UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005

COMMISSION FILE NUMBER: 001-32330

NORTHSTARREALTY FINANCE CORP.(EXACT NAME OF REGISTRANT ASSPECIFIED IN ITSCHARTER)

|                                            |  |                       |  |  |  |  |
|--------------------------------------------|--|-----------------------|--|--|--|--|
| MARYLAND                                   |  | 11-3707493            |
| (STATEOR OTHER JURISDICTION OF             |  | (IRSEMPLOYER          |
| INCORPORATION ORORGANIZATION)              |  | IDENTIFICATIONNUMBER) |
| 527MADISON AVENUE, 16th FLOOR, NEW YORK,NY |  | 10022                 |
| (ADDRESS OF PRINCIPAL EXECUTIVEOFFICE)     |  | (ZIP CODE)            |
|                                            |

(212)319-8801(REGISTRANT'S TELEPHONE NUMBER, INCLUDINGAREA CODE)

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|  |  |  |  |
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INDICATE BYCHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TOBE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THEREGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECTTO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.

YES[X] NO [   ].

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

YES [   ] NO[X].

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THE COMPANY HASONE CLASS OF COMMON STOCK, PAR VALUE $0.01 PER SHARE, WITH 21,264,930SHARES OUTSTANDING AS OF NOVEMBER 14,2005.

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NORTHSTAR REALTY FINANCECORP. QUARTERLY REPORT FOR THE THREE AND NINE MONTHS ENDEDSEPTEMBER 30, 2005

TABLE OF CONTENTS

|            |  |                                                                                                                                                                                                                                   |    |        |        |        |  |  |  |  |
|------------|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----|--------|--------|--------|--|--|--|--|
| INDEX      |  |                                                                                                                                                                                                                              |    | PAGE   |
| PARTI.     |  | FINANCIALINFORMATION                                                                                                                                                                                                              |    |   |   |   |
| Item1.     |  | FinancialStatements                                                                                                                                                                                                               |    |   | 3      |   |
|       |  | Condensed ConsolidatedBalance Sheets as of September 30, 2005 (unaudited) and December 31,2004                                                                                                                                    |    |   | 3      |   |
|       |  | Condensed ConsolidatedStatements of Operations for the three and nine months ended September30, 2005 (unaudited) and Condensed Combined Statements of Operationsfor the three and nine months ended September 30, 2004(unaudited) |    |   | 4      |   |
|       |  | CondensedConsolidated Statements of Cash Flows for the nine months endedSeptember 30, 2005 (unaudited) and Condensed Combined Statement of CashFlows for the nine months ended September 30, 2004(unaudited)                      |    |   | 5      |   |
|       |  | Notes to theCondensed Consolidated and Condensed Combined Financial Statements(unaudited)                                                                                                                                         |    |   | 6      |   |
| Item2.     |  | Management's Discussion and Analysis of FinancialCondition and Results ofOperations                                                                                                                                               |    |   | 26     |   |
| Item3.     |  | Quantitative and Qualitative Disclosures about MarketRisk                                                                                                                                                                         |    |   | 49     |   |
| Item 4.    |  | Controlsand Procedures                                                                                                                                                                                                            |    |   | 52     |   |
| PARTII.    |  | OTHERINFORMATION                                                                                                                                                                                                                  |    |   |   |   |
| Item 1.    |  | LegalProceedings                                                                                                                                                                                                                  |    |   | 54     |   |
| Item2.     |  | Unregistered Sales of Equity Securities and Use ofProceeds                                                                                                                                                                        |    |   | 54     |   |
| Item3.     |  | Defaults upon Senior Securities                                                                                                                                                                                                   |    |   | 54     |   |
| Item 4.    |  | Submission ofMatters to a Vote of SecurityHolders                                                                                                                                                                                 |    |   | 54     |   |
| Item 5.    |  | OtherInformation                                                                                                                                                                                                                  |    |   | 54     |   |
| Item6.     |  | Exhibits                                                                                                                                                                                                                          |    |   | 55     |   |
| SIGNATURES |  |                                                                                                                                                                                                                              | 58 |   |
|            |

2

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PART 1 — FINANCIALINFORMATION

ITEM 1.    FINANCIAL STATEMENTS

Northstar Realty Finance Corp. and Subsidiaries CondensedConsolidated BalanceSheets

|                                                                                                                                                                              |  |                  |               |                 |  |        |               |         |  |  |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|------------------|---------------|-----------------|--|--------|---------------|---------|--|--|
|                                                                                                                                                                         |  | September30,2005 |               | December31,2004 |
|                                                                                                                                                                         |  | (Unaudited)      |               |            |
| Assets:                                                                                                                                                                      |  |             |          |            |  |   |          |    |
| Cashand cash equivalents                                                                                                                                                     |  | $                | 20,524,000    |            |  | $      | 47,733,000    |    |
| Restrictedcash                                                                                                                                                               |  |             | 10,250,000    |            |  |   | 2,713,000     |    |
| Debtsecurities held fortrading                                                                                                                                               |  |             | 33,022,000    |            |  |   | 826,611,000   |    |
| Operatingreal estate —net                                                                                                                                              |  |             | 138,504,000   |            |  |   | 43,544,000    |    |
| Debtsecurities available forsale                                                                                                                                             |  |             | 179,933,000   |            |  |   | 37,692,000    |    |
| CDOdeposit and warehouse agreements                                                                                                                                          |  |             | 2,500,000     |            |  |   | 2,988,000     |    |
| Collateral held bybroker                                                                                                                                                     |  |             | 26,878,000    |            |  |   | 24,831,000    |    |
| Realestate debtinvestments                                                                                                                                                   |  |             | 524,716,000   |            |  |   | 70,841,000    |    |
| Investmentsin and advances to unconsolidatedventures                                                                                                                         |  |             | 4,232,000     |            |  |   | 5,363,000     |    |
| Receivables,net of allowance of $23,000 and $1,000 in 2005 and2004                                                                                                           |  |             | 3,892,000     |            |  |   | 1,926,000     |    |
| Unbilledrents receivable, net of allowance of $0 and $4,137,000 in 2005 and2004                                                                                              |  |             | 1,277,000     |            |  |   | 5,567,000     |    |
| Due fromaffiliates                                                                                                                                                           |  |             | 219,000       |            |  |   | 176,000       |    |
| Deferredcosts and intangible assets,net                                                                                                                                      |  |             | 31,470,000    |            |  |   | 4,233,000     |    |
| Assets heldfor sale                                                                                                                                                          |  |             | 21,040,000    |            |  |   | —       |    |
| Otherassets                                                                                                                                                                  |  |             | 3,468,000     |            |  |   | 4,132,000     |    |
| Totalassets                                                                                                                                                                  |  | $                | 1,001,925,000 |            |  | $      | 1,078,350,000 |    |
| Liabilitiesand Stockholders'Equity:                                                                                                                                          |  |             |          |            |  |   |          |    |
| Liabilities:                                                                                                                                                                 |  |             |          |            |  |   |          |    |
| Mortgagenotes and loanspayable                                                                                                                                               |  | $                | 137,400,000   |            |  | $      | 40,557,000    |    |
| Liabilityto subsidiary trusts issuing preferredsecurities                                                                                                                    |  |             | 67,020,000    |            |  |   | —       |    |
| CDObondspayable                                                                                                                                                              |  |             | 300,000,000   |            |  |   | —       |    |
| Creditfacilities                                                                                                                                                             |  |             | 204,804,000   |            |  |   | 27,821,000    |    |
| Repurchaseobligations                                                                                                                                                        |  |             | 58,302,000    |            |  |   | 800,418,000   |    |
| Securitiessold, not yet purchased                                                                                                                                            |  |             | 24,790,000    |            |  |   | 24,114,000    |    |
| Obligations undercapitalleases                                                                                                                                               |  |             | 3,356,000     |            |  |   | 3,303,000     |    |
| Accountspayable and accruedexpenses                                                                                                                                          |  |             | 7,029,000     |            |  |   | 5,603,000     |    |
| Due toaffiliates                                                                                                                                                             |  |             | 70,000        |            |  |   | 250,000       |    |
| Otherliabilities                                                                                                                                                             |  |             | 2,637,000     |            |  |   | 528,000       |    |
| Totalliabilities                                                                                                                                                             |  |             | 805,408,000   |            |  |   | 902,594,000   |    |
|                                                                                                                                                                         |  |             |          |            |  |   |          |    |
| Minorityinterest                                                                                                                                                             |  |             | 38,462,000    |            |  |   | 32,447,000    |    |
| Commitmentsandcontingencies                                                                                                                                                  |  |             |          |            |  |   |          |    |
| Stockholders'Equity:                                                                                                                                                         |  |             |          |            |  |   |          |    |
| Common stock, $0.01 parvalue, 500,000,000 shares authorized, 21,264,930 and 21,249,736 sharesissued and outstanding at September 30, 2005 and December 31, 2004,respectively |  |             | 213,000       |            |  |   | 212,000       |    |
| Additionalpaid-incapital                                                                                                                                                     |  |             | 139,565,000   |            |  |   | 145,697,000   |    |
| Retainedearnings(deficit)                                                                                                                                                    |  |             | 13,055,000    |            |  |   | (2,439,000    | )  |
| Accumulatedother comprehensiveincome                                                                                                                                         |  |             | 5,222,000     |            |  |   | (161,000      | )  |
| Totalstockholders'equity                                                                                                                                                     |  |             | 158,055,000   |            |  |   | 143,309,000   |    |
| Totalliabilities and stockholders'equity                                                                                                                                     |  | $                | 1,001,925,000 |            |  | $      | 1,078,350,000 |    |
|                                                                                                                                                                              |

Seeaccompanying notes to the condensed consolidated and combined financialstatements.

3

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

|                                                                     |  |                                     |            |                                     |  |                                    |           |                                    |  |        |            |         |  |        |            |         |  |  |
|---------------------------------------------------------------------|--|-------------------------------------|------------|-------------------------------------|--|------------------------------------|-----------|------------------------------------|--|--------|------------|---------|--|--------|------------|---------|--|--|
|                                                                |  | TheCompany(consolidated)            |            | ThePredecessor(combined)            |  | TheCompany(consolidated)           |           | ThePredecessor(combined)           |
|                                                                |  | ThreeMonths EndedSeptember 30, 2005 |            | Three MonthsEndedSeptember 30, 2004 |  | Nine Months EndedSeptember30, 2005 |           | Nine Months EndedSeptember 30,2004 |
| Revenues and otherincome:                                           |  |                                |       |                                |  |                               |      |                               |  |   |       |    |  |   |       |    |
| Rentaland escalation income                                         |  | $                                   | 2,983,000  |                                |  | $                                  | —   |                               |  | $      | 7,857,000  |    |  | $      | —    |    |
| Advisoryand management feeincome                                    |  |                                | 21,000     |                                |  |                               | 57,000    |                               |  |   | 92,000     |    |  |   | 165,000    |    |
| Advisoryand management fee income – relatedparties            |  |                                | 1,162,000  |                                |  |                               | 952,000   |                               |  |   | 3,233,000  |    |  |   | 2,134,000  |    |
| Interestincome                                                      |  |                                | 11,657,000 |                                |  |                               | 22,000    |                               |  |   | 26,770,000 |    |  |   | 22,000     |    |
| Interestincome- relatedparties                                      |  |                                | 1,824,000  |                                |  |                               | 906,000   |                               |  |   | 5,128,000  |    |  |   | 1,469,000  |    |
| Otherrevenue                                                        |  |                                | 2,000      |                                |  |                               | —   |                               |  |   | 7,000      |    |  |   | —    |    |
| Totalrevenues                                                       |  |                                | 17,649,000 |                                |  |                               | 1,937,000 |                               |  |   | 43,087,000 |    |  |   | 3,790,000  |    |
| Expenses:                                                           |  |                                |       |                                |  |                               |      |                               |  |   |       |    |  |   |       |    |
| Realestate properties – operatingexpenses                     |  |                                | 586,000    |                                |  |                               | —   |                               |  |   | 1,722,000  |    |  |   | —    |    |
| Interestexpense                                                     |  |                                | 8,812,000  |                                |  |                               | 201,000   |                               |  |   | 21,126,000 |    |  |   | 201,000    |    |
| Managementfees – relatedparty                                 |  |                                | 24,000     |                                |  |                               | —   |                               |  |   | 67,000     |    |  |   | —    |    |
| Generalandadministrative:                                           |  |                                |       |                                |  |                               |      |                               |  |   |       |    |  |   |       |    |
| Direct:                                                             |  |                                |       |                                |  |                               |      |                               |  |   |       |    |  |   |       |    |
| Salariesand othercompensation                                       |  |                                | 1,395,000  |                                |  |                               | 238,000   |                               |  |   | 3,934,000  |    |  |   | 838,000    |    |
| Sharedservices – relatedparty                                 |  |                                | 344,000    |                                |  |                               | —   |                               |  |   | 1,030,000  |    |  |   | —    |    |
| Equitybasedcompensation                                             |  |                                | 740,000    |                                |  |                               | —   |                               |  |   | 2,499,000  |    |  |   | —    |    |
| Insurance                                                           |  |                                | 257,000    |                                |  |                               | —   |                               |  |   | 687,000    |    |  |   | —    |    |
| Accountingand auditingfees                                          |  |                                | 133,000    |                                |  |                               | —   |                               |  |   | 1,362,000  |    |  |   | —    |    |
| Othergeneral andadministrative                                      |  |                                | 735,000    |                                |  |                               | 46,000    |                               |  |   | 2,665,000  |    |  |   | 147,000    |    |
| Allocated:                                                          |  |                                |       |                                |  |                               |      |                               |  |   |       |    |  |   |       |    |
| Salariesand othercompensation                                       |  |                                | —    |                                |  |                               | 1,520,000 |                               |  |   | —    |    |  |   | 2,764,000  |    |
| Insurance                                                           |  |                                | —    |                                |  |                               | 90,000    |                               |  |   | —    |    |  |   | 285,000    |    |
| Othergeneral andadministrative                                      |  |                                | —    |                                |  |                               | 323,000   |                               |  |   | —    |    |  |   | 845,000    |    |
| Totalgeneral andadministrative                                      |  |                                | 3,604,000  |                                |  |                               | 2,217,000 |                               |  |   | 12,177,000 |    |  |   | 4,879,000  |    |
| Depreciationandamortization                                         |  |                                | 1,080,000  |                                |  |                               | —   |                               |  |   | 2,833,000  |    |  |   | —    |    |
| Totalexpenses                                                       |  |                                | 14,106,000 |                                |  |                               | 2,418,000 |                               |  |   | 37,925,000 |    |  |   | 5,080,000  |    |
| Income(loss) fromoperations                                         |  |                                | 3,543,000  |                                |  |                               | (481,000  | )                             |  |   | 5,162,000  |    |  |   | (1,290,000 | )  |
| Equityin earnings of unconsolidated/uncombinedventures              |  |                                | 61,000     |                                |  |                               | 487,000   |                               |  |   | 167,000    |    |  |   | 1,351,000  |    |
| Unrealizedgain (loss) on investments andother                       |  |                                | 414,000    |                                |  |                               | (292,000  | )                             |  |   | 963,000    |    |  |   | 425,000    |    |
| Realizedgain (loss) on investments andother                         |  |                                | 1,661,000  |                                |  |                               | 636,000   |                               |  |   | 2,162,000  |    |  |   | 636,000    |    |
| Netincome before minorityinterest                                   |  |                                | 5,679,000  |                                |  |                               | 350,000   |                               |  |   | 8,454,000  |    |  |   | 1,122,000  |    |
| Minorityinterest                                                    |  |                                | (1,171,000 | )                              |  |                               | —   |                               |  |   | (1,743,000 | )  |  |   | —    |    |
| Netincome from continuingoperations                                 |  | $                                   | 4,508,000  |                                |  | $                                  | 350,000   |                               |  | $      | 6,711,000  |    |  | $      | 1,122,000  |    |
| Incomefrom discontinued operations, net of minorityinterest         |  |                                | 108,000    |                                |  |                               | —   |                               |  |   | 153,000    |    |  |   | —    |    |
| Gainon sale from discontinued operations, net of minorityinterest   |  |                                | —    |                                |  |                               | —   |                               |  |   | 8,630,000  |    |  |   | —    |    |
| Netincome                                                           |  | $                                   | 4,616,000  |                                |  | $                                  | 350,000   |                               |  | $      | 15,494,000 |    |  | $      | 1,122,000  |    |
| Othercomprehensiveincome:                                           |  |                                |       |                                |  |                               |      |                               |  |   |       |    |  |   |       |    |
| Unrealizedgain on debt securities available for sale andderivatives |  |                                | 1,671,000  |                                |  |                               | 655,000   |                               |  |   | 5,383,000  |    |  |   | 1,131,000  |    |
| Comprehensiveincome                                                 |  | $                                   | 6,287,000  |                                |  | $                                  | 1,005,000 |                               |  | $      | 20,877,000 |    |  | $      | 2,253,000  |    |
| Netincome per share from continuingoperations                       |  | $                                   | 0.21       |                                |  |                               |      |                               |  | $      | 0.32       |    |  |   |       |    |
| Incomefrom discontinuedoperations                                   |  |                                | 0.01       |                                |  |                               |      |                               |  |   | 0.01       |    |  |   |       |    |
| Gainon sale of discontinuedoperations                               |  |                                | —    |                                |  |                               |      |                               |  |   | 0.41       |    |  |   |       |    |
| Netincome available to commonshareholders                           |  | $                                   | 0.22       |                                |  |                               |      |                               |  | $      | 0.74       |    |  |   |       |    |
| Weightedaverage number of shares of commonstock:                    |  |                                |       |                                |  |                               |      |                               |  |   |       |    |  |   |       |    |
| Basic                                                               |  |                                | 21,264,930 |                                |  |                               |      |                               |  |   | 21,255,190 |    |  |   |       |    |
| Diluted                                                             |  |                                | 26,790,161 |                                |  |                               |      |                               |  |   | 26,774,300 |    |  |   |       |    |
|                                                                     |

Seeaccompanying notes to the condensed consolidated and combined financialstatements.

4

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

|                                                                                                         |  |                                           |              |                                            |  |        |             |         |  |  |
|---------------------------------------------------------------------------------------------------------|--|-------------------------------------------|--------------|--------------------------------------------|--|--------|-------------|---------|--|--|
|                                                                                                    |  | TheCompany(consolidated)                  |              | ThePredecessor(combined)                   |
|                                                                                                    |  | Forthe Nine MonthsEnded September 30,2005 |              | For the NineMonthsEnded September 30, 2004 |
| Net cashprovided by operatingactivities                                                                 |  | $                                         | 807,021,000  | (1)                                   |  | $      | 2,368,000   |    |
| Cashflows from investingactivities:                                                                     |  |                                      |         |                                       |  |   |        |    |
| Returnof investment in debtsecurities                                                                   |  |                                      | —      |                                       |  |   | 818,000     |    |
| Additionsto operating real estate,net                                                                   |  |                                      | (150,289,000 | )                                     |  |   | —     |    |
| Netproceeds from disposition of operating realestate                                                    |  |                                      | 27,988,000   |                                       |  |   | —     |    |
| Purchaseof debt securities available forsale                                                            |  |                                      | (139,154,000 | )                                     |  |   | (27,499,000 | )  |
| Purchasesof real estate debtinvestments                                                                 |  |                                      | (453,268,000 | )                                     |  |   | —     |    |
| Increasein CDO warehousedeposits                                                                        |  |                                      | (2,500,000   | )                                     |  |   | (3,034,000  | )  |
| Proceedsfrom disposition of debt securities available forsale                                           |  |                                      | 9,186,000    |                                       |  |   | —     |    |
| Proceeds fromCDOwarehouse                                                                               |  |                                      | 988,000      |                                       |  |   | 9,500,000   |    |
| Restrictedcash (CDOIV)                                                                                  |  |                                      | (6,654,000   | )                                     |  |   | —     |    |
| Contributionsto unconsolidated/uncombinedventures                                                       |  |                                      | (2,026,000   | )                                     |  |   | (1,048,000  | )  |
| Distributionsfrom unconsolidated/uncombinedventures                                                     |  |                                      | 3,134,000    |                                       |  |   | 1,319,000   |    |
| Netcash used in investingactivities                                                                     |  |                                      | (712,595,000 | )                                     |  |   | (19,944,000 | )  |
|                                                                                                    |  |                                      |         |                                       |  |   |        |    |
| Cashflows from financingactivities:                                                                     |  |                                      |         |                                       |  |   |        |    |
| Settlement of shortsaleobligation                                                                       |  |                                      | (24,148,000  | )                                     |  |   | —     |    |
| Collateralheld bybroker                                                                                 |  |                                      | (2,047,000   | )                                     |  |   | (12,933,000 | )  |
| Capitalcontributions by owners of thePredecessor                                                        |  |                                      | —      |                                       |  |   | 9,392,000   |    |
| Mortgageprincipalrepayments                                                                             |  |                                      | (25,980,000  | )                                     |  |   | —     |    |
| Mortgagenotes and loanborrowings                                                                        |  |                                      | 122,823,000  |                                       |  |   | 17,517,000  |    |
| Liabilityto subsidiary trusts issuing preferredsecurities                                               |  |                                      | 67,020,000   |                                       |  |   | —     |    |
| Deferredfinancingcosts.                                                                                 |  |                                      | (10,495,000  | )                                     |  |   | —     |    |
| Proceedsfrom creditfacilities                                                                           |  |                                      | 410,572,000  |                                       |  |   | —     |    |
| Repaymentof creditfacilities                                                                            |  |                                      | (233,589,000 | )                                     |  |   | —     |    |
| Repurchaseobligationrepayments                                                                          |  |                                      | (742,116,000 | )                                     |  |   | —     |    |
| Proceedsfrom securities sold, not yetpurchased                                                          |  |                                      | 24,671,000   |                                       |  |   | 12,585,000  |    |
| Proceedsfrom issuance of CDObonds                                                                       |  |                                      | 300,000,000  |                                       |  |   | —     |    |
| Receivablefromaffiliates                                                                                |  |                                      | —      |                                       |  |   | (1,125,000  | )  |
| Dividendsanddistributions                                                                               |  |                                      | (8,037,000   | )                                     |  |   | (6,809,000  | )  |
| Settlementofderivative                                                                                  |  |                                      | (309,000     | )                                     |  |   | —     |    |
| Netcash (used in) provided by financingactivities                                                       |  |                                      | (121,635,000 | )                                     |  |   | 18,627,000  |    |
| Net(decrease) increase in cash & cashequivalents                                                    |  |                                      | (27,209,000  | )                                     |  |   | 1,051,000   |    |
| Cash& cash equivalents — beginning ofperiod                                                   |  |                                      | 47,733,000   |                                       |  |   | 1,013,000   |    |
| Cash& cash equivalents — end ofperiod                                                         |  | $                                         | 20,524,000   |                                       |  | $      | 2,064,000   |    |
| Supplementaldisclosure of cash flowinformation:                                                         |  |                                      |         |                                       |  |   |        |    |
| Cash paid forinterest                                                                                   |  | $                                         | 19,837,000   |                                       |  | $      | —     |    |
| Supplemental disclosure ofnon-cash operating and investingactivities:                                   |  |                                      |         |                                       |  |   |        |    |
| Reclassification ofCDO deposit to debt securities available forsale                                     |  | $                                         | 2,690,000    |                                       |  | $      | —     |    |
| Writeoff of deferred cost and straight-line rents in connection withdisposition of operating realestate |  | $                                         | 2,715,000    |                                       |  | $      | —     |    |
| Reclassification to Assets heldfor sale:                                                                |  |                                      |         |                                       |  |   |        |    |
| Operating real estate,net                                                                               |  | $                                         | 18,854,000   |                                       |  |   | —     |    |
| Unbilledrentreceivable                                                                                  |  |                                      | 2,065,000    |                                       |  |   | —     |    |
| Deferredcosts and intangibles,net                                                                       |  |                                      | 121,000      |                                       |  |   | —     |    |
| Totalreclassification to Assets held forsale                                                            |  | $                                         | 21,040,000   |                                       |  |   | —     |    |
| FASB141 purchase price allocation:                                                                      |  |                                      |         |                                       |  |   |        |    |
| Deferred costs andintangibles,net                                                                       |  | $                                         | 18,370,000   |                                       |  |   | —     |    |
| Otherassets                                                                                             |  |                                      | 1,288,000    |                                       |  |   | —     |    |
| Otherliabilities                                                                                        |  |                                      | (54,000      | )                                     |  |   | —     |    |
| Totalreclassification from Operating real estate,net                                                    |  | $                                         | 19,604,000   |                                       |  |   | —     |    |
|                                                                                                         |

|  |
|--|
|  |  |
|  |

|     |                                                                                   |
|-----|-----------------------------------------------------------------------------------|
| (1) | Includes$793.6 million of proceeds from sales of debt securities held fortrading. |

See accompanying notes to the condensedconsolidated and combined financialstatements.

5

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

1.    Formationand Organization

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

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

2.    Basis of Quarterly Presentation

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

6

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

Principles of Consolidation andCombination

The Company

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

The Predecessor

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

Reclassifications

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

Recent Accounting Pronouncement

InDecember 2004, the FASB issued SFAS No. 123, (revised 2004) Share-BasedPayment, or SFAS No. 123 (R), which supersedes APB opinion No. 25,Accounting for Stock Issued to Employees and its related implementationguidance. SFAS No. 123 (R) established standards for the accounting fortransactions in which an entity exchanges its equity instruments forgoods or services. It also addresses transactions in which an entityincurs liabilities in exchange for goods or services that are based onthe fair value of the entity's equity instruments or that may besettled by the issuance of those equity instruments. SFAS No. 123 (R)focuses primarily on accounting for transactions in which an entityobtains employee services in share-based payment transactions. SFAS No.123 (R) is effective for fiscal years beginning after June 15, 2005.The impact of adopting SFAS No. 123 (R) is not expected to have amaterial adverse impact on our financial condition or results ofoperations.

3.    Property

Acquisitions

Chatsworth, California

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

Salt LakeCity Property

On August 2, 2005, the Company closed a $22.0million acquisition of a 117,553 square foot office building in SaltLake City, Utah, (the "GSA property") whichis 100% leased to the General Services 

7

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

Administration("GSA") under a lease that expires in April2012. The property is financed with a 5.16% fixed rate, sevenyear non-recourse first mortgage loan of $17 million.

EDSPortfolio

On September 30, 2005, the Company acquired aportfolio of four office buildings with 387,842 square feet of rentablespace located in Rancho Cordova, California, Auburn Hills, Michigan andCamp Hill, Pennsylvania for $61.4 million. The four office propertiesare net leased to Electronic Data Systems Corp., (the "EDSPortfolio"), under leases expiring in 2015. The Companyfinanced the acquisition with a $49.1 million non-recourse mortgagewith a fixed rate of 5.37% which matures in 2015.

TheCompany has made a preliminary allocation of the purchase price toproperty components pending receipt of the final appraisals of theoffice properties.

Operating Real Estate Dispositions

729 Seventh Avenue

The Company sold its interest in a19,618 square foot retail condominium unit at 729 Seventh Avenue("729") in New York City for $29.0 million.The transaction closed on June 30, 2005. The gain on sale wasapproximately $8.6 million, net of minority interest, for the three andnine months ended September 30, 2005.

The proceeds of the salewere used to pay down approximately $25.1 million of an existingmortgage and the remaining balance was reinvested into a similarproperty acquisition to effectuate a Section 1031-tax free exchangeunder the Internal Revenue Code.

In connection with the sale,729 7th Realty Corp., an affiliate of the Riese Organization'sNational Restaurant Management Inc., agreed to discontinue the legalaction that it had brought against the Company, settling theCompany's only material pending legal action. See Note 13.

1552 Broadway

The Company formally initiated an effort tomarket one of its operating real estate properties located at 1552Broadway ("1552") and on July 28, 2005,obtained board of directors approval for the sale. The Company has metthe held for sale criteria in accordance with FASB Statement No. 144,"Accounting for Impairment or Disposal of Long-LivedAssets". The property was classified as held for sale inthe condensed consolidated balance sheets at September 30, 2005 and itsoperations classified as discontinued operations in the condensedconsolidated statements of operations for the three and nine monthsended September 30, 2005.

The following table summarizes incomefrom discontinued operations, net of minority interest and related gainon sale of discontinued operations, net of minority interest, for thethree and nine months ended September 30, 2005, for 729 and 1552 (inthousands):

8

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

|                                                             |  |                                |         |                               |  |        |        |         |  |  |
|-------------------------------------------------------------|--|--------------------------------|---------|-------------------------------|--|--------|--------|---------|--|--|
|                                                        |  | ThreeMonthsEnded September 30, |         | Nine MonthsEnded September30, |
|                                                        |  | 2005                           |         | 2005                          |
| Revenue:                                                    |  |                           |    |                          |  |   |   |    |
| Rentaland escalationincome                                  |  | $                              | 615     |                          |  | $      | 3,394  |    |
| Interestandother                                            |  |                           | 99      |                          |  |   | 275    |    |
| Totalrevenue                                                |  |                           | 714     |                          |  |   | 3,669  |    |
| OperatingExpenses:                                          |  |                           |    |                          |  |   |   |    |
| Real estateproperty operatingexpenses                       |  |                           | 235     |                          |  |   | 949    |    |
| General andadministrative                                   |  |                           | 6       |                          |  |   | 159    |    |
| Interestexpense                                             |  |                           | 337     |                          |  |   | 2,052  |    |
| Depreciationandamortization                                 |  |                           | — |                          |  |   | 316    |    |
| Totalexpenses                                               |  |                           | 578     |                          |  |   | 3,476  |    |
| Income fromdiscontinued operations                          |  |                           | 136     |                          |  |   | 193    |    |
| Gainon disposition of discontinuedoperations                |  |                           | — |                          |  |   | 10,871 |    |
| Incomefrom discontinued operations before minorityinterest  |  |                           | 136     |                          |  |   | 11,064 |    |
| Minorityinterest                                            |  |                           | (28     | )                        |  |   | (2,281 | )  |
| Incomefrom discontinued operations, net of minorityinterest |  | $                              | 108     |                          |  | $      | 8,783  |    |
|                                                             |

729and 1552 were held as equity investments by our Predecessor;accordingly there are no corresponding discontinued operations in thecondensed combined statements of operations for the three and ninemonths ending September 30, 2004.

4.    Debt SecuritiesAvailable for Sale

The Company accounts for its investments inCDO I, CDO II, CDO III and CDO V (collectively "InvestmentGrade CDO Investments") as debt securities available forsale pursuant to Emerging Issues Task Force("EITF") 99-20, "Recognition ofInterest Income and Impairment on Purchased and Retained BeneficialInterests in Securitized Financial Assets." TheCompany's potential loss is limited to its investment grade CDOInvestments of approximately $107.0 million as of September 30, 2005.As of that date, the Company also has $72.9 million of commercialmortgage backed securities ("CMBS")investments which are recorded at fair market value, net of premium anddiscount. For the three and nine months ended September 30, 2005, theCompany recognized an unrealized gain of approximately $1.7 million and$5.4 million related to the change in fair value of these investments,respectively.

The Investment Grade CDO Investments are variableinterest entities; however, neither the Company nor the Predecessor arethe primary beneficiary under FASB Interpretation No 46R("FIN 46R"), "Consolidation ofVariable Interest Entities," and has not consolidatedthese variable interest entities.

9

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

CDO I

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

|                   |  |           |         |                       |  |                       |       |         |  |                |  |        |      |         |  |        |      |        |  |  |  |  |
|-------------------|--|-----------|---------|-----------------------|--|-----------------------|-------|---------|--|----------------|--|--------|------|---------|--|--------|------|--------|--|--|--|--|
|              |  |      |         |                  |  | WeightedAverage       |
|              |  | Principal |         | PercentageofPrincipal |  | Rating(S&P/Fitch) |       | Coupon  |  | Term(Years)    |
| CMBS              |  | $         | 223,046 |                  |  |                  | 63.4  | %  |  | BBB/BBB– |  |   | 6.59 | %  |  |   | 6.21 |   |
| UnsecuredREITDebt |  |      | 111,020 |                  |  |                  | 31.5  | %  |  | BBB–     |  |   | 7.46 | %  |  |   | 6.86 |   |
| RealEstateCDO     |  |      | 18,000  |                  |  |                  | 5.1   | %  |  | BBB/BBB– |  |   | 7.74 | %  |  |   | 7.26 |   |
| Total             |  | $         | 352,066 |                  |  |                  | 100.0 | %  |  | BBB/BBB– |  |   | 6.60 | %  |  |   | 6.47 |   |
|                   |

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

|        |  |                     |         |                     |  |                        |         |              |  |                    |         |                                |  |              |  |        |          |        |  |                    |  |  |  |  |  |  |
|--------|--|---------------------|---------|---------------------|--|------------------------|---------|--------------|--|--------------------|---------|--------------------------------|--|--------------|--|--------|----------|--------|--|--------------------|--|--|--|--|--|--|
| Class  |  | OriginalNoteBalance |         | PrincipalRepayments |  | NoteBalance At 9/30/05 |         | InterestRate |  | StatedMaturityDate |         | Ratings(Moody's/S&P/Fitch) |
| A-1    |  | $                   | 250,000 |                |  | $                      | (46,224 | )       |  | $                  | 203,776 |                           |  | LIBOR+0.42%  |  |   | 8/1/2038 |   |  | Aaa/AAA/AAA        |
| A-2A   |  |                | 45,000  |                |  |                   | — |         |  |               | 45,000  |                           |  | LIBOR+0.95%  |  |   | 8/1/2038 |   |  | Aa2/AAA/AAA        |
| A-2B   |  |                | 15,000  |                |  |                   | — |         |  |               | 15,000  |                           |  | 5.68%        |  |   | 8/1/2038 |   |  | Aa2/AAA/AAA        |
| B-1    |  |                | 15,000  |                |  |                   | — |         |  |               | 15,000  |                           |  | LIBOR+1.675% |  |   | 8/1/2038 |   |  | NR/A+/A+           |
| B-2    |  |                | 10,000  |                |  |                   | — |         |  |               | 10,000  |                           |  | LIBOR+1.80%  |  |   | 8/1/2038 |   |  | A3/A/A             |
| C-1A   |  |                | 5,000   |                |  |                   | — |         |  |               | 5,000   |                           |  | LIBOR+3.00%  |  |   | 8/1/2038 |   |  | Baa3/A–/BBB+ |
| C-1B   |  |                | 5,000   |                |  |                   | — |         |  |               | 5,000   |                           |  | 7.70%        |  |   | 8/1/2038 |   |  | Baa3/A–/BBB+ |
| C-2    |  |                | 24,000  |                |  |                   | — |         |  |               | 24,000  |                           |  | 7.01%        |  |   | 8/1/2038 |   |  | NR/BBB/BBB         |
| D-1A   |  |                | 10,000  |                |  |                   | — |         |  |               | 10,000  |                           |  | LIBOR+2.30%  |  |   | 8/1/2038 |   |  | NR/BB+/BB+         |
| D-1B   |  |                | 4,000   |                |  |                   | — |         |  |               | 4,000   |                           |  | 7.01%        |  |   | 8/1/2038 |   |  | NR/BB+/BB+         |
|   |  | $                   | 383,000 |                |  | $                      | (46,224 | )       |  | $                  | 336,776 |                           |  |         |  |   |     |   |  |               |
|        |

Theweighted average interest rate for the CDO I bonds payable was6.05% at September 30, 2005, including the effect of theinterest rate swap held by the CDO.

CDO II

Thefollowing is a summary of the real estate securities, which were heldby CDO II at September 30, 2005 (inthousands):

|                   |  |           |         |                       |  |                        |        |         |  |                |  |        |      |         |  |        |      |        |  |  |  |  |
|-------------------|--|-----------|---------|-----------------------|--|------------------------|--------|---------|--|----------------|--|--------|------|---------|--|--------|------|--------|--|--|--|--|
|              |  |      |         |                  |  | WeightedAverage        |
|              |  | Principal |         | PercentageofPrincipal |  | Ratings(S&P/Fitch) |        | Coupon  |  | Term(Years)    |
| CMBS              |  | $         | 280,578 |                  |  |                   | 71.31  | %  |  | BBB            |  |   | 6.49 | %  |  |   | 7.02 |   |
| UnsecuredREITDebt |  |      | 92,615  |                  |  |                   | 23.53  | %  |  | BBB–     |  |   | 5.29 | %  |  |   | 7.71 |   |
| RealEstateCDO     |  |      | 20,292  |                  |  |                   | 5.16   | %  |  | BBB–     |  |   | 6.73 | %  |  |   | 8.56 |   |
| Total             |  | $         | 393,485 |                  |  |                   | 100.00 | %  |  | BBB/BBB– |  |   | 6.22 | %  |  |   | 7.26 |   |
|                   |

10

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

The following table lists the CDO bondspayable to third parties for CDO II at September 30, 2005 (inthousands):

|        |  |                     |         |                    |  |                      |         |              |  |                    |         |                                |  |             |  |        |          |        |  |                    |  |  |  |  |  |  |
|--------|--|---------------------|---------|--------------------|--|----------------------|---------|--------------|--|--------------------|---------|--------------------------------|--|-------------|--|--------|----------|--------|--|--------------------|--|--|--|--|--|--|
| Class  |  | OriginalNoteBalance |         | PrincipalRepayment |  | NoteBalanceAt9/30/05 |         | InterestRate |  | StatedMaturityDate |         | Ratings(Moody's/S&P/Fitch) |
| A-1    |  | $                   | 236,000 |               |  | $                    | (7,917  | )       |  | $                  | 228,083 |                           |  | LIBOR+0.35% |  |   | 6/1/2039 |   |  | Aaa/AAA/AAA        |
| A-2A   |  |                | 42,000  |               |  |                 | — |         |  |               | 42,000  |                           |  | LIBOR+0.55% |  |   | 6/1/2039 |   |  | NR/AAA/AAA         |
| A-2B   |  |                | 15,000  |               |  |                 | — |         |  |               | 15,000  |                           |  | 5.55%       |  |   | 6/1/2039 |   |  | NR/AAA/AAA         |
| B-1    |  |                | 12,000  |               |  |                 | — |         |  |               | 12,000  |                           |  | LIBOR+0.8%  |  |   | 6/1/2039 |   |  | A2/A/A+            |
| B-2    |  |                | 14,000  |               |  |                 | — |         |  |               | 14,000  |                           |  | LIBOR+1.05% |  |   | 6/1/2039 |   |  | A3/A–/A      |
| C-1    |  |                | 24,000  |               |  |                 | — |         |  |               | 24,000  |                           |  | LIBOR+2.00% |  |   | 6/1/2039 |   |  | Baa3/BBB+/A– |
| C-2a   |  |                | 6,000   |               |  |                 | — |         |  |               | 6,000   |                           |  | LIBOR+2.35% |  |   | 6/1/2039 |   |  | NR/BBB/BBB+        |
| C-2b   |  |                | 16,000  |               |  |                 | — |         |  |               | 16,000  |                           |  | 6.591%      |  |   | 6/1/2039 |   |  | NR/BBB/BBB+        |
|   |  | $                   | 365,000 |               |  | $                    | (7,917  | )       |  | $                  | 357,083 |                           |  |        |  |   |     |   |  |               |
|        |

Theweighted average interest rate for the CDO II bonds payable was5.49% at September 30, 2005, including the effect of theinterest rate swap held by the CDO.

CDO III

In March2005, the Company closed its third CDO issuance ("CDOIII") and acquired all of the unrated income notes of CDOIII for $17.5 million with a face amount of $23 million and alsopurchased the BB-rated Class D Notes, with a face amount of $16.0million, for $14.1 million.

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

|                           |  |           |         |                       |  |                        |       |         |  |                |  |        |      |         |  |        |      |        |  |  |  |  |
|---------------------------|--|-----------|---------|-----------------------|--|------------------------|-------|---------|--|----------------|--|--------|------|---------|--|--------|------|--------|--|--|--|--|
|                      |  |      |         |                  |  | WeightedAverage        |
|                      |  | Principal |         | PercentageofPrincipal |  | Ratings(S&P/Fitch) |       | Coupon  |  | Term(Years)    |
| CMBS                      |  | $         | 284,083 |                  |  |                   | 70.7  | %  |  | BBB–/BB+ |  |   | 6.21 | %  |  |   | 6.26 |   |
| UnsecuredREITDebt         |  |      | 61,580  |                  |  |                   | 15.3  | %  |  | BBB–     |  |   | 5.81 | %  |  |   | 8.30 |   |
| OtherReal EstateInterests |  |      | 28,536  |                  |  |                   | 7.1   | %  |  | A–       |  |   | 6.80 | %  |  |   | 7.58 |   |
| RealEstateCDO             |  |      | 27,730  |                  |  |                   | 6.9   | %  |  | BBB            |  |   | 6.30 | %  |  |   | 7.34 |   |
| Total                     |  | $         | 401,929 |                  |  |                   | 100.0 | %  |  | BBB–     |  |   | 6.20 | %  |  |   | 6.74 |   |
|                           |

11

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

The following table lists the CDO bondspayable to third parties for CDO III at September 30, 2005 (inthousands):

|        |  |                     |         |                     |  |                      |         |              |  |                    |         |                        |  |             |  |        |          |        |  |                   |  |  |  |  |  |  |
|--------|--|---------------------|---------|---------------------|--|----------------------|---------|--------------|--|--------------------|---------|------------------------|--|-------------|--|--------|----------|--------|--|-------------------|--|--|--|--|--|--|
| Class  |  | OriginalNoteBalance |         | PrincipalRepayments |  | NoteBalanceAt9/30/05 |         | InterestRate |  | StatedMaturityDate |         | Ratings(S&P/Fitch) |
| A-1    |  | $                   | 294,000 |                |  | $                    | — |         |  | $                  | 294,000 |                   |  | LIBOR+0.28% |  |   | 6/1/2040 |   |  | AAA/AAA           |
| A-2A   |  |                | 15,000  |                |  |                 | — |         |  |               | 15,000  |                   |  | LIBOR+0.50% |  |   | 6/1/2040 |   |  | AA/AA             |
| A-2B   |  |                | 5,000   |                |  |                 | — |         |  |               | 5,000   |                   |  | 5.042%      |  |   | 6/1/2040 |   |  | AA/AA             |
| B      |  |                | 17,000  |                |  |                 | — |         |  |               | 17,000  |                   |  | LIBOR+0.85% |  |   | 6/1/2040 |   |  | A–/A– |
| C-1a   |  |                | 10,000  |                |  |                 | — |         |  |               | 10,000  |                   |  | LIBOR+1.25% |  |   | 6/1/2040 |   |  | BBB+/BBB+         |
| C-1b   |  |                | 6,000   |                |  |                 | — |         |  |               | 6,000   |                   |  | 5.804%      |  |   | 6/1/2040 |   |  | BBB+/BBB+         |
| C-2a   |  |                | 12,000  |                |  |                 | — |         |  |               | 12,000  |                   |  | LIBOR+1.55% |  |   | 6/1/2040 |   |  | BBB/BBB           |
| C-2b   |  |                | 2,000   |                |  |                 | — |         |  |               | 2,000   |                   |  | 6.135%      |  |   | 6/1/2040 |   |  | BBB/BBB           |
|   |  | $                   | 361,000 |                |  | $                    | — |         |  | $                  | 361,000 |                   |  |        |  |   |     |   |  |              |
|        |

Theweighted average interest rate for the CDO III bonds payable was5.40% at September 30, 2005, including the effect of theinterest rate swap held by the CDO.

CDO V

In September2005, the Company closed its fourth investment grade CDO issuance("CDO V"). CDO V issued $500 million of bondswhich were collateralized by a portfolio of real estate securities ofapproximately $500 million. Upon the closing of CDO V, the Companypurchased the BB rated Class F Notes, with a face amount ofapproximately $12.8 million, at par, the BBB- rated Class E Notes, witha face amount of $5.0 million at par, and the unrated Income Notes,with a face amount of $20.8 million for $25.5 million.

TheCompany has recorded a realized and unrealized gain of $0.6 million and$0.5 million, respectively, for the three and nine months endedSeptember 30, 2005 related to the change in fair value of the warehouseagreement for CDO V. The realized gain represents the net interestearned during the warehouse period on the securities that wereaccumulated and the unrealized gain represents the change in the fairvalue of the accumulated securities during the warehouse period.

In addition, the Company has recorded a realized gain of $0.8million for the three and nine months ended September 30, 2005 on thesale of a portion of the Class D BB rated securities of CDO II held bythe Company to CDO V.

The following is a summary of the realestate securities, which were held by CDO V at September 30, 2005 (inthousands):

|                           |  |           |         |                       |  |                        |        |         |  |             |  |        |      |         |  |        |      |        |  |  |  |  |
|---------------------------|--|-----------|---------|-----------------------|--|------------------------|--------|---------|--|-------------|--|--------|------|---------|--|--------|------|--------|--|--|--|--|
|                      |  |      |         |                  |  | WeightedAverage        |
|                      |  | Principal |         | PercentageofPrincipal |  | Ratings(S&P/Fitch) |        | Coupon  |  | Term(Years) |
| CMBS                      |  | $         | 320,023 |                  |  |                   | 65.19  | %  |  | BBB         |  |   | 5.75 | %  |  |   | 8.87 |   |
| UnsecuredREITDebt         |  |      | 112,256 |                  |  |                   | 22.86  | %  |  | BBB         |  |   | 6.01 | %  |  |   | 9.90 |   |
| OtherReal EstateInterests |  |      | 33,700  |                  |  |                   | 6.86   | %  |  | AAA         |  |   | 5.33 | %  |  |   | 0.25 |   |
| RealEstateCDO             |  |      | 25,000  |                  |  |                   | 5.09   | %  |  | BBB–  |  |   | 6.75 | %  |  |   | 9.01 |   |
| Total                     |  | $         | 490,979 |                  |  |                   | 100.00 | %  |  | BBB         |  |   | 5.84 | %  |  |   | 8.52 |   |
|                           |

12

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

The following table lists the CDO bondspayable to third parties for CDO V at September 30, 2005 (inthousands):

|        |  |                     |         |                     |  |                      |         |              |  |                    |         |                        |  |              |  |        |          |        |  |         |  |  |  |  |  |  |
|--------|--|---------------------|---------|---------------------|--|----------------------|---------|--------------|--|--------------------|---------|------------------------|--|--------------|--|--------|----------|--------|--|---------|--|--|--|--|--|--|
| Class  |  | OriginalNoteBalance |         | PrincipalRepayments |  | NoteBalanceAt9/30/05 |         | InterestRate |  | StatedMaturityDate |         | Ratings(S&P/Fitch) |
| A-1    |  | $                   | 339,735 |                |  | $                    | — |         |  | $                  | 339,735 |                   |  | LIBOR+0.265% |  |   | 3/1/2014 |   |  | AAA/AAA |
| A-2    |  |                | 47,000  |                |  |                 | — |         |  |               | 47,000  |                   |  | LIBOR+0.350% |  |   | 7/1/2015 |   |  | AAA/AAA |
| B      |  |                | 41,400  |                |  |                 | — |         |  |               | 41,400  |                   |  | LIBOR+0.450% |  |   | 5/1/2016 |   |  | AA/AA   |
| C      |  |                | 18,125  |                |  |                 | — |         |  |               | 18,125  |                   |  | 5.311%       |  |   | 1/1/2017 |   |  | A/A     |
| D      |  |                | 15,240  |                |  |                 | — |         |  |               | 15,240  |                   |  | 6.205%       |  |   | 8/1/2017 |   |  | BBB/BBB |
|   |  | $                   | 461,500 |                |  | $                    | — |         |  | $                  | 461,500 |                   |  |         |  |   |     |   |  |    |
|        |

Theweighted average interest rate for the CDO V bonds payable was2.89% at September 30, 2005, including the effect of theinterest rate swap held by the CDO.

5.    CDO Deposit andWarehouse Agreements

Warehouse Agreement for CDO VII

On September 27, 2005, the Company entered into a warehousearrangement with a major commercial bank whereby the bank has agreed topurchase up to $400 million of CMBS and other real estate debtsecurities under the Company's direction, with the expectation ofselling such securities to the Company's fifth investment gradeCDO issuance ("CDO VII"). As of September 30,2005, the Company has deposited $2.5 million as security for thepurpose of covering a portion of any losses or costs associated withthe accumulation of these securities under the warehouse agreement andwill be required to deposit additional equity based on accumulations ofsecurities that will be made under the warehouse agreement. The bankhad accumulated no real estate securities under the terms of thewarehouse agreement as of September 30, 2005. The CDO VII warehouseagreement also provides for the Company's notional participationin the income that the assets generate after deducting a notional debtcost. The agreement is being treated as a non-hedge derivative foraccounting purposes and is marked-to-market through income. The Companyrecorded no gain or loss for the three and nine months ended September30, 2005 related to the change in fair value of the warehouseagreement.

6.    Debt Securities Held for Trading

Asof September 30, 2005, the Company's debt securities held fortrading had a market value of $33.0 million and the remainingobligations under the related repurchase agreements amounted to $31.3million. The Company portfolio consists of three issuers whichrepresent 54%, 24%, and 22%, respectively, of thetotal market value of the debt securities held for trading at September30, 2005. The Company recorded an unrealized gain of $13,000 and anunrealized loss of $89,000 related to the change in fair value of thesesecurities and a realized gain of $33,000 and a realized loss $157,000related to the sales of debt securities for the three and nine monthsended September 30, 2005, respectively.

13

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

7.     Real Estate DebtInvestments

At September 30, 2005 the Company held thefollowing real estate debtinvestments:

|                                             |  |                                 |         |                              |  |                          |       |         |  |        |      |         |  |  |
|---------------------------------------------|--|---------------------------------|---------|------------------------------|--|--------------------------|-------|---------|--|--------|------|---------|--|--|
|                                        |  | CarryingValue(1) (in thousands) |         | Allocation byInvestment Type |  | Average Spread OverLIBOR |
| Whole loans, floatingrate                   |  | $                               | 88,670  |                         |  |                     | 16.9  | %  |  |   | 2.77 | %  |
| Subordinatemortgage interests, floatingrate |  |                            | 273,899 |                         |  |                     | 52.2  | %  |  |   | 4.65 | %  |
| Mezzanineloans, floatingrate                |  |                            | 162,147 |                         |  |                     | 30.9  | %  |  |   | 4.69 | %  |
| Total/Average                               |  | $                               | 524,716 |                         |  |                     | 100.0 | %  |  |   | 4.34 | %  |
|                                             |

|     |                                                                                                                                                                                                                    |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | AtSeptember 30, 2005, approximately $327 million of these investmentsserve as collateral for the CDO bonds of CDO IV and the balance arefinanced under either the Wachovia Facility or other repurchaseagreements. |

As of September 30, 2005, all real estate debtinvestments were performing in accordance with the terms of theunderlying loan agreements.

8.    Borrowings

Thefollowing is a table of the Company's outstanding borrowings asof September 30, 2005 and December 31,2004:

|                                                                   |  |                                 |  |                                  |  |                               |         |                                |  |        |         |        |  |  |  |  |  |  |
|-------------------------------------------------------------------|--|---------------------------------|--|----------------------------------|--|-------------------------------|---------|--------------------------------|--|--------|---------|--------|--|--|--|--|--|--|
|                                                              |  | StatedMaturity                  |  | Interest Rate                    |  | Balance 9/30/05 (inthousands) |         | Balance 12/31/04 (inthousands) |
| Mortgagenotes payable(non-recourse)                               |  |                            |  |                             |  |                          |    |                           |  |   |    |   |
| ALGM(1)                                                           |  | 1/01/2006                       |  | Thegreater of LIBOR or 2% +3.60% |  | $                             | 14,464  |                           |  | $      | 40,557  |   |
| Chatsworth                                                        |  | 5/1/2015                        |  | 5.65%                            |  |                          | 43,844  |                           |  |   | — |   |
| GSA                                                               |  | 9/1/2012                        |  | 5.16%                            |  |                          | 16,972  |                           |  |   | — |   |
| EDS                                                               |  | 10/8/2015                       |  | 5.37%                            |  |                          | 49,120  |                           |  |   | — |   |
| Mezzanineloan payable (Chatsworth)(non-recourse)                  |  | 5/1/2014                        |  | 6.64%                            |  |                          | 13,000  |                           |  |   | — |   |
| Repurchaseobligations                                             |  | See Repurchase Obligationsbelow |  | LIBOR + 0.05% to0.07%            |  |                          | 58,302  |                           |  |   | 800,418 |   |
| DBAGfacility                                                      |  | 12/21/2007                      |  | LIBOR + 0.75% to2.25%            |  |                          | — |                           |  |   | 27,821  |   |
| Wachoviacredit facility                                           |  | 7/12/2008                       |  | LIBOR + 0.20% to3.00%            |  |                          | 192,804 |                           |  |   | — |   |
| Bank ofAmerica credit facility                                    |  | 9/27/2006                       |  | LIBOR +3.25%                     |  |                          | 12,000  |                           |  |   | — |   |
| CDObonds payable – CDO IV                                   |  | 7/1/2040                        |  | LIBOR +0.62% (averagespread)     |  |                          | 300,000 |                           |  |   | — |   |
| Liabilityto subsidiary trusts issuing preferred securities TrustI |  | 3/30/2035                       |  | 8.15%                            |  |                          | 41,240  |                           |  |   | — |   |
| TrustII                                                           |  | 6/30/2035                       |  | 7.74%                            |  |                          | 25,780  |                           |  |   | — |   |
|                                                              |  |                            |  |                             |  | $                             | 767,526 |                           |  | $      | 868,796 |   |
|                                                                   |

|     |                                                                             |
|-----|-----------------------------------------------------------------------------|
| (1) | Relatedto assets held for sale on the condensed consolidated balancesheets. |

14

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

Mortgage Notes Payable

Chatsworth Mortgage

In connection with the acquisition ofthe Chatsworth Properties, a subsidiary of the Company entered into aloan agreement (the "Chatsworth Mortgage")with German American Capital Corporation for a non-recourse mortgage inthe principal amount of $44.0 million (the"Loan"). The Loan is secured by firstmortgage liens and security interests on the Chatsworth Properties,including two fee owned properties and the leasehold interest in theother property, including assignments of leases and rents.

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

The Company and its subsidiarieshave agreed to comply with environmental laws and have indemnified theLender against all liabilities and expenses related thereto.

GSA Mortgage

In connection with the acquisition of the GSAproperty, a subsidiary of the Company entered into a loan agreement(the "GSA Mortgage") with CBIC, Inc. for anon-recourse mortgage in the principal amount of $17.0 million. The GSAMortgage matures on September 1, 2012 and bears interest at a fixedrate of 5.16%. The loan requires monthly payments of $100,971representing interest in arrears and principal sufficient to amortizethe loan to a balance of approximately $14.3 million at maturity, aswell as monthly escrow deposits for real estate taxes.

EDSMortgage

In connection with the acquisition of the EDSportfolio, a subsidiary of the Company entered into a loan agreementwith Countrywide Commercial Real Esate Finance, Inc. for a non-recoursemortgage in the principal amount of $49.1 million. The mortgage matureson October 8, 2015 and bears interest at a fixed rate of 5.37%.The loan requires monthly payments of $274,997 representing interest inarrears and principal sufficient to amortize the loan to a balance ofapproximately $41.91 million at maturity, as well as monthly escrowdeposits for real estate taxes.

Mezzanine Loan Payable

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

15

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

CDO Bonds Payable

In June 2005,the Company closed its fourth CDO issuance ("CDOIV") and the Company acquired all of the below investmentgrade securities and income notes. The CDO IV issuer issued $300million face amount of the CDO bonds and sold them in a privateplacement to third parties. The proceeds of the CDO issuance were usedto repay the entire outstanding principal balance of the DBAG Facility(as defined below) of $233.6 million at closing. The CDO bonds arecollateralized by $327 million of real estate debt investments,consisting of junior participations, mezzanine loans and whole loans,$60.2 million of CMBS and CDO bonds. Approximately $6.3 million of cashis available to complete the ramp-up of CDO IV, which is included inthe condensed consolidated balance sheet in restricted cash atSeptember 30, 2005. For accounting purposes, CDO IV is consolidated inthe Company's condensed consolidated financial statements.

Repurchase Obligations

The Company has $58.3 million ofrepurchase agreements with three counterparties. These repurchaseagreements are used to finance the Company's AAA-rated, shortterm, floating rate securities, backed by commercial or residentialmortgage loans, and other investments, generally prior to obtainingpermanent financing. These repurchase obligations mature in less thanthirty days, with interest rates of LIBOR plus 0.05% to0.07%. These repurchase agreements are being accounted for assecured borrowings since the Company maintains effective control of thefinanced assets.

Wachovia Credit Facility

On July 13,2005, a subsidiary of the Company, entered into a master repurchaseagreement with Wachovia Bank, National Association (the"Wachovia Facility"). The Wachovia Facilitywas amended in September 2005 and currently the Company may borrow upto $350 million under this credit facility in order to finance theacquisition of primarily real estate debt and other real estate loansand securities. The additional capacity and flexibility under theamendment will allow the Company to accumulate sufficient collateralfor a contemplated subordinate debt CDO ("CDOVI") and to continue to finance other investments.

Advance rates under the Wachovia Facility range from 55% to95% (subject to increase under certain circumstances) of thevalue of the assets for which the advance is made. Amounts borrowedunder the Wachovia Facility bear interest at one-month LIBOR plus aspread which ranges from 0.20% to 3.00%, depending on thetype of asset for which the amount is borrowed. The Wachovia Facilityhas an initial term of three years, except that certain advances underthe Wachovia Facility are required to be repaid by February 24, 2006.If a securitization transaction is not consummated by March 30, 2006,advances under the facility in excess of $150 million will be subjectto a 0.48% commitment fee and a 0.25% unused facilityfee. The Wachovia Facility has an initial maturity date of July 12,2008 and, in addition, the Company must pay an unused facility feeequal to 0.25% of the unused portion of the Wachovia Facility upto $150 million (subject to the preceding sentence), commencing 120days after July 13, 2005, payable quarterly in arrears. The Company mayextend the term of the Wachovia Facility for one year if it is not indefault and must pay an extension fee of 0.25% of the aggregateamount then outstanding under the facility. If the Company extends thefacility's term, it will be required to retire 25% of theaggregate amount then outstanding under the facility during eachquarter of the remaining year of the term. The Company paid Wachovia a$750,000 structuring fee in connection with the execution of theWachovia Facility.

The debt outstanding under the WachoviaFacility is subject to a number of terms, conditions and restrictionsincluding, without limitation, scheduled interest payments and themaintenance of certain margin percentages on amounts outstanding underthe facility. If the market value of an asset securing 

16

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

outstanding debt declines, the Company maybe required to satisfy a margin call by paying cash or providingadditional collateral. Failure to meet any margin call could result inan event of default which would enable Wachovia to exercise variousrights and remedies including acceleration of the maturity date of thedebt outstanding under the facility and the sale of the collateral.

Bank of America Facility

On September 28, 2005, the Companyentered into a master loan, guarantee and security agreement with Bankof America, N.A., the Operating Partnership and NS Advisors LLC (the"BOA Master Loan Agreement"). The BOA MasterLoan Agreement provides for an unsecured, $50 million revolving creditfacility. The term of the unsecured facility is one year, with up totwo one-year extensions at the discretion of Bank of America. If theunsecured facilty is not extended by Bank of America, the Company hasthe option in lieu of immediate repayment to amortize the outstandingprincipal balance of the unsecured facility in equal quarterlyinstallments over twelve months, upon payment of a quarterly 12.5 basispoint fee on the outstanding balance under the unsecured facility atSeptember 27, 2006 and each quarter thereafter. The interest rate onthe unsecured facility is LIBOR, plus 325 basis points. In connectionwith the facility the Company paid a origination fee of 0.50%and, in addition, must pay an unused facility fee equal to 0.50%of the unused portion of the facility.

The BOA Master LoanAgreement contains certain covenants, including, among other things,financial covenants requiring minimum cash liquidity, minimum tangiblenet worth, maximum debt to tangible net worth and minimum debt servicecoverage. The BOA Master Loan Agreement also contains certain customaryrepresentations and warranties and events of default. The obligationsof the Operating Partnership, which is the borrower under the unsecuredfacility, are guaranteed by the Company, NS Advisors LLC and anysubsidiary of the Operating Partnership whose assets are included inthe borrowing base for the unsecured facility. As of September 30,2005, the Company has drawn $12 million of borrowings under theunsecured facility.

DBAG Credit Facility

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

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

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

17

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

Advances under the DBAG Facility fromDecember 31, 2004 through March 20, 2005 bore interest at one-monthLIBOR, which is reset monthly, plus a spread ranging from 0.75%to 2.25%. During the period from March 21, 2005 until the closeof CDO IV (the "CDO Ramp-Up Period"), amountsadvanced under the DBAG Facility in order to finance the acquisition ofassets to be included in CDO IV bore interest at one-month LIBOR plus aspread of 1.00% and amounts advanced for all other assets boreinterest at one-month LIBOR plus a spread which ranges from0.75% to 2.25%. After the CDO Ramp-Up Period, all amountsadvanced under the amended DBAG Facility bear interest at a rate ofone-month LIBOR plus the spread which ranges from 0.75% to2.25%.

During the CDO Ramp-Up Period and thereafter,assets were financed at advance rates ranging from 40% to92.5% of the value of the assets as applicable to the assetcategory.

Effective April 1, 2005, the covenants under the DBAGFacility require the Company to remain at a certain minimum tangiblenet worth, a certain minimum debt service coverage ratio, a certainrange of ratios of recourse indebtedness to net worth and certainminimum amounts of cash or marketable securities based on our ratio ofrecourse indebtedness to net worth.

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

Prior to September 14, 2005, the Company hadfinanced the acquisition of securities for CDO IV through borrowingsunder the DBAG Facility. The Company used a portion of the proceedsfrom the sale of the transferred assets to repay approximately $234million of the amount outstanding under the DBAG Facility. As ofSeptember 30, 2005 there are no outstanding borrowings under the DBAGfacility.

Liability to Subsidiary Trusts Issuing PreferredSecurities

On April 12, 2005 and May 25, 2005, NorthStar RealtyFinance Trust and NorthStar Realty Finance Trust II, (the"Trusts") sold, in two private placements,trust preferred securities for an aggregate amount of $40 million and$25 million, respectively. The Company owns all of the common stock ofthe Trusts. The Trusts used the proceeds to purchase theCompany's junior subordinated notes which mature on March 30,2035 and September 30, 2035, respectively. These notes represent all ofthe Trusts' assets. The terms of the junior subordinated notesare substantially the same as the terms of the trust preferredsecurities. The trust preferred securities have a fixed interest rateof 8.15% and 7.74% per annum, respectively, during thefirst ten years, after which the interest rate will float and resetquarterly at the three-month LIBOR rate plus 3.25% perannum.

Under the provisions FIN 46R, the Company determined thatthe holders of the trust preferred securities were the primarybeneficiaries of the Trusts. As a result, the Company did notconsolidate the Trusts and has reflected the obligation to the Trustsunder the caption "Liability to subsidiary trusts issuingpreferred securities" in the condensed consolidatedbalance sheet and will account for the investment in the common stockof the Trusts, which is reflected in Investments in and advances tounconsolidated ventures in the condensed consolidated balance sheet,under the equity method of accounting.

18

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

The Company may redeem the notes, inwhole or in part, for cash, at par, after March 30, 2010 and September30, 2010, respectively. To the extent the Company redeems notes, theTrusts are required to redeem a corresponding amount of trust preferredsecurities. On September 16, 2005, the Company amended the trustagreements and indentures to modify some of the payment dates for aportion of the junior subordinated notes and trust preferredsecurities.

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

The indenture for NorthStar Realty Finance Trust II has certaincovenants that are substantially similar to those under the DBAGFacility, Wachovia Facility and the unsecured facility with Bank ofAmerica and certain restrictions on issuing any additional trustpreferred securities and other subordinate unsecured debt.

Scheduled principal payment requirements on the Company'sborrowings are as follows as of September 30, 2005 (inthousands):

|            |  |        |         |                             |  |                   |         |                                                           |  |                       |         |                     |  |        |         |        |  |        |         |        |  |        |         |        |  |  |
|------------|--|--------|---------|-----------------------------|--|-------------------|---------|-----------------------------------------------------------|--|-----------------------|---------|---------------------|--|--------|---------|--------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|       |  | Total  |         | Mortgage andMezzanine Loans |  | Credit Facilities |         | Liability toSubsidiary Trusts Issuing PreferredSecurities |  | RepurchaseObligations |         | CDO BondsPayable(2) |
| 2005       |  | $      | 58,559  |                        |  | $                 | 257     |                                                      |  | $                     | — |                |  | $      | — |   |  | $      | 58,302  |   |  | $      | — |   |
| 2006       |  |   | 19,050  |                        |  |              | 16,050  |                                                      |  |                  | 3,000   | (1)            |  |   | — |   |  |   | — |   |  |   | — |   |
| 2007       |  |   | 11,580  |                        |  |              | 2,580   |                                                      |  |                  | 9,000   | (1)            |  |   | — |   |  |   | — |   |  |   | — |   |
| 2008       |  |   | 195,526 |                        |  |              | 2,722   |                                                      |  |                  | 192,804 |                |  |   | — |   |  |   | — |   |  |   | — |   |
| 2009       |  |   | 2,910   |                        |  |              | 2,910   |                                                      |  |                  | — |                |  |   | — |   |  |   | — |   |  |   | — |   |
| Thereafter |  |   | 479,901 |                        |  |              | 112,881 |                                                      |  |                  | — |                |  |   | 67,020  |   |  |   | — |   |  |   | 300,000 |   |
| Total      |  | $      | 767,526 |                        |  | $                 | 137,400 |                                                      |  | $                     | 204,804 |                |  | $      | 67,020  |   |  | $      | 58,302  |   |  | $      | 300,000 |   |
|            |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                                                        |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Assumesthe unsecured facility with Bank of America is not extended and assumesthe payment of a quarterly 12.5 basis point fee on the outstandingbalance under the unsecured facility at September 27, 2006 and eachquarter thereafter. |

|     |                                                                                         |
|-----|-----------------------------------------------------------------------------------------|
| (2) | Based onscheduled repayment date of related CDO collateral, stated maturity is7/1/2040. |

At September 30, 2005, the Company was incompliance with all covenants under its Borrowings.

9.    Related Party Transactions

Shared Facilities andServices Agreement

Total fees and expenses incurred by theCompany under the shared facilities and services agreement amounted to$0.3 million and $1.0 million for the three and nine months endedSeptember 30, 2005. No amounts were payable to NCIC at September 30,2005.

19

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

Advisory and Management Fee Income

NS Advisors LLC

CDO I, CDO II, CDO III and CDO V enteredinto agreements with the Predecessor and the Company, through NSAdvisors LLC, a subsidiary, to perform certain advisory services.

The Company earned total fees of approximately $1,054,000 and$2,825,000 for the three and nine months ended September 30, 2005. ThePredecessor earned total fees of $701,000 and $1,390,000 for the threeand nine months ended September 30, 2004. Unpaid advisory fees of$223,000 and $82,000 are included in due from affiliates in theCompany's condensed consolidated balance sheets as of September30, 2005 and December 31, 2004, respectively.

The Company alsoearned a structuring fee of $500,000 in connection with the closing ofCDO III in March 2005, which was used to reduce its investment in CDOIII which is included in debt securities available for sale in thecondensed consolidated balance sheet.

NSF venture

TheCompany earned and recognized advisory fees of approximately $108,000and $408,000 for the three and nine months ended September 30, 2005.The Predecessor earned and recognized $251,000 and $744,000 for thethree and nine months ended September 30, 2004.

ManagementFees

On December 28, 2004, ALGM terminated its existing assetmanagement agreement with Emmes Asset Management Co. LLC("Emmes"), an affiliate of NCIC. Pursuant tothe termination provisions of the agreement, ALGM paid Emmes acontractual termination payment of approximately $385,000, which isequal to two quarters of payments of the annual existing fee. Inaddition, ALGM and Emmes entered into a new asset management agreement,which is cancelable on 30 days notice. The annual asset management feeunder the new agreement is equal to 3.5% of gross collectionsfrom tenants of the properties not to exceed $350,000 or be less than$300,000 per year, except that in the event the assets under managementare decreased the fee shall not have a minimum. Total fees incurredunder this agreement amounted to $64,000 and $239,000 for the three andnine months ended September 30, 2005, of which $40,000 and $172,000,respectively, was included in discontinued operations for the three andnine months ended September 30, 2005.

Legacy Fund

OnSeptember 1, 2005, the Company entered into a loan agreement, aslender, with a subsidiary of Legacy Partners Realty Fund I, LLC, (the"Legacy Fund"), as borrowers, in the originalprincipal amount of $66.6 million, secured by a first-priority mortgagelien on an office property located in San Jose, California. At theclosing of this loan the Company funded $60.9 million of the originalprincipal amount and has an additional $5.7 million of future fundingcommitments. Simultaneously with the closing of this loan, the Companyentered into a participation and servicing agreement with a majorfinancial institution pursuant to which the Company sold a 50%participation in this loan and the future funding commitments.

Additionally, on September 8, 2005, the Company entered into a loanagreement with another subsidiary of the Legacy Fund in the originalprincipal amount of $47.4 million, secured by a first-priority mortgagelien on an office property located in San Jose, California. The Companyfunded $32.6 million at closing and has an additional $14.8 million offuture funding commitments. 

20

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

Simultaneously with the closing of thisloan, the Company entered into a participation and servicing agreementwith a major financial institution pursuant to which the Company sold a50% participation in this loan and the future fundingcommitments.

One of the Company's directors, PrestonButcher, is the chairman of the board of directors and chief executiveofficer and owns a significant interest in Legacy Partners Commercial,LLC, which indirectly owns an equity interest in, and owns the managerof, the Legacy Fund. The disinterested members of the Company'sboard of directors have approved this transaction.

EDSPortfolio

In connection with the acquisition of the EDSPortfolio on September 30, 2005, Koll Development Company, an affiliateof NCIC, received a brokerage commission of $921,000. The acquisitionand the associated brokerage fees payable to Koll Development Companywere approved in advance by all the independent members of our board ofdirectors.

10.    Derivatives and Hedging Activities

To limit the exposure to the variable LIBOR interest rate, theCompany entered into various swap agreements to fix the LIBOR rate on aportion of the Company's variable rate debt. The fixed LIBOR rateranges from 4.18% to 5.03%. The following tablesummarizes the notional amounts and fair (carrying) values of theCompany's derivative financial instruments as of September 30,2005 (in thousands):

|                                           |  |                |        |            |  |                  |     |        |  |                             |  |  |  |  |
|-------------------------------------------|--|----------------|--------|------------|--|------------------|-----|--------|--|-----------------------------|--|--|--|--|
|                                      |  | NotionalAmount |        | Fair Value |  | Range ofMaturity |
| Interest rate swaps, treated as hedges(a) |  | $              | 39,912 |       |  | $                | 248 |   |  | December2010 - November2018 |
|                                           |

|  |
|--|
|  |  |
|  |

|     |                          |
|-----|--------------------------|
| (a) | Included inOther assets. |

11.    Stockholders' Equity

Common Stock

On June 24, 2005, the Company granted a totalof 15,194 shares to its Board of Directors as part of their annualgrants.

Dividends

On April 21, 2005, the Companydeclared a cash dividend of $0.15 per share of common stock. Thedividend was paid on May 16, 2005 to the shareholders of record as ofthe close of business on May 2, 2005.

On July 28, 2005, theCompany declared a cash dividend of $0.15 per share of common stock.The dividend was paid on August 15, 2005 to the shareholders of recordas of the close of business on August 8, 2005.

12.    Earnings Per Share

The Company's basicearnings per share ("EPS") is computed bydividing net income available to common shareholders by the weightedaverage number of common shares outstanding. For purposes ofcalculating earnings per share, the Company considered all unvestedrestricted stock which participate in the dividends of the Company tobe outstanding. The computation of diluted EPS 

21

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

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

13.    Contingency

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

In connection with thesale of 729, the Tenant agreed to discontinue the legal action that ithad brought against the Company, settling the Company's onlymaterial pending legal action, at no cost to the Company.

14.    Equity Based Compensation

Long Term IncentiveBonus Plan

The Company has granted certain restricted awards tocertain employees and co-employees of the Company and NCIC employeeswho provide services to the Company pursuant to a shared servicesagreement. These restricted awards are subject to both employment andthe Company attaining certain performance hurdles. At September 30,2005, management has made its best estimate of the Company'sperformance during the performance periods, based on the facts andinformation then available and assumptions regarding the returns on theCompany's investments at September 30, 2005. On the basis of theforegoing, management has estimated that the Company would not meet thereturn hurdle in either of these performance periods. If the Companydoes not meet the return hurdle during the performance periods, theCompany will not grant any awards under this program to members ofmanagement, other of its employees and the employees of NCIC whoprovide services to the Company. Accordingly, no compensation expense,with respect to provisional awards under the 2004 Long Term IncentiveBonus Plan, has been recognized in the condensed consolidated financialstatements for the three or nine months ended September 30, 2005.

Employee Outperformance Plan

In connection with theemployment agreement of the Company's chief investment officer,he is eligible to receive incentive compensation equal to 15% ofthe annual net profits from the Company's real estate securitiesbusiness in excess of a 12% return on invested capital (theannual bonus participation amount). The Company will have the option ofterminating this incentive compensation arrangement at any time afterthe third anniversary of the date of its IPO by paying theCompany's chief investment officer an amount based on a multipleof the estimated annual bonus participation amount, at the time itexercises this buyout option. If the Company exercises this buyoutoption, the fixed amount due for terminating this arrangement will vestratably and be paid in four installments over a three-year period with25% paid on termination. If the Company's chief investmentofficer voluntarily terminates his employment with the Company prior toany exercise of the Company's buyout option, he will be eligibleto receive a portion of the future annual payments otherwise payable tohim while employed based on a reverse vesting formula.  Theportion of the annual benefit 

22

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

to which the chief investment officer iseligible after voluntary termination ranges from 20% of what hewould otherwise receive for most recently created income streams to100% of eligible income streams that are five or more years old.Approximately $25,000 of compensation has been earned by theCompany's chief investment officer under this plan for the threeand nine months ended September 30, 2005.

Omnibus StockIncentive Plan

On January 30, 2005 and August 1, 2005, theOperating Partnership granted an aggregate of 22,500 and 10,250 LTIPunits, resepectively, which are operating partnership units that arestructured as profits interests, to certain employees of the Companypursuant to the 2004 Omnibus Stock Incentive Plan. The LTIP units vestto the individual recipient at a rate of one-twelfth of the totalamount granted as of the end of each quarter beginning with the quarterended April 29, 2005 and October 29, 2005, respectively. In addition,the LTIP unit holders are entitled to dividends on the entiregrant.

16.    Segment Reporting

The Predecessor andthe Company have three reportable segments: (i) real estate debt, (ii)real estate securities and (iii) Operating real estate investments. TheCompany evaluates performance primarily based on its proportionateshare of the earnings of such investments. General and administrativeexpenses were not allocated by management to various segments andtherefore are included in unallocated. The reportable segments aremanaged separately due to the differing nature of the businessoperations. The following tables set forth certain segment informationfor the Company on a consolidated basis and for the Predecessor on acombined basis, as of and for the three and nine months ended September30, 2005 and 2004 (in thousands):

|                                                              |  |                      |         |                 |  |                                      |        |                |  |                   |        |        |  |        |         |         |  |        |        |        |  |  |
|--------------------------------------------------------------|--|----------------------|---------|-----------------|--|--------------------------------------|--------|----------------|--|-------------------|--------|--------|--|--------|---------|---------|--|--------|--------|--------|--|--|
|                                                         |  | OperatingReal Estate |         | Real EstateDebt |  | Investment GradeRealEstateSecurities |        | Unallocated(1) |  | ConsolidatedTotal |
| Total revenues for the three monthsended                     |  |                 |    |            |  |                                 |   |           |  |              |   |   |  |   |    |    |  |   |   |   |
| September30,2005                                             |  | $                    | 3,001   |            |  | $                                    | 9,858  |           |  | $                 | 2,962  |   |  | $      | 1,828   |    |  | $      | 17,649 |   |
| September30,2004                                             |  |                 | — |            |  |                                 | 308    |           |  |              | 1,629  |   |  |   | — |    |  |   | 1,937  |   |
|                                                         |  |                 |    |            |  |                                 |   |           |  |              |   |   |  |   |    |    |  |   |   |   |
| Netincome before minority interest for the three monthsended |  |                 |    |            |  |                                 |   |           |  |              |   |   |  |   |    |    |  |   |   |   |
| September30,2005                                             |  |                 | 110     |            |  |                                 | 5,377  |           |  |              | 4,260  |   |  |   | (4,068  | )  |  |   | 5,679  |   |
| September30,2004                                             |  |                 | 343     |            |  |                                 | 452    |           |  |              | 1,488  |   |  |   | (1,933  | )  |  |   | 350    |   |
|                                                         |  |                 |    |            |  |                                 |   |           |  |              |   |   |  |   |    |    |  |   |   |   |
| Totalrevenues for the nine monthsended                       |  |                 |    |            |  |                                 |   |           |  |              |   |   |  |   |    |    |  |   |   |   |
| September30,2005                                             |  |                 | 7,881   |            |  |                                 | 18,865 |           |  |              | 7,882  |   |  |   | 8,459   |    |  |   | 43,087 |   |
| September30,2004                                             |  |                 | — |            |  |                                 | 908    |           |  |              | 2,882  |   |  |   | — |    |  |   | 3,790  |   |
|                                                         |  |                 |    |            |  |                                 |   |           |  |              |   |   |  |   |    |    |  |   |   |   |
|                                                              |

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

|                                                             |  |                      |         |                 |  |                                      |         |                |  |                   |        |        |  |        |         |         |  |        |           |        |  |  |
|-------------------------------------------------------------|--|----------------------|---------|-----------------|--|--------------------------------------|---------|----------------|--|-------------------|--------|--------|--|--------|---------|---------|--|--------|-----------|--------|--|--|
|                                                        |  | OperatingReal Estate |         | Real EstateDebt |  | Investment GradeRealEstateSecurities |         | Unallocated(1) |  | ConsolidatedTotal |
| Net income beforeminority interest for the nine monthsended |  |                 |    |            |  |                                 |    |           |  |              |   |   |  |   |    |    |  |   |      |   |
| September30,2005                                            |  | $                    | 346     |            |  | $                                    | 10,907  |           |  | $                 | 9,204  |   |  | $      | (12,003 | )  |  | $      | 8,454     |   |
| September30,2004                                            |  |                 | 943     |            |  |                                 | 1,316   |           |  |              | 2,757  |   |  |   | (3,894  | )  |  |   | 1,122     |   |
|                                                        |  |                 |    |            |  |                                 |    |           |  |              |   |   |  |   |    |    |  |   |      |   |
| Totalassets                                                 |  | $                    | 191,107 |            |  | $                                    | 638,891 |           |  | $                 | 83,527 |   |  | $      | 88,400  |    |  | $      | 1,001,925 |   |
|                                                             |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                      |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Unallocatedincludes interest income and interest expense related to our temporaryinvestments and also includes corporate level general &administrative expenses. |

17.    Pro Forma FinancialInformation

As discussed in Note 3, the Company acquired anddisposed of interests in certain operating real estate propertiesduring the nine months ended September 30, 2005. The pro formafinancial information set forth below is based upon the Company'shistorical condensed consolidated statements of operations for the ninemonths ended September 30, 2005 and 2004, adjusted to give effect ofthese transactions as of January 1, 2004.

The pro formafinancial information is presented for informational purposes only andmay not be indicative of what actual results of operations would havebeen had the tranactions occurred January 1, 2004, nor does it purportto represent the results of futureoperations.

|                                                   |  |                                    |        |                                    |  |        |         |        |  |  |
|---------------------------------------------------|--|------------------------------------|--------|------------------------------------|--|--------|---------|--------|--|--|
| (Inthousands, except per shareamounts)            |  | Nine MonthsEndedSeptember 30, 2005 |        | Nine Months EndedSeptember30, 2004 |
| Pro formarevenues                                 |  | $                                  | 48,728 |                               |  | $      | 9,431   |   |
| Pro formanet income                               |  |                               | 15,758 |                               |  |   | 1,217   |   |
| Pro formanet income per common share –basic |  | $                                  | 0.74   |                               |  |   | — |   |
| Pro forma netincome per common share -diluted     |  | $                                  | 0.73   |                               |  |   | — |   |
|                                                   |

18.    SubsequentEvents

Dividends

On October 6, 2005, the Companydeclared a dividend of $0.23 per share of common stock, payable withrespect to the quarter ended September 30, 2005 to stockholders ofrecord as October 14, 2005. The Company made this payment on October21, 2005.

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

Real Estate Debt Investments

Thefollowing summarizes real estate debt investments acquired subsequentto September 30,2005:

|                             |  |                              |        |                              |  |                    |       |                          |  |        |         |         |  |        |         |         |  |  |
|-----------------------------|--|------------------------------|--------|------------------------------|--|--------------------|-------|--------------------------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                        |  | CarryingValue (in thousands) |        | Allocation by InvestmentType |  | Average Fixed Rate |       | Average SpreadOver LIBOR |
| Whole loans, floatingrate   |  | $                            | 12,849 |                         |  |               | 31.1  | %                   |  |   | — |    |  |   | 3.25    | %  |
| Wholeloans, fixedrate       |  |                         | 13,367 |                         |  |               | 32.4  | %                   |  |   | 5.27    | %  |  |   | — |    |
| Mezzanineloan, floatingrate |  |                         | 15,000 |                         |  |               | 36.3  | %                   |  |   | — | %  |  |   | 6.00    | %  |
| Mezzanineloans, fixedrate   |  |                         | 95     |                         |  |               | 0.2   | %                   |  |   | 15.00   | %  |  |   | — |    |
| Total/Average               |  | $                            | 41,311 |                         |  |               | 100.0 | %                   |  |   | 5.33    | %  |  |   | 4.73    | %  |
|                             |

TimarronAcquisition

On October 21, 2005, the Company entered into adefinitive purchase agreement with Allied Capital Corporation("Allied Capital") to acquire TimarronCapital, Inc. ("Timarron"). Timarron, basedin Dallas, Texas, was organized by former senior executives ofPrincipal Financial and other leading financial institutions to developa nationwide commercial mortgage loan origination platform. The closingof the acquisition is expected to occur in January 2006. Allied Capitalhas agreed to continue to provide Timarron with warehouse financing tofund its origination activities through the closing. The purchase pricewill be between $2.0 million and $2.6 million, depending upon whethercertain performance hurdles are achieved by Timarron prior to theclosing. Following the closing of the acquisition, Timarron will berenamed NorthStar Mortgage Capital LP. NorthStar Mortgage Capital LPwill originate commercial mortgage loans for the Company'scommercial real estate debt portfolio.

1552 Broadway SaleContract

On October 25, 2005, the Company entered into adefinitive agreement to sell its fee interest in the property at 1552to The Riese Organization's Restaurant Division, NationalRestaurants Management Inc. ("Riese"), for apurchase price of $48 million, or $3,970 per square foot. Riese made a$2.0 million non-refundable deposit in connection with this agreement.The four-story, 12,091 square foot building is located at the corner ofBroadway and West 46th Street in Times Square, New York City. Thetransaction, which is subject to customary closing conditions, isscheduled to close in the fourth quarter of 2005. The net book value of1552 is approximately $22.0 million at September 30, 2005.

Sublease Agreement

The shared services agreement expired onOctober 29, 2005 and the Company terminated the agreement and enteredinto a more limited sub-lease agreement with NCIC. Under the newsublease the Company will rent on a month-to-month basis the NCICoffice space currently used by the Company's accounting, legaland administrative personnel. The sublease rent is calculated as a perperson monthly charge, based on a "turn key"office arrangement (computer, network, telephone and furnituresupplied) for each person utilizing the NCIC facilities. The Companymay increase or decrease the number of people needing suchaccommodations and the sublease rental payment will increase ordecrease accordingly. Rent under the sublease is $30,001 per monthcommencing November 1, 2005. The sublease agreement has been approvedby a majority of the independent board members of both theCompany's board of directors and the board of directors ofNCIC.

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

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

Organization and Overview

We are aninternally-managed REIT that was formed to continue and expand the realestate debt, real estate securities and net lease businesses ofNorthStar Capital Investment Corp., or NorthStar Capital. Upon theconsummation of our initial public offering, or IPO, on October 29,2004, three subsidiaries of NorthStar Capital contributed 100%of their respective interests in entities through which NorthStarCapital engaged in these businesses in exchange for units of limitedpartnership interest in our operating partnership and approximately$36.1 million. Our management team consists primarily of the sameindividuals who managed these businesses for NorthStar Capital.

We commenced operations upon the consummation of our IPO. We conductsubstantially all of our operations and make our investments throughour operating partnership, NorthStar Realty Finance LimitedPartnership, or NorthStar Partnership, of which we are the sole generalpartner. Through our operating partnership,we:

|  |              |                                                                                                                                     |
|--|--------------|-------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | acquire, originate andstructure senior and subordinate debt investments secured primarily byincome-producing real estateproperties; |

|  |              |                                                                                                                                                     |
|--|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | we invest incommercial real estate debt securities including commercial mortgagedbacked securities, REIT unsecured debt and credit tenant loans;and |

|  |              |                                                                       |
|--|--------------|-----------------------------------------------------------------------|
|  | •  | acquire properties thatare primarily net leased to corporate tenants. |

We believe thatthese businesses are complementary due to their overlapping sources ofinvestment opportunities, common reliance on real estate fundamentalsand ability to utilize securitization to finance assets and enhancereturns. We seek to match fund our real estate securities and realestate debt investments, primarily by issuing CDOs.

Basis ofQuarterly Presentation

Set forth below is a discussion of thefinancial condition and results of operations of our predecessor forthe three and nine months ended September 30, 2004 and NorthStar RealtyFinance Corp. for the three and nine months ended September 30,2005.

Our predecessor is an aggregation of the entities throughwhich NorthStar Capital owned and operated its real estate debt, realestate securities and net lease properties businesses and was not aseparate legal operating entity. The ultimate owners of these entitieswere NorthStar Capital and their minority owners. NorthStarPartnership, L.P., the operating partnership of NorthStar Capital, wasthe managing member with day-to-day operational responsibility of theentities controlled by NorthStar Capital. These entities are combinedin our predecessor's historical financial statements. Where ourpredecessor had a non-controlling interest in any of the entities thatcomprised our predecessor, such entities are presented as part of ourpredecessor on an uncombined basis. Because the discussion of thefinancial condition and results of operations for the three and ninemonths ended September 30, 2004, which is set forth below, relates tothe entities comprising our predecessor, it reflects the historicalfinancing and operational strategies of these entities.

Althoughthe entities comprising our predecessor operated as separate businessesof NorthStar Capital, these businesses utilized certain of NorthStarCapital's employees, insurance and administrative services.General and administrative expenses incurred by NorthStar Capital onbehalf of all of its business units which include salaries andbenefits, rent, furniture, equipment, travel and entertainment,accounting, legal services and other expenses were allocated to ourpredecessor by NorthStar Capital through identification of specificexpense items, where practical, and otherwise through an estimation ofthe level of effort devoted by certain of NorthStar Capital'semployees. In the opinion of management, the methods used to allocategeneral and administrative expenses and other costs werereasonable.

26

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Upon the contribution of the initialinvestments to our operating partnership, these businesses became fullyintegrated and therefore we present our financial statements on aconsolidated basis for all periods thereafter. Simultaneously with thiscontribution, we entered into a shared facilities and servicesagreement with NorthStar Capital, pursuant to which certain general andadministrative services required to run these businesses are providedby NorthStar Capital for a period of one year in exchange for a fixedannual fee.

Since our IPO, we have hired additional accounting,legal and administrative personnel and have obtained separate officespace sufficient to temporarily accommodate most of our businessoperations. Accordingly, following the initial one-year term of theshared facilities and services agreement, which expired on October 29,2005, we terminated the agreement and entered into a more limitedsublease agreement with NorthStar Capital. Under the new sublease, wewill rent on a month-to-month basis the NorthStar Capital office spacecurrently used by our accounting, legal and administrative personnel(currently 7 people). The sublease rent is calculated as a per personmonthly charge, based on a "turn key" officearrangement (computer, network, telephone and furniture supplied) foreach person utilizing the NorthStar Capital facilities. We may increaseor decrease the number of people needing such accommodations, and weexpect that the sublease rental payment would increase or decreaseaccordingly. The sublease agreement has been approved by a majority ofthe independent board members of both our board of directors and theboard of directors of NorthStar Capital.

Sources of OperatingRevenues

Historically, our predecessor primarily derivedoperating revenues from earnings of uncombined ventures which consistedof our predecessor's proportionate share of the net income fromthe rental operations of the New York property portfolio, and from realestate debt investments. In more recent periods, our predecessor alsoderived operating revenues from advisory fees related to our realestate securities and real estate debt businesses, from the residualinterests in the cash flows of its investment grade CDOs based on ourequity interests in such CDOs and from the interest income on ourjunior debt investments in its investment grade CDOs.

Subsequentto our IPO and the integration of the real estate debt, real estatesecurities and net lease properties businesses, we primarily derivedoperating revenues from rental income, from the rental operations ofthe consolidated net lease real estate portfolio, from interest incomeon our consolidated investments in real estate debt, from the residualinterests in the cash flows of our investment grade CDOs based on ourequity interests in such CDOs and from the interest income on ourjunior debt investments in our investment grade CDOs, from earnings ofan unconsolidated venture which consists of our proportionate share ofthe net income of that venture's real estate debt investments andfrom advisory fees related to our real estate securities and realestate debt businesses.

Real Estate Debt

Direct Investments.    The additional liquidity provided bythe net proceeds of our IPO allowed us to increase the number and rangeof real estate debt transactions in which we invest. We used a portionof the net proceeds of our IPO to make investments in real estate debtwhich are consolidated on our balance sheet, including the assets ofCDO IV.

Prior to June 30, 2005, we were primarily focused on theacquisition or origination of subordinate debt investments securedprimarily by real estate properties. We have recently been placing moreemphasis on the acquisition and origination of senior mortgage loans assuch loans allow us a greater degree of control in loan structuring andallow us to maintain a more direct relationship with our borrowers. Weexpect to continue to expand our acquisition and origination of seniormortgage loans as a complement to our core real estate debt investmentbusiness.

We earn interest income, origination and other fees onthese consolidated investments. Any advisory fees earned on theseinvestments are eliminated in consolidation.

NSFventure.    NorthStar Capital commenced its business of investingin subordinate real estate debt in 2001 through an arrangement we referto as the NSF venture. NorthStar Funding Managing 

27

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Member LLC, a majority-owned subsidiary ofNorthStar Capital prior to the contribution of the initial investmentsto our operating partnership, is the managing member and holder of50% of the outstanding membership interests in NorthStar FundingManagement LLC, the managing member of the NSF venture. NorthStarFunding Management LLC is responsible for the origination, underwritingand structuring of all investments made by the NSF venture. Moreover,the NSF venture investor has the right to approve all investments thatNorthStar Funding Management LLC proposes to make on behalf of the NSFventure.

NorthStar Funding Investor Member LLC, a majority-ownedsubsidiary of NorthStar Capital prior to the contribution of theinitial investments to our operating partnership, owned a 5%interest in the NSF venture and the NSF venture investor owns theremaining 95%. Prior to July 10, 2003, NorthStar FundingInvestor Member LLC held a 10% interest in the NSF venture. OnJuly 10, 2003, the terms of the NSF venture were amended to increaseNSF venture investor's capital commitment to $190 million, or95% of $200 million, and reduce NorthStar Funding InvestorMember LLC's interest to 5%. NorthStar Capital contributedits interests in the NSF venture to our operating partnership uponconsummation of our IPO.

We receive an advisory fee of 1%of contributed capital per annum as compensation for NorthStar FundingManagement LLC's management of the NSF venture'sinvestments. We are also entitled to a profit participation equal to10% of the profit after a minimum return on the NSFventure's capital and a return of capital based upon theperformance of the NSF venture's investments. NorthStar FundingManaging Member LLC receives 75% of this 10% profitparticipation. We also earn an additional advisory fee from the NSFventure investor for underwriting and placing the senior participationand sub-participation interests that are acquired by the NSF ventureinvestor directly from the NSF venture.

Our equity in earningsof the NSF venture includes interest income, origination and other feeson investments.

Real Estate Securities

Weinvest in commercial real estate debt securities, including commercialmortgage-backed securities, or CMBS, REIT unsecured debt and credittenant loans, and are financed with long term debt through the issuanceof investment grade CDOs, thereby matching the terms of the assets andthe liabilities.

We earn a spread between the yield on theassets and the interest expense incurred on the CDO debt issued throughour investments in the equity interests and the junior CDO debt of eachCDO issuer.

We also earn ongoing management fees for ourmanagement and monitoring of the CDO collateral of our investments inCDO I, CDO II, CDO III and CDO V, which fees equal 0.35% of therelated CDO collateral.

Prior to a new investment grade CDOissuance, there is a period during which real estate securities areidentified and acquired for inclusion in a CDO, known as the warehouseaccumulation period. During this period, we direct the acquisition ofsecurities under a warehouse facility from a bank that will be the leadmanager of the CDO. The warehouse provider then purchases thesecurities and holds them on its balance sheet. We direct theacquisition of securities by the warehouse provider during this period,but we do not earn any fees for providing this service to either thewarehouse provider or the issuer of the CDO, which will receive suchsecurities upon the closing of the CDO. We contribute cash and othercollateral, which is held in escrow by the warehouse provider, to backour commitment to purchase equity in the CDO and to cover our share oflosses should securities need to be liquidated. Pursuant to thewarehouse agreement, we share gains, including the net interest earnedduring the warehouse period, and losses, if any, with the warehouseprovider.

During the warehouse period, our participation underthe warehouse agreement is reflected in our consolidated financial andour predecessor's combined financial statements as a non-hedgederivative, which is reflected at fair value and any unrealized gain orloss is charged to operations. 

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Based on an analysis of our and ourpredecessor's interest in CDO I as a variable interest entityunder FASB Interpretation No. 46R, "Consolidation ofVariable Interest Entities," the financial statements ofCDO I were not consolidated into our predecessor's financialstatements for the three and nine months ended September 30, 2004 or inour financial statements for the three and nine months ended September30, 2005 and for the period from October 29, 2004 to December 31, 2004,since neither our predecessor nor we were the primary beneficiary ofCDO I. Similarly, the financial statements of CDO II , CDO III and CDOV were not consolidated into our financial statements since we were notthe primary beneficiary of CDO II, CDO III and CDO V. Accordingly, wehave designated the beneficial interests in preferred equity of CDO Iand the unrated income notes of CDO II, CDO III and CDO V as debtsecurities available for sale as they meet the definition of debtinstruments due to their underlying redemption provisions.

Net Lease Properties

We earn rental incomefrom office, industrial and retail properties that are primarily netleased to corporate tenants.

We had two fee and six leaseholdinterests in a portfolio of retail and commercial properties located inthe Times Square and midtown area of Manhattan which we refer to as theNew York property portfolio. This portfolio is owned by our subsidiary,ALGM I Owners LLC, or ALGM. Our predecessor held a 97.5%non-managing equity interest in ALGM. Two of ALGM's leasesexpired in 2003, one in March and one in October. The Company sold itsinterest in one of ALGM's fee properties, 729 Seventh Avenue("729"), for $29.0 million on June 30,2005.

In July 2005, we formally initiated an effort to marketfor sale our fee interest in our property located at 1552 Broadway anddetermined that the plan for sale criteria in FASB Statement No. 144"Accounting for Impairment or Disposal of Long-LivedAssets" has been met. Accordingly, since the criteria wasmet, the property is classified to held for sale for the third quarterending September 30, 2005.

On October 25, 2005, we entered intoa definitive agreement to sell our fee interest in the property at 1552Broadway in New York City to Riese Organization's NationalRestaurant Management Inc. or Riese, for a purchase price of $48million, or $3,970 per square foot. Riese made a $2.0 millionnon-refundable deposit in connection with the agreement. Thefour-story, 12,091 square foot building is located at the corner ofBroadway and West 46th Street in Times Square. The transaction, whichis subject to customary closing conditions, is scheduled to close inthe fourth quarter of 2005.

As of September 30, 2005, ALGM ownedseven properties, which vary in size from 4,200 square feet to 21,140square feet and had a total of 76,496 net rentable square feet. Threeof the properties are primarily leased or subleased to single users andfour are leased or subleased to multiple tenants.

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

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

On August 2, 2005, we closed a $22.0 million acquisition ofa 117,553 square foot office building in Salt Lake City, Utah, which is100% leased to the General Services Administration or the GSA

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property, under a lease that expires in April2012. The property is financed with a 5.16% fixed rate, sevenyear non-recourse first mortgage loan of $17 million.

OnSeptember 30, 2005, we acquired a portfolio of four office buildingswith 387,842 square feet of rentable space from Electronic Data SystemsCorp., or EDS, for $61.4 million, which we refer to as the EDSPortfolio. The four buildings comprising the EDS Portfolio, which arelocated in Rancho Cordova, California, Auburn Hills, Michigan and CampHill, Pennsylvania, and were leased back to EDS under leases expiringin 2015. The first year rent is approximately $5.0 million, with rentincreases of 10.0% at the beginning of the third lease year,10.0% at the beginning of the sixth lease year and 2.5%at the beginning of the ninth lease year. We financed the acquisitionwith a $49.1 million non-recourse mortgage with a fixed rate of5.373% that matures in 2015.

Critical AccountingPolicies

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States, orUS GAAP, requires the use of estimates and assumptions that couldaffect the reported amounts of assets and liabilities, the disclosureof contingent assets and liabilities and the reported amounts ofrevenue and expenses. Management has identified certain criticalaccounting policies that affect the more significant judgments andestimates used by management in the preparation of ourpredecessor's combined financial statements and our consolidatedfinancial statements. Management evaluates on an ongoing basisestimates related to critical accounting policies, including thoserelated to revenue recognition, allowances for doubtful accountsreceivable and impairment of investments in uncombined ventures anddebt securities available for sale. The estimates are based oninformation that is currently available to management, as well as onvarious other assumptions that management believes are reasonable underthe circumstances.

Principles ofConsolidation

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

Debt SecuritiesAvailable for Sale

Debt securities available for sale arecarried at estimated fair value with the net unrealized gains or lossesreported as a component of accumulated other comprehensive income(loss) in stockholders' equity. The equity investments in CDO I,CDO II, CDO III and CDO V are relatively illiquid, and the value ofsuch investments must be estimated by management. Fair value is basedprimarily upon broker quotes or management's estimates. Theseestimated values are subject to significant variability based on marketconditions, such as interest rates and spreads. Changes in thevaluations do not affect reported income or cash flows, but impactstockholders' equity.

Real Estate DebtInvestments

We must periodically evaluate each of our directinvestments in real estate debt for possible impairment. Impairment isindicated when it is deemed probable that we will be unable to collectall amounts due according to the contractual terms of the loan. Upon adetermination of impairment, we would establish a specific valuationallowance with a corresponding charge to earnings. Significant judgmentis required both in determining impairment and in estimating theresulting loss allowance. Allowances for loan investment losses areestablished based upon a periodic review of the loan investments.Income recognition is generally suspended for loans at the earlier ofthe date at which payments become 90 days past due or when, in theopinion of management, a full recovery of income and principal becomesdoubtful. Income recognition is resumed when the loan becomescontractually current and performance is demonstrated to be resumed. Inperforming this review, management considers the estimated netrecoverable value of the loan as well as other factors, including thefair market value of any collateral, the amount and the status of anysenior debt, the prospects for the 

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borrower and the economic conditions in theregion where the borrower does business. Because this determination isbased upon projections of future economic events, which are inherentlysubjective, the amounts ultimately realized from the loan investmentsmay differ materially from the carrying value as of the balance sheetdate. To date, all of our direct investments in real estate debt arefully performing and we have determined that no loss allowances havebeen necessary with respect to the loans.

RevenueRecognition

Our rental revenue from our net lease real estateportfolio is recognized on a straight-line basis over the initial termof the respective leases. The excess of straight-line rents recognizedover amounts contractually due pursuant to the underlying leases areincluded in straight-line unbilled rents receivable in our condensedconsolidated balance sheet. Management provides an allowance fordoubtful accounts for estimated losses resulting from the inability ofits tenants to make required rent and other payments as due.Additionally, management establishes, on a current basis, an allowancefor future tenant credit losses on unbilled rents receivable based uponan evaluation of the collectibility of such amounts. Management isrequired to make subjective assessments about the collectibility of thedeferred rent receivable that in many cases will not be billed totenants for many years from the balance sheet date. Management'sdetermination is based upon an assessment of credit worthiness ofprivate company tenants for which financial information is not readilyavailable and as such is not subject to precise quantification.

Interest income on our real estate debt investments is recognizedover the life of the investment using the effective interest method andrecognized on an accrual basis. Fees received in connection with loancommitments are recognized over the term of the loan as an adjustmentto yield. Anticipated exit fees, whose collection is expected, are alsorecognized over the term of the loan as an adjustment to yield.

Performance-Based Compensation

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

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

On September 30, 2005,management has made its best estimate of our performance during thesetwo performance periods, based on the facts and information currentlyavailable and assumptions regarding the investment of the remainingproceeds of our IPO pursuant to our business strategy and 

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returns on future investments. On the basisof the foregoing, management has estimated that we will not meet thereturn hurdle in either of these performance periods. If we do not meetthe return hurdle during the performance periods, we will not grant anyawards under the incentive bonus plan to any of the eligibleparticipants.

Unconsolidated/UncombinedVentures

Management is required to make subjective assessmentsas to whether there are impairments in the values of its and ourpredecessor's investments in unconsolidated/uncombined ventureswhich are accounted for using the equity method. As no public marketexists for these investments, management estimates the recoverabilityof these investments based on projections and cash flow analysis. Theseassessments have a direct impact on net income because recording animpairment loss results in an immediate negative adjustment to netincome. The following is a summary of the accounting policies relatingto unconsolidated/uncombined ventures that are most affected byjudgments, estimates and assumptions.

Real Estate DebtInvestments.    We record the transfer of a participation orsub-participation in a loan investment as a sale when the attributes ofthe transaction meet the criteria for sale of SFAS 140,"Accounting for Transfers of Financial Assets andExtinguishments of Liabilities," including transferringthe financial interest beyond the reach of its creditors and placing nosubstantive restrictions on the resale of the participation orsub-participation by the purchaser.

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

Recent Accounting Pronouncements

In December2004, the FASB issued SFAS No. 123, (revised 2004) Share-Based Payment,or SFAS No. 123 (R), which supersedes APB opinion No. 25, Accountingfor Stock Issued to Employees and its related implementation guidance.SFAS No. 123 (R) established standards for the accounting fortransactions in which an entity exchanges its equity instruments forgoods or services. It also addresses transactions in which an entityincurs liabilities in exchange for goods or services that are based onthe fair value of the entity's equity instruments or that may besettled by the issuance of those equity instruments. SFAS No. 123 (R)focuses primarily on accounting for transactions in which an entityobtains employee services in share-based payment transactions. SFAS No.123 (R) is effective for fiscal years beginning after June 15, 2005.The impact of adopting SFAS No. 123 (R) is not expected to have amaterial adverse impact on our financial condition or results ofoperations.

RESULTS OF OPERATIONS

Ourpredecessor's results of operations for the three and nine monthsended September 30, 2004 are not necessarily indicative of our futureresults of operations due to the impact of our IPO, the acquisition ofadditional interests in ALGM and its resulting consolidation, theexpansion of our real estate securities and real estate debtbusinesses, and our new investments and their related debtfinancing.

We sold our interest in 729 Seventh Avenue on June30, 2005, and have entered into a definitive agreement to sell our feeinterest in 1552 Broadway. Both properties were in the New Yorkproperty portfolio, and we have classified their operations asdiscontinued operations for the three and nine months ended September30, 2005.

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Comparison of the Three Months EndedSeptember 30, 2005 to the Three Months Ended September 30,2004

Revenues

Rental and escalationincome

Rental and escalation income for the three months endedSeptember 30, 2005 totaled $3.0 million, representing a $3.0 millionincrease compared to the three months ended September 30, 2004. Theincrease was primarily attributable to $1.1 million of rental incomefrom the New York property portfolio (ALGM) which was accounted forunder the equity method of accounting in the three months endedSeptember 30, 2004. We acquired the 2.5% managing interest inthe New York property portfolio on October 29, 2004 and accordingly theoperations of these properties have been consolidated into thecondensed consolidated financial statements in 2005. We also acquiredthe Chatsworth properties on January 14, 2005, the Salt Lake Cityproperty on August 2, 2005, and the EDS portfolio on September 30,2005, which collectively contributed an additional $1.9 million ofrental income.

Advisory and management feeincome

Advisory and management fee income for the three monthsended September 30, 2005 totaled $21,000 representing a decrease of$36,000, or 63%, for the three months ended September 30, 2005,compared to the three months ended September 30, 2004 due to a loweraverage portfolio balance in the third quarter of 2005.

Advisory and management fee income – relatedparties

Advisory fees from related parties for the three monthsended September 30, 2005 totaled $1.2 million, representing an increaseof approximately $0.2 million, or 20%, compared to the threemonths ended September 30, 2004. The increase was comprised primarilyof $0.4 million of combined fees earned from CDO III, and CDO V. Thisincrease was offset by a decrease in fees earned from the NSF ventureof approximately $0.2 million which was due to a lower averageportfolio loan balance for the three months ended September 30,2005.

Interest income

Interest income forthe three months ended September 30, 2005 totaled $11.7 millionrepresenting an increase of $11.7 million compared to the three monthsended September 30, 2004. The increase was attributable to interest oninvestments which did not exist in the comparable prior quarter. Theinterest income on these investments included $1.8 million of interestincome earned from our investments in AAA-rated, short term, floatingrate securities, $9.7 million from interest income on real estate debtinvestments and $0.2 million on cash collateralizing our short securitysales and other investments. For the three months ended September 30,2004, interest income of $22,000 was earned on short security salesproceeds.

Interest income – related parties

Interest income from related parties for the three months endedSeptember 30, 2005 totaled $1.8 million, representing an increase of$0.9 million, or 100%, compared to the three months endedSeptember 30, 2004. The increase was attributable to interest earned onour four investment grade CDOs of $1.5 million, which includes CDO III,and CDO V, and approximately $0.3 million from our"BB" rated junior classes of debt securitiesand unrated income notes of CDO II. For the three months endedSeptember 30, 2004, interest income of $0.7 million was earned from CDOI and CDO II and $0.2 million was earned on the"BB" rated junior class of debt securities ofCDO II.

Expenses

Real estate properties– operating expenses

Property operating expenses for thethree months ended September 30, 2005 totaled $0.6 million,representing an increase of $0.6 million compared to the three monthsended September 30, 2004. 

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There was no corresponding expense for thethree months ended September 30, 2004 because the New York propertyportfolio was accounted for under the equity method of accounting forthe three months ended September 30, 2004. We acquired the 2.5%managing interest in the New York property portfolio on October 29,2004 and accordingly the operations of these properties have beenconsolidated into the condensed consolidated financial statements in2005. The increase in property operating expenses was attributable to$0.3 million of property operating expenses from our New York propertyportfolio and $0.3 million of property operating expenses from our 2005property acquisitions.

Interest expense

Interest expense for the three months ended September 30, 2005totaled approximately $8.8 million, representing an increase of $8.6million compared to the three months ended September 30, 2004. Thisincrease was attributable to the following: $1.5 million of interest onfinancing from our investments in AAA-rated, short term, floating ratesecurities, $0.3 million on our investment in the"BB" rated junior classes of debt securitiesand unrated income securities of CDO II and interest expense onsecurities underlying short sales we entered into during 2004, $1.0million related to the New York property portfolio, $1.1 million ofinterest on our Wachovia facility, described in"—Liquidity and Capital Resources—DebtObligations" $3.3 million of interest on our CDO IV bonds,and $1.4 million of interest on liabilities to subsidiary trusts thatissued preferred securities in the second quarter of 2005.

Management fees – related party

Management fees – related party for the three months endedSeptember 30, 2005 totaled $24,000, representing an increase of $24,000compared to the three months ended September 30, 2004. The increase wasprimarily attributable to the New York property portfolio which wasaccounted for under the equity method of accounting in the three monthsended September 30, 2004. The New York property portfolio incurred amanagement fee during the three months ended September 30, 2004 of$47,000. We acquired the 2.5% managing interest in the New Yorkproperty portfolio on October 29, 2004 and accordingly the operationsof these properties have been consolidated into the condensedconsolidated financial statements in 2005.

General and administrative

General andadministrative expenses for the three months ended September 30, 2005totaled $3.6 million, representing an increase of $1.4 million, or63%, compared to $2.2 million for the three months endedSeptember 30, 2004. The increase was comprised of the following:

Salaries and other compensation (direct and allocated) for the threemonths ended September 30, 2005 totaled $1.4 million, representing adecrease of approximately $0.4 million, or 22%, compared to thethree months ended September 30, 2004. Direct salaries of $1.4 millionincreased by $1.2 million, or 600%, in 2005 due to higherstaffing levels to accommodate our expansion following our IPO.However, this increase was offset by a decrease of $1.6 million ofother compensation (allocated) attributable to one time charges of thepredecessor relating to the termination of a former executive and thehiring of a new officer in the third quarter of 2004.

Sharedservices – related party for the three months ended September 30,2005 totaled $0.3 million, representing an increase of approximately$0.3 million compared to the three months ended September 30, 2004. Theincrease was attributable to the shared facilities and servicesagreement we entered into with NorthStar Capital on October 29,2004.

Equity based compensation expense for the three monthsended September 30, 2005 totaled $0.8 million, representing an increaseof $0.8 million compared to the three months ended September 30, 2004.The increase was primarily attributable to approximately $0.1 millionof compensation expense in connection with the buyout of a profitsinterest (a compensation arrangement) in NS Advisors LLC from one ofour employees, and approximately $0.7 million in connection with thethree-year vesting of equity based awards issued under our 2004 OmnibusStock Incentive Plan.

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Insurance (direct and allocated) for thethree months ended September 30, 2005 totaled $0.3 million representingan increase of $0.2 million, or 200%, compared to the threemonths ended September 30, 2004. The increase was attributable to thedirectors and officers policies we acquired subsequent to our IPO.

Accounting and auditing fees for the three months ended September30, 2005 totaled $0.1 million representing an increase of $0.1 millioncompared to the three months ended September 30, 2004. The increase wasattributable to quarterly review services provided for the secondquarter by our auditors. Our predecessor did not incur similaraccounting and auditing fees during the three months ended September30, 2004.

Other general and administrative expenses (direct andallocated) for the three months ended September 30, 2005 totaled $0.7million representing an increase of approximately $0.3 million, or75%, compared to the three months ended September 30, 2004. Thisincrease was primarily attributable to consulting fees of $0.1 millionassociated with periodic reporting obligations and various publiccompany expenses, including public relations costs of $0.2 million.

Depreciation andamortization

Depreciation andamortization expense for the three months ended September 30, 2005totaled $1.1 million representing an increase of $1.1 million comparedto the three months ended September 30, 2004. The increase wasprimarily attributable to $0.3 million from the New York propertyportfolio, which was accounted for under the equity method ofaccounting for the three months ended September 30, 2004. We acquiredthe 2.5% managing interest in the New York property portfolio onOctober 29, 2004 and accordingly the operations of these propertieshave been consolidated into the condensed consolidated financialstatements in 2005. We acquired the Chatsworth properties on January14, 2005, the Salt Lake City property on August 2, 2005, and the EDSportfolio on September 30, 2005, which collectively contributed anadditional $0.7 million of depreciation expense and $0.1 millionrelated to the amortization of the intangible assets.

Equity in earnings of unconsolidated/uncombinedventures

Equity in earnings for the three months endedSeptember 30, 2005 totaled $61,000 representing a decrease of $0.4million, or 87%, compared to the three months ended September30, 2004. The combined decrease of $0.4 million was attributable to alower average portfolio loan balance in 2005 on the NSF venture and adecrease from the New York property portfolio which was accounted forunder the equity method of accounting in 2004. We acquired the2.5% managing interest in the New York property portfolio onOctober 29, 2004 and accordingly the operations of these propertieshave been consolidated into the condensed consolidated financialstatements in 2005.

Unrealized gain (loss) oninvestments and other

Unrealized gain (loss) on investments andother increased by $0.7 million for the three months ended September30, 2005 to $0.4 million from a loss of $0.3 million for the threemonths ended September 30, 2004. Unrealized gains on investments forthe three months ended September 30, 2005 consisted of a $0.5 milliongain on the change in fair value of the CDO V warehouse offset by anunrealized loss on short term investments of approximately $0.1million. Unrealized losses on investments of $0.3 million for the threemonths ended September 30, 2004 was the net effect of a $0.1 millionunrealized gain related to the CDO II warehouse agreement offset by a$0.4 million unrealized loss on a short sale of a FNMA security.

Unrealized gain (loss) on investments relating to CDO warehouseagreements represent the changes in fair value of the warehouseagreement during the portion of the warehouse term in the financialreporting period.

Realized gain (loss) oninvestments and other

Realized gain (loss) on investments andother for the three months ended September 30, 2005 totaledapproximately $1.7 million, representing an increase of $1.0 millioncompared to the three 

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months ended September 30, 2004. Theincrease was attributable to realized gains of $0.6 million on CDO V asa result of the increase in fair value of the warehouse agreement,representing the net interest income on the accumulated securitiesduring the warehouse period. We also recognized a gain of $0.8 millionin the three months ended September 30, 2005 relating to the sale of$10 million, par value, of BB junior rated debt securities to the CDO Vwarehouse. In addition, we realized a gain of $0.2 million in the threemonths ended September 30, 2005 related to terminating a short positionthat had been used as an interest rate hedge. Realized gains oninvestments of $0.6 million for the three months ended September 30,2004 were related to the CDO II warehouse agreement.

Income (loss) from discontinued operations, net ofminority interest

In July 2005, we formally initiated an effortto market for sale our fee interest in our property located at 1552Broadway in New York City. Accordingly, the property's operationswere reclassified to income from discontinued operations. This propertywas accounted for under the equity method of accounting for the threemonths ended September 30, 2004, as part of the New York propertyportfolio. We acquired the 2.5% managing interest in the NewYork property portfolio on October 29, 2004 and accordingly theoperations of these properties have been consolidated into thecondensed consolidated financial statements in 2005.

Comparison of the Nine Months Ended September 30, 2005 tothe Nine Months Ended September 30, 2004

Revenues

Rental and escalation income

Rental andescalation income for the nine months ended September 30, 2005 totaled$7.9 million, representing a $7.9 million increase compared to the ninemonths ended September 30, 2004. The increase was primarilyattributable to $3.3 million from the New York property portfolio whichwas accounted for under the equity method of accounting in the ninemonths ended September 30, 2004. We acquired the 2.5% managinginterest in the New York property portfolio on October 29, 2004 andaccordingly the operations of these properties have been consolidatedinto the condensed consolidated financial statements in 2005. Weacquired the Chatsworth properties on January 14, 2005, the Salt LakeCity property on August 2, 2005, and the EDS portfolio on September 30,2005, which collectively contributed an additional $4.6 million ofrental income.

Advisory and management feeincome

Advisory and management fee income decreased by $73,000,or 44%, to $92,000 for the nine months ended September 30, 2005compared to the nine months ended September 30, 2004 due to a loweraverage portfolio balance in 2005.

Advisory andmanagement fee income – related parties

Advisory feesfrom related parties for the nine months ended September 30, 2005totaled $3.2 million, representing an increase of approximately $1.1million, or 52%, compared to the nine months ended September 30,2004. The increase was comprised primarily of $0.7 million of feesearned for CDO II and $0.8 million of fees earned for CDO III. Thisincrease was offset by a decrease in fees earned from the NSF ventureof approximately $0.3 million, which was due to a lower averageportfolio loan balance for the nine months ended September 30,2005.

Interest income

Interest income forthe nine months ended September 30, 2005 totaled $26.8 millionrepresenting an increase of $26.8 million compared to the nine monthsended September 30, 2004. The increase was attributable to interest oninvestments which did not exist in the comparable prior period. The

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interest income on these investmentsincluded $8.3 million of interest income earned from our investments inAAA-rated, short term, floating rate securities, $18 million frominterest income on real estate debt investments and $0.5 million oncash collateralizing our short security sales and other investments.For the nine months ended September 30, 2004, interest income of$22,000 was earned on our short security sales proceeds.

Interest income – related parties

Interest income from related parties for the nine months endedSeptember 30, 2005 totaled $5.1 million representing an increase of$3.7 million, or 240%, compared to the nine months endedSeptember 30, 2004. The increase was attributable to our fourinvestment grade CDOs, which earned $4.2 million in the nine monthsended September 30, 2005, including approximately $1.5 million from CDOIII, and $0.1 million from CDO V, and approximately $0.9 million fromour "BB" rated junior classes of debtsecurities and unrated income notes of CDO II. For the nine monthsended September 30, 2004, interest income of $1.3 million was earnedfrom CDO I and CDO II and $0.2 million was earned onthe"BB" rated junior classes of debtsecurities.

Expenses

Real estateproperties – operating expenses

Property operatingexpenses for the nine months ended September 30, 2005 totaled $1.7million, representing an increase of $1.7 million compared to the ninemonths ended September 30, 2004. The increase was primarilyattributable to $1.0 million of property operating expenses from theNew York property portfolio which was accounted for under the equitymethod of accounting in the nine months ended September 30, 2004. Weacquired the 2.5% managing interest in the New York propertyportfolio on October 29, 2004 and accordingly the operations of theseproperties have been consolidated into the condensed consolidatedfinancial statements in 2005. We acquired the Chatsworth properties onJanuary 14, 2005, the Salt Lake City property on August 2, 2005, andthe EDS portfolio on September 30, 2005, which collectively contributedan additional $0.7 million of property operating expenses.

Interest expense

Interest expense for thenine months ended September 30, 2005 totaled approximately $21.1million, representing an increase of $20.9 million compared to the ninemonths ended September 30, 2004. This increase was primarilyattributable to the following; approximately $7.1 million of intereston financing from our investments in AAA-rated, short term, floatingrate securities; approximately $0.8 million on our investment in the"BB" rated junior classes of debt securitiesand unrated income securities of CDO II and on securities underlyingshort sales we entered into during 2004; $2.9 million related to theNew York property portfolio; approximately $4.1 million on our realestate debt facilities, approximately $3.9 million on CDO IV; andapproximately $2.3 million on liabilities to subsidiary trusts thatissued preferred securities in the second quarter of 2005.

Management fees – related party

Management fees – related party for the nine months endedSeptember 30, 2005 totaled $67,000, representing an increase of $67,000compared to the nine months ended September 30, 2004. The increase wasprimarily attributable to the New York property portfolio, which wasaccounted for under the equity method of accounting in the nine monthsended September 30, 2004. ALGM incurred a management fee during thenine months ended September 30, 2004 of $142,000. We acquired the2.5% managing interest in the New York property portfolio onOctober 29, 2004 and accordingly the operations of these propertieshave been consolidated into the condensed consolidated financialstatements in 2005.

General andadministrative

General and administrative expenses for the ninemonths ended September 30, 2005 totaled $12.2 million, representing anincrease of $7.3 million, or 150%, compared to $4.9 million forthe nine months ended September 30, 2004. The increase was comprised ofthe following:

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Salaries and other compensation (directand allocated) for the nine months ended September 30, 2005 totaled$3.9 million, representing an increase of approximately $0.3 million,or 8%, compared to the nine months ended September 30, 2004. Theincrease was primarily attributable to an increase in salaries due tohigher staffing levels to accommodate the expansion of our threebusinesses subsequent to our IPO.

Shared services –related party for the nine months ended September 30, 2005 totaled $1.0million, representing an increase of approximately $1.0 millioncompared to the nine months ended September 30, 2004. The increase wasattributable to the shared facilities and services agreement we enteredinto with NorthStar Capital on October 29, 2004.

Equity basedcompensation expense for the nine months ended September 30, 2005totaled $2.5 million, representing an increase of $2.5 million comparedto the nine months ended September 30, 2004. The increase wasattributable to approximately $0.5 million of compensation expense inconnection with the buyout of a profits interest (a compensationarrangement) in NS Advisors LLC from one of our employees, andapproximately $1.8 million in connection with the three-year vesting ofequity based awards issued under our 2004 Omnibus Stock Incentive Plan.In addition, compensation expense of $0.2 million was recognized inconnection with a grant of 15,194 shares to the members of our Board ofDirectors on June 24, 2005.

Insurance (direct and allocated) forthe nine months ended September 30, 2005 totaled $0.7 million,representing an increase of $0.4 million or 133%, compared tothe nine months ended September 30, 2004. The increase was attributableto the directors and officers policies we acquired subsequent to theIPO.

Accounting and auditing fees for the nine months endedSeptember 30, 2005 totaled $1.4 million, representing an increase of$1.4 million compared to the nine months ended September 30, 2004. Theincrease is attributable to 2004 audit fees, the first and secondquarter reviews performed by our auditors and compliance work duringthe nine months ended September 30, 2005. Our predecessor did not incursimilar accounting and auditing fees during the nine months endedSeptember 30, 2004.

Other general and administrative expenses(direct and allocated) for the nine months ended September 30, 2005totaled $2.7 million, representing an increase of approximately $1.7million, or 170%, compared to the nine months ended September30, 2004. This increase was primarily attributable to legal costs of$0.5 million associated with general corporate matters, consulting feesof approximately $0.5 million associated with year end and periodicreporting obligations, recruiting fees of approximately $0.1 million,various public company expenses of $0.4 million, and public relationscosts of $0.1 million.

Depreciation andamortization

Depreciation and amortization expense for the ninemonths ended September 30, 2005 totaled $2.8 million, representing anincrease of $2.8 million compared to the nine months ended September30, 2004. The increase was primarily attributable to $1.0 million fromthe New York property portfolio which was accounted for under theequity method of accounting for the nine months ended September 30,2004. We acquired the 2.5% managing interest in the New Yorkproperty portfolio on October 29, 2004 and accordingly the operationsof these properties have been consolidated into the condensedconsolidated financial statements in 2005. We also acquired theChatsworth properties on January 14, 2005, which contributed anadditional $1.7 million of depreciation and amortization expense and$0.1 million related to the amortization of the intangible assets.

Equity in earnings of unconsolidated/uncombinedventures

Equity in earnings for the nine months ended September30, 2005 totaled $0.2 million, representing a decrease of $1.2 million,compared to the nine months ended September 30, 2004. The decrease wasattributable to the decrease in the equity in earnings of the NSFventure of approximately $0.2 million due to a lower average portfolioloan balance in 2005 and a decrease of $1.0 million from the New Yorkproperty portfolio which was accounted for under the equity method

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of accounting in 2004. We acquired the2.5% managing interest in the New York property portfolio onOctober 29, 2004 and accordingly the operations of these propertieshave been consolidated into the condensed consolidated financialstatements in 2005.

Unrealized gain (loss) oninvestments and other

Unrealized gain (loss) on investments andother increased by approximately $0.5 million for the nine months endedSeptember 30, 2005 to $1.0 million, from $0.4 million for the ninemonths ended September 30, 2004. Unrealized gains on investmentsconsisted of unrealized gains of $0.7 million on the CDO III warehouseagreement and approximately $0.7 million on the CDO V warehouseagreement, offset by $0.4 million of unrealized losses on short salesof securities and short term investments. Unrealized gains oninvestments of $0.4 million for the nine months ended September 30,2004 consisted of $0.5 million on the CDO II warehouse agreement and$0.3 million on the CDO III warehouse agreement, offset by $0.4 millionof unrealized losses on short sales of securities.

Unrealizedgains on investments relating to each of these CDO warehouse agreementsrepresent the changes in fair value of each warehouse agreement duringthe portion of the warehouse term in the financial reportingperiod.

Realized gain (loss) on investments andother

Realized gain (loss) on investments and other for thenine months ended September 30, 2005 totaled $2.2 million, representingan increase of $1.5 million compared to the nine months ended September30, 2004. The increase was attributable to realized gains of $0.7million and $0.6 million, representing the increase in fair value, andthe net interest income on the accumulated securities during thewarehouse period, of the CDO III warehouse agreement and CDO Vwarehouse. We sold $10 million of our BB junior rated debt securitiesto the CDO V warehouse, realizing a gain on sale of $0.8 million in thethree months ended September 30, 2005. In addition, we realized a gainof $0.2 million in the three months ended September 30, 2005 related toterminating a short position that had been used as an interest ratehedge. This increase was offset by a $0.1 million loss in the threemonths ended September 30, 2005 related to the sale of a portion of ourinvestments in AAA-rated, short term, floating rate securities.Realized gains on investments of $0.6 million for the nine months endedSeptember 30, 2004 were related to the CDO II warehouse agreement.

Income (loss) from discontinued operations, net ofminority interest

We sold our interest in 729 Seventh Avenue("729") on June 30, 2005 and we formallyinitiated an effort to market for sale our fee interest in the propertylocated at 1552 Broadway during the third quarter of 2005. Accordingly,the properties' operations were reclassified to income (loss)from discontinued operations. These properties were accounted for underthe equity method of accounting for the nine months ended September 30,2004, as part of the New York property portfolio.

Gain on sale from discontinued operations, net ofminority interest

We sold our interest in 729 for $29 million,recognizing a gain on sale, net of minority interest of $8.6 millionfor the nine months ended September 30, 2005.

Liquidity andCapital Resources

As of September 30, 2005, we had anunrestricted cash and cash equivalents balance of $20.5 million. As aREIT, we are required to distribute at least 90% of our annualREIT taxable income to our stockholders, and we intend to distributeall or substantially all of our REIT taxable income in order to complywith the REIT distribution requirements of the Internal Revenue Codeand to avoid federal income tax and the nondeductible excise tax. Webelieve that our unrestricted cash balances together with the availableborrowing capacity under our existing credit facilities, sale ofassets, and cash flow provided from our operations, will be sufficientto allow us to fund the equity portion of our new investments, makedistributions necessary to enable us to continue to qualify as a REITand fund 

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our operations for at least the next 12months. In order to fund investments that we may make in the next 12months, we may borrow additional funds under our current creditfacilities, issue debt securities or raise additional equity capital.On October 12, 2005 we filed a registration statement with theSecurities and Exchange Commission on Form S-11 in connection with anoffering by us to the public of 8,000,000 shares and up to 1,200,000shares to cover any over-allotments.

We expect to meet our longterm liquidity requirements, including the repayment of debt and ourinvestment funding needs, through existing cash resources andadditional borrowings, the issuance of debt and/or equity securitiesand the liquidation or refinancing of assets.

DebtObligations

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

|                                                                  |  |                                       |         |                |  |                               |        |                                       |  |                          |        |        |  |        |        |        |  |  |
|------------------------------------------------------------------|--|---------------------------------------|---------|----------------|--|-------------------------------|--------|---------------------------------------|--|--------------------------|--------|--------|--|--------|--------|--------|--|--|
|                                                             |  | CarryingAmount at9/30/05(inthousands) |         | StatedMaturity |  | InterestRate                  |        | WeightedAverageExpected Life(inyears) |
| Mortgage notes payable(non-recourse):                            |  |                                  |    |           |  |                          |   |                                  |  |                     |   |   |  |   |   |   |
| ALGM                                                             |  | $                                     | 14,464  |           |  | 1/1/2006                      |        | Thegreater of LIBOR or 2% +3.60%      |  | 0.25                     |
| Chatsworth                                                       |  |                                  | 43,844  |           |  | 5/1/2015                      |        | 5.65%                                 |  | 9.59                     |
| SaltLake City                                                    |  |                                  | 16,972  |           |  | 9/1/2012                      |        | 5.16%                                 |  | 6.9                      |
| EDS                                                              |  |                                  | 49,120  |           |  | 10/8/2015                     |        | 5.37%                                 |  | 10.0                     |
| Mezzanineloan payable (Chatsworth)(non-recourse)                 |  |                                  | 13,000  |           |  | 5/1/2014                      |        | 6.64%                                 |  | 8.59                     |
| Repurchaseobligations                                            |  |                                  | 58,302  |           |  | SeeRepurchaseObligationsbelow |        | LIBOR+ 0.06%to 1.25%                  |  | Various,generally 30days |
| CDO Bonds Payable(CDO IV)(non-recourse)                          |  |                                  | 300,000 |           |  | 7/1/2040                      |        | LIBOR+0.62%                           |  | 8.0                      |
|                                                             |  |                                  |    |           |  |                          |        | (AverageSpread)                       |  |                     |
| Wachovia creditfacility                                          |  |                                  | 192,804 |           |  | 7/12/2008                     |        | LIBOR + 0.2%to 3.00%                  |  | 2.82                     |
| Bank of America creditfacility                                   |  |                                  | 12,000  |           |  | 09/27/2006                    |        | LIBOR +3.25%                          |  | 0.99                     |
| Liability to subsidiarytrusts issuing preferred securitiesTrustI |  |                                  | 41,240  |           |  | 3/30/2035                     |        | 8.15%                                 |  | —                  |
| TrustII                                                          |  |                                  | 25,780  |           |  | 6/30/2035                     |        | 7.74%                                 |  | —                  |
| DBAGfacility                                                     |  |                                  | — |           |  | 12/21/2007                    |        | LIBOR +0.75%to2.25%                   |  | 2.22                     |
|                                                             |  | $                                     | 767,526 |           |  |                          |        |                                  |  |                     |
|                                                                  |

ALGMMortgage Loan.    The ALGM mortgage loan bears interest at thehigher of one-month LIBOR or 2%, plus a spread of 3.60%,or an aggregate of 6.725% at September 30, 2005. The loanoriginally matured on January 1, 2005 and was extended until January 1,2006. This non-recourse loan may be extended at ALGM's option fortwo additional one-year extension periods, subject to ALGM satisfyingcertain conditions provided for under the loan, including payment of afee equal to 0.75% of the loan balance as a condition toexercising the second and third extension options. The ALGM mortgageloan agreement includes the following financial covenants andrestrictions: (a) ALGM must maintain a debt service coverage ratio inexcess of 1.15 to 1, computed using an annual interest rate of10.09%, and (b) ALGM must establish and maintain certain escrowreserve accounts for, among other things, payment of real estate taxes,capital expenditures and tenant rollover costs. ALGM is uncombined inour predecessor's financial statements as of September 30, 2004and is consolidated in our financial statements at September 30, 2005and December 31, 2004. This mortgage is related to assets held for saleon the condensed consolidated balance sheets.

ChatsworthMortgage Loan.    The Chatsworth Mortgage matures on May 1, 2015and bears interest at a fixed rate of 5.65%. This non-recourseloan requires monthly payments of $230,906 representing interest inarrears and principal sufficient to amortize the loan to a balance ofapproximately $40.5 million at maturity, as well as monthly escrowdeposits for ground lease payments required under the ground lease forthe leasehold property.

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Salt Lake City MortgageLoan.    The Salt Lake City Mortgage matures on September 1, 2012and bears interest at a fixed rate of 5.16%. This non-recourseloan requires monthly payments of $100,971 representing interest inarrears and principal sufficient to amortize the loan to a balance ofapproximately $14.32 million at maturity, as well as monthly escrowdeposits for real estate taxes.

EDS MortgageLoan.    The EDS Mortgage matures on October 8, 2015 and bearsinterest at a fixed rate of 5.373%. This non-recourse loanrequires monthly payments of $274,997 representing interest in arrearsand principal sufficient to amortize the loan to a balance ofapproximately $41.91 million at maturity, as well as monthly escrowdeposits for real estate taxes.

Chatsworth MezzanineLoan.    This non-recourse loan bears interest at a fixed rate of6.64%, and requires monthly payments of interest only of $71,955for the period February 1, 2005, through February 1, 2006, andprincipal and interest payments of $170,914, thereafter, which willfully amortize the loan by the maturity date of May 1, 2014.

Repurchase Obligations.    We have $58.3 million ofrepurchase agreements with three counterparties. These repurchaseagreements are used to finance our AAA-rated, short term, floating ratesecurities, backed by commercial or residential mortgage loans, andother investments, generally, prior to obtaining permanent financing.These repurchase obligations mature in less than thirty days, withinterest rates of LIBOR plus 0.05% to 0.07%.

Wachovia Facility.    On July 13, 2005, our wholly ownedsubsidiary NRFC WA Holdings, LLC, or NRFC WA, entered into a masterrepurchase agreement with Wachovia Bank, National Association, or theWachovia facility. The Wachovia facility was amended in September 2005and currently NRFC WA may borrow up to $350 million under this creditfacility in order to finance the acquisition of primarily real estatedebt and other real estate loans and securities. The additionalcapacity and flexibility under the amendment will allow us toaccumulate sufficient collateral for a contemplated real estate debtCDO, or CDO VI, and to continue to finance other investments.

Advance rates under the Wachovia facility range from 55% to95% (subject to increase under certain circumstances) of thevalue of the assets for which the advance is made. Amounts borrowedunder the Wachovia facility bear interest at one-month LIBOR plus aspread which ranges from 0.20% to 3.00%, depending on thetype of asset for which the amount is borrowed. The Wachovia facilityhas an initial maturity date of July 12, 2008, except that certainadvances under the Wachovia facility are required to be repaid byFebruary 24, 2006. If a securitization transaction is not consummatedby March 30, 2006, certain advances under the facility will be subjectto commitment and unused facility fees. We have agreed to a limitedguarantee for the amounts borrowed by NRFC WA under the Wachoviafacility.

NRFC WA may extend the term of the Wachovia facilityfor one year if it is not in default and must pay an extension fee of0.25% of the aggregate amount then outstanding under thefacility. If NRFC WA extends the facility's term, it will berequired to retire 25% of the aggregate amount then outstandingunder the facility during each quarter of the remaining year of theterm. NRFC WA paid Wachovia a $750,000 structuring fee in connectionwith the execution of this facility.

The debt outstanding underthe Wachovia facility is subject to a number of terms, conditions andrestrictions including, without limitation, scheduled interest paymentsand the maintenance of certain margin percentages on amountsoutstanding under the facility. If the market value of an assetsecuring outstanding debt declines, NRFC WA may be required to satisfya margin call by paying cash or providing additional collateral.Failure to meet any margin call could result in an event of defaultwhich would enable Wachovia to exercise various rights and remediesincluding acceleration of the maturity date of the debt outstandingunder the facility and the sale of the collateral. Following September30, 2005, an affiliate of NRFC WA was added as a borrower under theWachovia facility.

Bank of America Facility.    OnSeptember 28, 2005, we entered into a master loan, guarantee andsecurity agreement with Bank of America, N.A., our operatingpartnership and NS Advisors LLC, which we refer to as the Bank ofAmerica facility. The Bank of America facility provides for anunsecured, $50 million revolving credit facility. The term of theunsecured facility is one year, with up to two one-year extensions atthe discretion of Bank of America. If the unsecured facilty is not

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extended by Bank of America, we have theoption in lieu of immediate repayment to amortize the outstandingprincipal balance of the unsecured facility in equal quarterlyinstallments over twelve months after the payment of a quarterly 12.5basis point fee on the outstanding balance under the unsecured facilityat September 27, 2006 and each quarter thereafter. The interest rate onthe unsecured facility is LIBOR, plus 325 basis points.

The Bankof America facility contains certain covenants, including, among otherthings, financial covenants requiring minimum cash liquidity, minimumtangible net worth, maximum debt to tangible net worth and minimum debtservice coverage. The Bank of America facility also contains certaincustomary representations and warranties and events of default. Theobligations of our operating partnership, which is the borrower underthe unsecured facility, are guaranteed by us, NS Advisors LLC and anysubsidiary of our operating partnership whose assets are included inthe borrowing base for the unsecured facility.

Liability toSubsidiary Trusts Issuing Preferred Securities.    On April 12,2005 and May 25, 2005, NorthStar Realty Finance Trust and NorthStarRealty Finance Trust II, which we refer to as the Trusts, sold, in twoprivate placements, trust preferred securities for an aggregate amountof $40 million and $25 million, respectively. We own all of the commonstock of the Trusts. The Trusts used the proceeds to purchase ouroperating partnership's junior subordinated notes due March 30,2035 and September 30, 2035, respectively, which represent all of theTrusts' assets. The terms of the junior subordinated notes aresubstantially the same as the terms of the trust preferred securities.The trust preferred securities have a fixed interest rate of8.15% and 7.74% per annum, respectively, during the firstten years, after which the interest rate will float and reset quarterlyat the three-month LIBOR rate plus 3.25% per annum.

Wemay redeem the notes, in whole or in part, for cash, at par, afterMarch 30, 2010 and September 30, 2010, respectively. To the extent weredeem the notes, the Trusts are required to redeem a correspondingamount of trust preferred securities. On September 16, 2005, we amendedthe trust agreements and indentures to modify some of the payment datesfor a portion of the junior subordinated notes and trust preferredsecurities.

The ability of the Trusts to pay dividends dependson the receipt of interest payments on the notes. We have the right,pursuant to certain qualifications and covenants, to defer payments ofinterest on the notes for up to nine consecutive quarters. If paymentof interest on the notes is deferred, the Trusts will defer thequarterly distributions on the trust preferred securities for acorresponding period. Additional interest accrues on deferred paymentsat the annual rate payable on the notes, compounded quarterly.

The indenture for NorthStar Realty Finance Trust II, has certaincovenants that are substantially similar to those under the DBAGfacility, the Wachovia facility and the unsecured facility with Bank ofAmerica and certain restrictions on issuing additional trust preferredsecurities.

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

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

The DBAG facility has an initial three-year term, which maybe extended for one additional year if NRFC DB Holdings is not indefault and pays an extension fee of 0.25% of the aggregate

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outstanding amount under the facility. IfNRFC DB Holdings extends the term of the facility, it will be requiredto retire 25% of the aggregate outstanding amount each quarterduring the remaining year of the term.

Under the terms of theDBAG facility, NRFC DB Holdings is able to finance the acquisition ofmortgage loans secured by first liens on commercial or multifamilyproperties, junior participation interests in mortgage loans secured byfirst or second liens on commercial or multifamily properties,mezzanine loans secured by a pledge of the entire ownership interest ina commercial or multifamily property, B– or higher rated CMBS andBB or higher rated real estate CDOs, debt securities issued by a REITand syndicated bank loans.

During the period from March 21, 2005through June 14, 2005, amounts advanced under the DBAG facility inorder to finance the acquisition of assets that were included in CDO IVbore interest at one-month LIBOR plus a spread of 1.00% andamounts advanced for all other assets bore interest at one-month LIBORplus a spread which ranges from 0.75% to 2.25%. AfterJune 14, 2005, all amounts advanced under the amended DBAG facilitybear interest at a rate of one-month LIBOR plus the spread which rangesfrom 0.75% to 2.25%. Assets will be financed at advancerates ranging from 40% to 92.5% of the value of theassets as applicable to the asset category.

Effective April 1,2005, the covenants under the DBAG facility require us to maintain at acertain minimum tangible net worth, a certain minimum debt servicecoverage ratio, a certain range of ratios of recourse indebtedness tonet worth and certain minimum amounts of cash or marketable securitiesbased on our ratio of recourse indebtedness to net worth.

Thedebt that may be outstanding under the DBAG facility is subject to anumber of terms, conditions and restrictions including, withoutlimitation, the maintenance of certain margin percentages on amountsoutstanding under the facility. If the market value of an assetsecuring the outstanding debt declines, cash flow due NRFC DB Holdingsmay be suspended and if market value continues to decline, NRFC DBHoldings may be required to satisfy a margin call by paying cash orproviding additional collateral. Failure to meet any margin call couldresult in an event of default which would enable Deutsche Bank AG toexercise various rights and remedies including acceleration of thematurity date of the debt outstanding under the DBAG facility or thesale of the assets financed thereunder. At November 9, 2005, we had noborrowings under the DBAG facility.

At September 30, 2005, we arein compliance with all covenants under our debt obligations.

Capital Expenditures

During 2005, we expect to incurapproximately $150,000 in connection with new tenant leasing costs andcapital expenditures with respect to the net lease portfolio owned byALGM. We anticipate the sources of funds for these expenditures willcome from our working capital and lender reserves.

OtherInvestment Activity

Warehouse Agreement for CDOVII

On September 27, 2005, we entered into a warehousearrangement with a major commercial bank whereby the bank has agreed topurchase up to $400 million of CMBS and other real estate debtsecurities under our direction, with the expectation of selling suchsecurities to our fifth investment grade CDO issuance, or CDO VII. Asof September 30, 2005, we have deposited $2.5 million as security forthe purpose of covering a portion of any losses or costs associatedwith the accumulation of these securities under the warehouse agreementand will be required to deposit additional equity based onaccumulations of securities that will be made under the warehouseagreement. The bank had accumulated no real estate securities under theterms of the warehouse agreement as of September 30, 2005. FromSeptember 30, 2005 through November 10, 2005, the warehouse providerhas acquired approximately $108.8 million in CMBS and REIT debtsecurities under the warehouse agreement. The CDO VII warehouseagreement also provides for our notional participation in the incomethat the assets generate after deducting a notional debt cost.

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Cash Flows

The net cash flowprovided by operating activities of $807.0 million, increased $804.6million for the nine months ended September 30, 2005 from $2.4 millionof cash provided by operations for the nine months ended September 30,2004. This increase was primarily due to sales of short term highlyliquid investments included in operating activities, where thecorresponding repayment of short term repurchase financing is includedin financing activities.

The net cash flow used in investingactivities of $712.6 million increased by $692.7 million for the ninemonths ended September 30, 2005 from $19.9 million for the nine monthsended September 30, 2004. Net cash used in investing activities in 2005consisted primarily of the purchase of operating real estate, fundsused to purchase debt securities available for sale, real estate debtinvestments, as well as funding of new warehouse deposits for ourCDOs.

The net cash flow used in financing activities of $121.6million increased by $140.2 million for the nine months ended September30, 2005 from $18.6 million of cash flow provided by financingactivities for the nine months ended September 30, 2004. The primaryuse of cash flow in financing activities in 2005 was for the repaymentof our repurchase agreements which financed our short term, highlyliquid investments, the repayment of the DBAG facility in connectionwith the closing of CDO IV, the repayment of a portion of the existingmortgage on the ALGM portfolio in connection with the sale of 729Seventh Avenue and payments of dividends and distributions to our unitholders of $8.0 million. This was offset by proceeds from the issuanceof CDO IV bonds, issuance of trust preferred securities and ourmortgage and credit faciility borrowings.

RecentDevelopments

Real Estate Debt Investments

The following summarizes real estate investments acquiredsubsequent to September 30,2005:

|                             |  |                              |        |                              |  |                    |       |                          |  |        |         |         |  |        |         |         |  |  |
|-----------------------------|--|------------------------------|--------|------------------------------|--|--------------------|-------|--------------------------|--|--------|---------|---------|--|--------|---------|---------|--|--|
|                        |  | CarryingValue (in thousands) |        | Allocation by InvestmentType |  | Average Fixed Rate |       | Average SpreadOver LIBOR |
| Whole loans, floatingrate   |  | $                            | 12,849 |                         |  |               | 31.1  | %                   |  |   | — |    |  |   | 3.25    | %  |
| Wholeloans, fixedrate       |  |                         | 13,367 |                         |  |               | 32.4  | %                   |  |   | 5.27    | %  |  |   | — |    |
| Mezzanineloan, floatingrate |  |                         | 15,000 |                         |  |               | 36.3  | %                   |  |   | — |    |  |   | 6.00    | %  |
| Mezzanineloans, fixedrate   |  |                         | 95     |                         |  |               | 0.2   | %                   |  |   | 15.00   | %  |  |   | — |    |
| Total/Average               |  | $                            | 41,311 |                         |  |               | 100.0 | %                   |  |   | 5.33    | %  |  |   | 4.73    | %  |
|                             |

TimarronAcquisition

On October 21, 2005, we entered into a definitivepurchase agreement with Allied Capital Corporation or Allied to acquireTimarron Capital, Inc. Timarron, based in Dallas, Texas, was organizedby former senior executives of Principal Financial and other leadingfinancial institutions to develop a nationwide commercial mortgage loanorigination platform. The closing of the acquisition is expected tooccur in January 2006. Allied Capital has agreed to continue to provideTimarron with warehouse financing to fund its origination activitiesthrough the closing. The purchase price will be between $2.0 millionand $2.6 million, depending upon whether certain performance hurdlesare achieved by Timarron prior to the closing. Following the closing ofthe acquisition, Timarron will be renamed NorthStar Mortgage CapitalLP. NorthStar Mortgage Capital will originate commercial mortgage loansfor our commercial real estate debt portfolio.

1552 Broadway Sale Contract

On October 25,2005 we entered into a definitive agreement to sell our fee interest inthe property at 1552 Broadway in New York City to Riese, for a purchaseprice of $48 million, or $3,970 per square foot. Riese made a $2.0million non-refundable deposit in connection with this agreement. Thefour-story, 12,091 square foot building is located at the corner ofBroadway and West 46th Street in Times Square. The transaction, whichis subject to customary closing conditions, is scheduled to close inthe fourth quarter of 2005. We estimate that we will record a gain onsale of approximately $23.1 million upon closing of the sale of theproperty.

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Dividends

On October 6, 2005,the Company declared a dividend of $0.23 per share of common stock,payable with respect to the quarter ended September 30, 2005 tostockholders of record as of October 14, 2005. The Company made thispayment on October 21, 2005.

Related Party Transactions

Advisory Fee — NorthStar Funding LLC

In2001, our predecessor entered into an advisory agreement with the NSFventure, pursuant to which it receives as compensation for itsmanagement of investments of the NSF venture an advisory fee equal to1% per annum of the capital invested by the NSF venture.Additionally, NorthStar Funding Managing Member LLC is entitled to anincentive profit participation equal to 10% of the profit aftera minimum required return on the NSF venture's capital and areturn of and on capital based upon the operating performance of theNSF venture's investments. Prior to the contribution of theinitial investments to our operating partnership and the related IPOtransactions, NorthStar Funding Managing Member LLC received 75%of this incentive profit participation equal to 10% of theprofit after a minimum required return on NSF venture's capitaland a return of and on capital based on the operating performance ofthe NSF venture's investments. We earned and recognized advisoryfees from the NSF venture of approximately $108,000 and $408,000 forthe three and nine months ended September 30, 2005. Our predecessorearned and recognized advisory fees from the NSF venture ofapproximately $251,000 and $744,000 for the three and nine months endedSeptember 30, 2004. We have received combined profit participationdistributions of $925,000 during the nine months ended September 30,2005. Because such distributions may have to be refunded, no profitparticipation distributions were recognized as income pursuant toMethod 1 of Emerging Issues Task Force Topic D-96.

Advisory and Management Fee Income

In August2003, July 2004, March 2005 and September 2005, CDO I, CDO II, CDO IIIand CDO V, respectively, entered into agreements with NS Advisors, toperform certain advisory services. We earned total fees ofapproximately $1,054,000 and $2,825,000 for the three and nine monthsended September 30, 2005. Our predecessor earned total fees ofapproximately $701,000 and $1,390,000 for the three and nine monthsended September 30, 2004. The unpaid advisory fees of $223,000 and$82,000 are included in due from affiliates in our condensedconsolidated balance sheets as of September 30, 2005 and December 31,2004. We also earned a structuring fee of $500,000 in connection withthe closing of CDO III for the nine months ended September 30, 2005,which was used to reduce our investment in debt securities availablefor sale.

ALGM

On December 28, 2004, weterminated the asset management agreement with Emmes Asset ManagementCo. LLC, an affiliate of NorthStar Capital, for a contractualtermination payment of approximately $380,000, which is equal to twoquarters of payments of the annual fee of $760,000. On that date, ALGMand Emmes entered into a new asset management agreement which iscancelable on 30 days notice by ALGM. The annual asset management feeunder the new agreement is equal to 3.5% of gross collectionsfrom tenants of the properties not to exceed $350,000 or be less than$300,000 per year, except that in the event the assets under managementare decreased the fee shall not have a minimum. Total fees incurredunder the asset management agreement were $24,000 and $67,000 for thethree and nine months ended September 30, 2005.

Sublease Agreement

Upon consummation of ourIPO, we entered into a one-year agreement with NorthStar Capitalpursuant to which NorthStar Capital agreed to provide us, directly orthrough its subsidiaries, with the 

45

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following facilities and services: 1)fully-furnished office space for our employees at NorthStarCapital's corporate headquarters; 2) use of common facilities andoffice equipment, supplies and storage space at NorthStarCapital's corporate headquarters; 3) accounting support andtreasury functions; 4) tax planning and REIT compliance advisoryservices; and 5) other administrative services. For the initial oneyear term of the agreement, NorthStar Capital provided these facilitiesand services to us for an annual fee of approximately $1.57 million,payable in monthly installments, plus additional charges forout-of-pocket expenses and taxes.

Since our IPO, we have hiredadditional accounting, legal and administrative personnel and haveobtained separate office space sufficient to temporarily accommodatemost of our business operations. Accordingly, following the initialone-year term of the shared facilities agreement, which expired onOctober 29, 2005, we terminated the agreement and entered into a morelimited sublease agreement with NorthStar Capital. Under the newsublease, we will rent on a month-to-month basis the NorthStar Capitaloffice space currently used by our accounting, legal and administrativepersonnel (currently 7 people). The sublease rent is calculated as aper person monthly charge, based on a "turnkey" office arrangement (computer, network, telephone andfurniture supplied) for each person utilizing the NorthStar Capitalfacilities. We may increase or decrease the number of people needingsuch accommodations, and we expect that the sublease rental paymentwould increase or decrease accordingly. Rent under the sublease is$30,001 per month commencing November 1, 2005. The sublease agreementhas been approved by a majority of the independent board members ofboth our board of directors and the board of directors of NorthStarCapital.

Total fees and expenses incurred by us under the sharedfacilities and services agreement amounted to $0.3 million and $1.0million for the three and nine months ended September 30, 2005.

Contractual Commitments

As of September 30, 2005, we hadthe following contractual commitments and commercial obligations (inthousands):

|                                                           |  |                      |         |                  |  |          |         |           |  |              |         |           |  |        |         |        |  |        |         |        |  |  |
|-----------------------------------------------------------|--|----------------------|---------|------------------|--|----------|---------|-----------|--|--------------|---------|-----------|--|--------|---------|--------|--|--------|---------|--------|--|--|
|                                                      |  | PaymentsDue byPeriod |
| ContractualObligations                                    |  | Total                |         | Less than 1 year |  | 1-3years |         | 3-5 years |  | After 5years |
| Mortgage loan –ALGM                                 |  | $                    | 14,464  |             |  | $        | 14,464  |      |  | $            | — |      |  | $      | — |   |  | $      | — |   |
| Mortgage loan –Chatsworth                           |  |                 | 43,844  |             |  |     | 67      |      |  |         | 558     |      |  |   | 619     |   |  |   | 42,600  |   |
| Mortgageloan – Salt LakeCity                        |  |                 | 16,972  |             |  |     | 54      |      |  |         | 687     |      |  |   | 760     |   |  |   | 15,471  |   |
| Mortgageloan –EDS                                   |  |                 | 49,120  |             |  |     | — |      |  |         | 749     |      |  |   | 1,394   |   |  |   | 46,977  |   |
| Mezzanineloan payable –Chatsworth                   |  |                 | 13,000  |             |  |     | — |      |  |         | 2,308   |      |  |   | 2,860   |   |  |   | 7,832   |   |
| Repurchaseagreements                                      |  |                 | 58,302  |             |  |     | 58,302  |      |  |         | — |      |  |   | — |   |  |   | — |   |
| Securitiessold, not yetpurchased                          |  |                 | 24,553  |             |  |     | 24,553  |      |  |         | — |      |  |   | — |   |  |   | — |   |
| CDObondspayable                                           |  |                 | 300,000 |             |  |     | — |      |  |         | — |      |  |   | — |   |  |   | 300,000 |   |
| Liabilityto subsidiary trusts issuing preferredsecurities |  |                 | 67,020  |             |  |     | — |      |  |         | — |      |  |   | — |   |  |   | 67,020  |   |
| Wachoviafacility                                          |  |                 | 192,804 |             |  |     | — |      |  |         | — |      |  |   | 192,804 |   |  |   | — |   |
| Bankof Americafacility                                    |  |                 | 12,000  |             |  |     | 3,000   | (1)  |  |         | 9,000   | (1)  |  |   | — |   |  |   | — |   |
| Capitalleases(2)                                          |  |                 | 17,866  |             |  |     | 88      |      |  |         | 712     |      |  |   | 934     |   |  |   | 16,132  |   |
| Operatingleases                                           |  |                 | 13,735  |             |  |     | 304     |      |  |         | 1,104   |      |  |   | 944     |   |  |   | 11,383  |   |
| Totalcontractualobligations                               |  | $                    | 823,680 |             |  | $        | 100,832 |      |  | $            | 15,118  |      |  | $      | 200,315 |   |  | $      | 507,415 |   |
|                                                           |

|  |
|--|
|  |  |
|  |

|     |                                                                                                                                                                                                                                       |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (1) | Assumesthe unsecured facility with Bank of America is not extended and assumesthe payment of a quarterly 12.5 basis point fee on the outstandingbalance under the unsecured facility at September 27, 2006 and eachquarterthereafter. |

|     |                                         |
|-----|-----------------------------------------|
| (2) | Includesinterest on the capital leases. |

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Off Balance Sheet Arrangements

As of September 30, 2005, we had the material off balance sheetarrangements described below.

We have provided an indemnity toNorthStar Partnership for any liability it may have under its limitedguaranties to the lender under ALGM's mortgage loan. At September30, 2005, NorthStar Partnership had a maximum exposure of $14.5 millionunder its guaranty to Greenwich Capital for such triggering events asfraud, misapplication of funds and failure to pay taxes. NorthStarPartnership also provided Greenwich Capital with a limited repaymentguaranty that may be triggered by the termination of a lease related toone of the properties in the New York property portfolio. The maximumexposure for such lease termination was equal to $2.5 million atSeptember 30, 2005.

Our potential losses in CDO I, CDO II, CDOIII and CDO V are limited to our aggregate carrying value which wasapproximately $107.0 million at September 30, 2005.

The terms ofthe portfolio of real estate securities held by CDO I, CDO II, CDO IIIand CDO V are matched with the terms of the non-recourse CDOliabilities. These CDO liabilities are repaid with the proceeds of theprincipal payments on the real estate securities collateralizing theCDO liabilities when these payments are actually received. There is norefinancing risk associated with the CDO liabilities, as principal isonly due to the extent that it has been collected on the underlyingreal securities and the stated maturities are noted above. CDOs producea relatively predictable income stream based on the spread between theinterest earned on the underlying securities and the interest paid onthe CDO liabilities. This spread may be reduced by credit losses on theunderlying securities or by hedging mismatches. CDO I, CDO II, CDO IIIand CDO V have not incurred any losses on any of their securitiesinvestments from the date of purchase through September 30, 2005. Wereceive quarterly cash distributions from CDO I and monthly cashdistributions from CDO II, CDO III and CDO V, each representing ourproportionate share of the residual cash flow from the CDOs, as well ascollateral advisory fees and interest income on the unrated incomenotes of CDO II, CDO III and CDO V. Our residual interests in the cashflows of CDO I, CDO II, CDO III and CDO V are accounted for as debtsecurities pursuant to Emerging Issues Task Force Topic 99-20.

The following table describes certain terms of the collateral forand the notes issued by CDO I, CDO II, CDO III and CDO V as ofSeptember 30,2005:

|        |  |                                          |         |                             |  |                                    |      |                                        |  |                             |      |                |  |   |         |        |  |        |      |         |  |        |          |        |  |  |
|--------|--|------------------------------------------|---------|-----------------------------|--|------------------------------------|------|----------------------------------------|--|-----------------------------|------|----------------|--|---|---------|--------|--|--------|------|---------|--|--------|----------|--------|--|--|
|   |  | CDOCollateral                            |         | CDONotes                    |
|   |  | Par Valueof CDO Collateral (inthousands) |         | WeightedAverageInterestRate |  | WeightedAverageExpectedLife(years) |      | Outstanding CDO Notes (inthousands)(1) |  | WeightedAverageInterestRate |      | StatedMaturity |
| CDOI   |  | $                                        | 352,066 |                        |  |                               | 6.60 | %                                 |  |                        | 6.47 |           |  | $ | 336,776 |   |  |   | 6.05 | %  |  |   | 8/1/2038 |   |
| CDOII  |  | $                                        | 393,485 |                        |  |                               | 6.22 | %                                 |  |                        | 7.26 |           |  | $ | 357,083 |   |  |   | 5.49 | %  |  |   | 6/1/2039 |   |
| CDOIII |  | $                                        | 401,929 |                        |  |                               | 6.20 | %                                 |  |                        | 6.74 |           |  | $ | 361,000 |   |  |   | 5.40 | %  |  |   | 6/1/2040 |   |
| CDOV   |  | $                                        | 490,979 |                        |  |                               | 5.84 | %                                 |  |                        | 8.52 |           |  | $ | 461,500 |   |  |   | 2.88 | %  |  |   | 9/5/2045 |   |
|        |

|  |
|--|
|  |  |
|  |

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

CDO I, CDO II, CDO IIIand CDO V are variable interest entities. However, management hasdetermined that we are not, and our predecessor was not, the primarybeneficiary of CDO I, CDO II, CDO III and CDO V and as such, inaccordance with FIN 46R, we did not consolidate CDO I, CDO II,CDO IIIand CDO V. The FASB has continued to discuss potential refinements toFIN 46R associated with, among other things, the types of interestswhich create variability and which type of interests absorb income andloss variability, and how such income and loss variability should bemeasured. In the event that the FASB modifies its interpretation of FIN46R as it applies to the consolidation of variable interest entities,we would reevaluate our determination of the primary beneficiary.Depending on the modifications which are made, it is possible that theCompany may be required to consolidate our interests in our CDOs in thefuture.

At this time, we do not anticipate a substantial risk ofincurring a loss with respect to any of the arrangements describedabove.

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Inflation

Our leases for tenantsof our net lease properties areeither:

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

|  |              |                                                                                                                                                                                     |
|--|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  | •  | operatingleases which provide for separate escalations of real estate taxes andoperating expenses over a base amount, and/or increases in the baserent based on changes in the CPI. |

We believe that inflationaryincreases in expenses will generally be offset by the expensereimbursements and contractual rent increases described above to theextent of occupancy.

We believe that the risk associated with anincrease in market interest rates on the floating rate debt used tofinance our investments in CDO I, CDO II, CDO III, CDO V, ALGM, and ourdirect investments in real estate debt, is largely offset by ourstrategy of matching the terms of our assets with the terms of ourliabilities and through our use of hedging instruments.

Fundsfrom Operations and Adjusted Funds from Operations

Managementbelieves that funds from operations, or FFO, and adjusted funds fromoperations, or AFFO, each of which are non-GAAP measures, areadditional appropriate measures of the operating performance of a REIT.We compute FFO in accordance with the standards established by theNational Association of Real Estate Investment Trusts, or NAREIT, asnet income or loss (computed in accordance with GAAP), excluding gainsor losses from sales of depreciable properties, the cumulative effectof changes in accounting principles, real estate-related depreciationand amortization, and after adjustments for unconsolidated/uncombinedpartnerships and joint ventures. We calculate AFFO by subtracting from(or adding) toFFO:

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

|  |              |                                                                                                               |
|--|--------------|---------------------------------------------------------------------------------------------------------------|
|  | •  | an adjustment toreverse the effects of straight-lining of rents and fair value leaserevenue under FAS 141;and |

|  |              |                                                                                                                |
|--|--------------|----------------------------------------------------------------------------------------------------------------|
|  | •  | the amortization oraccrual of various deferred costs including intangible assets andequity based compensation. |

Our calculation of AFFO differs fromthe methodology for calculating AFFO utilized by certain other REITsand, accordingly, may not be comparable to such other REITs.

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

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

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Set forth below isa reconciliation of our calculations of FFO and AFFO to net incomebefore minority interests for the three and nine months ended September30,2005:

|                                                   |  |                         |           |            |  |        |            |         |  |  |
|---------------------------------------------------|--|-------------------------|-----------|------------|--|--------|------------|---------|--|--|
|                                              |  | ThreeMonths             |           | NineMonths |
|                                              |  | EndedSeptember 30, 2005 |
| **Funds fromOperations:**                         |  |                    |      |       |  |   |       |    |
| Income beforeminorityinterests                    |  | $                       | 5,679,000 |       |  | $      | 8,454,000  |    |
| Adjustments:                                      |  |                    |      |       |  |   |       |    |
| Depreciationandamortization                       |  |                    | 1,080,000 |       |  |   | 2,833,000  |    |
| Fundsfrom discontinuedoperations                  |  |                    | 136,000   |       |  |   | 509,000    |    |
| FundsfromOperations                               |  | $                       | 6,895,000 |       |  | $      | 11,796,000 |    |
| **AdjustedFunds from Operations:**                |  |                    |      |       |  |   |       |    |
| FundsfromOperations                               |  | $                       | 6,895,000 |       |  | $      | 11,796,000 |    |
| Straightlinerental income,net                     |  |                    | (13,000   | )     |  |   | (47,000    | )  |
| Straightlinerental income, discontinuedoperations |  |                    | —   |       |  |   | (290,000   | )  |
| Amortizationof deferredcompensation               |  |                    | 740,000   |       |  |   | 2,499,000  |    |
| Fairvalue lease revenue (FAS 141adjustment)       |  |                    | (1,000    | )     |  |   | (4,000     | )  |
| AdjustedFunds fromOperations                      |  | $                       | 7,621,000 |       |  | $      | 13,954,000 |    |
|                                                   |

ITEM3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the exposure to loss resulting from changes ininterest rates and equity prices. We are subject to credit risk andinterest rate risk with respect to our investments in real estate debtand real estate securities. The primary market risk that we are exposedto is interest rate risk. Interest rates are highly sensitive to manyfactors, including governmental monetary and tax policies, domestic andinternational economic and political considerations and other factorsbeyond our control. Our interest rate risk sensitive assets,liabilities and related derivative positions are generally held fornon-trading purposes. A hypothetical 100 basis point increase ininterest rates applied to our variable rate assets would increase ourannual interest income by approximately $5,810,000, offset by anincrease in our interest expense of approximately $5,294,000 on ourvariable rate liabilities.

Real Estate Debt

We investin real estate debt instruments secured by commercial and multifamilyproperties, including first lien mortgage loans, junior participationsin first lien mortgage loans, second lien mortgage loans, mezzanineloans, and preferred equity interests in borrowers who own suchproperties. We generally hold these instruments for investment ratherthan trading purposes. These investments are either floating or fixedrate. The interest rates on our floating rate investments typicallyfloat at a fixed spread over an index such as LIBOR. These instrumentstypically reprice every 30 days based upon LIBOR in effect at thattime. Given the frequent and periodic repricing of our floating rateinvestments, changes in interest rates are unlikely to affect the valueof our floating rate portfolio. Changes in short term rates will,however, affect earnings from our investments. Increases in LIBOR willincrease the interest income received by us on our investments andtherefore will increase our earnings. Decreases in LIBOR have theopposite effect.

We also invest in fixed rate investments. Thevalue of these investments may be affected by changes in long terminterest rates. To the extent that long term interest rates increase,the value of long term fixed rate assets is diminished. Any fixed ratedebt investments which we hold would be similarly impacted. We do notgenerally seek to hedge this type of risk unless the asset is leveragedas the costs of such a hedging transaction over the term of such aninvestment would generally outweigh the benefits. If fixed rate debt isfunded with floating rate liabilities, the funding cost will be fixedthrough the use of interest rate swaps, caps or other hedges. Becausethe interest rates on our fixed rate investments are generally fixedthrough maturity of the investment, changes in interest rates do notaffect the income we earn from our fixed rate investments.

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In our real estate debt business we arealso exposed to credit risk, which is the risk that a borrower underour loan agreements cannot repay its obligations to us in a timelymanner. While we have never experienced a payment default or even alate payment to date, our position in the capital structure may exposeus to losses as a result of such default in the future. In the eventthat the borrower cannot repay our loan, we may exercise our remediesunder the loan documents which may include a foreclosure against thecollateral if we have a foreclosure right as a real estate debtholderunder the loan agreement. The real estate debt that we intend to investin will generally allow us to demand foreclosure as a real estatedebtholder if our loan is in default. To the extent the value of ourcollateral exceeds the amount of our loan (including all debt senior tous) and the expenses we incur in collecting on our loan, we wouldcollect 100% of our loan amount. To the extent that the amountof our loan plus all debt senior to our position exceeds the realizablevalue of our collateral, then we would incur a loss. We also incurcredit risk in our periodically scheduled interest payments which maybe interrupted as a result of the operating performance of theunderlying collateral.

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

We expect our investments to be denominated in U.S. dollars or, ifthey are denominated in another currency, to be converted back to U.S.dollars through the use of currency swaps. It may not be possible toeliminate all of the currency risk as the payment characteristics ofthe currency swap may not exactly match the payment characteristics ofthe investments.

Real Estate Securities

In our realestate securities business, we mitigate credit risk through creditanalysis, subordination and diversification. The commercialmortgage-backed securities we invest in are generally junior in rightof payment of interest and principal to one or more senior classes, butbenefit from the support of one or more subordinate classes ofsecurities or other form of credit support within a securitizationtransaction. The senior unsecured REIT debt securities we invest inreflect comparable credit risk. Credit risk refers to each individualborrower's ability to make required interest and principalpayments on the scheduled due dates. We believe that these securitiesoffer attractive risk-adjusted returns with reasonable long termprincipal protection under a variety of default and loss scenarios.While the expected yield on these securities is sensitive to theperformance of the underlying assets, the more subordinated securitiesand certain other features of a securitization, in the case of mortgagebacked securities, and the issuer's underlying equity andsubordinated debt, in the case of REIT securities, are designed to bearthe first risk of default and loss. The real estate securitiesportfolios of our CDOs are diversified by asset type, industry,location and issuer. We further minimize credit risk by activelymonitoring CDO I's, CDO II's, CDO III's and CDOV's real estate securities portfolios and the underlying creditquality of their holdings and, where appropriate, liquidating ourinvestments to mitigate the risk of loss.

At September 30, 2005,the real estate securities that serve as collateral for CDO I, CDO II,CDO III and CDO V each had an overall weighted average credit rating ofapproximately BBB- and approximately 74.6%, 74.4%,72.2% and 81.1%, respectively, of these securities areinvestment grade.

The real estate securities underlying CDO I,CDO II , CDO III and CDO V are also subject to spread risk. Themajority of these securities are fixed rate securities, which arevalued based on a market credit spread over the rate payable on fixedrate U.S. Treasuries of like maturity. In other words, their value isdependent on the yield demanded on such securities by the market, asbased on their credit relative to U.S. Treasuries. An excessive supplyof these securities combined with reduced demand will generally causethe market to require a higher yield on these securities, resulting inthe use of a higher or "wider" spread overthe benchmark rate (usually the applicable U.S. Treasury securityyield) to value these securities. Under these conditions, the value ofour real estate securities portfolio would tend to decrease.Conversely, if the spread used to value these securities were todecrease or "tighten," the value of our realestate securities would tend to increase. Such changes in 

50

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the market value of our real estatesecurities portfolio may affect our net equity or cash flow eitherdirectly through their impact on unrealized gains or losses onavailable-for-sale securities by diminishing our ability to realizegains on such securities, or indirectly through their impact on ourability to borrow and access capital.

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

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

Ourfinancing strategy is dependent on our ability to place thematch-funded debt we use to finance our real estate securities atspreads that provide a positive arbitrage. If spreads on the bondsissued by CDOs widen or if demand for these liabilities ceases toexist, then our ability to execute future CDO financings will beseverely restricted.

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

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

Debt Securities Held for Trading

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

Net Lease Properties

Our ability to managethe interest rate risk and credit risk associated with the assets weacquire is integral to the success of our net lease propertiesinvestment strategy. Although we may, in special 

51

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situations, finance our purchase of net leaseassets with floating rate debt, our general policy will be to mitigateour exposure to rising interest rates by financing our purchases withfixed rate mortgages. We will seek to match the term of fixed ratemortgages to our expected holding period for the underlying asset.Factors we will consider to assess the expected holding period willinclude, among others, the primary term of the lease as well as anyextension options that may exist.

We expect the credit profilesof our tenants will primarily be unrated and below investment grade. Inorder to ensure that we have as complete an understanding as possibleof a tenant's ability to satisfy its obligations under its lease,we expect to undertake a rigorous credit evaluation of each tenantprior to executing sale/leaseback or net lease asset acquisitions. Thisanalysis will include an extensive due diligence investigation of thetenant's business as well as an assessment of the strategicimportance of the underlying real estate to the tenant's corebusiness operations. Where appropriate, we may seek to augment thetenant's commitment to the facility by structuring variousprotection mechanisms into the underlying leases. These mechanismscould include security deposit requirements or affiliate guaranteesfrom entities we deem to be creditworthy.

Derivatives andHedging Activities

To limit the exposure to the variable LIBORrate on our corporate debt, we entered into various swap agreements tofix the LIBOR rate on a portion of our variable rate debt. The fixedLIBOR rates ranges from 4.18% to 5.03%. The followingtable summarizes the notional amounts and fair (carrying) values of ourderivative financial instruments as of September 30, 2005 (inthousands):

|                                       |  |                |        |            |  |                  |     |        |  |        |                                    |        |  |  |
|---------------------------------------|--|----------------|--------|------------|--|------------------|-----|--------|--|--------|------------------------------------|--------|--|--|
|                                  |  | NotionalAmount |        | Fair Value |  | Range ofMaturity |
| Interest rate swaps, treated ashedges |  | $              | 39,912 |       |  | $                | 248 |   |  |   | December 2010– November 2018 |   |
|                                       |

ITEM 4.    CONTROLS ANDPROCEDURES

NorthStar Realty Finance Corp. (the"Company") became subject to the periodic andother reporting requirements of the Securities Exchange Act of 1934, asamended (the "Exchange Act") on October 25,2004, the effective date of the Company's registration statementrelating to its IPO. On October 29, 2004, the Company received aninitial portfolio of real estate-related investments (the"Initial Investments") pursuant to certaincontribution agreements with subsidiaries of NorthStar CapitalInvestment Corp. ("NCIC") and commencedoperations. The financial statements included in this Quarterly Reporton Form 10-Q are for the Company as of September 30, 2005 and for thethree and nine months ended September 30, 2005 and for NorthStar RealtyFinance Corp. Predecessor (the"Predecessor"), a combination of NCIC'scontrolling and non-controlling interests in entities representing theInitial Investments, as of December 31, 2004 and for the three and ninemonths ended September 30, 2004.

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

As disclosed in the Company's Quarterly Report onForm 10-Q for the period ending September 30, 2004 (the"Third Quarter 10-Q") filed on December 30,2004, management identified certain deficiencies in thePredecessor's internal controls over financial reporting duringthe course of management's review in December 2004 of thefinancial statements of the Predecessor that were to be included in theThird Quarter Form 10-Q. Based upon further investigation, the Companydiscovered 

52

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certain errors in the accounting fortransactions entered into during September and the third quarter of2004 in connection with the Predecessor's CDO II and in thereporting of allocated general and administrative expenses. Theseerrors required the Company to adjust the Predecessor's financialstatements for the nine months ended September 30, 2004, as describedin Note 2 to the financial statements included in the Third QuarterForm 10-Q, and to make certain adjustments to the Predecessor'sfinancial statements for the three and nine months ended September 30,2004. As further disclosed in the Third Quarter Form 10-Q, thedeficiencies identified by management in December 2004 included (1) thecommunication between business unit personnel and financial reportingpersonnel with respect to the accounting for certain transactionsassociated with the Predecessor's CDO investments and otherCompany activity, (2) the level of training of accounting and financialreporting personnel, and (3) the level of detailed, quality controlreview of the Predecessor's financial statements. Taken together,these deficiencies rose to the level of a material weakness in thePredecessor's internal controls over financial reporting for thethree months ended September 30, 2004. As a result of the materialweakness identified in the Predecessor's internal controls overfinancial reporting and the issues that arose during the course of thereview in December 2004 of the Predecessor's financial statementsfor the third quarter of 2004, the Company's chief executiveofficer and chief financial officer concluded that thePredecessor's disclosure controls and procedures at September 30,2004 were not effective to ensure that financial information related tosuch items was recorded, processed, summarized and reported accuratelywithin the time periods specified in the SEC's rules andforms.

Commencing in December 2004 and continuing into the thirdquarter of 2005, the Company has undertaken a number of initiatives toremedy the deficiencies identified by management in thePredecessor's internal controls over financial reporting so thatthe Company's disclosure controls and procedures will beeffective for subsequent periods. In this regard, the Company (1) hireda chief accounting officer with significant GAAP and SEC financialreporting experience on January 20, 2005, (2) hired three additionalaccounting staff members (3) hired a manager of operations for itssecurities trading and CDO related activities, (4) hired an in-housecorporate counsel, (5) implemented policies to enhance communicationbetween business unit and financial reporting personnel in order toensure comprehensive review by management level business unit personnelof the recording of Company transactions, (6) retained an outsideaccounting firm to review processes and procedures that the Company hasadopted in connection with its financial reporting and to assist in thepreparation and review of its financial reports, (7) adopted processesfor documenting and verifying the accounting for CDO relatedtransactions, and (8) implemented procedures requiring more detailed,timely and comprehensive reporting from third party service providers,including its CDO warehouse provider. In addition, the Company hasimproved its training of accounting and financial reporting personnelby formalizing in writing and distributing to personnel the accountingpolicies and treatment of transactions entered into by each businesssegment of the Company.

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

53

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The Company has and will continue toevaluate the effectiveness of its disclosure controls and proceduresand internal controls over financial reporting on an ongoing basis andwill take corrective action and implement improvements asappropriate.

Except for the initiatives described above, therewere no changes in the Company's internal control over financialreporting during the fiscal quarter ended September 30, 2005 thatmaterially affected, or are reasonably likely to materially affect, theCompany's internal control over financial reporting.

PARTII – OTHER INFORMATION

ITEM 1.    LEGALPROCEEDINGS

None.

ITEM 2.    UNREGISTERED SALES OFEQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM3.    DEFAULTS UPON SENIOR SECURITIES

None.

ITEM4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5.    OTHER INFORMATION

None.

54

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ITEM6.    EXHIBITS

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

|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |  |  |  |
|------|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| No.  |  | ExhibitDescription                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 2.1  |  | Contribution Agreement,dated as of October 29, 2004, by and among NS Advisors Holdings LLC,Presidio Capital Investment Company, LLC and NorthStar Realty FinanceLimited Partnership*                                                                                                                                                                                                                                                                                                                                                     |
| 2.2  |  | ContributionAgreement, dated as of October 29, 2004, by and among NorthStarPartnership, L.P., NorthStar Funding Managing Member Holdings LLC andNorthStar Realty Finance Limited Partnership*                                                                                                                                                                                                                                                                                                                                            |
| 2.3  |  | Purchase and Sale Agreement, dated as of October29, 2004, between NorthStar Realty Finance Limited Partnership and ALGMI Equity, LLC*                                                                                                                                                                                                                                                                                                                                                                                                    |
| 3.1  |  | Articles of Amendmentand Restatement of NorthStar Realty Finance Corp., as filed with theState Department of Assessments and Taxation of Maryland on October 20,2004 (incorporated by reference to Exhibit 3.1 to the Company'sRegistration Statement on Form S-11 (File No. 333-114675))                                                                                                                                                                                                                                                |
| 3.2  |  | Bylaws of NorthStar Realty Finance Corp.(incorporated by reference to Exhibit 3.2 to the Company'sRegistration Statement on Form S-11 (File No. 333-114675))                                                                                                                                                                                                                                                                                                                                                                             |
| 3.3  |  | Amendment No. 1 to the Bylaws of NorthStar RealtyFinance Corp. (incorporated by reference to Exhibit 3.3 to theCompany's Current Report on Form 8-K, filed on April 27,2005)                                                                                                                                                                                                                                                                                                                                                             |
| 4.1  |  | Registration Rights Agreement,dated as of October 29, 2004, by and among NorthStar Realty FinanceCorp., NorthStar Partnership, L.P., NorthStar Funding Managing MemberHoldings LLC and NS Advisors Holdings LLC*                                                                                                                                                                                                                                                                                                                         |
| 10.1 |  | Agreement of Limited Partnership of NorthStarRealty Finance Limited Partnership, dated as of October 19, 2004, byand among NorthStar Realty Finance Corp., as sole general partner andinitial limited partner and the other limited partners a party theretofrom time to time*                                                                                                                                                                                                                                                           |
| 10.2 |  | Non-CompetitionAgreement, dated as of October 29, 2004, by and among NorthStar RealtyFinance Corp., NorthStar Realty Finance Limited Partnership, NorthStarCapital Investment Corp. and NorthStar Partnership, L.P.*                                                                                                                                                                                                                                                                                                                     |
| 10.3 |  | Shared Facilities and Services Agreement, datedas of October 29, 2004, by and between NorthStar Realty Finance Corp.and NorthStar Capital Investment Corp.*                                                                                                                                                                                                                                                                                                                                                                              |
| 10.4 |  | Amended, Restated and Consolidated Fee andLeasehold Mortgage, Assignment of Leases and Rents and SecurityAgreement, dated as of December 4, 2002, by and among 729 Demi-TasseLLC, 1552 Lonsdale LLC, ALGM Leasehold II LLC, ALGM Leasehold III LLC,ALGM Leasehold VI LLC, ALGM Leasehold VIII LLC, ALGM Leasehold IX LLC,ALGM Leasehold X LLC, ALGM Leasehold XII LLC and Greenwich CapitalFinancial Products, Inc. (incorporated by reference to Exhibit 10.1 tothe Company's Registration Statement on Form S-11 (File No.333-114675)) |
| 10.5 |  | Executive EmploymentAgreement, dated as of October 22, 2004, between David T. Hamamoto andNorthStar Realty Finance Corp.*                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.6 |  | Executive Employment Agreement, dated as ofOctober 22, 2004, between Mark E. Chertok and NorthStar Realty FinanceCorp.*                                                                                                                                                                                                                                                                                                                                                                                                                  |
|      |

55

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|       |  |                                                                                                                                                                                                                                                                                                                                                                |  |  |  |  |
|-------|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| No.   |  | ExhibitDescription                                                                                                                                                                                                                                                                                                                                             |
| 10.7  |  | Executive EmploymentAgreement, dated as of October 22, 2004, between Jean-Michel Wasterlainand NorthStar Realty Finance Corp.*                                                                                                                                                                                                                                 |
| 10.8  |  | Executive Employment Agreement, dated as ofOctober 22, 2004, between Daniel R. Gilbert and NorthStar RealtyFinance Corp.*                                                                                                                                                                                                                                      |
| 10.9  |  | NorthStar RealtyFinance Corp. 2004 Omnibus Stock Incentive Plan*                                                                                                                                                                                                                                                                                               |
| 10.10 |  | LTIP Unit Vesting Agreement under the NorthStarRealty Finance Corp. 2004 Omnibus Stock Incentive Plan among NorthStarRealty Finance Corp., NorthStar Realty Finance Limited Partnership andNRF Employee, LLC*                                                                                                                                                  |
| 10.11 |  | Form of VestingAgreement for Units of NRF Employee, LLC, each dated as of October 29,2004, between NRF Employee, LLC and certain employees and co-employeesof NorthStar Realty Finance Corp.*                                                                                                                                                                  |
| 10.12 |  | Form of Restricted Stock Agreement (incorporated by reference toExhibit 10.7(a) to the Company's Registration Statement on FormS-11 (File No. 333-114675))                                                                                                                                                                                                     |
| 10.13 |  | NorthStarRealty Finance Corp. 2004 Long Term Incentive Bonus Plan*                                                                                                                                                                                                                                                                                             |
| 10.14 |  | Form of Notification under NorthStar RealtyFinance Corp. 2004 Long Term Incentive Bonus Plan*                                                                                                                                                                                                                                                                  |
| 10.15 |  | Form of Indemnification Agreement for directorsand officers of NorthStar Realty Finance Corp. (incorporated byreference to Exhibit 10.15 to the Company's RegistrationStatement on Form S-11 (File No. 333-114675))                                                                                                                                            |
| 10.16 |  | Amended and Restated Master RepurchaseAgreement, dated as of March 21, 2005, between NRFC DB Holdings, LLCand Deutsche Bank AG, Cayman Islands Branch**                                                                                                                                                                                                        |
| 10.17 |  | Amended and Restated Junior SubordinatedIndenture, dated as of September 16, 2005, between NorthStar RealtyFinance Limited Partnership and JPMorgan Chase Bank, NationalAssociation, as trustee****                                                                                                                                                            |
| 10.18 |  | SecondAmended and Restated Trust Agreement, dated as of September 16, 2005,among NorthStar Realty Finance Limited Partnership, as depositor,JPMorgan Chase Bank, National Association, as property trustee, ChaseBank USA, National Association, as Delaware trustee and Mark Chertok,David Hamamoto and Richard McCready, each as administrativetrustees****  |
| 10.19 |  | Amended and RestatedJunior Subordinated Indenture, dated as of September 16, 2005, betweenNorthStar Realty Finance Limited Partnership and JPMorgan Chase Bank,National Association, as trustee****                                                                                                                                                            |
| 10.20 |  | Second Amended and Restated Trust Agreement, dated as of September16, 2005, among NorthStar Realty Finance Limited Partnership, asdepositor, JPMorgan Chase Bank, National Association, as propertytrustee, Chase Bank USA, National Association, as Delaware trustee andMark Chertok, David Hamamoto and Richard McCready, each asadministrative trustees**** |
| 10.21 |  | MasterRepurchase Agreement, dated as of July 13, 2005, between NRFC WAHoldings, LLC and Wachovia Bank, National Association (incorporated byreference to the like-numbered exhibit to the Company's QuarterlyReport on Form 10-Q for the quarter ended June 30, 2005)                                                                                          |
| 10.22 |  | First Amendment to the Master RepurchaseAgreement, dated as of August 24, 2005, between NRFC WA Holdings, LLCand Wachovia Bank, National Association****                                                                                                                                                                                                       |
|       |

56

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|       |  |                                                                                                                                                                                                                 |  |  |  |  |
|-------|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| No.   |  | ExhibitDescription                                                                                                                                                                                              |
| 10.23 |  | Second Amendment tothe Master Repurchase Agreement, dated as of September 20, 2005,between NRFC WA Holdings, LLC and Wachovia Bank, NationalAssociation****                                                     |
| 10.24 |  | Master Loan,Guarantee and Security Agreement, dated as of September 28, 2005,between NorthStar Realty Finance Limited Partnership, NorthStar RealtyFinance Corp., NS Advisors LLC and Bank of America, N.A.**** |
| 10.25 |  | Third Amendment to the Master RepurchaseAgreement, dated as of September 30, 2005, by and among NRFC WAHoldings, LLC and Wachovia Bank, National Association****                                                |
| 10.26 |  | Omnibus Amendment to the Master RepurchaseAgreement, dated as of October 21, 2005, between NRFC WA Holdings, LLC,NRFC WA Holdings II, LLC and Wachovia Bank, NationalAssociation                                |
| 10.27 |  | Agreement of Purchase andSale, dated October 25, 2005, between 1552 Lonsdale, LLC and 1552 BwayOwner, LLC                                                                                                       |
| 10.28 |  | Fourth Amendment to theMaster Repurchase Agreement, dated October 28, 2005, by and among NRFCWA Holdings, LLC, NRFC WA Holdings II, LLC and Wachovia Bank, NationalAssociation                                  |
| 10.29 |  | Sublease, dated October29, 2005, between NorthStar Partnership, L.P. and NorthStar RealtyFinance Limited Partnership                                                                                            |
| 31.1  |  | Certification of David T. Hamamoto, ChiefExecutive Officer pursuant to Rule 13a - 14(a) of the ExchangeAct                                                                                                      |
| 31.2  |  | Certification of Mark E. Chertok,Chief Financial Officer pursuant to Rule 13a - 14(a) of the ExchangeAct                                                                                                        |
| 32.1  |  | Certification of David T.Hamamoto, Chief Executive Officer pursuant to Section 1350 of Chapter63 of Title 18 of the United States Code                                                                          |
| 32.2  |  | Certification of Mark E. Chertok, Chief Financial Officer pursuantto Section 1350 of Chapter 63 of Title 18 of the United StatesCode                                                                            |
|       |

|  |
|--|
|  |  |
|  |

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

|    |                                                                                                                                                           |
|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** | Incorporated by reference to thelike-numbered exhibit to NorthStar Realty Finance Corp.'s AnnualReport on Form 10-K for the year ended December 31, 2004. |

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

|      |                                                                                                                                                          |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
| **** | Incorporated by reference tothe like-numbered exhibit to the NorthStar Realty Finance Corp.Registration Statement on Form S-11 filed on October 12,2005. |

57

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SIGNATURES

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

|                        |  |                               |  |                                                                                                                                                                                                                                         |  |  |  |  |  |  |
|------------------------|--|-------------------------------|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|--|--|
|                   |  | NORTHSTARREALTY FINANCE CORP. |
| Date:November 14, 2005 |  | By:                           |  | /S/ David T.Hamamoto                     Name: David T.Hamamoto Title: Chief Executive Officer                                      |
|                   |  | By:                           |  | /S/ Mark E.Chertok                            Name: MarkE. Chertok Title: Chief FinancialOfficer |
|                        |

58

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EXHIBITINDEX

|      |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |  |  |  |
|------|--|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| No.  |  | ExhibitDescription                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 2.1  |  | Contribution Agreement,dated as of October 29, 2004, by and among NS Advisors Holdings LLC,Presidio Capital Investment Company, LLC and NorthStar Realty FinanceLimited Partnership*                                                                                                                                                                                                                                                                                                                                                     |
| 2.2  |  | ContributionAgreement, dated as of October 29, 2004, by and among NorthStarPartnership, L.P., NorthStar Funding Managing Member Holdings LLC andNorthStar Realty Finance Limited Partnership*                                                                                                                                                                                                                                                                                                                                            |
| 2.3  |  | Purchase and Sale Agreement, dated as of October29, 2004, between NorthStar Realty Finance Limited Partnership and ALGMI Equity, LLC*                                                                                                                                                                                                                                                                                                                                                                                                    |
| 3.1  |  | Articles of Amendmentand Restatement of NorthStar Realty Finance Corp., as filed with theState Department of Assessments and Taxation of Maryland on October 20,2004 (incorporated by reference to Exhibit 3.1 to the Company'sRegistration Statement on Form S-11 (File No. 333-114675))                                                                                                                                                                                                                                                |
| 3.2  |  | Bylaws of NorthStar Realty Finance Corp.(incorporated by reference to Exhibit 3.2 to the Company'sRegistration Statement on Form S-11 (File No. 333-114675))                                                                                                                                                                                                                                                                                                                                                                             |
| 3.3  |  | Amendment No. 1 to the Bylaws of NorthStar RealtyFinance Corp. (incorporated by reference to Exhibit 3.3 to theCompany's Current Report on Form 8-K, filed on April 27,2005)                                                                                                                                                                                                                                                                                                                                                             |
| 4.1  |  | Registration Rights Agreement,dated as of October 29, 2004, by and among NorthStar Realty FinanceCorp., NorthStar Partnership, L.P., NorthStar Funding Managing MemberHoldings LLC and NS Advisors Holdings LLC*                                                                                                                                                                                                                                                                                                                         |
| 10.1 |  | Agreement of Limited Partnership of NorthStarRealty Finance Limited Partnership, dated as of October 19, 2004, byand among NorthStar Realty Finance Corp., as sole general partner andinitial limited partner and the other limited partners a party theretofrom time to time*                                                                                                                                                                                                                                                           |
| 10.2 |  | Non-CompetitionAgreement, dated as of October 29, 2004, by and among NorthStar RealtyFinance Corp., NorthStar Realty Finance Limited Partnership, NorthStarCapital Investment Corp. and NorthStar Partnership, L.P.*                                                                                                                                                                                                                                                                                                                     |
| 10.3 |  | Shared Facilities and Services Agreement, datedas of October 29, 2004, by and between NorthStar Realty Finance Corp.and NorthStar Capital Investment Corp.*                                                                                                                                                                                                                                                                                                                                                                              |
| 10.4 |  | Amended, Restated and Consolidated Fee andLeasehold Mortgage, Assignment of Leases and Rents and SecurityAgreement, dated as of December 4, 2002, by and among 729 Demi-TasseLLC, 1552 Lonsdale LLC, ALGM Leasehold II LLC, ALGM Leasehold III LLC,ALGM Leasehold VI LLC, ALGM Leasehold VIII LLC, ALGM Leasehold IX LLC,ALGM Leasehold X LLC, ALGM Leasehold XII LLC and Greenwich CapitalFinancial Products, Inc. (incorporated by reference to Exhibit 10.1 tothe Company's Registration Statement on Form S-11 (File No.333-114675)) |
| 10.5 |  | Executive EmploymentAgreement, dated as of October 22, 2004, between David T. Hamamoto andNorthStar Realty Finance Corp.*                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.6 |  | Executive Employment Agreement, dated as ofOctober 22, 2004, between Mark E. Chertok and NorthStar Realty FinanceCorp.*                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 10.7 |  | Executive Employment Agreement,dated as of October 22, 2004, between Jean-Michel Wasterlain andNorthStar Realty Finance Corp.*                                                                                                                                                                                                                                                                                                                                                                                                           |
|      |

59

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|       |  |                                                                                                                                                                                                                                                                                                                                                                |  |  |  |  |
|-------|--|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| No.   |  | ExhibitDescription                                                                                                                                                                                                                                                                                                                                             |
| 10.8  |  | ExecutiveEmployment Agreement, dated as of October 22, 2004, between Daniel R.Gilbert and NorthStar Realty Finance Corp.*                                                                                                                                                                                                                                      |
| 10.9  |  | NorthStar Realty Finance Corp. 2004 Omnibus StockIncentive Plan*                                                                                                                                                                                                                                                                                               |
| 10.10 |  | LTIP Unit VestingAgreement under the NorthStar Realty Finance Corp. 2004 Omnibus StockIncentive Plan among NorthStar Realty Finance Corp., NorthStar RealtyFinance Limited Partnership and NRF Employee, LLC*                                                                                                                                                  |
| 10.11 |  | Form of Vesting Agreement for Units of NRFEmployee, LLC, each dated as of October 29, 2004, between NRF Employee,LLC and certain employees and co-employees of NorthStar Realty FinanceCorp.*                                                                                                                                                                  |
| 10.12 |  | Form of Restricted StockAgreement (incorporated by reference to Exhibit 10.7(a) to theCompany's Registration Statement on Form S-11 (File No.333-114675))                                                                                                                                                                                                      |
| 10.13 |  | NorthStar Realty FinanceCorp. 2004 Long Term Incentive Bonus Plan*                                                                                                                                                                                                                                                                                             |
| 10.14 |  | Form of Notification under NorthStar RealtyFinance Corp. 2004 Long Term Incentive Bonus Plan*                                                                                                                                                                                                                                                                  |
| 10.15 |  | Form of Indemnification Agreement for directorsand officers of NorthStar Realty Finance Corp. (incorporated byreference to Exhibit 10.15 to the Company's RegistrationStatement on Form S-11 (File No. 333-114675))                                                                                                                                            |
| 10.16 |  | Amended and Restated Master RepurchaseAgreement, dated as of March 21, 2005, between NRFC DB Holdings, LLCand Deutsche Bank AG, Cayman Islands Branch**                                                                                                                                                                                                        |
| 10.17 |  | Amended and Restated Junior SubordinatedIndenture, dated as of September 16, 2005, between NorthStar RealtyFinance Limited Partnership and JPMorgan Chase Bank, NationalAssociation, as trustee****                                                                                                                                                            |
| 10.18 |  | SecondAmended and Restated Trust Agreement, dated as of September 16, 2005,among NorthStar Realty Finance Limited Partnership, as depositor,JPMorgan Chase Bank, National Association, as property trustee, ChaseBank USA, National Association, as Delaware trustee and Mark Chertok,David Hamamoto and Richard McCready, each as administrativetrustees****  |
| 10.19 |  | Amended and RestatedJunior Subordinated Indenture, dated as of September 16, 2005, betweenNorthStar Realty Finance Limited Partnership and JPMorgan Chase Bank,National Association, as trustee****                                                                                                                                                            |
| 10.20 |  | Second Amended and Restated Trust Agreement,dated as of September 16, 2005, among NorthStar Realty Finance LimitedPartnership, as depositor, JPMorgan Chase Bank, National Association,as property trustee, Chase Bank USA, National Association, as Delawaretrustee and Mark Chertok, David Hamamoto and Richard McCready, each asadministrative trustees**** |
| 10.21 |  | MasterRepurchase Agreement, dated as of July 13, 2005, between NRFC WAHoldings, LLC and Wachovia Bank, National Association (incorporated byreference to the like-numbered exhibit to the Company's QuarterlyReport on Form 10-Q for the quarter ended June 30, 2005)                                                                                          |
| 10.22 |  | First Amendment to the Master RepurchaseAgreement, dated as of August 24, 2005, between NRFC WA Holdings, LLCand Wachovia Bank, National Association****                                                                                                                                                                                                       |
| 10.23 |  | Second Amendment to the Master RepurchaseAgreement, dated as of September 20, 2005, between NRFC WA Holdings,LLC and Wachovia Bank, National Association****                                                                                                                                                                                                   |
|       |

60

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|       |  |                                                                                                                                                                                                                 |  |  |  |  |
|-------|--|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|--|--|
| No.   |  | ExhibitDescription                                                                                                                                                                                              |
| 10.24 |  | Master Loan, Guaranteeand Security Agreement, dated as of September 28, 2005, betweenNorthStar Realty Finance Limited Partnership, NorthStar Realty FinanceCorp., NS Advisors LLC and Bank of America, N.A.**** |
| 10.25 |  | Third Amendment to the Master RepurchaseAgreement, dated as of September 30, 2005, between NRFC WA Holdings,LLC and Wachovia Bank, National Association****                                                     |
| 10.26 |  | Omnibus Amendment to the Master RepurchaseAgreement, dated as of October 21, 2005, by and among NRFC WA Holdings,LLC, NRFC WA Holdings II, LLC and Wachovia Bank, NationalAssociation                           |
| 10.27 |  | Agreement of Purchase andSale, dated October 25, 2005, between 1552 Lonsdale, LLC and 1552 BwayOwner, LLC                                                                                                       |
| 10.28 |  | Fourth Amendment to theMaster Repurchase Agreement, dated October 28, 2005, by and among NRFCWA Holdings, LLC, NRFC WA Holdings II, LLC and Wachovia Bank, NationalAssociation                                  |
| 10.29 |  | Sublease, dated October29, 2005, between NorthStar Partnership, L.P. and NorthStar RealtyFinance Limited Partnership                                                                                            |
| 31.1  |  | Certification of David T. Hamamoto, ChiefExecutive Officer pursuant to Rule 13a - 14(a) of the ExchangeAct                                                                                                      |
| 31.2  |  | Certification of Mark E. Chertok,Chief Financial Officer pursuant to Rule 13a - 14(a) of the ExchangeAct                                                                                                        |
| 32.1  |  | Certification of David T.Hamamoto, Chief Executive Officer pursuant to Section 1350 of Chapter63 of Title 18 of the United States Code                                                                          |
| 32.2  |  | Certification of Mark E. Chertok, Chief FinancialOfficer pursuant to Section 1350 of Chapter 63 of Title 18 of theUnited StatesCode                                                                             |
|       |

|  |
|--|
|  |  |
|  |

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

|    |                                                                                                                                                           |
|----|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** | Incorporated by reference to thelike-numbered exhibit to NorthStar Realty Finance Corp.'s AnnualReport on Form 10-K for the year ended December 31, 2004. |

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

|      |                                                                                                                                                          |
|------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
| **** | Incorporated by reference tothe like-numbered exhibit to the NorthStar Realty Finance Corp.Registration Statement on Form S-11 filed on October 12,2005. |

61

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