UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC20549

FORM 10-Q

QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005

COMMISSION FILE NUMBER: 001-32330

NORTHSTARREALTY FINANCE CORP.

(EXACT NAME OFREGISTRANT AS SPECIFIED IN ITSCHARTER)

|                               |  |                       |  |  |  |  |
|-------------------------------|--|-----------------------|--|--|--|--|
| MARYLAND                      |  | 11-3707493            |
| (STATEOR OTHER JURISDICTIONOF |  | (IRSEMPLOYER          |
| INCORPORATION ORORGANIZATION) |  | IDENTIFICATIONNUMBER) |
|                               |

|                                            |  |           |  |  |  |  |
|--------------------------------------------|--|-----------|--|--|--|--|
| 527MADISON AVENUE, 16th FLOOR, NEW YORK,NY |  | 10022     |
| (ADDRESSOF PRINCIPAL EXECUTIVEOFFICE)      |  | (ZIPCODE) |
|                                            |

(212) 319-8801

(REGISTRANT'S TELEPHONE NUMBER, INCLUDINGAREA CODE)

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INDICATE BYCHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TOBE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THEREGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECTTO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.    YES       NO   .

INDICATE BY CHECKMARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN RULE12B-2 OF THE EXCHANGE ACT).

YES       NO   .

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THE COMPANY HAS ONE CLASS OFCOMMON STOCK, PAR VALUE $0.01 PER SHARE, WITH 21,249,736 SHARESOUTSTANDING AS OF MAY 12, 2005.

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NORTHSTAR REALTYFINANCE CORP. QUARTERLY REPORT FOR THE THREE MONTHS ENDEDMARCH 31, 2005

TABLE OF CONTENTS

|            |  |                                                                                                                                                                                                       |    |        |        |        |  |  |  |  |
|------------|--|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----|--------|--------|--------|--|--|--|--|
| Item       |  |                                                                                                                                                                                                  |    | PAGE   |
|       |  | PARTI.    FINANCIALINFORMATION                                                                                                                                                    |    |   |   |   |
|       |  |
| Item1.     |  | FinancialStatements                                                                                                                                                                                   |    |   |   |   |
|       |  | Condensed ConsolidatedBalance Sheets as of March 31, 2005 (unaudited) and December 31,2004                                                                                                            |    |   | 1      |   |
|       |  | Condensed ConsolidatedStatement of Operations for the three months ended March 31, 2005(unaudited) and Condensed Combined Statement of Operations for thethree months ended March 31, 2004(unaudited) |    |   | 2      |   |
|       |  | CondensedConsolidated Statement of Cash Flows for the three months ended March31, 2005 (unaudited) and Condensed Combined Statement of Cash Flows forthe three months ended March 31, 2004(unaudited) |    |   | 3      |   |
|       |  | Notes to theCondensed Consolidated and Condensed Combined Financial Statements(unaudited)                                                                                                             |    |   | 4      |   |
| Item2.     |  | Management's Discussion and Analysis of FinancialCondition and Results of Operations                                                                                                                  |    |   | 19     |   |
| Item3.     |  | Quantitative and Qualitative Disclosures about MarketRisk                                                                                                                                             |    |   | 37     |   |
| Item 4.    |  | Controls andProcedures                                                                                                                                                                                |    |   | 41     |   |
|       |  |                                                                                                                                                                                                  |    |   |   |   |
|       |  | PARTII.    OTHERINFORMATION                                                                                                                                                       |    |   |   |   |
|       |  |                                                                                                                                                                                                  |    |   |   |   |
| Item1.     |  | Legal Proceedings                                                                                                                                                                                     |    |   | 43     |   |
| Item2.     |  | Unregistered Sales of Equity Securities and Use ofProceeds                                                                                                                                            |    |   | 44     |   |
| Item 3.    |  | Defaults uponSenior Securities                                                                                                                                                                        |    |   | 44     |   |
| Item4.     |  | Submission of Matters to a Vote of SecurityHolders                                                                                                                                                    |    |   | 44     |   |
| Item 5.    |  | OtherInformation                                                                                                                                                                                      |    |   | 44     |   |
| Item6.     |  | Exhibits                                                                                                                                                                                              |    |   | 45     |   |
|       |  |                                                                                                                                                                                                  |    |   |   |   |
| SIGNATURES |  |                                                                                                                                                                                                  | 47 |   |
|            |

i

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PART I –FINANCIAL INFORMATION

ITEM 1.    FINANCIALSTATEMENTS

Northstar Realty Finance Corp. andSubsidiaries Condensed Consolidated BalanceSheets

|                                                                                                                                              |  |              |             |                 |  |        |               |         |  |  |
|----------------------------------------------------------------------------------------------------------------------------------------------|--|--------------|-------------|-----------------|--|--------|---------------|---------|--|--|
|                                                                                                                                         |  | March31,2005 |             | December31,2004 |
|                                                                                                                                         |  | (Unaudited)  |             |            |
| Assets:                                                                                                                                      |  |         |        |            |  |   |          |    |
| Operatingreal estate — net                                                                                                             |  | $            | 103,203,000 |            |  | $      | 43,544,000    |    |
| Debt securitiesavailable for sale                                                                                                            |  |         | 108,200,000 |            |  |   | 37,692,000    |    |
| Debt securitiesheld for trading                                                                                                              |  |         | 286,381,000 |            |  |   | 826,611,000   |    |
| CDO deposit andwarehouse agreements                                                                                                          |  |         | —     |            |  |   | 2,988,000     |    |
| Collateral held bybroker                                                                                                                     |  |         | 12,767,000  |            |  |   | 24,831,000    |    |
| Subordinatereal estate debtinvestments                                                                                                       |  |         | 147,361,000 |            |  |   | 70,841,000    |    |
| Investmentsin and advances to unconsolidatedventures                                                                                         |  |         | 2,224,000   |            |  |   | 5,363,000     |    |
| Cashand cash equivalents                                                                                                                     |  |         | 41,039,000  |            |  |   | 47,733,000    |    |
| Restrictedcash                                                                                                                               |  |         | 3,161,000   |            |  |   | 2,713,000     |    |
| Receivables, net ofallowance of $1,000 in 2005 and2004                                                                                       |  |         | 4,403,000   |            |  |   | 1,926,000     |    |
| Unbilledrents receivable, net of allowance of $4,228,000 and $4,137,000 in 2005and 2004                                                      |  |         | 5,686,000   |            |  |   | 5,567,000     |    |
| Duefrom affiliates                                                                                                                           |  |         | 272,000     |            |  |   | 176,000       |    |
| Deferred costs andintangible assets,net                                                                                                      |  |         | 10,087,000  |            |  |   | 4,233,000     |    |
| Otherassets                                                                                                                                  |  |         | 1,877,000   |            |  |   | 4,132,000     |    |
| Totalassets                                                                                                                                  |  | $            | 726,661,000 |            |  | $      | 1,078,350,000 |    |
| Liabilitiesand Stockholders'Equity:                                                                                                          |  |         |        |            |  |   |          |    |
| Liabilities:                                                                                                                                 |  |         |        |            |  |   |          |    |
| Mortgagenotes and loans payable                                                                                                              |  | $            | 97,170,000  |            |  | $      | 40,557,000    |    |
| Creditfacility                                                                                                                               |  |         | 132,080,000 |            |  |   | 27,821,000    |    |
| Repurchaseobligations                                                                                                                        |  |         | 292,902,000 |            |  |   | 800,418,000   |    |
| Securitiessold, not yet purchased                                                                                                            |  |         | 12,696,000  |            |  |   | 24,114,000    |    |
| Obligations undercapitalleases                                                                                                               |  |         | 3,321,000   |            |  |   | 3,303,000     |    |
| Accountspayable and accruedexpenses                                                                                                          |  |         | 6,090,000   |            |  |   | 5,603,000     |    |
| Due toaffiliates                                                                                                                             |  |         | 265,000     |            |  |   | 250,000       |    |
| Otherliabilities                                                                                                                             |  |         | 1,412,000   |            |  |   | 528,000       |    |
| Totalliabilities                                                                                                                             |  |         | 545,936,000 |            |  |   | 902,594,000   |    |
|                                                                                                                                         |  |         |        |            |  |   |          |    |
| Minorityinterest                                                                                                                             |  |         | 34,077,000  |            |  |   | 32,447,000    |    |
| Commitmentsandcontingencies                                                                                                                  |  |         |        |            |  |   |          |    |
| Stockholders'Equity:                                                                                                                         |  |         |        |            |  |   |          |    |
| Common stock, $0.01 parvalue, 500,000,000 shares authorized, 21,249,736 shares issued andoutstanding at March 31, 2005 and December 31, 2004 |  |         | 212,000     |            |  |   | 212,000       |    |
| Additional paid-incapital                                                                                                                    |  |         | 145,724,000 |            |  |   | 145,697,000   |    |
| Retainedearnings(deficit)                                                                                                                    |  |         | (1,384,000  | )          |  |   | (2,439,000    | )  |
| Accumulatedother comprehensive income(loss)                                                                                                  |  |         | 2,096,000   |            |  |   | (161,000      | )  |
| Totalstockholders'equity                                                                                                                     |  |         | 146,648,000 |            |  |   | 143,309,000   |    |
| Totalliabilities and stockholders'equity                                                                                                     |  | $            | 726,661,000 |            |  | $      | 1,078,350,000 |    |
|                                                                                                                                              |

Seeaccompanying notes to the condensed consolidated and combined financialstatements.

1

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Northstar Realty Finance Corp. andSubsidiaries andNorthstar Realty Finance Corp.PredecessorCondensed Consolidated and Condensed CombinedStatements of Operations

(Unaudited)

|                                                                     |  |                                                        |            |                                                        |  |        |           |         |  |  |
|---------------------------------------------------------------------|--|--------------------------------------------------------|------------|--------------------------------------------------------|--|--------|-----------|---------|--|--|
|                                                                |  | TheCompany(consolidated)Three MonthsEnded March31,2005 |            | The Predecessor(combined)ThreeMonthsEnded March31,2004 |
| Revenues and otherincome:                                           |  |                                                   |       |                                                   |  |   |      |    |
| Rental and escalationincome                                         |  | $                                                      | 3,856,000  |                                                   |  | $      | —   |    |
| Advisoryand management feeincome                                    |  |                                                   | 51,000     |                                                   |  |   | 55,000    |    |
| Advisory andmanagement fee income — relatedparties            |  |                                                   | 943,000    |                                                   |  |   | 598,000   |    |
| Interestincome                                                      |  |                                                   | 7,972,000  |                                                   |  |   | 255,000   |    |
| Totalrevenues                                                       |  |                                                   | 12,822,000 |                                                   |  |   | 908,000   |    |
| Expenses:                                                           |  |                                                   |       |                                                   |  |   |      |    |
| Realestate properties — operatingexpenses                     |  |                                                   | 736,000    |                                                   |  |   | —   |    |
| Interestexpense                                                     |  |                                                   | 6,489,000  |                                                   |  |   | —   |    |
| Managementfees — relatedparty                                 |  |                                                   | 85,000     |                                                   |  |   | —   |    |
| Generalandadministrative:                                           |  |                                                   |       |                                                   |  |   |      |    |
| Direct:                                                             |  |                                                   |       |                                                   |  |   |      |    |
| Salariesand othercompensation                                       |  |                                                   | 1,261,000  |                                                   |  |   | 302,000   |    |
| Sharedservices — relatedparty                                 |  |                                                   | 342,000    |                                                   |  |   | —   |    |
| Equity basedcompensation                                            |  |                                                   | 800,000    |                                                   |  |   | —   |    |
| Insurance                                                           |  |                                                   | 213,000    |                                                   |  |   | —   |    |
| Accountingand auditingfees                                          |  |                                                   | 1,093,000  |                                                   |  |   | —   |    |
| Other generalandadministrative                                      |  |                                                   | 1,132,000  |                                                   |  |   | 47,000    |    |
| Allocated:                                                          |  |                                                   |       |                                                   |  |   |      |    |
| Salariesand othercompensation                                       |  |                                                   | —    |                                                   |  |   | 619,000   |    |
| Insurance                                                           |  |                                                   | —    |                                                   |  |   | 98,000    |    |
| Othergeneral andadministrative                                      |  |                                                   | —    |                                                   |  |   | 309,000   |    |
| Totalgeneral andadministrative                                      |  |                                                   | 4,841,000  |                                                   |  |   | 1,375,000 |    |
| Depreciationandamortization                                         |  |                                                   | 1,022,000  |                                                   |  |   | —   |    |
| Totalexpenses                                                       |  |                                                   | 13,173,000 |                                                   |  |   | 1,375,000 |    |
| Lossfromoperations                                                  |  |                                                   | (351,000   | )                                                 |  |   | (467,000  | )  |
| Equityin earnings of unconsolidated/uncombinedventures              |  |                                                   | 46,000     |                                                   |  |   | 372,000   |    |
| Unrealizedgain on investments andother                              |  |                                                   | 1,047,000  |                                                   |  |   | 1,050,000 |    |
| Realizedgain on investments andother                                |  |                                                   | 587,000    |                                                   |  |   | —   |    |
| Incomebefore minorityinterest                                       |  |                                                   | 1,329,000  |                                                   |  |   | 955,000   |    |
| Minorityinterest                                                    |  |                                                   | (274,000   | )                                                 |  |   | —   |    |
| Netincome                                                           |  | $                                                      | 1,055,000  |                                                   |  | $      | 955,000   |    |
| Othercomprehensive income:                                          |  |                                                   |       |                                                   |  |   |      |    |
| Unrealizedgain on debt securities available for sale andderivatives |  |                                                   | 2,256,000  |                                                   |  |   | 507,000   |    |
| Comprehensiveincome                                                 |  | $                                                      | 3,311,000  |                                                   |  | $      | 1,462,000 |    |
| Netincome per share of commonstock:                                 |  |                                                   |       |                                                   |  |   |      |    |
| Basic andDiluted                                                    |  | $                                                      | 0.05       |                                                   |  |   |      |    |
| Weightedaverage number of sharesoutstanding:                        |  |                                                   |       |                                                   |  |   |      |    |
| Basic                                                               |  |                                                   | 21,249,736 |                                                   |  |   |      |    |
| Diluted                                                             |  |                                                   | 26,760,770 |                                                   |  |
|                                                                     |

Seeaccompanying notes to the condensed consolidated and combined financialstatements.

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Northstar Realty Finance Corp. andSubsidiaries andNorthstar Realty Finance Corp.PredecessorCondensed Consolidated and Condensed CombinedStatements of Cash Flows

(Unaudited)

|                                                                     |  |                                       |              |                                       |  |        |            |         |  |  |
|---------------------------------------------------------------------|--|---------------------------------------|--------------|---------------------------------------|--|--------|------------|---------|--|--|
|                                                                |  | TheCompany(consolidated)              |              | ThePredecessor(combined)              |
|                                                                |  | Forthe ThreeMonths EndedMarch 31,2005 |              | For theThreeMonths EndedMarch 31,2004 |
| Netcash provided by operatingactivities                             |  | $                                     | 541,169,000  | (1)                              |  | $      | 418,000    |    |
|                                                                |  |                                  |         |                                  |  |   |       |    |
| Cashflows from investingactivities:                                 |  |                                  |         |                                  |  |   |       |    |
| Additionsto operating real estate,net                               |  |                                  | (65,148,000  | )                                |  |   | —    |    |
| Purchase ofdebt securities available forsale                        |  |                                  | (64,480,000  | )                                |  |   | —    |    |
| Subordinatereal estate debtinvestments                              |  |                                  | (76,520,000  | )                                |  |   | —    |    |
| Cashreceipts from CDOissuer                                         |  |                                  | —      |                                  |  |   | 37,000     |    |
| Cash receiptsfromwarehouse                                          |  |                                  | 988,000      |                                  |  |   | —    |    |
| Contributionsto unconsolidated/uncombinedventures                   |  |                                  | —      |                                  |  |   | (6,000     | )  |
| Distributionsfrom unconsolidated/uncombinedventures                 |  |                                  | 3,175,000    |                                  |  |   | 1,002,000  |    |
| Netcash (used in) provided by investingactivities                   |  |                                  | (201,985,000 | )                                |  |   | 1,033,000  |    |
| Cashflows from financingactivities:                                 |  |                                  |         |                                  |  |   |       |    |
| Settlement of shortsaleobligation                                   |  |                                  | (11,298,000  | )                                |  |   | —    |    |
| Collateralheld bybroker                                             |  |                                  | 12,064,000   |                                  |  |   | —    |    |
| Capitalcontributions by owners of thePredecessor                    |  |                                  | —      |                                  |  |   | 6,000      |    |
| Mortgageprincipalrepayments                                         |  |                                  | (387,000     | )                                |  |   | —    |    |
| Mortgageborrowings                                                  |  |                                  | 57,000,000   |                                  |  |   | —    |    |
| Creditfacility                                                      |  |                                  | 104,259,000  |                                  |  |   | —    |    |
| Repurchaseobligationrepayments                                      |  |                                  | (507,516,000 | )                                |  |   | —    |    |
| Distributionsto owners of thePredecessor                            |  |                                  | —      |                                  |  |   | (1,092,000 | )  |
| Netcash used in financingactivities                                 |  |                                  | (345,878,000 | )                                |  |   | (1,086,000 | )  |
| Net(decrease) increase in cash and cashequivalents                  |  |                                  | (6,694,000   | )                                |  |   | 365,000    |    |
| Cashand cash equivalents — beginning ofperiod                 |  |                                  | 47,733,000   |                                  |  |   | 1,944,000  |    |
| Cashand cash equivalents — end ofperiod                       |  | $                                     | 41,039,000   |                                  |  | $      | 2,309,000  |    |
| Supplementaldisclosure of cash flowinformation:                     |  |                                  |         |                                  |  |   |       |    |
| Cash paid forinterest                                               |  | $                                     | 5,925,000    |                                  |  | $      | —    |    |
| Supplemental disclosure ofnon-cash investingactivities:             |  |                                  |         |                                  |  |   |       |    |
| Reclassification ofCDO deposit to debt securities available forsale |  | $                                     | 2,690,000    |                                  |  | $      | —    |    |
|                                                                     |

|     |                                                                                   |
|-----|-----------------------------------------------------------------------------------|
| (1) | Includes$539.4 million of proceeds from sales of debt securities held fortrading. |

|  |                                                                                       |
|--|---------------------------------------------------------------------------------------|
|  | See accompanying notes tothe condensed consolidated and combined financialstatements. |

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NorthstarRealty Finance Corp. and Subsidiaries and Northstar Realty FinanceCorp. PredecessorNotes to Condensed Consolidated and CondensedCombined Financial Statements(Unaudited)

1.    Formation andOrganization

NorthStar Realty Finance Corp., a Marylandcorporation (the "Company"), is aself-administered and self-managed real estate investment trust("REIT"), which was formed in October 2003 inorder to continue and expand the subordinate real estate debt, realestate securities and net lease businesses conducted by NorthStarCapital Investment Corp. ("NCIC"). TheCompany's assets are held by, and it conducts its operationsthrough, NorthStar Realty Finance Limited Partnership, a Delawarelimited partnership and the operating partnership of the Company (the"Operating Partnership"). On October 29,2004, the Company closed its initial public offering (the"IPO") pursuant to which it issued 20,000,000shares of common stock, with proceeds to the Company of approximately$160.1 million, net of issuance costs of $19.9 million. On November 19,2004, the Company issued an additional 1,160,750 shares of common stockpursuant to the exercise of the overallotment option by theunderwriters of the IPO, with proceeds to the Company of $9.7 million,net of issuance costs of $0.7 million. In connection with the IPO, theCompany also issued 50,000 shares of common stock, as partialcompensation for underwriting services, to the lead underwriter of theIPO. In addition, 38,886 shares of restricted common stock were grantedto the Company's non-employee directors. Simultaneously with theclosing of the IPO on October 29, 2004, three majority-ownedsubsidiaries of NCIC (the "NCIC ContributingSubsidiaries") contributed certain controlling andnon-controlling interests in entities through which NCIC conducted itssubordinate real estate debt, real estate securities and net leasebusinesses (collectively the "InitialInvestments") to the Operating Partnership in exchange foran aggregate of 4,705,915 units of limited partnership interest in theOperating Partnership (the "OP Units"),approximately $36.1 million in cash (the "ContributionTransactions") and an agreement to pay certain relatedtransfer taxes on behalf of NCIC in the amount of approximately $1.0million. From their inception through October 29, 2004, neither theCompany nor the Operating Partnership had any operations.

Thecombination of the Initial Investments contributed to the OperatingPartnership represents the predecessor of the Company (the"Predecessor"). The Company succeeded to thebusiness of the Predecessor upon the consummation of the IPO and thecontribution of the initial investments on October 29, 2004. Theultimate owners of the entities which comprise the Predecessor wereNCIC and certain other persons who held minority ownership interests insuch entities.

2.    Basis of Quarterly Presentation

The accompanying condensed consolidated and condensed combinedfinancial statements and related notes of the Company have beenprepared in accordance with accounting principles generally accepted inthe United States for interim financial reporting and the instructionsto Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certaininformation and footnote disclosures normally included in financialstatements prepared under accounting principles generally accepted inthe United States have been condensed or omitted. In the opinion ofmanagement, all adjustments considered necessary for a fairpresentation of the Company's financial position, results ofoperations and cash flows have been included and are of a normal andrecurring nature. The operating results presented for interim periodsare not necessarily indicative of the results that may be expected forany other interim period or for the entire year. These financialstatements should be read in conjunction with the Company'sDecember 31, 2004 consolidated and combined financial statements andnotes thereto included in the Company's annual report on Form10-K, which was filed with the Securities and Exchange Commission.Capitalized terms used herein, and not otherwise defined, are definedin the Company's December 31, 2004 consolidated and combinedfinancial statements.

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NorthstarRealty Finance Corp. and Subsidiaries and Northstar Realty FinanceCorp. PredecessorNotes to Condensed Consolidated and CondensedCombined Financial Statements (Continued)(Unaudited)

Principles of Consolidation andCombination

The Company

The consolidatedfinancial statements include the accounts of the Company and itsmajority-owned subsidiaries. All significant intercompany balances havebeen eliminated in consolidation.

The Predecessor

The combined and uncombined interests in entities contributed to theOperating Partnership have been aggregated to form the Predecessor. Theinterests in entities contributed to the Operating Partnership, whichwere controlled by NCIC, are reflected in the Predecessor on a combinedbasis. All intercompany accounts have been eliminated incombination.

The Company and the Predecessor have interests inthree and two variable interest entities, respectively; however,neither the Company nor the Predecessor is the primary beneficiaryunder the Financial Accounting Standards Board("FASB") Interpretation No 46R("FIN 46R") "Consolidation ofVariable Interest Entities" and has not consolidated thesevariable interest entities. See Note 4 for a description of thevariable interest entities.

Reclassifications

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

3.    PropertyAcquisitions

Chatsworth, California

On January 14,2005, we closed the acquisition of a portfolio of three net-leasedoffice properties, totaling 257,336 square feet of rentable space inChatsworth, CA (the "Chatsworth properties"),for $63.5 million. The properties are net leased to Washington MutualBank under leases that expire in June 2015. We financed the acquisitionwith a $44 million first mortgage, and a $13 million mezzanine loanwhich was funded by the warehouse provider under the warehouseagreement for CDO III. This mezzanine loan currently constitutes aportion of the portfolio of securities owned by CDO III. One of theproperties is subject to a ground lease. The ground lease has aninitial remaining term of 35 years and two five-year extension options.The ground lease also provides for periodic increases in base rentbased on the change in the Consumer Price Index.

The Company hasmade a preliminary allocation of the purchase price to propertycomponents pending receipt of an appraisal of the office properties.The Company expects to receive the final appraisal during the secondquarter of 2005 and at such time will make a final allocation of thepurchase price in accordance with FASB 141 "BusinessCombinations."

4.    Debt Securities Availablefor Sale

The Company accounts for its investments in CDO I, CDOII and CDO III (collectively "CDOInvestments") as debt securities available for salepursuant to Emerging Issues Task Force("EITF") 99-20 "Recognition ofInterest Income and Impairment on Purchased and Retained BeneficialInterests in Securitized Financial Assets." TheCompany's potential loss is limited to its CDO Investments ofapproximately $73.3 million. The Company also has $34.9 million ofcommercial mortgage-backed securities("CMBS") investments which are recorded atfair market value, net of premium and discount. For the three monthsended March 31, 2005, the Company recognized an unrealized gain ofapproximately $2.3 million related to the change in fair value of theseinvestments.

5

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NorthstarRealty Finance Corp. and Subsidiaries and Northstar Realty FinanceCorp. PredecessorNotes to Condensed Consolidated and CondensedCombined Financial Statements (Continued)(Unaudited)

CDO I

The following is a summaryof the real estate securities, which were held by CDO I on March 31,2005 (inthousands):

|                   |  |           |         |                       |  |                 |        |         |  |                |  |        |      |         |  |        |      |        |  |  |  |  |
|-------------------|--|-----------|---------|-----------------------|--|-----------------|--------|---------|--|----------------|--|--------|------|---------|--|--------|------|--------|--|--|--|--|
|              |  |      |         |                  |  | WeightedAverage |
|              |  | Principal |         | PercentageofPrincipal |  | Rating          |        | Coupon  |  | Term(Years)    |
| CMBS              |  | $         | 227,339 |                  |  |            | 63.44  | %  |  | BBB/BBB− |  |   | 6.49 | %  |  |   | 6.67 |   |
| UnsecuredREITDebt |  |      | 113,020 |                  |  |            | 31.54  | %  |  | BBB−     |  |   | 6.45 | %  |  |   | 7.27 |   |
| RealEstateCDO     |  |      | 18,000  |                  |  |            | 5.02   | %  |  | BBB/BBB− |  |   | 7.74 | %  |  |   | 7.76 |   |
| Total             |  | $         | 358,359 |                  |  |            | 100.00 | %  |  | BBB−     |  |   | 6.54 | %  |  |   | 6.91 |   |
|                   |

Thefollowing table lists the CDO bonds payable to third parties for CDO Iat March 31, 2005 (inthousands):

|        |  |                     |         |                     |  |                        |         |              |  |                    |         |                                |  |              |  |          |  |                |  |  |  |  |  |  |  |  |
|--------|--|---------------------|---------|---------------------|--|------------------------|---------|--------------|--|--------------------|---------|--------------------------------|--|--------------|--|----------|--|----------------|--|--|--|--|--|--|--|--|
| Class  |  | OriginalNoteBalance |         | PrincipalRepayments |  | NoteBalance At 3/31/05 |         | InterestRate |  | StatedMaturityDate |         | Ratings(Moody's/S&P/Fitch) |
| A-1    |  | $                   | 250,000 |                |  | $                      | (41,351 | )       |  | $                  | 208,649 |                           |  | LIBOR+0.42%  |  | 8/1/2038 |  | Aaa/AAA/AAA    |
| A-2A   |  |                | 45,000  |                |  |                   | — |         |  |               | 45,000  |                           |  | LIBOR+0.95%  |  | 8/1/2038 |  | Aa2/AAA/AAA    |
| A-2B   |  |                | 15,000  |                |  |                   | — |         |  |               | 15,000  |                           |  | 5.68%        |  | 8/1/2038 |  | Aa2/AAA/AAA    |
| B-1    |  |                | 15,000  |                |  |                   | — |         |  |               | 15,000  |                           |  | LIBOR+1.675% |  | 8/1/2038 |  | NR/A/A+        |
| B-2    |  |                | 10,000  |                |  |                   | — |         |  |               | 10,000  |                           |  | LIBOR+1.80%  |  | 8/1/2038 |  | A3/A–/A  |
| C-1A   |  |                | 5,000   |                |  |                   | — |         |  |               | 5,000   |                           |  | LIBOR+3.00%  |  | 8/1/2038 |  | Baa3/BBB+/BBB+ |
| C-1B   |  |                | 5,000   |                |  |                   | — |         |  |               | 5,000   |                           |  | 7.70%        |  | 8/1/2038 |  | Baa3/BBB+/BBB+ |
| C-2    |  |                | 24,000  |                |  |                   | — |         |  |               | 24,000  |                           |  | 7.01%        |  | 8/1/2038 |  | NR/BBB/BBB     |
| D-1A   |  |                | 10,000  |                |  |                   | — |         |  |               | 10,000  |                           |  | LIBOR+2.30%  |  | 8/1/2038 |  | NR/BB+/BB+     |
| D-1B   |  |                | 4,000   |                |  |                   | — |         |  |               | 4,000   |                           |  | 7.01%        |  | 8/1/2038 |  | NR/BB+/BB+     |
|   |  | $                   | 383,000 |                |  | $                      | (41,351 | )       |  | $                  | 341,649 |                           |  |         |  |     |  |           |
|        |

Theweighted average interest rate for the CDO I bonds payable was5.95% at March 31, 2005, including the effect of the interestrate swap held by the CDO.

CDO II

The following is asummary of the real estate securities, which are held by CDO II atMarch 31, 2005 (inthousands):

|                   |  |           |         |                       |  |                 |        |         |  |                |  |        |      |         |  |        |      |        |  |  |  |  |
|-------------------|--|-----------|---------|-----------------------|--|-----------------|--------|---------|--|----------------|--|--------|------|---------|--|--------|------|--------|--|--|--|--|
|              |  |      |         |                  |  | WeightedAverage |
|              |  | Principal |         | PercentageofPrincipal |  | Rating          |        | Coupon  |  | Term(Years)    |
| CMBS              |  | $         | 283,521 |                  |  |            | 71.14  | %  |  | BBB/BBB− |  |   | 6.40 | %  |  |   | 7.46 |   |
| UnsecuredREITDebt |  |      | 94,615  |                  |  |            | 23.75  | %  |  | BBB−     |  |   | 5.27 | %  |  |   | 8.12 |   |
| RealEstateCDO     |  |      | 20,383  |                  |  |            | 5.11   | %  |  | BBB−     |  |   | 6.10 | %  |  |   | 9.06 |   |
| Total             |  | $         | 398,519 |                  |  |            | 100.00 | %  |  | BBB/BBB− |  |   | 6.11 | %  |  |   | 7.70 |   |
|                   |

6

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NorthstarRealty Finance Corp. and Subsidiaries and Northstar Realty FinanceCorp. PredecessorNotes to Condensed Consolidated and CondensedCombined Financial Statements (Continued)(Unaudited)

The following table lists the CDO bondspayable to third parties for CDO II at March 31, 2005 (inthousands):

|        |  |                     |         |                     |  |                        |         |              |  |                    |         |                                |  |             |  |          |  |                      |  |  |  |  |  |  |  |  |
|--------|--|---------------------|---------|---------------------|--|------------------------|---------|--------------|--|--------------------|---------|--------------------------------|--|-------------|--|----------|--|----------------------|--|--|--|--|--|--|--|--|
| Class  |  | OriginalNoteBalance |         | PrincipalRepayments |  | NoteBalance At 3/31/05 |         | InterestRate |  | StatedMaturityDate |         | Ratings(Moody's/S&P/Fitch) |
| A-1    |  | $                   | 236,000 |                |  | $                      | (3,376  | )       |  | $                  | 232,624 |                           |  | LIBOR+0.35% |  | 6/1/2039 |  | Aaa/AAA/AAA          |
| A-2A   |  |                | 42,000  |                |  |                   | — |         |  |               | 42,000  |                           |  | LIBOR+0.55% |  | 6/1/2039 |  | NR/AAA/AAA           |
| A-2B   |  |                | 15,000  |                |  |                   | — |         |  |               | 15,000  |                           |  | 5.55%       |  | 6/1/2039 |  | NR/AAA/AAA           |
| B-1    |  |                | 12,000  |                |  |                   | — |         |  |               | 12,000  |                           |  | LIBOR+0.8%  |  | 6/1/2039 |  | A2/A/A               |
| B-2    |  |                | 14,000  |                |  |                   | — |         |  |               | 14,000  |                           |  | LIBOR+1.05% |  | 6/1/2039 |  | A3/A–/A– |
| C-1    |  |                | 24,000  |                |  |                   | — |         |  |               | 24,000  |                           |  | LIBOR+2.00% |  | 6/1/2039 |  | Baa3/BBB+/BBB+       |
| C-2a   |  |                | 6,000   |                |  |                   | — |         |  |               | 6,000   |                           |  | LIBOR+2.35% |  | 6/1/2039 |  | NR/BBB/BBB           |
| C-2b   |  |                | 16,000  |                |  |                   | — |         |  |               | 16,000  |                           |  | 6.591%      |  | 6/1/2039 |  | NR/BBB/BBB           |
|   |  | $                   | 365,000 |                |  | $                      | (3,376  | )       |  | $                  | 361,624 |                           |  |        |  |     |  |                 |
|        |

Theweighted average interest rate for the CDO II bonds payable was5.29% at March 31, 2005, including the effect of the interestrate swap held by the CDO.

CDO III

In March 2005, theCompany closed its third CDO through N-Star Real Estate CDO III Ltd.("CDO III") and acquired all of the unratedincome notes of CDO III, with a face amount of $23 million, for $17.5million and also purchased the BB-rated Class D Notes, with a faceamount of $16.0 million, for $14.1 million. The Company partiallyfinanced the acquisition of the Class D Notes with a $9.1 millionadvance from our DBAG facility, defined herein. CDO III is a variableinterest entity under FIN 46R. In determining whether the Company isthe primary beneficiary, management considered the impact of all cashflows from the Company's equity interest in CDO III, the BBnotes, and all collateral management fees to be received by the Companyfrom CDO III. The Company's variable interest in these cash flowswas compared to the other variable interests including the unratedincome note holder, the swap counterparty, the senior classes of CDOdebt and the Class D CDO debt. Based on management's analysis,the Company does not absorb a majority of the expected losses and isnot entitled to a majority of the expected residual returns.Accordingly, since the Company is not the primary beneficiary, CDOIII's financial statements were not consolidated into thecondensed consolidated financial statements of the Company as of March31, 2005.

The following is a summary of the real estatesecurities, which are held by CDO III at March 31, 2005 (inthousands):

|                           |  |           |         |                       |  |                 |        |         |  |                |  |        |      |         |  |        |      |        |  |  |  |  |
|---------------------------|--|-----------|---------|-----------------------|--|-----------------|--------|---------|--|----------------|--|--------|------|---------|--|--------|------|--------|--|--|--|--|
|                      |  |      |         |                  |  | WeightedAverage |
|                      |  | Principal |         | PercentageofPrincipal |  | Rating          |        | Coupon  |  | Term(Years)    |
| CMBS                      |  | $         | 275,122 |                  |  |            | 73.38  | %  |  | BBB−/BB+ |  |   | 5.98 | %  |  |   | 6.72 |   |
| UnsecuredREITDebt         |  |      | 47,180  |                  |  |            | 12.58  | %  |  | BBB−     |  |   | 5.75 | %  |  |   | 8.83 |   |
| OtherReal EstateInterests |  |      | 26,698  |                  |  |            | 7.12   | %  |  | A/A−     |  |   | 6.65 | %  |  |   | 8.27 |   |
| RealEstateCDO             |  |      | 25,945  |                  |  |            | 6.92   | %  |  | BBB/BBB− |  |   | 6.15 | %  |  |   | 8.07 |   |
| Total                     |  | $         | 374,945 |                  |  |            | 100.00 | %  |  | BBB−     |  |   | 6.01 | %  |  |   | 7.19 |   |
|                           |

7

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NorthstarRealty Finance Corp. and Subsidiaries and Northstar Realty FinanceCorp. PredecessorNotes to Condensed Consolidated and CondensedCombined Financial Statements (Continued)(Unaudited)

The following table lists the CDObonds payable to third parties for CDO III at March 31, 2005 (inthousands):

|        |  |                     |         |                     |  |                        |                                 |              |  |                    |         |                                |  |             |  |          |  |           |  |  |  |  |  |  |  |  |
|--------|--|---------------------|---------|---------------------|--|------------------------|---------------------------------|--------------|--|--------------------|---------|--------------------------------|--|-------------|--|----------|--|-----------|--|--|--|--|--|--|--|--|
| Class  |  | OriginalNoteBalance |         | PrincipalRepayments |  | NoteBalance At 3/31/05 |                                 | InterestRate |  | StatedMaturityDate |         | Ratings(Moody's/S&P/Fitch) |
| A-1    |  | $                   | 294,000 |                |  | $                      |     — |         |  | $                  | 294,000 |                           |  | LIBOR+0.28% |  | 6/1/2040 |  | AAA/AAA   |
| A-2A   |  |                | 15,000  |                |  |                   | —                         |         |  |               | 15,000  |                           |  | LIBOR+0.50% |  | 6/1/2040 |  | AA/AA     |
| A-2B   |  |                | 5,000   |                |  |                   | —                         |         |  |               | 5,000   |                           |  | 5.042%      |  | 6/1/2040 |  | AA/AA     |
| B      |  |                | 17,000  |                |  |                   | —                         |         |  |               | 17,000  |                           |  | LIBOR+0.85% |  | 6/1/2040 |  | A-/A-     |
| C-1a   |  |                | 10,000  |                |  |                   | —                         |         |  |               | 10,000  |                           |  | LIBOR+1.25% |  | 6/1/2040 |  | BBB+/BBB+ |
| C-1a   |  |                | 6,000   |                |  |                   | —                         |         |  |               | 6,000   |                           |  | 5.804%      |  | 6/1/2040 |  | BBB+/BBB+ |
| C-2a   |  |                | 12,000  |                |  |                   | —                         |         |  |               | 12,000  |                           |  | LIBOR+1.55% |  | 6/1/2040 |  | BBB/BBB   |
| C-2b   |  |                | 2,000   |                |  |                   | —                         |         |  |               | 2,000   |                           |  | 6.135%      |  | 6/1/2040 |  | BBB/BBB   |
|   |  | $                   | 361,000 |                |  | $                      | —                         |         |  | $                  | 361,000 |                           |  |        |  |     |  |      |
|        |

Theweighted average interest rate for the CDO III bonds payable was3.12% at March 31, 2005.

5.    Debt SecuritiesHeld for Trading

As of March 31, 2005, the Company's debtsecurities held for trading had a market value of $286.3 million andthe remaining obligations under the related repurchase agreementsamounted to $282.4 million. Four issuers of these debt securitiesrepresent 21%, 20%, 15% and 13%,respectively, of the total market value of the debt securities held fortrading at March 31, 2005. The Company recorded an unrealized lossrelated to the change in fair value of these securities of $17,000 anda realized loss of $102,000 related to the sales for the three monthperiod ended March 31, 2005.

6.    Subordinate Real EstateDebt Investments and Debt Securities Available for Sale

OnMarch 31, 2005, the Company's investments in subordinate realestate debt investments and debt securities available for sale werepledged as collateral for the DBAG Facility as follows, (inthousands):

|                                              |  |                                                  |         |                  |         |                 |  |                                 |  |                                     |  |                    |  |  |  |  |  |  |  |  |  |  |
|----------------------------------------------|--|--------------------------------------------------|---------|------------------|---------|-----------------|--|---------------------------------|--|-------------------------------------|--|--------------------|--|--|--|--|--|--|--|--|--|--|
| LoanName/Collateral                          |  | LoanType                                         |         | Principal Amount |         | InitialMaturity |  | Interest Rate or IndexandSpread |  | Interest Rate – March 31,2005 |
| New YorkOfficeBuilding                       |  | JuniorParticipationInterest in FirstMortgageLoan |         | $                | 24,000  |            |  | 8/9/2006                        |  | LIBOR+ 3.75%                        |  | 6.56%              |
| HotelPortfolio                               |  | MezzanineLoan                                    |         |             | 22,000  |            |  | 7/9/2006                        |  | LIBOR +4.75%                        |  | 7.56%              |
| ResidentialCondominiumConversion             |  | JuniorParticipationInterest in FirstMortgageLoan |         |             | 24,841  |            |  | 10/9/2006                       |  | LIBOR +5.60%                        |  | 8.41%              |
| FloridaMultifamily                           |  | JuniorParticipation                              |         |             | 21,200  |            |  | 7/31/2006                       |  | LIBOR +5.5%                         |  | 8.31%              |
| New YorkHotel                                |  | JuniorParticipation                              |         |             | 30,000  |            |  | 12/9/2006                       |  | LIBOR +5.55%                        |  | 8.36%              |
| BostonHotel                                  |  | JuniorParticipation                              |         |             | 13,000  |            |  | 4/1/2007                        |  | LIBOR +5.15%                        |  | 7.84%              |
| StoragePortfolio                             |  | JuniorParticipation                              |         |             | 7,820   |            |  | 11/1/2007                       |  | LIBOR +4.68%                        |  | 7.43%              |
| HotelPortfolio                               |  | JuniorParticipation                              |         |             | 4,500   |            |  | 9/1/2006                        |  | LIBOR +6.9%                         |  | 9.65%              |
| Totalsubordinate real estate debtinvestments |  | $                                                | 147,361 |             |         |            |  |                            |  |                                |  |               |
| CMBSBonds                                    |  | CMBS                                             |         |             | 39,313  |            |  | 11/2026 –4/2040           |  | 4.90% – 7.00%                 |  | 4.90%– 7.00% |
| CDO III                                      |  | CDO –BBs                                   |         |             | 16,000  |            |  | 4/5/2040                        |  | 6.53%                               |  | 6.53%              |
| Discountand FMVadjustment                    |  |                                             | (6,367  | )           |         |            |  |                            |  |                                |  |               |
| Debtsecurities available forsale             |  | $                                                | 48,946  |             |         |            |  |                            |  |                                |  |               |
| Total                                        |  |                                             |         | $                | 196,307 |            |  |                            |  |                                |  |               |
|                                              |

8

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NorthstarRealty Finance Corp. and Subsidiaries and Northstar Realty FinanceCorp. PredecessorNotes to Condensed Consolidated and CondensedCombined Financial Statements (Continued)(Unaudited)

As of March 31, 2005, all loans wereperforming in accordance with the terms of the loan agreements.

7.   Borrowings

The following is a table of ouroutstanding borrowings as of March 31, 2005 and December 31,2004:

|                                   |  |                                 |  |                                   |  |                               |         |                                |  |        |         |        |  |  |  |  |  |  |
|-----------------------------------|--|---------------------------------|--|-----------------------------------|--|-------------------------------|---------|--------------------------------|--|--------|---------|--------|--|--|--|--|--|--|
|                              |  | StatedMaturity                  |  | Interest Rate                     |  | Balance 3/31/05 (inthousands) |         | Balance 12/31/04 (inthousands) |
| Mortgage notes payable(ALGM)      |  | 1/01/2006                       |  | (Thegreater of LIBOR or 2%) +3.6% |  | $                             | 40,208  |                           |  | $      | 40,557  |   |
| Mortgagenotes payable(Chatsworth) |  | 5/1/2015                        |  | 5.65%                             |  |                          | 43,962  |                           |  |   | — |   |
| Mezzanineloan payable(Chatsworth) |  | 5/1/2014                        |  | 6.64%                             |  |                          | 13,000  |                           |  |   | — |   |
| Repurchaseobligations             |  | See Repurchase Obligationsbelow |  | LIBOR + 0.05% to0.10%             |  |                          | 292,902 |                           |  |   | 800,418 |   |
| DBAGfacility                      |  | 12/21/2007                      |  | LIBOR + 0.75% to2.25%             |  |                          | 132,080 |                           |  |   | 27,821  |   |
|                              |  |                            |  |                              |  | $                             | 552,152 |                           |  | $      | 868,796 |   |
|                                   |

MortgageNotes Payable

In connection with the acquisition of theChatsworth Properties, a subsidiary of the Company entered into a loanagreement (the "Chatsworth Mortgage") withGerman American Capital Corporation (the"Lender") for a mortgage in the principalamount of $44.0 million. The Loan is secured by first mortgage liensand security interests on the Chatsworth Properties, including two feeowned properties and the leasehold interest in the other property,including assignments of leases and rents.

The ChatsworthMortgage matures on May 1, 2015 and bears interest at a fixed rate of5.65%. The Loan requires monthly payments of $230,906representing interest in arrears and principal sufficient to amortizethe loan to a balance of approximately $40.5 million at maturity, aswell as monthly escrow deposits for ground lease payments requiredunder the ground lease for the leasehold property. Commencing on the112th payment date all excess cash flow, as defined in the ChatsworthMortgage, is required to be deposited into a cash sweep reserve until$3 million has been deposited, through maturity of the mortgage. TheChatsworth Mortgage is not prepayable prior to maturity and is subjectto yield maintenance for any unscheduled principal prepayments prior tomaturity.

The Company and its subsidiaries have agreed to complywith environmental laws and have indemnified the Lender against allliabilities and expenses related thereto. The principal balance of theChatsworth Mortgage was $43.9 million at March 31, 2005. Interestexpense incurred on this loan totaled $0.6 million for the three monthsended March 31, 2005.

Mezzanine Loan Payable

Inconnection with the acquisition of the Chatsworth Properties, asubsidiary of the Company entered into a mezzanine loan agreement (the"Chatsworth Mezzanine Loan") which wasassigned to, then funded by, the warehouse provider for CDO III (the"Chatsworth Mezzanine Lender") for a

9

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NorthstarRealty Finance Corp. and Subsidiaries and Northstar Realty FinanceCorp. PredecessorNotes to Condensed Consolidated and CondensedCombined Financial Statements (Continued)(Unaudited)

mezzanine loan in the principal amount of$13.0 million. The Chatsworth Mezzanine Loan bears interest at a fixedrate of 6.64%, and requires monthly payments of interest only of$71,955 for the period February 1, 2005 through February 1, 2006.Principal and interest payments of $170,914 are due thereafter, andwill fully amortize the loan by maturity, May 1, 2014. The ChatsworthMezzanine Loan is secured by a pledge of our equity interest in anaffiliate of the borrower of the Chatsworth Mortgage. The ChatsworthMezzanine Loan currently constitutes a portion of the portfolio ofsecurities owned by CDO III.

Repurchase Obligations

TheCompany's temporary investments, which are primarily AAA-rated,short term, floating rate securities, backed by commercial orresidential mortgage loans, were financed with repurchase agreementswith Citigroup and Greenwich Capital Markets, Inc. The Companyinitially borrowed approximately $1.25 billion under repurchaseagreements, of which $282.4 million was outstanding at March 31, 2005,with approximately $246.5 million owed to Citigroup and $35.9 millionowed to Greenwich. These repurchase obligations mature every thirtydays with an interest rate of LIBOR plus 0.13% to 0.65%,and carry a weighted average aggregate interest rate of 2.67% atMarch 31, 2005. These repurchase agreements are being accounted for assecured borrowings since the Company maintains effective control of thefinanced assets.

Credit Facility

On December 21, 2004,the Company, entered into a $150 million master repurchase agreementwith Deutsche Bank AG, Cayman Islands Branch. On March 21, 2005, thisfacility was amended and restated to allow the Company to borrow up to$300 million in order to finance the acquisition of primarilysubordinate real estate debt and other real estate loans and securities(as amended and restated, the "DBAGFacility"). The additional capacity and flexibility underthe amendment of the DBAG Facility will allow the Company to accumulatesufficient collateral for a contemplated CDO offering, (the"Subordinate Real Estate Debt CDO"), and tocontinue to finance other investments. If and when the Subordinate RealEstate Debt CDO closes, the availability under the DBAG Facility willbe reduced to $150 million. In the event the Subordinate Real EstateDebt CDO closing does not occur prior to September 17, 2005, theavailability under the DBAG Facility will remain at $300 million andcertain economic terms of the DBAG Facility will be adjusted asdescribed below.

The DBAG Facility has an initial three-yearterm, which may be extended for one additional year if the Company isnot in default and pays an extension fee of 0.25% of theaggregate outstanding amount under the facility. If the Company extendsthe term of the facility, it will be required to retire 25% ofthe aggregate outstanding amount each quarter during the remaining yearof the term.

Under the terms of the DBAG Facility, the Companyis able to finance the acquisition of mortgage loans secured by firstliens on commercial or multifamily properties, junior participationinterests in mortgage loans secured by first or second liens oncommercial or multifamily properties, mezzanine loans secured by apledge of the entire ownership interest in a commercial or multifamilyproperty, B− or higher rated commercial mortgage backedsecurities and BB or higher rated real estate CDOs, debt securitiesissued by a REIT and syndicated bank loans.

Advances under theagreement from December 31, 2004 through March 20, 2005 bear interestonly at one month LIBOR, which is reset monthly, plus a spread rangingfrom 0.75% to 2.25%. During the period from March 21,2005 until the earlier of the closing of the contemplated SubordinateReal Estate Debt CDO and September 17, 2005, (the "CDORamp-Up Period"), amounts advanced under the DBAG Facilityin order to finance the acquisition of assets to be included in theSubordinate Real Estate Debt CDO bear interest at one-month LIBOR plusa spread of 1.00% and amounts advanced for all other assets bearinterest at one-month LIBOR plus a spread which ranges from0.75% to 

10

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NorthstarRealty Finance Corp. and Subsidiaries and Northstar Realty FinanceCorp. PredecessorNotes to Condensed Consolidated and CondensedCombined Financial Statements (Continued)(Unaudited)

2.25%. After the CDO Ramp-Up Period,all amounts advanced under the amended DBAG Facility will bear interestat a rate of one-month LIBOR plus the spread which ranges from0.75% to 2.25%.

During the CDO Ramp-Up Period andthereafter, assets will be financed at advance rates ranging from40% to 92.5% of the value of the assets as applicable tothe asset category. In addition, during the CDO Ramp-Up Period, theCompany will have the option to fix the advance rate on any SubordinateReal Estate Debt CDO assets at a specific predetermined level subjectto certain conditions.

The covenants, effective April 1, 2005,under the DBAG Facility require the Company to maintain a certainminimum tangible net worth, a certain minimum debt service coverageratio, a certain range of ratios of recourse indebtedness to net worthand certain minimum amounts of cash or marketable securities based onour ratio of recourse indebtedness to net worth.

The debt thatmay be outstanding under the DBAG Facility is subject to a number ofterms, conditions and restrictions including, without limitation, themaintenance of certain margin percentages on amounts outstanding underthe facility. If the market value of an asset securing the outstandingdebt declines, cash flow due the Company may be suspended and if marketvalue continues to decline, the Company may be required to satisfy amargin call by paying cash or providing additional collateral. Failureto meet any margin call could result in an event of default which wouldenable Deutsche Bank AG to exercise various rights and remediesincluding acceleration of the maturity date of the debt outstandingunder the DBAG Facility or the sale of the assets financedthereunder.

As of March 31, 2005, the Company has borrowedapproximately $132 million under the DBAG Facility in order to financethe acquisition of approximately $203 million of subordinate realestate debt, CMBS and CDO securities. This amount bears interest at arate equal to one-month LIBOR plus 1.00% per annum, which resetson a monthly basis. The Company incurred interest expense of $0.8million for the three months ended March 31, 2005.

Scheduledprincipal payment requirements on the Company's borrowings are asfollows as of March 31, 2005 (inthousands):

|            |  |        |         |                             |  |              |        |                       |  |        |         |        |  |        |         |        |  |  |
|------------|--|--------|---------|-----------------------------|--|--------------|--------|-----------------------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|       |  | Total  |         | Mortgageand Mezzanine loans |  | DBAGFacility |        | Repurchaseobligations |
| 2005       |  | $      | 294,179 |                        |  | $            | 1,277  |                  |  | $      | — |   |  | $      | 292,902 |   |
| 2006       |  |   | 40,401  |                        |  |         | 40,401 |                  |  |   | — |   |  |   | — |   |
| 2007       |  |   | 133,661 |                        |  |         | 1,581  |                  |  |   | 132,080 |   |  |   | — |   |
| 2008       |  |   | 1,679   |                        |  |         | 1,679  |                  |  |   | — |   |  |   | — |   |
| 2009       |  |   | 1,799   |                        |  |         | 1,799  |                  |  |   | — |   |  |   | — |   |
| Thereafter |  |   | 50,433  |                        |  |         | 50,433 |                  |  |   | — |   |  |   | — |   |
| Total      |  | $      | 522,152 |                        |  | $            | 97,170 |                  |  | $      | 132,080 |   |  | $      | 292,902 |   |
|            |

8.   RelatedParty Transactions

Shared Facilities and ServicesAgreement

Total fees and expenses incurred by the Company underthe shared facilities and services agreement amounted to $0.3 millionfor the three months ended March 31, 2005. No amounts were payable toNCIC at March 31, 2005.

11

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NorthstarRealty Finance Corp. and Subsidiaries and Northstar Realty FinanceCorp. PredecessorNotes to Condensed Consolidated and CondensedCombined Financial Statements (Continued)(Unaudited)

Advisory Fees — CDO I, CDO II andCDO III

NS Advisors LLC

CDO I, CDO II and CDO IIIentered into agreements with the Predecessor and the Company, throughNS Advisors LLC, a subsidiary, to perform certain advisoryservices.

The Company and Predecessor earned total fees ofapproximately $752,000 and $345,000 for the three months ended March31, 2005 and 2004, respectively. Unpaid advisory fees of $164,000 and$82,000 are included in due from affiliates in the Company'scondensed consolidated balance sheets as of March 31, 2005 and December31, 2004, respectively.

The Company also earned a structuringfee of $500,000 in connection with the closing of CDO III in March2005, which was used to reduce its investment in CDO III which isincluded in debt securities available for sale in the condensedconsolidated balance sheet.

NSF Venture

The Company andPredecessor earned and recognized advisory fees of approximately$191,000 and $253,000 for the three months ended March 31, 2005 and2004, respectively from the NSF Venture. For the period prior to theIPO, the Predecessor recorded such fees as deemed distributions.

Management Fees

On December 28, 2004, ALGM terminated itsexisting asset management agreement with Emmes Asset Management Co. LLC("Emmes"), an affiliate of NCIC. Pursuant tothe termination provisions of the agreement, ALGM paid Emmes acontractual termination payment of approximately $385,000, which isequal to two quarters of payments of the annual existing fee. Inaddition, ALGM and Emmes entered into a new asset management agreement,which is cancelable on 30 days notice. The annual asset management feeunder the new agreement is equal to 3.5% of gross collectionsfrom tenants of the properties not to exceed $350,000 or be less than$300,000 per year, subject to certain provisions. Total fees incurredunder this agreement amounted to $85,000 for the three months endedMarch 31, 2005.

9.   Derivatives and Hedging Activities

To limit the exposure to the variable LIBOR rate on the DBAGfacility, the Company entered into various swap agreements to fix theLIBOR rate on a portion of the Company's variable rate debt. Thefixed LIBOR rate ranges from 4.18% to 5.03%. Thefollowing table summarizes the notional amounts and fair (carrying)values of the Company's derivative financial instruments as ofMarch 31, 2005 (in thousands):

|                                          |  |                |  |            |  |                                 |  |  |  |  |  |  |  |  |
|------------------------------------------|--|----------------|--|------------|--|---------------------------------|--|--|--|--|--|--|--|--|
|                                     |  | NotionalAmount |  | Fair Value |  | Range ofMaturity                |
| Interest rateswaps, treated as hedges(a) |  | $40,900        |  | $547       |  | December2010 – August2018 |
|                                          |

|  |
|--|
|  |  |
|  |

|  |                                                          |
|--|----------------------------------------------------------|
|  | (a)    Included in Otherassets, net. |

10.   Earnings Per Share

TheCompany's basic earnings per share("EPS") is computed by dividing net incomeavailable to common shareholders by the weighted average number ofcommon shares outstanding. For purposes of calculating earnings pershare, the Company considered all unvested restricted stock whichparticipate in the dividends of the Company to be outstanding. Thecomputation of diluted EPS 

12

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NorthstarRealty Finance Corp. and Subsidiaries and Northstar Realty FinanceCorp. PredecessorNotes to Condensed Consolidated and CondensedCombined Financial Statements (Continued)(Unaudited)

considers the potential dilution that couldoccur if securities or other contracts to issue common stock wereexercised or converted to common stock, where such exercise orconversion would result in a lower EPS amount. This also includes unitsof limited partnership interest in the Operating Partnership which areconsidered convertible securities. The operating partnership units areexchangeable for common shares on a one for one basis. Additionally,income is allocated to all unit holders including the Company on aprorata basis. The conversion of these units to common shares are notdilutive to earnings per share.

11.   Contingency

OnAugust 21, 2003, an action was filed against ALGM in New York StateSupreme Court, New York County (the"Complaint"). The Complaint was brought by729 7th Realty Corp. (the "Tenant"), asubsidiary of NRMI that is the net lessee of the Condominium, toenforce certain rights it claims to have under its net lease with ALGM(the "Net Lease").

In its Complaint,the Tenant asserts two causes of action against ALGM. In the firstcause of action, Tenant seeks specific performance of its alleged rightto require ALGM to provide a subordination, non-disturbance andattornment agreement (an "SNDA") to asubtenant (the "Subtenant") so that in theevent the Net Lease is terminated, the proposed sublease (the"Sublease") would remain in effect. Thesecond cause of action seeks a judgment in the amount of approximately$600,000 for damages that the Tenant allegedly suffered by reason ofALGM's refusal to provide the Subtenant with SNDA protection. Thefee owner moved to dismiss the plaintiff's claim for monetarydamages and that motion was granted on March 29, 2004.

ALGM hasrefused to grant SNDA protection to the Subtenant on the grounds thatthe proposed Sublease is configured in such a way so as to extract themost economically desirable portion of the Condominium for theSubtenant (an affiliate of the Tenant) rendering the remaining spacethat would revert to ALGM upon a termination of the Net Leaseunmarketable. Under the terms of the Net Lease, ALGM believes it has noobligation to provide SNDA protection to a proposed subtenant where, inALGM's discretion, the remaining space would be renderedunmarketable.

In response to the Complaint, on September 24,2003, ALGM moved to dismiss the second cause of action on the groundsthat the Net Lease prohibits the recovery of monetary damages that mayresult from ALGM's refusal to provide proposed subtenants withSNDA protection (the "Motion"). ALGM'stime to answer the first cause of action is stayed until a decision isrendered on the Motion. At that time, ALGM intends to vigorously opposethe Tenant's claim that it has the right to obtain SNDAprotection for its Subtenant under the current circumstances. ALGM andthe Tenant are still in discovery, and as such, the ultimate outcome ofthis matter is uncertain.

12.   Equity BasedCompensation

Long Term Incentive Bonus Plan

TheCompany has granted certain restricted awards to certain employees andco-employees of the Company and NCIC employees who provide services tothe Company pursuant to a shared service agreement. These restrictedawards are subject to both employment and the Company attaining certainperformance hurdles. At March 31, 2005, management has made its bestestimate of the Company's performance during the performanceperiods, based on the facts and information currently available andassumptions regarding the investment of the remaining proceeds of theCompany's initial public offering pursuant to our stated businessstrategy and returns on future investments. On the basis of theforegoing, management has estimated that the Company would not meet thereturn hurdle in either of these performance periods. If the Companydoes not meet the return hurdle during the performance periods, theCompany will not grant any awards under this program to members of

13

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NorthstarRealty Finance Corp. and Subsidiaries and Northstar Realty FinanceCorp. PredecessorNotes to Condensed Consolidated and CondensedCombined Financial Statements (Continued)(Unaudited)

management, other employees and theemployees of NCIC who provide services to the Company. Accordingly, nocompensation expense, with respect to provisional awards under the 2004Long Term Incentive Bonus Plan, has been recognized in the condensedconsolidated financial statements for the three months ended March 31,2005.

Employee Outperformance Plan

In connection withthe employment agreement of the Company's chief investmentofficer, he is eligible to receive incentive compensation equal to15% of the annual net profits from the Company's realestate securities business in excess of a 12% return on investedcapital (the "Annual Bonus ParticipationAmount"). The Company will have the option of terminatingthis incentive compensation arrangement at any time after the thirdanniversary of the date of its IPO by paying the Company's chiefinvestment officer an amount based on a multiple of the estimatedAnnual Bonus Participation Amount at the time the Company exercisesthis buyout option. If the Company exercises this buyout option, thefixed amount due for terminating this arrangement will vest ratably andbe paid in four installments over a three-year period with 25%paid on termination. If the Company's chief investment officervoluntarily terminates his employment with the Company prior to anyexercise of the Company's buyout option, he will be eligible toreceive future annual payments based on the future real estatesecurities annual net profits in excess of the 12% return hurdleon invested capital. The portion of the annual benefit to which thechief investment officer is eligible after voluntary terminationincreases with each year of employment until the fifth anniversary, atwhich point the chief investment officer is 100% vested in thefull amount of the payment that would be due related to the annualbonus participation amount on the real estate securities businessincome earned on, business initiated five years earlier, over thereturn hurdle. No compensation has been earned by the Company'schief investment officer under this plan for the three months endedMarch 31, 2005.

Omnibus Stock Incentive Plan

On January30, 2005, our Operating Partnership granted an aggregate of 22,500 LTIPunits, which are operating partnership units that are structured asprofits interests, to certain employees of the Company pursuant to the2004 Omnibus Stock Incentive Plan. The LTIP units vest to theindividual recipient at a rate of one-twelfth of the total amountgranted as of the end of each quarter beginning with the quarter endedApril 29, 2005. In addition the LTIP unit holders are entitled todividends on the entire grant.

13.   Segment Reporting

The Predecessor and the Company have three reportable segments: (i)subordinate real estate debt, (ii) real estate securities and (iii) netlease real estate investments. The Company evaluates performanceprimarily based on its proportionate share of the earnings of suchinvestments. General and administrative expenses were not allocated bymanagement to various segments and therefore are presented asunallocated. The reportable segments are managed separately due to thediffering nature of the business operations. The following tables setforth certain segment information for the Company on a consolidatedbasis and for the Predecessor on a combined basis, as of and for thethree months ended March 31, 2005 and 2004 (in thousands),respectively:

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NorthstarRealty Finance Corp. and Subsidiaries and Northstar Realty FinanceCorp. PredecessorNotes to Condensed Consolidated and CondensedCombined Financial Statements (Continued)(Unaudited)

|                                         |  |                    |         |                           |  |                         |         |                |  |                   |         |        |  |        |         |         |  |        |         |         |  |  |
|-----------------------------------------|--|--------------------|---------|---------------------------|--|-------------------------|---------|----------------|--|-------------------|---------|--------|--|--------|---------|---------|--|--------|---------|---------|--|--|
| ThreeMonths Ended March 31, 2005        |  | NetLeaseInvestment |         | SubordinateRealEstateDebt |  | RealEstateSecuritiesCDO |         | Unallocated(1) |  | ConsolidatedTotal |
| Rentalrevenue                           |  | $                  | 3,856   |                      |  | $                       | — |           |  | $                 | — |   |  | $      | — |    |  | $      | 3,856   |    |
| Advisoryand managementfees              |  |               | — |                      |  |                    | 242     |           |  |              | 752     |   |  |   | — |    |  |   | 994     |    |
| Interestincome                          |  |               | 9       |                      |  |                    | 2,657   |           |  |              | 1,298   |   |  |   | 4,008   |    |  |   | 7,972   |    |
| Equityin earnings of uncombinedventures |  |               | — |                      |  |                    | 46      |           |  |              | — |   |  |   | — |    |  |   | 46      |    |
| Gain(loss) in investment andother       |  |               | — |                      |  |                    | 29      |           |  |              | 1,726   |   |  |   | (121    | )  |  |   | 1,634   |    |
| Interestexpense                         |  |               | 1,661   |                      |  |                    | 994     |           |  |              | 245     |   |  |   | 3,589   |    |  |   | 6,489   |    |
| Otherexpenses                           |  |               | 2,187   |                      |  |                    | 42      |           |  |              | 417     |   |  |   | 4,038   |    |  |   | 6,684   |    |
| Minorityinterest                        |  |               | — |                      |  |                    | — |           |  |              | — |   |  |   | (274    | )  |  |   | (274    | )  |
| NetIncome(loss)                         |  | $                  | 17      |                      |  | $                       | 1,938   |           |  | $                 | 3,114   |   |  | $      | (4,014  | )  |  | $      | 1,055   |    |
| Totalassets                             |  | $                  | 123,852 |                      |  | $                       | 202,375 |           |  | $                 | 74,661  |   |  | $      | 325,773 |    |  | $      | 726,661 |    |
|                                         |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                      |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Unallocatedinterest income and interest expense relates to our temporaryinvestments. Unallocated other expenses is comprised of corporate levelgeneral & administrativeexpenses. |

|                                         |  |                    |         |                           |  |                         |         |             |  |               |         |        |  |        |         |         |  |        |       |        |  |  |
|-----------------------------------------|--|--------------------|---------|---------------------------|--|-------------------------|---------|-------------|--|---------------|---------|--------|--|--------|---------|---------|--|--------|-------|--------|--|--|
| ThreeMonths Ended March 31, 2004        |  | NetLeaseInvestment |         | SubordinateRealEstateDebt |  | RealEstateSecuritiesCDO |         | Unallocated |  | CombinedTotal |
| Advisory and managementfees             |  | $                  | — |                      |  | $                       | 308     |        |  | $             | 345     |   |  | $      | — |    |  | $      | 653   |   |
| Interestincome                          |  |               | — |                      |  |                    | — |        |  |          | 255     |   |  |   | — |    |  |   | 255   |   |
| Equityin earnings of uncombinedventures |  |               | 251     |                      |  |                    | 121     |        |  |          | — |   |  |   | — |    |  |   | 372   |   |
| Gain(loss) in investment andother       |  |               | — |                      |  |                    | — |        |  |          | 1,050   |   |  |   | — |    |  |   | 1,050 |   |
| Otherexpenses                           |  |               | — |                      |  |                    | — |        |  |          | 349     |   |  |   | 1,026   |    |  |   | 1,375 |   |
| NetIncome(loss)                         |  | $                  | 251     |                      |  | $                       | 429     |        |  | $             | 1,301   |   |  |   | ($1,026 | )  |  | $      | 955   |   |
|                                         |

14.   SubsequentEvents

Private Placement of Trust Preferred Securities

On April 12, 2005, the Operating Partnership completed a privateplacement of $40.0 million aggregate liquidation amount of floatingrate preferred securities (the "PreferredSecurities"), through a newly formed subsidiary, NorthStarRealty Finance Trust, a Delaware statutory trust (the"Trust").

The Preferred Securitieswere issued by the Trust pursuant to an Amended and Restated TrustAgreement (the "Trust Agreement") among theOperating Partnership, as depositor, JPMorgan Chase, NationalAssociation, as property trustee, Chase Bank USA, National Association,as Delaware trustee and three administrative trustees, each of whom isan executive officer of the Company. The Trust also issued $1.24million aggregate liquidation amount of floating rate common securities(the "Common Securities") pursuant to theTrust Agreement and sold the Common Securities to the OperatingPartnership. The Trust used the proceeds from the sale of the PreferredSecurities and the Common Securities to purchase $41.24 millionaggregate principal amount of floating rate junior subordinated notesdue 2035 of the Operating Partnership (the "JuniorSubordinated Notes") issued pursuant to a JuniorSubordinated Indenture, dated as of April 12, 2005 (the"Indenture") between the OperatingPartnership and JPMorgan Chase Bank, National Association, as trustee(the "Trustee.")

The PreferredSecurities require quarterly distributions at a fixed rate of8.15% through the interest payment date in March 2015 and at avariable rate of three-month LIBOR plus 3.25% 

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NorthstarRealty Finance Corp. and Subsidiaries and Northstar Realty FinanceCorp. PredecessorNotes to Condensed Consolidated and CondensedCombined Financial Statements (Continued)(Unaudited)

thereafter. Distributions are cumulative andaccrue from the date of original issuance; provided, however, thatafter October 12, 2006 distributions may be deferred for a period of upto six consecutive quarterly interest payment periods if the OperatingPartnership exercises its right under the Indenture to defer thepayment of interest on the Junior Subordinated Notes as describedbelow. The Preferred Securities mature on March 30, 2035, but may beredeemed beginning on March 30, 2010 if the Operating Partnershipexercises its right to redeem the Junior Subordinated Notes asdescribed below.

The Junior Subordinated Notes bear interest ata fixed rate of 8.15% through the interest payment date in March2015 and at a variable rate of three-month LIBOR plus 3.25%thereafter. Interest accrues from the date of original issuance. AfterOctober 12, 2006, the Operating Partnership may, as long as no Event ofDefault (as defined in the Indenture) has occurred, defer the paymentof interest at any time and from time to time for a period of up to sixconsecutive quarterly interest payment periods (each such period, an"Extension Period"). No interest shall be dueand payable during an Extension Period, but each installment ofinterest that would otherwise have been due and payable during suchExtension Period shall bear additional interest at a fixed rate of8.15% through the interest payment date in March 2015 and at avariable rate of three-month LIBOR plus 3.25% thereafter. Duringany Extension Period, the Operating Partnership may not declare or payany dividends on its capital stock or make any payment of principal ofor any interest or premium, on or repay, repurchase or redeem any debtsecurities of the Operating Partnership that rank pari passu in allrespects with or junior in interest to the Junior SubordinatedNotes.

The Junior Subordinated Notes mature on March 30, 2035,but the Operating Partnership may redeem the Junior Subordinated Notes,in whole or in part, at par beginning on March 30, 2010, and may redeemthem earlier than such date following the occurrence of a SpecialEvent, as defined in the Indenture. The Trust will be required toredeem a like amount of the Preferred Securities if the OperatingPartnership exercises its right to redeem all or a portion of theJunior Subordinated Notes.

Either the Trustee or the holders ofat least 25% of the aggregate principal amount of theoutstanding Junior Subordinated Notes may declare the principal amountof, and all accrued interest on, all the Junior Subordinated Notes tobe due and payable immediately, or if the holders of the JuniorSubordinated Notes fail to make such declaration, the holders of atleast 25% in aggregate liquidation amount of the PreferredSecurities outstanding shall have a right to make such declaration, ifan Event of Default occurs. Any holder of the Preferred Securities hasthe right, upon the occurrence of an Event of Default, to institutesuit directly against the Operating Partnership for enforcement ofpayment to such holder of principal of and any premium and interest,including additional interest, on the Junior Subordinated Notes havinga principal amount equal to the aggregate liquidation amount of thePreferred Securities held by such holder.

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NorthstarRealty Finance Corp. and Subsidiaries and Northstar Realty FinanceCorp. PredecessorNotes to Condensed Consolidated and CondensedCombined Financial Statements (Continued)(Unaudited)

Subordinate Real Estate Debt:

The Company has made the following investments subsequent to March31, 2005 (inthousands):

|                 |  |              |  |                          |  |                                 |         |                  |  |                      |  |              |  |  |  |  |  |  |  |  |  |  |
|-----------------|--|--------------|--|--------------------------|--|---------------------------------|---------|------------------|--|----------------------|--|--------------|--|--|--|--|--|--|--|--|--|--|
| Name            |  | DateAcquired |  | Type                     |  | Principal Balance atAcquisition |         | Initial Maturity |  | Current InterestRate |
| NYRetail        |  | 4/1/2005     |  | SubordinateParticipation |  | $                               | 10,000  |             |  | September2006        |  | LIBOR + 2.4% |
| HotelPortfolio  |  | 4/8/2005     |  | SubordinateParticipation |  |                            | 13,700  |             |  | July 2006            |  | LIBOR+3.0%   |
| HotelPortfolio  |  | 4/8/2005     |  | SubordinateParticipation |  |                            | 16,500  |             |  | February 2007        |  | LIBOR+3.5%   |
| HotelPortfolio  |  | 4/15/2005    |  | SubordinateParticipation |  |                            | 6,257   |             |  | January 2006         |  | LIBOR+3.25%  |
| CMBS Bond10     |  | 4/19/2005    |  | CMBS                     |  |                            | 4,301   |             |  | March2033            |  | 7% Fixed     |
| CMBS Bond11     |  | 4/26/2005    |  | CMBS                     |  |                            | 1,046   |             |  | February2034         |  | 6.96% Fixed  |
| NYOffice/Retail |  | 4/26/2005    |  | SubordinateParticipation |  |                            | 19,900  |             |  | October 2006         |  | LIBOR+4.5%   |
| OfficePortfolio |  | 4/29/2005    |  | SubordinateParticipation |  |                            | 17,910  |             |  | January 2007         |  | LIBOR+5.35%  |
| CMBS Bond12     |  | 4/29/2005    |  | CMBS                     |  |                            | 4,952   |             |  | May2043              |  | 5.25% Fixed  |
| Las VegasRetail |  | 5/3/2005     |  | SubordinateParticipation |  |                            | 19,000  |             |  | October2006          |  | LIBOR+3.35%  |
| Total           |  |         |  |                     |  | $                               | 113,566 |             |  |                 |  |         |
|                 |

Theseassets were financed with approximately $83.3 million in proceeds ofthe DBAG facility and the balance in cash.

Warehouse AgreementCDO V

On May 4, 2005, the Company entered into a warehousearrangement with a major commercial bank whereby the bank has agreed topurchase up to $400 million of CMBS and other real estate debtsecurities under the Company's direction, with the expectation ofselling such securities to the Company's fourth investment gradeCDO issuer ("CDO V"). The Company wasrequired to pledge up to $10 million as security for the purpose ofcovering a portion of any losses or costs associated with theaccumulation of these securities under the warehouse agreement. On May6, 2005, the Company has deposited $5 million and will be required todeposit an additional $2.5 million after $125 million in acquisitionsof securities have been made under the agreement, and increase thedeposit by an additional $2.5 million after $250 million inacquisitions of securities have been made under the agreement. The bankhas accumulated approximately $50.1 million of real estate securitiesunder the terms of the warehouse agreement as of May 12, 2005. The CDOV warehouse agreement also provides for the Company's notionalparticipation in the income that the assets generate after deducting anotional debt cost. The agreement will be treated as a non-hedgederivative for accounting purposes and will therefore bemarked-to-market through income. The collateral being accumulated underthis agreement is expected to be included in a securitizationtransaction in which the Company would acquire all of the equityinterest.

In addition, the Company has acquired approximately$9.0 million in CMBS and REIT debt securities. The Company anticipatesselling these securities to the CDO V warehouse during the secondquarter of 2005.

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NorthstarRealty Finance Corp. and Subsidiaries and Northstar Realty FinanceCorp. PredecessorNotes to Condensed Consolidated and CondensedCombined Financial Statements (Continued)(Unaudited)

Dividends

On April 21, 2005, theCompany declared a cash dividend of $0.15 per share of common stock.The dividend is expected to be paid on May 16, 2005 to the shareholdersof record as of the close of business on May 2,2005.

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ITEM2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION                     AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction withour and our predecessor's financial statements and notes theretoincluded in this report.

Organization and Overview

Weare an internally-managed REIT that was formed to continue and expandthe subordinate real estate debt, real estate securities and net leasebusinesses of NorthStar Capital Investment Corp., or NorthStar Capital.Upon the consummation of our initial public offering, or IPO, onOctober 29, 2004, three subsidiaries of NorthStar Capital contributed100% of their respective interests in entities through whichNorthStar Capital engaged in these businesses in exchange for units oflimited partnership interest in our operating partnership andapproximately $36.1 million. Our management team consists primarily ofthe same individuals who managed these businesses for NorthStarCapital.

We commenced operations upon the consummation of ourIPO. We conduct substantially all of our operations and make ourinvestments through our operating partnership, NorthStar Realty FinanceLimited Partnership, or NorthStar Partnership, of which we are the solegeneral partner. Through our operating partnership,we:

|              |                                                                                                                                                       |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | acquire, originate and structuresubordinate and other high-yielding debt investments secured byincome-producing commercial and multifamilyproperties; |

|              |                                                                                                                        |
|--------------|------------------------------------------------------------------------------------------------------------------------|
| •  | create, manage and issuecollateralized debt obligations, or CDOs, backed by commercial realestate debt securities; and |

|              |                                                                       |
|--------------|-----------------------------------------------------------------------|
| •  | acquireproperties that are primarily net leased to corporate tenants. |

Basis of Quarterly Presentation

Set forth below is adiscussion of the financial condition and results of operations of ourpredecessor for the three months ended March 31, 2004 and NorthStarRealty Finance Corp. for the three months ended March 31, 2005.

Our predecessor is an aggregation of the entities through whichNorthStar Capital owned and operated its subordinate real estate debt,real estate securities and net lease businesses and was not a separatelegal operating entity. The ultimate owners of these entities wereNorthStar Capital and their minority owners. NorthStar Partnership,L.P., the operating partnership of NorthStar Capital, was the managingmember with day-to-day operational responsibility of the entitiescontrolled by NorthStar Capital. These entities are combined in ourpredecessor's historical financial statements. Where ourpredecessor had a non-controlling interest in any of the entities thatcomprised our predecessor, such entities are presented as part of ourpredecessor on an uncombined basis. Because the discussion of thefinancial condition and results of operations for the three monthsended March 31, 2004, which is set forth below, relates to the entitiescomprising our predecessor, it reflects the historical financing andoperational strategies of these entities.

Although the entitiescomprising our predecessor operated as separate businesses of NorthStarCapital, these businesses utilized certain of NorthStar Capital'semployees, insurance and administrative services. General andadministrative expenses incurred by NorthStar Capital on behalf of allof its business units which include salaries and benefits, rent,furniture, equipment, travel and entertainment, accounting, legalservices and other expenses, were allocated to our predecessor byNorthStar Capital through identification of specific expense items,where practical, and otherwise through an estimation of the level ofeffort devoted by certain of NorthStar Capital's employees. Inthe opinion of management, the methods used to allocate general andadministrative expenses and other costs were reasonable.

Uponthe contribution of the initial investments to our operatingpartnership, these businesses became fully integrated and therefore wepresent our financial statements on a consolidated basis for

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all periods thereafter. Simultaneously withthis contribution, we entered into a shared facilities and servicesagreement with NorthStar Capital, pursuant to which certain general andadministrative services required to run these businesses are providedby NorthStar Capital for a period of one year in exchange for a fixedannual fee.

Sources of Operating Revenues

Historically,our predecessor primarily derived operating revenues from earnings ofuncombined ventures which consisted of our predecessor'sproportionate share of the net income from the rental operations of aportfolio of retail and commercial properties located in New York Cityand from subordinate real estate debt investments. In more recentperiods, our predecessor also derived operating revenues from advisoryfees related to our real estate securities and subordinate real estatedebt businesses, from the residual interests in the cash flows of itsinvestment grade CDOs based on our equity interests in such CDOs andfrom the interest income on our junior debt investments in itsinvestment grade CDOs.

Subsequent to our IPO and the integrationof the subordinate real estate debt, real estate securities and netlease businesses, we primarily derived operating revenues from rentalincome, from the rental operations of the consolidated net lease realestate portfolio, from interest income on our consolidated investmentsin subordinate real estate debt, from the residual interests in thecash flows of our investment grade CDOs based on our equity interestsin such CDOs and from the interest income on our junior debtinvestments in our investment grade CDOs, from earnings of anunconsolidated venture which consists of our proportionate share of thenet income of that venture's subordinate debt investments andfrom advisory fees related to our real estate securities andsubordinate real estate debt businesses.

Subordinate Real Estate Debt

DirectInvestments.    The additional liquidity provided by the netproceeds of our IPO allowed us to increase the number and range ofsubordinate real estate debt in which we invest. We used a portion ofthe net proceeds of our IPO to make investments in subordinate realestate debt which are consolidated on our balance sheet. We earninterest income and origination fees on these consolidated investments,but we do not earn advisory fees on these investments.

NSFVenture.    NorthStar Capital commenced its business of investingin subordinate real estate debt in 2001 through an arrangement we referto as the NSF Venture. NorthStar Funding Managing Member LLC, amajority-owned subsidiary of NorthStar Capital prior to thecontribution of the initial investments to our operating partnership,is the managing member and holder of 50% of the outstandingmembership interests in NorthStar Funding Management LLC, the managingmember of the NSF Venture. NorthStar Funding Management LLC isresponsible for the origination, underwriting and structuring of allinvestments made by the NSF Venture. However, the NSF Venture investorhas the right to approve all investments that NorthStar FundingManagement LLC proposes to make on behalf of the NSF Venture.

NorthStar Funding Investor Member LLC, a majority-owned subsidiaryof NorthStar Capital prior to the contribution of the initialinvestments to our operating partnership, owns a 5% interest inthe NSF Venture and the NSF Venture Investor owns the remaining95%. Prior to July 10, 2003, NorthStar Funding Investor MemberLLC held a 10% interest in the NSF Venture. On July 10, 2003,the terms of the NSF Venture were amended to increase NorthStar FundingInvestor Member LLC's capital commitment to $190 million, or95% of $200 million, and reduce NorthStar Funding InvestorMember LLC's interest to 5%. NorthStar Capital contributedits interests in the NSF Venture to our operating partnership uponconsummation of our IPO.

We receive an advisory fee of 1%of contributed capital per annum as compensation for NorthStar FundingManagement LLC's management of the NSF Venture'sinvestments. We are also entitled to a profit participation equal to10% of the profit after a minimum return on the NSFVenture's capital and a return of capital based upon theperformance of the NSF Venture's 

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investments. NorthStar Funding ManagingMember LLC receives 75% of this 10% profit participation.We also earn an additional advisory fee from the NSF Venture Investorfor underwriting and placing the senior participation andsub-participation interests that are acquired by the NSF VentureInvestor directly from the NSF Venture.

Our equity in earningsof the NSF Venture includes interest income and origination fees oninvestments.

Real Estate Securities

We invest incommercial mortgage-backed securities, or CMBS, and other real estatesecurities which are primarily investment grade and are financed withlong term debt through the issuance of investment grade CDOs, therebymatching the terms of the assets and the liabilities.

We earn aspread between the yield on the assets and the interest expenseincurred on the CDO debt issued through our investments in the equityinterests and the junior CDO debt of each CDO issuer.

We alsoearn ongoing management fees for our management and monitoring of theCDO collateral of our investments in CDO I, CDO II and CDO III, whichfees equal 0.35% of the related CDO collateral.

Prior toa new investment grade CDO issuance, there is a period during whichreal estate securities are identified and acquired for inclusion in aCDO, known as the warehouse accumulation period. During this period, wedirect the acquisition of securities under a warehouse facility from abank that will be the lead manager of the CDO. The warehouse providerthen purchases the securities and holds them on its balance sheet. Wedirect the acquisition of securities by the warehouse provider duringthis period, but we do not earn any fees for providing this service toeither the warehouse provider or the issuer of the CDO, which willreceive such securities upon the closing of the CDO. We contribute cashand other collateral, which is held in escrow by the warehouseprovider, to back our commitment to purchase equity in the CDO and tocover our share of losses should securities need to be liquidated.Pursuant to the warehouse agreement, we share gains, including the netinterest earned during the warehouse period, and losses, if any, withthe warehouse provider.

During the warehouse period, ourparticipation under the warehouse agreement is reflected in ourconsolidated financial and our predecessor's combined financialstatements as a non-hedge derivative, which is reflected at fair valueand any unrealized gain or loss is charged to operations. Based on ananalysis of our and our predecessor's interest in CDO I as avariable interest entity under FASB Interpretation No. 46R"Consolidation of Variable InterestEntities," the financial statements of CDO I were notconsolidated into our predecessor's financial statements for thethree months ended March 31, 2004 or in our financial statements forthe three months ended March 31, 2005 and for the period from October29, 2004 to December 31, 2004, since neither our predecessor nor wewere the primary beneficiary of CDO I. Similarly, the financialstatements of CDO II and CDO III were not consolidated into ourfinancial statements since we were not the primary beneficiary of CDOII or CDO III. Accordingly, we have designated the beneficial interestsin preferred equity of CDO I and the unrated income notes of CDO II andCDO III as debt securities available for sale as they meet thedefinition of debt instruments due to their underlying redemptionprovisions.

Net Lease Portfolio

We earn rentalincome from office, industrial and retail properties that are netleased to corporate tenants.

We have two fee and six leaseholdinterests in a portfolio of substantially net leased retail andcommercial properties located in the Times Square and midtown area ofManhattan which we refer to as the New York property portfolio. Thisportfolio is owned by our subsidiary, ALGM I Owners LLC, or ALGM. Ourpredecessor held a 97.5% non-managing equity interest in ALGM.Two of ALGM's leases expired in 2003, one in March and one inOctober. As of March 31, 2005, ALGM owned eight 

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properties, which vary in size from 4,200square feet to 21,140 square feet and had a total of 96,114 netrentable square feet. Four of the properties are primarily leased orsubleased to single users and four are leased or subleased to multipletenants.

The results of operations for these properties werereflected in our predecessor's equity in earnings of uncombinedventures because our predecessor owned a 97.5% non-managingequity interest in ALGM. Concurrently with the contribution of theinitial investments to our operating partnership, we purchased theremaining 2.5% managing equity interest from ALGM I Equity LLCwith $1.6 million of the proceeds of our IPO. The results of operationsof ALGM have been consolidated in our financial statements subsequentto our IPO.

On January 14, 2005, we closed the acquisition of aportfolio of three net-leased office properties, totaling 257,336square feet of rentable space in Chatsworth, CA, or the Chatsworthproperties, for $63.5 million. The Chatsworth properties are net leasedto Washington Mutual Bank under leases that expire in June 2015. Wefinanced the acquisition with a $44 million first mortgage and a $13million mezzanine loan which was funded by the warehouse provider underthe warehouse agreement for CDO III. This mezzanine loan currentlyconstitutes a portion of the portfolio of securities owned by CDO III.We refer to the New York property portfolio and the Chatsworthproperties as our net lease real estate portfolio.

CriticalAccounting Policies

The preparation of financial statements inconformity with generally accepted accounting principles, or GAAP,requires the use of estimates and assumptions that could affect thereported amounts of assets and liabilities, the disclosure ofcontingent assets and liabilities and the reported amounts of revenueand expenses. Management has identified certain critical accountingpolicies that affect the more significant judgments and estimates usedby management in the preparation of our predecessor's combinedfinancial statements and our consolidated financial statements.Management evaluates on an ongoing basis estimates related to criticalaccounting policies, including those related to revenue recognition,allowances for doubtful accounts receivable and impairment ofinvestments in uncombined ventures and debt securities available forsale. The estimates are based on information that is currentlyavailable to management, as well as on various other assumptions thatmanagement believes are reasonable under the circumstances.

Principles of Consolidation

The consolidatedfinancial statements include the accounts of the Company and itsmajority-owned subsidiaries. All significant intercompany balances havebeen eliminated in consolidation.

The Company has interests inthree variable interest entities; however, the Company is not theprimary beneficiary under FIN 46R and has not consolidated thesevariable interest entities.

Debt Securities Availablefor Sale

Debt securities available for sale are carried atestimated fair value with the net unrealized gains or losses reportedas a component of accumulated other comprehensive income (loss) instockholders' equity. The equity investments in CDO I, CDO II andCDO III are relatively illiquid, and the value of such investments mustbe estimated by management. Fair value is based primarily upon brokerquotes or management's estimates. These estimated values aresubject to significant variability based on market conditions, such asinterest rates and spreads. Changes in the valuations do not affectreported income or cash flows, but impact stockholders'equity.

Subordinate Real Estate Debt Investments

We must periodically evaluate each of our direct investments insubordinate real estate debt for possible impairment. Impairment isindicated when it is deemed probable that we will be unable to collectall amounts due according to the contractual terms of the loan. Upon adetermination of 

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impairment, we would establish a specificvaluation allowance with a corresponding charge to earnings.Significant judgment is required both in determining impairment and inestimating the resulting loss allowance. Allowances for loan investmentlosses are established based upon a periodic review of the loaninvestments. Income recognition is generally suspended for loans at theearlier of the date at which payments become 90 days past due or when,in the opinion of management, a full recovery of income and principalbecomes doubtful. Income recognition is resumed when the loan becomescontractually current and performance is demonstrated to be resumed. Inperforming this review, management considers the estimated netrecoverable value of the loan as well as other factors, including thefair market value of any collateral, the amount and the status of anysenior debt, the prospects for the borrower and the economic conditionsin the region where the borrower does business. Because thisdetermination is based upon projections of future economic events,which are inherently subjective, the amounts ultimately realized fromthe loan investments may differ materially from the carrying value asof the balance sheet date. To date, all of our direct investments insubordinate real estate debt are fully performing and we havedetermined that no loss allowances have been necessary with respect tothe loans.

Revenue Recognition

Our rentalrevenue from our net lease real estate portfolio is recognized on astraight-line basis over the initial term of the respective leases. Theexcess of straight-line rents recognized over amounts contractually duepursuant to the underlying leases are included in straight-lineunbilled rents receivable in our condensed consolidated balance sheet.Management provides an allowance for doubtful accounts for estimatedlosses resulting from the inability of its tenants to make requiredrent and other payments as due. Additionally, management establishes,on a current basis, an allowance for future tenant credit losses onunbilled rents receivable based upon an evaluation of thecollectibility of such amounts. Management is required to makesubjective assessments about the collectibility of the deferred rentreceivable that in many cases will not be billed to tenants for manyyears from the balance sheet date. Management's determination isbased upon an assessment of credit worthiness of private companytenants for which financial information is not readily available and assuch is not subject to precise quantification.

Performance-Based Compensation

Our board ofdirectors has adopted the NorthStar Realty Finance Corp. 2004 Long TermIncentive Bonus Plan, or the incentive bonus plan, in order to retainand incentivize officers and certain key employees of us, co-employeesof us and NorthStar Capital and employees of NorthStar Capital whoprovide services to us pursuant to the shared facilities and servicesagreement which we collectively refer to as the eligible participants.As of November 19, 2004, the compensation committee of our board ofdirectors had allocated an aggregate of 665,346 shares of our commonstock to certain of the eligible participants as potential awardspursuant to the incentive bonus plan if we achieve the return hurdlesestablished by the compensation committee for the two one-yearperformance periods beginning October 1, 2005 and October 1, 2006. Thecompensation committee has established a return hurdle for theseperformance periods of a 12.5% annual return on paid in capital,as defined in the incentive bonus plan. If we achieve these returnhurdles, these awards may be paid in cash, shares of common stock, LTIPunits or other shared-based form.

Each of the eligibleparticipants will be entitled to receive half of his or her allocatedaward if we meet the return hurdle for the one-year period beginningOctober 1, 2005 and such eligible participant is employed through theend of this first performance period. Each of the eligible participantswill be entitled to the other half of his or her total allocated awardamount if we meet the return hurdle for the one-year period beginningon October 1, 2006 and such eligible participant is employed throughthe end of this second performance period. If we do not meet the returnhurdle for the one-year period beginning October 1, 2005, but we meetthe return hurdle for the two-year period beginning October 1, 2005(determined by averaging our performance over the two-year period) andan eligible participant is employed through the end of this two-yearperiod, such eligible participant will be entitled to receive his orher total allocated award amount.

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On March 31, 2005, management has made itsbest estimate of our performance during these two performance periods,based on the facts and information currently available and assumptionsregarding the investment of the remaining proceeds of our IPO pursuantto our business strategy and returns on future investments. On thebasis of the foregoing, management has estimated that we will not meetthe return hurdle in either of these performance periods. If we do notmeet the return hurdle during the performance periods, we will notgrant any awards under the incentive bonus plan to any of the eligibleparticipants.

Unconsolidated/Uncombined Ventures

Management is required to make subjective assessments as to whetherthere are impairments in the values of its and our predecessor'sinvestments in unconsolidated/uncombined ventures which are accountedfor using the equity method. As no public market exists for theseinvestments, management estimates the recoverability of theseinvestments based on projections and cash flow analysis. Theseassessments have a direct impact on net income because recording animpairment loss results in an immediate negative adjustment to netincome. The following is a summary of the accounting policies relatingto unconsolidated/uncombined ventures that are most affected byjudgments, estimates and assumptions.

Subordinate Real EstateDebt Investments.    The NSF Venture records the transfer of aparticipation or sub-participation in a loan investment of the NSFVenture as a sale when the attributes of the transaction meet thecriteria for sale of SFAS 140, "Accounting for Transfersof Financial Assets and Extinguishments of Liabilities,"including transferring the financial interest beyond the reach of itscreditors and placing no substantive restrictions on the resale of theparticipation or sub-participation by the purchaser.

RevenueRecognition.    ALGM was accounted for as an uncombined ventureuntil our purchase of the 2.5% managing membership interest inALGM on October 29, 2004. Prior to such date, management applied thesame revenue recognition policy with respect to properties in the NewYork property portfolio as described under "—Critical Accounting Policies — Revenue Recognition"above.

Results of Operations

Our predecessor'sresults of operations for the three months ended March 31, 2004 are notnecessarily indicative of our future results of operations due to theimpact of our IPO, the acquisition of additional interests in ALGM andits resulting consolidation, the expansion of our real estatesecurities and subordinate real estate debt businesses, and our newinvestments and their related debt financing.

Comparison of the Three Months Ended March 31, 2005to the Three Months Ended March 31, 2004

Revenues

Rental and escalation income

Rental and escalation incomefor the three months ended March 31, 2005 totaled $3.9 millionrepresenting a $3.9 million increase compared to the three months endedMarch 31, 2004. The increase was primarily attributable to $2.6 millionfrom our New York property portfolio owned by ALGM which was accountedfor under the equity method of accounting in the three months endedMarch 31, 2004. We acquired the 2.5% managing interest in ALGMon October 29, 2004 and accordingly the operations of these propertieshave been consolidated into the condensed consolidated financialstatements in 2005. The Company also acquired the Chatsworth propertieson January 14, 2005 which contributed an additional $1.3 million ofrental income.

Advisory and management fee income

Advisory and management fee income remained relatively constant forthe three months ended March 31, 2005 compared to the three monthsended March 31, 2004.

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Advisory and management fee income -related parties

Advisory fees from related parties for thethree months ended March 31, 2005 totaled $0.9 million representing anincrease of approximately $0.3 million or 58% compared to thethree months ended March 31, 2004. The increase is comprised primarilyof $0.4 million of fees earned for CDO II (which closed in July 2004)and CDO III (which closed March 10, 2005). This increase was offset bya decrease in fees earned from the NSF Venture of approximately $0.1million which was due to a lower average portfolio loan balance for thethree months ended March 31, 2005.

Interest income

Interest income for the three months ended March 31, 2005 totaled$8.0 million representing an increase of $7.7 million compared to thethree months ended March 31, 2004. The increase is attributable tointerest on investments, which did not exist in the comparable quarter,which included $4.0 million of interest income earned from ourinvestments in AAA-rated, short term, floating rate securities, frominterest income of approximately $2.6 million on subordinate realestate debt investments and from approximately $1.1 million of interestincome from debt securities available for sale which is comprised of(1) approximately $0.7 million from the investments in the equity ofour three CDOs, (2) approximately $0.3 million from our"BB" rated junior classes of debt securitiesand unrated income notes of CDO II and (3) approximately $0.1 millionon cash collateralizing our short securitysales.

Expenses

Real estate properties -operating expenses

Property operating expenses for the threemonths ended March 31, 2005 totaled $0.7 million representing anincrease of $0.7 million compared to the three months ended March 31,2004. The increase was primarily attributable to $0.5 million ofproperty operating expenses from our New York property portfolio ownedby ALGM which was accounted for under the equity method of accountingin the three months ended March 31, 2004. We acquired the 2.5%managing interest in ALGM on October 29, 2004 and accordingly theoperations of these properties have been consolidated into thecondensed consolidated financial statements in 2005. The Company alsoacquired the Chatsworth properties on January 14, 2005 whichcontributed an additional $0.2 million of property operatingexpenses.

Interest expense

Interest expense for thethree months ended March 31, 2005 totaled approximately $6.5 millionrepresenting an increase of $6.5 million compared to the three monthsended March 31, 2004. This increase was primarily attributable to $3.6million of interest on financing for our investments in AAA-rated,short term, floating rate securities and our investment in the"BB" rated junior classes of debt securitiesand unrated income securities of CDO II. In addition, we incurredinterest expense related to the following: approximately $1.6 millionrelated to our net lease portfolio, approximately $1.0 million on theDBAG facility, and approximately $0.2 million on securities underlyingshort sales we entered into during 2004.

Management fees– related party

Management fees – related party forthe three months ended March 31, 2005 totaled $85,000 representing anincrease of $85,000 compared to the three months ended March 31, 2004.The increase was primarily attributable to our net lease portfoliowhich was accounted for under the equity method of accounting for thethree months ended March 31, 2004. ALGM incurred a $192,000 managementfee during the three months ended March 31, 2004. We acquired the2.5% managing interest in our net lease portfolio on October 29,2004 and accordingly the operations of these properties have beenconsolidated into the condensed consolidated financial statements in2005.

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General and Administrative

General and administrative expenses for the three months ended March31, 2005 totaled $4.8 million representing an increase of $3.4 millionor 252% compared to the three months ended March 31, 2004. Theincrease is comprised of the following:

Salaries and othercompensation (direct and allocated) for the three months ended March31, 2005 totaled $1.2 million representing an increase of approximately$0.3 million or 37% compared to the three months ended March 31,2004. The increase is primarily attributable to an increase in salariesdue to higher staffing levels to accommodate the expansion of our threebusinesses subsequent to our IPO.

Shared services –related party for the three months ended March 31, 2005 totaled $0.3million representing an increase of approximately $0.3 million comparedto the three months ended March 31, 2004. The increase was attributableto the shared facilities and services agreement we entered into withNorthStar Capital on October 29, 2004.

Equity based compensationexpense for the three months ended March 31, 2005 totaled $0.8 millionrepresenting an increase of $0.8 million compared to the three monthsended March 31, 2004. The increase is attributable to approximately$0.2 million of compensation expense in connection with theamortization of the non-vested portion of the buyout of a profitsinterest (a compensation arrangement) in NS Advisors from one of ouremployees, and approximately $0.6 million in connection with thethree-year vesting of equity based awards issued under our 2004 OmnibusStock Incentive Plan.

Insurance (direct and allocated) for thethree months ended March 31, 2005 totaled $213,000 representing anincrease of $115,000 or 117% compared to the three months endedMarch 31, 2004. The increase was attributable to the directors andofficers policies we acquired after our IPO.

Accounting andauditing fees for the three months ended March 31, 2005 totaled $1.1million representing an increase of $1.1 million compared to the threemonths ended March 31, 2004. The increase is attributable to the auditof the 2004 financial statements performed by our auditors during thethree months ended March 31, 2005. Our predecessor did not incursimilar accounting and auditing fees during the three months endedMarch 31, 2004.

Other general and administrative expenses(direct and allocated) for the three months ended March 31, 2005totaled $1.1 million representing an increase of approximately $0.8million or 218% compared to the three months ended March 31,2004. This increase is primarily attributable to legal costs of$344,000 associated with general corporate matters and tenantlitigation, consulting fees of $224,000 associated with year end andperiodic reporting obligations, various public company expenses of$102,000 and public relations costs of $30,000.

Depreciationand amortization expense

Depreciation and amortization expensefor the three months ended March 31, 2005 totaled $1.0 millionrepresenting an increase of $1.0 million compared to the three monthsended March 31, 2004. The increase was primarily attributable to $0.5million from our New York property portfolio owned by ALGM which wasaccounted for under the equity method of accounting for the threemonths ended March 31, 2004. We acquired the 2.5% managinginterest in ALGM on October 29, 2004 and accordingly, the operations ofthese properties have been consolidated into the condensed consolidatedfinancial statements in 2005. We also acquired the Chatsworthproperties on January 14, 2005 which contributed an additional $0.4million of depreciation and amortization expense and $0.1 millionrelated to the amortization of the intangible assets.

Equity inearnings

Equity in earnings for the three months ended March31, 2005 totaled $46,000 representing a decrease of $326,000 or88% compared to the three months ended March 31, 2004. Thedecrease was attributable to the decrease in the equity in earnings ofthe NSF Venture of approximately $75,000 

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due to a lower average portfolio loan balancein 2005 and a decrease of $0.3 million from our New York propertyportfolio owned by ALGM which was accounted for under the equity methodof accounting in 2004. We acquired the 2.5% managing interest inALGM on October 29, 2004 and accordingly the operations of theseproperties have been consolidated into the condensed consolidatedfinancial statements in 2005.

Unrealized gain on investmentsand other

Unrealized gain on investments and other remainedrelatively constant for the three months ended March 31, 2005 comparedto the three months ended March 31, 2004. Unrealized gain oninvestments for the three months ended March 31, 2005 of approximately$1.1 million consisted of unrealized gains on the CDO III warehouseagreement of approximately $0.8 million and $0.3 million of unrealizedgains on short sales of securities and short term investments,respectively. Unrealized gain on investments of $1.0 million for thethree months ended March 31, 2004 related to the CDO II warehouseagreement. Unrealized gain on investments relating to each of these CDOwarehouse agreements represent the increase in fair value of thewarehouse agreement during the portion of the warehouse term in thefinancial reporting period.

Realized gain on investments andother

Realized gain on investments and other for the threemonths ended March 31, 2005 totaled $0.6 million representing anincrease of $0.6 million compared to the three months ended March 31,2004. The increase is attributable to realized gains of $0.7 millionrepresenting the increase in fair value of the CDO III warehouseagreement through March 10, 2005, when the warehouse agreement wasterminated and the assets of the warehouse were transferred to CDO III.This increase was offset by a $0.1 million loss related to the sale ofa portion of our investments in AAA-rated, short term, floating ratesecurities.

Liquidity and Capital Resources

As of March31, 2005, we had an unrestricted cash balance of $41.0 million. Webelieve that our unrestricted cash balances together with the availableborrowing capacity under the DBAG facility, the net proceeds realizedfrom a private placement of $40 million of trust preferred securities,completed in April 2005 and cash flow provided from our operations,will be sufficient to allow us to make distributions necessary toenable us to continue to qualify as a REIT and fund our operations forat least the next 12 months. In order to fund investments that we maymake in the next 12 months, we may borrow additional funds under ourcredit facilities, enter into additional credit facilities, or issuedebt securities or raise equity capital.

We expect to meet ourlong term liquidity requirements, including the repayment of debt andour investment funding needs, through existing cash resources andadditional borrowings, the issuance of debt and/or equity securitiesand the sale or refinancing of assets at maturity. We believe that thevalue of the New York property portfolio is, and will continue to be,sufficient to allow us to refinance the mortgage debt on this portfolioat maturity.

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Debt Obligations

As of March 31,2005, we had the following debtoutstanding:

|                                   |  |                                          |         |                |  |                                 |  |                                        |  |                          |  |  |  |  |  |  |  |  |
|-----------------------------------|--|------------------------------------------|---------|----------------|--|---------------------------------|--|----------------------------------------|--|--------------------------|--|--|--|--|--|--|--|--|
|                              |  | CarryingAmount at 3/31/05 (in thousands) |         | StatedMaturity |  | Interest Rate                   |  | WeightedAverageExpected Life(in years) |
| Mortgage notes payable(ALGM)      |  | $                                        | 40,208  |           |  | 01/01/2006                      |  | (Thegreater ofLIBOR or 2%)+3.60%       |  | 1.00                     |
| Mortgagenotes payable(Chatsworth) |  |                                     | 43,962  |           |  | 5/1/2015                        |  | 5.65%                                  |  | 11.0                     |
| Mezzanineloan payable(Chatsworth) |  |                                     | 13,000  |           |  | 5/1/2014                        |  | 6.64%                                  |  | 10                       |
| Repurchaseobligations             |  |                                     | 292,902 |           |  | See RepurchaseObligations below |  | LIBOR + 0.05%to0.10%                   |  | Various,generally 30days |
| DBAGfacility                      |  |                                     | 132,080 |           |  | 12/21/2007                      |  | LIBOR+ 0.75%to2.25%                    |  | 3.00                     |
|                              |  | $                                        | 522,152 |           |  |                            |  |                                   |  |                     |
|                                   |

ALGMMortgage Loan.    The ALGM mortgage loan bears interest at thehigher of one-month LIBOR or 2%, plus a spread of 3.60%,or an aggregate of 6.35% at March 31, 2005. The loan originallymatured on January 1, 2005 and was extended until January 1, 2006. Thisloan may be extended at ALGM's option for two additional one-yearextension periods, subject to ALGM satisfying certain conditionsprovided for under the loan, including payment of a fee equal to0.75% of the loan balance as a condition to exercising thesecond and third extension options. The ALGM mortgage loan agreementincludes the following financial covenants and restrictions: (a) ALGMmust maintain a debt service coverage ratio in excess of 1.15 to 1,computed using an annual interest rate of 10.09%, and (b) ALGMmust establish and maintain certain escrow reserve accounts for, amongother things, payment of real estate taxes, capital expenditures andtenant rollover costs. ALGM is uncombined in our predecessor'sfinancial statements as of March 31, 2004 and is consolidated in ourfinancial statements at March 31, 2005 and December 31, 2004.

Chatsworth Mortgage Loan.    The Chatsworth mortgagematures on May 1, 2015 and bears interest at a fixed rate of5.65%. The loan requires monthly payments of $230,906representing interest in arrears and principal sufficient to amortizethe loan to a balance of approximately $40.5 million at maturity, aswell as monthly escrow deposits for ground lease payments requiredunder the ground lease for the leasehold property.

ChatsworthMezzanine Loan.    The Chatsworth mezzanine loan bears interestat a fixed rate of 6.64%, and requires monthly payments ofinterest only of $71,955 for the period February 1, 2005, throughFebruary 1, 2006, and principal and interest payments of $170,914,thereafter, which will fully amortize the loan by the maturity date ofMay 1, 2014.

Repurchase Obligations.    Our temporaryinvestments, which are primarily AAA-rated, short term, floating ratesecurities, backed by commercial or residential mortgage loans, werefinanced with repurchase agreements with Citigroup and GreenwichCapital Markets, Inc. We initially borrowed approximately $1.25 billionunder repurchase agreements, of which $282.4 million was outstanding atMarch 31, 2005, approximately $246.5 million with Citigroup and $35.9million with Greenwich.

The balance represents a repurchaseagreement with Citigroup which was used to finance the acquisition ofthe "BB" rated junior classes of debtsecurities. The debt matures on July 21, 2005 and bears interest atLIBOR plus 1.25% per annum.

DBAG Facility.    OnDecember 21, 2004, NRFC DB Holdings, LLC, one of our subsidiaries,entered into a $150 million master repurchase agreement with DeutscheBank AG, Cayman Islands 

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Branch, which we refer to as the DBAGfacility. On March 21, 2005, this facility was amended and restated toallow NRFC DB Holdings to borrow up to $300 million in order to financethe acquisition of primarily subordinate real estate debt and otherreal estate loans and securities. The additional capacity andflexibility under the amendment of the DBAG facility will allow us toaccumulate sufficient collateral for a contemplated CDO offering, whichwe refer to as the subordinate real estate debt CDO, and to continue tofinance other investments. If and when the subordinate real estate debtCDO closes, the availability under the DBAG facility will be reduced to$150 million. In the event the subordinate real estate debt CDO closingdoes not occur prior to September 17, 2005, the availability under theDBAG facility will remain at $300 million and certain economic terms ofthe DBAG facility will be adjusted as described below.

The DBAGfacility has an initial three-year term, which may be extended for oneadditional year if NRFC DB Holdings is not in default and pays anextension fee of 0.25% of the aggregate outstanding amount underthe facility. If NRFC DB Holdings extends the term of the facility, itwill be required to retire 25% of the aggregate outstandingamount each quarter during the remaining year of the term.

Underthe terms of the DBAG facility, NRFC DB Holdings is able to finance theacquisition of mortgage loans secured by first liens on commercial ormultifamily properties, junior participation interests in mortgageloans secured by first or second liens on commercial or multifamilyproperties, mezzanine loans secured by a pledge of the entire ownershipinterest in a commercial or multifamily property, B− or higherrated commercial mortgage backed securities and BB or higher rated realestate CDOs, debt securities issued by a REIT and syndicated bankloans.

During the period from March 21, 2005 until the earlierof the closing of the contemplated subordinate real estate debt CDO andSeptember 17, 2005, which we refer to as the CDO ramp-up period,amounts advanced under the DBAG facility in order to finance theacquisition of assets to be included in the subordinate real estatedebt CDO bear interest at one-month LIBOR plus a spread of 1.00%and amounts advanced for all other assets bear interest at one-monthLIBOR plus a spread which ranges from 0.75% to 2.25%.After the CDO ramp-up period, all amounts advanced under the amendedDBAG facility will bear interest at a rate of one-month LIBOR plus thespread which ranges from 0.75% to 2.25%.

Duringthe CDO ramp-up period and thereafter, assets will be financed atadvance rates ranging from 40% to 92.5% of the value ofthe assets as applicable to the asset category. In addition, during theCDO ramp-up period, NRFC DB Holdings will have the option to fix theadvance rate on any subordinate real estate debt CDO assets at aspecific predetermined level subject to certain conditions.

Thecovenants, effective April 1, 2005, require us to remain at a certainminimum tangible net worth, a certain minimum debt service coverageratio, a certain range of ratios of recourse indebtedness to net worthand certain minimum amounts of cash or marketable securities based onour ratio of recourse indebtedness to net worth.

The debt thatmay be outstanding under the DBAG facility is subject to a number ofterms, conditions and restrictions including, without limitation, themaintenance of certain margin percentages on amounts outstanding underthe facility. If the market value of an asset securing the outstandingdebt declines, cash flow due NRFC DB Holdings may be suspended and ifmarket value continues to decline, NRFC DB Holdings may be required tosatisfy a margin call by paying cash or providing additionalcollateral. Failure to meet any margin call could result in an event ofdefault which would enable Deutsche Bank AG to exercise various rightsand remedies including acceleration of the maturity date of the debtoutstanding under the DBAG facility or the sale of the assets financedthereunder.

As of March 31, 2005, NRFC DB Holdings has borrowedapproximately $132 million under this facility in order to finance theacquisition of approximately $198 million of subordinate real estatedebt, CMBS and CDO securities. This amount bears interest at a rateequal to one-month LIBOR plus 1.00% per annum, which resets on amonthly basis.

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Capital Expenditures

During2005, we expect to incur approximately $306,000 in connection with newtenant leasing costs and capital expenditures with respect to the NewYork property portfolio owned by ALGM. We anticipate the sources offunds for these expenditures to be from our working capital and lenderreserves.

Cash Flows

The net cash flow provided byoperating activities of $541.2 million, increased by $540.8 million forthe three months ended March 31, 2005 from $0.4 million of cashprovided by operations for the three months ended March 31, 2004 whichwas primarily due to sales of short term highly liquid investmentsincluded in operating activities, where the corresponding repayment ofshort term repurchase financing is included in financing activities.Adjusting for the effect of these sales, cash provided from operatingactivities would have increased by $1.3 million from 2004 to 2005.

The net cash flow used in investing activities decreased by $203.0million for the three months ended March 31, 2005 to a use of $202.0million from a use of $1.0 million for the three months ended March 31,2004. Net cash used in investing activities in 2005 consisted primarilyof the purchase of real estate, funds used to purchase our interest inthe unrated income notes and the "BB" ratednotes of CDO III, as well as purchases of subordinate debtinvestments.

The net cash flow used in financing activitiesincreased by $344.8 million for the three months ended March 31, 2005to $345.9 million from $1.1 million from financing activities for thethree months ended March 31, 2004. The primary use of cash flow infinancing activities in 2005 was for the repayment of our repurchaseagreements which financed our short term highly liquid investments,offset by proceeds from our DBAG facility and mortgage borrowings.

Contingencies

729 Seventh Avenue, one of the properties inthe New York property portfolio, is currently in litigation with thenet lessee of the property, a subsidiary of National RestaurantsManagement, Inc., or NRMI. If this claim is successful, it could resultin a total economic loss to us of up to approximately $700,000 in thefirst year, including damages and lost rent, in addition to the cost ofany legal proceedings or negotiations and approximately $650,000 to$850,000 in lost rent annually thereafter unless re-rented on the sameterms. We have established a collectibility reserve totaling $2,435,000as of March 31, 2005 related to straight-line (unbilled) rentsreceivable under this lease. This reserve represents management'sbest estimate of our potential exposure.

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Recent Developments

Subordinate Real Estate Debt

Since March 31, 2005,we have made the following investments in subordinate real estatedebt:

|                 |  |              |           |        |  |                               |  |                 |         |                     |  |               |  |              |  |  |  |  |  |  |  |  |
|-----------------|--|--------------|-----------|--------|--|-------------------------------|--|-----------------|---------|---------------------|--|---------------|--|--------------|--|--|--|--|--|--|--|--|
| Name            |  | DateAcquired |           | Type   |  | PrincipalBalanceatAcquisition |  | InitialMaturity |         | CurrentInterestRate |
| New YorkRetail  |  |         | 4/1/2005  |   |  | SubordinateParticipation      |  | $               | 10,000  |                |  | September2006 |  | LIBOR+ 2.4%  |
| HotelPortfolio  |  |         | 4/8/2005  |   |  | SubordinateParticipation      |  |            | 13,700  |                |  | July 2006     |  | LIBOR +3.0%  |
| HotelPortfolio  |  |         | 4/8/2005  |   |  | SubordinateParticipation      |  |            | 16,500  |                |  | February 2007 |  | LIBOR +3.5%  |
| HotelPortfolio  |  |         | 4/15/2005 |   |  | SubordinateParticipation      |  |            | 6,257   |                |  | January 2006  |  | LIBOR +3.25% |
| CMBS Bond10     |  |         | 4/19/2005 |   |  | CMBS                          |  |            | 4,301   |                |  | March2033     |  | 7% Fixed     |
| CMBS Bond11     |  |         | 4/26/2005 |   |  | CMBS                          |  |            | 1,046   |                |  | February2034  |  | 6.96% Fixed  |
| NYRetail/Office |  |         | 4/26/2005 |   |  | SubordinateParticipation      |  |            | 19,900  |                |  | October 2006  |  | LIBOR +4.5%  |
| OfficePortfolio |  |         | 4/29/2005 |   |  | SubordinateParticipation      |  |            | 17,910  |                |  | January 2007  |  | LIBOR +5.35% |
| CMBS Bond12     |  |         | 4/29/2005 |   |  | CMBS                          |  |            | 4,952   |                |  | May2043       |  | 5.25% Fixed  |
| Las VegasRetail |  |         | 5/3/2005  |   |  | SubordinateParticipation      |  |            | 19,000  |                |  | February2007  |  | LIBOR +3.35% |
| Total           |  |         |      |   |  |                          |  | $               | 113,566 |                |  |          |  |         |
|                 |

|  |
|--|
|  |  |
|  |

|  |                                                                                                                                               |
|--|-----------------------------------------------------------------------------------------------------------------------------------------------|
|  | Note:We enter into interest swaps for each fixed rate investment up to theamount they are financed to hedge against changes in interestrates. |

Warehouse Agreement for CDO V

OnMay 4, 2005, we entered into a warehouse arrangement with a financialinstitution whereby the financial institution has agreed to purchase upto $400 million of CMBS and other real estate debt securities under ourdirection, with the expectation of selling such securities to ourfourth investment grade CDO issuer, or CDO V. We were required topledge up to $10 million as security for the purpose of covering aportion of any losses or costs associated with the accumulation ofthese securities under the warehouse agreement. We were required todeposit $5 million upon execution of the agreement and increase thedeposit by $2.5 million after $125 million in acquisitions ofsecurities have been made under the agreement and increase the depositby an additional $2.5 million after $250 million in acquisitions ofsecurities have been made under the agreement. The bank has accumulatedapproximately $50.1 million of real estate securities under the termsof the warehouse agreement as of May 12, 2005. The CDO V warehouseagreement also provides for our notional participation in the incomethat the assets generate after deducting a notional debt cost. Theagreement will be treated as a non-hedge derivative for accountingpurposes and will therefore be marked-to-market through income. Thecollateral being accumulated under this agreement is expected to beincluded in a securitization transaction in which we would acquire allof the equity interest.

In addition, we had acquiredapproximately $9.0 million in CMBS and REIT debt securities. Weanticipate selling these securities to the CDO V warehouse during thesecond quarter of 2005.

Related Party Transactions

Advisory Fee — NorthStar Funding LLC

In 2001,our predecessor entered into an advisory agreement with the NSFVenture, pursuant to which it receives as compensation for itsmanagement of investments of the NSF Venture an advisory fee equal to1% per annum of the capital invested by the NSF Venture.Additionally, NorthStar Funding Managing Member LLC is entitled to anincentive profit participation equal to 10% of the profit aftera minimum required return on the NSF Venture's capital and areturn of and on capital based upon the operating performance of theNSF Venture's investments. Prior to the contribution of theinitial investments to our operating partnership and the related IPOtransactions, NorthStar Funding Managing Member LLC received 75%of this incentive profit participation equal to 10% of

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the profit after a minimum required returnon NSF Venture's capital and a return of and on capital based onthe operating performance of the NSF Venture's investments. TheCompany and our predecessor earned and recognized advisory fees fromthe NSF Venture of approximately $191,000 and $253,000 for the threemonths ended March 31, 2005 and 2004, respectively. The Company and ourpredecessor received combined profit participation distributions of$925,000 and $120,000 during the three months ended March 31, 2005 and2004, respectively. Because such distributions may have to be refunded,no profit participation distributions were recognized as incomepursuant to Method 1 of Emerging Issues Task Force Topic D-96.

Advisory Fees — CDO I, CDO II and CDO III

InAugust 2003, July 2004 and March 2005, CDO I, CDO II and CDO III,respectively, entered into agreements with NS Advisors, to performcertain advisory services. We and our predecessor earned total fees ofapproximately $752,000 and $345,000 for the three months ended March31, 2005 and 2004, respectively. The unpaid advisory fees of $164,000and $82,000 are included in due from affiliates in our condensedconsolidated balance sheets as of March 31, 2005 and December 31, 2004.We also earned a structuring fee of $500,000 in connection with theclosing of CDO III for the three months ended March 31, 2005, which wasused to reduce our investment in debt securities available forsale.

ALGM

On December 28, 2004, we terminatedthe asset management agreement with Emmes Asset Management Co. LLC, anaffiliate of NorthStar Capital, for a contractual termination paymentof approximately $380,000, which is equal to two quarters of paymentsof the annual fee of $760,000. On that date, ALGM and Emmes enteredinto a new asset management agreement which is cancelable on 30 daysnotice by ALGM. The annual asset management fee under the new agreementis equal to 3.5% of gross collections from tenants of theproperties not to exceed $350,000 or be less than $300,000 per year,subject to certain provisions. Total fees incurred under the assetmanagement agreement were $85,000 for the three months ended March 31,2005.

Shared Facilities and Services Agreement

Upon consummation of our IPO, we entered into a one-year agreementwith NorthStar Capital pursuant to which NorthStar Capital agreed toprovide us, directly or through its subsidiaries, with the followingfacilities and services: 1) fully-furnished office space for ouremployees at NorthStar Capital's corporate headquarters; 2) useof common facilities and office equipment, supplies and storage spaceat NorthStar Capital's corporate headquarters; 3) accountingsupport and treasury functions; 4) tax planning and REIT complianceadvisory services; and 5) other administrative services. For theinitial one year term of the agreement, NorthStar Capital agreed toprovide these facilities and services to us for an annual fee ofapproximately $1.57 million, payable in monthly installments, plusadditional charges for out-of-pocket expenses and taxes. This fee issubject to reduction by the amount that we pay certain full-timeemployees of NorthStar Capital who became our co-employees uponconsummation of our IPO, including Mr. McCready, our general counseland secretary.

After the initial one-year term of the agreement,we may elect to discontinue receiving any of the facilities or servicesset forth above upon 90 days written notice by us to NorthStar Capital.NorthStar Capital may discontinue providing a particular service to usupon 90 days written notice to us stating that NorthStar Capitalintends to discontinue permanently the provision of that service to itsown internal organizations. NorthStar Capital may also discontinueproviding office facilities to us upon 180 days written notice to us.In any of these cases, a reduction corresponding to the portion of thefee discussed above that relates to the discontinued facility orservice will be made.

The agreement is renewable for additionalone-year periods upon the mutual agreement of NorthStar Capital and us,together with a vote of the majority of our independent directors.

Total fees and expenses incurred by us under the shared facilitiesand services agreement amounted to $0.3 million for the three monthsended March 31, 2005.

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Contractual Commitments

As ofMarch 31, 2005, we had the following contractual commitments andcommercial obligations (inthousands):

|                                         |  |                       |         |        |  |           |         |           |  |            |         |        |  |        |         |        |  |        |         |        |  |  |
|-----------------------------------------|--|-----------------------|---------|--------|--|-----------|---------|-----------|--|------------|---------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|                                    |  | PaymentsDue by Period |
| ContractualObligation                   |  | Total                 |         | 2005   |  | 2006-2007 |         | 2008-2009 |  | Thereafter |
| Mortgageloan –ALGM                |  | $                     | 40,208  |   |  | $         | 1,092   |      |  | $          | 39,116  |   |  | $      | — |   |  | $      | — |   |
| Mortgage loan –Chatsworth         |  |                  | 43,962  |   |  |      | 185     |      |  |       | 558     |   |  |   | 619     |   |  |   | 42,600  |   |
| Mezzanineloan payable –Chatsworth |  |                  | 13,000  |   |  |      | — |      |  |       | 2,309   |   |  |   | 2,859   |   |  |   | 7,832   |   |
| Repurchaseagreements                    |  |                  | 292,902 |   |  |      | 292,902 |      |  |       | — |   |  |   | — |   |  |   | — |   |
| Securitiessold, not yetpurchased        |  |                  | 12,696  |   |  |      | 12,696  |      |  |       | — |   |  |   | — |   |  |   | — |   |
| DBAGfacility                            |  |                  | 132,080 |   |  |      | — |      |  |       | 132,080 |   |  |   | — |   |  |   | — |   |
| Capitalleases                           |  |                  | 18,130  |   |  |      | 352     |      |  |       | 712     |   |  |   | 934     |   |  |   | 16,132  |   |
| Operatingleases                         |  |                  | 14,163  |   |  |      | 732     |      |  |       | 1,104   |   |  |   | 944     |   |  |   | 11,383  |   |
| Totalcontractualobligations             |  | $                     | 567,141 |   |  | $         | 307,959 |      |  | $          | 175,879 |   |  | $      | 5,356   |   |  | $      | 77,947  |   |
|                                         |

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Off Balance Sheet Arrangements

As of March 31, 2005, we had the material off balance sheetarrangements described below.

We have provided an indemnity toNorthStar Partnership for any liability it may have under its limitedguaranties to the lender under ALGM's mortgage loan. At March 31,2005, NorthStar Partnership had a maximum exposure of $40.2 millionunder its guaranty to Greenwich Capital for such triggering events asfraud, misapplication of funds and failure to pay taxes. NorthStarPartnership also provided Greenwich Capital with a limited repaymentguaranty that may be triggered by the termination of a lease related toone of the properties in the New York property portfolio. The maximumexposure for such lease termination was equal to $2.5 million at March31, 2005.

Our potential losses in CDO I, CDO II and CDO III arelimited to our aggregate carrying value which was approximately $73.3million at March 31, 2005.

The terms of the portfolio of realestate securities held by CDO I, CDO II and CDO III are matched withthe terms of the non-recourse CDO liabilities. These CDO liabilitiesare repaid with the proceeds of the principal payments on the realestate securities collateralizing the CDO liabilities when thesepayments are actually received. There is no refinancing risk associatedwith the CDO liabilities, as principal is only due to the extent thatit has been collected on the underlying real estate securities and thestated maturities are noted above. CDOs produce a relativelypredictable income stream based on the spread between the interestearned on the underlying securities and the interest paid on the CDOliabilities. This spread may be reduced by credit losses on theunderlying securities or by hedging mismatches. CDO I, CDO II and CDOIII have not incurred any losses on any of their securities investmentsfrom the date of purchase through March 31, 2005. We receive quarterlycash distributions from CDO I and monthly cash distributions from CDOII and CDO III, each representing our proportionate share of theresidual cash flow from the CDOs, as well as collateral advisory feesand interest income on the unrated income notes of CDO II and CDO III.Our residual interests in the cash flows of CDO I, CDO II and CDO IIIare accounted for as debt securities pursuant to Emerging Issues TaskForce Topic 99-20.

The following table describes certain termsof the collateral for and the notes issued by CDO I, CDO II and CDO IIIas of March 31,2005:

|        |  |                                        |         |                             |  |                                    |      |                                      |  |                             |     |                |  |   |         |        |  |        |      |         |  |        |            |        |  |  |
|--------|--|----------------------------------------|---------|-----------------------------|--|------------------------------------|------|--------------------------------------|--|-----------------------------|-----|----------------|--|---|---------|--------|--|--------|------|---------|--|--------|------------|--------|--|--|
|   |  | CDOCollateral                          |         | CDONotes                    |
|   |  | Par ValueofCDOCollateral (inthousands) |         | WeightedAverageInterestRate |  | WeightedAverageExpectedLife(years) |      | OutstandingCDO Notes(inthousands)(1) |  | WeightedAverageInterestRate |     | StatedMaturity |
| CDOI   |  | $                                      | 358,359 |                        |  |                               | 6.54 | %                               |  |                        | 6.9 |           |  | $ | 341,649 |   |  |   | 5.95 | %  |  |   | 08/01/2038 |   |
| CDOII  |  | $                                      | 398,519 |                        |  |                               | 6.11 | %                               |  |                        | 7.7 |           |  | $ | 361,624 |   |  |   | 5.29 | %  |  |   | 06/01/2039 |   |
| CDOIII |  | $                                      | 374,945 |                        |  |                               | 6.01 | %                               |  |                        | 7.2 |           |  | $ | 361,000 |   |  |   | 3.12 | %  |  |   | 06/01/2040 |   |
|        |

|  |
|--|
|  |  |
|  |

|     |                                           |
|-----|-------------------------------------------|
| (1) | Includesonly notes held by third parties. |

CDO I, CDO II and CDO IIIare variable interest entities. However, management has determined thatwe are not, and our predecessor was not, the primary beneficiary of CDOI, CDO II or CDO III and as such, in accordance with FIN 46R, we didnot consolidate CDO I, CDO II or CDO III. The FASB has continued todiscuss potential refinements to FIN 46R associated with, among otherthings, the types of interests which create variability and which typeof interests absorb income and loss variability, and how such incomeand loss variability should be measured. In the event that the FASBmodifies its interpretation of FIN46R as it applies to theconsolidation of variable interest entities, we would reevaluate ourdetermination of the primary beneficiary. Depending on themodifications which are made, it is possible that the Company may berequired to consolidate our interests in our CDOs in the future.

At this time, we do not anticipate a substantial risk of incurring aloss with respect to any of the arrangements described above.

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Inflation

Our leases for tenantsof ALGM are either:

|              |                                                                                                                                                                                                                                             |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | net leases wherethe tenants are responsible for all real estate taxes, insurance andoperating expenses and the leases provide for increases in rent eitherbased on changes in the Consumer Price Index (CPI) or pre-negotiatedincreases; or |

|              |                                                                                                                                                                                     |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | operating leases whichprovide for separate escalations of real estate taxes and operatingexpenses over a base amount, and/or increases in the base rent based onchanges in the CPI. |

We believe that inflationary increases inexpenses will generally be offset by the expense reimbursements andcontractual rent increases described above to the extent ofoccupancy.

We believe that the risk associated with an increasein market interest rates on the floating rate debt used to finance ourinvestments in CDO I, CDO II, CDO III, ALGM, and our direct investmentsin subordinate real estate debt, is largely offset by our strategy ofmatching the terms of our assets with the terms of our liabilities andthrough our use of hedging instruments.

Funds from Operationsand Adjusted Funds from Operations

Management believes thatfunds from operations, or FFO, and adjusted funds from operations, orAFFO, each of which are non-GAAP measures, are additional appropriatemeasures of the operating performance of a REIT. We compute FFO inaccordance with the standards established by the National Associationof Real Estate Investment Trusts, or NAREIT, as net income or loss(computed in accordance with GAAP), excluding gains or losses fromsales of depreciable properties, the cumulative effect of changes inaccounting principles, real estate-related depreciation andamortization, and after adjustments for unconsolidated/uncombinedpartnerships and joint ventures. We calculate AFFO by subtracting from(or adding) to FFO:

|              |                                                                                                                                                                                                                  |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | normalizedrecurring expenditures that are capitalized by us and then amortized,but which are necessary to maintain our properties and revenue stream,e.g., leasing commissions and tenant improvementallowances; |

|              |                                                                     |
|--------------|---------------------------------------------------------------------|
| •  | an adjustment to reversethe effects of straight-lining of rents;and |

|              |                                                                                                                |
|--------------|----------------------------------------------------------------------------------------------------------------|
| •  | the amortization or accrual ofvarious deferred costs including intangible assets and equity basedcompensation. |

Our calculation of AFFO differs from themethodology used for calculating AFFO by certain other REITs and,accordingly, may not be comparable to such other REITs.

Webelieve that FFO and AFFO are additional appropriate measures of ouroperating performance because they facilitate an understanding of ouroperating performance after adjustment for certain non-cash expenses,such as real estate depreciation, which assumes that the value of realestate assets diminishes predictably over time. Since FFO is generallyrecognized as industry standards for measuring the operatingperformance of an equity REIT, we also believe that FFO providesinvestors with an additional useful measure to compare our financialperformance to other REITs.

Neither FFO nor AFFO is equivalentto net income or cash generated from operating activities determined inaccordance with GAAP. Furthermore, FFO and AFFO do not representamounts available for management's discretionary use because ofneeded capital replacement or expansion, debt service obligations orother commitments or uncertainties. Neither FFO nor AFFO should beconsidered as an alternative to net income as an indicator of ouroperating performance or as an alternative to cash flow from operatingactivities as a measure of our liquidity.

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Set forth below is a reconciliation ofour calculations of FFO and AFFO to net income for the three monthsended March 31,2005:

|                                                                         |  |        |           |         |  |  |  |  |  |  |
|-------------------------------------------------------------------------|--|--------|-----------|---------|--|--|--|--|--|--|
| **Fundsfrom operations:**                                               |  |   |      |    |  |
| Netincome                                                               |  | $      | 1,055,000 |    |  |
| Minorityinterest                                                        |  |   | 274,000   |    |  |
| Income beforeminorityinterests                                          |  | $      | 1,329,000 |    |  |
| Adjustments:                                                            |  |   |      |    |  |
| Depreciationand amortization                                            |  |   | 1,022,000 |    |  |
| Real estatedepreciation and amortization — unconsolidatedventures |  |   | —   |    |  |
| Fundsfromoperations                                                     |  | $      | 2,351,000 |    |  |
| **Adjustedfunds from operations:**                                      |  |   |      |    |  |
| Funds fromoperations                                                    |  | $      | 2,351,000 |    |  |
| Straightline rentalincome, net                                          |  |   | (119,000  | )  |  |
| Amortization ofdeferredcompensation                                     |  |   | 800,000   |    |  |
| Adjustedfunds fromoperations                                            |  | $      | 3,032,000 |    |  |
|                                                                         |

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ITEM3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the exposure to loss resulting from changes ininterest rates and equity prices. We are subject to credit risk andinterest rate risk with respect to our investments in subordinate realestate debt and real estate securities. The primary market risk that weare exposed to is interest rate risk. Interest rates are highlysensitive to many factors, including governmental monetary and taxpolicies, domestic and international economic and politicalconsiderations and other factors beyond our control. Our interest raterisk sensitive assets, liabilities and related derivative positions aregenerally held for non-trading purposes. A hypothetical 100 basis pointincrease in interest rates for the three months ended March 31, 2005,would have increased our interest expense for the period byapproximately $101,000 (which represents additional interest expense onthe ALGM mortgage) offset by an increase in our investment income ofapproximately $189,000. The increase in investment income includes anincrease of $69,000 related to debt securities available for tradingand a decrease of $119,500 related to all other investments which areheld for purposes other than trading.

Subordinate Real EstateDebt

We invest in subordinate real estate debt instrumentssecured by commercial and multifamily properties, including first lienmortgage loans, junior participations in first lien mortgage loans,second lien mortgage loans, mezzanine loans, and preferred equityinterests in borrowers who own such properties. We generally hold theseinstruments for investment rather than trading purposes. Theseinvestments are either floating or fixed rate. The interest rates onour floating rate investments typically float at a fixed spread over anindex such as LIBOR. These instruments typically reprice every 30 daysbased upon LIBOR in effect at that time. Given the frequent andperiodic repricing of our floating rate investments, changes ininterest rates are unlikely to affect the value of our floating rateportfolio. Changes in short term rates will, however, affect earningsfrom our investments. Increases in LIBOR will increase the interestincome received by us on our investments and therefore will increaseour earnings. Decreases in LIBOR have the opposite effect.

Wealso invest in fixed rate investments. The value of these investmentsmay be affected by changes in long term interest rates. To the extentthat long term interest rates increase, the value of long term fixedrate assets is diminished. Any fixed rate subordinate debt investmentswhich we hold would be similarly impacted. We do not generally seek tohedge this type of risk unless the asset is leveraged as the costs ofsuch a hedging transaction over the term of such an investment wouldgenerally outweigh the benefits. If fixed rate subordinate debt isfunded with floating rate liabilities, the funding cost will be fixedthrough the use of interest rate swaps, caps or other hedges. Becausethe interest rates on our fixed rate investments are generally fixedthrough maturity of the investment, changes in interest rates do notaffect the income we earn from our fixed rate investments.

Inour subordinate real estate debt business we are also exposed to creditrisk, which is the risk that a borrower under our loan agreementscannot repay its obligations to us in a timely manner. While we havenever experienced a payment default or even a late payment to date, oursubordinate position in the capital structure may expose us to lossesas a result of such default in the future. In the event that theborrower cannot repay our loan, we may exercise our remedies under theloan documents which may include a foreclosure against the collateralif we have a foreclosure right as a subordinate real estate debtholderunder the loan agreement. The subordinate real estate debt that weintend to invest in will generally allow us to demand foreclosure as asubordinate real estate debtholder if our loan is in default. To theextent the value of our collateral exceeds the amount of our loan(including all debt senior to us) and the expenses we incur incollecting on our loan, we would collect 100% of our loanamount. To the extent that the amount of our loan plus all debt seniorto our position exceeds the realizable value of our collateral, then wewould incur a loss. We also incur credit risk in our periodicallyscheduled interest payments which may be interrupted as a result of theoperating performance of the underlying collateral.

We seek tomanage credit risk through a thorough financial analysis of atransaction before we make such an investment. Our analysis is basedupon a broad range of real estate, financial, economic andborrower-related factors which we believe are critical to evaluatingthe credit risk inherent in a transaction.

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

Real Estate Securities

In our real estate securitiesbusiness, we mitigate credit risk through credit analysis,subordination and diversification. The commercial mortgage-backedsecurities we invest in are generally junior in right of payment ofinterest and principal to one or more senior classes, but benefit fromthe support of one or more subordinate classes of securities or otherform of credit support within a securitization transaction. The seniorunsecured REIT debt securities we invest in reflect comparable creditrisk. Credit risk refers to each individual borrower's ability tomake required interest and principal payments on the scheduled duedates. We believe that these securities offer attractive risk-adjustedreturns with reasonable long term principal protection under a varietyof default and loss scenarios. While the expected yield on thesesecurities is sensitive to the performance of the underlying assets,the more subordinated securities and certain other features of asecuritization, in the case of mortgage backed securities, and theissuer's underlying equity and subordinated debt, in the case ofREIT securities, are designed to bear the first risk of default andloss. The real estate securities portfolios of our CDOs are diversifiedby asset type, industry, location and issuer. We further minimizecredit risk by actively monitoring CDO I's, CDO II's andCDO III's real estate securities portfolios and the underlyingcredit quality of their holdings and, where appropriate, liquidatingour investments to mitigate the risk of loss.

On March 31, 2005,the real estate securities that serve as collateral for CDO I, CDO IIand CDO III each had an overall weighted average credit rating ofapproximately BBB– and approximately 73.5%, 73.8%,and 72.6% respectively, of these securities had an investmentgrade rating (BBB– or higher).

The real estate securitiesunderlying CDO I, CDO II and CDO III are also subject to spread risk.The majority of these securities are fixed rate securities, which arevalued based on a market credit spread over the rate payable on fixedrate U.S. Treasuries of like maturity. In other words, their value isdependent on the yield demanded on such securities by the market, asbased on their credit relative to U.S. Treasuries. An excessive supplyof these securities combined with reduced demand will generally causethe market to require a higher yield on these securities, resulting inthe use of a higher or "wider" spread overthe benchmark rate (usually the applicable U.S. Treasury securityyield) to value these securities. Under these conditions, the value ofour real estate securities portfolio would tend to decrease.Conversely, if the spread used to value these securities were todecrease or "tighten," the value of our realestate securities would tend to increase. Such changes in the marketvalue of our real estate securities portfolio may affect our net equityor cash flow either directly through their impact on unrealized gainsor losses on available-for-sale securities by diminishing our abilityto realize gains on such securities, or indirectly through their impacton our ability to borrow and access capital.

Returns on our realestate securities are sensitive to interest rate volatility. Ifinterest rates increase, the funding cost on liabilities that financethe securities portfolio will increase if these liabilities are at afloating rate or have maturities shorter than the assets.

Ourgeneral financing strategy focuses on the use of"match-funded" structures. This means that weseek to align the maturities of our debt obligations with thematurities of our investments in order to minimize the risk of beingforced to refinance our liabilities prior to the maturities of ourassets, as well as to reduce the impact of fluctuating interest rateson earnings. In addition, we generally match interest rates on ourassets with like-kind debt, so that fixed rate assets are financed withfixed rate debt and floating rate assets are financed with floatingrate debt, directly or through the use of interest rate swaps, caps orother financial instruments or through a combination of thesestrategies. CDO I, CDO II and CDO III utilize interest rate swaps tominimize the mismatch between its fixed rate assets and floating rateliabilities. We expect to hedge the interest rate risk in future CDOsin a similar manner.

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Our financing strategy is dependent on ourability to place the match-funded debt we use to finance our realestate securities at spreads that provide a positive arbitrage. Ifspreads on the bonds issued by CDOs widen or if demand for theseliabilities ceases to exist, then our ability to execute future CDOfinancings will be severely restricted.

Interest rate changesmay also impact our net book value as our investments in debtsecurities are marked-to-market each quarter with changes in fair valuereflected in other comprehensive income (a separate component ofowners' equity). Generally, as interest rates increase, the valueof fixed rate securities within the CDO, such as CMBS, decreases and asinterest rates decrease, the value of these securities will increase.These swings in value have a corresponding impact on the value of ourinvestment in the CDO. Within the CDO, we seek to hedge against changesin cash flows attributable to changes in interest rates by enteringinto interest rate swaps/caps and other derivative instruments asallowed by our predecessor's risk management policy. Suchderivatives are designated as cash flow hedge relationships accordingto SFAS No. 133.

During the warehouse period for CDOs, themarket value of the securities in the warehouse is hedged, typically byshort selling U.S. agency-sponsored (Federal National MortgageAssociation or Federal Home Loan Mortgage Corp.) debentures or U.S.Treasury securities in the warehouse. Movements in interest rates areexpected to result in a price movement for the hedge position that isopposite to and offsets the price movement of the fixed rate securitiesin the warehouse.

Debt Securities Held for Trading

Subsequent to the closing of our IPO, we temporarily invested aportion of the net proceeds of our IPO in primarily AAA-rated, shortterm, floating rate commercial and residential mortgage-backedsecurities which are subject to fluctuations in market value. Thesesecurities are financed with leverage of up to 97% which maymagnify this price volatility. If the market value of these securitieswere to decline, we would need to post additional collateral orliquidate a portion of these securities, possibly at a loss. The shortterm securities that we have temporarily invested in have been selectedto mitigate this risk to the extent possible. Their floating ratecoupon, short duration, and high credit ratings all serve to maximizeliquidity and to minimize the price volatility of these securities.Nevertheless, even a small decline in the price of these securities maybe magnified by the leverage and result in a loss to us when the assetsare liquidated. Unrealized losses may also occur even if the assets arenot liquidated because these securities are held for tradingpurposes.

Net Lease Portfolio

Our ability to manage theinterest rate risk and credit risk associated with the assets weacquire is integral to the success of our net lease propertiesinvestment strategy. Although we may, in special situations, financeour purchase of net lease assets with floating rate debt, our generalpolicy will be to mitigate our exposure to rising interest rates byfinancing our purchases with fixed rate mortgages. We seek to match theterm of fixed rate mortgages to our expected holding period for theunderlying asset. Factors we will consider to assess the expectedholding period include, among others, the primary term of the lease aswell as any extension options that may exist.

We expect thecredit profiles of our tenants will primarily be unrated and belowinvestment grade. In order to ensure that we have as complete anunderstanding as possible of a tenant's ability to satisfy itsobligations under its lease, we expect to undertake a rigorous creditevaluation of each tenant prior to executing sale/leaseback or netlease asset acquisitions. This analysis will include an extensive duediligence investigation of the tenant's business as well as anassessment of the strategic importance of the underlying real estate tothe tenant's core business operations. Where appropriate, we mayseek to augment the tenant's commitment to the facility bystructuring various protection mechanisms into the underlying leases.These mechanisms could include security deposit requirements oraffiliate guarantees from entities we deem to becreditworthy.

39

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Derivatives and Hedging Activities

To limit the exposure to the variable LIBOR rate on the DBAGfacility, the Company entered into various swap agreements to fix theLIBOR rate on a portion of the Company's variable rate debt. Thefixed LIBOR rates ranges from 4.18% to 5.03%. Thefollowing table summarizes the notional amounts and fair (carrying)values of the Company's derivative financial instruments as ofMarch 31, 2005 (in thousands):

|                                       |  |                |        |            |  |                  |     |        |  |                            |  |  |  |  |
|---------------------------------------|--|----------------|--------|------------|--|------------------|-----|--------|--|----------------------------|--|--|--|--|
|                                  |  | NotionalAmount |        | Fair Value |  | Range ofMaturity |
| Interest rate swaps, treated ashedges |  | $              | 40,900 |       |  | $                | 547 |   |  | December2010 - August 2018 |
|                                       |

40

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ITEM 4.    CONTROLS AND PROCEDURES

NorthStar Realty Finance Corp. (the"Company") became subject to the periodic andother reporting requirements of the Securities Exchange Act of 1934, asamended (the "Exchange Act") on October 25,2004, the effective date of the Company's registration statementrelating to its IPO. On October 29, 2004, the Company received aninitial portfolio of real estate-related investments (the"Initial Investments") pursuant to certaincontribution agreements with subsidiaries of NorthStar CapitalInvestment Corp. ("NCIC") and commencedoperations. The financial statements included in this Quarterly Reporton Form 10-Q are for the Company as of March 31, 2005 and for the threemonths ended March 31, 2005 and for NorthStar Realty Finance Corp.Predecessor (the "Predecessor"), acombination of NCIC's controlling and non-controlling interestsin entities representing the Initial Investments, as of December 31,2004 and for the three months ended March 31, 2004.

The Companyformed a Disclosure Committee in November 2004 in order to assure thatits disclosure controls and procedures were effective to ensure thatinformation required to be disclosed in the Company's periodicreports under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the SEC's rules andforms. The Disclosure Committee is currently comprised of theCompany's Chairman and each of the Company's five executiveofficers. Meetings frequently include other employees with knowledge ofinformation that may be considered material in the SEC reportingprocess. The Disclosure Committee has been given the responsibility ofdeveloping and assessing the financial and non-financial information tobe included in the Company's SEC reports and assisting theCompany's chief executive officer and chief financial officer inconnection with their certifications contained in the Company'sSEC reports. The Disclosure Committee meets and reports to the AuditCommittee on at least a quarterly basis.

As disclosed in theCompany's Quarterly Report on Form 10-Q for the period endingSeptember 30, 2004 (the "Third Quarter 10-Q")filed on December 30, 2004, management identified certain deficienciesin the Predecessor's internal controls over financial reportingduring the course of management's review in December 2004 of thefinancial statements of the Predecessor that were to be included in theThird Quarter Form 10-Q. Based upon further investigation, the Companydiscovered certain errors in the accounting for transactions enteredinto during June and the third quarter of 2004 in connection with thePredecessor's CDO II and in the reporting of allocated generaland administrative expenses. These errors required the Company toadjust the Predecessor's financial statements for the six monthsended June 30, 2004, as described in Note 2 to the financial statementsincluded in the Third Quarter Form 10-Q, and to make certainadjustments to the Predecessor's financial statements for thethree and nine months ended September 30, 2004. As further disclosed inthe Third Quarter Form 10-Q, the deficiencies identified by managementin December 2004 included (1) the communication between business unitpersonnel and financial reporting personnel with respect to theaccounting for certain transactions associated with thePredecessor's CDO investments and other Company activity, (2) thelevel of training of accounting and financial reporting personnel, and(3) the level of detailed, quality control review of thePredecessor's financial statements. Taken together, thesedeficiencies rose to the level of a material weakness in thePredecessor's internal controls over financial reporting for thethree months ended September 30, 2004. As a result of the materialweakness identified in the Predecessor's internal controls overfinancial reporting and the issues that arose during the course of thereview in December 2004 of the Predecessor's financial statementsfor the third quarter of 2004, the Company's chief executiveofficer and chief financial officer concluded that thePredecessor's disclosure controls and procedures at September 30,2004 were not effective to ensure that financial information related tosuch items was recorded, processed, summarized and reported accuratelywithin the time periods specified in the SEC's rules andforms.

Commencing in December 2004 and continuing into thesecond quarter of 2005, the Company has undertaken a number ofinitiatives to remedy the deficiencies identified by management in thePredecessor's internal controls over financial reporting so thatthe Company's disclosure controls and procedures will beeffective for subsequent periods. In this regard, the Company (1) hireda chief accounting officer with significant GAAP and SEC financialreporting experience on January 20, 2005, (2) hired two additionalaccounting staff members in the first quarter of 2005, (3) hired amanager of 

41

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operations for its securities trading and CDOrelated activities, (4) accelerated its search for additionalaccounting and financial reporting personnel, (5) implemented policiesto enhance communication between business unit and financial reportingpersonnel in order to ensure comprehensive review by management levelbusiness unit personnel of the recording of Company transactions, (6)retained an outside accounting firm to review processes and proceduresthat the Company has adopted in connection with its financial reportingand to assist in the preparation and review of its financial reports,(7) adopted processes for documenting and verifying the accounting forCDO related transactions, and (8) implemented procedures requiring moredetailed, timely and comprehensive reporting from third party serviceproviders, including its CDO warehouse provider. In addition, theCompany has improved its training of accounting and financial reportingpersonnel by formalizing in writing and distributing to personnel theaccounting policies and treatment of transactions entered into by eachbusiness segment of the Company.

The Company believes that theinitiatives described above, some of which have already been taken andothers of which are in the process of being implemented, will, whenfully implemented, substantially remedy the deficiencies noted above.However, as a result of the material weakness identified in thePredecessor's internal controls over financial reporting for thethree months ended September 30, 2004, the issues that arose during thecourse of the review in December 2004 of the financial statements to beincluded in the Third Quarter Form 10-Q, and the timing of theimplementation of the corrective actions described above, theCompany's chief executive officer and chief financial officerconcluded that the Predecessor's disclosure controls andprocedures at March 31, 2005 were not effective to ensure thatfinancial information related to such items was recorded, processed,summarized and reported accurately within the time periods specified inthe SEC's rules and forms. However, based upon their knowledge,which includes a review of the financial statements included in thisreport, the Company's chief executive officer and chief financialofficer believe that the financial statements, and other financialinformation included in this report, fairly present in all materialrespects the financial condition, results of operations and cash flowsof the Company and the Predecessor as of and for the periods presentedin this report.

The Company has and will continue to evaluatethe effectiveness of its disclosure controls and procedures andinternal controls over financial reporting on an ongoing basis and willtake corrective action and implement improvements as appropriate.

Except as noted above, there were no changes in the Company'sinternal control over financial reporting during the fiscal quarterended March 31, 2005 that materially affected, or are reasonably likelyto materially affect, the Company's internal control overfinancial reporting.

42

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PART II – OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

729 7th AvenueRealty Corp. v. 729 Demi-Tasse LLC

On August 21, 2003, the netlessee of 729 Seventh Avenue, 729 7th Avenue Realty Corp., a subsidiaryof NRMI, led an action against 729 Demi-TasseLLC, the fee owner of 729 Seventh Avenue, one of the properties in theNew York property portfolio, in New York State Supreme Court, New YorkCounty to enforce certain rights it claims to have under its net leasewith Demi-Tasse. We hold an indirect fee interest in and have assumedthe role of landlord of this property. In its complaint, 729 7th AvenueRealty Corp. sought specic performance of itsalleged right to require Demi-Tasse to provide a subordination,non-disturbance and attornment agreement, or an SNDA, to a proposedsubtenant so that in the event the net lease is terminated, theproposed sublease would remain in effect. The plaintiff also sought ajudgment in the amount of approximately $600,000 for damages 729 7thAvenue Realty Corp. allegedly suffered by reason of Demi-Tasse'srefusal to provide the subtenant with SNDA protection.

Demi-Tasse has refused to grant SNDA protection to the subtenant onthe grounds that the sublease is congured insuch a way so as to extract the most economically desirable portion ofthe property for the subtenant, an afliate of729 7th Realty Corp., rendering the remaining space that would revertto Demi-Tasse upon a termination of the net lease unmarketable. Underthe terms of the net lease, Demi-Tasse has no obligation to provideSNDA protection to a proposed sublease where, in Demi-Tasse'sdiscretion, the remaining space would be rendered unmarketable.

On September 18, 2003, Demi-Tasse moved to dismiss the claim for$600,000 in damages on the grounds that the net lease prohibits therecovery of monetary damages that may result from Demi-Tasse'srefusal to provide a proposed subtenant with SNDA protection.Demi-Tasse's time to answer the first cause of action was stayeduntil a decision was rendered on the motion. Demi-Tasse's motionto dismiss the claim for monetary damages was granted on March 29,2004. Demi-Tasse intends to vigorously oppose 729 7th RealtyCorp.'s claim that it has the right to obtain SNDA protection forits subtenant under the current circumstances.

If the claim forSNDA protection is successful, it would result in a total economic lossto us of up to approximately $700,000, including lost rent, leasingcommissions and concessions in the first year following the litigation,in addition to the cost of any legal proceedings or negotiations, andup to approximately $650,000 to $850,000 in lost rent annuallythereafter unless rerented on the same terms. We have established acollectibility reserve totaling $2,435,000 as of March 31, 2005 relatedto straight-line (unbilled) rents receivable under this lease. However,this reserve may not be adequate to protect us against anyloss.

43

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ITEM 2.    UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS

(a)    On January 30,2005, our operating partnership granted an aggregate of 22,500 LTIPunits, which are operating partnership units that are structured asprofits interests, to certain of our employees pursuant to our 2004Omnibus Stock Incentive Plan. Such grants of LTIP units were exemptfrom the registration requirements of the Securities Act pursuant toRule 701 and Rule 506 of Regulation D under the Securities Act.Conditioned upon minimum allocations to the capital accounts of theLTIP units for federal income tax purposes, each LTIP Unit may beconverted, at the election of the holder, into one operatingpartnership unit which will be redeemable at the election of the holderfor cash, or at our election, shares of common stock, generally on aone for one basis, beginning on October 29, 2005.

(b)    As disclosed in our quarterly report on Form 10-Qfor the quarter ending September 30, 2004, we consummated an initialpublic offering of our common stock in October 2004 pursuant to aregistration statement that was declared effective on October 25, 2004(File No. 333-114675) and we estimated initial public offering expensesof approximately $7.3 million, resulting in estimated net offeringproceeds to us, after deducting the underwriting discount and expenses,of $170.1 million. We have incurred initial public offering expenses ofapproximately $7.6 million, resulting in net offering proceeds of theinitial public offering to us, after deducting the underwritingdiscount and expenses, of approximately $169.8 million.

Initially, we posted approximately $52 million of the net proceedsas collateral for temporary investments in approximately $1.32 billionof primarily AAA-rated, short-term, floating rate securities and wedeposited approximately $117.8 million of the net proceeds in cash andmoney market funds. As of December 31, 2004 and March 31, 2005approximately $28 million and $20 million, respectively of the netproceeds remained invested in these temporary investments. As ofDecember 31, 2004 and March 31, 2005 approximately $20 million and $21million, respectively of the net proceeds were in money marketfunds.

(c)    None.

ITEM 3.    DEFAULTS UPONSENIOR SECURITIES

None.

ITEM 4.    SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM5.    OTHER INFORMATION

(a)    None.

(b)    None.

44

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ITEM6.    EXHIBITS

|            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |  |  |  |
|------------|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| ExhibitNo. |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 2.1        |  | ContributionAgreement, dated as of October 29, 2004, by and among NS AdvisorsHoldings LLC, Presidio Capital Investment Company, LLC and NorthStarRealty Finance Limited Partnership*                                                                                                                                                                                                                                                                                                                                                     |
| 2.2        |  | Contribution Agreement, dated as of October 29,2004, by and among NorthStar Partnership, L.P., NorthStar FundingManaging Member Holdings LLC and NorthStar Realty Finance LimitedPartnership*                                                                                                                                                                                                                                                                                                                                            |
| 2.3        |  | Purchase and SaleAgreement, dated as of October 29, 2004, between NorthStar RealtyFinance Limited Partnership and ALGM I Equity, LLC*                                                                                                                                                                                                                                                                                                                                                                                                    |
| 3.1        |  | Articles of Amendment and Restatement of NorthStarRealty Finance Corp., as filed with the State Department of Assessmentsand Taxation of Maryland on October 20, 2004 (incorporated by referenceto Exhibit 3.1 to the Company's Registration Statement on FormS-11 (File No. 333-114675))                                                                                                                                                                                                                                                |
| 3.2        |  | Bylaws ofNorthStar Realty Finance Corp. (incorporated by reference to Exhibit3.2 to the Company's Registration Statement on Form S-11 (FileNo. 333-114675))                                                                                                                                                                                                                                                                                                                                                                              |
| 3.3        |  | Amendment No. 1 to theBylaws of NorthStar Realty Finance Corp. (incorporated by reference toExhibit 3.3 to the Company's Current Report on Form 8-K, filed onApril 27, 2005)                                                                                                                                                                                                                                                                                                                                                             |
| 4.1        |  | Registration RightsAgreement, dated as of October 29, 2004, by and among NorthStar RealtyFinance Corp., NorthStar Partnership, L.P., NorthStar Funding ManagingMember Holdings LLC and NS Advisors Holdings LLC*                                                                                                                                                                                                                                                                                                                         |
| 10.1       |  | Agreement of Limited Partnership of NorthStarRealty Finance Limited Partnership, dated as of October 19, 2004, byand among NorthStar Realty Finance Corp., as sole general partner andinitial limited partner and the other limited partners a party theretofrom time to time*                                                                                                                                                                                                                                                           |
| 10.2       |  | Non-CompetitionAgreement, dated as of October 29, 2004, by and among NorthStar RealtyFinance Corp., NorthStar Realty Finance Limited Partnership, NorthStarCapital Investment Corp. and NorthStar Partnership, L.P.*                                                                                                                                                                                                                                                                                                                     |
| 10.3       |  | Shared Facilities and Services Agreement, datedas of October 29, 2004, by and between NorthStar Realty Finance Corp.and NorthStar Capital Investment Corp.*                                                                                                                                                                                                                                                                                                                                                                              |
| 10.4       |  | Amended, Restated and Consolidated Fee andLeasehold Mortgage, Assignment of Leases and Rents and SecurityAgreement, dated as of December 4, 2002, by and among 729 Demi-TasseLLC, 1552 Lonsdale LLC, ALGM Leasehold II LLC, ALGM Leasehold III LLC,ALGM Leasehold VI LLC, ALGM Leasehold VIII LLC, ALGM Leasehold IX LLC,ALGM Leasehold X LLC, ALGM Leasehold XII LLC and Greenwich CapitalFinancial Products, Inc. (incorporated by reference to Exhibit 10.1 tothe Company's Registration Statement on Form S-11 (File No.333-114675)) |
| 10.5       |  | Executive EmploymentAgreement, dated as of October 22, 2004, between David T. Hamamoto andNorthStar Realty Finance Corp.*                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.6       |  | Executive Employment Agreement, dated as ofOctober 22, 2004, between Mark E. Chertok and NorthStar Realty FinanceCorp.*                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.7       |  | Executive Employment Agreement,dated as of October 22, 2004, between Jean-Michel Wasterlain andNorthStar Realty Finance Corp.*                                                                                                                                                                                                                                                                                                                                                                                                           |
|            |

45

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|            |  |                                                                                                                                                                                                                                                                                                                                               |  |  |  |  |
|------------|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| ExhibitNo. |  | Description                                                                                                                                                                                                                                                                                                                                   |
| 10.8       |  | Executive EmploymentAgreement, dated as of October 22, 2004, between Daniel R. Gilbert andNorthStar Realty Finance Corp.*                                                                                                                                                                                                                     |
| 10.9       |  | NorthStar Realty Finance Corp. 2004 Omnibus StockIncentive Plan*                                                                                                                                                                                                                                                                              |
| 10.10      |  | LTIP Unit VestingAgreement under the NorthStar Realty Finance Corp. 2004 Omnibus StockIncentive Plan among NorthStar Realty Finance Corp., NorthStar RealtyFinance Limited Partnership and NRF Employee, LLC*                                                                                                                                 |
| 10.11      |  | Form of Vesting Agreement for Units of NRFEmployee, LLC, each dated as of October 29, 2004, between NRF Employee,LLC and certain employees and co-employees of NorthStar Realty FinanceCorp.*                                                                                                                                                 |
| 10.12      |  | Form of Restricted StockAgreement (incorporated by reference to Exhibit 10.7(a) to theCompany's Registration Statement on Form S-11 (File No.333-114675))                                                                                                                                                                                     |
| 10.13      |  | NorthStar Realty FinanceCorp. 2004 Long Term Incentive Bonus Plan*                                                                                                                                                                                                                                                                            |
| 10.14      |  | Form of Notification under NorthStar RealtyFinance Corp. 2004 Long Term Incentive Bonus Plan*                                                                                                                                                                                                                                                 |
| 10.15      |  | Form of Indemnification Agreement for directorsand officers of NorthStar Realty Finance Corp. (incorporated byreference to Exhibit 10.15 to the Company's RegistrationStatement on Form S-11 (File No. 333-114675))                                                                                                                           |
| 10.16      |  | Amended and Restated Master RepurchaseAgreement, dated as of March 21, 2005, between NRFC DB Holdings, LLCand Deutsche Bank AG, Cayman Islands Branch**                                                                                                                                                                                       |
| 10.17      |  | Indenture dated as of April 12, 2005, betweenNorthStar Realty Finance Limited Partnership and JPMorgan Chase Bank,National Association, as trustee***                                                                                                                                                                                         |
| 10.18      |  | Amended and Restated Trust Agreement, dated asof April 12, 2005, among NorthStar Realty Finance Limited Partnership,as depositor, JPMorgan Chase, National Association, as propertytrustee, Chase Bank USA, National Association, as Delaware trustee andMark Chertok, David Hamamoto and Richard McCready, each asadministrative trustees*** |
| 31.1       |  | Certification of David T. Hamamoto, ChiefExecutive Officer pursuant to Rule 13a - 14(a) of the ExchangeAct                                                                                                                                                                                                                                    |
| 31.2       |  | Certification of Mark E. Chertok,Chief Financial Officer pursuant to Rule 13a - 14(a) of the ExchangeAct                                                                                                                                                                                                                                      |
| 32.1       |  | Certification of David T.Hamamoto, Chief Executive Officer pursuant to Section 1350 of Chapter63 of Title 18 of the United States Code                                                                                                                                                                                                        |
| 32.2       |  | Certification of Mark E. Chertok, Chief Financial Officer pursuantto Section 1350 of Chapter 63 of Title 18 of the United StatesCode                                                                                                                                                                                                          |
|            |

|  |
|--|
|  |  |
|  |

|   |                                                                                                                                                                  |
|---|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| * | Incorporated byreference to the like-numbered exhibit to NorthStar Realty FinanceCorp.'s Quarterly Report on Form 10-Q for the quarter endingSeptember 30, 2004. |

|    |                                                                                                                                                           |
|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** | Incorporated byreference to the like-numbered exhibit to NorthStar Realty FinanceCorp.'s Annual Report on Form 10-K for the year ending December31, 2004. |

|     |                                                                                                                                                                                  |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *** | Incorporated by reference to thelike-numbered exhibit to NorthStar Realty Finance Corp.'sAmendment No. 1 to the Annual Report on Form 10-K for the year endingDecember 31, 2004. |

46

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SIGNATURES

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

|                   |  |                               |  |                                                                                                                                                                                                                                                                                                              |  |  |  |  |  |  |
|-------------------|--|-------------------------------|--|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|--|--|
|              |  | NORTHSTAR REALTYFINANCE CORP. |
| Date: May12, 2005 |  | By:                           |  | /S/  David T.Hamamoto                     Name:    David T.Hamamoto Title:      Chief Executive Officer                                      |
|              |  | By:                           |  | /S/  MarkE. Chertok                           Name:    Mark E. Chertok Title:      ChiefFinancial Officer |
|                   |

47

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EXHIBITINDEX

|            |      |             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |  |  |
|------------|------|-------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|
| ExhibitNo. |      | Description |
|       | 2.1  |             | ContributionAgreement, dated as of October 29, 2004, by and among NS AdvisorsHoldings LLC, Presidio Capital Investment Company, LLC and NorthStarRealty Finance LimitedPartnership*                                                                                                                                                                                                                                                                                                                                                      |
|       | 2.2  |             | Contribution Agreement,dated as of October 29, 2004, by and among NorthStar Partnership, L.P.,NorthStar Funding Managing Member Holdings LLC and NorthStar RealtyFinance Limited Partnership*                                                                                                                                                                                                                                                                                                                                            |
|       | 2.3  |             | Purchaseand Sale Agreement, dated as of October 29, 2004, between NorthStarRealty Finance Limited Partnership and ALGM I Equity,LLC*                                                                                                                                                                                                                                                                                                                                                                                                     |
|       | 3.1  |             | Articles of Amendment andRestatement of NorthStar Realty Finance Corp., as filed with the StateDepartment of Assessments and Taxation of Maryland on October 20, 2004(incorporated by reference to Exhibit 3.1 to the Company'sRegistration Statement on Form S-11 (File No.333-114675))                                                                                                                                                                                                                                                 |
|       | 3.2  |             | Bylaws of NorthStar RealtyFinance Corp. (incorporated by reference to Exhibit 3.2 to theCompany's Registration Statement on Form S-11 (File No.333-114675))                                                                                                                                                                                                                                                                                                                                                                              |
|       | 3.3  |             | Amendment No. 1 to theBylaws of NorthStar Realty Finance Corp. (incorporated by reference toExhibit 3.3 to the Company's Current Report on Form 8-K, filed onApril 27, 2005)                                                                                                                                                                                                                                                                                                                                                             |
|       | 4.1  |             | Registration RightsAgreement, dated as of October 29, 2004, by and among NorthStar RealtyFinance Corp., NorthStar Partnership, L.P., NorthStar Funding ManagingMember Holdings LLC and NS Advisors HoldingsLLC*                                                                                                                                                                                                                                                                                                                          |
|       | 10.1 |             | Agreement of Limited Partnershipof NorthStar Realty Finance Limited Partnership, dated as of October19, 2004, by and among NorthStar Realty Finance Corp., as sole generalpartner and initial limited partner and the other limited partners aparty thereto from time totime*                                                                                                                                                                                                                                                            |
|       | 10.2 |             | Non-Competition Agreement, datedas of October 29, 2004, by and among NorthStar Realty Finance Corp.,NorthStar Realty Finance Limited Partnership, NorthStar CapitalInvestment Corp. and NorthStar Partnership,L.P.*                                                                                                                                                                                                                                                                                                                      |
|       | 10.3 |             | Shared Facilities and ServicesAgreement, dated as of October 29, 2004, by and between NorthStarRealty Finance Corp. and NorthStar Capital InvestmentCorp.*                                                                                                                                                                                                                                                                                                                                                                               |
|       | 10.4 |             | Amended, Restated andConsolidated Fee and Leasehold Mortgage, Assignment of Leases and Rentsand Security Agreement, dated as of December 4, 2002, by and among 729Demi-Tasse LLC, 1552 Lonsdale LLC, ALGM Leasehold II LLC, ALGMLeasehold III LLC, ALGM Leasehold VI LLC, ALGM Leasehold VIII LLC, ALGMLeasehold IX LLC, ALGM Leasehold X LLC, ALGM Leasehold XII LLC andGreenwich Capital Financial Products, Inc. (incorporated by referenceto Exhibit 10.1 to the Company's Registration Statement on FormS-11 (File No. 333-114675)) |
|       | 10.5 |             | ExecutiveEmployment Agreement, dated as of October 22, 2004, between David T.Hamamoto and NorthStar Realty FinanceCorp.*                                                                                                                                                                                                                                                                                                                                                                                                                 |
|       | 10.6 |             | Executive Employment Agreement,dated as of October 22, 2004, between Mark E. Chertok and NorthStarRealty Finance Corp.*                                                                                                                                                                                                                                                                                                                                                                                                                  |
|       | 10.7 |             | ExecutiveEmployment Agreement, dated as of October 22, 2004, between Jean-MichelWasterlain and NorthStar Realty Finance Corp.*                                                                                                                                                                                                                                                                                                                                                                                                           |
|            |

48

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|            |       |             |                                                                                                                                                                                                                                                                                                                                              |  |  |  |
|------------|-------|-------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|
| ExhibitNo. |       | Description |
|       | 10.8  |             | Executive EmploymentAgreement, dated as of October 22, 2004, between Daniel R. Gilbert andNorthStar Realty FinanceCorp.*                                                                                                                                                                                                                     |
|       | 10.9  |             | NorthStar Realty Finance Corp.2004 Omnibus Stock IncentivePlan*                                                                                                                                                                                                                                                                              |
|       | 10.10 |             | LTIP Unit Vesting Agreementunder the NorthStar Realty Finance Corp. 2004 Omnibus Stock IncentivePlan among NorthStar Realty Finance Corp., NorthStar Realty FinanceLimited Partnership and NRF Employee,LLC*                                                                                                                                 |
|       | 10.11 |             | Form of Vesting Agreement forUnits of NRF Employee, LLC, each dated as of October 29, 2004, betweenNRF Employee, LLC and certain employees and co-employees of NorthStarRealty Finance Corp.*                                                                                                                                                |
|       | 10.12 |             | Form ofRestricted Stock Agreement (incorporated by reference to Exhibit10.7(a) to the Company's Registration Statement on Form S-11(File No. 333-114675))                                                                                                                                                                                    |
|       | 10.13 |             | NorthStarRealty Finance Corp. 2004 Long Term Incentive BonusPlan*                                                                                                                                                                                                                                                                            |
|       | 10.14 |             | Form of Notification underNorthStar Realty Finance Corp. 2004 Long Term Incentive BonusPlan*                                                                                                                                                                                                                                                 |
|       | 10.15 |             | Form of IndemnificationAgreement for directors and officers of NorthStar Realty Finance Corp.(incorporated by reference to Exhibit 10.15 to the Company'sRegistration Statement on Form S-11 (File No.333-114675))                                                                                                                           |
|       | 10.16 |             | Amended and RestatedMaster Repurchase Agreement, dated as of March 21, 2005, between NRFCDB Holdings, LLC and Deutsche Bank AG, Cayman IslandsBranch**                                                                                                                                                                                       |
|       | 10.17 |             | Indenture dated as of April12, 2005, between NorthStar Realty Finance Limited Partnership andJPMorgan Chase Bank, National Association, astrustee***                                                                                                                                                                                         |
|       | 10.18 |             | Amended and Restated TrustAgreement, dated as of April 12, 2005, among NorthStar Realty FinanceLimited Partnership, as depositor, JPMorgan Chase, NationalAssociation, as property trustee, Chase Bank USA, National Association,as Delaware trustee and Mark Chertok, David Hamamoto and RichardMcCready, each as administrativetrustees*** |
|       | 31.1  |             | Certification of David T.Hamamoto, Chief Executive Officer pursuant to Rule 13a - 14(a) of theExchange Act                                                                                                                                                                                                                                   |
|       | 31.2  |             | Certification of Mark E.Chertok, Chief Financial Officer pursuant to Rule 13a - 14(a) of theExchange Act                                                                                                                                                                                                                                     |
|       | 32.1  |             | Certification of David T.Hamamoto, Chief Executive Officer pursuant to Section 1350 of Chapter63 of Title 18 of the United StatesCode                                                                                                                                                                                                        |
|       | 32.2  |             | Certification of Mark E. Chertok,Chief Financial Officer pursuant to Section 1350 of Chapter 63 of Title18 of the United StatesCode                                                                                                                                                                                                          |
|            |

|  |
|--|
|  |  |
|  |

|   |                                                                                                                                                                  |
|---|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| * | Incorporated byreference to the like-numbered exhibit to NorthStar Realty FinanceCorp.'s Quarterly Report on Form 10-Q for the quarter endingSeptember 30, 2004. |

|    |                                                                                                                                                           |
|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** | Incorporated byreference to the like-numbered exhibit to NorthStar Realty FinanceCorp.'s Annual Report on Form 10-K for the year ending December31, 2004. |

|     |                                                                                                                                                                                  |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| *** | Incorporated by reference to thelike-numbered exhibit to NorthStar Realty Finance Corp.'sAmendment No. 1 to the Annual Report on Form 10-K for the year endingDecember 31, 2004. |

49

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