NORTHSTAR REALTY FINANCE CORP. - FORM 10-Q

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TABLE OF CONTENTS

Table of Contents

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

FORM 10-Q

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

For the quarterly period ended September 30, 2009

Commission File Number: 001-32330

NORTHSTAR REALTY FINANCE CORP.
(Exact Name of Registrant as Specified in its Charter)


Maryland (State or Other Jurisdiction of Incorporation or Organization)		11-3707493 (IRS Employer Identification No.)

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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


Large accelerated filer ý		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

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

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

The Company has one class of common stock, par value $0.01 per share, 74,707,052 shares outstanding as of November 5, 2009.

Table of Contents

NORTHSTAR REALTY FINANCE CORP.
QUARTERLY REPORT
For the Three Months and Nine Months Ended September 30, 2009
TABLE OF CONTENTS

Index

Part I.	Financial Information
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2009 (unaudited) and December 31, 2008	3
	Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2009 and September 30, 2008	4
	Condensed Consolidated Statements of Stockholders' Equity as of September 30, 2009 (unaudited) and December 31, 2008	5
	Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2009 and September 30, 2008	6
	Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and September 30, 2008	7
	Notes to the Condensed Consolidated Financial Statements (unaudited)	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	47
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	72
Item 4.	Controls and Procedures	76
Part II.	Other Information	77
Item 6.	Exhibits	77
Signatures		81

Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in Thousands)

			September 30, 2009			December 31, 2008

			(unaudited)
ASSETS:
Cash and cash equivalents			$	108,423		$	134,039
Restricted cash				177,507			163,157
Operating real estate—net				1,060,236			1,127,000
Available for sale securities, at fair value				306,662			221,143
Real estate debt investments, net				1,994,121			1,976,864
Real estate debt investments, held-for-sale				—			70,606
Investments in and advances to unconsolidated ventures				43,670			101,507
Receivables, net of allowance of $0 in 2009 and 2008				18,830			24,806
Unbilled rents receivable				9,718			7,993
Derivative instruments, at fair value				1,080			9,318
Deferred costs and intangible assets, net				58,299			79,633
Other assets				22,692			27,660

Total assets			$	3,801,238		$	3,943,726

LIABILITIES:
Mortgage notes and loans payable				852,839			910,620
Exchangeable senior notes				125,780			233,273
Bonds payable, at fair value				482,666			468,638
Credit facilities				—			44,881
Secured term loans				405,414			403,907
Liability to subsidiary trusts issuing preferred securities, at fair value				111,943			69,617
Obligations under capital leases				3,534			3,555
Accounts payable and accrued expenses				25,479			27,478
Escrow deposits payable				46,891			46,353
Derivative liability, at fair value				78,179			87,220
Other liabilities				31,031			34,424

Total liabilities				2,163,756			2,329,966
EQUITY:
NorthStar Realty Finance Corp. Stockholders' Equity:
8.75% Series A preferred stock, $0.01 par value, $25 liquidation preference per share, 2,400,000 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively				57,867			57,867
8.25% Series B preferred stock, $0.01 par value, $25 liquidation preference per share, 7,600,000 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively				183,505			183,505
Common stock, $0.01 par value, 500,000,000 shares authorized, 73,920,905, and 62,906,693 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively				739			634
Additional paid-in capital				658,067			620,028
Treasury stock, 0 and 475,051 shares held at September 30, 2009 and December 31, 2008, respectively				—			(1,384	)
Retained earnings				633,508			648,860
Accumulated other comprehensive loss				(97,656	)		(94,343	)

		Total NorthStar Realty Finance Corp. Stockholders' Equity		1,436,030			1,415,167
Non-controlling interest				201,452			198,593

	Total equity			1,637,482			1,613,760

Total liabilities and stockholders' equity			$	3,801,238		$	3,943,726

See accompanying notes to condensed consolidated financial statements

Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in Thousands, Except Per Share Data)

(Unaudited)

				Three Months Ended September 30, 2009			Three Months Ended September 30, 2008			Nine Months Ended September 30, 2009			Nine Months Ended September 30, 2008

Revenues and other income:
Interest income				$	34,305		$	49,783		$	106,838		$	163,373
Interest income—related parties					4,179			3,424			13,129			10,767
Rental and escalation income					28,000			29,028			79,649			87,005
Advisory and management fee income—related parties					1,924			1,812			5,423			10,688
Other revenue					206			9,493			552			14,452

			Total revenues		68,614			93,540			205,591			286,285
Expenses:
		Interest expense			29,345			46,311			95,378			148,291
		Real estate properties—operating expenses			4,148			1,938			9,081			6,023
		Asset management fees—related parties			848			853			2,555			3,892
		Provision for loan losses			24,229			2,450			62,691			5,700
General and administrative:
		Salaries and equity-based compensation(1)			10,960			9,429			33,805			31,084
		Auditing and professional fees			2,001			963			6,538			4,638
		Other general and administrative			2,760			3,333			9,806			10,748

			Total general and administrative		15,721			13,725			50,149			46,470
Depreciation and amortization					3,712			13,566			35,908			33,481

			Total expenses		78,003			78,843			255,762			243,857
Income (loss) from operations					(9,389	)		14,697			(50,171	)		42,428
Equity in (loss)/earnings of unconsolidated ventures					2,737			772			(1,522	)		(4,846	)
Unrealized gain (loss) on investments and other					(88,336	)		229,139			1,709			398,827
Realized gain on investments and other					29,215			6,973			89,411			14,057

Consolidated net income (loss)					(65,773	)		251,581			39,427			450,466
	Net income (loss) attributable to the non-controlling interests				4,539			(28,040	)		(9,816	)		(47,717	)
Preferred stock dividends					(5,231	)		(5,231	)		(15,694	)		(15,693	)

Net income (loss) attributable to NorthStar Realty Finance Corp. common stockholders				$	(66,465	)	$	218,310		$	13,917		$	387,056

Net income (loss) attributable to NorthStar Realty Finance Corp. common stockholders (basic/diluted)				$	(0.95	)	$	3.47		$	0.21		$	6.17

Weighted average number of shares of common stock:
		Basic			69,896,439			62,825,383			67,445,995			62,772,013
		Diluted			77,356,187			70,229,958			74,905,800			69,998,215

(1): The three months ended September 30, 2009 and 2008 include $5,007 and $5,439 of equity-based compensation expense, respectively. The nine months ended September 30, 2009 and 2008 include $15,471 and $18,396 of equity-based compensation expense, respectively.

See accompanying notes to condensed consolidated financial statements

Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Amounts in Thousands)

(Unaudited)

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

Balance at December 31, 2007	$	100	61,719		$	617	$	843,433			—		$	(179,293	)	$	(40,879	)	$	623,978		$	20,232		$	644,210
Equity component of exchangeable senior notes		—	—			—		2,451			—			—			—			2,451			—			2,451
Proceeds from dividend reinvestment and stock purchase plan		—	182			2		1,139			—			—			—			1,141			—			1,141
Proceeds from equity distribution agreement		—	114			1		875			—			—			—			876			—			876
Stock awards		—	273			3		2,411			—			—			—			2,414			22,266			24,680
Purchase of treasury shares		—	(475	)		—		—			(1,384	)		—			—			(1,384	)		—			(1,384	)
Comprehensive loss		—	—			—		—						(6,016	)		—			(6,016	)		(633	)		(6,649	)
Conversion of OP/LTIP units		—	1,094			11		10,991			—			—			—			11,002			(11,002	)		—
SFAS No. 159 beginning balance adjustment		—	—			—		—			—			90,966			170,577			261,543			22,743			284,286
Cash dividends on common stock		—	—			—		—			—			—			(90,069	)		(90,069	)		(22,312	)		(112,381	)
Cash dividends on preferred stock		—	—			—		—			—			—			(20,925	)		(20,925	)		—			(20,925	)
Issuance of shares of preferred stock																				—			94,822			94,822
Net income		—	—			—		—			—			—			630,156			630,156			72,477			702,633

Balance at December 31, 2008	$	100	62,907		$	634	$	861,300			(1,384	)	$	(94,343	)	$	648,860		$	1,415,167		$	198,593		$	1,613,760
Equity component of exchangeable senior notes		—	—			—		(4,321	)		—			—			—			(4,321	)		—			(4,321	)
Proceeds from dividend reinvestment and stock purchase plan		—	54			—		185			—			—			—			185			—			185
Proceeds from equity distribution agreement		—	6,543			61		21,272			1,384			—			—			22,717			—			22,717
Stock awards/LTIP awards			94			1		300			—			—			—			301			15,169			15,470
Comprehensive loss		—	—			—		—			—			(3,313	)		—			(3,313	)		(502	)		(3,815	)
Conversion of OP/LTIP units		—	607			6		9,993			—			—			—			9,999			(9,999	)		—
Stock dividends		—	3,716			37		10,610			—			—			(9,608	)		1,039			(1,039	)		—
Cash dividends on common stock		—	—			—		—			—			—			(19,661	)		(19,661	)		—			(19,661	)
Cash dividends on preferred stock		—	—			—		—			—			—			(15,694	)		(15,694	)		—			(15,694	)
Cash distribution to non-controlling interests		—	—			—		—			—			—			—			—			(10,586	)		(10,586	)
Net income		—	—			—		—			—			—			29,611			29,611			9,816			39,427

Balance at September 30, 2009	$	100	73,921		$	739	$	899,339		$	—		$	(97,656	)	$	633,508		$	1,436,030		$	201,452		$	1,637,482

See accompanying notes to condensed consolidated financial statements

Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in Thousands)

(Unaudited)

		Three Months Ended September 30, 2009			Three Months Ended September 30, 2008			Nine Months Ended September 30, 2009			Nine Months Ended September 30, 2008

Consolidated net income (loss)		$	(65,773	)	$	251,581		$	39,427		$	450,466
Unrealized gain (loss) on available for sale securities			4,656			(3,719	)		(12,416	)		(17,474	)
Change in fair value of derivatives			(843	)		(1,418	)		4,408			(3,872	)
Reclassification adjustment for gains included in net income			1,398			1,397			4,193			25,160

Comprehensive income (loss)			(60,562	)		247,841			35,612			454,280
	Less: Comprehensive income attributable to the non-controlling interests		(4,031	)		27,599			9,314			48,199

Comprehensive income attributable to NorthStar Realty Finance Corp		$	(56,531	)	$	220,242		$	26,298		$	406,081

See accompanying notes to condensed consolidated financial statements

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands)

(Unaudited)

	Nine Months Ended September 30, 2009			Nine Months Ended September 30, 2008

Net cash provided by operating activities	$	46,400		$	77,536
Cash flows from investing activities:
Acquisition of operating real estate, net		—			(21,160	)
Improvement of Operating real estate		(3,196	)		—
Acquisition of available for sale securities		(128,994	)		(55,031	)
Proceeds from disposition of securities available for sale		114,250			6,115
Available for sale securities repayments		1,397			2,987
Originations/acquisitions of real estate debt investments		(208,874	)		(276,637	)
Real estate debt investment repayments		60,708			266,200
Proceeds from the sale of real estate debt investments		140,753			30,400
Real estate debt investment acquisition costs		(97	)		(265	)
Corporate debt investment acquisitions		—			(16,362	)
Corporate debt investment repayments		—			24,985
Proceeds from disposition of corporate debt investment		—			102,575
Other loans receivable		(1,070	)		—
Other loans receivable repayment		3,000			10,000
Restricted cash used for investment activities		(16,211	)		(120,977	)
Acquisition deposits		—			(749	)
Investment in and advances to unconsolidated ventures		(674	)		(40,031	)
Distributions from unconsolidated ventures		22,310			5,850

Net cash (used in) investing activities		(16,698	)		(82,100	)
Cash flows from financing activities:
Collateral held by broker		—			12,746
Settlement of short sales		—			(12,778	)
Collateral held by swap counter party		3,708			(4,394	)
Mortgage principal repayments		(5,714	)		(3,764	)
Borrowing under credit facilities		1,912			37,648
Repayments credit facilities		(46,794	)		(112,900	)
Repurchase obligation borrowings		528			2,024
Repurchase obligation repayments		(703	)		(2,347	)
Proceeds from bonds		71,000			77,000
Bond repayments		—			(95,300	)
Borrowing under secured term loan		1,373			67,710
Secured term loan repayment		(3,417	)		(73,277	)
Bond repurchases		(51,135	)		(35,638	)
Payment of deferred financing costs		(153	)		(5,092	)
Capital contributions by joint venture		—			94,824
Restricted cash from financing activities		(2,883	)		87,403
Proceeds from exchangeable senior notes		—			80,000
Proceeds from common stock offerings		23,446			—
Proceeds from dividend reinvestment and stock purchase plan		185			1,958
Dividends (common and preferred) and distributions		(35,356	)		(91,486	)
Offering costs		(728	)		(263	)
Distributions to non-controlling interest		(10,587	)		(8,746	)

Net cash (used in) provided by financing activities		(55,318	)		15,328
Net (decrease) increase in cash & cash equivalents		(25,616	)		10,764
Cash and cash equivalents—beginning of period		134,039			153,829

Cash and cash equivalents—end of period	$	108,423		$	164,593

See accompanying notes to condensed consolidated financial statements

Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Amount in Thousands, Except per Share Data

(Unaudited)

1. Formation and Organization

NorthStar Realty Finance Corp., a Maryland corporation (the "Company"), is a self-administered and self-managed real estate investment trust ("REIT"), which was formed in October 2003 in order to continue and expand the real estate debt, real estate securities and net lease businesses conducted by NorthStar Capital Investment Corp. ("NCIC"). Substantially all of the Company's assets are held by, and it conducts its operations through, NorthStar Realty Finance Limited Partnership, a Delaware limited partnership and the operating partnership of the Company (the "Operating Partnership"). On October 29, 2004, the Company closed its initial public offering pursuant to which it issued 20,000,000 shares of common stock, with proceeds to the Company of approximately $160.1 million, net of issuance costs of $19.9 million. Simultaneously with the closing of the equity offering on October 29, 2004, three majority-owned subsidiaries of NCIC contributed certain controlling and non-controlling interests in entities through which NCIC conducted its subordinate real estate debt, real estate securities and net lease businesses to the Operating Partnership in exchange for an aggregate of 4,705,915 units of limited partnership interest in the Operating Partnership (the "OP Units") and approximately $36.1 million in cash and an agreement to pay certain related transfer taxes on behalf of NCIC for approximately $1.0 million. From their inception through October 29, 2004, neither the Company nor the Operating Partnership had any operations.

Joint Ventures

Wakefield Capital, LLC

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

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

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

1. Formation and Organization (Continued)

Company's unconsolidated affiliate Midwest Care Holdco TRS I LLC ("Midwest") becoming the lessee of the properties and Midwest simultaneously entering into a management contract with a third party operator. The management agreement is terminable by Midwest upon 60 days notice. This new structure allows the Company to participate in operating improvements of the underlying properties not previously available under the prior structure. The Company owns a 49% interest in Midwest and does not control the major decisions and as a result, the Company does not consolidate the operations of Midwest. The Company's investment in Midwest is accounted for using the equity method.

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

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

Monroe Capital NorthStar Funding, LLC

In March 2007, the Company entered into a joint venture with Monroe Capital Holdco, LLC ("Monroe"), which served as a platform for originating middle-market loans. The joint venture ("Monroe Capital") originated, structured and syndicated middle-market corporate loans, including middle-market loans to highly leveraged borrowers. On May 7, 2008, the Company completed a recapitalization of this middle-market corporate lending venture. As part of the recapitalization, an institutional money-manager invested approximately $87.2 million of cash equity into the business and the Company contributed $6.8 million of new equity capital and its CLO equity interests. The lender under two consolidated revolving credit facilities totaling $800.0 million of capacity and having $378.0 million outstanding at May 7, 2008, which the Company refers to as the MC Facility and the MC VFCC Facility, extinguished a portion of the outstanding debt balance and refinanced the remaining indebtedness in the form of a private CLO which match funded the underlying assets. The venture was also permitted to sell a portion of the loan collateral and to use the cash to make new corporate loan investments. The new investor became the controlling manager of the entity and the Company deconsolidated the venture. Additionally, as part of this recapitalization, the Company terminated its joint venture with Monroe Management.

2. Summary of Significant Accounting Policies

Basis of Quarterly Presentation

The accompanying condensed consolidated financial statements and related notes of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under accounting principles generally accepted in the United States have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of the Company's financial position, results of operations and cash flows have been included and are of a

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2008, which was filed with the Securities and Exchange Commission. Capitalized terms used herein, and not otherwise defined, are defined in the Company's December 31, 2008 consolidated financial statements included in its annual report on Form 10-K.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, and its subsidiaries, which are either majority owned or controlled by the Company or a variable interest entity ("VIE") where the Company is the primary beneficiary. All significant intercompany balances have been eliminated in consolidation.

Estimates

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

Reclassifications

On January 1, 2009, the Company adopted the accounting pronouncement regarding convertible debt instruments that, by their stated terms, may be settled in cash (or other assets) upon conversion, including partial cash settlement of the conversion option. The pronouncement requires bifurcation of the instrument into a debt component that is initially recorded at fair value and an equity component. The difference between the fair value of the debt component and the initial proceeds from issuance of the instrument is recorded as a component of equity. The liability component of the debt instrument is accreted to par using the effective interest method; accretion is reported as a component of interest expense. The equity component is not subsequently re-valued as long as it continues to qualify for equity treatment. Additionally, the pronouncement precludes the use of the fair value option of accounting. The financial statements for 2008 have been restated for the effects of the retroactive application of the pronouncement.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

The following tables present the cumulative effects of the change in accounting principle as of December 31, 2008 and for the three and nine months ended September 30, 2008:

	December 31, 2008

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

	Three Months Ended September 30. 2008

	As Originally Reported			As Adjusted			Effect of Change in Accounting Principle
Interest expense	$	45,484		$	46,311		$	827
Unrealized gain (loss) on investments and other		245,319			229,139			(16,180	)
Fundraising fees, debt issuance costs and other		—			—			—
Non-controlling interests		(29,824	)		(28,040	)		1,784
Net income attributable to NorthStar Realty Finance Corp. common stockholders		233,533			218,310			(15,223	)
Earnings per share	$	3.72		$	3.48		$	(0.24	)

	Nine Months Ended September 30. 2008

	As Originally Reported			As Adjusted			Effect of Change in Accounting Principle
Interest expense	$	146,306		$	148,291		$	1,985
Unrealized gain (loss) on investments and other		427,733			398,827			(28,906	)
Fundraising fees, debt issuance costs and other		4,948			—			(4,948	)
Non-controlling interests		(49,443	)		(47,717	)		1,726
Net income attributable to NorthStar Realty Finance Corp. common stockholders		411,277			387,056			(24,221	)
Earnings per share	$	6.55		$	6.17		$	(0.38	)

As of September 30, 2009 and December 31, 2008, the total carrying amount of the equity components of the exchangeable senior notes was $4.9 million and $9.2 million, respectively. The principal amount of the exchangeable senior notes liabilities was $128.9 million and $240.8 million as of September 30, 2009 and December 31, 2008, respectively. The unamortized discount of the liability components was $3.1 million and $7.5 million at September 30, 2009 and December 31, 2008, respectively. The net carrying amount of the liability components was $125.8 million and $233.3 million at September 30, 2009 and December 31, 2008, respectively. Interest expense for the three and nine months ended September 30, 2009 and 2008 related to the exchangeable senior notes was $3.6 million and $13.4 million and $6.4 million and $14.7 million, respectively, of which $3.1 million and

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

$11.6 million and $5.6 million and $12.7 million was related to contractual interest, respectively, and $0.5 million and $1.8 million and $0.8 million and $2.0 million was attributable to amortization of the debt discount and deferred financing costs, respectively.

On January 1, 2009, the Company adopted the provisions of the accounting pronouncement regarding non-controlling interests in consolidated financial statements. The pronouncement clarifies that a non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. The pronouncement also changes the way the consolidated income statement is presented by requiring consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest. It also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the non-controlling interest. The adoption of this pronouncement does not affect prior periods reported net income or retained earnings; however, the presentation and disclosure requirements have been applied retrospectively for all periods presented.

Recent Accounting Pronouncements

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

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

In April 2009, an accounting pronouncement was issued which provides additional guidance on determining whether a market for a financial asset is not active and a transaction is not distressed for fair value measurements. The pronouncement will be applied prospectively and retrospective application is not permitted. The pronouncement is effective for interim and annual periods ending

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

after June 15, 2009. The Company's adoption of the pronouncement did not have a material effect on its financial condition, results of operations, or cash flows.

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

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

In June 2009, an accounting pronouncement was issued which requires additional information regarding transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. The pronouncement eliminates the concept of a "qualifying special-purpose entity," changes the requirements for derecognizing financial assets, and requires additional disclosures. The pronouncement is effective for fiscal years beginning after November 15, 2009. The Company is currently evaluating the impact that the adoption of this pronouncement will have on its financial condition, results of operations, and disclosures.

In June 2009, an accounting pronouncement was issued which modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The pronouncement clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity's purpose and design and a company's ability to direct the activities of the entity that most significantly impact the entity's economic performance. The pronouncement requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity. The pronouncement also requires additional disclosures about a company's involvement in variable interest entities and any significant changes in risk exposure due to that involvement. The pronouncement is effective for fiscal years beginning after November 15, 2009. The Company believes that as a result of the implementation of this pronouncement, it will consolidate four of its off balance sheet term debt transactions (See Note 8 for further details) and its Securities Fund. The Company also believes that it will elect the fair value option of accounting on the assets and liabilities of these entities upon consolidation.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

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

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

In August 2009, a Codification update was issued which requires preferred securities that are redeemable for cash or other assets to be classified outside of permanent equity if they are redeemable (i) at a fixed or determinable price on a fixed or determinable date; (ii) at the option of the holder, or (iii) upon the occurrence of an event that is not solely within the control of the Company. The update also provides analogous guidance for other redeemable equity instruments including, for example, common stock, derivative instruments, non-controlling interests, securities held by an employee stock ownership plan and share-based payment arrangements with employees. The Company is currently evaluating the impact that the adoption of this update will have on its financial condition, results of operations, and disclosures.

3. Fair Value of Financial Instruments

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

•: Available for sale securities that serve as collateral for the Company's term debt transactions;
•: N-Star IV, VI, VII and VIII bonds payable;
•: Liabilities to subsidiary trusts issuing preferred securities; and
•: its equity investment in its corporate lending business.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Fair Value of Financial Instruments (Continued)

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

Fair Value Measurements

Fair Value Hierarchy

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

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


Level 1.	Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market (examples include active exchange-traded equity securities, listed derivatives, most U.S. government and agency securities, and certain other sovereign government obligations).
Level 2.	Financial assets and liabilities whose values are based on the following:
	a)	Quoted prices for similar assets or liabilities in active markets (for example, restricted stock);
	b)	Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds, which trade infrequently);
	c)	Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including interest rate and currency swaps); and
	d)	Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability (for example, certain mortgage loans).
Level 3.	Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management's own assumptions about the assumptions a market participant would use in pricing the asset or liability (examples include private equity investments, beneficial interest in securitizations and long-dated or complex derivatives, including certain foreign exchange options and long-dated options on gas and power).

Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table sets forth the Company's financial

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Fair Value of Financial Instruments (Continued)

assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2009 by level within the fair value hierarchy:

		Assets and Liabilities at Fair Value

		Level 1		Level 2		Level 3		Total
Assets:
Available for sale securities:
	CMBS	$	—	$	139,413	$	103,502	$	242,915
	Real estate term debt—N-Star		—		—		5,428		5,428
	Real estate term debt—Third party		—		—		883		883
	REIT debt		—		8,616		12,526		21,142
	Term debt equity—N-Star		—		—		29,289		29,289
	Trust preferred securities		—		—		7,005		7,005
Derivative asset			—		1,080		—		1,080
Corporate lending investment			—		—		9,398		9,398

	Total assets	$	—	$	149,109	$	168,031	$	317,140

Liabilities:
N-Star IV,VI, VII and VIII bonds payable			—		—		482,666	$	482,666
Liability to subsidiary trusts issuing preferred securities			—		—		111,943		111,943
Derivative liability			—		78,179		—		78,179

	Total liabilities	$	—	$	78,179	$	594,609	$	672,788

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Fair Value of Financial Instruments (Continued)

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

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

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

Beginning balance:			$	100,907	$	47,999		$	468,638	$	69,617
	Total transfers into Level 3
	Purchases, sales, issuance and settlements, net			59,430		(6,493	)		70,328
	Less: total losses (realized or unrealized):
		Included in earnings		8,293		32,108					42,326
		Included in other comprehensive loss		12,952
	Plus: total gains (realized or unrealized):
		Included in earnings		19,541					56,300
		Included in other comprehensive loss		—		—			—		—

Ending balance			$	158,633	$	9,398		$	482,666	$	111,943

The amount of total gains or (losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to assets or liabilities still held at the reporting date			$	11,249	$	(32,108	)	$	56,300	$	(42,326	)

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Fair Value of Financial Instruments (Continued)

Fair Value Option

Changes in fair value for assets and liabilities for which the election is made will be recognized in earnings as they occur. The fair value option may be elected on an instrument by instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument. The following table sets forth the Company's financial instruments for which the fair value option was elected:

			September 30, 2009		December 31, 2008

Financial Instruments, at Fair Value
	Assets:
	Available for sale securities:
		CMBS	$	242,915	$	124,595
		Real estate term debt—N-Star		3,763		5,236
		Real estate term debt—Third party		883		1,322
		REIT debt		21,142		44,936
		Trust preferred securities		7,005		4,488
	Corporate lending investment			9,398		47,999

		Total assets	$	285,106	$	228,576

	Liabilities:(1)
	N-Star IV,VI, VII and VIII bonds payable			482,666		468,638
	Liability to subsidiary trusts issuing preferred securities			111,943		69,617

		Total liabilities	$	594,609	$	538,255

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Fair Value of Financial Instruments (Continued)

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

		Fair Value at September 30, 2009		Amount Due Upon Maturity		Difference

Assets:
Available for sale securities:
	CMBS	$	242,915	$	801,766	$	(558,851	)
	Real estate term debt—N-Star		3,763		42,536		(38,773	)
	Real estate term debt—Third party		883		16,833		(15,950	)
	REIT debt		21,142		26,680		(5,538	)
	Trust preferred securities		7,005		15,000		(7,995	)

	Total assets	$	275,708	$	902,815	$	(627,107	)

Liabilities:
N-Star IV,VI, VII and VIII bonds payable			482,666		1,671,795		(1,189,129	)
Liability to subsidiary trusts issuing preferred securities			111,943		280,133		(168,190	)

	Total Liabilities	$	594,609	$	1,951,928	$	(1,357,319	)

At September 30, 2009, the basis in the Company's corporate lending investment was $71.5 million. The Company has elected the fair value option for this investment which is accounted for under the equity method of accounting. The fair market value of the Company's investment at September 30, 2009 was $9.4 million.

For the three and nine months ended September 30, 2009 and 2008, the Company recognized a net loss of $59.6 million and an net gain of $252.4 million and a net gain of $22.9 million and $434.3 million, respectively, as the result of the change in fair value of financial assets and liabilities for which the fair value option was elected, which is recorded as unrealized gain (loss) on investments and other in the Company's condensed consolidated statement of operations.

The impact of changes in instrument-specific credit spreads on N-Star bonds payable, liability to subsidiary trusts issuing preferred securities and derivatives for which the fair value option was elected was a net loss of $115.0 million and a net gain of $284.4 million for the three months ended September 30, 2009 and 2008, respectively, and a net gain of $49.9 million and $581.5 million for the nine months ended September 30, 2009 and 2008, respectively. The Company attributes changes in the fair value of floating rate liabilities to changes in instrument-specific credit spreads. For fixed rate liabilities, the firm allocates changes in fair value between interest rate-related changes and credit spread-related changes based on changes in interest rates.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

4. Available for Sale Securities

The following is a summary of the Company's available for sale securities at September 30, 2009 and December 31, 2008:

September 30, 2009		Carrying Value		Transition Adjustment			Losses in Accumulated OCI			Cumulative Unrealized Loss on Investments			Estimated Fair Value(1)

CMBS		$	490,151	$	(64,327	)	$	—		$	(182,909	)		242,915
Real estate term debt—N-Star			51,678		(17,616	)		(13,563	)		(15,071	)		5,428
Real estate term debt—Third party			16,448		(3,896	)		—			(11,669	)		883
REIT debt			20,891		(2,276	)		—			2,527			21,142
Term debt equity—N-Star			72,544		—			(43,255	)		—			29,289
Trust preferred securities			15,000		(2,736	)		—			(5,259	)		7,005

	Total	$	666,712	$	(90,851	)	$	(56,818	)	$	(212,381	)	$	306,662

(1): Approximately $209.2 million of these investments serve as collateral for the Company's only consolidated securities term debt transaction and the balance is financed under other borrowing facilities.

At September 30, 2009, the maturities of the available for sale securities ranged from one to 43 years.

During the three and nine months ended September 30, 2009, proceeds from the sale and redemption of available for sale securities was $50.6 million and $114.3 million, respectively, and the net realized gain on sale was $15.6 million and $33.2 million, respectively.

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

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

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

(1): Approximately $144.2 million of these investments serve as collateral for the Company's only consolidated securities term debt transaction and the balance is financed under other borrowing facilities.

At December 31, 2008, the maturities of the available for sale securities ranged from two to 44 years.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

5. Real Estate Debt Investments

At September 30, 2009 and December 31, 2008, the Company held the following real estate debt investments:

September 30, 2009		Carrying Value(1)

Whole loans, floating rate		$	1,040,761	52.2	%	—	%	2.66	%	54
Whole loans, fixed rate			62,349	3.1		6.89		—		7
Subordinate mortgage interests, floating rate			189,835	9.5		—		2.56		11
Subordinate mortgage interests, fixed rate			24,623	1.2		7.25		—		2
Mezzanine loans, floating rate			532,474	26.7		—		4.16		19
Mezzanine loan, fixed rate			125,405	6.3		6.65		—		10
Other loans—floating			13,109	0.7		—		1.63		2
Other loans—fixed			5,565	0.3		5.53		—		1

	Total/Weighted average	$	1,994,121	100.0	%	6.76	%	3.09	%	106

(1): Approximately $1.3 billion of these investments serve as collateral for the Company's three commercial real estate debt term debt transactions and the balance is financed under other borrowing facilities. The Company has future funding commitments, which are subject to certain conditions that borrowers must meet to qualify for such fundings, totaling $91.6 million related to these investments. The Company expects that a minimum of $57.4 million of these future fundings will be funded within the Company's existing term debt transactions and require no additional capital from the Company. Based upon currently approved advance rates on the Company's credit and term debt facilities and assuming that all loans that have future fundings meet the terms to qualify for such funding; the Company's equity requirement on the remaining $34.2 million of future funding requirements would be approximately $21.3 million.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

5. Real Estate Debt Investments (Continued)

December 31, 2008		Carrying Value(1)

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

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

(1): Approximately $1.3 billion of these investments served as collateral for the Company's three commercial real estate debt term debt transactions and the balance was financed under other borrowing facilities. The Company had future funding commitments, which were subject to certain conditions that borrowers must have met to qualify for such fundings, totaling $271.0 million related to these investments.

Contractual maturities of real estate debt investments at September 30, 2009 are as follows:

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

2009 (remainder)		$	343,878	$	83,733
2010			889,005		313,780
2011			152,792		516,779
2012			387,502		668,287
2013			—		190,597
Thereafter			301,911		301,912

	Total	$	2,075,088	$	2,075,088

(1): The year ending December 31, 2009, contains a whole loan with an initial maturity of October 1, 2008 and a principal balance of $21.4 million, a junior participation in a first mortgage with an initial maturity of March 1, 2009 and a principal balance of $28.5 million, a whole loan with an initial maturity of April 1, 2009 and a principal balance of $13.8 million, a junior participation in a first mortgage with an initial maturity of September 9, 2009 and a principal balance of $10.0 million and a mezzanine loan with an initial maturity of August 1, 2009 and a principal balance of $9.4 million that remain outstanding as of September 30, 2009.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

5. Real Estate Debt Investments (Continued)

Actual maturities may differ from contractual maturities because certain borrowers have the right to prepay with or without prepayment penalties. The contractual amounts differ from the carrying amounts due to unamortized origination fees and costs and unamortized premiums and discounts being reported as part of the carrying amount of the investment. Maturity Including Extensions assumes that all loans with extension options will qualify for extension at initial maturity according to the conditions stipulated in the related loan agreements.

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

Non-Performing Loans and Provision for Loan Losses

Non-Performing Loans

As of September 30, 2009, the Company had five non-performing loans totaling $83.1 million which consisted of a first mortgage having a principal balance of $21.4 million and a maturity date of October 1, 2008, a junior participation in a first mortgage having a principal balance of $28.5 million and a maturity date of March 1, 2009, a first mortgage having a principal balance of $13.8 million and a maturity date of April 1, 2009, a junior participation in a first mortgage having a principal balance of $10.0 million and a maturity date of September 9, 2009 and a mezzanine loan having a principal balance of $9.4 million and a maturity date of August 1, 2009, representing approximately 4.17% of the Company's total commercial real estate debt investments. The Company's maximum additional exposure to loss related to these loans would be equal to the outstanding principal balance less reserves taken.

Provision for Loan Losses

For the three and nine months ending September 30, 2009, the Company recorded a $24.2 million and $62.7 million credit loss provision relating to 10 and 15 loans, respectively. For the three and nine months ending September 30, 2008, the Company recorded a $2.5 million and $5.7 million credit loss provision relating to three and five loans, respectively. As of September 30, 2009, loan loss reserves totaled $73.9 million.

6. Investment in and Advances to Unconsolidated Ventures

The Company has non-controlling, unconsolidated ownership interests in entities that are accounted for using the equity method. Capital contributions, distributions, and profits and losses of the real estate entities are allocated in accordance with the terms of the applicable partnership and limited liability company agreements. Such allocations may differ from the stated percentage interests, if any, in such entities as a result of preferred returns and allocation formulas as described in such agreements.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

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

CS/Federal Venture

In February 2006, the Company, through a joint venture with an institutional investor, acquired a portfolio of three adjacent class A office/flex buildings located in Colorado Springs, Colorado for $54.3 million. The joint venture financed the transaction with two non-recourse, first mortgage loans totaling $38.0 million and the balance in cash. The loans mature on February 11, 2016 and bear fixed interest rates of 5.51% and 5.46%. The Company contributed $8.4 million for a 50% interest in the joint venture and incurred $0.3 million in costs related to its acquisition, which are capitalized to the investment account. These costs will be amortized over the useful lives of the assets held by the joint venture. The Company accounts for its investment under the equity method of accounting. At September 30, 2009 and December 31, 2008, the Company had an investment in CS/Federal of approximately $7.0 million and $7.3 million, respectively. The Company recognized equity in earnings of $0.1 million and $0.3 million for each of the three and nine months ended September 30, 2009 and September 30, 2008, respectively.

Monroe Capital Management Advisors, LLC

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

G-NRF, LTD

On May 7, 2008, the Company completed a recapitalization of Monroe Capital, its middle-market corporate lending platform. Upon completion of the recapitalization transaction, the new investor became the controlling manager of the assets and the Company deconsolidated the joint venture. The Company currently uses the equity method of accounting to account for the recapitalized joint venture and has elected the fair value option for its equity investment. As of September 30, 2009, the fair market value of the Company's investment in the corporate lending venture was $9.4 million. For the three and nine months ended September 30, 2009, the Company recognized an unrealized loss of $2.3 million and $32.1 million related to the fair value adjustment on its equity investment, respectively. The Company conducted its quarterly comprehensive credit review of this investment and as a result, concluded that due to the uncertainty of the underlying cash flows, the Company will utilize the cost recovery method of accounting for income recognition on this investment.

NorthStar Real Estate Securities Opportunity Fund

In July 2007, the Company closed on $109.0 million of equity capital for its Securities Fund, an investment vehicle in which the Company conducts most of its real estate securities investment business.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

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

The Company is the manager and general partner of the Securities Fund. The Company receives base management fees ranging from 1.0% to 2.0% per annum on third-party capital and is entitled to annual incentive management fees ranging from 20% to 25% of the increase in the Securities Fund's net asset value in excess of an 8.0% per annum return. Base and incentive fees vary depending on the investor capital lockup periods.

On August 31, 2009, the Company redeemed $11.0 million of its equity capital investment in the Securities Fund. At September 30, 2009 and December 31, 2008, the Company's investment in the Securities Fund was $8.9 million and $29.3 million, respectively, representing a 31.2% and 53.1% interest in the Securities Fund, respectively.

For the three and nine months ended September 30, 2009 and 2008, the Company recognized equity in earnings of $0.5 million and $0.5 million and equity in losses of $4.9 million and $5.1 million, respectively. The Company also earned $0.1 million for the three months ended September 30, 2008 and $0.1 million and $0.4 million in management fees from the Securities Fund for the nine months ended September 30, 2009 and 2008, respectively.

LandCap Investment

On October 5, 2007, the Company entered into a joint venture with Whitehall Street Global Real Estate Limited Partnership 2007 ("Whitehall"), to form LandCap Partners, which is referred to as LandCap. LandCap was established to opportunistically invest in single family residential land through land loans, lot option agreements and select land purchases. The joint venture is managed by a third party management group which has extensive experience in the single family housing sector. During the first quarter 2009, the Company and Whitehall agreed to provide no additional new investment capital in the LandCap joint venture. At September 30, 2009 and December 31, 2008 the Company's investment in LandCap is carried at $10.4 million and $12.9 million, respectively. For the three and nine months ended September 30, 2009 and 2008, the Company recognized equity in loss of $0.3 million and $0.8 million and $3.2 million and $2.5 million, respectively. At September 30, 2009 and December 31, 2008, LandCap has made investments totaling $39.1 million. In addition, the Company advanced approximately $4.9 million under a loan agreement to LandCap, which bears interest at a fixed rate of 12% and was included in other assets in the condensed consolidated balance sheets.

Midwest Care Holdco TRS I LLC

In June 2009, the Company restructured its net lease relationship with one of its healthcare operators to take advantage of new REIT legislation which now allows a taxable REIT subsidiary affiliate to become the lessee of healthcare-related properties. The restructuring resulted in Midwest becoming the lessee of the properties and Midwest simultaneously entering into a management contract with a third party operator. This new structure allows the Company to participate in operating improvements of the underlying properties not previously available under the prior structure. The Company owns a 49% interest in Midwest and does not control the major decisions and as a result, the Company does not consolidate the operations of Midwest. The Company recognized equity in earnings

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

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

of $2.4 million and $5.7million for the three and nine months ended September 30, 2009, respectively, on its investment in Midwest.

7. Variable Interest Entities

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

The Company is required to consolidate a variable interest entity ("VIE") if the Company is deemed to be the VIEs primary beneficiary. The primary beneficiary is the party that absorbs a majority of the VIEs anticipated losses and or a majority of the expected returns. The Company has evaluated its real estate debt investments, liability to subsidiary trusts issuing preferred securities and its investments in each of its eight term debt transaction issuers to determine whether they are VIEs. For each of these investments, the Company has evaluated: (1) the sufficiency of the fair value of the entity's equity investment at risk to absorb losses; (2) whether as a group the holders of the equity investment at risk have: (a) the direct or indirect ability through voting rights to make decisions about the entity's significant activities; (b) the obligation to absorb the expected losses of the entity and their obligations are not protected directly or indirectly; and (c) the right to receive the expected residual return of the entity and their rights are not capped; (3) whether the voting rights of these investors are proportional to their obligations to absorb the expected losses of the entity, their rights to receive the expected returns of their equity, or both; and (4) whether substantially all of the entity's activities involve or are conducted on behalf of an investor that has disproportionately fewer voting rights.

As of September 30, 2009 and December 31, 2008, the Company identified interests in 17 entities which were determined to be VIEs.

Based on management's analysis, the Company is not the primary beneficiary of 13 of the identified VIEs since it does not absorb a majority of the expected residual losses, or is entitled to a majority of the expected residual returns. Accordingly, these VIEs are not consolidated into the Company's financial statements as of September 30, 2009 or December 31, 2008.

Real Estate Debt Investments

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

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

7. Variable Interest Entities (Continued)

all other investments, the Company has determined that these investments are not VIEs and, as such, the Company has continued to account for all real estate debt investments as loans.

NorthStar Realty Finance Trusts

The Company owns all of the common stock of NorthStar Realty Finance Trusts I through VIII (collectively, the "Trusts"). The Trusts were formed to issue preferred securities. The Company determined that the holders of the trust preferred securities were the primary beneficiaries of the Trusts. As a result, the Company did not consolidate the Trusts and has accounted for the investment in the common stock of the Trusts under the equity method of accounting.

Term Debt Transactions

The Company has interests in eight collateralized debt obligations, also referred to as term debt transactions, whose term notes are primarily collateralized by investment grade real estate securities or real estate debt investments. The Company generally purchases the preferred equity or the income notes of each term debt transaction, which are the equity securities of the term debt issuances, and, with the exception of N-Star I, all of the below investment grade term debt notes of each term debt transaction. In addition, the Company earns a fee of 0.35% of the outstanding principal balance of the assets backing each of these term debt issuances as an annual collateral management fee. The Company's interests in each of the term debt transactions is accounted for as a single debt security available for sale. During the first quarter, two of the Company's term debt transactions experienced a credit loss on a security whose issuer filed for bankruptcy. The Company reviewed the equity notes for impairment and determined based upon its analysis that no impairment existed at September 30, 2009. The Company will use the cost recovery method of income recognition for the term notes because of the uncertainty of the income streams of these two term debt transactions. Any potential losses in the Company's off balance sheet term debt transactions is limited to the amortized cost of its investment of $109.3 million at September 30, 2009.

Consolidated Term Debt Transactions

N-Star IV, VI, VII and VIII are consolidated term debt transactions.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

7. Variable Interest Entities (Continued)

The following tables describe certain terms of the collateral for, and the notes issued by, N-Star IV, N-Star VI, N-Star VII and N-Star VIII at September 30, 2009 and December 31, 2008:

		Collateral—September 30, 2009									Term Notes—September 30, 2009

Issuance		Date Closed		Par Value of Collateral		Weighted Average Interest Rate			Weighted Average Expected Life (years)(1)		Outstanding Term Notes(2)		Weighted Average Interest Rate			Stated Maturity
N-Star IV			6/14/2005	$	408,397		4.41	%		2.00	$	292,500		0.87	%		7/1/2040
N-Star VI			3/17/2006		377,703		6.02			2.28		303,700		0.82			6/1/2041
N-Star VII			6/22/2006		721,075		4.97			6.58		499,200		0.61			6/22/2051
N-Star VIII			12/6/2006		788,159		4.99			1.97		576,395		0.75			2/1/2041

	Total				2,295,334		5.05	%		3.48	$	1,671,795		0.74	%

(1): Based upon initial maturity.
(2): Includes only notes held by third parties.

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

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

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

(1): Weighted average expected life is based upon initial maturity.
(2): Includes only notes held by third parties.

Unconsolidated term debt transactions

N-Star I, II, III and V are unconsolidated term debt transactions.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

7. Variable Interest Entities (Continued)

The following tables describe certain terms of the collateral for, and the notes issued by, N-Star I, N-Star II, N-Star III and N-Star V at September 30, 2009 and December 31, 2008:

		Collateral—September 30, 2009									Term Notes—September 30, 2009

Issuance		Date Closed		Par Value of Collateral		Weighted Average Interest Rate			Weighted Average Expected Life (years)		Outstanding Term Notes(1)		Weighted Average Interest Rate			Stated Maturity
N-Star I(2)			8/21/2003	$	284,098		6.59	%		4.24	$	267,056		6.21	%		8/01/2038
N-Star II			7/01/2004		302,937		6.16			5.10		268,241		5.50			6/01/2039
N-Star III			3/10/2005		429,926		5.52			4.13		358,446		4.19			6/01/2040
N-Star V			9/22/2005		605,092		5.41			5.36		456,319		4.42			9/05/2045

	Total			$	1,622,053		5.79	%		4.79	$	1,350,062		4.93	%

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

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

Issuance		Date Closed		Par Value of Collateral		Weighted Average Interest Rate			Weighted Average Expected Life (years)		Outstanding Term Notes(1)		Weighted Average Interest Rate			Stated Maturity
N-Star I(2)			8/21/2003	$	299,316		6.60	%		4.16	$	278,000		6.37	%		8/01/2038
N-Star II			7/01/2004		331,242		6.17			4.77		295,098		5.51			6/01/2039
N-Star III			3/10/2005		410,188		5.70			4.11		358,556		4.88			6/01/2040
N-Star V			9/22/2005		499,745		5.52			6.23		456,319		4.58			9/05/2045

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

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

8. Borrowings

The following is a table of the Company's outstanding borrowings as of September 30, 2009 and December 31, 2008:

		Initial Stated Maturity	Maximum Maturity Including Extensions	Interest Rate	Maximum Amount Available		Contractual Balance at September 30, 2009		Contractual Balance at December 31, 2008

Credit Facilities
	JP Facility	8/8/2009	8/8/2009	LIBOR + .80% to 1.80%	$	150,000	$	—	$	44,881

Total Credit Facilities						150,000		—		44,881
Term Loans
	WA Term Loan(1)	11/6/2009	11/6/2010	LIBOR + 2.00%		463,646		277,087		276,143
	Euro—note	11/6/2009	11/6/2010	3 month Euribor - 2.0%		106,128		106,128		103,526
	LB Term Loan	2/9/2010	2/9/2012	LIBOR + 1.50%		22,199		22,199		24,238

Total Credit Facilities & Term Loans					$	741,973		405,414		448,788

Mortgage notes payable (non-recourse)
	Chatsworth	5/1/2015		5.65%				—		42,923
	Salt Lake City	9/1/2012		5.16%				15,571		15,862
	EDS	10/8/2015		5.37%				47,163		47,698
	Executive Center(2)	1/1/2016		5.85%				51,480		51,480
	Green Pond	4/11/2016		5.68%				17,176		17,341
	Indianapolis	2/1/2017		6.06%				28,227		28,472
	Wakefield GE	8/30/2010		6.93%				66,501		67,269
	Wakefield—Park National	1/11/2014		5.94%				33,044		33,300
	Wakefield—GE—WLK	1/11/2017		6.99%				159,136		160,000
	Wakefield—GE—Tusc & Harmony	1/11/2017		7.09%				7,840		7,875
	Wakefield—Harmony FNMA	2/1/2017		6.39%				75,000		75,000
	Wakefield—Grove City	2/1/2038		5.45%				1,842		1,862
	Wakefield—Lancaster	6/1/2037		6.40%				2,580		2,605
	Wakefield—Marysville	6/1/2037		6.40%				1,657		1,673
	Wakefield—Washington	10/1/2038		6.65%				1,959		1,975
	Wakefield—Miller Merril	6/30/2012		7.07%				118,758		116,000
	Wakefield—ARL Mob Wachovia	5/11/2017		5.89%				3,400		3,412
	Wakefield—Ascend Colonial	5/31/2012		7.52%				6,500		6,500
	Wakefield—Colonial Dova	8/31/2012		7.32%				6,500		6,500
	Wakefield—Colonial 6 Alfs	10/31/2012		6.98%				20,000		23,329
	Wakefield—St Francis	9/10/2010		LIBOR + 2.00%				11,400		11,400
	Aurora	7/11/2016		6.22%				33,079		33,329
	DSG	10/11/2016		6.17%				33,910		34,237
	Keene	2/1/2016		5.85%				6,717		6,790
	Fort Wayne	1/1/2015		6.41%				3,420		3,480
	Portland	6/17/2014		7.34%				4,698		4,825
	Milpitas	3/6/2017		5.95%				22,221		22,548
	Fort Mill	4/6/2017		5.63%				27,700		27,700
	Reading	1/1/2015		5.58%				13,968		14,153
	Reading	1/1/2015		6.00%				5,000		5,000
	Alliance	12/6/2017		6.48%				23,586		23,787
Mezzanine loan payable (non-recourse)
	Chatsworth	5/1/2014		6.64%				—		9,310
	Fort Mill	4/6/2017		6.21%				2,806		2,985
Exchangeable Senior Notes(3)		6/15/2027		7.25%				68,165		160,800
Exchangeable Senior Notes ("NNN Notes")(3)		6/15/2013		11.50%				60,750		80,000
Repurchase obligations		Varies		LIBOR varies				—		176

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

8. Borrowings (Continued)

		Initial Stated Maturity	Interest Rate	Contractual Balance at September 30, 2009		Contractual Balance at December 31, 2008

Bonds payable(4)
	N-Star IV	7/1/2040	LIBOR + 0.61% (average spread)	$	292,500	$	292,500
	N-Star VI	6/1/2041	3 month LIBOR + 0.52% (average spread)		303,700		292,700
	N-Star VII	6/22/2051	LIBOR + 0.35% (average spread)		499,200		499,200
	N-Star VIII	2/1/2041	LIBOR + 0.49% (average spread)		576,395		524,045
Liability to subsidiary trusts issuing preferred securities(4)(5)
	Trust I	3/30/2035	8.15%		41,240		41,240
	Trust II	6/30/2035	7.74%		25,780		25,780
	Trust III	1/30/2036	7.81%		41,238		41,238
	Trust IV	6/30/2036	7.95%		50,100		50,100
	Trust V	9/30/2036	3 month LIBOR 2.70%		30,100		30,100
	Trust VI	12/30/2036	3 month LIBOR 2.90%		25,100		25,100
	Trust VII	4/30/2037	3 month LIBOR 2.50%		31,475		31,475
	Trust VIII	7/30/2037	3 month LIBOR 2.70%		35,100		35,100

				$	3,339,096	$	3,488,962

(1): The Company had an additional $170.8 million of availability under the revolving component of the term loan.
(2): The Company has a limited recourse obligation with respect to this loan. The amount of such obligation will vary based upon the tenancy of the property. The Company believes such obligation will not exceed $6.0 million.
(3): The contractual amounts may differ from the carrying value on the condensed consolidated balance sheets due to the equity component of the debt.
(4): Contractual amounts due may differ from the carrying value on the condensed consolidated balance sheets due to the election of the fair value option. See Note 3.
(5): The liability to subsidiary trusts for Trusts I, II, III and IV have a fixed interest rate for the first ten years after which the interest rate will float and reset quarterly at rates ranging from LIBOR plus 2.70% to 3.25%. The Company entered into interest rate swap agreements on Trusts V, VI, VII and VIII which fix the interest rates for 10 years at 8.16%, 8.02%, 7.60% and 8.29%, respectively.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

8. Borrowings (Continued)

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

Scheduled principal payment requirements on the Company's borrowings based on initial maturity dates are as follows as of September 30, 2009:

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

2009	$	384,825	$	1,610	$	—	$	383,215	$	—	$	—	$	—	$	—
2010		114,249		92,050		—	$	22,199		—		—		—		—
2011		10,843		10,843		—		—		—		—		—		—
2012		232,967		164,802		—		—		—		68,165		—		—
2013		70,312		9,562		—		—		—		60,750		—		—
Thereafter		2,525,900		573,972		—		—		280,133		—		—		1,671,795

Total	$	3,339,096	$	852,839	$	—	$	405,414	$	280,133	$	128,915	$	—	$	1,671,795

(1): $383.2 million of the secured term loan balance may be extended for one year.
(2): $68.2 million of the Company's 7.25% exchangeable senior notes have a final maturity date of June 15, 2027. The above table reflects the holders repurchase rights which may require the Company to repurchase the notes on June 15, 2012.

At September 30, 2009, the Company was in compliance with all covenants under its borrowings.

Debt Repurchases

During the three and nine months ended September 30, 2009, the Company repurchased approximately $10.0 million and $92.6 million face amount of its 7.25% exchangeable senior notes for a total of $4.8 million and $40.0 million, respectively. The Company also repurchased approximately $19.3 million face amount of its 11.50% exchangeable senior notes for a total of $10.2 million during the three and nine months ended September 30, 2009. The Company recorded a total net realized gain of $13.3 million and $59.5 million in connection with the repurchase of its notes for the three and nine months ended September 30, 2009, respectively. The repurchase of the Company's notes for the three and nine months ended September 30, 2009 represented a $14.3 million and a $61.7 million discount to the par value of the debt, respectively.

9. Related Party Transactions

Advisory Fees

The Company has agreements with each of N-Star I, N-Star II, N-Star III, N-Star V and N-Star IX to perform certain advisory services. The Company earned total fees on these agreements of approximately $1.8 million and $1.7 million and $5.2 million and $10.3 million for the three and nine months ended September 30, 2009 and 2008, respectively.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

9. Related Party Transactions (Continued)

The Company has an agreement with the Securities Fund to receive base management fees ranging from 1.0% to 2.0% per year on third-party capital. For the three months ended September 30, 2008, the Company earned $0.1 million in management fees. For the nine months ended September 30, 2009 and 2008, the Company earned $0.1 million and $0.4 million, respectively, in management fees.

Asset Management Fees

The Company entered into a management agreement in April 2006 with Wakefield Capital Management Inc., an affiliate of Chain Bridge, to perform certain management services. The Company incurred $0.9 million and $2.6 million in management fees for each of the three and nine months ended September 30, 2009 and 2008, respectively, which are recorded in asset management fees-related parties in the condensed consolidated statement of operations.

The Company entered into a management agreement in March 2007 with Monroe Management to perform certain management services. On May 7, 2008, the Company terminated its management agreement with Monroe Management. The Company incurred $1.3 million in management fees for the nine months ended September 30, 2008, which are recorded in asset management fees-related parties in the condensed consolidated statement of operations.

10. Equity-Based Compensation

Omnibus Stock Incentive Plan

On September 14, 2004, the Board of Directors of the Company adopted the NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan (the "Stock Incentive Plan"). The Stock Incentive Plan provides for the issuance of stock-based incentive awards, including incentive stock options, non-qualified stock options, and stock appreciation rights, shares of common stock of the Company, including restricted shares, and other equity-based awards, including OP Units which are structured as profits interests ("LTIP Units") or any combination of the foregoing. The eligible participants in the Stock Incentive Plan include directors, officers and employees of the Company and, prior to October 29, 2005, employees pursuant to the shared facilities and services agreement. An aggregate of 8,933,038 shares of common stock of the Company are currently reserved and authorized for issuance under the Stock Incentive Plan, subject to equitable adjustment upon the occurrence of certain corporate events. As of September 30, 2009, the Company has issued an aggregate of 8,283,340 LTIP Units, net of forfeitures of 60,368 LTIP Units. An aggregate of 1,021,613 LTIP Units were converted to commons stock and 468,064 shares of common stock were issued pursuant to the Stock Incentive Plan. Of the 8,283,340 LTIP Units, so long as the recipient continues to be an eligible recipient, 5,015,942 will vest to the individual recipient at a rate of one-twelfth of the total amount granted as of the end of each quarter, beginning with the first quarter after the date of grant ended either January 29, April 29, July 29, or October 29 for the three-year vesting period, 2,252,437 will vest over 16 consecutive quarters with the first quarter being January 29, 2008, 701,058 will cliff vest on December 31, 2010, and 170,801 are subject to no vesting requirements. The Company accelerated the vesting of 143,102 LTIP Units as part of the termination agreements provided to employees. In addition, the LTIP Unit holders are entitled to dividends on the entire grant beginning on the date of the grant.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

10. Equity-Based Compensation (Continued)

The Company has recognized compensation expense of $4.9 million and $5.1 million and $14.8 million and $15.2 million for the three and nine months ended September 30, 2009 and 2008, respectively. As of September 30, 2009, there were approximately 3,753,213 unvested LTIP Units and 60,368 LTIP Units were forfeited during the period. The related compensation expense to be recognized over the remaining vesting period of the Omnibus Incentive Plan LTIP grants is $25.0 million, provided there are no forfeitures.

2006 Outperformance Plan

In January 2006, the Compensation Committee of the Board of Directors approved the NorthStar Realty Finance Corp. 2006 Outperformance Plan (the "2006 Outperformance Plan"), a long-term compensation program to further align the interests of the Company's stockholders and management. The Company did not meet the performance hurdles under the 2006 Outperformance Plan as of the conclusion of the 2006 Outperformance Plan on December 31, 2008. The Company recorded the compensation expense for the 2006 Outperformance Plan of $0.1 million and $0.3 million for the three months ended September 30, 2009 and 2008, respectively, and $0.3 million and $0.9 million for the nine months ended September 30, 2009 and 2008, respectively. The remaining compensation expense to be recognized over the next five quarters is $0.3 million.

The status of all of the LTIP grants as September 30, 2009 and December 31, 2008 is as follows:

	September 30, 2009					December 31, 2008

	LTIP Grants			Weighted Average Grant Price		LTIP Grants			Weighted Average Grant Price
Balance at beginning of year(1)		8,067		$	9.86		5,484		$	11.47
Granted		—					3,533			7.26
Converted to common stock		(607	)		9.91		(895	)		9.51
Forfeited		—					(55	)		9.42

Ending balance(2)		7,460		$	9.86		8,067		$	9.86

(1): Reflects balance at January 1, 2009 and January 1, 2008 for the periods ended September 30, 2009 and December 31, 2008, respectively.
(2): Reflects balance at September 30, 2009 and December 31, 2008, respectively.

Incentive Compensation Plan

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

10. Equity-Based Compensation (Continued)

adjusted equity capital. Payout from the incentive pool is subject to achievement of additional performance goals summarized below.

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

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

The Company recorded no compensation expense under the Plan for the three months ended September 30, 2009.

11. Stockholders' Equity

Common Stock

In May 2009, the Company issued 94,045 shares of common stock with a fair value at the date of grant of $0.3 million to its Board of Directors as part of their annual grants.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

11. Stockholders' Equity (Continued)

In April 2007, the Company implemented a Dividend Reinvestment and Stock Purchase Plan (the "Plan"), pursuant to which it registered with the Securities and Exchange Commission and reserved for issuance 15,000,000 shares of its common stock. Under the terms of the Plan, stockholders who participate in the Plan may purchase shares of the Company's common stock directly from it, in cash investments up to $10,000. At the Company's sole discretion, it may accept optional cash investments in excess of $10,000 per month, which may qualify for a discount from the market price of 0% to 5%. Plan participants may also automatically reinvest all or a portion of their dividends for additional shares of the Company's stock. The Company expects to use the proceeds from any dividend reinvestments or stock purchases for general corporate purposes. For the three and nine months ended September 30, 2009, the Company issued a total of approximately 22,104 and 54,135 common shares, respectively, pursuant to the Plan.

Equity Distribution Agreements

In May 2009, the Company entered into an equity distribution agreement with JMP Securities LLC ("JMP"). In accordance with the terms of the agreement, the Company may offer and sell up to 10,000,000 shares of its common stock from time to time through JMP. JMP will receive a commission from the Company of up to 2.5% of the gross sales price of all shares sold through it under the equity distribution agreement. As of September 30, 2009, the Company issued 6,542,814 common shares and received approximately $22.7 million of net cash proceeds pursuant to its equity distribution agreement with JMP.

For the nine months ending September 30, 2009, the Company did not issue any common stock pursuant to its May 2008 equity distribution agreement with Wachovia.

Stock Repurchase Program

On October 8, 2008, the Company's Board of Directors authorized a stock repurchase program of up to 10,000,000 shares of its outstanding common stock, or approximately 16% of its outstanding common stock. Stock repurchases under this program will be made from time to time through the open market or in privately negotiated transactions. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. For the nine months ended September 30, 2009, the Company did not repurchase any common shares pursuant to its stock repurchase program.

Dividends

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

11. Stockholders' Equity (Continued)

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

On April 21, 2009, the Company declared a cash dividend of $0.10 per share of common stock, $0.54688 per share of Series A preferred stock and $0.51563 per share of Series B preferred stock. The dividends were paid on May 15, 2009 to the stockholders of record as of the close of business on May 5, 2009.

On July 21, 2009, the Company declared a dividend of $0.10 per share of common stock, $0.54688 per share of Series A preferred stock and $0.51563 per share of Series B preferred stock. The dividends were paid on August 14, 2009 to the stockholders of record as of the close of business on August 5, 2009.

Earnings Per Share

Earnings per share for the three and nine months ended September 30, 2009 and 2008 is computed as follows:

		Three Months Ended September 30, 2009			Three Months Ended September 30, 2008		Nine Months Ended September 30, 2009		Nine Months Ended September 30, 2008

Numerator (Income)
*Basic Earnings*
Net income (loss) available to common stockholders		$	(66,465	)	$	218,310	$	13,917	$	387,056
Effect of dilutive securities:
	Income (loss) allocated to non-controlling interest		(7,094	)		25,740		2,821		45,620

*Dilutive net income available to stockholders*		$	(73,559	)	$	244,050	$	16,738	$	432,676

Denominator (Weighted Average Shares)
*Basic Earnings:*
Shares available to common stockholders			69,896			62,825		67,446		62,772
Effect of dilutive securities:
OP/LTIP units			7,460			7,405		7,460		7,226

*Dilutive Shares*			77,356			70,230		74,906		69,998

The earnings per share calculation takes into account the conversion of LTIP units into common shares. The LTIPS convert on a one-for-one basis into commons shares and share equally in the Company's earnings. Depending on the timing of LTIP conversions and the amount of LTIPS converted, relative to the timing of the Company's earnings allocated to the LTIP non-controlling interest, and the weighting of the common shares, the LTIP conversions may result in an anti-dilutive effect on earnings per share. For the nine months ended September 30, 2009 the LTIP conversion were anti-dilutive.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

12. Non-controlling Interest

Operating Partnership

Non-controlling interest represents the aggregate limited partnership interests or OP Units in the Operating Partnership held by limited partners (the "Unit Holders"). Income allocated to the non-controlling interest is based on the Unit Holders ownership percentage of the Operating Partnership. The ownership percentage is determined by dividing the numbers of OP Units held by the Unit Holders by the total number of dilutive shares. The issuance of additional shares of beneficial interest (the "Common Shares" or "Share") or OP Units changes the percentage ownership of both the Unit Holders and the Company. Since a unit is generally redeemable for cash or Shares at the option of the Company, it is deemed to be equivalent to a Share. Therefore, such transactions are treated as capital transactions and result in an allocation between shareholders' equity and non-controlling interest in the accompanying condensed consolidated balance sheet to account for the change in the ownership of the underlying equity in the Operating Partnership. As of September 30, 2009 and December 31, 2008, non-controlling interest related to the aggregate limited partnership units of 7,459,748 and 8,067,211, represented a 9.17% and 11.37% interest in the Operating Partnership, respectively. Income allocated to the operating partnership non-controlling interest for the three and nine months ended September 30, 2009 and 2008 was a loss of $7.1 million and income of $25.7 million and income of $2.8 million and $45.6 million, respectively.

Joint Ventures

On July 9, 2008, Wakefield sold a $100 million convertible preferred membership interest to Inland American Real Estate Trust, Inc. The Wakefield joint venture is consolidated in the condensed consolidated financial statements with Inland American's and Chain Bridge's equity treated as non-controlling interests. Income allocated to the joint venture's non-controlling interest for the three and nine months ended September 30, 2009 and 2008 was $2.6 million and $2.3 million, respectively, and $7.0 million and $2.1 million, respectively.

13. Risk Management and Derivative Activities

Derivatives

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

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive Income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2009, such

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

13. Risk Management and Derivative Activities (Continued)

derivatives were used to hedge the variable cash flows associated with certain variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three and nine months ended September 30, 2009 and 2008, the Company recorded immaterial amounts of hedge ineffectiveness in earnings.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company's variable-rate debt. During the remainder of 2009, the Company estimates that an additional $2.8 million will be reclassified as an increase to interest expense.

The following tables summarize the Company's derivative financial instruments that were designated as cash flow hedges of interest rate risk as of September 30, 2009 and December 31, 2008:

					Range of Fixed LIBOR	Range of Maturity

Interest rate swaps and basis swaps
As of September 30, 2009	10	90,749	(9,514	)	4.18% - 5.08%	March 2010 - August 2018
As of December 31, 2008	10	90,749	(13,923	)	4.18% - 5.08%	March 2010 - August 2018

In January 2008, the Company elected the fair value option for its bonds payable and its liability to subsidiary trusts issuing preferred securities. As a result, the changes in fair value of these financial instruments are now recorded in earnings and the interest rate swap agreements associated with these debt instruments no longer qualify for hedge accounting given that the underlying debt is remeasured with changes in the fair value recorded in earnings. The unrealized gains or losses accumulated in other comprehensive income, related to these interest rate swaps, will be reclassified into earning over the shorter of either the life of the swap or the associated debt with current mark-to-market unrealized gains or losses recorded in earnings.

Derivatives not designated as hedges are not speculative and are used to manage the Company's exposure to interest rate movements and other identified risks but do not meet strict hedge accounting requirements. For the three months ended September 30, 2009 and 2008, the Company recorded, in earnings, a mark-to-market unrealized loss of $22.4 million and $1.8 million, respectively, for the non-qualifying interest rate swaps. For each of the three months ended September 30, 2009 and 2008, the Company recorded a $1.4 million reclassification from accumulated other comprehensive income for the non-qualifying interest rate swaps. For the nine months ended September 30, 2009 and 2008, the Company recorded, in earnings, a mark-to-market unrealized loss of $3.6 million and $8.3 million, respectively, for the non-qualifying interest rate swaps. For the nine months ended September 30, 2009 and 2008, the Company recorded a $4.2 million and $4.1 million reclassification from accumulated other comprehensive income for the non-qualifying interest rate swaps, respectively.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

13. Risk Management and Derivative Activities (Continued)

The following tables summarize the Company's derivative financial instruments that were not designated as hedges in qualifying hedging relationships as of September 30, 2009 and December 31, 2008:

					Range of Fixed LIBOR	Range of Maturity

Interest rate swaps and basis swaps
As of September 30, 2009	24	1,397,108	(67,585	)	0.35% - 5.63%	October 2009 - June 2018
As of December 31, 2008	24	1,396,879	(63,979	)	0.54% - 5.63%	October 2009 - June 2018

The following table presents the fair value of the Company's derivative financial instruments as well as their classification on its balance sheet as of September 30, 2009 and December 31, 2008.

Tabular Disclosure of Fair Values of Derivative Instruments

	Asset Derivatives						Liability Derivatives

	As of September 30, 2009			As of December 31, 2008			As of September 30, 2009				As of December 31, 2008
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value			Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Interest Rate Products	Derivative instrument, at fair value	$	—	Derivative instrument, at fair value	$	—	Derivative liability, at fair value	$	(9,514	)	Derivative liability, at fair value	$	(13,923	)

Total derivatives designated as hedging instruments		$	—		$	—		$	(9,514	)		$	(13,923	)

Derivatives not designated as hedging instruments
Interest Rate Products	Derivative instrument, at fair value	$	1,080	Derivative instrument, at fair value	$	9,318	Derivative liability, at fair value	$	(68,665	)	Derivative liability, at fair value	$	(73,297	)

Total derivatives not designated as hedging instruments		$	1,080		$	9,318		$	(68,665	)		$	(73,297	)

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

13. Risk Management and Derivative Activities (Continued)

The following tables present the effect of the Company's derivative financial instruments on its statement of operations for the three and nine months ended September 30, 2009 and 2008:

Derivatives in Cash Flow Hedging Relationships

	Location of Gain/(loss) recognized in income	Three Months Ended September 30, 2009			Three Months Ended September 30, 2008			Nine Months Ended September 30, 2009			Nine Months Ended September 30, 2009

*Interest rate products*
Amount of Gain or (loss) in OCI on Derivative on OCI (Effective Portion)	n/a	$	(3,574	)	$	(3,639	)	$	(321	)	$	(7,019	)
Amount of Gain or (loss) reclassified from accumulated OCI into Income (Effective Portion)	Interest Expense	$	7		$	7		$	21		$	21

Derivatives Not Designated as Hedging Instruments

	Location of Gain/(loss) recognized in income	Three Months Ended September 30, 2009			Three Months Ended September 30, 2008			Nine Months Ended September 30, 2009			Nine Months Ended September 30, 2009

*Interest rate products*
Amount of Gain or (loss) recognized in income	Unrealized gain (loss) on investment and other	$	(27,342	)	$	(5,698	)	$	(16,957	)	$	(2,565	)
Amount of Gain or (loss) reclassified from accumulated OCI into Income	Unrealized gain (loss) on investment and other	$	(1,404	)	$	(1,404	)	$	(4,213	)	$	(4,055	)

At September 30, 2009, the Company's counterparties hold approximately $26.5 million of cash margin as collateral against its swap contracts.

Credit Risk Concentrations

Concentrations of credit risk arise when a number of borrowers, tenants or issuers related to the Company's investments are engaged in similar business activities or located in the same geographic location to be similarly affected by changes in economic conditions. The Company monitors its portfolio to identify potential concentrations of credit risks. The Company has no one borrower or one tenant that generates 10% or more of its total revenue. However, approximately 53.8% and 52.2%, respectively of the Company's rental and escalation revenue for the three and nine months ended September 30, 2009 is generated from two tenants in the Company's healthcare net lease portfolio. The

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

13. Risk Management and Derivative Activities (Continued)

Company believes the remainder of its net lease portfolio is reasonably well diversified and does not contain any unusual concentration of credit risks.

14. Segment Reporting

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

The Company's operating real estate segment is focused on acquiring commercial real estate facilities located throughout the U.S. that are primarily leased under long-term triple-net leases to corporate tenants. Triple-net leases generally require the lessee to pay all costs of operating the facility, including taxes and insurance and maintenance of the facility. The Company's net-leased facilities are currently located in New York, Ohio, California, Utah, Pennsylvania, New Jersey, Indiana, Illinois, New Hampshire, Massachusetts, Kansas, Maine, South Carolina, Michigan, Colorado, North Carolina, Florida, Washington, Oregon, Wisconsin, Georgia, Oklahoma, Nebraska, Tennessee, Texas and Kentucky. Revenues from these assets are generated from rental income received from lessees of the facilities, and operating expenses, which include interest costs related to financing the assets, operating expenses, real estate taxes, insurance, ground rent and repairs and maintenance. The segment generates income from operations by leasing these facilities at a higher rate than the costs of owning and financing the assets.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

14. Segment Reporting (Continued)

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

The following table summarizes segment reporting for the three and nine months ended September 30, 2009 and 2008:

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

Total revenues for the three months ended
	September 30, 2009	$	23,662		$	10,627		$	17,030	$	19,335		$	(2,040	)	$	68,614
	September 30, 2008		42,001			21,852			13,083		16,256			348			93,540
Consolidated net income for the three months ended
	September 30, 2009		(104,236	)		5,705			61,374		1,679			(30,295	)		(65,773	)
	September 30, 2008		186,220			2,842			38,590		1,433			22,496			251,581
Consolidated net income(loss) after non-controlling interests and before preferred dividend for the three months ended
	September 30, 2009		(94,178	)		5,143			55,744		(878	)		(27,064	)		(61,234	)
	September 30, 2008		167,762			2,595			34,613		(868	)		19,441			223,543
Total revenues for the nine months ended
	September 30, 2009		77,740			31,811			48,717		52,936			(5,613	)		205,591
	September 30, 2008		130,202			47,929			47,096		48,384			12,674			286,285
Consolidated net income for the nine months ended
	September 30, 2009		(13,788	)		(3,772	)		131,952		(6,772	)		(68,193	)		39,427
	September 30, 2008		412,594			(1,041	)		40,559		2,946			(4,592	)		450,466
Consolidated net income(loss) after non-controlling interests and before preferred dividend for the nine months ended
	September 30, 2009		(13,622	)		(3,309	)		118,923		(13,767	)		(58,614	)		29,611
	September 30, 2008		370,000			(934	)		36,372		544			(3,233	)		402,749
Total assets as of
	September 30, 2009	$	2,214,642		$	450,164		$	303,766	$	715,983		$	116,683		$	3,801,238

(1): Total revenues for the three and nine months ended September 30, 2009 excludes $45.0 million and $75.0 million, respectively, in net realized and unrealized gains.
(2): Corporate includes corporate level investments, corporate level interest income, interest expense and unallocated general & administrative expenses.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

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

A summary of non-cash investing and financing activities for the nine months ended September 30, 2009 and 2008 is presented below:

	2009			2008

Real estate debt investment pay-down due from servicer	$	—		$	18,000
Write-off of deferred financing cost		—			29,918
Initial mark-to-market adjustment		—			(317,111	)
Elimination of bonds payable due to acquisition of consolidated assets		—			35,638
Allocation of purchase price of operating real estate to deferred cost		—			(272	)
Minority Interest buy-out		—			(1,566	)
Contribution of book value of assets to unconsolidated joint venture		2,668			112,097
Reclassification of construction in progress		—			(4,409	)
Write-off of deferred least costs related to lease terminations		—			(3,459	)
Write-off of operating real estate due to foreclosure		51,732			—
Reduction of mortgage notes payable due to foreclosure		(52,067	)		—
Reduction of restricted cash due to foreclosure		68			—
Allocate proceeds from exchangeable notes to equity		—			(3,100	)
Allocate payment of deferred financing costs to cost of capital		—			191
Stock dividend		10,646			—

16. Fair Value of Financial Instruments

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

As of September 30, 2009 cash equivalents, accounts receivable, accounts payable, repurchase agreements with major banks and securities firms and the master repurchase agreement balances reasonably approximate their fair values due to the short-term maturities of these items. The available for sale securities and securities sold, not yet purchased are carried on the balance sheet at their estimated fair value.

For the real estate debt investments the fair value of the fixed and floating rate investments was approximated comparing yields at which the investments are held to estimated yields at which loans originated with similar credit risks or market yields at which a third party might require to purchase the investment by discounting future cash flows at such market yields. Prices were calculated to the "worst" assuming fully extended maturities regardless of if structural or economic tests required to achieve such

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

16. Fair Value of Financial Instruments (Continued)

extended maturities. At September 30, 2009 the fair market value was $1.7 billion with a gross carrying amount of $2.0 billion.

For the exchangeable senior notes, the Company uses available market information, which includes quoted market prices or recent transactions, if available to estimate their fair value. At September 30, 2009, the fair market value of the 7.25% exchangeable senior notes was $66.9 million with a carrying amount of $68.2 million and the fair market value of the 11.50% exchangeable senior notes was $58.9 million with a carrying amount of $60.8 million.

For fixed rate mortgage loans payable, the Company uses rates currently available to them with similar terms and remaining maturities to estimate their fair value. At September 30, 2009, the fair market value was $866.9 million with a carrying amount of $852.8 million.

Disclosure about fair value of financial instruments is based on pertinent information available to management as of September 30, 2009. Although management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.

17. Commitments and Contingencies

Chatsworth Property

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

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

18. Subsequent Events

The Company has evaluated subsequent events through November 5, 2009, which is the date these financial statements were issued.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

18. Subsequent Events (Continued)

Dividends

On October 20, 2009, the Company declared a dividend of $0.10 per share of common stock, $0.54688 per share of Series A preferred stock and $0.51563 per share of Series B preferred stock. The dividends will be paid on November 16, 2009 to the stockholders of record as of the close of business on November 6, 2009.

Wells Fargo Debt Extension

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

On October 28, 2009, in connection with the WA Credit Facility, the Company entered into a warrant agreement (the "Warrant Agreement") with Wachovia under which the Company issued one million warrants (the "Warrants") to Wachovia to purchase one million shares of the Company's common stock, par value $0.01 per share ("Common Stock"), at a weighted average exercise price of $8.59 per share. 500,000 Warrants are exercisable immediately at a price of $7.50 per share, 250,000 Warrants are exercisable after October 28, 2010 at a price of $8.60 per share and 250,000 Warrants are exercisable after October 28, 2011 at a price of $10.75 per share. The exercise price of the Warrants may be paid in cash or by cashless exercise. The exercise price and the number of shares of Common Stock issuable upon exercise of the Warrants are subject to adjustment for dividends paid in common stock, subdivisions or combinations.

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

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

Forward-Looking Statements

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

Factors that could have a material adverse effect on our operations and future prospects are set forth in "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2008, and those described from time to time in our future reports filed with the Securities and Exchange Commission. The factors set forth in the Risk Factors section could cause our actual results to differ significantly from those contained in any forward- looking statement contained in this report.

Introduction

We primarily derive revenues from interest income on the real estate debt investments that we originate with borrowers or acquire from third parties and our real estate securities in which we invest. We generate rental income from our net lease investments. We also generate interest revenues from our ownership interest in non-consolidated securities term debt transaction issuances and advisory fee income and income from our unconsolidated ventures. Other income comprises a much smaller and more variable source of revenues and is generated principally from fees associated with early loan repayments.

We primarily derive income from our core business activities through the difference between the interest and rental income we are able to generate from our investments and the cost at which we are able to obtain financing for our investments. In order to protect this difference, or "spread", we seek to match-fund our investments using secured sources of long-term financing such as term debt transaction financings, mortgage financings and long-term unsecured subordinate debt. Match-funding means that we try to obtain debt with maturities equal to our asset maturities and borrow funds at interest rate benchmarks similar to our assets. Match-funding results in minimal impact to spread when interest rates are rising and falling and minimizes refinancing risk since our asset maturities match those of our debt.

More recently, realized gain on investments and other and unrealized gain (loss) on investments and other have comprised a larger and much more variable source of our income. Realized gains and losses principally relate to sales of our securities investments and early retirement of our debt through open market purchases. Unrealized gains and losses are primarily caused by inter-period mark-to-market valuation adjustments on certain of our assets and liabilities. These items historically

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have not been a part of our core business activities, but are currently more significant due to market volatility that has enabled us to opportunistically retire debt at discounts and monetize investments.

Profitability and Performance Metrics

We calculate several metrics to evaluate the profitability and performance of our business.

•: Adjusted funds from operations: ("AFFO") (see "Non-GAAP Financial Measures—Funds from Operations and Adjusted Funds from Operations" for a description of this metric).
•: Return on Equity ("ROE"), before and after general and administrative expenses. We calculate return on equity using AFFO, inclusive and exclusive of general and administrative expenses, divided by average common book equity during the period as a measure of the profitability generated by our assets and company on common stockholders' equity invested.
•: Credit losses are a measure of the performance of our investments and can be used to compare the credit performance of our assets to our competitors and other finance companies.
•: Assets Under Management ("AUM") growth is a key driver of our ability to grow our earnings, but is of lesser importance than other metrics such as AFFO and ROE due to lack of available new investment capital in the commercial real estate sector.

Credit risk management is our ability to manage our assets in a manner that preserves principal and income and minimizes credit losses that would decrease income.

Corporate expense management influences the profitability of our business. We must balance making appropriate investments in our infrastructure and employees with the recognition that our accounting, finance, legal and risk management infrastructure does not directly generate quantifiable revenues for us. We frequently refer to general and administrative expenses, excluding stock-based compensation expense, divided by total revenues as a measure of our efficiency in managing expenses. For 2008, a much higher percentage of our performance compensation was awarded in cash rather than stock equivalents compared to prior years, resulting in an unfavorable efficiency ratio compared to prior years.

Availability and cost of capital will impact our profitability and earnings since we must raise new capital to fund a majority of our AUM growth.

Outlook and Recent Trends

In early 2007, the subprime residential lending and single family housing markets began to experience significant default rates, declining real estate values and increasing backlog of housing supply. Other lending markets also experienced higher volatility and decreased liquidity resulting from the poor credit performance in the residential lending markets. The residential sector capital markets issues quickly spread more broadly into the asset-backed commercial real estate, corporate and other credit and equity markets.

During 2008, financial institutions curtailed their lending to peer institutions, even on a very short-term basis, as lack of transparency regarding asset quality reduced confidence in counterparty creditworthiness. Despite liquidity infusions from government-sponsored central banks worldwide, the cost of capital increased dramatically, and even the most liquid markets such as the commercial paper market experienced enormous outflows of capital. Those institutions deemed by the market to be most at risk for credit issues, principally those with large real estate and mortgage portfolios, experienced massive withdrawals from customer brokerage and deposit accounts. These institutions also became unable to transact in the capital markets because few participants were willing to take their counterparty risk, thereby resulting in their insolvency (most notably Bear, Stearns & Co. and Lehman Brothers Holdings, Inc.). The U.S. Government reacted to the rapid deterioration in the financial

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system by passing the Emergency Economic Stabilization Act of 2008, or the EESA, in early October. The EESA authorized and provided funds to the U.S. Treasury Department to acquire financial assets from institutions as a buyer of last resort in order to enable these institutions to reduce their exposure to troubled assets and to regain market confidence. During the fourth quarter of 2008, the U.S. abandoned the direct asset purchase strategy, committed to make up to $250 billion of direct equity investments through the Troubled Asset Relief Program, or TARP, into banking institutions and purchased commercial paper from corporations.

In February 2009, the U.S. Government ratified a nearly $800 billion economic stimulus package and in March announced the Public-Private Investment Program, or PPIP, to introduce up to $1 trillion of leverage into the financial system to purchase and finance high quality securities, including CMBS, and to acquire "legacy" loans from banks. The goal of the PPIP is to draw private capital into the market by providing government equity co-investment and attractive public financing, and the CMBS market initially responded positively to the announcement with credit spreads for the highest quality securities decreasing by several hundred basis points after the program's announcement. We, as well as a reported nearly 100 other potential PPIP managers filed an application with the U.S. Government to be one of its approved fund managers, but NorthStar was not one of the initial handful selected.

In June 2009, the Term Asset Lending Facility ("TALF"), a financing facility for asset-backed securities established by the U.S. Federal Reserve in late 2008, began accepting commercial real estate securities as assets eligible for financing. The Federal Reserve indicated that securities issued in 2009 and having a AAA rating would be considered eligible for financing, subject to the Fed's final approval of individual assets. Approximately $6.3 billion of TALF loans have been approved for legacy CMBS securities and NorthStar has been approved as a borrower under the program. To-date, it has been reported that several banks are working on new loans whose AAA rated securities would be eligible for TALF financing, but no securities created through this program have yet been financed under TALF.

During the second quarter 2009, several banks were permitted by the U.S. Government to repay their TARP equity investments, but other very large institutions (e.g., Bank of America and Citigroup, among others) were not deemed healthy enough to repay their TARP capital. Although repayment of the government investment was considered a sign of financial strength, those who repaid their TARP funds remain cautious in committing new capital to real estate in an uncertain economic environment. Despite TARP repayments, the overall U.S. banking sector remains under stress.

During the third quarter 2009, the velocity of bank seizures increased, with 61 banks seized since the beginning of the third quarter and 115 banks seized by the FDIC in 2009 to date. The securities program formed under the PPIP has resulted in decreasing yields for higher rated CMBS securities throughout the third quarter; however, prices for the lower rated classes of CMBS securities remain low as credit and liquidity concerns remain high. As a result of the inability of banks and other traditional real estate lenders to provide meaningful amounts of new lending capital and no new issue CMBS market, capital for commercial real estate remains extremely scarce and continued declines in macroeconomic conditions and employment are resulting in worsening credit performance across commercial real estate and many other sectors.

Despite negative macroeconomic and lending conditions continuing through the third quarter 2009, the public equity and corporate debt markets for real estate-owning REITs have performed extremely well for the first nine months this year. Year-to-date, the REIT market has raised nearly $17 billion of equity and approximately $10 billion of corporate debt. In addition, several newly-formed and externally advised REITs with a commercial real estate debt focus have raised approximately $1.5 billion of capital. Notwithstanding the ability of the public REIT market to raise capital, this market is very small relative to the size of the estimated $1.5 trillion commercial real estate finance market and we expect commercial real estate fundamentals to continue to deteriorate into 2010.

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Commercial Real Estate Macroeconomic Conditions

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

Most of our real estate loans bear interest rates based on a spread to one-month LIBOR, a floating rate index based on rates that banks charge each other to borrow. One-month LIBOR as of September 30, 2009 is 0.25%, well below its 3.5% average over the past five years. Lower LIBOR means lower debt service costs for our borrowers which should partially offset decreasing cash flows caused by the economic recession, and extend the life of interest reserves for those loans that require interest reserves to service debt while the collateral properties are being repositioned by our borrowers. Lower interest rates also theoretically support real estate valuations because a lower discount rate is applied to underlying future real estate cash flow assumptions in valuing a property. Currently, a lack of readily available financing, economic uncertainty and higher returning alternative investment opportunities have increased investor return expectations resulting in much higher risk premiums and, despite the lower interest rate, lower valuations for commercial real estate properties. The conditions are adversely impacting the performance of our real estate loans and the related collateral properties. The deep economic recession combined with a crippled banking sector has resulted in weakening cash flows from collateral properties and extreme difficulties in obtaining repayments at maturity.

For existing loans, when credit spreads widen, the fair value of these existing loans decreases. If a lender were to originate a similar loan today, such loan would carry a greater credit spread than the existing loan. Even though a loan may be performing in accordance with its loan agreement and the underlying collateral has not changed, the fair value of the loan may be negatively impacted by the incremental interest foregone from the widened credit spread. Accordingly, when a lender wishes to sell or finance the loan, the reduced value of the loan will impact the total proceeds that the lender will receive.

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

Real estate securities values are also influenced by credit ratings assigned to the securities by accredited rating agencies. The rating agencies have changed their ratings methodologies for all securitized asset classes, including commercial real estate, in light of questionable ratings previously

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assigned to residential mortgage portfolios. Their reviews have resulted in, and are continuing to result in, large amounts of ratings downgrade actions for CMBS, negatively impacting market values of CMBS and in some cases negatively impacting the term debt transaction financing structures used by us and others to leverage these investments.

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

Our Strategy

We responded to these difficult conditions by decreasing investment activity when we observed deteriorating market conditions. We expect credit to continue to be challenging throughout the remainder of 2009 and into 2010 and have focused our company resources on portfolio management activities to preserve our invested capital and liquidity. We anticipate that most of our investment activity and uses of available unrestricted cash liquidity for the foreseeable future will be focused on discounted repurchases of our previously issued debt securities which generally have been available in the market at very attractive prices, and for amortization of bank debt.

Approximately $4.0 billion of our collateralized debt obligations, also referred to as our term debt transaction liabilities (including the off-balance sheet and on-balance sheet term debt transaction financings) currently permit reinvestment of capital proceeds which means when the underlying assets repay we are able to reinvest the proceeds in new assets without having to repay the liabilities. We also have assets financed on a bank term loan with an outstanding balance of $383.2 million at September 30, 2009. On October 28, 2009, we completed a three-year extension of this debt and we repaid approximately $52.5 million of the outstanding balance by using uninvested cash contained within our term debt transactions. The bank debt requires six semi-annual amortization payments of $15 million, representing aggregate paydowns totaling $90 million over its term. Approximately $343.9 million of our funded loan commitments have their initial maturity date in the remainder of 2009; however, most of the loans contain extension options of at least nine months (many subject to performance criteria). It is therefore difficult to estimate how much capital, if any, from initial maturities or prepayments will be generated in our term debt transactions from loan repayments during 2009 to create availability to further amortize the bank loan.

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

We believe that in the longer term, liquidity could eventually return to the commercial real estate finance markets but that in the near term, new financing sources must be developed in order to attractively finance new investment activity. We believe these sources could include financing from U.S. Government sponsored programs such as PPIP and TARP, term loans from financial institutions and

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life insurance companies, more restrictive commercial real estate finance structures, which may not permit reinvestment from asset repayments, and financing provided by motivated sellers of assets.

Risk Management

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

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

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

We conduct a quarterly comprehensive credit review which is designed to enable management to evaluate and proactively manage asset-specific credit issues and identify credit trends on a portfolio-wide basis as an "early warning system." Nevertheless, we cannot be certain that our review will identify all issues within our portfolio due to, among other things, adverse economic conditions or events adversely affecting specific assets; therefore, potential future losses may also stem from assets that are not identified by our credit reviews. During the quarterly reviews, assets are put on non-performing status and identified for possible impairment based upon several factors, including missed or late contractual payments, significant declines in collateral performance, and other data which may indicate a potential issue in our ability to recover our capital from the investment.

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As of September 30, 2009, our loan portfolio had the following credit statistics:

		Dollar Value

Non-performing loans(1)	5	$	83,122	4.17	%
Loan loss reserves	15		73,892	3.71	%

(1): A loan is classified as non-performing at such time as the loan becomes 90 days delinquent in interest or principal payments or the loan has a maturity default. During October 2009, we were foreclosed out of a $9 million non-performing mezzanine loan. The loan had reserves equal to its principal balance so there was no loss recognized for the three months ended September 30, 2009.

As of September 30, 2009, our loan portfolio principal and interest aging is as follows (inclusive of our non-performing loans):

1 - 30 Days			31 - 60 Days			61 - 90 Days			90 + Days

$	10,295		$	9,362		$	29		$	63,759

During the three and nine month period ending September 30, 2009, we recorded $24.2 million and $62.7 million of credit loss provisions relating to 10 and 15 loans, respectively, and had no foreclosures or (reversals of prior period reserves). As of September 30, 2009, loan loss reserves totaled $73.9 million. At September 30, 2009, we had five loans totaling $83.1 million on non-performing status due to maturity defaults. A $21.4 million first mortgage loan secured by a condo/hotel development site in Manhattan was on the non-performing loan list at December 31, 2008 and the maturity default is not yet resolved. At September 30, 2009, we have a $8.4 million loan loss reserve for this loan, and continue to negotiate a potential assumption of our loan by new sponsors, who have significant hotel development and operating track records and intend to develop a full service hotel on the site, as well as pursuing legal remedies against the borrower. The second non-performing loan is a $28.5 million B-note secured by a large mixed use development located near Orlando, FL. Our note is subordinate to a $127 million A-note and senior to a $28.0 million C-note. The borrower did not meet the requirements for a March 2009 extension, and the A-Note holder is leading restructuring discussions with the borrower. The borrower also has existing recourse obligations to make scheduled amortization payments. At September 30, 2009, we have a $12.0 million loan loss reserve for this loan. The third non-performing loan which we fully reserved against, is a $9.4 million mezzanine loan backed by a multi-family development site in Washington D.C. Subsequent to the end of third quarter we were foreclosed out of this loan by the first mortgage lender. The fourth non-performing loan is a $13.9 million first mortgage loan secured by a condo development site in Manhattan which has the same sponsor as the $21.4 million non-performing loan previously discussed. There is a $4.2 million reserve for this loan at September 30, 2009. During the third quarter we added to NPL status due to a maturity default a $10.0 million B-note secured by two retail properties. The loan has positive debt service coverage and we believe the underlying collateral value is in excess of our loan basis. We believe the special servicer of the A-note will agree to an extension and modification to the loan, and therefore no credit loss reserve has been established for this loan. There can be no assurance that acceptable assumption and modification agreements can be reached with the respective borrowers under our non-performing loans, and if agreements cannot be reached we may determine that more reserves are required for these loans.

On June 30, 2009, we received $23.6 million of cash proceeds relating to the repayment of a $27.4 million first mortgage loan backed by a data center property bearing interest at LIBOR + 4.5% and having a February 2012 final maturity date. We agreed to the discounted payoff of our loan on this

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niche asset for the economic and credit risk benefits discussed herein. Accordingly, for the second quarter 2009 we recorded a $3.8 million credit loss relating to this discounted payoff.

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

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

Critical Accounting Policies

Refer to the section of our Annual Report on Form 10-K for the year ended December 31, 2008 entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting policies" for a full discussion of our critical accounting policies.

Recent Accounting Pronouncements

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

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comprehensive income, which is the noncredit component. Noncredit component losses are to be recorded in other comprehensive income if an investor can assess that (a) it does not have the intent to sell or (b) it is not more likely than not that it will have to sell the security prior to its anticipated recovery. The pronouncement is effective for interim and annual periods ending after June 15, 2009. The pronouncement will be applied prospectively with a cumulative effect transition adjustment as of the beginning of the period in which it is adopted. Our adoption of the pronouncement did not have a material effect on our financial condition, results of operations, or cash flows.

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

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

In June 2009, an accounting pronouncement was issued which requires additional information regarding transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. The pronouncement eliminates the concept of a "qualifying special-purpose entity," changes the requirements for derecognizing financial assets, and requires additional disclosures. The pronouncement is effective for fiscal years beginning after November 15, 2009. We are currently evaluating the impact that the adoption of this pronouncement will have on our financial condition, results of operations, and disclosures.

In June 2009, an accounting pronouncement was issued which modifies how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The pronouncement clarifies that the determination of whether a company is required to consolidate an entity is based on, among other things, an entity's purpose and design and a company's ability to direct the activities of the entity that most significantly impact the entity's economic performance. The pronouncement requires an ongoing reassessment of whether a company is the primary beneficiary of a variable interest entity. The pronouncement also requires additional disclosures about a company's involvement in variable interest entities and any significant changes in risk exposure due to that involvement. The pronouncement is effective for fiscal years beginning after November 15, 2009. We believe that as a result of the implementation of this pronouncement, we will consolidate four of our off balance sheet term debt transactions (See Note 8 for further details) and our Securities Fund. We also believe that we will elect the fair value option of accounting on these entities upon consolidation.

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intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. All existing accounting standard documents are superseded and all other accounting literature not included in the Codification is considered nonauthoritative. The Codification is effective for interim and annual periods ending after September 15, 2009. The Codification did not have an impact on our financial condition or results of operations.

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

In August 2009, a Codification update was issued which requires preferred securities that are redeemable for cash or other assets to be classified outside of permanent equity if they are redeemable (i) at a fixed or determinable price on a fixed or determinable date; (ii) at the option of the holder, or (iii) upon the occurrence of an event that is not solely within the control of the Company. The update also provides analogous guidance for other redeemable equity instruments including, for example, common stock, derivative instruments, non-controlling interests, securities held by an employee stock ownership plan and share-based payment arrangements with employees. We are currently evaluating the impact that the adoption of this update will have on its financial condition, results of operations, and disclosures.

RESULTS OF OPERATIONS

Comparison of the Three Months Ended September 30, 2009 to the Three Months Ended September 30, 2008

Revenues

Interest Income

Interest income for the three months ended September 30, 2009 totaled $34.3 million, representing a decrease of $15.5 million, or 31%, compared to $49.8 million for the three months ended September 30, 2008. The decrease consisted of a $19.6 million decrease attributable to an approximately 308 basis points lower average one-month LIBOR rate during the third quarter 2009 compared to third quarter 2008 and lower spreads on modified loans. The decrease was partially offset by a net increase to interest income of approximately $4.1 million resulting from the origination and acquisition of commercial real estate debt and commercial real estate securities with a net book value of $394.7 million subsequent to September 30, 2008 offset by approximately $341.4 million of investment dispositions and repayments during 2008.

Interest Income—Related Parties

Interest income from related parties for the three months ended September 30, 2009 totaled $4.2 million, representing an increase of $0.8 million, or 24%, compared to $3.4 million for the three months ended September 30, 2008. The increase is attributable to securities purchases within our non-consolidated term debt financings in which we own the non-investment grade note classes. We are

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generally earning higher yields on securities purchased during the past 12 months due to credit spread widening. All of our real estate securities term debt transactions completed since 2006, in which we retain the equity notes, have been accounted for as on-balance sheet financings.

Rental and Escalation Income

Rental and escalation income for the three months ended September 30, 2009 totaled $28.0 million, representing a decrease of $1.0 million, or 3%, compared to $29.0 million for the three months ended September 30, 2008. The decrease was primarily attributable to a decrease of $2.2 million related to the Reading, PA property lease termination and Chatsworth, CA property lease disaffirmation and $2.9 million related to the conversion of our net lease relationship with one of our healthcare operators to a management agreement offset partially by an increase of $4.1 million on the restructuring and termination of two of our leases with an operator in our healthcare portfolio operators.

Advisory and Management Fee Income—Related Parties

Advisory fees from related parties for the three months ended September 30, 2009 totaled $1.9 million, representing an increase of approximately $0.1 million, or 6%, compared to $1.8 million for the three months ended September 30, 2008. The increase was primarily attributable to an increase of $0.1 million as a result of the increase in the net asset value of our term debt transactions which generate advisory fees.

Other Revenue

Other revenue for the three months ended September 30, 2009 totaled $0.2 million, representing a decrease of $9.3 million, or 98%, compared to $9.5 million the three months ended September 30, 2008. Other revenue for three months ended September 30, 2009 consisted primarily of $0.1 million in exit fees and $0.1 million in unused credit line and draw fees. Other revenue for the three months ended September 30, 2008 consisted primarily of $9.0 million in a lease termination fee, $0.3 million in exit fees, $0.1 million in unused credit line fees and $0.1 million in miscellaneous other revenue.

Expenses

Interest Expense

Interest expense for the three months ended September 30, 2009 totaled $29.3 million, representing a decrease of $17.0 million, or 37%, compared to $46.3 million for the three months ended September 30, 2008. The decrease in interest was primarily the result of: (i) $10.3 million lower interest on our N-Star bonds payable and trust preferred debt due to lower average LIBOR rates, debt repurchases and repayments; (ii) $2.8 million lower interest on our 7.25% and 11.50% exchangeable senior notes due to repurchases; (iii) $1.0 million lower interest relating to lower average balances and lower LIBOR rates on our WA Term Loan; (iv) $1.1 million in lower interest rates on our Euro-note; (v) $1.5 million lower interest as a result of being foreclosed out of our investment due to Chatsworth, CA lease disaffirmation (vi); and $0.5 million lower interest related to the termination of our unsecured revolving credit line in May 2008. The decrease in interest expense was partially offset by: (i) $0.2 million in additional expense from our LB term loan which closed in June 2008.

Real Estate Properties—Operating Expenses

Real estate property operating expenses for three months ended September 30, 2009 totaled $4.1 million, representing an increase of $2.2 million, or 116%, compared to $1.9 million for three months ended September 30, 2008. The increase was primarily attributable to $2.8 million of operating expenses now consolidated in our financial statements resulting from terminating two of our net leases

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with an operator in our healthcare portfolio. The properties will continue to be managed by third parties and we will now consolidate the revenues and expenses relating to these operations. The increased costs were partially offset by $0.5 million in lower expenses as a result of Chatsworth, CA lease disaffirmation.

Asset Management Fees—Related Party

Advisory fees for related parties for the three months ended September 30, 2009 totaled $0.8 million, which was essentially flat, compared to $0.9 million for the three months ended September 30, 2008. We incurred advisory fees to Wakefield Capital Management for the three months ended September 30, 2009 and 2008.

Provision for Loan Losses

Provision for loan losses for the three months ended September 30, 2009 totaled $24.2 million and was specifically identified for 10 loans. The third quarter 2009 expense includes $15.9 million for first mortgage whole loans, $4.0 million for subordinated mortgage interests and $4.3 million for mezzanine loans. Provision for loan losses for the three months ended September 30, 2008 totaled $2.5 million and includes expense $3.2 million for first mortgage whole loans. We also reversed a $0.8 million reserve taken during the first quarter 2008 against a $19.5 million first mortgage upon recapitalization and assumption of the loan by a third party.

General and Administrative

General and administrative expenses for the three months ended September 30, 2009 totaled $15.7 million, representing an increase of $2.0 million, or 15%, compared to $13.7 million for the three months ended September 30, 2008. The primary components of our general and administrative expenses were the following:

Salaries and equity-based compensation for the three months ended September 30, 2009 totaled $11.0 million, representing an increase of approximately $1.6 million, or 17%, compared to $9.4 million, for the three months ended September 30, 2008. The increase was attributable to a $2.0 million increase related to salaries and accrued cash incentive compensation costs offset partially by a $0.4 million decrease related to equity-based compensation. The 2008 cash incentive compensation costs were weighted towards the fourth quarter in anticipation of a greater mix of equity than cash awards than was actually paid. The 2009 quarterly cash incentive compensation accruals assume the equity/cash mix will be consistent with actual 2008 payments. The $0.4 million decrease in equity-based compensation expense was attributable to a decrease of approximately $0.4 million in vesting of equity- based awards issued under our 2004 Omnibus Stock Incentive Plan and our 2006 Outperformance Plan relating to grants fully vesting.

Auditing and professional fees for the three months ended September 30, 2009 totaled $2.0 million, representing an increase of $1.0 million, or 100%, compared to $1.0 million for the three months ended September 30, 2008. The increase was primarily attributable to increased legal fees for general corporate work, investment activities and lease restructuring expenses in our healthcare portfolio.

Other general and administrative expenses for the three months ended September 30, 2009 totaled $2.7 million, representing a decrease of approximately $0.6 million, or 18%, compared to $3.3 million for the three months ended September 30, 2008. The decrease was primarily attributable to a decrease in overhead resulting from lower staffing levels during the three months ended September 30, 2009.

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Depreciation and Amortization

Depreciation and amortization expense for the three months ended September 30, 2009 totaled $3.7 million, representing a decrease of $9.9 million, or 73%, compared to $13.6 million for the three months ended September 30, 2008. This decrease was primarily attributable to lower depreciation and amortization of $9.7 million as a result of the Reading, PA property lease termination and Chatsworth, CA property lease disaffirmation and $0.2 million resulting from the restructuring of our net lease relationship with one of our healthcare operators.

Equity in (Loss) Earnings of Unconsolidated Ventures

Equity in (loss) earnings for the three months ended September 30, 2009 was a net $2.7 million in earnings, representing an increase of $1.9 million, compared to earnings of $0.8 million for the three months ended September 30, 2008. For the three months ended September 30, 2009, we recognized equity in earnings of $2.3 million on a new joint venture related to the conversion of the net lease relationship with one of our healthcare operators to a management agreement which resulted in one of our unconsolidated affiliates becoming the lessee of the properties and the unconsolidated affiliate simultaneously entering into a management contract with a third party operator, equity in earnings of $0.5 million from the Securities Fund (which includes both realized and unrealized gains from asset sales and mark-to-market adjustments) and equity in earnings of $0.1 million in connection with another net lease joint venture. The equity in earnings were partially offset by equity in losses of $0.2 million from the LandCap joint venture. For the three months ended September 30, 2008, we recognized equity in earnings $0.5 million from the Securities Fund, $0.9 million equity in earnings from our investment in the corporate lending joint venture, which was recapitalized in May 2008 resulting in deconsolidation of the venture and equity in earnings of $0.1 million in connection with our net lease joint venture. The earnings were partially offset by equity in loss of $0.8 million on the LandCap joint venture.

Unrealized Gain (Loss) on Investments and Other

Unrealized gain (loss) on investments and other decreased by approximately $317.4 million for the three months ended September 30, 2009 to a loss of $88.3 million, compared to a gain of $229.1million for the three months ended September 30, 2008. The unrealized loss on investments for the three months ended September 30, 2009 consisted primarily of unrealized losses of $86.1 million on various N-Star bonds payable, unrealized losses related mark-to-market adjustments of $16.2 million on liability to subsidiary trusts issuing preferred securities, net losses of $28.7 million on interest rate swap derivatives no longer qualifying, or not designated as, hedging instruments and unrealized losses of $2.3 million on our corporate lending joint venture (which is an equity investment that is marked to market). The unrealized losses were partially offset by unrealized gains related to mark-to-market adjustments of $45.0 million on various available for sale securities. The unrealized gain on investment for the three months ended September 30, 2008 consisted primarily of unrealized gains related to mark-to-market adjustments of $251.0 million on various N-Star bonds payable, $42.9 million on liability to subsidiary trusts issuing preferred securities and $16.2 million on exchangeable senior notes, offset partially by unrealized losses related to mark-to-market adjustments of $57.9 million on various N-Star available for sale securities and $7.1 million on interest rate swaps as a result of these swaps no longer qualifying for hedge accounting.

Realized Gain on Investments and Other

The realized gain of $29.2 million for the three months ended September 30, 2009 consisted primarily of net realized gains of $5.1 million on the repurchase of $10.0 million of our 7.25% exchangeable senior notes, $8.2 million on the repurchase of $19.3 million of our 11.50% exchangeable senior notes and net realized gains of $15.9 million on the sale of certain debt securities available for sale. The realized gain on investments and other of $7.0 million for the three months ended September 30, 2008, was attributable to the repurchase of various N-Star bonds.

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Comparison of the Nine months Ended September 30, 2009 to the Nine Months Ended September 30, 2008

Revenues

Interest Income

Interest income for the nine months ended September 30, 2009 totaled $106.8 million, representing a decrease of $56.6 million, or 35%, compared to $163.4 million for the nine months ended September 30, 2008. The decrease consisted of a $54.9 million decrease attributable to an approximately 250 basis points lower average one-month LIBOR rate and lower asset balances during the nine month period ending September 30, 2009 compared to the nine month period ending September 30 2008, and a $11.7 million decrease in interest income attributable to the recapitalization and deconsolidation of Monroe Capital in 2008. The decrease was partially offset by a net increase to interest income of approximately $10.0 million resulting from the origination and acquisition of commercial real estate debt and commercial real estate securities with a net book value of $394.7 million subsequent to September 30, 2008 offset by approximately $341.4 million of investment dispositions and repayments during 2008.

Interest Income—Related Parties

Interest income from related parties for the nine months ended September 30, 2009 totaled $13.1 million, representing an increase of $2.3 million, or 21%, compared to $10.8 million for the nine months ended September 30, 2008. The increase is attributable to securities purchases within our non-consolidated term debt financings in which we own the non-investment grade note classes. We are generally earning higher yields on securities purchased during the past 12 months due to credit spread widening. All of our real estate securities term debt transactions completed since 2006, in which we retain the equity notes, have been accounted for as on-balance sheet financings.

Rental and Escalation Income

Rental and escalation income for the nine months ended September 30, 2009 totaled $79.6 million, representing a decrease of $7.4 million, or 9%, compared to $87.0 million for the nine months ended September 30, 2008. The decrease was primarily attributable decreases of $6.6 million related to the Reading, PA property lease termination and the Chatsworth, CA property lease disaffirmation, a decrease of $5.0 million on the conversion of our net lease relationship with one of our healthcare operators to a management agreement and $0.5 million related to the Cincinnati, OH lease renewal partially offset by an increase $4.7million related to the restructuring and termination of two of our leases with an operator in our healthcare portfolio.

Advisory and Management Fee Income—Related Parties

Advisory fees from related parties for the nine months ended September 30, 2009 totaled $5.4 million, representing a decrease of approximately $5.3 million, or 50%, compared to $10.7 million for the nine months ended September 30, 2008. The decrease was primarily attributable to the sale of 67% of the advisory fee income stream from one of our term debt transactions to the Securities Fund which resulted in the recognition of an additional $4.8 million in advisory fee income during the second quarter 2008. The sale resulted in $0.2 million of lower advisory fees and a decrease of $0.3 million as a result of the decline in net asset value of our Securities Fund and our term debt transactions which generate the advisory fees.

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Other Revenue

Other revenue for the nine months ended September 30, 2009 totaled $0.6 million, representing a decrease of $13.9 million, or 96%, compared to $14.5 million the nine months ended September 30, 2008. Other revenue for nine months ended September 30, 2009 consisted primarily of $0.2 million in exit fees, $0.2 million in late fees and $0.2 million in unused credit line fees. Other revenue for the nine months ended September 30, 2008 consisted primarily of $9.0 million in a lease termination fee, $3.7 million in profit participation proceeds from the modification of a real estate debt investment and $0.3 million in prepayment penalties, $0.6 million of exit fees, $0.4 million in unused credit line fees, $0.2 million in draw fees and $0.3 million miscellaneous other revenue.

Expenses

Interest Expense

Interest expense for the nine months ended September 30, 2009 totaled $95.4 million, representing a decrease of $52.9 million, or 36%, compared to $148.3 million for the nine months ended September 30, 2008. The decrease in interest was primarily the result of: (i) $33.9 million lower interest on our N-Star bonds payable and trust preferred debt due to lower average LIBOR rates, debt repurchases and repayments; (ii) $6.1 million lower interest on our 7.25% exchangeable senior notes due to repurchases; (iii) $5.9 million lower interest as a result of the recapitalization, termination and de-consolidation of our corporate lending venture in 2008; (iv) $3.7 million lower interest relating to lower average balances and lower LIBOR rates on our WA Term Loan; (v) $2.9 million in lower interest rates on our Euro-note; (vi) $2.3 million lower interest as a result of being foreclosed out of our investment due to the Chatsworth, CA lease disaffirmation; (vii) $1.7 million lower interest related to the termination of our unsecured revolving credit line in May 2008; and (viii) $0.4 million lower interest related to lower average balances on repurchase obligations. The decrease in interest expense was partially offset by: (i) $3.8 million in additional expense from our $80.0 million 11.50% exchangeable senior notes issued in May 2008 and (ii) $0.1 million in additional expense from our LB term loan which closed in June 2008.

Real Estate Properties—Operating Expenses

Real estate property operating expenses for nine months ended September 30, 2009 totaled $9.1 million, representing an increase of $3.1 million, or 53%, compared to $6.0 million for nine months ended September 30, 2008. The increase was primarily attributable to $3.5 million of operating expenses now consolidated in our financial statements resulting from terminating two of our net leases with an operator in our healthcare portfolio. The properties will continue to be managed by third parties and we will now consolidate the revenues and expenses relating to these operations. The increase was also attributable to expenses of $0.5 million that are no longer reimbursed related to the Reading, PA facility that is now vacant, partially offset by $0.7 million in lower expenses as a result of Chatsworth, CA lease disaffirmation.

Asset Management Fees—Related Party

Advisory fees for related parties for the nine months ended September 30, 2009 totaled $2.6 million, representing a decrease of $1.3 million, or 33%, compared to $3.9 million for the nine months ended September 30, 2008. The decrease was primarily attributable to the termination of the corporate lending joint venture agreement. We incurred $2.6 million of advisory fees to Wakefield Capital Management and no advisory fees to the corporate lending joint venture for the nine months ended September 30, 2009, respectively. We incurred $2.6 million of advisory fees to Wakefield Capital Management and $1.3 million of advisory fees to our former corporate lending venture for the nine months ended September 30, 2008, respectively.

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Provision for Loan Losses

Provision for loan losses for the nine months ended September 30, 2009 totaled $62.7 million and was specifically identified for 15 loans. The provision for loan losses for the nine months ended September 30, 2009 included $29.9 million for first mortgage whole loans, $12.0 million for subordinated mortgage interests and $20.8 million for mezzanine loans. Provision for loan losses for the nine months ended September 30, 2008 totaled $5.7 million and included $3.7 million for first mortgage whole loans and $2.0 million for a mezzanine loan.

General and Administrative

General and administrative expenses for the nine months ended September 30, 2009 totaled $50.1 million, representing an increase of $3.6 million, or 8%, compared to $46.5 million for the nine months ended September 30, 2008. The primary components of our general and administrative expenses were the following:

Salaries and equity-based compensation for the nine months ended September 30, 2009 totaled $33.8 million, representing an increase of approximately $2.7 million, or 9%, compared to $31.1million, for the nine months ended September 30, 2008. The increase was attributable to a $5.6 million increase related to salaries and accrued cash incentive compensation costs offset partially by a $2.9 million decrease related to equity-based compensation. The 2008 cash incentive compensation costs were weighted towards the fourth quarter in anticipation of a greater mix of equity than cash awards than was actually paid. The 2009 quarterly cash incentive compensation accruals assume the equity/cash mix will be consistent with actual 2008 payments. The $2.9 million decrease in equity-based compensation expense was attributable to the one-time 2008 grants of $0.7 million in connection with employee compensation arrangements and $1.2 million in connection with employee separation agreements. In addition, approximately $0.9 million of the decrease was attributable to a decrease of vesting of equity-based awards issued under our 2004 Omnibus Stock Incentive Plan and our 2006 Outperformance Plan relating to awards fully vesting and a $0.1 million decrease in our Annual Directors grants.

Auditing and professional fees for the nine months ended September 30, 2009 totaled $6.5 million, representing an increase of $1.9 million, or 41%, compared to $4.6 million for the nine months ended September 30, 2008. The increase was primarily attributable to increased legal fees for general corporate work, investment activities and lease restructuring expense in our healthcare portfolio.

Other general and administrative expenses for the nine months ended September 30, 2009 totaled $9.9 million, representing a decrease of approximately $0.8 million, or 7%, compared to $10.7million for the nine months ended September 30, 2008. The decrease was primarily attributable to decreases costs related to decrease in overhead resulting from lower staffing levels during the nine months ended September 30, 2009.

Depreciation and Amortization

Depreciation and amortization expense for the nine months ended September 30, 2009 totaled $35.9 million, representing an increase of $2.4 million, or 7%, compared to $33.5 million for the nine months ended September 30, 2008. This increase was primarily attributable to an increase of $7.7 million related to the write off of certain costs associated with the lease restructuring and termination of two of our leases with an operator in our healthcare portfolio and our restructured net lease relationship with one of our healthcare operators partially offset by lower depreciation and amortization of $5.3 as a result of the write off of the Reading, PA and Chatsworth, CA properties.

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Equity in (Loss) Earnings of Unconsolidated Ventures

Equity in (loss) earnings for the nine months ended September 30, 2009 was a net $1.5 million loss, representing a decrease of $3.3 million, compared to a loss of $4.8 million for the nine months ended September 30, 2008. For the nine months ended September 30, 2009, we recognized equity in losses of $4.7 million from the Securities Fund (which includes both realized and unrealized gains from asset sales and mark-to-market adjustments) and $2.9 million from the LandCap joint venture. The losses were partially offset by equity in earnings of $5.7 million on our new joint venture related to the conversion of the net lease relationship with one of our healthcare operators to a management agreement, which resulted in one of our unconsolidated affiliates becoming the lessee of the properties and the unconsolidated affiliate simultaneously entering into a management contract with a third party operator and $0.4 million in connection with a net lease joint venture. For the nine months ended September 30, 2008, we recognized equity in losses of $5.1 million from the Securities Fund and equity in loss of $2.5 million on the LandCap joint venture. The losses were partially offset by our investment in Monroe Management prior to terminating the joint venture in May 2008 and our investment in the corporate lending joint venture which was recapitalized in May 2008 resulting in deconsolidation of the venture. We recognized $2.3 million of equity in earnings in connection with these joint ventures and $0.3 million in connection with our net lease joint venture.

Unrealized Gain (Loss) on Investments and Other

Unrealized gain (loss) on investments and other decreased by approximately $397.1 million for the nine months ended September 30, 2009 to a gain of $1.7 million, compared to a gain of $398.8 million for the nine months ended September 30, 2008. The unrealized gain on investments for the three months ended September 30, 2009 consisted primarily of unrealized gains related to mark-to-market adjustments of $55.9 million on various N-Star bonds payable and unrealized gains of $41.4 million on various available for sale securities. The unrealized gains were partially offset by unrealized losses related to mark-to-market adjustments of $32.1 million on our corporate lending joint venture (which is an equity investment that is marked to market), unrealized losses of $42.3 million on liability to subsidiary trusts issuing preferred securities and unrealized net losses of $21.2 million on interest rate swap derivatives no longer qualifying, or not designated as, hedging instruments. The unrealized gain on investment for the nine months ended September 30, 2008 consisted primarily of unrealized gains related to mark-to-market adjustments of $529.0 million on various N-Star bonds payable, $72.8 million on liability to subsidiary trusts issuing preferred securities and $28.9 million on exchangeable senior notes, offset partially by unrealized losses related to mark-to-market adjustments of $164.1 million on various N-Star available for sale securities, $32.3 million on our corporate lending joint venture and $6.6 million on interest rate swaps as a result of these swaps no longer qualifying for hedge accounting.

Realized Gain on Investments and Other

The realized gain of $89.4 million for the nine months ended September 30, 2009 consisted primarily of net realized gains of $51.3 million on the repurchase of $92.6 million face amount of our 7.25% exchangeable senior notes, $8.2 million on the repurchase of $19.3 million face amount of our 11.5% exchangeable senior notes, net realized gains of $33.7 million on the sale of certain debt securities available for sale offset partially by realized losses of $3.6 million related to the discounted payoff of a first mortgage and a foreign currency translation loss of $0.2 million related to our Euro-denominated investment. The realized gain on investments and other of $14.1million for the nine months ended September 30, 2008, was attributable to the recapitalization of our corporate loan venture in which we recognized a $46.0 million realized gain upon the extinguishment of a portion of the debt, a simultaneous $27.1 million cost basis reduction of our investment in the recapitalized venture and a realized loss of $18.9 million related to the sale of certain corporate loans within the portfolio. In addition we recognized a $14.1 million gain on the repurchase of various N-Star bonds.

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Liquidity and Capital Resources

We require significant capital to fund our investment activities and operating expenses. Our capital sources may include cash flow from operations, net proceeds from asset repayments and sales, borrowings under revolving credit facilities, financings secured by our assets such as first mortgage and term debt transaction financings, long-term senior and subordinate corporate capital such as senior notes, trust preferred securities and perpetual preferred and common stock. As we discussed in "Outlook and Recent Trends", availability of such capital from all of these sources is extremely scarce (if available at all) for financial institutions including commercial mortgage REITs, and we expect this capital to be difficult to obtain for the foreseeable future.

Our total available liquidity at September 30, 2009 was approximately $251.1 million, including $108.4 million of unrestricted cash and cash equivalents and $142.7 million of uninvested and available funds in our term debt transactions, which is available only for reinvestment within the term debt transactions.

As a REIT, we are required to distribute at least 90% of our annual REIT taxable income to our stockholders, including taxable income where we do not receive corresponding cash, and we intend to distribute all or substantially all of our REIT taxable income in order to comply with the REIT distribution requirements of the Internal Revenue Code and to avoid federal income tax and the non-deductible excise tax. For calendar year 2009, we will be permitted to pay up to 90% of our distribution requirement in common stock or other company securities which give us the flexibility to preserve cash. On January 20, 2009, we declared a $0.25 per common share dividend, of which up to 40% was paid in cash in order to preserve our capital. On April 21, July 21 and October 20 2009, we declared a $0.10 per common share cash dividend. In the past, we have maintained high unrestricted cash balances relative to the historical difference between our distributions and cash provided by operating activities. On a quarterly basis, our Board of Directors determines an appropriate common stock dividend based upon numerous factors, including REIT qualification requirements, the amount of cash flows provided by operating activities, availability of existing cash balances, borrowing capacity under existing credit agreements, access to cash in the capital markets and other financing sources, our view of our ability to realize gains in the future through appreciation in the value of our assets, general economic conditions and economic conditions that more specifically impact our business or prospects. Although we have significantly reduced the cash portion of the 2009 quarterly dividends declared to date relative to prior periods, future dividend levels are subject to further adjustment based upon our evaluation of the factors described above, as well as other factors that our Board of Directors may, from time to time, deem relevant to consider when determining an appropriate common stock dividend.

We currently believe that our existing sources of funds should be adequate for purposes of meeting our short-term liquidity needs; however, our secured term debt transaction financing structures generally require that the underlying collateral and cash flow generated by the collateral to be in excess of ratios stipulated in the related indentures. These ratios are called overcollateralization, or OC, and interest coverage, or IC, tests. In the event these tests are not met, cash that would normally be distributed to us would be used to amortize the senior notes until the financing is back in compliance with the tests. In the event cash flow is diverted to repay the notes, this could decrease cash available to pay our dividend and to comply with REIT requirements. Additionally, we may be required to buy assets out of our term debt transactions in order to preserve cash flow. As of September 30, 2009 we are in compliance with all of the OC and IC tests in our secured term debt transactions. We expect that very weak economic conditions, lack of capital for commercial real estate, decreasing real estate values and credit ratings downgrades of real estate securities will make complying with OC and IC tests more difficult in the future.

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We also have three bank loans which permit the lender to require partial repayment under certain circumstances. The WA Credit Facility renewed the WA and Euro term loans with a combined balance of $383.2 million at September 30, 2009 for three years on October 28, 2009. As part of the renewal, the lender received an up-front paydown totaling $52.5 million and we agreed to make six semi-annual amortization payments of $15 million. All margin call provisions were eliminated as long as the semi-annual amortization payments are made, with the exception of potential margin requirements for defaulted assets which would be credited to the semi-annual amortization requirements. A secured term loan with $22.2 million outstanding balance, as of September 30, 2009, provides the lender with a similar ability to require repayment, except the lender may require repayment at any time due to decreases in credit quality and decrease in value of the loan collateral based upon market credit spread movements. In a weakening economic environment we would generally expect credit quality and value of the underlying loans to decline resulting in a higher likelihood that the lenders would require partial repayment from us. Such amounts could be material to our cash and liquidity position depending on performance of the loan collateral and market credit spreads. In August 2009, we terminated the JP Facility and repaid the remaining principal balance of $12.2 million.

These bank loans also contain corporate financial covenants which we must comply with in order to avoid defaults under the loans. The corporate fixed charge coverage covenants are currently the most restrictive and as of September 30, 2009 we are in compliance with all financial covenants under these facilities. The October 2009 renewal of the WA Credit Facility eliminated the corporate fixed charge covenant and maintained the existing minimum tangible net worth and liquidity covenants.

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

Nonetheless, our ability to meet a long-term (beyond one year) liquidity requirement may be subject to obtaining additional debt and equity financing. Any decision by our lenders and investors to provide us with financing will depend upon a number of factors, such as our compliance with the terms of its existing credit arrangements, our financial performance, industry or market trends, the general availability of and rates applicable to financing transactions, such lenders' and investors' resources and policies concerning the terms under which they make capital commitments and the relative attractiveness of alternative investment or lending opportunities.

Equity Distribution Agreement

In May, 2009, we entered into an equity distribution agreement with JMP Securities, LLC, or JMP. In accordance with the terms of the agreement, we may offer and sell up to 10,000,000 shares of our common stock from time to time through JMP. JMP will receive a commission from us of up to 2.5% of the gross sales price of all shares sold through it under the equity distribution agreement. We may offer and sell shares of our common stock pursuant to our equity distribution agreement over the next six months if we believe the economics are attractive, and may use the proceeds for investments, debt repayment or general corporate purposes.

As of September 30, 2009, we issued 6,542,814 common shares and received approximately $22.7 million of net cash proceeds pursuant to our equity distribution agreement with JMP.

For the nine months ended September 30, 2009, we did not issue any shares of common stock pursuant to our May 2008 equity distribution agreement with Wachovia.

Dividend Reinvestment and Stock Purchase Plan

Effective as of April 27, 2007, we implemented a Dividend Reinvestment and Stock Purchase Plan, or the Plan, pursuant to which we registered and reserved for issuance 15,000,000 shares of our

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

During the nine months ended September 30, 2009, we issued a total of 54,135 common shares pursuant to the Plan for a gross sales price of approximately $0.2 million.

Debt Repurchases

During the three and nine months ended September 30, 2009, we repurchased approximately $10.0 million and $92.6 million face amount of our 7.25% exchangeable senior notes for a total of $4.8 million and $40.0 million, respectively. We also repurchased approximately $19.3 million face amount of our 11.50% exchangeable senior notes for a total of $10.2 million during the three and nine months ended September 30, 2009. We recorded a total net realized gain of $13.3 million and $59.5 million in connection with the repurchase of our notes for the three and nine months ended September 30, 2009, respectively. The repurchase of the notes for the three and nine months ended September 30, 2009 also represented a $14.3 million and a $61.7 million discount to the par value of the debt, respectively.

Wakefield Preferred Equity

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

Cash Flows

The net cash flow provided by operating activities of $46.4 million, decreased by $31.1 million for the nine months ended September 30, 2009 from $77.5 million for the nine months ended September 30, 2008. This was primarily due to the lower LIBOR rates which decreased interest income generated from our asset base.

The net cash flow used by investing activities was $16.7 million for the nine months ended September 30, 2009 compared to the net cash used by investing activities of $82.1 million for the nine months ended September 30, 2008. This decrease from 2008 was primarily a result of decreased investment activity and lower investment repayments in 2009. Net cash flow used in investing activities in 2008 was primarily the result of the payoffs and principal paydowns of our real estate debt investments and corporate loan investments combined with decreased investment activity.

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The net cash flow used by financing activities was $55.3 million for the nine months ended September 30, 2009 compared to $15.3 million of cash provided by financing activities for the nine months ended September 30, 2008. The primary use of cash flow by financing activities was credit facilities repayments and bond repurchases. Net cash flow in provided by financing activity in 2008 was primarily related to the paydown of our bonds, credit facilities, and secured term loan as a result of principal paydowns of our assets.

Contractual Obligations and Commitments

As of September 30, 2009, we had the following contractual commitments and commercial obligations:

	Payments Due by Period

Contractual Obligations	Total		1 year		2-3 years		4-5 years		After 5 Years
Mortgage notes	$	850,033	$	1,547	$	102,312	$	173,666	$	572,508
Mezzanine loan payable		2,806		63		581		698		1,464
Exchangeable senior notes(1)		128,915		—		68,165		60,750		—
Bonds payable		1,671,795		—		—		—		1,671,795
Secured term loan(2)		428,749		406,550		22,199		—		—
Liability to subsidiary trusts issuing preferred securities		280,133		—		—		—		280,133
Capital leases(3)		16,253		122		974		997		14,160
Operating leases		72,212		1,406		11,211		10,869		48,726
Outstanding unfunded commitments(4)		91,649		82,650		8,999		—		—

Total contractual obligations	$	3,542,545	$	492,338	$	214,441	$	246,980	$	2,588,786

(1): $68.2 million of our 7.25% exchangeable senior notes have a final maturity date of June 15, 2027. The above table reflects the holders repurchase rights which may require us to repurchase the notes on June 15, 2012.
(2): The WA and Euronote term loans have initial maturities in October 2009. On October 28, 2009, the Company completed a three-year extension of its WA and Euro term loans and repaid approximately $52.5 million of the outstanding balance.
(3): Includes interest on the capital leases.
(4): Our future funding commitments, which are subject to certain conditions that borrowers must meet to qualify for such fundings, totaled $91.6 million, of which a minimum of $57.4 million will be funded within our existing term debt transactions. Fundings are categorized by estimated funding period. We expect that our secured credit facility lenders generally will advance a majority of future fundings that are not otherwise funded within our term debt transactions. Based upon currently approved advance rates on our credit and term debt facilities and assuming that all loans that have future fundings meet the terms to qualify for such funding, our equity requirement on the remaining $34.2 million of future funding requirements would be approximately $21.3 million over the next two years.

Off-Balance Sheet Arrangements

Term Debt Issuances

The terms of the portfolio of real estate securities held by the term debt transactions are structured to be matched with the terms of the non-recourse term debt liabilities. These term debt liabilities are repaid with the proceeds of the principal payments on the real estate securities

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collateralizing the term debt liabilities when these payments are actually received. There is no refinancing risk associated with the term debt liabilities, as principal is only due to the extent that it has been collected on the underlying real securities and the stated maturities are noted above. Term debt transactions produce a relatively predictable income stream based on the spread between the interest earned on the underlying securities and the interest paid on the term debt transaction liabilities. This spread may be reduced by credit losses on the underlying securities or by hedging mismatches. In two of our term debt transactions we incurred a loss on a security whose issuer filed for bankruptcy. We reviewed the term notes for impairment and determined no impairment existed at September 30, 2009. We continue to receive quarterly cash distributions from N-Star I and monthly cash distributions from N-Star II, N-Star III and N-Star V, each representing our proportionate share of the residual cash flow from the term debt transactions, as well as collateral advisory fees and interest income on the unrated income notes of the term debt transactions.

The following tables describe certain terms of the collateral for and the notes issued by term debt transactions at September 30, 2009:

		Collateral—September 30, 2009								Term Notes—September 30, 2009

Issuance		Date Closed	Par Value of Collateral		Weighted Average Interest Rate			Weighted Average Expected Life (years)(1)		Outstanding Term Notes(2)		Weighted Average Interest Rate			Stated Maturity
N-Star I(3)		8/21/2003	$	284,098		6.59	%		4.24	$	267,056		6.21	%	8/01/2038
N-Star II		7/01/2004		302,937		6.16			5.10		268,241		5.50		6/01/2039
N-Star III		3/10/2005		429,926		5.52			4.13		358,446		4.19		6/01/2040
N-Star V		9/22/2005		605,092		5.41			5.36		456,319		4.42		9/05/2045

	Total		$	1,622,053		5.79	%		4.79	$	1,350,062		4.93	%

(1): Based upon initial maturity.
(2): Includes only notes held by third parties.
(3): We have an 83.3% interest.

Any potential losses in our off balance sheet term debt transactions is limited to the amortized cost of our investment of $109.3 million at September 30, 2009.

NorthStar Real Estate Securities Opportunity Fund

In July 2007, we closed on $109.0 million of equity capital for our Securities Fund, an investment vehicle in which we conduct most of our real estate securities investment business.

We are the manager and general partner of the Securities Fund. We receive base management fees ranging from 1.0% to 2.0% per annum on third-party capital and are entitled to annual incentive management fees ranging from 20% to 25% of the increase in the Securities Fund's net asset value in excess of an 8.0% per annum return. Base and incentive fees vary depending on the investor capital lockup periods.

On August 31, 2009, we redeemed $11.0 million of our equity capital investment in the Securities Fund. At September 30, 2009 and December 31, 2008, our investment in the Securities Fund was $8.9 million and $29.3 million, respectively, representing a 31.2% and 53.1% interest in the Securities Fund, respectively.

For the three and nine months ended September 30, 2009 and 2008, we recognized equity in earnings of $0.5 million and $0.5 million and equity in losses of $4.9 million and $5.1 million, respectively. We also earned $0.1 million for the three months ended September 30, 2008 and

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$0.1 million and $0.4 million in management fees from the Securities Fund for the nine months ended September 30, 2009 and 2008, respectively.

Recent Developments

Dividends

On October 20, 2009, we declared a cash dividend of $0.10 per share of common stock, $0.54688 per share of Series A preferred stock and $0.51563 per share of Series B preferred stock. The dividends are payable on November 16, 2009 to the stockholders of record as of the close of business on November 6, 2009.

Wells Fargo Debt Extension

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

On October 28, 2009, in connection with the WA Credit Facility, the we entered into a warrant agreement (the "Warrant Agreement") with Wachovia under we issued one million warrants (the "Warrants") to Wachovia to purchase one million shares of our common stock, par value $0.01 per share ("Common Stock"), at a weighted average exercise price of $8.59 per share. 500,000 Warrants are exercisable immediately at a price of $7.50 per share, 250,000 Warrants are exercisable after October 28, 2010 at a price of $8.60 per share and 250,000 Warrants are exercisable after October 28, 2011 at a price of $10.75 per share. The exercise price of the Warrants may be paid in cash or by cashless exercise. The exercise price and the number of shares of Common Stock issuable upon exercise of the Warrants are subject to adjustment for dividends paid in common stock, subdivisions or combinations.

Inflation

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

•: net leases where the tenants are responsible for all or a significant portion of the real estate taxes, insurance and operating expenses and the leases provide for increases in rent either based on changes in the Consumer Price Index, or CPI, or pre-negotiated increases; or
•: operating leases which provide for separate escalations of real estate taxes and operating expenses over a base amount, and/or increases in the base rent based on changes in the CPI.

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

We believe that the risk associated with an increase in market interest rates on the floating rate debt used to finance our investments in our term debt transactions and our direct investments in real estate debt, will be largely offset by our strategy of matching the terms of our assets with the terms of our liabilities and through our use of hedging instruments.

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See "Quantitative and Qualitative Disclosures About Market Risk" in Item 7A of this Annual Report on Form 10-K for additional information on our exposure to market risk.

Non-GAAP Financial Measures

Funds from Operations and Adjusted Funds from Operations

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

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

•: normalized recurring expenditures that are capitalized by us and then amortized, but which are necessary to maintain our properties and revenue stream, e.g., leasing commissions and tenant improvement allowances;
•: an adjustment to reverse the effects of the straight-lining of rents and fair value lease revenue;
•: the amortization or accrual of various deferred costs including intangible assets and equity-based compensation; and
•: an adjustment to reverse the effects of unrealized gains/(losses).

Our calculation of AFFO differs from the methodology used for calculating AFFO by certain other REITs and, accordingly, our AFFO may not be comparable to AFFO reported by other REITs. Our management utilizes FFO and AFFO as measures of our operating performance, and believes they are also useful to investors, because they facilitate an understanding of our operating performance after adjustment for certain non-cash expenses, such as real estate depreciation, which assumes that the value of real estate assets diminishes predictably over time and, in the case of AFFO, equity-based compensation. Additionally, FFO and AFFO serve as measures of our operating performance because they facilitate evaluation of our company without the effects of selected items required in accordance with GAAP that may not necessarily be indicative of current operating performance and that may not accurately compare our operating performance between periods. Furthermore, although FFO, AFFO and other supplemental performance measures are defined in various ways throughout the REIT industry, we also believe that FFO and AFFO may provide us and our investors with an additional useful measure to compare our financial performance to certain other REITs.

Neither FFO nor AFFO is equivalent to net income or cash generated from operating activities determined in accordance with U.S. GAAP. Furthermore, FFO and AFFO do not represent amounts available for management's discretionary use because of needed capital replacement or expansion, debt service obligations or other commitments or uncertainties. Neither FFO nor AFFO should be considered as an alternative to net income as an indicator of our operating performance or as an alternative to cash flow from operating activities as a measure of our liquidity.

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Set forth below is a reconciliation of FFO and AFFO to net income from continuing operations before non-controlling interest for the three and months ended September 30, 2009 and 2008:

	Three Months Ended September 30, 2009			Three Months Ended September 30, 2008			Nine Months Ended September 30, 2009			Nine Months Ended September 30, 2008

Funds from Operations:
Consolidated net income (loss)	$	(65,773	)	$	251,581		$	39,427		$	450,466
Non-controlling interest in joint ventures		(2,555	)		(2,300	)		(6,995	)		(2,097	)

Consolidated net income (loss) before non-controlling interest in operating partnership		(68,328	)		249,281			32,432			448,369
Adjustments:
Preferred stock dividends		(5,231	)		(5,231	)		(15,694	)		(15,693	)
Depreciation and amortization		3,712			13,566			35,908			33,481
Real estate depreciation and amortization—unconsolidated ventures		247			247			741			742

Funds from Operations	$	(69,600	)	$	257,863		$	53,387		$	466,899

Adjusted Funds from Operations:
Funds from Operations	$	(69,600	)	$	257,863		$	53,387		$	466,899
Straight-line rental income, net		(562	)		(344	)		(1,733	)		(1,817	)
Straight-line rental income and fair value lease revenue, unconsolidated ventures		(22	)		(39	)		(79	)		(125	)
Amortization of equity-based compensation		5,007			5,439			15,471			18,396
Fair value lease revenue		(304	)		(809	)		(466	)		(1,420	)
Unrealized (gains)/losses from mark-to-market adjustments		83,351			(233,064	)		(15,059	)		(409,659	)
Unrealized (gains)/losses from mark-to-market adjustments, unconsolidated ventures		1,652			(3,291	)		10,145			6,356

Adjusted Funds from Operations	$	19,522		$	25,755		$	61,666		$	78,630

Return on Average Common Book Equity

We calculate return on average common book equity ("ROE") on a consolidated basis and for each of our major business lines. We believe that ROE provides a good indication of the performance of the Company and our business lines because we believe it provides the best approximation of cash returns on common equity invested. Management also uses ROE, among other factors, to evaluate profitability and efficiency of equity capital employed, and as a guide in determining where to allocate capital within its business. ROEs may fluctuate from quarter to quarter based upon a variety of factors, including the timing and amount of investment fundings, repayments and asset sales, capital raised and leverage used, and the yield on investments funded.

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

			Three Months Ended September 30, 2009			Annualized September 30, 2009(2)		Year Ended December 31, 2008

Adjusted Funds from Operations (AFFO)		[A]	$	19,522		$	78,088	$	90,553
Plus: Fundraising Fees, Debt Issuance Costs and Other				—					7,823

AFFO, excluding Fundraising Fees, Debt Issuance Costs and Other				19,522					98,376
Plus: General & Administrative Expenses				15,721					74,859
Less: Equity-Based Compensation and straight line rent included in G&A				5,007					24,672
Less: Bad Debt Expense included in G&A				—					—

AFFO, excluding G&A		[B]		30,236			120,944		148,563
Average Common Book Equity & Operating Partnership Non-Controlling Interest(1)		[C]	$	1,322,541				$	887,515
	Return on Average Common Book Equity (including G&A)	[A]/[C]		5.9	%				10.2	%
	Return on Average Common Book Equity (excluding G&A)	[B]/[C]		9.1	%				16.7	%

(1): Average Common Book Equity & Operating Partnership Non-Controlling Interest computed using beginning and ending of period balances. ROE will be impacted by the timing of new investment closings and repayments during the quarter.
(2): Annualized numbers are calculated by taking the current quarter amounts and multiplying by four.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Although we seek to match-fund our assets and mitigate the risk associated with future interest rate volatility, we are primarily subject to interest rate risk prior to match-funding our investments and because we do not hedge our retained equity interest in our floating rate term debt transactions. To the extent a term debt transaction has floating rate assets, our earnings will generally increase with increases in floating interest rates, and decrease with declines in floating interest rates. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.

Our interest rate risk sensitive assets, liabilities and related derivative positions are generally held for non-trading purposes. As of September 30, 2009, a hypothetical 100 basis point increase in interest rates applied to our variable rate assets would increase our annual interest income by approximately $30.9 million offset by an increase in our interest expense of approximately $21.6 million on our variable rate liabilities. Similarly, a hypothetical 100 basis point decrease in interest rates would decrease our annual interest income by the same net amount.

Real Estate Debt

We invest in real estate debt which is generally secured by commercial and multifamily properties, including first lien mortgage loans, junior participations in first lien mortgage loans, second lien mortgage loans, mezzanine loans, and preferred equity interests in borrowers who own such properties. We generally hold these instruments for investment rather than trading purposes. These investments bear interest at either a floating or fixed rate. The interest rates on our floating rate investments

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typically float at a fixed spread over an index such as LIBOR. These instruments typically reprice every 30 days based upon LIBOR in effect at that time. Given the frequent and periodic repricing of our floating rate investments, changes in benchmark interest rates are unlikely to materially affect the value of our floating rate portfolio. Changes in short-term rates will, however, affect earnings from our investments. Increases in LIBOR will increase the interest income received by us on our investments and therefore increase our earnings. Decreases in LIBOR have the opposite effect.

We also invest in fixed rate investments. The value of these investments may be affected by changes in long-term interest rates. To the extent that long-term interest rates increase, the value of long-term fixed rate assets is diminished. Any fixed rate real estate debt investments which we hold would be similarly impacted. We do not generally seek to hedge this type of risk unless the asset is leveraged as we believe the costs of such a hedging transaction over the term of such an investment would generally outweigh the benefits. If fixed rate real estate debt is funded with floating rate liabilities, we typically convert the floating rate to fixed through the use of interest rate swaps, caps or other hedges. Because the interest rates on our fixed rate investments are generally fixed through maturity of the investment, changes in interest rates do not affect the income we earn from our fixed rate investments.

The value of our fixed and floating rate real estate debt investments changes with market credit spreads. This means that when market-demanded risk premiums, or credit spreads, increase, the value of our fixed and floating rate assets decrease, and vice versa. Market credit spreads are currently much wider than existed at the time we originated a majority of our real estate debt investments. These wider market credit spreads imply that our real estate debt investments may be worth less than the amounts at which we carry these investments on our balance sheet, but because we have typically financed these investments with debt priced in a similar credit environment and intend to hold them to maturity we do not believe that intra- and inter-period changes in value caused by changing credit spreads material impacts the economics associated with our real estate debt investments.

In our real estate debt business we are also exposed to credit risk, which is the risk that the borrower under our loan agreements cannot repay its obligations to us in a timely manner. Our loans are generally collateral dependent, meaning the principal source of repayment is from a sale or refinancing of the collateral securing our loan. Default risk increases in weak economic conditions because collateral cash flows may be below expectations when the loan was originated. Defaults also increase when, at loan maturity, the cost of debt and equity capital is higher than when the loan was originated. In the event that a borrower cannot repay our loan, we may exercise our remedies under the loan documents, which may include a foreclosure against the collateral. We describe many of the options available to us in this situation in "Item 1 Business." To the extent the value of our collateral exceeds the amount of our loan (including all debt senior to us) and the expenses we incur in collecting on our loan, we would collect 100% of our loan amount. To the extent that the amount of our loan plus all debt senior to our position exceeds the realizable value of our collateral, then we would incur a loss. We also incur credit risk in our periodically scheduled interest payments which may be interrupted as a result of the operating performance of the underlying collateral.

We seek to manage credit risk through a thorough analysis of a transaction before we make such an investment. Our analysis is based upon a broad range of real estate, financial, economic and borrower-related factors which we believe are critical to evaluating the credit risk inherent in a transaction.

We expect our investments to be denominated in U.S. dollars or, if they are denominated in another currency, to be converted back to U.S. dollars through the use of currency swaps. It may not be possible to eliminate all of the currency risk as the payment characteristics of the currency swap may not exactly match the payment characteristics of the investments.

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Real Estate Securities

In our real estate securities business, we seek to mitigate credit risk through credit analysis, subordination and diversification. The CMBS we invest in are generally junior in right of payment of interest and principal to one or more senior classes, but benefit from the support of one or more subordinate classes of securities or other form of credit support within a securitization transaction. The senior unsecured REIT debt securities we invest in reflect comparable credit risk. Credit risk refers to each individual borrower's ability to make required interest and principal payments on the scheduled due dates. While the expected yield on these securities is sensitive to the performance of the underlying assets, the more subordinated securities and certain other features of a securitization, in the case of mortgage backed securities, and the issuer's underlying equity and subordinated debt, in the case of REIT securities, are designed to bear the first risk of default and loss. The real estate securities portfolios of our investment grade term debt transactions are diversified by asset type, industry, location and issuer. We further seek to minimize credit risk by monitoring the real estate securities portfolios of our investment grade term debt transactions and the underlying credit quality of their holdings.

The real estate securities underlying our investment grade term debt transactions are also subject to credit spread risk. The majority of these securities are fixed rate securities, which are valued based on a market credit spread over the rate payable on fixed rate U.S. Treasuries of like maturity. In other words, their value is dependent on the yield demanded on such securities by the market, based on their credit relative to U.S. Treasuries. An excessive supply of these securities combined with reduced demand will generally cause the market to require a higher yield on these securities, resulting in the use of a higher or "wider" spread over the benchmark rate (usually the applicable U.S. Treasury security yield) to value these securities. Under these conditions, the value of our real estate securities portfolio would tend to decrease. Conversely, if the spread used to value these securities were to decrease or "tighten," the value of our real estate securities would tend to increase. Such changes in the market value of our real estate securities portfolio may affect our net equity or cash flow either directly through their impact on unrealized gains or losses on available-for-sale securities by diminishing our ability to realize gains on such securities, or indirectly through their impact on our ability to borrow and access capital.

Returns on our real estate securities are sensitive to interest rate volatility. If interest rates increase, the funding cost on liabilities that finance the securities portfolio will increase if these liabilities are at a floating rate or have maturities shorter than the assets.

Our general financing strategy has focused on the use of "match-funded" structures. This means that we seek to align the maturities of our debt obligations with the maturities of our investments in order to minimize the risk of being forced to refinance our liabilities prior to the maturities of our assets, as well as to reduce the impact of fluctuating interest rates on earnings. In addition, we generally match interest rates on our assets with like-kind debt, so that fixed rate assets are financed with fixed rate debt and floating rate assets are financed with floating rate debt, directly or through the use of interest rate swaps, caps or other financial instruments or through a combination of these strategies. Our investment grade term debt transactions utilize interest rate swaps to minimize the mismatch between their fixed rate assets and floating rate liabilities.

Our financing strategy is dependent on our ability to place the match-funded debt we use to finance our real estate securities at spreads that provide a positive funding spread. Match funded debt is currently very difficult to obtain, and market-demanded yields on all real estate assets have increased. Our current strategy is to use our existing term debt structures to fund new investment activity when repayment or sale proceeds are available within the financing, or to acquire securities which generate attractive returns without leverage.

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Interest rate changes may also impact our net book value as our investments in debt securities are marked-to-market each quarter with changes in fair value reflected in unrealized gains/losses or other comprehensive income (a separate component of owners' equity). Generally, as interest rates increase, the value of fixed rate securities within the term debt transaction, such as CMBS, decreases and as interest rates decrease, the value of these securities will increase. Conversely, we mark our term debt liabilities to market which causes a partial offset to the income and balance sheet impact of marking the securities assets to market.

Net Lease Properties

Our ability to manage the interest rate risk and credit risk associated with the assets we acquire is integral to the success of our net lease properties investment strategy. Although we may, in special situations, finance our purchase of net lease assets with floating rate debt, our general policy is to mitigate our exposure to rising interest rates by financing our net lease property purchases with fixed rate mortgages. We seek to match the term of fixed rate mortgages to our expected holding period for the underlying asset. Factors we consider to assess the expected holding period include, among others, the primary term of the lease as well as any extension options that may exist.

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

We are subject to the credit risk of the corporate lessee of our net lease properties. We undertake a rigorous credit evaluation of each tenant prior to acquiring net lease asset properties. This analysis includes an extensive due diligence investigation of the tenant's business as well as an assessment of the strategic importance of the underlying real estate to the tenant's core business operations. Where appropriate, we may seek to augment the tenant's commitment to the facility by structuring various credit enhancement mechanisms into the underlying leases. These mechanisms could include security deposit requirements or affiliate guarantees from entities we deem to be creditworthy.

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

Derivatives and Hedging Activities

We use derivatives primarily to manage interest rate risk exposure. These derivatives are typically in the form of interest rate swap agreements and the primary objective is to minimize interest rate risks

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associated with the our investment and financing activities. The counterparties of these arrangements are major financial institutions with which we may also have other financial relationships. We are exposed to credit risk in the event of non-performance by these counterparties and we monitor their financial condition; however, we currently do not anticipate that any of the counterparties will fail to meet their obligations because of their high credit ratings and financial support from the U.S. Government. At September 30, 2009, our counterparties hold approximately $26.5 million of cash margin as collateral against our swap contracts.

In January 2008, we elected the fair value option for our bonds payable and our liability to subsidiary trusts issuing preferred securities. As a result, the changes in fair value of these financial instruments are now recorded in earnings and the interest rate swap agreements associated with these debt instruments no longer qualify for hedge accounting given that the underlying debt is remeasured with changes in the fair value recorded in earnings. The unrealized gains or losses accumulated in other comprehensive income, related to these interest rate swaps, will be reclassified into earning over the shorter of either the life of the swap or the associated debt with current mark-to-market unrealized gains or losses recorded in earnings. For the three months ended September 30, 2009 and 2008, we recorded, in earnings, a mark-to-market unrealized loss of $22.4 million and $1.8 million, respectively, for the non-qualifying interest rate swaps. For each of the three months ended September 30, 2009 and 2008, we recorded a $1.4 million reclassification from accumulated other comprehensive income for the non-qualifying interest rate swaps. For the nine months ended September 30, 2009 and 2008, we recorded, in earnings, a mark-to-market unrealized loss of $3.6 million and $8.3 million, respectively, for the non-qualifying interest rate swaps. For the nine months ended September 30, 2009 and 2008, we recorded a $4.2 million and $4.1 million reclassification from accumulated other comprehensive income for the non-qualifying interest rate swaps, respectively.

The following table summarizes the notional amounts and fair (carrying) values of our derivative financial instruments as of September 30, 2009 (in thousands):

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

Interest rate swaps and basis swaps
As of September 30, 2009	34	$	1,487,857	$	(77,099	)	0.35% - 5.63%	October 2009 - August 2018

Item 4. Controls and Procedures

As of the end of the period covered by this report, our management conducted an evaluation (as required under Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act), under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures to disclose material information otherwise required to be set forth in our periodic reports.

Internal Control over Financial Reporting

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

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PART II. OTHER INFORMATION

Item 6. Exhibits

(a): Exhibits

Exhibit Number			Description of Exhibit

	3.1		Articles of Amendment and Restatement of NorthStar Realty Finance Corp., as filed with the State Department of Assessments and Taxation of Maryland on October 20, 2004 (incorporated by reference to Exhibit 3.1 to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-114675))
	3.2		Bylaws of NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 3.2 to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-114675))
	3.3		Amendment No. 1 to the Bylaws of NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 3.3 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed on April 27, 2005)
	3.4		Articles Supplementary Classifying NorthStar Realty Finance Corp.'s 8.75% Series A Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.2 to NorthStar Realty Finance Corp.'s Registration Statement on Form 8-A, dated September 14, 2006)
	3.5		Articles Supplementary Classifying NorthStar Realty Finance Corp.'s 8.25% Series B Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.2 to NorthStar Realty Finance Corp.'s Registration Statement on Form 8-A, dated February 7, 2007)
	3.6		Articles Supplementary Classifying and Designating Additional Shares of NorthStar Realty Finance Corp.'s 8.25% Series B Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.6 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007)
	10.1		Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of October 19, 2004, by and among NorthStar Realty Finance Corp., as sole general partner and initial limited partner and the other limited partners a party thereto from time to time (incorporated by reference to Exhibit 10.1 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)
	10.2		NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan (incorporated by reference to Exhibit 10.9 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)
	10.3		LTIP Unit Vesting Agreement under the NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan among NorthStar Realty Finance Corp., NorthStar Realty Finance Limited Partnership and NRF Employee, LLC (incorporated by reference to Exhibit 10.10 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)
	10.4		Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.7(a) to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-114675))
	10.5		NorthStar Realty Finance Corp. 2004 Long-Term Incentive Bonus Plan (incorporated by reference to Exhibit 10.13 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)

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Exhibit Number			Description of Exhibit

	10.6		Form of Notification under NorthStar Realty Finance Corp. 2004 Long-Term Incentive Bonus Plan (incorporated by reference to Exhibit 10.14 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)
	10.7		Form of Indemnification Agreement for directors and officers of NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 10.15 to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-114675))
	10.8		Amendment No. 1 to Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of March 14, 2006, by and among NorthStar Realty Finance Corp., as sole general partner and initial limited partner and the other limited partners a party thereto from time to time (incorporated by reference to Exhibit 10.34 to NorthStar Realty Finance Corp.'s Annual Report on Form 10-K for the year ended December 31, 2005)
	10.9		Second Amendment to the Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of September 14, 2006 (incorporated by reference to Exhibit 3.2 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed September 14, 2006)
	10.10		Third Amendment to the Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of February 7, 2007 (incorporated by reference to Exhibit 3.2 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed February 9, 2007)
	10.11		Amendment No. 1 to NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan (incorporated by reference to Exhibit 99.2 to the NorthStar Realty Finance Corp. Post-Effective Amendment No. 2 to Form S-8 filed on April 13, 2007)
	10.12		Amendment No. 2 to NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan (incorporated by reference to Exhibit 99.3 to the NorthStar Realty Finance Corp. Post-Effective Amendment No. 3 to Form S-8 filed on June 6, 2007)
	10.13		Note Purchase Agreement, dated as of March 29, 2007, between NRF–Reindeer Ltd., as seller, and Wachovia Bank, N.A., as purchaser
	10.14		Fourth Amendment to the Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of May 24, 2007 (incorporated by reference to Exhibit 3.3 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed May 29, 2007)
	10.15		Registration Rights Agreement relating to the 7.25% Exchangeable Senior Notes due 2027 of NorthStar Realty Finance Limited Partnership, dated June 18, 2007 (incorporated by reference to Exhibit 4.2 to the NorthStar Realty Finance Corp. Registration Statement on Form S-3 (File No. 333-146679))
	10.16		Indenture dated as of June 18, 2007, between NorthStar Realty Finance Limited Partnership, as Issuer, NorthStar Realty Finance Corp., as Guarantor, and Wilmington Trust Company, as Trustee (incorporated by reference to Exhibit 4.1 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed on June 22, 2007)
	10.17		Master Repurchase Agreement, dated as of August 8, 2007, by and among NRFC JP Holdings, LLC and JPMorgan Chase Bank, N.A. (incorporated by reference to Exhibit 10.56 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007)

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Exhibit Number			Description of Exhibit

	10.18		Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and David T. Hamamoto (incorporated by reference to Exhibit 99.1 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed October 5, 2007)
	10.19		Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and Andrew C. Richardson (incorporated by reference to Exhibit 99.2 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed October 5, 2007)
	10.20		Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and Daniel R. Gilbert (incorporated by reference to Exhibit 99.3 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed October 5, 2007)
	10.21		Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and Richard J. McCready (incorporated by reference to Exhibit 99.4 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed October 5, 2007)
	10.22		Credit Agreement, dated as of November 6, 2007, by and among NRFC WA Holdings, LLC, NRFC WA Holdings II, LLC, NRFC WA Holdings VII, LLC, NRFC WA Holdings X, LLC, NRFC WA Holdings XII, LLC, as borrowers, NorthStar Realty Finance Corp. and NorthStar Realty Finance L.P., as guarantors, and Wachovia Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.53 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007)
	10.23		Limited Guaranty Agreement, dated as of November 6, 2007, by and among NorthStar Realty Finance Corp., NorthStar Realty Finance Limited Partnership and Wachovia Bank, National Association, as administrative agent (incorporated by reference to Exhibit 10.54 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007)
	10.24		First Amendment to Note Purchase Agreement, dated as of November 6, 2007, by and among NRF-Reindeer Ltd., as seller, NorthStar Realty Finance Corp., as guarantor, and Wachovia Bank, N.A., as purchaser, and consented and agreed to by NRFC Luxembourg Holdings I S.Á R.L., as pledgor
	10.25		Registration Rights Agreement relating to the 11.50% Exchangeable Senior Notes due 2013 of NRFC NNN Holdings, LLC, dated May 28, 2008 (incorporated by reference to Exhibit 4.2 to the NorthStar Realty Finance Corp. Registration Statement on Form S-3 (File No. 333-152545))
	10.26		Indenture dated as of May 28, 2008, among NRFC NNN Holdings, LLC, as Issuer, NorthStar Realty Finance Corp., NorthStar Realty Finance Limited Partnership, and NRFC Sub-REIT Corp., as Guarantors, and Wilmington Trust Company, as Trustee (incorporated by reference to Exhibit 4.1 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed on May 28, 2008)
	10.27		Fifth Amendment to the Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of May 29, 2008 (incorporated by reference to Exhibit 10.37 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008)
	10.28		Amendment No. 1 to Master Repurchase Agreement, dated as of October 7, 2008, by and among NRFC JP Holdings, LLC, and JP Morgan Chase Bank, N.A. (incorporated by reference to Exhibit 10.37 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008)

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Exhibit Number			Description of Exhibit

	10.29		Amended and Restated Guarantee Agreement, dated as of October 7, 2008, made by NorthStar Realty Finance Corp., in favor of JP Morgan Chase Bank, N.A. (incorporated by reference to Exhibit 10.38 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008)
	10.30		Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and Albert Tylis (incorporated by reference to Exhibit 99.1 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed July 27, 2009)
	10.31		NorthStar Realty Finance Corp. Executive Incentive Bonus Plan
	10.32		Form of Award Agreement (incorporated by reference to Exhibit 99.2 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed on September 11, 2009)
	10.33		First Amended and Restated Credit Agreement, dated as of October 28, 2009, by and among NRFC WA Holdings, LLC, NRFC WA Holdings II, LLC, NRFC WA Holdings VII, LLC, NRFC WA Holdings X, LLC and NRFC WA Holdings XII, LLC, as borrowers, NorthStar Realty Finance Corp., and NorthStar Realty Finance L.P., as guarantors, the lenders party thereto, and Wachovia Bank, National Association, as administrative agent
	10.34		First Amended and Restated Guaranty Agreement, dated as of October 28, 2009, by NorthStar Realty Finance Corp., NorthStar Realty Finance L.P., and Wachovia Bank, National Association, as administrative agent
	10.35		Second Amendment to Note Purchase Agreement and Repurchase Documents, dated as of October 28, 2009, by and among NRF-Reindeer Ltd., as seller, NorthStar Realty Finance Corp., as guarantor and Wachovia Bank, N.A., as purchaser, and consented and agreed to by NRFC Luxembourg Holdings I S.Á R.L. and NRFC Sub-REIT Corp., as pledgor
	10.36		Common Stock Purchase Warrant, Certificate No. W-1, dated October 28, 2009, issued to Wachovia Bank, National Association
	10.37		Common Stock Purchase Warrant, Certificate No. W-2, dated October 28, 2009, issued to Wachovia Bank, National Association
	10.38		Common Stock Purchase Warrant, Certificate No. W-3, dated October 28, 2009, issued to Wachovia Bank, National Association
	31.1		Certification by the Chief Executive Officer pursuant to 17 CFR 240.13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	31.2		Certification by the Chief Financial Officer pursuant to 17 CFR 240.13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
	32.1		Certification by the Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2		Certification by the Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	NORTHSTAR REALTY FINANCE CORP.
Date: November 5, 2009	By:	/s/ DAVID T. HAMAMOTO David T. Hamamoto Chief Executive Officer
	By:	/s/ ANDREW C. RICHARDSON Andrew C. Richardson Chief Financial Officer

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