UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005

COMMISSION FILE NUMBER: 001-32330

|                                                              |  |                                   |  |  |  |  |
|--------------------------------------------------------------|--|-----------------------------------|--|--|--|--|
| **NORTHSTARREALTY FINANCE CORP.**                            |
| (EXACT NAME OF REGISTRANT ASSPECIFIED IN ITSCHARTER)         |
| MARYLAND                                                     |  | 11-3707493                        |
| (STATEOR OTHER JURISDICTION OFINCORPORATION OR ORGANIZATION) |  | (IRSEMPLOYERIDENTIFICATIONNUMBER) |
| 527MADISON AVENUE, 16th FLOOR, NEW YORK,NY                   |  | 10022                             |
| (ADDRESS OFPRINCIPAL EXECUTIVE OFFICE)                       |  | (ZIPCODE)                         |
| **(212)319-8801**                                            |
| (REGISTRANT'S TELEPHONENUMBER, INCLUDING AREACODE)           |
|                                                              |

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|--|
|  |  |  |  |
|  |

INDICATEBY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIREDTO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THATTHE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEENSUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES    NO .

INDICATE BY CHECK MARK WHETHER THEREGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN RULE 12B-2 OF THEEXCHANGE ACT).

YES     NO.

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|--|
|  |  |  |  |
|  |

THE COMPANYHAS ONE CLASS OF COMMON STOCK, PAR VALUE $0.01 PER SHARE, WITH21,264,930 SHARES OUTSTANDING AS OF AUGUST 12,2005.

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NORTHSTAR REALTYFINANCE CORP. QUARTERLY REPORT FOR THE THREE AND SIX MONTHSENDED JUNE 30, 2005

TABLE OF CONTENTS

|            |  |                                                                                                                                                                                                                       |  |        |  |  |  |  |  |  |
|------------|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--------|--|--|--|--|--|--|
| INDEX      |  |                                                                                                                                                                                                                  |  | PAGE   |
| PARTI.     |  | FINANCIALINFORMATION                                                                                                                                                                                                  |  |
| Item 1.    |  | FinancialStatements                                                                                                                                                                                                   |  |   |
|       |  | Condensed ConsolidatedBalance Sheets as of June 30, 2005 (unaudited) and December 31,2004                                                                                                                             |  | 3      |
|       |  | CondensedConsolidated Statements of Operations for the three and six monthsended June 30, 2005 (unaudited) and Condensed Combined Statements ofOperations for the three and six months ended June 30, 2004(unaudited) |  | 4      |
|       |  | CondensedConsolidated Statement of Cash Flows for the six months ended June 30,2005 (unaudited) and Condensed Combined Statement of Cash Flows for thesix months ended June 30, 2004(unaudited)                       |  | 5      |
|       |  | Notes to theCondensed Consolidated and Condensed Combined Financial Statements(unaudited)                                                                                                                             |  | 6      |
| Item2.     |  | Management's Discussion and Analysis of FinancialCondition and Results of Operations                                                                                                                                  |  | 24     |
| Item3.     |  | Quantitative and Qualitative Disclosures about MarketRisk                                                                                                                                                             |  | 45     |
| Item 4.    |  | Controls andProcedures                                                                                                                                                                                                |  | 49     |
| PART II.   |  | OTHERINFORMATION                                                                                                                                                                                                      |  |   |
| Item 1.    |  | LegalProceedings                                                                                                                                                                                                      |  | 51     |
| Item 2.    |  | UnregisteredSales of Equity Securities and Use ofProceeds                                                                                                                                                             |  | 51     |
| Item 3.    |  | Defaults uponSenior Securities                                                                                                                                                                                        |  | 51     |
| Item4.     |  | Submission of Matters to a Vote of SecurityHolders                                                                                                                                                                    |  | 51     |
| Item 5.    |  | OtherInformation                                                                                                                                                                                                      |  | 51     |
| Item6.     |  | Exhibits                                                                                                                                                                                                              |  | 52     |
| SIGNATURES |  |                                                                                                                                                                                                                  |  | 54     |
|            |

2

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PART I – FINANCIALINFORMATION

ITEM 1.    FINANCIAL STATEMENTS

Northstar Realty Finance Corp. and SubsidiariesCondensed Consolidated BalanceSheets

|                                                                                                                                                                         |  |             |             |                 |  |        |               |         |  |  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|-------------|-------------|-----------------|--|--------|---------------|---------|--|--|
|                                                                                                                                                                    |  | June30,2005 |             | December31,2004 |
|                                                                                                                                                                    |  | (Unaudited) |             |            |
| Assets:                                                                                                                                                                 |  |        |        |            |  |   |          |    |
| Cashand cash equivalents                                                                                                                                                |  | $           | 36,888,000  |            |  | $      | 47,733,000    |    |
| Restrictedcash                                                                                                                                                          |  |        | 78,110,000  |            |  |   | 2,713,000     |    |
| Debtsecurities held fortrading                                                                                                                                          |  |        | 212,498,000 |            |  |   | 826,611,000   |    |
| Operatingreal estate —net                                                                                                                                         |  |        | 88,181,000  |            |  |   | 43,544,000    |    |
| Debtsecurities available forsale                                                                                                                                        |  |        | 121,813,000 |            |  |   | 37,692,000    |    |
| CDOdeposit and warehouse agreements                                                                                                                                     |  |        | 12,660,000  |            |  |   | 2,988,000     |    |
| Collateral held bybroker                                                                                                                                                |  |        | 14,605,000  |            |  |   | 24,831,000    |    |
| Subordinatereal estate debtinvestments                                                                                                                                  |  |        | 302,880,000 |            |  |   | 70,841,000    |    |
| Investmentsin and advances to unconsolidatedventures                                                                                                                    |  |        | 4,241,000   |            |  |   | 5,363,000     |    |
| Receivables,net of allowance of $4,000 in 2005 and2004                                                                                                                  |  |        | 2,791,000   |            |  |   | 1,926,000     |    |
| Unbilledrents receivable, net of allowance of $1,828,000 and $4,137,000 in 2005and 2004                                                                                 |  |        | 3,330,000   |            |  |   | 5,567,000     |    |
| Duefromaffiliates                                                                                                                                                       |  |        | 585,000     |            |  |   | 176,000       |    |
| Deferredcosts and intangible assets,net                                                                                                                                 |  |        | 16,180,000  |            |  |   | 4,233,000     |    |
| Otherassets                                                                                                                                                             |  |        | 2,430,000   |            |  |   | 4,132,000     |    |
| Totalassets                                                                                                                                                             |  | $           | 897,192,000 |            |  | $      | 1,078,350,000 |    |
| Liabilitiesand Stockholders'Equity:                                                                                                                                     |  |        |        |            |  |   |          |    |
| Liabilities:                                                                                                                                                            |  |        |        |            |  |   |          |    |
| Mortgagenotes and loanspayable                                                                                                                                          |  | $           | 71,577,000  |            |  | $      | 40,557,000    |    |
| Liabilityto subsidiary trusts issuing preferredsecurities                                                                                                               |  |        | 67,020,000  |            |  |   | —       |    |
| CDObondspayable                                                                                                                                                         |  |        | 300,000,000 |            |  |   | —       |    |
| Creditfacility                                                                                                                                                          |  |        | 21,884,000  |            |  |   | 27,821,000    |    |
| Repurchaseobligations                                                                                                                                                   |  |        | 218,912,000 |            |  |   | 800,418,000   |    |
| Securitiessold, not yet purchased                                                                                                                                       |  |        | 13,081,000  |            |  |   | 24,114,000    |    |
| Obligations undercapitalleases                                                                                                                                          |  |        | 3,338,000   |            |  |   | 3,303,000     |    |
| Accountspayable and accruedexpenses                                                                                                                                     |  |        | 7,590,000   |            |  |   | 5,603,000     |    |
| Due toaffiliates                                                                                                                                                        |  |        | 148,000     |            |  |   | 250,000       |    |
| Otherliabilities                                                                                                                                                        |  |        | 1,765,000   |            |  |   | 528,000       |    |
| Totalliabilities                                                                                                                                                        |  |        | 705,315,000 |            |  |   | 902,594,000   |    |
|                                                                                                                                                                    |  |        |        |            |  |   |          |    |
| Minorityinterest                                                                                                                                                        |  |        | 36,948,000  |            |  |   | 32,447,000    |    |
| Commitmentsandcontingencies                                                                                                                                             |  |        |        |            |  |   |          |    |
| Stockholders'Equity:                                                                                                                                                    |  |        |        |            |  |   |          |    |
| Common stock, $0.01 parvalue, 500,000,000 shares authorized, 21,264,930 and 21,249,736 sharesissued and outstanding at June 30, 2005 and December 31, 2004,respectively |  |        | 213,000     |            |  |   | 212,000       |    |
| Additionalpaid-incapital                                                                                                                                                |  |        | 142,727,000 |            |  |   | 145,697,000   |    |
| Retainedearnings(deficit)                                                                                                                                               |  |        | 8,439,000   |            |  |   | (2,439,000    | )  |
| Accumulatedother comprehensiveincome                                                                                                                                    |  |        | 3,550,000   |            |  |   | (161,000      | )  |
| Totalstockholders'equity                                                                                                                                                |  |        | 154,929,000 |            |  |   | 143,309,000   |    |
| Totalliabilities and stockholders'equity                                                                                                                                |  | $           | 897,192,000 |            |  | $      | 1,078,350,000 |    |
|                                                                                                                                                                         |

Seeaccompanying notes to the condensed consolidated and combined financialstatements

3

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Northstar Realty Finance Corp. andSubsidiaries and Northstar Realty Finance Corp.PredecessorCondensed Consolidated and Condensed CombinedStatements of Operations(Unaudited)

|                                                                            |  |                                                        |            |                                                          |  |                                                      |           |                                                        |  |        |            |         |  |        |           |         |  |  |
|----------------------------------------------------------------------------|--|--------------------------------------------------------|------------|----------------------------------------------------------|--|------------------------------------------------------|-----------|--------------------------------------------------------|--|--------|------------|---------|--|--------|-----------|---------|--|--|
|                                                                       |  | TheCompany(consolidated)Three MonthsEnded June 30,2005 |            | The Predecessor (combined)ThreeMonthsEnded June 30, 2004 |  | TheCompany(consolidated)Six MonthsEnded June 30,2005 |           | The Predecessor (combined)Six MonthsEndedJune 30, 2004 |
| Revenues and otherincome:                                                  |  |                                                   |       |                                                     |  |                                                 |      |                                                   |  |   |       |    |  |   |      |    |
| Rentaland escalation income                                                |  | $                                                      | 3,323,000  |                                                     |  | $                                                    | —   |                                                   |  | $      | 6,431,000  |    |  | $      | —   |    |
| Advisory and management feeincome                                          |  |                                                   | 20,000     |                                                     |  |                                                 | 53,000    |                                                   |  |   | 71,000     |    |  |   | 108,000   |    |
| Advisoryand management fee income – relatedparties                   |  |                                                   | 1,128,000  |                                                     |  |                                                 | 584,000   |                                                   |  |   | 2,071,000  |    |  |   | 1,182,000 |    |
| Interestincome – debtsecurities                                      |  |                                                   | 10,451,000 |                                                     |  |                                                 | 308,000   |                                                   |  |   | 18,423,000 |    |  |   | 563,000   |    |
| Otherrevenue                                                               |  |                                                   | 5,000      |                                                     |  |                                                 | —   |                                                   |  |   | 5,000      |    |  |   | —   |    |
| Totalrevenues                                                              |  |                                                   | 14,927,000 |                                                     |  |                                                 | 945,000   |                                                   |  |   | 27,001,000 |    |  |   | 1,853,000 |    |
| Expenses:                                                                  |  |                                                   |       |                                                     |  |                                                 |      |                                                   |  |   |       |    |  |   |      |    |
| Realestate properties – operatingexpenses                            |  |                                                   | 743,000    |                                                     |  |                                                 | —   |                                                   |  |   | 1,473,000  |    |  |   | —   |    |
| Interestexpense                                                            |  |                                                   | 6,979,000  |                                                     |  |                                                 | —   |                                                   |  |   | 12,946,000 |    |  |   | —   |    |
| Managementfees – relatedparty                                        |  |                                                   | 61,000     |                                                     |  |                                                 | —   |                                                   |  |   | 118,000    |    |  |   | —   |    |
| Generalandadministrative:                                                  |  |                                                   |       |                                                     |  |                                                 |      |                                                   |  |   |       |    |  |   |      |    |
| Direct:                                                                    |  |                                                   |       |                                                     |  |                                                 |      |                                                   |  |   |       |    |  |   |      |    |
| Salariesand othercompensation                                              |  |                                                   | 1,278,000  |                                                     |  |                                                 | 298,000   |                                                   |  |   | 2,539,000  |    |  |   | 600,000   |    |
| Sharedservices – relatedparty                                        |  |                                                   | 344,000    |                                                     |  |                                                 | —   |                                                   |  |   | 686,000    |    |  |   | —   |    |
| Equitybasedcompensation                                                    |  |                                                   | 959,000    |                                                     |  |                                                 | —   |                                                   |  |   | 1,759,000  |    |  |   | —   |    |
| Insurance                                                                  |  |                                                   | 217,000    |                                                     |  |                                                 | —   |                                                   |  |   | 430,000    |    |  |   | —   |    |
| Accountingand auditingfees                                                 |  |                                                   | 290,000    |                                                     |  |                                                 | —   |                                                   |  |   | 1,316,000  |    |  |   | —   |    |
| Othergeneral andadministrative                                             |  |                                                   | 1,033,000  |                                                     |  |                                                 | 54,000    |                                                   |  |   | 2,011,000  |    |  |   | 101,000   |    |
| Allocated:                                                                 |  |                                                   |       |                                                     |  |                                                 |      |                                                   |  |   |       |    |  |   |      |    |
| Salariesand othercompensation                                              |  |                                                   | —    |                                                     |  |                                                 | 625,000   |                                                   |  |   | —    |    |  |   | 1,244,000 |    |
| Insurance                                                                  |  |                                                   | —    |                                                     |  |                                                 | 97,000    |                                                   |  |   | —    |    |  |   | 195,000   |    |
| Othergeneral andadministrative                                             |  |                                                   | —    |                                                     |  |                                                 | 213,000   |                                                   |  |   | —    |    |  |   | 522,000   |    |
| Totalgeneral andadministrative                                             |  |                                                   | 4,121,000  |                                                     |  |                                                 | 1,287,000 |                                                   |  |   | 8,741,000  |    |  |   | 2,662,000 |    |
| Depreciationandamortization                                                |  |                                                   | 1,046,000  |                                                     |  |                                                 | —   |                                                   |  |   | 1,984,000  |    |  |   | —   |    |
| Totalexpenses                                                              |  |                                                   | 12,950,000 |                                                     |  |                                                 | 1,287,000 |                                                   |  |   | 25,262,000 |    |  |   | 2,662,000 |    |
| Income(loss) fromoperations                                                |  |                                                   | 1,977,000  |                                                     |  |                                                 | (342,000  | )                                                 |  |   | 1,739,000  |    |  |   | (809,000  | )  |
| Equityin earnings of unconsolidated/uncombinedventures                     |  |                                                   | 60,000     |                                                     |  |                                                 | 492,000   |                                                   |  |   | 106,000    |    |  |   | 864,000   |    |
| Unrealizedgain (loss) on investments andother                              |  |                                                   | (498,000   | )                                                   |  |                                                 | (333,000  | )                                                 |  |   | 549,000    |    |  |   | 717,000   |    |
| Realizedgain (loss) on investments andother                                |  |                                                   | (86,000    | )                                                   |  |                                                 | —   |                                                   |  |   | 501,000    |    |  |   | —   |    |
| Netincome (loss) before minorityinterest                                   |  |                                                   | 1,453,000  |                                                     |  |                                                 | (183,000  | )                                                 |  |   | 2,895,000  |    |  |   | 772,000   |    |
| Minorityinterest                                                           |  |                                                   | (300,000   | )                                                   |  |                                                 | —   |                                                   |  |   | (597,000   | )  |  |   | —   |    |
| Netincome (loss) from continuingoperations                                 |  | $                                                      | 1,153,000  |                                                     |  | $                                                    | (183,000  | )                                                 |  | $      | 2,298,000  |    |  | $      | 772,000   |    |
| Income(loss) from discontinued operations, net of minorityinterest         |  |                                                   | 40,000     |                                                     |  |                                                 | —   |                                                   |  |   | (50,000    | )  |  |   | —   |    |
| Gainon sale from discontinued operations, net of minorityinterest          |  |                                                   | 8,630,000  |                                                     |  |                                                 | —   |                                                   |  |   | 8,630,000  |    |  |   | —   |    |
| Netincome(loss)                                                            |  | $                                                      | 9,823,000  |                                                     |  | $                                                    | (183,000  | )                                                 |  | $      | 10,878,000 |    |  | $      | 772,000   |    |
| Othercomprehensiveincome:                                                  |  |                                                   |       |                                                     |  |                                                 |      |                                                   |  |   |       |    |  |   |      |    |
| Unrealizedgain (loss) on debt securities available for sale andderivatives |  |                                                   | 1,456,000  |                                                     |  |                                                 | (31,000   | )                                                 |  |   | 3,711,000  |    |  |   | 476,000   |    |
| Comprehensiveincome                                                        |  | $                                                      | 11,279,000 |                                                     |  | $                                                    | (214,000  | )                                                 |  | $      | 14,589,000 |    |  | $      | 1,248,000 |    |
| Netincome per share from continuing operations                             |  | $                                                      | 0.06       |                                                     |  | $                                                    | —   |                                                   |  | $      | 0.11       |    |  | $      | —   |    |
| Income fromdiscontinuedoperations                                          |  |                                                   | —    |                                                     |  |                                                 | —   |                                                   |  |   | —    |    |  |   | —   |    |
| Gainon sale of discontinuedoperations                                      |  |                                                   | 0.41       |                                                     |  |                                                 | —   |                                                   |  |   | 0.41       |    |  |   | —   |    |
| Netincome available to commonshareholders                                  |  | $                                                      | 0.47       |                                                     |  |                                                 | —   |                                                   |  | $      | 0.52       |    |  |   | —   |    |
| Weightedaverage number of shares of commonstock:                           |  |                                                   |       |                                                     |  |                                                 |      |                                                   |  |   |       |    |  |   |      |    |
| Basic                                                                      |  |                                                   | 21,250,240 |                                                     |  |                                                 | —   |                                                   |  |   | 21,250,240 |    |  |   | —   |    |
| Diluted                                                                    |  |                                                   | 26,766,315 |                                                     |  |                                                 | —   |                                                   |  |   | 26,766,315 |    |  |   | —   |    |
|                                                                            |

Seeaccompanying notes to the condensed consolidated and combined financialstatements.

4

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Northstar Realty Finance Corp. andSubsidiaries and Northstar Realty Finance Corp.PredecessorCondensed Consolidated and Condensed CombinedStatements of Cash Flows(Unaudited)

|                                                                                                          |  |                                    |              |                                    |  |        |            |         |  |  |
|----------------------------------------------------------------------------------------------------------|--|------------------------------------|--------------|------------------------------------|--|--------|------------|---------|--|--|
|                                                                                                     |  | TheCompany(consolidated)           |              | ThePredecessor(combined)           |
|                                                                                                     |  | Forthe SixMonths EndedJune 30,2005 |              | For theSixMonths EndedJune 30,2004 |
| Net cashprovided by operatingactivities                                                                  |  | $                                  | 610,061,000  | (1)                           |  | $      | 1,021,000  |    |
| Cashflows from investingactivities:                                                                      |  |                               |         |                               |  |   |       |    |
| Additions tooperating real estate,net                                                                    |  |                               | (65,158,000  | )                             |  |   | —    |    |
| Netproceeds from disposition of operating realestate                                                     |  |                               | 27,988,000   |                               |  |   | —    |    |
| Purchaseof debt securities available forsale                                                             |  |                               | (74,778,000  | )                             |  |   | —    |    |
| Subordinatereal estate debtinvestments                                                                   |  |                               | (231,838,000 | )                             |  |   | —    |    |
| Increasein CDO warehousedeposits                                                                         |  |                               | (12,500,000  | )                             |  |   | (3,034,000 | )  |
| Proceedsfrom CDOwarehouse                                                                                |  |                               | 988,000      |                               |  |   | 672,000    |    |
| Restrictedcash (CDOIV)                                                                                   |  |                               | (72,330,000  | )                             |  |   | —    |    |
| Contributionsto unconsolidated/uncombinedventures                                                        |  |                               | (2,026,000   | )                             |  |   | (6,000     | )  |
| Distributionsfrom unconsolidated/uncombinedventures                                                      |  |                               | 3,238,000    |                               |  |   | 1,168,000  |    |
| Netcash used in investingactivities                                                                      |  |                               | (426,416,000 | )                             |  |   | (1,200,000 | )  |
| Cashflows from financingactivities:                                                                      |  |                               |         |                               |  |   |       |    |
| Settlement ofshort saleobligation                                                                        |  |                               | (11,298,000  | )                             |  |   | —    |    |
| Collateralheld bybroker                                                                                  |  |                               | 10,226,000   |                               |  |   | —    |    |
| Capitalcontributions by owners of thePredecessor                                                         |  |                               | —      |                               |  |   | 2,350,000  |    |
| Mortgageprincipalrepayments                                                                              |  |                               | (25,980,000  | )                             |  |   | —    |    |
| Mortgageborrowings                                                                                       |  |                               | 57,000,000   |                               |  |   | —    |    |
| Liabilityto subsidiary trusts issuing preferredsecurities                                                |  |                               | 67,020,000   |                               |  |   | —    |    |
| Proceedsfrom creditfacilities                                                                            |  |                               | 227,652,000  |                               |  |   | —    |    |
| Repaymentof creditfacilities                                                                             |  |                               | (233,589,000 | )                             |  |   | —    |    |
| Repurchaseobligationrepayments                                                                           |  |                               | (581,506,000 | )                             |  |   | —    |    |
| Distributionsto owners of thePredecessor                                                                 |  |                               | —      |                               |  |   | (2,286,000 | )  |
| Bondspayable                                                                                             |  |                               | 300,000,000  |                               |  |   | —    |    |
| Dividendsanddistributions                                                                                |  |                               | (4,015,000   | )                             |  |   | —    |    |
| Netcash (used in) provided by financingactivities                                                        |  |                               | (194,490,000 | )                             |  |   | 64,000     |    |
| Netdecrease in cash & cashequivalents                                                                |  |                               | (10,845,000  | )                             |  |   | (115,000   | )  |
| Cash& cash equivalents — beginning ofperiod                                                    |  |                               | 47,733,000   |                               |  |   | 1,944,000  |    |
| Cash& cash equivalents — end ofperiod                                                          |  | $                                  | 36,888,000   |                               |  | $      | 1,829,000  |    |
| Supplementaldisclosure of cash flowinformation:                                                          |  |                               |         |                               |  |   |       |    |
| Cash paid forinterest                                                                                    |  | $                                  | 12,314,000   |                               |  | $      | —    |    |
| Supplemental disclosure ofnon-cash investingactivities:                                                  |  |                               |         |                               |  |   |       |    |
| Reclassification ofCDO deposit to debt securities available forsale                                      |  | $                                  | 2,690,000    |                               |  | $      | —    |    |
| Write off of deferred cost and straight-linerents in connection with disposition of operating realestate |  | $                                  | 2,715,000    |                               |  | $      | —    |    |
|                                                                                                          |

|  |
|--|
|  |  |
|  |

|     |                                                                                   |
|-----|-----------------------------------------------------------------------------------|
| (1) | Includes$613.8 million of proceeds from sales of debt securities held fortrading. |

See accompanying notes to thecondensed consolidated and combined financialstatements.

5

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

1.    Formation and Organization

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

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

2.    Basis of Quarterly Presentation

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

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

Principles of Consolidation andCombination

The Company

The consolidated financialstatements include the accounts of the Company, its majority-ownedsubsidiaries and variable interest entities where the Company is theprimary beneficiary. All significant intercompany balances have beeneliminated in consolidation.

The Predecessor

Thecombined and uncombined interests in entities contributed to theOperating Partnership have been aggregated to form the Predecessor. Theinterests in entities contributed to the Operating Partnership, whichwere controlled by NCIC, and variable interest entities where thePredecessor is deemed the primary beneficiary are reflected in thePredecessor on a combined basis. All intercompany accounts have beeneliminated in combination.

Reclassifications

Certainprior period amounts have been reclassified to conform to the currentperiod presentation.

3.    Property Acquisitions

Chatsworth, California

On January 14, 2005, the Companyclosed the acquisition of a portfolio of three net-leased officeproperties, totaling 257,336 square feet of rentable space inChatsworth, CA (the "Chatsworth properties"),for $63.5 million. The properties are net leased to Washington MutualBank under leases that expire in June 2015. The Company financed theacquisition with a $44 million first mortgage, and a $13 millionmezzanine loan which was funded by the warehouse provider under thewarehouse agreement for CDO III. This mezzanine loan currentlyconstitutes a portion of the portfolio of securities owned by CDO III.One of the properties is subject to a ground lease. The ground leasehas an initial remaining term of 35 years and two five-year extensionoptions. The ground lease also provides for periodic increases in baserent based on the change in the Consumer Price Index.

TheCompany has made a preliminary allocation of the purchase price toproperty components pending receipt of an appraisal of the officeproperties. The Company received the final appraisal during the thirdquarter of 2005 and will make a final allocation of the purchase pricein accordance with FASB 141, "BusinessCombinations" in such quarter.

4.    DebtSecurities Available for Sale

The Company accounts for itsinvestments in CDO I, CDO II and CDO III (collectively"Investment Grade CDO Investments") as debtsecurities available for sale pursuant to Emerging Issues Task Force("EITF") 99-20 "Recognition ofInterest Income and Impairment on Purchased and Retained BeneficialInterests in Securitized Financial Assets." TheCompany's potential loss is limited to its CDO Investments ofapproximately $74.4 million as of June 30, 2005. As of that date, theCompany also has $47.4 million of commercial mortgage backed securities("CMBS") investments which are recorded atfair market value, net of premium and discount. For the three and sixmonths ended June 30, 2005, the Company recognized an unrealized gainof approximately $1.4 million and $3.7 million related to the change infair value of these investments, respectively.

The InvestmentGrade CDO Investments are variable interest entities, however, neitherthe Company nor the Predecessor is the primary beneficiary under FASBInterpretation No 46R ("FIN 46R")"Consolidation of Variable Interest Entities"and has not consolidated these variable interest entities.

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

CDO I

The following is a summaryof the real estate securities, which were held by CDO I on June 30,2005 (inthousands):

|                   |  |           |         |                       |  |                 |        |         |  |             |  |        |      |         |  |        |      |        |  |  |  |  |
|-------------------|--|-----------|---------|-----------------------|--|-----------------|--------|---------|--|-------------|--|--------|------|---------|--|--------|------|--------|--|--|--|--|
|              |  |      |         |                  |  | WeightedAverage |
|              |  | Principal |         | PercentageofPrincipal |  | Rating          |        | Coupon  |  | Term(Years) |
| CMBS              |  | $         | 224,990 |                  |  |            | 63.20  | %  |  | BBB-        |  |   | 6.54 | %  |  |   | 6.47 |   |
| UnsecuredREITDebt |  |      | 113,020 |                  |  |            | 31.75  | %  |  | BBB/BBB-    |  |   | 6.45 | %  |  |   | 7.02 |   |
| RealEstateCDO     |  |      | 18,000  |                  |  |            | 5.05   | %  |  | BBB/BBB-    |  |   | 7.74 | %  |  |   | 7.51 |   |
| Total             |  | $         | 356,010 |                  |  |            | 100.00 | %  |  | BBB/BBB-    |  |   | 6.57 | %  |  |   | 6.70 |   |
|                   |

Thefollowing table lists the CDO bonds payable to third parties for CDO Iat June 30, 2005 (inthousands):

|        |  |                     |         |                     |  |                        |         |              |  |                    |         |                                |  |              |  |          |  |              |  |  |  |  |  |  |  |  |
|--------|--|---------------------|---------|---------------------|--|------------------------|---------|--------------|--|--------------------|---------|--------------------------------|--|--------------|--|----------|--|--------------|--|--|--|--|--|--|--|--|
| Class  |  | OriginalNoteBalance |         | PrincipalRepayments |  | NoteBalance At 6/30/05 |         | InterestRate |  | StatedMaturityDate |         | Ratings(Moody's/S&P/Fitch) |
| A-1    |  | $                   | 250,000 |                |  | $                      | (46,200 | )       |  | $                  | 203,800 |                           |  | LIBOR+ 0.42% |  | 8/1/2038 |  | Aaa/AAA/AAA  |
| A-2A   |  |                | 45,000  |                |  |                   | — |         |  |               | 45,000  |                           |  | LIBOR+0.95%  |  | 8/1/2038 |  | Aa2/AAA/AAA  |
| A-2B   |  |                | 15,000  |                |  |                   | — |         |  |               | 15,000  |                           |  | 5.68%        |  | 8/1/2038 |  | Aa2/AAA/AAA  |
| B-1    |  |                | 15,000  |                |  |                   | — |         |  |               | 15,000  |                           |  | LIBOR+1.675% |  | 8/1/2038 |  | NR/A+/A+     |
| B-2    |  |                | 10,000  |                |  |                   | — |         |  |               | 10,000  |                           |  | LIBOR+1.80%  |  | 8/1/2038 |  | A3/A/A       |
| C-1A   |  |                | 5,000   |                |  |                   | — |         |  |               | 5,000   |                           |  | LIBOR+3.00%  |  | 8/1/2038 |  | Baa3/A-/BBB+ |
| C-1B   |  |                | 5,000   |                |  |                   | — |         |  |               | 5,000   |                           |  | 7.70%        |  | 8/1/2038 |  | Baa3/A-/BBB+ |
| C-2    |  |                | 24,000  |                |  |                   | — |         |  |               | 24,000  |                           |  | 7.01%        |  | 8/1/2038 |  | NR/BBB/BBB   |
| D-1A   |  |                | 10,000  |                |  |                   | — |         |  |               | 10,000  |                           |  | LIBOR+2.30%  |  | 8/1/2038 |  | NR/BB+/BB+   |
| D-1B   |  |                | 4,000   |                |  |                   | — |         |  |               | 4,000   |                           |  | 7.01%        |  | 8/1/2038 |  | NR/BB+/BB+   |
|   |  | $                   | 383,000 |                |  | $                      | (46,200 | )       |  | $                  | 336,800 |                           |  |         |  |     |  |         |
|        |

Theweighted average interest rate for the CDO I bonds payable was6.03% at June 30, 2005, including the effect of the interestrate swap held by the CDO.

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

CDO II

The following is a summaryof the real estate securities, which are held by CDO II at June 30,2005 (inthousands):

|                   |  |           |         |                       |  |                 |        |         |  |             |  |        |      |         |  |        |      |        |  |  |  |  |
|-------------------|--|-----------|---------|-----------------------|--|-----------------|--------|---------|--|-------------|--|--------|------|---------|--|--------|------|--------|--|--|--|--|
|              |  |      |         |                  |  | WeightedAverage |
|              |  | Principal |         | PercentageofPrincipal |  | Rating          |        | Coupon  |  | Term(Years) |
| CMBS              |  | $         | 284,878 |                  |  |            | 71.61  | %  |  | BBB/BBB-    |  |   | 6.44 | %  |  |   | 7.21 |   |
| UnsecuredREITDebt |  |      | 92,615  |                  |  |            | 23.28  | %  |  | BBB-        |  |   | 5.29 | %  |  |   | 7.94 |   |
| RealEstateCDO     |  |      | 20,332  |                  |  |            | 5.11   | %  |  | BBB-        |  |   | 6.33 | %  |  |   | 8.81 |   |
| Total             |  | $         | 397,825 |                  |  |            | 100.00 | %  |  | BBB/BBB-    |  |   | 6.11 | %  |  |   | 7.46 |   |
|                   |

Thefollowing table lists the CDO bonds payable to third parties for CDO IIat June 30, 2005 (inthousands):

|        |  |                     |         |                    |  |                       |         |              |  |                    |         |                                |  |             |  |          |  |                |  |  |  |  |  |  |  |  |
|--------|--|---------------------|---------|--------------------|--|-----------------------|---------|--------------|--|--------------------|---------|--------------------------------|--|-------------|--|----------|--|----------------|--|--|--|--|--|--|--|--|
| Class  |  | OriginalNoteBalance |         | PrincipalRepayment |  | NoteBalance At6/30/05 |         | InterestRate |  | StatedMaturityDate |         | Ratings(Moody's/S&P/Fitch) |
| A-1    |  | $                   | 236,000 |               |  | $                     | (4,070  | )       |  | $                  | 231,930 |                           |  | LIBOR+0.35% |  | 6/1/2039 |  | Aaa/AAA/AAA    |
| A-2A   |  |                | 42,000  |               |  |                  | — |         |  |               | 42,000  |                           |  | LIBOR+0.55% |  | 6/1/2039 |  | NR/AAA/AAA     |
| A-2B   |  |                | 15,000  |               |  |                  | — |         |  |               | 15,000  |                           |  | 5.55%       |  | 6/1/2039 |  | NR/AAA/AAA     |
| B-1    |  |                | 12,000  |               |  |                  | — |         |  |               | 12,000  |                           |  | LIBOR+0.8%  |  | 6/1/2039 |  | A2/A/A         |
| B-2    |  |                | 14,000  |               |  |                  | — |         |  |               | 14,000  |                           |  | LIBOR+1.05% |  | 6/1/2039 |  | A3/A-/A-       |
| C-1    |  |                | 24,000  |               |  |                  | — |         |  |               | 24,000  |                           |  | LIBOR+2.00% |  | 6/1/2039 |  | Baa3/BBB+/BBB+ |
| C-2a   |  |                | 6,000   |               |  |                  | — |         |  |               | 6,000   |                           |  | LIBOR+2.35% |  | 6/1/2039 |  | NR/BBB/BBB     |
| C-2b   |  |                | 16,000  |               |  |                  | — |         |  |               | 16,000  |                           |  | 6.591%      |  | 6/1/2039 |  | NR/BBB/BBB     |
|   |  | $                   | 365,000 |               |  | $                     | (4,070  | )       |  | $                  | 360,930 |                           |  |        |  |     |  |           |
|        |

Theweighted average interest rate for the CDO II bonds payable was5.37% at June 30, 2005, including the effect of the interestrate swap held by the CDO.

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

CDO III

In March 2005, theCompany closed its third CDO issuance ("CDOIII") and acquired all of the unrated income notes of CDOIII for $17.5 million with a face amount of $23 million and alsopurchased the BB-rated Class D Notes, with a face amount of $16.0million, for $14.1 million. The Company partially financed theacquisition of the Class D Notes with a $9.1 million advance from ourDBAG facility, defined herein.

The following is a summary of thereal estate securities, which are held by CDO III at June 30, 2005 (inthousands):

|                           |  |           |         |                       |  |                 |        |         |  |             |  |        |      |         |  |        |      |        |  |  |  |  |
|---------------------------|--|-----------|---------|-----------------------|--|-----------------|--------|---------|--|-------------|--|--------|------|---------|--|--------|------|--------|--|--|--|--|
|                      |  |      |         |                  |  | WeightedAverage |
|                      |  | Principal |         | PercentageofPrincipal |  | Rating          |        | Coupon  |  | Term(Years) |
| CMBS                      |  | $         | 284,748 |                  |  |            | 71.04  | %  |  | BBB-/BB+    |  |   | 6.09 | %  |  |   | 6.51 |   |
| UnsecuredREITDebt         |  |      | 61,580  |                  |  |            | 15.36  | %  |  | BBB-        |  |   | 5.82 | %  |  |   | 8.55 |   |
| OtherReal EstateInterests |  |      | 28,583  |                  |  |            | 7.13   | %  |  | A-          |  |   | 6.80 | %  |  |   | 7.83 |   |
| RealEstateCDO             |  |      | 25,945  |                  |  |            | 6.47   | %  |  | BBB/BBB-    |  |   | 6.28 | %  |  |   | 7.82 |   |
| Total                     |  | $         | 400,856 |                  |  |            | 100.00 | %  |  | BBB-        |  |   | 6.12 | %  |  |   | 7.00 |   |
|                           |

Thefollowing table lists the CDO bonds payable to third parties for CDOIII at June 30, 2005 (inthousands):

|        |  |                     |         |                     |  |                      |         |              |  |                    |         |                        |  |             |  |          |  |           |  |  |  |  |  |  |  |  |
|--------|--|---------------------|---------|---------------------|--|----------------------|---------|--------------|--|--------------------|---------|------------------------|--|-------------|--|----------|--|-----------|--|--|--|--|--|--|--|--|
| Class  |  | OriginalNoteBalance |         | PrincipalRepayments |  | NoteBalanceAt6/30/05 |         | InterestRate |  | StatedMaturityDate |         | Ratings(S&P/Fitch) |
| A-1    |  | $                   | 294,000 |                |  | $                    | — |         |  | $                  | 294,000 |                   |  | LIBOR+0.28% |  | 6/1/2040 |  | AAA/AAA   |
| A-2A   |  |                | 15,000  |                |  |                 | — |         |  |               | 15,000  |                   |  | LIBOR+0.50% |  | 6/1/2040 |  | AA/AA     |
| A-2B   |  |                | 5,000   |                |  |                 | — |         |  |               | 5,000   |                   |  | 5.042%      |  | 6/1/2040 |  | AA/AA     |
| B      |  |                | 17,000  |                |  |                 | — |         |  |               | 17,000  |                   |  | LIBOR+0.85% |  | 6/1/2040 |  | A-/A-     |
| C-1a   |  |                | 10,000  |                |  |                 | — |         |  |               | 10,000  |                   |  | LIBOR+1.25% |  | 6/1/2040 |  | BBB+/BBB+ |
| C-1b   |  |                | 6,000   |                |  |                 | — |         |  |               | 6,000   |                   |  | 5.804%      |  | 6/1/2040 |  | BBB+/BBB+ |
| C-2a   |  |                | 12,000  |                |  |                 | — |         |  |               | 12,000  |                   |  | LIBOR+1.55% |  | 6/1/2040 |  | BBB/BBB   |
| C-2b   |  |                | 2,000   |                |  |                 | — |         |  |               | 2,000   |                   |  | 6.135%      |  | 6/1/2040 |  | BBB/BBB   |
|   |  | $                   | 361,000 |                |  | $                    | — |         |  | $                  | 361,000 |                   |  |
|        |

The weighted averageinterest rate for the CDO III bonds payable was 3.37% at June30, 2005.

5.    CDO Deposit and Warehouse Agreements

Warehouse Agreement CDO V

On May 4, 2005, the Companyentered into a warehouse arrangement with a major commercial bankwhereby the bank has agreed to purchase up to $400 million of CMBS andother real estate debt securities under the Company's direction,with the expectation of selling such securities to the Company'sfourth investment grade CDO issuance ("CDOV"). As of June 30, 2005, the Company has deposited $12.5million as security for the purpose of covering a portion of any lossesor costs associated with the accumulation of these securities under thewarehouse agreement and will be required to deposit additional equitybased on accumulations of securities that will be made under thewarehouse agreement. The bank has accumulated approximately $238.0million of real estate securities under the terms of the warehouseagreement as of June 30, 2005. The CDO V warehouse agreement alsoprovides for the Company's notional participation in the incomethat the assets generate after deducting a notional debt cost. Theagreement is being treated as a non-hedge derivative for accountingpurposes and is marked-to-market through income. The Company recorded

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

an unrealized gain of $0.2 million for thethree and six months ended June 30, 2005 related to the change in fairvalue of the warehouse agreement. The collateral being accumulatedunder this agreement is expected to be included in a securitizationtransaction in which the Company would acquire all of the equityinterests.

6.    Debt Securities Held for Trading

Asof June 30, 2005, the Company's debt securities held for tradinghad a market value of $212.5 million and the remaining obligationsunder the related repurchase agreements amounted to $207.3 million.Four issuers of these debt securities represent 22%, 15%,15% and 12%, respectively, of the total market value ofthe debt securities held for trading at June 30, 2005. The Companyrecorded an unrealized loss related to the change in fair value ofthese securities of $84,000 and $102,000 and a realized loss of $86,000and $189,000 related to the sales for the three and six months endedJune 30, 2005, respectively.

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

In June2005, the Company closed its fourth CDO issuance ("CDOIV") and retained all of the below investment gradesecurities and income notes, as listed below of approximately $100million. The Company issued $300 million face amount of the CDO bondsand sold them in a private placement to third parties. The proceeds ofthe CDO issuance were used to repay the entire outstanding principalbalance of the DBAG Facility of $233.6 million at closing. The CDObonds are collateralized by the assets listed below and approximately$72.3 million of cash is available to complete the ramp-up of CDO IVwhich is recorded in the condensed consolidated balance sheet inrestricted cash at June 30, 2005.

CDO IV is a variable interestentity under FIN 46R. In determining whether the Company is the primarybeneficiary, management considered the impact of all cash flows fromthe Company's equity interest in CDO IV, the BB and B notes andall collateral management fees to be received by the Company from CDOIV. The Company's variable interest in these cash flows wascompared to the other variable interests. Based on management'sanalysis, the Company was deemed to be the primary beneficiary.Accordingly, CDO IV was consolidated into the condensed consolidatedfinancial statements of the Company as of June 30, 2005.

At June30, 2005, the Company's investments in subordinate real estatedebt investments and debt securities available for sale, listed below,are assets of CDO IV and serve as collateral for the CDO IV bondspayable (inthousands):

|                                   |  |                        |  |                  |        |                  |  |                                |  |                              |  |       |  |  |  |  |  |  |  |  |  |  |
|-----------------------------------|--|------------------------|--|------------------|--------|------------------|--|--------------------------------|--|------------------------------|--|-------|--|--|--|--|--|--|--|--|--|--|
| LoanName/Collateral               |  | LoanType               |  | Principal Amount |        | Initial Maturity |  | InterestRate orIndex andSpread |  | Interest Rate - June 30,2005 |
| New York OfficeBuilding           |  | JuniorParticipation    |  | $                | 24,000 |             |  | 8/9/2006                       |  | LIBOR+3.75%                  |  | 6.97% |
| HotelPortfolio                    |  | MezzanineLoan          |  |             | 22,000 |             |  | 7/9/2006                       |  | LIBOR+4.75%                  |  | 7.97% |
| ResidentialCondominium Conversion |  | JuniorParticipation(1) |  |             | 24,841 |             |  | 10/9/2006                      |  | LIBOR+5.60%                  |  | 8.82% |
| FloridaMultifamily                |  | JuniorParticipation    |  |             | 21,200 |             |  | 7/31/2006                      |  | LIBOR+5.50%                  |  | 8.72% |
|                                   |

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

|                                              |  |                     |         |                  |         |                  |  |                                |  |                              |  |              |  |  |  |  |  |  |  |  |  |  |
|----------------------------------------------|--|---------------------|---------|------------------|---------|------------------|--|--------------------------------|--|------------------------------|--|--------------|--|--|--|--|--|--|--|--|--|--|
| LoanName/Collateral                          |  | LoanType            |         | Principal Amount |         | Initial Maturity |  | InterestRate orIndex andSpread |  | Interest Rate - June 30,2005 |
| New YorkHotel                                |  | JuniorParticipation |         |             | 30,000  |             |  | 12/9/2006                      |  | LIBOR+5.55%                  |  | 8.77%        |
| BostonHotel                                  |  | JuniorParticipation |         |             | 13,000  |             |  | 4/1/2007                       |  | LIBOR +5.15%                 |  | 8.28%        |
| StoragePortfolio                             |  | JuniorParticipation |         |             | 7,820   |             |  | 11/1/2007                      |  | LIBOR+4.68%                  |  | 7.80%        |
| HotelPortfolio                               |  | JuniorParticipation |         |             | 4,500   |             |  | 9/1/2006                       |  | LIBOR+6.90%                  |  | 10.03%       |
| RetailPortfolio                              |  | JuniorParticipation |         |             | 10,000  |             |  | 9/9/2006                       |  | LIBOR+2.40%                  |  | 5.62%        |
| HotelPortfolio                               |  | JuniorParticipation |         |             | 13,700  |             |  | 7/9/2006                       |  | LIBOR+3.00%                  |  | 6.22%        |
| HotelPortfolio                               |  | MezzanineLoan       |         |             | 14,277  |             |  | 2/9/2007                       |  | LIBOR+3.5%                   |  | 6.72%        |
| HotelPortfolio                               |  | JuniorParticipation |         |             | 5,766   |             |  | 1/9/2006                       |  | LIBOR+3.25%                  |  | 6.49%        |
| New YorkOffice                               |  | MezzanineLoan       |         |             | 20,000  |             |  | 10/5/2006                      |  | LIBOR+4.51%                  |  | 7.73%        |
| CaliforniaOffice                             |  | MezzanineLoan       |         |             | 18,000  |             |  | 1/9/2007                       |  | LIBOR+5.35%                  |  | 8.57%        |
| Las VegasRetail                              |  | JuniorParticipation |         |             | 19,000  |             |  | 10/5/2006                      |  | LIBOR+3.35%                  |  | 6.57%        |
| ChicagoOffice                                |  | JuniorParticipation |         |             | 15,000  |             |  | 5/6/2006                       |  | LIBOR+1.84%                  |  | 5.06%        |
| Subtotal                                     |  |                |         |             | 263,104 |             |  |                           |  |                         |  |         |
| Discount                                     |  |                |         |             | (888    | )           |  |                           |  |                         |  |         |
| Totalsubordinate real estate debtinvestments |  | $                   | 262,216 |             |         |             |  |                           |  |                         |
| CMBSBonds                                    |  | CMBS                |         |             | 49,813  |             |  | 11/2026 –4/2040          |  | 4.90% - 7.00%                |  | 4.90%- 7.00% |
| CDO III                                      |  | CDO -BBs            |         |             | 16,000  |             |  | 4/5/2040                       |  | 6.46%                        |  | 6.46%        |
| Subtotal                                     |  |                |         |             | 65,813  |             |  |                           |  |                         |  |         |
| Discountand FMVadjustment                    |  |                | (4,363  | )           |         |             |  |                           |  |                         |
| Debtsecurities available forsale             |  | $                   | 61,450  |             |         |             |  |                           |  |                         |
| Total                                        |  |                |         | $                | 323,666 |             |  |                           |  |                         |  |         |
|                                              |

Asof June 30, 2005, all loans were performing in accordance with theterms of the loanagreements.

|  |
|--|
|  |  |
|  |

|  |                                                            |
|--|------------------------------------------------------------|
|  | (1)   Borrowerrepaid loan on July 20, 2005. |

12

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

The Company has acquired $41.3 million ofsubordinate real estate debt investments which are not collateral forCDO IV. The table below summarizes these additional investments held atJune 30, 2005 (inthousands):

|                     |  |                     |  |                 |        |                 |  |                               |  |                            |  |        |  |  |  |  |  |  |  |  |  |  |
|---------------------|--|---------------------|--|-----------------|--------|-----------------|--|-------------------------------|--|----------------------------|--|--------|--|--|--|--|--|--|--|--|--|--|
| LoanName/Collateral |  | LoanType            |  | PrincipalAmount |        | InitialMaturity |  | InterestRateorIndex andSpread |  | Interest Rate-June30, 2005 |
| ChicagoOffice       |  | JuniorParticipation |  | $               | 31,263 |            |  | 11/1/2007                     |  | LIBOR+6.25%                |  | 9.36%  |
| ChicagoOffice       |  | JuniorParticipation |  |            | 10,000 |            |  | 5/6/2006                      |  | LIBOR+1.84%                |  | 5.06%  |
| Subtotal            |  |                |  |            | 41,263 |            |  |                          |  |                       |  |   |
| Discount            |  |                |  |            | (599   | )          |  |                          |  |                       |  |   |
| Total               |  |                |  | $               | 40,664 |            |  |                          |  |                       |  |   |
|                     |

8.    Borrowings

The following is a table of our outstanding borrowings as of June30, 2005 and December 31,2004:

|                                                           |  |                                 |  |                                 |  |                               |         |                                |  |        |         |        |  |  |  |  |  |  |
|-----------------------------------------------------------|--|---------------------------------|--|---------------------------------|--|-------------------------------|---------|--------------------------------|--|--------|---------|--------|--|--|--|--|--|--|
|                                                      |  | StatedMaturity                  |  | Interest Rate                   |  | Balance 6/30/05 (inthousands) |         | Balance 12/31/04 (inthousands) |
| Mortgage notes payable (ALGM)(non-recourse)               |  | 1/01/2006                       |  | Thegreater of LIBOR or 2% +3.6% |  | $                             | 14,673  |                           |  | $      | 40,557  |   |
| Mortgagenotes payable (Chatsworth)(non-recourse)          |  | 5/1/2015                        |  | 5.65%                           |  |                          | 43,904  |                           |  |   | — |   |
| Mezzanineloan payable (Chatsworth)(non-recourse)          |  | 5/1/2014                        |  | 6.64%                           |  |                          | 13,000  |                           |  |   | — |   |
| Repurchaseobligations                                     |  | See Repurchase Obligationsbelow |  | LIBOR + 0.06% to1.25%           |  |                          | 218,912 |                           |  |   | 800,418 |   |
| DBAGfacility                                              |  | 12/21/2007                      |  | LIBOR + 0.75% to2.25%           |  |                          | — |                           |  |   | 27,821  |   |
| WATemporary Repurchase Agreement                          |  | 7/13/2005                       |  | LIBOR +2.25%                    |  |                          | 21,884  |                           |  |   | — |   |
|                                                      |  |                            |  |                            |  |                          |    |                           |  |   |    |   |
| CDObonds payable – CDO IV                           |  | 7/1/2040                        |  | LIBOR +0.62% (averagespread)    |  |                          | 300,000 |                           |  |   | — |   |
| Liabilityto subsidiary trusts issuing preferredsecurities |  |
| TrustI                                                    |  | 3/30/2035                       |  | 8.15%                           |  |                          | 41,240  |                           |  |   | — |   |
| TrustII                                                   |  | 6/30/2035                       |  | 7.74%                           |  |                          | 25,780  |                           |  |   | — |   |
|                                                      |  |                            |  |                            |  | $                             | 679,393 |                           |  | $      | 868,796 |   |
|                                                           |

MortgageNotes Payable

In connection with the acquisition of theChatsworth Properties, a subsidiary of the Company entered into a loanagreement (the "Chatsworth Mortgage") withGerman American Capital 

13

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

Corporation (the"Lender") for a non-recourse mortgage in theprincipal amount of $44.0 million (the"Loan"). The Loan is secured by firstmortgage liens and security interests on the Chatsworth Properties,including two fee owned properties and the leasehold interest in theother property, including assignments of leases and rents.

TheChatsworth Mortgage matures on May 1, 2015 and bears interest at afixed rate of 5.65%. The Loan requires monthly payments of$230,906 representing interest in arrears and principal sufficient toamortize the loan to a balance of approximately $40.5 million atmaturity, as well as monthly escrow deposits for ground lease paymentsrequired under the ground lease for the leasehold property. Commencingon the 112th payment date all excess cash flow, as defined in theChatsworth Mortgage, is required to be deposited into a cash sweepreserve until $3.0 million has been deposited, through maturity of themortgage. The Chatsworth Mortgage is not prepayable prior to maturityand is subject to yield maintenance for any unscheduled principalprepayments prior to maturity.

The Company and its subsidiarieshave agreed to comply with environmental laws and have indemnified theLender against all liabilities and expenses related thereto. Theprincipal balance of the Chatsworth Mortgage was $43.9 million at June30, 2005. Interest expense incurred on the Loan totaled $0.6 millionand $1.2 million for the three and six months ended June 30, 2005,respectively.

Mezzanine Loan Payable

In connection withthe acquisition of the Chatsworth Properties, a subsidiary of theCompany entered into a non-recourse mezzanine loan agreement (the"Chatsworth Mezzanine Loan") which wasassigned to, then funded by, the warehouse provider for CDO III (the"Chatsworth Mezzanine Lender") for amezzanine loan in the principal amount of $13.0 million. The ChatsworthMezzanine Loan bears interest at a fixed rate of 6.64%, andrequires monthly payments of interest only of $71,955 for the periodFebruary 1, 2005 through February 1, 2006. Principal and interestpayments of $170,914 are due thereafter, will fully amortize theChatsworth Mezzanine Loan by maturity, May 1, 2014. The ChatsworthMezzanine Loan is secured by a pledge of our equity interest in anaffiliate under the borrower of the Chatsworth Mortgage. The ChatsworthMezzanine Loan currently constitutes a portion of the portfolio ofsecurities owned by CDO III.

Repurchase Obligations

TheCompany's temporary investments, which are primarily AAA-rated,short term, floating rate securities, backed by commercial orresidential mortgage loans, were financed with repurchase agreementswith Citigroup and Greenwich Capital Markets, Inc. The Companyinitially borrowed approximately $1.25 billion under repurchaseagreements, of which $207.3 million was outstanding at June 30, 2005,with approximately $172.2 million owed to Citigroup and $35.1 millionowed to Greenwich. These repurchase obligations mature every thirtydays with an interest rate of LIBOR plus 0.06% to 1.0%,and carry a weighted average aggregate interest rate of 3.21% atJune 30, 2005. These repurchase agreements are being accounted for assecured borrowings since the Company maintains effective control of thefinanced assets.

WA Temporary Repurchase Agreement

OnJune 21, 2005, the Company entered into a temporary repurchaseagreement with Wachovia Bank, National Association, to temporarilyfinance the acquisition of loan participation interests until theWachovia Master Repurchase Agreement was closed. The Company borrowedapproximately $21.9 million under the temporary repurchase agreement.The advance bore interest at LIBOR plus 2.25%. The temporaryrepurchase agreement will mature at the closing of the Wachovia MasterRepurchase Agreement on July 13, 2005 and the principal balanceoutstanding will be rolled into the new facility. See Note 17.

14

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

DBAG Credit Facility

On December21, 2004, the Company entered into a $150 million master repurchaseagreement with Deutsche Bank AG, Cayman Islands Branch (as amended, the"DBAG Facility"). On March 21, 2005, thisfacility was amended and restated (as amended, the "DBAGFacility") to allow the Company to borrow up to $300million in order to finance the acquisition of primarily subordinatereal estate debt and other real estate loans and securities. Theadditional capacity and flexibility under the amendment of the DBAGFacility allowed the Company to accumulate sufficient collateral forCDO IV, and to continue to finance other investments. Pursuant to theterms of the DBAG Facility the availability under the DBAG Facility wasreduced to $150 million upon closing of CDO IV on June 14, 2005.

The DBAG Facility has an initial three-year term, which may beextended for one additional year if the Company is not in default andpays an extension fee of 0.25% of the aggregate outstandingamount under the facility. If the Company extends the term of thefacility, it will be required to retire 25% of the aggregateoutstanding amount each quarter during the remaining year of theterm.

Under the terms of the DBAG Facility, the Company is ableto finance the acquisition of mortgage loans secured by first liens oncommercial or multifamily properties, junior participation interests inmortgage loans secured by first or second liens on commercial ormultifamily properties, mezzanine loans secured by a pledge of theentire ownership interest in a commercial or multifamily property,B or higher rated commercial mortgage backedsecurities and BB or higher rated real estate CDOs, debt securitiesissued by a REIT and syndicated bank loans.

Advances under theDBAG Facility from December 31, 2004 through March 20, 2005 boreinterest at one month LIBOR, which is reset monthly, plus a spreadranging from 0.75% to 2.25%. During the period from March21, 2005 until the close of CDO IV, (the "CDO Ramp-UpPeriod"), amounts advanced under the DBAG Facility inorder to finance the acquisition of assets to be included in CDO IVbore interest at one-month LIBOR plus a spread of 1.00% andamounts advanced for all other assets bore interest at one-month LIBORplus a spread which ranges from 0.75% to 2.25%. After theCDO Ramp-Up Period, all amounts advanced under the amended DBAGFacility bear interest at a rate of one-month LIBOR plus the spreadwhich ranges from 0.75% to 2.25%.

During the CDORamp-Up Period and thereafter, assets will be financed at advance ratesranging from 40% to 92.5% of the value of the assets asapplicable to the asset category.

Effective April 1, 2005, thecovenants under the DBAG Facility require the Company to remain at acertain minimum tangible net worth, a certain minimum debt servicecoverage ratio, a certain range of ratios of recourse indebtedness tonet worth and certain minimum amounts of cash or marketable securitiesbased on our ratio of recourse indebtedness to net worth. At June 30,2005, the Company is in compliance with all covenants under the DBAGFacility.

The debt that may be outstanding under the DBAGFacility is subject to a number of terms, conditions and restrictionsincluding, without limitation, the maintenance of certain marginpercentages on amounts outstanding under the DBAG Facility. If themarket value of an asset securing the outstanding debt declines, cashflow due the Company may be suspended and if market value continues todecline, the Company may be required to satisfy a margin call by payingcash or providing additional collateral. Failure to meet any margincall could result in an event of default which would enable DeutscheBank AG to exercise various rights and remedies including accelerationof the maturity date of the debt outstanding under the DBAG Facility orthe sale of the assets financed thereunder.

Prior to June 14,2005, the Company had financed the acquisition of securities for CDO IVthrough borrowings under the DBAG Facility. The Company used a portionof the proceeds from the 

15

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

sale of the transferred assets to repayapproximately $234 million of the amount outstanding under the DBAGFacility. As of June 30, 2005 there are no outstanding borrowings underthe DBAG facility.

The Company incurred interest expense of $2.0million and $3.0 million for the three and six months ended June 30,2005, respectively.

Liability to Subsidiary Trusts IssuingPreferred Securities

On April 12, 2005 and May 25, 2005,NorthStar Realty Finance Trust and NorthStar Realty Finance Trust II,(the "Trusts") sold, in two privateplacements, trust preferred securities for an aggregate amount of $40million and $25 million, respectively. The Company owns all of thecommon stock of the Trusts. The Trusts used the proceeds to purchasethe Company's junior subordinated notes which mature on March 30,2035 and June 30, 2035, respectively, these notes represent all of theTrusts' assets. The terms of the junior subordinated notes aresubstantially the same as the terms of the trust preferred securities.The trust preferred securities have a fixed interest rate of8.15% and 7.74% per annum, respectively, during the firstten years, after which the interest rate will float and reset quarterlyat the three-month LIBOR rate plus 3.25% per annum.

Underthe provisions FIN 46R, the Company determined that the holders of thetrust preferred securities were the primary beneficiaries of theTrusts. As a result, the Company did not consolidate the Trusts and hasreflected the obligation to the Trusts under the caption"Liability to subsidiary trusts issuing preferredsecurities" in the condensed consolidated balance sheetand will account for the investment in the common stock of the Trusts,which is reflected in Investments in and advances to unconsolidatedventures in the condensed consolidated balance sheet, under the equitymethod of accounting.

The Company may redeem the notes, in wholeor in part, for cash, at par, after March 30, 2010 and June 30, 2010,respectively. To the extent the Company redeems notes, the Trusts arerequired to redeem a corresponding amount of trust preferredsecurities.

The ability of the Trusts to pay dividends dependson the receipt of interest payments on the notes. The Company has theright, pursuant to certain qualifications and covenants, to deferpayments of interest on the notes for up to six consecutive quarters.If payment of interest on the notes is deferred, the Trust will deferthe quarterly distributions on the trust preferred securities for acorresponding period. Additional interest accrues on deferred paymentsat the annual rate payable on the notes, compounded quarterly.

The indenture for NorthStar Realty Finance Trust II has certaincovenants that are substantially similar to those under the DBAGFacility and certain restrictions on issuing any additional trustpreferred securities and other subordinate unsecured debt. At June 30,2005, the Company is in compliance with all covenants under TrustII.

The terms are summarized asfollows:

|                                                          |  |            |  |             |  |  |  |  |  |  |
|----------------------------------------------------------|--|------------|--|-------------|--|--|--|--|--|--|
|                                                     |  | TrustI     |  | Trust II    |
| Trust Preferred SecuritiesOutstanding as of June 30,2005 |  | $40million |  | $25 million |
| Interest Rate as of June30,2005                          |  | 8.15%      |  | 7.74%       |
| Redemptionperiod at Company'soption                      |  | 3/30/2010  |  | 6/30/2010   |
| Maturitydate                                             |  | 3/30/2035  |  | 6/30/2035   |
|                                                          |

16

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

Scheduled principal payment requirementson the Company's borrowings are as follows as of June 30, 2005(inthousands):

|            |  |        |         |                             |  |                                  |        |                                                            |  |                       |         |                    |  |        |         |        |  |        |         |        |  |        |         |        |  |  |
|------------|--|--------|---------|-----------------------------|--|----------------------------------|--------|------------------------------------------------------------|--|-----------------------|---------|--------------------|--|--------|---------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|       |  | Total  |         | Mortgageand Mezzanine loans |  | WA Temporary RepurchaseAgreement |        | Liability to Subsidiary Trusts IssuingPreferred Securities |  | Repurchaseobligations |         | CDOBondsPayable(1) |
| 2005       |  | $      | 242,748 |                        |  | $                                | 1,952  |                                                       |  | $                     | 21,884  |               |  | $      | — |   |  | $      | 218,912 |   |  | $      | — |   |
| 2006       |  |   | 14,133  |                        |  |                             | 14,133 |                                                       |  |                  | — |               |  |   | — |   |  |   | — |   |  |   | — |   |
| 2007       |  |   | 1,581   |                        |  |                             | 1,581  |                                                       |  |                  | — |               |  |   | — |   |  |   | — |   |  |   | — |   |
| 2008       |  |   | 1,679   |                        |  |                             | 1,679  |                                                       |  |                  | — |               |  |   | — |   |  |   | — |   |  |   | — |   |
| 2009       |  |   | 1,799   |                        |  |                             | 1,799  |                                                       |  |                  | — |               |  |   | — |   |  |   | — |   |  |   | — |   |
| Thereafter |  |   | 417,453 |                        |  |                             | 50,433 |                                                       |  |                  | — |               |  |   | 67,020  |   |  |   | — |   |  |   | 300,000 |   |
| Total      |  | $      | 679,393 |                        |  | $                                | 71,577 |                                                       |  | $                     | 21,884  |               |  | $      | 67,020  |   |  | $      | 218,912 |   |  | $      | 300,000 |   |
|            |

|  |
|--|
|  |  |
|  |

|  |                                                                                                              |
|--|--------------------------------------------------------------------------------------------------------------|
|  | (1)   Basedon scheduled repayment date of related CDO collateral, stated maturityis 7/1/2040. |

9.    Related Party Transactions

Shared Facilities and Services Agreement

Total fees andexpenses incurred by the Company under the shared facilities andservices agreement amounted to $0.3 million and $0.6 million for thethree and six months ended June 30, 2005. No amounts were payable toNCIC at June 30, 2005.

Advisory and Management Fee Income

NS Advisors LLC

CDO I, CDO II and CDO III entered intoagreements with the Predecessor and the Company, through NS AdvisorsLLC, a subsidiary, to perform certain advisory services.

TheCompany earned total fees of approximately $1,019,000 and $1,771,000for the three and six months ended June 30, 2005. The Predecessorearned total fees of $344,000 and $689,000 for the three and six monthsended June 30, 2004. Unpaid advisory fees of $570,000 and $82,000 areincluded in due from affiliates in the Company's condensedconsolidated balance sheets as of June 30, 2005 and December 31, 2004,respectively.

The Company also earned a structuring fee of$500,000 in connection with the closing of CDO III in March 2005, whichwas used to reduce its investment in CDO III which is included in debtsecurities available for sale in the condensed consolidated balancesheet.

NSF Venture

The Company earned and recognizedadvisory fees of approximately $109,000 and $300,000 for the three andsix months ended June 30, 2005. The Predecessor earned and recognized$240,000 and $493,000 for the three and six months June 30, 2004.

Management Fees

On December 28, 2004, ALGM terminated itsexisting asset management agreement with Emmes Asset Management Co. LLC("Emmes"), an affiliate of NCIC. Pursuant tothe termination provisions of the agreement, ALGM paid Emmes acontractual termination payment of approximately $385,000,

17

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

which is equal to two quarters of paymentsof the annual existing fee. In addition, ALGM and Emmes entered into anew asset management agreement, which is cancelable on 30 days notice.The annual asset management fee under the new agreement is equal to3.5% of gross collections from tenants of the properties not toexceed $350,000 or be less than $300,000 per year, subject to certainprovisions. Total fees incurred under this agreement amounted to$61,000 and $118,000 for the three and six months ended June 30,2005.

10.    Derivatives and Hedging Activities

Tolimit the exposure to the variable LIBOR interest rate, the Companyentered into various swap agreements to fix the LIBOR rate on a portionof the Company's variable rate debt. The fixed LIBOR rate rangesfrom 4.18% to 5.03%. The following table summarizes thenotional amounts and fair (carrying) values of the Company'sderivative financial instruments as of June 30, 2005 (inthousands):

|                                           |  |                |  |            |  |                           |  |  |  |  |  |  |  |  |
|-------------------------------------------|--|----------------|--|------------|--|---------------------------|--|--|--|--|--|--|--|--|
|                                      |  | NotionalAmount |  | Fair Value |  | Range ofMaturity          |
| Interest rate swaps, treated as hedges(a) |  | $26,349        |  | ($663)     |  | December2010 - August2018 |
|                                           |

|  |
|--|
|  |  |
|  |

|  |                                                    |
|--|----------------------------------------------------|
|  | (a)   Included in Otherliabilities. |

11.    Stockholders' Equity

Common Stock

On June 24, 2005, the Company issued 15,194shares to its Board of Directors, as part of their annual grants.

Dividends

On April 21, 2005, the Company declared a cashdividend of $0.15 per share of common stock. The dividend was paid onMay 16, 2005 to the shareholders of record as of the close of businesson May 2, 2005.

12.    Earnings Per Share

TheCompany's basic earnings per share("EPS") is computed by dividing net incomeavailable to common shareholders by the weighted average number ofcommon shares outstanding. For purposes of calculating earnings pershare, the Company considered all unvested restricted stock whichparticipate in the dividends of the Company to be outstanding. Thecomputation of diluted EPS considers the potential dilution that couldoccur if securities or other contracts to issue common stock wereexercised or converted to common stock, where such exercise orconversion would result in a lower EPS amount. This also includes unitsof limited partnership interest in the Operating Partnership which areconsidered convertible securities. The operating partnership units areexchangeable for common shares on a one for one basis. Additionally,income is allocated to all unit holders including the Company on aprorata basis. The conversion of these units to common shares are notdilutive to earnings per share.

13.    Operating Real EstateDisposition

The Company sold its interest in a 19,618 squarefoot retail condominium unit at 729 Seventh Avenue("729") in New York City for $29.0 million.The transaction closed on June 30, 2005. The gain on sale wasapproximately $8.6 million, net of minority interest, for the three andsix months ended June 30, 2005.

18

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

The proceeds of the sale were used to paydown approximately $25.1 million of an existing mortgage on the ALGMportfolio and the remaining balance will be reinvested into a similarproperty acquisition to effectuate a 1031-tax free exchange.

Inconnection with the sale, 729 7th Realty Corp., an affiliate of theRiese Organization's National Restaurant Management Inc., agreedto discontinue the legal action that it had brought against theCompany, settling the Company's only material pending legalaction. See Note 14.

For the three and six months ended June 30,2005 and 2004, discontinued operations included the results ofoperations of 729. The following table summarizes Income (loss) fromdiscontinued operations, net of minority interest and related gain onsale of discontinued operations, net of minority interest (inthousands):

|                                                             |  |                               |         |                               |  |                              |         |                            |  |        |        |         |  |        |         |        |  |  |
|-------------------------------------------------------------|--|-------------------------------|---------|-------------------------------|--|------------------------------|---------|----------------------------|--|--------|--------|---------|--|--------|---------|--------|--|--|
|                                                        |  | ThreeMonthsEnded June 30,2005 |         | Three MonthsEnded June30,2004 |  | Six MonthsEnded June 30,2005 |         | SixMonthsEnded June30,2004 |
| Revenue:                                                    |  |                          |    |                          |  |                         |    |                       |  |   |   |    |  |   |    |   |
| Rentaland escalation income                                 |  | $                             | 639     |                          |  | $                            | — |                       |  | $      | 1,387  |    |  | $      | — |   |
| Interestandother                                            |  |                          | 5       |                          |  |                         | — |                       |  |   | 5      |    |  |   | — |   |
| Totalrevenue                                                |  |                          | 644     |                          |  |                         | — |                       |  |   | 1,392  |    |  |   |    |   |
| OperatingExpenses:                                          |  |                          |    |                          |  |                         |    |                       |  |   |   |    |  |   |    |   |
| Realestate property operatingexpenses                       |  |                          | 32      |                          |  |                         | — |                       |  |   | 220    |    |  |   | — |   |
| Accountingand auditfee                                      |  |                          | — |                          |  |                         | — |                       |  |   | 66     |    |  |   | — |   |
| Interestexpense                                             |  |                          | 562     |                          |  |                         | — |                       |  |   | 1,084  |    |  |   | — |   |
| Depreciationandamortization                                 |  |                          | — |                          |  |                         | — |                       |  |   | 85     |    |  |   | — |   |
| Totalexpenses                                               |  |                          | 594     |                          |  |                         | — |                       |  |   | 1,455  |    |  |   | — |   |
| Income(loss) from discontinuedoperations                    |  |                          | 50      |                          |  |                         | — |                       |  |   | (63    | )  |  |   | — |   |
| Gainon disposition of discontinuedoperations                |  |                          | 10,871  |                          |  |                         | — |                       |  |   | 10,871 |    |  |   | — |   |
| Incomefrom discontinued operations before minorityinterest  |  |                          | 10,921  |                          |  |                         | — |                       |  |   | 10,808 |    |  |   | — |   |
| Minorityinterest                                            |  |                          | (2,251  | )                        |  |                         | — |                       |  |   | (2,228 | )  |  |   | — |   |
| Incomefrom discontinued operations, net of minorityinterest |  | $                             | 8,670   |                          |  | $                            | — |                       |  | $      | 8,580  |    |  | $      | — |   |
|                                                             |

14.    Contingency

On August21, 2003, an action was filed against ALGM in New York State SupremeCourt, New York County (the "Complaint"). TheComplaint was brought by 729 7th Realty Corp. (the"Tenant"), a subsidiary of NRMI that is thenet lessee of the Condominium, to enforce certain rights it claims tohave under its net lease with ALGM (the "NetLease").

In connection with the sale of 729, thetenant agreed to discontinue the legal action that it had broughtagainst the Company, settling the Company's only material pendinglegal action, at no cost to the Company.

15.    Equity BasedCompensation

Long Term Incentive Bonus Plan

TheCompany has granted certain restricted awards to certain employees andco-employees of the Company and NCIC employees who provide services tothe Company pursuant to a shared service agreement. These restrictedawards are subject to both employment and the Company attaining

19

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

certain performance hurdles. At June 30,2005, management has made its best estimate of the Company'sperformance during the performance periods, based on the facts andinformation currently available and assumptions regarding theinvestment of the remaining proceeds of the Company's initialpublic offering pursuant to our stated business strategy and returns onfuture investments. On the basis of the foregoing, management hasestimated that the Company would not meet the return hurdle in eitherof these performance periods. If the Company does not meet the returnhurdle during the performance periods, the Company will not grant anyawards under this program to members of management, other of ouremployees and the employees of NCIC who provide services to theCompany. Accordingly, no compensation expense, with respect toprovisional awards under the 2004 Long Term Incentive Bonus Plan, hasbeen recognized in the condensed consolidated financial statements forthe three or six months ended June 30, 2005.

EmployeeOutperformance Plan

In connection with the employment agreementof the Company's chief investment officer, he is eligible toreceive incentive compensation equal to 15% of the annual netprofits from the Company's real estate securities business inexcess of a 12% return on invested capital (the annual bonusparticipation amount). The Company will have the option of terminatingthis incentive compensation arrangement at any time after the thirdanniversary of the date of its IPO by paying the Company's chiefinvestment officer an amount based on a multiple of the estimatedannual bonus participation amount, at the time it exercises this buyoutoption. If the Company exercises this buyout option, the fixed amountdue for terminating this arrangement will vest ratably and be paid infour installments over a three-year period with 25% paid ontermination. If the Company's chief investment officervoluntarily terminates his employment with the Company prior to anyexercise of the Company's buyout option, he will be eligible toreceive a portion of the future annual payments otherwise payable tohim while employed based on a reverse vesting formula.  Theportion of the annual benefit to which the chief investment officer iseligible after voluntary termination ranges from 20% of what hewould otherwise recieve for most recently created income streams to100% of eligible income streams that are five or more years old.No compensation has been earned by the Company's chief investmentofficer under this plan for the three or six months ended June 30,2005.

Omnibus Stock Incentive Plan

On January 30, 2005,our operating partnership granted an aggregate of 22,500 LTIP units,which are operating partnership units that are structured as profitsinterests, to certain employees of the Company pursuant to the 2004Omnibus Stock Incentive Plan. The LTIP units vest to the individualrecipient at a rate of one-twelfth of the total amount granted as ofthe end of each quarter beginning with the quarter ended April 29,2005. In addition, the LTIP unit holders are entitled to dividends onthe entire grant.

16.    Segment Reporting

ThePredecessor and the Company have three reportable segments: (i)subordinate real estate debt, (ii) real estate securities and (iii) netlease real estate investments. The Company evaluates performanceprimarily based on its proportionate share of the earnings of suchinvestments. General and administrative expenses were not allocated bymanagement to various segments and therefore are presented asunallocated. The reportable segments are managed separately due to thediffering nature of the business operations. The following tables setforth certain segment information for the Company on a consolidatedbasis and for the Predecessor on a combined basis, as of and for thethree and six months ended June 30, 2005 and 2004 (inthousands):

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

|                                         |  |                     |         |                           |  |                                       |         |                |  |                   |         |         |  |        |         |         |  |        |         |         |  |  |
|-----------------------------------------|--|---------------------|---------|---------------------------|--|---------------------------------------|---------|----------------|--|-------------------|---------|---------|--|--------|---------|---------|--|--------|---------|---------|--|--|
| ThreeMonths Ended June 30, 2005         |  | NetLeaseInvestments |         | SubordinateRealEstateDebt |  | Investment Grade RealEstateSecurities |         | Unallocated(1) |  | ConsolidatedTotal |
|                                    |  |                |    |                      |  |                                  |    |           |  |              |    |    |  |   |    |    |  |   |    |    |
| Rentalrevenue                           |  | $                   | 3,323   |                      |  | $                                     | — |           |  | $                 | — |    |  | $      | — |    |  | $      | 3,323   |    |
| Advisory and managementfees             |  |                | — |                      |  |                                  | 129     |           |  |              | 1,019   |    |  |   | — |    |  |   | 1,148   |    |
| Interestincome andother                 |  |                | 3       |                      |  |                                  | 5,979   |           |  |              | 1,851   |    |  |   | 2,623   |    |  |   | 10,456  |    |
| Equityin earnings of uncombinedventures |  |                | — |                      |  |                                  | 60      |           |  |              | — |    |  |   | — |    |  |   | 60      |    |
| Gain(loss) in investment andother       |  |                | — |                      |  |                                  | (42     | )         |  |              | (372    | )  |  |   | (170    | )  |  |   | (584    | )  |
| Interestexpense                         |  |                | 1,267   |                      |  |                                  | 2,469   |           |  |              | 266     |    |  |   | 2,977   |    |  |   | 6,979   |    |
| Otherexpenses                           |  |                | 1,833   |                      |  |                                  | 65      |           |  |              | 402     |    |  |   | 3,671   |    |  |   | 5,971   |    |
| Minorityinterest                        |  |                | (2,251  | )                    |  |                                  | — |           |  |              | — |    |  |   | (300    | )  |  |   | (2,551  | )  |
| Gainfrom discontinuedoperations         |  |                | 10,921  |                      |  |                                  | — |           |  |              | — |    |  |   | — |    |  |   | 10,921  |    |
| Netincome(loss)                         |  | $                   | 8,896   |                      |  | $                                     | 3,592   |           |  | $                 | 1,830   |    |  | $      | (4,495  | )  |  | $      | 9,823   |    |
| Totalassets                             |  | $                   | 105,002 |                      |  | $                                     | 444,443 |           |  | $                 | 87,275  |    |  | $      | 260,472 |    |  | $      | 897,192 |    |
|                                         |

|  |
|--|
|  |  |
|  |

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

|                                         |  |                     |         |                           |  |                                       |         |                |  |                   |         |        |  |        |         |         |  |        |        |         |  |  |
|-----------------------------------------|--|---------------------|---------|---------------------------|--|---------------------------------------|---------|----------------|--|-------------------|---------|--------|--|--------|---------|---------|--|--------|--------|---------|--|--|
| SixMonths Ended June 30, 2005           |  | NetLeaseInvestments |         | SubordinateRealEstateDebt |  | Investment Grade RealEstateSecurities |         | Unallocated(1) |  | ConsolidatedTotal |
|                                    |  |                |    |                      |  |                                  |    |           |  |              |    |   |  |   |    |    |  |   |   |    |
| Rentalrevenue                           |  | $                   | 6,431   |                      |  | $                                     | — |           |  | $                 | — |   |  | $      | — |    |  | $      | 6,431  |    |
| Advisory and managementfees             |  |                | — |                      |  |                                  | 371     |           |  |              | 1,771   |   |  |   | — |    |  |   | 2,142  |    |
| Interestincome andother                 |  |                | 12      |                      |  |                                  | 8,636   |           |  |              | 3,149   |   |  |   | 6,631   |    |  |   | 18,428 |    |
| Equityin earnings of uncombinedventures |  |                | — |                      |  |                                  | 106     |           |  |              | — |   |  |   | — |    |  |   | 106    |    |
| Gain(loss) in investment andother       |  |                | — |                      |  |                                  | (13     | )         |  |              | 1,354   |   |  |   | (291    | )  |  |   | 1,050  |    |
| Interestexpense                         |  |                | 2,406   |                      |  |                                  | 3,463   |           |  |              | 511     |   |  |   | 6,566   |    |  |   | 12,946 |    |
| Otherexpenses                           |  |                | 3,681   |                      |  |                                  | 107     |           |  |              | 819     |   |  |   | 7,709   |    |  |   | 12,316 |    |
| Minorityinterest                        |  |                | (2,228  | )                    |  |                                  | — |           |  |              | — |   |  |   | (597    | )  |  |   | (2,825 | )  |
| Gainfrom discontinuedoperations         |  |                | 10,808  |                      |  |                                  | — |           |  |              | — |   |  |   | — |    |  |   | 10,808 |    |
| Netincome(loss)                         |  | $                   | 8,936   |                      |  | $                                     | 5,530   |           |  | $                 | 4,944   |   |  | $      | (8,532  | )  |  | $      | 10,878 |    |
|                                         |

|                                         |  |                     |         |                           |  |                                       |         |             |  |               |         |         |  |        |         |         |  |        |       |         |  |  |
|-----------------------------------------|--|---------------------|---------|---------------------------|--|---------------------------------------|---------|-------------|--|---------------|---------|---------|--|--------|---------|---------|--|--------|-------|---------|--|--|
| ThreeMonths Ended June 30, 2004         |  | NetLeaseInvestments |         | SubordinateRealEstateDebt |  | Investment Grade RealEstateSecurities |         | Unallocated |  | CombinedTotal |
| Advisory and management fees            |  | $                   | — |                      |  | $                                     | 292     |        |  | $             | 345     |    |  | $      | — |    |  | $      | 637   |    |
| Interestincome                          |  |                | — |                      |  |                                  | — |        |  |          | 308     |    |  |   | — |    |  |   | 308   |    |
| Equityin earnings of uncombinedventures |  |                | 349     |                      |  |                                  | 143     |        |  |          | — |    |  |   | — |    |  |   | 492   |    |
| Gain(loss) in investment andother       |  |                | — |                      |  |                                  | — |        |  |          | (333    | )  |  |   | — |    |  |   | (333  | )  |
| Otherexpenses                           |  |                | — |                      |  |                                  | — |        |  |          | 352     |    |  |   | 935     |    |  |   | 1,287 |    |
| Netincome(loss)                         |  | $                   | 349     |                      |  | $                                     | 435     |        |  | $             | (32     | )  |  | $      | (935    | )  |  | $      | (183  | )  |
|                                         |

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

|                                         |  |                     |         |                           |  |                                       |         |             |  |               |         |        |  |        |         |         |  |        |       |        |  |  |
|-----------------------------------------|--|---------------------|---------|---------------------------|--|---------------------------------------|---------|-------------|--|---------------|---------|--------|--|--------|---------|---------|--|--------|-------|--------|--|--|
| SixMonths Ended June 30, 2004           |  | NetLeaseInvestments |         | SubordinateRealEstateDebt |  | Investment Grade RealEstateSecurities |         | Unallocated |  | CombinedTotal |
| Advisory and management fees            |  | $                   | — |                      |  | $                                     | 600     |        |  | $             | 690     |   |  | $      | — |    |  | $      | 1,290 |   |
| Interestincome                          |  |                | — |                      |  |                                  | — |        |  |          | 563     |   |  |   | — |    |  |   | 563   |   |
| Equityin earnings of uncombinedventures |  |                | 600     |                      |  |                                  | 264     |        |  |          | — |   |  |   | — |    |  |   | 864   |   |
| Gain(loss) in investment andother       |  |                | — |                      |  |                                  | — |        |  |          | 717     |   |  |   | — |    |  |   | 717   |   |
| Otherexpenses                           |  |                | — |                      |  |                                  | — |        |  |          | 701     |   |  |   | 1,961   |    |  |   | 2,662 |   |
| Netincome(loss)                         |  | $                   | 600     |                      |  | $                                     | 864     |        |  | $             | 1,269   |   |  | $      | (1,961  | )  |  | $      | 772   |   |
|                                         |

17.    SubsequentEvents

Wachovia Credit Facility

On July 13, 2005, NRFCWA Holdings, LLC ("NRFC WA"), a subsidiary ofthe Company entered into a master repurchase agreement with WachoviaBank, National Association, ("WachoviaBank"). NRFC WA may borrow up to $150 million (the"WA Facility") (which maximum borrowingamount may be increased to $300 million in Wachovia Bank's solediscretion) under this credit facility in order to finance theacquisition of first priority mortgage loans, senior or juniorparticipation interests or B notes in first priority mortgage loans,mezzanine loans secured by commercial and multi-family properties andcommercial properties in which the property is 100% leased undera credit tenant lease to, or guaranteed in full by, a credit tenant andB- or higher rated CMBS.

Advance rates under the WA Facilityrange from 55% to 95% of the value of the assets forwhich the advance is made. Amounts borrowed under the facility bearinterest at one-month LIBOR plus a spread which ranges from0.20% to 3.00%, depending on the type of asset for whichthe amount is borrowed. The facility has an initial term of three yearsand an initial maturity date of July 12, 2008. In addition, NRFC WAmust pay an unused facility fee equal to 0.25% of the unusedportion of the facility, commencing 120 days after July 13, 2005,payable quarterly in arrears. The Company has agreed to guarantyamounts borrowed by NRFC WA under the facility up to a maximum of $20million.

NRFC WA may extend the term of the WA Facility for oneyear if it is not in default and pays an extension fee of 0.25%of the aggregate amount then outstanding under the facility. If NRFC WAextends the facility's term, it will be required to retire25% of the aggregate amount then outstanding under the facilityduring each quarter of the remaining year of the term.

NRFC WApaid Wachovia Bank a $750,000 structuring fee in connection with theexecution of this facility.

The debt outstanding under thefacility is subject to a number of terms, conditions and restrictionsincluding, without limitation, scheduled interest payments, themaintenance of certain margin percentages on amounts outstanding underthe facility. If the market value of an asset securing outstanding debtdeclines, NRFC WA may be required to satisfy a margin call by payingcash or providing additional collateral. Failure to meet any margincall could result in an event of default which would enable WachoviaBank to exercise various rights and remedies including acceleration ofthe maturity date of the debt outstanding under the facility and thesale of the collateral.

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

Subordinate Real Estate DebtInvestments

The following investments were acquired subsequentto June 30,2005:

|                    |  |                     |  |                     |  |                               |        |                  |  |                             |  |             |  |  |  |  |  |  |  |  |  |  |
|--------------------|--|---------------------|--|---------------------|--|-------------------------------|--------|------------------|--|-----------------------------|--|-------------|--|--|--|--|--|--|--|--|--|--|
| Dateof Acquisition |  | LoanName/Collateral |  | LoanType            |  | Principal Amount(inthousands) |        | Initial Maturity |  | Interest RateIndexandSpread |
| 7/01/05            |  | OfficeBuilding      |  | JuniorParticipation |  | $                             | 4,250  |             |  | 1/2007                      |  | LIBOR+2.50% |
| 7/01/05            |  | OfficeBuilding      |  | MezzanineLoan       |  |                          | 5,000  |             |  | 1/2007                      |  | LIBOR+5.00% |
| 7/15/05            |  | OfficeBuilding      |  | JuniorParticipation |  |                          | 10,000 |             |  | 7/2007                      |  | LIBOR+7.00% |
| 8/1/05             |  | Multifamily         |  | JuniorParticipation |  |                          | 35,000 |             |  | 8/2007                      |  | LIBOR+5.25% |
|               |  | Total               |  |                |  | $                             | 54,250 |             |  |                        |  |        |
|                    |

Theseinvestments were acquired as part of the ramp-up of CDO IV.

Real Estate Securities

From June 30, 2005 through August 9,2005, the bank has acquired approximately $104.0 million in real estatesecurities under the terms of the CDO V warehouse agreement which areexpected to be included in a securitization transaction.

SaltLake City Property

On August 2, 2005, the Company closed a$22.0 million acquisition of a 117,553 square foot office building inSalt Lake City, Utah, which is 100% leased to the GeneralServices Administration under a lease that expires in April 2012. Theproperty is financed with a 5.16% fixed rate, seven yearnon-recourse first mortgage loan of $17 million.

Dividends

On July 28, 2005, the Company declared a cash dividend of $0.15 pershare of common stock. The dividend is expected to be paid on August15, 2005 to the shareholders of record as of the close of business onAugust 8, 2005.

Operating Real Estate Disposition

InJuly 2005, the Company formally initiated an effort to market for saleone of its operating real estate properties located at 1552Broadway.

On July 28, 2005, the Company obtained Board approvalfor the sale and determined that the plan for sale criteria in FASBStatement No. 144 "Accounting for Impairment or Disposalof Long-Lived Assets" has been met. Accordingly, since thecriteria was met subsequent to June 30, 2005, the property will not beclassified to held for sale until the third quarter ending September30, 2005.

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|              |                                                                                      |
|--------------|--------------------------------------------------------------------------------------|
| ITEM2.  | MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS |

Thefollowing discussion should be read in conjunction with our and ourpredecessor's financial statements and notes thereto included inthis report.

Organization and Overview

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

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

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

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

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

Basis of Quarterly Presentation

Set forth below is adiscussion of the financial condition and results of operations of ourpredecessor for the three and six months ended June 30, 2004 andNorthStar Realty Finance Corp. for the three and six months ended June30, 2005.

Our predecessor is an aggregation of the entitiesthrough which NorthStar Capital owned and operated its subordinate realestate debt, real estate securities and net lease properties businessesand was not a separate legal operating entity. The ultimate owners ofthese entities were NorthStar Capital and their minority owners.NorthStar Partnership, L.P., the operating partnership of NorthStarCapital, was the managing member with day-to-day operationalresponsibility of the entities controlled by NorthStar Capital. Theseentities are combined in our predecessor's historical financialstatements. Where our predecessor had a non-controlling interest in anyof the entities that comprised our predecessor, such entities arepresented as part of our predecessor on an uncombined basis. Becausethe discussion of the financial condition and results of operations forthe three and six months ended June 30, 2004, which is set forth below,relates to the entities comprising our predecessor, it reflects thehistorical financing and operational strategies of these entities.

Although the entities comprising our predecessor operated asseparate businesses of NorthStar Capital, these businesses utilizedcertain of NorthStar Capital's employees, insurance andadministrative services. General and administrative expenses incurredby NorthStar Capital on behalf of all of its business units whichinclude salaries and benefits, rent, furniture, equipment, travel andentertainment, accounting, legal services and other expenses wereallocated to our predecessor by NorthStar Capital throughidentification of specific expense items, where practical, andotherwise through an estimation of the level of effort devoted bycertain of NorthStar Capital's employees. In the opinion ofmanagement, the methods used to allocate general and administrativeexpenses and other costs were reasonable.

Upon the contributionof the initial investments to our operating partnership, thesebusinesses became fully integrated and therefore we present ourfinancial statements on a consolidated basis for 

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

Sources of Operating Revenues

Historically,our predecessor primarily derived operating revenues from earnings ofuncombined ventures which consisted of our predecessor'sproportionate share of the net income from the rental operations of theNew York property portfolio and from subordinate real estate debtinvestments. In more recent periods, our predecessor also derivedoperating revenues from advisory fees related to our real estatesecurities and subordinate real estate debt businesses, from theresidual interests in the cash flows of its investment grade CDOs basedon our equity interests in such CDOs and from the interest income onour junior debt investments in its investment grade CDOs.

Subsequent to our IPO and the integration of the subordinate realestate debt, real estate securities and net lease propertiesbusinesses, we primarily derived operating revenues from rental income,from the rental operations of the consolidated net lease real estateportfolio, from interest income on our consolidated investments insubordinate real estate debt, from the residual interests in the cashflows of our investment grade CDOs based on our equity interests insuch CDOs and from the interest income on our junior debt investmentsin our investment grade CDOs, from earnings of an unconsolidatedventure which consists of our proportionate share of the net income ofthat venture's subordinate debt investments and from advisoryfees related to our real estate securities and subordinate real estatedebt businesses.

Subordinate Real Estate Debt

DirectInvestments.    The additional liquidity provided by the netproceeds of our IPO allowed us to increase the number and range ofsubordinate real estate debt in which we invest. We used a portion ofthe net proceeds of our IPO to make investments in subordinate realestate debt which are consolidated on our balance sheet, including theassets of our first subordinate real estate debt CDO or CDO IV. We earninterest income and origination fees on these consolidated investments,any advisory fees earned on these investments are eliminated inconsolidation.

NSF Venture.    NorthStar Capitalcommenced its business of investing in subordinate real estate debt in2001 through an arrangement we refer to as the NSF Venture. NorthStarFunding Managing Member LLC, a majority-owned subsidiary of NorthStarCapital prior to the contribution of the initial investments to ouroperating partnership, is the managing member and holder of 50%of the outstanding membership interests in NorthStar Funding ManagementLLC, the managing member of the NSF Venture. NorthStar FundingManagement LLC is responsible for the origination, underwriting andstructuring of all investments made by the NSF Venture. Moreover, theNSF Venture investor has the right to approve all investments thatNorthStar Funding Management LLC proposes to make on behalf of the NSFVenture.

NorthStar Funding Investor Member LLC, a majority-ownedsubsidiary of NorthStar Capital prior to the contribution of theinitial investments to our operating partnership, owns a 5%interest in the NSF Venture and the NSF Venture Investor owns theremaining 95%. Prior to July 10, 2003, NorthStar FundingInvestor Member LLC held a 10% interest in the NSF Venture. OnJuly 10, 2003, the terms of the NSF Venture were amended to increaseNorthStar Funding Investor Member LLC's capital commitment to$190 million, or 95% of $200 million, and reduce NorthStarFunding Investor Member LLC's interest to 5%. NorthStarCapital contributed its interests in the NSF Venture to our operatingpartnership upon consummation of our IPO.

We receive an advisoryfee of 1% of contributed capital per annum as compensation forNorthStar Funding Management LLC's management of the NSFVenture's investments. We are also entitled to a profitparticipation equal to 10% of the profit after a minimum returnon the NSF Venture's capital and a return of capital based uponthe performance of the NSF Venture's 

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

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

Real Estate Securities

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

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

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

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

During the warehouse period, ourparticipation under the warehouse agreement is reflected in ourconsolidated financial and our predecessor's combined financialstatements as a non-hedge derivative, which is reflected at fair valueand any unrealized gain or loss is charged to operations. Based on ananalysis of our and our predecessor's interest in CDO I as avariable interest entity under FASB Interpretation No. 46R"Consolidation of Variable InterestEntities," the financial statements of CDO I were notconsolidated into our predecessor's financial statements for thethree and six months ended June 30, 2004 or in our financial statementsfor the three and six months ended June 30, 2005 and for the periodfrom October 29, 2004 to December 31, 2004, since neither ourpredecessor nor we were the primary beneficiary of CDO I. Similarly,the financial statements of CDO II and CDO III were not consolidatedinto our financial statements since we were not the primary beneficiaryof CDO II or CDO III. Accordingly, we have designated the beneficialinterests in preferred equity of CDO I and the unrated income notes ofCDO II and CDO III as debt securities available for sale as they meetthe definition of debt instruments due to their underlying redemptionprovisions.

Net Lease Properties

We earn rental incomefrom office, industrial and retail properties that are net leased tocorporate tenants.

We had two fee and six leasehold interests ina portfolio of retail and commercial properties located in the TimesSquare and midtown area of Manhattan which we refer to as the New Yorkproperty portfolio. This portfolio is owned by our subsidiary, ALGM IOwners LLC, or ALGM. Our predecessor held a 97.5% non-managingequity interest in ALGM. Two of ALGM's leases expired in 2003,one in March and one in October. The Company sold its interest in oneof ALGM's fee properties, 729 Seventh Avenue("729") for $29.0 million on June 30,2005.

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As of June 30, 2005, ALGM owned sevenproperties, which vary in size from 4,200 square feet to 21,140 squarefeet and had a total of 76,496 net rentable square feet. Three of theproperties are primarily leased or subleased to single users and fourare leased or subleased to multiple tenants.

The results ofoperations for these properties were reflected in ourpredecessor's equity in earnings of uncombined ventures becauseour predecessor owned a 97.5% non-managing equity interest inALGM. Concurrently with the contribution of the initial investments toour operating partnership, we purchased the remaining 2.5%managing equity interest from ALGM I Equity LLC with $1.6 million ofthe proceeds of our IPO. The results of operations of ALGM have beenconsolidated in our financial statements subsequent to our IPO.

On January 14, 2005, we closed the acquisition of a portfolio ofthree net-leased office properties, totaling 257,336 square feet ofrentable space in Chatsworth, CA, or the Chatsworth properties, for$63.5 million. The Chatsworth properties are net leased to WashingtonMutual Bank under leases that expire in June 2015. We financed theacquisition with a $44 million first mortgage and a $13 millionmezzanine loan which was funded by the warehouse provider under thewarehouse agreement for CDO III. This mezzanine loan currentlyconstitutes a portion of the portfolio of securities owned by CDOIII.

Critical Accounting Policies

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States of America, or US GAAP, requires the useof estimates and assumptions that could affect the reported amounts ofassets and liabilities, the disclosure of contingent assets andliabilities and the reported amounts of revenue and expenses.Management has identified certain critical accounting policies thataffect the more significant judgments and estimates used by managementin the preparation of our predecessor's combined financialstatements and our consolidated financial statements. Managementevaluates on an ongoing basis estimates related to critical accountingpolicies, including those related to revenue recognition, allowancesfor doubtful accounts receivable and impairment of investments inuncombined ventures and debt securities available for sale. Theestimates are based on information that is currently available tomanagement, as well as on various other assumptions that managementbelieves are reasonable under the circumstances.

Principles ofConsolidation

The consolidated financial statements include ouraccounts and our majority-owned subsidiaries, and interests in variableinterest entities where we are deemed the primary beneficiary inaccordance with FIN 46R. All significant intercompany balances havebeen eliminated in consolidation.

Debt Securities Available forSale

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

Subordinate Real Estate Debt Investments

Wemust periodically evaluate each of our direct investments insubordinate real estate debt for possible impairment. Impairment isindicated when it is deemed probable that we will be unable to collectall amounts due according to the contractual terms of the loan. Upon adetermination of impairment, we would establish a specific valuationallowance with a corresponding charge to earnings. Significant judgmentis required both in determining impairment and in estimating the

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resulting loss allowance. Allowances for loaninvestment losses are established based upon a periodic review of theloan investments. Income recognition is generally suspended for loansat the earlier of the date at which payments become 90 days past due orwhen, in the opinion of management, a full recovery of income andprincipal becomes doubtful. Income recognition is resumed when the loanbecomes contractually current and performance is demonstrated to beresumed. In performing this review, management considers the estimatednet recoverable value of the loan as well as other factors, includingthe fair market value of any collateral, the amount and the status ofany senior debt, the prospects for the borrower and the economicconditions in the region where the borrower does business. Because thisdetermination is based upon projections of future economic events,which are inherently subjective, the amounts ultimately realized fromthe loan investments may differ materially from the carrying value asof the balance sheet date. To date, all of our direct investments insubordinate real estate debt are fully performing and we havedetermined that no loss allowances have been necessary with respect tothe loans.

Revenue Recognition

Our rental revenue fromour net lease real estate portfolio is recognized on a straight-linebasis over the initial term of the respective leases. The excess ofstraight-line rents recognized over amounts contractually due pursuantto the underlying leases are included in straight-line unbilled rentsreceivable in our condensed consolidated balance sheet. Managementprovides an allowance for doubtful accounts for estimated lossesresulting from the inability of its tenants to make required rent andother payments as due. Additionally, management establishes, on acurrent basis, an allowance for future tenant credit losses on unbilledrents receivable based upon an evaluation of the collectibility of suchamounts. Management is required to make subjective assessments aboutthe collectibility of the deferred rent receivable that in many caseswill not be billed to tenants for many years from the balance sheetdate. Management's determination is based upon an assessment ofcredit worthiness of private company tenants for which financialinformation is not readily available and as such is not subject toprecise quantification.

Interest income on our subordinate realestate debt investments is recognized over the life of the investmentusing the effective interest method and recognized on an accrual basis.Fees received in connection with loan commitments are recognized overthe term of the loan as an adjustment to yield. Anticipated exit fees,whose collection is expected, are also recognized over the term of theloan as an adjustment to yield.

Performance-BasedCompensation

Our board of directors has adopted the NorthStarRealty Finance Corp. 2004 Long Term Incentive Bonus Plan, or theincentive bonus plan, in order to retain and incentivize officers andcertain key employees of us, co-employees of us and NorthStar Capitaland employees of NorthStar Capital who provide services to us pursuantto the shared facilities and services agreement which we collectivelyrefer to as the eligible participants. As of November 19, 2004, thecompensation committee of our board of directors had allocated anaggregate of 665,346 shares of our common stock to certain of theeligible participants as potential awards pursuant to the incentivebonus plan if we achieve the return hurdles established by thecompensation committee for the two one-year performance periodsbeginning October  1, 2005 and October 1, 2006. The compensationcommittee has established a return hurdle for these performance periodsof a 12.5% annual return on paid in capital, as defined in theincentive bonus plan. If we achieve these return hurdles, these awardsmay be paid in cash, shares of common stock, LTIP units or othershared-based form.

Each of the eligible participants will beentitled to receive half of his or her allocated award if we meet thereturn hurdle for the one-year period beginning October 1, 2005 andsuch eligible participant is employed through the end of this firstperformance period. Each of the eligible participants will be entitledto the other half of his or her total allocated award amount if we meetthe return hurdle for the one-year period beginning on October 1, 2006and such eligible participant is employed through the end of thissecond performance period. If we do not meet the return hurdle for theone-year 

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period beginning October 1, 2005, but we meetthe return hurdle for the two-year period beginning October 1, 2005(determined by averaging our performance over the two-year period) andan eligible participant is employed through the end of this two-yearperiod, such eligible participant will be entitled to receive his orher total allocated award amount.

On June 30, 2005, managementhas made its best estimate of our performance during these twoperformance periods, based on the facts and information currentlyavailable and assumptions regarding the investment of the remainingproceeds of our IPO pursuant to our business strategy and returns onfuture investments. On the basis of the foregoing, management hasestimated that we will not meet the return hurdle in either of theseperformance periods. If we do not meet the return hurdle during theperformance periods, we will not grant any awards under the incentivebonus plan to any of the eligible participants.

Unconsolidated/Uncombined Ventures

Management is requiredto make subjective assessments as to whether there are impairments inthe values of its and our predecessor's investments inunconsolidated/uncombined ventures which are accounted for using theequity method. As no public market exists for these investments,management estimates the recoverability of these investments based onprojections and cash flow analysis. These assessments have a directimpact on net income because recording an impairment loss results in animmediate negative adjustment to net income. The following is a summaryof the accounting policies relating to unconsolidated/uncombinedventures that are most affected by judgments, estimates andassumptions.

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

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

RESULTS OF OPERATIONS

Our predecessor'sresults of operations for the three and six months ended June 30, 2004are not necessarily indicative of our future results of operations dueto the impact of our IPO, the acquisition of additional interests inALGM and its resulting consolidation, the expansion of our real estatesecurities and subordinate real estate debt businesses, and our newinvestments and their related debt financing.

We sold one of theALGM properties on June 30, 2005 and have classified its operations for2005 as discontinued operations for the periods ending June 30, 2005and 2004.

Comparison of the Three Months Ended June 30, 2005 tothe Three Months Ended June 30, 2004

Revenues

Rentaland escalation income

Rental and escalation income for thethree months ended June 30, 2005 totaled $3.3 million representing a$3.3 million increase compared to the three months ended June 30, 2004.The increase was primarily attributable to $1.9 million of rentalincome from our net lease portfolio (ALGM) 

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which was accounted for under the equitymethod of accounting in the three months ended June 30, 2004. Weacquired the 2.5% managing interest in the net lease portfolioon October 29, 2004 and accordingly the operations of these propertieshave been consolidated into the condensed consolidated financialstatements in 2005. We also acquired the Chatsworth properties onJanuary 14, 2005, which contributed an additional $1.4 million ofrental income.

Advisory and management fee income

Advisory and management fee income totaled $20,000 representing adecrease of $33,000, or 62%, for the three months ended June 30,2005, compared to the three months ended June 30, 2004, due to a loweraverage portfolio balance in the second quarter of 2005.

Advisory and management fee income – related parties

Advisory fees from related parties for the three months ended June30, 2005 totaled $1.1 million representing an increase of approximately$0.5 million, or 93%, compared to the three months endedJune  30, 2004. The increase is comprised primarily of $0.3million of fees each earned from CDO I, CDO II (which closed in July2004) and CDO III (which closed March 10, 2005). This increase wasoffset by a decrease in fees earned from the NSF Venture ofapproximately $0.1 million which was due to a lower average portfolioloan balance for the three months ended June 30, 2005.

Interestincome

Interest income for the three months ended June 30, 2005totaled $10.5 million representing an increase of $10.1 million or3293% compared to the three months ended June 30, 2004. Theincrease is attributable to interest on investments, which did notexist in the comparable quarter. The interest income on theseinvestments included $2.6 million of interest income earned from ourinvestments in AAA-rated, short term, floating rate securities, frominterest income of approximately $6.0 million on subordinate realestate debt investments, and approximately $1.9 million of interestincome from debt securities available for sale which is comprised of(1) approximately $1.5 million from the investments in the equity ofour three CDOs, (2) approximately $0.3 million from our"BB" rated junior classes of debt securitiesand unrated income notes of CDO II and (3) approximately $0.1 millionon cash collateralizing our short security sales. For the three monthsended June 30, 2004, interest income of $0.3 million was earned fromCDO I.

Expenses

Real estate properties –operating expenses

Property operating expenses for the threeand months ended June 30, 2005 totaled $0.7 million, representing anincrease of $0.7 million compared to the three months ended June 30,2004. The increase was primarily attributable to $0.5 million ofproperty operating expenses from our net lease portfolio which wasaccounted for under the equity method of accounting in the three monthsended June 30, 2004. We acquired the 2.5% managing interest inthe net lease portfolio on October 29, 2004 and accordingly theoperations of these properties have been consolidated into thecondensed consolidated financial statements in 2005. We also acquiredthe Chatsworth properties on January 14, 2005 which contributed anadditional $0.2 million of property operating expenses.

Interest expense

Interest expense for the three monthsended June 30, 2005 totaled approximately $7.0 million, representing anincrease of $7.0 million compared to the three months ended June 30,2004. This increase was primarily attributable to the following: $2.0million of interest on financing from our investments in AAA-rated,short term, floating rate securities and $0.3 million on our investmentin the "BB" rated junior classes of debtsecurities and unrated income securities of CDO II and interest expenseon securities underlying short sales we entered into during 2004, $1.2million related to our net lease portfolio, $1.9 million on the DBAGfacility, $0.6 million relating to issuance of CDO bonds in the secondquarter and $1.0 million of interest on liabilities to subsidiarytrusts that issued preferred securities in the second quarter.

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Management fees – relatedparty

Management fees – related party for the threemonths ended June 30, 2005 totaled $61,000, representing an increase of$61,000 compared to the three months ended June 30, 2004. The increasewas primarily attributable to the net lease portfolio which wasaccounted for under the equity method of accounting in the three monthsended June 30, 2004. ALGM incurred a management fee during the threemonths ended June 30, 2004 of $128,000. We acquired the 2.5%managing interest in the net lease portfolio on October 29, 2004 andaccordingly the operations of these properties have been consolidatedinto the condensed consolidated financial statements in 2005.

General and Administrative

General and administrativeexpenses for the three months ended June 30, 2005 totaled $4.1 millionrepresenting an increase of $2.8 million, or 220%, compared to$1.3 million for the three months ended June 30, 2004. The increase iscomprised of the following:

Salaries and other compensation(direct and allocated) for the three months ended June 30, 2005 totaled$1.3 million representing an increase of approximately $0.4 million or38% compared to the three months ended June 30, 2004. Theincrease is primarily attributable to an increase in salaries due tohigher staffing levels to accommodate the expansion of our threebusinesses subsequent to our IPO.

Shared services –related party for the three months ended June 30, 2005 totaled $0.3million, representing an increase of approximately $0.3 millioncompared to the three months ended June 30, 2004. The increase wasattributable to the shared facilities and services agreement we enteredinto with NorthStar Capital on October 29, 2004.

Equity basedcompensation expense for the three months ended June 30, 2005 totaled$1.0 million, representing an increase of $1.0 million compared to thethree months ended June 30, 2004. The increase is attributable toapproximately $0.2 million of compensation expense in connection withthe buyout of a profits interest (a compensation arrangement) in NSAdvisors from one of our employees, and approximately $0.6 million inconnection with the three-year vesting of equity based awards issuedunder our 2004 Omnibus Stock Incentive Plan. In addition, compensationexpense of $0.2 million was recognized in connection with a grant of15,194 shares to our Board of Directors on June 24, 2005.

Insurance (direct and allocated) for the three months ended June 30,2005 totaled $217,000 representing an increase of $120,000 or124% compared to the three months ended June 30, 2004. Theincrease was attributable to the directors and officers policies weacquired subsequent to the IPO.

Accounting and auditing fees forthe three months ended June 30, 2005 totaled $0.3 million representingan increase of $0.3 million compared to the three months ended June 30,2004. The increase is attributable to services provided in 2005,including quarterly review and compliance work during the three monthsended June 30, 2005. Our predecessor did not incur similar accountingand auditing fees during the three months ended June 30, 2004.

Other general and administrative expenses (direct and allocated) forthe three months ended June  30, 2005 totaled $1.0 millionrepresenting an increase of approximately $0.8 million, or 287%,compared to the three months ended June 30, 2004. This increase isprimarily attributable to legal costs of $244,000 associated withgeneral corporate matters, consulting fees of $170,000 associated withperiodic reporting obligations, various public company expenses of$110,000, and public relations costs of $30,000.

Depreciationand amortization

Depreciation andamortization expense for the three months ended June 30, 2005 totaled$1.0 million representing an increase of $1.0 million compared to thethree months ended June 30, 2004. The increase was primarilyattributable to $0.5 million from our net lease portfolio which wasaccounted for under the equity method of accounting for the threemonths ended June 30, 2004. We acquired the 2.5% managinginterest in the net lease portfolio on October 29, 2004 and accordingly

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the operations of these properties have beenconsolidated into the condensed consolidated financial statements in2005. We also acquired the Chatsworth properties on January 14, 2005which contributed an additional $0.5 million of depreciation andamortization expense.

Equity in earnings ofunconsolidated/uncombined ventures

Equity in earnings for thethree months ended June 30, 2005 totaled $60,000 representing adecrease of $432,000 or 88% compared to the three months endedJune 30, 2004. The decrease was attributable to the decrease in theequity in earnings of the NSF Venture of approximately $0.1 million dueto a lower average portfolio loan balance in 2005 and a decrease of$0.3 million from our net lease portfolio which was accounted for underthe equity method of accounting in 2004. We acquired the 2.5%managing interest in the net lease portfolio on October 29, 2004 andaccordingly the operations of these properties have been consolidatedinto the condensed consolidated financial statements in 2005.

Unrealized gain (loss) on investments and other

Unrealizedgain (loss) on investments and other increased by $0.2 million for thethree months ended June 30, 2005 compared to the three months endedJune 30, 2004. Unrealized losses on investments for the three monthsended June 30, 2005 of approximately $0.5 million consisted of anunrealized gain on the CDO V warehouse agreement of approximately $0.2million which was offset by $0.5 million and $0.1 million of unrealizedlosses on short sales of securities and short term investments,respectively. Unrealized losses on investments of $0.3 million for thethree months ended June 30, 2004 related to the CDO II warehouseagreement. Unrealized gain(loss) on investments relating to each ofthese CDO warehouse agreements represent the changes in fair value ofeach warehouse agreement during the portion of the warehouse term inthe financial reporting period.

Realized gain (loss) oninvestments and other

Realized gain (loss) on investments andother for the three months ended June 30, 2005 totaled approximately$0.1 million representing an increase of $0.1 million compared to thethree months ended June 30, 2004. The increase is attributable torealized losses of $0.1 million related to the sale of a portion of ourinvestments in AAA-rated, short term, floating rate securities.

Income (loss) from discontinued operations, net of minorityinterest

We sold our interest in 729 Seventh Avenue("729"). Accordingly, the property'soperations were reclassified to Income (loss) from discontinuedoperations. This property was accounted for under the equity method ofaccounting for the three months ended June 30, 2004, as part of netlease portfolio. We acquired the 2.5% managing interest in thenet lease portfolio on October 29, 2004 and accordingly the operationsof these properties have been consolidated into the condensedconsolidated financial statements in 2005.

Gain on Sale fromdiscontinued operations, net of minority interest

We sold ourinterest in 729 for $29 million, recognizing a gain on sale, net ofminority interest of $8.6 million for the three months ended June 30,2005.

Comparison of the Six Months Ended June 30, 2005 to theSix Months Ended June 30, 2004

Revenues

Rental andescalation income

Rental and escalation income for the sixmonths ended June 30, 2005 totaled $6.4 million representing, a $6.4million increase compared to the six months ended June 30, 2004. Theincrease was primarily attributable to $3.7 million from our net leaseportfolio (ALGM) which was accounted 

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for under the equity method of accounting inthe six months ended June 30, 2004. We acquired the 2.5%managing interest in the net lease portfolio on October 29, 2004 andaccordingly the operations of these properties have been consolidatedinto the condensed consolidated financial statements in 2005. We alsoacquired the Chatsworth properties on January 14, 2005, whichcontributed an additional $2.7 million of rental income.

Advisory and management fee income

Advisory and managementfee income decreased by $37,000, or 34%, to $71,000 for the sixmonths ended June 30, 2005, compared to the six months ended June 30,2004, due to a lower average portfolio balance in 2005.

Advisory and management fee income – related parties

Advisory fees from related parties for the six months ended June 30,2005 totaled $2.1 million, representing an increase of approximately$0.9 million, or 75%, compared to the six months endedJune  30, 2004. The increase is comprised primarily of $0.7million of fees earned for CDO II (which closed in July 2004) and $0.4million of fees earned for CDO III (which closed March 10, 2005). Thisincrease was offset by a decrease in fees earned from the NSF Ventureof approximately $0.2 million, which was due to a lower averageportfolio loan balance for the six months ended June 30, 2005.

Interest income

Interest income for the six months endedJune 30, 2005 totaled $18.4 million representing an increase of $17.8million compared to the six months ended June 30, 2004. The increase isattributable to interest on investments, which did not exist in thecomparable period. The interest on these investments included $6.6million of interest income earned from our investments in AAA-rated,short term, floating rate securities, approximately $8.6 million onsubordinate real estate debt investments, and approximately $3.1million of interest income from debt securities available for salewhich is comprised of (1) approximately $2.4 million from theinvestments in the equity of our three CDOs, (2) approximately $0.6million from our "BB" rated junior classes ofdebt securities and unrated income notes of CDO II and (3)approximately $0.1 million on cash collateralizing our short securitysales. For the six months ended June 30, 2004, interest income of $0.6million was earned from CDO  I.

Expenses

Realestate properties – operating expenses

Property operatingexpenses for the six months ended June 30, 2005 totaled $1.5 million,representing an increase of $1.5 million compared to the six monthsended June 30, 2004. The increase was primarily attributable to $1.1million of property operating expenses from our net lease portfoliowhich was accounted for under the equity method of accounting in thesix months ended June 30, 2004. We acquired the 2.5% managinginterest in the net lease portfolio on October 29, 2004 and accordinglythe operations of these properties have been consolidated into thecondensed consolidated financial statements in 2005. We also acquiredthe Chatsworth properties on January 14, 2005 which contributed anadditional $0.4 million of property operating expenses.

Interest expense

Interest expense for the six months endedJune 30, 2005 totaled approximately $12.9 million, representing anincrease of $12.9 million compared to the six months ended June 30,2004. This increase was primarily attributable to the following $5.6million of interest on financing from our investments in AAA-rated,short term, floating rate securities, approximately $0.5 million on ourinvestment in the "BB" rated junior classesof debt securities and unrated income securities of CDO II and onsecurities underlying short sales we entered into during 2004, $2.4million related to our net lease portfolio, $2.9 on the DBAG Facility,approximately $0.6 million on CDO IV, and approximately $1.0 million onliabilities to subsidiary trusts that issued preferred securities inthe second quarter.

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Management fees – relatedparty

Management fees – related party for the six monthsended June 30, 2005 totaled $118,000, representing an increase of$118,000 compared to the six months ended June 30, 2004. The increasewas primarily attributable to the net lease portfolio which wasaccounted for under the equity method of accounting in the six monthsended June 30, 2004. ALGM incurred a management fee during the sixmonths ended June 30, 2004 of $258,000. We acquired the 2.5%managing interest in the net lease portfolio on October 29, 2004 andaccordingly the operations of these properties have been consolidatedinto the condensed consolidated financial statements in 2005.

General and Administrative

General and administrativeexpenses for the six months ended June 30, 2005 totaled $8.8 million,representing an increase of $6.1 million, or 228%, compared to$2.7 million for the six months ended June  30, 2004. Theincrease is comprised of the following:

Salaries and othercompensation (direct and allocated) for the six months ended June 30,2005 totaled $2.5 million, representing an increase of approximately$0.7 million, or 38%, compared to the six months ended June 30,2004. The increase is primarily attributable to an increase in salariesdue to higher staffing levels to accommodate the expansion of our threebusinesses subsequent to our IPO.

Shared services –related party for the six months ended June 30, 2005 totaled $0.7million, representing an increase of approximately $0.7 millioncompared to the six months ended June 30, 2004. The increase wasattributable to the shared facilities and services agreement we enteredinto with NorthStar Capital on October 29, 2004.

Equity basedcompensation expense for the six months ended June 30, 2005 totaled$1.8 million, representing an increase of $1.8 million compared to thesix months ended June 30, 2004. The increase is attributable toapproximately $0.4 million of compensation expense in connection withthe buyout of a profits interest (a compensation arrangement) in NSAdvisors from one of our employees, and approximately $1.2 million inconnection with the three-year vesting of equity based awards issuedunder our 2004 Omnibus Stock Incentive Plan. In addition, compensationexpense of $0.2 million was recognized in connection with a grant of15,194 shares to our Board of Directors on June 24, 2005.

Insurance (direct and allocated) for the six months ended June 30,2005 totaled $430,000 representing an increase of $235,000 or121% compared to the six months ended June 30, 2004. Theincrease was attributable to the directors and officers policies weacquired subsequent to the IPO.

Accounting and auditing fees forthe six months ended June 30, 2005 totaled $1.3 million, representingan increase of $1.3 million compared to the six months ended June 30,2004. The increase is attributable to 2004 audit fees, the firstquarter review performed by our auditors and compliance work during thesix months ended June 30, 2005. Our predecessor did not incur similaraccounting and auditing fees during the six months ended June 30,2004.

Other general and administrative expenses (direct andallocated) for the six months ended June  30, 2005 totaled $2.0million, representing an increase of approximately $1.4 million, or223%, compared to the six months ended June 30, 2004. Thisincrease is primarily attributable to legal costs of $0.5 millionassociated with general corporate matters, consulting fees ofapproximately $0.4 million associated with year end and periodicreporting obligations, recruiting fees of approximately $55,000 andvarious public company expenses of $124,000, and public relations costsof $60,000.

Depreciation and amortization

Depreciationand amortization expense for the six months ended June 30, 2005 totaled$2.0 million, representing an increase of $2.0 million compared to thesix months ended June 30, 2004. The increase was primarily attributableto $0.9 million from our net lease portfolio which was accounted forunder the equity method of accounting for the six months ended June 30,2004. We acquired the 2.5% managing interest in the net leaseportfolio on October 29, 2004 and accordingly the operations of theseproperties have been consolidated into the condensed consolidatedfinancial statements in 

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2005. We also acquired the Chatsworthproperties on January 14, 2005, which contributed an additional $1.0million of depreciation and amortization expense and $0.1 millionrelated to the amortization of the intangible assets.

Equity inearnings of unconsolidated/uncombined ventures

Equity inearnings for the six months ended June 30, 2005 totaled $106,000,representing a decrease of $758,000, or 88%, compared to the sixmonths ended June 30, 2004. The decrease was attributable to thedecrease in the equity in earnings of the NSF Venture of approximately$0.1 million due to a lower average portfolio loan balance in 2005 anda decrease of $0.6 million from our net lease portfolio which wasaccounted for under the equity method of accounting in 2004. Weacquired the 2.5% managing interest in the net lease portfolioon October 29, 2004 and accordingly the operations of these propertieshave been consolidated into the condensed consolidated financialstatements in 2005.

Unrealized gain (loss) on investments andother

Unrealized gain (loss) on investments and other decreasedby approximately $0.2 million, or 23%, from $0.7 million for thesix months ended June 30, 2005, compared to the six months ended June30, 2004. Unrealized gains on investments of approximately $0.5 millionconsisted of unrealized gains of $0.7 million on the CDO III warehouseagreement and approximately $0.2 million on the CDO V warehouseagreement, offset by $0.3 million of unrealized combined losses onshort sales of securities and short term investments. Unrealized gainson investments of $0.7 million for the six months ended June 30, 2004related to the CDO II warehouse agreement. Unrealized gains oninvestments relating to each of these CDO warehouse agreementsrepresent the changes in fair value of each warehouse agreement duringthe portion of the warehouse term in the financial reportingperiod.

Realized gain (loss) on investments and other

Realized gain (loss) on investments and other for the six monthsended June 30, 2005 totaled $0.5 million, representing an increase of$0.5 million compared to the six months ended June 30, 2004. Theincrease is attributable to realized gains of $0.7 million,representing the increase in fair value of the CDO III warehouseagreement through March 10, 2005, when the warehouse agreement wasterminated and the assets of the warehouse were transferred to CDO III.This increase was offset by a $0.2 million loss related to the sale ofa portion of our investments in AAA-rated, short term, floating ratesecurities.

Income (loss) from discontinued operations, net ofminority interest

We sold our interest in 729 Seventh Avenue("729"). Accordingly, the property'soperations were reclassified to Income (loss) from discontinuedoperations. This property was accounted for under the equity method ofaccounting for the three months ended June 30, 2004, as part of netlease portfolio. We acquired the 2.5% managing interest in thenet lease portfolio on October 29, 2004 and accordingly the operationsof these properties have been consolidated into the condensedconsolidated financial statements in 2005.

Gain on Sale fromdiscontinued operations, net of minority interest

We sold ourinterest in 729 for $29 million, recognizing a gain on sale, net ofminority interest of $8.6 million for the six months ended June 30,2005.

Liquidity and Capital Resources

As of June 30,2005, we had an unrestricted cash and cash equivalents balance of $36.9million. As a REIT, we are required to distribute at least 90%of our annual REIT taxable income to our stockholders, and we intend todistribute all or substantially all of our REIT taxable income in orderto comply with the REIT distribution requirements of the InternalRevenue Code and to avoid 

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federal income tax and the nondeductibleexcise tax. We believe that our unrestricted cash balances togetherwith the available borrowing capacity under both the DBAG Facility andWachovia credit facility described below, the net proceeds realizedfrom the private placement of $65 million of trust preferredsecurities, completed in April and May 2005, cash flow provided fromour operations, will be sufficient to allow us to fund the equityportion of our new investments, make distributions necessary to enableus to continue to qualify as a REIT and fund our operations for atleast the next 12 months. In order to fund investments that we may makein the next 12 months, we may borrow additional funds under our currentcredit facilities, issue debt securities or by raising equitycapital.

We expect to meet our long term liquidity requirements,including the repayment of debt and our investment funding needs,through existing cash resources and additional borrowings, the issuanceof debt and/or equity securities and the liquidation or refinancing ofassets at maturity. We believe that the value of the net leaseportfolio is, and will continue to be, sufficient to allow us torefinance the mortgage debt on this portfolio at maturity.

DebtObligations

As of June 30, 2005, we had the following debtoutstanding:

|                                                                   |  |                                       |         |                |  |                               |  |                                        |  |                          |  |  |  |  |  |  |  |  |
|-------------------------------------------------------------------|--|---------------------------------------|---------|----------------|--|-------------------------------|--|----------------------------------------|--|--------------------------|--|--|--|--|--|--|--|--|
|                                                              |  | CarryingAmount at6/30/05(inthousands) |         | StatedMaturity |  | InterestRate                  |  | WeightedAverageExpected Life(in years) |
| Mortgagenotes payable (ALGM)(non-recourse)                        |  | $                                     | 14,673  |           |  | 1/1/2006                      |  | Thegreater of LIBOR or 2%+3.60%        |  | 1.0                      |
| Mortgagenotes payable (Chatsworth)(non-recourse)                  |  |                                  | 43,904  |           |  | 5/1/2015                      |  | 5.65%                                  |  | 11.0                     |
| Mezzanineloan payable (Chatsworth)(non-recourse)                  |  |                                  | 13,000  |           |  | 5/1/2014                      |  | 6.64%                                  |  | 10.0                     |
| Repurchaseobligations                                             |  |                                  | 218,912 |           |  | SeeRepurchaseObligationsbelow |  | LIBOR+ 0.6%to 1.25%                    |  | Various,generally 30days |
| CDO BondsPayable                                                  |  |                                  | 300,000 |           |  | 7/1/2040                      |  | LIBOR +0.62%(AverageSpread)            |  | —                  |
| Liability to subsidiarytrusts issuing preferred securities TrustI |  |                                  | 41,240  |           |  | 3/30/2035                     |  | 8.15%                                  |  | —                  |
| TrustII                                                           |  |                                  | 25,780  |           |  | 6/30/2035                     |  | 7.74%                                  |  | —                  |
| WATemporary RepurchaseAgreement                                   |  |                                  | 21,884  |           |  | 7/13/2005                     |  | LIBOR +2.25%                           |  | 30 days                  |
| DBAGfacility                                                      |  |                                  | — |           |  | 12/21/2007                    |  | LIBOR +0.75%to2.25%                    |  | 3.0                      |
|                                                              |  | $                                     | 679,393 |           |  |                          |  |                                   |  |                     |
|                                                                   |

ALGMMortgage Loan.    The ALGM mortgage loan bears interest at thehigher of one-month LIBOR or 2%, plus a spread of 3.60%,or an aggregate of 6.725% at June 30, 2005. The loan originallymatured on January 1, 2005 and was extended until January 1, 2006. Thisnon-recourse loan may be extended at ALGM's option for twoadditional one-year extension periods, subject to ALGM satisfyingcertain conditions provided for under the loan, including payment of afee equal to 0.75% of the loan balance as a condition toexercising the second and third extension options. The ALGM mortgageloan agreement includes the following financial covenants andrestrictions: (a) ALGM must maintain a debt service coverage ratio inexcess of 1.15 to 1, computed using an annual interest rate of10.09%, and (b) ALGM must establish and maintain certain escrowreserve accounts for, among other things, payment of real estate taxes,capital expenditures and tenant rollover costs. ALGM is 

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uncombined in our predecessor'sfinancial statements as of June 30, 2004 and is consolidated in ourfinancial statements at June 30, 2005 and December 31, 2004.

Chatsworth Mortgage Loan.    The Chatsworth Mortgagematures on May 1, 2015 and bears interest at a fixed rate of5.65%. This non-recourse loan requires monthly payments of$230,906 representing interest in arrears and principal sufficient toamortize the loan to a balance of approximately $40.5 million atmaturity, as well as monthly escrow deposits for ground lease paymentsrequired under the ground lease for the leasehold property.

Chatsworth Mezzanine Loan.    This non-recourse loan bearsinterest at a fixed rate of 6.64%, and requires monthly paymentsof interest only of $71,955 for the period February 1, 2005, throughFebruary  1, 2006, and principal and interest payments of$170,914, thereafter, which will fully amortize the loan by thematurity date of May 1, 2014.

RepurchaseObligations.    Our temporary investments, which are primarilyAAA-rated, short term, floating rate securities, backed by commercialor residential mortgage loans, were financed with repurchase agreementswith Citigroup and Greenwich Capital Markets, Inc. We initiallyborrowed approximately $1.25 billion under repurchase agreements, ofwhich $207.3 million was outstanding at June 30, 2005, approximately$172.2 million with Citigroup and $35.1 million with Greenwich. Theserepurchase obligations mature every 30 days.

The balancerepresents a repurchase agreement with Citigroup which was used tofinance the acquisition of the "BB" ratedjunior classes of debt securities of CDO II. The debt matures onJuly  21, 2006 and bears interest at LIBOR plus 1.25% perannum.

DBAG Facility and CDO Bonds payable.    OnDecember 21, 2004, NRFC DB Holdings, LLC, one of our subsidiaries,entered into a $150 million master repurchase agreement with DeutscheBank AG, Cayman Islands Branch, which we refer to as the DBAG facility.On March 21, 2005, the DBAG facility was amended and restated to allowNRFC DB Holdings to borrow up to $300 million in order to finance theacquisition of primarily subordinate real estate debt and other realestate loans and securities. The additional capacity and flexibilityunder the amendment of the DBAG facility allowed us to accumulatesufficient collateral for CDO IV, and to continue to finance otherinvestments.

On June 14, 2005, we closed CDO IV and issued $300million face amount of the CDO Bonds which were sold in a privateplacement to third parties. The proceeds of the CDO IV issuance wereused to repay the entire outstanding principal balance of the DBAGFacility of $233.6 million at closing. The availability under the DBAGfacility was reduced to $150 million subsequent to the closing of CDOIV.

The DBAG facility has an initial three-year term, which maybe extended for one additional year if NRFC DB Holdings is not indefault and pays an extension fee of 0.25% of the aggregateoutstanding amount under the facility. If NRFC DB Holdings extends theterm of the facility, it will be required to retire 25% of theaggregate outstanding amount each quarter during the remaining year ofthe term.

Under the terms of the DBAG facility, NRFC DB Holdingsis able to finance the acquisition of mortgage loans secured by firstliens on commercial or multifamily properties, junior participationinterests in mortgage loans secured by first or second liens oncommercial or multifamily properties, mezzanine loans secured by apledge of the entire ownership interest in a commercial or multifamilyproperty, B or higher rated commercialmortgage backed securities and BB or higher rated real estate CDOs,debt securities issued by a REIT and syndicated bank loans.

During the period from March 21, 2005 through June 14, 2005, amountsadvanced under the DBAG facility in order to finance the acquisition ofassets that were included in CDO IV bore interest at one-month LIBORplus a spread of 1.00% and amounts advanced for all other assetsbore interest at one-month LIBOR plus a spread which ranges from0.75% to 2.25%. After June 14, 2005, all amounts advancedunder the amended DBAG facility will bear interest at a rate ofone-month LIBOR plus the spread which ranges from 0.75% to2.25%. Assets will be financed at advance rates ranging from40% to 92.5% of the value of the assets as applicable tothe asset category.

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Effective April 1, 2005, the covenantsunder the DBAG facility require us to remain at a certain minimumtangible net worth, a certain minimum debt service coverage ratio, acertain range of ratios of recourse indebtedness to net worth andcertain minimum amounts of cash or marketable securities based on ourratio of recourse indebtedness to net worth.

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

As of June 30, 2005, NRFC DB Holdings had noborrowings under this facility.

Wachovia Temporary RepurchaseAgreement

On June 21, 2005, we entered into a temporaryrepurchase agreement with Wachovia Bank, National Association, totemporarily finance the acquisition of loan participation interestsuntil the Wachovia Master Repurchase agreement was closed. We borrowedapproximately $21.9 million under the temporary repurchase agreement.The advance bears interest at LIBOR plus 2.25%. The temporaryrepurchase agreement matured at the closing of the Wachovia creditfacility, described below, on July 13, 2005 and the principal balanceoutstanding was rolled into that facility.

Liability tosubsidiary trusts issuing preferred securities

On April 12,2005 and May 25, 2005, NorthStar Realty Finance Trust and NorthStarRealty Finance Trust II, (the "Trusts") sold,in two private placements, trust preferred securities for an aggregateamount of $40 million and $25 million, respectively. We own all of thecommon stock of the Trusts. The Trusts used the proceeds to purchasethe Company's junior subordinated notes due March  30, 2035and June 30, 2035, respectively, which represent all of theTrusts' assets. The terms of the junior subordinated notes aresubstantially the same as the terms of the trust preferred securities.The trust preferred securities have a fixed interest rate of8.15% and 7.74% per annum, respectively, during the firstten years, after which the interest rate will float and reset quarterlyat the three-month LIBOR rate plus 3.25% per annum.

Wemay redeem the notes, in whole or in part, for cash, at par, afterMarch 30, 2010 and June 30, 2010, respectively. To the extent we redeemthe notes, the Trusts are required to redeem a corresponding amount oftrust preferred securities.

The ability of the Trusts to paydividends depends on the receipt of interest payments on the notes. Wehave the right, pursuant to certain qualifications and covenants, todefer payments of interest on the notes for up to six consecutivequarters. If payment of interest on the notes is deferred, the Trustwill defer the quarterly distributions on the trust preferredsecurities for a corresponding period. Additional interest accrues ondeferred payments at the annual rate payable on the notes, compoundedquarterly.

The indenture for NorthStar Realty Finance Trust II,has certain covenants that are substantially similar to those under theDBAG Facility, and certain restrictions on issuing additional trustpreferred securities. At June 30, 2005, we were in compliance with allcovenants under Trust II.

Capital Expenditures

During2005, we expect to incur approximately $150,000 in connection with newtenant leasing costs and capital expenditures with respect to the netlease portfolio owned by ALGM. We anticipate the sources of funds forthese expenditures to be from our working capital and lenderreserves.

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Other Investment Activity

Warehouse Agreement CDO V

On May 4, 2005, we entered into awarehouse arrangement with a major commercial bank whereby the bank hasagreed to purchase up to $400 million of CMBS and other real estatedebt securities under our direction, with the expectation of sellingsuch securities to our fourth investment grade CDO issuer("CDO V"). We were required to pledge up to$10 million as security for the purpose of covering a portion of anylosses or costs associated with the accumulation of these securitiesunder the warehouse agreement. As of June 30, 2005, we have deposited$12.5 million and will be required to deposit additional equity basedon accumulations of securities that will be made under the warehouseagreement. The bank has accumulated approximately $238.0 million ofreal estate securities under the terms of the warehouse agreement as ofJune 30, 2005. From June 30, 2005 through August 9, 2005, we haveacquired approximately $104.0 million in additional real estatesecurities. The CDO V warehouse agreement also provides for ournotional participation in the income that the assets generate afterdeducting a notional debt cost. The agreement is being treated as anon-hedge derivative for accounting purposes and is marked-to-marketthrough income. We recorded an unrealized gain of $0.2 million for thethree and six months ended June 30, 2005 related to the change in fairvalue of the warehouse agreement. The collateral being accumulatedunder this agreement is expected to be included in a securitizationtransaction in which we would acquire all of the equity interests.

Cash Flows

The net cash flow provided by operatingactivities of $610.1 million, increased for the six months ended June30, 2005 from $1.0 million of cash provided by operations for the sixmonths ended June  30, 2004 which was primarily due to sales ofshort term highly liquid investments included in operating activities,where the corresponding repayment of short term repurchase financing isincluded in financing activities. Adjusting for the effect of thesesales, cash provided from operating activities would have decreased by$4.8 million to cash used in operating activities from 2004 to2005.

The net cash flow used in investing activities increasedby $425.2 million for the six months ended June 30, 2005 from $1.2million for the six months ended June 30, 2004. Net cash used ininvesting activities in 2005 consisted primarily of the purchase ofoperating real estate, funds used to purchase our interest in theunrated income notes and the "BB" rated notesof CDO III, as well as purchases of subordinate real estate debtinvestments.

The net cash flow used in financing activitiesincreased by $194.6 million for the six months ended June 30, 2005 to$194.5 million from $0.1 million of cash flow provided by financingactivities for the six months ended June 30, 2004. The primary use ofcash flow in financing activities in 2005 was for the repayment of ourrepurchase agreements which financed our short term, highly liquidinvestments, the repayment of the DBAG facility in connection with theclosing of CDO IV, the repayment of $25.1 million of the existingmortgage on the ALGM portfolio in connection with the sale of 729 andpayment of dividends and distributions to our unit holders of $4.0million. This was offset by proceeds from the issuance of CDO IV bonds,issuance of Trust I and Trust II preferred securities and our mortgageborrowings.

Recent Developments

New Facility –Wachovia

On July 13, 2005, NRFC WA Holdings, LLC or NRFC WA,our subsidiary, entered into a master repurchase agreement withWachovia Bank, National Association or Wachovia Bank. NRFC WA mayborrow up to $150 million (the "WA Facility")(which maximum borrowing amount may be increased to $300 million inWachovia Bank's sole discretion) under this credit facility inorder to finance the acquisition of first priority mortgage loans,senior or junior participation interests or B notes in first

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priority mortgage loans, mezzanine loanssecured by commercial and multi-family properties and commercialproperties in which the property is 100% leased under a credittenant lease to, or guaranteed in full by, a credit tenant and B- orhigher rated CMBS.

Advance rates under the WA Facility rangefrom 55% to 95% of the value of the assets for which theadvance is made. Amounts borrowed under the facility bear interest atone-month LIBOR plus a spread which ranges from 0.20% to3.00%, depending on the type of asset for which the amount isborrowed. The facility has an initial term of three years and aninitial maturity date of July 12, 2008. In addition, NRFC WA must payan unused facility fee equal to 0.25% of the unused portion ofthe facility, commencing 120 days after July 13, 2005, payablequarterly in arrears. We have agreed to guaranty amounts borrowed byNRFC WA under the facility up to a maximum of $20 million.

NRFCWA may extend the term of the WA Facility for one year if it is not indefault and pays an extension fee of 0.25% of the aggregateamount then outstanding under the facility. If NRFC WA extends thefacility's term, it will be required to retire 25% of theaggregate amount then outstanding under the facility during eachquarter of the remaining year of the term.

NRFC WA paid WachoviaBank a $750,000 structuring fee in connection with the execution ofthis facility.

The debt outstanding under the facility issubject to a number of terms, conditions and restrictions including,without limitation, scheduled interest payments, the maintenance ofcertain margin percentages on amounts outstanding under the facility.If the market value of an asset securing outstanding debt declines,NRFC WA may be required to satisfy a margin call by paying cash orproviding additional collateral. Failure to meet any margin call couldresult in an event of default which would enable Wachovia Bank toexercise various rights and remedies including acceleration of thematurity date of the debt outstanding under the facility and the saleof the collateral.

As of July 15, 2005, NRFC WA has not borrowedany amounts under this facility.

Subordinate Real Estate DebtInvestments

The following investments were acquired subsequentto June 30,2005:

|                    |  |                     |  |                     |  |                               |        |                  |  |                            |        |        |  |             |  |  |  |  |  |  |  |  |
|--------------------|--|---------------------|--|---------------------|--|-------------------------------|--------|------------------|--|----------------------------|--------|--------|--|-------------|--|--|--|--|--|--|--|--|
| Dateof Acquisition |  | LoanName/Collateral |  | LoanType            |  | Principal Amount(inthousands) |        | Initial Maturity |  | InterestRateIndexandSpread |
| 7/01/05            |  | OfficeBuilding      |  | JuniorParticipation |  | $                             | 4,250  |             |  |                       | 1/2007 |   |  | LIBOR+2.50% |
| 7/01/05            |  | OfficeBuilding      |  | MezzanineLoan       |  |                          | 5,000  |             |  |                       | 1/2007 |   |  | LIBOR+5.00% |
| 7/15/05            |  | OfficeBuilding      |  | JuniorParticipation |  |                          | 10,000 |             |  |                       | 7/2007 |   |  | LIBOR+7.00% |
| 8/1/05             |  | Multifamily         |  | JuniorParticipation |  |                          | 35,000 |             |  |                       | 8/2007 |   |  | LIBOR+5.25% |
|               |  | Total               |  |                |  | $                             | 54,250 |             |  |                       |   |   |  |        |
|                    |

Theseinvestments were acquired as part of the ramp-up of CDO IV.

Salt Lake City Property

On August 2, 2005, we closed a$22.0 million acquisition of a 117,553 square foot office building inSalt Lake City, Utah, which is 100% leased to the GeneralServices Administration under a lease that expires in April 2012. Theproperty is financed with a 5.16% fixed rate, seven yearnon-recourse first mortgage loan of $17 million.

Dividends

On July 28, 2005, we declared a cash dividend of $0.15 per share ofcommon stock. The dividend is expected to be paid on August 15, 2005 tothe shareholders of record as of the close of business on August8, 2005.

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Related Party Transactions

Advisory Fee — NorthStar Funding LLC

In 2001, ourpredecessor entered into an advisory agreement with the NSF Venture,pursuant to which it receives as compensation for its management ofinvestments of the NSF Venture an advisory fee equal to 1% perannum of the capital invested by the NSF Venture. Additionally,NorthStar Funding Managing Member LLC is entitled to an incentiveprofit participation equal to 10% of the profit after a minimumrequired return on the NSF Venture's capital and a return of andon capital based upon the operating performance of the NSFVenture's investments. Prior to the contribution of the initialinvestments to our operating partnership and the related IPOtransactions, NorthStar Funding Managing Member LLC received 75%of this incentive profit participation equal to 10% of theprofit after a minimum required return on NSF Venture's capitaland a return of and on capital based on the operating performance ofthe NSF Venture's investments. We earned and recognized advisoryfees from the NSF Venture of approximately $109,000 and $300,000 forthe three and six months ended June 30, 2005. Our predecessor earnedand recognized advisory fees from the NSF Venture of approximately$240,000 and $493,000 for the three and six months ended June 30, 2004.We have received combined profit participation distributions of$925,000 during the six months ended June 30, 2005. Because suchdistributions may have to be refunded, no profit participationdistributions were recognized as income pursuant to Method 1 ofEmerging Issues Task Force Topic D-96.

Advisory and ManagementFee Income

In August 2003, July 2004, March 2005 and June 2005,CDO I, CDO II, and CDO III, respectively, entered into agreements withNS Advisors, to perform certain advisory services. We earned total feesof approximately $1,019,000 and $1,770,000 for the three and six monthsended June  30, 2005. Our predecessor earned total fees ofapproximately $344,000 and $689,000 for the three and six months endedJune 30, 2004. The unpaid advisory fees of $570,000 and $82,000 areincluded in due from affiliates in our condensed consolidated balancesheets as of June 30, 2005 and December  31, 2004. We also earneda structuring fee of $500,000 in connection with the closing of CDO IIIfor the six months ended June 30, 2005, which was used to reduce ourinvestment in debt securities available for sale.

ALGM

On December 28, 2004, we terminated the asset management agreementwith Emmes Asset Management Co. LLC, an affiliate of NorthStar Capital,for a contractual termination payment of approximately $380,000, whichis equal to two quarters of payments of the annual fee of $760,000. Onthat date, ALGM and Emmes entered into a new asset management agreementwhich is cancelable on 30 days notice by ALGM. The annual assetmanagement fee under the new agreement is equal to 3.5% of grosscollections from tenants of the properties not to exceed $350,000 or beless than $300,000 per year, subject to certain provisions. Total feesincurred under the asset management agreement were $61,000 and $118,000for the three and six months ended June 30, 2005.

SharedFacilities and Services Agreement

Upon consummation of our IPO,we entered into a one-year agreement with NorthStar Capital pursuant towhich NorthStar Capital agreed to provide us, directly or through itssubsidiaries, with the following facilities and services: 1)fully-furnished office space for our employees at NorthStarCapital's corporate headquarters; 2) use of common facilities andoffice equipment, supplies and storage space at NorthStarCapital's corporate headquarters; 3) accounting support andtreasury functions; 4) tax planning and REIT compliance advisoryservices; and 5) other administrative services. For the initial oneyear term of the agreement, NorthStar Capital agreed to provide thesefacilities and services to us for an annual fee of approximately $1.57million, payable in monthly installments, plus additional charges forout-of-pocket expenses and taxes. This fee is subject to reduction bythe amount that we pay certain full-time employees of NorthStar Capitalwho became our co-employees upon consummation of our IPO, including Mr.McCready, our general counsel and secretary.

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After the initial one-year term of theagreement, we may elect to discontinue receiving any of the facilitiesor services set forth above upon 90 days written notice by us toNorthStar Capital. NorthStar Capital may discontinue providing aparticular service to us upon 90 days written notice to us stating thatNorthStar Capital intends to discontinue permanently the provision ofthat service to its own internal organizations. NorthStar Capital mayalso discontinue providing office facilities to us upon 180 dayswritten notice to us. In any of these cases, a reduction correspondingto the portion of the fee discussed above that relates to thediscontinued facility or service will be made.

The agreement isrenewable for additional one-year periods upon the mutual agreement ofNorthStar Capital and us, together with a vote of the majority of ourindependent directors.

Total fees and expenses incurred by usunder the shared facilities and services agreement amounted to $0.3million and $0.6 million for the three and six months ended June 30,2005.

Contractual Commitments

As of June 30, 2005, wehad the following contractual commitments and commercial obligations(inthousands):

|                                                           |  |                       |         |                  |  |          |         |           |  |              |         |        |  |        |         |        |  |        |         |        |  |  |
|-----------------------------------------------------------|--|-----------------------|---------|------------------|--|----------|---------|-----------|--|--------------|---------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|                                                      |  | PaymentsDue by Period |
| ContractualObligations                                    |  | Total                 |         | Less than 1 year |  | 1-3years |         | 3-5 years |  | After 5years |
| Mortgage loan –ALGM                                 |  | $                     | 14,673  |             |  | $        | 14,673  |      |  | $            | — |   |  | $      | — |   |  | $      | — |   |
| Mortgage loan –Chatsworth                           |  |                  | 43,904  |             |  |     | 127     |      |  |         | 558     |   |  |   | 619     |   |  |   | 42,600  |   |
| Mezzanineloan payable –Chatsworth                   |  |                  | 13,000  |             |  |     | — |      |  |         | 2,309   |   |  |   | 2,859   |   |  |   | 7,832   |   |
| Repurchaseagreements                                      |  |                  | 218,912 |             |  |     | 218,912 |      |  |         | — |   |  |   | — |   |  |   | — |   |
| Securitiessold, not yetpurchased                          |  |                  | 13,081  |             |  |     | 13,081  |      |  |         | — |   |  |   | — |   |  |   | — |   |
| CDObondspayable                                           |  |                  | 300,000 |             |  |     | — |      |  |         | — |   |  |   | — |   |  |   | 300,000 |   |
| Liabilityto subsidiary trusts issuing preferredsecurities |  |                  | 67,020  |             |  |     | — |      |  |         | — |   |  |   | — |   |  |   | 67,020  |   |
| WATemporary RepurchaseAgreement                           |  |                  | 21,884  |             |  |     | 21,884  |      |  |         | — |   |  |   | — |   |  |   | — |   |
| Capitalleases(1)                                          |  |                  | 17,954  |             |  |     | 176     |      |  |         | 712     |   |  |   | 934     |   |  |   | 16,132  |   |
| Operatingleases                                           |  |                  | 13,845  |             |  |     | 414     |      |  |         | 1,104   |   |  |   | 944     |   |  |   | 11,383  |   |
| Totalcontractualobligations                               |  | $                     | 724,273 |             |  | $        | 269,267 |      |  | $            | 4,683   |   |  | $      | 5,356   |   |  | $      | 444,967 |   |
|                                                           |

|  |
|--|
|  |  |
|  |

|     |                                        |
|-----|----------------------------------------|
| (1) | Includesinterest on the capital leases |

Off Balance SheetArrangements

As of June 30, 2005, we had the material offbalance sheet arrangements described below.

We have provided anindemnity to NorthStar Partnership for any liability it may have underits limited guaranties to the lender under ALGM's mortgage loan.At June 30, 2005, NorthStar Partnership had a maximum exposure of $14.7million under its guaranty to Greenwich Capital for such triggeringevents as fraud, misapplication of funds and failure to pay taxes.NorthStar Partnership also provided Greenwich Capital with a limitedrepayment guaranty that may be triggered by the termination of a leaserelated to one of the properties in the New York property portfolio.The maximum exposure for such lease termination was equal to $2.5million at June 30, 2005.

Our potential losses in CDO I, CDO IIand CDO III are limited to our aggregate carrying value which wasapproximately $74.4 million at June 30, 2005.

The terms of theportfolio of real estate securities held by CDO I, CDO II and CDO IIIare matched with the terms of the non-recourse CDO liabilities. TheseCDO liabilities are repaid with the proceeds of the principal paymentson the real estate securities collateralizing the CDO liabilities

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when these payments are actually received.There is no refinancing risk associated with the CDO liabilities, asprincipal is only due to the extent that it has been collected on theunderlying real securities and the stated maturities are noted above.CDOs produce a relatively predictable income stream based on the spreadbetween the interest earned on the underlying securities and theinterest paid on the CDO liabilities. This spread may be reduced bycredit losses on the underlying securities or by hedging mismatches.CDO I, CDO II and CDO III have not incurred any losses on any of theirsecurities investments from the date of purchase through June 30, 2005.We receive quarterly cash distributions from CDO I and monthly cashdistributions from CDO II and CDO III, each representing ourproportionate share of the residual cash flow from the CDOs, as well ascollateral advisory fees and interest income on the unrated incomenotes of CDO II and CDO III. Our residual interests in the cash flowsof CDO I, CDO II and CDO III are accounted for as debt securitiespursuant to Emerging Issues Task Force Topic 99-20.

Thefollowing table describes certain terms of the collateral for and thenotes issued by CDO I, CDO II and CDO III as of June 30,2005:

|        |  |                                          |         |                             |  |                                    |      |                                        |  |                             |      |                |  |   |         |        |  |        |      |         |  |        |          |        |  |  |
|--------|--|------------------------------------------|---------|-----------------------------|--|------------------------------------|------|----------------------------------------|--|-----------------------------|------|----------------|--|---|---------|--------|--|--------|------|---------|--|--------|----------|--------|--|--|
|   |  | CDOCollateral                            |         | CDONotes                    |
|   |  | Par Valueof CDO Collateral (inthousands) |         | WeightedAverageInterestRate |  | WeightedAverageExpectedLife(years) |      | Outstanding CDO Notes (inthousands)(1) |  | WeightedAverageInterestRate |      | StatedMaturity |
| CDOI   |  | $                                        | 356,010 |                        |  |                               | 6.57 | %                                 |  |                        | 6.70 |           |  | $ | 336,800 |   |  |   | 6.03 | %  |  |   | 8/1/2038 |   |
| CDOII  |  | $                                        | 397,825 |                        |  |                               | 6.11 | %                                 |  |                        | 7.47 |           |  | $ | 360,930 |   |  |   | 5.37 | %  |  |   | 6/1/2039 |   |
| CDOIII |  | $                                        | 400,856 |                        |  |                               | 6.12 | %                                 |  |                        | 7.00 |           |  | $ | 361,000 |   |  |   | 3.37 | %  |  |   | 6/1/2040 |   |
|        |

|  |
|--|
|  |  |
|  |

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

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

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

Inflation

Our leases for tenants of ALGM areeither:

|              |                                                                                                                                                                                                                                             |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | net leases where the tenantsare responsible for all real estate taxes, insurance and operatingexpenses and the leases provide for increases in rent either based onchanges in the Consumer Price Index (CPI) or pre-negotiated increases;or |

|              |                                                                                                                                                                                     |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | operating leases which provide forseparate escalations of real estate taxes and operating expenses over abase amount, and/or increases in the base rent based on changes in theCPI. |

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

We believethat the risk associated with an increase in market interest rates onthe floating rate debt used to finance our investments in CDO I, CDOII, CDO III, ALGM, and our direct investments in subordinate realestate debt, is largely offset by our strategy of matching the terms ofour assets with the terms of our liabilities and through our use ofhedging instruments.

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Funds from Operations and Adjusted Fundsfrom Operations

Management believes that funds from operations,or FFO, and adjusted funds from operations, or AFFO, each of which arenon-GAAP measures, are additional appropriate measures of the operatingperformance of a REIT. We compute FFO in accordance with the standardsestablished by the National Association of Real Estate InvestmentTrusts, or NAREIT, as net income or loss (computed in accordance withGAAP), excluding gains or losses from sales of depreciable properties,the cumulative effect of changes in accounting principles, realestate-related depreciation and amortization, and after adjustments forunconsolidated/uncombined partnerships and joint ventures. We calculateAFFO by subtracting from (or adding) toFFO:

|              |                                                                                                                                                                                                                  |
|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| •  | normalized recurring expendituresthat are capitalized by us and then amortized, but which are necessaryto maintain our properties and revenue stream, e.g., leasingcommissions and tenant improvementallowances; |

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

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

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

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

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

Set forth below is areconciliation of our calculations of FFO and AFFO to net income beforeminority interests for the three and six months ended June 30,2005:

|                                                                         |  |                    |           |           |  |        |           |         |  |  |
|-------------------------------------------------------------------------|--|--------------------|-----------|-----------|--|--------|-----------|---------|--|--|
|                                                                    |  | ThreeMonths        |           | SixMonths |
|                                                                    |  | Ended June 30,2005 |
| **Funds fromOperations:**                                               |  |               |      |      |  |   |      |    |
| Income beforeminorityinterests                                          |  | $                  | 1,453,000 |      |  | $      | 2,895,000 |    |
| Adjustments:                                                            |  |               |      |      |  |   |      |    |
| Depreciationandamortization                                             |  |               | 1,046,000 |      |  |   | 1,984,000 |    |
| Realestate depreciation and amortization — unconsolidatedventures |  |               | —   |      |  |   | —   |    |
| FundsfromOperations                                                     |  | $                  | 2,499,000 |      |  | $      | 4,879,000 |    |
| **AdjustedFunds from Operations:**                                      |  |               |      |      |  |   |      |    |
| FundsfromOperations                                                     |  | $                  | 2,499,000 |      |  | $      | 4,879,000 |    |
| Straightlinerental income,net                                           |  |               | (113,000  | )    |  |   | (212,000  | )  |
| Amortizationof deferredcompensation                                     |  |               | 959,000   |      |  |   | 1,759,000 |    |
| AdjustedFunds fromOperations                                            |  | $                  | 3,345,000 |      |  | $      | 6,426,000 |    |
|                                                                         |

44

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ITEM3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the exposure to loss resulting from changes ininterest rates and equity prices. We are subject to credit risk andinterest rate risk with respect to our investments in subordinate realestate debt and real estate securities. The primary market risk that weare exposed to is interest rate risk. Interest rates are highlysensitive to many factors, including governmental monetary and taxpolicies, domestic and international economic and politicalconsiderations and other factors beyond our control. Our interest raterisk sensitive assets, liabilities and related derivative positions aregenerally held for non-trading purposes. A hypothetical 100 basis pointincrease in interest rates applied to our variable rate assets wouldincrease our annual interest income by approximately $4,325,000, offsetby an increase in our interest expense of approximately $3,481,000 onour variable rate liabilities.

Subordinate Real EstateDebt

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

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

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

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

We expect ourinvestments to be denominated in U.S. dollars or, if they aredenominated in another currency, to be converted back to U.S. dollarsthrough the use of currency swaps. It may not 

45

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be possible to eliminate all of the currencyrisk as the payment characteristics of the currency swap may notexactly match the payment characteristics of the investments.

Real Estate Securities

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

On June 30, 2005,the real estate securities that serve as collateral for CDO I, CDO IIand CDO III each had an overall weighted average credit rating ofapproximately BBB – and approximately 73.13%,74.44% and 71.3%, respectively, of these securities areinvestment grade.

The real estate securities underlying CDO I,CDO II and CDO III are also subject to spread risk. The majority ofthese securities are fixed rate securities, which are valued based on amarket credit spread over the rate payable on fixed rate U.S.Treasuries of like maturity. In other words, their value is dependenton the yield demanded on such securities by the market, as based ontheir credit relative to U.S. Treasuries. An excessive supply of thesesecurities combined with reduced demand will generally cause the marketto require a higher yield on these securities, resulting in the use ofa higher or "wider" spread over the benchmarkrate (usually the applicable U.S. Treasury security yield) to valuethese securities. Under these conditions, the value of our real estatesecurities portfolio would tend to decrease. Conversely, if the spreadused to value these securities were to decrease or"tighten," the value of our real estatesecurities would tend to increase. Such changes in the market value ofour real estate securities portfolio may affect our net equity or cashflow either directly through their impact on unrealized gains or losseson available-for-sale securities by diminishing our ability to realizegains on such securities, or indirectly through their impact on ourability to borrow and access capital.

Returns on our real estatesecurities are sensitive to interest rate volatility. If interest ratesincrease, the funding cost on liabilities that finance the securitiesportfolio will increase if these liabilities are at a floating rate orhave maturities shorter than the assets.

Our general financingstrategy focuses on the use of "match-funded"structures. This means that we seek to align the maturities of our debtobligations with the maturities of our investments in order to minimizethe risk of being forced to refinance our liabilities prior to thematurities of our assets, as well as to reduce the impact offluctuating interest rates on earnings. In addition, we generally matchinterest rates on our assets with like-kind debt, so that fixed rateassets are financed with fixed rate debt and floating rate assets arefinanced with floating rate debt, directly or through the use ofinterest rate swaps, caps or other financial instruments or through acombination of these strategies. CDO I, CDO II and CDO III utilizeinterest rate swaps to minimize the mismatch between its fixed rateassets and floating rate liabilities. We expect to hedge the interestrate risk in future CDOs in a similar manner.

Our financingstrategy is dependent on our ability to place the match-funded debt weuse to finance our real estate securities at spreads that provide apositive arbitrage. If spreads on the bonds 

46

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issued by CDOs widen or if demand for theseliabilities ceases to exist, then our ability to execute future CDOfinancings will be severely restricted.

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

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

Debt Securities Held for Trading

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

Net Lease Properties

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

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

47

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Derivatives and Hedging Activities

To limit the exposure to the variable LIBOR rate on the DBAGfacility, we entered into various swap agreements to fix the LIBOR rateon a portion of our variable rate debt. The fixed LIBOR rates rangesfrom 4.18% to 5.03%. The following table summarizes thenotional amounts and fair (carrying) values of our derivative financialinstruments as of June 30, 2005 (in thousands):

|                                       |  |                |  |            |  |                              |  |  |  |  |  |  |  |  |
|---------------------------------------|--|----------------|--|------------|--|------------------------------|--|--|--|--|--|--|--|--|
|                                  |  | NotionalAmount |  | Fair Value |  | Range ofMaturity             |
| Interest rate swaps, treated ashedges |  | $26,349        |  | ($663)     |  | December2010  -  August 2018 |
|                                       |

48

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ITEM 4.    CONTROLS AND PROCEDURES

NorthStar Realty Finance Corp. (the"Company") became subject to the periodic andother reporting requirements of the Securities Exchange Act of 1934, asamended (the "Exchange Act") on October 25,2004, the effective date of the Company's registration statementrelating to its IPO. On October 29, 2004, the Company received aninitial portfolio of real estate-related investments (theInitialInvestments") pursuant to certain contribution agreementswith subsidiaries of NorthStar Capital Investment Corp.("NCIC") and commenced operations. Thefinancial statements included in this Quarterly Report on Form 10-Q arefor the Company as of June 30, 2005 and for the three and six monthsended June 30, 2005 and for NorthStar Realty Finance Corp. Predecessor(the "Predecessor"), a combination ofNCIC's controlling and non-controlling interests in entitiesrepresenting the Initial Investments, as of December 31, 2004 and forthe three and six months ended June 30, 2004.

The Company formeda Disclosure Committee in November 2004 in order to assure that itsdisclosure controls and procedures were effective to ensure thatinformation required to be disclosed in the Company's periodicreports under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the SEC's rules andforms. The Disclosure Committee is currently comprised of each of theCompany's five executive officers and the Company'sin-house corporate counsel. Meetings frequently include other employeeswith knowledge of information that may be considered material in theSEC reporting process. The Disclosure Committee has been given theresponsibility of developing and assessing the financial andnon-financial information to be included in the Company's SECreports and assisting the Company's chief executive officer andchief financial officer in connection with their certificationscontained in the Company's SEC reports. The Disclosure Committeemeets and reports to the Audit Committee on at least a quarterlybasis.

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

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

49

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trading and CDO related activities, (4) hiredan in-house corporate counsel (5) implemented policies to enhancecommunication between business unit and financial reporting personnelin order to ensure comprehensive review by management level businessunit personnel of the recording of Company transactions, (6) retainedan outside accounting firm to review processes and procedures that theCompany has adopted in connection with its financial reporting and toassist in the preparation and review of its financial reports, (7)adopted processes for documenting and verifying the accounting for CDOrelated transactions, and (8) implemented procedures requiring moredetailed, timely and comprehensive reporting from third party serviceproviders, including its CDO warehouse provider. In addition, theCompany has improved its training of accounting and financial reportingpersonnel by formalizing in writing and distributing to personnel theaccounting policies and treatment of transactions entered into by eachbusiness segment of the Company.

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

The Company has and will continue to evaluate theeffectiveness of its disclosure controls and procedures and internalcontrols over financial reporting on an ongoing basis and will takecorrective action and implement improvements as appropriate.

Except for the initiatives described above, there were no changes inthe Company's internal control over financial reporting duringthe fiscal quarter ended June 30, 2005 that materially affected, or arereasonably likely to materially affect, the Company's internalcontrol over financial reporting.

50

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PART II – OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

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

In connection with the saleof 729 Seventh Avenue, 729 7th Realty Corp., an affiliate of the RieseOrganization's National Restaurant Management Inc., agreed todiscontinue the legal action that it had brought in New York StateSupreme Court, New York County, against 729 Demi-Tasse LLC, the feeowner of 729 Seventh Avenue, settling our only material pending legalaction.

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIESAND USE OF PROCEEDS

(a)        None.

(b)        As disclosed in our quarterly report on Form10-Q for the quarter ending September 30, 2004, we consummated aninitial public offering of our common stock in October 2004 pursuant toa registration statement that was declared effective on October 25,2004 (File No. 333-114675) and we estimated initial public offeringexpenses of approximately $7.3 million, resulting in estimated netoffering proceeds to us, after deducting the underwriting discount andexpenses, of $170.1 million. We have incurred initial public offeringexpenses of approximately $7.6 million, resulting in net offeringproceeds of the initial public offering to us, after deducting theunderwriting discount and expenses, of approximately $169.8 million. Asof June 30, 2005, we have deployed all of the net offering proceeds ofthe initial public offering.

(c)        None.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

            None.

ITEM 4.    SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS

The Company'sAnnual Meeting of shareholders was held on June  23, 2005 (the"Meeting"). At the close of business on therecord date for the Meeting (which was May 16, 2005), there were21,249,736 shares of common stock outstanding and entitled to vote atthe Meeting. Holders of 20,686,725 shares of common stock (representinga like number of votes) were present at the Meeting, either in personor by proxy.

At the Meeting, the following individuals wereelected to the Company's Board of Directors to hold office for aone-year term and until his or her successor is duly elected andqualified, by the following vote:

|                   |  |         |            |          |  |        |         |        |  |  |
|-------------------|--|---------|------------|----------|--|--------|---------|--------|--|--|
| Nominee           |  | InFavor |            | Withheld |
| William V.Adamski |  |    | 20,679,725 |     |  |   | 7,000   |   |
| PrestonButcher    |  |    | 20,675,225 |     |  |   | 11,500  |   |
| David T.Hamamoto  |  |    | 20,679,725 |     |  |   | 7,000   |   |
| Judith A.Hannaway |  |    | 20,623,725 |     |  |   | 63,000  |   |
| Wesley D.Minami   |  |    | 20,679,725 |     |  |   | 7,000   |   |
| W. EdwardScheetz  |  |    | 19,893,525 |     |  |   | 793,200 |   |
| Frank V.Sica      |  |    | 20,599,025 |     |  |   | 87,700  |   |
|                   |

At theMeeting, the Company's shareholders also ratified the appointmentof Grant Thornton LLP as the Company's independent auditors forfiscal year 2005, by the following vote:

|            |  |         |  |           |  |  |  |  |  |  |
|------------|--|---------|--|-----------|--|--|--|--|--|--|
| InFavor    |  | Against |  | Abstained |
| 20,084,925 |  | 601,800 |  | 0         |
|            |

ITEM5.    OTHER INFORMATION

(a)        None.

(b)        None.

51

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ITEM6.    EXHIBITS

|           |          |
|-----------|----------|
| (a)  | Exhibits |

|                  |             |
|------------------|-------------|
| ExhibitNo.  | Description |

|           |                                                                                                                                                                                      |
|-----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1  | Contribution Agreement, dated as of October29, 2004, by and among NS Advisors Holdings LLC, Presidio CapitalInvestment Company, LLC and NorthStar Realty Finance LimitedPartnership* |

|           |                                                                                                                                                                                               |
|-----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.2  | Contribution Agreement,dated as of October 29, 2004, by and among NorthStar Partnership, L.P.,NorthStar Funding Managing Member Holdings LLC and NorthStar RealtyFinance Limited Partnership* |

|           |                                                                                                                                       |
|-----------|---------------------------------------------------------------------------------------------------------------------------------------|
| 2.3  | Purchaseand Sale Agreement, dated as of October 29, 2004, between NorthStarRealty Finance Limited Partnership and ALGM I Equity, LLC* |

|           |                                                                                                                                                                                                                                                                                           |
|-----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1  | Articles of Amendment and Restatement ofNorthStar Realty Finance Corp., as filed with the State Department ofAssessments and Taxation of Maryland on October 20, 2004 (incorporatedby reference to Exhibit 3.1 to the Company's RegistrationStatement 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 Company'sRegistration Statement on Form S-11 (File No. 333-114675)) |

|           |                                                                                                                                                                              |
|-----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.3  | Amendment No. 1 to the Bylaws of NorthStarRealty Finance Corp. (incorporated by reference to Exhibit 3.3 to theCompany's Current Report on Form 8-K, filed on April 27,2005) |

|           |                                                                                                                                                                                                                  |
|-----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.1  | Registration Rights Agreement,dated as of October 29, 2004, by and among NorthStar Realty FinanceCorp., NorthStar Partnership, L.P., NorthStar Funding Managing MemberHoldings LLC and NS Advisors Holdings LLC* |

|            |                                                                                                                                                                                                                                                                                |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1  | Agreement of Limited Partnership ofNorthStar Realty Finance Limited Partnership, dated as of October 19,2004, by and among NorthStar Realty Finance Corp., as sole generalpartner and initial limited partner and the other limited partners aparty thereto from time to time* |

|            |                                                                                                                                                                                                                      |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2  | Non-Competition Agreement, dated as ofOctober 29, 2004, by and among NorthStar Realty Finance Corp.,NorthStar Realty Finance Limited Partnership, NorthStar CapitalInvestment Corp. and NorthStar Partnership, L.P.* |

|            |                                                                                                                                                             |
|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.3  | Shared Facilities and Services Agreement,dated as of October 29, 2004, by and between NorthStar Realty FinanceCorp. and NorthStar Capital Investment Corp.* |

|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.4  | Amended, Restated and Consolidated Fee andLeasehold Mortgage, Assignment of Leases and Rents and SecurityAgreement, dated as of December 4, 2002, by and among 729 Demi-TasseLLC, 1552 Lonsdale LLC, ALGM Leasehold II LLC, ALGM Leasehold III LLC,ALGM Leasehold VI LLC, ALGM Leasehold VIII LLC, ALGM Leasehold IX LLC,ALGM Leasehold X LLC, ALGM Leasehold XII LLC and Greenwich CapitalFinancial Products, Inc. (incorporated by reference to Exhibit 10.1 tothe Company's Registration Statement on Form S-11 (File No.333-114675)) |

|            |                                                                                                                           |
|------------|---------------------------------------------------------------------------------------------------------------------------|
| 10.5  | Executive EmploymentAgreement, dated as of October 22, 2004, between David T. Hamamoto andNorthStar Realty Finance Corp.* |

|            |                                                                                                                         |
|------------|-------------------------------------------------------------------------------------------------------------------------|
| 10.6  | Executive Employment Agreement, dated asof October 22, 2004, between Mark E. Chertok and NorthStar RealtyFinance Corp.* |

|            |                                                                                                                                |
|------------|--------------------------------------------------------------------------------------------------------------------------------|
| 10.7  | Executive EmploymentAgreement, dated as of October 22, 2004, between Jean-Michel Wasterlainand NorthStar Realty Finance Corp.* |

|            |                                                                                                                           |
|------------|---------------------------------------------------------------------------------------------------------------------------|
| 10.8  | Executive Employment Agreement, dated asof October 22, 2004, between Daniel R. Gilbert and NorthStar RealtyFinance Corp.* |

52

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|            |                                                                  |
|------------|------------------------------------------------------------------|
| 10.9  | NorthStar RealtyFinance Corp. 2004 Omnibus Stock Incentive Plan* |

|             |                                                                                                                                                                                                               |
|-------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.10  | LTIP Unit Vesting Agreement under theNorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan amongNorthStar Realty Finance Corp., NorthStar Realty Finance LimitedPartnership and NRF Employee, LLC* |

|             |                                                                                                                                                                                               |
|-------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.11  | Form of Vesting Agreement for Units ofNRF Employee, LLC, each dated as of October 29, 2004, between NRFEmployee, LLC and certain employees and co-employees of NorthStarRealty Finance Corp.* |

|             |                                                                                                                                                           |
|-------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.12  | Form ofRestricted Stock Agreement (incorporated by reference to Exhibit10.7(a) to the Company's Registration Statement on Form S-11(File No. 333-114675)) |

|             |                                                                    |
|-------------|--------------------------------------------------------------------|
| 10.13  | NorthStarRealty Finance Corp. 2004 Long Term Incentive Bonus Plan* |

|             |                                                                                               |
|-------------|-----------------------------------------------------------------------------------------------|
| 10.14  | Form of Notification under NorthStarRealty Finance Corp. 2004 Long Term Incentive Bonus Plan* |

|             |                                                                                                                                                                                                                     |
|-------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.15  | Form of Indemnification Agreement fordirectors and officers of NorthStar Realty Finance Corp. (incorporatedby reference to Exhibit 10.15 to the Company's RegistrationStatement on Form S-11 (File No. 333-114675)) |

|             |                                                                                                                                                         |
|-------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.16  | Amended and Restated Master RepurchaseAgreement, dated as of March 21, 2005, between NRFC DB Holdings, LLCand Deutsche Bank AG, Cayman Islands Branch** |

|             |                                                                                                                                                        |
|-------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.17  | Indenture, dated as of April 12, 2005,between NorthStar Realty Finance Limited Partnership and JPMorgan ChaseBank, National Association, as trustee*** |

|             |                                                                                                                                                                                                                                                                                                                                               |
|-------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.18  | Amended and Restated Trust Agreement,dated as of April 12, 2005, among NorthStar Realty Finance LimitedPartnership, as depositor, JPMorgan Chase, National Association, asproperty trustee, Chase Bank USA, National Association, as Delawaretrustee and Mark Chertok, David Hamamoto and Richard McCready, each asadministrative trustees*** |

|             |                                                                                                                                                  |
|-------------|--------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.19  | Indenture,dated as of May 25, 2005, between NorthStar Realty Finance LimitedPartnership and JPMorgan Chase Bank, National Association, astrustee |

|             |                                                                                                                                                                                                                                                                                                                                          |
|-------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.20  | Amended and Restated TrustAgreement, dated as of May 25, 2005, among NorthStar Realty FinanceLimited Partnership, as depositor, JPMorgan Chase, NationalAssociation, as property trustee, Chase Bank USA, National Association,as Delaware trustee and Mark Chertok, David Hamamoto and RichardMcCready, each as administrative trustees |

|             |                                                                                                                             |
|-------------|-----------------------------------------------------------------------------------------------------------------------------|
| 10.21  | Master Repurchase Agreement, dated as ofJuly 13, 2005, between NRFC WA Holdings, LLC and Wachovia Bank,National Association |

|            |                                                                                                            |
|------------|------------------------------------------------------------------------------------------------------------|
| 31.1  | Certification ofDavid T. Hamamoto, Chief Executive Officer pursuant to Rule 13a - 14(a)of the Exchange Act |

|            |                                                                                                          |
|------------|----------------------------------------------------------------------------------------------------------|
| 31.2  | Certification ofMark E. Chertok, Chief Financial Officer pursuant to Rule 13a - 14(a)of the Exchange Act |

|            |                                                                                                                                        |
|------------|----------------------------------------------------------------------------------------------------------------------------------------|
| 32.1  | Certification ofDavid T. Hamamoto, Chief Executive Officer pursuant to Section 1350 ofChapter 63 of Title 18 of the United States Code |

|            |                                                                                                                                      |
|------------|--------------------------------------------------------------------------------------------------------------------------------------|
| 32.2  | Certification of Mark E. Chertok, ChiefFinancial Officer pursuant to Section 1350 of Chapter 63 of Title 18 ofthe United States Code |

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

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

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

53

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SIGNATURES

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

|  | NORTHSTAR REALTY FINANCE CORP. |
|--|--------------------------------|

|                                                            |                                                                                                                                                                                                                               |
|------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Date:   August 12,2005  By:  | /S/David T.Hamamoto                     Name:   David T.Hamamoto Title:  Chief Executive Officer |

|  |           |                                                                                                                                                                                                                                                                    |
|--|-----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | By:  | /S/Mark E.Chertok                           Name:   Mark E. Chertok Title:  Chief FinancialOfficer |

54

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EXHIBITINDEX

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

55

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|            |       |             |  |                                                                                                                                                                                                                                                                                                                                               |  |  |
|------------|-------|-------------|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|
| ExhibitNo. |       | Description |
|       | 10.8  |        |  | Executive EmploymentAgreement, dated as of October 22, 2004, between Daniel R. Gilbert andNorthStar Realty Finance Corp.*                                                                                                                                                                                                                     |
|       | 10.9  |        |  | NorthStar Realty Finance Corp. 2004 Omnibus StockIncentive Plan*                                                                                                                                                                                                                                                                              |
|       | 10.10 |        |  | LTIP Unit VestingAgreement under the NorthStar Realty Finance Corp. 2004 Omnibus StockIncentive Plan among NorthStar Realty Finance Corp., NorthStar RealtyFinance Limited Partnership and NRF Employee, LLC*                                                                                                                                 |
|       | 10.11 |        |  | Form of Vesting Agreement for Units of NRFEmployee, LLC, each dated as of October 29, 2004, between NRF Employee,LLC and certain employees and co-employees of NorthStar Realty FinanceCorp.*                                                                                                                                                 |
|       | 10.12 |        |  | Form of Restricted StockAgreement (incorporated by reference to Exhibit 10.7(a) to theCompany's Registration Statement on Form S-11 (File No.333-114675))                                                                                                                                                                                     |
|       | 10.13 |        |  | NorthStar Realty FinanceCorp. 2004 Long Term Incentive Bonus Plan*                                                                                                                                                                                                                                                                            |
|       | 10.14 |        |  | Form of Notification under NorthStar RealtyFinance Corp. 2004 Long Term Incentive Bonus Plan*                                                                                                                                                                                                                                                 |
|       | 10.15 |        |  | Form of Indemnification Agreement for directorsand officers of NorthStar Realty Finance Corp. (incorporated byreference to Exhibit 10.15 to the Company's RegistrationStatement on Form S-11 (File No. 333-114675))                                                                                                                           |
|       | 10.16 |        |  | Amended and Restated Master RepurchaseAgreement, dated as of March 21, 2005, between NRFC DB Holdings, LLCand Deutsche Bank AG, Cayman Islands Branch**                                                                                                                                                                                       |
|       | 10.17 |        |  | Indenture, dated as of April 12, 2005, betweenNorthStar Realty Finance Limited Partnership and JPMorgan Chase Bank,National Association, as trustee***                                                                                                                                                                                        |
|       | 10.18 |        |  | Amended and Restated Trust Agreement, dated asof April 12, 2005, among NorthStar Realty Finance Limited Partnership,as depositor, JPMorgan Chase, National Association, as propertytrustee, Chase Bank USA, National Association, as Delaware trustee andMark Chertok, David Hamamoto and Richard McCready, each asadministrative trustees*** |
|       | 10.19 |        |  | Indenture,dated as of May 25, 2005, between NorthStar Realty Finance LimitedPartnership and JPMorgan Chase Bank, National Association, astrustee                                                                                                                                                                                              |
|       | 10.20 |        |  | Amended and Restated TrustAgreement, dated as of May 25, 2005, among NorthStar Realty FinanceLimited Partnership, as depositor, JPMorgan Chase, NationalAssociation, as property trustee, Chase Bank USA, National Association,as Delaware trustee and Mark Chertok, David Hamamoto and RichardMcCready, each as administrative trustees      |
|       | 10.21 |        |  | Master Repurchase Agreement, dated as of July13, 2005, between NRFC WA Holdings, LLC and Wachovia Bank, NationalAssociation                                                                                                                                                                                                                   |
|       | 31.1  |        |  | Certification of David T.Hamamoto, Chief Executive Officer pursuant to Rule 13a - 14(a) of theExchange Act                                                                                                                                                                                                                                    |
|       | 31.2  |        |  | Certification of Mark E.Chertok, Chief Financial Officer pursuant to Rule 13a - 14(a) of theExchange Act                                                                                                                                                                                                                                      |
|       | 32.1  |        |  | Certification of David T.Hamamoto, Chief Executive Officer pursuant to Section 1350 of Chapter63 of Title 18 of the United States Code                                                                                                                                                                                                        |
|       | 32.2  |        |  | Certification of Mark E. Chertok, Chief FinancialOfficer pursuant to Section 1350 of Chapter 63 of Title 18 of theUnited States Code                                                                                                                                                                                                          |
|            |

56

----

|            |  |             |  |                                                                                                                                                                                  |  |  |
|------------|--|-------------|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|
| ExhibitNo. |  | Description |
|       |  | *      |  | Incorporated by referenceto the like-numbered exhibit to NorthStar Realty Finance Corp.'sQuarterly Report on Form 10-Q for the quarter ending September 30,2004.                 |
|       |  | **     |  | Incorporated by reference to thelike-numbered exhibit to NorthStar Realty Finance Corp.'s AnnualReport on Form 10-K for the year ending December 31, 2004.                       |
|       |  | ***    |  | Incorporated by reference to the like-numberedexhibit to NorthStar Realty Finance Corp.'s Amendment No. 1 tothe Annual Report on Form 10-K for the year ending December 31,2004. |
|            |

57

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