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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2010

Commission File Number: 001-32330

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

Maryland(State or Other Jurisdiction of
Incorporation or Organization)

11-3707493(IRS Employer
Identification No.)


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

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

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

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

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

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (Do not check if a
smaller reporting company)

Smaller reporting company o


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

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

The
Company has one class of common stock, par value $0.01 per share, 77,161,882 shares outstanding as of November 3, 2010.



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Table of Contents



NORTHSTAR REALTY FINANCE CORP.  QUARTERLY REPORT  For the Three and Nine Months Ended September 30, 2010

TABLE OF CONTENTS



Index



PagePart I.

Financial InformationItem 1.

Financial StatementsCondensed Consolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009


1Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and September 30,
2009


2Condensed Consolidated Statements of Stockholders' Equity as of September 30, 2010 (unaudited) and December 31, 2009


3Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2010 and
September 30, 2009


4Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and September 30,
2009


5Notes to the Condensed Consolidated Financial Statements (unaudited)


6Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations


49Item 3.

Quantitative and Qualitative Disclosures about Market Risk


77Item 4.

Controls and Procedures


81Part II.

Other Information


82Item 6.

Exhibits


82Signatures


86


i

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Table of Contents



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in Thousands, Except Share Data)

September 30,
2010

December 31,
2009(unaudited)ASSETS:Cash and cash equivalents

$
135,200

$
138,928Restricted cash (includes $377,260 and $74,453 from consolidated VIEs, respectively)


431,139


129,180Operating real estate, net


957,416


978,902Available for sale securities, at fair value (includes $1,504,382 and $283,184 from consolidated VIEs, respectively)


1,525,303


336,220Real estate debt investments, net (includes $1,687,009 and $1,356,038 from consolidated VIEs, respectively)


1,841,416


1,936,482Real estate debt investments, held-for-sale (includes $37,821 and $from consolidated VIEs, respectively)


37,821


611Investments in and advances to unconsolidated ventures


98,641


38,299Receivables, net of allowance of $781 in 2010 and $1,349 in 2009 (includes net $27,382 and $7,421 from consolidated VIEs, respectively)


32,083


17,912Unbilled rents receivable


10,211


10,206Derivative instruments, at fair value (includes $29 and $from consolidated VIEs, respectively)


29


Deferred costs and intangible assets, net


57,231


57,551Assets of properties held for sale (includes $5,683 and $from consolidated VIEs, respectively)


5,683


Other assets (includes $2,923 and $2,888 from consolidated VIEs, respectively)


27,172


25,273Total assets

$
5,159,345

$
3,669,564LIABILITIES:Mortgage notes and loans payable


804,835


795,915Exchangeable senior notes


126,655


125,992Bonds payable, at fair value (includes $1,963,042 and $584,615 from consolidated VIEs, respectively)


1,963,042


584,615Secured term loans


36,881


368,865Liability to subsidiary trusts issuing preferred securities, at fair value


170,629


167,035Obligations under capital leases


1,818


3,527Accounts payable and accrued expenses (includes $20,460 and $1,631 from consolidated VIEs, respectively)


53,160


30,071Escrow deposits payable (includes $71,220 and $28,608 from consolidated VIEs, respectively)


71,705


39,461Derivative liability, at fair value (includes $218,968 and $46,187 from consolidated VIEs, respectively)


256,952


67,044Liabilities of properties held for sale (includes $153 and $from consolidated VIEs, respectively)


153


Other liabilities (includes $8,609 and $358 from consolidated VIEs, respectively)


28,904


28,399Total liabilities


3,514,734


2,210,924EQUITY:NorthStar Realty Finance Corp. Stockholders' Equity:8.75% Series A preferred stock, $0.01 par value, $25 liquidation preference per share, 2,400,000 shares issued and outstanding at September 30,
2010 and December 31, 2009, respectively


57,867


57,8678.25% Series B preferred stock, $0.01 par value, $25 liquidation preference per share, 7,600,000 shares issued and outstanding at September 30,
2010 and December 31, 2009, respectively


183,505


183,505Common stock, $0.01 par value, 500,000,000 shares authorized, 77,161,103 and 74,882,600 shares issued and outstanding at September 30, 2010 and
December 31, 2009, respectively


772


749Additional paid-in capital


699,221


662,805Retained earnings


572,665


460,915Accumulated other comprehensive loss


(50,350
)

(92,670
)Total NorthStar Realty Finance Corp. Stockholders' Equity


1,463,680


1,273,171Non-controlling interest


180,931


185,469Total equity


1,644,611


1,458,640Total liabilities and stockholders' equity

$
5,159,345

$
3,669,564


See accompanying notes to condensed consolidated financial statements

1

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Table of Contents



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in Thousands, Except Share and Per Share Data)

(Unaudited)

Three Months
Ended
September 30,
2010

Three Months
Ended
September 30,
2009

Nine Months
Ended
September 30,
2010

Nine Months
Ended
September 30,
2009Revenues and other income:Interest income

$
88,791

$
34,305

$
207,087

$
106,836Interest incomerelated parties


112


4,179


1,033


13,129Rental and escalation income


34,252


25,753


89,980


72,904Advisory and management fee incomerelated parties


684


1,924


1,666


5,423Commission income


1,861





2,233


Other revenue


1,093


206


2,340


552Total revenues


126,793


66,367


304,339


198,844Expenses:Interest expense


32,233


28,360


100,054


92,448Real estate propertiesoperating expenses


12,421


4,212


24,950


9,086Asset management feesrelated parties





841


466


2,536Commission expense


1,399





1,677


Impairment on operating real estate








1,180


Provision for loan losses


42,877


24,229


136,134


62,691General and administrative:Salaries and equity-based compensation(1)


11,863


10,960


40,708


33,805Auditing and professional fees


3,831


1,914


9,299


6,440Other general and administrative


4,277


2,748


14,239


9,778Total general and administrative


19,971


15,622


64,246


50,023Depreciation and amortization


8,621


3,148


25,467


34,217Total expenses


117,522


76,412


354,174


251,001Income/(loss) from operations


9,271


(10,045
)

(49,835
)

(52,157
)Equity in earnings/(loss) of unconsolidated ventures


(60
)

2,737


6,155


(1,522
)Unrealized (loss)/gain on investments and other


(198,168
)

(88,336
)

(206,408
)

1,709Realized gain on investments and other


26,795


29,215


109,766


89,411Gain from acquisitions


15,363





15,363


(Loss)/Income from continuing operations before extraordinary item


(146,799
)

(66,429
)

(124,959
)

37,441(Loss)/Income from discontinued operations


(49
)

656


52


1,986Gain on sale from discontinued operations








2,528


Consolidated net (loss)/income


(146,848
)

(65,773
)

(122,379
)

39,427Less: net (loss)/income attributable to the non-controlling interests


7,963


4,539


1,018


(9,816
)Preferred stock dividends


(5,231
)

(5,231
)

(15,694
)

(15,694
)Net (loss)/income attributable to NorthStar Realty Finance Corp. common stockholders

$
(144,116
)
$
(66,465
)
$
(137,055
)
$
13,917Net (loss)/income per share from continuing operations (basic/diluted)


(1.87
)

(0.96
)

(1.83
)

0.19Income per share from discontinued operations (basic/diluted)





0.01





0.03Gain per share on sale of discontinued operations (basic/diluted)








0.03


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

$
(1.87
)
$
(0.95
)
$
(1.80
)
$
0.21Weighted average number of shares of common stock:Basic


77,139,868


69,896,439


76,211,705


67,445,995Diluted


82,364,109


77,356,187


82,287,543


74,905,800


(1)The
three months ended September 30, 2010 and 2009 include $3,894 and $5,007 respectively, of equity-based compensation expense. The nine months
ended September 30, 2010 and 2009 include $13,133 and $15,471 respectively, of equity-based compensation expense. The nine months ended September 30, 2010 includes $3,583 of cash
compensation expense and $1,014 of equity based compensation expense relating to a separation and consulting agreement with a former executive.


See accompanying notes to condensed consolidated financial statements

2

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Amounts in Thousands)
(Unaudited)

Preferred
Stock
at Par

Shares
of
Common
Stock

Common
Stock
at Par

Additional
Paid-in
Capital

Treasury
Stock

Accumulated
Other
Comprehensive
Income (Loss)

Retained
Earnings

Total
NorthStar
Stockholders
Equity

Non-controlling
Interests

Total
Stockholders
EquityBalance at December 31, 2008

$
100


62,907

$
634

$
861,300


(1,384
)
$
(94,343
)
$
648,860

$
1,415,167

$
198,593

$
1,613,760Equity component of exchangeable senior notes











(4,321
)










(4,321
)




(4,321
)Equity component of warrants











117











117





117Dividend reinvestment and stock purchase plan





80


1


276











277





277Proceeds from equity distribution agreement





7,327


69


23,995


1,384








25,448





25,448Stock awards/LTIP awards





94


1


300











301


20,172


20,473Restricted share grant





15





1











1





1Comprehensive loss

















1,673





1,673


199


1,872Conversion of OP/LTIP units





744


7


12,013











12,020


(12,020
)

Stock dividends





3,716


37


10,610








(9,607
)

1,040


(1,040
)

Cash dividends on common stock




















(27,133
)

(27,133
)

(15,957
)

(43,090
)Cash dividends on preferred stock




















(20,925
)

(20,925
)




(20,925
)Redemption of membership interest











(214
)










(214
)




(214
)Equity in private fund


























1,815


1,815Net (loss)




















(130,280
)

(130,280
)

(6,293
)

(136,573
)Balance at December 31, 2009

$
100


74,883

$
749

$
904,077

$


$
(92,670
)
$
460,915

$
1,273,171

$
185,469

$
1,458,640VIE consolidation begining balance adjustments

















41,332


110,746


152,078


31,518


183,596Acquisition of N-STAR CDO IX




















160,826


160,826





160,826Amortization of deferred compensation











20











20


12,814


12,834Non-controlling interest contribution to joint venture


























5,267


5,267Dividend reinvestment and stock purchase plan





72





199











199





199Stock awards/LTIP awards





99


1


299











300





300Equity component of warrants











60











60





60Comprehensive loss

















988





988


121


1,109Conversion of OP/LTIP units





2,107


21


37,646











37,667


(37,667
)

Cash dividends on common stock




















(22,767
)

(22,767
)

(7,683
)

(30,450
)Cash dividends on preferred stock




















(15,694
)

(15,694
)

(7,875
)

(23,569
)Redemption of membership interest











(1,807
)










(1,807
)

1,800


(7
)Equity in private fund


























(1,815
)

(1,815
)Net (loss)




















(121,361
)

(121,361
)

(1,018
)

(122,379
)Balance at September 30, 2010

$
100


77,161

$
771

$
940,494

$


$
(50,350
)
$
572,665

$
1,463,680

$
180,931

$
1,644,611


See accompanying notes to condensed consolidated financial statements

3

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Table of Contents



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in Thousands)

(Unaudited)

Three Months Ended
September 30,
2010

Three Months Ended
September 30,
2009

Nine Months Ended
September 30,
2010

Nine Months Ended
September 30,
2009Consolidated net (loss)/income

$
(146,848
)
$
(65,773
)
$
(122,379
)
$
39,427Unrealized gain/(loss) on available for sale securities





4,656


(138
)

(12,416
)Change in fair value of derivatives





(843
)

(3,448
)

4,408Reclassification adjustment for gains included in net (loss)/income


1,547


1,398


4,695


4,193Comprehensive (loss)/income


(145,301
)

(60,562
)

(121,270
)

35,612Less: Comprehensive (loss)/income attributable to non-controlling interests


(7,848
)

(4,031
)

(897
)

9,314Comprehensive (loss)/income attributable to NorthStar Realty Finance Corp.

$
(137,453
)
$
(56,531
)
$
(120,373
)
$
26,298


See accompanying notes to condensed consolidated financial statements

4

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Table of Contents



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands)

(Unaudited)

Nine Months Ended
September 30, 2010

Nine Months Ended
September 30, 2009Net cash provided by operating activities

$
27,482

$
46,400Cash flows from investing activities:Improvement of operating real estate


(1,078
)

(3,196
)Acquisition of available for sale securities


(183,960
)

(128,994
)Proceeds from disposition of securities available for sale


181,718


114,250Available for sale securities repayments


43,643


1,397Originations/acquisitions of real estate debt investments


(60,062
)

(208,874
)Real estate debt investment repayments


249,468


60,708Proceeds from the sale of real estate debt investments


110,613


140,753Net proceeds from disposition of operating real estate


3,079


Real estate debt investment acquisition costs





(97
)Other loans receivable





(1,070
)Other loans receivable repayment





3,000Restricted cash used for investment activities


(221,630
)

(16,211
)Purchase of equity interest


(2,195
)

Deferred lease costs


(7,470
)

Investment in and advances to unconsolidated ventures


(7,229
)

(674
)Distributions from unconsolidated ventures


19,565


22,310Net cash provided by (used in) investing activities


124,462


(16,698
)Cash flows from financing activities:Purchase of interest rate cap


(243
)

Settlement of derivative


(283
)

Collateral held by swap counter party


4,651


3,708Mortgage notes and loan borrowings


78,200


Mortgage principal repayments


(64,546
)

(5,714
)Borrowing under credit facilities





1,912Repayments credit facilities





(46,794
)Repurchase obligation borrowings





528Repurchase obligation repayments





(703
)Proceeds from bonds


174,318


71,000Bond repayments


(108,355
)

Borrowing under secured term loan


24,739


1,373Secured term loan repayment


(248,744
)

(3,417
)Bond repurchases


(14,481
)

(51,135
)Payment of deferred financing costs


(2,059
)

(153
)Capital contributions by non-controlling interest


4,686


Restricted cash from financing activities


45,289


(2,883
)Proceeds from common stock offerings





23,446Proceeds from dividend reinvestment and stock purchase plan


263


185Dividends (common and preferred) and distributions


(38,460
)

(35,356
)Deferred offering costs


(81
)

Offering costs


(70
)

(728
)Distributions to non-controlling interest


(10,496
)

(10,587
)Net cash (used in) financing activities


(155,672
)

(55,318
)Net (decrease) increase in cash & cash equivalents


(3,728
)

(25,616
)Cash and cash equivalentsbeginning of period


138,928


134,039Cash and cash equivalentsend of period

$
135,200

$
108,423


See accompanying notes to condensed consolidated financial statements

5

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Table of Contents



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Amount in Thousands, Except per Share Data

(Unaudited)

1. Formation and Organization

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

Consolidating Subsidiaries

NRF Healthcare, LLC

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

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

In
December 2009, the Company completed a membership interest redemption with NRF Healthcare, LLC, NRFC Healthcare Holding Company, LLC, NorthStar Healthcare
Investors, Inc., Chain Bridge, Wakefield Capital Management, Midwest Care Holdings LLC, or Midwest Holdings, and certain individuals, pursuant to which NRF Healthcare, LLC
redeemed the 5.4% membership interest

6

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

1. Formation and Organization (Continued)

of
Chain Bridge and its affiliates in NRF Healthcare, LLC for $2.0 million and its membership interest in certain assets. As a result of the redemption, NorthStar holds 100% of the
common equity membership interests in NRF Healthcare, LLC.

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

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

2. Summary of Significant Accounting Policies

Basis of Quarterly Presentation

The accompanying condensed consolidated financial statements and related notes of the Company have been prepared in accordance with
accounting principles generally accepted in the United States for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under accounting principles generally accepted in the
United States have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of the Company's financial position, results of operations and
cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any
other interim period or for the entire year. These financial statements should be read in conjunction with the Company's consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K for the year ended December 31, 2009, which was filed with the Securities and Exchange Commission. Capitalized terms used herein, and not otherwise
defined, are defined in the Company's December 31, 2009 consolidated financial statements included in its annual report on Form 10-K.

7

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

Principles of Consolidation

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

Estimates

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

Reclassifications

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

Recent Accounting Pronouncements

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

In
July 2010, the FASB issued guidance requiring more robust and disaggregated disclosure about the credit quality of an entity's loans and its allowance for loan losses. The new
guidance will significantly expand the existing disclosure requirements and is focused on providing transparency regarding an entity's exposure to credit losses. This update is effective for interim
and annual reporting periods ending on or after December 15, 2010. The additional disclosures required by this update will be included in the note on real estate debt investments upon adoption.

3. Variable Interest Entities

On January 1, 2010, the Company adopted the FASB guidance for determining whether an entity is a variable interest entity, or VIE, and which requires an analysis of qualitative
rather than quantitative factors to determine the primary beneficiary of a VIE. The guidance requires an entity to consolidate a VIE if (i) it has the power to direct the activities that most
significantly impact the VIE's economic performance and (ii) the obligation to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be significant to the
VIE. As a result of the implementation of this pronouncement, the Company consolidated four of its previously off-balance sheet CDO

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Variable Interest Entities (Continued)

financings,
which are referred to as N-Star I, II, III and V. The Company has elected the fair value option of accounting for the available for sale securities and bonds payable of these
entities for the purpose of consistent accounting application.

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

As Reported,
December 31, 2009

As Adjusted,
January 1, 2010

Effect of Change in
Accounting PrincipleNon-controlling interest

$
185,469

$
205,798

$
20,329Retained earnings


460,915


582,850


121,935Accumulated other comprehensive loss


(92,670
)

(51,338
)

41,332


The
Company has evaluated its real estate debt investments, liability to subsidiary trusts issuing preferred securities, and its investments in each of its nine CDO transaction issuers
to determine whether they are a variable interest entity ("VIE"). A VIE is an entity that lacks one or more of the characteristics of a voting interest entity. For each of these investments, the
Company has evaluated: (1) the sufficiency of the fair value of the entity's equity investment at risk to absorb losses; (2) whether as a group the holders of the equity investment at
risk have: (a) the power, through voting rights or similar rights, to direct the activities of a legal entity that most significantly impact the entity's economic performance; (b) the
obligation to absorb the expected losses of the legal entity; and (c) the right to receive the expected residual returns of the legal entity; (3) whether the voting rights of these
investors are proportional to their obligations to absorb the expected losses of the entity, their rights to receive the expected returns of their equity, or both; and (4) whether substantially
all of the entity's activities involve or are conducted on behalf of an investor that has disproportionately fewer voting rights. An investment that lacks one or more of the above four characteristics
of a voting interest entity is considered to be a VIE.

As
of September 30, 2010, the Company identified interests in 19 entities which were determined to be VIEs. The Company reassesses its initial evaluation of an entity as a VIE
upon the occurrence of certain reconsideration events.

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

The
Company determines whether it is the primary beneficiary of a VIE by first performing a qualitative analysis to determine if it holds the power to direct the activities that most
significantly impact the VIEs economic performance. This analysis includes: (i) assessing the Company's variable interests (both implicit and explicit) and any other involvements in the VIE, as
well as the involvements of other variable interest holders; (ii) consideration of the VIEs purpose and design, including the risks the VIE was designed to create and pass through to its
variable interest holders; (iii) identifying the activities that most significantly affect the VIE's economic performance; (iv) determining whether the

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Variable Interest Entities (Continued)

Company's
significant involvement in the design of an entity provided the Company with the opportunity to establish arrangements that result in the Company having the power to direct the VIEs most
significant activities; and (v) determining whether the Company's level of economic interest in a VIE is indicative of the amount of power the Company holds in situations where the Company's
stated power to direct the VIEs most significant activities is disproportionately less than its economic interest in the entity. The Company performs a quantitative analysis to determine if it has the
obligation to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be significant to the VIE. For purposes of allocating a VIE's expected losses and expected
residual returns to its variable interest holders, the Company calculates its share of the VIE's expected losses and expected residual returns using the specific cash flows that would be allocated to
it, based on contractual arrangements and/or the Company's position in the capital structure of the VIE, under various probability-weighted scenarios.

Based
on management's analysis, the Company is not the primary beneficiary of nine of the identified VIEs since it (i) does not have the power to direct the activities that most
significantly impact the VIE's economic performance and (ii) does not have the obligation to absorb the losses of the VIE or the right to receive the benefits from the VIE, which could be
significant to the VIE. Accordingly, these VIEs are not consolidated into the Company's financial statements as of September 30, 2010. The Company reassesses its determination of whether it is
the primary beneficiary of a VIE each reporting period.

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

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

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Variable Interest Entities (Continued)

The
following tables present the cumulative effects of the consolidation of the assets and liabilities of CSE RE 2006- A and N-Star CDO IX on the Company's
consolidated balance sheet as of July 8, 2010 (in thousands):

As Reported,
June 30, 2010

Consolidation of
CSE RE 2006-A
Assets and
Liabilities

Consolidation of
N-Star CDO IX
Assets and
Liabilities

Effect of
ConsolidationRestricted cash

$
175,313

$
77,084

$
4,493

$
256,890Operating real estate, at fair value


960,340


4,201





964,541Available for sale securities, at fair value


1,317,564





283,477


1,601,041Real estate debt investment, at fair value


1,692,282


395,973


67,749


2,156,004Real estate debt investment held-for-sale








5,457


5,457Derivative assets, at fair value


35


38





73Receivables


23,880


2,815


3,938


30,633Bonds payable, at fair value


1,339,750


440,096


156,881


1,936,727Accounts payable and accrued expenses


30,771


12,528


1,554


44,853Derivative liabilities, at fair value


180,510


11,829


36,581


228,920Other liabilities


26,257





8,077


34,334Additional paid-in capital


698,735








698,735Noncontrolling interest


177,143


295





177,438Retained Earnings


574,857





160,826


735,683Gain from acquisition





15,363





15,363


Consolidated VIEs (the Company is the primary beneficiary)

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

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

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Variable Interest Entities (Continued)

The
following table displays the classification and carrying amounts of assets and liabilities of consolidated VIEs as of September 30, 2010 (in thousands):

Variable Interest Entity

N-Star I

N-Star II

N-Star III

N-Star IV

N-Star V

N-Star VI

N-Star VII

N-Star VIII

N-Star IX

CapitalSource

TotalAssets of consolidated VIEs:Restricted cash

$
1,429

$
361

$
2,352

$
26,255

$
1,942

$
45,252

$
1,209

$
22,848

$
8,163

$
267,449

$
377,260Assets of properties held for sale





























5,683


5,683Available for sale securities, at fair value


229,226


206,308


220,969


26,332


247,424


10,437


268,735


16,983


261,389


16,579


1,504,382Real estate debt investments, net








32,045


328,396





316,624


10,886


659,264


52,100


287,694


1,687,009Real estate debt investments, held-for-sale




















8,379


11,828


17,614





37,821Receivables, net of allowance


2,324


2,091


2,196


1,373


3,798


999


3,449


1,961


3,795


5,396


27,382Derivative instruments, at fair value




















18








11


29Other assets


28


43





123





2,229


134





366





2,923Total assets of consolidated VIEs(1):


233,007


208,803


257,562


382,479


253,164


375,541


292,810


712,884


343,427


582,812


3,642,489Liabilities of consolidated VIEs:Bonds payable, at fair value


188,295


157,879


132,232


146,241


155,110


159,257


119,720


257,735


166,993


479,580


1,963,042Accounts payable and accrued expenses


1,372


112


1,091


223


524


400


388


1,126


1,956


13,268


20,460Derivative liability, at fair value


16,311


17,511


21,082





37,098


9,128


44,015


18,741


40,846


14,236


218,968Liabilities of properties held for sale





























153


153Escrow deposits payable











21,127





15,929





13,320


2,023


18,821


71,220Other liabilities








48











341


82


7,798


340


8,609Total liabilities of consolidated VIEs(2):


205,978


175,502


154,453


167,591


192,732


184,714


164,464


291,004


219,616


526,398


2,282,452Net assets

$
27,029

$
33,301

$
103,109

$
214,888

$
60,432

$
190,827

$
128,346

$
421,880

$
123,811

$
56,414

$
1,360,037


(1)Assets
of each of the consolidated VIEs may only be used to settle obligations of the respective VIE.(2)Creditors
of each of the consolidated VIEs have no recourse to the general credit of the Company.


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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Variable Interest Entities (Continued)

The Company did not provide financial support to any of its consolidated VIEs during the three and nine months ended September 30, 2010 and 2009. At September 30, 2010,
there are no explicit arrangements or implicit variable interests that could require the Company to provide financial support to any of its consolidated VIEs.

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



The Company has identified one real estate debt investment with a principal amount of $21.8 million as a variable interest in a
VIE and has determined that the Company is not the primary beneficiary of this VIE and as such the VIE should not be consolidated in the Company's consolidated financial statements. For all other real
estate debt investments, the Company has determined that these investments are not VIEs and, as such, the Company has continued to account for all real estate debt investments as loans.



The Company owns all of the common stock of NorthStar Realty Finance Trusts I through VIII (collectively, the "Trusts"). The Trusts
were formed to issue preferred securities. The Company determined that the holders of the trust preferred securities were the primary beneficiaries of the Trusts. As a result, the Company did not
consolidate the Trusts and has accounted for the investment in the common stock of the Trusts under the equity method of accounting. The
following table displays the classification, carrying amounts and maximum exposure of unconsolidated VIEs as of September 30, 2010 (in thousands):

Variable Interest EntityTrusts Issuing
Preferred
Securities, at
Fair Value

Real Estate
Debt
Investments

Total

Maximum
Exposure to
Loss(1)Real estate debt investments




$
21,824

$
21,824

$
21,824Total assets





21,824


21,824


21,824Liability to subsidiary trusts issuing preferred securities, at fair value


170,629





170,629


N/ATotal liabilities


170,629





170,629


N/ANet assets

$
(170,629
)
$
21,824

$
(148,805
)
$
21,824


(1)The
Company's maximum exposure to loss at September 30, 2010, would not exceed the carrying amount of its investment.


The
Company did not provide financial support to any of its unconsolidated VIEs during the three and nine months ended September 30, 2010 and 2009. At September 30, 2010,
there are no explicit

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Variable Interest Entities (Continued)

arrangements
or implicit variable interests that could require the Company to provide financial support to any of its unconsolidated VIEs.

4. Fair Value of Financial Instruments

Fair Value Measurements



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

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

Level 1.

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

Financial assets and liabilities whose values are based on the following:a)

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

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

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

Pricing models whose inputs are derived principally from or corroborated by observable market data through correlation or other means for substantially the full term of the asset or liability (for example, certain
mortgage loans).Level 3.

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


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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

4. Fair Value of Financial Instruments (Continued)

Determination of Fair Value

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

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



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



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



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



CDO bonds payable are measured using an income approach with prices obtained from a nationally-recognized banking institution that
acted as underwriter for the investment and are generally measured using pricing models with market observable inputs such as interest rates and equity index

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

4. Fair Value of Financial Instruments (Continued)

levels,
with adjustments for unobservable inputs. These measurements are classified as Level 3 within the fair value hierarchy.



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

Financial
assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The following table sets forth the
Company's financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2010, by level within the fair value hierarchy:

Assets and Liabilities at Fair ValueLevel 1

Level 2

Level 3

TotalAssets:Available for sale securities:CMBS

$


$
719,952

$
463,732

$
1,183,684Third party CDO notes








21,533


21,533REIT debt





254,753


34,337


289,090Trust preferred securities








8,201


8,201Real estate interest





3,313


19,482


22,795Derivative asset





29





29Total assets

$


$
978,047

$
547,285

$
1,525,332Liabilities:N-Star CDO bonds payable








1,963,042

$
1,963,042Liability to subsidiary trusts issuing preferred securities








170,629


170,629Derivative liability





256,952





256,952Total liabilities

$


$
256,952

$
2,133,671

$
2,390,623


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

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

4. Fair Value of Financial Instruments (Continued)

preferred
securities which are measured at fair value on a recurring basis at September 30, 2010, for which the Company has utilized Level 3 inputs to determine fair value:

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

Available
for Sale
Securities

Corporate
Lending
Investment

N-Star
CDO Bonds
Payable

Liability to
Subsidiary
Trusts Issuing
Preferred
SecuritiesBeginning balance:

$
309,505

$
8,943

$
1,141,096

$
167,035Total net transfers into/out of Level 3


244,008Purchases, sales, issuance and settlements, net


26,154


(17,234
)

616,277


Total losses (realized or unrealized):Included in earnings


106,283





228,368


3,594Included in other comprehensive loss











Total gains (realized or unrealized):Included in earnings


73,861


8,291


22,699Included in other comprehensive loss


40








Ending balance

$
547,285

$


$
1,963,042

$
170,629The amount of total gains or (losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to assets or
liabilities still held at the reporting date

$
(32,382
)
$
8,291

$
(205,669
)
$
3,594


Fair Value Option

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



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

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

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

4. Fair Value of Financial Instruments (Continued)

for
that instrument. The following table sets forth the Company's financial instruments for which the fair value option was elected:

Financial Instruments, at Fair Value

September 30,
2010

December 31,
2009(1)Assets:Available for sale securities:CMBS

$
1,183,684

$
249,583N-Star CDO notes





4,268Third party CDO notes


21,533


9,515REIT debt


289,090


30,580Trust preferred securities


8,201


8,739Real estate interest


22,795


Corporate lending investment(2)





8,943Total assets

$
1,525,303

$
311,628Liabilities:N-Star CDO bonds payable


1,963,042


584,615Liability to subsidiary trusts issuing preferred securities


170,629


167,035Total liabilities

$
2,133,671

$
751,650


(1)December 31,
2009 does not include the assets and liabilities of N-Star I, II, III and V, for which the Company has elected the fair
value option, as these CDO financings were unconsolidated CDO financings prior to January 1, 2010.(2)During
2010, the Company's corporate lending joint venture sold assets having a fair market value in excess of their carrying value. As a result, the
Company reduced its equity investment to zero at September 30, 2010.


18

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

4. Fair Value of Financial Instruments (Continued)




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

Fair Value at
September 30,
2010

Amount
Due Upon
Maturity

DifferenceAssets:Available for sale securities:CMBS

$
1,183,684

$
2,787,169

$
(1,603,485
)Third party CDO notes


21,533


193,049


(171,516
)REIT debt


289,090


287,236


1,854Trust preferred securities


8,201


15,000


(6,799
)Real estate interest


22,795


35,049


(12,254
)Total assets

$
1,525,303

$
3,317,503

$
(1,792,200
)Liabilities:N-Star CDO bonds payable


1,963,042


4,635,734


(2,672,692
)Liability to subsidiary trusts issuing preferred securities


170,629


280,133


(109,504
)Total Liabilities

$
2,133,671

$
4,915,867

$
(2,782,196
)


At
September 30, 2010 and December 31, 2009, the basis in the Company's corporate lending investment was zero and $70.0 million, respectively. The Company has
elected the fair value option for this investment which is accounted for under the equity method of accounting. The fair market value of the Company's investment at September 30, 2010 and
December 31, 2009 was zero and $8.9 million, respectively.

For
the three and nine months ended September 30, 2010 and 2009, the Company recognized a net loss of $140.3 million and a net loss of $59.6 million, respectively,
and a net loss of $59.8 million and $22.9 million, respectively, as the result of the change in fair value of financial assets and liabilities for which the fair value option was
elected, which is recorded as unrealized gain (loss) on investments and other in the Company's consolidated statement of operations. The net loss and gain for the three and nine months ended
September 30, 2009 does not include net losses or gains on the assets and liabilities of N-Star I, II, III and V, as these CDO financings were unconsolidated CDO financings prior to
January 1, 2010.

The
impact of changes in instrument-specific credit spreads on N-Star bonds payable and liability to subsidiary trusts issuing preferred securities for which the fair value
option was elected was a net loss of $104.9 million and $115.0 million, respectively, and a net loss of $209.8 million and a net gain of $49.9 million, respectively, for
the three and nine months ended September 30, 2010 and 2009. The Company attributes changes in the fair value of floating rate liabilities to changes in instrument-specific credit spreads. For
fixed rate liabilities, the Company allocates changes in fair value between interest rate-related changes and credit spread-related changes based on changes in interest rates. The three
and nine months ended September 30, 2009 does not include net gains or losses on the assets and

19

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

4. Fair Value of Financial Instruments (Continued)

liabilities
of N-Star I, II, III and V, as these CDO financings were unconsolidated CDO financings prior to January 1, 2010.

5. Operating Real Estate

In connection with the acquisition of the CSE RE 2006-A equity notes and the consolidation of CSE RE 2006-A, the CDO financing had, as of September 30,
2010, three foreclosed real estate assets ("REO") consisting of two parcels of land with a combined fair market value at the time of acquisition of approximately $1.6 million and a multifamily
property having a fair market value at the time of acquisition of approximately $4.1 million.

Discontinued Operations

During the third quarter of 2010, we recorded as held for sale, two REO parcels of land located in Arizona and an REO multifamily
property located in Georgia. In May 2010, the Company completed the sale of a leasehold interest containing approximately 10,800 square feet of
retail space located in New York City to a private investor group for approximately $3.3 million, representing a gain of approximately $2.5 million. In December 2009, NRF
Healthcare, LLC completed the sale of 18 assisted living facilities containing approximately 1,300 beds located in North Carolina for approximately $95.9 million.

The
following table summarizes income from discontinued operations for the three and nine months ended September 30, 2010 and 2009:

For the Three
Months
Ended
September 30,
2010

For the Three
Months
Ended
September 30,
2009

For the Nine
Months
Ended
September 30,
2010

For the Nine
Months
Ended
September 30,
2009Revenue:Rental and escalation income

$
378

$
2,247

$
644

$
6,744Interest and other


32





33


3Total revenue


410


2,247


677


6,747Expenses:Property operating expenses


234


(65
)

282


(5
)Asset management feesrelated parties


21


7


30


19Auditing and professional fees





87





98General and administrative expenses


204


12


201


28Interest expense





985


60


2,930Depreciation and amortization





565


52


1,691Total expenses


459


1,591


625


4,761(Loss)/income from discontinued operations


(49
)

656


52


1,986Gain on disposition of discontinued operations











Total (loss)/income from discontinued operations

$
(49
)

656

$
52

$
1,986


20

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

5. Operating Real Estate (Continued)

The following table sets forth the major classes of assets and liabilities of properties classified as held for sale at September 30, 2010:

September 30,
2010(unaudited)ASSETS:Operating real estatenet


5,683Total assets

$
5,683LIABILITIES:Accounts payable and accrued expenses


110Other liabilities


43Total liabilities


153EQUITY:NorthStar Realty Finance Corp. Stockholders' Equity:Total equity


5,530Total liabilities and stockholders' equity

$
5,683


6. Available for Sale Securities

The following is a summary of the Company's available for sale securities at September 30, 2010:

September 30, 2010

Carrying
Value

Cumulative
Unrealized
(Loss)/Gain on
Investments

Fair
Value(1)CMBS

$
2,004,833

$
(821,149
)
$
1,183,684Third party CDO notes


169,629


(148,096
)

21,533REIT debt


278,752


10,339


289,091Real estate interest


30,916


(8,121
)

22,795Trust preferred securities


15,000


(6,800
)

8,200Total

$
2,499,130

$
(973,827
)
$
1,525,303


(1)Approximately
$1.5 billion of these investments serve as collateral for the Company's consolidated CDO transactions and the balance is financed under
other borrowing facilities.


At
September 30, 2010, the maturities of the available for sale securities ranged from three months to 46 years.

During
the three and nine months ended September 30, 2010, proceeds from the sale and redemption of available for sale securities was $62.3 million and
$181.7 million, respectively. The net

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

6. Available for Sale Securities (Continued)

realized
gain on the sale and redemption of available for sale securities was $13.1 million and $38.8 million, respectively. During the three and nine months ended September 30,
2009, proceeds from the sale and redemption of available for sale securities was $50.6 million and $114.3 million, respectively. The net realized gain on the sale of available for sale
securities was $15.6 million and $33.2 million, respectively. Proceeds and realized gains from the sale and redemption of available for sale securities for the three and nine months
ended September 30, 2009 does not include the sale and redemption of available for sale securities of N-Star I, II, III and V, as these CDO financings were unconsolidated CDO
financings prior to January 1, 2010.

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

December 31, 2009(1)

Carrying
Value

Losses in
Accumulated
OCI

Cumulative
Unrealized
(Loss)/Gain on
Investments

Fair
Value(2)CMBS

$
443,568

$


$
(193,985
)
$
249,583N-Star CDO notes


34,115


(13,517
)

(14,723
)

5,875Third party CDO notes


21,750





(12,235
)

9,515REIT debt


26,760





3,820


30,580N-Star CDO equity


72,926


(40,998
)




31,928Trust preferred securities


12,264





(3,525
)

8,739Total

$
611,383

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


(1)December 31,
2009 does not include the third party available for sale securities of N-Star I, II, III and V, as these CDO
financings were unconsolidated financings prior to January 1, 2010.(2)Approximately
$212.4 million of these investments serve as collateral for the Company's only consolidated securities CDO transaction at
December 31, 2009 and the balance is financed under other borrowing facilities.


At
December 31, 2009, the maturities of the available for sale securities ranged from one year to 42 years.

22

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

7. Real Estate Debt Investments

At September 30, 2010 and December 31, 2009, the Company held the following real estate debt investments:

September 30, 2010

Carrying
Value(3)

Allocation by
Investment Type

Average
Fixed Rate

Average
Spread Over
LIBOR(2)

Average
Spread Over
Prime

Number of
InvestmentsWhole loans, floating rateLIBOR

$
1,019,023


54.2
%


%

2.89
%


%

77Whole loansfloating rateprime


22,471


1.2
%







3.32
%

3Whole loans, fixed rate


114,814


6.1
%

5.94
%







28Subordinate mortgage interests, floating rate


173,972


9.2
%




3.35
%




11Subordinate mortgage interests, fixed rate


35,238


1.9
%

7.53
%







3Mezzanine loans, floating rate


329,087


17.5
%




2.76
%




16Mezzanine loan, fixed rate


142,364


7.6
%

5.60
%







7PreferredFloat


17,563


0.9
%




4.00
%




1Other loansfloating


12,224


0.7
%




2.50
%




2Other loansfixed


12,481


0.7
%

6.44
%







3Total/Weighted average

$
1,879,237


100.0
%

6.03
%

2.93
%

3.32
%

151


(1)Approximately
$1.7 billion of these investments serve as collateral for the Company's CDO financings and the balance is financed under other
borrowing facilities or unleveraged. The Company has future funding commitments, which are subject to certain conditions that borrowers must meet to qualify for such fundings, totaling
$56.5 million related to these investments. The Company expects that a minimum of $53.0 million of these future fundings will be funded within the Company's existing CDO financings and
require no additional capital from the Company. Assuming that all loans that have future fundings meet the terms to qualify for such funding, the Company's equity requirement on future funding
requirements would be approximately $3.5 million.(2)Approximately
$300.7 million of the Company's real estate debt investments have a weighted-average LIBOR rate floor of 3.14%(3)Includes
$37.8 million in real estate debt investments, held for sale.


On
July 8, 2010, the Company consolidated the assets acquired and liabilities assumed of CSE RE 2006-A and recorded a gain of approximately
$15.4 million for the three months ended September 30, 2010, resulting from the excess of the fair market value of the net assets acquired over

23

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

7. Real Estate Debt Investments (Continued)

the
consideration paid. The following table displays the outstanding principal balance and the fair market value of the assets acquired and the liabilities assumed at acquisition (in thousands):

At ClosingPrincipal
Balance

Fair Market
ValueLoan assetsperforming

$
810,690

$
380,003Loan assetsnon-performing


243,113


15,970REO


18,259


4,201Restricted cash


77,084


77,084Derivative assets





38Receivables


2,815


2,815Total assets

$
1,151,961

$
480,111CDO notes outstanding

$
1,012,490

$
440,096Derivative liabilities





11,829Accounts payable and accrued expenses


12,528


12,528Total liabilities

$
1,025,018

$
464,453Non-controlling interest


2,083


295Net assets

$
124,860

$
15,363Management rights


NA

$
7,000




December 31, 2009(1)

Carrying
Value(2)

Allocation by
Investment Type

Average
Fixed Rate

Average
Spread Over
LIBOR

Number of
InvestmentsWhole loans, floating rate

$
1,014,028


52.3
%


%

2.70
%

52Whole loans, fixed rate


62,373


3.2


6.89





7Subordinate mortgage interests, floating rate


193,275


10.0





2.69


11Subordinate mortgage interests, fixed rate


24,722


1.3


7.25





2Mezzanine loans, floating rate


538,173


27.8





3.35


20Mezzanine loan, fixed rate(3)


90,558


4.7


8.89





7Other loansfloating


8,610


0.4





2.24


2Other loansfixed


5,354


0.3


5.53





1Total/Weighted average

$
1,937,093


100.0
%

7.90
%

2.90
%

102


(1)December 31,
2009 does not include the real estate debt investments of N-Star III, as the CDO financing was an unconsolidated financing
prior to January 1, 2010.(2)Approximately
$1.3 billion of these investments served as collateral for the Company's three commercial real estate debt CDO financings and the
balance was financed under other borrowing facilities. The Company had future funding commitments, which were subject to certain conditions


24

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

7. Real Estate Debt Investments (Continued)

that
borrowers must have met to qualify for such fundings, totaling $80.0 million related to these investments. (3)Includes
$0.6 million in real estate debt investments, held for sale.


Contractual
maturities of real estate debt investments at September 30, 2010 are as follows:

Years Ending December 31:

Initial
Maturity(1)

Maturity
Including
Extensions2010 (remainder)

$
553,794

$
350,4482011


846,558


490,9422012


725,215


482,4262013


50,945


292,6542014


146,810


476,150Thereafter


393,454


624,156Total

$
2,716,766

$
2,716,766


(1)The
year ending December 31, 2010, contains 11 whole loans with initial maturities prior to September 30, 2010, having an aggregate principal
balance of $262.0 million and two junior participations in first mortgages with initial maturities prior to September 30, 2010, having an aggregate principal balance of
$38.5 million that remain outstanding as of September 30, 2010. The aggregate carrying value of these maturity-defaulted loans is $42.2 million as of September 30, 2010.


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

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

7. Real Estate Debt Investments (Continued)

As
of September 30, 2010, the status of the Company's performing and non-performing loans was as follows:

As of September 30, 2010

As of December 31, 2009Loan
Count

Performing
Loans

Loan
Count

Non-
Performing
Loans

Total

Loan
Count

Performing
Loans

Loan
Count

Non-
Performing
Loans

TotalOriginated and Acquired Debt InvestmentsWhole loans


52

$
890,789


3

$
39,608

$
930,397


53

$
1,050,903


6

$
60,797

$
1,111,700Subordinate mortgage interests


12


213,274


2


38,462


251,736


11


195,536


2


38,462


233,998Mezzanine loans


23


541,823








541,823


27


654,831








654,831Preferred


1


17,561








17,561














Other loans


5


24,702








24,702


3


13,964








13,964Total Originated and Acquired Debt Investments


93


1,688,149


5


78,070


1,766,219


94


1,915,234


8


99,259


2,014,493Provision for Loan Losses


12


(125,781
)

3


(48,896
)

(174,677
)

7


(39,500
)

6


(37,900
)

(77,400
)Total Originated and Acquired Debt Investments, net





1,562,368





29,174


1,591,542





1,875,734





61,359


1,937,093CSE RE 2006-AWhole loans(1)


42


242,058


9


14,952


257,010














Subordinate mortgage interests(2)


1


30,685








30,685














CSE RE 2006-A


43


272,743


9


14,952


287,695














Provision for Loan Losses





























CSE RE 2006-A





272,743





14,952


287,695














Total Debt Investments


136


1,960,892


14


93,022


2,053,914


94


1,915,234


8


99,259


2,014,493Total Provision for Loan Losses


12


(125,781
)

3


(48,896
)

(174,677
)

7


(39,500
)

6


(37,900
)

(77,400
)Total Debt Investments, net




$
1,835,111




$
44,126

$
1,879,237




$
1,875,734




$
61,359

$
1,937,093


(1)CSE
RE 2006-A whole loans have an aggregate outstanding principal amount of approximately $943.8 million at September 30,
2010.(2)CSE
RE 2006-A subordinate mortgage interests have an aggregate outstanding principal amount of approximately $38.8 million at
September 30, 2010.


The Company's maximum additional exposure to loss related to the non-performing loans is approximately $44.1 million.



For the three months ended September 30, 2010, the Company recorded a $42.9 million credit loss provision relating to
seven loans, one of which was sold during the period, and included a $0.5 million credit for a loan held for sale with a fair market value in excess of its carrying amount. For the nine months
ended September 30, 2010, the Company recorded a $136.1 million credit loss provision relating to 15 loans, seven of which were sold, or held for sale, during the period, and included a
$0.8 million credit for loans sold with a fair market value in excess of their carrying amounts and a $0.5 million credit for a loan held for sale with a fair market value in excess of
its carrying amount. For the three and nine months ended September 30, 2009, the Company recorded a $24.2 million and a $62.7 million credit loss provision relating to 10 and 15
loans, respectively. As of September 30, 2010, loan loss reserves totaled $174.7 million.

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

8. Investment in and Advances to Unconsolidated Ventures

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

CS/Federal Venture

In February 2006, the Company, through a joint venture with an institutional investor, acquired a portfolio of three adjacent
class A office/flex buildings located in Colorado Springs, Colorado for $54.3 million. The joint venture financed the transaction with two non-recourse, first mortgage loans
totaling $38.0 million and the balance in cash. The loans mature on February 11, 2016 and bear fixed interest rates of 5.51% and 5.46%. The Company contributed $8.4 million for a
50% interest in the joint venture and incurred $0.3 million in costs related to its acquisition, which are capitalized to the investment account. These costs will be amortized over the useful
lives of the assets held by the joint venture. The Company accounts for its investment under the equity method of accounting. At September 30, 2010 and December 31, 2009, the Company had
an investment in CS/Federal of approximately $6.4 million and $6.9 million, respectively. The Company recognized equity in earnings of $0.1 million for each of the three months
ended September 30, 2010 and 2009 and equity in earnings of $0.3 million for each of the nine months ended September 30, 2010 and 2009, respectively.

G-NRF, LTD

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

NorthStar Real Estate Securities Opportunity Fund

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

The
Company was the manager and general partner of the Securities Fund. The Company received base management fees ranging from 1.0% to 2.0% per annum on third-party capital and was
entitled to

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

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

annual
incentive management fees ranging from 20% to 25% of the increase in the Securities Fund's net asset value in excess of an 8.0% per annum return. Base and incentive fees varied depending on the
investor capital lockup periods.

During
the second quarter 2010, a subsidiary of the Company, as general partner of the Securities Fund, notified the Securities Fund's administrator and limited partners of its
determination to liquidate and dissolve the Securities Fund. Accordingly, during the second quarter 2010, the Securities Fund began to liquidate its assets in an orderly manner. On July 7,
2010, the Securities Fund completed the sale of its remaining investments, which included the sale of the N-Star CDO IX income notes and management fees, to a wholly-owned subsidiary of
the Company for $3.3 million. The Company consolidated the assets and liabilities of the CDO at their respective fair market values as of the acquisition date. A subsidiary of the Company, as
general partner of the Securities Fund, is currently in the process of determining the Securities Fund's final net asset value and expects to complete the process of dissolving the Securities Fund
during the fourth quarter 2010. As of September 30, 2010, the Company has received approximately $2.7 million in distributions related to the final liquidation of the Securities Fund.

At
September 30, 2010 and December 31, 2009, the carrying value of the Company's investment in the Securities Fund was $0.7 million and $7.2 million,
respectively, each representing a 31.2% interest in the Securities Fund.

For
the three months ended September 30, 2010 and 2009, the Company recognized immaterial equity in losses and equity in earnings of $0.5 million, respectively. For the
nine months ended September 30, 2010 and 2009, the Company recognized equity in losses of $3.9 million and $4.9 million, respectively.

LandCap Investment

On October 5, 2007, the Company entered into a joint venture with Whitehall Street Global Real Estate Limited Partnership 2007
("Whitehall"), to form LandCap Partners, which is referred to as LandCap. LandCap was established to opportunistically invest in single family residential land through land loans, lot option
agreements and select land purchases. The joint venture is managed by a third party management group which has extensive experience in the single family housing sector. The Company and Whitehall
agreed to provide no additional new investment capital in the LandCap joint venture. At September 30, 2010 and December 31, 2009 the Company's investment in LandCap is carried at
$10.0 million and $10.1 million, respectively. For the three months ended September 30, 2010 and 2009, the Company recognized equity in loss of $0.5 million and
$0.3 million, respectively. For the nine months ended September 30, 2010 and 2009, the Company recognized equity in loss of $1.3 million and $3.2 million, respectively. At
September 30, 2010 and December 31, 2009, LandCap had investments totaling $37.9 million. In addition, the Company has advanced approximately $4.9 million under a loan
agreement to LandCap, which bears interest at a fixed rate of 12% and is included in other assets in the consolidated balance sheets.

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

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

Midwest Care Holdco TRS I LLC

In June 2009, the Company restructured its net lease relationship with one of its healthcare operators to take advantage of new REIT
legislation which now allows a taxable REIT subsidiary affiliate to become the lessee of healthcare- related properties. The restructuring resulted in one of the Company's unconsolidated affiliate
Midwest Care Holdco TRS I LLC ("Midwest") becoming the lessee of the properties and Midwest simultaneously entering into a management contract with a third party operator. The management
agreement is terminable by Midwest upon 60 days notice. This new structure allows the Company to participate in operating improvements of the underlying properties not previously available
under the prior structure. The Company owned a 49% interest in Midwest and did not control the major decisions and as a result, the Company did not consolidate the operations of Midwest. In April
2010, pursuant to the membership redemption agreement entered into in December 2009, the Company acquired the remaining 51%
membership interest in Midwest Holdings owned by Chain Bridge for $1.0 million in cash. As a result of the acquisition, the Company holds 100% of the common membership interest in Midwest and
controls all major decisions. Accordingly the operations of Midwest, which were previously accounted for under the equity method, are consolidated. The Company has estimated the fair value of assets
acquired at the date of acquisition. The Company is in the process of valuing certain intangible assets. As a result, the allocation of the purchase price is subject to refinement.

The
Company recognized equity in earnings of $2.0 million for the nine months ended September 30, 2010. The Company recognized equity in earnings related to Midwest of
$2.4 million and $5.7 million for the three and nine months ended September 30, 2009, respectively.

NorthStar Income Opportunity REIT I, Inc.

The Company has an equity investment in NorthStar Income Opportunity REIT I, Inc. ("NIOR"), a commercial finance REIT which it
sponsors, and accounts for its investment under the equity method of accounting. At September 30, 2010 and December 31, 2009, the Company had an investment in NIOR of approximately
$1.8 million and $1.7 million, respectively. The Company recognized equity in earnings of $0.1 million for the three months ended September 30, 2010 and equity in earnings
of $0.2 million for the nine months ended September 30, 2010.

The NJ Property

The Company owned a $92.5 million pari passu participation in a $498.6 million first mortgage that was secured by a
retail/entertainment complex located in East Rutherford, NJ (the "NJ Property"). During the third quarter 2010, the lending group took effective ownership of the NJ Property and the Company invested
$6.0 million in an equal partnership with a third party to acquire $34.0 million of the first mortgage. The Company accounts for its 22% interest in the investment under the equity
method of accounting, and at September 30, 2010, the carrying value of the Company's investment was approximately $75.4 million.

29

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

9. Borrowings

The following is a table of the Company's outstanding borrowings as of September 30, 2010 and December 31, 2009:

Initial
Stated
Maturity

Interest Rate

Balance at
September 30,
2010

Balance at
December 31,
2009(1)Term Loans (recourse)WA Secured Term Loan(2)

10/28/2012

LIBOR + 3.50%





246,884Euronote

10/28/2012

3 month Euribor + 3.50%





85,218LB Term Loan(3)

2/9/2011

LIBOR + 1.50%


22,199


22,199Term Loans (non-recourse)Term Asset Backed Securities Loan Facility

10/29/2014

2.64%


14,682


14,682Total Credit Facilities & Term Loans






36,881


368,983Exchangeable Senior Notes (recourse)(4)(5)

6/15/2027

7.25%


68,165


68,165Exchangeable Senior Notes ("NNN Notes") (recourse)(4)

6/15/2013

11.50%


60,750


60,750Liability to subsidiary trusts issuing preferred securities (subordinate recourse)(6)(7)Trust I

3/30/2035

8.15%


41,240


41,240Trust II

6/30/2035

7.74%


25,780


25,780Trust III

1/30/2036

7.81%


41,238


41,238Trust IV

6/30/2036

7.95%


50,100


50,100Trust V

9/30/2036

3 month LIBOR 2.70%


30,100


30,100Trust VI

12/30/2036

3 month LIBOR 2.90%


25,100


25,100Trust VII

4/30/2037

3 month LIBOR 2.50%


31,475


31,475Trust VIII

7/30/2037

3 month LIBOR 2.70%


35,100


35,100Mortgage notes payable (non-recourse)Salt Lake City

9/1/2012

5.16%


15,165


15,471EDS

10/8/2015

5.37%


46,413


46,977Executive Center(8)

1/1/2016

5.85%


51,479


51,480Green Pond

4/11/2016

5.68%


16,945


17,119Indianapolis

2/1/2017

6.06%


27,881


28,142Northstar Healthcare GE



6.93%





44,163Northstar Healthcare GE

5/1/2015

3 month LIBOR + 5.95%


58,200


Northstar HealthcarePark National

1/11/2014

5.94%


32,643


32,944Northstar HealthcareGEWLK

1/11/2017

6.99%


159,136


159,138Northstar HealthcareGETusc & Harmony

1/11/2017

7.09%


7,843


7,843Northstar HealthcareHarmony FNMA

2/1/2017

6.39%


74,196


75,001Northstar HealthcareGrove City

8/1/2015

9.25%


3,048


1,835Northstar HealthcareLancaster

8/1/2015

9.25%


6,297


2,571Northstar HealthcareMarysville

8/1/2015

9.25%


5,407


1,651Northstar HealthcareWashington

8/1/2015

9.25%


5,237


1,952Northstar HealthcareMiller Merril

6/30/2012

7.07%


116,961


118,320Northstar HealthcareARL Mob Wachovia

5/11/2017

5.89%


3,359


3,389Northstar HealthcareSt Francis

9/10/2010

LIBOR + 2.00%





11,400Aurora

7/11/2016

6.22%


32,685


32,982DSG

10/11/2016

6.17%


33,444


33,795Keene

2/1/2016

5.85%


6,615


6,693Fort Wayne

1/1/2015

6.41%


3,335


3,399Portland

6/17/2014

7.34%


4,514


4,652Milpitas

3/6/2017

5.95%


21,760


22,107Fort Mill

4/6/2017

5.63%


27,700


27,700Reading

1/1/2015

5.58%


13,710


13,905Reading

1/1/2015

6.00%


5,000


5,000Alliance

12/6/2017

6.48%


23,309


23,543Mezzanine loan payable (non-recourse)Fort Mill

4/6/2017

6.21%


2,553


2,743


30

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

9. Borrowings (Continued)

Initial
Stated
Maturity

Interest Rate

Balance at
September 30,
2010

Balance at
December 31,
2009(1)Bonds payable (non-recourse)(6)N-Star I

8/1/2038

3 month LIBOR + 1.87% (average spread)


236,039


N-Star II

6/1/2039

LIBOR + 1.43% (average spread)


230,680


N-Star III

6/1/2040

LIBOR + 0.59% (average spread)


315,594


N-Star IV

7/1/2040

LIBOR + 0.59% (average spread)


259,673


282,500N-Star V

9/5/2045

LIBOR + 0.53% (average spread)


441,488


N-Star VI

6/1/2041

3 month LIBOR + 0.52% (average spread)


273,375


279,057N-Star VII

6/22/2051

LIBOR + 0.35% (average spread)


499,200


499,200N-Star VIII

2/1/2041

LIBOR + 0.45% (average spread)


586,460


590,645N-Star IX

8/7/2052

LIBOR + 0.40% (average spread)


744,960


CapSource

1/20/2037

3 month LIBOR + 0.41% (average spread)


1,048,266


$
5,886,498

$
3,225,348


(1)December 31,
2009 does not include the bonds payable of N-Star I, II, III and V as these CDO financings were unconsolidated financings
prior to January 1, 2010.(2)On
June 30, 2010, the Company fully repaid and extinguished, at a discount to its outstanding principal amount, its secured recourse WA Secured Term
Loan.(3)The
Company has a limited recourse obligation with respect to this loan of 50% of the outstanding loan balance.(4)The
contractual amounts may differ from the carrying value on the consolidated balance sheets due to the equity component of the debt.(5)The
holders have repurchase rights which may require the Company to repurchase the notes on June 15, 2012.(6)Contractual
amounts due may differ from the carrying value on the consolidated balance sheets due to the election of the fair value option. See
Note 4.(7)The
liability to subsidiary trusts for Trusts I, II, III and IV have a fixed interest rate for the first ten years after which the interest rate will float
and reset quarterly at rates ranging from LIBOR plus 2.70% to 3.25%. The Company entered into interest rate swap agreements on Trusts V, VI, VII and VIII which fix the interest rates for
10 years at 8.16%, 8.02%, 7.60% and 8.29%, respectively.(8)The
Company has a limited recourse obligation with respect to this loan. The amount of such obligation will vary based upon the tenancy of the property. The
Company believes such obligation will not exceed $2.5 million.


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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

9. Borrowings (Continued)




Scheduled principal payment requirements on the Company's borrowings based on initial maturity dates are as follows as of September 30,
2010:

Total

Mortgage and
Mezzanine
Loans

Secured Term
Loan

Liability to
Subsidiary
Trusts Issuing
Preferred
Securities

Exchangeable
Senior Notes(1)

Bonds Payable2010

$
2,016

$
2,016

$


$


$


$
2011


33,415


11,216


22,199








2012


207,777


139,612








68,165


2013


71,908


11,158








60,750


2014


60,590


45,908


14,682








Thereafter


5,510,792


594,925





280,133





4,635,734Total

$
5,886,498

$
804,835

$
36,881

$
280,133

$
128,915

$
4,635,734


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


At
September 30, 2010, the Company was in compliance with all covenants under its borrowings.



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

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

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

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

9. Borrowings (Continued)



As of September 30, 2010 and December 31, 2009, the total carrying amount of the equity components of the exchangeable
senior notes was $4.9 million. The principal amount of the exchangeable senior notes liabilities was $128.9 million as of September 30, 2010 and December 31, 2009. The
unamortized discount of the liability components was $2.3 million and $2.9 million at September 30, 2010 and December 31, 2009, respectively. The net carrying amount of the
liability components was $126.7 million and $126.0 million at September 30, 2010 and December 31, 2009, respectively. Interest expense for the three months ended
September 30, 2010 and 2009 related to the exchangeable senior notes was $3.5 million and $3.6 million, respectively, of which $3.0 million and $3.1 million was
related to contractual interest, respectively, and $0.5 million and $0.5 million was attributable to amortization of the debt discount and deferred financing costs, respectively.
Interest expense for the nine months ended September 30, 2010 and 2009 related to the exchangeable senior notes was $10.3 million and $13.4 million, respectively, of which
$8.9 million and $11.6 million was related to contractual interest, respectively, and $1.4 million and $1.8 million was attributable to amortization of the debt discount
and deferred financing costs, respectively.



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

On
July 30, 2010, the Company closed on a $20.0 million loan with VCC Healthcare Fund, LLC. The proceeds will be used to refinance $8.0 million of loans
maturing between June 2037 and October 2038 on four of the Company's healthcare- related net leased assets. The excess proceeds from the financing will be used for working capital and general
corporate purposes. The loan has a five-year term and an interest rate of 9.25%.

10. Related Party Transactions

Advisory Fees

The Company has agreements with each of its N-Star CDO financings and its CSE RE 2006-A CDO financing to
perform certain advisory services. The Company earned total fees on these agreements of approximately $0.7 million and $1.5 million for the three and nine months ended
September 30, 2010, respectively. The Company earned total fees on these agreements of approximately $1.8 million and $5.2 million for the three and nine months ended
September 30, 2009, respectively. As of January 1, 2010, the advisory fee income related to N-Star I, N-Star II, N-Star III and N-Star V
is eliminated as a result of the consolidation of the respective CDO financings.

33

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

10. Related Party Transactions (Continued)

The
Company has an agreement with NIOR, a commercial finance REIT, to perform certain advisory services. As of September 30, 2010, the Company has earned an immaterial amount of
fees on these agreements.

The
Company has an agreement with the Securities Fund to receive base management fees ranging from 1.0% to 2.0% per year on third-party capital. For each of the nine months ended
September 30, 2010 and 2009, the Company earned $0.1 million in management fees.

Asset Management Fees

The Company entered into a management agreement in April 2006 with Wakefield Capital Management Inc. to perform certain
management services. The Company incurred zero and $0.9 million in management fees for the three months ended September 30, 2010 and 2009, respectively, and $0.5 million and
$2.6 million in management fees for the nine months ended September 30, 2010 and 2009, respectively, which are recorded in asset management fees-related parties in the
condensed consolidated statement of operations. In April 2010, in connection with the Company's acquisition of the 51% membership interest in Midwest Holdings, the Company amended the management
agreement with Wakefield Capital Management, Inc. The amended management fee will be equal to one dollar per year.

11. Equity Based Compensation

Omnibus Stock Incentive Plan

On September 14, 2004, the Board of Directors of the Company adopted the NorthStar Realty Finance Corp. 2004 Omnibus Stock
Incentive Plan (the "Stock Incentive Plan"). The Stock Incentive Plan provides for the issuance of stock- based incentive awards, including incentive stock options, non-qualified stock
options, and stock appreciation rights, shares of common stock of the Company, including restricted shares, and other equity-based awards, including OP Units which are structured as profits interests
("LTIP Units") or any combination of the foregoing. The eligible participants in the Stock Incentive Plan include directors, officers and employees of the Company and, prior to October 29,
2005, employees pursuant to the shared facilities and services agreement. An aggregate of 8,933,038 shares of common stock of the Company are currently reserved and authorized for issuance under the
Stock Incentive Plan, subject to equitable adjustment upon the occurrence of certain corporate events. As of September 30, 2010, the Company has issued an aggregate of 8,281,635 LTIP Units, net
of forfeitures of 62,073 LTIP Units. An aggregate of 3,184,149 LTIP Units were converted to commons stock and 581,669 shares of common stock were issued pursuant to the Stock Incentive Plan. Of the
8,281,635 LTIP Units, so long as the recipient continues to be an eligible recipient, 4,975,252 will vest to the individual recipient at a rate of one-twelfth of the total amount granted
as of the end of each quarter, beginning with the first quarter after the date of grant ended either January 29, April 29, July 29, or October 29 for the
three-year vesting period, 2,154,029 will vest over 16 consecutive quarters with the first quarter being January 29, 2008, 701,058 will cliff vest on December 31, 2010, and
170,801 are subject to no vesting requirements. The Company accelerated the vesting of 280,495 LTIP Units as

34

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

11. Equity Based Compensation (Continued)

part
of the termination agreements provided to employees. In addition, the LTIP Unit holders are entitled to dividends on the entire grant beginning on the date of the grant.

The
Company has recognized compensation expense of $3.2 million and $4.9 million for the three months ended September 30, 2010 and 2009, respectively, and
$10.1 million and $14.8 million for the nine months ended September 30, 2010 and 2009, respectively. As of September 30, 2010, there were approximately 2,322,644 unvested
LTIP Units and no LTIP Units were forfeited during the period. The related compensation expense to be recognized over the remaining vesting period of the Omnibus Incentive Plan LTIP grants is
$10.0 million, provided there are no forfeitures.

The
status of all of the LTIP grants as of September 30, 2010 and December 31, 2009 is as follows:

September 30, 2010

December 31, 2009LTIP
Grants

Weighted
Average
Grant Price

LTIP
Grants

Weighted
Average
Grant PriceBalance at beginning of year(1)


7,323

$
9.85


8,067

$
9.86Granted











Converted to common stock


(2,107
)

12.58


(744
)

9.83Forfeited











Ending balance(2)


5,216

$
8.75


7,323

$
9.85


(1)Reflects
balance at January 1, 2010 and January 1, 2009 for the periods ended September 30, 2010 and December 31, 2009,
respectively.(2)Reflects
balance at September 30, 2010 and December 31, 2009, respectively.


Incentive Compensation Plan

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

The
incentive pool is expected to be divided into the following three separate incentive compensation components: (1) an annual cash bonus, tied to annual performance of the
Company and paid after year end at or around completion of the year end audit; (2) a deferred cash bonus, determined based on the same year's performance, but paid 50% following the close of
each of the first and second years after such incentive pool is determined, subject to the participant's continued employment through each payment date; and (3) a long-term
incentive, paid at the end of a three-year period based on the Company's achievement of cumulative performance goals for the three-year

35

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

11. Equity Based Compensation (Continued)

period,
subject to the participant's continued employment through the payment date. Performance goals for each component will be set by the Committee initially upon the adoption of the Plan and at the
beginning of each subsequent calendar year for each new cycle. The goals will generally be divided into ranges of performance, each of which will correspond to a pay-out level equal to a
percentage of a participant's pool allocation for such component.

The
annual bonus component for 2010 will be calculated based on AFFO and liquidity targets (weighted 50% and 25%, respectively) with the remaining 25% of the 2010 annual bonus determined
in the Committee's discretion. Additionally, the Committee has also allocated $2.0 million under the Plan for 2010 discretionary cash bonuses. The deferred bonus component will be calculated
based on the same performance measures as the annual bonus, but paid as described above. For the long-term incentive component, each participant will initially be granted a number of
restricted stock units determined by dividing the value of the participant's pool allocation for this component by the 20-day average closing price of the Company's common stock at the end
of the first year of the grant cycle (such amount, the "Initial Long-Term Allocation"). Upon the conclusion of the three-year performance period, the participant will receive a
payout equal to the value of one share of common stock at the time of such payout, with respect to a share of common stock during the three-year performance period, for each unit actually
earned based on the Company's achievement of cumulative AFFO and/or a stock price goal during the performance period (the "Long-Term Payout"). The Long-Term Payout will be made
in the form of shares of common stock to the extent available under the Company's equity compensation plans or, if all or a portion of such shares are not available, in cash; provided, that the amount
of cash paid to any participant with respect to the 2010 long-term incentive component shall not exceed such participant's Initial Long-Term Allocation.

The
Company recorded $0.6 million and $1.5 million in equity-based compensation expense related to the long term incentive component of the Plan for the three and nine
months ended September 30, 2010, respectively.

12. Stockholders' Equity

Dividend Reinvestment and Stock Purchase Plan

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

During
the three and nine months ended September 30, 2010, the Company issued a total of 24,053 and 72,534 common shares, respectively, pursuant to the Plan for a gross sales
price of approximately $0.1 million and $0.3 million, respectively. During the three and nine months ended

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

12. Stockholders' Equity (Continued)

September 30,
2009, the Company issued a total of 22,104 and 54,135 common shares, respectively, pursuant to the Plan for a gross sales price each of approximately $0.1 million.

Equity Distribution Agreements

In May 2009, the Company entered into an equity distribution agreement with JMP Securities LLC ("JMP"). In accordance with the
terms of the agreement, the Company may offer and sell up to 10,000,000 shares of its common stock from time to time through JMP. JMP will receive a commission from the Company of up to 2.5% of the
gross sales price of all shares sold through it under the equity distribution agreement.

For
the three and nine months ended September 30, 2010, the Company did not sell any common shares pursuant to its equity distribution agreement with JMP. For the three and nine
months ended September 30, 2009, the Company sold 5,291,186 and 6,542,814 common shares, respectively, and received $18.7 million and $22.7 million, respectively, of cash proceeds
pursuant to its equity distribution agreement with JMP.

Dividends

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

On
April 20, 2010, the Company declared a dividend of $0.10 per share of common stock, $0.54688 per share of Series A preferred stock and $0.51563 per share of
Series B preferred stock. The dividends were paid on May 14, 2010, to the stockholders of record as of the close of business on May 4, 2010.

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

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

12. Stockholders' Equity (Continued)

Earnings Per Share

Earnings per share for the three and nine months ended September 30, 2010 and 2009 is computed as follows (in thousands):

Three Months Ended
September 30,
2010

Three Months Ended
September 30,
2009

Nine Months Ended
September 30,
2010

Nine Months Ended
September 30,
2009Numerator (Income)Basic EarningsNet income/(loss) attributable to NorthStar Realty Finance Corp. common stockholders

$
(144,116
)
$
(66,465
)
$
(137,055
)
$
13,917Effect of dilutive securities:Income/(loss) allocated to non-controlling interest


(9,816
)

(7,094
)

(9,798
)

2,821Dilutive net income/(loss) available to stockholders

$
(153,932
)
$
(73,559
)
$
(146,853
)
$
16,738Basic Earnings:Shares available to common stockholders


77,140


69,896


76,212


67,446Effect of dilutive securities:OP/LTIP units


5,224


7,460


6,076


7,460Dilutive Shares


82,364


77,356


82,287


74,906Net income/(loss) per share attributable to NorthStar Realty Finance Corp. common stockholdersBasic/Diluted

$
(1.87
)
$
(0.95
)
$
(1.80
)
$
0.21


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

13. Non-controlling Interest

Operating Partnership

Non-controlling interest represents the aggregate limited partnership interests or OP Units in the Operating Partnership
held by limited partners (the "Unit Holders"). Income allocated to the non-controlling interest is based on the Unit Holders ownership percentage of the Operating Partnership. The
ownership percentage is determined by dividing the numbers of OP Units held by the Unit Holders by the total number of dilutive shares. The issuance of additional shares of beneficial

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

13. Non-controlling Interest (Continued)

interest
(the "Common Shares" or "Share") or OP Units changes the percentage ownership of both the Unit Holders and the Company. Since a unit is generally redeemable for cash or Shares at the option
of the Company, it is deemed to be equivalent to a Share. Therefore, such transactions are treated as capital transactions and result in an allocation between shareholders' equity and
non-controlling interest in the accompanying consolidated balance sheet to account for the change in the ownership of the underlying equity in the Operating Partnership. As of
September 30, 2010 and December 31, 2009, non-controlling interest related to the aggregate limited partnership units of 5,216,021 and 7,323,310, represented a 6.33% and
8.91% interest in the Operating Partnership, respectively. Income/(loss) allocated to the operating partnership non-controlling interest for the three months ended September 30,
2010 and 2009 was a loss of $9.8 million and a loss of $7.1 million, respectively. Income/(loss) allocated to the operating partnership non-controlling interest for the nine
months ended September 30, 2010 and 2009 was a loss of $9.8 million and income of $2.8 million, respectively.

Joint Ventures

In May 2006, the Company formed NRF Healthcare, LLC with Chain Bridge. On July 9, 2008, NRF Healthcare, LLC sold a
$100 million convertible preferred membership interest to Inland American Real Estate Trust, Inc. In December 2009, the Company completed a membership interest redemption with NRF
Healthcare, LLC, NRFC Healthcare Holding Company, LLC, NorthStar Healthcare Investors, Inc., Chain Bridge, Wakefield Capital Management, Midwest Care Holdings LLC, or
Midwest Holdings, and certain individuals, pursuant to which NRF Healthcare, LLC redeemed the 5.4% membership interest of Chain Bridge and its affiliates in NRF Healthcare, LLC for
$2.0 million and its membership interest in certain assets. As a result of the redemption, the Company holds 100% of the equity interests in NRF Healthcare, LLC, other than the
convertible preferred membership interests held by Inland. Accordingly, NRF Healthcare, LLC's financial statements are consolidated into the Company's consolidated financial statements and
Inland American's capital is treated as a non-controlling interest. Income allocated to the non-controlling interests for the three months ended September 30, 2010 and
2009 was income of $2.6 million and $2.6 million, respectively. Income allocated to the
non-controlling interests for the nine months ended September 30, 2010 and 2009 was income of $7.9 million and $7.0 million, respectively.

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

14. Risk Management and Derivative Activities

Derivatives

The Company uses derivatives primarily to manage interest rate risk exposure. These derivatives are typically in the form of interest
rate swap agreements and the primary objective is to minimize interest rate risks associated with the Company's investment and financing activities. The counterparties of these arrangements are major
financial institutions with which the Company may also have other financial relationships. The Company is exposed to credit risk in the event of non-performance by these

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

14. Risk Management and Derivative Activities (Continued)

counterparties
and it monitors their financial condition; however, the Company currently does not anticipate that any of the counterparties will fail to meet their obligations because of their high
credit ratings and financial support from the U.S. Government. The objective in using interest rate derivatives is to add stability to interest expense and to manage exposure to interest rate
movements.

The
effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive Income and is
subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three and nine months ended September 30, 2010 and 2009, such
derivatives were used to hedge the variable cash flows associated with certain variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized
directly in earnings. During the three and nine months ended September 30, 2010 and 2009, the Company recorded immaterial amounts of hedge ineffectiveness in earnings.

Amounts
reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company's
variable-rate debt. During the remainder of 2010, the Company estimates that an additional $2.8 million will be reclassified as an increase to interest expense.

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

Number of
Instruments

Notional
Amount

Fair Value
Net Asset/
(Liability)

Range of
Fixed LIBOR

Range of MaturityInterest rate swapsAs of December 31, 2009


10

$
90,749

$
(7,691
)
4.18% - 5.08%

March 2010 - August 2018


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

Derivatives
not designated as hedges are not speculative and are used to manage the Company's exposure to interest rate movements and other identified risks but do not meet strict hedge
accounting requirements. For the three months ended September 30, 2010 and 2009, the Company recorded, in earnings, a mark-to-market unrealized loss of
$28.2 million and an unrealized loss of $22.4 million, respectively, for the non-qualifying interest rate swaps. For the three months ended September 30, 2010 and
2009, the Company recorded a $1.9 million and a $1.4 million reclassification from accumulated other comprehensive income for the non-qualifying interest rate swaps,
respectively. For the nine months ended September 30, 2010 and 2009, the Company recorded, in earnings, a mark-to-market unrealized loss of $70.4 million and an
unrealized loss of $3.6 million, respectively, for the

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

14. Risk Management and Derivative Activities (Continued)

non-qualifying
interest rate swaps. For the nine months ended September 30, 2010 and 2009, the Company recorded a $4.7 million and a $4.2 million reclassification from
accumulated other comprehensive income for the non-qualifying interest rate swaps, respectively.

The
following tables summarize the Company's derivative financial instruments that were not designated as hedges in qualifying hedging relationships as of September 30, 2010 and
December 31, 2009:

Number of
Instruments

Notional
Amount

Fair Value
Net Asset/
(Liability)

Range of
Fixed LIBOR

Range of MaturityInterest rate swapsAs of September 30, 2010


64

$
2,709,565

$
(256,923
)
0.36% - 7.00%

December 2010 - October 2019As of December 31, 2009(1)


22

$
897,335

$
(59,353
)
0.34% - 5.63%

May 2010 - June 2018


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


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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

14. Risk Management and Derivative Activities (Continued)




The following table presents the fair value of the Company's derivative financial instruments as well as their classification on its balance sheet
as of September 30, 2010 and December 31, 2009:

Tabular Disclosure of Fair Values of Derivative Instruments

Asset Derivatives

Liability DerivativesAs of
September 30,
2010

As of
December 31,
2009(1)

As of
September 30,
2010

As of
December 31,
2009(1)Balance
Sheet
Location

Fair
Value

Balance
Sheet
Location

Fair
Value

Balance
Sheet
Location

Fair
Value

Balance
Sheet
Location

Fair
ValueDerivatives designated as hedging instrumentsInterest rate products

Derivative

$


Derivative

$


Derivative

$


Derivative

$
(7,691
)instrument,




instrument,




liability,




liability,at fair value




at fair value




at fair value




at fair valueTotal derivatives designated as hedging instruments



$




$




$




$
(7,691
)Derivatives not designated as hedging instrumentsInterest rate products

Derivative

$
29

Derivative

$


Derivative

$
(256,952
)
Derivative

$
(59,353
)instrument,




instrument,




liability,




liability,at fair value




at fair value




at fair value




at fair valueTotal derivatives not designated as hedging instruments



$
29



$




$
(256,952
)


$
(59,353
)


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


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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

14. Risk Management and Derivative Activities (Continued)

The following tables present the effect of the Company's derivative financial instruments on its statement of operations for the three and nine months ended September 30, 2010 and
2009:

Derivatives in Cash Flow Hedging Relationships

Location of Gain/(loss)
recognized in income

Three
Months
Ended
September 30,
2010

Three
Months
Ended
September 30,
2009(1)

Nine
Months
Ended
September 30,
2010

Nine
Months
Ended
September 30,
2009(1)Interest rate productsAmount of gain or (loss) in OCI on derivative (effective portion)

n/a

$


$
(3,574
)
$
(3,448
)
$
(321
)Amount of gain or (loss) reclassified from accumulated OCI into income (effective portion)

Interest Expense

$
365

$
7

$
37

$
21


(1)The
three and nine months ended September 30, 2009 does not include gains or loses and amounts reclassified from accumulated OCI into income on the
derivative instruments of N-Star I, II, III and V, as these CDO financings were unconsolidated financings prior to January 1, 2010.


Derivatives Not Designated as Hedging Instruments

Location of Gain/(loss)
recognized in income

Three
Months
Ended
September 30,
2010

Three
Months
Ended
September 30,
2009(1)

Nine
Months
Ended
September 30,
2010

Nine
Months
Ended
September 30,
2009(1)Interest rate productsAmount of gain or (loss) recognized in income

Unrealized gain (loss) on investment and other

$
(55,989
)
$
(27,342
)
$
(141,848
)
$
(16,957
)Amount of gain or (loss) reclassified from accumulated OCI into income

Unrealized gain (loss) on investment and other

$
(1,912
)
$
(1,404
)
$
(4,732
)
$
(4,213
)


(1)The
three and nine months ended September 30, 2009 does not include gains or loses and amounts reclassified from accumulated OCI into income on the
derivative instruments of N-Star I, II, III and V, as these CDO financings were unconsolidated financings prior to January 1, 2010.


At September 30, 2010, the Company's counterparties hold approximately $33.5 million of cash margin as collateral against its swap
contracts.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

14. Risk Management and Derivative Activities (Continued)

Credit Risk Concentrations

Concentrations of credit risk arise when a number of borrowers, tenants, operators or issuers related to the Company's investments are
engaged in similar business activities or located in the same geographic location to be similarly affected by changes in economic conditions. The Company monitors its portfolio to identify potential
concentrations of credit risks. The Company has no one borrower, tenant or operator that generates 10% or more of its total revenue. However, approximately 58% and 51% of the Company's rental and
escalation revenue for the three and nine months ended September 30, 2010, respectively, is generated from one tenants and one operator in the Company's healthcare net lease portfolio. The
Company believes the remainder of its net lease portfolio is reasonably well diversified and does not contain any unusual concentration of credit risks.

15. Segment Reporting

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

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

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

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

15. Segment Reporting (Continued)

The
following table summarizes segment reporting for the three and nine months ended September 30, 2010 and 2009:

Real Estate
Debt

Operating
Real Estate

Real Estate
Securities(1)

Healthcare
Real Estate
Joint Venture

Investments
and
Other(2)

Consolidated
TotalTotal revenues for the three months endedSeptember 30, 2010

$
39,467

$
8,994

$
51,231

$
25,324

$
1,777

$
126,793September 30, 2009


23,662


10,451


17,030


17,265


(2,040
)

66,367Consolidated net loss for the three months endedSeptember 30, 2010


(11,260
)

(2,546
)

(90,400
)

481


(43,123
)

(146,848
)September 30, 2009


(104,236
)

5,705


61,374


1,679


(30,295
)

(65,773
)Consolidated net loss after non-controlling interests and before preferred dividend for the three months endedSeptember 30, 2010


(10,416
)

(2,364
)

(83,065
)

(2,144
)

(40,896
)

(138,885
)September 30, 2009


(94,178
)

5,143


55,744


(878
)

(27,065
)

(61,234
)Total revenues for the nine months endedSeptember 30, 2010


85,080


27,179


126,825


63,014


2,241


304,339September 30, 2009


77,740


31,275


48,717


46,725


(5,613
)

198,844Consolidated net (loss)/income for the nine months endedSeptember 30, 2010


(44,551
)

(3,590
)

(8,512
)

738


(66,464
)

(122,379
)September 30, 2009


(13,788
)

(3,772
)

131,952


(6,772
)

(68,193
)

39,427Consolidated net (loss)/income after non-controlling interests and before preferred dividend for the nine months endedSeptember 30, 2010


(40,836
)

(3,293
)

(9,537
)

(7,146
)

(60,550
)

(121,361
)September 30, 2009


(13,622
)

(3,309
)

118,923


(13,767
)

(58,614
)

29,611Total assets as of September 30, 2010

$
2,338,473

$
424,941

$
1,614,487

$
636,779

$
144,665

$
5,159,345


(1)Total
revenues for the three months ended September 30, 2010 and 2009 excludes $156.0 million and $59.1 million in net realized and
unrealized losses, respectively. Total revenues for the nine


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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

15. Segment Reporting (Continued)

months
ended September 30, 2010 and 2009 excludes $81.3 million in net realized and unrealized losses and $91.1 million in net realized and unrealized gains, respectively. (2)Corporate
Investments and Other includes corporate level investments, corporate level interest income, interest expense and unallocated general &
administrative expenses.


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

A summary of non-cash investing and financing activities for the nine months ended September 30, 2010 and 2009 is presented below:

2010

2009Assets of CSE RE 2006-A CDO


(480,312
)

Liabilities of CSE RE 2006-A CDO


464,656


Assets of N-Star CDO financings


(1,143,649
)

Liabilities of N-Star CDO financings


798,058


Non-controlling interest in N-Star CDO financing


3,511


Distribution of operating real estate to non-controlling interest


9,525


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


(4,734
)

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


(1,815
)

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


35,287


Elimination of available for sale securities


1,342


Elimination of bonds payable


32,286


Deed in lieu of foreclosure of operating real estate


(74,389
)

Contribution of book value of assets to unconsolidated joint venture





2,668Writ-off of operating real estate, tenant improvement, deferred financing cost and below market lease due to foreclosure





51,732Reduction of mortgage notes payable due to foreclosure





(52,067
)Reduction of restricted cash due to foreclosure





68Stock Dividend





10,646


17. Fair Value of Financial Instruments

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

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

17. Fair Value of Financial Instruments (Continued)

As
of September 30, 2010 and December 31, 2009, cash equivalents, accounts receivable and accounts payable, reasonably approximate their fair values due to the
short-term maturities of these items. The available for sale securities are carried on the balance sheet at their estimated fair value.

For
the real estate debt investments the fair value of the fixed and floating rate investments was approximated comparing yields at which the investments are held to estimated yields at
which loans originated with similar credit risks or market yields at which a third party might require to purchase the investment by discounting future cash flows at such market yields. Prices were
calculated assuming fully extended maturities regardless of if structural or economic tests required to achieve such extended maturities. At September 30, 2010, the fair market value was
$1.7 billion with a gross principal amount of $2.7 billion. Of the $2.7 billion gross principal amount, approximately $0.9 billion of gross principal amount in RE
2006-A was recorded at a fair market value of approximately $287.7 million at September 30, 2010. At December 31, 2009, the fair market value was $1.7 billion
with a gross principal amount of $2.0 billion.

For
the exchangeable senior notes, the Company uses available market information, which includes quoted market prices or recent transactions, if available to estimate their fair value.
At September 30, 2010, the fair market value of the 7.25% exchangeable senior notes was $61.8 million, with a carrying amount of $67.3 million and the fair market value of the
11.50% exchangeable senior notes was $56.9 million with a carrying amount of $59.3 million. At December 31, 2009, the fair market value of the 7.25% exchangeable senior notes was
$34.8 million with a carrying amount of $67.0 million and the fair market value of the 11.50% exchangeable senior notes was $28.1 million with a carrying amount of
$59.0 million.

For
fixed rate mortgage loans payable, the Company uses rates currently available to them with similar terms and remaining maturities to estimate their fair value. At
September 30, 2010, the fair market value was $820.7 million with a carrying amount of $804.8 million. At December 31, 2009, the fair market value was $800.1 million
with a carrying amount of $795.9 million.

Disclosure
about fair value of financial instruments is based on pertinent information available to management as of September 30, 2010 and December 31, 2009. Although
management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that
date and current estimates of fair value may differ significantly from the amounts presented herein.

18. Commitments and Contingencies

Chatsworth Property

One of the Company's net lease investments was comprised of three office buildings totaling 257,000 square feet located in Chatsworth,
CA and was 100% leased to Washington Mutual Bank, FA ("WaMu"). NRFC NNN Holdings, Inc. ("NRFC NNN") and NRFC Sub Investor IV, LLC ("NRFC Sub IV"), which are subsidiaries of the Company,
are defendants in a lawsuit (the "Lawsuit") filed by GECCMC 2005-CI Plummer Office Limited Partnership (the "Lender") in the Superior Court of the State of California, County of Los
Angeles, relating to a loan on two properties previously owned by

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

18. Commitments and Contingencies (Continued)

NRFC
Sub IV that were 100% leased (the "Lease") to Washington Mutual Bank, FA ("WaMu"). The Lawsuit alleges, among other things, that the loan provided by Lender to NRFC Sub IV became a recourse
obligation of NRFC NNN due to an alleged termination of the Lease. The judge presiding over the Lawsuit has announced her intention to grant the Lender's motion for summary judgment and, accordingly,
is expected to enter a judgment against NRFC NNN in the amount of approximately $42 million plus accrued interest of approximately $2.2 million (the "Judgment"). NRFC NNN intends to
vigorously pursue an appeal of the decision.

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

In
connection with filing for an appeal, pursuant to California law NRFC NNN is required to post a bond in an amount equal to one and a half times the amount of the Judgment (the
"Bond"). Accordingly, the Company has entered into a standard General Agreement of Indemnity with an issuer of surety bonds (the "Surety Agreement"), which could require the Company to post collateral
equal to the amount of the Bond. As part of the Surety Agreement, in connection with the expected issuance of the Bond, the Company has agreed to post cash collateral equal to thirty-eight percent of
the amount of the Bond, which is expected to be approximately $25 million.

19. Pro Forma Financial Information

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

The
pro forma financial information set forth below is based upon the Company's historical condensed consolidated statements of operations for the three months ended September 30,
2009, and the nine months ended September 30, 2010 and 2009, adjusted to give effect of this transaction as of January 1, 2009. The acquisition of Midwest Holdings occurred on
April 1, 2010. The pro forma information set forth below does not reflect the three months ended September 30, 2010, as the

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

19. Pro Forma Financial Information (Continued)

operations
of Midwest Holdings for the three months ended September 30, 2010 are included in the Company's consolidated financial statements.

Three Months
Ended
September 30,
2009

Nine months
Ended
September 30,
2010

Nine months
Ended
September 30,
2009Pro Forma revenues

$
74,232

$
334,304

$
220,028Pro Forma net income


(66,576
)

(108,869
)
$
15,543Pro Forma net income per common sharebasis/diluted

$
(0.95
)
$
(1.42
)
$
0.25


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

20. Subsequent Events

Dividends

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

NIOR

On October 18, 2010, NIOR, an unconsolidated entity in which the Company has an equity investment, completed a merger with
NorthStar Real Estate Income Trust, Inc. ("NSREIT"), a consolidated subsidiary of the Company and each a commercial finance REIT sponsored by the Company, with NSREIT becoming the surviving
entity. As a result of the merger, the Company will deconsolidate NSREIT and will have an equity investment in the surviving entity of approximately $2.1 million as of October 18, 2010.
As of October 18, 2010, the Company will account for its investment in NSREIT under the equity method of accounting.

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

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

Forward-Looking Statements

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

Factors that could have a material adverse effect on our operations and future prospects are set forth in "Risk Factors" in our Annual Report on
Form 10-K for the year ended December 31, 2009, and those described from time to time in our future reports filed with the Securities and Exchange Commission. The factors set
forth in the Risk Factors section could cause our actual results to differ significantly from those contained in any forward-looking statement contained in this report.

Introduction

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

We
primarily derive income on a recurring basis through the difference between the interest and rental income we are able to generate from our investments, and the cost at which we are
able to obtain financing for our investments. In order to protect this difference, or "spread", we seek to match-fund our investments using secured sources of long term financing such as
CDO financings, mortgage financings and long-term unsecured subordinate debt. Match-funding means that we try to obtain debt with maturities equal to our asset maturities, and borrow funds
at interest rate benchmarks similar to our assets. Match-funding results in minimal impact to spread when interest rates are rising and falling and minimizes refinancing risk since our asset
maturities match those of our debt. We may also acquire investments which generate attractive returns with no long-term financing. Realized gains have more recently been a significant
source of income and have been primarily derived by selling securities at premiums to our carrying values and by repurchasing our issued debt at discounts to contractual face amounts. Both of these
activities are opportunistic in nature and are very dependent on market conditions; therefore it is difficult to predict whether realized gains may be a significant part of income in the future.

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Profitability and Performance Metrics

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



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

Corporate
expense management influences the profitability of our business. We must balance making appropriate investments in our infrastructure and employees with the recognition that
our accounting, finance, legal and risk management infrastructure does not directly generate quantifiable revenues for us. We frequently refer to general and administrative expenses, excluding
stock-based compensation expense, divided by total revenues as a measure of our efficiency in managing expenses.

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

Outlook and Recent Trends

U.S. macroeconomic and real estate sector conditions have remained poor since 2007, when the subprime residential lending and single
family housing market collapse quickly spread broadly into the capital markets. The resulting virtual shutdown of the credit and equity markets pushed the U.S. economy into recession, and the
unemployment rate increased from a low of 4.4% in 2007 to 9.6% at September 30, 2010. Several major financial institutions failed or had to be rescued in 2008, 140 banks failed in 2009 and 127
banks have failed through September 30, 2010. The U.S. Government responded in early 2009 to deteriorating conditions by creating several programs such as the Troubled Asset Relief Program and
the Public-Private Investment Program (TARP and TALF, respectively), designed to create demand for financial instruments and to re-equitize weaker banks. Congress also passed in early 2009
a $787 billion economic stimulus package, and the U.S. Federal Reserve lowered the Fed Funds target rate from over 5% in 2007 to 0-0.25% in 2009 (where it remains as of September 30,
2010) and introduced massive amounts of cash liquidity into the banking system.

The
corporate bond, consumer asset-backed debt and equity markets began to recover during 2009 and continued to improve during 2010, although macroeconomic statistics remained weak and
the commercial mortgage-backed markets are beginning to recover. Other traditional commercial real estate lenders such as banks and life companies severely curtailed their lending between
mid-2007 and 2009, resulting in a severe shortage of debt capital for real estate investors and those needing to refinance maturing loans. Several large commercial banks have begun to
rebuild their commercial mortgage lending operations, but new loan volume remains low, and new loans are being offered at leverage levels much lower than were available prior to the recession. The
lack of available credit for commercial real estate has generally depressed values and resulted in increasing loan defaults and restructurings throughout the industry. Furthermore, poor economic
conditions have generally resulted

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in
declining cash flow from commercial real estate, further depressing values and increasing the difficulty in finding new capital.

During
2009 the TALF program began providing 85% three and five-year non-recourse financing for the highest rated commercial mortgage-backed securities (CMBS) in
order to decrease credit spreads and with the expectation that the subsidized financing would eventually enable the CMBS markets to begin functioning. The program for legacy CMBS securities ended
June 30, 2010, and the program for new issue CMBS securities, which was used for only one transaction, were modestly successful in reducing yields on the highest rated securities. During the
first nine months of 2010, the first multi-borrower CMBS securitizations since mid-2008 were completed, but the underlying first mortgage collateral represents very low leverage levels
relative to loans underwritten before the financial crisis. The new issue market will have to grow dramatically and investors will have to become more risk tolerant in order to meet the needs of a
majority of borrowers who have pre-existing loans on their properties.

Despite
these conditions, REITs have collectively raised nearly $52 billion of debt and equity capital, and the Morgan Stanley REIT Index returned approximately 28.6% for 2009 and
approximately 19.6% year-to-date through September 30, 2010. In addition, three newly-formed REITs with a real estate debt focus raised approximately $1.5 billion
of capital in 2009, but no new commercial mortgage REITs have gone public during the first nine months of 2010. Notwithstanding the ability of the public REIT market to raise capital, this market is
very small relative to the size of the estimated $1.5 trillion commercial real estate finance market. More recently, U.S. economic conditions appear to be improving (based on GDP growth), however, the
unemployment rate remains high indicating a low rate of business expansion, which drives commercial real estate cash flows. Commercial real estate tends to lag economic recoveries and we expect
commercial real estate fundamentals to continue to be difficult into 2011.



Virtually all commercial real estate property types have been adversely impacted by this prolonged economic recession and liquidity
crisis, including hotel, retail, office, industrial and multi-family properties. Land, condominium and other commercial property types have also been severely impacted. As a result, cash flows and
values associated with properties serving as collateral for our loans are generally weaker than expected when we originated the loans. Business and retailer failures increased during 2009 and into
2010 and are expected to negatively impact occupancy rates in the future. Our credit loss provisioning levels for 2009 and the first nine months of 2010 were higher than in the past due to the impact
of these conditions. The degree to which commercial real estate values are impacted by weaker economic conditions and the level of credit losses in our asset base will be determined primarily by the
length that such conditions persist, the scarcity and cost of new debt capital, the absolute level of one-month LIBOR and the severity of the economic contraction, among other things.

Most
of our real estate loans bear interest rates based on a spread to one-month LIBOR, a floating rate index based on rates that banks charge each other to borrow.
One-month LIBOR as of September 30, 2010, is 0.26%, well below its 2.93% average over the past five years. Lower LIBOR means lower debt service costs for our borrowers which have
partially offset decreasing cash flows caused by the economic recession, and extended the life of interest reserves for those loans that require interest reserves to service debt while the collateral
properties are being repositioned by our borrowers. Lower interest rates also theoretically support real estate valuations because a lower discount rate is applied to underlying future real estate
cash flow assumptions in valuing a property, although the availability and cost of debt capital appears to have a much more significant impact on property values. Currently, a lack of readily
available financing, economic uncertainty and higher returning alternative investment opportunities have increased investor return expectations resulting in much higher risk premiums and, despite the
lower interest rate, lower valuations for commercial real estate properties.

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The
conditions are adversely impacting the performance of our real estate loans and securities and the related collateral properties. The deep economic recession combined with a crippled banking
sector has resulted in weakening cash flows from collateral properties and extreme difficulties in obtaining repayments at maturity.

For
existing loans, when credit spreads widen, which was the case in 2008 and early 2009, the economic value of existing loans decreases. If a lender were to originate a similar loan
today, such loan would carry a greater credit spread than the existing loan. Even though a loan may be performing in accordance with its loan agreement and the underlying collateral has not changed,
the economic value of the loan may be negatively impacted by the incremental interest foregone from the widened credit spread. Accordingly, when a lender wishes to sell or finance the loan, the
reduced value of the loan will impact the total proceeds that the lender will receive.

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

Real
estate securities values are also influenced by credit ratings assigned to the securities by accredited rating agencies. In 2009, the rating agencies changed their ratings
methodologies for all securitized asset classes, including commercial real estate, in light of questionable ratings previously assigned to residential mortgage portfolios. Combined with a poor
economic outlook, their reviews have resulted in, large amounts of ratings downgrade actions for CMBS in 2009 and to date in 2010, negatively impacting market values of CMBS and in some cases
negatively impacting the CDO financing structures used by us and others to leverage these investments.

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



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

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The relative lack of supply and high demand for capital is allowing investors with cash to make investments with very attractive returns compared to historical
levels. For this reason, we are working to raise equity capital through alternative channels, especially in the nonlisted REIT market. Our registration statement for NorthStar Real Estate Income
Trust, Inc. ("NSREIT"), a commercial finance REIT that is managed by us and will not be listed on a major exchange, has been declared effective by the SEC and we built NRF Capital Markets, our
wholesale broker dealer, to distribute the equity for this new REIT and other non-listed REITs sponsored by us. We also raised approximately $35 million of equity under an SEC
Regulation D exemption for NorthStar Income Opportunity REIT I, Inc. ("NIOR"), a commercial finance REIT also managed by us. In October 2010, the stockholders of NIOR approved a merger
of NIOR into NSREIT. We expect to use our broad commercial real estate investment and management platform to operate these companies and to earn management fees in return for our services, and the
non-traded REIT efforts reflect our strategy of accessing alternative sources of equity capital, leveraging our existing platform to generate fee revenues and to become less reliant on the
public markets to grow our business.



On June 30, 2010, we fully repaid and extinguished, at a discount to the outstanding principal amount, our WA Secured Term Loan,
which was fully recourse to us, having an
outstanding principal balance of approximately $304.0 million and secured by assets having an aggregate unpaid principal balance of approximately $448.6 at the time of the payoff. We paid
approximately $208.0 million of cash and granted the lender a 40% participation interest in the principal proceeds of the German Loan. Additionally, the lender agreed to use commercially
reasonable efforts to provide us and/or our affiliates with a new credit facility which is expected to have a minimum availability of $200.0 million.

As
of September 30, 2010, approximately $4.1 billion of our collateralized debt obligations permit reinvestment of capital proceeds which means when the underlying assets
repay we are able to reinvest the proceeds in new assets without having to repay the liabilities. Approximately $516.8 million of our funded loan commitments have their initial maturity date
during the remainder of 2010; however, most of the loans contain extension options of at least one year. We also expect that a majority of the $341.4 million of loans having final maturities
during the remainder of 2010 will have their maturities extended beyond 2010 with the expectation that future periods will have more attractive economic conditions and cheaper debt capital. It is
therefore difficult to estimate how much capital, if any, will be generated in our CDO financings from loan repayments during the remainder of 2010.

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

We
believe that liquidity will eventually return more broadly to the commercial real estate finance markets and corporate debt capital is currently available to the stronger equity
REITs. Three single-borrower CMBS transactions were completed in the fourth quarter of 2009 and, more importantly, approximately $7.2 billion in multi-borrower CMBS transactions have been
completed year-to-date

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through
October 31, 2010, the first since mid-2008. Other sources of capital could include term loans from financial institutions and life insurance companies, more restrictive
commercial real estate finance structures, which may not permit reinvestment from asset repayments, and financing provided by motivated sellers of assets. We also believe that the CMBS markets will
eventually heal and once again become an important source of secured, non-recourse debt capital for commercial real estate.

Risk Management

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

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

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

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

On
July 8, 2010, we acquired, as part of the CSE RE 2006-A CDO acquisition, commercial real estate loans having an aggregate $1.1 billion outstanding principal
balance. The loans were recorded as

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of
July 8, 2010, at their estimated $396.0 million fair market value. As of September 30, 2010, the CSE RE 2006-A loans had an aggregate
$943.8 million outstanding principal balance and an aggregate $287.7 million carrying value, which includes approximately $48.6 million of loans purchased or acquired and
approximately $160.9 million of repayments in the third quarter subsequent to the acquisition. The $662.8 million acquisition discount as of September 30, 2010, acts as a
built-in reserve for credit issues and recoveries less than contractual amounts related to these acquired loans. Although fair market values and any related discounts to outstanding
principal balances were determined on a loan-by-loan basis and therefore cannot be allocated to other loans, we believe the overall discount provides protection to our basis
for ongoing credit issues associated with this portfolio.

At
September 30, 2010, our loan portfolio, inclusive of the CSE RE 2006-A CDO, had the following credit statistics (in thousands):

Non-Performing
Loans(1)

Number of
Loans(2)

Outstanding
Principal
Balance

Reserves

CapSource CDO
Acquisition
Discount

Aggregate
Net Balance

Collateral Types and
Locations (% by loan balance)First mortgages


12

$
279,126

$
20,436

$
224,566

$
34,124

68% land located in FL, CA, PA, 14% hospitality located in IL, NJ, 8% hotel located in NY, 4% retail located in WI, 4% multifamily located in FL and 2% office located in PA.Junior participations in first mortgages


2


38,462


28,460


0


10,002

68% office located in GA and 32% land located in FL.Total


14

$
317,588

$
48,896

$
224,566

$
44,126Performing loans with loan loss reservesFirst mortgages(3)


3

$
89,301

$
22,010

$
0

$
67,291

89% office located in TX, CA, 8% land located in CA, and 3% retail located in IA.Junior participations in first mortgages


4


91,718


44,750


0


46,968

47% land located in NV, 36% retail located in GA and 17% office in NY.Mezzanine


5


164,506


59,021


0


105,485

61% hotel located throughout the USA, 21% retail located in AZ, 14% multi-family located in CA and 4% corporate loan located in
NC.Total


12

$
345,525

$
125,781

$
0

$
219,744Total NPLs and total performing loans with loan loss reserves


26

$
663,113

$
174,677

$
224,566

$
263,870


(1)A
loan is classified as non-performing at such time as the loan becomes 90 days delinquent in interest or principal payments or the loan
has a maturity default.(2)Where
NorthStar holds more than one loan on the same collateral or group of collateral properties, the loans are considered a single investment for purpose
of reporting non-perforning loans and reserves.(3)Includes
a first mortgage and mezzanine loan held by NorthStar, having a combined $34 million outstanding balance and having the same collateral
base, considered a single first mortgage for purposes of this table.


At September 30, 2010, our loan portfolio principal and interest aging is as follows (inclusive of our non-performing loans)
(in thousands):

1 - 90 Days

90+ Days$17,293

$284,896


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For
the three months ended September 30, 2010, we recorded a $42.9 million credit loss provision relating to seven loans which included a $6.6 million provision for
a sold loan and includes a credit of $0.5 million for a loan recorded as held for sale, which was sold during the fourth quarter 2010. For the nine months ended September 30, 2010, we
recorded a $136.1 million credit loss provision relating to 14 loans which included $20.9 million in provisions for three loans sold during the period, net of $1.3 million in
credits for a loan sold, and a loan recorded as held for sale, for which we received net sale proceeds in excess of their carrying amounts. In March 2010, we foreclosed on a $15.0 million
defaulted first mortgage loan backed by hotel collateral located in Phoenix, AZ and we simultaneously sold the hotel for approximately $9.6 million. In prior periods we had recorded
$5.0 million of credit loss reserves for this asset and it was a NPL at December 31, 2009. In April 2010, we sold a $13.9 million first mortgage loan backed by land collateral
located in New York, NY for approximately $8.5 million. The mortgage was a NPL and in prior periods we had recorded a net $5.5 million of loan loss reserves for this asset. In April
2010, we also sold a $39.1 million mezzanine loan backed by a portfolio of hotel properties for approximately $32.1 million. We had recorded $7.0 million of loan loss reserves for
this asset during the first quarter. In April 2010, we also foreclosed on an $18.0 million first mortgage loan backed by office collateral located in Philadelphia, PA. We had in prior periods
recorded $8.8 million of loan loss reserves for this asset and took a $1.2 million impairment charge during the second quarter related to the foreclosed real estate. In June 2010, we
sold a $40.0 first mortgage loan backed by hotel collateral located in New York, NY for approximately $32.0 million. We recorded an $8.1 million credit loss provision for this asset. In
September 2010, we sold a $32.1 mezzanine loan backed by hotel collateral for approximately $25.5 million and recorded a $6.6 million credit loss provision for this asset.

As
of September 30, 2010, loan loss reserves totaled $174.7 million and related to 15 loans having an aggregate $407.9 million gross book value (exclusive of the
related reserve) and includes reserves of $25.7 million related to loans having an aggregate gross book value of $43.6 million (exclusive of the related reserve) that were added to the
reserve balance as a result of the acquisition of N-Star CDO IX.

Activity
in the allowance for credit losses on real estate debt investments for the nine months ended September 30, 2010, is as follows:

Credit Loss ReserveBalance at December 31, 2009

$
77,400Provision for credit losses


136,135N-Star CDO IX loan reserves


25,679Write-offs and sold loans


(41,417
)Transfer to unconsolidated joint venture on foreclosure


(23,120
)Balance at September 30, 2010

$
174,677


At
September 30, 2010, we had five loans, exclusive of the CSE RE 2006-A loans, totaling $78.1 million of aggregate outstanding principal amount on
non-performing status due to maturity defaults, and $48.9 million of our credit loss reserves were allocated to these loans. First mortgages represent approximately 51% of the book
value of these loans (exclusive of reserves), and 36% of the loans are backed by land collateral. There can be no assurance that there will be acceptable outcomes under our non-performing
loans and accordingly, we may determine that more reserves are required for these loans.

Overall,
the prolonged poor economic conditions and the continuing scarcity of commercial real estate debt capital is resulting in increasing stress levels for commercial real estate
credit. A shrinking economy generally results in decreasing real estate cash flows as corporations and consumers reduce their real estate needs, travel and spending. While the overall economy has seen
some signs of growth,

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because
market volume remains very low, and banks and life companies have drastically curtailed new lending activity, real estate owners are having difficulty refinancing their assets at maturity.
Many owners are also having trouble achieving their business plans to the extent they acquired a property to reposition it or otherwise invest capital to increase the property's cash flows. Property
values have also generally decreased over the past few years because of scarcity of financing, which when it is available the terms generally are at much lower leverage and higher cost than available
in prior years, uncertainty regarding future economic conditions and higher returning investment opportunities available in other asset classes. Decreasing values make it difficult for real estate
investors to sell their properties and to recoup their capital. As a result of the weak commercial real estate market, many lenders, including us, are concluding that extending loans at original
maturity, rather than foreclosure and sale, may be the most attractive path for maximizing value.

For
the nine months ended September 30, 2010, we modified the contractual interest rates of loans as part of restructuring or extension negotiations and, in some cases, we
discontinued the recognition of income for interest accrual rates in excess of the stated cash pay rates. In the aggregate, these changes, as well as loans which were non-performing during the
quarter, resulted in an approximate $8.6 million reduction to interest income for the nine months ended September 30, 2010, respectively, ($12.9 million on an annualized basis).

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

Each
of our loan investments, while primarily backed by commercial real estate collateral, is unique and requires customized asset management strategies for dealing with potential credit
situations. The complexity of each situation depends on many factors, including the number of collateral properties, the type of property, macro and local market conditions impacting the demand, cash
flow and value of the of the collateral, and the financial condition of our borrowers and their willingness to support our collateral properties. Additionally, in many cases there are multiple lenders
involved with specific
collateral properties and these lenders may have different objectives which influence their preferred strategy for dealing with a credit situation.

Our
impairment analyses often requires that we make assumptions regarding collateral values and the timing regarding when we will receive debt service payments, including principal
recovery. In a difficult environment for commercial real estate, our impairment analyses may lead us to the determination that extending and working out a loan, rather than pursuing foreclosure, is
the best course of action to maximize total and long-term value. However, in situations where there are multiple creditors in large capital structures, it can be particularly difficult to
assess the most likely course of action that a lender group or the borrower may take. Consequently, there could be a wide range of potential principal recovery outcomes, the timing of which can be
unpredictable, based on the strategy pursued by a lender group and/or by a borrower. Our impairment analysis in each of these situations is based on our assessment of the facts and circumstances
currently known to us and because these situations often involve complicated collateral and complex creditor and borrower dynamics, our assessment of recovery value may change more dramatically and
quickly and without the visibility that

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may
be available in other situations. These multiple creditor situations tend to be associated with larger loans, and NorthStar has been and continues to be involved in situations such as these,
although Northstar, as one of a group of lenders and often a lender on a subordinated basis, does not independently control the decision making. The discussion below summarizes the largest credit
situations that currently meet some of the foregoing characteristics.



During the third quarter, the lender group took effective ownership of a retail/entertainment complex located in East Rutherford, NJ,
which was previously subject to a $498.6 million first mortgage (the "NJ Property"). Additionally, during the third quarter, we invested $6 million in an equal partnership with a
third party to acquire $34 million of the first mortgage. We own a 22% interest in the NJ Property and the lender group is in the process of seeking to recapitalize the
NJ Property. While the lender group has seen strong interest in the NJ Property, there is no assurance that a recapitalization will be completed or that a recapitalization will be
completed on terms acceptable to us, which could have a material adverse effect on our business and operations. Our net investment is now classified as an equity investment.



We own a €43.3 million participation in a mezzanine loan that is collateralized by a German retail portfolio
that was net leased to a single tenant (the "Tenant") that filed for bankruptcy in Germany (the "German Loan"). The sale of the Tenant by the German bankruptcy administrator to Berrgruen Holdings was
finalized on October 8, 2010 allowing for a restructuring of the German Loan effective as of July 20, 2010. There can be no assurance that the restructuring plan will be a success, that
the company will remain solvent and that the German Loan will not default in the future. If the insolvency plan fails and the Tenant is unable to remain solvent, the Tenant's lease may be terminated
and the Tenant could be liquidated, which may cause the German Loan to default and we may lose all of our investment, which could have a material adverse effect on our business and operations. On
June 30, 2010, in connection with the repayment and extinguishment of the WA Secured Term Loan, the lender was granted a 40% participation in the principal proceeds of the German Loan. We
recorded a second quarter 2010 realized loss of approximately $35.3 million in connection with the granting of the 40% participation interest in principal proceeds of the German Loan to the
lender.



We own an $89.0 million mezzanine loan that is secured by the Hard Rock Hotel and Casino in Las Vegas, NV (the "NV
Loan"). The NV Loan was most recently restructured in December 2009. The final maturity date of the NV Loan was extended to February 2014 to provide additional time for market conditions
to improve and for performance at the property to stabilize. As part of the extension, interest reserves were also established to support the NV Loan; however, performance at the property has
not improved and the interest reserves are currently expected to be depleted in the fourth quarter of 2010. If the NV Loan were to default and the borrower is not willing to provide additional
capital for the property, we may lose all of our investment, which could have a material adverse effect on our business and operations. During the third quarter 2010, we recorded a
$22.3 million provision for loan loss related to the NV Loan.

Critical Accounting Policies

Refer to the section of our Annual Report on Form 10-K for the year ended December 31, 2009 entitled
"Management's Discussion and Analysis of Financial Condition and Results of OperationsCritical Accounting policies" for a full discussion of our critical accounting policies.

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Recent Accounting Pronouncements

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

In
July 2010, the FASB issued guidance requiring more robust and disaggregated disclosure about the credit quality of an entity's loans and its allowance for loan losses. The new
guidance will significantly expand the existing disclosure requirements and is focused on providing transparency regarding an entity's exposure to credit losses. This update is effective for interim
and annual reporting periods ending on or after December 15, 2010. The additional disclosures required by this update will be included in the note on real estate debt investments upon adoption.

RESULTS OF OPERATIONS

Comparison of the Three Months Ended September 30, 2010 to the Three Months Ended September 30, 2009

Revenues



Interest income for the three months ended September 30, 2010 totaled $88.8 million, representing an increase of
$54.5 million, or 159%, compared to $34.3 million for the three months ended September 30, 2009. For the three months ended September 30, 2010, the increase in interest
income was primarily attributable to: (i) the addition of $24.3 million in interest income as the result of the January 1, 2010 consolidation of the N-Star I,
N-Star II, N-Star III and N-Star V CDO financing's available for sale securities and real estate debt investments; (ii) the addition of $20.6 million
in interest income, of which $13.4 million was related to contractual interest and $7.2 million was related to accretion of the discount, as the result of the July 8, 2010
consolidation of the CSE RE 2006-A CDO financing's real estate debt investments and available for sale securities and (iii) the addition of $10.1 million in interest income
as the result of the July 7, 2010 consolidation of the N-Star IX CDO financing's available for sale securities and real estate debt investments offset by a decrease of
$0.5 million due to lower asset balances.



Interest income from related parties for the three months ended September 30, 2010 totaled $0.1 million, representing a
decrease of $4.1 million, or 98%, compared to $4.2 million for the three months ended September 30, 2009. As of January 1, 2010, the consolidation of the N-Star
I, N-Star II, N-Star III and N-Star V CDOs financing the original non-investment grade notes are no longer accounted for as available for sale
securities, resulting in a decrease in interest incomerelated parties of $4.1 million.



Rental and escalation income for the three months ended September 30, 2010 totaled $34.3 million, representing an
increase of $8.5 million, or 33%, compared to $25.8 million for the three months ended September 30, 2009. The increase was primarily attributable to an increase of approximately
$10.0 million related to the consolidation of Midwest as a result of our acquisition of the 51% membership interest in Midwest formerly owned by Chain Bridge and an increase in rental

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income
of approximately $0.2 million related to a new lease on one of our properties. The increase in rental and escalation income was partially offset by a decrease of $1.7 million
related to lower rents and remaining vacancy on the lease renewal for the Cincinnati, OH property.



Advisory fees from related parties for the three months ended September 30, 2010 totaled $0.7 million, representing a
decrease of approximately $1.2 million, or 63%, compared to $1.9 million for the three months ended September 30, 2009. As of January 1, 2010, the related party advisory
and management fee income earned on the N-Star I, N-Star II, N-Star III and N-Star V CDO financings is eliminated as a result of the consolidation of
the respective CDO financings. The decrease in advisory and management fee incomerelated parties is attributable to the elimination of the advisory and management fee income earned on the
previously non-consolidated CDO financings.



Commission income represents income earned by us for raising equity, through our broker-dealer subsidiary, for the NorthStar Income
Opportunity REIT I, Inc., a commercial finance REIT sponsored by us. For the three months ended September 30, 2010, we recorded $1.9 million in commission income related to these
capital raising efforts. We had no such commission income for the three months ended September 30, 2009.



Other revenue for the three months ended September 30, 2010 totaled $1.1 million, representing an increase of
approximately $0.9 million, or 450%, compared to $0.2 million for the three months ended September 30, 2009. Other revenue for three months ended September 30, 2010
consisted primarily of $1.0 million in exit fees and $0.1 million in other fees. Other revenue for three months ended September 30, 2009 consisted primarily of $0.1 million
in exit fees and $0.1 million in unused credit line and draw fees.

Expenses



Interest expense for the three months ended September 30, 2010 totaled $32.2 million, representing an increase of
$3.8 million, or 14%, compared to $28.4 million for the three months ended September 30, 2009. The increase in interest was primarily the result of: (i) the addition of
$5.0 million in interest expense as the result of the January 1, 2010 consolidation of the N-Star I, N-Star II, N-Star III and N-Star V
CDO bonds payable; (ii) the addition of $2.6 million in interest expense as the result of the July 8, 2010 consolidation of the CSE RE 2006-A CDO bonds payable;
(iii) the addition of $1.3 million in interest expense as the result of the July 7, 2010 consolidation of the N-Star IX CDO bonds payable; and
(iv) $0.6 million in additional interest related to the Term Asset-Backed Securities Loan Facility, or TALF program debt. The increase in interest expense was partially offset by;
(i) $1.0 million lower interest on our issued CDO notes and trust preferred debt due to lower average LIBOR rates; (ii) $0.9 million in lower interest as a result of the
June 30, 2010 repayment of the Euro-note; (iii) $3.5 million lower interest related to the termination of our unsecured revolving credit line; and
(iv) $0.2 million lower interest on our 11.50% and 7.25% exchangeable senior notes due to 2009 repurchases.

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Real estate property operating expenses for three months ended September 30, 2010 totaled $12.4 million, representing an
increase of $8.2 million, or 195%, compared to $4.2 million for three months ended September 30, 2009. The increase was primarily attributable to an increase of approximately
$8.4 million related to the consolidation of Midwest as a result of our acquisition of the 51% membership interest in Midwest, formerly owned by Chain Bridge and $0.2 million related to
the foreclosure of an $18.0 million first mortgage loan backed by office collateral located in Philadelphia, PA. The increase in real estate property operating expenses was partially offset by
a decrease of $0.4 million related to the first mortgage lender foreclosing on the Chatsworth, CA properties during the third quarter of 2009.



Advisory fees for related parties for the three months ended September 30, 2010 were zero, representing a decrease of
$0.8 million, or 100%, compared to $0.8 million for the three
months ended September 30, 2009. The decrease was primarily related to the reduced asset management fee rate pursuant to the amended management agreement with Wakefield Capital
Management Inc.



Commission expense represents the portion of commission income which is paid to broker dealers with whom we have distribution
agreements. For the three months ended September 30, 2010, we recorded $1.4 million in commission expense related to capital raising efforts. We had no such commission expense for the
three months ended September 30, 2009.



Provision for loan losses for the three months ended September 30, 2010 totaled $42.9 million for seven loans, one of
which was sold during the period, and included a $0.5 million credit for a loan sold during the fourth quarter 2010. The provision for loan losses for the three months ended
September 30, 2010 included $11.6 million for subordinated mortgage interests, $31.7 million for mezzanine loans and a $0.5 million credit for first mortgage whole loans,.
Provision for loan losses for the three months ended September 30, 2009 totaled $24.2 million for 10 loans and includes $15.9 million for first mortgage whole loans,
$4.0 million for subordinated mortgage interests and $4.3 million for mezzanine loans.



General and administrative expenses for the three months ended September 30, 2010 totaled $19.9 million, representing an
increase of $4.3 million, or 28%, compared to $15.6 million for the three months ended September 30, 2009. The primary components of our general and administrative expenses were
the following:

Salaries
and equity-based compensation for the three months ended September 30, 2010 totaled $11.9 million, representing an increase of approximately $0.9 million,
or 8%, compared to $11.0 million, for the three months ended September 30, 2009. The increase was attributable to a $2.0 million increase related to salaries and accrued cash
incentive compensation costs and a $1.1 million decrease related to equity-based compensation. The $2.0 million increase in salaries and accrued compensation was attributable to higher
staffing levels in 2010 primarily relating to our broker-dealer subsidiary and internalizing management of our healthcare net lease assets. The $1.1 million decrease in equity-based
compensation expense was attributable to a $1.7 million decrease in expense from equity-based awards issued under our 2004 Omnibus Stock Incentive Plan becoming fully vested. The decrease was
partially

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offset
by an additional $0.6 million of equity-based compensation expense related to the long-term incentive component of our incentive compensation plan.

Auditing
and professional fees for the three months ended September 30, 2010 totaled $3.8 million, representing an increase of $1.9 million, or 100%, compared to
$1.9 million for the three months ended September 30, 2009. The increase was primarily attributable to an approximately $1.9 million increase relating to the acquisition of CSE RE
2006-A and portfolio management.

Other
general and administrative expenses for the three months ended September 30, 2010 totaled $4.3 million, representing an increase of approximately $1.6 million,
or 59%, compared to $2.7 million for the three months ended September 30, 2009. The increase was primarily attributable to legal fees and other costs related to investment initiatives
ultimately not consummated of approximately $0.6 million, costs associated with the acquisition of CSE RE 2006-A of approximately $0.3 million, and increased
overhead costs of approximately $0.5 million resulting from higher staffing levels primarily relating to our broker-dealer subsidiary and internalizing management of our healthcare net lease
assets during the three months ended September 30, 2010.



Depreciation and amortization expense for the three months ended September 30, 2010 totaled $8.6 million, representing a
decrease of $5.5 million, or 177%, compared to $3.1 million for the three months ended September 30, 2009. The decrease was primarily related to a decrease of $5.5 million
related to charges associated with the 2009 foreclosure by the first mortgage lender of the Chatsworth, CA property, and a decrease of $0.3 million related to deferred lease costs and tenant
improvements in our net lease portfolio being fully amortized. The decrease was partially offset by $0.3 million of expenses related to 2010 new operating real estate improvements.



Equity in (loss) earnings for the three months ended September 30, 2010 was net losses of $0.1 million, representing a
decrease of $2.8 million, compared to net earnings of $2.7 million for the three months ended September 30, 2009. For the three months ended September 30, 2010, we
recognized equity in losses of $0.5 million from the LandCap joint venture. The equity in losses was partially offset by equity in earnings of $0.2 million in connection with a net lease
joint venture and $0.2 million from our corporate lending joint venture. For the three months ended September 30, 2009, we recognized equity in earnings of $2.7 million including
equity in earnings of $2.3 million on a new joint venture related to the conversion of the net lease relationship with one of our healthcare operators to a management agreement which resulted
in one of our unconsolidated affiliates becoming the lessee of the properties and the unconsolidated affiliate simultaneously entering into a management contract with a third party operator, equity in
earnings of $0.5 million from the Securities Fund (which includes both realized and unrealized gains from asset sales and mark-to-market adjustments) and equity in
earnings of $0.1 million in connection with another net lease joint venture. The equity in earnings were partially offset by equity in losses of $0.2 million from the LandCap joint
venture.



Unrealized gain (loss) on investments and other decreased by approximately $109.9 million for the three months ended
September 30, 2010 to a loss of $198.2 million, compared to a loss of $88.3 million for the three months ended September 30, 2009. The unrealized loss on investments and
other for the three months ended September 30, 2010 consisted primarily of unrealized mark-to-market adjustment losses of $80.1 million on various issued CDO
bonds payable, $57.8 million unrealized losses on interest rate swap derivatives no longer qualifying, or not designated as, hedging instruments, unrealized losses of $35.4 million
related to mark-to-market adjustments on various available for sale securities and

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mark-to-market
adjustment losses of $24.8 million on liability to subsidiary trusts issuing preferred securities. The unrealized loss on investment for the three months
ended September 30, 2009 consisted primarily of unrealized losses of $86.1 million on various N-Star bonds payable, unrealized losses related
mark-to-market adjustments of $16.2 million on liability to subsidiary trusts issuing preferred securities, net losses of $28.7 million on interest rate swap
derivatives no longer qualifying, or not designated as, hedging instruments and unrealized losses of $2.3 million on our corporate lending joint venture (which is an equity investment that is
marked to market). The unrealized losses were partially offset by unrealized gains related to
mark-to-market adjustments of $45.0 million on various available for sale securities.



The realized gain of $26.8 million for the three months ended September 30, 2010 consisted primarily of a realized gain
of approximately $13.5 million on the sale of certain available for sale securities, a gain of $7.5 million on the sale of our interest in our middle market corporate lending venture and
a net foreign currency translation gain of $6.2 million related to our Euro-denominated investment. The realized gains were partially offset by a realized loss of approximately
$0.4 million related to other-than-temporary impairments on certain available for sale securities. The realized gain on investments and other of $29.2 million for
the three months ended September 30, 2009 consisted primarily of net realized gains of $5.1 million on the repurchase of $10.0 million of our 7.25% exchangeable senior notes,
$8.2 million on the repurchase of $19.3 million of our 11.50% exchangeable senior notes and net realized gains of $15.9 million on the sale of certain available for sale
securities.



On July 8, 2010, the Company consolidated the assets acquired and liabilities assumed of CSE RE 2006-A
and recorded a gain of approximately $15.4 million for the three months ended September 30, 2010, resulting from the excess of the fair market value of the net assets acquired over the
purchase price. We had no such gain for the three months ended September 30, 2009.



Income from discontinued operations represents the operations of properties sold or held for sale during the period. During the third
quarter of 2010, we recorded as held for sale, two real estate owned (or, "REO") parcels of land located in Arizona and an REO multifamily property located in Georgia, which were consolidated as of
July 8, 2010, in connection with the acquisition of CSE RE 2006-A. In December 2009, NRF Healthcare, LLC completed the sale of 18 assisted living facilities
containing approximately 1,300 beds located in North Carolina. Accordingly, a loss of $0.1 million and income of $0.7 million, respectively, related to the operations of these properties
was reclassified to loss/income from discontinued operations for the three months ended September 30, 2010 and 2009.

Comparison of the Nine months Ended September 30, 2010 to the Nine months Ended September 30, 2009

Revenues



Interest income for the nine months ended September 30, 2010 totaled $207.1 million, representing an increase of
$100.3 million, or 94%, compared to $106.8 million for the nine months ended September 30, 2009. For the nine months ended September 30, 2010, the increase in interest
income was primarily attributable to: (i) the addition of $73.8 million in interest income as the result of the January 1, 2010 consolidation of the N-Star I,
N-Star II, N-Star III and N-Star V CDO financing's

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available
for sale securities and real estate debt investments (ii) the addition of $20.6 million in interest income, of which $13.4 million was related to contractual interest
and $7.2 million was related to accretion of the discount, as the result of the July 8, 2010 consolidation of CSE RE 2006-A CDO financing's real estate debt
investments and available for sale securities and (iii) the addition of $10.1 million in interest income as the result of the July 7, 2010 consolidation of the
N-Star IX CDO financing's available for sale securities and real estate debt investments partially offset by: (i) a lower average one-month LIBOR of approximately
11 basis points and lower comparable asset balances resulting in a decrease of approximately $4.2 million in interest income.



Interest income from related parties for the nine months ended September 30, 2010 totaled $1.0 million, representing a
decrease of $12.1 million, or 92%, compared to $13.1 million for the nine months ended September 30, 2009. As of January 1, 2010, the consolidation of the
N-Star I, N-Star II, N-Star III and N-Star V CDOs financing the original non-investment grade notes are no longer accounted for as available
for sale securities, resulting in a decrease in interest incomerelated parties of $12.1 million.



Rental and escalation income for the nine months ended September 30, 2010 totaled $90.0 million, representing an increase
of $17.1 million, or 23%, compared to $72.9 million for the nine months ended September 30, 2009. The increase was primarily attributable to an increase of approximately
$21.2 million related to the consolidation of Midwest as a result of our acquisition of the 51% membership interest in Midwest formerly owned by Chain Bridge and an increase in rental income of
approximately $0.5 million related to a new lease on one of our properties offset partially by decreases of $4.1 million related to lower rents and remaining vacancy on the lease renewal
for the Cincinnati, OH property and $0.5 million related to the Chatsworth, CA property lease disaffirmation and foreclosure of the properties by the first mortgage lender in 2009.



Advisory fees from related parties for the nine months ended September 30, 2010 totaled $1.7 million, representing a
decrease of approximately $3.7 million, or 69%, compared to $5.4 million for the nine months ended September 30, 2009. As of January 1, 2010, the related party advisory and
management fee income earned on the N-Star I, N-Star II, N-Star III and N-Star V CDO financings is eliminated as a result of the consolidation of the
respective CDO financings. The decrease in advisory and management fee incomerelated parties is attributable to the elimination of the advisory and management fee income earned on the
previously non-consolidated CDO financings.



Commission income represents income earned by us for raising equity, through our broker-dealer subsidiary, for the NorthStar Income
Opportunity REIT I, Inc., a commercial finance REIT sponsored by us. For the nine months ended September 30, 2010, we recorded $2.2 million in commission income related to these
capital raising efforts. We had no such commission income for the nine months ended September 30, 2009.



Other revenue for the nine months ended September 30, 2010 totaled $2.3 million, representing an increase of
$1.7 million, or 283%, compared to $0.6 million for the nine months ended September 30, 2009. Other revenue for nine months ended September 30, 2010 consisted primarily
$1.0 million in exit

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fees,
$0.9 million in early redemption fees on available for sale securities and $0.4 million in other fees. Other revenue for nine months ended September 30, 2009 consisted
primarily of $0.2 million in exit fees, $0.2 million in late fees and $0.2 million in unused credit line fees.

Expenses



Interest expense for the nine months ended September 30, 2010 totaled $100.1 million, representing an increase of
$7.7 million, or 8%, compared to $92.4 million for the nine months ended September 30, 2009. The increase in interest was primarily the result of: (i) the addition of
$14.5 million in interest expense as the result of the January 1, 2010 consolidation of the
N-Star I, N-Star II, N-Star III and N-Star V CDO bonds payable; (ii) the addition of $2.6 million in interest expense as the result of the
July 8, 2010 consolidation of CSE RE 2006-A CDO bonds payable; (iii) the addition of $1.3 million in interest expense as the result of the July 7,
2010 consolidation of the N-Star IX CDO bonds payable; and (iv) $1.2 million in additional interest related to the Term Asset-Backed Securities Loan Facility, or TALF
program debt. The increase in interest expense was partially offset by; (i) $6.5 million lower interest on our issued CDO notes and trust preferred debt due to lower average LIBOR rates,
2009 debt repurchases and repayments; (ii) $3.8 million lower interest on our 11.50% and 7.25% exchangeable senior notes due to 2009 repurchases; (iii) $0.7 million in
lower interest as a result of the June 30, 2010 repayment of the WA Secured Term Loan; (iv) $0.6 million in lower interest as a result of the June 30, 2010 repayment of the
Euro-note; and (v) $0.2 million lower interest related to the termination of our unsecured revolving credit line.



Real estate property operating expenses for nine months ended September 30, 2010 totaled $25.0 million, representing an
increase of $15.9 million, or 175%, compared to $9.1 million for nine months ended September 30, 2009. The increase was primarily attributable to an increase of approximately
$17.6 million related to the consolidation of Midwest as a result of our acquisition of the 51% membership interest in Midwest, formerly owned by Chain Bridge and $0.1 million
related to the foreclosure of an $18.0 million first mortgage loan backed by office collateral located in Philadelphia, PA. The increase in real estate property operating expenses was
partially offset by $1.4 million in lower expenses related to a reduced real estate tax assessment and a decrease of $0.4 million related to the first mortgage lender foreclosing on the
Chatsworth, CA properties in during the third quarter of 2009.



Advisory fees for related parties for the nine months ended September 30, 2010 totaled $0.5 million, representing a
decrease of $2.0 million, or 80%, compared to $2.5 million for the nine months ended September 30, 2009. The decrease was primarily related to the reduced asset management fee
rate of the management agreement with Wakefield Capital Management Inc.



Commission expense represents the portion of commission income which is paid to broker dealers with whom we have distribution
agreements. For the nine months ended September 30, 2010, we recorded $1.7 million in commission expense related to capital raising efforts. We had no such commission expense for the
three months ended September 30, 2009.

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Impairment on operating real estate for the nine months ended September 30, 2010 totaled $1.2 million. In April 2010 we
foreclosed on an $18.0 million first mortgage loan backed by office collateral located in Philadelphia, PA and recorded an impairment on the foreclosed asset of approximately
$1.2 million. We had no such impairment for the nine months ended September 30, 2009.



Provision for loan losses for the nine months ended September 30, 2010 totaled $136.1 million for 14 loans and included
$20.9 million in provision for seven loans sold, or held for sale, during the period net of a $0.8 million credit for a loan sold with a fair market value in excess of its carrying
amount and a $0.5 million credit for a loan held for sale with a fair market value in excess of its carrying amount. The provision for loan losses for the nine months ended September 30,
2010 included $37.4 million for first mortgage whole loans, $42.5 million for subordinated mortgage interests, $57.5 million for mezzanine loans and $1.3 million in credits
for first mortgage whole loans. Provision for loan losses for the nine months ended September 30, 2009 totaled $62.7 million for 15 loans and included $29.9 million for first
mortgage whole loans, $12.0 million for subordinated mortgage interests and $20.8 million for mezzanine loans.



General and administrative expenses for the nine months ended September 30, 2010 totaled $64.2 million, representing an
increase of $14.2 million, or 28%, compared to $50.0 million for the nine months ended September 30, 2009. The primary components of our general and administrative expenses were
the following:

Salaries
and equity-based compensation for the nine months ended September 30, 2010 totaled $40.7 million, representing an increase of approximately $6.9 million, or
20%, compared to $33.8 million, for the nine months ended September 30, 2009. The increase was attributable to a $9.3 million increase related to salaries and accrued cash
incentive compensation costs and a $2.4 million decrease related to equity-based compensation. The $9.3 million increase in salaries and accrued compensation was attributable to a
one-time expense of $3.5 million relating to the separation and consulting agreement with our former COO and higher staffing levels in 2010 primarily relating to our broker-dealer
subsidiary and internalizing management of our healthcare net lease assets. The $2.4 million decrease in equity-based compensation expense was attributable to a $4.7 million decrease in
expense from equity-based awards issued under our 2004 Omnibus Stock Incentive Plan becoming fully vested. The decease was partially offset by an additional $1.0 million of equity-based
compensation expense related to the accelerated vesting of equity-based awards in connection with the separation agreement with our former COO and a $1.5 million increase in equity-based
compensation expense related to the long-term incentive component of our incentive compensation plan.

Auditing
and professional fees for the nine months ended September 30, 2010 totaled $9.2 million, representing an increase of $2.8 million, or 44%, compared to
$6.4 million for the nine months ended September 30, 2009. The increase was primarily attributable to approximately a $0.8 million increase in legal fees related to our
non-listed and private REITs, a $0.2 million increase in legal fees related to the Chatsworth property foreclosure, a $1.1 million increase in fees relating to capital
raising, asset sales and membership redemption in our healthcare portfolio and a $1.3 million increase in legal fees for general corporate work, and portfolio management, partially offset by a
decrease of $0.6 million related to 2009 lease restructuring expenses in our healthcare portfolio.

Other
general and administrative expenses for the nine months ended September 30, 2010 totaled $14.3 million, representing an increase of approximately $4.5 million,
or 46%, compared to $9.8 million

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for
the nine months ended September 30, 2009. The increase was primarily attributable to costs associated with the acquisition of CSE RE 2006-A of approximately
$0.4 million, legal fees and other costs related to investment initiatives ultimately not consummated of approximately $1.3 million, increased income and other taxes of approximately
$0.4 million principally related to our Midwest taxable REIT subsidiary, increased costs due to REO properties of $0.6 million, and increased overhead costs of approximately
$1.8 million resulting from higher staffing levels primarily relating to
our broker-dealer subsidiary and internalizing management of our healthcare net lease assets during the nine months ended September 30, 2010.



Depreciation and amortization expense for the nine months ended September 30, 2010 totaled $25.5 million, representing a
decrease of $8.7 million, or 25%, compared to $34.2 million for the nine months ended September 30, 2009. The decrease was primarily related to a decrease of $7.7 million
attributable to the 2009 write-off of certain costs associated with the lease restructuring and termination of one of our operators in our healthcare portfolio, a decrease of
$0.8 million related to deferred lease costs and tenant improvements in our net lease portfolio being fully amortized and a decrease of $0.2 million related to charges associated with
the 2009 foreclosure by the first mortgage lender of the Chatsworth, CA property. The decrease was partially offset by $0.1 million of expenses related to 2010 new operating real estate
improvements.



Equity in earnings (loss) for the nine months ended September 30, 2010 was net earnings of $6.2 million, representing an
increase of $7.7 million, compared to a loss of $1.5 million for the nine months ended September 30, 2009. For the nine months ended September 30, 2010, we recognized
equity in earnings of $8.3 million from our corporate lending platform as a result of the joint venture having sold assets with a carrying value of approximately $6.7 million for
$15.0 million, $2.5 million from our previously unconsolidated affiliated lessee formed in 2009, resulting from the termination of a lease to a third party in our healthcare real estate
portfolio and $0.4 million in connection with a net lease joint venture. The equity in earnings was partially offset by equity in losses of $3.9 million from the Securities Fund (which
includes both realized and unrealized gains from asset sales and mark-to-market adjustments) and $1.3 million from the LandCap joint venture. For the nine months ended
September 30, 2009, we recognized equity in losses of $4.7 million from the Securities Fund (which includes both realized and unrealized gains from asset sales and
mark-to-market adjustments) and $2.9 million from the LandCap joint venture. The losses were partially offset by equity in earnings of $5.7 million on our new
joint venture related to the conversion of the net lease relationship with one of our healthcare operators to a management agreement, which resulted in one of our unconsolidated affiliates becoming
the lessee of the properties and the unconsolidated affiliate simultaneously entering into a management contract with a third party operator and $0.4 million in connection with a net lease
joint venture.



Unrealized gain (loss) on investments and other decreased by approximately $208.1 million for the nine months ended
September 30, 2010 to a loss of $206.4 million, compared to a gain of $1.7 million for the nine months ended September 30, 2009. The unrealized loss on investments and
other for the nine months ended September 30, 2010 consisted primarily of unrealized mark-to-market adjustment losses of $206.3 million on various issued CDO
bonds payable, $146.5 million of unrealized losses on interest rate swap derivatives no longer qualifying, or not designated as, hedging instruments and mark-to-market
adjustment losses of $3.6 million on liability to subsidiary trusts issuing preferred securities. The unrealized losses were partially offset by unrealized gains of $150.0 million
related to

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mark-to-market
adjustments on various available for sale securities. The unrealized gain on investments for the nine months ended September 30, 2009 consisted primarily
of unrealized gains related to mark-to-market adjustments of $55.9 million on various N-Star bonds payable and unrealized gains of $41.4 million on
various available for sale securities. The unrealized gains were partially offset by unrealized losses related to mark-to-market adjustments of $32.1 million on our
corporate lending joint venture (which is an equity investment that is marked to market), unrealized losses of $42.3 million on liability to subsidiary trusts issuing preferred securities and
unrealized net losses of $21.2 million on interest rate swap derivatives no longer qualifying, or not designated as, hedging instruments.



The realized gain of $109.8 million for the nine months ended September 30, 2010 consisted primarily of a realized gain
of approximately $95.9 million on the repayment and extinguishment of our WA Secured Term Loan, net realized gains of approximately $39.5 million on the sale of certain available for
sale securities, a gain of $7.5 million on the sale of our interest in our middle market corporate lending venture, a net foreign currency translation gain of $2.8 million related to our
Euro-denominated investment, and net realized gains of approximately $0.5 million on the sale of bonds payable. The realized gains were partially offset by a realized loss of
approximately $35.3 million related to the 40% participation interest in the principal proceeds of the German Loan granted to the lender upon repayment and extinguishment of our WA Secured Term
Loan, a realized loss of approximately $0.4 million on the redemption of available for sale securities, a realized loss of approximately $0.4 million related to
other-than-temporary impairments on certain available for sale securities and a $0.3 million realized loss on the termination of an interest rate swap. The realized gain
on investments and other of $89.4 million for the nine months ended September 30, 2009, was attributable to net realized gains of $51.3 million on the repurchase of
$92.6 million face amount of our 7.25%
exchangeable senior notes, $8.2 million on the repurchase of $19.3 million face amount of our 11.5% exchangeable senior notes, net realized gains of $33.7 million on the sale of
certain debt securities available for sale offset partially by realized losses of $3.6 million related to the discounted payoff of a first mortgage and a foreign currency translation loss of
$0.2 million related to our Euro-denominated investment.



On July 8, 2010, the Company consolidated the assets acquired and liabilities assumed of CSE RE 2006-A
and recorded a gain of approximately $15.4 million for the nine months ended September 30, 2010, resulting from the excess of the fair market value of the net assets acquired over the
purchase price. We had no such gain for the nine months ended September 30, 2009.



Income from discontinued operations represents the operations of properties sold or held for sale during the period. During the third
quarter of 2010, we recorded as held for sale, two real estate owned (or, "REO") parcels of land located in Arizona and an REO multifamily property located in Georgia, acquired in connection with the
acquisition of CSE RE 2006-A. In May 2010, we completed the sale of a leasehold interest containing approximately 10,800 square feet of retail space located in New York City.
In December 2009, NRF Healthcare, LLC completed the sale of 18 assisted living facilities containing approximately 1,300 beds located in North Carolina. Accordingly, income of
$0.1 million and $2.0 million, respectively, related to the operations of these properties was reclassified to income from discontinued operations for the nine months ended
September 30, 2010 and 2009.

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

Liquidity and Capital Resources

We require significant capital to fund our investment activities and operating expenses. Our capital sources may include cash flow from
operations, net proceeds from asset repayments and sales, borrowings under revolving credit facilities, financings secured by our assets such as first mortgage and CDO financings,
long-term senior and subordinate corporate capital such as senior notes, trust preferred securities and perpetual preferred and common stock. As we discussed in "Outlook and Recent
Trends", availability of such capital from all of these sources is extremely scarce (if available at all) for most financial institutions that do not have access to U.S. Government funding sources
such as the Fed Discount window, including commercial mortgage REITs, and we expect this capital to be difficult to obtain during 2010.

Our
total available liquidity at September 30, 2010 was approximately $265.2 million, including $135.2 million of unrestricted cash and cash equivalents and
$130.0 million of uninvested and available funds in our CDO financings, which is available only for reinvestment within the CDO structures. On June 30, 2010, we fully repaid and
extinguished, at a discount to the outstanding principal amount, our WA Secured Term Loan, which was fully recourse to us, having an outstanding principal balance of approximately
$304.0 million and secured by assets having an aggregate unpaid principal balance of approximately $458.6 at the time of the payoff. We paid approximately $208.0 million of cash and
granted the lender a 40% participation interest in the principal proceeds of the German Loan owned by us that is collateralized by a German retail portfolio. Additionally, the lender agreed to use
commercially reasonable efforts to provide us and/or our affiliates with a new credit facility which is expected to have a minimum availability of $200.0 million.

As
set forth in our periodic reports filed with the Securities and Exchange Commission, NRFC NNN Holdings, Inc. ("NRFC NNN") and NRFC Sub Investor IV, LLC ("NRFC Sub IV"),
which are subsidiaries of ours, are defendants in a lawsuit (the "Lawsuit") filed by GECCMC 2005-CI Plummer Office Limited Partnership (the "Lender") in the Superior Court of the State of
California, County of Los Angeles, relating to a loan on two properties previously owned by NRFC Sub IV that were 100% leased (the "Lease") to Washington Mutual Bank, FA ("WaMu"). The Lawsuit alleges,
among other things, that the loan provided by Lender to NRFC Sub IV became a recourse obligation of NRFC NNN due to an alleged termination of the Lease. The judge presiding over the Lawsuit has
announced her intention to grant the Lender's motion for summary judgment and, accordingly, is expected to enter a judgment against NRFC NNN in the amount of approximately
$42 million (the "Judgment"). NRFC NNN continues to believe that this case is without merit and intends to vigorously pursue an appeal of the decision. In connection with such appeal, pursuant
to California law NRFC NNN is required to post a bond in an amount equal to one and a half times the amount of the Judgment (the "Bond"). Accordingly, we have entered into a standard General Agreement
of Indemnity with an issuer of surety bonds (the "Surety Agreement"), which could require us to post collateral equal to the amount of the Bond. As part of the Surety Agreement, in connection with the
expected issuance of the Bond, we have agreed to post cash collateral equal to thirty-eight percent of the amount of the Bond, which is expected to be approximately $25 million.

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

As
a REIT, we are required to distribute at least 90% of our annual REIT taxable income to our stockholders, including taxable income where we do not receive corresponding cash, and we
intend to distribute all or substantially all of our REIT taxable income in order to comply with the REIT distribution requirements of the Internal Revenue Code and to avoid federal income tax and the
non-deductible excise tax. In the past, we have maintained high unrestricted cash balances relative to the historical difference between our distributions and cash provided by operating
activities. On a quarterly basis, our Board of Directors determines an appropriate common stock dividend based upon numerous factors, including AFFO, REIT qualification requirements, the amount of
cash flows provided by operating activities, availability of existing cash balances, borrowing capacity under existing credit agreements, access to cash in the capital markets and other financing
sources, our view of our ability to realize gains in the future through appreciation in the value of our assets, general
economic conditions and economic conditions that more specifically impact our business or prospects. Although we significantly reduced the cash portion of quarterly dividends paid in 2009 and 2010 to
date relative to prior periods, future dividend levels are subject to further adjustment based upon our evaluation of the factors described above, as well as other factors that our Board of Directors
may, from time to time, deem relevant to consider when determining an appropriate common stock dividend.

We
currently believe that our existing sources of funds should be adequate for purposes of meeting our short-term liquidity needs; however, our CDO financing structures
generally require that the underlying collateral and cash flow generated by the collateral to be in excess of ratios stipulated in the related indentures. These ratios are called
overcollateralization, or OC, and interest coverage, or IC, tests. The reinvestment periods, which allow us to reinvest principal payments on the underlying assets into qualifying replacement
collateral and is instrumental in maintaining OC and IC ratios, for our N-Star CDO I, II, III, IV and V have expired, and, for our N-Star CDO VI, N-Star CDO VII,
N-Star CDO VIII and N-Star CDO IX will expire in June 2011, June 2011, February 2012 and June 2012, respectively. Since we are or will be unable to reinvest principal in these
CDOs, principal repayments will pay down the senior-most notes, which will de-lever the CDO. Following the conclusion of the reinvestment period in these CDOs, our ability to
maintain the OC and IC ratios will be negatively impacted. In the event these tests are not met, cash that would normally be distributed to us would be used to amortize the senior notes until the
financing is back in compliance with the tests. In the event cash flow is diverted to repay the notes, this could decrease cash available to pay our dividend and to comply with REIT requirements.
Additionally, we may be required to buy assets out of our CDO financings in order to preserve cash flow. As of September 30, 2010, three of our CDOs, N-Star CDO I, II and CSE
RE 2006-A were not in compliance with their respective OC and IC tests in our CDO financings. We expect that very weak economic conditions, lack of capital for commercial real estate,
decreasing real estate values and credit ratings downgrades of real estate securities will make complying with OC and IC tests more difficult in 2010 and in the future.

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The
following is a summary of our CDO cash distribution and coverage tests as of September 30, 2010:

Cash
Distributions(1)

Quarterly
Interest Coverage
Cushion(2)

Overcollateralization
CushionPrimary
Collateral
Type

Quarter Ended
September 30,
2010

September 30,
2010

September 30,
2010

At
Offering(3)N-Star I

CMBS

$
32

$
69

$
(2,227
)
$
8,687N-Star II

CMBS


0


(182
)

(7,867
)

10,944N-Star III

CMBS


1,581


1,715


31,521


13,610N-Star IV

Loans


2,111


2,474


91,339


19,808N-Star V

CMBS


1,183


1,335


28,100


12,940N-Star VI

Loans


1,108


3,452


49,496


17,412N-Star VII

CMBS


2,235


1,793


29,196


13,966N-Star VIII

Loans


3,778


5,279


130,421


42,193N-Star IX

CMBS


2,153


2,445


53,812


24,516CSE RE 2006-A

Loans


0


8,008


(123,693
)

(151,595
)


Table
shows cash distributions to the retained income notes. Interest coverage and overcollateralization coverage to the most constrained class. (1)Cash
distributions are exclusive of senior management fees which are not subject to the coverage tests.(2)Quarterly
interest cushion and overcollateralization cushion from remittance report issued on date nearest to September 30, 2010.(3)CSE
RE 2006-A based on trustee report as of June 24, 2010.


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



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

During
the three and nine months ended September 30, 2010, we did not issue any shares pursuant to our equity distribution agreement with JMP.

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Effective as of April 27, 2007, we implemented a Dividend Reinvestment and Stock Purchase Plan, or the Plan, pursuant to which
we registered and reserved for issuance 15,000,000 shares of our common stock. Under the terms of the Plan, stockholders who participate in the Plan may purchase shares of our common stock directly
from us, in cash investments up to $10,000. At our sole discretion, we may accept optional cash investments in excess of $10,000 per month, which may qualify for a discount from the market price of 0%
to 5%. Plan participants may also automatically reinvest all or a portion of their dividends for additional shares of our stock. We expect to use the proceeds from any dividend reinvestments or stock
purchases for general corporate purposes.

During
the three months end September 30, 2010, we issued a total of 24,053 common shares pursuant to the Plan for a gross sales price of approximately $0.1 million. During
the nine months end September 30, 2010, we issued a total of 72,534 common shares pursuant to the Plan for a gross sales price of approximately $0.3 million.



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

Cash Flows

The net cash provided by operating activities was $27.5 million for the nine months ended September 30, 2010 compared to
the net cash flow provided by operating activities of $46.4 million for the nine months ended September 30, 2009. The decrease was primarily due to the lower LIBOR rates and lower
spreads on our lending assets which decreased interest income generated from our asset base.

The
net cash flow provided by investing activities was $124.5 million for the nine months ended September 30, 2010 compared to the net cash used in investing activities of
$16.7 million for the nine months ended September 30, 2009. The primary source of cash flow provided by investing activities in 2010 was proceeds from the sale of real estate debt
investments, real estate debt pay downs and the disposition of available for sale securities. The primary uses of cash flow used by investing activities in 2009 were the origination or acquisition of
real estate debt investments, and the acquisition of real estate securities.

The
net cash flow used by financing activities was $155.7 million for the nine months ended September 30, 2010 compared to cash used by financing activities of
$55.3 million of cash used by financing activities for the nine months ended September 30, 2009. The primary use of cash flow by financing activities was the WA Secured Term Loan
repayment and the pay down of bonds. Net cash flow used in financing activity in 2009 was primarily related to the repurchase of our bonds and repayments on our credit facilities.

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As of September 30, 2010, we had the following contractual commitments and commercial obligations (dollars in thousands):

Payments Due by PeriodContractual Obligations

Total

1 year

2 - 3 years

4 - 5 years

After 5 YearsMortgage notes

$
802,282

$
1,945

$
150,172

$
56,318

$
593,847Mezzanine loan payable


2,553


71


656


748


1,078Exchangeable senior notes(1)


128,915





68,165


60,750


Bonds payable


4,635,734











4,635,734Secured term loan


36,881





22,199


14,682


Liability to subsidiary trusts issuing preferred securities


280,133











280,133Capital leases(2)


11,265


46


364


364


10,491Operating leases


67,495


1,464


11,433


11,380


43,218Outstanding unfunded commitments(3)


56,502


44,647


11,855





Estimated interest payments


592,010


35,022


258,604


204,103


94,281Total contractual obligations

$
6,613,770

$
83,195

$
523,448

$
348,345

$
5,658,782


(1)$68.2 million
of our 7.25% exchangeable senior notes have a final maturity date of June 15, 2027. The above table reflects the holders
repurchase rights which may require us to repurchase the notes on June 15, 2012.(2)Includes
interest on the capital leases.(3)Our
future funding commitments, which are subject to certain conditions that borrowers must meet to qualify for such fundings, totaled $56.5 million,
of which a minimum of $53.0 million will be funded within our existing CDO financings. Fundings are categorized by estimated funding period. Assuming that all loans that have future fundings
meet the terms to qualify for such funding, our equity requirement on the remaining future funding requirements would be approximately $3.5 million over the next two years.


Our
debt obligations contain covenants that are both financial and non-financial in nature. Significant financial covenants include a requirement that we maintain a minimum
tangible net worth and a minimum level of liquidity. As of September 30, 2010, we were in compliance with all financial and non-financial covenants in our debt agreements.

Recent Developments

Dividends

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

NIOR

On October 18, 2010, NIOR, an unconsolidated entity in which we have an equity investment, completed a merger with NorthStar
Real Estate Income Trust, Inc., ("NSREIT") a consolidated subsidiary of ours and each a commercial finance REIT sponsored by us, with NSREIT being the surviving entity. As a result of the
merger, we will deconsolidate NSREIT and will have an equity

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investment
in the surviving entity of approximately $2.1 million as of October 18, 2010. We will accounts for its investment in NSREIT under the equity method of accounting.

Inflation

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



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

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

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

Non-GAAP Financial Measures



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

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



Our
calculation of AFFO differs from the methodology used for calculating AFFO by certain other REITs and, accordingly, our AFFO may not be comparable to AFFO reported by other REITs.
Our management utilizes FFO and AFFO as measures of our operating performance, and believes they are also useful to investors, because they facilitate an understanding of our operating performance
after

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

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

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Set
forth below is a reconciliation of FFO and AFFO to net income from continuing operations before non-controlling interest for the three and nine months ended
September 30, 2010 and 2009 (in thousands):

Three Months
Ended
September 30,
2010

Three Months
Ended
September 30,
2009

Nine Months
Ended
September 30,
2010

Nine Months
Ended
September 30,
2009Funds from Operations:Income from continuing operations before extraordinary item

$
(146,799
)
$
(66,429
)
$
(124,959
)
$
37,441Non-controlling interest in joint ventures


(1,853
)

(2,555
)

(8,780
)

(6,995
)Consolidated net Income/(loss) before non-controlling interest in operating partnership


(148,652
)

(68,984
)

(133,739
)

30,446Adjustments:Preferred stock dividends


(5,231
)

(5,231
)

(15,694
)

(15,694
)Depreciation and amortization


8,621


3,148


25,467


34,217Funds from discontinued operations


(46
)

1,220


52


3,677Real estate depreciation and amortizationunconsolidated ventures


237


247


711


741Funds from Operations

$
(145,071
)
$
(69,600
)
$
(123,203
)
$
53,387Adjusted Funds from Operations:Funds from Operations

$
(145,071
)
$
(69,600
)
$
(123,203
)
$
53,387Straight-line rental income, net


(341
)

(562
)

(1,248
)

(1,733
)Straight-line rental income, discontinued operations











Straight-line rental income and fair value lease revenue, unconsolidated ventures


(18
)

(22
)

(63
)

(79
)Amortization of equity-based compensation


3,894


5,007


13,133


15,471Amortization of above/below market leases


(213
)

(304
)

(691
)

(466
)Unrealized (gains)/losses from mark-to-market adjustments


169,431


83,351


135,654


(15,059
)Unrealized (gains)/losses from mark-to-market adjustments, unconsolidated ventures





1,652


3,357


10,145Gain from acquisitions


(15,363
)




(15,363
)

Adjusted Funds from Operations

$
12,319

$
19,522

$
11,576

$
61,666


Return on Average Common Book Equity

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

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

Three Months
Ended
September 30,
2010

Annualized
September 30,
2010



Year Ended
December 31,
2009Adjusted Funds from Operations (AFFO)



$
12,319

$
49,276

[A]

$
82,545Plus: General & Administrative Expenses




19,971







70,542Less: Equity-Based Compensation included in G&A




3,894







20,474Less: Bad debt expense included in G&A












1,554AFFO, excluding G&A




28,396


113,584

[B]


131,059Average Common Book Equity & Operating Partnership Non-Controlling Interest(1)

[C]

$
1,297,653






$
1,194,310Return on Average Common Book Equity (including G&A)

[A]/[C]


3.8
%






6.9
%Return on Average Common Book Equity (excluding G&A)

[B]/[C]


8.8
%






11.0
%


(1)Average
Common Book Equity & Operating Partnership Non-controlling Interest computed using beginning and ending of period balances. ROE
will be impacted by the timing of new investment closings and repayments during the quarter.


Item 3.    Quantitative and Qualitative Disclosures About Market Risk

Although we seek to match-fund our assets and mitigate the risk associated with future interest rate volatility, we are
primarily subject to interest rate risk prior to match-funding our investments and because we generally maintain a net floating rate asset or liability position. To the extent we have net floating
rate assets, our earnings will generally increase with increases in floating interest rates, and decrease with declines in floating interest rates. Interest rates are highly sensitive to many factors,
including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.

Our
interest rate risk sensitive assets, liabilities and related derivative positions are generally held for non-trading purposes. As of September 30, 2010, a
hypothetical 100 basis point increase in interest rates applied to our variable rate assets would increase our annual interest income by approximately $28.3 million offset by an increase in our
interest expense of approximately $22.5 million on our variable rate liabilities. Similarly, a hypothetical 100 basis point decrease in interest rates would decrease our annual interest income
by the same net amount.

Real Estate Debt

We invest in real estate debt which is generally secured by commercial and multifamily properties, including first lien mortgage loans,
junior participations in first lien mortgage loans, second lien mortgage loans, mezzanine loans, and preferred equity interests in borrowers who own such properties. We generally hold these
instruments for investment rather than trading purposes. These investments bear interest at either a floating or fixed rate. The interest rates on our floating rate investments typically float at a
fixed spread over an index such as LIBOR. These instruments typically reprice every 30 days based upon LIBOR in effect at that time. Given the frequent and periodic repricing of our floating
rate investments, changes in benchmark interest rates are unlikely to materially affect the value

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of
our floating rate portfolio. Changes in short-term rates will, however, affect earnings from our investments. Increases in LIBOR will increase the interest income received by us on our
investments and therefore increase our earnings. Decreases in LIBOR have the opposite effect.

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

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

In
our real estate debt business we are also exposed to credit risk, which is the risk that the borrower under our loan agreements cannot repay its obligations to us in a timely manner.
Our loans are generally collateral dependent, meaning the principal source of repayment is from a sale or refinancing of the collateral securing our loan. Default risk increases in weak economic
conditions because collateral cash flows may be below expectations when the loan was originated. Defaults also increase when, at loan maturity, the cost of debt and equity capital is higher than when
the loan was originated. In the event that a borrower cannot repay our loan, we may exercise our remedies under the loan documents, which may include a foreclosure against the collateral. We describe
many of the options available to us in this situation in "Item 1 Business" of our Annual Report on Form 10-K. To the extent the value of our collateral exceeds the amount of
our loan (including all debt senior to us) and the expenses we incur in collecting on our loan, we would collect 100% of our loan amount. To the extent that the amount of our loan plus all debt senior
to our position exceeds the realizable value of our collateral, then we would incur a loss. We also incur credit risk in our periodically scheduled interest payments which may be interrupted as a
result of the operating performance of the underlying collateral.

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

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Real Estate Securities

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

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

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

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

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

Interest
rate changes may also impact our net book value as our investments in debt securities are marked-to-market each quarter with changes in fair value
reflected in unrealized gains/losses or other

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comprehensive
income (a separate component of owners' equity). Generally, as interest rates increase, the value of fixed rate securities within the CDO transaction, such as CMBS, decreases and as
interest rates decrease, the value of these securities will increase. Conversely, we mark our CDO liabilities to market which causes a partial offset to the income and balance sheet impact of marking
the securities assets to market.

Net Lease Properties

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

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

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

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

Derivatives and Hedging Activities

We use derivatives primarily to manage interest rate risk exposure. These derivatives are typically in the form of interest rate swap
agreements and the primary objective is to minimize interest rate risks associated with the our investment and financing activities. The counterparties of these arrangements are major financial
institutions with which we may also have other financial relationships. We are

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exposed
to credit risk in the event of non-performance by these counterparties and we monitor their financial condition; however, we currently do not anticipate that any of the
counterparties will fail to meet their obligations because of their high credit ratings and financial support from the U.S. Government. At September 30, 2010, our counterparties hold
approximately $33.5 million of cash margin as collateral against our swap contracts.

In
January 2008, we elected the fair value option for our bonds payable and our liability to subsidiary trusts issuing preferred securities. As a result, the changes in fair value of
these financial instruments are now recorded in earnings and the interest rate swap agreements associated with these debt instruments no longer qualify for hedge accounting given that the underlying
debt is remeasured with changes in the fair value recorded in earnings. The unrealized gains or losses accumulated in other comprehensive income, related to these interest rate swaps, will be
reclassified into earning over the shorter of either the life of the swap or the associated debt with current mark-to-market unrealized gains or losses recorded in earnings.
For the three months ended September 30, 2010 and 2009, we recorded, in earnings, a mark-to-market unrealized loss of $28.2 million and an unrealized loss of
$22.4 million, respectively, for the non-qualifying interest rate swaps. For the three months ended September 30, 2010 and 2009, we recorded a $1.9 million and a
$1.4 million reclassification from accumulated other comprehensive income for the non-qualifying interest rate swaps, respectively. For the nine months ended September 30,
2010 and 2009, we recorded, in earnings, a mark-to-market unrealized loss of $70.4 million and an unrealized loss of $3.6 million, respectively, for the
non-qualifying interest rate swaps. For the nine months ended September 30, 2010 and 2009, we recorded a $4.7 million and a $4.2 million reclassification from
accumulated other comprehensive income for the non-qualifying interest rate swaps, respectively.

The
following tables summarize our derivative financial instruments that were designated as cash flow hedges of interest rate risk as of December 31, 2009 (in thousands):

Number of
Instruments

Notional
Amount

Fair Value
Net Asset/
(Liability)

Range of
Fixed LIBOR

Range of MaturityInterest rate swapsAs of December 31, 2009


10

$
90,749

$
(7,691
)
4.18% - 5.08%

March 2010 - August 2018


The following tables summarize our derivative financial instruments that were not designated as hedges in qualifying hedging relationships as of
September 30, 2010 and December 31, 2009 (in thousands):

Number of
Instruments

Notional
Amount

Fair Value
Net Asset/
(Liability)

Range of
Fixed LIBOR

Range of MaturityInterest rate swapsAs of September 30, 2010


64

$
2,709,565

$
(256,923
)
0.36% - 7.00%

December 2010 - October 2019As of December 31, 2009(1)


22

$
897,335

$
(59,353
)
0.34% - 5.63%

May 2010 - June 2018


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


Item 4.    Controls and Procedures

As of the end of the period covered by this report, our management conducted an evaluation (as required under
Rules 13a-15(b) and 15d-15(b) under the Securities Exchange Act), under the supervision and with the participation of our Chief Executive Officer and Chief Financial
Officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer

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concluded
that, as of the end of the period covered by this report, our disclosure controls and procedures are effective. Notwithstanding the foregoing, a control system, no matter how well designed
and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures to disclose material information otherwise required to be set forth in our periodic reports.

Internal Control over Financial Reporting

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

PART II. OTHER INFORMATION

Item 6.    Exhibits



Exhibit
Number

Description of Exhibit3.1

Articles of Amendment and Restatement of NorthStar Realty Finance Corp., as filed with the State Department of Assessments and Taxation of Maryland on October 20, 2004 (incorporated by reference to Exhibit 3.1
to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-114675))3.2

Bylaws of NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 3.2 to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-114675))3.3

Amendment No. 1 to the Bylaws of NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 3.3 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed on April 27,
2005)3.4

Articles Supplementary Classifying NorthStar Realty Finance Corp.'s 8.75% Series A Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.2 to NorthStar Realty
Finance Corp.'s Registration Statement on Form 8-A, dated September 14, 2006)3.5

Articles Supplementary Classifying NorthStar Realty Finance Corp.'s 8.25% Series B Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to Exhibit 3.2 to NorthStar Realty
Finance Corp.'s Registration Statement on Form 8-A, dated February 7, 2007)3.6

Articles Supplementary Classifying and Designating Additional Shares of NorthStar Realty Finance Corp.'s 8.25% Series B Preferred Stock, liquidation preference $25.00 per share (incorporated by reference to
Exhibit 3.6 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007)10.1

Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of October 19, 2004, by and among NorthStar Realty Finance Corp., as sole general partner and initial limited partner and
the other limited partners a party thereto from time to time (incorporated by reference to Exhibit 10.1 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)10.2

NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan (incorporated by reference to Exhibit 10.9 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004)


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Exhibit
Number

Description of Exhibit10.3

LTIP Unit Vesting Agreement under the NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan among NorthStar Realty Finance Corp., NorthStar Realty Finance Limited Partnership and NRF Employee, LLC
(incorporated by reference to Exhibit 10.10 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended September 30, 2004)10.4

Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.7(a) to the NorthStar Realty Finance Corp. Registration Statement on Form S-11 (File No. 333-114675))10.5

NorthStar Realty Finance Corp. 2004 Long-Term Incentive Bonus Plan (incorporated by reference to Exhibit 10.13 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004)10.6

Form of Notification under NorthStar Realty Finance Corp. 2004 Long-Term Incentive Bonus Plan (incorporated by reference to Exhibit 10.14 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q
for the quarter ended September 30, 2004)10.7

Form of Indemnification Agreement for directors and officers of NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 10.15 to the NorthStar Realty Finance Corp. Registration Statement on
Form S-11 (File No. 333-114675))10.8

Amendment No. 1 to Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of March 14, 2006, by and among NorthStar Realty Finance Corp., as sole general partner and
initial limited partner and the other limited partners a party thereto from time to time (incorporated by reference to Exhibit 10.34 to NorthStar Realty Finance Corp.'s Annual Report on Form 10-K for the year ended December 31,
2005)10.9

Second Amendment to the Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of September 14, 2006 (incorporated by reference to Exhibit 3.2 to the NorthStar Realty
Finance Corp. Current Report on Form 8-K filed September 14, 2006)10.10

Third Amendment to the Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of February 7, 2007 (incorporated by reference to Exhibit 3.2 to the NorthStar Realty Finance
Corp. Current Report on Form 8-K filed February 9, 2007)10.11

Amendment No. 1 to NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan (incorporated by reference to Exhibit 99.2 to the NorthStar Realty Finance Corp. Post-Effective Amendment No. 2 to
Form S-8 filed on April 13, 2007)10.12

Amendment No. 2 to NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan (incorporated by reference to Exhibit 99.3 to the NorthStar Realty Finance Corp. Post-Effective Amendment No. 3 to
Form S-8 filed on June 6, 2007)10.13

Fourth Amendment to the Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of May 24, 2007 (incorporated by reference to Exhibit 3.3 to the NorthStar Realty Finance
Corp. Current Report on Form 8-K filed May 29, 2007)10.14

Registration Rights Agreement relating to the 7.25% Exchangeable Senior Notes due 2027 of NorthStar Realty Finance Limited Partnership, dated June 18, 2007 (incorporated by reference to Exhibit 4.2 to the
NorthStar Realty Finance Corp. Registration Statement on Form S-3 (File No. 333-146679))


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Exhibit
Number

Description of Exhibit10.15

Indenture dated as of June 18, 2007, between NorthStar Realty Finance Limited Partnership, as Issuer, NorthStar Realty Finance Corp., as Guarantor, and Wilmington Trust Company, as Trustee (incorporated by reference
to Exhibit 4.1 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed on June 22, 2007)10.16

Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and David T. Hamamoto (incorporated by reference to Exhibit 99.1 to the NorthStar Realty Finance Corp.
Current Report on Form 8-K filed October 5, 2007)10.17

Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and Andrew C. Richardson (incorporated by reference to Exhibit 99.2 to the NorthStar Realty Finance Corp.
Current Report on Form 8-K filed October 5, 2007)10.18

Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and Daniel R. Gilbert (incorporated by reference to Exhibit 99.3 to the NorthStar Realty Finance Corp.
Current Report on Form 8-K filed October 5, 2007)10.19

Executive Employment and Non-Competition Agreement, dated as of October 4, 2007, between the Company and Albert Tylis (incorporated by reference to Exhibit 99.1 to the NorthStar Realty Finance Corp. Current
Report on Form 8-K filed July 27, 2009)10.20

Registration Rights Agreement relating to the 11.50% Exchangeable Senior Notes due 2013 of NRFC NNN Holdings, LLC, dated May 28, 2008 (incorporated by reference to Exhibit 4.2 to the NorthStar Realty
Finance Corp. Registration Statement on Form S-3 (File No. 333-152545))10.21

Indenture dated as of May 28, 2008, among NRFC NNN Holdings, LLC, as Issuer, NorthStar Realty Finance Corp., NorthStar Realty Finance Limited Partnership, and NRFC Sub-REIT Corp., as Guarantors, and
Wilmington Trust Company, as Trustee (incorporated by reference to Exhibit 4.1 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed on May 28, 2008)10.22

Fifth Amendment to the Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of May 29, 2008 (incorporated by reference to Exhibit 10.37 to NorthStar Realty Finance
Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008)10.23

NorthStar Realty Finance Corp. Executive Incentive Bonus Plan (incorporated by reference to Exhibit 10.31 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2009)10.24

Form of Award Agreement (incorporated by reference to Exhibit 99.2 to the NorthStar Realty Finance Corp. Current Report on Form 8-K filed on September 11, 2009)10.25

Common Stock Purchase Warrant, Certificate No. W-1, dated October 28, 2009, issued to Wachovia Bank, National Association (incorporated by reference to Exhibit 10.36 to NorthStar Realty Finance Corp.'s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2009)10.26

Common Stock Purchase Warrant, Certificate No. W-2, dated October 28, 2009, issued to Wachovia Bank, National Association (incorporated by reference to Exhibit 10.37 to NorthStar Realty Finance Corp.'s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2009)


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Exhibit
Number

Description of Exhibit10.27

Common Stock Purchase Warrant, Certificate No. W-3, dated October 28, 2009, issued to Wachovia Bank, National Association (incorporated by reference to Exhibit 10.38 to NorthStar Realty Finance Corp.'s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2009)10.28

Separation and Consulting Agreement, dated January 25, 2010, between NorthStar Realty Finance Corp. and Richard J. McCready (incorporated by reference to Exhibit 99.1 to the NorthStar Realty Finance Corp.
Current Report on Form 8-K filed on January 25, 2010)10.29

Letter Agreement, dated June 30, 2010, by Wells Fargo Bank, National Association and Wells Fargo Bank, N.A., London Branch (as successor-by-merger to Wachovia Bank, N.A. (London Branch)), as acknowledged and
agreed by NorthStar Realty Finance Corp. and certain of its Affiliates and Subsidiaries (incorporated by reference to Exhibit 10.29 to NorthStar Realty Finance Corp.'s Quarterly Report on Form 10-Q for the quarter ended June 30,
2010)10.30

Common Stock Purchase Warrant, Certificate No. W-4, dated June 30, 2010, issued to Wells Fargo Bank, National Association (incorporated by reference to Exhibit 10.30 to NorthStar Realty Finance Corp.'s
Quarterly Report on Form 10-Q for the quarter ended June 30, 2010)31.1
*
Certification by the Chief Executive Officer pursuant to 17 CFR 240.13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
*
Certification by the Chief Financial Officer pursuant to 17 CFR 240.13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
*
Certification by the Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.32.2
*
Certification by the Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.


*Filed
herewith


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SIGNATURES

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

NORTHSTAR REALTY FINANCE CORP.Date: November 4, 2010

By:

/s/ DAVID T. HAMAMOTO David T. Hamamoto Chief Executive OfficerBy:

/s/ ANDREW C. RICHARDSON Andrew C. Richardson Chief Financial Officer


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