the staggered terms of our directors could reduce the possibility of a tender offer or an attempt at a change in control even though a tender offer or change in control might be in the best interests of our stockholders.

Risks Related to Our REIT Tax Status

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

Moreover, new tax legislation, administrative guidance or court decisions, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to qualify as a REIT. If we were to fail to qualify as a REIT in any taxable year, we would be subject to federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates, and distributions to stockholders would not be deductible by us in computing our taxable income. Any such corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our stockholders, which in turn could have an adverse impact on the value of, and trading prices for, our stock. We hold a substantial majority of our assets in a majority owned subsidiary, which we refer to as our private REIT. Our private REIT is organized to qualify as a REIT for federal income tax purposes. Our private REIT must also meet all of the REIT qualification tests under the Internal Revenue Code. If the private REIT did not qualify as a REIT, it is likely that we would also not qualify as a REIT. If, for any reason, we failed to qualify as a REIT and we were not entitled to relief under certain Internal Revenue Code provisions, we would be unable to elect REIT status for the four taxable years following the year during which we ceased to so qualify.

Complying with REIT requirements may force us to borrow funds to make distributions to stockholders or otherwise depend on external sources of capital to fund such distributions.

To qualify as a REIT, we are required to distribute annually at least 90% of our taxable income, subject to certain adjustments, to our stockholders. To the extent that we satisfy the distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed taxable income. In addition, we may elect to retain and pay income tax on our net long-term capital gain. In that case, a shareholder would be taxed on its proportionate share of our undistributed long-term gain and would receive a credit or refund for its proportionate share of the tax we paid. A shareholder, including a tax-exempt or foreign shareholder, would have to file a federal income tax return to claim that credit or refund. Furthermore, we will be subject to a 4% nondeductible excise tax if the actual amount that we distribute to our stockholders in a calendar year is less than a minimum amount specified under federal tax laws. While we intend to continue to make distributions sufficient to avoid imposition of the 4% tax, there can be no assurance that we will be able to do so. We anticipate that distributions generally will be taxable as ordinary income, although a portion of such distributions may be designated by us as long-term capital gain to the extent attributable to capital gain income recognized by us, or may constitute a return of capital to the extent that such distribution exceeds our earnings and profits as determined for tax purposes.

From time to time, we may generate taxable income greater than our net income for financial reporting purposes due to, among other things, amortization of capitalized purchase premiums, or our taxable income may be greater than our cash flow available for distribution to stockholders (for example, if a borrower defers the payment of interest in cash pursuant to a contractual right or otherwise). If we do not have other funds available in these situations we could be required to borrow funds on unfavorable terms, sell investments at disadvantageous prices or find another alternative source of funds to make distributions sufficient to enable us to distribute enough of our taxable income to satisfy the REIT distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year. These alternatives could increase our costs or reduce our equity.

Because of the distribution requirement, it is unlikely that we will be able to fund all future capital needs, including capital needs in connection with investments, from cash retained from operations. As a result, to fund future capital needs, we likely will have to rely on third-party sources of capital, including both debt and equity financing, which may or may not be available on favorable terms or at all. Our access to third-party sources of capital will depend upon a number of factors, including the market's perception of our growth potential and our current and potential future earnings and cash distributions and the market price of our stock.

We could fail to qualify as a REIT if the Internal Revenue Service successfully challenges our treatment of our mezzanine loans and repurchase agreements.

We intend to continue to operate in a manner so as to qualify as a REIT for federal income tax purposes. However, qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which only a limited number of judicial and administrative interpretations exist. If the Internal Revenue Service, or IRS, disagrees with the application of these provisions to our assets or transactions, including assets we have owned and past transactions, our REIT qualification could be jeopardized. For example, IRS Revenue Procedure 2003-65 provides a safe harbor pursuant to which a mezzanine loan, if it meets each of the requirements contained in the Revenue Procedure, will be treated by the IRS as a real estate asset for purposes of the REIT asset tests, and interest derived from it will be treated as qualifying mortgage interest for purposes of the REIT 75% income test. Although the Revenue Procedure provides a safe harbor on which taxpayers may rely, it does not prescribe rules of substantive tax law. Moreover, our mezzanine loans typically do not meet all of the requirements for reliance on this safe harbor. We have invested, and will continue to invest, in mezzanine loans in a manner that we believe will enable us to continue to satisfy the REIT gross income and asset tests. In addition, we have entered into sale and repurchase agreements under which we nominally sold certain of our mortgage assets to a counterparty and simultaneously entered into an agreement to repurchase the sold assets. We believe that we will be treated for U.S. federal income tax purposes as the owner of the mortgage assets that are the subject of any such agreement notwithstanding that we transferred record ownership of the assets to the counterparty during the term of the agreement. It is possible, however, that the IRS could assert that we did not own the mortgage assets during the term of the sale and repurchase agreement, in which case our ability to qualify as a REIT could be adversely affected. Even if the IRS were to disagree with one or more of our interpretations and we were treated as having failed to satisfy one of the REIT qualification requirements, we could maintain our REIT qualification if our failure was excused under certain statutory savings provisions. However, there can be no guarantee that we would be entitled to benefit from those statutory savings provisions if we failed to satisfy one of the REIT qualification requirements, and even if we were entitled to benefit from those statutory savings provisions, we could be required to pay a penalty tax.

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

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

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

To qualify as a REIT for federal income tax purposes we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. As discussed above, we may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. Additionally, we may be unable to pursue investments that would be otherwise attractive to us in order to satisfy the source of income requirements for qualifying as a REIT.

We must also ensure that at the end of each calendar quarter at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets can consist of the securities of any one issuer (other than government securities and qualified real estate assets), and no more than 20% of the value of our total securities can be represented by securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we must correct such failure within 30 days after the end of the calendar quarter to avoid losing our REIT status and suffering adverse tax consequences, unless certain relief provisions apply. As a result, compliance with the REIT requirements may hinder our ability to operate solely on the basis of profit maximization and may require us to liquidate or forego otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.

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

The REIT provisions of the Internal Revenue Code may limit our ability to hedge our operations. In general, income from hedging transactions does not constitute qualifying income for purposes of the REIT 75% and 95% gross income requirements. To the extent, however, that we enter into a qualified hedging contract to reduce interest rate risk or foreign currency risk on indebtedness incurred to acquire or carry real estate assets, any income that we derive from the contract would be excluded from gross income for purposes of calculating the REIT 95% gross income test if specified requirements are met, but would not be excluded and would not be qualifying income for purposes of calculating the REIT 75% gross income test. As a result of these rules, we may have to limit our use of hedging techniques that might otherwise be advantageous, which could result in greater risks associated with interest rate or other changes than we would otherwise incur.

Liquidation of assets may jeopardize our REIT status.

To continue to qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate our mortgage, preferred equity or other investments to satisfy our obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our status as a REIT.

We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our common stock.

At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. Any of those new laws or interpretations may take effect retroactively and could adversely affect us or you as a stockholder. Legislation enacted in 2003 and 2006 generally reduced the federal income tax rate on most dividends paid by corporations to investors taxed at individual rates to a maximum of 15% through the end of 2010. REIT dividends, with limited exceptions, do not benefit from the rate reduction, because a REITs income is generally not subject to corporate level tax. As such, this legislation could cause shares in non-REIT corporations to be a more attractive investment to investors taxed at individual rates than shares in REITs and could have an adverse effect on the value of our stock.

The stock ownership restrictions of the Internal Revenue Code for REITs and the 9.8% stock ownership limit in our charter may inhibit market activity in our stock and restrict our business combination opportunities.

To qualify as a REIT, five or fewer individuals, as defined in the Internal Revenue Code may not own, actually or constructively, more than 50% in value of our issued and outstanding stock at any time

during the last half of a taxable year. Attribution rules in the Internal Revenue Code determine if any individual or entity actually or constructively owns our stock under this requirement. Additionally, at least 100 persons must beneficially own our stock during at least 335 days of a taxable year. To help insure that we meet these tests, our charter restricts the acquisition and ownership of shares of our stock.

Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our Board of Directors, no person, including entities, may own more than 9.8% of the value of our outstanding shares of stock or more than 9.8% in value or number (whichever is more restrictive) of our outstanding shares of common stock. The board may not grant an exemption from these restrictions to any proposed transferee whose ownership in excess of 9.8% of the value of our outstanding shares would result in the termination of our status as a REIT. Despite these restrictions, it is possible that there will be five or fewer individuals who own more than 50% in value of our outstanding shares, which could cause us to fail to qualify as a REIT. These restrictions on transferability and ownership will not apply, however, if our Board of Directors determines that it is no longer in our best interest to continue to qualify as a REIT.

These ownership limits could delay or prevent a transaction or a change in control that might involve a premium price for our common stock or otherwise be in the best interest of the stockholders.

Our dividends that are attributable to excess inclusion income will likely increase the tax liability of our tax-exempt stockholders, foreign stockholders, and stockholders with net operating loss.

In general, dividend income that a tax-exempt entity receives from us should not constitute unrelated business taxable income as defined in Section 512 of the Internal Revenue Code. If we realize excess inclusion income and allocate it to our stockholders, however, then this income would be fully taxable as unrelated business taxable income to a tax-exempt entity under Section 512 of the Internal Revenue Code. A foreign stockholder would generally be subject to U.S. federal income tax withholding on this income without reduction pursuant to any otherwise applicable income tax treaty. U.S. stockholders would not be able to offset such income with their net operating losses.

Although the law is not entirely clear, the IRS has taken the position that we are subject to tax at the highest corporate rate on our excess inclusion income allocated to "disqualified organizations" (generally tax-exempt investors, such as certain state pension plans and charitable remainder trusts, that are not subject to the tax on unrelated business taxable income) that own our stock in record name. To the extent that our stock owned by "disqualified organizations" is held in street name by a broker/dealer or other nominee, the broker/dealer or nominee would be liable for a tax at the highest corporate rate on the portion of our excess inclusion income allocable to the stock held on behalf of the "disqualified organizations." A regulated investment company or other pass-through entity owning our stock may also be subject to tax at the highest corporate tax rate on any excess inclusion income allocated to their record name owners that are "disqualified organizations."

Excess inclusion income could result if a REIT held a residual interest in a real estate mortgage investment conduit, or REMIC. In addition, excess inclusion income also may be generated if a REIT issues debt obligations with two or more maturities and the terms of the payments of these obligations bear a relationship to the payments that the REIT received on mortgage loans or mortgage-backed securities securing those debt obligations. Although we do not hold any REMIC residual interests, we anticipate that certain of the term debt transactions conducted by our private REIT will produce excess inclusion income that will be allocated to our stockholders. Accordingly, we expect that a portion of our dividends will constitute excess inclusion income, which will likely increase the tax liability of tax-exempt stockholders, foreign stockholders, stockholders with net operating losses, regulated investment companies and other pass-through entities whose record name owners are disqualified

organizations, and brokers/dealers and other nominees who hold stock on behalf of disqualified organizations.

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

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

Because of the inability to offset capital losses against ordinary income, we may have REIT taxable income, which we would be required to distribute to our stockholders, in a year in which we are not profitable under GAAP principles or other economic measures.

We may deduct our capital losses only to the extent of our capital gains, and not against our ordinary income, in computing our REIT taxable income for a given taxable year. Consequently, we could have REIT taxable income, and would be required to distribute such income to our stockholders, in a year in which we are not profitable under GAAP principles or other economic measures.

We may lose our REIT status if the IRS successfully challenges our characterization of our income from our foreign taxable REIT subsidiaries.

We have elected to treat several Cayman Islands companies, including issuers in term debt transactions, as taxable REIT subsidiaries. We intend to treat certain income inclusions received with respect to our equity investments in those foreign taxable REIT subsidiaries as qualifying income for purposes of the 95% gross income test but not the 75% gross income test. Because there is no clear precedent with respect to the qualification of such income for purposes of the REIT gross income tests, no assurance can be given that the IRS will not assert a contrary position. In the event that such income was determined not to qualify for the 95% gross income test, we could be subject to a penalty tax with respect to such income to the extent it exceeds 5% of our gross income or we could fail to qualify as a REIT.

If our foreign taxable REIT subsidiaries are subject to U.S. federal income tax at the entity level, it would greatly reduce the amounts those entities would have available to distribute to us and that they would have available to pay their creditors.

There is a specific exemption from federal income tax for non-U.S. corporations that restrict their activities in the United States to trading stock and securities (or any activity closely related thereto) for their own account whether such trading (or such other activity) is conducted by the corporation or its employees through a resident broker, commission agent, custodian or other agent. We intend that our foreign taxable REIT subsidiaries will rely on that exemption or otherwise operate in a manner so that they will not be subject to U.S. federal income tax on their net income at the entity level. If the IRS were to succeed in challenging that tax treatment, it would greatly reduce the amount that those foreign taxable REIT subsidiaries would have available to pay to their creditors and to distribute to us.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

Our investments in net lease properties, which comprise our net lease business segment, are described under "Net Lease Properties." The following table sets forth certain information with respect to each of our net lease properties as of December 31, 2007:

Net Lease Portfolio: Property Information
Location City, State	Square Feet	Number of Buildings	Ownership Interest	Property Type	Leasehold Expiration Date	Lease/Sublease Expiration Date	Mortgage Debt (In Thousands)
Bloomingdale, IL	50,000	1	Leasehold	Retail	January 2027	January 2022	$	5,822
Concord Holdings, NH	50,000 20,087	1 1	Fee Fee	Retail Retail	N/A N/A	January 2016 May 2016		8,505 —
Fort Wayne, IN	50,000	1	Leasehold	Retail	January 2040	August 2024		3,555
Keene, NH	45,471	1	Fee	Retail	N/A	October 2020		6,882
Melville, NY	46,533	1	Leasehold	Retail	January 2022	January 2022		4,516
Millbury, MA	54,175	1	Leasehold	Retail	January 2024	January 2024		4,800
New York, NY	17,665 7,500 10,800	1 1 1	Leasehold Leasehold Leasehold	Retail Retail Retail	July 2015 December 2012 April 2029	July 2016 December 2012 June 2017		— — —
North Attleboro, MA	50,025	1	Leasehold	Retail	January 2024	January 2024		4,782
Portland, ME	52,900	1	Leasehold	Retail	November 2025	August 2023		4,984
Wichita, KS	48,780	1	Fee	Retail	N/A	March 2023		6,223
Auburn Hills, MI	105,692	2	Fee	Office	N/A	September 2015		11,609
Aurora, CO	183,529	1	Fee	Office	N/A	June 2015		33,500
Camp Hill, PA	214,150	1	Fee	Office	N/A	September 2015		25,638
Columbus, OH	199,112	1	Fee	Office	N/A	November 2017		24,033
Fort Mill, SC	165,000	1	Fee	Office	N/A	October 2020		30,909
Indianapolis, IN	333,600	1	Fee	Office	N/A	December 2025		28,600
Los Angeles, CA	97,336 160,000	1 2	Leasehold Fee	Office Office	May 2039 N/A	June 2015 June 2015		20,378 33,532
Milpitas, CA	178,213	2	Fee	Office	N/A	February 2017		22,959
Rancho Cordova, CA	68,000	1	Fee	Office	N/A	September 2015		11,125
Rockaway, NJ	15,038 106,000	1	Fee Fee	Office Office	N/A N/A	May 2015 July 2017		17,480
Salt Lake City, UT	117,553	1	Fee	Office	N/A	April 2012		16,231
Springdale, OH	173,145 174,554 139,264	1 1 1	Fee Fee Fee	Office Office Office	N/A N/A N/A	December 2009 December 2011 March 2010		19,208 16,586 15,686
Reading, PA	609,000	1	Fee	Distribution Center	N/A	November 2017		19,386
Albemarle, NC	19,649	1	Fee	Healthcare	N/A	October 2021		2,275
Black Mountain, NC	36,235	1	Fee	Healthcare	N/A	July 2021		4,896
Blountstown, FL	33,722	1	Fee	Healthcare	N/A	July 2021		3,719
Bremerton, WA	68,601	1	Fee	Healthcare	N/A	October 2021		6,750

Brevard, NC

19,778
18,174

1
1

Fee
Fee

Healthcare
Healthcare

N/A
N/A

October 2021
August 2020

1,725
2,097

Burnsville, NC

22,383

Fee

Healthcare

N/A

October 2022

2,625

Caroltton, GA

49,000

Fee

Healthcare

N/A

January 2017

2,988

Castletown, IN

46,026

Fee

Healthcare

N/A

June 2016

6,813

Charleston, IL

39,393

Fee

Healthcare

N/A

January 2017

5,862

Charlotte, NC

26,000

Fee

Healthcare

N/A

October 2021

2,500

Cherry Springs, NC

20,000

Fee

Healthcare

N/A

March 2016

2,786

Chesterfield, IN

19,062

Fee

Healthcare

N/A

June 2017

4,075

Cincinnati, OH

69,806

Fee

Healthcare

N/A

January 2017

11,468

Clemmons, NC

30,929

Fee

Healthcare

N/A

April 2022

3,250

Clinton, NC

25,688

Fee

Healthcare

N/A

May 2020

2,336

Clinton, OK

31,377

Fee

Healthcare

N/A

January 2017

1,355

Columbia City, IN

22,395

Fee

Healthcare

N/A

June 2017

8,079

Daly City, CA

26,262
78,482

1
1

Fee
Leasehold

Healthcare
Healthcare

N/A
August 2021

August 2021
August 2021

3,463
7,937

Denmark, WI

8,320

Fee

Healthcare

N/A

January 2017

1,219

Dunkirk, IN

19,140

Fee

Healthcare

N/A

June 2017

2,132

East Arlington, TX

26,552

Fee

Healthcare

N/A

December 2013

3,413

Edenton, NC

24,228

Fee

Healthcare

N/A

October 2022

2,625

Effingham, IL

39,393
7,808

1
1

Fee
Fee

Healthcare
Healthcare

N/A
N/A

January 2017
January 2017

4,617
553

Elk City, OK

51,989

Fee

Healthcare

N/A

January 2017

4,384

Elk Park, NC

22,383

Fee

Healthcare

N/A

October 2022

2,625

Fairfield, IL

39,393

Fee

Healthcare

N/A

January 2017

6,418

Fort Wayne, IN

31,500

Leasehold

Healthcare

N/A

June 2017

4,895

Franklin, WI

27,556

Fee

Healthcare

N/A

January 2017

6,366

Fullerton, CA

26,200
5,500

1
1

Fee
Fee

Healthcare
Healthcare

N/A
N/A

January 2017
January 2017

7,631
797

Garden Grove, CA

26,500

Fee

Healthcare

N/A

January 2017

11,228

Gastonia, NC

12,215

Fee

Healthcare

N/A

August 2020

1,847

Green Bay, WI

23,768

Fee

Healthcare

N/A

January 2017

3,173

Grove City

20,672

Fee

Healthcare

N/A

January 2017

1,887

Harrisburg, IL

36,393

Fee

Healthcare

N/A

January 2017

3,690

Hartford City, IN

22,400

Fee

Healthcare

N/A

June 2009

2,096

Haysville, NC

22,383

Fee

Healthcare

N/A

October 2022

2,625

Hillsboro, OR

286,652

Fee

Healthcare

N/A

December 2013

33,300

Hobart, IN

43,854

Fee

Healthcare

N/A

June 2017

5,958

Huntington, IN

31,169

Fee

Healthcare

N/A

June 2017

4,548

Indianapolis, IN

36,416

Fee

Healthcare

N/A

June 2017

2,251

Kenosha, WI

22,958

Fee

Healthcare

N/A

January 2017

4,130

Kingfisher, OK

26,698

Fee

Healthcare

N/A

January 2017

3,994

La Vista, NE

26,683

Fee

Healthcare

N/A

January 2017

4,296

LaGrange, IN

9,872
46,539

1
1

Fee
Fee

Healthcare
Healthcare

N/A
N/A

June 2017
June 2017

519
5,115

Lancaster, OH

21,666

Fee

Healthcare

N/A

January 2017

2,636

Madison, WI

25,411

Fee

Healthcare

N/A

January 2017

4,275

Manitowoc, WI

30,679

Fee

Healthcare

N/A

January 2017

5,017

Marysville, OH

16,992

Fee

Healthcare

N/A

January 2017

1,693

Mattoon, IL

39,393
39,393

1
1

Fee
Fee

Healthcare
Healthcare

N/A
N/A

January 2017
January 2017

6,954
5,677

McFarland, WI

25,700

Fee

Healthcare

N/A

January 2017

3,833

Memphis, TN

73,381

Fee

Healthcare

N/A

January 2017

14,681

Menomonee, WI

30,176

Fee

Healthcare

N/A

January 2017

6,075

Middletown, IN

18,500

Fee

Healthcare

N/A

June 2017

3,424

Mooresville, IN

24,945

Fee

Healthcare

N/A

June 2017

1,530

Morris, IL

94,719

Fee

Healthcare

N/A

March 2016

6,982

Mt. Sterling, KY

67,706

Fee

Healthcare

N/A

January 2022

7,650

Oklahoma City, OK

45,187

Fee

Healthcare

N/A

January 2017

4,453

Olney, IL

39,393
25,185

1
1

Fee
Fee

Healthcare
Healthcare

N/A
N/A

January 2017
January 2017

4,243
2,463

Paris, IL

39,393

Fee

Healthcare

N/A

January 2017

6,836

Peru, IN

36,861

Fee

Healthcare

N/A

June 2017

6,457

Plymouth, IN

39,092

Fee

Healthcare

N/A

June 2017

5,278

Portage, IN

38,205

Fee

Healthcare

N/A

June 2017

7,071

Racine, WI

26,583

Fee

Healthcare

N/A

January 2017

10,050

Raleigh, NC

52,697

Fee

Healthcare

N/A

April 2022

3,250

Rantoul, IL

39,393

Fee

Healthcare

N/A

January 2017

5,639

Robinson, IL

29,161

Fee

Healthcare

N/A

January 2017

4,006

Rockford, IL

54,000

Fee

Healthcare

N/A

January 2017

4,961

Rockport, IN

26,000

Fee

Healthcare

N/A

June 2017

1,723

Roxboro, NC

18,174

Fee

Healthcare

N/A

August 2020

3,301

Rushville, IN

13,118
35,304

1
1

Fee
Fee

Healthcare
Healthcare

N/A
N/A

June 2017
June 2017

554
4,108

Santa Ana, CA

24,500

Fee

Healthcare

N/A

January 2017

7,934

Sheboygan, WI

39,784

Fee

Healthcare

N/A

January 2017

9,300

Stephenville, TX

28,875

Fee

Healthcare

N/A

January 2017

6,187

Sterling, IL

149,008

Fee

Healthcare

N/A

March 2016

2,018

Stevens Point, WI

26,443

Fee

Healthcare

N/A

January 2017

8,487

Stoughton, WI

24,686

Fee

Healthcare

N/A

January 2017

1,686

Sullivan, IN

18,415
44,077

1
1

Fee
Fee

Healthcare
Healthcare

N/A
N/A

January 2017
January 2017

891
4,930

Sycamore, IL

54,000

Fee

Healthcare

N/A

January 2017

8,509

Syracuse, IN

57,980

Fee

Healthcare

N/A

January 2017

3,514

Tipton, IN

50,000

Fee

Healthcare

N/A

June 2017

6,937

Tuscola, IL

36,393

Fee

Healthcare

N/A

January 2017

4,185

Two Rivers, WI

14,369

Fee

Healthcare

N/A

January 2017

2,708

Vandalia, IL

39,393

Fee

Healthcare

N/A

January 2017

7,345

Wabash, IN

70,746
35,374

1
1

Fee
Fee

Healthcare
Healthcare

N/A
N/A

June 2017
June 2017

3,711
1,308

Wakarusa, IN

89,828
48,000

1
1

Fee
Fee

Healthcare
Healthcare

N/A
N/A

June 2017
June 2017

6,492
10,084

Warsaw, IN

25,514

Fee

Healthcare

N/A

June 2017

3,658

Washington Crt Hse, OH

19,660

Fee

Healthcare

N/A

January 2017

1,995

Wausau, WI

24,047

Fee

Healthcare

N/A

January 2017

7,553

Weatherford, OK

53,000

Fee

Healthcare

N/A

January 2017

4,519

Wendell, NC

26,926

Fee

Healthcare

N/A

August 2020

2,344

Wichita, KS

81,810

Fee

Healthcare

N/A

December 2019

9,188

Williamston, NC

18,174

Fee

Healthcare

N/A

August 2020

3,195

Windsor, NC

24,228

Fee

Healthcare

N/A

October 2022

2,625

Winston Salem, NC

33,592

Fee

Healthcare

N/A

March 2020

3,524

Winter Garden, FL

37,322

Fee

Healthcare

N/A

February 2016

4,954

Wisconsin Rapids, WI

20,869

Fee

Healthcare

N/A

January 2017

1,129

Yanceyville, NC

38,283

Fee

Healthcare

N/A

August 2020

4,375

Total

7,592,921

147

912,365

Item 3. Legal Proceedings

We are not subject to any material legal proceedings.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of our security holders during the fourth quarter of 2007.

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock is listed on the New York Stock Exchange under the symbol "NRF".

The following table sets forth the high, low and last sales prices for our common stock, as reported on the New York Stock Exchange, and dividends per share for the periods indicated.

Period	High		Low		Close		Dividends
2006
First Quarter	$	11.07	$	9.99	$	10.95	$	0.30
Second Quarter	$	12.10	$	10.50	$	12.01	$	0.30
Third Quarter	$	13.15	$	11.32	$	12.70	$	0.34
Fourth Quarter	$	16.71	$	12.64	$	16.57	$	0.35
2007
First Quarter	$	18.15	$	13.50	$	15.21	$	0.36
Second Quarter	$	15.65	$	11.88	$	12.51	$	0.36
Third Quarter	$	13.25	$	7.61	$	9.93	$	0.36
Fourth Quarter	$	11.02	$	7.85	$	8.92	$	0.36

On April 25, 2007, we declared a cash dividend of $0.36 per share of common stock. The dividend was paid on May 15, 2007 to the stockholders of record as of the close of business on May 7, 2007.

On July 24, 2007, we declared a cash dividend of $0.36 per share of common stock. The dividend was paid on August 15, 2007 to the stockholders of record as of the close of business on August 7, 2007.

On October 23, 2007, we declared a cash dividend of $0.36 per share of common stock. The dividend was paid on November 15, 2007 to the stockholders of record as of the close of business on November 7, 2007.

On January 22, 2008, we declared a dividend of $0.36 per share of common stock, payable with respect to the quarter ended December 31, 2007, to stockholders of record as of February 5, 2008. We made this payment on February 15, 2008.

On February 27, 2008, the closing sales price for our common stock, as reported on the NYSE, was $8.12. As of February 27, 2008, there were 63 record holders of our common stock. This figure does not reflect the beneficial ownership of shares held in nominee name.

Performance Graph

Set forth below is a graph comparing the cumulative total stockholder return on shares of our common stock with the cumulative total return of the NAREIT All REIT Index and the Russell 2000 Index. The period shown commences on October 26, 2004, the date that our common stock began trading on the NYSE after it was first registered under Section 12 of the Exchange Act, and ends on December 31, 2007, the end of our most recently completed fiscal year. The graph assumes an investment of $100 on October 26, 2004 and the reinvestment of any dividends. The stock price performance shown on this graph is not necessarily indicative of future price performance. The information in the graph and the table below was obtained from SNL Financial.

	Period Ending
Index	Period Ending
Index	10/26/04	12/31/04	12/31/05	12/31/06	12/31/07
NorthStar Realty Finance Corp.	100.00	130.86	122.93	220.64	135.08
Russell 2000	100.00	113.11	118.27	139.99	137.80
NAREIT All REIT Index	100.00	109.69	118.78	159.58	131.12

Equity Compensation Plan Information

The following table summarizes information, as of December 31, 2007, relating to our equity compensation plans pursuant to which grants of securities may be made 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 Available for Future Issuance
Approved by Security Holders:
	2004 Omnibus Stock Incentive Plan		4,786,236	(1)	n/a	4,026,183	(1)
	2004 Long-Term Incentive Bonus Plan		698,142		n/a	—	(2)

		Total	5,484,378		n/a	4,026,183

(1): Represents units of partnership interest which are structured as profits interest, or LTIP Units, in our operating partnership. Conditioned on minimum allocation to the capital accounts of the LTIP Unit for federal income tax purposes, each LTIP Unit may be converted, at the election of the holder, into one common unit of limited partnership interest in our operating partnership, or OP Units. Each of the OP Units underlying these LTIP Units are redeemable at the election of the OP Unit holder for: (i) cash equal to the then fair market value of one share of our common stock; or (ii) at the option of the Company in its capacity as general partner of our operating partnership, one share of our common stock.
(2): As of December 31, 2007, the return hurdles established by the compensation committee of our Board of Directors for the two performance periods were achieved.

Item 6. Selected Financial Data

The information below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the combined financial statements of our predecessor and the respective related notes, each included elsewhere in this Form 10-K.

Our predecessor is an aggregation, on a combined and uncombined basis, of the entities through which NCIC owned and operated its subordinate real estate debt, real estate securities and net lease properties businesses and was not a separate legal operating entity. The entities controlled by NCIC are combined in our predecessor's historical financial statements. Where our predecessor had a non-controlling interest in any of the entities that comprised our predecessor, such entities are presented as part of our predecessor on an uncombined basis. The selected combined historical financial information presented for the period January 1, 2004 to October 28, 2004 and for the year ended December 31, 2003 relates to the operations of our predecessor. The selected combined historical financial information presented for the year ended December 31, 2003 has been derived from the audited combined statements of operations of our predecessor. The selected historical consolidated information presented for the years ended December 31, 2007, 2006, 2005 and the period October 29, 2004 to December 31, 2004 relates to our operations and has been derived from our audited consolidated statement of operations included in this Annual Report on Form 10-K or our prior Annual Reports on Form 10-K.

Our consolidated financial statements include our majority-owned subsidiaries which we control. Where we have a non-controlling interest, such entity is reflected on an unconsolidated basis.

			The Company												The Predecessor (Combined)
															Period January 1, 2004 to October 28, 2004
												Period October 29, 2004 to December 31, 2004
			Year Ended December 31,
			Year Ended December 31,															Year Ended December 31, 2003
			2007			2006			2005									Year Ended December 31, 2003
			(In Thousands, Except per Share Amounts)
Statements of Operations Data:
Revenues:
	Interest income		$	292,135		$	134,847		$	40,043		$	3,990		$	31		$	502
	Interest income—related parties			13,516			11,671			8,374			727			1,828			—
	Rental and escalation income			95,755			37,546			11,403			510			—			—
	Advisory and management fee income—related parties			7,658			5,906			4,813			665			2,437			1,026
	Other revenue			6,249			5,874			464			38			185			64

		Total revenues		415,313			195,844			65,097			5,930			4,481			1,592
Expenses:
	Interest expense			242,560			104,239			32,568			3,352			285			—
	Real estate properties—operating expenses			8,709			8,552			2,044			185			—			—
	Asset management fees—related party			4,368			594			—			—			—			—
	Fund raising fees and other joint venture costs			6,295			—			—			—			—			—
General and administrative
Direct:
	Salaries and equity based compensation(1)			36,148			22,547			11,337			3,788			953			1,289
	Shared services—related party			—			—			1,145			231			—			—
	Auditing and professional fees			6,787			4,765			3,634			790			—			—
	Other general and administrative			13,626			7,739			2,881			1,043			181			203
Allocated:
	Salaries and other compensation			—			—			—			—			3,060			2,146
	Insurance			—			—			—			—			318			252
	Other general and administrative			—			—			—			—			925			1,098

Total general and administrative				56,561			35,051			18,997			5,852			5,437			4,988
	Depreciation and amortization			33,191			13,578			4,352			190			—			—

	Total expenses			351,684			162,014			57,961			9,579			5,722			4,988
Income (loss) from operations				63,629			33,830			7,136			(3,649	)		(1,241	)		(3,396	)
Equity in (loss) earnings of unconsolidated ventures				(11,684	)		432			226			83			1,520			2,048
Unrealized gain (loss) on investments and other				(4,330	)		4,934			867			200			279			1,219
Realized gain on investments and other				3,559			1,845			2,160			293			636			1,866

Income (loss) from continuing operations before minority interest				51,174			41,041			10,389			(3,073	)		1,194			1,737
Minority interest in operating partnerships				(2,702	)		(3,938	)		(2,116	)		632			—			—
Minority interest in joint ventures				(580	)		(68	)		—			—			—			—

Net income (loss) from continuing operations				47,892			37,035			8,273			(2,441	)		1,194			1,737
Income (loss) from discontinued operations, net of minority interest				(56	)		306			547			2			—			—
Gain (loss) on sale of discontinued operations, net of minority interest				—			445			28,852			—			—			—
Gain on sale of joint venture interest, net of minority interest				—			279			—			—			—			—

Net income (loss)				47,836			38,065			37,672			(2,439	)		1,194			1,737
Preferred stock dividends				(16,533	)		(860	)		—			—			—			—

Net income available to common stockholders			$	31,303		$	37,205		$	37,672		$	(2,439	)	$	1,194		$	1,737

Net income (loss) per share from continuing operations			$	0.51		$	0.91		$	0.38		$	(0.12	)		—			—
Income per share from discontinued operations (basic/diluted)				—			0.01			0.03			—			—			—
Gain per share on sale of discontinued operations and joint venture interest (basic/diluted)				—			0.02			1.33			—			—			—

Net income (loss) per share available to common stockholders			$	0.51		$	0.94		$	1.74		$	(0.12	)		—			—

Common stock dividends declared			$	87,948		$	44,600		$	11,268		$	—			—			—
Preferred stock dividends declared			$	16,533		$	860		$	—		$	—			—			—
Weighted average number of shares of common stock outstanding:
	Basic			61,510,951			39,635,919			21,660,993			20,868,865			—			—
	Diluted			65,086,953			44,964,455			27,185,013			25,651,027			—			—

(1): For the year ended December 31, 2007, 2006, 2005 and the period from October 29, 2004 to December 31, 2004, includes $16,007, $9,080, $5,847 and $2,991 equity based compensation, respectively.

	December 31,
	2007		2006		2005		2004		2003
	(In Thousands, Except per Share Amounts)
Balance Sheet Data
Operating real estate—net	$	1,134,136	$	468,608	$	198,708	$	43,544	$	—
Trading securities		—		—		—		826,611		—
Available for sale securities, at fair value		549,522		788,467		149,872		37,692		9,187
Real estate debt investments		2,007,022		1,571,510		681,106		70,569		—
Corporate loan investments		457,139		—		—		—		—
Investments in and advances to unconsolidated/uncombined ventures		33,143		11,845		5,458		5,363		15,537
Total assets		4,792,782		3,185,620		1,156,565		1,078,078		32,815
Mortgage notes and loans payable		912,365		390,665		174,296		40,557		—
Exchangeable senior notes		172,500		—		—		—		—
Bonds payable		1,654,185		1,682,229		300,000		—		—
Credit facilities		501,432		16,000		243,002		27,821		—
Secured term loan		416,934		—		—		—		—
Liability to subsidiary trusts issuing preferred securities		286,258		213,558		108,258		—		—
Repurchase obligations		1,864		80,261		7,054		800,418		—
Total liabilities		4,152,248		2,502,990		863,862		902,322		322
Minority interest in operating partnership		7,534		7,655		44,278		32,447		—
Stockholders' equity		618,039		659,771		248,425		143,309		32,493
Total liabilities and stockholders' equity	$	4,792,782	$	3,185,620	$	1,156,565	$	1,078,078	$	32,815

		The Company (Consolidated)												The Predecessor (Combined)
														Period January 1, 2004 to October 28, 2004
		Year Ended December 31,									Period October 29, 2004 to December 31, 2004
		Year Ended December 31,															Year Ended December 31, 2003
		2007			2006			2005									Year Ended December 31, 2003
		(In Thousands)
Other Data:
Cash Flow from:
	Operating activities from continuing operations	$	102,238		$	53,998		$	849,625		$	(828,783	)	$	2,440		$	1,289
	Investing activities		(2,373,929	)		(1,852,961	)		(881,090	)		(108,032	)		(19,197	)		(9,830	)
	Financing activities		2,380,767			1,815,828			11,630			981,923			18,369			9,554

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included in Item 8 of this report.

Organization and Overview

We are an internally-managed REIT that was formed in October 2003 to continue and expand the real estate debt, real estate securities and net lease businesses of our predecessor. Upon the consummation of our IPO, three subsidiaries of our predecessor contributed 100% of their respective interests in entities through which our predecessor engaged in these businesses in exchange for units of limited partnership interest in our operating partnership and approximately $36.1 million in cash.

We commenced operations upon the consummation of our IPO. We conduct substantially all of our operations and make our investments through our operating partnership, of which we are the sole general partner. Through our operating partnership, NorthStar Realty Finance Limited Partnership, including its subsidiaries, we primarily:

•: originate, structure and acquire senior and subordinate debt investments secured primarily by commercial and multifamily properties;

•: invest in, create and manage portfolios of primarily investment grade commercial debt, including CMBS, REIT unsecured debt and credit-tenant loans; and
•: acquire office, industrial, retail and healthcare related properties that are primarily net leased to corporate tenants.

We believe that these businesses are complementary to each other due to their overlapping sources of investment opportunities, common reliance on real estate fundamentals and ability to utilize securitization to finance assets and enhance returns. We seek to match-fund our real estate securities and real estate debt investments primarily by issuing term debt, obtaining secured term financing and accessing private equity.

Sources of Operating Revenues

We primarily derive revenues from interest income on the real estate debt investments that we originate with borrowers or acquire from third parties, our corporate loan investments and our real estate securities in which we invest. We generate rental income from our net lease investments. We also generate interest revenues from our ownership interest in non-consolidated securities term debt transaction issuances and advisory fee income, and income from our unconsolidated ventures. Other income comprises a much smaller and more variable source of revenues and is generated principally from fees associated with early loan repayments and gains/losses from sales of securities.

We primarily derive income through the difference between the interest and rental income we are able to generate from our investments, and the cost at which we are able to obtain financing for our investments. In order to protect this difference, or "spread", we seek to match-fund our investments using secured sources of long term financing such as term debt transaction financings, mortgage financings and long-term unsecured subordinate debt. Match-funding means that we try to obtain debt with maturities equal to our asset maturities, and borrow funds at interest rate benchmarks similar to our assets. Match-funding results in minimal impact to spread when interest rates are rising and falling and minimizes refinancing risk since our asset maturities match those of our debt.

Real Estate Debt

We primarily earn interest income from real estate debt investments. At December 31, 2007, our real estate debt portfolio consisted of approximately $2.0 billion of funded structured senior and subordinate debt investments. We completed 41 financings in 2007, 74 in 2006, 44 in 2005 and three for the period of October 29, 2004 to December 31, 2004. Whole loan first mortgages comprised 57.9% of our funded investment volume in 2007, and 68.9% in 2006.

Approximately 87.9% of our loan assets generate interest income based upon a floating index, primarily one-month LIBOR, plus a credit spread. Our revenues will be impacted by changes in LIBOR. However, we seek to minimize the impact of changes in floating interest rates by financing floating rate assets with floating rate debt having interest rates benchmarked to the same index as our assets. Decreases in floating interest rates will result in lower income for our stockholders, notwithstanding the match-funding of floating rate assets with floating rate liabilities.

Real Estate Securities

We earn interest income from real estate fixed income securities and management fees from our Securities Fund and off-balance sheet term debt transactions. During 2007, we raised $81 million of third-party capital to form the Securities Fund. At closing, we sold our equity interest in N-Star IX, our most recent term debt transaction completed in February 2007 and other securities interests to the Securities Fund. Similar to our real estate debt business, we seek to minimize the impact of floating interest rates by funding floating rate assets with floating rate debt and by hedging fixed rate assets funded with floating rate debt.

Net Lease Properties

We earn rental and escalation income from our net leased properties. During 2007, we acquired $125.9 million of core net lease properties. Despite the competitive environment for the first half of 2007, we were able to utilize our relationships and expertise in working through complicated structuring issues to find investments in primary and secondary markets that we believe will generate attractive risk adjusted returns and produce a stable income stream. As part of our business strategy to expand our net lease business into underserved real estate sectors, we partnered with experts in the healthcare- related net lease business in 2006 and formed the Wakefield joint venture. The joint venture acquired approximately $591.0 million of healthcare facilities in 2007. We believe there will be increasing demand for healthcare-related facilities with the anticipated growth in the aging U.S. population.

Corporate Loan Investments

Through our Monroe Capital joint venture we make senior and subordinate secured loans to middle-market corporations. These loans are typically widely syndicated to participants in the middle-market lending industry, carry floating rates of interest and generate interest income and origination fees. We have originated or acquired 108 corporate loan investments with a carrying value of approximately $457.1 million as of December 31, 2007.

Profitability and Performance Metrics

We calculate several metrics to evaluate the profitability and performance of our business.

Adjusted funds from operations: ("AFFO") (see "Non-GAAP Financial Measures—Funds from Operations and Adjusted Funds from Operations for a description of this metric).

Return on Equity ("ROE"), before and after general and administrative expenses. We calculate return on equity using AFFO, inclusive and exclusive of general and administrative expenses, divided by average common book equity during the period as a measure of the profitability generated by our assets and company on common stockholders' equity invested.

Assets Under Management ("AUM") growth is a key driver of our ability to grow our earnings.

Credit Risk Management is our ability to manage our assets in a manner that preserves principal and income and minimizes credit losses that would decrease income.

Corporate Expense Management influences the profitability of our business, and we must balance making appropriate investments in our infrastructure and employees with a recognition that our accounting, finance, legal and risk management infrastructure does not directly generate quantifiable revenues for the Company. We frequently refer to general and administrative expenses, excluding stock- based compensation expense, divided by total revenues as a measure of our efficiency in managing expenses.

Availability and cost of capital will impact our profitability and earnings since we must raise new capital to fund a majority of our AUM growth.

Book Value

Under generally accepted accounting principles, assets in our on balance sheet term debt vehicles are marked-to-market through other comprehensive income, while our related match-funded liabilities are carried at historical cost. Since the second quarter of 2007, this accounting mismatch has negatively impacted our book value. For example, as of December 31, 2007, our only on-balance sheet securities term debt vehicle, N-Star VII, had a cumulative negative mark-to-mark adjustment of $102.3 million, resulting in a net negative $74.6 million carrying value for our retained interest in the financing, even though N-Star VII is 100% non-recourse to us and there were no delinquent or non-performing assets in this vehicle. We believe we could recoup a portion of the lost book value resulting from the accounting mismatch between our mark-to-market assets and liabilities by electing the one-time irrevocable option to fair value the liabilities in our term debt vehicles, as well as fair valuing our unsecured convertible notes and trust preferred securities, under FASB 159—"Fair Value Option",

which became effective on January 1, 2008. The adoption of FASB 159 will be reflected in our financial statements for the quarter ending March 31, 2008.

Outlook and Recent Trends

In early 2007, the subprime residential lending and single family housing markets 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 real estate, corporate and other credit and equity markets even though underlying fundamentals outside of the residential real estate sector continued to show strong performance and credit metrics. Although we do not have any direct subprime exposure or direct exposure to the single family mortgage market, the factors described above have resulted in substantially reduced mortgage loan originations and securitizations, and are precipitating more generalized credit market dislocations and a significant contraction in available credit. As a result, most financial industry participants, including commercial real estate lenders and investors, are finding it difficult to obtain cost-effective debt capital to finance new investment activity or to refinance maturing debt. The U.S. Federal Reserve, or the "Federal Reserve," has responded to these conditions by lowering the federal funds rate from a high of 5.25% in September 2007 to 3.00% currently; however, many economists believe that the U.S. economy is either near or in a recession.

Low interest rates are generally good for commercial real estate values because the discount rate applied to underlying cash flows should be lower, and low rates are also good for loan credit because debt service costs are lower while underlying values are supported. Notwithstanding liquidity infusion by the Federal Reserve, capital markets conditions remain challenging and we believe commercial real estate valuations will be stressed in 2008 from weaker economic conditions and a scarcity of capital.

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 market place 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, the number of lenders participating in the market may change at an accelerated pace. Further, many lenders depend on the capital markets in order to finance their portfolio of commercial loans. Lenders are forced to increase the credit spread at which they are willing to lend as liquidity in the capital market decreases. As the market tightens, many warehouse lenders have requested additional collateral or repayments with respect to their loans in order to maintain margins that are acceptable to them.

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.

We responded to these difficult conditions by decreasing investment activity when we observed deteriorating residential market conditions, raised $172.5 million of unsecured corporate capital in late June 2007 as a defensive measure and diverted resources to our portfolio management group and to syndicating loans to generate liquidity. We expect credit to be more challenged in 2008 and believe we have the resources to quickly identify potential issues and to act aggressively to protect our invested capital.

Approximately $4 billion of our term debt transaction liabilities (including the off-balance sheet and on-balance sheet financings) are in their reinvestment periods which means when the underlying assets repay we are able to reinvest the proceeds in new assets without having to repay the liabilities. Because credit spreads are currently much wider than when we issued these liabilities, we currently expect to earn a higher return on equity on capital which is repaid and reinvested in this market. Approximately $427.0 million of our funded loan commitments have their initial maturity date in 2008. However, all of the loans contain extension options of at least six months (many subject to performance criteria) so it is difficult to estimate how much capital from initial maturities or early pre-payments may be recycled into higher earning investments in 2008.

We believe that in the longer term, liquidity and attractive pricing could return to the commercial real estate finance markets but that in the near term, new financing sources must be developed in order to attractively finance new investment activity. We believe these sources will include term loans from financial institutions and life companies, more restrictive commercial real estate finance structures which may not permit reinvestment from asset repayments and financing provided by motivated sellers of assets.

Critical Accounting Policies

Our accounting policies are more fully described in Note 1 of the consolidated financial statements included in Item 8 of this report. As disclosed in Note 1, the preparation of financial statements in conformity with U.S. generally accepted accounting principles, or U.S. GAAP, requires the use of estimates and assumptions that could affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Actual results could differ significantly from those estimates. Management has identified certain critical accounting policies that affect the more significant judgments and estimates used by management in the preparation of our consolidated financial statements. Management evaluates on an ongoing basis estimates related to critical accounting policies, including those related to revenue recognition, allowances for doubtful accounts receivable and impairment of investments in uncombined ventures and debt securities available for sale. The estimates are based on information that is currently available to management, as well as on various other assumptions that management believes are reasonable under the circumstances.

Principles of Consolidation

The consolidated financial statements include our accounts and our majority-owned subsidiaries and variable interest entities ("VIE") where we are deemed the primary beneficiary in accordance with the provisions and guidance of Financial Accounting Standards Board ("FASB") Interpretation No. 46R,"Consolidation of Variable Interest Entities" ("Fin 46(R)"). All significant intercompany balances have been eliminated in consolidation.

Operating Real Estate

In accordance with Statement of Financial Standards ("SFAS 144") "Accounting for the Impairment or Disposal of Long-Lived Assets," a property to be disposed of is reported at the lower of its carrying value or its estimated fair value less the cost to sell. Once an asset is determined to be held for sale, depreciation and straight-line rental income are no longer recorded. In addition, the asset is reclassified to assets held for sale on the consolidated balance sheet and the results of operations are reclassified to income (loss) from discontinued operations in our consolidated statements of operations.

In accordance with SFAS No. 141 "Business Combinations" ("SFAS 141"), we allocate the purchase price of operating properties to land, building, tenant improvements, deferred lease cost for the origination costs of the in-place leases and to intangibles for the value of the above or below market leases. We amortize the value allocated to the in-place leases over the remaining lease term.

The value allocated to the above or below market leases are amortized over the remaining lease term as an adjustment to rental income.

Available for Sale Securities

We determine the appropriate classification of our investments in securities at the time of purchase and reevaluate such determination at each balance sheet date. Securities for which we do not have the intent or the ability to hold to maturity are classified as available for sale securities. We have designated our investments in the equity notes of unconsolidated term debt transactions and CLOs as available for sale securities as they meet the definition of a debt instrument due to their redemption provisions. Available for sale securities are carried at estimated fair value with the net unrealized gains or losses reported as a component of accumulated other comprehensive income (loss) in the consolidated statements of stockholders' equity. Our investments in these equity notes are relatively illiquid, and their value must be estimated by management. Fair value is based primarily upon broker quotes or management's estimates. These estimated values are subject to significant variability based on market conditions, such as interest rates and current spreads. Changes in the valuations do not affect either our reported income or cash flows, but impact stockholders' equity. For additional information regarding unrealized gains and losses recorded in other comprehensive income due to changes in the fair value of our available for sale securities at December 31, 2007 and 2006, see Note 4 of the notes to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.

Revenue Recognition

In connection with our investments in the equity notes of our unconsolidated term debt transactions and CLOs, we recognize interest income on these investments pursuant to Emerging Issues Task Force ("EITF") 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets." Interest income is recognized on an estimated effective yield to maturity basis. Accordingly, on a quarterly basis, we calculate a revised yield on the current amortized cost of the investment and a current estimate of cash flows based upon actual and estimated prepayment and credit loss experience. The revised yield is then applied prospectively to recognize interest income.

Credit Losses, Impairment and Allowance for Doubtful Accounts

We assess whether unrealized losses on the change in fair value on our available for sale securities reflect a decline in value which is other than temporary in accordance with EITF 03-1 "The Meaning of Other than Temporary Impairment and its Application to Certain Investments." If it is determined the decline in value is other than temporary, the impaired securities are written down through earnings to their fair values. Significant judgment of management is required in this analysis, which includes, but is not limited to, making assumptions regarding the collectability of the principal and interest, net of related expenses, on the underlying loans.

Allowances for real estate debt investment losses are established based upon a periodic review of the loan investments. Income recognition is generally suspended for the investments at the earlier of the date at which payments become 90 days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. Income recognition is resumed when the suspended investment becomes contractually current and performance is demonstrated to be resumed. In performing this review, management considers the estimated net recoverable value of the investment as well as other factors, including the fair market value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the economic situation of the region where the borrower does business. Because this determination is based upon projections of future economic events, which are inherently subjective, the amounts ultimately realized from the investments may differ materially from the carrying value at the balance sheet date.

We review long-lived assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Upon determination that an impairment exists, the related asset is written down through earnings to its estimated fair value.

Allowances for doubtful accounts for tenant receivables are established based on periodic review of aged receivables resulting from estimated losses due to the inability of tenants to make required rent and other payments contractually due. Additionally, we established, on a current basis, an allowance for future tenant credit losses on billed and unbilled rents receivable based upon an evaluation of the collectability of such amounts.

Management is required to make subjective assessments as to whether there are impairments in the values of its investment in unconsolidated ventures accounted for using the equity method. As no public market exists for these investments, management estimates the recoverability of these investments based on projections and cash flow analysis. These assessments have a direct impact on our net income because recording an impairment loss results in an immediate negative adjustment to net income.

Risks and Uncertainties

In the normal course of business, we encounter primarily two significant types of economic risk: credit and market. Credit risk is the risk of default on securities, loans, leases, and derivatives that result from a borrower's, lessee's or derivative counterparty's inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of investments in securities, loans, real estate, derivatives, and our investment in term debt transaction issuers due to changes in interest rates, spreads or other market factors, including the value of the collateral underlying loans and securities and the valuation of real estate held us. Management believes that the carrying values of its investments are fairly stated, taking into consideration these risks along with estimated collateral values, payment histories and other market information.

Stock Based Compensation

We have adopted the fair value method of accounting prescribed in SFAS No. 123 "Accounting for Stock Based Compensation" ("SFAS 123") (as amended by SFAS No. 148 and SFAS 123(R)) for equity based compensation awards. SFAS 123 requires an estimate of the fair value of the equity award at the time of grant rather than the intrinsic value method. For all fixed equity based awards to employees and directors, which have no vesting conditions other than time of service, the fair value of the equity award at the grant date will be amortized to compensation expense over the award's vesting period. For performance based compensation plans we recognize compensation expense at such time as the performance hurdle is anticipated to be achieved over the performance period based upon the fair value at the date of grant. For target-based compensation plans we recognize compensation expense over the vesting period based upon the fair value of the plan.

Derivatives and Hedging Activities

We account for our derivatives and hedging activities in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which requires us to recognize all derivatives as either assets or liabilities in the consolidated balance sheet and to measure those instruments at fair value. Additionally, the fair value adjustments of each period will affect our consolidated financial statements differently depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity.

For those derivative instruments that are designated and qualify as hedging instruments, we must designate the hedging instrument, based upon the exposure being hedged, as either a cash flow hedge or a fair value hedge.

Generally, we enter into derivatives that are intended to qualify as hedges under accounting principles generally accepted in the United States, unless specifically stated otherwise. Toward this end, the terms of hedges are matched closely to the terms of hedged items.

With respect to derivative instruments that have not been designated as hedges, any net payments under, or fluctuations in the fair value of, such derivatives are recognized currently in income. Our basis swaps have been designated as non-hedge derivatives.

Our derivative financial instruments contain credit risk to the extent that our bank counterparties may be unable to meet the terms of the agreements. We minimize such risk by limiting our counterparties to major financial institutions with single A or better credit ratings. In addition, the potential risk of loss with any one party resulting from this type of credit risk is monitored.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS 157 "Fair Value Measurement" ("SFAS 157"). SFAS 157 establishes a framework for measuring fair value under generally accepted accounting principles, clarifies the definition of fair value within that framework, and expands disclosures about the use of fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. Early adoption is allowed, provided that the reporting entity has not yet issued financial statements, including interim financial statements for the fiscal year in which the statement is adopted. The provision of this statement is to be applied prospectively as of the fiscal year of adoption. We will adopt the provisions of SFAS 157 for our fiscal year commencing January 1, 2008. We do not believe the adoption of SFAS 157 will have a material impact on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 allows for the measurement of certain financial assets and financial liabilities at fair value. Under this statement, an entity may elect the fair value option on an instrument-by-instrument basis and measure the changes in the fair value as unrealized gains and losses in earnings. This statement is effective for the first fiscal year beginning after November 15, 2007. We will adopt the provisions of SFAS 159 for our fiscal year commencing January 1, 2008. We are currently evaluating our options under this statement and management believes the fair value measurement of certain financial liabilities will result in a positive impact on our book value.

In December 2007, the FASB issued SFAS 141(R), "Business Combinations" ("SFAS 141(R)"). This Statement replaces SFAS 141, "Business Combinations", and requires an acquirer to recognize the assets acquired, the liabilities assumed, including those arising from contractual contingencies, any contingent consideration, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. SFAS 141(R) also requires the acquirer in a business combination achieved in stages (sometimes referred to as a step acquisition) to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values (or other amounts determined in accordance with SFAS 141(R)). In addition, SFAS 141(R)'s requirement to measure the noncontrolling interest in the acquiree at fair value will result in recognizing the goodwill attributable to the noncontrolling interest in addition to that attributable to the acquirer. SFAS 141(R) amends SFAS No. 109, "Accounting for Income Taxes", to require the acquirer to recognize changes in the amount of its deferred tax benefits that are recognizable because of a business combination either in income from continuing operations in the period of the combination or directly in contributed capital, depending on the circumstances. It also amends SFAS 142, "Goodwill and Other Intangible Assets", to, among other things, provide guidance on the impairment testing of acquired research and development intangible assets and assets that the acquirer intends not to use. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual

reporting period beginning on or after December 15, 2008. We are currently assessing the potential impact that the adoption of SFAS 141(R) could have on our financial statements.

In December 2007, the FASB issued SFAS 160, "Noncontrolling Interests in Consolidated Financial Statements" ("SFAS 160"). SFAS 160 amends Accounting Research Bulletin 51, "Consolidated Financial Statements", to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 also changes the way the consolidated income statement is presented by requiring consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. SFAS 160 requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated and requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is effective for fiscal periods, and interim periods within those fiscal years, beginning on or after December 15, 2008. We are currently assessing the potential impact that the adoption of SFAS 160 could have on our financial statements.

Comparison of the Year Ended December 31, 2007 to the Year Ended December 31, 2006

Revenues

Interest Income

Interest income for the year ended December 31, 2007 totaled $292.1 million, representing an increase of $157.3 million or 117%, compared to $134.8 million for the year ended December 31, 2006. The increase was primarily attributable to increased investment activity and asset growth. We originated or acquired commercial real estate debt, commercial real estate securities and corporate debt with a net book value of $2.4 billion during 2007. Interest income from new investment activities was partially offset by approximately $636.6 million of real estate securities, corporate debt and real estate debt investment repayments and approximately $209.7 million of real estate securities, real estate debt and corporate debt investment sales during 2007.

Interest Income—Related Parties

Interest income from related parties for the year ended December 31, 2007 totaled $13.5 million, representing an increase of $1.8 million, or 15%, compared to $11.7 million for the year ended December 31, 2006. The increase is attributable to increases in our investments in the non-investment grade note classes of our unconsolidated term debt transactions. All of our real estate securities term debt transactions completed since 2006 in which we retain the equity notes have been accounted for as on-balance sheet financings.

Rental and Escalation Income

Rental and escalation income for the year ended December 31, 2007 totaled $95.8 million, representing an increase of $58.3 million, or 155%, compared to $37.5 million for the year ended December 31, 2006. The increase was primarily attributable to net lease property acquisitions by our Wakefield joint venture, which was formed in May 2006. These acquisitions collectively contributed $43.7 million of additional rental income. Other net lease properties acquired during the year ended, or subsequent to, December 31, 2006, contributed additional rental and escalation income of $14.2 million and rent increases at various properties, which are based on CPI indices, resulted in additional rental income of $0.4 million for the year ended December 31, 2007.

Advisory and Management Fee Income—Related Parties

Advisory fees from related parties for the year ended December 31, 2007 totaled $7.7 million, representing an increase of approximately $1.8 million, or 31%, compared to $5.9 million for the year ended December 31, 2006. The majority of the increase was attributable to the advisory fees earned on N-Star IX, which were formerly eliminated in consolidation. In July 2007, we sold our equity interest in N-Star IX to the Securities Fund. As a result of the sale, N-Star IX is no longer consolidated into our financial statements, but we continue to earn management fees from the term debt issuances. The increase was partially offset by lower fees from N-Star I, II, III and V as a result of lower collateral balances due to asset paydowns.

Other Revenue

Other revenue for the year ended December 31, 2007 totaled $6.2 million, representing an increase of $0.3 million, or 5%, compared to $5.9 million the year ended December 31, 2006. Other revenue for year ended December 31, 2007 consisted primarily of $2.6 million in early prepayment fees, $0.8 million of exit fees and loan draw fees, $0.2 million in assumption fees, $0.2 million in unused credit line fees and $0.2 million in other fees on loans in our real estate debt portfolio, $1.9 million of income earned from premiums received on credit default swaps, prior to the sale to the Securities Fund in July 2007, related to Abacus NS2, and $0.3 million related to a one-time consent fee on the early repayment of one of our real estate securities investment. Other revenue for the year ended December 31, 2006 included $1.5 million on the early repayment of our real estate debt investments, $1.4 million of premiums received on credit default swaps related to a synthetic term debt transaction we acquired in August 2006, $1.2 million of incentive fee income related to the sale of our interest in the NSF Venture, $1.0 million of net expense reimbursements at two properties in our net lease portfolio and $0.8 million of miscellaneous income related to investments.

Expenses

Interest Expense

Interest expense for the year ended December 31, 2007 totaled $242.6 million, representing an increase of $138.4 million, or 133%, compared to $104.2 million for the year ended December 31, 2006. This increase was primarily attributable to an increase in debt outstanding from the financing of our new investments. Our on-balance sheet financings of our real estate debt, securities, corporate loans and net lease investments increased from $2.4 billion as of December 31, 2006 to $3.9 billion as of December 31, 2007 and included the partial period impact of the June closing of our $172.5 million exchangeable senior notes offering and the $445.5 million in financing from our MC Facility. In addition there was an increase in our average borrowing rate on our non-hedged variable rate debt due to increased average LIBOR rates during 2007 as compared to 2006.

Real Estate Properties—Operating Expenses

Real estate property operating expenses for year ended December 31, 2007 totaled $8.7 million, representing an increase of $0.1 million, or 1%, compared to $8.6 million for year ended December, 2006. The increase was attributable to net lease property acquisitions. These acquisitions collectively contributed $0.1 million of additional operating expenses.

Asset Management Fees—Related Party

Advisory fees for related parties for the year ended December 31, 2007 totaled $4.4 million, representing an increase of $3.8 million, or 633%, compared to $0.6 million for the year ended December 31, 2006. The increase was primarily attributable to the full period impact of our Wakefield joint venture, which was formed in May 2006, and our Monroe Management joint venture, which was

formed in March 2007. We incurred $3.1 million of advisory fees to Wakefield Capital Management and $1.3 million of advisory fees to Monroe Management for the year ended December 31, 2007.

Fund Raising Fees and Other Joint Venture Costs

Fundraising fees and other joint venture costs for the year ended December 31, 2007 totaled $6.3 million. These fees were comprised of $3.2 million of placement fee expenses for raising private capital for our Securities Fund and a $3.1 million write-off of due diligence costs relating to the termination of a purchase agreement to acquire a portfolio of tax credit multi-family properties by one of our joint ventures. We had no such fees for the year ended December 31, 2006.

General and Administrative

General and administrative expenses for the year ended December 31, 2007 totaled $56.6 million, representing an increase of $21.5 million, or 61%, compared to $35.1 million for the year ended December 31, 2006. The primary components of our general and administrative expenses were the following:

Salaries and equity-based compensation for the year ended December 31, 2007 totaled $36.2 million, representing an increase of approximately $13.6 million, or 60%, compared to $22.6 million, for the year ended December 31, 2006. The $13.6 million increase was comprised of $6.6 million related to salaries and $7.0 million related to equity-based compensation. The increase in salaries of $6.6 million was due to higher staffing levels to accommodate the expansion of our business throughout 2006 into 2007. The $7.0 million increase in equity-based compensation expense was attributable to approximately $6.2 million relating to the vesting of equity based awards issued under our 2004 Omnibus Stock Incentive Plan, relating to 2007 grants, $0.2 million in additional compensation in connection with the Long Term Incentive Bonus Plan, relating to the grant of unallocated shares under the Plan, $0.6 million in additional compensation expense related to our Employee Outperformance Plan and to our board of directors annual grants.

Auditing and professional fees for the year ended December 31, 2007 totaled $6.8 million, representing an increase of $2.0 million, or 42%, compared to $4.8 million for the year ended December 31, 2006. The increase was primarily attributable to professional fees relating to legal fees for general corporate work and investment activities, recruiting fees, and fees related to agreed upon procedures in connection with term debt transactions.

Other general and administrative expenses for the year ended December 31, 2007 totaled $13.6 million, representing an increase of approximately $5.9 million, or 77%, compared to $7.7 million for the year ended December 31, 2006. The increase was primarily attributable to the lease for our new LA office, the new lease for the relocation of our corporate offices and minor increases in printing expenses, public relations expenses, cash management fees, software costs, and licensing fees.

Depreciation and Amortization

Depreciation and amortization expense for the year ended December 31, 2007 totaled $33.2 million, representing an increase of $19.6 million, or 144%, compared to $13.6 million for the year ended December 31, 2006. This increase was primarily attributable to $716.9 million of net lease acquisitions made during 2007.

Equity in (Loss) Earnings of Unconsolidated Ventures

Equity in (loss) earnings for the year ended December 31, 2007 totaled a loss of $11.7 million, representing a decrease of $12.1 million, compared to earnings of $0.4 for the year ended December 31, 2006. In July 2007, we closed our Securities Fund, retaining a 25.7% interest that was accounted for under the equity method of accounting. We recognized equity in loss of $9.2 million from

the Securities Fund, of which $11.2 million was the unrealized loss related to the mark-to-market adjustment on the securities in the Securities Fund. The decrease was also attributable to the operations of Monroe Management, which generated a loss of $2.3 million and the LandCap joint venture, which generated a loss of $0.7 million. The losses were partially offset by a net lease joint venture we entered into in February 2006, which generated equity in earnings of $0.5 million.

Unrealized Gain (Loss) on Investments and Other

Unrealized gain (loss) on investments and other decreased by approximately $9.2 million for the year ended December 31, 2007 to a loss of $4.3 million, compared to a gain of $4.9 million for the year ended December 31, 2006. The unrealized loss on investments for the year ended December 31, 2007 consisted primarily of a $3.5 million mark-to-market loss on the securities in N-Star IX warehouse prior to the closing of the term debt transaction in February 2007. The mark-to-market adjustments resulted from credit spread widening in the commercial real estate securities markets precipitated by credit issues in the residential sub-prime lending markets. We also had a $0.5 million unrealized loss related to the mark-to-market adjustments on a short sale and a $0.3 million unrealized loss related to the ineffective portion of our interest rate swaps. The unrealized gain on investment for the year ended December 31, 2006 consisted of a $3.2 million mark-to-market gain on the securities and $1.7 million gain that represents the net carry on the accumulated securities held under the warehouse agreement.

Realized Gain on Investments and Other

The realized gain of $3.6 million for the year ended December 31, 2007 is related to the increase in fair value related to the net carry of securities during the warehouse period of $1.3 million, which was realized at the close of N-Star IX, a gain of $1.4 million on the early redemption of REIT debt securities in N-Star VII, a foreign currency translation gain of $0.1 million related to our Euro-denominated investment and a net realized gain of $1.0 million on the sale of certain assets to the Securities Fund, partially offset by a realized loss of $0.3 million on the closing of a short securities position. The realized gain of $1.8 million for the year ended December 31, 2006 represented the net carry of securities during the warehouse period, which we recognized at the close of N-Star VII and the sale of certain securities in N-Star VII subsequent to closing.

Income from Discontinued Operations, Net of Minority Interest

Income from discontinued operations represents the operations of properties sold or held for sale during the period. In 2007, our Wakefield venture sold two assisted care living facilities, which closed April 2007. In the first quarter 2006, we sold our leasehold interest in 27 West 34th Street and terminated the leasehold interest in 1372 Broadway in January 2006 and recognized income, net of minority interest of $0.3 million for the year ended December 31, 2006 as income from discontinued operations.

Gain on Sale from Discontinued Operations, Net of Minority Interest

We sold our leasehold interest in 27 West 34th Street and terminated the leasehold interest in 1372 Broadway in January 2006 and recognized a gain on sale, net of minority interest of $0.4 million for the year ended December 31, 2006. We had no such gain on sale for the year ended December 31, 2007.

Gain on Sale of Joint Venture Interest, Net of Minority Interest

On February 1, 2006, we sold our interests in the NSF venture to the NSF venture investor and terminated the associated advisory agreements for total consideration of $2.9 million. We recognized a gain on sale, net of minority interest of $0.3 million for the year ended December 31, 2006. We had no such gain on sale for the year ended December 31, 2007.

Comparison of the Year Ended December 31, 2006 to the Year Ended December 31, 2005

Revenues

Interest Income

Interest income for the year ended December 31, 2006 totaled $134.8 million, representing an increase of $94.8 million, or 237%, compared to $40.0 million for the year ended December 31, 2005. The increase was primarily attributable to increased investment activity and asset growth. We originated or acquired real estate securities and real estate debt investments with a net book value of $1.8 billion during 2006. This was partially offset by approximately $464 million of real estate debt repayments, the sale of certain real estate securities during 2006 and the liquidation our trading securities portfolio in the latter part of 2005.

Interest Income—Related Parties

Interest income from related parties for the year ended December 31, 2006 totaled $11.7 million, representing an increase of $3.3 million, or 39%, compared to $8.4 million for the year ended December 31, 2005. The increase was attributable to having a full year benefit in 2006 of non-consolidating securities term debt transactions, which closed in 2005. N-Star III closed in March 2005 and N-Star V closed in September 2005. We acquired all of the non-investment grade note classes of these off-balance sheet financings. These acquisitions contributed approximately $3.8 million of additional interest income for the year ended December 31, 2006.

Rental and Escalation Income

Rental and escalation income for the year ended December 31, 2006 totaled $37.5 million, representing an increase of $26.1 million, or 229%, compared to $11.4 million for the year ended December 31, 2005. The increase was partially attributable to net lease acquisitions totaling $289.4 million during 2006. These acquisitions collectively contributed additional rental income of $14.8 million. The balance of the increase was attributable to having the full year benefit in 2006 of net lease acquisitions which closed in 2005.

Advisory and Management Fee Income—Related Parties

Advisory fees from related parties for the year ended December 31, 2006 totaled $5.9 million, representing an increase of approximately $1.1 million, or 23%, compared to $4.8 million for the year ended December 31, 2005. The increase was primarily attributable to the full year benefit in 2006 of advisory fees from two of our off balance sheet term debt transactions which closed in March and September 2005. This increase was partially offset by a decrease in fees earned from the NSF Venture of approximately $0.5 million due to termination of our advisory fee agreement on February 1, 2006.

Other Revenue

Other revenue for the year ended December 31, 2006 totaled $5.9 million, representing an increase of $5.5 million compared to $0.4 million the year ended December 31, 2005. The increase is primarily attributable to prepayment fees of $1.2 million on the early repayment of our real estate debt investments, $1.4 million of premiums received on credit default swaps related to a synthetic term debt transaction, we acquired in August 2006, $1.2 million of incentive fee income related to the sale of our interest in the NSF Venture, $1.0 million of net expense reimbursements at two properties in our net lease portfolio and $0.7 million of miscellaneous income related to investments.

Expenses

Interest Expense

Interest expense for the year ended December 31, 2006 totaled $104.2 million, representing an increase of $71.6 million, or 220%, compared to $32.6 million for the year ended December 31, 2005. This increase was primarily attributable to an increase in debt outstanding from the financing of $1.8 billion of net new investments during 2006. Our on-balance sheet financing of our investments increased from $0.8 billion as of December 31, 2005 to $2.4 billion at December 31, 2006. In addition there was an increase in our average borrowing rate on our non-hedged variable rate debt due to increased LIBOR rates.

Real Estate Properties—Operating Expenses

Property operating expenses for the year ended December 31, 2006 totaled $8.6 million, representing an increase of $6.6 million, or 330%, compared to $2.0 million for the year ended December 31, 2005. The increase was attributable to the expenses relating to net lease properties which were acquired during 2006, including properties acquired in the Wakefield joint venture which closed in May 2006. These investments collectively contributed to $6.1 million of additional property operating expenses. In addition, we incurred $0.5 million in additional real estate taxes due to an easement and a ground rent increase based on the CPI index at one of our net lease properties.

General and Administrative

General and administrative expenses for the year ended December 31, 2006 totaling $36.1 million increased $17.0 million, or 89%, compared to $19.1 million for the year ended December 31, 2005. The primary components of our general and administrative expenses were the following:

Salaries and equity based compensation for the year ended December 31, 2006 totaled $22.6 million, representing an increase of approximately $11.3 million, or 100%, compared to $11.3 million, for the year ended December 31, 2005. The $11.3 million increase was comprised of $8.1 million related to salaries and 3.2 related to equity based compensation. The increase in salaries of $8.1 million was attributable to an increase in salaries and bonuses due to higher staffing levels to accommodate the expansion of our business throughout 2005 into 2006 and the termination of the shared services agreement in November 2005. The acquisition of a loan origination business in January 2006 also resulted in an additional $1.5 million of compensation expense for 2006. The increase in equity based compensation of $3.2 million over the year ended December 31, 2005 was attributable to approximately $0.8 million relating to an employee outperformance bonus plan for the head of our real estate securities business, approximately $4.6 million relating to the vesting of equity based awards issued under our 2004 Omnibus Stock Incentive Plan, (which includes additional grants of 429,913 LTIP units in January 2006, 58,357 LTIP units in April 2006, 6,992 LTIP units in September 2006 and the accelerated LTIP vesting of the former CFO grants), $2.1 million relating to our Long-Term Incentive Bonus Plan, and compensation expense of $1.1 million relating to our 2006 Outperformance Plan which was approved by the Compensation Committee of our Board of Directors in January of 2006. The increase was slightly offset by a decrease of $0.3 million in stock based compensation which related to LTIP units granted to the head of our real estate securities business as part of a buyout of a profits interest in NS Advisors LLC was fully expensed in July 2005.

Shared services—related party decreased 100% for the year ended December 31, 2006 as a result of the termination of the shared facilities and services agreement in October 2005. At that time, we entered into a more limited sublease agreement with NCIC. Under the new sublease effective November 1, 2005, we rent office space from NCIC which is currently used by our accounting, legal and administrative personnel on a month to month basis. The sublease rent is calculated as a per

person monthly charge, based on a "turn key" office arrangement for each person utilizing NCIC facilities. These direct costs are reflected in other general and administrative expenses.

Auditing and professional fees for the year ended December 31, 2006 totaled $4.8 million, representing an increase of $1.2 million, or 33%, compared to $3.6 million for the year ended December 31, 2005. The increase was primarily attributable to auditing fees of $0.7 million relating to audit work performed by our current auditing firm so that they can opine on our prior period financial statements previously audited by another firm. We decided to re-audit the prior years in order to reduce the transaction cost and timing of accessing the capital markets when conditions are favorable. In addition, there was a $0.5 million increase in professional fees relating to legal fees for general corporate work, recruiting fees for new hires, and fees related to agreed upon procedures in connection with term debt transactions.

Other general and administrative expenses for the year ended December 31, 2006 totaled $7.7 million, representing an increase of approximately $5.7 million, or 285%, compared to $2.0 million for the year ended December 31, 2005. Approximately $3.6 million or 275% of the increase was primarily attributable to increased public company costs, which includes printing expense, public relations, cash management fees, software costs, direct office costs incurred in connection with the limited sublease agreement and the new lease for relocation of our corporate offices during early 2007, licensing fees, and approximately $0.7 million in connection with our loan origination business that we acquired on January 19, 2006. In addition, we wrote off approximately $0.3 million of previously capitalized costs in connection with a potential acquisition which did not close.

Depreciation and Amortization

Depreciation and amortization expense for the year ended December 31, 2006 totaled $13.6 million, representing an increase of $9.2 million, or 209%, compared to $4.4 million for the year ended December 31, 2005. This increase was primarily attributable to $289.4 million of net lease acquisitions made during 2006, which includes our Wakefield joint venture and the full year impact in 2006 of net lease acquisitions acquired in 2005.

Equity in Earnings of Unconsolidated Ventures

Equity in earnings for the year ended December 31, 2006 totaled $0.4 million, representing an increase of $0.2 million, compared to $0.2 million for the year ended December 31, 2005. The increase was attributable to a net lease joint venture interest we entered into in February 2006. During 2006, we recognized $0.4 million which represented our share of the net income of the CS/Federal Venture. The increase was partially offset by a decrease of $0.2 million relating to NSF Venture as a result of the sale of our interest in the NSF Venture on February 1, 2006, which was acquired in the latter part of the third quarter 2005.

Unrealized Gain on Investments and Other

Unrealized gain on investments and other increased by approximately $4.0 million for the year ended December 31, 2006 to $4.9 million from $0.9 million for the year ended December 31, 2005 primarily due to increased net carry interest income and increases in the fair market value of collateral held under our warehouse agreements. The unrealized gain on investments for 2006 consisted of a $3.2 million mark-to-market gain on the securities and $1.7 million gain that represented the net carry on the accumulated securities held under our warehouse agreement.

Realized Gain on Investments and Other

The realized gain on investments and other of $1.8 million for the year ended December 31, 2006 related to the net Carry of securities during the warehouse period, which we recognized at the close of

N-Star VII and the sale of certain securities in N-Star VII subsequent to closing. The realized gain of $2.2 million for the year ended December 31, 2005 was attributable to the increase in fair value related to the net Carry of securities during the warehouse period which we recognized at the close of N-Star V and the gain on sale of certain securities.

Income from Discontinued Operations, Net of Minority Interest

Income from discontinued operations, net of minority interest represents the operations of properties sold or held for sale during the period. We also sold our leasehold interest in 27 West 34th Street, 1372 Broadway and sold a property in the Wakefield portfolio during 2006. Accordingly, these leasehold interests operations were reclassified to income from discontinued operations.

Liquidity and Capital Resources

We require significant capital to fund our investment activities and operating expenses. Our capital sources may include cash flow from operations, borrowings under revolving credit facilities, financings secured by our assets such as first mortgage and term debt transaction financings, long-term senior and subordinate corporate capital such as senior notes, trust preferred securities and perpetual preferred and common stock.

Our total available liquidity at December 31, 2007 was approximately $352.4 million, including $153.8 million of unrestricted cash and cash equivalents, $98.6 million of cash in our term debt transactions, which is available for reinvestment within the term debt transaction, and $100.0 million of available undrawn liquidity under our unsecured credit facility.

We expect to meet our long term liquidity requirements, including the repayment of debt and our investment funding needs, through existing cash resources and additional borrowings, the issuance of debt and/or equity securities and the liquidation or refinancing of assets at maturity. We believe that the value of the net lease portfolio is, and will continue to be, sufficient to allow us to refinance the mortgage debt on this portfolio at maturity.

As a REIT, we are required to distribute at least 90% of our annual REIT taxable income to our stockholders, including taxable income where we do not receive corresponding cash, and we intend to distribute all or substantially all of our REIT taxable income in order to comply with the REIT distribution requirements of the Internal Revenue Code and to avoid federal income tax and the non deductible excise tax.

These distribution requirements limit our ability to retain earnings and thereby replenish or increase capital committed to our operations; however, we believe that our existing capital resources and financing will enable us to meet current non-discretionary capital requirements. We believe that our existing sources of funds will be adequate for purposes of meeting our short-term liquidity needs. Our ability to meet a long-term (beyond one year) liquidity requirement is subject to obtaining additional debt and equity financing. Any decision by our lenders and investors to provide us with financing will depend upon a number of factors, such as our compliance with the terms of its existing credit arrangements, our financial performance, industry or market trends, the general availability of and rates applicable to financing transactions, such lenders' and investors' resources and policies concerning the terms under which they make capital commitments and the relative attractiveness of alternative investment or lending opportunities.

Unsecured Exchangeable Senior Notes

In June 2007, we issued $172.5 million of 7.25% exchangeable senior notes (the "Notes"), which are due in 2027. The Notes were offered in accordance with Rule 144A under the Securities Act of 1933, as amended. The Notes pay interest semi-annually on June 15 and December 15, at a rate of

7.25% per annum, and mature on June 15, 2027. The Notes have an initial exchange rate representing an exchange price of $16.89 per share of our common stock. The initial exchange rate is subject to adjustment under certain circumstances. The Notes are senior unsecured obligations of our operating partnership and may be exchangeable upon the occurrence of specified events, and at any time on or after March 15, 2027, and prior to the close of business on the second business day immediately preceding 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 June 15, 2014. We may be required to repurchase the Notes on June 15, 2012, 2014, 2017 and 2022 and upon the occurrence of certain designated events. The net proceeds from the offering were approximately $167.5 million, after deducting fees and expenses. The proceeds of the offering were used to repay certain of our existing indebtedness, to make additional investments and for general corporate purposes.

Liabilities to Subsidiary Trusts Issuing Preferred Securities

In March 2007, a wholly owned subsidiary of ours, NorthStar Realty Finance Trust VII, completed a private placement of $37.5 million of trust preferred securities. The sole assets of the trust consist of a like amount of junior subordinate notes issued by us, which mature on April 30, 2037. The trust preferred securities and the notes have a 30-year term, ending April 30, 2037, and bear interest at a floating rate of three-month LIBOR plus 2.50%. We have entered into an interest rate swap agreement, which fixed the interest rate for ten years at 7.60%.

In June 2007, a wholly owned subsidiary of ours, NorthStar Realty Finance Trust VIII, completed a private placement of $35.0 million of trust preferred securities. The sole assets of the trust consist of a like amount of junior subordinate notes issued by us, which mature on July 30, 2027. The trust preferred securities and the notes have a 30-year term, ending July 30, 2027, and bear interest at a floating rate of three-month LIBOR plus 2.70%. We have entered into an interest rate swap agreement, which fixed the interest rate for ten years at 8.29%.

Credit Facilities

In May 2007, we entered into a $400 million Master Repurchase Agreement with a major financial institution, which was further amended on May 24, 2007 and June 22, 2007 (the "VFCC Facility"). The VFCC Facility provided for a maximum term of three years. In connection therewith, on June 5, 2007 and June 22, 2007, we amended our existing Master Repurchase Agreement with the same financial institution to borrow up to an additional $100 million (the"Swing Line Facility" and together with the VFCC Facility, the "WA Facilities").

In November 2007, we entered into a new term loan agreement (the "Term Loan Agreement", and together with the modified Euro Note, the "Term Facility") with a major financial institution, which provides for approximately $600 million of term loan capacity. The proceeds under the Term Facility were partially used to repay approximately $450 million outstanding under the WA Facilities, terminating these facilities. The Term Loan Agreement also provides for up to $300 million of revolving term loan capacity as portions of the outstanding balance under the Term Loan Agreement are repaid. The Term Facility initially bears interest at LIBOR plus 2.00% and has an initial two-year term which we have the option to extend for an additional one year period, subject to certain conditions. Additionally, we entered into a Limited Guaranty Agreement in connection with the Term Facility.

transaction. At December 31, 2007, the facility has a $374.5 million outstanding balance and finances corporate loans with a book value of $366.8 million and available for sale securities with a book value of $6.8 million. We are currently in discussions with various parties and the lender regarding a potential recapitalization and/or extension of the facility. Nevertheless, if no such transaction occurs and the lender sells the loans under the facility our maximum loss exposure would be approximately $16.0 million.

In July 2007, Monroe Capital entered into a $400 million Master Repurchase Agreement ("MC VFCC") with a major financial institution to accumulate collateral for a potential CLO securitization transaction. Advance rates under the MC VFCC facility range from 60% to 100% of the value of the collateral for which the advance is to be made. Amounts borrowed under the MC VFCC facility bear interest at a spread of 0.75% over the respective commercial paper rate. The MC VFCC facility has a maximum term of three years, subject to annual renewal by the financial institution on each anniversary of the Master Repurchase Agreement. If not renewed, the lender under the MC VFCC facility could sell the loans or enter into an amortization period where cash flow is trapped and the interest rate is increased to 2.50% on the respective commercial paper note 60 days after the amortization period begins.

In August, we entered into a new $350 million Master Repurchase Agreement with a major financial institution (the "JP Facility"). Advance rates under the JP Facility range from 65% to 97% of the value of the collateral for which the advance is to be made. Amounts borrowed under the JP Facility bear interest at spreads of 0.05% to 1.75% over one-month LIBOR, depending on the type of collateral for which the amount is borrowed. The JP Facility has a maximum term of three years, subject to annual renewal on each anniversary of the JP Facility.

Dividend Reinvestment and Stock Purchase Plan

Effective as of April 27, 2007, we implemented a Dividend Reinvestment and Stock Purchase Plan, or the Plan, pursuant to which we registered and reserved for issuance 15,000,000 shares of our common stock. Under the terms of the Plan, stockholders who participate in the Plan may purchase shares of our common stock directly from us, in cash investments up to $10,000. At our sole discretion, we may accept optional cash investments in excess of $10,000 per month, which may qualify for a discount from the market price of 0% to 5%. Plan participants may also automatically reinvest all or a portion of their dividends for additional shares of our stock. We expect to use the proceeds from any dividend reinvestments or stock purchases for general corporate purposes.

During 2007, we issued a total of approximately 330,297 common shares pursuant to the Plan for a gross sales price of approximately $3.8 million.

Cash Flows

Year Ended December 31, 2007 Compared to December 31, 2006

The net cash flow provided by operating activities of $102.2 million, increased by $48.2 million for the year ended December 31, 2007 from $54.0 million of cash provided by operations for the year ended December 31, 2006. This was primarily due to the operating cash flows generated from a greater asset base resulting from net origination/acquisition volumes generated by our business lines.

The net cash flow used in investing activities of $2.4 billion increased by $0.05 billion for the year ended December 31, 2007 from $1.9 billion for the year ended December 31, 2006. Net cash used in investing activities in 2007 consisted primarily of the purchase of operating real estate, funds used to acquire real estate securities and originate or acquire real estate debt investments and corporate loan investments.

The net cash flow provided by financing activities of $2.4 billion increased by $0.6 billion for the year ended December 31, 2007 from $1.8 billion for the year ended December 31, 2006. The primary source of cash flow provided by financing activities was the perpetual preferred equity offerings, the issuance of exchangeable debt, the issuance of term debt transaction bonds, borrowings under credit facilities, operating real estate, acquisition financing and the issuance of trust preferred securities.

Year Ended December 31, 2006 Compared to December 31, 2005

The net cash flow provided by operating activities of $54.0 million, increased by $30.8 million for the year ended December 31, 2006 from $23.2 million, excluding the effects of the short term security portfolio liquidation of $826.4 million for the year ended December 31, 2005. This was primarily due to the operating cash flows generated from a greater asset base resulting from net origination/acquisition volumes generated by our business lines.

The net cash flow used in investing activities of $1.85 billion increased by $971.9 million for the year ended December 31, 2006 from $881.1 million for the year ended December 31, 2005. Net cash used in investing activities in 2006 consisted primarily of the purchase of operating real estate, funds used to acquire real estate securities and originate or acquire real estate debt investments, as well as funding of new warehouse deposits for our term debt transactions.

The net cash flow provided by financing activities of $1.82 billion increased by $1.02 billion for the year ended December 31, 2006 from $805.0 million, excluding the effects of the short term portfolio liquidation of $793.3 million for the year ended December 31, 2005. The primary source of cash flow provided by financing activities was the perpetual preferred and common equity offerings, the issuance of term debt transaction bonds, borrowings under credit facilities and issuing trust preferred securities.

Capital Expenditures

During 2008, we expect to incur $14.5 million in capital expenditures with respect to our healthcare net lease portfolio.

Contractual Obligations and Commitments

As of December 31, 2007, we had the following contractual commitments and commercial obligations (dollars in thousands):

	Payments Due by Period
Contractual Obligations	Total		Less than 1 Year		1-3 Years		3-5 Years		After 5 Years
Mortgage notes	$	898,465	$	3,684	$	104,012	$	174,213	$	616,556
Mezzanine loan payable		13,900		1,605		3,558		4,144		4,593
Exchangeable senior notes		172,500		—		—		—		172,500
Bonds payable		1,654,185		—		—		—		1,654,185
Credit facilities		501,432		501,432		—		—		—
Secured term loan		416,934		—		416,934		—		—
Liability to subsidiary trusts issuing preferred securities		286,258		—		—		—		286,258
Repurchase agreements		1,864		1,864		—		—		—
Capital leases(1)		17,065		447		974		982		14,662
Operating leases		81,948		5,519		11,260		10,983		54,186
Placement fees		2,733		506		2,227		—		—
Outstanding unfunded commitments(2)		578,849		413,008		151,514		—		14,327

Total contractual obligations	$	4,626,133	$	928,065	$	690,479	$	190,322	$	2,817,267

(1): Includes interest on the capital leases.

(2): Our future funding commitments, which are subject to certain conditions that borrowers must meet to qualify for such fundings, totaled $578.8 million, of which a minimum of $284.1 million will be funded within our existing term debt transactions. Fundings are categorized by estimated funding period. We expect that our secured credit facility lenders generally will advance a majority of future fundings that are not otherwise funded within our term debt transactions. Assuming lenders will advance 75% of the $294.7 million of our future funding commitments outside of the term debt transactions, our equity requirement would be approximately $73.7 million. Based on these assumptions, we believe we have adequate liquidity to meet our existing future funding commitments.

Our debt obligations contain covenants that are both financial and non-financial in nature. Significant financial covenants include a requirement that we maintain a minimum tangible net worth, a minimum level of liquidity and a minimum fixed charge coverage ratio. As of December 31, 2007, we were in compliance with all financial and non-financial covenants in our debt agreements with the exception of our tangible net worth covenant for which we obtained a one-time waiver from our lenders.

Off Balance Sheet Arrangements

Term Debt Issuances

The terms of the portfolio of real estate securities held by the term debt transactions are structured to be matched with the terms of the non-recourse term debt liabilities. These term debt liabilities are repaid with the proceeds of the principal payments on the real estate securities collateralizing the term debt liabilities when these payments are actually received. There is no refinancing risk associated with the term debt liabilities, as principal is only due to the extent that it has been collected on the underlying real securities and the stated maturities are noted above. Term debt transactions produce a relatively predictable income stream based on the spread between the interest earned on the underlying securities and the interest paid on the term debt transaction liabilities. This spread may be reduced by credit losses on the underlying securities or by hedging mismatches. Our term debt transactions have not incurred any losses on any of their securities investments from the date of purchase through December 31, 2007. We receive quarterly cash distributions from N-Star I and monthly cash distributions from N-Star II, N-Star III and N-Star V, each representing our proportionate share of the residual cash flow from the term debt transactions, as well as collateral advisory fees and interest income on the unrated income notes of the term debt transactions.

The following tables describe certain terms of the collateral for and the notes issued by term debt transactions for the year ended December 31, 2007 (dollars in thousands):

		Collateral—December 31, 2007						Term Notes—December 31, 2007
Issuance		Date Closed	Par Value of Collateral		Weighted Average Interest Rate		Weighted Average Expected Life (years)	Outstanding Term Notes(1)		Weighted Average Interest Rate at 12/31/07		Stated Maturity
N-Star I(2)		8/21/03	$	320,583	6.58	%	4.64	$	301,406	6.24	%	8/01/2038
N-Star II		7/01/04		335,301	6.24		4.73		306,110	5.75		6/01/2039
N-Star III		3/10/05		404,772	6.30		5.20		358,892	5.84		6/01/2040
N-Star V		9/22/05		495,971	5.87		7.09		456,319	5.07		9/05/2045

	Total		$	1,556,627	6.21	%	5.59	$	1,422,727	5.66	%

(1): Includes only notes held by third parties.
(2): We have an 83.3% interest.

Any potential losses in our off balance sheet term debt transactions is limited to the carrying value of our investment of $68.6 million at December 31, 2007.

Monroe CLO Equity Notes

We own a residual equity interests in a CLO originated by Monroe Capital, LLC. The CLO includes collateral of approximately $400 million backed primarily by first lien senior secured loans. Based on the projected future cash flows, the equity is yielding an internal rate of return of approximately 18%. The CLO was determined to be a variable interest entity under Fin 46(R)-6 and we were determined not to be the primary beneficiary, therefore, the financial statements are not consolidated into our condensed financial statements. Our residual equity interests are accounted for as debt securities available for sale pursuant to EITF 99-20. The fair market value was $9.5 million at December 31, 2007.

NorthStar Real Estate Securities Opportunity Fund

In July 2007, we closed on $109.0 million of equity capital for our Securities Fund, an investment vehicle in which we intend to prospectively conduct our real estate securities investment business.

We are the manager and general partner of the Securities Fund. We will typically receive base management fees ranging from 1.0% to 2.0% per annum on third-party capital, and are entitled to annual incentive management fees ranging from 20% to 25% of the increase in the Securities Fund's net asset value in excess of an 8.0% per annum return. Base and incentive fees vary depending on the investor capital lockup periods.

At the initial closing, we sold to the Securities Fund $63.6 million of assets, including our interests in two synthetic commercial real estate term debt transactions, our equity interest in our most recent real estate securities term debt transaction, N-Star IX, deposits relating to our off-balance sheet warehouse facility and an equity interest in a third-party securitization. We received approximately $35.6 million of cash proceeds from the closing and retained a 25.7% interest in the Securities Fund. At closing, we recognized a $1.0 million realized gain relating to the sale of assets at fair market value. At December 31, 2007, we owned a 30.0% interest and our investment in the Securities Fund was $23.2 million. For the year ended December 31, 2007, we recognized equity in loss of $9.2 million, of which $11.7 million represented an unrealized loss on the mark-to-market adjustment of the securities in the Securities Fund.

In October 2007, the Securities Fund amended its warehouse agreement with a major commercial bank to extend the term to May 1, 2008. In connection with the amendment, the Securities Fund pledged $15.0 million of cash in addition to the $16.0 million already pledged and the Securities Fund agreed to $44.0 million of recourse liability under the warehouse agreement. We have committed to contribute up to $10.0 million of additional capital to the Securities Fund in the form of either debt or equity for purposes of the recourse obligation. Following December 31, 2007, in order to meet margin calls under the warehouse agreement, we and the Securities Fund have contributed an amount of capital sufficient to meet our respective obligations referred to above. As of the date hereof, the Securities Fund has not determined whether it would contribute any additional capital in connection with future margin calls, if any. If the Securities Fund does not contribute any such additional capital in response to a future margin call or the warehouse agreement is not extended, the lender may determine to liquidate the assets in the warehouse and the Securities Fund could lose all of the capital that it has contributed to support the warehouse. As of the date hereof, we believe that the Securities Fund could offset a sizeable portion of any such loss through the unwinding of hedges.

Recent Developments

Dividends

On January 23, 2008, we declared a dividend of $0.36 per share of common stock, $0.54688 per share of Series A preferred stock and $0.51563 per share of Series B preferred stock to stockholders of record as of February 5, 2008. The dividends were paid on February 15, 2008.

Inflation

Our leases for tenants of operating real estate are generally either:

•: net leases where the tenants are responsible for all or a significant portion of the real estate taxes, insurance and operating expenses and the leases provide for increases in rent either based on changes in the Consumer Price Index, or CPI, or pre-negotiated increases; or
•: operating leases which provide for separate escalations of real estate taxes and operating expenses over a base amount, and/or increases in the base rent based on changes in the CPI.

We believe that most inflationary increases in expenses will be offset by the expense reimbursements and contractual rent increases described above to the extent of occupancy.

We believe that the risk associated with an increase in market interest rates on the floating rate debt used to finance our investments in our term debt transactions and our direct investments in real estate debt, will be largely offset by our strategy of matching the terms of our assets with the terms of our liabilities and through our use of hedging instruments.

See "Quantitative and Qualitative Disclosures About Market Risk" in Item 7A of this Annual Report on Form 10-K for additional information on our exposure to market risk.

Non-GAAP Financial Measures

Funds from Operations and Adjusted Funds from Operations

Management believes that funds from operations, or FFO, and adjusted funds from operations, or AFFO, each of which are non-GAAP measures, are additional appropriate measures of the operating performance of a REIT and NorthStar in particular. We compute FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts (NAREIT), as net income or loss (computed in accordance with GAAP), excluding gains or losses from sales of depreciable properties, the cumulative effect of changes in accounting principles, real estate-related depreciation and amortization, and after adjustments for unconsolidated/uncombined partnerships and joint ventures. AFFO, as defined by NAREIT, is a computation made by analysts and investors to measure a real estate company's cash flow generated by operations.

We calculate AFFO by subtracting from (or adding) to FFO:

•: normalized recurring expenditures that are capitalized by us and then amortized, but which are necessary to maintain our properties and revenue stream, e.g., leasing commissions and tenant improvement allowances;
•: an adjustment to reverse the effects of the straight-lining of rents and fair value lease revenue under SFAS 141;
•: the amortization or accrual of various deferred costs including intangible assets and equity based compensation; and
•: an adjustment to reverse the effects of unrealized gains/(losses) relating to: (i) change in the value of our off-balance sheet warehouse facilities and carrying value of fund investments caused by changes in interest rates; and (ii) changes in the value of the credit default swaps in our consolidated synthetic term debt transaction equity interests (which would otherwise be recorded as an adjustment to stockholder's equity if such interests had been unconsolidated).

Our calculation of AFFO differs from the methodology used for calculating AFFO by certain other REITs and, accordingly, our AFFO may not be comparable to AFFO reported by other REITs. Our management utilizes FFO and AFFO as measures of our operating performance, and believes they are also useful to investors, because they facilitate an understanding of our operating performance after adjustment for certain non-cash expenses, such as real estate depreciation, which assumes that the value of real estate assets diminishes predictably over time and, in the case of AFFO, equity based compensation. Additionally, FFO and AFFO serve as measures of our operating performance because they facilitate evaluation of our company without the effects of selected items required in accordance with GAAP that may not necessarily be indicative of current operating performance and that may not accurately compare our operating performance between periods. Furthermore, although FFO, AFFO and other supplemental performance measures are defined in various ways throughout the REIT industry, we also believe that FFO and AFFO may provide us and our investors with an additional useful measure to compare our financial performance to certain other REITs.

Neither FFO nor AFFO is equivalent to net income or cash generated from operating activities determined in accordance with U.S. GAAP. Furthermore, FFO and AFFO do not represent amounts available for management's discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments or uncertainties. Neither FFO nor AFFO should be considered as an alternative to net income as an indicator of our operating performance or as an alternative to cash flow from operating activities as a measure of our liquidity.

	Year Ended December 31, 2007			Year Ended December 31, 2006			Year Ended December 31, 2005
	(dollars in thousands)
Funds from Operations:
Income from continuing operations before minority interest	$	51,174		$	41,041		$	10,389
Minority interest in joint ventures		(580	)		(68	)		—

Income from continuing operations before minority interest in operating partnership		50,594			40,973			10,389
Adjustments:
Preferred dividend		(16,533	)		(860	)		—
Depreciation and amortization		33,191			13,578			4,352
Funds from discontinued operations		17			550			1,458
Real estate depreciation and amortization—unconsolidated ventures		990			905			—

Funds from Operations	$	68,259		$	55,146		$	16,199

Adjusted Funds from Operations:
Funds from Operations	$	68,259		$	55,146		$	16,199
Straight-line rental income, net		(2,653	)		(958	)		(252	)
Straight-line rental income, discontinued operations		10			23			(281	)
Straight-line rental income, unconsolidated ventures		(219	)		(229	)		—
Amortization of equity-based compensation		16,007			9,080			5,847
Fair value lease revenue (SFAS 141 adjustment)		(864	)		(479	)		18
Unrealized(gains)/losses from mark-to-market adjustments		3,473			(3,175	)		(821	)
Unrealized losses from mark-to-market adjustments, unconsolidated ventures		11,670			—			—

Adjusted Funds from Operations	$	95,683		$	59,408		$	20,710

Return on Average Common Book Equity

We calculate return on average common book equity ("ROE") on a consolidated basis and for each of our major business lines. We believe that ROE provides a good indication of the performance

of the Company and our business lines because we believe it provides the best approximation of cash returns on common equity invested. Management also uses ROE, among other factors, to evaluate profitability and efficiency of equity capital employed, and as a guide in determining where to allocate capital within its business. ROEs may fluctuate from quarter to quarter based upon a variety of factors, including the timing and amount of investment fundings, repayments and asset sales, capital raised and leverage used, and the yield on investments funded.

Return on Average Common Book Equity (including and excluding G&A and one-time items)
($ in thousands)

			Year Ended December 31, 2007			Year Ended December 31, 2006			Year Ended December 31, 2005
Adjusted Funds from Operations (AFFO)		[A]	$	95,683		$	59,408		$	20,710
Plus: Fund Raising Fees and Other Joint Venture Costs				6,295			—			—

AFFO, excluding Fund Raising Fees and Other Joint Venture Costs		[B]		101,978			59,408			20,710
Plus: General & Administrative Expenses				56,561			35,051			18,997
Plus: General & Administrative Expenses from Unconsolidated Ventures				4,810			—			—
Less: Equity-Based Compensation and Straight-Line Rent included in G&A				16,214			9,813			5,847

AFFO, excluding G&A		[C]		147,135			84,646			33,860
Average Common Book Equity & Operating Partnership Minority Interest(1)		[D]	$	442,012		$	378,628		$	198,651
	Return on Average Common Book Equity (including G&A)	[A]/[D]		21.6	%		15.7	%		10.4	%
	Return on Average Common Book Equity (excluding Fund Raising and Other Joint Venture Costs)	[B]/[D]		23.1	%		15.7	%		10.4	%
	Return on Average Common Book Equity (excluding G&A)	[C]/[D]		33.3	%		22.3	%		17.0	%

(1): Average Common Book Equity & Operating Partnership Minority Interest computed using beginning and ending of period balances. ROE will be impacted by the timing of new investment closings and repayments during the quarter.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Real Estate Debt

We invest in real estate debt which are generally instruments secured by commercial and multifamily properties, including first lien mortgage loans, junior participations in first lien mortgage loans, second lien mortgage loans, mezzanine loans, and preferred equity interests in borrowers who own such properties. We generally hold these instruments for investment rather than trading purposes. These investments are either floating or fixed rate. The interest rates on our floating rate investments typically float at a fixed spread over an index such as LIBOR. These instruments typically reprice every 30 days based upon LIBOR in effect at that time. Given the frequent and periodic repricing of our floating rate investments, changes in interest rates are unlikely to materially affect the value of our floating rate portfolio. Changes in short-term rates will, however, affect earnings from our investments. Increases in LIBOR will increase the interest income received by us on our investments and therefore increase our earnings. Decreases in LIBOR have the opposite effect.

We also invest in fixed rate investments. The value of these investments may be affected by changes in long-term interest rates. To the extent that long-term interest rates increase, the value of long-term fixed rate assets is diminished. Any fixed rate real estate debt investments which we hold would be similarly impacted. We do not generally seek to hedge this type of risk unless the asset is leveraged as we believe the costs of such a hedging transaction over the term of such an investment would generally outweigh the benefits. If fixed rate real estate debt is funded with floating rate liabilities, we typically convert the floating rate to fixed through the use of interest rate swaps, caps or other hedges. Because the interest rates on our fixed rate investments are generally fixed through maturity of the investment, changes in interest rates do not affect the income we earn from our fixed rate investments.

In our real estate debt business we are also exposed to credit risk, which is the risk that the borrower under our loan agreements cannot repay its obligations to us in a timely manner. While we have not experienced a payment default as of the date of this Annual Report on Form 10-K, our position in the capital structure may expose us to losses as a result of such default in the future. In the event that the borrower cannot repay our loan, we may exercise our remedies under the loan documents, which may include a foreclosure against the collateral if we have a foreclosure right as a real estate debtholder under the loan agreement. The real estate debt that we intend to invest in will often allow us to demand foreclosure as a real estate debtholder if our loan is in default. To the extent the value of our collateral exceeds the amount of our loan (including all debt senior to us) and the expenses we incur in collecting on our loan, we would collect 100% of our loan amount. To the extent that the amount of our loan plus all debt senior to our position exceeds the realizable value of our collateral, then we would incur a loss. We also incur credit risk in our periodically scheduled interest payments which may be interrupted as a result of the operating performance of the underlying collateral.

We seek to manage credit risk through a thorough financial analysis of a transaction before we make such an investment. Our analysis is based upon a broad range of real estate, financial, economic and borrower-related factors which we believe are critical to evaluating the credit risk inherent in a transaction.

We expect our investments to be denominated in U.S. dollars or, if they are denominated in another currency, to be converted back to U.S. dollars through the use of currency swaps. It may not be possible to eliminate all of the currency risk as the payment characteristics of the currency swap may not exactly match the payment characteristics of the investments.

Real Estate Securities

In our real estate securities business, we mitigate credit risk through credit analysis, subordination and diversification. The CMBS we invest in are generally junior in right of payment of interest and

principal to one or more senior classes, but benefit from the support of one or more subordinate classes of securities or other form of credit support within a securitization transaction. The senior unsecured REIT debt securities we invest in reflect comparable credit risk. Credit risk refers to each individual borrower's ability to make required interest and principal payments on the scheduled due dates. We believe that these securities offer attractive risk-adjusted returns with reasonable long-term principal protection under a variety of default and loss scenarios. While the expected yield on these securities is sensitive to the performance of the underlying assets, the more subordinated securities and certain other features of a securitization, in the case of mortgage backed securities, and the issuer's underlying equity and subordinated debt, in the case of REIT securities, are designed to bear the first risk of default and loss. The real estate securities portfolios of our investment grade term debt transactions are diversified by asset type, industry, location and issuer. We further minimize credit risk by monitoring the real estate securities portfolios of our investment grade term debt transactions and the underlying credit quality of their holdings.

The real estate securities underlying our investment grade term debt transactions are also subject to spread risk. The majority of these securities are fixed rate securities, which are valued based on a market credit spread over the rate payable on fixed rate U.S. Treasuries of like maturity. In other words, their value is dependent on the yield demanded on such securities by the market, based on their credit relative to U.S. Treasuries. An excessive supply of these securities combined with reduced demand will generally cause the market to require a higher yield on these securities, resulting in the use of a higher or "wider" spread over the benchmark rate (usually the applicable U.S. Treasury security yield) to value these securities. Under these conditions, the value of our real estate securities portfolio would tend to decrease. Conversely, if the spread used to value these securities were to decrease or "tighten," the value of our real estate securities would tend to increase. Such changes in the market value of our real estate securities portfolio may affect our net equity or cash flow either directly through their impact on unrealized gains or losses on available-for-sale securities by diminishing our ability to realize gains on such securities, or indirectly through their impact on our ability to borrow and access capital.

Returns on our real estate securities are sensitive to interest rate volatility. If interest rates increase, the funding cost on liabilities that finance the securities portfolio will increase if these liabilities are at a floating rate or have maturities shorter than the assets.

Our general financing strategy focuses on the use of "match-funded" structures. This means that we seek to align the maturities of our debt obligations with the maturities of our investments in order to minimize the risk of being forced to refinance our liabilities prior to the maturities of our assets, as well as to reduce the impact of fluctuating interest rates on earnings. In addition, we generally match interest rates on our assets with like-kind debt, so that fixed rate assets are financed with fixed rate debt and floating rate assets are financed with floating rate debt, directly or through the use of interest rate swaps, caps or other financial instruments or through a combination of these strategies. Our investment grade term debt transactions utilize interest rate swaps to minimize the mismatch between their fixed rate assets and floating rate liabilities.

Our financing strategy is dependent on our ability to place the match-funded debt we use to finance our real estate securities at spreads that provide a positive arbitrage. If spreads on the bonds issued by term debt transactions widen or if demand for these liabilities ceases to exist, then our ability to execute future term debt transaction financings will be severely restricted.

Interest rate changes may also impact our net book value as our investments in debt securities are marked-to-market each quarter with changes in fair value reflected in other comprehensive income (a separate component of owners' equity). Generally, as interest rates increase, the value of fixed rate securities within the term debt transaction, such as CMBS, decreases and as interest rates decrease, the value of these securities will increase. These swings in value have a corresponding impact on the value

of our investment in the term debt transaction. Within the term debt transaction, we seek to hedge against changes in cash flows attributable to changes in interest rates by entering into interest rate swaps/caps and other derivative instruments. Such derivatives are typically designated as cash flow hedge relationships according to SFAS No. 133.

Net Lease Properties

Our ability to manage the interest rate risk and credit risk associated with the assets we acquire is integral to the success of our net lease properties investment strategy. Although we may, in special situations, finance our purchase of net lease assets with floating rate debt, our general policy will be to mitigate our exposure to rising interest rates by financing our purchases with fixed rate mortgages. We seek to match the term of fixed rate mortgages to our expected holding period for the underlying asset. Factors we consider to assess the expected holding period include, among others, the primary term of the lease as well as any extension options that may exist.

In order to ensure that we have as complete an understanding as possible of a tenant's ability to satisfy its obligations under its lease, we undertake a rigorous credit evaluation of each tenant prior to executing sale/leaseback or net lease asset acquisitions. This analysis includes an extensive due diligence investigation of the tenant's business as well as an assessment of the strategic importance of the underlying real estate to the tenant's core business operations. Where appropriate, we may seek to augment the tenant's commitment to the facility by structuring various credit enhancement mechanisms into the underlying leases. These mechanisms could include security deposit requirements or affiliate guarantees from entities we deem to be creditworthy.

Corporate Lending

Credit risk management for the corporate loan portfolio begins with an assessment of the credit risk of a borrower which is based on its financial position. As part of the overall credit risk assessment of a borrower, each corporate loan transaction is assigned a risk rating that is subject to approval based on defined credit approval process. Our credit rating criteria for each loan rating focuses on three factors, which are credit, collateral, and financial performance. Subsequent to loan origination, risk ratings are monitored on an ongoing basis. If necessary, risk ratings are adjusted to reflect changes in the borrower's financial condition, cash flow or financial situation. We use risk rating to measure and evaluate concentrations within portfolios. In making decisions regarding credit, we consider risk rating, collateral, industry and single name concentration limits.

We use a variety of tools to continuously monitor a borrower's or counterparty's ability to perform under its obligations. Additionally, we utilize syndication of exposure to other entities, loan sales and other risk mitigation techniques to manage the size and risk profile of the loan portfolio.

Derivatives and Hedging Activities

To limit the exposure to the variable LIBOR rate on our corporate debt, we entered into various swap agreements to fix the LIBOR rate on a portion of our variable rate debt. The following table summarizes the notional amounts and fair (carrying) values of our derivative financial instruments as of December 31, 2007 (in thousands):

December 31, 2007	Notional Value		Strike Rate		Expiration Date	Fair Value
Interest rate swap	$	5,100	4.18	%	12/2010	$	(53	)
Interest rate swap		6,160	4.29		8/2012		(64	)
Interest rate swap		3,290	4.80		12/2013		(102	)
Interest rate swap		2,842	5.04		8/2018		(101	)
Interest rate swap		5,492	4.76		3/2013		(165	)

Interest rate swap			3,465	4.41	3/2010		(52	)
Interest rate swap			4,000	4.66	11/2015		(83	)
Interest rate swap			15,000	5.08	5/2016		(738	)
Interest rate swap			34,000	5.07	5/2017		(1,614	)
Interest rate swap			3,765	4.98	7/2015		(146	)
Interest rate swap			3,567	4.98	6/2015		(140	)
Interest rate swap			5,957	5.06	8/2015		(231	)
Interest rate swap			23,300	4.99	12/2012		(979	)
Interest rate swap			2,686	5.02	2/2016		(86	)
Interest rate swap			20,000	5.05	6/2013		(841	)
Interest rate swap			12,750	5.06	8/2017		(488	)
Interest rate swap			7,700	5.30	5/2010		(268	)
Interest rate swap			14,000	5.03	10/2015		(621	)
Interest rate swap			323,505	5.53	6/2018		(23,468	)
Basis Swap			5,000	6.36	12/2015		(17	)
Basis Swap			15,000	6.61	6/2018		(49	)
Interest rate swap			9,873	4.81	8/2014		(293	)
Interest rate swap			3,000	4.89	6/2015		(99	)
Interest rate swap			60,000	5.52	6/2016		(4,855	)
Interest rate swap			16,200	5.52	6/2018		(1,349	)
Interest rate swap			49,404	5.63	7/2016		(3,905	)
Interest rate swap			13,200	5.06	2/2008		(5	)
Interest rate swap			49,150	4.88	3/2008		(15	)
Interest rate swap			30,000	5.46	9/2016		(2,206	)
Interest rate swap			25,000	5.12	9/2016		(1,219	)
Interest rate swap			37,500	5.10	4/2017		(1,749	)
Interest rate swap			35,000	5.59	7/2017		(2,964	)
Interest rate swap			11,400	4.78	9/2010		(315	)

	Total	$	856,306			$	(49,280	)

Item 8. Financial Statements and Supplementary Data

The consolidated financial statements of NorthStar Realty Finance Corp. and the notes related to the foregoing financial statements, together with the independent registered public accounting firm's reports thereon are included in this Item 8.

INDEX TO FINANCIAL STATEMENTS

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

		Page
Reports of Independent Registered Public Accounting Firm		84
Consolidated Balance Sheets as of December 31, 2007 and 2006		86
Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005		87
Consolidated Statement of Stockholders' Equity for the years ended December 31, 2007, 2006 and 2005		88
Consolidated Statements of Comprehensive Income for the years ended December 31, 2007, 2006 and 2005		89
Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005		90
Notes to Consolidated Financial Statements		92
Schedule III—Real Estate and Accumulated Depreciation as of December 31, 2007		141
Schedule IV—Loans and other Lending Investments as of December 31, 2007		149

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
NorthStar Realty Finance Corp.

We have audited the accompanying consolidated balance sheets of NorthStar Realty Finance Corp. and subsidiaries (the "Company") as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders' equity, comprehensive income and cash flows for each of the three years in the period ended December 31, 2007. Our audits of the basic financial statements included the financial statement schedules, (schedule III and IV) listed in the Index at Item 15 of the financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NorthStar Realty Finance Corp. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 29, 2008 expressed an unqualified opinion thereon.

/s/ GRANT THORNTON LLP

New York, New York
February 29, 2008

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
NorthStar Realty Finance Corp.

We have audited NorthStar Realty Finance Corp.'s (the "Company") internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the "COSO criteria"). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, NorthStar Realty Finance Corp. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2007 and 2006 and the related consolidated statements of operations, stockholders' equity, comprehensive income and cash flows for each of the three years in the period ended December 31, 2007 and our report dated February 29, 2008 expressed an unqualified opinion thereon.

/s/ GRANT THORNTON LLP
New York, New York
February 29, 2008

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in Thousands, Except per Share Data)

	December 31, 2007			December 31, 2006
ASSETS:
Cash and cash equivalents	$	153,829		$	44,753
Restricted cash		202,295			134,237
Operating real estate—net		1,134,136			468,608
Available for sale securities, at fair value		549,522			788,467
Warehouse deposits		—			32,649
Collateral held by broker		12,746			—
Real estate debt investments		2,007,022			1,571,510
Corporate loan investments		457,139			—
Investments in and advances to unconsolidated ventures		33,143			11,845
Receivables, net of allowance of $1 and $9 in 2007 and 2006, respectively		32,141			17,477
Unbilled rents receivable		5,684			2,828
Derivative instruments, at fair value		—			958
Deferred costs and intangible assets, net		126,677			90,200
Other assets		78,448			22,088

Total assets		4,792,782			3,185,620

LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Mortgage notes and loans payable		912,365			390,665
Exchangeable senior notes		172,500			—
Bonds payable		1,654,185			1,682,229
Credit facilities		501,432			16,000
Secured term loan		416,934			—
Liability to subsidiary trusts issuing preferred securities		286,258			213,558
Repurchase obligations		1,864			80,261
Securities sold, not yet purchased		12,856			—
Obligations under capital leases		3,541			3,454
Accounts payable and accrued expenses		34,893			20,025
Escrow deposits payable		65,445			58,478
Derivative liability, at fair value		49,280			16,012
Other liabilities		40,695			22,308

Total liabilities		4,152,248			2,502,990
Minority interest in operating partnership		7,534			7,655
Minority interest in joint ventures		14,961			15,204
Stockholders' Equity:
8.75% Series A preferred stock, $0.01 par value, $25 liquidation preference per share, 2,400,000 shares issued and outstanding at December 31, 2007 and December 31, 2006, respectively		57,867			57,867
8.25% Series B preferred stock, $0.01 par value, $25 liquidation preference per share, 7,600,000 and 0 shares issued and outstanding at December 31, 2007 and December 31, 2006, respectively		183,505			—
Common stock, $0.01 par value, 500,000,000 shares authorized, 61,719,469 and 61,237,781 shares issued and outstanding at December 31, 2007 and December 31, 2006, respectively		617			612
Additional paid-in capital		595,418			590,035
Retained earnings (deficit)		(40,075	)		16,570
Accumulated other comprehensive loss		(179,293	)		(5,313	)

Total stockholders' equity		618,039			659,771

Total liabilities and stockholders' equity	$	4,792,782		$	3,185,620

See accompanying notes to consolidated financial statements.

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amount in Thousands, Except per Share Data)

			Year Ended December 31, 2007			Year Ended December 31, 2006			Year Ended December 31, 2005
Revenues and other income:
Interest income			$	292,135		$	134,847		$	40,043
Interest income—related parties				13,516			11,671			8,374
Rental and escalation income				95,755			37,546			11,403
Advisory and management fee income—related parties				7,658			5,906			4,813
Other revenue				6,249			5,874			464

		Total revenues		415,313			195,844			65,097
Expenses:
	Interest expense			242,560			104,239			32,568
	Real estate properties—operating expenses			8,709			8,552			2,044
	Asset management fees—related parties			4,368			594			—
	Fund raising fees and other joint venture cost			6,295			—			—
General and administrative:
	Salaries and equity based compensation(1)			36,148			22,547			11,337
	Shared services—related party			—			—			1,145
	Auditing and professional fees			6,787			4,765			3,634
	Other general and administrative			13,626			7,739			2,881

		Total general and administrative		56,561			35,051			18,997
Depreciation and amortization				33,191			13,578			4,352

		Total expenses		351,684			162,014			57,961
Income from operations				63,629			33,830			7,136
Equity in (loss)/earnings of unconsolidated ventures				(11,684	)		432			226
Unrealized gain (loss) on investments and other				(4,330	)		4,934			867
Realized gain on investments and other				3,559			1,845			2,160

Income from continuing operations before minority interest				51,174			41,041			10,389
Minority interest in operating partnership				(2,702	)		(3,938	)		(2,116	)
Minority interest in joint ventures				(580	)		(68	)		—

Income from continuing operations				47,892			37,035			8,273
Income (loss) from discontinued operations, net of minority interest				(56	)		306			547
Gain on sale from discontinued operations, net of minority interest				—			445			28,852
Gain on sale of joint venture interest, net of minority interest				—			279			—

Net income				47,836			38,065			37,672
Preferred stock dividends				(16,533	)		(860	)

Net income available to common stockholders			$	31,303		$	37,205		$	37,672

Net income per share from continuing operations (basic/diluted)			$	0.51		$	0.91		$	0.38
Income per share from discontinued operations (basic/diluted)				—			0.01			0.03
Gain on sale of discontinued operations and joint venture interest (basic/diluted)				—			0.02			1.33

Net income available to common stockholders			$	0.51		$	0.94		$	1.74

Weighted average number of shares of common stock:
	Basic			61,510,951			39,635,919			21,660,993
	Diluted			65,086,953			44,964,455			27,185,013

(1): The years ended December 31, 2007, 2006 and 2005 include $16,007, $9,080 and $5,847 of equity based compensation expense, respectively.
See accompanying notes to consolidated financial statements.

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Amounts in Thousands, Except per Share Data)

	Preferred Stock at Par		Shares of Common Stock	Common Stock at Par		Additional Paid-in Capital		Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Stockholders' Equity
Balance at December 31, 2004		—	21,249,736		212		145,697		(161	)		(2,439	)		143,309
Stock awards		—	15,194		1		—		—			—			1
Net proceeds from secondary offering of common stock		—	9,200,000		92		78,920		—			—			79,012
Comprehensive loss		—	—		—		—		(577	)		—			(577	)
Amortization of equity based compensation		—	—		—		276		—			—			276
Cash dividends on common stock		—	—		—		—		—			(11,268	)		(11,268	)
Net income		—	—		—		—		—			37,672			37,672

Balance at December 31, 2005		—	30,464,930		305		224,893		(738	)		23,965			248,425
Issuance of restricted shares of common stock			4,808		—		—								—
Stock awards			44,441		—		525		—			—			525
Net proceeds from secondary offering of common stock		—	26,320,001		263		323,294		—			—			323,557
Issuance of shares of preferred stock, net of expenses		24	—		—		57,843		—			—			57,867
Comprehensive loss		—	—		—		—		(4,575	)		—			(4,575	)
Amortization of equity based compensation		—	—		—		132								132
Conversion of OP/LTIP units		—	4,403,601		44		41,191		—			—			41,235
Cash dividends on common stock		—	—		—		—		—			(44,600	)		(44,600	)
Cash dividends on preferred stock		—	—		—		—		—			(860	)		(860	)
Net income												38,065			38,065

Balance at December 31, 2006	$	24	61,237,781	$	612	$	647,878	$	(5,313	)	$	16,570		$	659,771
Proceeds from dividend reinvestment and stock purchase plan			330,297		4		3,805								3,809
Stock awards		—	25,088		—		463		—			—			463
Issuance of shares of preferred stock, net of expenses		76					183,429								183,505
Comprehensive loss									(173,980	)					(173,980	)
Conversion of OP/LTIP units			126,303		1		1,115								1,116
Cash dividends on common stock												(87,948	)		(87,948	)
Cash dividends on preferred stock												(16,533	)		(16,533	)
Net income												47,836			47,836

Balance at December 31, 2007	$	100	61,719,469	$	617	$	836,690	$	(179,293	)	$	(40,075	)	$	618,039

See accompanying notes to consolidated financial statements.

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in Thousands, Except per Share Data)

	Year Ended December 31, 2007			Year Ended December 31, 2006			Year Ended December 31, 2005
Net income	$	47,836		$	38,065		$	37,672
Unrealized gain (loss) on available for sale securities		(158,755	)		10,553			343
Change in fair value of derivatives		(24,772	)		(15,159	)		(933	)
Reclassification adjustment for gains included in net income		9,547			31			13

Comprehensive Income	$	(126,144	)	$	33,490		$	37,095

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands, Except per Share Data)

		The Company (Consolidated)
		Year Ended December 31, 2007			Year Ended December 31, 2006			Year Ended December 31, 2005
Cash flows from operating activities:
Net income		$	47,836		$	38,065		$	37,672
Adjustments to reconcile net income to net cash provided by operating activities:
	Gains on sale of operating real estate and interest in unconsolidated ventures		—			(846	)		(35,930	)
	Equity in loss/(earnings) of unconsolidated ventures		10,431			(152	)		(199	)
	Depreciation and amortization		33,191			13,646			5,038
	Amortization of origination fees/costs		(8,522	)		(2,272	)		(10	)
	Amortization of deferred financing costs		8,375			4,408			2,019
	Minority interest		3,279			4,186			9,328
	Equity based compensation		16,007			9,080			5,846
	Unrealized loss (gain) on investments and other		4,330			(4,934	)		(867	)
	Realized gain on sale of investments and other		(3,372	)		(1,845	)		(2,160	)
	Amortization of bond discount/premiums on securities		(2,489	)		(2,215	)		(1,715	)
	Operating real estate impairment		45			—			—
	Distributions from equity investments		458			152			199
	Capital lease		87			79			72
	Amortization—above/below market leases		(864	)		(1,711	)		28
	Unbilled rents receivable		(2,866	)		(1,711	)		(406	)
	Interest accretion		(7,634	)		(3,284	)		—
Changes in assets and liabilities:
	Restricted cash		(22,493	)		(43,581	)		(11,429	)
	Receivables		(19,037	)		(12,259	)		(3,908	)
	Trading securities		—			—			826,382
	Deferred costs and intangible assets		—			(640	)		—
	Other assets		(13,852	)		(11,020	)		958
	Receivables—related parties		(528	)		126			(224	)
	Accounts payable and accrued expenses		20,892			10,312			3,432
	Payables—related parties		2,026			82			(175	)
	Escrow deposit payable		10,485			46,907			11,571
	Fees from origination of real estate debt investment		15,746			11,147			892
	Other liabilities		10,707			2,268			3,211

Net cash provided by operating activities			102,238			53,988			849,625
Cash flows from investing activities:
Acquisition of operating real estate			(686,219	)		(260,653	)		(219,664	)
Net proceeds from disposition of operating real estate			—			10,751			74,141
Real estate debt investment acquisition costs			(3,265	)		(1,095	)		(815	)
Real estate debt investment repayments			555,433			435,207			84,915
Intangible asset related to acquisition			—			(2,833	)		—
Proceeds from sale of assets			62,821			—			—
Acquisition of available for sale securities			(777,145	)		(681,487	)		(137,309	)
Proceeds from disposition of securities available for sale			136,924			29,434			30,463
Available for sale securities repayments			54,466			37,789			1
Corporate debt investment acquisitions			(489,209	)		—			—
Corporate debt investment repayments			26,678			—			—
Proceeds from disposition of Corporate debt investment			5,419			—			—
Increase in term debt transaction warehouse deposits			(18,000	)		(29,191	)		(10,000	)
Acquisitions/originations of real estate debt investments			(1,158,215	)		(1,322,936	)		(694,297	)
Proceeds from disposition of real estate debt investments			67,322			—			—
Cash receipts from term debt transaction issuer			8,826			1,048			879

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Amounts in Thousands, Except per Share Data)

	The Company (Consolidated)
	Year Ended December 31, 2007			Year Ended December 31, 2006			Year Ended December 31, 2005
Other loans receivable		(13,590	)		—			—
Restricted cash for investment activities		(112,735	)		(63,530	)		(12,538	)
Acquisition deposits		(1,591	)		—			—
Deferred lease costs		—			(42	)		(29	)
Investment in and advance to unconsolidated ventures		(33,099	)		(8,650	)		(6	)
Distributions from unconsolidated ventures		1,250			322			3,169
Sale of investment in unconsolidated ventures		—			2,905			—

Net cash (used in) investing activities		(2,373,929	)		(1,852,961	)		(881,090	)
Cash flows from financing activities:
Restricted cash from financing activities		(10,917	)		—			—
Proceeds from securities sold, not yet purchased		28,471			—			24,131
Proceeds from collateral held by broker		(12,746	)		—			24,831
Borrowing under secured term loan		462,387			—			—
Secured term loan repayment		(45,453	)		—			—
Settlement of short sales		(16,371	)		—			(48,306	)
Mortgage notes and loan borrowings		506,252			189,919			174,600
Proceeds from bonds		881,300			1,416,129			300,000
Settlement of derivative		—			632			(301	)
Collateral held by swap counter-party		(8,476	)		375			(1,017	)
Mortgage principal repayments		(5,537	)		(5,913	)		(40,861	)
Borrowing under credit facilities		1,598,760			1,018,616			529,893
Repayments credit facilities		(1,113,329	)		(1,245,618	)		(314,712	)
Repurchase obligation borrowings		27,084			104,334			7,054
Repurchase obligation repayments		(105,480	)		(31,127	)		(800,418	)
Bond repayments		(113,594	)		(33,900	)		—
Other loans payable		13,300			—			—
Other loans payable repayments		(387	)		—			—
Capital contributions by joint venture		2,631			—			—
Proceeds from preferred stock offering		190,000			60,000			—
Proceeds from offerings		4,027			343,334			85,100
Proceeds from exchangeable senior notes		172,500			—			—
Borrowings from subsidiary trusts issuing preferred securities		72,500			105,000			105,000
Payment of deferred financing costs		(27,007	)		(31,496	)		(13,079	)
Dividends (common and preferred) and distributions		(109,733	)		(52,547	)		(14,197	)
Offering costs		(6,712	)		(21,910	)		(6,088	)
Distributions to minority interest owner		(2,703	)		—			—

Net cash provided by financing activities		2,380,767			1,815,828			11,630
Net (decrease) increase in cash & cash equivalents		109,076			16,855			(19,835	)
Cash and cash equivalents—beginning of period		44,753			27,898			47,733
Cash and cash equivalents—end of period	$	153,829		$	44,753		$	27,898

Supplemental disclosure of cash flow information:
Cash paid for interest	$	217,206		$	96,058		$	31,180

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

1. Formation and Organization

NorthStar Realty Finance Corp., a Maryland corporation (the "Company"), is a self-administered and self-managed real estate investment trust ("REIT"), which was formed in October 2003 in order to continue and expand the real estate debt, real estate securities and net lease businesses conducted by NorthStar Capital Investment Corp. ("NCIC"). Substantially all of the Company's assets are held by, and it conducts its operations through, NorthStar Realty Finance Limited Partnership, a Delaware limited partnership and the operating partnership of the Company (the "Operating Partnership"). On October 29, 2004, the Company closed its initial public offering (the "IPO") pursuant to which it issued 20,000,000 shares of common stock, with proceeds to the Company of approximately $160.1 million, net of issuance costs of $19.9 million. On November 19, 2004, the Company issued an additional 1,160,750 shares of common stock pursuant to the exercise of the overallotment option by the underwriters of the IPO, with proceeds to the Company of $9.7 million, net of issuance costs of $0.7 million. In connection with the IPO, the Company also issued 50,000 shares of common stock, as partial compensation for underwriting services, to the lead underwriter of the IPO. In addition, 38,886 shares of restricted common stock were granted to the Company's non-employee directors. Simultaneously with the closing of the IPO on October 29, 2004, three majority-owned subsidiaries of NCIC (the "NCIC Contributing Subsidiaries") contributed certain controlling and non-controlling interests in entities through which NCIC conducted its subordinate real estate debt, real estate securities and net lease businesses (collectively the "Initial Investments") to the Operating Partnership in exchange for an aggregate of 4,705,915 units of limited partnership interest in the Operating Partnership (the "OP Units") and approximately $36.1 million in cash (the "Contribution Transactions") and an agreement to pay certain related transfer taxes on behalf of NCIC for approximately $1.0 million. From their inception through October 29, 2004, neither the Company nor the Operating Partnership had any operations.

The combination of the Initial Investments contributed to the Operating Partnership represents the predecessor of the Company (the "Predecessor"). The Company succeeded to the business of the Predecessor upon the consummation of the IPO and the contribution of the initial investments on October 29, 2004. The ultimate owners of the entities which comprise the Predecessor were NCIC and certain other persons who held minority ownership interests in such entities.

In January 2006, the Company acquired Timarron Capital Corporation ("Timarron") for $2.8 million. Timarron, based in Dallas, Texas, was organized by former senior executives of Principal Financial and other lenders to develop a nationwide commercial mortgage loan origination platform. Timarron was renamed NRF Capital LP ("NRF Capital") and is a wholly owned consolidated subsidiary of the Company. The purchase price was allocated to an intangible asset since there were no tangible assets owned by Timarron.

In connection with the acquisition, the Company entered into a management incentive bonus plan with the senior management of NRF Capital. The bonus plan is based upon the performance of loans originated by NRF Capital and is payable quarterly in cash over the term of the originated loans. As of December 31, 2007 and 2006, the Company has accrued $4.1 million and $3.0 million, respectively, related to the bonus plan. These costs are considered a direct cost of originating the loans and, accordingly, are deferred and recognized as a reduction of the related loan's yield.

Joint Ventures

In May 2006, the Company entered into a joint venture with Chain Bridge Capital LLC to invest in senior housing and healthcare-related net leased assets, called Wakefield. In connection with the

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1. Formation and Organization (Continued)

formation of the venture, Chain Bridge contributed substantially all of its assets to Wakefield for its $15.1 million membership interest in the joint venture.

At December 31, 2007, the Company and Chain Bridge had equity of $196.8 million and $12.7 million, respectively. The Company controls all major decisions; accordingly, the joint venture's financial statements are consolidated into the Company's consolidated financial statements and Chain Bridge's capital is treated as minority interest.

In March 2007, the Company entered into a joint venture with Monroe Capital Holdco, LLC, or "Monroe," which serves as a platform for originating middle-market loans. The joint venture has commenced making senior and subordinate secured loans to middle-market corporations, including middle-market loans to highly leveraged borrowers. As of December 31, 2007, the Company owned a 95% controlling interest in the joint venture, which is consolidated in the consolidated financial statements and Monroe's capital is treated as minority interest. As of December 31, 2007, the Company and Monroe had equity capital of $55.3 million and $2.3 million, respectively.

2. Summary of Significant Accounting Policies

Basis of Accounting

The accompanying consolidated financial statements of the Company are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, and its subsidiaries, which are either majority owned or controlled by the Company or a variable interest entity ("VIE") where the Company is the primary beneficiary in accordance with the provision of Fin 46(R)-6. All significant intercompany balances have been eliminated in consolidation.

Variable Interest Entities

In accordance with Fin 46(R)-6, the Company identifies entities for which control is achieved through means other than through voting rights (a "variable interest entity" or "VIE"), and determines when and which business enterprise, if any, should consolidate the VIE. In addition, the Company discloses information pertaining to such entities wherein the Company is the primary beneficiary or other entities wherein the Company has a significant variable interest.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that could affect the amounts reported in the consolidated financial statements. Actual results could differ from these estimates.

Operating Real Estate

Operating real estate properties are carried at historical cost less accumulated depreciation. Costs directly related to the acquisition are capitalized. Ordinary repairs and maintenance which are not

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reimbursed by the tenants are expensed as incurred. Major replacements and betterments which improve or extend the life of the asset are capitalized and depreciated over their useful life.

Properties are depreciated using the straight-line method over the estimated useful lives of the assets.

The estimated useful lives are as follows:

Category		Term
Building (fee interest)		39 – 40 years
Building improvements		Lesser of the remaining life of building or useful life
Building (leasehold interest)		Lesser of 39 years or the remaining term of the lease
Property under capital lease		Lesser of 40 years or the remaining term of the lease
Tenant improvements		Lesser of the useful life or the remaining term of the lease
Furniture and fixtures		Four to seven years

In accordance with Statement of Financial Accounting Standards ("SFAS") 144 "Accounting for the impairment or Disposal of Long-Lived Assets" a property to be disposed of is reported at the lower of its carrying value or its estimated fair value less the cost to sell. Once an asset is determined to be held for sale, depreciation and straight-line rental income are no longer recorded. In addition, the asset is reclassified to assets held for sale on the consolidated balance sheet and the results of operations are reclassified to income (loss) from discontinued operations in the consolidated statements of operations.

In accordance with SFAS No. 141 "Business Combinations" ("SFAS 141") the Company allocates the purchase price of operating properties to land, building, tenant improvements, deferred lease cost for the origination costs of the in-place leases and to intangibles for the value of the above or below market leases. The Company amortizes the value allocated to the in-place leases over the remaining lease term. The value allocated to the above or below market leases are amortized over the remaining lease term as an adjustment to rental income.

Investments in and Advances to Unconsolidated Ventures

The Company has various investments in unconsolidated ventures. In circumstances where the Company has a non-controlling interest but are deemed to be able to exert influence over the affairs of the enterprise the Company utilizes the equity method of accounting. Under the equity method of accounting, the initial investment is increased each period for additional capital contributions and a proportionate share of the entity's earnings and decreased for cash distributions and a proportionate share of the entity's losses.

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Management periodically reviews its investments for impairment based on projected cash flows from the venture over the holding period. When any impairment is identified, the investments are written down to recoverable amounts.

Available for Sale Securities

The Company determines the appropriate classification of its investment in securities at the time of purchase and reevaluates such determination at each balance sheet date. Securities for which the Company does not have the intent or the ability to hold to maturity are classified as available for sale securities. The Company has designated its investments in the equity notes of unconsolidated securitizations ("equity notes") as available for sale securities as they meet the definition of a debt instrument due to their redemption provisions in accordance with the provisions of EITF 99-20. Securities available for sale are carried at estimated fair value with the net unrealized gains or losses reported as a component of accumulated other comprehensive income (loss) in the consolidated statements of stockholders' equity. The Company's investments in the equity notes are relatively illiquid, and their value must be estimated by management. Fair value is based primarily upon broker quotes or management's estimates. These estimated values are subject to significant variability based on market conditions, such as interest rates and current spreads. Changes in the valuations do not affect the Company's reported income or cash flows, but impact stockholders' equity.

Real Estate Debt Investments

Real estate debt investments are intended to be held to maturity and, accordingly, are carried at cost, net of unamortized loan origination fees, discounts, repayments, sales of partial interests in loans, and unfunded commitments unless such loan or investment is deemed to be impaired. Discounts and premiums on purchased assets are amortized over the life of the investment using the effective interest method. The origination cost and fees are deferred and amortized using the effective interest method over the life of the related loan investment. The amortization is reflected as an adjustment to interest income.

Real Estate Debt Investments Held for Sale

Real estate debt investments held for sale are carried at the lower of cost or market value using available market information obtained through consultation with dealers or other originators of such investments. The Company classifies, as held for sale, real estate debt investments that are actively being syndicated or marketed for sale.

Cash and Cash Equivalents

The Company considers all highly liquid investments that have remaining maturity dates of three months or less when purchased to be cash equivalents. Cash, including amounts restricted, exceeded the Federal Deposit Insurance Corporation deposit insurance limit of $100,000 per institution at December 31, 2007 and 2006. The Company mitigates its risk by placing cash and cash equivalents with major financial institutions.

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Restricted Cash

Restricted cash consists of escrows for taxes, insurance, leasing costs, capital expenditures, tenant security deposits, payments required under certain lease agreements, escrow deposits collected in connection with whole loan originations and deposits with the trustee related to the consolidating term debt transactions which is primarily proceeds of loan repayments which will be used to reinvest in collateral for the term debt transaction. The Company mitigates its risk by placing restricted cash with major financial institutions.

Deferred Costs, Net

Deferred lease costs consist of fees incurred to initiate and renew operating leases and the FAS 141 purchase price-allocation to in-place lease and lease cost. Lease costs are being amortized using the straight-line method over the terms of the respective leases.

Deferred financing costs represent commitment fees, legal and other third-party costs associated with obtaining financing. These costs are amortized over the term of the financing. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financing transactions, which do not close, are expensed in the period the financing transaction was terminated.

Short Sales

The Company may sell securities that it does not own ("short sales"). Short sales are typically entered into by the Company as a hedge to offset a future liability or changes in the market value of an asset resulting from changes in interest rates. To complete a short sale, the Company will arrange through a broker to borrow the securities to be delivered to the buyer. The proceeds received by the Company from the short sale are retained by the broker until the Company replaces the borrowed securities. In borrowing the securities to be delivered to the buyer, the Company becomes obligated to replace the securities borrowed at their market price at the time of the replacement, whatever that price may be. A gain, limited to the price at which the Company sold the security short, or a loss,

Identified Intangible Assets and Goodwill

Upon the acquisition of a business, the Company records intangible assets acquired at their estimated fair value separate and apart from goodwill. The Company amortizes identified intangible assets that are determined to have finite lives based on the period over which the assets are expected to contribute directly or indirectly to the future cash flows of the business acquired. Intangible assets not subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss is recognized if the carrying amount of an intangible asset is not recoverable or its carrying amount exceeds its estimated fair value.

Comprehensive Income

Comprehensive income or (loss) is recorded in accordance with the provisions of SFAS No. 130, "Reporting Comprehensive income" ("SFAS 130"). SFAS 130 establishes standards for reporting comprehensive income and its components in the financial statements. Comprehensive income (loss), is

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comprised of net income, as presented in the consolidated statements of operations, adjusted for changes in unrealized gains or losses on available for sale securities and changes in the fair value of derivative financial instruments accounted for as cash flow hedges.

Underwriting Commissions and Costs

Underwriting commissions and direct costs incurred in connection with the Company's public offering are reflected as a reduction of additional paid-in-capital.

Revenue Recognition

Rental income from leases is recognized on a straight-line basis over the noncancelable term of the respective leases. The excess of rents recognized over amounts contractually due pursuant to the underlying leases are included in unbilled rent receivable in the accompanying consolidated balance sheets.

Tenant reimbursement income is recognized in the period in which the related expense is incurred. Rental revenue, which is based upon a percentage of the sales recorded by the Company's tenants is recognized in the period such sales were earned by the respective tenants.

Interest income from the Company's loan investments is recognized on an accrual basis over the life of the investment using the effective interest method. Additional interest to be collected at the origination of the loan or the payoff of the loan is recognized over the term of the loan as an adjustment to yield.

Interest income from available for sale securities and held for trading is recognized on the accrual basis of accounting over the life of the investment on a yield-to-maturity basis.

In connection with its investment in the equity notes, the Company recognizes interest income on these investments pursuant to Emerging Issues Task Force ("EITF") 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets." Interest income is recognized on an estimated effective yield to maturity basis. Accordingly, on a quarterly basis, the Company calculates a revised yield on the current amortized cost of the investment and a current estimate of cash flows based upon actual and estimated prepayment and credit loss experience. The revised yield is then applied prospectively to recognize interest income.

Advisory fee income from both third parties and affiliates is recognized on the accrual basis as services are rendered and the fee income is contractually earned in accordance with the respective agreements. Fees from affiliated ventures accounted for under the equity method, are eliminated against the related equity in earnings in such affiliated ventures to the extent of the Company's ownership.

Incentive income related to performance where the Company is entitled to a promoted interest (i.e., the distribution of a disproportionate allocation of cash flow) after other members have obtained a specified return threshold and return of capital. The Company follows Method 1 of EITF Topic D-96 for recording such incentive income. Under Method 1 of EITF Topic D-96, no incentive income is recorded until all contingencies have been eliminated.

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Credit Losses, Impairment and Allowance for Doubtful Accounts

The Company assesses whether unrealized losses on the change in fair value on their available for sale securities reflect a decline in value which is other than temporary in accordance with EITF 03-1. If it is determined the decline in value is other than temporary the impaired securities are written down through earnings to their fair values. Significant judgment of management is required in this analysis, which includes, but is not limited to, making assumptions regarding the collectability of the principal and interest, net of related expenses, on the underlying collateral.

Allowances for real estate debt investment and corporate loan losses are established based upon a periodic review of the investments. Income recognition is generally suspended for loans at the earlier of the date at which payments become 90 days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. Income recognition is resumed when the suspended loan becomes contractually current and performance is demonstrated to be resumed. In performing this review, management considers the estimated net recoverable value of the loan as well as other factors, including the fair market value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the economic situation of the region where the borrower does business. Because this determination is based upon projections of future economic events, which are inherently subjective, the amounts ultimately realized from the loan investments may differ materially from the carrying value at the balance sheet date.

The Company reviews long-lived assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Upon determination that impairment exists, the related asset is written down through earnings to its estimated fair value.

Allowance for doubtful accounts for tenant receivables are established based on periodic review of aged receivables resulting from estimated losses due to the inability of its tenants to make required rent and other payments contractually due. Additionally, the Company establishes, on a current basis, an allowance for future tenant credit losses on billed and unbilled rents receivable based upon an evaluation of the collectability of such amounts.

Rent Expense

Rent expense is recorded on a straight-line basis over the term of the respective leases. The excess of rent expense incurred on a straight-line basis over rent expense, as it becomes payable according to the terms of the lease, is recorded as rent payable and is included in other liabilities in the consolidated balance sheets.

Income Taxes

The Company has elected to be treated as a REIT under Internal Revenue Code Sections 856 through 859 and intends to remain so qualified. As a REIT, the Company generally is not subject to Federal income tax. To maintain its qualification as a REIT, the Company must distribute at least 90% of its REIT taxable income to its stockholders and meet certain other requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to Federal income tax on its taxable income at regular corporate rates. The Company may also be subject to certain state, local and

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franchise taxes. Under certain circumstances, Federal income and excise taxes may be due on its undistributed taxable income.

Pursuant to amendments to the Code that became effective January 1, 2001, the Company has elected or may elect to treat certain of its existing or newly created corporate subsidiaries as taxable REIT subsidiaries (each a "TRS"). In general, a TRS of the Company may perform non-customary services for tenants of the Company, hold assets that the Company cannot hold directly and generally may engage in any real estate or non-real estate related business. A TRS is generally subject to regular corporate income tax. The Company has established several TRSs in jurisdictions for which no taxes are assessed on corporate earnings. However, the Company must include earnings from these TRSs currently.

The Company adopted the provisions of FASB Interpretation No. 48 ("Fin 48"), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 ("FAS No. 109") on January 1, 2007. As a result of the implementation of Fin 48, the Company recognized no material adjustments regarding its tax accounting treatment. The Company expects to recognize interest and penalties related to uncertain tax positions, if any, as income tax expense, which is included in general and administrative expense.

Derivatives and Hedging Activities

In the normal course of business, we use a variety of derivative instruments to manage, or hedge interest rate risk. The Company recognizes derivatives as either assets or liabilities in the consolidated balance sheets and measures those instruments at fair value. The fair value adjustments of each period will affect the consolidated financial statements of the Company differently depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity.

The Company generally enters into cash flow hedges and must designate them at the time of entering into the derivative. The derivatives entered into by the Company are intended to qualify as hedges under accounting principles generally accepted in the United States, unless specifically stated otherwise. Toward this end, the terms of hedges are matched closely to the terms of hedged items. The Company assesses the effectiveness of the cash flow hedges both at inception and on an on-going basis and determines whether the hedge is highly effective in offsetting changes in cash flows of the hedged item. The Company records the effective portion of changes in the estimated fair value in accumulated other comprehensive income (loss) and subsequently reclassifies the related amount of accumulated other comprehensive income (loss) to earnings when the hedging relationship is terminated. If it is determined that a derivative has ceased to be a highly effective hedge, the Company will discontinue hedge accounting for such transaction.

With respect to derivative instruments that have not been designated as hedges, any net payments under, or fluctuations in the fair value of, such derivatives are recognized currently in income.

The Company's derivative financial instruments contain credit risk to the extent that its bank counterparties may be unable to meet the terms of the agreements. The Company minimizes such risk by limiting its counterparties to major financial institutions with good credit ratings. In addition, the potential risk of loss with any one party resulting from this type of credit risk is monitored.

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2. Summary of Significant Accounting Policies (Continued)

Stock Based Compensation

The Company has adopted the fair value method of accounting prescribed in SFAS No. 123R "Accounting for Stock Based Compensation" ("SFAS 123R") (as amended by SFAS No. 148) for its equity based compensation awards. SFAS 123R requires an estimate of the fair value of the equity award at the time of grant rather than the intrinsic value method. All fixed equity based awards to employees and directors, which have no vesting conditions other than time of service, will be amortized to compensation expense over the award's vesting period based on the fair value of the award at the date of grant.

Foreign Currency Translation

The Company's functional currency of its euro-dominated investment is the US dollar. Non-monetary assets and liabilities are translated at historical rates and monetary assets and liabilities are translated at the exchange rates in effect at the end of the reporting period. Statement of operation accounts are translated at the average rates for the reporting period. Any gains and losses from the translation of foreign currency to US dollars are included in the statement of operations. Since the Company's foreign currency Euro-dominated investment is 100% financed with Euro-dominated debt any foreign currency translation gains or losses would be a result of a timing difference of the interest income received and the debt payment.

Earnings Per Share

The Company's basic earnings per share ("EPS") is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding. For purposes of calculating earnings per share, the Company considered all unvested restricted stock which participates in the dividends of the Company to be outstanding. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted to common stock, where such exercise or conversion would result in a lower EPS amount. This also includes units of limited partnership interest in the Operating Partnership. The dilutive effects of units of limited partnership interest and their equivalents are computed using the "treasury stock" method.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation.

Recently Issued Pronouncements

In September 2006, the FASB issued SFAS 157 "Fair Value Measurement" ("SFAS 157"). SFAS 157 establishes a framework for measuring fair value under generally accepted accounting principles, clarifies the definition of fair value within that framework, and expands disclosures about the use of fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The provision of this statement is to be applied prospectively as of the fiscal year of adoption. The Company will adopt the provisions of SFAS 157 for its fiscal year commencing January 1, 2008. The Company does not believe the adoption of SFAS 157 will have a material impact on its consolidated financial statements.

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In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 allows for the measurement of certain financial assets and financial liabilities at fair value. Under this statement, an entity may elect the fair value option on an instrument-by-instrument basis and measure the changes in the fair value as unrealized gains and losses in earnings. This statement is effective for the first fiscal year beginning after November 15, 2007. The Company will adopt the provisions of SFAS 159 for its fiscal year commencing January 1, 2008. The Company is currently evaluating its options under this statement and believes the fair value measurement of certain financial liabilities will result in a positive impact on its book value.

In December 2007, the FASB issued SFAS 141(R), "Business Combinations" (SFAS 141(R)). This Statement replaces SFAS 141, "Business Combinations", and requires an acquirer to recognize the assets acquired, the liabilities assumed, including those arising from contractual contingencies, any contingent consideration, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. SFAS 141(R) also requires the acquirer in a business combination achieved in stages (sometimes referred to as a step acquisition) to recognize the identifiable assets and liabilities, as well as the noncontrolling interest in the acquiree, at the full amounts of their fair values (or other amounts determined in accordance with SFAS 141(R)). In addition, SFAS 141(R)'s requirement to measure the noncontrolling interest in the acquiree at fair value will result in recognizing the goodwill attributable to the noncontrolling interest in addition to that attributable to the acquirer. SFAS 141(R) amends SFAS No. 109, "Accounting for Income Taxes", to require the acquirer to recognize changes in the amount of its deferred tax benefits that are recognizable because of a business combination either in income from continuing operations in the period of the combination or directly in contributed capital, depending on the circumstances. It also amends SFAS 142, "Goodwill and Other Intangible Assets", to, among other things, provide guidance on the impairment testing of acquired research and development intangible assets and assets that the acquirer intends not to use. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company is currently assessing the potential impact that the adoption of SFAS 141(R) could have on its financial statements.

In December 2007, the FASB issued SFAS 160, "Noncontrolling Interests in Consolidated Financial Statements" ("SFAS 160"). SFAS 160 amends Accounting Research Bulletin 51, "Consolidated Financial Statements", to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS 160 also changes the way the consolidated income statement is presented by requiring consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. SFAS 160 requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated and requires expanded disclosures in the consolidated financial statements that clearly identify and distinguish between the interests of the parent owners and the interests of the noncontrolling owners of a subsidiary. SFAS 160 is effective for fiscal periods, and interim periods within those fiscal years, beginning on or after December 15, 2008. The Company is currently assessing the potential impact that the adoption of SFAS 160 could have on its financial statements.

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3. Operating Real Estate

At December 31, 2007 and 2006, operating real estate, net consists of the following:

	December 31, 2007		December 31, 2006
Land	$	157,371	$	54,552
Buildings and improvements		945,760		378,241
Leasehold interests		26,117		15,847
Tenant improvements		38,681		30,974
Furniture and fixtures		1,623		403
Capital leases		3,028		3,028

		1,172,580		483,045
Less: Accumulated depreciation		38,444		14,437

Operating real estate, net	$	1,134,136	$	468,608

Depreciation expense amounted to approximately $24.0 million and $9.2 million for the year ended December 31, 2007 and 2006, respectively, of which a portion is included in income from discontinued operations for each of these periods.

Acquisitions—2007

In February 2007, the Company purchased a 178,213 square foot office property located in Milpitas, CA for $30.0 million. The property is net leased for ten years from the date of acquisition. The Company financed the acquisition with a $23.3 million non-recourse first mortgage, which bears a fixed interest rate of 5.95% and matures on March 6, 2017, and the balance in cash.

In March 2007, the Company purchased a 165,000 square foot office property located in Fort Mill, SC for $34.2 million. The property is net leased with a remaining lease term of 13.6 years from the date of acquisition. The Company financed the acquisition with a $27.7 million non-recourse first mortgage, which bears a fixed interest rate of 5.63% and a mezzanine loan of $3.4 million, which bears a fixed interest rate of 6.21%, and the balance in cash. Both loans mature on April 6, 2017.

In June 2007, the Company purchased a 609,000 square foot distribution warehouse located in Reading, PA for $28.1 million. The property is net leased with a remaining lease term of 10.4 years from the date of acquisition. The Company assumed a $14.5 million non-recourse mortgage, which bears a fixed interest rate of 5.58% and matures on January 1, 2015 and a $5.0 million mortgage, which bears a fixed interest rate of 6.00% and matures on January 1, 2015. The balance of the acquisition was paid in cash.

In November 2007, the Company purchased a 199,112 square foot office property located in Columbus, OH for $33.6 million. The property is net leased with a remaining lease term of ten years from the date of acquisition. The Company financed the acquisition with a $24.1 million non-recourse first mortgage, which bears a fixed interest rate of 6.48% and matures on December 6, 2017, and the balance in cash.

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3. Operating Real Estate (Continued)

Wakefield Joint Venture Acquisitions

The Wakefield joint venture made the following acquisitions during 2007:

A $101.0 million acquisition of a portfolio of 18 assisted living facilities on 15 campuses totaling 372,349 square feet located throughout Wisconsin in January 2007. The properties are net leased to a single tenant under a lease that expires in January 2017. The portfolio was financed with 15 non-recourse first mortgages totaling $75.0 million, which bear a fixed interest rate of 6.39% and mature in February 2017, and the balance in cash.

A $214.9 million acquisition of a portfolio of 28 assisted living facilities totaling 1,063,387 square feet located in California, Georgia, Illinois, Nebraska, Ohio, Oklahoma, Tennessee and Texas, in January 2007. The properties are net leased to a single tenant under a lease that expires in January 2017. The portfolio was financed with a non-recourse first mortgage totaling $160.0 million, which bears a fixed interest rate of 6.49% and matures in January 2017, and the balance in cash.

A $10.5 million acquisition of two assisted living facilities totaling 72,786 square feet located in Illinois, in January 2007. The properties are net leased to a single tenant under a lease that expires in January 2017. The acquisition was financed with a $7.9 million non-recourse first mortgage, which bears a fixed interest rate of 6.59%, and matures in January 2017, and the balance in cash.

A $11.0 million acquisition of a skilled nursing facility totaling 67,706 square feet located in Kentucky, in February 2007. The property is net leased to a single tenant under a lease that expires in January 2022 and contains three 5-year extension options. The property was financed with a $7.7 million non-recourse first mortgage, which bears a fixed interest rate of 7.12%, and matures in August 2010, and the balance in cash.

A $7.6 million acquisition of a skilled nursing facility and an assisted nursing facility totaling 83,626 square feet located in North Carolina, in April 2007. The properties are each net leased to a single tenant with a lease expiration of April 2022. In August 2007, the Wakefield joint venture secured a $6.5 million non-recourse first mortgage on the two properties, which bears a fixed interest rate of 7.32% and matures in August, 2012.

A $4.7 million acquisition of a medical office building totaling 26,552 square feet located in Texas, in May 2007. The property is net leased to two tenants with leases expiring in December 2013 and August 2011. The property was financed with a $3.4 million non-recourse first mortgage, which bears a fixed interest rate of 5.89% and matures in May 2017, and the balance in cash.

A $27.4 million acquisition of a portfolio of four assisted living facilities totaling 78,990 square feet located in Ohio, in June 2007. The properties are net leased to a single tenant under a lease that expires January 2017. The portfolio was financed with four non-recourse first mortgages totaling $8.3 million, which bear fixed interest rates ranging from 5.45% to 6.65% and mature in February 2037, February 2038, June 2037 and October 2038. The balance of the acquisition was paid in cash.

A $153.5 million acquisition of a portfolio of 28 skilled nursing and assisted nursing facilities totaling 1,000,532 square feet located in Indiana, in June 2007. The properties are net leased to a single tenant under a lease that expires in June 2017 and contains two 5-year extension options.

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(Amounts in Thousands, Except per Share Data)

3. Operating Real Estate (Continued)

The property was financed with a $116.0 million non-recourse first mortgage, which bears a fixed interest rate of 7.07% and matures in June 2012, and the balance in cash.

A $15.2 million acquisition of a skilled nursing facility and leasehold interest totaling 104,744 square feet located in California, in August 2007. The properties are net leased to a single tenant under a lease that expires in August 2021. The properties were financed with a $11.4 million non-recourse first mortgage, which bears an interest rate of 30-day LIBOR plus 2.00% and matures in September 2010, and the balance in cash. The Wakefield joint venture entered into an interest rate swap agreement which fixes the interest rate at 6.78% for three years.

A $32.5 million acquisition of a portfolio of six assisted living facilities totaling 153,888 square feet located in North Carolina, in October 2007. The properties are net leased to a single tenant under a lease that expires in October 2022. The portfolio was financed with a five-year mortgage totaling $17.5 million, which bears a fixed interest rate of 6.98% and matures in October 2012, and the balance in cash.

A $12.7 million acquisition of an assisted living facility totaling 81,810 square feet located in Kansas, in December 2007. The property is net leased to a single tenant under a lease that expires in December 2019 and contains two 5-year extension options. The property was financed with a $9.2 million non-recourse first mortgage, which bears a fixed interest rate of 5.66%, and matures in August 2010, and the balance in cash.

Acquisitions—2006

In March 2006, the Company purchased a 121,038 square foot suburban office building ("Green Pond") located in Rockaway, New Jersey for $21.8 million. The property is net leased to two tenants under leases that expire in 2015 and 2017. The Company financed the acquisition with a $17.5 million non-recourse, first mortgage, which bears a fixed interest rate of 5.68%, and matures on April 11, 2016, and the balance in cash.

In June 2006, the Company purchased a 333,600 square foot office property located in Indianapolis, Indiana for $34.4 million. The property is net leased to one tenant under a lease expiring in 2025. The Company financed the acquisition with a $28.6 million non-recourse, first mortgage, which bears a fixed interest rate of 6.06%, and matures on February 1, 2017, and the balance in cash.

In July 2006, the Company purchased a 183,529 square foot office building located in Aurora Colorado for $45.5 million. The property is net leased to a single tenant under a lease that expires in June 2015. The property was financed with a $33.5 million non-recourse, first mortgage, which bears a fixed interest rate 6.22%, and matures in July 2016, a $3.4 million mezzanine loan with an affiliate, which bears a fixed interest rate of 7.37%, and matures in May 2012 and the balance in cash.

Retail Portfolio

In September 2006, the Company purchased a 468,111 square foot portfolio of nine retail properties for $63.2 million. The properties are net leased to two retail tenants with leases expirations beginning in 2016 through 2024. The Company assumed three non-recourse first mortgages for three of the properties and the remaining properties were financed with non-recourse, first mortgages. The four

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(Amounts in Thousands, Except per Share Data)

3. Operating Real Estate (Continued)

mortgages, which bear fixed rates ranging from 5.85% to 7.34%, having maturities ranging from June 2014 to October 2016.

Wakefield Joint Venture

In connection with the Wakefield joint venture, Chain Bridge contributed a portfolio of 11 healthcare properties located in North Carolina, Pennsylvania, Illinois and Florida valued at $45.7 million, and consisting of 417,351 square feet. Each property in the portfolio is leased to a single tenant under leases with various expiration dates ranging from July 2007 to July 2020. The portfolio was financed with a $27.8 million non-recourse, first mortgage bearing fixed interest rate of 6.56% to 7.22%. In addition, the Company purchased two properties consisting of 88,107 square feet, one in California and one in North Carolina for $16.2 million, net of $5.1 million of non recourse, first mortgages at a fixed interest rate of 6.56%. All the mortgages expire in August of 2010.

The Wakefield joint venture made the following acquisitions from May 2006 through December 31, 2006:

•: A $3.6 million acquisition of an assisted facility totaling 20,000 square feet located in Hendersonville, NC. The property is net leased to a single tenant under a lease that expires in May 2016. The property was financed with a $2.8 million non-recourse, first mortgage, which bears a fixed interest rate of 6.56%, and matures in August 2010, and the balance in cash.
•: A $12.3 million acquisition of two skilled nursing facilities totaling 69,957 square feet, one in Black Mountain, NC and one in Blountstown, FL. The properties are net leased to a single tenant under a lease that expires in July 2021. The properties were financed with a $8.7 million non-recourse, first mortgage, which bears a fixed interest rate of 6.95%, and matures in August 2010, and the balance in cash.
•: An $8.8 million acquisition of three assisted care living facilities in a foreclosure sale, totaling 65,427 square feet, one in Albemarle, Brevard and Charlotte, NC. The properties are net leased to a single tenant under a lease that expires in October 2021. The properties were purchased for cash.
•: A $9.2 million acquisition of an assisted care living facility totaling 68,601 square feet in Bremerton, WA. The property is net leased to a single tenant under a ten year lease with renewal options. The property was financed with a $6.75 million non-recourse, first mortgage, which bears a fixed interest rate of 7.13%, and matures in August 2010, and the balance in cash.
•: A $44.9 million acquisition of a laboratory and office space on a Health Science University campus totaling 286,652 square feet. The property is net leased to a single tenant under a lease that expires in December 2013. The property was financed with $33.3 million non-recourse, first mortgage, which bears a fixed interest rate of 5.94%, and matures in January 2014, and the balance in cash.

Dispositions—2007

In April 2007, the Wakefield joint venture sold two properties. The Mountainside Manor property located in Dallas, PA was sold for $1.0 million, representing a gain on sale of approximately $0.1 million. The sale was 100% financed by Wakefield and accordingly the gain on sale is being

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

3. Operating Real Estate (Continued)

deferred and recognized under the installment method in accordance with FAS 66 "Accounting for Sales of Real Estate". The Pennswood Manor property located in Scranton, PA, was sold for $0.8 million.

Dispositions—2006

In January 2006, the Company sold its leasehold interests in 27 West 34th Street and 1372 Broadway, both located in New York City, for $2.3 million recognizing a gain of approximately $141,000, net of minority interest. The operations were classified as discontinued operations in the consolidated statements of operations.

In December 2006, the Wakefield joint venture sold its interest in an assisted care living facility located in Chino Hills, CA for $8.6 million, recognizing a gain of approximately $0.3 million, net of minority interest.

Discontinued Operations

The following table summarizes income from discontinued operations and related gain on sale of discontinued operations, net of minority interest, for the years ended December 31, 2007, 2006 and 2005:

			For the Year Ended December 31, 2007			For the Year Ended December 31, 2006			For the Year Ended December 31, 2005
Revenue:
	Rental and escalation income		$	38		$	750		$	5,618
	Interest and other			—			1			518

		Total revenue		38			751			6,136

Expenses:
	Real estate property operating expenses			—			42			1,818
	General and administrative expenses			1			1			591
	Interest expense			20			159			2,269
Depreciation and amortization				31			183			777

		Total expenses		52			385			5,455

Income (loss) from discontinued operations				(14	)		366			681
Gain on disposition of discontinued operations				(45	)		515			35,930

Income (loss) from discontinued operations before minority interest				(59	)		881			36,611
Minority interest				3			(130	)		(7,212	)

Income (loss) from discontinued operations, net of minority interest			$	(56	)	$	751		$	29,399

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

4. Available for Sale Securities

The following is a summary of the Company's available for sale securities at December 31, 2007:

December 31, 2007		Carrying Value		Gains in Accumulated OCI		Losses in Accumulated OCI			Estimated Fair Value(1)
CMBS		$	419,835	$	987	$	(73,253	)	$	347,569
Real estate term debt			52,178		—		(21,512	)		30,666
REIT debt			82,568		—		(2,276	)		80,292
Term debt equity			67,825		—		(22,960	)		44,865
Corporate CLO			50,697		—		(16,831	)		33,866
Trust preferred securities			15,000		—		(2,736	)		12,264

	Total	$	688,103	$	987	$	(139,568	)	$	549,522

(1): Approximately $405.0 million of these investments serve as collateral for the Company's only consolidated securities term debt transaction and the balance is financed under other borrowing facilities.

At December 31, 2007, the maturities of the available for sale securities ranged from 52 days to 45 years.

During the year ended December 31, 2007, proceeds from the sale and redemption of available for sale securities was $136.9 million. The realized gain on sale was $1.4 of which $1.0 was the unrealized gain which was included in other comprehensive income.

In August 2006, the Company acquired all of the notes issued in a synthetic CMBS term debt transaction, referred to as Abacus 2006-NS2 for $54.2 million. The notes of this term debt transaction bear interest backed by a combination of AAA floating rate securities and a fixed spread earned by the term debt transaction for having sold credit protection on a portfolio of investment grade-rated reference securities. The notes yield a blended spread above LIBOR of approximately 6.96%. Any losses on the reference securities will require the liquidation of a portion of the AAA collateral underlying the term debt in order to make payments to credit protection buyer under the credit default swaps. The term debt transaction was determined to be a variable interest entity under Fin 46(R)-6 and the Company was determined to be the primary beneficiary therefore the financial statements are consolidated into the consolidated financial statements of the Company. In July 2007, the Company sold its interest in Abacus to the Real Estate Securities Opportunity Fund (the "Securities Fund") and, as a result, Abacus is no longer consolidated into the consolidated financial statements of the Company.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

4. Available for Sale Securities (Continued)

The following is a summary of the Company's available for sale securities at December 31, 2006:

December 31, 2006		Carrying Value		Gains in Accumulated OCI		Losses in Accumulated OCI			Estimated Fair Value(1)
CMBS		$	551,194	$	11,830	$	(1,577	)	$	561,447
Real estate term debt transaction			58,021		812		(1,427	)		57,406
REIT debt			82,836		3,480		—			86,316
Term debt transaction equity			67,225		3,605		(2,532	)		68,298
Trust preferred securities			15,000		—		—			15,000

	Total	$	774,276	$	19,727	$	(5,536	)	$	788,467

(1): Approximately $489.2 million of these investments serve as collateral for the Company's only consolidated securities term debt transaction and the balance is financed under other borrowing facilities.

At December 31, 2006, the maturities of the debt securities available for sale ranged from seven to 49 years.

During the year ended December 31, 2006, proceeds from the sale and redemption of available for sale securities to an affiliate was $29.4 million. The realized gain on the sale was $855 of which $712 was the unrealized gain which was included in other comprehensive income.

5. Warehouse Deposits

Prior to closing the Securities Fund in July 2007, the Company entered into warehouse agreements with major commercial banks whereby the banks agree to purchase CMBS and other real estate debt securities under the Company's direction, with the expectation of selling such securities in a term debt transaction. The Company was required to pledge cash or other collateral as security for the purpose of covering a portion of any losses or costs associated with the accumulation of these securities under the warehouse agreement. The warehouse agreements also provided for the Company's notional participation in the income that the assets generated after deducting a notional debt cost. These agreements were treated as non-hedge derivatives for accounting purposes and are therefore marked to market through the consolidated statement of operations. In July 2007, the Company sold its warehouse deposits and assigned its rights under its warehouse agreement to the Securities Fund. See Note 8. As result of the sale, the Company has no warehouse deposits at December 31, 2007.

In March 2006, the Company entered into a warehouse arrangement with a major commercial bank whereby the bank had agreed to purchase up to $450 million of CMBS and other real estate debt securities under the Company's direction with the expectation of selling such securities to the Company's next real estate securities term debt transaction, N-Star IX ("N-Star IX"). In October 2006, the Company amended the warehouse agreement to allow the Company to borrow up to $750 million under the facility. In February 2007, the Company closed N-Star IX and terminated the warehouse agreement.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

6. Real Estate Debt Investments

At December 31, 2007 and 2006, the Company held the following real estate debt investments:

December 31, 2007		Carrying Value(1)		Allocation by Investment Type		Average Fixed Rate		Average Spread Over LIBOR		Number of Investments
Whole loans, floating rate		$	1,082,399	53.9	%	—	%	3.09	%	59
Whole loans, fixed rate			80,371	4.0		10.17		—		10
Subordinate mortgage interests, floating rate			158,347	7.9		—		3.72		13
Mezzanine loans, floating rate			505,227	25.3		—		4.59		16
Mezzanine loan, fixed rate			157,092	7.8		11.16		—		16
Other loans—floating			16,653	0.8		—		1.60		2
Other loans—fixed			6,933	0.3		5.53		—		1

	Total/Weighted average	$	2,007,022	100.0	%	10.67	%	3.56	%	117

(1): Approximately $1.3 billion of these investments serve as collateral for the Company's term debt transaction notes of its three real estate debt term debt transactions and the balance is financed under other borrowing facilities. The Company has future funding commitments, which are subject to certain conditions that borrowers must meet to qualify for such fundings, totaling $564.5 million related to these investments, of which a minimum of $284.1 million will be funded within the Company's existing term debt transactions and require no additional capital from the Company.

December 31, 2006		Carrying Value(1)		Allocation by Investment Type		Average Fixed Rate		Average Spread Over LIBOR		Number of Investments
Whole loans, floating rate		$	884,340	56.3	%	—	%	3.09	%	53
Whole loans, fixed rate			90,343	5.7		8.29		—		10
Subordinate mortgage interests, floating rate			97,345	6.2		—		4.53		9
Mezzanine loans, floating rate			293,825	18.7		—		5.43		12
Mezzanine loan, fixed rate			126,448	8.0		10.85		—		11
Preferred equity, fixed rate			29,271	1.9		9.35		—		2
Other loans—floating			42,195	2.7		—		2.47		7
Other loans—fixed			7,743	0.5		5.53		—		1

	Total/Weighted average	$	1,571,510	100.0	%	9.60	%	3.70	%	105

(1): Approximately $1.3 billion of these investments serve as collateral for the Company's three real estate loan term debt issuances and the balance is financed under other borrowing facilities. The Company had future funding commitments totaling $290.8 million related to these investments.

The Company has identified one real estate debt investment as a variable interest in a VIE and has determined that the Company is not the primary beneficiary of this VIE and as such the VIE should not be consolidated in the Company's consolidated financial statements. The Company's maximum exposure to loss would not exceed the carrying amount of its investment of $47.0 million. For

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

6. Real Estate Debt Investments (Continued)

all other investments, the Company has determined that these investments are not VIEs and, as such, the Company has continued to account for all real estate debt investments as loans.

As of December 31, 2007 and 2006, all loans were performing in accordance with the material terms of the loan agreements.

Contractual maturities of real estate debt investments at December 31, 2007 are as follows:

Years Ending December 31:		Initial Maturity		Maturity Including Extensions
2008		$	426,954	$	14,526
2009			573,700		100,095
2010			459,427		280,590
2011			206,488		677,871
2012			170,384		619,763
Thereafter			186,902		331,010

	Total	$	2,023,855	$	2,023,855

Actual maturities may differ from contractual maturities because certain borrowers have the right to prepay with or without prepayment penalties. The contractual amounts differ from the carrying amounts due to unamortized origination fees and costs and unamortized premiums and discounts being reported as part of the carrying amount of the investments.

7. Corporate Loan Investments

At December 31, 2007, the Company held the following corporate debt investments which were consolidated upon completion of a financing arrangement described in Note 11:

December 31, 2007	Carrying Value(1)		Allocation by Investment Type		Average Spread Over LIBOR/Prime		Number of Investments
First lien note	$	421,973	92.3	%	2.96	%	100
Second lien note		35,166	7.7		6.02		8

Total/Weighted average	$	457,139	100.0	%	3.19	%	108

(1): Approximately $366.8 million and $90.3 million of these investments serve as collateral for our MC Facility and our MC VFCC Facility, respectively, and the Company has future funding commitments totaling $14.3 million related to these investments.

8. Investments in and Advances to Unconsolidated/Uncombined Ventures

The Company has non-controlling, unconsolidated/uncombined ownership interests in entities that are accounted for using the equity method. Capital contributions, distributions, and profits and losses of the real estate entities are allocated in accordance with the terms of the applicable partnership and

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(Amounts in Thousands, Except per Share Data)

8. Investments in and Advances to Unconsolidated/Uncombined Ventures (Continued)

limited liability company agreements. Such allocations may differ from the stated percentage interests, if any, in such entities as a result of preferred returns and allocation formulas as described in such agreements.

CS/Federal Venture

In February 2006, the Company, through a joint venture with an institutional investor, acquired a portfolio of three adjacent class A office/flex buildings located in Colorado Springs, Colorado for $54.3 million. The joint venture financed the transaction with two non-recourse, first mortgage loans totaling $37.9 million and the balance in cash. The loans mature on February 11, 2016 and bear fixed interest rates of 5.51% and 5.46%. The Company contributed $8.4 million for a 50% interest in the joint venture and incurred $0.3 million in costs related to its acquisition, which is capitalized to the investment account. These costs will be amortized over the useful lives of the assets held by the joint venture. The Company accounts for its investment under the equity method of accounting. At December 31, 2007 and 2006, the Company had an investment in CS/Federal of approximately $7.8 million and $8.3 million, respectively.

NSF Venture

In February 2006, the Company sold its interests in the NSF Venture to the institutional pension fund which had an equity interest in the NSF Venture. As part of the sale, the NSF Venture terminated its advisory fee agreements with the Company. The Company recognized a gain on sale of $279,000, net of minority interest. In addition, the Company recognized incentive income of approximately $1.2 million which is included in other revenue in the condensed consolidated statement of operations, which was deferred at December 31, 2005 pursuant to Method 1 of EITF Topic D-96. Subsequent to January 31, 2006, the Company will no longer earn management or incentive fees from the NSF Venture or from loans owned directly by the Company's former joint venture partner.

Monroe Capital Management Advisors, LLC

In March 2007, the Company entered into a joint venture with Monroe Management, a Chicago-based firm, acquiring a 49.9% non-controlling interest in Monroe Management. Monroe Management originates, structures and syndicates middle-market corporate loans for Monroe Capital and provides asset management services. The Company accounts for its investment in the management company under the equity method of accounting. At December 31, 2007, the Company's investment in Monroe Management is carried at a loss of $0.9 million.

NorthStar Realty Finance Trusts

The Company owns all of the common stock of NorthStar Realty Finance Trusts I through VIII (collectively, the "Trusts"). The Trusts were formed to issue preferred securities. Under the provisions of FIN 46(R)-6, the Company determined that the holders of the trust preferred securities were the primary beneficiaries of the Trusts. As a result, the Company did not consolidate the Trusts and has accounted for the investment in the common stock of the Trusts under the equity method of accounting. At December 31, 2007 and December 31, 2006, the Company had an investment in the Trusts of approximately $3.8 and $3.5 million, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

8. Investments in and Advances to Unconsolidated/Uncombined Ventures (Continued)

NorthStar Real Estate Securities Opportunity Fund

In July 2007, the Company closed on $109.0 million of equity capital for its Securities Fund, an investment vehicle in which the Company intends to prospectively conduct its real estate securities investment business.

The Company is the manager and general partner of the Securities Fund. The Company will typically receive base management fees ranging from 1.0% to 2.0% per annum on third-party capital, and is entitled to annual incentive management fees ranging from 20% to 25% of the increase in the Securities Fund's net asset value in excess of an 8.0% per annum return. Base and incentive fees vary depending on the investor capital lockup periods.

At the initial closing, the Company sold $63.6 million of assets, including its interests in two synthetic commercial real estate term debt transactions, its equity interest in its most recent real estate securities term debt transaction, N-Star IX, deposits relating to its off-balance sheet warehouse facility and an equity interest in a third-party securitization. The Company received approximately $35.6 million of cash proceeds from the closing and retained a 25.7% interest in the Securities Fund. At closing, the Company recognized a $1.0 million realized gain relating to the sale of assets at fair market value. At December 31, 2007, the Company had invested a total of $33.0 million and the carrying value of its investment in the Securities Fund was $23.2 million. The Company also had advanced $10.0 million to the Securities Fund under a revolving credit agreement which bears interest at LIBOR plus 3.0% and was included in other assets in the consolidated balance sheet. During 2007, the Company recognized equity in loss of $9.2 million, of which $11.7 million represented an unrealized loss on the mark-to-market adjustment of the securities in the Securities Fund. The Company also earned $0.4 million of management fees from the Securities Fund.

In October 2007, the Securities Fund amended its warehouse agreement with a major commercial bank to extend the term to May 1, 2008. In connection with the amendment, the Securities Fund pledged an additional $15.0 million of cash and the Securities Fund provided $44.0 million of recourse under the warehouse agreement. The Company has committed to contribute up to $10.0 million of additional capital to the Securities Fund, if required, in the form of either debt or equity for purposes of the recourse obligation. At December 31, 2007, the Company's exposure under this warehouse agreement is $22.5 million.

The Company accounts for its investment under the equity method of accounting. The Company retains the investment company accounting of the Securities Fund when recording its share of the earnings or loss of the Securities Fund.

LandCap Investment

On October 5, 2007, we entered into joint venture with Whitehall Street Global Real Estate Limited Partnership 2007, to form LandCap Partners, which we refer to as LandCap. LandCap will opportunistically invest in single family residential land through land loans, lot option agreements and select land purchases. The venture is managed by professionals who have extensive experience in the single family housing sector. We have sole discretion with respect to funding our portion of any investment decisions relating to LandCap and have made no investments to date. The Company accounts for its investment under the equity method of accounting. At December 31, 2007 the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

8. Investments in and Advances to Unconsolidated/Uncombined Ventures (Continued)

Company's investment in LandCap is carried $0.7 million loss, which is the Company's share of the LandCap's general and administrative expenses. In addition the Company advanced approximately $1.0 million under a $2.5 million loan agreement which bears interest at a fixed rate of 12% and was included in other assets in the consolidated balance sheets.

Reconciliation between the operating data for all unconsolidated/uncombined ventures and equity in earnings is as follows:

	The Company
	For the Year Ended December 31, 2007			For the Year Ended December 31, 2006			For the Year Ended December 31, 2005
Net income	$	(33,657	)	$	1,413		$	7,328
Other partners' share of income		24,489			(981	)		(7,054	)
Fee income basis difference		(1,263	)		—			—
Elimination entries		(1,253	)		—			(48	)

Earnings from unconsolidated/uncombined ventures	$	(11,684	)	$	432		$	226

Reconciliation between the Company's investment in unconsolidated entities as of December 31, 2007 and December 31, 2006 is as follows:

	December 31, 2007		December 31, 2006
Company's equity in unconsolidated entities	$	32,801	$	11,491
Purchase price basis difference		342		354

Investment in and advances to unconsolidated ventures	$	33,143	$	11,845

The condensed combined balance sheets for the unconsolidated joint ventures at December 31, 2007 and 2006 are as follows:

			2007		2006
Assets
	Cash		$	4,116	$	184
	Restricted cash			353		168
	Operating real estate, net			50,504		51,902
	Available for sale securities, at fair value			133,926		—
	Deferred costs, net			4,846		5,456
	Other assets			6,131		222

		Total assets	$	199,876	$	57,932


Liabilities and members' equity
	Mortgage notes and loans payable		$	37,398	$	37,861
	Repurchase obligations			51,213		—
	Other liabilities			19,965		4,248
	Members' equity			91,300		15,823

		Total liabilities and members' equity	$	199,876	$	57,932

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

8. Investments in and Advances to Unconsolidated/Uncombined Ventures (Continued)

The condensed combined statements of operations for the unconsolidated joint ventures for the years ended December 31, 2007, 2006 and 2005 are as follows;

			2007			2006		2005
Revenues and other income:
	Interest income		$	8,806		$	624	$	7,364
	Rental and escalation income			5,046			4,542		—
	Other revenue			8,824			23		602

		Total revenue	$	22,676		$	5,189	$	7,966

Expenses:
	Interest expense			3,880			1,925		—
	General and administrative			9,583			41		638
	Depr amort			1,981			1,810		—
	Other expenses			2,276			—		—

		Total Expenses		17,720			3,776		638

Income from operations				4,956			1,413		7,328
	Unrealized loss on investments			(38,613	)		—		—

Net income			$	(33,657	)	$	1,413	$	7,328

9. Variable Interest Entities

Fin 46(R) requires a VIE to be consolidated by its primary beneficiary. The primary beneficiary is the party that absorbs a majority of the VIEs anticipated losses and or a majority of the expected returns. The Company has evaluated its real estate debt investments and its investments in each of its five term debt transaction issuers to determine whether they are VIEs. For each of these investments, the Company has evaluated (1) the sufficiency of the fair value of the entity's equity investment at risk to absorb losses, (2) whether as a group the holders of the equity investment at risk have (a) the direct or indirect ability through voting rights to make decisions about the entity's significant activities, (b) the obligation to absorb the expected losses of the entity and their obligations are not protected directly or indirectly, (c) the right to receive the expected residual return of the entity and their rights are not capped, (3) whether the voting rights of these investors are proportional to their obligations to absorb the expected losses of the entity, their rights to receive the expected returns of their equity, or both and (4) whether substantially all of the entity's activities involve or are conducted on behalf of an investor that has disproportionately fewer voting rights.

As of December 31, 2007, the Company identified interests in 18 entities which were determined to be VIEs under FIN 46(R)-6.

Based on management's analysis, the Company is not the primary beneficiary of 14 of the identified VIEs since it does not absorb a majority of the expected residual losses, or is entitled to a majority of the expected residual returns. Accordingly, these VIEs are not consolidated into the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

9. Variable Interest Entities (Continued)

Company's financial statements as of December 31, 2007 or 2006. See Note 20 for a more detailed discussion.

As of December 31, 2007, the Company was determined to be the primary beneficiary of term debt transactions N-Star IV, N-Star VI, N-Star VII and N-Star VIII and accordingly these entities are consolidated.

10. Deferred Costs and Intangible Assets, Net

Deferred costs and intangible assets as of December 31, 2007 and 2006 consisted of the following:

	December 31, 2007			December 31, 2006
Deferred lease costs	$	88,067		$	52,671
Deferred loan costs		62,225			44,149
Intangible assets		4,272			4,272
Pending deal costs		277			644

		154,841			101,736
Less accumulated amortization		(28,164	)		(11,536	)

Deferred costs and intangible assets, net	$	126,677		$	90,200

Deferred lease cost includes the allocation of a portion of the purchase price, in accordance with SFAS 141, to lease origination costs associated with the in-place leases. For the year ended December 31, 2007 and 2006, approximately $86.8 million and $51.4 million included in deferred lease cost was the allocation of the purchase price to deferred lease cost.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

11. Borrowings

The following table summarizes the Company's outstanding borrowings as of December 31, 2007 and December 31, 2006:

	Stated Maturity	Maximum Maturity Including Extensions	Interest Rate	Maximum Amount Available		Balance at December 31, 2007		Balance at December 31, 2006
Credit Facilities
WA Facility	11/6/2007	11/6/2007	Commercial Paper Rate + 0.15% to 2.10%	$	—	$	—	$	16,000
Unsecured Facility	11/3/2009	11/3/2009	LIBOR + 2.00% to 2.50%		100,000		—		—
MC Facility	3/31/2008	3/31/2008	LIBOR + 0.75%		400,000		374,459		—
MC Facility VFCC	7/29/2008	7/29/2010	Commercial Paper Rate + 0.75%		400,000		71,037		—
JP Facility	8/7/2008	8/7/2010	LIBOR + 0.05% to 1.75%		350,000		55,936		—
Term Loans
WA Term Loan	11/6/2009	11/6/2010	LIBOR + 2.00%		486,043		308,588		—
Euro—note	11/6/2009	11/6/2010	3 month Euribor + 2.0%		108,346		108,346		—

Total Credit Facilities & Term Loans				$	1,844,389		918,366		16,000

Mortgage notes payable (non-recourse)
Chatsworth	5/1/2015		5.65%				43,219		43,506
Salt Lake City	9/1/2012		5.16%				16,231		16,584
EDS	10/8/2015		5.37%				48,371		49,017
Executive Center	1/1/2016		5.85%				51,480		51,480
Green Pond	4/11/2016		5.68%				17,480		17,480
Indianapolis	2/1/2017		6.06%				28,600		28,600
Wakefield GE	8/30/2010		6.93%				67,586		51,560
Wakefield—Park National	1/11/2014		5.94%				33,300		33,300
Wakefield—GE—WLK	1/11/2017		6.49%				160,000		—
Wakefield—GE—Tusc & Harmony	1/11/2017		6.59%				7,875		—
Wakefield—Harmony FNMA	2/1/2017		6.39%				75,000		—
Wakefield—Grove City	2/1/2038		5.45%				1,887		—
Wakefield—Lancaster	6/1/2037		6.40%				2,636		—
Wakefield—Marysville	6/1/2037		6.40%				1,693		—
Wakefield—Washington	10/1/2038		6.65%				1,995		—
Wakefield—Miller Merril	6/30/2012		7.07%				116,000		—
Wakefield—ARL Mob Wachovia	5/11/2017		5.89%				3,412		—
Wakefield—Ascend Colonial	5/31/2012		7.52%				6,500		—
Wakefield—Colonial Dova	8/31/2012		7.32%				6,500		—
Wakefield—Colonial 6 Alfs	11/1/2012		6.98%				19,653		—
Wakefield—St Francis	9/31/2010		LIBOR + 2.00%				11,400		—
Aurora	7/11/2016		6.22%				33,500		33,500
DSG	10/11/2016		6.17%				34,648		35,038
Keene	2/1/2016		5.85%				6,882		6,970
Fort Wayne	1/1/2015		6.41%				3,555		3,626
Portland	6/17/2014		7.34%				4,984		5,132
Milpitas	3/6/2017		5.95%				22,959		—
Fort Mill	4/6/2017		5.63%				27,700		—
Reading	1/1/2015		5.58%				14,387		—
Reading	1/1/2015		6.00%				5,000		—
Alliance	12/6/2017		6.48%				24,032		—

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

11. Borrowings (Continued)

Mezzanine loan payable (non-recourse)
Chatsworth		5/1/2014	6.64%		10,692		11,985
Aurora		5/11/2012	7.37%		—		2,887
Fort Mill		4/6/2017	6.21%		3,208		—
Exchangeable Senior Notes		6/15/2027	7.25%		172,500		—
Repurchase obligations		See Repurchase Obligations below	LIBOR varies		1,864		80,261
Bonds payable
	N-Star IV	7/1/2040	LIBOR + 0.62% (average spread)		300,000		300,000
	N-Star VI	6/1/2041	3 month LIBOR + 0.56% (average spread)		310,500		312,079
	N-Star VII	6/22/2051	LIBOR + 0.34% (average spread)		510,800		510,800
	N-Star VIII	2/1/2041	LIBOR + 0.58% (average spread)		532,885		535,600
	Abacus NS2	8/28/2046	LIBOR + 4.41% (average spread)		—		23,750
Liability to subsidiary trusts issuing preferred securities(1)
Trust I		3/30/2035	8.15%		41,240		41,240
Trust II		6/30/2035	7.74%		25,780		25,780
Trust III		1/30/2036	7.81%		41,238		41,238
Trust IV		6/30/2036	7.95%		50,100		50,100
Trust V		9/30/2036	3 month LIBOR 2.70%		30,100		30,100
Trust VI		12/30/2036	3 month LIBOR 2.90%		25,100		25,100
Trust VII		4/30/2037	3 month LIBOR 2.50%		37,600		—
Trust VIII		7/30/2037	3 month LIBOR 2.70%		35,100		—

				$	3,945,538	$	2,382,713

(1): The liability to subsidiary trusts for Trusts I, II, III and IV have a fixed interest rate for the first ten years after which the interest rate will float and reset quarterly at rates ranging from LIBOR plus 2.70% to 3.25%. The Company entered into interest rate swap agreements on Trusts V, VI, VII and VIII which fix the interest rates for 10 years at 8.16%, 8.02%, 7.60% and 8.29%, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

11. Borrowings (Continued)

Scheduled principal payment requirements on the Company's borrowings are as follows as of December 31, 2007:

	Total		Mortgage and Mezzanine Loans		Credit Facilities		Secured Term Loan		Liability to Subsidiary Trusts Issuing Preferred Securities		Exchangeable Senior Notes		Repurchase Obligations		Bonds Payable
2008	$	508,585	$	5,289	$	501,432	$	—	$	—	$	—	$	1,864	$	—
2009		427,739		10,805		—		416,934		—		—		—		—
2010		96,765		96,765		—		—		—		—		—		—
2011		14,330		14,330		—		—		—		—		—		—
2012		164,027		164,027		—		—		—		—		—		—
Thereafter		2,734,092		621,149		—		—		286,258		172,500		—		1,654,185

Total	$	3,945,538	$	912,365	$	501,432	$	416,934	$	286,258	$	172,500	$	1,864	$	1,654,185

At December 31, 2007, the Company was in compliance with all covenants under its borrowings with the exception of its tangible net worth covenant for which the Company obtained a one-time waiver from its lending institutions.

Exchangeable Senior Notes

In June 2007, the Company issued $172.5 million of 7.25% exchangeable senior notes (the "Notes") which are due in 2027. The Notes were offered in accordance with Rule 144A under the Securities Act of 1933, as amended. The Notes pay interest semi-annually on June 15 and December 15, at a rate of 7.25% per annum, and mature on June 15, 2027. The Notes have an initial exchange rate representing an exchange price of $16.89 per share of the Company's common stock. The initial exchange rate is subject to adjustment under certain circumstances. The Notes are senior unsecured obligations of the Company's operating partnership and may be exchangeable upon the occurrence of specified events, and at any time on or after March 15, 2027, and prior to the close of business on the second business day immediately preceding the maturity date, into cash or a combination of cash and shares of the Company's common stock, if any, at the Company's option. The Notes are redeemable, at the Company's option, on and after June 15, 2014. The Company may be required to repurchase the Notes on June 15, 2012, 2014, 2017 and 2022, and upon the occurrence of certain designated events. The net proceeds from the offering were approximately $167.5 million, after deducting fees and expenses. The proceeds of the offering were used to repay certain of the Company's existing indebtedness, to make additional investments and for general corporate purposes.

Bonds Payable

N-Star VI

In March 2006, the Company completed its sixth term debt transaction ("N-Star VI"). The Company sold the investment grade rated notes having a face amount of $348.4 million, including $70.0 million of revolving floating rate notes, of which only $21.8 million was funded at the closing, and retained all of the below investment grade securities and income notes. N-Star VI has the ability to

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

11. Borrowings (Continued)

borrow, repay and re-borrow pursuant to the terms of the floating rate revolving notes, both during the ramp-up period and the re-investment period, subject to compliance with certain borrowing conditions. The net proceeds of N-Star VI were used to repay $296.1 million of the outstanding principal balance of the Wachovia Credit Facility. As of December 31, 2007 and 2006, the weighted average interest rate was 5.26% and 5.91%, respectively.

N-Star VII

In June 2006, the Company completed its seventh term debt transaction ("N-Star VII"). The Company sold investment grade notes having a face amount of $510.8 million and retained all the below investment grade securities and income notes. As of December 31, 2007 and 2006, the weighted average interest rate was 4.94% and 5.91%, respectively.

N-Star VIII

In December 2006, the Company completed its eighth term debt transaction ("N-Star VIII"). The Company sold the investment grade rated notes having a face amount of $703.8 million, including $260.0 million of revolving floating rate notes, none of which was funded at the closing, and retained all of the below investment grade securities and income notes. N-Star VIII has the ability to borrow, repay and re-borrow pursuant to the terms of the floating rate revolving notes, both during the ramp-up period and the re-investment period, subject to compliance with certain borrowing conditions. The net proceeds of N-Star VIII were used to repay $349.2 million of the outstanding principal balance of the Wachovia Credit Facility. As of December 31, 2007 and 2006, the weighted average interest rate was 5.18% and 5.90%, respectively.

N-Star IX

In February 2007, the Company completed its ninth term debt transaction N-Star IX. The Company sold the investment grade rated notes having a face amount of $759.0 million and retained all of the below investment grade securities and income notes. N-Star IX was collateralized by $593.4 million of securities and loans and $204.9 million of cash. In July 2007, the Company sold the equity notes of N-Star IX to the Securities Fund and as a result, N-Star IX is no longer consolidated into the Company's consolidated financial statements. See Note 8.

Secured Credit Facilities

In June 2006, the Company amended its master repurchase agreement with Wachovia Bank, National Association (the "Wachovia Facility"). Following the amendment, the Company was able to borrow up to $500.0 million under the Wachovia Facility in order to finance the origination and acquisition of senior and subordinate debt and other real estate loans and securities. The additional capacity and flexibility under the Wachovia Facility allowed the Company to accumulate collateral for its next contemplated real estate debt term debt transaction and to continue to finance other investments.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

11. Borrowings (Continued)

Advance rates under the Wachovia Facility ranged from 50% to 100% of the value of the collateral for which the advances were made. Amounts borrowed under the Wachovia Facility bear interest at spreads of 0.15% to 2.50% over one-month LIBOR, depending on the type of collateral for which the amount is borrowed.

In November 2006, the Company amended the Wachovia Facility. Following the amendment, the Company was able to temporarily borrow up to $750.0 million under the Wachovia Facility in order to allow the Company to accumulate collateral for N-Star VIII which closed in December 2006. The proceeds from N-Star VIII closing were used to pay down the facility. Upon closing the term debt transaction, the Company's availability under this facility was $200.0 million.

In May 2007, the Company entered into a new $400.0 million Master Repurchase Agreement with a major financial institution, which was further amended on May 24, 2007 and June 22, 2007 (the "VFCC Facility"). The VFCC Facility provided for a maximum term of three years and could be temporarily increased to $800.0 million for a period not to exceed 10 months in connection with the accumulation of collateral for a commercial real estate term debt securitization transaction.

In connection with the VFCC Facility, on June 5, 2007 and June 22, 2007, the Company amended its existing Master Repurchase Agreement with the same financial institution to allow the Company to borrow up to an additional $100.0 million (the "Swing Line Facility" and together with the VFCC Facility, the "WA Facilities").

In November 2007, the Company terminated the WA facilities and entered into a term loan with the same financial institution.

In June 2007, Monroe Capital entered into a temporary financing arrangement ("MC Facility") with a major financial institution whereby it can acquire loans and finance up to an aggregate amount of $400.0 million to accumulate collateral for a potential collateralized loan obligation ("CLO") securitization transaction. Advance rates range from 40% to 100% of the value of the collateral for which the advance is to be made. Amounts borrowed under the MC Facility bear interest at LIBOR plus 0.75%. The MC Facility terminates on the earlier of March 31, 2008 or a CLO securitized transaction. The financial institution had previously financed 100% of the collateral value under Monroe Capital's direction and retained all of the net interest income, which was accounted for as an off balance sheet warehouse. Upon completion of the MC Facility, the Company consolidated all the collateral financed under the prior financing facility. As of December 31, 2007, the effective interest rate was 5.35%.

In July 2007, Monroe Capital entered into a $400.0 million Master Repurchase Agreement ("MC VFCC") with a major financial institution to accumulate collateral for a potential CLO securitization transaction. Advance rates under the MC VFCC facility range from 40% to 100% of the value of the collateral for which the advance is to be made. Amounts borrowed under the MC VFCC facility bear interest at a spread of 0.75% over the respective commercial paper rate. The MC VFCC facility has a maximum term of three years, subject to annual renewal by the financial institution on each anniversary of the Master Repurchase Agreement. As of December 31, 2007, the effective interest rate was 5.86%.

In August, the Company entered into a new $350.0 million Master Repurchase Agreement with a major financial institution (the "JP Facility"). Advance rates under the JP Facility range from 65% to

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

11. Borrowings (Continued)

97% of the value of the collateral for which the advance is to be made. Amounts borrowed under the JP Facility bear interest at spreads of 0.05% to 1.75% over one-month LIBOR, depending on the type of collateral for which the amount is borrowed. The JP Facility has a maximum term of three years. For the year ended December 31, 2007, the weighted average interest rate was 5.72%.

Secured Term Loan

In March 2007, the Company entered into a non-recourse Euro denominated note purchase agreement with a major financial institution ("Euro Note"), to finance a note collateralized by a € 75.0 million participation in a junior mezzanine loan that bears interest at three month EURIBOR plus 3.75%. The Company borrowed approximately €75.0 million under the note purchase agreement. The loan bears interest at three month EURIBOR plus 1.50%. The note purchase agreement is coterminous with the underlying mezzanine loan scheduled to mature on July 8, 2011.

In November 2007, the Company entered into a new term loan agreement (the "Term Loan Agreement", and together with the modified Euro Note, the "Term Facility") with a major financial institution, which provides for approximately $600 million of term loan capacity. The proceeds under the Term Facility were partially used to repay approximately $450 million outstanding under the WA Facilities, terminating these facilities. The Term Loan Agreement also provides for up to $300 million of revolving term loan capacity as portions of the outstanding balance under the Term Loan Agreement are repaid. The Term Facility initially bears interest at LIBOR plus 2.00% and has an initial two-year term which the Company has the option to extend for an additional one year period, subject to certain conditions. Additionally, the Company entered into a Limited Guaranty Agreement in connection with the Term Facility.

Unsecured Revolving Line of Credit

On November 3, 2006, the Company entered into a Revolving Credit Agreement with Keybanc Capital Markets (the "Administrative Agent") and Bank of America, N.A., as co-lead arrangers. The agreement provides for an unsecured, $100 million revolving credit facility, has a term of three years and bears interest at between 2.00% to 2.50% over LIBOR, based on the overall company leverage.

The facility is supported by an identified asset base with advance rates that vary from 40% to 90% of the asset value provided under a borrowing base calculation. The Administrative Agent has consent rights to the inclusion of assets in the borrowing base calculation.

The terms of the facility include covenants that: (a) limit the Company's maximum total indebtedness to no more than 90% of total assets; (b) require the Company's fixed charge coverage ratio to be no less than 1.30 to 1.0; (c) require the Company to maintain minimum tangible net worth of not less than 85% of the Company's tangible net worth at the closing of the facility, plus 75% of the net proceeds from equity offerings completed after the closing of the facility; (d) limit the Company's recourse indebtedness to 10% of total assets; (e) restrict the Company from making distributions in excess of a maximum of 100% of its adjusted funds from operations, except that the Company may in any case pay distributions necessary to maintain its REIT status; and (f) require the Company to hedge its interest rate exposure such that a 100 basis point fluctuation in interest rates in a quarter would not negatively impact the Company's adjusted funds from operations in such quarter annualized by greater

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

11. Borrowings (Continued)

than 10%. The facility also contains certain customary representations and warranties and events of default.

As of December 31, 2007 and 2006 there were no outstanding borrowings under this facility.

Liability to Subsidiary Trusts Issuing Preferred Securities

In March 2006, a wholly owned subsidiary of the Company completed a private placement of $50.0 million of trust preferred securities ("Trust IV"). The sale assets of the trust consist of like amount of Junior Subordinate Notes due on June 30, 2036 issued by the Company. The trust preferred securities have a 30 year term, ending June 30, 2036 and a fixed interest rate of 7.95% per annum, during the first ten years, after which the interest rate will float and reset quarterly at the three-month LIBOR rate plus 2.80% per annum.

In August 2006, a wholly owned subsidiary of the Company, NorthStar Realty Finance Trust V, completed a private placement of $30.0 million of trust preferred securities. The sole assets of the trust consist of a like amount of junior subordinate notes due September 30, 2036 issued by the Company. The trust preferred securities and the notes have a 30-year term, ending September 30, 2036, and bear interest at a floating rate of three-month LIBOR plus 2.70%. The Company has entered into an interest rate swap agreement, which fixed the interest rate for ten years at 8.16%.

In October 2006, a wholly owned subsidiary of the Company, NorthStar Realty Finance Trust VI, completed a private placement of $25.0 million of trust preferred securities. The sole assets of the trust consist of a like amount of junior subordinate notes due December 30, 2036 issued by the Company. The trust preferred securities and the notes have a 30-year term, ending December 30, 2036, and bear interest at a floating rate of three-month LIBOR plus 2.90%. The Company has entered into an interest rate swap agreement, which fixed the interest rate for ten years at 8.02%.

In March 2007, a wholly owned subsidiary of the Company, NorthStar Realty Finance Trust VII, completed a private placement of $37.5 million of trust preferred securities. The sole assets of the trust consist of a like amount of junior subordinate notes issued by the Company. The trust preferred securities and the notes have a 30-year term, ending April 30, 2037, and bear interest at a floating rate of three-month LIBOR plus 2.50%. The Company has entered into an interest rate swap agreement, which fixed the interest rate for ten years at 7.60%.

In June 2007, a wholly owned subsidiary of the Company, NorthStar Realty Finance Trust VIII, completed a private placement of $35.0 million of trust preferred securities. The sole assets of the trust consist of a like amount of junior subordinate notes issued by the Company. The trust preferred securities and the notes have a 30-year term, ending July 30, 2037, and bear interest at a floating rate of three-month LIBOR plus 2.70%. The Company has entered into an interest rate swap agreement, which fixed the interest rate for ten years at 8.29%.

The Company may redeem the notes, in whole or in part, for cash, at par, after five years. To the extent the Company redeems notes, the Trusts are required to redeem a corresponding amount of trust preferred securities.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

11. Borrowings (Continued)

The ability of the Trusts to pay dividends depends on the receipt of interest payments on the notes. The Company has the right, pursuant to certain qualifications and covenants, to defer payments of interest on the notes for up to six consecutive quarters. If payment of interest on the notes is deferred, the Trust will defer the quarterly distributions on the trust preferred securities for a corresponding period. Additional interest accrues on deferred payments at the annual rate payable on the notes, compounded quarterly.

Repurchase Obligations

The Company had $1.9 million and $80.2 million of repurchase agreements which are collateralized by $13.0 million and $89.1 million of floating rate securities at December 31, 2007 and 2006, respectively. These repurchase agreements are generally used to finance the Company's floating rate securities, backed by mortgage loans, and other investments prior to obtaining permanent financing. These repurchase obligations mature in less than 30 days, and bear LIBOR interest rates. These repurchase agreements are being accounted for as secured borrowings since the Company maintains effective control of the financed assets. For the years ended December 31, 2007 and 2006, the weighted average interest rate was 6.65% and 5.41%, respectively.

12. Commitments and Contingencies

Obligations Under Capital Leases and Operating Lease Agreements

The Company is the lessee of two locations under capital leases, seven ground leases under operating real estate, of which five are paid directly by the tenants, and three corporate offices that are located in New York City, Los Angeles and Dallas. The following is a schedule of minimum future rental payments under these contractual lease obligations as of December 31, 2007:

Years Ending December 31:
2008	$	5,966
2009		6,110
2010		6,124
2011		6,061
2012		5,904
Thereafter		68,848

Total minimum lease payments		99,013
Less: Amounts representing interest		12,452

Future minimum lease payments	$	86,561

Under one of the capital leases, the Company also pays rent equal to 15% of the minimum rental income received from the sub-tenant.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

13. Rental Income Under Operating Leases

Rental income from real estate is derived from the leasing and sub-leasing of space to commercial tenants. The leases are for fixed terms of varying length and provide for annual rentals and expense reimbursements to be paid in monthly installments.

The following is a schedule of future minimum rental income under non-cancelable leases at December 31, 2007:

Years Ending December 31:
2008	$	103,438
2009		104,268
2010		102,289
2011		103,276
2012		99,350
Thereafter		503,346

	$	1,015,967

Included in rental income is percentage rent of $529, $513 and $559 for the year ended December 31, 2007, December 31, 2006 and 2005, respectively.

14. Related Party Transactions

Shared Facilities and Services Agreement

As of April 1, 2007, the Company entered into a sublease with NCIC pursuant to which it will rent, on a month-to-month basis, its office space currently used by NCIC's professionals. The sublease rent is calculated as a per person monthly charge, based on a "turn key" office arrangement.

Advisory Fees

The Company has agreements with N-Star I, N-Star II, N-Star III, N-Star V and N-Star IX, respectively, to perform certain advisory services.

The Company earned total fees of approximately $7.2 million, $5.8 million and $4.2 million for the years ended December 31, 2007, 2006 and 2005, respectively, of which $0.4 million, $0.3 million and $0.2 million is unpaid and included in the Company's balance sheets as of December 31, 2007, 2006 and 2005, respectively, in other assets.

The Company has an agreement with the Securities Fund to receive base management fees ranging from 1.0% to 2.0% per year on third-party capital. As of December 31, 2007, the Company earned $0.4 million in management fees.

Asset Management Fees

The Company entered into a management agreement in April 2006 with Wakefield Capital Management Inc. to perform certain management services. Wakefield Capital Management Inc. is

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

14. Related Party Transactions (Continued)

owned by the partners who own Chain Bridge. The Company has incurred $3.0 million and $0.6 million in management fees for the years ended December 31, 2007 and 2006, respectively, which are recorded in asset management fees related parties in the consolidated statement of operations. The Company had $0.3 million and $0.1 million of unpaid management fees recorded in other liabilities in the consolidated balance sheet at December 31, 2007 and 2006, respectively.

The Company entered into a management agreement in March 2007 with Monroe Management to perform certain management services, as described in Note 8. The Company has incurred $1.3 million in management fees for the year ended December 31, 2007, which is recorded in asset management fees related parties expense in the condensed consolidated statement of operations.

NSF Venture

During the first quarter of 2006, the Company sold its joint venture interest and no longer earns advisory fees from this venture. In connection with the sale, the Company recognized incentive income of approximately $1.2 million, which is included in other revenue in the consolidated statement of operations for the year ended December 31, 2006. The Company also earned and recognized advisory fees from this joint venture of approximately $60,000 for the year ended December 31, 2006.

Legacy Fund

In September 2005, the Company entered into a loan agreement, as lender, with a subsidiary of Legacy Partners Realty Fund I, LLC, (the "Legacy Fund"), as borrowers, in the original principal amount of $66.6 million, secured by a first-priority mortgage lien on an office property located in San Jose, California.

Simultaneously with the closing of this loan, the Company entered into a participation and servicing agreement with a major financial institution pursuant to which the Company sold a 50% participation in this loan and the future funding commitments.

Additionally, the Company entered into a loan agreement with another subsidiary of the Legacy Fund in the original principal amount of $47.4 million, secured by a first-priority mortgage lien on an office property located in San Jose, California. Simultaneously with the closing of this loan, the Company entered into a participation and servicing agreement with a major financial institution pursuant to which the Company sold a 50% participation in this loan and the future funding commitments.

One of the Company's directors, Preston Butcher, is the chairman of the Board of Directors and chief executive officer and owns a significant interest in Legacy Partners Commercial, LLC, which indirectly owns an equity interest in, and owns the manager of, the Legacy Fund. The disinterested members of the Company's Board of Directors approved this transaction. These loans are included in real estate debt investments in the consolidated balance sheets.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

14. Related Party Transactions (Continued)

Hard Rock Hotel Loan

On March 29, 2007, the Company purchased from Credit Suisse ("CS"), a $100 million junior participation in the financing provided by CS in connection the acquisition of the Hard Rock Hotel and Casino in Las Vegas by a joint venture between DLJ Merchant Banking Partners and the Morgans Hotel Group, or Morgans, which is the minority interest in the joint venture. David Hamamoto, the Company's president and chief executive officer, is the chairman of the board of Morgans. The loan is included in real estate debt investments in the consolidated balance sheets.

15. Fair Value of Financial Instruments

The following disclosures of estimated fair value were determined by management, using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

As of December 31, 2007 and 2006, cash equivalents, accounts receivable, accounts payable, repurchase agreements with major banks and securities firms and the master repurchase agreement balances reasonably approximate their fair values due to the short-term maturities of these items. The warehouse deposits available for sale securities and securities sold, not yet purchased are carried on the balance sheet at their estimated fair value. Due to the floating rate, mortgage notes payable and loan receivables are carried at amounts that reasonably approximate their fair value.

For fixed rate loan receivables fair value is estimated using quoted market prices or by discounting future cash flows using current rates at which similar loans would be made to similar borrowers with similar credit risk. The Company's fixed rate loan receivables carrying value for the year ended December 31, 2006 reasonably approximate their fair market value. For the year ended December 31, 2007 the fair market value was $341.3 million with a carrying amount of $332.1 million.

For fixed rate mortgage loans payable the Company uses rates currently available to them with similar terms and remaining maturities to estimate their fair value. The carrying value of the mortgage notes payable for the year ended December 31, 2006 reasonably approximate their fair market value. For the year ended December 31, 2007 the fair market value was $918.8 million with a carrying amount of $912.4 million.

Disclosure about fair value of financial instruments is based on pertinent information available to management as of December 31, 2007 and 2006. Although management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

16. Equity Based Compensation

Omnibus Stock Incentive Plan

On September 14, 2004, the Board of Directors of the Company adopted the NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan (the "Stock Incentive Plan"). The Stock Incentive Plan provides for the issuance of stock-based incentive awards, including incentive stock options, non-qualified stock options, stock appreciation rights, shares of common stock of the Company, including restricted shares, and other equity-based awards, including OP Units which are structured as profits interests ("LTIP Units") or any combination of the foregoing. The eligible participants in the Stock Incentive Plan include directors, officers and employees of the Company, and prior to October 29, 2005, employees pursuant to the shared facilities and services agreement. An aggregate of 8,933,038 shares of common stock of the Company are currently reserved and authorized for issuance under the Stock Incentive Plan, subject to equitable adjustment upon the occurrence of certain corporate events. As of December 31, 2007, the Company has issued an aggregate of 5,484,378 LTIP Units and 101,025 shares of common stock pursuant to the Stock Incentive Plan. Of the 5,484,378 LTIP Units, 3,186,929 vest to the individual recipient at a rate of one-twelfth of the total amount granted as of the end of each quarter, beginning with the first quarter after the date of grant ended either January 29, April 29, July 29, or October 29 for the three-year vesting period so long as the recipient continues to be an eligible recipient, and 2,297,449, comprised of 2,202,436 LTIP Units and 95,013 LTIP Units granted as retention awards, vest as set forth below. In addition, the LTIP Unit holders are entitled to dividends on the entire grant beginning on the date of the grant. Dividends or dividend equivalents paid on the portion of the grant that vested will be charged to retained earnings. Non forfeitable dividends or dividend equivalents paid on LTIP Units that are not vested will be recognized as additional compensation cost.

In January 2007, in connection with year-end bonus compensation the Company granted 1,095,387 LTIPs to employees under the Company's 2004 Omnibus Stock Incentive Plan. In addition, during 2007 there was 21,166 of LTIP grants as signing bonuses to new employees.

In October 2007, in connection with, among other things, entering into non-competition and employment agreements with certain officers of the Company, the Compensation Committee approved long-term retention awards under the Company's 2004 Omnibus Stock Incentive Plan and awarded an aggregate of 2,202,436 LTIP Units to certain of the Company's officers. These LTIP Units vest over a four-year period, with 10% vesting quarterly beginning on January 29, 2008 and 30% vesting quarterly each year thereafter.

In December 2007 the Company granted long-term retention awards under its 2004 Omnibus Stock Incentive Plan and awarded 95,013 LTIP Units to certain employees of the Company. These LTIP units vest over a four-year period, with 10% vesting quarterly beginning on January 29, 2008 and 30% vesting quarterly each year thereafter.

The Company has recognized compensation expense of $10.7 million, $4.5 million and $3.2 million related to the amortization of awards granted under this plan for the years ended December 31, 2007, 2006 and 2005, respectively. As of December 31, 2007, there were approximately 3.3 million unvested LTIP Units and 4,678 LTIP Units were forfeited during the period. The LTIP Units will vest over the next 16 respective quarters with the first quarter being January 29, 2008, and the related compensation expense to be recognized over such period is $37.2 million, provided there are no forfeitures.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

16. Equity Based Compensation (Continued)

Long-Term Incentive Bonus Plan

On September 14, 2004, the Board of Directors of the Company adopted the NorthStar Realty Finance Corp. 2004 Long-Term Incentive Bonus Plan (the "Incentive Bonus Plan"), in order to retain and provide incentive to officers and certain key employees of the Company, co-employees of the Company and NCIC and employees of NCIC who will provide services to the Company pursuant to the shared facilities and services agreement. Up to 2.5% of the Company's total capitalization as of consummation of the IPO is available to be paid under the Incentive Bonus Plan in cash, shares of common stock of the Company or other share-based form at the discretion of the compensation committee of the Company's Board of Directors, if certain return hurdles are met.

An aggregate of 698,142 shares of common stock of the Company were reserved and authorized for issuance under the Incentive Bonus Plan, subject to equitable adjustment upon the occurrence of certain corporate events. On November 19, 2004, an aggregate of 665,346 LTIP units were allocated to officers and employees for awards under the Incentive Bonus Plan if the Company achieves the return hurdles established by the compensation committee. The Company's compensation committee has established the return hurdle for these performance periods as an annual return on paid in capital as defined in the plan, equal to or greater than 12.5%. If the Company achieves these return hurdles, the vested awards may be paid in cash, shares of common stock, LTIP Units or other share based form.

The Company achieved the performance hurdles for both performance periods and each of the participants that was an employee at the conclusion of the performance periods received LTIP units equal to his or her reserved amount. The Compensation Committee determined that the Company met the performance hurdles for both performance hurdles. The aggregate number of units granted in connection with the performance hurdles was 698,142. The Company has recognized $2.2 million, $2.0 million and $2.2 million of compensation expense in the consolidated financial statements for the years ended December 31, 2007, 2006 and 2005, respectively.

Employee Outperformance Plan

In connection with the employment agreement of the Company's head of its real estate securities business, he is eligible to receive incentive compensation equal to 15% of the annual net profits from the Company's real estate securities business in excess of a 12% return on invested capital (the annual bonus participation amount). The Company has the option of terminating this incentive compensation arrangement by paying the Company's head of its real estate securities business an amount based on a multiple of the estimated annual bonus participation amount, at the time it exercises this buyout option. If the Company exercises this buyout option, the fixed amount due for terminating this arrangement will vest ratably and be paid in four installments over a three-year period with 25% paid on termination. If the Company's head of its real estate securities business voluntarily terminates his employment with the Company prior to any exercise of the Company's buyout option, he will be eligible to receive future annual payments based on the future real estate securities annual net profits in excess of the 12% return hurdle on invested capital. The portion of the annual benefit to which the head of the real estate securities business is eligible after voluntary termination increases with each year of employment until the fifth anniversary, at which point the head of the real estate securities business is 100% vested in the full amount of the payment that would be due related to the annual bonus

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

16. Equity Based Compensation (Continued)

participation amount on the real estate securities business income earned on business, initiated five years earlier, over the return hurdle. The Company has recorded compensation expense under this plan of $1.4 million, $0.7 million and $0.2 million for the years ended December 31, 2007, 2006 and 2005, respectively.

2006 Outperformance Plan

In January 2006, the Compensation Committee of the Board of Directors approved the NorthStar Realty Finance Corp. 2006 Outperformance Plan (the "2006 Outperformance Plan"), a long-term compensation program to further align the interests of the Company's stockholders and management. Under the 2006 Outperformance Plan, award recipients will share in a "performance pool" if the Company's total return to stockholders for the period from January 1, 2006 (measured based on the average closing price of the Company's common stock for the 20 trading days prior to January 1, 2006) to December 31, 2008 exceeds a cumulative total return to stockholders of 30%, including both share price appreciation and dividends paid. The size of the pool will be 10% of the outperformance amount in excess of the 30% benchmark, subject to a maximum dilution cap equal to $40 million, exclusive of accrued dividends. Each employee'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 performance pool that is established under the 2006 Outperformance Plan will be allocated among the Company's employees in accordance with the percentage specified in each employee's award agreement. Although the amount of the awards earned under the 2006 Outperformance Plan will be determined when the performance pool is established, not all of the awards vest at that time. Instead, 50% of the awards vest on December 31, 2008 and 25% of the awards vest on each of the first two anniversaries thereafter based on continued employment. The Company recorded the compensation expense for the 2006 Outperformance Plan in accordance with SFAS 123 (R) "Stock Based Compensation." The fair value of the 2006 Outperformance Plan on the date of adoption was determined by the Company to be $4.1 million. In connection with its determination, the Company retained a firm that had experience in appraising similar plans and considered such appraisal in its determination of the fair value of the 2006 Outperformance Plan. The Company will amortize 50% of the value into compensation expense over the first three years of the plan, 25% will be amortized over four years and the remaining 25% over five years. The Company recorded compensation expense of $1.1 million and $1.1 million for each of years ended December 31, 2007 and 2006.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

16. Equity Based Compensation (Continued)

The status of our LTIP grants as December 31, 2007 and 2006 is as follows:

	December 31, 2007				December 31, 2006
	LTIP Grants		Weighted Average Grant Price		LTIP Grants		Weighted Average Grant Price
Balance at beginning of year(1)	1,683		$	9.44	853		$	9.05
Granted	3,826			12.25	843			9.72
Converted to common stock	(20	)		9.0	(3	)		9.00
Forfeited	(5	)		16.48	(10	)		9.00

Ending balance(2)	5,484		$	11.47	1,683		$	9.44

(1): Reflects balance at January 1, 2007 and January 1, 2006 for the periods ended December 31, 2007 and 2006, respectively.
(2): Reflects balance at December 31, 2007 and 2006, respectively.

17. Stockholders' Equity

Common Stock

In March 2006, the Company granted a total of 4,808 shares to a new member of the Company's Board of Directors.

In May 2006, the Company issued 17,049 shares to its Board of Directors as part of their annual grants.

In May 2006, the Company completed a secondary public offering for 10.0 million shares at $10.60 per share and in June 2006 the underwriters exercised their over-allotment option and acquired 1,528,616 additional shares.

The net proceeds of approximately $114.7 million were used to pay down short term debt and to fund new investments. In November 2006, the Company completed a public offering for 12,391,385 shares at $14.95 per share and in December 2006 the underwriters exercised their over-allotment option and acquired 2,400,000 additional shares. The net proceeds of approximately $208.8 million were used to pay down short term debt and to fund new investments.

Effective as of April 27, 2007, the Company implemented a Dividend Reinvestment and Stock Purchase Plan pursuant to which it registered and reserved for issuance 15,000,000 shares of its common stock. For the year ended December 31, 2007, the Company issued a total of approximately 330,297 common shares for a gross sales price of approximately $3.8 million.

In May 2007, the Company issued 25,088 shares of common stock with a fair value at the date of grant of $0.3 million to its Board of Directors as part of their annual grants.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

17. Stockholders' Equity (Continued)

Preferred Stock

In September 2006, the Company completed a public offering of 2,400,000 shares of 8.75% Series A Cumulative Redeemable Preferred Stock at a price of $25.00 per share. The net proceed from the offering was $57.9 million.

In February 2007, the Company completed a public offering of 6,200,000 shares of 8.25% Series B Cumulative Redeemable Preferred Stock at a price of $25.00 per share and generated net proceeds of approximately $150.0 million. In May 2007, the Company completed a public offering of an additional 1,400,000 shares of 8.25% Series B Cumulative Redeemable Preferred Stock at a price of $25.00 per share which increased the number of Series B shares outstanding to 7,600,000 and generated additional net proceeds of approximately $33.5 million bringing total net proceeds from the sale of Series B preferred stock to approximately $183.5 million.

Dividends

On April 21, 2005, the Company declared a cash dividend of $0.15 per share of common stock. The dividend was paid on May 16, 2005 to the shareholders of record as of the close of business on May 2, 2005.

On July 28, 2005, the Company declared a cash dividend of $0.15 per share of common stock. The dividend was paid on August 15, 2005 to the shareholders of record as of the close of business on August 8, 2005.

On October 6, 2005, the Company declared a dividend of $0.23 per share of common stock, payable to stockholders of record as of October 14, 2005. The Company made this payment on October 21, 2005.

On January 26, 2006, the Company declared a cash dividend of $0.27 per share of common stock. The dividend was paid on February 10, 2006 to the shareholders of record as of the close of business on February 3, 2006.

On April 12, 2006, the Company declared a cash dividend of $0.30 per share of common stock. The dividend was paid on April 26, 2006 to the shareholders of record as of the close of business on April 19, 2006.

On July 25, 2006, the Company declared a cash dividend of $0.30 per share of common stock. The dividend was paid on August 11, 2006 to the shareholders of record as of the close of business on August 4, 2006.

On October 24, 2006, the Company declared a cash dividend of $0.34 per share of common stock. The dividend was paid on November 15, 2006 to the shareholders of record as of the close of business on November 6, 2006.

On January 23, 2007, the Company declared a cash dividend of $0.35 per share of common stock and $0.54688 per share of Series A preferred stock. The dividends were paid on February 15, 2007 to the stockholders of record as of the close of business on February 5, 2007.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

17. Stockholders' Equity (Continued)

On April 25, 2007, the Company declared a cash dividend of $0.36 per share of common stock, $0.54688 per share of Series A preferred stock and $0.55573 per share of Series B preferred stock. The dividends were paid on May 15, 2007 to the stockholders of record as of the close of business on May 7, 2007.

On July 24, 2007, the Company declared a cash dividend of $0.36 per share of common stock, $0.54688 per share of Series A preferred stock and $0.51563 per share of Series B preferred stock. The dividends were paid on August 15, 2007 to the stockholders of record as of the close of business on August 7, 2007.

On October 23, 2007, the Company declared a cash dividend of $0.36 per share of common stock, $0.54688 per share of Series A preferred stock and $0.51563 per share of Series B preferred stock. The dividends were paid on November 15, 2007 to the stockholders of record as of the close of business on November 7, 2007.

Earnings Per Share

Earnings per share for the years ended December 31, 2007, 2006 and 2005 is computed as follows (in thousands):

		2007		2006		2005
Numerator (Income)
*Basic Earnings*
Net income available to common stockholders		$	31,303	$	37,205	$	37,672
Effect of dilutive securities
	Income allocated to minority interest		2,699		5,072		9,498

*Dilutive net income available to stockholders*		$	34,002	$	42,277	$	47,170

Denominator (Weighted Average Shares)
*Basic Earnings:*
Shares available to common stockholders			61,511		39,636		21,661
Effect of dilutive securities:
OP/LTIP units			3,364		5,328		5,524

*Dilutive Shares*			64,875		44,964		27,185

18. Minority Interest

Operating Partnership

Minority interest represents the aggregate limited partnership interests or OP Units in the Operating Partnership held by limited partners (the "Unit Holders"). Income allocated to the minority interest is based on the Unit Holders ownership percentage of the Operating Partnership. The ownership percentage is determined by dividing the numbers of OP Units held by the Unit Holders by the total OP Units outstanding. The issuance of additional shares of beneficial interest (the "Common Shares" or "Share") or OP Units changes the percentage ownership of both the Unit Holders and the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

18. Minority Interest (Continued)

Company. Since a unit is generally redeemable for cash or Shares at the option of the Company, it is deemed to be equivalent to a Share. Therefore, such transactions are treated as capital transactions and result in an allocation between shareholders' equity and minority interest in the accompanying consolidated balance sheet to account for the change in the ownership of the underlying equity in the Operating Partnership. As of December 31, 2007 and 2006, minority interest related to the aggregate limited partnership units of 5,683,118 and 1,988,580 representing an 8.43% and 3.15% interest in the Operating Partnership, respectively. During 2007 and 2006, 126,303 and 4,403,601 OP/LTIP units, respectively, were converted to Common Stock.

Joint Ventures

In May 2006, the Company formed the Wakefield joint venture with Chain Bridge. The joint venture is consolidated in the consolidated financial statements and Chain Bridge's capital is treated as minority interest. Income allocated to minority interest for the year ended December 31, 2007 and 2006 was $226,000 and $68,000, respectively.

In March 2007, the Company formed a joint venture with Monroe. The joint venture is consolidated in the consolidated financial statements and Monroe's capital is treated as minority interest. Income allocated to minority interest for the year ended December 31, 2007 was $354,000.

19. Risk Management and Derivative Activities

Derivatives

The Company uses derivatives primarily to manage interest rate risk exposure. These derivatives are typically in the form of interest rate swap agreements and the primary objective is to minimize interest rate risks associated with the Company's investment and financing activities. The counterparties of these arrangements are major financial institutions with which the Company may also have other financial relationships. The Company is exposed to credit risk in the event of non-performance by these counterparties; however, the Company does not anticipate that any of the counterparties will fail to meet their obligations because of their high credit ratings. The objective in using interest rate derivatives is to add stability to interest expense and to manage exposure to interest rate movements.

The Company acquired all the notes of a synthetic CMBS term debt transaction that entered into a credit default swap agreement with a major financial institution to sell credit protection on a pool of CMBS securities. In July 2007, the Company sold its interest in the synthetic commercial real estate term debt transaction and the credit default swap. See Note 8.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

19. Risk Management and Derivative Activities (Continued)

The following tables summarize the Company's derivative financial instruments as of December 31, 2007 and 2006:

December 31, 2007		Notional Value		Strike Rate		Expiration Date	Fair Value
Interest rate swap		$	5,100	4.18	%	12/2010	$	(53	)
Interest rate swap			6,160	4.29		8/2012		(64	)
Interest rate swap			3,290	4.80		12/2013		(102	)
Interest rate swap			2,842	5.04		8/2018		(101	)
Interest rate swap			5,492	4.76		3/2013		(165	)
Interest rate swap			3,465	4.41		3/2010		(52	)
Interest rate swap			4,000	4.66		11/2015		(83	)
Interest rate swap			15,000	5.08		5/2016		(738	)
Interest rate swap			34,000	5.07		5/2017		(1,614	)
Interest rate swap			3,765	4.98		7/2015		(146	)
Interest rate swap			3,567	4.98		6/2015		(140	)
Interest rate swap			5,957	5.06		8/2015		(231	)
Interest rate swap			23,300	4.99		12/2012		(979	)
Interest rate swap			2,686	5.02		2/2016		(86	)
Interest rate swap			20,000	5.05		6/2013		(841	)
Interest rate swap			12,750	5.06		8/2017		(488	)
Interest rate swap			7,700	5.30		5/2010		(268	)
Interest rate swap			14,000	5.03		10/2015		(621	)
Interest rate swap			323,505	5.53		6/2018		(23,468	)
Basis Swap			5,000	6.36		12/2015		(17	)
Basis Swap			15,000	6.61		6/2018		(49	)
Interest rate swap			9,873	4.81		8/2014		(293	)
Interest rate swap			3,000	4.89		6/2015		(99	)
Interest rate swap			60,000	5.52		6/2016		(4,855	)
Interest rate swap			16,200	5.52		6/2018		(1,349	)
Interest rate swap			49,404	5.63		7/2016		(3,905	)
Interest rate swap			13,200	5.06		2/2008		(5	)
Interest rate swap			49,150	4.88		3/2008		(15	)
Interest rate swap			30,000	5.46		9/2016		(2,206	)
Interest rate swap			25,000	5.12		9/2016		(1,219	)
Interest rate swap			37,500	5.10		4/2017		(1,749	)
Interest rate swap			35,000	5.59		7/2017		(2,964	)
Interest rate swap			11,400	4.78		9/2010		(315	)

	Total	$	856,306				$	(49,280	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

19. Risk Management and Derivative Activities (Continued)

December 31, 2006		Notional Value		Strike Rate		Expiration Date	Fair Value
Interest rate swap		$	5,100	4.18	%	12/2010	$	151
Interest rate swap			6,160	4.29		8/2012		224
Interest rate swap			3,290	4.80		12/2013		49
Interest rate swap			2,842	5.04		8/2018		26
Interest rate swap			5,492	4.76		3/2013		81
Interest rate swap			3,465	4.41		3/2010		61
Interest rate swap			4,000	4.66		11/2015		104
Interest rate swap			15,000	5.08		5/2016		(61	)
Interest rate swap			3,765	4.98		7/2015		7
Interest rate swap			3,567	4.98		6/2015		6
Interest rate swap			5,957	5.06		8/2015		10
Interest rate swap			23,300	4.99		12/2012		(22	)
Interest rate swap			2,686	5.02		2/2016		(2	)
Interest rate swap			20,000	5.05		6/2013		(2	)
Interest rate swap			12,750	5.06		8/2017		61
Interest rate swap			7,700	5.30		5/2010		(82	)
Interest rate swap			14,000	5.03		10/2015		(22	)
Interest rate swap			323,505	5.53		6/2018		(9,808	)
Basis swap			5,000	7.07		12/2015		(6	)
Basis swap			15,000	7.31		6/2018		(11	)
Interest rate swap			60,000	5.52		6/2016		(2,251	)
Interest rate swap			16,200	5.52		6/2018		(645	)
Interest rate swap			49,404	5.63		7/2016		(2,021	)
Interest rate swap			13,200	5.06		2/2008		13
Interest rate swap			49,150	4.88		3/2008		163
Interest rate swap			30,000	5.46		9/2016		(943	)
Interest rate swap			25,000	5.12		9/2016		(135	)

	Total	$	725,533				$	(15,055	)

Credit Risk Concentrations

Concentration of credit risk arise when a number of borrowers, tenants or issuers related to the Company's investments are engaged in similar business activities or located in the same geographic location to be similarly affected by changes in economic conditions. The Company monitors its portfolio to identify potential concentrations of credit risks. Approximately 17.3% of the Company's 2007 rental and escalation revenue is generated from one tenant in the Company's healthcare net lease portfolio. The Company believes the rest of its net lease portfolio is reasonably well diversified and does not contain any unusual concentration of credit risks.

135

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

20. Off Balance Sheet Arrangements

Term Debt Transactions

The Company has interests in four term debt transactions, whose term notes are primarily collateralized by investment grade real estate securities. The Company generally purchases the preferred equity or the income notes of each term debt transaction, which are the equity securities of the term debt issuances, and, with the exception of N-Star I, all of the below investment grade term debt notes of each term debt transaction. In addition, the Company earns a fee of 0.35% of the outstanding principal balance of the assets backing each of these term debt issuances as an annual collateral management fee. The Company's interests in N-Star I, N-Star II, N-Star III and N-Star V are each accounted for as a single debt security available for sale pursuant to EITF 99-20.

The following tables describe certain terms of the collateral for and the notes issued by N-Star I, N-Star II, N-Star III and N-Star V as follows for the year ended December 31, 2007 and 2006:

		Collateral—December 31, 2007						Term Notes—December 31, 2007
Issuance		Date Closed	Par Value of Collateral		Weighted Average Interest Rate		Weighted Average Expected Life (years)	Outstanding Term Notes(1)		Weighted Average Interest Rate at 12/31/07		Stated Maturity
N-Star I(2)		8/21/03	$	320,583	6.58	%	4.64	$	301,406	6.24	%	8/01/2038
N-Star II		7/01/04		335,301	6.24		4.73		306,110	5.75		6/01/2039
N-Star III		3/10/05		404,772	6.30		5.20		358,892	5.84		6/01/2040
N-Star V		9/22/05		495,971	5.87		7.09		456,319	5.07		9/05/2045

	Total		$	1,556,627	6.21	%	5.59	$	1,422,727	5.66	%

(1): Includes only notes held by third parties.
(2): The Company has an 83.3% interest.

		Collateral—December 31, 2006						Term Notes—December 31, 2006
Issuance		Date Closed	Par Value of Collateral		Weighted Average Interest Rate		Weighted Average Expected Life (years)	Outstanding Term Notes(1)		Weighted Average Interest Rate at 12/31/06		Stated Maturity
N-Star I(2)		8/21/03	$	344,769	6.59	%	5.40	$	325,551	6.22	%	8/01/2038
N-Star II		7/01/04		377,911	6.30		6.30		341,101	5.78		6/01/2039
N-Star III		3/10/05		400,963	6.38		5.95		359,878	5.90		6/01/2040
N-Star V		9/22/05		501,021	5.92		9.03		461,500	5.17		9/05/2045

	Total		$	1,624,664	6.27	%	6.86	$	1,488,030	5.71	%

(1): Includes only notes held by third parties.
(2): The Company has an 83.3% interest.

136

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

20. Off Balance Sheet Arrangements (Continued)

Monroe CLO Equity Notes

In December 2006, the Company acquired 40% of the residual equity interests in a CLO originated by Monroe Capital, LLC, a specialty finance company, for $16.7 million. The CLO includes collateral of approximately $400 million backed primarily by first lien senior secured loans. The equity is currently yielding an internal rate of return of approximately 15%. The CLO was determined to be a variable interest entity under Fin 46(R)-6 and the Company was determined not to be the primary beneficiary; therefore, the financial statements of the CLO are not consolidated into the condensed financial statements of the Company. The Company's residual equity interests are accounted for as debt securities available for sale pursuant to EITF 99-20. The fair market value was $9.5 million at December 31, 2007.

The Company's potential loss in its off balance sheet investments is limited to the carrying value of its investment, which is $78.1 million, and $126.6 million, at December 31, 2007 and 2006 respectively.

21. Quarterly Financial Information (Unaudited)

The tables below reflect the Company's selected quarterly information for the Company for the years ended December 31, 2007, 2006 and 2005.

		Three Months Ended
		December 31, 2007		September 30, 2007		June 30, 2007		March 31, 2007
		(unaudited)
Total revenue		$	110,921	$	112,678	$	107,460	$	84,254
Income from continuing operations before minority interests			11,628		14,813		16,646		8,087
Income from continuing operations			10,532		13,918		15,731		7,711
Net income available to common stockholders			5,301		8,687		10,965		6,350
Net income per share—basic/diluted		$	0.08	$	0.14	$	0.18	$	0.10
Weighted-average shares outstanding
	basic		61,696,568		61,629,938		61,378,154		61,329,675
	diluted		67,062,284		64,659,852		64,419,056		64,126,691

137

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

21. Quarterly Financial Information (Unaudited) (Continued)

		Three Months Ended
		December 31, 2006		September 30, 2006		June 30, 2006		March 31, 2006
		(unaudited)
Total revenue		$	66,333	$	58,264	$	39,113	$	31,770
Income from continuing operations before minority interests			15,273		10,773		6,011		8,821
Income from continuing operations			14,774		9,533		5,160		7,423
Net income available to common stockholders			14,420		9,674		5,244		7,866
Net income per share—basic/diluted		$	0.29	$	0.23	$	0.15	$	0.25
Weighted-average shares outstanding
	basic		50,010,028		42,513,172		34,980,352		30,556,586
	diluted		54,109,492		48,068,996		40,744,276		36,323,517

		Three Months Ended
		December 31, 2005		September 30, 2005		June 30, 2005		March 31, 2005
		(unaudited)
Total revenue		$	23,233	$	17,232	$	13,750	$	10,882
Income (loss) from continuing operations before minority interests			2,095		5,620		1,310		1,364
Income from continuing operations			1,689		4,461		1,040		1,083
Net income available to common stockholders			22,178		4,616		9,823		1,055
Net income per share—basic		$	0.96	$	0.22	$	0.47	$	0.05
Weighted-average shares outstanding
	basic		23,164,930		21,264,930		21,250,240		21,249,736
	diluted		28,708,507		26,790,161		26,766,315		26,760,770

138

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

22. Segment Reporting

The Company's real estate debt segment is focused on originating, structuring and acquiring senior and subordinate debt investments secured primarily by commercial real estate properties. The Company generates revenues from this segment by earning interest income from its debt investments and its operating expenses consist primarily of interest costs from financing the assets. This segment generates income from operations by earning a positive spread between the yield on its assets and the interest cost of its debt. The Company evaluates performance and allocates resources to this segment based upon its contribution to income from continuing operations.

The Company's real estate securities segment is focused on investing in a wide range of commercial real estate debt securities, including commercial mortgage-backed securities ("CMBS"), REIT unsecured debt, credit tenant loans and unsecured subordinate securities of commercial real estate companies. The Company generates revenues from this segment by earning interest income and advisory fees from owning and managing these investments. Its operating expenses consist primarily of interest costs from financing its securities. The segment generates income from operations by earning advisory fees and a positive spread between the yield on its assets and the interest cost of its debt.

The Company's operating real estate segment is focused on acquiring commercial real estate facilities located throughout the U.S. that are primarily leased under long-term triple-net leases to corporate tenants. Triple-net leases generally require the lessee to pay all costs of operating the facility, including taxes and insurance and maintenance of the facility. The Company's net-leased facilities are currently located in New York, Ohio, California, Utah, Pennsylvania, New Jersey, Indiana, Illinois, New Hampshire, Massachusetts, Kansas, Maine, South Carolina, Michigan, Colorado, North Carolina, Florida, Washington, Oregon, Wisconsin, Georgia, Oklahoma, Nebraska, Tennessee, Texas and Kentucky. Revenues from these assets are generated from rental income received from lessees of the facilities, and operating expenses, which include interest costs related to financing the assets, operating expenses, real estate taxes, insurance, ground rent and repairs and maintenance. The segment generates income from operations by leasing these facilities at a higher rate than the costs of owning and financing the assets.

The Company's corporate loan segment is focused on originating, structuring and acquiring secured first and second lien loans to middle-market companies. The Company generates revenues from this segment by earning interest income from its debt investments and its operating expenses consist primarily of interest costs from financing the assets. This segment generates income from operations by earning a positive spread between the yield on its assets and the interest cost of its debt. The Company evaluates performance and allocates resources to this segment based upon its contribution to income from continuing operations.

139

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

22. Segment Reporting (Continued)

The following table summarizes segment reporting for the years ended December 31, 2007 and 2006 (in thousands):

		Operating Real Estate			Real Estate Debt		Real Estate Securities		Corporate Loans		Unallocated(1)			Consolidated Total
Total revenues for the twelve months ended
	December 31, 2007	$	99,069		$	204,056	$	78,962	$	25,406	$	7,820		$	415,313
	December 31, 2006		39,337			111,855		40,506		—		4,146			195,844
Income (loss) from continuing operations before minority interest for the twelve months ended
	December 31, 2007		(4,612	)		76,951		15,538		6,921		(43,624	)		51,174
	December 31, 2006		(3,442	)		46,145		23,922		—		(25,584	)		41,041
Net income (loss) for the twelve months ended
	December 31, 2007		(4,894	)		76,951		15,538		6,568		(46,327	)		47,836
	December 31, 2006		(2,745	)		46,423		23,922		—		(29,535	)		38,065
Total assets as of
	December 31, 2007		1,266,457			2,307,922		620,769		525,171		72,463			4,792,782
	December 31, 2006		580,508			1,693,536		774,736		—		136,840			3,185,620

(1): Unallocated includes corporate level interest income, interest expense and general & administrative expenses.

23. Supplemental Disclosure of Non-Cash Investing and Financing Activities

A summary of non-cash investing and financing activities for the years ended December 31, 2007, 2006 and 2005 is presented below:

	2007		2006		2005
The acquisition of available for sale securities with warehouse deposit	(21,878	)	—		2,988
Real estate debt investment pay-down due from servicer	(33,842	)	—		—
Assignment of minority interest to joint venture	—		(15,081	)	—
Write-off of deferred cost and straight-line rents in connection with disposition of operating real estate	27		609		4,955
Write-off of intangible in connection with the sale of joint venture interest	—		339		—
Assumption of loan in connection with acquisition of operating real estate	(19,499	)	—		—
Deed in lieu of foreclosure of operating real estate	(7,525	)	—		—

24. Subsequent Events (Unaudited)

Dividends

On January 22, 2008, the Company declared a dividend of $0.36 per share of common stock, $0.54688 per share of Series A preferred stock and $0.51563 per share of Series B preferred stock to stockholders of record as of February 5, 2008. The dividends were paid on February 15, 2008.

140

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES
SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION
As of December 31, 2007
(Amounts in Thousands, Except per Share Data)

Column A	Column B		Column C Initial Cost				Column D Cost Capitalized Subsequent To Acquisitions				Column E Gross Amount at Which Carried at Close of Period						Column F				Column H	Column I
Location	Encumbrances		Land		Building & Improvements		Land		Building & Improvements		Land		Building & Improvements		Total		Accumulated Depreciation		Total		Date Acquired	Life on Which Depreciation is Computed
987 Eighth Avenue, NY, NY	$	—	$	—	$	2,645	$	—	$	—	$	—	$	2,645	$	2,645	$	781	$	1,864	Mar-99	Various
36 West 34 Street, NY, NY		—		—		4,440		11		—		11		4,440		4,451		990		3,461	Mar-99	Various
701 Seventh Avenue, NY, NY		—		—		3,246		—		—		—		3,246		3,246		2,056		1,190	Mar-99	Various
Los Angeles, CA		53,910		5,837		55,030		—		—		5,837		55,030		60,867		4,976		55,891	Jan-05	39 years
Salt Lake Cit, UT		16,231		672		19,739		—		25		672		19,764		20,436		1,752		18,684	Aug-05	39 years
Auburn Hills, MI		11,609		2,980		8,607		—		—		2,980		8,607		11,587		895		10,692	Sep-05	39 years
Rancho Cordova, CA		11,125		3,060		9,360		—		—		3,060		9,360		12,420		769		11,651	Sep-05	39 years
Camp Hill, PA		25,638		5,900		19,510		—		—		5,900		19,510		25,410		1,844		23,566	Sep-05	39 years
Springdale, OH		19,208		3,030		20,469		—		476		3,030		20,945		23,975		1,387		22,588	Dec-05	39 years
Springdale, OH		16,586		2,470		17,821		—		—		2,470		17,821		20,291		1,210		19,081	Dec-05	39 years
Springdale, OH		15,686		1,500		17,690		—		—		1,500		17,690		19,190		1,201		17,989	Dec-05	39 years
Rockaway, NJ		17,480		6,118		15,664		—		28		6,118		15,692		21,810		860		20,950	Mar-06	39 years
Indianapolis, IN		28,600		1,670		32,306		—		—		1,670		32,306		33,976		1,493		32,483	Mar-06	39 years
Albemarle, NC		2,275		267		2,646		—		234		267		2,880		3,147		80		3,067	Oct-06	40 years
Blountstown, FL		3,719		378		5,069		—		—		378		5,069		5,447		185		5,262	Jul-06	40 years
Brevard, NC		1,725		145		2,100		—		6		145		2,106		2,251		64		2,187	Oct-06	40 years
Roxboro, NC		3,301		262		3,251		—		—		262		3,251		3,513		132		3,381	May-06	40 years
Charlotte, NC		2,500		350		2,826		—		416		350		3,242		3,592		89		3,503	Oct-06	40 years
East Arlington, TX		3,413		3,619		842		—		—		3,619		842		4,461		13		4,448	May-07	40 years

141

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES
SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
As of December 31, 2007
(Amounts in Thousands, Except per Share Data)

Column A	Column B	Column C Initial Cost		Column D Cost Capitalized Subsequent To Acquisitions		Column E Gross Amount at Which Carried at Close of Period			Column F		Column H	Column I
Location	Encumbrances	Land	Building & Improvements	Land	Building & Improvements	Land	Building & Improvements	Total	Accumulated Depreciation	Total	Date Acquired	Life on Which Depreciation is Computed
Elk Park, NC	2,625	250	4,197	—	—	250	4,197	4,447	22	4,425	Oct-07	40 years
Windsor, NC	2,625	991	3,935	—	—	991	3,935	4,926	20	4,906	Oct-07	40 years
Yanceyville, NC	4,375	259	7,155	—	—	259	7,155	7,414	37	7,377	Oct-07	40 years
Wichita, KS	9,188	2,282	10,418	—	—	2,282	10,418	12,700	11	12,689	Dec-07	40 years
Edenton, NC	2,625	306	4,142	—	—	306	4,142	4,448	22	4,426	Oct-07	40 years
Haysville, NC	2,625	157	4,291	—	—	157	4,291	4,448	22	4,426	Oct-07	40 years
Clemmons, NC	3,250	337	2,876	—	—	337	2,876	3,213	51	3,162	Apr-07	40 years
Grove City	1,887	613	6,813	—	—	613	6,813	7,426	92	7,334	Jun-07	40 years
Franklin, WI	6,366	872	5,420	—	—	872	5,420	6,292	130	6,162	Jan-07	40 years
Denmark, WI	1,219	241	1,501	—	—	241	1,501	1,742	36	1,706	Jan-07	40 years
Green Bay, WI	3,173	638	3,970	—	—	638	3,970	4,608	95	4,513	Jan-07	40 years
Kenosha, WI	4,130	697	4,336	—	—	697	4,336	5,033	104	4,929	Jan-07	40 years
Madison, WI	4,275	764	4,753	—	—	764	4,753	5,517	114	5,403	Jan-07	40 years
Manitowoc, WI	5,017	811	5,044	—	—	811	5,044	5,855	121	5,734	Jan-07	40 years
McFarland, WI	3,833	703	4,371	—	—	703	4,371	5,074	105	4,969	Jan-07	40 years
Racine, WI	10,050	1,609	10,007	—	—	1,609	10,007	11,616	240	11,376	Jan-07	40 years
Menomonee, WI	6,075	1,011	6,286	—	—	1,011	6,286	7,297	150	7,147	Jan-07	40 years
Sheboygan, WI	9,300	1,542	9,590	—	—	1,542	9,590	11,132	230	10,902	Jan-07	40 years
Stevens Point, WI	8,487	1,837	11,425	—	—	1,837	11,425	13,262	273	12,989	Jan-07	40 years

142

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES
SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
As of December 31, 2007
(Amounts in Thousands, Except per Share Data)

Column A	Column B	Column C Initial Cost		Column D Cost Capitalized Subsequent To Acquisitions		Column E Gross Amount at Which Carried at Close of Period			Column F		Column H	Column I
Location	Encumbrances	Land	Building & Improvements	Land	Building & Improvements	Land	Building & Improvements	Total	Accumulated Depreciation	Total	Date Acquired	Life on Which Depreciation is Computed
Stoughton, WI	1,686	349	2,168	—	—	349	2,168	2,517	52	2,465	Jan-07	40 years
Wausau, WI	7,553	498	3,095	—	—	498	3,095	3,593	74	3,519	Jan-07	40 years
Two Rivers, WI	2,708	1,421	8,839	—	—	1,421	8,839	10,260	212	10,048	Jan-07	40 years
Wisconsin Rapids, WI	1,129	416	2,585	—	—	416	2,585	3,001	62	2,939	Jan-07	40 years
Lancaster, OH	2,636	294	5,938	2	—	296	5,938	6,234	80	6,154	Jun-07	40 years
Marysville, OH	1,693	2,218	5,017	—	—	2,218	5,017	7,235	68	7,167	Jun-07	40 years
Indianapolis, IN	2,251	210	2,505	—	—	210	2,505	2,715	34	2,681	Jun-07	40 years
Castletown, IN	6,813	677	8,071	—	—	677	8,071	8,748	109	8,639	Jun-07	40 years
Chesterfield, IN	4,075	815	4,198	—	—	815	4,198	5,013	57	4,956	Jun-07	40 years
Columbia City, IN	8,079	1,034	6,384	—	—	1,034	6,384	7,418	84	7,334	Jun-07	40 years
Dunkirk, IN	2,132	310	2,293	—	—	310	2,293	2,603	31	2,572	Jun-07	40 years
Fort Wayne, IN	4,895	1,478	4,403	—	—	1,478	4,403	5,881	60	5,821	Jun-07	40 years
Hartford City, IN	2,096	199	1,775	—	—	199	1,775	1,974	24	1,950	Jun-07	40 years
Hobart, IN	5,958	1,835	5,012	—	—	1,835	5,012	6,847	68	6,779	Jun-07	40 years
Huntington, IN	4,548	526	5,031	—	—	526	5,031	5,557	68	5,489	Jun-07	40 years
LaGrange, IN	519	47	578	—	—	47	578	625	8	617	Jun-07	40 years
LaGrange, IN	5,115	446	5,487	—	—	446	5,487	5,933	74	5,859	Jun-07	40 years
Middletown, IN	3,424	132	4,743	—	—	132	4,743	4,875	64	4,811	Jun-07	40 years
Mooresville, IN	1,530	631	4,179	—	—	631	4,179	4,810	57	4,753	Jun-07	40 years

143

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES
SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
As of December 31, 2007
(Amounts in Thousands, Except per Share Data)

Column A	Column B	Column C Initial Cost		Column D Cost Capitalized Subsequent To Acquisitions		Column E Gross Amount at Which Carried at Close of Period			Column F		Column H	Column I
Location	Encumbrances	Land	Building & Improvements	Land	Building & Improvements	Land	Building & Improvements	Total	Accumulated Depreciation	Total	Date Acquired	Life on Which Depreciation is Computed
Peru, IN	6,457	502	7,128	—	—	502	7,128	7,630	97	7,533	Jun-07	40 years
Plymouth, IN	5,278	128	5,531	—	—	128	5,531	5,659	75	5,584	Jun-07	40 years
Portage, IN	7,071	1,438	7,981	—	—	1,438	7,981	9,419	108	9,311	Jun-07	40 years
Rockport, IN	1,723	253	2,085	—	—	253	2,085	2,338	28	2,310	Jun-07	40 years
Rushville, IN	554	62	1,171	—	—	62	1,171	1,233	16	1,217	Jun-07	40 years
Rushville, IN	4,108	310	5,852	—	—	310	5,852	6,162	79	6,083	Jun-07	40 years
Sullivan, IN	891	102	431	—	—	102	431	533	6	527	Jun-07	40 years
Sullivan, IN	4,930	1,794	4,458	—	—	1,794	4,458	6,252	60	6,192	Jun-07	40 years
Syracuse, IN	3,514	125	4,558	—	—	125	4,558	4,683	62	4,621	Jun-07	40 years
Tipton, IN	6,937	1,102	5,155	—	—	1,102	5,155	6,257	70	6,187	Jun-07	40 years
Wabash, IN	3,711	1,451	4,145	—	—	1,451	4,145	5,596	56	5,540	Jun-07	40 years
Wabash, IN	1,308	1,060	863	—	—	1,060	863	1,923	12	1,911	Jun-07	40 years
Wakarusa, IN	6,492	153	7,106	—	—	153	7,106	7,259	96	7,163	Jun-07	40 years
Wakarusa, IN	10,084	289	13,408	—	—	289	13,408	13,697	182	13,515	Jun-07	40 years
Warsaw, IN	3,658	319	3,718	—	—	319	3,718	4,037	51	3,986	Jun-07	40 years
Raleigh, NC	3,250	156	3,859	—	—	156	3,859	4,015	68	3,947	Apr-07	40 years
Daly City, CA	3,463	3,297	1,377	—	—	3,297	1,377	4,674	13	4,661	Aug-07	40 years
Daly City, CA	7,937	—	10,707	—	—	—	10,707	10,707	287	10,420	Aug-07	40 years
Washington Crt Hse, OH	1,995	341	5,123	13	—	354	5,123	5,477	69	5,408	Jun-07	40 years
Harrisburg, IL	3,690	191	5,055	—	—	191	5,055	5,246	121	5,125	Jun-07	40 years

144

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES
SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
As of December 31, 2007
(Amounts in Thousands, Except per Share Data)

Column A	Column B	Column C Initial Cost		Column D Cost Capitalized Subsequent To Acquisitions		Column E Gross Amount at Which Carried at Close of Period			Column F		Column H	Column I
Location	Encumbrances	Land	Building & Improvements	Land	Building & Improvements	Land	Building & Improvements	Total	Accumulated Depreciation	Total	Date Acquired	Life on Which Depreciation is Computed
Clinton, OK	1,355	225	3,522	—	76	225	3,598	3,823	84	3,739	Jan-07	40 years
Olney, IL	4,243	109	5,426	—	—	109	5,426	5,535	130	5,405	Jan-07	40 years
Vandalia, IL	7,345	82	7,965	—	—	82	7,965	8,047	191	7,856	Jan-07	40 years
Paris, IL	6,836	187	6,796	—	—	187	6,796	6,983	163	6,820	Jan-07	40 years
Rantoul, IL	5,639	151	5,372	—	—	151	5,372	5,523	129	5,394	Jan-07	40 years
Robinson, IL	4,006	219	4,740	—	—	219	4,740	4,959	114	4,845	Jan-07	40 years
Cincinnati, OH	11,468	2,052	15,965	—	—	2,052	15,965	18,017	379	17,638	Jan-07	40 years
Memphis, TN	14,681	4,770	14,318	—	—	4,770	14,318	19,088	343	18,745	Jan-07	40 years
Charleston, IL	5,862	485	6,205	—	—	485	6,205	6,690	148	6,542	Jan-07	40 years
Caroltton, GA	2,988	816	4,260	—	—	816	4,260	5,076	102	4,974	Jan-07	40 years
Kingfisher, OK	3,994	128	5,500	—	—	128	5,500	5,628	131	5,497	Jan-07	40 years
Elk City, OK	4,384	143	6,727	—	75	143	6,802	6,945	161	6,784	Jan-07	40 years
Olney, IL	2,463	57	2,891	—	—	57	2,891	2,948	69	2,879	Jan-07	40 years
Effingham, IL	4,617	340	5,002	—	—	340	5,002	5,342	120	5,222	Jan-07	40 years
Fairfield, IL	6,418	153	7,898	—	—	153	7,898	8,051	189	7,862	Jan-07	40 years
Fullerton, CA	7,631	4,065	8,559	—	—	4,065	8,559	12,624	205	12,419	Jan-07	40 years
La Vista, NE	4,296	562	4,970	—	—	562	4,970	5,532	119	5,413	Jan-07	40 years
Mattoon, IL	6,954	227	7,532	—	—	227	7,532	7,759	180	7,579	Jan-07	40 years
Mattoon, IL	5,677	210	6,865	—	—	210	6,865	7,075	164	6,911	Jan-07	40 years

145

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES
SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
As of December 31, 2007
(Amounts in Thousands, Except per Share Data)

Column A	Column B	Column C Initial Cost		Column D Cost Capitalized Subsequent To Acquisitions		Column E Gross Amount at Which Carried at Close of Period			Column F		Column H	Column I
Location	Encumbrances	Land	Building & Improvements	Land	Building & Improvements	Land	Building & Improvements	Total	Accumulated Depreciation	Total	Date Acquired	Life on Which Depreciation is Computed
Stephenville, TX	6,187	507	6,456	—	—	507	6,456	6,963	155	6,808	Jan-07	40 years
Fullerton, CA	797	1,357	868	—	—	1,357	868	2,225	21	2,204	Jan-07	40 years
Rockford, IL	4,961	1,101	4,816	—	—	1,101	4,816	5,917	115	5,802	Jan-07	40 years
Effingham, IL	553	211	1,141	—	—	211	1,141	1,352	27	1,325	Jan-07	40 years
Santa Ana, CA	7,934	2,281	7,050	—	—	2,281	7,050	9,331	169	9,162	Jan-07	40 years
Sycamore, IL	8,509	816	9,900	—	—	816	9,900	10,716	237	10,479	Jan-07	40 years
Oklahoma City, OK	4,453	757	5,182	3	—	760	5,182	5,942	123	5,819	Jan-07	40 years
Garden Grove, CA	11,228	6,976	5,944	—	—	6,976	5,944	12,920	142	12,778	Jan-07	40 years
Weatherford, OK	4,519	229	5,605	—	57	229	5,662	5,891	136	5,755	Jan-07	40 years
Mt. Sterling, KY	7,650	599	10,001	—	—	599	10,001	10,600	229	10,371	Feb-07	40 years
Tuscola, IL	4,185	237	4,728	—	—	237	4,728	4,965	121	4,844	Jan-07	40 years
Burnsville, NC	2,625	521	4,670	—	84	521	4,754	5,275	24	5,251	Oct-07	40 years
Middletown, NC	—	52	—	—	—	52	—	52	—	52	Jun-07	40 years
Huntington, IN	—	120	—	—	—	120	—	120	—	120	Jun-07	40 years
Rockport, IN	—	366	—	—	—	366	—	366	—	366	Jun-07	40 years
Sullivan, IN	—	494	—	—	—	494	—	494	—	494	Jun-07	40 years
Warsaw, IN	—	77	—	—	—	77	—	77	—	77	Jun-07	40 years
Windsor, NC	—	397	—	—	—	397	—	397	—	397	Feb-07	40 years
Cherry Springs, NC	2,786	164	3,215	—	—	164	3,215	3,379	124	3,255	Jun-06	40 years
Bremerton, NC	6,750	964	8,156	—	115	964	8,271	9,235	223	9,012	Dec-06	40 years
Sterling, IL	2,018	129	5,603	—	315	129	5,918	6,047	252	5,795	May-06	40 years
Clinton, NC	2,336	283	5,084	—	149	283	5,233	5,516	221	5,295	May-06	40 years
Winter Garden, FL	4,954	1,693	5,805	—	21	1,693	5,826	7,519	241	7,278	May-06	40 years
Brevard, NC	2,097	328	2,532	—	—	328	2,532	2,860	103	2,757	May-06	40 years
Black Mountain, NC	4,896	468	5,786	—	—	468	5,786	6,254	211	6,043	Jul-06	40 years
Hillsboro, OR	33,300	3,950	39,193	—	32	3,950	39,225	43,175	1,021	42,154	Dec-06	40 years
Wendell, NC	2,344	212	2,279	—	—	212	2,279	2,491	93	2,398	May-06	40 years
Winston-Salem, NC	3,524	1,258	6,374	—	628	1,258	7,002	8,260	282	7,978	May-06	40 years
Gastonia, NC	1,847	345	1,392	—	—	345	1,392	1,737	57	1,680	May-06	40 years

146

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES
SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
As of December 31, 2007
(Amounts in Thousands, Except per Share Data)

Column A	Column B		Column C Initial Cost				Column D Cost Capitalized Subsequent To Acquisitions				Column E Gross Amount at Which Carried at Close of Period						Column F				Column H	Column I
Location	Encumbrances		Land		Building & Improvements		Land		Building & Improvements		Land		Building & Improvements		Total		Accumulated Depreciation		Total		Date Acquired	Life on Which Depreciation is Computed
Morris, IL		6,982		568		8,509		—		53		568		8,562		9,130		352		8,778	May-06	40 years
Williamston, NC		3,195		265		2,925		—		—		265		2,924		3,189		119		3,070	May-06	40 years
Aurora, CO		33,500		2,650		35,786		24		—		2,674		35,786		38,460		1,481		36,979	Jul-06	39 years
North Attleboro, MA		4,782		—		5,445		—		—		—		5,445		5,445		216		5,229	Sep-06	39 years
Bloomingdale, IL		5,822		—		5,810		—		—		—		5,810		5,810		232		5,578	Sep-06	39 years
Concord Holdings, NH		8,505		2,145		9,216		—		—		2,145		9,216		11,361		374		10,987	Sep-06	39 years
Melville, NY		4,516		—		3,187		—		—		—		3,187		3,187		142		3,045	Sep-06	39 years
Millbury, MA		4,800		—		5,994		—		—		—		5,994		5,994		214		5,780	Sep-06	39 years
Wichita, KS		6,223		1,325		5,584		—		—		1,325		5,584		6,909		213		6,696	Sep-06	39 years
Keene, NH		6,882		3,033		5,919		—		—		3,033		5,919		8,952		240		8,712	Sep-06	39 years
Fort Wayne, IN		3,555		—		3,642		—		—		—		3,642		3,642		158		3,484	Sep-06	39 years
Portland, ME		4,984		—		6,687		—		—		—		6,687		6,687		387		6,300	Sep-06	39 years
Milpitas, CA		22,959		16,800		8,847		—		—		16,800		8,847		25,647		297		25,350	Feb-07	40 years
Columbus, OH		24,033		4,375		29,181		—		—		4,375		29,181		33,556		73		33,483	Nov-07	40 years
Fort Mill, SC		30,909		3,300		31,554		—		—		3,300		31,554		34,854		673		34,181	Mar-07	40 years
Reading, PA		19,386		3,225		23,009		—		—		3,225		23,009		26,234		331		25,903	Jun-07	40 years

	$	912,365	$	160,346	$	1,009,391	$	53	$	2,789	$	160,400	$	1,012,180	$	1,172,580	$	38,444	$	1,134,136

147

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES
SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
(Amounts in Thousands, Except per Share Data)

The changes in real estate for the year ended December 31, 2007, December 31, 2006 and December 31, 2005 are as follows:

	2007			2006			2005
Balance at beginning of period	$	483,045		$	205,708		$	54,198
Property acquisitions		688,766			286,919			193,669
Improvements		2,429			26			28
Assets held for sale		—			—			(4,222	)
Retirements/disposals		(1,660	)		(9,608	)		(37,965	)

Balance at end of period	$	1,172,580		$	483,045		$	205,708

The changes in accumulated depreciation, exclusive of amounts relating to equipment, auto and furniture and fixtures, for the period ended December 31, 2007, December 31, 2006 and December 31, 2005 are as follows:

	2007			2006			2005
Balance at beginning of period	$	14,437		$	7,000		$	10,654
Depreciation for the period		24,032			9,203			3,786
Assets held for sale		—			—			(2,733	)
Retirements/disposals		(25	)		(1,766	)		(4,707	)

Balance at end of period	$	38,444		$	14,437		$	7,000

148

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

SCHEDULE IV—LOANS AND OTHER LENDING INVESTMENTS

December 31, 2007

(In Thousands)

Description		Interest Rate	Final Maturity Date	Periodic Payment Terms(1)	Prior Liens		Principal Amount of Loans		Carrying Amount of Loans		Number of Loans
Type	Description
Whole Loans—Fixed	Office	8.30 – 12.00%	8/1/2009 – 5/1/2010	I/O	$	—	$	62,826	$	62,564	2
	Industrial	5.07 – 5.78%	6/1/2015 – 7/8/2015	P&I		—		12,950		12,985	3
	Healthcare	9.75 – 11.75%	10/8/2008 – 8/30/2010	I/O		—		4,822		4,822	5
Whole Loans—Float	Hotel	LIBOR + 2.00 – 8.00%	10/1/2008 – 6/1/2012	I/O		—		71,708		68,237	6
	Industrial	1.65 – 2.70%	2/1/2009 – 8/1/2009	I/O		—		50,395		50,157	4
	Land	3.50 – 5.84%	1/1/2009 – 11/9/2009	I/O		—		51,713		51,296	3
	Multifamily	1.25 – 3.50%	10/9/2008 – 4/1/2012	I/O		—		347,087		345,781	15
	Office	1.95 – 5.00%	7/1/2008 – 7/1/2016	I/O		—		370,805		368,999	21
	Condo	3.90 – 5.65%	4/1/2008 – 2/6/2010	I/O		—		74,031		73,385	3
	Construction	3.50 – 5.31%	6/1/2010 – 12/1/2011	I/O		—		61,608		61,100	2
	Retail	2.70 – 2.75%	7/1/2008 – 4/1/2010	I/O		—		34,404		33,536	3
	Various	3.00 – 3.15%	7/31/2008 – 8/1/2012	I/O		—		30,000		29,907	2
Junior Participation—Float	Office	LIBOR + 1.29 – 7.00%	7/1/2008 – 5/11/2016	I/O		410,021		107,852		102,361	8
	Hotel	4.50 – 9.75%	10/1/2010 – 2/22/2012	I/O		329,000		5,000		4,872	2
	Construction	2.35%	1/1/2010	I/O		18,100		6,764		6,661	1
	Retail	2.40%	9/9/2008	I/O		49,000		10,000		10,000	1
	Various	5.70%	2/1/2009	I/O		155,038		34,453		34,453	1
Mezzanine—Fixed*	Office	10.85%	6/15/2016	I/O		410,000		62,451		63,620	1
Mezzanine—Fixed	Industrial	9.00%	2/14/2011	I/O		37,736		11,119		11,152	1
	Multifamily	10.00 – 11.30%	1/1/2010 – 2/11/2012	I/O		168,620		55,330		55,646	6
	Various	11.30%	8/1/2008	I/O		22,683		7,593		7,566	1
	Office	15.00 – 18.00%	4/1/2010	I/O		—		8,865		8,803	5
	Hotel	11.25%	12/1/2011	I/O		—		10,482		10,306	2
Mezzanine—Float*	Hotel	LIBOR + 7.20%	2/9/2010	I/O		626,052		100,000		98,920	1
	Retail	3.75%	7/1/2011	I/O		3,754,318		108,346		108,132	1
Mezzanine—Float	Condo	LIBOR + 5.75 – 8.00%	1/9/2009 – 10/9/2010	I/O		77,850		31,670		31,510	3
	Hotel	2.50 – 4.50%	8/9/2008 – 5/9/2009	I/O		3,049,704		129,630		128,194	4
	Office	3.30 – 6.36%	7/9/2008 – 10/9/2008	I/O		53,899		35,203		35,231	2
	Retail	1.75 – 5.35%	8/9/2008 – 5/1/2017	I/O		782,000		50,310		50,534	2
	Multifamily	3.50%	4/1/2010 – 4/1/2012	I/O		150,890		52,843		52,707	3
Other—Fixed	Other	5.53%	6/25/2018	I/O		—		6,986		6,933	1
Other—Floating	Multifamily	LIBOR + 1.50%	4/24/2011	I/O		—		10,000		10,000	1
	Retail	LIBOR + 1.75%	12/16/2009	I/O		—		6,609		6,652	1

Total					$	10,094,911	$	2,023,855	$	2,007,022	117

*: Represents loans greater than 3% of the total carrying amount which may require individual disclosure
(1): Interest only, or I/O; Principal and Interest, or P&I.

149

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

SCHEDULE IV—LOANS AND OTHER LENDING INVESTMENTS (Continued)

December 31, 2007

(In Thousands)

		2007			2006			2005
Balance at beginning of period		$	1,571,510		$	681,106		$	70,569
Additions during the year:
New loans and additional advances on existing loans			1,102,671			1,335,614			696,589
	Acquisition cost and (fees)		(9,986	)		(6,560	)		(39	)
Premiums/(Discounts)			(4,079	)		(5,730	)		(2,118	)
	Amortization of acquisition costs, fees, premiums and discounts		8,430			2,287			1,058
Deductions:
	Collection of principal		661,524			435,207			84,953

Balance at end of period		$	2,007,022		$	1,571,510		$	681,106

150

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A. Controls and Procedures

Attached as exhibits to this Form 10-K are certifications of the Company's Chief Executive Officer and Chief Financial Officer, which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). This "Controls and Procedures" section includes information concerning the controls and procedures evaluation referred to in the certifications. Part II, Item 8 of this Form 10-K sets forth the report of Grant Thornton LLP, our independent registered public accounting firm, regarding its audit of the Company's internal control over financial reporting set forth below in this section. This section should be read in conjunction with the certifications and the Grant Thornton LLP report for a more complete understanding of the topics presented.

Disclosure Controls and Procedures

The management of the Company established and maintains disclosure controls and procedures that are designed to ensure that material information relating to the Company and its subsidiaries required to be disclosed in the reports that are filed or submitted under the 1934 Act are recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

As of the end of the period covered by this report, the Company's management conducted an evaluation, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures are effective. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company's periodic reports.

Internal Control over Financial Reporting

(a): (a) Management's annual report on internal control over financial reporting.

Management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, the principal executive and principal financial officer and effected by the Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely

151

detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.

Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the Company carried out an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2007 based on the "Internal Control—Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon this evaluation, management has concluded that the Company's internal control over financial reporting was effective as of December 31, 2007.

(b): Attestation report of the registered public accounting firm.

Our independent registered public accounting firm, Grant Thornton LLP, independently assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2007. Grant Thornton has issued an attestation report, which is included in Part II, Item 8. of this Form 10-K.

(c): Changes in internal control over financial reporting.

There have been no changes in the Company's internal control over financial reporting during the most recent quarter ended December 31, 2007 that have materially affected, or are reasonably likely to affect, internal controls over financial reporting.

Inherent Limitations on Effectiveness of Controls

The Company's management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

Item 9B. Other Information

Not applicable.

152

PART III

Item 10. Directors and Executive Officers and Corporate Governance*

Certain information relating to our code of business conduct and ethics and code of ethics for senior financial officers (as defined in the code) is included in Part I, Item 1 of this Annual Report on Form 10-K.

Item 11. Executive Compensation*

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters*

Item 13. Certain Relationships and Related Transactions and Directors Independence*

Item 14. Principal Accountant Fees and Services*

*: The information that is required by Items 10, 11, 12, 13 and 14 is incorporated herein by reference from the definitive proxy statement relating to the 2008 Annual Meeting of Stockholders of the Company, which is to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, no later than 120 days after the end of the Company's fiscal year ending December 31, 2007.

153

PART IV

Item 15. Exhibits and Financial Statement Schedules

(a) and (c) Financial Statement and Schedules—see Index to Financial Statements and Schedules included in Item 8.

(b) Exhibits

Exhibit Number		Description of Exhibit
3.1		Articles of Amendment and Restatement of NorthStar Realty Finance Corp., as filed with the State Department of Assessments and Taxation of Maryland on October 20, 2004 (incorporated by reference to Exhibit 3.1 to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-114675))
3.2		Bylaws of NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 3.2 to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-114675))
3.3		Amendment No. 1 to the Bylaws of NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 3.3 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed on April 27, 2005)
3.4		Articles Supplementary Classifying NorthStar Realty Finance Corp.'s 8.75% Series A Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.2 to NorthStar Realty Finance Corp.'s Registration Statement on Form 8-A, dated September 14, 2006)
3.5		Articles Supplementary Classifying NorthStar Realty Finance Corp.'s 8.25% Series B Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.2 to NorthStar Realty Finance Corp.'s Registration Statement on Form 8-A, dated February 7, 2007)
3.6		Articles Supplementary Classifying and Designating Additional Shares of NorthStar Realty Finance Corp.'s 8.25% Series B Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.6 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007)
10.1		Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of October 19, 2004, by and among NorthStar Realty Finance Corp., as sole general partner and initial limited partner and the other limited partners a party thereto from time to time (incorporated by reference to Exhibit 10.1 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)
10.2		Executive Employment Agreement, dated as of October 22, 2004, between Jean-Michel Wasterlain and NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 10.7 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)
10.3		NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan (incorporated by reference to Exhibit 10.9 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)

154

10.4		LTIP Unit Vesting Agreement under the NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan among NorthStar Realty Finance Corp., NorthStar Realty Finance Limited Partnership and NRF Employee, LLC (incorporated by reference to Exhibit 10.10 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)
10.5		Form of Vesting Agreement for Units of NRF Employee, LLC, each dated as of October 29, 2004, between NRF Employee, LLC and certain employees and co-employees of NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 10.11 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)
10.6		Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.7(a) to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-114675))
10.7		NorthStar Realty Finance Corp. 2004 Long-Term Incentive Bonus Plan (incorporated by reference to Exhibit 10.13 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)
10.8		Form of Notification under NorthStar Realty Finance Corp. 2004 Long-Term Incentive Bonus Plan (incorporated by reference to Exhibit 10.14 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)
10.9		Form of Indemnification Agreement for directors and officers of NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 10.15 to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-114675))
10.10		Junior Subordinated Indenture, dated as of March 10, 2006, between NorthStar Realty Finance Limited Partnership, NorthStar Realty Finance Corp. and Wilmington Trust Company, as trustee (incorporated by reference to Exhibit 10.31 to NorthStar Realty Finance Corp.'s Annual Report on Form 10-K for the year ended December 31, 2005)
10.11		Amended and Restated Trust Agreement, dated as of March 10, 2006, between NorthStar Realty Finance Limited Partnership, as depositor, NorthStar Realty Finance Corp., a guarantor, Wilmington Trust Company, as property trustee and Delaware trustee and Andrew Richardson, David Hamamoto and Richard McCready, each as administrative trustees (incorporated by reference to Exhibit 10.32 to NorthStar Realty Finance Corp.'s Annual Report on Form 10-K for the year ended December 31, 2005)
10.12		Amendment No. 1 to Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of March 14, 2006, by and among NorthStar Realty Finance Corp., as sole general partner and initial limited partner and the other limited partners a party thereto from time to time (incorporated by reference to Exhibit 10.34 to NorthStar Realty Finance Corp.'s Annual Report on Form 10-K for the year ended December 31, 2005)
10.13		Agreement, dated as of April 6, 2006 between Mark E. Chertok and NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 99.1 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed on April 10, 2006)
10.14		Junior Subordinated Indenture, dated as of August 1, 2006, between NorthStar Realty Finance Limited Partnership, NorthStar Realty Finance Corp. and Wilmington Trust Company, as trustee (incorporated by reference to Exhibit 10.39 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006)

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10.15		Amended and Restated Trust Agreement, dated as of August 1, 2006, between NorthStar Realty Finance Limited Partnership, as depositor, NorthStar Realty Finance Corp., a guarantor, Wilmington Trust Company, as property trustee and Delaware trustee and David Hamamoto, Andrew Richardson and Richard McCready, each as administrative trustees (incorporated by reference to Exhibit 10.40 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2006)
10.16		Second Amendment to the Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of September 14, 2006 (incorporated by reference to Exhibit 3.2 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed September 14, 2006)
10.17		Junior Subordinated Indenture, dated as of October 6, 2006, between NorthStar Realty Finance Limited Partnership, NorthStar Realty Finance Corp. and Wilmington Trust Company, as trustee (incorporated by reference to Exhibit 10.42 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2006)
10.18		Amended and Restated Trust Agreement, dated as of October 6, 2006, between NorthStar Realty Finance Limited Partnership, as depositor, NorthStar Realty Finance Corp., a guarantor, Wilmington Trust Company, as property trustee and Delaware trustee and David Hamamoto, Andrew Richardson and Richard McCready, each as administrative trustees (incorporated by reference to Exhibit 10.43 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2006)
10.19		Revolving Credit Agreement, dated as of November 3, 2006, between NorthStar Realty Finance Corp., NorthStar Realty Finance Limited Partnership, NRFC Sub-REIT Corp., NS Advisors, LLC, Keybanc Capital Markets and Bank of America, N.A. (incorporated by reference to Exhibit 10.44 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2006)
10.20		Third Amendment to the Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of February 7, 2007 (incorporated by reference to Exhibit 3.2 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed February 9, 2007)
10.21		Junior Subordinated Indenture, dated as of March 30, 2007, between NorthStar Realty Finance Limited Partnership, NorthStar Realty Finance Corp. and Wilmington Trust Company, as trustee (incorporated by reference to Exhibit 10.46 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007)
10.22		Amended and Restated Trust Agreement, dated as of March 30, 2007, between NorthStar Realty Finance Limited Partnership, as depositor, NorthStar Realty Finance Corp., a guarantor, Wilmington Trust Company, as property trustee and Delaware trustee and David Hamamoto, Andrew Richardson and Richard McCready, each as administrative trustees (incorporated by reference to Exhibit 10.47 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 2007)
10.23		Form of NorthStar Realty Finance Corp. 2006 Outperformance Plan Award Agreement (incorporated by reference to Exhibit 99.3 to the NorthStar Realty Finance Corp. Post-Effective Amendment No. 2 to Form S-8 filed on April 13, 2007)
10.24		Amendment No. 1 to NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan (incorporated by reference to Exhibit 99.2 to the NorthStar Realty Finance Corp. Post-Effective Amendment No. 2 to Form S-8 filed on April 13, 2007)

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10.25		Amendment No. 2 to NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan (incorporated by reference to Exhibit 99.3 to the NorthStar Realty Finance Corp. Post-Effective Amendment No. 3 to Form S-8 filed on June 6, 2007)
10.26		Junior Subordinated Indenture, dated as of June 7, 2007, between NorthStar Realty Finance Limited Partnership, NorthStar Realty Finance Corp. and Wilmington Trust Company, as trustee (incorporated by reference to Exhibit 10.52 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007)
10.27		Amended and Restated Trust Agreement, dated as of June 7, 2007, between NorthStar Realty Finance Limited Partnership, as depositor, NorthStar Realty Finance Corp., a guarantor, Wilmington Trust Company, as property trustee and Delaware trustee and David Hamamoto, Andrew Richardson and Richard McCready, each as administrative trustees (incorporated by reference to Exhibit 10.53 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007)
10.28		Registration Rights Agreement relating to the 7.25% Exchangeable Senior Notes due 2027 of NorthStar Realty Finance Limited Partnership dated June 18, 2007 (incorporated by reference to Exhibit 4.2 to the NorthStar Realty Finance Corp. Registration Statement on Form S-3 (File No. 333-146679))
10.29		Master Repurchase Agreement, dated as of August 8, 2007, by and among NRFC JP Holdings, LLC and JPMorgan Chase Bank, N.A. (incorporated by reference to Exhibit 10.56 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007)
10.30		Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and David T. Hamamoto (incorporated by reference to Exhibit 99.1 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed October 5, 2007)
10.31		Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and Andrew C. Richardson (incorporated by reference to Exhibit 99.2 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed October 5, 2007)
10.32		Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and Daniel R. Gilbert (incorporated by reference to Exhibit 99.3 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed October 5, 2007)
10.33		Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and Richard J. McCready (incorporated by reference to Exhibit 99.4 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed October 5, 2007)
10.34		Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and Daniel Raffe (incorporated by reference to Exhibit 99.5 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed October 5, 2007)
10.35		Credit Agreement, dated as of November 6, 2007, by and among NRFC WA Holdings, LLC, NRFC WA Holdings II, LLC, NRFC WA Holdings VII, LLC, NRFC WA Holdings X, LLC, NRFC WA Holdings XII, LLC, NorthStar Realty Finance Corp., NorthStar Realty Finance L.P. and Wachovia Bank, National Association, as Administrative Agent (incorporated by reference to Exhibit 10.53 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007)

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10.36		Limited Guaranty Agreement, dated as of November 6, 2007, by and among NorthStar Realty Finance Corp., NorthStar Realty Finance Limited Partnership and Wachovia Bank, National Association, as Administrative Agent (incorporated by reference to Exhibit 10.54 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007)
12.1		Computation of Ratio of Earnings to Fixed Charges
21.1		Significant Subsidiaries of the Registrant
23.1		Consent of Grant Thornton LLP
31.1		Certification by the Chief Executive Officer pursuant to 17 CFR 240.13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification by the Chief Financial Officer pursuant to 17 CFR 240.13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification by the Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification by the Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on February 29, 2008.

		NORTHSTAR REALTY FINANCE CORP.
		By:	/s/ DAVID T. HAMAMOTO Name: David T. Hamamoto Title:Chairman and Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Andrew C. Richardson and Albert Tylis and each of them severally, his true and lawful attorney-in-fact with power of substitution and re-substitution to sign in his name, place and stead, in any and all capacities, to do any and all things and execute any and all instruments that such attorney may deem necessary or advisable under the Securities Exchange Act of 1934 and any rules, regulations and requirements of the U.S. Securities and Exchange Commission in connection with this Annual Report on Form 10-K and any and all amendments hereto, as fully for all intents and purposes as he might or could do in person, and hereby ratifies and confirms all said attorneys-in-fact and agents, each acting alone, and his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below on behalf of the Registrant in the capacities and on the dates indicated.

Signature	Title	Date

/s/ DAVID T. HAMAMOTO David T. Hamamoto	Chairman and Chief Executive Officer (Principal Executive Officer)	February 29, 2008
/s/ ANDREW C. RICHARDSON Andrew C. Richardson	Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)	February 29, 2008
/s/ LISA MEYER Lisa Meyer	Chief Accounting Officer (Principal Accounting Officer)	February 29, 2008
/s/ WILLIAM V. ADAMSKI William V. Adamski	Director	February 29, 2008
/s/ PRESTON BUTCHER Preston Butcher	Director	February 29, 2008

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/s/ JUDITH A. HANNAWAY Judith A. Hannaway	Director	February 29, 2008
/s/ WESLEY D. MINAMI Wesley D. Minami	Director	February 29, 2008
/s/ LOUIS J. PAGLIA Louis J. Paglia	Director	February 29, 2008
/s/ FRANK V. SICA Frank V. Sica	Director	February 29, 2008