Northstar Realty Finance (NRF) 10-K 2009 FY 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, 2009
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 Class	Name of Each Exchange on Which Registered
Common Stock, $0.01 par value 8.75% Series A Cumulative Redeemable Preferred Stock, $0.01 par value 8.25% Series B Cumulative Redeemable Preferred Stock, $0.01 par value	New York Stock Exchange New York Stock Exchange 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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o    No o

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

          Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of "large accelerated filer", "accelerate filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer ý 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, 2009, was $193,490,533. As of February 24, 2010, the registrant had issued and outstanding 75,103,691 shares of common stock, par value $0.01 per share.

DOCUMENTS INCORPORATED BY REFERENCE

          Portions of the definitive proxy statement for the registrant's 2010 Annual Meeting of Stockholders (the "2010 Proxy Statement"), to be filed within 120 days after the end of the registrant's fiscal year ending December 31, 2009, 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	61
Item 2.	Properties	61
Item 3.	Legal Proceedings	63
Item 4.	Submission of Matters to a Vote of Security Holders	63
	PART II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	64
Item 6.	Selected Financial Data	66
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	69
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	102
Item 8.	Financial Statements and Supplementary Data	107
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	177
Item 9A.	Controls and Procedures	177
Item 9B.	Other Information	178
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	179
Item 11.	Executive Compensation	179
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	179
Item 13.	Certain Relationships and Related Transactions and Directors Independence	179
Item 14.	Principal Accountant Fees and Services	179
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	179

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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 13. 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 greatly reduced the availability of capital for many businesses, including those involved in the commercial real estate sector. As a result, most businesses focused on the commercial real estate sector have significantly reduced new investment activity until the macroeconomic outlook becomes clearer and market liquidity increases. It is unclear whether government programs will accelerate the return of debt capital into the real estate sector. In this environment we are focused on actively managing portfolio credit to preserve capital, generating and recycling liquidity from existing assets, reducing leverage by purchasing our issued debt at discounts to par and seeking access to investment capital through channels other than the public capital markets.

        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 business environment. Beginning in the second half of 2007 and continuing throughout 2009, 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. For financial information regarding our reportable segments, see Note 20, Segment Reporting, in our accompanying Consolidated Financial Statements for the year ended December 31, 2009.

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

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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 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. In addition, the early and active role of senior management in our investment process has been key to our strong credit track record and ability to be responsive to changing market conditions. As of December 31, 2009, our average funded loan size was $19.8 million and we managed 102 separate commercial real estate loans totaling $1.9 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 have 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 CDO transactions are flexible financing structures that have typically permitted 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 CDO is repaid when the underlying assets pay off. In addition to these CDO 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

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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.

        We 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 provides an opportunity for us to earn origination and other fees. We believe that the continued lack of available debt capital for commercial real estate and poor economic conditions may present opportunities to obtain attractive terms from both new directly-originated loans and from pre-existing loans acquired from third-party originators, who may be motivated to sell due to liquidity needs or who are exiting the business.

        At December 31, 2009 we held the following real estate debt investments (dollars in thousands):

December 31, 2009		Carrying Value(1)(2)		Allocation by Investment Type			Average Fixed Rate			Average Spread Over LIBOR			Number of Investments
Whole loans, floating rate		$	1,014,028		52.3	%			%		2.70	%%		52
Whole loans, fixed rate			62,371		3.2			6.89	%					7
Subordinate mortgage interests, floating rate			193,275		10.0						2.69	%		11
Subordinate mortgage interests, fixed rate			24,722		1.3			7.25	%					2
Mezzanine loans, floating rate			538,173		27.8						3.35	%		20
Mezzanine loan, fixed rate			90,558		4.7			8.89	%					7
Other loans—floating			8,610		0.4						2.24	%		2
Other loans—fixed			5,354		0.3			5.53	%					1
	Total/Weighted average	$	1,937,091		100.0	%		7.90	%		2.90	%		102

(1)

Approximately $1.3 billion of these investments serve as collateral for the Company's three commercial real estate CDO financings and the balance is financed under other borrowing facilities or unleveraged. The Company has future funding commitments, which are subject to certain conditions that borrowers must meet to qualify for such fundings, totaling $80.0 million related to these investments. The Company expects that a minimum of $51.9 million of these future fundings will be funded within the Company's existing CDO financings and require no additional capital from the Company. Based upon currently approved advance rates on the Company's credit and CDO facilities and assuming that all loans that have future fundings meet the terms to qualify for such funding; the Company's equity requirement on the remaining $28.1 million of future funding requirements would be approximately $9.1 million.

(2)

Includes $0.6 million of real estate debt investments, held for sale.

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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 commercial real estate debt securities, which we have financed by raising third-party capital in transactions structured as CDOs. These securities include CMBS, debt obligations of REITs, mortgage loans backed by credit-rated tenants (CTL transactions) and term debt transactions backed primarily by commercial real estate securities (CRE CDOs). Substantially all of our securities investments have explicit credit 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 were typically rated investment grade at the time of purchase. In addition to these securities, our CDOs may also invest in bank loans to REITs and real estate operating companies, 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. 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 generally carry similar credit ratings and 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, the more subordinated securities, in the case of CMBS, and the issuer's underlying equity, in the case of REIT securities, are designed to bear the first risk of default and loss. In addition to diversification by issuer and security within our CDOs, the underlying real estate portfolios represented by each such security are further diversified by number of properties, property type, geographic location, and tenant composition. We further seek to minimize credit risk by monitoring the real estate securities portfolios of our term debt issuances and the underlying credit quality of their holdings.

        The average rating of our securities investments was BB/Ba2 as of December 31, 2009. In addition, our securities portfolio had an average investment size of approximately $3.5 million as of December 31, 2009.

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.

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        CMBS.    CMBS, 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 and located in the United States. Underlying property types include regional malls, neighborhood shopping centers, office buildings, industrial or warehouse properties, hotels, apartment buildings, self-storage, and healthcare facilities. Loan collateral is held in a trust that issues securities in the form of fixed and floating-rate notes 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 "C". Any losses realized on defaulted loans are first absorbed by any non-rated classes, with losses then allocated in reverse sequential order to 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:    Substantially all of our long-term investments in REIT fixed income securities consist of non-amortizing senior unsecured notes 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. REIT senior unsecured notes typically incorporate protective financial covenants and have credit ratings issued by one or more rating agencies. We may also invest in junior unsecured debt, preferred equity or common equity of REITs.

        Commercial Real Estate Term Debt Transactions:    Commercial real estate term debt transactions (also referred to as CRE collateralized debt obligations or CRE CDO's) are debt obligations typically collateralized by a combination of CMBS and REIT unsecured debt. CRE CDOs may also include real estate whole loans, B-notes and other asset-backed securities as part of their underlying collateral. These assets are held within a special-purpose vehicle that issues rated liabilities and equity in private securities offerings. We have used the CRE CDO markets to finance a majority of our real estate loans and securities investments.

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 age, 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.

        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, as well as loans selected for higher risk characteristics such as low debt service coverage ratios, properties located in weaker markets, or properties that exhibit greater cash flow volatility such as hotels. We also review a random sample of small to medium sized loans in the pool. The loans in the sample are typically analyzed based on available information underwriter reports, servicer reports and third-party information providers, 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 assumption 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

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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 decisions are 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.

        At December 31, 2009, we held the following real estate security investments:

December 31, 2009		Carrying Value		Estimated Fair Value
CMBS		$	507,895	$	249,583
N-Star CDO notes			51,731		5,875
Third party CDO notes			25,646		9,515
REIT debt			29,036		30,580
N-Star CDO equity			72,926		31,928
Trust preferred securities			15,000		8,739
	Total	$	702,234	$	336,220

        The first four CDO financing transactions 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 CDO notes, we would show our interest as a $20 available for sale security on our balance sheet. N-Star VII, our fifth securities CDO financing, is accounted for as an on-balance sheet financing.

        A summary of the collateral and CDO notes for our off-balance sheet CDO financings at December 31, 2009 is provided below.

		Collateral—December 31, 2009									Term Notes—December 31, 2009
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 12/31/09			Stated Maturity
N-Star I(2)			8/21/03	$	282,846		6.59	%		4.26	$	266,389		5.84	%		8/01/2038
N-Star II			7/01/04		302,937		6.16			5.10		264,795		5.45			6/01/2039
N-Star III			3/10/05		438,714		5.58			3.96		353,086		4.02			6/01/2040
N-Star V			9/22/05		618,508		5.36			6.63		456,319		4.41			9/05/2045
	Total			$	1,643,005		5.78	%		5.23	$	1,340,589		4.80	%

(1)

Includes only notes held by third parties.

(2)

We have an 83.3% interest.

        In June 2009, the Financial Accounting Standards Board ("FASB") amended the guidance for determining whether an entity is a variable interest entity, or VIE, and requires an analysis of quantitative rather than qualitative factors to determine the primary beneficiary of a VIE. The guidance requires an entity to consolidate a VIE if (i) it has the power to direct the activities that most significantly impact the VIE's economic performance and (ii) the obligation to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be significant to the VIE. The pronouncement is effective for fiscal years beginning after November 15, 2009. As a result of the

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implementation of this pronouncement, we will consolidate four of our off balance sheet CDO financings. At December 31, 2009, the par value of the assets and liabilities of the four off-balance sheet CDO financings that will be consolidated is approximately $1.64 billion and $1.34 billion, respectively. We have elected the fair value option of accounting for the assets and liabilities of these entities upon consolidation. We are in the process of determining the fair market value of the CDO financings assets and liabilities that will be consolidated upon implementation of this pronouncement.

        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 2009 we made no new net lease investments because opportunities in commercial real estate fixed income securities and repurchases of our debt were more attractive. Also, our increased cost of capital relative to prior years continues to make investing in net lease assets uneconomical. Our primary focus in this area during 2009 was to actively manage our 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

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well-located, general purpose real estate with flexible design characteristics can maintain or increase in value when re-leasing opportunities arise.

Healthcare Net Lease

        We own and manage a portfolio of healthcare net lease assets, a majority of which are assisted living facilities with the remainder comprised of skilled nursing facilities, a medical campus and a medical office building. 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. We initially entered the healthcare net lease business through a joint venture, and in 2009 acquired our partner's interest and hired a senior management team that was formerly employed by our partner who also managed the assets. Our management team has significant experience investing in a wide variety of healthcare properties, ranging from low-acuity assisted living facilities to higher-acuity skilled nursing facilities. We have historically 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 management team that is focused on this sector provides us a competitive advantage because of its extensive relationships in the industry and its knowledge of and experience in operating, owning and lending to healthcare-related assets. On December 7, 2009 we filed a registration statement with the Securities and Exchange Commission, or SEC, to take a substantial portion of our healthcare real estate business public in a newly-formed REIT called NorthStar Healthcare Investors, Inc. An affiliate of NorthStar intends to be the manager of this company and we believe that, if successful, an IPO would enable this business to access capital at a lower cost than can be currently raised by our company.

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.

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Our Net Lease Investments

        At December 31, 2009, we held the following net lease investments (dollars in thousands):

Type of Property		Number of Properties		Carrying Value		Percentage of Aggregate Carrying Value
Healthcare			100	$	604,633		60.3
Office			14		261,796		26.1
Retail			12		54,946		5.5
Investment in unconsolidated joint venture-office/flex(1)			3		23,880		2.4
Office/Flex			1		30,510		3.0
Distribution center			1		23,632		2.4
Retail/Office			1		3,385		0.3
	Total		132	$	1,002,782		100.0

(1)

Our investment in the unconsolidated net lease joint venture is $6.9 million.

NRF Capital Markets

        In 2009, we began building a wholesale broker-dealer in Denver, CO, NRF Capital Markets, to raise capital for newly-formed companies sponsored by us and having investment strategies focused on the commercial real estate sector. Initially, we intend to enter into selling agreements with independent retail brokerage networks in order to raise equity capital for these new businesses. We are currently raising equity capital for NorthStar Income Opportunity REIT I, Inc. via a private placement, and have filed a registration statement with the SEC for NorthStar Real Estate Income Trust, Inc. Both companies intend to invest primarily in commercial real estate debt and fixed income securities.

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.

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        We closely monitor our net lease assets to ensure, among other things, 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. We also physically inspect these assets regularly so that we can ensure that the tenants are maintaining the assets as required.

        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 2010 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 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 large amounts of corporate equity capital at attractive levels and we are observing continued weakening performance levels in our asset base due to poor economic and employment conditions 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 using equity capital raised primarily from sources other than from our balance sheet. 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. In addition, 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 in the asset-backed debt markets, 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 remain closed for most types of real estate loans 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.

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        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 approximately $1.0 billion of aggregate net proceeds. We also raised approximately $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 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 CRE CDO transaction. More recently, we have used a term facility with an institutional lender to complement CDO financing to fund our assets on a longer term basis.

        In a CDO financing, 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 would sell all of the investment-grade rated CDO bonds, and retain the non-investment grade classes as our "equity" interest in the financing. CDO financings provided low cost financing because the most senior bond classes were rated "AAA/Aaa" by the rating agencies.

        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 and with the exception more recently of the publicly-traded equity REIT stock and bond markets, there has been very little liquidity in the commercial real estate markets due to issues precipitated by the subprime residential lending industry. The CMBS markets, an important source of debt capital for real estate investors, have been virtually shut down. During 2009, credit spreads on high quality CMBS securities significantly decreased compared to 2008 due in part to the Term Asset-Backed Securities Loan Facility, or TALF, program. In addition, three large single-borrower securitizations were completed near the end of 2009 and many experts believe the CMBS markets should continue to slowly heal throughout 2010. Many banks and life companies are beginning to re-assemble commercial real estate lending platforms in anticipation of the CMBS market re-opening. Furthermore, high quality equity REITs that invest directly in real estate were able to access the corporate bond markets at attractive prices in 2009. While we believe that lending conditions will remain difficult through 2010, we also believe that in the future the asset-backed markets will again provide attractive match-funded debt capital. We believe that our credit track record and our

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reputation with bank lenders and the asset-backed markets could enable us to develop alternative sources of debt financing.

Hedging Strategy

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

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

Regulation

        We are subject, in certain instances, to supervision and regulation by state and federal governmental authorities and may be subject to various laws and judicial and administrative decisions imposing various requirements and restrictions, which, among other things: (1) regulate credit granting activities; (2) establish maximum interest rates, finance charges and other fees we can charge our customers; (3) require disclosures to customers; (4) govern secured transactions; and (5) set collection, foreclosure, repossession and claims-handling procedures and other trade practices. Although most states do not regulate commercial finance, certain states impose limitations on interest rates and other charges and on certain collection practices and creditor remedies and require licensing of lenders and financiers and adequate disclosure of certain contract terms. We are also required to comply with certain provisions of the Equal Credit Opportunity Act that are applicable to commercial 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 of 1940, as amended (the "Investment Company Act"). We have been, and intend to continue to rely on current interpretations of the staff of the SEC 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 SEC. 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 Internal Revenue Code of 1986, as amended, or 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.

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        We expect our subsidiary, NRF Capital Markets, to be registered as a broker-dealer in all 50 states. Much of the regulation of broker-dealers has been delegated to self-regulatory organizations, or SROs, principally FINRA, that adopt and amend rules, subject to approval by the SEC, which govern their members and conduct periodic examinations of member firms' operations. The SEC, SROs and state securities commissions may conduct administrative proceedings that can result in censure, fine, suspension or expulsion of a broker-dealer, its officers or employees. Such administrative proceedings, whether or not resulting in adverse findings, can require substantial expenditures and can have an adverse impact on the reputation of a broker-dealer.

        When NRF Capital Markets becomes a registered broker-dealer, it will be required by federal law to belong to the Securities Investor Protection Corporation, or SIPC. When the SIPC fund falls below a certain amount, members are required to pay annual assessments to replenish the reserves. In anticipation of inadequate SIPC fund levels during the current economic environment, our broker-dealer subsidiary will be required to pay 0.25% of net operating revenues as a special assessment. We expect to begin to accrue to satisfy this special assessment in mid 2010. The SIPC fund provides protection for securities held in customer accounts up to $500,000 per customer, with a limitation of $100,000 on claims for cash balances.

        In addition, as a registered broker-dealer and member of FINRA, NRF Capital Markets will be subject to the SEC's Uniform Net Capital Rule 15c3-1, which is designed to measure the general financial integrity and liquidity of a broker-dealer and requires the maintenance of minimum net capital. Net capital is defined as the net worth of a broker-dealer subject to certain adjustments. In computing net capital, various adjustments are made to net worth that exclude assets not readily convertible into cash. Additionally, the regulations require that certain assets, such as a broker-dealer's position in securities, be valued in a conservative manner so as to avoid over-inflation of the broker-dealer's net capital.

        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 in the past 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 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, 2009, NorthStar had 54 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.

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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 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."

Risks Related to Our Businesses

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

        U.S. macroeconomic, financial and real estate sector conditions have remained poor since 2007, when the subprime residential lending and single family housing market collapse quickly spread broadly into the capital markets. The resulting virtual shutdown of the credit and equity markets pushed the U.S. economy into recession, with the unemployment rate increasing from a low of 4.4% in 2007 to 10.0% at December 31, 2009. Several major financial institutions failed or had to be rescued in 2008, and 140 banks failed in 2009. 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 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 meaningfully in the near future. A worsening of these conditions would likely 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.

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

        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 issuances of common equity, preferred equity, trust preferred securities and convertible senior notes. With capital market conditions negatively impacted 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 with "legacy" assets, continue to find it difficult 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 the Internal Revenue Code of 1986, as amended, requires that a REIT distribute 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 Code.

The WA Secured Term Loan that we use to finance our investments may require us to pay down a portion of the funds advanced, which could significantly impact our liquidity position.

        We have used credit facilities to finance some of our investments. Although our secured credit facility with Wells Fargo, or the WA Secured Term Loan, which is our primary credit facility, is not subject to margin calls based on credit spread widening, if the commercial real estate loans pledged by us suffer uncured collateral defaults, we will be required by Wells Fargo to pay down a portion of the funds advanced. In a difficult economic environment, we would generally expect performance of the commercial real estate loans that serve as collateral for our WA Secured Term Loan to decline, resulting in a higher likelihood that Wells Fargo would require partial repayment from us, which could be substantial. Additionally, the WA Secured Term Loan requires $15 million semi-annual amortization payments irrespective of collateral performance. Posting additional collateral to support our WA Secured Term Loan 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, Wells Fargo can accelerate our indebtedness and foreclose upon the assets securing the WA Secured Term Loan, which could have a material adverse effect on our business and operations.

Wells Fargo may choose to not fund future commitments.

        Our business plan and liquidity projections assume that Wells Fargo will fund a certain portion of our future funding obligations under the WA Secured Term Loan to borrowers under our commercial real estate loans. At December 31, 2009, we expected this amount to be $19.0 million. Nonetheless, Wells Fargo retains discretion over its 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. 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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The WA Secured Term Loan contains restrictive covenants relating to our operations.

        The WA Secured Term Loan contains covenants that, among other things, limit the amount of leverage that we may employ, require that we maintain certain interest coverage ratios, require certain minimum tangible net worth, and require that we maintain a certain amount of liquidity. At December 31, 2009, we were in compliance with all debt covenants under our borrowings. However, if economic conditions remain difficult or 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 economic environment will make maintaining compliance with the WA Secured Term Loan's covenants more difficult. If we are not in compliance with any of our covenants, there can be no assurance that Wells Fargo would waive such non-compliance in the future and any such non-compliance could lead to an event of default and could have a material adverse effect on us.

If we are unable to extend or renew the WA Secured Term Loan, our results of operations, financial condition and business could be significantly harmed.

        The WA Secured Term Loan, which had $332.1 million outstanding as of December 31, 2009 and is fully recourse to us, matures in October 2012. If we are unable to extend or renew the WA Secured Term Loan in 2012, our results of operations, financial condition and business could be significantly harmed. If we fail to extend or renew the WA Secured Term Loan we may be required to repay the facility in full, which we may be unable to do.

Our WA Secured Term Loan and exchangeable senior notes are recourse obligations to us.

        As of December 31, 2009, the amount outstanding under our WA Secured Term Loan was $332.1 million and the amount outstanding under our exchangeable senior notes was $126.0 million. These amounts are full recourse obligations of the company. If we are not able to extend, refinance or, in the case of the exchangeable senior notes, repurchase the indebtedness, we may not have the ability to repay these amounts when they come due. Our inability to repay any of this indebtedness could cause the acceleration of the indebtedness, which would have a material adverse effect on our business.

Our WA Secured Term Loan and exchangeable senior notes contain cross-default provisions.

        Our WA Secured Term Loan 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.

In addition to risks associated with the United States economy generally, we are subject to risks associated with economic conditions in Germany with respect to one of our loans which is financed on our WA Secured Term Loan.

        We own a €72.5 million participation in a mezzanine loan that is collateralized by a German retail portfolio that is net leased to a single tenant that has filed for bankruptcy in Germany, or the German Loan. Accordingly, economic conditions in Germany could have a direct impact on the German Loan. The German Loan is also pledged as collateral for our WA Secured Term Loan. There are ongoing negotiations relating to a restructuring of the German Loan; however, there can be no assurance that the restructuring will be successful and that the German Loan will not default in the future. As with all of the loans that serve as collateral for our WA Secured Term Loan, if a default on the German Loan went uncured, we could be required by Wells Fargo to pay down all or a portion of the funds advanced

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against the German Loan. If we do not have sufficient liquidity to meet such requirements, Wells Fargo can accelerate our indebtedness and foreclose upon the assets securing the WA Secured Term Loan, which could have a material adverse effect on our business and operations.

Our CDOs 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 CDOs 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 CDOs. 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 elect to buy assets out of our CDOs in order to preserve cash flow, which could have a significant impact on our liquidity. As of December 31, 2009 we are in compliance with all of the OC and IC tests in our CDOs. 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.

The reinvestment period for certain of our CDOs will expire in 2010.

        The reinvestment periods, which allow us to reinvest principal payments on the underlying assets into qualifying replacement collateral, for our N-Star Real Estate CDO III, N-Star REL CDO IV and N-Star Real Estate CDO V, will expire in April 2010, July 2010 and September 2010, respectively. The CDO notes have a stated maturity in April 2040, July 2040 and September 2045, respectively, although the actual life of the notes are expected to be substantially shorter. Since we will be unable to reinvest principal in these CDOs, principal repayments will pay down the senior-most notes, which will de-lever the CDO. Additionally, our ability to reinvest has been instrumental in maintaining OC and IC ratios. Following the conclusion of the reinvestment period in a CDO, our ability to maintain the OC and IC ratios will be negatively impacted.

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

        The subordinate classes of bonds and equity notes that we retain in the CDOs that we have issued represent leveraged investments in the underlying assets. Various classes of securities participate in the income stream in CDOs 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 CDO 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

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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.

A payment default on bonds underlying one of our CDOs could have a compounding affect on our other CDOs.

        Certain of our CDOs have invested in bonds issued by other CDOs that we created and manage. Such investments expose us to increased risk, as potential defaults in any particular CDO would also affect other CDOs that own bonds in the CDO that experiences defaults. Defaults across certain of our CDOs could, therefore, have a material impact on the cash flow of other CDOs that we own that may not have otherwise had such an impact.

We are unable to complete additional CDOs 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 CDOs 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 CDOs. Issuing CDOs was a critical part of our overall business plan and we currently believe that CDOs 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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Loan restructurings may reduce our net interest income.

        As a result of current adverse economic conditions and difficult conditions that persist in the commercial real estate market, we continue to restructure loans. In order to preserve long-term value, we are often required to lower the interest rate on our loans in connection with a restructuring, which ultimately reduces our net interest income. We expect loan restructurings where we reduce interest rates to continue, which will have an adverse impact on our net interest margin.

Our borrowers are increasingly unable to achieve their business plans due to the economic environment and strain on commercial real estate, which has caused 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 high 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 replenish 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 commercial real estate loans will likely decrease in the current economic environment, making it more difficult for borrowers to meet their payment obligations to us. In fact, many of our borrowers may only be meeting their obligations to us because of the reserves we set up at the outset of our loans. We expect that in the future many of the reserves will run out and some of our borrowers will 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, which was the case in 2008 and early 2009, the economic value of 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 economic value of the loan may be negatively impacted by the incremental interest foregone from the widened credit spread. Although credit spreads tightened in the second half of 2009 and into early 2010, 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

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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 2010, we will likely experience significant increases in loan loss reserves, potential defaults and asset impairment charges in 2010. Borrowers may also be less able to pay principal and interest on loans if the economy does not strengthen 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 when commercial real estate credit has been significantly curtailed 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. Our estimates and judgments may not be correct and, therefore, 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:

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macroeconomic conditions;

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tenant mix;

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success of tenant businesses;

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property management decisions;

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property location and condition;

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property operating costs, including insurance premiums, real estate taxes and maintenance costs;

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competition from comparable types of properties;

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changes in governmental rules, regulations and fiscal policies;

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changes in laws that increase operating expenses or limit rents that may be charged;

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any need to address environmental contamination at the property;

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the occurrence of any uninsured casualty at the property;

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changes in national, regional or local economic conditions and/or specific industry segments;

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declines in regional or local real estate values;

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declines in regional or local rental or occupancy rates;

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increases in interest rates;

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real estate tax rates and other operating expenses;

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acts of God;

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social unrest and civil disturbances;

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terrorism; and

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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.

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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.

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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.

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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.

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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,

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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 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, including subordinate securities, which entail certain risks.

        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 multifamily 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 2010. Furthermore, a weakening rental and leasing 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. 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.

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The mortgage-backed securities in which we may invest are subject to the risks of the mortgage securities market as a whole and risks of the securitization process.

        The value of mortgage-backed securities may change due to shifts in the market's perception of issuers and regulatory or tax changes adversely affecting the mortgage securities market as a whole. Mortgage-backed securities are also subject to several risks created through the securitization process. Subordinate mortgage-backed securities are paid interest only to the extent that there are funds available to make payments. To the extent the collateral pool includes delinquent loans, there is a risk that the interest payment on subordinate mortgage-backed securities will not be fully paid. Subordinate mortgage-backed securities are also subject to greater credit risk than those mortgage-backed securities that are more highly rated.

Interest shortfalls on the CMBS that we own could have an adverse impact on the cash flow in our securities CDOs.

        Our CMBS securities are subject to the risk of interest payment shortfalls on the CMBS that we own. These interest shortfalls may arise from underlying loan defaults, appraisal reductions, special-servicer workout fees, and realized losses on liquidation of foreclosed properties. We attempt to mitigate these losses by purchasing bonds with sufficient credit enhancement to avoid such shortfalls. However, given continuing pressure on commercial real estate occupancy levels and rental rates, there can be no assurance that such interest shortfalls will not continue to increase in the future.

We may not control the special servicing of the mortgage loans included in the CMBS in which we invest and, in such cases, the special servicer may take actions that could adversely affect our interests.

        With respect to each series of CMBS in which we invest, overall control over the special servicing of the related underlying mortgage loans may be held by a directing certificateholder, which is appointed by the holders of the most subordinate class of CMBS in such series. We ordinarily do not have the right to appoint the directing certificateholder. In connection with the servicing of the specially serviced mortgage loans, the related special servicer may, at the direction of the directing certificateholder, take actions that could adversely affect our interests.

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 virtually 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 couple of years 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 investors' increased yield requirements has 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 estate generally, have had a negative impact on CMBS and have significantly decreased the value of most of the CMBS that we own from the time we purchased the CMBS, other than, for the most part, CMBS purchased in 2009.

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 changed their ratings methodologies for all securitized asset classes, including commercial real estate, in light of questionable ratings previously assigned to

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residential mortgage portfolios. Combined with a poor economic outlook, their reviews have resulted in, and are continuing to result in, large amounts of ratings downgrade actions for CMBS, negatively impacting market values of CMBS and in many cases negatively impacting our CDOs. 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 impact our CDOs and may have an adverse affect on our financial condition.

Market conditions in 2008 and early 2009, and the risk of continued market deterioration, have caused and may continue to cause uncertainty in valuing our real estate securities.

        The market volatility and the lack of liquidity in 2008 and 2009 has made the valuation process pertaining to certain of our assets extremely difficult, particularly our CMBS assets for which there is limited 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. Although the current market environment has improved with some new issuances and increased secondary trading of CMBS, there continues to be uncertainty in the market and trading is limited. 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.

        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:

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limited liquidity in the secondary trading market;

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substantial market price volatility resulting from changes in prevailing interest rates and real estate values;

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

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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;

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•

the possibility that earnings of the REIT may be insufficient to meet its debt service and distribution obligations;

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the declining creditworthiness and potential for insolvency of the issuer during periods of rising interest rates, declining real estate values and economic downturns;

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rating agency credit rating downgrades negatively impacting value of securities; and

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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:

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national, state and local economic conditions;

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real estate conditions, such as an oversupply of or a reduction in demand for real estate space in an area;

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the perceptions of tenants and prospective tenants of the quality, convenience, attractiveness and safety of our properties;

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competition from comparable properties;

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the occupancy rate of, and the rental rates charged at, our properties;

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the ability to collect on a timely basis all rent from tenants;

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the effects of any bankruptcies or insolvencies of tenants;

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the expense of re-leasing space;

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changes in interest rates and in the availability, cost and terms of mortgage funding;

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the impact of present or future environmental legislation and compliance with environmental laws;

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cost of compliance with the Americans with Disabilities Act of 1990, or ADA;

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adverse changes in governmental rules and fiscal policies;

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civil unrest;

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acts of nature, including earthquakes, hurricanes and other natural disasters (which may result in uninsured losses);

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acts of terrorism or war;

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adverse changes in zoning laws; and

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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

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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.

        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.

        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

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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.

We are named as a defendant in a lawsuit and the adverse resolution of this matter could have a material adverse effect on our financial condition and results of operations.

        One of our net lease investments was comprised of three office buildings totaling 257,000 square feet located in Chatsworth, CA and was 100% leased to Washington Mutual Bank, FA ("WaMu"). The tenant vacated the buildings as of March 23, 2009, and the leases (the "WaMu Leases") were disaffirmed by the FDIC. In the third quarter of 2009 the lender, GECCMC 2005-CI Plummer Office Limited Partnership (the "Lender"), foreclosed on the property. On August 10, 2009, the Lender filed a compliant against NRFC NNN Holdings, Inc. ("NNN") and NRFC Sub Investor IV, LLC, which are our subsidiaries, in the Superior Court of the State of California, County of Los Angeles. In the complaint, the Lender alleges, among other things, that the WaMu Loan is a recourse obligation of NNN due to the FDIC's disaffirmance of the WaMu Leases. An adverse resolution of this matter could result in a $42.9 million judgment against us less the value of the property, which would have a material adverse effect on our liquidity and financial condition.

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 generally 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 CDOs, 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.

Our joint venture partners could take actions that decrease the value of an investment to us and lower our overall return.

        We may enter into joint ventures with third parties to make investments. We may also make investments in partnerships or other co-ownership arrangements or participations. Such investments may involve risks not otherwise present with other methods of investment, including, for example, the following risks:

•

that our co-venturer or partner in an investment could become insolvent or bankrupt;

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that such co-venturer or partner may at any time have economic or business interests or goals that are or that become inconsistent with our business interests or goals; or

•

that such co-venturer or partner may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives.

        Any of the above might subject us to liabilities and thus reduce our returns on our investment with that co-venturer or partner.

We are subject to risks associated with owning 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 currently managed by a third party. 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

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liquidation. We do not 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.

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 CDOs. If a CDO has floating rate assets, our earnings will generally increase with increases in floating interest rates to the extent such increases do not cause distress for borrowers and our underlying assets are able to provide sufficient cash to pay such higher rates. Conversely, our earnings will generally 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, 2009, a hypothetical 100 basis point increase in interest rates applied to our variable rate assets would increase our annual interest income by approximately $29.5 million offset by an increase in our interest expense of approximately $20.1 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:

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losses on a hedge position will reduce the cash available for distribution to stockholders;

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losses may exceed the amount invested in such instruments;

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a hedge may not perform its intended use of offsetting losses on an investment;

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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

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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.

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        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 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

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

        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, which we refer to as our Healthcare venture. In 2008, we brought another equity partner, Inland American Real Estate Trust, Inc., or Inland American, into the Healthcare venture by selling a $100 million preferred partnership interest to Inland American, convertible into an approximate 42% interest in the venture. In December 2009, we bought Chain Bridge Capital's interest in the Healthcare venture and retained certain principals of Chain Bridge who have extensive experience owning and investing in senior living facilities, or SNLs, and assisted living facilities, or ALFs.

        In December 2009, we filed a registration statement on Form S-11 for NorthStar Healthcare Investors, Inc., or NRH, a REIT containing a majority of our net leased healthcare real estate properties. We expect that if NRH goes public, it would also be managed by us and we would earn a management fee for our services.

        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.

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Our failure or the failure of our operators to comply with licensing and certification requirements, the requirements of governmental reimbursement programs such as Medicare or Medicaid, fraud and abuse regulations or new legislative developments may materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

        We or our operators, as the case may be, are subject to numerous federal, state and local laws and regulations that are subject to frequent and substantial changes (sometimes applied retroactively) resulting from legislation, adoption of rules and regulations, and administrative and judicial interpretations of existing laws. The ultimate timing or effect of any changes in these laws and regulations cannot be predicted. With respect to senior housing facilities held and operated through net-lease transaction structures, we have no direct control over our operators' ability to meet the numerous federal, state and local regulatory requirements. Failure to comply with these laws, requirements and regulations may materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders. In particular:

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Licensing and Certification.  We, our operators and our senior housing facilities are subject to regulatory and licensing requirements of federal, state and local authorities and are periodically surveyed by them to confirm compliance. Failure to obtain licensure or loss or suspension of licensure or certification may prevent a facility from operating or result in a suspension of reimbursement payments until all licensure or certification issues have been resolved and the necessary licenses or certification are obtained or reinstated. Our senior housing facilities may require governmental approval in the form of a certificate of need that generally varies by state and is subject to change, prior to the addition of new beds, the addition of service or certain capital expenditures. Facilities may also be affected by changes in accreditation standards or procedures of accrediting agencies that are recognized by governments in the certification process. State licensing laws require operators of healthcare facilities to comply with extensive standards governing operations. State agencies administering those laws regularly inspect such facilities and investigate complaints. Failure to meet all regulatory requirements could result in the loss of the ability to provide or bill and receive payment for healthcare services. In such event, revenues from those facilities could be reduced or eliminated for an extended period of time or permanently. Transfers of operations of healthcare facilities are subject to regulatory approvals not required for transfers of other types of commercial operations and real estate.

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Medicare and Medicaid.  Generally, a portion of the revenue from the operation of our senior housing facilities and other healthcare properties (and a significant portion of the revenue in the case of a SNF) is derived from governmentally-funded reimbursement programs, primarily Medicare and Medicaid, and failure to maintain enrollment and participation in these programs would result in a loss of funding from such programs. Moreover, federal and state governments have adopted and continue to consider various reform proposals to control healthcare costs. In recent years, there have been fundamental changes in the Medicare program that have resulted in reduced levels of payment for a substantial portion of healthcare services. In many instances, revenues from Medicaid programs are already insufficient to cover the actual costs incurred in providing care to patients. In addition, reimbursement from private payors has in many cases effectively been reduced to levels approaching those of government payors. Governmental concern regarding healthcare costs and their budgetary impact and the specter of fraud and abuse in claims reimbursement may result in significant reductions in payments to our operators, and future reimbursement rates for either governmental or private payors may not be sufficient to cover cost increases in providing services to patients. Exclusion, debarment, suspension or other ineligibility to participate in federal healthcare programs or any changes in reimbursement policies that reduce reimbursement to levels that are insufficient to cover the cost of providing patient care could cause our or our operators revenue and the value of the affected senior housing facilities and other healthcare properties to decline.

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Fraud and Abuse Laws and Regulations.  There are complex federal and state laws governing a wide array of referrals, financial relationships and arrangements and prohibiting fraud by healthcare providers, including criminal provisions that prohibit financial inducements for referrals, filing false claims or making false statements to receive payment or certification under Medicare and Medicaid, or failing to refund overpayments or improper payments. Governments are devoting increasing attention and resources to anti-fraud initiatives against healthcare providers. The Office of the Inspector General of the U.S. Department of Health and Human Services has announced a number of new and ongoing initiatives to study instances of potential Medicare and Medicaid overbilling and/or fraud. Violations of these laws subject persons and entities to termination from participation in Medicare, Medicaid and other federally funded healthcare programs. In addition, the federal False Claims Act allows a private individual with knowledge of fraud to bring a claim on behalf of the federal government and earn a percentage of the federal government's recovery. Because of these incentives, these so-called "whistleblower" suits have become more frequent. The violation of any of these laws or regulations by us or by any of our operators may result in the imposition of significant monetary damages, fines and other penalties.

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Other Laws.  Other laws that impact how we and our operators conduct business include: federal and state laws designed to protect the confidentiality and security of patient health information; state and local licensure laws; laws protecting consumers against deceptive practices; laws generally affecting the management of our senior housing facilities and other healthcare properties and equipment and how our operators generally conduct their operations, such as fire, health and safety, and environmental laws; federal and state laws affecting ALFs mandating quality of services and care, and quality of food service; resident rights (including abuse and neglect laws); and health standards set by the federal Occupational Safety and Health Administration.

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Legislative and Regulatory Developments.  Legislative proposals are often introduced or proposed in Congress and in some state legislatures that would effect changes in the healthcare system.

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 our healthcare portfolio and available cash flow from our healthcare assets 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 SNFs or ALFs, 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.

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A substantial portion of our business is dependent upon our operators successfully operating their businesses and their failure to do so could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.

        We depend on our operators to manage the day-to-day operations of our senior housing facilities in a manner which generates revenues sufficient to allow them to meet their obligations to us, including their obligations to pay rent, maintain certain insurance coverage, pay real estate taxes and maintain the facilities under their operational control in a manner so as not to jeopardize their operating licenses or regulatory status. The ability of our operators to fulfill their obligations to us may depend, in part, upon the overall profitability of their operations, including any other facilities, properties or businesses they may acquire or operate. The cash flow generated by the operation of our facilities may not be sufficient for an operator to meet its obligations to us. Our financial position could be weakened and our ability to fulfill our obligations under our indebtedness could be limited if our operators are unable to meet their obligations to us or we fail to renew or extend our contractual relationship with any of our operators. Any of these results could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.

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

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

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

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

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

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Events could occur that could adversely affect the ability of seniors to afford the monthly resident fees or entrance fees (including downturns in the economy, housing market, consumer confidence or the equity markets) and, in turn, materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

        Costs to seniors associated with independent and assisted living services are generally not reimbursable under government reimbursement programs such as Medicaid and Medicare. Only seniors with income or assets meeting or exceeding the comparable median in the regions where our facilities are located typically can afford to pay our monthly resident fees. Economic downturns, softness in the housing market, lower levels of consumer confidence, reductions or declining growth of government entitlement programs, such as social security benefits, stock market volatility and/or changes in demographics could adversely affect the ability of seniors to afford the monthly resident fees or entrance fees for our senior housing facilities. If our operators are unable to retain and/or attract seniors with sufficient income, assets or other resources required to pay the fees associated with independent and assisted living services and other service provided by our operators at our senior housing facilities, our occupancy rates could decline, which could, in turn, materially adversely affect our business, results of operations and financial condition and our ability to make distributions to our stockholders.

The inability of seniors to sell real estate may delay their moving into our residences which could materially adversely affect our occupancy rates and our business, financial condition and results of operations and our ability to make distributions to our stockholders.

        Recent housing price declines and reductions in residential mortgage availability have negatively affected the U.S. housing market, with certain geographic areas experiencing more acute deterioration than others. Downturns in the U.S. housing market, such as the one we have recently experienced, could adversely affect the ability (or perceived ability) of seniors to afford entrance fees and resident fees at our senior housing facilities, as potential residents frequently use the proceeds from the sale of their homes to cover the costs of these fees. Specifically, if seniors have a difficult time selling their homes, these difficulties could impact their ability to relocate into our facilities or finance their stays at our facilities. This could cause the amount of our revenues generated by private payment sources to decline. If the recent volatility in the U.S. housing market continues for a protracted period, it could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

Decisions by residents to terminate their residency agreements could adversely affect occupancy at our facilities which, in turn, could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

        State regulations governing ALFs require a written agreement with each resident. These regulations also require that residents have the right to terminate their residency agreements for any reason on reasonable notice. If multiple residents terminate their residency agreements at or around the same time, the occupancy rate at our facilities would decline, which could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

Reimbursement rates from third-party payors could be reduced, which would materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

        Our ability to generate revenue and profit influences the underlying value of our senior housing facilities. These revenues are generally derived from reimbursements paid to our operators or, in the

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case of the senior housing facilities that will be leased by us to our TRS Lessee, to our TRS Lessee. Sources of reimbursements include Medicare, state Medicaid programs, private insurance carriers, healthcare service plans, health maintenance organizations, preferred provider arrangements, self-insured employers and the patients themselves. Medicare and Medicaid programs, as well as numerous private insurance and managed care plans, generally require participating providers to accept government-determined reimbursement levels as payment in full for services rendered, without regard to a facility's charges. Changes in the reimbursement rate or methods of payment from third-party payors, including Medicare and Medicaid, or the implementation of other measures to reduce reimbursements, have in the past, and could in the future, result in a substantial reduction in our revenues. Additionally, revenue realizable under third-party payor agreements can change after examination and retroactive adjustment by payors during the claims settlement processes or as a result of post-payment audits. Payors may disallow requests for reimbursement based on determinations that certain costs are not reimbursable or reasonable or because additional documentation is necessary or because certain services were not covered or were not medically necessary. There also continue to be new legislative and regulatory proposals that could impose further limitations on government and private payments to healthcare providers. In some cases, states have enacted or are considering enacting measures designed to reduce their Medicaid expenditures and to make changes to private healthcare insurance. Moreover, owners and operators of senior housing facilities continue to experience pressures from private payors attempting to control healthcare costs, and reimbursement from private payors has in many cases effectively been reduced to levels approaching those of government payors. We cannot assure you that adequate reimbursement levels will continue to be available. Further limits on the scope of services reimbursed and on reimbursement rates could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.

Government budget deficits could lead to a reduction in Medicaid and Medicare reimbursement.

        The recent slowdown in the U.S. economy has negatively affected state budgets, which may put pressure on states to decrease reimbursement rates with the goal of decreasing state expenditures under state Medicaid programs. The need to control Medicaid expenditures may be exacerbated by the potential for increased enrollment in state Medicaid programs due to unemployment and declines in family incomes. These potential reductions could be compounded by the potential for federal cost-cutting efforts that could lead to reductions in reimbursement rates under both the federal Medicaid program and state Medicare programs. Potential reductions in reimbursements under these programs could negatively impact the ability of our operators and their ability to meet their obligations to us.

Possible changes in the acuity profile of our residents as well as payor mix and payment methodologies may materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

        The sources and amounts of our revenues are determined by a number of factors, including licensed bed capacity, occupancy, the acuity profile of residents and the rate of reimbursement. Changes in the acuity profile of the residents as well as payor mix among private pay, Medicare and Medicaid may materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

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We may become responsible for capital improvements. To the extent such capital improvements are not undertaken, the ability of our operators to manage our facilities effectively and on favorable terms may be affected, which in turn could materially adversely affect our business, financial conditions and results of operations and our ability to make distributions to our stockholders.

        Although under our typical triple-net lease structure our operators generally are responsible for capital improvement expenditures, it is possible that an operator may not be able to fulfill its obligations to keep the facility in good operating condition. Further, we may be responsible for capital improvement expenditures on such facilities after the terms of the triple-net leases expire. With respect to the senior housing facilities that will be leased by us to our TRS Lessee, our TRS Lessee will be responsible for capital improvement expenditures at those facilities. To the extent capital improvements are not undertaken or are deferred, occupancy rates and the amount of rental and reimbursement income generated by the facility may decline, which would impact the overall value of the affected senior housing facility. Any of these results could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.

The geographic concentration of our senior housing facilities could leave us vulnerable to an economic downturn, regulatory or reimbursement changes or acts of nature in those areas, which could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.

        For the year ended December 31, 2009, we derived 10% or more of our annualized contractual rental revenue from senior housing facilities in our portfolio located in Indiana (13.9%). As a result of such concentration, the conditions of local economies and real estate markets, changes in governmental rules and regulations, particularly with respect to state Medicaid programs, acts of nature and other factors that may result in a decrease in demand for services at our senior housing facilities in this state could have a material adverse effect on our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

Certain operators will account for a significant percentage of our contractual rental revenue, and the failure of any of these operators to meet their obligations to us could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

        For the year ended December 31, 2009, we derived 10% or more of our annualized contractual rental revenue from senior housing facilities in our portfolio operated by Miller Health Systems, Inc. (13.9%). If this operator fails to meet its obligations to us, our business, financial condition, results of operations and our ability to make distributions to our stockholders could be materially and adversely impacted. No other operator generated more than 10% of our annualized rental revenue under existing leases for the year ended December 31, 2009. The failure or inability of this operator to meet its obligations to us could materially reduce our rental revenue and net income, which could in turn reduce the amount of distributions we pay and cause our stock price to decline.

Because of the unique and specific improvements required for our healthcare properties, including our life sciences campus, we may be required to incur substantial renovation costs to make certain of our properties suitable for other operators, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

        Healthcare properties, including our life sciences campus, are typically highly customized and may not be easily adapted to non-healthcare-related uses. The improvements generally required to conform a property to healthcare use, such as upgrading electrical, gas and plumbing infrastructure, are costly and often times operator-specific. A new or replacement tenant may require different features in a property, depending on that tenant's particular operations. If a current tenant is unable to pay rent and

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vacates a property, we may incur substantial expenditures to modify a property for a new tenant, or for multiple tenants with varying infrastructure requirements, before we are able to release the space. Consequently, our healthcare properties, including our life sciences campus, may not be suitable for lease to traditional office or other tenants without significant expenditures or renovations, which costs may materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

We are subject to risks associated with debt financing, which could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

        Our healthcare portfolio has total debt of approximately $460.2 million. Financing for future investments and our maturing commitments for our healthcare portfolio may be provided by borrowings under credit facilities, private or public offerings of debt, the assumption of secured indebtedness, mortgage financing on a portion of our owned healthcare portfolio or through joint ventures. We are subject to risks normally associated with debt financing, including the risks that our cash flow will be insufficient to make timely payments of interest, that we will be unable to refinance existing indebtedness or support collateral obligations and that the terms of refinancing will not be as favorable as the terms of existing indebtedness. If we are unable to refinance or extend principal payments due at maturity or pay them with proceeds from other capital transactions, our cash flow may not be sufficient in all years to pay distributions to our stockholders and to repay all maturing debt. Furthermore, if prevailing interest rates, changes in our debt ratings or other factors at the time of refinancing result in higher interest rates upon refinancing, the interest expense relating to that refinanced indebtedness would increase, which could reduce our profitability and the amount of dividends we are able to pay. Moreover, additional debt financing increases the amount of our leverage, which could negatively affect our ability to obtain additional financing in the future or make us more vulnerable to a downturn in our results of operations or the economy generally.

        We expect to repay a portion of our existing healthcare portfolio indebtedness, including the repayment of certain mortgage loans insured by the U.S. Department of Housing and Urban Development, or HUD. Accordingly, we plan to apply to HUD and certain other lenders for approval of the indirect change in ownership of the facilities and other properties resulting from our healthcare portfolio initial public offering. We may not receive such approval prior to the initial public offering, and there can be no assurance that HUD or other lenders will not claim we are in default until such time as we obtain its approval or repay the applicable loan.

If our operators fail to cultivate new or maintain existing relationships with residents in the markets in which they operate, our occupancy percentage, payor mix and resident rates may deteriorate which could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.

        The ability of our operators to improve the overall occupancy percentage, payor mix and resident rates at our senior housing facilities, depends on our operators' reputation in the communities they serve and our operators' ability to successfully market our facilities to potential residents. A large part of our operators' marketing and sales effort is directed towards cultivating and maintaining relationships with key community organizations that work with seniors, physicians and other healthcare providers in the communities where our facilities are located, whose referral practices significantly affect the choices seniors make with respect to their long-term care needs. If our operators are unable to successfully cultivate and maintain strong relationships with these community organizations, physicians and other healthcare providers, occupancy rates at our facilities could decline, which could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

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We may not be able to compete effectively in those markets where overbuilding exists and our inability to compete in those markets may have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders.

        Overbuilding in the senior housing segment in the late 1990s reduced occupancy and revenue rates at assisted living residences. This, combined with unsustainable levels of indebtedness, forced several operators into bankruptcy. The occurrence of another period of overbuilding could adversely affect our future occupancy and resident fee rates, which in turn could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

We may obtain only limited warranties when we purchase a property, which will increase the risk that we may lose some or all of our invested capital in the property or rental income from the property which, in turn, could materially adversely affect our business, financial condition and results from operations and our ability to pay distributions to our stockholders.

        The seller of a property often sells such property in its "as is" condition on a "where is" basis and "with all faults," without any warranties of merchantability or fitness for a particular use or purpose. In addition, purchase and sale agreements may contain only limited warranties, representations and indemnifications that will only survive for a limited period after the closing. The purchase of properties with limited warranties increases the risk that we may lose some or all of our invested capital in the property, as well as the loss of rental income from that property if an issue should arise that decreases the value of that property and is not covered by the limited warranties. If any of these results occur, it may have a material adverse effect on our business, financial condition and results of operations and our ability to pay distributions to our stockholders.

Our operators may be subject to significant legal actions that could subject them to increased operating costs and substantial uninsured liabilities, which may affect their ability to meet their obligations to us.

        Our operators may be subject to claims that their services have resulted in resident injury or other adverse effects. The insurance coverage maintained by our operators, whether through commercial insurance or self-insurance, may not cover all claims made against them or continue to be available at a reasonable cost, if at all. In some states, insurance coverage for the risk of punitive damages arising from professional liability and general liability claims and/or litigation may not, in certain cases, be available to our operators due to state law prohibitions or limitations of availability. As a result, our operators operating in these states may be liable for punitive damage awards that are either not covered or are in excess of their insurance policy limits. From time to time, there may also be increases in government investigations of long-term care providers, particularly in the area of Medicare/Medicaid false claims, as well as increases in enforcement actions resulting from these investigations. Insurance is not available to cover such losses. Any adverse determination in a legal proceeding or government investigation, whether currently asserted or arising in the future, could lead to potential termination from government programs, large penalties and fines and otherwise have a material adverse effect on a healthcare operator's financial condition. If a healthcare operator is unable to obtain or maintain insurance coverage, if judgments are obtained in excess of the insurance coverage, if a healthcare operator is required to pay uninsured punitive damages, or if a healthcare operator is subject to an uninsurable government enforcement action, the healthcare operator could be exposed to substantial additional liabilities, which could result in its bankruptcy or insolvency or have a material adverse effect on the healthcare operator's business and its ability to meet its obligations to us.

        Moreover, advocacy groups that monitor the quality of care at healthcare facilities have sued healthcare facility operators and called upon state and federal legislators to enhance their oversight of trends in healthcare facility ownership and quality of care. Patients have also sued healthcare facility operators and have, in certain cases, succeeded in winning very large damage awards for alleged abuses. This litigation and potential litigation in the future has materially increased the costs incurred by our

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operators for monitoring and reporting quality of care compliance. In addition, the cost of medical malpractice and liability insurance has increased and may continue to increase so long as the present litigation environment affecting the operations of healthcare facilities continues. Increased costs could limit our healthcare operator's ability to meet their obligations to us, potentially decreasing our revenue and increasing our collection and litigation costs. To the extent we are required to remove or replace a healthcare operator, our revenue from the affected property could be reduced or eliminated for an extended period of time.

Delays in our operator's collection of their accounts receivable could adversely affect their cash flows and financial condition and their ability to meet their obligations to us.

        Prompt billing and collection are important factors in the liquidity of our operators. Billing and collection of accounts receivable are subject to the complex regulations that govern Medicare and Medicaid reimbursement and rules imposed by non-government payors. The inability of our operators to bill and collect on a timely basis pursuant to these regulations and rules could subject them to payment delays that could negatively impact their cash flows and ultimately their financial condition and their ability to meet their obligations to us.

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

        If our operators are unable to comply with the terms of their agreements with us, we may be forced to modify the agreements in ways that are unfavorable to us. Alternatively, the failure of an operator to perform under an agreement could require us to declare a default, repossess the property, find a suitable replacement operator, operate the property or sell the property. There is no assurance that we would be able to lease a property or enter into a management agreement with respect to such property on substantially equivalent or better terms than the prior agreements, or at all, find another operator, successfully reposition the property for other uses or sell the property on terms that are favorable to us.

        If any of our agreements with our operators expire or are terminated, we could be responsible for all of the operating expenses for that property until it is re-leased, until another operator is engaged or until the property is sold. We may not possess the required licenses to operate our net-leased properties. If we experience a significant number of un-leased/un-managed properties, our operating expenses could increase significantly. Any significant increase in our operating costs may have a material adverse effect on our business, financial condition and results of operations, our ability to make distributions to our stockholders and the trading price of our common stock.

        Any bankruptcy filing by or relating to one of our operators could bar all efforts by us to collect pre-bankruptcy debts from that operator or seize its property and may require us to find new operators. An operator's bankruptcy could also delay our efforts to collect past due balances, including unpaid rents, and could ultimately preclude collection of all or a portion of these sums. It is possible that we may recover substantially less than the full value of any unsecured claims we hold, if any, which may have a material adverse effect on our business, financial condition and results of operations, our ability to make distributions to our stockholders and the trading price of our common stock. Furthermore, dealing with an operator's bankruptcy or other default may divert management's attention and cause us to incur substantial legal and other costs.

        If one or more of our operators files for bankruptcy relief, the Bankruptcy Code provides that a debtor has the option to assume or reject the unexpired lease within a certain period of time. Most of our properties will generally be net-leased to an operator operating multiple facilities pursuant to a single master lease. It is possible that in bankruptcy the debtor operator may be required to assume or reject the master lease in its entirety, rather than making the decision on a property-by-property basis,

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thereby preventing the debtor from assuming the better performing properties and terminating the master lease with respect to the poorer performing properties. The Bankruptcy Code generally requires a debtor to assume or reject a contract in its entirety. Thus, a debtor cannot choose to keep the beneficial provisions of a contract while rejecting the burdensome ones; the contract must be assumed or rejected as a whole. However, where under applicable law a contract (even though it is contained in a single document) is determined to be divisible or severable into different agreements, or similarly, where a collection of documents is determined to constitute separate agreements instead of a single, integrated contract, then in those circumstances a debtor/trustee may be allowed to assume some of the divisible or separate agreements while rejecting the others. If the debtor chooses to assume the agreement or if a non-debtor operator is unable to comply with the terms of an agreement, we may be forced to modify the agreements in ways that are unfavorable to us.

Compliance with the Americans with Disabilities Act, Fair Housing Act, and fire, safety and other regulations may require us to make unanticipated expenditures which could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

        Our facilities and properties are required to comply with the American with Disabilities Act of 1990, or ADA. The ADA generally requires that buildings be made accessible to people with disabilities. We must also comply with the Fair Housing Act, which prohibits us and our operators from discriminating against individuals on certain bases in any of our practices if it would cause such individuals to face barriers in gaining residency in any of our facilities. In addition, our facilities and properties are required to operate in compliance with applicable fire and safety regulations, building codes and other land use regulations and food licensing or certification requirements as they may be adopted by governmental agencies and bodies from time to time. We may be required to make substantial expenditures to comply with those requirements.

We are facing increasing competition for the acquisition of senior housing facilities and other healthcare properties which may impede our ability to make future acquisitions or may increase the cost of these acquisitions which, in turn, could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders.

        We compete with many other businesses engaged in real estate investment activities for the acquisition of senior housing facilities and other healthcare properties, including local, regional and national operators and acquirers and developers of healthcare real estate. The competition for senior housing facilities and other healthcare properties may significantly increase the price we might pay for a facility or property we seek to acquire and our competitors may succeed in acquiring those facilities or properties themselves. In addition, operators with whom we attempt to do business may find our competitors to be more attractive because they may have greater resources, may be willing to pay more for the properties or may have a more compatible operating philosophy. In addition, the number of entities and the amount of funds competing for suitable investment properties may increase. This competition may result in increased demand for these assets and therefore increased prices paid for them. If we pay higher prices for healthcare properties, our business, financial condition and results of operations and our ability to make distributions to our stockholders may be materially adversely affected.

Risks Related to the Investment Management Business

The organization and management of our nonlisted REIT, REG D REIT and Securities Fund, and any future funds that we raise, may create conflicts of interest.

        In addition to managing the assets of our CDOs, we have filed a registration statement on Form S-11 for NorthStar Real Estate Income Trust, Inc., which we refer to as our nonlisted REIT, a commercial finance REIT that will be managed by us and will not be listed on a major exchange. We

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also sponsored and are managing and raising equity for NorthStar Income Opportunity REIT I, Inc., a private REIT issuing securities under Regulation D of the Securities Act of 1933, which we refer to as our REG D REIT. We currently manage an off-balance sheet fund, or our Securities Fund, which we formed in July 2007. We are the manager, and have a combined general partner and limited partner interest of 31.2% in the Securities Fund at December 31, 2009. We may in the future manage other third party funds or other investment vehicles.

        The nonlisted REIT, REG D REIT and 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 and our Funds. 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 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.

Our ability to raise capital and attract investors in our Sponsored REITs is critical to their success and our ability to grow depends on our ability to attract a motivated sales force in our licensed broker dealer.

        Our nonlisted REIT and REG D REIT, together referred to as our Sponsored REITs, depend upon our ability to attract purchasers of equity interests, which is highly dependent upon the efforts of the motivated sales force of our subsidiary, NRF Capital Markets, LLC, or NRF Capital Markets. We anticipate that NRF Capital Markets will be a licensed wholesale broker-dealer. Our ability to grow our Sponsored REITs will be dependent on our ability to retain and motivate our sales force and other key personnel and to strategically recruit, retain and motivate new talent. However, we may not be successful in our efforts to recruit, retain and motivate the required personnel as the market for qualified professionals is extremely competitive. If we do not retain a motivated and effective sales force, or our sales professionals join competitors or form competing companies, it could result in the loss of significant investment opportunities and possibly existing investors, which would have a material impact on our Sponsored REITs.

Our failure to obtain a broker-dealer license in the various jurisdictions in which we will do business could have a material adverse effect on our business, financial condition, liquidity and results of operations.

        We have applied for a membership application for a broker-dealer license for NRF Capital Markets with the Financial Industry Regulatory Authority, or FINRA, and filed for registration as a broker-dealer with the NASD and the SEC. We will also be required to obtain licenses with state securities regulators. There is no guarantee that the FINRA, NASD and SEC will approve NRF Capital Markets' application or how long it will require for such a broker-dealer license to be issued. Accordingly, it is uncertain how long after the effective date of our Sponsored REITs' offerings that NRF Capital Markets will be able to commence its operations, if at all. Such events would delay or potentially hinder sales of our Sponsored REITs' securities.

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There is no assurance we will be able to enter into third-party selling agreement, and declines in asset value and reductions in distributions in our Sponsored REITs could cause the loss of such third-party selling agreements and limit our ability to sign future third-party selling agreements.

        We anticipate NRF Capital Markets will enter into third-party selling agreements in order to raise capital for our Sponsored REITs. There is no assurance that we will be able to enter into such third-party selling agreements on substantially reasonable terms, or at all, which would hinder or even cease our ability to raise capital for our Sponsored REITs. Additionally, significant declines in asset value and reductions in distributions in our Sponsored REITs could cause us to lose third-party selling agreements and limit our ability to sign future third-party selling agreements.

Misconduct by third-party selling broker-dealers or our sales force, could have a material adverse effect on our business.

        We will rely on selling broker-dealers and our broker-dealer sales force to properly offer our securities programs to customers in compliance with our selling agreements and with applicable regulatory requirements. While these persons are responsible for their activities as registered broker-dealers, their actions may nonetheless result in complaints or legal or regulatory action against us.

Our organization and management of the Sponsored REITs could distract our management and have a negative effect on our business.

        The organization and management of our Sponsored REITs could divert our management team's attention from our existing business to form and manage the operations and personnel of the Sponsored REITs and implement the business initiatives. Our management team could be required to spend significant time and financial resources on the Sponsored REITs, which could distract and prevent them from furthering our core business activities, regardless of the outcome of the Sponsored REITs. Consequently, this could have a negative effect on our business.

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 CDO 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 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.

Termination of management arrangements with one or more of our Funds could harm our business.

        We provide management services to our existing Funds, and may in the future provide management services to any future funds, through our position as the sole or managing general partner of partnership funds, through our position as the operating manager of other fund entities, through our advisory agreements with our sponsored REITs, or combinations thereof. Our arrangements are generally expected to be long-term, and frequently have no specified termination dates. However, our management arrangements with, or our position as general partner, operating manager or advisor of, a

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fund typically may be terminated by action taken by the investors or board of directors of the applicable vehicle. Upon any such termination, our management fees, after payment of any termination payments required, would cease, thereby reducing our expected revenues.

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 deterioration of the capital markets, 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.

Investors in our Securities Fund may redeem their investments or elect to remove us as manager of our Securities Fund at any time without cause upon approval of 50% of the limited partners of our Securities Fund.

        Investors in our Securities Fund are able to redeem their investments on an annual or quarterly basis, subject to the specific redemption provisions, and remove us as manager without cause upon approval of 50% of the limited partners in the Securities Fund (excluding us). Investors may decide to move their capital away from our Securities Fund to other investments or remove us as manager of the Securities Fund for any number of reasons in addition to poor investment performance. Factors which could result in investors leaving our Securities Fund include changes in interest rates which make other investments more attractive, changes in investor perception regarding the Securities Fund's focus or alignment of interest, unhappiness with changes in or broadening of the Securities Fund's investment strategy, changes in our reputation, and departures or changes in responsibilities of key investment professionals.

        The stated lock-up periods in the Securities Fund expire in 2010 and we expect there may be significant redemptions within the Securities Fund. Subject to certain rights that we may have within the Securities Fund, in the event we do not have sufficient funds available to redeem all of the shares, we may be forced to liquidate investments more rapidly than otherwise desirable in order to raise the necessary cash to fund the redemptions. If we were removed as a manager of the Securities Fund, we would no longer be entitled to receive management or incentive fees and such removal could also cause significant reputational damage to us, thereby impacting our ability to raise new vehicles.

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.

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There are risks in using prime brokers and custodians.

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

Government intervention may limit our ability to continue to implement certain strategies or manage certain risks.

        The pervasive and fundamental disruptions that the global financial markets are currently undergoing have led to extensive and unprecedented governmental intervention, including the Emergency Economic Stabilization Act of 2008, in October 2008, which gave the U.S. Treasury Secretary the authority to use up to $700 billion to, among other things, inject capital into financial institutions and establish a program to purchase from financial institutions residential or commercial real estate loans and other securities, and TALF, in November 2008, which allowed the Federal Reserve Bank of New York to provide non-recourse loans to borrowers to fund their purchase of eligible assets, which initially included asset-backed securities but was later expanded to include CMBS and non-Agency residential mortgage-based securities, or RMBS.

        Such intervention has also in certain cases been implemented on an "emergency" basis, suddenly and substantially eliminating market participants' ability to continue to implement certain strategies or manage the risk of their outstanding positions. It is impossible to predict what, if any, additional interim or permanent governmental restrictions may be imposed on the markets and the effect of such restrictions on us and our results of operations. There is a high likelihood of significantly increased regulation of the financial markets that could have an impact on our operating results and financial condition.

Risks Related to Our Company

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

        Our future success depends, to a significant extent, upon the continued services of our key personnel, including 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.

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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 equity awards to our employees. We will likely seek shareholder approval for additional equity awards, but in the meantime we will 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".

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, we believe that 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

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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.

AFFO includes realized gains on items such as extinguishment of debt and sales of real estate securities, which we may not be able to replicate in the future.

        Historically, in addition to interest income that we earn on our assets, for purposes of AFFO we have also realized gains on extinguishing our corporate debt and CDO bonds, and from the sales of real estate securities. In 2009, extinguishment of debt gains and gains on the sale of real estate securities were $133.5 million, representing AFFO per share of $1.73. Replicating these gains may not be possible, which could significantly impact our AFFO in the future. If we are unable to generate substantial gains in order to increase our AFFO, our stock price could be negatively impacted, which could have a material adverse effect on us.

GAAP requirements and our mark-to-market adjustments of our liabilities do not necessarily provide a precise economic reflection of our shareholders' equity.

        We have elected to mark-to-market our liabilities in our real estate CDOs, 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 may not 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 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 our dividends in 2009 relative to prior years, 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.

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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. 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 CDOs 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 CDOs to sell their assets and reinvest the proceeds from asset sales. Our subsidiary that invests in net lease properties relies on the exception from the definition of "investment company" provided by Sections 3(c)(6) and 3(c)(5)(C) of the Investment Company Act, and certain of our other CDOs 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 CDO relies on the exception from the definition of "investment company" provided by 3(c)(5)(C) of the Investment Company Act, the CDO 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

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were required to register as an investment company under the Investment Company Act, we would become subject to substantial regulation with respect to our capital structure (including our ability to use leverage), management, operations, transactions with affiliated persons (as defined in the Investment Company Act), portfolio composition, including restrictions with respect to diversification and industry concentration and other matters.

Maryland takeover statutes may prevent a change of our control. This could depress our stock price.

        Under Maryland law, "business combinations" between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as any person who beneficially owns 10% or more of the voting power of the corporation's shares or an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation. A person is not an interested stockholder under the statute if the Board of Directors approved in advance the transaction by which he otherwise would have become an interested stockholder. However, in approving a transaction, the Board of Directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.

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

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

        The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer, including potential acquisitions that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders. The statute permits various exemptions from its provisions, including business combinations that are exempted by the Board of Directors prior to the time that the interested stockholder becomes an interested stockholder. Pursuant to the statute, our Board of Directors has exempted any business combinations 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

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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.

        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. Even an inadvertent or technical mistake could jeopardize our REIT status. Our continued qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis.

        Moreover, new tax legislation, administrative guidance or court decisions, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to qualify as a REIT. If we were to fail to qualify as a REIT in any taxable year, we would be subject to federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates, and distributions to stockholders would not be deductible by us in computing our taxable income. Any such corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our stockholders, which in turn could have an adverse impact on the value of, and trading prices for, our stock.

        We hold a substantial majority of our assets in a majority owned subsidiary, which we refer to as our private REIT. Our private REIT is organized to qualify as a REIT for federal income tax purposes. Additionally, we have sponsored and manage, through our private REIT, additional subsidiaries that intend to qualify as REITs. Our private REIT and its REIT subsidiaries must also meet all of the REIT qualification tests under the Internal Revenue Code and are subject to all of the same risks as us. If our private REIT or one of its REIT subsidiaries 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.

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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. We anticipate that distributions generally will be taxable as ordinary income, although a portion of such distributions may be designated by us as long-term capital gain to the extent attributable to capital gain income recognized by us, or may constitute a return of capital to the extent that such distribution exceeds our earnings and profits as determined for tax purposes.

        From time to time, we may generate taxable income greater than our net income for financial reporting purposes due to, among other things, amortization of capitalized purchase premiums, mark-to-market adjustments and reserves. In addition, our taxable income may be greater than our cash flow available for distribution to stockholders as a result of, among other things, repurchases of our outstanding debt at a discount and investments in assets that generate taxable income 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).

        We believe that our operating partnership may elect to defer, under section 108(i) of the Internal Revenue Code, the recognition of cancellation of indebtedness, or COD, income generated from repurchasing its debt at a discount. If our operating partnership elects to defer COD income and the Internal Revenue Service, or IRS, successfully challenges that position, we may be treated as having failed to pay sufficient dividends to satisfy the 90% distribution requirement and/or avoid the corporate income tax and the 4% nondeductible excise tax. We may be required to correct any failure to meet the 90% distribution requirement by paying deficiency dividends to our stockholders and an interest charge to the IRS in a later year.

        If we do not have other funds available in the situations described in the preceding paragraphs, 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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Under recently issued IRS guidance, we may pay taxable dividends of our common stock and cash, in which case stockholders may sell shares of our common stock to pay tax on such dividends, placing downward pressure on the market price of our common stock.

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

We could fail to qualify as a REIT if the IRS 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 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.

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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, the federal alternative minimum tax and state or local income, property and transfer taxes, such as mortgage recording taxes. Any of these taxes would decrease cash available for distribution to our stockholders. In addition, in order to meet the REIT qualification requirements, or to avert the imposition of a 100% tax that applies to certain gains derived by a REIT from dealer property or inventory, we may hold some of our assets through taxable subsidiary corporations.

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

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

        We must also ensure that at the end of each calendar quarter at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets can consist of the securities of any one issuer (other than government securities and qualified real estate assets), and no more than 25% (or, for our 2008 and prior taxable years, 20%) of the value of our total securities can be represented by securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we must correct such failure within 30 days after the end of the calendar quarter to avoid losing our REIT status and suffering adverse tax consequences, unless certain relief provisions apply. As a result, compliance with the REIT requirements may hinder our ability to operate solely on the basis of profit maximization and may require us to liquidate or forego otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.

Modifications of the terms of our mortgage loans, mezzanine loans and B-Notes and loans supporting our mortgage-backed securities in conjunction with reductions in the value of the real property securing such loans could cause us to fail to qualify as a REIT.

        Our investments in mortgage loans, mezzanine loans and B-Notes and mortgage-backed securities have been and may continue to be materially affected by the weakened condition of the real estate market and the economy in general. As a result, many of the terms of our mortgage loans, mezzanine loans and B-Notes and the loans supporting our mortgage-backed securities have been modified to avoid foreclosure actions and for other reasons. Under the Internal Revenue Code, if the terms of a loan are modified in a manner constituting a "significant modification," such modification triggers a deemed exchange of the original loan for the modified loan. Although the law is not entirely clear, if the IRS treats such a deemed exchange as a new "commitment" to acquire the modified loan and the fair market value of the real property securing such loan has fallen below the principal amount of the loan, a portion of the interest income from such loan will be non-qualifying income for purposes of the 75% gross income test, but will be qualifying income for purposes of the 95% gross income test, and a

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commensurate portion of the loan will likely be a non-qualifying asset for purposes of the 75% asset test. The non-qualifying portion of such a loan would be subject to, among other requirements, the requirement that a REIT not hold securities possessing more than 10% of the total value of the outstanding securities of any one issuer, or the 10% Value Test. In determining the value of the real property securing a loan that has been significantly modified, we generally will not obtain third-party appraisals, but rather will rely on internal valuations. No assurance can be provided that the IRS will not successfully challenge our internal valuations. If the terms of our mortgage loans, mezzanine loans and B-Notes and loans supporting our mortgage backed securities are modified in a manner constituting a "significant modification" and the fair market value of the real property securing such loans has decreased significantly, we could fail the 75% gross income test, the 75% asset test and/or the 10% Value Test. Unless we qualified for relief under certain Internal Revenue Code cure provisions, such failures could cause us to fail to qualify as a REIT.

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. Additionally, our gross income from qualifying hedges entered into prior to July 31, 2008 constitutes non-qualifying income for purposes of the 75% gross income test. Consequently, our gross income from qualifying hedges entered into prior to July 31, 2008, along with other sources of non-qualifying income for purposes of the 75% gross income test, cannot exceed 25% 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.

We may fail to qualify as a REIT as a result of our fee income from managing certain structured finance and investment vehicles and our income from active businesses.

        We currently manage certain structured finance and investment vehicles that are treated as taxable REIT subsidiaries or REITs. Additionally, we have formed a subsidiary that will earn active business income from the operation of a wholesale broker-dealer network. Fee income and active business income constitute non-qualifying income for purposes of the 95% and 75% gross income tests. It is not possible to predict with complete accuracy the amount of gross income that we will generate in any taxable year due to, among other things, fluctuations in interest rates. Accordingly, our qualifying income for purposes of our gross income tests may be lower than we anticipate, and, conversely, our fee income and active business income may be higher than we anticipate. If our fee income and active business income, combined with other sources of non-qualifying income, such as income from non-qualifying hedges, were to exceed 5% of our gross income, we would fail to satisfy the 95% gross income test. Unless we qualified for certain Internal Revenue Code cure provisions, a failure of the 95% gross income test would cause us to fail to qualify as a REIT.

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.

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Adverse legislative or regulatory tax changes 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. For example, 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 prohibited transactions tax may limit our ability to engage in transactions, including dispositions of assets and 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. Additionally, we may be subject to the prohibited transaction tax upon a disposition of real property. Although a safe-harbor to the characterization of the sale of real property by a REIT as a prohibited transaction is available, we cannot assure you that we can comply with the safe harbor or that we will avoid owning property that may be characterized as held primarily for sale to customers in the ordinary course of business. Consequently, we may choose not to engage in certain sales of real property or may conduct such sales through a taxable REIT subsidiary.

Because of the inability to offset capital losses against ordinary income for federal income tax purposes, 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.

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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.

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

        To qualify as a REIT, five or fewer individuals, as defined in the Internal Revenue Code, may not own, actually or constructively, more than 50% in value of our issued and outstanding stock at any time during the last half of a taxable year. Attribution rules in the Internal Revenue Code determine if any individual or entity actually or constructively owns our stock under this requirement. Additionally, at least 100 persons must beneficially own our stock during at least 335 days of a taxable year. To help insure that we meet these tests, our charter restricts the acquisition and ownership of shares of our stock.

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

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

Our dividends that are attributable to excess inclusion income will likely increase the tax liability of our tax-exempt stockholders, foreign stockholders, and stockholders with net operating 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 the portion of our excess inclusion income equal to the percentage of our stock held in record name by "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

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business taxable income). 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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Item 1B.    Unresolved Staff Comments

        Not applicable.

Item 2.    Properties

        Our investments in net lease properties, which comprise our net lease business segment, are described under "Business—Net Lease." The following table sets forth certain information with respect to each of our net lease properties as of December 31, 2009:

Net Lease Portfolio: Property Information

Location City, State	Square Feet		Rent per square ft.		Number of Buildings		Ownership Interest	Type	Leasehold Expiration Date	Lease/Sublease Expiration Date		Encumbrances (In Thousands)
Office
Auburn Hills, MI		50,000	$	11.61		1	Fee	Office	N/A		Sep-15	$	5,393
		55,692		13.47		1	Fee	Office	N/A		Sep-15		6,007
Aurora, CO		183,529		17.74		1	Fee	Office	N/A		Jun-15		32,982
Camp Hill, PA		214,150		12.30		1	Fee	Office	N/A		Sep-15		24,732
Columbus, OH		199,112		11.70		1	Fee	Office	N/A		Nov-17		23,543
Fort Mill, SC		165,000		12.72		1	Fee	Office	N/A		Oct-20		30,443
Milpitas, CA		180,481		14.65		2	Fee	Office	N/A		Feb-17		22,107
Rancho Cordova, CA		68,000		22.32		1	Fee	Office	N/A		Sep-15		10,845
Rockaway, NJ		15,038		7.00		1	Fee	Office	N/A		May-15		2,127
		106,000		15.51			Fee	Office	N/A		Jul-17		14,992
Salt Lake City, UT		117,553		19.70		1	Fee	Office	N/A		Apr-12		15,471
Springdale, OH		139,264		10.00		1	Fee	Office	N/A		Mar-10		15,686
		173,145		10.07		1	Fee	Office	N/A		Dec-09		19,208
		174,554		14.25		1	Fee	Office	N/A		Dec-21		16,586
Total Office		1,841,518		13.85		14							240,122
Retail
Bloomingdale, IL		50,000		10.50		1	Leasehold	Retail	Jan-27		Jan-22		5,679
Concord Holdings, NH		50,000		11.00		1	Fee	Retail	N/A		May-16		5,918
		20,087		12.75		1	Fee	Retail	N/A		Jan-16		2,378
Fort Wayne, IN		50,000		8.25		1	Leasehold	Retail	Jan-25		Aug-24		3,399
Keene, NH		45,471		15.03		1	Fee	Retail	N/A		Oct-20		6,693
Melville, NY		46,533		8.75		1	Leasehold	Retail	Jan-22		Jan-22		4,405
Millbury, MA		54,175		8.49		1	Leasehold	Retail	Jan-24		Jan-24		4,682
New York, NY		7,500		78.02		1	Leasehold	Retail	Dec-12		Dec-12		—
		10,800		64.81		1	Leasehold	Retail	Apr-29		Jun-17		—
North Attleboro, MA		50,025		8.62		1	Leasehold	Retail	Jan-24		Jan-24		4,663
Portland, ME		52,900		15.66		1	Leasehold	Retail	Aug-30		Aug-23		4,652
Wichita, KS		48,782		12.00		1	Fee	Retail	N/A		Mar-23		6,070
Total Retail		486,273		13.21		12							48,539
Healthcare
Black Mountain, NC		36,235		18.99		1	Fee	Healthcare	N/A		Jul-21		4,684
Blountstown, FL		33,722		17.58		1	Fee	Healthcare	N/A		Jul-21		3,558
Bremerton, WA		68,601		13.22		1	Fee	Healthcare	N/A		Oct-21		6,462
Caroltton, GA		49,000		10.26		1	Fee	Healthcare	N/A		Jan-17		2,951
Castletown, IN		46,026		18.84		1	Fee	Healthcare	N/A		Jun-16		6,755
Charleston, IL		39,393		9.33		1	Fee	Healthcare	N/A		Jan-17		5,846
Chesterfield, IN		19,062		25.42		1	Fee	Healthcare	N/A		Jun-17		4,041
Cincinnati, OH		69,806		27.89		1	Fee	Healthcare	N/A		Jan-17		11,397
Clemmons, NC		30,929		20.50		1	Fee	Healthcare	N/A		Apr-22		—
Clinton, OK		31,377		0.19		1	Fee	Healthcare	N/A		Jan-17		1,334
Columbia City, IN		22,395		42.13		1	Fee	Healthcare	N/A		Jun-17		8,011
Daly City, CA		26,262		22.77		1	Fee	Healthcare	N/A		Aug-21		3,463
		78,482		17.86		1	Leasehold	Healthcare	Aug-21		Aug-21		7,937
Denmark, WI		8,320		17.74		1	Fee	Healthcare	N/A		Jan-17		1,219
Dunkirk, IN		19,140		12.79		1	Fee	Healthcare	N/A		Jun-17		2,114
East Arlington, TX		26,552		14.56		1	Fee	Healthcare	N/A		Dec-13		3,389
Effingham, IL		7,808		19.61		1	Fee	Healthcare	N/A		Jan-17		547
		39,393		16.12		1	Fee	Healthcare	N/A		Jan-17		4,600

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Location City, State	Square Feet		Rent per square ft.		Number of Buildings		Ownership Interest	Type	Leasehold Expiration Date	Lease/Sublease Expiration Date		Encumbrances (In Thousands)
Elk City, OK		51,989		7.47		1	Fee	Healthcare	N/A		Jan-17		4,341
Fairfield, IL		39,393		15.39		1	Fee	Healthcare	N/A		Jan-17		6,402
Fort Wayne, IN		31,500		18.13		1	Fee	Healthcare	N/A		Jun-17		4,854
Franklin, WI		27,556		19.34		1	Fee	Healthcare	N/A		Jan-17		6,366
Fullerton, CA		5,500		24.55		1	Fee	Healthcare	N/A		Jan-17		779
		26,200		26.43		1	Fee	Healthcare	N/A		Jan-17		7,575
Garden Grove, CA		26,500		45.28		1	Fee	Healthcare	N/A		Jan-17		11,169
Green Bay, WI		23,768		16.42		1	Fee	Healthcare	N/A		Jan-17		3,173
Grove City		20,672		15.49		1	Fee	Healthcare	N/A		Jan-17		1,835
Harrisburg, IL		36,393		13.99		1	Fee	Healthcare	N/A		Jan-17		3,675
Hartford City, IN		22,400		3.64		1	Fee	Healthcare	N/A		Jun-17		2,078
Hillsboro, OR		286,652		12.70		1	Fee	Healthcare	N/A		Dec-13		32,945
Hobart, IN		43,854		15.12		1	Fee	Healthcare	N/A		Jun-17		5,908
Huntington, IN		31,169		18.49		2	Fee	Healthcare	N/A		Jun-17		4,510
Indianapolis, IN		36,416		7.00		1	Fee	Healthcare	N/A		Jun-17		2,232
Kenosha, WI		22,958		18.57		1	Fee	Healthcare	N/A		Jan-17		4,130
Kingfisher, OK		26,698		12.18		1	Fee	Healthcare	N/A		Jan-17		3,964
La Vista, NE		26,683		12.25		1	Fee	Healthcare	N/A		Jan-17		4,267
LaGrange, IN		9,872		4.13		1	Fee	Healthcare	N/A		Jun-17		515
		46,539		12.05		1	Fee	Healthcare	N/A		Jun-17		5,072
Lancaster, OH		21,666		23.77		1	Fee	Healthcare	N/A		Jan-17		2,571
Madison, WI		25,411		18.39		1	Fee	Healthcare	N/A		Jan-17		4,275
Manitowoc, WI		30,679		16.17		1	Fee	Healthcare	N/A		Jan-17		5,017
Marysville, OH		16,992		41.50		1	Fee	Healthcare	N/A		Jan-17		1,651
Mattoon, IL		39,393		16.55		1	Fee	Healthcare	N/A		Jan-17		6,922
		39,393		12.77		1	Fee	Healthcare	N/A		Jan-17		5,662
McFarland, WI		25,700		16.72		1	Fee	Healthcare	N/A		Jan-17		3,833
Mansfield, OH		3,780		9.01		1	Fee	Healthcare	N/A		Dec-17		—
		4,000		22.71		1	Fee	Healthcare	N/A		Dec-17		—
		13,209		9.44		1	Fee	Healthcare	N/A		Dec-17		—
Memphis, TN		73,381		23.79		1	Fee	Healthcare	N/A		Jan-17		14,596
Menomonee, WI		30,176		20.48		1	Fee	Healthcare	N/A		Jan-17		6,075
Middletown, IN		18,500		23.43		1	Fee	Healthcare	N/A		Jun-17		3,395
Mooresville, IN		24,945		19.42		1	Fee	Healthcare	N/A		Jun-17		1,517
Morris, IL		94,719		6.28		2	Fee	Healthcare	N/A		Mar-16		6,686
Mt. Sterling, KY		67,706		19.15		1	Fee	Healthcare	N/A		Jan-22		7,336
Oklahoma City, OK		45,187		4.39		1	Fee	Healthcare	N/A		Jan-17		4,416
Olney, IL		25,185		11.16		1	Fee	Healthcare	N/A		Jan-17		2,449
		39,393		11.14		1	Fee	Healthcare	N/A		Jan-17		4,227
Paris, IL		39,393		16.70		1	Fee	Healthcare	N/A		Jan-17		6,819
Peru, IN		36,861		13.84		1	Fee	Healthcare	N/A		Jun-17		6,402
Peshtigo, WI		19,380		9.39		1	Fee	Healthcare	N/A		Dec-17		—
Plymouth, IN		39,092		10.05		1	Fee	Healthcare	N/A		Jun-17		5,233
Portage, IN		38,205		14.68		1	Fee	Healthcare	N/A		Jun-17		7,011
Racine, WI		26,583		37.01		2	Fee	Healthcare	N/A		Jan-17		10,050
Rantoul, IL		39,393		12.01		1	Fee	Healthcare	N/A		Jan-17		5,621
Robinson, IL		29,161		13.59		1	Fee	Healthcare	N/A		Jan-17		3,990
Rockford, IL		54,000		8.48		1	Fee	Healthcare	N/A		Jan-17		4,940
Rockport, IN		26,000		9.22		1	Fee	Healthcare	N/A		Jun-17		1,709
Rushville, IN		13,118		7.66		1	Fee	Healthcare	N/A		Jun-17		549
		35,304		16.76		1	Fee	Healthcare	N/A		Jun-17		4,073
Santa Ana, CA		24,500		37.75		1	Fee	Healthcare	N/A		Jan-17		7,874
Sheboygan, WI		39,784		23.70		2	Fee	Healthcare	N/A		Jan-17		9,300
Stephenville, TX		28,875		18.46		1	Fee	Healthcare	N/A		Jan-17		6,150
Sterling, IL		149,008		3.30		2	Fee	Healthcare	N/A		Mar-16		1,932
Stevens Point, WI		26,443		42.48		2	Fee	Healthcare	N/A		Jan-17		8,487
Stoughton, WI		24,686		8.64		1	Fee	Healthcare	N/A		Jan-17		1,686
Sullivan, IN		18,415		4.15		1	Fee	Healthcare	N/A		Jan-17		884
		44,077		14.46		1	Fee	Healthcare	N/A		Jan-17		4,889
Sycamore, IL		54,000		11.93		1	Fee	Healthcare	N/A		Jan-17		8,487
Syracuse, IN		57,980		9.24		1	Fee	Healthcare	N/A		Jan-17		3,484
Tipton, IN		62,139		18.12		1	Fee	Healthcare	N/A		Jun-17		8,045
Tuscola, IL		36,393		13.77		1	Fee	Healthcare	N/A		Jan-17		4,168
Two Rivers, WI		14,369		21.18		1	Fee	Healthcare	N/A		Jan-17		2,708
Vandalia, IL		39,393		14.78		1	Fee	Healthcare	N/A		Jan-17		7,328

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Location City, State	Square Feet		Rent per square ft.		Number of Buildings		Ownership Interest	Type	Leasehold Expiration Date	Lease/Sublease Expiration Date		Encumbrances (In Thousands)
Wabash, IN		35,374		5.19		1	Fee	Healthcare	N/A		Jun-17		1,297
		70,746		7.50		1	Fee	Healthcare	N/A		Jun-17		3,680
Wakarusa, IN		48,000		24.44		1	Fee	Healthcare	N/A		Jun-17		9,998
		89,828		6.81		1	Fee	Healthcare	N/A		Jun-17		6,437
Warsaw, IN		25,514		10.99		1	Fee	Healthcare	N/A		Jun-17		3,627
Washington Crt Hse, OH		19,660		25.94		1	Fee	Healthcare	N/A		Jan-17		1,952
Wausau, WI		24,047		36.14		1	Fee	Healthcare	N/A		Jan-17		7,553
Weatherford, OK		53,000		1.42		1	Fee	Healthcare	N/A		Jan-17		4,484
Wichita, KS		81,810		11.96		1	Fee	Healthcare	N/A		Dec-19		8,770
Winter Garden, FL		37,322		22.36		1	Fee	Healthcare	N/A		Feb-16		4,735
Wisconsin Rapids, WI		20,869		12.18		1	Fee	Healthcare	N/A		Jan-17		1,129
Total Healthcare		3,657,352		14.86		100							460,207
New York, NY		17,665				1	Leasehold	Retail/Office	Jul-15		June 2011–Jul-16		—
Indianapolis, IN		333,600		7.29		1	Fee	Office/Flex	N/A		Dec-25		28,142
Reading, PA		609,000		3.84		1	Fee	Distribution Ctr	N/A				18,905
Total		6,945,408	$	13.11		129						$	795,915

        As of, and for the year ended December 31, 2009, we had no single property with a book value or gross revenues, respectively, equal to or greater than 10% of our total assets. For the year ended December 31, 2009, we had no single property with gross revenues equal to or greater than 10% of our total revenues.

Item 3.    Legal Proceedings

Chatsworth Property

        One of our net lease investments was comprised of three office buildings totaling 257,000 square feet located in Chatsworth, CA and was 100% leased to Washington Mutual Bank, FA ("WaMu"). The tenant vacated the buildings as of March 23, 2009, and the leases (the "WaMu Leases") were disaffirmed by the FDIC. The assets were financed with a non-recourse $42.9 million first mortgage loan (the "WaMu Loan") and a $9.2 million mezzanine loan which was collateral for one of our securities CDO financings. In the fourth quarter of 2008,we took an impairment charge relating to these properties and in the third quarter of 2009 the lender, GECCMC 2005-CI Plummer Office Limited Partnership (the "Lender"), foreclosed on the property.

        On August 10, 2009, the Lender filed a compliant against NRFC NNN Holdings, Inc. ("NNN") and NRFC Sub Investor IV, LLC, which are subsidiaries of ours, in the Superior Court of the State of California, County of Los Angeles. In the complaint, the Lender alleges, among other things, that the WaMu Loan is a recourse obligation of NNN due to the FDIC's disaffirmance of the WaMu Leases. We filed a motion for summary judgment to eliminate certain claims with respect to the lawsuit on February 23, 2010. We believe this case is without merit and we are defending this suit vigorously.

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 2009.

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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 with respect to the periods indicated.

Period	High		Low		Close		Dividends
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
2009
First Quarter	$	4.90	$	1.25	$	2.32	$	0.10
Second Quarter	$	4.10	$	2.22	$	2.83	$	0.10
Third Quarter	$	4.08	$	2.51	$	3.51	$	0.10
Fourth Quarter	$	3.74	$	3.11	$	3.43	$	0.10

        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 was 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 April 21, 2009, we declared a cash dividend of $0.10 per share of common stock. The dividend was paid on May 15, 2009 to the stockholders of record as of the close of business on May 5, 2009.

        On July 21, 2009, we declared a cash dividend of $0.10 per share of common stock. The dividend was paid on August 14, 2009 to the stockholders of record as of the close of business on August 4, 2009.

        On October 20, 2009, we declared a cash dividend of $0.10 per share of common stock. The dividend was paid on November 16, 2009 to the stockholders of record as of the close of business on November 6, 2009.

        On January 19, 2010, we declared a dividend of $0.10 per share of common stock. The dividend was paid on February 12, 2010 to the stockholders of record as of the close of business on February 5, 2010.

        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

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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. For the three months ended December 31, 2009 we did not purchase any shares pursuant to the share repurchase program. On February 25, 2010, the closing sales price for our common stock, as reported on the NYSE, was $4.39. As of February 25, 2010, there were 212 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 January 1, 2005 and ends on December 31, 2009, the end of our most recently completed fiscal year. The graph assumes an investment of $100 on January 1, 2005 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	12/31/04		12/31/05		12/31/06		12/31/07		12/31/08		12/31/09
NorthStar Realty Finance Corp.		100.00		93.94		168.61		103.22		54.03		53.34
Russell 2000		100.00		104.55		123.76		121.82		80.66		102.58
NAREIT All REIT Index		100.00		108.29		145.49		119.54		74.91		95.47

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Equity Compensation Plan Information

        The following table summarizes information, as of December 31, 2009, relating to our equity compensation plans pursuant to which grants of securities may be made from time to time.

Plan Category			Number of Securities to Be Issued Upon Exercise of Outstanding Options, Warrants and Rights(1)		Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights		Number of Securities Available for Future Issuance
Approved by Security Holders:
	2004 Omnibus Stock Incentive Plan			7,125,345		n/a		181,634
	2004 Long-Term Incentive Bonus Plan			197,968		n/a		—
		Total		7,323,313		n/a		181,634

(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.

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 related notes, each included elsewhere in this Form 10-K.

        The selected historical consolidated information presented for the years ended December 31, 2009, 2008, 2007, 2006 and 2005 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.

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        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.

			Year Ended December 31,
			2009			2008			2007			2006			2005
			(In thousands, except share and per share amounts)
Statements of Operations Data:
Revenues:
	Interest income		$	142,213		$	212,432		$	292,131		$	135,091		$	40,043
	Interest income—related parties			17,692			14,995			13,516			11,671			8,374
	Rental and escalation income			98,857			108,266			91,301			35,683			11,403
	Advisory and management fee income—related parties			7,295			12,496			7,658			5,906			4,813
	Other revenue			736			16,494			6,242			5,874			464
		Total revenues		266,793			364,683			410,848			194,225			65,097
Expenses:
	Interest expense			121,461			190,712			241,287			103,639			32,568
	Real estate properties—operating expenses			14,692			8,289			8,719			8,561			2,044
	Asset management fees—related party			3,381			4,746			4,368			594			—
	Fund raising fees and other joint venture costs			—			2,879			6,295			—			—
	Impairment on operating real estate			—			5,580			—			—			—
	Provision for loan losses			83,745			11,200			—			—			—
General and administrative
	Salaries and equity based compensation(1)			47,213			53,269			36,148			22,547			11,337
	Auditing and professional fees			9,640			7,075			6,787			4,765			3,634
	Other general and administrative			13,689			14,486			13,610			7,739			4,026
Total general and administrative				70,542			74,830			56,545			35,051			18,997
	Depreciation and amortization			41,864			41,182			31,916			13,042			4,352
	Total expenses			335,685			339,418			349,130			160,887			57,961
Income/(loss) from operations				(68,892	)		25,265			61,718			33,338			7,136
Equity in (loss)/earnings of unconsolidated ventures				(1,809	)		(11,918	)		(11,684	)		432			226
Unrealized gain/(loss) on investments and other				(209,976	)		649,113			(4,330	)		4,934			867
Realized gain on investments and other				128,461			37,699			3,559			1,845			2,160
Income/(loss) from continuing operations				(152,216	)		700,159			49,263			40,549			10,389
Income from discontinued operations				1,844			2,170			1,047			798			547
Gain on sale of discontinued operations				13,799			—			—			445			28,852
Gain on sale of joint venture interest				—			—			—			279			—
Consolidated net income (loss)				(136,573	)		702,329			50,310			42,071			39,788
	Net income (loss) attributable to the non-controlling interests			6,293			(72,172	)		(3,276	)		(4,006	)		(2,116	)
Preferred stock dividends				(20,925	)		(20,925	)		(16,533	)		(860	)		—
Net income available to common stockholders			$	(151,205	)	$	609,232		$	30,501		$	37,205		$	37,672
Net income (loss) per share from continuing operations				(2.36	)		9.62			0.48			0.91			0.38
Income per share from discontinued operations (basic/diluted)				0.02			0.03			0.02			0.01			0.03
Gain per share on sale of discontinued operations and joint venture interest (basic/diluted)				0.18			—			—			0.02			1.33
Net income (loss) per share available to common stockholders			$	(2.16	)	$	9.65		$	0.50		$	0.94		$	1.74
Common stock dividends declared			$	0.55		$	1.44		$	1.43		$	1.21		$	0.53
Preferred stock dividends declared				20,925			20,925			16,533			860			—
Weighted average number of shares of common stock outstanding:
	Basic			69,869,717			63,135,608			61,510,951			39,635,919			21,660,993
	Diluted			77,193,083			70,136,783			65,086,953			44,964,455			27,185,013

(1)

For the year ended December 31, 2009, 2008, 2007, 2006 and 2005 includes $20,474, $24,680, $16,007, $9,080 and $5,847 in equity based compensation, respectively. Cash incentive compensation expense incurred but payable in future periods totaled $4,635, $2,169, $0, $0 and $0, respectively, for the years ended December 31, 2009, 2008, 2007, 2006 and 2005.

67

	December 31,
	2009		2008		2007		2006		2005
	(In thousands)
Balance Sheet Data
Operating real estate—net	$	978,902	$	1,127,000	$	1,134,136	$	468,608	$	198,708
Available for sale securities, at fair value		336,220		221,143		549,522		788,467		149,872
Real estate debt investments, net		1,936,482		1,976,864		2,007,022		1,571,510		681,106
Real estate debt investments, held-for-sale		611		70,606		—		—		—
Corporate loan investments		—		—		457,139		—		—
Investments in and advances to unconsolidated/uncombined ventures		38,299		101,507		33,143		11,845		5,458
Total assets		3,669,564		3,943,726		4,792,782		3,185,620		1,156,565
Mortgage notes and loans payable		795,915		910,620		912,365		390,665		174,296
Exchangeable senior notes		125,992		233,273		172,500		—		—
Bonds payable		584,615		468,638		1,654,185		1,682,229		300,000
Credit facilities		—		44,881		501,432		16,000		243,002
Secured term loans		368,865		403,907		416,934		—		—
Liability to subsidiary trusts issuing preferred securities		167,035		69,617		286,258		213,558		108,258
Repurchase obligations		—		176		1,864		80,261		7,054
Total liabilities		2,210,924		2,329,966		4,152,248		2,502,990		863,862
Non-controlling interests		185,469		198,593		22,495		22,859		44,278
Stockholders' equity		1,273,171		1,415,167		618,039		659,771		248,425
Total liabilities and stockholders' equity	$	3,669,564	$	3,943,726	$	4,792,782	$	3,185,620	$	1,156,565

		Year Ended December 31,
		2009			2008			2007			2006			2005
		(In thousands)
Other Data:
Cash Flow from:
	Operating activities from continuing operations	$	54,518		$	87,612		$	102,238		$	53,998		$	849,625
	Investing activities		125,559			(110,708	)		(2,373,929	)		(1,852,961	)		(881,090	)
	Financing activities		(175,188	)		3,306			2,380,767			1,815,828			11,630

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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 CDO 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 on a recurring basis 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 CDO 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. Realized gains have more recently been a significant source of income and have been primarily derived by selling securities at premiums to our carrying values and by repurchasing our issued debt at discounts to contractual face amounts. Both of these activities are opportunistic in nature and are very dependent on market conditions; therefore it is difficult to predict whether realized gains may be a significant part of income in the future.

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Real Estate Debt

        We primarily earn interest income from real estate debt investments. At December 31, 2009, our real estate debt portfolio consisted of approximately $1.9 billion of senior and subordinate debt investments. We completed one new investment in 2009, three investments in 2008, 41 investments in 2007, 74 investments in 2006 and 44 investments in 2005.

        Approximately 89.3% of our loan assets generate interest income based upon a floating index, primarily one-month LIBOR, plus a credit spread. Our revenues will be impacted by changes in LIBOR; however, we seek to minimize the impact of changes in floating interest rates by financing floating rate assets with floating rate debt having interest rates benchmarked to the same index as our assets. Decreases in floating interest rates may result in lower income for our stockholders because the unfinanced portion of the asset is not hedged, 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 CDO financings. 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, 2006 and 2005, we acquired $125.9 million, $164.9 million and $215.4 million, respectively, of core net lease properties. We made no core net lease acquisitions during 2008 or 2009. 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 and in 2009 we acquired our partner's minority interest in the venture.

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 the recognition that our

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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.

        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.

Outlook and Recent Trends

        U.S. macroeconomic, financial and real estate sector conditions have remained poor since 2007, when the subprime residential lending and single family housing market collapse quickly spread broadly into the capital markets. The resulting virtual shutdown of the credit and equity markets pushed the U.S. economy into recession, with the unemployment rate increasing from a low of 4.4% in 2007 to 10.0% at December 31, 2009. Several major financial institutions failed or had to be rescued in 2008, and 140 banks failed in 2009. The U.S. Government responded in early 2009 to deteriorating conditions by creating several programs such as the Troubled Asset Relief Program and the Public-Private Investment Program (TARP and TALF, respectively), designed to create demand for financial instruments and to re-equitize weaker banks. Congress also passed in early 2009 a $787 billion economic stimulus package, and the U.S. Federal Reserve lowered the Fed Funds target rate from over 5% in 2007 to 0-0.25% in 2009 and introduced massive amounts of cash liquidity into the banking system.

        The corporate bond, consumer asset-backed debt and equity markets began to recover during 2009, although macroeconomic statistics remained weak and the commercial mortgage-backed markets remained virtually closed. Other traditional commercial real estate lenders such as banks and life companies severely curtailed their lending during this period, resulting in a severe shortage of debt capital for real estate investors and those needing to refinance maturing loans. During 2009 the TALF program began providing 85% three and five-year non-recourse financing for the highest rated commercial mortgage-backed securities (CMBS) in order to decrease credit spreads and with the expectation that the subsidized financing would eventually enable the CMBS markets to begin functioning. The program to-date has been modestly successful in reducing yields on the highest rated securities, but no new multi-borrower CMBS deals have been completed. The lack of available credit for commercial real estate has depressed values and resulted in increasing loan defaults and restructurings throughout the industry. Furthermore, poor economic conditions have generally resulted in declining cash flow from commercial real estate, further depressing values and increasing the difficulty in finding new capital.

        Despite these conditions, REITs have collectively raised nearly $30 billion of debt and equity capital, and the Morgan Stanley REIT Index returned approximately 28.6% for 2009. In addition, several REITs with a real estate debt focus raised approximately $1.5 billion of capital in 2009. Notwithstanding the ability of the public REIT market to raise capital, this market is very small relative to the size of the estimated $1.5 trillion commercial real estate finance market and we expect commercial real estate fundamentals to continue to deteriorate into 2010.

Commercial Real Estate Macroeconomic Conditions

        Virtually all commercial real estate property types have been adversely impacted by this prolonged economic recession and liquidity crisis, including hotel, retail, office, industrial and multi-family properties. Land, condominium and other commercial property types have also been severely impacted. As a result, cash flows and values associated with properties serving as collateral for our loans are generally weaker than expected when we originated the loans. Business and retailer failures increased during 2009 and are expected to negatively impact occupancy rates in the future. Our credit loss provisioning levels for 2009 were higher than in the past due to the impact of these conditions. The

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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, the scarcity and cost of new debt capital, the absolute level of one-month LIBOR and the severity of the economic contraction, among other things.

        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 as of December 31, 2009 is 0.23%, well below its 3.35% average over the past five years. Lower LIBOR means lower debt service costs for our borrowers which have partially offset decreasing cash flows caused by the economic recession, and extended 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, although the availability and cost of debt capital appears to have a much more significant impact on property values. 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. The conditions are adversely impacting the performance of our real estate loans and securities and the related collateral properties. The deep economic recession combined with a crippled banking sector has resulted in weakening cash flows from collateral properties and extreme difficulties in obtaining repayments at maturity.

        For existing loans, when credit spreads widen, which was the case in 2008 and early 2009, the economic value of 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 economic 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 are also negatively impacted by weaker real estate market and economic conditions. Within the underlying loan pools, slowdown in economic conditions is reducing 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 are negatively affected as existing leases renew at lower rates. Finally, declining occupancy rates 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 changed their ratings methodologies for all securitized asset classes, including commercial real estate, in light of questionable ratings previously assigned to residential mortgage portfolios. Combined with a poor economic outlook, their reviews have resulted in, and are continuing to result 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.

        Our net leased assets are also adversely impacted by a weaker economy as well. Corporate space needs are contracting 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 terms of their leases.

Our Strategy

        We responded to these difficult conditions by decreasing investment activity and aggressively raising corporate capital when we observed deteriorating market conditions. We expect credit to

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continue to be challenging in 2010 and continue to focus 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, for amortization of bank debt and for growth in our asset management portfolio.

        The lack of supply and high demand for capital is allowing investors with cash to make investments with very attractive returns compared to historical levels. For this reason, we are working to raise equity capital through alternative channels, especially in the nonlisted REIT market. We have filed a registration statement on Form S-11 for NorthStar Real Estate Income Trust, Inc., a commercial finance REIT that will be managed by us and will not be listed on a major exchange, and we are building a wholesale broker dealer network to raise equity capital for the nonlisted REIT. We are also raising equity under an SEC Regulation D exemption for NorthStar Income Opportunity REIT I, Inc., a commercial finance REIT also managed by us. We expect to use our broad commercial real estate investment and management platform to operate these companies and to earn management fees in return for our services.

        REITs focused on healthcare properties are currently being attractively valued, compared to historical levels, by the public equity markets, and at a much lower cost of capital than us. In December 2009, we filed a registration statement on Form S-11 for NorthStar Healthcare Investors, Inc. (NRH), a newly formed REIT containing a majority of our net leased healthcare real estate business having a net book value of approximately $604.6 million at December 31, 2009. We expect that if NRH goes public it would also be managed by us and we would earn a management fee for our services.

        Both the private REITs and the NRH filing reflect our strategy of accessing alternative sources of equity capital, leveraging our existing platform to generate fee revenues and to become less reliant on the public markets to grow our business.

Our Financing Structures

        Approximately $4.0 billion of our collateralized debt obligations, (including the off-balance sheet and on-balance sheet term CDO 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 with a net book value of approximately $463.3 million financed on a bank term loan with an outstanding balance of $332.1 million at December 31, 2009. On October 28, 2009, we completed a three-year extension of this bank term loan and we repaid approximately $52.5 million of the outstanding balance by using uninvested cash contained within our CDO financings. The bank debt requires six semi-annual amortization payments of $15 million, representing aggregate paydowns totaling $90 million over its term. Approximately $990.4 million of our funded loan commitments have their initial maturity date in 2010; however, most of the loans contain extension options of at least one year (many subject to performance criteria). We also expect that a majority of the $314.4 million of loans having final maturities in 2010 will have their maturities extended beyond 2010 with the expectation that future periods will have more attractive economic conditions and cheaper debt capital. It is therefore difficult to estimate how much capital, if any, will be generated in our CDO financings from loan repayments during 2010 to create availability to further amortize the bank loan.

        Our CDO structures do not have corporate financial covenants but require that the underlying loans and securities meet interest coverage 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

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reinvest can be adversely impacted if these tests are not in compliance. Ratings downgrades and defaults 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 CDO structures. As economic conditions remain weak and capital for commercial real estate remains scarce, we expect credit quality in our assets and across the commercial real estate sector to continue to weaken. While we have devoted a majority of our resources to managing our existing asset base, a continued poor environment and additional credit ratings downgrades will make maintaining compliance with the CDO structures more difficult, jeopardizing regular cash flow distributions to our company.

        We believe that liquidity will eventually return more broadly to the commercial real estate finance markets. Corporate debt capital is available to the stronger equity REITs, and three single-borrower CMBS transactions were completed in the fourth quarter of 2009. Other sources could include financing from U.S. Government sponsored programs such as PPIP, 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. We also believe that the CMBS markets will eventually heal and once again become an important source of secured non-recourse debt capital for commercial real estate.

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 although as the economic recession continues, obtaining additional collateral from struggling borrowers has become more difficult. 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.

        In certain circumstances, we may pursue loan sales and payoffs at discounts to our book value. Generally, we may agree to discounted payoffs where we believe there is an economic benefit from monetizing the asset in advance of its contractual maturity date. For example, we may accept a discounted payoff where we believe the cash proceeds can be reinvested at a much higher rate of return (including the capital loss from the payoff), where we believe there is significant risk of collateral value or cash flow erosion through maturity, or where we believe refinancing risk at maturity is very high. When evaluating sales and payoffs at discounts to book value, we must also consider the impact such transactions have on our financing structures, corporate debt covenants and earnings.

        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 are problems with the underlying collateral. Generally, we manage risk in the securities portfolio by selling the asset when we can obtain a price that is attractive relative to its risk. In certain situations, we may sell an asset

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because there is an opportunity to reinvest the capital into a new asset with a more attractive risk/return profile.

        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. During the quarterly reviews, assets are put on non-performing status and identified for possible impairment based upon several factors, including missed or late contractual payments, significant declines in collateral performance, and other data which may indicate a potential issue in our ability to recover our capital from the investment.

        At December 31, 2009, our loan portfolio had the following credit statistics:

	Number of Loans		Dollar Value (in thousands)		Percent of Total Loan Portfolio
Non-performing loans(1)		6	$	99,259		4.91	%
Loan loss reserves(2)		13		81,000		4.01	%

(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.

(2)

Includes four of the six non-performing loans.

        At December 31, 2009, our loan portfolio principal and interest aging is as follows (inclusive of our non-performing loans) (in thousands):

1 – 30 Days	31 – 60 Days	61 – 90 Days	90+ Days
$25,825	$78	$12	$73,839

        During 2009, we recorded $83.7 million of credit loss provisions relating to 15 loans, and had one foreclosure resulting in the full write-off of a $9.3 million mezzanine loan. During 2009 we also incurred $9.0 million of losses associated with the discounted payoffs in advance of their stated maturities of two first mortgage loans having a $55.9 million aggregate book value. As of December 31, 2009, loan loss reserves totaled $81.0 million and related to 13 loans having an aggregate $290.3 million book value (exclusive of the related reserve).

        Activity in the allowance for credit losses on real estate debt investments for the periods ended December 31, 2008 and 2009, respectively, is as follows:

Credit Loss Reserve
Balance at December 31, 2007	$	—
Provision for credit losses		11,200
Balance at December 31, 2008		11,200
Provision for credit losses		83,745
Write-offs		(13,945	)
Balance at December 31, 2009	$	81,000

        At December 31, 2009, we had six loans totaling $99.3 million on non-performing status due to maturity defaults, and $37.9 million of our credit loss reserves were allocated to these loans. First mortgages represent approximately 61.3% of the book value of these loans (exclusive of reserves), and 42.7% of the loans are backed by land collateral. There can be no assurance that acceptable

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assumption and modification agreements can be reached with the respective borrowers under our non-performing loans, and if agreements cannot be reached we may determine that more reserves are required for these loans.

        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.

        During 2009, we modified the contractual interest rates of loans as part of restructuring or extension negotiations and, in some cases, we discontinued the recognition of income for interest accrual rates in excess of the stated cash pay rates. In the aggregate, these changes, as well as loans which were non-performing during the year, resulted in an approximate $13.5 million reduction to interest income ($24.3 million on an annualized basis).

        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.

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:.

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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. All significant inter-company balances have been eliminated in consolidation.

Valuation of Financial Instruments

        Proper valuation of financial instruments is a critical component of our financial statement preparation. 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 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

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prices obtained from recognized financial data service providers. Generally these prices are provided by a recognized financial data service provider.

        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 involve a significant degree of management's judgment.

        Investments for which market prices are not observable are generally investments in equity or income notes of CDO financings, 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 CDO 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

        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.

        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.

Fair Value Option

        The fair value option of accounting for financial assets and financial liabilities 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. The fair value option permits election on an instrument by instrument basis at initial recognition. We have elected to fair value 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.

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Available for Sale Securities

        We determine the appropriate classification of our investments in securities at the time of purchase and reevaluate such determination at each balance sheet date. Securities for which we do not have the intent or the ability to hold to maturity are classified as available for sale securities. We have designated our investments in the equity notes and our non investment grade notes of unconsolidated CDO financings 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 CDO financings, which we have elected the fair value option, are carried at fair value with the net unrealized gains or losses reported as a component of earnings in the statement of operations. For additional information regarding unrealized gains and losses due to changes in the fair value of our available for sale securities at December 31, 2009 and 2008, 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.

        Interest income on our investments in the equity notes of our unconsolidated CDO financings 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. If it is determined the decline in value is other than temporary, the impaired securities are written down through earnings to their fair values. Significant judgment of management is required in this analysis, which includes, but is not limited to, making assumptions regarding the collectability of the principal and interest, net of related expenses, on the underlying loans.

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

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events, which are inherently subjective, the amounts ultimately realized from the investments may differ materially from the carrying value at the balance sheet date.

        On a periodic basis, we assess whether there are any indicators that the value of our real estate properties may be impaired or that its carrying value may not be recoverable. A property's value is considered impaired if management's estimate of the aggregate future cash flows to be generated by the property are less than the carrying value of the property. To the extent an impairment has occurred and is considered to be other than temporary, the loss will be measured as the excess of the carrying amount of the property over the calculated fair value of the property.

        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 for equity based compensation awards. 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 as either assets or liabilities in the consolidated balance sheet and measure those instruments at fair value. Additionally, the fair value adjustments of each period will affect our consolidated financial statements differently depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity.

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

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

        With respect to derivative instruments that have not been designated as hedges, or are hedges on debt that is remeasured at fair value, 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.

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        In January 2008, we elected the fair value option for our bonds payable and its liability to subsidiary trusts issuing preferred securities. Accordingly, 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 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 January 2009, The Financial Accounting Standards Board ("FASB") issued an accounting pronouncement which amends previously issued impairment guidance to achieve more consistent determination of whether an other-than-temporary impairment has occurred. The pronouncement also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements in other related guidance. The pronouncement is effective and should be applied prospectively for financial statements issued for fiscal years and interim periods ending after December 15, 2008. Our adoption of the pronouncement did not have a material effect on our financial condition, results of operations, or cash flows.

        In April 2009, the FASB issued an accounting pronouncement which is intended to provide greater clarity to investors about the credit and noncredit component of an other-than-temporary event and to more effectively communicate when an other-than-temporary event has occurred. The pronouncement applies to debt securities and requires that the total other-than-temporary impairment be presented in the statement of income with an offset for the amount of impairment that is recognized in other comprehensive income, which is the noncredit component. Noncredit component losses are to be recorded in other comprehensive income if an investor can assess that (a) it does not have the intent to sell or (b) it is not more likely than not that it will have to sell the security prior to its anticipated recovery. The pronouncement is effective for interim and annual periods ending after June 15, 2009. The pronouncement will be applied prospectively with a cumulative effect transition adjustment as of the beginning of the period in which it is adopted. Our adoption of the pronouncement did not have a material effect on our financial condition, results of operations, or cash flows.

        In April 2009, the FASB issued an accounting pronouncement which provides additional guidance on determining whether a market for a financial asset is not active and a transaction is not distressed for fair value measurements. The pronouncement will be applied prospectively and retrospective application is not permitted. The pronouncement is effective for interim and annual periods ending after June 15, 2009. Our adoption of the pronouncement did not have a material effect on our financial condition, results of operations, or cash flows.

        In April 2009, the FASB issued an accounting pronouncement which will require an entity to provide disclosures about the fair value of financial instruments in interim financial information. The pronouncement would apply to certain financial instruments and will require entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial instruments, in both interim financial statements as well as annual financial statements. The pronouncement is effective for interim and annual periods ending after June 15, 2009. Our adoption of the pronouncement did not have a material effect on our financial condition, results of operations, or cash flows.

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        In May 2009, the FASB issued an accounting pronouncement which establishes general standards of accounting for, and requires disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. We adopted the pronouncement for the quarter ended June 30, 2009. Our adoption of the pronouncement did not have a material effect on our financial condition, results of operations, or cash flows.

        In June 2009, the FASB issued an accounting pronouncement which requires additional information regarding transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. The pronouncement eliminates the concept of a "qualifying special-purpose entity," changes the requirements for derecognizing financial assets, and requires additional disclosures. The pronouncement is effective for fiscal years beginning after November 15, 2009. Our adoption of the pronouncement will not have a material effect on our financial condition, results of operations, or cash flows.

        In June 2009, the FASB amended the guidance for determining whether an entity is a variable interest entity, or VIE, and requires an analysis of quantitative rather than qualitative factors to determine the primary beneficiary of a VIE. The guidance requires an entity to consolidate a VIE if (i) it has the power to direct the activities that most significantly impact the VIE's economic performance and (ii) the obligation to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be significant to the VIE. The pronouncement is effective for fiscal years beginning after November 15, 2009. As a result of the implementation of this pronouncement, we will consolidate four of our off balance sheet CDO financings. At December 31, 2009, the par value of the assets and liabilities of the four off-balance sheet CDO financings that will be consolidated as of January 1, 2010, is approximately $1.64 billion and $1.34 billion, respectively (see Note 8 for further details). We have elected the fair value option of accounting for the assets and liabilities of these entities upon consolidation. We are in the process of determining the fair market value of the CDO financings assets and liabilities that will be consolidated upon implementation of this pronouncement.

        In June 2009, the FASB issued an accounting pronouncement which approved the "FASB Accounting Standards Codification" ("Codification") as the single source of authoritative nongovernmental U.S. GAAP effective July 1, 2009. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. All existing accounting standard documents are superseded and all other accounting literature not included in the Codification is considered nonauthoritative. The Codification is effective for interim and annual periods ending after September 15, 2009. The Codification did not have an impact on our financial condition or results of operations.

        In August 2009, the FASB issued an Accounting Standards Update ("ASU") which amends the Codification and provides clarification that in circumstances in which a quoted price in an active market for an identical liability is not available, an entity is required to measure fair value using one or more of the following techniques: (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset, or quoted prices for similar liabilities or similar liabilities when traded as assets, (ii) another valuation technique consistent with the principles of fair value measurements and disclosures such as a present value technique or a market approach that is based on the amount at the measurement date that the entity would pay to transfer the identical liability or would receive to enter into the identical liability. The update is effective for the first reporting period (including interim periods) beginning after issuance, which for the us is October 1, 2009. Our adoption of the ASU did not have a material effect on our financial condition, results of operations, or cash flows.

        In January 2010, the FASB issued an ASU which amends the Codification and clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the

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aggregate is considered a share issuance that is reflected in earnings per share prospectively and is not a stock dividend. The ASU is effective for interim and annual periods ending on or after December 15, 2009, and should be applied on a retrospective basis. The adoption of the ASU did not have an impact on our financial condition, results of operations or disclosures.

        January 2010, the FASB issued an ASU which amends fair value disclosure requirements such that an entity will be required to present detailed disclosures about transfers to and from Level 1 and 2 of the fair value valuation hierarchy and to present purchases, sales, issuances, and settlements on a "gross" basis within the Level 3 of the fair value valuation hierarchy. The ASU is effective for interim and annual periods beginning on or after December 15, 2009 except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning on or after December 15, 2010, and for interim periods within those fiscal years. The adoption of the ASU will not have an impact on our financial condition or results of operations.

Comparison of the Year Ended December 31, 2009 to the Year Ended December 31, 2008

Revenues

Interest Income

        Interest income for the year ended December 31, 2009 totaled $142.2 million, representing a decrease of $70.2 million, or 33%, compared to $212.4 million for the year ended December 31, 2008. In 2009, the combination of a lower average one-month LIBOR of approximately 247 basis points and lower comparable asset balances resulted in a decrease of approximately $65.4 million in interest income. In addition, the recapitalization and deconsolidation of our corporate lending venture in 2008 further decreased interest income by $11.3 million. The decrease was partially offset by a net increase to interest income of approximately $6.5 million resulting primarily from the acquisition during 2009 of higher yielding commercial real estate securities and real estate debt investment fundings with a net book value of $481.2 million subsequent to December 31, 2008 offset by approximately $465.3 million of investment dispositions and repayments during 2009.

Interest Income—Related Parties

        Interest income from related parties for the year ended December 31, 2009 totaled $17.7 million, representing an increase of $2.7 million, or 18%, compared to $15.0 million for the year ended December 31, 2008. The increase is attributable to securities purchases within our non-consolidated CDO financings in which we own the non-investment grade note classes. We are generally earning higher yields on securities purchased during 2009 due to wider credit spreads. All of our real estate securities CDO financings 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, 2009 totaled $98.9 million, representing a decrease of $9.4 million, or 9%, compared to $108.3 million for the year ended December 31, 2008. The decrease was primarily attributable to decreases of $8.4 million related to the Reading, PA property lease termination in 2008 and the Chatsworth, CA property lease disaffirmation and foreclosure of the properties by the first mortgage lender in 2009, a decrease of $7.4 million was attributable to the change of our net lease relationship with one of our healthcare operators, which resulted in one of our unconsolidated affiliates becoming the lessee of the properties and our unconsolidated affiliate simultaneously entered into a management agreement with a third party operator and $0.9 million related to lower rents on the lease renewal for the Cincinnati, OH property for the year ended December 31, 2009 as compared to the year ended December 31, 2008, partially

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offset by an increase in rental income of $5.9 million related to the restructuring and termination of two of our leases with an operator in our healthcare portfolio and a $1.4 million increase in rental income in our net lease healthcare portfolio for leases, which are based on CPI indices.

Advisory and Management Fee Income—Related Parties

        Advisory fees from related parties for the year ended December 31, 2009 totaled $7.3 million, representing a decrease of approximately $5.2 million, or 42%, compared to $12.5 million for the year ended December 31, 2008. The decrease was primarily attributable to the sale of 67% of the advisory fee income stream from one of our CDO financings to the Securities Fund which resulted in the recognition of an additional $4.8 million in advisory fee income during the second quarter 2008. In addition, the reinvestment periods have expired in two of our CDO financings resulting in lower advisory fees due to collateral payoffs.

Other Revenue

        Other revenue for the year ended December 31, 2009 totaled $0.7 million, representing a decrease of $15.8 million, or 96%, compared to $16.5 million for the year ended December 31, 2008. Other revenue for year ended December 31, 2009 consisted primarily of $0.3 million in assumption and late fees, $0.2 million in unused credit line fees and $0.2 million in other fees. 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.

Expenses

Interest Expense

        Interest expense for the year ended December 31, 2009 totaled $121.5 million, representing a decrease of $69.2 million, or 36%, compared to $190.7 million for the year ended December 31, 2008. The decrease in interest was primarily the result of: (i) $40.1 million lower interest on our issued CDO notes and trust preferred debt due to lower average LIBOR rates, debt repurchases and repayments; (ii) $8.2 million lower interest on our 7.25% exchangeable senior notes due to repurchases; (iii) $5.9 million lower interest as a result of the recapitalization, termination and de-consolidation of our corporate lending venture in 2008; (iv) $7.9 million lower interest relating to lower average balances and lower LIBOR rates on our WA Secured Term Loan; (v) $3.9 million in lower interest rates on our Euro-note; (vi) $3.1 million lower interest as a result of the foreclosure by the first mortgage lender of our Chatsworth, CA properties; (vii) $2.2 million lower interest related to the termination of our unsecured revolving credit line in May 2008; and (viii) $1.1 million lower interest related to lower average balances on repurchase obligations. The decrease in interest expense was partially offset by $3.2 million in additional expense from our $80.0 million 11.50% exchangeable senior notes issued in May 2008.

Real Estate Properties—Operating Expenses

        Real estate property operating expenses for year ended December 31, 2009 totaled $14.7 million, representing an increase of $6.4 million, or 77%, compared to $8.3 million for year ended December 31, 2008. The increase was primarily attributable to $7.0 million of operating expenses now consolidated in our financial statements resulting from terminating two of our net leases with an operator in our healthcare portfolio. The properties will continue to be managed by third parties and we will now consolidate the revenues and expenses relating to these operations. The increase was also attributable to expenses of $0.5 million that are no longer reimbursed related to the Reading, PA

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facility that is now vacant, partially offset by $1.0 million in lower expenses as a result of the first mortgage lender foreclosing on the Chatsworth, CA properties.

Asset Management Fees—Related Party

        Advisory fees for related parties for the year ended December 31, 2009 totaled $3.4 million, representing a decrease of $1.3 million, or 28%, compared to $4.7 million for the year ended December 31, 2008. The decrease was primarily attributable to the termination of the corporate lending joint venture agreement. We incurred $3.4 million of management fees to Wakefield Capital Management and no management fees to the corporate lending joint venture for the year ended December 31, 2009, respectively. We incurred $3.4 million of management fees to Wakefield Capital Management and $1.3 million of management fees to our former corporate lending venture for the year ended December 31, 2008, respectively.

Fundraising Fees and Other Joint Venture Costs

        We did not incur any fundraising fees and other joint venture costs for the year ended December 31, 2009. In 2008 these costs included a $2.9 million write-off of goodwill relating to our NRF Capital acquisition in 2005.

Impairment on Operating Real Estate

        We had no impairment on operating real estate for the year ended December 31, 2009 compared to a $5.6 million impairment for the year ended December 31, 2008. The impairment on operating real estate was taken on our net investment comprised of three office buildings totaling 257,000 square feet located in Chatsworth, CA and 100% leased 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 and a $9.3 million mezzanine loan. On February 5, 2009, we became aware the tenant intended to vacate the properties by March 23, 2009. As a result, we determined that we would return the property back to the first mortgage lender and accordingly, we took an impairment charge of $5.6 million as of December 31, 2008.

Provision for Loan Losses

        Provision for loan losses for the year ended December 31, 2009 totaled $83.7 million for 15 loans. The provision for loan losses for the year ended December 31, 2009 included $38.0 million for first mortgage whole loans, $16.0 million for subordinated mortgage interests and $29.7 million for mezzanine loans. Provision for loan losses for the year ended December 31, 2008 totaled $11.2 million. During 2008, we recorded $15.7 million for 10 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.

General and Administrative

        General and administrative expenses for the year ended December 31, 2009 totaled $70.5 million, representing a decrease of $4.3 million, or 6%, compared to $74.8 million for the year ended December 31, 2008. The primary components of our general and administrative expenses were the following:

        Salaries and equity-based compensation for the year ended December 31, 2009 totaled $47.2 million, representing a decrease of approximately $6.1 million, or 11%, compared to $53.3 million, for the year ended December 31, 2008. The decrease was attributable to a $1.9 million decrease related to salaries and accrued cash incentive compensation costs and a $4.2 million decrease related to equity-based compensation. The $1.9 million decrease in salaries and accrued compensation

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was attributable to lower staffing levels in 2009. Included in salaries and accrued cash incentive compensation cost for 2009 and 2008 are $4.6 million and $2.2 million, respectively, of deferred cash incentive compensation payable in future periods upon continuing employment. The $4.2 million decrease in equity-based compensation expense was attributable to the one-time grants of $0.7 million in 2008 in connection with employee compensation arrangements and $1.2 million in connection with employee separation agreements. In addition, approximately $2.2 million of the decrease was attributable to a decrease of vesting of equity-based awards issued under our 2004 Omnibus Stock Incentive Plan and our 2006 Outperformance Plan relating to awards fully vesting and a $0.1 million decrease in our annual directors grants.

        Auditing and professional fees for the year ended December 31, 2009 totaled $9.6 million, representing an increase of $2.5 million, or 35%, compared to $7.1 million for the year ended December 31, 2008. The increase was primarily attributable to approximately $1.2 relating to lease restructuring expense in our healthcare portfolio, and a $1.1 million increase in legal fees for general corporate work, and portfolio management.

        Other general and administrative expenses for the year ended December 31, 2009 totaled $13.7 million, representing a decrease of approximately $0.7 million, or 5%, compared to $14.4 million for the year ended December 31, 2008. The decrease was primarily attributable to decreased overhead costs resulting from lower staffing levels during the year ended December 31, 2009.

Depreciation and Amortization

        Depreciation and amortization expense for the year ended December 31, 2009 totaled $41.9 million, representing an increase of $0.7 million, or 2%, compared to $41.2 million for the year ended December 31, 2008. This increase was primarily attributable to an increase of $6.3 million related to the write off of certain costs associated with the lease restructuring and termination of two of our leases with an operator in our healthcare portfolio and our restructured net lease relationship with one of our healthcare operators partially offset by lower depreciation and amortization of $5.7 million relating to the lease termination for the Reading, PA property and the foreclosure by the first mortgage lender of the Chatsworth, CA property.

Equity in (Loss) Earnings of Unconsolidated Ventures

        Equity in (loss) earnings for the year ended December 31, 2009 was a net $1.8 million loss, representing a decrease of $10.1 million, compared to a loss of $11.9 million for the year ended December 31, 2008. For the year ended December 31, 2009, we recognized equity in losses of $6.5 million from the Securities Fund (which includes both realized and unrealized gains from asset sales and mark-to-market adjustments) and $3.7 million from the LandCap joint venture. The losses were partially offset by equity in earnings of $8.0 million from our unconsolidated affiliated lessee formed in 2009, resulting from the termination of a lease to a third party in our healthcare real estate portfolio and $0.4 million in connection with a net lease joint venture. For the year ended December 31, 2008, we recognized equity in losses of $12.4 million from the Securities Fund and equity in loss of $3.4 million on the LandCap joint venture. The losses in 2008 were partially offset by income from our investment in a corporate lending venture prior to terminating the joint venture in May 2008, from which we recognized $3.4 million of equity in earnings and $0.5 million in connection with our net lease joint venture.

Unrealized Gain (Loss) on Investments and Other

        Unrealized gain (loss) on investments and other decreased by approximately $859.1 million for the year ended December 31, 2009 to a loss of $210.0 million, compared to a gain of $649.1 million for the year ended December 31, 2008. The unrealized loss on investments for the year ended December 31,

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2009 consisted primarily of unrealized losses related to mark-to-market adjustments of $97.4 million on liability to subsidiary trusts issuing preferred securities, $51.1 million on various issued CDO bonds payable, unrealized losses related to mark-to-market adjustments of $31.1 million on our corporate lending joint venture (which is an equity investment that is marked to market), unrealized losses of $22.1 million on interest rate swap derivatives no longer qualifying, or not designated as, hedging instruments and unrealized losses of $8.3 million on various available for sale securities. The unrealized gain on investment for the year ended December 31, 2008 consisted primarily of unrealized gains related to mark-to-market adjustments of $958.2 million on various N-Star CDO bonds payable and $95.2 million on liability to subsidiary trusts issuing preferred securities, offset partially by unrealized losses related to mark-to-market adjustments of $338.0 million on various available for sale securities, $30.0 million on our corporate lending joint venture and $36.3 million on interest rate swaps as a result of these swaps no longer qualifying for hedge accounting.

Realized Gain on Investments and Other

        The realized gain of $128.5 million for the year ended December 31, 2009 consisted primarily of net realized gains of $51.3 million on the repurchase of $92.6 million face amount of our 7.25% exchangeable senior notes, $8.2 million on the repurchase of $19.3 million face amount of our 11.5% exchangeable senior notes, net realized gains of $73.3 million on the sale of certain real estate debt securities available for sale, a $0.4 million gain on the repurchase of various N-Star bonds and $0.2 million in various write-offs on the sale of real estate debt investments, offset partially by realized losses of $3.8 million related to the discounted payoff of a first mortgage, losses of $0.7 million on the abandonment of CDO notes and a foreign currency translation loss of $0.7 million related to our Euro-denominated investment. The realized gain on investments and other of $37.7 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, in 2008, we recognized a $38.2 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.

Income from Discontinued Operations

        Income from discontinued operations represents the operations of properties sold or held for sale during the period. In December 2009, our Wakefield venture sold a portfolio of 18 assisted living facilities located in North Carolina. Accordingly, net income of $1.8 million and $2.2 million related to the operations of these properties was reclassified to income from discontinued operations for the years ended December 31, 2009 and 2008, respectively.

Gain on Sale from Discontinued Operations

        In December 2009, our Wakefield venture sold a portfolio of 18 assisted living facilities located in North Carolina and we recognized a gain on sale of $13.8 million for the year ended December 31, 2009. We had no such gain on sale for the year ended December 31, 2008.

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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 our corporate lending venture 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 grade note classes of our unconsolidated CDO financings. All of our real estate securities CDO financings 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 $108.3 million, representing an increase of $17.0 million, or 19%, compared to $91.3 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 $13.1 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 one of our CDO financings to the Securities Fund. As a result of the sale, it 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 in one of our CDO financings, 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 prior to the sale of $1.0 million, partially offset by reduced advisory fees earned on the CDO after the sale of $1.0 million, all of which were formerly eliminated in consolidation.

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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 $190.7 million, representing a decrease of $50.6 million, or 21%, compared to $241.3 million for the year ended December 31, 2007. The decrease in interest was primarily the result of: (i) $41.2 million lower interest on issued CDO notes 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 on which we elected the fair value option 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 due to the partial repayment of repurchase obligations. The decrease in interest expense was partially offset by: (i) $9.5 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 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.

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Fundraising Fees, Debt Issuance Costs and Other

        Fundraising fees, debt issuance costs and other for the year ended December 31, 2008 totaled $2.9 million, representing a decrease of $3.4 million, or 54%, 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. 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 had a combined $57.0 million net book value and were 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 the tenant intended to vacate the properties by March 23, 2009. As a result, we determined that we would return the property back to the first mortgage lender and accordingly, we took an impairment charge of $5.6 million 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 provision relating to 10 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 $74.8 million, representing an increase of $18.3 million, or 32%, compared to $56.5 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

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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 $14.4 million, representing an increase of approximately $0.8 million, or 6%, 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 $41.2 million, representing an increase of $9.3 million, or 29%, compared to $31.9 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.

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 the management company of our corporate lending venture prior to terminating the joint venture in May 2008 and 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 the management company of our corporate lending venture, 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 $653.4 million for the year ended December 31, 2008 to a gain of $649.1 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,

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2008 consisted primarily of unrealized gains related to the fair value option of accounting mark-to-market adjustments of $958.2 million on various N-Star bonds payable and $95.2 million on liability to subsidiary trusts issuing preferred securities offset partially by unrealized losses related to the fair value option of accounting 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. 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 CDO 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 $37.7 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 $34.8 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.

Income from Discontinued Operations

        Income from discontinued operations represents the operations of properties sold or held for sale during the period. In December 2009, our Wakefield venture sold a portfolio of 18 assisted living facilities located in North Carolina. Accordingly, income of $2.2 million and $1.1 million related to the operations of these properties was reclassified to income from discontinued operations for the years ended December 31, 2008 and 2007, respectively. Additionally, in April 2007, the Wakefield venture sold two assisted care living facilities. Accordingly, a loss of $0.1 million related to the operations of these properties was reclassified to income from discontinued operations 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 CDO 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 "Outlook and Recent Trends", availability of such capital from all of these sources is extremely scarce (if available at all) for most financial institutions that do not have access to U.S. Government funding sources such as the Fed Discount window, including commercial mortgage REITs, and we expect this capital to be difficult to obtain during 2010.

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        Our total available liquidity at December 31, 2009 was approximately $238.3 million, including $138.9 million of unrestricted cash and cash equivalents and $99.4 million of uninvested and available funds in our CDO financings, which is available only for reinvestment within the CDO structures.

        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% was paid in cash in order to preserve our capital. On April 21, July 21, and October 20, 2009, we declared a $0.10 per common share cash dividend. 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 AFFO, 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 significantly reduced the cash portion of the 2009 quarterly dividends declared 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 CDO 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. The reinvestment periods, which allow us to reinvest principal payments on the underlying assets into qualifying replacement collateral and is instrumental in maintaining OC and IC ratios, for our N-Star Real Estate CDO I and N-Star Real Estate CDO II have expired, and, for our N-Star Real Estate CDO III, N-Star REL CDO IV, N-Star Real Estate CDO V, N-Star REL CDO VI, N-Star Real Estate CDO VII, N-Star REL CDO VIII and N-Star Real Estate CDO IX will expire in April 2010, July 2010, September 2010, June 2011, June 2011, February 2012 and June 2012, respectively. Since we are or will be unable to reinvest principal in these CDOs, principal repayments will pay down the senior-most notes, which will de-lever the CDO. Following the conclusion of the reinvestment period in these CDOs, our ability to maintain the OC and IC ratios will be negatively impacted. 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 CDO financings in order to preserve cash flow. As of December 31, 2009, we were in compliance with all of the OC and IC tests in our CDO financings. 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 2010.

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        The following is a summary of our CDO cash distribution and coverage tests as of December 31, 2009:

		Cash Distributions(1)		Quarterly Interest Coverage Cushion(2)		Overcollateralization Cushion
	Primary Collateral Type	Quarter Ended December 31, 2009		December 31, 2009		December 31, 2009		At Offering
N-Star I	CMBS	$	189	$	381	$	6,273	$	8,687
N-Star II	CMBS		193		70		8,142		10,944
N-Star III	CMBS		1,462		1,032		26,836		13,610
N-Star IV	Loans		2,221		2,032		55,259		19,808
N-Star V	CMBS		1,695		1,578		66,388		12,940
N-Star VI	Loans		1,319		4,149		34,041		17,412
N-Star VII	CMBS		2,015		1,381		93,278		13,966
N-Star VIII	Loans		3,650		4,556		76,486		42,193
N-Star IX(3)	CMBS		2,417		2,498		102,003		24,516

Table shows cash distributions to the retained income notes. Interest coverage and overcollateralization coverage to the most constrained class.

(1)

Cash distributions are exclusive of senior management fees which are not subject to the coverage tests.

(2)

Quarterly interest cushion and overcollateralization cushion from remittance report issued on date nearest to December 31, 2009.

(3)

NorthStar indirectly owns approximately 31% of N-Star IX income notes through its interest in the Securities Fund.

        On October 28, 2009, we entered into the First Amended and Restated Credit Agreement (the "Credit Agreement") and the Second Amendment to Note Purchase Agreement (the "Note Purchase Agreement," and together with the Credit Agreement, the "WA Secured Term Loan") with Wachovia Bank, National Association ("Wachovia"). As a result of the debt renewal, we have two bank loans which permit the lender to require partial repayment under certain circumstances. The WA Secured Term Loan renewed the WA and Euro term loans with a combined balance of $332.1 million at December 31, 2009, for three years to October 28, 2012 and bears interest at LIBOR plus 3.50%. As part of the renewal, we repaid approximately $52.5 million of the outstanding balance and agreed to make six semi-annual amortization payments of $15 million. The WA Secured Term Loan eliminates all margin call provisions and does not restrict the payment of dividends, as long as the semi-annual amortization payments are made and we are in compliance with the financial covenants in the Credit Agreement and no event of default has occurred thereunder, with the exception of potential margin requirements for defaulted assets which would be credited to the semi-annual amortization requirements. On October 28, 2009, in connection with the WA Secured Term Loan, we entered into a warrant agreement (the "Warrant Agreement") with Wachovia under which we issued one million warrants (the "Warrants") to Wachovia to purchase one million shares of our common stock. 500,000 Warrants are exercisable immediately through October 28, 2019, at a price of $7.50 per share, 250,000 Warrants are exercisable after October 28, 2010 and through October 28, 2020, at a price of $8.60 per share and 250,000 Warrants are exercisable after October 28, 2011 and through October 28, 2021, at a price of $10.75 per share. The exercise price of the Warrants may be paid in cash or by cashless exercise. The exercise price and the number of shares of Common Stock issuable upon exercise of the Warrants are subject to adjustment for dividends paid in common stock, subdivisions or combinations. Additionally, a secured term loan relating to a single loan investment with $22.2 million outstanding balance as of December 31, 2009, provides the lender with a similar ability to require repayment,

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except the lender 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 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 October 2009 renewal of the WA Secured Term Loan eliminated the corporate fixed charge and recourse covenants and maintained the existing minimum tangible net worth, interest coverage, leverage and liquidity covenants.

        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 CDOs 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.

Equity Distribution Agreement

        In May, 2009, we entered into an equity distribution agreement with JMP Securities, LLC, or JMP. 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 JMP. JMP 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. We may offer and sell shares of our common stock pursuant to our equity distribution agreement if we believe the economics are attractive, and may use the proceeds for investments, debt repayment or general corporate purposes.

        As of December 31, 2009, we issued 7,326,942 common shares and received approximately $25.7 million of net cash proceeds pursuant to our equity distribution agreement with JMP.

Debt Repurchases

        During the year ended December 31, 2009, we repurchased approximately $92.6 million face amount of our 7.25% exchangeable senior notes for a total of $40.0 million, $19.3 million face amount of our 11.50% exchangeable senior notes for a total of $10.2 million and $27.4 million face amount of our N-Star CDO bonds payable for a total of $5.4 million. We recorded a total net realized gain of $59.9 million in connection with the repurchase of our notes and bonds for the year ended December 31, 2009. The repurchase of the notes and bonds for the year ended December 31, 2009 also represented an aggregate $83.7 million discount to the par value of the debt.

JP Facility

        In August 2009, we terminated the JP Facility and repaid the remaining principal balance of $12.2 million.

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Dividend Reinvestment and Stock Purchase Plan

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

        During the year ended December 31, 2009, we issued a total of 80,395 common shares pursuant to the Plan for a gross sales price of approximately $0.3 million. 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.

Cash Flows

Year Ended December 31, 2009 Compared to December 31, 2008

        The net cash flow provided by operating activities was $54.2 million for the year ended December 31, 2009 compared to the net cash flow provided by operating activities of $87.6 million for the year ended December 31, 2008. The decrease was primarily due to the lower LIBOR rates which decreased interest income generated from our asset base. Approximately $9.8 million of the decrease related to loan asset restructurings, partially offset by $481.2 million from higher yielding CMBS securities purchases and real estate debt investment fundings.

        The net cash flow provided by investing activities was $125.9 million for the year ended December 31, 2009 compared to the net cash used by investing activities of $110.7 million for the year ended December 31, 2008. The primary sources of cash flow provided by investing activities in 2009 were proceeds from the sale and repayments of real estate securities and real estate debt investments and proceeds from the sale of a portfolio of net leased healthcare properties. The primary uses of cash flow used by investing activities in 2008 were the origination or acquisition of real estate debt investments, and the acquisition of real estate securities.

        The net cash flow used by financing activities was $175.2 million for the year ended December 31, 2009 compared to $3.3 million of cash provided by financing activities for the year ended December 31, 2008. The primary use of cash flow by financing activities was secured term loan repayments, bond repurchases and repayments, mortgage principal and credit facilities repayments. Net cash flow in provided by financing activity in 2008 was primarily related to the paydown of our bonds, credit facilities, and secured term loan as a result of principal paydowns of our assets.

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

        The net cash flow provided by operating activities was $87.6 million for the year ended December 31, 2008 compared to the net cash flow provided by operating activities of $102.2 million for the year ended December 31, 2007. This decrease 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 2007. 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.

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        The net cash flow provided by financing activities was $3.3 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 $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 CDO bonds, borrowing under our credit facilities, operating real estate, acquisition financing and the issuance of trust preferred securities to finance our investing activities.

Capital Expenditures

        During 2010, we expect to incur $3.7 million in capital expenditures with respect to our healthcare net lease portfolio and $0.6 million with respect to our core net lease portfolio.

Contractual Obligations and Commitments

        As of December 31, 2009, 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	$	793,172	$	63,063	$	148,404	$	53,976	$	527,729
Mezzanine loan payable		2,743		261		656		748		1,078
Exchangeable senior notes(1)		128,915		—		68,165		60,750		—
Bonds payable		1,651,402		—		—		—		1,651,402
Credit facilities		—		—		—		—		—
Secured term loan		368,983		—		354,301		14,682		—
Liability to subsidiary trusts issuing preferred securities		280,133		—		—		—		280,133
Repurchase agreements		—		—		—		—		—
Capital leases(2)		16,130		487		982		1,004		13,657
Operating leases		70,806		5,637		10,983		10,968		43,218
Placement fees		—		—		—		—		—
Outstanding unfunded commitments(3)		80,030		63,521		16,509		—		—
Estimated interest payments		507,728		105,787		196,825		130,669		74,447
Total contractual obligations	$	3,900,042	$	238,756	$	796,825	$	272,797	$	2,591,664

(1)

$68.2 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)

Includes interest on the capital leases.

(3)

Our future funding commitments, which are subject to certain conditions that borrowers must meet to qualify for such fundings, totaled $80.0 million, of which a minimum of $51.9 million will be funded within our existing CDO financings. Fundings are categorized by estimated funding period. We expect that our secured credit facility lender generally will advance a majority of future fundings that are not otherwise funded within our CDO financings. Based upon currently approved advance rates on our credit facility and CDOs and assuming that all loans that have future fundings meet the terms to qualify for such funding, our equity requirement on the remaining

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$28.1 million of future funding requirements would be approximately $9.1 million over the next two years.

        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, 2009, we were in compliance with all financial and non-financial covenants in our debt agreements.

Off Balance Sheet Arrangements

CDO Financings

        The terms of the portfolio of real estate securities held by the CDO financings are structured to be matched with the terms of the non-recourse CDO liabilities. These CDO liabilities are repaid with the proceeds of the principal payments on the real estate securities collateralizing the CDO liabilities when these payments are actually received. There is no refinancing risk associated with the CDO 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. CDO financings produce a relatively predictable income stream based on the spread between the interest earned on the underlying securities and the interest paid on the CDO liabilities. This spread may be reduced by credit losses on the underlying securities or by hedging mismatches. In two of our CDO financings we incurred a loss on a security whose issuer filed for bankruptcy. We reviewed the term notes for impairment and determined no impairment existed at December 31, 2009. We continue to 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 CDO financings, as well as collateral advisory fees and interest income on the unrated income notes of the CDO financings.

        The following tables describe certain terms of the collateral for and the notes issued by CDO financings at December 31, 2009:

		Collateral—December 31, 2009									Term Notes—December 31, 2009
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	$	282,846		6.59	%		4.26	$	266,389		5.84	%		8/01/2038
N-Star II			7/01/04		302,937		6.16			5.10		264,795		5.45			6/01/2039
N-Star III			3/10/05		438,714		5.58			3.96		353,086		4.02			6/01/2040
N-Star V			9/22/05		618,508		5.36			6.63		456,319		4.41			9/05/2045
	Total			$	1,643,005		5.78	%		5.23	$	1,340,589		4.80	%

(1)

Includes only notes held by third parties.

(2)

We have an 83.3% interest.

        Any potential losses in our off balance sheet CDO financings is limited to the amortized cost of our investment of $109.6 million at December 31, 2009.

        In June 2009, the FASB issued an accounting pronouncement which modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The pronouncement is effective for fiscal years beginning after November 15, 2009. As a result of the implementation of this pronouncement, we will consolidate four of our off balance sheet CDO financings. At December 31, 2009, the par value of the assets and liabilities of the four off balance sheet CDO financings that will be consolidated is approximately

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$1.64 billion and $1.34 billion, respectively (see Note 8 for further details). We have elected the fair value option of accounting for the assets and liabilities of these entities upon consolidation. We are currently unable to estimate the fair market value of the CDO financings assets and liabilities that will be consolidated upon implementation of this pronouncement.

NorthStar Real Estate Securities Opportunity Fund

        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 and we do not expect to earn any incentive management fees from the Securities Fund in the future.

        At December 31, 2009 and 2008, the carrying value of our investment in the Securities Fund was $7.2 million and $29.3 million, respectively, representing a 31.2% and 53.1% interest in the Securities Fund, respectively.

        For the years ended December 31, 2009 and 2008, we recognized equity in losses of $6.5 million and $12.4 million, respectively. We also earned $0.2 million and $0.5 million in management fees from the Securities Fund for the years ended December 31, 2009 and 2008, respectively.

Recent Developments

        On January 19, 2010, 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 12, 2010 to the stockholders of record as of the close of business on February 5, 2010.

        On January 19, 2010, we declared a dividend of $0.10 per share of common stock. The dividends were paid on February 12, 2010 to the stockholders of record as of February 5, 2010.

Inflation

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

•

net leases where the tenants are responsible for all or a significant portion of the real estate taxes, insurance and operating expenses and the leases provide for increases in rent either based on changes in the Consumer Price Index, or CPI, or pre-negotiated increases; or

•

operating leases which provide for separate escalations of real estate taxes and operating expenses over a base amount, and/or increases in the base rent based on changes in the CPI.

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

        We believe that the risk associated with an increase in market interest rates on the floating rate debt used to finance our investments in our CDO financings 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.

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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;

•

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 non-controlling interest for the years ended December 31, 2009, 2008 and 2007 (in thousands):

		Year Ended December 31, 2009			Year Ended December 31, 2008			Year Ended December 31, 2007
Funds from Operations:
Consolidated net income (loss)		$	(152,216	)	$	700,159		$	49,263
Non-controlling interest in joint ventures			(9,555	)		(4,614	)		(580	)
	Consolidated net income (loss) before non-controlling interest in operating partnership		(161,771	)		695,545			48,683
Adjustments:
Preferred stock dividends			(20,925	)		(20,925	)		(16,533	)
Depreciation and amortization			41,864			41,182			31,916
Funds from discontinued operations			3,872			4,220			17
Real estate depreciation and amortization—unconsolidated ventures			1,088			945			990
Funds from Operations		$	(135,872	)	$	720,967		$	65,073
Adjusted Funds from Operations:
Funds from Operations		$	(135,872	)	$	720,967		$	65,073
Straight-line rental income, net			(2,276	)		(2,322	)		(2,653	)
Straight-line rental income, discontinued operations			—			—			10
Straight-line rental income and fair Value lease revenue, unconsolidated ventures			(143	)		(155	)		(219	)
Amortization of equity-based compensation			20,474			24,680			16,007
Amortization of above/below market leases			(801	)		(1,740	)		(864	)
Unrealized (gains)/losses from mark-to-market adjustments			188,887			(664,119	)		3,473
Unrealized (gains)/losses from mark-to-market adjustments, unconsolidated ventures			12,276			17,026			11,670
Adjusted Funds from Operations		$	82,545		$	94,337		$	92,497

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, 2009			Year Ended December 31, 2008			Year Ended December 31, 2007
Adjusted Funds from Operations (AFFO)		[A]	$	82,545		$	94,337		$	92,497
Plus: Fundraising Fees, Debt Issuance Costs and Other				—			2,879			6,295
AFFO, excluding Fundraising Fees, Debt Issuance Costs and Other				82,545			97,216			98,792
Plus: General & Administrative Expenses				70,542			74,830			56,545
Less: Equity-Based Compensation included in G&A				20,474			24,672			16,214
Less: Bad debt expense included in G&A				1,554			—			—
AFFO, excluding G&A		[B]		131,059			147,374			139,123
Average Common Book Equity & Operating Partnership Non-Controlling Interest(1)		[C]	$	1,194,310		$	887,515		$	442,012
	Return on Average Common Book Equity (including G&A)	[A]/[C]		7.9	%		10.6	%		20.9	%
	Return on Average Common Book Equity (excluding G&A)	[B]/[C]		12.3	%		16.6	%		31.5	%

(1)

Average Common Book Equity & Operating Partnership Non-controlling 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 generally maintain a net floating rate asset or liability position. To the extent we have net 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, 2009, a hypothetical 100 basis point increase in interest rates applied to our variable rate assets would increase our annual interest income by approximately $29.5 million offset by an increase in our interest expense of approximately $20.1 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.

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 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

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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 CDO financings 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 CDO financings and the underlying credit quality of their holdings.

        The real estate securities underlying our investment grade CDO financings 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 CDO financings 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 CDO 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 CDO transaction, such as CMBS, decreases and as interest rates decrease, the value of these securities will increase. Conversely, we mark our CDO 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.

        In June 2009, we restructured our net lease relationship with one of our healthcare operators to take advantage of new REIT legislation which now allows a taxable REIT subsidiary affiliate to become the lessee of healthcare-related properties. The restructuring resulted in one of our unconsolidated affiliate Midwest Care Holdco TRS I LLC ("Midwest") becoming the lessee of the properties and Midwest simultaneously entering into a management contract with a third party operator. The management agreement is terminable by Midwest upon 60 days notice. This new structure allows us to participate in operating improvements of the underlying properties not previously available under the prior structure. Under these arrangements we are less vulnerable to credit risk with respect to the manager of the facility, but our taxable REIT subsidiary has more exposure to fluctuations in net income at the properties (both reductions and increases) which would not be the case in a lease to an unaffiliated lessee operating the property.

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

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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. At December 31, 2009, our counterparties hold approximately $27.9 million of cash margin as collateral against our swap contracts.

        In January 2008, we elected the fair value option for our bonds payable and our liability to subsidiary trusts issuing preferred securities. As a result, the changes in fair value of these financial instruments are now recorded in earnings and the interest rate swap agreements associated with these debt instruments no longer qualify for hedge accounting given that 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 years ended December 31, 2009 and 2008, we recorded, in earnings, a mark-to-market unrealized gain of $4.6 million and an unrealized loss of $15.9 million, respectively, for the non-qualifying interest rate swaps. For the years ended December 31, 2009 and 2008, we recorded a $5.6 million and a $5.5 million reclassification from accumulated other comprehensive income for the non-qualifying interest rate swaps, respectively.

        The following tables summarize our derivative financial instruments that were designated as cash flow hedges of interest rate risk as of December 31, 2009 and December 31, 2008 (in thousands):

	Number of Investments		Notional Amount		Fair Value Net Asset/ (Liability)			Range of Fixed LIBOR	Range of Maturity
Interest rate swaps
As of December 31, 2009		10	$	90,749	$	(7,691	)	4.18% – 5.08%	March 2010 – August 2018
As of December 31, 2008		10		90,749		(13,923	)	4.18% – 5.08%	March 2010 – August 2018

        The following tables summarize our derivative financial instruments that were not designated as hedges in qualifying hedging relationships as of December 31, 2009 and 2008 (in thousands):

	Number of Investments		Notional Amount		Fair Value Net Asset/ (Liability)			Range of Fixed LIBOR	Range of Maturity
Interest rate swaps
As of December 31, 2009		22	$	897,335	$	(59,353	)	0.34% – 5.63%	May 2010 – June 2018
As of December 31, 2008		24		1,396,879		(63,979	)	0.54% – 5.63%	October 2009 – June 2018

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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	108
Consolidated Balance Sheets as of December 31, 2009 and 2008	110
Consolidated Statements of Operations for the years ended December 31, 2009, 2008 and 2007	111
Consolidated Statement of Stockholders' Equity for the years ended December 31, 2009, 2008 and 2007	112
Consolidated Statements of Comprehensive Income for the years ended December 31, 2009, 2008 and 2007	114
Consolidated Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007	115
Notes to Consolidated Financial Statements	117
Schedule III—Real Estate and Accumulated Depreciation as of December 31, 2009	171
Schedule IV—Loans and other Lending Investments as of December 31, 2009	177

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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, 2009 and 2008, 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, 2009. 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, 2009 and 2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009, 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 NorthStar Realty Finance Corp. and subsidiaries' internal control over financial reporting as of December 31, 2009, 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 26, 2010 expressed an unqualified opinion thereon.

/s/ GRANT THORNTON LLP

New York, New York
February 26, 2010

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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, 2009, 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, 2009, 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 NorthStar Realty Finance Corp. and subsidiaries' as of December 31, 2009 and 2008 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, 2009, and our report dated February 26, 2010 expressed an unqualified opinion thereon.

/s/ GRANT THORNTON LLP

New York, New York
February 26, 2010

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CONSOLIDATED BALANCE SHEETS

(Amounts in Thousands, Except Share Data)

			December 31, 2009			December 31, 2008
ASSETS:
Cash and cash equivalents			$	138,928		$	134,039
Restricted cash				129,180			163,157
Operating real estate—net				978,902			1,127,000
Available for sale securities, at fair value				336,220			221,143
Real estate debt investments, net				1,936,482			1,976,864
Real estate debt investments, held-for-sale				611			70,606
Investments in and advances to unconsolidated ventures				38,299			101,507
Receivables, net of allowance of $1,349 in 2009 and $0 in 2008				17,912			24,806
Unbilled rents receivable				10,206			7,993
Derivative instruments, at fair value				—			9,318
Deferred costs and intangible assets, net				57,551			79,633
Other assets				25,273			27,660
Total assets			$	3,669,564		$	3,943,726
LIABILITIES:
Mortgage notes and loans payable				795,915			910,620
Exchangeable senior notes				125,992			233,273
Bonds payable, at fair value				584,615			468,638
Credit facilities				—			44,881
Secured term loans				368,865			403,907
Liability to subsidiary trusts issuing preferred securities, at fair value				167,035			69,617
Obligations under capital leases				3,527			3,555
Accounts payable and accrued expenses				30,071			27,478
Escrow deposits payable				39,461			46,353
Derivative liability, at fair value				67,044			87,220
Other liabilities				28,399			34,424
Total liabilities				2,210,924			2,329,966
EQUITY:
NorthStar Realty Finance Corp. 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, 2009 and December 31, 2008, 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, 2009 and December 31, 2008, respectively				183,505			183,505
Common stock, $0.01 par value, 500,000,000 shares authorized, 74,882,600 and 62,906,693 shares issued and outstanding at December 31, 2009 and December 31, 2008, respectively				749			634
Additional paid-in capital				662,805			620,028
Treasury stock, 0 and 475,051 shares held at December 31, 2009 and December 31, 2008, respectively				—			(1,384	)
Retained earnings				460,915			648,860
Accumulated other comprehensive loss				(92,670	)		(94,343	)
		Total NorthStar Realty Finance Corp. Stockholders' Equity		1,273,171			1,415,167
Non-controlling interest				185,469			198,593
	Total equity			1,458,640			1,613,760
Total liabilities and stockholders' equity			$	3,669,564		$	3,943,726

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF OPERATIONS

(Amount in Thousands, Except Share and per Share Data)

			Year Ended December 31, 2009			Year Ended December 31, 2008			Year Ended December 31, 2007
Revenues and other income:
Interest income			$	142,213		$	212,432		$	292,131
Interest income—related parties				17,692			14,995			13,516
Rental and escalation income				98,857			108,266			91,301
Advisory and management fee income—related parties				7,295			12,496			7,658
Other revenue				736			16,494			6,242
		Total revenues		266,793			364,683			410,848
Expenses:
	Interest expense			121,461			190,712			241,287
	Real estate properties—operating expenses			14,692			8,289			8,719
	Asset management fees—related parties			3,381			4,746			4,368
	Fundraising fees and other joint venture costs			—			2,879			6,295
	Impairment on operating real estate			—			5,580			—
	Provision for loan losses			83,745			11,200			—
General and administrative:
	Salaries and equity-based compensation(1)			47,213			53,269			36,148
	Auditing and professional fees			9,640			7,075			6,787
	Other general and administrative			13,689			14,486			13,610
		Total general and administrative		70,542			74,830			56,545
Depreciation and amortization				41,864			41,182			31,916
		Total expenses		335,685			339,418			349,130
Income/(loss) from operations				(68,892	)		25,265			61,718
Equity in (loss)/earnings of unconsolidated ventures				(1,809	)		(11,918	)		(11,684	)
Unrealized gain/(loss) on investments and other				(209,976	)		649,113			(4,330	)
Realized gain on investments and other				128,461			37,699			3,559
Income/(loss) from continuing operations				(152,216	)		700,159			49,263
Income from discontinued operations				1,844			2,170			1,092
Gain on sale from discontinued operations				13,799			—			(45	)
Consolidated net income (loss)				(136,573	)		702,329			50,310
	Net income (loss) attributable to the non-controlling interests			6,293			(72,172	)		(3,276	)
Preferred stock dividends				(20,925	)		(20,925	)		(16,533	)
Net income (loss) attributable to NorthStar Realty Finance Corp. common stockholders			$	(151,205	)	$	609,232		$	30,501
Net (loss)/income per share from continuing operations (basic/diluted)				(2.36	)		9.62			0.48
Income per share from discontinued operations (basic/diluted)				0.02			0.03			0.02
Gain on sale of discontinued operations and joint venture interest (basic/diluted)				0.18			—			—
Net income (loss) attributable to NorthStar Realty Finance Corp. common stockholders (basic/diluted)			$	(2.16	)	$	9.65		$	0.50
Weighted average number of shares of common stock:
	Basic			69,869,717			63,135,608			61,510,951
	Diluted			77,193,083			70,136,783			65,086,953

(1)

The years ended December 31, 2009, 2008 and 2007 include $20,474, $24,680 and $16,007, respectively, of equity-based compensation expense. Cash incentive compensation expense incurred but payable in future periods totaled $4,635, $2,169 and $0, respectively, for the years ended December 31, 2009, 2008 and 2007.

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Amounts in Thousands)

	Preferred Stock at Par		Shares of Common Stock			Common Stock at Par		Additional Paid-in Capital			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total NorthStar Stockholders Equity			Non- controlling Interests			Total Stockholders Equity
Balance at December 31, 2006	$	24		61,238		$	612	$	647,878			—		$	(5,313	)		16,570		$	659,771		$	22,858		$	682,629
Equity component of exchangeable senior notes		—		—			—		6,743			—			—			—			6,743			—			6,743
dividend reinvestment and stock purchase plan		—		330			4		3,805			—			—			—			3,809			—			3,809
Stock awards		—		25			—		463			—			—			—			463			—			463
Issuance of shares of preferred stock, net of expenses		76		—			—		183,429			—			—			—			183,505			—			183,505
Comprehensive loss		—		—			—		—			—			(173,980	)		—			(173,980	)		(12,748	)		(186,728	)
Conversion of OP/LTIP units		—		126			1		1,115			—			—			—			1,116			(1,116	)		—
Contributions from non-controlling interest		—		—			—		—			—			—			—			—			2,630			2,630
Amortization of deferred compensation		—		—			—		—			—			—			—			—			15,543			15,543
Cash dividends on common stock		—		—			—		—			—			—			(87,950	)		(87,950	)		(7,954	)		(95,904	)
Cash dividends on preferred stock		—		—			—		—			—			—			(16,533	)		(16,533	)		—			(16,533	)
Net income		—		—			—		—			—			—			47,034			47,034			3,276			50,310
Balance at December 31, 2007	$	100		61,719		$	617	$	843,433			—		$	(179,293	)	$	(40,879	)	$	623,978		$	22,489		$	646,467
Equity component of exchangeable senior notes		—		—			—		2,451			—			—			—			2,451			—			2,451
Dividend reinvestment and stock purchase plan		—		182			2		1,139			—			—			—			1,141			—			1,141
Proceeds from equity distribution agreement		—		114			1		875			—			—			—			876			—			876
Stock awards		—		273			3		2,411			—			—			—			2,414			22,266			24,680
Purchase of treasury shares		—		(475	)		—		—			(1,384	)		—			—			(1,384	)		—			(1,384	)
Comprehensive loss		—		—			—		—						(6,016	)		—			(6,016	)		(898	)		(6,914	)
Conversion of OP/LTIP units		—		1,094			11		10,991			—			—			—			11,002			(11,002	)		—
Purchase of non-controlling interest		—		—			—		—			—			—			—			—			(1,566	)		(1,566	)
SFAS No. 159 beginning balance adjustment		—		—			—		—			—			90,966			170,576			261,542			22,743			284,285
Cash dividends on common stock		—		—			—		—			—			—			(90,069	)		(90,069	)		(22,433	)		(112,502	)
Cash dividends on preferred stock		—		—			—		—			—			—			(20,925	)		(20,925	)		—			(20,925	)
Issuance of shares of preferred stock																					—			94,822			94,822
Net income		—		—			—		—			—			—			630,157			630,157			72,172			702,329
Balance at December 31, 2008	$	100		62,907		$	634	$	861,300			(1,384	)	$	(94,343	)	$	648,860		$	1,415,167		$	198,593		$	1,613,760
Equity component of exchangeable senior notes		—		—			—		(4,321	)		—			—			—			(4,321	)		—			(4,321	)
Equity component of warrants		—		—			—		117			—			—			—			117			—			117
Dividend reinvestment and stock purchase plan		—		80			1		276			—			—			—			277			—			277
Proceeds from equity distribution agreement		—		7,327			69		23,995			1,384			—			—			25,448			—			25,448
Stock awards/LTIP awards				94			1		300			—			—			—			301			20,172			20,473
Restricted share grant		—		15			—		1			—			—			—			1			—			1
Comprehensive loss		—		—			—		—			—			1,673			—			1,673			199			1,872
Conversion of OP/LTIP units		—		744			7		12,013			—			—			—			12,020			(12,020	)		—
Stock dividends		—		3,716			37		10,610			—			—			(9,607	)		1,040			(1,040	)		—
Cash dividends on common stock		—		—			—		—			—			—			(27,133	)		(27,133	)		(15,957	)		(43,090	)
Cash dividends on preferred stock		—		—			—		—			—			—			(20,925	)		(20,925	)		—			(20,925	)
Redemption of membership interest		—		—			—		(214	)		—			—			—			(214	)		—			(214	)
Equity in private fund																								1,815			1,815
Net income		—		—			—		—			—			—			(130,280	)		(130,280	)		(6,293	)		(136,573	)
Balance at December 31, 2009	$	100		74,883		$	749	$	904,077		$	—		$	(92,670	)	$	460,915		$	1,273,171		$	185,469		$	1,458,640

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in Thousands)

		Year Ended December 31, 2009			Year Ended December 31, 2008			Year Ended December 31, 2007
Consolidated net income (loss)		$	(136,573	)	$	702,329		$	50,310
Unrealized gain (loss) on available for sale securities			(9,949	)		(20,694	)		(170,429	)
Change in fair value of derivatives			6,232			(12,777	)		(26,505	)
Reclassification adjustment for gains included in net income			5,589			26,557			10,206
Comprehensive income (loss)			(134,701	)		695,415			(136,418	)
	Less: Comprehensive income attributable to non-controlling interests		199			(898	)		(12,748	)
Comprehensive income attributable to NorthStar Realty Finance Corp.		$	(134,900	)	$	696,313		$	(123,670	)

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands)

		Year Ended December 31, 2009			Year Ended December 31, 2008			Year Ended December 31, 2007
Cash flows from operating activities:
Net (loss) income		$	(130,280	)	$	630,157		$	47,034
Adjustments to reconcile net income to net cash provided by operating activities:
	Operating real estate Impairment		—			5,580			—
	Equity in loss/(earnings) of unconsolidated ventures		9,450			11,918			10,431
	Depreciation and amortization		43,891			43,232			33,191
	Amortization of origination fees/costs		(8,730	)		(9,919	)		(8,522	)
	Amortization of deferred financing costs		5,498			7,137			8,528
	Minority interest		(6,293	)		72,172			3,272
	Equity based compensation		20,474			24,680			16,007
	Unrealized loss (gain) on investments and other		188,887			(664,119	)		4,330
	Realized gain on sale of investments and other		(142,290	)		(39,804	)		(3,372	)
	Amortization of bond discount/premiums on securities		(13,170	)		(3,218	)		(1,834	)
	Operating real estate impairment		—			—			45
	Distributions from equity investments		419			2,657			458
	Capital lease		(28	)		14			87
	Amortization of capitalized above/below market leases		(801	)		(1,758	)		(864	)
	Unbilled rents receivable		(2,225	)		(2,296	)		(2,866	)
	Interest accretion		(3,632	)		(8,737	)		(7,634	)
	Loan loss provision		83,744			11,200			—
	Bad debt		1,554			—			—
Changes in assets and liabilities:
	Restricted cash		6,321			21,686			(22,493	)
	Receivables		5,287			6,929			(19,037	)
	Deferred costs and intangible assets		—			260			—
	Other assets		2,391			4,202			(13,852	)
	Receivables—related parties		(1,345	)		(1,609	)		(528	)
	Accounts payable and accrued expenses		2,547			(7,625	)		20,892
	Payables—related parties		—			757			2,026
	Escrow deposit payable		(6,892	)		(19,092	)		10,485
	Deferred management fee income		—			3,848			—
	Real estate debt investment origination fees		939			3,181			15,746
	Other liabilities		(1,198	)		(3,821	)		10,708
Net cash provided by operating activities			54,518			87,612			102,238
Cash flows from investing activities:
Acquisition of operating real estate, net			—			(4,261	)		(686,219	)
Improvement of Operating real estate			(3,597	)		(20,289	)		—
Acquisition of available for sale securities			(257,801	)		(59,186	)		(777,145	)
Proceeds from disposition of securities available for sale			210,399			6,115			136,924
Available for sale securities repayments			2,706			3,043			54,466
Increase in term debt transaction warehouse deposits			—			—			(18,000	)
Originations/acquisitions of real estate debt investments			(223,382	)		(329,266	)		(1,158,215	)
Real estate debt investment repayments			111,452			290,449			555,433
Proceeds from the sale of real estate debt investments			140,753			30,400			67,322
Net proceeds from disposition of operating real estate			91,546			—			—
Real estate debt investment acquisition costs			(97	)		(275	)		(3,265	)
Intangible asset related to acquisition			—			2,875			—
Proceeds from sale of assets			—			—			62,821
Corporate debt investment acquisitions			—			(16,362	)		(489,209	)
Corporate debt investment repayments			—			24,985			26,678

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CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)

(Amounts in Thousands)

	Year Ended December 31, 2009			Year Ended December 31, 2008			Year Ended December 31, 2007
Proceeds from disposition of corporate debt investment		—			102,575			5,419
Cash receipts from term debt transaction issuer		—			—			8,826
Other loans receivable		(1,170	)		(9,826	)		(13,590	)
Other loans receivable repayment		3,084			14,000			—
Restricted cash used for investment activities		29,064			(109,513	)		(112,735	)
Acquisition deposits		(300	)		(741	)		(1,591	)
Deferred lease costs		(157	)		—			—
Investment in and advances to unconsolidated ventures		(847	)		(44,143	)		(33,099	)
Distributions from unconsolidated ventures		23,906			8,712			1,250
Net cash provided by (used in) investing activities		125,559			(110,708	)		(2,373,929	)
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	)
Collateral held by swap counter party		2,384			(20,837	)		(8,476	)
Mortgage notes and loan borrowings		—			3,677			506,252
Mortgage principal repayments		(62,638	)		(5,422	)		(5,537	)
Borrowing under credit facilities		1,912			39,816			1,598,760
Repayments credit facilities		(46,794	)		(118,403	)		(1,113,329	)
Repurchase obligation borrowings		528			2,200			27,084
Repurchase obligation repayments		(703	)		(3,887	)		(105,480	)
Proceeds from bonds		91,000			137,011			881,300
Bond repayments		(20,693	)		(95,300	)		(113,594	)
Other loans payable		—			—			13,300
Other loans payable repayments		—			—			(387	)
Borrowing under secured term loan		39,570			70,864			462,387
Secured term loan repayment		(76,750	)		(80,190	)		(45,453	)
Bond repurchases		(55,567	)		(49,859	)		—
Borrowings from subsidiary trusts issuing preferred securities		—			—			72,500
Payment of deferred financing costs		(4,239	)		(5,188	)		(27,007	)
Capital contributions by non-controlling interest		1,815			94,822			2,631
Restricted cash from financing activities		(3,861	)		86,832			(10,917	)
Proceeds from exchangeable senior notes		—			80,000			172,500
Proceeds from preferred stock offering		—			—			190,000
Proceeds from common stock offerings		26,253			2,268			4,027
Proceeds from dividend reinvestment and stock purchase plan		63			—			—
Purchase of treasury stock		—			(1,384	)		—
Dividends (common and preferred) and distributions		(48,058	)		(122,059	)		(109,733	)
Pending offering costs		(2,648	)		—			—
Offering costs		(804	)		(252	)		(6,712	)
Distributions to non-controlling interest		(15,958	)		(11,371	)		(2,703	)
Net cash (used in) provided by financing activities		(175,188	)		3,306			2,380,767
Net (decrease) increase in cash & cash equivalents		4,889			(19,790	)		109,076
Cash and cash equivalents—beginning of period		134,039			153,829			44,753
Cash and cash equivalents—end of period	$	138,928		$	134,039		$	153,829
Supplemental disclosure of cash flow information:
Cash paid for interest	$	104,270		$	216,115		$	217,206

See accompanying notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

1. Formation and Organization

        NorthStar Realty Finance Corp., a Maryland corporation (the "Company"), is a self-administered and self-managed real estate investment trust ("REIT"), which was formed in October 2003 in order to continue and expand the real estate debt, real estate securities and net lease businesses conducted by NorthStar Capital Investment Corp. ("NCIC"). Substantially all of the Company's assets are held by, and it conducts its operations through, NorthStar Realty Finance Limited Partnership, a Delaware limited partnership and the operating partnership of the Company (the "Operating Partnership"). On October 29, 2004, the Company closed its initial public offering 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 equity offering on October 29, 2004, three majority-owned subsidiaries of NCIC 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 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 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.

Consolidating Subsidiaries

Wakefield Capital, LLC

        In May 2006, the Company entered into 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 participating in new Wakefield investment opportunities in proportion to its percentage ownership interest, assuming it was to convert its interests to common equity.

        In June, 2009, the Company terminated two additional leases for certain other net leased senior housing assets in its Wakefield joint venture and assumed the operations of these facilities, which are managed by an experienced third-party operator.

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(Amounts in Thousands, Except per Share Data)

1. Formation and Organization (Continued)

        In December 2009, the Company completed a membership interest redemption with Wakefield, NRFC Wakefield, Chain Bridge, Wakefield Capital Management, Midwest Care Holdings LLC, or Midwest Holdings, and certain individuals, pursuant to which Wakefield redeemed the 5.4% membership interest of Chain Bridge and its affiliates in Wakefield. As a result of the redemption, NorthStar holds 100% of the common equity membership interests in Wakefield.

Corporate Lending Joint Venture

        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 the Company refers 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. 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 the management company of our corporate lending venture.

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. All significant intercompany balances have been eliminated in consolidation.

Variable Interest Entities

        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.

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(Amounts in Thousands, Except per Share Data)

2. Summary of Significant Accounting Policies (Continued)

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 expensed as incurred. 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 ten years

        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.

        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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

2. Summary of Significant Accounting Policies (Continued)

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.

Fair Value Measurements

        Fair value is used to measure many of the Company's financial instruments. 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

        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. The changes in the fair value of these instruments are recorded in unrealized gain (loss) on investments and other in the 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. 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's available for sale securities that serve as collateral for its CDO financings, which the Company has elected the fair value option, 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 has designated its investments in the equity notes and its non investment grade notes of unconsolidated CDO financings 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.

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, 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

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(Amounts in Thousands, Except per Share Data)

2. Summary of Significant Accounting Policies (Continued)

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, 2009 and 2008. 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, 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 CDO financings which is primarily proceeds of loan repayments which will be used to reinvest in collateral for the CDO transaction. The Company mitigates its risk by placing restricted cash with major financial institutions.

Deferred Costs, Net

        Deferred lease costs consist of fees incurred to initiate and renew operating leases and purchase price-allocations to 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.

Detachable Stock Warrants

        The Company allocates proceeds received from issuing debt with detachable stock purchase warrants between the debt and the warrants, based on their relative fair values at the time of issuance. The portion of the proceeds that is allocated to the warrants was recorded as additional paid-in-capital. The resulting discount on the debt will be recorded as interest expense over the life of the associated debt, using the effective interest method, in the consolidated statement of operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

2. Summary of Significant Accounting Policies (Continued)

Comprehensive Income

        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.

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 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 off balance sheet CDO financing's equity notes, the Company recognizes interest income on these investments 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.

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, for which the fair value option was not elected, reflect a decline in value which is other

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(Amounts in Thousands, Except per Share Data)

2. Summary of Significant Accounting Policies (Continued)

than temporary. If it is determined the decline in value is other than temporary the impaired securities are written down through earnings to their fair values. Significant judgment of management is required in this analysis, which includes, but is not limited to, making assumptions regarding the collectability of the principal and interest, net of related expenses, on the underlying collateral.

        Allowances for real estate debt investments 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.

        On a periodic basis, the Company assesses whether there are any indicators that the value of our operating real estate properties may be impaired or that its carrying value may not be recoverable. A property's value is considered impaired if management's estimate of the aggregate future undiscounted cash flows to be generated by the property are less than the carrying value of the property. To the extent an impairment has occurred and is considered to be other than temporary, the loss will be measured as the excess of the carrying amount of the property over the calculated fair value of the property.

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

Rent Expense

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

Income Taxes

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

2. Summary of Significant Accounting Policies (Continued)

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

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

        The Company will recognize interest and penalties, if any, related to uncertain tax positions 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, 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

2. Summary of Significant Accounting Policies (Continued)

Stock Based Compensation

        The Company has adopted the fair value method of accounting for its equity based compensation awards. The fair value method of accounting requires an estimate of the fair value of the equity award at the time of grant rather than the intrinsic value method. All fixed equity based awards to employees and directors, which have no vesting conditions other than time of service, will be amortized to compensation expense over the award's vesting period based on the fair value of the award at the date of grant.

Foreign Currency Translation

        The Company's functional currency of its euro-dominated investment is the US dollar. Non-monetary assets and liabilities are translated at historical rates and monetary assets and liabilities are translated at the exchange rates in effect at the end of the reporting period. Statement of operation accounts are translated at the average rates for the reporting period. Any gains and losses from the translation of foreign currency to US dollars are included in the statement of operations. Since the Company's foreign currency Euro-dominated investment is approximately 82% financed with Euro-dominated debt, any net foreign currency translation gains or losses on the portion of the investment not financed with Euro-denominated debt are included in realized gains (losses) in the Company's consolidated statement of operations.

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.

        On January 1, 2009, the Company adopted the accounting pronouncement regarding 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. The pronouncement 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 interest 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. Additionally, the pronouncement precludes the use of the fair value option of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

2. Summary of Significant Accounting Policies (Continued)

accounting. The financial statements for 2008 have been restated for the effects of the retroactive application of the pronouncement.

        The following tables present the cumulative effects of the change in accounting principle as of December 31, 2008 and for the year ended December 31, 2008:

	December 31, 2008
	As Originally Reported		As Adjusted		Effect of Change in Accounting Principle
Deferred costs and intangible assets, net	$	71,933	$	79,633	$	7,700
Exchangeable senior notes		112,576		233,273		120,697
Non-controlling interests		210,281		198,593		(11,688	)
Total NorthStar Realty Finance Corp. Stockholders' Equity	$	1,516,475	$	1,415,167	$	(101,308	)

	Year Ended December 31. 2008
	As Originally Reported			As Adjusted			Effect of Change in Accounting Principle
Interest expense(1)	$	191,472		$	194,295		$	2,823
Unrealized gain (loss) on investments and other		752,332			649,113			(103,219	)
Realized gain on investments and other		36,036			37,699			1,663
Fundraising fees, debt issuance costs and other		7,823			2,875			(4,948	)
Non-controlling interests		(82,098	)		(72,172	)		9,926
Net income attributable to NorthStar Realty Finance Corp. common stockholders		698,741			609,232			(89,509	)
Earnings per share	$	11.07		$	9.65		$	(1.51	)

(1)

As adjusted amount excludes additional reclassifications as a result of discontinued operations (see Note 4 for additional information).

        As of December 31, 2009 and 2008, the total carrying amount of the equity components of the exchangeable senior notes was $4.9 million and $9.2 million, respectively. The principal amount of the exchangeable senior notes liabilities was $128.9 million and $240.8 million as of December 31, 2009 and 2008, respectively. The unamortized discount of the liability components was $2.9 million and $7.5 million at December 31, 2009 and 2008, respectively. The net carrying amount of the liability components was $126.0 million and $233.3 million at December 31, 2009 and 2008, respectively. Interest expense for the years ended, 2009, 2008 and 2007 related to the exchangeable senior notes was $16.8 million, $20.7million and $3.6 million, respectively, of which $14.5 million. $17.9 million and $2.5 million was related to contractual interest, respectively, and $2.3 million. $2.8 million and $1.1 million was attributable to amortization of the debt discount and deferred financing costs, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

2. Summary of Significant Accounting Policies (Continued)

        On January 1, 2009, the Company adopted the provisions of the accounting pronouncement regarding non-controlling interests in consolidated financial statements. The pronouncement clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The pronouncement 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 non-controlling 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 non-controlling interest. The adoption of this pronouncement does not affect prior periods reported net income or retained earnings; however, the presentation and disclosure requirements have been applied retrospectively for all periods presented.

Recently Issued Pronouncements

        In January 2009, The Financial Accounting Standards Board ("FASB") issued an accounting pronouncement which amends previously issued impairment guidance to achieve more consistent determination of whether an other-than-temporary impairment has occurred. The pronouncement also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements in other related guidance. The pronouncement is effective and should be applied prospectively for financial statements issued for fiscal years and interim periods ending after December 15, 2008. The Company's adoption of the pronouncement did not have a material effect on its financial condition, results of operations, or cash flows.

        In April 2009, the FASB issued an accounting pronouncement which is intended to provide greater clarity to investors about the credit and noncredit component of an other-than-temporary event and to more effectively communicate when an other-than-temporary event has occurred. The pronouncement applies to debt securities and requires that the total other-than-temporary impairment be presented in the statement of income with an offset for the amount of impairment that is recognized in other comprehensive income, which is the noncredit component. Noncredit component losses are to be recorded in other comprehensive income if an investor can assess that (a) it does not have the intent to sell or (b) it is not more likely than not that it will have to sell the security prior to its anticipated recovery. The pronouncement is effective for interim and annual periods ending after June 15, 2009. The pronouncement will be applied prospectively with a cumulative effect transition adjustment as of the beginning of the period in which it is adopted. The Company's adoption of the pronouncement did not have a material effect on its financial condition, results of operations, or cash flows.

        In April 2009, the FASB issued an accounting pronouncement which provides additional guidance on determining whether a market for a financial asset is not active and a transaction is not distressed for fair value measurements. The pronouncement will be applied prospectively and retrospective application is not permitted. The pronouncement is effective for interim and annual periods ending after June 15, 2009. The Company's adoption of the pronouncement did not have a material effect on its financial condition, results of operations, or cash flows.

        In April 2009, the FASB issued an accounting pronouncement which will require an entity to provide disclosures about the fair value of financial instruments in interim financial information. The pronouncement would apply to certain financial instruments and will require entities to disclose the

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(Amounts in Thousands, Except per Share Data)

2. Summary of Significant Accounting Policies (Continued)

method(s) and significant assumptions used to estimate the fair value of financial instruments, in both interim financial statements as well as annual financial statements. The pronouncement is effective for interim and annual periods ending after June 15, 2009. The Company's adoption of the pronouncement did not have a material effect on its financial condition, results of operations, or cash flows.

        In May 2009, the FASB issued an accounting pronouncement which establishes general standards of accounting for, and requires disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The Company adopted the pronouncement for the quarter ended June 30, 2009. The Company's adoption of the pronouncement did not have a material effect on its financial condition, results of operations, or cash flows.

        In June 2009, the FASB issued an accounting pronouncement which requires additional information regarding transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. The pronouncement eliminates the concept of a "qualifying special-purpose entity," changes the requirements for derecognizing financial assets, and requires additional disclosures. The pronouncement is effective for fiscal years beginning after November 15, 2009. The Company's adoption of the pronouncement will not have a material effect on its financial condition, results of operations, or cash flows.

        In June 2009, the FASB amended the guidance for determining whether an entity is a variable interest entity, or VIE, and requires an analysis of quantitative rather than qualitative factors to determine the primary beneficiary of a VIE. The guidance requires an entity to consolidate a VIE if (i) it has the power to direct the activities that most significantly impact the VIE's economic performance and (ii) the obligation to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be significant to the VIE. The pronouncement is effective for fiscal years beginning after November 15, 2009. As a result of the implementation of this pronouncement, the Company will consolidate four of its off balance sheet CDO financings. At December 31, 2009, the par value of the assets and liabilities of the four off-balance sheet CDO financings that will be consolidated as of January 1, 2010, is approximately $1.64 billion and $1.34 billion, respectively. The Company has elected the fair value option of accounting for the assets and liabilities of these entities upon consolidation. The Company is in the process of determining the fair market value of the CDO financings assets and liabilities that will be consolidated upon implementation of this pronouncement.

        In June 2009, the FASB issued an accounting pronouncement which approved the "FASB Accounting Standards Codification" ("Codification") as the single source of authoritative nongovernmental U.S. GAAP effective July 1, 2009. The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. All existing accounting standard documents are superseded and all other accounting literature not included in the Codification is considered nonauthoritative. The Codification is effective for interim and annual periods ending after September 15, 2009. The Codification did not have an impact on the Company's financial condition or results of operations.

        In August 2009, the FASB issued an Accounting Standards Update ("ASU") which amends the Codification and provides clarification that in circumstances in which a quoted price in an active

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2. Summary of Significant Accounting Policies (Continued)

market for an identical liability is not available, an entity is required to measure fair value using one or more of the following techniques: (i) a valuation technique that uses the quoted price of the identical liability when traded as an asset, or quoted prices for similar liabilities or similar liabilities when traded as assets, (ii) another valuation technique consistent with the principles of fair value measurements and disclosures such as a present value technique or a market approach that is based on the amount at the measurement date that the entity would pay to transfer the identical liability or would receive to enter into the identical liability. The update is effective for the first reporting period (including interim periods) beginning after issuance, which for the Company is October 1, 2009. The Company's adoption of the ASU did not have a material effect on its financial condition, results of operations, or cash flows.

3. Fair Value of Financial Instruments

        The Company has elected to apply the fair value option of accounting to the following financial assets and liabilities existing at the time of adoption or at the time the Company recognizes the eligible item:

•

Available for sale securities that serve as collateral for the Company's CDO financings;

•

N-Star IV, VI, VII and VIII bonds payable;

•

Liabilities to subsidiary trusts issuing preferred securities; 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

Fair Value Hierarchy

        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 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).

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3. Fair Value of Financial Instruments (Continued)

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, beneficial interest in securitizations and long-dated or complex derivatives, including certain foreign exchange options and long-dated options on gas and power).

        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

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3. Fair Value of Financial Instruments (Continued)

assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2009 by level within the fair value hierarchy:

		Assets and Liabilities at Fair Value
		Level 1		Level 2		Level 3		Total
Assets:
Available for sale securities:
	CMBS	$	—	$	159,279	$	90,304	$	249,583
	N-Star CDO notes		—		—		5,875		5,875
	Third party CDO notes		—		—		9,515		9,515
	REIT debt		—	$	18,126		12,454		30,580
	N-Star CDO equity		—		—		31,928		31,928
	Trust preferred securities		—		—		8,739		8,739
Derivative asset			—		—		—		—
Corporate lending investment			—		—		8,943		8,943
	Total assets	$	—	$	177,405	$	167,758	$	345,163
Liabilities:
N-Star IV,VI, VII and VIII bonds payable			—		—		584,615	$	584,615
Liability to subsidiary trusts issuing preferred securities			—		—		167,035		167,035
Derivative liability			—		67,044		—		67,044
	Total liabilities	$	—	$	67,044	$	751,650	$	818,694

        The following table presents additional information about the Company's available for sale securities, corporate lending investment, bonds payable and liabilities to subsidiary trusts issuing

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3. Fair Value of Financial Instruments (Continued)

preferred securities which are measured at fair value on a recurring basis for which the Company has utilized Level 3 inputs to determine fair value:

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

			Available for sale securities			Corporate lending investment			N-Star CDO Bonds Payable			Liability to subsidiary trusts issuing preferred securities
Beginning balance:			$	100,907		$	47,999		$	468,638		$	69,617
	Total net transfers into Level 3			17,434
	Purchases, sales, issuance and settlements, net			57,941			(7,957	)		65,308			—
	Total losses (realized or unrealized):
		Included in earnings		14,457			31,099			51,101			97,418
		Included in other comprehensive loss		7,788			—			—			—
	Total gains (realized or unrealized):
		Included in earnings		4,778			—			(432	)		—
		Included in other comprehensive loss		—			—			—			—
Ending balance			$	158,815		$	8,943		$	584,615		$	167,035
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			$	(9,679	)	$	(31,099	)	$	(45,043	)	$	(97,418	)

Fair Value Option

        Changes in fair value for assets and liabilities for which the election is made will be recognized in earnings as they occur. The fair value option may be elected 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

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3. Fair Value of Financial Instruments (Continued)

for that instrument. 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, 2009		December 31, 2008
Assets:
Available for sale securities:
	CMBS	$	249,583	$	124,595
	N-Star CDO notes		4,268		5,236
	Third party CDO notes		9,515		1,322
	REIT debt		30,580		44,936
	Trust preferred securities		8,739		4,488
Corporate lending investment			8,943		47,999
	Total assets	$	311,628	$	228,576
Liabilities:(1)
N-Star IV,VI, VII and VIII bonds payable			584,615		468,638
Liability to subsidiary trusts issuing preferred securities			167,035		69,617
	Total liabilities	$	751,650	$	538,255

        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, 2009		Amount Due Upon Maturity		Difference
Assets:
Available for sale securities:
	CMBS	$	249,583	$	815,047	$	(565,464	)
	N-Star CDO notes		4,268		47,467		(43,199	)
	Third party CDO notes		9,515		37,832		(28,317	)
	REIT debt		30,580		34,810		(4,230	)
	Trust preferred securities		8,739		15,000		(6,261	)
	Total assets	$	302,685	$	950,156	$	(647,471	)
Liabilities:
N-Star IV,VI, VII and VIII bonds payable			584,615		1,651,402		(1,066,787	)
Liability to subsidiary trusts issuing preferred securities			167,035		280,133		(113,098	)
	Total Liabilities	$	751,650	$	1,931,535	$	(1,179,885	)

        At December 31, 2009, the basis in the Company's corporate lending investment was $70.0 million. The Company has elected the fair value option for this investment which is accounted for under the

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3. Fair Value of Financial Instruments (Continued)

equity method of accounting. The fair market value of the Company's investment at December 31, 2009 was $8.9 million.

        For the years ended December 31, 2009 and 2008, the Company recognized a net loss of $156.8 million and an net gain of $715.4 million, respectively, 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 consolidated statement of operations.

        The impact of changes in instrument-specific credit spreads on N-Star bonds payable, liability to subsidiary trusts issuing preferred securities and derivatives for which the fair value option was elected was a net loss of $143.9 million and a net gain of $1.1 billion for the years ended December 31, 2009 and 2008, respectively. 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.

4. Operating Real Estate

        At December 31, 2009 and 2008, operating real estate, net consists of the following:

	December 31, 2009		December 31, 2008
Land	$	148,473	$	160,838
Buildings and improvements		851,302		973,826
Leasehold interests		19,271		18,876
Tenant improvements		33,680		37,517
Furniture and fixtures		7,161		5,965
Allowance for operating real estate impairment		—		(5,580	)
Capital leases		3,028		3,027
		1,062,915		1,194,469
Less: Accumulated depreciation		84,013		67,469
Operating real estate, net	$	978,902	$	1,127,000

        Depreciation expense amounted to approximately $27.6 million and $29.5 million for the year ended December 31, 2009 and 2008, respectively. In addition to the amounts included in the above table, approximately $66.5 million and $84.3 million of real estate acquisition costs as of December 31, 2009 and 2008, respectively, are classified as deferred lease costs. See Note 10 for additional information.

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(Amounts in Thousands, Except per Share Data)

4. Operating Real Estate (Continued)

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.

Dispositions—2009

Wakefield Joint Venture Dispositions

        In December 2009, the Wakefield joint venture completed the sale of 18 assisted living facilities containing approximately 1,300 beds located in North Carolina to a private investor group for approximately $95.9 million, representing a gain on sale of approximately $13.8 million.

Discontinued Operations

        The following table summarizes income from discontinued operations and related gain on sale of discontinued operations for the years ended December 31, 2009, 2008 and 2007:

		For the Year Ended December 31, 2009		For the Year Ended December 31, 2008		For the Year Ended December 31, 2007
Revenue:
	Rental and escalation income	$	7,997	$	7,807	$	4,493
	Interest and other		3		14		12
	Total revenue		8,000		7,821		4,505
Expenses:
	Real estate property operating expenses		81		12		—
	General and administrative expenses		31		5		6
	Interest expense		4,017		3,583		2,102
	Depreciation and amortization		2,027		2,051		1,305
	Total expenses		6,156		5,651		3,413
Income from discontinued operations			1,844		2,170		1,092
Gain (loss) on disposition of discontinued operations			13,799		—		(45	)
Income from discontinued operations, net of non-controlling interest		$	15,643	$	2,170	$	1,047

        The consolidated balance sheet at December 31, 2008 includes $80.8 million of assets and $51.6 million of liabilities related to discontinued operations.

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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, 2009:

December 31, 2009		Carrying Value		Transition Adjustment			Losses in Accumulated OCI			Unrealized (Loss)/Gain on Investments			Estimated Fair Value(1)
CMBS		$	507,895	$	(64,327	)	$	—		$	(193,985	)	$	249,583
N-Star CDO notes			51,731		(17,616	)		(13,517	)		(14,723	)		5,875
Third party CDO notes			25,646		(3,896	)		—			(12,235	)		9,515
REIT debt			29,036		(2,276	)		—			3,820			30,580
N-Star CDO equity			72,926		—			(40,998	)		—			31,928
Trust preferred securities			15,000		(2,736	)		—			(3,525	)		8,739
	Total	$	702,234	$	(90,851	)	$	(54,515	)	$	(220,648	)	$	336,220

(1)

Approximately $212.4 million of these investments serve as collateral for the Company's only consolidated securities CDO transaction and the balance is financed under other borrowing facilities.

        At December 31, 2009, the maturities of the available for sale securities ranged from one to 42 years.

        During the year ended December 31, 2009 proceeds from the sale and redemption of available for sale securities was $213.1 million. The realized gain on sale was $72.8 million.

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

December 31, 2008		Carrying Value		Transition Adjustment			Losses in Accumulated OCI			Unrealized Loss on Investments			Estimated Fair Value(1)
CMBS		$	444,790	$	(64,442	)	$	—		$	(255,754	)	$	124,594
N-Star CDO notes			50,680		(17,616	)		(12,633	)		(13,391	)		7,040
Third party CDO notes			16,156		(3,896	)		—			(10,938	)		1,322
REIT debt			82,753		(2,276	)		—			(35,542	)		44,935
N-Star CDO equity			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 CDO 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.

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6. Real Estate Debt Investments

        At December 31, 2009 and 2008, the Company held the following real estate debt investments:

December 31, 2009		Carrying Value(1)(2)		Allocation by Investment Type			Average Fixed Rate			Average Spread Over LIBOR			Number of Investments
Whole loans, floating rate		$	1,014,028		52.3	%			%		2.70	%%		52
Whole loans, fixed rate			62,373		3.2			6.89	%					7
Subordinate mortgage interests, floating rate			193,275		10.0						2.69	%		11
Subordinate mortgage interests, fixed rate			24,722		1.3			7.25	%					2
Mezzanine loans, floating rate			538,173		27.8						3.35	%		20
Mezzanine loan, fixed rate			90,558		4.7			8.89	%					7
Other loans—floating			8,610		0.4						2.24	%		2
Other loans—fixed			5,354		0.3			5.53	%					1
	Total/Weighted average	$	1,937,093		100.0	%		7.90	%		2.90	%		102

(1)

Approximately $1.3 billion of these investments serve as collateral for the Company's three commercial real estate debt CDO financings and the balance is financed under other borrowing facilities or unleveraged. The Company has future funding commitments, which are subject to certain conditions that borrowers must meet to qualify for such fundings, totaling $80.0 million related to these investments. The Company expects that a minimum of $51.9 million of these future fundings will be funded within the Company's existing CDO financings and require no additional capital from the Company. Based upon currently approved advance rates on the Company's credit and CDO facilities and assuming that all loans that have future fundings meet the terms to qualify for such funding; the Company's equity requirement on the remaining $28.1 million of future funding requirements would be approximately $9.1 million.

(2)

Includes $0.6 million in real estate debt investments, held for sale.

December 31, 2008		Carrying Value(1)		Allocation By Investment Type			Average Fixed Rate			Average Spread Over LIBOR			Number of Investments
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 served as collateral for the Company's three commercial real estate debt CDO financings and the balance was financed under other borrowing

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6. Real Estate Debt Investments (Continued)

facilities. The Company had future funding commitments, which were subject to certain conditions that borrowers must have met to qualify for such fundings, totaling $271.0 million related to these investments.

        Contractual maturities of real estate debt investments at December 31, 2009 are as follows:

Years Ending December 31:		Initial Maturity(1)		Maturity Including Extensions
2010		$	990,392	$	314,441
2011			190,422		505,555
2012			450,631		531,231
2013			—		233,071
2014			176,231		126,800
Thereafter			214,720		311,298
	Total	$	2,022,396	$	2,022,396

(1)

The year ending December 31, 2010, contains a whole loan with an initial maturity of October 1, 2008 and a principal balance of $21.4 million, a junior participation in a first mortgage with an initial maturity of March 1, 2009 and a principal balance of $28.5 million, a whole loan with an initial maturity of April 1, 2009 and a principal balance of $13.9 million, a junior participation in a first mortgage with an initial maturity of September 9, 2009 and a principal balance of $10.0 million, a whole loan with an initial maturity of December 1, 2009 and a principal balance of $15.0 million and a whole loan with an initial maturity of December 31, 2009 and a principal balance of $10.5 million that remain outstanding as of December 31, 2009.

        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.

        On June 30, 2009, the Company received $23.6 million of cash proceeds relating to the repayment of a $27.4 million first mortgage loan backed by a data center property bearing interest at LIBOR + 4.5% and having a February 2012 final maturity date. The Company agreed to the discounted payoff of its loan on this niche asset for the economic and credit risk benefits. Accordingly, during the second quarter 2009, the Company recorded a $3.8 million credit loss relating to this discounted payoff.

        On December 16, 2009, the Company received $23.1 million of cash proceeds relating to the repayment of $28.4 million on two first mortgage loans backed by land, bearing a weighted average interest rate of LIBOR + 5.3% and having a March 2010 final maturity date. The Company agreed to the discounted payoff of its loans on these assets in order to avoid a prolonged foreclosure with the

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6. Real Estate Debt Investments (Continued)

borrower. Accordingly, during the fourth quarter 2009, the Company recorded a $5.3 million credit loss relating to this discounted payoff.

Non-Performing Loans and Provision for Loan Losses

Non-Performing Loans

        As of December 31, 2009, the Company had six non-performing loans totaling $99.3 million which consisted of a first mortgage having a principal balance of $21.4 million and a maturity date of October 1, 2008, a junior participation in a first mortgage having a principal balance of $28.5 million and a maturity date of March 1, 2009, a first mortgage having a principal balance of $13.9 million and a maturity date of April 1, 2009, a junior participation in a first mortgage having a principal balance of $10.0 million and a maturity date of September 9, 2009, a first mortgage having a principal balance of $15.0 million and a maturity date of December 1, 2009 and a first mortgage having a principal balance of $10.5 million and a maturity date of December 31, 2009, representing approximately 4.9% of the Company's total commercial real estate debt investments. The Company's maximum additional exposure to loss related to these loans would be equal to the outstanding principal balance less reserves taken.

Provision for Loan Losses

        For the year ended December 31, 2009, the Company recorded an $83.7 million credit loss provision relating to 15 loans. For the year ended December 31, 2008, the Company recorded a $11.2 million credit loss provision relating to 10 loans. As of December 31, 2009, loan loss reserves totaled $81.0 million.

7. Investments in and Advances to Unconsolidated Ventures

        The Company has non-controlling, unconsolidated 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, 2009 and 2008, the Company had an investment in CS/Federal of approximately

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

7. Investments in and Advances to Unconsolidated Ventures (Continued)

$6.9 million and $7.3 million, respectively. The Company recognized equity in earnings of $0.4 million, $0.5 million and $0.5 million for the years ended December 31, 2009, 2008 and 2007, respectively.

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.

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 for its equity investment. As of December 31, 2009, the fair market value of the Company's investment in the corporate lending venture was $8.9 million. For the years ended December 31, 2008 and 2009, the Company recognized an unrealized loss of $30.0 million and $31.1 million, respectively, related to the fair value adjustment on its equity investment. The Company conducted its quarterly comprehensive credit review of this investment and as a result, concluded that due to the uncertainty of the underlying cash flows, the Company will utilize the cost recovery method of accounting for income recognition on this investment.

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 and we do not expect to earn any incentive management fees from the Securities Fund in the future.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

7. Investments in and Advances to Unconsolidated Ventures (Continued)

        At December 31, 2009 and 2008, the carrying value of the Company's investment in the Securities Fund was $7.2 million and $29.3 million, respectively, representing a 31.2% and 53.1% interest in the Securities Fund, respectively.

        For the year ended December 31, 2009, 2008 and 2007, the Company recognized equity in losses of $6.5 million, $12.4 million and $9.1 million, respectively. The Company also earned $0.2 million, $0.5 million and $0.4 million in management fees from the Securities Fund for the years ended December 31, 2009, 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 ("Whitehall"), 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 joint venture is managed by a third party management group which has extensive experience in the single family housing sector. The Company and Whitehall agreed to provide no additional new investment capital in the LandCap joint venture. At December 31, 2009 and 2008 the Company's investment in LandCap is carried at $10.1 million and $12.9 million, respectively. For the years ended December 31, 2009, 2008 and 2007, the Company recognized equity in loss of $3.7 million, $3.3 million and $0.7 million, respectively. At December 31, 2009 and 2008, LandCap had investments totaling $39.1 million. In addition, the Company advanced approximately $4.9 million under a loan agreement to LandCap, which bears interest at a fixed rate of 12% and was included in other assets in the consolidated balance sheets.

Midwest Care Holdco TRS I LLC

        In June 2009, the Company restructured its net lease relationship with one of its healthcare operators to take advantage of new REIT legislation which now allows a taxable REIT subsidiary affiliate to become the lessee of healthcare- related properties. The restructuring resulted in one of the Company's unconsolidated affiliate Midwest Care Holdco TRS I LLC ("Midwest") becoming the lessee of the properties and Midwest simultaneously entering into a management contract with a third party operator. The management agreement is terminable by Midwest upon 60 days notice. This new structure allows the Company to participate in operating improvements of the underlying properties not previously available under the prior structure. The Company owns a 49% interest in Midwest and does not control the major decisions and as a result, the Company does not consolidate the operations of Midwest. The Company's investment in Midwest is accounted for using the equity method. At December 31, 2009, the Company had an investment in Midwest of approximately $1.0 million. The Company recognized equity in earnings of $7.5 million for the year ended December 31, 2009, related to Midwest.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

7. Investments in and Advances to Unconsolidated Ventures (Continued)

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

	For the Year Ended December 31, 2009			For the Year Ended December 31, 2008			For the Year Ended December 31, 2007
Net income	$	(13,535	)	$	(51,469	)	$	(33,657	)
Other partners' share of income		4,084			37,198			24,489
Fee income basis difference		—			1,263			(1,263	)
Joint venture equity write-off		—			811			—
Elimination entries		7,642			279			(1,253	)
Earnings from unconsolidated/uncombined ventures	$	(1,809	)	$	(11,918	)	$	(11,684	)

        Reconciliation between the Company's investment in unconsolidated entities as of December 31, 2009 and December 31, 2008 is as follows:

	December 31, 2009		December 31, 2008
Company's equity in unconsolidated entities	$	36,874	$	100,899
Elimination entries		1,109		279
Purchase price basis difference		316		329
Investment in and advances to unconsolidated ventures	$	38,299	$	101,507

        The condensed combined balance sheets for the unconsolidated joint ventures at December 31, 2009 and 2008 are as follows:

			2009		2008
			(unaudited)		(unaudited)
Assets
	Cash		$	25,655	$	29,119
	Restricted cash			4,006		537
	Operating real estate, net			47,850		63,473
	Available for sale securities, at fair value			350,598		373,588
	Deferred costs, net			3,708		4,269
	Other assets			8,166		2,244
		Total assets	$	439,983	$	473,230
Liabilities and members' equity
	Mortgage notes and loans payable		$	46,138	$	36,886
	Other liabilities			221,844		280,780
	Members' equity			172,001		155,564
		Total liabilities and members' equity	$	439,983	$	473,230

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

7. Investments in and Advances to Unconsolidated Ventures (Continued)

        The condensed combined statements of operations for the unconsolidated joint ventures for the years ended December 31, 2009, 2008 and 2007 are as follows;

			2009			2008			2007
			(unaudited)			(unaudited)			(unaudited)
Revenues and other income:
	Interest income		$	19,724		$	18,292		$	8,806
	Rental and escalation income			44,110			4,720			5,046
	Other revenue			1,956			267			8,824
		Total revenue		65,790			23,279			22,676
Expenses:
	Interest expense			4,017			4,542			3,880
	General and administrative			16,941			7,752			9,583
	Depreciation and amortization			2,406			1,936			1,981
	Other expenses			27,793			2,465			2,276
		Total Expenses		55,247			16,695			17,720
Income from operations				14,543			6,584			4,956
	Unrealized loss on investments			(25,277	)		(60,661	)		(38,613	)
	Realized loss on investments			(2,605	)		—			—
Net income			$	(13,339	)	$	(54,077	)	$	(33,657	)

8. 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 CDO financings. The collateral securities include CMBS, fixed income securities issued by REITs and CDO financings 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 CDO financings, the Company expects to generate attractive risk-adjusted equity returns and to match the term of its assets and liabilities.

        The Company is required to consolidate a variable interest entity ("VIE") if the Company is deemed to be the VIEs 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 CDO 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

8. Variable Interest Entities (Continued)

entity and their rights are not capped; (3) whether the voting rights of these investors are proportional to their obligations to absorb the expected losses of the entity, their rights to receive the expected returns of their equity, or both; and (4) whether substantially all of the entity's activities involve or are conducted on behalf of an investor that has disproportionately fewer voting rights.

        As of December 31, 2009 and 2008, the Company identified interests in 17 entities which were determined to be VIEs.

        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 December 31, 2009 and 2008.

Real Estate Debt Investments

        The Company has identified one real estate debt investment as a variable interest in a VIE and has determined that the Company is not the primary beneficiary of this VIE and as such the VIE should not be consolidated in the Company's consolidated financial statements. The Company's maximum exposure to loss would not exceed the carrying amount of its investment of $22.5 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.

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. 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.

CDO financings

        The Company has interests in eight collateralized debt obligations, also referred to as CDOs, 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 CDO transaction, which are the equity securities of the CDO financings, and, with the exception of N-Star I, all of the below investment grade CDO notes of each CDO transaction. In addition, the Company earns a fee of 0.35% of the outstanding principal balance of the assets backing each of these CDO financings as an annual collateral management fee. The Company's interests in each of the CDO financings are accounted for as a single debt security available for sale. During the first quarter, two of the Company's CDO financings experienced a credit loss on a security whose issuer filed for bankruptcy. The Company reviewed the equity notes for impairment and determined based upon its analysis that no impairment existed at December 31, 2009. The Company will use the cost recovery method of income recognition for the term notes because of the uncertainty of the income streams of these two CDO financings. Any potential losses in the Company's off balance sheet CDO financings are limited to the amortized cost of its investment of $109.6 million at December 31, 2009.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

8. Variable Interest Entities (Continued)

Consolidated CDO financings

        N-Star IV, VI, VII and VIII are consolidated CDO financings.

        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 at December 31, 2009 and December 31, 2008:

		Collateral—December 31, 2009									Term Notes—December 31, 2009
Issuance		Date Closed		Par Value of Collateral		Weighted Average Interest Rate			Weighted Average Expected Life (years)(1)		Outstanding Term Notes(2)		Weighted Average Interest Rate			Stated Maturity
N-Star IV			6/14/2005	$	410,888		4.30	%		1.59	$	282,500		0.83	%		7/1/2040
N-Star VI			3/17/2006		383,106		5.20			2.80		279,057		0.79			6/1/2041
N-Star VII			6/22/2006		708,699		4.97			6.67		499,200		0.58			6/22/2051
N-Star VIII			12/6/2006		836,142		5.02			1.97		590,645		0.72			2/1/2041
	Total			$	2,338,835		4.91	%		3.46	$	1,651,402		0.71	%

(1)

Based upon initial maturity.

(2)

Includes only notes held by third parties.

		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(2)		Weighted Average Interest Rate			Stated Maturity
N-Star IV(1)			6/14/2005	$	346,996		6.93	%		1.71	$	292,500		1.08	%		7/1/2040
N-Star VI(1)			3/17/2006		385,251		7.26			2.11		292,700		2.45			6/1/2041
N-Star VII(1)			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)

Weighted average expected life is based upon initial maturity.

(2)

Includes only notes held by third parties.

Unconsolidated CDO financings

        N-Star I, II, III and V are unconsolidated CDO financings.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

8. 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 at December 31, 2009 and December 31, 2008:

		Collateral—December 31, 2009									Term Notes—December 31, 2009
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 12/31/09			Stated Maturity
N-Star I(2)			8/21/03	$	282,846		6.59	%		4.26	$	266,389		5.84	%		8/01/2038
N-Star II			7/01/04		302,937		6.16			5.10		264,795		5.45			6/01/2039
N-Star III			3/10/05		438,714		5.58			3.96		353,086		4.02			6/01/2040
N-Star V			9/22/05		618,508		5.36			6.63		456,319		4.41			9/05/2045
	Total			$	1,643,005		5.78	%		5.23	$	1,340,589		4.80	%

(1)

Includes only notes held by third parties.

(2)

The Company has an 83.3% interest.

		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			Stated Maturity
N-Star I(2)			8/21/2003	$	299,316		6.60	%		4.16	$	278,000		6.37	%		8/01/2038
N-Star II			7/01/2004		331,242		6.17			4.77		295,098		5.51			6/01/2039
N-Star III			3/10/2005		410,188		5.70			4.11		358,556		4.88			6/01/2040
N-Star V			9/22/2005		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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

9. Deferred Costs and Intangible Assets, Net

        Deferred costs and intangible assets as of December 31, 2009 and 2008 consisted of the following:

	December 31, 2009			December 31, 2008
Deferred lease costs	$	67,897		$	85,630
Deferred loan costs		18,612			26,278
Intangible assets		839			839
Pending deal costs		2,650			17
		89,998			112,764
Less accumulated amortization		(32,447	)		(33,131	)
Deferred costs and intangible assets, net	$	57,551		$	79,633

        Deferred lease cost includes the allocation of a portion of the purchase price to lease origination costs associated with the in-place leases. For acquisitions for the year ended December 31, 2008, an additional $0.3 million was allocated from the purchase price to deferred lease cost.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

10. Borrowings

        The following table summarizes the Company's outstanding borrowings as of December 31, 2009 and 2008:

	Initial Stated Maturity		Interest Rate	Contractual Balance at December 31, 2009		Contractual Balance at December 31, 2008
Credit Facilities
JP Facility(1)		8/8/2009	LIBOR + .80% to 1.80%	$	—	$	44,881
Total Credit Facilities					—		44,881
Term Loans
WA Secured Term Loan(2)		10/28/2012	LIBOR + 3.50%		246,884		276,143
Euro—note		10/28/2012	3 month Euribor + 3.50%		85,218		103,526
LB Term Loan		2/9/2010	LIBOR + 1.50%		22,199		24,238
Term Asset Backed Securities Loan Facility		10/29/2014	2.64%		14,682		—
Total Credit Facilities & Term Loans					368,983		448,788
Mortgage notes payable (non-recourse)
Chatsworth		5/1/2015	5.65%		—		42,923
Salt Lake City		9/1/2012	5.16%		15,471		15,862
EDS		10/8/2015	5.37%		46,977		47,698
Executive Center(3)		1/1/2016	5.85%		51,480		51,480
Green Pond		4/11/2016	5.68%		17,119		17,341
Indianapolis		2/1/2017	6.06%		28,142		28,472
Wakefield GE		8/30/2010	6.93%		44,163		67,269
Wakefield—Park National		1/11/2014	5.94%		32,944		33,300
Wakefield—GE—WLK		1/11/2017	6.99%		159,138		160,000
Wakefield—GE—Tusc & Harmony		1/11/2017	7.09%		7,843		7,875
Wakefield—Harmony FNMA		2/1/2017	6.39%		75,001		75,000
Wakefield—Grove City		2/1/2038	5.45%		1,835		1,862
Wakefield—Lancaster		6/1/2037	6.40%		2,571		2,605
Wakefield—Marysville		6/1/2037	6.40%		1,651		1,673
Wakefield—Washington		10/1/2038	6.65%		1,952		1,975
Wakefield—Miller Merril		6/30/2012	7.07%		118,320		116,000
Wakefield—ARL Mob Wachovia		5/11/2017	5.89%		3,389		3,412
Wakefield—Ascend Colonial		5/31/2012	7.52%		—		6,500
Wakefield—Colonial Dova		8/31/2012	7.32%		—		6,500
Wakefield—Colonial 6 Alfs		10/31/2012	6.98%		—		23,329
Wakefield—St Francis		9/10/2010	LIBOR + 2.00%		11,400		11,400
Aurora		7/11/2016	6.22%		32,982		33,329
DSG		10/11/2016	6.17%		33,795		34,237
Keene		2/1/2016	5.85%		6,693		6,790
Fort Wayne		1/1/2015	6.41%		3,399		3,480
Portland		6/17/2014	7.34%		4,652		4,825
Milpitas		3/6/2017	5.95%		22,107		22,548
Fort Mill		4/6/2017	5.63%		27,700		27,700
Reading		1/1/2015	5.58%		13,905		14,153
Reading		1/1/2015	6.00%		5,000		5,000

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

10. Borrowings (Continued)

	Initial Stated Maturity		Interest Rate	Contractual Balance at December 31, 2009		Contractual Balance at December 31, 2008
Alliance		12/6/2017	6.48%		23,543		23,787
Mezzanine loan payable (non-recourse)
Chatsworth		5/1/2014	6.64%		—		9,310
Fort Mill		4/6/2017	6.21%		2,743		2,985
Exchangeable Senior Notes(4)		6/15/2027	7.25%		68,165		160,800
Exchangeable Senior Notes ("NNN Notes")(4)		6/15/2013	11.50%		60,750		80,000
Repurchase obligations		Varies	LIBOR varies		—		176
Bonds payable(5)
N-Star IV		7/1/2040	LIBOR + 0.61% (average spread)		282,500		292,500
N-Star VI		6/1/2041	3 month LIBOR + 0.52% (average spread)		279,057		292,700
N-Star VII		6/22/2051	LIBOR + 0.35% (average spread)		499,200		499,200
N-Star VIII		2/1/2041	LIBOR + 0.49% (average spread)		590,645		524,045
Liability to subsidiary trusts issuing preferred securities(5)(6)
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		31,475
Trust VIII		7/30/2037	3 month LIBOR 2.70%		35,100		35,100
				$	3,225,348	$	3,488,962

(1)

In August 2009, the Company terminated its JP Facility and repaid the remaining principal balance of $12.2 million.

(2)

The Company had an additional $19.0 million of availability under the delay draw term facility of the WA Secured Term Loan.

(3)

The Company has a limited recourse obligation with respect to this loan. The amount of such obligation will vary based upon the tenancy of the property. The Company believes such obligation will not exceed $2.5 million.

(4)

The contractual amounts may differ from the carrying value on the consolidated balance sheets due to the equity component of the debt.

(5)

Contractual amounts due may differ from the carrying value on the consolidated balance sheets due to the election of the fair value option. See Note 3.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

10. Borrowings (Continued)

(6)

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.

        Scheduled principal payment requirements on the Company's borrowings based on initial maturity dates are as follows as of December 31, 2009:

	Total		Mortgage and Mezzanine Loans		Secured Term Loan(1)		Liability to Subsidiary Trusts Issuing Preferred Securities(2)		Exchangeable Senior Notes(2)		Bonds Payable(1)
2010	$	63,324	$	63,324	$	—	$	—	$	—	$	—
2011		10,474		10,474		—		—		—		—
2012		561,052		138,586		354,301		—		68,165		—
2013		70,782		10,032		—		—		60,750		—
2014		59,374		44,692		14,682		—		—		—
Thereafter		2,460,342		528,807		—		280,133		—		1,651,402
Total	$	3,225,348	$	795,915	$	368,983	$	280,133	$	128,915	$	1,651,402

(1)

$68.2 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, 2009, the Company was in compliance with all covenants under its borrowings.

Secured Term Loan

        On October 28, 2009, the Company entered into the First Amended and Restated Credit Agreement (the "Credit Agreement") and the Second Amendment to Note Purchase Agreement (the "Note Purchase Agreement," and together with the Credit Agreement, the "WA Secured Term Loan") with Wachovia Bank, National Association ("Wachovia"). The maturity date of the WA Secured Term Loan was extended for three years to October 28, 2012 and the WA Secured Term Loan bears interest at LIBOR plus 3.50%. The WA Secured Term Loan eliminates all margin call provisions and does not restrict the payment of dividends, subject in both cases to the semi-annual amortization payments described below. The WA Secured Term Loan also provides for up to $300 million of revolving borrowing capacity as the amount outstanding under the WA Secured Term Loan is reduced below $300 million, on a dollar-for-dollar basis. The Secured Term Loan eliminates the corporate fixed charge and recourse debt covenants and maintains the liquidity and tangible net worth covenants in the WA Secured Term Loan. The Company repaid approximately $52.5 million of the outstanding balance in connection with the WA Secured Term Loan.

        On October 28, 2009, in connection with the WA Secured Term Loan, the Company entered into a warrant agreement (the "Warrant Agreement") with Wachovia under which we issued one million warrants (the "Warrants") to Wachovia to purchase one million shares of the Company's common stock, par value $0.01 per share ("Common Stock"), at a weighted average exercise price of $8.59 per share. 500,000 Warrants are exercisable immediately at a price of $7.50 per share, 250,000 Warrants are

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

10. Borrowings (Continued)

exercisable after October 28, 2010 at a price of $8.60 per share and 250,000 Warrants are exercisable after October 28, 2011 at a price of $10.75 per share. The exercise price of the Warrants may be paid in cash or by cashless exercise. The exercise price and the number of shares of Common Stock issuable upon exercise of the Warrants are subject to adjustment for dividends paid in common stock, subdivisions or combinations. The Company determined that the allocable fair value of the warrants, as of October 28, 2009, was $0.1 million. The fair value of the warrants was recorded in equity and the associated discount on the debt will be amortized into interest expense using the effective interest method over the life of the associated 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 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

10. Borrowings (Continued)

Debt Repurchases

        During the year ended December 31, 2009, the Company repurchased approximately $92.6 million face amount of its 7.25% exchangeable senior notes for a total of $40.0 million, $19.3 million face amount of its 11.50% exchangeable senior notes for a total of $10.2 million and $27.4 million face amount of its N-Star CDO bonds payable for a total of $5.4 million. The Company recorded a total net realized gain of $59.9 million in connection with the repurchase of its notes and bonds for the year ended December 31, 2009. The repurchase of the notes and bonds for the year ended December 31, 2009 also represented an aggregate $83.7 million discount to the par value of the debt.

        During the year ended December 31, 2008, the Company repurchased $111.4 million of its notes, which consisted of $93.6 million of its N-Star CDO 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.

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.

JP Facility

        On October 8, 2008, the Company and a subsidiary entered into Amendment No. 1 (the "Amendment") to the Master Repurchase Agreement (as amended, the "JP Facility") with JPMorgan. The JP 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 JP 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 JP Facility will be determined by JPMorgan. Pursuant to the Amendment, the maximum amount outstanding under the JP Facility shall not exceed $150 million and we have agreed to guaranty the outstanding amount under the JP Facility. In August 2009, the Company terminated the JP Facility and repaid the remaining principal balance of $12.2 million.

Secured Term Loan

        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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

10. Borrowings (Continued)

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

11. 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, 2009:

Years Ending December 31:
2010	$	5,627
2011		5,564
2012		5,407
2013		5,465
2014		5,512
Thereafter		44,737
Total minimum lease payments		72,312
Less: Amounts representing interest		11,742
Future minimum lease payments	$	60,570

        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's Los Angeles office is sub-leased through December 31, 2011 and generated approximately $0.1 in sub-lease rental income for the year ended December 31, 2009. The Company recognized $2.6 million, $3.1 million and $2.7 million in rental expense for its four corporate offices for the years ended December 31, 2009, 2008 and 2007, respectively.

Chatsworth Property

        One of the Company's net lease investments was comprised of three office buildings totaling 257,000 square feet located in Chatsworth, CA and was 100% leased to Washington Mutual Bank, FA ("WaMu"). The tenant vacated the buildings as of March 23, 2009, and the leases (the "WaMu Leases") were disaffirmed by the FDIC. The assets were financed with a non-recourse $42.9 million first mortgage loan (the "WaMu Loan") and a $9.2 million mezzanine loan which was collateral for one of the Company's securities term financings. In the fourth quarter of 2008, the Company took an impairment charge relating to these properties and in the third quarter of 2009 the lender, GECCMC 2005-CI Plummer Office Limited Partnership (the "Lender"), foreclosed on the property.

        On August 10, 2009, the Lender filed a compliant against NRFC NNN Holdings, Inc. ("NNN") and NRFC Sub Investor IV, LLC, which are subsidiaries of ours, in the Superior Court of the State of California, County of Los Angeles. In the complaint, the Lender alleges, among other things, that the WaMu Loan is a recourse obligation of NNN due to the FDIC's disaffirmance of the WaMu Leases. The Company believes this case is without merit and is defending this suit vigorously.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

12. 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, 2009:

Years Ending December 31:
2010	$	86,559
2011		85,485
2012		82,836
2013		82,312
2014		78,681
Thereafter		258,666
	$	674,539

        Included in rental income is percentage rent of $650, $585 and $529 for the year ended December 31, 2009, 2008 and 2007, respectively.

13. 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. The Company earned total fees on these agreements of approximately $7.0 million, $12.0 million and $7.2 million for the years ended December 31, 2009, 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 years ended December 31, 2009, 2008 and 2007, the Company earned $0.2 million, $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., an affiliate of Chain Bridge, to perform certain management services. The Company incurred $3.4 million in management fees for each of the years ended December 31, 2009 and 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 consolidated statement of operations. Pursuant to the December 2009 membership interest redemption and sale agreement, the Company amended the management agreement with Wakefield Capital Management Inc. The amended management fee will be equal to one-twelfth of one percent of the daily weighted average amount of Wakefield's equity for each previous month.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

13. Related Party Transactions (Continued)

        The Company entered into a management agreement in March 2007 with the management company of our corporate lending venture to perform certain management services. On May 7, 2008, the Company terminated its management agreement with the management company of our corporate lending venture. The Company incurred $1.3 million and $3.0 million in management fees for the years ended December 31, 2008 and 2007, respectively, which are recorded in asset management fees-related parties in the 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 March 2007, the Company acquired a $100.0 million junior participation (subsequently converted into a second loss mezzanine loan in November 2007) in the financing provided by Credit Suisse, or CS, in connection with the acquisition of the Hard Rock Hotel and Casino, or Hard Rock, in Las Vegas, NV, by a joint venture between DLJ Merchant Banking and Morgans Hotel Group, or Morgans, which is a minority partner in the joint venture. In August 2008, the Company purchased a $30.0 million junior participation from CS, in connection with the acquisition of 11.05 acres of land immediately adjacent to the Hard Rock by the same joint venture. Both loans were subsequently modified in December 2009, which included the extension of each loan's maturity date. David Hamamoto, the Company's chairman and chief executive officer, is the chairman of the board of Morgans.

14. Fair Value of Financial Instruments

        The following disclosures of estimated fair value were determined by the Company, 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, 2009 and 2008 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 available for sale securities and securities sold, not yet purchased are carried on the balance sheet at their estimated fair value.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

14. Fair Value of Financial Instruments (Continued)

        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. At December 31, 2009 the fair market value was $1.7 billion with a gross carrying amount of $1.9 billion. At December 31, 2008 the fair market value was $1.7 billion with a gross carrying amount of $2.1 billion.

        For the exchangeable senior notes, the Company uses available market information, which includes quoted market prices or recent transactions, if available to estimate their fair value. At December 31, 2009, the fair market value of the 7.25% exchangeable senior notes was $34.8 million with a carrying amount of $67.0 million and the fair market value of the 11.50% exchangeable senior notes was $28.1 million with a carrying amount of $59.0 million. At December 31, 2008, the fair market value of the 7.25% exchangeable senior notes was $67.5 million with a face amount of $160.8 million and the fair market value of the 11.50% exchangeable senior notes was $45.0 million with a face amount of $80.0 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. At December 31, 2009, the fair market value was $800.1 million with a carrying amount of $795.9 million. At December 31, 2008, the fair market value was $934.3 million with a carrying amount of $910.6 million.

        Disclosure about fair value of financial instruments is based on pertinent information available to management as of December 31, 2009 and 2008. 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.

15. 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, 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, 2009, the Company has issued an aggregate of 8,283,510 LTIP Units, net of forfeitures of 60,198 LTIP Units. An aggregate of 1,157,995 LTIP Units were converted to commons stock and 482,989 shares of common stock were issued pursuant to the Stock Incentive Plan.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

15. Equity Based Compensation (Continued)

Of the 8,283,510 LTIP Units, so long as the recipient continues to be an eligible recipient, 5,015,942 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, 2,252,427 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 agreements 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 $19.7 million, $21.3 million and $10.7 million for the three years ended December 31, 2009, respectively. As of December 31, 2009, there were approximately 3,282,774 unvested LTIP Units and 170 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 $20.1 million, provided there are no forfeitures.

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. The Company did not meet the performance hurdles under the 2006 Outperformance Plan as of the conclusion of the 2006 Outperformance Plan on December 31, 2008. The Company recorded compensation expense for the 2006 Outperformance Plan of $0.5 million, $1.1 million and $1.1 million for the year ended December 31, 2007, 2008 and 2009, respectively. The remaining compensation expense to be recognized over the next four quarters is $0.2 million.

        The status of all of the LTIP grants as of December 31, 2009 and December 31, 2008 is as follows:

	December 31, 2009					December 31, 2008
	LTIP Grants			Weighted Average Grant Price		LTIP Grants			Weighted Average Grant Price
Balance at beginning of year(1)		8,067			9.86		5,484		$	11.47
Granted		—			—		3,533			7.26
Converted to common stock		(744	)		9.83		(895	)		9.51
Forfeited		—			—		(55	)		9.42
Ending balance(2)		7,323			9.85		8,067		$	9.86

(1)

Reflects balance at January 1, 2009 and January 1, 2008 for the periods ended December 31, 2009 and December 31, 2008, respectively.

(2)

Reflects balance at December 31, 2009 and December 31, 2008, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

15. Equity Based Compensation (Continued)

Incentive Compensation Plan

        On July 21, 2009, the Compensation Committee of the Board of Directors (the "Committee") of the Company approved the material terms of a new Incentive Compensation Plan for the Company's executive officers and other employees (the "Plan"). Under the Plan, a potential incentive compensation pool will be established each calendar year. The size of the incentive pool will be calculated as the sum of (a) 1.75% of the Company's "adjusted equity capital" and (b) 25% of the Company's adjusted funds from operations, as adjusted ("AFFO"), above a 9% return hurdle on adjusted equity capital. Payout from the incentive pool is subject to achievement of additional performance goals summarized below.

        The incentive pool will be divided into the following three separate incentive compensation components: (1) an annual cash bonus, tied to annual performance of the Company and paid after year end at or around completion of the year end audit; (2) a deferred cash bonus, determined based on the same year's performance, but paid 50% following the close of each of the first and second years after such incentive pool is determined, subject to the participant's continued employment through each payment date; and (3) a long-term incentive, paid at the end of a three-year period based on the Company's achievement of cumulative performance goals for the three-year period, subject to the participant's continued employment through the payment date. Performance goals for each component will be set by the Committee initially upon the adoption of the Plan and at the beginning of each subsequent calendar year for each new cycle. The goals will generally be divided into five distinct ranges of performance, each of which will correspond to a pay-out level equal to a percentage (0%, 25%, 50%, 75% or 100%) of a participant's pool allocation for such component.

        The annual bonus component for 2009 will be calculated based on AFFO and liquidity targets (weighted 50% and 25%, respectively) with the remaining 25% of the 2009 annual bonus determined in the Committee's discretion. The deferred bonus component will be calculated based on the same performance measures as the annual bonus, but paid as described above. For the long-term incentive component, each participant will initially be granted a number of restricted stock units determined by dividing the value of the participant's pool allocation for this component by the 20-day average closing price of the Company's common stock at the end of the first year of the grant cycle (such amount, the "Initial Long-Term Allocation"). Upon the conclusion of the three-year performance period, the participant will receive a payout equal to the value of one share of common stock at the time of such payout, with respect to a share of common stock during the three-year performance period, for each unit actually earned based on the Company's achievement of cumulative AFFO and/or a stock price goal during the performance period (the "Long-Term Payout"). The Long-Term Payout will be made in the form of shares of common stock to the extent available under the Company's equity compensation plans or, if all or a portion of such shares are not available, in cash; provided, that the amount of cash paid to any participant with respect to the 2009 long-term incentive component shall not exceed such participant's Initial Long-Term Allocation. For the three-year performance period ending December 31, 2011, the stock price goal is $8.21 per share.

        The Company recorded no equity-based compensation expense related to the long term incentive component of the Plan for the year ended December 31, 2009.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

16. Stockholders' Equity

Dividend Reinvestment and Stock Purchase Plan

        In April 2007, the Company implemented a Dividend Reinvestment and Stock Purchase Plan (the "Plan"), pursuant to which it registered with the SEC 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.

        During the year ended December 31, 2009, the Company issued a total of 80,395 common shares pursuant to the Plan for a gross sales price of approximately $0.3 million. During the year ended December 31, 2008, the Company issued a total of 181,593 common shares pursuant to the Plan for a gross sales price of approximately $1.1 million.

Equity Distribution Agreements

        In May 2009, the Company entered into an equity distribution agreement with JMP Securities LLC ("JMP"). 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 JMP. JMP 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. As of December 31, 2009, the Company issued 7,326,942 common shares and received approximately $25.7 million of net cash proceeds pursuant to its equity distribution agreement with JMP.

        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 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, 2009, the Company did not issue any common stock pursuant to its May 2008 equity distribution agreement with Wachovia. For the year ended December 31, 2008, the Company issued 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.

Common Stock

        In May 2009, the Company issued 94,045 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

16. Stockholders' Equity (Continued)

        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 December 2009, the Company issued 14,925 shares of restricted common stock with a fair value at the date of grant of $0.1 million to a newly appointed member of its Board of Directors.

        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. For the year ended December 31, 2009, the Company did not repurchase any common shares pursuant to its stock repurchase program.

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 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

16. Stockholders' Equity (Continued)

        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.

        On January 20, 2009, the Company declared a dividend of $0.25 per share of common stock. The dividends were paid on February 27, 2009 to the stockholders of record as of January 28, 2009. The common stock dividends were paid in a combination of 40% cash and 60% common stock which totaled approximately 3,715,869 shares of common stock.

        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 April 21, 2009, the Company declared a cash dividend of $0.10 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, 2009 to the stockholders of record as of the close of business on May 5, 2009.

        On July 21, 2009, the Company declared a dividend of $0.10 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 14, 2009 to the stockholders of record as of the close of business on August 5, 2009.

        On October 20, 2009, the Company declared a dividend of $0.10 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 16, 2009 to the stockholders of record as of the close of business on November 6, 2009.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

16. Stockholders' Equity (Continued)

Earnings Per Share

        Earnings per share for the years ended December 31, 2009, 2008 and 2007 is computed as follows (in thousands):

		Year Ended December 31 2009			Year Ended December 31 2008			Year Ended December 31 2007
Numerator (Income)
Basic Earnings
Income/(loss) from continuing operations		$	(152,216	)	$	700,159		$	49,263
Less:
	Net income (loss) attributable to the non-controlling interests		7,850			(71,846	)		(3,159	)
Preferred stock dividends		$	20,925		$	20,925		$	16,533
Net (loss)/income from continuing operations (basic/diluted)			(165,291	)		607,388			29,571
Income from discontinued operations,net of non-controlling interest			1,596			1,844			970
Gain on sale from discontinued operations,net of non-controlling interest			12,490			—			(40	)
Net income (loss) attributable to NorthStar Realty Finance Corp. common stockholders			(151,205	)		609,232			30,501
Effect of dilutive securities:
	Income (loss) allocated to non-controlling interest		(15,848	)		67,558			2,696
Dilutive net income available to stockholders		$	(167,053	)	$	676,790		$	33,197
Denominator (Weighted Average Shares)
Basic Earnings:
Shares available to common stockholders			69,870			63,136			61,511
Effect of dilutive securities:
OP/LTIP units			7,323			7,001			3,576
Dilutive Shares			77,193			70,137			65,087

        The earnings per share calculation takes into account the conversion of LTIP units into common shares. The LTIPS convert on a one-for-one basis into commons shares and share equally in the Company's earnings. Depending on the timing of LTIP conversions and the amount of LTIPS converted, relative to the timing of the Company's earnings allocated to the LTIP non-controlling interest, and the weighting of the common shares, the LTIP conversions may result in an anti-dilutive effect on earnings per share. For the years ended December 31, 2009, 2008 and 2007, the LTIP conversion were anti-dilutive.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

17. Non-controlling Interest

Operating Partnership

        Non-controlling 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 non-controlling 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 number of dilutive shares. 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 non-controlling interest in the accompanying consolidated balance sheet to account for the change in the ownership of the underlying equity in the Operating Partnership. As of December 31, 2009 and December 31, 2008, non-controlling interest related to the aggregate limited partnership units of 7,323,310 and 8,067,211, represented an 8.91% and 11.37% interest in the Operating Partnership, respectively. Income allocated to the operating partnership non-controlling interest for the years ended December 31, 2009 and 2008 was a loss of $13.6 million and income of $67.6 million, 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. In December 2009, the Company completed a membership interest redemption with Wakefield, NRFC Wakefield, Chain Bridge, Wakefield Capital Management, Midwest Care Holdings LLC, or Midwest Holdings, and certain individuals, pursuant to which Wakefield redeemed the 5.4% membership interest of Chain Bridge and its affiliates in Wakefield. As a result of the redemption, NorthStar holds 100% of the equity interests in Wakefield, other than the convertible preferred membership interests held by Inland. Accordingly, Wakefield's financial statements are consolidated into the Company's consolidated financial statements and Inland American's capital is treated as a non-controlling interest. Income allocated to the non-controlling interests for the years ended December 31, 2009 and 2008 was $9.6 million and $4.9 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 non-controlling interest. Loss allocated to non-controlling interest prior to the recapitalization of Monroe Capital was $0.3 million.

18. 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

18. Risk Management and Derivative Activities (Continued)

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. The objective in using interest rate derivatives is to add stability to interest expense and to manage exposure to interest rate movements.

        The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive Income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2009, such derivatives were used to hedge the variable cash flows associated with certain variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the years ended December 31, 2009 and 2008, the Company recorded immaterial amounts of hedge ineffectiveness in earnings.

        Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company's variable-rate debt. During 2010, the Company estimates that an additional $8.5 million will be reclassified as an increase to interest expense.

        The following tables summarize the Company's derivative financial instruments that were designated as cash flow hedges of interest rate risk as of December 31, 2009 and December 31, 2008:

	Number of Investments		Notional Amount		Fair Value Net Asset/ (Liability)			Range of Fixed LIBOR	Range of Maturity
Interest rate swaps
As of December 31, 2009		10	$	90,749	$	(7,691	)	4.18% – 5.08%	March 2010 – August 2018
As of December 31, 2008		10		90,749		(13,923	)	4.18% – 5.08%	March 2010 – August 2018

        In January 2008, the Company elected the fair value option for its bonds payable and its liability to subsidiary trusts issuing preferred securities. As a result, the changes in fair value of these financial instruments are now recorded in earnings and the interest rate swap agreements associated with these debt instruments no longer qualify for hedge accounting given that 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.

        Derivatives not designated as hedges are not speculative and are used to manage the Company's exposure to interest rate movements and other identified risks but do not meet strict hedge accounting requirements. For the years ended December 31, 2009 and 2008, the Company recorded, in earnings, a mark-to-market unrealized gain of $4.6 million and an unrealized loss of $15.9 million, respectively, for the non-qualifying interest rate swaps. For the years ended December 31, 2009 and 2008, the Company recorded a $5.6 million and a $5.5 million reclassification from accumulated other comprehensive income for the non-qualifying interest rate swaps, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

18. Risk Management and Derivative Activities (Continued)

        The following tables summarize the Company's derivative financial instruments that were not designated as hedges in qualifying hedging relationships as of December 31, 2009 and 2008:

	Number of Investments		Notional Amount		Fair Value Net Asset/ (Liability)			Range of Fixed LIBOR	Range of Maturity
Interest rate swaps
As of December 31, 2009		22	$	897,335	$	(59,353	)	0.34% – 5.63%		May 2010 – June 2018
As of December 31, 2008		24		1,396,879		(63,979	)	0.54% – 5.63%		October 2009 – June 2018

        The following table presents the fair value of the Company's derivative financial instruments as well as their classification on its balance sheet as of December 31, 2009 and 2008.

Tabular Disclosure of Fair Values of Derivative Instruments

	Asset Derivatives						Liability Derivatives
	As of December 31, 2009			As of December 31, 2008			As of December 31, 2009				As of December 31, 2008
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value			Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Interest Rate Products	Derivative instrument, at fair value	$	—	Derivative instrument, at fair value	$	—	Derivative liability, at fair value	$	(7,691	)	Derivative liability, at fair value	$	(13,923	)
Total derivatives designated as hedging instruments		$	—		$	—		$	(7,691	)		$	(13,923	)
Derivatives not designated as hedging instruments
Interest Rate Products	Derivative instrument, at fair value	$	—	Derivative instrument, at fair value	$	9,318	Derivative liability, at fair value	$	(59,353	)	Derivative liability, at fair value	$	(73,297	)
Total derivatives not designated as hedging instruments		$	—		$	9,318		$	(59,353	)		$	(73,297	)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

18. Risk Management and Derivative Activities (Continued)

        The following tables present the effect of the Company's derivative financial instruments on its statement of operations for the years ended December 31, 2009, 2008 and 2007:

Derivatives in Cash Flow Hedging Relationships

	Location of Gain/(loss) recognized in income	Year Ended December 31, 2009		Year Ended December 31, 2008			Year Ended December 31, 2007
Interest rate products
Amount of Gain or (loss) in OCI on Derivative on OCI (Effective Portion)	n/a	$	2,115	$	(14,758	)	$	(33,620	)
Amount of Gain or (loss) reclassified from accumulated OCI into Income (Effective Portion)	Interest Expense		28		28			104

Derivatives Not Designated as Hedging Instruments

	Location of Gain/(loss) recognized in income	Year Ended December 31, 2009			Year Ended December 31, 2008			Year Ended December 31, 2007
Interest rate products
Amount of Gain or (loss) recognized in income	Unrealized gain (loss) on investment and other	$	(16,463	)	$	(30,851	)	$	—
Amount of Gain or (loss) reclassified from accumulated OCI into Income	Unrealized gain (loss) on investment and other		(5,618	)		(5,460	)		(259	)

        At December 31, 2009, the Company's counterparties hold approximately $27.9 million of cash margin as collateral against its swap contracts.

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 33.5% of the Company's rental and escalation revenue for the year ended December 31, 2009 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

19. Quarterly Financial Information (Unaudited)

        The tables below reflect the Company's selected quarterly information for the Company for the years ended December 31, 2009, 2008 and 2007.

		Three Months Ended
		December 31, 2009			September 30, 2009			June 30, 2009			March 31, 2009
		(unaudited)
Total revenue		$	67,412		$	62,404		$	66,579		$	70,398
Income from continuing operations			(189,931	)	$	(67,485	)		2,469			102,731
Income from discontinued operations			132			513			594			605
Consolidated net income			(176,000	)		(65,773	)		2,469			102,731
Net income attributable to NorthStar Realty Finance Corp. common stockholders			(165,122	)		(66,466	)		(4,253	)		84,636
Net income per share attributable to NorthStar Realty Finance Corp. common stockholders—basic/diluted		$	(2.21	)	$	(0.86	)	$	(0.06	)	$	1.17
Weighted-average shares outstanding
	basic		74,311,394			69,896,439			67,353,541			64,348,264
	diluted		82,134,760			77,356,187			75,049,690			72,255,413

		Three Months Ended
		December 31, 2008		September 30, 2008		June 30, 2008			March 31, 2008
		(unaudited)
Total revenue		$	84,156	$	91,559	$	91,119		$	97,849
Income from continuing operations			251,259		251,013		(23,776	)		221,663
Income from discontinued operations			604		569		508			489
Consolidated net income			251,863		251,581		(23,267	)		222,152
Net income attributable to NorthStar Realty Finance Corp. common stockholders			218,992		218,310		(25,059	)		193,805
Net income per share attributable to NorthStar Realty Finance Corp. common stockholders—basic/diluted		$	3.11	$	3.11	$	(0.36	)	$	2.78
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)

19. Quarterly Financial Information (Unaudited) (Continued)

		Three Months Ended
		December 31, 2007		September 30, 2007		June 30, 2007		March 31, 2007
		(unaudited)
Total revenue		$	109,357	$	111,678	$	106,495	$	83,318
Income from continuing operations			11,112		14,409		16,173		7,569
Income from discontinued operations			310		199		269		314
Consolidated net income			11,426		14,611		16,387		7,886
Net income attributable to NorthStar Realty Finance Corp. common stockholders			5,084		8,502		10,766		6,149
Net income per share attributable to NorthStar Realty Finance Corp. common stockholders—basic/diluted		$	0.08	$	0.13	$	0.17	$	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

20. 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 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 real estate securities segment is focused on investing in a wide range of commercial real estate debt securities, including commercial mortgage- backed securities ("CMBS"), REIT unsecured debt, credit tenant loans and unsecured subordinate securities of commercial real estate companies. The Company generates revenues from this segment by earning interest income and advisory fees from owning and managing these investments. Its operating expenses consist primarily of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

20. Segment Reporting (Continued)

interest costs from financing its securities. The segment generates income from operations by earning advisory fees and a positive spread between the yield on its assets and the interest cost of its debt.

        The following table summarizes segment reporting for the years ended December 31, 2009, 2008 and 2007 (in thousands):

		Real Estate Debt			Operating Real Estate			Real Estate Securities(1)		Healthcare Real Estate Joint Venture			Corporate Investments and Other(2)			Consolidated Total
Total revenues for the years ended
	December 31, 2009	$	101,386		$	42,349		$	67,157	$	56,667		$	(766	)	$	266,793
	December 31, 2008		171,792			60,551			62,524		57,086			12,730			364,683
	December 31, 2007		204,056			47,893			78,962		46,711			33,226			410,848
Consolidated net (loss)/income for the years ended
	December 31, 2009		(127,291	)		(5,089	)		133,593		6,756			(144,542	)		(136,573	)
	December 31, 2008		703,097			(5,784	)		7,639		38			(2,661	)		702,329
	December 31, 2007		76,951			(8,546	)		15,538		3,933			(37,566	)		50,310
Consolidated net (loss)/income after non-controlling interests and before preferred dividend for the years ended
	December 31, 2009		(116,518	)		(4,495	)		120,578		(2,799	)		(127,046	)		(130,280	)
	December 31, 2008		632,913			(5,207	)		6,876		(4,881	)		456			630,157
	December 31, 2007		76,951			(8,601	)		15,538		3,707			(40,561	)		47,034
Total assets as of
	December 31, 2009	$	2,139,259		$	444,558		$	312,109	$	633,635		$	140,003			3,669,564
	December 31, 2008	$	2,266,115		$	515,577		$	259,326	$	732,513		$	170,195		$	3,943,726

(1)

Total revenues for the year ended December 31, 2009 and 2008 excludes $81.9 million in net realized and unrealized losses and $686.8 million in net realized and unrealized gains, respectively.

(2)

Corporate Investments and Other includes corporate level investments, corporate level interest income, interest expense and unallocated general & administrative expenses.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Amounts in Thousands, Except per Share Data)

21. Supplemental Disclosure of Non-Cash Investing and Financing Activities

        A summary of non-cash investing and financing activities for the years ended December 31, 2009, 2008 and 2007 is presented below:

	2009			2008			2007
The acquisition of available for sale securities with warehouse deposit		—			—			(21,898	)
Real estate debt investment pay-down due from servicer		(50	)		—			(33,842	)
Write-off of deferred financing cost in connection with FAS 159 implementation		—			29,918			—
Initial mark-to-market adjustment in connection with FAS 159 implementation		—			(317,111	)		—
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	)
Non-controlling 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			—
Write-off of operating real estate due to foreclosure		51,732			—			—
Reduction of mortgage notes payable due to foreclosure		(52,067	)		—			—
Reduction of restricted cash due to foreclosure		68			—			—
Write-off of deferred cost and straight-line rents in connection with disposition of operating real estate		3,009			—			27
Write-off of intangible in connection with the sale of joint venture interest		—			—			—
Assumption of loan in connection with acquisition of operating real estate		—			—			(19,499	)
Deed in lieu of foreclosure of operating real estate		—			—			(7,525	)
Allocation of proceeds from exchangeable senior notes to equity		—			(3,100	)		—
Allocation of payment of deferred financing fees to cost of capital		—			191			—
Equity component of warrant issuance		117			—			—
Stock dividend		10,646			—			—

22. Subsequent Events (Unaudited)

        The Company has evaluated subsequent events through February 26, 2010, which is the date these financial statements were issued.

        On January 19, 2010, 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 12, 2010 to the stockholders of record as of the close of business on February 5, 2010.

        On January 19, 2010, the Company declared a dividend of $0.10 per share of common stock. The dividends were paid on February 12, 2010 to the stockholders of record as of February 5, 2010.

169

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES
SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION
As of December 31, 2009
(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		—		—		2,292		—		350		—		2,642		2,642		986		1,662		Mar-99		Various
36 West 34 Street, NY, NY		—		—		4,333		—		281		—		4,614		4,614		1,219		3,385		Mar-99		Various
701 Seventh Avenue, NY, NY		—		—		3,245		—		—		—		3,245		3,245		2,535		714		Mar-99		Various
Salt Lake Cit, UT		15,471		672		19,739		—		289		672		20,028		20,700		3,152		17,548		Aug-05		40 years
Auburn Hills, MI		11,400		2,980		8,607		—		—		2,980		8,607		11,587		1,688		9,899		Sep-05		40 years
Rancho Cordova, CA		10,845		3,060		9,360		—		—		3,060		9,360		12,420		1,442		10,978		Sep-05		40 years
Camp Hill, PA		24,732		5,900		19,510		—		—		5,900		19,510		25,410		3,472		21,938		Sep-05		40 years
Springdale, OH		19,208		3,030		20,469		—		2,109		3,030		22,578		25,608		2,873		22,735		Dec-05		40 years
Springdale, OH		16,586		2,470		17,821		—		—		2,470		17,821		20,291		2,420		17,871		Dec-05		40 years
Springdale, OH		15,686		1,500		17,690		—		—		1,500		17,690		19,190		2,401		16,789		Dec-05		40 years
Rockaway, NJ		17,119		6,118		15,664		—		295		6,118		15,959		22,077		1,814		20,263		Mar-06		40 years
Indianapolis, IN		28,142		1,670		32,306		—		—		1,670		32,306		33,976		3,466		30,510		Mar-06		40 years
Blountstown, FL		3,558		378		5,069		—		—		378		5,069		5,447		438		5,009		Jul-06		40 years
East Arlington, TX		3,389		3,619		901		—		—		3,619		901		4,520		56		4,464		May-07		40 years
Wichita, KS		8,770		2,282		10,478		—		—		2,282		10,478		12,760		532		12,228		Dec-07		40 years
Clemmons, NC		—		337		4,541		—		—		337		4,541		4,878		246		4,632		Apr-07		40 years
Grove City		1,835		613		6,882		—		182		613		7,064		7,677		457		7,220		Jun-07		40 years
Franklin, WI		6,366		872		3,903		—		—		872		3,903		4,775		289		4,486		Jan-07		40 years
Denmark, WI		1,219		241		1,668		—		—		241		1,668		1,909		123		1,786		Jan-07		40 years
Green Bay, WI		3,173		638		3,508		—		—		638		3,508		4,146		259		3,887		Jan-07		40 years
Kenosha, WI		4,130		697		4,679		—		—		697		4,679		5,376		346		5,030		Jan-07		40 years
Madison, WI		4,275		764		4,485		—		—		764		4,485		5,249		332		4,917		Jan-07		40 years
Manitowoc, WI		5,017		811		5,008		—		—		811		5,008		5,819		370		5,449		Jan-07		40 years
McFarland, WI		3,833		703		4,793		—		—		703		4,793		5,496		354		5,142		Jan-07		40 years

170

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
Racine, WI		10,050		1,609		10,359		—		—		1,609		10,359		11,968		766		11,202		Jan-07		40 years
Menomonmee, WI		6,075		1,011		4,837		—		—		1,011		4,837		5,848		358		5,490		Jan-07		40 years
Sheboygan, WI		9,300		1,542		10,141		—		—		1,542		10,141		11,683		750		10,933		Jan-07		40 years
Stevens Point, WI		8,487		1,837		12,458		—		—		1,837		12,458		14,295		921		13,374		Jan-07		40 years
Stoughton, WI		1,686		349		2,205		—		—		349		2,205		2,554		163		2,391		Jan-07		40 years
Wausau, WI		7,553		498		9,214		—		—		498		9,214		9,712		682		9,030		Jan-07		40 years
Two Rivers, WI		2,708		1,421		3,281		—		—		1,421		3,281		4,702		243		4,459		Jan-07		40 years
Wisconsin Rapids, WI		1,129		416		2,868		—		—		416		2,868		3,284		212		3,072		Jan-07		40 years
Lancaster, OH		2,571		294		6,094		—		309		294		6,403		6,697		422		6,275		Jun-07		40 years
Marysville, OH		1,651		2,218		5,015		—		277		2,218		5,292		7,510		343		7,167		Jun-07		40 years
Indianapolis, IN		2,232		210		2,511		—		—		210		2,511		2,721		159		2,562		Jun-07		40 years
Castletown, IN		6,755		677		8,077		—		—		677		8,077		8,754		513		8,241		Jun-07		40 years
Chesterfield, IN		4,041		815		4,204		—		—		815		4,204		5,019		267		4,752		Jun-07		40 years
Columbia City, IN		8,011		1,034		6,390		—		—		1,034		6,390		7,424		406		7,018		Jun-07		40 years
Dunkirk, IN		2,114		310		2,299		—		—		310		2,299		2,609		146		2,463		Jun-07		40 years
Fort Wayne, IN		4,854		1,478		4,409		—		—		1,478		4,409		5,887		280		5,607		Jun-07		40 years
Hartford City, IN		2,078		199		1,782		—		—		199		1,782		1,981		113		1,868		Jun-07		40 years
Hobart, IN		5,908		1,835		5,019		—		—		1,835		5,019		6,854		319		6,535		Jun-07		40 years
Huntington, IN		4,510		526		5,037		—		—		526		5,037		5,563		320		5,243		Jun-07		40 years
LaGrange, IN		515		47		584		—		—		47		584		631		37		594		Jun-07		40 years
LaGrange, IN		5,072		446		5,494		—		—		446		5,494		5,940		349		5,591		Jun-07		40 years
Middletown,IN		3,395		132		4,750		—		—		132		4,750		4,882		302		4,580		Jun-07		40 years
Mooresville, IN		1,517		631		4,187		—		—		631		4,187		4,818		266		4,552		Jun-07		40 years
Peru, IN		6,402		502		7,135		—		—		502		7,135		7,637		453		7,184		Jun-07		40 years
Plymouth, IN		5,233		128		5,538		—		—		128		5,538		5,666		352		5,314		Jun-07		40 years
Portage, IN		7,011		1,438		7,988		—		—		1,438		7,988		9,426		507		8,919		Jun-07		40 years
Rockport, IN		1,709		253		2,092		—		—		253		2,092		2,345		133		2,212		Jun-07		40 years
Rushville, IN		549		62		1,177		—		—		62		1,177		1,239		75		1,164		Jun-07		40 years
Rushville, IN		4,073		310		5,858		—		—		310		5,858		6,168		372		5,796		Jun-07		40 years

171

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
Sullivan, IN		884		102		441		—		—		102		441		543		28		515		Jun-07		40 years
Sullivan, IN		4,889		1,794		4,469		—		—		1,794		4,469		6,263		283		5,980		Jun-07		40 years
Syracuse, IN		3,484		125		4,564		—		—		125		4,564		4,689		290		4,399		Jun-07		40 years
Tipton, IN		8,045		1,102		10,836		—		—		1,102		10,836		11,938		508		11,430		Jun-07		40 years
Wasbash, IN		3,680		1,451		4,154		—		—		1,451		4,154		5,605		264		5,341		Jun-07		40 years
Wabash, IN		1,297		1,060		870		—		—		1,060		870		1,930		55		1,875		Jun-07		40 years
Wakarusa, IN		6,437		153		7,111		—		—		153		7,111		7,264		452		6,812		Jun-07		40 years
Wakarusa, IN		9,998		289		13,420		—		—		289		13,420		13,709		852		12,857		Jun-07		40 years
Warsaw, IN		3,627		319		3,722		—		—		319		3,722		4,041		236		3,805		Jun-07		40 years
Sullivan II		—		494		—		—		—		494		—		494		—		494		Jun-07		40 years
Huntington II		—		120		—		—		—		120		—		120		—		120		Jun-07		40 years
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
Daly City, CA		3,463		3,297		1,872		—		—		3,297		1,872		5,169		99		5,070		Aug-07		40 years
Daly City, CA		7,937		—		—		—		12,321		—		12,321		12,321		1,983		10,338		Aug-07		40 years
Washington Crt Hse, OH		1,952		341		5,169		13		206		354		5,375		5,729		346		5,383		Jun-07		40 years
Harrisburg, IL		3,675		191		5,059		—		3		191		5,062		5,253		374		4,879		Jun-07		40 years
Clinton, OK		1,334		225		3,513		—		402		225		3,915		4,140		329		3,811		Jan-07		40 years
Olney, IL		4,227		109		5,419		—		38		109		5,457		5,566		406		5,160		Jan-07		40 years
Vandalia, IL		7,328		82		7,969		—		4		82		7,973		8,055		589		7,466		Jan-07		40 years
Paris, IL		6,819		187		6,797		—		10		187		6,807		6,994		504		6,490		Jan-07		40 years
Rantoul, IL		5,621		151		5,377		—		3		151		5,380		5,531		398		5,133		Jan-07		40 years
Robinson, IL		3,990		219		4,746		—		84		219		4,830		5,049		359		4,690		Jan-07		40 years
Cincinatti, OH		11,397		2,052		15,776		—		659		2,052		16,435		18,487		1,276		17,211		Jan-07		40 years
Memphis, TN		14,596		4,770		14,305		—		456		4,770		14,761		19,531		1,099		18,432		Jan-07		40 years

172

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
Charleston, IL		5,846		485		6,211		—		5		485		6,216		6,701		459		6,242		Jan-07		40 years
Caroltton, GA		2,951		816		4,220		—		82		816		4,302		5,118		326		4,792		Jan-07		40 years
Kingfisher, OK		3,964		128		5,497		—		281		128		5,778		5,906		449		5,457		Jan-07		40 years
Elk City, OK		4,341		143		6,721		—		390		143		7,111		7,254		564		6,690		Jan-07		40 years
Olney, IL		2,449		57		2,897		—		9		57		2,906		2,963		215		2,748		Jan-07		40 years
Effingham, IL		4,600		340		4,994		—		20		340		5,014		5,354		372		4,982		Jan-07		40 years
Fairfield, IL		6,402		153		7,898		—		20		153		7,918		8,071		587		7,484		Jan-07		40 years
Fullerton, CA		7,575		4,065		8,564		—		127		4,065		8,691		12,756		656		12,100		Jan-07		40 years
La Vista, NE		4,267		562		4,966		—		34		562		5,000		5,562		372		5,190		Jan-07		40 years
Mattoon, IL		6,922		227		7,534		—		12		227		7,546		7,773		559		7,214		Jan-07		40 years
Mattoon, IL		5,662		210		6,871		—		9		210		6,880		7,090		509		6,581		Jan-07		40 years
Stephenville, TX		6,150		507		6,459		13		33		520		6,492		7,012		482		6,530		Jan-07		40 years
Fullerton, CA		779		1,357		872		—		9		1,357		881		2,238		65		2,173		Jan-07		40 years
Rockford, IL		4,940		1,101		4,814		—		25		1,101		4,839		5,940		358		5,582		Jan-07		40 years
Effingham, IL		547		211		1,145		—		9		211		1,154		1,365		85		1,280		Jan-07		40 years
Santa Ana, CA		7,874		2,281		7,046		—		137		2,281		7,183		9,464		546		8,918		Jan-07		40 years
Sycamore, IL		8,487		816		9,897		—		43		816		9,940		10,756		737		10,019		Jan-07		40 years
Oklahoma City, OK		4,416		757		5,184		3		338		760		5,522		6,282		435		5,847		Jan-07		40 years
Garden Grove, CA		11,169		6,975		5,927		—		161		6,975		6,088		13,063		466		12,597		Jan-07		40 years
Weatherford, OK		4,484		229		5,600		—		353		229		5,953		6,182		470		5,712		Jan-07		40 years
Mt. Sterling, KY		7,336		599		12,561		—		25		599		12,586		13,185		799		12,386		Feb-07		40 years
Tuscola, IL		4,168		237		4,616		—		121		237		4,737		4,974		376		4,598		Jan-07		40 years
Windsor, NC		—		397		—		—		—		397		—		397		—		397		Feb-07		40 years
Bremerton, WA		6,462		964		8,171		—		100		964		8,271		9,235		652		8,583		Dec-06		40 years
Sterling, IL		1,932		129		6,229		—		473		129		6,702		6,831		604		6,227		May-06		40 years
Winter Garden, FL		4,735		1,693		8,451		—		23		1,693		8,474		10,167		639		9,528		May-06		40 years
Black Mountain, NC		4,684		468		5,786		—		—		468		5,786		6,254		500		5,754		Jul-06		40 years

173

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
Hillsboro, OR		32,945		3,954		39,233		—		—		3,954		39,233		43,187		2,984		40,203		Dec-06		40 years
Morris, IL		6,686		568		9,103		—		195		568		9,298		9,866		804		9,062		May-06		40 years
Chenita Group Home		—		73		249		—		—		73		249		322		12		310		Jan-08		40 years
Whispering Oaks		—		244		1,359		—		—		244		1,359		1,603		67		1,536		Jan-08		40 years
Twin Oaks Living		—		58		1,027		—		—		58		1,027		1,085		51		1,034		Jan-08		40 years
Twin Oaks Care		—		42		747		—		—		42		747		789		37		752		Jan-08		40 years
Salem Annex		—		11		90		—		—		11		90		101		—		101		Jan-08		40 years
Aurora, CO		32,982		2,650		35,786		24		—		2,674		35,786		38,460		3,342		35,118		Jul-06		40 years
North Attleboro, MA		4,663		—		5,445		—		—		—		5,445		5,445		542		4,903		Sep-06		40 years
Bloomingdale, IL		5,679		—		5,810		—		—		—		5,810		5,810		580		5,230		Sep-06		40 years
Concord Holdings, NH		8,296		2,145		9,216		—		—		2,145		9,216		11,361		936		10,425		Sep-06		40 years
Melville, NY		4,405		—		3,187		—		—		—		3,187		3,187		357		2,830		Sep-06		40 years
Millbury, MA		4,682		—		5,994		—		—		—		5,994		5,994		534		5,460		Sep-06		40 years
Wichita, KS		6,070		1,325		5,584		—		—		1,325		5,584		6,909		535		6,374		Sep-06		40 years
Keene, NH		6,693		3,033		5,919		—		—		3,033		5,919		8,952		584		8,368		Sep-06		40 years
Fort Wayne, IN		3,399		—		3,642		—		—		—		3,642		3,642		391		3,251		Sep-06		40 years
Portland, ME		4,652		—		6,687		—		—		—		6,687		6,687		958		5,729		Sep-06		40 years
Milpitas, CA		22,107		16,800		8,847		—		—		16,800		8,847		25,647		1,025		24,622		Feb-07		40 years
Columbus, OH		23,543		4,375		29,184		—		—		4,375		29,184		33,559		1,871		31,688		Nov-07		40 years
Fort Mill, SC		30,443		3,300		31,554		—		—		3,300		31,554		34,854		2,507		32,347		Mar-07		40 years
Reading, PA		18,905		3,225		21,792		—		—		3,225		21,792		25,017		1,385		23,632		Jun-07		40 years
		—		—		—		—		—		—		—		—		—		—
	$	795,915	$	148,421	$	893,129	$	53	$	21,312	$	148,474	$	914,441	$	1,062,915	$	84,013	$	978,902

174

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, 2009, December 31, 2008 and December 31, 2007 are as follows:

	2009			2008			2007
Balance at beginning of period	$	1,194,469		$	1,172,580		$	483,045
Property acquisitions		—			3,989			688,766
Improvements		3,597			24,698			2,429
Impairments		(55,286	)		(5,580	)		—
Retirements/disposals		(79,865	)		(1,218	)		(1,660	)
Balance at end of period	$	1,062,915		$	1,194,469		$	1,172,580

        The changes in accumulated depreciation, exclusive of amounts relating to equipment, auto and furniture and fixtures, for the period ended December 31, 2009, December 31, 2008 and December 31, 2007 are as follows:

	2009			2008			2007
Balance at beginning of period	$	67,469		$	38,444		$	14,437
Depreciation for the period		28,285			30,243			24,032
Assets held for sale		—			—			—
Retirements/disposals		(11,741	)		(1,218	)		(25	)
Balance at end of period	$	84,013		$	67,469		$	38,444

175

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES
SCHEDULE IV—LOANS AND OTHER LENDING INVESTMENTS
December 31, 2009 (in thousands)

Description		Interest Rate		Final Maturity Date	Periodic Payment Terms(1)	Prior Liens		Principal Amount of Loans		Carrying Amount of Loans			Number of Loans
Junior Participation—Float < 3% of total carrying amount	Office		LIBOR + 1.50 - 3.35	7/9/2010 – 4/6/2012	I/O	$	317,049	$	76,626	$	76,351			6
	Hotel		4.50	2/22/2013	I/O		285,693		40,139		40,068			1
	Construction		4.28	12/31/2011	I/O		44,204		20,544		20,544			1
	Land		0.00 - 2.00	1/1/2010 – 2/9/2014	I/O		134,078		62,312		46,312			2
	Retail		2.4	1/1/2010	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		183,000		29,000		24,722			2
Mezzanine—Fixed *	Office		10.85	6/15/2016	I/O		410,000		63,572		63,554			1
Mezzanine—Fixed < 3% of total carrying amount	Office		'0.00 - 8.00	4/1/2011 – 7/10/2016	I/O		80,247		10,819		8,868			2
	Hotel		0	12/31/2011	I/O		50,494		11,134		(20	)		1
	Multifamily		7.16	1/1/2016	I/O		51,954		13,752		13,752			1
	Land		0.00	4/1/2011	I/O		11,603		3,047		1,047			1
	Healthcare		15	2/1/2010	I/O		4,026		611		611			1
	Retail		0.00 - 4.26	4/1/2011 – 5/1/2017	I/O		216,062		37,507		31,069			2
Mezzanine—Float *	Hotel		0.00 - 4.26	2/9/2014	I/O		4,293,505		88,978		88,915			1
	Retail		3.75	7/1/2011	I/O		2,347,363		103,844		102,964			1
Mezzanine—Float < 3% of total carrying amount	Condo		LIBOR + 5.75 - 8.00	1/9/2011 – 7/1/2011	I/O		13,536		22,075		22,035			3
	Hotel		2.50 - 4.50	10/12/2010 – 5/9/2012	I/O		2,747,235		121,284		119,452			4
	Office		3.33 - 6.36	7/9/2010 – 2/9/2012	I/O		363,731		51,214		50,706			2
	Multifamily		2.00 - 4.00	8/10/2011 – 1/1/2016	I/O		250,396		130,102		125,779			7
Other—Fixed < 3% of total carrying amount	Other		5.53	6/25/2018	I/O		—		5,354		5,354			1
Other—Floating < 3% of total carrying amount	Multifamily		LIBOR + 1.50	3/23/2011	I/O		—		2,250		2,250			1
	Retail		2.5	12/16/2010	I/O		—		6,360		6,360			1
Whole Loan—Fixed < 3% of total carrying amount	Office		7.03 - 8.30	5/1/2011 – 7/10/2016	I/O		—		47,700		47,689			2
	Industrial		5.07 - 5.78	6/1/2015 – 8/1/2015	P&I		—		12,529		12,546			3
	Healthcare		9.01 - 9.02	8/30/2010	I/O		—		1,857		2,136			2
Whole Loan—Float *	Construction		LIBOR + 2.75	7/1/2010	I/O		—		92,485		92,391			1
Whole Loan—Float < 3% of total carrying amount	Hotel		LIBOR + 2.00 - 4.00	3/1/2011 – 4/1/2012	I/O		—		107,719		102,570			5
	Industrial		1.65 - 2.70	3/1/2011 – 4/1/2016	I/O		—		52,842		52,813			4
	Land		0.00 - 3.50	1/1/2010 – 4/1/2012	I/O		10,975		56,654		50,306			4
	Condo		0.00 - 3.50	1/8/2013	I/O		—		51,704		51,680			1
	Multifamily		1.25 - 3.40	3/1/2011 – 1/1/2016	I/O		—		327,994		327,769			13
	Office		1.95 - 8.60	2/1/2010 – 2/1/2014	I/O		—		260,971		247,824			17
	Construction		0.00 - 3.50	1/1/2010 – 6/1/2012	I/O		12,230		58,792		48,128			4
	Healthcare		2.41	1/1/2016	I/O		—		11,500		11,500			1
	Retail		2.75	7/1/2010	I/O		—		17,125		17,103			1
	Various		3.00	8/1/2012	I/O		—		12,000		11,943			1
Total						$	11,876,382	$	2,022,396	$	1,937,093			102

*

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.

176

		2009		2008			2007
Balance at beginning of period		$	2,047,470	$	2,007,022		$	1,571,510
Additions during the year:
New loans and additional advances on existing loans			487,306		335,618			1,102,671
	Acquisition cost and (fees)		4,255		122			(9,986	)
Premiums/(Discounts)					(3,219	)		(4,079	)
	Amortization of acquisition costs, fees, premiums and discounts		2,352		9,928			8,430
Deductions:
	Collection of principal		604,290		302,001			661,524
Balance at end of period(1)		$	1,937,093	$	2,047,470		$	2,007,022

(1)

Includes $0.6 million in real estate debt investments, held for sale.

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.

177

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.

        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, 2009 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, 2009.

(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, 2009. 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, 2009 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.

178

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 9, 10, 11, 12 and 13 is incorporated herein by reference from the definitive proxy statement relating to the 2010 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, 2009.

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 7.



(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)

179

Exhibit Number		Description of Exhibit
	3.6	Articles Supplementary Classifying and Designating Additional Shares of NorthStar Realty Finance Corp.'s 8.25% Series B Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.6 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007)
	10.1	Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of October 19, 2004, by and among NorthStar Realty Finance Corp., as sole general partner and initial limited partner and the other limited partners a party thereto from time to time (incorporated by reference to Exhibit 10.1 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)
	10.2	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)
	10.3	LTIP Unit Vesting Agreement under the NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan among NorthStar Realty Finance Corp., NorthStar Realty Finance Limited Partnership and NRF Employee, LLC (incorporated by reference to Exhibit 10.10 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)
	10.4	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))
	10.5	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)
	10.6	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)
	10.7	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))
	10.8	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)
	10.9	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)
	10.10	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)
	10.11	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)

180

Exhibit Number		Description of Exhibit
	10.12	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)
	10.13	Note Purchase Agreement, dated as of March 29, 2007, between NRF—Reindeer Ltd., as seller, and Wachovia Bank, N.A., as purchaser (incorporated by reference to Exhibit 10.13 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009)
	10.14	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)
	10.15	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))
	10.16	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)
	10.17	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)
	10.18	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)
	10.19	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)
	10.20	Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and Albert Tylis (incorporated by reference to Exhibit 99.1 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed July 27, 2009)
	10.21	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, as borrowers, NorthStar Realty Finance Corp. and NorthStar Realty Finance L.P., as guarantors, 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)
	10.22	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)

181

Exhibit Number		Description of Exhibit
	10.23	First Amendment to Note Purchase Agreement, dated as of November 6, 2007, by and among NRF-Reindeer Ltd., as seller, NorthStar Realty Finance Corp., as guarantor, and Wachovia Bank, N.A., as purchaser, and consented and agreed to by NRFC Luxembourg Holdings I S.Á R.L., as pledgor (incorporated by reference to Exhibit 10.24 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009)
	10.24	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))
	10.25	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)
	10.26	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)
	10.27	NorthStar Realty Finance Corp. Executive Incentive Bonus Plan (incorporated by reference to Exhibit 10.31 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009)
	10.28	Form of Award Agreement (incorporated by reference to Exhibit 99.2 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed on September 11, 2009)
	10.29	First Amended and Restated Credit Agreement, dated as of October 28, 2009, by and among NRFC WA Holdings, LLC, NRFC WA Holdings II, LLC, NRFC WA Holdings VII, LLC, NRFC WA Holdings X, LLC and NRFC WA Holdings XII, LLC, as borrowers, NorthStar Realty Finance Corp., and NorthStar Realty Finance L.P., as guarantors, the lenders party thereto, and Wachovia Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.33 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009)
	10.30	First Amended and Restated Guaranty Agreement, dated as of October 28, 2009, by NorthStar Realty Finance Corp., NorthStar Realty Finance L.P., and Wachovia Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.34 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009)
	10.31	Second Amendment to Note Purchase Agreement and Repurchase Documents, dated as of October 28, 2009, by and among NRF-Reindeer Ltd., as seller, NorthStar Realty Finance Corp., as guarantor and Wachovia Bank, N.A., as purchaser, and consented and agreed to by NRFC Luxembourg Holdings I S.Á R.L. and NRFC Sub-REIT Corp., as pledgor (incorporated by reference to Exhibit 10.35 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009)
	10.32	Common Stock Purchase Warrant, Certificate No. W-1, dated October 28, 2009, issued to Wachovia Bank, National Association (incorporated by reference to Exhibit 10.36 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009)

182

Exhibit Number		Description of Exhibit
	10.33	Common Stock Purchase Warrant, Certificate No. W-2, dated October 28, 2009, issued to Wachovia Bank, National Association (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, 2009)
	10.34	Common Stock Purchase Warrant, Certificate No. W-3, dated October 28, 2009, issued to Wachovia Bank, National Association (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, 2009)
	10.35	Separation and Consulting Agreement, dated January 25, 2010, between NorthStar Realty Finance Corp. and Richard J. McCready (incorporated by reference to Exhibit 99.1 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed on January 25, 2010)
	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.

183

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 26, 2010.

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 26, 2010
/s/ ANDREW C. RICHARDSON Andrew C. Richardson	Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer)	February 26, 2010
/s/ LISA MEYER Lisa Meyer	Chief Accounting Officer (Principal Accounting Officer)	February 26, 2010
/s/ PRESTON BUTCHER Preston Butcher	Director	February 26, 2010
/s/ STEPHEN E. CUMMINGS Stephen E. Cummings	Director	February 26, 2010

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Signature	Title	Date
/s/ JUDITH A. HANNAWAY Judith A. Hannaway	Director	February 26, 2010
/s/ WESLEY D. MINAMI Wesley D. Minami	Director	February 26, 2010
/s/ LOUIS J. PAGLIA Louis J. Paglia	Director	February 26, 2010

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