ISTAR FINANCIAL INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
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FORM 10-K

(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, 2001
OR

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

FOR THE TRANSITION PERIOD FROM ______________ TO ______________

COMMISSION FILE NO. 1-10150
--------------------------

ISTAR FINANCIAL INC.

(Exact name of registrant as specified in its charter)

MARYLAND 95-6881527
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

1114 AVENUE OF THE AMERICAS, 27TH FLOOR 10036
NEW YORK, NY 10036 (Zip code)
(Address of principal executive offices)

Registrant's telephone number, including area code: (212) 930-9400
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Securities registered pursuant to Section 12(b) of the Act:

Title of each class: Name of Exchange on which registered:

COMMON STOCK, $0.001 PAR VALUE NEW YORK STOCK EXCHANGE

9.375% SERIES B CUMULATIVE REDEEMABLE NEW YORK STOCK EXCHANGE
PREFERRED STOCK, $0.001 PAR VALUE

9.200% SERIES C CUMULATIVE REDEEMABLE NEW YORK STOCK EXCHANGE
PREFERRED STOCK, $0.001 PAR VALUE

8.000% SERIES D CUMULATIVE REDEEMABLE NEW YORK STOCK EXCHANGE
PREFERRED STOCK, $0.001 PAR VALUE

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant: (i) 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 (ii) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /

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. / /

As of March 15, 2002, the aggregate market value of the common stock, $0.001
par value per share of iStar Financial Inc. ("Common Stock"), held by
non-affiliates(1) of the registrant was approximately $2.4 billion, based upon
the closing price of $28.29 on the New York Stock Exchange composite tape on
such date.

As of March 15, 2002, there were 87,877,976 shares of Common Stock
outstanding.

(1) For purposes of this Annual Report only, includes all outstanding Common
Stock other than Common Stock held directly by the Registrant's directors
and executive officers.

DOCUMENTS INCORPORATED BY REFERENCE

1. Portions of the registrant's definitive proxy statement for the registrant's
2002 Annual Meeting, to be filed within 120 days after the close of the
registrant's fiscal year, are incorporated by reference into Part III of
this Annual Report on Form 10-K.

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TABLE OF CONTENTS

PART I

ITEM 1. BUSINESS

EXPLANATORY NOTE FOR PURPOSES OF THE "SAFE HARBOR PROVISIONS" OF SECTION 21E OF
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
which involve certain risks and uncertainties. Forward-looking statements are
included with respect to, among other things, the Company's current business
plan, business strategy and portfolio management. The Company's actual results
or outcomes may differ materially from those anticipated. Important factors that
the Company believes might cause such differences are discussed in the
cautionary statements presented under the caption "Factors That May Affect the
Company's Business Strategy" in Item 1 of this Form 10-K or otherwise accompany
the forward-looking statements contained in this Form 10-K. In assessing all
forward-looking statements, readers are urged to read carefully all cautionary
statements contained in this Form 10-K.

OVERVIEW

iStar Financial Inc. (the "Company") is the leading publicly traded finance
company focused on the commercial real estate industry. The Company provides
structured financing to private and corporate owners of real estate nationwide,
including senior and junior mortgage debt, corporate mezzanine and subordinated
capital, and corporate net lease financing. The Company, which is taxed as a
real estate investment trust ("REIT"), seeks to deliver superior risk-adjusted
returns on equity to shareholders by providing innovative and value-added
financing solutions to its customers.

The Company's primary product lines include:

- STRUCTURED FINANCE. The Company provides senior and subordinated loans
that typically range in size from $20 million to $100 million to borrowers
controlling institutional quality real estate. These loans may be either
fixed or variable rate and are structured to meet the specific financing
needs of the borrowers, including the acquisition or financing of large,
high-quality real estate. The Company offers borrowers a wide range of
structured finance options, including first mortgages, second mortgages,
partnership loans, participating debt and interim facilities.

- PORTFOLIO FINANCE. The Company provides funding to regional and national
borrowers who own multiple properties in a geographically diverse
portfolio. Loans are cross-collateralized to give borrowers the benefit of
all available collateral and underwritten to recognize inherent portfolio
diversification. Property types include multifamily, suburban office,
hotels and other property types where individual property values are less
than $20 million on average. Loan terms are structured to meet the
specific requirements of the borrower and typically range in size from
$25 million to $150 million.

- CORPORATE FINANCE. The Company provides senior and subordinated capital to
corporations engaged in real estate or real estate-related businesses.
Financing may be either secured or unsecured and typically range in size
from $20 million to $150 million.

- LOAN ACQUISITION. The Company acquires whole loans and loan participations
which present attractive risk-reward opportunities. Loans are generally
acquired at a discount to the principal balance outstanding and may be
acquired with financing provided by the seller. Loan acquisitions
typically range in size from $5 million to $100 million and are
collateralized by all major property types.

- CORPORATE TENANT LEASING. The Company provides capital to corporations, as
well as borrowers who control properties leased to single creditworthy
tenants. The Company's net leased assets are

2

generally mission-critical headquarters or distribution facilities that
are subject to long-term leases with rated corporate credit tenants, and
which provide for all expenses at the property to be paid by the tenant on
a triple net lease basis. Corporate tenant transactions typically range in
size from $20 million to $200 million.

- SERVICING. Through its iStar Asset Services division, the Company provides
rated servicing to third-party institutional loan portfolios, as well as
to the Company's own portfolio.

As more fully discussed in Note 1 to the Company's Consolidated Financial
Statements, the Company began its business in 1993 through private investment
funds formed to capitalize on inefficiencies in the real estate finance market.
In March 1998, these funds contributed their approximately $1.1 billion of
assets to the Company's predecessor, Starwood Financial Trust, in exchange for a
controlling interest in that company. Since that time, the Company has grown by
originating new lending and leasing transactions, as well as through corporate
acquisitions.

Specifically, in September 1998, the Company acquired the loan origination
and servicing business of a major insurance company, and in December 1998, the
Company acquired the mortgage and mezzanine loan portfolio of its largest
private competitor. Additionally, in November 1999, the Company acquired TriNet
Corporate Realty Trust, Inc., then the largest publicly traded company
specializing in the net leasing of corporate office and industrial facilities.
The acquisition of TriNet was structured as a stock-for-stock merger of TriNet
with a subsidiary of the Company. We refer to TriNet throughout this document as
the "Leasing Subsidiary."

Concurrent with the acquisition of TriNet, the Company also acquired its
former external advisor in exchange for shares of Common Stock and converted its
organizational form to a Maryland corporation. As part of the conversion to a
Maryland corporation, the Company replaced its former dual class common share
structure with a single class of Common Stock. The Company's Common Stock began
trading on the New York Stock Exchange on November 4, 1999. Prior to this date,
the Company's common shares were traded on the American Stock Exchange.

INVESTMENT STRATEGY

The Company's investment strategy targets specific sectors of the real
estate credit markets in which it believes it can deliver value-added, flexible
financial solutions to its customers, thereby differentiating its financial
products from those offered by other capital providers.

The Company has implemented its investment strategy by:

- Focusing on the origination of large, structured mortgage, corporate and
lease financings where customers require flexible financial solutions.

- Avoiding commodity businesses in which there is significant direct
competition from other providers of capital such as conduit lending and
investment in commercial or residential mortgage-backed securities.

- Developing direct relationships with borrowers and corporate customers as
opposed to sourcing transactions solely through intermediaries.

- Adding value beyond simply providing capital by offering borrowers and
corporate customers specific lending expertise, flexibility, certainty and
continuing relationships beyond the closing of a particular financing
transaction.

- Taking advantage of market anomalies in the real estate financing markets
when the Company believes credit is mispriced by other providers of
capital, such as the spread between lease yields and the yields on
corporate customers' underlying credit obligations.

3

The Company intends to continue to emphasize a mix of portfolio financing
transactions to create asset diversification and single-asset financings for
properties with strong, long-term competitive market positions. The Company's
credit process will continue to focus on:

- Building diversification by asset type, property type, obligor, loan/lease
maturity and geography.

- Financing high-quality commercial real estate assets in major metropolitan
markets.

- Underwriting assets using conservative assumptions regarding collateral
value and future property performance.

- Requiring adequate cash flow coverage on its investments.

- Stress testing potential investments for adverse economic and real estate
market conditions.

As of December 31, 2001, based on current gross carrying values, the
Company's business consists of the following product lines:

PRODUCT LINE

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

4

The Company seeks to maintain an investment portfolio which is diversified
by asset type, underlying property type and geography. As of December 31, 2001,
based on current gross carrying values, the Company's total investment portfolio
has the following characteristics:

ASSET TYPE

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

PROPERTY TYPE

GEOGRAPHY

5

FINANCING STRATEGY

The Company has access to a wide range of debt and equity capital resources
to finance its investment and growth strategies. At December 31, 2001, the
Company had approximately $1.8 billion of tangible book equity capital and a
total market capitalization of approximately $5.1 billion. The Company believes
that its size, diversification, investor sponsorship and track record are
competitive advantages in obtaining attractive financing for its businesses.

The Company seeks to maximize risk-adjusted returns on equity and financial
flexibility by accessing a variety of public and private debt and equity capital
sources, including:

- iStar Asset Receivables ("STARs"), the Company's proprietary match-funded,
securitized debt program.

- Long-term, unsecured corporate debt.

- A combined $2.2 billion available under its unsecured and secured
revolving credit facilities at year end.

The Company's business model is premised on significantly lower leverage
than many other commercial finance companies. In this regard, the Company seeks
to:

- Target a maximum consolidated debt/book equity ratio of 1.5x to 2.0x.

- Maintain a large tangible equity base and conservative credit statistics.

- Match fund assets and liabilities.

The Company has not historically utilized, nor currently plans to utilize,
"off-balance sheet" financing vehicles other than normal corporate tenant
leasing joint ventures with unrelated third parties, which may be accounted for
under the equity method due to the existence of provisions providing for a
sharing of control with the venture partners. Detailed information on joint
ventures in which the Company currently has investments/operations, including
information on the Company's share of the joint ventures' non-recourse debt, is
provided in Item 7--"Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources," and in Note 6 to
the Company's Consolidated Financial Statements.

A more detailed discussion of the Company's current capital resources is
provided in Item 7--"Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."

BUSINESS

REAL ESTATE LENDING:

The Company provides structured financing to private and corporate owners of
real estate nationwide, including senior and junior mortgage debt, as well as
corporate mezzanine and subordinated capital.

6

Set forth below is information regarding the Company's primary real estate
lending product lines as of December 31, 2001:

As more fully discussed in Note 3 to the Company's Consolidated Financial
Statements, the Company continually monitors borrower performance and completes
a detailed, loan-by-loan formal credit review on a quarterly basis. After having
originated or acquired over $5 billion of investment transactions, neither the
Company nor its private investment fund predecessors have experienced any actual
losses on their lending investments. Further, based on current reviews of its
portfolio, management is not aware of any factors relating to specific loans
which indicate that such losses may be experienced in the forseeable future.

While no specific losses are currently indicated, the Company has considered
it prudent to establish a policy of providing loan portfolio reserves for losses
which may be realized in the future. Accordingly, since its first full quarter
as a public company (the quarter ended June 30, 1998), management has reflected
quarterly provisions for possible loan in its operating results.

SUMMARY OF INTEREST CHARACTERISTICS

As more fully discussed in Item 7--"Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources"
as well as in Item 7a.--"Quantitative and Qualitative Disclosures about Market
Risk," the Company utilizes certain interest rate risk management techniques,
including both asset/liability matching and certain other hedging techniques, in
order to mitigate the Company's exposure to interest rate risks.

As of December 31, 2001, the Company's Lending Business portfolio has the
following interest rate characteristics:

SUMMARY OF PREPAYMENT TERMS

The Company is exposed to risks of prepayment on its loan assets, and
generally seeks to protect itself from such risk by structuring its loans with
prepayment restrictions and/or penalties.

7

As of December 31, 2001, the Company's Lending Business portfolio has the
following call protection characteristics:

SUMMARY OF LENDING BUSINESS MATURITIES

As of December 31, 2001, the Company's Lending Business portfolio has the
following maturity characteristics:

STRUCTURED FINANCE

The Company provides custom-tailored senior and subordinated loans that
typically range in size from $20 million to $100 million to borrowers
controlling institutional-quality real estate. These loans may be either fixed
or variable rate and are structured to meet the specific financing needs of the
borrowers, including financing related to the acquisition or refinancing of
large, high-quality real estate. The Company offers borrowers a wide range of
structured finance options, including first mortgages, second mortgages,
partnership loans, participating debt and interim facilities.

8

As of December 31, 2001, the Company's structured finance investments have
the following characteristics:

EXPLANATORY NOTES:
- ----------------------------------------

(1) Where Current Carrying Value is less than Initial Carrying Value, difference
represents contractual amortization, partial prepayment of loan principal,
or amortization of acquired premiums, discounts or deferred loan fees.

(2) All variable-rate loans assume a one-month LIBOR rate of 1.87% (the actual
one-month LIBOR rate at December 31, 2001).

(3) Estimated accounting yield represents the stated rate on the loan as
adjusted for the amortization of loan fee revenue and any direct loan costs
or acquisition premiums or discounts using the effective interest method
over the term of the loan. Such estimate is not adjusted for the effects of
expected early repayments of loans subject to prepayment penalties or the
effects of possible additional contingent interest on loan participation
features included under certain of the Company's loan investments.

(4) Weighted average ratio of first dollar current loan carrying value to
underlying collateral value using third-party appraisal (where applicable)
or the Company's internal valuation (where no current appraisal available).

(5) Weighted average ratio of last dollar current loan carrying value to
underlying collateral value using third-party appraisal (where applicable)
or the Company's internal valuation (where no current appraisal available).

(6) Junior first mortgages represent promissory notes secured by first mortgages
which are junior to other promissory notes secured by the same first
mortgage.

10

LOAN SERVICING

Through its iStar Asset Services division, the Company provides loan
servicing to third-party institutional owners of loan portfolios, as well as to
the Company's own asset base. iStar Asset Services is currently rated "above
average" by Standard & Poor's and "CPS2" (approved) by Fitch Inc. as a master
servicer. The Company's servicing business focuses on maximizing risk-adjusted
investment returns through active, ongoing asset management with particular
focus on risk management, asset financing strategies and opportunistic
responsiveness to changing customer needs.

CORPORATE TENANT LEASING:

The Company, directly and through its Leasing Subsidiary, provides capital
to corporate owners of office and industrial facilities. Net leased facilities
are generally subject to long-term leases to rated corporate credit tenants, and
typically provide for all expenses at the property to be paid by the corporate
tenant on a triple net lease basis. Corporate tenant lease ("CTL") transactions
typically range in size from $20 million to $200 million.

The Company pursues the origination of corporate tenant lease transactions
by structuring purchase/ leasebacks and by acquiring facilities subject to
existing long-term net leases. In a typical purchase/ leaseback transaction, the
Company purchases a corporation's facility and leases it back to that
corporation subject to a long-term net lease. This structure allows the
corporate customer to reinvest the proceeds from the sale of its facilities into
its core business, while the Company capitalizes on its structured financing
expertise.

The Company generally intends to hold its CTL assets for long-term
investment. However, subject to certain tax restrictions, the Company may
dispose of an asset if it deems the disposition to be in the best interest of
shareholders and may either reinvest the disposition proceeds, use the proceeds
to reduce debt, or distribute the proceeds to shareholders.

The Company's CTL investments primarily represent a diversified portfolio of
mission-critical headquarters or distribution facilities subject to net lease
agreements with creditworthy corporate tenants. The Company generally seeks
high-quality, general-purpose real estate with residual values that represent a
discount to current market values and replacement costs. Under a typical net
lease agreement, the corporate customer agrees to pay a base monthly operating
lease payment and all facility operating expenses (including taxes, maintenance
and insurance).

The Company generally seeks corporate tenants with the following
characteristics:

- Established companies with stable core businesses or market leaders in
growing industries.

- Investment-grade credit strength or appropriate credit enhancements if
corporate credit strength is not sufficient on a stand-alone basis.

- Commitment to the facility as a mission-critical asset to their on-going
businesses.

As of December 31, 2001, the Company had 159 corporate customers operating
in more than 21 major industry sectors, including aerospace, energy, finance,
healthcare, manufacturing, technology and telecommunications. These customers
represent well-recognized national and international companies, such as Federal
Express, Goodyear, IBM, Nike, Nokia, the U.S. Government and Verizon.

11

As of December 31, 2001, the Company's CTL portfolio has the following
tenant credit characteristics:

EXPLANATORY NOTES:
- ------------------------------

(1) A customer's credit rating is considered "Investment Grade" if it has a
published senior unsecured credit rating of Baa3/BBB- or above by one or
more of the three national rating agencies. Where a customer's credit is
rated investment grade by one agency and non-investment grade by another,
the Company only classifies the credit "Investment Grade" if the agency
rating the credit investment grade is Standard & Poor's or Moody's Investors
Service.

(2) A customer's credit rating is considered "Implied Investment Grade" if it
has no published ratings, but has credit characteristics that the Company
believes warrant an investment grade senior unsecured credit rating.
Examples at December 31, 2001 include Alcatel Network Systems, Cisco Systems
Inc., Mitsubishi Electronics and Volkswagen of America.

(3) Reflects annualized GAAP operating lease income for leases in place at
December 31, 2001. The operating lease income includes the Company's
pro-rata share from facilities owned by the Company's joint ventures.

RISK MANAGEMENT STRATEGIES. The Company believes that diligent risk
management of its CTL assets is an essential component of its long-term
strategy. There are several ways to optimize the performance and maximize the
value of CTL assets. The Company monitors its portfolio for changes that could
affect the performance of the markets, credits and industries in which it has
invested. As part of this monitoring, the Company's risk management group
reviews market, customer and industry data and frequently inspects its
facilities. In addition, the Company attempts to develop strong relationships
with its large corporate customers, which provide a source of information
concerning the customers' facilities needs. These relationships allow the
Company to be proactive in obtaining early lease renewals and in conducting
early marketing of assets where the customer has decided not to renew.

12

As of December 31, 2001, the Company owned 154 office and industrial
facilities principally subject to net leases to 159 customers, comprising
22.6 million square feet in 26 states. The Company also has a portfolio of 17
hotels under a long-term master lease with a single customer. Information
regarding the Company's CTL assets as of December 31, 2001 is set forth below:

EXPLANATORY NOTE:
- ----------------------------------
(1) Reflects annualized GAAP operating lease income for leases in place at
December 31, 2001. The operating lease income includes the Company's
pro-rata share from facilities owned by the Company's joint ventures.

(2) Reflects annualized GAAP operating lease income for leases in place at
December 31, 2001 as a percentage of annualized total revenue for the
quarter ended December 31, 2001.

13

As of December 31, 2001, lease expirations on the Company's CTL assets,
including facilities owned by the Company's joint ventures, are as follows:

EXPLANATORY NOTES:
- ------------------------------

(1) Reflects annualized GAAP operating lease income for leases in place at
December 31, 2001. The operating lease income includes the Company's
pro-rata share from facilities owned by the Company's joint ventures.

(2) Reflects annualized GAAP operating lease income for leases in place at
December 31, 2001 as a percentage of annualized total revenue for the
quarter ended December 31, 2001.

POLICIES WITH RESPECT TO OTHER ACTIVITIES

At all times, the Company intends to make investments in a manner consistent
with the requirements of the Code for the Company to qualify as a REIT.

INVESTMENT RESTRICTIONS OR LIMITATIONS

The Company does not have any prescribed allocation among investments or
product lines. Instead, the Company focuses on corporate and real estate credit
underwriting to develop an in-depth analysis of the risk/reward ratios in
determining the pricing and advisability of each particular transaction.

The Company believes that it is not, and intends to conduct its operations
so as not to become, regulated as an investment company under the Investment
Company Act. The Investment Company Act generally exempts entities that are
"primarily engaged in purchasing or otherwise acquiring mortgages and other
liens on and interests in real estate" (collectively, "Qualifying Interests").
The Company intends to rely on current interpretations of the Securities and
Exchange Commission in an effort to qualify for this exemption. Based on these
interpretations, the Company, among other things, must maintain at least 55% of
its assets in Qualifying Interests and at least 25% of its assets in real
estate-related assets (subject to reduction to the extent the Company invests
more than 55% of its assets in Qualifying Interests). Generally, the Company's
senior mortgages and certain of its subordinated mortgages constitute Qualifying
Interests.

Subject to the limitations on ownership of certain types of assets and the
gross income tests imposed by the Code, the Company also may invest in the
securities of other REITs, other entities engaged in real estate activities or
other issuers, including for the purpose of exercising control over such
entities.

14

COMPETITION

The Company is engaged in a competitive business. In originating and
acquiring assets, the Company competes with public and private companies,
including other finance companies, mortgage banks, pension funds, savings and
loan associations, insurance companies, institutional investors, investment
banking firms and other lenders and industry participants, as well as individual
investors. Existing industry participants and potential new entrants compete
with the Company for the available supply of investments suitable for
origination or acquisition, as well as for debt and equity capital. Certain of
the Company's competitors are larger than the Company, have longer operating
histories, may have access to greater capital and other resources, may have
management personnel with more experience than the officers of the Company, and
may have other advantages over the Company in conducting certain businesses and
providing certain services.

REGULATION

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

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

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

The Company was eligible and elected to be taxed as a REIT for taxable years
beginning January 1, 1998.

FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS STRATEGY

The implementation of the Company's business strategy and investment
policies are subject to certain risks, including the effect of economic and
other conditions on underlying property performance, the risks of borrower and
corporate tenant defaults, risks resulting from delays in enforcing remedies or
in gaining control over real estate collateral following a default, risks that
the properties collateralizing debt instruments held by the Company or CTL
assets owned by the Company will not generate revenues sufficient to meet
operating expenses and to pay scheduled debt service, the risk that prepayment

15

restrictions may be insufficient to deter prepayments, the existence of junior
mortgages that may affect the Company's rights, liability associated with
uninsurable losses and unknown environmental liabilities.

ENVIRONMENTAL MATTERS

Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner of real estate (including, in certain
circumstances, a secured lender that succeeds to ownership or control of a
property) may become liable for the costs of removal or remediation of certain
hazardous or toxic substances at, on, under or in its property. Those laws
typically impose cleanup responsibility and liability without regard to whether
the owner or control party knew of or was responsible for the release or
presence of such hazardous or toxic substances. The costs of investigation,
remediation or removal of those substances may be substantial. The owner or
control party of a site may be subject to common law claims by third parties
based on damages and costs resulting from environmental contamination emanating
from a site. Certain environmental laws also impose liability in connection with
the handling of or exposure to asbestos-containing materials, pursuant to which
third parties may seek recovery from owners of real properties for personal
injuries associated with asbestos-containing materials. Absent succeeding to
ownership or control of real property, a secured lender is not likely to be
subject to any of these forms of environmental liability. The Company is not
currently aware of any environmental issues which could materially affect the
Company.

EMPLOYEES

As of March 15, 2002, the Company had 134 employees and believes its
relationships with its employees to be good. The Company's employees are not
represented by a collective bargaining agreement.

ITEM 2. PROPERTIES

The Company's principal executive and administrative offices are located at
1114 Avenue of the Americas, New York, NY 10036. Its telephone number, general
facsimile number and web address are (212) 930-9400, (212) 930-9494 and
www.istarfinancial.com, respectively. The lease for the Company's primary
corporate office space expires in February 2010. The Company believes that this
office space is suitable for its operations for the foreseeable future. The
Company also maintains super-regional offices in San Francisco, California;
Hartford, Connecticut; and Atlanta, Georgia, as well as regional offices in
Boston, Massachusetts; Dallas, Texas; and Denver, Colorado.

See Item 1--"Corporate Tenant Leasing" for a discussion of corporate tenant
lease facilities held by the Company and its Leasing Subsidiary for investment
purposes and Item 8--"Schedule III--Corporate Tenant Lease Assets and
Accumulated Depreciation" for a detailed listing of such facilities.

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any material litigation or legal proceedings,
or to the best of its knowledge, any threatened litigation or legal proceedings
which, in the opinion of management, individually or in the aggregate, would
have a material adverse effect on its results of operations or financial
condition.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the
fourth quarter of 2001.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S EQUITY AND RELATED SHARE MATTERS

The Company's Common Stock trades on the New York Stock Exchange ("NYSE")
under the symbol "SFI."

The high and low sales prices per share of Common Stock are set forth below
for the periods indicated.

On March 15, 2002, the closing sale price of the Common Stock as reported by
the NYSE was $28.29. The Company had approximately 2,025 holders of record of
Common Stock as of March 15, 2002.

At December 31, 2001, the Company had four series of preferred stock
outstanding: Series A Preferred Stock (which currently pays dividends at the
rate of 9.50% per annum), 9.375% Series B Preferred Stock, 9.20% Series C
Preferred Stock and 8.00% Series D Preferred Stock. Each of the Series B, C and
D preferred stock is publicly traded.

DIVIDENDS

The Company's management expects that any taxable income remaining after the
distribution of preferred dividends and the regular quarterly or other dividends
on its Common Stock will be distributed annually to the holders of the Common
Stock on or prior to the date of the first regular quarterly dividend payment
date of the following taxable year. The dividend policy with respect to the
Common Stock is subject to revision by the Board of Directors. All distributions
in excess of dividends on preferred stock or those required for the Company to
maintain its REIT status will be made by the Company at the sole discretion of
the Board of Directors and will depend on the taxable earnings of the Company,
the financial condition of the Company, and such other factors as the Board of
Directors deems relevant. The Board of Directors has not established any minimum
distribution level. In order to maintain its qualifications as a REIT, the
Company intends to make regular quarterly dividends to its shareholders that, on
an annual basis, will represent at least 90% of its taxable income (which may
not necessarily equal net income as calculated in accordance with generally
accepted accounting principles), determined without regard to the deduction for
dividends paid and excluding any net capital gains.

Holders of Common Stock will be entitled to receive distributions if, as and
when the Board of Directors authorizes and declares distributions. However,
rights to distributions may be subordinated to the rights of holders of
preferred stock, when preferred stock is issued and outstanding. In any
liquidation, dissolution or winding up of the Company, each outstanding share of
Common Stock will entitle its holder to a proportionate share of the assets that
remain after the Company pays its liabilities and any preferential distributions
owed to preferred shareholders.

17

The following table sets forth the dividends paid or declared by the Company
on its Common Stock:

EXPLANATORY NOTES:
- ------------------------------

(1) A portion of this quarterly dividend (approximately $0.5976 per share) was
treated as income to shareholders of record in 2000, and the remainder was
treated as 2001 income.

(2) For tax reporting purposes, the 2001 dividends were classified as 90.55%
($2.2206) ordinary income and 9.45% ($0.2318) return of capital.

The Company declared dividends aggregating $20.9 million, $4.7 million,
$3.0 million and $8.0 million, respectively, on its Series A, B, C and D
preferred stock, respectively, for the year ended December 31, 2001. There are
no dividend arrearages on any of the preferred shares currently outstanding.

Distributions to shareholders will generally be taxable as ordinary income,
although a portion of such dividends may be designated by the Company as capital
gain or may constitute a tax-free return of capital. The Company annually
furnishes to each of its shareholders a statement setting forth the
distributions paid during the preceding year and their characterization as
ordinary income, capital gain or return of capital.

The Company intends to continue to declare quarterly distributions on its
Common Stock. No assurance, however, can be given as to the amounts or timing of
future distributions, as such distributions are subject to the Company's
earnings, financial condition, capital requirements and such other factors as
the Company's Board of Directors deems relevant.

ITEM 6. SELECTED FINANCIAL DATA

The following table sets forth selected financial data on a consolidated
historical basis for the Company. However, prior to March 1998, as discussed
more fully in Note 1 to the Company's Consolidated Financial Statements (the
"Recapitalization Transactions"), the Company did not have substantial
operations or capital resources. Prior to the Recapitalization Transactions, the
Company's structured finance operations were conducted by two private investment
partnerships which contributed substantially all their structured finance assets
to the Company in the Recapitalization Transactions in exchange for cash and
shares of the Company.

Further, on November 4, 1999, as more fully discussed in Note 4 to the
Company's Consolidated Financial Statements, the Company acquired TriNet, which
increased the size of the Company's operations, and also acquired its external
advisor. Operating results for the year ended December 31, 1999 reflect only the
effects of these transactions subsequent to their consummation.

Accordingly, the historical balance sheet information as of and prior to
December 31, 1998, as well as the results of operations for the Company for all
periods prior to and including the year ended December 31, 1999, do not reflect
the current operations of the Company as a well capitalized, internally-managed
finance company operating in the commercial real estate industry. For these
reasons, the Company believes that the information contained in the following
tables relating to the 1997 period is not

18

indicative of the Company's current business and should be read in conjunction
with the discussions set forth in Item 7--"Management's Discussion and Analysis
of Financial Condition and Results of Operations."

19

EXPLANATORY NOTES:
- ------------------------

(1) As more fully discussed in Note 4 to the Company's Consolidated Financial
Statements, this amount represents a non-recurring, non-cash charge of
approximately $94.5 million relating to the acquisition of the Company's
external advisor in November 1999.

(2) Represents one-time effect of adoption of Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" as of January 1, 2001.

(3) Prior to November 1999, earnings per common share excludes 1% of net income
allocable to the Company's former class B shares. The former class B shares
were exchanged for Common Stock in connection with the acquisition of TriNet
and other related transactions on November 4, 1999. As a result, the Company
now has a single class of Common Stock outstanding.

(4) The Company generally declares common and preferred dividends in the month
subsequent to the end of the quarter.

(5) Adjusted earnings represents net income in accordance with GAAP, before
gains (losses) on sales of corporate tenant lease assets, extraordinary
items and cumulative effect of change in accounting principle, plus
depreciation and amortization, less preferred stock dividends, and after
adjustments for unconsolidated partnerships and joint ventures and, for the
year ended December 31, 1999, exclude the non-recurring, non-cash cost
incurred in acquiring the Company's external advisor (see Note 4 to the
Company's Consolidated Financial Statements).

(6) The 1999 and 1998 EBITDA to interest expense ratios on a pro forma basis
(see Note 4 to the Company's Conslidated Financial Statements) would have
been 2.83x and 2.84x, respectively.

(7) Combined fixed charges are comprised of interest expense, capitalized
interest, amortization of loan costs and preferred stock dividend
requirements. The 1999 and 1998 EBITDA to combined fixed charges ratios on a
pro forma basis (see Note 4 to the Company's Conslidated Financial
Statements) would have been 2.23x and 2.44x, respectively.

(8) As adjusted for one-for-six reverse stock split effected by the Company on
June 19, 1998.

20

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

GENERAL

The Company began its business in 1993 through private investment funds
formed to take advantage of the lack of well-capitalized lenders capable of
servicing the needs of high-end customers in its markets. In March 1998, the
Company's private investment funds contributed their approximately $1.1 billion
of assets to the Company's predecessor, Starwood Financial Trust, in exchange
for a controlling interest in that public company. In November 1999, the Company
acquired its leasing subsidiary, TriNet Corporate Realty Trust, Inc. ("TriNet"
or the "Leasing Subsidiary"), which was then the largest publicly-traded company
specializing in the net leasing of corporate office and industrial facilities.
Concurrent with the TriNet Acquisition, the Company also acquired its external
advisor in exchange for shares of its Common Stock and converted its
organizational form to a Maryland corporation. As part of the conversion to a
Maryland corporation, the Company replaced its former dual-class Common Stock
structure with a single class of Common Stock. This single class of Common Stock
began trading on the New York Stock Exchange under the symbol "SFI" in
November 1999.

None of the Company's investment assets were directly impacted by the
terrorist attacks against the United States on September 11, 2001. While the
Company believes that the diversification of its portfolio, its strict
underwriting standards and its use of credit enhancement techniques represent an
appropriate emphasis on risk management, the Company cannot predict the effect
that any future terrorist attack might have on the U.S. economy and the
Company's business.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

INTEREST INCOME--Interest income decreased $13.9 million to $254.1 million
for the 12 months ended December 31, 2001 from $268.0 million for the same
period in 2000. Approximately $12.7 million of this decrease is the result of
lower average LIBOR rates of 3.9% in 2001 compared to 6.4% in 2000 on the
Company's variable-rate lending investments. This decrease was partially offset
by $55.1 million of interest income on new originations or additional fundings,
net of $51.6 million from the repayment of loans and other lending investments,
in addition to a decrease of $1.5 million from income earned on cash and cash
equivalents.

OPERATING LEASE INCOME--Operating lease income increased $15.3 million to
$201.3 million for the 12 months ended December 31, 2001 from $186.0 million for
the same period in 2000. Of this increase, $11.8 million was attributable to new
corporate tenant lease assets and $6.0 million to additional operating lease
income from existing corporate tenant lease assets owned in both periods. In
addition, joint venture income contributed $4.6 million to the increase. These
increases were partially offset by a $7.0 million decrease in operating lease
income resulting from asset dispositions made in 2000 and 2001.

OTHER INCOME--Other income consists primarily of prepayment penalties and
gains from the early repayment of loans and other lending investments, financial
advisory and asset management fees, lease termination fees, mortgage servicing
fees, loan participation payments and dividends on certain investments. During
the year ended December 31, 2001, other income included loan participation
payments of $13.1 million (45.5% of other income), prepayment penalties and
gains on loan repayments of $13.0 million (45.1%) and financial advisory, lease
termination, asset management and mortgage servicing fees of $5.3 million
(18.4%). These amounts were partially offset by a loss of $2.3 million from
iStar Operating, the Company's internal loan servicing business.

INTEREST EXPENSE--For the 12 months ended December 31, 2001, interest
expense decreased by $3.8 million to $170.1 million from $173.9 million for the
same period in 2000. This decrease was primarily due to the lower average LIBOR
rates of 3.9% in 2001 compared to 6.4% in 2000 on the Company's variable-rate
debt obligations. This decrease was partially offset by the higher average
borrowings on the Company's credit facilities, term loans and unsecured notes
and $7.6 million additional amortization of deferred financing costs on the
Company's debt obligations in 2001 compared to the same period in 2000.

21

OPERATING COSTS-CORPORATE TENANT LEASE ASSETS--For the 12 months ended
December 31, 2001, operating costs were substantially unchanged as compared to
the same period in 2000. Such operating costs represent unreimbursed operating
expenses associated with corporate tenant lease assets.

DEPRECIATION AND AMORTIZATION--Depreciation and amortization increased by
approximately $1.1 million to $35.6 million for the 12 months ended
December 31, 2001 from $34.5 million for the same period 2000. This increase is
primarily the result of additional depreciation from new corporate tenant lease
assets and from improvements of existing corporate tenant lease assets that
accounted for $1.3 and $1.0 million of the increase, respectively. These
increases were partially offset by corporate tenant lease dispositions that
accounted for a $1.1 million decrease.

GENERAL AND ADMINISTRATIVE--For the 12 months ended December 31, 2001,
general and administrative expenses decreased by $1.5 million to $24.2 million,
compared to $25.7 million for the same period in 2000. This decrease is
primarily the result of a reduction in office and related costs and professional
fees, partially offset by an increase in personnel and related costs.

PROVISION FOR LOAN LOSSES--The Company's charge for provision for loan
losses increased to $7.0 million for the 12 months ended December 31, 2001 from
$6.5 million for the same period in 2000 as a result of the continued expansion
of the Company's lending operations as well as additional seasoning of its
existing lending portfolio. As more fully discussed in Note 5 to the Company's
Consolidated Financial Statements, the Company has not realized any actual
losses on any of its loan investments to date. However, the Company has
considered it prudent to establish a policy of providing loan portfolio reserves
for losses which may be realized in the future. Accordingly, since its first
full quarter operating its current business as a public company (the quarter
ended June 30, 1998), management has reflected quarterly provisions for loan
losses in its operating results. The Company plans to continue to recognize
quarterly provisions until a stabilized reserve level is attained.

STOCK-BASED COMPENSATION EXPENSE--Stock-based compensation expense increased
by approximately $711,000 as a result of charges relating to grants of stock
options and restricted shares.

GAIN ON SALE OF CORPORATE TENANT LEASE ASSETS--During 2001, the Company
disposed of four corporate tenant lease assets for total proceeds of
$26.3 million and recognized net gains of $1.1 million.

During 2000, the Company disposed of 14 corporate tenant lease assets,
including six assets held in joint venture partnerships, for total proceeds of
$256.7 million, and recognized net gains of $2.9 million.

EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT--During the 12 months
ended December 31, 2001 and 2000, the Company or its joint ventures prepaid debt
obligations of $133.0 million and $24.5 million, respectively. These
transactions resulted in an extraordinary loss on early extinguishment of debt
resulting from prepayment penalties and the expense associated with remaining
unamortized deferred financing costs in the amount of $1.6 million and $705,000
for the 12 months ended December 31, 2001 and 2000, respectively.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

INTEREST INCOME--Interest income increased to approximately $268.0 million
for the year ended December 31, 2000 from approximately $209.8 million for the
same period in 1999. This increase is a result of the interest income generated
by $721.2 million of newly-originated loan investments during fiscal 2000 and an
additional $56.0 million funded under existing loan commitments. The increase
was partially offset by a reduction in interest earned as a result of
approximately $584.5 million of principal repayments on the Company's loan
investments during the year ended December 31, 2000. In addition, the increase
was in part due to higher average interest rates on the Company's variable-rate
loans and other lending investments.

OPERATING LEASE INCOME--Operating lease income increased to approximately
$186.0 million for the year ended December 31, 2000 from approximately
$42.2 million for the same period in 1999. Approximately $134.2 million of this
increase is attributable to operating lease income generated from corporate
tenant lease assets acquired in the acquisition of TriNet, which were included
in operations for

22

the entire year in fiscal 2000 as compared to two months in 1999. In addition,
approximately $5.4 million resulted from income generated by $128.4 million of
new corporate tenant lease assets.

OTHER INCOME--Other income consists primarily of prepayment penalties and
gains from the early repayment of loans and other lending investments, financial
advisory and asset management fees, lease termination fees, mortgage servicing
fees, loan participation payments and dividends on certain investments. During
the year ended December 31, 2000, other income included prepayment penalties and
gains on loan repayments of $10.5 million (or 58.8% of other income),
$2.1 million (11.8%) in connection with a loan defeasance, loan participation
payments of $1.9 million (10.6%), financial advisory, asset management and
mortgage servicing fees of $2.6 million (14.6%) and lease termination fees of
$770,000 (4.3%).

INTEREST EXPENSE--The Company's interest expense increased by $82.7 million
for the year ended December 31, 2000 over the same period in the prior year.
Approximately $44.1 million of this increase is attributable to interest expense
incurred by the Leasing Subsidiary subsequent to its acquisition, which was
included in operations for the entire year in fiscal 2000 as compared to two
months in 1999. In addition, the increase was in part due to higher average
aggregate borrowings by the Company on its credit facilities, other term loans
and secured notes, the proceeds of which were used to fund additional
investments. The increase was also attributable to higher average interest rates
on the Company's variable-rate debt obligations.

OPERATING COSTS-CORPORATE TENANT LEASE ASSETS--For the year ended
December 31, 2000, operating costs associated with corporate tenant lease assets
increased by approximately $10.6 million to approximately $12.8 million, net of
recoveries from corporate tenants. Such operating costs represent unreimbursed
operating expenses associated with corporate tenant lease assets. This increase
is primarily attributable to operating costs generated from corporate tenant
lease assets acquired in the acquisition of TriNet, which were included in
operations for the entire year in fiscal 2000 as compared to two months in 1999.

DEPRECIATION AND AMORTIZATION--Depreciation and amortization increased by
approximately $24.2 million to $34.5 million for the year ended December 31,
2000 over the same period in the prior year. Approximately $24.0 million of this
increase is attributable to depreciation and amortization relating to the
corporate tenant lease assets acquired in the acquisition of TriNet, which were
included in operations for the entire year in fiscal 2000 as compared to two
months in 1999.

GENERAL AND ADMINISTRATIVE--The Company's general and administrative
expenses during the year ended December 31, 2000 increased by approximately
$19.4 million to $25.7 million compared to the same period in 1999. These
increases were generally the result of the increased scope of the Company's
operations associated with the acquisition of TriNet and the direct overhead
costs associated with the Company's former external advisor, which were included
in operations for the entire year in fiscal 2000 as compared to two months in
1999.

PROVISION FOR LOAN LOSSES--The Company's charge for provision for loan
losses increased to $6.5 million from $4.8 million as a result of expanded
lending operations as well as additional seasoning of the Company's existing
lending portfolio. As more fully discussed in Note 5 to the Company's
Consolidated Financial Statements, the Company has not realized any actual
losses on any of its loan investments to date. However, the Company has
considered it prudent to establish a policy of providing loan portfolio reserves
for losses which may be realized in the future. Accordingly, since its first
full quarter as a public company (the quarter ended June 30, 1998), management
has reflected quarterly provisions for loan losses in its operating results. The
Company plans to continue to recognize quarterly provisions until a stabilized
reserve level is attained.

STOCK-BASED COMPENSATION EXPENSE--Stock-based compensation expense increased
by approximately $2.5 million as a result of charges relating to grants of stock
options to the Company's employees, including amortization of the deferred
charge related to options granted to employees of the Company's former external
advisor subsequent to such personnel becoming direct employees of the Company as
of November 4, 1999.

23

ADVISORY FEES--There were no advisory fees during the year ended
December 31, 2000 because, subsequent to the acquisition of the Company's former
external advisor, the Company is now internally-managed. No further advisory
fees will be incurred.

COSTS INCURRED IN ACQUIRING EXTERNAL ADVISOR--As more fully discussed in
Note 4 to the Company's Consolidated Financial Statements, included in fiscal
1999 costs and expenses is a non-recurring, non-cash charge of approximately
$94.5 million relating to the aquisition of the Company's former external
advisor.

GAIN ON SALE OF CORPORATE TENANT LEASE ASSETS--During the year ended 2000,
the Company disposed of 14 corporate tenant lease assets, including six assets
held in joint venture partnerships, for a total of $256.7 million in proceeds,
and recognized net gains of $2.9 million.

EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT--During the 12 months
ended December 31, 2000, the Company or its joint ventures prepaid debt
obligations of $24.5 million. These transactions resulted in an extraordinary
loss on early extinquishment of debt resulting from prepayment penalties in the
amount of $705,000.

ADJUSTED EARNINGS

Adjusted earnings represents net income computed in accordance with GAAP,
before gains (losses) on sales of corporate tenant lease assets, extraordinary
items and cumulative effect of change in accounting principle, plus depreciation
and amortization, less preferred stock dividends, and after adjustments for
unconsolidated partnerships and joint ventures. Adjustments for unconsolidated
partnerships and joint ventures reflect the Company's share of adjusted earnings
calculated on the same basis.

The Company believes that to facilitate a clear understanding of the
historical operating results of the Company, adjusted earnings should be
examined in conjunction with net income as shown in the Consolidated Statements
of Operations. Adjusted earnings should not be considered as an alternative to
net income (determined in accordance with GAAP) as an indicator of the Company's
performance, or to cash flows from operating activities (determined in
accordance with GAAP) as a measure of the Company's liquidity, nor is it
indicative of funds available to fund the Company's cash needs.

EXPLANATORY NOTE:
- ------------------------------

(1) Represents one-time effect of adoption of Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" as of January 1, 2001.

24

RISK MANAGEMENT

INVESTMENT MODIFICATIONS--On October 1, 2001, the Company substantially
enhanced the value of its security under a ground lease with a CTL customer
located in San Jose, CA. As part of the transaction, the customer posted an
additional $15.0 million letter of credit as additional collateral for its lease
obligation to the Company. This increased the total letters of credit securing
the customer's lease obligation from $10.0 million to $25.0 million. In
addition, the customer received a one-time $3.0 million reduction to its
operating lease payments through September 30, 2002, and in return the Company
received prepaid cash of $6.6 million for operating lease payments for the same
period. The prepaid lease payment together with the increased letters of credit
are sufficient to fully cover the customer's lease payments to the Company until
May 2005. For accounting purposes, the one-time reduction will be recognized on
a straight-line basis over the remaining lease term. The customer remains
current on all of its lease obligations to the Company.

On October 1, 2001, the Company agreed to a six-month deferal of principal
amortization on a $42.0 million first mortgage secured by a hotel property in
New York, New York. This mortgage matures on April 30, 2005 and bears interest
at LIBOR + 4.50%. In addition to the interest coupon, the borrower is required
to pay significant annual amortization, such that the borrower's debt service
constant is 11.33%. The Company granted the borrower a one-time deferral of
principal payments for a period of six months covering the fourth quarter of
2001 and the first quarter of 2002. In return, the borrower was required to
establish an additional debt service reserve secured by a pledge of the
partnership interests in two residential properties located in New York, New
York. In addition, the borrower is required to immediately repay the deferred
amortization out of operating cash flow, to the extent available, commencing
April 1, 2002. The borrower remains current on all of its debt service payments
to the Company, and the Company is currently comfortable that it has adequate
collateral to support the book value of the asset.

NON-ACCRUAL LOANS--The Company transfers loans to non-accrual status at such
time as: (1) management believes that the potential risk exists that scheduled
debt service payments will not be met within the coming 12 months; (2) the loans
become 90 days delinquent; (3) management determines the borrower is incapable
of, or ceased efforts toward, curing the cause of an impairment; or (4) the net
realizable value of the loan's underlying collateral approximates the Company's
carrying value of such loan. Interest income is recognized only upon actual cash
receipt for loans on non-accrual status. As of December 31, 2001, the Company
had two assets on non-accrual status with an aggregate gross book value of
$6.2 million, or 0.14% of the gross book value of the Company's investments.
Each borrower remains current on all of its debt service payments to the
Company, and the Company is currently comfortable that it has adequate
collateral to support the book values of the assets.

One of the two non-accrual loans is a $4.3 million partnership loan on two
shopping malls located in the suburbs of Washington, D.C. This investment was
part of a larger loan originally made by affiliates of Lazard Freres prior to
the Company's acquisition of Lazard's structured finance portfolio in 1998. The
loan matures in September 2003 and bears interest at 12.00%. The Company
received cash payments equal to the interest due on the loan during the year
ended December 31, 2001, and the borrower remains current on its obligations to
the Company. However, the Company anticipates that this loan will remain on
non-accrual status for the foreseeable future.

Additionally, the Company, through its investment in TriNet Management
Operating Company, has a $2.0 million investment in debt securities that are
convertible into shares of a real estate company which trades on the Mexican
Stock Exchange. This investment was made by TriNet prior to its acquisition by
the Company in 1999. The securities bear interest at 12.00% per annum payable in
arrears on December 4th of each year. The Company received cash payments equal
to the interest due on the investment for the year ended December 31, 2001, and
the borower remains current on its obligations to the Company. However, the
Company anticipates that this investment will remain on non-accrual status for
the forseeable future.

WATCH LIST ASSETS--The Company conducts a quarterly comprehensive credit
review, resulting in an individual risk rating being assigned to each asset.
This review is designed to enable management to evaluate and proactively manage
asset-specific credit issues and identify credit trends on a portfolio-wide

25

basis as an "early warning system." In addition to the three loans mentioned
above under "Investment Modifications" and "Non-Accrual Loans," the Company has
two CTL investments that are on its credit watch list.

In November 2000, a customer occupying a headquarters office facility owned
by the Company filed for protection under Chapter 11 of the U.S. Bankruptcy
Code. Following the bankruptcy filing, the customer affirmed the Company's lease
in bankruptcy and agreed to extend the Company's lease for an additional ten
years (with escalating lease payments) through January 2023. Throughout this
period, the customer remained current on its lease payments to the Company and
remains current through the date hereof. The customer reasonably expects to
emerge from bankruptcy prior to July 2002, although there can be no assurance
that this will occur. The net carrying value of this investment at December 31,
2001 was $41.1 million.

In January 2002, a customer occupying office facilities owned by the Company
filed a voluntary petition for reorganization under Chapter 11 of the U.S.
Bankruptcy Code. The customer utilizes these facilities as the U.S. headquarters
for one of its major business lines. The customer recently moved approximately
150 of its employees from other area locations into the Company's facilities,
and continues to consolidate its space needs into the Company's facilities. In
addition, the customer has invested approximately $3 million of its own capital
in the facilities. The customer remains current on its lease payments to the
Company. The customer has not yet filed any motion to assume or reject the
Company's lease with the Bankruptcy Court. The net carrying value of this
investment at December 31, 2001 was $11.2 million.

LIQUIDITY AND CAPITAL RESOURCES

The Company requires capital to fund its investment activities and operating
expenses. The Company has significant access to capital resources to fund its
existing business plan, which includes the expansion of its real estate lending
and corporate tenant leasing businesses. The Company's capital sources include
cash flow from operations, borrowings under lines of credit, additional term
borrowings, long-term financing secured by the Company's assets, unsecured
financing and the issuance of common, convertible and /or preferred equity
securities. Further, the Company may acquire other businesses or assets using
its capital stock, cash or a combination thereof.

The distribution requirements under the REIT provisions of the Code limit
the Company's ability to retain earnings and thereby replenish capital committed
to its operations. However, the Company believes that its significant capital
resources and access to financing will provide it with financial flexibility and
market responsiveness at levels sufficient to meet current and anticipated
capital requirements, including expected new lending and corporate tenant
leasing transactions.

The Company believes that its existing sources of funds will be adequate for
purposes of meeting its short- and long-term liquidity needs. The Company's
ability to meet its long-term (i.e., beyond one year) liquidity requirements is
subject to obtaining additional debt and equity financing. Any decision by the
Company's lenders and investors to enter into such transactions with the Company
will depend upon a number of factors, such as compliance with the terms of its
existing credit arrangements, the Company's financial performance, industry or
market trends, the general availability of and rates applicable to financing
transactions, such lenders' and investors' resources and policies concerning the
terms under which they make such capital commitments and the relative
attractiveness of alternative investment or lending opportunities.

26

The following table outlines the timing of required principal payments
related to the Company's debt agreements (in thousands):

EXPLANATORY NOTES:

- ------------------------------

(1) Assumes exercise of extensions to the extent such extensions are at the
Company's option.

(2) Based on expected proceeds from principal payments received on loan assets
collateralizing such notes.

The Company has three LIBOR-based secured revolving credit facilities of
$700.0 million, $700.0 million and $500.0 million, respectively, which have
final maturities in fiscal years 2005, 2005 and 2003, respectively. The final
maturities of these facilities include a one-year "term-out" extension at the
Company's option. As of December 31, 2001, the Company had drawn approximately
$312.3 million, $439.3 million and $148.9 million under these facilities,
respectively. Availability under these facilities is based on collateral
provided under a borrowing base calculation. At December 31, 2001, the Company
also had an unsecured credit facility totaling $300.0 million which bears
interest at LIBOR + 2.125% and matures in July 2004, including a one-year
extension at the Company's option. At December 31, 2001, the Company had not
drawn any amounts under this facility.

RECENT FINANCING ACTIVITIES--On May 17, 2000, the Company closed the
inaugural offering under its proprietary matched funding program, STARs,
Series 2000-1. In the initial transaction, a wholly-owned subsidiary of the
Company issued $896.5 million of investment grade bonds secured by the
subsidiary's assets, which had an aggregate outstanding principal balance of
approximately $1.2 billion at inception. Principal payments received on the
assets will be utilized to repay the most senior class of the bonds then
outstanding. The maturity of the bonds match funds the maturity of the
underlying assets financed under the program. For accounting purposes, this
transaction was treated as a secured financing.

On January 11, 2001, the Company closed a new $700.0 million secured
revolving credit facility which is led by a major commercial bank. The new
facility has a three-year primary term and one-year "term-out" extension option,
and bears interest at LIBOR plus 1.40% to 2.15%, depending upon the collateral
contributed to the borrowing base. The new facility accepts a broad range of
structured finance assets and has a final maturity of January 2005.

On May 15, 2001, the Leasing Subsidiary repaid its $100.0 million 7.30%
unsecured notes.

On June 14, 2001, the Company closed $193.0 million of term loan financing
secured by 15 corporate tenant lease assets. The variable-rate loan bears
interest at LIBOR plus 1.85% (not to exceed 10.00%) and has two one-year
extensions at the Company's option. The Company used these proceeds to repay a
$77.8 million secured term loan maturing in June 2001 and to pay down a portion
of its revolving credit facilities. In addition, the Company extended the final
maturity of its $500.0 million secured revolving credit facility to August 12,
2003.

On July 6, 2001, the Leasing Subsidiary financed a $75.0 million structured
finance asset with a $50.0 million term loan bearing interest at
LIBOR + 2.50%. The loan has a maturity of July 2006, including a one-year
extension at the Leasing Subsidiary's option.

On July 27, 2001, the Company completed a $300.0 million unsecured revolving
credit facility with a group of leading financial institutions. The new facility
has an initial maturity of July 2003, with a one-year extension at the Company's
option and another one-year extension at the lenders' option. The new facility
replaces two prior credit facilities maturing in 2002 and 2003, and bears
interest at LIBOR + 2.125%.

27

On August 9, 2001, the Company issued $350.0 million of 8.75% senior notes
due in 2008. The notes are unsecured senior obligations of the Company. The
Company used the net proceeds to partially repay outstanding borrowings under
its secured credit facilities.

HEDGING ACTIVITIES--Since January 1, 1999, the Company has entered into the
following cash flow hedges that have expired or been settled prior to
December 31, 2001 (in thousands):

Since January 1, 1999, the Company has entered into the following cash flow
hedges that are outstanding as of December 31, 2001. The net value (liability)
associated with these hedges is reflected on the Company's balance sheet (in
thousands).

EXPLANATORY NOTE:
- ------------------------------

(1) Acquired in connection with the TriNet Acquisition (see Note 4 to the
Company's Consolidated Financial Statements).

In connection with the STARs, Series 2000-1 in May 2000, the Company entered
into a LIBOR interest rate cap struck at 10.00% in the notional amount of $312.0
million, and simultaneously sold a LIBOR interest rate cap with the same terms.
Since these instruments do not change the Company's net interest rate risk
exposure, they do not qualify as hedges and changes in their respective values
are charged to earnings. As the terms of these arrangements are substantially
the same, the effects of a revaluation of these two instruments substantially
offset one another.

Certain of the Company's CTL joint ventures, have hedging activities which
are more fully described in Note 6 to the Company's Consolidated Financial
Statements.

OFF-BALANCE SHEET TRANSACTIONS--The Company is not dependent on the use of
any off-balance sheet financing arrangements for liquidity. The Company has
investments in five CTL joint ventures that are accounted for under the equity
method which have total debt obligations outstanding of approximately
$258.4 million (see Note 6). The Company's pro-rata share of the ventures'
third-party debt is approximately $118.0 million. These ventures were formed for
the purpose of operating, acquiring and in certain cases, developing corporate
tenant lease facilities. These joint venture debt obligations are non-recourse
to the ventures and the Company and mature between fiscal years 2004 and 2011.
They consist of six term loans bearing fixed rates ranging from 6.55% to 8.43%
and one variable-rate term loan with a rate of LIBOR + 1.25%.

28

RATINGS TRIGGERS--On July 27, 2001, the Company completed a $300.0 million
unsecured revolving credit facility with a group of leading financial
institutions. The new facility has an initial maturity of July 2003 with a
one-year extension at the Company's option and another one-year extension at the
lenders' option. The new facility replaces two prior credit facilities maturing
in 2002 and 2003, and bears interest at LIBOR + 2.125% based on the Company's
senior unsecured credit ratings of BB+ and Ba1 from Standard & Poor's and
Moody's Investor Service, respectively. If the Company achieves a higher rating,
the facility's interest rate will improve to LIBOR + 2.00%. If the Company's
credit rating is downgraded (regardless of how far), the facility's interest
rate will increase to LIBOR + 2.25%. In the event the Company receives two
credit ratings that are not equivalent, the spread over LIBOR shall be
determined by the lower of the two such ratings. As of December 31, 2001, no
amounts have yet been drawn on this facility. Accordingly, management does not
believe any rating changes would have a material adverse impact on the Company's
results of operations. There are no other ratings triggers in any of the
Company's debt instruments or other operating or financial agreements.

TRANSACTIONS WITH RELATED PARTIES--The Company has an investment in iStar
Operating Inc. ("iStar Operating"), a taxable subsidiary that, through a
wholly-owned subsidiary, services the Company's loans and certain loan
portfolios owned by third parties. The Company owns all of the non-voting
preferred stock and a 95% economic interest in iStar Operating. An affiliate of
the Company's largest shareholder is the owner of all the voting common stock
and a 5% economic interest in iStar Operating. As of December 31, 2001, there
have never been any distributions to the common shareholder, nor does the
Company expect to make any in the future. At any time, the Company has the right
to acquire all of the common stock of iStar Operating at fair market value,
which the Company believes to be nominal.

In addition, the Company has an investment in TriNet Management Operating
Company, Inc. ("TMOC"), a taxable noncontrolled subsidiary that has a
$2.0 million investment in a real estate company based in Mexico. The Company
owns 95% of the outstanding voting and non-voting common stock (representing 1%
voting power and 95% of the economic interest) in TMOC. The other two owners of
TMOC stock are executives of the Company, who own a combined 5% of the
outstanding voting and non-voting common stock (representing 99% voting power
and 5% economic interest) in TMOC. As of December 31, 2001, there have never
been any distributions to the common shareholders, nor does the Company expect
to make any in the future. At any time, the Company has the right to acquire all
of the common stock of TMOC at fair market value, which the Company believes to
be nominal.

Both iStar Operating and TMOC were formed as taxable corporations for
purposes of maintaining compliance with REIT provisions of the Code and are
accounted for under the equity method for financial reporting purposes. If they
were consolidated with the Company for financial statement purposes, they would
have no material impact on the Company's operations. As of December 31, 2001,
these corporations have no debt obligations.

The Company entered into an employment agreement with its Chief Executive
Officer as of March 31, 2001. In addition to the salary and bonus provisions of
the agreement, the agreement provides for an award of two million phantom units
to the executive, each of which notionally represents one share of the Company's
Common Stock. Portions of these phantom units will vest on a contingent basis if
the average closing price of the Company's Common Stock achieves certain levels
(ranging from $25.00 to $37.00 per share) for 60 consecutive calendar days.
Contingently vested units will become fully vested, meaning that they are no
longer subject to forfeiture, if the executive remains employed through
March 30, 2004, or earlier upon certain change of control and termination
events. When and if contingently vested phantom units become fully vested units,
the Company must deliver to the executive either a number of shares of Common
Stock equal to the number of fully vested units or an amount of cash equal to
the then fair market value of that number of shares of Common Stock. If shares
were unavailable under the Company's then long-term incentive plans, this
obligation could require the Company to make a substantial cash payment to the
executive.

DRIP PROGRAM--The Company maintains a dividend reinvestment and direct stock
purchase plan. Under the dividend reinvestment component of the plan, the
Company's shareholders may purchase

29

additional shares of Common Stock without payment of brokerage commissions or
service charges by automatically reinvesting all or a portion of their Common
Stock cash dividends. Under the direct stock purchase component of the plan, the
Company's shareholders and new investors may purchase shares of Common Stock
directly from the Company without payment of brokerage commissions or service
charges. All purchases of shares in excess of $10,000 per month pursuant to the
direct purchase component are at the Company's sole discretion. Shares issued
under the plan may reflect a discount of up to a 3.0% from the prevailing market
price of the Company's Common Stock. The Company is authorized to issue up to
8.0 million shares of Common Stock pursuant to the dividend reinvestment and
direct stock purchase plan. In 2001, the Company issued a total of 195,078
shares of its Common Stock through the direct stock purchase component of the
plan for net proceeds of approximately $4.7 million. Approximately $3.9 million
of these proceeds were received in January 2002.

STOCK REPURCHASE PROGRAM--The Board of Directors approved, and the Company
has implemented, a stock repurchase program under which the Company is
authorized to repurchase up to 5.0 million shares of its Common Stock from time
to time, primarily using proceeds from the disposition of assets or loan
repayments and excess cash flow from operations, but also using borrowings under
its credit facilities if the Company determines that it is advantageous to do
so. As of both December 31, 2001 and 2000, the Company had repurchased
approximately 2.3 million shares at an aggregate cost of approximately
$40.7 million.

CRITICAL ACCOUNTING POLICIES

The Company's Consolidated Financial Statements include the accounts of the
Company and all majority-owned and controlled subsidiaries. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions in certain circumstances
that affect amounts reported in the accompanying consolidated financial
statements. In preparing these financial statements, management has made its
best estimates and judgments of certain amounts included in the financial
statements, giving due consideration to materiality. The Company does not
believe that there is a great likelihood that materially different amounts would
be reported related to the accounting policies described below. However,
application of these accounting policies involves the exercise of judgment and
use of assumptions as to future uncertainties and, as a result, actual results
could differ from these estimates.

Management has the obligation to ensure that its policies and methodologies
are in accordance with GAAP. During 2001, management reviewed and evaluated its
critical accounting policies and believes them to be appropriate. The Company's
accounting policies are described in Note 3 to the Company's Consolidated
Financial Statements. Management believes the more significant of these to be as
follows:

REVENUE RECOGNITION--The most significant sources of the Company's revenue
come from its lending operations and its corporate tenant lease operations. For
its lending operations, the Company reflects income using the effective yield
method, which recognizes periodic income over the expected term of the
investment on a constant yield basis. For corporate tenant lease assets, the
Company recognizes income on the straight-line method, which effectively
recognizes contractual lease payments to be received by the Company evenly over
the term of the lease. Management believes the Company's revenue recognition
policies are appropriate to reflect the substance of the underlying
transactions.

PROVISION FOR LOAN LOSSES--The Company's accounting policies require that an
allowance for estimated credit losses be reflected in the financial statements
based upon an evaluation of known and inherent risks in its private lending
assets. While neither the Company nor its private predecessors have experienced
any actual losses on their lending investments, management considers it prudent
to establish a policy to provide for potential losses in the asset base that may
be realized in the future. In establishing these allowances, management utilized
available historical industry loss information applied to its assets consistent
with its internal risk rating system. Actual losses, if any, could ultimately
differ from these estimates.

IMPAIRMENT OF LONG-LIVED ASSETS--Corporate tenant lease assets represent
"long-lived" assets for accounting purposes. The Company periodically reviews
long-lived assets to be held and used in its leasing

30

operations for impairment in value whenever any events or changes in
circumstances indicate that the carrying amount of the assets may not be
recoverable. In management's opinion, based on this analysis, corporate tenant
assets to be held and used are not carried at amounts in excess of their
estimated recoverable amounts.

RISK MANAGEMENT AND FINANCIAL INSTRUMENTS--The Company has historically
utilized derivative financial instruments only as a means to help to manage its
interest rate risk exposure on a portion of its variable-rate debt obligations
(i.e., as cash flow hedges). The instruments utilized are generally either
pay-fixed swaps or LIBOR-based interest rate caps which are widely used in the
industry and typically with major financial institutions. The Company's
accounting policies generally reflect these instruments at their fair value with
unrealized changes in fair value reflected in other comprehensive income.
Realized effects on the Company's cash flows are generally recognized currently
in income.

INCOME TAXES--The Company's financial results generally do no reflect
provisions for current or deferred income taxes. Management believes that the
Company has and intends to continue to operate in a manner that will continue to
allow it to be taxed as a REIT and, as a result, does not expect to pay
substantial corporate-level taxes. Many of these requirements, however, are
highly technical and complex. If the Company were to fail to meet these
requirements, the Company would be subject to Federal income tax.

EXECUTIVE COMPENSATION--The Company's accounting policies generally provide
cash compensation to be estimated and recognized over the period of service.
With respect to stock-based compensation arrangements, the Company has elected
to use APB 25 accounting, which measures the compensation charges based on the
intrinsic value of such securities when they become fixed and determinable, and
recognizes such expense over the related service period. These arrangements are
often complex and generally structured to align the interests of management with
those of the Company's shareholders. See Note 10 to the Company's Consolidated
Financial Statements for a detailed discussion of such arrangements and the
related accounting effects.

During 2001, the Company entered into new three-year employment agreements
with its Chief Executive Officer and its President. See Note 10 to the Company's
Consolidated Financial Statements for a more detailed description of both
employment agreements.

The following are hypothetical illustrations of the effects on the Company's
net income and adjusted earnings per share of the full vesting of phantom units
and restricted shares under the employment agreements with Chief Executive
Officer and the President.

During the year ended December 31, 2001, 350,000 phantom shares awarded to
the Chief Executive Officer became contingently vested. Absent an earlier change
of control or termination of employment, these 350,000 shares will not become
fully vested until March 31, 2004. Assuming that the market price of the Common
Stock on March 31, 2004 is $24.95 (which was the market price of the Common
Stock on December 31, 2001), the Company would incur a one-time charge to both
net income and adjusted earnings at that time equal to $8.7 million (the fair
market value of the 350,000 shares at $24.95 per share). Assuming that there are
90.0 million diluted weighted average shares outstanding on March 31, 2004, the
effect of the one-time charge on diluted adjusted earnings per share would be
$0.0970 per share.

The earliest that restricted shares awarded to the President can become
fully vested is pursuant to a voluntary resignation after September 30, 2002,
absent an earlier change of control or termination of employment. Using
October 1, 2002 and December 31, 2002 as hypothetical vesting dates, and
assuming that: (1) the price of the Common Stock on those dates is $24.95 (which
was the market price of the Common Stock on December 31, 2001), and (2) a Common
Stock dividend payment rate of $0.63 per share per quarter, then between 366,851
shares and 427,782 shares would become fully vested on October 1, 2002 and
December 31, 2002, respectively. The Company would incur a one-time charge to
both net income and adjusted earnings of approximately $9.2 million (for vesting
on October 1, 2002), or approximately $10.7 million (for vesting on
December 31, 2002), in each case representing the fair market value of the
shares on the date they become fully vested. Assuming that there are
90.0 million diluted weighted average shares outstanding on both October 1, 2002
and December 31, 2002, the effect on the

31

Company's diluted adjusted earnings per share would be $0.1017 per share and
$0.1186 per share, respectively.

NEW ACCOUNTING STANDARDS

In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging
Activities." On June 23, 1999, the FASB voted to defer the effectiveness of SFAS
No. 133 for one year. SFAS No. 133 is now effective for fiscal years beginning
after June 15, 2000, but earlier application is permitted as of the beginning of
any fiscal quarter subsequent to June 15, 1998. SFAS No. 133 establishes
accounting and reporting standards for derivative financial instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. If certain conditions are met, a derivative may
be specifically designated as: (1) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment; (2) a hedge of the exposure to variable cash flows of a forecasted
transaction; or (3) in certain circumstances a hedge of a foreign currency
exposure. The Company adopted this pronouncement, as amended by Statement of
Financial Accounting Standards No. 137 "Accounting for Derivative Instruments
and Hedging Activities--deferral of the Effective Date of FASB Statement
No. 133" and Statement of Financial Accounting Standards No. 138 "Accounting for
Certain Hedging Activities--an Amendment of FASB No. 133," on January 1, 2001.
Because the Company has primarily used derivatives as cash flow hedges of
interest rate risk only, the adoption of SFAS No. 133 did not have a material
financial impact on the financial position and results of operations of the
Company. However, should the Company change its current use of such derivatives
(see Note 9), the adoption of SFAS No. 133 could have a more significant effect
on the Company prospectively.

In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." In June 2000, the SEC staff amended SAB 101 to provide registrants
with additional time to implement SAB 101. The Company adopted SAB 101, as
required, in the fourth quarter of fiscal 2000. The adoption of SAB 101 did not
have a material financial impact on the financial position or results of
operations of the Company.

In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation." The Company
was required to adopt FIN 44 effective July 1, 2000 with respect to certain
provisions applicable to new awards, exchanges of awards in a business
combination, modifications to outstanding awards, and changes in grantee status
that occur on or after that date. FIN 44 addresses practice issues related to
the application of Accounting Practice Bulletin Opinion No. 25, "Accounting for
Stock Issued to Employees." The initial adoption of FIN 44 did not have a
significant impact on the Company.

In September 2000, the FASB issued Statement of Financial Accounting
Standards No. 140 ("SFAS No. 140"), "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." This statement is
applicable for transfers of assets and extinguishments of liabilities occurring
after March 31, 2001. The Company adopted the provisions of this statement as
required for all transactions entered into on or after April 1, 2001. The
adoption of SFAS No. 140 did not have a significant impact on the Company.

In July 2001, the SEC released Staff Accounting Bulletin No. 102 ("SAB
102"), "Selected Loan Loss Allowance and Documentation Issues." SAB 102
summarizes certain of the SEC's views on the development, documentation and
application of a systematic methodology for determining allowances for loan and
lease losses. Adoption of SAB 102 by the Company did not have a significant
impact on the Company.

In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141 ("SFAS No. 141"), "Business Combinations" and Statement of Financial
Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible
Assets." SFAS No. 141 requires the purchase method of accounting to be used for
all business combinations initiated after June 30, 2001. SFAS No. 141 also

32

addresses the initial recognition and measurement of goodwill and other
intangible assets acquired in business combinations and requires intangible
assets to be recognized apart from goodwill if certain tests are met. The
Company does not believe the adoption of SFAS No. 141 will have a significant
effect on the Company's financial position or results of operations. SFAS
No. 142 requires that goodwill not be amortized but instead be measured for
impairment at least annually, or when events indicate that there may be an
impairment. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001. Early application is permitted for companies with fiscal
years beginning after March 15, 2001. The Company will adopt the provisions of
this statement, as required, on January 1, 2002 and it does not believe the
adoption of SFAS No. 142 will have a significant impact on the Company.

In October 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS No. 144 provides new guidance on the recognition of
impairment losses on long-lived assets to be held and used or to be disposed of
and also broadens the definition of what constitutes a discontinued operation
and how the results of a discontinued operation are to be measured and
presented. The Company is currently evaluating this statement to assess its
impact on the financial statements. The provisions of SFAS No. 144 are effective
for financial statements issued for fiscal years beginning after December 15,
2001, and must be applied at the beginning of a fiscal year. The Company will
adopt the provisions of this statement on January 1, 2002, as required. The
Company does not believe the adoption of SFAS No. 144 will have a significant
impact on the Company.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISKS

Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices and equity prices. In
pursuing its business plan, the primary market risk to which the Company is
exposed is interest rate risk. Consistent with its liability management
objectives, the Company has implemented an interest rate risk management policy
based on match funding, with the objective that variable-rate assets be
primarily financed by variable-rate liabilities and fixed-rate assets be
primarily financed by fixed-rate liabilities.

The Company's operating results will depend in part on the difference
between the interest and related income earned on its assets and the interest
expense incurred in connection with its interest-bearing liabilities.
Competition from other providers of real estate financing may lead to a decrease
in the interest rate earned on the Company's interest-bearing assets, which the
Company may not be able to offset by obtaining lower interest costs on its
borrowings. Changes in the general level of interest rates prevailing in the
financial markets may affect the spread between the Company's interest-earning
assets and interest-bearing liabilities. Any significant compression of the
spreads between interest-earning assets and interest-bearing liabilities could
have a material adverse effect on the Company. In addition, an increase in
interest rates could, among other things, reduce the value of the Company's
interest-bearing assets and its ability to realize gains from the sale of such
assets, and a decrease in interest rates could reduce the average life of the
Company's interest-earning assets.

A substantial portion of the Company's loan investments are subject to
significant prepayment protection in the form of lock-outs, yield maintenance
provisions or other prepayment premiums which provide substantial yield
protection to the Company. Those assets generally not subject to prepayment
penalties include: (1) variable-rate loans based on LIBOR, originated or
acquired at par, which would not result in any gain or loss upon repayment; and
(2) discount loans and loan participations acquired at discounts to face values,
which would result in gains upon repayment. Further, while the Company generally
seeks to enter into loan investments which provide for substantial prepayment
protection, in the event of declining interest rates, the Company could receive
such prepayments and may not be able to reinvest such proceeds at favorable
returns. Such prepayments could have an adverse effect on the spreads between
interest-earning assets and interest-bearing liabilities.

33

While the Company has not experienced any significant credit losses, in the
event of a significant rising interest rate environment and/or economic
downturn, defaults could increase and result in credit losses to the Company
which adversely affect its liquidity and operating results. Further, such
delinquencies or defaults could have an adverse effect on the spreads between
interest-earning assets and interest-bearing liabilities.

Interest rates are highly sensitive to many factors, including governmental
monetary and tax policies, domestic and international economic and political
conditions, and other factors beyond the control of the Company. As more fully
discussed in Note 9 to the Company's Consolidated Financial Statements, the
Company employs match funding-based hedging strategies to limit the effects of
changes in interest rates on its operations, including engaging in interest rate
caps, floors, swaps, futures and other interest rate-related derivative
contracts. These strategies are specifically designed to reduce the Company's
exposure, on specific transactions or on a portfolio basis, to changes in cash
flows as a result of interest rate movements in the market. The Company does not
enter into derivative contracts for speculative purposes nor as a hedge against
changes in credit risk of its borrowers or of the Company itself.

Each interest rate cap or floor agreement is a legal contract between the
Company and a third party (the "counterparty"). When the Company purchases a cap
or floor contract, the Company makes an up-front payment to the counterparty and
the counterparty agrees to make payments to the Company in the future should the
reference rate (typically one- or three-month LIBOR) rise above (cap agreements)
or fall below (floor agreements) the "strike" rate specified in the contract.
Each contract has a notional face amount. Should the reference rate rise above
the contractual strike rate in a cap, the Company will earn cap income. Should
the reference rate fall below the contractual strike rate in a floor, the
Company will earn floor income. Payments on an annualized basis will equal the
contractual notional face amount multiplied by the difference between the actual
reference rate and the contracted strike rate. The cost of the up-front payment
is amortized over the term of the contract and is included in "Interest expense"
on the Company's Consolidated Statements of Operations.

Interest rate swaps are agreements in which a series of interest rate flows
are exchanged over a prescribed period. The notional amount on which swaps are
based is not exchanged. In general, the Company's swaps are "pay fixed" swaps
involving the exchange of variable-rate interest payments from the counterparty
for fixed interest payments from the Company.

Interest rate futures are contracts, generally settled in cash, in which the
seller agrees to deliver on a specified future date the cash equivalent of the
difference between the specified price or yield indicated in the contract and
the value of the specified instrument (e.g., U.S. Treasury securities) upon
settlement. Under these agreements, the Company would generally receive
additional cash flow at settlement if interest rates rise and pay cash if
interest rates fall. The effects of such receipts or payments would be deferred
and amortized over the term of the specific related fixed-rate borrowings. In
the event that, in the opinion of management, it is no longer probable that a
forecasted transaction will occur under terms substantially equivalent to those
projected, the Company would cease recognizing such transactions as hedges and
immediately recognize related gains or losses based on actual settlement or
estimated settlement value.

While a REIT may freely utilize the types of derivative instruments
discussed above to hedge interest rate risk on its liabilities, the use of
derivatives for other purposes, including hedging asset-related risks such as
credit, prepayment or interest rate exposure on the Company's loan assets, could
generate income which is not qualified income for purposes of maintaining REIT
status. As a consequence, the Company may only engage in such instruments to
hedge such risks on a limited basis.

There can be no assurance that the Company's profitability will not be
adversely affected during any period as a result of changing interest rates. In
addition, hedging transactions using derivative instruments involve certain
additional risks such as counterparty credit risk, legal enforceability of
hedging contracts and the risk that unanticipated and significant changes in
interest rates will cause a significant loss of basis in the contract. With
regard to loss of basis in a hedging contract, indices upon which contracts are
based may be more or less variable than the indices upon which the hedged assets
or liabilities are based, thereby

34

making the hedge less effective. The counterparties to these contractual
arrangements are major financial institutions with which the Company and its
affiliates may also have other financial relationships. The Company is
potentially exposed to credit loss in the event of nonperformance by these
counterparties. However, because of their high credit ratings, the Company does
not anticipate that any of the counterparties will fail to meet their
obligations. There can be no assurance that the Company will be able to
adequately protect against the foregoing risks and that the Company will
ultimately realize an economic benefit from any hedging contract it enters into
which exceeds the related costs incurred in connection with engaging in such
hedges.

The following table quantifies the potential changes in net investment
income and net fair value of financial instruments should interest rates
increase or decrease 100 or 200 basis points, assuming no change in the shape of
the yield curve (i.e., relative interest rates). Net investment income is
calculated as revenue from loans and other lending investments and operating
leases, less related interest expense and operating costs on corporate tenant
lease assets, for the year ended December 31, 2001. Net fair value of financial
instruments is calculated as the sum of the value of derivative instruments and
the present value of cash in-flows generated from interest-earning assets, less
cash out-flows in respect of interest-bearing liabilities as of December 31,
2001. The cash flows associated with the Company's assets are calculated based
on management's best estimate of expected payments for each loan based on loan
characteristics such as loan-to-value ratio, interest rate, credit history,
prepayment penalty, term and collateral type. Most of the Company's loans are
protected from prepayment as a result of prepayment penalties and contractual
terms which prohibit prepayments during specified periods. However, for those
loans where prepayments are not currently precluded by contract, declines in
interest rates may increase prepayment speeds. The base interest rate scenario
assumes interest rates as of December 31, 2001. Actual results could differ
significantly from those estimated in the table.

ESTIMATED PERCENTAGE CHANGE IN

EXPLANATORY NOTE:
- ------------------------------

(1) Amounts exclude fair values of non-financial investments, primarily CTL
assets and certain forms of corporate finance investments.

35

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

Index to Financial Statements

All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.

Financial statements of five owned companies or joint ventures accounted for
under the equity method have been omitted because the Company's proportionate
share of the income from continuing operations before income taxes is less than
20% of the respective consolidated amount and the investments in and advances to
each company are less than 20% of consolidated total assets.

36

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders
of iStar Financial Inc.

In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of iStar
Financial Inc. and its subsidiaries (the "Company") at December 31, 2001 and
2000, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedules listed in the accompanying index
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements. These
financial statements and financial statement schedules are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
New York, NY
March 1, 2002

37

ISTAR FINANCIAL INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

- ------------------------------

* RECLASSIFIED TO CONFORM TO 2001 PRESENTATION.

The accompanying notes are an integral part of the financial statements.

38

ISTAR FINANCIAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

EXPLANATORY NOTE:

- ------------------------------

* RECLASSIFIED TO CONFORM TO 2001 PRESENTATION.

(1) Net income per basic common share excludes 1% of net income allocable to the
Company's class B shares prior to November 4, 1999. These shares were
exchanged for Common Stock in connection with the TriNet Acquisition and
related transactions on November 4, 1999. As a result, the Company now has a
single class of Common Stock outstanding.

The accompanying notes are an integral part of the financial statements.

39

ISTAR FINANCIAL INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS)

- ----------------------------------

* RECLASSIFIED TO CONFORM TO 2001 PRESENTATION.

The accompanying notes are an integral part of the financial statements.

40

ISTAR FINANCIAL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

- ------------------------------
* RECLASSIFIED TO CONFORM TO 2001 PRESENTATION.

The accompanying notes are an integral part of the financial statements.

41

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--BUSINESS AND ORGANIZATION.

BUSINESS--iStar Financial Inc. (the "Company") is the leading
publicly-traded finance company focused on the commercial real estate industry.
The Company provides structured financing to private and corporate owners of
real estate nationwide, including senior and junior mortgage debt, corporate
mezzanine and subordinated capital, and corporate net lease financing. The
Company seeks to deliver superior risk-adjusted returns on equity for
shareholders by providing innovative and value-added financing solutions to its
customers.

The Company has implemented its investment strategy by: (1) focusing on the
origination of large, highly structured mortgage, corporate and lease financings
where customers require flexible financial solutions, and avoiding commodity
businesses in which there is significant direct competition from other providers
of capital; (2) developing direct relationships with borrowers and corporate
tenants as opposed to sourcing transactions through intermediaries; (3) adding
value beyond simply providing capital by offering borrowers and corporate
tenants specific lending expertise, flexibility, certainty and continuing
relationships beyond the closing of a particular financing transaction; and
(4) taking advantage of market anomalies in the real estate financing markets
when the Company believes credit is mispriced by other providers of capital,
such as the spread between lease yields and the yields on corporate tenants'
underlying credit obligations.

The Company intends to continue to emphasize a mix of portfolio financing
transactions to create built-in diversification and single-asset financings for
properties with strong, long-term competitive market positions.

ORGANIZATION--The Company began its business in 1993 through private
investment funds formed to capitalize on inefficiencies in the real estate
finance market. In March 1998, these funds contributed their approximately
$1.1 billion of assets to the Company's predecessor, Starwood Financial Trust,
in exchange for a controlling interest in that company (collectively, the
"Recapitalization Transactions"). Since that time, the Company has grown by
originating new lending and leasing transactions, as well as through corporate
acquisitions. Specifically, in September 1998, the Company acquired the loan
origination and servicing business of a major insurance company, and in
December 1998, the Company acquired the mortgage and mezzanine loan portfolio of
its largest private competitor. Additionally, in November 1999, the Company
acquired TriNet Corporate Realty Trust, Inc. ("TriNet" or the "Leasing
Subsidiary"), which was then the largest publicly traded company specializing in
the net leasing of corporate office and industrial facilities (the "TriNet
Acquisition"). The TriNet Acquisition was structured as a stock-for-stock merger
of TriNet with a subsidiary of the Company. Concurrent with the TriNet
Acquisition, the Company also acquired its external advisor (the "Advisor
Transaction") in exchange for shares of common stock of the Company ("Common
Stock") and converted its organizational form to a Maryland corporation (the
"Incorporation Merger"). As part of the conversion to a Maryland corporation,
the Company replaced its former dual class common share structure with a single
class of Common Stock. The Company's Common Stock began trading on the New York
Stock Exchange under the symbol "SFI" in November 1999.

The Company was eligible and elected to be taxed as a REIT for the taxable
years beginning January 1, 1998.

NOTE 2--BASIS OF PRESENTATION

The accompanying audited Consolidated Financial Statements have been
prepared in conformity with generally accepted accounting principles ("GAAP")
for complete financial statements. The Consolidated Financial Statements include
the accounts of the Company, its qualified REIT subsidiaries, and its
majority-owned and controlled partnerships.

42

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2--BASIS OF PRESENTATION (CONTINUED)
The Company has an investment in iStar Operating Inc. ("iStar Operating"), a
taxable subsidiary that, through a wholly-owned subsidiary, services the
Company's loans and certain loan portfolios owned by third parties. The Company
owns all of the non-voting preferred stock and a 95% economic interest in iStar
Operating. An affiliate of the Company's largest shareholder is the owner of all
the voting common stock and a 5% economic interest in iStar Operating. As of
December 31, 2001, there have never been any distributions to the common
shareholder, nor does the Company expect to make any in the future. At any time,
the Company has the right to acquire all of the common stock of iStar Operating
at fair market value, which the Company believes to be nominal. In addition to
the direct general and administrative costs of iStar Operating, the Company
allocates a portion of its general overhead expenses to iStar Operating based on
the number of employees at iStar Operating as a percentage of the Company's
total employees. The Company funds losses incurred by iStar Operating.

In addition, the Company has an investment in TriNet Management Operating
Company, Inc. ("TMOC"), a taxable noncontrolled subsidiary that has a $2.0
million investment in a real estate company based in Mexico. The Company owns
95% of the outstanding voting and non-voting common stock (representing 1%
voting power and 95% of the economic interest) in TMOC. The other two owners of
TMOC stock are executives of the Company, who own a combined 5% of the
outstanding voting and non-voting common stock (representing 99% voting power
and 5% economic interest) in TMOC. As of December 31, 2001 there have never been
any distributions to the common shareholders, nor does the Company expect to
make any in the future. At any time, the Company has the right to acquire all of
the common stock of TMOC at fair market value, which the Company believes to be
nominal.

Both iStar Operating and TMOC were formed as taxable corporations for
purposes of maintaining compliance with REIT provisions of the Code and are
accounted for under the equity method for financial reporting purposes. If they
were consolidated with the Company for financial statement purposes, they would
have no material impact on the Company's operations. As of December 31, 2001,
these corporations have no debt obligations.

Further, certain other investments in partnerships or joint ventures which
the Company does not control are also accounted for under the equity method. All
significant intercompany balances and transactions have been eliminated in
consolidation.

NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

LOANS AND OTHER LENDING INVESTMENTS, NET--As described in Note 5, "Loans and
Other Lending Investments," includes the following investments: senior
mortgages, subordinate mortgages, corporate/ partnership loans and other lending
or similar investments. In general, management considers its investments in this
category as held-to-maturity and, accordingly, reflects such items at amortized
historical cost.

CORPORATE TENANT LEASE ASSETS AND DEPRECIATION--Corporate tenant lease
assets are generally recorded at cost less accumulated depreciation. Certain
improvements and replacements are capitalized when they extend the useful life,
increase capacity or improve the efficiency of the asset. Repairs and
maintenance items are expensed as incurred. Depreciation is computed using the
straight line method of cost recovery over estimated useful lives of 40.0 years
for buildings, five years for furniture and equipment, the shorter of the
remaining lease term or expected life for tenant improvements and the remaining
life of the building for building improvements.

43

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Corporate tenant lease assets to be disposed of are reported at the lower of
their carrying amount or fair value less costs to sell. The Company also
periodically reviews long-lived assets to be held and used for an impairment in
value whenever events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable. In accordance with management's
opinion, corporate tenant lease assets to be held and used are not carried at
amounts in excess of their estimated recoverable amounts.

CAPITALIZED INTEREST--The Company capitalizes interest costs incurred during
the land development or construction period on qualified development projects,
including investments in joint ventures accounted for under the equity method.
Interest capitalized was approximately $1.0 million and $513,000 during the
12-month periods ended December 31, 2001 and 2000, respectively.

CASH AND CASH EQUIVALENTS--Cash and cash equivalents include cash held in
banks or invested in money market funds with original maturity terms of less
than 90 days.

RESTRICTED CASH--Restricted cash represents amounts required to be
maintained in escrow under certain of the Company's debt obligations and leasing
transactions.

NON-CASH ACTIVITY--During 1999, the Company acquired TriNet (see Note 4).
The following is a summary of the effects of this transaction on the Company's
consolidated financial position (in thousands):

There was no significant non-cash activity during the years ended
December 31, 2001 and 2000, other than those items shown on the Company's
Consolidated Statements of Cash Flows.

REVENUE RECOGNITION--The Company's revenue recognition policies are as
follows:

LOANS AND OTHER LENDING INVESTMENTS: The Company generally intends to hold
all of its loans and other lending investments to maturity. Accordingly, it
reflects all of these investments at amortized cost less allowance for loan
losses, acquisition premiums or discounts, deferred loan fees and undisbursed
loan funds. On occasion, the Company may acquire loans at either premiums or
discounts based on the credit characteristics of such loans. These premiums or
discounts are recognized as yield adjustments over the lives of the related
loans. If loans that were acquired at a premium or discount are prepaid, the
Company immediately recognizes the unamortized premium or discount as a decrease
or increase in the prepayment gain or loss, respectively. Loan origination or
exit fees, as well as direct loan origination costs, are also deferred and
recognized over the lives of the related loans as a yield adjustment. Interest
income is recognized using the effective interest method applied on a
loan-by-loan basis.

A limited number of the Company's loans provide for accrual of interest at
specified rates which differ from current payment terms. Interest is recognized
on such loans at the accrual rate subject to

44

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
management's determination that accrued interest and outstanding principal are
ultimately collectible, based on the underlying collateral and operations of the
borrower.

Prepayment penalties or yield maintenance payments from borrowers are
recognized as additional income when received. Certain of the Company's loan
investments provide for additional interest based on the borrower's operating
cash flow or appreciation of the underlying collateral. Such amounts are
considered contingent interest and are reflected as income only upon certainty
of collection.

LEASING INVESTMENTS: Operating lease revenue is recognized on the
straight-line method of accounting from the later of the date of the origination
of the lease or the date of acquisition of the facility subject to existing
leases. Accordingly, contractual lease payment increases are recognized evenly
over the term of the lease. The cumulative difference between lease revenue
recognized under this method and contractual lease payment terms is recorded as
a deferred operating lease income receivable on the balance sheet.

PROVISION FOR LOAN LOSSES--The Company's accounting policies require that an
allowance for estimated loan losses be maintained at a level that management,
based upon an evaluation of known and inherent risks in the portfolio, considers
adequate to provide for loan losses. Specific valuation allowances are
established for impaired loans in the amount by which the carrying value, before
allowance for estimated losses, exceeds the fair value of collateral less
disposition costs on an individual loan basis. Management considers a loan to be
impaired when, based upon current information and events, it believes that it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement on a timely basis. Management
measures these impaired loans at the fair value of the loans' underlying
collateral less estimated disposition costs. Impaired loans may be left on
accrual status during the period the Company is pursuing repayment of the loan;
however, these loans are placed on non-accrual status at such time as: (1)
management believes that the potential risk exists that scheduled debt service
payments will not be met within the coming 12 months; (2) the loans become
90 days delinquent; (3) management determines the borrower is incapable of, or
has ceased efforts toward, curing the cause of the impairment; or (4) the net
realizable value of the loan's underlying collateral approximates the Company's
carrying value of such loan. While on non-accrual status, interest income is
recognized only upon actual receipt. Impairment losses are recognized as direct
write-downs of the related loan with a corresponding charge to the provision for
loan losses. Charge-offs occur when loans, or a portion thereof, are considered
uncollectible and of such little value that further pursuit of collection is not
warranted. Management also provides a loan portfolio reserve based upon its
periodic evaluation and analysis of the portfolio, historical and industry loss
experience, economic conditions and trends, collateral values and quality, and
other relevant factors.

INCOME TAXES--As a REIT, the Company is subject to federal income taxation
at corporate rates on its REIT taxable income; however, the Company is allowed a
deduction for the amount of dividends paid to its shareholders, thereby
subjecting the distributed net income of the Company to taxation at the
shareholder level only. The Company intends to operate in a manner consistent
with and to elect to be treated as a REIT. iStar Operating and TMOC, the
Company's taxable subsidiaries, are not consolidated for federal income tax
purposes and are taxed as corporations. For financial reporting purposes,
current and deferred taxes are provided for in the portion of earnings
recognized by the Company with respect to its interest in iStar Operating and
TMOC. Accordingly, except for the Company's taxable subsidiaries, no current or
deferred taxes are provided for in the Consoliated Financial Statements.

45

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET INCOME ALLOCABLE TO COMMON SHARES--Net income allocable to common shares
excludes 1% of net income allocable to the class B shares prior to November 4,
1999. The class A and class B shares were exchanged for Common Stock in
connection with the TriNet Acquisition, as more fully described in Note 4.

EARNINGS (LOSS) PER COMMON SHARES--In accordance with the Statement of
Financial Accounting Standards No. 128 ("FASB No. 128"), the Company presents
both basic and diluted earnings per share ("EPS"). Basic earnings per share
("Basic EPS") excludes dilution and is computed by dividing net income available
to common shareholders by the weighted average number of shares outstanding for
the period. Diluted earnings per share ("Diluted EPS") reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock, where such exercise or conversion
would result in a lower earnings per share amount.

RECLASSIFICATIONS--Certain prior year amounts have been reclassified in the
Consolidated Financial Statements and the related notes to conform to the 2001
presentation.

USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.

CHANGE IN ACCOUNTING PRINCIPLE--In June 1998, the FASB issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for
Derivative Instruments and Hedging Activities." On June 23, 1999, the FASB voted
to defer the effectiveness of SFAS No. 133 for one year. SFAS No. 133 is now
effective for fiscal years beginning after June 15, 2000, but earlier
application is permitted as of the beginning of any fiscal quarter subsequent to
June 15, 1998. SFAS No. 133 establishes accounting and reporting standards for
derivative financial instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as:
(1) a hedge of the exposure to changes in the fair value of a recognized asset
or liability or an unrecognized firm commitment; (2) a hedge of the exposure to
variable cash flows of a forecasted transaction; or (3) in certain
circumstances, a hedge of a foreign currency exposure. The Company adopted this
pronouncement, as amended by Statement of Financial Accounting Standards
No. 137 "Accounting for Derivative Instruments and Hedging Activities-deferral
of the Effective Date of FASB Statement No. 133" and Statement of Financial
Accounting Standards No. 138 "Accounting for Certain Derivative Instruments and
Certain Hedging Activities-an Amendment of FASB Statement No. 133," on
January 1, 2001. Because the Company has primarily used derivatives as cash flow
hedges of interest rate risk only, the adoption of SFAS No. 133 did not have a
material financial impact on the financial position and results of operations of
the Company. However, should the Company change its current use of such
derivatives (see Note 9), the adoption of SFAS No. 133 could have a more
significant effect on the Company prospectively.

Upon adoption, the Company recognized a charge to net income of
approximately $282,000 and an additional charge of $9.4 million to other
comprehensive income, representing the cumulative effect of the change in
accounting principle.

OTHER NEW ACCOUNTING STANDARDS--In December 1999, the Securities and
Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." In June 2000, the SEC
staff amended SAB 101 to provide registrants with additional time to implement
SAB 101. The Company adopted SAB 101, as required, in the fourth quarter of
fiscal 2000. The

46

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
adoption of SAB 101 did not have a material financial impact on the financial
position or the results of operations of the Company.

In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation." The Company
was required to adopt FIN 44 effective July 1, 2000 with respect to certain
provisions applicable to new awards, exchanges of awards in a business
combination, modifications to outstanding awards, and changes in grantee status
that occur on or after that date. FIN 44 addresses practice issues related to
the application of Accounting Practice Bulletin Opinion No. 25, "Accounting for
Stock Issued to Employees." The initial adoption of FIN 44 by the Company did
not have a significant impact on the Company.

In September 2000, the FASB issued Statement of Financial Accounting
Standards No. 140 ("SFAS No. 140"), "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." This statement is
applicable for transfers of assets and extinguishments of liabilities occurring
after March 31, 2001. The Company adopted the provisions of this statement as
required for all transactions entered into on or after April 1, 2001. The
adoption of SFAS No. 140 did not have a significant impact on the Company.

In July 2001, the SEC released Staff Accounting Bulletin No. 102 ("SAB
102"), "Selected Loan Loss Allowance and Documentation Issues." SAB 102
summarizes certain of the SEC's views on the development, documentation and
application of a systematic methodology for determining allowances for loan and
lease losses. Adoption of SAB 102 by the Company did not have a significant
impact on the Company.

In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141 ("SFAS No. 141"), "Business Combinations" and Statement of Financial
Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible
Assets." SFAS No. 141 requires the purchase method of accounting to be used for
all business combinations initiated after June 30, 2001. SFAS No. 141 also
addresses the initial recognition and measurement of goodwill and other
intangible assets acquired in business combinations and requires intangible
assets to be recognized apart from goodwill if certain tests are met. The
Company does not believe the adoption of SFAS No. 141 will have a material
impact on the Company's financial position or results of operations. SFAS
No. 142 requires that goodwill not be amortized but instead be measured for
impairment at least annually, or when events indicate that there may be an
impairment. SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001. Early application is permitted for companies with fiscal
years beginning after March 15, 2001. The Company will adopt the provisions of
this statement on January 1, 2002, as required, and it does not believe the
adoption of SFAS No. 142 will have a significant impact on the Company.

In October 2001, the FASB issued Statement of Financial Accounting Standards
No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS No. 144 provides new guidance on the recognition of
impairment losses on long-lived assets to be held and used or to be disposed of
and also broadens the definition of what constitutes a discontinued operation
and how the results of a discontinued operation are to be measured and
presented. The Company is currently evaluating this statement to assess its
impact on the financial statements. The provisions of SFAS No. 144 are effective
for financial statements issued for fiscal years beginning after December 15,
2001, and must be applied at the beginning of a fiscal year. The Company will
adopt the provisions of this statement on January 1, 2002, as required. The
Company does not believe the adoption of SFAS No. 144 will have a significant
impact on the Company.

47

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4--CAPITAL TRANSACTIONS

PRIOR TRANSACTIONS WITH AFFILIATES--Prior to November 4, 1999, the Company
was party to an Advisory Agreement (the "Former Advisory Agreement") with an
external advisor (the "Former Advisor"), an affiliate of SOFIV SMT Holdings.,
L.L.C. ("SOF IV") and certain other affiliates (collectively, the Starwood
Investors). Pursuant to the Former Advisory Agreement, the Former Advisor
managed the affairs of the Company. In connection with the Advisory Agreement,
the Company paid the Former Advisor a quarterly base management fee of 0.3125%
(1.25% per annum) of the Book Equity Value of the Company, as defined. In
addition, the Company paid the Former Advisor a quarterly incentive fee of 5.00%
of the Company's Adjusted Net Income in excess of a benchmark rate. Prior to the
transactions described below through which, among other things, the Company
became internally-managed, the Company was dependent on the services of the
Former Advisor and its officers and employees for the successful execution of
its business strategy.

On October 30, 2001, the Starwood Investors sold 18.975 million shares of
Common Stock (including the subsequently exercised 2.475 million share
over-allotment option granted to the underwriters) owned by them. The Company
did not sell any shares in this offering. As a result of the secondary offering,
Starwood Mezzanine holds no remaining interest in the Company and SOF IV
currently owns approximately 38.7% of the Company's Common Stock (based on the
diluted sharecount as of December 31, 2001).

1999 TRANSACTIONS--On November 3, 1999, consistent with previously announced
terms, the Company's shareholders approved a series of transactions including:
(1) the acquisition, through a merger, of TriNet; (2) the acquisition, through a
merger and a contribution of interests, of 100% of the ownership interests in
the Advisor; and (3) the change in form, through a merger, of the Company's
organization to a Maryland corporation. TriNet shareholders also approved the
TriNet Acquisition on November 3, 1999. These transactions were consummated on
November 4, 1999. As part of these transactions, the Company also replaced its
dual class common share structure with a single class of Common Stock.

TRINET ACQUISITION--TriNet merged with and into a subsidiary of the Company,
with TriNet surviving as a wholly-owned subsidiary of the Company (the "Leasing
Subsidiary"). In the TriNet Acquisition, each share of TriNet common stock was
converted into 1.15 shares of Common Stock, resulting in an aggregate issuance
of 28.9 million shares of Common Stock. Each share of TriNet Series A, Series B
and Series C Cumulative Redeemable Preferred Stock was converted into a share of
Series B, Series C or Series D (respectively) Cumulative Redeemable Preferred
Stock of the Company. The Company's preferred stock issued to the former TriNet
preferred shareholders has substantially the same terms as the TriNet preferred
stock, except that the new Series B, C and D preferred stock has additional
voting rights not associated with the TriNet preferred stock. The holders of the
Company's Series A preferred stock retained the same rights and preferences as
existed prior to the TriNet Acquisition. The TriNet Acquisition was accounted
for as a purchase.

ADVISOR TRANSACTION--Contemporaneously with the consummation of the TriNet
Acquisition, the Company acquired 100% of the interests in the Former Advisor in
exchange for total consideration of four million shares of Common Stock. For
accounting purposes, the Advisor Transaction was not considered the acquisition
of a "business" in applying Accounting Principles Board Opinion No. 16,
"Business Combinations" and, therefore, the market value of the Common Stock
issued in excess of the fair value of the net tangible assets acquired of
approximately $94.5 million was charged to operating income as a non-recurring,
non-cash item in the fourth quarter of 1999, rather than capitalized as
goodwill.

INCORPORATION MERGER--Prior to the consummation of the TriNet Acquisition
and the Advisor Transaction, the Company changed its form from a Maryland trust
to a Maryland corporation in the

48

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4--CAPITAL TRANSACTIONS (CONTINUED)
Incorporation Merger, which technically involved a merger of the Company with a
wholly-owned subsidiary formed solely to effect such merger. In the
Incorporation Merger, the former class B shares were converted into shares of
Common Stock on a 49-for-one basis (the same ratio at which the former class B
shares were previously convertible into class A shares), and the class A shares
were converted into shares of Common Stock on a one-for-one basis. As a result,
the Company no longer has multiple classes of common shares. The Incorporation
Merger was treated as a transfer of assets and liabilities under common control.
Accordingly, the assets and liabilities transferred from the Maryland trust to
the Maryland corporation were reflected at their predecessor basis and no gain
or loss was recognized.

The Company declared and paid a special dividend of one million shares of
its Common Stock payable pro rata to all holders of record of its Common Stock
following completion of the Incorporation Merger, but prior to the effective
time of the TriNet Acquisition and the Advisor Transaction.

PRO FORMA INFORMATION--The summary unaudited pro forma consolidated
statements of operations for the year ended December 31, 1999 are presented as
if the following transactions, consummated in November 1999, had occured on
January 1, 1999: (1) the TriNet Acquisition; (2) the Advisor Transaction; and
(3) the borrowings necessary to consummate the aforementioned transactions. The
unaudited pro forma information is based upon the historical consolidated
results of operations of the Company and TriNet for the year ended December 31,
1999, after giving effect to the events described above.

49

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4--CAPITAL TRANSACTIONS (CONTINUED)
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Investments and dispositions are assumed to have taken place as of
January 1, 1999; however, loan originations and acquisitions are not reflected
in these pro forma numbers until the actual origination or acquisition date by
the Company. The pro forma information above excludes the charge of
approximately $94.5 million taken by the Company in fiscal 1999 to reflect the
costs incurred in acquiring the Former Advisor as such charge is non-recurring.
The pro forma information also excludes certain non-recurring historical charges
recorded by TriNet of $3.4 million in 1999 for a provision for a write-down of
CTL assets. General and administrative costs represent estimated expense levels
as an internally-managed Company.

The pro forma financial information is not necessarily indicative of what
the consolidated results of operations of the Company would have been as of and
for the period indicated, nor does it purport to represent the results of
operations for future periods.

50

ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5--LOANS AND OTHER LENDING INVESTMENTS

The following is a summary description of the Company's loans and other
lending investments (in thousands)(1):

EXPLANATORY NOTES:
- ----------------------------------
(1) Amounts and details are for loans outstanding as of December 31, 2001.
(2) Substantially all variable-rate loans are based on 30-day LIBOR and reprice
monthly. The 30-day LIBOR rate on December 31, 2001 was 1.87%.
(3) The loans require fixed payments of principal and interest resulting in
partial principal amortization over the term of the loan with the remaining
principal due at maturity. In addition, one of the loans permits additional
annual prepayments of principal of up to $1.3 million without penalty at the
borrower's option.
(4) Under some of these loans, the lender receives additional payments
representing additional interest from participation in available cash flow
from operations of the property and the proceeds, in excess of a base
amount, arising from a sale or refinancing of the property.
(5) Includes a participation interest in a second mortgage and a subordinate
interest in a private REMIC whose sole asset is a single first mortgage
loan.
(6) Includes a subordinate interest in a private REMIC whose sole asset is a
single first mortgage loan.

51

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5--LOANS AND OTHER LENDING INVESTMENTS (CONTINUED)

During the 12-month periods ended December 31, 2001 and 2000, respectively,
the Company and its affiliated ventures originated or acquired an aggregate of
approximately $696.9 million and $721.2 million in loans and other lending
investments, funded $99.6 million and $56.0 million under existing loan
commitments, and received principal repayments of $676.0 million and
$584.5 million.

As of December 31, 2001, the Company had ten loans with unfunded
commitments. The total unfunded commitment amount was approximately
$169.3 million, of which $31.8 million was discretionary (i.e., at the Company's
option) and $137.5 million was non-discretionary.

The Company's loans and other lending investments are predominantly pledged
as collateral under either the iStar Asset Receivables secured notes, the
secured revolving facilities or secured term loans (see Note 7).

The Company has reflected provisions for loan losses of approximately
$7.0 million, $6.5 million and $4.8 million during the years ended December 31,
2001, 2000 and 1999, respectively. These provisions represent loan portfolio
reserves based on management's evaluation of general market conditions, the
Company's internal risk management policies and credit risk ratings system,
industry loss experience, the likelihood of delinquencies or defaults, and the
underlying collateral. No direct impairment reserves on specific loans were
considered necessary.

NOTE 6--CORPORATE TENANT LEASE ASSETS

The Company's investments in corporate tenant lease assets, at cost, were as
follows (in thousands):

The Company's CTL assets are leased to customers with initial term
expiration dates from 2002 to 2023. Future operating lease payments under
non-cancelable leases, excluding customer reimbursements of expenses, in effect
at December 31, 2001, are approximately as follows (in thousands):

Under certain leases, the Company receives additional participating lease
payments to the extent gross revenues of the corporate tenant exceed a base
amount. The Company earned $0.4 million,

52

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--CORPORATE TENANT LEASE ASSETS (CONTINUED)
$0.6 million and $0.5 million of such additional participating lease payments in
the years ended December 31, 2001, 2000 and 1999, respectively. In addition, the
Company also receives reimbursements from customers for certain facility
operating expenses.

The Company is subject to expansion option agreements with three existing
customers which could require the Company to fund and to construct up to 166,000
square feet of additional adjacent space on which the Company would receive
additional operating lease income under the terms of the option agreements.

INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED JOINT VENTURES: At
December 31, 2001, the Company had investments in five joint ventures:
(1) TriNet Sunnyvale Partners L.P. ("Sunnyvale"), whose external partners are
John D. O'Donnell, Trustee, John W. Hopkins, and Donald S. Grant; (2) Corporate
Technology Associates LLC ("CTC I"), whose external member is Corporate
Technology Centre Partners LLC; (3) Sierra Land Ventures ("Sierra"), whose
external joint venture partner is Sierra-LC Land, Ltd.; (4) TriNet Milpitas
Associates, LLC ("Milpitas"), whose external member is The Prudential Insurance
Company of America; and (5) ACRE Simon, L.L.C. ("ACRE"), whose external partner
is William E. Simon & Sons Realty Investments, L.L.C. These ventures were formed
for the purpose of operating, acquiring and in certain cases, developing
corporate tenant lease facilities. The Company previously had an equity
investment in CTC II. The corporate tenant lease assets held in that joint
venture were sold for approximately $66.0 million in September 2000. In
connection with this sale, the Company's note receivable from the venture was
modified to mature on December 31, 2001, on which date it was repaid in full.

At December 31, 2001, the ventures comprised 23 net leased facilities.
Additionally, 17.7 acres of land are held for sale. The Company's combined
investment in these joint ventures at December 31, 2001 was $60.2 million. The
joint ventures' carrying value for the 23 facilities owned at December 31, 2001
was $334.1 million. The joint ventures' carrying value of the land held for sale
was $7.7 million. In the aggregate, the joint ventures had total assets of
$384.6 million and total liabilities of $277.8 million as of December 31, 2001,
and net income of $16.6 million for the 12 months ended December 31, 2001. The
Company accounts for these investments under the equity method because the
Company's joint venture partners have certain participating rights which limit
the Company's control. The Company's ownership percentages, its investments in
and advances to unconsolidated joint ventures, its respective income and

53

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--CORPORATE TENANT LEASE ASSETS (CONTINUED)
the Company's pro rata share of its ventures' third-party non-recourse debt as
of December 31, 2001 are presented below (in thousands):

EXPLANATORY NOTE:
- ------------------------------

(1) Maturity date reflects a one-year extension at the venture's option.

Effective March 15, 2000, ACRE entered into an interest rate cap agreement
which had a notional amount of $17.4 million and a LIBOR strike of 7.25%. This
instrument did not qualify for hedge accounting at inception and is therefore
reflected at fair value at each balance sheet date, with changes in value
included in the income statement for the period. This cap expired on
February 1, 2002.

Effective September 29, 2000, iStar Sunnyvale Partners, LP (the entity which
is controlled by Sunnyvale) entered into an interest rate cap agreement limiting
the venture's exposure to interest rate movements on its $24.0 million
LIBOR-based mortgage loan to an interest rate of 9.0% through November 9, 2003.

Currently, the limited partners of Sunnyvale have the option to convert
their partnership interest into cash; however, the Company may elect to deliver
297,728 shares of Common Stock in lieu of cash. Additionally, commencing in
February 2002, subject to acceleration under certain circumstances, the venture
interest held by the external member of Milpitas may be converted into 984,476
shares of Common Stock.

Income generated from the above joint venture investments is included in
Operating Lease Income in the Consolidated Statements of Operations.

54

ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--DEBT OBLIGATIONS

As of December 31, 2001 and 2000, the Company has debt obligations under
various arrangements with financial institutions as follows (in thousands):

55

EXPLANATORY NOTES:
- ------------------------------
(1) Maturity date reflects a one-year "term-out" extension at the Company's
option.

(2) On July 27, 2001, the Company replaced both unsecured facilities with a new
$300.0 million unsecured revolving credit facility bearing interest at
LIBOR + 2.125%. The new facility has an initial maturity of July 2003 with a
one-year extension at the Company's option and another one-year extension at
the lenders' option.

(3) Maturity date reflects two one-year extensions at the Company's option.

(4) Maturity date reflects a one-year extension at the Company's option.

(5) Principal payments on these bonds are a function of the principal repayments
on loan assets which collateralize these obligations. The dates indicated
above represent the expected date on which the final payment would occur for
such class based on the assumptions that the loans which collateralize the
obligations are not voluntarily prepaid, the loans are paid on their
effective maturity dates and no extensions of the effective maturity dates
of any of the loans are granted. The final maturity date for the underlying
indenture on classes A, B, C, D, E and F is September 25, 2022.

(6) The notes are callable by the Company at any time for an amount equal to the
total of principal outstanding, accrued interest and the applicable
make-whole prepayment premium.

(7) Subject to mandatory tender on March 1, 2003, to either the dealer or the
Leasing Subsidiary. The initial coupon of 6.75% applies to the first
five-year term through the mandatory tender date. If tendered to the dealer,
the notes must be remarketed. The rates reset to then-prevailing market
rates upon remarketing.

(8) These obligations were assumed as part of the TriNet Acquisition. As part of
the accounting for the purchase, these fixed-rate obligations were
considered to have stated interest rates which were below the
then-prevailing market rates at which the Leasing Subsidiary could issue new
debt obligations and, accordingly, the Company ascribed a market discount to
each obligation. Such discounts are amortized as an adjustment to interest
expense using the effective interest method over the related term of the
obligations. As adjusted, the effective annual interest rates on these
obligations were 8.81%, 8.75%, 9.51% and 9.04%, for the 6.75% Dealer
Remarketable Securities, 7.30% Notes, 7.70% Notes and 7.95% Notes,
respectively.

56

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--DEBT OBLIGATIONS (CONTINUED)

Availability of amounts under the secured revolving credit facilities are
based on percentage borrowing base calculations. In addition, certain of the
Company's debt obligations contain financial covenants.

On May 17, 2000, the Company closed the inaugural offering under its
proprietary matched funding program, STARs, Series 2000-1. In the initial
transaction, a wholly-owned subsidiary of the Company issued $896.5 million of
investment grade bonds secured by the subsidiary's assets, which had an
aggregate outstanding principal balance of approximately $1.2 billion at
inception. Principal payments received on the assets will be utilized to repay
the most senior class of the bonds then outstanding. The maturity of the bonds
match funds the maturity of the underlying assets financed under the program.
For accounting purposes, this transaction was treated as a secured financing.

On January 11, 2001, the Company closed a new $700.0 million secured
revolving credit facility which is led by a major commercial bank. The new
facility has a three-year primary term and one-year "term-out" extension option,
and bears interest at LIBOR plus 1.40% to 2.15%, depending upon the collateral
contributed to the borrowing base. The new facility accepts a broad range of
structured finance assets and has a final maturity of January 2005. In addition,
on February 22, 2001, the Company extended the maturity of its $350.0 million
unsecured revolving credit facility to May 2002.

On May 15, 2001, the Company repaid its $100.0 million 7.30% unsecured
notes. These notes were senior unsecured obligations of the Leasing Subsidiary
and ranked equally with the Leasing Subsidiary's other senior unsecured and
unsubordinated indebtedness.

On June 14, 2001, the Company closed $193.0 million of term loan financing
secured by 15 corporate tenant lease assets. The variable-rate loan bears
interest at LIBOR plus 1.85% (not to exceed 10.00%) and has two one-year
extensions at the Company's option. The Company used these proceeds to repay a
$77.8 million secured term loan maturing in June 2001 and to pay down a portion
of its revolving credit facilities. In addition, the Company extended the final
maturity of its $500.0 million secured revolving credit facility to August 12,
2003.

On July 6, 2001, the Leasing Subsidiary financed a $75.0 million structured
finance asset with a $50.0 million term loan bearing interest at
LIBOR + 2.50%. The loan has a maturity of July 2006, including a one-year
extension at the Leasing Subsidiary's option.

On July 27, 2001, the Company completed a $300.0 million unsecured revolving
credit facility with a group of leading financial institutions. The new facility
has an initial maturity of July 2003, with a one-year extension at the Company's
option and another one-year extension at the lenders' option. The new facility
replaces two prior credit facilities maturing in 2002 and 2003, and bears
interest at LIBOR + 2.125%.

On August 9, 2001, the Company issued $350.0 million of 8.75% senior notes
due in 2008. The notes are unsecured senior obligations of the Company. The
Company used the net proceeds to repay outstanding borrowings under its secured
credit facilities.

During the years ended December 31, 2001 and 2000, the Company incurred an
extraordinary loss of approximately $1.6 million and $0.7 million, respectively,
as a result of the early retirement of certain debt obligations of its Leasing
Subsidiary.

57

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--DEBT OBLIGATIONS (CONTINUED)
As of December 31, 2001, future expected/scheduled maturities of outstanding
long-term debt obligations are as follows (in thousands)(1):

2002........................................................ $ 29,207
2003........................................................ 324,144
2004........................................................ 218,719
2005........................................................ 883,563
2006........................................................ 293,000
Thereafter.................................................. 762,160
----------
Total principal maturities.................................. 2,510,793
Net unamortized debt discounts.............................. (15,424)
----------
Total debt obligations...................................... $2,495,369
==========

EXPLANATORY NOTE:
- ------------------------------

(1) Assumes exercise of extensions to the extent such extensions are at the
Company's option.

NOTE 8--SHAREHOLDERS' EQUITY

The Company's charter provides for the issuance of up to 200.0 million shares
of Common Stock, par value $0.001 per share, and 30.0 million shares of
preferred stock. The Company has 4.4 million shares of 9.5% Series A Cumulative
Redeemable Preferred Stock, 2.3 million shares of 9.375% Series B Cumulative
Redeemable Preferred Stock, 1.5 million shares of 9.20% Series C Cumulative
Redeemable Preferred Stock, and 4.6 million shares of 8.0% Series D Cumulative
Redeemable Preferred Stock. The Series A, B, C and D Cumulative Redeemable
Preferred Stock are redeemable without premium at the option of the Company at
their respective liquidation preferences beginning on December 15, 2003,
June 15, 2001, August 15, 2001 and October 8, 2002, respectively.

On December 15, 1998, the Company issued warrants to acquire 6.1 million
common shares of Common Stock, as adjusted for dilution, at $34.35 per share.
The warrants are exercisable on or after December 15, 1999 at a price of $34.35
per share and expire on December 15, 2005.

STOCK REPURCHASE PROGRAM--The Board of Directors approved, and the Company
has implemented, a stock repurchase program under which the Company is
authorized to repurchase up to 5.0 million shares of its Common Stock from time
to time, primarily using proceeds from the disposition of assets or loan
repayments and excess cash flow from operations, but also using borrowings under
its credit facilities if the Company determines that it is advantageous to do
so. As of both December 31, 2001 and 2000, the Company had repurchased
approximately 2.3 million shares at an aggregate cost of approximately
$40.7 million.

DRIP PROGRAM--The Company maintains a dividend reinvestment and direct stock
purchase plan. Under the dividend reinvestment component of the plan, the
Company's shareholders may purchase additional shares of Common Stock without
payment of brokerage commissions or service charges by automatically reinvesting
all or a portion of their Common Stock cash dividends. Under the direct stock
purchase component of the plan, the Company's shareholders and new investors may
purchase shares of Common Stock directly from the Company without payment of
brokerage commissions or service charges. All purchases of shares in excess of
$10,000 per month pursuant to the direct purchase component are at the Company's
sole discretion. Shares issued under the plan may reflect a discount of up to a
3.0% from

58

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8--SHAREHOLDERS' EQUITY (CONTINUED)
the prevailing market price of the Company's Common Stock. The Company is
authorized to issue up to 8.0 million shares of Common Stock pursuant to the
dividend reinvestment and direct stock purchase plan. In 2001, the Company
issued a total of 195,078 shares of its Common Stock through the direct stock
purchase component of the plan for net proceeds of approximately $4.7 million.
Approximately $3.9 million of these proceeds were received in January 2002.

NOTE 9--RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS

RISK MANAGEMENT--In the normal course of its on-going business operations,
the Company encounters economic risk. There are three main components of
economic risk: interest rate risk, credit risk and market risk. The Company is
subject to interest rate risk to the degree that its interest-bearing
liabilities mature or reprice at different speeds, or different bases, than its
interest-earning assets. Credit risk is the risk of default on the Company's
lending investments that results from a property's, borrower's or corporate
tenant's inability or unwillingness to make contractually required payments.
Market risk reflects changes in the value of loans due to changes in interest
rates or other market factors, including the rate of prepayments of principal
and the value of the collateral underlying loans and the valuation of corporate
tenant lease facilities held by the Company.

USE OF DERIVATIVE FINANCIAL INSTRUMENTS--The Company's use of derivative
financial instruments is primarily limited to the utilization of interest rate
agreements or other instruments to manage interest rate risk exposure. The
principal objective of such arrangements is to minimize the risks and/or costs
associated with the Company's operating and financial structure as well as to
hedge specific anticipated transactions. The counterparties to these contractual
arrangements are major financial institutions with which the Company and its
affiliates may also have other financial relationships. The Company is
potentially exposed to credit loss in the event of nonperformance by these
counterparties. However, because of their high credit ratings, the Company does
not anticipate that any of the counterparties will fail to meet their
obligations.

Since January 1, 1999, the Company has entered into the following cash flow
hedges that have expired or been settled prior to December 31, 2001 (in
thousands):

59

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9--RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS (CONTINUED)
Since January 1, 1999, the Company has entered into the following cash flow
hedges that are outstanding as of December 31, 2001. The net value (liability)
associated with these hedges is reflected on the Company's balance sheet (in
thousands).

EXPLANATORY NOTE:
- ------------------------
(1) Acquired in connection with the TriNet Acquisition (see Note 4).

In connection with the STARs, Series 2000-1 in May 2000, the Company entered
into a LIBOR interest rate cap struck at 10.00% in the notional amount of $312.0
million, and simultaneously sold a LIBOR interest rate cap with the same terms.
Since these instruments do not change the Company's net interest rate risk
exposure, they do not qualify as hedges and changes in their respective values
are charged to earnings. As the terms of these arrangements are substantially
the same, the effects of a revaluation of these two instruments substantially
offset one another.

During the year ended December 31, 1999, the Company settled an aggregate
notional amount of approximately $63.0 million that was outstanding under
certain hedging agreements which the Company had entered into in order to hedge
the potential effects of interest rate movements on anticipated fixed-rate
borrowings. The settlement of such agreements resulted in a receipt of
approximately $0.6 million which had been deferred pending completion of the
planned fixed-rate financing transaction. Subsequently, the transaction was
modified and was actually consummated as a variable-rate financing transaction.
As a result, the previously deferred receipt no longer qualified for hedge
accounting treatment and the $0.6 million was recognized as a gain included in
other income in the consolidated statement of operations for the year ended
December 31, 2000 in connection with the closing of STARs, Series 2000-1 in
May 2000.

During the year ended December 31, 1999, the Company refinanced its
$125.0 million term loan maturing March 15, 1999 with a $155.4 million term loan
maturing March 5, 2009. The new term loan bears interest at 7.44% per annum,
payable monthly, and amortizes over an approximately 22-year schedule. The new
term loan represented forecasted transactions for which the Company had
previously entered into U.S. Treasury-based hedging transactions. The net
$3.4 million cost of the settlement of such hedges has been deferred and is
being amortized as an increase to the effective financing cost of the new term
loan over its effective ten-year term.

CREDIT RISK CONCENTRATIONS--Concentrations of credit risks arise when a
number of borrowers or customers related to the Company's investments are
engaged in similar business activities, or activities in the same geographic
region, or have similar economic features that would cause their ability to meet
contractual obligations, including those to the Company, to be similarly
affected by changes in economic conditions. The Company regularly monitors
various segments of its portfolio to assess potential

60

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9--RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS (CONTINUED)
concentrations of credit risks. Management believes the current credit risk
portfolio is reasonably well diversified and does not contain any unusual
concentration of credit risks.

Substantially all of the Company's corporate tenant lease assets (including
those held by joint ventures) and loans and other lending investments, are
collateralized by facilities located in the United States, with significant
concentrations (i.e., greater than 10.0%) as of December 31, 2001 in California
(23.5%), Texas (15.1%) and New York (10.9%). As of December 31, 2001, the
Company's investments also contain significant concentrations in the following
asset types: office (47.7%), hotel lending (12.5%) and industrial (10.6%).

The Company underwrites the credit of prospective borrowers and customers
and often requires them to provide some form of credit support such as corporate
guarantees, letters of credit and/or cash security deposits. Although the
Company's loans and other lending investments and corporate customer lease
assets are geographically diverse and the borrowers and customers operate in a
variety of industries, to the extent the Company has a significant concentration
of interest or operating lease revenues from any single borrower or customer,
the inability of that borrower or customer to make its payment could have an
adverse effect on the Company. As of December 31, 2001, the Company's five
largest borrowers or corporate tenants collectively accounted for approximately
16.7% of the Company's aggregate annualized interest and operating lease
revenue.

NOTE 10--STOCK-BASED COMPENSATION PLANS AND EMPLOYEE BENEFITS

The Company's 1996 Long-Term Incentive Plan (the "Plan") is designed to
provide incentive compensation for officers, other key employees and directors
of the Company. The Plan provides for awards of stock options and shares of
restricted stock and other performance awards. The maximum number of shares of
Common Stock available for awards under the Plan is 9.0% of the outstanding
shares of Common Stock, calculated on a fully diluted basis, from time to time;
provided that the number of shares of Common Stock reserved for grants of
options designated as incentive stock options is 5.0 million, subject to certain
antidilution provisions in the Plan. All awards under the Plan, other than
automatic awards to non-employee directors, are at the discretion of the Board
or a committee of the Board. At December 31, 2001, a total of approximately
7.9 million shares of Common Stock were available for awards under the Plan, of
which options to purchase approximately 5.3 million shares of Common Stock were
outstanding and approximately 637,000 shares of restricted stock were
outstanding.

Concurrently with the Recapitalization Transactions, the Company issued
approximately 2.5 million (as adjusted) fully vested and immediately exercisable
options to purchase shares of Common Stock at $14.72 per share (as adjusted) to
the Former Advisor with a term of ten years. The Former Advisor granted a
portion of these options to its employees and the remainder were allocated to an
affiliate. Upon consummation of the Advisor Transaction, these individuals
became employees of the Company. In general, the grants to these employees
provided for scheduled vesting over a predefined service period of three to five
years and, under certain conditions, provide for accelerated vesting. These
options expire on March 15, 2008.

In connection with the TriNet Acquisition, outstanding options to purchase
TriNet stock under TriNet's stock option plans were converted into options to
purchase shares of Common Stock on substantially the same terms, except that
both the exercise price and number of shares issuable upon exercise of the
TriNet options were adjusted to give effect to the merger exchange ratio of 1.15
shares of Common Stock for each share of TriNet common stock. In addition,
options held by the former directors of TriNet and certain executive officers
became fully vested as a result of the transaction. These options

61

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10--STOCK-BASED COMPENSATION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
were converted into options to purchase shares of Common Stock on substantially
the same terms, as adjusted for the merger exchange ratios.

Also, as a result of the TriNet Acquisition, TriNet terminated its dividend
equivalent rights program. The program called for immediate vesting and cash
redemption of all dividend equivalent rights upon a change of control of 50% or
more of the voting common stock. Concurrent with the TriNet Acquisition, all
dividend equivalent rights were vested and amounts due to former TriNet
employees of approximately $8.3 million were paid by the Company. Such payments
were included as part of the purchase price paid by the Company to acquire
TriNet for financial reporting purposes.

Changes in options outstanding during each of fiscal 1999, 2000 and 2001 are
as follows:

EXPLANATORY NOTE:
- ------------------------
(1) Represents the reclassification of stock options originally granted to the
Former Advisor and regranted to its employees who became employees of the
Company upon consummation of the Advisor Transaction (see Note 4).

62

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10--STOCK-BASED COMPENSATION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 2001:

EXPLANATORY NOTE:
- ------------------------------

(1) Includes approximately 764,000 options which were granted, on a fully
exercisable basis, in connection with the Recapitalization Transactions, and
which are now held by a privately-owned affiliate of Starwood Capital Group.
Beneficial interests in these options were subsequently regranted by that
affiliate to employees of Starwood Capital Group and its affiliates, subject
to vesting requirements. In the event that these employees forfeit such
options, they revert to the affiliate of Starwood Capital Group, which may
regrant them at its discretion. As of December 31, 2001, approximately
520,000 of these options are currently exercisable by the beneficial owners.

The Company has elected to use the intrinsic method for accounting for
options issued to employees or directors, as allowed under Statement of
Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation"
("SFAS No. 123") and, accordingly, recognizes no compensation charge in
connection with these options to the extent that the options exercise price
equals or exceeds the quoted price of the Company's common shares at the date of
grant or measurement date. In connection with the Advisor Transaction, as part
of the computation of the one-time charge to earnings, the Company calculated a
deferred compensation charge of approximately $5.1 million. This deferred charge
represents the difference of the closing sales price of the shares of Common
Stock on the date of the Advisor Transaction of $20.25 over the strike price of
the options of $14.72 per share (as adjusted) for the unvested portion of the
options granted to former employees of the Advisor who are now employees of the
Company. This deferred charge will be amortized over the related remaining
vesting terms to the individual employees as additional compensation expense.

In connection with the original grant of options in March 1998 to its
external advisor, the Company utilized the option value method as required by
SFAS No. 123. An independent financial advisory firm estimated the value of
these options at date of grant to be approximately $2.40 per share using a
Black-Scholes valuation model. In the absence of comparable historical market
information for the Company, the advisory firm utilized assumptions consistent
with activity of a comparable peer group of companies, including an estimated
option life of five years, a 27.5% volatility rate and an estimated annual
dividend

63

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10--STOCK-BASED COMPENSATION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
rate of 8.5%. The resulting charge to earnings was calculated as the number of
options allocated to the Advisor multiplied by the estimated value at
consummation. A charge of approximately $6.0 million was reflected in the
Company's first quarter 1998 financial results for this original grant.

Had the Company's compensation costs been determined using the fair value
method of accounting for stock options issued under the Plan to employees and
directors prescribed by SFAS No. 123, the Company's net income for the fiscal
years ended December 31, 2001, 2000 and 1999 would have been reduced on a pro
forma basis by approximately $705,000, $275,000 and $141,000 respectively. This
would not have significantly impacted earnings per share.

The fair value of each significant option grant is estimated on the date of
grant (January 2, 2001 for the 2001 options) using the Black-Scholes model. For
the above SFAS No.123 calculation, the following assumptions were used for the
Company's fair value calculations of stock options:

Future charges may be taken to the extent of additional option grants, which
are at the discretion of the Board of Directors.

During the year ended December 31, 2001, the Company granted 94,859
restricted shares to employees in lieu of cash bonuses for the year ended
December 31, 2000 at the employees' election. These restricted shares were
immediately vested on the date of grant and are not transferable for a period of
one year following vesting.

During the year ended December 31, 2001, the Company entered into a new
three-year employment agreement with its chief executive officer. Under the
agreement, the Chief Executive Officer receives an annual base salary of
$1.0 milion. He may also receive a bonus, which is targeted to be an amount
equal to his base salary, if the Company achieves certain performance targets
set by the Compensation Committee in consultation with the Chief Executive
Officer. The bonus award may be increased or reduced from the target depending
upon the degree to which the performance goals are exceeded or are not met. The
bonus amount may not exceed 200% of his base salary. The bonus was $800,000 in
2001. The bonus is reduced by the amount of any dividends paid to the Chief
Executive Officer in respect of phantom shares (described below) which are
awarded to him and have vested. The Chief Executive Officer received
approximately $643,000 in such dividends in 2001. As part of this agreement, the
Company confirmed a prior grant of 750,000 stock options made to the executive
on March 2, 2001 with an exercise price of $19.69, which represented the market
price at the date of the original contingent grant. However, because the grant
required further approval by the compensation committee and the Board of
Directors, no measurement date occurred for accounting purposes until such
approvals were made, at which point the market price of the Company's Common
Stock was $24.90. Accordingly, an aggregate charge of approximately $3.9 million
will be recognized with respect to these options over the terms of this
agreement. The options will vest in equal installments of 250,000 shares in each
January beginning with January 2002.

The Company also granted the executive 2.0 million unvested phantom shares,
each of which represents one share of the Company's Common Stock. These shares
will vest in installments of 350,000 shares, 650,000 shares, 600,000 shares and
400,000 shares on a contingent basis if the 60-day average closing price of the
Company's Common Stock achieves thresholds of $25.00, $30.00, $34.00 and $37.00,

64

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10--STOCK-BASED COMPENSATION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
respectively. As of December 31, 2001, the $25.00 threshold has been attained
and 350,000 of these shares have contingently vested. Shares that have
contingently vested generally will not become fully vested until the end of the
three-year term of the agreement, except upon certain termination or change of
control events. Further, if the stock price drops below certain specified levels
for the 60-day average before such date, they would also not fully vest and be
forfeited. The executive will receive dividends on shares that have contingently
or fully vested and have not been forfeited under the terms of the agreement, if
and when the Company declares and pays dividends on its Common Stock. Because no
shares have been issued, dividends received on these phantom shares, if any,
will be reflected as compensation expense by the Company. For accounting
purposes, this arrangement will be treated as a contingent, variable plan and no
compensation will be recognized until the shares, in whole or in part, become
irrevocably vested, where upon the Company will reflect a charge equal to the
then fair value of the phantom shares irrevocably vested.

In addition, the Company entered into a three-year employment agreement,
subject to a one-year extension option, with an executive in connection with his
appointment as President of the Company. Under the agreement, in lieu of salary
and bonus, the Company granted the executive 500,000 unvested restricted shares.
The vesting of the shares is a function of the total return realized by the
Company's common shareholders, as measured by cumulative dividends paid on the
Company's Common Stock from and after January 1, 2001 and the market price of
the Company's Common Stock. If the total shareholder return as of a measurement
date contemplated by the agreement is between 0% and 29.99%, then between zero
and 150,000 restricted shares are subject to contingent vesting using
straight-line interpolation. If the total return is between 30.00% and 60.00%,
then the balance of the shares are subject to contingent vesting using
straight-line interpolation. Contingently vested shares will become fully vested
shares (no longer subject to forfeiture) if the executive remains employed
through the term of the agreement, or earlier if there is a change of control
event, a termination without cause, a termination with good reason or an event
of death or disability. In addition, the entire 500,000 share grant will
automatically become fully vested on September 30, 2002 if the target
shareholder total return of 60.00% is achieved for 60 consecutive calendar days
on or prior to September 30, 2002. None of the shares will vest (regardless of
the total rate of return to shareholders) if the executive voluntarily
terminates his employment without good reason before September 30, 2002.

If the executive voluntarily resigns without good reason after
September 30, 2002, then some or all of his restricted shares will become fully
vested on such date, depending upon the level of total shareholder returns that
have been achieved at that date. Until shares under the agreement are otherwise
vested or forfeited, the executive will receive dividends on the share grant
during the term of the agreement if and when the Company declares and pays
dividends on its Common Stock. For financial statement purposes, such dividends
were accounted for in a manner consistent with the the Company's normal Common
Stock dividends as a reduction to retained earnings. None of these restricted
shares were vested at December 31, 2001. For accounting purposes, this
arrangement will be treated as a contingent, variable plan and no compensation
will be recognized until the shares, in whole or in part, become irrevocably
vested, whereupon the Company will reflect a charge equal to the then fair value
of the restricted shares vested.

SOFIV Management, L.L.C. and Starwood Capital Group I, L.P., each a
beneficial owner of the Company's Common Stock, and the Company's Chief
Executive Officer entered into an agreement with the Company whereby they agreed
to reimburse the Company, through the delivery of cash or shares, 87.5% of the
value of any shares granted to the President pursuant to his employment
agreement in excess

65

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10--STOCK-BASED COMPENSATION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
of 350,000 shares, less the value of any tax benefits realized by the Company or
its shareholders on account of compensation expense deductions.

During the year ended December 31, 2000, the Company granted 143,646
restricted shares to employees. Of this total, 74,996 restricted shares were
granted in lieu of cash bonuses at the employees' election, were immediately
vested on the date of grant, and were not transferable for a period of one year
following vesting. An additional 68,650 of such restricted shares vest over
periods ranging from one to three years following the date of grant and are
transferable upon vesting. For accounting purposes, the Company measures
compensation costs for these shares as of the date of the grant and is charging
such amount to earnings at the grant date if no vesting period existed or
ratably over the respective vesting period.

On July 28, 2000, the Company granted to its employees profits interests in
a wholly-owned subsidiary of the Company called iStar Venture Direct Holdings,
LLC. iStar Venture Direct Holdings, LLC has a net investment of $1.4 million in
the preferred stock of three real estate-related technology companies. The
profits interests have three-year vesting schedules, and are subject to
forfeiture in the event of termination of employment for cause or a voluntary
resignation.

Effective November 4, 1999, the Company implemented a savings and retirement
plan (the "401(k) Plan"), which is a voluntary, defined contribution plan. All
employees are eligible to participate in the 401 (k) Plan following completion
of six months of continuous service with the Company. Each participant may
contribute on a pretax basis between 2% and 15% of such participant's
compensation. At the discretion of the Board of Directors, the Company may make
matching contributions on the participant's behalf of up to 50% of the first 10%
of the participant's annual contribution. The Company made gross contributions
of approximately $319,000 and $320,000 to the 401(k) Plan for the years ended
December 31, 2001 and 2000, respectively.

66

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11--EARNINGS PER SHARE

The following table presents a reconciliation of the numerators and
denominators of the basic and diluted EPS calculations for the years ended
December 31, 2001, 2000 and 1999, respectively (in thousands, except per share
data):

67

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11--EARNINGS PER SHARE (CONTINUED)
Prior to November 4, 1999, Basic EPS was computed based on the income
allocable to class A shares (net income reduced by accrued dividends on
preferred shares and by 1% allocated to the former class B shares), divided by
the weighted average number of class A shares outstanding during the period.
Diluted EPS was based on the net earnings allocable to class A shares plus
dividends on the former class B shares which were convertible into class A
shares, divided by the weighted average number of class A shares and dilutive
potential class A shares that were outstanding during the period. Dilutive
potential class A shares included the former class B shares, which were
convertible into class A shares at a rate of 49 former class B shares for one
class A share, and potentially dilutive options to purchase class A shares
issued to the Former Advisor and the Company's directors and warrants to acquire
class A shares.

As more fully described in Note 4, in the Incorporation Merger, the class A
shares and the former class B shares were converted into shares of Common Stock
and, as a result, the Company no longer has multiple classes of common shares.

NOTE 12--COMPREHENSIVE INCOME

In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income" effective for fiscal
years beginning after December 15, 1997. The statement changes the reporting of
certain items currently reported as changes in the shareholders' equity section
of the balance sheet and establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 130 requires that all components of comprehensive
income shall be reported in the financial statements in the period in which they
are recognized. Furthermore, a total amount for comprehensive income shall be
displayed in the financial statements. The Company has adopted this standard
effective January 1, 1998. Total comprehensive income was $214.8 million,
$217.8 million and $38.7 million for the years ended December 31, 2001, 2000 and
1999, respectively. The primary component of comprehensive income other than net
income was the adoption and continued application of SFAS No. 133.

For the year ended December 31, 2001, the change in fair market value of the
Company's interest rate swaps was $(11.3) million and was recorded as a
reduction to other comprehensive income. The reconciliation to other
comprehensive income is as follows (in thousands):

68

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 12--COMPREHENSIVE INCOME (CONTINUED)
As of December 31, 2001 and 2000, accumulated other comprehensive income
reflected in the Company's equity on the balance sheet is comprised of the
following (in thousands):

NOTE 13--DIVIDENDS

In order to maintain its election to qualify as a REIT, the Company must
currently distribute, at a minimum, an amount equal to 90% of its taxable income
and must distribute 100% of its taxable income to avoid paying corporate federal
income taxes. The Company anticipates it will distribute all of its taxable
income to its shareholders. Because taxable income differs from cash flow from
operations due to non-cash revenues or expenses, in certain circumstances, the
Company may be required to borrow to make sufficient dividend payments to meet
this anticipated dividend threshold.

For the year ended December 31, 2001, total dividends declared by the
Company aggregated $213.1 million, or $2.45 per common share, consisting of
quarterly dividends of $0.6125 per share which were declared on April 2, 2001,
July 2, 2001, October 1, 2001 and December 3, 2001. The dividend attributable to
the fourth quarter 2000 was $51.4 million, or $0.60 per share of Common Stock,
and was paid on January 12, 2001. The Company also declared dividends
aggregating $20.9 million, $4.7 million, $3.0 million and $8.0 million,
respectively, on its Series A, B, C and D preferred stock, respectively, for the
year ended December 31, 2001. There are no divided arrearages on any of the
preferred shares currently outstanding.

The Series A preferred stock has a liquidation preference of $50.00 per
share and carries an initial dividend yield of 9.50% per annum. The dividend
rate on the preferred shares will increase to 9.75% on December 15, 2005, to
10.00% on December 15, 2006 and to 10.25% on December 15, 2007 and thereafter.
Dividends on the Series A preferred shares are payable quarterly in arrears and
are cumulative.

Holders of shares of the Series B preferred stock are entitled to receive,
when and as declared by the Board of Directors, out of funds legally available
for the payment of dividends, cumulative preferential cash dividends at the rate
of 9.375% per annum of the $25.00 liquidation preference, equivalent to a fixed
annual rate of $2.34 per share. Dividends are cumulative from the date of
original issue and are payable quarterly in arrears on or before the 15th day of
each March, June, September and December or, if not a business day, the next
succeeding business day. Any dividend payable on the Series B preferred stock
for any partial dividend period will be computed on the basis of a 360-day year
consisting of twelve 30-day months. Dividends will be payable to holders of
record as of the close of business on the first day of the calendar month in
which the applicable dividend payment date falls or on another date designated
by the Board of Directors of the Company for the payment of dividends that is
not more than 30 nor less than ten days prior to the dividend payment date.

Holders of shares of the Series C preferred stock are entitled to receive,
when and as declared by the Board of Directors, out of funds legally available
for the payment of dividends, cumulative preferential

69

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 13--DIVIDENDS (CONTINUED)
cash dividends at the rate of 9.20% per annum of the $25.00 liquidation
preference, equivalent to a fixed annual rate of $2.30 per share. The remaining
terms relating to dividends of the Series C preferred stock are substantially
identical to the terms of the Series B preferred stock described above.

Holders of shares of the Series D preferred stock are entitled to receive,
when and as declared by the Board of Directors, out of funds legally available
for the payment of dividends, cumulative preferential cash dividends at the rate
of 8.00% per annum of the $25.00 liquidation preference, equivalent to a fixed
annual rate of $2.00 per share. The remaining terms relating to dividends of the
Series D preferred stock are substantially identical to the terms of the
Series B preferred stock described above.

The exact amount of future quarterly dividends to common shareholders will
be determined by the Board of Directors based on the Company's actual and
expected operations for the fiscal year and the Company's overall liquidity
position.

NOTE 14--FAIR VALUES OF FINANCIAL INSTRUMENTS

SFAS No. 107, "Disclosures About Fair Value of Financial Instruments" ("SFAS
No. 107"), requires the disclosure of the estimated fair values of financial
instruments. The fair value of a financial instrument is the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced or liquidation sale. Quoted market prices, if available,
are utilized as estimates of the fair values of financial instruments. Because
no quoted market prices exist for a significant part of the Company's financial
instruments, the fair values of such instruments have been derived based on
management's assumptions, the amount and timing of future cash flows and
estimated discount rates. The estimation methods for individual classifications
of financial instruments are described more fully below. Different assumptions
could significantly affect these estimates. Accordingly, the net realizable
values could be materially different from the estimates presented below. The
provisions of SFAS No. 107 do not require the disclosure of the fair value of
non-financial instruments, including intangible assets or the Company's
corporate tenant lease assets.

In addition, the estimates are only indicative of the value of individual
financial instruments and should not be considered an indication of the fair
value of the Company as an operating business.

SHORT-TERM FINANCIAL INSTRUMENTS--The carrying values of short-term
financial instruments including cash and cash equivalents and short-term
investments approximate the fair values of these instruments. These financial
instruments generally expose the Company to limited credit risk and have no
stated maturities, or have an average maturity of less than 90 days and carry
interest rates which approximate market.

LOANS AND OTHER LENDING INVESTMENTS--For the Company's interests in loans
and other lending investments, the fair values were estimated by discounting the
future contractual cash flows (excluding participation interests in the sale or
refinancing proceeds of the underlying collateral) using estimated current
market rates at which similar loans would be made to borrowers with similar
credit ratings for the same remaining maturities.

MARKETABLE SECURITIES--Securities held for investment, securities available
for sale, loans held for sale, trading account instruments, long-term debt and
trust preferred securities traded actively in the secondary market have been
valued using quoted market prices.

70

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 14--FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
OTHER FINANCIAL INSTRUMENTS--The carrying value of other financial
instruments including, restricted cash, accrued interest receivable, accounts
payable, accrued expenses and other liabilities approximate the fair values of
the instruments.

DEBT OBLIGATIONS--A substantial portion of the Company's existing debt
obligations bear interest at fixed margins over LIBOR. Such margins may be
higher or lower than those at which the Company could currently replace the
related financing arrangements. Other obligations of the Company bear interest
at fixed rates, which may differ from prevailing market interest rates. As a
result, the fair values of the Company's debt obligations were estimated by
discounting current debt balances from December 31, 2001 and 2000 to maturity
using estimated current market rates at which the Company could enter into
similar financing arrangements.

INTEREST RATE PROTECTION AGREEMENTS--The fair value of interest rate
protection agreements such as interest rate caps, floors, collars and swaps used
for hedging purposes (see Note 9) is the estimated amount the Company would
receive or pay to terminate these agreements at the reporting date, taking into
account current interest rates and current creditworthiness of the respective
counterparties.

The book and fair values of financial instruments as of December 31, 2001
and 2000 were (in thousands):

NOTE 15--SEGMENT REPORTING

Statement of Financial Accounting Standard No. 131 ("SFAS No. 131")
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected financial information about operating
segments in interim financial reports issued to shareholders.

The Company has two reportable segments: Real Estate Lending and Corporate
Tenant Leasing. The Company does not have substantial foreign operations. The
accounting policies of the segments are the same as those described in Note 3.
The Company has no single customer that accounts for 10% or more of revenues
(see Note 9 for other information regarding concentrations of credit risk).

71

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 15--SEGMENT REPORTING (CONTINUED)
The Company evaluates performance based on the following financial measures
for each segment:

EXPLANATORY NOTES:
- ------------------------------

(1) Includes the Company's pre-existing Corporate Tenant Leasing investments
since March 18, 1998 and the Corporate Tenant Leasing business acquired in
the TriNet Acquisition since November 4, 1999.

(2) Corporate and Other represents all corporate level items, including general
and administrative expenses and any intercompany eliminations necessary to
reconcile to the consolidated Company totals. This caption also includes the
Company's servicing business, which is not considered a material separate
segment. In addition, as more fully discussed in Note 4, Corporate and Other
for the year ended December 31, 1999 includes a non-recurring charge,
non-cash of approximately $94.5 million relating to the Advisor Transaction.

(3) Total revenues represents all revenues earned during the period from the
assets in each segment. Revenue from the Real Estate Lending business
primarily represents interest income and revenue from the Corporate Tenant
Leasing business primarily represents operating lease income.

(4) Total operating and interest expense represents provision for loan losses
for the Real Estate Lending business and operating costs on corporate tenant
lease assets for the Corporate Tenant Leasing business, as well as interest
expense specifically related to each segment. General and administrative
expense, advisory fees (prior to November 4, 1999) and stock-based
compensation expense is included in Corporate and Other for all periods.
Depreciation and amortization of $35,642, $34,514 and $10,340 in 2001, 2000
and 1999, respectively, are included in the amounts presented above.

(5) Net operating income before minority interests represents net operating
income before minority interest, gain on sale of corporate tenant lease
assets and extraordinary loss as defined in note (3) above, less total
operating and interest expense, as defined in note (4) above.

(6) Total long-lived assets is comprised of Loans and Other Lending Investments,
net and Corporate Tenant Lease Assets, net, for each respective segment.

72

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 16--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following table sets forth the selected quarterly financial data for the
Company (in thousands, except per share amounts).

73

ISTAR FINANCIAL INC.

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

(IN THOUSANDS)

EXPLANATORY NOTE:
- ------------------------------

(1) See Note 5 to the Company's Consolidated Financial Statements.

74

ISTAR FINANCIAL INC.
SCHEDULE III--CORPORATE TENANT LEASE ASSETS AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 2001
(DOLLARS IN THOUSANDS)

75

ISTAR FINANCIAL INC.
SCHEDULE III--CORPORATE TENANT LEASE ASSETS AND ACCUMULATED DEPRECIATION
(CONTINUED)
AS OF DECEMBER 31, 2001
(DOLLARS IN THOUSANDS)

76

ISTAR FINANCIAL INC.
SCHEDULE III--CORPORATE TENANT LEASE ASSETS AND ACCUMULATED DEPRECIATION
(CONTINUED)
AS OF DECEMBER 31, 2001
(DOLLARS IN THOUSANDS)

77

ISTAR FINANCIAL INC.
SCHEDULE III--CORPORATE TENANT LEASE ASSETS AND ACCUMULATED DEPRECIATION
(CONTINUED)
AS OF DECEMBER 31, 2001
(DOLLARS IN THOUSANDS)

78

ISTAR FINANCIAL INC.
SCHEDULE III--CORPORATE TENANT LEASE ASSETS AND ACCUMULATED DEPRECIATION
(CONTINUED)
AS OF DECEMBER 31, 2001
(DOLLARS IN THOUSANDS)

79

ISTAR FINANCIAL INC.

NOTES TO SCHEDULE III

DECEMBER 31, 2001

(DOLLARS IN THOUSANDS)

1. RECONCILIATION OF CORPORATE TENANT LEASE ASSETS:

The following table reconciles Corporate Tenant Lease Assets from
January 1, 1999 to December 31, 2001:

2. RECONCILIATION OF ACCUMULATED DEPRECIATION:

The following table reconciles Accumulated Depreciation from January 1, 1999
to December 31, 2001:

80

ISTAR FINANCIAL INC.

SCHEDULE IV--LOANS AND OTHER LENDING INVESTMENTS

AS OF DECEMBER 31, 2001

(DOLLARS IN THOUSANDS)

EXPLANATORY NOTES:
- ----------------------------------
(1) Loan is a part of a common borrowing provided by the Company (see
corresponding letter reference).
(2) Represents only third-party liens and excludes senior loans held by the
Company from the same borrower on the same collateral.
(3) P&I = principal and interest, IO = interest only.

81

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Portions of the Company's definitive proxy statement for the 2002 annual
meeting of shareholders to be filed within 120 days after the close of the
Company's fiscal year are incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

Portions of the Company's definitive proxy statement for the 2002 annual
meeting of shareholders to be filed within 120 days after the close of the
Company's fiscal year are incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Portions of the Company's definitive proxy statement for the 2002 annual
meeting of shareholders to be filed within 120 days after the close of the
Company's fiscal year are incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Portions of the Company's definitive proxy statement for the 2002 annual
meeting of the shareholders to be filed within 120 days after the close of the
Company's fiscal year are incorporated herein by reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) and (d). Financial statements and schedules--see Index to Financial
Statements and Schedules included in Item 8.

(b) Reports on Form 8-K.

On October 19, 2001, a Current Report on Form 8-K was filed in connection
with a secondary offering of the Company's Common Stock.

On October 30, 2001, a Current Report on Form 8-K was filed in order to
file exhibits Pursuant to Regulation S-K Item 601 in lieu of filing the
otherwise required exhibits to the registration statement on Form S-3 of
the Company.

(c) Exhibits--see index on following page.

82

INDEX TO EXHIBITS

84

EXPLANATORY NOTES:
- ------------------------

(1) Incorporated by reference from the Company's Registration Statement on
Form S-4 filed on May 12, 1998.

(2) Incorporated by reference from the Company's Annual Report on Form 10- K
for the year ended December 31, 1997 filed on April 2, 1998.

(3) Incorporated by reference from the Company's Form 8-K filed on
December 23, 1998.

(4) Incorporated by reference to the Company's Current Report on Form 8-K filed
on June 22, 1999.

(5) Incorporated by reference to the Company's Registration Statement on
Form S-4 filed on August 25, 1999.

(6) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1999 filed on March 30, 2000.

(7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2000 filed on May 15, 2000.

(8) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2000 filed on August 14, 2000.

(9) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 2000 filed on March 30, 2001.

(10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001 filed on November 14, 2001.

(11) Incorporated by reference from the Company's Form 8-K filed on November 5,
2001.

(12) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001 filed on August 3, 2001.

(13) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001 filed on May 15, 2001.

85

SIGNATURES

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

iSTAR FINANCIAL INC.
REGISTRANT

Date: March 26, 2002
------------------------------------------------
Jay Sugarman
CHAIRMAN OF THE BOARD OF DIRECTORS

Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following person on behalf of
the registrant and in the capacities and on the dates indicated.

Date: March 26, 2002
-------------------------------------------
Jay Sugarman
CHIEF EXECUTIVE OFFICER AND DIRECTOR

Date: March 26, 2002
-------------------------------------------
Spencer B. Haber
PRESIDENT, CHIEF FINANCIAL OFFICER, DIRECTOR AND
SECRETARY
(EXECUTIVE VICE PRESIDENT--FINANCE)

Date: March 26, 2002
-------------------------------------------
Willis Andersen Jr.
DIRECTOR

Date: March 26, 2002
-------------------------------------------
Jeffrey G. Dishner
DIRECTOR

Date: March 26, 2002
-------------------------------------------
Andrew L. Farkas
DIRECTOR

Date: March 26, 2002
-------------------------------------------
Madison F. Grose
DIRECTOR

86

Date: March 26, 2002
-------------------------------------------
Robert W. Holman, Jr.
DIRECTOR

Date: March 26, 2002
-------------------------------------------
Robin Josephs
DIRECTOR

Date: March 26, 2002
-------------------------------------------
Merrick R. Kleeman
DIRECTOR

Date: March 26, 2002
-------------------------------------------
H. Cabot Lodge III
DIRECTOR

Date: March 26, 2002
-------------------------------------------
Matthew J. Lustig
DIRECTOR

Date: March 26, 2002
-------------------------------------------
William M. Matthes
DIRECTOR

Date: March 26, 2002
-------------------------------------------
John G. McDonald
DIRECTOR

Date: March 26, 2002
-------------------------------------------
Stephen B. Oresman
DIRECTOR

Date: March 26, 2002
-------------------------------------------
George R. Puskar
DIRECTOR

Date: March 26, 2002
-------------------------------------------
Barry S. Sternlicht
DIRECTOR