Northstar Realty Finance (NRF) 10-K/A 2006 FY Annual report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

Amendment No. 1

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

	For the fiscal year ended December 31, 2006
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________________________ to __________________________

Commission file number: 001-32330

NorthStar Realty Finance Corp.

(Exact Name of Registrant as Specified in its Charter)

Maryland	11-3707493
(State or other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
399 Park Avenue, 18th Floor New York, New York	10022
(Address of Principal Executive Offices)	(Zip Code)

(212) 547-2600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Stock, $0.01 par value	New York Stock Exchange
Preferred Stock, $0.01 par value 8.75% Series A Cumulative Redeemable	New York Stock Exchange
Preferred Stock, $0.01 par value 8.25% Series B Cumulative Redeemable	New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

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

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

Large accelerated filer o  Accelerated filer x  Non-accelerated filer o

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

The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2006, was $496,883,521. As of May 31, 2007, the registrant had issued and outstanding 61,369,689 shares of common stock, par value $0.01 per share.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement for the registrant’s 2007 Annual Meeting of Stockholders (the “2007 Proxy Statement”), filed within 120 days after the end of the registrant’s fiscal year ending December 31, 2006, are incorporated by reference into this Annual Report on Form 10-K/A in response to Part III, Items 10, 11, 12, 13 and 14.

EXPLANATORY NOTE

Grant Thornton LLP, NorthStar Realty Finance Corp.’s (the “Company”) independent registered public accounting firm, inadvertently omitted from their audit report included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006 (the “Form 10-K”) the reference to the Predecessor for the period from January 1, 2004 through October 28, 2004. Accordingly, the Company is filing this Amendment No. 1 to its Form 10-K solely to permit Grant Thonton LLP to make such reference in its report.

All of the financial statements included herein, including those of NorthStar Realty Finance Corp. and the Predecessor, are unchanged from those included in the Company’s Form 10-K.

In connection with filing this Form 10-K/A and pursuant to Rules 12b-15, 13a-14(a) and 13a-14(b) under Exchange Act, the Company is also filing a currently dated consent of Grant Thornton LLP and currently dated certifications of the Company's Chief Executive Officer and Chief Financial Officer pursuant to Rules 13a-14(a) and 13a-14(b) under the Exchange Act. Except as described above, and updating certain Company information on the cover page hereto, no other amendments are being made to the Form 10-K. This Form 10-K/A does not reflect events occurring after the filing of the Form 10-K or modify or update the disclosure contained therein in any way other than as required to reflect the amendments discussed above.

INDEX

	PART II	Page
Item 8.	Financial Statements And Supplementary Data	2
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	55

1

Part II.

Item 8. Financial Statements and Supplementary Data

The consolidated and combined financial statements of NorthStar Realty Finance Corp. and NorthStar Finance Corp. Predecessor, respectively, and the notes related to the foregoing financial statements, each together with the independent registered public accounting firm’s reports thereon.

2

INDEX TO FINANCIAL STATEMENTS

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

AND NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

	Page
Reports of Independent Registered Public Accounting Firms	4
Consolidated Balance Sheets as of December 31, 2006 and 2005	6
Consolidated and Combined Statements of Operations for the year ended December 31, 2006 and 2005, and for the period from October 29, 2004 to December 31, 2004, for the period from January 1, 2004 to October 28, 2004	7
Consolidated Statement of Stockholders’ Equity for the year ended December 31, 2006 and 2005 and the period from October 29, 2004 to December 31, 2004	8
Combined Statement of Owners’ Equity for the period from January 1, 2004 to October 28, 2004	9
Consolidated Statements of Comprehensive Income	10
Consolidated and Combined Statements of Cash Flows for the year ended December 31, 2006 and 2005, and for the period from October 29, 2004 to December 31, 2004, for the period from January 1, 2004 to October 28, 2004	11
Notes to Consolidated and Combined Financial Statements	14
Schedule III - Real Estate and Accumulated Depreciation as of December 31, 2006	51
Schedule IV - Loans and other Lending Investments as of December 31, 2006	53

3

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

NorthStar Realty Finance Corp.

We have audited the accompanying consolidated balance sheet of NorthStar Realty Finance Corp. and subsidiaries (the “Company”) as of December 31, 2006 and 2005, and the related consolidated statement of operations, stockholders’ equity and cash flows for the years ended December 31, 2006, 2005 and for the period from October 29, 2004 (commencement of operations) through December 31, 2004 and the related combined statements of operations, owners’ equity and cash flows of Northstar Realty Finance Corp. Predecessor, as defined in Note 1, for the period from January 1, 2004 through October 28, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NorthStar Realty Finance Corp. and subsidiaries as of December 31, 2006, 2005 and the results of their operations and their cash flows for the years ended December 31, 2006, 2005 and for the period from October 29, 2004 (commencement of operations) through December 31, 2004, and the combined results of operations and cash flows of Northstar Realty Finance Corp. Predecessor for the period from January 1, 2004 through October 28, 2004, in conformity with accounting principles generally accepted in the United States of America.

Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules, (schedule III and IV) included in the Index at Item 15 of the financial statements, are presented for purposes of additional analysis and are not a required part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 13, 2007 expressed an unqualified opinion thereon.

/s/ GRANT THORNTON LLP

New York, New York

March 13, 2007

4

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

NorthStar Realty Finance Corp.

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting as of December 31, 2006, that NorthStar Realty Finance Corp. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

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

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

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

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006 is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2006 and 2005 and the related consolidated statements of operations, stockholders’ equity and cash flows for the year ended December 31, 2006 and 2005 and our report dated March 13, 2007 expressed an unqualified opinion thereon.

/s/ GRANT THORNTON LLP

New York, New York

March 13, 2007

5

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in Thousands, Except per Share Data)

	December 31, 2006			December 31, 2005
ASSETS
Cash and cash equivalents	$	44,753		$	27,898
Restricted cash		134,237			27,501
Operating real estate - net		468,608			198,708
Available for sale securities, at fair value		788,467			149,872
CDO deposit and warehouse agreements		32,649			9,458
Real estate debt investments		1,571,510			681,106
Investments in and advances to unconsolidated ventures		11,845			5,458
Receivables, net of allowance of $9 and $4 in 2006 and 2005		17,477			5,218
Unbilled rents receivable		2,828			1,117
Derivative instruments, at fair value		958			726
Receivables - related parties		378			528
Deferred costs and intangible assets, net		90,200			38,745
Assets of properties held for sale		—			2,918
Other assets		21,710			7,312
Total assets	$	3,185,620		$	1,156,565
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Mortgage notes and loans payable	$	390,665		$	174,296
Liability to subsidiary trusts issuing preferred securities		213,558			108,258
CDO bonds payable		1,682,229			300,000
Credit facilities		16,000			243,002
Repurchase obligations		80,261			7,054
Obligations under capital leases		3,454			3,375
Accounts payable and accrued expenses		20,025			9,091
Payables - related parties		108			26
Escrow deposits payable		58,478			11,571
Derivative liability, at fair value		16,012			32
Other liabilities		22,200			7,157
Total liabilities		2,502,990			863,862
Minority interest in operating partnership		7,655			44,278
Minority interest in joint ventures		15,204			—
Commitments and contingencies		—			—
Stockholders’ Equity:
8.75% series A preferred stock, $0.01 par value, $25 liquidation preference per share, 2,400,000 and 0 shares issued and outstanding at December 31, 2006 and 2005, respectively		57,867			—
Common stock, $0.01 par value, 500,000,000 shares authorized, 61,237,781 and 30,464,930 shares issued and outstanding at December 31, 2006 and 2005, respectively		612			305
Additional paid-in capital		590,035			224,893
Retained earnings		16,570			23,965
Accumulated other comprehensive loss		(5,313	)		(738	)
Total stockholders’ equity		659,771			248,425
Total liabilities and stockholders’ equity	$	3,185,620		$	1,156,565

See accompanying notes to consolidated financial statements.

6

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS

(Amount in Thousands, Except per Share Data)

	The Company (Consolidated)									The Predecessor (Combined)
	Year Ended December 31, 2006			Year Ended December 31, 2005			Period from October 29, 2004 to December 31, 2004			Period from January 1, 2004 to October 28, 2004
Revenues and other income:
Interest income	$	134,847		$	40,043		$	3,990		$	31
Interest income-related parties		11,671			8,374			727			1,828
Rental and escalation income		37,641			11,403			510			—
Advisory and management fee income - related parties		5,906			4,813			665			2,437
Other revenue		5,874			464			38			185
Total revenues		195,939			65,097			5,930			4,481
Expenses:
Interest expense		104,265			32,568			3,352			285
Real estate properties - operating expenses		8,054			1,973			185			—
General and administrative:
Direct:
Salaries and equity based compensation(1)		22,547			11,337			3,788			953
Shared services - related party		—			1,145			231			—
Insurance		1,309			916			148			—
Auditing and professional fees		4,765			3,634			790			—
Other general and administrative		7,522			2,036			895			181
Allocated:
Salaries and other compensation		—			—			—			3,060
Insurance		—			—			—			318
Other general and administrative		—			—			—			925
Total general and administrative		36,143			19,068			5,852			5,437
Depreciation and amortization		13,646			4,352			190			—
Total expenses		162,108			57,961			9,579			5,722
Income (loss) from operations		33,831			7,136			(3,649	)		(1,241	)
Equity in earnings of unconsolidated/uncombined ventures		432			226			83			1,520
Unrealized gain on investments and other		4,934			867			200			279
Realized gain on investments and other		1,845			2,160			293			636
Income (loss) from continuing operations before minority interest		41,042			10,389			(3,073	)		1,194
Minority interest in operating partnership		(3,951	)		(2,116	)		632			—
Minority interest in joint venture		(68	)		—			—			—
Income (loss) from continuing operations		37,023			8,273			(2,441	)		1,194
Income from discontinued operations, net of minority interest		318			547			2			—
Gain on sale of discontinued operations, net of minority interest		445			28,852			—			—
Gain on sale of joint venture interest, net of minority interest		279			—			—			—
Net income (loss)		38,065			37,672			(2,439	)		1,194
Preferred stock dividends		(860	)		—			—			—
Net income (loss) available to common shareholders	$	37,205		$	37,672		$	(2,439	)	$	1,194
Net income (loss) per share from continuing operations
Basic/Diluted	$	0.91		$	0.38		$	(0.12	)		—
Income per share from discontinued operations
Basic/Diluted	$	0.01		$	0.03			—			—
Gain on sale of discontinued operations and joint venture interest
Basic/Diluted	$	0.02		$	1.33			—			—
Net income (loss) available to common shareholders
Basic/Diluted	$	0.94		$	1.74		$	(0.12	)	$	—
Weighted average number of shares of common stock:
Basic		39,635,919			21,660,993			20,868,865
Diluted		44,964,455			27,185,013			25,651,027

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

See accompanying notes to consolidated financial statements.

7

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Amounts in Thousands, Except per Share Data)

	Series A Preferred Stock at Par		Shares of Common Stock		Common Stock at Par		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Stockholders’ Equity
Balance at October 29, 2004		—		—		—		—			—			—			—
Net proceeds from IPO of common stock		—		20,050,100	$	200	$	159,904		$	—		$	—		$	160,104
Issuance of shares of common stock, net of expense (underwriter’s over-allotment)		—		1,160,750		12		9,703			—			—			9,715
Adjustment to rebalance minority interests in operating partnership		—		—		—		(23,930	)		—			—			(23,930	)
Comprehensive loss - unrealized loss on debt securities available for sale		—		—		—		—			(161	)		—			(161	)
Issuance of restricted shares of common stock		—		38,886		—		—			—			—			—
Amortization of equity based compensation		—		—		—		20			—			—			20
Net loss		—		—		—		—			—			(2,439	)		(2,439	)
Balance at December 31, 2004		—		21,249,736		212		145,697			(161	)		(2,439	)		143,309
Issuance of shares of common stock		—		15,194		1		—			—			—			1
Net proceeds from secondary offering of common stock		—		9,200,000		92		78,920			—			—			79,012
Comprehensive loss - unrealized loss on debt securities available for sale		—		—		—		—			(577	)		—			(577	)
Amortization of equity based compensation		—		—		—		276			—			—			276
Cash dividends on common stock		—		—		—		—			—			(11,268	)		(11,268	)
Net income		—		—		—		—			—			37,672			37,672
Balance at December 31, 2005		—		30,464,930		305		224,893			(738	)		23,965			248,425
Issuance of restricted shares of common stock				4,808		—		—									—
Issuance of common stock				44,441		—		525			—			—			525
Net proceeds from secondary offering of common stock		—		26,320,001		263		323,294			—			—			323,557
Issuance of shares of preferred stock, net of expenses		24		—		—		57,843			—			—			57,867
Comprehensive loss - unrealized loss on debt securities available for sale		—		—		—		—			(4,575	)		—			(4,575	)
Amortization of equity based compensation		—		—		—		132									132
Conversion of OP/LTIP units		—		4,403,601		44		41,191			—			—			41,235
Cash dividends on common stock		—		—		—		—			—			(44,600	)		(44,600	)
Cash dividends on preferred stock		—		—		—		—			—			(860	)		(860	)
Net income														38,065			38,065
Balance at December 31, 2006	$	24		61,237,781	$	612	$	647,878		$	(5,313	)	$	16,570		$	659,771

See accompanying notes to consolidated financial statements.

8

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

COMBINED STATEMENTS OF OWNERS’ EQUITY

(Amounts in Thousands, Except per Share Data)

Balance at December 31, 2003		32,493
Contributions		9,392
Distributions		(6,853	)
Other comprehensive income - unrealized gain on debt securities available for sale		2,004
Allocated general and administrative expenses, net of fee income		3,651
Net income		1,194
Balance at October 28, 2004 (contribution to Operating Partnership)	$	41,881

See accompanying notes to consolidated financial statements.

9

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in Thousands, Except per Share Data)

	Year Ended December 31, 2006			Year Ended December 31, 2005			Period of 10/29/04 to 12/31/04
Net income	$	38,065		$	37,672		$	(2,439	)
Unrealized gain (loss) on available for sale securities		10,553			343			(161	)
Change in fair value of derivatives		(15,159	)		(933	)		—
Reclassification adjustment for gains/(losses) included in net income		31			13			—
Comprehensive Income	$	33,490		$	37,095		$	(2,600	)

See accompanying notes to consolidated financial statements.

10

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS

(Amounts in Thousands, Except per Share Data)

	The Company (Consolidated)									The Predecessor (Combined)
	Year Ended December 31, 2006			Year Ended December 31, 2005			Period from October 29, 2004 to December 31, 2004			Period from January 1, 2004 to October 28, 2004
Cash flows from operating activities:
Net income (loss)	$	38,065		$	37,672		$	(2,439	)	$	1,194
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Gains on sale of operating real estate and interest in unconsolidated ventures		(846	)		(35,930	)		—			—
Equity in (earnings) of unconsolidated ventures		(152	)		(199	)		(83	)		(1,520	)
Depreciation and amortization		13,646			5,038			411			—
Amortization of acquisition fees/costs and deferred financing costs		2,136			2,009			147			—
Minority interest		4,186			9,328			(632	)		—
Equity based compensation		9,080			5,846			3,011			—
Unrealized gain on investments and other		(4,934	)		(867	)		(200	)		(279	)
Realized gain on sale of investments and other		(1,845	)		(2,160	)		(293	)		(636	)
Amortization of bond discount/premiums on securities		(2,215	)		(1,715	)		405			(55	)
Allocated general and administrative expenses		—			—			—			4,302
Distributions from equity investments		152			199			—			—
Capital lease		79			72			11			—
Amortization - above/below market leases		(1,711	)		28			—			—
Allocated advisory fee		—			—			—			(651	)
Unbilled rents receivable		(1,711	)		(406	)		(91	)		—
Interest accretion		(3,284	)		—			(49	)		—
Changes in assets and liabilities:
Restricted cash		(142	)					234			—
Receivables		(12,259	)		(3,908	)		(1,575	)		(187	)
Debt securities held for trading		—			826,382			(826,814	)		—
Deferred costs and intangible assets		(640	)		—			(864	)		—
Other assets		(11,020	)		958			(3,753	)		—
Receivables - related parties		126			(224	)		141			—
Accounts payable and accrued expenses		10,312			3,432			3,994			92
Payables - related parties		82			(175	)		—			—
Restricted cash - escrows		(43,439	)		(11,429	)		—			—
Escrow deposit payable		46,907			11,571			—			—
Fees from origination of real estate debt investment		11,147			892			272
Other liabilities		2,268			3,211			(616	)		180
Net cash provided by (used in) operating activities		53,988			849,625			(828,783	)		2,440

See accompanying notes to consolidated financial statements.

11

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS - (Continued)

(Amounts in Thousands, Except per Share Data)

	The Company (Consolidated)									The Predecessor (Combined)
	Year Ended December 31, 2006			Year Ended December 31, 2005			Period from October 29, 2004 to December 31, 2004			Period from January 1, 2004 to October 28, 2004
Cash flows from investing activities:
Acquisition of operating real estate		(260,653	)		(219,664	)		(1,507	)		—
Net proceeds from disposition of operating real estate		10,751			74,141			—			—
Real estate debt investment acquisition costs		(1,095	)		(815	)		—			—
Real estate debt investments repayments		435,207			84,915			—			—
Intangible asset related to acquisition		(2,833	)		—			—			—
Purchase of initial investments		—			—			(37,078	)		—
Acquisition of debt securities available for sale		(681,487	)		(137,309	)		—			(26,863	)
Proceeds from disposition of securities available for sale		29,434			30,463			—			—
Debt security available for sale repayments		37,789			1			—			—
Increase in CDO warehouse deposits		(29,191	)		(10,000	)		(2,500	)		(3,034	)
Acquisitions/originations of real estate debt investments		(1,322,936	)		(694,297	)		(70,841	)		—
Net proceeds from CDO warehouse		—			—			—			9,500
Cash receipts from CDO issuer		1,048			879			—			884
Restricted cash		(63,530	)		(12,538	)		—			—
Cash recorded on initial consolidation of ALGM		—			—			3,012			—
Deferred lease costs		(42	)		(29	)		—			—
Investment in and advance to unconsolidated ventures		(8,650	)		(6	)		—			(1,048	)
Distributions from unconsolidated ventures		322			3,169			882			1,364
Sale of investment in unconsolidated ventures		2,905			—			—			—
Net cash (used in) investing activities		(1,852,961	)		(881,090	)		(108,032	)		(19,197	)
Cash flows from financing activities:
Proceeds from securities sold, not yet purchased	$	—		$	24,131		$	11,377		$	12,336
Proceeds from Collateral held by broker		—			24,831			(11,725	)		(13,106	)
Due from affiliates		—			—			2,134			(1,094	)
Capital contributions by owners of the Predecessor		—			—			—			9,392
Settlement of short sales		—			(48,306	)		—			—
Mortgage notes and loan borrowings		189,919			174,600			—			—
Proceeds from issuance of CDO bonds		1,416,129			300,000			—			—
Settlement of derivative		632			(301	)		—			—
Collateral held by swap counter-party		375			(1,017	)		—			—
Mortgage principal repayments		(5,913	)		(40,861	)		(228	)		—
Borrowing under credit facilities		1,018,616			529,893			27,821			—
Repayments credit facilities		(1,245,618	)		(314,712	)		—			—
Repurchase obligation borrowings		104,334			7,054			1,253,557			17,694
Repurchase obligation repayments		(31,127	)		(800,418	)		(470,833	)		—
CDO bonds repayment		(33,900	)		—			—			—
Proceeds from preferred stock offering		60,000			—			—			—
Proceeds from offerings		343,334			85,100			190,447			—
Borrowings from subsidiary trusts issuing preferred securities		105,000			105,000			—			—
Payment of deferred financing costs		(31,496	)		(13,079	)		—			—
Dividends (common and preferred) and distributions		(52,547	)		(14,197	)		—			—
Offering costs		(21,910	)		(6,088	)		(20,627	)		—
Distributions to owners of the Predecessor		—			—			—			(6,853	)
Net cash provided by financing activities		1,815,828			11,630			981,923			18,369
Net (decrease) increase in cash & cash equivalents	��	16,855			(19,835	)		45,108			1,612
Cash and cash equivalents - beginning of period		27,898			47,733			2,625			1,013
Cash and cash equivalents - end of period	$	44,753		$	27,898		$	47,733		$	2,625

See accompanying notes to consolidated financial statements.

12

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS - (Continued)

(Amounts in Thousands, Except per Share Data)

	The Company (Consolidated)									The Predecessor (Combined)
	Year Ended December 31, 2006			Year Ended December 31, 2005			Period from October 29, 2004 to December 31, 2004			Period from January 1, 2004 to October 28, 2004
Supplemental disclosure of cash flow information:
Cash paid for interest	$	96,058		$	31,180		$	2,913		$	130
Supplementary disclosure of non-cash investing and financing activities:
Consolidation of the accounts of ALGM I Owners LLC (“ALGM”) as a result of purchasing controlling interest:
Investment in uncombined entities prior to consolidation:	$	—		$	—		$	(10,578	)	$	—
Operating real estate, net		—			—			43,855			—
Restricted cash		—			—			2,947			—
Receivables		—			—			217			—
Unbilled rents receivable		—			—			5,476			—
Deferred costs, net		—			—			2,195			—
Other assets		—			—			326			—
Mortgage loan		—			—			(40,785	)		—
Obligations under capital leases		—			—			(3,292	)		—
Accounts payable and accrued expenses		—			—			(1,081	)		—
Other liabilities		—			—			(692	)		—
Net cash received in purchase transaction(1)		—			—			(1,412	)		—
Non-cash contribution of operating real estate assets in Wakefield joint venture
Operating real estate assets, net	$	43,150
Real estate debt investments acquisitions		4,294
Mortgage borrowings		(32,363	)
Minority interest		(15,081	)
Reclassification of Predecessor’s equity to minority interest in connection with contribution of Initial Investments		—			—		$	41,881			—
Reclassification of CDO deposits to debt securities available for sale	$	—		$	2,988			—			—
Write off of deferred costs and unbilled rents receivable in connection with the disposition of operating real estate	$	609		$	4,955			—			—
Write off of intangible assets related to the sale of joint venture interest	$	339			—			—			—
Reclassifications to assets held for sale:
Operating real estate	$	—		$	1,493		$	—		$	—
Restricted cash		—			196			—			—
Receivables		—			439			—			—
Unbilled rents receivable		—			356			—			—
Deferred cost and intangibles, net		—			190			—			—
Other assets		—			244			—			—
Accounts payable and accrued expenses		—			(79	)		—			—
Other liabilities		—			(281	)		—			—
Purchase price allocation from operating real estate:
Deferred cost and intangibles, net	$	26,038		$	25,187			—			—
Other assets	$	1,632		$	1,288			—			—
Other liabilities	$	(11,197	)	$	(509	)		—			—

(1) Represents ALGM cash of $3,012 less the purchase price of remaining equity in ALGM of $1,600.

See accompanying notes to consolidated financial statements.

13

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

1. Formation and Organization

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

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

Timarron Acquisition

In October 2005, the Company entered into a definitive purchase agreement with Allied Capital (“Allied”) to acquire Timarron Capital Corporation (“Timarron”). Timarron, based in Dallas, Texas, was organized by former senior executives of Principal Financial and other lenders to develop a nationwide commercial mortgage loan origination platform. The Company closed on the transaction on January 19, 2006 for $2.8 million, including closing costs. Timarron was renamed NRF Capital LP (“NRF Capital”) upon the close of the transaction. NRF Capital is a wholly owned subsidiary of the Company and is consolidated in the condensed consolidated financial statement of the Company. The purchase price was allocated to an intangible asset, since Allied had no equity at January 19, 2006 and there were no tangible assets owned by Timarron.

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

14

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

2. Summary of Significant Accounting Policies

Basis of Accounting

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

Principles of Consolidation and Combination

The Company

The consolidated financial statements include the accounts of the Company, and its subsidiaries, which are either majority owned or controlled by the Company or a variable interest entity (“VIE”) where the Company is the primary beneficiary in accordance with the provision of Fin 46(R)-6.

The Predecessor

The combined and uncombined interests in entities contributed to the Operating Partnership have been aggregated to form the Predecessor. The interests in entities contributed to the Operating Partnership, which were controlled by NCIC, and variable interest entities where the Predecessor is deemed the primary beneficiary accordance with the provisions of Fin 46(R)-6 are reflected in the Predecessor on a combined basis. All intercompany accounts have been eliminated in combination.

Variable Interest Entities

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

Estimates

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

Operating Real Estate

Operating real estate properties are carried at historical cost less accumulated depreciation. Costs directly related to the acquisition are capitalized. Ordinary repairs and maintenance which are not reimbursed by the tenants are expensed as incurred. Major replacements and betterments which improve or extend the life of the asset are capitalized and depreciated over their useful life.

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

15

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

2. Summary of Significant Accounting Policies - (continued)

The estimated useful lives are as follows:

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

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

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

Investments in and Advances to Unconsolidated/Uncombined Ventures

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

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

Available for Sale Securities

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

16

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

2. Summary of Significant Accounting Policies - (continued)

Real Estate Debt Investments

Investments in loans, either direct or participating interests, are recorded at their cost net of unamortized loan origination costs and fees, discounts and premiums. Discounts and premiums on purchased assets are amortized over the life of the investment using the effective interest method. The origination cost and fees are deferred and amortized using the effective interest method over the life of the related loan investment. The amortization is reflected as an adjustment to interest income.

Cash and Cash Equivalents

The Company and the Predecessor consider all highly liquid investments that have remaining maturity dates of three months or less when purchased to be cash equivalents. Cash, including amounts restricted, exceeded the Federal Deposit Insurance Corporation deposit insurance limit of $100,000 per institution at December 31, 2006 and 2005. The Company mitigates its risk by placing cash and cash equivalents with major financial institutions.

Restricted Cash

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

Deferred Costs and Intangible Assets, Net

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

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

The Company has recorded purchased intangible assets related to the acquisition of minority interests in NSA, which are being amortized over the life of the revenue stream giving rise to the valuation of these interests.

Identified Intangible Assets and Goodwill

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

Comprehensive Income

Comprehensive income or (loss) is recorded in accordance with the provisions of SFAS No. 130, “Reporting Comprehensive income” (“SFAS 130”). SFAS 130 establishes standards for reporting comprehensive income and its components in the financial statements. Comprehensive income (loss), is comprised of net income, as presented in the consolidated statements of operations, adjusted for changes in unrealized gains or losses on debt securities available for sale and changes in the fair value of derivative financial instruments accounted for as cash flow hedges.

17

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

2. Summary of Significant Accounting Policies - (continued)

Underwriting Commissions and Costs

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

Revenue Recognition

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

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

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

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

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

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

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

Credit Losses, Impairment and Allowance for Doubtful Accounts

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

18

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

2. Summary of Significant Accounting Policies - (continued)

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

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

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

Rent Expense

Rent expense is recorded on a straight-line basis over the term of the respective leases. The excess of rent expense incurred on a straight-line basis over rent expense, as it becomes payable according to the terms of the lease, is recorded as rent payable and is included in other liabilities in the consolidated balance sheets at December 31, 2006 and 2005, respectively.

Income Taxes

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

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

The Predecessor’s combined entities were limited liability companies and as such, the income of such entities was reportable in the income tax returns of the members. Accordingly, no income tax provision is recorded in the accompanying combined financial statements of the Predecessor.

19

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

2. Summary of Significant Accounting Policies - (continued)

Derivatives and Hedging Activities

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

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

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

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

Stock Based Compensation

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

Recently Issued Pronouncements

On April 13, 2006, FASB issued FASB Staff Position FIN 46(R)-6, “Determining the Variability to be Considered When Applying FASB Interpretation No. 46(R)”. The FSP addresses the approach to determine the variability to consider when applying FIN 46(R), and includes several illustrative examples of how the variability should be considered. The variability that is considered in applying Interpretation 46(R) may affect: (a) the determination as to whether the entity is a variable interest entity (VIE); (b) the determination of which interests are variable interests in the entity; (c) if necessary, the calculation of expected losses and residual returns of the entity; and (d) the determination of which party is the primary beneficiary of the VIE. Thus, determining the variability to be considered is necessary to apply the provisions of Interpretation 46(R)-6.

A company will apply the guidance in FIN 46(R)-6 prospectively to all entities (including newly created entities) with which that Company first becomes involved and to all entities previously required to be analyzed under FIN 46(R) when a reconsideration event has occurred beginning the first day of the first reporting period after June 15, 2006. Early application is permitted for periods for which financial statements have not yet been issued.

Retrospective application to the date of the initial application of FIN 46(R)-6 is permitted but not required. Retrospective application, if elected, must be completed no later than the end of the first annual reporting period ending after July 15, 2006. The adoption did not have a material effect on the Company’s financial statements as a whole since the Company adopted the provisions of FIN 46(R)-6 prospectively.

20

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

2. Summary of Significant Accounting Policies - (continued)

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS 155”). SFAS 155 allows any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, to be carried at fair value in its entirety, with changes in fair value recognized in earnings. In addition, SFAS 155 requires that beneficial interests in securitized financial assets be analyzed to determine whether they are freestanding derivatives or contain an embedded derivative. SFAS 155 also eliminates a prior restriction on the types of passive derivatives that a qualifying special purpose entity is permitted to hold. SFAS 155 is applicable to new or modified financial instruments in fiscal years beginning after September 15, 2006. The Company does not believe that the adoption of SFAS 155 will have a material impact on the consolidated financial statements as of January 1, 2007.

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”, or FIN 48. This interpretation, among other things, creates a two-step approach for evaluating uncertain tax positions. Recognition (step one) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two) determines the amount of benefit that more-likely-than-not will be realized upon settlement. Derecognition of a tax position that was previously recognized would occur when a company subsequently determines that a tax position no longer meets the more-likely-than-not threshold of being sustained. FIN 48 specifically prohibits the use of a valuation allowance as a substitute for derecognition of tax positions, and it has expanded disclosure requirements. FIN 48 is effective for fiscal years beginning after December 15, 2006, in which the impact of adoption should be accounted for as a cumulative-effect adjustment to the beginning balance of retained earnings. The Company does not believe the adoption of Fin 48 will have a material impact on the consolidated financial statements.

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

In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB 108). The interpretations in SAB 108 express the staff’s views regarding the process of quantifying financial statement misstatements. The staff believes registrants must consider the impact of correcting all misstatements, including the effect of misstatements that were not corrected at the end of the prior year. These prior year misstatements should be considered in quantifying misstatements in current year financial statements. Thus, a registrant’s financial statements would require adjustment when the assessment in the current year or in prior years results in quantifying a misstatement that is material, after considering all relevant quantitative and qualitative factors. The adoption of SAB 108 did not have a material impact on the consolidated financial statements.

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

3. Operating Real Estate

Earnings Per Share

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

Reclassifications

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

At December 31, 2006 and 2005, the Operating real estate, net consists of the following:

	December 31, 2006			December 31, 2005
Land	$	54,552		$	25,449
Buildings and Improvements		378,241			152,293
Leasehold interests		15,847			8,391
Tenant Improvements		30,974			16,547
Furniture and Fixtures		403			—
Capital leases		3,028			3,028
		483,045			205,708
Less accumulated depreciation		(14,437	)		(7,000	)
Operating real estate, net		468,608		$	198,708

Depreciation expense amounted to approximately $9.2 million and $3.8 million for the year ended December 31, 2006 and 2005, respectively, of which a portion is included in income from discontinued operations for each of these periods.

Acquisitions-2006

Green Pond

In March 2006, the Company closed on a $21.8 million acquisition of a suburban office building located in Rockaway, New Jersey totaling 121,038 square feet of rentable space (the “Green Pond Property”). The property is net leased to two tenants under leases that expire in 2015 and 2017. The Company financed the acquisition with a $17.5 million non-recourse, first mortgage bearing a fixed interest rate of 5.68%, maturing on April 11, 2016, and the balance in cash.

Indianapolis Property

In June 2006, the Company closed on a $34.4 million acquisition of an office property located in Indianapolis, Indiana totaling 333,600 square feet of rentable space. The property is net leased to one tenant under a lease expiring in 2025. The Company financed the acquisition with a $28.6 million non-recourse, first mortgage bearing a fixed interest rate of 6.06%, maturing on February 1, 2017, and the balance in cash.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

3. Operating Real Estate - (continued)

Aurora Property

In July 2006, the Company closed on a $45.5 million acquisition of a 183,529 square foot office building in Aurora, Colorado. The property is net leased to a single tenant under a lease that expires in June 2015. The property was financed with a $33.5 million non-recourse, first mortgage bearing a fixed interest rate 6.22%, maturing in July 2016, a $2.9 million mezzanine loan with an affiliate bearing a fixed interest rate of 7.37%, maturing May 2012 and the balance in cash.

Retail Portfolio

In September 2006, the Company closed on a portfolio of nine retail net lease properties for a purchase price of $63.2 million. The properties contain 468,111 of rentable square feet and are net leased to two retail tenants with leases expirations beginning in 2016 through 2024. The Company assumed three non-recourse first mortgages for three of the properties and the remaining properties were financed with a non-recourse, first mortgage. The four mortgages bear fixed rates ranging from 5.85% to 7.34%, with maturities ranging from June 2014 to October 2016.

Wakefield Capital, LLC

In May 2006, the Company formed a joint venture with Chain Bridge Capital LLC, referred to as Wakefield Capital LLC (“Wakefield”), to acquire healthcare properties. Chain Bridge Capital contributed a portfolio of 11 healthcare properties located in North Carolina, Pennsylvania, Illinois and Florida valued at $45.7 million, and consisting of 417,351 square feet. Each property in the portfolio is leased to a single tenant under leases that expire at various times, from July 2007 to July 2020. The portfolio was financed with a $27.8 million non-recourse, first mortgage bearing fixed interest rate of 6.56% to 7.22%. In addition, the Company purchased from Chain Bridge Capital two properties consisting of 88,107 square feet, one in California and one in North Carolina for $16.2 million, net of $5.1 million of non-recourse, first mortgages at a fixed interest rate of 6.56%, which it then contributed to the joint venture. All the mortgages expire in August of 2010.

In June 2006, the Wakefield joint venture closed on a $3.6 million acquisition of a 20,000 square foot building in Hendersonville, NC. The property is net leased to a single tenant under a lease that expires in May 2016. The property was financed with a $2.8 million non-recourse, first mortgage bearing a fixed interest rate of 6.56% maturing in August 2010, and the balance in cash.

In July 2006, the Wakefield joint venture closed on a $12.3 million acquisition of two buildings consisting of 69,957 square feet, one in Black Mountain, NC and one in Blountstown, FL. The properties are net leased to a single tenant under a lease that expires in June 2021. The properties were financed with a $8.7 million non-recourse, first mortgage bearing a fixed interest rate of 6.95% maturing in August 2010, and the balance in cash.

In October 2006, the Wakefield joint venture closed on a $8.8 million acquisition of three buildings in a foreclosure sale consisting of 65,457 square feet, one in Albemarle, Brevard and Charlotte, NC. The properties are net leased to a single tenant under a lease that expires in October 2021. The properties were purchased for cash.

In December 2006, the Wakefield joint venture closed on a $9.2 million acquisition of a 26,000 square foot building in Bremerton, WA. The property is net leased to a single tenant under a ten year lease with renewal options. The property was financed with a $6.75 million non-recourse, first mortgage bearing a fixed interest rate of 7.13% maturing in August 2010, and the balance in cash.

In December 2006, the Wakefield joint venture closed on a $44.9 million acquisition of 286,652 square feet of laboratory and office space on a Health Science University campus. The property is net leased to a single tenant under a lease that expires in December 2013. The property was financed with $33.3 million non-recourse, first mortgage bearing a fixed interest rate of 5.94% maturing in December 2013, and the balance in cash.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

3. Operating Real Estate - (continued)

Acquisitions-2005

Chatsworth, California

On January 14, 2005, the Company closed the acquisition of a portfolio of three net-leased office properties, totaling 257,336 square feet of rentable space in Chatsworth, CA (the “Chatsworth properties”), for $63.5 million. The properties are net leased to Washington Mutual Bank under leases that expire in September 2015. The Company financed the acquisition with a $44 million first mortgage, and a $13 million mezzanine loan. This mezzanine loan currently constitutes a portion of the portfolio of securities owned by CDO III. One of the properties is subject to a ground lease. The ground lease has an initial remaining term of 35 years and two five-year extension options. The ground lease also provides for periodic increases in base rent based on the change in the Consumer Price Index.

Salt Lake City Property

On August 2, 2005, the Company closed a $22.0 million acquisition of a 117,553 square foot office/flex building in Salt Lake City, Utah, (the “Salt Lake City property”) which is 100% leased to the General Services Administration (“Salt Lake City”) under a lease that expires in April 2012. The property is financed with a $17 million non-recourse first mortgage.

EDS Portfolio

On September 30, 2005, the Company closed the acquistion of a portfolio of four office buildings with 387,842 square feet of rentable space located in Rancho Cordova, California, Auburn Hills, Michigan and Camp Hill, Pennsylvania for $61.4 million. The four office properties are net leased to Electronic Data Systems Corp., (the “EDS Portfolio”), under leases expiring in 2015. The Company financed the acquisition with a $49.1 million non-recourse first mortgage.

Executive Centre Portfolio

In December 2005, the Company acquired a portfolio of three class A office buildings, located in Springdale, Ohio, with 486,963 square feet of rentable space for $68.5 million. Two of the properties are 100% and 96% leased to General Electric Company under leases expiring in 2009 and 2010. The remaining building is leased 100% to Cincom Systems, Inc. under a lease that expires in 2011. The Company financed the acquisition with a $51.5 million non-recourse first mortgage.

Dispositions-2006

27 West 34th Street and 1372 Broadway

On January 31, 2006, the Company sold its leasehold interests in 27 West 34th Street and 1372 Broadway, both located in New York City, for $2.3 million recognizing a gain of approximately $141,000, net of minority interest. The operations were classified as discontinued operations in the consolidated statements of operations.

Chino Hills

On December 29, 2006, the Wakefield joint venture sold its interest in an assisted care living facility located in Chino Hills, CA for $8.6 million, recognizing a gain of approximately $0.3 million, net of minority interest.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

3. Operating Real Estate - (continued)

Dispositions-2005

729 Seventh Avenue

The Company sold its interest in a 19,618 square foot retail condominium unit at 729 Seventh Avenue (“729”) in New York City for $29.0 million. The transaction closed on June 30, 2005. The gain on sale was approximately $8.6 million, net of minority interest. For the year ended December 31, 2005 and the period of October 29, 2004 to December 31, 2004 the operations were classified as discontinued operations in the consolidated statements of operations.

The proceeds of the sale were used to pay down approximately $25.1 million of an existing mortgage and the remaining balance was reinvested into a similar property acquisition to effectuate a Section 1031-tax free exchange under the Internal Revenue Code.

In connection with the sale, 729 7th Realty Corp., an affiliate of the Riese Organization’s National Restaurant Management Inc., agreed to discontinue the legal action that it had brought against the Company, settling the Company’s only material pending legal action.

1552 Broadway

The Company sold its interest in a four-story, 12,091 square foot building located at 1552 Broadway (“1552”) in New York City for a purchase price of $48 million, or $3,970 per square foot. The transaction closed on November 30, 2005. The gain on sale was approximately $20.3 million, net of minority interest. For the year ended December 31, 2005 and the period of October 29, 2004 to December 31, 2004 the operations were classified as discontinued operations in the consolidated statements of operations.

Discontinued Operations

The following table summarizes income from discontinued operations and related gain on sale of discontinued operations, each net of minority interest, for the years ended December 31, 2006, 2005 and the period of October 29, 2004 to December 31, 2004:

	For the Year Ended December 31, 2006			For the Year Ended December 31, 2005			For the Period of October 29, 2004 to December 31, 2004
Revenue:
Rental and escalation income	$	656		$	5,618		$	1,649
Interest and other		1			518			3
Total revenue		657			6,136			1,652
Expenses:
Real estate property operating expenses		42			1,818			788
General and administrative expenses		—			591			69
Interest expense		133			2,269			570
Depreciation and amortization		116			777			222
Total expenses		291			5,455			1,649
Income (loss) from discontinued operations		366			681			3
Gain on disposition of discontinued operations		514			35,930			—
Income (loss) from discontinued operations before minority interest		880			36,611			3
Minority interest		(117	)		(7,212	)		(1	)
Income (loss) from discontinued operations, net of minority interest	$	763		$	29,399		$	2

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

4. Available for Sale Securities

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

	Carrying Value		Gains in Accumulated OCI		Losses in Accumulated OCI			Estimated Fair Value
CMBS	$	551,194	$	11,830	$	(1,577	)	$	561,447
Real estate CDO		58,021		812		(1,427	)		57,406
REIT debt		82,836		3,480		—			86,316
CDO equity		67,225		3,605		(2,532	)		68,298
Trust preferred securities		15,000		—		—			15,000
Total	$	774,276	$	19,727	$	(5,536	)	$	788,467

The maturities of the debt securities available for sale range from seven to forty nine years.

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

In August 2006, the Company acquired all of the notes issued in a synthetic CMBS CDO, referred to as Abacus 2006-NS2 for $54.2 million. The notes of this CDO bear interest backed by a combination of AAA floating rate securities and a fixed spread earned by the CDO for having sold credit protection on a portfolio of investment grade-rated reference securities. The notes yield a blended spread above LIBOR of approximately 6.96%. Any losses on the reference securities will require the CDO to liquidate a portion of the AAA collateral in order to make payments to credit protection buyer under the credit default swaps. The CDO was determined to be a variable interest entity under Fin 46(R)-6 and the Company was determined to be the primary beneficiary therefore the financial statements are consolidated into the condensed consolidated financial statements of the Company. The AAA collateral of $50.4 million is included in debt securities available for sale and the corresponding bonds are included in CDO bonds payable in the consolidated balance sheets.

The following is a summary of the Company’s available for sale securities at December 31, 2005:

	Carrying Value		Gains in Accumulated OCI		Losses in Accumulated OCI			Estimated Fair Value
CMBS	$	46,467	$	259	$	(671	)	$	46,055
Real estate CDO		36,112		189		(754	)		35,547
REIT debt		—		—		—			—
CDO equity		66,684		3,125		(1,539	)		68,270
Preferred equity		—		—		—			—
Total	$	149,263	$	3,573	$	(2,964	)	$	149,872

During the year ended December 31, 2005, proceeds from the sales of available for sale securities to an affiliate was $21.5 million. The realized gain on the sale was $361,000 of which $436,000 was the unrealized gain which was included in other comprehensive income.

5. CDO Deposit and Warehouse Agreements

The Company enters into warehouse agreements with major commercial banks whereby the banks agree to purchase CMBS and other real estate debt securities under the Company’s direction, with the expectation of selling such securities to a CDO issuance. The Company is required to pledge cash or other collateral as security for the purpose of covering a portion of any losses or costs associated with the accumulation of these securities under the warehouse agreement. The warehouse agreements also provide for the Company’s notional participation in the income that the assets generate after deducting a notional debt cost. These agreements are treated as non-hedge derivatives for accounting purposes and are therefore marked to market through current income. Although the Company currently anticipates completing the most recent CDO in the near term, there is no assurance that such CDO will be consummated or on what terms it will be consummated.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

5. CDO Deposit and Warehouse Agreements - (continued)

On September 27, 2005, the Company entered into a warehouse arrangement with a major commercial bank whereby the bank has agreed to purchase up to $400 million of CMBS and other real estate debt securities under the Company’s direction, with the expectation of selling such securities to the Company’s fifth investment grade CDO issuance or CDO VII. As of December 31, 2005, the Company has deposited $10 million as security for the purpose of covering a portion of any losses or costs associated with the accumulation of these securities under the warehouse agreement and will be required to deposit additional equity based on accumulations of securities that will be made under the warehouse agreement. The bank had accumulated $156.4 million of real estate securities under the terms of the warehouse agreement as of December 31, 2005. In June 2006, the Company closed CDO VII and terminated this warehouse agreement.

In March 2006, the Company entered into a warehouse arrangement with a major commercial bank whereby the bank has agreed to purchase up to $450 million of CMBS and other real estate debt securities under the Company’s direction with the expectation of selling such securities to the Company’s next real estate securities CDO. In October 2006, the Company amended the warehouse agreement. The amendment will allow the Company to borrow up to $750 million under the warehouse agreement to allow the Company to accumulate collateral for its next securities CDO.

As of December 31, 2006, the Company deposited $29.2 million of cash collateral for the purpose of covering a portion of any losses or cost associated with the accumulations of securities that will be made under the warehouse agreement. As of December 31, 2006, the bank accumulated $567.5 million in real estate securities under the terms of the warehouse agreement. The warehouse agreement also provides for the Company’s notional participation in the income that the assets generate after deducting a notional debt cost (the “Carry”).

These agreements are treated as non-hedge derivatives for accounting purposes and marked-to-market through income. The Company has recorded a $5.0 million and $0.9 million unrealized gain for the year ended December 31, 2006 and 2005, respectively, related to the change in fair value of the warehouse agreements which includes the market-to-market of the securities in the warehouse and the net Carry. The collateral to be accumulated under these agreements is expected to be included in a securitization transaction in which the Company intends to acquire all of the equity interests.

6. Real Estate Debt Investments

At December 31, 2006 and 2005, the Company’s investments in real estate debt investments are as follows:

December 31, 2006	Carrying Value(1)		Allocation by Investment Type			Average Fixed Rate			Average Spread Over LIBOR			Number of Investments
Whole loans, floating rate	$	884,340		56.3	%		—			3.09	%		53
Whole loans, fixed rate		90,343		5.7			8.29			—			10
Subordinate mortgage interests, floating rate		97,345		6.2			—			4.53			9
Mezzanine loans, floating rate		293,825		18.7			—			5.43			12
Mezzanine loan, fixed rate		126,448		8.0			10.85			—			11
Preferred equity, fixed rate		29,271		1.9			9.35			—			2
Other loans - floating		42,195		2.7			—			2.47			7
Other loans - fixed		7,743		0.5			5.53			—			1
Total/Weighted average	$	1,571,510		100.0	%		9.60	%		3.70	%		105

(1) (a) Approximately $1.3 billion of these investments serve as collateral for the CDO bonds of our three real estate debt CDO issuance and the balance are financed under the Wachovia Facility (as defined in Note 11) or other Repurchase Agreements.

(b) The Company has future funding commitments $290.8 million related to these investments.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

6. Real Estate Debt Investments - (continued)

December 31, 2005	Carrying Value(1)		Allocation by Investment Type			Average Fixed Rate			Average Spread Over LIBOR			Number of Investments
Whole loans, floating rate	$	178,775		26.3	%		—			3.06	%		10
Whole loans, fixed rate		13,082		1.9	%		5.27	%		—			3
Subordinate mortgage interests, floating rate		237,276		34.8	%		—			4.97	%		17
Mezzanine loans, floating rate		223,621		32.8	%		—			4.86	%		11
Mezzanine loan, fixed rate		151		0.0	%		15.00	%		—			1
Preferred equity, fixed rate		28,201		4.2	%		9.36	%		—			2
Total/Average	$	681,106		100.0	%		8.09	%		4.40	%		44

(1) Approximately $320 million of these investments serve as collateral for the CDO bonds of CDO IV and the balance are financed under the Wachovia Facility or other Repurchase Agreements.

As of December 31, 2006 and 2005, all loans were performing in accordance with the terms of the loan agreements.

Contractual maturities of real estate debt investments at December 31, 2006 are as follows:

Years Ending December 31:
2007	$	361,658
2008		414,413
2009		404,575
2010		169,922
2011		50,889
Thereafter		181,156
Total	$	1,582,613

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

7. Investments in and Advances to Unconsolidated/Uncombined Ventures

The Company and Predecessor have a non-controlling, unconsolidated/uncombined ownership interest 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 $37.9 million and the balance in cash. The loans mature on February 11, 2016 and bear fixed interest rates of 5.51% and 5.46%. The Company contributed $8.4 million for a 50% interest in the joint venture and incurred $0.3 million in costs related to its acquisition, which is capitalized to the investment account. These costs will be amortized over the useful lives of the assets held by the joint venture. The Company accounts for its investment under the equity method of accounting. At December 31, 2006, the Company had an investment in CS/Federal of approximately $8.3 million.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

7. Investments in and Advances to Unconsolidated/Uncombined Ventures - (continued)

NSF Venture

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

Northstar Realty Finance Trusts

The Company owns all of the common stock of Northstar Realty Finance Trust, Northstar Realty Finance Trust II, NorthStar Realty Finance Trust III, NorthStar Realty Finance Trust IV, NorthStar Realty Finance Trust V and NorthStar Realty Finance Trust VI (collectively, the “Trusts”). The Trusts were formed to issue preferred securities. Under the provisions of FIN 46(R)-6, the Company determined that the holders of the trust preferred securities were the primary beneficiaries of the Trusts. As a result, the Company did not consolidate the Trusts and has accounted for the investment in the common stock of the Trusts under the equity method of accounting. At December 31, 2006 and 2005, the Company had an investment in the Trusts of approximately $3.5 million and $3.3 million, respectively.

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

	The Company								The Predecessor
	For the Year Ended December 31, 2006		For the Year Ended December 31, 2005			For the Period October 29, 2004 to December 31, 2004			For the Period January 1, 2004 to October 28, 2004
Net income	$	432	$	7,328		$	2,136		$	11,515
Other partners’ share of income		—		(7,054	)		(2,063	)		(10,032	)
Elimination entries		—		(48	)		10			44
Step up costs		—		—			—			(7	)
Earnings from unconsolidated/uncombined ventures	$	432	$	226		$	83		$	1,520

Reconciliation between the Company’s investment in unconsolidated entities as of December 31, 2006 and December 31, 2005 is as follows:

	December 31, 2006		December 31, 2005
Company’s equity in unconsolidated entities	$	11,491	$	5,546
Elimination entry		—		(88	)
Purchase price basis difference		354		—
Investment in and advances to unconsolidated ventures	$	11,845	$	5,458

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

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NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

8. Variable Interest Entities

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

As of December 31, 2006, the Company identified interests in 18 entities which were determined to be VIEs under FIN 46(R)-6.

Based on management’s analysis, the Company is not the primary beneficiary of 13 of the identified VIEs since it does not absorb a majority of the expected residual losses, or is entitled to a majority of the expected residual returns. Accordingly, these VIEs are not consolidated into the Company’s financial statements as of December 31, 2006 or 2005. See footnote 19 Off-Balance Sheet Arrangements for a more detailed discussion.

The Company was determined to be the primary beneficiary of CDO IV, VI, VII, VIII and Abacus since we own 100% of the equity and would absorb the majority of loss or residual return and accordingly these entities are consolidated.

9. Deferred Costs and Intangible Assets, Net

Deferred costs and intangible assets as of December 31, 2006 and 2005 consisted of the following:

	December 31, 2006			December 31, 2005
Deferred lease costs	$	52,671		$	26,407
Deferred loan costs		44,149			13,523
Intangible assets		4,272			1,396
Pending deal costs		644			402
		101,736			41,728
Less accumulated amortization		(11,536	)		(2,983	)
Deferred costs and intangible assets, net	$	90,200		$	38,745

Deferred lease cost includes the allocation of a portion of the purchase price, in accordance with SFAS 141, to lease origination costs associated with the in-place leases. For the year ended December 31, 2006 and 2005, approximately $51.4 million and $25.1 million included in deferred lease cost was the allocation of the purchase price to deferred lease cost.

In connection with the IPO, the Company purchased a 23% minority interest in NSA, a subsidiary of the Company. The excess of the fair value of the minority interest over the historical book value of $839,000 was recorded as a step-up in basis and allocated to an intangible asset. The intangible asset is being amortized on a straight line basis over the remaining life of the underlying assets giving rise to the revenue stream used in the valuation with an estimated life of 7.7 years. The Company recognized $283,000, $283,000 and $48,000 as amortization expense, relating to both acquisitions, which is reflected in the consolidated statement of operations for the year ended December 31, 2006, 2005 and for the period of October 29, 2004 through December 31, 2004, respectively.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

10. Borrowings

The following is a table of the Company’s outstanding borrowings as of December 31, 2006 and December 31, 2005:

	Stated Maturity		Interest Rate		Balance at December 31, 2006		Balance at December 31, 2005
Mortgage notes payable (non recourse)
Chatsworth		5/1/2015		5.65%	$	43,506	$	43,777
Salt Lake City		9/1/2012		5.16%		16,584		16,919
EDS		10/8/2015		5.37%		49,017		49,120
Executive Center		1/1/2016		5.85%		51,480		51,480
Green Pond		4/11/2016		5.68%		17,480		—
Indianapolis		2/1/2017		6.06%		28,600		—
Wakefield		1/11/2014		5.94% to 7.46%		84,860		—
Aurora		7/11/2016		6.22%		33,500		—
DSG		10/11/2016		6.17%		35,038		—
Keene		2/1/2016		5.85%		6,970		—
Fort Wayne		1/1/2015		6.41%		3,626		—
Portland		6/17/2014		7.34%		5,132		—
Mezzanine loan payable (non recourse)
Chatsworth		5/1/2014		6.64%		11,985		13,000
Aurora		5/11/2012		7.37%		2,887		—
Repurchase obligations		See Repurchase Obligations below		LIBOR varies		80,261		7,054
Credit Facilities
DBAG		12/21/2007		LIBOR + 0.75% to 2.25%		—		—
Wachovia		7/12/2008		LIBOR + 0.15% to 2.50%		16,000		243,002
Keybanc		11/3/2009		LIBOR + 2.20% to 2.50%		—		—
Bank of America (2)		11/10/2006		LIBOR + 3.25%		—		—
CDO bonds payable
CDO IV		7/1/2040		LIBOR + 0.62% (average spread)		300,000		300,000
CDO VI		6/1/2041		LIBOR + 0.55% (average spread)		312,079		—
CDO VII		6/22/2051		LIBOR + 0.34% (average spread)		510,800		—
CDO VIII		2/1/2041		LIBOR + 0.58% (average spread)		535,600		—
Abacus II		8/28/2046		LIBOR + 4.41%		23,750		—
Liability to subsidiary trusts issuing preferred securities(1)
Trust I		3/30/2035		8.15%		41,240		41,240
Trust II		6/30/2035		7.74%		25,780		25,780
Trust III		1/30/2036		7.81%		41,238		41,238
Trust IV		6/30/2036		7.95%		50,100		—
Trust V		9/30/2036		3 month LIBOR + 2.70%		30,100		—
Trust VI		12/30/2036		3 month LIBOR + 2.90%		25,100		—
					$	2,382,713	$	832,610

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

(2) The facility matured and was terminated upon the closing of the Keybanc facility.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

10. Borrowings - (continued)

Scheduled principal payment requirements on the Company’s borrowings are as follows as of December 31, 2006:

	Total		Mortgage and Mezzanine Loans		Credit Facilities		Liability to Subsidiary Trusts Issuing Preferred Securities		Repurchase Obligations		CDO Bonds Payable
2007	$	85,026	$	4,765	$	—	$	—	$	80,261	$	—
2008		20,295		4,295		16,000		—		—		—
2009		5,888		5,888		—		—		—		—
2010		59,669		59,669		—		—		—		—
2011		6,699		6,699		—		—		—		—
Thereafter		2,205,136		309,349		—		213,558		—		1,682,229
Total	$	2,382,713	$	390,665	$	16,000	$	213,558	$	80,261	$	1,682,229

At December 31, 2006, the Company was in compliance with all covenants under its Borrowings.

CDO Bonds Payable

In June 2005, the Company closed its fourth CDO issuance (“CDO IV”) and the Company acquired all of the below investment grade securities and income notes. The CDO IV issuer issued $300 million face amount of the CDO bonds and sold them in a private placement to third parties. The proceeds of the CDO issuance were used to repay the entire outstanding principal balance of the DBAG Facility (as defined below) of $233.6 million at closing. The CDO bonds are collateralized by real estate debt investments, consisting of junior participations, mezzanine loans, whole loans, CMBS and CDO bonds. For the years ended December 31, 2006 and 2005, the weighted average interest note was 5.94% and 5.01%, respectively.

In March 2006, the Company completed its sixth CDO issuance (“CDO VI”). The Company sold the investment grade rated notes having a face amount of $348.4 million, including $70.0 million of revolving floating rate notes, of which only $21.8 million was funded at the closing, and retained all of the below investment grade securities and income notes. CDO VI has the ability to borrow, repay and re-borrow pursuant to the terms of the floating rate revolving notes, both during the ramp-up period and the re-investment period, subject to compliance with certain borrowing conditions. The net proceeds of CDO VI were used to repay $296.1 million of the outstanding principal balance of the Wachovia Credit Facility. The CDO VI bonds are collateralized by $389.2 million of real estate debt investments consisting of whole loans, junior participations in first mortgages, mezzanine loans, preferred equity investments and bonds of other CDOs. For the year ended December 31, 2006, the weighted average interest rate was 5.91%.

In June 2006, the Company completed its seventh CDO issuance (“CDO VII”). The Company sold investment grade notes having a face amount of $510.8 million and retained all the below investment grade securities and income notes. The CDO VII bonds are collateralized by $460.0 million of real estate securities, $41.3 million real estate debt investments and $40.0 million of cash.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

10. Borrowings - (continued)

CDO VIII

In December 2006, the Company completed its eighth CDO issuance (“CDO VIII”). The Company sold the investment grade rated notes having a face amount of $703.8 million, including $260.0 million of revolving floating rate notes, of which $0.0 million was funded at the closing, and retained all of the below investment grade securities and income notes. CDO VIII has the ability to borrow, repay and re-borrow pursuant to the terms of the floating rate revolving notes, both during the ramp-up period and the re-investment period, subject to compliance with certain borrowing conditions. The net proceeds of CDO VIII were used to repay $349.2 million of the outstanding principal balance of the Wachovia Credit Facility. The CDO VIII bonds are collateralized by $556.2 million of real estate debt investments consisting of whole loans, junior participations in first mortgages, mezzanine loans, preferred equity investments and bonds of other CDOs. For the year ended December 31, 2006, the weighted average interest rate was 5.90%.

Repurchase Obligations

The Company had $80.2 million and $3.7 million of repurchase agreements which is collateralized by $89.1 million and $5.0 million of floating rate securities at December 31, 2006 and 2005, respectively. These repurchase agreements are generally used to finance the Company’s floating rate securities, backed by commercial or residential mortgage loans, and other investments prior to obtaining permanent financing. These repurchase obligations mature in less than 30 days, and bear LIBOR interest rates. These repurchase agreements are being accounted for as secured borrowings since the Company maintains effective control of the financed assets. For the years ended December 31, 2006 and 2005, the weighted average interest rate was 5.41% and 4.98%, respectively.

Wachovia Credit Facility

In July 2005, a subsidiary of the Company, entered into a $200 million master repurchase agreement with Wachovia Bank, National Association (the “Wachovia Facility”). The Wachovia Facility was amended in September 2005 and currently the Company may borrow up to $350 million under this credit facility in order to finance the acquisition of primarily real estate debt and other real estate loans and securities. The additional capacity and flexibility under the amendment will allow the Company to accumulate sufficient collateral for a contemplated subordinate debt CDO (“CDO VI”) and to continue to finance other investments.

In June 2006, the Company amended its master repurchase agreement with Wachovia Bank, National Association (the “Wachovia Facility”). Following the amendment, the Company may now borrow up to $500 million under the Wachovia Facility in order to finance the origination and acquisition of senior and subordinate debt and other real estate loans and securities. The additional capacity and flexibility under the Wachovia Facility will allow the Company to accumulate collateral for its next contemplated real estate debt CDO and to continue to finance other investments.

Advance rates under the Wachovia Facility range from 50% to 100% of the value of the collateral for which the advance is to be made. Amounts borrowed under the Wachovia Facility bear interest at spreads of 0.15% to 2.50% over one-month LIBOR, depending on the type of collateral for which the amount is borrowed. Additionally, if a securitization transaction with respect to the collateral subject to the Wachovia Facility is not consummated by March 23, 2007, certain advances under the Wachovia Facility will be subject to commitment and unused fees.

In November 2006, the Company amended the Wachovia Facility. Following the amendment, the Company may temporarily borrow up to $750 million under the Wachovia Facility in order to allow the Company to accumulate collateral for real estate debt CDO VIII which closed in December 2006. The proceeds from the CDO VIII closing was used to pay down the facility. Upon closing the CDO, the Company’s availability under this facility is $200 million.

For the year ended December 31, 2006 and 2005, the weighted average interest rate on the Wachovia Facility was 6.32% and 5.95%.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

10. Borrowings - (continued)

Unsecured Revolving Line of Credit

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

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

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

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

Liability to Subsidiary Trusts Issuing Preferred Securities

In April 2005, May 2005 and November 2005 NorthStar Realty Finance Trust I, NorthStar Realty Finance Trust II and NorthStar Realty Finance Trust III (collectively “The Trusts”) sold, in three private placements, trust preferred securities for an aggregate amount of $40 million, $25 million and $40 million, respectively. The Company owns all of the common stock of the Trusts. The Trusts used the proceeds to purchase the Company’s junior subordinated notes which mature on March 30, 2035, June 30, 2035 and January 30, 2036, respectively. These notes represent all of the Trusts’ assets. The terms of the junior subordinated notes are substantially the same as the terms of the trust preferred securities. The trust preferred securities have a fixed interest rate of 8.15%, 7.74% and 7.81% per annum, respectively, during the first ten years, after which the interest rate will float and reset quarterly at the three-month LIBOR rate plus 3.25% per annum for Trusts I and II and three-month LIBOR rate plus 2.83% per annum on Trust III.

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

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

34

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

10. Borrowings - (continued)

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

The Company may redeem the notes, in whole or in part, for cash, at par, after five years. To the extent the Company redeems notes, the Trusts are required to redeem a corresponding amount of trust preferred securities. On September 16, 2005, the Company amended the trust agreements and indentures to modify some of the payment dates for a portion of the junior subordinated notes.

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

11. Commitments and Contingencies

Obligations Under Capital Leases and Operating Lease Agreements

The Company is the lessee of two locations under capital leases, seven ground leases under operating real estate and three corporate offices that are located in New York City, Los Angeles and Dallas. The following is a schedule of minimum future rental payments under these contractual lease obligations as of December 31, 2006:

Years Ending December 31:
2007	$	5,977
2008		5,966
2009		6,110
2010		6,124
2011		6,061
Thereafter		74,753
Total minimum lease payments		104,991
Less amounts representing interest		12,801
Future minimum lease payments	$	92,190

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

12. Rental Income Under Operating Leases

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

35

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

12. Rental Income Under Operating Leases - (continued)

The following is a schedule of future minimum rental income under non-cancelable leases at December 31, 2006:

Years Ending December 31:
2007	$	44,417
2008		45,233
2009		45,512
2010		43,142
2011		43,694
Thereafter		234,724
	$	456,722

Included in rental income is percentage rent of $513, $559 and $110 for the year ended December 31, 2006, December 31, 2005 and the period October 29, 2004 to December 31, 2004, respectively.

13. Related Party Transactions

Shared Facilities and Services Agreement

Upon consummation of the IPO, the Company entered into a one-year agreement with NCIC pursuant to which NCIC agreed to provide the Company, directly or through its subsidiaries, with facilities and services as follows: 1) fully-furnished office space for the Company’s employees at NCIC’s corporate headquarters; 2) use of common facilities and office equipment, supplies and storage space at NCIC’s corporate headquarters; 3) accounting support and treasury functions; 4) tax planning and REIT compliance advisory services; and 5) other administrative services, for an annual fee of $1.57 million, payable in monthly installments, plus additional charges for out-of-pocket expenses and taxes. This fee was subject to reduction by the amount that the Company paid certain employees of NCIC who became co-employees upon consummation of the IPO.

On October 29, 2005, the Company terminated the agreement and entered into a more limited sublease agreement with NorthStar Capital. Under the new sublease effective November 1, 2005, the Company rents from NorthStar Capital office space currently used by its accounting, legal and administrative personnel on a month to month basis. The sublease rent is calculated as a per person monthly charge, based on a “turn key” office arrangement (computer, network, telephone and furniture supplied) for each person utilizing NorthStar Capital facilities. These direct costs are reflected in other general and administrative expenses.

Total fees and expenses incurred by the Company under the shared facilities and services agreement amounted to $0.8 million, $1.1 million and $0.2 million for the year ended December 31, 2006 and 2005 and for the period from October 29, 2004 to December 31, 2004, respectively. No amounts were payable to NCIC at December 31, 2006 and 2005.

Advisory Fees

In August 2003, July 2004, March 2005 and September 2005, the Company and Predecessor entered into agreements with CDO I, CDO II, CDO III and CDO V, respectively, to perform certain advisory services.

The Company and Predecessor earned total fees of approximately $5.8 million, $4.2 million, $0.5 million and $1.6 million for the years ended December 31, 2006 and 2005, for the period October 29 to December 31, 2004 and for the period January 1 to October 28, 2004, respectively, of which $0.3 million, $0.2 million and $0.1 million is unpaid and included in the Company’s balance sheets as of December 31, 2005 and December 31, 2004, respectively, as receivables from related parties.

36

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

13. Related Party Transactions - (continued)

The Company also earned a structuring fee of $0.5 million in connection with the closing of CDO III in March 2005, which was used to reduce its investment in CDO III which is included in debt securities available for sale in the consolidated balance sheet.

NSF Venture

In 2001, NCIC entered into an advisory agreement with the NSF Venture, whereby it receives as compensation for its management of the origination and underwriting of the investments of the NSF Venture, an advisory fee equal to 1% per annum of the capital invested by the NSF Venture. In November 2003, NCIC assigned the right to receive such fees to NFMM. For years prior to such assignment, the advisory fees have been reflected as part of the Predecessor with a corresponding decrease in contributed capital. The Company and Predecessor earned and recognized fees of approximately $0.1 million, $0.5 million, $0.2 million and $0.9 million, for the year ending December 31, 2006, 2005 and the periods October 29, 2004 to December 31, 2004 and for the period of January 1 to October 28, 2004, respectively.

In February 2006, the Company sold its interest in the NSF Venture and terminated the associated advisory agreements.

Management Fees - Related Parties

On December 28, 2004, ALGM terminated its existing asset management agreement with Emmes Asset Management Co. LLC (“Emmes”), an affiliate of NCIC. Pursuant to the termination provisions of the agreement, ALGM paid Emmes a contractual termination payment of approximately $385,000, which is equal to two quarters of payments of the annual existing fee. In addition, ALGM and Emmes entered into a new asset management agreement, which is cancelable on 30 days notice. The annual asset management fee under the new agreement is equal to 3.5% of gross collections from tenants of the properties not to exceed $350. Total fees incurred under this agreement amounted to $89, $291 and $516, including the termination payment of $385, for the years ended December 31, 2006, 2005 and the period from October 29, 2004 to December 31, 2004, respectively, which are included in property operating expenses in the consolidated statement of operations. A portion of the management fee was allocated to the properties sold or held for sale and was classified in income from discontinued operations in the consolidated statement of operations. See Note 3.

EDS Portfolio

In connection with the acquisition of the EDS portfolio, Koll Development Company, an affiliate of NCIC, received a brokerage commission of $921,000. The acquisition and the associated brokerage fees payable to Koll Development Company were approved in advance by all of the disinterested members of the Board of Directors.

Legacy Fund

In September 2005, the Company entered into a loan agreement, as lender, with a subsidiary of Legacy Partners Realty Fund I, LLC, (the “Legacy Fund”), as borrowers, in the original principal amount of $66.6 million, secured by a first-priority mortgage lien on an office property located in San Jose, California. At the closing of this loan the Company funded $60.9 million of the original principal amount and has an additional $5.7 million of future funding commitments. Simultaneously with the closing of this loan, the Company entered into a participation and servicing agreement with a major financial institution pursuant to which the Company sold a 50% participation in this loan and the future funding commitments.

Additionally, the Company entered into a loan agreement with another subsidiary of the Legacy Fund in the original principal amount of $47.4 million, secured by a first-priority mortgage lien on an office property located in San Jose, California. The Company funded $32.6 million at closing and has an additional $14.8 million of future funding commitments. Simultaneously with the closing of this loan, the Company entered into a participation and servicing agreement with a major financial institution pursuant to which the Company sold a 50% participation in this loan and the future funding commitments.

37

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

13. Related Party Transactions - (continued)

One of the Company’s directors, Preston Butcher, is the chairman of the Board of Directors and chief executive officer and owns a significant interest in Legacy Partners Commercial, LLC, which indirectly owns an equity interest in, and owns the manager of, the Legacy Fund. The disinterested members of the Company’s Board of Directors approved this transaction.

14. Fair Value of Financial Instruments

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

As of December 31, 2006 and 2005, cash equivalents, accounts receivable, accounts payable, repurchase agreements with major banks and securities firms and the master repurchase agreement balances reasonably approximate their fair values due to the short-term maturities of these items. The CDO deposit and warehouse agreement, debt securities available for sale and securities sold, not yet purchased are carried on the balance sheet at their estimated fair value. Due to the floating rate, mortgage notes payable and loan receivables are carried at amounts that reasonably approximate their fair value.

For fixed rate loan receivables fair value is estimated using quoted market prices or by discounting future cash flows using current rates at which similar loans would be made to similar borrowers with similar credit risk. The Company’s fixed rate loan receivables carrying value for the years ended December 31, 2006 and 2005 reasonably approximated their fair value.

For fixed rate mortgage loans payable the Company uses rates currently available to them with similar terms and remaining maturities to estimate their fair value. The carrying value of the mortgage notes payable for the year ended December 31, 2006 reasonably approximate their fair market value. For the year ended December 31, 2005 the fair market value was $172.0 million with a carrying amount of $174.2 million.

Disclosure about fair value of financial instruments is based on pertinent information available to management as of December 31, 2006 and 2005. Although management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.

15. Equity Based Compensation

Employee Buy-Outs

NSA Advisors Profit Sharing Buy-Out

In connection with the Contribution Transactions, the Company agreed to buy-out the vested and unvested profit sharing arrangement of an employee of NSA for 206,850 OP Units and $88,000 in cash. The OP Units are subject to a vesting schedule identical to the one the employee had with the profit sharing arrangement (one third vested at July 31, 2003, and one third vests on each of the anniversaries following). The OP Units received were recorded as compensation expense in accordance with SFAS 123. The fair value of the award was $1,862,000 based upon the fair market value of the OP Units at the date of the buy-out. In connection with the buy-out, the Company recognized $1,572,000 in compensation expense for the period of October 29, 2004 through December 31, 2004 in the consolidated statement of operations. The remaining balance of $378,000 was recognized into compensation expense for the year ended December 31, 2005.

38

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

15. Equity Based Compensation - (continued)

NFMM Employee Ownership Interests Buy-Out

In connection with the Contribution Transactions, the Company agreed to acquire a 25% ownership interest in NFMM held by an employee of NCIC and a former employee of NCIC for 173,128 OP Units. The fair value of OP Units issued in excess of the fair value of the ownership interest received was recorded as compensation expense in accordance with SFAS 123. The fair value of the award was $1,558,000 and the estimated fair value of the ownership interest was $558,000, which resulted in $1,000,000 of compensation expense recorded in the consolidated statement of operations for the period of October 29, 2004 through December 31, 2004. The fair value of the ownership interest acquired in excess of historical costs basis of the minority interest was recorded as a purchase adjustment, which was allocated to an intangible asset on the consolidated balance sheet, which was fully amortized in 2006 in connection with the sale of the Company’s interest in the NSF Venture.

Omnibus Stock Incentive Plan

On September 14, 2004, the Board of Directors of the Company adopted the NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan (the “Stock Incentive Plan”). The Stock Incentive Plan provides for the issuance of stock-based incentive awards, including incentive stock options, non-qualified stock options, stock appreciation rights, shares of common stock of the Company, including restricted shares, and other equity-based awards, including OP Units which are structured as profits interests (“LTIP Units”) or any combination of the foregoing. The eligible participants in the Stock Incentive Plan include directors, officers and employees of the Company, and prior to October 29, 2005, employees pursuant to the shared facilities and services agreement. An aggregate of 5,933,038 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. To date, the Company has issued an aggregate of 1,683,130 LTIP Units of restricted common stock pursuant to the Stock Incentive Plan. LTIP Units vest to the individual recipient at a rate of one-twelfth of the total amount granted as of the end of each quarter, beginning with the first quarter after the date of grant ended either January 29, April 29, July 29, or October 29 for the three-year vesting period so long as the recipient continues to be an eligible recipient. In addition, the LTIP Unit holders are entitled to dividends on the entire grant beginning on the date of the grant. Dividends or dividend equivalents paid on the portion of the grant that vested will be charged to retained earnings. Non forfeitable dividends or dividend equivalents paid on LTIP Units that are not vested will be recognized as additional compensation cost.

The awards granted to the NCIC employees who provided services to the Company pursuant to the shared facilities and services agreement and certain co-employees were accelerated and became fully vested upon the termination of the shared facility and service agreement on October 29, 2005. The additional compensation expense related to the accelerated vesting was approximately $0.4 million.

The Company has recognized compensation expense of $4.5 million, $3.2 million and $0.4 million related to the amortization of awards granted under this plan for the years ended December 31, 2006 and 2005 and the period October 29, 2004 through December 31, 2004, respectively.

39

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

15. Equity Based Compensation - (continued)

Long-Term Incentive Bonus Plan

On September 14, 2004, the Board of Directors of the Company adopted the NorthStar Realty Finance Corp. 2004 Long-Term Incentive Bonus Plan (the “Incentive Bonus Plan”), in order to retain and provide incentive to officers and certain key employees of the Company, co-employees of the Company and NCIC and employees of NCIC who will provide services to the Company pursuant to the shared facilities and services agreement. Up to 2.5% of the Company’s total capitalization as of consummation of the IPO is available to be paid under the Incentive Bonus Plan in cash, shares of common stock of the Company or other share-based form at the discretion of the compensation committee of the Company’s Board of Directors, if certain return hurdles are met.

An aggregate of 698,142 shares of common stock of the Company are currently reserved and authorized for issuance under the Incentive Bonus Plan, subject to equitable adjustment upon the occurrence of certain corporate events. On November 19, 2004, an aggregate of 665,346 shares of common stock of the Company were allocated to officers, employees and co-employees of the Company and NCIC for awards under the Incentive Bonus Plan if the Company achieves the return hurdles established by the compensation committee. The Company’s compensation committee has established the return hurdle for these performance periods as an annual return on paid in capital as defined in the plan, equal to or greater than 12.5%. If the Company achieves these return hurdles, the vested awards may be paid in cash, shares of common stock, LTIP Units or other share based form.

Each of the participants will be entitled to receive half of his or her total reserved amount if the Company meets the return hurdle for the one-year period beginning October 1, 2005 and such participant is employed through the end of this first performance period. Each of the participants will be entitled to the other half of his or her total reserved amount if the Company meets the return hurdle for the one-year period beginning on October 1, 2006 and such participant is employed through the end of this second performance period. If the Company does not meet the performance hurdles for either period, the award amounts are generally forfeited, provided that, if the Company does not meet the return hurdle for the one-year period beginning October 1, 2005, but the Company meets the return hurdle for the two-year period beginning October 1, 2005 (determined by averaging the Company’s performance over the 2-year period) and a participant is employed through the end of this two-year period, such participant will be entitled to receive his or her total reserved amount.

At December 31, 2005, management determined it would meet the performance hurdles and in accordance with FASB 123(R) the Company has recognized compensation expense in the consolidated financial statements for the year ended December 31, 2006 and 2005 of $2.0 million and $2.2 million (which included a catch-up adjustment of $1.7 million). The Company achieved the performance hurdle for the first performance period and 332,082 shares were awarded to eligible participants.

Employee Outperformance Plan

In connection with the employment agreement of the Company’s chief investment officer, he is eligible to receive incentive compensation equal to 15% of the annual net profits from the Company’s real estate securities business in excess of a 12% return on invested capital (the annual bonus participation amount). The Company will have the option of terminating this incentive compensation arrangement at any time after the third anniversary of the date of its IPO by paying the Company’s chief investment officer an amount based a multiple of the estimated annual bonus participation amount, at the time it exercises this buyout option. If the Company exercises this buyout option, the fixed amount due for terminating this arrangement will vest ratably and be paid in four installments over a three-year period with 25% paid on termination. If the Company’s chief investment officer voluntarily terminates his employment with the Company prior to any exercise of the Company’s buyout option, he will be eligible to receive future annual payments based on the future real estate securities annual net profits in excess of the 12% return hurdle on invested capital. The portion of the annual benefit to which the chief investment officer is eligible after voluntary termination increases with each year of employment until the fifth anniversary, at which point the chief investment officer is 100% vested in the full amount of the payment that would be due related to the annual bonus participation amount on the real estate securities business income earned on, business initiated five years earlier, over the return hurdle. Compensation has been earned by the Company’s chief investment officer under this plan for the years ended December 31, 2006 and 2005 of $0.7 million and $0.2 million, respectively, and there was no compensation earned for the period October 29, 2004 through December 31, 2004.

40

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

15. Equity Based Compensation - (continued)

2006 Outperformance Plan

In January 2006, the Compensation Committee of the Board of Directors approved the NorthStar Realty Finance Corp. 2006 Outperformance Plan (the “Outperformance Plan”), a long-term compensation program, to further align the interests of the Company’s stockholders and management. Under the 2006 Outperformance Plan, award recipients will share in a “performance pool” if the Company’s total return to stockholders for the period from January 1, 2006 (measured based on the average closing price of our common stock for the 20 trading days prior to January 1, 2006) to December 31, 2008 exceeds a cumulative total return to stockholders of 30%, including both share price appreciation and dividends paid. The size of the pool will be 10% of the outperformance amount in excess of the 30% benchmark, subject to a maximum dilution cap equal to $40 million, exclusive of accrued dividends. Each employee’s award under the 2006 Outperformance Plan will be designated as a specified percentage of the aggregate performance pool. Assuming the 30% benchmark is achieved, the performance pool that is established under the Outperformance Plan will be allocated among the Company’s employees in accordance with the percentage specified in each employee’s award agreement. Although the amount of the awards earned under the Outperformance Plan will be determined when the performance pool is established, not all of the awards vest at that time. Instead, 50% of the awards vest on December 31, 2008 and 25% of the awards vest on each of the first two anniversaries thereafter based on continued employment. The Company recorded the compensation expense for the Outperformance Plan in accordance with SFAS 123 (R) “Stock Based Compensation”. The fair value of the Outperformance Plan on the date of adoption was determined to be $4.1 million based upon a third-party appraisal by an independent firm that is an expert in valuing target based compensation plans. The Company will amortize 50% of the value into compensation expense over the first three years of the plan, 25% will be amortized over four years and the remaining 25% over five years. The Company recorded compensation expense of $1.1 million for the year ended December 31, 2006.

16. Stockholders’ Equity

Common Stock

On June 24, 2005, the Company granted a total of 15,194 shares to the members of its Board of Directors as part of their annual grants.

In December 2005, the Company closed a secondary public offering of 9.2 million common shares at $9.25 per share, which included 1.2 million shares to cover the underwriters’ over-allotment. Net proceeds from the offering were approximately $78.9 million. The proceeds from the offering were used to pay down short term debt and to fund new investments.

In March 2006, the Company granted a total of 4,808 shares to a new member of the Company’s Board of Directors.

In May 2006, the Company issued 17,049 shares to its Board of Directors as part of their annual grants.

In May 2006, the Company completed a secondary public offering for 10,000,000 shares at $10.60 per share and in June 2006 the underwriters exercised their over-allotment option and acquired 1,528,616 additional shares. The net proceeds of approximately $114.7 million were used to pay down short term debt and to fund new investments. In November 2006, the Company completed a public offering for 12,391,385 shares at $14.95 per share and in December 2006 the underwriters exercised their over-allotment option and acquired 2,400,000 additional shares. The net proceeds of approximately $208.8 million were used to pay down short term debt and to fund new investments.

41

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

16. Stockholders’ Equity - (continued)

Preferred Stock

In September 2006, the Company completed a public offering of 2,400,000 shares of 8.75% Series A Cumulative Redeemable Preferred Stock at a price of $25.00 per share. The net proceed from the offering was $57.9 million.

Dividends

On April 21, 2005, the Company declared a cash dividend of $0.15 per share of common stock. The dividend was paid on May 16, 2005 to the shareholders of record as of the close of business on May 2, 2005.

On July 28, 2005, the Company declared a cash dividend of $0.15 per share of common stock. The dividend was paid on August 15, 2005 to the shareholders of record as of the close of business on August 8, 2005.

On October 6, 2005, the Company declared a dividend of $0.23 per share of common stock, payable to stockholders of record as of October 14, 2005. The Company made this payment on October 21, 2005.

On January 26, 2006, the Company declared a cash dividend of $0.27 per share of common stock. The dividend was paid on February 10, 2006 to the shareholders of record as of the close of business on February 3, 2006.

On April 12, 2006, the Company declared a cash dividend of $0.30 per share of common stock. The dividend was paid on April 26, 2006 to the shareholders of record as of the close of business on April 19, 2006.

On July 25, 2006, the Company declared a cash dividend of $0.30 per share of common stock. The dividend was expected to be paid on August 11, 2006 to the shareholders on record as of the close of business on August 4, 2006.

On October 24, 2006, the Company declared a cash dividend of $0.34 per share of common stock. The dividend is expected to be paid on November 15, 2006 to the shareholders on record as of the close of business on November 6, 2006.

42

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

17. Minority Interest

Minority interest represents the aggregate limited partnership interests or OP Units in the Operating Partnership held by limited partners (the “Unit Holders”). Income allocated to the minority interest is based on the Unit Holders ownership percentage of the Operating Partnership. The ownership percentage is determined by dividing the numbers of OP Units held by the Unit Holders by the total OP Units outstanding. The issuance of additional shares of beneficial interest (the “Common Shares” or “Share”) or OP Units changes the percentage ownership of both the Unit Holders and the Company. Since a unit is generally redeemable for cash or Shares at the option of the Company, it is deemed to be equivalent to a Share. Therefore, such transactions are treated as capital transactions and result in an allocation between shareholders’ equity and minority interest in the accompanying consolidated balance sheet to account for the change in the ownership of the underlying equity in the Operating Partnership.

In conjunction with the formation of the Company, certain persons and entities contributing ownership interests in the Predecessor to the Operating Partnership received OP Units. Upon consummation of the IPO, 19.0% of the carrying value of the net assets of the Operating Partnership was allocated to minority interest. As a result of the exercise of the underwriters’ over-allotment option of 1,160,750 shares on November 19, 2004, the minority interests were reduced to 18.2%.

Under their respective contribution agreements, NCIC and affiliates directly and/or indirectly received 4,705,915 OP Units.

During 2006, 4,403,601 OP/LTIP units were converted to Common Stock.

Minority interest at December 31, 2006, 2005 and 2004 represents 3.15%, 15.3% and 18.2%, respectively.

18. Risk Management and Derivative Activities

Derivatives

The Company uses derivatives primarily to manage interest rate risk exposure. These derivatives are typically in the form of interest rate swap agreements and the primary objective is to minimize interest rate risks associated with the Company’s investment and financing activities. The counterparties of these arrangements are major financial institutions with which the Company may also have other financial relationships. The Company is exposed to credit risk in the event of non-performance by these counterparties; however, the Company does not anticipate that any of the counterparties will fail to meet their obligations because of their high credit ratings. The objective in using interest rate derivatives is to add stability to interest expense and to manage exposure to interest rate movements.

The Company has acquired all the notes of a synthetic CMBS CDO, that entered into a credit default swap agreement with a major financial institution to sell credit protections on a pool of CMBS securities. As of December 31, 2006, the credit default swap fair market value was $0 and therefore there are no unrealized gains or losses were recorded in the consolidated statement of operations. The Company’s maximum exposure to loss on the credit default swap is limited to its $54.2 million initial investment. See Note 4 for additional information.

43

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

18. Risk Management and Derivative Activities - (continued)

December 31, 2006	Notional Value		Strike Rate			Expiration Date		Fair Value
Interest rate swap	$	5,100		4.18	%		12/2010	$	151
Interest rate swap		6,160		4.29			08/2012		224
Interest rate swap		3,290		4.80			12/2013		49
Interest rate swap		2,842		5.04			08/2018		26
Interest rate swap		5,492		4.76			03/2013		81
Interest rate swap		3,465		4.41			03/2010		61
Interest rate swap		4,000		4.66			11/2015		104
Interest rate swap		15,000		5.08			05/2016		(61	)
Interest rate swap		3,765		4.98			07/2015		7
Interest rate swap		3,567		4.98			06/2015		6
Interest rate swap		5,957		5.06			08/2015		10
Interest rate swap		23,300		4.99			12/2012		(22	)
Interest rate swap		2,686		5.02			02/2016		(2	)
Interest rate swap		20,000		5.05			06/2013		(2	)
Interest rate swap		12,750		5.06			08/2017		61
Interest rate swap		7,700		5.30			05/2010		(82	)
Interest rate swap		14,000		5.03			10/2015		(22	)
Interest rate swap		323,505		5.53			06/2018		(9,808	)
Basis swap		5,000		7.07			12/2015		(6	)
Basis swap		15,000		7.31			06/2018		(11	)
Interest rate swap		60,000		5.52			06/2016		(2,251	)
Interest rate swap		16,200		5.52			06/2018		(645	)
Interest rate swap		49,404		5.63			07/2016		(2,021	)
Interest rate swap		13,200		5.06			02/2008		13
Interest rate swap		49,150		4.88			03/2008		163
Interest rate swap		30,000		5.46			09/2016		(943	)
Interest rate swap		25,000		5.12			09/2016		(135	)
Total	$	725,533						$	(15,055	)

December 31, 2005	Notional Value		Strike Rate			Expiration Date		Fair Value
Interest rate swap	$	5,100		4.18	%		12/2010	$	144
Interest rate swap		6,160		4.29			08/2012		190
Interest rate swap		3,290		4.80			12/2013		10
Interest rate swap		2,842		5.04			08/2018		(32	)
Interest rate swap		5,492		4.76			03/2013		27
Interest rate swap		3,465		4.41			03/2010		51
Interest rate swap		9,563		4.55			08/2017		247
Interest rate swap		4,000		4.66			11/2015		48
Interest rate swap		13,331		4.76			08/2015		40
Total	$	53,243						$	725

44

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

18. Risk Management and Derivative Activities - (continued)

Credit Risk Concentrations

Concentration of credit risk arise when a number of borrowers, tenants or issuers related to the Company’s investments are engaged in similar business activities or located in the same geographic location to be similarly affected by changes in economic conditions. The Company monitors its portfolio to identify potential concentrations of credit risks. The Company believes its portfolio is reasonably well diversified and does not contain any unusual concentration of credit risks.

19. Off Balance Sheet Arrangements

CDO Issuances

The Company has interests in four CDO issuances, whose CDO notes are primarily collateralized by investment grade real estate securities. The Company generally purchases the preferred equity or the income notes of each CDO, which are the equity securities of the CDO issuances, and, with the exception of CDO I, all of the below investment grade CDO Notes of each CDO issuance. In addition, the Company earns a fee of 0.35% of the outstanding principal balance of the assets backing each of these CDO issuances as an annual collateral management fee. The Company’s and the Predecessor’s interests in CDO I, CDO II, CDO III and CDO V are each accounted for as a single debt security available for sale pursuant to EITF 99-20.

The following tables describe certain terms of the collateral for and the notes issued by CDO I, CDO II, CDO III and CDO V as follows for the year ended December 31, 2006 and 2005:

	CDO Collateral - December 31, 2006									CDO Notes - December 31, 2006
Issuance	Date Closed		Par Value of CDO Collateral		Weighted Average Interest Rate			Weighted Average Expected Life (years)		Outstanding CDO Notes(1)		Weighted Average Interest Rate at 12/31/06			Stated Maturity
CDO I(2)		8/21/03	$	344,769		6.59	%		5.40	$	325,551		6.22	%		8/01/2038
CDO II		7/01/04		377,911		6.30	%		6.30		341,101		5.78	%		6/01/2039
CDO III		3/10/05		400,963		6.38	%		5.95		359,878		5.90	%		6/01/2040
CDO V		9/22/05		501,021		5.92	%		9.03		461,500		5.17	%		9/05/2045
Total			$	1,624,664						$	1,488,030

(1) Includes only notes held by third parties.

(2) The Company has an 83.3% interest.

			CDO Collateral - December 31, 2005								CDO Notes - December 31, 2005
Issuance	Date Closed		Par Value of CDO Collateral		Weighted Average Interest Rate		Weighted Average Rating		Weighted Average Expected Life (years)		Outstanding CDO Notes(1)		Weighted Average Interest Rate at 12/31/05(3)		Stated Maturity
CDO I(2)		8/21/03	$	352,041		6.62%		BBB/BBB-		6.01	$	332,831		6.13%		8/01/2038
CDO II		7/01/04		392,841		6.25%		BBB/BBB-		6.65		356,170		5.58%		6/01/2039
CDO III		3/10/05		401,790		6.06%		BBB-		6.69		360,973		5.59%		6/01/2040
CDO V		9/22/05		500,969		5.69%		BBB		9.08		461,500		2.89%		9/05/2045
Total			$	1,647,641							$	1,511,474

(1) Includes only notes held by third parties.

(2) The Company has an 83.3% interest.

(3) Includes the effect of the interest rate swap held in each CDO. The weighted average interest rate for CDO V reflects the initial payment from the swap counterparty for CDO V. The effective interest rate on the CDO V Notes will increase in subsequent periods.

45

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

19. Off Balance Sheet Arrangements - (continued)

Monroe CLO Equity Notes

In December 2006, the Company acquired 40% of the residual equity interests in a CLO originated by Monroe Capital, LLC, a specialty finance company, for $16.7 million. The CLO includes collateral of approximately $400 million backed primarily by first lien senior secured loans. Based on the projected future cash flows the equity is yielding an internal rate of return of approximately 18%. The CLO was determined to be a variable interest entity under Fin46(R)-6 and the Company was determined not to be the primary beneficiary therefore the financial statements are not consolidated into the condensed financial statements of the Company. The Company’s residual equity interests are accounted for as debt securities available for sale pursuant to EITF 99-20.

In August 2006, the Company acquired all of the notes issued in a synthetic CMBS CDO referred to as SEAWALL 2006-4a for $27 million of which $12.0 million was acquired by the Company’s warehouse provider (see note 5). The notes of this CDO bear interest backed by a combination of AAA floating rate securities and a fixed spread earned by the CDO for having sold credit protection on a portfolio of investment grade-rated reference securities. The notes yield a blended spread above LIBOR of approximately 4.41%. Any losses on the reference securities will require the CDO to liquidate a portion of the AAA collateral in order to make payments to credit protection buyer under the credit default swaps. SEAWALL 2006-4a is determined to be a Qualified Special Purpose Entity (“QSPE”) and accordingly is not consolidated. The notes acquired are accounted for as debt securities available for sale and are carried at their fair value with net unrealized gains or loss reported as a component of other comprehensive income.

The Company’s potential loss in its off balance sheet investments is limited to the carrying value of its investment, which is $126.6 million and $90.0 million, respectively, at December 31, 2006 and 2005.

20. Quarterly Financial Information (Unaudited)

The tables below reflect the Company’s selected quarterly information for the Company and the Predecessor for the years ended December 31, 2006, 2005 and 2004.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

20. Quarterly Financial Information (Unaudited) - (continued)

	Three Months Ended
	December 31, 2006		September 30, 2006		June 30, 2006		March 31, 2006
	(unaudited)
Total revenue	$	66,428	$	58,609	$	39,132	$	31,770
Income from continuing operations before minority interests		15,274		10,932		6,015		8,821
Income from continuing operations		14,762		9,674		5,164		7,423
Net income per share - basic/diluted	$	0.29	$	0.23	$	0.15	$	0.25
Weighted-average shares outstanding
basic		50,010,028		42,513,172		34,980,352		30,556,586
diluted		54,109,492		48,068,996		40,744,276		36,323,517

	Three Months Ended
	December 31, 2005		September 30, 2005		June 30, 2005		March 31, 2005
Total revenue	$	23,233	$	17,232	$	13,345	$	11,287
Income from continuing operations before minority interests		2,095		5,620		1,261		1,413
Income from continuing operations		22,178		4,616		9,823		1,055
Net income per share - basic/diluted	$	0.96	$	0.22	$	0.46	$	0.05
Weighted-average shares outstanding
basic		23,164,930		21,264,930		21,250,240		21,249,736
diluted		28,708,507		26,790,161		26,766,315		26,760,770

		Three Months Ended
					Predecessor
		December 31,			September 30,		June 30,			March 31,
		2004(1)			2004		2004			2004
Total revenue	$	6,620		$	1,937	$	945		$	908
Income (loss) from continuing operations before minority interests		(3,002	)		350		(183	)		955
Net income (loss) from continuing operations		(2,367	)		350		(183	)		955
Net income per share - basic		($0.12	)		—		—			—
Weighted-average shares outstanding
basic		20,868,865			N/A		N/A			N/A
diluted		25,651,027			N/A		N/A			N/A

(1) In order to present quarterly information for the quarter ended December 31, 2004, the Company has combined our predecessor’s results for the period from October 1, 2004 to October 28, 2004 with the results of its operations for the period from October 29, 2004 to December 31, 2004.

47

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

21. Segment Reporting

The Company’s real estate debt segment is focused on originating, structuring and acquiring senior and subordinate debt investments secured primarily by commercial real estate properties. The Company generates revenues from this segment by earning interest income from its debt investments and its operating expenses consist primarily of interest costs from financing the assets. This segment generates income from operations by earning a positive spread between the yield on its assets and the interest cost of its debt. The Company evaluates performance and allocates resources to this segment based upon its contribution to income from continuing operations.

The Company’s real estate securities segment is focused on investing in a wide range of commercial real estate debt securities, including commercial mortgage-backed securities (“CMBS”), REIT unsecured debt, credit tenant loans and unsecured subordinate securities of commercial real estate companies. The Company generates revenues from this segment by earning interest income and advisory fees from owning and managing these investments. Its operating expenses consist primarily of interest costs from financing its securities. The segment generates income from operations by earning advisory fees and a positive spread between the yield on its assets and the interest cost of its debt.

The Company’s operating real estate segment is focused on acquiring commercial real estate facilities located throughout the U.S. that are primarily leased under long-term triple-net leases to corporate tenants. Triple-net leases generally require the lessee to pay all costs of operating the facility, including taxes and insurance and maintenance of the facility. The Company’s net-leased facilities are currently located in New York, Ohio, California, Utah, Pennsylvania, New Jersey, Indiana, Illinois, New Hampshire, Massachusetts, Kansas, Maine and Michigan. Revenues from these assets are generated from rental income received from lessees of the facilities, and operating expenses 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 its costs of owning and financing the assets.

The following table summarizes segment reporting for the years ended December 31, 2006 and 2005 (in thousands):

	Operating Real Estate			Real Estate Debt		Real Estate Securities		Unallocated(1)			Consolidated Total
Total revenues for the twelve months ended
December 31, 2006		39,432			111,855		40,506		4,146			195,939
December 31, 2005		11,451			31,602		13,170		8,874			65,097
Income (loss) from continuing operations for the twelve months ended
December 31, 2006		(3,441	)		46,145		23,922		(25,584	)		41,042
December 31, 2005		(476	)		13,136		12,690		(14,961	)		10,389
Net income (loss) for the twelve months ended
December 31, 2006		(2,745	)		46,423		23,922		(29,535	)		38,065
December 31, 2005		28,923			13,136		12,690		(17,077	)		37,672
Total assets as of
December 31, 2006	$	580,508		$	1,693,536	$	774,736	$	136,840		$	3,185,620
December 31, 2005	$	240,438		$	735,594	$	147,329	$	33,204		$	1,156,565

(1) Unallocated includes interest income and interest expense related to our temporary investments and also includes corporate level and general & administrative expenses.

48

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

22. Subsequent Events (Unaudited)

Real Estate Debt

Subsequent to December 31, 2006, the Company originated $203.6 million of new real estate debt investments, consisting of eight floating rate loans and one fixed rate loan. The weighted average interest rate of the floating rate loans is LIBOR plus a spread of 3.52%. The interest rate on the fixed rate loan is 11.30%.

Warehouse Agreements

In February 2007, the Company entered into a warehouse arrangement with a major commercial bank whereby the bank has agreed to purchase up to $600.0 million CMBS synthetic assets and other real estate debt securities under the Company’s direction with the expectation of selling such securities to the Company’s next securities CDO. The Company has made $2.0 million of deposits and the bank has accumulated $17.8 million securities under this warehouse agreement.

CDO Closing

In 2007, the Company completed an $800 million on-balance sheet CDO financing (“CDO IX”) backed primarily by the Company’s real estate securities investments. The Company sold investment grade notes having a face amount of approximately $759.0 million and retained approximately $41.0 million of the income notes and the below investment grade-rated notes. The weighted average interest rate on the investment grade notes, including fees and expenses, was LIBOR plus 0.46% and their weighted average life is approximately 12 years.

In February 2007, the Company purchased a 178,213 square foot office property located in Milpitas, CA. The property is net leased for ten years to Credence Corp. The Company financed the acquisition with a $23.3 million non-recourse first mortgage, bearing a fixed interest rate of 5.95%, and the balance in cash.

Wakefield Joint Venture

In January 2007, the Wakefield joint venture closed on the three acquisitions described below:

A $101.0 million acquisition of a portfolio of 19 assisted living facilities in Wisconsin, on 15 campuses throughout the state, consisting of 372,349 square feet. The properties are net leased to a single tenant under a lease that expires January 2017. The portfolio was financed with fifteen non-recourse first mortgages totaling $75 million bearing a fixed interest rate of 6.39%, maturing in February 2017, and the balance in cash.

A $214.9 million acquisition of a portfolio of 28 assisted living properties located in California, Georgia, Illinois, Nebraska, Ohio, Oklahoma, Tennessee and Texas, consisting of 1,063,387 square feet. The properties are net leased to a single tenant under a lease that expires in January 2017. The portfolio was financed with a non-recourse first mortgage totaling $160 million bearing a fixed interest rate of 6.49%, maturing in January 2017 and the balance in cash.

A $10.5 million acquisition of two assisted living properties in Illinois, consisting of 72,786 square feet. The properties are net leased to a single tenant under a lease that expires in January 2017. The acquisition was financed with a $7.65 million non-recourse first mortgage bearing a fixed interest rate of 6.589%, maturing in January 2017 and the balance in cash.

Additionally, in February 2007 the Wakefield joint venture closed on a $10.97 million acquisition of a skilled nursing facility in Kentucky, consisting of 67,706 square feet. The property is net leased to a single tenant under a fifteen year lease with three five year extension options. The property was financed with a $7.65 million non-recourse first mortgage, bearing a fixed interest rate of 7.12% maturing in August 2010 and the balance in cash.

49

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

22. Subsequent Events (Unaudited) - (continued)

On March 12, 2007, NorthStar entered into a joint venture with Monroe Capital LLC, a Chicago-based firm that originates, acquires and finances middle-market and broadly syndicated corporate loans. Under the terms of the venture, the Company will provide equity required to fund Monroe’s lending business, and from time to time acquire a portion of the equity issued in securitizations sponsored by Monroe. As part of the new venture, the Company will also own a minority interest in the existing management company that originates, structures and syndicates middle-market corporate loans and provides asset management services for the warehouse assets and the current and future CLOs sponsored by Monroe.

Dividends

On January 23, 2007, the Company declared a dividend of $0.35 per share of common stock and $0.54688 per share of Series A preferred stock to stockholders of record as of February 5, 2007. The dividends were paid on February 15, 2007.

Preferred Stock Offering

On February 7, 2007, the Company issued and sold 6,200,000 of its 8.25% Series B Cumulative Redeemable Preferred Stock (liquidation preference $25.00 per share, par value $0.01 per share) at $25.00 per share (which included 800,000 shares pursuant to an over-allotment option granted to the underwriters), in an underwritten public offering pursuant to an effective registration statement. Net proceeds from the offering were approximately $150.0 million. The proceeds from the offering were used to repay borrowings under the Company’s credit facilities and to fund new investments.

50

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION

As of December 31, 2006

(Amounts in Thousands, Except per Share Data)

Column A		Column B		Column C Initial Cost				Column D Cost Capitalized Subsequent to Acquisition				Column E Gross Amount at Which Carried at Close of Period						Column F			Column H	Column I
																						Life on Which
						Buildings &				Buildings &				Buildings &				Accumulated			Date	Depreciation
Location		Encumbrances		Land		Improvements		Land		Improvements		Land		Improvements		Total		Depreciation		Total	Acquired	is Computed
987 Eighth Avenue, NY, NY	$	—	$	—	$	2,645	$	—	$	—	$	—	$	2,645	$	2,645	$	680	$	1,965	Mar-99		Various
36 West 34 Street, NY, NY		—		—		4,440		—		—		—		4,440		4,440		875		3,565	Mar-99		Various
701 Seventh Avenue(2) , NY, NY		—		—		3,246		—		—		—		3,246		3,246		1,818		1,428	Mar-99		Various
Los Angeles, CA		55,491		5,837		55,030		—		—		5,837		55,030		60,867		3,294		57,573	Jan-05		39 years
Salt Lake City, UT		16,584		672		19,740		—		25		672		19,765		20,437		1,024		19,413	Aug-05		39 yrs/2-7yrs	(1	)
Auburn Hills, MI		11,493		2,980		8,607		—		—		2,980		8,607		11,587		498		11,089	Sept-05		39 years
Rancho Cordova, CA		12,319		3,060		9,360		—		—		3,060		9,360		12,420		427		11,993	Sept-05		39 years
Camp Hill, PA		25,205		5,900		19,510		—		—		5,900		19,510		25,410		1,026		24,384	Sept-05		39 years
Springdale, OH		19,208		3,030		20,469		—		—		3,030		20,469		23,499		675		22,824	Dec-05		39 years
Springdale, OH		16,586		2,470		17,821		—		—		2,470		17,821		20,291		630		19,661	Dec-05		39 years
Springdale, OH		15,686		1,500		17,690		—		—		1,500		17,690		19,190		626		18,564	Dec-05		39 years
Rockaway, NJ		17,480		6,118		15,664		—		—		6,118		15,664		21,782		372		21,410	Mar-06		39 years
Indianapolis, IN		28,600		1,670		32,306		—		—		1,670		32,306		33,976		498		33,478	Mar-06		39 years
Albemarle, NC		—		267		2,646		—		—		267		2,646		2,913		14		2,899	Oct-06		40 years
Blountstown, FL		3,719		378		5,069		—		—		378		5,069		5,447		58		5,389	Jul-06		40 years
Brevard, NC		—		145		2,100		—		—		145		2,100		2,245		11		2,234	Oct-06		40 years
Roxboro, NC		3,301		262		3,251		—		—		262		3,251		3,513		51		3,462	May-06		40 years
Charlotte, NC		—		350		2,826		—		25		350		2,851		3,201		15		3,186	Oct-06		40 years
Cherry Springs, NC		2,786		164		3,215		—		—		164		3,215		3,379		44		3,335	Jun-06		40 years
Bremerton, NC		6,750		964		8,156		—		100		964		8,256		9,220		8		9,212	Dec-06		40 years
Sterling, DL		2,018		129		5,603		—		76		129		5,679		5,808		91		5,717	May-06		40 years
Clinton, NC		2,336		283		5,084		—		66		283		5,150		5,433		84		5,349	May-06		40 years
Winter Garden, FL		4,954		1,693		5,805		—		21		1,693		5,826		7,519		93		7,426	May-06		40 years
Brevard, NC		2,097		328		2,532		—		—		328		2,532		2,860		40		2,820	May-06		40 years
Bolles, PA		436		32		803		—		—		32		803		835		13		822	May-06		40 years
Black Mountain, NC		4,896		468		5,786		—		—		468		5,786		6,254		66		6,188	Jul-06		40 years
Hillsboro, OR		33,300		3,954		39,193		—		—		3,954		39,193		43,147		41		43,106	Dec-06		40 years
Wendell, NC		2,344		212		2,279		—		—		212		2,279		2,491		36		2,455	May-06		40 years
Scranton, PA		375		78		757		—		—		78		757		835		12		823	May-06		40 years
Winston-Salem, NC		3,524		1,269		6,349		—		42		1,269		6,391		7,660		102		7,558	May-06		40 years
Gastonia, NC		1,847		345		1,392		—		—		345		1,392		1,737		22		1,715	May-06		40 years
Morris, IL		6,982		568		8,509		—		48		568		8,557		9,125		134		8,991	May-06		40 years
Williamston, NC		3,195		263		2,925		—		—		263		2,925		3,188		46		3,142	May-06		39 years
Aurora, CO		36,387		2,650		35,786		10		—		—		—		—		—		—			7 years	(1	)
North Attleboro, MA		4,835		—		5,445		—		—		—		5,445		5,445		49		5,396	Sept-06		39 years
Bloomingdale, IL		5,888		—		5,810		—		—		—		5,810		5,810		52		5,758	Sept-06		39 years
Concord Holdings, NH		8,601		2,145		9,216		—		—		2,145		9,216		11,361		85		11,276	Sept-06		39 years
Melville, NY		4,567		—		3,187		—		—		—		3,187		3,187		32		3,155	Sept-06		39 years
Millbury, MA		4,854		—		5,994		—		—		—		5,994		5,994		48		5,946	Sept-06		39 years
Wichita, KS		6,293		1,325		5,584		—		—		1,325		5,584		6,909		48		6,861	Sept-06		39 years
Keene, NH		6,970		3,033		5,919		—		—		3,033		5,919		8,952		59		8,893	Sept-06		39 years
Fort Wayne, IN		3,626		—		3,642		—		—		—		3,642		3,642		38		3,604	Sept-06		39 years
Portland, ME		5,132		—		6,687		—		—		—		6,687		6,687		97		6,590	Sept-06		39 years
Total	$	390,665	$	54,542	$	428,078	$	10	$	403	$	54,552	$	428,481	$	483,033	$	14,425	$	468,608

(1) Extended life for Furniture, Fixtures and Equipment.

51

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION - (Continued)

As of December 31, 2006

(Amounts in Thousands, Except per Share Data)

The changes in real estate for the year ended December 31, 2006, December 31, 2005, and December 31, 2004 are as follows:

	2006			2005			2004
Balance at beginning of period	$	205,708		$	54,198		$	54,191
Property acquisitions		286,919			193,669			—
Improvements		26			28			7
Assets held for sale		—			(4,222	)		—
Retirements/disposals		(9,608	)		(37,965	)		—
Balance at end of period	$	483,045		$	205,708		$	54,198

The changes in accumulated depreciation, exclusive of amounts relating to equipment, auto and furniture and fixtures, for the period ended December 31, 2006, December 31, 2005 and December 31, 2004 are as follows:

	2006			2005			2004
Balance at beginning of period	$	7,000		$	10,654		$	10,292
Depreciation for the period		9,203			3,786			362
Assets held for sale		—			(2,733	)		—
Retirements/disposals		(1,766	)		(4,707	)		—
Balance at end of period	$	14,437		$	7,000		$	10,654

52

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

SCHEDULE IV - LOANS AND OTHER LENDING INVESTMENTS

December 31, 2006

(In Thousands)

Description			Interest Rate		Final Maturity Date		Periodic Payment Terms(1)		Prior Liens		Principal Amount of Loans		Carrying Amount of Loans		Number of Loans
Type	Description
Whole Loan - Fixed		Office		9.00%		9/1/2009		I/O	$	—	$	50,472	$	50,163		1
Whole Loans - Fixed < 3%		Office		6.37 - 8.30%		4/1/2010 - 5/11/2016		I/O		—		22,700		16,698		2
		Industrial		5.78%		6/1/2015 - 7/1/2015		I/O		—		7,259		7,242		2
		Warehouse		5.07%		8/1/2015		I/O		—		5,890		5,849		1
		Healthcare		9.75 - 11.75%		10/8/2008 - 11/11/2020		I/O		—		10,292		10,391		4
Whole Loan - Float		Office		LIBOR + 1.80%		10/9/2008		I/O		—		70,000		69,903		1
Whole Loan - Float < 3%		Office		LIBOR + 1.95 - 5.00%		1/1/2007 - 7/1/2016		I/O		—		328,714		327,815		21
		Retail		LIBOR + 2.70%		7/1/2009		I/O		—		12,500		12,399		1
		Hotel		LIBOR + 2.15 - 6.00%		5/9/2007 - 4/1/2010		I/O		—		96,252		95,928		6
		Condo		LIBOR + 3.65 - 4.75%		1/1/2007 - 11/1/2007		I/O		—		44,950		44,708		2
		Industrial		LIBOR + 2.50 - 5.10%		6/23/2007 - 7/1/2015		P&I		—		23,625		23,551		3
		Multifamily		LIBOR + 2.22 - 3.25%		3/1/2009 - 1/1/2010		I/O		—		213,747		212,241		12
		Various		LIBOR + 1.50 - 5.84%		6/23/07 - 2/1/2011		I/O		—		100,485		97,795		7
Junior Participation - Float < 3%		Office		LIBOR + 1.84 - 7.00%		5/16/2007 - 1/22/2008		I/O		—		53,785		53,795		4
		Retail		LIBOR + 2.4%		9/9/2009		I/O		—		10,000		10,000		1
		Retail/Hotel		LIBOR + 1.7%		6/6/2007		I/O		—		7,000		7,004		1
		Hotel		LIBOR + 9.75%		11/1/2007		I/O		—		5,000		4,987		1
		Condo		LIBOR + 6.98 — 10.25%		9/9/2007 - 10/9/2007		I/O		—		21,591		21,559		2
Mezzanine - Fixed		Office		10.85%		6/1/2016		I/O		410,000		60,975		62,226		1
Mezzanine - Fixed < 3%		Retail		15.00%		5/1/2008		I/O		—		3,365		3,389		1
		Industrial		9.00%		2/14/2011		I/O		—		13,200		13,233		1
		Multifamily		10.00 - 11.30%		1/1/2010 - 1/1/2012		I/O		—		34,342		34,711		4
		Various		3.00 - 12.00%		11/26/2007 - 6/1/2016		I/O		—		12,999		12,889		4
Mezzanine - Float < 3%		Office		LIBOR + 3.30 - 6.36%		7/9/2007 - 10/9/2008		I/O		—		38,682		38,742		3
		Retail		LIBOR + 1.75%		8/9/2007		I/O		—		16,000		15,990		1
		Hotel		LIBOR + 2.75 - 7.75%		7/15/2007 - 2/6/2010		I/O		—		165,418		165,209		4
		Condo		LIBOR + 3.50 - 13.00%		10/9/2007 - 1/9/2008		I/O		—		74,076		73,884		4

53

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

SCHEDULE IV - LOANS AND OTHER LENDING INVESTMENTS - (Continued)

December 31, 2006

(In Thousands)

Description			Interest Rate		Final Maturity Date		Periodic Payment Terms(1)		Prior Liens		Principal Amount of Loans		Carrying Amount of Loans		Number of Loans
Type	Description
��
Other - Fixed < 3%		Various		5.53%		6/25/2018		I/O		—		7,743		7,743		1
Other - Floating < 3%		Retail		LIBOR + 1.75%		12/16/2009		I/O		—		6,609		6,675		1
		Hotel		LIBOR + 1.38%		2/22/2013		I/O		—		5,476		5,476		1
		Multifamily		LIBOR + 1.50%		4/1/2011 - 4/4/2011		I/O		—		10,000		10,044		4
		Various		LIBOR + 2.40 - 3.50%		4/2/2007		I/O		—		20,000		20,000		1
Preferred - Fixed < 3%		Office		9.00 - 11.00%		1/1/2010 - 11/1/2010		I/O		—		29,464		29,271		2
Total									$	410,000	$	1,582,611	$	1,571,510		105

	2006			2005			2004
Balance at beginning of period	$	681,106		$	70,569		$	—
Additions during the year:
New loans and additional advances on existing loans		1,335,614			696,589			70,841
Acquisition cost and (fees)		(6,560	)		(39	)		(284	)
Premiums/(Discounts)		(5,730	)		(2,118	)		—
Amortization of acquisition costs, fees, premiums and discounts		2,287			1,058			12
Deductions:
Collection of principal		435,207			84,953			—
Balance at end of period	$	1,571,510		$	681,106		$	70,569

(1) Interest only or I/O; Principal and Interest or P&I.

54

Part IV

Item 15. Exhibits and Financial Statement Schedules

(a) and (c) Financial Statement and Schedules - see Index to Financial Statements and Schedules included in Item 8.

(b) Exhibits

Exhibit Number	Description of Exhibit
3.1	Articles of Amendment and Restatement of NorthStar Realty Finance Corp., as filed with the State Department of Assessments and Taxation of Maryland on October 20, 2004 (incorporated by reference to Exhibit 3.1 to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-114675))
3.2	Bylaws of NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 3.2 to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-114675))
3.3	Amendment No. 1 to the Bylaws of NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 3.3 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed on April 27, 2005)
3.4	Articles Supplementary Classifying NorthStar Realty Finance Corp.’s 8.75 % Series A Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.2 to NorthStar Realty Finance Corp.’s Registration Statement on Form 8-A, dated September 14, 2006)
3.5	Articles Supplementary Classifying NorthStar Realty Finance Corp.’s 8.25 % Series B Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.2 to NorthStar Realty Finance Corp.’s Registration Statement on Form 8-A, dated February 7, 2007)
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	Non-Competition Agreement, dated as of October 29, 2004, by and among NorthStar Realty Finance Corp., NorthStar Realty Finance Limited Partnership, NorthStar Capital Investment Corp. and NorthStar Partnership, L.P. (incorporated by reference to Exhibit 10.2 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)
10.3	Executive Employment Agreement, dated as of October 22, 2004, between David T. Hamamoto and NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 10.5 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)
10.4	Executive Employment Agreement, dated as of October 22, 2004, between Jean-Michel Wasterlain and NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 10.7 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)
10.5	Executive Employment Agreement, dated as of October 22, 2004, between Daniel R. Gilbert and NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 10.8 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)
10.6	NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan (incorporated by reference to Exhibit 10.9 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)
10.7	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)
10.8	Form of Vesting Agreement for Units of NRF Employee, LLC, each dated as of October 29, 2004, between NRF Employee, LLC and certain employees and co-employees of NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 10.11 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004).

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10.9	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))
10.10	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)
10.11	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)
10.12	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))
10.13	Amended and Restated Master Repurchase Agreement, dated as of March 21, 2005, between NRFC DB Holdings, LLC and Deutsche Bank AG, Cayman Islands Branch (incorporated by reference to the like-numbered exhibit to NorthStar Realty Finance Corp.’s Annual Report on Form 10-K for the year ended December 31, 2004)
10.14	Amended and Restated Junior Subordinated Indenture dated as of September 16, 2005, between NorthStar Realty Finance Limited Partnership and JPMorgan Chase Bank, National Association, as trustee (incorporated by reference to the like-numbered exhibit to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-128962))
10.15	Second Amended and Restated Trust Agreement, dated as of September 16, 2005, among NorthStar Realty Finance Limited Partnership, as depositor, JPMorgan Chase Bank, National Association, as property trustee, Chase Bank USA, National Association, as Delaware trustee and Andrew Richardson, David Hamamoto and Richard McCready, each as administrative trustees (incorporated by reference to the like-numbered exhibit to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-128962))
10.16	Master Repurchase Agreement, dated as of July 13, 2005, between NRFC WA Holdings, LLC and Wachovia Bank, National Association (incorporated by reference to Exhibit 10.21 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended June 30, 2005)
10.17	First Amendment to the Master Repurchase Agreement, dated as of August 24, 2005, between NRFC WA Holdings, LLC and Wachovia Bank, National Association (incorporated by reference to Exhibit 10.22 to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-128962))
10.18	Second Amendment to the Master Repurchase Agreement, dated as of September 20, 2005, between NRFC WA Holdings, LLC and Wachovia Bank, National Association (incorporated by reference to Exhibit 10.23 to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-128962))
10.19	Master Loan, Guarantee and Security Agreement, dated as of September 28, 2005, between NorthStar Realty Finance Limited Partnership, NorthStar Realty Finance Corp., NS Advisors LLC and Bank of America, N.A. (incorporated by reference to Exhibit 10.24 to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-128962))
10.20	Third Amendment to the Master Repurchase Agreement, dated as of September 30, 2005, between NRFC WA Holdings, LLC and Wachovia Bank, National Association (incorporated by reference to Exhibit 10.25 to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-128962))
10.21	Omnibus Amendment to the Master Repurchase Agreement, dated as of October 21, 2005, between NRFC WA Holdings, LLC, NRFC WA Holdings II, LLC and Wachovia Bank, National Association (incorporated by reference to Exhibit 10.26 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2005)
10.22	Agreement of Purchase and Sale, dated as of October 25, 2005, between 1552 Lonsdale LLC and 1552 Bway Owner, LLC (incorporated by reference to Exhibit 10.27 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2005)

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Exhibit Number	Description of Exhibit
10.23	Fourth Amendment to the Master Repurchase Agreement, dated October 28, 2005, by and among NRFC WA Holdings, LLC, NRFC WA Holdings II, LLC and Wachovia Bank, National Association (incorporated by reference to Exhibit 10.28 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2005)
10.24	Sublease, dated as of November 7, 2005, between NorthStar Realty Finance Limited Partnership and NorthStar Partnership, L.P. (incorporated by reference to Exhibit 10.29 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2005)
10.25	Junior Subordinated Indenture, dated as of November 22, 2005, between NorthStar Realty Finance Limited Partnership and JPMorgan Chase Bank, National Association, as trustee (incorporated by reference to Exhibit 10.30 to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-128962))
10.26	Amended and Restated Trust Agreement, dated as of November 22, 2005, between NorthStar Realty Finance Limited Partnership, as depositor, JPMorgan Chase Bank, National Association, as property trustee, Chase Bank USA, National Association, as Delaware trustee and Andrew Richardson, David Hamamoto and Richard McCready, each as administrative trustees (incorporated by reference to Exhibit 10.31 to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-128962))
10.27	Fifth Amendment to the Master Repurchase Agreement, dated February 28, 2005, by and among NRFC WA Holdings, LLC, NRFC WA Holdings II, LLC and Wachovia Bank, National Association (incorporated by reference to the like-numbered exhibit to NorthStar Realty Finance Corp.’s Annual Report on Form 10-K for the year ended December 31, 2005)
10.28	Junior Subordinated Indenture, dated as of March 10, 2006, between NorthStar Realty Finance Limited Partnership, NorthStar Realty Finance Corp. and Wilmington Trust Company, as trustee (incorporated by reference to the like-numbered exhibit to NorthStar Realty Finance Corp.’s Annual Report on Form 10-K for the year ended December 31, 2005)
10.29	Amended and Restated Trust Agreement, dated as of March 10, 2006, between NorthStar Realty Finance Limited Partnership, as depositor, NorthStar Realty Finance Corp., a guarantor, Wilmington Trust Company, as property trustee and Delaware trustee and Andrew Richardson, David Hamamoto and Richard McCready, each as administrative trustees (incorporated by reference to the like-numbered exhibit to NorthStar Realty Finance Corp.’s Annual Report on Form 10-K for the year ended December 31, 2005)
10.30	Form of NorthStar Realty Finance Corp. 2006 Outperformance Plan Award Agreement (incorporated by reference to the like-numbered exhibit to NorthStar Realty Finance Corp.’s Annual Report on Form 10-K for the year ended December 31, 2005)
10.31	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 the like-numbered exhibit to NorthStar Realty Finance Corp.’s Annual Report on Form 10-K for the year ended December 31, 2005)
10.32	Executive Employment Agreement, dated as of March 14, 2006, between Richard J. McCready and NorthStar Realty Finance Corp. (incorporated by reference to the like-numbered exhibit to NorthStar Realty Finance Corp.’s Annual Report on Form 10-K for the year ended December 31, 2005)
10.33	Executive Employment Agreement, dated as of March 22, 2006, between Andrew C. Richardson and NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 99.1 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed on March 28, 2006)
10.34	Agreement, dated as of April 6, 2006 between Mark E. Chertok and NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 99.1 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed on April 10, 2006)

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Exhibit Number	Description of Exhibit
10.35	Second Omnibus Amendment to Repurchase Documents, dated as of June 6, 2006, by and among NRFC WA Holdings, LLC, NRFC WA Holdings II, LLC, NRFC WA Holdings III, LLC, NRFC WA Holdings IV, LLC, NRFC WA Holdings V, LLC, NRFC WA Holdings VI, LLC, NRFC WA Holdings VII, LLC, NRFC WA Holdings VIII, LLC, and Wachovia Bank, National Association (incorporated by reference to the like-numbered exhibit to NorthStar Realty Finance Corp.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006)
10.36	Junior Subordinated Indenture, dated as of August 1, 2006, between NorthStar Realty Finance Limited Partnership, NorthStar Realty Finance Corp. and Wilmington Trust Company, as trustee
10.37	Amended and Restated Trust Agreement, dated as of August 1, 2006, between NorthStar Realty Finance Limited Partnership, as depositor, NorthStar Realty Finance Corp., a guarantor, Wilmington Trust Company, as property trustee and Delaware trustee and David Hamamoto, Andrew Richardson and Richard McCready, each as administrative trustees (incorporated by reference to the like-numbered exhibit to NorthStar Realty Finance Corp.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006)
10.38	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)
10.39	Junior Subordinated Indenture, dated as of October 6, 2006, between NorthStar Realty Finance Limited Partnership, NorthStar Realty Finance Corp. and Wilmington Trust Company, as trustee (incorporated by reference to Exhibit 10.42 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2006)
10.40	Amended and Restated Trust Agreement, dated as of October 6, 2006, between NorthStar Realty Finance Limited Partnership, as depositor, NorthStar Realty Finance Corp., a guarantor, Wilmington Trust Company, as property trustee and Delaware trustee and David Hamamoto, Andrew Richardson and Richard McCready, each as administrative trustees (incorporated by reference to Exhibit 10.43 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2006)
10.41	Revolving Credit Agreement, dated as of November 3, 2006, between NorthStar Realty Finance Corp., NorthStar Realty Finance Limited Partnership, NRFC Sub-REIT Corp., NS Advisors, LLC, Keybanc Capital Markets and Bank of America, N.A. (incorporated by reference to Exhibit 10.44 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2006)
10.42	Sixth Amendment to the Master Repurchase Agreement, dated as of November 7, 2006, by and among NRFC WA Holdings, LLC, NRFC WA Holdings II, LLC, NRFC WA Holdings III, LLC, NRFC WA Holdings IV, LLC, NRFC WA Holdings V, LLC, NRFC WA Holdings VI, LLC, NRFC WA Holdings VII, LLC, NRFC WA Holdings VIII, LLC, and Wachovia Bank, National Association (incorporated by reference to Exhibit 10.45 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2006)
10.43	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)
10.44	Purchase and Sale Agreement, dated as of February 23, 2007, by and among GIN Housing Partners I, L.L.C. and the persons and entities identified as sellers on the signature pages thereto, portions of which have been omitted pursuant to a request for confidential treatment (incorporated by reference to Exhibit 10.44 to the NorthStar Realty Finance Corp. Annual Report on Form 10-K for the fiscal year ended December 31, 2006, filed on March 15, 2007).
12.1	Computation of Ratio of Earnings to Fixed Charges (incorporated by reference to Exhibit 12.1 to the NorthStar Realty Finance Corp. Annual Report on Form 10-K for the fiscal year ended December 31, 2006, filed on March 15, 2007).
21.1	Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1 to the NorthStar Realty Finance Corp. Annual Report on Form 10-K for the fiscal year ended December 31, 2006, filed on March 15, 2007).
23.1	Consent of Grant Thornton LLP

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Exhibit Number	Description of Exhibit
24.1	Power of Attorney (included in signature page to the NorthStar Realty Finance Corp. Annual Report on Form 10-K for the fiscal year ended December 31, 2006, filed on March 15, 2007).
31.1	Certification by the Chief Executive Officer pursuant to 17 CFR 240.13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification by the Chief Financial Officer pursuant to 17 CFR 240.13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification by the Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification by the Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on June 29, 2007.

NORTHSTAR REALTY FINANCE CORP.
By:	/s/ Albert Tylis
	Name: Albert Tylis Title: Executive Vice President and General Counsel

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below on behalf of the Registrant in the capacities and on the dates indicated.

Signature	Title	Date
/s/ *	Chief Executive Officer, President and Director (Principal Executive Officer)	June 29, 2007
David T. Hamamoto
/s/ *	Chief Financial Officer and Treasurer (Principal Financial Officer)	June 29, 2007
Andrew C. Richardson
/s/ *	Chief Accounting Officer (Principal Accounting Officer)	June 29, 2007
Lisa Meyer
/s/ *	Chairman of the Board of Directors	June 29, 2007
W. Edward Scheetz
/s/ *	Director	June 29, 2007
William V. Adamski
/s/ *	Director	June 29, 2007
Preston Butcher
/s/ *	Director	June 29, 2007
Judith A. Hannaway
/s/ *	Director	June 29, 2007
Wesley D. Minami
/s/ *	Director	June 29, 2007
Louis J. Paglia
/s/ *	Director	June 29, 2007
Frank V. Sica

* By:	/s/ Albert Tylis
	Albert Tylis Attorney-in-fact

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EXHIBIT INDEX

Exhibit Number	Description of Exhibit
23.1	Consent of Grant Thornton LLP.
31.1	Certification by the Chief Executive Officer pursuant to 17 CFR 240.13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification by the Chief Financial Officer pursuant to 17 CFR 240.13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification by the Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification by the Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

61