Northstar Realty Finance 10K 2008 Annual report

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, 2008
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission file number: 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 o No ý

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. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the 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 (Do not check if a smaller reporting company)		Smaller reporting company o

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

The aggregate market value of the registrant's voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2008, was $522,983,760. As of February 24, 2009, the registrant had issued and outstanding 63,021,773 shares of common stock, par value $0.01 per share.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement for the registrant's 2009 Annual Meeting of Stockholders (the "2009 Proxy Statement"), to be filed within 120 days after the end of the registrant's fiscal year ending December 31, 2008, 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	49
Item 4.	Submission of Matters to a Vote of Security Holders	49
PART II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	50
Item 6.	Selected Financial Data	53
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	56
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	88
Item 8.	Financial Statements and Supplementary Data	93
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	165
Item 9A.	Controls and Procedures	165
Item 9B.	Other Information	166
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	167
Item 11.	Executive Compensation	167
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	167
Item 13.	Certain Relationships and Related Transactions and Directors Independence	167
Item 14.	Principal Accountant Fees and Services	167
PART IV
Item 15.	Exhibits and Financial Statement Schedules	168

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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, particularly given the economic environment. 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.

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PART I

Item 1. Business

Our Company

We are a real estate finance company that has focused primarily on originating, investing in and managing commercial real estate debt, commercial real estate securities and net lease properties. We have invested in those areas of commercial real estate finance that enabled 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 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 apply similar asset management skills to maximize value and to protect capital. We conduct our operations so as to qualify as a real estate investment trust, or a REIT, for federal income tax purposes.

We rely on the normal functioning of credit and equity markets to finance and grow our business. The current worldwide economic and financial crisis, which began in 2007 with increasing credit issues in U.S. sub-prime residential mortgage loans, has resulted in severe credit and liquidity issues throughout the worldwide financial system, a global economic recession, the failure of several financial institutions and several multinational financial institutions requiring governmental assistance to remain in business. Global deleveraging by financial institutions and economic contraction has virtually shut down the availability of capital for most businesses, including those involved in the commercial real estate sector. As a result, most businesses, including ours, have significantly reduced new investment activity until the capital markets become more stable, the macroeconomic outlook becomes clearer and market liquidity increases. It is unclear whether existing or proposed government programs will help a return of capital market stability. In this environment we are focused on actively managing portfolio credit to preserve capital, generating and recycling liquidity from existing assets, managing debt maturities by purchasing our issued debt at discounts to par and optimizing corporate overhead.

The following describes the major commercial asset classes in which we have invested and which we continue to actively manage to maximize value and to preserve our capital through this difficult economic and capital markets environment. During the second half of 2007 and throughout 2008, we significantly reduced new investment activity in these businesses, which was generally limited to a level supported by recycled capital from repayments and asset sales.

Real Estate Debt

Overview

Our real estate debt business has historically focused 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 sometimes syndicate or sell portions of loans to maximize risk adjusted returns, manage credit exposure and generate liquidity.

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 generally could not provide these

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types of loans because of constraints within their funding structures and because they usually originated loans with the intent to sell them to third parties and relinquish control. Additionally, our centralized investment organization has enabled 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, allowed us to respond quickly and provided a high degree of certainty to our borrowers that we would 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. As of December 31, 2008, our average funded loan size was $19.2 million and we managed 108 separate commercial real estate loans totaling $2.0 billion.

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 non-recourse, term debt liabilities which were structured as collateralized debt obligations, or CDOs, and sold under the N-Star brand. These term debt, or CDO, 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. In addition to these term debt transaction financings we have utilized secured term financings and credit facilities to finance real estate debt investments.

Targeted Investments

Our real estate debt investments typically have many of the following characteristics: (i) terms of two to ten years inclusive of any extension options; (ii) 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; (iii) investment amounts of $5 million to $200 million; (iv) floating interest rates priced at a spread over LIBOR or fixed interest rates; (v) an interest rate cap or other hedge to protect against interest rate volatility; and (vi) 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 have employed a standardized investment and underwriting process that focuses on a number of factors in order to ensure each investment is being evaluated appropriately, including: (i) macroeconomic conditions that may influence operating performance; (ii) 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: (iii) real estate market factors that may influence the economic performance of the collateral; (iv) the operating expertise and financial strength of the sponsor or borrower; (v) real estate and leasing market conditions affecting the asset; (vi) the cash flow in place and projected to be in place over the term of the loan; (vii) the appropriateness of estimated costs associated with rehabilitation or new construction; (viii) 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; (ix) review of third-party reports including appraisals, engineering and environmental reports; (x) physical inspections of properties and markets; and (xi) the overall structure of the investment and the lenders' rights in the loan documentation.

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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 and in potential future loan modification or restructuring negotiations, 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 have been 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 to sell by liquidity issues or are exiting the business.

At December 31, 2008 we held the following real estate debt investments (dollars in thousands):

December 31, 2008		Carrying Value(1)

Whole loans, floating rate		$	1,048,310	51.2	%	—	%	2.89	%	52
Whole loans, fixed rate			96,252	4.7		7.58		—		8
Subordinate mortgage interests, floating rate			200,556	9.8		—		6.42		13
Subordinate mortgage interests, fixed rate			24,349	1.2		7.51		—		2
Mezzanine loans, floating rate			463,765	22.6		—		4.43		15
Mezzanine loan, fixed rate			191,438	9.4		11.65		—		15
Other loans—floating			16,609	0.8		—		1.60		2
Other loans—fixed			6,191	0.3		5.53		—		1

	Total/Weighted average	$	2,047,470	100.0	%	9.99	%	3.70	%	108

(1): Approximately $1.3 billion of these investments serve as collateral for our three term debt transactions backed by commercial 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 $271.0 million related to our debt investments. We expect that a minimum of $133.9 million of these future fundings will be funded within our existing term debt transactions and require no additional capital from us. 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. Based upon currently approved advance rates on our credit and term debt facilities and assuming that all commercial real estate loans that have future fundings meet the terms to qualify for such funding, our equity requirement would be approximately $94.5 million.

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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

Our real estate securities business has historically invested in, created and managed portfolios of primarily investment grade commercial real estate debt securities, which we have financed by issuing term debt. In July 2007, we created the NorthStar Real Estate Securities Opportunity Fund, or the Securities Fund, of which we are the manager and general partner. Our interest in the Securities Fund was 53.1% at December 31, 2008. We receive fees from the Securities Fund for managing the third party private capital. Other than in connection with making new investments to reinvest proceeds from asset sales or repayments in previously issued non-recourse term debt transactions, we intend to conduct substantially 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. While the expected yield on our securities investments is sensitive to the performance of the underlying assets,

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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 seek to 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. During 2008, the asset-backed markets in which we had historically obtained match-funded financing remained virtually closed, and we expect the markets to remain difficult through 2009. Consequently, most of our securities investment activity in 2008 was funded using proceeds from repayments and sales of existing investments.

The average rating of our securities investments was Baa2/BBB (investment grade) as of December 31, 2008. In addition, our securities portfolio had an average investment size of approximately $5.2 million as of December 31, 2008.

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 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. 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. The majority of our long-term investments in REIT fixed income securities are in REIT unsecured debt. We also invest in junior unsecured debt or preferred equity of REITs.

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Commercial Real Estate Term Debt Transactions: Commercial real estate term debt transactions (also referred to as collateralized debt obligations, or CDO's), 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: (i) review of the rent roll and historical operating statements in order to evaluate the stability of the underlying property's cash flow; (ii) 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 (iii) 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.

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.

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At December 31, 2008, we held the following real estate security investments:

December 31, 2008		Carrying Value		Estimated Fair Value

CMBS		$	444,790	$	124,594
Real estate term debt—N-Star			50,680		7,040
Real estate term debt—Third party			16,156		1,322
REIT debt			82,753		44,935
Term debt equity			70,532		38,764
Trust preferred securities			15,000		4,488

	Total	$	679,911	$	221,143

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 term debt transactions at December 31, 2008 is provided below.

		Collateral—December 31, 2008									Term Notes—December 31, 2008

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 12/31/08			Stated Maturity
N-Star I(2)			8/21/03	$	299,316		6.60	%		4.16	$	278,000		6.37	%		8/01/2038
N-Star II			7/01/04		331,242		6.17			4.77		295,098		5.51			6/01/2039
N-Star III			3/10/05		410,188		5.70			4.11		358,556		4.88			6/01/2040
N-Star V			9/22/05		499,745		5.52			6.23		456,319		4.58			9/05/2045

	Total			$	1,540,491		5.92	%		4.95	$	1,387,973		5.23	%

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

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

CMBS AUM by Vintage		Securities AUM

Net Lease

Overview

Our net lease strategy involved investing 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, capital 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 and capital costs. 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.

During 2008 we made no new net lease investments because opportunities in commercial real estate loans, commercial real estate fixed income securities and repurchases of our debt were more attractive. Also, our increased cost of capital relative to prior years has made investing in net lease assets uneconomical. Our primary focus in this area during 2008 was to actively manage the existing asset base and to find opportunities to generate liquidity and to recycle capital. Based on current capital markets and economic conditions we do not expect new net lease investing to be a material part of our business going forward.

Core Net Lease

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. In a normalized market, we believe that well-located, general purpose real estate with flexible design characteristics can maintain or increase in value when re-leasing opportunities arise.

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Healthcare Net Lease

We invest in healthcare net lease assets through our Wakefield joint venture. 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. Wakefield has sought 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 typically have been 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.

Underwriting Process and Financing for Net Lease Investments

Our core net lease investments were underwritten utilizing our skills in evaluating real estate market and property fundamentals, real estate residual values and tenant credit. At inception and throughout the life of our ownership 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 included 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 evaluated stress scenarios to understand refinancing risk.

Our health care net lease investments were underwritten utilizing a comprehensive analysis of the profitability of a targeted business or facility, its cash flow, occupancy, patient and payer mix, financial trends in revenues and expenses, barriers to competition, the need in the market for the type of healthcare services provided by the business or the facility, the strength of the location and the underlying value of the business or the facility, as well as the financial strength and experience of the management team of the business or the facility.

Our core and healthcare net lease investments are principally financed with non-recourse first mortgages having terms approximately matching the term of the underlying leases.

Our Net Lease Investments

At December 31, 2008, we held the following net lease investments (dollars in thousands):

Type of Property			Carrying Value

Healthcare		118	$	692,931	60.2	%
Office		17		297,632	25.9
Retail		12		77,411	6.7
Investment in unconsolidated joint venture-office/flex(1)		3		24,581	2.1
Office/Flex		1		31,439	2.7
Distribution center		1		24,177	2.1
Retail/Office		1		3,410	0.3

	Total	153	$	1,151,581	100.0	%

(1): Our investment in the unconsolidated net lease joint venture is $7.3 million.

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LandCap Venture

During 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. The venture is managed by professionals who have extensive experience in the single family housing sector. LandCap's investment strategy was to opportunistically invest in single family residential land through land loans, lot option agreements and select land purchases. These investments were expected to generate very little current cash flow and to be held for several years prior to liquidation. The venture made no investments in 2007 and $39.1 million of investments during 2008. Our share of the investment was $16.9 million. During the second half of 2008, we and Whitehall directed the venture's management team to raise third party capital to fund new investment activity. This mandate was due to the existing partners' desires to conserve liquidity in their respective businesses as capital markets conditions further deteriorated. The venture has not received any new capital commitments and we do not currently expect to provide any new investment capital to LandCap in the future. The venture will continue to manage existing investments and we do not expect the venture to return capital to us for several years.

Portfolio Management

We actively monitor collateral and property-level performance of our asset base through our portfolio management group which is closely supervised by our senior executive team. All major portfolio management strategies and tactics are developed using the extensive experience of our senior executives and a majority of our employees are dedicated to portfolio management activities.

For commercial real estate loans, we typically have a contractual right to regularly receive updated information from our borrowers 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. When a borrower cannot comply with its requirements according to the loan terms, we generally have a range of strategies to choose from, including foreclosing on the collateral in order to sell it, extending the final maturity date in return for a paydown and/or a fee, changing the interest rate or making any other modification to the loan terms which we believe maximizes long-term value and preserves capital.

We closely monitor our securities investments by using sophisticated third-party applications that are designed to screen for performance issues in the loan collateral underlying the securities. We also utilize our capital markets expertise to seek opportunities to sell securities investments which we believe the market is valuing too highly relative to the underlying risk.

We inspect our owned net lease assets to ensure the tenants are complying with the terms of their respective leases, and seek to enter into renewal discussions with tenants well in advance of lease expirations.

Poor economic conditions and scarcity of new debt capital have negatively impacted commercial real estate cash flows, valuations and real estate investors' ability to refinance properties when existing debt is due. The commercial real estate industry may experience increasing stress and decreasing credit quality the longer these conditions continue. We expect that a majority of our efforts in 2009 will be spent in portfolio management activities.

Business Strategy

Our long-term primary objectives are to make real estate-related investments that increase our franchise value, produce attractive risk-adjusted returns and generate predictable cash flow for

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distribution to our stockholders. The current global economic recession and financial crisis has required us to focus on preserving capital and managing liquidity. Like most finance companies, we cannot currently raise corporate capital at attractive levels and we are observing weakening performance levels in our asset base due to the shrinking economy and lack of capital for commercial real estate. We believe that we have created a franchise that derives 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 hope that our reputation in the marketplace will enable us to be early in raising corporate capital when market conditions improve. 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. Match funded debt capital is currently very difficult to obtain. The asset-backed markets for commercial real estate are not functioning and banks and life companies are currently working to deleverage their balance sheets and therefore are not making significant new lending commitments. Our current strategy has been to use our existing flexible financing structures to leverage new investments, or to acquire new investments that generate attractive returns without leverage.

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 and portfolio management processes are centralized and overseen by our senior management team. We have formal guidelines which require senior management approval for all new investments, and Board approval is generally required for investments exceeding size and concentration limits. Senior management also reviews and approves portfolio management strategies including all loan modification and workout situations.

Financing Strategy

We seek to 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 preferred and common equity offerings raising $647.8 million of aggregate net proceeds. We

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also raised over $81.0 million of private capital for our Securities Fund. Additionally, during 2007 and 2008 we issued $252.5 million of unsecured 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.

In the past, we have sought 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 financed 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 with an institutional lender to complement term debt transaction financing to match-fund our assets as best we can.

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.

Since mid-2007, there has been 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 asset backed securities, or ABS, markets remain 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 expect the ABS markets for commercial real estate to be unavailable for at least the next year as most originators and traditional buyers of this product have disassembled or drastically reduced their investment platforms. While we believe that market conditions will remain difficult for an extended period of time, we believe that in the future match funded debt sources could 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

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

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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 real estate 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 may apply to be registered investment advisors under the Investment Advisors Act of 1940, or the Investment Advisors Act, and, as such, may also 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 have been subject to significant competition in seeking real estate investments. Historically, we have competed with many third parties engaged in real estate investment activities including other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance

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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

As of December 31, 2008, NorthStar had 60 employees. Management believes that a major strength of NorthStar is the quality and dedication of our people. We strive to maintain a work environment that fosters professionalism, excellence, diversity and cooperation among our employees.

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 and 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 securities and exchange commission, or 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 and corporate governance committee and compensation committee of our Board of Directors. Within the time period required by the rules of the SEC and the New York Stock Exchange, or 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."

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Risks Related to Our Businesses

The commercial real estate finance industry has been and will continue to be adversely affected by conditions in the global financial markets and economic conditions in the United States generally.

Since mid-2007, and particularly during the second half of 2008, the global financial markets were expansively impacted by significant declines in the values of nearly all asset classes and by an unprecedented lack of liquidity. This was initially triggered by the subprime residential lending and single family housing markets experiencing significant default rates, declining residential real estate values and increasing backlog of housing supply. Other lending markets also experienced extreme 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. The global markets have been characterized by substantially increased volatility and an overall loss of investor confidence, initially in financial institutions, but more recently in companies in a number of other industries, including our industry, and in the broader markets. The markets have produced downward pressure on stock prices and the lack of available credit for certain issuers without regard to those issuers' underlying financial strength.

The resulting economic conditions and the difficulties currently being experienced in the commercial real estate finance industry have increased pressure on our stock price and adversely affected our business model, financial condition, results of operations and our prospects for future growth. We do not expect that the difficult conditions in the financial markets are likely to improve in the near future. A worsening of these conditions would exacerbate the adverse effects that the current market environment has had on us, on others in the commercial real estate finance industry and on commercial real estate generally.

Liquidity is essential to our businesses and we rely on outside sources of capital that have been severely impacted by the current economic crisis.

We require significant outside capital to fund our businesses. Our businesses have been and will continue to be adversely affected by disruptions in the capital markets, including the lack of access to capital or prohibitively high costs of obtaining capital. A primary source of liquidity for us has been the equity and debt capital markets, including issuing common equity, preferred equity, trust preferred securities and convertible senior notes. With capital market conditions devastated by the current global economic crisis, companies in the real estate industry, including us, are currently experiencing an unprecedented lack of capital sources. Additionally, nearly all financial industry participants, including commercial real estate lenders and investors, continue to find it nearly impossible to obtain cost-effective debt capital to finance new investment activity or to refinance maturing debt. We do not know whether any sources of capital will be available to us in the future on terms that are acceptable to us, if at all. If we cannot obtain sufficient capital on acceptable terms, our businesses and our ability to operate will be severely impacted. 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.

We also depend on external sources of capital 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. 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. These distribution requirements are partly mitigated for calendar year 2009 because REITs are permitted to pay up to 90% of its distribution requirement in common stock or other company securities, rather than cash.

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The credit facilities that we use to finance our investments may require us to provide additional collateral, which could significantly impact our liquidity position.

We have used credit facilities to finance some of our investments. Although our secured credit facility with a major financial institution, or the Secured Term Loan, which is 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 commercial real estate loans pledged by us decline in value due to credit quality deterioration, we may be required by the lending institution to provide additional collateral or pay down a portion of the funds advanced. Additionally, our Master Repurchase Agreement, or the JP Facility, with a major financial institution provides the lender with a similar ability to require repayment, but also provides the lender with the ability to require repayment due to decreases in the value of the commercial real estate loan collateral based upon market credit spread movements. In a weakening economic environment, we would generally expect credit quality and the value of the commercial real estate loans that serve as collateral for our credit facilities to decline, resulting in a higher likelihood that the lenders would require partial repayment from us, which could be substantial. Posting additional collateral to support our credit facilities could significantly 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 and foreclose upon the assets securing these facilities, which could have a material adverse effect on our business and operations.

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

Credit facilities are critical to our business. If we are unable to extend or renew our existing secured credit facilities, our results of operations, financial condition and business could be significantly harmed. In particular, the Secured Term Loan, which has $379.7 million outstanding as of December 31, 2008, of which we have guaranteed $200 million, has an initial maturity in November 2009 and contains a one-year extension at our option provided that we are in compliance with the terms of the Secured Term Loan. If we fail to comply with such terms we may be unable to exercise the extension option and be required to repay the facility in full, which would have a material adverse affect on us and our business and operations. Additionally, Wachovia, the original lender under our Secured Term Loan has recently merged with another financial institution, which creates additional uncertainly regarding the facility.

Furthermore, the JP Facility, which has $44.9 million outstanding as of December 31, 2008, all of which we have guaranteed, matures in August 2009. The facility is extendable for an additional year at the lender's option. If the lender decides to not renew that facility, we would be required to repay amounts due at the maturity date, which could have a significant impact on our liquidity position.

Our lenders under our credit facilities may choose to not fund future commitments.

Our business plan and liquidity projections assume that our lenders under our secured credit facilities fund a certain portion of our future funding obligations to borrowers under our commercial real estate loans. At December 31, 2008, we expected this amount to be $42.6 million. Nonetheless, our lenders retain discretion over their obligation to fund such future funding commitments under our commercial real estate loans. As a result, we may be required to fund future commitments with existing liquidity, which could have a significant impact on our liquidity position. Furthermore, if our lenders do not fund such future funding commitments, we may not be able to leverage our assets as fully as we would choose, which will reduce our returns on such assets. If we are unable to meet future funding commitments, our borrowers may take legal action against us, which could have a material adverse effect on us.

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Our credit facilities contain restrictive covenants relating to our operations.

Our secured credit facilities 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 (which may be particularly difficult to comply with given low LIBOR rates due to most of our assets paying a floating interest rate), require that we maintain a certain minimum tangible net worth, limit our recourse indebtedness, limit our ability to distribute more than a certain amount of our funds from operations and require us to hedge our interest rate exposure. At December 31, 2008, we were in compliance with all debt covenants under our borrowings. However, if economic conditions continue to weaken and capital for commercial real estate remains scarce, we expect credit quality in our assets and across the commercial real estate sector to weaken. While we have devoted a majority of our resources to managing our existing asset base, a continued weak environment will make maintaining compliance with the credit facilities' covenants more difficult. 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 credit facilities and exchangeable senior notes contain cross-default provisions.

Our credit facilities and our indentures governing our exchangeable senior notes contain cross-default provisions whereby a default under one agreement could result in a default and acceleration of indebtedness under other agreements. If a cross-default were to occur, we may not be able to pay our debts or access capital from external sources in order to refinance our debts. If some or all of our debt obligations default and it causes a default under other indebtedness, our business, financial condition and results of operations could be materially and adversely affected.

Our term debt transactions have certain coverage tests that are required to be met in order for payments to be made to our subordinate bonds and equity notes. Failing coverage tests could significantly impact our cash flow and overall liquidity position.

Our term debt transactions generally require that the underlying collateral and cash flow generated by the collateral to be in excess of ratios stipulated in the related indentures. These ratios are called overcollateralization, or OC, and interest coverage, or IC, tests and 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. Uncured defaults on commercial real estate loans and rating agency downgrades on commercial real estate securities are the primary causes for decreases in the OC and IC ratios. In the event these tests are not met, cash that would normally be distributed to us would be used to amortize the senior notes until the financing is back in compliance with the tests. Additionally, we may be required to buy assets out of our term debt transactions in order to preserve cash flow, which could have a significant impact on our liquidity. As of December 31, 2008 we are in compliance with all of the OC and IC tests in our term debt transactions. Nonetheless, we expect that continued weak economic conditions, lack of capital for commercial real estate, decreasing real estate values and credit ratings downgrades of real estate securities will make complying with OC and IC tests more difficult in the future. Our failure to satisfy the coverage tests could adversely affect our operating results, liquidity and cash flows.

We retain the subordinate classes of bonds and equity notes in the term debt transactions that we have issued, which entails certain risks, including that subordinate classes of bonds and equity notes in the term debt transactions receive distributions only if the term debt transaction generates enough income to pay all of the other bond classes.

The subordinate classes of bonds and equity notes that we retain in the term debt transactions that we have issued represent leveraged investments in the underlying assets. Various classes of securities

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participate in the income stream in term debt transactions and distributions on subordinate classes of bonds and equity notes 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 equity notes, distributions may be made to holders of the subordinate classes of bonds and equity notes on each payment date after all of the other required payments are made on each payment date. There will be little or no income available to the subordinate classes of bonds and equity notes if there are defaults by the obligors under the underlying collateral and those defaults exceed a certain amount. In that event, the value of our investment in the term debt transaction could decrease quickly and substantially. 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 and equity notes 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, which could have a material adverse effect on us.

We are unable to complete additional term debt transactions due to the collapse of the credit markets and the severe economic recession.

We historically accessed the asset-backed markets to match-fund our real estate debt investments with non-recourse, term debt liabilities which were structured as collateralized debt obligations and sold under the N-Star brand. Due to the collapse of the credit markets and the severe economic recession, and the resulting investor concerns surrounding the real estate markets and the asset-backed markets generally, among other things, there is currently no liquidity available through the issuance of new term debt transactions. Issuing term debt transactions was a critical part of our overall business plan and we currently believe that term debt transactions will not be available for the foreseeable future, if ever.

Continued disruptions in the financial markets and deteriorating economic conditions could adversely affect the values of investments we made.

Weakening macroeconomic conditions combined with turmoil in the capital markets has constrained equity and debt capital available for investment in commercial real estate, resulting in fewer buyers seeking to acquire commercial properties and increases in discount rates and lower valuations for commercial real estate properties. Furthermore, these deteriorating economic conditions have negatively impacted commercial real estate fundamentals, which have resulted, and may in the future result, in adverse effects on the collateral securing our commercial real estate loans.

Adverse economic conditions could significantly reduce the amount of income we earn on our commercial real estate loans.

Adverse economic conditions have caused us to experience an increase in the number of commercial real estate loans that could result in loan delinquencies, foreclosures and nonperforming assets and a decrease in the value of the property or other collateral which secures our commercial real estate loans, all of which could adversely affect our results of operations. Loan defaults result in a decrease in interest income and may require the establishment of, or an increase in, loan loss reserves. The decrease in interest income resulting from a loan default or defaults may be for a prolonged period of time as we seek to recover, primarily through legal proceedings, the outstanding principal balance, accrued interest and default interest due on a defaulted commercial real estate loan, plus the legal costs incurred in pursuing our legal remedies. Legal proceedings, which may include foreclosure actions and bankruptcy proceedings, are expensive and time consuming. The decrease in interest income, and the costs involved in pursuing our legal remedies will reduce the amount of cash available to meet our expenses and adversely impact our liquidity and operating results.

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Our borrowers may increasingly be unable to achieve their business plans due to the economic environment and strain on commercial real estate, which may cause stress in our commercial real estate loan portfolio.

Many of our commercial real estate loans were made to borrowers who had a business plan to improve the collateral property. The current economic environment has created a number of obstacles to borrowers attempting to achieve their business plans, including lower occupancy rates and lower lease rates across all property types, which continues to be exacerbated by rising unemployment and overall financial uncertainty. If borrowers are unable achieve their business plans, the related commercial real estate loans could go into default and severely impact our operating results and cash flows.

Many of our commercial real estate loans are funded with interest reserves and our borrowers may be unable to replenish those interest reserves once they run out.

Given the transitional nature of many of our commercial real estate loans, we required borrowers to pre-fund reserves to cover interest and operating expenses until the property cash flows were projected to increase sufficiently to cover debt service costs. We also generally required the borrower to refill reserves if they became deficient due to underperformance or if the borrower wanted to exercise extension options under the loan. Despite low interest rates, revenues on the properties underlying any commercial real estate loan investments will likely decrease in the current economic environment, making it more difficult for borrowers to meet their payment obligations to us. We expect that in the future some of our borrowers may have difficulty servicing our debt and will not have sufficient capital to replenish reserves, which could have a significant impact on our operating results and cash flow.

Our mortgage loans, mezzanine loans, participation interests in mortgage and mezzanine loans, real estate securities and preferred equity investments have been and may continue to be adversely affected by widening credit spreads, and if spreads continue to widen, the value of our loan and securities portfolios would decline further.

Our investments in commercial real estate loans and real estate securities are subject to changes in credit spreads. When credit spreads widen, as continues to be the case into 2009, the economic value of our existing loans decrease. 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 economic value of the loan may be negatively impacted by the incremental interest foregone from the widened credit spread. The economic value of our commercial real estate loan portfolio and our real estate securities portfolio has been significantly impacted, and may continue to be significantly impacted, by credit spread widening.

Loan repayments are unlikely in the current market environment.

In the past, a source of liquidity for us was the voluntary repayment of loans. Because the commercial real estate asset-backed markets remain closed, and banks and life insurance companies have drastically curtailed new lending activity, real estate owners are having difficulty refinancing their assets at maturity. If borrowers are not able to refinance loans at their maturity, the loans could go into default and the liquidity that we would receive from such repayments will not be available. Furthermore, without a functioning commercial real estate finance market, borrowers that are performing on their loans will almost certainly extend such loans if they have that right, which will further delay our ability to access liquidity through repayments.

Higher loan loss reserves are expected if economic conditions do not improve.

If the decline in the U.S. economy does not stabilize and reverse in 2009, we will likely experience significant increases in loan loss reserves, potential defaults and asset impairment charges in 2009.

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Borrowers may also be less able to pay principal and interest on loans if the economy continues to weaken and they continue to experience financial stress. Declining real property values also would increase loan-to-value ratios on our loans and, therefore, weaken our collateral coverage and increase the likelihood of higher loan loss reserves. Any sustained period of increased defaults and foreclosures would adversely affect our interest income, financial condition, business prospects and our cash flows.

Loan loss reserves are particularly difficult to estimate in a turbulent economic environment.

Our loan loss reserves are evaluated on a quarterly basis. Our determination of loan loss reserves requires us to make certain estimates and judgments, which are particularly difficult to determine during a recession where commercial real estate credit has been nearly shut off and commercial real estate transactions have dramatically decreased. Our estimates and judgments are based on a number of factors, including projected cash flows from the collateral securing our commercial real estate loans, loan structure, including the availability of reserves and recourse guarantees, likelihood of repayment in full at the maturity of a loan, potential for a refinancing market coming back to commercial real estate in the future and expected market discount rates for varying property types. If our estimates and judgments are not correct, our results of operations and financial condition could be severely impacted.

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, all of which are and will continue to be more prevalent if the overall economic environment does not improve significantly. 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:

•: macroeconomic conditions;
•: 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;

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•: 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 for a number of reasons, including the following, which could have a material adverse effect on our financial performance.

•: If the value of real property or other assets securing our commercial real estate loans deteriorates. The majority of our commercial real estate loans are fully or substantially non-recourse, although a large amount of our commercial real estate loans provide for interest reserve replenishments which are 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 commercial real estate 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 commercial real estate loans that are secured by equity interests in the borrowing entities or by investing directly in the owner of the property. In the current recession, asset values have deteriorated and there can be no assurance that the value of the assets securing our commercial real estate loans will not deteriorate further. 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 commercial real estate 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. Due to deteriorating economic conditions, many borrowers and guarantors are facing financial difficulties and are unable to comply with their financial covenants. 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 commercial real estate 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 commercial real estate loan to a borrower, assess the strength and skills of an 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.

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•: 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 commercial real estate loan. If a borrower defaults on our commercial real estate loan and the mortgaged real estate or other borrower assets collateralizing our commercial real estate loan are insufficient to satisfy our commercial real estate 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 commercial real estate loan. In addition, certain of our commercial real estate loans are subordinate to other debt of the borrower. If a borrower defaults on our commercial real estate loan or on debt senior to our commercial real estate loan, or in the event of a borrower bankruptcy, our commercial real estate 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. Given the difficult economic environment, borrower bankruptcies and litigation relating to our assets will increase appreciably, which will require us to spend significant amounts of money and require significant senior management resources in order to protect our interests.
•: If provisions of our commercial real estate loan agreements are unenforceable. Our rights and obligations with respect to our commercial real estate 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.

The subordinate mortgage notes, participation interests in mortgage notes, mezzanine loans and preferred equity investments we have originated and invested 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 have focused on originating, structuring and acquiring senior and subordinate debt investments secured primarily by commercial 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. Similarly, a majority of the participating lenders may be able to take actions to which we object but to which we will be bound. Certain transactions that we have originated and invested in could be particularly difficult, time consuming and costly to workout because of their complicated structure and the diverging interests of all the various classes of debt in the capital structure of a given asset.

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

Our commercial real estate 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

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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 commercial real estate 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 commercial real estate loans if the borrower is unable to sell the project or refinance our commercial real estate loan.

We have and may continue to invest in CMBS securities, including subordinate securities, which entail certain risks.

Collateralized mortgage backed securities, or CMBS, 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, including CMBS which are subject to the first risk of loss if any losses are realized on the underlying mortgage loans. CMBS 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 will be affected by payments, defaults, delinquencies and losses on the underlying commercial real estate loans, which began to increase significantly towards the end of 2008 and are expected to continue to increase into 2009. Furthermore, a weakening rental market generally, including reduced occupancy rates and reduced market rental rates could reduce cash flow from the loan pools underlying our CMBS investments.

Additionally, CMBS 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 commercial real estate loan, particularly if the current economic environment continues to deteriorate. 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 may be highly dependent on the performance of the servicer or special servicer. Expenses of enforcing the underlying commercial real estate loans (including litigation expenses) and expenses of protecting the properties securing the commercial real estate loans may be substantial. Consequently, in the event of a default or loss on one or more commercial real estate loans contained in a securitization, we may not recover our investment.

The CMBS market has been severely impacted by the current economic turbulence, which has had a negative impact on the CMBS that we own.

Because the CMBS markets remain closed and other participants in the commercial real estate lending have drastically curtailed new lending activity, real estate owners are having difficulty refinancing their assets. Property values have also decreased over the past year because of scarcity of financing, which, when it is available, has terms generally at much lower leverage and higher cost than available in prior years. Uncertainty regarding future economic conditions and higher returning investment opportunities available in other asset classes have also negatively impacted commercial real estate values. These conditions, together with wide-spread downgrades of CMBS by the rating agencies, significantly higher risk premiums required by investors and uncertainty surrounding commercial real

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estate generally, have had a negative impact on CMBS and have significantly decreased the value of most of the CMBS that we own.

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 rating agencies have commenced re-evaluations of their ratings methodologies for all securitized asset classes, including commercial real estate, in light of questionable ratings previously assigned to residential mortgage portfolios. Their reviews, when overlaid with more negative economic assumptions, are resulting in large amounts of ratings downgrade actions for CMBS, negatively impacting market values of CMBS and in some cases negatively impacting the CDO financing structures used by us and others to leverage these investments. 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.

Recent market conditions and the risk of continued market deterioration have caused and may continue to cause uncertainty in valuing our real estate securities.

The continued market volatility and the lack of liquidity has made the valuation process pertaining to certain of our assets extremely difficult, particularly our CMBS assets for which there is very little market activity. Historically, our estimate of the value of these investments was primarily based on active issuances and the secondary trading market of such securities as compiled and reported by independent pricing agencies. The current market environment is absent new issuances and there has been very limited secondary trading of CMBS. Therefore, our estimate of fair value, which is based on the notion of orderly market transactions, requires significant judgment and consideration of other indicators of value such as current interest rates, relevant market indices, broker quotes, expected cash flows and other relevant market and security-specific data as appropriate. The amount that we could obtain if we were forced to liquidate our securities portfolio into the current market could be materially different than management's best estimate of fair value.

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 the risks resulting from the continued disruptions in the financial markets and deteriorating economic conditions, 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 commercial real estate 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. REITs have been severely impacted by the current economic environment and have had very little access to the capital markets or the debt markets in order to meet their existing obligations or to refinance maturing debt.

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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;

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•: 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.

Our net leased assets could be negatively impacted by the deteriorating economic conditions and weaker rental markets. 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. The poor economic conditions would likely reduce tenants' ability to make rent payments in accordance with the contractual terms of their leases and lead to early termination of leases. Furthermore, corporate space needs may contract resulting in lower lease renewal rates and longer releasing periods when leases are not renewed. Any of these situations may result in extended periods where there is a significant decline in revenues or no revenues generated by a property. Additionally, to the extent that market rental rates are reduced, property-level cash flows would likely be negatively affected as existing leases renew at lower rates. 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.

As was the case with our leases to WaMu Bank, N.A., lease defaults or terminations by one or more tenants may reduce our revenues unless a default is cured or a suitable replacement tenant is found promptly. The creditworthiness of our tenants in our net leased assets, particularly given the difficult economic environment, could be significantly impacted, which could result in their inability to meet the terms of their leases. 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.

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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 commercial real estate 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 commercial real estate 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 further changes in economic and other conditions, which may result in losses to us.

Our investments are relatively illiquid. Especially in the current economic environment, we do not have the ability to sell properties, securities or commercial real estate loans in response to further changes in economic and other conditions, except at distressed prices. 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 any of our assets even if a disposition were in the best interests of our stockholders. As a result, our ability to vary our portfolio in response to further 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, given the current economic conditions and lack of credit market, we may invest in unrated securities, enter into net leases with unrated tenants or participate in unrated or distressed mortgage loans. 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 during such economic recession, prices of lower credit quality investments and securities have declined. The 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.

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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 commercial real estate 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.

Our portfolio is highly 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, commercial real estate loans, securitizations, including the issuance of term debt transactions, and other borrowings, many of which are not currently available to us. The type and percentage of leverage varies depending on our ability to obtain credit facilities 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 has been reduced because of the current deteriorating market conditions which have caused the cost of financing to increase relative to the income that can be derived from our assets. Moreover, we may have to incur more recourse indebtedness in order to obtain financing for our business.

We are subject to risks associated with managing residential land investments in our LandCap joint venture.

In late 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. The venture is managed by professionals who have extensive experience in the single family housing sector. LandCap's investment strategy was to opportunistically invest in single family residential land through land loans, lot option agreements and select land purchases. These investments were expected to generate very little current cash flow and to be held for several years prior to liquidation. The venture has been seeking third party capital, but has not received any new capital commitments and we do not currently expect to provide any new investment capital to LandCap in the future. The venture will continue to manage existing investments and we do not expect the venture to return capital to us for several years.

In addition to the risks associated with the continuing decline in the value of residential land, certain loans in which we invested in our LandCap joint venture are either distressed or non-performing. These loans will generally have a greater risk of loss to us and our ability to generate positive returns on these loans will be subject to many factors, including, but not limited to, our ability to obtain a discounted payoff from the borrower of these loans in excess of our purchase price and our ability to foreclose and liquidate the asset(s) underlying such loans accretively. Additionally, if loans that we purchase have evidence of deterioration of credit quality at the time of purchase, we will apply the American Institute of Certified Public Accountants Statement of Position 03-3 "Accounting for Certain Loans or Debt Securities Acquired in a Transfer", or SOP 03-3, to these loans. SOP 03-3 addresses accounting for loans for which it is probable, at the time of our acquisition, that we will be unable to collect all contractual principal and interest. For these loans, the amount representing the excess of cash flows estimated by us at acquisition over the purchase price is accreted into income over the life of a loan. If we cannot reasonably estimate the cash flows that we expect to receive from a

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loan, then we will first apply any cash received from a loan as a reduction to our carrying value, and any cash received in excess of the carrying value will be recorded as income.

Estimating the amount of a loan's future cash flows involves significant judgment. The amount and timing of actual cash flows could differ materially from our estimates. Any decreases in our estimates of expected cash flows from purchased loans accounted for under SOP 03-3 may result in a significant negative adjustment to the amount of revenue that we had previously recorded from a purchased loan.

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 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, 2008, a hypothetical 100 basis point increase in interest rates applied to our variable rate assets would increase our annual interest income by approximately $30.8 million offset by an increase in our interest expense of approximately $25.1 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 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 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.

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

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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.

We have been, and may in the future be, subject to significant competition, and we may not be able to compete successfully for investments.

We have been, and may in the future be, 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 the healthcare-related net lease business by forming a joint venture with Chain Bridge Capital LLC to invest in senior housing and healthcare-related net leased assets, called Wakefield. In 2008, we brought another equity partner, Inland American Real Estate Trust, Inc., or Inland American, into the Wakefield venture by selling a $100 million preferred partnership interest to Inland American, convertible into an approximate 42% interest in the venture. As of December 31, 2008, we owned 51.6% 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 relatively 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 and there can be no assurance that we will be able to retain the principles of Chain Bridge.

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.

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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.

A significant portion of our leases expire in the same year.

A significant portion of the leases that we have entered into expire in 2017, which coincides with the debt maturities on the properties subject to these leases. As a result, we could be subject to a sudden and material change in value of the assets in Wakefield and available cash flow from Wakefield in the event that these leases are not renewed or in the event that we are not able to extend or refinance the loans on the properties that are subject to these leases.

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

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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 Securities Fund, and any future funds that we raise, may create conflicts of interest.

In addition to managing the assets of our term debt transactions, we manage an off-balance sheet fund, or our Securities Fund, which we formed in July 2007, to prospectively conduct our real estate securities investment business. We are the manager, and have a combined general partner and limited partner interest of 53.1% in the Securities Fund at December 31, 2008. We may in the future manage other third party funds or other investment vehicles.

The Securities Fund, along with any new funds we may manage, which together are referred to as our "Funds," will hold assets that we determine should be acquired by the Funds and doing so may create conflicts of interest, including between investors in these Funds and our shareholders, since many investment opportunities that are suitable for us may also be suitable for the Funds. Additionally, our executives and other real estate and debt finance professionals may face conflicts of interest in allocating their time among NorthStar, our Securities Fund and any other third party funds we may manage. 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 and the collapse of the CMBS market have adversely affected our Securities Fund, which may impact our ability to raise capital for future Funds and may cause investor redemptions.

The current global recession, deterioration of the capital markets and credit spread widening and corresponding lower mark-to-market adjustments to the assets in the Securities Fund have adversely affected the performance of our Securities Fund. Due to the foregoing, raising capital for future Funds could be more difficult and redemptions within the Securities Fund have occurred and are expected to occur in the future.

The creation and management of Funds and other investment vehicles could 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 Funds and other investment vehicles, including term debt vehicles, is that we may 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

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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 have used, and may in the future use, capital to preserve the existence of our Securities Fund and any future third party funds we manage.

Our Securities Fund is, and any future third party funds we manage 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 to the Funds.

Investors in our Securities Fund and, likely, any new third party 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 Securities Fund are, and investors in any future third party 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 Fund 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 may not be 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. The valuation policies of the Securities Fund 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.

There are risks in using prime brokers and custodians.

Our Funds will likely 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

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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.

We are subject to certain counterparty risks in our Securities Fund.

We have entered into credit default swaps with counterparties. As a result of the global credit crises, there is a risk that counterparties could fail, shut down, file for bankruptcy or be unable to pay out contracts. The failure of a counterparty that holds collateral that we post in connection with certain credit default swaps could result in the loss of such collateral.

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 and will likely in the future adopt certain incentive plans to create incentives that will allow us to retain and attract the services of key employees. These incentive plans may be tied to the performance of our common stock and as a result of the decline in our stock price, 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.

Our ability to issue equity awards to employees as compensation could be impacted, which will require greater cash compensation in relation to previous levels of cash compensations.

We have historically paid a substantial portion of our overall compensation in the form of equity awards. Currently, we do not have availability under our incentive plans to issue a meaningful amount of equity awards to our employees. We will likely seek shareholder approval for additional equity awards, but may be required to compensate our employees in a greater proportion of cash compared to equity awards. Because adjusted funds from operations, or AFFO, excludes equity based compensation expense, payment of higher levels of cash relative to equity awards will have a negative impact on our AFFO and reduce our liquidity position. Additionally, the lack of availability of equity awards could impact our ability to retain employees as equity awards historically have been a significant component of our long-term incentives.

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 "Management Discussion and Analysis of Financial Condition and Results of Operations—Risk Management".

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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, 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 believe AFFO is an appropriate measure of our operating performance; however, in certain instances AFFO may not be reflective of actual economic results.

We utilize AFFO as a measure of our operating performance and believe that it is useful to investors because it facilitates an understanding of our operating performance after adjustment for certain non-cash expenses, such as real estate depreciation, equity based compensation and unrealized gains/losses from mark-to-market adjustments. Additionally, AFFO serves as a good measure of our operating performance because it facilitates evaluation of our company without the effects of selected items required in accordance with accounting principles generally accepted in the United States, or GAAP, that may not necessarily be indicative of current operating performance and that may not accurately compare our operating performance between periods. Nonetheless, in certain instances AFFO may not necessarily be reflective of our actual economic results. For example, if a CMBS position that we purchased at par in a given year is marked down at the end of such year and then sold the subsequent year at a price above the marked down price, but less than par, we would still have a gain for purposes of AFFO between the difference of the year-end mark and the amount that we sold the CMBS for, even though we would have suffered an economic loss on the CMBS position. Our book value would, however, accurately reflect the economic loss because the decrease in value of the CMBS investment in its year of purchase would have been recorded as an unrealized loss in our income statement. Conversely, if we repurchase, for example, one of our issued CDO bonds for 50% of par in a given year and if such CDO bond were marked below 50% of par at the end of the previous year, for AFFO purposes we would recognize a realized loss on retirement of debt from the repurchase even though there is a positive economic impact to the retirement of the debt. Consistent with the prior example, while our book value would properly reflect the economic benefit from the debt repurchase because the decrease in value of the debt would have been recorded as an unrealized gain in the prior year, the impact to AFFO would not be reflective of actual economic results.

GAAP requirements and our mark-to-market adjustments of our liabilities under SFAS 159 in particular, do not necessarily provide a precise economic reflection of our shareholders' equity.

Pursuant to SFAS 159, we have elected to mark-to-market our liabilities in our real estate term debt transactions, but we do not mark-to-market the corresponding loans, which we hold at par net of any related credit loss reserves. Even if these loans are performing, because of a number of factors, including credit spread widening and concerns over commercial real estate generally, a third-party would not likely be willing to pay par for such loans. Therefore, our carrying value for these loans is likely above their current economic value. Additionally, while we have liabilities that are marked below the principal amount that we owe on such liabilities, which correspondingly increases our shareholders' equity, absent repurchasing such liabilities at a discount we will be required to repay the full par

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amount of such liabilities at maturity or upon a liquidation of the underlying collateral or our company. As a result of the foregoing, our shareholders' equity is and will likely continue to not necessarily be reflective of current economic or liquidation value.

Our dividend policy is subject to change.

On a quarterly basis, our Board of Directors determines an appropriate common stock dividend based upon numerous factors, including REIT qualification requirements, the amount of cash flows provided by operating activities, availability of existing cash balances, borrowing capacity under existing credit agreements, access to cash in the capital markets and other financing sources, our view of our ability to realize gains in the future through appreciation in the value of our assets, general economic conditions and economic conditions that more specifically impact our business or prospects. Although we have significantly reduced the cash portion of our first quarter 2009 dividend relative to prior periods, future dividend levels are subject to further adjustment based upon any one or more of the risk factors set forth in this Form 10-K, as well as other factors that our Board of Directors may, from time to time, deem relevant to consider when determining an appropriate common stock dividend.

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.

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

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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.

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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 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 us 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 subject us to federal income tax and reduce 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

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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 our 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. We currently intend to satisfy the 90% distribution requirement and avoid the 4% nondeductible excise tax with distributions that are payable in cash or our stock.

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. In addition, our taxable income may be greater than our cash flow available for distribution to stockholders as a result of investments in assets that generate taxable income in excess of economic income or in advance of the corresponding cash flow from the assets (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.

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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 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 certain 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.

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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% (or, beginning with our 2009 taxable year, 25%) of the value of our total securities can be represented by securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we must correct 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 effectively. Our aggregate gross income from non-qualifying hedges, fees, and certain other non-qualifying sources cannot exceed 5% of our annual gross income. As a result, we might have to limit our use of advantageous hedging techniques or implement those hedges through a taxable REIT subsidiary. Any hedging income earned by a taxable REIT subsidiary would be subject to federal, state and local income tax at regular corporate rates. This could increase the cost of our hedging activities or expose us to greater risks associated 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

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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 losses.

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.

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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 is, 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.

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Item 2. Properties

Our investments in net lease properties, which comprise our net lease business segment, are described under "Business—Net Lease." The following table sets forth certain information with respect to each of our net lease properties as of December 31, 2008:

Net Lease Portfolio: Property Information

Location City, State		Square Feet		Rent per square ft.		Number of Buildings		Ownership Interest	Property Type	Leasehold Expiration Date	Lease/Sublease Expiration Date	Encumbrances (In Thousands)
Bloomingdale, IL			50,000		10.50		1	Leasehold	Retail	January 2027	January 2022	$	5,753
Concord Holdings, NH			50,000		11.00		1	Fee	Retail	N/A	May 2016		5,995
			20,087		12.75		1	Fee	Retail	N/A	January 2016		2,409
Fort Wayne, IN			50,000		7.25		1	Leasehold	Retail	January 2025	August 2024		3,479
Keene, NH			45,471		15.03		1	Fee	Retail	N/A	October 2020		6,791
Melville, NY			46,533		8.75		1	Leasehold	Retail	January 2022	January 2022		4,463
Millbury, MA			54,175		8.49		1	Leasehold	Retail	January 2024	January 2024		4,744
New York, NY			7,500		78.02		1	Leasehold	Retail	December 2012	December 2012		—
			10,800		64.81		1	Leasehold	Retail	April 2029	June 2017		—
North Attleboro, MA			50,025		8.62		1	Leasehold	Retail	January 2024	January 2024		4,725
Portland, ME			52,900		15.66		1	Leasehold	Retail	August 2030	August 2023		4,824
Wichita, KS			48,782		12.00		1	Fee	Retail	N/A	March 2023		6,149

	Total Retail		486,273		11.06		12						49,332
Auburn Hills, MI			50,000		11.61		1	Fee	Office	N/A	September 2015		5,416
			55,692		13.47		1	Fee	Office	N/A	September 2015		6,032
Aurora, CO			183,529		16.92		1	Fee	Office	N/A	June 2015		33,329
Camp Hill, PA			214,150		12.30		1	Fee	Office	N/A	September 2015		25,279
Columbus, OH			199,112		11.70		1	Fee	Office	N/A	November 2017		23,788
Fort Mill, SC			165,000		12.72		1	Fee	Office	N/A	October 2020		30,685
Los Angeles CA			160,000		25.50		2	Fee	Office	N/A	June 2015		32,383
			97,336		23.58		1	Leasehold	Office	May 2039	June 2015		19,848
Milpitas, CA			180,481		14.36		2	Fee	Office	N/A	February 2017		22,548
Rancho Cordova, CA			68,000		22.32		1	Fee	Office	N/A	September 2015		10,970
Rockaway, NJ			15,038		7.00		1	Fee	Office	N/A	May 2015		2,154
			106,000		15.51			Fee	Office	N/A	July 2017		15,187
Salt Lake City, UT			117,553		19.70		1	Fee	Office	N/A	April 2012		15,863
Springdale, OH			139,264		10.00		1	Fee	Office	N/A	March 2010		15,686
			173,145		10.07		1	Fee	Office	N/A	December 2009		19,208
			174,554		14.25		1	Fee	Office	N/A	December 2011		16,586

	Total Office		2,098,854		15.09		17						294,962
Albemarle, NC			19,649		17.37		1	Fee	Healthcare	N/A	October 2021		2,275
Black Mountain, NC			36,235		18.74		1	Fee	Healthcare	N/A	July 2021		4,873
Blountstown, FL			33,722		17.29		1	Fee	Healthcare	N/A	July 2021		3,702
Bremerton, WA			68,601		12.84		1	Fee	Healthcare	N/A	October 2021		6,720
Brevard, NC			18,174		12.99		1	Fee	Healthcare	N/A	August 2020		2,087
			19,778		13.71		1	Fee	Healthcare	N/A	October 2021		1,725
Burnsville, NC			22,383		21.08		1	Fee	Healthcare	N/A	October 2022		3,000
Caroltton, GA			49,000		8.73		1	Fee	Healthcare	N/A	January 2017		2,988
Castletown, IN			46,026		18.64		1	Fee	Healthcare	N/A	June 2016		6,813
Charleston, IL			39,393		14.27		1	Fee	Healthcare	N/A	January 2017		5,862
Charlotte, NC			26,000		14.96		1	Fee	Healthcare	N/A	October 2021		2,500
Cherry Springs, NC			20,000		17.90		1	Fee	Healthcare	N/A	March 2016		2,772
Chesterfield, IN			19,062		25.15		1	Fee	Healthcare	N/A	June 2017		4,075
Cincinnati, OH			69,806		21.89		1	Fee	Healthcare	N/A	January 2017		11,468
Clemmons, NC			30,929		15.78		1	Fee	Healthcare	N/A	April 2022		3,250
Clinton, OK			31,377		10.51		1	Fee	Healthcare	N/A	January 2017		1,355
Clinton, NC			25,688		19.01		1	Fee	Healthcare	N/A	May 2020		2,324
Columbia City, IN			22,395		41.68		1	Fee	Healthcare	N/A	June 2017		8,079
Daly City, CA			26,262		21.12		1	Fee	Healthcare	N/A	August 2021		3,463
			78,482		16.56		1	Leasehold	Healthcare	August 2021	August 2021		7,937

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Net Lease Portfolio: Property Information

Location City, State	Square Feet		Rent per square ft.		Number of Buildings		Ownership Interest	Property Type	Leasehold Expiration Date	Lease/Sublease Expiration Date	Encumbrances (In Thousands)
Denmark, WI		8,320		17.70		1	Fee	Healthcare	N/A	January 2017		1,219
Dunkirk, IN		19,140		12.65		1	Fee	Healthcare	N/A	June 2017		2,132
East Arlington, TX		26,552		14.92		1	Fee	Healthcare	N/A	December 2013		3,413
Edenton, NC		24,228		21.08		1	Fee	Healthcare	N/A	October 2022		3,000
Effingham, IL		7,808		14.55		1	Fee	Healthcare	N/A	January 2017		553
		39,393		11.37		1	Fee	Healthcare	N/A	January 2017		4,617
Elk City, OK		51,989		11.48		1	Fee	Healthcare	N/A	January 2017		4,384
Elk Park, NC		22,383		21.08		1	Fee	Healthcare	N/A	October 2022		3,000
Fairfield, IL		39,393		17.20		1	Fee	Healthcare	N/A	January 2017		6,416
Fort Wayne, IN		31,500		17.94		1	Fee	Healthcare	N/A	June 2017		4,895
Franklin, WI		27,556		19.30		1	Fee	Healthcare	N/A	January 2017		6,366
Fullerton, CA		5,500		34.17		1	Fee	Healthcare	N/A	January 2017		797
		26,200		40.69		1	Fee	Healthcare	N/A	January 2017		7,631
Garden Grove, CA		26,500		41.20		1	Fee	Healthcare	N/A	January 2017		11,228
Gastonia, NC		12,215		18.10		1	Fee	Healthcare	N/A	August 2020		1,839
Green Bay, WI		23,768		16.39		1	Fee	Healthcare	N/A	January 2017		3,173
Grove City		20,672		38.25		1	Fee	Healthcare	N/A	January 2017		1,862
Harrisburg, IL		36,393		12.16		1	Fee	Healthcare	N/A	January 2017		3,690
Hartford City, IN		22,400		3.60		1	Fee	Healthcare	N/A	June 2009		2,096
Haysville, NC		22,383		21.08		1	Fee	Healthcare	N/A	October 2022		3,000
Hillsboro, OR		286,652		12.24		1	Fee	Healthcare	N/A	December 2013		33,300
Hobart, IN		43,854		14.96		1	Fee	Healthcare	N/A	June 2017		5,958
Huntington, IN		31,169		18.29		2	Fee	Healthcare	N/A	June 2017		4,548
Indianapolis, IN		36,416		6.93		1	Fee	Healthcare	N/A	June 2017		2,251
Kenosha, WI		22,958		18.53		1	Fee	Healthcare	N/A	January 2017		4,130
Kingfisher, OK		26,698		18.08		1	Fee	Healthcare	N/A	January 2017		3,994
La Vista, NE		26,683		17.46		1	Fee	Healthcare	N/A	January 2017		4,296
LaGrange, IN		9,872		4.09		1	Fee	Healthcare	N/A	June 2017		519
		46,539		11.93		1	Fee	Healthcare	N/A	June 2017		5,115
Lancaster, OH		21,666		27.26		1	Fee	Healthcare	N/A	January 2017		2,605
Madison, WI		25,411		18.35		1	Fee	Healthcare	N/A	January 2017		4,275
Manitowoc, WI		30,679		16.13		1	Fee	Healthcare	N/A	January 2017		5,017
Marysville, OH		16,992		32.13		1	Fee	Healthcare	N/A	January 2017		1,673
Mattoon, IL		39,393		16.53		1	Fee	Healthcare	N/A	January 2017		6,954
		39,393		15.07		1	Fee	Healthcare	N/A	January 2017		5,677
McFarland, WI		25,700		16.69		1	Fee	Healthcare	N/A	January 2017		3,833
Mansfield, OH		3,780		9.80		1	Fee	Healthcare	N/A	December 2017		—
		4,000		9.40		1	Fee	Healthcare	N/A	December 2017		—
		13,209		9.40			Fee	Healthcare	N/A	December 2017		—
Memphis, TN		73,381		21.87		1	Fee	Healthcare	N/A	January 2017		14,681
Menomonee, WI		30,176		20.44		1	Fee	Healthcare	N/A	January 2017		6,075
Middletown, IN		18,500		23.18		1	Fee	Healthcare	N/A	June 2017		3,424
Mooresville, IN		24,945		19.21		1	Fee	Healthcare	N/A	June 2017		1,530
Morris, IL		94,719		21.10		2	Fee	Healthcare	N/A	March 2016		6,951
Mt. Sterling, KY		67,706		15.39		1	Fee	Healthcare	N/A	January 2022		7,629
Oklahoma City, OK		45,187		11.27		1	Fee	Healthcare	N/A	January 2017		4,453
Olney, IL		25,185		9.86		1	Fee	Healthcare	N/A	January 2017		2,463
		39,393		11.80		1	Fee	Healthcare	N/A	January 2017		4,243
Paris, IL		39,393		14.87		1	Fee	Healthcare	N/A	January 2017		6,836
Peru, IN		36,861		13.69		1	Fee	Healthcare	N/A	June 2017		6,457
Peshtigo, WI		19,380		22.70		1	Fee	Healthcare	N/A	December 2017		—
Plymouth, IN		39,092		9.94		1	Fee	Healthcare	N/A	June 2017		5,278
Portage, IN		38,205		14.53		1	Fee	Healthcare	N/A	June 2017		7,071
Racine, WI		26,583		18.47		2	Fee	Healthcare	N/A	January 2017		10,050
Raleigh, NC		52,697		15.78		1	Fee	Healthcare	N/A	April 2022		3,250
Rantoul, IL		39,393		11.76		1	Fee	Healthcare	N/A	January 2017		5,639
Robinson, IL		29,161		14.33		1	Fee	Healthcare	N/A	January 2017		4,006
Rockford, IL		54,000		9.22		1	Fee	Healthcare	N/A	January 2017		4,961

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Net Lease Portfolio: Property Information

Location City, State		Square Feet		Rent per square ft.		Number of Buildings		Ownership Interest	Property Type	Leasehold Expiration Date	Lease/Sublease Expiration Date	Encumbrances (In Thousands)
Rockport, IN			26,000		9.12		1	Fee	Healthcare	N/A	June 2017		1,723
Roxboro, NC			18,174		20.55		1	Fee	Healthcare	N/A	August 2020		3,284
Rushville, IN			13,118		7.58		1	Fee	Healthcare	N/A	June 2017		554
			35,304		16.58		1	Fee	Healthcare	N/A	June 2017		4,108
Santa Ana, CA			24,500		32.25		1	Fee	Healthcare	N/A	January 2017		7,934
Sheboygan, WI			39,784		23.66		2	Fee	Healthcare	N/A	January 2017		9,300
Stephenville, TX			28,875		20.30		1	Fee	Healthcare	N/A	January 2017		6,187
Sterling, IL			149,008		18.55		2	Fee	Healthcare	N/A	March 2016		2,009
Stevens Point, WI			26,443		21.19		2	Fee	Healthcare	N/A	January 2017		8,487
Stoughton, WI			24,686		8.69		1	Fee	Healthcare	N/A	January 2017		1,686
Sullivan, IN			18,415		4.11		1	Fee	Healthcare	N/A	January 2017		891
			44,077		14.31		1	Fee	Healthcare	N/A	January 2017		4,930
Sycamore, IL			54,000		16.63		1	Fee	Healthcare	N/A	January 2017		8,509
Syracuse, IN			57,980		9.14		1	Fee	Healthcare	N/A	January 2017		3,514
Tipton, IN			50,000		10.16		1	Fee	Healthcare	N/A	June 2017		8,116
Tuscola, IL			36,393		11.50		1	Fee	Healthcare	N/A	January 2017		4,185
Two Rivers, WI			14,369		21.13		1	Fee	Healthcare	N/A	January 2017		2,708
Vandalia, IL			39,393		17.14		1	Fee	Healthcare	N/A	January 2017		7,345
Wabash, IN			35,374		5.13		1	Fee	Healthcare	N/A	June 2017		1,308
			70,746		7.42		1	Fee	Healthcare	N/A	June 2017		3,711
Wakarusa, IN			48,000		24.18		1	Fee	Healthcare	N/A	June 2017		10,084
			89,828		6.74		1	Fee	Healthcare	N/A	June 2017		6,492
Warsaw, IN			25,514		10.88		1	Fee	Healthcare	N/A	June 2017		3,658
Washington Crt Hse, OH			19,660		16.76		1	Fee	Healthcare	N/A	January 2017		1,974
Wausau, WI			24,047		18.03		1	Fee	Healthcare	N/A	January 2017		7,553
Weatherford, OK			53,000		9.50		1	Fee	Healthcare	N/A	January 2017		4,519
Wendell, NC			26,926		15.11		1	Fee	Healthcare	N/A	August 2020		2,332
Wichita, KS			81,810		11.61		1	Fee	Healthcare	N/A	December 2019		9,135
Williamston, NC			18,174		22.52		1	Fee	Healthcare	N/A	August 2020		3,179
Windsor, NC			24,228		21.08		2	Fee	Healthcare	N/A	October 2022		3,000
Winston Salem, NC			33,592		17.12		1	Fee	Healthcare	N/A	March 2020		3,507
Winter Garden, FL			37,322		14.31		1	Fee	Healthcare	N/A	February 2016		4,930
Wisconsin Rapids, WI			20,869		11.60		1	Fee	Healthcare	N/A	January 2017		1,129
Yanceyville, NC			38,283		20.62		1	Fee	Healthcare	N/A	August 2020		5,000

	Total Healthcare		4,090,168		15.82		118						518,702
New York, NY			17,665		53.42		1	Leasehold	Retail/Office	July 2015	June 2011– July 2016		–
Indianapolis, IN			333,600		7.29		1	Fee	Office/Flex	N/A	December 2025		28,472
Reading, PA			609,000		–		1	Fee	Distribution Ctr	N/A			19,152

Total			7,635,560		13.90		150					$	910,620

At December 31, 2008, we had no single property with a book value equal to or greater than 10% of our total assets. For the year ended December 31, 2008, we had no single property with gross revenues equal to or greater than 10% of our total revenues.

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 2008.

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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

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
2008
First Quarter	$	9.95	$	7.00	$	8.17	$	0.36
Second Quarter	$	10.74	$	8.10	$	8.32	$	0.36
Third Quarter	$	9.33	$	6.46	$	7.75	$	0.36
Fourth Quarter	$	7.79	$	2.60	$	3.91	$	0.25

On April 22, 2008, we declared a cash dividend of $0.36 per share of common stock. The dividend was paid on May 15, 2008 to the stockholders of record as of the close of business on May 5, 2008.

On July 22, 2008, we declared a cash dividend of $0.36 per share of common stock. The dividend was paid on August 15, 2008 to the stockholders of record as of the close of business on August 5, 2008.

On October 8, 2008, we declared a cash dividend of $0.36 per share of common stock. The dividend was paid on November 14, 2008 to the stockholders of record as of the close of business on November 4, 2008.

On January 20, 2009, we declared a dividend of $0.25 per share of common stock, payable with respect to the quarter ended December 31, 2008, to stockholders of record as of January 28, 2009. The dividend will be paid on February 27, 2009 in a combination of 40% cash and 60% common stock to the stockholders of record as of the close of business on January 28, 2009.

On October 8, 2008 our Board of Directors authorized a share repurchase program of up to 10,000,000 shares of our outstanding common stock, or approximately 16% of our outstanding common stock. Stock repurchases under this program may be made from time to time through the open market or in privately negotiated transactions. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities.

Purchase of equity securities by us:

Period		Average Price Paid per Share

October 1–October 31	—		—	—	10,000,000
November 1–November 30	475,051	$	2.91	475,051	9,524,949
December 1–December 31	—		—	—	9,524,949

Total	475,051	$	2.91	475,051	9,524,949

(1): In October 2008, we announced an open market repurchase program for the repurchase of up to 10.0 million shares of our outstanding common stock.

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On February 23, 2009, the closing sales price for our common stock, as reported on the NYSE, was $2.50. As of February 23, 2009, there were 119 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, 2008, 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.

Total Return Performance

	Period Ending

Index	10/26/04		12/31/04		12/31/05		12/31/06		12/31/07		12/31/08
NorthStar Realty Finance Corp.		100.00		130.86		122.93		220.64		135.08		70.70
Russell 2000		100.00		113.11		118.27		139.99		137.80		91.24
NAREIT All REIT Index		100.00		109.69		118.78		159.58		131.12		82.17

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Equity Compensation Plan Information

The following table summarizes information, as of December 31, 2008, relating to our equity compensation plans pursuant to which grants of securities may be made from time to time.

Plan Category

Approved by Security Holders:
	2004 Omnibus Stock Incentive Plan		7,628,447	n/a	275,508
	2004 Long-Term Incentive Bonus Plan		438,767	n/a	—

		Total	8,067,214	n/a	275,508

(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, at the option of the Company in its capacity as general partner of our operating partnership, for: (i) cash equal to the then fair market value of one share of our common stock; or (ii) one share of our common stock.

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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.

The selected combined historical financial information presented for the period January 1, 2004 to October 28, 2004 relates to the operations of our predecessor. The selected historical consolidated information presented for the years ended December 31, 2008, 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)

			Year Ended December 31,								Period October 29, 2004 to December 31, 2004		Period January 1, 2004 to October 28, 2004
			2008		2007		2006		2005		Period October 29, 2004 to December 31, 2004		Period January 1, 2004 to October 28, 2004
			(In Thousands, Except per Share Amounts)
Statements of Operations Data:
Revenues:
	Interest income		$	212,444	$	292,135	$	134,847	$	40,043	$	3,990	$	31
	Interest income—related parties			14,995		13,516		11,671		8,374		727		1,828
	Rental and escalation income			116,073		95,755		37,546		11,403		510		—
	Advisory and management fee income—related parties			12,496		7,658		5,906		4,813		665		2,437
	Other revenue			16,496		6,249		5,874		464		38		185

		Total revenues		372,504		415,313		195,844		65,097		5,930		4,481
Expenses:
	Interest expense			191,472		242,560		104,239		32,568		3,352		285
	Real estate properties—operating expenses			8,278		8,709		8,552		2,044		185		—
	Asset management fees—related party			4,746		4,368		594		—		—		—
	Fund raising fees and other joint venture costs			7,823		6,295		—		—		—		—
	Impairment on operating real estate			5,580		—		—		—		—		—
	Provision for loss on investments			11,200		—		—		—		—		—
General and administrative
Direct:
	Salaries and equity based compensation(1)			53,269		36,148		22,547		11,337		3,788		953
	Shared services—related party			—		—		—		1,145		231		—
	Auditing and professional fees			7,098		6,787		4,765		3,634		790		—
	Other general and administrative			14,492		13,626		7,739		2,881		1,043		181
Allocated:
	Salaries and other compensation			—		—		—		—		—		3,060
	Insurance			—		—		—		—		—		318
	Other general and administrative			—		—		—		—		—		925

Total general and administrative				74,859		56,561		35,051		18,997		5,852		5,437
	Depreciation and amortization			43,232		33,191		13,578		4,352		190		—

	Total expenses			347,190		351,684		162,014		57,961		9,579		5,722

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		The Company															The Predecessor (Combined)

		Year Ended December 31,												Period October 29, 2004 to December 31, 2004			Period January 1, 2004 to October 28, 2004
		2008			2007			2006			2005			Period October 29, 2004 to December 31, 2004			Period January 1, 2004 to October 28, 2004
		(In Thousands, Except per Share Amounts)
Income (loss) from operations			25,314			63,629			33,830			7,136			(3,649	)		(1,241	)
Equity in (loss) earnings of unconsolidated ventures			(11,918	)		(11,684	)		432			226			83			1,520
Unrealized gain (loss) on investments and other			752,332			(4,330	)		4,934			867			200			279
Realized gain on investments and other			36,036			3,559			1,845			2,160			293			636

Income (loss) from continuing operations before minority interest			801,764			51,174			41,041			10,389			(3,073	)		1,194
Minority interest in operating partnerships			(77,484	)		(2,702	)		(3,938	)		(2,116	)		632			—
Minority interest in joint ventures			(4,614	)		(580	)		(68	)		—			—			—

Net income (loss) from continuing operations			719,666			47,892			37,035			8,273			(2,441	)		1,194
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)			719,666			47,836			38,065			37,672			(2,439	)		1,194
Preferred stock dividends			(20,925	)		(16,533	)		(860	)		—			—			—

Net income available to common stockholders		$	698,741		$	31,303		$	37,205		$	37,672		$	(2,439	)	$	1,194

Net income (loss) per share from continuing operations		$	11.07		$	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		$	11.07		$	0.51		$	0.94		$	1.74		$	(0.12	)		—

Common stock dividends declared		$	90,069		$	87,948		$	45,461		$	11,268		$	—		$	—
Preferred stock dividends declared		$	20,925		$	16,533		$	860		$	—		$	—		$	—
Weighted average number of shares of common stock outstanding:
	Basic		63,135,608			61,510,951			39,635,919			21,660,993			20,868,865			—
	Diluted		70,136,783			65,086,953			44,964,455			27,185,013			25,651,027			—

(1): For the year ended December 31, 2008, 2007, 2006, 2005 and the period from October 29, 2004 to December 31, 2004, includes $24,680, $16,007, $9,080, $5,847 and $2,991 equity based compensation, respectively.

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	December 31,

	2008		2007		2006		2005		2004
	(In Thousands, Except per Share Amounts)
Balance Sheet Data
Operating real estate—net	$	1,127,000	$	1,134,136	$	468,608	$	198,708	$	43,544
Trading securities		—		—		—		—		826,611
Available for sale securities, at fair value		221,143		549,522		788,467		149,872		37,692
Real estate debt investments, net		1,976,864		2,007,022		1,571,510		681,106		70,569
Real estate debt investments, held-for-sale		70,606		—		—		—		—
Corporate loan investments		—		457,139		—		—		—
Investments in and advances to unconsolidated/uncombined ventures		101,507		33,143		11,845		5,458		5,363
Total assets		3,936,026		4,792,782		3,185,620		1,156,565		1,078,078
Mortgage notes and loans payable		910,620		912,365		390,665		174,296		40,557
Exchangeable senior notes		112,576		172,500		—		—		—
Bonds payable		468,638		1,654,185		1,682,229		300,000		—
Credit facilities		44,881		501,432		16,000		243,002		27,821
Secured term loans		403,907		416,934		—		—		—
Liability to subsidiary trusts issuing preferred securities		69,617		286,258		213,558		108,258		—
Repurchase obligations		176		1,864		80,261		7,054		800,418
Total liabilities		2,209,270		4,152,248		2,502,990		863,862		902,322
Minority interest in operating partnership		109,110		7,534		7,655		44,278		32,447
Minority interest in joint ventures		101,171		14,961		15,204		—		—
Stockholders' equity		1,516,475		618,039		659,771		248,425		143,309
Total liabilities and stockholders' equity	$	3,936,026	$	4,792,782	$	3,185,620	$	1,156,565	$	1,078,078

		The Company (Consolidated)															The Predecessor (Combined)

		Year Ended December 31,												Period October 29, 2004 to December 31, 2004			Period January 1, 2004 to October 28, 2004
		2008			2007			2006			2005			Period October 29, 2004 to December 31, 2004			Period January 1, 2004 to October 28, 2004
		(In Thousands)
Other Data:
Cash Flow from:
	Operating activities from continuing operations	$	82,668		$	102,238		$	53,998		$	849,625		$	(828,783	)	$	2,440
	Investing activities		(110,708	)		(2,373,929	)		(1,852,961	)		(881,090	)		(108,032	)		(19,197	)
	Financing activities		8,250			2,380,767			1,815,828			11,630			981,923			18,369

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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 a real estate investment trust, or 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. 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, 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 and REIT unsecured debt; 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 secured debt 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 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 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.

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. We may also acquire investments which generate attractive returns with no long-term financing.

Real Estate Debt

We primarily earn interest income from real estate debt investments. At December 31, 2008, our real estate debt portfolio consisted of approximately $2.1 billion of funded structured senior and subordinate debt investments. We completed 3 investments in 2008, 41 investments in 2007, 74 investments in 2006, 44 investments in 2005 and 3 investments for the period of October 29, 2004 to December 31, 2004.

Approximately 84.4% 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

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floating rate assets with floating rate debt having interest rates benchmarked to the same index as our assets. Decreases in floating interest rates may 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. During 2008, we sold 67% of our N-Star IX advisory fee income stream to the Securities Fund for $8.8 million. 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. We made no core net lease acquisitions during 2008. Part of our business strategy had been to expand our net lease business into underserved real estate sectors. In 2006, we partnered with experts in the healthcare-related net lease business and formed the Wakefield joint venture. The joint venture acquired approximately $591.0 million of healthcare facilities in 2007 and $4.2 million in 2008.

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.
•: Credit losses are a measure of the performance of our investments and can be used to compare the credit performance of our assets to our competitors and other finance companies.
•: Assets Under Management ("AUM") growth is a key driver of our ability to grow our earnings, but is of lesser importance than other metrics such as AFFO and ROE due to lack of available new investment capital in the commercial real estate sector.

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. 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 us. 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. For 2008, a much higher percentage of our performance compensation was awarded in cash rather than stock equivalents compared to prior years, resulting in an unfavorable efficiency ratio compared to prior years.

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.

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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. Other lending markets also 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.

During 2008, financial institutions curtailed their lending to peer institutions, even on a very short-term basis, as lack of transparency regarding asset quality reduced confidence in counterparty creditworthiness. Despite liquidity infusions from government-sponsored central banks worldwide, the cost of capital increased dramatically, and even the most liquid markets such as the commercial paper market experienced enormous outflows of capital. Those institutions deemed by the market to be most at risk for credit issues, principally those with large real estate and mortgage portfolios, experienced massive withdrawals from customer brokerage and deposit accounts. These institutions also became unable to transact in the capital markets because few participants were willing to take their counterparty risk, thereby resulting in their insolvency (most notably Bear, Stearns & Co. and Lehman Brothers Holdings, Inc.). The U.S. Government reacted to the rapid deterioration in the financial system by passing the Emergency Economic Stabilization Act of 2008, or the EESA, in early October. The EESA authorized and provided funds to the U.S. Treasury Department to acquire financial assets from institutions as a buyer of last resort in order to enable these institutions to reduce their exposure to troubled assets and to regain market confidence. During the fourth quarter of 2008, the U.S. abandoned the direct asset purchase strategy, committed to make up to $250 billion of direct equity investments into banking institutions and purchased commercial paper from corporations. In February 2009, the U.S. Government ratified a $787 billion economic stimulus package. However, it is unclear whether such government actions will result in any near-term recovery to the financial sector.

As a result of the enormous credit market disruptions and worldwide economic recession, most financial industry participants, including commercial real estate lenders and investors, continue to find it difficult to obtain cost-effective debt and equity capital to fund new investment activity or to refinance maturing debt. Weakening macroeconomic conditions combined with the continued lack of liquidity in the U.S. commercial real estate market continue to pressure underlying real estate values and cash flows.

Commercial Real Estate Macroeconomic Conditions

Property types most directly and immediately impacted by these weaker conditions include residential condominium projects in markets which experienced a high level of development during the residential market boom, such as in South Florida, Las Vegas and areas of California. Multi-family properties located in nearby areas have generally been impacted by the oversupply of condominiums because many of these projects are being converted into competing rental properties. Also, hotels are generally most immediately impacted by changing economic conditions because revenues are generated on a nightly basis, based on room rates and occupancy. Business and leisure travel is declining as macroeconomic conditions worsen. The next most sensitive real estate class to changing economic conditions is retail, followed by office and industrial properties. Office, industrial and retail property types have longer-term, multi-year leases and therefore reset to market on a lagging basis. Business and retailer failures have become more frequent and are expected to negatively impact occupancy rates in the future. The degree to which commercial real estate values are impacted by weaker economic conditions and the level of credit losses in our asset base will be determined primarily by the length that such conditions persist and the severity of the economic contraction.

Most of our real estate loans bear interest rates based on a spread to one-month LIBOR, a floating rate index based on rates that banks charge each other to borrow. One-month LIBOR is

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currently below 0.50%, well below its 3.5% average over the past five years. Lower LIBOR means lower debt service costs for our borrowers which should partially offset decreasing cash flows caused by the economic recession, and extend the life of interest reserves for those loans that require interest reserves to service debt while the collateral properties are being repositioned by our borrowers. Lower interest rates also theoretically support real estate valuations because a lower discount rate is applied to underlying future real estate cash flow assumptions in valuing a property. Currently, a lack of readily available financing, economic uncertainty and higher returning alternative investment opportunities have increased investor return expectations resulting in much higher risk premiums and, despite the lower interest rate, lower valuations for commercial real estate properties.

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.

Our real estate securities investments could also be negatively impacted by weaker rental market conditions. Within the underlying loan pools, any slowdown in economic conditions would likely reduce tenants' ability to make rent payments in accordance with the terms of their leases. Additionally, to the extent that market rental rates are reduced, property-level cash flows would likely be negatively affected as existing leases renew at lower rates. Finally, declining occupancy rates could also impact cash flow and reduce borrowers' ability to service their outstanding loans.

Real estate securities values are also influenced by credit ratings assigned to the securities by accredited rating agencies. The rating agencies have commenced re-evaluations of their ratings methodologies for all securitized asset classes, including commercial real estate, in light of questionable ratings previously assigned to residential mortgage portfolios. Their reviews, when overlayed with more negative economic assumptions, are resulting in large amounts of ratings downgrade actions for CMBS, negatively impacting market values of CMBS and in some cases negatively impacting the term debt transaction financing structures used by us and others to leverage these investments.

Our net leased assets could be adversely impacted by a weaker economy as well. Corporate space needs may contract resulting in lower lease renewal rates and longer releasing periods when leases are not renewed. Poor economic conditions may negatively impact the creditworthiness of our tenants which could result in their inability to meet the contractual terms of their leases.

Our Strategy

We responded to these difficult conditions by decreasing investment activity when we observed deteriorating market conditions. We expect credit to continue to be challenging throughout the remainder of 2009 and into 2010 and have focused our company resources on portfolio management activities to preserve our invested capital and liquidity. We anticipate that most of our investment activity and uses of available unrestricted cash liquidity for the foreseeable future will be focused on discounted repurchases of our previously issued debt securities which generally have been available in the market at very attractive prices, and also allows us to reduce future debt maturities. Our business plan assumes that the gains from repurchasing this debt at discounts to par more than offsets credit losses during the same period.

Approximately $4.0 billion of our term debt transaction liabilities (including the off-balance sheet and on-balance sheet term debt transaction financings) currently permit reinvestment of capital proceeds which means when the underlying assets repay we are able to reinvest the proceeds in new assets without having to repay the liabilities. We also have assets financed on a bank term loan with an outstanding balance of $379.6 million at December 31, 2008, which has a final maturity in October

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2010. Rather than making new investments with loan repayment proceeds in our term debt transactions, in certain instances we have been amortizing the bank term loan by transferring performing assets financed by the term loan into our term debt transactions, providing match funded financing for these assets. Approximately $797.6 million of our funded loan commitments have their initial maturity date in 2009; however, most of the loans contain extension options of at least nine months (many subject to performance criteria). It is therefore difficult to estimate how much capital, if any, from initial maturities or prepayments will be generated in our term debt transactions from loan repayments during 2009 to create availability to further amortize the bank loan.

Our term debt structures do not have corporate financial covenants but require that the underlying loans and securities meet debt service and collateral value coverage (as defined by the indentures) in order for us to receive regular cash flow distributions. If the tests are not met cash flow is diverted from us to repay the liabilities until the tests are back into compliance. In some cases, our ability to reinvest can be adversely impacted if these tests are not in compliance. Ratings downgrades of CMBS and other securities can reduce the deemed value of the security in measuring collateral coverage, depending on the level of the downgrade. Also, defaults in our loans can reduce the collateral coverage of the defaulted loan in our term debt structures. As economic conditions continue to weaken and capital for commercial real estate remains scarce, we expect credit quality in our assets and across the commercial real estate sector to weaken. While we have devoted a majority of our resources to managing our existing asset base, a continued weak environment will make maintaining compliance with the term debt structures more difficult, jeopardizing regular cash flow distributions to our company.

We believe that in the longer term, liquidity could eventually 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 could include term loans from financial institutions and life insurance companies, more restrictive commercial real estate finance structures, which may not permit reinvestment from asset repayments, and financing provided by motivated sellers of assets.

Risk Management

We use many methods to actively manage our asset base to preserve our income and capital. Generally, for loans and net lease assets, frequent dialogue with borrowers/tenants and inspections of our collateral and owned properties have proven to be an effective process for identifying issues early and prior to missed debt service and lease payments. Many of our loans also require borrowers to replenish cash reserves for items such as taxes, insurance and future debt service costs. Late replenishments also may be an early indicator there could be a problem with the borrower or collateral property. We also may negotiate modifications to loan terms if we believe such modification improves our ability to maximize principal recovery. Modifications may include changes to contractual interest rates, maturity dates and other borrower obligations. Generally, when we make a concession such as reducing an interest rate or extending a maturity date, we seek to get additional collateral and/or fees in return for the modification. In some cases we may issue default notices and begin foreclosure proceedings when the borrower is not complying with the loan terms and we believe taking control of the collateral is the best course of action to protect our capital. For net leases, we may seek to obtain up-front or accelerated payment in return for an early cancelation of the lease if we believe the tenant's creditworthiness has significantly deteriorated and that taking control of the property and re-leasing it maximizes value.

Securities investments generally have a more liquid market than loans and net lease assets, but we typically have very little control over restructuring decisions when there is a problem with the asset. Generally, we manage risk in the securities portfolio by selling the asset when we can obtain a price that is attractive relative to its riskiness. In certain situations, we may sell an asset because there is an opportunity to reinvest the capital into a new asset with a more attractive risk/return profile.

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We conduct a quarterly comprehensive credit review which is designed to enable management to evaluate and proactively manage asset-specific credit issues and identify credit trends on a portfolio-wide basis as an "early warning system." Nevertheless, we cannot be certain that our review will identify all issues within our portfolio due to, among other things, adverse economic conditions or events adversely affecting specific assets; therefore, potential future losses may also stem from assets that are not identified by our credit reviews. Based on the quarterly reviews, loans and net lease assets are put on an internal "Watch List" if we believe there is greater near-term risk that we could lose invested capital and/or there is a situation at the underlying collateral which requires intensive risk management and portfolio management resources. Securities investments are generally added to the watch list if there is a default, although management may use its discretion to include or exclude any asset from the watch list based on qualitative factors such as likelihood of actual loss realization, level of resources required to work out the issue, and probability of default if there has not yet been an actual default. A Watch List asset does not necessarily mean it is non-performing or that there is an impaired loan basis, but indicates our view that the risk of the asset becoming non-performing or impaired is much greater than in the overall portfolio. We believe the Watch List is a useful internal tool for prioritizing management resources but delinquencies, realized losses, non-performing loans and actual credit loss reserves are the appropriate basis in which our investors should compare our credit performance to other financial services companies. These metrics are much more objective and comparable than management's assessment of Watch List criteria which are more subjective and difficult to define in the current environment. For this reason, in the future we may decide to not publish our internal Watch List in order to avoid investor confusion when comparing our credit track record to other companies.

As of December 31, 2008 our loan portfolio had the following credit statistics: (dollar amounts in thousands)

		$

Non-performing loans(1)	1	$	21,373	1.04	%
Loan loss reserves	7		11,200	0.55	%

(1): A loan is classified as non-performing at such time as the loan becomes 90 days delinquent in interest or principal payments or the loan has a maturity default.

During 2008, we recorded $15.7 million of credit loss provisions relating to 10 loans and reversed $4.5 million of previously recorded reserves relating to four loans. As of December 31, 2008, loan loss reserves totaled $11.2 million. Overall, the prolonged financial sector crisis and economic recession is resulting in increasing stress levels for commercial real estate credit. A shrinking economy generally results in decreasing real estate cash flows as corporations and consumers reduce their real estate needs, travel and spending. Because the commercial real estate asset-backed markets remain closed, and banks and life companies have drastically curtailed new lending activity, real estate owners are having difficulty refinancing their assets at maturity. Many owners are also having trouble achieving their business plans to the extent they acquired a property to reposition it or otherwise invest capital to increase the property's cash flows. Property values have also generally decreased over the past year because of scarcity of financing, which when it is available the terms generally are at much lower leverage and higher cost than available in prior years), uncertainty regarding future economic conditions and higher returning investment opportunities available in other asset classes. Decreasing values make it difficult for real estate investors to sell their properties and to recoup their capital. As a result of the weak commercial real estate market, many lenders, including us, are concluding that extending loans at original maturity, rather than foreclosure and sale, may be the most attractive path for maximizing value.

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Many of our loans were made to borrowers who had a business plan to improve the collateral property and who therefore needed a flexible balance sheet lender. In many cases we required the borrowers to pre-fund reserves to cover interest and operating expenses until the property cash flows increased sufficiently to cover debt service costs. We also generally required the investor to refill these reserves if they became deficient due to underperformance and if the borrower wanted to exercise extension options under the loan. Despite low interest rates, we expect that in the future some of our borrowers may have difficulty servicing our debt because they cannot achieve their business plan in this economic environment. If any of our borrowers are unable to replenish reserves and otherwise ultimately achieve their business plans, the related loans may become non-performing. In addition, even if a borrower's business plan is achieved, current real estate valuations and the financing environment may result in a borrower being unable to recoup its invested capital and a default under the loan causing a partial or full loss of our loan principal.

Our net leased assets are generally leased to a single tenant and we typically financed these assets with non-recourse first mortgage loans. In the event a tenant goes out of business, we must decide whether to continue to pay debt service and property operating costs until we find a new tenant, or we may give the property to the mortgage lender and lose our invested equity capital. One of our net lease investments is comprised of three office buildings totaling 257,000 square feet located in Chatsworth, CA and 100% leased to Washington Mutual Bank, FA, or WaMu. The assets are financed with a non-recourse $43.0 million first mortgage loan. The assets are also financed with a $9.3 million mezzanine loan which is collateral for one of our securities term financings. On September 25, 2008, JPMorgan Chase & Co., or JPMorgan, announced that it had acquired substantially all of the assets and liabilities of WaMu from the Federal Deposit Insurance Corp. JPMorgan was entitled to a 90-day period from the WaMu acquisition date to decide whether they will accept or reject the terms of the lease. On February 5, 2009, we became aware that JPMorgan intends to vacate the properties by March 23, 2009. As a result, we took a $5.6 million impairment charge to these properties as of December 31, 2008. We are evaluating our options regarding this investment, which could include transferring our ownership in the properties to the first mortgage lender.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based on our financial statements which have been prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. These accounting principles 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. 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. We have identified our critical accounting policies that affect the more significant judgments and estimates used by us in the preparation of our consolidated financial statements to be the following:.

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 inter-company balances have been eliminated in consolidation.

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Valuation of Financial Instruments

Proper valuation of financial instruments is a critical component of our financial statement preparation. We adopted the provisions of SFAS No. 157 "Fair Value Measurements" ("SFAS 157") effective January 1, 2008. SFAS 157 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between marketplace participants at the measurement date (i.e., the exit price).

We have categorized our financial instruments, based on the priority of the inputs to the valuation technique, into a three level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

Financial assets and liabilities recorded on the Condensed Consolidated Balance Sheets are categorized based on the inputs to the valuation techniques as follows:

Level

1. Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market (examples include active exchange-traded equity securities, listed derivatives, most U.S. Government and agency securities, and certain other sovereign government obligations).

Level

2. Financial assets and liabilities whose values are based on the following:

a): Quoted prices for similar assets or liabilities in active markets (for example, restricted stock);
b): Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds, which trade infrequently);
c): Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including interest rate and currency swaps); and
d): Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability (for example, certain mortgage loans).

Level

3. Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management's own assumptions about the assumptions a market participant would use in pricing the asset or liability (examples include private equity investments, commercial mortgage backed securities, and long-dated or complex derivatives including certain foreign exchange options and long dated options on gas and power).

The fair values of our financial instruments are based on observable market prices when available. Such prices are based on the last sales price on the date of determination, or, if no sales occurred on such day, at the "bid" price at the close of business on such day and if sold short at the "asked" price at the close of business on such day. Interest rate swap contracts are valued based on market rates or prices obtained from recognized financial data service providers. Generally these prices are provided by a recognized financial data service provider.

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We have valued our financial instruments, in the absence of observable market prices, using the valuation methodologies described below applied on a consistent basis. For some financial instruments little market activity may exist; management's determination of fair value is then based on the best information available in the circumstances, and may incorporate management's own assumptions and involves a significant degree of management's judgment.

Investments for which market prices are not observable are generally investments in equity or income notes of term debt transactions, equity interests in collateralized loan obligations and trust preferred securities. Fair values of these investments are determined by reference to market rates or prices provided by the underwriters of the structured securities or cash flow models utilizing an internal rate of return provided by the underwriters of the term debt or CLO transaction. An analysis is applied to the estimated future cash flows using various factors depending on the investments, including various reinvestment parameters.

Liabilities for which market prices are not generally observable include our liability to subsidiary trusts issuing preferred securities. The fair value of these debt instruments are based upon an analysis of other instruments issued by us that are currently actively traded including our preferred stock and exchangeable senior notes. An analysis is performed on the implied credit spreads that could be observed for these instruments. We believe that the credit spreads for our preferred stock and exchangeable senior notes are valid proxies for those of the liability to subsidiary trusts issuing preferred securities because they share many of the same structural and credit features. However, in deriving appropriate credit spreads for the liability to subsidiary trusts issuing preferred securities on the basis of observed credit spreads for preferred stock and exchangeable senior notes, several adjustments are made to reflect the differences between these instruments and the liability to subsidiary trusts issuing preferred securities.

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.

Fair Value Option

SFAS 159" Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159") provides a fair value option election that allows companies to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities. Changes in fair value for assets and liabilities for which the election is made will be recognized in earnings as they occur. SFAS 159 permits the fair value option election on an instrument by instrument basis at initial recognition. We adopted SFAS No. 159 effective January 1, 2008 and have elected to fair value for our third party available for sale securities, our exchangeable senior notes, our N-Star bonds payable and our liabilities to subsidiary trust issuing preferred securities. We determine the fair value of these

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financial assets and financial liabilities pursuant to the guidance in SFAS 157. See Note 3 to the condensed consolidated financial statements for further information.

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 in accordance with SFAS "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). 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 and our non investment grade notes of unconsolidated term debt transactions as available for sale securities as they meet the definition of a debt instrument due to their redemption provisions. These 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 available for sale securities that serve as collateral for our term debt transactions, which we have elected the fair value option pursuant to SFAS 159, are carried at fair value with the net unrealized gains or losses reported as a component of earnings in the statement of operations. We determine the fair value of our available for sale securities pursuant to the guidance in SFAS 157. For additional information regarding unrealized gains and losses due to changes in the fair value of our available for sale securities at December 31, 2008 and 2007, see Note 5 of the notes to our consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.

Revenue Recognition

Interest Income from our real estate debt investments is recognized on an accrual basis over the life of the investment using the effective interest method, Fees, discounts, premiums, anticipated exit fees and direct cost are recognized over the term of the loan as an adjustment to the yield. Fees on commitments that expire unused are recognized at expiration.

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

We recognize interest income on our investments in the equity notes of our unconsolidated term debt transactions 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.

Rental Income from our net lease portfolio is recognized on a straight-line basis over the non-cancelable term of the respective leases.

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.

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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.

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.

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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, or are hedges on debt that is remeasured at fair value pursuant to SFAS 159, 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.

In January 2008, we adopted SFAS 159 and elected the fair value option for our bonds payable and its liability to subsidiary trusts issuing preferred securities. Under SFAS 159, the changes in fair value of these financial instruments are recorded in earnings. As a result of this election, the interest rate swap agreements associated with these debt instruments no longer qualify for hedge accounting, in accordance with SFAS 133 "Derivatives and Hedging Activity", since the underlying debt is remeasured with changes in the fair value recorded in earnings. The unrealized gains or losses accumulated in other comprehensive income, related to these interest rate swaps, will be reclassified into earnings over the shorter of either the life of the swap or the associated debt with current mark-to-market unrealized gains or losses recorded in earnings.

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 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.

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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.

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities—An Amendment of FASB Statement No. 133" ("SFAS 161"). SFAS 161 expands the disclosure requirements for derivative instruments and hedging activities. SFAS 161 specifically requires entities to provide enhanced disclosures addressing the following: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. SFAS 161 is effective for us on January 1, 2009. We are currently assessing the potential impact that the adoption of SFAS 161 could have on our financial statements.

In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS 162"). SFAS 162 is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with generally accepted accounting principles in the United States for non-governmental entities. SFAS 162 is effective 60 days following approval by the U.S. Securities and Exchange Commission ("SEC") of the Public Company Accounting Oversight Board's amendments to AU Section 411, "The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles". The adoption of SFAS 162 did not have a material impact on our financial statements.

In May 2008, the FASB issued FASB Staff Position APB 14-1, "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)" ("FSP APB 14-1"). FSP APB 14-1 applies to convertible debt instruments that, by their stated terms, may be settled in cash (or other assets) upon conversion, including partial cash settlement of the conversion option. FSP APB 14-1 requires bifurcation of the instrument into a debt component that is initially recorded at fair value and an equity component. The difference between the fair value of the debt component and the initial proceeds from issuance of the instrument is recorded as a component of equity. The liability component of the debt instrument is accreted to par using the effective yield method; accretion is reported as a component of interest expense. The equity component is not subsequently re-valued as long as it continues to qualify for equity treatment. This practice marks a significant change from the current accounting practice for convertible debt instruments in the scope of the FSP. Current practice does not require separation of the liability and equity components of such instruments. Separately accounting for these instruments' liability and equity components will result in the recording of more non-cash interest cost over the life of the convertible debt instrument, because

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of an initial debt discount. Additionally, FSP APB 14-1 precludes the use of the fair value option pursuant to SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities." FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. We intend to adopt FSP APB 14-1 effective January 1, 2009 and apply its provisions retrospectively to all periods presented in our financial statements. We have determined that FSP APB 14-1will result in the recognition of additional non-cash interest expense of approximately $0.8 million, $2.8 million and $3.6 million in our 2007, 2008 and 2009 statements of operations, respectively. The 2008 increase in non-cash interest expense will be offset by a $5.0 million capitalization of financing fees which were expensed upon the election of the fair value option on the convertible debt instruments.

In October 2008, the FASB issued Staff Position No. FAS 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active ("FSP 157-3"). FSP 157-3 clarifies the application of SFAS 157, which we adopted as of January 1, 2008, in cases where a market is not active. We have considered the guidance provided by FSP 157-3 in our determination of estimated fair values as of December 31, 2008, and the impact was not material.

In December 2008, the FASB issued Staff Position No. FAS 140-4 and FIN 46(R)-8, "Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities" ("FSP FAS 140-4 and FIN 46(R)-8"). FSP FAS 140-4 and FIN 46(R)-8 increases disclosure requirements for public companies and is effective for reporting periods (interim and annual) that end after December 15, 2008. The purpose of this FSP is to promptly improve disclosures by public entities and enterprises until the pending amendments to FASB Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"("SFAS 140"), and FASB Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities" ("FIN 46(R)") , are finalized and approved by the Board. The FSP amends SFAS 140 to require public entities to provide additional disclosures about transferors' continuing involvements with transferred financial assets. It also amends FIN 46(R) to require public enterprises, including sponsors that have a variable interest in a variable interest entity, to provide additional disclosures about their involvement with variable interest entities. This pronouncement is related to disclosure only and will not have an impact on our consolidated financial position, results of operations or cash flows.

Comparison of the Year Ended December 31, 2008 to the Year Ended December 31, 2007

Revenues

Interest Income

Interest income for the year ended December 31, 2008 totaled $212.4 million, representing a decrease of $79.7 million, or 27%, compared to $292.1 million for the year ended December 31, 2007. The decrease consisted of a $62.7 million decrease attributable to a lower average LIBOR rate during 2008 of approximately 250 basis points compared to 2007, a decrease of $32.0 million in interest income attributable to the sale of securities investments to the Securities Fund and the deconsolidation of Monroe Capital as a result of the recapitalization. The decrease was partially offset by a net increase to interest income of approximately $15.3 million resulting from the origination and acquisition of commercial real estate debt and commercial real estate securities during 2008 with a net book value of $388.5 million offset by approximately $330.0 million of investment dispositions and repayments during 2008.

Interest Income—Related Parties

Interest income from related parties for the year ended December 31, 2008 totaled $15.0 million, representing an increase of $1.5 million, or 11%, compared to $13.5 million for the year ended December 31, 2007. The increase is attributable to increases in our investments in the non-investment

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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, 2008 totaled $116.1 million, representing an increase of $20.3 million, or 21%, compared to $95.8 million for the year ended December 31, 2007. The increase was primarily attributable to net lease property acquisitions by our Wakefield joint venture during 2007 for which we earned a full year of revenues in 2008. These acquisitions collectively contributed $16.6 million of additional rental income. The full year impact of other net lease properties acquired during 2007 contributed additional rental and escalation income of $3.7 million during 2008.

Advisory and Management Fee Income—Related Parties

Advisory fees from related parties for the year ended December 31, 2008 totaled $12.5 million, representing an increase of approximately $4.8 million, or 62%, compared to $7.7 million for the year ended December 31, 2007. 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 advisory fees from the financing. During the second quarter 2008, we sold 67% of our advisory fee income stream, pursuant to our agreement with N-Star IX, to the Securities Fund. The increase was primarily attributable to the recognition of an additional $4.8 million in fee income related to the sale and the advisory fees earned on N-Star IX prior to the sale of $1.0 million, partially offset by reduced advisory fees earned on N-Star IX after the sale of $1.0 million, all of which were formerly eliminated in consolidation.

Other Revenue

Other revenue for the year ended December 31, 2008 totaled $16.5 million, representing an increase of $10.3 million, or 166%, compared to $6.2 million the year ended December 31, 2007. Other revenue for the year ended December 31, 2008 consisted primarily of: (i) a $9.0 million lease termination fee; (ii) $5.6 million in profit participation proceeds from modifications of real estate debt investments; (iii) $0.6 million of exit fees; and (iv) $1.3 million of unused credit line fees, prepayment penalties, draw fees and other miscellaneous revenue. Other revenue for the year ended December 31, 2007 includes: (i) $2.6 million in early prepayment fees; (ii) $1.9 million of recurring income from premiums received on credit default swaps related to Abacus NS2 which was sold to the Securities Fund in 2007; (iii) $0.8 million of exit fees and loan draw fees; and (iv) $0.9 million in consent, assumption, unused credit line and other fees on loans in our real estate debt portfolio.

Expenses

Interest Expense

Interest expense for the year ended December 31, 2008 totaled $191.5 million, representing a decrease of $51.1 million, or 21%, compared to $242.6 million for the year ended December 31, 2007. The decrease in interest was primarily the result of: (i) $41.2 million lower interest on N-Star IV, VI, VII and VIII bonds payable and trust preferred debt due to lower average LIBOR rates, debt repurchases and debt repayments; (ii) $2.6 million of lower deferred financing fee amortization relating to debt which we elected to fair value under SFAS 159 in 2008; (iii) $15.8 million lower interest relating to the debt associated with assets sold to the Securities Fund in 2007; (iv) $8.3 million lower interest as a result of the recapitalization of our corporate lending venture in 2008; (v) $5.3 million relating to lower average balances and lower LIBOR rates on our WA Term Loan; (vi) $0.3 million related to the termination of our unsecured revolving credit line in May 2008; and (vii) $3.9 million lower interest

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due to the partial repayment of repurchase obligations. The decrease in interest expense was partially offset by: (i) $10.0 million of additional interest on mortgage loans payable due to the full year impact of 2007 acquisitions in our net lease portfolio; (ii) an increase of $5.8 million relating to the full year impact of the June 2007 closing of our $172.5 million exchangeable senior notes offering; (iii) $5.4 million from $80.0 million exchangeable senior notes offering issued in May 2008; (iv) $2.9 million from the full year impact of the Euro-note; and (v) $2.2 million relating to the full .year impact of the August 2007 JP Facility and our new LB term loan which closed in June 2008. In additional interest expense for 2008 does not reflect the $15.0 million of interest rate swap payments which was classified in unrealized gain (loss) on investments (as required under SFAS 133), as a result of the fair value option elected for the debt associated with the interest rate swaps.

Real Estate Properties—Operating Expenses

Real estate property operating expenses for year ended December 31, 2008 totaled $8.3 million, representing a decrease of $0.4 million, or 5%, compared to $8.7 million for year ended December 31, 2007. The decrease was primarily attributable to lower tenant reimbursable expenses at one of our core net lease properties and reduced insurance expense at various net lease properties.

Asset Management Fees—Related Party

Advisory fees for related parties for the year ended December 31, 2008 totaled $4.7 million, representing an increase of $0.3 million, or 7%, compared to $4.4 million for the year ended December 31, 2007. The increase was primarily attributable to increased asset management fees in our Wakefield joint venture resulting from higher average assets under management during 2008.

Fundraising Fees, Debt Issuance Costs and Other

Fundraising fees, debt issuance costs and other for the year ended December 31, 2008 totaled $7.8 million, representing an increase of $1.5 million, or 24%, compared to $6.3 million for the year ended December 31, 2007. Fundraising fees, debt issuance costs and other for the year ended December 31, 2008 included $2.9 million associated with the write-off of goodwill relating to the NRF Capital acquisition in 2005 and $4.9 million of debt issuance cost related to the May 2008 issuance of our 11.50% exchangeable senior notes, which we refer to as the NNN Notes, for which we elected the fair value option under SFAS 159. Fundraising fees, debt issuance costs and other for the year ended December 31, 2007 included $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.

Impairment on Operating Real Estate

Impairment on operating real estate for the year ended December 31, 2008 totaled $5.6 million. The impairment on operating real estate was taken on our net leased asset comprised of three office buildings totaling 257,000 square feet located in Chatsworth, CA and 100% leased as of December 31, 2008. The buildings have a combined $57.0 million net book value and are financed with a non-recourse $43.0 million first mortgage loan and a $9.3 million mezzanine loan. On February 5, 2009 we became aware that JPMorgan intends to vacate the properties by March 23, 2009. As a result, we took a $5.6 million impairment charge on these properties as of December 31, 2008. We had no impairment on operating real estate for the year ended December 31, 2007.

Provision for Loan Losses

Provision for loss on investments for the year ended December 31, 2008 totaled a net of $11.2 million. During 2008, we recorded $15.7 million of asset-specific loan reserves relating to 10

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separate loans and reversed $4.5 million of reserves relating to four separate loans due to resolution of the impairment which resulted in the original reserve. We had no provision for loan losses for the year ended December 31, 2007.

General and Administrative

General and administrative expenses for the year ended December 31, 2008 totaled $74.9 million, representing an increase of $18.3 million, or 32%, compared to $56.6 million for the year ended December 31, 2007. The primary components of our general and administrative expenses were the following:

Salaries and equity-based compensation for the year ended December 31, 2008 totaled $53.3 million, representing an increase of approximately $17.1 million, or 47%, compared to $36.2 million, for the year ended December 31, 2007. The increase was attributable to an $8.7 million increase in equity-based compensation expense and an increase of $8.4 million in cash compensation costs. The increase in equity-based compensation expense was principally attributable to $9.5 million of additional 2008 expense relating to vesting of equity retention grants issued to our executive officers and key employees in the fourth quarter 2007 and performance-based equity grants issued in January 2008 relating to calendar year 2007 performance, $2.7 million relating to employee compensation and separation agreements, and $0.9 million from accelerated vesting of equity awards previously granted to employees who were terminated in connection with our restructuring in December 2008. Equity grants are amortized over the related vesting periods based upon the value as of the date of grant. Equity-based compensation expense for 2008 represented a weighted-average share price of $9.86 per share based upon grant date values. The increase in salaries and benefits was attributable to $1.0 million of termination benefits paid to employees as part of the December 2008 restructuring and $7.4 million related to incentive compensation relating to 2008. The 2008 incentive compensation included a higher proportion of cash versus stock than prior periods due to our desire to issue less equity given the negative impact macroeconomic and capital markets conditions have had on our stock price and broader market indices. Total value of cash and equity based awards granted in 2008 were $7.4 million lower than such grants relating to 2007. The increase was offset by $2.3 million of lower costs relating to the 2004 Long Term Incentive Bonus Plan, which was fully vested as of December 31, 2007, and a decrease in equity-based compensation expense of $1.3 million related to our Employee Outperformance Plan.

Auditing and professional fees for the year ended December 31, 2008 totaled $7.1 million, representing an increase of $0.3 million, or 4%, compared to $6.8 million for the year ended December 31, 2007. The increase was primarily attributable to increased legal and consulting fees relating to a corporate restructuring and general corporate matters.

Other general and administrative expenses for the year ended December 31, 2008 totaled $14.5 million, representing an increase of approximately $0.9 million, or 7%, compared to $13.6 million for the year ended December 31, 2007. The increase was primarily attributable to increased computer software and supplies related to our information technology disaster recovery initiative, the write-off of accounts receivables at one of our properties in our healthcare net lease portfolio and legal fees and other costs related to investment initiatives ultimately not consummated.

Depreciation and Amortization

Depreciation and amortization expense for the year ended December 31, 2008 totaled $43.2 million, representing an increase of $10.0 million, or 30%, compared to $33.2 million for the year ended December 31, 2007. This increase was primarily attributable to the full year impact of $686.2 million of net lease acquisitions made during 2007.

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Equity in (Loss) Earnings of Unconsolidated Ventures

Equity in (loss) earnings for the year ended December 31, 2008 totaled a loss of $11.9 million, representing a decrease of $0.2 million, compared to a loss of $11.7 million for the year ended December 31, 2007. In July 2007, we closed our Securities Fund, retaining a 25% interest that is accounted for under the equity method of accounting. During 2008, we increased our interest in the Securities Fund to 53.1%. For the year ended December 31, 2008, we recognized equity in loss of $12.4 million from the Securities Fund (which includes both realized and unrealized gains from asset sales and mark-to-market adjustments) and equity in loss of $3.3 million on the LandCap joint venture. The losses were partially offset by our investment in Monroe Management prior to terminating the joint venture in May 2008 and our investment in the corporate lending joint venture which was recapitalized in May 2008 resulting in deconsolidation of the venture. We are currently accounting for the venture under the equity method of accounting. We recognized $3.1 million of equity in earnings in connection with these joint ventures and $0.5 million in connection with our net lease joint venture. Equity in losses for the year ended December 31, 2007 consisted primarily of a loss of $9.2 million on the Securities Fund, 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 increased by approximately $756.6 million for the year ended December 31, 2008 to a gain of $752.3 million, compared to a loss of $4.3 million for the year ended December 31, 2007. The unrealized gain on investments for the year ended December 31, 2008 consisted primarily of unrealized gains related to SFAS 159 mark-to-market adjustments of $958.2 million on various N-Star bonds payable, $103.2 million on exchangeable senior notes and $95.2 million on liability to subsidiary trusts issuing preferred securities offset partially by unrealized losses related to SFAS 159 mark-to-market adjustments of $338.0 million on various N-Star available for sale securities, $30.0 million on our corporate lending joint venture (which is an equity investment that is marked to market) and $36.3 million on interest rate swaps as a result of these swaps no longer qualifying for hedge accounting under SFAS 133. The unrealized loss on investment for the year ended December 31, 2007 consisted 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, 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.

Realized Gain on Investments and Other

The realized gain of $36.0 million for the year ended December 31, 2008 was attributable to the recapitalization of our corporate loan venture in which we recognized a $46.0 million realized gain upon the extinguishment of a portion of the debt, a simultaneous $27.1 million cost basis reduction of our investment in the recapitalized venture and a realized loss of $18.9 million related to the sale of certain corporate loans within the portfolio. In addition we recognized a $36.5 million gain on the repurchase of various N-Star bonds, exchangeable senior notes and liability to subsidiary trusts issuing preferred securities, a foreign currency translation loss of $0.3 million related to our Euro-denominated investment and a $0.2 million loss on the sale of certain securities. 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.

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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 April 2007, our Wakefield venture sold two assisted care living facilities. Accordingly, these operations were reclassified to income from discontinued operations. We had no discontinued operations for the year ended December 31, 2008.

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.

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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.

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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

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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.

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, net proceeds from asset repayments and sales, 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. As we discussed in "Our Company" and "Outlook and Recent Trends", availability of such capital from all of these sources is

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extremely scarce (if available at all) for financial institutions including commercial mortgage REITs, and we expect this capital to be difficult to obtain for the foreseeable future.

Our total available liquidity at December 31, 2008 was approximately $256.6 million, including $134.0 million of unrestricted cash and cash equivalents and $122.6 million of uninvested and available funds in our term debt transactions, which is available only for reinvestment within the term debt transactions.

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. For calendar year 2009, we will be permitted to pay up to 90% of our distribution requirement in common stock or other company securities which give us the flexibility to preserve cash. On January 20, 2009, we declared a $0.25 per common share dividend, of which up to 40% will be paid in cash in order to preserve our capital. In the past, we have maintained high unrestricted cash balances relative to the historical difference between our distributions and cash provided by operating activities. On a quarterly basis, our Board of Directors determines an appropriate common stock dividend based upon numerous factors, including REIT qualification requirements, the amount of cash flows provided by operating activities, availability of existing cash balances, borrowing capacity under existing credit agreements, access to cash in the capital markets and other financing sources, our view of our ability to realize gains in the future through appreciation in the value of our assets, general economic conditions and economic conditions that more specifically impact our business or prospects. Although we have significantly reduced the cash portion of our first quarter 2009 dividend relative to prior periods, future dividend levels are subject to further adjustment based upon our evaluation of the factors described above, as well as other factors that our Board of Directors may, from time to time, deem relevant to consider when determining an appropriate common stock dividend.

We currently believe that our existing sources of funds should be adequate for purposes of meeting our short-term liquidity needs; however, our secured term debt transaction financing structures generally require that the underlying collateral and cash flow generated by the collateral to be in excess of ratios stipulated in the related indentures. These ratios are called overcollateralization, or OC, and interest coverage, or IC, tests. In the event these tests are not met, cash that would normally be distributed to us would be used to amortize the senior notes until the financing is back in compliance with the tests. In the event cash flow is diverted to repay the notes, this could decrease cash available to pay our dividend and to comply with REIT requirements. Additionally, we may be required to buy assets out of our term debt transactions in order to preserve cash flow. As of December 31, 2008 we are in compliance with all of the OC and IC tests in our secured term debt transactions. We expect that very weak economic conditions, lack of capital for commercial real estate, decreasing real estate values and credit ratings downgrades of real estate securities will make complying with OC and IC tests more difficult in the future.

We also have four bank loans which permit the lender to require partial repayment under certain circumstances. The WA and Euro term loans with a combined balance of $379.7 million at December 31, 2008 allow the lender to require a partial repayment based on quarterly credit reviews of the loan assets which serve as collateral for the facilities. The amount of the repayment is based upon lender's sole discretion regarding the decrease in value of its collateral due to credit deterioration. The JP Facility and a secured term loan with $44.9 million and $24.2 million outstanding balances, respectively, as of December 31, 2008, provide the lenders with a similar ability to require repayment, except the lenders under both loans may require repayment at any time due to decreases in credit quality and decrease in value of the loan collateral based upon market credit spread movements. In a weakening economic environment we would generally expect credit quality and value of the underlying

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loans to decline resulting in a higher likelihood that the lenders would require partial repayment from us. Such amounts could be material to our cash and liquidity position depending on performance of the loan collateral and market credit spreads.

These bank loans also contain corporate financial covenants which we must comply with in order to avoid defaults under the loans. The interest and fixed charge coverage covenants are currently the most restrictive and as of December 31, 2008 we are in compliance with all financial covenants under these facilities. The interest and fixed charge covenants include credit loss provisions in their calculations; therefore, higher levels of credit provisions without corresponding increases in income from other sources could decrease our cushion under these covenants and result in a default which would allow the lenders to accelerate their debt. In addition, the WA and Euro term loans have an initial maturity in October 2009 and both contain a one-year extension at our option provided that we are in compliance with the terms of the loans. If we fail to comply with the financial and non-financial covenants in these loans we may be unable to exercise the extension option. Furthermore, the $44.9 million JP Facility reaches a maturity date in August 2009. The facility is extendable for an additional year at the lender's option. If the lender decides to not renew that facility, we would be required to repay amounts due at the maturity date.

We will seek to meet our long term liquidity requirements, including the repayment of debt and our investment funding needs, through existing cash resources, our existing secured term debt and the liquidation or refinancing of assets at maturity.

Nonetheless, our ability to meet a long-term (beyond one year) liquidity requirement may be 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.

Exchangeable Senior Notes

In May 2008, NRFC NNN Holdings, LLC, a wholly-owned subsidiary of ours, issued $80.0 million of 11.50% exchangeable senior notes, or the Notes, which are due in 2013. The net proceeds from the offering were approximately $71.4 million, after deducting fees and expenses. The proceeds of the offering were used to make additional investments.

We have elected the SFAS 159 fair value option for the Notes. Changes in fair value of the Notes will be recognized in earnings as they occur. We adopted the provisions of FSP APB 14-1 on January 1, 2009. As a result, our exchangeable senior notes will no longer be eligible for the fair value option under SFAS 159. The exchangeable senior notes will be carried at the discounted value as determined in accordance with FSP APB 14-1.

Unsecured Revolving Line of Credit

On May 28, 2008, we voluntarily terminated the Revolving Credit Agreement, dated November 3, 2006 by us and KeyBanc Capital Markets and Bank of America, N.A. (the "Credit Agreement") in order to permit the issuance of the NNN Notes, given certain restrictive covenants set forth in the Credit Agreement. The Credit Agreement had a November 2009 expiration and no amounts were outstanding under the Credit Agreement at the time of termination.

Secured Credit Facilities

In August 2007, we entered into a new $350.0 million Master Repurchase Agreement, or the JP Facility, with a major financial institution. 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.

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In October 8, 2008, we and a subsidiary of ours entered into Amendment No. 1 (the "Amendment") to the Master Repurchase Agreement (as amended, the "Facility") with JPMorgan. The Facility had approximately $50.4 million outstanding on the amendment date and such amounts bear interest at spreads of 1.25% to 1.80% over one-month LIBOR. Advance rates for the assets currently financed under the Facility range from 55% to 80% of the value of the collateral for which the advance is made. Interest rates and advance rates on future borrowings under the Facility will be determined by JPMorgan. Pursuant to the Amendment, the maximum amount outstanding under the Facility shall not exceed $150 million and we have agreed to guaranty the outstanding amount under the Facility. The term of the Facility will expire on August 8, 2010, subject to renewal by JPMorgan on August 8, 2009.

Secured Term Loan

In March 2007, we entered into a Euro denominated note purchase agreement with a major financial institution, or 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%. We borrowed approximately €75.0 million under the note purchase agreement. The loan bears interest at three month EURIBOR plus 1.50%.

In November 2007, we terminated our secured credit facility and entered into a new term loan agreement (the "Term Loan Agreement", and together with the modified Euro Note, the "Secured Term Loan") with a major financial institution, which provides for approximately $600 million of term loan capacity. The proceeds under the Secured Term Loan were partially used to repay approximately $450 million outstanding under the WA Facilities, terminating these facilities. The Secured 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 Secured Term Loan 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, which provides for the guaranty by us of $200.0 million of the Term Facility.

In June 2008, a wholly owned subsidiary of ours entered into a $24.2 million term loan agreement with an investment bank (the "LB Term Loan"). The collateral for the LB Term Loan is a $44.0 million mezzanine loan position and we have guaranteed 50% of such amount. The LB Term Loan matures in February 2010, has two one-year automatic term extensions and bears interest at a spread of 1.50% over one-month LIBOR. Both the LB Term Loan and the mezzanine loan collateral have three one-year extension options. The LB Term Loan contains certain covenants including, among others, financial covenants of a minimum tangible net worth and a minimum debt-to-equity ratio.

Equity Distribution Agreement

In May, 2008, we entered into an equity distribution agreement with Wachovia Capital Markets, LLC, or Wachovia. In accordance with the terms of the agreement, we may offer and sell up to 10,000,000 shares of our common stock from time to time through Wachovia. Wachovia will receive a commission from us of up to 2.5% of the gross sales price of all shares sold through it under the equity distribution agreement.

For the year ended December 31, 2008, we issued a total of 114,100 shares of common stock related to our equity distribution agreement with Wachovia raising net proceeds of approximately $0.9 million.

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

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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 the year ended December 31, 2008, we issued a total of 181,593 common shares pursuant to the Plan for a gross sales price of approximately $1.1 million.

Debt Repurchases

During 2008, we repurchased $111.4 million of our notes, which consisted of $93.6 million of our N-Star term debt transaction bonds payable, $11.7 million of our 7.25% exchangeable senior notes and $6.1 million of our liability to subsidiary trusts issuing preferred securities for a total of $49.8 million. We recorded a realized gain of $36.5 million in connection with the repurchase of our notes. These repurchases also represented a $61.6 million discount to the par value of the debt.

Wakefield Preferred Equity

On July 9, 2008, Wakefield sold a $100 million convertible preferred membership interest to Inland American Real Estate Trust, Inc., or Inland American. We received approximately $87.7 million of net proceeds from the transaction. Prior to conversion, the convertible preferred investment will yield a dividend of 10.5%. The convertible preferred membership interest may be converted or redeemed, at Inland American's option, upon the sale or recapitalization of the Wakefield venture. Wakefield may, at its option, redeem the convertible preferred interests at any time following the first anniversary of the closing, subject to payment of a call premium that declines over time. In addition, at any time after the second anniversary of the closing, Inland American may convert its preferred membership interests into common equity in Wakefield. Based on the current investment amount and capital accounts of the Wakefield members, the convertible preferred membership interests would represent, upon conversion, approximately a 42% common equity ownership interest in Wakefield. Inland American will have the option of contributing additional preferred membership interest and participating in new Wakefield investment opportunities in proportion to its percentage ownership interest, assuming it were to convert its interests to common equity.

Cash Flows

Year Ended December 31, 2008 Compared to December 31, 2007

The net cash flow provided by operating activities of $82.7 million, decreased by $19.5 million for the year ended December 31, 2008 from $102.2 million for the year ended December 31, 2007. This was primarily due to the lower LIBOR rates which decreased interest income generated from our asset base.

The net cash flow used by investing activities was $110.7 million for the year ended December 31, 2008 compared to the net cash used by investing activities of $2.4 billion for the year ended December 31, 2007. This decrease from 2007 was primarily a result of decreased investment activity in 2008. Net cash flow used in investing activities in 2007 consisted primarily of the acquisitions of operating real estate, real estate securities, corporate loan investments, and the origination or acquisition of real estate debt investments.

The net cash flow provided by financing activities was $8.3 million for the year ended December 31, 2008 compared to $2.4 billion of cash provided by financing activities for the year ended December 31, 2007. The primary source of cash flow provided by financing activities was the sale of

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$100 million convertible preferred membership interest to Inland American, the issuance of $80.0 million of our 11.50% exchangeable senior notes and additional borrowings under our term loans and credit facilities. Net cash flow in provided by financing activity in 2007 was primarily from the issuance of preferred equity, the issuance of our 7.25% exchangeable senior notes, the issuance of term debt transaction bonds, borrowing under our credit facilities, operating real estate, acquisition financing and the issuance of trust preferred securities to finance our investing activities.

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 $0.5 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.

Capital Expenditures

During 2009, we expect to incur $4.2 million in capital expenditures with respect to our healthcare net lease portfolio and $0.8 million with respect to our core net lease portfolio.

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Contractual Obligations and Commitments

As of December 31, 2008, we had the following contractual commitments and commercial obligations (dollars in thousands):

	Payments Due by Period

Contractual Obligations	Total		1 year		2–3 years		4–5 years		After 5 Years
Mortgage notes	$	898,325	$	8,951	$	107,291	$	175,859	$	606,224
Mezzanine loan payable		12,295		1,719		3,845		4,425		2,306
Exchangeable senior notes(1)	��	240,800		—		—		240,800		—
Bonds payable		1,608,445		—		—		—		1,608,445
Credit facilities		44,881		44,881		—		—		—
Secured term loan(2)		403,907		403,907		—		—		—
Liability to subsidiary trusts issuing preferred securities		280,133		—		—		—		280,133
Repurchase agreements		176		176		—		—		—
Capital leases(3)		16,618		487		974		997		14,160
Operating leases		76,429		5,623		11,211		10,869		48,726
Placement fees		912		304		608		—		—
Outstanding unfunded commitments(4)		270,991		237,096		33,895		—		—

Total contractual obligations	$	3,853,912	$	703,144	$	157,824	$	432,950	$	2,559,994

(1): $160.8 million of our 7.25% exchangeable senior notes have a final maturity date of June 15, 2027. The above table reflects the holders repurchase rights which may require us to repurchase the notes on June 15, 2012.
(2): The WA and Euronote term loans have initial maturities in October 2009. We have a one-year option to extend the term for an additional year provided we are in compliance with the terms of the indentures.
(3): Includes interest on the capital leases.
(4): Our future funding commitments, which are subject to certain conditions that borrowers must meet to qualify for such fundings, totaled $271.0 million, of which a minimum of $133.9 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. Based upon currently approved advance rates on our credit and term debt facilities and assuming that all loans that have future fundings meet the terms to qualify for such funding, our equity requirement would be approximately $94.5 million.

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, 2008, we were in compliance with all financial and non-financial covenants in our debt agreements.

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

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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, 2008. 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, 2008 (dollars in thousands):

		Collateral—December 31, 2008									Term Notes—December 31, 2008

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 12/31/08			Stated Maturity
N-Star I(2)			8/21/03	$	299,316		6.60	%		4.16	$	278,000		6.37	%		8/01/2038
N-Star II			7/01/04		331,242		6.17			4.77		295,098		5.51			6/01/2039
N-Star III			3/10/05		410,188		5.70			4.11		358,556		4.88			6/01/2040
N-Star V			9/22/05		499,745		5.52			6.23		456,319		4.58			9/05/2045

	Total			$	1,540,491		5.92	%		4.95	$	1,387,973		5.23	%

(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 $45.8 million at December 31, 2008.

CLO Equity Notes

In December 2006, we acquired 40% of the residual equity interests in a collateralized loan obligation 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. We also acquired a 12.5% and 33.5% residual equity interest in two third party CLO's. The CLOs were determined to be variable interest entities under Fin 46(R)-6 and we were determined not to be the primary beneficiary; therefore, the financial statements of the CLOs were not consolidated into our condensed consolidated financial statements. On May 7, 2008, we completed a recapitalization of our middle-market corporate lending venture. We contributed our CLO equity interests into the recapitalized entity. Prior to May 7, 2008, our residual combined equity interests were accounted for as debt securities available for sale pursuant to EITF 99-20. Upon completion of the recapitalization transaction, the new investor became the controlling manager of the assets and we deconsolidated the venture and now use the equity method of accounting for the investment, which includes our residual combined equity interests in the CLO's contributed in the recapitalization.

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 conduct most of our real estate securities investment business.

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We are the manager and general partner of the Securities Fund. 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% 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.

During the second quarter 2008, we invested an additional $20.0 million in the Securities Fund. Additionally, during the second quarter 2008, we sold 67% of our N-Star IX advisory fee income stream to the Securities Fund for $8.8 million. The Securities Fund owns all of the equity in the N-Star IX term financing but we retained the advisory fees when N-Star IX was sold to the Securities Fund at its inception. We recognized $4.8 million of advisory fee income from the sale and deferred the remaining $4.0 million, which represented our ownership interest in the Securities Fund. The deferred advisory fee income will be recognized into income as the fees are earned. For the year ended December 31, 2008, we recognized $0.2 million in additional income from the amortization of deferred advisory fee income. During the third quarter 2008, the Securities Fund made a claim against Lehman Brothers for $6.8 million (plus damages) to recover cash collateral held by Lehman Brothers and recorded a reserve of $3.4 million against the $6.8 million cash collateral receivable.

At December 31, 2008, we had invested a total of $51.2 million in the Securities Fund and the carrying value of our investment was $29.3 million, representing a 53.1% interest.

For the year ended December 31, 2008 and 2007, we recognized equity in losses of $12.4 million and $9.1 million, respectively. We also earned $0.5 million and $0.4 million in management fees from the Securities Fund for the year ended December 31, 2008 and 2007, respectively.

Recent Developments

On January 20, 2009, we declared a cash dividend of $0.54688 per share of Series A preferred stock and $0.51563 per share of Series B preferred stock. The dividends were paid on February 16, 2009 to the stockholders of record as of the close of business on February 6, 2009.

On January 20, 2009, we declared a dividend of $0.25 per share of common stock. The dividends are payable on February 27, 2009 to the stockholders of record as of January 28, 2009. The common stock dividends will be paid in a combination of cash and common stock.

From January 1, 2009 to February 24, 2009 we repurchased approximately $40.0 million of our 7.25% exchangeable senior notes for $17.7 million. We will record a realized gain of $22.0 million in connection with the repurchase of our notes.

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.

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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, or 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).

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.

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Set forth below is a reconciliation of FFO and AFFO to net income from continuing operations before minority interest for the years ended December 31, 2008, 2007 and 2006 (in thousands):

	Year Ended December 31, 2008			Year Ended December 31, 2007			Year Ended December 31, 2006

Funds from Operations:
Income from continuing operations before minority interest	$	801,764		$	51,174		$	41,041
Minority interest in joint ventures		(4,614	)		(580	)		(68	)

Income from continuing operations before minority interest in operating partnership		797,150			50,594			40,973
Adjustments:
Preferred dividend		(20,925	)		(16,533	)		(860	)
Depreciation and amortization		43,232			33,191			13,578
Funds from discontinued operations		—			17			550
Real estate depreciation and amortization—unconsolidated ventures		945			990			905

Funds from Operations	$	820,402		$	68,259		$	55,146

Adjusted Funds from Operations:
Funds from Operations	$	820,402		$	68,259		$	55,146
Straight-line rental income, net		(2,322	)		(2,653	)		(958	)
Straight-line rental income, discontinued operations		—			10			23
Straight-line rental income and fair value lease revenue (SFAS 141 adjustment), unconsolidated ventures		(155	)		(219	)		(229	)
Amortization of equity-based compensation		24,680			16,007			9,080
Fair value lease revenue (SFAS 141 adjustment)		(1,740	)		(864	)		(479	)
Unrealized(gains)/losses from mark-to-market adjustments		(767,338	)		3,473			(3,175	)
Unrealized losses from mark-to-market adjustments, unconsolidated ventures		17,026			11,670			—

Adjusted Funds from Operations	$	90,553		$	95,683		$	59,408

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 our performance 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.

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

			Year Ended December 31, 2008			Year Ended December 31, 2007			Year Ended December 31, 2006

Adjusted Funds from Operations (AFFO)		[A]	$	90,553		$	95,683		$	59,408
Plus: Fundraising Fees, Debt Issuance Costs and Other				7,823			6,295			—

AFFO, excluding Fundraising Fees, Debt Issuance Costs and Other		[B]		98,376			101,978			59,408
Plus: General & Administrative Expenses				74,859			56,561			35,051
Plus: General & Administrative Expenses from Unconsolidated Ventures				3,780			4,810			—
Less: Equity-Based Compensation and Straight-Line Rent included in G&A				24,672			16,214			9,813

AFFO, excluding G&A		[C]		152,343			147,135			84,646
Average Common Book Equity & Operating Partnership Minority Interest(1)		[D]	$	887,515		$	442,012		$	378,628
	Return on Average Common Book Equity (including G&A)	[A]/[D]		10.2	%		21.6	%		15.7	%
	Return on Average Common Book Equity (excluding Fundraising Fees, Debt Issuance Costs and Other)	[B]/[D]		11.1	%		23.1	%		15.7	%
	Return on Average Common Book Equity (excluding G&A)	[C]/[D]		17.2	%		33.3	%		22.3	%

(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

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.

Real Estate Debt

We invest in real estate debt which is generally 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

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bear interest at either a 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 benchmark 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.

The value of our fixed and floating rate real estate debt investments changes with market credit spreads. This means that when market-demanded risk premiums, or credit spreads, increase, the value of our fixed and floating rate assets decrease, and vice versa. Market credit spreads are currently much wider than existed at the time we originated a majority of our real estate debt investments. These wider market credit spreads imply that our real estate debt investments may be worth less than the amounts at which we carry these investments on our balance sheet, but because we have typically financed these investments with debt priced in a similar credit environment and intend to hold them to maturity we do not believe that intra- and inter-period changes in value caused by changing credit spreads material impacts the economics associated with our real estate debt 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. Our loans are generally collateral dependent, meaning the principal source of repayment is from a sale or refinancing of the collateral securing our loan. Default risk increases in weak economic conditions because collateral cash flows may be below expectations when the loan was originated. Defaults also increase when, at loan maturity, the cost of debt and equity capital is higher than when the loan was originated. In the event that a borrower cannot repay our loan, we may exercise our remedies under the loan documents, which may include a foreclosure against the collateral. We describe many of the options available to us in this situation in "Item 1 Business." 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 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.

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Real Estate Securities

In our real estate securities business, we seek to 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. 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 seek to 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 credit 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 has focused 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 funding spread. Match funded debt is currently very difficult to obtain, and market-demanded yields on all real estate assets have increased. Our current strategy is to use our existing term debt structures to fund new investment activity when repayment or sale proceeds are available within the financing, or to acquire securities which generate attractive returns without leverage.

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 unrealized gains/losses or other

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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. Conversely, we mark our term debt liabilities to market which causes a partial offset to the income and balance sheet impact of marking the securities assets to market.

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 is to mitigate our exposure to rising interest rates by financing our net lease property 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.

The value of our net lease real estate properties may be influenced by long-term fixed interest rates. To derive value, an investor typically forecasts expected future cash flows to be generated by the property then discounts the cash flows at a discount rate based upon a long-term fixed interest rate (such as the 10-year U.S. Treasury Note yield) plus a risk premium based on the property type and creditworthiness of the tenants. Lower risk free rates generally result in lower discount rates and therefore higher valuations and vice versa although the scarcity of financing for net lease properties and investor concerns over commercial real estate generally have recently decreased commercial real estate valuations, including valuations for net lease properties. We generally intend to hold our net lease properties for long periods, but the market value of the asset may fluctuate with changes in interest rates, among other things.

We are subject to the credit risk of the corporate lessee of our net lease properties. We undertake a rigorous credit evaluation of each tenant prior to acquiring net lease asset properties. 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.

Derivatives and Hedging Activities

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 interest rate risks associated with the our investment and financing activities. The counterparties of these arrangements are major financial institutions with which we may also have other financial relationships. We are exposed to credit risk in the event of non-performance by these counterparties and we monitor their financial condition; however, we currently do not anticipate that any of the counterparties will fail to meet their obligations because of their high credit ratings and financial support from the U.S. Government. For the year ended December 31, 2008, our counterparties hold approximately $30.2 million of cash margin as collateral against our swap contracts.

In January 2008, we adopted SFAS 159 and elected the fair value option for our bonds payable and our liability to subsidiary trusts issuing preferred securities. Under SFAS 159, the changes in fair value of these financial instruments are now recorded in earnings. As a result of this election, the interest rate swap agreements associated with these debt instruments no longer qualify for hedge accounting, in accordance with SFAS 133 "Derivatives and Hedging Activity", since the underlying debt is remeasured with changes in the fair value recorded in earnings. The unrealized gains or losses accumulated in other comprehensive income, related to these interest rate swaps, will be reclassified into earning over the shorter of either the life of the swap or the associated debt with current

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mark-to-market unrealized gains or losses recorded in earnings. For the year ended December 31, 2008, we recorded in earnings a mark-to-market unrealized loss of $15.8 million and a $5.5 million reclassification from accumulated other comprehensive income for the non-qualifying interest rate swaps.

The following table summarizes the notional amounts and fair (carrying) values of our derivative financial instruments as of December 31, 2008 (in thousands):

December 31, 2008		Notional Value					Fair Value

Interest rate swap		$	5,100	4.18	%	12/2010	$	(291	)
Interest rate swap			6,160	4.29		8/2012		(552	)
Interest rate swap			3,290	4.80		12/2013		(435	)
Interest rate swap			2,842	5.04		8/2018		(627	)
Interest rate swap			5,492	4.76		3/2013		(642	)
Interest rate swap			3,465	4.41		3/2010		(142	)
Interest rate swap			4,000	4.66		11/2015		(536	)
Interest rate swap			15,000	5.08		5/2016		(2,903	)
Interest rate swap			34,000	5.07		5/2017		(7,109	)
Interest rate swap			3,765	4.98		7/2015		(284	)
Interest rate swap			3,567	4.98		6/2015		(272	)
Interest rate swap			5,957	5.06		8/2015		(447	)
Interest rate swap			23,300	4.99		12/2012		(1,875	)
Interest rate swap			2,686	5.02		2/2016		(155	)
Interest rate swap			20,000	5.05		6/2013		(1,652	)
Interest rate swap			12,750	5.06		8/2017		(814	)
Interest rate swap			7,700	5.30		5/2010		(356	)
Interest rate swap			14,000	5.03		10/2015		(1,134	)
Basis Swap			201,255	1.53		3/2015		(16	)
Interest rate swap			323,505	5.53		6/2018		(32,398	)
Basis Swap			5,000	3.08		12/2015		2
Basis Swap			15,000	3.33		6/2018		28
Interest rate swap			9,873	4.81		8/2014		(830	)
Interest rate swap			3,000	4.89		6/2015		(255	)
Interest rate swap			60,000	5.52		6/2016		(5,291	)
Interest rate swap			16,200	5.52		6/2018		(991	)
Interest rate swap			49,404	5.63		7/2016		(3,872	)
Interest rate swap			30,000	5.46		9/2016		(6,517	)
Interest rate swap			25,000	5.12		9/2016		(4,841	)
Interest rate swap			37,500	5.10		4/2017		(7,504	)
Interest rate swap			35,000	5.59		7/2017		(3,793	)
Reverse interest rate swap			250,000	3.03		10/2009		4,648
Reverse interest rate swap			250,000	3.02		10/2009		4,641
Interest rate swap			11,400	4.78		9/2010		(687	)

	Total / weighted average	$	1,495,211	4.03			$	(77,902	)

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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		94
Consolidated Balance Sheets as of December 31, 2008 and 2007		96
Consolidated Statements of Operations for the years ended December 31, 2008, 2007 and 2006		97
Consolidated Statement of Stockholders' Equity for the years ended December 31, 2008, 2007 and 2006		98
Consolidated Statements of Comprehensive Income for the years ended December 31, 2008, 2007 and 2006		99
Consolidated Statements of Cash Flows for the years ended December 31, 2008, 2007 and 2006		100
Notes to Consolidated Financial Statements		102
Schedule III—Real Estate and Accumulated Depreciation as of December 31, 2008		158
Schedule IV—Loans and other Lending Investments as of December 31, 2008		163

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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, 2008 and 2007, 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, 2008. Our audits of the basic financial statements included the financial statement schedules, (Schedules 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, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, 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, 2008, 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 25, 2009 expressed an unqualified opinion thereon.

/s/ GRANT THORNTON LLP

New York, New York
February 25, 2009

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
NorthStar Realty Finance Corp.

We have audited NorthStar Realty Finance Corp. and subsidiaries' (the "Company") internal control over financial reporting as of December 31, 2008, based on criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). 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 generally accepted accounting principles. 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 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 (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. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, based on criteria established inInternal Control—Integrated Framework issued by COSO.

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, 2008 and 2007 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, 2008, and the accompanying financial statement schedules, and our report dated February 25, 2009 expressed an unqualified opinion thereon.

/s/ GRANT THORNTON LLP

New York, New York
February 25, 2009

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in Thousands, Except per Share Data)

	December 31, 2008			December 31, 2007

ASSETS:
Cash and cash equivalents	$	134,039		$	153,829
Restricted cash		163,157			202,295
Operating real estate—net		1,127,000			1,134,136
Available for sale securities, at fair value		221,143			549,522
Collateral held by broker		—			12,746
Real estate debt investments, net		1,976,864			2,007,022
Real estate debt investments, held-for-sale		70,606			—
Corporate loan investments		—			457,139
Investments in and advances to unconsolidated ventures		101,507			33,143
Receivables, net of allowance of $0 and $1 in 2008 and 2007, respectively		24,806			32,141
Unbilled rents receivable		7,993			5,684
Derivative instrument, at fair value		9,318			—
Deferred costs and intangible assets, net		71,933			126,677
Other assets		27,660			78,448

Total assets	$	3,936,026		$	4,792,782

LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Mortgage notes and loans payable		910,620			912,365
Exchangeable senior notes, measured at fair value as of December 31, 2008		112,576			172,500
Bonds payable, measured at fair value as of December 31, 2008		468,638			1,654,185
Credit facilities		44,881			501,432
Secured term loans		403,907			416,934
Liability to subsidiary trusts issuing preferred securities, measured at fair value as of December 31, 2008		69,617			286,258
Repurchase obligations		176			1,864
Securities sold, not yet purchased, at fair value		—			12,856
Obligations under capital leases		3,555			3,541
Accounts payable and accrued expenses		27,478			34,893
Escrow deposits payable		46,353			65,445
Derivative liability, at fair value		87,220			49,280
Other liabilities		34,248			40,695

Total liabilities		2,209,269			4,152,248
Minority interest in operating partnership		109,110			7,534
Minority interest in joint ventures		101,171			14,961
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, 2008 and December 31, 2007, respectively		57,867			57,867
8.25% Series B preferred stock, $0.01 par value, $25 liquidation preference per share,7,600,000 shares issued and outstanding at December 31, 2008 and December 31, 2007, respectively		183,505			183,505
Common stock, $0.01 par value, 500,000,000 shares authorized, 62,906,693 and 61,719,469 shares issued and outstanding at December 31, 2008 and December 31, 2007, respectively		634			617
Additional paid-in capital		610,834			595,418
Treasury stock, 475,051 and 0 shares held at December 31, 2008 and December 31, 2007, respectively		(1,384	)		—
Retained earnings (deficit)		759,363			(40,075	)
Accumulated other comprehensive loss		(94,343	)		(179,293	)

Total stockholders' equity		1,516,476			618,039

Total liabilities and stockholders' equity	$	3,936,026		$	4,792,782

See accompanying notes to consolidated financial statements.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Amount in Thousands, Except per Share Data)

			Year Ended December 31, 2008			Year Ended December 31, 2007			Year Ended December 31, 2006

Revenues and other income:
Interest income			$	212,444		$	292,135		$	134,847
Interest income—related parties				14,995			13,516			11,671
Rental and escalation income				116,073			95,755			37,546
Advisory and management fee income—related parties				12,496			7,658			5,906
Other revenue				16,496			6,249			5,874

		Total revenues		372,504			415,313			195,844
Expenses:
	Interest expense			191,472			242,560			104,239
	Real estate properties—operating expenses			8,278			8,709			8,552
	Asset management fees—related parties			4,746			4,368			594
	Fundraising fees, debt issuance costs and other			7,823			6,295			—
	Impairment on operating real estate			5,580			—			—
	Provision for loan losses			11,200			—			—
General and administrative:
	Salaries and equity based compensation(1)			53,269			36,148			22,547
	Auditing and professional fees			7,098			6,787			4,765
	Other general and administrative			14,492			13,626			7,739

		Total general and administrative		74,859			56,561			35,051
Depreciation and amortization				43,232			33,191			13,578

		Total expenses		347,190			351,684			162,014
Income from operations				25,314			63,629			33,830
Equity in (loss)/earnings of unconsolidated ventures				(11,918	)		(11,684	)		432
Unrealized gain (loss) on investments and other				752,332			(4,330	)		4,934
Realized gain on investments and other				36,036			3,559			1,845

Income from continuing operations before minority interest				801,764			51,174			41,041
Minority interest in operating partnership				(77,484	)		(2,702	)		(3,938	)
Minority interest in joint ventures				(4,614	)		(580	)		(68	)

Income from continuing operations				719,666			47,892			37,035
Income (loss) from discontinued operations, net of minority interest				—			(56	)		306
Gain on sale from discontinued operations, net of minority interest				—			—			445
Gain on sale of joint venture interest, net of minority interest				—			—			279

Net income				719,666			47,836			38,065
Preferred stock dividends				(20,925	)		(16,533	)		(860	)

Net income available to common stockholders			$	698,741		$	31,303		$	37,205

Net income per share from continuing operations (basic/diluted)			$	11.07		$	0.51		$	0.91
Income per share from discontinued operations (basic/diluted)				—			—			0.01
Gain on sale of discontinued operations and joint venture interest (basic/diluted)				—			—			0.02

Net income available to common stockholders			$	11.07		$	0.51		$	0.94

Weighted average number of shares of common stock:
	Basic			63,135,608			61,510,951			39,635,919
	Diluted			70,136,783			65,086,953			44,964,455

(1): The years ended December 31, 2008, 2007 and 2006 include $24,680, $16,007 and $9,080 of equity based compensation expense, respectively.
See accompanying notes to consolidated financial statements.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Amounts in Thousands)

	Preferred Stock at Par				Common Stock at Par		Additional Paid-in Capital		Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Stockholders' Equity

Balance at December 31, 2005	$	—	30,465		$	305	$	224,893	$	—		$	(738	)	$	23,965		$	248,425
Issuance of restricted shares of common stock			5			—		—		—			—			—			—
Stock awards		—	44			—		525		—			—			—			525
Net proceeds from secondary offering of common stock		—	26,320			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		—	4,404			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	61,238		$	612	$	647,878		—		$	(5,313	)	$	16,570		$	659,771
Proceeds from dividend reinvestment and stock purchase plan		—	330			4		3,805		—			—			—			3,809
Stock awards		—	25			—		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			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		$	617	$	836,690		—		$	(179,293	)	$	(40,075	)	$	618,039
Net proceeds from dividend reinvestment and stock purchase plan		—	182			2		1,139		—			—			—			1,141
Net proceeds equity distribution agreement		—	114			1		875		—			—			—			876
Stock awards		—	273			3		2,411		—			—			—			2,414
Purchase of treasury shares		—	(475	)		—		—		(1,384	)		—			—			(1,384	)
Comprehensive loss		—	—			—				—			(6,016	)		—			(6,016	)
Conversion of OP/LTIP units		—	1,094			11		10,991		—			—			—			11,002
SFAS No. 159 beginning balance adjustment		—	—			—		—		—			90,966			190,766			281,732
Cash dividends on common stock		—	—			—		—		—			—			(90,069	)		(90,069	)
Cash dividends on preferred stock		—	—			—		—		—			—			(20,925	)		(20,925	)
Net income		—	—			—		—		—			—			719,666			719,666

Balance at December 31, 2008	$	100	62,907		$	634	$	852,106	$	(1,384	)	$	(94,343	)	$	759,363		$	1,516,476

See accompanying notes to consolidated financial statements.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in Thousands, Except per Share Data)

	Year Ended December 31, 2008			Year Ended December 31, 2007			Year Ended December 31, 2006

Net income	$	719,666		$	47,836		$	38,065
Unrealized gain (loss) on available for sale securities		(20,545	)		(158,755	)		10,553
Change in fair value of derivatives		(12,053	)		(24,772	)		(15,159	)
Reclassification adjustment for gains included in net income		26,582			9,547			31

Comprehensive Income	$	713,650		$	(126,144	)	$	33,490

See accompanying notes to consolidated financial statements.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands, Except per Share Data)

		Year Ended December 31, 2008			Year Ended December 31, 2007			Year Ended December 31, 2006

Cash flows from operating activities:
Net income		$	719,666		$	47,836		$	38,065
Adjustments to reconcile net income to net cash provided by operating activities:
	Operating real estate Impairement		5,580
	Gains on sale of operating real estate and interest in unconsolidated ventures		—			—			(846	)
	Equity in loss/(earnings) of unconsolidated ventures		11,918			10,431			(152	)
	Depreciation and amortization		43,232			33,191			13,646
	Amortization of origination fees/costs		(9,919	)		(8,522	)		(2,272	)
	Amortization of deferred financing costs		5,821			8,375			4,408
	Minority interest		82,098			3,279			4,186
	Equity based compensation		24,680			16,007			9,080
	Unrealized loss (gain) on investments and other		(767,338	)		4,330			(4,934	)
	Realized gain on sale of investments and other		(38,141	)		(3,372	)		(1,845	)
	Amortization of bond discount/premiums on securities		(4,730	)		(2,489	)		(2,215	)
	Operating real estate impairment		—			45			—
	Distributions from equity investments		2,657			458			152
	Capital lease		14			87			79
	Amortization of capitalized above/below market leases		(1,758	)		(864	)		(1,711	)
	Unbilled rents receivable		(2,296	)		(2,866	)		(1,711	)
	Interest accretion		(8,737	)		(7,634	)		(3,284	)
	Loan loss provision		11,200			—			—
Changes in assets and liabilities:
	Restricted cash		21,686			(22,493	)		(43,581	)
	Receivables		6,929			(19,037	)		(12,259	)
	Deferred costs and intangible assets		260			—			(640	)
	Other assets		4,202			(13,852	)		(11,020	)
	Receivables—related parties		(1,609	)		(528	)		126
	Accounts payable and accrued expenses		(7,625	)		20,892			10,312
	Payables—related parties		757			2,026			82
	Escrow deposit payable		(19,092	)		10,485			46,907
	Deferred management fee income		3,848			—			—
	Real estate debt investment origination fees		3,181			15,746			11,147
	Other liabilities		(3,816	)		10,707			2,268

Net cash provided by operating activities			82,668			102,238			53,988
Cash flows from investing activities:
Acquisition of operating real estate, net			(4,261	)		(686,219	)		(260,653	)
Improvement of Operating real estate			(20,289	)		—
Acquisition of available for sale securities			(59,186	)		(777,145	)		(681,487	)
Proceeds from disposition of securities available for sale			6,115			136,924			29,434
Available for sale securities repayments			3,043			54,466			37,789
Increase in term debt transaction warehouse deposits			—			(18,000	)		(29,191	)
Originations/acquisitions of real estate debt investments			(329,266	)		(1,158,215	)		(1,322,936	)
Real estate debt investment repayments			290,449			555,433			435,207
Proceeds from the sale of real estate debt investments			30,400			67,322			—
Net proceeds from disposition of operating real estate			—			—			10,751
Real estate debt investment acquisition costs			(275	)		(3,265	)		(1,095	)
Intangible asset related to acquisition			2,875			—			(2,833	)
Proceeds from sale of assets			—			62,821			—
Corporate debt investment acquisitions			(16,362	)		(489,209	)		—
Corporate debt investment repayments			24,985			26,678			—
Proceeds from disposition of corporate debt investment			102,575			5,419			—
Cash receipts from term debt transaction issuer			—			8,826			1,048
Other loans receivable			(9,826	)		(13,590	)		—
Other loans receivable repayment			14,000			—			—
Restricted cash used for investment activities			(109,513	)		(112,735	)		(63,530	)
Acquisition deposits			(741	)		(1,591	)		—
Deferred lease costs			—			—			(42	)

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CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Amounts in Thousands, Except per Share Data)

	Year Ended December 31, 2008			Year Ended December 31, 2007			Year Ended December 31, 2006

Investment in and advances to unconsolidated ventures		(44,143	)		(33,099	)		(8,650	)
Distributions from unconsolidated ventures		8,712			1,250			322
Sale of investment in unconsolidated ventures		—			—			2,905

Net cash (used in) investing activities		(110,708	)		(2,373,929	)		(1,852,961	)
Cash flows from financing activities:
Collateral held by broker		12,746			(12,746	)		—
Securities sold, not yet purchased		—			28,471			—
Settlement of short sales		(12,778	)		(16,371	)		—
Settlement of derivative		—			—			632
Collateral held by swap counter party		(20,837	)		(8,476	)		375
Mortgage notes and loan borrowings		3,677			506,252			189,919
Mortgage principal repayments		(5,422	)		(5,537	)		(5,913	)
Borrowing under credit facilities		39,816			1,598,760			1,018,616
Repayments credit facilities		(118,403	)		(1,113,329	)		(1,245,618	)
Repurchase obligation borrowings		2,200			27,084			104,334
Repurchase obligation repayments		(3,887	)		(105,480	)		(31,127	)
Proceeds from bonds		137,011			881,300			1,416,129
Bond repayments		(95,300	)		(113,594	)		(33,900	)
Other loans payable		—			13,300			—
Other loans payable repayments		—			(387	)		—
Borrowing under secured term loan		70,864			462,387			—
Secured term loan repayment		(80,190	)		(45,453	)		—
Bond repurchases		(49,859	)		—			—
Borrowings from subsidiary trusts issuing preferred securities		—			72,500			105,000
Payment of deferred financing costs		(244	)		(27,007	)		(31,496	)
Capital contributions by joint venture		94,822			2,631			—
Restricted cash from financing activities		86,832			(10,917	)		—
Proceeds from exchangeable senior notes		80,000			172,500			—
Proceeds from preferred stock offering		—			190,000			60,000
Proceeds from common stock offerings		—			4,027			343,334
Proceeds from dividend reinvestment and stock purchase plan		2,268			—			—
Purchase of treasury stock		(1,384	)		—			—
Dividends (common and preferred) and distributions		(122,059	)		(109,733	)		(52,547	)
Offering costs		(252	)		(6,712	)		(21,910	)
Distributions to minority interest owners		(11,371	)		(2,703	)		—

Net cash provided by financing activities		8,250			2,380,767			1,815,828
Net (decrease) increase in cash & cash equivalents		(19,790	)		109,076			16,855
Cash and cash equivalents—beginning of period		153,829			44,753			27,898
Cash and cash equivalents—end of period	$	134,039		$	153,829		$	44,753

Supplemental disclosure of cash flow information:
Cash paid for interest	$	216,115		$	217,206		$	96,058

See accompanying notes to consolidated financial statements.

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(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. 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.

Joint Ventures

Wakefield Capital, LLC

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 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.

On July 9, 2008, Wakefield sold a $100 million convertible preferred membership interest to Inland American Real Estate Trust, Inc. ("Inland American"). The Company received approximately $87.7 million of net proceeds from the transaction. Prior to conversion, the convertible preferred investment is entitled to a 10.5% dividend per annum. The convertible preferred membership interest may be converted or redeemed, at Inland American's option, upon the sale or recapitalization of the Wakefield venture. Wakefield may, at its option, redeem the convertible preferred interests at any time following the first anniversary of the closing, subject to payment of a call premium that declines over time. In addition, at any time after the second anniversary of the closing, Inland American may convert its preferred membership interests into common equity in Wakefield. Based on the initial investment amount and capital accounts of the Wakefield members, the convertible preferred membership interests represent, upon conversion, approximately a 42% common equity ownership interest in Wakefield. Inland American will have the option of contributing additional preferred membership interest and

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1. Formation and Organization (Continued)

participating in new Wakefield investment opportunities in proportion to its percentage ownership interest, assuming it were to convert its interests to common equity.

The Company controls substantially all major decisions of the joint venture. Accordingly, the joint venture's financial statements are consolidated into the Company's consolidated financial statements and Inland American's and Chain Bridge's capital are treated as minority interests.

Monroe Capital NorthStar Funding, LLC

In March 2007, the Company entered into a joint venture with Monroe Capital Holdco, LLC ("Monroe"), which served as a platform for originating middle-market loans. The joint venture ("Monroe Capital") originated, structured and syndicated middle-market corporate loans, including middle-market loans to highly leveraged borrowers.

On May 7, 2008, the Company completed a recapitalization of this middle-market corporate lending venture. As part of the recapitalization, an institutional money-manager invested approximately $87.2 million of cash equity into the business and the Company contributed $6.8 million of new equity capital and its CLO equity interests. The lender under two consolidated revolving credit facilities totaling $800.0 million of capacity and having $378.0 million outstanding at May 7, 2008, which we refer to as the MC Facility and the MC VFCC Facility, extinguished a portion of the outstanding debt balance and refinanced the remaining indebtedness in the form of a private CLO which match funded the underlying assets. The venture was also permitted to sell a portion of the loan collateral and to use the cash to make new corporate loan investments.

In connection with the recapitalization, the Company recognized a $46.0 million realized gain upon the extinguishment of a portion of the debt, a simultaneous $27.1 million cost basis reduction to its investment in the recapitalized venture and a realized loss of $18.9 million related to the sale of certain corporate loans within the portfolio, which were recorded in realized gain (loss) on investments and other in the condensed consolidated statement of operations. The new investor became the controlling manager of the entity and the Company deconsolidated the venture. Additionally, as part of this recapitalization, the Company terminated its joint venture with Monroe Management.

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.

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(Amounts in Thousands, Except per Share Data)

2. Summary of Significant Accounting Policies (Continued)

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 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)		40 years
Building improvements		Lesser of the remaining life of building or useful life
Building (leasehold interest)		Lesser of 40 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.

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2. Summary of Significant Accounting Policies (Continued)

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.

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.

Financial Instruments

Fair Value Measurements

Fair value is used to measure many of the Company's financial instruments. In accordance with provisions of SFAS No. 157 "Fair Value Measurements" ("SFAS 157") the fair value of these financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., the exit price).

Fair Value Option

In accordance with SFAS No. 159 "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"), the Company had the one-time option to elect fair value on January 1, 2008 for its existing financial assets and liabilities. For all new financial instruments, the Company has the one-time option to elect fair value for these financial assets or liabilities on the election date, as defined in SFAS 159. The changes in the fair value of these instruments are recorded in unrealized gain (loss) on investments and other in the condensed consolidated statements of operations.

Available for Sale Securities

The Company determines the appropriate classification of its investments in securities at the time of purchase and reevaluates such determination at each balance sheet date in accordance with SFAS "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"). 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 and its non investment grade notes of unconsolidated term debt transactions as available for sale securities as they meet the definition of a debt instrument due to their redemption provisions. These securities are carried at

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(Amounts in Thousands, Except per Share Data)

2. Summary of Significant Accounting Policies (Continued)

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 available for sale securities that serve as collateral for its term debt transactions, which the Company has elected the fair value option pursuant to SFAS 159, are carried at fair value with the net unrealized gains or losses reported as a component of earnings in the statement of operations. The Company determines the fair value of its available for sale securities pursuant to the guidance in SFAS 157. For additional information regarding unrealized gains and losses due to changes in the fair value of the Company's available for sale securities at December 31, 2008 and 2007, see Note 5.

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 including sales prices and 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 $250,000 per institution at December 31, 2008 and 2007. The Company mitigates its risk by placing cash and cash equivalents with major financial institutions.

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.

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2. Summary of Significant Accounting Policies (Continued)

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 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.

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2. Summary of Significant Accounting Policies (Continued)

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 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 is 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.

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.

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2. Summary of Significant Accounting Policies (Continued)

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 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

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2. Summary of Significant Accounting Policies (Continued)

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, the Company uses 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, or are hedges on debt that is remeasured at fair value pursuant to SFAS 159, any net payments under, or fluctuations in the fair value of, such derivatives are recognized currently in income. The Company's basis swaps have been designated as non-hedge derivatives.

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.

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

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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 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

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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 evaluating 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 evaluating the potential impact that the adoption of SFAS 160 could have on its financial statements.

In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities—An Amendment of FASB Statement No. 133" ("SFAS 161"). SFAS 161 expands the disclosure requirements for derivative instruments and hedging activities. SFAS 161 specifically requires entities to provide enhanced disclosures addressing the following: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity's financial position, financial performance, and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. SFAS 161 will be effective for the Company on January 1, 2009. The Company is currently evaluating the potential impact that the adoption of SFAS 161 could have on its financial statements.

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settled in cash (or other assets) upon conversion, including partial cash settlement of the conversion option. FSP APB 14-1 requires bifurcation of the instrument into a debt component that is initially recorded at fair value and an equity component. The difference between the fair value of the debt component and the initial proceeds from issuance of the instrument is recorded as a component of equity. The liability component of the debt instrument is accreted to par using the effective yield method; accretion is reported as a component of interest expense. The equity component is not subsequently re-valued as long as it continues to qualify for equity treatment. This practice marks a significant change from the current accounting practice for convertible debt instruments in the scope of FSP APB 14-1. Current practice does not require separation of the liability and equity components of such instruments. Separately accounting for these instruments' liability and equity components will result in the recording of more non-cash interest cost over the life of the convertible debt instrument, because of an initial debt discount. Additionally, FSP APB 14-1 precludes the use of the fair value option pursuant to SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities." FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. The Company intends to adopt FSP APB 14-1 effective January 1, 2009 and apply its provisions retrospectively to all periods presented in its financial statements. The Company has determined that FSP APB 14-1 will result in the Company recognizing additional non-cash interest expense of approximately $0.8 million, $2.8 million and $3.6 million in its 2007, 2008 and 2009 statements of operations, respectively. The 2008 increase in non-cash interest expense will be offset by a $5.0 million capitalization of financing fees which were expensed upon the election of the fair value option on the convertible debt instruments.

In October 2008, the FASB issued Staff Position No. FAS 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active" ("FSP 157-3"). FSP 157-3 clarifies the application of SFAS 157, which the Company adopted as of January 1, 2008, in cases where a market is not active. The Company has considered the guidance provided by FSP 157-3 in its determination of estimated fair values as of December 31, 2008, and the impact was not material.

In December 2008, the FASB issued Staff Position No. FAS 140-4 and FIN 46(R)-8, "Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities" ("FSP FAS 140-4 and FIN 46(R)-8"). FSP FAS 140-4 and FIN 46(R)-8 increases disclosure requirements for public companies and is effective for reporting periods (interim and annual) that end after December 15, 2008. The purpose of this FSP is to promptly improve disclosures by public entities and enterprises until the pending amendments to FASB Statement No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"("SFAS 140"), and FASB Interpretation No. 46 (revised December 2003), "Consolidation of Variable Interest Entities" ("FIN 46(R)") , are finalized and approved by the Board. The FSP amends SFAS 140 to require public entities to provide additional disclosures about transferors' continuing involvements with transferred financial. It also amends FIN 46(R) to require public enterprises, including sponsors that have a variable interest in a variable interest entity, to provide additional disclosures about their involvement with variable interest entities. This pronouncement is related to disclosure only and will not have an impact on the Company's consolidated financial position, results of operations or cash flows.

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3. Fair Value of Financial Instruments

The Company adopted the provisions of SFAS 157 and 159 effective as of January 1, 2008 and elected to apply the fair value option to the following financial assets and liabilities existing at the time of adoption:

•: Available for sale securities that serve as collateral for the Company's term debt transactions;
•: N-Star IV, VI, VII and VIII bonds payable;
•: Liabilities to subsidiary trusts issuing preferred securities; and
•: 7.25% exchangeable senior notes.

During the second quarter 2008, the Company elected the fair value option for its 11.50% exchangeable senior notes issued in May 2008 and its equity investment in its corporate lending business.

The Company has elected the fair value option for the above financial instruments for the purpose of enhancing the transparency of its financial condition.

Fair Value Measurements

SFAS 157 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. In addition, SFAS 157 requires an issuer to incorporate changes in its own credit spreads when determining the fair value of its liabilities.

Fair Value Hierarchy

In accordance with SFAS 157, the Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the financial instruments fall within different levels of the hierarchy, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

Financial assets and liabilities recorded on the condensed consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:

Level

1. Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market (examples include active exchange-traded equity securities, listed derivatives, most U.S. government and agency securities, and certain other sovereign government obligations).

Level

2. Financial assets and liabilities whose values are based on the following:

a): Quoted prices for similar assets or liabilities in active markets (for example, restricted stock);
b): Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds, which trade infrequently);

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c): Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including interest rate and currency swaps); and
d): Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability (for example, certain mortgage loans).

Level: 3. Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management's own assumptions about the assumptions a market participant would use in pricing the asset or liability (examples include private equity investments, beneficial interest in securitizations and long-dated or complex derivatives, including certain foreign exchange options and long-dated options on gas and power).

As required by SFAS 157, financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table sets forth the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2008 by level within the fair value hierarchy (in thousands):

		Assets and Liabilities at Fair Value

		Level 1		Level 2		Level 3		Total
Assets:
Available for sale securities:
	CMBS	$	—	$	75,901	$	48,693	$	124,594
	Real estate term debt—N-Star(1)		—		—		7,040		7,040
	Real estate term debt—Third party		—		—		1,322		1,322
	REIT debt		—		44,336		600		44,936
	Term debt equity—N-Star		—		—		38,764		38,764
	Trust preferred securities		—		—		4,488		4,488
Derivative asset			—		9,318		—		9,318
Corporate lending investment			—		—		47,999		47,999

	Total assets	$	—	$	129,555	$	148,906	$	278,461

Liabilities:
Exchangeable senior notes		$	—	$	112,576	$	—	$	112,576
N-Star IV,VI, VII and VIII bonds payable(1)			—		—		468,638	$	468,638
Liability to subsidiary trusts issuing preferred securities			—		—		69,617		69,617
Derivative liability			—		87,220		—		87,220

	Total liabilities	$	—	$	199,796	$	538,255	$	738,051

(1): Markets have become relatively inactive for these securities and as a result the balances have been transferred from Level 2 to Level 3.

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As of December 31, 2008, the Company did not have any assets or liabilities measured at fair value on a non-recurring basis.

The following table presents additional information about the Company's available for sale securities, liabilities to subsidiary trusts issuing preferred securities and corporate lending investment which are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value (in thousands):

Fair Value Measurements Using Significant Unobservable Inputs (Level 3):

			Available for sale securities		Corporate lending investment		N-Star Bonds Payable		Liability to subsidiary trusts issuing preferred securities

Beginning balance:			$	57,129	$	—	$	—	$	168,454
	Total transfers into Level 3			125,208				1,138,919
	Purchases, sales, issuance and settlements, net			13,982		77,992		—		(1,622	)
	Total losses (realized or unrealized):
		Included in earnings		85,900		29,993		—		—
		Included in other comprehensive loss		9,512		—		—		—
	Total gains (realized or unrealized):
		Included in earnings		—		—		670,281		97,215
		Included in other comprehensive loss		—		—		—		—

Ending balance			$	100,907	$	47,999	$	468,638	$	69,617

The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets or liabilities still held at the reporting date			$	85,900	$	29,993	$	670,281	$	97,215

Fair Value Option

SFAS 159 provides a fair value option election that allows companies to irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and liabilities. Changes in fair value for assets and liabilities for which the election is made will be recognized in earnings as they occur. SFAS 159 permits the fair value option election on an instrument by instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument.

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The following table sets forth the Company's financial instruments for which the fair value option was elected:

Financial Instruments, at Fair Value		December 31, 2008		December 31, 2007

Assets:
Available for sale securities:
	CMBS	$	124,595	$	342,353
	Real estate term debt—N-Star		5,236		18,507
	Real estate term debt—Third party		1,322		12,159
	REIT debt		44,936		80,292
	Trust preferred securities		4,488		12,264
Corporate lending investment			47,999		—

	Total assets	$	228,576	$	465,575

Liabilities:(1)
Exchangeable senior notes			112,576		172,500
N-Star IV,VI, VII and VIII bonds payable			468,638		1,654,185
Liability to subsidiary trusts issuing preferred securities			69,617		286,258
	Total liabilities	$	650,831	$	2,112,943

(1): Liabilities are carried at historical amortized cost as of December 31, 2007.

The following table presents a summary of existing eligible financial assets and financial liabilities for which the fair value option was elected on January 1, 2008 and the cumulative-effect adjustment to retained earnings recorded in connection with the initial adoption of SFAS 159.

	Carrying Value at January 1, 2008		Transition Adjustment to Retained Earnings (Gain)/Loss			Carrying Value at January 1, 2008 (After adoption of SFAS 159)

Assets:
Available for sale securities(1)	$	465,575	$	90,966		$	465,575
Deferred costs and intangible assets, net(2)		126,677		34,607			92,070
Liabilities:
Exchangeable senior notes		172,500		(26,824	)		145,676
N-Star IV, VI, VII and VIII bonds payable		1,654,185		(196,209	)		1,457,976
Liability to subsidiary trusts issuing preferred securities		286,258		(117,804	)		168,454

Cumulative gain upon the adoption of SFAS 159			$	(215,264	)

(1): Prior to January 1, 2008, available for sale securities were carried at fair value with the change in fair value recorded in other comprehensive income. Accordingly, the election of the fair value option for these instruments did not change their carrying value and resulted in a reclassification from accumulated other comprehensive income to retained earnings.
(2): Represents the write-off of $34.6 million of deferred financing costs associated with exchangeable senior notes, N-Star bonds payable and liability to subsidiary trusts issuing preferred securities.

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The following table presents the difference between fair values and the aggregate contractual amounts of available for sale securities and liabilities, for which the fair value option has been elected:

			Fair Value at December 31, 2008		Amount Due Upon Maturity		Difference

Assets:
Available for sale securities:
	CMBS		$	124,595	$	497,130	$	(372,535	)
	Real estate term debt—N-Star			5,236		38,443		(33,207	)
	Real estate term debt—Third party			1,322		16,576		(15,254	)
	REIT debt			44,936		84,183		(39,247	)
	Trust preferred securities			4,488		15,000		(10,512	)

		Total assets	$	180,577	$	651,332	$	(470,755	)

Liabilities:
Exchangeable Senior Notes				112,576		240,800		(128,224	)
N-Star IV,VI, VII and VIII bonds payable				468,638		1,608,445		(1,139,807	)
Liability to subsidiary trusts issuing preferred securities				69,617		280,133		(210,516	)

	Total Liabilities		$	650,831	$	2,129,378	$	(1,478,547	)

At December 31, 2008, the basis in our corporate lending investment was $78.0 million. We have elected the fair market value option pursuant to SFAS 159 for this investment which is accounted for under the equity method of accounting. The fair market value of our investment at December 31, 2008 was $48.0 million.

For the year ended December 31, 2008, the Company recognized a net gain of $752.3 million as the result of the change in fair value of financial assets and liabilities for which the fair value option was elected, which is recorded as unrealized gain (loss) on investments and other in the Company's condensed consolidated statement of operations.

The impact of changes in instrument-specific credit spreads on exchangeable senior notes, N-Star bonds payable, liability to subsidiary trusts issuing preferred securities and derivatives for which the fair value option was elected was a net gain of $1.2 billion for the year ended December 31, 2008. The Company attributes changes in the fair value of floating rate liabilities to changes in instrument-specific credit spreads. For fixed rate liabilities, the firm allocates changes in fair value between interest rate-related changes and credit spread-related changes based on changes in interest rates.

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4. Operating Real Estate

At December 31, 2008 and 2007, operating real estate, net consists of the following:

	December 31, 2008			December 31, 2007

Land	$	160,838		$	157,371
Buildings and improvements		973,826			945,760
Leasehold interests		18,876			26,117
Tenant improvements		37,517			38,681
Furniture and fixtures		5,965			1,623
Allowance for operating real estate impairment		(5,580	)		—
Capital leases		3,027			3,028

		1,194,469			1,172,580
Less: Accumulated depreciation		67,469			38,444

Operating real estate, net	$	1,127,000		$	1,134,136

Depreciation expense amounted to approximately $31.4 million and $24.0 million for the year ended December 31, 2008 and 2007, respectively, of which a portion is included in income from discontinued operations for the year ended December 31, 2007. In addition to the amounts included in the above table, approximately $85.6 million and $88.1 million of real estate acquisition costs as of December 31, 2008 and 2007, respectively, are classified as deferred lease costs. See Note 10 for additional information.

Acquisitions—2008

Wakefield Joint Venture Acquisitions

In January 2008, the Wakefield joint venture acquired a portfolio of three skilled nursing facilities totaling 40,369 square feet located in Ohio and Wisconsin, for $4.2 million. The properties are net leased to a single tenant under a lease that expires in December 2017. The acquisition was purchased with cash.

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 Company assumed a $14.5 million non-recourse mortgage, which

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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.

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.

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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. 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.

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 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.

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(Amounts in Thousands, Except per Share Data)

4. Operating Real Estate (Continued)

Discontinued Operations

There were no discontinued operations for the year ended December 31, 2008. 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 and 2006:

			For the Year Ended December 31, 2007			For the Year Ended December 31, 2006

Revenue:
	Rental and escalation income		$	38		$	750
	Interest and other			—			1

		Total revenue		38			751

Expenses:
	Real estate property operating expenses			—			42
	General and administrative expenses			1			1
	Interest expense			20			159
Depreciation and amortization				31			183

		Total expenses		52			385

Income (loss) from discontinued operations				(14	)		366
Gain (loss) on disposition of discontinued operations				(45	)		515

Income (loss) from discontinued operations before minority interest				(59	)		881
Minority interest				3			(130	)

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

Chatsworth Property

On September 25, 2008, JPMorgan Chase & Co. ("JPMorgan") announced that it had acquired substantially all of the assets and liabilities of Washington Mutual Bank, FA ("WaMu") from the Federal Deposit Insurance Corp. JPMorgan is entitled to a 90-day period from the WaMu acquisition date to decide whether they will accept or reject the terms of the lease. During the third quarter 2008, the Company added its net leased asset comprised of three office buildings totaling 257,000 square feet located in Chatsworth, CA and 100% leased to WaMu to its watch list. As of December 31, 2008, the buildings had a combined $57.0 million net book value and were financed with a non-recourse $43.0 million first mortgage loan. The assets are also financed with a $9.3 million mezzanine loan which is collateral for one of the Company's securities term financings. The Company's potential loss if the lease is rejected would be the value of the Company's mezzanine loan and residual equity interest. On February 5, 2009 the Company became aware that JPMorgan intends to vacate the properties by March 23, 2009. As a result, the Company took a $5.6 million impairment charge to these properties as of December 31, 2008. The Company is evaluating its options regarding this investment, which could include transferring its ownership in the properties to the first mortgage lender.

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(Amounts in Thousands, Except per Share Data)

5. Available for Sale Securities

The following is a summary of the Company's available for sale securities at December 31, 2008:

December 31, 2008		Carrying Value		SFAS 159 Transition Adjustment			Losses in Accumulated OCI			Unrealized Loss on Investments			Estimated Fair Value(1)

CMBS		$	444,790	$	(64,442	)	$	—		$	(255,754	)	$	124,594
Real estate term debt—N-Star			50,680		(17,616	)		(12,633	)		(13,391	)		7,040
Real estate term debt—Third party			16,156		(3,896	)		—			(10,938	)		1,322
REIT debt			82,753		(2,276	)		—			(35,542	)		44,935
Term debt equity—N-Star			70,532		—			(31,768	)		—			38,764
Trust preferred securities			15,000		(2,736	)		—			(7,776	)		4,488

	Total	$	679,911	$	(90,966	)	$	(44,401	)	$	(323,401	)	$	221,143

(1): Approximately $144.2 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, 2008, the maturities of the available for sale securities ranged from two to 44 years.

During the year ended December 31, 2008, proceeds from the sale and redemption of available for sale securities was $9.1 million. The realized gain on sale was $0.3 million.

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 debt securities available for sale 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 the sale was $1.4 of which $1.0 was the unrealized gain which was included in other comprehensive income.

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(Amounts in Thousands, Except per Share Data)

6. Real Estate Debt Investments

At December 31, 2008 and 2007, the Company held the following real estate debt investments:

December 31, 2008		Carrying Value(1)

Whole loans, floating rate		$	1,048,310	51.2	%	—	%	2.89	%	52
Whole loans, fixed rate			96,252	4.7		7.58		—		8
Subordinate mortgage interests, floating rate			200,556	9.8		—		6.42		13
Subordinate mortgage interests, fixed rate			24,349	1.2		7.51		—		2
Mezzanine loans, floating rate			463,765	22.6		—		4.43		15
Mezzanine loan, fixed rate			191,438	9.4		11.65		—		15
Other loans—floating			16,609	0.8		—		1.60		2
Other loans—fixed			6,191	0.3		5.53		—		1

	Total/Weighted average	$	2,047,470	100.0	%	9.99	%	3.70	%	108

(1): Approximately $1.3 billion of these investments serve as collateral for the Company's term debt transaction notes of its three commercial 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 $271.0 million related to these investments. The Company expects that a minimum of $133.9 million of these future fundings will be funded within the Company's existing term debt transactions and require no additional capital from the Company. Based upon currently approved advance rates on the Company's credit and term debt facilities and assuming that all loans that have future fundings meet the terms to qualify for such funding, the Company's equity requirement would be approximately $94.5 million.

December 31, 2007		Carrying Value(1)

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			134,322	6.7		—		3.72		11
Subordinate mortgage interests, fixed rate			24,025	1.2		7.54		—		2
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	%	10.39	%	3.57	%	117

(1): Approximately $1.4 billion of these investments serve as collateral for the Company's term debt transaction notes of its three commercial real estate debt term debt transactions and the balance is financed under other borrowing facilities. The Company has future funding commitments, which

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6. Real Estate Debt Investments (Continued)

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.

As of December 31, 2008, all loans, with the exception of a whole loan having a principal balance of $21.4 million and a maturity date of October 1, 2008, representing approximately 1.0% of the Company's total commercial real estate debt investments, were current on principal and interest payments in accordance with the terms of the loan agreement. The Company's maximum exposure to loss related to this whole loan would be equal to the outstanding principal balance. As of December 31, 2008, the Company has $11.2 million of credit loss reserves relating to its loans.

Contractual maturities of real estate debt investments at December 31, 2008 are as follows:

Years Ending December 31:		Initial Maturity(1)		Maturity Including Extensions

2009		$	830,132	$	128,592
2010			638,675		324,044
2011			213,185		543,218
2012			200,385		703,499
2013			—		183,024
Thereafter			191,169		191,169

	Total	$	2,073,546	$	2,073,546

(1): The year ending December 31, 2009, contains a whole loan with an initial maturity of October 1, 2008 and a principal balance of $21.4 million that remains outstanding as of December 31, 2008.

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 investment. Maturity Including Extensions assumes that all loans with extension options will qualify for extension at initial maturity according to the conditions stipulated in the related loan agreements.

7. Corporate Loan Investments

At December 31, 2008, the Company held no corporate debt investments as a result of the recapitalization and deconsolidation of the Monroe joint venture. See Note 2 for additional information.

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(Amounts in Thousands, Except per Share Data)

7. Corporate Loan Investments (Continued)

At December 31, 2007, the Company held the following corporate debt investments:

December 31, 2007	Carrying Value(1)

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 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 $38.0 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 are 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, 2008 and December 31, 2007, the Company had an investment in CS/Federal of approximately $7.3 million and $7.8 million, respectively. The Company recognized equity in earnings of $0.5 million for each of the years ended December 31, 2008 and December 31, 2007.

Monroe Capital Management Advisors, LLC

In March 2007, the Company entered into a joint venture with Monroe Management, a Chicago-based firm, and acquired a 49.9% non-controlling interest in Monroe Management. Monroe Management originated, structured and syndicated middle-market corporate loans for Monroe Capital and provided asset management services. On May 7, 2008, the Company terminated its joint venture with Monroe Management upon the completion of the recapitalization of Monroe Capital. See Note 1 for additional information.

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(Amounts in Thousands, Except per Share Data)

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

G-NRF, LTD

On May 7, 2008, the Company completed a recapitalization of Monroe Capital, its middle-market corporate lending platform. Upon completion of the recapitalization transaction, the new investor became the controlling manager of the assets and the Company deconsolidated the joint venture. The Company currently uses the equity method of accounting to account for the recapitalized joint venture and has elected the fair value option under SFAS 159 for its equity investment. As of December 31, 2008, the fair market value of the Company's investment in the corporate lending venture was $48.0 million. For the period from May 8, 2008 to December 31, 2008, the Company recognized equity in earnings of $2.2 million and an unrealized loss of $30.0 million related to the fair value adjustment on its equity investment. See Note 2 for additional information.

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, 2008 and December 31, 2007, the Company had an investment in the Trusts of approximately $3.7 million.

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 conducts most of its real estate securities investment business.

The Company is the manager and general partner of the Securities Fund. The Company receives 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.

During 2008, the Company invested an additional $20.0 million in the Securities Fund and sold 67% of its N-Star IX advisory fee income stream to the Securities Fund for $8.8 million. The Securities Fund owns all of the equity in the N-Star IX term financing but the Company retained the advisory fees when N-Star IX was sold to the Securities Fund at its inception. The Company recognized $4.8 million of advisory fee income from the sale and deferred the remaining $4.0 million, which represented the Company's ownership interest in the Securities Fund. The deferred advisory fee income will be recognized into income as the fees are earned. For the year ended December 31, 2008, the Company recognized $0.2 million in additional income from the amortization of deferred advisory fee income. During the third quarter 2008, the Securities Fund made a claim against Lehman Brothers for $6.8 million (plus damages) to recover cash collateral held by Lehman Brothers and recorded a reserve of $3.4 million against the $6.8 million cash collateral receivable.

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

At December 31, 2008, the Company had invested a total of $51.2 million in the Securities Fund and the carrying value of its investment was $29.3 million, representing a 53.1% interest.

For the year ended December 31, 2008 and 2007 the Company recognized equity in losses of $12.4 million and $9.1 million, respectively. The Company also earned $0.5 million and $0.4 million in management fees from the Securities Fund for the year ended December 31, 2008 and 2007, respectively.

LandCap Investment

On October 5, 2007, the Company entered into a joint venture with Whitehall Street Global Real Estate Limited Partnership 2007, to form LandCap Partners, which is referred to as LandCap. LandCap was established to 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. The Company has sole discretion with respect to funding its portion of any investment decisions relating to LandCap and accounts for its investment under the equity method of accounting. At December 31, 2008 the Company's investment in LandCap is carried at $12.9 million. For the year ended December 31, 2008 the Company made contributions to LandCap of $16.9 million and recognized a loss $3.3 million which consisted primarily of general and administrative expenses for the year. At December 31, 2008, LandCap has made investments totaling $39.1 million. In addition, the Company advanced approximately $3.8 million under a loan agreement to LandCap, which bears interest at a fixed rate of 12% and was included in other assets in the condensed 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, 2008			For the Year Ended December 31, 2007			For the Year Ended December 31, 2006
Net income	$	(51,469	)	$	(33,657	)	$	1,413
Other partners' share of income		37,198			24,489			(981	)
Fee income basis difference		1,263			(1,263	)		—
Joint venture equity write-off		811			—			—
Elimination entries		279			(1,253	)		—

Earnings from unconsolidated/uncombined ventures	$	(11,918	)	$	(11,684	)	$	432

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(Amounts in Thousands, Except per Share Data)

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

Reconciliation between the Company's investment in unconsolidated entities as of December 31, 2008 and December 31, 2007 is as follows:

	December 31, 2008		December 31, 2007

Company's equity in unconsolidated entities	$	100,899	$	32,801
Elimination entries		279		—
Purchase price basis difference		329		342

Investment in and advances to unconsolidated ventures	$	101,507	$	33,143

The condensed combined balance sheets for the unconsolidated joint ventures at December 31, 2008 and 2007 are as follows:

			2008		2007

Assets
	Cash		$	29,119	$	4,116
	Restricted cash			537		353
	Operating real estate, net			63,473		50,504
	Available for sale securities, at fair value			373,588		133,926
	Deferred costs, net			4,269		4,846
	Other assets			2,244		6,131

		Total assets	$	473,230	$	199,876

Liabilities and members' equity
	Mortgage notes and loans payable		$	36,886	$	37,398
	Repurchase obligations			—		51,213
	Other liabilities			280,780		19,965
	Members' equity			155,564		91,300

		Total liabilities and members' equity	$	473,230	$	199,876

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(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, 2008, 2007 and 2006 are as follows;

			2008			2007			2006

Revenues and other income:
	Interest income		$	18,292		$	8,806		$	624
	Rental and escalation income			4,720			5,046			4,542
	Other revenue			267			8,824			23

		Total revenue		23,279			22,676			5,189
Expenses:
	Interest expense			4,542			3,880			1,925
	General and administrative			7,752			9,583			41
	Depreciation and amortization			1,936			1,981			1,810
	Other expenses			2,465			2,276			—

		Total Expenses		16,695			17,720			3,776

Income from operations				6,584			4,956			1,413
	Unrealized loss on investments			(60,661	)		(38,613	)		—

Net income			$	(54,077	)	$	(33,657	)	$	1,413

9. Variable Interest Entities

The Company has created and manages portfolios of primarily investment grade commercial real estate securities and real estate debt investments, which were financed in term debt transactions. The collateral securities include CMBS, fixed income securities issued by REITs and term debt transactions backed primarily by real estate securities. These securities are primarily investment grade and generally are not insured by the Federal Housing Administration or guaranteed by the Veterans Administration or otherwise guaranteed or insured. The collateral debt investments include whole loans, subordinate mortgage interests, mezzanine loans and other loans. By financing these securities with long-term debt through the issuance of term debt transactions, the Company expects to generate attractive risk-adjusted equity returns and to match the term of its assets and liabilities.

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, liability to subsidiary trusts issuing preferred securities and its investments in each of its eight 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; and (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

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9. Variable Interest Entities (Continued)

entity's activities involve or are conducted on behalf of an investor that has disproportionately fewer voting rights.

FASB Staff Position No. FIN 46(R)-6, Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R) ("FSP FIN 46(R)-6") addresses how a reporting enterprise should determine the variability to be considered and provides guidance in applying Fin 46(R).

As of December 31, 2007, the Company identified interests in 17 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 13 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 Company's financial statements as of December 31, 2008 or 2007. See Note 6 and 8 for additional information.

Term Debt Transactions

The Company has interests in eight term debt transactions, whose term notes are primarily collateralized by investment grade real estate securities or real estate debt investments. 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 each of the term debt transactions accounted for as a single debt security available for sale pursuant to EITF 99-20.

Consolidated Term Debt Transactions

N-Star IV, VI, VII and VIII are consolidated term debt transactions in accordance with the guidance provided in FSP FIN 46(R)-6.

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9. Variable Interest Entities (Continued)

The following tables describe certain terms of the collateral for and the notes issued by N-Star IV, N-Star VI, N-Star VII and N-Star VIII as follows for the year ended December 31, 2008 and 2007:

		Collateral—December 31, 2008								Term Notes—December 31, 2008

Issuance		Date Closed	Par Value of Collateral		Weighted Average Interest Rate at 12/31/08			Weighted Average Expected Life (years)		Outstanding Term Notes(1)		Weighted Average Interest Rate at 12/31/08			Stated Maturity
N-Star IV		6/14/2005	$	346,996		6.93	%		1.71	$	292,500		1.08	%	7/1/2040
N-Star VI		3/17/2006		385,251		7.26			2.11		292,700		2.45		6/1/2041
N-Star VII		6/22/2006		563,771		5.05			7.38		499,200		1.74		6/22/2051
N-Star VIII		12/6/2006		717,705		7.42			2.05		524,045		2.41		2/1/2041

	Total		$	2,013,723		6.64	%		3.49	$	1,608,445		1.97	%

(1): Includes only notes held by third parties.

		Collateral—December 31, 2007								Term Notes—December 31, 2007

Issuance		Date Closed	Par Value of Collateral		Weighted Average Interest Rate at 12/31/07			Weighted Average Expected Life (years)		Outstanding Term Notes(1)		Weighted Average Interest Rate at 12/31/07			Stated Maturity
N-Star IV		6/14/2005	$	373,276		8.81	%		1.89	$	300,000		5.49	%	7/1/2040
N-Star VI		3/17/2006		341,244		7.93			2.55		310,500		5.54		6/1/2041
N-Star VII		6/22/2006		537,774		6.30			8.12		510,810		5.13		6/22/2051
N-Star VIII		12/6/2006		668,306		9.25			2.54		532,885		5.81		2/1/2041

	Total		$	1,920,600		8.09	%		3.98	$	1,654,195		5.49	%

(1): Includes only notes held by third parties.

Unconsolidated term debt transactions

N-Star I, II, III and V are unconsolidated term debt transactions in accordance with the provisions of FIN 46(R).

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(Amounts in Thousands, Except per Share Data)

9. Variable Interest Entities (Continued)

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, 2008 and 2007:

		Collateral—December 31, 2008								Term Notes—December 31, 2008

Issuance		Date Closed	Par Value of Collateral		Weighted Average Interest Rate at 12/31/08			Weighted Average Expected Life (years)		Outstanding Term Notes(1)		Weighted Average Interest Rate at 12/31/08			Stated Maturity
N-Star I(2)		8/21/03	$	299,316		6.60	%		4.16	$	278,000		6.37	%	8/01/2038
N-Star II		7/01/04		331,242		6.17			4.77		295,098		5.51		6/01/2039
N-Star III		3/10/05		410,188		5.70			4.11		358,556		4.88		6/01/2040
N-Star V		9/22/05		499,745		5.52			6.23		456,319		4.58		9/05/2045

	Total		$	1,540,491		5.92	%		4.95	$	1,387,973		5.23	%

(1): Includes only notes held by third parties.
(2): The Company has an 83.3% interest.

		Collateral—December 31, 2007								Term Notes—December 31, 2007

Issuance		Date Closed	Par Value of Collateral		Weighted Average Interest Rate at 12/31/08			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.

The Company has identified one real estate debt investment as a variable interest in a variable interest entity ("VIE") in accordance with the provisions of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, ("Fin 46(R)") 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 $26.8 million. For 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.

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(Amounts in Thousands, Except per Share Data)

10. Deferred Costs and Intangible Assets, Net

Deferred costs and intangible assets as of December 31, 2008 and 2007 consisted of the following:

	December 31, 2008			December 31, 2007

Deferred lease costs	$	85,630		$	88,067
Deferred loan costs		16,873			62,225
Intangible assets		839			4,272
Pending deal costs		17			277

		103,359			154,841
Less accumulated amortization		(31,426	)		(28,164	)

Deferred costs and intangible assets, net	$	71,933		$	126,677

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, 2008 and 2007, approximately $0.3 million and $86.8 million included in deferred lease cost was the allocation of the purchase price to deferred lease cost.

11. Borrowings

The following table summarizes the Company's outstanding borrowings as of December 31, 2008 and December 31, 2007:

		Initial Stated Maturity	Maximum Maturity Including Extensions	Interest Rate	Maximum Amount Available		Contractual Balance at December 31, 2008		Contractual Balance at December 31, 2007

Credit Facilities
	JP Facility	8/8/2009	8/8/2010	LIBOR + .80% to 1.80%	$	150,000	$	44,881	$	55,936
	MC Facility(1)	3/31/2008	3/31/2008	LIBOR + 0.75%		—		—		374,459
	MC Facility VFCC(1)	7/29/2008	7/29/2010	Commercial Paper Rate + 0.75%		—		—		71,037

Total Credit Facilities						150,000		44,881		501,432
Term Loans
	WA Term Loan(2)	11/6/2009	11/6/2010	LIBOR + 2.00%		466,248		276,143		308,588
	Euro—note	11/6/2009	11/6/2010	3 month Euribor + 2.0%		103,526		103,526		108,346
	LB Term Loan	2/9/2009	2/9/2012	LIBOR + 1.50%		24,238		24,238		—

Total Credit Facilities & Term Loans					$	744,012		448,788		918,366

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(Amounts in Thousands, Except per Share Data)

11. Borrowings (Continued)

		Initial Stated Maturity	Interest Rate

Mortgage notes payable (non-recourse)
	Chatsworth	5/1/2015	5.65%	42,923	43,219
	Salt Lake City	9/1/2012	5.16%	15,862	16,231
	EDS	10/8/2015	5.37%	47,698	48,371
	Executive Center	1/1/2016	5.85%	51,480	51,480
	Green Pond	4/11/2016	5.68%	17,341	17,480
	Indianapolis	2/1/2017	6.06%	28,472	28,600
	Wakefield GE	8/30/2010	6.93%	67,269	67,586
	Wakefield—Park National	1/11/2014	5.94%	33,300	33,300
	Wakefield—GE—WLK	1/11/2017	6.49%	160,000	160,000
	Wakefield—GE—Tusc & Harmony	1/11/2017	6.59%	7,875	7,875
	Wakefield—Harmony FNMA	2/1/2017	6.39%	75,000	75,000
	Wakefield—Grove City	2/1/2038	5.45%	1,862	1,887
	Wakefield—Lancaster	6/1/2037	6.40%	2,605	2,636
	Wakefield—Marysville	6/1/2037	6.40%	1,673	1,693
	Wakefield—Washington	10/1/2038	6.65%	1,975	1,995
	Wakefield—Miller Merril	6/30/2012	7.07%	116,000	116,000
	Wakefield—ARL Mob Wachovia	5/11/2017	5.89%	3,412	3,412
	Wakefield—Ascend Colonial	5/31/2012	7.52%	6,500	6,500
	Wakefield—Colonial Dova	8/31/2012	7.32%	6,500	6,500
	Wakefield—Colonial 6 Alfs	11/1/2012	6.98%	23,329	19,653
	Wakefield—St Francis	9/31/2010	LIBOR + 2.00%	11,400	11,400
	Aurora	7/11/2016	6.22%	33,329	33,500
	DSG	10/11/2016	6.17%	34,237	34,648
	Keene	2/1/2016	5.85%	6,790	6,882
	Fort Wayne	1/1/2015	6.41%	3,480	3,555
	Portland	6/17/2014	7.34%	4,825	4,984
	Milpitas	3/6/2017	5.95%	22,548	22,959
	Fort Mill	4/6/2017	5.63%	27,700	27,700
	Reading	1/1/2015	5.58%	14,153	14,387
	Reading	1/1/2015	6.00%	5,000	5,000
	Alliance	12/6/2017	6.48%	23,787	24,032
Mezzanine loan payable (non-recourse)
	Chatsworth	5/1/2014	6.64%	9,310	10,692
	Fort Mill	4/6/2017	6.21%	2,985	3,208
Exchangeable Senior Notes(3)		6/15/2027	7.25%	160,800	172,500
Exchangeable Senior Notes ("NNN Notes")(3)		6/15/2013	11.50%	80,000	—

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(Amounts in Thousands, Except per Share Data)

11. Borrowings (Continued)

		Initial Stated Maturity	Interest Rate	Contractual Balance at December 31, 2008		Contractual Balance at December 31, 2007

Repurchase obligations		Varies	LIBOR varies		176		1,864
Bonds payable(3)
	N-Star IV	7/1/2040	LIBOR + 0.62% (average spread)		292,500		300,000
	N-Star VI	6/1/2041	3 month LIBOR + 0.56% (average spread)		292,700		310,500
	N-Star VII	6/22/2051	LIBOR + 0.36% (average spread)		499,200		510,800
	N-Star VIII	2/1/2041	LIBOR + 0.57% (average spread)		524,045		532,885
Liability to subsidiary trusts issuing preferred securities(3)(4)
	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%		31,475		37,600
	Trust VIII	7/30/2037	3 month LIBOR 2.70%		35,100		35,100

				$	3,488,962	$	3,945,538

(1): Refer to Note 1 for details on the termination of these facilities.
(2): The Company had an additional $190.1 million of availability under the revolving component of the term loan.
(3): Contractual amounts due may differ from the carrying value on the condensed consolidated balance sheets due to the fair value accounting option under SFAS 159. See Note 3
(4): 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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(Amounts in Thousands, Except per Share Data)

11. Borrowings (Continued)

Scheduled principal payment requirements on the Company's borrowings based on initial maturity dates are as follows as of December 31, 2008:

	Total		Mortgage and Mezzanine Loans		Credit Facilities		Secured Term Loan(1)		Liability to Subsidiary Trusts Issuing Preferred Securities(2)		Exchangeable Senior Notes(2)		Repurchase Obligations		Bonds Payable(1)

2009	$	459,634	$	10,670	$	44,881	$	403,907	$	—	$	—	$	176	$	—
2010		96,768		96,768		—		—		—		—		—		—
2011		14,368		14,368		—		—		—		—		—		—
2012		328,471		167,671		—		—		—		160,800		—		—
2013		92,613		12,613		—		—		—		80,000		—		—
Thereafter		2,497,108		608,530		—		—		280,133		—		—		1,608,445

Total	$	3,488,962	$	910,620	$	44,881	$	403,907	$	280,133	$	240,800	$	176	$	1,608,445

(1): $386.0 million of the secured term loan balance may be extended for one year and the remaining balance of $24.2 million may be extended for three years at the Company's option, subject to certain conditions.
(2): Scheduled principal payments may differ from the carrying value on the condensed consolidated balance sheets due to the fair value accounting option under SFAS 159. See Note 3. $160.8 million of the Company's 7.25% exchangeable senior notes have a final maturity date of June 15, 2027. The above table reflects the holders repurchase rights which may require the Company to repurchase the notes on June 15, 2012.

At December 31, 2008, the Company was in compliance with all covenants under its borrowings.

Debt Repurchases

During 2008, the Company repurchased approximately $111.4 million of its bonds, which consisted of $23.2 million of Class J, BB rated notes, $19.2 million of Class B, AA rated notes, $14.5 million of Class C, single A rated notes, $10.7 million of Class H, BBB rated notes, $13.0 million of Class G, AAA rated notes, $4.0 million of Class D, BBB rated notes, $5.0 million of Class A2, AAA rated notes, $3.0 million of Class DFL, BBB rated notes and $1.0 million of Class E, single A rated notes of its various N-Star bonds payable, $11.7 million of its 7.25% exchangeable senior notes and $6.1 million of its liability to subsidiary trusts issuing preferred securities for a total of $49.8 million. The Company recorded a realized gain of $36.5 million in connection with the repurchase of its notes. These repurchases also represented a $61.6 million discount to the par value of the debt.

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

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11. Borrowings (Continued)

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.

In May 2008, NRFC NNN Holdings, LLC ("Triple Net Holdings"), a wholly-owned subsidiary of the Company issued $80.0 million of 11.50% exchangeable senior notes (the "NNN Notes") due in 2013. The NNN Notes were offered in accordance with Rule 144A under the Securities Act of 1933, as amended. The NNN Notes pay interest semi-annually on June 15 and December 15, at a rate of 11.50% per annum, and mature on June 15, 2013. The NNN Notes have an initial exchange rate representing an exchange price of $12.00 per share of the Company's common stock, subject to adjustment under certain circumstances. The NNN Notes are senior unsecured obligations of Triple Net Holdings and may be exchangeable upon the occurrence of specified events, and at any time on or after March 15, 2013, and prior to the close of business on the second business day immediately preceding the maturity date, into cash, shares of the Company's common stock or a combination of cash and shares of the Company's common stock, if any, at the Company's option. The NNN Notes are redeemable, at the Company's option, on and after June 15, 2011. The Company may be required to repurchase the NNN Notes upon the occurrence of certain events. The net proceeds from the offering were approximately $71.4 million, after deducting a $4.6 million security deposit representing one semi-annual interest payment, and fees and expenses.

The Company has elected the SFAS 159 fair value option for the Notes and the NNN Notes. Changes in fair value of the Notes and the NNN Notes will be recognized in earnings as they occur. The Company adopted the provisions of FSP APB 14-1 on January 1, 2009. As a result, the Company's exchangeable senior notes will no longer be eligible for the fair value option under SFAS 159. The exchangeable senior notes will be carried at the discounted value as determined in accordance with FSP APB 14-1.

Unsecured Revolving Line of Credit

On May 28, 2008, the Company voluntarily terminated the Revolving Credit Agreement, dated November 3, 2006 with KeyBanc Capital Markets and Bank of America, N.A. (the "Credit Agreement") in order to permit the issuance of the NNN Notes, given certain restrictive covenants set forth in the Credit Agreement. The Credit Agreement had a November 2009 expiration and no amounts were outstanding under the Credit Agreement at the time of termination.

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(Amounts in Thousands, Except per Share Data)

11. Borrowings (Continued)

Secured Credit Facilities

In August 2007, the Company entered into a new $350.0 million Master Repurchase Agreement (the "JP Facility") with a major financial institution. 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.

On October 8, 2008, the Company and a subsidiary of its entered into Amendment No. 1 (the "Amendment") to the Master Repurchase Agreement (as amended, the "Facility") with JPMorgan. The Facility had approximately $50.4 million outstanding on the amendment date and such amounts bear interest at spreads of 1.25% to 1.80% over one-month LIBOR. Advance rates for the assets currently financed under the Facility range from 55% to 80% of the value of the collateral for which the advance is made. Interest rates and advance rates on future borrowings under the Facility will be determined by JPMorgan. Pursuant to the Amendment, the maximum amount outstanding under the Facility shall not exceed $150 million and we have agreed to guaranty the outstanding amount under the Facility. The term of the Facility will expire on August 8, 2010, subject to renewal by JPMorgan on August 8, 2009.

Secured Term Loan

In March 2007, the Company entered into 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 terminated its secured credit facility and 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.

In June 2008, a wholly owned subsidiary of the Company entered into a $24.2 million term loan agreement with an investment bank (the "LB Term Loan"). The collateral for the LB Term Loan is a $44.0 million mezzanine loan position and the Company has guaranteed 50% of the outstanding term debt. The LB Term Loan matures in February 2010, has two one-year automatic term extensions and bears interest at a spread of 1.50% over one-month LIBOR. Both the LB Term Loan and the mezzanine loan collateral have three one-year extension options. The LB Term Loan contains certain

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(Amounts in Thousands, Except per Share Data)

11. Borrowings (Continued)

covenants including, among others, financial covenants of a minimum tangible net worth and a minimum debt-to-equity ratio.

Liability to Subsidiary Trusts Issuing Preferred Securities

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.

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 $0.2 million and $1.9 million of repurchase agreements which are collateralized by a security with a face value of $8.0 million and $13.0 million of floating rate securities at December 31, 2008 and 2007, respectively.

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(Amounts in Thousands, Except per Share Data)

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, 2008:

Years Ending December 31:

2009	$	6,110
2010		6,124
2011		6,061
2012		5,904
2013		5,962
Thereafter		62,886

Total minimum lease payments		93,047
Less: Amounts representing interest		12,096

Future minimum lease payments	$	80,951

Under one of the capital leases, the Company also pays rent equal to 15% of the minimum rental income received from the sub-tenant. The Company recognized $3.1 million, $2.7 million and $2.0 million in rental expense for its three corporate offices for the years ended December 31, 2008, 2007 and 2006, respectively.

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, 2008:

Years Ending December 31:

2009	$	106,452
2010		104,770
2011		106,066
2012		102,311
2013		101,923
Thereafter		338,627

	$	860,149

Included in rental income is percentage rent of $585, $529 and $513 for the year ended December 31, 2008, 2007 and 2006, respectively.

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(Amounts in Thousands, Except per Share Data)

14. Related Party Transactions

Advisory Fees

The Company has agreements with each of N-Star I, N-Star II, N-Star III, N-Star V and N-Star IX to perform certain advisory services. During the second quarter 2008, the Company sold 67% of its advisory fee income stream, pursuant to its agreement with N-Star IX, to the Securities Fund for $8.8 million. Advisory and management fee income—related parties for the year ended December 31, 2008 includes $4.9 million of additional income as a result of the sale. The Company has deferred the remaining $3.8 million, which represents the Company's ownership interest in the Securities Fund. The deferred advisory fee income will be recognized into income as the fees are earned. The Company earned total fees on these agreements of approximately $12.0 million and $7.2 million for the year ended December 31, 2008 and 2007, respectively.

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. For the year ended December 31, 2008 and 2007, the Company earned $0.5 million and $0.4 million in management fees, respectively.

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 owned by the partners who own Chain Bridge. The Company incurred $1.3 million and $3.0 million in management fees for the year ended December 31, 2008 and 2007, respectively, which are recorded in asset management fees-related parties in the condensed consolidated statement of operations.

The Company entered into a management agreement in March 2007 with Monroe Management to perform certain management services. On May 7, 2008, the Company terminated its management agreement with Monroe Management, as described in Note 1. The Company incurred $3.4 million in management fees for the year ended December 31, 2008, and $3.0 million in management fees for the year ended December 31, 2007, which are recorded in asset management fees-related parties in the condensed consolidated statement of operations.

Legacy Fund

In September 2008, the Company and a major financial institution, as co-lenders, amended an existing loan agreement with a subsidiary of Legacy Partners Realty Fund I, LLC (the "Legacy Fund"), as borrower, to extend the loan maturity in exchange for an extension fee, a partial principal repayment of the loan and a guaranty by the borrower of certain additional obligations. 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 loan is included in real estate debt investments in the consolidated balance sheets.

Hard Rock Hotel Loan

In August 2008, the Company purchased from Credit Suisse ("CS"), a $30.0 million junior participation in the financing provided by CS in connection with the acquisition of 11.05 acres of land immediately adjacent to the Hard Rock Hotel and Casino in Las Vegas by a joint venture between DLJ

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

14. Related Party Transactions (Continued)

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, 2008 and 2007, 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.

For the real estate debt investments the fair value of the fixed and floating rate investments was approximated comparing yields at which the investments are held to estimated yields at which loans originated with similar credit risks or market yields at which a third party might require to purchase the investment by discounting future cash flows at such market yields. Prices were calculated to the "worst" assuming fully extended maturities regardless of if structural or economic tests required to achieve such extended maturities. For the year ended December 31, 2008 the fair market value was $1.7 billion with a gross carrying amount of $2.1 billion. For the year ended December 31, 2007 the fair market value of the fixed rate real estate debt investments 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. For the year ended December 31, 2008 the fair market value was $934.3 million with a carrying amount of $910.6million. 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, 2008 and 2007. 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.

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, and stock appreciation rights, shares of common stock of the Company,

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16. Equity Based Compensation (Continued)

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, 2008, the Company has issued an aggregate of 8,283,510 LTIP Units, net of forfeitures of 60,198 LTIP Units. An aggregate of 655,063 LTIP Units were converted to commons stock and 374,020 shares of common stock were issued pursuant to the Stock Incentive Plan. Of the 8,283,510 LTIP Units, so long as the recipient continues to be an eligible recipient, 5,016,112 will 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, 2,252,437 will vest over 16 consecutive quarters with the first quarter being January 29, 2008, 701,058 will cliff vest on December 31, 2010, and 170,801 are subject to no vesting requirements. The Company accelerated the vesting of 143,102 LTIP Units as part of the termination benefits provided to employees. In addition, the LTIP Unit holders are entitled to dividends on the entire grant beginning on the date of the grant.

The Company has recognized compensation expense of $21.3 million, $10.7 million and $4.5 million for the three years ended December 31, 2008, respectively. As of December 31, 2008, there were approximately 5,198,950 unvested LTIP Units and 55,520 LTIP Units were forfeited during the period. The related compensation expense to be recognized over the remaining vesting period of the Omnibus Incentive Plan LTIP grants is $39.8 million, provided there are no forfeitures.

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, among others. 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. All units under the plan were allocated to employees of the Company. The Company's compensation committee 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%.

The Company achieved the performance hurdles for both performance periods in 2006 and 2007 and all units reserved under this plan were granted to each of the participants that was an employee at the conclusion of the last performance period in November 2007. The Company has recognized, in the condensed consolidated financial statements, $2.2 million and $2.1 million in compensation expense for the years ending December 31, 2007 and 2006, respectively.

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(Amounts in Thousands, Except per Share Data)

16. Equity Based Compensation (Continued)

Employee Outperformance Plan

In connection with the employment agreement of the Company's head of its real estate securities business, he was 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).

In April 2008, the Company's head of its real estate securities business left the Company. As a result, his employment agreement with the Company was terminated effective April 11, 2008. He was not entitled to any severance, bonus or other payments or awards as a result of his departure. However, pursuant to his Outperformance Bonus Plan, he is deemed to have a vested interest in, and may continue to receive the following: (i) 20% of the bonus participation amount relating to fee streams and securities investments that were made in the 12 months prior to April 11, 2008; (ii) 40% of the bonus participation amount relating to fee streams and securities investments that were made more than 12 months and less than 24 months prior to April 11, 2008; (iii) 60% of the bonus participation amount relating to fee streams and securities investments that were made more than 24 months and less than 36 months prior to April 11, 2008; (iv) 80% of the bonus participation amount relating to fee streams and securities investments that were made more than 36 months and less than 48 months prior to April 11, 2008; and (v) 100% of the bonus participation amount relating to fee streams and securities investments that were made more than 48 months prior to April 11, 2008.

The Company has recorded no compensation expense under this plan for the year ended December 31, 2008, and $1.2 million and $0.8 million for the years ending December 31, 2007 and 2006, 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 would 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 exceeded a cumulative total return to stockholders of 30%, including both share price appreciation and dividends paid. The size of the pool would 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 was designated as a specified percentage of the aggregate performance pool. The Company did not meet the cumulative return hurdles under the plan. 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. Based on the vesting periods under the plan, the Company amortized 50% of the value into compensation expense over the first three years of the plan and will amortize 25% of the fair value in each of the years four and five. The Company recorded

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16. Equity Based Compensation (Continued)

compensation expense of $1.1 million for each of the three years ended December 31, 2008, 2007 and 2006, respectively.

The status of all of the LTIP grants as December 31, 2008 and 2007 is as follows:

	December 31, 2008					December 31, 2007

	LTIP Grants			Weighted Average Grant Price		LTIP Grants			Weighted Average Grant Price
Balance at beginning of year(1)		5,484		$	11.47		1,683		$	9.44
Granted		3,533			7.26		3,826			12.25
Converted to common stock		(895	)		9.51		(20	)		9.0
Forfeited		(55	)		9.42		(5	)		16.48

Ending balance(2)		8,067		$	9.86		5,484		$	11.47

(1): Reflects balance at January 1, 2008 and January 1, 2007 for the periods ended December 31, 2008 and 2007, respectively.
(2): Reflects balance at December 31, 2008 and 2007, respectively.

17. Stockholders' Equity

Common Stock

In April 2007, the Company implemented a Dividend Reinvestment and Stock Purchase Plan, or the Plan, pursuant to which it registered with the Securities and Exchange Commission and reserved for issuance 15,000,000 shares of its common stock. Under the terms of the Plan, stockholders who participate in the Plan may purchase shares of the Company's common stock directly from it, in cash investments up to $10,000. At the Company's sole discretion, it 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 the Company's stock. The Company expects to use the proceeds from any dividend reinvestments or stock purchases for general corporate purposes. 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. For the year ended December 31, 2008, the Company issued a total of approximately 181,593 common shares for a gross sales price of approximately $1.1 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.

In May 2008, the Company issued 37,812 shares of common stock with a fair value at the date of grant of $0.4 million to its Board of Directors as part of their annual grants.

In May 2008, the Company entered into an equity distribution agreement with Wachovia Capital Markets, LLC ("Wachovia"). In accordance with the terms of the agreement, the Company may offer and sell up to 10,000,000 shares of its common stock from time to time through Wachovia. Wachovia will receive a commission from the Company of up to 2.5% of the gross sales price of all shares sold through it under the equity distribution agreement. For the year ended December 31, 2008, the

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17. Stockholders' Equity (Continued)

Company sold a total of 114,100 shares of common stock related to its equity distribution agreement with Wachovia raising net proceeds of approximately $0.9 million.

For the year ended December 31, 2008, the Company issued a total of 235,183 shares of common stock related to employee compensation arrangements and employee separation agreements.

Stock Repurchase Program

On October 8, 2008, the Company's Board of Directors authorized a stock repurchase program of up to 10,000,000 shares of our outstanding common stock, or approximately 16% of its outstanding common stock. Stock repurchases under this program will be made from time to time through the open market or in privately negotiated transactions. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. For the year ended December 31, 2008, the Company repurchased a total of approximately 475,051 common shares for approximately $1.4 million.

Preferred Stock

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 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.

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17. Stockholders' Equity (Continued)

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.

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.

On January 22, 2008, 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 February 15, 2008 to stockholders of record as of the close of business on February 5, 2008.

On April 22, 2008, 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 May 15, 2008 to the stockholders of record as of the close of business on May 5, 2008.

On July 22, 2008, 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, 2008 to the stockholders of record as of the close of business on August 5, 2008.

On October 8, 2008, the Company declared a cash dividend of $0.36 per share of common stock. On October 21, 2008, the Company declared a cash dividend of $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 14, 2008 to the stockholders of record as of the close of business on November 4, 2008.

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(Amounts in Thousands, Except per Share Data)

17. Stockholders' Equity (Continued)

Earnings Per Share

Earnings per share for the years ended December 31, 2008, 2007 and 2006 is computed as follows (in thousands):

		2008		2007		2006

Numerator (Income)
*Basic Earnings*
Net income available to common stockholders		$	698,741	$	31,303	$	37,205
Effect of dilutive securities
	Income allocated to minority interest		77,484		2,699		5,072

*Dilutive net income available to stockholders*		$	776,255	$	34,002	$	42,277

Denominator (Weighted Average Shares)
*Basic Earnings:*
Shares available to common stockholders			63,136		61,511		39,636
Effect of dilutive securities:
OP/LTIP units			7,001		3,576		5,328

*Dilutive Shares*		$	70,137		65,087		44,964

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 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 condensed consolidated balance sheet to account for the change in the ownership of the underlying equity in the Operating Partnership. As of December 31, 2008 and December 31, 2007, minority interest related to the aggregate limited partnership units of 8,067,211 and 5,683,118, represented an 11.37% and 8.43% interest in the Operating Partnership, respectively.

Joint Ventures

In May 2006, the Company formed the Wakefield joint venture with Chain Bridge. On July 9, 2008, Wakefield sold a $100 million convertible preferred membership interest to Inland American Real Estate Trust, Inc. The joint venture is consolidated in the condensed consolidated financial statements and Inland American's and Chain Bridge's capital are treated as minority interests. Income allocated to

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18. Minority Interest (Continued)

minority interest for the year ended December 31, 2008 and December 31, 2007 was $4.6 million and $0.2 million, respectively.

In March 2007, the Company formed a joint venture with Monroe. On May 7, 2008, the Company completed a recapitalization of Monroe Capital, its middle-market corporate lending venture. Upon completion of the recapitalization transaction, the Company deconsolidated the venture. Monroe Capital's equity is no longer a component of minority interest. Loss allocated to minority interest prior to the recapitalization of Monroe Capital was $0.3 million.

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 and it monitors their financial condition; however, the Company currently does not anticipate that any of the counterparties will fail to meet their obligations because of their high credit ratings and financial support from the U.S. Government. For the year ended December 31, 2008, the Company's counterparties hold $30.2 million cash margin as collateral against its swap contracts.

In January 2008, the Company adopted SFAS 159 and elected the fair value option for its bonds payable and its liability to subsidiary trusts issuing preferred securities. Under SFAS 159, the changes in fair value of these financial instruments are now recorded in earnings. As a result of this election, the interest rate swap agreements associated with these debt instruments no longer qualify for hedge accounting, in accordance with SFAS 133 "Derivatives and Hedging Activity", since the underlying debt is remeasured with changes in the fair value recorded in earnings. The unrealized gains or losses accumulated in other comprehensive income, related to these interest rate swaps, will be reclassified into earning over the shorter of either the life of the swap or the associated debt with current mark-to-market unrealized gains or losses recorded in earnings. For the year ended December 31, 2008, the Company recorded, in earnings, a mark-to-market unrealized gain of $15.0 million reclassification from accumulated other comprehensive income for the non-qualifying interest rate swaps.

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(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, 2008 and 2007:

December 31, 2008		Notional Value					Fair Value

Interest rate swap		$	5,100	4.18	%	12/2010	$	(291	)
Interest rate swap			6,160	4.29		8/2012		(552	)
Interest rate swap			3,290	4.80		12/2013		(435	)
Interest rate swap			2,842	5.04		8/2018		(627	)
Interest rate swap			5,492	4.76		3/2013		(642	)
Interest rate swap			3,465	4.41		3/2010		(142	)
Interest rate swap			4,000	4.66		11/2015		(536	)
Interest rate swap			15,000	5.08		5/2016		(2,903	)
Interest rate swap			34,000	5.07		5/2017		(7,109	)
Interest rate swap			3,765	4.98		7/2015		(284	)
Interest rate swap			3,567	4.98		6/2015		(272	)
Interest rate swap			5,957	5.06		8/2015		(447	)
Interest rate swap			23,300	4.99		12/2012		(1,875	)
Interest rate swap			2,686	5.02		2/2016		(155	)
Interest rate swap			20,000	5.05		6/2013		(1,652	)
Interest rate swap			12,750	5.06		8/2017		(814	)
Interest rate swap			7,700	5.30		5/2010		(356	)
Interest rate swap			14,000	5.03		10/2015		(1,134	)
Basis Swap			201,255	1.53		3/2015		(16	)
Interest rate swap			323,505	5.53		6/2018		(32,398	)
Basis Swap			5,000	3.08		12/2015		2
Basis Swap			15,000	3.33		6/2018		28
Interest rate swap			9,873	4.81		8/2014		(830	)
Interest rate swap			3,000	4.89		6/2015		(255	)
Interest rate swap			60,000	5.52		6/2016		(5,291	)
Interest rate swap			16,200	5.52		6/2018		(991	)
Interest rate swap			49,404	5.63		7/2016		(3,872	)
Interest rate swap			30,000	5.46		9/2016		(6,517	)
Interest rate swap			25,000	5.12		9/2016		(4,841	)
Interest rate swap			37,500	5.10		4/2017		(7,504	)
Interest rate swap			35,000	5.59		7/2017		(3,793	)
Reverse interest rate swap			250,000	3.03		10/2009		4,648
Reverse interest rate swap			250,000	3.02		10/2009		4,641
Interest rate swap			11,400	4.78		9/2010		(687	)

	Total / weighted average	$	1,495,211	4.03			$	(77,902	)

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19. Risk Management and Derivative Activities (Continued)

December 31, 2007		Notional Value					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 / weighted average	$	856,307	5.35			$	(49,280	)

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(Amounts in Thousands, Except per Share Data)

19. Risk Management and Derivative Activities (Continued)

Credit Risk Concentrations

Concentrations 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. The Company has no one borrower or one tenant that generates 10% or more of its total revenue. However, approximately 29.0% of the Company's rental and escalation revenue for the year ended December 31, 2008 is generated from two tenants in the Company's healthcare net lease portfolio. The Company believes the remainder of its net lease portfolio is reasonably well diversified and does not contain any unusual concentration of credit risks.

20. Off Balance Sheet Arrangements

Equity Notes of Collateralized Loan Obligations

In December 2006, the Company acquired 40% of the residual equity interests in a collateralized loan obligation ("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 Company also acquired a 12.5% and 33.5% residual equity interest in two third party CLOs. The Company determined the CLOs to be variable interest entities under FIN 46(R)-6 and that it was not the primary beneficiary; therefore, the financial statements of the CLOs were not consolidated into the condensed consolidated financial statements of the Company. On May 7, 2008, the Company completed a recapitalization of Monroe Capital, its middle-market corporate lending venture and contributed its CLO equity interests into the recapitalized entity. See Note 1 for additional information.

21. Quarterly Financial Information (Unaudited)

The tables below reflect the Company's selected quarterly information for the Company for the years ended December 31, 2008, 2007 and 2006.

		Three Months Ended

		December 31, 2008		September 30, 2008		June 30, 2008			March 31, 2008
		(unaudited)
Total revenue		$	86,219	$	93,540	$	93,016		$	99,729
Income from continuing operations before minority interests			325,351		268,588		(15,968	)		223,793
Income from continuing operations			290,136		238,764		(13,308	)		200,504
Net income available to common stockholders			284,905		233,533		(18,539	)		195,273
Net income per share—basic/diluted			4.51	$	3.72	$	(0.30	)	$	3.14
Weighted-average shares outstanding
	basic		63,160,947		62,825,383		62,708,688			62,243,736
	diluted		70,422,832		70,229,958		70,192,538			69,589,079

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

21. Quarterly Financial Information (Unaudited) (Continued)

		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

		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

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 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

22. Segment Reporting (Continued)

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 joint venture (Wakefield Capital LLC) is an operating real estate segment is focused on senior living facilities located throughout the U.S. that are primarily leased under long-term triple-net leases. 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 Ohio, California, Indiana, Illinois, Kentucky, Kansas, North Carolina, Florida, Washington, Oregon, Wisconsin, Georgia, Oklahoma, Nebraska, Tennessee and Texas. Revenues from these assets are generated from rental income received from lessees of the facilities. The primary operating expense is interest costs related to financing the assets, The segment generates income from operations by leasing these facilities at a higher rate than the costs of owning and financing the assets.

On May 7, 2008, the Company completed a recapitalization of its middle-market corporate lending venture. Upon completion of the recapitalization transaction, the Company deconsolidated the venture and now uses the equity method of accounting for the investment. As a result, and as of May 7, 2008, the corporate loan segment is no longer a reportable segment of the Company. Its current investment is included in corporate.

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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, 2008 and 2007 (in thousands):

		Real Estate Debt		Operating Real Estate			Real Estate Securities		Healthcare Real Estate Joint Venture			Corporate Investments and Other(1)			Consolidated Total

Total revenues for the year ended
	December 31, 2008	$	171,792	$	60,551		$	62,524	$	64,909		$	12,728		$	372,504
	December 31, 2007	$	204,056	$	47,893		$	78,962	$	51,176		$	33,226		$	415,313
Income (loss) from continuing operations before minority interest for the year ended
	December 31, 2008		703,097		(5,784	)		7,639		38			96,774			801,764
	December 31, 2007		76,951		(8,545	)		15,538		3,933			(36,703	)		51,174
Net income (loss) for the year ended
	December 31, 2008		632,913		(5,207	)		6,876		(4,881	)		89,965			719,666
	December 31, 2007		76,951		(8,543	)		15,538		3,649			(39,759	)		47,836
Total assets as of
	December 31, 2008	$	2,266,115	$	515,577		$	259,326	$	732,513		$	162,495		$	3,936,026
	December 31, 2007	$	2,307,922	$	534,661		$	620,769	$	731,796		$	597,634		$	4,792,782

(1): Includes corporate level interest income, interest expense, other investments and general & administrative expenses.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

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, 2008, 2007 and 2006 is presented below:



The acquisition of available for sale securities with warehouse deposit	—		(21,898	)	(7,045	)
Real estate debt investment pay-down due from servicer	—		(33,842	)	—
Write-off of deferred financing cost in connection with FAS 159 implementation	34,605		—		—
Initial mark-to-market adjustment in connection with FAS 159 implementation	(340,835	)	—		—
Elimination of available for sale securities due to acquisition of consolidated liabilities	—		(5,390	)	—
Reduction of mortgage notes and loans payable due to acquisition of consolidated asset and release of mortgage escrow	—		1,485		—
Elimination of bonds payable due to acquisition of consolidated assets	—		(7,250	)	—
Allocation of purchase price of operating real estate to deferred cost	(272	)	(33,755	)	—
Minority interest buy-out	(1,566	)	—		—
Contribution of book value of assets to unconsolidated joint venture	112,097		—		—
Reclassification of prior-year construction in progress	(4,409	)	—		—
Write-off of deferred lease cost, tenant improvements and below market lease adjustments related to lease termination	(3,456	)	—		—
Application of tenant security deposit to receivable	1,990		—		—
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
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)

On January 20, 2009, the Company declared a cash dividend of $0.54688 per share of Series A preferred stock and $0.51563 per share of Series B preferred stock. The dividends were paid on February 16, 2009 to the stockholders of record as of the close of business on February 6, 2009.

On January 20, 2009, the Company declared a dividend of $0.25 per share of common stock. The dividends are payable on February 27, 2009 to the stockholders of record as of January 28, 2009. The common stock dividends will be paid in a combination of 40% cash and 60% common stock.

From January 1, 2009 to February 24, 2009 the Company repurchased approximately $40.0 million of its 7.25% exchangeable senior notes for $17.7 million. The Company will record a realized gain of $22.0 million in connection with the repurchase of its notes.

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SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION
As of December 31, 2008
(Amounts in Thousands, Except per Share Data)

Column A	Column B		Column C Initial Cost				Column D Cost Capitalized Subsequent To Acquisition					Column E Gross Amount at Which Carried at Close of Period						Column F				Column H		Column I

Location	Encumbrances		Land		Buildings & Improvements		Land		Buildings & Improvements			Land		Buildings & Improvements		Total		Accumulated Depreciation		Total		Date Acquired		Life on Which Depreciation is Computed
987 Eighth Avenue, NY, NY		—		—		2,645		—		—			—		2,645		2,645		882		1,763		Mar-99	Various
36 West 34 Street, NY, NY		—		—		4,440		11		65			11		4,505		4,516		1,106		3,410		Mar-99	Various
701 Seventh Avenue, NY, NY		—		—		3,246		—		—			—		3,246		3,246		2,294		952		Mar-99	Various
Los Angeles, CA		52,231		5,837		55,030		—		(5,580	)		5,837		49,450		55,286		6,531		48,755		Jan-05	40 years
Salt Lake Cit, UT		15,863		672		19,739		—		264			672		20,003		20,675		2,419		18,256		Aug-05	40 years
Auburn Hills, MI		11,447		2,980		8,607		—		—			2,980		8,607		11,587		1,295		10,292		Sep-05	40 years
Rancho Cordova, CA		10,970		3,060		9,360		—		—			3,060		9,360		12,420		1,106		11,314		Sep-05	40 years
Camp Hill, PA		25,279		5,900		19,510		—		—			5,900		19,510		25,410		2,663		22,747		Sep-05	40 years
Springdale, OH		19,208		3,030		20,469		—		1,992			3,030		22,461		25,491		2,100		23,391		Dec-05	40 years
Springdale, OH		16,586		2,470		17,821		—		—			2,470		17,821		20,291		1,815		18,476		Dec-05	40 years
Springdale, OH		15,686		1,500		17,690		—		—			1,500		17,690		19,190		1,801		17,389		Dec-05	40 years
Rockaway, NJ		17,341		6,118		15,664		—		28			6,118		15,692		21,810		1,331		20,479		Mar-06	40 years
Indianapolis, IN		28,472		1,670		32,306		—		—			1,670		32,306		33,976		2,487		31,489		Mar-06	40 years
Albemarle, NC		2,275		267		2,646		—		234			267		2,880		3,147		152		2,995		Oct-06	40 years
Blountstown, FL		3,702		378		5,069		—		—			378		5,069		5,447		312		5,135		Jul-06	40 years
Brevard, NC		1,725		145		2,100		—		267			145		2,367		2,512		120		2,392		Oct-06	40 years
Roxboro, NC		3,284		262		3,251		—		6			262		3,257		3,519		213		3,306		May-06	40 years
Charlotte, NC		2,500		350		2,826		—		418			350		3,244		3,594		172		3,422		Oct-06	40 years
East Arlington, TX		3,413		3,619		842		—		—			3,619		842		4,461		34		4,427		May-07	40 years
Elk Park, NC		3,000		250		4,215		—		—			250		4,215		4,465		127		4,338		Oct-07	40 years
Windsor House, NC		3,000		991		3,935		—		65			991		4,000		4,991		120		4,871		Oct-07	40 years
Yanceyville, NC		5,000		259		7,155		—		137			259		7,292		7,551		218		7,333		Oct-07	40 years
Wichita, KS		9,135		2,282		10,418		—		12			2,282		10,430		12,712		271		12,441		Dec-07	40 years
Edenton, NC		3,000		306		4,142		—		70			306		4,212		4,518		126		4,392		Oct-07	40 years
Haysville, NC		3,000		157		4,291		—		18			157		4,309		4,466		130		4,336		Oct-07	40 years
Clemmons, NC		3,250		337		2,876		—		1,578			337		4,454		4,791		134		4,657		Apr-07	40 years
Grove City		1,862		613		6,813		—		86			613		6,899		7,512		268		7,244		Jun-07	40 years
Franklin, WI		6,366		872		3,903		—		—			872		3,903		4,775		191		4,584		Jan-07	40 years
Denmark, WI		1,219		241		1,668		—		—			241		1,668		1,909		82		1,827		Jan-07	40 years
Green Bay, WI		3,173		638		3,508		—		—			638		3,508		4,146		172		3,974		Jan-07	40 years
Kenosha, WI		4,130		697		4,679		—		—			697		4,679		5,376		229		5,147		Jan-07	40 years
Madison, WI		4,275		764		4,485		—		—			764		4,485		5,249		220		5,029		Jan-07	40 years
Manitowoc, WI		5,017		811		5,008		—		—			811		5,008		5,819		245		5,574		Jan-07	40 years
Mcfarland, WI		3,833		703		4,793		—		—			703		4,793		5,496		235		5,261		Jan-07	40 years
Racine, WI		10,050		1,609		10,359		—		—			1,609		10,359		11,968		507		11,461		Jan-07	40 years

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SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
As of December 31, 2008
(Amounts in Thousands, Except per Share Data)

Column A	Column B		Column C Initial Cost				Column D Cost Capitalized Subsequent To Acquisition				Column E Gross Amount at Which Carried at Close of Period						Column F				Column H		Column I

Location	Encumbrances		Land		Buildings & Improvements		Land		Buildings & Improvements		Land		Buildings & Improvements		Total		Accumulated Depreciation		Total		Date Acquired		Life on Which Depreciation is Computed
Menomonmee, WI		6,075		1,011		4,837		—		—		1,011		4,837		5,848		237		5,611		Jan-07	40 years
Sheboygan, WI		9,300		1,542		10,141		—		—		1,542		10,141		11,683		496		11,187		Jan-07	40 years
Stevens Point, WI		8,487		1,837		12,458		—		—		1,837		12,458		14,295		610		13,685		Jan-07	40 years
Stoughton, WI		1,686		349		2,205		—		—		349		2,205		2,554		108		2,446		Jan-07	40 years
Wausau, WI		7,553		498		9,214		—		—		498		9,214		9,712		451		9,261		Jan-07	40 years
Two Rivers, WI		2,708		1,421		3,281		—		—		1,421		3,281		4,702		160		4,542		Jan-07	40 years
Wisconsin Rapids, WI		1,129		416		2,868		—		—		416		2,868		3,284		140		3,144		Jan-07	40 years
Lancaster, OH		2,605		294		5,938		0		262		294		6,200		6,494		242		6,252		Jun-07	40 years
Marysville, OH		1,673		2,218		5,017		—		106		2,218		5,123		7,341		195		7,146		Jun-07	40 years
Indianapolis, IN		2,251		210		2,511		—		—		210		2,511		2,721		97		2,624		Jun-07	40 years
Castletown, IN		6,813		677		8,077		—		—		677		8,077		8,754		311		8,443		Jun-07	40 years
Chesterfield, IN		4,075		815		4,204		—		—		815		4,204		5,019		162		4,857		Jun-07	40 years
Columbia City, IN		8,079		1,034		6,390		—		—		1,034		6,390		7,424		246		7,178		Jun-07	40 years
Dunkirk, IN		2,132		310		2,299		—		—		310		2,299		2,609		89		2,520		Jun-07	40 years
Fort Wayne, IN		4,895		1,478		4,409		—		—		1,478		4,409		5,887		170		5,717		Jun-07	40 years
Hartford City, IN		2,096		199		1,782		—		—		199		1,782		1,981		69		1,912		Jun-07	40 years
Hobart, IN		5,958		1,835		5,019		—		—		1,835		5,019		6,854		193		6,661		Jun-07	40 years
Huntington, IN		4,548		526		5,037		—		—		526		5,037		5,563		194		5,369		Jun-07	40 years
LaGrange, IN		519		47		584		—		—		47		584		631		22		609		Jun-07	40 years
LaGrange, IN		5,115		446		5,494		—		—		446		5,494		5,940		212		5,728		Jun-07	40 years
Middletown,IN		3,424		132		4,750		—		—		132		4,750		4,882		183		4,699		Jun-07	40 years
Mooresville, IN		1,530		631		4,187		—		—		631		4,187		4,818		161		4,657		Jun-07	40 years
Peru, IN		6,457		502		7,135		—		—		502		7,135		7,637		275		7,362		Jun-07	40 years
Plymouth, IN		5,278		128		5,538		—		—		128		5,538		5,666		213		5,453		Jun-07	40 years
Portage, IN		7,071		1,438		7,988		—		—		1,438		7,988		9,426		308		9,118		Jun-07	40 years
Rockport, IN		1,723		253		2,092		—		—		253		2,092		2,345		81		2,264		Jun-07	40 years
Rushville, IN		554		62		1,177		—		—		62		1,177		1,239		45		1,194		Jun-07	40 years
Rushville, IN		4,108		310		5,858		—		—		310		5,858		6,168		226		5,942		Jun-07	40 years
Sullivan, IN		891		102		441		—		—		102		441		543		17		526		Jun-07	40 years
Sullivan, IN		4,930		1,794		4,469		—		—		1,794		4,469		6,263		172		6,091		Jun-07	40 years
Syracuse, IN		3,514		125		4,564		—		—		125		4,564		4,689		176		4,513		Jun-07	40 years
Tipton, IN		8,114		1,102		5,155		—		5,670		1,102		10,825		11,927		237		11,690		Jun-07	40 years
Wasbash, IN		3,711		1,451		4,154		—		—		1,451		4,154		5,605		160		5,445		Jun-07	40 years
Wabash, IN		1,308		1,060		870		—		—		1,060		870		1,930		33		1,897		Jun-07	40 years
Wakarusa, IN		6,492		153		7,111		—		—		153		7,111		7,264		274		6,990		Jun-07	40 years
Wakarusa, IN		10,084		289		13,420		—		—		289		13,420		13,709		517		13,192		Jun-07	40 years
Warsaw, IN		3,658		319		3,721		—		—		319		3,721		4,040		143		3,897		Jun-07	40 years
Sullivan II		—		494		—		—		—		494		—		494		—		494		Jun-07	40 years
Huntington II		—		120		—		—		—		120		—		120		—		120		Jun-07	40 years

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SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
As of December 31, 2008
(Amounts in Thousands, Except per Share Data)

Column A	Column B		Column C Initial Cost				Column D Cost Capitalized Subsequent To Acquisition				Column E Gross Amount at Which Carried at Close of Period						Column F				Column H		Column I

Location	Encumbrances		Land		Buildings & Improvements		Land		Buildings & Improvements		Land		Buildings & Improvements		Total		Accumulated Depreciation		Total		Date Acquired		Life on Which Depreciation is Computed
Middletown II		—		52		—		—		—		52		—		52		—		52		Jun-07	40 years
Rockport II		—		366		—		—		—		366		—		366		—		366		Jun-07	40 years
Warsaw II		—		77		—		—		—		77		—		77		—		77		Jun-07	40 years
Raleigh, NC		3,250		156		3,859		—		2,546		156		6,405		6,561		193		6,368		Apr-07	40 years
Daly City, CA		3,463		3,297		1,377		—		426		3,297		1,803		5,100		52		5,048		Aug-07	40 years
Daly City, CA		7,937		—		10,707		—		1,279		—		11,986		11,986		1,092		10,894		Aug-07	40 years
Washington Crt Hse, OH		1,974		341		5,123		13		94		354		5,217		5,571		200		5,371		Jun-07	40 years
Harrisburg, IL		3,690		191		5,055		—		3		191		5,058		5,249		247		5,002		Jun-07	40 years
Clinton, OK		1,355		225		3,512		—		364		225		3,876		4,101		200		3,901		Jan-07	40 years
Olney, IL		4,243		109		5,418		—		24		109		5,442		5,551		268		5,283		Jan-07	40 years
Vandalia, IL		7,345		82		7,968		—		—		82		7,968		8,050		390		7,660		Jan-07	40 years
Paris, IL		6,836		187		6,796		—		6		187		6,802		6,989		333		6,656		Jan-07	40 years
Rantoul, IL		5,639		151		5,376		—		1		151		5,377		5,528		263		5,265		Jan-07	40 years
Robinson, IL		4,006		219		4,745		—		32		219		4,777		4,996		234		4,762		Jan-07	40 years
Cincinatti, OH		11,468		2,052		15,775		—		653		2,052		16,428		18,480		814		17,666		Jan-07	40 years
Memphis, TN		14,681		4,770		14,303		—		118		4,770		14,421		19,191		706		18,485		Jan-07	40 years
Charleston, IL		5,862		485		6,210		—		1		485		6,211		6,696		303		6,393		Jan-07	40 years
Caroltton, GA		2,988		816		4,225		—		61		816		4,286		5,102		213		4,889		Jan-07	40 years
Kingfisher, OK		3,994		128		5,495		—		267		128		5,762		5,890		284		5,606		Jan-07	40 years
Elk City, OK		4,384		143		6,720		—		365		143		7,085		7,228		358		6,870		Jan-07	40 years
Olney, IL		2,463		57		2,896		—		2		57		2,898		2,955		142		2,813		Jan-07	40 years
Effingham, IL		4,617		340		4,993		—		14		340		5,007		5,347		246		5,101		Jan-07	40 years
Fairfield, IL		6,418		153		7,897		—		11		153		7,908		8,061		387		7,674		Jan-07	40 years
Fullerton, CA		7,631		4,065		8,563		—		124		4,065		8,687		12,752		428		12,324		Jan-07	40 years
La Vista, NE		4,296		562		4,965		—		23		562		4,988		5,550		245		5,305		Jan-07	40 years
Mattoon,IL		6,954		227		7,532		—		7		227		7,539		7,766		369		7,397		Jan-07	40 years
Mattoon, IL		5,677		210		6,870		—		4		210		6,874		7,084		336		6,748		Jan-07	40 years
Stephenville, TX		6,187		507		6,458		13		17		520		6,475		6,995		317		6,678		Jan-07	40 years
Fullerton, CA		797		1,357		871		—		6		1,357		877		2,234		43		2,191		Jan-07	40 years
Rockford, IL		4,961		1,101		4,813		—		8		1,101		4,821		5,922		236		5,686		Jan-07	40 years
Effingham, IL		553		211		1,143		—		3		211		1,146		1,357		56		1,301		Jan-07	40 years
Santa Ana, CA		7,934		2,281		7,045		—		131		2,281		7,176		9,457		355		9,102		Jan-07	40 years
Sycamore, IL		8,509		816		9,896		—		24		816		9,920		10,736		486		10,250		Jan-07	40 years
Oklahoma City, OK		4,453		757		5,182		3		308		760		5,490		6,250		271		5,979		Jan-07	40 years
Garden Grove, CA		11,228		6,960		5,925		—		186		6,960		6,111		13,071		316		12,755		Jan-07	40 years
Weatherford, OK		4,519		229		5,599		—		326		229		5,925		6,154		296		5,858		Jan-07	40 years
Mt. Sterling, KY		7,629		599		10,001		—		2,419		599		12,420		13,019		484		12,535		Feb-07	40 years
Tuscola, IL		4,185		237		4,728		—		4		237		4,732		4,969		248		4,721		Jan-07	40 years
Burnsville, NC		3,000		521		4,670		—		576		521		5,246		5,767		147		5,620		Oct-07	40 years
Windsor, NC		—		397		—		—		—		397		—		397		—		397		Feb-07	40 years

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES
SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)
As of December 31, 2008
(Amounts in Thousands, Except per Share Data)

Column A	Column B		Column C Initial Cost				Column D Cost Capitalized Subsequent To Acquisition				Column E Gross Amount at Which Carried at Close of Period						Column F				Column H		Column I

Location	Encumbrances		Land		Buildings & Improvements		Land		Buildings & Improvements		Land		Buildings & Improvements		Total		Accumulated Depreciation		Total		Date Acquired		Life on Which Depreciation is Computed
Cherry Springs, NC		2,772		164		3,215		—		279		164		3,494		3,658		208		3,450		Jun-06	40 years
Bremerton, NC		6,720		964		8,156		—		115		964		8,271		9,235		437		8,798		Dec-06	40 years
Sterling, IL		2,009		129		5,603		—		597		129		6,200		6,329		420		5,909		May-06	40 years
Clinton, NC		2,324		283		5,084		—		253		283		5,337		5,620		361		5,259		May-06	40 years
Winter Garden, FL		4,930		1,693		5,805		—		2,666		1,693		8,471		10,164		425		9,739		May-06	40 years
Brevard, NC		2,087		328		2,532		—		28		328		2,560		2,888		166		2,722		May-06	40 years
Black Mountain, NC		4,873		468		5,786		—		—		468		5,786		6,254		356		5,898		Jul-06	40 years
Hillsboro, OR		33,300		3,954		39,193		—		41		3,954		39,234		43,188		2,002		41,186		Dec-06	40 years
Wendell, NC		2,332		212		2,279		—		615		212		2,894		3,106		160		2,946		May-06	40 years
Winston-Salem, NC		3,507		1,269		6,349		—		736		1,269		7,085		8,354		449		7,905		May-06	40 years
Gastonia, NC		1,839		345		1,392		—		105		345		1,497		1,842		92		1,750		May-06	40 years
Morris, IL		6,951		568		8,509		—		411		568		8,920		9,488		571		8,917		May-06	40 years
Williamston, NC		3,179		265		2,925		—		5		265		2,930		3,195		192		3,003		May-06	40 years
Chenita Group Home		—		73		249		—		—		73		249		322		6		316		Jan-08	40 years
Whispering Oaks		—		244		1,359		—		—		244		1,359		1,603		33		1,571		Jan-08	40 years
Twin Oaks Living		—		58		1,027		—		—		58		1,027		1,085		26		1,059		Jan-08	40 years
Twin Oaks Care		—		42		747		—		—		42		747		789		18		771		Jan-08	40 years
Salem Annex		—		11		90		—		—		11		90		102		2		100		Jan-08	40 years
Aurora, CO		33,329		2,650		35,786		24		—		2,674		35,786		38,460		2,376		36,084		Jul-06	40 years
North Attleboro, MA		4,725		—		5,445		—		—		—		5,445		5,445		377		5,068		Sep-06	40 years
Bloomingdale, IL		5,753		—		5,810		—		—		—		5,810		5,810		404		5,406		Sep-06	40 years
Concord Holdings, NH		8,404		2,145		9,216		—		—		2,145		9,216		11,361		651		10,710		Sep-06	40 years
Melville, NY		4,463		—		3,187		—		—		—		3,187		3,187		249		2,938		Sep-06	40 years
Millbury, MA		4,744		—		5,994		—		—		—		5,994		5,994		372		5,622		Sep-06	40 years
Wichita, KS		6,149		1,325		5,584		—		—		1,325		5,584		6,909		373		6,536		Sep-06	40 years
Keene, NH		6,791		3,033		5,919		—		—		3,033		5,919		8,952		406		8,546		Sep-06	40 years
Fort Wayne, IN		3,479		—		3,642		—		—		—		3,642		3,642		272		3,370		Sep-06	40 years
Portland, ME		4,824		—		6,687		—		—		—		6,687		6,687		667		6,020		Sep-06	40 years
Milpitas, CA		22,548		16,800		8,847		—		—		16,800		8,847		25,647		669		24,978		Feb-07	40 years
Columbus, OH		23,788		4,375		29,181		—		89		4,375		29,270		33,645		991		32,654		Nov-07	40 years
Fort Mill, SC		30,685		3,300		31,554		—		—		3,300		31,554		34,854		1,609		33,245		Mar-07	40 years
Reading, PA		19,153		3,225		21,792		—		—		3,225		21,792		25,017		840		24,177		Jun-07	40 years
		—		—		—		—		—		—		—		—		—		—

	$	910,620	$	160,773	$	1,011,560	$	64	$	22,072	$	160,837	$	1,033,632	$	1,194,469	$	67,469	$	1,127,000

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION

(Amounts in Thousands, Except per Share Data)

The changes in real estate for the year ended December 31, 2008, December 31, 2007 and December 31, 2006 are as follows:

	2008			2007			2006

Balance at beginning of period	$	1,172,580		$	483,045		$	205,708
Property acquisitions		3,989			688,766			286,919
Improvements		24,698			2,429			26
Impairments		(5,580	)		—			—
Assets held for sale		—			—			—
Retirements/disposals		(1,218	)		(1,660	)		(9,608	)

Balance at end of period	$	1,194,469		$	1,172,580		$	483,045

The changes in accumulated depreciation, exclusive of amounts relating to equipment, auto and furniture and fixtures, for the period ended December 31, 2008, December 31, 2007 and December 31, 2006 are as follows:

	2008			2007			2006

Balance at beginning of period	$	38,444		$	14,437		$	7,000
Depreciation for the period		30,243			24,032			9,203
Assets held for sale		—			—			—
Retirements/disposals		(1,218	)		(25	)		(1,766	)

Balance at end of period	$	67,469		$	38,444		$	14,437

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

SCHEDULE IV—LOANS AND OTHER LENDING INVESTMENTS

December 31, 2008 (in thousands)

Type	Description	Interest Rate	Final Maturity Date	Periodic Payment Terms(1)	Prior Liens		Principal Amount of Loans		Carrying Amount of Loans

Junior Participation—Float < 3% of total carrying amount	Office	LIBOR + 1.50–7.00	7/9/2010–4/15/2012	I/O	$	199,704	$	76,542	$	76,305	5
	Construction	2.23–4.28	4/1/2011–2/22/2013	I/O		267,052		56,519		56,164	3
	Land	5.70–22.50	3/1/2009–8/9/2010	I/O		148,077		58,462		58,086	2
	Retail	2.40	9/9/2009	I/O		49,000		10,000		10,000	1
Junior Participation—Fixed < 3% of total carrying amount	Office	6.13–8.44	10/1/2015–5/11/2016	I/O	$	178,837	$	29,000	$	24,349	2
Mezzanine—Fixed*	Office	10.85	6/15/2016	I/O		410,000		63,301		64,379	1
Mezzanine—Fixed < 3% of total carrying amount	Multifamily	11.30–18	10/1/2011–2/11/2012	I/O		221,892		63,762		62,371	6
	Office	8.00–15.00	4/1/2011–7/10/2016	I/O		50,537		8,165		8,236	2
	Healthcare	15.00	2/1/2009	I/O		4,059		611		611	1
	Hotel	10.00	12/1/2013	I/O		50,494		11,134		8,542	1
	Land	11.30–18.00	8/1/2009–4/1/2011	I/O		66,882		14,183		10,653	2
	Retail	10.53–17.25	4/1/2011–5/1/2017	I/O		216,159		37,467		37,646	2
Mezzanine—Float*	Hotel	LIBOR + 7.20	2/9/2012	I/O		741,205		88,978		88,374	1
	Retail	3.75	7/1/2011	I/O		936,368		103,526		102,121	1
Mezzanine—Float < 3% of total carrying amount	Condo	LIBOR + 5.75–8.00	1/9/2011–7/1/2011	I/O		68,954		27,624		27,520	3
	Hotel	2.50–4.50	10/12/2010–5/9/2012	I/O		2,459,800		122,229		121,826	4
	Office	6.36	7/9/2010	I/O		53,148		7,704		7,705	1
	Retail	1.75	8/9/2010	I/O		570,000		16,000		16,000	1
	Multifamily	3.5	4/1/2012	I/O		149,142		61,083		61,008	3
	Various	3.33	2/9/2012	I/O		287,311		44,000		39,213	1
Other—Fixed < 3% of total carrying amount	Other	5.53	6/25/2018	I/O		—		6,190		6,190	1
Other—Floating < 3% of total carrying amount	Multifamily	LIBOR + 1.50	3/23/2011	I/O		—		10,000		10,000	1
	Retail	1.75	12/16/2010	I/O		—		6,609		6,609	1
Whole Loan—Fixed < 3% of total carrying amount	Office	7.03–9.00	5/1/2011–7/10/2016	I/O		—		81,637		81,532	3
	Industrial	5.07–5.78	6/1/2015–8/1/2015	P&I		—		12,747		12,808	3
	Healthcare	9.00	8/30/2010	I/O		—		1,830		1,913	2
Whole Loan—Float*	Retail	LIBOR + 2.75%	10/1/2010	I/O		—		72,682		72,230	1
Whole Loan—Float < 3% of total carrying amount	Hotel	LIBOR + 2.00–4.00	12/1/2010–12/1/2013	I/O		—		104,600		104,205	5
	Industrial	1.65–2.70	6/1/2010–8/1/2012	I/O		—		51,085		50,942	4
	Land	2.75–5.84	4/1/2009–4/1/2012	I/O		10,975		103,643		103,205	7
	Multifamily	1.25–3.25	10/9/2009–10/1/2013	I/O		—		338,179		336,664	14
	Office	1.95–4.50	2/10/2009–7/1/2012	I/O		—		279,320		276,319	17
	Construction	3.50–5.65	10/1/2009–6/1/2012	I/O		12,230		42,826		42,160	4
	Various	3.00–3.90	2/06/2012–8/1/2012	I/O		—		61,908		61,584	2

Total					$	7,151,826	$	2,073,546	$	2,047,470	108

*: 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.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

SCHEDULE IV—LOANS AND OTHER LENDING INVESTMENTS

		2008			2007			2006

Balance at beginning of period		$	2,007,022		$	1,571,510		$	681,106
Additions during the year:
New loans and additional advances on existing loans			335,618			1,102,671			1,335,614
	Acquisition cost and (fees)		122			(9,986	)		(6,560	)
Premiums/(Discounts)			(3,219	)		(4,079	)		(5,730	)
	Amortization of acquisition costs, fees, premiums and discounts		9,928			8,430			2,287
Deductions:
	Collection of principal		302,001			661,524			435,207

Balance at end of period		$	2,047,470		$	2,007,022		$	1,571,510

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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): 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 detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.

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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, 2008 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, 2008.

(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, 2008. 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, 2008 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.

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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, 2008.

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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		Security Agreement dated as of August 21, 2003, among N-Star Real Estate CDO I Ltd., as Issuer, LaSalle Bank National Association, as trustee, and LaSalle Bank National Association, as collateral agent and as accountholder
	10.2		Security Agreement dated as of July 1, 2004, between N-Star Real Estate CDO II Ltd., as Issuer and LaSalle Bank National Association, as trustee and as accountholder
	10.3		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)
	10.4		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)
	10.5		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)

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Exhibit Number			Description of Exhibit

	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		Indenture dated as of March 10, 2005, among N-Star Real Estate CDO III Ltd., as Issuer, N-Star Real Estate CDO III Corp., as Co-Issuer and Wells Fargo Bank, National Association, as trustee
	10.11		Indenture dated as of June 14, 2005, among N-Star REL CDO IV Ltd., as Issuer, N-Star REL CDO IV Corp., as Co-Issuer, NS Advisors, LLC, as advancing agent and Wells Fargo Bank, National Association, as trustee
	10.12		Indenture dated as of September 22, 2005, among N-Star Real Estate CDO V Ltd., as Issuer, N-Star Real Estate CDO V Corp., as Co-Issuer and LaSalle Bank National Association, as trustee
	10.13		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)
	10.14		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)
	10.15		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)
	10.16		Indenture dated as of March 17, 2006, among N-Star REL CDO VI Ltd., as Issuer, N-Star REL CDO VI LLC, as Co-Issuer, NS Advisors, LLC, as advancing agent and Wells Fargo Bank, National Association, as trustee
	10.17		Indenture dated as of June 22, 2006, between N-Star Real Estate CDO VII Ltd., as Issuer, and LaSalle Bank National Association, as trustee
	10.18		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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Exhibit Number			Description of Exhibit

	10.19		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)
	10.20		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)
	10.21		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)
	10.22		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)
	10.23		Indenture dated as of December 7, 2006, among N-Star REL CDO VIII Ltd., as Issuer, N-Star REL CDO VIII LLC, as Co-Issuer, NS Advisors, LLC, as advancing agent and Wells Fargo Bank, National Association, as trustee
	10.24		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)
	10.25		Indenture dated as of February 28, 2007, between N-Star Real Estate CDO IX Ltd., as Issuer, and LaSalle Bank National Association, as trustee
	10.26		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)
	10.27		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)
	10.28		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)
	10.29		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)
	10.30		Fourth Amendment to the Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of May 24, 2007 (incorporated by reference to Exhibit 3.3 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed May 29, 2007)

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Exhibit Number			Description of Exhibit

	10.31		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)
	10.32		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)
	10.33		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))
	10.34		Indenture dated as of June 18, 2007, between NorthStar Realty Finance Limited Partnership, as Issuer, NorthStar Realty Finance Corp., as Guarantor, and Wilmington Trust Company, as Trustee (incorporated by reference to Exhibit 4.1 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed on June 22, 2007)
	10.35		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)
	10.36		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)
	10.37		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)
	10.38		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)
	10.39		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)
	10.40		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)
	10.41		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)

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Exhibit Number			Description of Exhibit

	10.42		Registration Rights Agreement relating to the 11.50% Exchangeable Senior Notes due 2013 of NRFC NNN Holdings, LLC, dated May 28, 2008 (incorporated by reference to Exhibit 4.2 to the NorthStar Realty Finance Corp. Registration Statement on Form S-3 (File No. 333-152545))
	10.43		Indenture dated as of May 28, 2008, among NRFC NNN Holdings, LLC, as Issuer, NorthStar Realty Finance Corp., NorthStar Realty Finance Limited Partnership, and NRFC Sub-REIT Corp., as Guarantors, and Wilmington Trust Company, as Trustee (incorporated by reference to Exhibit 4.1 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed on May 28, 2008)
	10.44		Fifth Amendment to the Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of May 29, 2008 (incorporated by reference to Exhibit 10.37 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008)
	10.45		Amendment No. 1 to Master Repurchase Agreement, dated as of October 7, 2008, by and among NRFC JP Holdings, LLC, and JP Morgan Chase Bank, N.A. (incorporated by reference to Exhibit 10.37 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008)
	10.46		Amended and Restated Guarantee Agreement, dated as of October 7, 2008, made by NorthStar Realty Finance Corp., in favor of JP Morgan Chase Bank, N.A. (incorporated by reference to Exhibit 10.38 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008)
	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 25, 2009.


	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 25, 2009
/s/ ANDREW C. RICHARDSON Andrew C. Richardson	Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)	February 25, 2009
/s/ LISA MEYER Lisa Meyer	Chief Accounting Officer (Principal Accounting Officer)	February 25, 2009
/s/ PRESTON BUTCHER Preston Butcher	Director	February 25, 2009
/s/ JUDITH A. HANNAWAY Judith A. Hannaway	Director	February 25, 2009
/s/ WESLEY D. MINAMI Wesley D. Minami	Director	February 25, 2009
/s/ LOUIS J. PAGLIA Louis J. Paglia	Director	February 25, 2009
/s/ FRANK V. SICA Frank V. Sica	Director	February 25, 2009

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Northstar Realty Finance (NRF) Inactive 10-K2008 FY Annual report

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