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

FORM 10-Q

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

For the quarterly period ended June 30, 2010

Commission File Number: 001-32330

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

Maryland(State or Other Jurisdiction of
Incorporation or Organization)

11-3707493(IRS Employer
Identification No.)


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

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

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

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

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

Large accelerated filer o

Accelerated filer ý

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

Smaller reporting company o


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

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

The
Company has one class of common stock, par value $0.01 per share, 77,119,911 shares outstanding as of August 4, 2010.



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Table of Contents

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

TABLE OF CONTENTS



Index



PagePart I.

Financial InformationItem 1.

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


3Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2010 and
June 30, 2009


4Condensed Consolidated Statements of Stockholders' Equity as of June 30, 2010 (unaudited) and December 31,
2009


5Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30,
2010 and June 30, 2009


6Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and June 30,
2009


7Notes to the Condensed Consolidated Financial Statements (unaudited)


8Item 2.

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


47Item 3.

Quantitative and Qualitative Disclosures about Market Risk


74Item 4.

Controls and Procedures


78Part II.

Other Information


79Item 6.

Exhibits


79Signatures


83


2

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Table of Contents



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in Thousands, Except Share Data)

June 30,
2010

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

$
109,081

$
138,928Restricted cash (includes $127,642 and $74,453 from consolidated VIEs, respectively)


175,313


129,180Operating real estatenet (includes $8,000 and $ from consolidated VIEs, respectively)


960,340


978,902Available for sale securities, at fair value (includes $1,265,078 and $283,184 from consolidated VIEs, respectively)


1,317,564


336,220Real estate debt investments, net (includes $1,513,928 and $1,356,038 from consolidated VIEs, respectively)


1,692,282


1,936,482Real estate debt investments, held-for-sale





611Investments in and advances to unconsolidated ventures


25,739


38,299Receivables, net of allowance of $781 in 2010 and $1,349 in 2009 (includes net $18,102 and $7,421 from consolidated VIEs, respectively)


23,880


17,912Unbilled rents receivable


9,506


10,206Derivative instruments, at fair value (includes $35 and $ from consolidated VIEs, respectively)


35


Deferred costs and intangible assets, net


52,619


57,551Assets of properties held for sale


4,134


Other assets (includes $3,092 and $2,888 from consolidated VIEs, respectively)


26,363


25,273Total assets

$
4,396,856

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


794,709


795,915Exchangeable senior notes


126,426


125,992Bonds payable, at fair value (includes $1,339,750 and $584,615 from consolidated VIEs, respectively)


1,339,750


584,615Secured term loans


60,304


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


145,863


167,035Obligations under capital leases


74


3,527Accounts payable and accrued expenses (includes $5,795 and $1,631 from consolidated VIEs, respectively)


30,771


30,071Escrow deposits payable (includes $48,265 and $28,608 from consolidated VIEs, respectively)


49,126


39,461Derivative liability, at fair value (includes $148,143 and $46,187 from consolidated VIEs, respectively)


180,510


67,044Liabilities of properties held for sale


1,971


Other liabilities (includes $360 and $358 from consolidated VIEs, respectively)


26,257


28,399Total liabilities


2,755,761


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


57,867


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


183,505


183,505Common stock, $0.01 par value, 500,000,000 shares authorized, 77,118,834 and 74,882,600 shares issued and outstanding at June 30, 2010 and
December 31, 2009, respectively


771


749Additional paid-in capital


698,735


662,805Retained earnings


574,857


460,915Accumulated other comprehensive loss


(51,783
)

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


1,463,952


1,273,171Non-controlling interest


177,143


185,469Total equity


1,641,095


1,458,640Total liabilities and stockholders' equity

$
4,396,856

$
3,669,564


See accompanying notes to condensed consolidated financial statements

3

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Table of Contents



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

(Unaudited)

Three Months
Ended June 30,
2010

Three Months
Ended June 30,
2009

Six Months Ended
June 30,
2010

Six Months Ended
June 30,
2009Revenues and other income:Interest income

$
60,721

$
35,749

$
118,296

$
72,530Interest incomerelated parties


300


4,443


921


8,950Rental and escalation income


33,884


21,928


55,257


46,689Advisory and management fee incomerelated parties


464


1,808


982


3,499Commission income


372





372


Other revenue


192


177


1,247


345Total revenues


95,933


64,105


177,075


132,013Expenses:Interest expense


35,727


30,899


67,712


63,997Real estate propertiesoperating expenses


10,765


2,711


12,366


4,761Asset management feesrelated parties


16


840


466


1,677Commission expense


278





278


Impairment on operating real estate


1,180





1,180


Provision for loan losses


56,941


17,000


93,257


38,462General and administrative:Salaries and equity-based compensation(1)


12,313


11,235


28,845


22,845Auditing and professional fees


2,523


2,264


5,463


4,518Other general and administrative


5,924


3,461


9,936


7,027Total general and administrative


20,760


16,960


44,244


34,390Depreciation and amortization


8,351


16,779


16,760


30,990Total expenses


134,018


85,189


236,263


174,277(Loss) from operations


(38,085
)

(21,084
)

(59,188
)

(42,264
)Equity in earnings/(loss) of unconsolidated ventures


4,866


159


6,215


(4,259
)Unrealized (loss)/gain on investments and other


(6,397
)

(616
)

(8,240
)

90,045Realized gain on investments and other


81,538


23,283


82,971


60,196Income from continuing operations


41,922


1,742


21,758


103,718Income from discontinued operations


123


727


183


1,482Gain on sale from discontinued operations


2,528





2,528


Consolidated net income


44,573


2,469


24,469


105,200Less: net income attributable to the non-controlling interests


(7,357
)

(1,490
)

(6,945
)

(14,355
)Preferred stock dividends


(5,231
)

(5,231
)

(10,463
)

(10,463
)Net income/(loss) attributable to NorthStar Realty Finance Corp. common stockholders

$
31,985

$
(4,252
)
$
7,061

$
80,382Net income/(loss) per share from continuing operations (basic/diluted)


0.39


(0.07
)

0.06


1.20Income per share from discontinued operations (basic/diluted)


0.00


0.01


0.00


0.02Gain per share on sale of discontinued operations (basic/diluted)


0.03





0.03


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

$
0.42

$
(0.06
)
$
0.09

$
1.22Weighted average number of shares of common stock:Basic


76,407,339


67,353,541


76,579,403


65,964,065Diluted


82,279,682


75,049,690


82,305,725


73,660,271


(1)The
three months ended June 30, 2010 and 2009 include $4,181 and $5,320 respectively, of equity-based compensation expense. The six months ended
June 30, 2010 and 2009 include $9,239 and $10,464 respectively, of equity-based compensation expense. The six months ended June 30, 2010 includes $3,583 of cash compensation expense and
$1,014 of equity based compensation expense relating to a separation and consulting agreement with a former executive.


See accompanying notes to condensed consolidated financial statements

4

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Amounts in Thousands)

(Unaudited)

Preferred
Stock
at Par

Shares
of
Common
Stock

Common
Stock
at Par

Additional
Paid-in
Capital

Treasury
Stock

Accumulated
Other
Comprehensive
Income (Loss)

Retained
Earnings

Total
NorthStar
Stockholders
Equity

Non-controlling
Interests

Total
Stockholders
EquityBalance at December 31, 2008

$
100


62,907

$
634

$
861,300


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

$
1,415,167

$
198,593

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











(4,321
)










(4,321
)




(4,321
)Equity component of warrants











117











117





117Dividend reinvestment and stock purchase plan





80


1


276











277





277Proceeds from equity distribution agreement





7,327


69


23,995


1,384








25,448





25,448Stock awards/LTIP awards





94


1


300











301


20,172


20,473Restricted share grant





15





1











1





1Comprehensive loss

















1,673





1,673


199


1,872Conversion of OP/LTIP units





744


7


12,013











12,020


(12,020
)

Stock dividends





3,716


37


10,610








(9,607
)

1,040


(1,040
)

Cash dividends on common stock




















(27,133
)

(27,133
)

(15,957
)

(43,090
)Cash dividends on preferred stock




















(20,925
)

(20,925
)




(20,925
)Redemption of membership interest











(214
)










(214
)




(214
)Equity in private fund


























1,815


1,815Net income




















(130,280
)

(130,280
)

(6,293
)

(136,573
)Balance at December 31, 2009

$
100


74,883

$
749

$
904,077

$


$
(92,670
)
$
460,915

$
1,273,171

$
185,469

$
1,458,640VIE consolidation begining balance adjustment

















41,332


121,935


163,267


20,329


183,596Amortization of deferred compensation











8











8


8,931


8,939Non-controlling interest contribution to joint venture


























4,687


4,687Dividend reinvestment and stock purchase plan





48





113











113





113Stock awards/LTIP awards





99


1


299











300





300Equity component of warrants











60











60





60Comprehensive loss

















(445
)




(445
)

6


(439
)Conversion of OP/LTIP units





2,089


21


37,257











37,278


(37,278
)

Cash dividends on common stock




















(15,054
)

(15,054
)

(6,681
)

(21,735
)Cash dividends on preferred stock




















(10,463
)

(10,463
)

(5,250
)

(15,713
)Redemption of membership interest











(1,807
)










(1,807
)

1,800


(7
)Equity in private fund


























(1,815
)

(1,815
)Net income




















17,524


17,524


6,945


24,469Balance at June 30, 2010

$
100


77,119

$
771

$
940,007

$


$
(51,783
)
$
574,857

$
1,463,952

$
177,143

$
1,641,095


See accompanying notes to condensed consolidated financial statements

5

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Table of Contents



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Amounts in Thousands)

(Unaudited)

Three Months
Ended June 30,
2010

Three Months
Ended June 30,
2009

Six Months
Ended June 30,
2010

Six Months
Ended June 30,
2009Consolidated net income

$
44,573

$
2,469

$
24,469

$
105,200Unrealized (loss) on available for sale securities


(94
)

(1,212
)

(138
)

(17,072
)Change in fair value of derivatives


(2,591
)

4,272


(3,448
)

5,251Reclassification adjustment for gains included in net income


1,409


1,398


3,148


2,795Comprehensive (loss)/income


43,297


6,927


24,031


96,174Less: Comprehensive income attributable to non-controlling interests


7,267


1,952


6,951


13,345Comprehensive income attributable to NorthStar Realty Finance Corp.

$
36,030

$
4,975

$
17,080

$
82,829


See
accompanying notes to condensed consolidated financial statements

6

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Table of Contents



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in Thousands)

(Unaudited)

Six Months Ended
June 30, 2010

Six Months Ended
June 30, 2009Net cash provided by operating activities

$
7,937

$
22,403Cash flows from investing activities:Acquisition of operating real estate, net





Improvement of operating real estate


(899
)

(2,514
)Acquisition of available for sale securities


(118,738
)

(62,249
)Proceeds from disposition of securities available for sale


119,373


63,652Available for sale securities repayments


10,959


380Increase in term debt transaction warehouse deposits





Originations/acquisitions of real estate debt investments


(33,454
)

(189,293
)Real estate debt investment repayments


65,480


15,165Proceeds from the sale of real estate debt investments


85,369


140,753Net proceeds from disposition of operating real estate


3,078


Real estate debt investment acquisition costs





(97
)Other loans receivable





(1,070
)Other loans receivable repayment





3,000Restricted cash used for investment activities


(22,669
)

(704
)Purchase of equity interest


(1,000
)

Deferred lease costs


(398
)

Investment in and advances to unconsolidated ventures


(463
)

(397
)Distributions from unconsolidated ventures


9,306


8,857Net cash provided by (used in) investing activities


115,944


(24,517
)Cash flows from financing activities:Purchase of interest rate cap


(243
)

Settlement of derivative


(283
)

Collateral held by swap counter party


8,542


3,707Mortgage notes and loan borrowings


58,200


Mortgage principal repayments


(54,672
)

(3,923
)Borrowing under credit facilities





1,912Repayments credit facilities





(34,612
)Repurchase obligation borrowings





528Repurchase obligation repayments





(703
)Proceeds from bonds


104,708


71,000Bond repayments


(19,055
)

Borrowing under secured term loan


24,739


1,373Secured term loan repayment


(225,321
)

(1,884
)Bond repurchases


(12,649
)

(35,247
)Payment of deferred financing costs


(1,349
)

(153
)Capital contributions by non-controlling interest


4,687


Restricted cash from financing activities


(7,805
)

(2,030
)Proceeds from dividend reinvestment and stock purchase plan


175


4,061Dividends (common and preferred) and distributions


(25,517
)

(23,287
)Deferred offering costs


(945
)

Offering costs


(70
)

(126
)Distributions to non-controlling interest


(6,870
)

(6,993
)Net cash (used in) financing activities


(153,728
)

(26,377
)Net (decrease) increase in cash & cash equivalents


(29,847
)

(28,491
)Cash and cash equivalentsbeginning of period


138,928


134,039Cash and cash equivalentsend of period

$
109,081

$
105,548


See accompanying notes to condensed consolidated financial statements

7

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Table of Contents



NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Amount in Thousands, Except per Share Data

(Unaudited)

1. Formation and Organization

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

Consolidating Subsidiaries

NRF Healthcare, LLC

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

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

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

8

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

1. Formation and Organization (Continued)

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

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

2. Summary of Significant Accounting Policies

Basis of Quarterly Presentation

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

Principles of Consolidation

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

Estimates

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

9

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

2. Summary of Significant Accounting Policies (Continued)

Reclassifications

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

Recent Accounting Pronouncements

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

3. Variable Interest Entities

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

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

As Reported,
December 31, 2009

As Adjusted,
January 1, 2010

Effect of Change in
Accounting PrincipleNon-controlling interest

$
185,469

$
205,798

$
20,329Retained earnings


460,915


582,850


121,935Accumulated other comprehensive loss


(92,670
)

(51,338
)

41,332


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

10

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Variable Interest Entities (Continued)

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

As
of June 30, 2010, the Company identified interests in 17 entities which were determined to be VIEs. The Company reassesses its initial evaluation of an entity as a VIE upon the
occurrence of certain reconsideration events.

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

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

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

11

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Variable Interest Entities (Continued)

Consolidated VIEs (the Company is the primary beneficiary)

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

N-Star
I, II, III, IV, V, VI, VII and VIII are consolidated CDO financings.

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

Variable Interest Entity

N-Star I

N-Star II

N-Star III

N-Star IV

N-Star V

N-Star VI

N-Star VII

N-Star VIII

TotalAssets of consolidated VIEs:Restricted cash

$
1,418

$
807

$
4,107

$
16,702

$
3,718

$
49,620

$
4,612

$
46,658

$
127,642Operating real estatenet























8,000


8,000Available for sale securities, at fair value


235,518


228,732


229,987


22,877


258,469


10,512


262,680


16,303


1,265,078Real estate debt investments, net








32,251


357,803





358,574


20,343


744,957


1,513,928Receivables, net of allowance


2,458


1,718


2,036


1,246


3,841


1,027


3,415


2,361


18,102Derivative instruments, at fair value




















35





35Other assets


5


20


(95
)

328





2,644


146


44


3,092Total assets of consolidated VIEs(1):


239,399


231,277


268,286


398,956


266,028


422,377


291,231


818,323


2,935,877Liabilities of consolidated VIEs:Bonds payable, at fair value


192,145


177,691


133,360


146,197


155,170


178,448


85,895


270,844


1,339,750Accounts payable and accrued expenses


1,463


123


1,160


97


523


455


360


1,614


5,795Derivative liability, at fair value


15,936


16,484


20,009





32,144


8,147


38,749


16,674


148,143Escrow deposits payable











8,852





28,557





10,856


48,265Other liabilities




















360





360Total liabilities of consolidated VIEs(2):


209,544


194,298


154,529


155,146


187,837


215,607


125,364


299,988


1,542,313Net assets

$
29,855

$
36,979

$
113,757

$
243,810

$
78,191

$
206,770

$
165,867

$
518,335

$
1,393,564


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


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

12

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

3. Variable Interest Entities (Continued)

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



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



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

The
following table displays the classification, carrying amounts and maximum exposure of unconsolidated VIEs as of June 30, 2010 (in thousands):

Variable Interest EntityTrusts Issuing Preferred
Securities, at Fair Value

Real Estate Debt
Investments

Total

Maximum Exposure to
Loss(1)Real estate debt investments




$
21,814

$
21,814

$
21,814Total assets





21,814


21,814


21,814Liability to subsidiary trusts issuing preferred securities, at fair value


145,863





145,863


N/ATotal liabilities


145,863





145,863


N/ANet assets

$
(145,863
)
$
21,814

$
(124,049
)
$
21,814


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


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

13

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

4. Fair Value of Financial Instruments

Fair Value Measurements



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

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

Level 1.

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

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

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

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

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

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

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


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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

4. Fair Value of Financial Instruments (Continued)

Determination of Fair Value

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

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



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



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



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



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

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

4. Fair Value of Financial Instruments (Continued)



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

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

Assets and Liabilities at Fair ValueLevel 1

Level 2

Level 3

TotalAssets:Available for sale securities:CMBS

$


$
857,503

$
146,184

$
1,003,687N-Star CDO notes








1,342


1,342Third party CDO notes








18,673


18,673REIT debt





247,589


9,515


257,104Trust preferred securities








7,703


7,703Real estate interest





16,527


12,528


29,055Derivative asset





35





35Total assets

$


$
1,121,654

$
195,945

$
1,317,599Liabilities:N-Star CDO bonds payable








1,339,750

$
1,339,750Liability to subsidiary trusts issuing preferred securities








145,863


145,863Derivative liability





180,510





180,510Total liabilities

$


$
180,510

$
1,485,613

$
1,666,123


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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

4. Fair Value of Financial Instruments (Continued)

The
following table presents additional information about the Company's available for sale securities, corporate lending investment, bonds payable and liabilities to subsidiary trusts
issuing preferred securities which are measured at fair value on a recurring basis at June 30, 2010, for which the Company has utilized Level 3 inputs to determine fair value:

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

Available
for Sale
Securities

Corporate
Lending
Investment

N-Star
CDO Bonds
Payable

Liability to
Subsidiary
Trusts Issuing
Preferred
SecuritiesBeginning balance:

$
309,505

$
8,943

$
1,141,096

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


(76,611
)Purchases, sales, issuance and settlements, net


(59,292
)

(17,234
)

72,530


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


26,620





150,914


Included in other comprehensive loss











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


48,923


8,291


24,790


21,172Included in other comprehensive loss


40








Ending balance

$
195,945

$


$
1,339,750

$
145,863The amount of total gains or (losses) for the period included in earnings attributable to the change in unrealized gains or losses relating to assets or
liabilities still held at the reporting date

$
22,343

$
8,291

$
(126,124
)
$
21,172


Fair Value Option

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



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

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

4. Fair Value of Financial Instruments (Continued)

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

Financial Instruments, at Fair Value

June 30,
2010

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

$
1,003,687

$
249,583N-Star CDO notes





4,268Third party CDO notes


18,673


9,515REIT debt


257,104


30,580Trust preferred securities


7,703


8,739Real estate interest


29,055


Corporate lending investment(2)





8,943Total assets

$
1,316,222

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


1,339,750


584,615Liability to subsidiary trusts issuing preferred securities


145,863


167,035Total liabilities

$
1,485,613

$
751,650


(1)December 31,
2009 does not include the assets and liabilities of N-Star I, II, III and V, for which the Company has elected the fair
value option, as these CDO financings were unconsolidated CDO financings prior to January 1, 2010.(2)During
the second quarter 2010, the Company's corporate lending joint venture sold assets having a carrying value of approximately $6.7 million for
$15.0 million. As a result, the Company recognized $8.3 million of equity in earnings and reduced its equity investment to zero at June 30, 2010.


18

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

4. Fair Value of Financial Instruments (Continued)




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

Fair Value at
June 30,
2010

Amount
Due Upon
Maturity

DifferenceAssets:Available for sale securities:CMBS

$
1,003,687

$
2,090,357

$
(1,086,670
)Third party CDO notes


18,673


125,018


(106,345
)REIT debt


257,104


253,591


3,513Trust preferred securities


7,703


15,000


(7,297
)Real estate interest


29,055


40,636


(11,581
)Total assets

$
1,316,222

$
2,524,602

$
(1,208,380
)Liabilities:N-Star CDO bonds payable


1,339,750


3,012,399


(1,672,649
)Liability to subsidiary trusts issuing preferred securities


145,863


280,133


(134,270
)Total Liabilities

$
1,485,613

$
3,292,532

$
(1,806,919
)


At
June 30, 2010 and December 31, 2009, the basis in the Company's corporate lending investment was $16.4 million and $70.0 million, respectively. The Company
has elected the fair value option for this investment which is accounted for under the equity method of accounting. The fair market value of the Company's investment at June 30, 2010 and
December 31, 2009 was zero and $8.9 million, respectively.

For
the three and six months ended June 30, 2010 and 2009, the Company recognized a net gain of $47.1 million and a net loss of $6.7 million, respectively, and a net
gain of $80.4 million and $82.5 million, respectively, as the result of the change in fair value of financial assets and liabilities for which the fair value option was elected, which is
recorded as unrealized gain (loss) on investments and other in the Company's consolidated statement of operations. The net loss and gain for the three and six months ended June 30, 2009 does
not include net losses or gains on the assets and liabilities of N-Star I, II, III and V, as these CDO financings were unconsolidated CDO financings prior to January 1, 2010.

The
impact of changes in instrument-specific credit spreads on N-Star bonds payable and liability to subsidiary trusts issuing preferred securities for which the fair value
option was elected was a net loss of $39.3 million and $21.6 million, respectively, and a net loss of $105.0 million and a net gain of $115.9 million, respectively, for the
three and six months ended June 30, 2010 and 2009. The Company attributes changes in the fair value of floating rate liabilities to changes in instrument-specific credit spreads. For fixed rate
liabilities, the Company allocates changes in fair value between interest rate-related changes and credit spread-related changes based on changes in interest rates. The three and six
months ended June 30, 2009 does not include net gains or losses on the assets and liabilities of N-Star I, II, III and V, as these CDO financings were unconsolidated CDO financings
prior to January 1, 2010.

19

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

5. Operating Real Estate

Discontinued Operations

In May 2010, the Company completed the sale of a leasehold interest containing approximately 10,800 square feet of retail space located
in New York City to a private investor group for approximately $3.3 million, representing a gain of approximately $2.5 million. The Company also recorded as held for sale a leasehold
interest containing approximately 17,700 square feet of retail and office space located in New York City. In December 2009, NRF Healthcare, LLC completed the sale of 18 assisted living
facilities containing approximately 1,300 beds located in North Carolina for approximately $95.9 million.

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

For the Three
Months
Ended
June, 30, 2010

For the Three
Months
Ended
June, 30, 2009

For the Six
Months
Ended
June, 30, 2010

For the Six
Months
Ended
June 30, 2009Revenue:Rental and escalation income

$
331

$
2,474

$
737

$
4,959Interest and other


1


1


1


4Total revenue


332


2,475


738


4,963Expenses:Property operating expenses


52


95


214


172Asset management feesrelated parties


10


14


26


30Auditing and professional fees





10





19General and administrative expenses


21


3


27


19Interest expense


62


1,022


150


2,036Depreciation and amortization


64


604


138


1,205Total expenses


209


1,748


555


3,481Income from discontinued operations


123


727


183


1,482Gain on disposition of discontinued operations


2,528





2,528


Total income from discontinued operations

$
2,651

$
727

$
2,711

$
1,482


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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

5. Operating Real Estate (Continued)

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

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


3,425Receivables


20Unbilled rents receivable


306Deferred costs and intangible assets, net


144Other assets


239Total assets

$
4,134LIABILITIES:Obligations under capital leases


1,818Accounts payable and accrued expenses


20Escrow deposits payable


117Other liabilities


16Total liabilities


1,971EQUITY:Total equity


2,163Total liabilities and stockholders' equity

$
4,134


6. Available for Sale Securities

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

June 30, 2010

Carrying
Value

Losses in
Accumulated
OCI

Cumulative
Unrealized
(Loss)/Gain on
Investments

Fair
Value(1)CMBS

$
1,550,084

$


$
(546,397
)
$
1,003,687N-Star CDO notes


15,202


(13,860
)




1,342Third party CDO notes


102,291





(83,618
)

18,673REIT debt


249,905





7,199


257,104Real estate interest


35,084





(6,029
)

29,055Trust preferred securities


15,000





(7,297
)

7,703Total

$
1,967,566

$
(13,860
)
$
(636,142
)
$
1,317,564


(1)Approximately
$1.3 billion of these investments serve as collateral for the Company's consolidated CDO transactions and the balance is financed under
other borrowing facilities.


21

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

6. Available for Sale Securities (Continued)




At
June 30, 2010, the maturities of the available for sale securities ranged from two months to 48 years.

During
the three and six months ended June 30, 2010, proceeds from the sale and redemption of available for sale securities was $85.2 million and $130.3 million,
respectively. The net realized gain on the sale and redemption of available for sale securities was $22.7 million and $25.6 million, respectively. During the three and six months ended
June 30, 2009, proceeds from the sale and redemption of available for sale securities was $47.2 million and $63.7 million, respectively. The net realized gain on the sale of
available for sale securities was $15.2 million and $17.7 million, respectively. Proceeds and realized gains from the sale and redemption of available for sale securities for the three
and six months ended June 30, 2009 does not include the sale and redemption of available for sale securities of N-Star I, II, III and V, as these CDO financings were
unconsolidated CDO financings prior to January 1, 2010.

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

December 31, 2009(1)

Carrying
Value

Losses in
Accumulated
OCI

Cumulative
Unrealized
(Loss)/Gain on
Investments

Fair
Value(2)CMBS

$
443,568

$


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


34,115


(13,517
)

(14,723
)

5,875Third party CDO notes


21,750





(12,235
)

9,515REIT debt


26,760





3,820


30,580N-Star CDO equity


72,926


(40,998
)




31,928Trust preferred securities


12,264





(3,525
)

8,739Total

$
611,383

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


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


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

22

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

7. Real Estate Debt Investments

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

June 30, 2010

Carrying
Value(1)

Allocation by
Investment Type

Average
Fixed Rate

Average
Spread
Over LIBOR

Number of
InvestmentsWhole loans, floating rate

$
929,467


54.9
%


%

2.99
%

44Whole loans, fixed rate


21,167


1.2


6.29





6Subordinate mortgage interests, floating rate


152,562


9.0





3.23


11Subordinate mortgage interests, fixed rate


24,917


1.5


7.25





2Mezzanine loans, floating rate


440,115


26.0





3.36


18Mezzanine loan, fixed rate


80,308


4.7


8.85





5Preferred, float


18,015


1.1





4.00


1Other loansfloating


12,913


0.8





2.45


3Other loansfixed


12,818


0.8


6.43





3Total/Weighted average

$
1,692,282


100.0
%

7.99
%

3.14
%

93


(1)Approximately
$1.5 billion of these investments serve as collateral for the Company's CDO financings and the balance is financed under other
borrowing facilities or unleveraged. The Company has future funding commitments, which are subject to certain conditions that borrowers must meet to qualify for such fundings, totaling
$61.7 million related to these investments. The Company expects that a minimum of $57.6 million of these future fundings will be funded within the Company's existing CDO financings and
require no additional capital from the Company. Assuming that all loans that have future fundings meet the terms to qualify for such funding, the Company's equity requirement on future funding
requirements would be approximately $4.1 million.


23

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

7. Real Estate Debt Investments (Continued)




December 31, 2009(1)

Carrying
Value(2)

Allocation by
Investment Type

Average
Fixed Rate

Average Spread
Over LIBOR

Number of
InvestmentsWhole loans, floating rate

$
1,014,028


52.3
%


%

2.70
%

52Whole loans, fixed rate


62,373


3.2


6.89





7Subordinate mortgage interests, floating rate


193,275


10.0





2.69


11Subordinate mortgage interests, fixed rate


24,722


1.3


7.25





2Mezzanine loans, floating rate


538,173


27.8





3.35


20Mezzanine loan, fixed rate(3)


90,558


4.7


8.89





7Other loansfloating


8,610


0.4





2.24


2Other loansfixed


5,354


0.3


5.53





1Total/Weighted average

$
1,937,093


100.0
%

7.90
%

2.90
%

102


(1)December 31,
2009 does not include the real estate debt investments of N-Star III, as the CDO financing was an unconsolidated financing
prior to January 1, 2010.(2)Approximately
$1.3 billion of these investments served as collateral for the Company's three commercial real estate debt CDO financings and the
balance was financed under other borrowing facilities. The Company had future funding commitments, which were subject to certain conditions that borrowers must have met to qualify for such fundings,
totaling $80.0 million related to these investments.(3)Includes
$0.6 million in real estate debt investments, held for sale.


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

Years Ending December 31:

Initial
Maturity(1)

Maturity
Including
Extensions2010 (remainder)

$
406,859

$
245,4662011


455,063


259,0442012


568,540


442,7932013


13,709


240,3002014


175,713


260,845Thereafter


251,012


422,448Total


1,870,896


1,870,896


(1)The
year ending December 31, 2010, contains a whole loan with an initial maturity of October 1, 2008 and a principal balance of
$21.4 million and a junior participation in a first mortgage with an initial maturity of March 1, 2009 and a principal balance of $28.5 million that remain outstanding as of
June 30, 2010.


24

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

7. Real Estate Debt Investments (Continued)

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

Non-Performing Loans and Provision for Loan Losses



As of June 30, 2010, the Company had two non-performing loans totaling $49.9 million which consisted of a
first mortgage having a principal balance of $21.4 million and an initial maturity date of October 1, 2008, and a junior participation in a first mortgage having a principal balance of
$28.5 million and an initial maturity date of March 1, 2009. The Company's maximum additional exposure to loss related to these loans is approximately $10.8 million.



For the three months ended June 30, 2010, the Company recorded a $56.9 million credit loss provision relating to eight
loans, three of which were sold during the period. For the six months ended June 30, 2010, the Company recorded a $93.3 million credit loss provision relating to 12 loans, three of which
were sold during the period, and included a $0.8 million credit for loans sold with a fair market value in excess of their carrying amounts. For the three and six months
ended June 30, 2009, the Company recorded a $17.0 million and a $38.5 million credit loss provision relating to eight and 13 loans, respectively. As of June 30,
2010, loan loss reserves totaled $135.9 million.

8. Investment in and Advances to Unconsolidated Ventures

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

CS/Federal Venture

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

25

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

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

2010
and December 31, 2009, the Company had an investment in CS/Federal of approximately $6.5 million and $6.9 million, respectively. The Company recognized equity in earnings of
$0.1 million for
each of the three months ended June 30, 2010 and 2009 and equity in earnings of $0.3 million and $0.2 million for the six months ended June 30, 2010 and 2009, respectively.

G-NRF, LTD

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

NorthStar Real Estate Securities Opportunity Fund

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

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

During
the second quarter 2010, a subsidiary of the Company, as general partner of the Securities Fund, notified the Securities Fund's administrator and limited partners of its
determination to liquidate and dissolve the Securities Fund. Accordingly, during the second quarter 2010, the Securities Fund began to liquidate its assets in an orderly manner. At June 30,
2010 and December 31, 2009, the carrying value of the Company's investment in the Securities Fund was $3.4 million and $7.2 million, respectively, each representing a 31.2%
interest in the Securities Fund.

For
the three months ended June 30, 2010 and 2009, the Company recognized equity in losses of $3.0 million and $3.1 million, respectively. The Company also earned
$0.1 million in management fees from the Securities Fund for the three months ended June 30, 2009. For the six months ended June 30, 2010 and 2009, the Company recognized equity
in losses of $3.9 million and $5.4 million, respectively. The Company also earned $0.1 million in management fees from the Securities Fund for the six months ended June 30,
2009.

26

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

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

LandCap Investment

On October 5, 2007, the Company entered into a joint venture with Whitehall Street Global Real Estate Limited Partnership 2007
("Whitehall"), to form LandCap Partners, which is referred to as LandCap. LandCap was established to opportunistically invest in single family residential land through land loans, lot option
agreements and select land purchases. The joint venture is managed by a third party management group which has extensive experience in the single family housing sector. The Company and Whitehall
agreed to provide no additional new investment capital in the LandCap joint venture. At June 30, 2010 and December 31, 2009 the Company's investment in LandCap is carried at
$9.7 million $10.1 million, respectively. For each of the three months ended June 30, 2010 and 2009, the Company recognized equity in loss of $0.4 million. For the six
months ended June 30, 2010 and 2009, the Company recognized equity in loss of $0.8 million and $2.8 million, respectively. At June 30, 2010 and December 31, 2009,
LandCap had investments totaling $39.1 million. In addition, the Company has advanced approximately $4.9 million under a loan agreement to LandCap, which bears interest at a fixed rate
of 12% and is included in other assets in the consolidated balance sheets.

Midwest Care Holdco TRS I LLC

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

The
Company recognized equity in losses related to Midwest of $0.4 million and equity in earnings of $2.0 million for the three and six months ended June 30, 2010,
respectively. The Company recognized equity in earnings related to Midwest of $3.3 million for the three and six months ended June 30, 2009, respectively.

27

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

9. Borrowings

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

Initial
Stated
Maturity

Interest Rate

Contractual
Balance at
June 30,
2010

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


10/28/2012

LIBOR + 3.50%





246,884Euronote


10/28/2012

3 month Euribor + 3.50%





85,218LB Term Loan(3)


2/9/2011

LIBOR + 1.50%


22,199


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


10/29/2014

2.64%


14,682


14,682Term Asset Backed Securities Loan Facility


3/29/2015

3.63%


23,423


Total Credit Facilities & Term Loans







60,304


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


6/15/2027

7.25%


68,165


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


6/15/2013

11.50%


60,750


60,750Liability to subsidiary trusts issuing preferred securities (subordinate recourse)(5)(6)Trust I


3/30/2035

8.15%


41,240


41,240Trust II


6/30/2035

7.74%


25,780


25,780Trust III


1/30/2036

7.81%


41,238


41,238Trust IV


6/30/2036

7.95%


50,100


50,100Trust V


9/30/2036

3 month LIBOR 2.70%


30,100


30,100Trust VI


12/30/2036

3 month LIBOR 2.90%


25,100


25,100Trust VII


4/30/2037

3 month LIBOR 2.50%


31,475


31,475Trust VIII


7/30/2037

3 month LIBOR 2.70%


35,100


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


9/1/2012

5.16%


15,267


15,471EDS


10/8/2015

5.37%


46,599


46,977Executive Center(7)


1/1/2016

5.85%


51,480


51,480Green Pond


4/11/2016

5.68%


17,002


17,119Indianapolis


2/1/2017

6.06%


27,966


28,142Northstar Healthcare GE




6.93%





44,163Northstar Healthcare GE


5/1/2015

3 month LIBOR + 5.95%


58,200


Northstar HealthcarePark National


1/11/2014

5.94%


32,740


32,944Northstar HealthcareGEWLK


1/11/2017

6.99%


159,137


159,138Northstar HealthcareGETusc & Harmony


1/11/2017

7.09%


7,843


7,843Northstar HealthcareHarmony FNMA


2/1/2017

6.39%


74,485


75,001Northstar HealthcareGrove City


2/1/2038

5.45%


1,820


1,835Northstar HealthcareLancaster


6/1/2037

6.40%


2,553


2,571Northstar HealthcareMarysville


6/1/2037

6.40%


1,641


1,651Northstar HealthcareWashington


10/1/2038

6.65%


1,941


1,952Northstar HealthcareMiller Merril


6/30/2012

7.07%


117,422


118,320Northstar HealthcareARL Mob Wachovia


5/11/2017

5.89%


3,369


3,389Northstar HealthcareSt Francis


9/10/2010

LIBOR + 2.00%





11,400Aurora


7/11/2016

6.22%


32,783


32,982DSG


10/11/2016

6.17%


33,561


33,795Keene


2/1/2016

5.85%


6,641


6,693Fort Wayne


1/1/2015

6.41%


3,357


3,399Portland


6/17/2014

7.34%


4,560


4,652Milpitas


3/6/2017

5.95%


21,875


22,107Fort Mill


4/6/2017

5.63%


27,700


27,700


28

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

9. Borrowings (Continued)

Initial
Stated
Maturity

Interest Rate

Contractual
Balance at
June 30,
2010

Contractual
Balance at
December 31,
2009(1)Reading


1/1/2015

5.58%


13,776


13,905Reading


1/1/2015

6.00%


5,000


5,000Alliance


12/6/2017

6.48%


23,377


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


4/6/2017

6.21%


2,614


2,743Bonds payable (non-recourse)(5)N-Star I


8/1/2038

3 month LIBOR + 1.83% (average spread)


254,741


N-Star II


6/1/2039

LIBOR + 1.31% (average spread)


257,686


N-Star III


6/1/2040

LIBOR + 0.57% (average spread)


337,547


N-Star IV


7/1/2040

LIBOR + 0.60% (average spread)


270,000


282,500N-Star V


9/5/2045

LIBOR + 0.55% (average spread)


443,465


N-Star VI


6/1/2041

3 month LIBOR + 0.53% (average spread)


323,200


279,057N-Star VII


6/22/2051

LIBOR + 0.35% (average spread)


499,200


499,200N-Star VIII


2/1/2041

LIBOR + 0.48% (average spread)


626,560


590,645$
4,276,460

$
3,225,348


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


29

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

9. Borrowings (Continued)




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

Total

Mortgage and
Mezzanine
Loans

Secured Term
Loan

Liability to
Subsidiary
Trusts Issuing
Preferred
Securities

Exchangeable
Senior Notes(1)

Bonds Payable2010

$
3,922

$
3,922

$


$


$


$
2011


33,314


11,115


22,199








2012


207,668


139,503








68,165


2013


71,779


11,029








60,750


2014


60,443


45,761


14,682








Thereafter


3,899,334


583,379


23,423


280,133





3,012,399Total

$
4,276,460

$
794,709

$
60,304

$
280,133

$
128,915

$
3,012,399


(1)$68.2 million
of the Company's 7.25% exchangeable senior notes have a final maturity date of June 15, 2027. The above table reflects the
holders repurchase rights which may require the Company to repurchase the notes on June 15, 2012.
At
June 30, 2010, the Company was in compliance with all covenants under its borrowings.




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

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

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

30

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Table of Contents

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

9. Borrowings (Continued)



As of June 30, 2010 and December 31, 2009, the total carrying amount of the equity components of the exchangeable senior
notes was $4.9 million. The principal amount of the exchangeable senior notes liabilities was $128.9 million as of June 30, 2010 and December 31, 2009. The unamortized
discount of the liability components was $2.5 million and $2.9 million at June 30, 2010 and December 31, 2009, respectively. The net carrying amount of the liability
components was $126.4 million and $126.0 million at June 30, 2010 and December 31, 2009, respectively. Interest expense for the three months ended June 30, 2010 and
2009 related to the exchangeable senior notes was $3.5 million and $5.1 million, respectively, of which $3.0 million and $4.5 million was related to contractual interest,
respectively, and $0.5 million and $0.6 million was attributable to amortization of the debt discount and deferred financing costs, respectively. Interest expense for the six months
ended June 30, 2010 and 2009 related to the exchangeable senior notes was $6.9 million and $9.7million, respectively, of which $6.0 million and $8.4 million was related to
contractual interest, respectively, and $0.9 million and $1.3 million was attributable to amortization of the debt discount and deferred financing costs, respectively.



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

10. Related Party Transactions

Advisory Fees

The Company has agreements with each of its N-Star CDO financings to perform certain advisory services. The Company earned
total fees on these agreements of approximately $0.3 million and $0.7 million for the three and six months ended June 30, 2010, respectively. The Company earned total fees on
these agreements of approximately $1.8 million and $3.4 million for the three and six months ended June 30, 2009, respectively. As of January 1, 2010, the advisory fee
income related to N-Star I, N-Star II, N-Star III and N-Star V is eliminated as a result of the consolidation of the respective CDO financings.

The
Company has an agreement with NorthStar Income Opportunity REIT I, Inc., a commercial finance REIT, to perform certain advisory services. The Company earned total fees on
these agreements of approximately $0.1 million for the three and six months ended June 30, 2010.

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

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

10. Related Party Transactions (Continued)

Asset Management Fees

The Company entered into a management agreement in April 2006 with Wakefield Capital Management Inc. to perform certain
management services. The Company incurred zero and $0.9 million in management fees for the three months ended June 30, 2010 and 2009, respectively, and $0.5 million and
$1.7 million in management fees for the six months ended June 30, 2010 and 2009, respectively, which are recorded in asset management fees-related parties in the condensed
consolidated statement of operations. In April 2010, in connection with the Company's acquisition of the 51% membership interest in Midwest Holdings, the Company amended the management agreement with
Wakefield Capital Management, Inc. The amended management fee will be equal to one dollar per year.

11. Equity Based Compensation

Omnibus Stock Incentive Plan

On September 14, 2004, the Board of Directors of the Company adopted the NorthStar Realty Finance Corp. 2004 Omnibus Stock
Incentive Plan (the "Stock Incentive Plan"). The Stock Incentive Plan provides for the issuance of stock- based incentive awards, including incentive stock options, non-qualified stock
options, and stock appreciation rights, shares of common stock of the Company, including restricted shares, and other equity-based awards, including OP Units which are structured as profits interests
("LTIP Units") or any combination of the foregoing. The eligible participants in the Stock Incentive Plan include directors, officers and employees of the Company and, prior to October 29,
2005, employees pursuant to the shared facilities and services agreement. An aggregate of 8,933,038 shares of common stock of the Company are currently reserved
and authorized for issuance under the Stock Incentive Plan, subject to equitable adjustment upon the occurrence of certain corporate events. As of June 30, 2010, the Company has issued an
aggregate of 8,283,340 LTIP Units, net of forfeitures of 60,368 LTIP Units. An aggregate of 3,165,933 LTIP Units were converted to commons stock and 581,669 shares of common stock were issued pursuant
to the Stock Incentive Plan. Of the 8,283,340 LTIP Units, so long as the recipient continues to be an eligible recipient, 4,976,957 will vest to the individual recipient at a rate of
one-twelfth of the total amount granted as of the end of each quarter, beginning with the first quarter after the date of grant ended either January 29, April 29,
July 29, or October 29 for the three-year vesting period, 2,154,029 will vest over 16 consecutive quarters with the first quarter being January 29, 2008, 701,058 will
cliff vest on December 31, 2010, and 170,801 are subject to no vesting requirements. The Company accelerated the vesting of 280,495 LTIP Units as part of the termination agreements provided to
employees. In addition, the LTIP Unit holders are entitled to dividends on the entire grant beginning on the date of the grant.

The
Company has recognized compensation expense of $3.2 million and $4.9 million for the three months ended June 30, 2010 and 2009, respectively, and
$7.9 million and $9.9 million for the six months ended June 30, 2010 and 2009, respectively. As of June 30 2010, there were approximately 2,322,644 unvested LTIP Units and
no LTIP Units were forfeited during the period. The related compensation expense to be recognized over the remaining vesting period of the Omnibus Incentive Plan LTIP grants is $13.2 million,
provided there are no forfeitures.

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

11. Equity Based Compensation (Continued)

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

June 30, 2010

December 31, 2009LTIP
Grants

Weighted
Average
Grant Price

LTIP
Grants

Weighted
Average
Grant PriceBalance at beginning of year(1)


7,323

$
9.85


8,067

$
9.86Granted











Converted to common stock


(2,089
)

12.61


(744
)

9.83Forfeited











Ending balance(2)


5,234


8.75


7,323

$
9.85


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


Incentive Compensation Plan

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

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

The
annual bonus component for 2010 will be calculated based on AFFO and liquidity targets (weighted 50% and 25%, respectively) with the remaining 25% of the 2010 annual bonus determined
in the Committee's discretion. Additionally, the Committee has also allocated $2.0 million under the Plan

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

11. Equity Based Compensation (Continued)

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

The
Company recorded $0.6 million and $0.9 million in equity-based compensation expense related to the long term incentive component of the Plan for the three and six
months ended June 30, 2010, respectively.

12. Stockholders' Equity

Dividend Reinvestment and Stock Purchase Plan

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

During
the three and six months ended June 30, 2010, the Company issued a total of 24,506 and 48,481 common shares, respectively, pursuant to the Plan for a gross sales price of
approximately $0.1 million and $0.2 million, respectively. During the three and six months ended June 30, 2009, the Company issued a total of 27,062 and 32,030 common shares,
respectively, pursuant to the Plan for a gross sales price each of approximately $0.1 million.

Equity Distribution Agreements

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

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

12. Stockholders' Equity (Continued)

distribution
agreement. For the three and six months ended June 30, 2010, the Company did not sell any common shares pursuant to its equity distribution agreement with JMP. For the three and
six months ended June 30, 2009, the Company sold 1,251,628 common shares and received $4.0 million of cash proceeds pursuant to its equity distribution agreement with JMP.

Dividends

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

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

Earnings Per Share

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

Three Months
Ended
June 30,
2010

Three Months
Ended
June 30,
2009

Six Months
Ended
June 30,
2010

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

$
31,985

$
(4,252
)
$
7,061

$
80,382Effect of dilutive securities:Income/(loss) allocated to non-controlling interest


2,392


(486
)

18


9,915Dilutive net income/(loss) available to stockholders

$
34,377

$
(4,738
)
$
7,079

$
90,297Basic Earnings:Shares available to common stockholders


76,407


67,354


76,579


65,964Effect of dilutive securities:OP/LTIP units


5,872


7,696


5,727


7,696Dilutive Shares


82,279


75,050


82,306


73,660Net income/(loss) per share attributable to Northstar Realty Finance Corp. common stockholdersBasic/Diluted

$
0.42

$
(0.06
)
$
0.09

$
1.22


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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

12. Stockholders' Equity (Continued)

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

13. Non-controlling Interest

Operating Partnership

Non-controlling interest represents the aggregate limited partnership interests or OP Units in the Operating Partnership
held by limited partners (the "Unit Holders"). Income allocated to the non-controlling interest is based on the Unit Holders ownership percentage of the Operating Partnership. The
ownership percentage is determined by dividing the numbers of OP Units held by the Unit Holders by the total number of dilutive shares. The issuance of additional shares of beneficial interest (the
"Common Shares" or "Share") or OP Units changes the percentage ownership of both the Unit Holders and the Company. Since a unit is generally redeemable for cash or Shares at the option of the Company,
it is deemed to be equivalent to a Share. Therefore, such transactions are treated as capital transactions and result in an allocation between shareholders' equity and non-controlling
interest in the accompanying consolidated balance sheet to account for the change in the ownership of the underlying equity in the Operating Partnership. As of June 30, 2010 and
December 31, 2009, non-controlling interest related to the aggregate limited partnership units of 5,234,237 and 7,323,310, represented a 6.36% and 8.91% interest in the Operating
Partnership, respectively. Income/(loss) allocated to the operating partnership non-controlling interest for the three months ended June 30, 2010 and 2009 was income of
$2.4 million and a loss of $0.5 million, respectively. Income/(loss) allocated to the operating partnership non-controlling interest for the six months ended June 30,
2010 and 2009 was immaterial and income of $9.9 million, respectively.

Joint Ventures

In May 2006, the Company formed NRF Healthcare, LLC with Chain Bridge. On July 9, 2008, NRF Healthcare, LLC sold a
$100 million convertible preferred membership interest to Inland American Real Estate Trust, Inc. In December 2009, the Company completed a membership interest redemption with NRF
Healthcare, LLC, NRFC Healthcare Holding Company, LLC, NorthStar Healthcare Investors, Inc., Chain Bridge, Wakefield Capital Management, Midwest Care Holdings LLC, or
Midwest Holdings, and certain individuals, pursuant to which NRF Healthcare, LLC redeemed the 5.4% membership interest of Chain Bridge and its affiliates in NRF Healthcare, LLC for
$2.0 million and its membership interest in certain assets. As a result of the redemption, the Company holds 100% of the equity interests in NRF Healthcare, LLC, other than the
convertible preferred membership interests held by Inland. Accordingly, NRF Healthcare, LLC's financial statements are consolidated into the Company's consolidated financial statements and
Inland American's capital is treated as a non-controlling interest. Income allocated to the non-controlling interests for the three months ended June 30, 2010 and 2009
was income of $5.0 million and $2.0 million, respectively. Income allocated to

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

13. Non-controlling Interest (Continued)

the
non-controlling interests for the six months ended June 30, 2010 and 2009 was income of $6.9 million and $4.4 million, respectively.

In
one of the Company's CDO financings, 16.7% of the equity notes are held by a third party. The equity notes held by the third party are reflected as non-controlling
interest in the Company's condensed consolidated financial statements.

14. Risk Management and Derivative Activities

Derivatives

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

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

Amounts
reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company's
variable-rate debt. During the remainder of 2010, the Company estimates that an additional $7.0 million will be reclassified as an increase to interest expense.

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

Number of
Investments

Notional
Amount

Fair Value
Net Asset/
(Liability)

Range of
Fixed LIBOR

Range of MaturityInterest rate swapsAs of December 31, 2009


10

$
90,749

$
(7,691
)
4.18% - 5.08%

March 2010 - August 2018


In January 2008, the Company elected the fair value option for its bonds payable and its liability to subsidiary trusts issuing preferred
securities. As a result, the changes in fair value of these financial instruments are now recorded in earnings and the interest rate swap agreements associated with these debt instruments no longer
qualify for hedge accounting given that the underlying debt is remeasured

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

14. Risk Management and Derivative Activities (Continued)

with
changes in the fair value recorded in earnings. The unrealized gains or losses accumulated in other comprehensive income, related to these interest rate swaps, will be reclassified into earning
over the shorter of either the life of the swap or the associated debt with current mark-to-market unrealized gains or losses recorded in earnings.

Derivatives
not designated as hedges are not speculative and are used to manage the Company's exposure to interest rate movements and other identified risks but do not meet strict hedge
accounting requirements. For the three months ended June 30, 2010 and 2009, the Company recorded, in earnings, a mark-to-market unrealized loss of $52.1 million
and an unrealized gain
of $7.4 million, respectively, for the non-qualifying interest rate swaps. For each of the three months ended June 30, 2010 and 2009, the Company recorded a
$1.4 million reclassification from accumulated other comprehensive income for the non-qualifying interest rate swaps, respectively. For the six months ended June 30, 2010 and
2009, the Company recorded, in earnings, a mark-to-market unrealized loss of $85.9 million and an unrealized gain of $10.4 million, respectively, for the
non-qualifying interest rate swaps. For the six months ended June 30, 2010 and 2009, the Company recorded a $2.8 million and a $2.8 million reclassification from
accumulated other comprehensive income for the non-qualifying interest rate swaps, respectively.

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

Number of
Investments

Notional
Amount

Fair Value
Net Asset/
(Liability)

Range of
Fixed LIBOR

Range of MaturityInterest rate swapsAs of June 30, 2010


43

$
2,068,151

$
(180,475
)
0.46% - 7.00%

December 2010 - August 2018As of December 31, 2009(1)


22

$
897,335

$
(59,353
)
0.34% - 5.63%

May 2010 - June 2018


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


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

14. Risk Management and Derivative Activities (Continued)

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

Tabular Disclosure of Fair Values of Derivative Instruments

Asset Derivatives

Liability DerivativesAs of
June 30, 2010

As of
December 31,
2009(1)

As of
June 30, 2010

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

Fair
Value

Balance
Sheet
Location

Fair
Value

Balance
Sheet
Location

Fair
Value

Balance
Sheet
Location

Fair
ValueDerivatives designated as hedging instrumentsInterest rate products

Derivative
instrument,
at fair value

$


Derivative
instrument,
at fair value

$


Derivative
liability,
at fair value

$


Derivative
liability,
at fair value

$
(7,691
)Total derivatives designated as hedging instruments



$




$




$




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

Derivative
instrument,
at fair value

$
35

Derivative
instrument,
at fair value

$


Derivative
liability,
at fair value

$
(180,510
)
Derivative
liability,
at fair value

$
(59,353
)Total derivatives not designated as hedging instruments



$
35



$




$
(180,510
)


$
(59,353
)


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


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

14. Risk Management and Derivative Activities (Continued)




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

Derivatives in Cash Flow Hedging Relationships

Location of Gain/(loss)
recognized in income

Three
Months
Ended
June 30,
2010

Three
Months
Ended
June 30,
2009(1)

Six
Months
Ended
June 30,
2010

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

n/a

$
(2,591
)
$
3,252

$
(3,448
)
$
3,253Amount of gain or (loss) reclassified from accumulated OCI into income (effective portion)

Interest Expense

$
7

$
7

$
(328
)
$
14


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


Derivatives Not Designated as Hedging Instruments

Location of Gain/(loss)
recognized in income

Three
Months
Ended
June 30,
2010

Three
Months
Ended
June 30,
2009(1)

Six
Months
Ended
June 30,
2010

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

Unrealized gain (loss) on
investment and other

$
(52,110
)
$
7,445

$
(85,859
)
$
10,385Amount of gain or (loss) reclassified from accumulated OCI into income

Unrealized gain (loss) on
investment and other

$
(1,416
)
$
(1,405
)
$
(2,820
)
$
(2,809
)


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


At
June 30, 2010, the Company's counterparties hold approximately $27.6 million of cash margin as collateral against its swap contracts.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

14. Risk Management and Derivative Activities (Continued)

Credit Risk Concentrations

Concentrations of credit risk arise when a number of borrowers, tenants or issuers related to the Company's investments are engaged in
similar business activities or located in the same geographic location to be similarly affected by changes in economic conditions. The Company monitors its portfolio to identify potential
concentrations of credit risks. The Company has no one borrower or one tenant that generates 10% or more of its total revenue. However, approximately 58.8% and 48.0% of the Company's rental and
escalation revenue for the three and six months ended June 30, 2010, respectively, is generated from two tenants in the Company's healthcare net lease portfolio. The Company believes the
remainder of its net lease portfolio is reasonably well diversified and does not contain any unusual concentration of credit risks.

15. Segment Reporting

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

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

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

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

15. Segment Reporting (Continued)

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

Real Estate
Debt

Operating
Real Estate

Real Estate
Securities(1)

Healthcare
Real Estate
Joint
Venture

Corporate
Investments
and
Other(2)

Consolidated
TotalTotal revenues for the three months endedJune 30, 2010

$
23,959

$
8,396

$
37,574

$
25,608

$
396

$
95,933June 30, 2009


25,853


10,026


16,356


15,012


(3,142
)

64,105Consolidated net (loss)/income for the three months endedJune 30, 2010


(1,345
)

1,398


24,679


339


19,502


44,573June 30, 2009


944


(1,856
)

47,157


(7,846
)

(35,930
)

2,469Consolidated net (loss)/income after non-controlling interests and before preferred dividend for the three months endedJune 30, 2010


(1,251
)

1,301


20,622


(2,288
)

18,832


37,216June 30, 2009


847


(1,666
)

42,321


(9,820
)

(30,703
)

979Total revenues for the six months endedJune 30, 2010


45,613


17,714


75,594


37,690


464


177,075June 30, 2009


54,078


21,184


31,687


28,637


(3,573
)

132,013Consolidated net (loss)/income for the six months endedJune 30, 2010


(33,291
)

(1,044
)

81,888


257


(23,341
)

24,469June 30, 2009


90,448


(9,477
)

70,578


(8,451
)

(37,898
)

105,200Consolidated net (loss)/income after non-controlling interests and before preferred dividend for the six months endedJune 30, 2010


(30,420
)

(929
)

73,529


(5,002
)

(19,654
)

17,524June 30, 2009


80,556


(8,453
)

63,179


(12,890
)

(31,547
)

90,845Total assets as ofJune 30, 2010

$
1,881,001

$
431,622

$
1,358,730

$
626,891

$
98,612

$
4,396,856


(1)Total
revenues for the three months ended June 30, 2010 and 2009 excludes $75.1 million and $22.7 million in net realized and
unrealized gains, respectively. Total revenues for the six months ended June 30, 2010 and 2009 excludes $74.7 million and $150.2 million in net realized and unrealized gains,
respectively.(2)Corporate
Investments and Other includes corporate level investments, corporate level interest income, interest expense and unallocated general &
administrative expenses.


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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

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

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

2010

2009Consolidation of assets of N-Star I, II, III and V CDO financings

$
(812,166
)
$
Consolidation of liabilities of N-Star I, II, III and V CDO financings


628,595


Consolidation of non-controlling interest in N-Star I CDO financing


3,216


Distribution of operating real estate to non-controlling interest


9,525


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


(4,734
)

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


(1,815
)

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


35,287


Real estate debt investment pay-down due from servicer





32,701Stock dividend





10,646


17. Fair Value of Financial Instruments

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

As
of June 30, 2010 and December 31, 2009, cash equivalents, accounts receivable, accounts payable, repurchase agreements with major banks and securities firms and the
master repurchase agreement balances reasonably approximate their fair values due to the short-term maturities of these items. The available for sale securities and securities sold, not
yet purchased are carried on the balance sheet at their estimated fair value.

For
the real estate debt investments the fair value of the fixed and floating rate investments was approximated comparing yields at which the investments are held to estimated yields at
which loans originated with similar credit risks or market yields at which a third party might require to purchase the investment by discounting future cash flows at such market yields. Prices were
calculated assuming fully extended maturities regardless of if structural or economic tests required to achieve such extended maturities. At June 30, 2010, the fair market value was
$1.6 billion with a gross principal amount of $1.9 billion. At December 31, 2009, the fair market value was $1.7 billion with a gross principal amount of
$2.0 billion.

For
the exchangeable senior notes, the Company uses available market information, which includes quoted market prices or recent transactions, if available to estimate their fair value.
At June 30, 2010, the fair market value of the 7.25% exchangeable senior notes was $56.6 million, with a carrying amount

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

17. Fair Value of Financial Instruments (Continued)

of
$67.2 million and the fair market value of the 11.50% exchangeable senior notes was $51.1 million with a carrying amount of $59.2 million. At December 31, 2009, the fair
market value of the 7.25% exchangeable senior notes was $34.8 million with a carrying amount of $67.0 million and the fair market value of the 11.50% exchangeable senior notes was
$28.1 million with a carrying amount of $59.0 million.

For
fixed rate mortgage loans payable, the Company uses rates currently available to them with similar terms and remaining maturities to estimate their fair value. At June 30,
2010, the fair market value was $810.7 million with a carrying amount of $794.7 million. At December 31, 2009, the fair market value was $800.1 million with a carrying
amount of $795.9 million.

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

18. Commitments and Contingencies

Chatsworth Property

One of the Company's net lease investments was comprised of three office buildings totaling 257,000 square feet located in Chatsworth,
CA and was 100% leased to Washington Mutual Bank, FA ("WaMu"). NRFC NNN Holdings, Inc. ("NRFC NNN") and NRFC Sub Investor IV, LLC ("NRFC Sub IV"), which are subsidiaries of the
Company, are defendants in a lawsuit (the "Lawsuit") filed by GECCMC 2005-CI Plummer Office Limited Partnership (the "Lender") in the Superior Court of the State of California, County of
Los Angeles, relating to a loan on two properties previously owned by NRFC Sub IV that were 100% leased (the "Lease") to Washington Mutual Bank, FA ("WaMu"). The Lawsuit alleges, among other things,
that the loan provided by Lender to NRFC Sub IV became a recourse obligation of NRFC NNN due to an alleged termination of the Lease. The judge presiding over the Lawsuit has announced her intention to
grant the Lender's motion for summary judgment and, accordingly, is expected to enter a judgment against NRFC NNN in the amount of approximately $42 million (the "Judgment"). NRFC NNN intends
to vigorously pursue an appeal of the decision. Additionally, prior to pursuing an appeal, NRFC NNN intends to file a motion to vacate the Judgment and enter Judgment for NRFC NNN or, in the
alternative, vacate the Judgment and set the matter for trial.

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

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

18. Commitments and Contingencies (Continued)

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

19. Pro Forma Financial Information

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

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

Three Months
Ended
June 30, 2009

Six Months
Ended
June 30, 2010

Six Months
Ended
June 30, 2009Pro Forma revenues

$
70,617

$
188,079

$
145,331Pro Forma net income


(3,190
)

7,500


82,119Pro Forma net income per common sharebasis/diluted

$
(0.05
)
$
0.10

$
1.25


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

20. Subsequent Events

Dividends

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

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NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Amount in Thousands, Except per Share Data

(Unaudited)

20. Subsequent Events (Continued)

Securities Fund

On July 7, 2010, the Securities Fund completed the sale of its remaining investments, which included the sale of the
N-Star CDO IX income notes to a wholly owned subsidiary of the Company. A subsidiary of the Company, as general partner of the Securities Fund, is currently in the process of determining
the Securities Fund's final net asset value and expects to complete the process of dissolving the Securities Fund during 2010. As a result of the sale of the N-Star CDO IX income notes to
a wholly owned subsidiary of the Company, the Company expects to consolidate the assets and liabilities of the CDO at their respective fair market values as of the acquisition date.

CDO Acquisition

On July 8, 2010, an affiliate of CapitalSource Inc. ("CapitalSource") (i) delegated to an affiliate of the Company
collateral management and special servicing rights, and the associated fees, relating to CapitalSource's approximately $1.1 billion collateralized debt obligation consisting primarily of first
mortgage loans on commercial real estate (the "CDO") and (ii) sold to the Company the CDO's Class J notes (approximately $50 million current balance), the CDO's Class K
notes (approximately $60 million current balance) and the CDO's equity. The total consideration paid in the transaction by the Company was $7 million. As of July 8, 2010, the CDO
had approximately $103.4 million cash available for investment. The Company expects to consolidate the assets and liabilities of the CDO at their respective fair market values as of the
acquisition date.

NRF Healthcare, LLC

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

Chatsworth Property

On August 4, 2010, NRFC NNN filed a motion to vacate the Judgment and enter Judgment for NRFC NNN or, in the alternative, vacate
the Judgment and set the matter for trial.

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

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

Forward-Looking Statements

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

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

Introduction

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

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

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Profitability and Performance Metrics

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



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

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

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

Outlook and Recent Trends

U.S. macroeconomic, financial and real estate sector conditions have remained poor since 2007, when the subprime residential lending
and single family housing market collapse quickly spread broadly into the capital markets. The resulting virtual shutdown of the credit and equity markets pushed the U.S. economy into recession, with
the unemployment rate increasing from a low of 4.4% in 2007 to 9.5% at June 30, 2010. Several major financial institutions failed or had to be rescued in 2008, 140 banks failed in 2009 and 86
banks have failed through June 30, 2010. The U.S. Government responded in early 2009 to deteriorating conditions by creating several programs such as the Troubled Asset Relief Program and the
Public-Private Investment Program (TARP and TALF, respectively), designed to create demand for financial instruments and to re-equitize weaker banks. Congress also passed in early 2009 a
$787 billion economic stimulus package, and the U.S. Federal Reserve lowered the Fed Funds target rate from over 5% in 2007 to 0-0.25% in 2009 (where it remains as of
June 30, 2010) and introduced massive amounts of cash liquidity into the banking system.

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

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

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

Despite
these conditions, REITs have collectively raised nearly $52 billion of debt and equity capital, and the Morgan Stanley REIT Index returned approximately 28.6% for 2009 and
approximately 5.7% year-to-date through June 30, 2010. In addition, three newly-formed REITs with a real estate debt focus raised approximately $1.5 billion of
capital in 2009, but no new commercial mortgage REITs have gone public during the first six months of 2010. Notwithstanding the ability of the public REIT market to raise capital, this market is very
small relative to the size of the estimated $1.5 trillion commercial real estate finance market. More recently, U.S. economic conditions appear to be improving (based on GDP growth), however, the
unemployment rate remains high indicating a low rate of business expansion, which drives commercial real estate cash flows. Commercial real estate tends to lag economic recoveries and we expect
commercial real estate fundamentals to continue to deteriorate through 2010.



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

Most
of our real estate loans bear interest rates based on a spread to one-month LIBOR, a floating rate index based on rates that banks charge each other to borrow.
One-month LIBOR as of June 30, 2010, is 0.35%, well below its 3.35% average over the past five years. Lower LIBOR means lower debt service costs for our borrowers which have
partially offset decreasing cash flows caused by the economic recession, and extended the life of interest reserves for those loans that require interest reserves to service debt while the collateral
properties are being repositioned by our borrowers. Lower interest rates also theoretically support real estate valuations because a lower discount rate is applied to underlying future real estate
cash flow assumptions in valuing a property, although the availability and cost of debt capital appears to have a much more significant impact on property values. Currently, a lack of readily
available financing, economic uncertainty and higher returning alternative investment opportunities have increased investor return expectations resulting in much higher risk premiums and, despite the
lower interest rate, lower valuations for commercial real estate properties. The conditions

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

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

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

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

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



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

The
relative lack of supply and high demand for capital is allowing investors with cash to make investments with very attractive returns compared to historical levels. For this reason,
we are working to raise equity capital through alternative channels, especially in the nonlisted REIT market. We have filed a registration statement on Form S-11 for NorthStar Real
Estate Income Trust, Inc., a commercial finance REIT that will be managed by us and will not be listed on a major exchange, and we built NRF Capital Markets, our wholesale broker dealer, to
distribute the equity for this new REIT and other non-listed REITs sponsored by us. We are also raising equity under an SEC Regulation D exemption for NorthStar Income Opportunity
REIT I, Inc., a commercial finance REIT also managed by us. We expect to use our broad commercial real estate investment and management platform to operate these companies and to earn
management fees in return for our services, and the non-traded REIT efforts reflect our strategy of accessing alternative sources of equity capital, leveraging our

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existing
platform to generate fee revenues and to become less reliant on the public markets to grow our business.



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

As
of June 30, 2010, approximately $3.9 billion of our collateralized debt obligations permit reinvestment of capital proceeds which means when the underlying assets repay
we are able to reinvest the proceeds in new assets without having to repay the liabilities. Approximately $406.9 million of our funded loan commitments have their initial maturity date during
the remainder of 2010; however, most of the loans contain extension options of at least one year (many subject to performance criteria). We also expect that a majority of the $245.5 million of
loans having final maturities during the remainder of 2010 will have their maturities extended beyond 2010 with the expectation that future periods will have more attractive economic conditions and
cheaper debt capital. It is therefore difficult to estimate how much capital, if any, will be generated in our CDO financings from loan repayments during the remainder of 2010.

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

We
believe that liquidity will eventually return more broadly to the commercial real estate finance markets and corporate debt capital is currently available to the stronger equity
REITs. Three single-borrower CMBS transactions were completed in the fourth quarter of 2009 and, more importantly, $1.7 billion in multi-borrower CMBS transactions have been completed during
the first six months of 2010, the first since mid-2008. Other sources of capital could include term loans from financial institutions and life insurance companies, more restrictive
commercial real estate finance structures, which may not permit reinvestment from asset repayments, and financing provided by motivated sellers of assets. We also believe that the CMBS markets will
eventually heal and once again become an important source of secured, non-recourse debt capital for commercial real estate.

Risk Management

We use many methods to actively manage our asset base to preserve our income and capital. Generally, for loans and net lease assets,
frequent dialogue with borrowers/tenants and inspections of our collateral and owned properties have proven to be an effective process for identifying issues early

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

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

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

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

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At June 30, 2010, our loan portfolio had the following credit statistics (in thousands):

Non-Performing Loans(1)

Number
of
Loans

Aggregate
Balance

Reserves

Aggregate
Net Balance

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


1

$
21,373

$
10,600

$
10,773

100% land located in New York, NYJunior participations in first mortgages


1


28,460


28,460


0

100% land located in Orlando, FLTotal


2


49,833


39,060


10,773Performing loans with loan loss reservesFirst mortgages(2)


5


180,580


42,430


138,151

43% office located in Austin, TX, San Jose & Livermore, CA, 4% land located in Livermore, CA, 2% retail located in Pleasant Hill, IA and 51% retail / entertainment located in East Rutherford,
NJ.Junior participations in first mortgages


2


45,631


18,400


27,231

73% land located in Las Vegas, NV and 27% office located in Chappaqua, NY.Mezzanine


3


69,975


36,054


33,921

50% retail located in Phoenix, AZ, 34% multi-family located in Ventura, CA and 16% hotel located throughout the USA.Total


10


296,186


96,884


199,303Total NPLs and performing loans with loan loss reserves


12

$
346,019

$
135,944

$
210,075


(1)A
loan is classified as non-performing at such time as the loan becomes 90 days delinquent in interest or principal payments or the loan
has a maturity default.(2)Includes
a first mortgage and mezzanine loan held by NorthStar, having a combined $33 million outstanding balance and having the same collateral
base, considered a single first mortgage for purposes of this table.


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

1 - 90 Days

90+ Days$75

$
49,849


For
the three months ended June 30, 2010, we recorded a $56.9 million credit loss provision relating to eight loans which included $8.4 million in provisions for two
loans sold during the period. For the six months ended June 30, 2010, we recorded a $93.3 million credit loss provision relating to 12 loans which included $14.6 million in
provisions for two loans sold during the period, net of a $0.8 million credit for a loan sold with a fair market value in excess of its carrying amount. In March 2010, we foreclosed on a
$15.0 million defaulted first mortgage loan backed by hotel collateral located in Phoenix, AZ and we simultaneously sold the hotel for approximately $9.6 million. In prior periods we had
recorded $5.0 million of credit loss reserves for this asset and it was a NPL at December 31, 2009. In April 2010, we sold a $13.9 million first mortgage loan backed by land
collateral located in New York, NY for approximately $8.5 million. The mortgage was a NPL and in prior periods we had recorded a net $5.5 million of loan loss reserves for this asset. In
April 2010, we also sold a $39.1 million mezzanine loan backed by a portfolio of hotel properties for approximately $32.1 million.

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We
had recorded $7.0 million of loan loss reserves for this asset during the first quarter. In April 2010, we also foreclosed on an $18.0 million first mortgage loan backed by office
collateral located in Philadelphia, PA. We had in prior periods recorded $8.8 million of loan loss reserves for this asset and took a $1.2 million impairment charge during the second
quarter related to the foreclosed real estate. In June 2010, we sold a $40.0 first mortgage loan backed by hotel collateral located in New York, NY for approximately $32.0 million. We recorded
an $8.1 million credit loss provision for this asset.

As
of June 30, 2010, loan loss reserves totaled $135.9 million and related to 11 loans having an aggregate $346.0 million book value (exclusive of the related
reserve).

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

Credit Loss ReserveBalance at December 31, 2009

$
77,400Provision for credit losses


93,257Write-offs


(34,713
)Balance at June 30, 2010

$
135,944


At
June 30, 2010, we had two loans totaling $49.9 million on non-performing status due to maturity defaults, and $39.1 million of our credit loss
reserves were allocated to these loans. First mortgages represent approximately 42.9% of the book value of these loans (exclusive of reserves), and 57.1% of the loans are backed by land collateral.
There can be no assurance that there will be acceptable outcomes under our non-performing loans and accordingly, we may determine that more reserves are required for these loans.

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

For
the six months ended June 30, 2010, we modified the contractual interest rates of loans as part of restructuring or extension negotiations and, in some cases, we discontinued
the recognition of income for interest accrual rates in excess of the stated cash pay rates. In the aggregate, these changes, as well as loans which were non-performing during the quarter,
resulted in an approximate $6.1 million reduction to interest income for the six months ended June 30, 2010, respectively, ($11.3 million on an annualized basis).

Many
of our loans were made to borrowers who had a business plan to improve the collateral property and who therefore needed a flexible balance sheet lender. In many cases we required
the borrowers to pre-fund reserves to cover interest and operating expenses until the property cash flows increased sufficiently to cover debt service costs. We also generally required the
investor to refill these

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reserves
if they became deficient due to underperformance and if the borrower wanted to exercise extension options under the loan. Despite low interest rates, we expect that in the future some of our
borrowers may have difficulty servicing our debt because they cannot achieve their business plan in this economic environment. If any of our borrowers are unable to replenish reserves and otherwise
ultimately achieve their business plans, the related loans may become non-performing. In addition, even if a borrower's business plan is achieved, current real estate valuations and the
financing environment may result in a borrower being unable to recoup its invested capital and a default under the loan causing a partial or full loss of our loan principal.

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

Our
impairment analyses often requires that we make assumptions regarding collateral values and the timing regarding when we will receive debt service payments, including principal
recovery. In a difficult environment for commercial real estate, our impairment analyses may lead us to the determination that extending and working out a loan, rather than pursuing foreclosure, is
the best course of action to maximize total and long-term value. However, in situations where there are multiple creditors in large capital structures, it can be particularly difficult to
assess the most likely course of action that a lender group or the borrower may take. Consequently, there could be a wide range of potential principal recovery outcomes, the timing of which can be
unpredictable, based on the strategy pursued by a lender group and/or by a borrower. Our impairment analysis in each of these situations is based on our assessment of the facts and circumstances
currently known to us and because these situations often involve complicated collateral and complex creditor and borrower dynamics, our assessment of recovery value may change more dramatically and
quickly and without the visibility that
may be available in other situations. These multiple creditor situations tend to be associated with larger loans, and NorthStar has been and continues to be involved in situations such as these,
although Northstar, as one of a group of lenders and often a lender on a subordinated basis, does not independently control the decision making. The discussion below summarizes the largest credit
situations that currently meet some of the foregoing characteristics.



We own a $92.5 million pari passu participation in a $498.6 million first mortgage that is secured by a
retail/entertainment complex located in East Rutherford, NJ (the "NJ Loan"). The NJ Loan was most recently modified as of March 31, 2010, and the maturity date of the NJ Loan was extended to
August 9, 2010, to provide the borrower additional time to seek new capital for the project. We do not currently believe that the borrower will be successful in attracting the capital necessary
for the project and, accordingly, we believe that the NJ Loan is likely to default in the future. While the lending group may take title to the property and seek to recapitalize the property, if the
NJ Loan were to default, we may lose a substantial amount of our investment, which could have a material adverse effect on our business and operations. During the second quarter 2010, we recorded a
$23.1 million provision for loan loss related to the NJ Loan.



We own a €72.5 million participation in a mezzanine loan that is collateralized by a German retail portfolio
that is net leased to a single tenant (the "Tenant") that has filed for bankruptcy in Germany

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(the
"German Loan"). There are ongoing negotiations relating to a restructuring of the German Loan, as well as ongoing discussions relating to a potential sale of the Tenant by the German bankruptcy
administrator. There can be no assurance that the restructuring will be successful and that the German Loan will not default in the future. There can also be no assurance that the bankruptcy
administrator will be successful in selling the Tenant. An unsuccessful sale of the Tenant would result in the Tenant's liquidation and termination of the leases on the retail portfolio that serve as
collateral for the German Loan. If the German Loan were to default or the Tenant were liquidated, we may lose all of our investment, which could have a material adverse effect on our business and
operations. On June 30, 2010, in connection with the repayment and extinguishment of the WA Secured Term Loan, the lender was granted a 40% participation in the principal proceeds of the German
Loan. We recorded a realized loss of approximately $35.3 million in connection with the granting of the 40% participation interest in principal proceeds of the German Loan to the lender.



We own an $89.0 million mezzanine loan that is secured by the Hard Rock Hotel and Casino in Las Vegas, NV (the "NV
Loan"). The NV Loan was most recently restructured in December 2009. The final maturity date of the NV Loan was extended to February 2014 to provide additional time for market conditions
to improve and for performance at the property to stabilize. As part of the extension, interest reserves were also established to support the NV Loan. There can be no assurance that market
conditions will improve in the future or that the performance at the property will improve such that its cash flow can support the NV Loan. If the NV Loan were to default or the interest
reserves are depleted and the borrower is not willing to provide additional capital for the property, we may lose all of our investment, which could have a material adverse effect on our business and
operations.

Critical Accounting Policies

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

Recent Accounting Pronouncements

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

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RESULTS OF OPERATIONS

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

Revenues



Interest income for the three months ended June 30, 2010 totaled $60.7 million, representing an increase of
$25.0 million, or 70%, compared to $35.7 million for the three months ended June 30, 2009. For the three months ended June 30, 2010, the increase in interest income was
primarily attributable to: (i) the addition of $25.5 million in interest income as the result of the January 1, 2010 consolidation of the N-Star I, N-Star
II, N-Star III and N-Star V CDO financing's available for sale securities and real estate debt investments; and (ii) the acquisition of higher yielding commercial real
estate securities subsequent to June 30, 2009 resulting in $2.0 million of higher interest, partially offset by: (i) a lower average one-month LIBOR of approximately
12 basis points and lower comparable asset balances resulting in a decrease of approximately $2.5 million in interest income.



Interest income from related parties for the three months ended June 30, 2010 totaled $0.3 million, representing a
decrease of $4.1 million, or 93%, compared to $4.4 million for the three months ended June 30, 2009. As of January 1, 2010, the consolidation of the N-Star I,
N-Star II, N-Star III and N-Star V CDOs financing the non-investment grade notes are no longer accounted for as available for sale securities, resulting
in a decrease in interest incomerelated parties of $4.1 million.



Rental and escalation income for the three months ended June 30, 2010 totaled $33.9 million, representing an increase of
$12.0 million, or 55%, compared to $21.9 million for the three months ended June 30, 2009. The increase was primarily attributable to an increase of approximately
$13.2 million related to the consolidation of Midwest as a result of our acquisition of the 51% membership interest in Midwest formerly owned by Chain Bridge and an increase in rental income of
approximately $0.2 million related to a new lease on one of our properties. The increase in rental and escalation income was partially offset by a decrease of $1.4 million related to
lower rents and remaining vacancy on the lease renewal for the Cincinnati, OH property.



Advisory fees from related parties for the three months ended June 30, 2010 totaled $0.5 million, representing a decrease
of approximately $1.3 million, or 72%, compared to $1.8 million for the three months ended June 30, 2009. As of January 1, 2010, the related party advisory and management
fee income earned on the N-Star I, N-Star II, N-Star III and N-Star V CDO financings is eliminated as a result of the consolidation of the respective
CDO financings. The decrease in advisory and management fee incomerelated parties is attributable to the elimination of the advisory and management fee income earned on the previously
non-consolidated CDO financings.



Commission income represents income earned by us for raising equity, through our broker-dealer subsidiary, for the NorthStar Income
Opportunity REIT I, Inc., a commercial finance REIT sponsored by us. For the three months ended June 30, 2010, we recorded $0.4 million in commission income related to these
capital raising efforts. We had no such commission income for the three months ended June 30, 2009.

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Other revenue for the three months ended June 30, 2010 totaled $0.2 million, which was essentially flat as compared to
$0.2 million for the three months ended June 30, 2009. Other revenue for three months ended June 30, 2010 consisted primarily of $0.2 million in other fees. Other revenue
for three months ended June 30, 2009 consisted primarily of $0.1 million in exit fees and $0.1 million in unused credit line fees.

Expenses



Interest expense for the three months ended June 30, 2010 totaled $35.7 million, representing an increase of
$4.8 million, or 16%, compared to $30.9 million for the three months ended June 30, 2009. The increase in interest was primarily the result of: (i) the addition of
$4.9 million in interest expense as the result of the January 1, 2010 consolidation of the
N-Star I, N-Star II, N-Star III and N-Star V CDO bonds payable; (ii) $2.0 million due to the amortization of deferred financing fees as a
result of the June 30, 2010 repayment of the WA Secured Term Loan, (iii) $0.5 million higher interest relating to an increased spread on our amended WA Secured Term Loan;
(iv) $0.6 million in higher interest rates and the amortization of deferred financing fees as a result of the June 30, 2010 repayment of the Euro-note; and
(v) $0.5 million in additional interest related to the Term Asset-Backed Securities Loan Facility, or TALF program debt. The increase in interest expense was partially offset by;
(i) $2.3 million lower interest on our issued CDO notes and trust preferred debt due to lower average LIBOR rates; (ii) $1.3 million lower interest on our 11.50% and 7.25%
exchangeable senior notes due to 2009 repurchases; and (iii) $0.1 million lower interest related to the termination of our unsecured revolving credit line.



Real estate property operating expenses for three months ended June 30, 2010 totaled $10.8 million, representing an
increase of $8.1 million, or 300%, compared to $2.7 million for three months ended June 30, 2009. The increase was primarily attributable to an increase of approximately
$9.4 million related to the consolidation of Midwest as a result of our acquisition of the 51% membership interest in Midwest, formerly owned by Chain Bridge and $0.1 million related to
the foreclosure of an $18.0 million first mortgage loan backed by office collateral located in Philadelphia, PA. The increase in real estate property operating expenses was partially offset by
$1.2 million in lower expenses related to a reduced real estate tax assessment and a decrease of $0.1 million related to the first mortgage lender foreclosing on the Chatsworth, CA
properties during the third quarter of 2009.



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



Commission expense represents the portion of commission income which is paid to broker dealers with whom we have distribution
agreements. For the three months ended
June 30, 2010, we recorded $0.3 million in commission expense related to these capital raising efforts. We had no such commission expense for the three months ended June 30, 2009.

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



Provision for loan losses for the three months ended June 30, 2010 totaled $56.9 million for eight loans and included
$8.4 million in provision for two loans sold during the period. The provision for loan losses for the three months ended June 30, 2010 included $31.3 million for first mortgage
whole loans, $16.9 million for subordinated mortgage interests and $8.8 million for mezzanine loans. Provision for loan losses for the three months ended June 30, 2009 totaled
$17.0 million for eight loans and includes $7.5 million for first mortgage whole loans, $5.0 million for subordinated mortgage
interests and $4.5 million for mezzanine loans.$12.0 million for mezzanine loans, $6.5 million for whole loans and $3.0 million for subordinated mortgage interests.



General and administrative expenses for the three months ended June 30, 2010 totaled $20.8 million, representing an
increase of $3.8 million, or 22%, compared to $17.0 million for the three months ended June 30, 2009. The primary components of our general and administrative expenses were the
following:

Salaries
and equity-based compensation for the three months ended June 30, 2010 totaled $12.3 million, representing an increase of approximately $1.1 million, or
10%, compared to $11.2 million, for the three months ended June 30, 2009. The increase was attributable to a $2.2 million increase related to salaries and accrued cash incentive
compensation costs and a $1.1 million decrease related to equity-based compensation. The $2.2 million increase in salaries and accrued compensation was attributable to higher staffing
levels in 2010 primarily relating to our broker-dealer subsidiary and internalizing management of our healthcare net lease assets. The $1.1 million decrease in equity-based compensation expense
was attributable to a $1.7 million decrease in expense from equity-based awards issued under our 2004 Omnibus Stock Incentive Plan becoming fully vested. The decrease was partially offset by an
additional $0.6 million of equity-based compensation expense related to the long-term incentive component of our incentive compensation plan.

Auditing
and professional fees for the three months ended June 30, 2010 totaled $2.5 million, representing an increase of $0.2 million, or 9%, compared to
$2.3 million for the three months ended June 30, 2009. The increase was primarily attributable to approximately a $0.5 million increase in legal fees for general corporate work
and portfolio management partially offset by a decrease of $0.3 million related to 2009 lease restructuring expenses in our healthcare portfolio.

Other
general and administrative expenses for the three months ended June 30, 2010 totaled $6.0 million, representing an increase of approximately $2.5 million, or
71%, compared to $3.5 million for the three months ended June 30, 2009. The increase was primarily attributable to costs associated with the acquisition of a new CDO of approximately
$0.7 million, legal fees and other costs related to investment initiatives ultimately not consummated of approximately $0.7 million, increased income taxes and other taxes of
approximately $0.5 million principally related to our Midwest taxable REIT subsidiary and increased overhead costs of approximately $0.6 million resulting from higher staffing levels
during the three months ended June 30, 2010.

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Depreciation and amortization expense for the three months ended June 30, 2010 totaled $8.4 million, representing a
decrease of $8.4 million, or 50%, compared to $16.8 million for the three months ended June 30, 2009. The decrease was primarily related to a decrease of $7.4 million
attributable to the 2009 write-off of certain costs associated with the lease restructuring and termination of one of our operators in our healthcare portfolio, a decrease of
$0.3 million related to charges associated with the 2009 foreclosure by the first mortgage lender of the Chatsworth, CA property, and a decrease of $0.9 million related to deferred lease
costs and tenant improvements in our net lease portfolio being fully amortized. The decrease was partially offset by $0.2 million of expenses related to 2010 new operating real estate
improvements.



Equity in earnings (loss) for the three months ended June 30, 2010 was net earnings of $4.9 million, representing an
increase of $4.7 million, compared to net earnings of $0.2 million for the three months ended June 30, 2009. For the three months ended June 30, 2010, we recognized equity
in earnings of $8.3 million from our corporate lending platform as a result of the joint venture having sold assets with a carrying value of approximately $6.7 million for
$15.0 million and $0.2 million in connection with a net lease joint venture. The equity in earnings was partially offset by equity in losses of $3.0 million from the Securities
Fund (which includes both realized and unrealized gains from asset sales and mark-to-market adjustments), equity in losses of $0.4 million from the LandCap joint venture
and an adjustment to equity in losses, from our previously unconsolidated affiliated lessee formed in 2009, of $0.4 million, prior to its consolidation. For the three months ended
June 30, 2009, we recognized equity in earnings of $3.4 million on a new joint venture related to the restructured net lease relationship with one of our healthcare operators which
resulted in one of our unconsolidated affiliates becoming the lessee of the properties and the unconsolidated affiliate simultaneously entering into a management contract with a third party operator
and equity in earnings of $0.1 million in connection with another net lease joint venture. The equity in earnings was partially offset by equity in losses $3.0 million from the
Securities Fund (which includes both realized and unrealized gains from asset sales and mark-to-market adjustments) and equity in losses $0.3 million from the LandCap
joint venture.



Unrealized gain (loss) on investments and other decreased by approximately $5.8 million for the three months ended
June 30, 2010 to a loss of $6.4 million, compared to a loss of $0.6 million for the three months ended June 30, 2009. The unrealized loss on investments and other for the
three months ended June 30, 2010 consisted primarily of unrealized mark-to-market adjustment losses of $84.4 million on various issued CDO bonds payable,
$53.5 million unrealized losses on interest rate swap derivatives no longer qualifying, or not designated as, hedging instruments and mark-to-market adjustment losses of
$2.7 million on our corporate lending joint venture (which is an equity investment that is marked to market). The unrealized losses were partially offset by unrealized gains of
$89.2 million related to mark-to-market adjustments on various available for sale securities and mark-to-market adjustment gains of
$45.0 million on liability to subsidiary trusts issuing preferred securities. The unrealized loss on investment for the three months ended June 30, 2009 consisted primarily of unrealized
losses related to mark-to-market adjustments of $28.0 million on liability to subsidiary trusts issuing preferred securities and unrealized losses of $4.6 million
on our corporate lending joint venture (which is an equity investment that is marked to market). The unrealized losses were partially offset by unrealized gains related to
mark-to-market adjustments of $19.5 million on various available for sale securities, unrealized gains of $6.5 million on various N-Star bonds payable
and net gains of $6.0 million on interest rate swap derivatives no longer qualifying, or not designated as, hedging instruments.

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The realized gain of $81.6 million for the three months ended June 30, 2010 consisted primarily of a realized gain of
approximately $95.9 million on the repayment and extinguishment of our WA Secured Term Loan, net realized gains of approximately $22.8 million on the sale of certain available for sale
securities and net realized gains of approximately $0.8 million on the sale of bonds payable. The realized gains were partially offset partially by a realized loss of approximately
$35.3 million related to the 40% participation interest in the principal proceeds of the German Loan granted to the lender upon repayment and extinguishment of our WA Secured Term Loan, a net
foreign currency translation loss of $2.3 million related to our Euro-denominated investment and a realized loss of approximately $0.3 million on the redemption of available
for sale securities. The realized gain on investments and other of $23.3 million for the three months ended June 30, 2009 consisted primarily of net realized gains of
$11.9 million on the repurchase of $21.6 million of our 7.25% exchangeable senior notes and net realized gains of
$15.5 million on the sale of certain available for sale securities, offset partially by realized losses of $3.8 million related to the discounted payoff of a first mortgage.



Income from discontinued operations represents the operations of properties sold or held for sale during the period. In May 2010, we
completed the sale of a leasehold interest containing approximately 10,800 square feet of retail space located in New York City and recorded as held for sale a leasehold interest containing
approximately 17,700 square feet of retail and office space also located in New York City. In December 2009, NRF Healthcare, LLC completed the sale of 18 assisted living facilities containing
approximately 1,300 beds located in North Carolina. Accordingly, income of $0.1 million and $0.7 million, respectively, related to the operations of these properties was reclassified to
income from discontinued operations for the three months ended June 30, 2010 and 2009.



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

Comparison of the Six Months Ended June 30, 2010 to the Six Months Ended June 30, 2009

Revenues



Interest income for the six months ended June 30, 2010 totaled $118.3 million, representing an increase of
$45.8 million, or 63%, compared to $72.5 million for the six months ended June 30, 2009. For the six months ended June 30, 2010, the increase in interest income was
primarily attributable to: (i) the addition of $49.5 million in interest income as the result of the January 1, 2010 consolidation of the N-Star I, N-Star
II, N-Star III and N-Star V CDO financing's available for sale securities and real estate debt investments; and (ii) the acquisition of higher yielding commercial real
estate securities subsequent to June 30, 2009 resulting in $1.8 million of higher interest, partially offset by: (i) a lower average one-month LIBOR of approximately
17 basis points and lower comparable asset balances resulting in a decrease of approximately $5.5 million in interest income.



Interest income from related parties for the six months ended June 30, 2010 totaled $0.9 million, representing a decrease
of $8.1 million, or 90%, compared to $9.0 million for the six months ended June 30, 2009. As of January 1, 2010, the consolidation of the N-Star I,
N-Star II, N-Star III and

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N-Star
V CDOs financing the non-investment grade notes are no longer accounted for as available for sale securities, resulting in a decrease in interest
incomerelated parties of $8.1 million.



Rental and escalation income for the six months ended June 30, 2010 totaled $55.3 million, representing an increase of
$8.6 million, or 18%, compared to $46.7 million for the six months ended June 30, 2009. The increase was primarily attributable to an increase of approximately
$11.2 million related to the consolidation of Midwest as a result of our acquisition of the 51% membership interest in Midwest formerly owned by Chain Bridge and an increase in rental income of
approximately $0.3 million related to a new lease on one of our properties offset partially by decreases of $2.4 million related to lower rents and remaining vacancy on the lease renewal
for the Cincinnati,
OH property and $0.6 million related to the Chatsworth, CA property lease disaffirmation and foreclosure of the properties by the first mortgage lender in 2009.



Advisory fees from related parties for the six months ended June 30, 2010 totaled $1.0 million, representing a decrease
of approximately $2.5 million, or 71%, compared to $3.5 million for the six months ended June 30, 2009. As of January 1, 2010, the related party advisory and management fee
income earned on the N-Star I, N-Star II, N-Star III and N-Star V CDO financings is eliminated as a result of the consolidation of the respective CDO
financings. The decrease in advisory and management fee incomerelated parties is attributable to the elimination of the advisory and management fee income earned on the previously
non-consolidated CDO financings.



Commission expense represents the portion of commission income which is paid to broker dealers with whom we have distribution
agreements. For the six months ended June 30, 2010, we recorded $0.4 million in commission income related to these capital raising efforts. We had no such commission income for the six
months ended June 30, 2009.



Other revenue for the six months ended June 30, 2010 totaled $1.2 million, representing an increase of
$0.9 million, or 300%, compared to $0.3 million for the six months ended June 30, 2009. Other revenue for six months ended June 30, 2010 consisted primarily of
$0.9 million in early redemption fees on available for sale securities and $0.3 million in other fees. Other revenue for six months ended June 30, 2009 consisted primarily of
$0.2 million in late fees and $0.1 million in unused credit line fees.

Expenses



Interest expense for the six months ended June 30, 2010 totaled $67.7 million, representing an increase of
$3.7 million, or 6%, compared to $64.0 million for the six months ended June 30, 2009. The increase in interest was primarily the result of: (i) the addition of
$9.5 million in interest expense as the result of the January 1, 2010 consolidation of the N-Star I, N-Star II, N-Star III and N-Star V
CDO bonds payable; (ii) $0.7 million in additional interest related to the Term Asset-Backed Securities Loan Facility, or TALF program debt; (iii) $2.0 million in higher
interest rates due to the amortization of deferred financing fees as a result of the June 30, 2010 repayment of the WA Secured Term Loan, (iv) $0.9 million higher interest
relating to an increased spread on our amended WA Secured Term Loan; and (v) $0.6 million in higher interest rates and the amortization of deferred financing fees as a result of the
June 30, 2010 repayment of the Euro-note. The increase in interest expense was partially

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offset
by; (i) $5.2 million lower interest on our issued CDO notes and trust preferred debt due to lower average LIBOR rates, 2009 debt repurchases and repayments;
(ii) $3.6 million lower interest on our 11.50% and 7.25% exchangeable senior notes due to 2009 repurchases; (iii) $0.8 million lower interest as a result of the foreclosure
by the first mortgage lender of our Chatsworth, CA properties; and (v) $0.2 million lower interest related to the termination of our unsecured revolving credit line.



Real estate property operating expenses for six months ended June 30, 2010 totaled $12.4 million, representing an
increase of $7.6 million, or 158%, compared to $4.8 million for six months ended June 30, 2009. The increase was primarily attributable to an increase of approximately
$9.4 million related to the consolidation of Midwest as a result of our acquisition of the 51% membership interest in Midwest, formerly owned by Chain Bridge and $0.1 million related to
the foreclosure of an $18.0 million first mortgage loan backed by office collateral located in Philadelphia, PA. The increase in real estate property operating expenses was partially offset by
$1.4 million in lower
expenses related to a reduced real estate tax assessment and a decrease of $0.4 million related to the first mortgage lender foreclosing on the Chatsworth, CA properties in during the third
quarter of 2009.



Advisory fees for related parties for the six months ended June 30, 2010 totaled $0.5 million, representing a decrease of
$1.2 million, or 71%, compared to $1.7 million for the six months ended June 30, 2009. The decrease was primarily related to the reduced asset management fee rate of the
management agreement with Wakefield Capital Management Inc.



Commission expense represents expenses incurred by us for raising equity, through our broker-dealer subsidiary, for the NorthStar
Income Opportunity REIT I, Inc., a commercial finance REIT and for other non-listed REITs sponsored by us. For the six months ended June 30, 2010, we recorded
$0.3 million in commission expense related to these capital raising efforts. We had no such commission expense for the three months ended June 30, 2009.



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



Provision for loan losses for the six months ended June 30, 2010 totaled $93.3 million for 12 loans and included
$14.6 million in provision for two loans sold during the period net of a $0.8 million credit for a loan sold with a fair market value in excess of its carrying amount. The
provision for loan losses for the six months ended June 30, 2010 included $37.4 million for first mortgage whole loans, $30.8 million for subordinated mortgage interests,
$25.9 million for mezzanine loans and a $0.8 million credit for a first mortgage whole loan. Provision for loan losses for the six months ended June 30, 2009 totaled
$38.5 million for 13 loans and included $14.0 million for first mortgage whole loans, $8.0 million for subordinated mortgage interests and $16.5 million for mezzanine
loans.

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General and administrative expenses for the six months ended June 30, 2010 totaled $44.2 million, representing an
increase of $9.8 million, or 28%, compared to $34.4 million for the six months ended June 30, 2009. The primary components of our general and administrative expenses were the
following:

Salaries
and equity-based compensation for the six months ended June 30, 2010 totaled $28.8 million, representing an increase of approximately $5.9 million, or 26%,
compared to $22.9 million, for the six months ended June 30, 2009. The increase was attributable to a $7.2 million increase related to salaries and accrued cash incentive
compensation costs and a $1.3 million decrease related to equity-based compensation. The $7.2 million increase in salaries and accrued compensation was attributable to a
one-time expense of $3.5 million relating to the separation and consulting agreement with our former COO and higher staffing levels in 2010 primarily relating to our broker-dealer
subsidiary and internalizing management of our healthcare net lease assets. The $1.3 million decrease in equity-based compensation expense was attributable to a $3.2 million decrease in
expense from equity-based awards issued under our 2004 Omnibus Stock Incentive Plan becoming fully vested. The decease was partially offset by an additional $1.0 million of equity-based
compensation expense related to the accelerated vesting of equity-based awards in connection with the separation agreement with our former COO and a $0.9 million increase in equity-based
compensation expense related to the long-term incentive component of our incentive compensation plan.

Auditing
and professional fees for the six months ended June 30, 2010 totaled $5.5 million, representing an increase of $1.0 million, or 22%, compared to
$4.5 million for the six months ended June 30, 2009. The increase was primarily attributable to approximately a $0.8 million increase in legal fees related to our
non-listed and private REITs, a $0.2 million increase in legal fees related to the Chatsworth property foreclosure, a $0.5 million increase in fees relating to capital
raising, asset sales and membership redemption in our healthcare portfolio and a $0.1 million increase in legal fees for general corporate work, and portfolio management, partially offset by a
decrease of $0.6 million related to 2009 lease restructuring expenses in our healthcare portfolio.

Other
general and administrative expenses for the six months ended June 30, 2010 totaled $9.9 million, representing an increase of approximately $2.9 million, or
40%, compared to $7.0 million for the six months ended June 30, 2009. The increase was primarily attributable to costs associated with the acquisition of a new CDO of approximately
$0.7 million, legal fees and other costs related to investment initiatives ultimately not consummated of approximately $0.7 million, increased income and other taxes of approximately
$0.6 million principally related to our Midwest taxable REIT subsidiary and increased overhead costs of approximately $0.9 million resulting from higher staffing levels during the six
months ended June 30, 2010.



Depreciation and amortization expense for the six months ended June 30, 2010 totaled $16.8 million, representing a
decrease of $14.2 million, or 46%, compared to $31.0 million for the six months ended June 30, 2009. The decrease was primarily related to a decrease of $7.7 million
attributable to the 2009 write-off of certain costs associated with the lease restructuring and termination of one of our operators in our healthcare portfolio, a decrease of
$5.7 million related to charges associated with the 2009 foreclosure by the first mortgage lender of the Chatsworth, CA property, and a decrease of $1.1 million related to deferred lease
costs and tenant improvements in our net lease portfolio being fully amortized. The decrease was partially offset by $0.1 million of expenses related to 2010 new operating real estate
improvements.



Equity in earnings (loss) for the six months ended June 30, 2010 was net earnings of $6.3 million, representing an
increase of $10.6 million, compared to a loss of $4.3 million for the six months ended

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June 30,
2009. For the six months ended June 30, 2010, we recognized equity in earnings of $8.3 million from our corporate lending platform as a result of the joint venture having
sold assets with a carrying value of approximately $6.7 million for $15.0 million, $2.0 million from our previously unconsolidated affiliated lessee formed in 2009, resulting from
the termination of a lease to a third party in our healthcare real estate portfolio and $0.3 million in connection with a net lease joint venture. The equity in earnings was partially offset by
equity in losses of $3.9 million from the Securities Fund (which includes both realized and unrealized gains from asset sales and mark-to-market adjustments) and
$0.8 million from the LandCap joint venture. For the six months ended June 30, 2009, we recognized equity in losses of $2.7 million from the LandCap joint venture and equity in
losses of $5.2 million from the Securities Fund (which includes
both realized and unrealized gains from asset sales and mark-to-market adjustments). The losses were partially offset by equity in earnings of $3.4 million on our new
joint venture related to the restructured net lease relationship with one of our healthcare operators which resulted in one of our unconsolidated affiliates becoming the lessee of the properties and
the unconsolidated affiliate simultaneously entering into a management contract with a third party operator and $0.2 million in connection with a net lease joint venture.



Unrealized gain (loss) on investments and other decreased by approximately $98.2 million for the six months ended
June 30, 2010 to a loss of $8.2 million, compared to a gain of $90.0 million for the six months ended June 30, 2009. The unrealized loss on investments and other for the
six months ended June 30, 2010 consisted primarily of unrealized mark-to-market adjustment losses of $126.1 million on various issued CDO bonds payable and
$88.7 million of unrealized losses on interest rate swap derivatives no longer qualifying, or not designated as, hedging instruments. The unrealized losses were partially offset by unrealized
gains of $185.5 million related to mark-to-market adjustments on various available for sale securities and mark-to-market adjustment gains of
$21.1 million on liability to subsidiary trusts issuing preferred securities. The unrealized gain on investments for the six months ended June 30, 2009 consisted primarily of unrealized
gains related to mark-to-market adjustments of $142.1 million on various N-Star bonds payable and unrealized net gains of $7.6 million on interest
rate swap derivatives no longer qualifying, or not designated as, hedging instruments. The unrealized gains were partially offset by unrealized losses related to mark-to-market
adjustments of $29.9 million on our corporate lending joint venture (which is an equity investment that is marked to market), unrealized losses of $26.1 million on liability to
subsidiary trusts issuing preferred securities and unrealized losses of $3.6 million on various available for sale securities.



The realized gain of $83.0 million for the six months ended June 30, 2010 consisted primarily of a realized gain of
approximately $95.9 million on the repayment and extinguishment of our WA Secured Term Loan, net realized gains of approximately $26.0 million on the sale of certain available for sale
securities and net realized gains of approximately $0.8 million on the sale of bonds payable. The realized gains were partially offset by a realized loss of approximately $35.3 million
related to the 40% participation interest in the principal proceeds of the German Loan granted to the lender upon repayment and extinguishment of our WA Secured Term Loan, a net foreign currency
translation loss of $3.4 million related to our Euro-denominated investment, a realized loss of approximately $0.8 million on the redemption of available for sale securities
and a $0.3 million realized loss on the termination of an interest rate swap. The realized gain on investments and other of $60.2 million for the six months ended June 30, 2009,
was attributable to net realized gains of $46.2 million on the repurchase of $82.6 million of our 7.25% exchangeable senior
notes and net realized gains of $17.8 million on the sale of certain available for sale securities, offset partially by realized losses of $3.8 million related to the discounted payoff
of a first mortgage and a foreign currency translation gain of $0.2 million related to our Euro-denominated investment.

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Income from discontinued operations represents the operations of properties sold or held for sale during the period. In May 2010, we
completed the sale of a leasehold interest containing approximately 10,800 square feet of retail space located in New York City and recorded as held for sale a leasehold interest containing
approximately 17,700 square feet of retail and office space also located in New York City. In December 2009, NRF Healthcare, LLC completed the sale of 18 assisted living facilities containing
approximately 1,300 beds located in North Carolina. Accordingly, income of $0.2 million and $1.5 million, respectively, related to the operations of these properties was reclassified to
income from discontinued operations for the six months ended June 30, 2010 and 2009.



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

Liquidity and Capital Resources

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

Our
total available liquidity at June 30, 2010 was approximately $119.8 million, including $109.1 million of unrestricted cash and cash equivalents and
$10.7 million of uninvested and available funds in our CDO financings, which is available only for reinvestment within the CDO structures. On June 30, 2010, we fully repaid and
extinguished, at a discount to the outstanding principal amount, our WA Secured Term Loan, which was fully recourse to us, having an outstanding principal balance of approximately
$304.0 million and secured by assets having an aggregate unpaid principal balance of approximately $458.6 at the time of the payoff. We paid approximately $208.0 million of cash and
granted the lender a 40% participation interest in the principal proceeds of the German Loan owned by us that is collateralized by a German retail portfolio. Additionally, the lender agreed to use
commercially reasonable efforts to provide us and/or our affiliates with a new credit facility which is expected to have a minimum availability of $200.0 million.

As
set forth in our periodic reports filed with the Securities and Exchange Commission, NRFC NNN Holdings, Inc. ("NRFC NNN") and NRFC Sub Investor IV, LLC ("NRFC Sub IV"),
which are subsidiaries of ours, are defendants in a lawsuit (the "Lawsuit") filed by GECCMC 2005-CI Plummer Office Limited Partnership (the "Lender") in the Superior Court of the State of
California, County of Los Angeles, relating to a loan on two properties previously owned by NRFC Sub IV that were 100% leased (the "Lease") to Washington Mutual Bank, FA ("WaMu"). The Lawsuit alleges,
among other things, that the loan provided by Lender to NRFC Sub IV became a recourse obligation of NRFC NNN due to an alleged termination of the Lease. The judge presiding over the Lawsuit has
announced her intention to grant the Lender's motion for summary judgment and, accordingly, is expected to enter a judgment against NRFC NNN in the amount of approximately $42 million (the
"Judgment"). NRFC NNN continues to believe that this case is without merit and intends to vigorously pursue an appeal of the decision. Additionally, NRFC NNN filed a motion to vacate the Judgment and
enter Judgment for

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

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

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

We
currently believe that our existing sources of funds should be adequate for purposes of meeting our short-term liquidity needs; however, our CDO financing structures
generally require that the underlying collateral and cash flow generated by the collateral to be in excess of ratios stipulated in the related indentures. These ratios are called
overcollateralization, or OC, and interest coverage, or IC, tests. The reinvestment periods, which allow us to reinvest principal payments on the underlying assets into qualifying replacement
collateral and is instrumental in maintaining OC and IC ratios, for our N-Star CDO I, II and III have expired, and, for our N-Star CDO IV, N-Star CDO V,
N-Star CDO VI, N-Star CDO VII, N-Star CDO VIII and N-Star CDO IX will expire in July 2010, September 2010, June 2011, June 2011, February 2012 and June
2012, respectively. Since we are or will be unable to reinvest principal in these CDOs, principal repayments will pay down the senior-most notes, which will de-lever the CDO.
Following the conclusion of the reinvestment period in these CDOs, our ability to maintain the OC and IC ratios will be negatively impacted. In the event these tests are not met, cash

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that
would normally be distributed to us would be used to amortize the senior notes until the financing is back in compliance with the tests. In the event cash flow is diverted to repay the notes,
this could decrease cash available to pay our dividend and to comply with REIT requirements. Additionally, we may be required to buy assets out of our CDO financings in order to preserve cash flow. As
of June 30, 2010, we were in compliance with all of the OC and IC tests in our CDO financings. We expect that very weak economic conditions, lack of capital for commercial real estate,
decreasing real estate values and credit ratings downgrades of real estate securities will make complying with OC and IC tests more difficult in 2010 and in the future.

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

Cash Distributions(1)

Quarterly
Interest Coverage
Cushion(2)

Overcollateralization
CushionPrimary
Collateral
Type

Quarter Ended
June 30,
2010

June 30,
2010

June 30,
2010

At
OfferingN-Star I(3)

CMBS

$
314

$
129

$
4,377

$
8,687N-Star II

CMBS


20


137


82


10,944N-Star III

CMBS


2,123


1,644


34,430


13,610N-Star IV

Loans


2,006


2,828


91,339


19,808N-Star V

CMBS


1,636


2,374


40,232


12,940N-Star VI

Loans


708


3,684


49,496


17,412N-Star VII

CMBS


2,200


1,513


29,300


13,966N-Star VIII

Loans


3,659


5,803


130,421


42,193N-Star IX(4)

CMBS


1,776


1,538


64,589


24,516


Table
shows cash distributions to the retained income notes. Interest coverage and overcollateralization coverage to the most constrained class. (1)Cash
distributions are exclusive of senior management fees which are not subject to the coverage tests.(2)Quarterly
interest cushion and overcollateralization cushion from remittance report issued on date nearest to June 30, 2010, with the exception of
CDOs IV, VI, and VIII which have been updated to reflect material changes to collateral as of June 30, 2010.(3)N-Star
I equity cash flow represents NorthStar's 83% ownership percentage.(4)NorthStar
indirectly owns approximately 31% of N-Star IX income notes through its interest in the Securities Fund.


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



In May, 2009, we entered into an equity distribution agreement with JMP Securities, LLC, or JMP. In accordance with the terms of
the agreement, we may offer and sell up to 10,000,000 shares of our

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

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



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

During
the three months end June 30, 2010, we issued a total of 24,506 common shares pursuant to the Plan for a gross sales price of approximately $0.1 million. During the
six months end June 30, 2010, we issued a total of 48,481 common shares pursuant to the Plan for a gross sales price of approximately $0.2 million.



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

Cash Flows

The net cash provided by operating activities was $7.9 million for the six months ended June 30, 2010 compared to the net
cash flow provided by operating activities of $22.4 million for the six months ended June 30, 2009. The decrease was primarily due to the lower LIBOR rates and lower spreads on our
lending assets which decreased interest income generated from our asset base.

The
net cash flow provided by investing activities was $115.9 million for the six months ended June 30, 2010 compared to the net cash used in investing activities of
$24.5 million for the six months ended June 30, 2009. The primary source of cash flow provided by investing activities in 2010 was proceeds from the sale of real estate debt investments.
The primary uses of cash flow used by investing activities in 2009 were the origination or acquisition of real estate debt investments, and the acquisition of real estate securities.

The
net cash flow used by financing activities was $153.7 million for the six months ended June 30, 2010 compared to cash used by financing activities of
$26.4 million of cash used by financing activities for the six months ended June 30, 2009. The primary use of cash flow by financing activities was the WA Secured Term Loan repayment,
partially offset by proceeds from the sale of bonds. Net cash flow used in financing activity in 2009 was primarily related to the repurchase of our bonds and repayments on our credit facilities.

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Contractual Obligations and Commitments

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

Payments Due by PeriodContractual Obligations

Total

1 year

2 - 3 years

4 - 5 years

After 5 YearsMortgage notes

$
792,095

$
3,789

$
149,962

$
56,042

$
582,302Mezzanine loan payable


2,614


133


656


748


1,077Exchangeable senior notes(1)


128,915





68,165


60,750


Bonds payable


3,012,399











3,012,399Secured term loan


60,304





22,199


14,682


23,423Liability to subsidiary trusts issuing preferred securities


280,133











280,133Capital leases(2)


11,310


91


364


364


10,491Operating leases


68,916


2,885


11,433


11,380


43,218Outstanding unfunded commitments(3)


61,751


47,728


14,024





Estimated interest payments


550,118


57,486


224,334


177,246


91,051Total contractual obligations

$
4,968,555

$
112,112

$
491,137

$
321,212

$
4,044,094


(1)$68.2 million
of our 7.25% exchangeable senior notes have a final maturity date of June 15, 2027. The above table reflects the holders
repurchase rights which may require us to repurchase the notes on June 15, 2012.(2)Includes
interest on the capital leases.(3)Our
future funding commitments, which are subject to certain conditions that borrowers must meet to qualify for such fundings, totaled $61.7 million,
of which a minimum of $57.6 million will be funded within our existing CDO financings. Fundings are categorized by estimated funding period. Assuming that all loans that have future fundings
meet the terms to qualify for such funding, our equity requirement on the remaining future funding requirements would be approximately $4.1 million over the next two years.


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

Recent Developments

Dividends

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

Securities Fund

On July 7, 2010, the Securities Fund completed the sale of its remaining investments, which included the sale of the
N-Star CDO IX income notes to a subsidiary of ours. One of our subsidiaries, as general partner of the Securities Fund, is currently in the process of determining the Securities Fund's
final net asset value and expect to complete the process of dissolving the Securities Fund during 2010. As a result of the sale of the N-Star CDO IX income notes to a subsidiary of ours,
we expect to

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consolidate
the assets and liabilities of the CDO at their respective fair market values as of the acquisition date.

CDO Acquisition

On July 8, 2010, an affiliate of CapitalSource Inc. ("CapitalSource") (i) delegated to an affiliate of ours
collateral management and special servicing rights, and the associated fees, relating to CapitalSource's approximately $1.1 billion collateralized debt obligation consisting primarily of first
mortgage loans on commercial real estate (the "CDO") and (ii) sold to us the CDO's Class J notes (approximately $50 million current balance), the CDO's Class K notes
(approximately $60 million current balance) and the CDO's equity. The total consideration paid in the transaction by us was $7 million. As of July 8, 2010, the CDO had
approximately $103.4 million cash available for investment. We expect to consolidate the assets and liabilities of the CDO at their respective fair market values as of the acquisition date.

NRF Healthcare, LLC

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

Chatsworth Property

On August 4, 2010, NRFC NNN filed a motion to vacate the Judgment and enter Judgment for NRFC NNN or, in the alternative, vacate
the Judgment and set the matter for trial.

Inflation

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



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

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

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

Non-GAAP Financial Measures



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

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



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

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

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

Three Months
Ended
June 30, 2010

Three Months
Ended
June 30, 2009

Six Months
Ended
June 30, 2010

Six Months
Ended
June 30, 2009Funds from Operations:Income from continuing operations

$
41,922

$
1,742

$
21,758

$
103,718Non-controlling interest in joint ventures


(4,965
)

(1,976
)

(6,927
)

(4,440
)Consolidated net Income/(loss) before non-controlling interest in operating partnership


36,957


(234
)

14,831


99,278Adjustments:Preferred stock dividends


(5,231
)

(5,231
)

(10,463
)

(10,463
)Depreciation and amortization


8,351


16,779


16,760


30,990Funds from discontinued operations


135


1,330


318


2,688Real estate depreciation and amortizationunconsolidated ventures


237


247


474


494Funds from Operations

$
40,449

$
12,891

$
21,920

$
122,987Adjusted Funds from Operations:Funds from Operations

$
40,449

$
12,891

$
21,920

$
122,987Straight-line rental income, net


(361
)

(699
)

(907
)

(1,171
)Straight-line rental income and fair value lease revenue, unconsolidated ventures


(19
)

(25
)

(45
)

(57
)Amortization of equity-based compensation


4,181


5,320


9,239


10,464Amortization of above/below market leases


(214
)

163


(478
)

(162
)Unrealized (gains)/losses from mark-to-market adjustments


(12,926
)

(3,847
)

(33,777
)

(98,410
)Unrealized (gains)/losses from mark-to-market adjustments, unconsolidated ventures


2,731


5,728


3,357


8,493Adjusted Funds from Operations

$
33,841

$
19,531

$
(691
)
$
42,144


Return on Average Common Book Equity

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

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

Three Months
Ended
June 30, 2010

Annualized
June 30, 2010



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



$
33,841

$
135,364

[A]

$
82,545Plus: General & Administrative Expenses




20,760







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




4,181







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












1,554AFFO, excluding G&A




50,420


201,680

[B]


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

[C]

$
1,280,959






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

[A]/[C]


10.6
%






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

[B]/[C]


15.7
%






11.0
%


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


Item 3.    Quantitative and Qualitative Disclosures About Market Risk

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

Our
interest rate risk sensitive assets, liabilities and related derivative positions are generally held for non-trading purposes. As of June 30, 2010, a hypothetical
100 basis point increase in interest rates applied to our variable rate assets would increase our annual interest income by approximately $22.6 million offset by an increase in our interest
expense of approximately $11.1 million on our variable rate liabilities. Similarly, a hypothetical 100 basis point decrease in interest rates would decrease our annual interest income by the
same net amount.

Real Estate Debt

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

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investments.
Increases in LIBOR will increase the interest income received by us on our investments and therefore increase our earnings. Decreases in LIBOR have the opposite effect.

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

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

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

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

Real Estate Securities

In our real estate securities business, we seek to mitigate credit risk through credit analysis, subordination and diversification. The
CMBS we invest in are generally junior in right of payment of interest and principal to one or more senior classes, but benefit from the support of one or more subordinate classes of securities or
other form of credit support within a securitization transaction. The senior unsecured REIT debt securities we invest in reflect comparable credit risk. Credit risk refers to each individual
borrower's ability to make required interest and principal payments on the scheduled due dates. While the expected yield on these securities is sensitive to the performance of the underlying

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assets,
the more subordinated securities and certain other features of a securitization, in the case of mortgage backed securities, and the issuer's underlying equity and subordinated debt, in the
case of REIT securities, are designed to bear the first risk of default and loss. The real estate securities portfolios of our investment grade CDO financings are diversified by asset type, industry,
location and issuer. We further seek to minimize credit risk by monitoring the real estate securities portfolios of our investment grade CDO financings and the underlying credit quality of their
holdings.

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

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

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

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

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

Net Lease Properties

Our ability to manage the interest rate risk and credit risk associated with the assets we acquire is integral to the success of our
net lease properties investment strategy. Although we may, in special

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situations,
finance our purchase of net lease assets with floating rate debt, our general policy is to mitigate our exposure to rising interest rates by financing our net lease property purchases with
fixed rate mortgages. We seek to match the term of fixed rate mortgages to our expected holding period for the underlying asset. Factors we consider to assess the expected holding period include,
among others, the primary term of the lease as well as any extension options that may exist.

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

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

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

Derivatives and Hedging Activities

We use derivatives primarily to manage interest rate risk exposure. These derivatives are typically in the form of interest rate swap
agreements and the primary objective is to minimize interest rate risks associated with the our investment and financing activities. The counterparties of these arrangements are major financial
institutions with which we may also have other financial relationships. We are exposed to credit risk in the event of non-performance by these counterparties and we monitor their financial
condition; however, we currently do not anticipate that any of the counterparties will fail to meet their obligations because of their high credit ratings and financial support from the U.S.
Government. At June 30, 2010, our counterparties hold approximately $27.6 million of cash margin as collateral against our swap contracts.

In
January 2008, we elected the fair value option for our bonds payable and our liability to subsidiary trusts issuing preferred securities. As a result, the changes in fair value of
these financial instruments are now recorded in earnings and the interest rate swap agreements associated with these debt instruments no longer qualify for hedge accounting given that the underlying
debt is remeasured with changes in the fair value recorded in earnings. The unrealized gains or losses accumulated in other

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comprehensive
income, related to these interest rate swaps, will be reclassified into earning over the shorter of either the life of the swap or the associated debt with current
mark-to-market unrealized gains or losses recorded in earnings. For the three months ended June 30, 2010 and 2009, we recorded, in earnings, a
mark-to-market unrealized loss of $52.1million and an unrealized gain of $7.4 million, respectively, for the non-qualifying interest rate swaps. For each of
the three months ended June 30, 2010 and 2009, we recorded a $1.4 million reclassification from accumulated other comprehensive income for the non-qualifying interest rate
swaps. For the six months ended June 30, 2010 and 2009, we recorded, in earnings, a mark-to-market unrealized loss of $85.9 million and an unrealized gain of
$10.4 million, respectively, for the non-qualifying interest rate swaps. For the six months ended June 30, 2010 and 2009, we recorded a $2.8 million and a
$2.8 million reclassification from accumulated other comprehensive income for the non-qualifying interest rate swaps, respectively.

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

Number of
Investments

Notional
Amount

Fair Value
Net Asset/
(Liability)

Range of
Fixed LIBOR

Range of MaturityInterest rate swapsAs of December 31, 2009


10

$
90,749

$
(7,691
)
4.18% - 5.08%

March 2010 - August 2018


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

Number of
Investments

Notional
Amount

Fair Value
Net Asset/
(Liability)

Range of
Fixed LIBOR

Range of MaturityInterest rate swapsAs of June 30, 2010


43

$
2,068,151

$
(180,475
)
0.46% - 7.00%

December 2010 - August 2018As of December 31, 2009(1)


22

$
897,335

$
(59,353
)
0.34% - 5.63%

May 2010 - June 2018


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


Item 4.    Controls and Procedures

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

Internal Control over Financial Reporting

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

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PART II. OTHER INFORMATION

Item 6.    Exhibits

(a)   Exhibits

Exhibit
Number

Description of Exhibit3.1

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

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

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

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

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

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

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

NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan (incorporated by reference to Exhibit 10.9 to the NorthStar Realty Finance Corp. Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004)10.3

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

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

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


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Exhibit
Number

Description of Exhibit10.6

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

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

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

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

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

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

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

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

Registration Rights Agreement relating to the 7.25% Exchangeable Senior Notes due 2027 of NorthStar Realty Finance Limited Partnership, dated June 18, 2007 (incorporated by reference to Exhibit 4.2 to the
NorthStar Realty Finance Corp. Registration Statement on Form S-3 (File No. 333-146679))10.15

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

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

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


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Exhibit
Number

Description of Exhibit10.18

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

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

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

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

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

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

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

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

Common Stock Purchase Warrant, Certificate No. W-2, dated October 28, 2009, issued to Wachovia Bank, National Association (incorporated by reference to Exhibit 10.37 to NorthStar Realty Finance Corp.'s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2009)10.27

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

Separation and Consulting Agreement, dated January 25, 2010, between NorthStar Realty Finance Corp. and Richard J. McCready (incorporated by reference to Exhibit 99.1 to the NorthStar Realty Finance Corp.
Current Report on Form 8-K filed on January 25, 2010)10.29
*
Letter Agreement, dated June 30, 2010, by Wells Fargo Bank, National Association and Wells Fargo Bank, N.A., London Branch (as successor-by-merger to Wachovia Bank, N.A. (London Branch)), as acknowledged and
agreed by NorthStar Realty Finance Corp. and certain of its Affiliates and Subsidiaries


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Exhibit
Number

Description of Exhibit10.30
*
Common Stock Purchase Warrant, Certificate No. W-4, dated June 30, 2010, issued to Wells Fargo Bank, National Association31.1
*
Certification by the Chief Executive Officer pursuant to 17 CFR 240.13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
*
Certification by the Chief Financial Officer pursuant to 17 CFR 240.13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
*
Certification by the Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.32.2
*
Certification by the Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.


*Filed
herewith


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SIGNATURES

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

NORTHSTAR REALTY FINANCE CORP.Date: August 5, 2010

By:

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

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


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