Northstar Realty Finance 10Q 2010 Q3 Quarterly report

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TABLE OF CONTENTS

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

FORM 10-Q

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

For the quarterly period ended September 30, 2010

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 (IRS Employer Identification No.)

399 Park Avenue, 18th Floor New York, NY 10022
(Address of Principal Executive Offices, Including Zip Code)

(212) 547-2600
(Registrant's Telephone Number, Including Area Code)

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


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 Exchange Act). Yes o No ý

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date:

The Company has one class of common stock, par value $0.01 per share, 77,161,882 shares outstanding as of November 3, 2010.

Table of Contents

NORTHSTAR REALTY FINANCE CORP.
QUARTERLY REPORT
For the Three and Nine Months Ended September 30, 2010

TABLE OF CONTENTS

Index

Part I.	Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009	1
	Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and September 30, 2009	2
	Condensed Consolidated Statements of Stockholders' Equity as of September 30, 2010 (unaudited) and December 31, 2009	3
	Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2010 and September 30, 2009	4
	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and September 30, 2009	5
	Notes to the Condensed Consolidated Financial Statements (unaudited)	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	49
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	77
Item 4.	Controls and Procedures	81
Part II.	Other Information	82
Item 6.	Exhibits	82
Signatures		86

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in Thousands, Except Share Data)

			September 30, 2010			December 31, 2009

			(unaudited)
ASSETS:
Cash and cash equivalents			$	135,200		$	138,928
Restricted cash (includes $377,260 and $74,453 from consolidated VIEs, respectively)				431,139			129,180
Operating real estate, net				957,416			978,902
Available for sale securities, at fair value (includes $1,504,382 and $283,184 from consolidated VIEs, respectively)				1,525,303			336,220
Real estate debt investments, net (includes $1,687,009 and $1,356,038 from consolidated VIEs, respectively)				1,841,416			1,936,482
Real estate debt investments, held-for-sale (includes $37,821 and $—from consolidated VIEs, respectively)				37,821			611
Investments in and advances to unconsolidated ventures				98,641			38,299
Receivables, net of allowance of $781 in 2010 and $1,349 in 2009 (includes net $27,382 and $7,421 from consolidated VIEs, respectively)				32,083			17,912
Unbilled rents receivable				10,211			10,206
Derivative instruments, at fair value (includes $29 and $—from consolidated VIEs, respectively)				29			—
Deferred costs and intangible assets, net				57,231			57,551
Assets of properties held for sale (includes $5,683 and $—from consolidated VIEs, respectively)				5,683			—
Other assets (includes $2,923 and $2,888 from consolidated VIEs, respectively)				27,172			25,273

Total assets			$	5,159,345		$	3,669,564

LIABILITIES:
Mortgage notes and loans payable				804,835			795,915
Exchangeable senior notes				126,655			125,992
Bonds payable, at fair value (includes $1,963,042 and $584,615 from consolidated VIEs, respectively)				1,963,042			584,615
Secured term loans				36,881			368,865
Liability to subsidiary trusts issuing preferred securities, at fair value				170,629			167,035
Obligations under capital leases				1,818			3,527
Accounts payable and accrued expenses (includes $20,460 and $1,631 from consolidated VIEs, respectively)				53,160			30,071
Escrow deposits payable (includes $71,220 and $28,608 from consolidated VIEs, respectively)				71,705			39,461
Derivative liability, at fair value (includes $218,968 and $46,187 from consolidated VIEs, respectively)				256,952			67,044
Liabilities of properties held for sale (includes $153 and $—from consolidated VIEs, respectively)				153			—
Other liabilities (includes $8,609 and $358 from consolidated VIEs, respectively)				28,904			28,399

Total liabilities				3,514,734			2,210,924
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 September 30, 2010 and December 31, 2009, 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 September 30, 2010 and December 31, 2009, respectively				183,505			183,505
Common stock, $0.01 par value, 500,000,000 shares authorized, 77,161,103 and 74,882,600 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively				772			749
Additional paid-in capital				699,221			662,805
Retained earnings				572,665			460,915
Accumulated other comprehensive loss				(50,350	)		(92,670	)

		Total NorthStar Realty Finance Corp. Stockholders' Equity		1,463,680			1,273,171
Non-controlling interest				180,931			185,469

	Total equity			1,644,611			1,458,640

Total liabilities and stockholders' equity			$	5,159,345		$	3,669,564

See accompanying notes to condensed consolidated financial statements

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in Thousands, Except Share and Per Share Data)

(Unaudited)

				Three Months Ended September 30, 2010			Three Months Ended September 30, 2009			Nine Months Ended September 30, 2010			Nine Months Ended September 30, 2009

Revenues and other income:
Interest income				$	88,791		$	34,305		$	207,087		$	106,836
Interest income—related parties					112			4,179			1,033			13,129
Rental and escalation income					34,252			25,753			89,980			72,904
Advisory and management fee income—related parties					684			1,924			1,666			5,423
Commission income					1,861			—			2,233			—
Other revenue					1,093			206			2,340			552

			Total revenues		126,793			66,367			304,339			198,844
Expenses:
		Interest expense			32,233			28,360			100,054			92,448
		Real estate properties—operating expenses			12,421			4,212			24,950			9,086
		Asset management fees—related parties			—			841			466			2,536
		Commission expense			1,399			—			1,677			—
		Impairment on operating real estate			—			—			1,180			—
		Provision for loan losses			42,877			24,229			136,134			62,691
General and administrative:
		Salaries and equity-based compensation(1)			11,863			10,960			40,708			33,805
		Auditing and professional fees			3,831			1,914			9,299			6,440
		Other general and administrative			4,277			2,748			14,239			9,778

			Total general and administrative		19,971			15,622			64,246			50,023
Depreciation and amortization					8,621			3,148			25,467			34,217

			Total expenses		117,522			76,412			354,174			251,001
Income/(loss) from operations					9,271			(10,045	)		(49,835	)		(52,157	)
Equity in earnings/(loss) of unconsolidated ventures					(60	)		2,737			6,155			(1,522	)
Unrealized (loss)/gain on investments and other					(198,168	)		(88,336	)		(206,408	)		1,709
Realized gain on investments and other					26,795			29,215			109,766			89,411
Gain from acquisitions					15,363			—			15,363			—

(Loss)/Income from continuing operations before extraordinary item					(146,799	)		(66,429	)		(124,959	)		37,441
(Loss)/Income from discontinued operations					(49	)		656			52			1,986
Gain on sale from discontinued operations					—			—			2,528			—

Consolidated net (loss)/income					(146,848	)		(65,773	)		(122,379	)		39,427
	Less: net (loss)/income attributable to the non-controlling interests				7,963			4,539			1,018			(9,816	)
Preferred stock dividends					(5,231	)		(5,231	)		(15,694	)		(15,694	)

Net (loss)/income attributable to NorthStar Realty Finance Corp. common stockholders				$	(144,116	)	$	(66,465	)	$	(137,055	)	$	13,917

Net (loss)/income per share from continuing operations (basic/diluted)					(1.87	)		(0.96	)		(1.83	)		0.19
Income per share from discontinued operations (basic/diluted)					—			0.01			—			0.03
Gain per share on sale of discontinued operations (basic/diluted)					—			—			0.03			—

Net (loss)/income per common share attributable to NorthStar Realty Finance Corp. common stockholders (basic/diluted)				$	(1.87	)	$	(0.95	)	$	(1.80	)	$	0.21

Weighted average number of shares of common stock:
		Basic			77,139,868			69,896,439			76,211,705			67,445,995
		Diluted			82,364,109			77,356,187			82,287,543			74,905,800

(1): The three months ended September 30, 2010 and 2009 include $3,894 and $5,007 respectively, of equity-based compensation expense. The nine months ended September 30, 2010 and 2009 include $13,133 and $15,471 respectively, of equity-based compensation expense. The nine months ended September 30, 2010 includes $3,583 of cash compensation expense and $1,014 of equity based compensation expense relating to a separation and consulting agreement with a former executive.

See accompanying notes to condensed consolidated financial statements

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in Thousands)
(Unaudited)

	Preferred Stock at Par			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, 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 (loss)		—	—		—		—			—			—			(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

VIE consolidation begining balance adjustments		—	—		—		—			—			41,332			110,746			152,078			31,518			183,596
Acquisition of N-STAR CDO IX		—	—		—		—			—			—			160,826			160,826			—			160,826
Amortization of deferred compensation		—	—		—		20			—			—			—			20			12,814			12,834
Non-controlling interest contribution to joint venture		—	—		—		—			—			—			—			—			5,267			5,267
Dividend reinvestment and stock purchase plan		—	72		—		199			—			—			—			199			—			199
Stock awards/LTIP awards		—	99		1		299			—			—			—			300			—			300
Equity component of warrants		—	—		—		60			—			—			—			60			—			60
Comprehensive loss		—	—		—		—			—			988			—			988			121			1,109
Conversion of OP/LTIP units		—	2,107		21		37,646			—			—			—			37,667			(37,667	)		—
Cash dividends on common stock		—	—		—		—			—			—			(22,767	)		(22,767	)		(7,683	)		(30,450	)
Cash dividends on preferred stock		—	—		—		—			—			—			(15,694	)		(15,694	)		(7,875	)		(23,569	)
Redemption of membership interest		—	—		—		(1,807	)		—			—			—			(1,807	)		1,800			(7	)
Equity in private fund																						(1,815	)		(1,815	)
Net (loss)		—	—		—		—			—			—			(121,361	)		(121,361	)		(1,018	)		(122,379	)

Balance at September 30, 2010	$	100	77,161	$	771	$	940,494		$	—		$	(50,350	)	$	572,665		$	1,463,680		$	180,931		$	1,644,611

See accompanying notes to condensed consolidated financial statements

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in Thousands)

(Unaudited)

		Three Months Ended September 30, 2010			Three Months Ended September 30, 2009			Nine Months Ended September 30, 2010			Nine Months Ended September 30, 2009

Consolidated net (loss)/income		$	(146,848	)	$	(65,773	)	$	(122,379	)	$	39,427
Unrealized gain/(loss) on available for sale securities			—			4,656			(138	)		(12,416	)
Change in fair value of derivatives			—			(843	)		(3,448	)		4,408
Reclassification adjustment for gains included in net (loss)/income			1,547			1,398			4,695			4,193

Comprehensive (loss)/income			(145,301	)		(60,562	)		(121,270	)		35,612
	Less: Comprehensive (loss)/income attributable to non-controlling interests		(7,848	)		(4,031	)		(897	)		9,314

Comprehensive (loss)/income attributable to NorthStar Realty Finance Corp.		$	(137,453	)	$	(56,531	)	$	(120,373	)	$	26,298

See accompanying notes to condensed consolidated financial statements

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands)

(Unaudited)

	Nine Months Ended September 30, 2010			Nine Months Ended September 30, 2009

Net cash provided by operating activities	$	27,482		$	46,400
Cash flows from investing activities:
Improvement of operating real estate		(1,078	)		(3,196	)
Acquisition of available for sale securities		(183,960	)		(128,994	)
Proceeds from disposition of securities available for sale		181,718			114,250
Available for sale securities repayments		43,643			1,397
Originations/acquisitions of real estate debt investments		(60,062	)		(208,874	)
Real estate debt investment repayments		249,468			60,708
Proceeds from the sale of real estate debt investments		110,613			140,753
Net proceeds from disposition of operating real estate		3,079			—
Real estate debt investment acquisition costs		—			(97	)
Other loans receivable		—			(1,070	)
Other loans receivable repayment		—			3,000
Restricted cash used for investment activities		(221,630	)		(16,211	)
Purchase of equity interest		(2,195	)		—
Deferred lease costs		(7,470	)		—
Investment in and advances to unconsolidated ventures		(7,229	)		(674	)
Distributions from unconsolidated ventures		19,565			22,310

Net cash provided by (used in) investing activities		124,462			(16,698	)
Cash flows from financing activities:
Purchase of interest rate cap		(243	)		—
Settlement of derivative		(283	)		—
Collateral held by swap counter party		4,651			3,708
Mortgage notes and loan borrowings		78,200			—
Mortgage principal repayments		(64,546	)		(5,714	)
Borrowing under credit facilities		—			1,912
Repayments credit facilities		—			(46,794	)
Repurchase obligation borrowings		—			528
Repurchase obligation repayments		—			(703	)
Proceeds from bonds		174,318			71,000
Bond repayments		(108,355	)		—
Borrowing under secured term loan		24,739			1,373
Secured term loan repayment		(248,744	)		(3,417	)
Bond repurchases		(14,481	)		(51,135	)
Payment of deferred financing costs		(2,059	)		(153	)
Capital contributions by non-controlling interest		4,686			—
Restricted cash from financing activities		45,289			(2,883	)
Proceeds from common stock offerings		—			23,446
Proceeds from dividend reinvestment and stock purchase plan		263			185
Dividends (common and preferred) and distributions		(38,460	)		(35,356	)
Deferred offering costs		(81	)		—
Offering costs		(70	)		(728	)
Distributions to non-controlling interest		(10,496	)		(10,587	)

Net cash (used in) financing activities		(155,672	)		(55,318	)
Net (decrease) increase in cash & cash equivalents		(3,728	)		(25,616	)
Cash and cash equivalents—beginning of period		138,928			134,039

Cash and cash equivalents—end of period	$	135,200		$	108,423

See accompanying notes to condensed consolidated financial statements

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Amount in Thousands, Except per Share Data

(Unaudited)

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

NRF Healthcare, LLC

In May 2006, the Company entered into a joint venture called NRF Healthcare, LLC with Chain Bridge Capital LLC to invest in senior housing and healthcare-related net leased assets. In connection with the formation of the venture, Chain Bridge contributed substantially all of its assets to NRF Healthcare, LLC for its $15.1 million membership interest in the joint venture.

In July 2008, NRF Healthcare, LLC sold a $100 million convertible preferred membership interest to Inland American Real Estate Trust, Inc. ("Inland American"). NRF Healthcare, LLC 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 NRF Healthcare, LLC. NRF Healthcare, LLC may, at its option, redeem the convertible preferred interests at any time. In addition, Inland American may convert its preferred membership interests into common equity in NRF Healthcare, LLC. Based on the initial investment amount and capital accounts of the members of NRF Healthcare, LLC, the convertible preferred membership interests represent, upon conversion, approximately a 42% common equity ownership interest in NRF Healthcare, LLC. Inland American will have the option of contributing additional preferred membership interest and participating in new NRF Healthcare, LLC investment opportunities in proportion to its percentage ownership interest, assuming it was to convert its interests to common equity.

In December 2009, the Company completed a membership interest redemption with NRF Healthcare, LLC, NRFC Healthcare Holding Company, LLC, NorthStar Healthcare Investors, Inc., Chain Bridge, Wakefield Capital Management, Midwest Care Holdings LLC, or Midwest Holdings, and certain individuals, pursuant to which NRF Healthcare, LLC redeemed the 5.4% membership interest

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

1. Formation and Organization (Continued)

of Chain Bridge and its affiliates in NRF Healthcare, LLC for $2.0 million and its membership interest in certain assets. As a result of the redemption, NorthStar holds 100% of the common equity membership interests in NRF Healthcare, LLC.

In April 2010, pursuant to the membership redemption agreement entered into in December 2009, the Company 51% acquired the membership interest in Midwest Holdings owned by Chain Bridge for $1.0 million in cash. As a result of the acquisition, the Company now holds 100% of the common membership interest in Midwest Holdings and controls all major decisions. Accordingly, the operations of Midwest Holdings, which were previously accounted for under the equity method, are consolidated.

In July, 2010, the Company was notified by Inland American that Inland American desires to have NRF Healthcare, LLC engage in a sale process for a portfolio of 34 senior housing properties or otherwise redeem $50 million of Inland American's convertible preferred membership interest in NRF Healthcare, LLC by January 9, 2011. If NRF Healthcare, LLC has not redeemed $50 million of the Inland American investment or sold the 34 property senior housing portfolio by October 9, 2011, then Inland American may undertake a sale process for the portfolio. Inland American may also undertake a sale process for all of the assets of NRF Healthcare, LLC beginning August 8, 2011, unless at least $25 million of Inland American's preferred interest has been redeemed by June 10, 2011, in which case all future net cash flow to the common members of NRF Healthcare, LLC will be used to redeem the preferred membership interest. On July 8, 2012, if the preferred membership interest has not been redeemed in full, Inland American may sell the assets of NRF Healthcare, LLC. The Company is currently in discussions with Inland American and other third-parties regarding a possible recapitalization of NRF Healthcare, LLC.

2. Summary of Significant Accounting Policies

Basis of Quarterly Presentation

The accompanying condensed consolidated financial statements and related notes of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under accounting principles generally accepted in the United States have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of the Company's financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2009, which was filed with the Securities and Exchange Commission. Capitalized terms used herein, and not otherwise defined, are defined in the Company's December 31, 2009 consolidated financial statements included in its annual report on Form 10-K.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

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.

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 condensed consolidated financial statements. Actual results could differ from these estimates.

Reclassifications

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

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board ("FASB") issued guidance requiring additional disclosures about fair value measurements regarding transfers between fair value categories as well as purchases, sales, issuances and settlements related to fair value measurements of financial instruments with non-observable inputs. This update was effective and was adopted by the Company for interim and annual periods beginning after December 15, 2009 except for disclosures about purchases, sales, issuances and settlements of financial instruments with non-observable inputs, which are effective for years beginning after December 15, 2010. The additional disclosures required by this update will be included in the note on fair value measurements upon adoption.

In July 2010, the FASB issued guidance requiring more robust and disaggregated disclosure about the credit quality of an entity's loans and its allowance for loan losses. The new guidance will significantly expand the existing disclosure requirements and is focused on providing transparency regarding an entity's exposure to credit losses. This update is effective for interim and annual reporting periods ending on or after December 15, 2010. The additional disclosures required by this update will be included in the note on real estate debt investments upon adoption.

3. Variable Interest Entities

On January 1, 2010, the Company adopted the FASB guidance for determining whether an entity is a variable interest entity, or VIE, and which requires an analysis of qualitative rather than quantitative 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. As a result of the implementation of this pronouncement, the Company consolidated four of its previously off-balance sheet CDO

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Variable Interest Entities (Continued)

financings, which are referred to as N-Star I, II, III and V. The Company has elected the fair value option of accounting for the available for sale securities and bonds payable of these entities for the purpose of consistent accounting application.

The following tables present the cumulative effects of the change in accounting principle as of January 1, 2010 (in thousands):

	As Reported, December 31, 2009			As Adjusted, January 1, 2010			Effect of Change in Accounting Principle

Non-controlling interest	$	185,469		$	205,798		$	20,329
Retained earnings		460,915			582,850			121,935
Accumulated other comprehensive loss		(92,670	)		(51,338	)		41,332

The Company has evaluated its real estate debt investments, liability to subsidiary trusts issuing preferred securities, and its investments in each of its nine CDO transaction issuers to determine whether they are a variable interest entity ("VIE"). A VIE is an entity that lacks one or more of the characteristics of a voting interest entity. 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 power, through voting rights or similar rights, to direct the activities of a legal entity that most significantly impact the entity's economic performance; (b) the obligation to absorb the expected losses of the legal entity; and (c) the right to receive the expected residual returns of the legal entity; (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. An investment that lacks one or more of the above four characteristics of a voting interest entity is considered to be a VIE.

As of September 30, 2010, the Company identified interests in 19 entities which were determined to be VIEs. The Company reassesses its initial evaluation of an entity as a VIE upon the occurrence of certain reconsideration events.

The Company is required to consolidate a VIE if the Company is deemed to be the VIEs primary beneficiary. The primary beneficiary is the party that (i) has the power to direct the activities that most significantly impact the VIE's economic performance and (ii) has 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 Company determines whether it is the primary beneficiary of a VIE by first performing a qualitative analysis to determine if it holds the power to direct the activities that most significantly impact the VIEs economic performance. This analysis includes: (i) assessing the Company's variable interests (both implicit and explicit) and any other involvements in the VIE, as well as the involvements of other variable interest holders; (ii) consideration of the VIEs purpose and design, including the risks the VIE was designed to create and pass through to its variable interest holders; (iii) identifying the activities that most significantly affect the VIE's economic performance; (iv) determining whether the

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Variable Interest Entities (Continued)

Company's significant involvement in the design of an entity provided the Company with the opportunity to establish arrangements that result in the Company having the power to direct the VIEs most significant activities; and (v) determining whether the Company's level of economic interest in a VIE is indicative of the amount of power the Company holds in situations where the Company's stated power to direct the VIEs most significant activities is disproportionately less than its economic interest in the entity. The Company performs a quantitative analysis to determine if it has 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. For purposes of allocating a VIE's expected losses and expected residual returns to its variable interest holders, the Company calculates its share of the VIE's expected losses and expected residual returns using the specific cash flows that would be allocated to it, based on contractual arrangements and/or the Company's position in the capital structure of the VIE, under various probability-weighted scenarios.

Based on management's analysis, the Company is not the primary beneficiary of nine of the identified VIEs since it (i) does not have the power to direct the activities that most significantly impact the VIE's economic performance and (ii) does not have 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. Accordingly, these VIEs are not consolidated into the Company's financial statements as of September 30, 2010. The Company reassesses its determination of whether it is the primary beneficiary of a VIE each reporting period.

On July 8, 2010, an affiliate of CapitalSource Inc. ("CapitalSource") (i) delegated to an affiliate of the Company collateral management and special servicing rights, and the associated fees, relating to CapitalSource's approximately $1.1 billion collateralized debt obligation consisting primarily of first mortgage loans on commercial real estate (the "CSE RE 2006-A" CDO) and (ii) sold to the Company the CSE RE 2006-A Class J notes (approximately $50 million current balance) and the Class K notes (approximately $60 million current balance). The total consideration paid in the transaction by the Company was $7 million. The Company has evaluated its investment in CSE RE 2006-A and has determined that CSE RE 2006-A is a VIE and that the Company is the primary beneficiary of the VIE. As a result, the Company consolidated CSE RE 2006-A as of July 8, 2010 and recorded a gain of approximately $15.4 million resulting from the excess of the fair market value of the net assets acquired over the purchase price. The CSE RE 2006-A loans will be accreted to projected recovery values over the respective term of each of the loans. The Company has elected the fair value option of accounting for the bonds payable of CSE RE 2006-A for the purpose of consistent accounting application.

On July 7, 2010, the Company purchased the N-Star CDO IX income notes and management fees from the NorthStar Real Estate Securities Opportunity Fund ("Securities Fund") for approximately $3.3 million. The Company has evaluated its investment in the N-Star CDO IX income notes and has determined that N-Star CDO IX is a VIE and that the Company is the primary beneficiary of the VIE. As a result, the Company consolidated the assets and liabilities of N-Star CDO IX at their respective fair market values as of the acquisition date. The Company has elected the fair value option of accounting for the available for sale securities and bonds payable of N-Star CDO IX for the purpose of consistent accounting application.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Variable Interest Entities (Continued)

The following tables present the cumulative effects of the consolidation of the assets and liabilities of CSE RE 2006- A and N-Star CDO IX on the Company's consolidated balance sheet as of July 8, 2010 (in thousands):

	As Reported, June 30, 2010		Consolidation of CSE RE 2006-A Assets and Liabilities		Consolidation of N-Star CDO IX Assets and Liabilities		Effect of Consolidation

Restricted cash	$	175,313	$	77,084	$	4,493	$	256,890
Operating real estate, at fair value		960,340		4,201		—		964,541
Available for sale securities, at fair value		1,317,564		—		283,477		1,601,041
Real estate debt investment, at fair value		1,692,282		395,973		67,749		2,156,004
Real estate debt investment held-for-sale		—		—		5,457		5,457
Derivative assets, at fair value		35		38		—		73
Receivables		23,880		2,815		3,938		30,633
Bonds payable, at fair value		1,339,750		440,096		156,881		1,936,727
Accounts payable and accrued expenses		30,771		12,528		1,554		44,853
Derivative liabilities, at fair value		180,510		11,829		36,581		228,920
Other liabilities		26,257		—		8,077		34,334
Additional paid-in capital		698,735		—		—		698,735
Noncontrolling interest		177,143		295		—		177,438
Retained Earnings		574,857		—		160,826		735,683
Gain from acquisition		—		15,363		—		15,363

Consolidated VIEs (the Company is the primary beneficiary)

The Company has originated, acquired and manages portfolios of commercial real estate securities and real estate debt investments, which were financed in CDO financings. The collateral securities include commercial mortgage-backed securities ("CMBS"), fixed income securities issued by REITs and CDO financings backed primarily by real estate securities. 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. In connection with the Company's CDO financings, the Company has various forms of significant ongoing involvement, which may include: (i) holding senior or subordinated interests in the CDOs; (ii) asset management; and (iii) entering into derivative contracts.

N-Star I, II, III, IV, V, VI, VII, VIII, IX and CSE RE 2006-A are consolidated CDO financings.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Variable Interest Entities (Continued)

The following table displays the classification and carrying amounts of assets and liabilities of consolidated VIEs as of September 30, 2010 (in thousands):

Variable Interest Entity

	N-Star I		N-Star II		N-Star III		N-Star IV		N-Star V		N-Star VI		N-Star VII		N-Star VIII		N-Star IX		CapitalSource		Total

Assets of consolidated VIEs:
Restricted cash	$	1,429	$	361	$	2,352	$	26,255	$	1,942	$	45,252	$	1,209	$	22,848	$	8,163	$	267,449	$	377,260
Assets of properties held for sale		—		—		—		—		—		—		—		—		—		5,683		5,683
Available for sale securities, at fair value		229,226		206,308		220,969		26,332		247,424		10,437		268,735		16,983		261,389		16,579		1,504,382
Real estate debt investments, net		—		—		32,045		328,396		—		316,624		10,886		659,264		52,100		287,694		1,687,009
Real estate debt investments, held-for-sale		—		—		—		—		—		—		8,379		11,828		17,614		—		37,821
Receivables, net of allowance		2,324		2,091		2,196		1,373		3,798		999		3,449		1,961		3,795		5,396		27,382
Derivative instruments, at fair value		—		—		—		—		—		—		18		—		—		11		29
Other assets		28		43		—		123		—		2,229		134		—		366		—		2,923

Total assets of consolidated VIEs(1):		233,007		208,803		257,562		382,479		253,164		375,541		292,810		712,884		343,427		582,812		3,642,489
Liabilities of consolidated VIEs:
Bonds payable, at fair value		188,295		157,879		132,232		146,241		155,110		159,257		119,720		257,735		166,993		479,580		1,963,042
Accounts payable and accrued expenses		1,372		112		1,091		223		524		400		388		1,126		1,956		13,268		20,460
Derivative liability, at fair value		16,311		17,511		21,082		—		37,098		9,128		44,015		18,741		40,846		14,236		218,968
Liabilities of properties held for sale		—		—		—		—		—		—		—		—		—		153		153
Escrow deposits payable		—		—		—		21,127		—		15,929		—		13,320		2,023		18,821		71,220
Other liabilities		—		—		48		—		—		—		341		82		7,798		340		8,609

Total liabilities of consolidated VIEs(2):		205,978		175,502		154,453		167,591		192,732		184,714		164,464		291,004		219,616		526,398		2,282,452

Net assets	$	27,029	$	33,301	$	103,109	$	214,888	$	60,432	$	190,827	$	128,346	$	421,880	$	123,811	$	56,414	$	1,360,037

(1): Assets of each of the consolidated VIEs may only be used to settle obligations of the respective VIE.
(2): Creditors of each of the consolidated VIEs have no recourse to the general credit of the Company.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Variable Interest Entities (Continued)

The Company did not provide financial support to any of its consolidated VIEs during the three and nine months ended September 30, 2010 and 2009. At September 30, 2010, there are no explicit arrangements or implicit variable interests that could require the Company to provide financial support to any of its consolidated VIEs.

Unconsolidated VIEs (the Company is not the primary beneficiary, but has a variable interest)

Real Estate Debt Investments

The Company has identified one real estate debt investment with a principal amount of $21.8 million 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. For all other real estate debt 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. The following table displays the classification, carrying amounts and maximum exposure of unconsolidated VIEs as of September 30, 2010 (in thousands):

	Variable Interest Entity

	Trusts Issuing Preferred Securities, at Fair Value			Real Estate Debt Investments		Total			Maximum Exposure to Loss(1)
Real estate debt investments		—		$	21,824	$	21,824		$	21,824
Total assets		—			21,824		21,824			21,824
Liability to subsidiary trusts issuing preferred securities, at fair value		170,629			—		170,629			N/A

Total liabilities		170,629			—		170,629			N/A

Net assets	$	(170,629	)	$	21,824	$	(148,805	)	$	21,824

(1): The Company's maximum exposure to loss at September 30, 2010, would not exceed the carrying amount of its investment.

The Company did not provide financial support to any of its unconsolidated VIEs during the three and nine months ended September 30, 2010 and 2009. At September 30, 2010, there are no explicit

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Variable Interest Entities (Continued)

arrangements or implicit variable interests that could require the Company to provide financial support to any of its unconsolidated VIEs.

4. Fair Value of Financial Instruments

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).
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).

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

4. Fair Value of Financial Instruments (Continued)

Determination of Fair Value

The Company uses valuation techniques consistent with the market and income approaches to measure the fair value of its assets and liabilities. The Company's market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The Company's income approach uses valuation techniques to convert future projected cash flows to a single discounted present value amount. When applying either approach, the Company maximizes the use of observable inputs and minimizes the use of unobservable inputs. The Company reviews the fair values determined by the third-party pricing models and dealer quotes and compares the results to internally generated pricing models on each asset or liability to validate reasonableness.

The following is a description of the valuation techniques used to measure fair value and the general classification of these instruments pursuant to the fair value hierarchy.

Available for sale securities

When available, the fair value of available for sale securities is based on quoted prices in active markets. If quoted prices are not available, fair values are obtained from nationally-recognized pricing services, broker quotes, or other model-based valuation techniques. The fair value of Level 2 securities is based on a market approach with prices obtained from nationally-recognized pricing services. Observable inputs used to value these securities can include: reported trades, benchmark yields, issuer spreads and broker/dealer quotes. The fair value of Level 3 securities is typically based on a single broker quote or the Company's discounted cash flow analysis.

Derivative instruments

Derivatives are measured using market approach with prices obtained from nationally-recognized pricing service and are generally measured using pricing models with market observable inputs such as interest rates and equity index levels. These measurements are classified as Level 2 within the fair value hierarchy.

Corporate lending investment

The Company's corporate lending investment is measured using in income approach with prices obtained from a nationally-recognized banking institution that acted as underwriter for the investment and is generally measured using pricing models with market observable inputs such as interest rates and equity index levels, with adjustments for unobservable inputs. These measurements are classified as Level 3 within the fair value hierarchy.

CDO bonds payable

CDO bonds payable are measured using an income approach with prices obtained from a nationally-recognized banking institution that acted as underwriter for the investment and are generally measured using pricing models with market observable inputs such as interest rates and equity index

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

4. Fair Value of Financial Instruments (Continued)

levels, with adjustments for unobservable inputs. These measurements are classified as Level 3 within the fair value hierarchy.

Liability to subsidiary trusts issuing preferred securities

Liability to subsidiary trusts issuing preferred securities is measured using market approach with prices obtained from an experienced pricing service and is generally measured using pricing models with market observable inputs such as implied credit spreads on the Company's preferred stock and exchangeable senior notes as adjusted for unobservable inputs which reflect the differences between these other instruments and the trust preferred securities. These measurements are classified as Level 3 within the fair value hierarchy.

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table sets forth the Company's financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2010, 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	$	—	$	719,952	$	463,732	$	1,183,684
	Third party CDO notes		—		—		21,533		21,533
	REIT debt		—		254,753		34,337		289,090
	Trust preferred securities		—		—		8,201		8,201
	Real estate interest		—		3,313		19,482		22,795
Derivative asset			—		29		—		29

	Total assets	$	—	$	978,047	$	547,285	$	1,525,332

Liabilities:
N-Star CDO bonds payable			—		—		1,963,042	$	1,963,042
Liability to subsidiary trusts issuing preferred securities			—		—		170,629		170,629
Derivative liability			—		256,952		—		256,952

	Total liabilities	$	—	$	256,952	$	2,133,671	$	2,390,623

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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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

4. Fair Value of Financial Instruments (Continued)

preferred securities which are measured at fair value on a recurring basis at September 30, 2010, 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:			$	309,505		$	8,943		$	1,141,096		$	167,035
	Total net transfers into/out of Level 3			244,008
	Purchases, sales, issuance and settlements, net			26,154			(17,234	)		616,277			—
	Total losses (realized or unrealized):
		Included in earnings		106,283			—			228,368			3,594
		Included in other comprehensive loss		—			—			—			—
	Total gains (realized or unrealized):
		Included in earnings		73,861			8,291			22,699
		Included in other comprehensive loss		40			—			—			—

Ending balance			$	547,285		$	—		$	1,963,042		$	170,629

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			$	(32,382	)	$	8,291		$	(205,669	)	$	3,594

Fair Value Option

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;
•: CDO 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 consistent accounting application.

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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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

4. 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		September 30, 2010		December 31, 2009(1)

Assets:
Available for sale securities:
	CMBS	$	1,183,684	$	249,583
	N-Star CDO notes		—		4,268
	Third party CDO notes		21,533		9,515
	REIT debt		289,090		30,580
	Trust preferred securities		8,201		8,739
	Real estate interest		22,795		—
Corporate lending investment(2)			—		8,943

	Total assets	$	1,525,303	$	311,628

Liabilities:
N-Star CDO bonds payable			1,963,042		584,615
Liability to subsidiary trusts issuing preferred securities			170,629		167,035

	Total liabilities	$	2,133,671	$	751,650

(1): December 31, 2009 does not include the assets and liabilities of N-Star I, II, III and V, for which the Company has elected the fair value option, as these CDO financings were unconsolidated CDO financings prior to January 1, 2010.
(2): During 2010, the Company's corporate lending joint venture sold assets having a fair market value in excess of their carrying value. As a result, the Company reduced its equity investment to zero at September 30, 2010.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

4. Fair Value of Financial Instruments (Continued)

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 September 30, 2010		Amount Due Upon Maturity		Difference

Assets:
Available for sale securities:
	CMBS	$	1,183,684	$	2,787,169	$	(1,603,485	)
	Third party CDO notes		21,533		193,049		(171,516	)
	REIT debt		289,090		287,236		1,854
	Trust preferred securities		8,201		15,000		(6,799	)
	Real estate interest		22,795		35,049		(12,254	)

	Total assets	$	1,525,303	$	3,317,503	$	(1,792,200	)

Liabilities:
N-Star CDO bonds payable			1,963,042		4,635,734		(2,672,692	)
Liability to subsidiary trusts issuing preferred securities			170,629		280,133		(109,504	)

	Total Liabilities	$	2,133,671	$	4,915,867	$	(2,782,196	)

At September 30, 2010 and December 31, 2009, the basis in the Company's corporate lending investment was zero and $70.0 million, respectively. The Company has elected the fair value option for this investment which is accounted for under the equity method of accounting. The fair market value of the Company's investment at September 30, 2010 and December 31, 2009 was zero and $8.9 million, respectively.

For the three and nine months ended September 30, 2010 and 2009, the Company recognized a net loss of $140.3 million and a net loss of $59.6 million, respectively, and a net loss of $59.8 million and $22.9 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 net loss and gain for the three and nine months ended September 30, 2009 does not include net losses or gains on the assets and liabilities of N-Star I, II, III and V, as these CDO financings were unconsolidated CDO financings prior to January 1, 2010.

The impact of changes in instrument-specific credit spreads on N-Star bonds payable and liability to subsidiary trusts issuing preferred securities for which the fair value option was elected was a net loss of $104.9 million and $115.0 million, respectively, and a net loss of $209.8 million and a net gain of $49.9 million, respectively, for the three and nine months ended September 30, 2010 and 2009. The Company attributes changes in the fair value of floating rate liabilities to changes in instrument-specific credit spreads. For fixed rate liabilities, the Company allocates changes in fair value between interest rate-related changes and credit spread-related changes based on changes in interest rates. The three and nine months ended September 30, 2009 does not include net gains or losses on the assets and

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

4. Fair Value of Financial Instruments (Continued)

liabilities of N-Star I, II, III and V, as these CDO financings were unconsolidated CDO financings prior to January 1, 2010.

5. Operating Real Estate

In connection with the acquisition of the CSE RE 2006-A equity notes and the consolidation of CSE RE 2006-A, the CDO financing had, as of September 30, 2010, three foreclosed real estate assets ("REO") consisting of two parcels of land with a combined fair market value at the time of acquisition of approximately $1.6 million and a multifamily property having a fair market value at the time of acquisition of approximately $4.1 million.

Discontinued Operations

During the third quarter of 2010, we recorded as held for sale, two REO parcels of land located in Arizona and an REO multifamily property located in Georgia. In May 2010, the Company completed the sale of a leasehold interest containing approximately 10,800 square feet of retail space located in New York City to a private investor group for approximately $3.3 million, representing a gain of approximately $2.5 million. In December 2009, NRF Healthcare, LLC completed the sale of 18 assisted living facilities containing approximately 1,300 beds located in North Carolina for approximately $95.9 million.

The following table summarizes income from discontinued operations for the three and nine months ended September 30, 2010 and 2009:

		For the Three Months Ended September 30, 2010			For the Three Months Ended September 30, 2009			For the Nine Months Ended September 30, 2010		For the Nine Months Ended September 30, 2009

Revenue:
	Rental and escalation income	$	378		$	2,247		$	644	$	6,744
	Interest and other		32			—			33		3

	Total revenue		410			2,247			677		6,747

Expenses:
	Property operating expenses		234			(65	)		282		(5	)
	Asset management fees—related parties		21			7			30		19
	Auditing and professional fees		—			87			—		98
	General and administrative expenses		204			12			201		28
	Interest expense		—			985			60		2,930
	Depreciation and amortization		—			565			52		1,691

	Total expenses		459			1,591			625		4,761

(Loss)/income from discontinued operations			(49	)		656			52		1,986
Gain on disposition of discontinued operations			—			—			—		—

Total (loss)/income from discontinued operations		$	(49	)		656		$	52	$	1,986

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

5. Operating Real Estate (Continued)

The following table sets forth the major classes of assets and liabilities of properties classified as held for sale at September 30, 2010:

		September 30, 2010

		(unaudited)
ASSETS:
Operating real estate—net			5,683

Total assets		$	5,683

LIABILITIES:
Accounts payable and accrued expenses			110
Other liabilities			43

Total liabilities			153
EQUITY:
NorthStar Realty Finance Corp. Stockholders' Equity:
	Total equity		5,530

Total liabilities and stockholders' equity		$	5,683

6. Available for Sale Securities

The following is a summary of the Company's available for sale securities at September 30, 2010:

September 30, 2010		Carrying Value		Cumulative Unrealized (Loss)/Gain on Investments			Fair Value(1)

CMBS		$	2,004,833	$	(821,149	)	$	1,183,684
Third party CDO notes			169,629		(148,096	)		21,533
REIT debt			278,752		10,339			289,091
Real estate interest			30,916		(8,121	)		22,795
Trust preferred securities			15,000		(6,800	)		8,200

	Total	$	2,499,130	$	(973,827	)	$	1,525,303

(1): Approximately $1.5 billion of these investments serve as collateral for the Company's consolidated CDO transactions and the balance is financed under other borrowing facilities.

At September 30, 2010, the maturities of the available for sale securities ranged from three months to 46 years.

During the three and nine months ended September 30, 2010, proceeds from the sale and redemption of available for sale securities was $62.3 million and $181.7 million, respectively. The net

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

6. Available for Sale Securities (Continued)

realized gain on the sale and redemption of available for sale securities was $13.1 million and $38.8 million, respectively. During the three and nine months ended September 30, 2009, proceeds from the sale and redemption of available for sale securities was $50.6 million and $114.3 million, respectively. The net realized gain on the sale of available for sale securities was $15.6 million and $33.2 million, respectively. Proceeds and realized gains from the sale and redemption of available for sale securities for the three and nine months ended September 30, 2009 does not include the sale and redemption of available for sale securities of N-Star I, II, III and V, as these CDO financings were unconsolidated CDO financings prior to January 1, 2010.

The following is a summary of the Company's available for sale securities at December 31, 2009:

December 31, 2009(1)		Carrying Value		Losses in Accumulated OCI			Cumulative Unrealized (Loss)/Gain on Investments			Fair Value(2)

CMBS		$	443,568	$	—		$	(193,985	)	$	249,583
N-Star CDO notes			34,115		(13,517	)		(14,723	)		5,875
Third party CDO notes			21,750		—			(12,235	)		9,515
REIT debt			26,760		—			3,820			30,580
N-Star CDO equity			72,926		(40,998	)		—			31,928
Trust preferred securities			12,264		—			(3,525	)		8,739

	Total	$	611,383	$	(54,515	)	$	(220,648	)	$	336,220

(1): December 31, 2009 does not include the third party available for sale securities of N-Star I, II, III and V, as these CDO financings were unconsolidated financings prior to January 1, 2010.
(2): Approximately $212.4 million of these investments serve as collateral for the Company's only consolidated securities CDO transaction at December 31, 2009 and the balance is financed under other borrowing facilities.

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

7. Real Estate Debt Investments

At September 30, 2010 and December 31, 2009, the Company held the following real estate debt investments:

September 30, 2010		Carrying Value(3)

Whole loans, floating rate—LIBOR		$	1,019,023	54.2	%	—	%	2.89	%	—	%	77
Whole loans—floating rate—prime			22,471	1.2	%					3.32	%	3
Whole loans, fixed rate			114,814	6.1	%	5.94	%	—		—		28
Subordinate mortgage interests, floating rate			173,972	9.2	%	—		3.35	%	—		11
Subordinate mortgage interests, fixed rate			35,238	1.9	%	7.53	%	—		—		3
Mezzanine loans, floating rate			329,087	17.5	%	—		2.76	%	—		16
Mezzanine loan, fixed rate			142,364	7.6	%	5.60	%	—		—		7
Preferred—Float			17,563	0.9	%	—		4.00	%	—		1
Other loans—floating			12,224	0.7	%	—		2.50	%	—		2
Other loans—fixed			12,481	0.7	%	6.44	%	—		—		3

	Total/Weighted average	$	1,879,237	100.0	%	6.03	%	2.93	%	3.32	%	151

(1): Approximately $1.7 billion of these investments serve as collateral for the Company's 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 $56.5 million related to these investments. The Company expects that a minimum of $53.0 million of these future fundings will be funded within the Company's existing CDO financings and require no additional capital from the Company. Assuming that all loans that have future fundings meet the terms to qualify for such funding, the Company's equity requirement on future funding requirements would be approximately $3.5 million.
(2): Approximately $300.7 million of the Company's real estate debt investments have a weighted-average LIBOR rate floor of 3.14%
(3): Includes $37.8 million in real estate debt investments, held for sale.

On July 8, 2010, the Company consolidated the assets acquired and liabilities assumed of CSE RE 2006-A and recorded a gain of approximately $15.4 million for the three months ended September 30, 2010, resulting from the excess of the fair market value of the net assets acquired over

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

7. Real Estate Debt Investments (Continued)

the consideration paid. The following table displays the outstanding principal balance and the fair market value of the assets acquired and the liabilities assumed at acquisition (in thousands):

		At Closing

		Principal Balance		Fair Market Value
Loan assets—performing		$	810,690	$	380,003
Loan assets—non-performing			243,113		15,970
REO			18,259		4,201
Restricted cash			77,084		77,084
Derivative assets			—		38
Receivables			2,815		2,815

	Total assets	$	1,151,961	$	480,111
CDO notes outstanding		$	1,012,490	$	440,096
Derivative liabilities			—		11,829
Accounts payable and accrued expenses			12,528		12,528

	Total liabilities	$	1,025,018	$	464,453
Non-controlling interest			2,083		295
Net assets		$	124,860	$	15,363
Management rights			NA	$	7,000

December 31, 2009(1)		Carrying Value(2)

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(3)			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): December 31, 2009 does not include the real estate debt investments of N-Star III, as the CDO financing was an unconsolidated financing prior to January 1, 2010.
(2): 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 facilities. The Company had future funding commitments, which were subject to certain conditions

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

7. Real Estate Debt Investments (Continued)

that borrowers must have met to qualify for such fundings, totaling $80.0 million related to these investments.

(3): Includes $0.6 million in real estate debt investments, held for sale.

Contractual maturities of real estate debt investments at September 30, 2010 are as follows:

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

2010 (remainder)		$	553,794	$	350,448
2011			846,558		490,942
2012			725,215		482,426
2013			50,945		292,654
2014			146,810		476,150
Thereafter			393,454		624,156

	Total	$	2,716,766	$	2,716,766

(1): The year ending December 31, 2010, contains 11 whole loans with initial maturities prior to September 30, 2010, having an aggregate principal balance of $262.0 million and two junior participations in first mortgages with initial maturities prior to September 30, 2010, having an aggregate principal balance of $38.5 million that remain outstanding as of September 30, 2010. The aggregate carrying value of these maturity-defaulted loans is $42.2 million as of September 30, 2010.

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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

7. Real Estate Debt Investments (Continued)

As of September 30, 2010, the status of the Company's performing and non-performing loans was as follows:

		As of September 30, 2010													As of December 31, 2009

		Loan Count		Performing Loans			Loan Count		Non- Performing Loans			Total			Loan Count		Performing Loans			Loan Count		Non- Performing Loans			Total
Originated and Acquired Debt Investments
	Whole loans		52	$	890,789			3	$	39,608		$	930,397			53	$	1,050,903			6	$	60,797		$	1,111,700
	Subordinate mortgage interests		12		213,274			2		38,462			251,736			11		195,536			2		38,462			233,998
	Mezzanine loans		23		541,823			—		—			541,823			27		654,831			—		—			654,831
	Preferred		1		17,561			—		—			17,561			—		—			—		—			—
	Other loans		5		24,702			—		—			24,702			3		13,964			—		—			13,964

Total Originated and Acquired Debt Investments			93		1,688,149			5		78,070			1,766,219			94		1,915,234			8		99,259			2,014,493
	Provision for Loan Losses		12		(125,781	)		3		(48,896	)		(174,677	)		7		(39,500	)		6		(37,900	)		(77,400	)

Total Originated and Acquired Debt Investments, net					1,562,368					29,174			1,591,542					1,875,734					61,359			1,937,093
CSE RE 2006-A
	Whole loans(1)		42		242,058			9		14,952			257,010			—		—			—		—			—
	Subordinate mortgage interests(2)		1		30,685			—		—			30,685			—		—			—		—			—

CSE RE 2006-A			43		272,743			9		14,952			287,695			—		—			—		—			—
	Provision for Loan Losses		—		—			—		—			—			—		—			—		—			—

CSE RE 2006-A					272,743					14,952			287,695					—					—			—

Total Debt Investments			136		1,960,892			14		93,022			2,053,914			94		1,915,234			8		99,259			2,014,493
	Total Provision for Loan Losses		12		(125,781	)		3		(48,896	)		(174,677	)		7		(39,500	)		6		(37,900	)		(77,400	)

Total Debt Investments, net				$	1,835,111				$	44,126		$	1,879,237				$	1,875,734				$	61,359		$	1,937,093

(1): CSE RE 2006-A whole loans have an aggregate outstanding principal amount of approximately $943.8 million at September 30, 2010.
(2): CSE RE 2006-A subordinate mortgage interests have an aggregate outstanding principal amount of approximately $38.8 million at September 30, 2010.

The Company's maximum additional exposure to loss related to the non-performing loans is approximately $44.1 million.

Provision for Loan Losses

For the three months ended September 30, 2010, the Company recorded a $42.9 million credit loss provision relating to seven loans, one of which was sold during the period, and included a $0.5 million credit for a loan held for sale with a fair market value in excess of its carrying amount. For the nine months ended September 30, 2010, the Company recorded a $136.1 million credit loss provision relating to 15 loans, seven of which were sold, or held for sale, during the period, and included a $0.8 million credit for loans sold with a fair market value in excess of their carrying amounts and a $0.5 million credit for a loan held for sale with a fair market value in excess of its carrying amount. For the three and nine months ended September 30, 2009, the Company recorded a $24.2 million and a $62.7 million credit loss provision relating to 10 and 15 loans, respectively. As of September 30, 2010, loan loss reserves totaled $174.7 million.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

8. Investment 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 September 30, 2010 and December 31, 2009, the Company had an investment in CS/Federal of approximately $6.4 million and $6.9 million, respectively. The Company recognized equity in earnings of $0.1 million for each of the three months ended September 30, 2010 and 2009 and equity in earnings of $0.3 million for each of the nine months ended September 30, 2010 and 2009, respectively.

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. In the second quarter 2010, the corporate lending joint venture sold assets and as a result the Company received a $15.0 million distribution. Since the Company accounts for this investment under the cost recovery method, approximately $6.7 million of the distribution was applied to the investment reducing the Company's basis in the investment to zero. The remaining cash distribution of $8.3 million was recognized as income and recorded in equity in earnings. During the third quarter 2010, the Company sold its interest in the venture, with a zero carrying value, to its joint venture partner for a total consideration of $7.5 million, resulting in a $7.5 million realized gain.

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 a portion of its real estate securities investment business.

The Company was the manager and general partner of the Securities Fund. The Company received base management fees ranging from 1.0% to 2.0% per annum on third-party capital and was entitled to

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

8. Investment in and Advances to Unconsolidated Ventures (Continued)

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 varied depending on the investor capital lockup periods.

During the second quarter 2010, a subsidiary of the Company, as general partner of the Securities Fund, notified the Securities Fund's administrator and limited partners of its determination to liquidate and dissolve the Securities Fund. Accordingly, during the second quarter 2010, the Securities Fund began to liquidate its assets in an orderly manner. On July 7, 2010, the Securities Fund completed the sale of its remaining investments, which included the sale of the N-Star CDO IX income notes and management fees, to a wholly-owned subsidiary of the Company for $3.3 million. The Company consolidated the assets and liabilities of the CDO at their respective fair market values as of the acquisition date. A subsidiary of the Company, as general partner of the Securities Fund, is currently in the process of determining the Securities Fund's final net asset value and expects to complete the process of dissolving the Securities Fund during the fourth quarter 2010. As of September 30, 2010, the Company has received approximately $2.7 million in distributions related to the final liquidation of the Securities Fund.

At September 30, 2010 and December 31, 2009, the carrying value of the Company's investment in the Securities Fund was $0.7 million and $7.2 million, respectively, each representing a 31.2% interest in the Securities Fund.

For the three months ended September 30, 2010 and 2009, the Company recognized immaterial equity in losses and equity in earnings of $0.5 million, respectively. For the nine months ended September 30, 2010 and 2009, the Company recognized equity in losses of $3.9 million and $4.9 million, 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 September 30, 2010 and December 31, 2009 the Company's investment in LandCap is carried at $10.0 million and $10.1 million, respectively. For the three months ended September 30, 2010 and 2009, the Company recognized equity in loss of $0.5 million and $0.3 million, respectively. For the nine months ended September 30, 2010 and 2009, the Company recognized equity in loss of $1.3 million and $3.2 million, respectively. At September 30, 2010 and December 31, 2009, LandCap had investments totaling $37.9 million. In addition, the Company has advanced approximately $4.9 million under a loan agreement to LandCap, which bears interest at a fixed rate of 12% and is included in other assets in the consolidated balance sheets.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

8. Investment in and Advances to Unconsolidated Ventures (Continued)

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 owned a 49% interest in Midwest and did not control the major decisions and as a result, the Company did not consolidate the operations of Midwest. In April 2010, pursuant to the membership redemption agreement entered into in December 2009, the Company acquired the remaining 51% membership interest in Midwest Holdings owned by Chain Bridge for $1.0 million in cash. As a result of the acquisition, the Company holds 100% of the common membership interest in Midwest and controls all major decisions. Accordingly the operations of Midwest, which were previously accounted for under the equity method, are consolidated. The Company has estimated the fair value of assets acquired at the date of acquisition. The Company is in the process of valuing certain intangible assets. As a result, the allocation of the purchase price is subject to refinement.

The Company recognized equity in earnings of $2.0 million for the nine months ended September 30, 2010. The Company recognized equity in earnings related to Midwest of $2.4 million and $5.7 million for the three and nine months ended September 30, 2009, respectively.

NorthStar Income Opportunity REIT I, Inc.

The Company has an equity investment in NorthStar Income Opportunity REIT I, Inc. ("NIOR"), a commercial finance REIT which it sponsors, and accounts for its investment under the equity method of accounting. At September 30, 2010 and December 31, 2009, the Company had an investment in NIOR of approximately $1.8 million and $1.7 million, respectively. The Company recognized equity in earnings of $0.1 million for the three months ended September 30, 2010 and equity in earnings of $0.2 million for the nine months ended September 30, 2010.

The NJ Property

The Company owned a $92.5 million pari passu participation in a $498.6 million first mortgage that was secured by a retail/entertainment complex located in East Rutherford, NJ (the "NJ Property"). During the third quarter 2010, the lending group took effective ownership of the NJ Property and the Company invested $6.0 million in an equal partnership with a third party to acquire $34.0 million of the first mortgage. The Company accounts for its 22% interest in the investment under the equity method of accounting, and at September 30, 2010, the carrying value of the Company's investment was approximately $75.4 million.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

9. Borrowings

The following is a table of the Company's outstanding borrowings as of September 30, 2010 and December 31, 2009:

		Initial Stated Maturity	Interest Rate

Term Loans (recourse)
	WA Secured Term Loan(2)	10/28/2012	LIBOR + 3.50%	—	246,884
	Euro—note	10/28/2012	3 month Euribor + 3.50%	—	85,218
	LB Term Loan(3)	2/9/2011	LIBOR + 1.50%	22,199	22,199
Term Loans (non-recourse)
	Term Asset Backed Securities Loan Facility	10/29/2014	2.64%	14,682	14,682

Total Credit Facilities & Term Loans				36,881	368,983
Exchangeable Senior Notes (recourse)(4)(5)		6/15/2027	7.25%	68,165	68,165
Exchangeable Senior Notes ("NNN Notes") (recourse)(4)		6/15/2013	11.50%	60,750	60,750
Liability to subsidiary trusts issuing preferred securities (subordinate recourse)(6)(7)
	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
Mortgage notes payable (non-recourse)
	Salt Lake City	9/1/2012	5.16%	15,165	15,471
	EDS	10/8/2015	5.37%	46,413	46,977
	Executive Center(8)	1/1/2016	5.85%	51,479	51,480
	Green Pond	4/11/2016	5.68%	16,945	17,119
	Indianapolis	2/1/2017	6.06%	27,881	28,142
	Northstar Healthcare GE	—	6.93%	—	44,163
	Northstar Healthcare GE	5/1/2015	3 month LIBOR + 5.95%	58,200	—
	Northstar Healthcare—Park National	1/11/2014	5.94%	32,643	32,944
	Northstar Healthcare—GE—WLK	1/11/2017	6.99%	159,136	159,138
	Northstar Healthcare—GE—Tusc & Harmony	1/11/2017	7.09%	7,843	7,843
	Northstar Healthcare—Harmony FNMA	2/1/2017	6.39%	74,196	75,001
	Northstar Healthcare—Grove City	8/1/2015	9.25%	3,048	1,835
	Northstar Healthcare—Lancaster	8/1/2015	9.25%	6,297	2,571
	Northstar Healthcare—Marysville	8/1/2015	9.25%	5,407	1,651
	Northstar Healthcare—Washington	8/1/2015	9.25%	5,237	1,952
	Northstar Healthcare—Miller Merril	6/30/2012	7.07%	116,961	118,320
	Northstar Healthcare—ARL Mob Wachovia	5/11/2017	5.89%	3,359	3,389
	Northstar Healthcare—St Francis	9/10/2010	LIBOR + 2.00%	—	11,400
	Aurora	7/11/2016	6.22%	32,685	32,982
	DSG	10/11/2016	6.17%	33,444	33,795
	Keene	2/1/2016	5.85%	6,615	6,693
	Fort Wayne	1/1/2015	6.41%	3,335	3,399
	Portland	6/17/2014	7.34%	4,514	4,652
	Milpitas	3/6/2017	5.95%	21,760	22,107
	Fort Mill	4/6/2017	5.63%	27,700	27,700
	Reading	1/1/2015	5.58%	13,710	13,905
	Reading	1/1/2015	6.00%	5,000	5,000
	Alliance	12/6/2017	6.48%	23,309	23,543
Mezzanine loan payable (non-recourse)
	Fort Mill	4/6/2017	6.21%	2,553	2,743

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

9. Borrowings (Continued)

		Initial Stated Maturity	Interest Rate	Balance at September 30, 2010		Balance at December 31, 2009(1)

Bonds payable (non-recourse)(6)
	N-Star I	8/1/2038	3 month LIBOR + 1.87% (average spread)		236,039		—
	N-Star II	6/1/2039	LIBOR + 1.43% (average spread)		230,680		—
	N-Star III	6/1/2040	LIBOR + 0.59% (average spread)		315,594		—
	N-Star IV	7/1/2040	LIBOR + 0.59% (average spread)		259,673		282,500
	N-Star V	9/5/2045	LIBOR + 0.53% (average spread)		441,488		—
	N-Star VI	6/1/2041	3 month LIBOR + 0.52% (average spread)		273,375		279,057
	N-Star VII	6/22/2051	LIBOR + 0.35% (average spread)		499,200		499,200
	N-Star VIII	2/1/2041	LIBOR + 0.45% (average spread)		586,460		590,645
	N-Star IX	8/7/2052	LIBOR + 0.40% (average spread)		744,960		—
	CapSource	1/20/2037	3 month LIBOR + 0.41% (average spread)		1,048,266		—

				$	5,886,498	$	3,225,348

(1): December 31, 2009 does not include the bonds payable of N-Star I, II, III and V as these CDO financings were unconsolidated financings prior to January 1, 2010.
(2): On June 30, 2010, the Company fully repaid and extinguished, at a discount to its outstanding principal amount, its secured recourse WA Secured Term Loan.
(3): The Company has a limited recourse obligation with respect to this loan of 50% of the outstanding loan balance.
(4): The contractual amounts may differ from the carrying value on the consolidated balance sheets due to the equity component of the debt.
(5): The holders have repurchase rights which may require the Company to repurchase the notes on June 15, 2012.
(6): 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 4.
(7): 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.
(8): 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.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

9. Borrowings (Continued)

Scheduled principal payment requirements on the Company's borrowings based on initial maturity dates are as follows as of September 30, 2010:

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

2010	$	2,016	$	2,016	$	—	$	—	$	—	$	—
2011		33,415		11,216		22,199		—		—		—
2012		207,777		139,612		—		—		68,165		—
2013		71,908		11,158		—		—		60,750		—
2014		60,590		45,908		14,682		—		—		—
Thereafter		5,510,792		594,925		—		280,133		—		4,635,734

Total	$	5,886,498	$	804,835	$	36,881	$	280,133	$	128,915	$	4,635,734

(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 September 30, 2010, the Company was in compliance with all covenants under its borrowings.

Secured Term Loan

On June 30, 2010, the Company fully repaid and extinguished, at a discount to its outstanding principal amount WA Secured Term Loan, which was fully recourse to the Company, having an outstanding principal balance of approximately $304.0 million and secured by assets having an aggregate unpaid principal balance of approximately $448.6 at the time of the payoff. The Company paid approximately $208.0 million of cash and granted the lender a 40% participation interest in the principal proceeds of a €72.5 million participation in a mezzanine loan owned by the Company that is collateralized by a German retail portfolio (the "German Loan").

In connection with the repayment and extinguishment of the WA Secured Term Loan, the Company issued, to the lender, warrants to purchase two million shares of its common stock. The warrants are exercisable immediately through June 30, 2020, at a price of $7.60 per share. The exercise price of the warrants may be paid in cash or by cashless exercise and the exercise price and the number of shares of common stock issuable upon exercise of the warrants are subject to anti-dilution adjustments.

The Company recognized approximately $60.6 million of net realized gains in connection with the repayment and extinguishment of the WA Secured Term Loan and the granting of the 40% participation interest in the principal proceeds of the German Loan.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

9. Borrowings (Continued)

Exchangeable Senior Notes

As of September 30, 2010 and December 31, 2009, the total carrying amount of the equity components of the exchangeable senior notes was $4.9 million. The principal amount of the exchangeable senior notes liabilities was $128.9 million as of September 30, 2010 and December 31, 2009. The unamortized discount of the liability components was $2.3 million and $2.9 million at September 30, 2010 and December 31, 2009, respectively. The net carrying amount of the liability components was $126.7 million and $126.0 million at September 30, 2010 and December 31, 2009, respectively. Interest expense for the three months ended September 30, 2010 and 2009 related to the exchangeable senior notes was $3.5 million and $3.6 million, respectively, of which $3.0 million and $3.1 million was related to contractual interest, respectively, and $0.5 million and $0.5 million was attributable to amortization of the debt discount and deferred financing costs, respectively. Interest expense for the nine months ended September 30, 2010 and 2009 related to the exchangeable senior notes was $10.3 million and $13.4 million, respectively, of which $8.9 million and $11.6 million was related to contractual interest, respectively, and $1.4 million and $1.8 million was attributable to amortization of the debt discount and deferred financing costs, respectively.

Mortgage note refinancing

On March 31, 2010, the Company closed on a $65.0 million loan with General Electric Capital Corporation. The proceeds were primarily used to refinance $52.0 million of loans maturing in 2010 on nine of the Company's healthcare- related net leased assets. The excess proceeds from the financing will be used for working capital and general corporate purposes. The loan has a five-year term with a one-year interest only period and principal and interest payments thereafter. The interest rate is 90-day LIBOR + 5.95% with a 1% LIBOR floor.

On July 30, 2010, the Company closed on a $20.0 million loan with VCC Healthcare Fund, LLC. The proceeds will be used to refinance $8.0 million of loans maturing between June 2037 and October 2038 on four of the Company's healthcare- related net leased assets. The excess proceeds from the financing will be used for working capital and general corporate purposes. The loan has a five-year term and an interest rate of 9.25%.

10. Related Party Transactions

Advisory Fees

The Company has agreements with each of its N-Star CDO financings and its CSE RE 2006-A CDO financing to perform certain advisory services. The Company earned total fees on these agreements of approximately $0.7 million and $1.5 million for the three and nine months ended September 30, 2010, respectively. The Company earned total fees on these agreements of approximately $1.8 million and $5.2 million for the three and nine months ended September 30, 2009, respectively. As of January 1, 2010, the advisory fee income related to N-Star I, N-Star II, N-Star III and N-Star V is eliminated as a result of the consolidation of the respective CDO financings.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

10. Related Party Transactions (Continued)

The Company has an agreement with NIOR, a commercial finance REIT, to perform certain advisory services. As of September 30, 2010, the Company has earned an immaterial amount of fees on these agreements.

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 each of the nine months ended September 30, 2010 and 2009, the Company earned $0.1 million in management fees.

Asset Management Fees

The Company entered into a management agreement in April 2006 with Wakefield Capital Management Inc. to perform certain management services. The Company incurred zero and $0.9 million in management fees for the three months ended September 30, 2010 and 2009, respectively, and $0.5 million and $2.6 million in management fees for the nine months ended September 30, 2010 and 2009, respectively, which are recorded in asset management fees-related parties in the condensed consolidated statement of operations. In April 2010, in connection with the Company's acquisition of the 51% membership interest in Midwest Holdings, the Company amended the management agreement with Wakefield Capital Management, Inc. The amended management fee will be equal to one dollar per year.

11. 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 September 30, 2010, the Company has issued an aggregate of 8,281,635 LTIP Units, net of forfeitures of 62,073 LTIP Units. An aggregate of 3,184,149 LTIP Units were converted to commons stock and 581,669 shares of common stock were issued pursuant to the Stock Incentive Plan. Of the 8,281,635 LTIP Units, so long as the recipient continues to be an eligible recipient, 4,975,252 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, 2,154,029 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 280,495 LTIP Units as

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

11. Equity Based Compensation (Continued)

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 $3.2 million and $4.9 million for the three months ended September 30, 2010 and 2009, respectively, and $10.1 million and $14.8 million for the nine months ended September 30, 2010 and 2009, respectively. As of September 30, 2010, there were approximately 2,322,644 unvested LTIP Units and no 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 $10.0 million, provided there are no forfeitures.

The status of all of the LTIP grants as of September 30, 2010 and December 31, 2009 is as follows:

	September 30, 2010					December 31, 2009

	LTIP Grants			Weighted Average Grant Price		LTIP Grants			Weighted Average Grant Price
Balance at beginning of year(1)		7,323		$	9.85		8,067		$	9.86
Granted		—			—		—			—
Converted to common stock		(2,107	)		12.58		(744	)		9.83
Forfeited		—			—		—			—

Ending balance(2)		5,216		$	8.75		7,323		$	9.85

(1): Reflects balance at January 1, 2010 and January 1, 2009 for the periods ended September 30, 2010 and December 31, 2009, respectively.
(2): Reflects balance at September 30, 2010 and December 31, 2009, respectively.

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 is expected to 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 is expected to 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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

11. Equity Based Compensation (Continued)

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 ranges of performance, each of which will correspond to a pay-out level equal to a percentage of a participant's pool allocation for such component.

The annual bonus component for 2010 will be calculated based on AFFO and liquidity targets (weighted 50% and 25%, respectively) with the remaining 25% of the 2010 annual bonus determined in the Committee's discretion. Additionally, the Committee has also allocated $2.0 million under the Plan for 2010 discretionary cash bonuses. 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 2010 long-term incentive component shall not exceed such participant's Initial Long-Term Allocation.

The Company recorded $0.6 million and $1.5 million in equity-based compensation expense related to the long term incentive component of the Plan for the three and nine months ended September 30, 2010, respectively.

12. 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 up 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 three and nine months ended September 30, 2010, the Company issued a total of 24,053 and 72,534 common shares, respectively, pursuant to the Plan for a gross sales price of approximately $0.1 million and $0.3 million, respectively. During the three and nine months ended

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

12. Stockholders' Equity (Continued)

September 30, 2009, the Company issued a total of 22,104 and 54,135 common shares, respectively, pursuant to the Plan for a gross sales price each of approximately $0.1 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.

For the three and nine months ended September 30, 2010, the Company did not sell any common shares pursuant to its equity distribution agreement with JMP. For the three and nine months ended September 30, 2009, the Company sold 5,291,186 and 6,542,814 common shares, respectively, and received $18.7 million and $22.7 million, respectively, of cash proceeds pursuant to its equity distribution agreement with JMP.

Dividends

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

On April 20, 2010, 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 May 14, 2010, to the stockholders of record as of the close of business on May 4, 2010.

On July 20, 2010, 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 16, 2010, to the stockholders of record as of the close of business on August 6, 2010.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

12. Stockholders' Equity (Continued)

Earnings Per Share

Earnings per share for the three and nine months ended September 30, 2010 and 2009 is computed as follows (in thousands):

		Three Months Ended September 30, 2010			Three Months Ended September 30, 2009			Nine Months Ended September 30, 2010			Nine Months Ended September 30, 2009

Numerator (Income)
*Basic Earnings*
Net income/(loss) attributable to NorthStar Realty Finance Corp. common stockholders		$	(144,116	)	$	(66,465	)	$	(137,055	)	$	13,917
Effect of dilutive securities:
	Income/(loss) allocated to non-controlling interest		(9,816	)		(7,094	)		(9,798	)		2,821

Dilutive net income/(loss) available to stockholders		$	(153,932	)	$	(73,559	)	$	(146,853	)	$	16,738

*Basic Earnings:*
Shares available to common stockholders			77,140			69,896			76,212			67,446
Effect of dilutive securities:
OP/LTIP units			5,224			7,460			6,076			7,460

*Dilutive Shares*			82,364			77,356			82,287			74,906

Net income/(loss) per share attributable to NorthStar Realty Finance Corp. common stockholders—Basic/Diluted		$	(1.87	)	$	(0.95	)	$	(1.80	)	$	0.21

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.

13. 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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

13. Non-controlling Interest (Continued)

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 September 30, 2010 and December 31, 2009, non-controlling interest related to the aggregate limited partnership units of 5,216,021 and 7,323,310, represented a 6.33% and 8.91% interest in the Operating Partnership, respectively. Income/(loss) allocated to the operating partnership non-controlling interest for the three months ended September 30, 2010 and 2009 was a loss of $9.8 million and a loss of $7.1 million, respectively. Income/(loss) allocated to the operating partnership non-controlling interest for the nine months ended September 30, 2010 and 2009 was a loss of $9.8 million and income of $2.8 million, respectively.

Joint Ventures

In May 2006, the Company formed NRF Healthcare, LLC with Chain Bridge. On July 9, 2008, NRF Healthcare, LLC 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 NRF Healthcare, LLC, NRFC Healthcare Holding Company, LLC, NorthStar Healthcare Investors, Inc., Chain Bridge, Wakefield Capital Management, Midwest Care Holdings LLC, or Midwest Holdings, and certain individuals, pursuant to which NRF Healthcare, LLC redeemed the 5.4% membership interest of Chain Bridge and its affiliates in NRF Healthcare, LLC for $2.0 million and its membership interest in certain assets. As a result of the redemption, the Company holds 100% of the equity interests in NRF Healthcare, LLC, other than the convertible preferred membership interests held by Inland. Accordingly, NRF Healthcare, LLC'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 three months ended September 30, 2010 and 2009 was income of $2.6 million and $2.6 million, respectively. Income allocated to the non-controlling interests for the nine months ended September 30, 2010 and 2009 was income of $7.9 million and $7.0 million, respectively.

A third party holds 16.7% of the equity notes of N-Star CDO I. The equity notes held by the third party are reflected as non-controlling interest in the Company's condensed consolidated financial statements.

14. Risk Management and Derivative Activities

Derivatives

The Company uses derivatives primarily to manage interest rate risk exposure. These derivatives are typically in the form of interest rate swap agreements and the primary objective is to minimize interest rate risks associated with the Company's investment and financing activities. The counterparties of these arrangements are major financial institutions with which the Company may also have other financial relationships. The Company is exposed to credit risk in the event of non-performance by these

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

14. Risk Management and Derivative Activities (Continued)

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 the three and nine months ended September 30, 2010 and 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 three and nine months ended September 30, 2010 and 2009, 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 the remainder of 2010, the Company estimates that an additional $2.8 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 December 31, 2009:

		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

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 three months ended September 30, 2010 and 2009, the Company recorded, in earnings, a mark-to-market unrealized loss of $28.2 million and an unrealized loss of $22.4 million, respectively, for the non-qualifying interest rate swaps. For the three months ended September 30, 2010 and 2009, the Company recorded a $1.9 million and a $1.4 million reclassification from accumulated other comprehensive income for the non-qualifying interest rate swaps, respectively. For the nine months ended September 30, 2010 and 2009, the Company recorded, in earnings, a mark-to-market unrealized loss of $70.4 million and an unrealized loss of $3.6 million, respectively, for the

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

14. Risk Management and Derivative Activities (Continued)

non-qualifying interest rate swaps. For the nine months ended September 30, 2010 and 2009, the Company recorded a $4.7 million and a $4.2 million reclassification from accumulated other comprehensive income for the non-qualifying interest rate swaps, respectively.

The following tables summarize the Company's derivative financial instruments that were not designated as hedges in qualifying hedging relationships as of September 30, 2010 and December 31, 2009:

		Notional Amount		Fair Value Net Asset/ (Liability)			Range of Fixed LIBOR	Range of Maturity

Interest rate swaps
As of September 30, 2010	64	$	2,709,565	$	(256,923	)	0.36% - 7.00%	December 2010 - October 2019
As of December 31, 2009(1)	22	$	897,335	$	(59,353	)	0.34% - 5.63%	May 2010 - June 2018

(1): December 31, 2009 does not include the interest rate swaps of N-Star I, II, III and V, as these CDO financings were unconsolidated financings prior to January 1, 2010.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

14. Risk Management and Derivative Activities (Continued)

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 September 30, 2010 and December 31, 2009:

Tabular Disclosure of Fair Values of Derivative Instruments

	Asset Derivatives						Liability Derivatives

	As of September 30, 2010			As of December 31, 2009(1)			As of September 30, 2010				As of December 31, 2009(1)
	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	$	—	Derivative	$	—	Derivative	$	—		Derivative	$	(7,691	)
	instrument,			instrument,			liability,				liability,
	at fair value			at fair value			at fair value				at fair value

Total derivatives designated as hedging instruments		$	—		$	—		$	—			$	(7,691	)

Derivatives not designated as hedging instruments
Interest rate products	Derivative	$	29	Derivative	$	—	Derivative	$	(256,952	)	Derivative	$	(59,353	)
	instrument,			instrument,			liability,				liability,
	at fair value			at fair value			at fair value				at fair value

Total derivatives not designated as hedging instruments		$	29		$	—		$	(256,952	)		$	(59,353	)

(1): December 31, 2009 does not include the derivative instruments of N-Star I, II, III and V, as these CDO financings were unconsolidated financings prior to January 1, 2010.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

14. 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 three and nine months ended September 30, 2010 and 2009:

Derivatives in Cash Flow Hedging Relationships

	Location of Gain/(loss) recognized in income	Three Months Ended September 30, 2010		Three Months Ended September 30, 2009(1)			Nine Months Ended September 30, 2010			Nine Months Ended September 30, 2009(1)

*Interest rate products*
Amount of gain or (loss) in OCI on derivative (effective portion)	n/a	$	—	$	(3,574	)	$	(3,448	)	$	(321	)
Amount of gain or (loss) reclassified from accumulated OCI into income (effective portion)	Interest Expense	$	365	$	7		$	37		$	21

(1): The three and nine months ended September 30, 2009 does not include gains or loses and amounts reclassified from accumulated OCI into income on the derivative instruments of N-Star I, II, III and V, as these CDO financings were unconsolidated financings prior to January 1, 2010.

Derivatives Not Designated as Hedging Instruments

	Location of Gain/(loss) recognized in income	Three Months Ended September 30, 2010			Three Months Ended September 30, 2009(1)			Nine Months Ended September 30, 2010			Nine Months Ended September 30, 2009(1)

*Interest rate products*
Amount of gain or (loss) recognized in income	Unrealized gain (loss) on investment and other	$	(55,989	)	$	(27,342	)	$	(141,848	)	$	(16,957	)
Amount of gain or (loss) reclassified from accumulated OCI into income	Unrealized gain (loss) on investment and other	$	(1,912	)	$	(1,404	)	$	(4,732	)	$	(4,213	)

(1): The three and nine months ended September 30, 2009 does not include gains or loses and amounts reclassified from accumulated OCI into income on the derivative instruments of N-Star I, II, III and V, as these CDO financings were unconsolidated financings prior to January 1, 2010.

At September 30, 2010, the Company's counterparties hold approximately $33.5 million of cash margin as collateral against its swap contracts.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

14. Risk Management and Derivative Activities (Continued)

Credit Risk Concentrations

Concentrations of credit risk arise when a number of borrowers, tenants, operators 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, tenant or operator that generates 10% or more of its total revenue. However, approximately 58% and 51% of the Company's rental and escalation revenue for the three and nine months ended September 30, 2010, respectively, is generated from one tenants and one operator 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.

15. 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 CMBS, REIT unsecured debt, credit tenant loans and unsecured subordinate securities of commercial real estate companies. The Company generates revenues from this segment by earning interest income and advisory fees from owning and managing these investments. Its operating expenses consist primarily of interest costs from financing its securities. The segment generates income from operations by earning advisory fees and a positive spread between the yield on its assets and the interest cost of its debt.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

15. Segment Reporting (Continued)

The following table summarizes segment reporting for the three and nine months ended September 30, 2010 and 2009:

		Real Estate Debt			Operating Real Estate			Real Estate Securities(1)			Healthcare Real Estate Joint Venture			Investments and Other(2)			Consolidated Total

Total revenues for the three months ended
	September 30, 2010	$	39,467		$	8,994		$	51,231		$	25,324		$	1,777		$	126,793
	September 30, 2009		23,662			10,451			17,030			17,265			(2,040	)		66,367
Consolidated net loss for the three months ended
	September 30, 2010		(11,260	)		(2,546	)		(90,400	)		481			(43,123	)		(146,848	)
	September 30, 2009		(104,236	)		5,705			61,374			1,679			(30,295	)		(65,773	)
Consolidated net loss after non-controlling interests and before preferred dividend for the three months ended
	September 30, 2010		(10,416	)		(2,364	)		(83,065	)		(2,144	)		(40,896	)		(138,885	)
	September 30, 2009		(94,178	)		5,143			55,744			(878	)		(27,065	)		(61,234	)
Total revenues for the nine months ended
	September 30, 2010		85,080			27,179			126,825			63,014			2,241			304,339
	September 30, 2009		77,740			31,275			48,717			46,725			(5,613	)		198,844
Consolidated net (loss)/income for the nine months ended
	September 30, 2010		(44,551	)		(3,590	)		(8,512	)		738			(66,464	)		(122,379	)
	September 30, 2009		(13,788	)		(3,772	)		131,952			(6,772	)		(68,193	)		39,427
Consolidated net (loss)/income after non-controlling interests and before preferred dividend for the nine months ended
	September 30, 2010		(40,836	)		(3,293	)		(9,537	)		(7,146	)		(60,550	)		(121,361	)
	September 30, 2009		(13,622	)		(3,309	)		118,923			(13,767	)		(58,614	)		29,611
Total assets as of September 30, 2010		$	2,338,473		$	424,941		$	1,614,487		$	636,779		$	144,665		$	5,159,345

(1): Total revenues for the three months ended September 30, 2010 and 2009 excludes $156.0 million and $59.1 million in net realized and unrealized losses, respectively. Total revenues for the nine

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

15. Segment Reporting (Continued)

months ended September 30, 2010 and 2009 excludes $81.3 million in net realized and unrealized losses and $91.1 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.

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

A summary of non-cash investing and financing activities for the nine months ended September 30, 2010 and 2009 is presented below:



Assets of CSE RE 2006-A CDO	(480,312	)	—
Liabilities of CSE RE 2006-A CDO	464,656		—
Assets of N-Star CDO financings	(1,143,649	)	—
Liabilities of N-Star CDO financings	798,058		—
Non-controlling interest in N-Star CDO financing	3,511		—
Distribution of operating real estate to non-controlling interest	9,525		—
Assumption of mortgage notes and loans payable to non-controlling interest	(4,734	)	—
Deconsolidation of non-controlling interest in NorthStar Income Opportunity REIT I, Inc.	(1,815	)	—
40% participation interest in the principal proceeds of the German Loan granted to the lender in connection with the repayment and extinguishment of the WA Secured Term Loan	35,287		—
Elimination of available for sale securities	1,342		—
Elimination of bonds payable	32,286		—
Deed in lieu of foreclosure of operating real estate	(74,389	)	—
Contribution of book value of assets to unconsolidated joint venture	—		2,668
Writ-off of operating real estate, tenant improvement, deferred financing cost and below market lease due to foreclosure	—		51,732
Reduction of mortgage notes payable due to foreclosure	—		(52,067	)
Reduction of restricted cash due to foreclosure	—		68
Stock Dividend	—		10,646

17. 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.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

17. Fair Value of Financial Instruments (Continued)

As of September 30, 2010 and December 31, 2009, cash equivalents, accounts receivable and accounts payable, reasonably approximate their fair values due to the short-term maturities of these items. The available for sale securities are carried on the balance sheet at their estimated fair value.

For the real estate debt investments the fair value of the fixed and floating rate investments was approximated comparing yields at which the investments are held to estimated yields at which loans originated with similar credit risks or market yields at which a third party might require to purchase the investment by discounting future cash flows at such market yields. Prices were calculated assuming fully extended maturities regardless of if structural or economic tests required to achieve such extended maturities. At September 30, 2010, the fair market value was $1.7 billion with a gross principal amount of $2.7 billion. Of the $2.7 billion gross principal amount, approximately $0.9 billion of gross principal amount in RE 2006-A was recorded at a fair market value of approximately $287.7 million at September 30, 2010. At December 31, 2009, the fair market value was $1.7 billion with a gross principal amount of $2.0 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 September 30, 2010, the fair market value of the 7.25% exchangeable senior notes was $61.8 million, with a carrying amount of $67.3 million and the fair market value of the 11.50% exchangeable senior notes was $56.9 million with a carrying amount of $59.3 million. 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.

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 September 30, 2010, the fair market value was $820.7 million with a carrying amount of $804.8 million. At December 31, 2009, the fair market value was $800.1 million with a carrying amount of $795.9 million.

Disclosure about fair value of financial instruments is based on pertinent information available to management as of September 30, 2010 and December 31, 2009. 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.

18. Commitments and Contingencies

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"). NRFC NNN Holdings, Inc. ("NRFC NNN") and NRFC Sub Investor IV, LLC ("NRFC Sub IV"), which are subsidiaries of the Company, are defendants in a lawsuit (the "Lawsuit") filed by GECCMC 2005-CI Plummer Office Limited Partnership (the "Lender") in the Superior Court of the State of California, County of Los Angeles, relating to a loan on two properties previously owned by

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

18. Commitments and Contingencies (Continued)

NRFC Sub IV that were 100% leased (the "Lease") to Washington Mutual Bank, FA ("WaMu"). The Lawsuit alleges, among other things, that the loan provided by Lender to NRFC Sub IV became a recourse obligation of NRFC NNN due to an alleged termination of the Lease. The judge presiding over the Lawsuit has announced her intention to grant the Lender's motion for summary judgment and, accordingly, is expected to enter a judgment against NRFC NNN in the amount of approximately $42 million plus accrued interest of approximately $2.2 million (the "Judgment"). NRFC NNN intends to vigorously pursue an appeal of the decision.

Pursuant to the guidance Accounting for Contingencies, an estimated loss from a loss contingency shall be accrued by a charge to income if two conditions are met. First, information available prior to the issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements. It is implicit in this condition that it must be probable that on one or more future events will occur confirming the facts of the loss. Second, the amount of the loss can be reasonably estimated. The Company believes it is not probable that the Lawsuit will result in an unfavorable outcome and, therefore, the Company has not established an accrual relating to the Lawsuit.

In connection with filing for an appeal, pursuant to California law NRFC NNN is required to post a bond in an amount equal to one and a half times the amount of the Judgment (the "Bond"). Accordingly, the Company has entered into a standard General Agreement of Indemnity with an issuer of surety bonds (the "Surety Agreement"), which could require the Company to post collateral equal to the amount of the Bond. As part of the Surety Agreement, in connection with the expected issuance of the Bond, the Company has agreed to post cash collateral equal to thirty-eight percent of the amount of the Bond, which is expected to be approximately $25 million.

19. Pro Forma Financial Information

As discussed in Note 1, the Company acquired the 51% membership interest in Midwest Holdings previously owned by Chain Bridge for $1.0 million in cash. As a result of the acquisition, the Company now holds 100% of the common membership interest in Midwest Holdings and controls all major decisions. Accordingly, the operations of Midwest Holdings, which were previously accounted for under the equity method, are consolidated.

The pro forma financial information set forth below is based upon the Company's historical condensed consolidated statements of operations for the three months ended September 30, 2009, and the nine months ended September 30, 2010 and 2009, adjusted to give effect of this transaction as of January 1, 2009. The acquisition of Midwest Holdings occurred on April 1, 2010. The pro forma information set forth below does not reflect the three months ended September 30, 2010, as the

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

19. Pro Forma Financial Information (Continued)

operations of Midwest Holdings for the three months ended September 30, 2010 are included in the Company's consolidated financial statements.

	Three Months Ended September 30, 2009			Nine months Ended September 30, 2010			Nine months Ended September 30, 2009

Pro Forma revenues	$	74,232		$	334,304		$	220,028

Pro Forma net income		(66,576	)		(108,869	)	$	15,543

Pro Forma net income per common share—basis/diluted	$	(0.95	)	$	(1.42	)	$	0.25

The pro forma financial information is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the transactions occurred January 1, 2009, nor does it purport to represent the results of future operations.

20. Subsequent Events

Dividends

On October 19, 2010, 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 will be paid on November 15, 2010, to the stockholders of record as of the close of business on November 5, 2010.

NIOR

On October 18, 2010, NIOR, an unconsolidated entity in which the Company has an equity investment, completed a merger with NorthStar Real Estate Income Trust, Inc. ("NSREIT"), a consolidated subsidiary of the Company and each a commercial finance REIT sponsored by the Company, with NSREIT becoming the surviving entity. As a result of the merger, the Company will deconsolidate NSREIT and will have an equity investment in the surviving entity of approximately $2.1 million as of October 18, 2010. As of October 18, 2010, the Company will account for its investment in NSREIT under the equity method of accounting.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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

Forward-Looking Statements

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

Factors that could have a material adverse effect on our operations and future prospects are set forth in "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2009, and those described from time to time in our future reports filed with the Securities and Exchange Commission. 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.

Introduction

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. 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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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 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 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, and the unemployment rate increased from a low of 4.4% in 2007 to 9.6% at September 30, 2010. Several major financial institutions failed or had to be rescued in 2008, 140 banks failed in 2009 and 127 banks have failed through September 30, 2010. 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 (where it remains as of September 30, 2010) 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 and continued to improve during 2010, although macroeconomic statistics remained weak and the commercial mortgage-backed markets are beginning to recover. Other traditional commercial real estate lenders such as banks and life companies severely curtailed their lending between mid-2007 and 2009, resulting in a severe shortage of debt capital for real estate investors and those needing to refinance maturing loans. Several large commercial banks have begun to rebuild their commercial mortgage lending operations, but new loan volume remains low, and new loans are being offered at leverage levels much lower than were available prior to the recession. The lack of available credit for commercial real estate has generally depressed values and resulted in increasing loan defaults and restructurings throughout the industry. Furthermore, poor economic conditions have generally resulted

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in declining cash flow from commercial real estate, further depressing values and increasing the difficulty in finding new capital.

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 for legacy CMBS securities ended June 30, 2010, and the program for new issue CMBS securities, which was used for only one transaction, were modestly successful in reducing yields on the highest rated securities. During the first nine months of 2010, the first multi-borrower CMBS securitizations since mid-2008 were completed, but the underlying first mortgage collateral represents very low leverage levels relative to loans underwritten before the financial crisis. The new issue market will have to grow dramatically and investors will have to become more risk tolerant in order to meet the needs of a majority of borrowers who have pre-existing loans on their properties.

Despite these conditions, REITs have collectively raised nearly $52 billion of debt and equity capital, and the Morgan Stanley REIT Index returned approximately 28.6% for 2009 and approximately 19.6% year-to-date through September 30, 2010. In addition, three newly-formed REITs with a real estate debt focus raised approximately $1.5 billion of capital in 2009, but no new commercial mortgage REITs have gone public during the first nine months of 2010. 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. More recently, U.S. economic conditions appear to be improving (based on GDP growth), however, the unemployment rate remains high indicating a low rate of business expansion, which drives commercial real estate cash flows. Commercial real estate tends to lag economic recoveries and we expect commercial real estate fundamentals to continue to be difficult into 2011.

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 into 2010 and are expected to negatively impact occupancy rates in the future. Our credit loss provisioning levels for 2009 and the first nine months of 2010 were higher than in the past due to the impact of these conditions. The degree to which commercial real estate values are impacted by weaker economic conditions and the level of credit losses in our asset base will be determined primarily by the length that such conditions persist, 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 September 30, 2010, is 0.26%, well below its 2.93% 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.

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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. In 2009, the rating agencies 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, large amounts of ratings downgrade actions for CMBS in 2009 and to date in 2010, 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 continue to be challenging through 2010 and we 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 and for growth in our asset management portfolio.

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The relative 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. Our registration statement for NorthStar Real Estate Income Trust, Inc. ("NSREIT"), a commercial finance REIT that is managed by us and will not be listed on a major exchange, has been declared effective by the SEC and we built NRF Capital Markets, our wholesale broker dealer, to distribute the equity for this new REIT and other non-listed REITs sponsored by us. We also raised approximately $35 million of equity under an SEC Regulation D exemption for NorthStar Income Opportunity REIT I, Inc. ("NIOR"), a commercial finance REIT also managed by us. In October 2010, the stockholders of NIOR approved a merger of NIOR into NSREIT. 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, and the non-traded REIT efforts 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

On June 30, 2010, we fully repaid and extinguished, at a discount to the outstanding principal amount, our WA Secured Term Loan, which was fully recourse to us, having an outstanding principal balance of approximately $304.0 million and secured by assets having an aggregate unpaid principal balance of approximately $448.6 at the time of the payoff. We paid approximately $208.0 million of cash and granted the lender a 40% participation interest in the principal proceeds of the German Loan. Additionally, the lender agreed to use commercially reasonable efforts to provide us and/or our affiliates with a new credit facility which is expected to have a minimum availability of $200.0 million.

As of September 30, 2010, approximately $4.1 billion of our collateralized debt obligations 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. Approximately $516.8 million of our funded loan commitments have their initial maturity date during the remainder of 2010; however, most of the loans contain extension options of at least one year. We also expect that a majority of the $341.4 million of loans having final maturities during the remainder of 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 the remainder of 2010.

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 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 and corporate debt capital is currently available to the stronger equity REITs. Three single-borrower CMBS transactions were completed in the fourth quarter of 2009 and, more importantly, approximately $7.2 billion in multi-borrower CMBS transactions have been completed year-to-date

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through October 31, 2010, the first since mid-2008. Other sources of capital could include term loans from financial institutions and life insurance companies, more restrictive commercial real estate finance structures, which may not permit reinvestment from asset repayments, and financing provided by motivated sellers of assets. 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 of cash reserves 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 challenging real estate conditions continue, 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 sales or 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 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 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.

On July 8, 2010, we acquired, as part of the CSE RE 2006-A CDO acquisition, commercial real estate loans having an aggregate $1.1 billion outstanding principal balance. The loans were recorded as

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of July 8, 2010, at their estimated $396.0 million fair market value. As of September 30, 2010, the CSE RE 2006-A loans had an aggregate $943.8 million outstanding principal balance and an aggregate $287.7 million carrying value, which includes approximately $48.6 million of loans purchased or acquired and approximately $160.9 million of repayments in the third quarter subsequent to the acquisition. The $662.8 million acquisition discount as of September 30, 2010, acts as a built-in reserve for credit issues and recoveries less than contractual amounts related to these acquired loans. Although fair market values and any related discounts to outstanding principal balances were determined on a loan-by-loan basis and therefore cannot be allocated to other loans, we believe the overall discount provides protection to our basis for ongoing credit issues associated with this portfolio.

At September 30, 2010, our loan portfolio, inclusive of the CSE RE 2006-A CDO, had the following credit statistics (in thousands):

Non-Performing Loans(1)			Outstanding Principal Balance		Reserves		CapSource CDO Acquisition Discount		Aggregate Net Balance		Collateral Types and Locations (% by loan balance)

	First mortgages	12	$	279,126	$	20,436	$	224,566	$	34,124	68% land located in FL, CA, PA, 14% hospitality located in IL, NJ, 8% hotel located in NY, 4% retail located in WI, 4% multifamily located in FL and 2% office located in PA.
	Junior participations in first mortgages	2		38,462		28,460		0		10,002	68% office located in GA and 32% land located in FL.

Total		14	$	317,588	$	48,896	$	224,566	$	44,126
Performing loans with loan loss reserves
	First mortgages(3)	3	$	89,301	$	22,010	$	0	$	67,291	89% office located in TX, CA, 8% land located in CA, and 3% retail located in IA.
	Junior participations in first mortgages	4		91,718		44,750		0		46,968	47% land located in NV, 36% retail located in GA and 17% office in NY.
	Mezzanine	5		164,506		59,021		0		105,485	61% hotel located throughout the USA, 21% retail located in AZ, 14% multi-family located in CA and 4% corporate loan located in NC.

Total		12	$	345,525	$	125,781	$	0	$	219,744

Total NPLs and total performing loans with loan loss reserves		26	$	663,113	$	174,677	$	224,566	$	263,870

(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): Where NorthStar holds more than one loan on the same collateral or group of collateral properties, the loans are considered a single investment for purpose of reporting non-perforning loans and reserves.
(3): Includes a first mortgage and mezzanine loan held by NorthStar, having a combined $34 million outstanding balance and having the same collateral base, considered a single first mortgage for purposes of this table.

At September 30, 2010, our loan portfolio principal and interest aging is as follows (inclusive of our non-performing loans) (in thousands):

1 - 90 Days		90+ Days

$17,293		$284,896

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For the three months ended September 30, 2010, we recorded a $42.9 million credit loss provision relating to seven loans which included a $6.6 million provision for a sold loan and includes a credit of $0.5 million for a loan recorded as held for sale, which was sold during the fourth quarter 2010. For the nine months ended September 30, 2010, we recorded a $136.1 million credit loss provision relating to 14 loans which included $20.9 million in provisions for three loans sold during the period, net of $1.3 million in credits for a loan sold, and a loan recorded as held for sale, for which we received net sale proceeds in excess of their carrying amounts. In March 2010, we foreclosed on a $15.0 million defaulted first mortgage loan backed by hotel collateral located in Phoenix, AZ and we simultaneously sold the hotel for approximately $9.6 million. In prior periods we had recorded $5.0 million of credit loss reserves for this asset and it was a NPL at December 31, 2009. In April 2010, we sold a $13.9 million first mortgage loan backed by land collateral located in New York, NY for approximately $8.5 million. The mortgage was a NPL and in prior periods we had recorded a net $5.5 million of loan loss reserves for this asset. In April 2010, we also sold a $39.1 million mezzanine loan backed by a portfolio of hotel properties for approximately $32.1 million. We had recorded $7.0 million of loan loss reserves for this asset during the first quarter. In April 2010, we also foreclosed on an $18.0 million first mortgage loan backed by office collateral located in Philadelphia, PA. We had in prior periods recorded $8.8 million of loan loss reserves for this asset and took a $1.2 million impairment charge during the second quarter related to the foreclosed real estate. In June 2010, we sold a $40.0 first mortgage loan backed by hotel collateral located in New York, NY for approximately $32.0 million. We recorded an $8.1 million credit loss provision for this asset. In September 2010, we sold a $32.1 mezzanine loan backed by hotel collateral for approximately $25.5 million and recorded a $6.6 million credit loss provision for this asset.

As of September 30, 2010, loan loss reserves totaled $174.7 million and related to 15 loans having an aggregate $407.9 million gross book value (exclusive of the related reserve) and includes reserves of $25.7 million related to loans having an aggregate gross book value of $43.6 million (exclusive of the related reserve) that were added to the reserve balance as a result of the acquisition of N-Star CDO IX.

Activity in the allowance for credit losses on real estate debt investments for the nine months ended September 30, 2010, is as follows:

Credit Loss Reserve

Balance at December 31, 2009	$	77,400
Provision for credit losses		136,135
N-Star CDO IX loan reserves		25,679
Write-offs and sold loans		(41,417	)
Transfer to unconsolidated joint venture on foreclosure		(23,120	)

Balance at September 30, 2010	$	174,677

At September 30, 2010, we had five loans, exclusive of the CSE RE 2006-A loans, totaling $78.1 million of aggregate outstanding principal amount on non-performing status due to maturity defaults, and $48.9 million of our credit loss reserves were allocated to these loans. First mortgages represent approximately 51% of the book value of these loans (exclusive of reserves), and 36% of the loans are backed by land collateral. There can be no assurance that there will be acceptable outcomes under our non-performing loans and accordingly, we may determine that more reserves are required for these loans.

Overall, the prolonged poor economic conditions and the continuing scarcity of commercial real estate debt capital 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. While the overall economy has seen some signs of growth,

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because market volume remains very low, 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 few years 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.

For the nine months ended September 30, 2010, 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 quarter, resulted in an approximate $8.6 million reduction to interest income for the nine months ended September 30, 2010, respectively, ($12.9 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.

Each of our loan investments, while primarily backed by commercial real estate collateral, is unique and requires customized asset management strategies for dealing with potential credit situations. The complexity of each situation depends on many factors, including the number of collateral properties, the type of property, macro and local market conditions impacting the demand, cash flow and value of the of the collateral, and the financial condition of our borrowers and their willingness to support our collateral properties. Additionally, in many cases there are multiple lenders involved with specific collateral properties and these lenders may have different objectives which influence their preferred strategy for dealing with a credit situation.

Our impairment analyses often requires that we make assumptions regarding collateral values and the timing regarding when we will receive debt service payments, including principal recovery. In a difficult environment for commercial real estate, our impairment analyses may lead us to the determination that extending and working out a loan, rather than pursuing foreclosure, is the best course of action to maximize total and long-term value. However, in situations where there are multiple creditors in large capital structures, it can be particularly difficult to assess the most likely course of action that a lender group or the borrower may take. Consequently, there could be a wide range of potential principal recovery outcomes, the timing of which can be unpredictable, based on the strategy pursued by a lender group and/or by a borrower. Our impairment analysis in each of these situations is based on our assessment of the facts and circumstances currently known to us and because these situations often involve complicated collateral and complex creditor and borrower dynamics, our assessment of recovery value may change more dramatically and quickly and without the visibility that

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may be available in other situations. These multiple creditor situations tend to be associated with larger loans, and NorthStar has been and continues to be involved in situations such as these, although Northstar, as one of a group of lenders and often a lender on a subordinated basis, does not independently control the decision making. The discussion below summarizes the largest credit situations that currently meet some of the foregoing characteristics.

East Rutherford, NJ Retail Construction First Mortgage Loan

During the third quarter, the lender group took effective ownership of a retail/entertainment complex located in East Rutherford, NJ, which was previously subject to a $498.6 million first mortgage (the "NJ Property"). Additionally, during the third quarter, we invested $6 million in an equal partnership with a third party to acquire $34 million of the first mortgage. We own a 22% interest in the NJ Property and the lender group is in the process of seeking to recapitalize the NJ Property. While the lender group has seen strong interest in the NJ Property, there is no assurance that a recapitalization will be completed or that a recapitalization will be completed on terms acceptable to us, which could have a material adverse effect on our business and operations. Our net investment is now classified as an equity investment.

German Retail Portfolio Mezzanine Loan Participation

We own a €43.3 million participation in a mezzanine loan that is collateralized by a German retail portfolio that was net leased to a single tenant (the "Tenant") that filed for bankruptcy in Germany (the "German Loan"). The sale of the Tenant by the German bankruptcy administrator to Berrgruen Holdings was finalized on October 8, 2010 allowing for a restructuring of the German Loan effective as of July 20, 2010. There can be no assurance that the restructuring plan will be a success, that the company will remain solvent and that the German Loan will not default in the future. If the insolvency plan fails and the Tenant is unable to remain solvent, the Tenant's lease may be terminated and the Tenant could be liquidated, which may cause the German Loan to default and we may lose all of our investment, which could have a material adverse effect on our business and operations. On June 30, 2010, in connection with the repayment and extinguishment of the WA Secured Term Loan, the lender was granted a 40% participation in the principal proceeds of the German Loan. We recorded a second quarter 2010 realized loss of approximately $35.3 million in connection with the granting of the 40% participation interest in principal proceeds of the German Loan to the lender.

Las Vegas, NV Casino/Hotel Mezzanine Loan

We own an $89.0 million mezzanine loan that is secured by the Hard Rock Hotel and Casino in Las Vegas, NV (the "NV Loan"). The NV Loan was most recently restructured in December 2009. The final maturity date of the NV Loan was extended to February 2014 to provide additional time for market conditions to improve and for performance at the property to stabilize. As part of the extension, interest reserves were also established to support the NV Loan; however, performance at the property has not improved and the interest reserves are currently expected to be depleted in the fourth quarter of 2010. If the NV Loan were to default and the borrower is not willing to provide additional capital for the property, we may lose all of our investment, which could have a material adverse effect on our business and operations. During the third quarter 2010, we recorded a $22.3 million provision for loan loss related to the NV Loan.

Critical Accounting Policies

Refer to the section of our Annual Report on Form 10-K for the year ended December 31, 2009 entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting policies" for a full discussion of our critical accounting policies.

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Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board ("FASB) issued guidance requiring additional disclosures about fair value measurements regarding transfers between fair value categories as well as purchases, sales, issuances and settlements related to fair value measurements of financial instruments with non-observable inputs. This update was effective and was adopted by us for interim and annual periods beginning after December 15, 2009 except for disclosures about purchases, sales, issuances and settlements of financial instruments with non-observable inputs, which are effective for years beginning after December 15, 2010. The additional disclosures required by this update will be included in the note on fair value measurements upon adoption.

RESULTS OF OPERATIONS

Comparison of the Three Months Ended September 30, 2010 to the Three Months Ended September 30, 2009

Revenues

Interest Income

Interest income for the three months ended September 30, 2010 totaled $88.8 million, representing an increase of $54.5 million, or 159%, compared to $34.3 million for the three months ended September 30, 2009. For the three months ended September 30, 2010, the increase in interest income was primarily attributable to: (i) the addition of $24.3 million in interest income as the result of the January 1, 2010 consolidation of the N-Star I, N-Star II, N-Star III and N-Star V CDO financing's available for sale securities and real estate debt investments; (ii) the addition of $20.6 million in interest income, of which $13.4 million was related to contractual interest and $7.2 million was related to accretion of the discount, as the result of the July 8, 2010 consolidation of the CSE RE 2006-A CDO financing's real estate debt investments and available for sale securities and (iii) the addition of $10.1 million in interest income as the result of the July 7, 2010 consolidation of the N-Star IX CDO financing's available for sale securities and real estate debt investments offset by a decrease of $0.5 million due to lower asset balances.

Interest Income—Related Parties

Interest income from related parties for the three months ended September 30, 2010 totaled $0.1 million, representing a decrease of $4.1 million, or 98%, compared to $4.2 million for the three months ended September 30, 2009. As of January 1, 2010, the consolidation of the N-Star I, N-Star II, N-Star III and N-Star V CDOs financing the original non-investment grade notes are no longer accounted for as available for sale securities, resulting in a decrease in interest income—related parties of $4.1 million.

Rental and Escalation Income

Rental and escalation income for the three months ended September 30, 2010 totaled $34.3 million, representing an increase of $8.5 million, or 33%, compared to $25.8 million for the three months ended September 30, 2009. The increase was primarily attributable to an increase of approximately $10.0 million related to the consolidation of Midwest as a result of our acquisition of the 51% membership interest in Midwest formerly owned by Chain Bridge and an increase in rental

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income of approximately $0.2 million related to a new lease on one of our properties. The increase in rental and escalation income was partially offset by a decrease of $1.7 million related to lower rents and remaining vacancy on the lease renewal for the Cincinnati, OH property.

Advisory and Management Fee Income—Related Parties

Advisory fees from related parties for the three months ended September 30, 2010 totaled $0.7 million, representing a decrease of approximately $1.2 million, or 63%, compared to $1.9 million for the three months ended September 30, 2009. As of January 1, 2010, the related party advisory and management fee income earned on the N-Star I, N-Star II, N-Star III and N-Star V CDO financings is eliminated as a result of the consolidation of the respective CDO financings. The decrease in advisory and management fee income—related parties is attributable to the elimination of the advisory and management fee income earned on the previously non-consolidated CDO financings.

Commission Income

Commission income represents income earned by us for raising equity, through our broker-dealer subsidiary, for the NorthStar Income Opportunity REIT I, Inc., a commercial finance REIT sponsored by us. For the three months ended September 30, 2010, we recorded $1.9 million in commission income related to these capital raising efforts. We had no such commission income for the three months ended September 30, 2009.

Other Revenue

Other revenue for the three months ended September 30, 2010 totaled $1.1 million, representing an increase of approximately $0.9 million, or 450%, compared to $0.2 million for the three months ended September 30, 2009. Other revenue for three months ended September 30, 2010 consisted primarily of $1.0 million in exit fees and $0.1 million in other fees. Other revenue for three months ended September 30, 2009 consisted primarily of $0.1 million in exit fees and $0.1 million in unused credit line and draw fees.

Expenses

Interest Expense

Interest expense for the three months ended September 30, 2010 totaled $32.2 million, representing an increase of $3.8 million, or 14%, compared to $28.4 million for the three months ended September 30, 2009. The increase in interest was primarily the result of: (i) the addition of $5.0 million in interest expense as the result of the January 1, 2010 consolidation of the N-Star I, N-Star II, N-Star III and N-Star V CDO bonds payable; (ii) the addition of $2.6 million in interest expense as the result of the July 8, 2010 consolidation of the CSE RE 2006-A CDO bonds payable; (iii) the addition of $1.3 million in interest expense as the result of the July 7, 2010 consolidation of the N-Star IX CDO bonds payable; and (iv) $0.6 million in additional interest related to the Term Asset-Backed Securities Loan Facility, or TALF program debt. The increase in interest expense was partially offset by; (i) $1.0 million lower interest on our issued CDO notes and trust preferred debt due to lower average LIBOR rates; (ii) $0.9 million in lower interest as a result of the June 30, 2010 repayment of the Euro-note; (iii) $3.5 million lower interest related to the termination of our unsecured revolving credit line; and (iv) $0.2 million lower interest on our 11.50% and 7.25% exchangeable senior notes due to 2009 repurchases.

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Real Estate Properties—Operating Expenses

Real estate property operating expenses for three months ended September 30, 2010 totaled $12.4 million, representing an increase of $8.2 million, or 195%, compared to $4.2 million for three months ended September 30, 2009. The increase was primarily attributable to an increase of approximately $8.4 million related to the consolidation of Midwest as a result of our acquisition of the 51% membership interest in Midwest, formerly owned by Chain Bridge and $0.2 million related to the foreclosure of an $18.0 million first mortgage loan backed by office collateral located in Philadelphia, PA. The increase in real estate property operating expenses was partially offset by a decrease of $0.4 million related to the first mortgage lender foreclosing on the Chatsworth, CA properties during the third quarter of 2009.

Asset Management Fees—Related Party

Advisory fees for related parties for the three months ended September 30, 2010 were zero, representing a decrease of $0.8 million, or 100%, compared to $0.8 million for the three months ended September 30, 2009. The decrease was primarily related to the reduced asset management fee rate pursuant to the amended management agreement with Wakefield Capital Management Inc.

Commission Expense

Commission expense represents the portion of commission income which is paid to broker dealers with whom we have distribution agreements. For the three months ended September 30, 2010, we recorded $1.4 million in commission expense related to capital raising efforts. We had no such commission expense for the three months ended September 30, 2009.

Provision for Loan Losses

Provision for loan losses for the three months ended September 30, 2010 totaled $42.9 million for seven loans, one of which was sold during the period, and included a $0.5 million credit for a loan sold during the fourth quarter 2010. The provision for loan losses for the three months ended September 30, 2010 included $11.6 million for subordinated mortgage interests, $31.7 million for mezzanine loans and a $0.5 million credit for first mortgage whole loans,. Provision for loan losses for the three months ended September 30, 2009 totaled $24.2 million for 10 loans and includes $15.9 million for first mortgage whole loans, $4.0 million for subordinated mortgage interests and $4.3 million for mezzanine loans.

General and Administrative

General and administrative expenses for the three months ended September 30, 2010 totaled $19.9 million, representing an increase of $4.3 million, or 28%, compared to $15.6 million for the three months ended September 30, 2009. The primary components of our general and administrative expenses were the following:

Salaries and equity-based compensation for the three months ended September 30, 2010 totaled $11.9 million, representing an increase of approximately $0.9 million, or 8%, compared to $11.0 million, for the three months ended September 30, 2009. The increase was attributable to a $2.0 million increase related to salaries and accrued cash incentive compensation costs and a $1.1 million decrease related to equity-based compensation. The $2.0 million increase in salaries and accrued compensation was attributable to higher staffing levels in 2010 primarily relating to our broker-dealer subsidiary and internalizing management of our healthcare net lease assets. The $1.1 million decrease in equity-based compensation expense was attributable to a $1.7 million decrease in expense from equity-based awards issued under our 2004 Omnibus Stock Incentive Plan becoming fully vested. The decrease was partially

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offset by an additional $0.6 million of equity-based compensation expense related to the long-term incentive component of our incentive compensation plan.

Auditing and professional fees for the three months ended September 30, 2010 totaled $3.8 million, representing an increase of $1.9 million, or 100%, compared to $1.9 million for the three months ended September 30, 2009. The increase was primarily attributable to an approximately $1.9 million increase relating to the acquisition of CSE RE 2006-A and portfolio management.

Other general and administrative expenses for the three months ended September 30, 2010 totaled $4.3 million, representing an increase of approximately $1.6 million, or 59%, compared to $2.7 million for the three months ended September 30, 2009. The increase was primarily attributable to legal fees and other costs related to investment initiatives ultimately not consummated of approximately $0.6 million, costs associated with the acquisition of CSE RE 2006-A of approximately $0.3 million, and increased overhead costs of approximately $0.5 million resulting from higher staffing levels primarily relating to our broker-dealer subsidiary and internalizing management of our healthcare net lease assets during the three months ended September 30, 2010.

Depreciation and Amortization

Depreciation and amortization expense for the three months ended September 30, 2010 totaled $8.6 million, representing a decrease of $5.5 million, or 177%, compared to $3.1 million for the three months ended September 30, 2009. The decrease was primarily related to a decrease of $5.5 million related to charges associated with the 2009 foreclosure by the first mortgage lender of the Chatsworth, CA property, and a decrease of $0.3 million related to deferred lease costs and tenant improvements in our net lease portfolio being fully amortized. The decrease was partially offset by $0.3 million of expenses related to 2010 new operating real estate improvements.

Equity in (Loss) Earnings of Unconsolidated Ventures

Equity in (loss) earnings for the three months ended September 30, 2010 was net losses of $0.1 million, representing a decrease of $2.8 million, compared to net earnings of $2.7 million for the three months ended September 30, 2009. For the three months ended September 30, 2010, we recognized equity in losses of $0.5 million from the LandCap joint venture. The equity in losses was partially offset by equity in earnings of $0.2 million in connection with a net lease joint venture and $0.2 million from our corporate lending joint venture. For the three months ended September 30, 2009, we recognized equity in earnings of $2.7 million including equity in earnings of $2.3 million on a new joint venture related to the conversion of the net lease relationship with one of our healthcare operators to a management agreement which resulted in one of our unconsolidated affiliates becoming the lessee of the properties and the unconsolidated affiliate simultaneously entering into a management contract with a third party operator, equity in earnings of $0.5 million from the Securities Fund (which includes both realized and unrealized gains from asset sales and mark-to-market adjustments) and equity in earnings of $0.1 million in connection with another net lease joint venture. The equity in earnings were partially offset by equity in losses of $0.2 million from the LandCap joint venture.

Unrealized Gain (Loss) on Investments and Other

Unrealized gain (loss) on investments and other decreased by approximately $109.9 million for the three months ended September 30, 2010 to a loss of $198.2 million, compared to a loss of $88.3 million for the three months ended September 30, 2009. The unrealized loss on investments and other for the three months ended September 30, 2010 consisted primarily of unrealized mark-to-market adjustment losses of $80.1 million on various issued CDO bonds payable, $57.8 million unrealized losses on interest rate swap derivatives no longer qualifying, or not designated as, hedging instruments, unrealized losses of $35.4 million related to mark-to-market adjustments on various available for sale securities and

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mark-to-market adjustment losses of $24.8 million on liability to subsidiary trusts issuing preferred securities. The unrealized loss on investment for the three months ended September 30, 2009 consisted primarily of unrealized losses of $86.1 million on various N-Star bonds payable, unrealized losses related mark-to-market adjustments of $16.2 million on liability to subsidiary trusts issuing preferred securities, net losses of $28.7 million on interest rate swap derivatives no longer qualifying, or not designated as, hedging instruments and unrealized losses of $2.3 million on our corporate lending joint venture (which is an equity investment that is marked to market). The unrealized losses were partially offset by unrealized gains related to mark-to-market adjustments of $45.0 million on various available for sale securities.

Realized Gain on Investments and Other

The realized gain of $26.8 million for the three months ended September 30, 2010 consisted primarily of a realized gain of approximately $13.5 million on the sale of certain available for sale securities, a gain of $7.5 million on the sale of our interest in our middle market corporate lending venture and a net foreign currency translation gain of $6.2 million related to our Euro-denominated investment. The realized gains were partially offset by a realized loss of approximately $0.4 million related to other-than-temporary impairments on certain available for sale securities. The realized gain on investments and other of $29.2 million for the three months ended September 30, 2009 consisted primarily of net realized gains of $5.1 million on the repurchase of $10.0 million of our 7.25% exchangeable senior notes, $8.2 million on the repurchase of $19.3 million of our 11.50% exchangeable senior notes and net realized gains of $15.9 million on the sale of certain available for sale securities.

Gain on Acquisitions

Income from Discontinued Operations

Income from discontinued operations represents the operations of properties sold or held for sale during the period. During the third quarter of 2010, we recorded as held for sale, two real estate owned (or, "REO") parcels of land located in Arizona and an REO multifamily property located in Georgia, which were consolidated as of July 8, 2010, in connection with the acquisition of CSE RE 2006-A. In December 2009, NRF Healthcare, LLC completed the sale of 18 assisted living facilities containing approximately 1,300 beds located in North Carolina. Accordingly, a loss of $0.1 million and income of $0.7 million, respectively, related to the operations of these properties was reclassified to loss/income from discontinued operations for the three months ended September 30, 2010 and 2009.

Comparison of the Nine months Ended September 30, 2010 to the Nine months Ended September 30, 2009

Revenues

Interest Income

Interest income for the nine months ended September 30, 2010 totaled $207.1 million, representing an increase of $100.3 million, or 94%, compared to $106.8 million for the nine months ended September 30, 2009. For the nine months ended September 30, 2010, the increase in interest income was primarily attributable to: (i) the addition of $73.8 million in interest income as the result of the January 1, 2010 consolidation of the N-Star I, N-Star II, N-Star III and N-Star V CDO financing's

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available for sale securities and real estate debt investments (ii) the addition of $20.6 million in interest income, of which $13.4 million was related to contractual interest and $7.2 million was related to accretion of the discount, as the result of the July 8, 2010 consolidation of CSE RE 2006-A CDO financing's real estate debt investments and available for sale securities and (iii) the addition of $10.1 million in interest income as the result of the July 7, 2010 consolidation of the N-Star IX CDO financing's available for sale securities and real estate debt investments partially offset by: (i) a lower average one-month LIBOR of approximately 11 basis points and lower comparable asset balances resulting in a decrease of approximately $4.2 million in interest income.

Interest Income—Related Parties

Interest income from related parties for the nine months ended September 30, 2010 totaled $1.0 million, representing a decrease of $12.1 million, or 92%, compared to $13.1 million for the nine months ended September 30, 2009. As of January 1, 2010, the consolidation of the N-Star I, N-Star II, N-Star III and N-Star V CDOs financing the original non-investment grade notes are no longer accounted for as available for sale securities, resulting in a decrease in interest income—related parties of $12.1 million.

Rental and Escalation Income

Rental and escalation income for the nine months ended September 30, 2010 totaled $90.0 million, representing an increase of $17.1 million, or 23%, compared to $72.9 million for the nine months ended September 30, 2009. The increase was primarily attributable to an increase of approximately $21.2 million related to the consolidation of Midwest as a result of our acquisition of the 51% membership interest in Midwest formerly owned by Chain Bridge and an increase in rental income of approximately $0.5 million related to a new lease on one of our properties offset partially by decreases of $4.1 million related to lower rents and remaining vacancy on the lease renewal for the Cincinnati, OH property and $0.5 million related to the Chatsworth, CA property lease disaffirmation and foreclosure of the properties by the first mortgage lender in 2009.

Advisory and Management Fee Income—Related Parties

Advisory fees from related parties for the nine months ended September 30, 2010 totaled $1.7 million, representing a decrease of approximately $3.7 million, or 69%, compared to $5.4 million for the nine months ended September 30, 2009. As of January 1, 2010, the related party advisory and management fee income earned on the N-Star I, N-Star II, N-Star III and N-Star V CDO financings is eliminated as a result of the consolidation of the respective CDO financings. The decrease in advisory and management fee income—related parties is attributable to the elimination of the advisory and management fee income earned on the previously non-consolidated CDO financings.

Commission Income

Commission income represents income earned by us for raising equity, through our broker-dealer subsidiary, for the NorthStar Income Opportunity REIT I, Inc., a commercial finance REIT sponsored by us. For the nine months ended September 30, 2010, we recorded $2.2 million in commission income related to these capital raising efforts. We had no such commission income for the nine months ended September 30, 2009.

Other Revenue

Other revenue for the nine months ended September 30, 2010 totaled $2.3 million, representing an increase of $1.7 million, or 283%, compared to $0.6 million for the nine months ended September 30, 2009. Other revenue for nine months ended September 30, 2010 consisted primarily $1.0 million in exit

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fees, $0.9 million in early redemption fees on available for sale securities and $0.4 million in other fees. Other revenue for nine months ended September 30, 2009 consisted primarily of $0.2 million in exit fees, $0.2 million in late fees and $0.2 million in unused credit line fees.

Expenses

Interest Expense

Interest expense for the nine months ended September 30, 2010 totaled $100.1 million, representing an increase of $7.7 million, or 8%, compared to $92.4 million for the nine months ended September 30, 2009. The increase in interest was primarily the result of: (i) the addition of $14.5 million in interest expense as the result of the January 1, 2010 consolidation of the N-Star I, N-Star II, N-Star III and N-Star V CDO bonds payable; (ii) the addition of $2.6 million in interest expense as the result of the July 8, 2010 consolidation of CSE RE 2006-A CDO bonds payable; (iii) the addition of $1.3 million in interest expense as the result of the July 7, 2010 consolidation of the N-Star IX CDO bonds payable; and (iv) $1.2 million in additional interest related to the Term Asset-Backed Securities Loan Facility, or TALF program debt. The increase in interest expense was partially offset by; (i) $6.5 million lower interest on our issued CDO notes and trust preferred debt due to lower average LIBOR rates, 2009 debt repurchases and repayments; (ii) $3.8 million lower interest on our 11.50% and 7.25% exchangeable senior notes due to 2009 repurchases; (iii) $0.7 million in lower interest as a result of the June 30, 2010 repayment of the WA Secured Term Loan; (iv) $0.6 million in lower interest as a result of the June 30, 2010 repayment of the Euro-note; and (v) $0.2 million lower interest related to the termination of our unsecured revolving credit line.

Real Estate Properties—Operating Expenses

Real estate property operating expenses for nine months ended September 30, 2010 totaled $25.0 million, representing an increase of $15.9 million, or 175%, compared to $9.1 million for nine months ended September 30, 2009. The increase was primarily attributable to an increase of approximately $17.6 million related to the consolidation of Midwest as a result of our acquisition of the 51% membership interest in Midwest, formerly owned by Chain Bridge and $0.1 million related to the foreclosure of an $18.0 million first mortgage loan backed by office collateral located in Philadelphia, PA. The increase in real estate property operating expenses was partially offset by $1.4 million in lower expenses related to a reduced real estate tax assessment and a decrease of $0.4 million related to the first mortgage lender foreclosing on the Chatsworth, CA properties in during the third quarter of 2009.

Asset Management Fees—Related Party

Advisory fees for related parties for the nine months ended September 30, 2010 totaled $0.5 million, representing a decrease of $2.0 million, or 80%, compared to $2.5 million for the nine months ended September 30, 2009. The decrease was primarily related to the reduced asset management fee rate of the management agreement with Wakefield Capital Management Inc.

Commission Expense

Commission expense represents the portion of commission income which is paid to broker dealers with whom we have distribution agreements. For the nine months ended September 30, 2010, we recorded $1.7 million in commission expense related to capital raising efforts. We had no such commission expense for the three months ended September 30, 2009.

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Impairment on Operating Real Estate

Impairment on operating real estate for the nine months ended September 30, 2010 totaled $1.2 million. In April 2010 we foreclosed on an $18.0 million first mortgage loan backed by office collateral located in Philadelphia, PA and recorded an impairment on the foreclosed asset of approximately $1.2 million. We had no such impairment for the nine months ended September 30, 2009.

Provision for Loan Losses

Provision for loan losses for the nine months ended September 30, 2010 totaled $136.1 million for 14 loans and included $20.9 million in provision for seven loans sold, or held for sale, during the period net of a $0.8 million credit for a loan sold with a fair market value in excess of its carrying amount and a $0.5 million credit for a loan held for sale with a fair market value in excess of its carrying amount. The provision for loan losses for the nine months ended September 30, 2010 included $37.4 million for first mortgage whole loans, $42.5 million for subordinated mortgage interests, $57.5 million for mezzanine loans and $1.3 million in credits for first mortgage whole loans. Provision for loan losses for the nine months ended September 30, 2009 totaled $62.7 million for 15 loans and included $29.9 million for first mortgage whole loans, $12.0 million for subordinated mortgage interests and $20.8 million for mezzanine loans.

General and Administrative

General and administrative expenses for the nine months ended September 30, 2010 totaled $64.2 million, representing an increase of $14.2 million, or 28%, compared to $50.0 million for the nine months ended September 30, 2009. The primary components of our general and administrative expenses were the following:

Salaries and equity-based compensation for the nine months ended September 30, 2010 totaled $40.7 million, representing an increase of approximately $6.9 million, or 20%, compared to $33.8 million, for the nine months ended September 30, 2009. The increase was attributable to a $9.3 million increase related to salaries and accrued cash incentive compensation costs and a $2.4 million decrease related to equity-based compensation. The $9.3 million increase in salaries and accrued compensation was attributable to a one-time expense of $3.5 million relating to the separation and consulting agreement with our former COO and higher staffing levels in 2010 primarily relating to our broker-dealer subsidiary and internalizing management of our healthcare net lease assets. The $2.4 million decrease in equity-based compensation expense was attributable to a $4.7 million decrease in expense from equity-based awards issued under our 2004 Omnibus Stock Incentive Plan becoming fully vested. The decease was partially offset by an additional $1.0 million of equity-based compensation expense related to the accelerated vesting of equity-based awards in connection with the separation agreement with our former COO and a $1.5 million increase in equity-based compensation expense related to the long-term incentive component of our incentive compensation plan.

Auditing and professional fees for the nine months ended September 30, 2010 totaled $9.2 million, representing an increase of $2.8 million, or 44%, compared to $6.4 million for the nine months ended September 30, 2009. The increase was primarily attributable to approximately a $0.8 million increase in legal fees related to our non-listed and private REITs, a $0.2 million increase in legal fees related to the Chatsworth property foreclosure, a $1.1 million increase in fees relating to capital raising, asset sales and membership redemption in our healthcare portfolio and a $1.3 million increase in legal fees for general corporate work, and portfolio management, partially offset by a decrease of $0.6 million related to 2009 lease restructuring expenses in our healthcare portfolio.

Other general and administrative expenses for the nine months ended September 30, 2010 totaled $14.3 million, representing an increase of approximately $4.5 million, or 46%, compared to $9.8 million

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for the nine months ended September 30, 2009. The increase was primarily attributable to costs associated with the acquisition of CSE RE 2006-A of approximately $0.4 million, legal fees and other costs related to investment initiatives ultimately not consummated of approximately $1.3 million, increased income and other taxes of approximately $0.4 million principally related to our Midwest taxable REIT subsidiary, increased costs due to REO properties of $0.6 million, and increased overhead costs of approximately $1.8 million resulting from higher staffing levels primarily relating to our broker-dealer subsidiary and internalizing management of our healthcare net lease assets during the nine months ended September 30, 2010.

Depreciation and Amortization

Depreciation and amortization expense for the nine months ended September 30, 2010 totaled $25.5 million, representing a decrease of $8.7 million, or 25%, compared to $34.2 million for the nine months ended September 30, 2009. The decrease was primarily related to a decrease of $7.7 million attributable to the 2009 write-off of certain costs associated with the lease restructuring and termination of one of our operators in our healthcare portfolio, a decrease of $0.8 million related to deferred lease costs and tenant improvements in our net lease portfolio being fully amortized and a decrease of $0.2 million related to charges associated with the 2009 foreclosure by the first mortgage lender of the Chatsworth, CA property. The decrease was partially offset by $0.1 million of expenses related to 2010 new operating real estate improvements.

Equity in (Loss) Earnings of Unconsolidated Ventures

Equity in earnings (loss) for the nine months ended September 30, 2010 was net earnings of $6.2 million, representing an increase of $7.7 million, compared to a loss of $1.5 million for the nine months ended September 30, 2009. For the nine months ended September 30, 2010, we recognized equity in earnings of $8.3 million from our corporate lending platform as a result of the joint venture having sold assets with a carrying value of approximately $6.7 million for $15.0 million, $2.5 million from our previously 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. The equity in earnings was partially offset by equity in losses of $3.9 million from the Securities Fund (which includes both realized and unrealized gains from asset sales and mark-to-market adjustments) and $1.3 million from the LandCap joint venture. For the nine months ended September 30, 2009, we recognized equity in losses of $4.7 million from the Securities Fund (which includes both realized and unrealized gains from asset sales and mark-to-market adjustments) and $2.9 million from the LandCap joint venture. The losses were partially offset by equity in earnings of $5.7 million on our new joint venture related to the conversion of the net lease relationship with one of our healthcare operators to a management agreement, which resulted in one of our unconsolidated affiliates becoming the lessee of the properties and the unconsolidated affiliate simultaneously entering into a management contract with a third party operator and $0.4 million in connection with a net lease joint venture.

Unrealized Gain (Loss) on Investments and Other

Unrealized gain (loss) on investments and other decreased by approximately $208.1 million for the nine months ended September 30, 2010 to a loss of $206.4 million, compared to a gain of $1.7 million for the nine months ended September 30, 2009. The unrealized loss on investments and other for the nine months ended September 30, 2010 consisted primarily of unrealized mark-to-market adjustment losses of $206.3 million on various issued CDO bonds payable, $146.5 million of unrealized losses on interest rate swap derivatives no longer qualifying, or not designated as, hedging instruments and mark-to-market adjustment losses of $3.6 million on liability to subsidiary trusts issuing preferred securities. The unrealized losses were partially offset by unrealized gains of $150.0 million related to

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mark-to-market adjustments on various available for sale securities. The unrealized gain on investments for the nine months ended September 30, 2009 consisted primarily of unrealized gains related to mark-to-market adjustments of $55.9 million on various N-Star bonds payable and unrealized gains of $41.4 million on various available for sale securities. The unrealized gains were partially offset by unrealized losses related to mark-to-market adjustments of $32.1 million on our corporate lending joint venture (which is an equity investment that is marked to market), unrealized losses of $42.3 million on liability to subsidiary trusts issuing preferred securities and unrealized net losses of $21.2 million on interest rate swap derivatives no longer qualifying, or not designated as, hedging instruments.

Realized Gain on Investments and Other

The realized gain of $109.8 million for the nine months ended September 30, 2010 consisted primarily of a realized gain of approximately $95.9 million on the repayment and extinguishment of our WA Secured Term Loan, net realized gains of approximately $39.5 million on the sale of certain available for sale securities, a gain of $7.5 million on the sale of our interest in our middle market corporate lending venture, a net foreign currency translation gain of $2.8 million related to our Euro-denominated investment, and net realized gains of approximately $0.5 million on the sale of bonds payable. The realized gains were partially offset by a realized loss of approximately $35.3 million related to the 40% participation interest in the principal proceeds of the German Loan granted to the lender upon repayment and extinguishment of our WA Secured Term Loan, a realized loss of approximately $0.4 million on the redemption of available for sale securities, a realized loss of approximately $0.4 million related to other-than-temporary impairments on certain available for sale securities and a $0.3 million realized loss on the termination of an interest rate swap. The realized gain on investments and other of $89.4 million for the nine months ended September 30, 2009, was attributable to 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 $33.7 million on the sale of certain debt securities available for sale offset partially by realized losses of $3.6 million related to the discounted payoff of a first mortgage and a foreign currency translation loss of $0.2 million related to our Euro-denominated investment.

Gain on Acquisitions

On July 8, 2010, the Company consolidated the assets acquired and liabilities assumed of CSE RE 2006-A and recorded a gain of approximately $15.4 million for the nine months ended September 30, 2010, resulting from the excess of the fair market value of the net assets acquired over the purchase price. We had no such gain for the nine months ended September 30, 2009.

Income from Discontinued Operations

Income from discontinued operations represents the operations of properties sold or held for sale during the period. During the third quarter of 2010, we recorded as held for sale, two real estate owned (or, "REO") parcels of land located in Arizona and an REO multifamily property located in Georgia, acquired in connection with the acquisition of CSE RE 2006-A. In May 2010, we completed the sale of a leasehold interest containing approximately 10,800 square feet of retail space located in New York City. In December 2009, NRF Healthcare, LLC completed the sale of 18 assisted living facilities containing approximately 1,300 beds located in North Carolina. Accordingly, income of $0.1 million and $2.0 million, respectively, related to the operations of these properties was reclassified to income from discontinued operations for the nine months ended September 30, 2010 and 2009.

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Gain on Sale from Discontinued Operations

In May 2010, we completed the sale of a leasehold interest containing approximately 10,800 square feet of retail space located in New York City to a private investor group for approximately $3.3 million, representing a gain of approximately $2.5 million.

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.

Our total available liquidity at September 30, 2010 was approximately $265.2 million, including $135.2 million of unrestricted cash and cash equivalents and $130.0 million of uninvested and available funds in our CDO financings, which is available only for reinvestment within the CDO structures. On June 30, 2010, we fully repaid and extinguished, at a discount to the outstanding principal amount, our WA Secured Term Loan, which was fully recourse to us, having an outstanding principal balance of approximately $304.0 million and secured by assets having an aggregate unpaid principal balance of approximately $458.6 at the time of the payoff. We paid approximately $208.0 million of cash and granted the lender a 40% participation interest in the principal proceeds of the German Loan owned by us that is collateralized by a German retail portfolio. Additionally, the lender agreed to use commercially reasonable efforts to provide us and/or our affiliates with a new credit facility which is expected to have a minimum availability of $200.0 million.

As set forth in our periodic reports filed with the Securities and Exchange Commission, NRFC NNN Holdings, Inc. ("NRFC NNN") and NRFC Sub Investor IV, LLC ("NRFC Sub IV"), which are subsidiaries of ours, are defendants in a lawsuit (the "Lawsuit") filed by GECCMC 2005-CI Plummer Office Limited Partnership (the "Lender") in the Superior Court of the State of California, County of Los Angeles, relating to a loan on two properties previously owned by NRFC Sub IV that were 100% leased (the "Lease") to Washington Mutual Bank, FA ("WaMu"). The Lawsuit alleges, among other things, that the loan provided by Lender to NRFC Sub IV became a recourse obligation of NRFC NNN due to an alleged termination of the Lease. The judge presiding over the Lawsuit has announced her intention to grant the Lender's motion for summary judgment and, accordingly, is expected to enter a judgment against NRFC NNN in the amount of approximately $42 million (the "Judgment"). NRFC NNN continues to believe that this case is without merit and intends to vigorously pursue an appeal of the decision. In connection with such appeal, pursuant to California law NRFC NNN is required to post a bond in an amount equal to one and a half times the amount of the Judgment (the "Bond"). Accordingly, we have entered into a standard General Agreement of Indemnity with an issuer of surety bonds (the "Surety Agreement"), which could require us to post collateral equal to the amount of the Bond. As part of the Surety Agreement, in connection with the expected issuance of the Bond, we have agreed to post cash collateral equal to thirty-eight percent of the amount of the Bond, which is expected to be approximately $25 million.

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On July 10, 2010, we were notified by Inland American that Inland American desires to have NRF Healthcare, LLC engage in a sale process for a portfolio of 34 senior housing properties or otherwise redeem $50 million of Inland American's convertible preferred membership interest in NRF Healthcare, LLC by January 9, 2011. If NRF Healthcare, LLC has not redeemed $50 million of the Inland American investment or sold the 34 property senior housing portfolio by October 9, 2011, then Inland American may undertake a sale process for the portfolio. Inland American may also undertake a sale process for all of the assets of NRF Healthcare, LLC beginning August 8, 2011, unless at least $25 million of Inland American's preferred interest has been redeemed by June 10, 2011, in which case all future net cash flow to the common members of NRF Healthcare, LLC will be used to redeem the preferred membership interest. On July 8, 2012, if the preferred membership interest has not been redeemed in full, Inland American may sell the assets of NRF Healthcare, LLC. We are currently in discussions with Inland American and other third-parties regarding a possible recapitalization of NRF Healthcare, LLC.

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. 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 quarterly dividends paid in 2009 and 2010 to date 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 CDO I, II, III, IV and V have expired, and, for our N-Star CDO VI, N-Star CDO VII, N-Star CDO VIII and N-Star CDO IX will expire in 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 September 30, 2010, three of our CDOs, N-Star CDO I, II and CSE RE 2006-A were not in compliance with their respective 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 and in the future.

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The following is a summary of our CDO cash distribution and coverage tests as of September 30, 2010:

		Cash Distributions(1)		Quarterly Interest Coverage Cushion(2)			Overcollateralization Cushion

	Primary Collateral Type	Quarter Ended September 30, 2010		September 30, 2010			September 30, 2010			At Offering(3)
N-Star I	CMBS	$	32	$	69		$	(2,227	)	$	8,687
N-Star II	CMBS		0		(182	)		(7,867	)		10,944
N-Star III	CMBS		1,581		1,715			31,521			13,610
N-Star IV	Loans		2,111		2,474			91,339			19,808
N-Star V	CMBS		1,183		1,335			28,100			12,940
N-Star VI	Loans		1,108		3,452			49,496			17,412
N-Star VII	CMBS		2,235		1,793			29,196			13,966
N-Star VIII	Loans		3,778		5,279			130,421			42,193
N-Star IX	CMBS		2,153		2,445			53,812			24,516
CSE RE 2006-A	Loans		0		8,008			(123,693	)		(151,595	)

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 September 30, 2010.
(3): CSE RE 2006-A based on trustee report as of June 24, 2010.

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.

During the three and nine months ended September 30, 2010, we did not issue any shares pursuant to our equity distribution agreement with JMP.

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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 three months end September 30, 2010, we issued a total of 24,053 common shares pursuant to the Plan for a gross sales price of approximately $0.1 million. During the nine months end September 30, 2010, we issued a total of 72,534 common shares pursuant to the Plan for a gross sales price of approximately $0.3 million.

Mortgage note refinancing

On March 31, 2010, we closed on a $65.0 million loan with General Electric Capital Corporation. The proceeds were primarily used to refinance $52.0 million of loans maturing in 2010 on nine of our healthcare-related net leased assets. The excess proceeds from the financing will be used for working capital and general corporate purposes. The loan has a five-year term with a one-year interest only period and principal and interest payments thereafter. The interest rate is 90-day LIBOR + 5.95% with a 1% LIBOR floor.

Cash Flows

The net cash provided by operating activities was $27.5 million for the nine months ended September 30, 2010 compared to the net cash flow provided by operating activities of $46.4 million for the nine months ended September 30, 2009. The decrease was primarily due to the lower LIBOR rates and lower spreads on our lending assets which decreased interest income generated from our asset base.

The net cash flow provided by investing activities was $124.5 million for the nine months ended September 30, 2010 compared to the net cash used in investing activities of $16.7 million for the nine months ended September 30, 2009. The primary source of cash flow provided by investing activities in 2010 was proceeds from the sale of real estate debt investments, real estate debt pay downs and the disposition of available for sale securities. The primary uses of cash flow used by investing activities in 2009 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 $155.7 million for the nine months ended September 30, 2010 compared to cash used by financing activities of $55.3 million of cash used by financing activities for the nine months ended September 30, 2009. The primary use of cash flow by financing activities was the WA Secured Term Loan repayment and the pay down of bonds. Net cash flow used in financing activity in 2009 was primarily related to the repurchase of our bonds and repayments on our credit facilities.

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Contractual Obligations and Commitments

As of September 30, 2010, 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	$	802,282	$	1,945	$	150,172	$	56,318	$	593,847
Mezzanine loan payable		2,553		71		656		748		1,078
Exchangeable senior notes(1)		128,915		—		68,165		60,750		—
Bonds payable		4,635,734		—		—		—		4,635,734
Secured term loan		36,881		—		22,199		14,682		—
Liability to subsidiary trusts issuing preferred securities		280,133		—		—		—		280,133
Capital leases(2)		11,265		46		364		364		10,491
Operating leases		67,495		1,464		11,433		11,380		43,218
Outstanding unfunded commitments(3)		56,502		44,647		11,855		—		—
Estimated interest payments		592,010		35,022		258,604		204,103		94,281

Total contractual obligations	$	6,613,770	$	83,195	$	523,448	$	348,345	$	5,658,782

(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 $56.5 million, of which a minimum of $53.0 million will be funded within our existing CDO financings. Fundings are categorized by estimated funding period. Assuming that all loans that have future fundings meet the terms to qualify for such funding, our equity requirement on the remaining future funding requirements would be approximately $3.5 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 and a minimum level of liquidity. As of September 30, 2010, we were in compliance with all financial and non-financial covenants in our debt agreements.

Recent Developments

Dividends

On October 19, 2010, we 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 will be paid on November 15, 2010 to the stockholders of record as of the close of business on November 5, 2010.

NIOR

On October 18, 2010, NIOR, an unconsolidated entity in which we have an equity investment, completed a merger with NorthStar Real Estate Income Trust, Inc., ("NSREIT") a consolidated subsidiary of ours and each a commercial finance REIT sponsored by us, with NSREIT being the surviving entity. As a result of the merger, we will deconsolidate NSREIT and will have an equity

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investment in the surviving entity of approximately $2.1 million as of October 18, 2010. We will accounts for its investment in NSREIT under the equity method of accounting.

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 our Annual Report on Form 10-K for additional information on our exposure to market risk.

Non-GAAP Financial Measures

Funds from Operations and Adjusted Funds from Operations

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

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

•: normalized recurring expenditures that are capitalized by us and then amortized, but which are necessary to maintain our properties and revenue stream, e.g., leasing commissions and tenant improvement allowances;
•: an adjustment to reverse the effects of the straight-lining of rents and fair value lease revenue;
•: 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).
•: An adjustment to reverse the effects of acquisition gains or 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

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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 three and nine months ended September 30, 2010 and 2009 (in thousands):

	Three Months Ended September 30, 2010			Three Months Ended September 30, 2009			Nine Months Ended September 30, 2010			Nine Months Ended September 30, 2009

Funds from Operations:
Income from continuing operations before extraordinary item	$	(146,799	)	$	(66,429	)	$	(124,959	)	$	37,441
Non-controlling interest in joint ventures		(1,853	)		(2,555	)		(8,780	)		(6,995	)

Consolidated net Income/(loss) before non-controlling interest in operating partnership		(148,652	)		(68,984	)		(133,739	)		30,446
Adjustments:
Preferred stock dividends		(5,231	)		(5,231	)		(15,694	)		(15,694	)
Depreciation and amortization		8,621			3,148			25,467			34,217
Funds from discontinued operations		(46	)		1,220			52			3,677
Real estate depreciation and amortization—unconsolidated ventures		237			247			711			741

Funds from Operations	$	(145,071	)	$	(69,600	)	$	(123,203	)	$	53,387

Adjusted Funds from Operations:
Funds from Operations	$	(145,071	)	$	(69,600	)	$	(123,203	)	$	53,387
Straight-line rental income, net		(341	)		(562	)		(1,248	)		(1,733	)
Straight-line rental income, discontinued operations		—			—			—			—
Straight-line rental income and fair value lease revenue, unconsolidated ventures		(18	)		(22	)		(63	)		(79	)
Amortization of equity-based compensation		3,894			5,007			13,133			15,471
Amortization of above/below market leases		(213	)		(304	)		(691	)		(466	)
Unrealized (gains)/losses from mark-to-market adjustments		169,431			83,351			135,654			(15,059	)
Unrealized (gains)/losses from mark-to-market adjustments, unconsolidated ventures		—			1,652			3,357			10,145
Gain from acquisitions		(15,363	)		—			(15,363	)		—

Adjusted Funds from Operations	$	12,319		$	19,522		$	11,576		$	61,666

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)

			Three Months Ended September 30, 2010			Annualized September 30, 2010			Year Ended December 31, 2009

Adjusted Funds from Operations (AFFO)			$	12,319		$	49,276	[A]	$	82,545
Plus: General & Administrative Expenses				19,971						70,542
Less: Equity-Based Compensation included in G&A				3,894						20,474
Less: Bad debt expense included in G&A				—						1,554

AFFO, excluding G&A				28,396			113,584	[B]		131,059
Average Common Book Equity & Operating Partnership Non-Controlling Interest(1)		[C]	$	1,297,653					$	1,194,310
	Return on Average Common Book Equity (including G&A)	[A]/[C]		3.8	%					6.9	%
	Return on Average Common Book Equity (excluding G&A)	[B]/[C]		8.8	%					11.0	%

(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 3. 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 September 30, 2010, a hypothetical 100 basis point increase in interest rates applied to our variable rate assets would increase our annual interest income by approximately $28.3 million offset by an increase in our interest expense of approximately $22.5 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 floating rate investments, changes in benchmark interest rates are unlikely to materially affect the value

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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" of our Annual Report on Form 10-K. 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.

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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 September 30, 2010, our counterparties hold approximately $33.5 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 three months ended September 30, 2010 and 2009, we recorded, in earnings, a mark-to-market unrealized loss of $28.2 million and an unrealized loss of $22.4 million, respectively, for the non-qualifying interest rate swaps. For the three months ended September 30, 2010 and 2009, we recorded a $1.9 million and a $1.4 million reclassification from accumulated other comprehensive income for the non-qualifying interest rate swaps, respectively. For the nine months ended September 30, 2010 and 2009, we recorded, in earnings, a mark-to-market unrealized loss of $70.4 million and an unrealized loss of $3.6 million, respectively, for the non-qualifying interest rate swaps. For the nine months ended September 30, 2010 and 2009, we recorded a $4.7 million and a $4.2 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 (in thousands):

		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

The following tables summarize our derivative financial instruments that were not designated as hedges in qualifying hedging relationships as of September 30, 2010 and December 31, 2009 (in thousands):

		Notional Amount		Fair Value Net Asset/ (Liability)			Range of Fixed LIBOR	Range of Maturity

Interest rate swaps
As of September 30, 2010	64	$	2,709,565	$	(256,923	)	0.36% - 7.00%	December 2010 - October 2019
As of December 31, 2009(1)	22	$	897,335	$	(59,353	)	0.34% - 5.63%	May 2010 - June 2018

(1): December 31, 2009 does not include the interest rate swaps of N-Star I, II, III and V, as these CDO financings were unconsolidated financings prior to January 1, 2010.

Item 4. Controls and Procedures

As of the end of the period covered by this report, our management conducted an evaluation (as required under Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act), under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer

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concluded that, as of the end of the period covered by this report, our 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 to disclose material information otherwise required to be set forth in our periodic reports.

Internal Control over Financial Reporting

Changes in internal control over financial reporting. There have not been any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II. OTHER INFORMATION

Item 6. Exhibits

(a): Exhibits

Exhibit Number			Description of Exhibit

	3.1		Articles of Amendment and Restatement of NorthStar Realty Finance Corp., as filed with the State Department of Assessments and Taxation of Maryland on October 20, 2004 (incorporated by reference to Exhibit 3.1 to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-114675))
	3.2		Bylaws of NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 3.2 to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-114675))
	3.3		Amendment No. 1 to the Bylaws of NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 3.3 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed on April 27, 2005)
	3.4		Articles Supplementary Classifying NorthStar Realty Finance Corp.'s 8.75% Series A Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.2 to NorthStar Realty Finance Corp.'s Registration Statement on Form 8-A, dated September 14, 2006)
	3.5		Articles Supplementary Classifying NorthStar Realty Finance Corp.'s 8.25% Series B Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.2 to NorthStar Realty Finance Corp.'s Registration Statement on Form 8-A, dated February 7, 2007)
	3.6		Articles Supplementary Classifying and Designating Additional Shares of NorthStar Realty Finance Corp.'s 8.25% Series B Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.6 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007)
	10.1		Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of October 19, 2004, by and among NorthStar Realty Finance Corp., as sole general partner and initial limited partner and the other limited partners a party thereto from time to time (incorporated by reference to Exhibit 10.1 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)
	10.2		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)

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Exhibit Number			Description of Exhibit

	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)
	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		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)
	10.14		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))

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Exhibit Number			Description of Exhibit

	10.15		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)
	10.16		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)
	10.17		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)
	10.18		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)
	10.19		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)
	10.20		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))
	10.21		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)
	10.22		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)
	10.23		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)
	10.24		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)
	10.25		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)
	10.26		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)

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		Description of Exhibit

10.27		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)
10.28		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)
10.29		Letter Agreement, dated June 30, 2010, by Wells Fargo Bank, National Association and Wells Fargo Bank, N.A., London Branch (as successor-by-merger to Wachovia Bank, N.A. (London Branch)), as acknowledged and agreed by NorthStar Realty Finance Corp. and certain of its Affiliates and Subsidiaries (incorporated by reference to Exhibit 10.29 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010)
10.30		Common Stock Purchase Warrant, Certificate No. W-4, dated June 30, 2010, issued to Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.30 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010)

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.

*: Filed herewith

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SIGNATURES

Pursuant to the requirements 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.


	NORTHSTAR REALTY FINANCE CORP.
Date: November 4, 2010	By:	/s/ DAVID T. HAMAMOTO David T. Hamamoto Chief Executive Officer
	By:	/s/ ANDREW C. RICHARDSON Andrew C. Richardson Chief Financial Officer

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Northstar Realty Finance (NRF) Inactive 10-Q2010 Q3 Quarterly report

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