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Table of Contents

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



FORM 10-K/A

Amendment No. 2

(Mark One)    

ý

 

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

For the fiscal year ended December 31, 2010

or

o

 

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

For the transition period from            to          

Commission file number: 001-32330

NorthStar Realty Finance Corp.
(Exact Name of Registrant as Specified in its Charter)

Maryland
(State or other Jurisdiction of
Incorporation or Organization)
  11-3707493
(I.R.S. Employer
Identification No.)

399 Park Avenue, 18th Floor
New York, New York

(Address of Principal Executive Offices)

 

10022
(Zip Code)

(212) 547-2600
(Registrant's telephone number, including area code)

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

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

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

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

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

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

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

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

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

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

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

         The aggregate market value of the registrant's voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2010, was $205,907,287. As of March 17, 2011, the registrant had issued and outstanding 78,586,494 shares of common stock, par value $0.01 per share.

DOCUMENTS INCORPORATED BY REFERENCE

         Portions of the definitive proxy statement for the registrant's 2011 Annual Meeting of Stockholders (the "2011 Proxy Statement"), to be filed within 120 days after the end of the registrant's fiscal year ending December 31, 2010, are incorporated by reference into this Annual Report on Form 10-K/A in response to Part III, Items 10, 11, 12, 13 and 14.



Explanatory Note

        In Amendment No. 1 to the Annual Report on Form 10-K/A for the fiscal year ended December 31, 2010 (the "Form 10-K/A") of NorthStar Realty Finance Corp. (the "Company"), the attestation report on internal control over financial reporting by Grant Thornton LLP, the Company's independent registered public accounting firm, was inadvertently included in duplicate, resulting in the omission of their attestation report on the consolidated financial statements. Accordingly, the Company is filing this Amendment No. 2 to its Form 10-K/A solely to include Grant Thornton LLP's attestation report on the consolidated financial statements, dated February 25, 2011, on the Company's consolidated financial statements.

        All of the financial statements included herein are unchanged from those included in the Form 10-K/A.

        In connection with filing this Amendment No. 2 to Form 10-K/A and pursuant to Rules 12b-15, 13a-14(a) and 13a-14(b) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company is also filing a currently dated consent of Grant Thornton LLP and currently dated certifications of the Company's principal executive officer and principal financial officer pursuant to Rules 13a-14(a) and 13a-14(b) under the Exchange Act. Except as described above, and updating certain Company information on the cover page hereto, no other amendments are being made to the Form 10-K/A. This Amendment No.2 to the Company's Form 10-K/A does not reflect events occurring after the filing of the Form 10-K/A or modify or update the disclosure contained therein in any way other than as required to reflect the amendments discussed above.


Table of Contents

INDEX

2


Table of Contents

Item 8.    Financial Statements and Supplementary Data

        The consolidated financial statements of NorthStar Realty Finance Corp. and the notes related to the foregoing financial statements, together with the independent registered public accounting firm's reports thereon are included in this Item 8.


INDEX TO FINANCIAL STATEMENTS
NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

 
  Page

Reports of Independent Registered Public Accounting Firm

  5

Consolidated Balance Sheets as of December 31, 2010 and 2009

  6

Consolidated Statements of Operations for the years ended December 31, 2010, 2009 and 2008

  7

Consolidated Statements of Stockholders' Equity for the years ended December 31, 2010, 2009 and 2008

  8

Consolidated Statements of Comprehensive Income for the years ended December 31, 2010, 2009 and 2008

  9

Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008

  10

Notes to Consolidated Financial Statements

  12

Schedule II—Valuation and Qualifying Accounts and Reserves

  75

Schedule III—Real Estate and Accumulated Depreciation as of December 31, 2010

  76

Schedule IV—Loans and other Lending Investments as of December 31, 2010

  83

3


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
NorthStar Realty Finance Corp.

        We have audited the accompanying consolidated balance sheets of NorthStar Realty Finance Corp. and subsidiaries (the "Company") as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders' equity, comprehensive income and cash flows for each of the three years in the period ended December 31, 2010. Our audits of the basic financial statements included the financial statement schedules, (Schedules II, III and IV) listed in the Index at Item 15 of the financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.

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

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NorthStar Realty Finance Corp. and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

        As discussed in Note 3 to the consolidated financial statements, the Company adopted new accounting guidance relating to the consolidation of certain variable interest entities.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of NorthStar Realty Finance Corp. and subsidiaries' internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2011 expressed an unqualified opinion thereon.

/s/ GRANT THORNTON LLP

New York, New York
February 25, 2011

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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

NorthStar Realty Finance Corp.

        We have audited NorthStar Realty Finance Corp. and subsidiaries' (the "Company") internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

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

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

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

        In our opinion, NorthStar Realty Finance Corp. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by COSO.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of NorthStar Realty Finance Corp. and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders' equity, comprehensive income and cash flows for each of the three years in the period ended December 31, 2010, and our report dated February 25, 2011 expressed an unqualified opinion thereon.

/s/ GRANT THORNTON LLP

New York, New York
February 25, 2011

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Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in Thousands, Except Share Data)

 
  December 31,
2010
  December 31,
2009
 

ASSETS:

             

Cash and cash equivalents

  $ 125,439   $ 138,928  

Restricted cash (includes $263,314 and $74,453 from consolidated VIEs, respectively)

    309,384     129,180  

Operating real estate, net

    938,062     978,902  

Available for sale securities, at fair value (includes $1,668,217 and $283,184 from consolidated VIEs, respectively)

    1,691,054     336,220  

Real estate debt investments, net (includes $1,659,882 and $1,356,038 from consolidated VIEs, respectively)

    1,826,239     1,936,482  

Real estate debt investments, held-for-sale (includes $18,661 and $—from consolidated VIEs, respectively)

    18,662     611  

Investments in and advances to unconsolidated ventures (includes $66,959 and $—from consolidated VIEs, respectively)

    94,412     38,299  

Receivables, net of allowance of $2,642 in 2010 and $1,349 in 2009 (includes net $26,337 and $7,421 from consolidated VIEs, respectively)

    32,329     17,912  

Unbilled rents receivable

    10,404     10,206  

Derivative instruments, at fair value (includes $42 and $—from consolidated VIEs, respectively)

    59      

Deferred costs and intangible assets, net

    52,973     57,551  

Assets of properties held for sale (includes $13,141 and $—from consolidated VIEs, respectively)

    13,141      

Other assets (includes $14,277 and $2,888 from consolidated VIEs, respectively)

    39,833     25,273  
           

Total assets

  $ 5,151,991   $ 3,669,564  
           

LIABILITIES:

             

Mortgage notes and loans payable

    803,114     795,915  

Exchangeable senior notes

    126,889     125,992  

Bonds payable, at fair value (includes $2,258,807 and $584,615 from consolidated VIEs, respectively)

    2,258,805     584,615  

Secured term loans

    36,881     368,865  

Liability to subsidiary trusts issuing preferred securities, at fair value

    191,250     167,035  

Accounts payable and accrued expenses (includes $15,668 and $1,631 from consolidated VIEs, respectively)

    49,819     30,071  

Escrow deposits payable (includes $60,163 and $28,608 from consolidated VIEs, respectively)

    60,711     39,461  

Derivative liability, at fair value (includes $190,993 and $46,187 from consolidated VIEs, respectively)

    220,689     67,044  

Liabilities of properties held for sale (includes $131 and $—from consolidated VIEs, respectively)

    131      

Other liabilities (includes $8,654 and $358 from consolidated VIEs, respectively)

    31,189     31,926  
           

Total liabilities

    3,779,478     2,210,924  

Contingently redeemable non-controlling interest

   
94,822
   
94,822
 

EQUITY:

             

NorthStar Realty Finance Corp. Stockholders' Equity:

             

8.75% Series A preferred stock, $0.01 par value, $25 liquidation preference per share, 2,400,000 shares issued and outstanding at December 31, 2010 and December 31, 2009, respectively

    57,867     57,867  

8.25% Series B preferred stock, $0.01 par value, $25 liquidation preference per share, 7,600,000 shares issued and outstanding at December 31, 2010 and December 31, 2009, respectively

    183,505     183,505  

Common stock, $0.01 par value, 500,000,000 shares authorized, 78,104,753 and 74,882,600 shares issued and outstanding at December 31, 2010 and December 31, 2009, respectively

    781     749  

Additional paid-in capital

    723,102     662,805  

Retained earnings

    293,382     460,915  

Accumulated other comprehensive loss

    (36,119 )   (92,670 )
           
   

Total NorthStar Realty Finance Corp. Stockholders' Equity

    1,222,518     1,273,171  

Non-controlling interests

    55,173     90,647  
           
 

Total equity

    1,277,691     1,363,818  
           

Total liabilities and stockholders' equity

  $ 5,151,991   $ 3,669,564  
           

See accompanying notes to consolidated financial statements.

6


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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

 
  Year Ended
December 31,
2010
  Year Ended
December 31,
2009
  Year Ended
December 31,
2008
 

Revenues and other income:

                   

Interest income

  $ 318,792   $ 142,213   $ 212,432  

Interest income—related parties

    1,108     17,692     14,995  

Rental and escalation income

    124,828     98,143     107,559  

Advisory and management fee income—related parties

    3,201     7,295     12,496  

Commission income

    2,476          

Other revenue

    3,268     736     16,494  
               
     

Total revenues

    453,673     266,079     363,976  

Expenses:

                   
   

Interest expense

    131,335     121,289     190,538  
   

Real estate properties—operating expenses

    37,691     14,653     8,160  
   

Asset management fees—related parties

    466     3,356     4,721  
   

Fundraising fees and other joint venture costs

                2,879  
   

Commission expense

    1,867          
   

Impairment on operating real estate

    5,249         5,580  
   

Provision for loan losses

    168,446     83,745     11,200  

General and administrative:

                   
   

Salaries and equity-based compensation(1)

    54,828     47,213     53,269  
   

Auditing and professional fees

    13,803     9,636     7,075  
   

Other general and administrative

    20,778     13,685     14,486  
               
     

Total general and administrative

    89,409     70,534     74,830  

Depreciation and amortization

    34,097     41,726     41,043  
               
     

Total expenses

    468,560     335,303     338,951  

(Loss)/income from operations

    (14,887 )   (69,224 )   25,025  

Equity in earnings/(loss) of unconsolidated ventures

    2,253     (1,809 )   (11,918 )

Unrealized (loss)/gain on investments and other

    (538,572 )   (209,976 )   649,113  

Realized gain on investments and other

    145,722     128,461     37,699  

Gain from acquisitions

    15,363          
               

(Loss)/income from continuing operations

    (390,121 )   (152,548 )   699,919  

(Loss)/income from discontinued operations

    (1,967 )   2,173     2,410  

Gain on sale from discontinued operations

    2,528     13,799      
               

Consolidated net (loss)/income

    (389,560 )   (136,576 )   702,329  
 

Less: net (loss)/income attributable to the non-controlling interests

    15,019     6,293     (72,172 )

Preferred stock dividends

    (20,925 )   (20,925 )   (20,925 )
               

Net (loss)/income attributable to NorthStar Realty Finance Corp. common stockholders

  $ (395,466 ) $ (151,208 ) $ 609,232  
               

Net (loss)/income per share from continuing operations (basic/diluted)

    (5.17 )   (2.40 )   9.61  

(Loss)/income per share from discontinued operations (basic/diluted)

    (0.03 )   0.04     0.04  

Gain per share on sale of discontinued operations (basic/diluted)

    0.03     0.20      
               

Net (loss)/income per common share attributable to NorthStar Realty Finance Corp. common stockholders (basic/diluted)

  $ (5.17 ) $ (2.16 ) $ 9.65  
               

Weighted average number of shares of common stock:

                   
   

Basic

    76,552,702     69,869,717     63,135,608  
   

Diluted

    82,842,990     77,193,083     70,136,783  

(1)
The years ended December 31, 2010, 2009 and 2008 include $16,991, $20,474 and $24,680 respectively, of equity-based compensation expense. The year ended December 31,2010 includes $3,583 of cash compensation expense and $1,014 of equity based compensation expense relating to a separation and consulting agreement with a former executive. Cash incentive compensation expense incurred but payable in future periods totaled $4,616, $4,635 and $2,169, respectively, for the years ended December 31, 2010, 2009 and 2008.

See accompanying notes to consolidated financial statements.

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Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Amounts in Thousands)

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

Balance at December 31, 2008

  $ 100     62,907   $ 634   $ 861,300     (1,384 ) $ (94,343 ) $ 648,860   $ 1,415,167   $ 103,938   $ 1,613,760  

Equity component of exchangeable senior notes

                (4,321 )               (4,321 )       (4,321 )

Equity component of warrants

                117                 117         117  

Dividend reinvestment and stock purchase plan

        80     1     276                 277         277  

Proceeds from equity distribution agreement

        7,327     69     23,995     1,384             25,448         25,448  

Stock awards/LTIP awards

          94     1     300                 301     20,172     20,473  

Restricted share grant

        15         1                 1         1  

Comprehensive loss

                        1,673         1,673     199     1,872  

Conversion of OP/LTIP units

        744     7     12,013                 12,020     (12,020 )    

Stock dividends

        3,716     37     10,610             (9,607 )   1,040     (1,040 )    

Cash dividends on common stock

                            (27,133 )   (27,133 )   (15,957 )   (43,090 )

Cash dividends on preferred stock

                            (20,925 )   (20,925 )       (20,925 )

Redemption of membership interest

                (214 )               (214 )       (214 )

Equity in private fund

                                                    1,815     1,815  

Net income

                            (130,280 )   (130,280 )   (6,293 )   (136,573 )
                                           

Balance at December 31, 2009

  $ 100     74,883   $ 749   $ 904,077   $   $ (92,670 ) $ 460,915   $ 1,273,171   $ 90,647   $ 1,363,818  
                                           

VIE consolidation begining balance adjustments

                        41,332     110,790     152,122     30,535     182,657  

Acquisition of N-Star IX

                            147,626     147,626         147,626  

Amortization of deferred compensation

                17                 17     16,673     16,690  

Non-controlling interest contribution to joint venture

                                    11,336     11,336  

Dividend reinvestment and stock purchase plan

        92     1     282                 283         283  

Stock awards/LTIP awards

        99     1     299                 300         300  

Equity component of warrants

                61                 61         61  

Comprehensive loss

                        15,219         15,219     1,290     16,509  

Conversion of OP/LTIP units

        3,031     30     61,445                 61,475     (61,475 )    

Cash dividends on common stock

                            (30,483 )   (30,483 )   (8,299 )   (38,782 )

Cash dividends on preferred stock

                            (20,925 )   (20,925 )   (10,500 )   (31,425 )

Redemption of membership interest

                (1,807 )               (1,807 )   1,800     (7 )

Equity in private fund

                                                    (1,815 )   (1,815 )

Net income

                            (374,541 )   (374,541 )   (15,019 )   (389,560 )
                                           

Balance at December 31, 2010

  $ 100     78,105   $ 781   $ 964,374   $   $ (36,119 ) $ 293,382   $ 1,222,518   $ 55,173   $ 1,277,691  
                                           

See accompanying notes to consolidated financial statements.

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Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in Thousands)

 
  Year Ended
December 31,
2010
  Year Ended
December 31,
2009
  Year Ended
December 31,
2008
 

Consolidated net (loss)/income

  $ (389,560 ) $ (136,573 ) $ 702,329  

Unrealized gain/(loss) on available for sale securities

    13,353     (9,949 )   (20,694 )

Change in fair value of derivatives

    (3,448 )   6,232     (12,777 )

Reclassification adjustment for gains included in net income

    6,605     5,589     26,557  
               

Comprehensive (loss)/income

    (373,050 )   (134,701 )   695,415  
 

Less: Comprehensive (loss)/income attributable to non-controlling interests

    (13,729 )   (6,094 )   (71,275 )
               

Comprehensive (loss)/income attributable to NorthStar Realty Finance Corp. 

  $ (359,321 ) $ (128,607 ) $ 624,140  
               

See accompanying notes to consolidated financial statements.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands)

 
  Year Ended
December 31, 2010
  Year Ended
December 31, 2009
  Year Ended
December 31, 2008
 

Cash flows from operating activities:

                   
 

Consolidated net income (loss)

  $ (389,560 ) $ (136,573 )   702,329  

Adjustments to reconcile net income to net cash provided by operating activities:

                   
 

Operating real estate Impairment

    6,429         5,580  
 

Equity in loss/(earnings) of unconsolidated ventures

    (2,253 )   9,450     11,918  
 

Depreciation and amortization

    34,149     43,891     43,232  
 

Amortization of origination fees/costs

    (40,844 )   (8,730 )   (9,919 )
 

Amortization of deferred financing costs

    6,096     5,498     7,137  
 

Equity based compensation

    16,991     20,474     24,680  
 

Unrealized loss (gain) on investments and other

    438,585     188,887     (664,119 )
 

Realized gain on sale of investments and other

    (148,459 )   (142,290 )   (39,804 )
 

Gain from acquisition

    (15,363 )        
 

Amortization of bond discount/premiums on securities

    (42,085 )   (13,170 )   (3,218 )
 

Distributions from equity investments

    9,097     419     2,657  
 

Amortization of capitalized above/below market leases

    (905 )   (801 )   (1,758 )
 

Unbilled rents receivable

    (1,479 )   (2,225 )   (2,296 )
 

Interest accretion

    (1,316 )   (3,632 )   (8,737 )
 

Provision for loan losses

    168,446     83,745     11,200  
 

Allowance for uncollectable accounts

    1,451     1,554      

Changes in assets and liabilities:

                   
 

Restricted cash

    (22,949 )   6,321     21,686  
 

Receivables

    851     3,942     5,320  
 

Deferred costs and intangible assets

            260  
 

Other assets

    2,102     2,391     4,202  
 

Accounts payable and accrued expenses

    (909 )   2,546     (6,868 )
 

Cash received from purchase of equity investment

    2,307          
 

Escrow deposit payable

    21,250     (6,892 )   (19,092 )
 

Deferred management fee income

            3,848  
 

Real estate debt investment origination fees

    2,639     939     3,181  
 

Other liabilities

    (8,713 )   (1,226 )   (3,807 )
               

Net cash provided by operating activities

  $ 35,558   $ 54,518   $ 87,612  

Cash flows from investing activities:

                   
 

Acquisition of operating real estate, net

            (4,261 )
 

Improvement of operating real estate

    (1,498 )   (3,597 )   (20,289 )
 

Acquisition of available for sale securities

    (301,259 )   (257,801 )   (59,186 )
 

Proceeds from disposition of available for sale securities

    302,379     210,399     6,115  
 

Available for sale securities repayments

    68,137     2,706     3,043  
 

Originations/acquisitions of real estate debt investments

    (125,848 )   (223,382 )   (329,266 )
 

Real estate debt investment repayments

    313,199     111,452     290,449  
 

Proceeds from the sale of real estate debt investments

    143,665     140,753     30,400  
 

Net proceeds from disposition of operating real estate

    3,078     91,546      
 

Real estate debt investment acquisition costs

        (97 )   (275 )
 

Intangible asset related to acquisition

            2,875  
 

Corporate debt investment acquisitions

            (16,362 )
 

Corporate debt investment repayments

            24,985  
 

Proceeds from disposition of corporate debt investment

            102,575  
 

Other loans receivable

    (221 )   (1,170 )   (9,826 )
 

Other loans receivable repayment

        3,084     14,000  

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Amounts in Thousands)

 
  Year Ended
December 31, 2010
  Year Ended
December 31, 2009
  Year Ended
December 31, 2008
 
 

Restricted cash used in investment activities

    (284,300 )   29,064     (109,513 )
 

Purchase of equity interest

    (2,195 )        
 

Deferred costs and intangible assets

    (7,495 )   (157 )    
 

Other receivables

    (1,082 )   (2,240 )    
 

Acquisition deposits

        (300 )   (741 )
 

Investment in and advances to unconsolidated ventures

    (7,332 )   (847 )   (44,143 )
 

Distributions from unconsolidated ventures

    19,797     23,906     8,712  
               

Net cash provided by (used in) investing activities

    119,025     123,319     (110,708 )

Cash flows from financing activities:

                   
 

Collateral held by broker

            12,746  
 

Securities sold, not yet purchased

            (12,778 )
 

Purchase of interest rate cap

    (300 )        
 

Settlement of derivative

    (283 )        
 

Collateral held by swap counter party

    9,189     2,384     (20,837 )
 

Mortgage notes and loan borrowings

    78,200         3,677  
 

Mortgage notes principal repayments

    (66,267 )   (62,638 )   (5,422 )
 

Borrowing under credit facilities

        1,912     39,816  
 

Credit facilities repayments

        (46,794 )   (118,403 )
 

Repurchase obligation borrowings

        528     2,200  
 

Repurchase obligation repayments

        (703 )   (3,887 )
 

Proceeds from bonds

    174,318     91,000     137,011  
 

Bond repayments

    (271,316 )   (20,693 )   (95,300 )
 

Bond repurchases

    (17,653 )   (55,567 )   (49,859 )
 

Borrowing under secured term loan

    24,739     39,570     70,864  
 

Secured term loan repayment

    (248,744 )   (76,750 )   (80,190 )
 

Payment of deferred financing costs

    (2,297 )   (4,239 )   (5,188 )
 

Capital contributions by non-controlling interest

    4,686     1,815     94,822  
 

Restricted cash from financing activities

    212,975     (3,861 )   86,832  
 

Proceeds from exchangeable senior notes

            80,000  
 

Proceeds from common stock offerings

        26,253     2,268  
 

Proceeds from dividend reinvestment and stock purchase plan

    346     63      
 

Purchase of treasury stock

            (1,384 )
 

Dividends (common and preferred) and distributions

    (51,408 )   (48,058 )   (122,059 )
 

Deferred offering costs

    (449 )   (408 )    
 

Offering costs

    (70 )   (804 )   (252 )
 

Distributions to non-controlling interest

    (13,738 )   (15,958 )   (11,371 )
               

Net cash (used in)/provided financing activities

    (168,072 )   (172,948 )   3,306  

Net (decrease) increase in cash & cash equivalents

    (13,489 )   4,889     (19,790 )

Cash and cash equivalents—beginning of period

    138,928     134,039     153,829  
               

Cash and cash equivalents—end of period

  $ 125,439   $ 138,928   $ 134,039  
               

Supplemental disclosure of cash flow information:

                   

Cash paid for interest

  $ 232,324   $ 104,270   $ 216,115  
               

See accompanying notes to consolidated financial statements.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Amounts in Thousands, Except per Share Data)

1. Formation and Organization

        NorthStar Realty Finance Corp., a Maryland corporation (the "Company"), is a self-administered and self-managed real estate investment trust ("REIT"), which was formed in October 2003 in order to continue and expand the real estate debt, real estate securities and net lease businesses conducted by its predecessor. 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").

Consolidating Subsidiaries

    NRF Healthcare, LLC

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

        In December 2009, the Company completed a membership interest redemption with NRF Healthcare, LLC, NRFC Healthcare Holding Company, LLC, NorthStar Healthcare Investors, Inc., Chain Bridge, Wakefield Capital Management, Midwest Care Holdings LLC, or Midwest Holdings, and certain individuals, pursuant to which NRF Healthcare, LLC redeemed the 5.4% membership interest of Chain Bridge and its affiliates in NRF Healthcare, LLC for $2.0 million and its membership interest in certain assets. As a result of the redemption, NorthStar holds 100% of the common equity membership interests in NRF Healthcare, LLC.

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

2. Summary of Significant Accounting Policies

Basis of Accounting

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

    Principles of Consolidation

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

    Variable Interest Entities

        The Company identifies entities for which control is achieved through means other than through voting rights (a "variable interest entity" or "VIE"), and determines when and which business

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

2. Summary of Significant Accounting Policies (Continued)

enterprise, if any, should consolidate the VIE. In addition, the Company discloses information pertaining to such entities wherein the Company is the primary beneficiary or other entities wherein the Company has a significant variable interest.

    Estimates

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

    Operating Real Estate

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

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

        The estimated useful lives are as follows:

Category
  Term

Building (fee interest)

  40 years

Building improvements

  Lesser of the remaining life of building or useful life

Building (leasehold interest)

  Lesser of 40 years or the remaining term of the lease

Property under capital lease

  Lesser of 40 years or the remaining term of the lease

Tenant improvements

  Lesser of the useful life or the remaining term of the lease

Furniture and fixtures

  Four to ten years

        A property to be disposed of is reported at the lower of its carrying value or its estimated fair value less the cost to sell. Once an asset is determined to be held for sale, depreciation and straight-line rental income are no longer recorded. In addition, the asset is reclassified to assets held for sale on the consolidated balance sheet and the results of operations are reclassified to income (loss) from discontinued operations in the consolidated statements of operations.

        The Company allocates the purchase price of operating properties to land, building, tenant improvements, deferred lease cost for the origination costs of the in-place leases and to intangibles for the value of the above or below market leases. The Company amortizes the value allocated to the in-place leases over the remaining lease term. The value allocated to the above or below market leases are amortized over the remaining lease term as an adjustment to rental income.

        Real estate that the Company acquires as a result of foreclosure or by deed-in-lieu of foreclosure is recorded at the lower of its cost, which is the unpaid balance of the loan, or fair market value at the date of foreclosure.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

2. Summary of Significant Accounting Policies (Continued)

    Investments in and Advances to Unconsolidated Ventures

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

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

    Fair Value Measurements

        Fair value is used to measure many of the Company's financial instruments. The fair value of these financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (i.e., the exit price).

    Fair Value Option

        The Company had the one-time option to elect fair value on January 1, 2008 for its existing financial assets and liabilities. For all new financial instruments, the Company has the one-time option to elect fair value for these financial assets or liabilities on the election date. The changes in the fair value of these instruments are recorded in unrealized gain (loss) on investments and other in the consolidated statements of operations.

    Available for Sale Securities

        The Company determines the appropriate classification of its investments in securities at the time of purchase and reevaluates such determination at each balance sheet date. Securities for which the Company does not have the intent or the ability to hold to maturity are classified as available for sale securities. The Company's available for sale securities that serve as collateral for its CDO financings, which the Company has elected the fair value option, are carried at fair value with the net unrealized gains or losses reported as a component of earnings in the statement of operations. Prior to consolidation of the CDO financings as the result of the Company being deemed the primary beneficiary, the Company designated its investments in the equity notes and its non investment grade notes of unconsolidated CDO financings as available for sale securities as they met the definition of a debt instrument due to their redemption provisions. These securities are carried at estimated fair value with the net unrealized gains or losses reported as a component of accumulated other comprehensive income (loss) in the consolidated statements of stockholders' equity.

    Real Estate Debt Investments

        Real estate debt investments are intended to be held to maturity and, accordingly, are carried at cost, net of unamortized loan origination fees, discounts, and unfunded commitments unless such loan or investment is deemed to be impaired. Discounts and premiums on purchased assets are amortized

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

2. Summary of Significant Accounting Policies (Continued)

over the life of the investment using the effective interest method. The origination cost and fees are deferred and amortized using the effective interest method over the life of the related loan investment. The amortization is reflected as an adjustment to interest income.

    Real Estate Debt Investments Held for Sale

        Real estate debt investments held for sale are carried at the lower of cost or market value using available market information including sales prices and information obtained through consultation with dealers or other originators of such investments. The Company classifies, as held for sale, real estate debt investments that are actively being marketed for sale.

    Cash and Cash Equivalents

        The Company considers all highly liquid investments that have remaining maturity dates of three months or less when purchased to be cash equivalents. Cash, including amounts restricted, exceeded the Federal Deposit Insurance Corporation deposit insurance limit of $250,000 per institution at December 31, 2010 and 2009. The Company mitigates its risk by placing cash and cash equivalents with major financial institutions.

    Restricted Cash

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

    Deferred Costs, Net

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

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

    Detachable Stock Warrants

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

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

2. Summary of Significant Accounting Policies (Continued)

    Comprehensive Income

        Comprehensive income (loss), is comprised of consolidated net income, as presented in the consolidated statements of operations, adjusted for changes in unrealized gains or losses on available for sale securities and changes in the fair value of derivative financial instruments accounted for as cash flow hedges recorded in other comprehensive income.

    Underwriting Commissions and Costs

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

    Revenue Recognition

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

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

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

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

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

    Credit Losses, Impairment and Allowance for Doubtful Accounts

        The Company assesses whether unrealized losses on the change in fair value on their available for sale securities, for which the fair value option was not elected, reflect a decline in value which is other than temporary. If it is determined the decline in value is other than temporary the impaired securities are written down through earnings to their fair values. Significant judgment of management is required in this analysis, which includes, but is not limited to, making assumptions regarding the collectability of the principal and interest, net of related expenses, on the underlying collateral.

        For all classes of real estate debt investments, allowances are established based upon a periodic review of the investments. Income recognition is suspended for loans at the earlier of the date at which

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

2. Summary of Significant Accounting Policies (Continued)


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

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

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

    Rent Expense

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

    Income Taxes

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

        Pursuant to amendments to the Code that became effective January 1, 2001, the Company has elected or may elect to treat certain of its existing or newly created corporate subsidiaries as taxable REIT subsidiaries (each a "TRS"). In general, a TRS of the Company may perform non-customary services for tenants of the Company, hold assets that the Company cannot hold directly and may engage in any real estate or non-real estate related business. A TRS is subject to regular corporate

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

2. Summary of Significant Accounting Policies (Continued)


income tax. The Company has established several TRSs in jurisdictions for which no taxes are assessed on corporate earnings. However, the Company must include earnings from these TRSs currently.

        The Company will recognize interest and penalties, if any, related to uncertain tax positions as income tax expense, which is included in general and administrative expense.

    Derivatives and Hedging Activities

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

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

        With respect to derivative instruments that have not been designated as hedges, or are hedges on debt that is remeasured at fair value, any net payments under, or fluctuations in the fair value of, such derivatives are recognized currently in income. The Company's basis swaps have been designated as non-hedge derivatives.

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

    Stock Based Compensation

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

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

2. Summary of Significant Accounting Policies (Continued)

    Foreign Currency Translation

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

    Earnings Per Share

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

    Reclassifications

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

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

(Amounts in Thousands, Except per Share Data)

2. Summary of Significant Accounting Policies (Continued)

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

 
  Year Ended December 31. 2008  
 
  As Originally
Reported
  As Adjusted   Effect of Change in
Accounting Principle
 

Interest expense(1)

  $ 191,472   $ 194,295   $ 2,823  

Unrealized gain (loss) on investments and other

    752,332     649,113     (103,219 )

Realized gain on investments and other

    36,036     37,699     1,663  

Fundraising fees, debt issuance costs and other

    7,823     2,875     (4,948 )

Non-controlling interests

    (82,098 )   (72,172 )   9,926  

Net income attributable to NorthStar Realty Finance Corp. common stockholders

    698,741     609,232     (89,509 )

Earnings per share

  $ 11.07   $ 9.65   $ (1.51 )

(1)
As adjusted amount excludes additional reclassifications as a result of discontinued operations (see Note 4 for additional information).

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

    Recently Issued Pronouncements

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

        In July 2010, the FASB issued an accounting update requiring more robust and disaggregated disclosure about the credit quality of an entity's loans and its allowance for loan losses. The new

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

2. Summary of Significant Accounting Policies (Continued)


guidance significantly expands the existing disclosure requirements and is focused on providing transparency regarding an entity's exposure to credit losses. This update is effective for interim and annual reporting periods ending on or after December 15, 2010. The additional disclosures required by this update are included in the note on real estate debt investments.

        In December 2010, the FASB issued an accounting update specifying that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amendments in this update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company's adoption of this update will not have a material effect on its financial condition, results of operations, or cash flows.

3. Variable Interest Entities

        On January 1, 2010, the Company adopted the FASB guidance for determining whether an entity is a variable interest entity, or VIE, and which requires an analysis of qualitative rather than quantitative factors to determine the primary beneficiary of a VIE. The guidance requires an entity to consolidate a VIE if (i) it has the power to direct the activities that most significantly impact the VIE's economic performance and (ii) the obligation to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be significant to the VIE. As a result of the implementation of this pronouncement, the Company consolidated four of its previously off-balance sheet CDO financings, which are referred to as N-Star I, II, III and V. The Company has elected the fair value option of accounting for the available for sale securities and bonds payable of these entities for the purpose of consistent accounting application.

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

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

Non-controlling interest

  $ 90,647   $ 110,976   $ 20,329  

Retained earnings

    460,915     582,850     121,935  

Accumulated other comprehensive loss

    (92,670 )   (51,338 )   41,332  

        The Company has evaluated its real estate debt investments, liability to subsidiary trusts issuing preferred securities, and its investments in each of its nine CDO transaction issuers to determine whether they are a variable interest entity ("VIE"). A VIE is an entity that lacks one or more of the characteristics of a voting interest entity. For each of these investments, the Company has evaluated: (1) the sufficiency of the fair value of the entity's equity investment at risk to absorb losses; (2) whether as a group the holders of the equity investment at risk have: (a) the power, through voting rights or similar rights, to direct the activities of a legal entity that most significantly impact the entity's

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

3. Variable Interest Entities (Continued)


economic performance; (b) the obligation to absorb the expected losses of the legal entity; and (c) the right to receive the expected residual returns of the legal entity; (3) whether the voting rights of these investors are proportional to their obligations to absorb the expected losses of the entity, their rights to receive the expected returns of their equity, or both; and (4) whether substantially all of the entity's activities involve or are conducted on behalf of an investor that has disproportionately fewer voting rights. An investment that lacks one or more of the above four characteristics of a voting interest entity is considered to be a VIE.

        As of December 31, 2010, the Company identified interests in 19 entities which were determined to be VIEs. The Company reassesses its initial evaluation of an entity as a VIE upon the occurrence of certain reconsideration events.

        The Company is required to consolidate a VIE if the Company is deemed to be the VIEs primary beneficiary. The primary beneficiary is the party that (i) has the power to direct the activities that most significantly impact the VIE's economic performance and (ii) has the obligation to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be significant to the VIE.

        The Company determines whether it is the primary beneficiary of a VIE by first performing a qualitative analysis to determine if it holds the power to direct the activities that most significantly impact the VIEs economic performance. This analysis includes: (i) assessing the Company's variable interests (both implicit and explicit) and any other involvements in the VIE, as well as the involvements of other variable interest holders; (ii) consideration of the VIEs purpose and design, including the risks the VIE was designed to create and pass through to its variable interest holders; (iii) identifying the activities that most significantly affect the VIE's economic performance; (iv) determining whether the Company's significant involvement in the design of an entity provided the Company with the opportunity to establish arrangements that result in the Company having the power to direct the VIEs most significant activities; and (v) determining whether the Company's level of economic interest in a VIE is indicative of the amount of power the Company holds in situations where the Company's stated power to direct the VIEs most significant activities is disproportionately less than its economic interest in the entity. The Company performs a quantitative analysis to determine if it has the obligation to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be significant to the VIE. For purposes of allocating a VIE's expected losses and expected residual returns to its variable interest holders, the Company calculates its share of the VIE's expected losses and expected residual returns using the specific cash flows that would be allocated to it, based on contractual arrangements and/or the Company's position in the capital structure of the VIE, under various scenarios.

        Based on management's analysis, the Company is not the primary beneficiary of nine of the identified VIEs since it (i) does not have the power to direct the activities that most significantly impact the VIE's economic performance and (ii) does not have the obligation to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be significant to the VIE. Accordingly, these VIEs are not consolidated into the Company's financial statements as of December 31, 2010. The Company reassesses its determination of whether it is the primary beneficiary of a VIE each reporting period.

        On July 8, 2010, an affiliate of CapitalSource Inc. ("CapitalSource") (i) delegated to an affiliate of the Company collateral management and special servicing rights, and the associated fees, relating to

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

3. Variable Interest Entities (Continued)


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

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

Consolidated VIEs (the Company is the primary beneficiary)

        The Company has originated, acquired and manages portfolios of commercial real estate securities and real estate debt investments, which were financed in CDO financings. The collateral securities include commercial mortgage-backed securities ("CMBS"), fixed income securities issued by REITs and CDO financings backed primarily by real estate securities. The collateral debt investments include whole loans, subordinate mortgage interests, mezzanine loans and other loans. By financing these securities with long-term debt through the issuance of CDO financings, the Company expects to generate attractive risk-adjusted equity returns and to match the term of its assets and liabilities. In connection with the Company's CDO financings, the Company has various forms of significant ongoing involvement, which may include: (i) holding senior or subordinated interests in the CDOs; (ii) asset management; and (iii) entering into derivative contracts.

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

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

3. Variable Interest Entities (Continued)

        The following table displays the classification and carrying amounts of assets and liabilities of consolidated VIEs as of December 31, 2010 (in thousands):

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

Assets of consolidated VIEs:

                                                                   

Restricted cash

  $ 27,730   $ 677   $ 13,006   $ 23,375   $ 1,719   $ 44,794   $ 1,480   $ 32,746   $ 18,750   $ 99,037   $ 263,314  

Available for sale securities, at fair value

    202,671     192,528     238,251     32,754     280,668     14,949     308,378     25,880     307,860     64,278     1,668,217  

Real estate debt investments, net

            31,507     326,293         291,684     19,953     649,565     45,535     295,345     1,659,882  

Investments in and advances to unconsolidated ventures

                                66,959             66,959  

Real estate debt investments, held-for-sale

                                    5,396     13,265     18,661  

Receivables, net of allowance

    1,781     1,559     1,978     1,481     3,357     1,086     3,215     2,026     4,253     5,601     26,337  

Derivative instruments, at fair value

                            35             7     42  

Assets of properties held for sale

                                8,040         5,101     13,141  

Other assets

    47     43     15     305         2,607     54     6     298     10,902     14,277  
                                               

Total assets of consolidated VIEs(1):

    232,229     194,807     284,757     384,208     285,744     355,120     333,115     785,222     382,092     493,536     3,730,830  

Liabilities of consolidated VIEs:

                                                                   

Bonds payable, at fair value

    193,242     139,922     156,107     164,315     170,358     180,813     233,892     322,431     207,136     490,591     2,258,807  

Accounts payable and accrued expenses

    1,324     104     1,126     122     522     381     329     1,124     2,082     8,554     15,668  

Escrow deposits payable

                19,662         12,853         10,010     1,352     16,286     60,163  

Derivative liability, at fair value

    14,120     14,726     18,666         31,169     8,538     39,452     18,258     34,767     11,297     190,993  

Liabilities of properties held for sale

                                32         99     131  

Other liabilities

            70                 314         8,270         8,654  
                                               

Total liabilities of consolidated VIEs(2):

    208,686     154,752     175,969     184,099     202,049     202,585     273,987     351,855     253,607     526,827     2,534,416  
                                               

Net assets

  $ 23,543   $ 40,055   $ 108,788   $ 200,109   $ 83,695   $ 152,535   $ 59,128   $ 433,367   $ 128,485   $ (33,291 ) $ 1,196,414  
                                               

(1)
Assets of each of the consolidated VIEs may only be used to settle obligations of the respective VIE.

(2)
Creditors of each of the consolidated VIEs have no recourse to the general credit of the Company.

        The Company did not provide financial support to any of its consolidated VIEs during the years ended December 31, 2010 and 2009. At December 31, 2010, there are no explicit arrangements or implicit variable interests that could require the Company to provide financial support to any of its consolidated VIEs.

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

Real Estate Debt Investments

        The Company has identified one real estate debt investment with a principal amount of $20.6 million as a variable interest in a VIE and has determined that the Company is not the primary beneficiary of this VIE and as such the VIE should not be consolidated in the Company's consolidated financial statements. For all other real estate debt investments, the Company has determined that these

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

3. Variable Interest Entities (Continued)


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

NorthStar Realty Finance Trusts

        The Company owns all of the common stock of NorthStar Realty Finance Trusts I through VIII (collectively, the "Trusts"). The Trusts were formed to issue preferred securities. The Company determined that the holders of the trust preferred securities were the primary beneficiaries of the Trusts. As a result, the Company did not consolidate the Trusts and has accounted for the investment in the common stock of the Trusts under the equity method of accounting. The following table displays the classification, carrying amounts and maximum exposure of unconsolidated VIEs as of December 31, 2010 (in thousands):

 
  Variable Interest Entity    
   
 
 
  Trusts Issuing Preferred
Securities, at Fair Value
  Real Estate Debt
Investments
  Total   Maximum Exposure to
Loss(1)
 

Real estate debt investments

      $ 20,556   $ 20,556   $ 20,556  
                   

Total assets

        20,556     20,556     20,556  

Liability to subsidiary trusts issuing preferred securities, at fair value

   
191,250
   
   
191,250
   
N/A
 
                   

Total liabilities

    191,250         191,250     N/A  
                   

Net assets

  $ (191,250 ) $ 20,556   $ (170,694 ) $ 20,556  
                   

(1)
The Company's maximum exposure to loss at December 31, 2010, would not exceed the carrying amount of its investment.

        The Company did not provide financial support to any of its unconsolidated VIEs during the years ended December 31, 2010 and 2009. At December 31, 2010, there are no explicit arrangements or implicit variable interests that could require the Company to provide financial support to any of its unconsolidated VIEs.

4. Fair Value of Financial Instruments

Fair Value Measurements

    Fair Value Hierarchy

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

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

4. Fair Value of Financial Instruments (Continued)

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

Level 1.   Financial assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market (examples include active exchange-traded equity securities, listed derivatives, most U.S. government and agency securities, and certain other sovereign government obligations).
Level 2.   Financial assets and liabilities whose values are based on the following:

 

 

a)

 

Quoted prices for similar assets or liabilities in active markets (for example, restricted stock);

 

 

b)

 

Quoted prices for identical or similar assets or liabilities in non-active markets (examples include corporate and municipal bonds, which trade infrequently);

 

 

c)

 

Pricing models whose inputs are observable for substantially the full term of the asset or liability (examples include most over-the-counter derivatives, including interest rate and currency swaps); and

 

 

d)

 

Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability (for example, certain mortgage loans).

Level 3.

 

Financial assets and liabilities whose values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. These inputs reflect management's own assumptions about the assumptions a market participant would use in pricing the asset or liability (examples include private equity investments, beneficial interest in securitizations and long-dated or complex derivatives, including certain foreign exchange options and long-dated options on gas and power).

Determination of Fair Value

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

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

4. Fair Value of Financial Instruments (Continued)

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

    Available for sale securities

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

    Derivative instruments

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

    Corporate lending investment

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

    CDO bonds payable

        CDO bonds payable are measured with prices obtained from a nationally-recognized banking institution that acted as underwriter for the investment and are generally measured using pricing models with market observable inputs such as interest rates and equity index levels, with adjustments for unobservable inputs. These measurements are classified as Level 3 within the fair value hierarchy.

    Liability to subsidiary trusts issuing preferred securities

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

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

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

4. Fair Value of Financial Instruments (Continued)


assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2010, by level within the fair value hierarchy:

 
  Assets and Liabilities at Fair Value  
 
  Level 1   Level 2   Level 3   Total  

Assets:

                         

Available for sale securities:

                         
 

CMBS

  $   $ 1,016,372   $ 375,727   $ 1,392,099  
 

Third party CDO notes

            37,213     37,213  
 

REIT debt

        182,106     54,852     236,958  
 

Trust preferred securities

            24,784     24,784  

Derivative asset

        59         59  
                   
 

Total assets

  $   $ 1,198,537   $ 492,576   $ 1,691,113  
                   

Liabilities:

                         

N-Star CDO bonds payable

            2,258,805   $ 2,258,805  

Liability to subsidiary trusts issuing preferred securities

            191,250     191,250  

Derivative liability

        220,689         220,689  
                   
 

Total liabilities

  $   $ 220,689   $ 2,450,055   $ 2,670,744  
                   

        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 preferred securities which are measured at fair value on a recurring basis at December 31, 2010, for which the Company has utilized Level 3 inputs to determine fair value:

 
  Available
for Sale
Securities
  Corporate
Lending
Investment
  N-Star
CDO Bonds
Payable
  Liability to
Subsidiary
Trusts Issuing
Preferred
Securities
 

Beginning balance:

  $ 309,505   $ 8,943   $ 1,141,096   $ 167,035  
 

Total net transfers into/out of Level 3

    91,281                    
 

Purchases, sales, issuance and settlements, net

    64,197     (17,430 )   450,144      
 

Total losses (realized or unrealized):

                         
   

Included in earnings

    132,851         667,974     24,215  
   

Included in other comprehensive loss

                 
 

Total gains (realized or unrealized):

                         
   

Included in earnings

    160,444     8,488     409      
   

Included in other comprehensive loss

                 
                   

Ending balance

  $ 492,576   $   $ 2,258,805   $ 191,250  
                   

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

  $ 27,593   $ 8,488   $ (667,564 ) $ (24,215 )
                   

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

4. Fair Value of Financial Instruments (Continued)

Fair Value Option

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

    Available for sale securities;

    CDO bonds payable;

    Liabilities to subsidiary trusts issuing preferred securities; and

    its equity investment in its corporate lending business.

        The Company has elected the fair value option for the above financial instruments for the purpose of consistent accounting application.

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

Financial Instruments, at Fair Value
  December 31,
2010
  December 31,
2009(1)
 

Assets:

             

Available for sale securities:

             
 

CMBS

  $ 1,392,099   $ 249,583  
 

N-Star CDO notes

        4,268  
 

Third party CDO notes

    37,213     9,515  
 

REIT debt

    236,958     30,580  
 

Trust preferred securities

    24,784     8,739  

Corporate lending investment (2)

        8,943  
           
 

Total assets

  $ 1,691,054   $ 311,628  
           

Liabilities:

             

N-Star CDO bonds payable

    2,258,805     584,615  

Liability to subsidiary trusts issuing preferred securities

    191,250     167,035  
           
 

Total liabilities

  $ 2,450,055   $ 751,650  
           

(1)
December 31, 2009 does not include the assets and liabilities of N-Star I, II, III and V, for which the Company has elected the fair value option, as these CDO financings were unconsolidated CDO financings prior to January 1, 2010.

(2)
During 2010, the Company's corporate lending joint venture sold assets having a fair market value in excess of their carrying value and the Company sold its interest in the

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

4. Fair Value of Financial Instruments (Continued)

    joint venture to the joint venture partner. As a result, the Company reduced its equity investment to zero at December 31, 2010.

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

 
  Fair Value at
December 31,
2010
  Amount
Due Upon
Maturity
  Difference  

Assets:

                   

Available for sale securities:

                   
 

CMBS

  $ 1,392,099   $ 2,844,090   $ (1,451,991 )
 

Third party CDO notes

    37,213     206,620     (169,407 )
 

REIT debt

    249,350     244,366     4,984  
 

Trust preferred securities

    12,392     20,000     (7,608 )
               
   

Total assets

  $ 1,691,054   $ 3,315,076   $ (1,624,022 )
               

Liabilities:

                   

N-Star CDO bonds payable

    2,258,805     4,448,545     (2,189,740 )

Liability to subsidiary trusts issuing preferred securities

    191,250     280,133     (88,883 )
               
   

Total Liabilities

  $ 2,450,055   $ 4,728,678   $ (2,278,623 )
               

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

        For the year ended December 31, 2010 and 2009, the Company recognized a net loss of $397.9 million and a net loss of $156.8 million, respectively, as the result of the change in fair value of financial assets and liabilities for which the fair value option was elected, which is recorded as unrealized gain (loss) on investments and other in the Company's consolidated statement of operations. The net loss for the year ended December 31, 2009 does not include losses or gains on the assets and liabilities of N-Star I, II, III and V, as these CDO financings were unconsolidated CDO financings prior to January 1, 2010.

        The impact of changes in instrument-specific credit spreads on N-Star bonds payable and liability to subsidiary trusts issuing preferred securities for which the fair value option was elected was a net loss of $692.2 million and $148.5 million, respectively, for the year ended December 31, 2010 and 2009. The Company attributes changes in the fair value of floating rate liabilities to changes in instrument-specific credit spreads. For fixed rate liabilities, the Company allocates changes in fair value between interest rate-related changes and credit spread-related changes based on changes in interest rates. The net loss for the year ended December 31, 2009 does not include losses or gains on the assets and liabilities of N-Star I, II, III and V, as these CDO financings were unconsolidated CDO financings prior to January 1, 2010.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

5. Operating Real Estate

        At December 31, 2010 and 2009, operating real estate, net consists of the following:

 
  December 31,
2010
  December 31,
2009
 

Land

  $ 146,780   $ 148,473  

Buildings and improvements

    838,539     851,302  

Leasehold interests

    18,288     19,271  

Tenant improvements

    33,351     33,680  

Furniture and fixtures

    7,698     7,161  

Capital leases

    1,836     3,028  
           

    1,046,492     1,062,915  

Less: Accumulated depreciation

    108,430     84,013  
           

Operating real estate, net

  $ 938,062   $ 978,902  
           

        Depreciation expense amounted to approximately $24.4 million and $24.2 million for the year ended December 31, 2010 and 2009, respectively. In addition to the amounts included in the above table, approximately $66.1 million and $66.5 million of real estate acquisition costs as of December 31, 2010 and 2009, respectively, are classified as deferred lease costs. See Note 9 for additional information.

Dispositions—2010

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

Dispositions—2009

    NRF Healthcare, LLC

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

Discontinued Operations

        In connection with the acquisition of the CSE RE 2006-A equity notes and the consolidation of CSE RE 2006-A, the CDO financing had, as of December 31, 2010, three foreclosed assets consisting of two parcels of land located in Arizona with a combined fair market value at the time of acquisition of approximately $1.6 million and a multifamily property located in Georgia having a fair market value at the time of acquisition of approximately $3.9 million. During the third quarter of 2010, we recorded as held for sale, the two REO parcels of land located in Arizona and the multifamily property located in Georgia. During the fourth quarter of 2010, we recorded as held for sale, an REO office building containing 142,988 square feet located in Philadelphia, PA.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

5. Operating Real Estate (Continued)

        The following table summarizes income from discontinued operations and related gain on sale of discontinued operations for the years ended December 31, 2010, 2009 and 2008:

 
  For the Year
Ended
December 31,
2010
  For the Year
Ended
December 31,
2009
  For the Year
Ended
December 31,
2008
 

Revenue:

                   
 

Rental and escalation income

  $ 1,068   $ 8,710   $ 8,514  
 

Interest and other

    88     3     14  
               
 

Total revenue

    1,156     8,713     8,528  
               

Expenses:

                   
 

Property operating expenses

    865     120     141  
 

Asset management fees—related parties

    52     25     25  
 

Auditing and professional fees

    94     4      
 

General and administrative expenses

    819     35     5  
 

Interest expense

    60     4,187     3,757  
 

Depreciation and amortization

    53     2,166     2,190  
 

Impairment on operating real estate

    1,180          
               
 

Total expenses

    3,123     6,537     6,118  
               

Income from discontinued operations

    (1,967 )   2,176     2,410  

Gain on disposition of discontinued operations

    2,528     13,799      
               

Total income from discontinued operations

  $ 561   $ 15,975   $ 2,410  
               

        The following table sets forth the major classes of assets and liabilities of properties classified as held for sale at December 31, 2010:

 
  December 31, 2010  

ASSETS:

       

Operating real estate—net

  $ 13,141  
       

Assets of properties held for sale

  $ 13,141  
       

LIABILITIES:

       

Accounts payable and accrued expenses

    60  

Other liabilities

    71  
       

Liabilities of properties held for sale

  $ 131  
       

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

6. Available for Sale Securities

        The following is a summary of the Company's available for sale securities at December 31, 2010:

December 31, 2010
  Carrying
Value
  Cumulative
Unrealized
(Loss)/Gain on
Investments
  Fair
Value(1)
 

CMBS

  $ 2,040,582   $ (648,483 ) $ 1,392,099  

Third party CDO notes

    174,537     (137,324 )   37,213  

REIT debt

    222,112     14,846     236,958  

Trust preferred securities

    34,917     (10,133 )   24,784  
               
 

Total

  $ 2,472,148   $ (781,094 ) $ 1,691,054  
               

(1)
Approximately $1.7 billion of these investments serve as collateral for the Company's consolidated CDO transactions and the balance is either financed under other borrowing facilities or unleveraged.

        At December 31, 2010, the maturities of the available for sale securities ranged from three months to 46 years.

        During the years ended December 31, 2010, proceeds from the sale and redemption of available for sale securities was $370.5 million. The net realized gain on the sale and redemption of available for sale securities was $75.8 million. During the year ended December 31, 2009, proceeds from the sale and redemption of available for sale securities was $213.1 million. The net realized gain on the sale of available for sale securities was $72.8 million. Proceeds and realized gains from the sale and redemption of available for sale securities for the year ended December 31, 2009 does not include the sale and redemption of available for sale securities of N-Star I, II, III and V, as these CDO financings were unconsolidated CDO financings prior to January 1, 2010.

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

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

CMBS

  $ 443,568   $   $ (193,985 ) $ 249,583  

N-Star CDO notes

    34,115     (13,517 )   (14,723 )   5,875  

Third party CDO notes

    21,750         (12,235 )   9,515  

REIT debt

    26,760         3,820     30,580  

N-Star CDO equity

    72,926     (40,998 )       31,928  

Trust preferred securities

    12,264         (3,525 )   8,739  
                   
 

Total

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

(1)
December 31, 2009 does not include the third party available for sale securities of N-Star I, II, III and V, as these CDO financings were unconsolidated financings prior to January 1, 2010.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

6. Available for Sale Securities (Continued)

(2)
Approximately $212.4 million of these investments serve as collateral for the Company's only consolidated securities CDO transaction at December 31, 2009 and the balance is financed under other borrowing facilities.

7. Real Estate Debt Investments

        At December 31, 2010, the Company held the following real estate debt investments:

December 31, 2010
  Principal Balances   Carrying
Value(1)(2)
  Allocation by
Investment Type
  Average
Fixed Rate
  Average
Spread Over
LIBOR(3)
  Average
Spread Over
Prime
  Number of
Investments
 

Whole loans, floating rate—LIBOR

  $ 1,533,352   $ 1,042,194     56.5 %   %   2.79 %   %   71  

Whole loans—floating rate—prime

    106,279     17,417     0.9 %               3.32 %   3  

Whole loans, fixed rate

    211,565     107,419     5.8 %   5.76 %           27  

Subordinate mortgage interests, floating rate

    220,444     143,153     7.8 %       3.06 %       10  

Subordinate mortgage interests, fixed rate

    74,443     46,805     2.5 %   7.62 %           3  

Mezzanine loans, floating rate

    387,183     305,901     16.6 %       2.76 %       16  

Mezzanine loan, fixed rate

    153,027     140,956     7.7 %   5.65 %           7  

Preferred—Float

    17,444     17,444     0.9 %       4.00 %       1  

Other loans—floating

    11,460     11,460     0.6 %       2.50 %       2  

Other loans—fixed

    12,152     12,152     0.7 %   6.44 %           3  
                               
 

Total/Weighted average

  $ 2,727,349   $ 1,844,901     100.0 %   6.05 %   2.82 %   3.32 %   143  
                               

(1)
Approximately $1.7 billion of these investments serve as collateral for the Company's CDO financings, $44.0 million is financed under a borrowing facility and the remainder is unleveraged. The Company has future funding commitments, which are subject to certain conditions that borrowers must meet to qualify for such fundings, totaling $48.5 million related to these investments. The Company expects that a minimum of $45.5 million of these future fundings will be funded within the Company's existing CDO financings and require no additional capital from the Company. Assuming that all loans that have future fundings meet the terms to qualify for such funding, the Company's equity requirement on future funding requirements would be approximately $3.0 million.

(2)
Includes $18.7 million in real estate debt investments, held for sale.

(3)
Approximately $525.2 million of the Company's real estate debt investments have a weighted-average LIBOR rate floor of 2.08%

        On July 8, 2010, the Company consolidated the assets acquired and liabilities assumed of CSE RE 2006-A and recorded a gain of approximately $15.4 million resulting from the excess of the fair market value of the net assets acquired over the consideration paid. The following table displays the

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

7. Real Estate Debt Investments (Continued)


outstanding principal balance and the fair market value of the assets acquired and the liabilities assumed at acquisition (in thousands):

 
  At Closing  
 
  Principal
Balance
  Fair Market
Value
 

Loan assets—performing

  $ 810,690   $ 380,003  

Loan assets—non-performing

    243,113     15,970  

REO

    18,259     4,201  

Restricted cash

    77,084     77,084  

Derivative assets

        38  

Receivables

    2,815     2,815  
           
 

Total assets

  $ 1,151,961   $ 480,111  

CDO notes outstanding

 
$

1,012,490
 
$

440,096
 

Derivative liabilities

        11,829  

Accounts payable and accrued expenses

    12,528     12,528  
           
 

Total liabilities

  $ 1,025,018   $ 464,453  

Non-controlling interest

   
2,083
   
295
 

Net assets

  $ 124,860   $ 15,363  

Management rights

   
NA
 
$

7,000
 

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

December 31, 2009(1)
  Principal
Balances
  Carrying
Value(2)
  Allocation by
Investment Type
  Average
Fixed Rate
  Average Spread
Over LIBOR
  Number of
Investments
 

Whole loans, floating rate

  $ 1,049,784   $ 1,014,028     52.3 %   %   2.70 %   52  

Whole loans, fixed rate

    62,086     62,373     3.2     6.89         7  

Subordinate mortgage interests, floating rate

    209,621     193,275     10.0         2.69     11  

Subordinate mortgage interests, fixed rate

    29,000     24,722     1.3     7.25         2  

Mezzanine loans, floating rate

    563,405     538,173     27.8         3.35     20  

Mezzanine loan, fixed rate(3)

    94,535     90,558     4.7     8.89         7  

Other loans—floating

    8,610     8,610     0.4         2.24     2  

Other loans—fixed

    5,354     5,354     0.3     5.53         1  
                           
 

Total/Weighted average

  $ 2,022,396   $ 1,937,093     100.0 %   7.90 %   2.90 %   102  
                           

(1)
December 31, 2009 does not include the real estate debt investments of N-Star III, as the CDO financing was an unconsolidated financing prior to January 1, 2010.

(2)
Approximately $1.3 billion of these investments served as collateral for the Company's three commercial real estate debt CDO financings and the balance was financed under other borrowing facilities. The

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

7. Real Estate Debt Investments (Continued)

    Company had future funding commitments, which were subject to certain conditions that borrowers must have met to qualify for such fundings, totaling $80.0 million related to these investments.

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

        Contractual maturities of real estate debt investments at December 31, 2010 are as follows:

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

2011

  $ 265,131   $ 186,170  

2012

    999,991     536,468  

2013

    735,055     506,401  

2014

    56,130     293,096  

2015

    175,742     469,159  

Thereafter

    495,300     736,055  
           
 

Total

  $ 2,727,349   $ 2,727,349  
           

(1)
The year ending December 31, 2011, contains eight whole loans with initial maturities prior to December 31, 2010, having an aggregate principal balance of $213.1 million and three junior participations in first mortgages with initial maturities prior to December 31, 2010, having an aggregate principal balance of $52.0 million that remain outstanding as of December 31, 2010. The aggregate carrying value of these maturity-defaulted loans is $52.7 million as of December 31, 2010.

        Actual maturities may differ from contractual maturities because certain borrowers have the right to prepay with or without prepayment penalties. The contractual amounts differ from the carrying amounts due to unamortized origination fees and costs and unamortized premiums and discounts being reported as part of the carrying amount of the investment. At December 31, 2010, the Company had $683.2 million of unamortized discounts and deferred fees. Maturity Including Extensions assumes that all loans with extension options will qualify for extension at initial maturity according to the conditions stipulated in the related loan agreements.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

7. Real Estate Debt Investments (Continued)

        As of December 31, 2010, the status of the Company's performing and non-performing loans was as follows:

 
  As of December 31, 2010   As of December 31, 2009  
 
  Loan
Count
  Performing
Loans
  Loan
Count
  Non-
Performing
Loans
  Total(3)   Loan
Count
  Performing
Loans
  Loan
Count
  Non-
Performing
Loans
  Total  

Originated and Acquired Debt Investments

                                                             
 

Whole loans

    52   $ 892,950     1   $ 12,500   $ 905,450     53   $ 1,050,903     6   $ 60,797   $ 1,111,700  
 

Subordinate mortgage interests

    10     182,685     3     51,988     234,673     11     195,536     2     38,462     233,998  
 

Mezzanine loans

    23     539,527             539,527     27     654,831             654,831  
 

Preferred

    1     17,444             17,444                      
 

Other loans

    5     23,612             23,612     3     13,964             13,964  
                                                   

Total Originated and Acquired Debt Investments

    91     1,656,218     4     64,488     1,720,706     94     1,915,234     8     99,259     2,014,493  
 

Provision for Loan Losses

    14     (158,417 )   2     (38,783 )   (197,200 )   7     (39,500 )   6     (37,900 )   (77,400 )
                                                   

Total Originated and Acquired Debt Investments, net

          1,497,801           25,705     1,523,506           1,875,734           61,359     1,937,093  

CSE RE 2006-A

                                                             
 

Whole loans(1)

    38     252,347     9     30,216     282,563                      
 

Subordinate mortgage interests(2)

    1     38,832             38,832                      
                                                   

CSE RE 2006-A

    39     291,179     9     30,216     321,395                      
 

Provision for Loan Losses

                                         
                                                   

CSE RE 2006-A

          291,179           30,216     321,395                          
                                                   

Total Debt Investments

    130     1,947,397     13     94,704     2,042,101     94     1,915,234     8     99,259     2,014,493  
 

Total Provision for Loan Losses

    14     (158,417 )   2     (38,783 )   (197,200 )   7     (39,500 )   6     (37,900 )   (77,400 )
                                                   

Total Debt Investments, net

        $ 1,788,980         $ 55,921   $ 1,844,901         $ 1,875,734         $ 61,359   $ 1,937,093  
                                                   

(1)
CSE RE 2006-A whole loans have an aggregate outstanding principal amount of approximately $919.1 million at December 31, 2010.

(2)
CSE RE 2006-A subordinate mortgage interests have an aggregate outstanding principal amount of approximately $8.3 million at December 31, 2010.

(3)
Includes $18.7 million of real estate debt investments classified as held for sale.

        The Company's maximum additional exposure to loss related to the non-performing loans is approximately $55.9 million.

    Provision for Loan Losses

        For the year ended December 31, 2010, the Company recorded a $168.4 million credit loss provision relating to 16 loans, eight of which were sold, or held for sale and one of which was foreclosed during the period, and included $1.8 million in credit loss reversal for two loans sold with a fair market value in excess of their carrying amounts. For the year ended December 31, 2009, the

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

7. Real Estate Debt Investments (Continued)

Company recorded an $83.7 million credit loss provision relating 15 loans. As of December 31, 2010, loan loss reserves totaled $197.2 million.

        Activity in the allowance for credit losses on real estate debt investments for year ended December 31, 2010 and 2009, is as follows:

Credit Loss Reserve
   
 

Balance at December 31, 2008

  $ 11,200  

Provision for credit losses

    83,745  

Write-offs and sold loans

    (13,945 )

Foreclosure on loan

    (3,600 )
       

Balance at December 31, 2009

    77,400  

Provision for credit losses

    168,446  

N-Star CDO IX loan reserves

    25,679  

Write-offs and sold loans

    (51,205 )

Foreclosure on loan

    (23,120 )
       

Balance at December 31, 2010

  $ 197,200  
       

        At December 31, 2010, the loan loss reserve is comprised of the following:

Class of Loan
  # of Loans   Principal Amount   Carrying Amount   Credit Loss Provision  

Whole loans

    3   $ 68,320   $ 47,165   $ (20,984 )

Subordinate mortgage interests

    5     119,247     26,593     (83,545 )

Mezzanine loans

    8     177,595     84,708     (92,671 )
                   
 

Total

    16   $ 365,162   $ 158,466   $ (197,200 )
                   

        The Company's commercial real estate loans are typically secured by liens on real estate properties or by interests in entities that directly own real estate properties, which serve as the primary source of cash for the payment of principal and interest. The Company differentiates the relative credit quality of its loans based upon whether the collateral is currently paying contractual debt service, and whether the Company believes it will be able to do so in the future. Those loans for which the Company expects to receive full payment of contractual principal and interest payments are categorized as "performing." The Company groups weaker credit quality loans that are currently performing, but for which it believes there is an impairment such that future collection of all principal and interest is in doubt, in a category called "performing, with credit reserves." The Company's weakest credit quality loans are generally non-performing loans. NPLs typically have a maturity default and/or are past due at least 90 days on their contractual debt service payments.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

7. Real Estate Debt Investments (Continued)

        The following table is a summary of real estate debt investments by credit quality indicator as of each applicable balance sheet date:

Credit Quality Indicator
  Carrying Amount
December 31, 2010
  Carrying Amount
December 31, 2009
 

Non-performing loans

  $ 55,922   $ 61,359  

Performing loans with a reserve

    156,286     101,228  

Performing loans

    1,632,693     1,774,505  
           
 

Total

  $ 1,844,901   $ 1,937,092  
           

        At December 31, 2010, the Company had real estate debt investments with an aggregate carrying amount of $76.1 million on nonaccrual status.

        At December 31, 2010, the Company's loan portfolio principal and interest aging is as follows (inclusive of its non-performing loans) (in thousands):

1 - 90 Days   90+ Days  
$41,975   $ 223,390  

    Discounted Payoffs

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

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

8. Investments in and Advances to Unconsolidated Ventures

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

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

8. Investments 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 December 31, 2010 and 2009, the Company had an investment in CS/Federal of approximately $6.2 million and $6.9 million, respectively. The Company recognized equity in earnings of $0.5 million, $0.4 million and $0.5 million for the years ended December 31, 2010, 2009 and 2008, respectively.

G-NRF, LTD

        On May 7, 2008, the Company completed a recapitalization of Monroe Capital, its middle-market corporate lending platform. Upon completion of the recapitalization transaction, the new investor became the controlling manager of the assets and the Company deconsolidated the joint venture. The Company currently uses the equity method of accounting to account for the recapitalized joint venture and has elected the fair value option for its equity investment. In the second quarter 2010, the corporate lending joint venture sold assets and as a result the Company received a $15.0 million distribution. Since the Company accounts for this investment under the cost recovery method, approximately $6.7 million of the distribution was applied to the investment reducing the Company's basis in the investment to zero. The remaining cash distribution of $8.3 million was recognized as income and recorded in equity in earnings. During the third quarter 2010, the Company sold its interest in the venture, with a zero carrying value, to its joint venture partner for a total consideration of $7.5 million, resulting in a $7.5 million realized gain.

NorthStar Real Estate Securities Opportunity Fund

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

        The Company is the manager and general partner of the Securities Fund. The Company receives base management fees ranging from 1.0% to 2.0% per annum on third-party capital and is entitled to annual incentive management fees ranging from 20% to 25% of the increase in the Securities Fund's net asset value in excess of an 8.0% per annum return. Base and incentive fees vary depending on the investor capital lockup periods and we do not expect to earn any incentive management fees from the Securities Fund in the future.

        During the second quarter 2010, a subsidiary of the Company, as general partner of the Securities Fund, notified the Securities Fund's administrator and limited partners of its determination to liquidate and dissolve the Securities Fund. Accordingly, during the second quarter 2010, the Securities Fund began to liquidate its assets in an orderly manner. On July 7, 2010, the Securities Fund completed the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

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


sale of its remaining investments, which included the sale of the N-Star CDO IX income notes and management fees to a wholly-owned subsidiary of the Company for $3.3 million. The Company consolidated the assets and liabilities of the CDO at their respective fair market values as of the acquisition date. A subsidiary of the Company, as general partner of the Securities Fund, is currently in the process of determining the Securities Fund's final net asset value and expects to complete the process of dissolving the Securities Fund during the first half 2011. As of December 31, 2010, the Company has received approximately $2.7 million in distributions related to the final liquidation of the Securities Fund.

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

        For the years ended December 31, 2010, 2009 and 2008, the Company recognized equity in losses of $3.9 million, equity in losses of $6.5 million and equity in losses of $12.4 million, respectively.

LandCap Investment

        On October 5, 2007, the Company entered into a joint venture with Whitehall Street Global Real Estate Limited Partnership 2007 ("Whitehall"), to form LandCap Partners, which is referred to as LandCap. LandCap was established to opportunistically invest in single family residential land through land loans, lot option agreements and select land purchases. The joint venture is managed by a third party management group which has extensive experience in the single family housing sector. The Company and Whitehall agreed to provide no additional new investment capital in the LandCap joint venture. At December 31, 2010 and December 31, 2009 the Company's investment in LandCap is carried at $8.8 million and $10.1 million, respectively. At December 31, 2010 and 2009, LandCap had investments totaling $34.9 million and $37.9 million, respectively. In addition, the Company has advanced approximately $4.9 million under a loan agreement to LandCap, which bears interest at a fixed rate of 12% and is included in other assets in the consolidated balance sheets. For the years ended December 31, 2010, 2009 and 2008, the Company recognized equity in losses of $2.5 million, equity in losses of $3.7 million and equity in losses of $3.3 million, respectively.

Midwest Care Holdco TRS I LLC

        In June 2009, the Company restructured its net lease relationship with one of its healthcare operators to take advantage of new REIT legislation which now allows a taxable REIT subsidiary affiliate to become the lessee of healthcare- related properties. The restructuring resulted in one of the Company's unconsolidated affiliate Midwest becoming the lessee of the properties and Midwest simultaneously entering into a management contract with a third party operator. The management agreement is terminable by Midwest upon 60 days notice. This new structure allows the Company to participate in operating improvements of the underlying properties not previously available under the prior structure. The Company owned a 49% interest in Midwest and did not control the major decisions and as a result, the Company did not consolidate the operations of Midwest. In April 2010, pursuant to the membership redemption agreement entered into in December 2009, the Company acquired the remaining 51% membership interest in Midwest Holdings owned by Chain Bridge for $1.0 million in cash. As a result of the acquisition, the Company holds 100% of the common

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

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


membership interest in Midwest and controls all major decisions. Accordingly the operations of Midwest, which were previously accounted for under the equity method, are consolidated. The Company has estimated the fair value of assets acquired at the date of acquisition. The Company recognized equity in earnings of $2.0 million for the year ended December 31, 2010.

        At December 31, 2009, the Company had an investment in Midwest of approximately $1.0 million and recognized equity in earnings of $7.5 million for the year ended December 31, 2009.

NorthStar Income Opportunity REIT I, Inc. / NorthStar Real Estate Income Trust, Inc.

        On October 18, 2010, NorthStar Income Opportunity REIT I, Inc. ("NIOR"), an unconsolidated entity in which the Company has an equity investment, completed a merger with NorthStar Real Estate Income Trust, Inc., ("NSREIT") a consolidated subsidiary of the Company and each a commercial finance REIT sponsored by the Company. NSREIT became the surviving entity of the merger. As of October 18, 2010, the Company deconsolidated, and has an equity investment in, NSREIT and accounts for its investment in NSREIT under the equity method of accounting.

        At December 31, 2010, the Company had an investment in NSREIT, the surviving entity, of approximately $1.8 million. At December 31, 2009, the Company had an investment in NIOR of approximately $1.6 million. The Company recognized equity in loss on this investment of $0.2 million for the year ended December 31, 2010.

Meadowlands One, LLC

        The Company owned a $92.5 million pari passu participation in a $498.6 million first mortgage held in Meadowlands One, LLC that is secured by a retail/entertainment complex located in East Rutherford, NJ (the "NJ Property"). During the third quarter 2010, the lender group took effective ownership of the NJ Property. The Company accounts for its 22% equity interest in the investment under the equity method of accounting, and at December 31, 2010, the carrying value of the Company's investment was approximately $72.6 million. For the year ended December 31, 2010, the Company recognized equity in losses of $2.9 million from its investment.

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

 
  For the
Year Ended
December 31,
2010
  For the
Year Ended
December 31,
2009
  For the
Year Ended
December 31,
2008
 

Net income

  $ 431   $ (13,535 ) $ (51,469 )

Other partners' share of income

    (692 )   4,084     37,198  

Fee income basis difference

              1,263  

Joint venture equity write-off

              811  

Elimination entries

    2,514     7,642     279  
               

Earnings from unconsolidated/uncombined ventures

  $ 2,253   $ (1,809 ) $ (11,918 )
               

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

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

        Reconciliation between the Company's investment in unconsolidated entities as of December 31, 2010 and December 31, 2009 is as follows:

 
  December 31,
2010
  December 31,
2009
 

Company's equity in unconsolidated entities

  $ 93,361   $ 36,874  

Elimination entries

    746     1,109  

Purchase price basis difference

    305     316  
           

Investment in and advances to unconsolidated ventures

  $ 94,412   $ 38,299  
           

        The condensed combined balance sheets for the unconsolidated joint ventures at December 31, 2010 and 2009 are as follows:

 
  2010   2009  
 
  (unaudited)
  (unaudited)
 

Assets

             
 

Cash

  $ 42,572   $ 25,655  
 

Restricted cash

    551     4,006  
 

Operating real estate, net

    579,957     86,206  
 

Available for sale securities, at fair value

    31,264     312,242  
 

Deferred costs, net

    3,234     3,708  
 

Other assets

    835     8,166  
           
   

Total assets

  $ 658,413   $ 439,983  
           

Liabilities and members' equity

             
 

Mortgage notes and loans payable

  $ 45,576   $ 46,138  
 

Other liabilities

    41,072     221,844  
 

Members' equity

    571,765     172,001  
           
   

Total liabilities and members' equity

  $ 658,413   $ 439,983  
           

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

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

        The condensed combined statements of operations for the unconsolidated joint ventures for the years ended December 31, 2010, 2009 and 2008 are as follows;

 
  2010   2009   2008  
 
  (unaudited)
  (unaudited)
  (unaudited)
 

Revenues and other income:

                   
 

Interest income

  $ 17,010   $ 19,724   $ 18,292  
 

Rental and escalation income

    18,021     44,110     4,720  
 

Other revenue

    249     1,956     267  
               
   

Total revenue

    35,280     65,790     23,279  

Expenses:

                   
 

Interest expense

    10,555     4,017     4,542  
 

General and administrative

    9,560     16,941     7,752  
 

Depreciation and amortization

    1,913     2,406     1,936  
 

Other expenses

    21,436     27,793     2,465  
               
   

Total Expenses

    43,464     55,247     16,695  
               

Income from operations

    (8,184 )   14,543     6,584  
 

Unrealized gain/(loss) on investments

    72,498     (25,277 )   (60,661 )
 

Realized loss on investments

    (63,883 )   (2,605 )    
               

Net income

  $ 431   $ (13,339 ) $ (54,077 )
               

9. Deferred Costs and Intangible Assets, Net

        Deferred costs and intangible assets as of December 31, 2010 and 2009 consisted of the following:

 
  December 31,
2010
  December 31,
2009
 

Deferred lease costs

  $ 68,062   $ 67,897  

Deferred loan costs

    15,078     18,612  

Intangible assets

    7,839     839  

Reimbursable deal costs

    862     2,650  
           

    91,841     89,998  

Less accumulated amortization

    (38,868 )   (32,447 )
           

Deferred costs and intangible assets, net

  $ 52,973   $ 57,551  
           

        Deferred lease cost includes the allocation of a portion of the purchase price to lease origination costs associated with the in-place leases. For acquisitions for the year ended December 31, 2009, an additional $0.3 million was allocated from the purchase price to deferred lease cost.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

10. Borrowings

        The following table summarizes the Company's outstanding borrowings as of December 31, 2010 and 2009:

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

Term Loans (recourse)

                     
   

WA Secured Term Loan(2)

  10/28/2012   LIBOR + 3.50%         246,884  
   

Euro—note

  10/28/2012   3 month Euribor + 3.50%         85,218  
   

LB Term Loan(3)

  2/9/2011   LIBOR + 1.50%     22,199     22,199  
 

Term Loans (non-recourse)

                     
   

Term Asset Backed Securities Loan Facility

  10/29/2014   2.64%     14,682     14,682  
                     
 

Total Credit Facilities & Term Loans

            36,881     368,983  
 

Exchangeable Senior Notes (recourse)(4)(5)

 

6/15/2027

 

7.25%

   
68,165
   
68,165
 
 

Exchangeable Senior Notes ("NNN Notes") (recourse)(4)

  6/15/2013   11.50%     60,750     60,750  
 

Liability to subsidiary trusts issuing preferred securities (subordinate recourse)(6)(7)

                     
   

Trust I

  3/30/2035   8.15%     41,240     41,240  
   

Trust II

  6/30/2035   7.74%     25,780     25,780  
   

Trust III

  1/30/2036   7.81%     41,238     41,238  
   

Trust IV

  6/30/2036   7.95%     50,100     50,100  
   

Trust V

  9/30/2036   3 month LIBOR
2.70%
    30,100     30,100  
   

Trust VI

  12/30/2036   3 month LIBOR
2.90%
    25,100     25,100  
   

Trust VII

  4/30/2037   3 month LIBOR
2.50%
    31,475     31,475  
   

Trust VIII

  7/30/2037   3 month LIBOR
2.70%
    35,100     35,100  
 

Mortgage notes payable (non-recourse)

                     
   

Salt Lake City

  9/1/2012   5.16%     15,059     15,471  
   

EDS

  10/8/2015   5.37%     46,218     46,977  
   

Executive Center(8)

  1/1/2016   5.85%     51,480     51,480  
   

Green Pond

  4/11/2016   5.68%     16,884     17,119  
   

Indianapolis

  2/1/2017   6.06%     27,789     28,142  
   

Northstar Healthcare GE

    6.93%         44,163  
   

Northstar Healthcare GE

  5/1/2015   3 month LIBOR + 5.95%     58,200      
   

Northstar Healthcare—Park National

  1/11/2014   5.94%     32,537     32,944  
   

Northstar Healthcare—GE—WLK

  1/11/2017   6.99%     159,135     159,138  
   

Northstar Healthcare—GE—Tusc & Harmony

  1/11/2017   7.09%     7,842     7,843  
   

Northstar Healthcare—Harmony FNMA

  2/1/2017   6.39%     73,901     75,001  
   

Northstar Healthcare—Grove City

  8/1/2015   9.25%     3,040     1,835  
   

Northstar Healthcare—Lancaster

  8/1/2015   9.25%     6,280     2,571  
   

Northstar Healthcare—Marysville

  8/1/2015   9.25%     5,393     1,651  
   

Northstar Healthcare—Washington

  8/1/2015   9.25%     5,223     1,952  
   

Northstar Healthcare—Miller Merril

  6/30/2012   7.07%     116,806     118,320  
   

Northstar Healthcare—ARL Mob Wachovia

  5/11/2017   5.89%     3,349     3,389  
   

Northstar Healthcare—St Francis

  9/10/2010   LIBOR + 2.00%         11,400  
   

Aurora

  7/11/2016   6.22%     32,583     32,982  
   

DSG

  10/11/2016   6.17%     33,325     33,795  
   

Keene

  2/1/2016   5.85%     6,588     6,693  
   

Fort Wayne

  1/1/2015   6.41%     3,313     3,399  
   

Portland

  6/17/2014   7.34%     4,466     4,652  
   

Milpitas

  3/6/2017   5.95%     21,639     22,107  
   

Fort Mill

  4/6/2017   5.63%     27,700     27,700  
   

Reading

  1/1/2015   5.58%     13,643     13,905  
   

Reading

  1/1/2015   6.00%     5,000     5,000  
   

Alliance

  12/6/2017   6.48%     23,239     23,543  
 

Mezzanine loan payable (non-recourse)

                     
   

Fort Mill

  4/6/2017   6.21%     2,482     2,743  

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

10. Borrowings (Continued)

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

Bonds payable (non-recourse)(6)

                     
   

N-Star I

  8/1/2038   3 month LIBOR + 1.93%
(average spread)
    225,701      
   

N-Star II

  6/1/2039   LIBOR + 1.30% (average spread)     197,212      
   

N-Star III

  6/1/2040   LIBOR + 0.59% (average spread)     313,907      
   

N-Star IV

  7/1/2040   LIBOR + 0.59% (average spread)     258,769     282,500  
   

N-Star V

  9/5/2045   LIBOR + 0.53% (average spread)     434,633      
   

N-Star VI

  6/1/2041   3 month LIBOR + 0.52%
(average spread)
    271,698     279,057  
   

N-Star VII

  6/22/2051   LIBOR + 0.35% (average spread)     499,200     499,200  
   

N-Star VIII

  2/1/2041   LIBOR + 0.45% (average spread)     586,460     590,645  
   

N-Star IX

  8/7/2052   LIBOR + 0.40% (average spread)     744,960      
   

CapSource

  1/20/2037   3 month LIBOR + 0.42%
(average spread)
    916,005      
                     
 

          $ 5,697,588   $ 3,225,348  
                     

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

(2)
On June 30, 2010, the Company fully repaid and extinguished, at a discount to its outstanding principal amount, its secured recourse WA Secured Term Loan.

(3)
The Company has a limited recourse obligation with respect to this loan of 50% of the outstanding loan balance.

(4)
The contractual amounts may differ from the carrying value on the consolidated balance sheets due to the equity component of the debt.

(5)
The holders have repurchase rights which may require the Company to repurchase the notes on June 15, 2012.

(6)
Contractual amounts due may differ from the carrying value on the consolidated balance sheets due to the election of the fair value option. See Note 4.

(7)
The liability to subsidiary trusts for Trusts I, II, III and IV have a fixed interest rate for the first ten years after which the interest rate will float and reset quarterly at rates ranging from LIBOR plus 2.70% to 3.25%. The Company entered into interest rate swap agreements on Trusts V, VI, VII and VIII which fix the interest rates for 10 years at 8.16%, 8.02%, 7.60% and 8.29%, respectively.

(8)
The Company has a limited recourse obligation with respect to this loan. The amount of such obligation will vary based upon the tenancy of the property. The Company believes such obligation will not exceed $2.5 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

10. Borrowings (Continued)

        Scheduled principal payment requirements on the Company's borrowings based on initial maturity dates are as follows as of December 31, 2010:

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

2011

  $ 31,431   $ 9,232   $ 22,199   $   $   $  

2012

    210,053     141,888             68,165      

2013

    72,017     11,267             60,750      

2014

    60,930     46,248     14,682              

2015

    193,831     193,831                  

Thereafter

    5,129,326     400,648         280,133         4,448,545  
                           

Total

  $ 5,697,588   $ 803,114   $ 36,881   $ 280,133   $ 128,915   $ 4,448,545  
                           

(1)
$68.2 million of the Company's 7.25% exchangeable senior notes have a final maturity date of June 15, 2027. The above table reflects the holders repurchase rights which may require the Company to repurchase the notes on June 15, 2012.

        At December 31, 2010, the Company was in compliance with all covenants under its borrowings.

    Secured Term Loan

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

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

10. Borrowings (Continued)


upon exercise of the Warrants are subject to adjustment for dividends paid in common stock, subdivisions or combinations. The Company determined that the allocable fair value of the warrants, as of October 28, 2009, was $0.1 million. The fair value of the warrants was recorded in equity and the associated discount on the debt will be amortized into interest expense using the effective interest method over the life of the associated debt.

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

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

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

    Exchangeable Senior Notes

        In June 2007, the Company issued $172.5 million of 7.25% exchangeable senior notes (the "Notes") which are due in 2027. The Notes were offered in accordance with Rule 144A under the Securities Act of 1933, as amended. The Notes pay interest semi-annually on June 15 and December 15, at a rate of 7.25% per annum, and mature on June 15, 2027. The Notes have an initial exchange rate representing an exchange price of $16.89 per share of the Company's common stock. The initial exchange rate is subject to adjustment under certain circumstances. The Notes are senior unsecured obligations of the Company's operating partnership and may be exchangeable upon the occurrence of specified events, and at any time on or after March 15, 2027, and prior to the close of business on the second business day immediately preceding the maturity date, into cash or a combination of cash and shares of the Company's common stock, if any, at the Company's option. The Notes are redeemable, at the Company's option, on and after June 15, 2014. The Company may be required to repurchase the Notes on June 15, 2012, 2014, 2017 and 2022, and upon the occurrence of certain designated events. The net proceeds from the offering were approximately $167.5 million, after deducting fees and expenses. The proceeds of the offering were used to repay certain of the Company's existing indebtedness, to make additional investments and for general corporate purposes.

        In May 2008, NRFC NNN Holdings, LLC ("Triple Net Holdings"), a wholly-owned subsidiary of the Company issued $80.0 million of 11.50% exchangeable senior notes (the "NNN Notes") due in 2013. The NNN Notes were offered in accordance with Rule 144A under the Securities Act of 1933, as

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

10. Borrowings (Continued)


amended. The NNN Notes pay interest semi-annually on June 15 and December 15, at a rate of 11.50% per annum, and mature on June 15, 2013. The NNN Notes have an initial exchange rate representing an exchange price of $12.00 per share of the Company's common stock, subject to adjustment under certain circumstances. The NNN Notes are senior unsecured obligations of Triple Net Holdings and may be exchangeable upon the occurrence of specified events, and at any time on or after March 15, 2013, and prior to the close of business on the second business day immediately preceding the maturity date, into cash, shares of the Company's common stock or a combination of cash and shares of the Company's common stock, if any, at the Company's option. The NNN Notes are redeemable, at the Company's option, on and after June 15, 2011. The Company may be required to repurchase the NNN Notes upon the occurrence of certain events. The net proceeds from the offering were approximately $71.4 million, after deducting a $4.6 million security deposit representing one semi-annual interest payment, and fees and expenses.

        As of December 31, 2010 and December 31, 2009, the total carrying amount of the equity components of the exchangeable senior notes was $4.9 million. The principal amount of the exchangeable senior notes liabilities was $128.9 million as of December 31, 2010 and December 31, 2009. The unamortized discount of the liability components was $2.0 million and $2.9 million at December 31, 2010 and December 31, 2009, respectively. The net carrying amount of the liability components was $126.9 million and $126.0 million at December 31, 2010 and December 31, 2009, respectively. Interest expense for the years ended December 31, 2010, 2009 and 2008 related to the exchangeable senior notes was $13.8 million, $16.8 million and $20.7 million, respectively, of which $11.9 million, $14.5 million and $17.9 million was related to contractual interest, respectively, and $1.9 million, $2.3 million and $2.8 million was attributable to amortization of the debt discount and deferred financing costs, respectively.

    Modification of Mortgage Loan

        The Company owns a partially vacant net lease property located in Cincinnati, Ohio. In November 2010, the mortgage lender declared a payment default and, in December 2010, began foreclosure proceedings on the property. The Company is currently in discussions with the lender seeking to modify the mortgage terms; however, there can be no assurance that there will be a favorable resolution and the lender may ultimately foreclose on the property.

    Mortgage note refinancing

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

        On July 30, 2010, the Company closed on a $20.0 million loan with VCC Healthcare Fund, LLC. The proceeds will be used to refinance $8.0 million of loans maturing between June 2037 and October 2038 on four of the Company's healthcare- related net leased assets. The excess proceeds from

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

10. Borrowings (Continued)


the financing will be used for working capital and general corporate purposes. The loan has a five-year term and an interest rate of 9.25%.

    Debt Repurchases

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

        During the year ended December 31, 2008, the Company repurchased $111.4 million of its notes, which consisted of $93.6 million of its N-Star CDO bonds payable, $11.7 million of its 7.25% exchangeable senior notes and $6.1 million of its liability to subsidiary trusts issuing preferred securities for a total of $49.8 million. The Company recorded a realized gain of $36.5 million in connection with the repurchase of its notes. These repurchases also represented a $61.6 million discount to the par value of the debt.

    JP Facility

        On October 8, 2008, the Company and a subsidiary entered into Amendment No. 1 (the "Amendment") to the Master Repurchase Agreement (as amended, the "JP Facility") with JPMorgan. The JP Facility had approximately $50.4 million outstanding on the amendment date and such amounts bear interest at spreads of 1.25% to 1.80% over one-month LIBOR. Advance rates for the assets currently financed under the JP Facility range from 55% to 80% of the value of the collateral for which the advance is made. Interest rates and advance rates on future borrowings under the JP Facility will be determined by JPMorgan. Pursuant to the Amendment, the maximum amount outstanding under the JP Facility shall not exceed $150 million and we have agreed to guaranty the outstanding amount under the JP Facility. In August 2009, the Company terminated the JP Facility and repaid the remaining principal balance of $12.2 million.

    LB Term Loan

        In June 2008, a wholly owned subsidiary of the Company entered into a $24.2 million term loan agreement with an investment bank (the "LB Term Loan"). The collateral for the LB Term Loan is a $44.0 million mezzanine loan position and the Company has guaranteed 50% of the outstanding term debt. The LB Term Loan matures in February 2012, has a one-year extension option and bears interest at a spread of 1.50% over one-month LIBOR. The LB Term Loan contains certain covenants including, among others, financial covenants of a minimum tangible net worth and a minimum debt-to-equity ratio.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

11. Commitments and Contingencies

Obligations Under Capital Leases and Operating Lease Agreements

        The Company is the lessee of two locations under capital leases, seven ground leases under operating real estate, of which five are paid directly by the tenants, and five corporate offices that are located in New York, NY, Los Angeles, CA, Dallas, TX, Englewood, CO, and Bethesda, MD. The following is a schedule of minimum future rental payments under these contractual lease obligations as of December 31, 2010:

Years Ending December 31:
   
 

2011

  $ 5,600  

2012

    5,392  

2013

    5,506  

2014

    5,460  

2015

    5,331  

Thereafter

    36.533  
       

Total minimum lease payments

    63,822  

Less: Amounts representing interest

    9,220  
       

Future minimum lease payments

  $ 54,602  
       

        Under one of the capital leases, the Company also pays rent equal to 15% of the minimum rental income received from the sub-tenant. The Company's Los Angeles office is sub-leased through December 31, 2011 and generated approximately $0.1 million in sub-lease rental income for each of the years ended December 31, 2010 and 2009. The Company recognized $2.9 million, $2.6 million and $3.1 million in rental expense for its five corporate offices for the years ended December 31, 2010, 2009 and 2008, respectively.

Chatsworth Property

        One of the Company's net lease investments was comprised of three office buildings totaling 257,000 square feet located in Chatsworth, CA and was 100% leased to Washington Mutual Bank, FA, or WaMu. NRFC NNN Holdings, Inc. , or NNN, which is a subsidiary of the Company's, is a defendant in a lawsuit, or the Lawsuit, filed by GECCMC 2005-CI Plummer Office Limited Partnership, or the Lender, in the Superior Court of the State of California, County of Los Angeles, relating to a loan the properties previously owned by one of the Company's subsidiaries, NRFC Sub IV, that were 100% leased, or the Lease, to WaMu. The Lawsuit alleges, among other things, that the loan provided by Lender to NRFC Sub IV became a recourse obligation of NNN due to an alleged termination of the Lease. The judge presiding over the Lawsuit granted the Lender's motion for summary judgment and, accordingly, entered a judgment against NNN in the amount of approximately $45 million, or the Judgment. NNN intends to vigorously pursue an appeal of the decision.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

11. Commitments and Contingencies (Continued)

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

        In connection with filing for an appeal, pursuant to California law NNN is required to post a bond in an amount equal to one and a half times the amount of the Judgment, or the Bond. Accordingly, the Company has entered into a standard General Agreement of Indemnity with an issuer of surety bonds, or the Surety Agreement, which could require the Company to post collateral equal to the amount of the Bond. As part of the Surety Agreement, in connection with the issuance of the Bond, the Company expects to post cash collateral equal to thirty-eight percent of the amount of the Bond, or approximately $26 million.

12. Rental Income Under Operating Leases

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

        The following is a schedule of future minimum rental income under non-cancelable leases at December 31, 2010:

Years Ending December 31:
   
 

2011

  $ 78,081  

2012

    76,162  

2013

    75,505  

2014

    71,961  

2015

    68,640  

Thereafter

    145,016  
       

  $ 515,365  
       

        Included in rental income is percentage rent of $694, $650 and $585 for the years ended December 31, 2010, 2009 and 2008, respectively.

13. Related Party Transactions

Advisory Fees

        The Company has agreements with each of its N-Star CDO financings and its CSE RE 2006-A CDO financing to perform certain advisory services. The Company earned total fees on these agreements of approximately $3.1 million, $7.1 million and $12.0 million for the years ended December 31, 2010, 2009 and 2008, respectively. As of January 1, 2010, the advisory fee income related

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

13. Related Party Transactions (Continued)


to N-Star I, N-Star II, N-Star III and N-Star V is eliminated as a result of the consolidation of the respective CDO financings.

        The Company has an agreement with NSREIT, a commercial finance REIT, to perform certain advisory services. As of December 31, 2010, the Company has earned an immaterial amount of fees on this agreement.

        The Company has an agreement with the Securities Fund to receive base management fees ranging from 1.0% to 2.0% per year on third-party capital. For the years ended December 31, 2010, 2009 and 2008, the Company earned $0.1 million, $0.2 million and $0.5 million in management fees.

Asset Management Fees

        The Company entered into a management agreement in April 2006 with Wakefield Capital Management Inc. to perform certain management services. The Company incurred $0.5 million, $3.4 million and $3.4 million in management fees for the years ended December 31, 2010, 2009 and 2008, respectively, which are recorded in asset management fees-related parties in the condensed consolidated statement of operations. In April 2010, in connection with the Company's acquisition of the 51% membership interest in Midwest Holdings, the Company amended the management agreement with Wakefield Capital Management, Inc. The amended management fee will be equal to one dollar per year.

        The Company entered into a management agreement in March 2007 with the management company of our corporate lending venture to perform certain management services. On May 7, 2008, the Company terminated its management agreement with the management company of our corporate lending venture. The Company incurred zero in management fees for the years ended December 31, 2010 and 2009, and $1.3 million in management fees for the years ended December 31, 2008, respectively, which are recorded in asset management fees-related parties in the consolidated statement of operations.

Legacy Fund

        The Company has two real estate debt investments with a subsidiary of Legacy Partners Realty Fund I, LLC (the "Legacy Fund"), as borrower, totaling $33.4 million in principal amount. In January 2010, the Company extended the $19.2 million loan through January 2012, with three additional one-year extension options. In June 2010 the Company modified the $14.1 million loan. The interest rate was increased to LIBOR plus 450 and extended the maturity date to April, 2013, with two one-year extension options. One of the Company's directors, Preston Butcher, is the chairman of the Board of Directors and chief executive officer and owns a significant interest in Legacy Partners Commercial, LLC, which indirectly owns an equity interest in, and owns the manager of, the Legacy Fund. The loans are included in real estate debt investments in the consolidated balance sheets.

Hard Rock Hotel Loan

        In March 2007, the Company acquired a $100.0 million junior participation (subsequently converted into a second loss mezzanine loan in November 2007) in the financing provided by Credit Suisse, or CS, in connection with the acquisition of the Hard Rock Hotel and Casino, or Hard Rock, in

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(Amounts in Thousands, Except per Share Data)

13. Related Party Transactions (Continued)


Las Vegas, NV, by a joint venture between DLJ Merchant Banking and Morgans Hotel Group, or Morgans, which is a minority partner in the joint venture. In August 2008, the Company purchased a $30.0 million junior participation from CS, in connection with the acquisition of 11.05 acres of land immediately adjacent to the Hard Rock by the same joint venture. Both loans were subsequently modified in December 2009, which included the extension of each loan's maturity date. David Hamamoto, the Company's chairman and chief executive officer, is the chairman of the board of Morgans.

14. Fair Value of Financial Instruments

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

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

        For the real estate debt investments the fair value of the fixed and floating rate investments was approximated comparing yields at which the investments are held to estimated yields at which loans originated with similar credit risks or market yields at which a third party might require to purchase the investment by discounting future cash flows at such market yields. Prices were calculated assuming fully extended maturities regardless of if structural or economic tests required to achieve such extended maturities. At December 31, 2010, the fair market value was $1.6 billion with a gross principal amount of $2.7 billion. Of the $2.7 billion gross principal amount, approximately $997.1 million of gross principal amount in CSE RE 2006-A was recorded at a fair market value of approximately $321.4 million at December 31, 2010. At December 31, 2009, the fair market value was $1.7 billion with a gross principal amount of $2.0 billion.

        For the exchangeable senior notes, the Company uses available market information, which includes quoted market prices or recent transactions, if available to estimate their fair value. At December 31, 2010, the fair market value of the 7.25% exchangeable senior notes was $64.4 million, with a carrying amount of $67.4 million and the fair market value of the 11.50% exchangeable senior notes was $56.8 million with a carrying amount of $59.4 million. At December 31, 2009, the fair market value of the 7.25% exchangeable senior notes was $34.8 million with a carrying amount of $67.0 million and the fair market value of the 11.50% exchangeable senior notes was $28.1 million with a carrying amount of $59.0 million.

        For fixed rate mortgage loans payable, the Company uses rates currently available to them with similar terms and remaining maturities to estimate their fair value. At December 31, 2010, the fair market value was 818.9 million with a carrying amount of $803.1 million. At December 31, 2009, the fair market value was $800.1 million with a carrying amount of $795.9 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

14. Fair Value of Financial Instruments (Continued)

        Disclosure about fair value of financial instruments is based on pertinent information available to management as of December 31, 2010 and December 31, 2009. Although management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.

15. Equity Based Compensation

Omnibus Stock Incentive Plan

        On September 14, 2004, the Board of Directors of the Company adopted the NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan (the "Stock Incentive Plan"). The Stock Incentive Plan provides for the issuance of stock- based incentive awards, including incentive stock options, non-qualified stock options, and stock appreciation rights, shares of common stock of the Company, including restricted shares, and other equity-based awards, including OP Units which are structured as profits interests ("LTIP Units") or any combination of the foregoing. The eligible participants in the Stock Incentive Plan include directors, officers and employees of the Company and, prior to October 29, 2005, employees pursuant to the shared facilities and services agreement. An aggregate of 8,933,038 shares of common stock of the Company are currently reserved and authorized for issuance under the Stock Incentive Plan, subject to equitable adjustment upon the occurrence of certain corporate events. As of December 31, 2010, the Company has issued an aggregate of 8,280,417 LTIP Units, net of forfeitures of 63,291 LTIP Units. An aggregate of 4,107,971 LTIP Units were converted to commons stock and 581,669 shares of common stock were issued pursuant to the Stock Incentive Plan. Of the 8,280,417 LTIP Units, so long as the recipient continues to be an eligible recipient, 4,974,034 will vest to the individual recipient at a rate of one-twelfth of the total amount granted as of the end of each quarter, beginning with the first quarter after the date of grant ended either January 29, April 29, July 29, or October 29 for the three-year vesting period, 2,154,029 will vest over 16 consecutive quarters with the first quarter being January 29, 2008, 701,058 cliff vested on December 31, 2010, and 170,801 are subject to no vesting requirements. The Company accelerated the vesting of 280,495 LTIP Units as part of the termination agreements provided to employees. In addition, the LTIP Unit holders are entitled to dividends on the entire grant beginning on the date of the grant.

        The Company has recognized compensation expense of $13.3 million, $19.7 million and $21.3 million for the years ended December 31, 2010, 2009 and 2008, respectively. As of December 31, 2010, there were approximately 899,004 unvested LTIP Units and no LTIP Units were forfeited during the period. The related compensation expense to be recognized over the remaining vesting period of the Omnibus Incentive Plan LTIP grants is $5.7 million, provided there are no forfeitures.

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(Amounts in Thousands, Except per Share Data)

15. Equity Based Compensation (Continued)

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

 
  December 31, 2010   December 31, 2009  
 
  LTIP
Grants
  Weighted
Average
Grant Price
  LTIP
Grants
  Weighted
Average
Grant Price
 

Balance at beginning of year(1)

    7,323   $ 9.85     8,067   $ 9.86  

Granted

                 

Converted to common stock

    (3,031 )   12.59     (744 )   9.83  

Forfeited

    (3 )   8.55          
                   

Ending balance(2)

    4,289   $ 7.92     7,323   $ 9.85  
                   

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

(2)
Reflects balance at December 31, 2010 and December 31, 2009, respectively.

Incentive Compensation Plan

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

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

        The annual bonus component for 2010 was calculated based on AFFO and liquidity targets (weighted 50% and 25%, respectively) with the remaining 25% of the 2010 annual bonus determined in

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(Amounts in Thousands, Except per Share Data)

15. Equity Based Compensation (Continued)


the Committee's discretion. Additionally, the Committee had also allocated $2.0 million under the Plan for 2010 discretionary cash bonuses, of which $1.5 million will be paid. The deferred bonus component was calculated based on the same performance measures as the annual bonus, but paid as described above. For the long-term incentive component for 2010, each participant was 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 as of December 31, 2010 (such amount, the "Initial Long-Term Allocation"). Upon the conclusion of the three-year performance period, the participant will receive a payout equal to the value of one share of common stock at the time of such payout, with respect to a share of common stock during the three-year performance period, for each unit actually earned based on the Company's achievement of cumulative AFFO and/or a stock price goal during the performance period (the "Long-Term Payout"). The Long-Term Payout will be made in the form of shares of common stock to the extent available under the Company's equity compensation plans or, if all or a portion of such shares are not available, in cash; provided, that the amount of cash paid to any participant with respect to the 2010 long-term incentive component shall not exceed such participant's Initial Long-Term Allocation.

        The Company recorded $2.1 million in equity-based compensation expense related to the long term incentive component of the Plan for the year ended December 31, 2010.

2006 Outperformance Plan

        In January 2006, the Compensation Committee of the Board of Directors approved the NorthStar Realty Finance Corp. 2006 Outperformance Plan (the "2006 Outperformance Plan"), a long-term compensation program to further align the interests of the Company's stockholders and management. The Company did not meet the performance hurdles under the 2006 Outperformance Plan as of the conclusion of the 2006 Outperformance Plan on December 31, 2008. The Company recorded compensation expense for the 2006 Outperformance Plan of $0.2 million, $1.1 million and $1.1 million for the year ended December 31, 2010, 2009 and 2008, respectively.

16. Stockholders' Equity

Dividend Reinvestment and Stock Purchase Plan

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

        During the year ended December 31, 2010, the Company issued a total of 92,362 common shares pursuant to the Plan for a gross sales price of approximately $0.4 million. During the year ended

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(Amounts in Thousands, Except per Share Data)

16. Stockholders' Equity (Continued)


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

Equity Distribution Agreements

        In May 2009, the Company entered into an equity distribution agreement with JMP Securities LLC ("JMP"). In accordance with the terms of the agreement, the Company may offer and sell up to 10,000,000 shares of its common stock from time to time through JMP. JMP will receive a commission from the Company of up to 2.5% of the gross sales price of all shares sold through it under the equity distribution agreement. For the year ended December 31, 2010, the Company did not sell any common shares pursuant to its equity distribution agreement with JMP. For the year ended December 31, 2009, the Company issued 7,326,942 common shares and received approximately $25.7 million of net cash proceeds pursuant to its equity distribution agreement with JMP.

Common Stock

        In May 2010, the Company issued 98,860 shares of common stock with a fair value at the date of grant of $0.3 million to its Board of Directors as part of their annual grants.

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

        In May 2008, the Company issued 37,812 shares of common stock with a fair value at the date of grant of $0.4 million to its Board of Directors as part of their annual grants.

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

        For the year ended December 31, 2009, the Company issued a total of 235,183 shares of common stock related to employee compensation arrangements and employee separation agreements.

Stock Repurchase Program

        On October 8, 2008, the Company's Board of Directors authorized a stock repurchase program of up to 10,000,000 shares of our outstanding common stock, or approximately 16% of its outstanding common stock. Stock repurchases under this program will be made from time to time through the open market or in privately negotiated transactions. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements, market conditions, and other corporate liquidity requirements and priorities. For the year ended December 31, 2008, the Company repurchased a total of approximately 475,051 common shares for approximately $1.4 million. For the years ended December 31, 2010 and 2009, the Company did not repurchase any common shares pursuant to its stock repurchase program.

Dividends

        On January 22, 2008, the Company declared a cash dividend of $0.36 per share of common stock, $0.54688 per share of Series A preferred stock and $0.51563 per share of Series B preferred stock. The

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(Amounts in Thousands, Except per Share Data)

16. Stockholders' Equity (Continued)


dividends were paid on February 15, 2008 to stockholders of record as of the close of business on February 5, 2008.

        On April 22, 2008, the Company declared a cash dividend of $0.36 per share of common stock, $0.54688 per share of Series A preferred stock and $0.51563 per share of Series B preferred stock. The dividends were paid on May 15, 2008 to the stockholders of record as of the close of business on May 5, 2008.

        On July 22, 2008, the Company declared a cash dividend of $0.36 per share of common stock, $0.54688 per share of Series A preferred stock and $0.51563 per share of Series B preferred stock. The dividends were paid on August 15, 2008 to the stockholders of record as of the close of business on August 5, 2008.

        On October 8, 2008, the Company declared a cash dividend of $0.36 per share of common stock. On October 21, 2008, the Company declared a cash dividend of $0.54688 per share of Series A preferred stock and $0.51563 per share of Series B preferred stock. The dividends were paid on November 14, 2008 to the stockholders of record as of the close of business on November 4, 2008.

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

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

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

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

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

        On January 19, 2010, the Company declared a dividend of $0.10 per share of common stock, $0.54688 per share of Series A preferred stock and $0.51563 per share of Series B preferred stock. The dividends were paid on February 12, 2010, to the stockholders of record as of February 5, 2010.

        On April 20, 2010, the Company declared a dividend of $0.10 per share of common stock, $0.54688 per share of Series A preferred stock and $0.51563 per share of Series B preferred stock. The

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(Amounts in Thousands, Except per Share Data)

16. Stockholders' Equity (Continued)


dividends were paid on May 14, 2010, to the stockholders of record as of the close of business on May 4, 2010.

        On July 20, 2010, the Company declared a dividend of $0.10 per share of common stock, $0.54688 per share of Series A preferred stock and $0.51563 per share of Series B preferred stock. The dividends were paid on August 16, 2010, to the stockholders of record as of the close of business on August 6, 2010.

        On October 19, 2010, the Company declared a dividend of $0.10 per share of common stock, $0.54688 per share of Series A preferred stock and $0.51563 per share of Series B preferred stock. The dividends will be paid on November 15, 2010, to the stockholders of record as of the close of business on November 5, 2010.

Earnings Per Share

        Earnings per share for the years ended December 31, 2010, 2009 and 2008 is computed as follows (in thousands):

 
  Year Ended
December 31,
2010
  Year Ended
December 31,
2009
  Year Ended
December 31,
2008
 

Numerator (Income)

                   

Basic Earnings

                   

Net (loss)/income attributable to NorthStar Realty Finance Corp. common stockholders

  $ (395,466 ) $ (151,205 ) $ 609,232  

Effect of dilutive securities:

                   
 

Income/(loss) allocated to non-controlling interest

    (25,864 )   (15,848 )   67,558  
               

Dilutive net income/(loss) available to stockholders

  $ (421,330 ) $ (167,053 ) $ 676,790  
               

Basic Earnings:

                   

Shares available to common stockholders

    76,553     69,870     63,136  

Effect of dilutive securities:

                   

OP/LTIP units

    6,290     7,323     7,001  
               

Dilutive Shares

    82,843     77,193     70,137  
               

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

  $ (5.09 ) $ (2.16 ) $ 9.65  
               

        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.

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(Amounts in Thousands, Except per Share Data)

17. Non-controlling Interest

Operating Partnership

        Non-controlling interest represents the aggregate limited partnership interests or OP Units in the Operating Partnership held by limited partners (the "Unit Holders"). Income allocated to the non-controlling interest is based on the Unit Holders ownership percentage of the Operating Partnership. The ownership percentage is determined by dividing the numbers of OP Units held by the Unit Holders by the total number of dilutive shares. The issuance of additional shares of beneficial interest (the "Common Shares" or "Share") or OP Units changes the percentage ownership of both the Unit Holders and the Company. Since a unit is generally redeemable for cash or Shares at the option of the Company, it is deemed to be equivalent to a Share. Therefore, such transactions are treated as capital transactions and result in an allocation between shareholders' equity and non-controlling interest in the accompanying consolidated balance sheet to account for the change in the ownership of the underlying equity in the Operating Partnership. As of December 31, 2010 and December 31, 2009, non-controlling interest related to the aggregate limited partnership units of 4,292,199 and 7,323,310, represented a 5.21% and 8.91% interest in the Operating Partnership, respectively. Income/(loss) allocated to the operating partnership non-controlling interest for the years ended December 31, 2010 and 2009 was a loss of $25.9 million and a loss of $15.8 million, respectively.

Contingently Redeemable Non-controlling Interest

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

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

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(Amounts in Thousands, Except per Share Data)

17. Non-controlling Interest (Continued)


redeemed in full, Inland American may sell the assets of NRF Healthcare, LLC. The Company is currently exploring alternatives for partial and/or full redemption of the preferred membership interest.

        For the years ending December 31, 2010 and 2009, the Company reclassified Inland American's non-controlling interest from equity to temporary equity on the consolidated balance sheets in accordance with its interpretation of Accounting Series Release No. 268, Presentation in Financial Statements of "Redeemable Preferred Stocks", Section No. 211, "Redeemable Preferred Stocks"

        Income allocated to the non-controlling interests for the years ended December 31, 2010 and 2009 was income of $10.8 million and $9.6 million, respectively.

Joint Ventures

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

        In March 2007, the Company formed a joint venture with Monroe. On May 7, 2008, the Company completed a recapitalization of Monroe Capital, its middle- market corporate lending venture. Upon completion of the recapitalization transaction, the Company deconsolidated the venture. Monroe Capital's equity is no longer a component of non-controlling interest. Loss allocated to non-controlling interest prior to the recapitalization of Monroe Capital for the year ended December 31, 2008 was $0.3 million.

18. Risk Management and Derivative Activities

Derivatives

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 the year ended December 31, 2009, such derivatives were used to hedge the variable cash flows associated with certain variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the year ended December 31, 2009, the Company recorded immaterial amounts of hedge ineffectiveness in earnings.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

18. Risk Management and Derivative Activities (Continued)

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

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

Interest rate swaps

                         

As of December 31, 2009

    10   $ 90,749   $ (7,691 ) 4.18% - 5.08%   March 2010 - August 2018

        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.

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

        Derivatives not designated as hedges are not speculative and are used to manage the Company's exposure to interest rate movements and other identified risks but do not meet strict hedge accounting requirements. For the years ended December 31, 2010, 2009 and 2008 the Company recorded, in earnings, a mark-to-market unrealized loss of $134.0 million, an unrealized gain of $4.6 million and an unrealized loss of $15.9 million, respectively, for the non-qualifying interest rate swaps. For the years ended December 31, 2010, 2009 and 2008, the Company recorded a $6.6 million, a $5.6 million and a $5.5 million reclassification from accumulated other comprehensive income for the non-qualifying interest rate swaps, respectively.

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

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

Interest rate swaps

                         

As of December 31, 2010

    64   $ 2,812,409   $ (220,630 ) 0.37% - 7.00%   February 2011 - October 2019

As of December 31, 2009(1)

    22   $ 897,335   $ (59,353 ) 0.34% - 5.63%   May 2010 - June 2018

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

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(Amounts in Thousands, Except per Share Data)

18. Risk Management and Derivative Activities (Continued)

        The following table presents the fair value of the Company's derivative financial instruments as well as their classification on its balance sheet as of December 31, 2010 and 2009:

Tabular Disclosure of Fair Values of Derivative Instruments

 
  Asset Derivatives   Liability Derivatives  
 
  As of
December 31,
2010
  As of
December 31,
2009(1)
  As of
December 31,
2010
  As of
December 31,
2009(1)
 
 
  Balance
Sheet
Location
  Fair
Value
  Balance
Sheet
Location
  Fair
Value
  Balance
Sheet
Location
  Fair
Value
  Balance
Sheet
Location
  Fair
Value
 

Derivatives designated as hedging instruments

                                         

Interest rate products

  Derivative instrument, at fair value   $   Derivative instrument, at fair value   $   Derivative liability, at fair value   $   Derivative liability, at fair value   $ (7,691 )
                                   

Total derivatives designated as hedging instruments

      $       $       $       $ (7,691 )
                                   

Derivatives not designated as hedging instruments

                                         

Interest rate products

  Derivative instrument, at fair value   $ 59   Derivative instrument, at fair value   $   Derivative liability, at fair value   $ (220,689 ) Derivative liability, at fair value   $ (59,353 )
                                   

Total derivatives not designated as hedging instruments

      $ 59       $       $ (220,689 )     $ (59,353 )
                                   

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

18. Risk Management and Derivative Activities (Continued)

        The following tables present the effect of the Company's derivative financial instruments on its statement of operations for the years ended December 31, 2010, 2009 and 2008:

Derivatives in Cash Flow Hedging Relationships

 
  Location of Gain/(loss)
recognized in income
  Year
Ended
December 31,
2010
  Year
Ended
December 31,
2009(1)
  Year
Ended
December 31,
2008(1)
 

Interest rate products

                       

Amount of gain or (loss) in OCI on derivative (effective portion)

  n/a   $ (3,448 ) $ 2,115   $ (14,758 )

Amount of gain or (loss) reclassified from accumulated OCI into income (effective portion)

  Interest Expense   $ 30   $ 28   $ 28  

(1)
The years ended December 31, 2009 and 2008 do not include gains or losses and amounts reclassified from accumulated OCI into income on the derivative instruments of N-Star I, II, III and V, as these CDO financings were unconsolidated financings prior to January 1, 2010.

Derivatives Not Designated as Hedging Instruments

 
  Location of Gain/(loss)
recognized in income
  Year
Ended
December 31,
2010
  Year
Ended
December 31,
2009(1)
  Year
Ended
December 31,
2008(1)
 

Interest rate products

                       

Amount of gain or (loss) recognized in income

  Unrealized gain (loss) on
investment and other
  $ (134,070 ) $ (16,463 ) $ (30,851 )

Amount of gain or (loss) reclassified from accumulated OCI into income

  Unrealized gain (loss) on
investment and other
  $ (6,635 ) $ (5,618 ) $ (5,460 )

(1)
The years ended December 31, 2009 and 2008 do not include gains or losses and amounts reclassified from accumulated OCI into income on the derivative instruments of N-Star I, II, III and V, as these CDO financings were unconsolidated financings prior to January 1, 2010.

        At December 31, 2010, the Company's counterparties hold approximately $26.7 million of cash margin as collateral against its swap contracts.

Credit Risk Concentrations

        Concentrations of credit risk arise when a number of borrowers, tenants, operators or issuers related to the Company's investments are engaged in similar business activities or located in the same

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(Amounts in Thousands, Except per Share Data)

18. Risk Management and Derivative Activities (Continued)


geographic location to be similarly affected by changes in economic conditions. The Company monitors its portfolio to identify potential concentrations of credit risks. The Company has no one borrower, tenant or operator that generates 10% or more of its total revenue. However, approximately 34% of the Company's rental and escalation revenue for the year ended December 31, 2010, is generated from one tenant and one operator in the Company's healthcare net lease portfolio. The Company believes the remainder of its net lease portfolio is reasonably well diversified and does not contain any unusual concentration of credit risks.

19. Quarterly Financial Information (Unaudited)

        The tables below reflect the Company's selected quarterly information for the Company for the years ended December 31, 2010, 2009 and 2008:

 
  Three Months Ended  
 
  December 31,
2010
  September 30,
2010
  June 30,
2010
  March 31,
2010
 
 
  (unaudited)
 

Total revenue

  $ 149,351   $ 126,780   $ 95,929   $ 81,613  

(Loss) from continuing operations

    (267,070 ) $ (146,683 )   43,664     (20,033 )

(Loss) from discontinued operations

    (111 )   (116 )   (1,619 )   (120 )

Consolidated net (loss)/income

    (267,181 )   (146,849 )   44,573     (20,103 )

Net income attributable to NorthStar Realty Finance Corp. common stockholders

    (258,410 )   (144,118 )   31,985     (24,923 )

Net income (loss) per share attributable to NorthStar Realty Finance Corp. common stockholders—basic/diluted

  $ (3.33 ) $ (1.87 ) $ 0.42   $ (0.33 )

Weighted-average shares outstanding

                         
 

basic

    77,564,571     77,139,868     76,407,339     75,068,654  
 

diluted

    82,383,931     82,364,109     82,279,682     82,217,223  

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

19. Quarterly Financial Information (Unaudited) (Continued)

 

 
  Three Months Ended  
 
  December 31,
2009
  September 30,
2009
  June 30,
2009
  March 31,
2009
 
 
  (unaudited)
 

Total revenue

  $ 67,235   $ 62,228   $ 66,399   $ 70,217  

Income (loss) from continuing operations

    (189,989 ) $ (67,629 )   2,404     102,667  

Income (loss) from discontinued operations

    (190 )   657     659     669  

Consolidated net income (loss)

    (176,000 )   (65,773 )   2,469     102,731  

Net income (loss) attributable to NorthStar Realty Finance Corp. common stockholders

    (165,122 )   (66,466 )   (4,253 )   84,635  

Net income (loss) per share attributable to NorthStar Realty Finance Corp. common stockholders—basic/diluted

  $ (2.01 ) $ (0.86 ) $ (0.06 ) $ 1.17  

Weighted-average shares outstanding

                         
 

basic

    74,311,394     69,896,439     67,353,541     64,348,264  
 

diluted

    82,134,760     77,356,187     75,049,690     72,255,413  

 

 
  Three Months Ended  
 
  December 31,
2008
  September 30,
2008
  June 30,
2008
  March 31,
2008
 
 
  (unaudited)
 

Total revenue

  $ 83,980   $ 91,383   $ 90,939   $ 97,674  

Income (loss) from continuing operations

    251,202     250,951     (23,836 )   221,602  

Income (loss) from discontinued operations

    661     630     569     550  

Consolidated net income (loss)

    251,863     251,581     (23,267 )   222,152  

Net income attributable to NorthStar Realty Finance Corp. common stockholders

    218,992     218,310     (25,059 )   193,805  

Net income (loss) per share attributable to NorthStar Realty Finance Corp. common stockholders—basic/diluted

  $ 3.11   $ 3.11   $ (0.36 ) $ 2.78  

Weighted-average shares outstanding

                         
 

basic

    63,160,947     62,825,383     62,708,688     62,243,736  
 

diluted

    70,422,832     70,229,958     70,192,538     69,589,079  

20. Segment Reporting

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

        The Company's operating real estate segment is focused on acquiring commercial real estate facilities located throughout the U.S. that are primarily leased under long-term triple-net leases to

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

20. Segment Reporting (Continued)

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

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

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

20. Segment Reporting (Continued)

        The following table summarizes segment reporting for the years ended December 31, 2010, 2009 and 2008 (in thousands):

 
  Real Estate
Debt
  Operating
Real Estate
  Real Estate
Securities
  Corporate
Loans
  Healthcare   Broker-
Dealer
  Unallocated(1)   Consolidated
Total
 

December 31,2010:

                                                 
 

Interest income

  $ 143,659   $ 20   $ 176,183   $   $ 247   $   $ (209 ) $ 319,900  
 

Rental and escalation income

    155     36,570             88,104         (1 )   124,828  
 

Commission income

                        2,476         2,476  
 

Other revenue

    2,334     11     3,464         189     46     425     6,469  
                                   

    146,148     36,601     179,647         88,540     2,522     215     453,673  
 

Interest expense

   
(28,985

)
 
(21,554

)
 
(24,400

)
 
   
(34,039

)
 
   
(22,354

)
 
(131,332

)
 

Operating expenses

    (36 )   (4,730 )           (32,907 )       (18 )   (37,691 )
 

Commission expense

                        (1,867 )       (1,867 )
 

Realized gain (loss)

    79,357     2,493     74,847     7,508     (494 )       (98 )   163,613  
 

Unrealized gain (loss)

    (269,468 )       (230,874 )       (40 )       (38,189 )   (538,571 )
 

Equity earning in unconsolidated venture

    (5,390 )   526     (3,911 )   8,509     1,987         532     2,253  
 

Impairment on operating real estate / loan loss reserves

    (167,963 )   (5,249 )   (233 )               (249 )   (173,694 )
 

Depreciation & amortization

    (548 )   (15,687 )           (16,666 )   (26 )   (1,170 )   (34,097 )
 

G&A and other

    (13,147 )   (1,904 )   (4,199 )   (4,346 )   (6,698 )   (5,975 )   (53,611 )   (89,880 )
                                   

    (406,180 )   (46,105 )   (188,770 )   11,671     (88,857 )   (7,868 )   (115,157 )   (841,266 )

Income from discontinued operations

   
(2,063

)
 
96
   
   
   
   
   
   
(1,967

)
                                   

Consolidated net (loss)/income

    (262,095 )   (9,408 )   (9,123 )   11,671     (317 )   (5,346 )   (114,942 )   (389,560 )
                                   

Net income (loss) attributable to the non-controlling interest

    17,401     624     606     (775 )   (10,824 )   355     7,631     15,018  

Preferred stock dividends

    (14,078 )   (506 )   (490 )   627     (17 )   (287 )   (6,174 )   (20,925 )
                                   

Net income (loss) attributable to NorthStar Realty Finance Corp. common stockholders

  $ (258,772 ) $ (9,289 ) $ (9,007 ) $ 11,523   $ (11,158 ) $ (5,278 ) $ (113,485 ) $ (395,466 )
                                   

Total Assets as of December 31, 2010

  $ 2,216,425   $ 418,386   $ 1,741,395   $ 89   $ 634,932   $ 1,591   $ 139,173   $ 5,151,991  
                                   

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

20. Segment Reporting (Continued)

 

 
  Real Estate
Debt
  Operating
Real Estate
  Real Estate
Securities
  Corporate
Loans
  Healthcare   Broker-
Dealer
  Unallocated(1)   Consolidated
Total
 

December 31,2009:

                                                 
 

Interest income

  $ 100,697   $ 20   $ 59,687   $   $ 276   $   $ (775 ) $ 159,905  
 

Rental and escalation income

    140     41,612             56,390         1     98,143  
 

Commission income

                                 
 

Other revenue

    550     3     7,470                 8     8,031  
                                   

    101,387     41,635     67,157         56,666         (766 )   266,079  
 

Interest expense

   
(42,331

)
 
(21,829

)
 
(23,462

)
 
   
(12,539

)
 
   
(21,128

)
 
(121,289

)
 

Operating expenses

        (7,325 )           (7,315 )       (13 )   (14,653 )
 

Commission expense

                                 
 

Realized gain (loss)

    (3,156 )       73,568         12,328         59,520     142,260  
 

Unrealized gain (loss)

    (84,617 )       25,684     (31,451 )   (21,089 )       (98,503 )   (209,976 )
 

Equity earning in unconsolidated venture

    (3,696 )   419     (6,547 )       7,483         532     (1,809 )
 

Impairment on operating real estate / loan loss reserves

    (84,415 )                       670     (83,745 )
 

Depreciation & amortization

    (16 )   (16,858 )           (24,263 )   (1 )   (588 )   (41,726 )
 

G&A and other

    (10,445 )   (1,462 )   (2,807 )   29,817     (6,360 )   (1,268 )   (81,366 )   (73,891 )
                                   

    (228,676 )   (47,055 )   66,436     (1,634 )   (51,755 )   (1,269 )   (140,876 )   (404,829 )

Income from discontinued operations

   
   
467
   
   
   
1,709
   
   
   
2,176
 
                                   

Consolidated net (loss)/income

    (127,289 )   (4,953 )   133,593     (1,634 )   6,620     (1,269 )   (141,642 )   (136,573 )
                                   

Net income (loss) attributable to the non-controlling interest

    14,771     575     (15,504 )   190     (10,323 )   147     16,437     6,293  

Preferred stock dividends

    (19,503 )   (759 )   20,469     (250 )   1,014     (194 )   (21,702 )   (20,925 )
                                   

Net income (loss) attributable to NorthStar Realty Finance Corp. common stockholders

  $ (132,021 ) $ (5,137 ) $ 138,558   $ (1,694 ) $ (2,689 ) $ (1,316 ) $ (146,907 ) $ (151,205 )
                                   

Total Assets as of December 31, 2009

  $ 2,139,259   $ 444,558   $ 329,915   $ 12,565   $ 633,635   $ 956   $ 108,676   $ 3,669,564  
                                   

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

20. Segment Reporting (Continued)

 

 
  Real Estate
Debt
  Operating
Real Estate
  Real Estate
Securities
  Corporate
Loans
  Healthcare   Broker-
Dealer
  Unallocated(1)   Consolidated
Total
 

December 31,2008:

                                                 
 

Interest income

  $ 161,325   $ 15   $ 53,279   $ 11,917   $ 374   $   $ 528   $ 227,438  
 

Rental and escalation income

    (3 )   50,819             56,709         21     107,546  
 

Commission income

                                 
 

Other revenue

    7,233     9,013     12,550     96     3         97     28,992  
                                   

    168,555     59,847     65,829     12,013     57,086         646     363,976  
 

Interest expense

   
(89,502

)
 
(28,358

)
 
(33,508

)
 
(5,997

)
 
(21,276

)
 
   
(11,897

)
 
(190,538

)
 

Operating expenses

        (7,834 )           (325 )       (1 )   (8,160 )
 

Commission expense

                                 
 

Realized gain (loss)

    24,533         4,422         1,382         7,362     37,699  
 

Unrealized gain (loss)

    619,760         (14,422 )   (29,993 )   (118,225 )       191,993     649,113  
 

Equity earning in unconsolidated venture

    (3,348 )   502     (12,448 )   3,098             278     (11,918 )
 

Impairment on operating real estate / loan loss reserves

    (7,200 )   (5,580 )                   (4,000 )   (16,780 )
 

Depreciation & amortization

    (20 )   (22,488 )           (17,302 )       (1,233 )   (41,043 )
 

G&A and other

    (9,678 )   (2,111 )   (2,235 )   25,948     96,527         (190,881 )   (82,430 )
                                   

    534,545     (65,869 )   (58,191 )   (6,944 )   (59,219 )       (8,379 )   335,943  

Income from discontinued operations

   
   
241
   
   
   
2,169
   
   
   
2,410
 
                                   

Consolidated net (loss)/income

    703,100     (5,781 )   7,638     5,069     36         (7,733 )   702,329  
                                   

Net income (loss) attributable to the non-controlling interest

    (67,632 )   556     (735 )   (488 )   (4,617 )       744     (72,172 )

Preferred stock dividends

    (20,948 )   172     (227 )   (151 )   (1 )       230     (20,925 )
                                   

Net income (loss) attributable to NorthStar Realty Finance Corp. common stockholders

  $ 614,520   $ (5,053 ) $ 6,676   $ 4,430   $ (4,582 ) $   $ (6,759 ) $ 609,232  
                                   

Total Assets as of December 31, 2008

  $ 2,266,115   $ 515,577   $ 259,326   $ 49,544   $ 732,513   $   $ 120,649   $ 3,943,724  

(1)
Corporate Investments and Other includes corporate level investments, corporate level interest income, interest expense and unallocated general & administrative expenses.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

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

        A summary of non-cash investing and financing activities for the years ended December 31, 2010, 2009 and 2008 is presented below:

 
  2010   2009   2008  

Assets of CSE RE 2006-A CDO

    (480,312 )        

Liabilities of CSE RE 2006-A CDO

    464,656          

Assets of N-Star CDO financings

    (1,143,649 )        

Liabilities of N-Star CDO financings

    798,706          

Non-controlling interest in N-Star CDO financing

    3,511          

Distribution of operating real estate to non-controlling interest

    9,525          

Assumption of mortgage notes and loans payable to non-controlling interest

    (4,734 )        

Deconsolidation of non-controlling interest in NorthStar Income Opportunity REIT I, Inc. 

    (1,815 )        

40% participation interest in the principal proceeds of the German Loan granted to the lender in connection with the repayment and extinguishment of the WA Secured Term Loan

    35,287          

Elimination of available for sale securities

    1,342          

Elimination of bonds payable

    32,286          

Deed in lieu of foreclosure of operating real estate

    (76,389 )        

Contribution of book value of assets to unconsolidated joint venture

              112,097  

Write-off of operating real estate, tenant improvement, deferred financing cost and below market lease due to foreclosure

        51,732      

Reduction of mortgage notes payable due to foreclosure

        (52,067 )    

Write-off of deferred cost and straight-line rents in connection with disposition of operating real estate

        3,009      

Reduction of restricted cash due to foreclosure

        68      

Real estate debt investment pay-down due from servicer

        (50 )    

Write-off of deferred financing cost in connection with fair value election accounting

            29,918  

Initial mark-to-market adjustment in connection with fair value election accounting

            (317,111 )

Allocation of purchase price of operating real estate to deferred cost

              (272 )

Non-controlling interest buy-out

            (1,566 )

Reclassification of prior-year construction in progress

            (4,409 )

Write-off of deferred lease cost, tenant improvements and below market lease adjustments due to lease termination

            (3,456 )

Application of tenant security deposits to receivable

            1,990  

Allocation of proceeds from exchangeable senior notes to equity

            (3,100 )

Allocation of payment of deferred financing fees to cost of capital

            191  

Equity component of warrant issue

        117      

Stock Dividend

        10,646      

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

22. Income Taxes

        The Company and its subsidiary, NRFC Sub-REIT Corp, have each elected to be taxed as a REIT and to comply with the related provisions of the Internal Revenue Code of 1986, as amended, the ("Code"). Accordingly, the Company generally will not be subject to U.S. federal income tax to the extent of its distributions to shareholders and as long as certain asset, income and share ownership tests are met. If the Company were to fail to meet these requirements, it would be subject to U.S. federal income tax, which could have a material adverse impact on its results of operations and amounts available for distributions to its shareholders. The Company believes that all of the criteria to maintain the Company's and NRFC Sub-REIT Corp's REIT qualification have been met for the applicable periods, but there can be no assurance that these criteria will continue to be met in subsequent periods.

        The Company maintains various taxable REIT subsidiaries, ("TRSs"), which may be subject to U.S. federal, state and local income taxes and foreign taxes. Current and deferred taxes are provided on the portion of earnings (losses) recognized by the Company with respect to its interest in domestic TRSs. Deferred income tax assets and liabilities are computed based on temporary differences between the Company's GAAP consolidated financial statements and the federal and state income tax basis of assets and liabilities as of the consolidated balance sheet date. The Company evaluates the realizability of its deferred tax assets (e.g., net operating loss and capital loss carryforwards) and recognizes a valuation allowance if, based on the available evidence, it is more likely than not that some portion or all of its deferred tax assets will not be realized. When evaluating the realizability of its deferred tax assets, the Company considers estimates of expected future taxable income, existing and projected book/tax differences, tax planning strategies available, and the general and industry specific economic outlook. This realizability analysis is inherently subjective, as it requires the Company to forecast its business and general economic environment in future periods. Changes in estimate of deferred tax asset realizability, if any, are included in income tax expense on the consolidated statements of operations.

        From time to time, the Company's TRSs generate taxable income from intercompany transactions. The TRS entities generate taxable revenue from fees for services provided to our various lines of business. Certain entities may be consolidated in the Company's financial statements. In consolidation, these fees are eliminated when the entity is included in the consolidated group. Nonetheless, all income taxes are accrued by the TRSs in the year in which the taxable revenue is received. These income taxes are not eliminated when the related revenue is eliminated in consolidation.

        Certain TRS entities are domiciled in the non-US jurisdictions and, accordingly, taxable income generated by these entities may not be subject to local income taxation, but generally will be included in the Company's taxable income on a current basis, whether or not distributed. Upon distribution of any previously included income, no incremental U.S. federal, state, or local income taxes would be payable by the Company.

        The TRS entities may be subject to tax laws that are complex and potentially subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. In establishing a provision for income tax expense, the Company must make judgments and interpretations about the application of these inherently complex tax laws. Actual income taxes paid may vary from estimates depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. The Company reviews the tax balances of its TRS entities quarterly and as new information becomes available, the balances are adjusted as appropriate.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Amounts in Thousands, Except per Share Data)

23. Pro Forma Financial Information

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

        The pro forma financial information set forth below is based upon the Company's historical condensed consolidated statements of operations for the years ended December 31, 2010 and 2009, adjusted to give effect of this transaction as of January 1, 2009.

 
  Year Ended
December 31,
2010
  Year Ended
December 31,
2009
 

Pro Forma revenues

  $ 494,743   $ 285,410  
           

Pro Forma net income

  $ (393,335 ) $ (150,428 )
           

Pro Forma net income per common share—basis/diluted

  $ (5.14 ) $ (2.15 )
           

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

23. Subsequent Events (Unaudited)

        On January 19, 2011, 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 14, 2011 to the stockholders of record as of the close of business on February 4, 2011.

        On January 19, 2011, the Company declared a dividend of $0.10 per share of common stock. The dividends were paid on February 14, 2011 to the stockholders of record as of February 14, 2011.

        On January 7, 2011, as part of the Surety Agreement, in connection with the issuance of the Bond, the Company posted cash collateral equal to thirty-eight percent of the amount of the Bond, or approximately $26.1 million.

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SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

(In thousands)

 
  Balance at
Beginning
of Period
  Charged to
Costs and
Expenses
  Other
Charges
  Deductions   Balance at
End of
Period
 

Description

                               

For the Year Ended December 31, 2008

                               
 

Reserve for loan losses

  $   $ 14,900   $   $ (3,700 ) $ 11,200  
 

Allowance for doubtful accounts

    320     473         (347 )   447  
                       

  $ 320   $ 15,373   $   $ (4,047 ) $ 11,647  

For the Year Ended December 31, 2009

                               
 

Reserve for loan losses

  $ 11,200   $ 84,416   $   $ (18,216 ) $ 77,400  
 

Allowance for doubtful accounts

    447     1,554         (1,473 )   528  
                       

  $ 11,647   $ 85,970   $   $ (19,689 ) $ 77,928  

For the Year Ended December 31, 2010

                               
 

Reserve for loan losses

  $ 77,400   $ 168,446   $   $ (48,646 ) $ 197,200  
 

Allowance for doubtful accounts

    528     1,130         (64 )   1,594  
                       

  $ 77,928   $ 169,576   $   $ (48,710 ) $ 198,794  

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION

As of December 31, 2010

(Amounts in Thousands, Except per Share Data)

Column A   Column B   Column C
Initial Cost
  Column D
Cost Capitalized
Subsequent
To Acquisition
  Column E
Gross Amount at Which Carried at
Close of Period
  Column F   Column H   Column I  
Location
  Encumbrances   Land   Buildings &
Improvements
  Land   Buildings &
Improvements
  Land   Buildings &
Improvements
  Total   Accumulated
Depreciation
  Total   Date Acquired   Life on Which
Depreciation is
Computed
 

36 West 34 Street, NY, NY

            4,333         375         4,708     4,708     1,342     3,366     Mar-99     Various  

701 Seventh Avenue, NY, NY

            3,245                 3,245     3,245     2,769     476     Mar-99     Various  

Salt Lake Cit, UT

    15,059     672     19,739         322     672     20,061     20,733     3,884     16,849     Aug-05     40 years  

Auburn Hills, MI

    11,216     2,980     8,607             2,980     8,607     11,587     2,081     9,506     Sep-05     40 years  

Rancho Cordova, CA

    10,670     3,060     9,360             3,060     9,360     12,420     1,778     10,642     Sep-05     40 years  

Camp Hill, PA

    24,332     5,900     19,510             5,900     19,510     25,410     4,281     21,129     Sep-05     40 years  

Springdale, OH

    19,208     3,030     20,469         130     3,030     20,599     23,629     3,166     20,463     Dec-05     40 years  

Springdale, OH

    16,586     2,470     17,821         (1,681 )   2,470     16,140     18,610     3,025     15,585     Dec-05     40 years  

Springdale, OH

    15,686     1,500     17,690         (1,588 )   1,500     16,102     17,602     3,236     14,366     Dec-05     40 years  

Rockaway, NJ

    16,884     6,118     15,664         295     6,118     15,959     22,077     2,311     19,766     Mar-06     40 years  

Indianapolis, IN

    27,790     1,670     32,306             1,670     32,306     33,976     4,445     29,531     Mar-06     40 years  

Blountstown, FL

    3,871     378     5,069             378     5,069     5,447     565     4,882     Jul-06     40 years  

East Arlington, TX

    3,349     3,619     901         5     3,619     906     4,525     79     4,446     May-07     40 years  

Wichita, KS

    7,848     2,282     10,478         10     2,282     10,488     12,770     794     11,976     Dec-07     40 years  

Clemmons, NC

    2,156     337     4,541         33     337     4,574     4,911     360     4,551     Apr-07     40 years  

Grove City

    3,040     613     6,882         206     613     7,088     7,701     647     7,054     Jun-07     40 years  

Franklin, WI

    6,272     872     3,903             872     3,903     4,775     386     4,389     Jan-07     40 years  

Denmark, WI

    1,201     241     1,668             241     1,668     1,909     165     1,744     Jan-07     40 years  

Green Bay, WI

    3,127     638     3,508             638     3,508     4,146     347     3,799     Jan-07     40 years  

Kenosha, WI

    4,070     697     4,679             697     4,679     5,376     463     4,913     Jan-07     40 years  

Madison, WI

    4,212     764     4,485             764     4,485     5,249     443     4,806     Jan-07     40 years  

Manitowoc, WI

    4,943     811     5,008             811     5,008     5,819     495     5,324     Jan-07     40 years  

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)

As of December 31, 2010

(Amounts in Thousands, Except per Share Data)

Column A   Column B   Column C
Initial Cost
  Column D
Cost Capitalized
Subsequent
To Acquisition
  Column E
Gross Amount at Which Carried at
Close of Period
  Column F   Column H   Column I  
Location
  Encumbrances   Land   Buildings &
Improvements
  Land   Buildings &
Improvements
  Land   Buildings &
Improvements
  Total   Accumulated
Depreciation
  Total   Date Acquired   Life on Which
Depreciation is
Computed
 

McFarland, WI

    3,777     703     4,793             703     4,793     5,496     474     5,022     Jan-07     40 years  

Racine, WI

    9,903     1,609     10,359             1,609     10,359     11,968     1,025     10,943     Jan-07     40 years  

Menomonmee, WI

    5,986     1,011     4,837             1,011     4,837     5,848     479     5,369     Jan-07     40 years  

Sheboygan, WI

    9,164     1,542     10,141             1,542     10,141     11,683     1,004     10,679     Jan-07     40 years  

Stevens Point, WI

    8,363     1,837     12,458             1,837     12,458     14,295     1,233     13,062     Jan-07     40 years  

Stoughton, WI

    1,662     349     2,205             349     2,205     2,554     218     2,336     Jan-07     40 years  

Wausau, WI

    7,443     498     9,214             498     9,214     9,712     912     8,800     Jan-07     40 years  

Two Rivers, WI

    2,668     1,421     3,281             1,421     3,281     4,702     325     4,377     Jan-07     40 years  

Wisconsin Rapids, WI

    1,112     416     2,868             416     2,868     3,284     284     3,000     Jan-07     40 years  

Lancaster, OH

    6,279     294     6,094         329     294     6,423     6,717     605     6,112     Jun-07     40 years  

Marysville, OH

    5,392     2,218     5,015         334     2,218     5,349     7,567     497     7,070     Jun-07     40 years  

Indianapolis, IN

    2,203     210     2,511             210     2,511     2,721     222     2,499     Jun-07     40 years  

Castletown, IN

    6,669     677     8,077             677     8,077     8,754     715     8,039     Jun-07     40 years  

Chesterfield, IN

    3,989     815     4,204             815     4,204     5,019     372     4,647     Jun-07     40 years  

Columbia City, IN

    7,909     1,034     6,390             1,034     6,390     7,424     566     6,858     Jun-07     40 years  

Dunkirk, IN

    2,087     310     2,299             310     2,299     2,609     203     2,406     Jun-07     40 years  

Fort Wayne, IN

    4,792     1,478     4,409             1,478     4,409     5,887     390     5,497     Jun-07     40 years  

Hartford City, IN

    2,052     199     1,782             199     1,782     1,981     158     1,823     Jun-07     40 years  

Hobart, IN

    5,832     1,835     5,019             1,835     5,019     6,854     444     6,410     Jun-07     40 years  

Huntington, IN

    4,452     526     5,037             526     5,037     5,563     446     5,117     Jun-07     40 years  

LaGrange, IN

    509     47     584             47     584     631     52     579     Jun-07     40 years  

LaGrange, IN

    5,007     446     5,494             446     5,494     5,940     486     5,454     Jun-07     40 years  

77


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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)

As of December 31, 2010

(Amounts in Thousands, Except per Share Data)

Column A   Column B   Column C
Initial Cost
  Column D
Cost Capitalized
Subsequent
To Acquisition
  Column E
Gross Amount at Which Carried at
Close of Period
  Column F   Column H   Column I  
Location
  Encumbrances   Land   Buildings &
Improvements
  Land   Buildings &
Improvements
  Land   Buildings &
Improvements
  Total   Accumulated
Depreciation
  Total   Date Acquired   Life on Which
Depreciation is
Computed
 

Middletown, IN

    3,351     132     4,750             132     4,750     4,882     420     4,462     Jun-07     40 years  

Mooresville, IN

    1,497     631     4,187             631     4,187     4,818     371     4,447     Jun-07     40 years  

Peru, IN

    6,320     502     7,135             502     7,135     7,637     632     7,005     Jun-07     40 years  

Plymouth, IN

    5,166     128     5,538             128     5,538     5,666     490     5,176     Jun-07     40 years  

Portage, IN

    6,921     1,438     7,988             1,438     7,988     9,426     707     8,719     Jun-07     40 years  

Rockport, IN

    1,687     253     2,092             253     2,092     2,345     185     2,160     Jun-07     40 years  

Rushville, IN

    542     62     1,177             62     1,177     1,239     104     1,135     Jun-07     40 years  

Rushville, IN

    4,021     310     5,858             310     5,858     6,168     519     5,649     Jun-07     40 years  

Sullivan, IN

    872     102     441             102     441     543     39     504     Jun-07     40 years  

Sullivan, IN

    4,826     1,794     4,469             1,794     4,469     6,263     395     5,868     Jun-07     40 years  

Syracuse, IN

    3,439     125     4,564             125     4,564     4,689     404     4,285     Jun-07     40 years  

Tipton, IN

    7,942     1,102     10,836         (27 )   1,102     10,809     11,911     778     11,133     Jun-07     40 years  

Wasbash, IN

    3,633     1,451     4,154             1,451     4,154     5,605     77     5,528     Jun-07     40 years  

Wabash, IN

    1,281     1,060     870             1,060     870     1,930     368     1,562     Jun-07     40 years  

Wakarusa, IN

    6,355     153     7,111             153     7,111     7,264     629     6,635     Jun-07     40 years  

Wakarusa, IN

    9,871     289     13,420             289     13,420     13,709     1,188     12,521     Jun-07     40 years  

Warsaw, IN

    3,581     319     3,722             319     3,722     4,041     329     3,712     Jun-07     40 years  

Sullivan II

        494                 494         494         494     Jun-07     40 years  

Huntington II

        120                 120         120         120     Jun-07     40 years  

Middletown II

        52                 52         52         52     Jun-07     40 years  

Rockport II

        366                 366         366         366     Jun-07     40 years  

Warsaw II

        77                 77         77         77     Jun-07     40 years  

78


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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)

As of December 31, 2010

(Amounts in Thousands, Except per Share Data)

Column A   Column B   Column C
Initial Cost
  Column D
Cost Capitalized
Subsequent
To Acquisition
  Column E
Gross Amount at Which Carried at
Close of Period
  Column F   Column H   Column I  
Location
  Encumbrances   Land   Buildings &
Improvements
  Land   Buildings &
Improvements
  Land   Buildings &
Improvements
  Total   Accumulated
Depreciation
  Total   Date Acquired   Life on Which
Depreciation is
Computed
 

Daly City, CA

    4,797     3,297     1,872             3,297     1,872     5,169     146     5,023     Aug-07     40 years  

Daly City, CA

    11,244                 12,321         12,321     12,321     2,873     9,448     Aug-07     40 years  

Washington Crt Hse, OH

    5,223     341     5,169     13     232     354     5,401     5,755     498     5,257     Jun-07     40 years  

Harrisburg, IL

    3,674     191     5,059         5     191     5,064     5,255     501     4,754     Jun-07     40 years  

Clinton, OK

    1,334     225     3,513         438     225     3,951     4,176     456     3,720     Jan-07     40 years  

Olney, IL

    4,227     109     5,419         56     109     5,475     5,584     545     5,039     Jan-07     40 years  

Vandalia, IL

    7,328     82     7,969         4     82     7,973     8,055     789     7,266     Jan-07     40 years  

Paris, IL

    6,819     187     6,797         21     187     6,818     7,005     675     6,330     Jan-07     40 years  

Rantoul, IL

    5,621     151     5,377         10     151     5,387     5,538     532     5,006     Jan-07     40 years  

Robinson, IL

    3,990     219     4,746         90     219     4,836     5,055     486     4,569     Jan-07     40 years  

Cincinatti, OH

    11,397     2,052     15,776         697     2,052     16,473     18,525     1,736     16,789     Jan-07     40 years  

Memphis, TN

    14,598     4,770     14,305         566     4,770     14,871     19,641     1,508     18,133     Jan-07     40 years  

Charleston, IL

    5,846     485     6,211         6     485     6,217     6,702     615     6,087     Jan-07     40 years  

Caroltton, GA

    2,951     816     4,220         127     816     4,347     5,163     441     4,722     Jan-07     40 years  

Kingfisher, OK

    3,964     128     5,497         289     128     5,786     5,914     615     5,299     Jan-07     40 years  

Elk City, OK

    4,341     143     6,721         397     143     7,118     7,261     771     6,490     Jan-07     40 years  

Olney, IL

    2,449     57     2,897         20     57     2,917     2,974     288     2,686     Jan-07     40 years  

Effingham, IL

    4,601     340     4,994         45     340     5,039     5,379     501     4,878     Jan-07     40 years  

Fairfield, IL

    6,402     153     7,898         26     153     7,924     8,077     786     7,291     Jan-07     40 years  

Fullerton, CA

    7,575     4,065     8,564         130     4,065     8,694     12,759     884     11,875     Jan-07     40 years  

La Vista, NE

    4,267     562     4,966         47     562     5,013     5,575     499     5,076     Jan-07     40 years  

Mattoon, IL

    6,922     227     7,534         20     227     7,554     7,781     748     7,033     Jan-07     40 years  

79


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)

As of December 31, 2010

(Amounts in Thousands, Except per Share Data)

Column A   Column B   Column C
Initial Cost
  Column D
Cost Capitalized
Subsequent
To Acquisition
  Column E
Gross Amount at Which Carried at
Close of Period
  Column F   Column H   Column I  
Location
  Encumbrances   Land   Buildings &
Improvements
  Land   Buildings &
Improvements
  Land   Buildings &
Improvements
  Total   Accumulated
Depreciation
  Total   Date Acquired   Life on Which
Depreciation is
Computed
 

Mattoon, IL

    5,662     210     6,871         13     210     6,884     7,094     682     6,412     Jan-07     40 years  

Stephenville, TX

    6,150     507     6,459     13     86     520     6,545     7,065     648     6,417     Jan-07     40 years  

Fullerton, CA

    779     1,357     872         21     1,357     893     2,250     88     2,162     Jan-07     40 years  

Rockford, IL

    4,940     1,101     4,814         37     1,101     4,851     5,952     481     5,471     Jan-07     40 years  

Effingham, IL

    547     211     1,145         9     211     1,154     1,365     113     1,252     Jan-07     40 years  

Santa Ana, CA

    7,874     2,281     7,046         143     2,281     7,189     9,470     737     8,733     Jan-07     40 years  

Sycamore, IL

    8,487     816     9,897         56     816     9,953     10,769     989     9,780     Jan-07     40 years  

Oklahoma City, OK

    4,416     757     5,184     3     346     760     5,530     6,290     600     5,690     Jan-07     40 years  

Garden Grove, CA

    11,168     6,975     5,927         165     6,975     6,092     13,067     630     12,437     Jan-07     40 years  

Weatherford, OK

    4,484     229     5,600         369     229     5,969     6,198     646     5,552     Jan-07     40 years  

Mt. Sterling, KY

    11,204     599     12,561         25     599     12,586     13,185     1,116     12,069     Feb-07     40 years  

Tuscola, IL

    4,168     237     4,616         123     237     4,739     4,976     504     4,472     Jan-07     40 years  

Windsor, NC

        397                 397         397         397     Feb-07     40 years  

Bremerton, WA

    7,275     964     8,171         185     964     8,356     9,320     866     8,454     Dec-06     40 years  

Sterling, IL

    2,346     129     6,229         550     129     6,779     6,908     808     6,100     May-06     40 years  

Black Mountain, NC

    5,296     468     5,786             468     5,786     6,254     645     5,609     Jul-06     40 years  

Hillsboro, OR

    32,536     3,954     39,233             3,954     39,233     43,187     3,965     39,222     Dec-06     40 years  

Morris, IL

    2,161     568     9,103         822     568     9,925     10,493     1,077     9,416     May-06     40 years  
 

Chenita Group Home

        73     249             73     249     322     18     304     Jan-08     40 years  
 

Whispering Oaks

        244     1,359             244     1,359     1,603     101     1,502     Jan-08     40 years  
 

Twin Oaks Living

        58     1,027             58     1,027     1,085     77     1,008     Jan-08     40 years  
 

Twin Oaks Care

        42     747             42     747     789     56     733     Jan-08     40 years  
 

Salem Annex

        11     90             11     90     101     2     99     Jan-08     40 years  

80


Table of Contents


NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION (Continued)

As of December 31, 2010

(Amounts in Thousands, Except per Share Data)

Column A   Column B   Column C
Initial Cost
  Column D
Cost Capitalized
Subsequent
To Acquisition
  Column E
Gross Amount at Which Carried at
Close of Period
  Column F   Column H   Column I  
Location
  Encumbrances   Land   Buildings &
Improvements
  Land   Buildings &
Improvements
  Land   Buildings &
Improvements
  Total   Accumulated
Depreciation
  Total   Date Acquired   Life on Which
Depreciation is
Computed
 

Aurora, CO

    32,583     2,650     35,786     24         2,674     35,786     38,460     4,309     34,151     Jul-06     40 years  

North Attleboro, MA

    4,599         5,445                 5,445     5,445     706     4,739     Sep-06     40 years  

Bloomingdale, IL

    5,599         5,810                 5,810     5,810     756     5,054     Sep-06     40 years  

Concord Holdings, NH

    8,180     2,145     9,216             2,145     9,216     11,361     1,220     10,141     Sep-06     40 years  

Melville, NY

    4,344         3,187                 3,187     3,187     465     2,722     Sep-06     40 years  

Millbury, MA

    4,617         5,994                 5,994     5,994     696     5,298     Sep-06     40 years  

Wichita, KS

    5,985     1,325     5,584             1,325     5,584     6,909     698     6,211     Sep-06     40 years  

Keene, NH

    6,588     3,033     5,919             3,033     5,919     8,952     761     8,191     Sep-06     40 years  

Fort Wayne, IN

    3,313         3,642                 3,642     3,642     510     3,132     Sep-06     40 years  

Portland, ME

    4,466         6,687                 6,687     6,687     1,249     5,438     Sep-06     40 years  
 

Milpitas, CA

    21,638     16,800     8,847             16,800     8,847     25,647     1,382     24,265     Feb-07     40 years  
 

Columbus, OH

    23,239     4,375     29,184             4,375     29,184     33,559     2,750     30,809     Nov-07     40 years  
 

Fort Mill, SC

    30,182     3,300     31,554             3,300     31,554     34,854     3,404     31,450     Mar-07     40 years  
 

Reading, PA

    18,643     3,225     21,792         44     3,225     21,836     25,061     1,934     23,127     Jun-07     40 years  

Philadelphia, PA

        2,359     5,681             2,359     5,681     8,000         8,040     Dec-10     N/A  

Atlanta, GA

        841     3,363             551     3,363     4,204         4,204     Dec-10     N/A  

Chandler, AZ

        551                 551         551         551     Dec-10     N/A  

Florence, AZ

        345                 345         345         345     Dec-10     N/A  
                                                       

  $ 803,114   $ 151,517   $ 902,173   $ 53   $ 17,284   $ 151,877   $ 908,715   $ 1,059,592   $ 108,389   $ 951,203              
                                                       

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

SCHEDULE III—REAL ESTATE AND ACCUMULATED DEPRECIATION

(Amounts in Thousands, Except per Share Data)

        The changes in real estate for the year ended December 31, 2010, December 31, 2009 and December 31, 2008 are as follows:

 
  2010   2009   2008  

Balance at beginning of period

  $ 1,062,915   $ 1,194,469   $ 1,172,580  

Property acquisitions

    13,480         3,989  

Improvements

    1,618     3,597     24,698  

Impairments

    (5,248 )   (55,286 )   (5,580 )

Retirements/disposals

    (12,834 )   (79,865 )   (1,218 )
               

Balance at end of period

  $ 1,059,931   $ 1,062,915   $ 1,194,469  
               

        The changes in accumulated depreciation, exclusive of amounts relating to equipment, auto and furniture and fixtures, for the period ended December 31, 2010, December 31, 2009 and December 31, 2008 are as follows:

 
  2010   2009   2008  

Balance at beginning of period

  $ 84,013   $ 67,469   $ 38,444  

Depreciation for the period

    31,173     28,285     30,243  

Assets held for sale

             

Retirements/disposals

    (6,797 )   (11,741 )   (1,218 )
               

Balance at end of period

  $ 108,389   $ 84,013   $ 67,469  
               

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

SCHEDULE IV—LOANS AND OTHER LENDING INVESTMENTS

December 31, 2010 (in thousands)

Description
  Interest Rate   Final
Maturity Date
  Periodic
Payment
Terms(1)
  Prior Liens   Principal
Amount
of Loans
  Carrying
Amount
of Loans
  Number
of Loans
 

Junior Participation—Float <

  Office     LIBOR + 1.50 - 3.35   7/9/2010 - 4/10/2014   I/O   $ 196,225   $ 75,187   $ 67,607     5  
 

3% of total

  Hotel     4.50   2/22/2013   I/O     307,800     42,371     42,332     1  
 

carrying amount

  Land     0.00 - 2.00   1/1/2010 - 2/9/2014   I/O     134,078     61,597     2     2  

  Retail     4.28 - 8.42   9/9/2011 - 12/31/2011   I/O     110,496     32,990     32,778     2  

  Multifamily     4.35   4/9/2013   I/O         8,300     435     1  

Junior Participation—Fixed <

 

Office

   
6.13 - 8.44
 

10/1/2015 - 5/11/2016

 

I/O

   
182,442
   
28,893
   
25,047
   
2
 
 

3% of total carrying

  Retail     7.85   5/11/2015   I/O         45,550     21,758     1  
 

amount

                                           

Mezzanine—Fixed >3% of

 

Retail

   
0.50
 

7/20/2014

 

I/O

   
3,338,342
   
57,462
   
57,151
   
1
 
 

total carrying amount*

  Office     10.85   6/15/2016   I/O     410,000     63,572     63,556     1  

Mezzanine—Fixed < 3% of

 

Multifamily

   
7.16
 

1/1/2016

 

I/O

   
51,954
   
13,752
   
13,752
   
1
 
 

total carrying amount

  Senior Corporate     8.00   5/11/2015   I/O         6,063     5,396     1  

  Retail     0.00   4/1/2011   I/O     3,959     2,735     (0 )   1  

  Land     0.00   4/1/2011   I/O     65,660     3,047     400     1  

  Office     0.00   4/1/2011   I/O     57,178     6,396     700     1  

Mezzanine—Float >

 

Multifamily

   
3.50
 

4/1/2012

 

I/O

   
66,898
   
60,175
   
60,046
   
1
 
 

3% of total

                                           
 

carrying amount*

                                           

Mezzanine—Float < 3% of

 

Multifamily

   
LIBOR + 2.00 - 4.00
 

8/10/2011 - 1/1/2016

 

I/O

   
182,543
   
73,452
   
69,413
   
6
 

  Office     2.70 - 6.36   1/15/2011 - 7/10/2016   I/O     401,679     56,678     56,741     3  

  Hotel     0.70 - 4.50   12/31/2011 - 2/9/2012   I/O     2,928,798     149,590     93,817     4  

  Retail     0.00   5/1/2017   I/O     212,000     34,773     13,448     1  

  Condo     7.40   7/1/2011   I/O         12,516     12,435     1  

Other—Fixed < 3% of total

 

Other

   
5.53
 

6/25/2018

 

I/O

   
   
4,476
   
4,476
   
1
 
 

carrying amount

  Industrial     8.91   5/1/2015   I/O         1,102     1,102     1  

  Office     6.65   12/5/2019   I/O         6,574     6,574     1  

Other—Floating < 3% of

 

Retail

   
LIBOR + 2.50
 

12/16/2011 - 12/14/1212

 

I/O

   
   
11,460
   
11,460
   
2
 
 

total carrying amount

                                           

Whole Loan—Fixed < 3% of

 

Industrial

   
5.07 - 5.78
 

6/1/2015 - 8/1/2015

 

I/O

   
   
12,299
   
12,317
   
3
 
 

total carrying amount

  Healthcare     0.00 - 9.53   6/30/2011 - 9/1/2031   I/O         137,426     87,196     17  

  Land     0   5/12/2010   I/O         56,108     2,174     1  

  Retail     6.36 - 7.03   11/25/2017 - 6/15/2018   I/O         5,732     5,732     6  

Whole Loan—Float Prime

 

Various

   
1.25
 

11/19/2011

 

I/O

   
   
8,568
   
1,520
   
1
 

  Timeshare     1.75 - 3.50   9/19/2012 - 4/12/2014   I/O         97,711     15,897     2  

Whole Loan—Float

 

Hotel

   
LIBOR + 0.00 - 6.00
 

12/12/2011 - 11/15/2015

 

I/O

   
   
319,564
   
166,040
   
13
 
 

(LIBOR+)

  Industrial     1.65 - 4.00   6/30/2011 - 4/1/2016   I/O         53,255     53,043     4  
 

< 3% of total

  Land         1/1/2010 - 1/1/2015   I/O         202,923     63,569     8  
 

carrying amount

  Mixed-Use         1/5/2012 - 12/31/2015   I/O         37,824     15,179     3  

  Multifamily         7/24/2011 - 6/9/2017   I/O         353,774     322,259     14  

  Healthcare     2.50 - 7.00   1/31/2011 - 1/30/2012   I/O         28,481     19,462     4  

  Office     1.65 - 8.60   1/31/2011 - 7/10/2016   I/O         339,855     318,022     18  

  Condo         1/31/2011 - 1/8/2013   I/O         79,928     57,127     2  

  Timeshare     3   7/23/2014   I/O         76,470     15,685     1  

  Self-Storage     3.4   11/30/2014   I/O         18,057     6,002     1  

  Retail     0.00 - 5.50   7/1/2011 - 8/18/2011   I/O         23,219     5,805     2  

Preferred—Float

 

Multifamily

   
4
 

6/1/2017

 

I/O

   
   
17,444
   
17,444
   
1
 
                                     

Total

                $ 8,650,053   $ 2,727,349   $ 1,844,901     143  
                                     

*
Represents loans greater than 3% of the total carrying amount which may require individual disclosure

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

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  2010   2009   2008  

Balance at beginning of period

  $ 1,937,093   $ 2,047,470   $ 2,007,022  

Additions during the year:

                   

New loans and additional advances on existing loans

    1,941,972     487,306     335,618  
 

Acquisition cost and (fees)

    (2,674 )   4,255     122  

Premiums/(Discounts)

    (730,417 )         (3,219 )
 

Amortization of acquisition costs, fees, premiums and discounts

    138,786     2,352     9,928  

Deductions:

                   
 

Collection of principal

    1,439,859     604,290     302,001  
               

Balance at end of period(1)

  $ 1,844,901   $ 1,937,093   $ 2,047,470  
               

(1)
Includes $18.7 million and $0.6 million in real estate debt investments, held for sale at December 31, 2010 and 2009, respectively.

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PART IV

Item 15.    Exhibits and Financial Statement Schedules

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))

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Exhibit
Number
  Description of Exhibit
  10.5   NorthStar Realty Finance Corp. 2004 Long-Term Incentive Bonus Plan (incorporated by reference to Exhibit 10.13 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)

 

10.6

 

Form of Notification under NorthStar Realty Finance Corp. 2004 Long-Term Incentive Bonus Plan (incorporated by reference to Exhibit 10.14 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)

 

10.7

 

Form of Indemnification Agreement for directors and officers of NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 10.15 to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-114675))

 

10.8

 

Amendment No. 1 to Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of March 14, 2006, by and among NorthStar Realty Finance Corp., as sole general partner and initial limited partner and the other limited partners a party thereto from time to time (incorporated by reference to Exhibit 10.34 to NorthStar Realty Finance Corp.'s Annual Report on Form 10-K for the year ended December 31, 2005)

 

10.9

 

Second Amendment to the Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of September 14, 2006 (incorporated by reference to Exhibit 3.2 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed September 14, 2006)

 

10.10

 

Third Amendment to the Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of February 7, 2007 (incorporated by reference to Exhibit 3.2 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed February 9, 2007)

 

10.11

 

Amendment No. 1 to NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan (incorporated by reference to Exhibit 99.2 to the NorthStar Realty Finance Corp. Post-Effective Amendment No. 2 to Form S-8 filed on April 13, 2007)

 

10.12

 

Amendment No. 2 to NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan (incorporated by reference to Exhibit 99.3 to the NorthStar Realty Finance Corp. Post-Effective Amendment No. 3 to Form S-8 filed on June 6, 2007)

 

10.13

 

Fourth Amendment to the Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of May 24, 2007 (incorporated by reference to Exhibit 3.3 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed May 29, 2007)

 

10.14

 

Registration Rights Agreement relating to the 7.25% Exchangeable Senior Notes due 2027 of NorthStar Realty Finance Limited Partnership, dated June 18, 2007 (incorporated by reference to Exhibit 4.2 to the NorthStar Realty Finance Corp. Registration Statement on Form S-3 (File No. 333-146679))

 

10.15

 

Indenture dated as of June 18, 2007, between NorthStar Realty Finance Limited Partnership, as Issuer, NorthStar Realty Finance Corp., as Guarantor, and Wilmington Trust Company, as Trustee (incorporated by reference to Exhibit 4.1 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed on June 22, 2007)

 

10.16

 

Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and David T. Hamamoto (incorporated by reference to Exhibit 99.1 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed October 5, 2007)

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Exhibit
Number
  Description of Exhibit
  10.17   Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and Andrew C. Richardson (incorporated by reference to Exhibit 99.2 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed October 5, 2007)

 

10.18

 

Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and Daniel R. Gilbert (incorporated by reference to Exhibit 99.3 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed October 5, 2007)

 

10.19

 

Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and Albert Tylis (incorporated by reference to Exhibit 99.1 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed July 27, 2009)

 

10.20

 

Registration Rights Agreement relating to the 11.50% Exchangeable Senior Notes due 2013 of NRFC NNN Holdings, LLC, dated May 28, 2008 (incorporated by reference to Exhibit 4.2 to the NorthStar Realty Finance Corp. Registration Statement on Form S-3 (File No. 333-152545))

 

10.21

 

Indenture dated as of May 28, 2008, among NRFC NNN Holdings, LLC, as Issuer, NorthStar Realty Finance Corp., NorthStar Realty Finance Limited Partnership, and NRFC Sub-REIT Corp., as Guarantors, and Wilmington Trust Company, as Trustee (incorporated by reference to Exhibit 4.1 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed on May 28, 2008)

 

10.22

 

Fifth Amendment to the Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of May 29, 2008 (incorporated by reference to Exhibit 10.37 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008)

 

10.23

 

NorthStar Realty Finance Corp. Executive Incentive Bonus Plan (incorporated by reference to Exhibit 10.31 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009)

 

10.24

 

Form of Award Agreement (incorporated by reference to Exhibit 99.2 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed on September 11, 2009)

 

10.25

 

Common Stock Purchase Warrant, Certificate No. W-1, dated October 28, 2009, issued to Wachovia Bank, National Association (incorporated by reference to Exhibit 10.36 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009)

 

10.26

 

Common Stock Purchase Warrant, Certificate No. W-2, dated October 28, 2009, issued to Wachovia Bank, National Association (incorporated by reference to Exhibit 10.37 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009)

 

10.27

 

Common Stock Purchase Warrant, Certificate No. W-3, dated October 28, 2009, issued to Wachovia Bank, National Association (incorporated by reference to Exhibit 10.38 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009)

 

10.28

 

Separation and Consulting Agreement, dated January 25, 2010, between NorthStar Realty Finance Corp. and Richard J. McCready (incorporated by reference to Exhibit 99.1 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed on January 25, 2010)

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Exhibit
Number
  Description of Exhibit
  10.29   Letter Agreement, dated June 30, 2010, by Wells Fargo Bank, National Association and Wells Fargo Bank, N.A., London Branch (as successor-by-merger to Wachovia Bank, N.A. (London Branch)), as acknowledged and agreed by NorthStar Realty Finance Corp. and certain of its Affiliates and Subsidiaries (incorporated by reference to Exhibit 10.29 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010)

 

10.30

 

Common Stock Purchase Warrant, Certificate No. W-4, dated June 30, 2010, issued to Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.30 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010)

 

12.1

 

Ratio of Earnings to Combined Fixed Charges and Preference Dividends (incorporated by reference to Exhibit 12.1 to NorthStar Realty Finance Corp.'s Annual Report on Form 10-K for the year ended December 31, 2010).

 

21.1

 

Significant Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1 to NorthStar Realty Finance Corp.'s Annual Report on Form 10-K for the year ended December 31, 2010).

 

23.1

 

Consent of Grant Thornton LLP.

 

24.1

 

Power of Attorney (incorporated by reference to Exhibit 24.1 to NorthStar Realty Finance Corp.'s Annual Report on Form 10-K for the year ended December 31, 2010).

 

31.1

*

Certification by the Chief Executive Officer pursuant to 17 CFR 240.13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2

*

Certification by the Chief Financial Officer pursuant to 17 CFR 240.13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1

*

Certification by the Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

32.2

*

Certification by the Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on March 18, 2011.

    NORTHSTAR REALTY FINANCE CORP.

 

 

By:

 

/s/ DAVID T. HAMAMOTO

        Name:   David T. Hamamoto
        Title:   Chairman and Chief Executive Officer

89