NORTHSTAR REALTY (Form: 10-K, Received: 03/16/2006 16:01:50)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

R	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2005 or
£	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________________________ to __________________________

Commission file number: 001-32330

NorthStar Realty Finance Corp.

(Exact name of registrant as specified in its charter)

Maryland	11-3707493
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

527 Madison Avenue, 16 ^th Floor New York, New York	10022
(Address of principal executive offices)	(Zip Code)
(212) 319-8801 (Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Name of each exchange on which registered
Common Stock, $0.01 par value	New York Stock Exchange (NYSE)

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes £ No R

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes £ No R

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. R

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See the definition of “accelerated filer and large accelerate filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer £ Accelerated filer R Non-accelerated filer £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

Yes £ No R

The aggregate market value of the registrant's voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2005, was $215,823,588. As of March 7, 2006, the registrant had issued and outstanding 30,569,738 shares of common stock, par value $0.01 per share.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement for the registrant's 2006 Annual Meeting of Stockholders (the "2006 Proxy Statement"), to be filed within 120 days after the end of the registrant's fiscal year ending December 31, 2005, are incorporated by reference into this Annual Report on Form 10-K in response to Part III, Items 10 ,11, 12, 13 and 14.

INDEX

Page

PART I

ITEM 1.	BUSINESS	5

ITEM 1A.	RISK FACTORS	22

ITEM 1B.	UNRESOLVED STAFF COMMENTS	39

ITEM 2.	PROPERTIES	40

ITEM 3.	LEGAL PROCEEDINGS	42

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	42

PART II

ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	43

ITEM 6.	SELECTED HISTORICAL CONSOLIDATED AND COMBINED FINANCIAL DATA	45

ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	48

ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	76

ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	80

ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	81

ITEM 9A.	CONTROLS AND PROCEDURES	82

PART III

ITEM 10.	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT	84

ITEM 11.	EXECUTIVE COMPENSATION	84

ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT	84

ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	84

ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	84

PART IV

ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	85

FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among other things, the operating performance of our investments and financing needs. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “endeavor,” “seek,” “anticipate,” “estimate,” “overestimate,” “underestimate,” “believe,” “could,” “project,” “predict,” “continue” or other similar words or expressions. Forward-looking statements are not guarantees of performance and are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain projections of results of operations or of financial condition or state other forward-looking information. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth in the forward-looking statements. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from forecasted results. We are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results.

Factors that could have a material adverse effect on our operations and future prospects are set forth in “Risk Factors” in this Annual Report on Form 10-K beginning on page 22. The factors set forth in the Risk Factors section could cause our actual results to differ significantly from those contained in any forward-looking statement contained in this report.

PART I

ITEM 1. BUSINESS

Overview

We are an internally-managed real estate finance company that makes investments in real estate debt, real estate securities and net lease properties. We conduct our operations so as to qualify as a real estate investment trust, or a REIT, for federal income tax purposes. We invest in those areas of commercial real estate finance that enable us to leverage our real estate investment expertise, utilize our broad capital markets knowledge, and capitalize on our ability to employ innovative financing structures.

We are focused on three core businesses:

Real Estate Debt: We acquire, originate and structure senior and subordinate debt investments secured primarily by income-producing real estate properties.

Real Estate Securities: We invest in commercial real estate debt securities, including commercial mortgage backed securities, or CMBS, REIT unsecured debt, and credit tenant loans.

Net Lease Properties: We acquire properties that are primarily net leased to corporate tenants.

We believe that these businesses are complementary to each other due to their overlapping sources of investment opportunities, common reliance on real estate fundamentals and ability to utilize securitization to finance assets and enhance returns. We seek to match fund our real estate securities and real estate debt investments, primarily by issuing collateralized debt obligations, or CDOs. CDOs are a securitization structure whereby multiple classes of debt are issued to finance a portfolio of securities. We allocate capital to these businesses in such a way as to diversify our credit risk and optimize our returns. Our primary objectives are to produce attractive risk-adjusted returns and to generate predictable cash flow for distribution to our stockholders.

Our Business Strategy

Our primary objectives are to make real estate-related investments that produce attractive risk-adjusted returns and to generate predictable cash flow for distribution to our stockholders. Our strategy is to target sectors that combine characteristics of both real estate and fixed income investments. We believe we derive a competitive advantage from the combination of our real estate and capital markets expertise, which enables us to manage credit risk across all three business lines as well as to structure and finance our assets efficiently.

We believe our complementary core businesses provide us with the following synergies that enhance our competitive position:

Sourcing Investments - CMBS, real estate debt and net leased properties are often sourced from the same originators. We can offer a single source of financing by purchasing or originating a rated senior interest for our real estate securities portfolio and an unrated junior interest for our real estate debt portfolio.

Credit Analysis - Real estate debt interests are usually marketed to investors prior to the issuance of CMBS backed by rated senior interests secured by the same property. By participating in both sectors, we can utilize our underwriting resources more efficiently and enhance our ability to underwrite the securitized debt.

CDO Financing - Our experience and reputation as a CDO manager gives us access to low cost, match funded financing for all of our real estate securities and real estate debt investments.

Capital Allocation - Through our participation in these three businesses, we benefit from market information that enables us to make more informed decisions with regard to the relative valuation of financial assets and capital allocation.

Our Corporate History

We were formed as a Maryland corporation in October 2003 in order to continue and expand the subordinate real estate debt, real estate securities and net lease businesses begun by our management at NorthStar Capital. We commenced operations upon the closing of our initial public offering in October 2004, or our IPO, and conduct substantially all of our operations and investing activities through our operating partnership, NorthStar Realty Finance Limited Partnership, and its subsidiaries.

Our Business Lines

Real Estate Debt Investments

Overview

We acquire, originate and structure senior and subordinate debt investments which we finance primarily by issuing CDO’s. These investments are generally secured by income-producing commercial and multifamily properties, including first lien mortgage loans, which are also referred to as senior mortgage loans, junior participations in first lien mortgage loans, which are often referred to as B-notes, second lien mortgage loans, mezzanine loans, and preferred equity interests in borrowers who own such properties.

Prior to a new real estate debt CDO issuance, there is a period during which we identify and acquire real estate debt investments for inclusion in the CDO. During the accumulation period, the investments are financed under a credit facility with a major lending institution. The advance rates under the credit facility vary depending on the criteria of the lending institution. During the accumulation period the investments and the financing are recorded on our consolidated balance sheet.

Our primary focus is directed at investing in and originating loans secured by income-producing assets, although we may on occasion make investments in real estate-related loans secured by properties that require stabilization, involve repositioning or may involve conversion to residential condominiums We seek to make real estate debt investments that offer the most attractive risk-adjusted returns and evaluate the risk based upon our underwriting criteria and the pricing of comparable investments.

Targeted Investments

Our real estate debt investments typically have the following characteristics:

•

terms of 2 to 10 years and in some cases, such terms are inclusive of extension options;

•

collateral in the form of a first mortgage or a subordinate interest in a first mortgage on real property, a pledge of ownership interests in a real estate owning entity or a preferred equity investment in a real estate owning entity;

•

secured by income-producing commercial or multi-family properties;

•

investment amounts of $5 million to $75 million;

•

floating interest rates priced at a spread over LIBOR or fixed interest rates;

•

the borrower purchases an interest rate cap or other hedge to protect against interest rate volatility in the case of floating rate investments; and

•

an intercreditor agreement that outlines our rights relative to investors with more senior positions in the capital structure of the transaction and that typically provides us with a right to cure any defaults to the lender of those tranches senior to us and, under certain circumstances, to purchase senior tranches.

Underwriting Factors for Real Estate Debt

We employ a standardized underwriting process that focuses on a number of factors, including:

•

fundamental real estate analysis of the underlying real estate collateral, including tenant rosters, lease terms and the asset's overall competitive position in its market;

•

market factors that may influence the economic performance of the collateral;

•

the operating expertise and financial strength of the sponsor or borrower;

•

the overall structure of the investment and the lenders' rights in the loan documentation;

•

real estate and leasing market conditions affecting the asset;

•

macroeconomic conditions that may influence operating performance;

•

the ability to liquidate an investment through a sale or refinancing of the collateral;

•

the cash flow coverage in place and projected to be in place over the term of the loan;

•

a valuation of the property and our investment basis relative to its value;

•

review of third-party reports including appraisals, engineering and environmental reports; and

•

physical inspections of properties and markets.

We monitor property-level performance of the collateral underlying our debt investments. We regularly review updated information such as operating statements, rent rolls, major tenant lease signings, renewals, expirations and modifications; changes in property management and management fees; changes in operating expenses; borrower's and sponsor's financial condition; distributions from reserves and capital accounts; real estate market conditions; sales of comparable and competitive properties; occupancy and asking rents at competitive properties; and financial performance of major tenants.

Prior to June 30, 2005, we were primarily focused on the acquisition or origination of subordinate debt investments secured primarily by real estate properties. We have recently been placing more emphasis on the acquisition and origination of senior mortgage loans as such loans allow us a greater degree of control in loan structuring, provide us the opportunity to create subordinate interests in the loan, if desired, that meet our risk-return objectives, and allow us to maintain a more direct relationship with our borrowers.

We currently expect to continue to expand our acquisition and origination of senior mortgage loans as a complement to our core real estate debt investment business. To that end, on October 20, 2005, we entered into a definitive purchase agreement with Allied Capital Corporation to acquire Timarron Capital Corporation. Timarron, based in Dallas, Texas, was organized by former senior executives of Principal Financial and other leading financial institutions to develop a nationwide commercial mortgage loan origination platform. We closed on the acquisition on January 19, 2006. The purchase price was approximately $2.7 million. Timarron was renamed and reorganized as NRF Capital LP. NRF Capital LP will originate commercial mortgage loans for our commercial real estate debt portfolio.

Our Investments in Real Estate Debt

At December 31, 2005 we held the following real estate debt investments:

	Carrying Value (1) (in thousands)		% of Aggregate Carrying Value			Average Fixed Rate			Average Spread Over LIBOR			Number of Investments
Whole loans, floating rate	$	178,775		26.3	%		—			3.06	%		10
Whole loans, fixed rate		13,082		1.9	%		5.27	%		—			3
Subordinate mortgage interests, floating rate		237,276		34.8	%		—			4.97	%		17
Mezzanine loans, floating rate		223,621		32.8	%		—			4.86	%		11
Mezzanine loans, fixed rate		151		0.0	%		15.00	%		—			1
Preferred equity, fixed rate		28,201		4.2	%		9.36	%		—			2
Total / Average	$	681,106		100.0	%		8.09%(2	)		4.40%(3	)		44

(1) At December 31, 2005, approximately $320 million of these investments serve as collateral for the CDO bonds of our fourth CDO issuance, CDO IV, and the balance are financed under either our Wachovia facility or under other repurchase agreements.

(2) Represents average fixed rate applicable to fixed rate loans.

(3) Represents average spread over LIBOR for floating rate loans.

We made the following additional real estate debt investments subsequent to December 31, 2005 and prior to March 7, 2006:

Subsequent to December 31, 2005	Carrying Value (in thousands)		Allocation by Investment Type			Average Fixed Rate			Average Spread Over LIBOR			Number of Investments
Whole loans, floating rate	$	92,335		54.0	%		—			3.33	%		5
Whole loans, fixed rate		—		—			—			—			—
Mezzanine loan, floating rate		66,580		39.0	%		—			9.34	%		2
Mezzanine loans, fixed rate		11,880		7.0	%		8.00	%		—			1
Total / Average	$	170,795		100.0	%		8.00%(1)			5.85%(2)			8

(1) Represents average fixed rate applicable to fixed rate loans.

(2) Represents average spread over LIBOR for floating rate loans.

As of March 7, 2006, all real estate debt investments were performing in accordance with the terms of the underlying loan agreements

Real Estate Debt CDO Issuances

CDO IV

In June 2005, we closed CDO IV and retained all of the below investment grade securities and income notes, as listed below, of approximately $100 million. The CDO IV issuer issued $300 million face amount of the CDO bonds and sold them in a private placement to third parties. At closing, the proceeds of the issuance and sale of the CDO notes were used to repay the entire outstanding principal balance of $233.6 million under the DBAG facility.

The table below lists the classes of CDO bonds issued by CDO IV and their respective ratings, principal amounts and interest rates.

Class	Moody's/ S&P Ratings		Principal Amount (in thousands)		Interest Rate
A		Aaa/AAA	$	185,000		LIBOR + 0.35%
B		Aa2/AA		32,600		LIBOR + 0.45%
C		A2/A		31,800		LIBOR + 0.75%
D		Baa2/BBB		38,600		LIBOR + 1.60%
E		Baa3/BBB-		12,000		LIBOR + 1.75%
Total			$	300,000

The weighted average spread above LIBOR is 0.62%, excluding costs for the CDO bonds issued by CDO IV.

The CDO IV issuer sold the Class A through Class E notes in a private placement. We retained the Class F and Class G notes from the CDO IV issuer and one of our subsidiaries purchased the income notes, all of which are eliminated in consolidation under U.S. GAAP. The CDO IV debt securities and income notes are expected to mature in 2013, but their contractual maturity date is July 2040.

The CDO IV issuer entered into a collateral management agreement with NS Advisors LLC, one of our subsidiaries, pursuant to which NS Advisors LLC has agreed to advise the CDO IV issuer on certain matters regarding the collateral interests and other eligible investments securing the Class A through Class F notes and supporting the Class G notes and income notes in exchange for a fee which is payable on a monthly basis in accordance with the priority of payments set forth in the indenture for the CDO IV debt securities. NS Advisors LLC’s aggregate fee is equal to 0.34875% per annum of the net outstanding portfolio balance, which is equal to the sum of (1) the aggregate principal balance of the collateral interests, excluding any impaired interests or written down interests and (2) cash and eligible investments held in certain accounts pledged as security for payment for the Class A through Class F notes. In addition, NS Advisors LLC receives a fee equal to 0.00125% of the outstanding principal balance of Class A and Class B notes as advancing agent.

Credit Facilities

Wachovia Facility

On July 13, 2005, our wholly owned subsidiary NRFC WA Holdings, LLC, or NRFC WA, entered into a master repurchase agreement, which we refer to as the Wachovia facility, with Wachovia Bank, National Association, or Wachovia. The Wachovia facility was amended in September 2005 and February 2006 and currently NRFC WA may borrow up to $400 million under this credit facility in order to finance the acquisition of primarily subordinate real estate debt and other real estate loans and securities. The additional capacity and flexiblility under the amendment will allow us to accumulate sufficient collateral for a contemplated real estate debt CDO, or CDO VI, and to continue to finance other investments.

Advance rates under the Wachovia facility range from 55% to 95% (subject to increase under certain circumstances) of the value of the assets for which the advance is to be made. Amounts borrowed under the Wachovia facility bear interest at one-month LIBOR plus a spread which ranges from 0.20% to 3.00%, depending on the type of asset for which the amount is borrowed. The Wachovia facility has an initial maturity date of July 12, 2008, except that certain advances under the Wachovia facility were required to be repaid by February 24, 2006. If a securitization transaction is not consummated by March 30, 2006, certain advances under the facility will be subject to commitment and unused facility fees. The Company has agreed to a limited guarantee for the amounts borrowed by NRFC WA under the Wachovia facility.

NRFC WA may extend the term of the Wachovia facility for one year if it is not in default and must pay an extension fee of 0.25% of the aggregate amount then outstanding under the facility. If NRFC WA extends the facility's term, it will be required to retire 25% of the aggregate amount then outstanding under the facility during each quarter of the remaining year of the term.

The debt outstanding under the Wachovia facility is subject to a number of terms, conditions and restrictions including, without limitation, scheduled interest payments and the maintenance of certain margin percentages on amounts outstanding under the facility. If the market value of an asset securing outstanding debt declines, NRFC WA may be required to satisfy a margin call by paying cash or providing additional collateral. Failure to meet any margin call could result in an event of default which would enable Wachovia to exercise various rights and remedies including acceleration of the maturity date of the debt outstanding under the facility and the sale of the collateral. An affiliate of NRFC WA was added as borrower under the Wachovia facility in the fourth quarter of 2005.

As of March 7, 2006, NRFC WA and its affiliates had $379.0 million of borrowings outstanding under this facility.

DBAG Facility

On December 21, 2004, NRFC DB Holdings, LLC, one of our subsidiaries, entered into a $150 million master repurchase agreement with Deutsche Bank AG, Cayman Islands Branch, which we refer to as the DBAG facility. On March 21, 2005, the DBAG facility was amended and restated to allow NRFC DB Holdings to borrow up to $300 million in order to finance the acquisition of primarily subordinate real estate debt and other real estate loans and securities. The additional capacity and flexibility under the amendment of the DBAG facility allowed us to accumulate sufficient collateral for CDO IV, and to continue to finance other investments.

Under the terms of the DBAG facility, NRFC DB Holdings is able to finance the acquisition of mortgage loans secured by first liens on commercial or multifamily properties, junior participation interests in mortgage loans secured by first or second liens on commercial or multifamily properties, mezzanine loans secured by a pledge of the entire ownership interest in a commercial or multifamily property, B− or higher rated CMBS and BB or higher rated real estate CDOs, debt securities issued by a REIT and syndicated bank loans.

The DBAG facility has an initial three-year term, which may be extended for one additional year, subject to certain conditions and the payment of an extension fee. See "Management's Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Debt Obligations — DBAG Facility and CDO Bonds Payable" for a description of such extension terms and fees and the advance amounts and rates for the financing of the acquisition of assets pursuant to the DBAG facility.

As of March 7, 2006, no amounts were outstanding under the DBAG facility.

NSF Venture

On February 1, 2006, we sold our interests in the NSF venture to the institutional pension fund which had an equity interest in the NSF venture and terminated the associated advisory agreements for total consideration of $2.9 million. We will recognize incentive income of approximately $1.2 million, which was deferred at December 31, 2005. Subsequent to January 31, 2006, we will no longer earn management or incentive fees from the NSF venture or from loans owned directly by the NSF venture investor. Prior to the sale, one of our subsidiaries, NorthStar Funding Managing Member LLC, was responsible for the origination, underwriting and structuring of all investments made by the NSF venture, but the institutional pension fund had the right to approve all investments that NorthStar Funding Management LLC proposed to make on behalf of the NSF venture. The NSF venture had focused exclusively on loans to office and multi-family properties. As of the time of the sale, the NSF venture held approximately $85.8 million of subordinate real estate debt.

Real Estate Securities Investments

Overview

We create and manage portfolios of primarily investment grade commercial real estate securities, which we finance by issuing CDOs. These securities include CMBS, fixed income securities issued by REITs, credit rated tenant loans and CDOs backed primarily by real estate securities. These securities are rated primarily investment grade and generally are not insured by the Federal Housing Administration or guaranteed by the Veterans Administration or otherwise guaranteed or insured. In addition to these securities, our investment grade CDOs may also include real estate whole loans or subordinate debt investments such as B-Notes and mezzanine loans. By financing these securities with long-term debt through the issuance of CDOs, we expect to generate attractive risk-adjusted equity returns and to match the term of our assets and liabilities.

CDOs are a securitization structure whereby multiple classes of debt are issued to finance a portfolio of securities. Cash flow from the portfolio of securities is used to repay the CDO liabilities sequentially, in order of seniority. The most senior classes of debt typically have credit ratings of "AAA" through "BBB−" and therefore can be issued at yields that are lower than the average yield of the securities backing the CDO. On each investment grade CDO we issue, we intend to retain the equity and the junior CDO debt securities and earn a spread between the yield on our assets and the yield on the CDO debt we issue. The equity and the junior CDO debt securities that we intend to retain are the most junior securities in the CDO's capital structure and are unrated or rated below investment grade. We also earn ongoing management fees for our management of the CDO collateral. A portion of these management fees is senior to the ‘‘AAA’’ rated debt securities of each CDO. We finance our real estate securities investments with the CDO debt we issue that initially represents approximately 93% of the value of these investments. In addition, we may also finance the junior CDO securities that we retain. The leverage level of our investment grade CDOs may vary depending on the composition of the portfolio and market conditions at the time of the issuance of each CDO. We may increase or decrease leverage on our investment grade CDOs, at securitization, upward or downward to improve returns or to manage credit risk. We may also use other capital markets techniques in addition to CDOs to finance our real estate securities portfolio.

Prior to a new CDO issuance, there is a period during which real estate securities are identified and acquired for inclusion in a CDO. During this warehouse accumulation period, we direct the acquisition of securities by a financial institution, or the warehouse provider, that will be the lead manager of the CDO under a warehouse facility. In the warehouse arrangements we have utilized to date, the warehouse provider purchases the securities and holds them on its balance sheet. We contribute cash and other collateral which is held in escrow by the warehouse provider to back our commitment to purchase equity in the CDO and to cover our share of losses should the real estate securities need to be liquidated.

We expect to produce a stable income stream from our investments in real estate securities by carefully managing credit risk and interest rate risk. Securities are selected based on their long-term earnings potential and credit quality. Our primary objective is to derive earnings from interest income rather than trading gains. We use the real estate expertise of our management team to analyze the loans and properties backing these securities and to anticipate trends in the real estate markets.

NS Advisors LLC

One of our subsidiaries, NS Advisors LLC, manages our investment grade CDOs that have been issued and will manage our future investment grade CDOs. NS Advisors LLC earns 0.35% of the outstanding principal balance of the assets backing each of these CDO issuances as an annual management fee. NS Advisors also manages CDO IV, our subordinate real estate CDO, as discussed above. A summary of the collateral and the capital structure for each of our investment grade CDOs at December 31, 2005 is provided below.

	CDO Collateral - December 31, 2005											CDO Notes - December 31, 2005
Issuance	Date Closed		Par Value of CDO Collateral (in ’000s)		Weighted Average Interest Rate			Weighted Average Rating		Weighted Average Expected Life (years)		Outstanding CDO Notes ⁽¹⁾ (in ’000s)		Weighted Average Interest Rate at 12/31/05 ⁽³⁾			Stated Maturity		Carrying Value 12/31/05 ⁽⁴⁾ (in ’000s)		Carrying Value 12/31/04 ⁽⁴⁾ (in ’000s)
CDO I ⁽²⁾		8/21/03	$	352,041		6.62	%		BBB/BBB-		6.01	$	332,831		6.13	%		8/1/2038	$	9,792	$	10,411
CDO II		7/1/04		392,841		6.25	%		BBB/BBB-		6.65		356,170		5.58	%		6/1/2039		18,317		27,281
CDO III		3/10/05		401,790		6.06	%		BBB-		6.69		360,973		5.59	%		6/1/2040		20,085		--
CDO V		9/22/05		500,969		5.69	%		BBB		9.08		461,500		2.89	%		9/5/2045		41,860		--
Total			$	1,647,641								$	1,511,474						$	90,054	$	37,692

(1)

Includes only notes held by third parties.

(2)

We have an 83.33% interest in CDO I.

(3)

Includes the effect of the interest rate swap held in each CDO. The weighted average interest rate for CDO V reflects the initial payment from the swap counterparty for CDO V. The effective interest rate on the CDO V Notes will increase in subsequent periods.

(4)

Our potential loss in CDO I, CDO II, CDO III and CDO V is limited to the carrying value of our investment in CDO I, CDO II, CDO III and CDO V, respectively, at December 31, 2005 and 2004. Carrying value includes certain BB rated junior notes of CDO II, III and V.

CDO I, CDO II, CDO III and CDO V are variable interest entities. Unlike the other participants in these CDO issuances, who are either debt holders or swap counterparties, we, the Predecessor and the other preferred equity holders have residual interests in the net cash flow of the our CDO issuances, and therefore bear the first risk of loss. As of December 31, 2005, there had been no losses on these interests, and none of such real estate securities held by these CDOs were delinquent.

Warehouse Agreement for CDO VII

On September 27, 2005, we entered into a warehouse arrangement with a major commercial bank whereby the bank has agreed to purchase up to $400 million of CMBS and other real estate debt securities under our direction, with the expectation of selling such securities to our fifth investment grade CDO issuances or CDO VII. As of December 31, 2005, we have deposited $10 million as security for the purpose of covering a portion of any losses or costs associated with the accumulation of these securities under the warehouse agreement and will be required to deposit additional equity based on accumulations of securities that will be made under the warehouse agreement. The bank had accumulated $156.4 million of real estate securities under the terms of the warehouse agreement as of December 31, 2005. As of March 7, 2006, the bank had accumulated $260.9 million of real estate securities under the terms of the warehouse agreement. The CDO VII warehouse agreement also provides for our notional participation in the income that the assets generate after deducting a notional debt cost.

Types of Real Estate Securities Collateralizing our Investment Grade CDOs

The various types of securities backed by real estate assets that we invest in, including CMBS, fixed income securities issued by REITs and real estate CDOs, are described in more detail below.

CMBS. CMBS are backed by one or more loans secured by income-producing commercial and multifamily properties, or collateralized mortgage backed securities. These properties primarily consist of office buildings, retail properties, apartment buildings, industrial properties, health care properties and hotels. The properties are primarily located in the United States; although CMBS backed by properties located in Europe, Asia and other countries are a growing segment of the market. We have not yet invested in CMBS backed primarily by properties outside of the United States, but we may do so in the future. The loans are held in a trust that issues securities in the form of various classes of debt secured by the cash flows from the underlying loans. The securities issued by the trust have varying levels of priority in the allocation of cash flows from the pooled loans and are rated by one or more nationally recognized statistical rating agencies. These ratings reflect the risk characteristics of each class of CMBS and range from ‘‘AAA’’ to ‘‘CCC’’. Any losses realized on defaulted loans are absorbed first by the most junior, lowest-rated bond classes. Typically, all principal received on the loans is allocated first to the most senior outstanding class of bonds and then to the next class in order of seniority.

The portfolios of our four investment grade CDO issuances include different types of CMBS, including:

Conduit CMBS: Conduit CMBS are backed by large pools of loans secured by first mortgages on properties owned by separate borrowers. Typically, the pool includes over 100 loans and the largest five loans together account for less than 20% of the total pool balance. The loans are also diversified by property type and location. Most loans have initial maturities of ten years, bear a fixed interest rate, and are subject to prepayment penalties or a prohibition against prepayment.

Fusion CMBS: Fusion CMBS are similar to conduit CMBS, but have a higher percentage of the pool concentrated in one or more large loans. These large loans often have characteristics consistent with investment-grade rated securities.

Large Loan CMBS: Large loan CMBS are typically backed by up to 20 large loans secured by first mortgages on properties owned by separate borrowers. It is typical for these individual loans to each have credit characteristics consistent with investment-grade rated securities.

Credit Tenant Lease CMBS: These CMBS are backed by a series of loans secured by single-tenant properties. Retail property is the most prevalent asset class securing these types of loans. However, office properties and non-traditional asset classes are not uncommon in credit tenant lease CMBS.

Single Borrower Portfolio CMBS: These CMBS are backed by one or more cross-collateralized pools of assets owned by a single borrower. The borrowers for these types of transactions are typically of institutional quality and these securities are typically rated investment-grade.

Single Property CMBS: This can be either an entire CMBS pool backed by a single property, or a tranche of a larger CMBS pool which is backed by a specific loan. The properties securing these loans are typically of very high quality.

Other Real Estate Securities.

REIT Fixed Income Securities: REIT fixed income securities include both secured and unsecured debt issued by REITs. REITs own a variety of property types with a large number of companies focused on the office, retail, multifamily, industrial, healthcare and hotel sectors. In addition, several REITs focus on the ownership of self-storage properties and triple net lease properties. Certain REITs are more diversified in nature, owning properties across various asset classes. Both REIT secured and unsecured debt are typically rated by one or more nationally recognized statistical rating agencies. Currently, the majority of such notes issued by REITs are rated investment-grade. The majority of our long-term investments in REIT fixed income securities will be in REIT unsecured debt. We may also utilize credit derivatives, such as default swaps, to enhance returns or to manage our portfolio.

REIT unsecured debt is an unsecured general obligation of the issuing company and ranks equally with all existing and future unsecured and unsubordinated debt of the issuer. These notes typically pay a fixed interest rate semi-annually over their stated lives which typically range from 5 to 10 years.

Commercial Real Estate CDOs: Commercial real estate CDOs, or CRE CDOs, are debt obligations typically collateralized by a combination of CMBS and REIT unsecured debt. CRE CDOs may also include real estate whole loans and other asset-backed securities as part of their underlying collateral, although this is not as common. A CRE CDO is a special-purpose vehicle that finances the purchase of CMBS, REIT debt and other assets by issuing rated liabilities rated by rating agencies and equity in private securities offerings.

CMBS Re-REMICS: These securities are backed by a discrete pool of CMBS securities. These transactions are similar to CDOs, but have no interest coverage or principal coverage tests and are not managed. These pools are separated in tranches with any losses to the underlying CMBS securities first absorbed by the lowest-rated bond classes. Principal received is typically allocated to bond classes based on their level of seniority.

Financing Strategy for Real Estate Securities

As part of our financing strategy, we issue CDOs to finance discrete pools of real estate securities, and seek to match the terms of our assets and liabilities. In a CDO, the cash flow received from a portfolio of securities is applied to repaying several classes of bonds. Principal and interest payments are made sequentially starting with the most senior class of bonds. Principal payments received from the securities in the underlying pool are passed through to the CDO bonds when received, thereby creating a close match between the maturities of the assets and the CDO bonds. CDOs provide low cost financing because the most senior bond classes are rated ‘‘AAA’’ by the rating agencies. Approximately 74%, 73%, 74% and 77% of the bonds issued by CDO I, CDO II, CDO III and CDO V, respectively, were rated ‘‘AAA’’ by at least two rating agencies at the time of the initial issuance.

We may also utilize other securitization structures to provide long-term financing for our assets or we may issue CDOs that include subordinate debt or real estate debt secured by net lease properties.

Hedging Strategy for Real Estate Securities

We use hedging techniques such as interest rate swaps, interest rate caps, short sales of securities and mortgage derivatives to manage our real estate securities portfolio's interest rate risk and to preserve a steady income stream regardless of movements in interest rates. We hedge fixed rate assets that are funded with floating rate liabilities to mitigate the potential impact of rising interest rates. The floating rate portions of the issuances of debt securities by our investment grade CDOs are each hedged with an interest rate swap for this purpose. Securities held by a bank pursuant to a warehouse agreement, which we participate in on a derivative basis, are hedged to mitigate the impact of interest rate fluctuations prior to the issuance of a CDO.

Underwriting Process for Real Estate Securities

Our underwriting process for real estate securities is focused on evaluating both the real estate risk of the underlying assets and the structural protections available to the particular class of securities in which we are investing. We believe that even when a security such as a CMBS or a REIT bond is backed by a diverse pool of properties, risk cannot be evaluated purely by statistical or quantitative means. Properties backing loans with identical debt service coverage ratios or loan-to-value ratios can have very different risk characteristics depending on their location, lease structure and physical condition. Our underwriting process seeks to identify those factors that may lead to an increase or decrease in credit quality over time.

Our underwriting process for the acquisition of real estate securities backed by a single loan or a small pool of large loans includes: (1) review of the rent roll and historical operating statements in order to evaluate the stability of the underlying property's cash flow; (2) utilization of our network of relationships with real estate investors and other professionals to identify market and sub-market trends in order to assess the property's competitive position within its market; and (3) evaluation of the loan's structural protections and intercreditor rights.

When evaluating a CMBS pool backed by large number of loans, we combine real estate analysis on individual loans with stress testing of the portfolio under various sets of default and loss assumptions. First, we identify a sample of loans in the pool which are subject to individual analysis. This sample typically includes the largest ten to fifteen loans in the pool, loans selected for risk characteristics such as low debt service coverage ratios, unusual property type or location in a weak market, and a random sample of small to medium sized loans in the pool. The loans in the sample are analyzed based on the available information, as well as any additional market or property level information that we are able to obtain. Each loan in the sample is assigned a risk rating, which affects the default assumptions for that loan in our stress test. A loan with the lowest risk rating is assumed to default and suffer a loss whereas loans with better risk ratings are assigned a lower probability of default. The stress tests we run allow us to determine whether the bond class in which we are investing would suffer a loss under the stressed assumptions. We invest only in securities in which we expect to recover our invested capital even if the underlying loans experience significant stress.

REIT securities are evaluated based on the quality, type and location of the property portfolio, the capital structure and financial ratios of the company, and management's track record, operating expertise and strategy. We also evaluate the REIT's debt covenants. Our investment decision is based on the REIT's ability to withstand financial stress, as well as more subjective criteria related to the quality of management and of the property portfolio

Net Lease Investments

Overview

Our strategy is to invest primarily in office, industrial and retail properties across the United States that are net leased to corporate tenants. Net lease properties are typically leased to a single tenant who agrees to pay basic rent, plus all taxes, insurance and operating expenses arising from the use of the leased property. We may also invest in properties that are leased to government tenants, for which we are responsible for some or all of the operating expenses. We target properties within two subsectors of the net lease market: (1) properties leased to unrated or below investment-grade corporate tenants; and (2) investments with lease terms of less than 15 years.

We generally target properties that are located in primary or secondary markets with strong demand fundamentals, and that have a property design and location that make them suitable and attractive for alternative tenants.

We believe that most investors are primarily focused on assets leased to investment-grade tenants under leases with terms of 15 years or longer. In our experience, there is a more limited universe of acquirers with the real estate and capital markets expertise necessary to underwrite net lease assets with valuations that are more closely linked to real estate fundamentals than to tenant credit. We believe that well-located, general purpose real estate with flexible design characteristics can maintain or increase in value when re-leasing opportunities arise. By leveraging our relationships and employing our combination of skills to identify and execute asset acquisitions in sectors of the net lease market where less liquidity exists, we expect to generate risk-adjusted returns superior to those arising from more traditional net lease investment strategies. We originate net lease property investments through sellers or intermediaries structuring sale leaseback transactions and our proprietary network of property owners, corporate tenants and tenant representative brokers.

Underwriting Process for Net Lease Investments

Our ability to maximize the risk-adjusted returns available from investing capital in net lease properties will depend, in part, on our ability to underwrite and monitor tenant credit and real estate market and property fundamentals. We believe a thorough investment analysis is important to assessing the particular merits of a given investment.

We target investments in the net lease market that require particular focus on tenant credit and property-level fundamentals. We conduct detailed tenant credit analyses to assess, among other things, the potential for credit deterioration and lease default risk. This analysis is also employed to measure the adequacy of landlord protection mechanisms incorporated into the underlying lease.

Our underwriting process includes sub-market and property-level due diligence in order to understand downside investment risks, including quantifying the costs associated with tenant defaults and releasing scenarios. We model stress scenarios to understand the adequacy of important refinancing assumptions.

We incorporate the information obtained through the due diligence process into an investment memorandum, which includes base case and downside financial models to support the investment recommendations. Approval by our investment committee is required prior to funding any proposed investment.

Financing Strategy for our Net Lease Properties

We expect to finance the majority of our net lease investments at approximately 70% to 80% of the aggregate appraised value of our net lease investments on a stabilized basis. The financing typically will be non-recourse. We will seek to match the term of the financing with the term of the lease where possible.

Acquisitions of Net Lease Properties

Chatsworth Portfolio

In January 2005, we acquired a portfolio of three net leased office properties, totaling 257,336 square feet of rentable space in Chatsworth, California for $63.5 million. The properties are 100% net leased to Washington Mutual Bank under two leases that expire in 2015.

Salt Lake City Property

In August 2005, we acquired a 117,553 square foot office building in Salt Lake City, Utah for approximately $22.0 million. This property is 100% leased to the General Services Administration under a lease that expires in 2012.

EDS Portfolio

In September 2005, we acquired a portfolio of four office buildings with 387,842 square feet of rentable space for $61.4 million. The four buildings comprising the EDS portfolio, which are located in Rancho Cordova, California, Auburn Hills, Michigan and Camp Hill, Pennsylvania, were leased to EDS under leases expiring in 2015.

Executive Centre Portfolio

In December 2005, we acquired a portfolio of three class A office buildings, located in Cincinnati, Ohio, with 486,963 square feet of rentable space for $68.5 million. Two of the properties are 100% and 96% leased to General Electric Company under leases expiring in 2009 and 2010. The remaining building is leased 100% to Cincom Systems, Inc. under a lease that expires in 2011.

Quantum Joint Venture

In February 2006, through a 50% owned joint venture interest with Cushman & Wakefield Net Lease Trust, we acquired a portfolio of three adjacent class A office/flex buildings located Colorado Springs, CO, with 406,204 square feet of rentable space for $54.25 million. The properties are 100% leased to Quantum Corp. under leases expiring in 2021 (59%), 2013 (11%), 2011 (13%) and 2009 (17%).

Dispositions of Net Lease Properties

On June 30, 2005, we sold our fee interest in a 19,618 square foot retail condominium unit located at 729 Seventh Avenue in New York City for $29.0 million, or $1,478 per square foot, to an affiliate of The Riese Organization's Restaurant Division, National Restaurants Management Inc, or NRMI, and Himmel + Meringoff Properties. In connection with the sale, 729 7th Realty Corp., an affiliate of NRMI, agreed to discontinue the legal action that it had brought against us, settling our only material pending legal action.

On November 30, 2005, we sold our fee interest in a net lease property located at 1552 Broadway in New York City to NRMI, for a purchase price of $48 million, or $3,970 per square foot. The four-story, 12,091 square foot building is located at the corner of Broadway and West 46th Street in Times Square.

On January 31, 2006, the Company sold its leasehold interests in 25-27 West 34 ^th and 1372 Broadway, both of which are located in New York City, for $2.3 million.

Stock Offering

Stock Offering

In December 2005, we closed a public offering of 9.2 million common shares at $9.25 per share, which included 1.2 million shares to cover the underwriters’ over-allotment. Net proceeds from the offering were approximately $79 million. The proceeds from the offering were used to pay down short term debt and to fund new investments.

Financing

Mortgages

Chatsworth Mortgage

In connection with the acquisition of the Chatsworth Portfolio, we entered into a loan agreement (the "Chatsworth Mortgage") for a non-recourse mortgage in the principal amount of $44.0 million. The Chatsworth Mortgage matures on May 1, 2015 and bears interest at a fixed rate of 5.65%. The Chatsworth Mortgage requires monthly payments of $230,906 representing interest in arrears and principal sufficient to amortize the loan to a balance of approximately $40.5 million at maturity, as well as monthly escrow deposits for ground lease payments required under the ground lease for the leasehold property. The Chatsworth Mortgage is secured by first mortgage liens and security interests on the Chatsworth Portfolio, including two fee owned properties and the leasehold interest in the other property, including assignments of leases and rents.

Salt Lake City Mortgage

In connection with the acquisition of the Salt Lake City property, we entered into a loan agreement (the "Salt Lake City Mortgage") for a non-recourse mortgage in the principal amount of $17.0 million. The Salt Lake City Mortgage matures on September 1, 2012 and bears interest at a fixed rate of 5.16%. This loan requires monthly payments of $100,971 representing interest in arrears and principal sufficient to amortize the loan to a balance of approximately $14.3 million at maturity, as well as monthly escrow deposits for real estate taxes.

EDS Mortgage

In connection with the acquisition of the EDS portfolio, we entered into a loan agreement (the “EDS mortgage”) for a non-recourse mortgage in the principal amount of $49.1 million. The EDS mortgage matures on October 8, 2015 and bears interest at a fixed rate of 5.37%. The loan requires monthly payments of $274,997 representing interest in arrears and principal sufficient to amortize the loan to a balance of approximately $41.91 million at maturity, as well as monthly escrow deposits for real estate taxes.

Executive Centre Mortgage

In connection with the acquisition of the Executive Centre portfolio we entered into a $51.5 million mortgage that matures on January 1, 2016 and bears interest at a fixed rate of 5.851%. This non-recourse loan requires monthly payments of $303,732 representing interest in arrears and principal sufficient to amortize the loan to a balance of approximately $48.1 million at maturity, as well as monthly escrow deposits for real estate taxes.

Mezzanine Loan

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

Unsecured Credit Facility

On September 28, 2005, we entered into a master loan, guarantee and security agreement with Bank of America, N.A., through our Operating Partnership and NS Advisors LLC (the "BOA Master Loan Agreement"). The BOA Master Loan Agreement provides for an unsecured, $50 million revolving credit facility. The term of the unsecured facility is one year, with up to two one-year extensions at the discretion of Bank of America. If the unsecured facility is not extended by Bank of America, we have the option in lieu of immediate repayment to amortize the outstanding principal balance of the unsecured facility in equal quarterly installments over twelve months, upon payment of a quarterly 12.5 basis point fee on the outstanding balance under the unsecured facility at September 27, 2006 and each quarter thereafter. The interest rate on the unsecured facility is LIBOR, plus 325 basis points. In connection with the facility the Company paid an 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.

Trust Preferred Private Placements

On April 12, 2005 and May 25, 2005, NorthStar Realty Finance 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. We own all of the common stock of the Trusts. The Trusts used the proceeds to purchase our junior subordinated notes which mature on March 30, 2035 and June 30, 2035, respectively. These notes represent all of the Trusts' assets. The terms of the junior subordinated notes are substantially the same as the terms of the trust preferred securities. The trust preferred securities have a fixed interest rate of 8.15% and 7.74% per annum, respectively, during the first ten years, after which the interest rate will float and reset quarterly at the three-month LIBOR rate plus 3.25% per annum.

On November 22, 2005 we completed our third private placement of $40 million of trust preferred securities through our subsidiary, NorthStar Realty Finance Trust III. The proceeds were used to repay $32 million of short term debt and to fund new investments. These trust preferred securities have a 30-year term, ending January 30, 2036. They bear interest at a fixed rate of 7.81% for the first ten years, ending January 2016, whereupon the rate floats at three-month LIBOR plus 2.83%. These securities are redeemable at par beginning on January 30, 2011.

On March 10, 2006, our subsidiary, NorthStar Realty Finance Trust IV, completed a private placement of $50 million of trust preferred securities. The sole assets of the trust consist of a like amount of junior subordinated notes due June 30, 2036 issued by our operating partnership and guaranteed by us. The proceeds of the issuance of the notes were used to repay short term debt and to fund new investments. These trust preferred securities and the notes both have a 30-year term, ending June 30, 2036, and bear interest at a fixed rate of 7. 95 % for the first ten years, ending June 2016, whereupon the rate floats at three-month LIBOR plus 2.80%. These securities are redeemable at par beginning on June 30, 2011.

Regulatory Aspects of Our Investment Strategy

We conduct our operations so that we are not required to register as an investment company under the Investment Company Act of 1940, as amended. Section 3(a)(1)(A) of the Investment Company Act defines an investment company as any issuer that is or holds itself out as being engaged primarily in the business of investing, reinvesting, or trading in securities. Because we hold our securities and are not primarily in the business of investing, reinvesting and trading in securities, we do not believe we are subject to regulation as an investment company under Section 3(a)(1)(A). Section 3(a)(1)(C) of the Investment Company Act defines as an investment company any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value of the issuer's total assets (exclusive of government securities and cash items) on an unconsolidated basis. Excluded from the term "investment securities," among other things, are U.S. government securities and securities issued by majority owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of investment company provided by Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act. This means that the securities issued by our majority owned subsidiaries that are excepted from the definition of "investment company" in Section 3(c)(1) or 3(c)(7) of the Investment Company Act, together with any other investment securities we may own, may not have a combined value in excess of 40% of the value of our total assets on an unconsolidated basis. This requirement limits the types of businesses in which we may engage through these subsidiaries.

A majority of our subsidiaries rely on exceptions and exemptions from the Investment Company Act. These exceptions and exemptions limit the types of assets these subsidiaries may purchase. For instance, CDO II, CDO III and CDO V rely on the exemption from the Investment Company Act provided by Rule 3a-7 thereunder, which is available for certain structured financing vehicles. This exemption limits the ability of these CDOs to sell their assets and reinvest the proceeds from asset sales. Our subsidiary that invests in net lease properties relies on the exception from the definition of "investment company" provided by Sections 3(c)(6) and 3(c)(5)(C) of the Investment Company Act, and CDO IV similarly relies on the 3(c)(5)(C) exception from the definition of "investment company". These exceptions except companies that primarily invest in real estate, mortgages and certain other qualifying real estate assets. Relying on the exception from the definition of "investment company" provided by Section 3(c)(5)(C) of the Investment Company Act, CDO IV is limited in the types of real estate related assets that it could invest in. We believe that neither our operating partnership nor the subsidiary REIT through which we hold the substantial majority of our investments are investment companies because each of them satisfy the 40% test of Section 3(a)(1)(C). We must monitor their holdings to ensure that the value of their investment securities does not exceed 40% of their respective total assets (exclusive of government securities and cash items) on an unconsolidated basis. Our subsidiaries that engage in operating businesses are not subject to the Investment Company Act.

If the combined value of the investment securities issued by our subsidiaries that are excepted by Sections 3(c)(1) or 3(c)(7) of the Investment Company Act, together with any other investment securities we may own, exceeds 40% of our total assets on an unconsolidated basis, we may be deemed to be an investment company. If our subsidiaries fail to maintain their exceptions or exemptions from the Investment Company Act, we would become subject to substantial regulation with respect to our capital structure (including our ability to use leverage), management, operations, transactions with affiliated persons (as defined in the Investment Company Act), portfolio composition, including restrictions with respect to diversification and industry concentration and other matters.

In addition to the foregoing, we believe that we should be able to rely on additional exemptions under the Investment Company Act.

Government Regulations

Many laws and governmental regulations are applicable to our investments and changes in these laws and regulations, or their interpretation by agencies and courts, occur frequently.

Americans with Disabilities Act

Under the American with Disabilities Act, or ADA, all public accommodations and commercial facilities are required to meet certain federal requirements related to access and use by disabled persons. These requirements became effective in 1992. Compliance with the ADA requirements could require removal of access barriers, and noncompliance could result in the imposition of fines by the federal government or an award of damages to private litigants. Although we believe that our properties are substantially in compliance with these requirements, we may incur additional costs to comply with the ADA. In addition, a number of additional federal, state and local laws may require us to modify any properties we purchase, or may restrict further renovations thereof, with respect to access by disabled persons. Additional legislation could impose financial obligations or restrictions with respect to access by disabled persons. Although we believe that such costs will not have a material adverse effect on us, if required changes involve a greater amount of expenditures than we currently anticipate, our ability to make expected distributions could be adversely affected.

Environmental Matters

Under various federal, state and local laws, ordinances and regulations relating to the protection of the environment, a current or previous owner or operator of real property may be held liable for the costs of removal or remediation of certain hazardous or toxic substances or petroleum product releases at such property. These laws often impose clean-up responsibility and liability without regard to whether the owner or operator was responsible for, or even knew of, the presence of such hazardous or toxic substances. The costs of investigation, removal or remediation of such substances may be substantial, and the presence of such substances may adversely affect our ability to rent or sell the property or to borrow using such property as collateral and may expose us to liability resulting from any release of or exposure to such substances. If we arrange for the disposal or treatment of hazardous or toxic substances at another location, we may be liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not such facility is owned or operated by us. We may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from a site that we own or operate. Certain environmental laws also impose liability in connection with the handling of or exposure to asbestos-containing materials, pursuant to which third parties may seek recovery from owners or operators of real properties for personal injury associated with asbestos-containing materials and other hazardous or toxic substances. In connection with the ownership (direct or indirect), operation, management and development of real properties, we may be considered an owner or operator of such properties or as having arranged for the disposal or treatment of hazardous or toxic substances and therefore potentially liable for removal or remediation costs, as well as certain other related costs, including governmental penalties and injuries to persons and property.

We believe that each of our properties are in compliance in all material respects with all federal, state and local laws, ordinances and regulations regarding hazardous or toxic substances. We have not been notified by any governmental authority, or are otherwise aware, of any material noncompliance, liability or claim relating to hazardous or toxic substances in connection with any of these properties. We are not aware of any environmental liabilities relating to our properties that would reasonably expect to have a material adverse effect on our financial condition or results of operations taken as a whole, nor are we aware of any such material environmental liability. However, it is possible that there are material environmental liabilities of which we are unaware. There can be no assurance that future laws, ordinances or regulations will not impose any material environmental liability or the current environmental condition of the properties will not be affected by tenants, by the condition of land or operations in the vicinity of the properties (such as the presence of underground storage tanks) or by third parties unrelated to us. If compliance with the various laws and regulations, now existing or hereafter adopted, exceeds our budgets for such items, our ability to make expected distributions to stockholders could be adversely affected.

Other Regulations

The net lease properties we own are also subject to various federal, state and local regulatory requirements, such as zoning and state and local fire and life safety requirements. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. We believe that the properties are in material compliance with all such regulatory requirements. However, there can be no assurance that these requirements will not be changed or that new requirements will not be imposed which would require significant unanticipated expenditures by us and could have an adverse effect on our financial condition. Except as described in this report, we are not aware of any other laws or regulations that have a material effect on our operations, other than typical state and local laws affecting the development and operation of real property, such as zoning laws.

Competition

We are subject to significant competition in seeking real estate investments. We compete with many third parties engaged in real estate investment activities including other REITs, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, lenders, governmental bodies and other entities. In addition, there are other REITs with asset acquisition objectives similar to ours and others may be organized in the future. Some of these competitors, including larger REITs, have substantially greater financial resources than we do and generally may be able to accept more risk. They may also enjoy significant competitive advantages that result from, among other things, a lower cost of capital and enhanced operating efficiencies.

Competition may limit the number of suitable investment opportunities offered to us. It may also result in higher prices, lower yields and a narrower spread of yields over our borrowing costs, making it more difficult for us to acquire new investments on attractive terms.

Employees

At December 31, 2005, we have 23 employees.

Corporate Governance and Internet Address

We emphasize the importance of professional business conduct and ethics through our corporate governance initiatives. Our board of directors consists of a majority of independent directors; the audit, nominating/corporate governance, and compensation committees of our board of directors are composed exclusively of independent directors. We have adopted corporate governance guidelines and a code of business conduct and ethics, which delineate our standards for our officers, directors and employees.

Our internet address is www.nrfc.com. We make available, free of charge through a link on our site, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports, if any, as filed with the SEC as soon as reasonably practicable after such filing. Our site also contains our code of business conduct and ethics, code of ethics for senior financial officers, corporate governance guidelines, and the charters of our audit committee, nominating/corporate governance committee and compensation committee of our board of directors. Within the time period required by the rules of the SEC and the NYSE, we will post on our website any amendment to our code of business conduct and ethics and our code of ethics for senior financial officers as defined in the code.

ITEM 1a. RISK FACTORS

This section describes risk factors that could have a material adverse effect on our operations and future prospects. The risk factors set forth in this section could cause our actual results to differ significantly from those contained in this Annual Report on Form 10-K. In connection with the forward-looking statements that appear in this Annual Report on Form 10-K, you should carefully review the factors discussed below and the cautionary statements referred to under " Forward-Looking Statements."

Risks Related to Our Investments

The subordinate mortgage notes, mezzanine loans and participation interests in mortgage and mezzanine loans we invest in may be subject to risks relating to the structure and terms of the transactions, as well as subordination in bankruptcy, and there may not be sufficient funds or assets remaining to satisfy our subordinate notes, which may result in losses to us.

We invest in subordinate mortgage notes, mezzanine loans and participation interests in mortgage and mezzanine loans. These investments are subordinate to first mortgages on commercial property and are secured by subordinate rights to the commercial property or by equity interests in the commercial entity. If a borrower defaults or declares bankruptcy, after senior obligations are met, there may not be sufficient funds or assets remaining to satisfy our subordinate notes. Because each transaction is privately negotiated, subordinate mortgage notes can vary in their structural characteristics and lender rights. Our rights to control the default or bankruptcy process following a default will vary from transaction to transaction. The subordinate real estate debt that we intend to invest in may not give us the right to demand foreclosure as a subordinate real estate debtholder. Furthermore, the presence of intercreditor agreements may limit our ability to amend our loan documents, assign our loans, accept prepayments, exercise our remedies and control decisions made in bankruptcy proceedings relating to borrowers. Bankruptcy and borrower litigation can significantly increase the time needed for us to acquire underlying collateral in the event of a default, during which time the collateral may decline in value. In addition, there are significant costs and delays associated with the foreclosure process.

We invest in subordinate mortgage-backed securities which are subject to a greater risk of loss than senior securities. We may hold the most junior class of mortgage-backed securities which are subject to the first risk of loss if any losses are realized on the underlying mortgage loans.

We invest in a variety of subordinate mortgage-backed securities and sometimes hold a "first loss" subordinate holder position. The ability of a borrower to make payments on the loan underlying these securities is dependent primarily upon the successful operation of the property rather than upon the existence of independent income or assets of the borrower. In the event of default and the exhaustion of any equity support, reserve fund, letter of credit and any classes of securities junior to those in which we invest, we will not be able to recover all of our investment in the securities we purchase.

Expenses of enforcing the underlying mortgage loans (including litigation expenses), expenses of protecting the properties securing the mortgage loans and the lien on the mortgaged properties, and, if such expenses are advanced by the servicer of the mortgage loans, interest on such advances will also be allocated to such "first loss" securities prior to allocation to more senior classes of securities issued in the securitization. Prior to the reduction of distributions to more senior securities, distributions to the "first loss" securities may also be reduced by payments of compensation to any servicer engaged to enforce a defaulted mortgage loan. Such expenses and servicing compensation may be substantial and consequently, in the event of a default or loss on one or more mortgage loans contained in a securitization, we may not recover our investment.

Our investments in REIT securities are subject to risks relating to the particular REIT issuer of the securities and to the general risks of investing in senior unsecured real estate securities, which may result in losses to us.

In addition to general economic and market risks, our investments in REIT securities involve special risks relating to the particular REIT issuer of the securities, including the financial condition and business outlook of the issuer. REITs generally are required to substantially invest in real estate or real estate-related assets and are subject to the inherent risks associated with real estate-related investments.

Our investments in REIT securities and other senior unsecured debt are also subject to the risks described above with respect to mortgage loans and mortgage-backed securities and similar risks, including:

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risks of delinquency and foreclosure;

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the dependence upon the successful operation of and net income from real property;

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risks generally related to interests in real property; and

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risks that may be presented by the type and use of a particular commercial property.

REIT securities are generally unsecured and may also be subordinate to other obligations of the issuer. We may also invest in REIT securities that are rated below investment-grade. As a result, investments in REIT securities are also subject to risks of:

limited liquidity in the secondary trading market;

substantial market price volatility resulting from changes in prevailing interest rates;

subordination to the prior claims of banks and other senior lenders to the REIT;

the operation of mandatory sinking fund or redemption provisions during periods of declining interest rates that could cause the issuer to reinvest premature redemption proceeds in lower yielding assets;

the possibility that earnings of the REIT may be insufficient to meet its debt service and distribution obligations; and

the declining creditworthiness and potential for insolvency of the issuer during periods of rising interest rates and economic downturns.

These risks may adversely affect the value of outstanding REIT securities and the ability of the issuers thereof to repay principal and interest or make distributions.

The mortgage loans we invest in and the mortgage loans underlying the mortgage-backed securities we invest in are subject to risks of delinquency, foreclosure, loss and bankruptcy of the borrower under the loan. If the borrower defaults, it may result in losses to us.

Commercial mortgage loans are secured by commercial property and are subject to risks of delinquency, foreclosure, loss and bankruptcy of the borrower. The ability of a borrower to repay a loan secured by an income-producing property is dependent primarily upon the successful operation of such property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower's ability to repay the loan may be impaired. Net operating income of an income-producing property can be affected by, among other things:

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tenant mix;

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success of tenant businesses;

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property management decisions;

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property location and condition;

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competition from comparable types of properties;

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changes in laws that increase operating expense or limit rents that may be charged;

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any need to address environmental contamination at the property;

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the occurrence of any uninsured casualty at the property;

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changes in national, regional or local economic conditions and/or specific industry segments;

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declines in regional or local real estate values;

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declines in regional or local rental or occupancy rates;

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increases in interest rates;

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real estate tax rates and other operating expenses; and

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terrorism.

Any one or a combination of these factors may cause a borrower to default on a loan or to declare bankruptcy. If a default or bankruptcy occurs and the underlying asset value is less than the loan amount, we will suffer a loss.

We are subject to significant competition, and we may not be able to compete successfully for investments.

We are subject to significant competition for attractive investment opportunities from other real estate investors, some of which have greater financial resources than us, including publicly traded REITs, private REITs, investment banking firms, private institutional funds and private opportunity funds. We may not be able to compete successfully for investments.

Many of our investments are illiquid, and we may not be able to vary our portfolio in response to changes in economic and other conditions, which may result in losses to us.

Our investments are relatively illiquid and, therefore, our ability to sell and purchase properties, securities and debt promptly in response to a change in economic or other conditions will be limited. The Internal Revenue Code also places limits on our ability to sell properties held for fewer than four years. These considerations could make it difficult for us to dispose of properties, even if a disposition were in the best interests of our stockholders. In addition, a majority of the mortgage-backed securities, REIT securities and real estate debt that we purchase in connection with privately negotiated transactions will not be registered under the relevant securities laws, resulting in a prohibition against their transfer, sale, pledge or other disposition except in a transaction that is exempt from the registration requirements of, or is otherwise in compliance with, those laws. As a result, our ability to vary our portfolio in response to changes in economic and other conditions may be relatively limited, which may result in losses to us.

We may not be able to acquire eligible securities for a CDO issuance, or may not be able to issue CDO securities on attractive terms, which may require us to seek more costly financing for our real estate securities investments or to liquidate assets.

We acquire investment grade real estate securities and finance them on a long-term basis through the issuance of CDOs. Prior to a new investment grade CDO issuance, there is a period during which real estate securities are identified and acquired for inclusion in a CDO, known as the warehouse accumulation period. During this period, we direct the acquisition of securities under a warehouse facility from a warehouse provider that will be the lead manager of the CDO. The warehouse provider then purchases the securities and holds them on its balance sheet. We contribute cash and other collateral which is held in escrow by the warehouse provider to back our commitment to purchase equity in the investment grade CDO and to cover our share of losses should securities need to be liquidated. As a result, we are subject to the risk that we will not be able to acquire, during the period that our warehouse facility is available, a sufficient amount of eligible securities to maximize the efficiency of a CDO issuance. In addition, conditions in the capital markets may make the issuance of a CDO less attractive to us when we do have a sufficient pool of collateral. If we are unable to issue a CDO to finance these assets or if doing so is not economical, we may be required to seek other forms of potentially less attractive financing or to liquidate the assets at a price that could result in a loss of all or a portion of the cash and other collateral backing our purchase commitment.

Our warehouse facilities and our CDO financing agreements may limit our ability to make investments.

In order for us to borrow money to make investments under our warehouse facilities, our warehouse providers have the right to review the potential investment for which we are seeking financing. We may be unable to obtain the consent of our warehouse providers to make investments that we believe are favorable to us. In the event that our warehouse providers do not consent to the inclusion of the potential asset in the warehouse facility, we may be unable to obtain alternate financing for that investment. Our warehouse provider's consent rights with respect to our warehouse facility may limit our ability to execute our business strategy.

In addition, each CDO financing that we engage in will contain certain eligibility criteria with respect to the collateral that we seek to acquire and sell to the CDO issuer. If the collateral does not meet the eligibility criteria for eligible collateral as set forth in the transaction documents of such CDO transaction, we may not be able to acquire and sell such collateral to the CDO issuer. The inability of the collateral to meet eligibility requirements with respect to our CDOs may limit our ability to execute our business strategy.

Our future investment grade CDOs will be collateralized with real estate securities that are similar to those collateralizing our four existing investment grade CDO issuances, and any adverse market trends that affect these types of real estate securities are likely to adversely affect our CDOs in general.

Our existing investment grade CDO issuances are collateralized by fixed and floating rate CMBS, REIT debt and real estate CDOs, and we expect that our future issuances will be backed by similar securities. Any adverse market trends that affect the value of these types of securities will adversely impact the value of our interests in our CDOs. Such trends could include declines in real estate values in certain geographic markets or sectors, underperformance of CMBS issued in a particular year, or changes in federal income tax laws that could affect the performance of debt issued by REITs.

We may make investments in non-U.S. dollar denominated securities, which will be subject to currency rate exposure and the uncertainty of foreign laws and markets, which may adversely impact our returns on non-dollar denominated investments.

We may purchase CMBS denominated in foreign currencies. We expect that our exposure, if any, would be principally to the British pound and the euro. A change in foreign currency exchange rates may adversely impact returns on our non-dollar denominated investments. We may hedge our foreign currency risk, subject to the REIT income qualification tests. However, we may not be able to do so successfully and may incur losses on these investments as a result of exchange rate fluctuations.

We may make investments in assets with lower credit quality, which will increase our risk of losses.

We may invest in unrated securities, enter into net leases with unrated tenants or participate in unrated or distressed mortgage loans. A projection of an economic downturn, for example, could cause a decline in the price of lower credit quality investments and securities because the ability of obligors of net leases and mortgages, including mortgages underlying mortgage-backed securities, to make rent or principal and interest payments may be impaired. If this were to occur, existing credit support in the securitization structure may be insufficient to protect us against loss of our principal on these investments and securities. We have not established and do not plan to establish any investment criteria to limit our exposure to these risks for future investments.

We have no established investment criteria limiting the geographic concentration of our investments in real estate debt, real estate securities or net lease properties. If our investments are concentrated in an area that experiences adverse economic conditions, our investments may lose value and we may experience losses.

Certain loans and securities in which we invest may be secured by a single property or properties in one geographic location. We hold leasehold interests in a portfolio of retail and commercial properties located in New York City. We also own a portfolio of three net leased commercial properties in Chatsworth, California. Net lease properties that we may acquire may also be located in New York City or may otherwise be located in a geographic cluster. These current and future investments carry the risks associated with significant geographical concentration. We have not established and do not plan to establish any investment criteria to limit our exposure to these risks for future investments. As a result, properties underlying our investments may be overly concentrated in certain geographic areas, and we may experience losses as a result. A worsening of economic conditions in the geographic area in which our investments may be concentrated could have an adverse effect on our business, including reducing the demand for new financings, limiting the ability of customers to pay financed amounts and impairing the value of our collateral.

Our rights to the collateral underlying securities in which we invest may be unenforceable.

Loans underlying the securities in which we invest are governed by written loan agreements and related documentation. It is possible that a court could determine that one or more provisions of a loan agreement are unenforceable, such as a loan prepayment provision or the provisions governing our security interest in the underlying collateral. If this were to happen with respect to material assets or groups of assets serving as collateral for the securities in which we invest, we could be adversely affected.

Interest rate fluctuations may reduce the spread we earn on our interest-earning investments and may reduce our net income.

Market risk is the exposure to loss resulting from changes in interest rates and equity prices. Although we seek to finance our assets on a match-funded basis and mitigate the risk associated with future interest rate volatility, we are subject to credit risk and interest rate risk with respect to our investments in real estate debt and real estate securities. The primary market risk that we are exposed to is interest rate risk. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.

Our interest rate risk sensitive assets, liabilities and related derivative positions are generally held for non-trading purposes. As of December 31, 2005, a hypothetical 100 basis point increase in interest rates applied to our variable rate assets would increase our annual interest income by approximately $6,888,000, offset by an increase in our interest expense of approximately $5,430,000 on our variable rate liabilities. Similarly, a hypothetical 100 basis point decrease in interest rates would decrease our annual interest income by the same net amount.

Our investments in real estate securities, mortgage notes, mezzanine loans and participation interests in mortgage and mezzanine loans are subject to changes in credit spreads and if spreads widen, the value of our loan and securities portfolios would decline.

Our investments in real estate securities are subject to changes in credit spreads. The value of these securities is dependent upon the yield demanded on these securities by the market based on the underlying credit. Excessive supply of these securities combined with reduced demand will generally cause the market to require a higher yield on these real estate securities, resulting in the use of a higher, or "wider," spread over the benchmark rate to value such securities. Under such conditions, the value of our securities portfolio would tend to decline. Such changes in the market value of our portfolio may adversely affect our net equity or cash flow directly through their impact on unrealized gains or losses on available-for-sale securities, and therefore our ability to realize gains on such securities, or indirectly through their impact on our ability to borrow and access capital.

The value of our investments in mortgage loans, mezzanine loans and participation interests in mortgage and mezzanine loans are also subject to changes in credit spreads. The majority of the loans we invest in are floating rate loans valued based on a market credit spread to LIBOR. The value of the loans is dependent upon the yield demanded by the market based on their credit. The value of our portfolio would tend to decline should the market require a higher yield on such loans, resulting in the use of a higher spread over the benchmark rate. Any credit or spread losses incurred with respect to our loan portfolio would affect us in the same way as similar losses on our real estate securities portfolio as described above.

Our hedging transactions may limit our gains or result in losses.

To limit the effects of changes in interest rates on our operations, we may employ hedging strategies, including engaging in interest rate swaps, caps, floors and other interest rate exchange contracts as well as engaging in short sales of securities or of future contracts. The use of these types of derivatives to hedge our assets and liabilities carries certain risks, including the risks that:

•	losses on a hedge position will reduce the cash available for distribution to stockholders;

•	losses may exceed the amount invested in such instruments;

•	a hedge may not perform its intended use of offsetting losses on an investment;

•	the counterparties with which we trade may cease making markets and quoting prices in such instruments, which may render us unable to enter into an offsetting transaction with respect to an open position; and

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the counterparties with which we trade may experience business failures, which would most likely result in a default. Default by such counterparty may result in the loss of unrealized profits, which were expected to offset losses on our assets. Such defaults may also result in a loss of income on swaps or caps, which income was expected to be available to cover our debt service payments.

Our board of directors adopted a general policy with respect to the use of derivatives which generally allows us to use derivatives where appropriate, but does not set forth specific policies and procedures. Our results of operations may be adversely affected during any period as a result of the use of derivatives. If we anticipate that the income from any such hedging transaction will not be qualifying income for REIT income test purposes, we may conduct some or all of our hedging activities through a to-be-formed corporate subsidiary that is fully subject to federal corporate income taxation.

Prepayment rates can increase, adversely affecting yields on our investments.

The value of our assets may be affected by prepayment rates on mortgage loans underlying the securities in which we intend to invest. Prepayment rates on mortgage loans are influenced by changes in current interest rates and a variety of economic, geographic and other factors beyond our control, and consequently, such prepayment rates cannot be predicted with certainty. In periods of declining mortgage interest rates, prepayments on mortgage loans generally increase. If general interest rates decline as well, the proceeds of such prepayments received during such periods are likely to be reinvested by us in assets yielding less than the yields on the assets that were prepaid. Under certain interest rate and prepayment scenarios we may fail to recoup fully our cost of acquisition of certain investments.

Investments in net lease properties may generate losses.

The value of our investments and the income from our investments in net lease properties may be significantly adversely affected by a number of factors, including:

•	national, state and local economic climates;

•	real estate conditions, such as an oversupply of or a reduction in demand for real estate space in the area;

•	the perceptions of tenants and prospective tenants of the convenience, attractiveness and safety of our properties;

•	competition from comparable properties;

•	the occupancy rate of our properties;

•	the ability to collect on a timely basis all rent from tenants;

•	the effects of any bankruptcies or insolvencies of major tenants;

•	the expense of re-leasing space;

•	changes in interest rates and in the availability, cost and terms of mortgage funding;

•	the impact of present or future environmental legislation and compliance with environmental laws;

•	cost of compliance with the American with Disabilities Act of 1990, or ADA;

•	adverse changes in governmental rules and fiscal policies;

•	civil unrest;

•	acts of nature, including earthquakes, hurricanes and other natural disasters (which may result in uninsured losses);

•	acts of terrorism or war;

•	adverse changes in zoning laws; and

•	other factors which are beyond our control.

We may not be able to relet or renew leases at the properties held by us on terms favorable to us.

We are subject to the risks that upon expiration of leases for space located at our properties the space may not be relet or, if relet, the terms of the renewal or reletting (including the cost of required renovations or concessions to tenants) may be less favorable than current lease terms. Any of these situations may result in extended periods where there is a significant decline in revenues or no revenues generated by a property. If we are unable to relet or renew leases for all or substantially all of the space at these properties, if the rental rates upon such renewal or reletting are significantly lower than expected, or if our reserves for these purposes prove inadequate, we may be required to reduce or eliminate distributions to our stockholders.

Lease defaults or terminations or landlord-tenant disputes may adversely reduce our income from our net lease property portfolio.

Lease defaults or terminations by one or more of our significant tenants may reduce our revenues unless a default is cured or a suitable replacement tenant is found promptly. In addition, disputes may arise between the landlord and tenant that result in the tenant withholding rent payments, possibly for an extended period. These disputes may lead to litigation or other legal procedures to secure payment of the rent withheld or to evict the tenant. Any of these situations may result in extended periods during which there is a significant decline in revenues or no revenues generated by a property. If this were to occur, it could adversely affect our results of operations.

Environmental compliance costs and liabilities associated with our properties or our real estate related investments may materially impair the value of our investments.

Under various federal, state and local laws, ordinances and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up certain hazardous substances released at the property, and may be held liable to a governmental entity or to third parties for property damage and for investigation and cleanup costs incurred by such parties in connection with the contamination. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. The presence of contamination or the failure to remediate contamination may adversely affect the owner's ability to sell or lease real estate or to borrow using the real estate as collateral. The owner or operator of a site may be liable under common law to third parties for damages and injuries resulting from environmental contamination emanating from the site. We may experience environmental liability arising from conditions not known to us.

We may invest in real estate, or mortgage loans secured by real estate, with environmental problems that materially impair the value of the real estate. There are substantial risks associated with such an investment. We have only limited experience in investing in real estate with environmental liabilities.

Our insurance on our real estate may not cover all losses.

There are certain types of losses, generally of a catastrophic nature, such as earthquakes, floods, hurricanes, terrorism or acts of war, that may be uninsurable or not economically insurable. Inflation, changes in building codes and ordinances, environmental considerations and other factors, including terrorism or acts of war, also might make the insurance proceeds insufficient to repair or replace a property if it is damaged or destroyed. Under such circumstances, the insurance proceeds received might not be adequate to restore our economic position with respect to the affected real property. Any uninsured loss could result in both loss of cash flow from and the asset value of the affected property.

As a result of the events of September 11, 2001, insurance companies are limiting and charging significant premiums to cover acts of terrorism in insurance policies. As a result, although we, our tenants or our borrowers generally carry terrorism insurance, we may suffer losses from acts of terrorism that are not covered by insurance. In addition, the mortgage loans which are secured by certain of our properties contain customary covenants, including covenants that require us to maintain property insurance in an amount equal to the replacement cost of the properties, which may increase the cost of obtaining the required insurance.

We may change our investment strategy without stockholder consent and make riskier investments.

We may change our investment strategy at any time without the consent of our stockholders, which could result in our making investments that are different from, and possibly riskier than, the investments described in this Form 10-K. A change in our investment strategy may increase our exposure to interest rate and real estate market fluctuations.

Our portfolio is leveraged, which may adversely affect our return on our investments and may reduce cash available for distribution.

We leverage our portfolio through borrowings, generally through the use of bank credit facilities, repurchase agreements, mortgage loans on real estate, securitizations, including the issuance of CDOs, and other borrowings. The type and percentage of leverage varies depending on our ability to obtain credit facilities and the lender's estimate of the stability of the portfolio's cash flow. However, we do not restrict the amount of indebtedness that we may incur. Our return on our investments and cash available for distribution to our stockholders may be reduced to the extent that changes in market conditions cause the cost of our financing to increase relative to the income that can be derived from the assets acquired. Moreover, we may have to incur more recourse indebtedness.

The repurchase agreements and bank credit facilities that we use to finance our investments may require us to provide additional collateral.

We use bank credit facilities, including repurchase agreements, to finance some of our investments, primarily on an interim basis. If the market value of the loans pledged or sold by us to a funding source decline in value, we may be required by the lending institution to provide additional collateral or pay down a portion of the funds advanced. We may not have the funds available to pay down our debt, which could result in defaults. Posting additional collateral to support our credit facilities will reduce our liquidity and limit our ability to leverage our assets. In the event we do not have sufficient liquidity to meet such requirements, lending institutions can accelerate our indebtedness, increase interest rates and terminate our ability to borrow. Such a situation would likely result in a rapid deterioration of our financial condition and solvency.

Further, our credit facility providers require us to maintain a certain amount of cash uninvested or set aside unlevered assets sufficient to maintain a specified liquidity position in order to satisfy our collateral obligations. As a result, we may not be able to leverage our assets as fully as we would choose, which could reduce our return on assets. In the event that we are unable to meet these collateral obligations, our financial condition could deteriorate rapidly.

Lenders may require us to enter into restrictive covenants relating to our operations.

When we obtain financing, lenders impose restrictions on us that affect our ability to incur additional debt, our capability to make distributions to stockholders and our flexibility to determine our operating policies. Loan documents we execute may contain negative covenants that limit, among other things, our ability to repurchase stock, distribute more than a certain amount of our funds from operations, and employ leverage beyond certain amounts, any of which may limit our operating flexibility.

The use of CDO financings with coverage tests may have a negative impact on our operating results and cash flows.

We have purchased, and expect to purchase in the future, subordinate classes of bonds in our CDO financings. The terms of the CDO securities issued by us include and will include coverage tests, including over-collateralization tests, which are used primarily to determine whether and to what extent principal and interest proceeds on the underlying collateral debt securities and other assets may be used to pay principal of and interest on the subordinate classes of bonds in the CDO. In the event the coverage tests are not satisfied, interest and principal that would otherwise be payable on the subordinate classes may be re-directed to pay principal on the senior bond classes. Therefore, our failure to satisfy the coverage tests could adversely affect our operating results and cash flows.

Certain coverage tests (based on delinquency levels or other criteria) may also restrict our ability to receive net income from assets pledged to secure the CDOs. We cannot assure you, in advance of completing negotiations with the rating agencies or other key transaction parties on any future CDOs, the actual terms of the delinquency tests, over-collateralization terms, cash flow release mechanisms or other significant factors regarding the calculation of net income to us. Failure to obtain favorable terms with regard to these matters may materially and adversely affect the availability of net income to us. If our assets fail to perform as anticipated, our over-collateralization or other credit enhancement expense associated with our CDOs will increase.

Our due diligence may not reveal all of a borrower's liabilities and may not reveal other weaknesses in its business.

Before making a loan to a borrower, we assess the strength and skills of such entity's management and other factors that we believe are material to the performance of the investment. This process is particularly important and subjective with respect to newly organized entities because there may be little or no information publicly available about the entities. In making the assessment and otherwise conducting customary due diligence, we rely on the resources available to us and, in some cases, an investigation by third parties. There can be no assurance that our due diligence processes will uncover all relevant facts or that any investment will be successful.

Credit ratings assigned to our investments are subject to ongoing evaluations and we cannot assure you that the ratings currently assigned to our investments will not be downgraded.

Some of our investments are rated by Moody's Investors Service, Fitch Ratings or Standard & Poor's, Inc. The credit ratings on these investments are subject to ongoing evaluation by credit rating agencies, and we cannot assure you that any such rating will not be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant. If rating agencies assign a lower-than-expected rating or reduce, or indicate that they may reduce, their ratings of our investments in the future, the value of these investments could significantly decline, which may have an adverse affect on our financial condition.

Risks Related to Our Company

In the past, our internal controls over financial reporting were found to have material weaknesses.

Our management identified certain deficiencies in our predecessor's internal controls over financial reporting during the course of its review in December 2004 of the financial statements of our predecessor that were to be included in our Form 10-Q for the quarter ended September 30, 2004. Based upon further investigation, we discovered certain errors in the accounting for transactions entered into during June 2004 and the third quarter of 2004 in connection with CDO II and in the reporting of allocated general and administrative expenses. These errors required us to adjust our predecessor's financial statements for the six months ended June 30, 2004, as described in Note 2 to the financial statements included in our Form 10-Q for the quarter ended September 30, 2004, and to make certain adjustments to our predecessor's financial statements for the three and nine months ended September 30, 2004. The deficiencies identified by our management in December 2004 included (1) the communication between business unit personnel and financial reporting personnel with respect to the accounting for certain transactions associated with our predecessor's CDO investments and other company activity, (2) the level of training of accounting and financial reporting personnel, and (3) the level of detailed, quality control review of our predecessor's financial statements. Taken together, management concluded that these deficiencies rose to the level of a material weakness in our predecessor's internal controls over financial reporting for the three months ended September 30, 2004.

In December 2004, our prior independent registered public accounting firm, Ernst & Young LLP, advised our management and audit committee that it considered our internal controls over financial reporting to have the significant deficiencies identified by management in December 2004 which, considered in combination, constituted a material weakness in our internal controls. The term "material weakness" refers to an organization's internal control deficiency in which the design or operation of a component of internal control does not reduce to a relatively low level the risk that a material misstatement may be contained in the organization's financial statements. In March 2005, Ernst & Young LLP advised our management and audit committee that such significant deficiencies in our internal controls over financial reporting continued to exist.

Since December 2004, we have had to expend significant financial resources, and our management has had to spend significant time, in order to take a series of measures designed to remedy these significant deficiencies. We may continue to expend significant financial resources and time in order to improve our internal controls over financial reporting. Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the Company carried out an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2005 based on the “Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon this evaluation, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2005. Additionally, Grant Thornton LLP, our current independent registered public accounting firm, has audited management’s assessment and has issued an attestation report concurring with management’s assessment.

We cannot assure you that there will not be any other significant deficiencies that in combination constitute material weaknesses in our internal control over financial reporting in the future.

Our ability to operate our business successfully would be harmed if key personnel with long-standing business relationships terminate their employment with us.

Our future success depends, to a significant extent, upon the continued services of our key personnel, including certain of our executive officers and Mr. Hamamoto in particular. For instance, the extent and nature of the experience of our executive officers and nature of the relationships they have developed with real estate developers and financial institutions are critical to the success of our business. Our executive officers have significant real estate investment experience. We cannot assure you of their continued employment with us. The loss of services of certain of our executive officers could harm our business and our prospects.

In connection with the IPO, our board of directors has adopted the NorthStar Realty Finance Corp. Long-Term Incentive Bonus Plan, which we refer to as the incentive bonus plan, in order to retain and incentivize officers and certain key employees. At December 31, 2005, based on the facts and information then available and assumptions regarding the returns on our investments at December 31, 2005, our management estimates that we will meet the hurdle of 12.5% return on invested capital during two one-year performance periods beginning October 1, 2005 and 2006 under the incentive bonus plan, and therefore, at December 31, 2005, we expect to issue awards under the incentive bonus plan. However, if we do not meet the return hurdles that our compensation committee established under the incentive bonus plan for the two-year period beginning October 1, 2005, we will ultimately not grant any awards under this plan to members of our management or other of our employees who provide services to us. As a result, we may be unable to motivate and retain our management and these other employees. Our inability to motivate and retain these individuals could also harm our business and our prospects. Additionally, competition for experienced real estate professionals could require us to pay higher wages and provide additional benefits to attract qualified employees, which could result in higher compensation expenses to us.

We may not be able to renew our office sublease expiring in September 2007 or renew our sublease on comparable terms, which could have an adverse impact on our financial condition, results of operations and business.

Our primary office space, which we have subleased from NorthStar Capital, is set to expire in September 2007. Given the highly competitive leasing market and price appreciation in New York City since the commencement of the original lease, following September 2007 we will not likely be able to lease this office space on terms comparable to our existing terms, if at all. Paying more for this existing office space or relocating our business to a new office space could have an adverse impact on our financial condition and results of operations and could have the effect of diverting our resources away from the focus of our core businesses.

Our financial condition and results of operations depend on our ability to manage future growth effectively.

Our ability to achieve our investment objectives depends on our ability to grow, which depends, in turn, on our ability to identify and invest in subordinated and senior real estate debt, real estate securities and net lease properties that meet our investment criteria. Accomplishing this result on a cost-effective basis is largely a function of our structuring of the investment process and our access to financing on acceptable terms. Any failure to manage our future growth effectively could have a material adverse effect on our business, financial condition and results of operations.

Our management has limited experience operating a publicly-owned REIT.

We commenced operations upon consummation of our IPO in October 2004. Our management has limited experience operating a publicly-owned REIT. Given our recent IPO, you will be limited in fully evaluating our management's public company and REIT operational abilities.

We are subject to potential conflicts of interest in our relationship with our management relating to the time such individuals may devote to other matters for NorthStar Capital, and with NorthStar Capital, and our conflict of interest policies may not successfully eliminate the influence of such conflicts.

Our President and Chief Executive Officer, David Hamamoto, is the Co-Chief Executive Officer of NorthStar Capital. We expect that Mr. Hamamoto will devote a majority of his time and efforts to managing our affairs. However, he also devotes such time as is necessary to the management of NorthStar Capital's business operations, and he may engage in other business ventures. As a result, Mr. Hamamoto may be subject to conflicts in prioritizing his time and efforts. Mr. McCready, our general counsel and secretary, also serves as a director and the President and Chief Operating Officer of NorthStar Capital. While Mr. McCready continues to devote a significant amount of his time to the business of NorthStar Capital, he devotes the majority of his time and efforts to our business affairs.

In the future, we may enter into additional transactions with NorthStar Capital with the approval of the independent members of our board. Although Maryland law addresses certain conflicts of interest situations and our board has adopted certain policies relating to conflicts of interest requiring, among other things, that all transactions in which directors or executive officers have a material interest be approved by a majority of our disinterested directors, our policies or Maryland law requirements may not be successful in eliminating the influence of such conflicts.

Assuming redemption of all operating partnership units beneficially owned by NorthStar Capital for shares of our common stock, NorthStar Capital would beneficially own approximately 11% of our outstanding common stock. If NorthStar Capital causes the redemption of these operating partnership units and we elect to issue shares of our common stock in exchange for such units, NorthStar Capital may be able to significantly influence the election of all of the members of our board of directors and the outcome of all matters submitted to a vote of our stockholders, including matters involving mergers or other business combinations, the acquisition or disposition of assets, the incurrence of indebtedness and the issuance of any additional shares of common stock or other equity securities. NorthStar Capital's influence over us may not always be exerted in a manner consistent with the interests of our other stockholders.

Maintenance of our Investment Company Act exemption imposes limits on our operations.

We conduct our operations so that we are not required to register as an investment company under the Investment Company Act of 1940, as amended, or the Investment Company Act. Section 3(a)(1)(C) of the Investment Company Act defines as an investment company any issuer that is engaged or proposes to engage in the business of investing, reinvesting, owning, holding or trading in securities and owns or proposes to acquire investment securities having a value exceeding 40% of the value of the issuer's total assets (exclusive of government securities and cash items) on an unconsolidated basis. Excluded from the term "investment securities," among other things, are U.S. government securities and securities issued by majority owned subsidiaries that are not themselves investment companies and are not relying on the exception from the definition of investment company in Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act. Because we are a holding company that conducts its businesses through subsidiaries, this means that the securities issued by our subsidiaries that rely on the exception from the definition of "investment company" in Section 3(c)(1) or 3(c)(7) of the Investment Company Act, together with any other investment securities we may own, may not have a combined value in excess of 40% of the value of our total assets on an unconsolidated basis. This requirement limits the types of businesses in which we may engage through these subsidiaries.

A majority of our subsidiaries rely on exceptions and exemptions from the Investment Company Act. These exceptions and exemptions limit the types of assets these subsidiaries may purchase. For instance, CDO II, CDO III and CDO V rely on the exemption from the Investment Company Act provided by Rule 3a-7 thereunder, which is available for certain structured financing vehicles. This exemption limits the ability of these CDOs to sell their assets and reinvest the proceeds from asset sales. Our subsidiary that invests in net lease properties relies on the exception from the definition of "investment company" provided by Sections 3(c)(6) and 3(c)(5)(C) of the Investment Company Act, and CDO IV similarly relies on the 3(c)(5)(C) exception from the definition of "investment company". These exceptions except companies that primarily invest in real estate, mortgages and certain other qualifying real estate assets. Relying on the exception from the definition of "investment company" provided by 3(c)(5)(C) of the Investment Company Act, CDO IV is limited in the types of real estate related assets that it could invest in. We believe that neither our operating partnership nor the subsidiary REIT through which we hold the substantial majority of our investments are investment companies because each of them satisfy the 40% test of Section 3(a)(1)(C). We must monitor their holdings to ensure that the value of their investment securities does not exceed 40% of their respective total assets (exclusive of government securities and cash items) on an unconsolidated basis. Our subsidiaries that engage in operating businesses are not subject to the Investment Company Act.

If the combined value of the investment securities issued by our subsidiaries that rely on the exception provided by Section 3(c)(1) or 3(c)(7) of the Investment Company Act, together with any other investment securities we may own, exceeds 40% of our total assets on an unconsolidated basis, we may be deemed to be an investment company. If we fail to maintain an exemption, exception or other exclusion from registration as an investment company, we could, among other things, be required either (a) to substantially change the manner in which we conduct our operations to avoid being required to register as an investment company or (b) to register as an investment company, either of which could have an adverse effect on us and the market price of our common stock. If we were required to register as an investment company under the Investment Company Act, we would become subject to substantial regulation with respect to our capital structure (including our ability to use leverage), management, operations, transactions with affiliated persons (as defined in the Investment Company Act), portfolio composition, including restrictions with respect to diversification and industry concentration and other matters.

Maryland takeover statutes may prevent a change of our control. This could depress our stock price.

Under Maryland law, "business combinations" between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as any person who beneficially owns 10% or more of the voting power of the corporation's shares or an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then outstanding voting stock of the corporation. A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction by which he otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.

After the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder.

These super-majority vote requirements do not apply if the corporation's common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form previously paid by the interested stockholder for its shares.

The business combination statute may discourage others from trying to acquire control of us and increase the difficulty of consummating any offer, including potential acquisitions that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders. The statute permits various exemptions from its provisions, including business combinations that are exempted by the board of directors prior to the time that the interested stockholder becomes an interested stockholder. Pursuant to the statute, our board of directors has exempted any business combinations (a) between us and NorthStar Capital or any of its affiliates and (b) between us and any person, provided that any such business combination is first approved by our board of directors (including a majority of our directors who are not affiliates or associates of such person). Consequently, the five-year prohibition and the super-majority vote requirements do not apply to business combinations between us and any of them. As a result, such parties may be able to enter into business combinations with us that may not be in the best interest of our stockholders, without compliance with the supermajority vote requirements and the other provisions in the statute.

Our authorized but unissued common and preferred stock and other provisions of our charter and bylaws may prevent a change in our control.

Our charter authorizes us to issue additional authorized but unissued shares of our common stock or preferred stock and authorizes our board, without stockholder approval, to amend our charter to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we have the authority to issue. In addition, our board of directors may classify or reclassify any unissued shares of common stock or preferred stock and may set the preferences, rights and other terms of the classified or reclassified shares. Our board could establish a series of common stock or preferred stock that could delay or prevent a transaction or a change in control that might involve a premium price for the common stock or otherwise be in the best interest of our stockholders.

Our charter and bylaws also contain other provisions that may delay or prevent a transaction or a change in control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.

Maryland law also allows a corporation with a class of equity securities registered under the Securities Exchange Act of 1934, as amended, or the Securities Exchange Act, and at least three independent directors to elect to be subject, by provision in its charter or bylaws or a resolution of its board of directors and notwithstanding any contrary provision in the charter or bylaws, to a classified board, unless its charter prohibits such an election. Our charter contains a provision prohibiting such an election to classify our board under this provision of Maryland law. This makes the company more vulnerable to a change in control. If our stockholders voted to amend this charter provision and to classify our board of directors, the staggered terms of our directors could reduce the possibility of a tender offer or an attempt at a change in control even though a tender offer or change in control might be in the best interests of our stockholders.

Risks Related to REIT Tax Status

Our failure to qualify as a REIT would result in higher taxes and reduced cash available for distribution to our stockholders.

We intend to operate in a manner so as to qualify as a REIT for federal income tax purposes. However, qualification as a REIT involves the application of highly technical and complex Internal Revenue Code provisions for which only a limited number of judicial and administrative interpretations exist. Even an inadvertent or technical mistake could jeopardize our REIT status. Our continued qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. Moreover, new tax legislation, administrative guidance or court decisions, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to qualify as a REIT. If we were to fail to qualify as a REIT in any taxable year, we would be subject to federal income tax, including any applicable alternative minimum tax, on our taxable income at regular corporate rates, and distributions to stockholders would not be deductible by us in computing our taxable income. Any such corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our stockholders, which in turn could have an adverse impact on the value of, and trading prices for, our common stock. We hold a substantial majority of our assets in a majority owned subsidiary, which we refer to as our private REIT. Our private REIT is organized to qualify as a REIT for federal income tax purposes. Our private REIT must also meet all of the REIT qualification tests under the Internal Revenue Code. If the private REIT did not qualify as a REIT, it is likely that NorthStar Realty would also not qualify as a REIT. If, for any reason, we failed to qualify as a REIT and unless we were entitled to relief under certain Internal Revenue Code provisions, we would be unable to elect REIT status for the four taxable years following the year during which we ceased to so qualify.

Complying with REIT requirements may force us to borrow funds to make distributions to stockholders or otherwise depend on external sources of capital to fund such distributions.

To qualify as a REIT, we are required to distribute at least 90% of our annual taxable income, subject to certain adjustments, to our stockholders. To the extent that we satisfy the distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we distribute to our stockholders in a calendar year is less than a minimum amount specified under federal tax laws. While we intend to make distributions sufficient to avoid imposition of the 4% tax, there can be no assurance that we will be able to do so. We anticipate that distributions generally will be taxable as ordinary income, although a portion of such distributions may be designated by us as long-term capital gain to the extent attributable to capital gain income recognized by us, or may constitute a return of capital to the extent that such distribution exceeds our earnings and profits as determined for tax purposes.

From time to time, we may generate taxable income greater than our net income for financial reporting purposes due to, among other things, amortization of capitalized purchase premiums, or our taxable income may be greater than our cash flow available for distribution to stockholders (for example, if a borrower defers the payment of interest in cash pursuant to a contractual right or otherwise). If we do not have other funds available in these situations we could be required to borrow funds, sell investments at disadvantageous prices or find another alternative source of funds to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year. These alternatives could increase our costs or reduce our equity.

Because of the distribution requirement, it is unlikely that we will be able to fund all future capital needs, including capital needs in connection with investments, from cash retained from operations. As a result, to fund future capital needs, we likely will have to rely on third-party sources of capital, including both debt and equity financing, which may or may not be available on favorable terms or at all. Our access to third-party sources of capital will depend upon a number of factors, including the market's perception of our growth potential and our current and potential future earnings and cash distributions and the market price of our common stock.

Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.

Even if we remain qualified for taxation as a REIT, we may be subject to certain federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes, such as mortgage recording taxes. Any of these taxes would decrease cash available for distribution to our stockholders. In addition, in order to meet the REIT qualification requirements, or to avert the imposition of a 100% tax that applies to certain gains derived by a REIT from dealer property or inventory, we may hold some of our assets through taxable subsidiary corporations.

Complying with REIT requirements may cause us to forego otherwise attractive opportunities or liquidate otherwise attractive investments.

To qualify as a REIT for federal income tax purposes we must continually satisfy tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders and the ownership of our stock. As discussed above, we may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution.

We must also ensure that at the end of each calendar quarter at least 75% of the value of our assets consists of cash, cash items, government securities and qualified real estate assets. The remainder of our investment in securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets can consist of the securities of any one issuer (other than government securities and qualified real estate assets), and no more than 20% of the value of our total securities can be represented by securities of one or more taxable REIT subsidiaries. If we fail to comply with these requirements at the end of any calendar quarter, we must correct such failure within 30 days after the end of the calendar quarter to avoid losing our REIT status and suffering adverse tax consequences, unless certain relief provisions apply. As a result, compliance with the REIT requirements may hinder our ability to operate solely on the basis of profit maximization and may require us to liquidate or forego otherwise attractive investments.

Complying with REIT requirements may limit our ability to hedge effectively.

The REIT provisions of the Internal Revenue Code may limit our ability to hedge our operations. In general, income from hedging transactions does not constitute qualifying income for purposes of the REIT 75% and 95% gross income requirements. To the extent, however, that we enter into a hedging contract to reduce interest rate risk or foreign currency risk on indebtedness incurred to acquire or carry real estate assets, any income that we derive from the contract would be excluded from gross income for purposes of calculating the REIT 95% gross income test if specified requirements are met, but would not be excluded and would not be qualifying income for purposes of calculating the REIT 75% gross income test. As a result of these rules, we may have to limit our use of hedging techniques that might otherwise be advantageous, which could result in greater risks associated with interest rate or other changes than we would otherwise incur.

Liquidation of collateral may jeopardize our REIT status.

To continue to qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate our mortgage and preferred equity investments to satisfy our obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our status as a REIT.

We may be subject to adverse legislative or regulatory tax changes that could reduce the market price of our common stock.

At any time, the federal income tax laws governing REITs or the administrative interpretations of those laws may be amended. Any of those new laws or interpretations may take effect retroactively and could adversely affect us or you as a stockholder. Legislation enacted in 2003 generally reduced the federal income tax rate on most dividends paid by corporations to individual investors to a maximum of 15%. REIT dividends, with limited exceptions, do not benefit from the rate reduction, because a REIT's income is generally not subject to corporate level tax. As such, this legislation could cause shares in non-REIT corporations to be a more attractive investment to individual investors than shares in REITs and could have an adverse effect on the value of our common stock.

The stock ownership restrictions of the Internal Revenue Code for REITs and the 9.8% stock ownership limit in our charter may inhibit market activity in our stock and restrict our business combination opportunities.

To qualify as a REIT, five or fewer individuals, as defined in the Internal Revenue Code to include certain entities, may not own, actually or constructively, more than 50% in value of our issued and outstanding stock at any time during the last half of a taxable year. Attribution rules in the Internal Revenue Code determine if any individual or entity actually or constructively owns our stock under this requirement. Additionally, at least 100 persons must beneficially own our stock during at least 335 days of a taxable year. To help insure that we meet these tests, our charter restricts the acquisition and ownership of shares of our stock.

Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary and desirable to preserve our qualification as a REIT. Unless exempted by our board of directors, no person, including entities, may own more than 9.8% of the value of our outstanding shares of stock or more than 9.8% in value or number (whichever is more restrictive) of our outstanding shares of common stock. The board may not grant an exemption from these restrictions to any proposed transferee whose ownership in excess of 9.8% of the value of our outstanding shares would result in the termination of our status as a REIT. Despite these restrictions, it is possible that there will be five or fewer individuals who own more than 50% in value of our outstanding shares, which could cause us to fail to qualify as a REIT. These restrictions on transferability and ownership will not apply, however, if our board of directors determines that it is no longer in our best interest to continue to qualify as a REIT.

These ownership limits could delay or prevent a transaction or a change in control that might involve a premium price for our common stock or otherwise be in the best interest of the stockholders.

The "taxable mortgage pool" rules may increase the taxes that we or our stockholders may incur, and may limit the manner in which we effect future securitizations.

Certain of our current and future securitizations could be considered to result in the creation of taxable mortgage pools for federal income tax purposes. As a REIT, so long as we own 100% of the equity interests in a taxable mortgage pool, we would generally not be adversely affected by the characterization of the securitization as a taxable mortgage pool. Certain categories of stockholders, however, such as foreign stockholders eligible for treaty benefits, stockholders with net operating losses, and certain tax-exempt stockholders that are subject to unrelated business income tax, could be subject to increased taxes on a portion of their dividend income from us that is attributable to the taxable mortgage pool. In addition, to the extent that our stock is owned by tax-exempt "disqualified organizations," such as certain government-related entities that are not subject to tax on unrelated business income, although Treasury regulations have not yet been drafted to clarify the law, we may incur a corporate level tax on a portion of our income from the taxable mortgage pool. In that case, all of our investors and not just our investors who are "disqualified organizations" will bear a portion of the cost associated with the imposition of such tax on us. See "Federal Income Tax Considerations—Taxation of NorthStar Realty—Taxable Mortgage Pools" and "Federal Income Tax Considerations—Taxation of Stockholders—Taxation of Tax-Exempt Stockholders." Moreover, we would be precluded from selling equity interests in these securitizations to outside investors, or selling any debt securities issued in connection with these securitizations that might be considered to be equity interests for tax purposes. These limitations may prevent us from using certain techniques to maximize our returns from securitization transactions.

ITEM 1B. Unresolved Staff Comments

Not applicable.

ITEM 2. PROPERTIES

Our investments in net lease properties, which comprise our net lease business segment, are described under "Net Lease Properties." The following table sets forth certain information with respect to each of the net lease properties in the portfolio as of December 31, 2005:

Net Lease Portfolio: Property Information
Property Address	Square Feet		Ownership Interest		Leasehold Expiration Date		Major Tenants		Percent of Total Square Feet Leased			Annualized Rent		Lease/ Sublease Expiration Date

9401 Oakdale, Los Angeles, CA		97,336		Leasehold		May 2039		Washington Mutual Bank		100	%	$	2,296,000		June 2015

19850/60 Plummer , Los Angeles CA		160,000		Fee		N/A		Washington Mutual Bank		100	%	$	3,407,000		June 2015

2222 West 2300 South, Salt Lake City, UT		117,553		Fee		N/A		General Services Administration		100	%	$	2,316,000		April 2012

10888 White Rock Rd Rancho Cordova, CA		68,000		Fee		N/A		Electronic Data Systems Corp		100	%	$	1,380,000		September 2015

985 West Entrance Dr, Auburn Hills, MI		55,692		Fee		N/A		Electronic Data Systems Corp.		100	%	$	682,000		September 2015

1080 West Entrance Dr, Auburn Hills MI		50,000		Fee		N/A		Electronic Data Systems Corp.		100	%	$	528,000		September 2015

225 Grandview Ave, Camp Hill, PA		214,150		Fee		N/A		Electronic Data Systems Corp.		100	%	$	2,395,000		September 2015

111 Merchant St, Springdale, OH		173,145		Fee		N/A		General Electric Company		100	%	$	1,657,000		December 2009

55 Merchant St., Springdale, OH		174,554		Fee		N/A		Cincom Systems, Inc.		100	%	$	2,313,000		December 2011

25 Merchant St., Springdale, OH		139,264		Fee		N/A		General Electric Company		98	%	$	1,191,000		March 2010

25-27 West 34 th Street (5)		21,140		Leasehold		12/30/2009		Payless Shoes (d/b/a Parade of Shoes )		13.2	%	$	475,000		Dec. 2009
								Sleepy's		14.2	%	$	116,000		Dec. 2009
								Solstice		4.0	%	$	262,000		Dec. 2009
								Su & Su		23.6	%	$	89,000		Dec. 2009
								Orion Technology		21.3	%	$	95,000		Dec. 2009
								AT&T Wireless		0.0% ⁽²⁾		$	44,000		Nov. 2009
										76.3	%

Net Lease Portfolio: Property Information

Property

Address

Square

Feet

Ownership

Interest

Leasehold

Expiration

Date

Major Tenants

Percent of

Total

Square Feet

Leased

Annualized Rent

Lease/

Sublease

Expiration

Date

36 West 34th Street	17,665	Leasehold	7/31/2015 ⁽³⁾	Aerosoles	12.5	%	$	396,000	June 2012
				Active Temporaries	18.1	%	$	65,000	May 2014
				233-70 Restaurant Corp.	18.1	%	$	19,000	Aug. 2014
				Montes Food	9.1	%	$	89,000	Sep. 2013
				Mother's Work	11.1	%	$	118,000	July 2016
				TLP LLC (d/b/a Curves)	11.1	%	$	62,000	July 2006
				Wolfe Doyle Advertising	9.1	%	$	60,000	June 2011
				Life is Beautiful Spa	10.9	%	$	51,000	March, 2015
					100.0	%

701 Seventh Avenue	7,500	Leasehold	12/30/2012	Sbarro, Inc.	100.0	%	$	559,000 ⁽¹⁾	Dec. 2012

987 Eighth Avenue	10,800	Leasehold	4/30/2008 ⁽⁴⁾	Duane Reade	100.0	%	$	600,000	June 2017

1372 Broadway(5)	4,200	Leasehold	6/30/2006	Merel Foods	19.0	%	$	89,000	June 2006
				Leather Villa	14.3	%	$	85,000	June 2006
				1372 Photo Corp.	19.0	%	$	146,000	June 2006
				O-Dett Enterprises	47.7	%	$	60,000	June 2006
					100.0	%

Total Net Rentable Space	1,310,999
Unleasable Space	4,100
Total square feet	1,306,899

(1)	Tenant pays percentage rent and no taxes.

(2)	Tenant leases space on the roof of the building for a cellular antenna.

(3)	The leasehold on 36 West 34th Street includes two 21-year extension options and one 15-year extension option. Upon extension, the leasehold would expire in 2072.

(4)	The leasehold on 987 Eighth Avenue includes a 21-year extension option. Upon extension, the leasehold would expire in 2029.

(5)	Under contract to sell these properties at December 31, 2005 for total purchase price of $2.3 million. The sale closed January 31, 2006.

ITEM 3. LEGAL PROCEEDINGS

We are not subject to any legal proceedings required to be disclosed hereunder

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our security holders during the fourth quarter of 2005.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock has been listed on the New York Stock Exchange under the symbol "NRF" since the completion of our IPO in October 2004. The following table sets forth the high, low and last sales prices for our common stock, as reported on the New York Stock Exchange, and dividends for the periods indicated.

Period	High		Low		Close		Dividends
2004
October 26, 2004 to December 31, 2004	$	11.50	$	8.65	$	11.45		N/A

2005
First Quarter	$	11.45	$	9.34	$	9.68	$	0.15 ⁽¹⁾
Second Quarter	$	10.90	$	9.58	$	10.34	$	0.15 ⁽²⁾
Third Quarter	$	10.79	$	9.31	$	9.39	$	0.23 ⁽³⁾
Fourth Quarter	$	10.41	$	8.89	$	9.94	$	0.27 ⁽⁴⁾

(1)	On April 21, 2005, we declared a dividend of $0.15 per share of common stock, payable with respect to the quarter ended March 31, 2005, to stockholders of record as of May 2, 2005. We made this payment on May 16, 2005.

(2)	On July 28, 2005, we declared a dividend of $0.15 per share of common stock, payable with respect to the quarter ended June 30, 2005, to stockholders of record as of August 8, 2005. We made this payment on August 15, 2005.

(3)	On October 6, 2005, we declared a dividend of $0.23 per share of common stock, payable with respect to the quarter ended September 30, 2005, to stockholders of record as of October 14, 2005. We made this payment on October 21, 2005.

(4)	On January 26, 2006, we declared a dividend of $0.27 per share of common stock, payable with respect to the quarter ended December 31, 2005, to stockholders of record as of February 3, 2006. We made this payment on February 10, 2006.

On March 7, 2006, the closing sales price for our common stock, as reported on the NYSE, was $10.00 As of March 7, 2006, there were 20 record holders of our common stock. This figure does not reflect the beneficial ownership of shares held in nominee name.

Equity Compensation Plan Information

The following table summarizes information, as of December 31, 2005, relating to our equity compensation plan pursuant to which grants of securities may be made from time to time.

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities available for issuance under equity compensation plans (excluding securities reflected in first column)

Approved by Security Holders:
2004 Omnibus Stock Incentive Plan		852,919 ¹		n/a		526,039
2004 Long-Term Incentive Bonus Plan		-		n/a		698,142 ²
Total		852,919		n/a		1,224,181

(1) Represents units of partnership interest which are structured as profits interest, or LTIP Units, in our operating partnership. Conditioned on minimum allocation to the capital accounts of the LTIP Unit for federal income tax purposes, each LTIP Unit may be converted, at the election of the holder, into one common unit of limited partnership interest in our operating partnership, or OP Units. Each of the OP Units underlying these LTIP Units are redeemable at the election of the OP Unit holder for (i) cash equal to the then fair market value of one share of our common stock, or (ii) at the option of the Company in its capacity as general partnership of our operating partnership, one share of our common stock.

(2) As of December 31, 2005, the comp ensation committee of our board of directors had allocated an aggregate of 636,783 shares of our common stock to certain of the eligible participants as potential awards pursuant to the incentive bonus plan if we achieve the return hurdles established by the compensation committee for the two one-year performance periods beginning October 1, 2005 and October 1, 2006. Each of the eligible participants will be entitled to receive half of his or her allocated award if we meet the return hurdle for the one-year period beginning October 1, 2005 and such eligible participant is employed through the end of this first performance period. Each of the eligible participants will be entitled to the other half of his or her total allocated award amount if we meet the return hurdle for the one-year period beginning on October 1, 2006 and such eligible participant is employed through the end of this second performance period. If we do not meet the return hurdle for the one-year period beginning October 1, 2005, but we meet the return hurdle for the two-year period beginning October 1, 2005 (determined by averaging our performance over the two-year period) and an eligible participant is employed through the end of this two-year period, such eligible participant will be entitled to receive his or her total allocated award amount.

ITEM 6. SELECTED HISTORICAL CONSOLIDATED AND COMBINED FINANCIAL DATA

The information below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the combined financial statements of our predecessor and the respective related notes, each included elsewhere in this Form 10-K.

Our predecessor is an aggregation, on a combined and uncombined basis, of the entities through which NorthStar Capital owned and operated its subordinate real estate debt, real estate securities and net lease properties businesses and was not a separate legal operating entity. The ultimate owners of these entities were NorthStar Capital and certain others who had minority ownership interests in these entities. NorthStar Partnership, the operating partnership of NorthStar Capital, was the managing member with day-to-day operational responsibility of the entities controlled by NorthStar Capital that are combined in our predecessor's historical financial statements. Where our predecessor had a non-controlling interest in any of the entities that comprised our predecessor, such entities are presented as part of our predecessor on an uncombined basis. The selected combined historical financial information presented for the period January 1, 2004 to October 28, 2004 and for the years ended December 31, 2003, 2002, and 2001 relates to the operations of our predecessor. The selected combined historical financial information presented for the years ended December 31, 2003, 2002 and 2001 has been derived from the audited combined statements of operations of our predecessor. The selected historical consolidated information presented for the period October 29, 2004 to December 31, 2004 relates to our operations and has been derived from our audited consolidated statement of operations included in this Annual Report on Form 10-K. The selected historical consolidated information presented for the year ended December 31, 2005 has been derived from our audited consolidated statement of operations included in this Annual Report on Form 10-K.

Our consolidated financial statements include our majority-owned subsidiaries which we control. Where we have a non-controlling interest, such entity is reflected on an unconsolidated basis.


	The Company			The Company (consolidated)			The Predecessor (combined)
	(consolidated)			Period						Year Ended December 31,
	Year Ended December 31, 2005			October 29, 2004 to December 31, 2004			Period January 1, 2004 to October 28, 2004			2003			2002			2001
Statements of Operations Data:
Revenues:
Rental and escalation income	$	11,403,000		$	510,000		$	—		$	—		$	—		$	—
Advisory and management fee income		112,000			38,000			185,000			64,000			—			—
Advisory and management fee income — related parties		4,813,000			665,000			2,437,000			1,026,000			8,000			—
Interest income		40,043,000			3,990,000			31,000			502,000			—			—
Interest income — related parties		8,374,000			727,000			1,828,000			—			—			—
Other		352,000			—			—			—			—			—
Total revenues		65,097,000			5,930,000			4,481,000			1,592,000			8,000			—
Expenses:
Real estate properties — operating expenses		1,911,000			100,000			—			—			—			—
Interest expense		32,568,000			3,352,000			285,000			—			—			—
Management fees — related party		62,000			85,000			—			—			—			—
General and administrative
Direct:
Salaries and other compensation		5,490,000			797,000			953,000			1,289,000			206,000			—
Shared services — related party		1,145,000			231,000			—			—			—			—
Equity based compensation		5,847,000			2,991,000			—			—			—			—
Insurance		916,000			148,000			—			—			—			—
Auditing and professional fees		3,634,000			790,000			—			—			—			—
Formation and organization costs		—			517,000			—			—			—			—
Other general and administrative		2,036,000			378,000			181,000			203,000			27,000			—
Allocated:
Salaries and other compensation		—			—			3,060,000			2,146,000			806,000			187,000
Insurance		—			—			318,000			252,000			10,000			5,000
Other general and administrative		—			—			925,000			1,098,000			135,000			45,000
Total general and administrative		19,068,000			5,852,000			5,437,000			4,988,000			1,184,000			237,000
Depreciation and amortization		4,352,000			190,000			—			—			—			—
Total expenses		57,961,000			9,579,000			5,722,000			4,988,000			1,184,000			237,000
Income (loss) from operations		7,136,000			(3,649,000	)		(1,241,000	)		(3,396,000	)		(1,176,000	)		(237,000	)
Equity in earnings of unconsolidated/uncombined ventures		226,000			83,000			1,520,000			2,048,000			1,369,000			1,146,000
Other gains and losses:
Unrealized gain (loss) on investments and other		867,000			200,000			279,000			1,219,000			—			—
Realized gain on investments and other		2,160,000			293,000			636,000			1,866,000			—			—
Net income before minority interest		10,389,000			(3,073,000	)		1,194,000			1,737,000			193,000			909,000
Minority interest		(2,116,000	)		(632,000	)		—			—			—			—
Net income (loss) from continuing operations	$	8,273,000		$	(2,441,000	)	$	1,194,000		$	1,737,000		$	193,000		$	909,000
Income from discontinued operations, net of minority interest		547,000			2,000			—			—			—			—
Gain on sale of discontinued operations, net of minority interest		28,852,000			—			—			—			—			—
Net income (loss)	$	37,672,000		$	(2,439,000	)	$	1,194,000		$	1,737,000		$	193,000		$	909,000
Net income (loss) per share from continuing operations	$	0.38		$	(0.12	)
Income per share from discontinued operations		0.03			—
Gain per share on sale of discontinued operations		1.33			—
Net income (loss) per share available to common shareholders	$	1.74		$	(0.12	)
Weighted average number of shares of common stock outstanding:
Basic		21,660,993			20,868,865
Diluted		27,185,013			(1)

	December 31,
Balance Sheet Data (at period end)	2005		2004		2003		2002		2001

Operating real estate- net	$	198,708,000	$	43,544,000	$	—	$	—	$	—
Investments in and advances to unconsolidated/ uncombined ventures		5,458,000		5,363,000		15,537,000		12,650,000		16,883,000
Debt securities held for trading		—		826,611,000		—		—		—
Debt securities available for sale		149,872,000		37,692,000		9,187,000		—		—
Real estate debt investments		681,106,000		70,569,000		—		—		—
Total assets		1,153,439,000		1,078,078,000		32,815,000		25,545,000		16,883,000
Mortgage notes and loans payable		174,296,000		40,557,000		—		—		—
Liability to subsidiary trusts issuing preferred securities		108,258,000		—		—		—		—
CDO bonds payable		300,000,000		—		—		—		—
Credit facilities		243,002,000		27,821,000		—		—		—
Repurchase obligations		7,054,000		800,418,000		—		—		—
Total liabilities		860,736,000		902,322,000		322,000		241,000		—
Minority interest		44,278,000		32,447,000		—		—		—
Stockholders' and Owners' equity		248,425,000		143,309,000		32,493,000		25,304,000		16,883,000
Total liabilities and stockholders'/ owners' equity	$	1,153,439,000	$	1,078,078,000	$	32,815,000	$	25,545,000	$	16,883,000

	The Company (consolidated)						The Predecessor (combined)
										Year Ended December 31,
	2005			Period October 29, 2004 to December 31, 2004			Period January 1, 2004 to October 28, 2004			2003			2002			2001
Other Data:
Cash Flow from:
Operating activities from continuing operations	$	848,733,000		$	(828,783,000	)	$	2,440,000		$	1,289,000		$	—		$	—
Investing activities		(880,198,000	)		(108,032,000	)		(19,197,000	)		(9,830,000	)		595,000			(35,000	)
Financing activities		11,630,000			981,923,000			18,369,000			9,554,000			(595,000	)		35,000

^{(1)
For the period of October 29, 2004 through December 31, 2004, we did not present
the weighted average number of shares of common stock outstanding on a diluted
basis because there was a net loss available to common stockholders for the
period and the effect would have been anti-dilutive.}

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our and our predecessor's financial statements and notes thereto included in Part II, Item 8 of this report.

Organization and Overview

We are an internally-managed REIT that was formed in October 2003 to continue and expand the real estate debt, real estate securities and net lease businesses of NorthStar Capital. Upon the consummation of our IPO, three subsidiaries of NorthStar Capital contributed 100% of their respective interests in entities through which NorthStar Capital engaged in these businesses in exchange for units of limited partnership interest in our operating partnership and approximately $36.1 million. Our management team consists primarily of the same individuals who managed these businesses for NorthStar Capital.

We commenced operations upon the consummation of our IPO. We conduct substantially all of our operations and make our investments through our operating partnership, of which we are the sole general partner. Through our operating partnership, Northstar Realty Finance Limited Partnership, including its subsidiaries, we:

•

acquire, originate and structure senior and subordinate debt investments secured primarily by income-producing commercial and multifamily properties;

•

invest in commercial real estate debt securities, including CMBS, REIT unsecured debt and credit tenant loans; and

•

acquire properties that are primarily net leased to corporate tenants.

Basis of Presentation

Set forth below is a discussion of the financial condition and results of operations of our predecessor for 2003 and the period January 1, 2004 through October 28, 2004 and of NorthStar Realty Finance Corp. for the period from the commencement of our operations on October 29, 2004 to December 31, 2004 and for the year ended December 31, 2005.

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

Upon the closing of our IPO in October 2004, certain subsidiaries of NorthStar Capital contributed their interests in NorthStar Capital's subordinate real estate debt, real estate securities and net lease businesses, which we refer to as the initial investments, to our operating partnership, pursuant to several contribution agreements. Upon the contribution of the initial investments to our operating partnership, these businesses became fully integrated and therefore we present our financial statements on a consolidated basis for all periods thereafter. Simultaneously with this contribution, we entered into a shared facilities and services agreement with NorthStar Capital, pursuant to which certain general and administrative services required to run these businesses were provided by NorthStar Capital for a period of one year in exchange for an annual fee of $1.57 million.

Since our IPO, we have hired additional accounting, legal and administrative personnel and have obtained separate office space sufficient to temporarily accommodate most of our business operations. Accordingly, following the initial one-year term of the shared facilities and services agreement, which expired on October 29, 2005, we terminated the agreement and entered into a more limited sublease agreement with NorthStar Capital. Under the new sublease, we rent on a month-to-month basis the NorthStar Capital office space currently used by our accounting, legal and administrative personnel (currently 7 people). The sublease rent is calculated as a per person monthly charge, based on a "turn key" office arrangement (computer, network, telephone and furniture supplied) for each person utilizing the NorthStar Capital facilities. We may increase or decrease the number of people needing such accommodations, and we expect that the sublease rental payment would increase or decrease accordingly. The sublease agreement was approved by a majority of the independent board members of both our board of directors and the board of directors of NorthStar Capital.

Sources of Operating Revenues

Historically, our predecessor primarily derived operating revenues from earnings of uncombined ventures which consisted of our predecessor's proportionate share of the net income from the rental operations of the New York property portfolio and from real estate debt investments. In more recent periods, our predecessor also derived operating revenues from advisory fees related to our real estate securities and real estate debt businesses, the residual interests in the cash flows of its investment grade CDOs based on our equity interests in such CDOs and the interest income on our junior debt investments in its investment grade CDOs.

Subsequent to our IPO and the integration of the real estate debt, real estate securities and net lease properties businesses, we primarily derive operating revenues from rental income, from the rental operations of our net lease property portfolio, interest income on our consolidated investments in real estate debt, the residual interests in the cash flows of our investment grade CDOs based on our equity interests in such CDOs and the interest income on our junior debt investments in our investment grade CDOs, earnings of an unconsolidated venture which consists of our proportionate share of the net income of the NSF venture's subordinate debt investments and advisory fees related to our real estate securities and real estate debt businesses.

Real Estate Debt

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

Prior to June 30, 2005, we were primarily focused on the acquisition or origination of subordinate debt investments secured primarily by real estate properties. We have recently been placing more emphasis on the acquisition and origination of senior mortgage loans as such loans allow us a greater degree of control in loan structuring and allow us to maintain a more direct relationship with our borrowers. We expect to continue to expand our acquisition and origination of senior mortgage loans as a complement to our core real estate debt investment business.

We earn interest income and origination fees on these consolidated investments, but we do not earn advisory fees on these investments.

NSF Venture. NorthStar Capital commenced its business of investing in subordinate real estate debt in 2001 through the NSF venture. NorthStar Funding Managing Member LLC, a majority-owned subsidiary of NorthStar Capital prior to the contribution of the initial investments to our operating partnership, is the managing member and holder of 50% of the outstanding membership interests in NorthStar Funding Management LLC, the managing member of the NSF venture. NorthStar Funding Management LLC is responsible for the origination, underwriting and structuring of all investments made by the NSF venture, but an institutional pension fund which has an equity interest in the NSF venture, or the NSF venture investor, had the right to approve all investments that NorthStar Funding Management LLC proposes to make on behalf of the NSF venture.

NorthStar Funding Investor Member LLC, a majority-owned subsidiary of NorthStar Capital prior to the contribution of the initial investments to our operating partnership, owned a 5% interest in the NSF venture and the NSF venture investor owns the remaining 95%. Prior to July 10, 2003, NorthStar Funding Investor Member LLC held a 10% interest in the NSF venture. On July 10, 2003, the terms of the NSF venture were amended to increase the NSF venture investor’s capital commitment to $190 million, or 95% of $200 million, and reduce NorthStar Funding Investor Member LLC's interest to 5%. NorthStar Capital contributed its interests in the NSF venture to our operating partnership upon consummation of our IPO. On February 1, 2006 we sold our interests in the NSF venture to the NSF venture investor for $2.9 million. We will recognize approximately $1.2 million of incentive income which had been deferred at December 31, 2005.

Prior to the sale of our interests in the NSF venture on February 1, 2006, we received an advisory fee of 1% of contributed capital per annum as compensation for NorthStar Funding Management LLC's management of the NSF venture's investments. We were also entitled to a profit participation equal to 10% of the profit after a minimum return on the NSF venture's capital and a return of capital based upon the performance of the NSF venture's investments. NorthStar Funding Managing Member LLC received 75% of this 10% profit participation prior to our IPO, and receives 100% of this 10% profit participation thereafter. We also earned an additional advisory fee from the NSF venture investor for underwriting and placing the senior participation and sub-participation interests that are acquired by the NSF venture investor directly from the NSF venture.

Our equity in earnings of the NSF venture includes interest income and origination fees on investments.

Real Estate Securities

We invest in CMBS and other commercial real estate debt securities which are primarily investment-grade and are financed with long-term debt through the issuance of investment grade CDOs, thereby matching the terms of the assets and the liabilities.

We earn a spread between the yield on the assets and the interest expense incurred on the CDO debt issued through our investments in the equity interests and the junior CDO debt of each CDO issuer.

We also earn ongoing management fees for our management and monitoring of the CDO collateral of our investments in our investment grade CDOs. These fees equal 0.35% of the related CDO collateral.

Prior to a new investment grade CDO issuance, there is a period during which real estate securities are identified and acquired for inclusion in a CDO. During this warehouse accumulation period, we direct the acquisition of securities under a warehouse facility by a financial institution, or warehouse provider, that will be the lead manager of the CDO. The warehouse provider then purchases the securities and holds them on its balance sheet. We direct the acquisition of securities by the warehouse provider during this period, but we do not earn any fees for providing this service to either the warehouse provider or the issuer of the CDO, which will receive such securities upon the closing of the CDO. We contribute cash and other collateral, which is held in escrow by the warehouse provider, to back our commitment to purchase equity in the CDO and to cover our share of losses should securities need to be liquidated. Pursuant to the warehouse agreement, we share gains, including the net interest earned during the warehouse accumulation period, and losses, if any, with the warehouse provider.

During the warehouse accumulation period, our participation under the warehouse agreement is reflected in our financial statements as a non-hedge derivative, which is reflected at fair value and any unrealized gain or loss is charged to operations. Based on an analysis of our predecessor's interest in CDO I as a variable interest entity under FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities," the financial statements of CDO I were not consolidated into our or our predecessor's financial statements as of December 31, 2003, 2004 or 2005, since neither our predecessor nor we were the primary beneficiary of CDO I. Similarly, the financial statements of CDO II, III and V were not consolidated into our financial statements since we were not the primary beneficiary of CDO II, III and V. Accordingly, we have designated these beneficial interests in preferred equity of CDO I and the unrated income notes of CDO II, III and V as available for sale securities as they meet the definition of a debt instrument due to their underlying redemption provisions.

Net Lease Properties

We earn rental income from office, industrial and retail properties that are net leased to corporate tenants.

At December 31, 2005, one of our wholly owned subsidiaries, ALGM, owns the New York property portfolio, which consisted of five leasehold interests in five properties which vary in size from 4,200 square feet to 21,140 square feet and had a total of 61,305 net rentable square feet. Three of the properties are primarily leased or subleased to single users and two are leased or subleased to multiple tenants.

On June 30, 2005, we sold our ownership interest in a 19,618 square foot retail condominium unit at 729 Seventh Avenue in New York City for $29.0 million, or $1,478 per square foot, to 729 7th Realty Corp., an affiliate of NRMI and Himmel + Meringoff Properties. In connection with the sale, 729 7th Realty Corp. agreed to discontinue the legal action that it had brought against us, settling the only material legal action pending against us.

On November 30, 2005, we sold our fee interest in the property at 1552 Broadway in New York City to NRMI, for a purchase price of $48 million, or $3,970 per square foot and repaid the balance of the ALGM loan with a portion of the proceeds. The four-story, 12,091 square foot building is located at the corner of Broadway and West 46 ^th Street in Times Square.

The results of operations for the New York property portfolio are reflected in our predecessor's equity in earnings of uncombined ventures because our predecessor owned a 97.5% non-managing equity interest in ALGM. Concurrently with the contribution of the ALGM’s assets to our operating partnership in connection with our IPO and formation transactions, we purchased the remaining 2.5% managing equity interest of ALGM that we did not own from ALGM I Equity LLC with $1.6 million of the proceeds of our IPO. The results of operations of ALGM have been consolidated in our financial statements subsequent to our IPO.

On January 14, 2005, we acquired the Chatsworth Portfolio for $63.5 million. The Chatsworth Portfolio is net leased to Washington Mutual Bank, FA, under leases that expire in June 2015. We financed the acquisition with a $44 million first mortgage and a $13 million mezzanine loan which was funded by the warehouse provider under the warehouse agreement for CDO III. This mezzanine loan currently constitutes a portion of the portfolio of securities owned by CDO III.

On August 2, 2005, we acquired a 117,553 square foot office building in Salt Lake City, Utah for approximately $22.0 million. This property is 100% leased to the General Services Administration under a lease that expires in April 2012 and was financed with a 5.16% fixed rate, seven year non-recourse first mortgage loan of $17 million. We paid the balance of the purchase price in cash.

On September 30, 2005, we acquired from EDS for $61.4 million the EDS Portfolio, a portfolio of four office buildings with 387,842 square feet of rentable space that are located in Rancho Cordova, California, Auburn Hills, Michigan and Camp Hill, Pennsylvania, and leased these buildings back to EDS under leases expiring in 2015. The first year rent is approximately $5.0 million, with rent increases 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 acquisition with a $49.1 million non-recourse mortgage with a fixed rate of 5.373% which matures in 2015. In connection with the acquisition, Koll Development Company, an affiliate of NorthStar Capital, received a brokerage commission of $921,000. The acquisition and the associated brokerage fees payable to Koll Development Company were approved in advance by all of the independent members of our board of directors.

Critical Accounting Policies

The preparation of financial statements in conformity with U.S. generally accepted accounting principles, or U.S. GAAP, requires the use of estimates and assumptions that could affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses. Management has identified certain critical accounting policies that affect the more significant judgments and estimates used by management in the preparation of our predecessor's combined financial statements and our consolidated financial statements. Management evaluates on an ongoing basis estimates related to critical accounting policies, including those related to revenue recognition, allowances for doubtful accounts receivable and impairment of investments in uncombined ventures and debt securities available for sale. The estimates are based on information that is currently available to management, as well as on various other assumptions that management believes are reasonable under the circumstances.

Principles of Consolidation

The consolidated financial statements include our accounts and our majority-owned subsidiaries and variable interest entities (“VIE”) where we are deemed the primary beneficiary in accordance with the provisions and guidance of Financial Accounting Standards Board (“FASB”) Interpretation No. 46(R), “ Consolidation of Variable Interest Entities”(“Fin 46(R)”) . All significant intercompany balances have been eliminated in consolidation.

Fin 46 (R) requires a VIE to be consolidated by its primary beneficiary. The primary beneficiary is the party that aborbs a majority of the VIE’s anticipated losses and or a majority of the expected returns. We have evaluated our real estate debt investments and our investments in each of our five CDO issuers to determine whether we are VIE’s. For each of these investments, we have evaluated (1) the sufficiency of the fair value of the entity’s equity investment at risk to absorb losses, (2) whether as a group, the holders of the equity investment at risk have (a) the direct or indirect ability through voting rights to make decisions about the entity’s significant activities, (b) the obligation to absorb the expected losses of the entity and their obligations are not protected directly or indirectly, (c) the right to receive the expected residual return of the entity and their rights are not capped, (3) whether the voting rights of these investors are proportional to their obligations to absorb the expected losses of the entity, their rights to recieve the expected returns of their equity, or both and (4) whether substantially all of the entities activities involve or are conducted on behalf of an investor that has disproportionately fewer voting rights.

As of December 31, 2005, we identified eight interests in entities which were determined to be VIE’s under FIN 46 (R) they are as follows; CDO I, CDO II, CDO III, CDO V, NorthStar Realty Finance Trust I, II, and III and a preferred equity investment in a net lease property.

Based on management's analysis, we are not the primary beneficiary since we don’t absorb a majority of the expected losses or are entitled to a majority of the expected residual returns. Accordingly, these VIE’s were not consolidated into our financial statements as of December 31, 2005 or 2004.

Operating Real Estate

Operating real estate properties are carried at historical cost less accumulated depreciation. Cost directly related to the acquisition are capitalized. Ordinary repairs and maintenance which are not reimbursed by our tenants are expensed as incurred. Major replacements and betterments which improve or extend the life of the asset are capitalized and depreciated over their useful life.

In accordance with Statement of Financial Standards (“SFAS”) 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” a property to be disposed of is reported at the lower of its carrying value or its estimated fair value less the cost to sell. Once an asset is determined to be held for sale, depreciation and straight-line rental income are no longer recorded. In addition, the asset is reclassified to assets held for sale on the consolidated balance sheet and the results of operations are reclassified to income (loss) from discontinued operations in our consolidated statements of operations.

In accordance with SFAS No. 141 “Business Combinations”(“SFAS 141”) we allocate the purchase price of operating properties to land, building, tenant improvements, deferred lease cost for the origination costs of the in-place leases and to intangibles for the value of the above or below market leases. We amortize the value allocated to the in-place leases over the remaining lease term. The value allocated to the above or below market leases are amortized over the remaining lease term as an adjustment to rental income.

Debt Securities Available for Sale

We determine the appropriate classification of our investments in debt securities at the time of purchase and reevaluate such determination at each balance sheet date. Debt securities for which we do not have the intent or the ability to hold to maturity are classified as available for sale securities. We have designated our investments in CDO I, II, III and V as available for sale securities as they meet the definition of a debt instrument due to their redemption provisions. Debt securities available for sale are carried at estimated fair value with the net unrealized gains or losses reported as a component of accumulated other comprehensive income (loss) in the consolidated statements of stockholders' equity. Our investments in CDO I, II, III and V are relatively illiquid, and their value must be estimated by management. Fair value is based primarily upon broker quotes or management's estimates. These estimated values are subject to significant variability based on market conditions, such as interest rates and current spreads. Changes in the valuations do not affect either our reported income or cash flows, but impact stockholders' equity and owners' equity, respectively.

Real Estate Debt Investments

We must periodically evaluate each of our direct investments in real estate debt for possible impairment. Impairment is indicated when it is deemed probable that we will be unable to collect all amounts due according to the contractual terms of the loan. Upon a determination of impairment, we would establish a specific valuation allowance with a corresponding charge to earnings. Significant judgment is required both in determining impairment and in estimating the resulting loss allowance. Allowances for loan investment losses are established based upon a periodic review of the loan investments. Income recognition is generally suspended for loans at the earlier of the date at which payments become 90 days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. Income recognition is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. In performing this review, management considers the estimated net recoverable value of the loan as well as other factors, including the fair market value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the economic conditions in the region where the borrower does business. Because this determination is based upon projections of future economic events, which are inherently subjective, the amounts ultimately realized from the loan investments may differ materially from the carrying value at the balance sheet date. As of the date of this Annual Report on Form 10-K, all of our direct investments in real estate debt are fully performing and we have determined that no loss allowances have been necessary with respect to the loans.

Revenue Recognition

Rental income from leases is recognized on a straight-line basis over the noncancelable term of the respective leases. The excess of rents recognized over amounts contractually due pursuant to the underlying leases are included in unbilled rent receivable in our consolidated balance sheets.

Tenant reimbursement income is recognized in the period in which the related expense is incurred. Rental revenue, which is based upon a percentage of the sales recorded by our tenants is recognized in the period such sales were earned by the respective tenants.

Interest income from our unsecuritized loan investments is recognized on an accrual basis over the life of the investment using the effective interest method. Additional interest to be collected at payoff is recognized over the term of the loan as an adjustment to yield.

Interest income from debt securities available for sale and held for trading is recognized on the accrual basis of accounting over the life of the investment on a yield-to-maturity basis.

In connection with our investments in CDO I, II, III and V, we recognize interest income on these investments pursuant to Emerging Issues Task Force (‘‘EITF") 99-20, ‘‘Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets," Interest income is recognized on an estimated effective yield to maturity basis. Accordingly, on a quarterly basis, we calculate a revised yield on the current amortized cost of the investment and a current estimate of cash flows based upon actual and estimated prepayment and credit loss experience. The revised yield is then applied prospectively to recognize interest income.

Advisory fee income from both third parties and affiliates are recognized on the accrual basis as services are rendered and the fee income is contractually earned in accordance with the respective agreements. Fees from affiliated ventures accounted for under the equity method, such as the NSF venture, are partially eliminated against the related equity in earnings in such affiliated ventures to the extent of our ownership.

We earn incentive income related to the performance of the NSF venture through NFMM, who, as the managing member of the NSF venture, is entitled to a promoted interest (i.e., the distribution of a disproportionate allocation of cash flow) after other members have obtained a specified return threshold and return of capital. We follow Method 1 of EITF Topic D-96 for recording such incentive income. Under Method 1 of EITF Topic D-96, no incentive income is recorded until all contingencies have been eliminated. Incentive income distributions received by NFMM, which are subject to refund to the NSF venture if certain return thresholds are not met, are recorded as unearned income (a liability) on our consolidated balance sheets.

Credit Losses, Impairment and Allowance for Doubtful Accounts

We assess whether unrealized losses on the change in fair value on our debt securities reflect a decline in value which is other than temporary. If it is determined the decline in value is other than temporary the impaired securities are written down through earnings to their fair values. Significant judgment of management is required in this analysis, which includes, but is not limited to, making assumptions regarding the collectibility of the principal and interest, net of related expenses, on the underlying loans.

Allowances for real estate debt investment losses are established based upon a periodic review of the loan investments. Income recognition is generally suspended for loans at the earlier of the date at which payments become 90 days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. Income recognition is resumed when the suspended loan becomes contractually current and performance is demonstrated to be resumed. In performing this review, management considers the estimated net recoverable value of the loan as well as other factors, including the fair market value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the economic situation of the region where the borrower does business. Because this determination is based upon projections of future economic events, which are inherently subjective, the amounts ultimately realized from the loan investments may differ materially from the carrying value at the balance sheet date.

We review long-lived assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Upon determination that an impairment exists, the related asset is written down through earnings to its estimated fair value.

Allowance for doubtful accounts for tenant receivables are established based on periodic review of aged receivables resulting from estimated losses due to the inability of its tenants to make required rent and other payments contractually due. Additionally, we established, on a current basis, an allowance for future tenant credit losses on billed and unbilled rents receivable based upon an evaluation of the collectibility of such amounts.

Risks and Uncertainties

In the normal course of business, we encounter primarily two significant types of economic risk: credit and market. Credit risk is the risk of default on our securities, loans, leases, and derivatives that result from a borrower's, lessee's or derivative counterparty's inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of investments in securities, loans and real estate, or in derivatives, such as our CDO Deposit and Warehouse Agreement and our investment in the CDO Issuers, due to changes in interest rates, spreads or other market factors, including the value of the collateral underlying loans and securities and the valuation of real estate held us. Management believes that the carrying values of its investments are fairly stated, taking into consideration these risks along with estimated collateral values, payment histories and other market information.

Stock Based Compensation

We have adopted the fair value method of accounting prescribed in SFAS No. 123 "Accounting for Stock Based Compensation" ("SFAS 123") (as amended by SFAS No. 148) for equity based compensation awards. SFAS 123 requires an estimate of the fair value of the equity award at the time of grant rather than the intrinsic value method. All fixed equity based awards to employees and directors, which have no vesting conditions other than time of service, will be amortized to compensation expense over the award's vesting period based on the fair value of the award at the date of grant.

Performance-Based Compensation

Our board of directors has adopted the long term incentive bonus plan, in order to retain and incentivize officers and certain key employees of us, co-employees of us and NorthStar Capital and employees of NorthStar Capital who provide services to us pursuant to the shared facilities and services agreement, which we collectively refer to as the eligible participants. As of December 31, 2005, the compensation committee of our board of directors had allocated an aggregate of 698,142 shares of our common stock to certain of the eligible participants as potential awards pursuant to the long term incentive bonus plan if we achieve the return hurdles established by the compensation committee for the two one-year performance periods beginning October 1, 2005 and October 1, 2006. The compensation committee has established a return hurdle for these performance periods of a 12.5% annual return on paid in capital, as defined in the incentive bonus plan. If we achieve these return hurdles, these awards may be paid in cash, shares of common stock, long term incentive plan units or LTIP units or other shared-based form.

Each of the eligible participants will be entitled to receive half of his or her allocated award if we meet the return hurdle for the one-year period beginning October 1, 2005 and such eligible participant is employed through the end of this first performance period. Each of the eligible participants will be entitled to the other half of his or her total allocated award amount if we meet the return hurdle for the one-year period beginning on October 1, 2006 and such eligible participant is employed through the end of this second performance period. If we do not meet the return hurdle for the one-year period beginning October 1, 2005, but we meet the return hurdle for the two-year period beginning October 1, 2005 (determined by averaging our performance over the two-year period) and an eligible participant is employed through the end of this two-year period, such eligible participant will be entitled to receive his or her total allocated award amount.

At December 31, 2005, management has made its best estimate of our performance during these two performance periods, based on the facts and information then available and assumptions regarding the returns on our investments at December 31, 2005. On the basis of the foregoing, management has estimated that we will meet the return hurdle in these performance periods. If we do not ultimately meet the return hurdle during the performance periods, we will not grant any awards under the incentive bonus plan to any of the eligible participants.

Unconsolidated Ventures

Management is required to make subjective assessments as to whether there are impairments in the values of its investment in unconsolidated ventures accounted for using the equity method. As no public market exists for these investments, management estimates the recoverability of these investments based on projections and cash flow analysis. These assessments have a direct impact on our and our predecessor's net income because recording an impairment loss results in an immediate negative adjustment to net income. The following is a summary of the accounting policies relating to the unconsolidated ventures of us and our predecessor that are most affected by judgments, estimates and assumptions.

Real Estate Debt Investments. We record the transfer of a participation or sub-participation in a loan investment as a sale when the attributes of the transaction meet the criteria for sale of SFAS 140, "Accounting for Transfers of Financial Assets and Extinguishments of Liabilities," including transferring the financial interest beyond the reach of its creditors and placing no substantive restrictions on the resale of the participation or sub-participation by the purchaser.

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

Derivatives and Hedging Activities

We account for our derivatives and hedging activities in accordance with SFAS No. 133, ‘‘Accounting for Derivative Instruments and Hedging Activities," which requires us to recognize all derivatives as either assets or liabilities in the consolidated balance sheet and to measure those instruments at fair value. Additionally, the fair value adjustments of each period will affect our consolidated financial statements differently depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity.

For those derivative instruments that are designated and qualify as hedging instruments, we must designate the hedging instrument, based upon the exposure being hedged, as either a cash flow hedge or a fair value hedge.

Generally, all derivatives we enter into are intended to qualify as hedges under accounting principles generally accepted in the United States, unless specifically stated otherwise. Toward this end, the terms of hedges are matched closely to the terms of hedged items.

With respect to derivative instruments that have not been designated as hedges, any net payments under, or fluctuations in the fair value of, such derivatives are recognized currently in income. Our CDO Deposit and Warehouse Agreements have been designated as non-hedge derivatives.

Our derivative financial instruments contain credit risk to the extent that its bank counterparties may be unable to meet the terms of the agreements. We minimize such risk by limiting our counterparties to major financial institutions with good credit ratings. In addition, the potential risk of loss with any one party resulting from this type of credit risk is monitored.

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123, (revised 2004) Share-Based Payment, or SFAS No. 123 (R), which supersedes APB opinion No. 25, Accounting for Stock Issued to Employees and its related implementation guidance. SFAS No. 123 (R) established standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. SFAS No. 123 (R) focuses primarily on accounting for transactions in which an entity obtains 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 a material adverse impact on our financial condition or results of operations.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections - A Replacement of APB Opinion No. 20 and SFAS No. 3. SFAS No. 154 changes the requirements for the accounting and reporting of a change in accounting principle by requiring that a voluntary change in accounting principle be applied retrospectively with all prior periods’ financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS No. 154 also requires that a change in depreciation or amortization for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle and corrections of errors in previously issued financial statements should be termed a “restatement”. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We believe that the adoption of SFAS No. 154 will not have a material effect our consolidated financial statements.

In June 2005, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) on Issue No. 04-05, “Determining Whether a General Partner, or General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” (“EITF 04-05”). EITF 04-05 provides a framework for determining whether a general partner controls, and should consolidate, a limited partnership or a similar entity. EITF 04-05 became effective on June 29, 2005, for all newly formed or modified limited partnership arrangements and January 1, 2006 for all existing limited partnership arrangements. We believe that the adoption of this standard will not have a material effect on our consolidated financial statements.

Accounting for the Purchase of Certain Securities and Related Repurchase Agreements

In certain instances, we have purchased securities from a counterparty and subsequently financed the acquisition of these securities through repurchase agreements, which are also collateralized by these securities, with the same counterparty (a “Same Party Transaction”). We currently record the acquisition of these securities as assets and the related financings under repurchase agreements as liabilities gross on our consolidated balance sheet. The securities are generally short term highly liquid securities classified as debt securities held for trading, with changes in the fair value of these securities being recorded in the income statement. The corresponding interest income earned on these securities and interest expense incurred on the related repurchase agreements are reported gross on our consolidated statements of income.

As of December 31, 2004, we had $351.0 million in securities and $333.4 million in financings under the related repurchase agreements. As of December 31, 2005 and March 13, 2006, we had no remaining Same Party Transactions.

However, based upon our understanding of a technical interpretation of the provisions of SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS 140”), Same Party Transactions may not qualify as a purchase by us because the securities purchased by us in Same Party Transactions may not be determined to be legally isolated from the counterparty to such transactions. The result of this technical interpretation would be to preclude us from presenting (i) these securities and the related financings under repurchase agreements on a gross basis on our consolidated balance sheet and (ii) the related interest income earned and interest expense incurred on a gross basis on our consolidated statements of income. Instead, we would be required to present Same Party Transactions on a net basis as derivatives. This alternate view would not have a material impact on stockholders’ equity as of, or net income for the years ending December 31, 2004 or December 31, 2005.

If we were to determine it was required to apply this technical interpretation of SFAS 140, the potential change in its accounting treatment would not affect the economics of the Same Party Transactions, but would affect how these transactions were reported on our consolidated financial statements. We believe that our cash flows, liquidity and ability to pay dividend distributions would be unchanged and that our taxable income would not be affected. Although we believe that our accounting for Same Party Transactions is appropriate, we will continue to evaluate such position as the interpretation of this issue among industry participants and standard setters evolves.

Results of Operations

Our predecessor's results of operations for the period from January 1, 2004 to October 28, 2004 and for the year ended 2003 are not necessarily indicative of our future results of operations due to the impact of our IPO, the acquisition of additional interests in ALGM and its resulting consolidation, the expansion of our real estate securities and real estate debt businesses, and our new investments and their related debt financing. To facilitate a comparison of the results of operations for the year ended December 31, 2005 to 2004 and 2003, we have combined our predecessor’s results for the period from January 1, 2004 to October 28, 2004 with the results of our operations for the period from October 29, 2004 to December 31, 2004. We refer to this combined period as the 2004 pro forma period. We will compare the year ended December 31, 2005 to the 2004 pro forma period and compare the 2004 pro forma period to the year ended December 31, 2003.

We sold our interests in 729 Seventh Avenue on June 30, 2005 and sold our fee interest in the property located at 1552 Broadway on November 30, 2005. On December 30, 2005, we entered into a contract to sell our leasehold interest in 27 West 34th Street and terminate the leasehold interest in 1372 Broadway. Accordingly, the properties' previously reported revenues and expenses were reclassified to income from discontinued operations for the year ended December 31, 2005 and the portion of the 2004 pro forma period for which such operations were consolidated . For the year ended December 31, 2003 there was no reclassification for these properties since they were held within an equity method investment by our Predecessor.

	The Company			The Company/The Predecessor			The Predecessor
	Year Ended December 31,			2004 Pro Forma			Year Ended December 31,
	2005			Period			2003
Revenues:
Rental and escalation income	$	11,403,000		$	510,000		$	—
Advisory and management fee income		112,000			223,000			64,000
Advisory and management fee income - related parties		4,813,000			3,102,000			1,026,000
Interest income		40,043,000			4,021,000			—
Interest income- related parties		8,374,000			2,555,000			502,000
Other revenue		352,000			—			—
Total revenues		65,097,000			10,411,000			1,592,000

Expenses:
Real estate properties - operating expenses		1,911,000			100,000			—
Interest expense		32,568,000			3,637,000			—
Management fees - related parties		62,000			85,000			—
General and administrative:
Salaries and other compensation		5,490,000			4,810,000			3,435,000
Equity based compensation		5,847,000			2,991,000			—
Shared services - related party		1,145,000			231,000			—
Insurance		916,000			466,000			252,000
Auditing and professional fees		3,634,000			790,000			—
Formation and organization costs		—			517,000			—
Other general and administrative		2,036,000			1,484,000			1,301,000
Total general and administrative		19,068,000			11,289,000			4,988,000

Depreciation and amortization		4,352,000			190,000			—
Total expenses		57,961,000			15,301,000			4,988,000
Income (loss) from operations		7,136,000			(4,890,000	)		(3,396,000	)
Equity in earnings of unconsolidated/uncombined ventures		226,000			1,603,000			2,048,000
Unrealized gain (loss) on investments and other		867,000			479,000			1,219,000
Realized gain (loss) on investments and other		2,160,000			929,000			1,866,000
Income (loss) before minority interest		10,389,000			(1,879,000	)		1,737,000
Minority Interest		(2,116,000	)		(632,000	)		—
Net income (loss) from continuing operations		8,273,000			(1,247,000	)		1,737,000
Income from discontinued operations, net of minority interest		547,000			2,000			—
Gain from discontinued operations, net of minority interest		28,852,000			—			—
Net income (loss)	$	37,672,000		$	(1,245,000	)	$	1,737,000

Comparison of the Year Ended December 31, 2005 to the 2004 Pro Forma period

Reve nues

Rental and escalation income

Rental and escalation income for the year ended December 31, 2005 totaled $11.4 million, representing a $10.9 million increase compared to $0.5 million in the 2004 pro forma period. The increase was attributable to the following acquisitions; the Chatsworth Portfolio on January 14, 2005, the Salt Lake City property on August 2, 2005, the EDS Portfolio on September 30, 2005 and the Cincinnati properties on December 8, 2005, which collectively contributed an additional $8.7 million of rental income in addition to $2.7 million from the New York property portfolio. For the 2004 pro forma period, the New York property portfolio had $0.5 million of rental and escalation income, which was accounted for under the equity method of accounting for the period from January 1, 2004 to October 28, 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 been consolidated into the condensed consolidated financial statements for the period October 29, 2004 to December 31, 2004 and for the year ended December 31, 2005.

Advisory and management fee income

Advisory and management fee income decreased by $111,000, or 50%, to $112,000 for the year ended December 31, 2005 compared to $223,000 for the 2004 pro forma period due to a lower average portfolio balance in 2005 in the NSF venture.

Advisory and management fee income - related parties

Advisory fees from related parties for the year ended December 31, 2005 totaled $4.8 million, representing an increase of approximately $1.7 million, or 55%, compared to $3.1 million for the 2004 pro forma period. The increase was comprised primarily of higher fees earned for CDO II, CDO III (which closed March 10, 2005) and CDO V (which closed September 22, 2005) of $0.7 million, $1.1 million and $0.5 million, respectively, offset by lower fees on CDO I of $0.1 million due to principal paydowns of the real estate securities in that CDO. This increase was offset by a decrease in fees earned from the NSF venture of approximately $0.5 million, which was due to a lower average portfolio loan balance for the year ended December 31, 2005.

Interest income

Interest income for the year ended December 31, 2005 totaled $40.0 million, representing an increase of $36.0 million, compared to $4.0 million for the 2004 pro forma period. The increase was primarily attributable to $30.5 million of interest on real estate debt investments made in 2005. In addition, interest income on our short term AAA-rated, short term, floating rate securities increased $4.9 million from $3.4 million in 2004 to $8.3 million in 2005, or 244%. We liquidated that balance of our portfolio in the fourth quarter of 2005. The balance of the increase is interest income of $0.6 million on cash collateralizing our short security sales and other investments.

Interest income - related parties

Interest income from related parties for the year ended December 31, 2005 totaled $8.4 million, representing an increase of $5.8 million, or 223%, compared to $2.6 million for the 2004 pro forma period. The increase was attributable to higher average investments in our four investment grade CDOs in 2005, which earned interest income of $4.2 million in the year ended December 31, 2005, including $1.1 million from CDO I and II, approximately $2.2 million from CDO III, which closed on March 10, 2005, and $0.9 million from CDO V, which closed on September 22, 2005, and higher interest income of approximately $0.4 million from our "BB" rated junior classes of debt securities of CDO II, in which we were invested for the full year in 2005, versus approximately five months in 2004. We also earned $1.2 million on real estate securities and other investments.

Other revenue

Other revenue for the year ended December 31, 2005 totaled $0.4 million, representing an increase of $0.4 million compared to the 2004 profoma period. The increase is primarily attributable to an exit fee earned on one of our real estate debt investments.

Expenses

Real estate properties - operating expenses

Property operating expenses for the year ended December 31, 2005 totaled $1.9 million, representing an increase of $1.8 million, compared to $0.1 million for the 2004 pro forma period. The increase was attributable to $0.5 million of higher property operating expenses from the New York property portfolio which was accounted for under the equity method of accounting for the period January 1, 2004 to October 28, 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 been consolidated into the condensed consolidated financial statements for a full year in 2005 versus a partial year in 2004. We acquired the Chatsworth Portfolio on January 14, 2005, the Salt Lake City property on August 2, 2005, the EDS Portfolio on September 30, 2005, and the Cincinnati properties on December 8, 2005 which collectively contributed an additional $1.3 million of property operating expenses.

Interest expense

Interest expense for the year ended December 31, 2005 totaled approximately $32.6 million, representing an increase of $29.0 million, compared to $3.6 million for the 2004 pro forma period. This increase was primarily attributable to the following: approximately $4.3 million of increased interest in 2005 on financing for our investments in AAA-rated, short term, floating rate securities (we had acquired these investments subsequent to our IPO in October 2004); approximately $0.4 million of increased interest in 2005 on our investment in the "BB" rated junior classes of debt securities and unrated income securities of CDO II and on securities underlying short sales we entered into during 2004; approximately $5.0 million of interest expenses on mortgage and mezzanine debt on our net lease properties; $7.4 million on our real estate debt facilities; approximately $7.6 million on our non-recourse CDO IV bonds; approximately $0.2 million on our Bank of America facility; $4.4 million of interest expense on liabilities to the three subsidiary trusts that issued preferred securities in the second and fourth quarters of 2005.

Management fees - related party

Management fees - related party for the year ended December 31, 2005 totaled $62,000, representing an decrease of $23,000, or 27%, compared to $85,000 for the 2004 pro forma period. The decrease was attributable to the New York property portfolio, which was accounted for under the equity method of accounting in the 2004 profoma period. ALGM incurred a one time termination fee related to its management agreement during the 2004 profoma period. 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 been consolidated into our consolidated financial statements for a full year in 2005 and for a partial year in 2004.

General and administrative

General and administrative expenses for the year ended December 31, 2005 totaled $19.1 million, representing an increase of $7.8 million, or 69%, compared to $11.3 million for the 2004 pro forma period. General and administrative expenses, excluding equity based compensation expense, for the year ended December 31, 2005 totaled $13.2 million, representing an increase of $5.0 million, or 61%, compared to $8.2 million for the 2004 pro forma period. The increase was comprised of the following:

Salaries and other compensation (direct and allocated) for the year ended December 31, 2005 totaled $5.5 million, representing an increase of approximately $0.7 million, or 15%, compared to $4.8 million for the 2004 pro forma period. The increase was primarily attributable to an increase in salaries due to higher staffing levels to accommodate the expansion of our three businesses subsequent to our IPO throughout 2005.

Shared services - related party for the year ended December 31, 2005 totaled $1.1 million, representing an increase of approximately $0.9 million, compared to $0.2 million for the 2004 pro forma period. The increase was attributable to the shared facilities and services agreement we entered into with NorthStar Capital on October 29, 2004. On October 29, 2005, we terminated that agreement and entered into a more limited sublease agreement with NorthStar Capital. Under the new sublease effective November 1, 2005, we rent from NorthStar Capital office space currently used by our accounting, legal and administrative personnel on a month to month basis. The sublease rent is calculated as a per person monthly charge, based on a "turn key" office arrangement (computer, network, telephone and furniture supplied) for each person utilizing NorthStar Capital facilities. These direct costs are reflected in other general and administrative expenses .

Equity based compensation expense for the year ended December 31, 2005 totaled $5.8 million, representing an increase of $2.8 million, or 93%, compared to $3.0 million for the 2004 pro forma period. The increase was attributable to approximately $0.2 million in connection with an employee outperformance bonus plan for one of our executive officers, approximately $2.4 million in connection with the three-year vesting of equity based awards issued under our 2004 Omnibus Stock Incentive Plan (which includes approximately $0.4 million of additional amortization in the fourth quarter for employees of Northstar Capital who became fully vested in connection with our termination of the shared facilities and service agreement on October 29, 2005), $2.2 million in connection with our Long-Term Incentive Bonus Plan or our incentive bonus (of which $1.7 million was a catch up adjustment due to a revision in management’s estimate that we will now likely meet the required earnings hurdle during the first and second measurement periods and all shares under the incentive bonus plan will likely be earned), and compensation expense of $0.3 million in connection with the grants to the members of our Board of Directors. These increases were offset by a reduction of $2.3 million of amortization in 2005 relating to buyouts of a profits interest in NS Advisors LLC from one of our employees and membership interests in Northstar Funding Managing Member, LLC from two former employees in the 2004 pro forma period in connection with our IPO.

Insurance (direct and allocated) for the year ended December 31, 2005 totaled $0.9 million, representing an increase of $0.4 million, or 80%, compared to $0.5 million for the 2004 pro forma period. The increase was attributable to direct costs incurred for directors and officers liability policies we acquired subsequent to the IPO in 2004 and renewed in October 2005.

Auditing and professional fees for the year ended December 31, 2005 totaled $3.6 million, representing an increase of $2.8 million, or 350%, compared to $0.8 million for the 2004 pro forma period. The increase was primarily attributable to auditing fees of $1.7 million, comprised of 2004 audit fees expensed in 2005, quarterly reviews performed by our auditors, Sarbanes-Oxley compliance work and audit work completed during 2005 related to our 2005 year-end audit, in addition, there were higher legal costs of $0.4 million associated with general corporate matters, and increased consulting fees of approximately $0.7 million associated with year end and periodic reporting obligations and recruiting during the year ended December 31, 2005. There were no formation expenses for the year ended December 31, 2005. We incurred approximately $0.5 million of expenses in connection with our formation and organization in the 2004 profoma period.

Other general and administrative expenses (direct and allocated) for the year ended December 31, 2005 totaled $2.0 million, representing an increase of approximately $0.5 million, or 33%, compared to $1.5 million for the 2004 pro forma period. This increase was primarily attributable to public company expenses of $0.5 million, which includes public relations costs of approximately $0.1 million.

Depreciation and amortization

Depreciation and amortization expense for the year ended December 31, 2005 totaled $ 4.4 million, representing an increase of $4.2 million, compared to $0.2 million for the 2004 pro forma period. This increase was primarily attributable to $3.1 million of depreciation and amortization expense and $0.3 million related to the amortization of the intangible assets under SFAS 141 for the Chatsworth Portfolio acquired on January 14, 2005, the Salt Lake City property acquired on August 2, 2005, the EDS Portfolio acquired on September 30 2005 and the Cincinati properties acquired on December 8, 2005. In addition, $0.8 million of depreciation expense is attributable the New York property portfolio which was accounted for under the equity method of accounting for the period January 1, 2004 to October 28, 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 been consolidated into our consolidated financial statements in 2005.

Equity in earnings of unconsolidated/uncombined ventures

Equity in earnings for the year ended December 31, 2005 totaled $0.2 million, representing a decrease of $1. 4 million, or 88%, compared to $1.6 million for the 2004 pro forma period. The decrease was attributable to the decrease in the equity in earnings of the NSF venture of approximately $0.3 million due to lower average portfolio loan balances in 2005 and a decrease of $1.1 million from the New York property portfolio which was accounted for under the equity method of accounting for the period January 1, 2004 to October 28, 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 been consolidated into our consolidated financial statements in 2005.

Unrealized gain on investments and other

Unrealized gain on investments and other increased by approximately $0. 4 million for the year ended December 31, 2005 to $0.9 million from $0.5 million for the 2004 pro forma period. This increase is primarily related to unrealized gains on investments of $0.7 million on the CDO III warehouse agreement and approximately $0.7 million on the CDO V warehouse agreement, offset by $0.5 million of unrealized losses on the CDO VII warehouse. Unrealized gains on investments of $0.5 million for the 2004 profoma period consisted of $0.5 million on the CDO II warehouse agreement and $0.5 million on the CDO III warehouse agreement, offset by $0.4 million of unrealized losses on short sales of securities and $0.1 million on our investments in AAA-rated, short term, floating rate securities.

Unrealized gains on investments relating to each of these CDO warehouse agreements represent the changes in fair value of each warehouse agreement during the portion of the warehouse term included in the financial reporting period.

Realized gain on investments and other

Realized gain (loss) on investments and other for the year ended December 31, 2005 totaled $2.2 million, representing an increase of $1. 3 million compared to $0.9 million in the 2004 pro forma period. The increase was attributable to 2005 realized gains of $0.7 million and $0.6 million, representing the increase in fair value related to the net interest income on the accumulated securities during the warehouse period of the CDO III warehouse and CDO V warehouse, respectively. We sold $10 million of our BB junior rated debt securities to the warehouse provider for CDO V, realizing a gain on sale of $0.8 million in the year ended December 31, 2005. In addition, we realized a $0.1 million gain in the year ended December 31, 2005 related to the sale of our investments in AAA-rated, short term, floating rate securities.

Realized gains on investments of $0.9 million for the 2004 pro forma period, of which $0.6 million was related to the CDO II warehouse agreement and $0.3 million related to sales of portions of our AAA-rated, short term, floating rate securities .

Income from discontinued operations, net of minority interest

We sold our interest s in 729 Seventh Avenue on June 30, 2005 and sold our fee interest in the property located at 1552 Broadway on November 30, 2005. On December 30, 2005, we entered into a contract to sell our leasehold interest in 27 West 34 ^th Street and terminate the leasehold interest in 1372 Broadway. Accordingly, these properties' and leashold interests operations were reclassified to income from discontinued operations. The properties and leashold interests were accounted for under the equity method of accounting as part of the New York property portfolio prior to our IPO.

Gain on sale from discontinued operations, net of minority interest

We sold our interests in 729 Seventh Avenue and 1552 Bro adway for $29 million and $48 million, respectively, recognizing gains on sale, net of minority interest of $8.6 million and $20.2 million, respectively, for the year ended December 31, 2005. We had no such gain in 2004.

Comparison of 2004 Pro Forma period to the Year Ended December 31, 2003

Revenues

Rental and escalation income

Rental income of approximately $0.5 million represents rental income from ALGM’s tenants during the period October 29, 2004 to December 31, 2004. In 2003 and through our IPO, ALGM was uncombined and our share of ALGM’s operations was reflected in equity in earnings of uncombined ventures. As part of the formation transactions, we acquired the remaining 2.5% interest in ALGM, which is consolidated in our financial statements for the period October 29, 2004 to December 31, 2004.

Advisory and management fee income

Advisory and management fee income in 2004 increased by $0.1 million, or 50%, to approximately $0.2 million as a result of higher fees earned from third parties due to a larger porfolio in the NSF venture.

Advisory and management fee income -related parties

Advisory and management fee income from related parties in the 2004 pro forma period increased by $2.1 million, or 210%, to approximately $3.1 million as a result of asset advisory fees earned in 2004 for CDO I and CDO II (which had closed in July 2004) of approximately $2.1 million, and approximately $1.0 million in fees earned from the NSF venture due to a larger portfolio balance. Advisory and management fee income from related parties totaling $1.0 million in 2003 includes advisory fees earned for CDO I of $0.5 million for the period August 21, 2003 (date of closing) through December 31, 2003 and approximately $0.5 million from the NSF venture.

Interest income

Interest income increased by $4.0 million, representing an increase of $4.0 million compared to the year ended December 31, 2003. The interest income earned in the pro forma period 2004 includes approximately $3.4 million earned from our investments in AAA-rated, short-term, floating rate securities which are backed by commercial or residential mortgage loans with proceeds from our initial public offering, interest income of approximately $0.4 million on the three subordinate real estate debt investments made on our balance sheet subsequent to our IPO and $0.2 million on cash collateralizing our short security sales and other investments. In 2003, all interest income related to our investment in our first CDO transaction, CDO I, which closed in August 2003.

Interest income -related parties

Interest income - related parties increased by $2.1 million, to approximately $2.6 million, from $0.5 million in 2003. The interest income earned in 2004 includes interest income on debt securities available for sale of approximately $2.6 million, which is comprised of approximately $1.2 million of interest earned on CDO I and $1.4 million of interest income earned on our investment in the "BB" rated junior classes of debt securities and unrated income securities of CDO II, which closed in July 2004. In 2003, all interest income related to our investment in our first CDO transaction, CDO I, which closed in August 2003.

Expenses

Real estate property operating expenses, management fees and depreciation and amortization expense

Real estate property expenses of $0.1 million, management fees (related party) of $0.1 million, and depreciation and amortization expense of $0.2 million relate to the ALGM properties for the period October 29, 2004 to December 31, 2004. Included in the related party management fee is a non-recurring termination payment of $0.4 million related to the termination of our previous management agreement. In 2003 and through our IPO, ALGM was uncombined and our share of ALGM’s operations was reflected in equity in earnings of uncombined ventures. As part of the formation transactions, we acquired the remaining 2.5% managing equity interest in ALGM, which is consolidated in our financial statements for the period October 29, 2004 to December 31, 2004.

Interest expense

Interest expense for the year ended December 31, 2004 totaled approximately $3.6 million, while we did not incur any interest expense in 2003. Interest expense in 2004 is comprised of interest on reverse repurchase obligations with major banking institutions totaling approximately $3.1 million, which were used to finance our investments in AAA-rated, short-term, floating rate securities and our investment in the "BB" rated junior classes of debt securities and unrated income securities of CDO II. In addition, we incurred interest expense of approximately $0.1 million related to ALGM’s mortgage as well as interest on capital leases for the period October 29, 2004 to December 31, 2004 and approximately $0.4 million of interest expense on the securities underlying the short sales we entered into during 2004.

General and administrative expenses

General and administrative expenses for the 2004 pro forma period totaled $11.3 million, representing an increase of $6.3 million, or 126%, compared to $5.0 million for the year ending December 31, 2003. The increase was comprised of the following:

Salary expense increased by approximately $1.4 million, or 41%, to approximately $4.8 million for the pro forma period ended December 31, 2004. The increase is primarily related to an increase in allocated salaries in 2004 as compared to 2003, due to higher staffing levels to accommodate the expansion of our three businesses.

Shared services - related party for the 2004 profoma period totaled $0.2 million, representing an increase of approximately $0.2 million compared to the year ending December 31, 2003. The increase was attributable to the shared facilities and services agreement we entered into with NorthStar Capital on October 29, 2004.

Equity based compensation expense of $3.0 million for the 2004 pro forma period relates to the following formation transactions in connection with our IPO as follows: approximately $1.6 million of compensation expense was recognized in connection with the buyout of a 15% profits interest (which was a compensation arrangement) in NS Advisors from one of its employees, approximately $1.0 million of compensation expense was recognized in connection with the buyout of a 25% profits interest in Northstar Funding Managing Member, LLC, which was held by two former employees of NorthStar Capital, and approximately $0.4 million has been charged to compensation expense in connection with the three-year vesting of equity based awards issued in connection with our IPO under our Omnibus Stock Incentive Plan.

Insurance (direct and allocated) for the 2004 pro forma period totaled $0.5 million, representing an increase of $0.2 million, or 67%, compared to $0.3 million of allocated costs for the year ending December 31, 2003. The increase was attributable to direct costs incurred for directors and officers policies we acquired subsequent to the IPO in 2004.

Auditing and professional fees for the 2004 pro forma period totaled $0.8 million, representing an increase of $0.8 million compared to the year ended December 31, 2003. The increase was attributable to direct professional fees of $0.5 million incurred in connection with quarterly review services performed by our auditors and $0.3 million of legal and other professional fees.

We incurred approximately $0.5 million of expenses in connection with our formation and organization in the 2004 pro foma period.

Other general and administrative expenses for the 2004 pro forma period increased by approximately $0.2 million, or 15%, to approximately $1.5 million compared to the year ending December 31, 2003. This increase is primarily related to various public company expenses, including director fees, organizational costs, as well as general and administrative costs associated with ALGM, which is consolidated in our financial statements from October 29, 2004.

Equity in earnings of unconsolidated/uncombined ventures

Equity in earnings for the 2004 pro forma period totaled $1.6 million, representing a decrease of $0.4 million or 20%, compared to $2.0 million for the year ended December 31, 2003. The decrease was attributable to the e quity in earnings in ALGM which decreased by $0.6 million. The results for 2004 represent our 97.5% share of the earnings prior to October 29, 2004. Subsequent to October 29, 2004, when we acquired the remaining 2.5% managing membership interest, ALGM was consolidated in our financial statements.

This decrease was offset by our increase in equity in earnings from the NSF venture of approximately $0.2 million for the 2004 pro forma period. The net income of the NSF venture increased due to higher interest income earned for all of 2004 on loan participations that closed late in 2003, in addition to the closing of a new loan in September 2004.

Unrealized gain on investments and other

Unrealized gain on investments and other for the 2004 pro forma period decreased by approximately $0.7 million compared to $1.2 million for the year ended December 31, 2003. Unrealized gains on investments in the 2004 pro forma period consisted of unrealized gains of $0.5 million on the CDO III warehouse agreement and approximately $0.5 million on the CDO II warehouse agreement, offset by $0.4 million of unrealized losses on short sales of securities and $0.1 million on our investments in AAA-rated, short term, floating rate securities .

There were $1.2 million of unrealized gains, of which $1.0 million related to CDO I and $0.2 million related to CDO II in 2003. The CDO I gains represented the increase in fair value of the warehouse agreement from January 1, 2003 through August 21, 2003, the day the warehouse agreement was terminated and the underlying securities were transferred into CDO I. Similarly, the CDO II unrealized gain represents the change in the fair value of the warehouse agreement.

Realized gain on investments and other

Realized gains on investments and other decreased by approximately $1.0 million from $1.9 million in 2003 to $0.9 million in the 2004 pro forma period. Realized gains for the 2004 pro forma period consisted of a $0.3 million gain related to the sale of a portion of our temporary investments in AAA-rated, short-term, floating rate securities and a $0.6 million gain representing the increase in fair value of the CDO II warehouse agreement from January 1, 2004 through July 2004 when the warehouse agreement terminated. In 2003, the realized gain of $1.9 million related to the increase in fair value of the CDO I warehouse agreement from January 1, 2003 through August 2003 when the warehouse agreement terminated.

Minority Interest

Minority interests were approximately $0.6 million for the 2004 pro forma period as a result of allocating approximately 21% of the consolidated loss before minority interests to the limited partner unit holders in our operating partnership for the period October 29, 2004 to December 31, 2004, (“Unit holders”). There was no minority interest in our Predecessor for the year ended December 31, 2003 through the date of our IPO.

Liquidity and Capital Resources

As of December 31, 2005, we had a unrestricted cash and cash equivalents balance of $27.9 million. As a REIT, we are required to distribute at least 90% of our annual REIT taxable income to our stockholders, and we intend to distribute all or substantially all of our REIT taxable income in order to comply with the REIT distribution requirements of the Internal Revenue Code and to avoid federal income tax and the nondeductible excise tax. We believe that our unrestricted cash balances together with the available borrowing capacity under our existing credit facilities, proceeds from the sale of assets, proceeds from private placement of trust preferred securities and cash flow provided from our operations, will be sufficient to allow us to fund the equity portion of our new investments, make distributions necessary to enable us to continue to qualify as a REIT and fund our operations for at least the next 12 months. In order to fund investments that we may make in the next 12 months, we may borrow additional funds under our current credit facilities, issue debt securities or raise additional equity capital.

We expect to meet our long term liquidity requirements, including the repayment of debt and our investment funding needs, through existing cash resources and additional borrowings, the issuance of debt and/or equity securities and the liquidation or refinancing of assets.

Debt Obligations

As of December 31, 2005, we had the following debt outstanding:

	Carrying Amount at 12/31/05 (in thousands)	Stated Maturity	Interest Rate	Weighted Average Expected Life (in years)
Mortgage notes payable (non-recourse):
Chatsworth	$43,777	5/1/2015	5.65%	9.34
Salt Lake City	16,919	9/1/2012	5.16%	6.67
EDS	49,120	10/8/2015	5.37%	9.78
Executive Centre	51,480	01/1/2016	5.85%	10.01
Mezzanine loan payable (Chatsworth) (non-recourse)	13,000	5/1/2014	6.64%	8.34
Repurchase obligations	7,054	See Repurchase Obligations below	LIBOR + 0.6% to 1.25%	Various, generally 30 days
CDO Bonds Payable (CDO IV) (non-recourse)	300,000	7/1/2040	LIBOR + 0.62% (Average Spread)	8.0
Wachovia credit facility	243,002	7/12/2008	LIBOR + 0.2% to 2.5%	2.53
Bank of America credit facility	-	09/27/2006	LIBOR + 3.25%	0.74
Liability to subsidiary trusts issuing preferred securities
Trust I	41,240	3/30/2035	8.15%	—
Trust II	25,780	6/30/2035	7.74%	—
Trust III	41,238	1/30/2036	7.81%	—
DBAG facility	—	12/21/2007	LIBOR + 0.75% to 2.25%	1.97
	$832,610

Chatsworth Mortgage Loan. The Chatsworth mortgage matures on May 1, 2015 and bears interest at a fixed rate of 5.65%. This non-recourse loan requires monthly payments of $230,906, representing interest in arrears and principal sufficient to amortize the loan to a balance of approximately $40.5 million at maturity, as well as monthly escrow deposits for ground lease payments required under the ground lease for the leasehold property.

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

EDS Mortgage Loan. The EDS Mortgage matures on October 8, 2015 and bears interest at a fixed rate of 5.373%. This non-recourse loan requires monthly payments of $274,997, representing interest in arrears and principal sufficient to amortize the loan to a balance of approximately $41.91 million at maturity, as well as monthly escrow deposits for real estate taxes.

Executive Centre Mortgage Loan. The Executive Centre Mortgage matures on January 1, 2016 and bears interest at a fixed rate of 5.851%. This non-recourse loan requires monthly payments of $303,732, representing interest in arrears and principal sufficient to amortize the loan to a balance of approximately $48.1 million at maturity, as well as monthly escrow deposits for real estate taxes.

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

Repurchase Obligations. We have $7.1 million of repurchase agreements with two counterparties. These repurchase agreements are used to finance certain investments on a short term basis, prior to their sale or transfer to one of our CDOs to finance these assets on a permanent basis. These repurchase obligations mature in less than thirty days, with interest rates of LIBOR plus 0.05% to 0.07%.

Wachovia Facility. On July 13, 2005, our wholly owned subsidiary NRFC WA Holdings, LLC, or NRFC WA, entered into a master repurchase agreement, which we refer to as the Wachovia facility, with Wachovia Bank, National Association, or Wachovia. The Wachovia facility was amended in September 2005 and currently NRFC WA may borrow up to $400 million under this credit facility in order to finance the acquisition of primarily subordinate real estate debt and other real estate loans and securities. The additional capacity and flexiblility under the amendment will allow us to accumulate sufficient collateral for a contemplated real estate debt CDO, or CDO VI, and to continue to finance other investments.

The debt outstanding under the Wachovia facility is subject to a number of terms, conditions and restrictions including, without limitation, scheduled interest payments and the maintenance of certain margin percentages on amounts outstanding under the facility. If the market value of an asset securing outstanding debt under the Wachovia facility declines, NRFC WA may be required to satisfy a margin call by paying cash or providing additional collateral. Failure to meet any margin call could result in an event of default which would enable Wachovia to exercise various rights and remedies including acceleration of the maturity date of the debt outstanding under the facility and the sale of the collateral. Following September 30, 2005, an affiliate of NRFC WA was added as a borrower under the Wachovia facility.

As of December 31, 2005, NRFC WA and its affiliates had $243.0 million of borrowings outstanding under this facility.

Bank of America Facility. On September 28, 2005, we entered into a master loan, guarantee and security agreement with Bank of America, N.A., our operating partnership and NS Advisors LLC, which we refer to as the Bank of America facility. The Bank of America facility provides for an unsecured, $50 million revolving credit facility. The term of the unsecured facility is one year, with up to two one-year extensions at the discretion of Bank of America. If the unsecured facilty is not extended by Bank of America, we have the option in lieu of immediate repayment to amortize the outstanding principal balance of the unsecured facility in equal quarterly installments over twelve months upon payment of a quarterly 12.5 basis point fee on the outstanding balance under the unsecured facility at September 27, 2006 and each quarter thereafter. The interest rate on the unsecured facility is LIBOR, plus 325 basis points.

The Bank of America facility contains certain covenants, including, among other things, financial covenants requiring the Company to have minimum cash liquidity, minimum tangible net worth, maximum debt to tangible net worth and minimum debt service coverage. The Bank of America facility also contains certain customary representations and warranties and events of default. The obligations of our operating partnership, which is the borrower under the unsecured facility, are guaranteed by us, NS Advisors LLC and each of our respective subsidiaries and any subsidiary of our operating partnership whose assets are included in the borrowing base for the unsecured facility.

At December 31, 2005, we had no borrowings outstanding under the Bank of America facility.

Liability to Subsidiary Trusts Issuing Preferred Securities . On April 12, 2005, May 25, 2005, and November 22, 2005 NorthStar Realty Finance Trust, NorthStar Realty Finance Trust II and NorthStar Realty Finance Trust III, which we refer to as the Trusts, sold, in three private placements, trust preferred securities for an aggregate amount of $40 million, $25 million, and $40 million, respectively. We own all of the common stock of the Trusts. The Trusts used the proceeds to purchase our operating partnership’s junior subordinated notes due March 30, 2035, June 30, 2035 and January 30, 2036, respectively, which represent all of the Trusts' assets. The terms of the junior subordinated notes are substantially the same as the terms of the trust preferred securities. The trust preferred securities have fixed interest rates of 8.15%, 7.74% and 7.81% per annum, respectively, during the first ten years, after which the interest rate will float and reset quarterly at the three-month LIBOR rate plus 3.25% per annum, for Trust I and II, and 2.83% for Trust III.

We may redeem the notes, in whole or in part, for cash, at par, after March 30, 2010, June 30, 2010, and January 30, 2011, respectively. To the extent we redeem the notes, the Trusts are required to redeem a corresponding amount of trust preferred securities. On September 16, 2005, we amended the trust agreements and indentures for Trust I and II to modify some of the payment dates for a portion of the junior subordinated notes and trust preferred securities.

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

DBAG Facility and CDO Bonds Payable. On December 21, 2004, NRFC DB Holdings, LLC, one of our subsidiaries, entered into a $150 million master repurchase agreement with Deutsche Bank AG, Cayman Islands Branch, which we refer to as the DBAG facility. On March 21, 2005, the DBAG facility was amended and restated to allow NRFC DB Holdings to borrow up to $300 million in order to finance the acquisition of primarily subordinate real estate debt and other real estate loans and securities. The additional capacity and flexibility under the amendment of the DBAG facility allowed us to accumulate sufficient collateral for CDO IV, and to continue to finance other investments.

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

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

During the period from March 21, 2005 through June 14, 2005, amounts advanced under the DBAG facility in order to finance the acquisition of assets that were included in CDO IV bore interest at one-month LIBOR plus a spread of 1.00% and amounts advanced for all other assets bore interest at one-month LIBOR plus a spread which ranges from 0.75% to 2.25%. After June 14, 2005, all amounts advanced under the amended DBAG facility bear interest at a rate of one-month LIBOR plus the spread which ranges from 0.75% to 2.25%. Assets will be financed at advance rates ranging from 40% to 92.5% of the value of the assets as applicable to the asset category.

Effective April 1, 2005, the covenants under the DBAG facility require us to maintain a certain minimum tangible net worth, a certain minimum debt service coverage ratio, a certain range of ratios of recourse indebtedness to net worth and certain minimum amounts of cash or marketable securities based on our ratio of recourse indebtedness to net worth.

The debt that may be outstanding under the DBAG facility is subject to a number of terms, conditions and restrictions including, without limitation, the maintenance of certain margin percentages on amounts outstanding under the facility. If the market value of an asset securing the outstanding debt declines, cash flow due NRFC DB Holdings may be suspended and if market value continues to decline, NRFC DB Holdings may be required to satisfy a margin call by paying cash or providing additional collateral. Failure to meet any margin call could result in an event of default which would enable Deutsche Bank AG to exercise various rights and remedies including acceleration of the maturity date of the debt outstanding under the DBAG facility or the sale of the assets financed thereunder.

At December 31, 2005, we were in compliance with all covenants under our debt obligations.

Capital Expenditures

During 2006, we do not expect to incur any material capital expenditures with respect to our net lease portfolio, since most of these expenses are the obligations of our tenants.

Cash Flows

Year Ended December 31, 2005 Compared to 2004 Pro Forma Period

To facilitate a comparison of cash flows for the year ending December 31, 2005 to the prior year, we have combined our predecessor's cash flows for the period from January 1, 2004 to October 28, 2004 with our cash flows for the period from October 29, 2004 to December 31, 2004 .

The net cash flow provided by operating activities of $8 48.7 million increased $1,675.1 million for the year ended December 31, 2005 from a use of $826.4 million of cash for the 2004 pro forma period. This increase was primarily due to sales of all short-term highly liquid investments of $826.4 million in 2005, which we had acquired in the 2004 pro forma period. The corresponding repayment of short term repurchase financing was included in financing activities.

The net cash flow used in investing activities of $880.2 million increased by $753 million for the year ended December 31, 2005 from a use of $127.2 million for the 2004 pro forma period. Net cash used in investing activities in 2005 consisted primarily of the purchase of operating real estate, funds used to purchase debt securities available for sale, real estate debt investments, as well as funding of new warehouse deposits for our CDOs.

The net cash flow provided by financing activities of $11.6 million decreased by $988.7 million for the year ended December 31, 2005 from $1,000.3 million of cash flow provided by financing activities for the pr forma period ended December 31, 2004. The primary use of cash flow in financing activities in 2005 was for the repayment of our repurchase agreements which financed our short term, highly liquid investments, the repayment of the DBAG facility in connection with the closing of CDO IV, the repayment of a portion of the existing mortgage on the ALGM portfolio in connection with the sales of 729 Seventh Avenue and 1552 Broadway and payments of dividends and distributions to our unit holders of $14.2 million. This was offset by proceeds from our secondary offering, the issuance of CDO IV bonds, issuance of trust preferred securities and our mortgage and credit faciility borrowings.

2004 Pro Forma Period Compared to Year Ended December 31, 2003

The net cash flow used in operating activities of $826.3 million for the pro forma period ended December 31, 2004 decreased by $827.6 million, from $1.3 million of cash provided by operations for the year ended December 31, 2003, primarily due to the required inclusion of purchases of short-term highly liquid investments in operating activities, where the corresponding short-term repurchase financing is included in financing activities. Adjusting for the effect of these purchases, cash provided from operating activities would have only decreased $0.8 million from the 2004 prp forma period to 2003.

The net cash flow used in investing activities increased by $117.4 million for the pro forma period ended December 31, 2004 to a use of $127.2 million from a use of $9.8 million for the year ended December 31, 2003. Net cash used in investing activities in 2004 consisted primarily of purchases of real estate and interests in entities in connection with our IPO, funds used to purchase our interest in the unrated income and the "BB" rated notes of CDO II, as well as purchases of subordinate debt investments.

The net cash flow provided by financing activities increased by $990.7 million for the pro forma period ended December 31, 2004 to $1.0 billion from $9.6 million from financing activities for the year ended December 31, 2003. The primary sources of cash flow from financing activities in 2004 were our net proceeds from our repurchase agreements and credit facility, net IPO proceeds, loan proceeds to finance CDO II and contributions by owners, prior to our IPO.

Recent Developments

Real Estate Debt Investments

The following summarizes real estate debt investments acquired from January 1, 2006 through March 7, 2006 , (dollars in thousands):

January 1, 2006 through March 7, 2006	Carrying Value (in thousands)		Allocation by Investment Type			Average Spread Over LIBOR			Average Fixed Rate			Number of Investments
Whole loans, floating rate	$	92,335		54.0	%		3.33	%		—			5
Whole loans, fixed rate		—		—			—			—			—
Mezzanine loans, floating rate		66,580		39.0	%		9.34	%		—			2
Mezzanine loan, fixed rate		11,880		7.0	%		—			8.00	%		1
Total / Average	$	170,795		100.0	%		5.86	%		8.00	%		8

Timarron Acquisition

On October 20, 2005, we entered into a definitive purchase agreement with Allied Capital Corporation to acquire Timarron Capital Corporation. Timarron, based in Dallas, Texas, was organized by former senior executives of Principal Financial and other leading financial institutions to develop a nationwide commercial mortgage loan origination platform. We closed on the acquisition on January 19, 2006. The purchase price was approximately $2.7 million. Timarron was renamed and reorganized as NRF Capital LP. NRF Capital LP will originate commercial mortgage loans for our commercial real estate debt portfolio.

NSF Venture Sale

On February 1, 2006, we sold our interests in the the NSF venture to the NSF venture investor and terminated the associated advisory agreements for total consideration of $2.9 million. We will recognize approximately $1.2 million of incentive income which had been deferred at December 31, 2005. Subsequent to January 31, 2006, we will no longer earn management or incentive fees from the NSF venture or from loans owned directly by the NSF venture investor.

Net Lease Properties

On January 31, 2006, we sold our leasehold interests in 27 West 34 ^th Street and 1372 Broadway, both in New York City, for $2.3 million. We anticipate recognizing a gain on sale of approximately $200,000 in the first quarter of 2006.

Quantum Joint Venture

Private Placement

Dividends

On January 26, 2006, we declared a cash dividend of $0.2 7 per share of common stock. The dividend was paid on February 10, 2006 to the shareholders of record as of the close of business on February 3, 2006.

Contractual Commitments

As of December 31, 2005, we had the following contractual commitments and commercial obligations (in thousands):

	Payments Due by Period
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		After 5 years
Mortgage loan - Chatsworth	$	43,777	$	271	$	584	$	663	$	42,259
Mortgage loan - Salt Lake City		16,919		335		722		803		15,059
Mortgage loan - EDS		49,120		103		1,320		1,479		46,218
Mortgage loan - Executive Centre		51,480		—		—		—		51,480
Mezzanine loan payable - Chatsworth		13,000		1,015		2,676		3,055		6,254
Repurchase agreements		7,054		7,054		—		—		—
Securities sold, not yet purchased
CDO bonds payable		300,000		—		—		—		300,000
Liability to subsidiary trusts issuing preferred securities		108,258		—		—		—		108,258
Wachovia facility		243,002		—		243,002		—		—
Bank of America facility		—		—		—		—		—
Capital leases ⁽¹⁾		17,778		353		807		974		15,644
Operating leases		17,088		967		994		994		14,133
Total contractual obligations	$	867,476	$	10,098	$	250,105	$	7,968	$	599,305

⁽¹⁾	Includes interest on the capital leases.

Off Balance Sheet Arrangements

As of December 31, 2005, we had the material off balance sheet arrangements described below.

Our potential losses in CDO I, CDO II, CDO III and CDO V are limited to our aggregate carrying value which was approximately $90.1 million at December 31, 2005.

The terms of the portfolio of real estate securities held by CDO I, CDO II, CDO III and CDO V are structured to be matched with the terms of the non-recourse CDO liabilities. These CDO liabilities are repaid with the proceeds of the principal payments on the real estate securities collateralizing the CDO liabilities when these payments are actually received. There is no refinancing risk associated with the CDO liabilities, as principal is only due to the extent that it has been collected on the underlying real securities and the stated maturities are noted above. CDOs produce a relatively predictable income stream based on the spread between the interest earned on the underlying securities and the interest paid on the CDO liabilities. This spread may be reduced by credit losses on the underlying securities or by hedging mismatches. CDO I, CDO II, CDO III and CDO V have not incurred any losses on any of their securities investments from the date of purchase through December 31, 2005. We receive quarterly cash distributions from CDO I and monthly cash distributions from CDO II, CDO III and CDO V, each representing our proportionate share of the residual cash flow from the CDOs, as well as collateral advisory fees and interest income on the unrated income notes of CDO II, CDO III and CDO V. Our residual interests in the cash flows of these CDOs are accounted for as debt securities pursuant to EITF Topic 99-20.

The following table describes certain terms of the collateral for and the notes issued by CDO I, CDO II, CDO III and CDO V as of December 31, 2005:

	CDO Collateral							CDO Notes
	Par Value of CDO Collateral (in ’000s)		Weighted Average Interest Rate			Weighted Average Expected Life (years)		Outstanding CDO Notes ⁽¹⁾ (in ’000s)		Weighted Average Interest Rate			Stated Maturity
CDO I	$	352,041		6.62	%		6.01	$	332,831		6.13	%		8/1/2038
CDO II	$	392,841		6.25	%		6.65	$	356,170		5.58	%		6/1/2039
CDO III	$	401,790		6.06	%		6.69	$	360,973		5.59	%		6/1/2040
CDO V	$	500,969		5.69	%		9.08	$	461,500		2.89	%		9/5/2045

⁽¹⁾	Includes only notes held by third parties.

CDO I, CDO II, CDO III and CDO V are variable interest entities. However, management has determined that we are not, and our predecessor was not, the primary beneficiary of CDO I, CDO II, CDO III or CDO V and as such, in accordance with FIN 46R, we did not consolidate CDO I, CDO II, CDO III or CDO V. The FASB has continued to discuss potential refinements to FIN 46R associated with, among other things, the types of interests which create variability and which type of interests absorb income and loss variability, and how such income and loss variability should be measured. In the event that the FASB modifies its interpretation of FIN 46R 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 we may be required to consolidate our interests in our CDOs in the future.

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

Warehouse Agreement for CDO VII

On September 27, 2005, we entered into a warehouse arrangement with a major commercial bank whereby the bank has agreed to purchase up to $400 million of CMBS and other real estate debt securities under our direction, with the expectation of selling such securities to our fifth investment grade CDO issuance, or CDO VII. As of December 31, 2005, we have deposited $10.0 million as security for the purpose of covering a portion of any losses or costs associated with the accumulation of these securities under the warehouse agreement and will be required to deposit additional equity based on accumulations of securities that will be made under the warehouse agreement. The bank had accumulated $156.4 million of real estate securities under the terms of the warehouse agreement as of December 31, 2005. The CDO VII warehouse agreement also provides for our notional participation in the income that the assets generate after deducting a notional debt cost.

Inflation

Our leases for tenants of operating real estate are either:

•

net leases where the tenants are responsible for all real estate taxes, insurance and operating expenses and the leases provide for increases in rent either based on changes in the Consumer Price Index, or CPI, or pre-negotiated increases; or

•

operating leases which provide for separate escalations of real estate taxes and operating expenses over a base amount, and/or increases in the base rent based on changes in the CPI.

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

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

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

Funds from Operations and Adjusted Funds from Operations

Management believes that funds from operations, or FFO, and adjusted funds from operations, or AFFO, each of which are non-GAAP measures, are additional appropriate measures of the operating performance of a REIT. We compute FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts, or NAREIT, as net income or loss (computed in accordance with GAAP), excluding gains or losses from sales of depreciable properties, the cumulative effect of changes in accounting principles, real estate-related depreciation and amortization, and after adjustments for unconsolidated/uncombined partnerships and joint ventures. AFFO is a computation often made by REIT industry analysts and investors to measure a real estate company's cash flow generated from operations. We believe that AFFO is helpful to investors as a measure of our liquidity position because, along with cash generated from operating activities, this measure provides investors with an understanding or our ability to pay dividends. In addition, because this measure is commonly used in the REIT industry, our use of AFFO may assist investors in comparing our liquidity position with that of other REITs. We calculate AFFO by subtracting from (or adding) to FFO:

•

normalized recurring expenditures that are capitalized by us and then amortized, but which are necessary to maintain our properties and revenue stream, e.g., leasing commissions and tenant improvement allowances;

•

an adjustment to reverse the effects of straight-lining of rents and fair value lease revenue under SFAS 141; and

•

the amortization or accrual of various deferred costs including intangible assets and equity based compensation.

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

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

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

	The Company		The Company			The Predecessor
	Year Ended December 31, 2005		October 29, 2004 to December 31, 2004			January 1, 2004 to October 28, 2004		2003
Funds from operations:
Income (loss) before minority interests	$	10,389,000	$	(3,073,000	)	$	1,194,000	$	1,737,000

Adjustments:
Depreciation and amortization		4,352,000		190,000			—		—
Funds from discontinued operations		1,458,000		145,000			—		—
Real estate depreciation and amortization - unconsolidated ventures		—		—			1,608,000		2,204,000
Funds from operations	$	16,199,000	$	(2,738,000	)	$	2,802,000	$	3,941,000

Adjusted funds from operations:
Funds from Operations		16,199,000		$	(2,738,000	)	$	2,802,000		$	3,941,000
Straightline rental income, net		(252,000	)		(18,000	)		—			—
Straightline rental income - unconsolidated ventures		—			—			(456,000	)		(654,000	)
Straightline rental income, discontinued operations		(281,000	)		(133,000	)		—			—
Fair value lease revenue (SFAS 141 adjustment)		18,000			—			—			—
Amortization of deferred compensation		5,847,000			2,991,000			—			—
Adjusted funds from operations ⁽¹⁾	$	21,531,000		$	102,000		$	2,346,000		$	3,287,000

⁽¹⁾	FFO and AFFO for the period from October 29, 2004 through December 31, 2004 have been reduced by one-time formation and organization costs of $517,000.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the exposure to loss resulting from changes in interest rates and equity prices. We are subject to credit risk and interest rate risk with respect to our investments in real estate debt and real estate securities. The primary market risk that we are exposed to is interest rate risk. Interest rates are highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control. Our interest rate risk sensitive assets, liabilities and related derivative positions are generally held for non-trading purposes. As of December 31, 2005, a hypothetical 100 basis point increase in interest rates applied to our variable rate assets would increase our annual interest income by approximately $ 6,888,000, offset by an increase in our interest expense of approximately $5,430,000 on our variable rate liabilities.

Real Estate Debt

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

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

In our real estate debt business we are also exposed to credit risk, which is the risk that the borrower under our loan agreements cannot repay its obligations to us in a timely manner. While we have never experienced a payment default or even a late payment as of the date of this Annual Report on Form 10-K, our position in the capital structure may expose us to losses as a result of such default in the future. In the event that the borrower cannot repay our loan, we may exercise our remedies under the loan documents which may include a foreclosure against the collateral if we have a foreclosure right as a real estate debtholder under the loan agreement. The real estate debt that we intend to invest in will often allow us to demand foreclosure as a real estate debtholder if our loan is in default. To the extent the value of our collateral exceeds the amount of our loan (including all debt senior to us) and the expenses we incur in collecting on our loan, we would collect 100% of our loan amount. To the extent that the amount of our loan plus all debt senior to our position exceeds the realizable value of our collateral, then we would incur a loss. We also incur credit risk in our periodically scheduled interest payments which may be interrupted as a result of the operating performance of the underlying collateral.

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

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

Real Estate Securities

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

At December 31, 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 of approximately BBB- and approximately 75.3%, 72.9%, 69.1%, and 79.5%, respectively, of these securities are investment grade.

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

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

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

Our financing strategy is dependent on our ability to place the match-funded debt we use to finance our real estate securities at spreads that provide a positive arbitrage. If spreads on the bonds issued by CDOs widen or if demand for these liabilities ceases to exist, then our ability to execute future CDO financings will be severely restricted.

Interest rate changes may also impact our net book value as our investments in debt securities are marked-to-market each quarter with changes in fair value reflected in other comprehensive income (a separate component of owners' equity). Generally, as interest rates increase, the value of fixed rate securities within the CDO, such as CMBS, decreases and as interest rates decrease, the value of these securities will increase. These swings in value have a corresponding impact on the value of our investment in the CDO. Within the CDO, we seek to hedge against changes in cash flows attributable to changes in interest rates by entering into interest rate swaps/caps and other derivative instruments as allowed by our predecessor's risk management policy. Such derivatives are designated as cash flow hedge relationships according to SFAS No. 133.

During the warehouse period for CDOs, the market value of the securities in the warehouse is hedged, typically by short selling U.S. agency-sponsored (Federal National Mortgage Association or Federal Home Loan Mortgage Corp.) debentures or U.S. Treasury securities in the warehouse. Movements in interest rates are expected to result in a price movement for the hedge position that is opposite to and offsets the price movement of the fixed rate securities in the warehouse.

Debt Securities Held for Trading

Subsequent to the closing of our IPO, we temporarily invested a portion of the net proceeds of our IPO in primarily AAA-rated, short-term, floating rate commercial and residential mortgage-backed securities which are subject to fluctuations in market value. These securities are financed with leverage of up to 97% which may magnify this price volatility. If the market value of these securities were to decline, we would need to post additional collateral or liquidate a portion of these securities, possibly at a loss. The short-term securities that we have temporarily invested in have been selected to mitigate this risk to the extent possible. Their floating rate coupon, short duration, and high credit ratings all serve to maximize liquidity and to minimize the price volatility of these securities. Nevertheless, even a small decline in the price of these securities may be magnified by the leverage and result in a loss to us when the assets are liquidated. Unrealized losses may also occur even if the assets are not liquidated because these securities are held for trading purposes.

Net Lease Properties

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

We expect the credit profiles of our tenants will primarily be unrated and below investment grade. In order to ensure that we have as complete an understanding as possible of a tenant's ability to satisfy its obligations under its lease, we expect to undertake a rigorous credit evaluation of each tenant prior to executing sale/leaseback or net lease asset acquisitions. This analysis will include an extensive due diligence investigation of the tenant's business as well as an assessment of the strategic importance of the underlying real estate to the tenant's core business operations. Where appropriate, we may seek to augment the tenant's commitment to the facility by structuring various protection mechanisms into the underlying leases. These mechanisms could include security deposit requirements or affiliate guarantees from entities we deem to be creditworthy.

Derivatives and Hedging Activities

To limit the exposure to the variable LIBOR rate on our corporate debt, we entered into various swap agreements to fix the LIBOR rate on a portion of our variable rate debt. The fixed rates range from 4.18% to 5.03%. The following table summarizes the notional amounts and fair (carrying) values of our derivative financial instruments as of December 31, 2005 (in thousands):

		Notional Amount			Fair Value			Range of Maturity
Interest rate swaps, treated as hedges		$	53,242		$	726			March 2010 - August 2018

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated and combined financial statements of NorthStar Realty Finance Corp. and NorthStar Finance Corp. Predecessor, respectively, the consolidated financial statements of ALGM I Owners LLC and Subsidiaries for the two year period ended December 31, 2004 and the financial statements of NorthStar Funding LLC for the two year period ended December 31, 2004 and the notes related to each of the foregoing financial statements, each together with the independent registered public accounting firm's reports thereon, are set forth on pages F-1 through F-79 of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

Attached as exhibits to this Form 10-K are certifications of the Company’s Chief Executive Officer and Chief Financial Officer, which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the Exchange Act). This “Controls and Procedures” section includes information concerning the controls and controls evaluation referred to in the certifications. Part II, Item 8 of this Form 10-K sets forth the report of Grant Thornton LLP, our independent registered public accounting firm, regarding its audit of the Company’s internal control over financial reporting and of management’s assessment of internal control over financial reporting set forth below in this section. This section should be read in conjunction with the certifications and the Grant Thornton report for a more complete understanding of the topics presented.

Disclosure Controls and Procedures

The management of the Company established and maintains disclosure controls and procedures that are designed to ensure that material information relating to the Company and its subsidiaries required to be disclosed in the reports that are filed or submitted under the 1934 Act are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

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

Internal Control over Financial Reporting

(a) Management’s annual report on internal control over financial reporting .

Management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange Act Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, the principal executive and principal financial officer and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, the Company carried out an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2005 based on the “Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon this evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2005.

(b) Attestation report of the registered public accounting firm .

Our independent registered public accounting firm, Grant Thornton LLP, audited management’s assessment of the Company’s internal control over financial reporting as of December 31, 2005 and independently assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005. Grant Thornton has issued an attestation report concurring with management’s assessment, which is included at the end of Part II, Item 8 of this Form 10-K.

There have been no changes in the Company’s internal control over financial reporting during the most recent quarter ended December 31, 2005 that have materially affected, or are reasonably likely to affect, internal controls over financial reporting.

Inherent Limitations on Effectiveness of Controls

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) or our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

ITEM 9B. OTHER INFORMATION

Not applicable.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT*

Information relating to our code of business conduct and ethics and code of ethics for senior financial officers (as defined in the code) is included in Part I, Item 1 of this Annual Report on Form 10-K.

ITEM 11. EXECUTIVE COMPENSATION*

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS*

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS*

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES*

(*) The information that is required by Items 10, 11, 12, 13 and 14 is incorporated herein by reference from the definitive proxy statement relating to the 2006 Annual Meeting of Stockholders of the Company, which is to be filed with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended, no later than 120 days after the end of the Company’s fiscal year ending December 31, 2005.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) and (c) Financial Statements and Schedules.

Reference is made to the "Index to the Financial Statements" on page F-1 of this report.

All other financial statement schedules are not required under the related instructions, or they have been omitted either because they are not significant, the required information has been disclosed in the consolidated and combined financial statements and the notes related thereto.

(b) Exhibits

Exhibit Number		Description of Exhibit
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 Finance Limited Partnership*
2.2		Contribution Agreement, dated as of October 29, 2004, by and among NorthStar Partnership, L.P., NorthStar Funding Managing Member Holdings LLC and NorthStar Realty Finance Limited Partnership*
2.3		Purchase and Sale Agreement, dated as of October 29, 2004, between NorthStar Realty Finance Limited Partnership and ALGM I Equity, LLC*
3.1		Articles of Amendment and Restatement of NorthStar Realty Finance Corp., as filed with the State Department of Assessments and Taxation of Maryland on October 20, 2004 (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-11 (File No. 333-114675))
3.2		Bylaws of NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-11 (File No. 333-114675))
3.3		Amendment No. 1 to the Bylaws of NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 3.3 to the Company'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 Finance Corp., NorthStar Partnership, L.P., NorthStar Funding Managing Member Holdings LLC and NS Advisors Holdings LLC*
10.1		Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of October 19, 2004, by and among NorthStar Realty Finance Corp., as sole general partner and initial limited partner and the other limited partners a party thereto from time to time*
10.2		Non-Competition Agreement, dated as of October 29, 2004, by and among NorthStar Realty Finance Corp., NorthStar Realty Finance Limited Partnership, NorthStar Capital Investment Corp. and NorthStar Partnership, L.P.*
10.3		Shared Facilities and Services Agreement, dated as of October 29, 2004, by and between NorthStar Realty Finance Corp. and NorthStar Capital Investment Corp.*

Exhibit

Number

Description of Exhibit

10.4		Amended, Restated and Consolidated Fee and Leasehold Mortgage, Assignment of Leases and Rents and Security Agreement, dated as of December 4, 2002, by and among 729 Demi-Tasse LLC, 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 Capital Financial Products, Inc. (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-11 (File No. 333-114675))
10.5		Executive Employment Agreement, dated as of October 22, 2004, between David T. Hamamoto and NorthStar Realty Finance Corp.*
10.6		Executive Employment Agreement, dated as of October 22, 2004, between Mark E. Chertok and NorthStar Realty Finance Corp.*
10.7		Executive Employment Agreement, dated as of October 22, 2004, between Jean-Michel Wasterlain and NorthStar Realty Finance Corp.*
10.8		Executive Employment Agreement, dated as of October 22, 2004, between Daniel R. Gilbert and NorthStar Realty Finance Corp.*
10.9		NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan*
10.10		LTIP Unit Vesting Agreement under the NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan among NorthStar Realty Finance Corp., NorthStar Realty Finance Limited Partnership and NRF Employee, LLC*
10.11		Form of Vesting Agreement for Units of NRF Employee, LLC, each dated as of October 29, 2004, between NRF Employee, LLC and certain employees and co-employees of NorthStar Realty Finance Corp.*
10.12		Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.7(a) to the Company's Registration Statement on Form S-11 (File No. 333-114675))
10.13		NorthStar Realty Finance Corp. 2004 Long-Term Incentive Bonus Plan*
10.14		Form of Notification under NorthStar Realty Finance Corp. 2004 Long-Term Incentive Bonus Plan*
10.15		Form of Indemnification Agreement for directors and officers of NorthStar Realty Finance Corp. (incorporated by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-11 (File No. 333-114675))
10.16		Amended and Restated Master Repurchase Agreement, dated as of March 21, 2005, between NRFC DB Holdings, LLC and Deutsche Bank AG, Cayman Islands Branch (incorporated by reference to the like-numbered exhibit to NorthStar Realty Finance Corp.'s Annual Report on Form 10-K for the year ended December 31, 2004)

Exhibit

Number

Description of Exhibit

10.17		Amended and Restated Junior Subordinated Indenture dated as of September 16, 2005, between NorthStar Realty Finance Limited Partnership and JPMorgan Chase Bank, National Association, as trustee ( incorporated by reference to the like-numbered exhibit to the Company's Registration Statement on Form S-11 (File No. 333-128962))
10.18		Second Amended 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, Chase Bank USA, National Association, as Delaware trustee and Mark Chertok, David Hamamoto and Richard McCready, each as administrative trustees ( incorporated by reference to the like-numbered exhibit to the Company's Registration Statement on Form S-11 (File No. 333-128962))
10.19		Master Repurchase Agreement, dated as of July 13, 2005, between NRFC WA Holdings, LLC and Wachovia Bank, National Association (incorporated by reference to Exhibit 10.21 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2005)
10.20		First Amendment to the Master Repurchase Agreement, dated as of August 24, 2005, between NRFC WA Holdings, LLC and Wachovia Bank, National Association ( incorporated by reference to Exhibit 10.22 to the Company's Registration Statement on Form S-11 (File No. 333-128962))
10.21		Second Amendment to the Master Repurchase Agreement, dated as of September 20, 2005, between NRFC WA Holdings, LLC and Wachovia Bank, National Association ( incorporated by reference to Exhibit 10.23 to the Company's Registration Statement on Form S-11 (File No. 333-128962))
10.22		Master Loan, Guarantee and Security Agreement, dated as of September 28, 2005, between NorthStar Realty Finance Limited Partnership, NorthStar Realty Finance Corp., NS Advisors LLC and Bank of America, N.A. ( incorporated by reference to Exhibit 10.24 to the Company's Registration Statement on Form S-11 (File No. 333-128962))
10.23		Third Amendment to the Master Repurchase Agreement, dated as of September 30, 2005, between NRFC WA Holdings, LLC and Wachovia Bank, National Association ( incorporated by reference to Exhibit 10.25 to the Company's Registration Statement on Form S-11 (File No. 333-128962))
10.24		Omnibus Amendment to the Master Repurchase Agreement, dated as of October 21, 2005, between NRFC WA Holdings, LLC, NRFC WA Holdings II, LLC and Wachovia Bank, National Association (incorporated by reference to Exhibit 10.26 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005)
10.25		Agreement of Purchase and Sale, dated as of October 25, 2005, between 1552 Lonsdale LLC and 1552 Bway Owner, LLC (incorporated by reference to Exhibit 10.27 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005)
10.26		Fourth Amendment to the Master Repurchase Agreement, dated October 28, 2005, by and among NRFC WA Holdings, LLC, NRFC WA Holdings II, LLC and Wachovia Bank, National Association (incorporated by reference to Exhibit 10.28 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005)

Exhibit

Number

Description of Exhibit

10.27		Sublease, dated as of November 7, 2005, between NorthStar Realty Finance Limited Partnership and NorthStar Partnership, L.P. (incorporated by reference to Exhibit 10.29 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005)
10.28		Junior Subordinated Indenture, dated as of November 22, 2005, between NorthStar Realty Finance Limited Partnership and JPMorgan Chase Bank, National Association, as trustee ( incorporated by reference to Exhibit 10.30 to the Company's Registration Statement on Form S-11 (File No. 333-128962))
10.29		Amended and Restated Trust Agreement, dated as of November 22, 2005, between NorthStar Realty Finance Limited Partnership, as depositor, JPMorgan Chase Bank, National Association, as property trustee, Chase Bank USA, National Association, as Delaware trustee and Mark Chertok, David Hamamoto and Richard McCready, each as administrative trustees ( incorporated by reference to Exhibit 10.31 to the Company's Registration Statement on Form S-11 (File No. 333-128962))
10.30		Fifth Amendment to the Master Repurchase Agreement, dated February 28, 2005, by and among NRFC WA Holdings, LLC, NRFC WA Holdings II, LLC and Wachovia Bank, National Association
10.31		Junior Subordinated Indenture, dated as of March 10, 2006, between NorthStar Realty Finance Limited Partnership, NorthStar Realty Finance Corp. and Wilmington Trust Company, as trustee
10.32		Amended and Restated Trust Agreement, dated as of March 10, 2006, between NorthStar Realty Finance Limited Partnership, as depositor, NorthStar Realty Finance Corp. , a guarantor, Wilmington Trust Company, as property trustee and Delaware trustee and Mark Chertok, David Hamamoto and Richard McCready, each as administrative trustees
10.33		Form of NorthStar Realty Finance Corp. 2006 Outperformance Plan Award Agreement
10.34		Amendment No. 1 to Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership, dated as of March 14, 2006, by and among NorthStar Realty Finance Corp., as sole general partner and initial limited partner and the other limited partners a party thereto from time to time
10.35		Executive Employment Agreement, dated as of March 14, 2006, between Richard J. McCready and NorthStar Realty Finance Corp.
12.1		Ratio of Earnings
21.1		Subsidiaries of the Registrant
23.1		Consent of Ernst & Young LLP
23.2		Consent of Grant Thornton LLP
31.1		Certification by the Chief Executive Officer pursuant to 17 CFR 240.13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification by the Chief Financial Officer pursuant to 17 CFR 240.13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification by the Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification by the Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

_______________________

* Incorporated by reference to the like-numbered exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ending September 30, 2004.

INDEX TO FINANCIAL STATEMENTS

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES AND

NORTHSTAR REALTY FINANCE CORP. PREDECESSOR

Consolidated and Combined Financial Statements	Page
Reports of Independent Registered Public Accounting Firms	F-2
Consolidated Balance Sheets as of December 31, 2005 and 2004	F-5
Consolidated and Combined Statements of Operations for the year ended December 31, 2005, for the period from October 29, 2004 to December 31, 2004, for the period from January 1, 2004 to October 28, 2004, and for the year ended December 31, 2003	F-6
Consolidated Statement of Stockholders' Equity for the year ended December 31, 2005 and the period from October 29, 2004 to December 31, 2004	F-7
Combined Statement of Owners' Equity for the period from January 1, 2004 to October 28, 2004 and the year ended December 31, 2003	F-8
Consolidated and Combined Statements of Cash Flows for the year ended December 31, 2005, for the period from October 29, 2004 to December 31, 2004, for the period from January 1, 2004 to October 28, 2004 and for the year ended December 31, 2003	F-9
Notes to Consolidated and Combined Financial Statements	F-11
Schedule II—Valuation and Qualifying Accounts as of December 31, 2005	F-46
Schedule III—Real Estate and Accumulated Depreciation as of December 31, 2005	F-47
Schedule IV—Loans and other Lending Investments as of December 31, 2005	F-48

ALGM I OWNERS LLC AND SUBSIDIARIES

Consolidated Financial Statements	Page
Index	F-50
Report of Independent Registered Public Accounting Firm	F-51
Consolidated Balance Sheet as of December 31, 2004	F-52
Consolidated Statements of Income for the years ended December 31, 2004 and 2003	F-53
Consolidated Statements of Members' Equity for the years ended December 31, 2004 and 2003	F-54
Consolidated Statements of Cash Flows for the years ended December 31, 2004 and 2003	F-55
Notes to Consolidated Financial Statements	F-56
Schedule II—Valuation and Qualifying Accounts as of December 31, 2004	F-65
Schedule III—Real Estate and Accumulated Depreciation as of December 31, 2004	F-66

NORTHSTAR FUNDING LLC

Financial Statements	Page
Index	F-68
Report of Independent Registered Public Accounting Firm	F-69
Balance Sheet as of December 31, 2004	F-70
Statements of Income for the years ended December 31, 2004 and 2003	F-71
Statements of Members' Equity for the years ended December 31, 2004 and 2003	F-72
Statements of Cash Flows for the years ended December 31, 2004 and 2003	F-73
Notes to Financial Statements	F-74
Schedule IV—Loans and other Lending Investments as of December 31, 2004	F-79

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

NorthStar Realty Finance Corp.

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting as of December 31, 2005, that NorthStar Realty Finance Corp. and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2005, and the related consolidated statements of operations, stockholders’ equity and cash flows for the year ended December 31, 2005 and our report dated March 7, 2006 expressed an unqualified opinion thereon.

/s/ GRANT THORNTON LLP

New York, New York

March 7, 2006

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

NorthStar Realty Finance Corp.

We have audited the accompanying consolidated balance sheet of NorthStar Realty Finance Corp. and subsidiaries (the “Company”) as of December 31, 2005 and the related consolidated statement of operations, stockholders’ equity and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NorthStar Realty Finance Corp. and subsidiaries as of December 31, 2005, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 7, 2006 expressed an unqualified opinion thereon.

/s/ GRANT THORNTON LLP

New York, New York

March 7, 2006

F-3

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

NorthStar Realty Finance Corp.

We have audited the accompanying consolidated balance sheet of NorthStar Realty Finance Corp. and Subsidiaries (“the Company”) as of December 31, 2004, the related consolidated statements of operations, stockholders’ equity and cash flows of NorthStar Realty Finance Corp. and Subsidiaries for the period from October 29, 2004 (commencement of operations) through December 31, 2004 and the related combined statements of operations, owners’ equity and cash flows of NorthStar Realty Finance Corp. Predecessor, as defined in Note 1, for the period from January 1, 2004 through October 28, 2004 and for the year ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of NorthStar Realty Finance Corp. and Subsidiaries at December 31, 2004, the consolidated results of operations and cash flows of NorthStar Realty Finance Corp. and Subsidiaries for the period from October 29, 2004 (commencement of operations) through December 31, 2004, and the combined results of operations and cash flows of NorthStar Realty Finance Corp. Predecessor for the period from January 1, 2004 through October 28, 2004 and for the year ended December 31, 2003, in conformity with U.S. generally accepted accounting principles.

/s/ ERNST & YOUNG LLP

New York, New York

March 30, 2005,

except for Note 3(d), as to which the date is

March 6, 2006

F-4

Northstar Realty Finance Corp. and Subsidiaries

Consolidated Balance Sheets

	December 31, 2005			December 31, 2004
Assets:
Cash and cash equivalents	$	27,898,000		$	47,733,000
Restricted cash		27,501,000			2,713,000
Debt securities held for trading		—			826,611,000
Operating real estate — net		198,708,000			43,544,000
Debt securities available for sale		149,872,000			37,692,000
CDO deposit and warehouse agreements		9,458,000			2,988,000
Collateral held by broker		—			24,831,000
Real estate debt investments		681,106,000			70,569,000
Investments in and advances to unconsolidated ventures		5,458,000			5,363,000
Receivables, net of allowance of $4,000 and $1,000 in 2005 and 2004		5,218,000			1,926,000
Unbilled rents receivable, net of allowance $0 and $4,137,000 in 2005 and 2004		1,117,000			5,567,000
Receivables – related parties		528,000			176,000
Deferred costs and intangible assets, net		38,745,000			4,233,000
Assets of properties held for sale		2,918,000			—
Other assets		4,912,000			4,132,000
Total assets	$	1,153,439,000		$	1,078,078,000
Liabilities and Stockholders' Equity:
Liabilities:
Mortgage notes and loans payable	$	174,296,000		$	40,557,000
Liability to subsidiary trusts issuing preferred securities		108,258,000			—
CDO bonds payable		300,000,000			—
Credit facilities		243,002,000			27,821,000
Repurchase obligations		7,054,000			800,418,000
Securities sold, not yet purchased		—			24,114,000
Obligations under capital leases		3,375,000			3,303,000
Accounts payable and accrued expenses		9,091,000			5,603,000
Due to affiliates		26,000			250,000
Liabilities of properties held for sale		360,000			—
Escrow deposits payable		11,571,000			—
Other liabilities		3,703,000			256,000
Total liabilities		860,736,000			902,322,000
Minority interest		44,278,000			32,447,000
Commitments and contingencies
Stockholders' Equity:
Common stock, $0.01 par value, 500,000,000 shares authorized, 30,464,930 and 21,249,736 shares issued and outstanding at December 31, 2005 and 2004, respectively		305,000			212,000
Additional paid-in capital		213,625,000			145,697,000
Retained earnings (deficit)		35,233,000			(2,439,000	)
Accumulated other comprehensive income		(738,000	)		(161,000	)
Total stockholders’ equity		248,425,000			143,309,000
Total liabilities and stockholders' equity	$	1,153,439,000		$	1,078,078,000

See accompanying notes to the consolidated and combined financial statements.

F-5

Northstar Realty Finance Corp. and Subsidiaries and

Northstar Realty Finance Corp. Predecessor

Consolidated and Combined Statements of Operations

	The Company (consolidated)						The Predecessor (combined)
	Year Ended December 31,			Period from October 29, 2004 to December 31,			Period from January 1, 2004 to October 28,			Year Ended December 31,
	2005			2004			2004			2003
Revenues and other income:
Rental and escalation income	$	11,403,000		$	510,000		$	—		$	—
Advisory and management fee income		112,000			38,000			185,000			64,000
Advisory and management fee income — related parties		4,813,000			665,000			2,437,000			1,026,000
Interest income		40,043,000			3,990,000			31,000			—
Interest income — related parties		8,374,000			727,000			1,828,000			502,000
Other revenue		352,000			—			—			—
Total revenues		65,097,000			5,930,000			4,481,000			1,592,000
Expenses:
Real estate properties — operating expenses		1,911,000			100,000			—			—
Interest expense		32,568,000			3,352,000			285,000			—
Management fees — related parties		62,000			85,000			—			—
General and administrative:
Direct:
Salaries and other compensation		5,490,000			797,000			953,000			1,289,000
Shared services—related party		1,145,000			231,000			—			—
Equity based compensation		5,847,000			2,991,000			—			—
Insurance		916,000			148,000			—			—
Auditing and professional fees		3,634,000			790,000			—			—
Formation and organization costs		—			517,000			—			—
Other general and administrative		2,036,000			378,000			181,000			203,000
Allocated:
Salaries and other compensation		—			—			3,060,000			2,146,000
Insurance		—			—			318,000			252,000
Other general and administrative		—			—			925,000			1,098,000
Total general and administrative		19,068,000			5,852,000			5,437,000			4,988,000
Depreciation and amortization		4,352,000			190,000			—			—
Total expenses		57,961,000			9,579,000			5,722,000			4,988,000
Income (loss) from operations		7,136,000			(3,649,000	)		(1,241,000	)		(3,396,000	)
Equity in earnings of unconsolidated/uncombined ventures		226,000			83,000			1,520,000			2,048,000
Unrealized gain on investments and other		867,000			200,000			279,000			1,219,000
Realized gain on investments and other		2,160,000			293,000			636,000			1,866,000
Net income (loss) before minority interest		10,389,000			(3,073,000	)		1,194,000			1,737,000
Minority interest		(2,116,000	)		(632,000	)		—			—
Income (loss) from continuing operations		8,273,000			(2,441,000	)		1,194,000			1,737,000
Income from discontinued operations, net of minority interest		547,000			2,000			—			—
Gain on sale of discontinued operations, net minority interest		28,852,000			—			—			—
Net income (loss)	$	37,672,000		$	(2,439,000	)	$	1,194,000		$	1,737,000
Net income (loss) per share from continuing operations
Basic/Diluted	$	0.38		$	(0.12	)
Income per share from discontinued operations
Basic/Diluted	$	0.03			—
Gain on sale of discontinued operations
Basic/Diluted	$	1.33			—
Net income (loss) available to common shareholders
Basic/Diluted	$	1.74		$	(0.12	)
Weighted average number of shares of common stock:
Basic		21,660,993			20,868,865
Diluted		27,185,013			(1	)

(1) See note 2 -Earnings Per Share

See accompanying notes to the consolidated and combined financial statements.

F-6

Northstar Realty Finance Corp. and Subsidiaries

Consolidated Statement of Stockholders' Equity

	Shares of Common Stock		Common Stock at par		Additional Paid-in Capital			Accumulated Other Comprehensive Income (loss)			Retained Earnings			Total Stockholders’ Equity			Comprehensive Income
Balance at October 29, 2004	—		—		—			—			—			—			—
Net proceeds from IPO of common stock		20,050,100	$	200,000	$	159,904,000		$	—		$	—		$	160,104,000		$	—
Issuance of shares of common stock, net of expense (underwriter's over-allotment)		1,160,750		12,000		9,703,000			—			—			9,715,000			—
Adjustment to rebalance minority interests in operating partnership		—		—		(23,930,000	)		—			—			(23,930,000	)		—
Comprehensive loss — unrealized loss on debt securities available for sale		—		—		—			(161,000	)		—			(161,000	)		(161,000	)
Issuance of restricted shares of common stock		38,886		—		—			—			—			—			—
Amortization of equity based compensation		—		—		20,000			—			—			20,000			—
Net loss		—		—		—			—			(2,439,000	)		(2,439,000	)		(2,439,000	)
Balance at December 31, 2004		21,249,736		212,000		145,697,000			(161,000	)		(2,439,000	)		143,309,000			(2,600,000	)
Issuance of restricted shares of common stock		15,194		1,000		—			—			—			1,000			—
Net proceeds from secondary offering of common stock		9,200,000		92,000		78,920,000			—			—			79,012,000			—
Comprehensive loss — unrealized loss on debt securities available for sale		—		—		—			(577,000	)		—			(577,000	)		(577,000	)
Amortization of equity based compensation		—		—		276,000			—			—			276,000			—
Cash dividends on common stock		—		—		(11,268,000	)		—			—			(11,268,000	)		—
Net income		—		—		—			—			37,672,000			37,672,000			37,672,000
Balance at December 31, 2005		30,464,930	$	305,000	$	213,625,000		$	(738,000	)	$	35,233,000		$	248,425,000		$	34,495,000

See accompanying notes to the consolidated and combined financial statements.

F-7

Northstar Realty Finance Corp. Predecessor

Combined Statements of Owners' Equity

Balance at December 31, 2002	$	25,304,000
Contributions		5,431,000
Distributions		(2,834,000	)
Allocated general and administrative expenses, net of fee income		2,910,000
Other comprehensive loss — unrealized loss on debt securities available for sale		(55,000	)
Net income		1,737,000
Balance at December 31, 2003		32,493,000
Contributions		9,392,000
Distributions		(6,853,000	)
Other comprehensive income — unrealized gain on debt securities available for sale		2,004,000
Allocated general and administrative expenses, net of fee income		3,651,000
Net income		1,194,000
Balance at October 28, 2004 (contribution to Operating Partnership)	$	41,881,000

See accompanying notes to the consolidated and combined financial statements.

F-8

Northstar Realty Finance Corp. and Subsidiaries and

Northstar Realty Finance Corp. Predecessor

Consolidated and Combined Statements of Cash Flows

	The Company (consolidated)						The Predecessor (combined)
		Year Ended December 31, 2005			Period from October 29, 2004 to December 31, 2004			Period from January 1, 2004 to October 28, 2004			Year Ended December 31, 2003
Cash flows from operating activities:
Net income (loss)	$	37,672,000		$	(2,439,000	)	$	1,194,000		$	1,737,000
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Gains on sale of real estate		(35,930,000	)		—			—			—
Equity in (earnings) of unconsolidated/uncombined ventures		(199,000	)		(83,000	)		(1,520,000	)		(2,048,000	)
Depreciation and amortization		5,038,000			411,000			—			—
Amortization of acquisition fees/costs and deferred financing costs		2,009,000			147,000			—			—
Minority interest		9,328,000			(632,000	)		—			—
Equity based compensation		5,846,000			2,991,000			—			—
Unrealized gain on investments and other		(867,000	)		(200,000	)		(279,000	)		(1,219,000	)
Realized gain on sale of investments and other		(2,160,000	)		(293,000	)		(636,000	)		—
Amortization of premium on securities held for trading		—			433,000			—			—
Amortization of bond discount		(1,715,000	)		(28,000	)		(55,000	)		—
Allocated general and administrative expenses		—			—			4,302,000			3,496,000
Distributions from equity investments		199,000			—			—			—
Capital lease		72,000			—			—			—
Amortization-above/below market leases		28,000			—			—			—
Allocated advisory fee		—			—			(651,000	)		(586,000	)
Unbilled rents receivable		(406,000	)		(91,000	)		—			—
Other		—			(18,000	)		—			—
Changes in assets and liabilities:
Restricted cash		—			234,000			—			—
Receivables		(3,908,000	)		(1,575,000	)		(187,000	)		(16,000	)
Debt securities held for trading		826,382,000			(826,814,000	)		—			—
Deferred costs and intangible assets		—			(864,000	)		—			—
Other assets		958,000			(3,753,000	)		—			—
Due to affiliates		(224,000	)		141,000			—			(397,000	)
Accounts payable and accrued expenses		3,432,000			3,994,000			92,000			322,000
Due from affiliates		(175,000	)		—			—			—
Restricted cash- escrows		(11,429,000	)		—			—			—
Escrow deposit payable		11,571,000			—			—			—
Origination fees		892,000			272,000
Other liabilities		3,211,000			(616,000	)		180,000			—
Net cash provided by (used in) operating activities		849,625,000			(828,783,000	)		2,440,000			1,289,000
Cash flows from investing activities:
Additions to operating real estate, net		(219,664,000	)		(1,507,000	)		—			—
Net proceeds from sales of real estate		74,141,000			—			—			—
Real estate debt acquisition costs		(815,000	)		—			—			—
Real estate investments - repayments		84,915,000			—			—			—
Purchase of initial investments		—			(37,078,000	)		—			—
Purchase of debt securities available for sale		(137,309,000	)		—			(26,863,000	)		(9,500,000	)
CDO warehouse deposits		(10,000,000	)		(2,500,000	)		(3,034,000	)		(10,766,000	)
Purchase of real estate debt investments		(694,297,000	)		(70,841,000	)		—			—
Proceeds from CDO warehouse		30,464,000			—			9,500,000			10,000,000
Cash receipts from CDO issuer		879,000			—			884,000			1,275,000
CDO IV restricted cash		(12,538,000	)		—			—			—
Cash recorded on initial consolidation of ALGM		—			3,012,000			—			—
Deferred lease costs		(29,000	)		—			—			—
Contributions to unconsolidated/uncombined ventures		(6,000	)		—			(1,048,000	)		(3,673,000	)
Distributions of capital from unconsolidated/uncombined ventures		3,169,000			882,000			1,364,000			2,834,000
Net cash (used in) investing activities		(881,090,000	)		(108,032,000	)		(19,197,000	)		(9,830,000	)

See accompanying notes to the consolidated and combined financial statements.

F-9

Northstar Realty Finance Corp. and Subsidiaries and

Northstar Realty Finance Corp. Predecessor

Consolidated and Combined Statements of Cash Flows — (continued)

	The Company (consolidated)						The Predecessor (combined)
		Year Ended December 31, 2005			Period from October 29, 2004 to December 31, 2004			Period from January 1, 2004 to October 28, 2004			Year Ended December 31, 2003
Cash flows from financing activities:
Proceeds from securities sold, not yet purchased	$	24,131,000		$	11,377,000		$	12,336,000		$	—
Proceeds from Collateral held by broker		24,831,000			(11,725,000	)		(13,106,000	)		—
Due from affiliates		—			2,134,000			(1,094,000	)		6,957,000
Capital contributions by owners of the Predecessor		—			—			9,392,000			5,431,000
Settlement of short sales		(48,306,000	)		—			—			—
Mortgage borrowings		174,600,000			—			—			—
Proceeds from bonds payable		300,000,000			—			—			—
Settlement of derivative		(301,000	)		—			—			—
Collateral held by swap counter-party		(1,017,000	)		—			—			—
Mortgage principal repayments		(40,861,000	)		(228,000	)		—			—
Proceeds from credit facilities		529,893,000			27,821,000			—			—
Credit facilities – repayments		(314,712,000	)		—			—			—
Repurchase obligation borrowings		7,054,000			1,253,557,000			17,694,000			—
Repurchase obligation repayments		(800,418,000	)		(470,833,000	)		—			—
Proceeds from offerings		85,100,000			190,447,000			—			—
Proceeds from trust preferred securities		105,000,000			—			—			—
Deferred financing costs		(13,079,000	)		—			—			—
Dividends and distributions		(14,197,000	)		—			—			—
Payment of offering costs		(6,088,000	)		(20,627,000	)		—			—
Distributions to owners of the Predecessor		—			—			(6,853,000	)		(2,834,000	)
Net cash provided by financing activities		11,630,000			981,923,000			18,369,000			9,554,000
Net (decrease) increase in cash & cash equivalents		(19,835,000	)		45,108,000			1,612,000			1,013,000
Cash and cash equivalents — beginning of period		47,733,000			2,625,000			1,013,000			—
Cash and cash equivalents — end of period	$	27,898,000		$	47,733,000		$	2,625,000		$	1,013,000
Supplemental disclosure of cash flow information:
Cash paid for interest	$	31,180,000		$	2,913,000		$	130,000			—
Supplementary disclosure of non-cash investing and financing activities:
Consolidation of the accounts of ALGM I Owners LLC ("ALGM") as a result of purchasing controlling interest:
Investment in uncombined entities prior to consolidation:	$	—		$	(10,578,000	)	$	—		$	—
Operating real estate, net		—			43,855,000			—			—
Restricted cash		—			2,947,000			—			—
Receivables		—			217,000			—			—
Unbilled rents receivable		—			5,476,000			—			—
Deferred costs, net		—			2,195,000			—			—
Other assets		—			326,000			—			—
Mortgage loan		—			(40,785,000	)		—			—
Obligations under capital leases		—			(3,292,000	)		—			—
Accounts payable and accrued expenses		—			(1,081,000	)		—			—
Other liabilities		—			(692,000	)		—			—
Net cash received in purchase transaction ⁽¹⁾		—			1,412,000			—			—
Reclassification of Predecessor’s equity to minority interest in connection with contribution of Initial Investments		—		$	41,881,000			—			—

Reclassification of CDO deposits to debt securities available for sale	$	2,988,000			—			—			—
Write off of deferred costs and unbilled rents receivable in connection with the disposition of operating real estate	$	4,955,000			—			—			—
Reclassifications to assets held for sale:
Operating real estate		1,493,000			—			—			—
Restricted cash		196,000			—			—			—
Receivables		439,000			—			—			—
Unbilled rents receivable		356,000			—			—			—
Deferred cost and intangibles, net		190,000			—			—			—
Other assets		244,000			—			—			—
Accounts payable and accrued expenses		(79,000	)		—			—			—
Other liabilities		(281,000	)		—			—			—
Purchase price allocation from operating real estate:
Deferred cost and intangibles, net		25,187,000			—			—			—
Other assets		1,288,000			—			—			—
Other liabilities		(509,000	)		—			—			—

See accompanying notes to the consolidated and combined financial statements.

(1)	Represents ALGM cash consolidated of $3,012,000 less the purchase price of remaining equity in ALGM of $1,600,000.

F-10

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

1. Formation and Organization

NorthStar Realty Finance Corp., a Maryland corporation (the "Company"), is a self-administered and self-managed real estate investment trust ("REIT"), which was formed in October 2003 in order to continue and expand the subordinate real estate debt, real estate securities and net lease businesses conducted by NorthStar Capital Investment Corp. ("NCIC"). Substantially all of the Company's assets are held by, and it conducts its operations through, NorthStar Realty Finance Limited Partnership, a Delaware limited partnership and the operating partnership of the Company (the "Operating Partnership"). On October 29, 2004, the Company closed its initial public offering (the "IPO") pursuant to which it issued 20,000,000 shares of common stock, with proceeds to the Company of approximately $160.1 million, net of issuance costs of $19.9 million. On November 19, 2004, the Company issued an additional 1,160,750 shares of common stock pursuant to the exercise of the overallotment option by the underwriters 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, the Company also issued 50,000 shares of common stock, as partial compensation for underwriting services, to the lead underwriter of the IPO. In addition, 38,886 shares of restricted common stock were granted to the Company's non-employee directors. Simultaneously with the closing of the IPO on October 29, 2004, three majority-owned subsidiaries of NCIC (the "NCIC Contributing Subsidiaries") contributed certain controlling and non-controlling interests in entities through which NCIC conducted its subordinate real estate debt, real estate securities and net lease businesses (collectively the "Initial Investments") to the Operating Partnership in exchange for an aggregate of 4,705,915 units of limited partnership interest in the Operating Partnership (the "OP Units") and approximately $36.1 million in cash (the "Contribution Transactions") and an agreement to pay certain related transfer taxes on behalf of NCIC in the amount of approximately $1.0 million. From their inception through October 29, 2004, neither the Company nor the Operating Partnership had any operations.

The combination of the Initial Investments contributed to the Operating Partnership represents the predecessor of the Company (the "Predecessor"). The Company succeeded to the business of the Predecessor upon the consummation of the IPO and the contribution of the initial investments on October 29, 2004. The ultimate owners of the entities which comprise the Predecessor were NCIC and certain other persons who held minority ownership interests in such entities (collectively, the "Participants").

F-11

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

The following table lists the entities that comprise the Predecessor, the Predecessor's ownership and voting interests in and control of such entities and the accounting basis for the inclusion of such entities in the combined financial statements of the Predecessor.

Entity	Predecessor's Ownership and Voting Interest	Control	Predecessor Accounting Basis ⁽¹⁾	Ownership Interest Type
Real Estate Securities Business:
NS Advisors LLC ("NSA")	100%	Yes	Combined	Managing Member
NS CDO Holdings I, LLC	100%	Yes	Combined	Managing Member
NS CDO Holdings II, LLC	100%	Yes	Combined	Managing Member
Subordinate Real Estate Debt Business:
NorthStar Funding Managing Member LLC ("NFMM")	75%	Yes	Combined	Managing Member
NorthStar Funding Management LLC ⁽²⁾	37.5%	No	Uncombined	Co-Managing Member
NorthStar Funding Investor Member LLC	100%	Yes	Combined	Managing Member
NorthStar Funding LLC (the "NSF Venture")	4.995%	No	Uncombined	Member
Net Lease Business: ALGM I Owners LLC ("ALGM")	97.50%	No	Uncombined	Member

⁽¹⁾	The uncombined equity interests are held either directly or indirectly by the Predecessor and are accounted for under the equity method as further described in Note 2.

⁽²⁾	Owns 0.01% of NorthStar Funding LLC, the joint venture through which NCIC conducted its subordinate real estate debt business.

Prior to October 29, 2004, the Company and the Operating Partnership were majority-owned and controlled subsidiaries of NCIC and therefore the contribution of the Initial Investments by the NCIC Contributing Subsidiaries to the Operating Partnership for cash and OP Units was accounted for at NCIC's historical cost basis as reflected in the accompanying combined financial statements of the Predecessor, with the exception of certain minority interests.

F-12

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

A summary of the Contribution Transactions and the accounting treatment by the Company for the minority interests in the Operating Partnership on consummation of the Contribution Transactions is as follows:

	Percentage Ownership Contributed by the Participants ^(d)	Percentage Ownership of Controlled Subsidiaries Owned by Third Parties and Participating in the Contribution Transactions	Percentage of Contributed Subsidiaries Acquired from Employee Prior to the Contribution Transactions	Basis at which Participants/ Employees Interest were Contributed
Real Estate Securities Business:
NSA	100%	23% ^(a)	—% ^(b)	Fair Value
NS CDO I Holding, LLC	100%	23% ^(a)		Fair Value
NS CDO II Holding, LLC	100%	23% ^(a)		Fair Value
Subordinate Real Estate Debt Business:
NFMM	100%	0% ^(c)	25% ^(c)	Fair Value
NorthStar Funding Investor Member LLC	100%	0%		N/A
Net Lease Business:
ALGM	97.50%	0%		N/A

(a)	Represents minority interest in Presidio Capital Investment Company LLC, a majority-owned and controlled subsidiary of NorthStar Partnership, L.P. ("NPLP") which directly owned and controlled the real estate securities business of NCIC.

(b)

An employee of NCIC held a 15% profit sharing right in NSA, which was acquired by an NCIC majority-owned and controlled subsidiary immediately prior to the Contribution Transactions. This profit sharing right was a compensation arrangement and does not represent legal ownership, or a minority interest.

(c)	A 25% profits interest in NFMM was held by two employees of NCIC and was acquired by an NCIC majority-owned and controlled subsidiary immediately prior to the Contribution Transactions.

(d)

NPLP has a minority ownership interest of approximately 26.7%. However, such interest did not directly participate in the Contribution Transactions with the NCIC Contributing Subsidiaries, the Company and the Operating Partnership. Accordingly, such minority interest, together with all of the interests of NCIC Contributing Subsidiaries, were contributed to the Operating Partnership on a historical cost basis, except as described above.

2. Summary of Significant Accounting Policies

Basis of Accounting

The accompanying consolidated and combined financial statements of the Company and the Predecessor, respectively, are prepared on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States.

Principles of Consolidation and Combination

The Company

The consolidated financial statements include the accounts of the Company, its majority-owned subsidiaries and variable interest entities (“VIE”) where the Company is the primary beneficiary in accordance with the provisions and guidance of Financial Accounting Standards Board (“FASB”) Interpretation No. 46(R), “ Consolidation of Variable Interest Entities”(“Fin 46(R)”) . All significant intercompany balances have been eliminated in consolidation.

F-13

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

The Predecessor

The combined and uncombined interests in entities contributed to the Operating Partnership have been aggregated to form the Predecessor. The interests in entities contributed to the Operating Partnership, which were controlled by NCIC, and variable interest entities where the Predecessor is deemed the primary beneficiary in accordance with the provisions and guidance of Fin 46 (R) are reflected in the Predecessor on a combined basis. All intercompany accounts have been eliminated in combination.

Variable Interest Entities

Fin 46 (R) requires a VIE to be consolidated by its primary beneficiary. The primary beneficiary is the party that absorbs a majority of the VIE’s anticipated losses and or a majority of the expected returns. The Company has evaluated its real estate debt investments and its investments in each of its’ five CDO issuers to determine whether they are VIE’s. For each of these investments, the Company has evaluated (1) the sufficiency of the fair value of the entity’s equity investment at risk to absorb losses, (2) whether as a group the holders of the equity investment at risk have (a) the direct or indirect ability through voting rights to make decisions about the entity’s significant activities, (b) the obligation to absorb the expected losses of the entity and their obligatons are not protected directly or indirectly, (c) the right to receive the expected residual return of the entity and their rights are not capped, (3) whether the voting rights of these investors are proportional to their obligations to absorb the expected losses of the entity, their rights to recieve the expected returns of their equity, or both and (4) whether substantially all of the entity’s activities involve or are conducted on behalf of an investor that has disproportionately fewer voting rights.

As of December 31, 2005, the Company identified eight interests in entities which were determined to be VIE’s under FIN 46 (R). They are as follows: CDO I, CDO II, CDO III, CDO V, NorthStar Realty Finance Trust I, II, and III and a preferred equity investment in a net lease property.

Based on management's analysis, neither the Company nor the Predecessor is the primary beneficiary since neither absorbs a majority of the expected losses, nor is entitled to a majority of the expected residual returns. Accordingly, these VIE’s are not consolidated into the Company's financial statements as of December 31, 2005 or 2004.

Estimates

Operating Real Estate

Operating real estate properties are carried at historical cost less accumulated depreciation. Cost directly related to the acquisition are capitalized. Ordinary repairs and maintenance which are not reimbursed by the tenants are expensed as incurred. Major replacements and betterments which improve or extend the life of the asset are capitalized and depreciated over their useful life.

Properties are depreciated using the straight-line method over the estimated useful lives of the assets.

The estimated useful lives are as follows:

Category	Term
Building (fee interest)	39 years
Building Improvements	Lesser of the remaining life of building or useful life
Building (leasehold interest)	Lesser of 39 years or the remaining term of the lease
Property under capital lease	Lesser of 40 years or the remaining term of the lease
Tenant Improvements	Lesser of the useful life or the remaining term of the lease
Funiture and fixtures	Four to seven years

F-14

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

Depreciation expense amounted to approximately $3.8 million and $362,000 for the year ended December 31, 2005 and the period of October 29, 2004 to December 31, 2004, of which a portion is included in income from discontinued operations for each of these periods.

In accordance with Statement of Financial Accounting Standards (“SFAS”) 144 “Accounting for the impairment or Disposal of Long-Lived Assets” a property to be disposed of is reported at the lower of its carrying value or its estimated fair value less the cost to sell. Once an asset is determined to be held for sale, depreciation and straight-line rental income are no longer recorded. In addition, the asset is reclassified to assets held for sale on the consolidated balance sheet and the results of operations are reclassified to income (loss) from discontinued operations in the consolidated statements of operations.

In accordance with SFAS No. 141 “Business Combinations”(“SFAS 141”) the Company allocates the purchase price of operating properties to land, building, tenant improvements, deferred lease cost for the the origination costs of the in-place leases and to intangibles for the value of the above or below market leases. The Company amortizes the value allocated to the in-place leases over the remaining lease term. The value allocated to the above or below market leases are amortized over the remaining lease term as an adjustment to rental income.

As a result of the Company’s evaluation under SFAS No. 141 of acquisitions made, as of December 31, 2005, the Company has recorded $25.1 million in deferred costs and intangible assets, net, related to the in-place leases and $1.2 million related to the above market leases which is recorded in other assets and $0.5 million related to the below market leases in other liabilities in the consolidated balance sheet. Approximately $0.9 million was recorded in depreciation expense related to the in-place leases. Rental income was decreased by approximately $18,000 related to the amortization of the intangible related to above/below market leases for the year ended December 31, 2005, in the consolidated statement of operations.

Investments in and Advances to Unconsolidated/Uncombined Ventures

The Company and the Predecessor have various investments in unconsolidated/uncombined ventures. In circumstances where the Company and the Predecessor have a non-controlling interest but are deemed to be able to exert influence over the affairs of the enterprise the Company and the Predecessor utilize the equity method of accounting. Under the equity method of accounting, the initial investment is increased each period for additional capital contributions and a proportionate share of the entity's earnings and decreased for cash distributions and a proportionate share of the entity's losses.

Management periodically reviews its investments for impairment based on projected cash flows from the venture over the holding period. When any impairment is identified, the investments are written down to recoverable amounts.

Debt Securities Available for Sale

The Company determines the appropriate classification of its investment in debt securities at the time of purchase and reevaluates such determination at each balance sheet date. Debt securities for which the Company does not have the intent or the ability to hold to maturity are classified as available for sale securities. The Company and the Predecessor have designated their investments in CDO I, II, III and V (described in Note 6) as available for sale securities as they meet the definition of a debt instrument due to their redemption provisions. Debt securities available for sale are carried at estimated fair value with the net unrealized gains or losses reported as a component of accumulated other comprehensive income (loss) in the consolidated statements of stockholders' equity. The Company's investments in CDO I, II, III and V are relatively illiquid, and their value must be estimated by management. Fair value is based primarily upon broker quotes or management's estimates. These estimated values are subject to significant variability based on market conditions, such as interest rates and current spreads. Changes in the valuations do not affect either the Company's or the Predecessor's reported income or cash flows, but impact stockholders' equity and owners' equity, respectively.

F-15

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

Debt Securities Held for Trading

The Company has designated certain securities as assets held for trading at the time of purchase and reevaluates such determination at each balance sheet date. Marketable securities that are bought and held principally for the purpose of selling them in the near future are classified as trading securities and are reported at fair market value with unrealized gains and losses reognized in earnings.

Real Estate Debt Investments

Investments in unsecuritized loans, either direct or participating interests, are recorded at their cost net of unamortized loan origination costs and fees, discounts and premiums. Discounts and premiums on purchased assets are amortized over the life of the investment using the effective interest method. The origination cost and fees are deferred and amortized using the effective interest method over the life of the related unsecuritized loan investment. The amortization is reflected as a reduction of interest income.

Cash and Cash Equivalents

The Company and the Predecessor consider all highly liquid investments that have remaining maturity dates of three months or less when purchased to be cash equivalents. Cash, including amounts restricted, exceeded the Federal Deposit Insurance Corporation deposit insurance limit of $100,000 per institution at December 31, 2005 and 2004. The Company mitigates its risk by placing cash and cash equivalents with major financial institutions.

Restricted Cash

Restricted cash consists of escrows for taxes, insurance, leasing costs, capital expenditures, tenant security deposits, payments required under certain leases agreements, esrow deposits collected in connection with whole loan originations and deposits with the trustee related to CDO IV primarily from proceeds of loan repayments which will be used to reinvest in collateral for CDO IV. The Company mitigates its risk by placing restricted cash with major financial institutions.

Deferred Costs and Intangible Assets, Net

Deferred lease costs consist of fees incurred to initiate and renew operating leases. Lease costs are being amortized using the straight-line method over the terms of the respective leases.

Deferred financing costs represent commitment fees, legal and other third party costs associated with obtaining financing. These costs are amortized over the term of the financing. Unamortized deferred financing costs are expensed when the associated debt is refinanced or repaid before maturity. Costs incurred in seeking financing transactions, which do not close, are expensed in the period the financing transaction was terminated.

The Company has recorded purchased intangible assets related to the acquisition of minority interests in NFMM and NSA, which are being amortized over the life of the revenue stream giving rise to the valuation of these interests.

Short Sales

The Company may sell securities that it does not own ("short sales"). Short sales are typically entered into by the Company as a hedge to offset a future liability or changes in the market value of an asset resulting from changes in interest rates. To complete a short sale, the Company will arrange through a broker to borrow the securities to be delivered to the buyer. The proceeds received by the Company from the short sale are retained by the broker until the Company replaces the borrowed securities. In borrowing the securities to be delivered to the buyer, the Company becomes obligated to replace the securities borrowed at their market price at the time of the replacement, whatever that price may be. A gain, limited to the price at which the Company sold the security short, or a loss, unlimited as to dollar amount, will be realized upon the termination of a short sale if the market price is less than or greater than the proceeds originally received. The Company's liability under the short sales is recorded at fair value, which is the market price of the security to be acquired to effect repayment. Unrealized gains or losses on such short sale obligations are included in unrealized loss on investments in the consolidated statement of operations. The Company is exposed to credit loss in the event of nonperformance by the broker that holds a deposit as collateral for securities borrowed. However, the Company does not anticipate nonperformance by the broker. The Company has recorded approximately $0 and $24.1 million as of December 31, 2005 and 2004, respectively in short sales as securities sold not yet purchased on the consolidated balance sheets.

F-16

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

Comprehensive Income

Comprehensive income or (loss) is recorded in accordance with the provisions of SFAS No. 130, "Reporting Comprehensive income" ("SFAS 130"). SFAS 130 establishes standards for reporting comprehensive income and its components in the financial statements. Comprehensive income (loss), is comprised of net income, as presented in the consolidated statements of operations, adjusted for changes in unrealized gains or losses on debt securities available for sale and changes in the fair value of derivative financial instruments accounted for as cash flow hedges.

Underwriting Commissions and Costs

Underwriting commissions and direct costs incurred in connection with the Company's IPO in 2004 and the Company’s secondary public offering in 2005 are reflected as a reduction of additional paid-in-capital.

Revenue Recognition

Tenant reimbursement income is recognized in the period in which the related expense is incurred. Rental revenue, which is based upon a percentage of the sales recorded by the Company's tenants is recognized in the period such sales were earned by the respective tenants.

Interest income from the Company's unsecuritized loan investments is recognized on an accrual basis over the life of the investment using the effective interest method. Additional interest to be collected at payoff is recognized over the term of the loan as an adjustment to yield.

Interest income from debt securities available for sale and held for trading is recognized on the accrual basis of accounting over the life of the investment on a yield-to-maturity basis.

In connection with its investment in CDO I, II, III and V the Company recognizes interest income on these investments pursuant to Emerging Issues Task Force (‘‘EITF") 99-20, ‘‘Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets," . Interest income is recognized on an estimated effective yield to maturity basis. Accordingly, on a quarterly basis, the Company calculates a revised yield on the current amortized cost of the investment and a current estimate of cash flows based upon actual and estimated prepayment and credit loss experience. The revised yield is then applied prospectively to recognize interest income.

Advisory fee income from both third parties and affiliates are recognized on the accrual basis as services are rendered and the fee income is contractually earned in accordance with the respective agreements. Fees from affiliated ventures accounted for under the equity method, such as from the NSF Venture, are partially eliminated against the related equity in earnings in such affiliated ventures to the extent of the Company's ownership.

F-17

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

The Company earns incentive income related to the performance of the NSF Venture through NFMM, who, as the managing member of the NSF Venture, is entitled to a promoted interest (i.e., the distribution of a disproportionate allocation of cash flow) after other members have obtained a specified return threshold and return of capital. The Company follows Method 1 of EITF Topic D-96 for recording such incentive income. Under Method 1 of EITF Topic D-96, no incentive income is recorded until all contingencies have been eliminated. Incentive income distributions received by NFMM, which are subject to refund to the NSF Venture if certain return thresholds are not met, are recorded as unearned income (a liability) on the consolidated balance sheets. In 2004, the Predecessor and Company, through NFMM, received incentive income distributions from the NSF Venture in the amount of approximately $180,000 and $47,000 in the periods January 1, 2004 through October 28, 2004 and October 29, 2004 through December 31, 2004, respectively. In 2005 the Company received incentive income in the amount of $925,000. These distributions are included in Other liabilities in the accompanying consolidated balance sheets.

Credit Losses, Impairment and Allowance for Doubtful Accounts

The Company assesses whether unrealized losses on the change in fair value on their debt securities reflect a decline in value which is other than temporary. If it is determined the decline in value is other than temporary the impaired securities are written down through earnings to their fair values. Significant judgment of management is required in this analysis, which includes, but is not limited to, making assumptions regarding the collectibility of the principal and interest, net of related expenses, on the underlying loans.

The Company reviews long-lived assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Upon determination that an impairment exists, the related asset is written down through earnings to its estimated fair value.

Allowance for doubtful accounts for tenant receivables are established based on periodic review of aged receivables resulting from estimated losses due to the inability of its tenants to make required rent and other payments contractually due. Additionally, the Company establishes, on a current basis, an allowance for future tenant credit losses on billed and unbilled rents receivable based upon an evaluation of the collectibility of such amounts.

Rent Expense

Rent expense, which is included in real estate properties operating expenses in the consolidated statement of operations, is recorded on a straight-line basis over the term of the respective leases. The excess of rent expense incurred on a straight-line basis over rent expense, as it becomes payable according to the terms of the lease, is recorded as rent payable and is included in other liabilities in the consolidated balance sheets at December 31, 2005 and 2004, respectively.

F-18

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

Risks and Uncertainties

In the normal course of business, the Company encounters primarily two significant types of economic risk: credit and market. Credit risk is the risk of default on the Company's securities, loans, leases, and derivatives that result from a borrower's, lessee's or derivative counterparty's inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of investments in securities, loans and real estate, or in derivatives, such as the CDO Deposit and Warehouse Agreement (described in Note 5) and the Company's investment in the CDO Issuers, due to changes in interest rates, spreads or other market factors, including the value of the collateral underlying loans and securities and the valuation of real estate held by the Company. Management believes that the carrying values of its investments are fairly stated, taking into consideration these risks along with estimated collateral values, payment histories and other market information.

Income Taxes

The Company has elected to be treated as a REIT under Internal Revenue Code Sections 856 through 859 and intends to remain so qualified. As a REIT, the Company generally is not subject to Federal income tax. To maintain its qualification as a REIT, the Company must distribute at least 90% of its REIT taxable income to its stockholders and meet certain other requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to Federal income tax on its taxable income at regular corporate rates. The Company may also be subject to certain state, local and franchise taxes. Under certain circumstances, Federal income and excise taxes may be due on its undistributed taxable income.

Pursuant to amendments to the Code that became effective January 1, 2001, the Company has elected or may elect to treat certain of its existing or newly created corporate subsidiaries as taxable REIT subsidiaries (each a "TRS"). In general, a TRS of the Company may perform non-customary services for tenants of the Company, hold assets that the Company cannot hold directly and generally may engage in any real estate or non-real estate related business. A TRS is generally subject to regular corporate income tax. However, the Company has established its TRS in a jurisdiction for which no taxes are assessed on corporate earnings.

The Predecessor's combined entities were limited liability companies and as such, the income of such entities was reportable in the income tax returns of the members. Accordingly, no income tax provision is recorded in the accompanying combined financial statements of the Predecessor.

Derivatives and Hedging Activities

The Company accounts for its derivatives and hedging activities in accordance with SFAS No. 133, ‘‘Accounting for Derivative Instruments and Hedging Activities," which requires the Company to recognize all derivatives as either assets or liabilities in the consolidated balance sheet and to measure those instruments at fair value. Additionally, the fair value adjustments of each period will affect the consolidated financial statements of the Company differently depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity.

The Company generally enters into cash flow hedges and must designate them at the time of entering into the derivative. The derivatives entered into by the Company are intended to qualify as hedges under accounting principles generally accepted in the United States, unless specifically stated otherwise. Toward this end, the terms of hedges are matched closely to the terms of hedged items. The Company assesses the effectiveness of the cash flow hedges both at inception and on an on-going basis and determines whether the hedge is highly effective in offsetting changes in cash flows of the hedged item. The Company records the effective portion of changes in the estimated fair value in accumulated other comprehensive income (loss) and subsequently reclassifies the related amount of accumulated other comprehensive income (loss) to earnings when the hedging relationship is terminated. If it is determined that a derivative has ceased to be a highly effective hedge, the Company will discontinue hedge accounting for such transaction.

With respect to derivative instruments that have not been designated as hedges, any net payments under, or fluctuations in the fair value of, such derivatives are recognized currently in income.

F-19

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

The Company's derivative financial instruments contain credit risk to the extent that its bank counterparties may be unable to meet the terms of the agreements. The Company minimizes such risk by limiting its counterparties to major financial institutions with good credit ratings. In addition, the potential risk of loss with any one party resulting from this type of credit risk is monitored.

Stock Based Compensation

The Company has adopted the fair value method of accounting prescribed in SFAS No. 123 "Accounting for Stock Based Compensation" ("SFAS 123") (as amended by SFAS No. 148) for its equity based compensation awards. SFAS 123 requires an estimate of the fair value of the equity award at the time of grant rather than the intrinsic value method. All fixed equity based awards to employees and directors, which have no vesting conditions other than time of service, will be amortized to compensation expense over the award's vesting period based on the fair value of the award at the date of grant.

Recently Issued Pronouncements

In December 2004, the FASB issued SFAS No. 123, (revised 2004) Share-Based Payment, or SFAS No. 123 (R), which supersedes APB opinion No. 25, Accounting for Stock Issued to Employees and its related implementation guidance. SFAS No. 123 (R) established standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. SFAS No. 123 (R) focuses primarily on accounting for transactions in which an entity obtains 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 a material effect on the Company’s financial condition or results of operations.

In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections – A Replacement of APB Opinion No. 20 and SFAS No. 3. SFAS No. 154 changes the requirements for the accounting and reporting of a change in accounting principle by requiring that a voluntary change in accounting principle be applied retrospectively with all prior periods’ financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS No. 154 also requires that a change in depreciation or amortization for long-lived, non-financial assets be accounted for as a change in accounting estimate effected by a change in accounting principle and corrections of errors in previously issued financial statements should be termed a “restatement”. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 is not expected to have a material effect on the Company’s consolidated financial statements.

In June 2005, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) on Issue No. 04-05, “Determining Whether a General Partner, or General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights” (“EITF 04-05”). EITF 04-05 provides a framework for determining whether a general partner controls, and should consolidate, a limited partnership or a similar entity. EITF 04-05 became effective on June 29, 2005, for all newly formed or modified limited partnership arrangements and January 1, 2006 for all existing limited partnership arrangements. The adoption of EITF 04-05 is not expected to have a material effect on the Company’s consolidated financial statements.

Earnings Per Share

The Company's basic earnings per share ("EPS") is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding. For purposes of calculating earnings per share, the Company considered all unvested restricted stock which participate in the dividends of the Company to be outstanding. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted to common stock, where such exercise or conversion would result in a lower EPS amount.

F-20

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

This also includes units of limited partnership interest in the Operating Partnership. The dilutive effects of units of limited partnership interest and their equivalents are computed using the "treasury stock" method. For the period of October 29, 2004 through December 31, 2004, the Company did not present diluted EPS as a result of a net loss available to common shareholders for the period.

Reclassifications

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

3. Operating Real Estate

At December 31, 2005 and 2004, the Operating real estate, net consists of the following (in thousands):

		December 31,		December 31,
		2005		2004
Land	$	25,449	$	7,597
Buildings and Improvements		152,293		30,368
Leasehold interests		8,391		12,518
Tenant Improvements		16,547		687
Capital leases		3,028		3,028
		205,708		54,198
Less accumulated depreciation		7,000		10,654
Operating real estate, net	$	198,708	$	43,544

(a) Acquisitions

Chatsworth, California

On January 14, 2005, the Company closed the acquisition of a portfolio of three net-leased office properties, totaling 257,336 square feet of rentable space in Chatsworth, CA (the "Chatsworth properties"), for $63.5 million. The properties are net leased to Washington Mutual Bank under leases that expire in September 2015. The Company financed the acquisition with a $44 million first mortgage, and a $13 million mezzanine loan. This mezzanine loan currently constitutes a portion of the portfolio of securities owned by CDO III. One of the properties is subject to a ground lease. The ground lease has an initial remaining term of 35 years and two five-year extension options. The ground lease also provides for periodic increases in base rent based on the change in the Consumer Price Index.

Salt Lake City Property

On August 2, 2005, the Company closed a $22.0 million acquisition of a 117,553 square foot office building in Salt Lake City, Utah, (the "Salt Lake City property") which is 100% leased to the General Services Administration ("Salt Lake City") under a lease that expires in April 2012. The property is financed with a $17 million non-recourse first mortgage.

EDS Portfolio

On September 30, 2005, the Company closed the acquistion of a portfolio of four office buildings with 387,842 square feet of rentable space located in Rancho Cordova, California, Auburn Hills, Michigan and Camp Hill, Pennsylvania for $61.4 million. The four office properties are net leased to Electronic Data Systems Corp., (the "EDS Portfolio"), under leases expiring in 2015. The Company financed the acquisition with a $49.1 million non-recourse first mortgage.

Executive Centre Portfolio

In December 2005, the Company acquired a portfolio of three class A office buildings, located in Springdale, Ohio, with 486,963 square feet of rentable space for $68.5 million. Two of the properties are 100% and 96% leased to General Electric Company under leases expiring in 2009 and 2010. The remaining building is leased 100% to Cincom Systems, Inc. under a lease that expires in 2011. The Company financed the acquisition with a $51.5 million non-recourse first mortgage.

F-21

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

The Company has made a preliminary allocation of the purchase price to property components based on a preliminary appraisal and expects to make a final allocation of the purchase price in accordance with SFAS 141 during the first quarter of 2006.

(b) Dispositions

729 Seventh Avenue

The Company sold its interest in a 19,618 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 was approximately $8.6 million, net of minority interest. For the year ended December 31, 2005 and the period of October 29, 2004 to December 31, 2004 the operations were classified as discontinued operations in the consolidated statements of operations.

The proceeds of the sale were used to pay down approximately $25.1 million of an existing mortgage and the remaining balance was reinvested into a similar property acquisition to effectuate a Section 1031-tax free exchange under the Internal Revenue Code.

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

1552 Broadway

The Company sold its interest in a four-story, 12,091 square foot building is located at 1552 Broadway (“1552”) in New York City for a purchase price of $48 million, or $3,970 per square foot. The transaction closed on November 30, 2005. The gain on sale was approximately $20.3 million, net of minority interest. . For the year ended December 31, 2005 and the period of October 29, 2004 to December 31, 2004 the operations were classified as discontinued operations in the consolidated statements of operations.

The proceeds of the sale were used to pay off the balance of existing mortgage and the remaining proceeds were reinvested into a similar property acquisition to effectuate a Section 1031-tax free exchange under the Internal Revenue Code.

27 West 34th and 1372 Broadway

The Company formally initiated an effort to market two of its leasehold interests located at 27 West 34th Street (“27 West”) and 1372 Broadway ("1372") and on December 30, 2005 entered into a definitive sale contract. The Company has met the held for sale criteria in accordance with SFAS No. 144 and accordingly, the leaseholds were classified as held for sale in the consolidated balance sheet at December 31, 2005 and its operations were classified as discontinued operations in the consolidated statements of operations for the year ended December 31, 2005 and the period of October 29, 2004 to December 31, 2004.

(c) Discontinued Operations- 2005

The following table summarizes income from discontinued operations, net of minority interest and related gain on sale of discontinued operations, net of minority interest, for the year ended December 31, 2005 (in thousands):

	For the year ended D ecember 31, 2005
Revenue:
Rental and escalation income	$	5,618
Interest and other		518
Total revenue	$	6,136
Operating Expenses:
Real estate property operating expenses		1,589
Management fee -affiliates		229
General and administrative		591
Interest expense		2,269
Depreciation and amortization		777
Total expenses		5,455
Income from discontinued operations		681
Gain on disposition of discontinued operations		35,930
Income from discontinued operations before minority interest		36,611
Minority interest		(7,212	)
Income from discontinued operations, net of minority interest	$	29,399

F-22

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

(d) Discontinued Operations-2004

The assets and liabilities of the properties subsequently sold or in contract for sale were $42.4 million and $41.6 million, respectively, at December 31, 2004.

The following table summarizes income from discontinued operations, net of minority interest for the period of October 29, 2004 to December 31, 2004 (in thousands):

	For the period of October 29, 2004 - December 31, 2004
Revenue:
Rental and escalation income	$	1,649
Interest and other		3
Total revenue	$	1,652
Operating Expenses:
Real estate property operating expenses		358
Management fee -affiliates		430
General and administrative		69
Interest expense		570
Depreciation and amortization		222
Total expenses		1,649
Income from discontinued operations		3
Gain on disposition of discontinued operations		—
Income from discontinued operations before minority interest		3
Minority interest		(1	)
Income from discontinued operations, net of minority interest	$	2

These properties were held within an equity method investment by the Predecessor, accordingly there are no corresponding discontinued operations in the consolidated statements of operations for the period January 1, 2004 through October 28, 2004 or for the year ended December 31, 2003.

4 . Pro Forma Financial Information-(Unaudited)

As discussed in Note 3, the Company acquired and disposed of interests in certain operating real estate properties during the year ended December 31, 2005. The pro forma financial information set forth below is based upon the Company's historical consolidated statements of operations for the years ended December 31, 2005 and for the period of October 29, 2004 to December 31, 2004, adjusted to give effect of these transactions as of October 29, 2004 (date of IPO).

The pro forma financial information is presented for informational purposes only and may not be indicative of what actual results of operations would have been had the tranactions occurred October 29, 2004 (date of IPO), nor does it purport to represent the results of future operations.

F-23

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

(In thousands, except per share amounts)		For the year ended December 31, 2005		For the period October 29, 2004 - December 31, 2004
Pro forma revenues	$	79,278	$	8,797
Pro forma net income (loss)		35,574(1)		(2,450	)
Pro forma net income (loss) per common share - basic		1.72		(.12	)
Pro forma net income (loss) per common share - diluted		1.72		—

(1) The gain on sale of 729 and 1552 in the amount of $28.9 million is reflected in the period of the sale and was not reflected in the pro-forma net income for the period of October 29, 2004 to December 31, 2004.

5. CDO Deposit and Warehouse Agreements

The Company enters into warehouse agreements with major commercial banks whereby the banks agree to purchase CMBS and other real estate debt securities under the Company’s direction, with the expectation of selling such securities to a CDO issuance. The Company is required to pledge cash or other collateral as security for the purpose of covering a portion of any losses or costs associated with the accumulation of these securities under the warehouse agreement. The warehouse agreements also provide for the Company's notional participation in the income that the assets generate after deducting a notional debt cost. These agreements are treated as non-hedge derivatives for accounting purposes and are therefore marked to market through current income. Although the Company currently anticipates completing the most recent CDO in the near term, there is no assurance that such CDO will be consummated or on what terms it will be consummated.

In September 2004, the Predecessor entered into a warehouse arrangement with a major commercial bank whereby the bank has agreed to purchase up to $400 million of CMBS and other real estate debt securities under the Predecessor's direction, with the expectation of selling such securities to the Predecessor's third CDO issuer ("CDO III"). The Predecessor was required to pledge up to $10 million as security for the purpose of covering a portion of any losses or costs associated with the accumulation of these securities under the warehouse agreement. This security was in the form of a pledge of the Predecessor's preferred shares of CDO I for acquisitions of securities up to $150 million and cash deposits of up to $5.7 million to cover the accumulation of securities from $150 million to the maximum of $400 million. In November 2004, the Company made a $2.5 million cash deposit as required under this warehouse agreement. The CDO III warehouse agreement also provides for the Predecessor's and the Company's notional participation in the income that the assets generate after deducting a notional debt cost. An unrealized gain on the warehouse agreement for CDO III of $0.3 million was recognized for the period January 1, 2004 through October 28, 2004 by the Predecessor and $0.2 million was recognized for the period October 29, 2004 to December 31, 2004, by the Company, which is shown in the combined and consolidated statements of operations.

In January 2005, the pledge of the Company’s approximately 83% equity interest in CDO I was replaced with an additional cash deposit of $15.0 million, for a total cash deposit of $17.5 million, which represented the purchase price for the $23 million face amount of unrated Class E Subordinate Income Notes of CDO III which the Company acquired at the closing on March 10, 2005. The Company also purchased the BB-rated Class D Notes, with a face amount of $16.0 million, for $14.1 million. The Company partially financed the acquisition of the Class D Notes with a $9.1 million advance from its DBAG Facility, defined herein.

On September 27, 2005, the Company entered into a warehouse arrangement with a major commercial bank whereby the bank has agreed to purchase up to $400 million of CMBS and other real estate debt securities under the Company’s direction, with the expectation of selling such securities to the Company’s fifth investment grade CDO issuance or CDO VII. As of December 31, 2005, the Company has deposited $10 million as security for the purpose of covering a portion of any losses or costs associated with the accumulation of these securities under the warehouse agreement and will be required to deposit additional equity based on accumulations of securities that will be made under the warehouse agreement. The bank had accumulated $156.4 million of real estate securities under the terms of the warehouse agreement as of December 31, 2005. An unrealized loss on the warehouse house agreement for CDO VII of $0.5 million was recognized for the year ended December 31, 2005.

F-24

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

6. Debt Securities Available for Sale

The following is a summary of the Company’s available for sale securities at December 31, 2005 (in thousands):

Security	Contractual Maturity		Face Value		Amortized Cost		Unrealized Gain/(Loss)			Estimated Fair Value
SBM7 2000-C3 H	12/18/33	$	6,200	$	6,058		($158	)	$	5,900
PNCMA 2000-C2 L	10/12/33		5,500		4,567		(74	)		4,493
DLJCM 2000-CKP1 B4	11/10/33		8,000		7,505		(113	)		7,392
BSCMS 2000-WF1 J	02/15/32		1,110		861		4			865
NSTAR CDO III 2005-1 D	04/05/40		15,999		14,145		(382	)		13,763
FUNBC 2001-C4 N	12/12/33		1,406		1,149		(12	)		1,137
JPMCC 2003-C1 L	01/12/37		4,273		3,693		(97	)		3,596
MLMI 1998-C1 E	11/15/26		3,691		3,848		49			3,897
BACM 2003-1 J	09/11/36		7,132		6,723		206			6,929
BACM 2003-1 L	09/11/36		2,000		1,743		(8	)		1,735
GMACC 2000-C1 H	03/15/33		4,500		4,325		(57	)		4,268
COMM 2005-LP5 G	05/01/43		5,000		4,954		(138	)		4,816
COMM 2001-J1A F	02/14/34		1,000		1,041		(14	)		1,027
NSTAR CDO V - Class F	09/05/45		12,750		12,750		(291	)		12,459
NSTAR CDO V - Class E	09/05/45		5,000		5,000		(81	)		4,919
NSTAR CDO I - Preferred Equity	08/01/38		10,518		8,540		1,252			9,792
NSTAR CDO II - Income Note	06/01/39		15,067		15,011		(1,100	)		13,911
NSTAR CDO II - BB	06/01/39		5,000		4,217		189			4,406
NSTAR CDO III - Income Note	06/01/40		23,000		18,212		1,873			20,085
NSTAR CDO V - Income Note	09/05/45		26,154		24,921		(439	)		24,482
Total		$	163,300	$	149,263	$	609		$	149,872

During the year ended December 31, 2005, proceeds from the sales of available for sale securities to an affiliate was $21.5 million. The realized gain on the sale was $361,000 of which $436,000 was the unrealized gain which was included in other comprehensive income.

For the year ended December 31, 2004 the Company and the Predecessor’s investments in debt securities available for sale are as follows;

CDO I

On August 21, 2003, the first CDO Offering was completed by the Predecessor through its majority-owned subsidiaries, N-Star Real Estate CDO I Ltd. and N-Star Real Estate CDO I Corp., the issuer and co-issuer, respectively (collectively "CDO I"). CDO I purchased all of the securities accumulated under the CDO Deposit and Warehouse Agreement and financed the purchase through the issuance of collateralized debt obligations and the issuance of certain equity securities. The Predecessor, through NS CDO Holdings I LLC, acquired 15,833 preferred shares of CDO I with a liquidation preference of $15.8 million for $10 million. These preferred shares represent 83.33% of the preferred equity of CDO I. The Company's and the Predecessor's interest in CDO I is accounted for as a debt security available for sale pursuant to EITF 99-20. The Predecessor has recorded an unrealized gain of approximately $2.0 million for the period of January 1, 2004 through October 28, 2004 and the Company recognized an unrealized loss of $0.1 million for the period of October 29, 2004 through December 31, 2004, which was recorded as a component of other comprehensive income in owners' equity and stockholders' equity, respectively. The Company's potential loss in CDO I is limited to its investment in CDO I of approximately $10.4 million, which is included in the Company's consolidated balance sheet at December 31, 2004.

F-25

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

CDO II

In July 2004, the Predecessor completed its second CDO issuance through a majority-owned subsidiary, NS CDO II, Ltd., the issuer of the CDO ("CDO II"). CDO II acquired approximately $400 million of securities accumulated by a major commercial bank under the CDO II warehouse agreement and financed the purchase through the issuance of collateralized debt securities and unrated income notes. The Predecessor purchased $35.0 million of subordinated securities of this CDO issuance at a price of $27.4 million. This investment was recorded at $27.5 million as it includes the rollover of the Predecessor's share of the unrealized gains on the warehouse agreement accumulated during the warehouse period. These securities consist of the "BB" rated junior classes of debt securities and the unrated income notes, which effectively represent the residual interest in CDO II. The warehouse facility was terminated upon closing of CDO II in July 2004. The Predecessor's deposit was applied to the purchase price, $17.4 million was borrowed under a short-term facility with the warehouse bank and the balance of the purchase price was paid from working capital and an additional capital contribution by NSA. The Predecessor has recorded an unrealized loss of approximately $0.2 million for the period of January 1, 2004 through October 28, 2004 and the Company has recorded an unrealized gain of $0.1 million for the period of October 29, 2004 through December 31, 2004, related to the change in the fair value of CDO II's residual equity and the BB notes, which has been recorded as a component of other comprehensive income in owners equity and stockholders' equity, respectively.

The Predecessor's and the Company's investment in the unrated income notes of CDO II is accounted for as a debt security available for sale pursuant to EITF 99-20. The Company's potential loss in CDO II is limited to its investment in CDO II of approximately $27.3 million, which is included in the consolidated balance sheet at December 31, 2004.

7. Debt Securities Held forTrading

Subsequent to the IPO in October 2004, the Company made temporary investments in $1.31 billion of primarily AAA-rated, short-term, floating rate securities, which are backed by commercial or residential mortgage loans. These investments were financed through repurchase agreements with Citigroup Global Markets, Inc. and Greenwich Capital Markets, Inc. whereby the Company borrowed approximately $1.25 billion and funded the remaining balance of approximately $55 million in cash. The repurchase obligations generally mature and reinvest every thirty days with an interest rate of LIBOR plus 0.13% to 0.65% with a weighted average aggregate interest rate of 2.367% at December 31, 2004. These repurchase agreements are being accounted for as secured borrowings since the Company maintains effective control of the financed assets. (See Note 24 under Recent Accounting Developments). In December 2004, the Company sold $432.1 million of these temporary investments and repaid the associated repurchase obligations, recognizing a gain on the sale of approximately $0.3 million.

As of December 31, 2004, the Company's debt securities held for trading had a market value of $826.6 million and the remaining obligations under the related repurchase agreements amounted to $790.2 million. Two issuers of these debt securities represent 11% and 19%, respectively, of the total market value of the debt securities held for trading at December 31, 2004. For the period October 29, 2004 through December 31, 2004, the Company recorded an unrealized loss related to the change in fair value of these securities of $0.1 million, interest income of $3.1 million and interest expense in the amount of $3.0 million, related to the repurchase obligations. The Company's temporary investment strategy was designed to generate sufficient qualifying income during the two-month period before the Company's December 31, 2004 fiscal year-end so that the Company would be able to meet all of the REIT compliance requirements in advance of deploying capital pursuant to the Company's long-term business plan.

F-26

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

The Company fully liquidated the portfolio of these short term investments and repaid the associated repurchase agreements in 2005. The net realized gain on the portfolio from the sale of these short term investments was $80,000 for the year ended December 31, 2005.

8. Real Estate Debt Investments

At December 31, 2005 and 2004, the Company's investments in real estate debt investments are as follows (dollars in thousands):

December 31, 2005		Carrying Value ⁽¹⁾	Allocation by Investment Type		Average Spread Over LIBOR		Average Fixed Rate		Number of Investments
Whole loans, floating rate	$	178,775	26.3	%	3.06	%	—		10
Whole loans, fixed rate		13,082	1.9	%	—		5.27	%	3
Subordinate mortgage interests, floating rate		237,276	34.8	%	4.97	%	—		17
Mezzanine loans, floating rate		223,621	32.8	%	4.86	%	—		11
Mezzanine loan, fixed rate		151	0.0	%	—		15.00	%	1
Preferred equity, fixed rate		28,201	4.2	%	—		9.36	%	2
Total / Average	$	681,106	100.0	%	4.40	%	8.09	%	44

(1) Approximately $320 million of these investments serve as collateral for the CDO bonds of CDO IV (as defined in Note 11) and the balance are financed under the Wachovia Facility (as defined in Note 11) or other Repurchase Agreements.

December 31, 2004		Carrying Value ⁽¹⁾		Allocation by Investment Type		Average Spread Over LIBOR		Average Fixed Rate	Number of Investments
Subordinate mortgage interests, floating rate	$	48,515		68.5	%	4.69	%	N/A	2
Mezzanine loans, floating rate		22,054		31.5	%	4.75	%	N/A	1
Total / Average	$	70,569 (2	)	100.0	%	4.71	%	N/A	3

(1)

These investments served as collateral for the DBAG facility (defined in Note 11).

(2)

The carrying amounts differ from the contractual amounts due to the deferred loan originations fees and acquisition cost in the amount of ($347,000) and $75,000 respectively.

As of December 31, 2005 and 2004, all loans were performing in accordance with the terms of the loan agreements.

Contractual maturities of real estate debt investments at December 31, 2005 are as follows (in thousands):

Years ending December 31:
2006	$	169,087
2007		310,635
2008		128,956
2009		32,969
2010		28,530
Thereafter		12,299
Total	$	682,476

Actual maturities may differ from contractual maturities because certain borrowers have the right to prepay with or without prepayment penalties. The contractual amounts differ from the carrying amounts due to unamortized origination fees and costs and unamortized premiums and discounts being reported as part of the carrying amount of the investments.

9. Investments in and Advances to Unconsolidated/Uncombined Ventures

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

F-27

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

ALGM

Prior to the IPO the Predecessor owned a 97.5% non-controlling interest in ALGM until October 28, 2004. ALGM owned leasehold interests in eight net leased retail properties and fee simple interests in two retail/office properties. Prior to the contribution of the Initial Investments, the Predecessor accounted for its investment in ALGM under the equity method of accounting.

Concurrently with the contribution of the Initial Investments to the Operating Partnership and the IPO, the Company purchased the remaining 2.5% managing equity interest for $1.6 million from an affiliate with a portion of the proceeds of the IPO. As of October 29, 2004, ALGM is a wholly-owned subsidiary, and accordingly, has been consolidated in the Company's financial statements.

NSF Venture

The NSF Venture was formed to acquire and originate subordinate debt instruments on real estate assets. This was accounted for under the equity method by the Company and the Predecessor.

At December 31, 2005 and 2004, the Company has an investment of approximately $2.2 million and $5.4 million, respectively, which is included in investments in and advances to unconsolidated ventures in the accompanying consolidated balance sheets.

Northstar Realty Finance Trusts

The Company owns all of the common stock of Northstar Realty Finance Trust, Northstar Realty Finance Trust II and Northstar Realty Finance Trust III (collectively, “the Trusts”). The Trusts were formed to issue preferred securities. Under the provisions of FIN 46 (R), the Company determined that the holders of the trust preferred securities were the primary beneficiaries of the Trusts. As a result, the Company did not consolidate the Trusts and has accounted for the investment in the common stock of the Trusts under the equity method of accounting, which is reflected in Investments in and advances to unconsolidated ventures in the consolidated balance sheet. At December 31, 2005, the Company had an investment in the Trusts of approximately $3.3 million.

Reconciliation between the operating data for all unconsolidated/uncombined ventures and equity in earnings is as follows : (in thousands)

	The Company						The Predecessor
		For the year ended			For the period ended			For the period ended			For the year ended
		December 31, 2005			October 29, 2004 - December 31, 2004			January 1, 2004 - October 28, 2004			2003
Net income	$	7,328		$	2,136		$	11,515		$	7,854
Other partners' share of income		(7,054	)		(2,063	)		(10,032	)		(5,832	)
Elimination entries		(48	)		10			44			35
Step up costs		—			—			(7	)		(9	)
Earnings from unconsolidated/ uncombined ventures	$	226		$	83		$	1,520		$	2,048

Reconciliation between the Company's investment in unconsolidated entities as of December 31, 2005 and December 31, 2004 is as follows: (in thousands)

F-28

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

		December 31, 2005			December 31, 2004
Company's equity in unconsolidated entities	$	5,546		$	5,274
Elimination entry		(88	)		89
Purchase price basis difference		—			—
Investment in and advances to unconsolidated ventures	$	5,458		$	5,363

10. Deferred Costs and Intangible Assets, Net

Deferred costs and intangible assets as of December 31, 2005 and 2004 consisted of the following: (in thousands)

	December 31, 2005			December 31, 2004
Deferred lease costs	$	26,407		$	1,803
Deferred loan costs		13,523			3,360
Intangible assets		1,396			1,396
Pending deal costs		402			—
Accumulated amortization		(2,983	)		(2,326	)
Deferred costs and intangible assets, net	$	38,745		$	4,233

Deferred lease cost includes the allocation of a portion of the purchase price, in accordance with SFAS 141, to lease origination costs associated with the in-place leases. Appoximately $25.1 million was allocated to lease origination costs associated with the in-place leases for the year ended December 31, 2005, relating to the new acquisitions. See Note 3.

Intangible assets were recorded in connection with the acquisition of employee ownership interests in the subordinate real estate debt business and the minority interest in the real estate securities businesses as part of the Contribution Transactions. The Company purchased a 25% interest in NFMM from two former employees of NCIC. The excess of the fair value of the employee interest over the historical book value was $558,000, which was recorded as a step-up in basis and recorded as an intangible asset. The intangible asset is being amortized on a straight line basis over the remaining life of the underlying assets giving rise to the revenue stream used in the valuation with an estimated lfe of 3.2 years. The Company also purchased a 23% minority interest in NSA. The excess of the fair value of the minority interest over the historical book value of $839,000, was recorded as a step-up in basis and allocated to an intangible asset. The intangible asset is being amortized on a straight line basis over the remaining life of the underlying assets giving rise to the revenue stream used in the valuation with an estimated life of 7.7 years. The Company recognized $283,000 and $48,000 as amortization expense, relating to both acquisitions, which is reflected in the consolidated statement of operations for the year ended December 31, 2005 and for the period of October 29, 2004 through December 31, 2004, respectively.

F-29

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

11. Borrowings

The following is a table of the Company's outstanding borrowings as of December 31, 2005 and December 31, 2004:

	Stated Maturity	Interest Rate	Balance 12/31/05 (in thousands)	Balance 12/31/04 (in thousands)
Mortgage notes payable (non-recourse)
ALGM	1/01/2006	The greater of LIBOR or 2% + 3.60%	$ —	$ 40,557
Chatsworth	5/1/2015	5.65%	43,777	—
Salt Lake City	9/1/2012	5.16%	16,919	—
EDS	10/8/2015	5.37%	49,120	—
Executive Centre	1/1/2016	5.85%	51,480	—
Mezzanine loan payable (Chatsworth) (non-recourse)	5/1/2014	6.64%	13,000	—
Repurchase obligations	See below	See below	7,054	800,418
DBAG facility	12/21/2007	LIBOR + 0.75% to 2.25%	—	27,821
Wachovia credit facility	7/12/2008	LIBOR + 0.20% to 3.00%	243,002	—
Bank of America credit facility	9/27/2006	LIBOR + 3.25%	—	—
CDO bonds payable - CDO IV	7/1/2040	LIBOR + 0.62% (average spread)	300,000	—
Liability to subsidiary trusts issuing preferred securities
Trust I	3/30/2035	8.15%	41,240	—
Trust II	6/30/2035	7.74%	25,780	—
Trust III	6/30/2035	7.81%	41,238	—
			$ 832,610	$ 868,796

Scheduled principal payment requirements on the Company's borrowings are as follows as of December 31, 2005 (in thousands):

		Total		Mortgage and Mezzanine Loans		Credit Facilities		Liability to Subsidiary Trusts Issuing Preferred Securities		Repurchase Obligations		CDO Bonds Payable
2006	$	8,778	$	1,724	$	—	$	—	$	7,054	$	—
2007		2,580		2,580		—		—		—		—
2008		245,724		2,722		243,002		—		—		—
2009		2,910		2,910		—		—		—		—
2010		3,091		3,091		—		—		—		—
Thereafter		569,527		161,269		—		108,258		—		300,000
Total	$	832,610	$	174,296	$	243,002	$	108,258	$	7,054	$	300,000

At December 31, 2005, the Company was in compliance with all covenants under its Borrowings.

Mortgage Notes Payable

ALGM Mortgage

F-30

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

On December 4, 2002, ALGM and its subsidiaries, as Borrowers, and NPLP, as guarantor, entered into a loan agreement (the "Loan") with Greenwich Capital Financial Products, Inc. (the "Lender") for a mortgage in the principal amount of $43.0 million. The Loan is secured by a first mortgage lien and security interests on the ALGM Properties, including the fee owned properties, six leasehold interests and all other property collateral therein, including assignments of leases and rents. Pursuant to the contribution agreement between NPLP and the Operating Partnership, the Operating Partnership provided full indemnification of any liability to NPLP under this limited guaranty. At December 31, 2004, NorthStar Partnership had a maximum exposure of $40.6 million under its "bad boy" guaranty to the Lender. NorthStar Partnership also provided the Lender with a limited repayment guaranty that may be triggered by the termination of a lease related to one of the ALGM Properties. The maximum exposure for such lease termination was equal to $2.5 million at December 31, 2004.

ALGM and the Lender have allocated the Loan to the ALGM Properties as agreed to and the allocated amounts will be the basis for the calculation of the mandatory prepayment amount (as defined) which would be required upon sale of any one or more of the ALGM Properties. The mortgage was fully paid off in 2005 in connection with the sales of 1552 and 729.

Chatsworth Mortgage

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

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

The Company and its subsidiaries have agreed to comply with environmental laws and have indemnified the Lender against all liabilities and expenses related thereto.

Salt Lake City Mortgage

In connection with the acquisition of the Salt Lake City property, the Company entered into a loan agreement (the "Salt Lake City Mortgage") with CIBC, Inc. for a non-recourse mortgage in the principal amount of $17.0 million. The Salt Lake City Mortgage matures on September 1, 2012 and bears interest at a fixed rate of 5.16%. The loan requires monthly payments of $100,971 representing interest in arrears and principal sufficient to amortize the loan to a balance of approximately $14.3 million at maturity, as well as monthly escrow deposits for real estate taxes.

EDS Mortgage

In connection with the acquisition of the EDS portfolio, the Company entered into a loan agreement with Countrywide Commercial Real Estate Finance, Inc. for a non-recourse mortgage in the principal amount of $49.1 million. The mortgage matures on October 8, 2015 and bears interest at a fixed rate of 5.37%. The loan requires monthly payments of $274,997 representing interest in arrears and principal sufficient to amortize the loan to a balance of approximately $41.9 million at maturity, as well as monthly escrow deposits for real estate taxes.

Executive Centre Mortgage

In connection with the acquisition of the Executive Centre portfolio the Company entered into a mortgage with a principal amount of $51.5 million that matures on January 1, 2016 and bears interest at a fixed rate of 5.85%. This non-recourse loan requires monthly payments of $303,732 representing interest in arrears and principal sufficient to amortize the loan to a balance of approximately $48.1 million at maturity, as well as monthly escrow deposits for real estate taxes.

F-31

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

Mezzanine Loan Payable

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

CDO Bonds Payable

In June 2005, the Company closed its fourth CDO issuance ("CDO IV") and the Company acquired all of the below investment grade securities and income notes. The CDO IV issuer issued $300 million face amount of the CDO bonds and sold them in a private placement to third parties. The proceeds of the CDO issuance were used to repay the entire outstanding principal balance of the DBAG Facility (as defined below) of $233.6 million at closing. The CDO bonds are collateralized by real estate debt investments, consisting of junior participations, mezzanine loans, whole loans, CMBS and CDO bonds.

Repurchase Obligations

On July 21, 2004, NS CDO Holdings II, LLC entered into a financing arrangement with Citigroup Global Markets Inc. ("Citigroup") and originally borrowed $17.4 million under a repurchase agreement that is being accounted for as a secured borrowing since the Company maintains effective control of the financed assets. This financing is secured by the "BB" rated junior classes of debt securities and unrated income notes of CDO II. The financing matures on July 21, 2005 and bears interest at LIBOR plus 125 basis points. On November 3, 2004, the Company repaid $7.3 million of its short-term loan payable to Citigroup, which was secured by the unrated income notes. The principal amount outstanding at December 31, 2005 and 2004 is $3.3 million and $10.2 million, respectively and the aggregate interest rate was 5.63% and 3.67% (LIBOR + 1.25%), respectively.

The Company's temporary investments, which are primarily AAA-rated, short-term, floating rate securities, backed by commercial or residential mortgage loans, were financed with repurchase agreements with Citigroup and Greenwich Capital Markets, Inc. The Company initially borrowed approximately $1.25 billion under repurchase agreements, of which $790.2 million was outstanding at December 31, 2004, approximately $754.3 million with Citigroup and $35.9 million with Greenwich. The Company fully liquidated its short term security portfolio in 2005 and fully repaid the associated repurchase agreements.

In 2005 the Company used repurchase agreements with Citigroup to finance certain available for sale securities. At December 31, 2005 there was approximately $3.7 million outstanding with Citigroup. These repurchase obligation matures and reinvest every thirty days with an aggragate interest rate of 4.98% (LIBOR plus 0.60%) at December 31, 2005. This repurchase agreements are being accounted for as secured borrowings since the Company maintains effective control of the financed assets.

Wachovia Credit Facility

On July 13, 2005, a subsidiary of the Company, entered into a master repurchase agreement with Wachovia Bank, National Association (the "Wachovia Facility"). The Wachovia Facility was amended in September 2005 and currently the Company may borrow up to $350 million under this credit facility in order to finance the acquisition of primarily real estate debt and other real estate loans and securities. The additional capacity and flexibility under the amendment will allow the Company to accumulate sufficient collateral for a contemplated subordinate debt CDO ("CDO VI") and to continue to finance other investments.

F-32

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

Advance rates under the Wachovia Facility range from 55% to 95% (subject to increase under certain circumstances) of the value of the assets for which the advance is made. Amounts borrowed under the Wachovia Facility bear interest at one-month LIBOR plus a spread which ranges from 0.20% to 3.00%, depending on the type of asset for which the amount is borrowed. The Wachovia Facility has an initial term of three years, except that certain advances under the 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 subject to a 0.48% commitment fee and a 0.25% unused facility fee. The Wachovia Facility has an initial maturity date of July 12, 2008 and, in addition, the Company must pay an unused facility fee equal to 0.25% of the unused portion of the Wachovia Facility up to $150 million (subject to the preceding sentence), commencing 120 days after July 13, 2005, payable quarterly in arrears. The Company may extend the term of the Wachovia Facility for one year if it is not in default and must pay an extension fee of 0.25% of the aggregate amount then outstanding under the facility. If the Company extends the facility's term, it will be required to retire 25% of the aggregate amount then outstanding under the facility during each quarter of the remaining year of the term. The Company paid Wachovia a $750,000 structuring fee in connection with the execution of the Wachovia Facility.

The debt outstanding under the Wachovia Facility is subject to a number of terms, conditions and restrictions including, without limitation, scheduled interest payments and the maintenance of certain margin percentages on amounts outstanding under the facility. If the market value of an asset securing outstanding debt declines, the Company may be required to satisfy a margin call by paying cash or providing additional collateral. Failure to meet any margin call could result in an event of default which would enable Wachovia to exercise various rights and remedies including acceleration of the maturity date of the debt outstanding under the facility and the sale of the collateral. For the year ended December 31, 2005, the weighted average interest rate on the Wachovia Facility was 5.95%.

Bank of America Facility

On September 28, 2005, the Company entered into a master loan, guarantee and security agreement with Bank of America, N.A., the Operating Partnership and NS Advisors LLC (the "BOA Master Loan Agreement"). The BOA Master Loan Agreement provides for an unsecured, $50 million revolving credit facility. The term of the unsecured facility is one year, with up to two one-year extensions at the discretion of Bank of America. If the unsecured facilty is not extended by Bank of America, the Company has the option in lieu of immediate repayment to amortize the outstanding principal balance of the unsecured facility in equal quarterly installments over twelve months, upon payment of a quarterly 12.5 basis point fee on the outstanding balance under the unsecured facility at September 27, 2006 and each quarter thereafter. The interest rate on the unsecured facility is LIBOR, plus 325 basis points. For the year ended December 31, 2005, the weighted average interest rate on this facility was 7.22%. In connection with 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 Loan Agreement contains certain covenants, including, among other things, financial covenants requiring minimum cash liquidity, minimum tangible net worth, maximum debt to tangible net worth and minimum debt service coverage. The BOA Master Loan Agreement also contains certain customary representations and warranties and events of default. The obligations of the Operating Partnership, which is the borrower under the unsecured facility, are guaranteed by the Company, NS Advisors LLC and any subsidiary of the Operating Partnership whose assets are included in the borrowing base for the unsecured facility.

DBAG Credit Facility

On December 21, 2004, the Company entered into a $150 million master repurchase agreement with Deutsche Bank AG, Cayman Islands Branch. On March 21, 2005, this facility was amended and restated (as amended, the "DBAG Facility") to allow the Company to borrow up to $300 million in order to finance the acquisition of primarily subordinate real estate debt and other real estate loans and securities. The additional capacity and flexibility under the amendment of the DBAG Facility allowed the Company to accumulate sufficient collateral for CDO IV, and to continue to finance other investments. Pursuant to the terms of the DBAG Facility, the availability under the DBAG Facility was reduced to $150 million upon closing of CDO IV on June 14, 2005.

F-33

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

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

Under the terms of the DBAG Facility, the Company is able to finance the acquisition of mortgage loans secured by first liens on commercial or multifamily properties, junior participation interests in mortgage loans secured by first or second liens on commercial or multifamily properties, mezzanine loans secured by a pledge of the entire ownership interest in a commercial or multifamily property, B- or higher rated commercial mortgage backed securities and BB or higher rated real estate CDOs, debt securities issued by a REIT and syndicated bank loans.

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

Prior to June 14, 2005, the Company had financed the acquisition of securities for CDO IV through borrowings under the DBAG Facility. The Company used a portion of the proceeds from the sale of the transferred assets to repay the amount outstanding under the DBAG Facility.

Liability to Subsidiary Trusts Issuing Preferred Securities

On April 12, 2005, May 25, 2005 and November 22, 2005 NorthStar Realty Finance Trust I, NorthStar Realty Finance Trust II and NorthStar Realty Finance Trust III (collectively “The Trusts") sold, in three private placements, trust preferred securities for an aggregate amount of $40 million, $25 million and $40 million, respectively. The Company owns all of the common stock of the Trusts. The Trusts used the proceeds to purchase the Company's junior subordinated notes which mature on March 30, 2035, June 30, 2035 and January 30, 2036, respectively. These notes represent all of the Trusts' assets. The terms of the junior subordinated notes are substantially the same as the terms of the trust preferred securities. The trust preferred securities have a fixed interest rate of 8.15%, 7.74% and 7.81% per annum, respectively, during the first ten years, after which the interest rate will float and reset quarterly at the three-month LIBOR rate plus 3.25% per annum for Trusts I and II and three-month LIBOR rate plus 2.83% per annum on Trust III.

The Company may redeem the notes, in whole or in part, for cash, at par, after March 30, 2010, June 30, 2010 and January 30, 2011, respectively. To the extent the Company redeems notes, the Trusts are required to redeem a corresponding amount of trust preferred securities. On September 16, 2005, we amended the trust agreements and indentures to modify some of the payment dates for a portion of the junior subordinated notes.

The ability of the Trusts to pay dividends depends on the receipt of interest payments on the notes. The Company has the right, pursuant to certain qualifications and covenants, to defer payments of interest on the notes for up to six consecutive quarters. If payment of interest on the notes is deferred, the Trust will defer the quarterly distributions on the trust preferred securities for a corresponding period. Additional interest accrues on deferred payments at the annual rate payable on the notes, compounded quarterly.

F-34

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

12. Obligations Under Capital Leases and Operating Lease Agreements

The Company is the lessee of two locations under capital leases. The following is a schedule of minimum future rentals under capital leases as of December 31, 2005 (in thousands):

Years ending December 31:
2006	$	262
2007		262
2008		342
2009		382
2010		382
Thereafter		14,887
Total minimum lease payments		16,517
Less amounts representing interest		13,142
Present value of future minimum lease payments	$	3,375

Interest on the above capital leases was imputed at the incremental borrowing rate of 10% at the acquisition date of each lease. Interest expense incurred on the above capital leases totaled $334,000 and $58,000 for year ended December 31, 2005 and the period October 29, 2004 to December 31, 2004, respectively.

Under one of the capital leases, the Company also pays rent equal to 15% of the minimum rental income received from the sub-tenant. In addition the Company pays rent for its corporate offices in connection with its Sublease with NCIC. The Sublease expires in 2006.

The following is a schedule of minimum future rentals due as of December 31, 2005 (in thousands):

Years ending December 31:
2006	$	90
2007		98
2008		105
2009		105
2010		105
Thereafter		758
Total minimum lease payments	$	1,261

Under one of its operating real estate properties the Company pays ground rent. In addition the Company pays rent for its corporate offices in connection with its Sublease with NCIC. The Sublease expires in October 2006.

The following is a schedule of minimum future rental payments as of December 31, 2005 (in thousands):

Years ending December 31:
2006	$	967
2007		497
2008		497
2009		497
2010		497
Thereafter		14,133
	$	17,088

13. Rental Income Under Operating Leases

Rental income from real estate is derived from the leasing and sub-leasing of space to commercial tenants. The leases are for fixed terms of varying length and provide for annual rentals and expense reimbursements to be paid in monthly installments.

The following is a schedule of future minimum rental income under non-cancelable leases at December 31, 2005 (in thousands):

F-35

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

Years ending December 31:
2006	$	19,507
2007		19,769
2008		20,505
2009		20,626
2010		18,063
Thereafter		67,422
	$	165,892

Included in rental income is percentage rent of $559,000 and $110,000 for the year ended December 31, 2005 and the period October 29, 2004 to December 31, 2004, respectively.

14. Related Party Transactions

Shared Facilities and Services Agreement

Upon consummation of the IPO, the Company entered into a one-year agreement with NCIC pursuant to which NCIC agreed to provide the Company, directly or through its subsidiaries, with facilities and services as follows: 1) fully-furnished office space for the Company’s employees at NCIC's corporate headquarters; 2) use of common facilities and office equipment, supplies and storage space at NCIC's corporate headquarters; 3) accounting support and treasury functions; 4) tax planning and REIT compliance advisory services; and 5) other administrative services, for an annual fee of $1.57 million, payable in monthly installments, plus additional charges for out-of-pocket expenses and taxes. This fee was subject to reduction by the amount that the Company paid certain employees of NCIC who became co-employees upon consummation of the IPO.

On October 29, 2005, the Company terminated the agreement and entered into a more limited sublease agreement with NorthStar Capital. Under the new sublease effective November 1, 2005, the Company rents from NorthStar Capital office space currently used by its accounting, legal and administrative personnel on a month to month basis. The sublease rent is calculated as a per person monthly charge, based on a "turn key" office arrangement (computer, network, telephone and furniture supplied) for each person utilizing NorthStar Capital facilities. These direct costs are reflected in other general and administrative expenses. Total rent expense incurred by the Company under the Sublease to $0.1 million for the period November 1, 2005 to December 31, 2005.

Total fees and expenses incurred by the Company under the shared facilities and services agreement amounted to $1.1 million and $0.2 million for the year ended December 31, 2005 and for the period from October 29, 2004 to December 31, 2004. No amounts were payable to NCIC at December 31, 2005 and 2004.

Advisory Fees

In August 2003, July 2004, March 2005 and September 2005, the Company and Predecessor entered into agreements with CDO I, CDO II, CDO III and CDO V, respectively, to perform certain advisory services.

The Company and Predecessor earned total fees of approximately $4,296,000, $471,000, $1,595,000 and $504,000 for the year ended December 31, 2005, for the period October 29 to December 31, 2004, for the period January 1 to October 28, 2004 and for the year ended December 31, 2003, respectively, of which $224,000 and $82,000 is unpaid and included in the Company's balance sheets as of December 31, 2005 and December 31, 2004, respectively, as receivables from related parties.

The Predecessor also earned structuring fees of $500,000 in connection with the closing of both CDO I and II in August 2003 and July 2004, respectively, which was used to reduce its investments in debt securities available for sale.

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

F-36

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

NSF Venture

In 2001, NCIC entered into an advisory agreement with the NSF Venture, whereby it receives as compensation for its management of the origination and underwriting of the investments of the NSF Venture, an advisory fee equal to 1% per annum of the capital invested by the NSF Venture. In November 2003, NCIC assigned the right to receive such fees to NFMM. For years prior to such assignment, the advisory fees have been reflected as part of the Predecessor with a corresponding decrease in contributed capital. The Company and Predecessor earned and recognized fees of approximately $517,000, $192,000, $876,000, and $522,000 for the year ending December 31, 2005 and the periods October 29, 2004 to December 31, 2004, January 1 to October 28, 2004, and for the year ended December 31, 2003, respectively. For the period prior to the IPO, the Predecessor recorded such fees as deemed distributions.

Management fees-related parties

On December 28, 2004, ALGM terminated its existing asset management agreement with Emmes Asset Management Co. LLC ("Emmes"), an affiliate of NCIC. Pursuant to the termination provisions of the agreement, ALGM paid Emmes a contractual termination payment of approximately $385,000, which is equal to two quarters of payments of the annual existing fee. In addition, ALGM and Emmes entered into a new asset management agreement, which is cancelable on 30 days notice. The annual asset management fee under the new agreement is equal to 3.5% of gross collections from 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 management are decreased the fee shall not have a minimum subject to certain provisions. Total fees incurred under this agreement amounted to $291,000 and $516,000, including the termination payment of $385,000, for the year ended December 31, 2005 and the period from October 29, 2004 to December 31, 2004, repectively. A portion of the management fee was allocated to the properties sold or held for sale and was classified in income from discontinued operations in the consolidated statement of operations. See Note 3.

EDS portfolio

In connection with the acquisition of the EDS portfolio, Koll Development Company, an affiliate of NCIC, received a brokerage commission of $921,000. The acquisition and the associated brokerage fees payable to Koll Development Company were approved in advance by all of the disinterested members of the board of directors.

Legacy Fund

On September 1, 2005, the Company entered into a loan agreement, as lender, with a subsidiary of Legacy Partners Realty Fund I, LLC, (the "Legacy Fund"), as borrowers, in the original principal amount of $66.6 million, secured by a first-priority mortgage lien on an office property located in San Jose, California. At the closing of this loan the Company funded $60.9 million of the original principal amount and has an additional $5.7 million of future funding commitments. Simultaneously with the closing of this loan, the Company entered into a participation and servicing agreement with a major financial 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 loan agreement with another subsidiary of the Legacy Fund in the original principal amount of $47.4 million, secured by a first-priority mortgage lien on an office property located in San Jose, California. The Company funded $32.6 million at closing and has an additional $14.8 million of future funding commitments. Simultaneously with the closing of this loan, the Company entered into a participation and servicing agreement with a major financial institution pursuant to which the Company sold a 50% participation in this loan and the future funding commitments.

One of the Company's directors, Preston Butcher, is the chairman of the board of directors and chief executive officer and owns a significant interest in Legacy Partners Commercial, LLC, which indirectly owns an equity interest in, and owns the manager of, the Legacy Fund. The disinterested members of the Company's board of directors approved this transaction.

F-37

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

15. Fair Value of Financial Instruments

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

In 2004, cash equivalents, accounts receivable, accounts payable, repurchase agreements with major banks and securities firms and the master repurchase agreement balances reasonably approximate their fair values due to the short-term maturities of these items. The CDO deposit and warehouse agreement, debt securities available for sale and securities sold, not yet purchased are carried on the balance sheet at their estimated fair value. Due to the floating rate, mortgage notes payable and loan receivables are carried at amounts that reasonably approximate their fair value.

In 2005, cash equivalents, accounts receivable, accounts payable, repurchase agreements with major banks and securities firms and the master repurchase agreement balances reasonably approximate their fair values due to the short-term maturities of these items. The CDO deposit and warehouse agreement, debt securities available for sale are carried on the balance sheet at their estimated fair value. The credit facilities and the variable rate mortgage receivables are carried at amounts which reasonably approximate their fair value, due to their floating rates.

For fixed rate loan receivables fair value is estimated using quoted market prices or by discounting future cash flows using current rates at which similar loans would be made to similar borrowers with similar credit risk. Since The Company’s fixed rate loan receivables had an estimated fair value of $41.4 million which approximated the carrying value.

For fixed rate mortgage loans payable the Company uses rates currently available to them with similar terms and remaining maturities to estimate their fair value. The fair value of the mortgage notes payable was $172.0 million with a carrying amount of $174.2 million.

Disclosure about fair value of financial instruments is based on pertinent information available to management as of December 31, 2005 and 2004. Although management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.

16. Equity Based Compensation

Employee Buy-Outs

NSA Advisors Profit Sharing Buy-Out

In connection with the Contribution Transactions, the Company agreed to buy-out the vested and unvested profit sharing arrangement of an employee of NSA for 206,850 OP Units and $88,000 in cash. The OP Units are subject to a vesting schedule identical to the one the employee had with the profit sharing arrangement (one third vested at July 31, 2003, and one third vests on each of the anniversaries following). The OP Units received were recorded as compensation expense in accordance with SFAS 123. The fair value of the award was $1,862,000 based upon the fair market value of the OP Units at the date of the buy-out. In connection with the buy-out, the Company recognized $1,572,000 in compensation expense for the period of October 29, 2004 through December 31, 2004 in the consolidated statement of operations. The remaining balance of $378,000 was recognized into compensation expense for the year ended December 31, 2005.

NFMM Employee Ownership Interests Buy-Out

In connection with the Contribution Transactions, the Company agreed to acquire a 25% ownership interest in NFMM held by an employee of NCIC and a former employee of NCIC for 173,128 OP Units. The fair value of OP Units issued in excess of the fair value of the ownership interest received was recorded as compensation expense in accordance with SFAS 123. The fair value of the award was $1,558,000 and the estimated fair value of the ownership interest was $558,000, which resulted in $1,000,000 of compensation expense recorded in the consolidated statement of operations for the period of October 29, 2004 through December 31, 2004. The fair value of the ownership interest acquired in excess of historical costs basis of the minority interest was recorded as a purchase adjustment, which was allocated to an intangible asset on the consolidated balance sheet. See Note 10.

F-38

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

Omnibus Stock Incentive Plan

On September 14, 2004, the board of directors of the Company adopted the NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan (the "Stock Incentive Plan"). The Stock Incentive Plan provides for the issuance of stock-based incentive awards, including incentive stock options, non-qualified stock options, stock appreciation rights, shares of common stock of the Company, including restricted shares, and other equity-based awards, including OP Units which are structured as profits interests ("LTIP Units") or any combination of the foregoing. The eligible participants in the Stock Incentive Plan include directors, officers and employees of the Company, co-employees of the Company and NCIC and employees of NCIC who will provide services to the Company pursuant to the shared facilities and services agreement. An aggregate of 1,433,038 shares of common stock of the Company are currently reserved and authorized for issuance under the Stock Incentive Plan, subject to equitable adjustment upon the occurrence of certain corporate events. On October 29, 2004, an aggregate of 38,886 shares of restricted common stock were granted to the Company's non-employee directors pursuant to the Stock Incentive Plan. In addition, an aggregate of 798,582 LTIP Units have been granted to the Company's officers, employees and co-employees of the Company and NCIC pursuant to the Stock Incentive Plan. LTIP Units vest to the individual recipient at a rate of one-twelfth of the total amount granted as of the end of each quarter, beginning with the quarter ended January 29, 2005, for the three-year vesting period so long as the recipient continues to be an eligible recipient. In addition, the LTIP Unit holders are entitled to dividends on the entire grant. Dividends or dividend equivalents paid on the portion of the grant that vested will be charged to retained earnings. Non forfeitable dividends or dividend equivalents paid on shares of stock that are not vested will be recognized as additional compensation cost.

The awards granted to the NCIC employees who provided services to the Company pursuant to the shared facilities and services agreement and certain co-employees were accelerated and became fully vested upon the termination of the shared facility and service agreement on October 29, 2005. The additional compensation expense related to the accelerated vesting was approximately $0.4 million.

The Company has recognized compensation expense of $3.2 million and $0.4 million related to the amortization of awards granted under this plan for the year ended December 31, 2005 and the period October 29, 2004 through December 31, 2004, respectively.

Long-Term Incentive Bonus Plan

On September 14, 2004, the board of directors of the Company adopted the NorthStar Realty Finance Corp. 2004 Long-Term Incentive Bonus Plan (the ‘‘Incentive Bonus Plan"), in order to retain and incentivize officers and certain key employees of the Company, co-employees of the Company and NCIC and employees of NCIC who will provide services to the Company pursuant to the shared facilities and services agreement. Up to 2.5% of the Company's total capitalization as of consummation of the IPO is available to be paid under the Incentive Bonus Plan in cash, shares of common stock of the Company or other share-based form at the discretion of the compensation committee of the Company's board of directors, if certain return hurdles are met.

An aggregate of 698,142 shares of common stock of the Company are currently reserved and authorized for issuance under the Incentive Bonus Plan, subject to equitable adjustment upon the occurrence of certain corporate events. On November 19, 2004, an aggregate of 665,346 shares of common stock of the Company were allocated to officers, employees and co-employees of the Company and NCIC for awards under the Incentive Bonus Plan if the Company achieves the return hurdles established by the compensation committee. The Company's compensation committee has established the return hurdle for these performance periods as an annual return on paid in capital as defined in the plan, equal to or greater than 12.5%. If the Company achieves these return hurdles, the vested awards may be paid in cash, shares of common stock, LTIP Units or other share based form.

F-39

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

Each of the participants will be entitled to receive half of his or her total reserved amount if the Company meets the return hurdle for the one-year period beginning October 1, 2005 and such participant is employed through the end of this first performance period. Each of the participants will be entitled to the other half of his or her total reserved amount if the Company meets the return hurdle for the one-year period beginning on October 1, 2006 and such participant is employed through the end of this second performance period. If the Company does not meet the performance hurdles for either period, the award amounts are generally forfeited, provided that, if the Company does not meet the return hurdle for the one-year period beginning October 1, 2005, but the Company meets the return hurdle for the two-year period beginning October 1, 2005 (determined by averaging the Company's performance over the 2-year period) and a participant is employed through the end of this two-year period, such participant will be entitled to receive his or her total reserved amount.

At December 31, 2005 , management has made its best estimate of the Company's performance during the performance periods, based on the facts and information currently available and assumptions regarding the investment of the remaining proceeds of the Company's IPO and the proceeds from its secondary offering pursuant to its stated business strategy and returns on future investments. On the basis of the foregoing, management has estimated that the Company would meet the return hurdle in each of these performance periods. Compensation expense, with respect to provisional awards under the 2004 Long-Term Incentive Bonus Plan, has been recognized in the consolidated financial statements of the Company for the year ended December 31, 2005 of $2.2 million which included a catch-up adjustment of $1.7 million in accordance with the provisions of SFAS 123.

Employee Outperformance Plan

In connection with the employment agreement of the Company's chief investment officer, he is eligible to receive incentive compensation equal to 15% of the annual net profits from the Company's real estate securities business in excess of a 12% return on invested capital (the annual bonus participation amount). The Company will have the option of terminating this incentive compensation arrangement at any time after the third anniversary of the date of its IPO by paying the Company's chief investment officer an amount based a multiple of the estimated annual bonus participation amount, at the time it exercises this buyout option. If the Company exercises this buyout option, the fixed amount due for terminating this arrangement will vest ratably and be paid in four installments over a three-year period with 25% paid on termination. If the Company's chief investment officer voluntarily terminates his employment with the Company prior to any exercise of the Company's buyout option, he will be eligible to receive future annual payments based on the future real estate securities annual net profits in excess of the 12% return hurdle on invested capital. The portion of the annual benefit to which the chief investment officer is eligible after voluntary termination increases with each year of employment until the fifth anniversary, at which point the chief investment officer is 100% vested in the full amount of the payment that would be due related to the annual bonus participation amount on the real estate securities business income earned on, business initiated five years earlier, over the return hurdle. Compensation has been earned by the Company's chief investment officer under this plan for the year ended December 31, 2005 of $0.2 million and there was no compensation earned for the period October 29, 2004 through December 31, 2004.

17. Stockholders' Equity

Common Stock

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

In December 2005, the Company closed a secondary public offering of 9.2 million common shares at $9.25 per share, which included 1.2 million shares to cover the underwriters’ over-allotment. Net proceeds from the offering were approximately $78.9 million. The proceeds from the offering were used to pay down short term debt and to fund new investments .

F-40

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

Dividends

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

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

On October 6, 2005, the Company declared a dividend of $0.23 per share of common stock, payable to stockholders of record as of October 14, 2005. The Company made this payment on October 21, 2005.

18. Minority Interest

Minority interest represents the aggregate limited partnership interests or OP Units in the Operating Partnership held by limited partners (the “Unit Holders”). Income allocated to the minority interest is based on the Unit Holders ownership percentage of the Operating Partnership. The ownership percentage is determined by dividing the numbers of OP Units held by the Unit Holders by the total OP Units outstanding. The issuance of additional shares of beneficial interest (the ‘‘Common Shares’’ or ‘‘Share”) or OP Units changes the percentage ownership of both the Unit Holders and the Company. Since a unit is generally redeemable for cash or Shares at the option of the Company, it is deemed to be equivalent to a Share. Therefore, such transactions are treated as capital transactions and result in an allocation between shareholders' equity and minority interest in the accompanying consolidated balance sheet to account for the change in the ownership of the underlying equity in the Operating Partnership.

In conjunction with the formation of the Company, certain persons and entities contributing ownership interests in the Predecessor to the Operating Partnership received OP Units. Upon consummation of the IPO, 19.0% of the carrying value of the net assets of the Operating Partnership was allocated to minority interest. As a result of the exercise of the underwriters' over-allotment option of 1,160,750 shares on November 19, 2004, the minority interests were reduced to 18.2%.

Under their respective contribution agreements, NCIC and affiliates directly and/or indirectly received 4,705,915 OP Units.

Minority interest at December 31, 2005 and 2004 represents 15.3% and 18.2%, respectivly, of all vested Unit Holders.

19. Derivatives and Hedging Activities

In 2005 the Company in an effort to limit the exposure to the variable LIBOR interest rate, the Company entered into various swap agreements to fix the LIBOR rate on a portion of the Company's variable rate debt. The fixed LIBOR rate ranged from 4.18 % to 5.03%. The following table summarizes the notional amounts and fair (carrying) values of the Company's derivative financial instruments as of December 31, 2005 (in thousands):

		Notional Amount			Fair Value			Range of Maturity
Interest rate swaps, treated as hedges		$	53,242		$	726			March 2010 - August 2018

20. Contingency

On August 21, 2003, an action was filed against ALGM in New York State Supreme Court, New York County (the "Complaint"). The Complaint was brought by 729 7th Realty Corp. (the "Tenant"), a subsidiary of the net lessee of the Condominium, to enforce certain rights it claims to have under its net lease with ALGM (the "Net Lease").

F-41

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

In connection with the sale of 729, the Tenant agreed to discontinue the legal action that it had brought against the Company, settling the Company's only material pending legal action, at no cost to the Company.

21. Off Balance Sheet Arrangements

The Company has interests in four CDO issuances, whose CDO notes are primarily collateralized by investment grade real estate securities. The Company generally purchases the preferred equity or the income notes of each CDO, which are the equity securities of the CDO issuances, and, with the exception of CDO I, all of the below investment grade CDO Notes of each CDO issuance. In addition, the Company earns a fee of 0.35% of the outstanding principal balance of the assets backing each of these CDO issuances as an annual collateral management fee. The Company's and the Predecessor's interests in CDO I, CDO II, CDO III and CDO V are each accounted for as a single debt security available for sale pursuant to EITF 99-20.

The following table describes certain terms of the collateral for and the notes issued by CDO I, CDO II, CDO III and CDO V as follows:

		CDO Collateral - December 31, 2005				CDO Notes - December 31, 2005
Issuance	Date Closed	Par Value of CDO Collateral (in thousands)	Weighted Average Interest Rate	Weighted Average Rating	Weighted Average Expected Life (years)	OutstandingCDO Notes ( in thousands) ⁽¹⁾	Weighted Average Interest Rate at 12/31/05 ⁽³⁾	Stated Maturity	CarryingValue 12/31/05 (in thousands) ⁽⁴⁽ⁱ⁾	CarryingValue 12/31/04 ( in thousands) ^( 4 )
CDO I ⁽²⁾	8/21/03	$ 352,041	6.62%	BBB/BBB-	6.01	$ 332,831	6.13%	8/1/2038	$ 9,792	$ 10,411
CDO II	7/1/04	392,841	6.25%	BBB/BBB-	6.65	356,170	5.58%	6/1/2039	18,317	27,281
CDO III	3/10/05	401,790	6.06%	BBB-	6.69	360,973	5.59%	6/1/2040	20,085	--
CDO V	9/22/05	500,969	5.69%	BBB	9.08	461,500	2.89%	9/5/2045	41,860	--
Total		$ 1,647,641				$ 1,511,474			$ 90,054	$ 37,692

(1)

Includes only notes held by third parties.

(2)

The Company has an 83.33% interest in CDO I.

(3)

(4)

The Company's potential loss in CDO I, CDO II, CDO III and CDO V is limited to the carrying value of its investment in CDO I, CDO II, CDO III and CDO V, respectively, at December 31, 2005 and 2004.

22. Quarterly Financial Information (Unaudited)

The tables below reflect the Company's selected quarterly information for the Company and the Predecessor for the years ended December 31, 2005 and 2004.

Consolidated and Combined Statements of Operations Information

(unaudited)

	Three Months Ended
		December 31,		September 30,		June 30,		March 31,
		2005		2005		2005		2005
Total revenue	$	23,233	$	17,232	$	13,345	$	11,287
Income before minority interests		2,095		5,620		1,261		1,413
Net income		22,178		4,616		9,823		1,055
Net income per share-basic/diluted	$	0.96	$	0.22	$	0.46	$	0.05
Weighted-average shares outstanding — basic		23,164,930		21,264,930		21,250,240		21,249,736
diluted		28,708,507		26,790,161		26,766,315		26,760,770

F-42

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

	Three Months Ended
					Predecessor
		December 31, 2004 (1)			September 30, 2004		June 30, 2004			March 31, 2004
Total revenue	$	6,620		$	1,937	$	945		$	908
Income (loss) before minority interests		(3,002	)		350		(183	)		955
Net income (loss)		(2,367	)		350		(183	)		955
Net income per share-basic(2)		($0.12	)		—		—			—
Weighted-average shares outstanding — basic (2)		20,868,865			N/A		N/A			N/A

(1) In order to present quarterly information for the quarter ended December 31, 2004, the Company has combined our predecessor’s results for the period from September 1, 2004 to October 28, 2004 with the results of its operations for the period from October 29, 2004 to December 31, 2004.

(2) Net income per share and the weighted average shares outstanding is for the period of October 29, 2004 (Date of IPO) to December 31, 2004.

23. Segment Reporting

The Company and the Predecessor (prior to the IPO) were engaged in three lines of business (i) real estate debt, (ii) real estate securities and (iii) operating real estate investments. These lines of business make up our reportable segments.

In real estate debt business the Company acquires, originates and structures senior and subordinate debt investments secured primarily by income-producing real estate properties . Revenues generated from this segment is interest income with operating expenses consistng of interest expense. The Company evaluates performance and allocates resources based upon earnings contributions to income from continuing operations.

In the real estate securities business the Company invests in commercial real estate debt securities, including commercial mortgage backed securities, or CMBS, REIT unsecured debt, and credit tenant loans. Revenues generated from this segment is interest income and advisory fees with operating expenses consistng of interest expense. The Company evaluates performance and allocates resources based upon earnings contributions to income from continuing operations.

In the operating real estate segment the Company acquires properties that are primarily net leased to corporate tenants located through out the United States, currently the geographical locations are New York, Ohio, California, Utah, Pennsylvania, and Michigan. Revenues generated from this segment is rental income with operating expenses consisting of real estate taxes, insurance, repairs and maintenance, utilities and ground rent. The Company evaluates performance and allocates resources based upon earnings contributions to income from continuing operations.

These operating segments were determined based upon the investment activity of the Company. The reportable segments are managed separately due to the differing nature of the business operations.

General and administrative expenses were not allocated by management to various segments and therefore are presented as unallocated.

The following tables set forth certain segment information for the Company and Predecessor on a combined basis, as of and for the year ended December 31, 2005 and 2004 (in thousands):

F-43

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

		Operating Real Estate		Real Estate Debt		Real Estate Securities		Unallocated ⁽¹⁾			Consolidated Total
Total revenues for the years ended
December 31, 2005	$	11,451	$	33,304	$	11,737	$	8,605		$	65,097
December 31, 2004		526		1,677		4,687		3,521			10,411

Income (loss) from continuing operations for the year ended
December 31, 2005		274		18,254		12,411		(20,550	)		10,389
December 31, 2004		1,179		2,217		4,044		(9,319	)		(1,879	)

Net income(loss) for the year ended
December 31, 2005		29,673		18,254		12,411		(22,666	)		37,672
December 31, 2004		1,182		2,217		4,044		(8,688	)		(1,245	)

Total assets as of
December 31, 2005	$	237,312	$	775,324	$	82,615	$	58,188		$	1,153,439
December 31, 2004	$	57,262	$	78,358		57,001	$	885,457		$	1,078,078

(1)	Unallocated includes interest income and interest expense related to our temporary investments and also includes corporate level and general & administrative expenses

24. Subsequent Events (Unaudited)

Real estate debt

The Company has made investments in unsecuritized loans subsequent to December 31, 2005 as follows, (dollars in thousands):

Subsequent to December 31, 2005		Carrying Value (in thousands)	Allocation by Investment Type		Average Spread Over LIBOR		Average Fixed Rate		Number of Investments
Whole loans, floating rate	$	92,335	54.06	%	3.33	%	—		5
Whole loans, fixed rate		—	—		—		—		—
Mezzanine loans, floating rate		66,580	38.98	%	9.34	%	—		2
Mezzanine loan, fixed rate		11,880	6.96	%	—		8.00	%	1
Total / Average	$	170,795	100.0	%	5.85	%	8.00	%	8

NSF Venture

On February 1, 2006, the Company sold its interests in the NSF Venture to the institutional pension fund which had an equity interest in the NSF Venture and terminated the associated advisory agreements for total consideration of $2.9 million. The Company will recognize incentive income of approximately $1.2 million which was deferred at December 31, 2005. Subsequent to January 31, 2006, we will no longer earn management or incentive fees from the NSF venture or from loans owned directly by the NSF venture investor.

Timarron Acquisition

On October 20, 2005, the Company entered into a definitive purchase agreement with Allied Capital to acquire Timarron Capital Corporation. Timarron, based in Dallas, Texas, was organized by former senior executives of Principal Financial and other leading financial institutions to develop a nationwide commercial mortgage loan origination platform. The Company closed on the acquisition on January 19, 2006. The purchase price was approximately $2.7 million. Timarron was renamed NRF Capital LP. NRF Capital LP will originate commercial mortgage loans for our commercial real estate debt portfolio.

Operating Real Estate

Acquisitions

On February 6, 2006, through a 50% owned joint venture interest with an institutional investor, the Company acquired a portfolio of three adjacent class A office/flex buildings located in Colorado Springs, CO, with 406,204 square feet of rentable space for $54.25 million. The properties are 100% leased to Quantum Corp. under leases expiring in 2021 (59%), 2013 (11%), 2011 (13%) and 2009 (17%).

F-44

NorthStar Realty Finance Corp. and Subsidiaries and Northstar Realty Finance Corp. Predecessor

Notes to Consolidated and Combined Financial Statements (Continued)

Dispositions

On January 31, 2006, the Company sold its leasehold interests in 27 West 34th Street and 1372 Broadway, both located in New York City, for $2.3 million.

Dividends

On January 26, 2006, the Company declared a dividend of $0.27 per share of common stock to stockholders of record as of February 3, 2006. The dividend was paid on February 10, 2006.

Wachovia Credit Facility Amendment

On February 28, 2006, the Company amended the Wachovia Credit to increase the Company’s maximum borrowings under the facility to $400 million from $350 million.

Issuance of Preferred Securities

On March 10, 2006, a subsidiary of the Company, NorthStar Realty Finance Trust IV, completed a private placement of $50 million of trust preferred securities. The sole assets of the trust consist of a like amount of junior subordinated notes due June 30, 2036 issued by the Operating Partnership and guaranteed by the Company. The proceeds of the issuance of the notes were used to repay short term debt and to fund new investments. The trust preferred securities and the notes both have a 30-year term, ending June 30, 2036, and bear interest at a fixed rate of 7.95% for the first ten years, ending June 2016, whereupon the rate floats at three-month LIBOR plus 2.80%. The securities are redeemable at par beginning on June 30, 2011.

Recent Accounting Developments

In 2004, the Company purchased securities and simultaneously financed the acquisition of the securities through repurchase agreements, collateralized with the same securities purchased, with the selling broker. The Company currently records on the consolidated balance sheet, the acquisition of these securities as trading securities which are carried at fair value and the related repurchase agreements as liabilities at contract value which approximates their fair market value due to the extremely short term nature and the floating rates. Interest income earned on the securities and interest expense incurred on the repurchase obligations are reported on a gross basis on the statement of operations.

Presently, the accounting for these transactions is being discussed among the standard setters which may be resolved through a FASB Staff Position (FSP) or other guidance addressing an alternative view that under SFAS 140 such transactions, as described above, may not qualify as purchases by the Company because the securities purchased may not be deemed legally isolated from the counterparty after they are transferred under the repurchase agreement. Under this view, the Company would present the net investment in these transactions as derivatives on the balance sheet, with the corresponding change in fair value being recorded in the statement of operations. As of December 31, 2004, the Company has entered into transactions aggregating approximately $ 351.0 million in securities, and $333.4 million in repurchase agreements described above. The portfolio was fully liquidated in 2005. This alternate view would not have a material impact on stockholders, equity or net income of the Company for the years ended December 31, 2005 or December 31, 2004.

F-45

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS

AS OF DECEMBER 31, 2005

Description		Balance at Beginning of the period (in thousands)		Charged to Costs and Expenses (in thousands)			Additions/ Charges to Other Accounts		Deductions (2) (in thousands)		Balance at End of Period (in thousands)
For the Period October 29, 2004 through December 31, 2004
Provision for loan losses	$	—	$	—		$	—	$	—	$	—
Allowance for doubtful accounts — SL ⁽¹⁾		4,050		87			—		—		4,137
Allowance for doubtful accounts ⁽¹⁾		5		(4	)		—		—		1
Total	$	4,055	$	83		$	—	$	—	$	4,138

Year Ended December 31, 2005
Provision for loan losses		—
Allowance for doubtful accounts — SL ⁽¹⁾		4,137		126			—		4,263		—
Allowance for doubtful accounts ⁽¹⁾		1		153			—		150		4
Total	$	4,138	$	279		$	—	$	4,413	$	4

Explanatory Notes:

(1) See Note 2 to the Company's Consolidated Financial Statements.

(2) The deductions are a result of the sale of two operating real estate properties and the two leaseholds which are classified as discontinued operations. See Note 3.

F-46

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

SCHEDULE III — REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2005 (in thousands)

Column A		Column B		Column C Initial Cost				Column D Cost Capitalized Subsequent To Acquisition
Description		Encumbrances		Land		Buildings & Improvements		Land		Buildings & Improvements
987 Eighth Avenue, NY		—		—		2,645		—		—
36 West 34 Street, NY		—		—		4,410		—		7
991 Third Avenue ⁽¹⁾ NY		—		—		1,703		—		—
701 Seventh Avenue ⁽¹⁾ NY		—		—		3,246		—		—
Chatsworth properties		56,777		5,837		55,030		—		—
Salt Lake City		16,918		672		19,740		—		21
EDS Portfolio		49,120		11,940		37,477		—		—
Executive Center		51,480		7,000		55,980		—		—
	$	174,295	$	25,449	$	180,231	$	—	$	28

Column E Gross Amount at Which Carried at Close of Period							Column F	Column G	Column H	Column I
	Land		Buildings & Improvements		Total		Accumulated Depreciation	Date of Construction	Date Acquired	Life on Which Depreciation is Computed
	—		2,645		2,645		580		Mar-99	Various
	—		4,417		4,417		759		Mar-99	Various
	—		1,703		1,703		1,703		Mar-99	Various
	—		3,246		3,246		1,579		Mar-99	Various
	5,837		55,030		60,867		1,612		Jan-05	Various
	672		19,761		20,433		297		Aug-05	Various
	11,940		37,477		49,417		393		Sept-05	Various
	7,000		55,980		62,980		77		Dec-05	Various
$	25,499	$	180,259	$	205,708	$	7,000

⁽¹⁾	Represents a leasehold interest amortized over the life of the underlying lease.

The changes in real estate for the year ended December 31, 2005, are as follows (in thousands):

		2005			2004
Balance at beginning of period	$	54,198		$	54,191 (1	)
Property acquisitions		193,669
Improvements		28			7
Retirements/disposals		(37,965	)
Assets held for sale		(4,222	)
Balance at end of period	$	205,708		$	54,198

(1) These assets were acquired in connection with our IPO. See Note 1.

The changes in accumulated depreciation, exclusive of amounts relating to equipment, and furniture and fixtures, for the year ended December 31, 2005 are as follows:

		2005			2004
Balance at beginning of period	$	10,654		$	10,292
Depreciation for the period		3,786			362
Retirements/disposals		(4,707	)
Assets held for sale		(2,733	)
Balance at end of period	$	7,000		$	10,654

F-47

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

SCHEDULE IV — LOANS AND OTHER LENDING INVESTMENTS

DECEMBER 31, 2005

Description

Location

Interest Rate

Final Maturity Date

Periodic Payment Terms (1)

Prior Liens

Carrying Amount of Loans

Principal Amount of Loans

Whole Loans:

Industrial

New Jersey

5.10%

7/1/2015

P& I

$ -

$ 3,700

$ 3,775

Industrial

California

5.78%

6/1/2015

P& I

3,569

3,576

Office

California

LIBOR + 2.85%

9/11/2008

I/O

16,089

16,300

Office

California

LIBOR + 2.85%

9/9/2008

I/O

27,653

27,950

Office

California

LIBOR + 5.00%

9/9/2008

I/O

2,500

Office

Houston

LIBOR + 3.15%

12/1/2008

I/O

24,000

Office

New Jersey

LIBOR + 3.00%

1/1/2007

I/O

8,000

Office

Houston

LIBOR + 3.50%

1/1/2009

I/O

32,750

Warehouse

New Jersey

5.07%

7/8/2015

P& I

5,813

5,971

Hotel

California

LIBOR + 2.15%

6/8/2007

I/O

24,506

24,500

Hotel

California

LIBOR + 3.12%

8/9/2007

I/O

17,428

17,420

Retail

Alabama

LIBOR + 3.25%

5/1/2008

I/O

12,849

Office

North Carolina

LIBOR + 3.75%

12/1/2008

I/O

5,000

Office

New Jersey

LIBOR + 3.50%

7/1/2007

I/O

8,000

$ -

$ 191,857

$ 192,591

Junior Participation:

Multi-family

Various Locations

LIBOR + 5.25%

8/9/2007

I/O

$ 515,000

$ 35,000

Office

Chicago

LIBOR + 1.84%

5/15/2006

I/O

550,000

24,456

25,000

Retail / Hotel

Various Locations

LIBOR + 1.70%

6/6/2007

I/O

80,000

7,013

7,000

Land

Florida

LIBOR + 9.65%

6/1/2008

I/O

112,300

15,026

15,000

Hotel

California

LIBOR + 9.75%

10/1/2007

I/O

17,500

4,956

5,000

Office

New York

LIBOR + 3.75%

8/9/2006

I/O

44,000

23,911

24,000

Multi-family

Florida

LIBOR + 5.50%

7/31/2006

I/O

25,000

21,214

21,200

Hotel

New York

LIBOR + 5.55%

12/9/2006

I/O

140,000

30,020

30,000

Hotel

Boston

LIBOR + 5.15%

4/1/2007

I/O

19,000

13,014

13,000

Storage

Various Locations

LIBOR + 4.68%

11/1/2007

I/O

15,000

7,834

7,820

Hotel

Various Locations

LIBOR + 6.90%

9/1/2006

I/O

8,000

4,482

4,474

Retail

New York

LIBOR + 2.40%

9/9/2006

I/O

49,000

10,012

10,000

Office

New York

LIBOR + 2.50%

1/8/2007

I/O

18,750

4,260

4,250

Office

Georgia

LIBOR + 7.00%

7/9/2007

I/O

18,000

10,013

10,000

Retail

Chicago

LIBOR + 7.58%

12/9/2006

I/O

24,000

11,053

11,000

F-48

NORTHSTAR REALTY FINANCE CORP. AND SUBSIDIARIES

SCHEDULE IV — LOANS AND OTHER LENDING INVESTMENTS

DECEMBER 31, 2005

(Continued)

Description

Location

Interest Rate

Final Maturity Date

Periodic Payment

Terms (1)

Prior Liens

Carrying Amount of Loans

Principal Amount of Loans

Office

Indiana

LIBOR + 3.25%

7/9/2007

I/O

40,200

15,012

15,000

$1,675,750

$237,276

$237,744

Mezzanine:

Office

Chicago

LIBOR + 6.25%

11/1/2007

P & I

$200,000

$31,093

$31,075

Hotel

Various Locations

LIBOR + 3.25%

7/13/2008

I/O

4,050,000

25,018

25,000

Hotel

Various Locations

LIBOR + 4.50%

9/11/2007

I/O

2,305,000

31,451

31,416

Retail

Alabama

15.00%

5/1/2008

I/O

12,849

151

Various

Texas

LIBOR + 6.00%

11/9/2007

P & I

190,000

14,819

14,921

Hotel

Various Locations

LIBOR + 4.15%

10/12/2007

I/O

864,000

34,003

34,000

Hotel

Various Locations

LIBOR + 4.75%

7/9/2006

I/O

108,000

22,016

22,000

Hotel

Various Locations

LIBOR + 3.50%

2/9/2007

I/O

100,000

14,287

14,278

Office

New York

LIBOR + 4.51%

10/5/2006

I/O

80,000

19,962

20,000

Office

California

LIBOR + 5.35%

1/9/2007

I/O

112,000

17,956

18,000

Office

New York

LIBOR + 5.00%

1/8/2007

I/O

23,000

5,010

5,000

Office

Indiana

LIBOR + 6.36%

7/9/2007

I/O

55,200

8,006

8,000

$8,100,049

$223,772

$223,841

Preferred:

Office

Georgia

11.00%

11/1/2010

I/O

$ -

$5,123

$5,000

Office

Virginia

9.00%

1/1/2010

I/O

23,078

23,300

$ -

$28,201

$28,300

Subtotal

9,775,799

$ 681,106

$682,476

Provision for losses

Total

$9,775,799

$ 681,106

$682,476

F-48

	2005			2004
Balance at beginning of period	$	70,569		$	—
Additions during the year :
New loans and additional advances on existing loans		696,589			70,841
Acquisition cost and (fees)		(39	)		(284	)
Premiums/ (Discounts)		(2,118	)		—
Amortization of fees and discounts		1,241			12
Deductions:
Collection of principal		84,953			—
Amortization of acquisition cost and premiums		183			—
Balance at end of period	$	681,106		$	70,569

⁽¹⁾	Interest only or I/O; Principal and Interest or P&I.

F-49

ALGM I Owners LLC and Subsidiaries

Consolidated Financial Statements

Contents

	Page
Report of Independent Registered Public Accounting Firm	F-51
Consolidated Balance Sheet as of December 31, 2004	F-52
Consolidated Statements of Income for the years ended December 31, 2004 and 2003	F-53
Consolidated Statements of Members' Equity for the years ended December 31, 2004 and 2003	F-54
Consolidated Statements of Cash Flows for the years ended December 31, 2004 and 2003	F-55
Notes to Consolidated Financial Statements	F-56
Schedule II — Valuation and Qualifying Accounts	F-65
Schedule III — Real Estate and Accumulated Depreciation as of December 31, 2004	F-66

F-50

Report of Independent Registered Public Accounting Firm

To the Members of

ALGM I OWNERS LLC and Subsidiaries

We have audited the accompanying consolidated balance sheet of ALGM I OWNERS LLC and Subsidiaries (“the Company”) as of December 31, 2004, and the related consolidated statements of income, members’ equity, and cash flows for each of the two years in the period ended December 31, 2004. Our audits also included the financial statement Schedules II and III. These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ALGM I OWNERS LLC and Subsidiaries at December 31, 2004, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

/s/ ERNST & YOUNG LLP

New York, New York

March 30, 2005,

except for Note 10, as to which the date is

March 6, 2006

F-51

ALGM I Owners LLC and Subsidiaries

Consolidated Balance Sheet

	December 31,
	2004
Assets
Real estate, at cost—net of accumulated depreciation	$	43,543,933
Cash and cash equivalents		2,342,819
Tenant receivables, net of allowance for doubtful accounts of $1,013		482,378
Prepaid expenses		469,407
Deferred leasing costs, net		1,182,084
Restricted deposits		2,239,133
Tenant security deposits		473,621
Deferred financing costs, net		846,660
Other assets		115,180
Unbilled rents receivable		5,566,850
Total assets	$	57,262,065
Liabilities and members' equity
Liabilities:
Mortgage payable	$	40,557,280
Obligations under capital leases		3,303,424
Accrued interest payable—mortgage payable		206,490
Accounts payable and accrued expenses including $28,378 to affiliates		1,006,703
Rent payable		29,158
Tenant security deposits		441,784
Total liabilities		45,544,839
Commitments and contingencies
Members' equity		11,717,226
Total liabilities and members' equity	$	57,262,065

See accompanying notes to consolidated financial statements.

F-52

ALGM I Owners LLC and Subsidiaries

Consolidated Statements of Income

	Year ended December 31,
	2004		2003
Revenues:
Minimum and percentage rent	$	2,580,591	$	3,021,073
Tenant reimbursements		130,464		204,709
Interest income and other		18,016		9,261
Total revenues		2,729,071		3,235,043
Expenses:
Rent—master leases		125,997		276,651
Real estate taxes		295,516		413,505
Operating expenses		177,737		165,250
Marketing, general and administrative including $16,702 (2004), and $30,587 (2003) to affiliates		27,346		111,344
Interest expense		326,706		320,664
Asset management fee—affiliate		188,985		140,271
Depreciation and amortization		775,443		1,030,247
Total expenses		1,917,730		2,457,932
Income before discontinued operations		811,341		777,111
Income from discontinued operations		404,099		900,104
Net Income	$	1,215,440	$	1,677,215

See accompanying notes to consolidated financial statements.

F-53

ALGM I Owners LLC and Subsidiaries

Consolidated Statements of Members' Equity

Years ended December 31, 2004 and 2003

	Total Members' Equity			Managing Member			Other Members
Capital balances, December 31, 2002	$	10,682,467		$	267,063		$	10,415,404
Distributions		(2,531,410	)		(63,285	)		(2,468,125	)
Net income		1,677,215			41,930			1,635,285
Capital balances, December 31, 2003		9,828,272			245,708			9,582,564
Distributions		(856,411	)		(606,411	)		(250,000	)
Net Income		1,215,440			166,067			1,049,373
Purchase of interest and push down of basis		1,529,925			11,911,862			(10,381,937	)
Capital balances, December 31, 2004	$	11,717,226		$	11,717,226		$	—

See accompanying notes to consolidated financial statements.

F-54

ALGM I Owners LLC and Subsidiaries

Consolidated Statements of Cash Flows

	Year ended December 31,
	2004			2003
Cash flows from operating activities:
Net income	$	1,215,440		$	1,677,215
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,011,114			2,260,073
Amortization of financing costs		822,038			812,553
Increase in obligation under capital lease		64,606			58,482
(Increase) decrease in operating assets:
Tenant receivables		(19,337	)		(170,509	)
Unbilled receivables		(562,638	)		(654,463	)
Prepaid expenses and other assets		(35,504	)		(345,739	)
Payments for leasing costs		(7,416	)		(333,664	)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses		17,446			156,919
Rent payable		(19,441	)		(19,438	)
Accrued interest payable		4,530			201,960
Tenant security deposits—net		3,818			(28,405	)
Net cash provided by operating activities		3,494,656			3,614,984

Cash flows from investing activities:
Purchases of building and leasehold improvements		(321,230	)		(34,790	)
Withdrawals from (deposits to) restricted deposits—net		(337,901	)		(132,834	)
Net cash used in investing activities		(659,131	)		(167,624	)

Cash flows from financing activities:
Payment of financing costs		(9,845	)		(151,570	)
Principal repayments of mortgage		(1,323,854	)		(1,118,866	)
Distributions to members		(856,411	)		(2,531,410	)
Net cash used in financing activities		(2,190,110	)		(3,801,846	)
Net increase (decrease) in cash and cash equivalents		645,415			(354,486	)
Cash and cash equivalents—beginning of period		1,697,404			2,051,890
Cash and cash equivalents—end of period	$	2,342,819		$	1,697,404

Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	2,350,432		$	2,565,700

See accompanying notes to consolidated financial statements.

F-55

ALGM I Owners LLC and Subsidiaries

Notes to Consolidated Financial Statements

1. Organization and Nature of Business

ALGM I Owners LLC and its wholly-owned limited liability companies were organized under the laws of the State of Delaware (collectively, the "Company" or the "Companies"). On June 30, 1998, the Company acquired through a series of transactions a $151,505,000 loan (the "Acquired Loan") for $56,500,000 from a commercial bank which was made to the Riese Organization Inc., National Restaurants Management Inc. and their various subsidiaries and affiliates (collectively referred to as "NRMI").

The Acquired Loan was secured by, among other things, (i) a first mortgage on two fee interests in real property located at 729 Seventh Avenue ("729" or the "Condominium") and 1552 Broadway ("1552"), New York, New York. 729 is a 19,618 square foot retail condominium and 1552 is a 12,091 square foot free standing building, both located in New York City's Times Square area and (ii) twenty-four retail leasehold interests. Thirteen of these leaseholds were secured by recorded leasehold mortgages with the remainder secured by a recorded collateral assignment of rents.

The Company commenced foreclosure actions against NRMI in order to gain control of the collateral securing the Acquired Loan, and on February 28, 1999, a settlement agreement was reached whereby the Company received, among other things, deeds in lieu of foreclosure for 729 and 1552 and an assignment of eleven of the twenty-four leasehold interests.

The Company commenced operations on June 4, 1998 and is to continue until December 31, 2028, unless sooner terminated pursuant to the Operating Agreement or by law.

The original members of the Company were NorthStar Partnership, L.P. (‘‘NorthStar’’) and ALGM Equity LLC (‘‘Equity’’), as managing member. On October 29, 2004 an affiliate of NorthStar, NorthStar Realty Finance Corp. (‘‘NRFC’’), acquired Equity’s interest for $1.6 million. Contemporaneously, NorthStar transferred its member interest to NRFC and, as a result of these transactions, NRFC became the sole member of the Company. The $1,333,615 cost in excess of Equity’s basis plus $196,310 of historical capitalized costs maintained on the books of NorthStar in excess of their member’s equity account have been pushed down to the Company and have been allocated to land, buildings and leaseholds based on their relative fair values.

Profits are allocated to the members in accordance with their membership interests until the members receive distributions in an amount equal to their total capital contributions and a cumulative return of 10% compounded quarterly on each member's capital contribution ("Preferred Return"). After the members have received distributions equal to their respective capital contributions and Preferred Return, available cash and profits shall be distributed/allocated 10% to Managing Member and 90% to all members, including Managing Member, in accordance with their membership interests. Losses are allocated to the members until the capital accounts of all members have reached a zero balance and thereafter in accordance with their membership interests.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The financial statements include the accounts of ALGM I Owners LLC and all of its wholly-owned single member limited liability companies. Intercompany balances and transactions have been eliminated in consolidation.

Revenue Recognition

Rental revenue is recognized on a straight-line basis over the noncancelable term of the respective leases. The excess of rents recognized over amounts contractually due pursuant to the underlying leases are included in unbilled rents receivable in the accompanying consolidated balance sheet.

F-56

ALGM I Owners LLC and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

Tenant reimbursement income is recognized in the period in which the related expense is incurred. Rental revenue which is based upon a percentage of the sales recorded by the Company's tenants is recognized in the period such sales were earned by the respective tenants.

The Company provides an allowance for doubtful accounts for estimated losses resulting from the inability of its tenants to make required rent and other payments as due. Additionally, the Company establishes, on a current basis, an allowance for future tenant credit losses on unbilled rents receivable based upon an evaluation of the collectibility of such amounts.

Real Estate

Real estate is carried at historical cost less accumulated depreciation and any write-downs for impairment.

Buildings are being depreciated by the straight-line method over 39 years. Leasehold interests and leasehold improvements are being depreciated by the straight-line method over the term of the respective master leases which range from approximately 1 to 25 years.

The Company reviews long-lived assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Upon determination that impairment exists, the related asset is written down to its estimated fair value. No impairment reserves have been recorded in the accompanying financial statements.

Property Under Capital Lease

The Company is the lessee of two retail locations under capital leases expiring in 2029 and 2072, respectively. The assets and liabilities under capital leases are recorded at the present value of the future minimum lease payments. The assets are being depreciated by the straight-line method over the shorter of their related lease terms or their estimated useful lives of 40 years. Depreciation of assets under capital leases is included in depreciation and amortization and totaled $85,420 in 2004 and 2003.

Leasing Costs

Leasing costs are being amortized by the straight-line method over the terms of the respective leases. Amortization of leasing costs was $152,575 and $192,132, of which a portion has been reclassified from depreciation and amortization to discontinued operations, for the years ended December 31, 2004 and 2003, respectively. Leasing costs are shown net of accumulated amortization of $620,146 on the consolidated balance sheet at December 31, 2004.

Financing Costs

Financing costs related to the Greenwich Capital Loan, as defined in Note 4, are being amortized over the life of the loan using the effective interest rate method. Amortization of financing costs was $822,038 and $812,554 for the years ended December 31, 2004 and 2003, respectively. See Note 10. Financing costs are shown on the consolidated balance sheet net of accumulated amortization of $1,646,649 at December 31, 2004.

Derivatives

The Company is party to certain interest rate cap agreements. These contracts are entered into as part of the Company's management of interest rate exposure and effectively limit the amount of interest rate risk on a portion of the Company's outstanding indebtedness. The interest rate cap agreements are included in deferred financing costs on the accompanying balance sheet at their estimated fair value. Changes in fair value are reflected as a component of interest expense each period.

Rent Expense

Rent expense is recorded on a straight-line basis over the noncancelable term of the respective leases. Rent payable represents the excess of rent expense incurred on a straight-line basis over rent expense as it becomes payable according to the terms of the lease.

F-57

ALGM I Owners LLC and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

Cash Equivalents

The Company considers all highly liquid debt instruments purchased with maturities of three months or less and money market funds to be cash equivalents.

Restricted Deposits

Restricted deposits consist of escrows for taxes, insurance, leasing costs, capital expenditures and payments required under certain leases.

Income Taxes

The Companies were organized as limited liability companies under the laws of the State of Delaware. Although limited liability companies are unincorporated associations, the entity is classified as a partnership for federal income tax purposes. Accordingly, the Companies are not subject to federal and state income taxes and make no provision for income taxes in their financial statements. The Companies' taxable income or loss is reportable by their members.

Deposit Insurance

Cash, including restricted and tenant security deposits, exceeded the Federal Deposit Insurance Corporation deposit insurance limit of $100,000 per financial institution by approximately $4,856,000, at December 31, 2004.

Fair Value of Financial Instruments

Due to the variable rate nature of the mortgages payable, management believes that the carrying values of the mortgages approximate the fair values as of December 31, 2004. Due to the short-term nature of all other financial instruments, management believes that carrying values of those financial instruments approximate fair values.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

The accounting policies most effected by judgments, estimates and assumptions are as follows.

Management is required to make subjective estimates as to whether there are impairments in the value of the Company's real estate assets. Such assessments are based upon multiple factors including, local market conditions, current cost of capital and tenant quality, which are inherently uncertain.

Management is also required to make subjective assessments about the collectibility of the deferred rent receivable that in many cases will not be billed to tenants for many years from the balance sheet date. Management's determination is based upon an assessment of credit worthiness of the private company tenants for which financial information is not readily available and as such is not subject to precise quantification.

Reclassifications

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

3. Real Estate

On February 28, 1999, a settlement agreement was reached whereby the Company received deeds in lieu of foreclosure for 729 and 1552, and an assignment of leasehold interests in various retail and office properties located in New York City (the "Properties"). Two of the above mentioned leases were recorded as capital leases. The Company leases and subleases space in the Properties to various retail and commercial third party tenants.

F-58

ALGM I Owners LLC and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

In 2003, two of the leasehold interests expired, leaving six leasehold interests in the portfolio at December 31, 2004.

Real estate at December 31, 2004 is summarized as follows:

	Total		Fee Owned		Leasehold Interests		Capital Leases
Land	$	7,597,099	$	7,597,099	$	—	$	—
Buildings		33,395,796		30,367,662		—		3,028,134
Leasehold interests		12,517,646		—		12,517,646		—
Improvements		686,896		—		142,851		544,045
		54,197,437		37,964,761		12,660,497		3,572,179
Less accumulated depreciation		10,653,504		4,400,631		5,132,883		1,119,990
Net real estate	$	43,543,933	$	33,564,130	$	7,527,614	$	2,452,189

Depreciation expense totaled $1,858,539 and $2,067,941 for the years ended December 31, 2004 and 2003, respectively before consideration of the subsequent sales. See Note 10.

4. Mortgage Payable

Greenwich Capital Loan Payable

On December 4, 2002, the Company and its subsidiaries, as Borrowers, and NorthStar Partnership, L.P. ("NSLP") (an affiliate of the Company), as guarantor, entered into a loan agreement (the ‘‘Greenwich Capital Loan") with Greenwich Capital Financial Products, Inc. (‘‘Greenwich Capital Lender") for a mortgage in the principal amount of $43,000,000. The loan is secured by a first mortgage lien and security interests on the Company's properties including the fee owned properties, six leasehold interests and all other property collateral therein, including assignments of leases and rents. Pursuant to the contribution agreement between NorthStar and the Operating Partnership, the Operating Partnership provided full indemnification of any liability to NorthStar under this guaranty.

The Greenwich Capital Loan was scheduled to mature on January 1, 2005 and bears interest at the greater of 2%, or thirty-day LIBOR, adjusted monthly, plus 3.60%, which aggregate rate was 5.91% and 5.60% at December 31, 2004 and 2003, respectively. The Greenwich Capital Loan requires monthly payments of interest in arrears and principal sufficient to amortize the loan over a period of 200 months using an assumed interest rate of 8.50% per annum, as well as monthly escrow deposits for real estate taxes, insurance, capital expenses and tenant rollover reserves, as defined. The Greenwich Capital Loan has three one-year extension periods that may be exercised by the Company, provided that the Company meets certain conditions, as defined, and, with respect to the second and third extension periods only, pays a fee equal to 0.75% of the then current loan amount payable. The Company exercised the first extension option for one year to January 1, 2006. The Loan is subject to an exit fee of 1%, as defined, which is due and payable upon any repayment or prepayment of principal. However, payment of exit fees with respect to the required amortization payments will be deferred and payable at the maturity date, as extended. Should the maturity date be extended beyond January 1, 2006, the exit fee will be waived. Based upon management's intent, the exit fee has been accrued and included in deferred financing costs and is being amortized over the life of the loan using the effective interest method. The Company was not permitted to make any prepayments on the loan prior to June 30, 2004 (the ‘‘Lockout Date"). Thereafter, prepayment of the loan is permitted subject to a prepayment premium, as defined. Notwithstanding the preceding, there will be no prepayment premium if the loan is repaid after July 1, 2005.

In accordance with the terms of the loan agreement, the Company purchased an interest rate cap on a notional amount of $43,000,000, which limited LIBOR to a maximum of 5%. The cost of this interest rate cap was $85,000 and expired on January 1, 2005. In connection with the extension of the loan agreement to January 1, 2006, the Company purchased a replacement interest rate cap on a notional amount of $43,000,000, which limited LIBOR to a maximum of 5%. The interest rate cap is included in deferred financing costs at its estimated fair market value of $0 at December 31, 2004. In the event the loan is extended, the Company has agreed to purchase an interest rate cap on a notional amount equal to the then outstanding loan amount which limits LIBOR to a maximum of 5% during the extension periods referred to above.

F-59

ALGM I Owners LLC and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

The loan agreement includes various financial covenants and restrictions, the most restrictive of which is a debt service coverage ratio (as defined). The loan agreement requires the Company to establish and maintain certain escrowed reserve accounts for, among other things, payment of real estate taxes, capital expenditures and tenant rollover costs. Upon the occurrence of certain events at two of the Company's properties (a ‘‘Trigger Event") affecting either the Company's leases or the sub-leases entered into by the Company's tenant, the Company is required to deposit agreed upon amounts into a leasing reserve account. Such funds will be made available to the Company to pay for costs incurred to release the space. In the event the Company's tenant pays such leasing costs, the funds will be released to the Company. Required deposits to this reserve, under certain circumstances, may be accumulated over a six-month period. In 2003, a Trigger Event occurred when one of the NRMI sub-tenants vacated. On November 1, 2003 the Company made the first of six required monthly payments of $100,000 into this reserve based upon the occurrence of this Trigger Event. At December 31, 2004 the total of all escrow accounts amounted to $2,239,133 and is included in restricted deposits.

The Company and its subsidiaries have agreed to comply with environmental laws and have indemnified the Greenwich Capital Lender against all liabilities and expenses related thereto. The principal balance of the Greenwich Capital Loan was $40,557,280 at December 31, 2004. Interest expense incurred on the Greenwich Capital Loan was $2,354,962 and $2,409,900 for the years ended December 31, 2004 and 2003, respectively.

Scheduled principal payment requirements on the Greenwich Capital Loan as of December 31, 2004 are as follows:

Years ending December 31:
2005	$	1,441,000
2006		39,116,280
	$	40,557,280

The Company and the Greenwich Capital Lender have allocated the Greenwich Capital Loan to the Properties as agreed to and the allocated amounts will be the basis for the calculation of the mandatory prepayment amount (as defined) required upon sale of any one or more of the Properties.

5. Obligations Under Capital Leases

The Company is the lessee of two locations under capital leases. The following is a schedule of minimum future rentals under capital leases as of December 31, 2004:

Years ending December 31:
2005	$	262,184
2006		262,184
2007		262,184
2008		342,184
2009		382,184
Thereafter		15,268,347
Total minimum lease payments		16,779,267
Less amounts representing interest		13,475,843
Present value of future minimum lease payments	$	3,303,424

F-60

ALGM I Owners LLC and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

Interest on the above capital leases was imputed at the Company's incremental borrowing rate of 10% at the acquisition date of each lease. Interest expense incurred on the above capital leases totaled $326,706 and $320,666 for the years ended December 31, 2004 and 2003, respectively.

Under one of the capital leases, the Company also pays rent equal to 15% of the minimum rental income received from the Company's sub-tenant. The following is a schedule of minimum future rentals due to the lessor based on the Company's existing sub-lease as of December 31, 2004.

Years ending December 31:
2005	$	90,000
2006		90,000
2007		97,750
2008		105,000
2009		105,000
Thereafter		862,750
Total minimum lease payments	$	1,350,500

6. Related Party Transactions

The Company had an asset management agreement with Emmes Asset Management Company LLC ("EAMC"), an affiliate of NorthStar and the Company. The asset management agreement, which was terminated on December 28, 2004, provided for an annual fee equal to 1.5% of the sum of the aggregate capital contributed by members of the Company and principal indebtedness from borrowed funds, less any dispositions of property. A fee of $384,454 was paid in connection with the termination of this agreement. A replacement agreement was entered into on December 28, 2004, which provides for the Company to pay an annual fee equal to 3.5% of gross collections as defined. Notwithstanding this calculation, the fee shall not be less than $300,000 or greater than $350,000 for any given year, provided, however, in the event the assets under management are decreased in number or in size the fee shall not have a minimum. The asset management fee is payable quarterly in advance. In addition, the Company reimburses EAMC for expenses, as defined, incurred in the management of the properties. In the event that available cash is insufficient to pay the asset management fee in full, the Company has agreed that from time to time it will cause the members to contribute additional capital.

The Company has engaged Emmes Realty Services, LLC ("ERS"), an affiliate of NorthStar and the Company, as leasing broker for the properties. Under the terms of the brokerage agreement, the Company pays a commission to ERS for leases executed by the Company where ERS has acted as broker. No leasing commissions were paid or payable to ERS for the year ended December 31, 2004.

Total fees, and expenses incurred by the Company under the asset management agreement amounted to $1,252,512 and $833,501 for the years ended December 31, 2004 and 2003, respectively. Amounts payable, included in the December 31, 2004 balance sheet, to EAMC and ERS total $28,378.

7. Commitments—Rent Under Operating Master Leases

At December 31, 2004, future minimum rental payments to be made by the Company under operating leases for the leasehold interests are as follows:

Years ending December 31:
2005	$	442,000
2006		245,000
2007		85,000
2008		85,000
2009		85,000
	$	942,000

F-61

ALGM I Owners LLC and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

The Company's leasehold interests are generally pursuant to net leases whereby the Company is responsible for its allocable share of real estate taxes, for all operating expenses and for the general maintenance of the premises subject to the lease. Rents under such leases aggregated $422,299 and $572,954 for the years ended December 31, 2004 and 2003, respectively. The Properties under the operating leases are in turn subleased to unrelated parties.

8. Rental Income Under Operating Leases

The Company's credit risk is primarily associated with its tenant leases. Revenues from NRMI, net of reserves, comprised approximately 78% of future minimum rental income at December 31, 2004. Unbilled rents receivable from NRMI, net of reserves, comprised approximately 75% of all unbilled rents receivable at December 31, 2004.

The following is a schedule of future minimum rental income under noncancelable leases at December 31, 2004 before consideration of subsequent property sales. See Note 10:

Years ending December 31:
2005	$	8,466,000
2006		7,866,000
2007		7,971,000
2008		8,234,000
2009		8,366,000
Thereafter		92,007,000
	$	132,910,000

In December 2001, the Company received notice from NRMI that it would be abandoning its master lease for 1552, thereby turning the property back to the Company subject to a sublease with its affiliate for a portion of the property. On analysis, management determined that it could not reasonably expect a recovery from NRMI of unbilled contractual rents if it were to bring suit, and as such decided to immediately accept the space NRMI was abandoning and lease it to other tenants. In connection with the abandonment of the lease in 2001, the Company wrote off all unbilled rents receivable related to the abandoned space. Additionally, management reevaluated the collectibility of all of its unbilled rent to NRMI and determined that an incremental reserve is required for all additional unbilled rent recorded related to NRMI. Accordingly, for the years ended December 31, 2004 and 2003, an incremental reserve is provided for 50% of all additional unbilled rent recorded related to NRMI.

The Company earned percentage rent of $868,000 and $839,000 for the years ended December 31, 2004 and 2003, respectively.

9. Contingency

On August 21, 2003, an action was filed against the Company in New York State Supreme Court, New York County (the "Complaint"). The Complaint was brought by 729 7th Realty Corp. (the "Tenant"), a subsidiary of NRMI that is the net lessee of the Condominium, to enforce certain rights it claims to have under its net lease with the Company (the "Net Lease").

In its Complaint, Tenant asserts two causes of action against the Company. In the first cause of action, Tenant seeks specific performance of its alleged right to require the Company to provide a subordination, non-disturbance and attornment agreement (an "SNDA") to a subtenant (the "Subtenant") so that in the event the Net Lease is terminated, the proposed sublease (the "Sublease") would remain in effect. The second cause of action seeks a judgment in the amount of approximately $600,000 for damages the Tenant allegedly suffered by reason of the Company's refusal to provide the Subtenant with SNDA protection.

F-62

ALGM I Owners LLC and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

The Company has refused to grant SNDA protection to the Subtenant on the grounds that the proposed Sublease is configured in such a way so as to extract the most economically desirable portion of the Condominium for the Subtenant (an affiliate of the Tenant) rendering the remaining space that would revert to the Company upon a termination of the Net Lease unmarketable. Under the terms of the Net Lease, the Company believes it has no obligation to provide SNDA protection to a proposed subtenant where, in the Company's discretion, the remaining space would be rendered unmarketable.

In response to the Complaint, on September 24, 2003, the Company moved to dismiss the second cause of action on the grounds that the Net Lease prohibits the recovery of monetary damages that may result from the Company's refusal to provide proposed subtenants with SNDA protection (the "Motion"). By decision and order of the court filed on March 29, 2004, the Company's Motion was granted. The Company is vigorously opposing Tenant's claim that it has the right to obtain SNDA protection for its Subtenant under the current circumstances. Although the ultimate outcome of this matter is uncertain, management does not believe it will have a material impact on the financial position or results of operations of the Company.

10. Subsequent Events - Discontinued Operations

729 Seventh Avenue

On June 30, 2005, the Company sold 729 Seventh Avenue (‘‘729’’) and, in compliance with FASB 144, ‘‘Accounting for Impairment or Disposal of Long-Lived Assets’’ (‘‘FAS 144’’), the Company has reclassified previously reported revenues and expenses from this property as income (loss) from discontinued operations for the years ended December 31, 2004 and 2003.

1552 Broadway

On November 30, 2005, the Company sold 1552 Broadway (“1552”) and, in compliance with FASB 144, the Company has reclassified previously reported revenues and expenses from this property as income (loss) from discontinued operations for the years ended December 31, 2004 and 2003.

27 West 34th and 1372 Broadway

The Company formally initiated an effort to market two of its leasehold interests located at 27 West 34th Street (“27 West”) and 1372 Broadway ("1372") and on December 30, 2005 entered into a definitive sale contract. The Company has met the held for sale criteria in accordance with SFAS No. 144 and accordingly, its previously reported revenues and expenses for these properties have been reclassified as discontinued operations in the consolidated statements of income for the years ended December 31, 2004 and 2003.

F-63

ALGM I Owners LLC and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

The assets and liabilities of the properties subsequently sold or contracted for sale were $42.4 million and $41.6 million, respectively, at December 31, 2004. The reclassification of revenues and expenses to discontinued operations did not have an impact on net income in 2004 and 2003.

The table summarizes income from discontinued operations from 729, 1552, 27 West and 1372 for the two years ended December 31, 2004:

	2004		2003
Revenues:
Minimum & percentage rent	$	7,602,289	$	7,656,024
Tenant reimbursements		422,177		419,408
Interest income and other		12,235		8,270
Total revenues		8,036,701		8,083,702
Expenses:
Operating expense		1,480,248		1,419,161
Marketing, general and administrative		403,097		218,185
Allowance for uncollectible billed and unbilled rents		380,208		456,689
Interest expense		3,177,001		3,222,456
Asset management fee - affiliate		956,377		637,281
Depreciation and amortization		1,235,671		1,229,826
Total expenses		7,632,602		7,183,598
Net income from discontinued operations	$	404,099	$	900,104

F-64

ALGM I Owners LLC and Subsidiaries

Schedule II — Valuation and Qualifying Accounts

As of December 31, 2004

Description	Balance at Beginning of Period		Charged to Costs and Expenses			Additions/Charges to Other Accounts		Deductions			Balance at End of Period
For the Year Ended December 31, 2003
Provision for loan losses	$	—	$	—		$	—	$	—		$	—
Allowance for doubtful accounts — SL ⁽¹⁾		3,288,631		453,225			—		—			3,741,856
Allowance for doubtful accounts ⁽¹⁾		89,086		20,233			—		(89,948	)		19,371
	$	3,377,717	$	473,458		$	—	$	(89,948	)	$	3,761,227

For the Year Ended December 31, 2004
Provision for loan losses	$	—	$	—		$	—	$	—		$	—
Allowance for doubtful accounts — SL ⁽¹⁾		3,741,856		394,863			—		—			4,136,719
Allowance for doubtful accounts ⁽¹⁾		19,371		(18,358	)		—		—			1,013
	$	3,761,227	$	376,505		$	—	$	—		$	4,137,732

Explanatory Notes:

⁽¹⁾	See Note 2 to the Company's Consolidated Financial Statements.

F-65

ALGM I OWNERS LLC AND SUBSIDIARIES

SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION

DECEMBER 31, 2004

Column A	Column B	Column C Initial Cost				Column D Cost Capitalized Subsequent To Acquisition				Column E Gross Amount at Which Carried at Close of Period						Column F		Column G	Column H		Column I
Description (1)	Encumbrances	Land		Buildings & Improvements		Land		Buildings & Improvements		Land		Buildings & Improvements		Total		Accumulated Depreciation		Date of Construction	Date Acquired		Life on Which Depreciation is Computed
1552 Broadway		$	4,177,140	$	16,708,561	$	140,967		552,082	$	4,318,107	$	17,260,643	$	21,578,750	$	2,501,603			Mar-99		Various
729 Seventh Avenue			3,170,923		12,683,693		108,069		423,326		3,278,992		13,107,019		16,386,011		1,899,028			Mar-99		Various
987 Eighth Avenue			—		2,218,794		—		426,227		—		2,645,021		2,645,021		727,420			Mar-99		Various
36 West 34 Street			—		4,145,318		—		271,979		—		4,417,297		4,417,297		391,098			Mar-99		Various
1372 Broadway (2)			—		461,905		—		545		—		462,450		462,450		367,484			Mar-99		Various
991 Third Avenue (2)			—		1,642,327		—		59,792		—		1,702,119		1,702,119		1,442,564			Mar-99		Various
27 West 34 Street (2)			—		3,592,591		—		167,578		—		3,760,169		3,760,169		1,982,206			Mar-99		Various
701 Seventh Avenue (2)			—		3,179,364		—		66,256		—		3,245,620		3,245,620		1,342,101			Mar-99		Various
		$	7,348,063	$	44,632,553	$	249,036	$	1,967,785	$	7,597,099	$	46,600,338	$	54,197,437	$	10,653,504

⁽¹⁾	All properties are located in New York, NY.

⁽²⁾	Represents a leasehold interest amortized over the life of the underlying lease.

F-66

The changes in real estate for the two years ended December 31, 2004 are as follows:

	2004		2003
Balance at beginning of year	$	52,646,282	$	54,136,887
Improvements		21,230		334,790
Basis step up		1,529,925		—
Retirements/disposals		—		(,825,395	)
Balance at end of year	$	54,197,437	$	52,646,282

The changes in accumulated depreciation, exclusive of amounts relating to equipment and furniture and fixtures, for the two years ended December 31, 2004, are as follows:

	2004		2003
Balance at beginning of year	$	8,794,965	$	8,552,419
Depreciation for the year		1,858,539		2,067,941
Retirements/disposals		—		(1,825,395	)
Balance at end of year	$	10,653,504	$	8,794,965

F-67

NorthStar Funding LLC

Financial Statements

Contents

	Page
Report of Independent Registered Public Accounting Firm	F-69

Balance Sheet as of December 31, 2004	F-70
Statements of Income for the years ended December 31, 2004 and 2003	F-71
Statements of Members' Equity for the years ended December 31, 2004 and 2003	F-72
Statements of Cash Flows for the years ended December 31, 2004 and 2003	F-73
Notes to Financial Statements	F-74
Schedule IV — Loans and other Lending Investments as of December 31, 2004	F-79

F-68

Report of Independent Registered Public Accounting Firm

To the Members of

NorthStar Funding LLC

We have audited the accompanying balance sheet of NorthStar Funding LLC (“the Company”) as of December 31, 2004, and the related statements of income, members’ equity, and cash flows for each of the two years in the period ended December 31, 2004. Our audits also included the financial statement Schedule IV. These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NorthStar Funding LLC at December 31, 2004, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ ERNST & YOUNG LLP

New York, New York

March 30, 2005

F-69

NorthStar Funding LLC

Balance Sheet

	December 31, 2004
Assets
Cash and cash equivalents	$	147,289
Subordinate real estate debt investments		107,823,661
Accrued interest receivable		745,075
Total assets	$	108,716,025

Liabilities
Accrued expenses	$	15,715
Deferred loan origination fees, net		854,159
Unearned revenue		—
Due to loan participant		—
Due to affiliates		232,509
Total liabilities		1,102,383

Members' equity		107,613,642
Total liabilities and members' equity	$	108,716,025

See accompanying notes to financial statements.

F-70

NorthStar Funding LLC

Statements of Income

	Years ended December 31,
	2004		2003
Revenue:
Interest income	$	13,580,769	$	6,827,156
Other income		186,546		10,939
Total revenue		13,767,315		6,838,095

Expenses:
Advisory fees — affiliate		1,080,863		556,661
Legal fees		67,562		61,768
General and administrative		15,148		22,626
Other expenses		34,480		20,248
Total expenses		1,198,053		661,303
Net income	$	12,569,262	$	6,176,792

See accompanying notes to financial statements.

F-71

NorthStar Funding LLC

Statements of Members' Equity

Years ended December 31, 2004 and 2003

	Managing Member			NSF Venture Investor			NorthStar			Total
Balance at December 31, 2002	$	—		$	18,195,917		$	2,021,701		$	20,217,618
Contributed capital		—			90,202,826			3,672,895			93,875,721
Distributions		—			(5,432,944	)		(365,103	)		(5,798,047	)
Net income		—			5,790,244			386,548			6,176,792
Balance at December 31, 2003		—			108,756,043			5,716,041			114,472,084

Contributed capital		—			19,913,624			1,048,085			20,961,709
Distributions		(453,442	)		(37,938,916	)		(1,997,055	)		(40,389,413	)
Net income		453,442			11,510,029			605,791			12,569,262
Balance at December 31, 2004	$	—		$	102,240,780		$	5,372,862		$	107,613,642

See accompanying notes to financial statements.

F-72

NorthStar Funding LLC

Statements of Cash Flows

	Years ended December 31,
	2004			2003
Cash flows from operating activities:
Net income	$	12,569,262		$	6,176,792
Adjustments to reconcile net income to net cash provided by operating activities:
Changes in assets and liabilities:
Accrued interest receivable		(149,497	)		(494,169	)
Amortization of deferred loan origination costs		(428,895	)		(37,958	)
Unearned revenue		(77,792	)		77,792
Due to affiliate		(47,286	)		247,425
Due to loan participant		(26,179	)		26,179
Accrued expenses		(90,826	)		(144,861	)
Net cash provided by operating activities		11,748,787			5,851,200

Cash flows from investing activities:
Additions to subordinate real estate debt investments		(21,000,000	)		(230,388,229	)
Deferred loan origination costs		543,750			810,682
Principal repayments		28,017,032			78,029
Proceeds from sale of sub-participation interests		—			135,719,507
Net cash provided by (used in) investing activities		7,560,782			(93,780,011	)

Cash flows from financing activities:
Capital contributions by members		20,961,709			93,875,721
Distributions to members		(40,389,413	)		(5,798,047	)
Net cash (used in) provided by financing activities		(19,427,704	)		88,077,674

Net (decrease) increase in cash and cash equivalents		(118,135	)		148,863
Cash and cash equivalents at beginning of period		265,424			116,561
Cash and cash equivalents at end of period	$	147,289		$	265,424

See accompanying notes to financial statements.

F-73

NorthStar Funding LLC

Notes to Financial Statements

1. Organization

NorthStar Funding LLC (the "Company") is a limited liability company formed under the laws of the State of Delaware on May 16, 2001 for the purpose of making fixed income investments secured by real estate. The Company is authorized to acquire or originate the following types of investments: loans secured by a pledge of equity interest in portfolio companies (whether corporations, partnerships, limited liability companies or other types of entities with interests primarily in real estate assets) that are subordinate to mortgage loans; subordinated debt and preferred equity securities issued by public or private portfolio companies; second mortgage loans secured by junior interests in real estate; shorter term bridge loans secured by mortgages or pledges of equity in portfolio companies; bank loans secured by real estate; distressed debt and equity securities issued by portfolio companies; participation interests in any of the foregoing funds as well as participation interests in first mortgage loans, and securities or other assets received by the Company as distributions on, in exchange for or as a result of foreclosing on any of the foregoing.

The term of the Company's existence shall initially be seven years and may be extended for up to two additional one-year terms. On September 14, 2004, the Company amended its limited liability agreement (the "Member agreement") to extend its term to continue through May 24, 2014.

The managing member of the Company is NorthStar Funding Management LLC (the "Managing Member"). NorthStar Funding Investor Member LLC, a Delaware limited liability company ("NorthStar"), and an institutional pension fund (the "NSF Venture Investor"), are the investor members (the "Investor Members"). The Managing Member owns .01% of the Company. NorthStar and the NSF Venture Investor initially committed to invest $10.0 million and $90.0 million for a 9.995% and 89.995% interest, respectively, in the Company.

On July 10, 2003, the Managing Member negotiated several modifications regarding funding requirements, which included an increase in the NSF Venture Investor's capital commitment to $190 million, and a reduction of NorthStar's ownership interest to 4.995%. Subsequent to July 10, 2003, NorthStar Funding Management LLC continues to own .01% of the Company and NorthStar and the NSF Venture Investor own a 4.995% and 94.995% interest, respectively, in the Company.

Total funded capital to the Company from Investor Members as of December 31, 2004 is $135.2 million.

2. Summary of Significant Accounting Policies

Basis of Presentation

The financial statements are presented on an accrual basis in conformity with accounting principles generally accepted in the United States.

Cash and Cash Equivalents

The Company classifies highly liquid investments with original maturities of three months or less from the date of purchase as cash equivalents. At December 31, 2004, cash balances of approximately $147,300 were on deposit with a bank in New York and are federally insured up to $100,000.

Revenue Recognition

Interest income for the Company's subordinate real estate debt investments is recognized on an accrual basis over the life of the investment using the effective interest method. Additional interest to be collected at payoff is recognized over the term of the loan as an adjustment to yield.

Allowances for loan investment losses are established based upon a periodic review of the loan investments. Income recognition is generally suspended for loans at the earlier of the date at which payments become 90 days past due or when, in the opinion of management, a full recovery of income and principal becomes doubtful. Income recognition is resumed when the suspended loan becomes contractually current and performance is demonstrated to be resumed. In performing this review, management considers the estimated net recoverable value of the loan as well as other factors, including the fair market value of any collateral, the amount and the status of any senior debt, the prospects for the borrower and the economic situation of the region where the borrower does business. Because this determination is based upon projections of future economic events, which are inherently subjective, the amounts ultimately realized from the loan investments may differ materially from the carrying value at the balance sheet date.

F-74

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of four subordinate real estate debt investments, the underlying loans for which are collateralized by commercial properties, and cash balances held with financial institutions, which at times exceed federally insurable limits. As of December 31, 2004, approximately 49% and 23% of all loan investments are secured by properties in New York and Chicago, respectively.

Subordinate Real Estate Debt Investments

Investments in subordinate real estate debt investments, either direct or participating interests, are recorded at their purchased cost. Discounts and premiums on purchased assets are amortized over the life of the investment using the effective interest method.

Fair Values of Financial Instruments

The Company has estimated that the carrying amounts of its financial instruments cash and cash equivalents, receivables, accounts payable balances reasonably approximate their fair values due to the short-term nature of these items. Subordinate real estate debt participations had an estimated fair value of approximately $108,936,661 which exceeds the book value by $1,113,000.

Disclosure about fair value of financial instruments is based on pertinent information available to management as of December 31, 2004. Although management is not aware of any factors that would significantly affect the reasonable fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein.

Loan Origination Fees and Acquisition Costs

The Company defers costs incurred related to the acquisition or underwriting of loan investments, as well as any origination fees received. The net balance of deferred costs/fees is amortized using the effective interest method over the life of the related loan investment. Such amortization is reflected as a component of interest income. The Company has recorded net loan origination fees and acquisition costs of ($854,159) at December 31, 2004.

Sale of Sub-Participations of Loan Investments

The Company records the transfer of a sub-participation in a loan investment as a sale when the attributes of the transaction meet the criteria for sale of FAS 140, "Accounting for Transfers of Financial Assets and Extinguishments of Liabilities", including transferring the financial interest beyond the reach of the Company's creditors and placing no substantive restrictions on the resale of the sub-participation by the purchaser.

Income Taxes

No provision has been made in the accompanying financial statements for federal, state or local income taxes as each member of the Company is responsible for reporting their respective share of the Company's income or losses.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

F-75

Recent Accounting Pronouncement

In December 2003, the Financial Accounting Standards Board ("FASB") issued interpretation No 46R ("FIN 46R") "Consolidation of Variable Interest Entities" to replace Interpretation No 46 ("FIN 46") which was issued in January 2003. In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with proportionate voting rights or (b) has not been capitalized with sufficient financial resources for the entity to support its activities. FIN 46R requires a variable interest entity to be consolidated by primary beneficiary which is the entity subject to a majority of the risk of loss from the variable interest entity's activities or is entitled to receive a majority of the entity's residual returns, or both. The Company has adopted FIN 46R and analyzed the applicability of this interpretation. The adoption of FIN 46R had no material impact on the Company's financial condition or results of operations as of December 31, 2004.

3. Limited Liability Company Agreement

The Company's Member agreement stipulates the method of allocation and distribution of the Company's income and cash.

Allocations of Net Income and Net Loss

Each item of income, gain, loss deduction or credit included in net income and net loss shall generally be allocated among the members in the manner in which distributable proceeds have been or are distributed to the members pursuant to the Company's Member Agreement.

Cash Distributions of Portfolio Investments

Distributable proceeds are derived from the cash remaining from the disposition or financing proceeds of a portfolio investment, from insurance proceeds received related to a casualty loss or from items of ordinary income such as interest, dividends, or rental income, net of all related costs and expenses.

Generally, each member's percentage interest of distributable proceeds will be paid as follows: First, pro rata based on ownership percentages to each member until 100% of invested capital is recovered and a priority return of 10% per annum on the liquidated portion of the portfolio have been received. Second, 80% of distributable proceeds are allocated to the Managing Member and 20% is allocated to the Investor Members pro rata until the Managing Member has received 20% of the cumulative cash distributed. Thereafter, the Managing Member will receive 20% of the distributable proceeds and the Investor Members will receive 80% of distributable proceeds on a pro rata basis.

The Company made cash distributions of $453,442 to the Managing Member during the year ended December 31, 2004 in connection with loan repayments by borrowers.

4. Subordinate Real Estate Debt Investments

At December 31, 2004, the Company's investments in subordinate real estate debt are as follows, in thousands:

Investment	Closing Date		Face Amount		Proceeds from Sale of Subparticipations		NS Funding LLC Net Participation		Principal payments ⁽²⁾		December 31, 2004 Investment Balance
Alhambra Plaza		11/06/2002	$	14,000	$	6,000	$	8,000		—		—
Douglas Entrance		12/19/2002		12,250		—		12,250		—		—
Portland Multifamily Portfolio,		02/06/2003		15,300		7,650		7,650		—		—
BellSouth Tower, ⁽¹⁾		4/15/2003		24,300		14,820		9,480	$	195	$	9,285
IBM Plaza		7/10/2003		64,789		40,000		24,789		—		24,789
Max Capital Portfolio, ⁽¹⁾		8/1/2003		56,000		32,000		24,000		—		24,000
450 West 33 ^rd Street ⁽³⁾		12/31/2003		70,000		41,250		28,750		—		28,750
Pickwick Plaza		9/14/2004		21,000		—		21,000		—		21,000
Totals			$	277,639	$	141,720	$	135,919	$	195	$	107,824

⁽¹⁾	Loan was extended and paid off in February, 2005. See Note 7.

⁽²⁾	All loans are interest only, except for BellSouth Tower which requires monthly principal payments of $9,753.

⁽³⁾	Loan was paid off in March, 2005. See Note 7.

F-76

Investment

Location

Type

Initial

Maturity

Extension

Options

Interest

Rate

at 12/31/04

Base Rate

Alhambra Plaza

Florida

Office

10/09/05

Two 1-year

—

30 Day Libor +

9.30%

Douglas Entrance

Florida

Office

11/10/2004

One 1-year

—

12%

Portland Multifamily Portfolio

Oregon

Multifamily

12/11/2004

6 months,

two one year

—

30 Day Libor +

8.75%

BellSouth Tower

Florida

Office

8/11/2004

Two 1-year

12.74%

30 Day Libor +

10.34%

IBM Plaza

Chicago

Office

3/09/2006

Two 1-year

12.46%

30 Day Libor +

10.06%

Max Capital Portfolio

New York

Office

1/09/2005

Three 1-year

12.42%

30 Day Libor( 3% floor) +

9.42%

450 West 33 ^rd Street

New York

Office

1/09/2006

Three 1-year

13.08%

30 Day Libor +

10.68%

Pickwick Plaza

Connecticut

Office

4/11/2014

No extensions

9.84%

Fixed rate of

9.84%

Investment activity

The Douglas Entrance mezzanine loan was prepaid on February 11, 2004. The amount of the prepayment was approximately $12.6 million, which included the principal balance of $12.25 million, interest and prepayment premiums.

In September 2004, the Company originated a $21 million mezzanine loan collateralized by an office building in Connecticut. The interest rate is 9.84% and initial maturity is April, 2014.

The Alhambra mezzanine loan was prepaid on October 12, 2004. The amount of the prepayment was approximately $14.1 million, which included the principal balance of $14.0 million and interest.

The Portland Multifamily mezzanine loan was prepaid on December 17, 2004. The amount of the prepayment was approximately $15.4 million, which included the principal balance of approximately $15.3 million and interest.

5. Advisory Fees—Affiliates

On May 24, 2001, the Company entered into an advisory agreement (the "Advisory Agreement") with NorthStar Capital Investment Corp., a Maryland corporation, an affiliate of NorthStar. On November 18, 2003 the Advisory Agreement was assigned by NorthStar Capital Investment Corp. to Managing Member. NorthStar Capital Investment Corp. and Managing Member are collectively referred to as the "Advisor."

F-77

The Company pays the Advisor an annual administrative and advisory fee (the "Advisory Fee"), payable quarterly in arrears equal to (i) 1% of the aggregate capital contributions of NorthStar, the NSF Venture Investor and members of the Company with capital commitments of $50.0 million or more and (ii) 1.5% of the capital contributions of members (other than NorthStar) of the Company with capital commitments of less than $50.0 million. In the event that the Advisor does not act as an investment advisor to the Company for the entire quarter, the Advisory Fee will be prorated to reflect the portion of such quarter.

The Advisory Agreement will continue for a seven-year period and shall thereafter automatically renew for up to two one-year periods upon the extension of the term of the existence of the Company. This agreement may be terminated by either the Advisor or the Company upon the resignation or removal of NorthStar Funding Management LLC as Managing Member of the Company.

In 2004 and 2003, the Company incurred advisory fees of $1,080,863 and $556,661, of which $35,043 is included in due to affiliates at December 31, 2004.

6. Due to Affiliates

Due to affiliates includes cash received on behalf of an affiliate and advisory fees due to the Managing Member.

7. Subsequent Events

The Bell South Tower mezzanine loan was repaid February 3, 2005. The prepayment was approximately $9.5 million, which included the principal balance of approximately $9.3 million, interest and a prepayment premium of $102,519.

The Max Capital mezzanine loan was repaid February 14, 2005. The prepayment was approximately $24.3 million which included the principal balance of approximately $24.0 million and accrued interest.

The 450 West 33rd Street loan was repaid on March 8, 2005. The amount of the prepayment was approximately $29.6 million which included the principal balance of $28.8 million, exit and prepayment fees totaling approximately $0.5 million and accrued interest.

F-78

NorthStar Funding LLC

Schedule IV—Loans and Other Lending Investments

December 31, 2004

(dollars in thousands)

Type of Loan/Borrowers

Description/

Locations

Interest

Accrual Rates

Interest

Payment Rates

Final

Maturity

Date

Periodic

Payment

Terms ⁽¹⁾

Principal

Amounts

Carrying

Amount

of Loans

BellSouth Tower (2)

Office, Florida

30 Day Libor +10.31%

8/11/2004

P&I

9,285

IBM Plaza

Office, Chicago

30 Day Libor +10.02%

3/09/2006

I/O

24,789

Max Capital Portfolio (2)

Office, New York

30 Day Libor +9.42%

30 Day Libor(3% floor) +9.42%

1/09/2005

I/O

24,000

450 West 33rd Street (3)

Office, New York

30 Day Libor +10.62%

1/09/2006

I/O

28,750

Pickwick Plaza

Office, Connecticut

9.84% Fixed

4/11/2014

I/O

21,000

Subtotal

107,824

Provision for losses

—

Total

107,824

⁽¹⁾	Interest only or I/O; principal and Interest or P&I.

⁽²⁾	Loan was extended and paid off in February, 2005.

⁽³⁾	Loan was paid off in March, 2005.

No prior liens exist on the above loans.

F-79

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on March 16, 2006.


	NORTHSTAR REALTY FINANCE CORP.

	By:	/s/ David T. Hamamoto
		Name: David T. Hamamoto
		Title: Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Mark E. Chertok and Richard J. McCready and each of them severally, his true and lawful attorney-in-fact with power of substitution and resubstitution to sign in his name, place and stead, in any and all capacities, to do any and all things and execute and all instruments that such attorney may deem necessary or advisable under the Securities Exchange Act of 1934 and any rules, regulations and requirements of the U.S. Securities and Exchange Commission in connection with this Annual Report on Form 10-K and any and all amendments hereto, as fully for all intents and purposes as he might or could do in person, and hereby ratifies and confirms all said attorneys-in-fact and agents, each acting alone, and his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below on behalf of the Registrant in the capacities and on the dates indicated.

Signature	Title	Date

/s/ DAVID T. HAMAMOTO	Chief Executive Officer and President	March 16, 2006
David T. Hamamoto	(Principal Executive Officer)

/s/ MARK E. CHERTOK	Chief Financial Officer and Treasurer	March 16, 2006
Mark E. Chertok	(Principal Financial Officer)

/s/ W. EDWARD SCHEETZ	Chairman of the Board of Directors	March 16, 2006
W. Edward Scheetz

/s/ WILLIAM V. ADAMSKI	Director	March 16, 2006
William V. Adamski

/s/ PRESTON BUTCHER	Director	March 16, 2006
Preston Butcher

/s/ JUDITH A. HANNAWAY	Director	March 16, 2006
Judith A. Hannaway

/s/ WESLEY D. MINAMI	Director	March 16, 2006
Wesley D. Minami

/s/ LOUIS J. PAGLIA	Director	March 16, 2006
Louis J. Paglia

/s/ FRANK V. SICA	Director	March 16, 2006
Frank V. Sica

EXECUTION VERSION

FIFTH AMENDMENT TO

MASTER REPURCHASE AGREEMENT

(Wachovia Transaction with NRFC WA Holdings, LLC)

THIS FIFTH AMENDMENT TO MASTER REPURCHASE AGREEMENT , dated as of February 28, 2006 (this “ Amendment No. 5 ”), is entered into by and among NRFC WA HOLDINGS, LLC , as a seller (“ NRFC ”) and NRFC WA HOLDINGS II, LLC , as a seller (“ NRFC II ” and, collectively with NRFC, the “ Sellers ”), WACHOVIA BANK, NATIONAL ASSOCIATION , as the buyer (in such capacity, the “ Buyer ”), and NORTHSTAR REALTY FINANCE CORP. , as the guarantor (the “ Guarantor ”), and consented to by NRFC SUB – REIT CORP., as the pledgor (the “ Pledgor ”), WELLS FARGO BANK, NATIONAL ASSOCIATION (f/k/a Wells Fargo Bank Minnesota, N.A.), as the custodian (in such capacity, the “ Custodian ”), and WACHOVIA BANK, NATIONAL ASSOCIATION , as the swap counterparty (in such capacity, the “ Swap Counterparty ”). Capitalized terms used and not otherwise defined herein shall have the meanings given to such terms in the Repurchase Agreement (as defined below).

R E C I T A L S

WHEREAS , the Seller, the Guarantor and the Buyer are parties to that certain Master Repurchase Agreement (including all annexes, exhibits and schedules thereto), dated as of July 13, 2005, as amended by that certain First Amendment to Master Repurchase Agreement, dated as of August 24, 2005 (“ Amendment No. 1 ”), that certain Second Amendment to Master Repurchase Agreement, dated as of September 20, 2005 (“ Amendment No. 2 ”), that certain Third Amendment to Master Repurchase Agreement, dated as of September 30, 2005 (“ Amendment No. 3 ”), that certain Omnibus Amendment to Repurchase Documents and Joinder, dated as of October 21, 2005 (“ Omnibus Amendment ”), and that certain Fourth Amendment to Master Repurchase Agreement, dated as of October 28, 2005 (“ Amendment No. 4 ”) (as such Master Repurchase Agreement is amended, modified, restated, replaced, waived, substituted, supplemented or extended from time to time, including pursuant to Amendment No. 1, Amendment No. 2, Amendment No. 3, the Omnibus Amendment, Amendment No. 4 and this Amendment No. 5, the “ Repurchase Agreement ”);

WHEREAS , the Seller desires to make certain modifications to the Repurchase Agreement;

WHEREAS , the Buyer is willing to modify the Repurchase Agreement as requested by the Seller on the terms and conditions specified herein; and

WHEREAS , the Pledgor, the Custodian and the Swap Counterparty are parties to other Repurchase Documents and related agreements that may be affected, directly or indirectly, by this Amendment No. 5 and desire to consent to the amendments and modifications set forth herein.

NOW THEREFORE , in consideration of the foregoing recitals, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows:

Section 1 . Amendments to Repurchase Agreement .

( a ) The following definitions in Section 1(a) of Annex I to the Repurchase Agreement are hereby amended and restated in their entirety as follows:

(1) “ Eurodollar Period : With respect to any Transaction, (i) initially, the period commencing on the Purchase Date with respect to such Transaction and ending on the earlier of (x) the related Repurchase Date or (y) the first Payment Date following the Purchase Date, and (ii) thereafter, each period commencing on the day following the last day of the preceding Eurodollar Period applicable to such Transaction and ending on the earliest of (x) the related Repurchase Date, (y) the date that is one-month thereafter, or (z) the Facility Maturity Date.”

(2) “ Maximum Amount : Means (a) during the Temporary Increase Period, $400,000,000 and (b) after the Temporary Increase Period, (i) in the event the Seller repays the Temporary Increase Indebtedness plus all accrued and unpaid Price Differential thereon and all related Breakage Costs on or before the Temporary Increase Expiration Date, $150,000,000 and (ii) in the event the Seller does not satisfy clause (b)(i) of this definition, $400,000,000; provided , however , (1) the amounts under clauses (a) and (b) of this definition shall be reduced by the amount of the Bond Purchase Price outstanding under the Bond Purchase Agreement and (2) on and after the Facility Maturity Date, the Maximum Amount shall mean the aggregate Purchase Price outstanding for all Transactions.”

(3) “ Payment Date : The 1 ^st day of each calendar month, or, if such day is not a Business Day, the next Business Day.”

(4) “ Temporary Increase Amount : $250,000,000.”

Amendment No. 5 to Master Repurchase Agreement

(Wachovia/NorthStar)

( b ) Section 24 of Annex I to the Repurchase Agreement is hereby amended and restated as follows:

“ Section 24 Temporary Increase Period .

During the Temporary Increase Period, (a) with respect to Mortgage Assets that are eligible for the CDO Securitization and that the Buyer has agreed to purchase (other than Over-Advance Assets), the Seller may elect, on or before the related Purchase Date by written notice to the Buyer, the Advance Rates and the Pricing Spreads reflected on Schedule 1 to Amendment No. 3 (collectively, the “ Ramp-Up Pricing ”) in lieu of the Advance Rate and Pricing Spreads contained in the Fee Letter that are otherwise applicable to such Mortgage Assets (each such Purchased Asset, a “ Ramp-Up Asset ”), (b) the Unused Fee shall not accrue on the unused portion of the Temporary Increase Amount (but it shall accrue on the unused portion of the Maximum Amount in effect prior to Amendment No. 2 (i.e., $150,000,000) subject to the terms of the Fee Letter) and (c) a commitment fee shall be payable by the Seller to the Buyer on the Temporary Increase Amount only in accordance with clause (b)(ii) of the second to last sentence of this Section 24 . In the event the Seller elects the Ramp-Up Pricing for any Purchased Asset and any such Ramp-Up Assets are not repurchased by the Seller and sold into the CDO Securitization on or before the Temporary Increase Expiration Date, (i) the Ramp-Up Pricing shall cease to be effective with respect to each such Purchased Asset from and after the Temporary Increase Expiration Date and, thereafter, the Advance Rate and Pricing Spread for each such Purchased Asset shall be the applicable Pricing Spread and Advance Rate set forth in the Fee Letter and (ii) the Seller shall, on or before the Temporary Increase Expiration Date, make principal payments to the Buyer as necessary so that the Purchase Price outstanding for each such Ramp-Up Asset is equal to or less than the Purchase Price based on the applicable Advance Rate set forth in the Fee Letter. On or before the Temporary Increase Expiration Date, the Seller shall either (a) pay to the Buyer the aggregate outstanding Temporary Increase Indebtedness, any accrued Price Differential thereon and any related Breakage Costs or (b) provided the CDO Securitization has not closed, (i) the Seller shall pay to the Buyer on the Temporary Increase Expiration Date a commitment fee in the amount of the product of the Temporary Increase Amount and 48 basis points, (ii) the Maximum Amount shall remain at $400,000,000 subject to the definition thereof, and (iii) the Unused Fee shall commence accruing based on the full amount of the Maximum Amount specified in the preceding clause (b)(ii) subject to the terms of the Fee Letter. Notwithstanding the Buyer’s agreement to this Amendment No. 5, including, without limitation, the preceding sentence, the Buyer, has, retains and does not waive any of its rights and/or benefits under the Repurchase Documents, including without limitation, the ability to determine at any time the Asset Value of one or more Purchased Assets.”

Section 2 . [ Reserved ].

Section 3 . Repurchase Documents in Full Force and Effect as Modified .

Except as specifically modified hereby, the Repurchase Documents shall remain in full force and effect. All references to the Repurchase Agreement shall be deemed to mean the Repurchase Agreement as modified by this Amendment No. 5. This Amendment No. 5 shall not constitute a novation of the Repurchase Agreement, but shall constitute a modification thereof. The parties hereto agree to be bound by the terms and conditions of the Repurchase Agreement, as modified by this Amendment No. 5, as though such terms and conditions were set forth herein.

Amendment No. 5 to Master Repurchase Agreement

(Wachovia/NorthStar)

Section 4 . Representations .

Each of the Sellers, the Guarantor and the Pledgor represents and warrants, as of the date of this Amendment No. 5, as follows:

( a ) it is duly incorporated or organized, validly existing and in good standing under the laws of its jurisdiction of organization and each jurisdiction where it conducts business;

( b ) the execution, delivery and performance by it of this Amendment No. 5 is within its corporate, company or partnership powers, has been duly authorized and does not contravene (1) its Governing Documents or its applicable resolutions, (2) any Applicable Law or (3) any Contractual Obligation, Indebtedness or Guarantee Obligation;

( c ) no consent, license, permit, approval or authorization of, or registration, filing or declaration with, any Governmental Authority or other Person is required in connection with the execution, delivery, performance, validity or enforceability by or against it of this Amendment No. 5;

( d ) this Amendment No. 5 has been duly executed and delivered by it;

( e ) this Amendment No. 5, as well as each of the Repurchase Documents as modified by this Amendment No. 5, constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights generally or by general principles of equity;

( f ) no Default or Event of Default exists or will exist after giving effect to this Amendment No. 5; and

( g ) each of the Repurchase Documents is in full force and effect and neither the Seller, the Guarantor nor the Pledgor have any defenses, offsets, counterclaims, abatements, rights of rescission or other claims, legal or equitable, available to the Seller, the Guarantor, the Pledgor or any other Person with respect to this Amendment No. 5, the Repurchase Agreement, the Repurchase Documents or any other instrument, document and/or agreement described herein or therein, as modified and amended hereby, or with respect to the obligation of the Seller to repay the Obligations and other amounts due under the Repurchase Documents.

Section 5 . Conditions Precedent .

The effectiveness of this Amendment No. 5 is subject to the following conditions precedent: (i) delivery to the Buyer of this Amendment No. 5 duly executed by each of the parties hereto; (ii) payment of all reasonable legal fees and expenses of Moore & Van Allen PLLC, as counsel to the Buyer, in the amount to be set forth on a separate invoice; and (iii) such other documents, agreements or certifications as the Buyer may reasonably require.

Amendment No. 5 to Master Repurchase Agreement

(Wachovia/NorthStar)

Section 6 . Miscellaneous .

( a ) This Amendment No. 5 may be executed in any number of counterparts (including by facsimile), and by the different parties hereto on the same or separate counterparts, each of which shall be deemed to be an original instrument but all of which together shall constitute one and the same agreement.

( b ) The descriptive headings of the various sections of this Amendment No. 5 are inserted for convenience of reference only and shall not be deemed to affect the meaning or construction of any of the provisions hereof.

( c ) This Amendment No. 5 may not be amended or otherwise modified, waived or supplemented except as provided in the Repurchase Agreement.

( d ) The interpretive provisions of Section 1(b) of Annex I of the Repurchase Agreement are incorporated herein mutadis mutandis .

( e ) This Amendment No. 5 represents the final agreement among the parties and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements between the parties. There are no unwritten oral agreements between the parties.

( f ) THIS AMENDMENT NO. 5 AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS AMENDMENT NO. 5 SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REFERENCE TO ITS CONFLICT OF LAWS PROVISIONS.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

Amendment No. 5 to Master Repurchase Agreement

(Wachovia/NorthStar)

IN WITNESS WHEREOF, the parties have caused this Amendment No. 5 to be executed by their respective officers thereunto duly authorized, as of the date first above written.

THE SELLERS:	NRFC WA HOLDINGS, LLC,
	a Delaware limited liability company

	By: /s/ Daniel Gilbert
	Name: Daniel Gilbert
	Title: Executive Vice President

	Address for Notices:

	NRFC WA Holdings, LLC
	c/o NorthStar Realty Finance Corp.
	527 Madison Avenue
	New York, New York 10022
	Attention:	Mark E. Chertok
		Richard McCready
		Daniel R. Gilbert
	Facsimile No:	(212) 208-2651
		(212) 319-4558
	Confirmation No.:	(212) 319-2618
		(212) 319-2623
		(212) 319-3679

	with a copy to:

	Paul Hastings Janofsky & Walker LLP
	75 East 55 ^th Street
	New York, New York 10022
	Attention: Robert J. Grados, Esq.
	Facsimile No.: (212) 230-7830
	Confirmation No.: (212) 318-6923

[ SIGNATURES CONTINUED ON FOLLOWING PAGE ]

Amendment No. 5 to Master Repurchase Agreement

(Wachovia/NorthStar)

S-1

THE SELLERS (cont.):	NRFC WA HOLDINGS II, LLC,
	a Delaware limited liability company

	By: /s/ Daniel Gilbert
	Name: Daniel Gilbert
	Title: Executive Vice President

	Address for Notices:

	NRFC WA Holdings II, LLC
	c/o NorthStar Realty Finance Corp.
	527 Madison Avenue
	New York, New York 10022
	Attention:	Mark E. Chertok
		Richard McCready
		Daniel R. Gilbert
	Facsimile No:	(212) 208-2651
		(212) 319-4558
	Confirmation No.:	(212) 319-2618
		(212) 319-2623
		(212) 319-3679

	with a copy to:

	Paul Hastings Janofsky & Walker LLP
	75 East 55 ^th Street
	New York, New York 10022
	Attention: Robert J. Grados, Esq.
	Facsimile No.: (212) 230-7830
	Confirmation No.: (212) 318-6923

[ SIGNATURES CONTINUED ON FOLLOWING PAGE ]

Amendment No. 5 to Master Repurchase Agreement

(Wachovia/NorthStar)

S-2

THE GUARANTOR:	NORTHSTAR REALTY FINANCE CORP.,
	a Maryland corporation

	By: /s/ Daniel Gilbert
	Name: Daniel Gilbert
	Title: Executive Vice President

	Address for Notices:

	NorthStar Realty Finance Corp.
	527 Madison Avenue
	New York, New York 10022
	Attention:	Mark E. Chertok
		Richard McCready
		Daniel R. Gilbert
	Facsimile No:	(212) 208-2651
		(212) 319-4558
	Confirmation No.:	(212) 319-2618
		(212) 319-2623
		(212) 319-3679

	with a copy to:

	Paul Hastings Janofsky & Walker LLP
	75 East 55 ^th Street
	New York, New York 10022
	Attention: Robert J. Grados, Esq.
	Facsimile No.: (212) 230-7830
	Confirmation No.: (212) 318-6923

[ SIGNATURES CONTINUED ON FOLLOWING PAGE ]

Amendment No. 5 to Master Repurchase Agreement

(Wachovia/NorthStar)

S-3

THE BUYER :	WACHOVIA BANK, NATIONAL
	ASSOCIATION , a national banking association

	By: /s/ Joe Cannon
	Name: Joe Cannon
	Title: Vice President

	Wachovia Bank, National Association
	One Wachovia Center, Mail Code: NC0166
	301 South College Street
	Charlotte, North Carolina 28288
	Attention: Marianne Hickman
	Facsimile No.: (704) 715-0066
	Confirmation No.: (704) 715-7818

[ SIGNATURES CONTINUED ON FOLLOWING PAGE ]

Amendment No. 5 to Master Repurchase Agreement

(Wachovia/NorthStar)

S-4

CONSENTED TO BY:

THE PLEDGOR:	NRFC SUB – REIT CORP.,
	a Maryland corporation

	By: /s/ Daniel Gilbert
	Name: Daniel Gilbert
	Title: Executive Vice President

	NRFC Sub – REIT Corp.
	c/o NorthStar Realty Finance Corp.
	527 Madison Avenue
	New York, New York 10022
	Attention:	Mark E. Chertok
		Richard McCready
		Daniel R. Gilbert
	Facsimile No:	(212) 208-2651
		(212) 319-4558
	Confirmation No.:	(212) 319-2618
		(212) 319-2623
		(212) 319-3679

	with a copy to:

	Paul Hastings Janofsky & Walker LLP
	75 East 55 ^th Street
	New York, New York 10022
	Attention: Robert J. Grados, Esq.
	Facsimile No.: (212) 230-7830
	Confirmation No.: (212) 318-6923

[ SIGNATURES CONTINUED ON FOLLOWING PAGE ]

Amendment No. 5 to Master Repurchase Agreement

(Wachovia/NorthStar)

S-5

CONSENTED TO BY:

THE CUSTODIAN:	WELLS FARGO BANK, NATIONAL ASSOCIATION

	By: /s/ Karolyn Kleingartner
	Name: Karolyn Kleingartner
	Title: Corporate Trust Officer

	Wells Fargo Bank, National Association
	CMBS Department
	1015 10 ^th Avenue SE
	Minneapolis, Minnesota 55414
	Attention:	Tina Hatfield,
		Assistant Vice President
	Facsimile No.:	(612) 466-5416
	Confirmation No.:	(612) 466-5252

[ SIGNATURES CONTINUED ON FOLLOWING PAGE ]

Amendment No. 5 to Master Repurchase Agreement

(Wachovia/NorthStar)

S-6

THE SWAP COUNTERPARTY :	WACHOVIA BANK, NATIONAL
	ASSOCIATION , a national banking association

	By: /s/ Delene M. Travella
	Name: Delene M. Travella
	Title: Director

	Wachovia Bank, National Association
	One Wachovia Center, Mail Code: NC0166
	301 South College Street
	Charlotte, North Carolina 28202-0600
	Attention:	Bruce M. Young, Senior Vice
		President, Risk Management
	Facsimile No.:	(704) 383-0575
	Confirmation No.:	(704) 383-8778

Amendment No. 5 to Master Repurchase Agreement

(Wachovia/NorthStar)

S-7

JUNIOR SUBORDINATED INDENTURE

between

NORTHSTAR REALTY FINANCE LIMITED PARTNERSHIP,

as Issuer,

NORTHSTAR REALTY FINANCE CORP.,

as Guarantor,

and

WILMINGTON TRUST COMPANY

as Trustee

_____________________

Dated as of March 10, 2006

_____________________

TABLE OF CONTENTS

		Page

ARTICLE I

Definitions and Other Provisions of General Application

SECTION 1.1.	Definitions.	1
SECTION 1.2.	Compliance Certificate and Opinions.	10
SECTION 1.3.	Forms of Documents Delivered to Trustee.	11
SECTION 1.4.	Acts of Holders.	12
SECTION 1.5.	Notices, Etc.	13
SECTION 1.6.	Notice to Holders; Waiver.	14
SECTION 1.7.	Effect of Headings and Table of Contents.	14
SECTION 1.8.	Successors and Assigns.	15
SECTION 1.9.	Separability Clause.	15
SECTION 1.10.	Benefits of Indenture.	15
SECTION 1.11.	Governing Law.	15
SECTION 1.12.	Submission to Jurisdiction.	15
SECTION 1.13.	Non-Business Days.	15

ARTICLE II

Security Forms

SECTION 2.1.	Form of Security.	16
SECTION 2.2.	Restricted Legend.	20
SECTION 2.3.	Form of Trustee’s Certificate of Authentication.	23
SECTION 2.4.	Temporary Securities.	23
SECTION 2.5.	Definitive Securities.	23

ARTICLE III

The Securities

SECTION 3.1.	Payment of Principal and Interest.	24
SECTION 3.2.	Denominations.	26
SECTION 3.3.	Execution, Authentication, Delivery and Dating.	26
SECTION 3.4.	Global Securities.	27
SECTION 3.5.	Registration, Transfer and Exchange Generally.	29

-i-

SECTION 3.6.	Mutilated, Destroyed, Lost and Stolen Securities.	30
SECTION 3.7.	Persons Deemed Owners.	31
SECTION 3.8.	Cancellation.	31
SECTION 3.9.	RESERVED.	31
SECTION 3.10.	Right of Set-Off.	31
SECTION 3.11.	Agreed Tax Treatment.	31
SECTION 3.12.	CUSIP Numbers.	31

ARTICLE IV

Satisfaction and Discharge

SECTION 4.1.	Satisfaction and Discharge of Indenture.	32
SECTION 4.2.	Application of Trust Money.	33

ARTICLE V

Remedies

SECTION 5.1.	Events of Default.	33
SECTION 5.2.	Acceleration of Maturity; Rescission and Annulment.	34
SECTION 5.3.	Collection of Indebtedness and Suits for Enforcement by Trustee.	36
SECTION 5.4.	Trustee May File Proofs of Claim.	36
SECTION 5.5.	Trustee May Enforce Claim Without Possession of Securities.	37
SECTION 5.6.	Application of Money Collected.	37
SECTION 5.7.	Limitation on Suits.	37
SECTION 5.8.	Unconditional Right of Holders to Receive Principal, Premium and Interest; Direct Action by Holders of Preferred Securities.	38
SECTION 5.9.	Restoration of Rights and Remedies.	38
SECTION 5.10.	Rights and Remedies Cumulative.	39
SECTION 5.11.	Delay or Omission Not Waiver.	39
SECTION 5.12.	Control by Holders.	39
SECTION 5.13.	Waiver of Past Defaults.	39
SECTION 5.14.	Undertaking for Costs.	40
SECTION 5.15.	Waiver of Usury, Stay or Extension Laws.	40

ARTICLE VI

The Trustee

SECTION 6.1.	Corporate Trustee Required.	41
SECTION 6.2.	Certain Duties and Responsibilities.	41

-ii-

SECTION 6.3.	Notice of Defaults.	42
SECTION 6.4.	Certain Rights of Trustee.	43
SECTION 6.5.	May Hold Securities.	45
SECTION 6.6.	Compensation; Reimbursement; Indemnity.	45
SECTION 6.7.	Resignation and Removal; Appointment of Successor.	46
SECTION 6.8.	Acceptance of Appointment by Successor.	47
SECTION 6.9.	Merger, Conversion, Consolidation or Succession to Business.	47
SECTION 6.10.	Not Responsible for Recitals or Issuance of Securities.	47
SECTION 6.11.	Appointment of Authenticating Agent.	48

ARTICLE VII

Holder’s Lists and Reports by Trustee and Company

SECTION 7.1.	Company to Furnish Trustee Names and Addresses of Holders.	49
SECTION 7.2.	Preservation of Information, Communications to Holders.	49
SECTION 7.3.	Reports by Company and Trustee.	50

ARTICLE VIII

Consolidation, Merger, Conveyance, Transfer or Lease

SECTION 8.1.	Company and Guarantor May Consolidate, Etc., Only on Certain Terms.	51
SECTION 8.2.	Successor Company or Guarantor Substituted.	52

ARTICLE IX

Supplemental Indentures

SECTION 9.1.	Supplemental Indentures without Consent of Holders.	53
SECTION 9.2.	Supplemental Indentures with Consent of Holders.	53
SECTION 9.3.	Execution of Supplemental Indentures.	54
SECTION 9.4.	Effect of Supplemental Indentures.	55
SECTION 9.5.	Reference in Securities to Supplemental Indentures.	55

ARTICLE X

Covenants

SECTION 10.1.	Payment of Principal, Premium and Interest.	55
SECTION 10.2.	Money for Security Payments to be Held in Trust.	55
SECTION 10.3.	Statement as to Compliance.	56

-iii-

SECTION 10.4.	Calculation Agent.	57
SECTION 10.5.	Additional Tax Sums.	57
SECTION 10.6.	Additional Covenants.	58
SECTION 10.7.	Waiver of Covenants.	59
SECTION 10.8.	Treatment of Securities.	59

ARTICLE XI

Redemption of Securities

SECTION 11.1.	Optional Redemption.	60
SECTION 11.2.	Special Event Redemption.	60
SECTION 11.3.	Election to Redeem; Notice to Trustee.	60
SECTION 11.4.	Selection of Securities to be Redeemed.	60
SECTION 11.5.	Notice of Redemption.	61
SECTION 11.6.	Deposit of Redemption Price.	62
SECTION 11.7.	Payment of Securities Called for Redemption.	62

ARTICLE XII

Subordination of Securities

SECTION 12.1.	Securities Subordinate to Senior Debt of the Company.	62
SECTION 12.2.	No Payment When Senior Debt of the Company in Default; Payment Over of Proceeds Upon Dissolution, Etc.	63
SECTION 12.3.	Payment Permitted If No Default.	64
SECTION 12.4.	Subrogation to Rights of Holders of Senior Debt of the Company.	64
SECTION 12.5.	Provisions Solely to Define Relative Rights.	65
SECTION 12.6.	Trustee to Effectuate Subordination.	65
SECTION 12.7.	No Waiver of Subordination Provisions.	65
SECTION 12.8.	Notice to Trustee.	66
SECTION 12.9.	Reliance on Judicial Order or Certificate of Liquidating Agent.	67
SECTION 12.10.	Trustee Not Fiduciary for Holders of Senior Debt of the Company.	67
SECTION 12.11.	Rights of Trustee as Holder of Senior Debt of the Company; Preservation of Trustee’s Rights.	67
SECTION 12.12.	Article Applicable to Paying Agents.	67

ARTICLE XIII

Guarantee

SECTION 13.1.	The Guarantee.	68

-iv-

SECTION 13.2.	Guarantee Unconditional, etc.	68
SECTION 13.3.	Reinstatement.	69
SECTION 13.4.	Subrogation.	69

ARTICLE XIV

Subordination of Guarantee

SECTION 14.1.	Securities Subordinate to Senior Debt of the Guarantor.	69
SECTION 14.2.	No Payment When Senior Debt of the Guarantor in Default; Payment Over of Proceeds Upon Dissolution, Etc.	69
SECTION 14.3.	Payment Permitted If No Default.	71
SECTION 14.4.	Subrogation to Rights of Holders of Senior Debt of the Guarantor.	71
SECTION 14.5.	Provisions Solely to Define Relative Rights.	72
SECTION 14.6.	Trustee to Effectuate Subordination.	72
SECTION 14.7.	No Waiver of Subordination Provisions.	72
SECTION 14.8.	Notice to Trustee.	73
SECTION 14.9.	Reliance on Judicial Order or Certificate of Liquidating Agent.	73
SECTION 14.10.	Trustee Not Fiduciary for Holders of Senior Debt of the Guarantor.	74
SECTION 14.11.	Rights of Trustee as Holder of Senior Debt of the Guarantor; Preservation of Trustee’s Rights.	74
SECTION 14.12.	Article Applicable to Paying Agents.	74

SCHEDULES

Schedule A	Determination of LIBOR

Exhibit A	Form of Officer’s Certificate
Exhibit B	Form of Officer’s Certificate pursuant to Section 10.3

-v-

Junior Subordinated Indenture , dated as of March 10, 2006, between NorthStar Realty Finance Limited Partnership, a Delaware limited partnership (the “ Company ”), NorthStar Realty Finance Corp., a Maryland corporation (the “ Guarantor ”), and Wilmington Trust Company, a Delaware banking corporation, as Trustee (in such capacity, the “ Trustee ”).

Recitals of the Company

Whereas , the Company has duly authorized the execution and delivery of this Indenture to provide for the issuance of its unsecured junior subordinated notes (the “ Securities ”) issued to evidence loans made to the Company of the proceeds from the issuance by NorthStar Realty Finance Trust IV, a Delaware statutory trust (the “ Trust ”), of undivided preferred beneficial interests in the assets of the Trust (the “ Preferred Securities ”) and undivided common beneficial interests in the assets of the Trust (the “ Common Securities ” and, collectively with the Preferred Securities, the “ Trust Securities ”), and to provide the terms and conditions upon which the Securities are to be authenticated, issued and delivered; and the Guarantor has duly authorized the issuance of its guarantee of the Securities (the “Guarantee”) under this Indenture; and

Whereas , all things necessary to make this Indenture a valid agreement of the Company and the Guarantor, in accordance with its terms, have been done.

Now, therefore, this Indenture Witnesseth:

For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities, as follows:

ARTICLE I

Definitions and Other Provisions of General Application

SECTION 1.1. Definitions.

For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires:

(a) the terms defined in this Article I have the meanings assigned to them in this Article I ;

(b) the words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”;

(d) unless the context otherwise requires, any reference to an “Article” or a “Section” refers to an Article or a Section, as the case may be, of this Indenture;

(e) the words “hereby”, “herein”, “hereof” and “hereunder” and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision;

(f) a reference to the singular includes the plural and vice versa; and

(g) the masculine, feminine or neuter genders used herein shall include the masculine, feminine and neuter genders.

“ Act ” when used with respect to any Holder, has the meaning specified in Section 1.4 .

“ Administrative Trustee ” means, with respect to the Trust, a Person identified as an “Administrative Trustee” in the Trust Agreement, solely in its capacity as Administrative Trustee of the Trust under the Trust Agreement and not in its individual capacity, or its successor in interest in such capacity, or any successor Administrative Trustee appointed as therein provided.

“ Additional Interest ” means the interest, if any, that shall accrue on any amounts payable on the Securities, the payment of which has not been made on the applicable Interest Payment Date and which shall accrue at the rate per annum specified or determined as specified in such Security, in each case to the extent legally enforceable.

“ Additional Tax Sums ” has the meaning specified in Section 10.5 .

“ Additional Taxes ” means taxes, duties or other governmental charges imposed on the Trust as a result of a Tax Event (which, for the sake of clarity, does not include amounts required to be deducted or withheld by the Trust from payments made by the Trust to or for the benefit of the Holder of, or any Person that acquires a beneficial interest in, the Securities).

“ Affiliate ” of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, “control,” when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

“ Applicable Depositary Procedures ” means, with respect to any transfer or transaction involving a Global Security or beneficial interest therein, the rules and procedures of the Depositary for such Security, in each case to the extent applicable to such transaction and as in effect from time to time.

“ Authenticating Agent ” means any Person authorized by the Trustee pursuant to Section 6.11 to act on behalf of the Trustee to authenticate the Securities.

“ Board of Directors ” means the board of directors of the Company or the Guarantor, as the context requires, or any duly authorized committee of that board.

“ Board Resolution ” means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company or the Guarantor, as the context requires, to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification.

“ Business Day ” means any day other than (i) a Saturday or Sunday, (ii) a day on which banking institutions in the City of New York are authorized or required by law or executive order to remain closed or (iii) a day on which the Corporate Trust Office of the Trustee is closed for business.

“ Calculation Agent ” has the meaning specified in Section 10.4 .

“Code” means the Internal Revenue Code of 1986, as amended.

“Commission ” means the Securities and Exchange Commission.

“ Common Securities ” has the meaning specified in the first recital of this Indenture.

“ Company ” means the Person named as the “ Company ” in the first paragraph of this Indenture until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter “ Company ” shall mean such successor Person.

“ Company Request ” and “ Company Order ” mean, respectively, the written request or order signed in the name of the Company by its Chairman of the Board of Directors, its Vice Chairman of the Board of Directors, its Chief Executive Officer, its President, its Chief Financial Officer, its Treasurer, its Secretary, a Vice President, an Assistant Treasurer or an Assistant Secretary, and delivered to the Trustee.

“ Corporate Trust Office ” means the principal office of the Trustee at which at any particular time its corporate trust business shall be administered, which office at the date of this Indenture is located at Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001, Attention: Corporate Capital Markets.

“ Debt ” means, with respect to any Person, whether recourse is to all or a portion of the assets of such Person, whether currently existing or hereafter incurred and whether or not contingent and without duplication, (i) every obligation of such Person for money borrowed; (ii) every obligation of such Person evidenced by bonds, debentures, notes or other similar instruments, including obligations incurred in connection with the acquisition of property, assets or businesses; (iii) every reimbursement obligation of such Person with respect to letters of credit, bankers’ acceptances or similar facilities issued for the account of such Person; (iv) every obligation of such Person issued or assumed as the deferred purchase price of property or services (but excluding trade accounts payable or other accrued liabilities arising in the ordinary course of business); (v) every capital lease obligation of such Person; (vi) all indebtedness of such Person, whether incurred on or prior to the date of this Indenture or thereafter incurred, for claims in respect of derivative products, including interest rate, foreign exchange rate and commodity forward contracts, options and swaps and similar arrangements; (vii) every obligation of the type referred to in clauses (i) through (vi) of another Person and all dividends of another Person the payment of which, in either case, such Person has guaranteed or is responsible or liable for, directly or indirectly, as obligor or otherwise; and (viii) any renewals, extensions, refundings, amendments or modifications of any obligation of the type referred to in clauses (i) through (vii).

“ Defaulted Interest ” has the meaning specified in Section 3.1 .

“ Delaware Trustee ” means, with respect to the Trust, the Person identified as the “Delaware Trustee” in the Trust Agreement, solely in its capacity as Delaware Trustee of the Trust under the Trust Agreement and not in its individual capacity, or its successor in interest in such capacity, or any successor Delaware Trustee appointed as therein provided.

“ Depositary ” means an organization registered as a clearing agency under the Exchange Act that is designated as Depositary by the Company or any successor thereto. DTC will be the initial Depositary.

“ Depositary Participant ” means a broker, dealer, bank, other financial institution or other Person for whom from time to time a Depositary effects book-entry transfers and pledges of securities deposited with the Depositary.

“ Distributions ” means amounts payable in respect of the Trust Securities as provided in the Trust Agreement and referred to therein as “Distributions.”

“ Dollar ” or “$” means the currency of the United States of America that, as at the time of payment, is legal tender for the payment of public and private debts.

“ DTC ” means The Depository Trust Company, a New York corporation, or any successor thereto.

“ EDGAR” means the Commission’s Electronic Data Gathering, Analysis and Retrieval system.

“ Equity Interests ” means (a) the partnership interests (general or limited) in a partnership, (b) the membership interests in a limited liability company and (c) the shares or stock interests (both common stock and preferred stock) in a corporation.

“ Event of Default ” has the meaning specified in Section 5.1 .

“ Exchange Act ” means the Securities Exchange Act of 1934 or any statute successor thereto, in each case as amended from time to time.

“ Expiration Date ” has the meaning specified in Section 1.4 .

“ GAAP ” means United States generally accepted accounting principles, consistently applied, from time to time in effect.

“ Global Security ” means a Security that evidences all or part of the Securities, the ownership and transfers of which shall be made through book entries by a Depositary.

“ Government Obligation ” means (a) any security that is (i) a direct obligation of the United States of America of which the full faith and credit of the United States of America is pledged or (ii) an obligation of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America or the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case (i) or (ii), is not callable or redeemable at the option of the issuer thereof, and (b) any depositary receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act) as custodian with respect to any Government Obligation that is specified in clause (a) above and held by such bank for the account of the holder of such depositary receipt, or with respect to any specific payment of principal of or interest on any Government Obligation that is so specified and held, provided , that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depositary receipt from any amount received by the custodian in respect of the Government Obligation or the specific payment of principal or interest evidenced by such depositary receipt.

“ Guarantee ” has the meaning specified in the first recital of this Indenture.

“ Guarantor ” means the Person named as the “ Guarantor ” in the first paragraph of this Indenture until a successor corporation shall have become such pursuant to the applicable provisions of this Indenture, and thereafter “ Guarantor ” shall mean such successor corporation.

“ Holder ” means a Person in whose name a Security is registered in the Securities Register.

“ Indenture ” means this instrument as originally executed or as it may from time to time be amended or supplemented by one or more amendments or indentures supplemental hereto entered into pursuant to the applicable provisions hereof.

“ Interest Payment Date ” means March 30 ^th , June 30 ^th , September 30 ^th and December 30 ^th of each year, commencing on June 30, 2006, during the term of this Indenture.

“ Investment Company Act ” means the Investment Company Act of 1940 or any successor statute thereto, in each case as amended from time to time.

“ Investment Company Event ” means the receipt by the Company of an Opinion of Counsel experienced in such matters to the effect that, as a result of the occurrence of a change in law or regulation (including any announced prospective change) or a written change in interpretation or application of law or regulation by any legislative body, court, governmental agency or regulatory authority, there is more than an insubstantial risk that the Trust is or, within ninety (90) days of the date of such opinion will be, considered an “investment company” that is required to be registered under the Investment Company Act, which change or prospective change becomes effective or would become effective, as the case may be, on or after the date of the issuance of the Securities.

“ LIBOR ” has the meaning specified in Schedule A .

“ LIBOR Business Day ” has the meaning specified in Schedule A .

“ LIBOR Determination Date ” has the meaning specified in Schedule A .

“Liquidation Amount” has the meaning specified in the Trust Agreement.

“ Maturity ,” when used with respect to any Security, means the date on which the principal of such Security or any installment of principal becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption or otherwise.

“ Notice of Default ” means a written notice of the kind specified in Section 5.1(d) .

“ Officer’s Certificate ” means a certificate signed by the Chairman of the Board, a Vice Chairman of the Board, the Chief Executive Officer, the President, the Chief Financial Officer, the Treasurer, the Secretary, a Vice President, an Assistant Treasurer or an Assistant Secretary, of the Company or the Guarantor, as applicable, and delivered to the Trustee.

“ Opinion of Counsel ” means a written opinion of counsel, who may be counsel for or an employee of the Company or the Guarantor or any Affiliate of the Company or the Guarantor.

“ Original Issue Date ” means the date of original issuance of each Security.

“ Outstanding ” means, when used in reference to any Securities, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except:

(i) Securities theretofore canceled by the Trustee or delivered to the Trustee for cancellation;

(ii) Securities for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company or the Guarantor) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Securities; provided , that, if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provision therefor satisfactory to the Trustee has been made; and

(iii) Securities that have been paid, or in substitution for or in lieu of which other Securities have been authenticated and delivered pursuant to the provisions of this Indenture, unless proof satisfactory to the Trustee is presented that any such Securities are held by Holders in whose hands such Securities are valid, binding and legal obligations of the Company;

provided , that, in determining whether the Holders of the requisite principal amount of Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Securities owned by the Company, the Guarantor or any other obligor upon the Securities or any Affiliate of the Company, the Guarantor or such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities that a Responsible Officer of the Trustee actually knows to be so owned shall be so disregarded. Securities so owned that have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee’s right so to act with respect to such Securities and that the pledgee is not the Company, the Guarantor or any other obligor upon the Securities or any Affiliate of the Company, the Guarantor or such other obligor. Notwithstanding anything herein to the contrary, Securities initially issued to the Trust that are owned by the Trust shall be deemed to be Outstanding notwithstanding the ownership by the Company or an Affiliate of any beneficial interest in the Trust.

“ Paying Agent ” means the Trustee or any Person authorized by the Company to pay the principal of or any premium or interest on, or other amounts in respect of, any Securities on behalf of the Company.

“ Person ” means a legal person, including any individual, corporation, company, estate, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated association, government or any agency or political subdivision thereof, or any other entity of whatever nature.

“ Place of Payment ” means, with respect to the Securities, the Corporate Trust Office of the Trustee.

“ Preferred Securities ” has the meaning specified in the first recital of this Indenture.

“ Predecessor Security ” of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security. For the purposes of this definition, any security authenticated and delivered under Section 3.6 in lieu of a mutilated, destroyed, lost or stolen Security shall be deemed to evidence the same debt as the mutilated, destroyed, lost or stolen Security.

“ Proceeding ” has the meaning specified in Section 12.2 .

“ Property Trustee ” means the Person identified as the “Property Trustee” in the Trust Agreement, solely in its capacity as Property Trustee of the Trust under the Trust Agreement and not in its individual capacity, or its successor in interest in such capacity, or any successor Property Trustee appointed as therein provided.

“ Purchasers ” means AWE, Ltd. and Credit Suisse Securities (USA) LLC, as purchasers of the Preferred Securities pursuant to the Purchase Agreement.

“ Redemption Date ” means, when used with respect to any Security to be redeemed, the date fixed for such redemption by or pursuant to this Indenture.

“ Redemption Price ” means, when used with respect to any Security to be redeemed, in whole or in part, the price at which such Security or portion thereof is to be redeemed as fixed by or pursuant to this Indenture.

“ Reference Banks ” has the meaning specified in Schedule A .

“ Regular Record Date ” for the interest payable on any Interest Payment Date with respect to the Securities means the date that is fifteen (15) days preceding such Interest Payment Date (whether or not a Business Day).

“ Responsible Officer ” means, with respect to the Trustee, any Senior Vice President, any Vice President, any Assistant Vice President, the Secretary, any Assistant Secretary, the Treasurer, any Assistant Treasurer, any Trust Officer or Assistant Trust Officer, or any other officer in the Corporate Trust Office of the Trustee with direct responsibility for the administration of this Indenture and also means, with respect to a particular corporate trust matter, any other officer of the Trustee to whom such matter is referred because of that officer’s knowledge of and familiarity with the particular subject.

“ Rights Plan ” means a plan of the Company or the Guarantor providing for the issuance by the Company or the Guarantor to all holders of its Equity Interests of rights entitling the holders thereof to subscribe for or purchase Equity Interests of the Company or the Guarantor, as applicable, which rights (i) are deemed to be transferred with such Equity Interests and (ii) are also issued in respect of future issuances of such Equity Interests, in each case until the occurrence of a specified event or events.

“ Securities ” or “ Security ” means any debt securities or debt security, as the case may be, authenticated and delivered under this Indenture.

“ Securities Act ” means the Securities Act of 1933 or any successor statute thereto, in each case as amended from time to time.

“ Securities Register ” and “ Securities Registrar ” have the respective meanings specified in Section 3.5 .

“ Senior Credit Facility ” means the Master Loan, Guarantee and Security Agreement, dated as of September 28, 2005, among the Company, NorthStar Realty Finance Corp., NS Advisors LLC, as Guarantor and Collateral Manager, the entities listed on the signature pages thereof, and Bank of America, N.A., as in effect on the date hereof and as such agreement may be amended, extended, refinanced or replaced from time to time.

“ Senior Debt ” means the principal of and any premium and interest on (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Company, or the Guarantor, as the context requires, whether or not such claim for post-petition interest is allowed in such proceeding) all Debt of the Company, or the Guarantor, as the context requires, (including, without limitation, the Senior Credit Facility) whether incurred on or prior to the date of this Indenture or thereafter incurred, unless it is provided in the instrument creating or evidencing the same or pursuant to which the same is outstanding, that such obligations are not superior in right of payment to the Securities; provided, however, that Senior Debt shall not include any other debt securities, and guarantees in respect of such debt securities, issued to any trust other than the Trust (or a trustee of such trust), partnership or other entity affiliated with the Company or the Guarantor that is a financing vehicle of the Company or the Guarantor (a “financing entity”), in connection with the issuance by such financing entity of equity securities or other securities that rank pari passu with or junior in right of payment to the Securities, including, without limitation, (i) the debt securities of the Company issued under the Indenture, dated April 12, 2005, between the Company and JPMorgan Chase Bank, National Association, as trustee, (ii) the debt securities of the Company issued under the Indenture, dated May 25, 2005, between the Company and JPMorgan Chase Bank, National Association, as trustee and (iii) the debt securities of the Company issued under the Indenture, dated November 22, 2005, between the Company and JPMorgan Chase Bank, National Association, as trustee,.

“ Special Event ” means the occurrence of an Investment Company Event or a Tax Event.

“ Special Event Redemption Price ” has the meaning specified in Section 11.2 .

“ Special Record Date ” for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 3.1 .

“ Stated Maturity ” means June 30, 2036.

“ Subsidiary ” means a Person more than fifty percent (50%) of the outstanding voting stock or other voting interests of which is owned, directly or indirectly, by the Company or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. For purposes of this definition, “voting stock” means stock that ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency.

“ Tax Event ” means the receipt by the Company of an Opinion of Counsel experienced in such matters to the effect that, as a result of (a) any amendment to or change (including any announced prospective change) in the laws or any regulations thereunder of the United States or any political subdivision or taxing authority thereof or therein or (b) any judicial decision or any official administrative pronouncement (including any private letter ruling, technical advice memorandum or field service advice) or regulatory procedure, including any notice or announcement of intent to adopt any such pronouncement or procedure (an “Administrative Action”), regardless of whether such judicial decision or Administrative Action is issued to or in connection with a proceeding involving the Company or the Trust and whether or not subject to review or appeal, which amendment, change, judicial decision or Administrative Action is enacted, promulgated or announced, in each case, on or after the date of issuance of the Securities, there is more than an insubstantial risk that (i) the Trust is, or will be within ninety (90) days of the date of such opinion, subject to United States federal income tax with respect to income received or accrued on the Securities, (ii) interest payable by the Company on the Securities is not, or within ninety (90) days of the date of such opinion, will not be, deductible by the Company, in whole or in part, for United States federal income tax purposes, or (iii) the Trust is, or will be within ninety (90) days of the date of such opinion, subject to more than a de minimis amount of other taxes, duties or other governmental charges.

“ Trust ” has the meaning specified in the first recital of this Indenture.

“ Trust Agreement ” means the Amended and Restated Trust Agreement executed and delivered by the Company, the Guarantor, the Property Trustee, the Delaware Trustee and the Administrative Trustees named therein, contemporaneously with the execution and delivery of this Indenture, for the benefit of the holders of the Trust Securities, as amended or supplemented from time to time.

“ Trustee ” means the Person named as the “ Trustee ” in the first paragraph of this instrument, solely in its capacity as such and not in its individual capacity, until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and, thereafter, “ Trustee ” shall mean or include each Person who is then a Trustee hereunder.

“ Trust Indenture Act ” means the Trust Indenture Act of 1939, as amended and as in effect on the date as of this Indenture.

“ Trust Securities ” has the meaning specified in the first recital of this Indenture.

SECTION 1.2. Compliance Certificate and Opinions.

(a) Upon any application or request by the Company or the Guarantor to the Trustee to take any action under any provision of this Indenture, the Company or the Guarantor shall, if requested by the Trustee, furnish to the Trustee an Officer’s Certificate stating that all conditions precedent (including covenants compliance with which constitutes a condition precedent), if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent (including covenants compliance with which constitutes a condition precedent), if any, have been complied with, except that, in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished.

(b) Every certificate delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture (other than the certificate provided pursuant to Section 10.3 ) shall include:

(i) a statement by each individual signing such certificate or opinion that such individual has read such covenant or condition and the definitions herein relating thereto;

(ii) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions of such individual contained in such certificate or opinion are based;

(iii) a statement that, in the opinion of such individual, he or she has made such examination or investigation as is necessary to enable him or her to express an informed opinion as to whether or not such covenant or condition has been complied with; and

(iv) a statement as to whether, in the opinion of such individual, such condition or covenant has been complied with.

SECTION 1.3. Forms of Documents Delivered to Trustee.

(a) In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents.

(b) Any certificate or opinion of an officer of the Company or the Guarantor may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or after reasonable inquiry should know, that the certificate or opinion or representations with respect to matters upon which his or her certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company or the Guarantor stating that the information with respect to such factual matters is in the possession of the Company or the Guarantor, unless such counsel knows, or after reasonable inquiry should know, that the certificate or opinion or representations with respect to such matters are erroneous.

(c) Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument.

(d) Whenever, subsequent to the receipt by the Trustee of any Board Resolution, Officer’s Certificate, Opinion of Counsel or other document or instrument, a clerical, typographical or other inadvertent or unintentional error or omission shall be discovered therein, a new document or instrument may be substituted therefor in corrected form with the same force and effect as if originally received in the corrected form and, irrespective of the date or dates of the actual execution and/or delivery thereof, such substitute document or instrument shall be deemed to have been executed and/or delivered as of the date or dates required with respect to the document or instrument for which it is substituted. Without limiting the generality of the foregoing, any Securities issued under the authority of such defective document or instrument shall nevertheless be the valid obligations of the Company entitled to the benefits of this Indenture equally and ratably with all other Outstanding Securities.

SECTION 1.4. Acts of Holders.

(a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given to or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent thereof duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments (including any appointment of an agent) is or are delivered to the Trustee, and, where it is hereby expressly required, to the Company or the Guarantor. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the “ Act ” of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and conclusive in favor of the Trustee and the Company or the Guarantor, if made in the manner provided in this Section 1.4 .

(b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by the certificate of any notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him or her the execution thereof. Where such execution is by a Person acting in other than his or her individual capacity, such certificate or affidavit shall also constitute sufficient proof of his or her authority. The fact and date of the execution by any Person of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner that the Trustee deems sufficient and in accordance with such reasonable rules as the Trustee may determine.

(d) Any request, demand, authorization, direction, notice, consent, waiver or other action by the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done or suffered to be done by the Trustee, the Company or the Guarantor in reliance thereon, whether or not notation of such action is made upon such Security.

(e) Without limiting the foregoing, a Holder entitled to take any action hereunder with regard to any particular Security may do so with regard to all or any part of the principal amount of such Security or by one or more duly appointed agents each of which may do so pursuant to such appointment with regard to all or any part of such principal amount.

(f) Except as set forth in paragraph (g) of this Section 1.4 , the Company may set any day as a record date for the purpose of determining the Holders of Outstanding Securities entitled to give, make or take any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this Indenture to be given, made or taken by Holders of Securities. If any record date is set pursuant to this paragraph, the Holders of Outstanding Securities on such record date, and no other Holders, shall be entitled to take the relevant action, whether or not such Holders remain Holders after such record date; provided , that no such action shall be effective hereunder unless taken on or prior to the applicable Expiration Date (as defined below) by Holders of the requisite principal amount of Outstanding Securities on such record date. Nothing in this paragraph shall be construed to prevent the Company from setting a new record date for any action for which a record date has previously been set pursuant to this paragraph (whereupon the record date previously set shall automatically and with no action by any Person be canceled and of no effect). Promptly after any record date is set pursuant to this paragraph, the Company, at its own expense, shall cause notice of such record date, the proposed action by Holders and the applicable Expiration Date to be given to the Trustee in writing and to each Holder of Securities in the manner set forth in Section 1.6 .

(g) The Trustee may set any day as a record date for the purpose of determining the Holders of Outstanding Securities entitled to join in the giving or making of (i) any Notice of Default, (ii) any declaration of acceleration or rescission or annulment thereof referred to in Section 5.2 , (iii) any request to institute proceedings referred to in Section 5.7(b) or (iv) any direction referred to in Section 5.12 . If any record date is set pursuant to this paragraph, the Holders of Outstanding Securities on such record date, and no other Holders, shall be entitled to join in such notice, declaration, request or direction, whether or not such Holders remain Holders after such record date; provided , that no such action shall be effective hereunder unless taken on or prior to the applicable Expiration Date by Holders of the requisite principal amount of Outstanding Securities on such record date. Nothing in this paragraph shall be construed to prevent the Trustee from setting a new record date for any action for which a record date has previously been set pursuant to this paragraph (whereupon the record date previously set shall automatically and with no action by any Person be canceled and of no effect). Promptly after any record date is set pursuant to this paragraph, the Trustee, at the Company’s expense, shall cause notice of such record date, the proposed action by Holders and the applicable Expiration Date to be given to the Company in writing and to each Holder of Securities in the manner set forth in Section 1.6 .

(h) With respect to any record date set pursuant to paragraph (f) or (g) of this Section 1.4 , the party hereto that sets such record date may designate any day as the “ Expiration Date ” and from time to time may change the Expiration Date to any earlier or later day; provided , that no such change shall be effective unless notice of the proposed new Expiration Date is given to the other party hereto in writing, and to each Holder of Securities in the manner set forth in Section 1.6 , on or prior to the existing Expiration Date. If an Expiration Date is not designated with respect to any record date set pursuant to this Section 1.4 , the party hereto that set such record date shall be deemed to have initially designated the ninetieth (90 ^th ) day after such record date as the Expiration Date with respect thereto, subject to its right to change the Expiration Date as provided in this paragraph. Notwithstanding the foregoing, no Expiration Date shall be later than the one hundred and eightieth (180 ^th ) day after the applicable record date.

SECTION 1.5. Notices, Etc.

Any request, demand, authorization, direction, notice, consent, waiver, Act of Holders, or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with:

(a) the Trustee by any Holder, any holder of Preferred Securities, the Company or the Guarantor shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office,

(b) the Company or the Guarantor by the Trustee, any Holder or any holder of Preferred Securities shall be sufficient for every purpose hereunder if in writing and mailed, first class, postage prepaid, to the Company addressed to it at c/o NorthStar Realty Finance Corp., 527 Madison Avenue, New York, New York 10022 Attn: Chief Financial Officer, or at any other address previously furnished in writing to the Trustee by the Company, or to the Guarantor addressed to it at 527 Madison Avenue, New York, New York 10022 Attn: Chief Financial Officer, or at any other address previously furnished in writing to the Trustee by the Guarantor, or

(c) the Purchasers by the Trustee, the Company, the Guarantor, any Holder or any holder or beneficial owner of the Preferred Securities, shall be sufficient for every purpose hereunder if in writing and mailed first-class postage prepaid to (i) AWE, Ltd. at c/o Maples Finance Limited, P.O. Box 1093 GT, Queensgate House, South Church Street, George Town, Grand Cayman, Cayman Islands, Attention: The Directors, or any other address previously furnis hed by AWE, Ltd, or (ii) Credit Suisse Securities (USA) LLC, Eleven Madison Avenue, New York, New York 10010 , Attention: The CDO Group, or any other address previously furnished by Credit Suisse Securities (USA) LLC.

SECTION 1.6. Notice to Holders; Waiver.

Where this Indenture provides for notice to Holders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first class, postage prepaid, to each Holder affected by such event to the address of such Holder as it appears in the Securities Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. If, by reason of the suspension of or irregularities in regular mail service or for any other reason, it shall be impossible or impracticable to mail notice of any event to Holders when said notice is required to be given pursuant to any provision of this Indenture, then any manner of giving such notice as shall be satisfactory to the Trustee shall be deemed to be a sufficient giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver.

SECTION 1.7. Effect of Headings and Table of Contents.

The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction of this Indenture.

SECTION 1.8. Successors and Assigns.

This Indenture shall be binding upon and shall inure to the benefit of any successor to the Company, the Guarantor and the Trustee, including any successor by operation of law. Except in connection with a transaction involving the Company that is permitted under Article VIII and pursuant to which the assignee agrees in writing to perform the Company’s obligations hereunder, the Company shall not assign its obligations hereunder.

SECTION 1.9. Separability Clause.

If any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby, and there shall be deemed substituted for the provision at issue a valid, legal and enforceable provision as similar as possible to the provision at issue.

SECTION 1.10. Benefits of Indenture.

Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto and their successors and assigns, the holders of Senior Debt, the Holders of the Securities and, to the extent expressly provided in Sections 5.2 , 5.8 , 5.9 , 5.11 , 5.13 , 9.2 and 10.7 , the holders of Preferred Securities, any benefit or any legal or equitable right, remedy or claim under this Indenture.

SECTION 1.11. Governing Law.

This Indenture and the rights and obligations of each of the Holders, the Company, the Guarantor and the Trustee shall be construed and enforced in accordance with and governed by the laws of the State of New York without reference to its conflict of laws provisions (other than Section 5-1401 of the General Obligations Law).

SECTION 1.12. Submission to Jurisdiction.

ANY LEGAL ACTION OR PROCEEDING BY OR AGAINST ANY PARTY HERETO OR WITH RESPECT TO OR ARISING OUT OF THIS INDENTURE MAY BE BROUGHT IN OR REMOVED TO THE COURTS OF THE STATE OF NEW YORK, IN AND FOR THE COUNTY OF NEW YORK, OR OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK (IN EACH CASE SITTING IN THE BOROUGH OF MANHATTAN). BY EXECUTION AND DELIVERY OF THIS INDENTURE, EACH PARTY ACCEPTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS (AND COURTS OF APPEALS THEREFROM) FOR LEGAL PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS INDENTURE.

SECTION 1.13. Non-Business Days.

If any Interest Payment Date, Redemption Date or Stated Maturity of any Security shall not be a Business Day, then (notwithstanding any other provision of this Indenture or the Securities) payment of interest, premium, if any, or principal or other amounts in respect of such Security shall not be made on such date, but shall be made on the next succeeding Business Day (and no interest shall accrue in respect of the amounts whose payment is so delayed for the period from and after such Interest Payment Date, Redemption Date or Stated Maturity, as the case may be, until such next succeeding Business Day) except that, if such Business Day falls in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on the Interest Payment Date or Redemption Date or at the Stated Maturity.

ARTICLE II

Security Forms

SECTION 2.1. Form of Security.

Any Security issued hereunder shall be in substantially the following form:

NorthStar Realty Finance Limited Partnership

Junior Subordinated Note due 2036

No. _____________

$__________

NorthStar Realty Finance Limited Partnership, a limited partnership organized and existing under the laws of Delaware (hereinafter called the “ Company ,” which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to _______________, or registered assigns, the principal sum of $__________ Dollars [ if the Security is a Global Security, then insert — or such other principal amount represented hereby as may be set forth in the records of the Securities Registrar hereinafter referred to in accordance with the Indenture] on June 30, 2036. The Company further promises to pay interest on said principal sum from March 10, 2006, or from the most recent Interest Payment Date to which interest has been paid or duly provided for, quarterly in arrears on March 30 ^th , June 30 ^th , September 30 ^th and December 30 ^th of each year, commencing on June 30, 2006, or if any such day is not a Business Day, on the next succeeding Business Day (and no interest shall accrue in respect of the amounts whose payment is so delayed for the period from and after such Interest Payment Date until such next succeeding Business Day), except that, if such Business Day falls in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case, with the same force and effect as if made on the Interest Payment Date, at a fixed rate per annum equal to 7.95% through the Interest Payment Date in June, 2016, and a variable rate per annum, reset quarterly, equal to LIBOR plus 2.80% thereafter, together with Additional Tax Sums, if any, as provided in Section 10.5 of the Indenture, until the principal hereof is paid or duly provided for or made available for payment; provided , that any overdue principal, premium, if any, or Additional Tax Sums and any overdue installment of interest shall bear Additional Interest (to the extent that the payment of such interest shall be legally enforceable) at a fixed rate per annum equal to 7.95% through the Interest Payment Date in June, 2016, and a variable rate per annum, reset quarterly, equal to LIBOR plus 2.80% thereafter, compounded quarterly, from the dates such amounts are due until they are paid or made available for payment, and such interest shall be payable on demand.

The amount of interest payable for any interest period shall be computed and paid on the basis of a 360-day year and the actual number of days elapsed in the relevant interest period. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date shall, as provided in the Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest installment. Any such interest not so punctually paid or duly provided for shall forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities not less than ten (10) days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange or automated quotation system on which the Securities may be listed, traded or quoted and upon such notice as may be required by such exchange or automated quotation system, all as more fully provided in the Indenture.

Payment of principal of, premium, if any, and interest on this Security shall be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. Payments of principal, premium, if any, and interest due at the Maturity of this Security shall be made at the office or agency of the Company maintained for that purpose in the Place of Payment upon surrender of such Securities to the Paying Agent, and payments of interest shall be made, subject to such surrender where applicable, by wire transfer at such place and to such account at a banking institution in the United States as may be designated in writing to the Paying Agent at least ten (10) Business Days prior to the date for payment by the Person entitled thereto unless proper written wire transfer instructions have not been received by the relevant record date, in which case such payments shall be made by check mailed to the address of such Person as such address shall appear in the Security Register. Notwithstanding the foregoing, so long as the Holder of this Security is the Property Trustee, the payment of the principal of (and premium, if any) and interest (including any overdue installment of interest and Additional Tax Sums, if any) on this Security will be made at such place and to such account as may be designated by the Property Trustee.

The indebtedness evidenced by this Security is, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all Senior Debt, and this Security is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on his or her behalf to take such actions as may be necessary or appropriate to effectuate the subordination so provided and (c) appoints the Trustee his or her attorney-in-fact for any and all such purposes. Each Holder hereof, by his or her acceptance hereof, waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior Debt, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions.

This Security shall be entitled to the benefit of the guarantee of NorthStar Realty Finance Corp., the “ Guarantor ,” which term includes any successor permitted under the Indenture) as specified in the Indenture (the “ Guarantee ”). The obligations of the Guarantor under the Guarantee are, to the extent provided in the Indenture, subordinate and junior in right of payment to the prior payment in full of all Senior Debt of the Guarantor. Each Holder of this Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) authorizes and directs the Trustee on such Holder’s behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination of the Guarantee so provided and (c) appoints the Trustee such holder’s attorney-in-fact for any and all such purposes. Each Holder of this Security, by such Holder’s acceptance hereof, hereby waives all notice of the acceptance of the subordination provisions relating to the Guarantee contained herein and in the Indenture by each holder of Senior Debt of the Guarantor, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions.

Unless the certificate of authentication hereon has been executed by the Trustee by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose.

This Security is one of a duly authorized issue of securities of the Company (the “ Securities ”) issued under the Junior Subordinated Indenture, dated as of March 10, 2006 (the “ Indenture ”), between the Company, Guarantor and Wilmington Trust Company, as Trustee (in such capacity, the “ Trustee ,” which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Guarantor, the Trustee, the holders of Senior Debt and the Holders of the Securities, and of the terms upon which the Securities are, and are to be, authenticated and delivered.

All terms used in this Security that are defined in the Indenture or in the Amended and Restated Trust Agreement, dated as of March 10, 2006 (as modified, amended or supplemented from time to time, the “ Trust Agreement ”), relating to NorthStar Realty Finance Trust IV (the “ Trust ”), among the Company, as Depositor, the trustees named therein and the holders from time to time of the Trust Securities issued pursuant thereto, shall have the meanings assigned to them in the Indenture or the Trust Agreement, as the case may be.

The Company may, on any Interest Payment Date, at its option, upon not less than thirty (30) days’ nor more than sixty (60) days’ written notice to the Holders of the Securities (unless a shorter notice period shall be satisfactory to the Trustee) on or after June 30, 2011 and subject to the terms and conditions of Article XI of the Indenture, redeem this Security in whole at any time or in part from time to time at a Redemption Price equal to one hundred percent (100%) of the principal amount hereof, together, in the case of any such redemption, with accrued interest, including any Additional Interest, to but excluding the date fixed for redemption.

In addition, upon the occurrence and during the continuation of a Special Event, the Company may, at its option, upon not less than thirty (30) days’ nor more than sixty (60) days’ written notice to the Holders of the Securities (unless a shorter notice period shall be satisfactory to the Trustee), redeem this Security, in whole but not in part, subject to the terms and conditions of Article XI of the Indenture at the Special Event Redemption Price.

In the event of redemption of this Security in part only, a new Security or Securities for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. If less than all the Securities are to be redeemed, the particular Securities to be redeemed shall be selected not more than sixty (60) days prior to the Redemption Date by the Trustee from the Outstanding Securities not previously called for redemption, by such method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of a portion of the principal amount of any Security.

The Indenture permits, with certain exceptions as therein provided, the Company, the Guarantor and the Trustee at any time to enter into a supplemental indenture or indentures for the purpose of modifying in any manner the rights and obligations of the Company, the Guarantor and of the Holders of the Securities, with the consent of the Holders of not less than a majority in principal amount of the Outstanding Securities. The Indenture also contains provisions permitting Holders of specified percentages in principal amount of the Securities, on behalf of the Holders of all Securities, to waive compliance by the Company or the Guarantor with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security.

No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and any premium, if any, and interest, including any Additional Interest (to the extent legally enforceable), on this Security at the times, place and rate, and in the coin or currency, herein prescribed.

As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Securities Register, upon surrender of this Security for registration of transfer at the office or agency of the Company maintained for such purpose, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Securities Registrar and duly executed by, the Holder hereof or such Holder’s attorney duly authorized in writing, and thereupon one or more new Securities, of like tenor, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees.

The Securities are issuable only in registered form without coupons in minimum denominations of $100,000 and any integral multiple of $1,000 in excess thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities are exchangeable for a like aggregate principal amount of Securities and of like tenor of a different authorized denomination, as requested by the Holder surrendering the same.

No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith.

The Company, the Guarantor, the Trustee and any agent of the Company, the Guarantor or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Guarantor, the Trustee nor any such agent shall be affected by notice to the contrary.

The Company and, by its acceptance of this Security or a beneficial interest herein, the Holder of, and any Person that acquires a beneficial interest in, this Security agree that, for United States federal, state and local tax purposes, it is intended that this Security constitute indebtedness.

This Security shall be construed and enforced in accordance with and governed by the laws of the State of New York, without reference to its conflict of laws provisions (other than Section 5-1401 of the General Obligations Law).

IN WITNESS WHEREOF, the Company has duly executed this certificate this ____ day of ____________, 2006.

NorthStar Realty Finance Limited Partnership

	By:	NorthStar Realty Finance Corp., its General Partner

	By:
		Name: Title:

SECTION 2.2. Restricted Legend.

(a) Any Security issued hereunder shall bear a legend in substantially the following form:

“[ IF THIS SECURITY IS A GLOBAL SECURITY INSERT: THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF THE DEPOSITORY TRUST COMPANY (“DTC”) OR A NOMINEE OF DTC. THIS SECURITY IS EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN DTC OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY DTC TO A NOMINEE OF DTC OR BY A NOMINEE OF DTC TO DTC OR ANOTHER NOMINEE OF DTC) MAY BE REGISTERED EXCEPT IN LIMITED CIRCUMSTANCES.

UNLESS THIS SECURITY IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF DTC TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY SECURITY ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.]

THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND SUCH SECURITIES, AND ANY INTEREST THEREIN, MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF ANY SECURITIES IS HEREBY NOTIFIED THAT THE SELLER OF THE SECURITIES MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A UNDER THE SECURITIES ACT.

THE HOLDER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITIES MAY BE OFFERED, RESOLD OR OTHERWISE TRANSFERRED ONLY (I) TO THE COMPANY, (II) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A “QUALIFIED INSTITUTIONAL BUYER” (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, OR (III) TO AN INSTITUTIONAL “ACCREDITED INVESTOR” WITHIN THE MEANING OF SUBPARAGRAPH (a) (1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF AN “ACCREDITED INVESTOR” WITHIN THE MEANING OF SUBPARAGRAPH (a) (1), (2), (3) OR (7) OF RULE 501, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND, IN THE CASE OF (III), SUBJECT TO THE RIGHT OF THE COMPANY TO REQUIRE AN OPINION OF COUNSEL ADDRESSING COMPLIANCE WITH THE U.S. SECURITIES LAWS, AND OTHER INFORMATION SATISFACTORY TO IT AND (B) THE HOLDER WILL NOTIFY ANY PURCHASER OF ANY SECURITIES FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE.

THE SECURITIES WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING AN AGGREGATE PRINCIPAL AMOUNT OF NOT LESS THAN $100,000. TO THE FULLEST EXTENT PERMITTED BY LAW, ANY ATTEMPTED TRANSFER OF SECURITIES, OR ANY INTEREST THEREIN, IN A BLOCK HAVING AN AGGREGATE PRINCIPAL AMOUNT OF LESS THAN $100,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. TO THE FULLEST EXTENT PERMITTED BY LAW, ANY SUCH PURPORTED TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF SUCH SECURITIES FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF PRINCIPAL OF OR INTEREST ON SUCH SECURITIES, OR ANY INTEREST THEREIN, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN SUCH SECURITIES.

THE HOLDER OF THIS SECURITY, OR ANY INTEREST THEREIN, BY ITS ACCEPTANCE HEREOF OR THEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT PLAN, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED (“ ERISA ”), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE “ CODE ”) (EACH A “ PLAN ”), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE “PLAN ASSETS” BY REASON OF ANY PLAN’S INVESTMENT IN THE ENTITY, AND NO PERSON INVESTING “PLAN ASSETS” OF ANY PLAN MAY ACQUIRE OR HOLD THIS SECURITY OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY, OR ANY INTEREST THEREIN, ARE NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE AND HOLDING. ANY PURCHASER OR HOLDER OF THE SECURITIES OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN OR OTHER PLAN TO WHICH TITLE I OF ERISA OR SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF ANY SUCH EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE “PLAN ASSETS” OF ANY SUCH EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE OR HOLDING WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH FULL EXEMPTIVE RELIEF IS NOT AVAILABLE UNDER AN APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION.

(b) The above legends shall not be removed from any Security unless there is delivered to the Company satisfactory evidence, which may include an Opinion of Counsel, as may be reasonably required to ensure that any future transfers thereof may be made without restriction under or violation of the provisions of the Securities Act and other applicable law. Upon provision of such satisfactory evidence, the Company shall execute and deliver to the Trustee, and the Trustee shall deliver, at the written direction of the Company, a Security that does not bear the legend.

SECTION 2.3. Form of Trustee’s Certificate of Authentication.

The Trustee’s certificates of authentication shall be in substantially the following form:

This represents Securities referred to in the within-mentioned Indenture.

Dated:
	WILMINGTON TRUST COMPANY , not in its individual capacity but solely as Trustee

	By:
		Authorized officer

SECTION 2.4. Temporary Securities.

(a) Pending the preparation of definitive Securities, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities that are printed, lithographed, typewritten, mimeographed or otherwise produced, in any denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as evidenced by their execution of such Securities.

(b) If temporary Securities are issued, the Company will cause definitive Securities to be prepared without unreasonable delay. After the preparation of definitive Securities, the temporary Securities shall be exchangeable for definitive Securities upon surrender of the temporary Securities at the office or agency of the Company designated for that purpose without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor one or more definitive Securities of any authorized denominations having the same Original Issue Date and Stated Maturity and having the same terms as such temporary Securities. Until so exchanged, the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities.

SECTION 2.5. Definitive Securities.

The Securities issued on the Original Issue Date shall be in definitive form. The definitive Securities shall be printed, lithographed or engraved, or produced by any combination of these methods, if required by any securities exchange on which the Securities may be listed, on a steel engraved border or steel engraved borders or may be produced in any other manner permitted by the rules of any securities exchange on which the Securities may be listed, all as determined by the officers executing such Securities, as evidenced by their execution of such Securities.

ARTICLE III

The Securities

SECTION 3.1. Payment of Principal and Interest.

(a) The unpaid principal amount of the Securities shall bear interest at a fixed rate per annum equal to 7.95% through the Interest Payment Date in June, 2016, and a variable rate per annum, reset quarterly, equal to LIBOR plus 2.80% thereafter, such interest to accrue from the Original Issue Date or from the most recent Interest Payment Date to which interest has been paid or duly provided for, and any overdue principal, premium, if any, or Additional Tax Sums and any overdue installment of interest shall bear Additional Interest (to the extent payment of such interest would be legally enforceable) at a fixed rate per annum equal to 7.95% through the Interest Payment Date in June, 2016, and a variable rate per annum, reset quarterly, equal to LIBOR plus 2.80% thereafter, from the dates such amounts are due until they are paid or funds for the payment thereof are made available for payment.

(b) Interest and Additional Interest on any Security that is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name that Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, except that interest and any Additional Interest payable on the Stated Maturity (or any date of principal repayment upon early maturity) of the principal of a Security or on a Redemption Date shall be paid to the Person to whom principal is paid. The initial payment of interest on any Security that is issued between a Regular Record Date and the related Interest Payment Date shall be payable as provided in such Security.

(c) Any interest on any Security that is due and payable, but is not timely paid or duly provided for, on any Interest Payment Date for Securities (herein called “ Defaulted Interest ”) shall forthwith cease to be payable to the registered Holder on the relevant Regular Record Date by virtue of having been such Holder, and such Defaulted Interest may be paid by the Company, at its election in each case, as provided in paragraph (i) or (ii) below:

(i) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Securities (or their respective Predecessor Securities) are registered at the close of business on a special record date for the payment of such Defaulted Interest (a “ Special Record Date ”), which shall be fixed in the following manner. At least thirty (30) days prior to the date of the proposed payment, the Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest, which shall be not more than fifteen (15) days and not less than ten (10) days prior to the date of the proposed payment and not less than ten (10) days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be mailed, first class, postage prepaid, to each Holder of a Security at the address of such Holder as it appears in the Securities Register not less than ten (10) days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Securities (or their respective Predecessor Securities) are registered on such Special Record Date; or

(ii) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange or automated quotation system on which the Securities may be listed, traded or quoted and, upon such notice as may be required by such exchange or automated quotation system (or by the Trustee if the Securities are not listed), if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such payment shall be deemed practicable by the Trustee.

(d) Payments of interest on the Securities shall include interest accrued to but excluding the respective Interest Payment Dates. The amount of interest payable for any interest period shall be computed and paid on the basis of a 360-day year and the actual number of days elapsed in the relevant interest period.

(e) Payment of principal of, premium, if any, and interest on the Securities shall be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. Payments of principal, premium, if any, and interest due at the Maturity of such Securities shall be made at the Place of Payment upon surrender of such Securities to the Paying Agent and payments of interest shall be made subject to such surrender where applicable, by wire transfer at such place and to such account at a banking institution in the United States as may be designated in writing to the Paying Agent at least ten (10) Business Days prior to the date for payment by the Person entitled thereto unless proper written transfer instructions have not been received by the relevant record date, in which case such payments shall be made by check mailed to the address of such Person as such address shall appear in the Security Register. Notwithstanding the foregoing, so long as the holder of the Security is the Property Trustee, the payment of the principal of (and premium if any) and interest (including any overdue installment of interest and Additional Tax Sums, if any) on the Security will be made at such place and to such account as may be designated by the Property Trustee.

(f) Subject to the foregoing provisions of this Section 3.1 , each Security delivered under this Indenture upon transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, that were carried by such other Security.

SECTION 3.2. Denominations.

The Securities shall be in registered form without coupons and shall be issuable in minimum denominations of $100,000 and any integral multiple of $1,000 in excess thereof.

SECTION 3.3. Execution, Authentication, Delivery and Dating.

(a) At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities in an aggregate principal amount (including all then Outstanding Securities) not in excess of $50,100,000 executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities, and the Trustee in accordance with the Company Order shall authenticate and deliver such Securities. In authenticating such Securities, and accepting the additional responsibilities under this Indenture in relation to such Securities, the Trustee shall be entitled to receive, and shall be fully protected in relying upon:

(i) a copy of any Board Resolution relating thereto; and

(ii) an Opinion of Counsel stating that (1) such Securities, when authenticated and delivered by the Trustee and issued by the Company in the manner and subject to any conditions specified in such Opinion of Counsel, will constitute valid and legally binding obligations of the Company, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors’ rights and to general equity principles; (2) the Securities have been duly authorized and executed by the Company and have been delivered to the Trustee for authentication in accordance with this Indenture; and (3) the Securities are not required to be registered under the Securities Act.

(b) The Securities shall be executed on behalf of the Company by its Chairman of the Board, its Vice Chairman of the Board, its Chief Executive Officer, its President or one of its Vice Presidents. The signature of any of these officers on the Securities may be manual or facsimile. Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities.

(c) No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose, unless there appears on such Security a certificate of authentication substantially in the form provided for herein executed by the Trustee by the manual signature of one of its authorized officers, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder. Notwithstanding the foregoing, if any Security shall have been authenticated and delivered hereunder but never issued and sold by the Company, and the Company shall deliver such Security to the Trustee for cancellation as provided in Section 3.8 , for all purposes of this Indenture such Security shall be deemed never to have been authenticated and delivered hereunder and shall never be entitled to the benefits of this Indenture.

(d) Each Security shall be dated the date of its authentication.

SECTION 3.4. Global Securities.

(a) Upon the election of the Holder after the Original Issue Date, which election need not be in writing, the Securities owned by such Holder shall be issued in the form of one or more Global Securities registered in the name of the Depositary or its nominee. Each Global Security issued under this Indenture shall be registered in the name of the Depositary designated by the Company for such Global Security or a nominee thereof and delivered to such Depositary or a nominee thereof or custodian therefor, and each such Global Security shall constitute a single Security for all purposes of this Indenture.

(b) Notwithstanding any other provision in this Indenture, no Global Security may be exchanged in whole or in part for registered Securities, and no transfer of a Global Security in whole or in part may be registered, in the name of any Person other than the Depositary for such Global Security or a nominee thereof unless (i) such Depositary advises the Trustee and the Company in writing that such Depositary is no longer willing or able to properly discharge its responsibilities as Depositary with respect to such Global Security, and no qualified successor is appointed by the Company within ninety (90) days of receipt by the Company of such notice, (ii) such Depositary ceases to be a clearing agency registered under the Exchange Act and no successor is appointed by the Company within ninety (90) days after obtaining knowledge of such event, (iii) the Company executes and delivers to the Trustee a Company Order stating that the Company elects to terminate the book-entry system through the Depositary or (iv) an Event of Default shall have occurred and be continuing. Upon the occurrence of any event specified in clause (i), (ii), (iii) or (iv) above, the Trustee shall notify the Depositary and instruct the Depositary to notify all owners of beneficial interests in such Global Security of the occurrence of such event and of the availability of Securities to such owners of beneficial interests requesting the same. Upon the issuance of such Securities and the registration in the Securities Register of such Securities in the names of the Holders of the beneficial interests therein, the Trustees shall recognize such holders of beneficial interests as Holders.

(c) If any Global Security is to be exchanged for other Securities or canceled in part, or if another Security is to be exchanged in whole or in part for a beneficial interest in any Global Security, then either (i) such Global Security shall be so surrendered for exchange or cancellation as provided in this Article III or (ii) the principal amount thereof shall be reduced or increased by an amount equal to the portion thereof to be so exchanged or canceled, or equal to the principal amount of such other Security to be so exchanged for a beneficial interest therein, as the case may be, by means of an appropriate adjustment made on the records of the Securities Registrar, whereupon the Trustee, in accordance with the Applicable Depositary Procedures, shall instruct the Depositary or its authorized representative to make a corresponding adjustment to its records. Upon any such surrender or adjustment of a Global Security by the Depositary, accompanied by registration instructions, the Company shall execute and the Trustee shall authenticate and deliver any Securities issuable in exchange for such Global Security (or any portion thereof) in accordance with the instructions of the Depositary. The Trustee shall not be liable for any delay in delivery of such instructions and may conclusively rely on, and shall be fully protected in relying on, such instructions.

(d) Every Security authenticated and delivered upon registration of transfer of, or in exchange for or in lieu of, a Global Security or any portion thereof shall be authenticated and delivered in the form of, and shall be, a Global Security, unless such Security is registered in the name of a Person other than the Depositary for such Global Security or a nominee thereof.

(e) Securities distributed to holders of Book-Entry Preferred Securities (as defined in the Trust Agreement) upon the dissolution of the Trust shall be distributed in the form of one or more Global Securities registered in the name of a Depositary or its nominee, and deposited with the Securities Registrar, as custodian for such Depositary, or with such Depositary, for credit by the Depositary to the respective accounts of the beneficial owners of the Securities represented thereby (or such other accounts as they may direct). Securities distributed to holders of Preferred Securities other than Book-Entry Preferred Securities upon the dissolution of the Trust shall not be issued in the form of a Global Security or any other form intended to facilitate book-entry trading in beneficial interests in such Securities.

(f) The Depositary or its nominee, as the registered owner of a Global Security, shall be the Holder of such Global Security for all purposes under this Indenture and the Securities, and owners of beneficial interests in a Global Security shall hold such interests pursuant to the Applicable Depositary Procedures. Accordingly, any such owner’s beneficial interest in a Global Security shall be shown only on, and the transfer of such interest shall be effected only through, records maintained by the Depositary or its nominee or its Depositary Participants. The Securities Registrar and the Trustee shall be entitled to deal with the Depositary for all purposes of this Indenture relating to a Global Security (including the payment of principal and interest thereon and the giving of instructions or directions by owners of beneficial interests therein and the giving of notices) as the sole Holder of the Security and shall have no obligations to the owners of beneficial interests therein. Neither the Trustee nor the Securities Registrar shall have any liability in respect of any transfers effected by the Depositary.

(g) The rights of owners of beneficial interests in a Global Security shall be exercised only through the Depositary and shall be limited to those established by law and agreements between such owners and the Depositary and/or its Depositary Participants.

(h) No holder of any beneficial interest in any Global Security held on its behalf by a Depositary shall have any rights under this Indenture with respect to such Global Security, and such Depositary may be treated by the Company, the Guarantor, the Trustee and any agent of the Company, the Guarantor or the Trustee as the owner of such Global Security for all purposes whatsoever. None of the Company, the Guarantor, the Trustee nor any agent of the Company, the Guarantor or the Trustee will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests of a Global Security or maintaining, supervising or reviewing any records relating to such beneficial ownership interests. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Guarantor, the Trustee or any agent of the Company, the Guarantor or the Trustee from giving effect to any written certification, proxy or other authorization furnished by a Depositary or impair, as between a Depositary and such holders of beneficial interests, the operation of customary practices governing the exercise of the rights of the Depositary (or its nominee) as Holder of any Security.

SECTION 3.5. Registration, Transfer and Exchange Generally.

(a) The Trustee shall cause to be kept at the Corporate Trust Office a register (the “ Securities Register ”) in which the registrar and transfer agent with respect to the Securities (the “ Securities Registrar ”), subject to such reasonable regulations as it may prescribe, shall provide for the registration of Securities and of transfers and exchanges of Securities. The Trustee shall at all times also be the Securities Registrar. The provisions of Article VI shall apply to the Trustee in its role as Securities Registrar.

(b) Subject to compliance with Section 2.2(b), upon surrender for registration of transfer of any Security at the offices or agencies of the Company designated for that purpose the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of any authorized denominations of like tenor and aggregate principal amount.

(c) At the option of the Holder, Securities may be exchanged for other Securities of any authorized denominations, of like tenor and aggregate principal amount, upon surrender of the Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange, the Company shall execute, and upon receipt thereof the Trustee shall authenticate and deliver, the Securities that the Holder making the exchange is entitled to receive.

(d) All Securities issued upon any transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such transfer or exchange.

(e) Every Security presented or surrendered for transfer or exchange shall (if so required by the Company or the Trustee) be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Company and the Securities Registrar, duly executed by the Holder thereof or such Holder’s attorney duly authorized in writing.

(f) No service charge shall be made to a Holder for any transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any transfer or exchange of Securities.

(g) Neither the Company nor the Trustee shall be required pursuant to the provisions of this Section 3.5 to (i) issue, register the transfer of or exchange any Security during a period beginning at the opening of business fifteen (15) days before the day of selection for redemption of Securities pursuant to Article XI and ending at the close of business on the day of mailing of the notice of redemption or (ii) to register the transfer of or exchange any Security so selected for redemption in whole or in part, except, in the case of any such Security to be redeemed in part, any portion thereof not to be redeemed.

(h) The Company shall designate an office or offices or agency or agencies where Securities may be surrendered for registration or transfer or exchange. The Company initially designates the Corporate Trust Office as its office and agency for such purposes. The Company shall give prompt written notice to the Trustee and to the Holders of any change in the location of any such office or agency.

SECTION 3.6. Mutilated, Destroyed, Lost and Stolen Securities.

(a) If any mutilated Security is surrendered to the Trustee together with such security or indemnity as may be required by the Company or the Trustee to save each of them harmless, the Company shall execute and upon receipt thereof the Trustee shall authenticate and deliver in exchange therefor a new Security of like tenor and aggregate principal amount and bearing a number not contemporaneously outstanding.

(b) If there shall be delivered to the Company and to the Trustee (i) evidence to their satisfaction of the destruction, loss or theft of any Security and (ii) such security or indemnity as may be required by them to save each of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and upon its written request the Trustee shall authenticate and deliver, in lieu of any such destroyed, lost or stolen Security, a new Security of like tenor and aggregate principal amount as such destroyed, lost or stolen Security, and bearing a number not contemporaneously outstanding.

(c) If any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security.

(d) Upon the issuance of any new Security under this Section 3.6 , the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith.

(e) Every new Security issued pursuant to this Section 3.6 in lieu of any mutilated, destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the mutilated, destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all the benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder.

(f) The provisions of this Section 3.6 are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities.

SECTION 3.7. Persons Deemed Owners.

The Company, the Guarantor, the Trustee and any agent of the Company, the Guarantor or the Trustee shall treat the Person in whose name any Security is registered as the owner of such Security for the purpose of receiving payment of principal of and any interest on such Security and for all other purposes whatsoever, and neither the Company, the Guarantor, the Trustee nor any agent of the Company, the Guarantor or the Trustee shall be affected by notice to the contrary.

SECTION 3.8. Cancellation.

All Securities surrendered for payment, redemption, transfer or exchange shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee, and any such Securities and Securities surrendered directly to the Trustee for any such purpose shall be promptly canceled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder that the Company may have acquired in any manner whatsoever, and all Securities so delivered shall be promptly canceled by the Trustee. No Securities shall be authenticated in lieu of or in exchange for any Securities canceled as provided in this Section 3.8 , except as expressly permitted by this Indenture. All canceled Securities shall be disposed of by the Trustee in accordance with its customary practices and the Trustee shall deliver to the Company a certificate of such disposition.

SECTION 3.9. RESERVED.

SECTION 3.10. RESERVED.

SECTION 3.11. Agreed Tax Treatment.

Each Security issued hereunder shall provide that the Company and, by its acceptance or acquisition of a Security or a beneficial interest therein, the Holder of, and any Person that acquires a direct or indirect beneficial interest in, such Security, intend and agree to treat such Security as indebtedness of the Company for United States Federal, state and local tax purposes and to treat the Preferred Securities (including but not limited to all payments and proceeds with respect to the Preferred Securities) as an undivided beneficial ownership interest in the Securities (and payments and proceeds therefrom, respectively) for United States Federal, state and local tax purposes. The provisions of this Indenture shall be interpreted to further this intention and agreement of the parties.

SECTION 3.12. CUSIP Numbers.

The Company in issuing the Securities may use “CUSIP” numbers (if then generally in use), and, if so, the Trustee shall use “CUSIP” numbers in notices of redemption and other similar or related materials as a convenience to Holders; provided , that any such notice or other materials may state that no representation is made as to the correctness of such numbers either as printed on the Securities or as contained in any notice of redemption or other materials and that reliance may be placed only on the other identification numbers printed on the Securities, and any such redemption shall not be affected by any defect in or omission of such numbers.

ARTICLE IV

Satisfaction and Discharge

SECTION 4.1. Satisfaction and Discharge of Indenture.

This Indenture shall, upon Company Request, cease to be of further effect (except as to any surviving rights of registration of transfer or exchange of Securities herein expressly provided for and as otherwise provided in this Section 4.1 ) and the Trustee, on demand of and at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when

(a) either

(i) all Securities theretofore authenticated and delivered (other than (A) Securities that have been mutilated, destroyed, lost or stolen and that have been replaced or paid as provided in Section 3.6 and (B) Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust as provided in Section 10.2) have been delivered to the Trustee for cancellation; or

(ii) all such Securities not theretofore delivered to the Trustee for cancellation

(A)		have become due and payable, or

(B)		will become due and payable at their Stated Maturity within one year of the date of deposit, or

(C)		are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company,

and the Company, in the case of subclause (ii)(A), (B) or (C) above, has deposited or caused to be deposited with the Trustee as trust funds in trust for such purpose (x) an amount in the currency or currencies in which the Securities are payable, (y) Government Obligations which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than the due date of any payment, money in an amount or (z) a combination thereof, in each case sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for principal and any premium, if any, and interest (including any Additional Interest) to the date of such deposit (in the case of Securities that have become due and payable) or to the Stated Maturity (or any date of principal repayment upon early maturity) or Redemption Date, as the case may be;

(b) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and

(c) the Company has delivered to the Trustee an Officer’s Certificate and an Opinion of Counsel each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with.

Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 6.6 , the obligations of the Company to any Authenticating Agent under Section 6.11 and, if money shall have been deposited with the Trustee pursuant to subclause (a)(ii) of this Section 4.1 , the obligations of the Trustee under Section 4.2 and Section 10.2(e) shall survive.

SECTION 4.2. Application of Trust Money.

Subject to the provisions of Section 10.2(e) , all money deposited with the Trustee pursuant to Section 4.1 shall be held in trust and applied by the Trustee, in accordance with the provisions of the Securities and this Indenture, to the payment in accordance with Section 3.1 , either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal and any premium, if any, and interest (including any Additional Interest) for the payment of which such money or obligations have been deposited with or received by the Trustee. Moneys held by the Trustee under this Section 4.2 shall not be subject to the claims of holders of Senior Debt under Article XII .

ARTICLE V

Remedies

SECTION 5.1. Events of Default.

“ Event of Default ” means, wherever used herein with respect to the Securities, any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body):

(a) default in the payment of any interest upon any Security, including any Additional Interest in respect thereof, when it becomes due and payable, and continuance of such default for a period of thirty (30) days; or

(b) default in the payment of the principal of or any premium, if any, on any Security at its Maturity; or

(c) default in the performance, or breach, of any covenant or warranty of the Company or the Guarantor in this Indenture and continuance of such default or breach for a period of thirty (30) days after there has been given, by registered or certified mail, to the Company and the Guarantor by the Trustee or to the Company, the Guarantor and the Trustee by the Holders of at least twenty five percent (25%) in aggregate principal amount of the Outstanding Securities a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a “Notice of Default” hereunder; or

(d) the entry by a court having jurisdiction in the premises of a decree or order adjudging the Company or the Guarantor a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company or the Guarantor under any applicable Federal or state bankruptcy, insolvency, reorganization or other similar law, or appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or the Guarantor or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order for relief or any such other decree or order unstayed and in effect for a period of sixty (60) consecutive days; or

(e) the institution by the Company or the Guarantor of proceedings to be adjudicated a bankrupt or insolvent, or the consent by the Company or the Guarantor to the institution of bankruptcy or insolvency proceedings against it, or the filing by the Company or the Guarantor of a petition or answer or consent seeking reorganization or relief under any applicable Federal or state bankruptcy, insolvency, reorganization or other similar law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Company or of any substantial part of its property or the Guarantor or of any substantial part of its property, or the making by the Company or the Guarantor of an assignment for the benefit of creditors, or the admission by the Company or the Guarantor in writing of its inability to pay its debts generally as they become due and its willingness to be adjudicated a bankrupt or insolvent, or the taking of corporate action by the Company or the Guarantor in furtherance of any such action; or

(f) the Trust shall have voluntarily or involuntarily liquidated, dissolved, wound-up its business or otherwise terminated its existence, except in connection with (1) the distribution of the Securities to holders of the Preferred Securities in liquidation of their interests in the Trust, (2) the redemption of all of the outstanding Preferred Securities or (3) certain mergers, consolidations or amalgamations, each as and to the extent permitted by the Trust Agreement; or

(g) the Guarantee shall cease to be in full force and effect or the Guarantor shall, in writing to the Trustee, to a Holder or a holder of the Preferred Securities or to any governmental agency or regulatory authority, deny or disaffirm its obligations under the Guarantee.

SECTION 5.2. Acceleration of Maturity; Rescission and Annulment.

(a) If an Event of Default occurs and is continuing, then and in every such case the Trustee or the Holders of not less than twenty five percent (25%) in principal amount of the Outstanding Securities may declare the principal amount of all the Securities to be due and payable immediately, by a notice in writing to the Company and the Guarantor (and to the Trustee if given by Holders), provided, that if, upon an Event of Default, the Trustee or the Holders of not less than twenty five percent (25%) in principal amount of the Outstanding Securities fail to declare the principal of all the Outstanding Securities to be immediately due and payable, the holders of at least twenty five percent (25%) in aggregate Liquidation Amount of the Preferred Securities then outstanding shall have the right to make such declaration by a notice in writing to the Property Trustee, the Company and the Guarantor and the Trustee; and upon any such declaration the principal amount of and the accrued interest (including any Additional Interest) on all the Securities shall become immediately due and payable.

(b) At any time after such a declaration of acceleration with respect to Securities has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter provided in this Article V , the Holders of a majority in principal amount of the Outstanding Securities, by written notice to the Indenture Trustee, or the holders of a majority in aggregate Liquidation Amount of the Preferred Securities, by written notice to the Property Trustee, the Company, the Guarantor and the Trustee, may rescind and annul such declaration and its consequences if:

(i) the Company or the Guarantor has paid or deposited with the Trustee a sum sufficient to pay:

(A)		all overdue installments of interest on all Securities,

(B)		any accrued Additional Interest on all Securities,

(C)		the principal of and any premium, if any, on any Securities that have become due otherwise than by such declaration of acceleration and interest (including any Additional Interest) thereon at the rate borne by the Securities, and

(D)		all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, the Property Trustee and their agents and counsel; and

(ii) all Events of Default with respect to Securities, other than the non-payment of the principal of Securities that has become due solely by such acceleration, have been cured or waived as provided in Section 5.13 ;

provided , that if the Holders of such Securities fail to annul such declaration and waive such default, the holders of not less than a majority in aggregate Liquidation Amount of the Preferred Securities then outstanding shall also have the right to rescind and annul such declaration and its consequences by written notice to the Property Trustee, the Company, the Guarantor and the Trustee, subject to the satisfaction of the conditions set forth in paragraph (b) of this Section 5.2 . No such rescission shall affect any subsequent default or impair any right consequent thereon.

SECTION 5.3. Collection of Indebtedness and Suits for Enforcement by Trustee.

(a) Each of the Company and the Guarantor covenants that if:

(i) default is made in the payment of any installment of interest (including any Additional Interest) on any Security when such interest becomes due and payable and such default continues for a period of thirty (30) days, or

(ii) default is made in the payment of the principal of and any premium on any Security at the Maturity thereof,

the Company and the Guarantor will, upon demand of the Trustee, pay to the Trustee, for the benefit of the Holders of such Securities, the whole amount then due and payable on such Securities for principal and any premium and interest (including any Additional Interest) and, in addition thereto, all amounts owing the Trustee under Section 6.6 .

(b) If the Company or the Guarantor fails to pay such amounts forthwith upon such demand, the Trustee, in its own name and as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, and may prosecute such proceeding to judgment or final decree, and may enforce the same against the Company, the Guarantor or any other obligor upon such Securities and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company, the Guarantor or any other obligor upon the Securities, wherever situated.

(c) If an Event of Default with respect to Securities occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of Securities by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy.

SECTION 5.4. Trustee May File Proofs of Claim.

In case of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or similar judicial proceeding relative to the Company or the Guarantor (or any other obligor upon the Securities), its property or its creditors, the Trustee shall be entitled and empowered, by intervention in such proceeding or otherwise, to take any and all actions authorized hereunder in order to have claims of the Holders and the Trustee allowed in any such proceeding. In particular, the Trustee shall be authorized to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to first pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts owing the Trustee, any predecessor Trustee and other Persons under Section 6.6 .

SECTION 5.5. Trustee May Enforce Claim Without Possession of Securities.

All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment shall, subject to Article XII and after provision for the payment of all the amounts owing the Trustee, any predecessor Trustee and other Persons under Section 6.6 , be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered.

SECTION 5.6. Application of Money Collected.

Any money or property collected or to be applied by the Trustee with respect to the Securities pursuant to this Article V shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money or property on account of principal or any premium or interest (including any Additional Interest), upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid:

FIRST: To the payment of all amounts due the Trustee, any predecessor Trustee and other Persons under Section 6.6 ;

SECOND: To the payment of all Senior Debt of the Company if and to the extent required by Article XII or by Article XIV .

THIRD: Subject to Article XII and Article XIV , to the payment of the amounts then due and unpaid upon the Securities for principal and any premium and interest (including any Additional Interest) in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on the Securities for principal and any premium and interest (including any Additional Interest), respectively; and

FOURTH: The balance, if any, to the Person or Persons entitled thereto.

SECTION 5.7. Limitation on Suits.

Subject to Section 5.8 , no Holder of any Securities shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture or for the appointment of a custodian, receiver, assignee, trustee, liquidator, sequestrator (or other similar official) or for any other remedy hereunder, unless:

(a) such Holder has previously given written notice to the Trustee of a continuing Event of Default with respect to the Securities;

(b) the Holders of not less than a majority in aggregate principal amount of the Outstanding Securities shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder;

(c) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request;

(d) the Trustee after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding for sixty (60) days; and

(e) no direction inconsistent with such written request has been given to the Trustee during such sixty (60)-day period by the Holders of a majority in aggregate principal amount of the Outstanding Securities;

it being understood and intended that no one or more of such Holders shall have any right in any manner whatever by virtue of, or by availing itself of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders of Securities, or to obtain or to seek to obtain priority or preference over any other of such Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all such Holders.

SECTION 5.8. Unconditional Right of Holders to Receive Principal, Premium and Interest; Direct Action by Holders of Preferred Securities.

Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment of the principal of and any premium on such Security at its Maturity and payment of interest (including any Additional Interest) on such Security when due and payable and to institute suit for the enforcement of any such payment, and such right shall not be impaired without the consent of such Holder. Any registered holder of the Preferred Securities shall have the right, upon the occurrence of an Event of Default described in Section 5.1(a) or Section 5.1(b) to institute a suit directly against the Company or the Guarantor for enforcement of payment to such holder of principal of and any premium and interest (including any Additional Interest) on the Securities having a principal amount equal to the aggregate Liquidation Amount of the Preferred Securities held by such holder.

SECTION 5.9. Restoration of Rights and Remedies.

If the Trustee, any Holder or any holder of Preferred Securities has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee, such Holder or such holder of Preferred Securities, then and in every such case the Company, the Guarantor, the Trustee, such Holders and such holder of Preferred Securities shall, subject to any determination in such proceeding, be restored severally and respectively to their former positions hereunder, and thereafter all rights and remedies of the Trustee, such Holder and such holder of Preferred Securities shall continue as though no such proceeding had been instituted.

SECTION 5.10. Rights and Remedies Cumulative.

Except as otherwise provided in Section 3.6(f) , no right or remedy herein conferred upon or reserved to the Trustee or the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy.

SECTION 5.11. Delay or Omission Not Waiver.

No delay or omission of the Trustee, any Holder of any Securities or any holder of any Preferred Security to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article V or by law to the Trustee or to the Holders and the right and remedy given to the holders of Preferred Securities by Section 5.8 may be exercised from time to time, and as often as may be deemed expedient, by the Trustee, the Holders or the holders of Preferred Securities, as the case may be.

SECTION 5.12. Control by Holders.

The Holders of not less than a majority in aggregate principal amount of the Outstanding Securities (or, as the case may be, the holders of a majority in aggregate Liquidation Amount of the Preferred Securities) shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee; provided , that:

(a) such direction shall not be in conflict with any rule of law or with this Indenture,

(b) the Trustee may take any other action deemed proper by the Trustee that is not inconsistent with such direction, and

(c) subject to the provisions of Section 6.2 , the Trustee shall have the right to decline to follow such direction if a Responsible Officer or Officers of the Trustee shall, in good faith, reasonably determine that the proceeding so directed would be unjustly prejudicial to the Holders not joining in any such direction or would involve the Trustee in personal liability.

SECTION 5.13. Waiver of Past Defaults.

(a) The Holders of not less than a majority in aggregate principal amount of the Outstanding Securities and the holders of not less than a majority in aggregate Liquidation Amount of the Preferred Securities may waive any past Event of Default hereunder and its consequences except an Event of Default:

(i) in the payment of the principal of or any premium or interest (including any Additional Interest) on any Security (unless such Event of Default has been cured and the Company or the Guarantor has paid to or deposited with the Trustee a sum sufficient to pay all installments of interest (including any Additional Interest) due and past due and all principal of and any premium on all Securities due otherwise than by acceleration), or

(ii) in respect of a covenant or provision hereof that under Article IX cannot be modified or amended without the consent of each Holder of any Outstanding Security.

(b) Any such waiver shall be deemed to be on behalf of the Holders of all the Securities or, in the case of a waiver by holders of Preferred Securities issued by such Trust, by all holders of Preferred Securities.

(c) Upon any such waiver, such Event of Default shall cease to exist and any Event of Default arising therefrom shall be deemed to have been cured for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other Event of Default or impair any right consequent thereon.

SECTION 5.14. Undertaking for Costs.

All parties to this Indenture agree, and each Holder of any Security by his or her acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit, and that such court may in its discretion assess reasonable costs, including reasonable attorneys’ fees and expenses, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section 5.14 shall not apply to any suit instituted by the Trustee, to any suit instituted by any Holder, or group of Holders, holding in the aggregate more than ten percent (10%) in aggregate principal amount of the Outstanding Securities, or to any suit instituted by any Holder for the enforcement of the payment of the principal of or any premium on the Security after the Stated Maturity or any interest (including any Additional Interest) on any Security after it is due and payable.

SECTION 5.15. Waiver of Usury, Stay or Extension Laws.

Each of the Company and the Guarantor covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any usury, stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and each of the Company and the Guarantor (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted.

ARTICLE VI

The Trustee

SECTION 6.1. Corporate Trustee Required.

There shall at all times be a Trustee hereunder with respect to the Securities. The Trustee shall be a corporation organized and doing business under the laws of the United States or of any state thereof, authorized to exercise corporate trust powers, having a combined capital and surplus of at least $50,000,000, subject to supervision or examination by Federal or state authority and having an office within the United States. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of such supervising or examining authority, then, for the purposes of this Section 6.1 , the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 6.1 , it shall resign immediately in the manner and with the effect hereinafter specified in this Article VI .

SECTION 6.2. Certain Duties and Responsibilities.

(a) Except during the continuance of an Event of Default:

(i) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and

(ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; provided , that in the case of any such certificates or opinions that by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they substantially conform on their face to the requirements of this Indenture.

(b) If an Event of Default known to the Trustee has occurred and is continuing, the Trustee shall, prior to the receipt of directions, if any, from the Holders of at least a majority in aggregate principal amount of the Outstanding Securities (or, if applicable, from the holders of a majority in aggregate Liquidation Amount of the Preferred Securities), exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in its exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person’s own affairs.

(c) Notwithstanding the foregoing, no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section 6.2 . To the extent that, at law or in equity, the Trustee has duties and liabilities relating to the Holders, the Trustee shall not be liable to any Holder for the Trustee’s good faith reliance on the provisions of this Indenture. The provisions of this Indenture, to the extent that they restrict the duties and liabilities of the Trustee otherwise existing at law or in equity, are agreed by the Company and the Holders to replace such other duties and liabilities of the Trustee.

(d) No provisions of this Indenture shall be construed to relieve the Trustee from liability with respect to matters that are within the authority of the Trustee under this Indenture for its own negligent action, negligent failure to act or willful misconduct, except that:

(i) the Trustee shall not be liable for any error or judgment made in good faith by an authorized officer of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts;

(ii) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of at least a majority in aggregate principal amount of the Outstanding Securities (or, if applicable, from the holders of a majority in aggregate Liquidation Amount of the Preferred Securities), relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee under this Indenture; and

(iii) the Trustee shall be under no liability for interest on any money received by it hereunder and money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law.

SECTION 6.3. Notice of Defaults.

Within ninety (90) days after the occurrence of any default actually known to the Trustee, the Trustee shall give the Holders notice of such default unless such default shall have been cured or waived; provided , that except in the case of a default in the payment of the principal of or any premium or interest on any Securities, the Trustee shall be fully protected in withholding the notice if and so long as the board of directors, the executive committee or a trust committee of directors and/or Responsible Officers of the Trustee in good faith determines that withholding the notice is in the interest of holders of Securities; and provided further , that in the case of any default of the character specified in Section 5.1(c) , no such notice to Holders shall be given until at least thirty (30) days after the occurrence thereof. For the purpose of this Section 6.3 , the term “default” means any event which is, or after notice or lapse of time or both would become, an Event of Default.

SECTION 6.4. Certain Rights of Trustee.

Subject to the provisions of Section 6.2 :

(a) the Trustee may conclusively rely and shall be fully protected in acting or refraining from acting in good faith and in accordance with the terms hereof upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties;

(b) if (i) in performing its duties under this Indenture the Trustee is required to decide between alternative courses of action, (ii) in construing any of the provisions of this Indenture the Trustee finds ambiguous or inconsistent with any other provisions contained herein or (iii) the Trustee is unsure of the application of any provision of this Indenture, then, except as to any matter as to which the Holders are entitled to decide under the terms of this Indenture, the Trustee shall deliver a notice to the Company requesting the Company’s written instruction as to the course of action to be taken and the Trustee shall take such action, or refrain from taking such action, as the Trustee shall be instructed in writing to take, or to refrain from taking, by the Company; provided , that if the Trustee does not receive such instructions from the Company within ten Business Days after it has delivered such notice or such reasonably shorter period of time set forth in such notice the Trustee may, but shall be under no duty to, take such action, or refrain from taking such action, as the Trustee shall deem advisable and in the best interests of the Holders, in which event the Trustee shall have no liability except for its own negligence, bad faith or willful misconduct;

(c) any request or direction of the Company shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution;

(d) the Trustee may consult with counsel (which counsel may be counsel to the Trustee, the Company, the Guarantor or any of their Affiliates, and may include any of its employees) and the advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon;

(e) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders or any holder of Preferred Securities pursuant to this Indenture, unless such Holders (or such holders of Preferred Securities) shall have offered to the Trustee security or indemnity reasonably satisfactory to it against the costs, expenses (including reasonable attorneys’ fees and expenses) and liabilities that might be incurred by it in compliance with such request or direction, including reasonable advances as may be requested by the Trustee;

(f) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, indenture, note or other paper or document, but the Trustee in its discretion may make such inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company and the Guarantor, personally or by agent or attorney;

(g) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents, attorneys, custodians or nominees and the Trustee shall not be responsible for any misconduct or negligence on the part of any such agent, attorney, custodian or nominee appointed with due care by it hereunder;

(h) whenever in the administration of this Indenture the Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or taking any other action with respect to enforcing any remedy or right hereunder, the Trustees (i) may request instructions from the Holders (which instructions may only be given by the Holders of the same aggregate principal amount of Outstanding Securities as would be entitled to direct the Trustee under this Indenture in respect of such remedy, right or action), (ii) may refrain from enforcing such remedy or right or taking such action until such instructions are received and (iii) shall be protected in acting in accordance with such instructions;

(i) except as otherwise expressly provided by this Indenture, the Trustee shall not be under any obligation to take any action that is discretionary under the provisions of this Indenture;

(j) without prejudice to any other rights available to the Trustee under applicable law, when the Trustee incurs expenses or renders services in connection with any bankruptcy, insolvency or other proceeding referred to in clauses (d) or (e) of the definition of Event of Default, such expenses (including legal fees and expenses of its agents and counsel) and the compensation for such services are intended to constitute expenses of administration under any bankruptcy laws or law relating to creditors rights generally;

(k) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, conclusively rely upon an Officer’s Certificate addressing such matter, which, upon receipt of such request, shall be promptly delivered by the Company or the Guarantor;

(l) the Trustee shall not be charged with knowledge of any default or Event of Default unless either (i) a Responsible Officer of the Trustee shall have actual knowledge or (ii) the Trustee shall have received written notice thereof from the Company, the Guarantor or a Holder; and

(m) in the event that the Trustee is also acting as Paying Agent, Authenticating Agent or Securities Registrar hereunder, the rights and protections afforded to the Trustee pursuant to this Article VI shall also be afforded such Paying Agent, Authenticating Agent, or Securities Registrar.

SECTION 6.5. May Hold Securities.

The Trustee, any Authenticating Agent, any Paying Agent, any Securities Registrar or any other agent of the Company, in its individual or any other capacity, may become the owner or pledgee of Securities and may otherwise deal with the Company and the Guarantor with the same rights it would have if it were not Trustee, Authenticating Agent, Paying Agent, Securities Registrar or such other agent.

SECTION 6.6. Compensation; Reimbursement; Indemnity.

(a) The Company agrees

(i) to pay to the Trustee from time to time reasonable compensation for all services rendered by it hereunder in such amounts as the Company and the Trustee shall agree from time to time (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust);

(ii) to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence, bad faith or willful misconduct; and

(iii) to the fullest extent permitted by applicable law, to indemnify the Trustee (including in its individual capacity) and its Affiliates, and their officers, directors, shareholders, agents, representatives and employees for, and to hold them harmless against, any loss, damage, liability, tax (other than income, franchise or other taxes imposed on amounts paid pursuant to (i) or (ii) hereof), penalty, expense or claim of any kind or nature whatsoever incurred without negligence, bad faith or willful misconduct on its part arising out of or in connection with the acceptance or administration of this trust or the performance of the Trustee’s duties hereunder, including the advancement of funds to cover the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder.

(b) To secure the Company’s payment obligations in this Section 6.6, the Company hereby grants and pledges to the Trustee and the Trustee shall have a lien prior to the Securities on all money or property held or collected by the Trustee, other than money or property held in trust to pay principal and interest on particular Securities. Such lien shall survive the satisfaction and discharge of this Indenture or the resignation or removal of the Trustee.

(c) The obligations of the Company and the Guarantor under this Section 6.6 shall survive the satisfaction and discharge of this Indenture and the earlier resignation or removal of the Trustee.

(d) In no event shall the Trustee be liable for any indirect, special, punitive or consequential loss or damage of any kind whatsoever, including, but not limited to, lost profits, even if the Trustee has been advised of the likelihood of such loss or damage and regardless of the form of action.

(e) In no event shall the Trustee be liable for any failure or delay in the performance of its obligations hereunder because of circumstances beyond its control, including, but not limited to, acts of God, flood, war (whether declared or undeclared), terrorism, fire, riot, embargo, government action, including any laws, ordinances, regulations, governmental action or the like which delay, restrict or prohibit the providing of the services contemplated by this Indenture.

SECTION 6.7. Resignation and Removal; Appointment of Successor.

(a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article VI shall become effective until the acceptance of appointment by the successor Trustee under Section 6.8 .

(b) The Trustee may resign at any time by giving written notice thereof to the Company.

(c) Unless an Event of Default shall have occurred and be continuing, the Trustee may be removed at any time by the Company by a Board Resolution. If an Event of Default shall have occurred and be continuing, the Trustee may be removed by Act of the Holders of a majority in aggregate principal amount of the Outstanding Securities, delivered to the Trustee and to the Company and to the Guarantor.

(d) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any reason, at a time when no Event of Default shall have occurred and be continuing, the Company, by a Board Resolution, shall promptly appoint a successor Trustee, and such successor Trustee and the retiring Trustee shall comply with the applicable requirements of Section 6.8 . If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any reason, at a time when an Event of Default shall have occurred and be continuing, the Holders, by Act of the Holders of a majority in aggregate principal amount of the Outstanding Securities, shall promptly appoint a successor Trustee, and such successor Trustee and the retiring Trustee shall comply with the applicable requirements of Section 6.8 . If no successor Trustee shall have been so appointed by the Company or the Holders and accepted appointment within sixty (60) days after the giving of a notice of resignation by the Trustee or the removal of the Trustee in the manner required by Section 6.8 , any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of such Holder and all others similarly situated, and any resigning Trustee may, at the expense of the Company, petition any court of competent jurisdiction for the appointment of a successor Trustee.

(e) The Company shall give notice to all Holders in the manner provided in Section 1.6 of each resignation and each removal of the Trustee and each appointment of a successor Trustee. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office.

SECTION 6.8. Acceptance of Appointment by Successor.

(a) In case of the appointment hereunder of a successor Trustee, each successor Trustee so appointed shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on the request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder.

(b) Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all rights, powers and trusts referred to in paragraph (a) of this Section 6.8 .

(c) No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article VI .

SECTION 6.9. Merger, Conversion, Consolidation or Succession to Business.

Any Person into which the Trustee may be merged or converted or with which it may be consolidated, or any Person resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any Person succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided , that such Person shall be otherwise qualified and eligible under this Article VI . In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation or as otherwise provided above in this Section 6.9 to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated, and in case any Securities shall not have been authenticated, any successor to the Trustee may authenticate such Securities either in the name of any predecessor Trustee or in the name of such successor Trustee, and in all cases the certificate of authentication shall have the full force which it is provided anywhere in the Securities or in this Indenture that the certificate of the Trustee shall have.

SECTION 6.10. Not Responsible for Recitals or Issuance of Securities.

The recitals contained herein and in the Securities, except the Trustee’s certificates of authentication, shall be taken as the statements of the Company or the Guarantor, and neither the Trustee nor any Authenticating Agent assumes any responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities. Neither the Trustee nor any Authenticating Agent shall be accountable for the use or application by the Company of the Securities or the proceeds thereof.

SECTION 6.11. Appointment of Authenticating Agent.

(a) The Trustee may appoint an Authenticating Agent or Agents with respect to the Securities, which shall be authorized to act on behalf of the Trustee to authenticate Securities issued upon original issue and upon exchange, registration of transfer or partial redemption thereof or pursuant to Section 3.6 , and Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Wherever reference is made in this Indenture to the authentication and delivery of Securities by the Trustee or the Trustee’s certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Company and shall at all times be a corporation organized and doing business under the laws of the United States of America, or of any State or Territory thereof or the District of Columbia, authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of not less than $50,000,000 and subject to supervision or examination by Federal or state authority. If such Authenticating Agent publishes reports of condition at least annually pursuant to law or to the requirements of said supervising or examining authority, then for the purposes of this Section 6.11 the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section 6.11 , such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section 6.11 .

(b) Any Person into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any Person resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any Person succeeding to all or substantially all of the corporate trust business of an Authenticating Agent shall be the successor Authenticating Agent hereunder, provided such Person shall be otherwise eligible under this Section 6.11 , without the execution or filing of any paper or any further act on the part of the Trustee or the Authenticating Agent.

(c) An Authenticating Agent may resign at any time by giving written notice thereof to the Trustee and to the Company. The Trustee may at any time terminate the agency of an Authenticating Agent by giving written notice thereof to such Authenticating Agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section 6.11 , the Trustee may appoint a successor Authenticating Agent eligible under the provisions of this Section 6.11 , which shall be acceptable to the Company, and shall give notice of such appointment to all Holders. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent.

(d) The Company or the Guarantor agrees to pay to each Authenticating Agent from time to time reasonable compensation for its services under this Section 6.11 in such amounts as the Company and the Authenticating Agent shall agree from time to time.

(e) If an appointment of an Authenticating Agent is made pursuant to this Section 6.11 , the Securities may have endorsed thereon, an alternative certificate of authentication in the following form:

This represents Securities designated therein and referred to in the within mentioned Indenture.

Dated:
		WILMINGTON TRUST COMPANY , not in its individual capacity, but solely as Trustee

		Authenticating Agent

		By:
		Authorized Officer

ARTICLE VII

Holder’s Lists and Reports by Trustee and Company

SECTION 7.1. Company to Furnish Trustee Names and Addresses of Holders.

The Company will furnish or cause to be furnished to the Trustee:

(a) semi-annually, on or before June 30 and December 31 of each year, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders as of a date not more than fifteen (15) days prior to the delivery thereof, and

(b) at such other times as the Trustee may request in writing, within thirty (30) days after the receipt by the Company of any such request, a list of similar form and content as of a date not more than fifteen (15) days prior to the time such list is furnished, in each case to the extent such information is in the possession or control of the Company and has not otherwise been received by the Trustee in its capacity as Securities Registrar.

SECTION 7.2. Preservation of Information, Communications to Holders.

(a) The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 7.1 and the names and addresses of Holders received by the Trustee in its capacity as Securities Registrar. The Trustee may destroy any list furnished to it as provided in Section 7.1 upon receipt of a new list so furnished.

(b) The rights of Holders to communicate with other Holders with respect to their rights under this Indenture or under the Securities, and the corresponding rights and privileges of the Trustee, shall be as provided in the Trust Indenture Act.

(c) Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of the disclosure of information as to the names and addresses of the Holders made pursuant to the Trust Indenture Act.

SECTION 7.3. Reports by Company and Trustee.

(a) The Company shall furnish to the Holders and to prospective purchasers of Securities, upon their request, the information required to be furnished pursuant to Rule 144A(d)(4) under the Securities Act.

(b) The Company shall furnish to (i) the Holders and to subsequent holders of Securities reasonably identified to the Company, (ii) the Purchasers, (iii) any beneficial owner of the Securities reasonably identified to the Company (which identification may be made either by such beneficial owner or the Purchasers) and (iv) any designee of (i), (ii) or (iii) above, a duly completed and executed certificate in the form attached hereto as Exhibit A, including the financial statements referenced in such Exhibit, which certificate and financial statements shall be so furnished by the Company not later than forty five (45) days after the end of each of the first three fiscal quarters of each fiscal year of the Company and not later than ninety (90) days after the end of each fiscal year of the Company.

(c) If the Company intends to file its annual and quarterly information with the Commission in electronic form pursuant to Regulation S-T of the Commission using the EDGAR system, the Company shall notify the Trustee in the manner prescribed herein of each such annual and quarterly filing. The Trustee is hereby authorized and directed to access the EDGAR system for purposes of retrieving the financial information so filed. The Trustee shall have no duty to search for or obtain any electronic or other filings that the Company makes with the Commission, regardless of whether such filings are periodic, supplemental or otherwise. Delivery of reports, information and documents to the Trustee pursuant to this Section 7.3(c) shall be solely for purposes of compliance with this Section 7.3 and, if applicable, with Section 314(a) of the Trust Indenture Act, but shall not relieve the Company of the requirement to deliver the certificate referred to in Section 7.3(b). The Trustee’s receipt of such reports, information and documents shall not constitute notice to it of the content thereof or any matter determinable from the contents thereof, including the Company’s compliance with any of its covenants hereunder, as to which the Trustee is entitled to rely upon Officer’s Certificates.

(d) The Trustee shall receive all reports, certificates and information, which it is entitled to receive under each of the Operative Documents (as defined in the Trust Agreement), and deliver to the Purchasers, or designees thereof, as identified in writing to the Trustee, all such reports, certificates or information promptly upon receipt thereof.

ARTICLE VIII

Consolidation, Merger, Conveyance, Transfer or Lease

SECTION 8.1. Company and Guarantor May Consolidate, Etc., Only on Certain Terms.

(a) The Company shall not consolidate with or merge into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, and no Person shall consolidate with or merge into the Company or convey, transfer or lease its properties and assets substantially as an entirety to the Company, unless:

(i) if the Company shall consolidate with or merge into another Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, the entity formed by such consolidation or into which the Company is merged or the Person that acquires by conveyance or transfer, or that leases, the properties and assets of the Company substantially as an entirety shall be an entity organized and existing under the laws of the United States of America or any State or Territory thereof or the District of Columbia and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form reasonably satisfactory to the Trustee, the due and punctual payment of the principal of and any premium and interest (including any Additional Interest) on all the Securities and the performance of every covenant of this Indenture on the part of the Company to be performed or observed;

(ii) immediately after giving effect to such transaction, no Event of Default, and no event that, after notice or lapse of time, or both, would constitute an Event of Default, shall have happened and be continuing; and

(iii) the Company has delivered to the Trustee an Officer’s Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction, any such supplemental indenture comply with this Article VIII and that all conditions precedent herein provided for relating to such transaction have been complied with; and the Trustee may rely upon such Officer’s Certificate and Opinion of Counsel as conclusive evidence that such transaction complies with this Section 8.1 .

(b) The Guarantor shall not consolidate with or merge into any other Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, and no Person shall consolidate with or merge into the Guarantor or convey, transfer or lease its properties and assets substantially as an entirety to the Guarantor, unless:

(i) if the Guarantor shall consolidate with or merge into another Person or convey, transfer or lease its properties and assets substantially as an entirety to any Person, the entity formed by such consolidation or into which the Guarantor is merged or the Person that acquires by conveyance or transfer, or that leases, the properties and assets of the Guarantor substantially as an entirety shall be an entity organized and existing under the laws of the United States of America or any State or Territory thereof or the District of Columbia and shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form reasonably satisfactory to the Trustee, the due and punctual payment of the principal of and any premium and interest (including any Additional Interest) on all the Securities and the performance of every covenant of this Indenture on the part of the Guarantor to be performed or observed;

(iii) the Guarantor has delivered to the Trustee an Officer’s Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and, if a supplemental indenture is required in connection with such transaction, any such supplemental indenture comply with this Article VIII and that all conditions precedent herein provided for relating to such transaction have been complied with; and the Trustee may rely upon such Officer’s Certificate and Opinion of Counsel as conclusive evidence that such transaction complies with this Section 8.1 .

SECTION 8.2. Successor Company or Guarantor Substituted.

(a) Upon any consolidation or merger by the Company or the Guarantor with or into any other Person, or any conveyance, transfer or lease by the Company or Guarantor of its properties and assets substantially as an entirety to any Person in accordance with Section 8.1 and the execution and delivery to the Trustee of the supplemental indenture described in Section 8.1(a) , the successor entity formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company or the Guarantor under this Indenture with the same effect as if such successor Person had been named as the Company or the Guarantor herein; and in the event of any such conveyance or transfer, following the execution and delivery of such supplemental indenture, the Company or the Guarantor shall be discharged from all obligations and covenants under the Indenture and the Securities.

(b) Such successor Person to the Company may cause to be executed, and may issue either in its own name or in the name of the Company, any or all of the Securities issuable hereunder that theretofore shall not have been signed by the Company and delivered to the Trustee; and, upon the order of such successor Person instead of the Company and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee shall authenticate and shall deliver any Securities that previously shall have been signed and delivered by the officers of the Company to the Trustee for authentication, and any Securities that such successor Person thereafter shall cause to be executed and delivered to the Trustee on its behalf. All the Securities so issued shall in all respects have the same legal rank and benefit under this Indenture as the Securities theretofore or thereafter issued in accordance with the terms of this Indenture.

(c) In case of any such consolidation, merger, sale, conveyance or lease, such changes in phraseology and form may be made in the Securities thereafter to be issued as may be appropriate to reflect such occurrence.

ARTICLE IX

Supplemental Indentures

SECTION 9.1. Supplemental Indentures without Consent of Holders.

Without the consent of any Holders, the Company and the Guarantor, when authorized by Board Resolutions, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form reasonably satisfactory to the Trustee, for any of the following purposes:

(a) to evidence the succession of another Person to the Company or the Guarantor, and the assumption by any such successor of the covenants of the Company or the Guarantor herein and in the Securities; or

(b) to cure any ambiguity, to correct or supplement any provision herein that may be defective or inconsistent with any other provision herein, or to make or amend any other provisions with respect to matters or questions arising under this Indenture, which shall not be inconsistent with the other provisions of this Indenture, provided , that such action pursuant to this clause (b) shall not adversely affect in any material respect the interests of any Holders or the holders of the Preferred Securities; or

(c) to add to the covenants, restrictions or obligations of the Company or the Guarantor or to add to the Events of Default, provided , that such action pursuant to this clause (c) shall not adversely affect in any material respect the interests of any Holders or the holders of the Preferred Securities; or

(d) to modify, eliminate or add to any provisions of the Indenture or the Securities to such extent as shall be necessary to ensure that the Securities are treated as indebtedness of the Company for United States Federal income tax purposes, provided , that such action pursuant to this clause (d) shall not adversely affect in any material respect the interests of any Holders or the holders of the Preferred Securities; or

(e) to evidence and provide for the acceptance of appointment hereunder by a successor trustee, provided , that such action pursuant to this clause (e) shall not adversely affect in any material respect the interests of any Holders or the holders of the Preferred Securities; or

(f) to comply with the rules and regulations of any securities exchange or automatic quotation system on which any of the Securities may be listed, traded or quoted, provided , that such action pursuant to this clause (f) shall not adversely affect in any material respect the interests of any Holders or the holders of the Preferred Securities.

SECTION 9.2. Supplemental Indentures with Consent of Holders.

(a) With the consent of the Holders of not less than a majority in aggregate principal amount of the Outstanding Securities, by Act of said Holders delivered to the Company, the Guarantor and the Trustee, the Company and the Guarantor, when authorized by Board Resolutions, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders of Securities under this Indenture; provided , that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security,

(i) change the Stated Maturity of the principal or any premium of any Security or change the date of payment of any installment of interest (including any Additional Interest) on any Security, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption thereof or change the place of payment where, or the coin or currency in which, any Security or interest thereon is payable, or restrict or impair the right to institute suit for the enforcement of any such payment on or after such date, or

(ii) reduce the percentage in aggregate principal amount of the Outstanding Securities, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver of compliance with any provision of this Indenture or of defaults hereunder and their consequences provided for in this Indenture, or

(iii) modify any of the provisions of this Section 9.2 , Section 5.13 or Section 10.7 , except to increase any percentage in aggregate principal amount of the Outstanding Securities, the consent of whose Holders is required for any reason, or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Security;

provided, further, that, so long as any Preferred Securities remain outstanding, no amendment under this Section 9.2 shall be effective until the holders of a majority in Liquidation Amount of the Trust Securities shall have consented to such amendment; provided, further, that if the consent of the Holder of each Outstanding Security is required for any amendment under this Indenture, such amendment shall not be effective until the holder of each Outstanding Trust Security shall have consented to such amendment.

(b) It shall not be necessary for any Act of Holders under this Section 9.2 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof.

SECTION 9.3. Execution of Supplemental Indentures.

In executing or accepting the additional trusts created by any supplemental indenture permitted by this Article IX or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and shall be fully protected in conclusively relying upon, an Officer’s Certificate and an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture, and that all conditions precedent herein provided for relating to such action have been complied with. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture that affects the Trustee’s own rights, duties, indemnities or immunities under this Indenture or otherwise. Copies of the final form of each supplemental indenture shall be delivered by the Trustee at the expense of the Company to each Holder, and, if the Trustee is the Property Trustee, to each holder of Preferred Securities, promptly after the execution thereof.

SECTION 9.4. Effect of Supplemental Indentures.

Upon the execution of any supplemental indenture under this Article IX , this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby.

SECTION 9.5. Reference in Securities to Supplemental Indentures.

Securities authenticated and delivered after the execution of any supplemental indenture pursuant to this Article IX may, and shall if required by the Company, bear a notation in form approved by the Company as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities so modified as to conform, in the opinion of the Company, to any such supplemental indenture may be prepared and executed by the Company and the Guarantor and authenticated and delivered by the Trustee in exchange for Outstanding Securities.

ARTICLE X

Covenants

SECTION 10.1. Payment of Principal, Premium and Interest.

The Company covenants and agrees for the benefit of the Holders of the Securities that it will duly and punctually pay the principal of and any premium and interest (including any Additional Interest) on the Securities in accordance with the terms of the Securities and this Indenture.

SECTION 10.2. Money for Security Payments to be Held in Trust.

(a) If the Company shall at any time act as its own Paying Agent with respect to the Securities, it will, on or before each due date of the principal of and any premium or interest (including any Additional Interest) on the Securities, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal and any premium or interest (including Additional Interest) so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided, and will promptly notify the Trustee in writing of its failure so to act.

(b) Whenever the Company shall have one or more Paying Agents, it will, prior to 10:00 a.m., New York City time, on each due date of the principal of or any premium or interest (including any Additional Interest) on any Securities, deposit with a Paying Agent a sum sufficient to pay such amount, such sum to be held as provided in the Trust Indenture Act and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of its failure so to act.

(c) The Company will cause each Paying Agent for the Securities other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section 10.2 , that such Paying Agent will (i) comply with the provisions of this Indenture and the Trust Indenture Act applicable to it as a Paying Agent and (ii) during the continuance of any default by the Company (or any other obligor upon the Securities) in the making of any payment in respect of the Securities, upon the written request of the Trustee, forthwith pay to the Trustee all sums held in trust by such Paying Agent for payment in respect of the Securities.

(d) The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same terms as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money.

(e) Any money deposited with the Trustee or any Paying Agent, or then held by the Company in trust for the payment of the principal of and any premium or interest (including any Additional Interest) on any Security and remaining unclaimed for two years after such principal and any premium or interest has become due and payable shall (unless otherwise required by mandatory provision of applicable escheat or abandoned or unclaimed property law) be paid on Company Request to the Company, or (if then held by the Company) shall (unless otherwise required by mandatory provision of applicable escheat or abandoned or unclaimed property law) be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided , that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in the Borough of Manhattan, The City of New York, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than thirty (30) days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company.

SECTION 10.3. Statement as to Compliance.

The Company shall deliver to the Trustee, within one hundred and twenty (120) days after the end of each fiscal year of the Company ending after the date hereof, an Officer’s Certificate (substantially in the form attached hereto as Exhibit B ) covering the preceding fiscal year, stating whether or not to the knowledge of the signers thereof the Company is in default in the performance or observance of any of the terms, provisions and conditions of this Indenture (without regard to any period of grace or requirement of notice provided hereunder), and if the Company shall be in default, specifying all such defaults and the nature and status thereof of which they may have knowledge.

SECTION 10.4. Calculation Agent.

(a) The Company hereby agrees that for so long as any of the Securities remain Outstanding, there will at all times be an agent appointed to calculate LIBOR in respect of each Interest Payment Date in accordance with the terms of Schedule A (the “ Calculation Agent ”). The Company has initially appointed the Property Trustee as Calculation Agent for purposes of determining LIBOR for each Interest Payment Date. The Calculation Agent may be removed by the Company at any time. Except as described in the immediately preceding sentence, so long as the Property Trustee holds any of the Securities, the Calculation Agent shall be the Property Trustee. If the Calculation Agent is unable or unwilling to act as such or is removed by the Company, the Company will promptly appoint as a replacement Calculation Agent the London office of a leading bank which is engaged in transactions in Eurodollar deposits in the international Eurodollar market and which does not control or is not controlled by or under common control with the Company or its Affiliates. The Calculation Agent may not resign its duties without a successor having been duly appointed.

(b) The Calculation Agent shall be required to agree that, as soon as possible after 11:00 a.m. (London time) on each LIBOR Determination Date (as defined in Schedule A ), but in no event later than 11:00 a.m. (London time) on the Business Day immediately following each LIBOR Determination Date, the Calculation Agent will calculate the interest rate (rounded to the nearest cent, with half a cent being rounded upwards) for the related Interest Payment Date, and will communicate such rate and amount to the Company, the Trustee, each Paying Agent and the Depositary. The Calculation Agent will also specify to the Company the quotations upon which the foregoing rates and amounts are based and, in any event, the Calculation Agent shall notify the Company before 5:00 p.m. (London time) on each LIBOR Determination Date that either: (i) it has determined or is in the process of determining the foregoing rates and amounts or (ii) it has not determined and is not in the process of determining the foregoing rates and amounts, together with its reasons therefor. The Calculation Agent’s determination of the foregoing rates and amounts for any Interest Payment Date will (in the absence of manifest error) be final and binding upon all parties. For the sole purpose of calculating the interest rate for the Securities, “Business Day” shall be defined as any day on which dealings in deposits in Dollars are transacted in the London interbank market.

SECTION 10.5. Additional Tax Sums.

So long as no Event of Default has occurred and is continuing, if (a) the Trust is the Holder of all of the Outstanding Securities and (b) a Tax Event described in clause (i) or (iii) in the definition of Tax Event in Section 1.1 hereof has occurred and is continuing, the Company shall pay to the Trust (and its permitted successors or assigns under the related Trust Agreement) for so long as the Trust (or its permitted successor or assignee) is the registered holder of the Outstanding Securities, such amounts as may be necessary in order that the amount of Distributions (including any Additional Interest Amount (as defined in the Trust Agreement)) then due and payable by the Trust on the Preferred Securities and Common Securities that at any time remain outstanding in accordance with the terms thereof shall not be reduced as a result of any Additional Taxes arising from such Tax Event (additional such amounts payable by the Company to the Trust, the “ Additional Tax Sums ”). Whenever in this Indenture or the Securities there is a reference in any context to the payment of principal of or interest on the Securities, such mention shall be deemed to include mention of the payments of the Additional Tax Sums provided for in this Section 10.5 to the extent that, in such context, Additional Tax Sums are, were or would be payable in respect thereof pursuant to the provisions of this Section 10.5 and express mention of the payment of Additional Tax Sums (if applicable) in any provisions hereof shall not be construed as excluding Additional Tax Sums in those provisions hereof where such express mention is not made.

SECTION 10.6. Additional Covenants.

(a) The Company and Guarantor covenant and agree with each Holder of Securities that if an Event of Default shall have occurred and be continuing, it shall not (i) declare or pay any dividends or distributions on, or redeem, purchase, acquire or make a liquidation payment with respect to, any shares of the Company’s or the Guarantor’s Equity Interests, (ii) vote in favor of or permit or otherwise allow any of its respective Subsidiaries to declare or pay any dividends or distributions on, or redeem, purchase, acquire or make a liquidation payment with respect to or otherwise retire, any shares of any such Subsidiary’s preferred stock or other Equity Interests entitling the holders thereof to a stated rate of return, other than dividends or distributions on Equity Interests payable to the Guarantor, the Company or any Subsidiary thereof (for the avoidance of doubt, whether such preferred stock or other Equity Interests are perpetual or otherwise), or (iii) make any payment of principal of or any interest or premium on or repay, repurchase or redeem any debt securities of the Company or Guarantor that rank pari passu in all respects with or junior in interest to the Securities (other than (A) repurchases, redemptions or other acquisitions of shares of Equity Interests of the Company or Guarantor in connection with any employment contract, benefit plan or other similar arrangement with or for the benefit of any one or more employees, officers, directors or consultants, in connection with a dividend reinvestment or stockholder stock purchase plan or in connection with the issuance of Equity Interests of the Company or Guarantor (or securities convertible into or exercisable for such Equity Interest) as consideration in an acquisition transaction entered into prior to the applicable Event of Default, (B) as a result of an exchange or conversion of any class or series of the Company’s or the Guarantor’s Equity Interests (or any Equity Interests of a Subsidiary of the Company or Guarantor) for any class or series of the Company’s or the Guarantor’s Equity Interests or of any class or series of the Company’s or the Guarantor’s indebtedness for any class or series of the Company’s or the Guarantor’s Equity Interests, (C) the purchase of fractional interests in shares of the Company’s or the Guarantor’s Equity Interests pursuant to the conversion or exchange provisions of such capital stock or the security being converted or exchanged, (D) any declaration of a dividend in connection with any Rights Plan, the issuance of rights, stock or other property under any Rights Plan or the redemption or repurchase of rights pursuant thereto, or (E) any dividend in the form of stock, warrants, options or other rights where the dividend stock or the stock issuable upon exercise of such warrants, options or other rights is the same stock as that on which the dividend is being paid or ranks pari passu with or junior to such stock).

(b) The Company also covenants with each Holder of Securities (i) to hold, directly or indirectly, one hundred percent (100%) of the Common Securities of the Trust, provided , that any permitted successor of the Company hereunder may succeed to the Company’s ownership of such Common Securities, (ii) as holder of such Common Securities, not to voluntarily dissolve, wind-up or liquidate the Trust other than (A) in connection with a distribution of the Securities to the holders of the Preferred Securities in liquidation of the Trust or (B) in connection with certain mergers, consolidations or amalgamations permitted by the Trust Agreement and (iii) to use its reasonable commercial efforts, consistent with the terms and provisions of the Trust Agreement, to cause the Trust to continue to be taxable as a grantor trust and not as a corporation for United States Federal income tax purposes.

(c) The Guarantor agrees that the Guarantor will use its commercially reasonable efforts to meet the requirements to qualify as a REIT under Sections 856 through 860 of the Code, effective for the taxable year ending December 31, 2005 and unless and until the Board of Directors of the Guarantor determines that it is in the best interests of the Guarantor not to be organized as a REIT, the Guarantor will be organized in conformity with the requirements for qualification as a REIT under the Code.

SECTION 10.7. Waiver of Covenants.

The Company may omit in any particular instance to comply with any covenant or condition contained in Section 10.6 if, before or after the time for such compliance, the Holders of at least a majority in aggregate principal amount of the Outstanding Securities shall, by Act of such Holders, and at least a majority of the aggregate Liquidation Amount of the Preferred Securities then outstanding, by consent of such holders, either waive such compliance in such instance or generally waive compliance with such covenant or condition, but no such waiver shall extend to or affect such covenant or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company in respect of any such covenant or condition shall remain in full force and effect.

SECTION 10.8. Treatment of Securities.

The Company will treat the Securities as indebtedness, and the amounts, other than payments of principal, payable in respect of the principal amount of such Securities as interest, for all U.S. federal income tax purposes. All payments in respect of the Securities will be made free and clear of U.S. withholding tax to any beneficial owner thereof that has provided an Internal Revenue Service Form W-9 or W-8BEN (or any substitute or successor form) establishing its U.S. or non-U.S. status for U.S. federal income tax purposes and establishing that no withholding is required for U.S. federal income tax purposes, or any other applicable form establishing an exemption from U.S. withholding tax.

ARTICLE XI

Redemption of Securities

SECTION 11.1. Optional Redemption.

The Company may, at its option, on any Interest Payment Date, on or after June 30, 2011, redeem the Securities in whole at any time or in part from time to time, at a Redemption Price equal to one hundred (100%) percent of the principal amount thereof (or of the redeemed portion thereof, as applicable), together, in the case of any such redemption, with accrued interest, including any Additional Interest, to but excluding the date fixed for redemption.

SECTION 11.2. Special Event Redemption.

Upon the occurrence and during the continuation of a Special Event, the Company may, at its option, redeem the Securities, in whole but not in part, at a redemption price equal to one hundred three (103%) percent of the principal amount thereof, together, in the case of any such redemption, with accrued interest, including any Additional Interest, to but excluding the date fixed for redemption (the “Special Event Redemption Price”) .

SECTION 11.3. Election to Redeem; Notice to Trustee.

The election of the Company to redeem any Securities, in whole or in part, shall be evidenced by or pursuant to a Board Resolution. In case of any redemption at the election of the Company, the Company shall, not less than forty five (45) days and not more than seventy five (75) days prior to the Redemption Date (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee and the Property Trustee under the Trust Agreement in writing of such date and of the principal amount of the Securities to be redeemed and provide the additional information required to be included in the notice or notices contemplated by Section 11.5 . In the case of any redemption of Securities, in whole or in part, (a) prior to the expiration of any restriction on such redemption provided in this Indenture or the Securities or (b) pursuant to an election of the Company which is subject to a condition specified in this Indenture or the Securities, the Company shall furnish the Trustee with an Officer’s Certificate and an Opinion of Counsel evidencing compliance with such restriction or condition.

SECTION 11.4. Selection of Securities to be Redeemed.

(a) If less than all the Securities are to be redeemed, the particular Securities to be redeemed shall be selected and redeemed on a pro rata basis not more than sixty (60) days prior to the Redemption Date by the Trustee from the Outstanding Securities not previously called for redemption, provided , that the unredeemed portion of the principal amount of any Security shall be in an authorized denomination (which shall not be less than the minimum authorized denomination) for such Security.

(b) The Trustee shall promptly notify the Company in writing of the Securities selected for redemption and, in the case of any Securities selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Security redeemed or to be redeemed only in part, to the portion of the principal amount of such Security that has been or is to be redeemed.

(c) The provisions of paragraphs (a) and (b) of this Section 11.4 shall not apply with respect to any redemption affecting only a single Security, whether such Security is to be redeemed in whole or in part. In the case of any such redemption in part, the unredeemed portion of the principal amount of the Security shall be in an authorized denomination (which shall not be less than the minimum authorized denomination) for such Security.

SECTION 11.5. Notice of Redemption.

(a) Notice of redemption shall be given not later than the thirtieth (30th) day, and not earlier than the sixtieth (60th) day, prior to the Redemption Date to each Holder of Securities to be redeemed, in whole or in part (unless a shorter notice shall be satisfactory to the Property Trustee under the related Trust Agreement).

(b) With respect to Securities to be redeemed, in whole or in part, each notice of redemption shall state:

(i) the Redemption Date;

(ii) the Redemption Price or, if the Redemption Price cannot be calculated prior to the time the notice is required to be sent, the estimate of the Redemption Price, as calculated by the Company, together with a statement that it is an estimate and that the actual Redemption Price will be calculated on the fifth Business Day prior to the Redemption Date (and if an estimate is provided, a further notice shall be sent of the actual Redemption Price on the date that such Redemption Price is calculated);

(iii) if less than all Outstanding Securities are to be redeemed, the identification (and, in the case of partial redemption, the respective principal amounts) of the particular Securities to be redeemed;

(iv) that on the Redemption Date, the Redemption Price will become due and payable upon each such Security or portion thereof, and that any interest (including any Additional Interest) on such Security or such portion, as the case may be, shall cease to accrue on and after said date; and

(v) the place or places where such Securities are to be surrendered for payment of the Redemption Price.

(c) Notice of redemption of Securities to be redeemed, in whole or in part, at the election of the Company shall be given by the Company or, at the Company’s request, by the Trustee in the name and at the expense of the Company and shall be irrevocable. The notice if mailed in the manner provided above shall be conclusively presumed to have been duly given, whether or not the Holder receives such notice. In any case, a failure to give such notice by mail or any defect in the notice to the Holder of any Security designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Security.

SECTION 11.6. Deposit of Redemption Price.

Prior to 10:00 a.m., New York City time, on the Redemption Date specified in the notice of redemption given as provided in Section 11.5 , the Company will deposit with the Trustee or with one or more Paying Agents (or if the Company is acting as its own Paying Agent, the Company will segregate and hold in trust as provided in Section 10.2 ) an amount of money sufficient to pay the Redemption Price of, and any accrued interest (including any Additional Interest) on, all the Securities (or portions thereof) that are to be redeemed on that date.

SECTION 11.7. Payment of Securities Called for Redemption.

(a) If any notice of redemption has been given as provided in Section 11.5 , the Securities or portion of Securities with respect to which such notice has been given shall become due and payable on the date and at the place or places stated in such notice at the applicable Redemption Price, together with accrued interest (including any Additional Interest) to the Redemption Date. On presentation and surrender of such Securities at a Place of Payment specified in such notice, the Securities or the specified portions thereof shall be paid and redeemed by the Company at the applicable Redemption Price, together with accrued interest (including any Additional Interest) to the Redemption Date.

(b) Upon presentation of any Security redeemed in part only, the Company shall execute and upon receipt thereof the Trustee shall authenticate and deliver to the Holder thereof, at the expense of the Company, a new Security or Securities, of authorized denominations, in aggregate principal amount equal to the unredeemed portion of the Security so presented and having the same Original Issue Date, Stated Maturity and terms.

(c) If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal of and any premium on such Security shall, until paid, bear interest from the Redemption Date at the rate prescribed therefor in the Security.

ARTICLE XII

Subordination of Securities

SECTION 12.1. Securities Subordinate to Senior Debt of the Company.

The Company covenants and agrees, and each Holder of a Security, by its acceptance thereof, likewise covenants and agrees, that, to the extent and in the manner hereinafter set forth in this Article XII , the payment of the principal of and any premium and interest (including any Additional Interest) on each and all of the Securities are hereby expressly made subordinate and subject in right of payment to the prior payment in full of all Senior Debt of the Company. Notwithstanding anything herein to the contrary, the Securities shall be senior to the trade debt of the Company incurred in the ordinary course of business.

SECTION 12.2. No Payment When Senior Debt of the Company in Default; Payment Over of Proceeds Upon Dissolution, Etc.

(a) In the event and during the continuation of any default by the Company in the payment of any principal of or any premium or interest on any Senior Debt of the Company (following any grace period, if applicable) when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration of acceleration or otherwise, then, upon written notice of such default to the Company by the holders of such Senior Debt of the Company or any trustee therefor, unless and until such default shall have been cured or waived or shall have ceased to exist, no direct or indirect payment (in cash, property, securities, by set-off or otherwise) shall be made or agreed to be made on account of the principal of or any premium or interest (including any Additional Interest) on any of the Securities, or in respect of any redemption, repayment, retirement, purchase or other acquisition of any of the Securities.

(b) In the event of a bankruptcy, insolvency or other proceeding described in clause (d) or (e) of the definition of Event of Default (each such event, if any, herein sometimes referred to as a “ Proceeding ”), all Senior Debt of the Company (including any interest thereon accruing after the commencement of any such proceedings) shall first be paid in full before any payment or distribution, whether in cash, securities or other property, shall be made to any Holder of any of the Securities on account thereof. Any payment or distribution, whether in cash, securities or other property (other than securities of the Company or any other entity provided for by a plan of reorganization or readjustment the payment of which is subordinate, at least to the extent provided in these subordination provisions with respect to the indebtedness evidenced by the Securities, to the payment of all Senior Debt of the Company at the time outstanding and to any securities issued in respect thereof under any such plan of reorganization or readjustment), which would otherwise (but for these subordination provisions) be payable or deliverable in respect of the Securities shall be paid or delivered directly to the holders of Senior Debt of the Company in accordance with the priorities then existing among such holders until all Senior Debt of the Company (including any interest thereon accruing after the commencement of any Proceeding) shall have been paid in full.

(c) In the event of any Proceeding, after payment in full of all sums owing with respect to Senior Debt of the Company, the Holders of the Securities, together with the holders of any obligations of the Company ranking on a parity with the Securities, shall be entitled to be paid from the remaining assets of the Company the amounts at the time due and owing on account of unpaid principal of and any premium and interest (including any Additional Interest) on the Securities and such other obligations before any payment or other distribution, whether in cash, property or otherwise, shall be made on account of any capital stock or any obligations of the Company ranking junior to the Securities and such other obligations. If, notwithstanding the foregoing, any payment or distribution of any character or any security, whether in cash, securities or other property (other than securities of the Company or any other entity provided for by a plan of reorganization or readjustment the payment of which is subordinate, at least to the extent provided in these subordination provisions with respect to the indebtedness evidenced by the Securities, to the payment of all Senior Debt of the Company at the time outstanding and to any securities issued in respect thereof under any such plan of reorganization or readjustment) shall be received by the Trustee or any Holder in contravention of any of the terms hereof and before all Senior Debt of the Company shall have been paid in full, such payment or distribution or security shall be received in trust for the benefit of, and shall be paid over or delivered and transferred to, the holders of the Senior Debt of the Company at the time outstanding in accordance with the priorities then existing among such holders for application to the payment of all Senior Debt of the Company remaining unpaid, to the extent necessary to pay all such Senior Debt of the Company (including any interest thereon accruing after the commencement of any Proceeding) in full. In the event of the failure of the Trustee or any Holder to endorse or assign any such payment, distribution or security, each holder of Senior Debt of the Company is hereby irrevocably authorized to endorse or assign the same.

(d) The Trustee and the Holders, at the expense of the Company, shall take such reasonable action (including the delivery of this Indenture to an agent for any holders of Senior Debt of the Company or consent to the filing of a financing statement with respect hereto) as may, in the opinion of counsel designated by the holders of a majority in principal amount of the Senior Debt of the Company at the time outstanding, be necessary or appropriate to assure the effectiveness of the subordination effected by these provisions.

(e) The provisions of this Section 12.2 shall not impair any rights, interests, remedies or powers of any secured creditor of the Company in respect of any security interest the creation of which is not prohibited by the provisions of this Indenture.

(f) The securing of any obligations of the Company, otherwise ranking on a parity with the Securities or ranking junior to the Securities, shall not be deemed to prevent such obligations from constituting, respectively, obligations ranking on a parity with the Securities or ranking junior to the Securities.

SECTION 12.3. Payment Permitted If No Default.

Nothing contained in this Article XII or elsewhere in this Indenture or in any of the Securities shall prevent (a) the Company, at any time, except during the pendency of the conditions described in paragraph (a) of Section 12.2 or of any Proceeding referred to in Section 12.2 , from making payments at any time of principal of and any premium or interest (including any Additional Interest) on the Securities or (b) the application by the Trustee of any moneys deposited with it hereunder to the payment of or on account of the principal of and any premium or interest (including any Additional Interest) on the Securities or the retention of such payment by the Holders, if, at the time of such application by the Trustee, it did not have knowledge (in accordance with Section 12.8 ) that such payment would have been prohibited by the provisions of this Article XII , except as provided in Section 12.8 .

SECTION 12.4. Subrogation to Rights of Holders of Senior Debt of the Company.

Subject to the payment in full of all amounts due or to become due on all Senior Debt of the Company, or the provision for such payment in cash or cash equivalents or otherwise in a manner satisfactory to the holders of Senior Debt of the Company, the Holders of the Securities shall be subrogated to the extent of the payments or distributions made to the holders of such Senior Debt of the Company pursuant to the provisions of this Article XII (equally and ratably with the holders of all indebtedness of the Company that by its express terms is subordinated to Senior Debt of the Company to substantially the same extent as the Securities are subordinated to the Senior Debt of the Company and is entitled to like rights of subrogation by reason of any payments or distributions made to holders of such Senior Debt of the Company) to the rights of the holders of such Senior Debt of the Company to receive payments and distributions of cash, property and securities applicable to the Senior Debt of the Company until the principal of and any premium and interest (including any Additional Interest) on the Securities shall be paid in full. For purposes of such subrogation, no payments or distributions to the holders of the Senior Debt of the Company of any cash, property or securities to which the Holders of the Securities or the Trustee would be entitled except for the provisions of this Article XII , and no payments made pursuant to the provisions of this Article XII to the holders of Senior Debt of the Company by Holders of the Securities or the Trustee, shall, as among the Company, its creditors other than holders of Senior Debt of the Company, and the Holders of the Securities, be deemed to be a payment or distribution by the Company to or on account of the Senior Debt of the Company.

SECTION 12.5. Provisions Solely to Define Relative Rights.

The provisions of this Article XII are intended solely for the purpose of defining the relative rights of the Holders of the Securities on the one hand and the holders of Senior Debt of the Company on the other hand. Nothing contained in this Article XII or elsewhere in this Indenture or in the Securities is intended to or shall (a) impair, as between the Company and the Holders of the Securities, the obligations of the Company, which are absolute and unconditional, to pay to the Holders of the Securities the principal of and any premium and interest (including any Additional Interest) on the Securities as and when the same shall become due and payable in accordance with their terms, (b) affect the relative rights against the Company of the Holders of the Securities and creditors of the Company other than their rights in relation to the holders of Senior Debt of the Company or (c) prevent the Trustee or the Holder of any Security (or to the extent expressly provided herein, the holder of any Preferred Security) from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, including filing and voting claims in any Proceeding, subject to the rights, if any, under this Article XII of the holders of Senior Debt of the Company to receive cash, property and securities otherwise payable or deliverable to the Trustee or such Holder.

SECTION 12.6. Trustee to Effectuate Subordination.

Each Holder of a Security by his or her acceptance thereof authorizes and directs the Trustee on his or her behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination provided in this Article XII and appoints the Trustee his or her attorney-in-fact for any and all such purposes.

SECTION 12.7. No Waiver of Subordination Provisions.

(a) No right of any present or future holder of any Senior Debt of the Company to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof that any such holder may have or be otherwise charged with.

(b) Without in any way limiting the generality of paragraph (a) of this Section 12.7 , the holders of Senior Debt of the Company may, at any time and from to time, without the consent of or notice to the Trustee or the Holders of the Securities, without incurring responsibility to such Holders of the Securities and without impairing or releasing the subordination provided in this Article XII or the obligations hereunder of such Holders of the Securities to the holders of Senior Debt of the Company, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, Senior Debt of the Company, or otherwise amend or supplement in any manner Senior Debt of the Company or any instrument evidencing the same or any agreement under which Senior Debt of the Company is outstanding, (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Debt of the Company, (iii) release any Person liable in any manner for the payment of Senior Debt of the Company and (iv) exercise or refrain from exercising any rights against the Company and any other Person.

SECTION 12.8. Notice to Trustee.

(a) The Company shall give prompt written notice to a Responsible Officer of the Trustee of any fact known to the Company that would prohibit the making of any payment to or by the Trustee in respect of the Securities. Notwithstanding the provisions of this Article XII or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment to or by the Trustee in respect of the Securities, unless and until a Responsible Officer of the Trustee shall have received written notice thereof from the Company or a holder of Senior Debt of the Company or from any trustee, agent or representative therefor; provided , that if the Trustee shall not have received the notice provided for in this Section 12.8 at least two Business Days prior to the date upon which by the terms hereof any monies may become payable for any purpose (including, the payment of the principal of and any premium on or interest (including any Additional Interest) on any Security), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such monies and to apply the same to the purpose for which they were received and shall not be affected by any notice to the contrary that may be received by it within two Business Days prior to such date.

(b) The Trustee shall be entitled to rely on the delivery to it of a written notice by a Person representing himself or herself to be a holder of Senior Debt of the Company (or a trustee, agent, representative or attorney-in-fact therefor) to establish that such notice has been given by a holder of Senior Debt of the Company (or a trustee, agent, representative or attorney-in-fact therefor). With respect to any Senior Debt that is a syndicated loan, all rights of the holders of such Senior Debt (including, without limitation, the rights to give and receive notices) may be taken or exercised on behalf of the holders of such Senior Debt by an administrative agent for such holders or an equivalent party to the extent set forth therein. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of Senior Debt of the Company to participate in any payment or distribution pursuant to this Article XII , the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Debt of the Company held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article XII , and if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment.

SECTION 12.9. Reliance on Judicial Order or Certificate of Liquidating Agent.

Upon any payment or distribution of assets of the Company referred to in this Article XII , the Trustee and the Holders of the Securities shall be entitled to conclusively rely upon any order or decree entered by any court of competent jurisdiction in which such Proceeding is pending, or a certificate of the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit of creditors, agent or other Person making such payment or distribution, delivered to the Trustee or to the Holders of Securities, for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of the Senior Debt of the Company and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article XII .

SECTION 12.10. Trustee Not Fiduciary for Holders of Senior Debt of the Company.

The Trustee, in its capacity as trustee under this Indenture, shall not owe or be deemed to owe any fiduciary duty to the holders of Senior Debt of the Company and shall not be liable to any such holders if it shall in good faith mistakenly pay over or distribute to Holders of Securities or to the Company or to any other Person cash, property or securities to which any holders of Senior Debt of the Company shall be entitled by virtue of this Article XII or otherwise.

SECTION 12.11. Rights of Trustee as Holder of Senior Debt of the Company; Preservation of Trustee’s Rights.

The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article XII with respect to any Senior Debt of the Company that may at any time be held by it, to the same extent as any other holder of Senior Debt of the Company, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder. With respect to the holders of Senior Debt of the Company, the Trustee undertakes to perform only such of its obligations as are specifically set forth in this Article XII, and no implied covenants or obligations with respect to the holders of such Senior Debt of the Company shall be read into this Indenture against the Trustee. Nothing in this Article XII shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.6.

SECTION 12.12. Article Applicable to Paying Agents.

If at any time any Paying Agent other than the Trustee shall have been appointed by the Company and be then acting hereunder, the term “ Trustee ” as used in this Article XII shall in such case (unless the context otherwise requires) be construed as extending to and including such Paying Agent within its meaning as fully for all intents and purposes as if such Paying Agent were named in this Article XII in addition to or in place of the Trustee; provided , that Sections 12.8 and 12.11 shall not apply to the Company or any Affiliate of the Company if the Company or such Affiliate acts as Paying Agent.

ARTICLE XIII

Guarantee

SECTION 13.1. The Guarantee .

The Guarantor hereby fully, unconditionally and irrevocably guarantees to each holder of a Security authenticated and delivered by the Trustee the due and punctual payment of the principal of and premium, if any, and interest (including Additional Amounts) on such Security, when and as the same shall become due and payable, whether at maturity, by acceleration, upon redemption or otherwise, in accordance with the terms of such Security and this Indenture, as well as the due and punctual performance of all other obligations contained in the Securities and this Indenture. In case of the failure of the Company to punctually pay its obligations on any Security, the Guarantor hereby agrees to cause any such payment to be made punctually when and as the same shall become due and payable, whether at maturity, by acceleration, upon redemption or otherwise, and as if such payment were made by the Company.

SECTION 13.2. Guarantee Unconditional, etc .

The Guarantor hereby agrees that it shall be liable as principal and as debtor hereunder with respect to its obligations under this Article. This Article creates a guarantee of payment and not of collection on the part of the Guarantor. The Guarantor’s obligations hereunder shall be absolute, irrevocable and unconditional, irrespective of, and shall be unaffected by, any invalidity, irregularity or unenforceability of any Security or this Indenture, any failure to enforce the provisions of any Security or this Indenture, or any waiver, modification, consent or indulgence granted with respect thereto by the holder of such Security or the Trustee, the recovery of any judgment against the Company or any action to enforce the same, or any other circumstances which may otherwise constitute a legal or equitable discharge of a surety or guarantor. The Guarantor hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of merger, insolvency or bankruptcy of the Company, any right to require a proceeding first against the Company, protest or notice with respect to any such Security or the indebtedness evidenced thereby and all demands whatsoever, and covenants that this Guarantee will not be discharged except by payment in full of the principal of and premium, if any, and interest (including Additional Amounts) on the Securities and the complete performance of all other obligations contained in the Securities and this Indenture. The Guarantor further agrees, to the fullest extent that it lawfully may do so, that, as between the Guarantor, on the one hand, and the Holders and the Trustee, on the other hand, the maturity of the Securities shall or may, as the case may be, be accelerated as provided in this Indenture for purposes of the Guarantor’s obligations under this Guarantee, notwithstanding any stay, injunction or prohibition existing under any bankruptcy, insolvency, reorganization or other similar law of any jurisdiction preventing such acceleration in respect of the obligations guaranteed hereby.

SECTION 13.3. Reinstatement .

This Guarantee shall continue to be effective or be reinstated, as the case may be, if at any time a payment in respect of any Security, in whole or in part, is rescinded or must otherwise be restored to the Company or the Guarantor upon the bankruptcy, liquidation or reorganization of the Company or otherwise.

SECTION 13.4. Subrogation .

The Guarantor shall be subrogated to all rights of the holder of any Security against the Company in respect of any amounts paid to such holder by the Guarantor pursuant to the provisions of this Guarantee; provided , however , that the Guarantor shall not be entitled to enforce, or to receive any payments arising out of or based upon, such right of subrogation as a result of payment under this Guarantee, if, after giving effect to any such payment, any amounts are due and unpaid under this Guarantee. If any amount shall be paid to the Guarantor in violation of the preceding sentence, the Guarantor agrees to hold such amount in trust for the Holders and to pay such amount to the Holders.

ARTICLE XIV

Subordination of Guarantee

SECTION 14.1. Securities Subordinate to Senior Debt of the Guarantor .

The Guarantor covenants and agrees, and each Holder of a Security, by its acceptance thereof, likewise covenants and agrees, that, to the extent and in the manner hereinafter set forth in this Article XIV , the payment of the principal of and any premium and interest (including any Additional Interest) on each and all of the Securities are hereby expressly made subordinate and subject in right of payment to the prior payment in full of all Senior Debt of the Guarantor. Notwithstanding anything herein to the contrary, the guarantee of the Securities shall be senior to the trade debt of the Guarantor incurred in the ordinary course of business.

SECTION 14.2. No Payment When Senior Debt of the Guarantor in Default; Payment Over of Proceeds Upon Dissolution, Etc.

(a) In the event and during the continuation of any default by the Guarantor in the payment of any principal of or any premium or interest on any Senior Debt of the Guarantor (following any grace period, if applicable) when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or by declaration of acceleration or otherwise, then, upon written notice of such default to the Guarantor by the holders of such Senior Debt of the Guarantor or any trustee therefor, unless and until such default shall have been cured or waived or shall have ceased to exist, no direct or indirect payment (in cash, property, securities, by set-off or otherwise) shall be made or agreed to be made on account of the principal of or any premium or interest (including any Additional Interest) on any of the Securities, or in respect of any redemption, repayment, retirement, purchase or other acquisition of any of the Securities.

(b) In the event of a bankruptcy, insolvency or other proceeding described in clause (d) or (e) of the definition of Event of Default (each such event, if any, herein sometimes referred to as a “ Proceeding ”), all Senior Debt of the Guarantor (including any interest thereon accruing after the commencement of any such proceedings) shall first be paid in full before any payment or distribution, whether in cash, securities or other property, shall be made to any Holder of any of the Securities on account thereof. Any payment or distribution, whether in cash, securities or other property (other than securities of the Guarantor or any other entity provided for by a plan of reorganization or readjustment the payment of which is subordinate, at least to the extent provided in these subordination provisions with respect to the indebtedness evidenced by the Securities, to the payment of all Senior Debt of the Guarantor at the time outstanding and to any securities issued in respect thereof under any such plan of reorganization or readjustment), which would otherwise (but for these subordination provisions) be payable or deliverable in respect of the Securities shall be paid or delivered directly to the holders of Senior Debt of the Guarantor in accordance with the priorities then existing among such holders until all Senior Debt of the Guarantor (including any interest thereon accruing after the commencement of any Proceeding) shall have been paid in full.

(c) In the event of any Proceeding, after payment in full of all sums owing with respect to Senior Debt of the Guarantor, the Holders of the Securities, together with the holders of any obligations of the Guarantor ranking on a parity with the Securities, shall be entitled to be paid from the remaining assets of the Guarantor the amounts at the time due and owing on account of unpaid principal of and any premium and interest (including any Additional Interest) on the Securities and such other obligations before any payment or other distribution, whether in cash, property or otherwise, shall be made on account of any capital stock or any obligations of the Guarantor ranking junior to the Securities and such other obligations. If, notwithstanding the foregoing, any payment or distribution of any character or any security, whether in cash, securities or other property (other than securities of the Guarantor or any other entity provided for by a plan of reorganization or readjustment the payment of which is subordinate, at least to the extent provided in these subordination provisions with respect to the indebtedness evidenced by the Securities, to the payment of all Senior Debt of the Guarantor at the time outstanding and to any securities issued in respect thereof under any such plan of reorganization or readjustment) shall be received by the Trustee or any Holder in contravention of any of the terms hereof and before all Senior Debt of the Guarantor shall have been paid in full, such payment or distribution or security shall be received in trust for the benefit of, and shall be paid over or delivered and transferred to, the holders of the Senior Debt of the Guarantor at the time outstanding in accordance with the priorities then existing among such holders for application to the payment of all Senior Debt of the Guarantor remaining unpaid, to the extent necessary to pay all such Senior Debt of the Guarantor (including any interest thereon accruing after the commencement of any Proceeding) in full. In the event of the failure of the Trustee or any Holder to endorse or assign any such payment, distribution or security, each holder of Senior Debt of the Guarantor is hereby irrevocably authorized to endorse or assign the same.

(d) The Trustee and the Holders, at the expense of the Guarantor, shall take such reasonable action (including the delivery of this Indenture to an agent for any holders of Senior Debt of the Guarantor or consent to the filing of a financing statement with respect hereto) as may, in the opinion of counsel designated by the holders of a majority in principal amount of the Senior Debt of the Guarantor at the time outstanding, be necessary or appropriate to assure the effectiveness of the subordination effected by these provisions.

(e) The provisions of this Section 14.2 shall not impair any rights, interests, remedies or powers of any secured creditor of the Guarantor in respect of any security interest the creation of which is not prohibited by the provisions of this Indenture.

(f) The securing of any obligations of the Guarantor, otherwise ranking on a parity with the Securities or ranking junior to the Securities, shall not be deemed to prevent such obligations from constituting, respectively, obligations ranking on a parity with the Securities or ranking junior to the Securities.

SECTION 14.3. Payment Permitted If No Default .

Nothing contained in this Article XIV or elsewhere in this Indenture or in any of the Securities shall prevent (a) the Guarantor, at any time, except during the pendency of the conditions described in paragraph (a) of Section 14.2 or of any Proceeding referred to in Section 14.2 , from making payments at any time of principal of and any premium or interest (including any Additional Interest) on the Securities or (b) the application by the Trustee of any moneys deposited with it hereunder to the payment of or on account of the principal of and any premium or interest (including any Additional Interest) on the Securities or the retention of such payment by the Holders, if, at the time of such application by the Trustee, it did not have knowledge (in accordance with Section 14.8 ) that such payment would have been prohibited by the provisions of this Article XIV , except as provided in Section 14.8 .

SECTION 14.4. Subrogation to Rights of Holders of Senior Debt of the Guarantor .

Subject to the payment in full of all amounts due or to become due on all Senior Debt of the Guarantor, or the provision for such payment in cash or cash equivalents or otherwise in a manner satisfactory to the holders of Senior Debt of the Guarantor, the Holders of the Securities shall be subrogated to the extent of the payments or distributions made to the holders of such Senior Debt of the Guarantor pursuant to the provisions of this Article XIV (equally and ratably with the holders of all indebtedness of the Guarantor that by its express terms is subordinated to Senior Debt of the Guarantor to substantially the same extent as the Securities are subordinated to the Senior Debt of the Guarantor and is entitled to like rights of subrogation by reason of any payments or distributions made to holders of such Senior Debt of the Guarantor) to the rights of the holders of such Senior Debt of the Guarantor to receive payments and distributions of cash, property and securities applicable to the Senior Debt of the Guarantor until the principal of and any premium and interest (including any Additional Interest) on the Securities shall be paid in full. For purposes of such subrogation, no payments or distributions to the holders of the Senior Debt of the Guarantor of any cash, property or securities to which the Holders of the Securities or the Trustee would be entitled except for the provisions of this Article XIV , and no payments made pursuant to the provisions of this Article XIV to the holders of Senior Debt of the Guarantor by Holders of the Securities or the Trustee, shall, as among the Guarantor, its creditors other than holders of Senior Debt of the Guarantor, and the Holders of the Securities, be deemed to be a payment or distribution by the Guarantor to or on account of the Senior Debt of the Guarantor.

SECTION 14.5. Provisions Solely to Define Relative Rights .

The provisions of this Article XIV are intended solely for the purpose of defining the relative rights of the Holders of the Securities on the one hand and the holders of Senior Debt of the Guarantor on the other hand. Nothing contained in this Article XIV or elsewhere in this Indenture or in the Securities is intended to or shall (a) impair, as between the Guarantor and the Holders of the Securities, the obligations of the Guarantor, which are absolute and unconditional, to pay to the Holders of the Securities the principal of and any premium and interest (including any Additional Interest) on the Securities as and when the same shall become due and payable in accordance with their terms, (b) affect the relative rights against the Guarantor of the Holders of the Securities and creditors of the Guarantor other than their rights in relation to the holders of Senior Debt of the Guarantor or (c) prevent the Trustee or the Holder of any Security (or to the extent expressly provided herein, the holder of any Preferred Security) from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, including filing and voting claims in any Proceeding, subject to the rights, if any, under this Article XIV of the holders of Senior Debt of the Guarantor to receive cash, property and securities otherwise payable or deliverable to the Trustee or such Holder.

SECTION 14.6. Trustee to Effectuate Subordination .

Each Holder of a Security by such Holder’s acceptance thereof authorizes and directs the Trustee on such Holder’s behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination provided in this Article XIV and appoints the Trustee such Holder’s attorney-in-fact for any and all such purposes.

SECTION 14.7. No Waiver of Subordination Provisions .

(a) No right of any present or future holder of any Senior Debt of the Guarantor to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Guarantor or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Guarantor with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof that any such holder may have or be otherwise charged with.

(b) Without in any way limiting the generality of paragraph (a) of this Section 14.7 , the holders of Senior Debt of the Guarantor may, at any time and from to time, without the consent of or notice to the Trustee or the Holders of the Securities, without incurring responsibility to such Holders of the Securities and without impairing or releasing the subordination provided in this Article XIV or the obligations hereunder of such Holders of the Securities to the holders of Senior Debt of the Guarantor, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, Senior Debt of the Guarantor, or otherwise amend or supplement in any manner Senior Debt of the Guarantor or any instrument evidencing the same or any agreement under which Senior Debt of the Guarantor is outstanding, (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Debt of the Guarantor, (iii) release any Person liable in any manner for the payment of Senior Debt of the Guarantor and (iv) exercise or refrain from exercising any rights against the Guarantor and any other Person.

SECTION 14.8. Notice to Trustee .

(a) The Guarantor shall give prompt written notice to a Responsible Officer of the Trustee of any fact known to the Guarantor that would prohibit the making of any payment to or by the Trustee in respect of the Securities. Notwithstanding the provisions of this Article XIV or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts that would prohibit the making of any payment to or by the Trustee in respect of the Securities, unless and until a Responsible Officer of the Trustee shall have received written notice thereof from the Guarantor or a holder of Senior Debt of the Guarantor or from any trustee, agent or representative therefor; provided , that if the Trustee shall not have received the notice provided for in this Section 14.8 at least two Business Days prior to the date upon which by the terms hereof any monies may become payable for any purpose (including, the payment of the principal of and any premium on or interest (including any Additional Interest) on any Security), then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such monies and to apply the same to the purpose for which they were received and shall not be affected by any notice to the contrary that may be received by it within two Business Days prior to such date.

(b) The Trustee shall be entitled to rely on the delivery to it of a written notice by a Person representing himself or herself to be a holder of Senior Debt of the Guarantor (or a trustee, agent, representative or attorney-in-fact therefor) to establish that such notice has been given by a holder of Senior Debt of the Guarantor (or a trustee, agent, representative or attorney-in-fact therefor). In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of Senior Debt of the Guarantor to participate in any payment or distribution pursuant to this Article XIV , the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Debt of the Guarantor held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article XIV , and if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment.

SECTION 14.9. Reliance on Judicial Order or Certificate of Liquidating Agent .

Upon any payment or distribution of assets of the Guarantor referred to in this Article XIV , the Trustee and the Holders of the Securities shall be entitled to conclusively rely upon any order or decree entered by any court of competent jurisdiction in which such Proceeding is pending, or a certificate of the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit of creditors, agent or other Person making such payment or distribution, delivered to the Trustee or to the Holders of Securities, for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of the Senior Debt of the Guarantor and other indebtedness of the Guarantor, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article XIV .

SECTION 14.10. Trustee Not Fiduciary for Holders of Senior Debt of the Guarantor .

The Trustee, in its capacity as trustee under this Indenture, shall not owe or be deemed to owe any fiduciary duty to the holders of Senior Debt of the Guarantor and shall not be liable to any such holders if it shall in good faith mistakenly pay over or distribute to Holders of Securities or to the Guarantor or to any other Person cash, property or securities to which any holders of Senior Debt of the Guarantor shall be entitled by virtue of this Article XIV or otherwise.

SECTION 14.11. Rights of Trustee as Holder of Senior Debt of the Guarantor; Preservation of Trustee’s Rights .

The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article XIV with respect to any Senior Debt of the Guarantor that may at any time be held by it, to the same extent as any other holder of Senior Debt of the Guarantor, and nothing in this Indenture shall deprive the Trustee of any of its rights as such holder. With respect to the holders of Senior Debt of the Guarantor, the Trustee undertakes to perform only such of its obligations as are specifically set forth in this Article XIV, and no implied covenants or obligations with respect to the holders of such Senior Debt of the Guarantor shall be read into this Indenture against the Trustee. Nothing in this Article XIV shall apply to claims of, or payments to, the Trustee under or pursuant to Section 6.6.

SECTION 14.12. Article Applicable to Paying Agents .

If at any time any Paying Agent other than the Trustee shall have been appointed by the Guarantor and be then acting hereunder, the term “ Trustee ” as used in this Article XIV shall in such case (unless the context otherwise requires) be construed as extending to and including such Paying Agent within its meaning as fully for all intents and purposes as if such Paying Agent were named in this Article XIV in addition to or in place of the Trustee; provided , that Sections 14.8 and 14.11 shall not apply to the Guarantor or any Affiliate of the Guarantor if the Guarantor or such Affiliate acts as Paying Agent.

This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. Delivery of an executed signature page of this Indenture by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof.

* * * *

IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the day and year first above written.


	NorthStar Realty Finance Limited Partnership, as Issuer

	By:	NorthStar Realty Finance Corp., its General Partner



	By:	/s/ Richard J. McCready
		Name: Richard J. McCready Title: General Counsel


	NorthStar Realty Finance Corp., as Guarantor

	By:	/s/ Richard J. McCready
		Name: Richard J. McCready Title: General Counsel


	WILMINGTON TRUST COMPANY , as Trustee

	By:	/s/ W. Thomas Morris, II
		Name: W. Thomas Morris, II Title: Assistant Vice President

AMENDED AND RESTATED TRUST AGREEMENT

among

NORTHSTAR REALTY FINANCE LIMITED PARTNERSHIP ,

as Depositor

NORTHSTAR REALTY FINANCE CORP. ,

as Guarantor

WILMINGTON TRUST COMPANY

as Property Trustee

WILMINGTON TRUST COMPANY

as Delaware Trustee

and

THE ADMINISTRATIVE TRUSTEES NAMED HEREIN

as Administrative Trustees

Dated as of March 10, 2006

NORTHSTAR REALTY FINANCE TRUST IV

TABLE OF CONTENTS


		Page

ARTICLE I. Defined Terms		1
SECTION 1.1.	Definitions.	1

ARTICLE II. The Trust		10
SECTION 2.1.	Name.	10
SECTION 2.2.	Office of the Delaware Trustee; Principal Place of Business.	10
SECTION 2.3.	Initial Contribution of Trust Property; Fees, Costs and Expenses.	10
SECTION 2.4.	Purposes of Trust.	11
SECTION 2.5.	Authorization to Enter into Certain Transactions.	11
SECTION 2.6.	Assets of Trust.	14
SECTION 2.7.	Title to Trust Property.	14

ARTICLE III. Payment Account; Paying Agents		14
SECTION 3.1.	Payment Account.	14
SECTION 3.2.	Appointment of Paying Agents.	15

ARTICLE IV. Distributions; Redemption		15
SECTION 4.1.	Distributions.	15
SECTION 4.2.	Redemption.	16
SECTION 4.3.	Subordination of Common Securities.	19
SECTION 4.4.	Payment Procedures.	20
SECTION 4.5.	Withholding Tax.	20
SECTION 4.6.	Tax Returns and Other Reports.	20
SECTION 4.7.	Payment of Taxes, Duties, Etc. of the Trust.	21
SECTION 4.8.	Payments under Indenture or Pursuant to Direct Actions.	21
SECTION 4.9.	Exchanges.	21
SECTION 4.10.	Calculation Agent.	22
SECTION 4.11.	Certain Accounting Matters.	22

ARTICLE V. Securities		23
SECTION 5.1.	Initial Ownership.	23
SECTION 5.2.	Authorized Trust Securities.	23
SECTION 5.3.	Issuance of the Common Securities; Subscription and Purchase of Notes.	23
SECTION 5.4.	The Securities Certificates.	23
SECTION 5.5.	Rights of Holders.	24
SECTION 5.6.	Book-Entry Preferred Securities.	25
SECTION 5.7.	Registration of Transfer and Exchange of Preferred Securities Certificates.	26
SECTION 5.8.	Mutilated, Destroyed, Lost or Stolen Securities Certificates.	28
SECTION 5.9.	Persons Deemed Holders.	28
SECTION 5.10.	Cancellation.	29
SECTION 5.11.	Ownership of Common Securities by Depositor.	29
SECTION 5.12.	Restricted Legends.	29
SECTION 5.13.	Form of Certificate of Authentication.	32

ARTICLE VI. Meetings; Voting; Acts of Holders		32
SECTION 6.1.	Notice of Meetings.	32
SECTION 6.2.	Meetings of Holders of the Preferred Securities.	33
SECTION 6.3.	Voting Rights.	33
SECTION 6.4.	Proxies, Etc.	33
SECTION 6.5.	Holder Action by Written Consent.	34
SECTION 6.6.	Record Date for Voting and Other Purposes.	34
SECTION 6.7.	Acts of Holders.	34
SECTION 6.8.	Inspection of Records.	35
SECTION 6.9.	Limitations on Voting Rights.	35
SECTION 6.10.	Acceleration of Maturity; Rescission of Annulment; Waivers of Past Defaults.	36

ARTICLE VII. Representations and Warranties		38
SECTION 7.1.	Representations and Warranties of the Property Trustee and the Delaware Trustee.	38
SECTION 7.2.	Representations and Warranties of Depositor.	39

ARTICLE VIII. The Trustees		40
SECTION 8.1.	Number of Trustees.	40
SECTION 8.2.	Property Trustee Required.	40
SECTION 8.3.	Delaware Trustee Required.	41
SECTION 8.4.	Appointment of Administrative Trustees.	41
SECTION 8.5.	Duties and Responsibilities of the Trustees.	42
SECTION 8.6.	Notices of Defaults and Extensions.	43
SECTION 8.7.	Certain Rights of Property Trustee.	44
SECTION 8.8.	Delegation of Power.	46
SECTION 8.9.	May Hold Securities.	46
SECTION 8.10.	Compensation; Reimbursement; Indemnity.	46
SECTION 8.11.	Resignation and Removal; Appointment of Successor.	47
SECTION 8.12.	Acceptance of Appointment by Successor.	48
SECTION 8.13.	Merger, Conversion, Consolidation or Succession to Business.	49
SECTION 8.14.	Not Responsible for Recitals or Issuance of Securities.	49
SECTION 8.15.	Property Trustee May File Proofs of Claim.	49
SECTION 8.16.	Reports to and from the Property Trustee.	50

ARTICLE IX. Termination, Liquidation and Merger		51
SECTION 9.1.	Dissolution Upon Expiration Date.	51
SECTION 9.2.	Early Termination.	51
SECTION 9.3.	Termination.	51
SECTION 9.4.	Liquidation.	51
SECTION 9.5.	Mergers, Consolidations, Amalgamations or Replacements of Trust.	53

ARTICLE X. Information to Purchaser		54
SECTION 10.1.	Depositor Obligations to Purchaser.	54
SECTION 10.2.	Property Trustee’s Obligations to Purchaser.	54

ARTICLE XI. Miscellaneous Provisions		55
SECTION 11.1.	Limitation of Rights of Holders.	55
SECTION 11.2.	Agreed Tax Treatment of Trust and Trust Securities.	55
SECTION 11.3.	Amendment.	55

SECTION 11.4.

Separability.

SECTION 11.5.	Governing Law.	57
SECTION 11.6.	Successors.	57
SECTION 11.7.	Headings.	57
SECTION 11.8.	Reports, Notices and Demands.	57
SECTION 11.9.	Agreement Not to Petition.	58

Exhibit A Certificate of Trust of NorthStar Realty Finance Trust IV

Exhibit B Form of Common Securities Certificate

Exhibit C Form of Preferred Securities Certificate

Exhibit D Junior Subordinated Indenture

Exhibit E Form of Transferee Certificate to be Executed by Transferees other than QIBs

Exhibit F Form of Transferor Certificate to be Executed by QIBs

Exhibit G Form of Officer’s Certificate

Exhibit H Form of Officer’s Certificate pursuant to Section 8.16(a)

Schedule A Calculation of LIBOR

iii

AMENDED AND RESTATED TRUST AGREEMENT, dated as of March 10, 2006, among (i) NorthStar Realty Finance Limited Partnership, a Delaware limited partnership (including any successors or permitted assigns, the “Depositor”), (ii) NorthStar Realty Finance Corp., a Maryland corporation (including any successors or permitted assigns, the “Guarantor”), (iii) Wilmington Trust Company, a Delaware banking corporation, as property trustee (in such capacity, the “Property Trustee”), (iv) Wilmington Trust Company, a Delaware banking corporation, as Delaware trustee (in such capacity, the “Delaware Trustee”), (v) David T. Hamamoto, an individual, Richard J. McCready, an individual, and Mark E. Chertok, an individual, each of whose address is c/o NorthStar Realty Finance Limited Partnership, c/o NorthStar Realty Finance Corp., 527 Madison Avenue, New York, NY 10022, as administrative trustees (in such capacities, each an “Administrative Trustee” and, collectively, the “Administrative Trustees” and, together with the Property Trustee and the Delaware Trustee, the “Trustees”) and (vi) the several Holders, as hereinafter defined.

WITNESSETH

WHEREAS , the Depositor, the Property Trustee and the Delaware Trustee have heretofore created a Delaware statutory trust pursuant to the Delaware Statutory Trust Act by entering into a Trust Agreement, dated as of March 7, 2006 (the “Original Trust Agreement”), and by executing and filing with the Secretary of State of the State of Delaware the Certificate of Trust, substantially in the form attached as Exhibit A ; and

WHEREAS, the Depositor and the Trustees desire to amend and restate the Original Trust Agreement in its entirety as set forth herein to provide for, among other things, (i) the issuance of the Common Securities by the Trust to the Depositor, (ii) the issuance and sale of the Preferred Securities by the Trust pursuant to the Purchase Agreement and (iii) the acquisition by the Trust from the Depositor of all of the right, title and interest in and to the Notes;

NOW, THEREFORE, in consideration of the agreements and obligations set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each party, for the benefit of the other parties and for the benefit of the Holders, hereby amends and restates the Original Trust Agreement in its entirety and agrees as follows:

ARTICLE I.

DEFINED TERMS

SECTION 1.1. Definitions.

For all purposes of this Trust Agreement, except as otherwise expressly provided or unless the context otherwise requires:

(a) the terms defined in this Article I have the meanings assigned to them in this Article I;

(b) the words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”;

(c) all accounting terms used but not defined herein have the meanings assigned to them in accordance with United States generally accepted accounting principles;

(d) unless the context otherwise requires, any reference to an “Article”, a “Section”, a “Schedule” or an “Exhibit” refers to an Article, a Section, a Schedule or an Exhibit, as the case may be, of or to this Trust Agreement;

(e) the words “hereby”, “herein”, “hereof” and “hereunder” and other words of similar import refer to this Trust Agreement as a whole and not to any particular Article, Section or other subdivision;

(f) a reference to the singular includes the plural and vice versa; and

(g) the masculine, feminine or neuter genders used herein shall include the masculine, feminine and neuter genders.

“Act” has the meaning specified in Section 6.7 .

“Additional Interest” has the meaning specified in Section 1.1 of the Indenture.

“Additional Interest Amount” means, with respect to Trust Securities of a given Liquidation Amount and/or a given period, the amount of Additional Interest paid by the Depositor on a Like Amount of Notes for such period.

“Additional Taxes” has the meaning specified in Section 1.1 of the Indenture.

“Additional Tax Sums” has the meaning specified in Section 10.5 of the Indenture.

“Administrative Trustee” means each of the Persons identified as an “Administrative Trustee” in the preamble to this Trust Agreement, solely in each such Person’s capacity as Administrative Trustee of the Trust and not in such Person’s individual capacity, or any successor Administrative Trustee appointed as herein provided.

“Affiliate” of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, “control” when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

“Applicable Depositary Procedures” means, with respect to any transfer or transaction involving a Book-Entry Preferred Security, the rules and procedures of the Depositary for such Book-Entry Preferred Security, in each case to the extent applicable to such transaction and as in effect from time to time.

“Bankruptcy Event” means, with respect to any Person:

(a) the entry of a decree or order by a court having jurisdiction in the premises (i) judging such Person a bankrupt or insolvent, (ii) approving as properly filed a petition seeking reorganization, arrangement, adjudication or composition of or in respect of such Person under any applicable Federal or state bankruptcy, insolvency, reorganization or other similar law, (iii) appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of such Person or of any substantial part of its property or (iv) ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order unstayed and in effect for a period of sixty (60) consecutive days; or

(b) the institution by such Person of proceedings to be adjudicated a bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law, or the consent by it to the filing of any such petition or to the appointment of a custodian, receiver, liquidator, assignee, trustee, sequestrator or similar official of such Person or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due and its willingness to be adjudicated a bankrupt or insolvent, or the taking of corporate action by such Person in furtherance of any such action.

“Bankruptcy Laws” means all Federal and state bankruptcy, insolvency, reorganization and other similar laws, including the United States Bankruptcy Code.

“Book-Entry Preferred Security” means a Preferred Security, the ownership and transfers of which shall be made through book entries by a Depositary.

“Business Day” means a day other than (a) a Saturday or Sunday, (b) a day on which banking institutions in the City of New York are authorized or required by law or executive order to remain closed or (c) a day on which the Corporate Trust Office is closed for business.

“Calculation Agent” has the meaning specified in Section 4.10 .

“Closing Date” has the meaning specified in the Purchase Agreement.

“Code” means the United States Internal Revenue Code of 1986, as amended.

“Commission” means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act or, if at any time after the execution of this Trust Agreement such Commission is not existing and performing the duties assigned to it, then the body performing such duties at such time.

“Common Securities Certificate” means a certificate evidencing ownership of Common Securities, substantially in the form attached as Exhibit B .

“Common Security” means a common security of the Trust, denominated as such and representing an undivided beneficial interest in the assets of the Trust, having a Liquidation Amount of $1,000 and having the terms provided therefor in this Trust Agreement.

“Corporate Trust Office” means the principal office of the Property Trustee at which any particular time its corporate trust business shall be administered, which office at the date of this Trust Agreement is located at Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001, Attention: Corporate Capital Markets.

“Definitive Preferred Securities Certificates” means Preferred Securities issued in certificated, fully registered form that are not Global Preferred Securities.

“Delaware Statutory Trust Act” means Chapter 38 of Title 12 of the Delaware Code, 12 Del. Code § 3801 et seq., or any successor statute thereto, in each case as amended from time to time.

“Delaware Trustee” means the Person identified as the “Delaware Trustee” in the preamble to this Trust Agreement, solely in its capacity as Delaware Trustee of the Trust and not in its individual capacity, or its successor in interest in such capacity, or any successor Delaware Trustee appointed as herein provided.

“Depositary” means an organization registered as a clearing agency under the Exchange Act that is designated as Depositary by the Depositor or any successor thereto. DTC will be the initial Depositary.

“Depository Participant” means a broker, dealer, bank, other financial institution or other Person for whom from time to time the Depositary effects book-entry transfers and pledges of securities deposited with the Depositary.

“Depositor” has the meaning specified in the preamble to this Trust Agreement and any successors and permitted assigns.

“Depositor Affiliate” has the meaning specified in Section 4.9 .

“Distribution Date” has the meaning specified in Section 4.1(a)(i) .

“Distributions” means amounts payable in respect of the Trust Securities as provided in Section 4.1 .

“DTC” means The Depository Trust Company or any successor thereto.

“Early Termination Event” has the meaning specified in Section 9.2 .

“Event of Default” means any one of the following events (whatever the reason for such event and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body):

(a) the occurrence of a Note Event of Default; or

(b) default by the Trust in the payment of any Distribution when it becomes due and payable, and continuation of such default for a period of thirty (30) days; or

(c) default by the Trust in the payment of any Redemption Price of any Trust Security when it becomes due and payable; or

(d) default in the performance, or breach, in any material respect of any covenant or warranty of the Trustees in this Trust Agreement (other than those specified in clause (b) or (c) above) and continuation of such default or breach for a period of thirty (30) days after there has been given, by registered or certified mail, to the Trustees and to the Depositor by the Holders of at least twenty five percent (25%) in aggregate Liquidation Amount of the Outstanding Preferred Securities a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a “Notice of Default” hereunder; or

(e) the occurrence of a Bankruptcy Event with respect to the Property Trustee if a successor Property Trustee has not been appointed within ninety (90) days thereof.

“Exchange Act” means the Securities Exchange Act of 1934, and any successor statute thereto, in each case as amended from time to time.

“Expiration Date” has the meaning specified in Section 9.1 .

“Fiscal Year” shall be the fiscal year of the Trust, which shall be the calendar year, or such other period as is required by the Code.

“Global Preferred Security” means a Preferred Securities Certificate evidencing ownership of Book-Entry Preferred Securities.

“Guarantor” has the meaning specified in the preamble to this Trust Agreement and any successors and permitted assigns.

“Holder” means a Person in whose name a Trust Security or Trust Securities are registered in the Securities Register; any such Person shall be a beneficial owner within the meaning of the Delaware Statutory Trust Act.

“Indemnified Person” has the meaning specified in Section 8.10(c) .

“Indenture” means the Junior Subordinated Indenture executed and delivered by the Depositor, the Guarantor and the Note Trustee contemporaneously with the execution and delivery of this Trust Agreement, for the benefit of the holders of the Notes, a copy of which is attached hereto as Exhibit D , as amended or supplemented from time to time.

“Indenture Redemption Price” has the meaning specified in Section 4.2(c) .

“Interest Payment Date” has the meaning specified in Section 1.1 of the Indenture.

“Investment Company Act” means the Investment Company Act of 1940, or any successor statute thereto, in each case as amended from time to time.

“Investment Company Event” has the meaning specified in Section 1.1 of the Indenture.

“LIBOR” has the meaning specified in Schedule A .

“LIBOR Business Day” has the meaning specified in Schedule A .

“LIBOR Determination Date” has the meaning specified in Schedule A .

“Lien” means any lien, pledge, charge, encumbrance, mortgage, deed of trust, adverse ownership interest, hypothecation, assignment, security interest or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever.

“Like Amount” means (a) with respect to a redemption of any Trust Securities, Trust Securities having a Liquidation Amount equal to the principal amount of Notes to be contemporaneously redeemed or paid at maturity in accordance with the Indenture, the proceeds of which will be used to pay the Redemption Price of such Trust Securities, (b) with respect to a distribution of Notes to Holders of Trust Securities in connection with a dissolution of the Trust, Notes having a principal amount equal to the Liquidation Amount of the Trust Securities of the Holder to whom such Notes are distributed and (c) with respect to any distribution of Additional Interest Amounts to Holders of Trust Securities, Notes having a principal amount equal to the Liquidation Amount of the Trust Securities in respect of which such distribution is made.

“Liquidation Amount” means the stated amount of $1,000 per Trust Security.

“Liquidation Date” means the date on which assets are to be distributed to Holders in accordance with Section 9.4(a) hereunder following dissolution of the Trust.

“Liquidation Distribution” has the meaning specified in Section 9.4(d) .

“Majority in Liquidation Amount of the Preferred Securities” means Preferred Securities representing more than fifty percent (50%) of the aggregate Liquidation Amount of all (or a specified group of) then Outstanding Preferred Securities.

“Note Event of Default” means any “Event of Default” specified in Section 5.1 of the Indenture.

“Note Redemption Date” means, with respect to any Notes to be redeemed under the Indenture, the date fixed for redemption of such Notes under the Indenture.

“Note Trustee” means the Person identified as the “Trustee” in the Indenture, solely in its capacity as Trustee pursuant to the Indenture and not in its individual capacity, or its successor in interest in such capacity, or any successor Trustee appointed as provided in the Indenture.

“Notes” means the Depositor’s Junior Subordinated Notes issued pursuant to the Indenture.

“Officer’s Certificate” means a certificate signed by the Chief Executive Officer, the President, an Executive Vice President, the Chief Financial Officer, the Treasurer or an Assistant Treasurer, of the Depositor or the Guarantor, as applicable, and delivered to the Trustees. Any Officer’s Certificate delivered with respect to compliance with a condition or covenant provided for in this Trust Agreement (other than the certificate provided pursuant to Section 8.16(a) ) shall include:

(a) a statement by each officer signing the Officer’s Certificate that such officer has read the covenant or condition and the definitions relating thereto;

(b) a brief statement of the nature and scope of the examination or investigation undertaken by such officer in rendering the Officer’s Certificate;

(c) a statement that such officer has made such examination or investigation as, in such officer’s opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and

(d) a statement as to whether, in the opinion of such officer, such condition or covenant has been complied with.

“Operative Documents” means the Purchase Agreement, the Indenture, the Trust Agreement, the Notes and the Trust Securities.

“Opinion of Counsel” means a written opinion of counsel, who may be counsel for, or an employee of, the Depositor or the Guarantor or any Affiliate of the Depositor or the Guarantor.

“Original Issue Date” means the date of original issuance of the Trust Securities.

“Original Trust Agreement” has the meaning specified in the recitals to this Trust Agreement.

“Outstanding,” when used with respect to any Trust Securities, means, as of the date of determination, all Trust Securities theretofore executed and delivered under this Trust Agreement, except:

(a) Trust Securities theretofore canceled by the Property Trustee or delivered to the Property Trustee for cancellation;

(b) Trust Securities for which payment or redemption money in the necessary amount has been theretofore deposited with the Property Trustee or any Paying Agent in trust for the Holders of such Trust Securities; provided, that if such Trust Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Trust Agreement; and

(c) Trust Securities that have been paid or in exchange for or in lieu of which other Trust Securities have been executed and delivered pursuant to the provisions of this Trust Agreement, unless proof satisfactory to the Property Trustee is presented that any such Trust Securities are held by Holders in whose hands such Trust Securities are valid, legal and binding obligations of the Trust;

provided, that in determining whether the Holders of the requisite Liquidation Amount of the Outstanding Preferred Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Preferred Securities owned by the Depositor, the Guarantor, any Trustee or any Affiliate of the Depositor, the Guarantor or of any Trustee shall be disregarded and deemed not to be Outstanding, except that (i) in determining whether any Trustee shall be protected in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Preferred Securities that such Trustee knows to be so owned shall be so disregarded and (ii) the foregoing shall not apply at any time when all of the Outstanding Preferred Securities are owned by the Depositor, the Guarantor, one or more of the Trustees and/or any such Affiliate. Preferred Securities so owned that have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Administrative Trustees the pledgee’s right so to act with respect to such Preferred Securities and that the pledgee is not the Depositor, the Guarantor, any Trustee or any Affiliate of the Depositor, the Guarantor or of any Trustee.

“Owner” means each Person who is the beneficial owner of Book-Entry Preferred Securities as reflected in the records of the Depositary or, if a Depositary Participant is not the beneficial owner, then the beneficial owner as reflected in the records of the Depositary Participant.

“Paying Agent” means any Person authorized by the Administrative Trustees to pay Distributions or other amounts in respect of any Trust Securities on behalf of the Trust.

“Payment Account” means a segregated non-interest-bearing corporate trust account maintained by the Property Trustee for the benefit of the Holders in which all amounts paid in respect of the Notes will be held and from which the Property Trustee, through the Paying Agent, shall make payments to the Holders in accordance with Sections 3.1 , 4.1 and 4.2 .

“Person” means a legal person, including any individual, corporation, estate, partnership, joint venture, association, joint stock company, company, limited liability company, trust, unincorporated association or government, or any agency or political subdivision thereof, or any other entity of whatever nature.

“Preferred Security” means a preferred security of the Trust, denominated as such and representing an undivided beneficial interest in the assets of the Trust, having a Liquidation Amount of $1,000 and having the terms provided therefor in this Trust Agreement.

“Preferred Securities Certificate” means a certificate evidencing ownership of Preferred Securities, substantially in the form attached as Exhibit C .

“Property Trustee” means the Person identified as the “Property Trustee” in the preamble to this Trust Agreement, solely in its capacity as Property Trustee of the Trust and not in its individual capacity, or its successor in interest in such capacity, or any successor Property Trustee appointed as herein provided.

“Purchase Agreement” means the Purchase Agreement, dated as of March 10, 2006, executed and delivered by the Trust, the Depositor, the Guarantor, AWE, Ltd. and Credit Suisse Securities (USA) LLC.

“Purchasers” means (i) AWE, Ltd., whose address is c/o Maples Finance Limited, P.O. Box 1093 GT, Queensgate House, South Church Street, George Town, Grand Cayman, Cayman Islands, Attention: The Directors and (ii) Credit Suisse Securities (USA) LLC, Eleven Madison Avenue, New York, New York 10010, Attention: The CDO Group, in each case as purchasers of the Preferred Securities pursuant to the Purchase Agreement.

“QIB” means a “qualified institutional buyer” as defined in Rule 144A under the Securities Act.

“Redemption Date” means, with respect to any Trust Security to be redeemed, the date fixed for such redemption by or pursuant to this Trust Agreement; provided, that each Note Redemption Date and the stated maturity (or any date of principal repayment upon early maturity) of the Notes shall be a Redemption Date for a Like Amount of Trust Securities.

“Redemption Price” means, with respect to any Trust Security, the Liquidation Amount of such Trust Security, plus accumulated and unpaid Distributions to the Redemption Date, plus the related amount of the premium, if any, paid by the Depositor upon the concurrent redemption or payment at maturity of a Like Amount of Notes.

“Reference Banks” has the meaning specified in Schedule A .

“Responsible Officer” means, with respect to the Property Trustee, any Senior Vice President, any Vice President, any Assistant Vice President, the Secretary, any Assistant Secretary, the Treasurer, any Assistant Treasurer, any Trust Officer or Assistant Trust Officer or any other officer in the Corporate Trust Office of the Property Trustee with direct responsibility for the administration of this Trust Agreement and also means, with respect to a particular corporate trust matter, any other officer of the Property Trustee to whom such matter is referred because of that officer’s knowledge of and familiarity with the particular subject.

“Securities Act” means the Securities Act of 1933, and any successor statute thereto, in each case as amended from time to time.

“Securities Certificate” means any one of the Common Securities Certificates or the Preferred Securities Certificates.

“Securities Register” and “Securities Registrar” have the respective meanings specified in Section 5.7 .

“Special Event Redemption Price” has the meaning specified in Section 11.2 of the Indenture.

“Successor Securities” has the meaning specified in Section 9.5(a) .

“Tax Event” has the meaning specified in Section 1.1 of the Indenture.

“Trust” means the Delaware statutory trust known as “NorthStar Realty Finance Trust IV,” which was created on March 7, 2006, under the Delaware Statutory Trust Act pursuant to the Original Trust Agreement and the filing of the Certificate of Trust, and continued pursuant to this Trust Agreement.

“Trust Agreement” means this Amended and Restated Trust Agreement, including all Schedules and Exhibits (other than Exhibit D), as the same may be modified, amended or supplemented from time to time in accordance with the applicable provisions hereof.

“Trustees” means the Administrative Trustees, the Property Trustee and the Delaware Trustee, each as defined in this Article I .

“Trust Property” means (a) the Notes, (b) any cash on deposit in, or owing to, the Payment Account and (c) all proceeds and rights in respect of the foregoing and any other property and assets for the time being held or deemed to be held by the Property Trustee pursuant to the trusts of this Trust Agreement.

“Trust Security” means any one of the Common Securities or the Preferred Securities.

ARTICLE II.

THE TRUST

SECTION 2.1. Name.

The trust continued hereby shall be known as “NorthStar Realty Finance Trust IV,” as such name may be modified from time to time by the Administrative Trustees following written notice to the Holders of Trust Securities and the other Trustees, in which name the Trustees may conduct the business of the Trust, make and execute contracts and other instruments on behalf of the Trust and sue and be sued.

SECTION 2.2. Office of the Delaware Trustee; Principal Place of Business.

The address of the Delaware Trustee in the State of Delaware is Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001, Attention: Corporate Capital Markets, or such other address in the State of Delaware as the Delaware Trustee may designate by written notice to the Holders, the Depositor, the Guarantor, the Property Trustee and the Administrative Trustees. The principal executive office of the Trust is c/o NorthStar Realty Finance Corp., 527 Madison Avenue, New York, NY 10022, Attention: Chief Financial Officer, as such address may be changed from time to time by the Administrative Trustees following written notice to the Holders and the other Trustees.

SECTION 2.3. Initial Contribution of Trust Property; Fees, Costs and Expenses.

The Property Trustee acknowledges receipt from the Depositor in connection with the Original Trust Agreement of the sum of ten dollars ($10), which constituted the initial Trust Property. The Depositor shall pay all fees, costs and expenses of the Trust (except with respect to the Trust Securities) as they arise or shall, upon request of any Trustee, promptly reimburse such Trustee for any such fees, costs and expenses paid by such Trustee. The Depositor shall make no claim upon the Trust Property for the payment of such fees, costs or expenses.

SECTION 2.4. Purposes of Trust.

(a) The exclusive purposes and functions of the Trust are to (i) issue and sell Trust Securities and use the proceeds from such sale to acquire the Notes and (ii) engage in only those activities necessary or incidental thereto. The Delaware Trustee, the Property Trustee and the Administrative Trustees are trustees of the Trust, and have all the rights, powers and duties to the extent set forth herein. The Trustees hereby acknowledge that they are trustees of the Trust.

(b) So long as this Trust Agreement remains in effect, the Trust (or the Trustees acting on behalf of the Trust) shall not undertake any business, activities or transaction except as expressly provided herein or contemplated hereby. In particular, the Trust (or the Trustees acting on behalf of the Trust) shall not (i) acquire any investments or engage in any activities not authorized by this Trust Agreement, (ii) sell, assign, transfer, exchange, mortgage, pledge, set-off or otherwise dispose of any of the Trust Property or interests therein, including to Holders, except as expressly provided herein, (iii) incur any indebtedness for borrowed money or issue any other debt, (iv) take or consent to any action that would result in the placement of a Lien on any of the Trust Property, (v) take or consent to any action that would reasonably be expected to cause (or, in the case of the Property Trustee, to the actual knowledge of a Responsible Officer would cause) the Trust to become taxable as a corporation or classified as other than a grantor trust for United States federal income tax purposes, (vi) take or consent to any action that would cause (or, in the case of the Property Trustee, to the actual knowledge of a Responsible Officer would cause) the Notes to be treated as other than indebtedness of the Depositor for United States federal income tax purposes or (vii) take or consent to any action that would cause (or, in the case of the Property Trustee, to the actual knowledge of a Responsible Officer would cause) the Trust to be deemed to be an “investment company” required to be registered under the Investment Company Act.

SECTION 2.5. Authorization to Enter into Certain Transactions.

(a) The Trustees shall conduct the affairs of the Trust in accordance with and subject to the terms of this Trust Agreement. In accordance with the following provisions (i) and (ii), the Trustees shall have the authority to enter into all transactions and agreements determined by the Trustees to be appropriate in exercising the authority, express or implied, otherwise granted to the Trustees, under this Trust Agreement, and to perform all acts in furtherance thereof, including the following:

(i) As among the Trustees, each Administrative Trustee shall severally have the power, authority and authorization to act on behalf of the Trust with respect to the following matters:

(A) the issuance and sale of the Trust Securities;

(B) to cause the Trust to enter into, and to execute, deliver and perform on behalf of the Trust, such agreements, documents, instruments, certificates and other writings as may be necessary or desirable in connection with the purposes and function of the Trust, including, without limitation, a common securities subscription agreement and a junior subordinated note subscription agreement and to cause the Trust to perform under the Purchase Agreement;

(C) assisting in the sale of the Preferred Securities in one or more transactions exempt from registration under the Securities Act, and in compliance with applicable state securities or blue sky laws;

(D) assisting in the sending of notices (other than notices of default) and other information regarding the Trust Securities and the Notes to the Holders in accordance with this Trust Agreement;

(E) the appointment of a successor Paying Agent and Calculation Agent in accordance with this Trust Agreement;

(F) execution and delivery of the Trust Securities on behalf of the Trust in accordance with this Trust Agreement;

(G) execution and delivery of closing certificates, if any, pursuant to the Purchase Agreement;

(H) preparation and filing of all applicable tax returns and tax information reports that are required to be filed on behalf of the Trust;

(I) establishing a record date with respect to all actions to be taken hereunder that require a record date to be established, except as provided in Section 6.10(a) ;

(J) unless otherwise required by the Delaware Statutory Trust Act, to execute on behalf of the Trust (either acting alone or together with the other Administrative Trustees) any documents and other writings that such Administrative Trustee has the power to execute pursuant to this Trust Agreement; and

(K) the taking of any action incidental to the foregoing as such Administrative Trustee may from time to time determine is necessary or advisable to give effect to the terms of this Trust Agreement.

(ii) As among the Trustees, the Property Trustee shall have the power, authority and authorization to act on behalf of the Trust with respect to the following matters:

(A) the receipt and holding of legal title of the Notes;

(B) the establishment of the Payment Account;

(C) the receipt of interest, principal and any other payments made in respect of the Notes and the holding of such amounts in the Payment Account;

(D) the distribution through the Paying Agent of amounts distributable to the Holders in respect of the Trust Securities;

(E) the exercise of all of the rights, powers and privileges of a holder of the Notes in accordance with the terms of this Trust Agreement;

(F) the sending of notices of default and other information regarding the Trust Securities and the Notes to the Holders in accordance with this Trust Agreement;

(G) the distribution of the Trust Property in accordance with the terms of this Trust Agreement;

(H) to the extent provided in this Trust Agreement, the winding up of the affairs of and liquidation of the Trust and the preparation, execution and filing of the certificate of cancellation of the Trust with the Secretary of State of the State of Delaware;

(I) application for a taxpayer identification number for the Trust;

(J) the authentication of the Preferred Securities as provided in this Trust Agreement; and

(K) the taking of any action incidental to the foregoing as the Property Trustee may from time to time determine is necessary or advisable to give effect to the terms of this Trust Agreement and protect and conserve the Trust Property for the benefit of the Holders (without consideration of the effect of any such action on any particular Holder).

(b) In connection with the issue and sale of the Preferred Securities, the Depositor shall have the right and responsibility to assist the Trust with respect to, or effect on behalf of the Trust, the following (and any actions taken by the Depositor in furtherance of the following prior to the date of this Trust Agreement are hereby ratified and confirmed in all respects):

(i) the negotiation of the terms of, and the execution and delivery of, the Purchase Agreement providing for the sale of the Preferred Securities in one or more transactions exempt from registration under the Securities Act, and in compliance with applicable state securities or blue sky laws; and

(ii) the taking of any other actions necessary or desirable to carry out any of the foregoing activities.

(c) Notwithstanding anything herein to the contrary, the Administrative Trustees are authorized and directed to conduct the affairs of the Trust and to operate the Trust so that the Trust will not be taxable as a corporation or classified as other than a grantor trust for United States federal income tax purposes, so that the Notes will be treated as indebtedness of the Depositor for United States federal income tax purposes and so that the Trust will not be deemed to be an “investment company” required to be registered under the Investment Company Act. In this connection, each Administrative Trustee is authorized to take any action, not inconsistent with applicable law, the Certificate of Trust or this Trust Agreement, that such Administrative Trustee determines in his or her discretion to be necessary or desirable for such purposes, as long as such action does not adversely affect in any material respect the interests of the Holders of the Outstanding Preferred Securities. In no event shall the Administrative Trustees be liable to the Trust or the Holders for any failure to comply with this Section 2.5 to the extent that such failure results solely from a change in law or regulation or in the interpretation thereof.

(d) Any action taken by a Trustee in accordance with its powers shall constitute the act of and serve to bind the Trust. In dealing with any Trustee acting on behalf of the Trust, no Person shall be required to inquire into the authority of such Trustee to bind the Trust. Persons dealing with the Trust are entitled to rely conclusively on the power and authority of any Trustee as set forth in this Trust Agreement.

SECTION 2.6. Assets of Trust.

The assets of the Trust shall consist of the Trust Property.

SECTION 2.7. Title to Trust Property.

(a) Legal title to all Trust Property shall be vested at all times in the Property Trustee and shall be held and administered by the Property Trustee in trust for the benefit of the Trust and the Holders in accordance with this Trust Agreement.

(b) The Holders shall not have any right or title to the Trust Property other than the undivided beneficial interest in the assets of the Trust conferred by their Trust Securities and they shall have no right to call for any partition or division of property, profits or rights of the Trust except as described below. The Trust Securities shall be personal property giving only the rights specifically set forth therein and in this Trust Agreement.

ARTICLE III.

PAYMENT ACCOUNT; PAYING AGENTS

SECTION 3.1. Payment Account.

(a) On or prior to the Closing Date, the Property Trustee shall establish the Payment Account. The Property Trustee and the Paying Agent shall have exclusive control and sole right of withdrawal with respect to the Payment Account for the purpose of making deposits in and withdrawals from the Payment Account in accordance with this Trust Agreement. All monies and other property deposited or held from time to time in the Payment Account shall be held by the Property Trustee in the Payment Account for the exclusive benefit of the Holders and for Distribution as herein provided.

(b) The Property Trustee shall deposit in the Payment Account, promptly upon receipt, all payments of principal of or interest on, and any other payments with respect to, the Notes. Amounts held in the Payment Account shall not be invested by the Property Trustee pending distribution thereof.

SECTION 3.2. Appointment of Paying Agents.

The Property Trustee is appointed as the initial Paying Agent and hereby accepts such appointment. The Paying Agent shall make Distributions to Holders from the Payment Account and shall report the amounts of such Distributions to the Property Trustee and the Administrative Trustees. Any Paying Agent shall have the revocable power to withdraw funds from the Payment Account solely for the purpose of making the Distributions referred to above. The Administrative Trustees may revoke such power and remove the Paying Agent in their sole discretion. Any Person acting as Paying Agent shall be permitted to resign as Paying Agent upon thirty (30) days’ written notice to the Administrative Trustees and the Property Trustee. If the Property Trustee shall no longer be the Paying Agent or a successor Paying Agent shall resign or its authority to act be revoked, the Administrative Trustees shall appoint a successor (which shall be a bank or trust company) to act as Paying Agent. Such successor Paying Agent appointed by the Administrative Trustees shall execute and deliver to the Trustees an instrument in which such successor Paying Agent shall agree with the Trustees that as Paying Agent, such successor Paying Agent will hold all sums, if any, held by it for payment to the Holders in trust for the benefit of the Holders entitled thereto until such sums shall be paid to such Holders. The Paying Agent shall return all unclaimed funds to the Property Trustee and upon removal of a Paying Agent such Paying Agent shall also return all funds in its possession to the Property Trustee. The provisions of Article VIII shall apply to the Property Trustee also in its role as Paying Agent, for so long as the Property Trustee shall act as Paying Agent and, to the extent applicable, to any other Paying Agent appointed hereunder. Any reference in this Trust Agreement to the Paying Agent shall include any co-paying agent unless the context requires otherwise.

ARTICLE IV.

DISTRIBUTIONS; REDEMPTION

SECTION 4.1. Distributions.

(a) The Trust Securities represent undivided beneficial interests in the Trust Property, and Distributions (including any Additional Interest Amounts) will be made on the Trust Securities at the rate and on the dates that payments of interest (including any Additional Interest) are made on the Notes. Accordingly:

(i) Distributions on the Trust Securities shall be cumulative, and shall accumulate whether or not there are funds of the Trust available for the payment of Distributions. Distributions shall accumulate from March 10, 2006, and, except as provided in clause (ii) below, shall be payable quarterly in arrears on March 30 ^th , June 30 ^th , September 30 ^th and December 30 ^th of each year, commencing on June 30, 2006. If any date on which a Distribution is otherwise payable on the Trust Securities is not a Business Day, then the payment of such Distribution shall be made on the next succeeding Business Day (and no interest shall accrue in respect of the amounts whose payment is so delayed for the period from and after each such date until the next succeeding Business Day), except that, if such Business Day falls in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case, with the same force and effect as if made on such date (each date on which Distributions are payable in accordance with this Section 4.1(a)(i), a “Distribution Date”);

(ii) Distributions shall accumulate in respect of the Trust Securities at a fixed rate per annum equal to 7.95% of the Liquidation Amount of the Trust Securities through the Distribution Date in June, 2016 and a variable rate per annum, reset quarterly, equal to LIBOR plus 2.80% of the Liquidation Amount of the Trust Securities, thereafter. LIBOR shall be determined by the Calculation Agent in accordance with Schedule A . The amount of Distributions payable for any Distribution period shall be computed and paid on the basis of a 360-day year and the actual number of days elapsed in the relevant Distribution period. The amount of Distributions payable for any period shall include any Additional Interest Amounts in respect of such period; and

(iii) Distributions on the Trust Securities shall be made by the Paying Agent from the Payment Account and shall be payable on each Distribution Date only to the extent that the Trust has funds then on hand and available in the Payment Account for the payment of such Distributions.

(b) Distributions on the Trust Securities with respect to a Distribution Date shall be payable to the Holders thereof as they appear on the Securities Register for the Trust Securities at the close of business on the relevant record date, which shall be at the close of business on the fifteenth day (whether or not a Business Day) preceding the relevant Distribution Date. Distributions payable on any Trust Securities that are not punctually paid on any Distribution Date as a result of the Depositor having failed to make an interest payment under the Notes will cease to be payable to the Person in whose name such Trust Securities are registered on the relevant record date, and such defaulted Distributions and any Additional Interest Amounts will instead be payable to the Person in whose name such Trust Securities are registered on the special record date, or other specified date for determining Holders entitled to such defaulted Distribution and Additional Interest Amount, established in the same manner, and on the same date, as such is established with respect to the Notes under the Indenture.

(c) As a condition to the payment of any principal of or interest on the Trust Securities without the imposition of withholding tax, the Administrative Trustees shall require the previous delivery of properly completed and signed applicable U.S. federal income tax certifications (generally, an Internal Revenue Service Form W-9 (or applicable successor form) in the case of a person that is a “United States person” within the meaning of Section 7701(a)(30) of the Code or an Internal Revenue Service Form W-8 (or applicable successor form) in the case of a person that is not a “United States person” within the meaning of Section 7701(a)(30) of the Code) and any other certification acceptable to it to enable the Paying Agent to determine its duties and liabilities with respect to any taxes or other charges that it may be required to pay, deduct or withhold in respect of such Trust Securities.

SECTION 4.2. Redemption.

(a) On each Note Redemption Date and on the stated maturity (or any date of principal repayment upon early maturity) of the Notes and on each other date on (or in respect of) which any principal on the Notes is repaid, the Trust will be required to redeem a Like Amount of Trust Securities at the Redemption Price.

(b) Notice of redemption shall be given by the Property Trustee by first-class mail, postage prepaid, mailed not less than thirty (30) nor more than sixty (60) days prior to the Redemption Date to each Holder of Trust Securities to be redeemed, at such Holder’s address appearing in the Securities Register. All notices of redemption shall state:

(i) the Redemption Date;

(ii) the Redemption Price or, if the Redemption Price cannot be calculated prior to the time the notice is required to be sent, the estimate of the Redemption Price provided pursuant to the Indenture, as calculated by the Depositor, together with a statement that it is an estimate and that the actual Redemption Price will be calculated by the Calculation Agent on the fifth Business Day prior to the Redemption Date (and if an estimate is provided, a further notice shall be sent of the actual Redemption Price on the date that such Redemption Price is calculated);

(iii) if less than all the Outstanding Trust Securities are to be redeemed, the identification (and, in the case of partial redemption, the respective Liquidation Amounts) and Liquidation Amounts of the particular Trust Securities to be redeemed;

(iv) that on the Redemption Date, the Redemption Price will become due and payable upon each such Trust Security, or portion thereof, to be redeemed and that Distributions thereon will cease to accumulate on such Trust Security or such portion, as the case may be, on and after said date, except as provided in Section 4.2(d) ;

(v) the place or places where the Trust Securities are to be surrendered for the payment of the Redemption Price; and

(vi) such other provisions as the Property Trustee deems relevant.

(c) The Trust Securities (or portion thereof) redeemed on each Redemption Date shall be redeemed at the Redemption Price with the proceeds from the contemporaneous redemption or payment at maturity of Notes. Redemptions of the Trust Securities (or portion thereof) shall be made and the Redemption Price shall be payable on each Redemption Date only to the extent that the Trust has funds then on hand and available in the Payment Account for the payment of such Redemption Price. Under the Indenture, the Notes may be redeemed by the Depositor on any Interest Payment Date, at the Depositor’s option, on or after June 30, 2011, in whole or in part, from time to time at a redemption price equal to one hundred (100%) percent of the principal amount thereof, together, in the case of any such redemption, with accrued interest, including any Additional Interest, to but excluding the date fixed for redemption (the “Indenture Redemption Price”). The Notes may also be redeemed by the Depositor, at its option, in whole but not in part, upon the occurrence of an Investment Company Event or a Tax Event at the Special Event Redemption Price (as set forth in the Indenture).

(d) If the Property Trustee gives a notice of redemption in respect of any Preferred Securities, then by 10:00 A.M., New York City time, on the Redemption Date, the Depositor shall deposit sufficient funds with the Property Trustee to pay the Redemption Price. If such deposit has been made by such time, then by 12:00 noon, New York City time, on the Redemption Date, the Property Trustee will, with respect to Book-Entry Preferred Securities, irrevocably deposit with the Depositary for such Book-Entry Preferred Securities, to the extent available therefor, funds sufficient to pay the applicable Redemption Price and will give such Depositary irrevocable instructions and authority to pay the Redemption Price to the Holders of the Preferred Securities. With respect to Preferred Securities that are not Book-Entry Preferred Securities, the Property Trustee will irrevocably deposit with the Paying Agent, to the extent available therefor, funds sufficient to pay the applicable Redemption Price and will give the Paying Agent irrevocable instructions and authority to pay the Redemption Price to the Holders of the Preferred Securities upon surrender of their Preferred Securities Certificates. Notwithstanding the foregoing, Distributions payable on or prior to the Redemption Date for any Trust Securities (or portion thereof) called for redemption shall be payable to the Holders of such Trust Securities as they appear on the Securities Register on the relevant record dates for the related Distribution Dates. If notice of redemption shall have been given and funds deposited as required, then upon the date of such deposit, all rights of Holders holding Trust Securities (or portion thereof) so called for redemption will cease, except the right of such Holders to receive the Redemption Price and any Distribution payable in respect of the Trust Securities on or prior to the Redemption Date, but without interest, and, in the case of a partial redemption, the right of such Holders to receive a new Trust Security or Securities of authorized denominations, in aggregate Liquidation Amount equal to the unredeemed portion of such Trust Security or Securities, and such Securities (or portion thereof) called for redemption will cease to be Outstanding. In the event that any date on which any Redemption Price is payable is not a Business Day, then payment of the Redemption Price payable on such date will be made on the next succeeding Business Day (and no interest shall accrue in respect of the amounts whose payment is so delayed for the period from and after each such date until the next succeeding Business Day), except that, if such Business Day falls in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case, with the same force and effect as if made on such date. In the event that payment of the Redemption Price in respect of any Trust Securities (or portion thereof) called for redemption is improperly withheld or refused and not paid either by the Trust or by the Depositor or the Guarantor pursuant to the Indenture, Distributions on such Trust Securities (or portion thereof) will continue to accumulate, as set forth in Section 4.1 , from the Redemption Date originally established by the Trust for such Trust Securities(or portion thereof) to the date such Redemption Price is actually paid, in which case the actual payment date will be the date fixed for redemption for purposes of calculating the Redemption Price.

(e) Subject to Section 4.3 (a), if less than all the Outstanding Trust Securities are to be redeemed on a Redemption Date, then the aggregate Liquidation Amount of Trust Securities to be redeemed shall be allocated pro rata to the Common Securities and the Preferred Securities based upon the relative aggregate Liquidation Amounts of the Common Securities and the Preferred Securities. The Preferred Securities to be redeemed shall be selected on a pro rata basis based upon their respective Liquidation Amounts not more than sixty (60) days prior to the Redemption Date by the Property Trustee from the Outstanding Preferred Securities not previously called for redemption; provided, however, that with respect to Holders that would be required to hold less than one hundred (100) but more than zero (0) Trust Securities as a result of such redemption, the Trust shall redeem Trust Securities of each such Holder so that after such redemption such Holder shall hold either one hundred (100) Trust Securities or such Holder no longer holds any Trust Securities, and shall use such method (including, without limitation, by lot) as the Trust shall deem fair and appropriate; and provided, further, that so long as the Preferred Securities are Book-Entry Preferred Securities, such selection shall be made in accordance with the Applicable Depositary Procedures for the Preferred Securities by such Depositary. The Property Trustee shall promptly notify the Securities Registrar in writing of the Preferred Securities (or portion thereof) selected for redemption and, in the case of any Preferred Securities selected for partial redemption, the Liquidation Amount thereof to be redeemed. For all purposes of this Trust Agreement, unless the context otherwise requires, all provisions relating to the redemption of Preferred Securities shall relate, in the case of any Preferred Securities redeemed or to be redeemed only in part, to the portion of the aggregate Liquidation Amount of Preferred Securities that has been or is to be redeemed.

(f) The Trust in issuing the Trust Securities may use “CUSIP” numbers (if then generally in use), and, if so, the Property Trustee shall indicate the “CUSIP” numbers of the Trust Securities in notices of redemption and related materials as a convenience to Holders; provided, that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Trust Securities or as contained in any notice of redemption and related materials.

SECTION 4.3. Subordination of Common Securities.

(a) Payment of Distributions (including any Additional Interest Amounts) on, the Redemption Price of and the Liquidation Distribution in respect of, the Trust Securities, as applicable, shall be made, pro rata among the Common Securities and the Preferred Securities based on the Liquidation Amount of the respective Trust Securities; provided, that if on any Distribution Date, Redemption Date or Liquidation Date an Event of Default shall have occurred and be continuing, no payment of any Distribution (including any Additional Interest Amounts) on, Redemption Price of or Liquidation Distribution in respect of, any Common Security, and no other payment on account of the redemption, liquidation or other acquisition of Common Securities, shall be made unless payment in full in cash of all accumulated and unpaid Distributions (including any Additional Interest Amounts) on all Outstanding Preferred Securities for all Distribution periods terminating on or prior thereto, or in the case of payment of the Redemption Price the full amount of such Redemption Price on all Outstanding Preferred Securities then called for redemption, or in the case of payment of the Liquidation Distribution the full amount of such Liquidation Distribution on all Outstanding Preferred Securities, shall have been made or provided for, and all funds immediately available to the Property Trustee shall first be applied to the payment in full in cash of all Distributions (including any Additional Interest Amounts) on, or the Redemption Price of or the Liquidation Distribution in respect of, the Preferred Securities then due and payable.

(b) In the case of the occurrence of any Event of Default, the Holders of the Common Securities shall have no right to act with respect to any such Event of Default under this Trust Agreement until all such Events of Default with respect to the Preferred Securities have been cured, waived or otherwise eliminated. Until all such Events of Default under this Trust Agreement with respect to the Preferred Securities have been so cured, waived or otherwise eliminated, the Property Trustee shall act solely on behalf of the Holders of the Preferred Securities and not on behalf of the Holders of the Common Securities, and only the Holders of all the Preferred Securities will have the right to direct the Property Trustee to act on their behalf.

SECTION 4.4. Payment Procedures.

Payments of Distributions (including any Additional Interest Amounts), the Redemption Price, Liquidation Amount or any other amounts in respect of the Preferred Securities shall be made by wire transfer at such place and to such account at a banking institution in the United States as may be designated in writing at least ten (10) Business Days prior to the date for payment by the Person entitled thereto unless proper written transfer instructions have not been received by the relevant record date, in which case such payments shall be made by check mailed to the address of such Person as such address shall appear in the Securities Register. If any Preferred Securities are held by a Depositary, such Distributions thereon shall be made to the Depositary in immediately available funds. Payments in respect of the Common Securities shall be made in such manner as shall be mutually agreed between the Property Trustee and the Holder of all the Common Securities.

SECTION 4.5. Withholding Tax.

The Trust and the Administrative Trustees shall comply with all withholding and backup withholding tax requirements under United States federal, state and local law. The Administrative Trustees on behalf of the Trust shall request, and the Holders shall provide to the Trust, such forms or certificates as are necessary to establish an exemption from withholding and backup withholding tax with respect to each Holder and any representations and forms as shall reasonably be requested by the Administrative Trustees on behalf of the Trust to assist it in determining the extent of, and in fulfilling, its withholding and backup withholding tax obligations. The Administrative Trustees shall file required forms with applicable jurisdictions and, unless an exemption from withholding and backup withholding tax is properly established by a Holder, shall remit amounts withheld with respect to the Holder to applicable jurisdictions. To the extent that the Trust is required to withhold and pay over any amounts to any jurisdiction with respect to Distributions or allocations to any Holder, the amount withheld shall be deemed to be a Distribution in the amount of the withholding to the Holder. In the event of any claimed overwithholding, Holders shall be limited to an action against the applicable jurisdiction. If the amount required to be withheld was not withheld from actual Distributions made, the Administrative Trustees on behalf of the Trust may reduce subsequent Distributions by the amount of such required withholding.

SECTION 4.6. Tax Returns and Other Reports.

(a) The Administrative Trustees shall prepare (or cause to be prepared) at the principal office of the Trust in the United States, as defined for purposes of Treasury regulations section 301.7701-7, at the Depositor’s expense, and file, all United States federal, state and local tax and information returns and reports required to be filed by or in respect of the Trust. The Administrative Trustees shall prepare at the principal office of the Trust in the United States, as defined for purposes of Treasury regulations section 301.7701-7, and furnish (or cause to be prepared and furnished), by January 31 in each taxable year of the Trust to each Holder all Internal Revenue Service forms and returns required to be provided by the Trust. The Administrative Trustees shall provide the Depositor and the Property Trustee with a copy of all such returns and reports promptly after such filing or furnishing.

SECTION 4.7. Payment of Taxes, Duties, Etc. of the Trust.

Upon receipt under the Notes of Additional Tax Sums and upon the written direction of the Administrative Trustees, the Property Trustee shall promptly pay, solely out of monies on deposit pursuant to this Trust Agreement, any Additional Taxes imposed on the Trust by the United States or any other taxing authority.

SECTION 4.8. Payments under Indenture or Pursuant to Direct Actions.

Any amount payable hereunder to any Holder of Preferred Securities shall be reduced by the amount of any corresponding payment such Holder (or any Owner with respect thereto) has directly received pursuant to Section 5.8 of the Indenture or Section 6.10(b) of this Trust Agreement.

SECTION 4.9. Exchanges.

(a) If at any time the Depositor or any of its Affiliates (in either case, a “Depositor Affiliate”) is the Owner or Holder of any Preferred Securities, such Depositor Affiliate shall have the right to deliver to the Property Trustee all or such portion of its Preferred Securities as it elects and, subject to compliance with Sections 2.2 and 3.5 of the Indenture, receive, in exchange therefor, a Like Amount of Notes. Such election (i) shall be exercisable effective on any Distribution Date by such Depositor Affiliate delivering to the Property Trustee a written notice of such election specifying the Liquidation Amount of Preferred Securities with respect to which such election is being made and the Distribution Date on which such exchange shall occur, which Distribution Date shall be not less than ten (10) Business Days after the date of receipt by the Property Trustee of such election notice and (ii) shall be conditioned upon such Depositor Affiliate having delivered or caused to be delivered to the Property Trustee or its designee the Preferred Securities that are the subject of such election by 10:00 A.M. New York time, on the Distribution Date on which such exchange is to occur. After the exchange, such Preferred Securities will be canceled and will no longer be deemed to be Outstanding and all rights of the Depositor Affiliate with respect to such Preferred Securities will cease.

(b) In the case of an exchange described in Section 4.9(a) , the Property Trustee on behalf of the Trust will, on the date of such exchange, exchange Notes having a principal amount equal to a proportional amount of the aggregate Liquidation Amount of the Outstanding Common Securities, based on the ratio of the aggregate Liquidation Amount of the Preferred Securities exchanged pursuant to Section 4.9(a) divided by the aggregate Liquidation Amount of the Preferred Securities Outstanding immediately prior to such exchange, for such proportional amount of Common Securities held by the Depositor (which contemporaneously shall be canceled and no longer be deemed to be Outstanding); provided, that the Depositor delivers or causes to be delivered to the Property Trustee or its designee the required amount of Common Securities to be exchanged by 10:00 A.M. New York time, on the Distribution Date on which such exchange is to occur.

SECTION 4.10. Calculation Agent.

(a) The Property Trustee shall initially, and, subject to the immediately following sentence, for so long as it holds any of the Notes, be the Calculation Agent for purposes of determining LIBOR for each Distribution Date. The Calculation Agent may be removed by the Administrative Trustees at any time. If the Calculation Agent is unable or unwilling to act as such or is removed by the Administrative Trustees, the Administrative Trustees will promptly appoint as a replacement Calculation Agent the London office of a leading bank which is engaged in transactions in three-month U.S. dollar deposits in Europe and which does not control or is not controlled by or under common control with the Administrative Trustee or its Affiliates. The Calculation Agent may not resign its duties without a successor having been duly appointed.

(b) The Calculation Agent shall be required to agree that, as soon as possible after 11:00 a.m. (London time) on each LIBOR Determination Date, but in no event later than 11:00 a.m. (London time) on the Business Day immediately following each LIBOR Determination Date, the Calculation Agent will calculate the interest rate (rounded to the nearest cent, with half a cent being rounded upwards) for the related Distribution Date, and will communicate such rate and amount to the Depositor, the Property Trustee, each Paying Agent and the Depositary. The Calculation Agent will also specify to the Administrative Trustees the quotations upon which the foregoing rates and amounts are based and, in any event, the Calculation Agent shall notify the Administrative Trustees before 5:00 p.m. (London time) on each LIBOR Determination Date that either: (i) it has determined or is in the process of determining the foregoing rates and amounts or (ii) it has not determined and is not in the process of determining the foregoing rates and amounts, together with its reasons therefor. The Calculation Agent’s determination of the foregoing rates and amounts for any Distribution Date will (in the absence of manifest error) be final and binding upon all parties. For the sole purpose of calculating the interest rate for the Trust Securities, “Business Day” shall be defined as any day on which dealings in deposits in Dollars are transacted in the London interbank market.

SECTION 4.11. Certain Accounting Matters.

(a) At all times during the existence of the Trust, the Administrative Trustees shall keep, or cause to be kept at the principal office of the Trust in the United States, as defined for purposes of Treasury Regulations section 301.7701-7, full books of account, records and supporting documents, which shall reflect in reasonable detail each transaction of the Trust. The books of account shall be maintained on the accrual method of accounting, in accordance with generally accepted accounting principles, consistently applied.

(b) The Administrative Trustees shall either (i) if the Depositor is then subject to such reporting requirements, cause each Form 10-K and Form 10-Q prepared by the Depositor and filed with the Commission in accordance with the Exchange Act to be delivered to each Holder, with a copy to the Property Trustee, within thirty (30) days after the filing thereof or (ii) cause to be prepared at the principal office of the Trust in the United States, as defined for purposes of Treasury Regulations section 301.7701-7, and delivered to each of the Holders, with a copy to the Property Trustee, within ninety (90) days after the end of each Fiscal Year, annual financial statements of the Trust, including a balance sheet of the Trust as of the end of such Fiscal Year, and the related statements of income or loss.

(c) The Trust shall maintain one or more bank accounts in the United States, as defined for purposes of Treasury Regulations section 301.7701-7, in the name and for the sole benefit of the Trust; provided , however , that all payments of funds in respect of the Notes held by the Property Trustee shall be made directly to the Payment Account and no other funds of the Trust shall be deposited in the Payment Account. The sole signatories for such accounts (including the Payment Account) shall be designated by the Property Trustee.

ARTICLE V.

SECURITIES

SECTION 5.1. Initial Ownership.

Upon the creation of the Trust and the contribution by the Depositor referred to in Section 2.3 and until the issuance of the Trust Securities, and at any time during which no Trust Securities are Outstanding, the Depositor shall be the sole beneficial owner of the Trust.

SECTION 5.2. Authorized Trust Securities.

The Trust shall be authorized to issue one series of Preferred Securities having an aggregate Liquidation Amount of $50,000,000 and one series of Common Securities having an aggregate Liquidation Amount of $100,000.

SECTION 5.3. Issuance of the Common Securities; Subscription and Purchase of Notes.

On the Closing Date, an Administrative Trustee, on behalf of the Trust, shall execute and deliver to the Depositor Common Securities Certificates, registered in the name of the Depositor, evidencing an aggregate of 100 Common Securities having an aggregate Liquidation Amount of $100,000, against receipt by the Trust of the aggregate purchase price of such Common Securities of $100,000. Contemporaneously therewith and with the sale by the Trust to the Holders of an aggregate of 50,000 Preferred Securities having an aggregate Liquidation Amount of $50,000,000, an Administrative Trustee, on behalf of the Trust, shall subscribe for and purchase from the Depositor Notes, to be registered in the name of the Property Trustee on behalf of the Trust and having an aggregate principal amount equal to $50,100,000, and, in satisfaction of the purchase price for such Notes, the Property Trustee, on behalf of the Trust, shall deliver to the Depositor the sum of $50,100,000 (being the aggregate amount paid by the Holders for the Preferred Securities and the amount paid by the Depositor for the Common Securities).

SECTION 5.4. The Securities Certificates.

(a) The Preferred Securities Certificates shall be issued in minimum denominations of $100,000 Liquidation Amount and integral multiples of $1,000 in excess thereof, and the Common Securities Certificates shall be issued in minimum denominations of $10,000 Liquidation Amount and integral multiples of $1,000 in excess thereof. The Securities Certificates shall be executed on behalf of the Trust by manual or facsimile signature of at least one Administrative Trustee. Securities Certificates bearing the signatures of individuals who were, at the time when such signatures shall have been affixed, authorized to sign such Securities Certificates on behalf of the Trust shall be validly issued and entitled to the benefits of this Trust Agreement, notwithstanding that such individuals or any of them shall have ceased to be so authorized prior to the delivery of such Securities Certificates or did not have such authority at the date of delivery of such Securities Certificates.

(b) On the Closing Date, upon the written order of an authorized officer of the Depositor, the Administrative Trustees shall cause Securities Certificates to be executed on behalf of the Trust and delivered, without further corporate action by the Depositor, in authorized denominations.

(c) The Preferred Securities issued to QIBs shall be, except as provided in Section 5.6 , Book-Entry Preferred Securities issued in the form of one or more Global Preferred Securities registered in the name of the Depositary, or its nominee and deposited with the Depositary or the Property Trustee as custodian for the Depositary for credit by the Depositary to the respective accounts of the Depositary Participants thereof (or such other accounts as they may direct). The Preferred Securities issued to a Person other than a QIB shall be issued in the form of Definitive Preferred Securities Certificates.

(d) A Preferred Security shall not be valid until authenticated by the manual signature of a Responsible Officer of the Property Trustee. Such signature shall be conclusive evidence that the Preferred Security has been authenticated under this Trust Agreement. Upon written order of the Trust signed by one Administrative Trustee, the Property Trustee shall authenticate and deliver one or more Preferred Security Certificates evidencing the Preferred Securities for original issue. The Property Trustee may appoint an authenticating agent that is a U.S. Person acceptable to the Trust to authenticate the Preferred Securities. A Common Security need not be so authenticated and shall be valid upon execution by one or more Administrative Trustees. The form of this certificate of authentication can be found in Section 5.13 .

(e) Upon issuance of the Trust Securities as provided in this Trust Agreement, the Trust Securities so issued shall be deemed to be validly issued, fully paid and nonassessable, and each Holder thereof shall be entitled to the benefits provided by this Trust Agreement.

SECTION 5.5. Rights of Holders.

The Trust Securities shall have no, and the issuance of the Trust Securities is not subject to, preemptive or similar rights and when issued and delivered to Holders against payment of the purchase price therefor will be fully paid and non-assessable by the Trust. Except as provided in Section 5.11(b) , the Holders of the Trust Securities, in their capacities as such, shall be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware.

SECTION 5.6. Book-Entry Preferred Securities.

(a) A Global Preferred Security may be exchanged, in whole or in part, for Definitive Preferred Securities Certificates registered in the names of the Owners only if such exchange complies with Section 5.7 and (i) the Depositary advises the Administrative Trustees and the Property Trustee in writing that the Depositary is no longer willing or able properly to discharge its responsibilities with respect to the Global Preferred Security, and no qualified successor is appointed by the Administrative Trustees within ninety (90) days of receipt of such notice, (ii) the Depositary ceases to be a clearing agency registered under the Exchange Act and the Administrative Trustees fail to appoint a qualified successor within ninety (90) days of obtaining knowledge of such event, (iii) the Administrative Trustees at their option advise the Property Trustee in writing that the Trust elects to terminate the book-entry system through the Depositary or (iv) a Note Event of Default has occurred and is continuing. Upon the occurrence of any event specified in clause (i), (ii), (iii) or (iv) above, the Administrative Trustees shall notify the Depositary and instruct the Depositary to notify all Owners of Book-Entry Preferred Securities, the Delaware Trustee and the Property Trustee of the occurrence of such event and of the availability of the Definitive Preferred Securities Certificates to Owners of the Preferred Securities requesting the same. Upon the issuance of Definitive Preferred Securities Certificates, the Trustees shall recognize the Holders of the Definitive Preferred Securities Certificates as Holders. Notwithstanding the foregoing, if an Owner of a beneficial interest in a Global Preferred Security wishes at any time to transfer an interest in such Global Preferred Security to a Person other than a QIB, such transfer shall be effected, subject to the Applicable Depositary Procedures, in accordance with the provisions of this Section 5.6 and Section 5.7 , and the transferee shall receive a Definitive Preferred Securities Certificate in connection with such transfer. A holder of a Definitive Preferred Securities Certificate that is a QIB may, upon request, and in accordance with the provisions of this Section 5.6 and Section 5.7 , exchange such Definitive Preferred Securities Certificate for a beneficial interest in a Global Preferred Security.

(b) If any Global Preferred Security is to be exchanged for Definitive Preferred Securities Certificates or canceled in part, or if any Definitive Preferred Securities Certificate is to be exchanged in whole or in part for any Global Preferred Security, then either (i) such Global Preferred Security shall be so surrendered for exchange or cancellation as provided in this Article V or (ii) the aggregate Liquidation Amount represented by such Global Preferred Security shall be reduced, subject to Section 5.4 , or increased by an amount equal to the Liquidation Amount represented by that portion of the Global Preferred Security to be so exchanged or canceled, or equal to the Liquidation Amount represented by such Definitive Preferred Securities Certificates to be so exchanged for any Global Preferred Security, as the case may be, by means of an appropriate adjustment made on the records of the Securities Registrar, whereupon the Property Trustee, in accordance with the Applicable Depositary Procedures, shall instruct the Depositary or its authorized representative to make a corresponding adjustment to its records. Upon any such surrender to the Administrative Trustees or the Securities Registrar of any Global Preferred Security or Securities by the Depositary, accompanied by registration instructions, the Administrative Trustees, or any one of them, shall execute the Definitive Preferred Securities Certificates in accordance with the instructions of the Depositary, and the Property Trustee, upon receipt thereof, shall authenticate and deliver such Definitive Preferred Securities Certificates. None of the Securities Registrar or the Trustees shall be liable for any delay in delivery of such instructions and may conclusively rely on, and shall be fully protected in relying on, such instructions.

(c) Every Securities Certificate executed and delivered upon registration or transfer of, or in exchange for or in lieu of, a Global Preferred Security or any portion thereof shall be executed and delivered in the form of, and shall be, a Global Preferred Security, unless such Securities Certificate is registered in the name of a Person other than the Depositary for such Global Preferred Security or a nominee thereof.

(d) The Depositary or its nominee, as registered owner of a Global Preferred Security, shall be the Holder of such Global Preferred Security for all purposes under this Trust Agreement and the Global Preferred Security, and Owners with respect to a Global Preferred Security shall hold such interests pursuant to the Applicable Depositary Procedures. The Securities Registrar and the Trustees shall be entitled to deal with the Depositary for all purposes of this Trust Agreement relating to the Global Preferred Securities (including the payment of the Liquidation Amount of and Distributions on the Book-Entry Preferred Securities represented thereby and the giving of instructions or directions by Owners of Book-Entry Preferred Securities represented thereby and the giving of notices) as the sole Holder of the Book-Entry Preferred Securities represented thereby and shall have no obligations to the Owners thereof. None of the Trustees nor the Securities Registrar shall have any liability in respect of any transfers effected by the Depositary.

(e) The rights of the Owners of the Book-Entry Preferred Securities shall be exercised only through the Depositary and shall be limited to those established by law, the Applicable Depositary Procedures and agreements between such Owners and the Depositary and/or the Depositary Participants; provided, that, solely for the purpose of determining whether the Holders of the requisite amount of Preferred Securities have voted on any matter provided for in this Trust Agreement, to the extent that Preferred Securities are represented by a Global Preferred Security, the Trustees may conclusively rely on, and shall be fully protected in relying on, any written instrument (including a proxy) delivered to the Property Trustee by the Depositary setting forth the Owners’ votes or assigning the right to vote on any matter to any other Persons either in whole or in part. To the extent that Preferred Securities are represented by a Global Preferred Security, the initial Depositary will make book-entry transfers among the Depositary Participants and receive and transmit payments on the Preferred Securities that are represented by a Global Preferred Security to such Depositary Participants, and none of the Depositor or the Trustees shall have any responsibility or obligation with respect thereto.

(f) To the extent that a notice or other communication to the Holders is required under this Trust Agreement, for so long as Preferred Securities are represented by a Global Preferred Security, the Trustees shall give all such notices and communications to the Depositary, and shall have no obligations to the Owners.

SECTION 5.7. Registration of Transfer and Exchange of Preferred Securities Certificates.

(a) The Property Trustee shall keep or cause to be kept, at the Corporate Trust Office, a register or registers (the “Securities Register”) in which the registrar and transfer agent with respect to the Trust Securities (the “Securities Registrar”), subject to such reasonable regulations as it may prescribe, shall provide for the registration of Preferred Securities Certificates and Common Securities Certificates and registration of transfers and exchanges of Preferred Securities Certificates as herein provided. The Property Trustee shall at all times also be the Securities Registrar. The provisions of Article VIII shall apply to the Property Trustee in its role as Securities Registrar.

(b) Subject to Section 5.7(d), upon surrender for registration of transfer of any Preferred Securities Certificate at the office or agency maintained pursuant to Section 5.7(f) , the Administrative Trustees or any one of them shall execute by manual or facsimile signature and deliver to the Property Trustee, and upon receipt thereof the Property Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Preferred Securities Certificates in authorized denominations of a like aggregate Liquidation Amount as may be required by this Trust Agreement dated the date of execution by such Administrative Trustee or Trustees. At the option of a Holder, Preferred Securities Certificates may be exchanged for other Preferred Securities Certificates in authorized denominations and of a like aggregate Liquidation Amount upon surrender of the Preferred Securities Certificate to be exchanged at the office or agency maintained pursuant to Section 5.7(f) . Whenever any Preferred Securities Certificates are so surrendered for exchange, the Administrative Trustees or any one of them shall execute by manual or facsimile signature and deliver to the Property Trustee, and upon receipt thereof the Property Trustee shall authenticate and deliver, the Preferred Securities Certificates that the Holder making the exchange is entitled to receive.

(c) The Securities Registrar shall not be required, (i) to issue, register the transfer of or exchange any Preferred Security during a period beginning at the opening of business fifteen (15) days before the day of selection for redemption of such Preferred Securities pursuant to Article IV and ending at the close of business on the day of mailing of the notice of redemption or (ii) to register the transfer of or exchange any Preferred Security so selected for redemption in whole or in part, except, in the case of any such Preferred Security to be redeemed in part, any portion thereof not to be redeemed.

(d) Every Preferred Securities Certificate presented or surrendered for registration of transfer or exchange shall be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Securities Registrar duly executed by the Holder or such Holder’s attorney duly authorized in writing and (i) if such Preferred Securities Certificate is being transferred otherwise than to a QIB, accompanied by a certificate of the transferee substantially in the form set forth as Exhibit E hereto or (ii) if such Preferred Securities Certificate is being transferred to a QIB, accompanied by a certificate of the transferor substantially in the form set forth as Exhibit F hereto.

(e) No service charge shall be made for any registration of transfer or exchange of Preferred Securities Certificates, but the Property Trustee on behalf of the Trust may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer or exchange of Preferred Securities Certificates.

(f) The Administrative Trustees shall designate an office or offices or agency or agencies where Preferred Securities Certificates may be surrendered for registration of transfer or exchange, and initially designate the Corporate Trust Office as its office and agency for such purposes. The Administrative Trustees shall give prompt written notice to the Depositor, the Property Trustee and to the Holders of any change in the location of any such office or agency.

SECTION 5.8. Mutilated, Destroyed, Lost or Stolen Securities Certificates.

(a) If any mutilated Securities Certificate shall be surrendered to the Securities Registrar together with such security or indemnity as may be required by the Securities Registrar and the Administrative Trustees to save each of them harmless, the Administrative Trustees, or any one of them, on behalf of the Trust, shall execute and make available for delivery and, with respect to Preferred Securities, the Property Trustee shall authenticate, in exchange therefor a new Securities Certificate of like class, tenor and denomination.

(b) If the Securities Registrar shall receive evidence to its satisfaction of the destruction, loss or theft of any Securities Certificate and there shall be delivered to the Securities Registrar and the Administrative Trustees such security or indemnity as may be required by them to save each of them harmless, then in the absence of notice that such Securities Certificate shall have been acquired by a protected purchaser, the Administrative Trustees, or any one of them, on behalf of the Trust, shall execute and make available for delivery, and, with respect to Preferred Securities, the Property Trustee shall authenticate, in exchange for or in lieu of any such destroyed, lost or stolen Securities Certificate, a new Securities Certificate of like class, tenor and denomination.

(c) In connection with the issuance of any new Securities Certificate under this Section 5.8 , the Administrative Trustees or the Securities Registrar may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith.

(d) Any duplicate Securities Certificate issued pursuant to this Section 5.8 shall constitute conclusive evidence of an undivided beneficial interest in the assets of the Trust corresponding to that evidenced by the mutilated, lost, stolen or destroyed Securities Certificate, as if originally issued, whether or not the lost, stolen or destroyed Securities Certificate shall be found at any time.

(e) If any such mutilated, destroyed, lost or stolen Securities Certificate has become or is about to become due and payable, the Depositor in its discretion may, instead of issuing a new Trust Security, pay such Trust Security.

(f) The provisions of this Section 5.8 are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement of mutilated, destroyed, lost or stolen Securities Certificates.

SECTION 5.9. Persons Deemed Holders.

The Trustees and the Securities Registrar shall each treat the Person in whose name any Securities Certificate shall be registered in the Securities Register as the owner of the Trust Securities evidenced by such Securities Certificate for the purpose of receiving Distributions and for all other purposes whatsoever, and none of the Trustees and the Securities Registrar shall be bound by any notice to the contrary.

SECTION 5.10. Cancellation.

All Preferred Securities Certificates surrendered for registration of transfer or exchange or for payment shall, if surrendered to any Person other than the Property Trustee, be delivered to the Property Trustee, and any such Preferred Securities Certificates and Preferred Securities Certificates surrendered directly to the Property Trustee for any such purpose shall be promptly canceled by it. The Administrative Trustees may at any time deliver to the Property Trustee for cancellation any Preferred Securities Certificates previously delivered hereunder that the Administrative Trustees may have acquired in any manner whatsoever, and all Preferred Securities Certificates so delivered shall be promptly canceled by the Property Trustee. No Preferred Securities Certificates shall be executed and delivered in lieu of or in exchange for any Preferred Securities Certificates canceled as provided in this Section 5.10 , except as expressly permitted by this Trust Agreement. All canceled Preferred Securities Certificates shall be disposed of by the Property Trustee in accordance with its customary practices and the Property Trustee shall deliver to the Administrative Trustees a certificate of such disposition.

SECTION 5.11. Ownership of Common Securities by Depositor.

(a) On the Closing Date, the Depositor shall acquire, and thereafter shall retain, beneficial and record ownership of the Common Securities. Neither the Depositor nor any successor Holder of the Common Securities may transfer less than all the Common Securities, and the Depositor or any such successor Holder may transfer the Common Securities only (i) in connection with a consolidation or merger of the Depositor into another Person, or any conveyance, transfer or lease by the Depositor of its properties and assets substantially as an entirety to any Person (in which event such Common Securities will be transferred to such surviving entity, transferee or lessee, as the case may be), pursuant to Section 8.1 of the Indenture or (ii) to the Depositor or an Affiliate of the Depositor, in each such case in compliance with applicable law (including the Securities Act, and applicable state securities and blue sky laws). To the fullest extent permitted by law, any attempted transfer of the Common Securities other than as set forth in the immediately preceding sentence shall be void. The Administrative Trustees shall cause each Common Securities Certificate issued to the Depositor to contain a legend stating substantially “THIS CERTIFICATE IS NOT TRANSFERABLE EXCEPT IN COMPLIANCE WITH APPLICABLE LAW AND SECTION 5.11 OF THE TRUST AGREEMENT.”

(b) Any Holder of the Common Securities shall be liable for the debts and obligations of the Trust in the manner and to the extent set forth with respect to the Depositor and agrees that it shall be subject to all liabilities to which the Depositor may be subject and, prior to becoming such a Holder, shall deliver to the Administrative Trustees an instrument of assumption satisfactory to such Trustees.

SECTION 5.12. Restricted Legends .

(a) Each Preferred Security Certificate shall bear a legend in substantially the following form:

“[ IF THIS SECURITY IS A GLOBAL SECURITY INSERT: THIS PREFERRED SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE TRUST AGREEMENT HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF THE DEPOSITORY TRUST COMPANY (“DTC”) OR A NOMINEE OF DTC. THIS PREFERRED SECURITY IS EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN DTC OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE TRUST AGREEMENT, AND NO TRANSFER OF THIS PREFERRED SECURITY (OTHER THAN A TRANSFER OF THIS PREFERRED SECURITY AS A WHOLE BY DTC TO A NOMINEE OF DTC OR BY A NOMINEE OF DTC TO DTC OR ANOTHER NOMINEE OF DTC) MAY BE REGISTERED EXCEPT IN LIMITED CIRCUMSTANCES.

UNLESS THIS PREFERRED SECURITY IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF DTC TO NORTHSTAR REALTY FINANCE TRUST IV OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY PREFERRED SECURITY ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.]

THE PREFERRED SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND SUCH PREFERRED SECURITIES OR ANY INTEREST THEREIN, MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF ANY PREFERRED SECURITIES IS HEREBY NOTIFIED THAT THE SELLER OF THE PREFERRED SECURITIES MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A UNDER THE SECURITIES ACT.

THE HOLDER OF THE PREFERRED SECURITIES REPRESENTED BY THIS CERTIFICATE AGREES FOR THE BENEFIT OF THE TRUST AND THE DEPOSITOR THAT (A) SUCH PREFERRED SECURITIES MAY BE OFFERED, RESOLD OR OTHERWISE TRANSFERRED ONLY (I) TO THE TRUST, (II) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A “QUALIFIED INSTITUTIONAL BUYER” (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, OR (III) TO AN INSTITUTIONAL “ACCREDITED INVESTOR” WITHIN THE MEANING OF SUBPARAGRAPH (a) (1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF AN “ACCREDITED INVESTOR” WITHIN THE MEANING OF SUBPARAGRAPH (a) (1), (2), (3) OR (7) OF RULE 501, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND, IN THE CASE OF (III), SUBJECT TO THE RIGHT OF THE TRUST AND THE DEPOSITOR TO REQUIRE AN OPINION OF COUNSEL ADDRESSING COMPLIANCE WITH THE U.S. SECURITIES LAWS, AND OTHER INFORMATION SATISFACTORY TO EACH OF THEM AND (B) THE HOLDER WILL NOTIFY ANY PURCHASER OF ANY PREFERRED SECURITIES FROM IT OF THE RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE.

THE PREFERRED SECURITIES WILL BE ISSUED AND MAY BE TRANSFERRED ONLY IN BLOCKS HAVING AN AGGREGATE LIQUIDATION AMOUNT OF NOT LESS THAN $100,000. TO THE FULLEST EXTENT PERMITTED BY LAW, ANY ATTEMPTED TRANSFER OF PREFERRED SECURITIES, OR ANY INTEREST THEREIN, IN A BLOCK HAVING AN AGGREGATE LIQUIDATION AMOUNT OF LESS THAN $100,000 AND MULTIPLES OF $1,000 IN EXCESS THEREOF SHALL BE DEEMED TO BE VOID AND OF NO LEGAL EFFECT WHATSOEVER. TO THE FULLEST EXTENT PERMITTED BY LAW, ANY SUCH PURPORTED TRANSFEREE SHALL BE DEEMED NOT TO BE THE HOLDER OF SUCH PREFERRED SECURITIES FOR ANY PURPOSE, INCLUDING, BUT NOT LIMITED TO, THE RECEIPT OF LIQUIDATION AMOUNT OF OR DISTRIBUTIONS ON SUCH PREFERRED SECURITIES, OR ANY INTEREST THEREIN, AND SUCH PURPORTED TRANSFEREE SHALL BE DEEMED TO HAVE NO INTEREST WHATSOEVER IN SUCH PREFERRED SECURITIES.

THE HOLDER OF THIS SECURITY, OR ANY INTEREST THEREIN, BY ITS ACCEPTANCE HEREOF OR THEREOF ALSO AGREES, REPRESENTS AND WARRANTS THAT IT IS NOT AN EMPLOYEE BENEFIT PLAN, INDIVIDUAL RETIREMENT ACCOUNT OR OTHER PLAN OR ARRANGEMENT SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED (“ERISA”), OR SECTION 4975 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE “CODE”) (EACH A “PLAN”), OR AN ENTITY WHOSE UNDERLYING ASSETS INCLUDE “PLAN ASSETS” BY REASON OF ANY PLAN’S INVESTMENT IN THE ENTITY, AND NO PERSON INVESTING “PLAN ASSETS” OF ANY PLAN MAY ACQUIRE OR HOLD THIS PREFERRED SECURITY OR ANY INTEREST THEREIN, UNLESS SUCH PURCHASER OR HOLDER IS ELIGIBLE FOR THE EXEMPTIVE RELIEF AVAILABLE UNDER U.S. DEPARTMENT OF LABOR PROHIBITED TRANSACTION CLASS EXEMPTION 96-23, 95-60, 91-38, 90-1 OR 84-14 OR ANOTHER APPLICABLE EXEMPTION OR ITS PURCHASE AND HOLDING OF THIS SECURITY, OR ANY INTEREST THEREIN, ARE NOT PROHIBITED BY SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE WITH RESPECT TO SUCH PURCHASE AND HOLDING. ANY PURCHASER OR HOLDER OF THE PREFERRED SECURITIES OR ANY INTEREST THEREIN WILL BE DEEMED TO HAVE REPRESENTED BY ITS PURCHASE AND HOLDING THEREOF THAT EITHER (i) IT IS NOT AN EMPLOYEE BENEFIT PLAN OR OTHER PLAN TO WHICH TITLE I OF ERISA OR SECTION 4975 OF THE CODE IS APPLICABLE, A TRUSTEE OR OTHER PERSON ACTING ON BEHALF OF ANY SUCH EMPLOYEE BENEFIT PLAN OR PLAN, OR ANY OTHER PERSON OR ENTITY USING THE “PLAN ASSETS” OF ANY SUCH EMPLOYEE BENEFIT PLAN OR PLAN TO FINANCE SUCH PURCHASE, OR (ii) SUCH PURCHASE OR HOLDING WILL NOT RESULT IN A PROHIBITED TRANSACTION UNDER SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE FOR WHICH FULL EXEMPTIVE RELIEF IS NOT AVAILABLE UNDER AN APPLICABLE STATUTORY OR ADMINISTRATIVE EXEMPTION.

(b) The above legend shall not be removed from any of the Preferred Securities Certificates unless there is delivered to the Property Trustee and the Depositor satisfactory evidence, which may include an Opinion of Counsel, as may be reasonably required to ensure that any future transfers thereof may be made without restriction under or violation of the provisions of the Securities Act and other applicable law. Upon provision of such satisfactory evidence, one or more of the Administrative Trustees on behalf of the Trust shall execute and deliver to the Property Trustee, and the Property Trustee shall authenticate and deliver, at the written direction of the Administrative Trustees and the Depositor, Preferred Securities Certificates that do not bear the legend.

SECTION 5.13. Form of Certificate of Authentication.

The Property Trustee’s certificate of authentication shall be in substantially the following form:

This represents Preferred Securities referred to in the within-mentioned Trust Agreement.


Date:	Wilmington Trust Company, not in its individual capacity, but solely as Property Trustee

	By:
		Authorized officer

ARTICLE VI.

MEETINGS; VOTING; ACTS OF HOLDERS

SECTION 6.1. Notice of Meetings.

Notice of all meetings of the Holders of the Preferred Securities, stating the time, place and purpose of the meeting, shall be given by the Property Trustee pursuant to Section 11.8 to each Holder of Preferred Securities, at such Holder’s registered address, at least fifteen (15) days and not more than ninety (90) days before the meeting. At any such meeting, any business properly before the meeting may be so considered whether or not stated in the notice of the meeting. Any adjourned meeting may be held as adjourned without further notice.

SECTION 6.2. Meetings of Holders of the Preferred Securities.

(a) No annual meeting of Holders is required to be held. The Property Trustee, however, shall call a meeting of the Holders of the Preferred Securities to vote on any matter upon the written request of the Holders of at least twenty five percent (25%) in aggregate Liquidation Amount of the Outstanding Preferred Securities and the Administrative Trustees or the Property Trustee may, at any time in their discretion, call a meeting of the Holders of the Preferred Securities to vote on any matters as to which such Holders are entitled to vote.

(b) The Holders of at least a Majority in Liquidation Amount of the Preferred Securities, present in person or by proxy, shall constitute a quorum at any meeting of the Holders of the Preferred Securities.

(c) If a quorum is present at a meeting, an affirmative vote by the Holders present, in person or by proxy, holding Preferred Securities representing at least a Majority in Liquidation Amount of the Preferred Securities held by the Holders present, either in person or by proxy, at such meeting shall constitute the action of the Holders of the Preferred Securities, unless this Trust Agreement requires a lesser or greater number of affirmative votes.

SECTION 6.3. Voting Rights.

Holders shall be entitled to one vote for each $10,000 of Liquidation Amount represented by their Outstanding Trust Securities in respect of any matter as to which such Holders are entitled to vote.

SECTION 6.4. Proxies, Etc.

At any meeting of Holders, any Holder entitled to vote thereat may vote by proxy, provided, that no proxy shall be voted at any meeting unless it shall have been placed on file with the Administrative Trustees, or with such other officer or agent of the Trust as the Administrative Trustees may direct, for verification prior to the time at which such vote shall be taken. Pursuant to a resolution of the Property Trustee, proxies may be solicited in the name of the Property Trustee or one or more officers of the Property Trustee. Only Holders of record shall be entitled to vote. When Trust Securities are held jointly by several Persons, any one of them may vote at any meeting in person or by proxy in respect of such Trust Securities, but if more than one of them shall be present at such meeting in person or by proxy, and such joint owners or their proxies so present disagree as to any vote to be cast, such vote shall not be received in respect of such Trust Securities. A proxy purporting to be executed by or on behalf of a Holder shall be deemed valid unless challenged at or prior to its exercise, and the burden of proving invalidity shall rest on the challenger. No proxy shall be valid more than three years after its date of execution.

SECTION 6.5. Holder Action by Written Consent.

Any action that may be taken by Holders at a meeting may be taken without a meeting and without prior notice if Holders holding at least a Majority in Liquidation Amount of all Preferred Securities entitled to vote in respect of such action (or such lesser or greater proportion thereof as shall be required by any other provision of this Trust Agreement) shall consent to the action in writing; provided, that notice of such action is promptly provided to the Holders of Preferred Securities that did not consent to such action. Any action that may be taken by the Holders of all the Common Securities may be taken without a meeting and without prior notice if such Holders shall consent to the action in writing.

SECTION 6.6. Record Date for Voting and Other Purposes.

Except as provided in Section 6.10(a) , for the purposes of determining the Holders who are entitled to notice of and to vote at any meeting or to act by written consent, or to participate in any distribution on the Trust Securities in respect of which a record date is not otherwise provided for in this Trust Agreement, or for the purpose of any other action, the Administrative Trustees may from time to time fix a date, not more than ninety (90) days prior to the date of any meeting of Holders or the payment of a Distribution or other action, as the case may be, as a record date for the determination of the identity of the Holders of record for such purposes.

SECTION 6.7. Acts of Holders.

(a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this Trust Agreement to be given, made or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by an agent thereof duly appointed in writing; and, except as otherwise expressly provided herein, such action shall become effective when such instrument or instruments are delivered to an Administrative Trustee. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the “Act” of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Trust Agreement and conclusive in favor of the Trustees, if made in the manner provided in this Section 6.7 .

(b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than such signer’s individual capacity, such certificate or affidavit shall also constitute sufficient proof of such signer’s authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner that any Trustee receiving the same deems sufficient.

(d) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Trust Security shall bind every future Holder of the same Trust Security and the Holder of every Trust Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustees, the Administrative Trustees or the Trust in reliance thereon, whether or not notation of such action is made upon such Trust Security.

(e) Without limiting the foregoing, a Holder entitled hereunder to take any action hereunder with regard to any particular Trust Security may do so with regard to all or any part of the Liquidation Amount of such Trust Security or by one or more duly appointed agents each of which may do so pursuant to such appointment with regard to all or any part of such Liquidation Amount.

(f) If any dispute shall arise among the Holders or the Trustees with respect to the authenticity, validity or binding nature of any request, demand, authorization, direction, notice, consent, waiver or other Act of such Holder or Trustee under this Article VI , then the determination of such matter by the Property Trustee shall be conclusive with respect to such matter.

SECTION 6.8. Inspection of Records.

Upon reasonable written notice to the Administrative Trustees and the Property Trustee, the records of the Trust shall be open to inspection by any Holder during normal business hours for any purpose reasonably related to such Holder’s interest as a Holder.

SECTION 6.9. Limitations on Voting Rights.

(a) Except as expressly provided in this Trust Agreement and in the Indenture and as otherwise required by law, no Holder of Preferred Securities shall have any right to vote or in any manner otherwise control the administration, operation and management of the Trust or the obligations of the parties hereto, nor shall anything herein set forth, or contained in the terms of the Securities Certificates, be construed so as to constitute the Holders from time to time as partners or members of an association.

(b) So long as any Notes are held by the Property Trustee on behalf of the Trust, the Property Trustee shall not (i) direct the time, method and place of conducting any proceeding for any remedy available to the Note Trustee, or exercise any trust or power conferred on the Property Trustee with respect to the Notes, (ii) waive any past default that may be waived under Section 5.13 of the Indenture, (iii) exercise any right to rescind or annul a declaration that the principal of all the Notes shall be due and payable or (iv) consent to any amendment, modification or termination of the Indenture or the Notes, where such consent shall be required, without, in each case, obtaining the prior approval of the Holders of at least a Majority in Liquidation Amount of the Preferred Securities; provided, that where a consent under the Indenture would require the consent of each holder of Notes (or each Holder of Preferred Securities) affected thereby, no such consent shall be given by the Property Trustee without the prior written consent of each Holder of Preferred Securities. The Property Trustee shall not revoke any action previously authorized or approved by a vote of the Holders of the Preferred Securities, except by a subsequent vote of the Holders of the Preferred Securities. In addition to obtaining the foregoing approvals of the Holders of the Preferred Securities, prior to taking any of the foregoing actions, the Property Trustee shall, at the expense of the Depositor, obtain an Opinion of Counsel experienced in such matters to the effect that such action shall not cause the Trust to be taxable as a corporation or classified as other than a grantor trust for United States federal income tax purposes.

(c) If any proposed amendment to the Trust Agreement provides for, or the Trustees otherwise propose to effect, (i) any action that would adversely affect in any material respect the powers, preferences or special rights of the Preferred Securities, whether by way of amendment to the Trust Agreement or otherwise or (ii) the dissolution, winding-up or termination of the Trust, other than pursuant to the terms of this Trust Agreement, then the Holders of Outstanding Preferred Securities as a class will be entitled to vote on such amendment or proposal and such amendment or proposal shall not be effective except with the approval of the Holders of at least a Majority in Liquidation Amount of the Preferred Securities. Notwithstanding any other provision of this Trust Agreement, no amendment to this Trust Agreement may be made if, as a result of such amendment, it would cause the Trust to be taxable as a corporation or classified as other than a grantor trust for United States federal income tax purposes.

SECTION 6.10. Acceleration of Maturity; Rescission of Annulment; Waivers of Past Defaults.

(a) For so long as any Preferred Securities remain Outstanding, if, upon a Note Event of Default, the Note Trustee fails or the holders of not less than twenty five percent (25%) in principal amount of the outstanding Notes fail to declare the principal of all of the Notes to be immediately due and payable, the Holders of at least twenty-five percent (25%) in Liquidation Amount of the Preferred Securities then Outstanding shall have the right to make such declaration by a notice in writing to the Property Trustee, the Depositor and the Note Trustee. At any time after a declaration of acceleration with respect to the Notes has been made and before a judgment or decree for payment of the money due has been obtained by the Note Trustee as provided in the Indenture, the Holders of at least a Majority in Liquidation Amount of the Preferred Securities, by written notice to the Property Trustee, the Depositor and the Note Trustee, may rescind and annul such declaration and its consequences if:

(i) the Depositor has paid or deposited with the Note Trustee a sum sufficient to pay:

(A) all overdue installments of interest on all of the Notes;

(B) any accrued Additional Interest on all of the Notes;

(C) the principal of and premium, if any, on any Notes that have become due otherwise than by such declaration of acceleration and interest and Additional Interest thereon at the rate borne by the Notes; and

(D) all sums paid or advanced by the Note Trustee under the Indenture and the reasonable compensation, expenses, disbursements and advances of the Note Trustee, the Property Trustee and their agents and counsel; and

(ii) all Note Events of Default, other than the non-payment of the principal of the Notes that has become due solely by such acceleration, have been cured or waived as provided in Section 5.13 of the Indenture.

Upon receipt by the Property Trustee of written notice requesting such an acceleration, or rescission and annulment thereof, by Holders of any part of the Preferred Securities, a record date shall be established for determining Holders of Outstanding Preferred Securities entitled to join in such notice, which record date shall be at the close of business on the day the Property Trustee receives such notice. The Holders on such record date, or their duly designated proxies, and only such Persons, shall be entitled to join in such notice, whether or not such Holders remain Holders after such record date; provided, that, unless such declaration of acceleration, or rescission and annulment, as the case may be, shall have become effective by virtue of the requisite percentage having joined in such notice prior to the day that is ninety (90) days after such record date, such notice of declaration of acceleration, or rescission and annulment, as the case may be, shall automatically and without further action by any Holder be canceled and of no further effect. Nothing in this paragraph shall prevent a Holder, or a proxy of a Holder, from giving, after expiration of such ninety (90)-day period, a new written notice of declaration of acceleration, or rescission and annulment thereof, as the case may be, that is identical to a written notice that has been canceled pursuant to the proviso to the preceding sentence, in which event a new record date shall be established pursuant to the provisions of this Section 6.10(a) .

(b) For so long as any Preferred Securities remain Outstanding, to the fullest extent permitted by law and subject to the terms of this Trust Agreement and the Indenture, upon a Note Event of Default specified in paragraph (a) or (b) of Section 5.1 of the Indenture, any Holder of Preferred Securities shall have the right to institute a proceeding directly against the Depositor or the Guarantor, pursuant to Section 5.8 of the Indenture, for enforcement of payment to such Holder of any amounts payable in respect of Notes having an aggregate principal amount equal to the aggregate Liquidation Amount of the Preferred Securities of such Holder. Except as set forth in Section 6.10(a) and this Section 6.10(b) , the Holders of Preferred Securities shall have no right to exercise directly any right or remedy available to the holders of, or in respect of, the Notes.

(c) Notwithstanding paragraphs (a) and (b) of this Section 6.10 , the Holders of at least a Majority in Liquidation Amount of the Preferred Securities may, on behalf of the Holders of all the Preferred Securities, waive any Note Event of Default, except any Note Event of Default arising from the failure to pay any principal of or premium, if any, or interest on (including any Additional Interest) the Notes (unless such Note Event of Default has been cured and a sum sufficient to pay all matured installments of interest and all principal and premium, if any, on all Notes due otherwise than by acceleration has been deposited with the Note Trustee) or a Note Event of Default in respect of a covenant or provision that under the Indenture cannot be modified or amended without the consent of the holder of each outstanding Note. Upon any such waiver, such Note Event of Default shall cease to exist and any Note Event of Default arising therefrom shall be deemed to have been cured for every purpose of the Indenture; but no such waiver shall affect any subsequent Note Event of Default or impair any right consequent thereon.

(d) Notwithstanding paragraphs (a) and (b) of this Section 6.10 , the Holders of at least a Majority in Liquidation Amount of the Preferred Securities may, on behalf of the Holders of all the Preferred Securities, waive any past Event of Default and its consequences. Upon such waiver, any such Event of Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Trust Agreement, but no such waiver shall extend to any subsequent or other Event of Default or impair any right consequent thereon.

(e) The Holders of a Majority in Liquidation Amount of the Preferred Securities shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Property Trustee in respect of this Trust Agreement or the Notes or exercising any trust or power conferred upon the Property Trustee under this Trust Agreement; provided, that, subject to Sections 8.5 and 8.7 , the Property Trustee shall have the right to decline to follow any such direction if the Property Trustee being advised by counsel determines that the action so directed may not lawfully be taken, or if the Property Trustee in good faith shall, by an officer or officers of the Property Trustee, determine that the proceedings so directed would be illegal or involve it in personal liability or be unduly prejudicial to the rights of Holders not party to such direction, and provided, further, that nothing in this Trust Agreement shall impair the right of the Property Trustee to take any action deemed proper by the Property Trustee and which is not inconsistent with such direction.

ARTICLE VII.

REPRESENTATIONS AND WARRANTIES

SECTION 7.1. Representations and Warranties of the Property Trustee and the Delaware Trustee.

The Property Trustee and the Delaware Trustee, each severally on behalf of and as to itself, hereby represents and warrants for the benefit of the Depositor, the Guarantor and the Holders that:

(a) the Property Trustee is a Delaware banking corporation with trust powers, duly organized, validly existing and in good standing under the laws of the State of Delaware;

(b) the Property Trustee has full corporate power, authority and legal right to execute, deliver and perform its obligations under this Trust Agreement and has taken all necessary action to authorize the execution, delivery and performance by it of this Trust Agreement;

(c) the Delaware Trustee is a Delaware banking corporation, duly organized with trust powers, validly existing and in good standing under the laws of the State of Delaware and with its principal place of business in the State of Delaware;

(d) the Delaware Trustee has full corporate power, authority and legal right to execute, deliver and perform its obligations under this Trust Agreement and has taken all necessary action to authorize the execution, delivery and performance by it of this Trust Agreement;

(e) this Trust Agreement has been duly authorized, executed and delivered by the Property Trustee and the Delaware Trustee and constitutes the legal, valid and binding agreement of each of the Property Trustee and the Delaware Trustee enforceable against each of them in accordance with its terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors’ rights generally and to general principles of equity and the discretion of the court (regardless of whether considered in a proceeding in equity or at law);

(f) the execution, delivery and performance of this Trust Agreement have been duly authorized by all necessary corporate or other action on the part of the Property Trustee and the Delaware Trustee and do not require any approval of stockholders of the Property Trustee and the Delaware Trustee and such execution, delivery and performance will not (i) violate the Charter or By-laws of the Property Trustee or the Delaware Trustee or (ii) violate any applicable law, governmental rule or regulation of the United States or the State of Delaware, as the case may be, governing the banking and trust powers of the Property Trustee or the Delaware Trustee or any order, judgment or decree applicable to the Property Trustee or the Delaware Trustee;

(g) neither the authorization, execution or delivery by the Property Trustee or the Delaware Trustee of this Trust Agreement nor the consummation of any of the transactions by the Property Trustee or the Delaware Trustee contemplated herein requires the consent or approval of, the giving of notice to, the registration with or the taking of any other action with respect to any governmental authority or agency under any existing law of the United States or the State of Delaware governing the banking and trust powers of the Property Trustee or the Delaware Trustee, as the case may be; and

(h) to the best of each of the Property Trustee’s and the Delaware Trustee’s knowledge, there are no proceedings pending or threatened against or affecting the Property Trustee or the Delaware Trustee in any court or before any governmental authority, agency or arbitration board or tribunal that, individually or in the aggregate, would materially and adversely affect the Trust or would question the right, power and authority of the Property Trustee or the Delaware Trustee, as the case may be, to enter into or perform its obligations as one of the Trustees under this Trust Agreement.

SECTION 7.2. Representations and Warranties of Depositor.

The Depositor hereby represents and warrants for the benefit of the Holders that:

(a) the Depositor is a limited partnership duly organized, validly existing and in good standing under the laws of its state of organization;

(b) the Depositor has full power, authority and legal right to execute, deliver and perform its obligations under this Trust Agreement and has taken all necessary action to authorize the execution, delivery and performance by it of this Trust Agreement;

(c) this Trust Agreement has been duly authorized, executed and delivered by the Depositor and constitutes the legal, valid and binding agreement of the Depositor enforceable against the Depositor in accordance with its terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors’ rights generally and to general principles of equity;

(d) the Securities Certificates issued at the Closing Date on behalf of the Trust have been duly authorized and will have been duly and validly executed, issued and delivered by the applicable Trustees pursuant to the terms and provisions of, and in accordance with the requirements of, this Trust Agreement and the Holders will be, as of such date, entitled to the benefits of this Trust Agreement;

(e) the execution, delivery and performance of this Trust Agreement have been duly authorized by all necessary action on the part of the Depositor and do not require any approval of equity owners of the Depositor and such execution, delivery and performance will not (i) violate the organizational documents of the Depositor or (ii) violate any applicable law, governmental rule or regulation governing the Depositor or any material portion of its property or any order, judgment or decree applicable to the Depositor or any material portion of its property;

(f) neither the authorization, execution or delivery by the Depositor of this Trust Agreement nor the consummation of any of the transactions by the Depositor contemplated herein requires the consent or approval of, the giving of notice to, the registration with or the taking of any other action with respect to any governmental authority or agency under any existing law governing the Depositor or any material portion of its property; and

(g) there are no proceedings pending or, to the best of the Depositor’s knowledge, threatened against or affecting the Depositor or any material portion of its property in any court or before any governmental authority, agency or arbitration board or tribunal that, individually or in the aggregate, would materially and adversely affect the Trust or would question the right, power and authority of the Depositor, as the case may be, to enter into or perform its obligations under this Trust Agreement.

ARTICLE VIII.

THE TRUSTEES

SECTION 8.1. Number of Trustees.

The number of Trustees shall be five (5), provided, that the Property Trustee and the Delaware Trustee may be the same Person, in which case the number of Trustees shall be four (4). The number of Trustees may be increased or decreased by Act of the Holder of the Common Securities subject to Sections 8.2 , 8.3 , and 8.4 . The death, resignation, retirement, removal, bankruptcy, incompetence or incapacity to perform the duties of a Trustee shall not operate to annul, dissolve or terminate the Trust.

SECTION 8.2. Property Trustee Required.

There shall at all times be a Property Trustee hereunder with respect to the Trust Securities. The Property Trustee shall be a corporation organized and doing business under the laws of the United States or of any state thereof, authorized to exercise corporate trust powers, having a combined capital and surplus of at least fifty million dollars ($50,000,000), subject to supervision or examination by federal or state authority and having an office within the United States. If any such Person publishes reports of condition at least annually pursuant to law or to the requirements of its supervising or examining authority, then for the purposes of this Section 8.2 , the combined capital and surplus of such Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Property Trustee shall cease to be eligible in accordance with the provisions of this Section 8.2 , it shall resign immediately in the manner and with the effect hereinafter specified in this Article VIII .

SECTION 8.3. Delaware Trustee Required.

(a) If required by the Delaware Statutory Trust Act, there shall at all times be a Delaware Trustee with respect to the Trust Securities. The Delaware Trustee shall either be (i) a natural person who is at least 21 years of age and a resident of the State of Delaware or (ii) a legal entity that has its principal place of business in the State of Delaware, otherwise meets the requirements of applicable Delaware law and shall act through one or more persons authorized to bind such entity. If at any time the Delaware Trustee shall cease to be eligible in accordance with the provisions of this Section 8.3 , it shall resign immediately in the manner and with the effect hereinafter specified in this Article VIII .

(b) The Delaware Trustee shall not be entitled to exercise any powers, nor shall the Delaware Trustee have any of the duties and responsibilities, of the Property Trustee or the Administrative Trustees set forth herein. The Delaware Trustee shall be one of the trustees of the Trust for the sole and limited purpose of fulfilling the requirements of Section 3807 of the Delaware Statutory Trust Act and for taking such actions as are required to be taken by a Delaware trustee under the Delaware Statutory Trust Act. The duties (including fiduciary duties), liabilities and obligations of the Delaware Trustee shall be limited to (a) accepting legal process served on the Trust in the State of Delaware and (b) the execution of any certificates required to be filed with the Secretary of State of the State of Delaware that the Delaware Trustee is required to execute under Section 3811 of the Delaware Statutory Trust Act and there shall be no other duties (including fiduciary duties) or obligations, express or implied, at law or in equity, of the Delaware Trustee.

SECTION 8.4. Appointment of Administrative Trustees.

(a) There shall at all times be one or more Administrative Trustees hereunder with respect to the Trust Securities. Each Administrative Trustee shall be either a natural person who is at least 21 years of age or a legal entity that shall act through one or more persons authorized to bind that entity. Each of the individuals identified as an “Administrative Trustee” in the preamble of this Trust Agreement hereby accepts his or her appointment as such.

(b) Except where a requirement for action by a specific number of Administrative Trustees is expressly set forth in this Trust Agreement, any act required or permitted to be taken by, and any power of the Administrative Trustees may be exercised by, or with the consent of, any one such Administrative Trustee. Whenever a vacancy in the number of Administrative Trustees shall occur, until such vacancy is filled by the appointment of an Administrative Trustee in accordance with Section 8.11 , the Administrative Trustees in office, regardless of their number (and notwithstanding any other provision of this Trust Agreement), shall have all the powers granted to the Administrative Trustees and shall discharge all the duties imposed upon the Administrative Trustees by this Trust Agreement.

SECTION 8.5. Duties and Responsibilities of the Trustees.

(a) The rights, immunities, duties and responsibilities of the Trustees shall be as provided by this Trust Agreement and there shall be no other duties (including fiduciary duties) or obligations, express or implied, at law or in equity, of the Trustees; provided, however, that if an Event of Default known to the Property Trustee has occurred and is continuing, the Property Trustee shall, prior to the receipt of directions, if any, from the Holders of at least a Majority in Liquidation Amount of the Preferred Securities, exercise such of the rights and powers vested in it by this Trust Agreement, and use the same degree of care and skill in its exercise, as a prudent person would exercise or use under the circumstances in the conduct of such person’s own affairs. Notwithstanding the foregoing, no provision of this Trust Agreement shall require any of the Trustees to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its or their rights or powers, if it or they shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Whether or not herein expressly so provided, every provision of this Trust Agreement relating to the conduct or affecting the liability of or affording protection to the Trustees shall be subject to the provisions of this Section 8.5 . To the extent that, at law or in equity, a Trustee has duties and liabilities relating to the Trust or to the Holders, such Trustee shall not be liable to the Trust or to any Holder for such Trustee’s good faith reliance on the provisions of this Trust Agreement. The provisions of this Trust Agreement, to the extent that they restrict the duties and liabilities of the Trustees otherwise existing at law or in equity, are agreed by the Depositor, the Guarantor and the Holders to replace such other duties and liabilities of the Trustees.

(b) All payments made by the Property Trustee or a Paying Agent in respect of the Trust Securities shall be made only from the revenue and proceeds from the Trust Property and only to the extent that there shall be sufficient revenue or proceeds from the Trust Property to enable the Property Trustee or a Paying Agent to make payments in accordance with the terms hereof. Each Holder, by its acceptance of a Trust Security, agrees that it will look solely to the revenue and proceeds from the Trust Property to the extent legally available for distribution to it as herein provided and that the Trustees are not personally liable to it for any amount distributable in respect of any Trust Security or for any other liability in respect of any Trust Security. This Section 8.5(b) does not limit the liability of the Trustees expressly set forth elsewhere in this Trust Agreement.

(c) No provisions of this Trust Agreement shall be construed to relieve the Property Trustee from liability with respect to matters that are within the authority of the Property Trustee under this Trust Agreement for its own negligent action, negligent failure to act or willful misconduct, except that:

(i) the Property Trustee shall not be liable for any error or judgment made in good faith by an authorized officer of the Property Trustee, unless it shall be proved that the Property Trustee was negligent in ascertaining the pertinent facts;

(ii) the Property Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of at least a Majority in Liquidation Amount of the Preferred Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Property Trustee hereunder or under the Indenture, or exercising any trust or power conferred upon the Property Trustee under this Trust Agreement;

(iii) the Property Trustee’s sole duty with respect to the custody, safe keeping and physical preservation of the Notes and the Payment Account shall be to deal with such Property in a similar manner as the Property Trustee deals with similar property for its own account, subject to the protections and limitations on liability afforded to the Property Trustee under this Trust Agreement;

(iv) the Property Trustee shall not be liable for any interest on any money received by it; and money held by the Property Trustee need not be segregated from other funds held by it except in relation to the Payment Account maintained by the Property Trustee pursuant to Section 3.1 and except to the extent otherwise required by law; and

(v) the Property Trustee shall not be responsible for monitoring the compliance by the Administrative Trustees, the Guarantor or the Depositor with their respective duties under this Trust Agreement, nor shall the Property Trustee be liable for the default or misconduct of any other Trustee, the Guarantor or the Depositor.

SECTION 8.6. Notices of Defaults and Extensions.

(a) Within ninety (90) days after the occurrence of a default actually known to the Property Trustee, the Property Trustee shall transmit notice of such default to the Holders, the Administrative Trustees, the Guarantor and the Depositor, unless such default shall have been cured or waived; provided, that, except in the case of a default in the payment of the principal of or any premium or interest (including any Additional Interest) on any Trust Security, the Property Trustee shall be fully protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors and/or Responsible Officers of the Property Trustee in good faith determines that the withholding of such notice is in the interests of the Holders of the Trust Securities. For the purpose of this Section 8.6 , the term “default” means any event that is, or after notice or lapse of time or both would become, an Event of Default.

(b) RESERVED.

(c) The Property Trustee shall not be deemed to have knowledge of any default or Event of Default unless the Property Trustee shall have received written notice thereof from the Depositor, the Guarantor, any Administrative Trustee or any Holder or unless a Responsible Officer of the Property Trustee shall have obtained actual knowledge of such default or Event of Default.

(d) The Property Trustee shall notify all Holders of the Preferred Securities of any notice of default received with respect to the Notes.

SECTION 8.7. Certain Rights of Property Trustee.

Subject to the provisions of Section 8.5 :

(a) the Property Trustee may conclusively rely and shall be protected in acting or refraining from acting in good faith and in accordance with the terms hereof upon any resolution, Opinion of Counsel, certificate, written representation of a Holder or transferee, certificate of auditors or any other resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, appraisal, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties;

(b) if (i) in performing its duties under this Trust Agreement the Property Trustee is required to decide between alternative courses of action, (ii) in construing any of the provisions of this Trust Agreement the Property Trustee finds a provision ambiguous or inconsistent with any other provisions contained herein or (iii) the Property Trustee is unsure of the application of any provision of this Trust Agreement, then, except as to any matter as to which the Holders of the Preferred Securities are entitled to vote under the terms of this Trust Agreement, the Property Trustee shall deliver a notice to the Depositor requesting the Depositor’s written instruction as to the course of action to be taken and the Property Trustee shall take such action, or refrain from taking such action, as the Property Trustee shall be instructed in writing to take, or to refrain from taking, by the Depositor; provided, that if the Property Trustee does not receive such instructions of the Depositor within ten (10) Business Days after it has delivered such notice or such reasonably shorter period of time set forth in such notice, the Property Trustee may, but shall be under no duty to, take such action, or refrain from taking such action, as the Property Trustee shall deem advisable and in the best interests of the Holders, in which event the Property Trustee shall have no liability except for its own negligence, bad faith or willful misconduct;

(c) any direction or act of the Depositor or the Guarantor contemplated by this Trust Agreement shall be sufficiently evidenced by an Officer’s Certificate unless otherwise expressly provided herein;

(d) any direction or act of an Administrative Trustee contemplated by this Trust Agreement shall be sufficiently evidenced by a certificate executed by such Administrative Trustee and setting forth such direction or act;

(e) the Property Trustee shall have no duty to see to any recording, filing or registration of any instrument (including any financing or continuation statement or any filing under tax or securities laws) or any re-recording, re-filing or re-registration thereof;

(f) the Property Trustee may consult with counsel (which counsel may be counsel to the Property Trustee, the Depositor or the Guarantor or any of the Depositor’s or the Guarantor’s Affiliates, and may include any of its employees) and the advice of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon and in accordance with such advice; the Property Trustee shall have the right at any time to seek instructions concerning the administration of this Trust Agreement from any court of competent jurisdiction;

(g) the Property Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Trust Agreement at the request or direction of any of the Holders pursuant to this Trust Agreement, unless such Holders shall have offered to the Property Trustee reasonable security or indemnity against the costs, expenses (including reasonable attorneys’ fees and expenses) and liabilities that might be incurred by it in compliance with such request or direction, including reasonable advances as may be requested by the Property Trustee;

(h) the Property Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, approval, bond, debenture, note or other evidence of indebtedness or other paper or document, unless requested in writing to do so by one or more Holders, but the Property Trustee may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Property Trustee shall determine to make such inquiry or investigation, it shall be entitled to examine the books, records and premises of the Depositor, personally or by agent or attorney;

(i) the Property Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through its agents, attorneys, custodians or nominees and the Property Trustee shall not be responsible for any negligence or misconduct on the part of any such agent, attorney, custodian or nominee appointed with due care by it hereunder;

(j) whenever in the administration of this Trust Agreement the Property Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right hereunder, the Property Trustee (i) may request instructions from the Holders (which instructions may only be given by the Holders of the same proportion in Liquidation Amount of the Trust Securities as would be entitled to direct the Property Trustee under this Trust Agreement in respect of such remedy, right or action), (ii) may refrain from enforcing such remedy or right or taking such other action until such instructions are received and (iii) shall be protected in acting in accordance with such instructions;

(k) except as otherwise expressly provided by this Trust Agreement, the Property Trustee shall not be under any obligation to take any action that is discretionary under the provisions of this Trust Agreement;

(l) without prejudice to any other rights available to the Property Trustee under applicable law, when the Property Trustee incurs expenses or renders services in connection with a Bankruptcy Event, such expenses (including legal fees and expenses of its agents and counsel) and the compensation for such services are intended to constitute expenses of administration under any bankruptcy law or law relating to creditors rights generally; and

(m) whenever in the administration of this Trust Agreement the Property Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Property Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, request and rely on an Officer’s Certificate which, upon receipt of such request, shall be promptly delivered by the Depositor.

No provision of this Trust Agreement shall be deemed to impose any duty or obligation on any Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it, in any jurisdiction in which it shall be illegal, or in which such Person shall be unqualified or incompetent in accordance with applicable law, to perform any such act or acts, or to exercise any such right, power, duty or obligation.

SECTION 8.8. Delegation of Power.

Any Trustee may, by power of attorney or otherwise, delegate to any other Person its, his or her power for the purpose of executing any documents contemplated in Section 2.5 . The Trustees shall have power to delegate from time to time to such of their number or to the Depositor the doing of such things and the execution of such instruments either in the name of the Trust or the names of the Trustees or otherwise as the Trustees may deem expedient, to the extent such delegation is not prohibited by applicable law or contrary to the provisions of this Trust Agreement.

SECTION 8.9. May Hold Securities.

Any Trustee or any other agent of any Trustee or the Trust, in its individual or any other capacity, may become the owner or pledgee of Trust Securities and except as provided in the definition of the term “Outstanding” in Article I , may otherwise deal with the Trust with the same rights it would have if it were not a Trustee or such other agent.

SECTION 8.10. Compensation; Reimbursement; Indemnity.

The Depositor agrees:

(a) to pay to the Trustees from time to time such reasonable compensation for all services rendered by them hereunder as may be agreed by the Depositor and the Trustees from time to time (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust);

(b) to reimburse the Trustees upon request for all reasonable expenses, disbursements and advances incurred or made by the Trustees in accordance with any provision of this Trust Agreement (including the reasonable compensation and the expenses and disbursements of their agents and counsel), except any such expense, disbursement or advance as may be attributable to their gross negligence, bad faith or willful misconduct; and

(c) to the fullest extent permitted by applicable law, to indemnify and hold harmless (i) each Trustee (including in its individual capacity), (ii) any Affiliate of any Trustee, (iii) any officer, director, shareholder, employee, representative or agent of any Trustee or any Affiliate of any Trustee and (iv) any employee or agent of the Trust (referred to herein as an “Indemnified Person”) from and against any loss, damage, liability, tax (other than income, franchise or other taxes imposed on amounts paid pursuant to Section 8.10(a) or (b) hereof), penalty, expense or claim of any kind or nature whatsoever incurred without negligence, bad faith or willful misconduct on its part, arising out of or in connection with the acceptance or administration of the Trust hereunder, including the advancement of funds to cover the reasonable costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder.

The Trust shall have no payment, reimbursement or indemnity obligations to the Trustees under this Section 8.10 . The provisions of this Section 8.10 shall survive the termination of this Trust Agreement and the earlier removal or resignation of any Trustee.

No Trustee may claim any Lien on any Trust Property whether before or after termination of the Trust as a result of any amount due pursuant to this Section 8.10 .

To the fullest extent permitted by law, in no event shall the Property Trustee and the Delaware Trustee be liable for any indirect, special, punitive or consequential loss or damage of any kind whatsoever, including, but not limited to, lost profits, even if the Trustee has been advised of the likelihood of such loss or damage and regardless of the form of action.

In no event shall the Property Trustee and the Delaware Trustee be liable for any failure or delay in the performance of its obligations hereunder because of circumstances beyond its control, including, but not limited to, acts of God, flood, war (whether declared or undeclared), terrorism, fire, riot, embargo, government action, including any laws, ordinances, regulations, governmental action or the like which delay, restrict or prohibit the providing of the services contemplated by this Trust Agreement.

SECTION 8.11. Resignation and Removal; Appointment of Successor.

(a) No resignation or removal of any Trustee and no appointment of a successor Trustee pursuant to this Article VIII shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 8.12 .

(b) A Trustee may resign at any time by giving written notice thereof to the Depositor and, in the case of the Property Trustee and the Delaware Trustee, to the Holders.

(c) Unless an Event of Default shall have occurred and be continuing, the Property Trustee or the Delaware Trustee, or both of them, may be removed (with or without cause) at any time by Act of the Holder of Common Securities. If an Event of Default shall have occurred and be continuing, the Property Trustee or the Delaware Trustee, or both of them, may be removed (with or without cause) at such time by Act of the Holders of at least a Majority in Liquidation Amount of the Preferred Securities, delivered to the removed Trustee (in its individual capacity and on behalf of the Trust). An Administrative Trustee may be removed (with or without cause) only by Act of the Holder of the Common Securities at any time.

(d) If any Trustee shall resign, be removed or become incapable of acting as Trustee, or if a vacancy shall occur in the office of any Trustee for any reason, at a time when no Event of Default shall have occurred and be continuing, the Holder of the Common Securities, by Act of the Holder of the Common Securities, shall promptly appoint a successor Trustee or Trustees, and such successor Trustee and the retiring Trustee shall comply with the applicable requirements of Section 8.12 . If the Property Trustee or the Delaware Trustee shall resign, be removed or become incapable of continuing to act as the Property Trustee or the Delaware Trustee, as the case may be, at a time when an Event of Default shall have occurred and be continuing, the Holders of the Preferred Securities, by Act of the Holders of a Majority in Liquidation Amount of the Preferred Securities, shall promptly appoint a successor Property Trustee or Delaware Trustee, and such successor Property Trustee or Delaware Trustee and the retiring Property Trustee or Delaware Trustee shall comply with the applicable requirements of Section 8.12 . If an Administrative Trustee shall resign, be removed or become incapable of acting as Administrative Trustee, at a time when an Event of Default shall have occurred and be continuing, the Holder of the Common Securities by Act of the Holder of Common Securities shall promptly appoint a successor Administrative Trustee and such successor Administrative Trustee and the retiring Administrative Trustee shall comply with the applicable requirements of Section 8.12 . If no successor Trustee shall have been so appointed by the Holder of the Common Securities or Holders of the Preferred Securities, as the case may be, and accepted appointment in the manner required by Section 8.12 within thirty (30) days after the giving of a notice of resignation by a Trustee, the removal of a Trustee, or a Trustee becoming incapable of acting as such Trustee, any Holder who has been a Holder of Preferred Securities for at least six (6) months may, on behalf of himself and all others similarly situated, and any resigning Trustee may, in each case, at the expense of the Depositor, petition any court of competent jurisdiction for the appointment of a successor Trustee.

(e) The Depositor shall give notice of each resignation and each removal of the Property Trustee or the Delaware Trustee and each appointment of a successor Property Trustee or Delaware Trustee to all Holders in the manner provided in Section 10.8 . Each notice shall include the name of the successor Property Trustee or Delaware Trustee and the address of its Corporate Trust Office if it is the Property Trustee.

(f) Notwithstanding the foregoing or any other provision of this Trust Agreement, in the event any Administrative Trustee or a Delaware Trustee who is a natural person dies or becomes, in the opinion of the Holder of Common Securities, incompetent or incapacitated, the vacancy created by such death, incompetence or incapacity may be filled by (i) the unanimous act of the remaining Administrative Trustees if there are at least two of them or (ii) otherwise by the Holder of the Common Securities (with the successor in each case being a Person who satisfies the eligibility requirement for Administrative Trustees or Delaware Trustee, as the case may be, set forth in Sections 8.3 and 8.4 ).

(g) Upon the appointment of a successor Delaware Trustee, such successor Delaware Trustee shall file a Certificate of Amendment to the Certificate of Trust in accordance with Section 3810 of the Delaware Statutory Trust Act.

SECTION 8.12. Acceptance of Appointment by Successor.

(a) In case of the appointment hereunder of a successor Trustee, each successor Trustee shall execute and deliver to the Depositor and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and each such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on request of the Trust or any successor Trustee such retiring Trustee shall, upon payment of its charges, duly assign, transfer and deliver to such successor Trustee all Trust Property, all proceeds thereof and money held by such retiring Trustee hereunder with respect to the Trust Securities and the Trust.

(b) Upon request of any such successor Trustee, the Trust (or the retiring Trustee if requested by the Depositor) shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts referred to in the preceding paragraph.

(c) No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article VIII .

SECTION 8.13. Merger, Conversion, Consolidation or Succession to Business.

Any Person into which the Property Trustee or the Delaware Trustee may be merged or converted or with which it may be consolidated, or any Person resulting from any merger, conversion or consolidation to which such Trustee shall be a party, or any Person succeeding to all or substantially all the corporate trust business of such Trustee, shall be the successor of such Trustee hereunder, without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided, that such Person shall be otherwise qualified and eligible under this Article VIII .

SECTION 8.14. Not Responsible for Recitals or Issuance of Securities.

The recitals contained herein and in the Securities Certificates shall be taken as the statements of the Trust and the Depositor, and the Trustees do not assume any responsibility for their correctness. The Trustees make no representations as to the title to, or value or condition of, the property of the Trust or any part thereof, nor as to the validity or sufficiency of this Trust Agreement, the Notes or the Trust Securities. The Trustees shall not be accountable for the use or application by the Depositor of the proceeds of the Notes.

SECTION 8.15. Property Trustee May File Proofs of Claim.

(a) In case of any Bankruptcy Event (or event that with the passage of time would become a Bankruptcy Event) relative to the Trust or any other obligor upon the Trust Securities or the property of the Trust or of such other obligor or their creditors, the Property Trustee (irrespective of whether any Distributions on the Trust Securities shall then be due and payable and irrespective of whether the Property Trustee shall have made any demand on the Trust for the payment of any past due Distributions) shall be entitled and empowered, to the fullest extent permitted by law, by intervention in such proceeding or otherwise:

(i) to file and prove a claim for the whole amount of any Distributions owing and unpaid in respect of the Trust Securities and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Property Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Property Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding; and

(ii) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same;

and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such proceeding is hereby authorized by each Holder to make such payments to the Property Trustee and, in the event the Property Trustee shall consent to the making of such payments directly to the Holders, to pay to the Property Trustee first any amount due it for the reasonable compensation, expenses, disbursements and advances of the Property Trustee, its agents and counsel, and any other amounts due the Property Trustee.

(b) Nothing herein contained shall be deemed to authorize the Property Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or compensation affecting the Trust Securities or the rights of any Holder thereof or to authorize the Property Trustee to vote in respect of the claim of any Holder in any such proceeding.

SECTION 8.16. Reports to and from the Property Trustee.

(a) The Depositor, the Guarantor and the Administrative Trustees shall deliver to the Property Trustee, not later than forty five (45) days after the end of each of the first three fiscal quarters of the Depositor and the Guarantor and not later than ninety (90) days after the end of each fiscal year of the Depositor and the Guarantor ending after the date of this Trust Agreement, an Officer’s Certificate (substantially in the form attached hereto as Exhibit H ) covering the preceding fiscal period, stating whether or not to the knowledge of the signers thereof the Depositor, the Guarantor, the Administrative Trustees or the Trust are in default in the performance or observance of any of the terms, provisions and conditions of this Trust Agreement (without regard to any period of grace or requirement of notice provided hereunder) and, if the Depositor, the Guarantor, the Administrative Trustees or the Trust shall be in default, specifying all such defaults and the nature and status thereof of which they have knowledge.

(b) The Depositor and the Guarantor shall furnish to (i) the Property Trustee, (ii) the Purchasers, (iii) any Owner of the Preferred Securities reasonably identified to the Depositor, the Guarantor or the Trust (which identification may be made either by such Owner or by the Purchasers) and (iv) any designee of (i), (ii) or (iii) above, a duly completed and executed certificate in the form attached hereto as Exhibit G, including the financial statements referenced in such Exhibit, which certificate and financial statements shall be so furnished by the Depositor and the Guarantor not later than forty five (45) days after the end of each of the first three fiscal quarters of each fiscal year of the Depositor and the Guarantor and not later than ninety (90) days after the end of each fiscal year of the Depositor and the Guarantor.

(c) The Property Trustee shall receive all reports, certificates and information, which it is entitled to obtain under each of the Operative Documents, and deliver to (i) the Purchasers, or a designee thereof, as identified in writing to the Property Trustee, copies of all such reports, certificates or information promptly upon receipt thereof.

ARTICLE IX.

TERMINATION, LIQUIDATION AND MERGER

SECTION 9.1. Dissolution Upon Expiration Date.

Unless earlier dissolved, the Trust shall automatically dissolve on June 30, 2041 (the “Expiration Date”), and the Trust Property shall be liquidated in accordance with Section 9.4 .

SECTION 9.2. Early Termination.

The first to occur of any of the following events is an “Early Termination Event”, upon the occurrence of which the Trust shall be dissolved:

(a) the occurrence of a Bankruptcy Event in respect of, or the dissolution or liquidation of, the Depositor, in its capacity as the Holder of the Common Securities, unless the Depositor shall have transferred the Common Securities as provided by Section 5.11 , in which case this provision shall refer instead to any such successor Holder of the Common Securities;

(b) the written direction to the Property Trustee from the Holder of the Common Securities at any time to dissolve the Trust and, after satisfaction of any liabilities of the Trust as required by applicable law, to distribute the Notes to Holders in exchange for the Preferred Securities (which direction is optional and wholly within the discretion of the Holder of the Common Securities).

(c) the redemption of all of the Preferred Securities in connection with the payment at maturity or redemption of all the Notes; and

(d) the entry of an order for dissolution of the Trust by a court of competent jurisdiction.

SECTION 9.3. Termination.

The respective obligations and responsibilities of the Trustees and the Trust shall terminate upon the latest to occur of the following: (a) the distribution by the Property Trustee to Holders of all amounts required to be distributed hereunder upon the liquidation of the Trust pursuant to Section 9.4 , or upon the redemption of all of the Trust Securities pursuant to Section 4.2 ; (b) the satisfaction of any expenses owed by the Trust; and (c) the discharge of all administrative duties of the Administrative Trustees, including the performance of any tax reporting obligations with respect to the Trust or the Holders.

SECTION 9.4. Liquidation.

(a) If an Early Termination Event specified in Section 9.2(a) , (b) or (d) occurs or upon the Expiration Date, the Trust shall be liquidated by the Property Trustee as expeditiously as the Property Trustee shall determine to be possible by distributing, after satisfaction of liabilities to creditors of the Trust as provided by applicable law, to each Holder a Like Amount of Notes, subject to Section 9.4(d) . Notice of liquidation shall be given by the Property Trustee not less than thirty (30) nor more than sixty (60) days prior to the Liquidation Date to each Holder of Trust Securities at such Holder’s address appearing in the Securities Register. All such notices of liquidation shall:

(i) state the Liquidation Date;

(ii) state that from and after the Liquidation Date, the Trust Securities will no longer be deemed to be Outstanding and (subject to Section 9.4(d) ) any Securities Certificates not surrendered for exchange will be deemed to represent a Like Amount of Notes; and

(iii) provide such information with respect to the mechanics by which Holders may exchange Securities Certificates for Notes, or if Section 9.4(d) applies, receive a Liquidation Distribution, as the Property Trustee shall deem appropriate.

(b) Except where Section 9.2(c) or 9.4(d) applies, in order to effect the liquidation of the Trust and distribution of the Notes to Holders, the Property Trustee, either itself acting as exchange agent or through the appointment of a separate exchange agent, shall establish a record date for such distribution (which shall not be more than forty-five (45) days prior to the Liquidation Date nor prior to the date on which notice of such liquidation is given to the Holders) and establish such procedures as it shall deem appropriate to effect the distribution of Notes in exchange for the Outstanding Securities Certificates.

(c) Except where Section 9.2(c) or 9.4(d) applies, after the Liquidation Date, (i) the Trust Securities will no longer be deemed to be Outstanding, (ii) certificates representing a Like Amount of Notes will be issued to Holders of Securities Certificates, upon surrender of such Certificates to the exchange agent for exchange, (iii) the Depositor shall use its best efforts to have the Notes listed on the New York Stock Exchange or on such other exchange, interdealer quotation system or self-regulatory organization on which the Preferred Securities are then listed, if any, (iv) Securities Certificates not so surrendered for exchange will be deemed to represent a Like Amount of Notes bearing accrued and unpaid interest in an amount equal to the accumulated and unpaid Distributions on such Securities Certificates until such certificates are so surrendered (and until such certificates are so surrendered, no payments of interest or principal will be made to Holders of Securities Certificates with respect to such Notes) and (v) all rights of Holders holding Trust Securities will cease, except the right of such Holders to receive Notes upon surrender of Securities Certificates.

(d) Notwithstanding the other provisions of this Section 9.4 , if distribution of the Notes in the manner provided herein is determined by the Property Trustee not to be permitted or practical, the Trust Property shall be liquidated, and the Trust shall be wound up by the Property Trustee in such manner as the Property Trustee determines. In such event, Holders will be entitled to receive out of the assets of the Trust available for distribution to Holders, after satisfaction of liabilities to creditors of the Trust as provided by applicable law, an amount equal to the Liquidation Amount per Trust Security plus accumulated and unpaid Distributions thereon to the date of payment (such amount being the “Liquidation Distribution”). If, upon any such winding up the Liquidation Distribution can be paid only in part because the Trust has insufficient assets available to pay in full the aggregate Liquidation Distribution, then, subject to the next succeeding sentence, the amounts payable by the Trust on the Trust Securities shall be paid on a pro rata basis (based upon Liquidation Amounts). The Holder of the Common Securities will be entitled to receive Liquidation Distributions upon any such winding up pro rata (based upon Liquidation Amounts) with Holders of all Trust Securities, except that, if an Event of Default has occurred and is continuing, the Preferred Securities shall have a priority over the Common Securities as provided in Section 4.3 .

SECTION 9.5. Mergers, Consolidations, Amalgamations or Replacements of Trust.

The Trust may not merge with or into, consolidate, amalgamate, or be replaced by, or convey, transfer or lease its properties and assets substantially as an entirety to, any Person except pursuant to this Article IX . At the request of the Holders of the Common Securities, without the consent of the Holders of the Preferred Securities, the Trust may merge with or into, consolidate, amalgamate, or be replaced by or convey, transfer or lease its properties and assets substantially as an entirety to a trust organized as such under the laws of any State; provided, that:

(a) such successor entity either (i) expressly assumes all of the obligations of the Trust under this Trust Agreement with respect to the Preferred Securities or (ii) substitutes for the Preferred Securities other securities having substantially the same terms as the Preferred Securities (such other Securities, the “Successor Securities”) so long as the Successor Securities have the same priority as the Preferred Securities with respect to distributions and payments upon liquidation, redemption and otherwise;

(b) a trustee of such successor entity possessing substantially the same powers and duties as the Property Trustee is appointed to hold the Notes;

(c) if the Preferred Securities or the Notes are rated, such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not cause the Preferred Securities or the Notes (including any Successor Securities) to be downgraded by any nationally recognized statistical rating organization that then assigns a rating to the Preferred Securities or the Notes;

(d) the Preferred Securities are listed, or any Successor Securities will be listed upon notice of issuance, on any national securities exchange or interdealer quotation system on which the Preferred Securities are then listed, if any;

(e) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the Holders of the Preferred Securities (including any Successor Securities) in any material respect;

(f) such successor entity has a purpose substantially identical to that of the Trust;

(g) prior to such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, the Depositor has received an Opinion of Counsel to the effect that (i) such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the Holders of the Preferred Securities (including any Successor Securities) in any material respect; (ii) following such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, neither the Trust nor such successor entity will be required to register as an “investment company” under the Investment Company Act and (iii) following such merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, the Trust (or the successor entity) will continue to be classified as a grantor trust for U.S. federal income tax purposes; and

(h) the Depositor or its permitted transferee owns all of the common securities of such successor entity and guarantees the obligations of such successor entity under the Successor Securities at least to the extent provided by the Indenture.

Notwithstanding the foregoing, the Trust shall not, except with the consent of Holders of all of the Preferred Securities, consolidate, amalgamate, merge with or into, or be replaced by or convey, transfer or lease its properties and assets substantially as an entirety to any other Person or permit any other entity to consolidate, amalgamate, merge with or into, or replace, the Trust if such consolidation, amalgamation, merger, replacement, conveyance, transfer or lease would cause the Trust or the successor entity to be taxable as a corporation or classified as other than a grantor trust for United States federal income tax purposes or cause the Notes to be treated as other than indebtedness of the Depositor for United States federal income tax purposes.

ARTICLE X.

INFORMATION TO PURCHASER

SECTION 10.1. Depositor Obligations to Purchaser.

Notwithstanding any other provision herein, the Depositor and the Guarantor shall furnish to (a) the Purchasers, (b) any Owner of the Preferred Securities reasonably identified to the Depositor, the Guarantor, or the Trust (which identification may be made either by such Owner or by the Purchasers) and (c) any designee of (a) or (b) above, copies of all correspondence, notices, forms, filings, reports and other documents required to be provided by the Depositor or the Guarantor, whether acting through an Administrative Trustee or otherwise, to the Property Trustee or Delaware Trustee under this Trust Agreement.

SECTION 10.2. Property Trustee’s Obligations to Purchaser.

Notwithstanding any other provision herein, the Property Trustee shall furnish to the Purchasers, and any a designee thereof as identified in writing to the Property Trustee, copies of all (i) correspondence, notices, forms, filings, reports and other documents received by the Property Trustee or Delaware Trustee from the Depositor, whether acting through an Administrative Trustee or otherwise, under this Trust Agreement, and (ii) all correspondence, notices, forms, filings, reports and other documents required to be provided to the Depositor or a Holder by the Property Trustee or Delaware Trustee under this Trust Agreement.

ARTICLE XI.

MISCELLANEOUS PROVISIONS

SECTION 11.1. Limitation of Rights of Holders.

Except as set forth in Section 9.2 , the death, bankruptcy, termination, dissolution or incapacity of any Person having an interest, beneficial or otherwise, in Trust Securities shall not operate to terminate this Trust Agreement, nor annul, dissolve or terminate the Trust nor entitle the legal representatives or heirs of such Person or any Holder for such Person, to claim an accounting, take any action or bring any proceeding in any court for a partition or winding up of the arrangements contemplated hereby, nor otherwise affect the rights, obligations and liabilities of the parties hereto or any of them.

SECTION 11.2. Agreed Tax Treatment of Trust and Trust Securities.

The parties hereto and, by its acceptance or acquisition of a Trust Security or a beneficial interest therein, the Holder of, and any Person that acquires a beneficial interest in, such Trust Security intend and agree to treat the Trust as a grantor trust for United States federal, state and local tax purposes, and to treat the Trust Securities (including all payments and proceeds with respect to such Trust Securities) as undivided beneficial ownership interests in the Trust Property (and payments and proceeds therefrom, respectively) for United States federal, state and local tax purposes and to treat the Notes as indebtedness of the Depositor for United States federal, state and local tax purposes. The provisions of this Trust Agreement shall be interpreted to further this intention and agreement of the parties.

SECTION 11.3. Amendment.

(a) This Trust Agreement may be amended from time to time by the Property Trustee, the Administrative Trustees and the Holder of all the Common Securities, without the consent of any Holder of the Preferred Securities, (i) to cure any ambiguity, correct or supplement any provision herein that may be defective or inconsistent with any other provision herein, or to make or amend any other provisions with respect to matters or questions arising under this Trust Agreement, which shall not be inconsistent with the other provisions of this Trust Agreement, (ii) to modify, eliminate or add to any provisions of this Trust Agreement to such extent as shall be necessary to ensure that the Trust will neither be taxable as a corporation nor be classified as other than a grantor trust for United States federal income tax purposes at all times that any Trust Securities are Outstanding or to ensure that the Notes are treated as indebtedness of the Depositor for United States federal income tax purposes, or to ensure that the Trust will not be required to register as an “investment company” under the Investment Company Act or (iii) to add to the covenants, restrictions or obligations of the Depositor; provided, that in the case of clauses (i), (ii) or (iii), such action shall not adversely affect in any material respect the interests of any Holder.

(b) Except as provided in Section 11.3(c) , any provision of this Trust Agreement may be amended by the Property Trustee, the Administrative Trustees and the Holder of all of the Common Securities and with (i) the consent of Holders of at least a Majority in Liquidation Amount of the Preferred Securities and (ii) receipt by the Trustees of an Opinion of Counsel to the effect that such amendment or the exercise of any power granted to the Trustees in accordance with such amendment will not cause the Trust to be taxable as a corporation or classified as other than a grantor trust for United States federal income tax purposes or affect the treatment of the Notes as indebtedness of the Depositor for United States federal income tax purposes or affect the Trust’s exemption from status (or from any requirement to register) as an “investment company” under the Investment Company Act.

(c) Notwithstanding any other provision of this Trust Agreement, without the consent of each Holder, this Trust Agreement may not be amended to (i) change the accrual rate, amount, currency or timing of any Distribution on or the redemption price of the Trust Securities or otherwise adversely affect the amount of any Distribution or other payment required to be made in respect of the Trust Securities as of a specified date, (ii) restrict or impair the right of a Holder to institute suit for the enforcement of any such payment on or after such date, (iii) reduce the percentage of aggregate Liquidation Amount of Outstanding Preferred Securities, the consent of whose Holders is required for any such amendment, or the consent of whose Holders is required for any waiver of compliance with any provision of this Trust Agreement or of defaults hereunder and their consequences provided for in this Trust Agreement; (iv) impair or adversely affect the rights and interests of the Holders in the Trust Property, or permit the creation of any Lien on any portion of the Trust Property; or (v) modify the definition of “Outstanding,” this Section 11.3(c) , Sections 4.1 , 4.2 , 4.3 , 6.10(e) or Article IX .

(d) Notwithstanding any other provision of this Trust Agreement, no Trustee shall enter into or consent to any amendment to this Trust Agreement that would cause the Trust to be taxable as a corporation or to be classified as other than a grantor trust for United States federal income tax purposes or that would cause the Notes to fail or cease to be treated as indebtedness of the Depositor for United States federal income tax purposes or that would cause the Trust to fail or cease to qualify for the exemption from status (or from any requirement to register) as an “investment company” under the Investment Company Act.

(e) If any amendment to this Trust Agreement is made, the Administrative Trustees or the Property Trustee shall promptly provide to the Depositor and the Note Trustee a copy of such amendment.

(f) No Trustee shall be required to enter into any amendment to this Trust Agreement that affects its own rights, duties or immunities under this Trust Agreement. The Trustees shall be entitled to receive an Opinion of Counsel and an Officer’s Certificate stating that any amendment to this Trust Agreement is in compliance with this Trust Agreement and all conditions precedent herein provided for relating to such action have been met.

(g) No amendment or modification to this Trust Agreement that adversely affects in any material respect the rights, duties, liabilities, indemnities or immunities of the Delaware Trustee hereunder shall be permitted without the prior written consent of the Delaware Trustee.

SECTION 11.4. Separability.

If any provision in this Trust Agreement or in the Securities Certificates shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby, and there shall be deemed substituted for the provision at issue a valid, legal and enforceable provision as similar as possible to the provision at issue.

SECTION 11.5. Governing Law.

THIS TRUST AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF EACH OF THE HOLDERS, THE TRUST, THE DEPOSITOR, THE GUARANTOR AND THE TRUSTEES WITH RESPECT TO THIS TRUST AGREEMENT AND THE TRUST SECURITIES SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE WITHOUT REFERENCE TO ITS CONFLICTS OF LAWS PROVISIONS.

SECTION 11.6. Successors.

This Trust Agreement shall be binding upon and shall inure to the benefit of any successor to the Depositor, the Guarantor, the Trust and any Trustee, including any successor by operation of law. Except in connection with a transaction involving the Depositor that is permitted under Article VIII of the Indenture and pursuant to which the assignee agrees in writing to perform the Depositor’s obligations hereunder, the Depositor shall not assign its obligations hereunder.

SECTION 11.7. Headings.

The Article and Section headings are for convenience only and shall not affect the construction of this Trust Agreement.

SECTION 11.8. Reports, Notices and Demands.

(a) Any report, notice, demand or other communication that by any provision of this Trust Agreement is required or permitted to be given or served to or upon any Holder, the Depositor or the Guarantor may be given or served in writing delivered in person, or by reputable, overnight courier, by telecopy or by deposit thereof, first-class postage prepaid, in the United States mail, addressed, (a) in the case of a Holder of Preferred Securities, to such Holder as such Holder’s name and address may appear on the Securities Register; (b) in the case of the Holder of all the Common Securities or the Depositor, to NorthStar Realty Finance Limited Partnership c/o NorthStar Realty Finance Corp., 527 Madison Avenue, New York, NY 10022, Attention: Chief Financial Officer, or to such other address as may be specified in a written notice by the Holder of all the Common Securities or the Depositor, as the case may be, to the Property Trustee; and (c) in the case of the Guarantor, to NorthStar Realty Finance Corp., 527 Madison Avenue, New York, NY 10022, Attention: Chief Financial Officer, or to such other address as may be specified in a written notice by the Guarantor to the Property Trustee. Such report, notice, demand or other communication to or upon a Holder, the Depositor or the Guarantor shall be deemed to have been given when received in person, within one (1) Business Day following delivery by overnight courier, when telecopied with receipt confirmed, or within three (3) Business Days following delivery by mail, except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver.

(b) Any notice, demand or other communication that by any provision of this Trust Agreement is required or permitted to be given or served to or upon the Property Trustee, the Delaware Trustee, the Administrative Trustees or the Trust shall be given in writing by deposit thereof, first-class postage prepaid, in the U.S. mail, personal delivery or facsimile transmission, addressed to such Person as follows: (a) with respect to the Property Trustee and the Delaware Trustee to Wilmington Trust Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890-0001, Attention: Corporate Capital Markets, facsimile no. (302) 636-4140; (b) with respect to the Administrative Trustees, to them at the address above for notices to the Depositor, marked “Attention: Administrative Trustees of NorthStar Realty Finance Trust IV,” and (c) with respect to the Trust, to its principal executive office specified in Section 2.2 , with a copy to the Property Trustee. Such notice, demand or other communication to or upon the Trust, the Property Trustee or the Administrative Trustees shall be deemed to have been sufficiently given or made only upon actual receipt of the writing by the Trust, the Property Trustee or the Administrative Trustees.

SECTION 11.9. Agreement Not to Petition.

Each of the Trustees and the Depositor agree for the benefit of the Holders that, until at least one year and one day after the Trust has been terminated in accordance with Article IX , they shall not file, or join in the filing of, a petition against the Trust under any Bankruptcy Law or otherwise join in the commencement of any proceeding against the Trust under any Bankruptcy Law. If the Depositor takes action in violation of this Section 11.9 , the Property Trustee agrees, for the benefit of Holders, that at the expense of the Depositor, it shall file an answer with the applicable bankruptcy court or otherwise properly contest the filing of such petition by the Depositor against the Trust or the commencement of such action and raise the defense that the Depositor has agreed in writing not to take such action and should be estopped and precluded therefrom and such other defenses, if any, as counsel for the Property Trustee or the Trust may assert.

This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. Delivery of an executed signature page of this instrument my facsimile transmission shall be effective as delivery of a manually executed counterpart hereof.

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IN WITNESS WHEREOF, the parties hereto have executed this Amended and Restated Trust Agreement as of the day and year first above written.


	NorthStar Realty Finance Limited Partnership , as Depositor

	By:	/s/ Richard J. McCready
		Name: Richard J. McCready
		Title: General Counsel


	NorthStar Realty Finance Corp. , as Guarantor

	By:	/s/ Richard J. McCready
		Name: Richard J. McCready
		Title: General Counsel


Wilmington Trust Company, as Property Trustee		Wilmington Trust Company, as Delaware Trustee

By:	/s/ W. Thomas Morris, II	By:	/s/ W. Thomas Morris, II

	Name: W. Thomas Morris, II Title: Assistant Vice President		Name: W. Thomas Morris, II Title: Assistant Vice President


/s/ David T. Hamamoto			/s/ Richard J. McCready

Administrative Trustee Name: David T. Hamamoto			Administrative Trustee Name: Richard J. McCready


/s/ Mark E. Chertok

Administrative Trustee Name: Mark E. Chertok

NORTHSTAR REALTY FINANCE CORP.

2006 OUTPERFORMANCE PLAN

AWARD AGREEMENT

Name of Grantee: _____________________ (“Grantee”)

Participation Percentage: ___.__%

Grant Date: _______ __, 2006

RECITALS

A. T he Grantee is an employee of NorthStar Realty Finance Corp. ( the “ Company ”) and its subsidiary NorthStar Realty Finance Limited Partnership, through which the Company conducts substantially all of its operations (the “ Partnership ”).

B. The Company has adopted the 2006 Outperformance Plan (the “ Outperformance Plan ”) to provide the Company’s employees with incentive compensation . The Outperformance Plan was adopted by the Compensation Committee (the “ Committee ”) of the Board of Directors of the Compnay (the “ Board ”) pursuant to authority delegated to it by the Board as set forth in the Committee’s charter, including authority to make grants of equity interests in the Partnership which may, under certain circumstances, become exchangeable for shares of the Company’s common stock reserved for issuance under the NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan, or any successor plan (as any such plan may be amended, modified or supplemented from time to time, collectively the “ Stock Plan ”)). This a ward agreement (this “ Agreement ”) evidences an award to the Grantee under the Outperformance Plan (the “ Award ”), which is subject to the terms and conditions set forth herein.

C. The Grantee was selected by the Committee to receive this Award and the Board effective as of the grant date specified above, awarded to the Grantee the participation percentage in the Outperformance Pool (as defined herein) set forth above.

NOW, THEREFORE, the Company, the Partnership and the Grantee agree as follows:

1. Administration. T he Outperformance Plan and all awards thereunder, including this Award, shall be administered by the Committee, which in the administration of the Outperformance Plan shall have the same powers and authority it has in the administration of the Stock Plan as set forth in the Stock Plan.

2. Definitions. Capitalized terms used herein without definitions shall have the meanings given to those terms in the Stock Plan. In addition, as used herein:

“ Additional Share Baseline Value ” means, with respect to an Additional Share, the gross proceeds received by the Company or the Partnership upon the issuance of such Additional Share, which amount shall be deemed to equal, as applicable, (A) if such Additional Share is issued in a public offering or private placement, the gross price to the public or to the purchaser(s), (B) if such Additional Share is issued in exchange for assets or upon the acquisition of another entity, the cash value imputed to such Additional Share for purposes of such transaction by the parties thereto, as determined by the Committee, or, if no such value can be imputed, the Common Stock Price on the date of issuance, and (C) if such Additional Shares are issued upon exercise of stock options or in exchange (directly or indirectly) for LTIP Units, OPP Units or other Units issued to employees, non-employee directors, consultants or other persons or entities as incentive compensation or if such Additional Shares constitute restricted shares of Common Stock issued to employees or other persons or entities in exchange for services provided to the Company, zero.

“ Additional Shares ” means (without double-counting) the sum of (A) the number of shares of Common Stock plus (B) the product of the Adjustment Factor then in effect multiplied by the number of Units (other than those issued to the Company), in the case of each (A) and (B), to the extent issued after January 1, 2006 and on or before the Valuation Date in a capital raising transaction, in exchange for assets or upon the acquisition of another entity, but specifically excluding, without limitation, shares of Common Stock issued upon exercise of stock options or upon the exchange (directly or indirectly) of LTIP Units, OPP Units or other Units issued to employees, non-employee directors, consultants or other persons or entities as incentive compensation and restricted shares of Common Stock issued to employees or other persons or entities in exchange for services provided to the Company.

“ Adjustment Factor ” has the meaning given to that term in the Partnership Agreement.

“ Award OPP Units ” has the meaning set forth in Section 3 .

“ Baseline ” means, as of the Valuation Date, an amount representing (without double-counting) the sum of: (a) the Baseline Value multiplied by (I) the Initial Shares, and (II) the sum of 100% plus the Target Return Percentage; plus (b) with respect to each Additional Share, the product of (I) the Additional Share Baseline Value of such Additional Share, multiplied by (II) the sum of (A) 100% plus (B) the product of the Target Return Percentage multiplied by a fraction the numerator of which is the number of days prior to and including the Valuation Date during which such Additional Share has been outstanding and the denominator of which is the number of days from and including January 1, 2006 to and including the Valuation Date; provided that if the Valuation Date occurs prior to December 31, 2008 as a result of a Change in Control, then for purposes of this definition in connection with the calculation of the Outperformance Pool as of the Valuation Date, (i) the “Baseline” shall be calculated as of the date that such Change of Control is consummated instead of December 31, 2008 and (ii) the Target Return Percentage to be used in such calculation shall be reduced to 30% multiplied by the Fraction.

“ Baseline Value ” means $9.92, which the Committee determined was the average closing price of the Company’s Common Stock for the twenty (20) trading days prior to the Effective Date .

" Beneficial Owner " shall have the meaning set forth in Rule 13d-3 under the Exchange Act.

“ Change of Control ” means:

(a) any Person is or becomes Beneficial Owner, directly or indirectly, of securities of the Company representing thirty-five percent (35%) or more of the combined voting power of the then outstanding securities of the Company, excluding (I) any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (I) of paragraph (b) below, (II) any Person who becomes such a Beneficial Owner through the issuance of such securities with respect to purchases made directly from the Company; and (III) NCIC or any of its majority-owned or controlled subsidiaries; or

(b) the consummation of a merger or consolidation of the Company with any other corporation or the issuance of voting securities of the Company in connection with a merger or consolidation of the Company (or any direct or indirect subsidiary of the Company) pursuant to applicable stock exchange requirements, other than (I) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) fifty percent (50%) or more of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (II) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing thirty-five percent (35%) or more of the combined voting power of the then outstanding securities of the Company; or

(c) the consummation of an agreement for the sale or disposition by the Company of all or substantially all of the assets of the Company approved by the stockholders of the Company; or

(d) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company.

“ Code ” means the Internal Revenue Code of 1986, as amended.

“ Common Stock ” means Company’s Common Stock, par value $.01 per share, either currently existing or authorized hereafter.

“ Common Stock Price ” means, as of a particular date, the average of the Fair Market Value of one share of Common Stock for the twenty (20) trading days ending on, and including, such date (or, if such date is not a trading day, the most recent trading day immediately preceding such date); provided , however , that for purposes of determining the Common Stock Price in connection with a Transactional Change of Control (but only if in due course such Transactional Change of Control is actually consummated by the Company), the Common Stock Price shall be equal to the fair market value in cash of the total consideration per share of Common Stock to be paid or payable in the transaction resulting in the Transactional Change of Control, as determined by the Committee as of the date on which the Transactional Change of Control is publicly announced (or if more than a single public announcement is made, as of the date of the latest announcement or announcements setting forth the terms and conditions of such Transactional Change of Control that are relevant to the Committee’s determination of such fair market value).

“ Disability ” means, unless otherwise provided in the Grantee’s Service Agreement (if any), a disability which renders the Grantee incapable of performing all of his or her material duties for a period of at least 180 consecutive or non-consecutive days during any consecutive twelve-month period.

“ Dividend Unit Equivalent ” has the meaning set forth in Section 3 .

“ Dividend Value ” means, as of a particular date of determination, the aggregate amount of dividends and other distributions paid on one share of Common Stock that was outstanding as of the Effective Date between January 1, 2006 and such date of determination (excluding dividends and distributions paid in the form of additional shares of Common Stock).

“ Effective Date ” means January 1, 2006.

“ Exchange Act ” means the Securities Exchange Act of 1934, as amended.

“ Fair Market Value ” has the meaning given to that term in the Stock Plan.

“ Fraction ” means the number of calendar days that have elapsed since the Effective Date divided by 1,096.

“ Initial Shares ” means _____________ shares of Common Stock and Units outstanding to be used for purposes of the calculation of the Baseline.

“ LTIP Units ” means Partnership Units, as such term is defined in the Partnership Agreement, issued as profits interests to employees, non-employee directors, consultants or other persons or entities as incentive or other compensation for services provided to the Company having the rights, voting powers, restrictions, limitations as to distributions, qualifications and terms and conditions of redemption set forth in the Partnership Agreement and any applicable award or similar agreement.

“ Maximum Outperformance Pool Amount ” means $40,000,000.

" NCIC " means NorthStar Capital Investment Corp., a Maryland corporation.

“ OPP Units ” means Partnership Units, as such term is defined in the Partnership Agreement, awarded as profits interests under the Outperformance Plan having the rights, voting powers, restrictions, limitations as to distributions, qualifications and terms and conditions of redemption set forth herein and in the Partnership Agreement.

“ OPP Unit Equivalent ” has the meaning set forth in Section 3 .

“ Outperformance Pool ” means, as of the Valuation Date, a dollar amount calculated as follows: subtract the Baseline from the Total Return, in each case as of the Valuation Date, and multiply the resulting amount (or, if the resulting amount is a negative number, zero) by 10%; provided , however , that in no event shall the Outperformance Pool as of the Valuation Date exceed the Maximum Outperformance Pool Amount.

“ Participation Percentage ” means the Grantee’s share of the Outperformance Pool as set forth on the first page of this Agreement.

“ Partnership Agreement ” means the Agreement of Limited Partnership of the Partnership dated as of October 19, 2004 among the Company and the limited partners party thereto, as amended from time to time.

" Person " means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization, other entity or "group" (as defined in the Exchange Act).

“ Service Agreement ” means, as of a particular date, any employment, consulting or similar service agreement(s) then in effect between the Grantee, on the one hand, and the Company or the Partnership, on the other hand, as amended or supplemented through such date.

“ Target Return Percentage ” means 30%, except as otherwise defined for purposes of the definition of Baseline in certain circumstances, as described in such definition .

“ Total Return ” means (without double-counting), as of a particular date, an amount equal to the sum of (a) the Total Shares multiplied by the Common Stock Price as of such date plus (b) an amount equal to the sum of the total dividends and other distributions actually paid between January 1, 2006 and such date (excluding dividends and distributions paid in the form of additional shares of Common Stock or Units), in respect of (I) the Initial Shares and (II) the Additional Shares if and to the extent that shares of Common Stock included within the definition of “Additional Shares” were outstanding on the record date with respect to the applicable dividend or distribution so paid.

“ Total Shares ” means (without double-counting) the algebraic sum of: (A) the number of shares of Common Stock outstanding on the Valuation Date; plus (B) the product of the Adjustment Factor then in effect multiplied by the number of Units (other than those owned by the Company) outstanding on the Valuation Date; plus (C) shares of Common Stock issuable as of the Valuation Date upon exercise of outstanding stock options, but only if and to the extent that such options are then exercisable and with the number of such shares being calculated on a “net” basis after giving pro forma effect to the exercise of such options as if they were exercised on a “cashless” basis on the Valuation Date; minus (D) the product of the Adjustment Factor then in effect multiplied by the number of LTIP Units, OPP Units or other Units outstanding on the Valuation Date that were issued to employees, non-employee directors, consultants or other persons or entities as incentive compensation if and to the extent that such LTIP Units, OPP Units or other Units as of the Valuation Date are subject to time- or performance-based vesting restrictions or other risk of forfeiture conditions that have not been satisfied; and minus (E) restricted shares of Common Stock or other stock-based awards outstanding on the Valuation Date that were granted to employees or other persons or entities in exchange for services provided to the Company if and to the extent that such restricted shares or other stock-based awards as of the Valuation Date are subject to time- or performance-based vesting restrictions or other risk of forfeiture conditions that have not been satisfied.

“ Total Unit Equivalent ” has the meaning set forth in Section 3 .

“ Transactional Change of Control ” means (a) a Change of Control described in clause (a) of the definition thereof where the “person” or “group” makes a tender offer for Common Stock, or (b) a Change of Control described in clauses (b) or (c) of the definition thereof.

“ Units ” means all Partnership Common Units (as defined in the Partnership Agreement), Partnership Preferred Units (as defined in the Partnership Agreement) and other Partnership Units (as defined in the Partnership Agreement) with economic attributes substantially similar to Partnership Common Units and Partnership Preferred Units as determined by the Committee, outstanding or issuable upon the conversion, exercise, exchange or redemption of any securities of any kind convertible, exercisable, exchangeable or redeemable for Partnership Common Units, Partnership Preferred Units or such other Partnership Units.

“ Valuation Date ” means the earliest of (i) December 31, 2008, (ii) the date upon which a Change of Control shall occur, and (iii) the last day of a 30 consecutive calendar day period during which, on each day in that period, the Outperformance Pool would have reached the Maximum Outperformance Pool Amount if such day had been the Valuation Date.

3. Outperformance Award.

(a) Subject to Section 8 , the Grantee is hereby granted an Award consisting of the participation percentage in the Outperformance Pool set forth on the first page of this Agreement. In approving the Outperformance Plan the Committee has resolved that the Grantee’s Award be denominated in and settled through the issuance of OPP Units in a number calculated to give the Grantee a value equal to the Grantee’s participation percentage in the Outperformance Pool (“Award OPP Units”) as of the Valuation Date. The timing of issuance of Award OPP Units to the Grantee pursuant to this Award will be within the full and exclusive control of the Committee, so long as it such issuance occurs on or prior to the Valuation Date as provided in this Section 3. Without limiting the discretion of the Committee, Award OPP Units may be issued to the Grantee: (i) from time to time based on a determination by the Committee of the extent to which the performance objectives established under the Outperformance Plan have been achieved and an estimate of the value of the Outperformace Pool as of such time or times; (ii) as of the Valuation Date based on the final calculations set forth in Section 3(b) of this Agreement; or (iii) at any other time or times between the date hereof and the Valuation Date. Award OPP Units, when issued, shall constitute and be treated as the property of the Grantee, subject to the terms of this Agreement and the Partnership Agreement. The issuance of Award OPP Units to the Grantee pursuant to this Award shall be set forth in minutes of the meetings of the Committee and communicted to the Grantee in writing promptly after the approval thereof by the Committee. Award OPP Units will be: (A) subject to forfeiture or increase to the extent provided in this Section 3 as set forth below; and (B) subject to vesting as provided in Sections 4 and 8 hereof. In connection with each issuance of Award OPP Units the Grantee shall execute and deliver to the Company and the Partnership such documents, comparable to the documents executed and delivered in connection with this Agreement, as the Company and/or the Partnership reasonably request in order to comply with all applicable legal requirements, including, without limitation, federal and state securities laws.

(b) As soon as practicable following the Valuation Date, but as of the Valuation Date, the Committee will determine the Outperformance Pool (if any) and then perform the following calculations with respect to this Award:

(i) multiply (w) the Outperformance Pool calculated as of the Valuation Date by (x) the Grantee’s Participation Percentage, and then divide the result by the product of (y) the Common Stock Price calculated as of the Valuation Date multiplied by (z) the Adjustment Factor on the Valuation Date; the resulting number is hereafter referred to as the “ OPP Unit Equivalent ”;

(ii) multiply (v) the OPP Unit Equivalent by (w) the Adjustment Factor on the Valuation Date and (x) the Dividend Value as of the Valuation Date, and then divide the result by the product of (y) the Common Stock Price calculated as of the Valuation Date multiplied by (z) the Adjustment Factor on the Valuation Date; the resulting number is hereafter referred to as the “ Dividend Unit Equivalent ”; and

(iii) add the OPP Unit Equivalent to the Dividend Unit Equivalent; the resulting number is hereafter referred to as the “ Total Unit Equivalent ”.

(c) If the Total Unit Equivalent is smaller than the number of Award OPP Units previously issued to the Grantee pursuant to Section 3(a) hereof, then the Grantee, as of the Valuation Date, shall forfeit a number of Award OPP Units equal to the difference, and thereafter the term Award OPP Units will refer only to the remaining Award OPP Units that were not forfeited. If the Total Unit Equivalent is greater than the number of Award OPP Units previously issued to the Grantee pursuant to Section 3(a) hereof, then, upon the performance of the calculations set forth in Section 3(b) hereof: (A) the Company shall cause the Partnership to issue to the Grantee, as of the Valuation Date, a number of additional OPP Units equal to the difference; (B) such additional OPP Units shall be added to the Award OPP Units previously issued, if any, and thereby become part of this Award; (C) the Company and the Partnership shall take such corporate or partnership action as is necessary to accomplish the grant of such additional OPP Units; (D) the Grantee shall execute and deliver in connection with such grant such documents, comparable to the documents executed and delivered in connection with this Agreement, as the Company and/or the Partnership reasonably request in order to comply with all applicable legal requirements, including, without limitation, federal and state securities laws; and (E) thereafter the term Award OPP Units will refer collectively to the Award OPP Units, if any, issued prior to such additional grant plus such additional OPP Units. If the Total Unit Equivalent is the same as the number of Award OPP Units previously issued to the Grantee pursuant to Section 3(a) hereof, then there will be no change to the number of Award OPP Units under this Award pursuant to this Section 3.

4. Termination of Grantee’s Service Relationship; Vesting; Change of Control .

(a) If at any time prior to the Valuation Date the Grantee shall cease to be an employee of the Company for any reason other than termination by the Company without cause (as defined in the Service Agreement), then this Award Agreement shall automatically and immediately be forfeited by the Grantee; provided , however , that in the case of the termination by reason of death or Disability of the Grantee, the provisions of Section 8 shall apply. If at any time prior to vesting pursuant to Section 4(c) hereof the Grantee shall cease to be an employee of the Company for any reason other than termination by the Company without cause (as defined in the Service Agreement), all Award OPP Units that remain unvested at such time shall automatically and immediately be forfeited by the Grantee; provided , however , that in the case of the termination by reason of death or Disability of the Grantee, the provisions of Section 8 shall apply. In the event Grantee becomes a consultant or advisor to the Company or the Partnership or a non-employee director of the Company, such change in status shall not be deemed a termination of employment or service with the Company at the time of such change in status for purposes of this Section 4.

(b) Notwithstanding anything to the contrary in this Section 4 or in any Service Agreement which provides for accelerated vesting or payout of the Grantee’s bonuses and incentive awards in the event of certain types of terminations of Grantee’s service relationship with the Company (such as, for example, termination at the end of the term, termination without cause by the employer or termination for good reason by the Grantee), the Grantee hereby agrees that the treatment of this Award and the Grantee’s Award OPP Units shall be governed solely by this Agreement and not by the terms of such Service Agreement. For the avoidance of doubt, the foregoing sentence will be deemed an amendment to any applicable Service Agreement to the extent required to avoid application thereof to this Award and the Grantee’s Award OPP Units, such that, by way of illustration, any such accelerated vesting or payout pursuant to the terms of such Service Agreement shall not be interpreted as requiring that any calculations set forth in Section 3 hereof be performed with respect to this Award, except as specifically provided in Section 8 hereof, prior to the date on which such calculations would otherwise be performed pursuant to the terms of the Outperformance Plan for all Grantees. If at any time prior to the Valuation Date the Grantee’s service relationship with the Company is terminated by the Company without cause (as defined in the Service Agreement), then this Award shall be modified as follows: (A) this Award and any Award OPP Units issued prior to such termination shall not be forfeited by the Grantee as of the date of termination ; (B) the calculations set forth in Section 3 hereof shall be performed as of the Valuation Date in the same manner as they would have been performed absent such termination, except that (I) the OPP Unit Equivalent so calculated will then be multiplied by a fraction the numerator of which is the number of days from and including January 1, 2006 to the date of such termination and the denominator of which is the number of days from and including January 1, 2006 to and including the Valuation Date, (II) the Dividend Unit Equivalent shall be calculated using the adjusted OPP Unit Equivalent calculated pursuant to the foregoing clause (I), and (III) the Total Unit Equivalent shall be the sum of the adjusted OPP Unit Equivalent and Dividend Unit Equivalent calculated pursuant to the foregoing clauses (I) and (II); and (C) all of the Grantee’s Award OPP Units issued and not forfeited pursuant to Section 3 hereof shall be automatically and immediately vested as of the Valuation Date without application of the vesting provisions of Section 4(c) below.

(c) Subject to Section 8 hereof , the Grantee’s Award OPP Units issued and not forfeited pursuant to Section 3 hereof shall become vested as follows: (i) fifty percent (50%) of such Award OPP Units shall become vested on the Valuation Date; and (ii) an additional twenty-five (25%) of such Award OPP Units shall become vested on each of the first and second anniversaries of the Valuation Date, provided , however , that all unvested Award OPP Units that have not previously been forfeited pursuant to Section 3 hereof shall vest immediately upon the occurrence of a Change of Control. For the avoidance of doubt, the vesting of the Award OPP Units pursuant to this Section 4(c) shall be independent from, and in no way effect, the determination of the Outperformance Pool (if any), and the corresponding calculation of the Total Unit Equivalent (if any), pursuant to Section 3 hereof.

5. Payments by Award Recipients. No amount shall be payable to the Company or the Partnership by the Grantee at any time in respect of this Award.

6. Distributions . The holder of the Award OPP Units shall be entitled to receive distributions with respect to such Award OPP Units to the extent provided for in the Partnership Agreement. The Distribution Participation Date (as defined in the Partnership Agreement) with respect to Award OPP Units in an amount equal to the Total Unit Equivalent is the Valuation Date.

7. Restrictions on Transfer . None of the Award OPP Units shall be sold, assigned, transferred, pledged, hypothecated, given away or in any other manner disposed of, encumbered, whether voluntarily or by operation of law (each such action a “ Transfer ”), or redeemed in accordance with the Partnership Agreement (a) prior to vesting and (b) unless such Transfer is in compliance with all applicable securities laws (including, without limitation, the Securities Act of 1933, as amended (the “ Securities Act ”)), and such Transfer is in accordance with the applicable terms and conditions of the Partnership Agreement. In connection with any Transfer of Award OPP Units, the Partnership may require the Grantee to provide an opinion of counsel, satisfactory to the Partnership, that such Transfer is in compliance with all federal and state securities laws (including, without limitation, the Securities Act). Any attempted Transfer of Award OPP Units not in accordance with the terms and conditions of this Section 7 shall be null and void, and the Partnership shall not reflect on its records any change in record ownership of any OPP Units as a result of any such Transfer, shall otherwise refuse to recognize any such Transfer and shall not in any way give effect to any such Transfer of any OPP Units. This Agreement is personal to the Grantee, is non-assignable and is not transferable in any manner, by operation of law or otherwise, other than by will or the laws of descent and distribution.

8. Death or Disability .

(a) Notwithstanding any other provision herein, but subject to Section 8(c) below, if, prior to the Valuation Date, the Grantee shall cease to be an employee, consultant or advisor, as applicable, of the Company as a result of his death or Disability, then (i) with respect to the Grantee the calculations provided in Section 3 hereof shall be performed with respect to this Award immediately upon such cessation as if a Change of Control had occurred (with respect to the Grantee only) on the date of his death or termination by reason of Disability and (ii) all of the Award OPP Units comprising this Award (after giving effect to the issuance of additional OPP Units or forfeiture of Award OPP Units pursuant to Section 3 hereof) shall automatically and immediately vest.

(b) Notwithstanding any other provision herein, but subject to Section 8(c) below, if, on or after the Valuation Date, the Grantee shall cease to be an employee, consultant or advisor, as applicable, of the Company as a result of his death or Disability, then all of the Grantee’s Award OPP Units shall automatically and immediately vest.

(c) Notwithstanding Sections 8(a) and 8(b) above, the provisions of the Grantee’s Service Agreement, if any, with respect to death or disability shall govern the treatment of the Grantee’s Award OPP Units hereunder.

9. Changes in Capital Structure . If (i) the Company shall at any time be involved in a merger, consolidation, dissolution, liquidation, reorganization, exchange of shares, sale of all or substantially all of the assets or stock of the Company or other transaction similar thereto, (ii) any stock dividend, stock split, reverse stock split, stock combination, reclassification, recapitalization, significant repurchases of stock or other similar change in the capital structure of the Company, or any distribution to holders of Common Stock other than regular cash dividends, shall occur or (iii) any other event shall occur which in the good faith judgment of the Committee necessitates action by way of appropriate equitable adjustment in the terms of this Award, the Outperformance Plan or the OPP Units, then the Committee may in its sole discretion take such action as it deems necessary to maintain the Grantee’s rights hereunder so that they are substantially proportionate to the rights existing under this Award, the Outperformance Plan and the terms of the OPP Units prior to such event, including, without limitation: (A) adjustments in the Award OPP Units, Additional Shares, Baseline Value, Dividend Value, Common Stock Price, Maximum Outperformance Pool Amount, Total Shares and Total Return; and (B) substitution of other awards under the Stock Plan or otherwise.

10. Miscellaneous .

(a) Amendments. This Agreement may be amended or modified only with the consent of the Partnership acting through the Committee; provided that any such amendment or modification adversely affecting the rights of the Grantee hereunder must be consented to by the Grantee to be effective as against him.

(b) Incorporation of Stock Plan; Committee Determinations. The provisions of the Stock Plan are hereby incorporated by reference as if set forth herein. If and to the extent that any provision contained in this Agreement is inconsistent with the Stock Plan, this Agreement shall govern. The Committee will make the determinations and certifications required by this Award as promptly as reasonably practicable following the occurrence of the event or events necessitating such determinations or certifications. In the event of a Change of Control, the Committee will make such determinations within a period of time that enables the Company to make any payments due hereunder on or within five business days after the consummation of the Change of Control.

(c) Status as a Partner . As of the grant date set forth on the first page of this Agreement, the Grantee shall be admitted as a partner of the Partnership with beneficial ownership of such number of Award OPP Units as the Committee elects to issue to the Grantee as of such date pursuant to Section 3 hereof by: (A) signing and delivering to the Partnership a copy of this Agreement; and (B) signing, as a Limited Partner, and delivering to the Partnership a counterpart signature page to the Partnership Agreement (attached hereto as Exhibit A ). The Partnership Agreement shall be amended from time to time as applicable to reflect the issuance to the Grantee of Award OPP Units pursuant to Section 3 hereof, whereupon the Grantee shall have all the rights of a Limited Partner of the Partnership with respect to the number of OPP Units then held by the Grantee, as set forth in the Partnership Agreement, subject, however, to the restrictions and conditions specified herein and in the Partnership Agreement.

(d) Status of OPP Units under the Stock Plan . Award OPP Units may, but need not, be issued as equity securities under the Stock Plan insofar as the Outperformance Plan has been established as an incentive program of the Partnership. The Company will have the right, as set forth in the Partnership Agreement, to issue shares of Common Stock in exchange for Units into which Award OPP Units may have been converted pursuant to the Partnership Agreement, subject to certain limitations set forth in the Partnership Agreement, and such shares of Common Stock may be issued under the Stock Plan if the Committee so determines. The Grantee must be eligible to receive the Award OPP Units in compliance with applicable federal and state securities laws and to that effect is required to complete, execute and deliver certain covenants, representations and warranties (attached as Exhibit B ). The Committee may, in its sole and absolute discretion, determine whether and when Award OPP Units issued pursuant to Section 3 hereof become part of the Stock Plan, and upon and to the extent of such determination this Award will be considered an award under the Stock Plan. The Grantee acknowledges that the Grantee will have no right to approve or disapprove such determination by the Committee.

(e) Legend . The records of the Partnership evidencing the Award OPP Units shall bear an appropriate legend, as determined by the Partnership in its sole discretion, to the effect that such OPP Units are subject to restrictions as set forth herein and in the Partnership Agreement.

(f) Compliance With Law . The Partnership and the Grantee will make reasonable efforts to comply with all applicable securities laws. In addition, notwithstanding any provision of this Agreement to the contrary, no OPP Units will become vested or be paid at a time that such vesting or payment would result in a violation of any such law.

(g) Investment Representation; Registration . The Grantee hereby makes the covenants, representations and warranties and set forth on Exhibit B attached hereto. All of such covenants, warranties and representations shall survive the execution and delivery of this Agreement by the Grantee. The Partnership will have no obligation to register under the Securities Act any OPP Units or any other securities issued pursuant to this Agreement or upon conversion or exchange of OPP Units.

(h) Section 83(b) Election . In connection with each separate issuance of OPP Units under this Award pursuant to Section 3 hereof the Grantee hereby agrees to make an election to include in gross income in the year of transfer the applicable Award OPP Units pursuant to Section 83(b) of the Code substantially in the form attached hereto as Exhibit C and to supply the necessary information in accordance with the regulations promulgated thereunder.

(i) Severability . In the event that one or more of the provisions of this Agreement may be invalidated for any reason by a court, any provision so invalidated will be deemed to be separable from the other provisions hereof, and the remaining provisions hereof will continue to be valid and fully enforceable.

(j) Governing Law . This Agreement is made under, and will be construed in accordance with, the laws of the State of New York, without giving effect to the principle of conflict of laws of such State.

(k) No Obligation to Continue Position as an Employee, Consultant or Advisor . Neither the Company nor any affiliate is obligated by or as a result of this Agreement to continue to have the Grantee as an employee, consultant or advisor and this Agreement shall not interfere in any way with the right of the Company or any affiliate to terminate the Grantee’s service relationship at any time.

(l) Notices . Notices hereunder shall be mailed or delivered to the Partnership at its principal place of business and shall be mailed or delivered to the Grantee at the address on file with the Partnership or, in either case, at such other address as one party may subsequently furnish to the other party in writing.

(m) Withholding and Taxes . No later than the date as of which an amount first becomes includible in the gross income of the Grantee for income tax purposes or subject to the Federal Insurance Contributions Act withholding with respect to this Award, the Grantee will pay to the Company or, if appropriate, any of its affiliates, or make arrangements satisfactory to the Committee regarding the payment of, any United States federal, state or local or foreign taxes of any kind required by law to be withheld with respect to such amount. The obligations of the Company under this Agreement will be conditional on such payment or arrangements, and the Company and its affiliates shall, to the extent permitted by law, have the right to deduct any such taxes from any payment otherwise due to the Grantee.

(n) Successors and Assigns . This Agreement shall be binding upon the Partnership’s successors and assigns, whether or not this Agreement is expressly assumed.

[signature page follows]

IN WITNESS WHEREOF, the undersigned have caused this Award Agreement to be executed as of the __ day of __________, 2006.

NORTHSTAR REALTY FINANCE CORP.

By:
	Name: Mark E. Chertok
	Title: Chief Financial Officer and Treasurer


NORTHSTAR REALTY FINANCE LIMITED PARTNERSHIP

By:	NorthStar Realty Finance Corp., its general partner

	By:
		Name: Mark E. Chertok Title: Chief Financial Officer and Treasurer


GRANTEE


Name:

EXHIBIT A

FORM OF LIMITED PARTNER SIGNATURE PAGE

The Grantee, desiring to become one of the within named Limited Partners of NorthStar Realty Finance Limited Partnership, hereby accepts all of the terms and conditions of (including, without limitation, the provisions of Section 2.4 titled “Power of Attorney”), and becomes a party to, the Agreement of Limited Partnership, dated as of October 19, 2004, of NorthStar Realty Finance Limited Partnership, as amended through the date hereof (the “ Partnership Agreement ”). The Grantee agrees that this signature page may be attached to any counterpart of the Partnership Agreement.

	Signature Line for Limited Partner: Name: ______________________ Date: __________ __, 2006 Address of Limited Partner: ________________________ ________________________

EXHIBIT B

GRANTEE’S COVENANTS, REPRESENTATIONS AND WARRANTIES

The Grantee hereby represents, warrants and covenants as follows:

(a) The Grantee has received and had an opportunity to review the following documents (the “ Background Documents ”):

(i) The Company’s latest Annual Report to Stockholders;

(ii) The Company’s Proxy Statement for its most recent Annual Meeting of Stockholders;

(iii) The Company’s Report on Form 10-K for the fiscal year most recently ended;

(iv) The Company’s Form 10-Q for the most recently ended quarter filed by the Company with the Securities and Exchange Commission since the filing of the Form 10-K described in clause (iii) above;

(v) Each of the Company’s Current Report(s) on Form 8-K, if any, filed since the end of the fiscal year most recently ended for which a Form 10-K has been filed by the Company;

(vi) The Partnership Agreement;

(vii) The Stock Plan; and

(viii) The Company’s Certificate of Incorporation, as amended.

The Grantee also acknowledges that any delivery of the Background Documents and other information relating to the Company and the Partnership prior to the determination by the Partnership of the suitability of the Grantee as a holder of OPP Units shall not constitute an offer of OPP Units until such determination of suitability shall be made.

(b) The Grantee hereby represents and warrants that

(i) The Grantee either (A) is an “accredited investor” as defined in Rule 501(a) under the Securities Act of 1933, as amended (the “ Securities Act ”), or (B) by reason of the business and financial experience of the Grantee, together with the business and financial experience of those persons, if any, retained by the Grantee to represent or advise him with respect to the grant to him or her of OPP Units, the potential conversion of OPP Units into Partnership Common Units of the Partnership and the potential redemption of such Partnership Common Units for shares of Common Stock (“ REIT Shares ”), has such knowledge, sophistication and experience in financial and business matters and in making investment decisions of this type that the Grantee (I) is capable of evaluating the merits and risks of an investment in the Partnership and potential investment in the Company and of making an informed investment decision, (II) is capable of protecting his own interest or has engaged representatives or advisors to assist him in protecting his interests, and (III) is capable of bearing the economic risk of such investment.

(ii) The Grantee understands that (A) the Grantee is responsible for consulting his own tax advisors with respect to the application of the U.S. federal income tax laws, and the tax laws of any state, local or other taxing jurisdiction to which the Grantee is or by reason of the award of OPP Units may become subject, to his particular situation; (B) the Grantee has not received or relied upon business or tax advice from the Company, the Partnership or any of their respective employees, agents, consultants or advisors, in their capacity as such; (C) the Grantee provides services to the Partnership on a regular basis and in such capacity has access to such information, and has such experience of and involvement in the business and operations of the Partnership, as the Grantee believes to be necessary and appropriate to make an informed decision to accept this Award of OPP Units; and (D) an investment in the Partnership and/or the Company involves substantial risks. The Grantee has been given the opportunity to make a thorough investigation of matters relevant to the OPP Units and has been furnished with, and has reviewed and understands, materials relating to the Partnership and the Company and their respective activities (including, but not limited to, the Background Documents). The Grantee has been afforded the opportunity to obtain any additional information (including any exhibits to the Background Documents) deemed necessary by the Grantee to verify the accuracy of information conveyed to the Grantee. The Grantee confirms that all documents, records, and books pertaining to his or her receipt of OPP Units which were requested by the Grantee have been made available or delivered to the Grantee. The Grantee has had an opportunity to ask questions of and receive answers from the Partnership and the Company, or from a person or persons acting on their behalf, concerning the terms and conditions of the OPP Units. The Grantee has relied upon, and is making its decision solely upon, the Background Documents and other written information provided to the Grantee by the Partnership or the Company.

(iii) The OPP Units to be issued, the Partnership Common Units issuable upon conversion of the OPP Units and any REIT Shares issued in connection with the redemption of any such Partnership Common Units will be acquired for the account of the Grantee for investment only and not with a current view to, or with any intention of, a distribution or resale thereof, in whole or in part, or the grant of any participation therein, without prejudice, however, to the Grantee’s right (subject to the terms of the OPP Units, the Stock Plan and this Agreement) at all times to sell or otherwise dispose of all or any part of his or her OPP Units, Partnership Common Units or REIT Shares in compliance with the Securities Act, and applicable state securities laws, and subject, nevertheless, to the disposition of his assets being at all times within his control.

(iv) The Grantee acknowledges that (A) neither the OPP Units to be issued, nor the Partnership Common Units issuable upon conversion of the OPP Units, have been registered under the Securities Act or state securities laws by reason of a specific exemption or exemptions from registration under the Securities Act and applicable state securities laws and, if such OPP Units or Partnership Common Units are represented by certificates, such certificates will bear a legend to such effect, (B) the reliance by the Partnership and the Company on such exemptions is predicated in part on the accuracy and completeness of the representations and warranties of the Grantee contained herein, (C) such OPP Units, or Partnership Common Units, therefore, cannot be resold unless registered under the Securities Act and applicable state securities laws, or unless an exemption from registration is available, (D) there is no public market for such OPP Units and Partnership Common Units and (E) neither the Partnership nor the Company has any obligation or intention to register such OPP Units or the Partnership Common Units issuable upon conversion of the OPP Units under the Securities Act or any state securities laws or to take any action that would make available any exemption from the registration requirements of such laws, except, that, upon the redemption of the Partnership Common Units for REIT Shares, the Company may issue such REIT Shares under the Stock Plan and pursuant to a Registration Statement on Form S-8 under the Securities Act, to the extent that (I) the Grantee is eligible to receive such REIT Shares under the Stock Plan at the time of such issuance, (II) the Company has filed a Form S-8 Registration Statement with the Securities and Exchange Commission registering the issuance of such REIT Shares and (III) such Form S-8 is effective at the time of the issuance of such REIT Shares. The Grantee hereby acknowledges that because of the restrictions on transfer or assignment of such OPP Units acquired hereby and the Partnership Common Units issuable upon conversion of the OPP Units which are set forth in the Partnership Agreement or this Agreement, the Grantee may have to bear the economic risk of his ownership of the OPP Units acquired hereby and the Partnership Common Units issuable upon conversion of the OPP Units for an indefinite period of time.

(v) The Grantee has determined that the OPP Units are a suitable investment for the Grantee.

(vi) No representations or warranties have been made to the Grantee by the Partnership or the Company, or any officer, director, shareholder, agent, or affiliate of any of them, and the Grantee has received no information relating to an investment in the Partnership or the OPP Units except the information specified in Paragraph (b) above.

(c) So long as the Grantee holds any OPP Units, the Grantee shall disclose to the Partnership in writing such information as may be reasonably requested with respect to ownership of OPP Units as the Partnership may deem reasonably necessary to ascertain and to establish compliance with provisions of the Code, applicable to the Partnership or to comply with requirements of any other appropriate taxing authority.

(d) The Grantee hereby agrees to make an election under Section 83(b) of the Code with respect to the OPP Units awarded hereunder, and has delivered with this Agreement a completed, executed copy of the election form attached hereto as Exhibit C . The Grantee agrees to file the election (or to permit the Partnership to file such election on the Grantee’s behalf) within thirty (30) days after the award of the OPP Units hereunder with the IRS Service Center at which such Grantee files his personal income tax returns, and to file a copy of such election with the Grantee’s U.S. federal income tax return for the taxable year in which the OPP Units are awarded to the Grantee.

(e) The address set forth on the signature page of this Agreement is the address of the Grantee’s principal residence, and the Grantee has no present intention of becoming a resident of any country, state or jurisdiction other than the country and state in which such residence is sited.

EXHIBIT C

ELECTION TO INCLUDE IN GROSS INCOME IN YEAR OF

TRANSFER OF PROPERTY PURSUANT TO SECTION 83(B)

OF THE INTERNAL REVENUE CODE

The undersigned hereby makes an election pursuant to Section 83(b) of the Internal Revenue Code with respect to the property described below and supplies the following information in accordance with the regulations promulgated thereunder:

The name, address and taxpayer identification number of the undersigned are:

Name: _____________________________ (the “ Taxpayer ”)

Address: _________________________________

_________________________________________

Social Security No./Taxpayer Identification No.: _________________

Description of property with respect to which the election is being made:

The election is being made with respect to ____________ OPP Units in NorthStar Realty Finance Limited Partnership (the “ Partnership ”).

The date on which the OPP Units were transferred is ________ __, 2006. The taxable year to which this election relates is calendar year 2006.

Nature of restrictions to which the OPP Units are subject:

(a)

With limited exceptions, until the OPP Units vest, the Taxpayer may not transfer in any manner any portion of the OPP Units without the consent of the Partnership.

(b)

The Taxpayer’s OPP Units vest in accordance with the vesting provisions described in the Schedule attached hereto. Unvested OPP Units are forfeited in accordance with the vesting provisions described in the Schedule attached hereto.

The fair market value at time of transfer (determined without regard to any restrictions other than restrictions which by their terms will never lapse) of the OPP Units with respect to which this election is being made was $0 per OPP Unit.

The amount paid by the Taxpayer for the OPP Units was $0 per OPP Unit.

A copy of this statement has been furnished to the Partnership and NorthStar Realty Finance Corp.

Dated: _____________________


		Name:

SCHEDULE A

Vesting Provisions of OPP Units

The OPP Units are subject to time-based and performance-based vesting with the final vesting percentage equaling the product of the time-based vesting percentage and the performance-based vesting percentage. Performance-based vesting will be from 0-100% based on NorthStar Realty Finance Corp.’s (the “Company’s”) per-share total return to shareholders for the period from January 1, 2006 to December 31, 2008 (or earlier in certain circumstances). Under the time-based vesting hurdles, fifty-percent (50%) of the OPP Units will vest on the last day of the performance period and twenty-five percent (25%) of the remaining OPP Units will vest on each of the first and second anniversaries thereof, provided that the Taxpayer remains an employee of the Company through such dates, subject to acceleration in the event of certain extraordinary transactions or termination of the Taxpayer’s service relationship with the Company under specified circumstances. Unvested OPP Units are subject to forfeiture in the event of failure to vest based on the passage of time or the determination of the performance-based percentage.

NORTHSTAR REALTY FINANCE LIMITED PARTNERSHIP

First Amendment to the

Agreement of Limited Partnership of NorthStar Realty Finance Limited Partnership

This Amendment is made as of March 14, 2006, by NORTHSTAR REALTY FINANCE CORP., a Maryland corporation, as general partner (the “ General Partner ”), of NORTHSTAR REALTY FINANCE LIMITED PARTNERSHIP, a Delaware limited partnership (the “ Partnership ”), for the purpose of further amending the Agreement of Limited Partnership of the Partnership dated October 19, 2004 (the “ Partnership Agreement ”). All capitalized terms used herein and not defined shall have the respective meanings ascribed to them in the Partnership Agreement.

WHEREAS, pursuant to Section 4.2 of the Partnership Agreement, the General Partner is establishing an additional series of LTIP Units, to be referred to as the “OPP Units” with the rights, preferences and privileges set forth in the Partnership Unit Designation attached hereto, to certain persons who provide services for the benefit of the Partnership (the “Grantees”).

NOW, THEREFORE, in consideration of the mutual covenants set forth herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the General Partner hereby amends the Partnership Agreement as follows:

1. Issuance of LTIP Units .

A. Pursuant to Section 4.2 of the Partnership Agreement, the Partnership may from time to time issue OPP Units to the Grantees in the respective amounts set forth on Schedule A hereto. The holder of any OPP Units shall have the benefits and obligations under the Partnership Agreement to which the holder of such a Limited Partner Interest may be entitled or obliged under the Partnership Agreement, as supplemented and amended by the rights, powers, privileges, restrictions, qualifications and limitations specified in Exhibit B to the Partnership Agreement as added by this Amendment.

B. The admission of the Grantees as Additional Limited Partners of the Partnership shall become effective as of the date of this Amendment, which shall also be the date upon which the names of the Grantees are recorded on the books and records of the Partnership, and Exhibit A to the Partnership Agreement is amended to reflect such admission.

2. Amendments to Partnership Agreement .

The General Partner, as general partner of the Partnership and as attorney-in-fact for its Limited Partners, hereby amends the Partnership Agreement as follows:

A. Article I of the Partnership Agreement is amended by inserting the following definitions in alphabetical order:

“ Liquidating Losses ” has the meaning set forth in Section 6.3(b) hereof.

“ LTIP Unit ” means a Partnership Unit which is designated as an LTIP Unit, with such further designation as the General Partner may assign to distinguish any series of LTIP Units from other series, and which has the rights, preferences and other privileges designated in Section 4.5 hereof, in any Partnership Unit Designation establishing an additional series of LTIP Units and elsewhere in this Agreement in respect of Holders of LTIP Units. The allocation of LTIP Units among the Partners shall be set forth on Exhibit A , as may be amended from time to time.

B. Section 6.3(b) of the Partnership Agreement is amended by replacing the existing text with the following:

E. Special Allocations Regarding LTIP Units . Notwithstanding the provisions of Section 6.2 above, but subject to the prior allocation of income, gain, deduction and loss under paragraph (a) above and to the terms of any Partnership Unit Designation in respect of any class of Partnership Interests ranking senior to the LTIP Units with respect to return of capital or any preferential or priority return, any Liquidating Gains shall first be allocated to the Holders of LTIP Units until the Economic Capital Account Balances of such Holders, to the extent attributable to their ownership of LTIP Units, are equal to (i) the Partnership Common Unit Economic Balance, multiplied by (ii) the number of their LTIP Units; provided that no such Liquidating Gains will be allocated with respect to any particular LTIP Unit unless and to the extent that such Liquidating Gains, when aggregated with other Liquidating Gains realized since the issuance of such LTIP Unit, exceed Liquidating Losses realized since the issuance of such LTIP Unit. Notwithstanding the provisions of Section 6.2 above, but subject to the prior allocation of income, gain, deduction and loss under paragraph (a) above and to the terms of any Partnership Unit Designation in respect of any class of Partnership Interests ranking senior to the LTIP Units with respect to return of capital or any preferential or priority return, in the event that, due to distributions with respect to Common Units in which the LTIP Units do not participate or otherwise, the Economic Capital Account Balance of any present or former Holder of LTIP Units, to the extent attributable to the Holder’s ownership of LTIP Units, exceeds the target balance specified above, then Liquidating Losses shall be allocated to such Holder to the extent necessary to reduce or eliminate the disparity. In the event that Liquidating Gains or Liquidating Losses are allocated under this Section 6.3(b), Net Income and Net Loss shall be recomputed without regard to the Liquidating Gains or Liquidating Losses so allocated (subject to any prior allocation of Net Income or Net Loss otherwise provided for). For this purpose, “ Liquidating Gains ” means any net capital gain realized in connection with the actual or hypothetical sale of all or substantially all of the assets of the Partnership, including but not limited to net capital gain realized in connection with an adjustment to the Gross Asset Value of Partnership Assets under paragraph (b) of the definition of “Gross Asset Value.” Similarly, “ Liquidating Losses ” means any net capital loss realized in connection with any such event. The “ Economic Capital Account Balances ” of the Holders of LTIP Units will be equal to their Capital Account balances, plus the amount of their shares of any Partner Minimum Gain or Partnership Minimum Gain, in either case to the extent attributable to their ownership of LTIP Units. Similarly, the “ Partnership Common Unit Economic Balance ” shall mean (i) the Capital Account balance of the General Partner, plus the amount of the General Partner’s share of any Partner Minimum Gain or Partnership Minimum Gain, in either case to the extent attributable to the General Partner’s ownership of Partnership Common Units and computed on a hypothetical basis after taking into account all allocations through the date on which any allocation is made under this Section 6.3(b), divided by (ii) the number of the General Partner’s Partnership Common Units. Any such allocations shall be made among the holders of LTIP Units in proportion to the amounts required to be allocated to each under this Section 6.3(b). The parties agree that the intent of this Section 6.3(b) is to make the Capital Account balance associated with each LTIP Unit economically equivalent to the Capital Account balance associated with the General Partner’s Partnership Common Units (on a per-unit basis), but only if and to the extent that the Partnership has recognized cumulative net gains with respect to its assets since the issuance of the relevant LTIP Unit.

C. Section 6.3(c) of the Partnership Agreement is hereby amended by inserting the following new paragraph (viii), renumbering the existing paragraph (viii) as paragraph (ix), and revising the first phrase of paragraph (ix) as follows:

(viii) Forfeiture Allocations . Upon a forfeiture of any unvested Partnership Interest by any Partner, gross items of income, gain, loss or deduction shall be allocated to such Partner if and to the extent required by final Treasury Regulations promulgated after January 1, 2006 to ensure that allocations made with respect to all unvested Partnership Interests are recognized under Code Section 704(b).

(ix) Curative Allocations . The allocations set forth in Sections 6.3(c)(i) through (viii) above (the “Regulatory Allocations”) are intended [balance of section unchanged]

D. Section 10.2 of the Partnership Agreement is amended by designating the existing text of Section 10.2 as paragraph (a), and by appending the following new paragraph (b):

(b) To the extent provided for in Treasury Regulations, revenue rulings, revenue procedures and/or other IRS guidance issued after the date hereof, the Partnership is hereby authorized to, and at the direction of the General Partner shall, elect a safe harbor under which the fair market value of any Partnership Interests issued after the effective date of such Treasury Regulations (or other guidance) will be treated as equal to the liquidation value of such Partnership Interests (i.e., a value equal to the total amount that would be distributed with respect to such interests if the Partnership sold all of its assets for their fair market value immediately after the issuance of such Partnership Interests, satisfied its liabilities (excluding any non-recourse liabilities to the extent the balance of such liabilities exceeds the fair market value of the assets that secure them) and distributed the net proceeds to the Partners under the terms of this Agreement). In the event that the Partnership makes a safe harbor election as described in the preceding sentence, each Partner hereby agrees to comply with all safe harbor requirements with respect to transfers of such Partnership Interests while the safe harbor election remains effective.

E. The Partnership Agreement is hereby amended by appending Exhibit B to this Amendment as Exhibit B to the Partnership Agreement.

3.	Continuation of Partnership Agreement .

The Partnership Agreement and this Amendment shall be read together and shall have the same force and effect as if the provisions of the Partnership Agreement and this Amendment (including Exhibit B hereto) were contained in one document. Any provisions of the Partnership Agreement not amended by this Amendment shall remain in full force and effect as provided in the Partnership Agreement immediately prior to the date hereof.

[ Remainder of page intentionally blank ]

IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the Partnership Agreement as of the 14th day of March 2006.


	GENERAL PARTNER
	NORTHSTAR REALTY FINANCE CORP.

	By:	/s/ Mark E. Chertok
		Name: Mark E. Chertok
		Title: Chief Financial Officer and Treasurer

	GRANTEES:

	*Individual Counterpart Signature Pages Attached.

[Signature Page to Amendment to the Partnership Agreement]

Schedule A to First Amendment to Partnership Agreement

Name and Address	Number of OPP Units

EXHIBIT B

NORTHSTAR REALTY FINANCE LIMITED PARTNERSHIP

PARTNERSHIP UNIT DESIGNATION - OPP UNITS

The following are the terms of the OPP Units:

1. LTIP Equivalence . Except as otherwise expressly provided in this Partnership Unit Designation, OPP Units shall be treated as LTIP Units, and shall have the rights, privileges, restrictions, powers and duties applicable to LTIP Units under the Agreement, including without limitation the provisions of Section 4.5 of the Agreement.

2.	Distributions .

A. OPP Distributions . Commencing from the Distribution Participation Date (as defined below) established for any OPP Units, Holders of such OPP Units shall be entitled to receive, if, when and as authorized by the General Partner, any distributions otherwise payable with respect to LTIP Units and shall be treated as outstanding LTIP Units for purposes of the distribution provisions of the Agreement. For the avoidance of doubt, for purposes of the first distribution to occur after the Distribution Participation Date, OPP Units issued on or before the relevant quarterly period shall be treated as having been outstanding for the full period. Prior to the Distribution Participation Date, OPP Units shall be entitled to any distributions by the Partnership (i) in connection with an Adjustment Event as provided in Section 4.5(b) of the Agreement, treating the OPP Units as outstanding LTIP Units, and (ii) if, when and as authorized by the General Partner out of funds or other property legally available for the payment of distributions, distributions representing proceeds of a sale or other disposition of all or substantially all of the assets of the Partnership in an amount per unit equal to the amount of any such distributions payable on the Partnership Common Units, provided that the amount of distributions to any Holder of OPP Units under this clause (ii) shall not exceed the positive balances of the Capital Account of the Holders of such OPP Units to the extent attributable to the ownership of such OPP Units.

B. Distribution Participation Date . The “ Distribution Participation Date ” for each OPP Unit will be either (i) with respect to OPP Units granted pursuant to the General Partner’s 2006 Outperformance Plan, as it may be amended or supplemented from time to time or any successor plan under which additional OPP Units may be issued (the “ Plan ”), the applicable Valuation Date (as defined in the Award Agreement of each Person granted OPP Units under the Plan) or (ii) with respect to other OPP Units, such date as may be specified in the Award Agreement or other documentation pursuant to which such OPP Units are issued.

3.	Allocations .

A. Allocations of Net Income and Net Loss . Commencing with the portion of the taxable year of the Partnership that begins on the Distribution Participation Date established for any OPP Units, such OPP Units shall be allocated Net Income and Net Loss under Section 6.2 in amounts per OPP Unit equal to the amounts allocated per Partnership Common Unit (adjusted to the extent required by any Regulatory Allocations or any curative allocations under Section 6.3(c)(ix)). The General Partner is authorized in its discretion to delay or accelerate the participation of the OPP Units in allocations of Net Income and Net Loss, or to adjust the allocations made after the Distribution Participation Date, so that the ratio of (i) the total amount of Net Income or Net Loss allocated under Section 6.2 with respect to each OPP Unit in the taxable year in which that OPP Unit’s Distribution Participation Date falls, to (ii) the total amount distributed to that OPP Unit with respect to such period, is more nearly equal to such ratio as computed for the Partnership Common Units held by the General Partner.

B. Special Allocations . OPP Units shall be treated as outstanding LTIP Units (and the Holders thereof treated as Holders of LTIP Units) for all purposes of Section 6.3(b).

4.	Voting Rights .

A. Voting with LTIP Units . Except as otherwise provided herein, OPP Units and Partners who hold OPP Units shall be treated as LTIP Units and LTIP Unitholders, respectively, for all purposes of Section 14.4.

B. Special Approval Rights . So long as any OPP Units remain outstanding, the Partnership shall not, without the affirmative vote of the Partners who hold at least a majority of the OPP Units outstanding at the time, given in person or by proxy, either in writing or at a meeting (voting separately as a class), amend, alter or repeal, whether by merger, consolidation or otherwise, the provisions of the Partnership Agreement applicable to OPP Units so as to materially and adversely affect any right, privilege or voting power of the OPP Units or the Partners who hold OPP Units as such, unless such amendment, alteration or repeal affects equally, ratably and proportionately the rights, privileges and powers of the holders of LTIP Units; but subject, in any case, to the following provisions:

(i)

Any difference in effect between the LTIP Units and the OPP Units that is required or reasonably desirable to implement the difference in the distribution rights with respect to LTIP Units and OPP Units shall not be deemed to have an effect that is not equal, ratable or proportionate to the effect on the holders of LTIP Units;

(ii)

Any creation or issuance of any Partnership Units or of any class or series of Partnership Interest, whether ranking senior to, junior to, or on a parity with the OPP Units with respect to distributions and the distribution of assets upon liquidation, dissolution or winding up shall not be deemed to have an effect that is not equal, ratable or proportionate to the effect on the holders of LTIP Units; and

(iii)

any waiver by the Partnership of restrictions or limitations applicable to any outstanding LTIP Units or OPP Units with respect to any Unitholder or Unitholders shall not be deemed to materially and adversely alter, change, modify or amend the rights, powers or privileges of the LTIP Units or OPP Units with respect to other Unitholders

[End of Text]

EXECUTIVE EMPLOYMENT AGREEMENT

This Executive Employment Agreement (the “ Agreement ”) by and between Richard J. McCready (“ Executive ”) and NorthStar Realty Finance Corp. (the “ Company ”), is dated as of March 14, 2006 (the “ Effective Date ”).

WHEREAS, Executive and the Company desire to memorialize the terms and conditions related to Executive’s employment by the Company.

NOW THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

1. Agreements Between the Parties . This Agreement is intended to memorialize all of the terms and conditions of Executive’s employment by the Company.

2. Employment .

(a) Term . The Company shall employ Executive, and Executive agrees to be employed with the Company, upon the terms and conditions set forth in this Agreement, for the period beginning on the Effective Date and ending on the third anniversary of the Effective Date (the “ Employment Period ”); provided , however , that commencing on the third anniversary of the Effective Date and on each subsequent anniversary of the Effective Date (each such anniversary, a “ Renewal Date ”), the Employment Period shall automatically be extended for one additional year unless, not later than 90 days prior to such Renewal Date, the Company or Executive shall have given written notice not to extend the Employment Period; provided , further , however, that the Employment Period shall be subject to earlier termination as provided in Section 5(b) hereof (the “ Term ”).

(b) Base Salary . Executive’s initial base salary shall be $150,000 per annum (pro-rated for partial calendar years), payable in equal bi-monthly installments (as in effect from time to time, the “ Base Salary ”). In subsequent years of the Term, the Base Salary shall be subject to annual review and adjustment from time to time by the compensation committee of the Company’s board of directors (the “ Compensation Committee ”), taking into account such factors as the Compensation Committee deems appropriate, including but not limited to the amount of Executive’s business time devoted to the affairs of the Company and the salaries of executive o fficers having similar titles and performing similar functions as Executive at comparable companies

(c) Annual Cash Bonus . For fiscal years during the Executive’s employment with the Company, Executive shall participate in an annual cash incentive compensation plan as adopted and approved by the board of directors of the Company (the “ Board ”) from time to time, with applicable corporate and individual performance targets and maximum award amounts determined by the Board (the “ Annual Cash Bonus ”). The initial target amount of the Annual Cash Bonus shall be 100% of Executive’s Base Salary, but the actual Annual Cash Bonus amount shall be determined by the Board, in its discretion, subject to approval of the Compensation Committee. Any Annual Cash Bonus payable to Executive will be paid at the time the Company normally pays such bonuses to its senior executives, but in no event later than 90 days following the end of the applicable fiscal year, and will be subject to the terms and conditions of the applicable annual cash incentive compensation plan.

(d) Long Term Incentive Plan . During Executive’s employment with the Company, Executive shall be eligible to receive long term equity incentive compensation awards (which may consist of restricted stock, stock options, stock appreciation rights or other types of equity or cash bonus awards, as determined by the Board in its discretion) pursuant to the Company’s equity incentive compensation plans and programs in effect from time to time including, without limitation, the Company’s 2004 Omnibus Stock Incentive Plan, the 2004 Long-Term Incentive Bonus Plan and the 2006 Outperformance Plan . These awards shall be granted in the discretion of the Board and shall include such terms and conditions (including performance objectives) as the Board deems appropriate.

(e) Vacation . Executive shall be eligible for up to four weeks of annual vacation to be accrued and payable in accordance with the Company’s policy with respect to senior executives.

(f) Other Benefits . In addition, Executive will be eligible to participate in all fringe benefit plans and retirement plans of the Company, as are generally available to the other senior management employees of the Company, such as health insurance plans, disability insurance plans, life insurance plans, expense reimbursement and the Company’s 401(k) retirement plan.

3. Duties of Executive .

(a) Duties of Position . During the Employment Period, Executive shall serve as Executive Vice President, General Counsel and Secretary of the Company. Notwithstanding the foregoing, Executive’s title(s) may be modified by the Chief Executive Officer, provided that in the event of any such modification Executive’s new title(s), duties and authority shall be consistent with those of a senior executive officer of the Company at such time, and Executive shall, in any event, report directly to the Chief Executive Officer or Board of Directors. Executive’s duties shall include, without limitation, such duties and responsibilities, consistent with Executive’s title (as may be modified from time to time in accordance with this Agreement), training and experience, as are from time to time reasonably assigned to Executive by the Board or the Company’s Chief Executive Officer. Executive agrees to devote not less than a majority of Executive’s business time, attention and energies to the performance of the duties assigned to Executive hereunder, and to perform such duties faithfully, diligently and to the best of Executive’s abilities and subject to such laws, rules, regulations and policies from time to time applicable to the Company’s employees. Notwithstanding the above, nothing in this Agreement shall preclude Executive from devoting a portion of Executive’s business time, attention and energies to the performance of Executive’s duties as President and Chief Operating Officer of NorthStar Capital Investment Corp. and other business endeavors. The Company may assign all or a portion of its rights and obligations under this agreement to any of its affiliates or enter into an agreement with any of its affiliates that provides that Executive will perform services on behalf of such affiliate and Executive agrees to provide such services, as directed by the Company.

(b) Confidential Information . Executive shall hold in confidence for the benefit of the Company all of the information (other than information concerning corporate opportunities ) and business secrets in respect of the Company and all of its affiliates, including, but not limited to, all information and data relating to or concerned with the business, finances, pending transactions and other affairs of the Company and all of its affiliates, and Executive shall not at any time before or after Executive’s employment by the Company is terminated for any reason, or Executive resigns for any reason, willfully use or disclose or divulge any such information or data to any other Person (as defined below) except (i) with the prior written consent of the Company, (ii) to the extent necessary to comply with applicable law or the valid order of a court of competent jurisdiction, in which event Executive shall notify the Company as promptly as reasonably practicable (and, if possible, prior to making such disclosure) and (iii) in the performance of Executive’s duties hereunder. With respect to information concerning corporate opportunities of the Company and all of its affiliates that are developed, initiated or become known to Executive during his employment with the Company, Executive shall hold in confidence for the benefit of the Company all of such information in respect of the Company and all of its affiliates, including, but not limited to, all information and data relating to or concerned with such opportunities of the Company and all of its affiliates, and Executive shall not at any time before or within one year after Executive’s employment by the Company is terminated for any reason, or Executive resigns for any reason, willfully use or disclose or divulge any information relating to any such corporate opportunities to or for the benefit of the Executive or any other Person (as defined below) except (i) with the prior written consent of the Company, (ii) to the extent necessary to comply with applicable law or the valid order of a court of competent jurisdiction, in which event Executive shall notify the Company as promptly as reasonably practicable (and, if possible, prior to making such disclosure) and (iii) in the performance of Executive’s duties hereunder. The foregoing provisions of this Section 3(b) shall not apply to any information or data which has been previously disclosed to the public or is otherwise in the public domain in each case other than as a result of the breach by Executive of his obligations under this Section 3(b). For purposes of this Agreement, “ Person ” means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization, other entity or “group” (as defined in the Securities Exchange Act of 1934).

4. Termination of Employment . Executive’s employment hereunder may be terminated in accordance with this Section 4.

(a) Death . Executive’s employment hereunder shall terminate upon his death.

(b) Disability . If, as a result of Executive’s incapacity due to physical or mental illness, Executive shall have been absent from the full-time performance of his duties hereunder for the entire period of six consecutive months, and within 30 days after written Notice of Termination (as defined in Section 8) is given shall not have returned to the performance of his duties hereunder on a full-time basis, the Company may terminate Executive’s employment hereunder for “ Disability .”

(c) Cause . The Company may terminate Executive’s employment hereunder for Cause. For purposes of this Agreement, the Company shall have “ Cause ” to terminate Executive’s employment hereunder upon the occurrence of any of the following events:

(i) the conviction of Executive for the commission of a felony;

(ii) continuing willful failure for 10 business days to substantially perform his duties hereunder in a manner consistent (other than such failure resulting from Executive’s incapacity due to physical or mental illness or subsequent to the issuance of a Notice of Termination by Executive for Good Reason) after demand for substantial performance is delivered by the Company in writing that specifically identifies the manner in which the Company believes Executive has not substantially performed his duties; or

(iii) misconduct by Executive (including, but not limited to, breach by Executive of the provisions of Section 7) that is demonstrably and materially injurious to the Company or its subsidiaries, whether monetarily or ot herwise.

(d) Good Reason . Executive may terminate his employment hereunder for “ Good Reason ” within 30 days after the occurrence, without his written consent, of one of the following events that has not been cured within 10 business days after written notice thereof has been given by Executive to the Company:

(i) the assignment to Executive of a title or duties that are materially inconsistent with his status as a senior executive officer of the Company, or if Executive is directed to directly report to other than the Board or the Company’s Chief Executive Officer;

(ii) a reduction by the Company in Executive’s Base Salary or a failure by the Company to pay any Base Salary or contractually committed cash bonus payment amounts when due;

(iii) following a Change of Control (as defined below) of the Company, the requirement by the Company that the principal place of performance of Executive’s services be at a location more than fifty (50) miles from the greater New York City metropolitan area;

(iv) any purported termination of Executive’s employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Section 5(a);

(v) a material failure by the Company to comply with any other material provision of this Agreement.

(e) Change of Control . For the purposes of Section 4(d) above, a “ Change of Control ” of the Company shall be deemed to have occurred if an event set forth in any one of the following paragraphs (i)-(iii) shall have occurred:

(i) any Person is or becomes Beneficial Owner (as defined below), directly or indirectly, of securities of the Company representing thirty-five percent (35%) or more of the combined voting power of the then outstanding securities of the Company, excluding (A) any Person who becomes such a Beneficial Owner in connection with a transaction described in clause (x) of paragraph (ii) below, (B) any Person who becomes such a Beneficial Owner through the issuance of such securities with respect to purchases made directly from the Company, and (C) NorthStar Capital Investment Corp. (“ NCIC ”) and its controlled affiliates; or

(ii) the consummation of a merger or consolidation of the Company with any other corporation or the issuance of voting securities of the Company in connection with a merger or consolidation of the Company (or any direct or indirect subsidiary of the Company) pursuant to applicable stock exchange requirements, other than (x) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) fifty percent (50%) or more of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (y) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person, other than NCIC together with its controlled affiliates, is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing thirty-five percent (35%) or more of the combined voting power of the then outstanding securities of the Company; or

(iii) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the assets of the Company.

For purposes of this Agreement, “ Beneficial Owner ” shall have the meaning set forth in Rule 13d-3 under the Exchange Act.

(f) The Company may terminate Executive’s employment at any time for any reason, including without Cause.

5. Termination Procedure .

(a) Notice of Termination . Any termination of Executive’s employment by the Company or by Executive (other than termination pursuant to Section 6(a) hereof) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 12. For purposes of this Agreement, a “ Notice of Termination ” shall mean a notice that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive’s employment under the provision so indicated.

(b) Effect of Date of Termination . “ Date of Termination ” of this Agreement shall mean (i) if the Term of this Agreement expires without renewal as of the third anniversary of the Effective Date or any subsequent Renewal Date, the date of such expiration (ii) if Executive’s employment is terminated pursuant to Section 4(a) above, the date of Executive’s death (iii) if the Executive’s employment is terminated pursuant to Section 4(b) above, 30 days after delivery to the Executive of Notice of Termination (provided that Executive shall not have returned to the performance of his duties on a full-time basis during such 30 day period), (iv) if Executive’s employment is terminated pursuant to Sections 4(c) and 4(f) above, the date specified in the Notice of Termination, and (v) if Executive’s employment is terminated pursuant to Section 4(d) above, the date on which a Notice of Termination is given or any later date (within 30 days) set forth in such Notice of Termination, provided , however , that, if within 30 days after any Notice of Termination is given pursuant to Section 4(d)(iii) above, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the Date of Termination shall be the date on which the dispute is finally determined, either by mutual written agreement of the parties, by a binding and final arbitration award or by a final judgment, order or decree of a court of competent jurisdiction (the time for appeal therefrom having expired and no appeal having been perfected). Upon the Date of Termination, the Term of this Agreement shall expire and the Company shall have no further obligation to the Executive except to the extent the Executive is otherwise entitled to any unpaid salary or benefits hereunder and insurance coverage in accordance with applicable law; provided that the provisions set forth in Sections 3(b), 6(b), 6(c), 7, and 14 hereof and this Section 5(b) shall remain in full force and effect after the termination of the Executive’s employment, notwithstanding the expiration of the Term of or termination of this Agreement.

6. Obligations of the Company Upon Termination of Employment .

(a) Expiration of Term, By the Company for Cause or by Executive without Good Reason. If Executive’s employment shall be terminated:

(i) due to and upon expiration of the Term of this Agreement the Company shall pay Executive his full salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and an amount equal to the product of (x) all bonuses and awards that would have been earned by Executive upon completion of each award cycle that began during the Term but had not been completed as of the Date of Termination, calculated as though the full achievement of all goals and targets relating thereto had been achieved in full and (y) a fraction, the numerator of which shall be the number of days from the beginning of the applicable bonus or award cycle to and including the Date of Termination and the denominator of which shall be the number of days in such cycle; or

(ii) if Executive’s employment shall be terminated by the Company for Cause or by Executive without Good Reason, then the Company shall pay Executive his Base Salary (at the rate in effect at the time Notice of Termination is given) through the Date of Termination, and the Company shall have no additional obligations to Executive under this Agreement.

(b) For any other reason . If Executive’s employment shall be terminated for any reason other than those provided in Section 6(a) above, then:

(i) the Company shall pay Executive his full salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, and an amount equal to the product of (x) all bonuses and awards that would have been earned by Executive upon completion of each award cycle that began during the Term but had not been completed as of the Date of Termination, calculated as though the full achievement of all goals and targets relating thereto had been achieved in full and (y) a fraction, the numerator of which shall be the number of days from the beginning of the applic able bonus or award cycle to and including the Date of Termination and the denominator of which shall be the number of days in such cycle; and

(ii) in lieu of paying any further compensation to Executive for periods subsequent to the Date of Termination, the Company shall pay to the Executive severance payments in the form of continuation of Executive’s Base Salary in effect as of the Date of Termination for a period of two years following such Date of Termination (the “ Severance Payment Period ”).

(i) If any of the payments or benefits received or to be received by Executive, whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with the Company are deemed by the Auditor (as defined below), the Company’s tax counsel (“ Tax Counsel ”) or the Internal Revenue Services to constitute an excess parachute payment under Section 280(G) of the Internal Revenue Code of 1986, as amended (the “ Code ”) (all such payments and benefits, excluding the Gross-Up Payment (which is defined below), being hereinafter referred to as the “ Total Payments ”), the Company shall pay to Executive an additional amount (the “ Gross-Up Payment ”) such that the net amount retained by Executive, after deduction of any total excise tax, together with all applicable interest and penalties (collectively, the “ Excise Tax ”) Tax on the Total Payments and any federal, state and local income and employment taxes and Excise Tax upon the Gross-Up Payment, shall be equal to the Total Payments.

(ii) For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) all of the Total Payments shall be treated as “parachute payments” (within the meaning of section 280G(b)(2) of the Code) unless, in the opinion of Tax Counsel reasonably acceptable to Executive and selected by the accounting firm which was, immediately prior to the change in control, the Company’s independent auditor (the “ Auditor ”), such payments or benefits (in whole or in part) do not constitute parachute payments, including by reason of section 280G(b)(4)(A) of the Code, (ii) all “excess parachute payments” within the meaning of section 280G(b)(l) of the Code shall be treated as subject to the Excise Tax unless, in the opinion of Tax Counsel, such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered (within the meaning of section 280G(b)(4)(B) of the Code) in excess of the base amount allocable to such reasonable compensation, or are otherwise not subject to the Excise Tax, and (iii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Auditor in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay federal income tax at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Executive’s residence on the Date of Termination (or if there is no Date of Termination, then the date on which the Gross-Up Payment is calculated for purposes of this Section 6(b)), net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. If there has not been a Date of Termination with respect to Executive, the Company shall cause the Gross-Up Payment to be calculated within 30 days of a written request to that effect from Executive.

(iii) Executive and the Company shall each reasonably cooperate with the other in connection with any administrative or judicial proceedings concerning the existence or amount of liability for Excise Tax with respect to the Total Payments.

(iv) The payments provided in this Section 6(c) shall be made not later than the fifth day following the Date of Termination (or if there is no Date of Termination, then the fifth day following date on which the Gross-Up Payment is calculated for purposes of Section 6(c), provided , however , that if the amounts of such payments cannot be finally determined on or before such day, the Company shall pay to Executive on such day an estimate, as determined in good faith by the Company, in accordance with Section 6(b), of the minimum amount of such payments to which Executive is clearly entitled and shall pay the remainder of such payments (together with interest on the unpaid remainder) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the occurrence of a Date of Termination. At the time that payments are made under this Agreement, the Company shall provide Executive with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice the Company has received from Tax Counsel, the Auditor or other advisors or consultants (and any such opinions or advice which are in writing shall be attached to the statement).

7. Non-Solicitation and Business Relationships . Executive agrees that during Executive’s employment by the Company and for one year following the Executive’s Date of Termination ( the “ Non-Solicitation Period ”), Executive shall not, directly or indirectly, (i) solicit, induce, or attempt to solicit or induce any officer, director, employee , consultant, agent or joint venture partner of the Company or any of its affiliates to terminate his, her or its employment or other relationship with the Company or any of its affiliates for the purpose of associating with any competitor of any the Company or any of its affiliates, or otherwise encourage any such person to leave or sever his, her or its employment or other relationship with the Company or any of its affiliates for any other reason , or authorize the taking of such actions by any other person or entity, or assist or participate with any such person or entity in taking such action.

8. Confidentiality . Each party to this Agreement shall keep strictly confidential the terms of this Agreement, provided, that (i) either party to this Agreement may disclose the terms of this Agreement with the prior written consent of the other party, (ii) either party to this Agreement may disclose the terms of this Agreement to the extent necessary to comply with law or legal process, in which event the disclosing party shall notify the other party to this Agreement as promptly as practicable (and, if possible, prior to making such disclosure), (iii) either party to this Agreement may disclose the terms of this Agreement to outside counsel, underwriters and accountants and (iv) the Company may disclose the terms of this Agreement in public filings with the Securities and Exchange Commission or other regulatory agencies, without notice to Executive, to the extent that it believes such disclosure to be prudent, necessary or required by applicable law in connection with the operation of the business of the Company and shall have the right to file a copy of this Agreement with such regulating agencies, it being understood that if this Agreement is so disclosed or filed, Executive shall thereafter be released from his obligation in respect of this Section 8.

9. No Waiver . No failure or delay on the part of the Company or Executive in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to the Company or Executive at law or in equity. No waiver of or consent to any departure by either the Company or Executive from any provision of this Agreement shall be effective unless signed in writing by the party entitled to the benefit thereof. No amendment, modification or termination of any provision of this Agreement shall be effective unless signed in writing by all parties hereto. Any waiver of any provision of this Agreement, and any consent to any departure from the terms of any provision of this Agreement, shall be effective only in the specific instance and for the specific purpose for which made or given.

10. Severability of Provisions . Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. Moreover, if any one or more of the provisions contained in this Agreement shall be held to be excessively broad as to duration, activity or subject, such provision shall be construed by limiting and reducing it so as to be enforceable to the maximum extent allowed by applicable law.

11. Non-Assignability . The rights and obligations of Executive under this Agreement are personal to Executive and may not be assigned or delegated to any other Person; provided, however, that nothing in this Agreement shall preclude Executive from designating any of his beneficiaries to receive any benefits payable hereunder upon his death, or his executors, administrators or other legal representatives from assigning any rights hereunder to the person or persons entitled thereto.

12. Notices . Any notice given hereunder shall be in writing and shall be deemed to have been given when delivered by messenger or courier service (against appropriate receipt), or mailed by registered or certified mail (return receipt requested), addressed as follows:

	If to the Company:	NorthStar Realty Finance Corp. 527 Madison Avenue, 16 ^th Floor New York, NY 10022 Attention: Chief Executive Officer

	If to Executive:	Richard J. McCready 527 Madison Avenue, 16 ^th Floor New York, NY 10022

or at such other address as shall be indicated to the parties hereto in writing. Notice of change of address shall be effective only upon receipt.

13. Governing Law . This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York applicable to contracts made and to be entirely performed within such State.

14. Dispute Resolution :

(a) Subject to the provisions of Section 14(b), any dispute, contr oversy or claim arising between the parties relating to this Agreement, or otherwise relating in any way to Executive’s employment by or interest in the Company or any of its affiliate (whether such dispute arises under any federal, state or local statute or regulation, or at common law), shall be resolved by final and binding arbitration before a single arbitrator, selected by the American Arbitration Association in accordance with its rules pertaining at the time the dispute arises. In such arbitration proceedings, the arbitrator shall have the discretion, to be exercised in accordance with applicable law, to allocate among the parties the arbitrator’s fees, tribunal and other administrative and litigation costs and, to the prevailing party, attorneys’ fees. The award of the arbitrator may be confirmed before and entered as a judgment of any court having jurisdiction over the parties.

(b) The provisions of Section 14(a) shall not apply with respect to any application made by the Company for injunctive relief under this Agreement.

15. Headings . The paragraph headings used or contained in this Agreement are for convenience of reference only and shall not affect the construction of this Agreement.

16. Entire Agreement . This Agreement and any agreements executed contemporaneously herewith constitute the entire agreement between the parties with respect to the matters set forth herein, and there are no promises or undertakings with respect thereto relative to the subject matter hereof not expressly set forth or referred to herein or therein.

17. Execution in Counterparts . This Agreement may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same Agreement.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement.

/s/ Richard J. McCready

Richard J. McCready

NORTHSTAR REALTY FINANCE CORP.

By: /s/ David T. Hamamoto

David T. Hamamoto

Chief Executive Officer

Exhibit 12.1

NorthStar Realty Finance Corp . Computation of Ratio of Assets-to-Equity

At December 31, 2005
Assets	$	1,153,439,000
Stockholders' Equity	$	248,425,000
Ratio of Assets-to-Equity		4.6:1
or		4.6x

Exhibit 21.1

List of Subsidiaries of NorthStar Realty Finance Corp .

SUBSIDIARY	JURISDICTION OF INCORPORATION OR ORGANIZATION

NorthStar Realty Finance Limited	Delaware
Partnership

NRFC Sub-REIT Corp.	Maryland

ALGM I Owners LLC	Delaware

ALGM I LLC	Delaware

NS Advisors LLC	Delaware

NS CDO Holdings I, LLC	Delaware

N-Star Real Estate CDO I Ltd.	Cayman Islands

NS CDO Holdings II, LLC	Delaware

NS CDO Holdings III, LLC	Delaware

N-Star Real Estate CDO II Ltd.	Cayman Islands

N-Star Real Estate CDO III Ltd.	Cayman Islands

NRFC DB Holdings LLC	Delaware

NRFC NNN Holdings LLC	Delaware

NRFC Sub Investor WASH Equity IV LLC	Delaware

NRFC Sub Investor IV LLC	Delaware

NS CDO Ordinary Shares II, LLC	Delaware

Northstar OS II, LLC	Delaware

NorthStar OS III, LLC	Delaware

NorthStar OS IV, LLC	Delaware

NorthStar OS V, LLC	Delaware

N-Star Real Estate CDO V Ltd	Cayman Islands

NS CDO Holdings IV, LLC	Delaware

NS CDO Holdings V, LLC	Delaware

NRFC Sub Investor II LLC	Delaware

NRFC WA Holdings, LLC	Delaware

N-Star REL CDO IV Ltd	Cayman Islands

NRFC WA Holdings II, LLC	Delaware

NRFC Edison Holdings, LLC	Delaware

NRFC CINN Investor LLC	Delaware

NRFC CS/Federal Drive LLC	Delaware

CS/Federal Drive LLC	Delaware

Edison Rancho Cordova LLC	Delaware

Edison Auburn Hills 1080 LLC	Delaware

Edison Auburn Hills 985 LLC	Delaware

Edison Camp Hill LLC	Delaware

Northstar Mortgage Capital LP, LLC	Delaware

Northstar Mortgage Capital GP, LLC	Delaware

NRF Capital LP	Delaware

NS Servicing LLC	Delaware

Northstar Realty Finance Trust I	Delaware

Northstar Realty Finance Trust II	Delaware

Northstar Realty Finance Trust III	Delaware

Northstar Realty Finance Trust IV	Delaware

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLICACCOUNTING FIRM

We have issued our report dated March 7, 2006, accompanying the 2005 consolidated financial statements and schedule, and management’s assessment of the effectiveness of internal control over financial reporting included in the Annual Report of NorthStar Realty Finance Corp. and subsidiaries on Form 10-K for the year ended December 31, 2005. We hereby consent to the incorporation by reference of said reports in the Registration Statements of NorthStar Realty Finance Corp. on Form S-8 (File No. 333-120025, effective October 28, 2004).

/s/GRANT THORNTON LLP

New York, New York

March 7, 2006

Exhibit 23.2

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-120025) pertaining to the NorthStar Realty Finance Corp. 2004 Omnibus Stock Incentive Plan, of our reports dated (i) March 30, 2005 (except Note 3 (d), as to which the date is March 6, 2006) with respect to the consolidated balance sheet of NorthStar Realty Finance Corp. and Subsidiaries (the Company), as of December 31, 2004, the related consolidated statements of operations, stockholders' equity, and cash flows of the Company for the period from October 29, 2004 (commencement of operations) through December 31, 2004 and the related combined statement of operations, owners' equity, and cash flows of NorthStar Realty Finance Corp. Predecessor as defined in Note 1 to the Company’s consolidated financial statements for the period from January 1, 2004 through October 28, 2004 and for the year ended December 31, 2003; (ii) March 30, 2005 (except Note 10, as to which the date is March 6, 2006) with respect to the consolidated financial statements and schedules of ALGM I Owners LLC and Subsidiaries as of December 31, 2004 and for each of the two years in the period ended December 31, 2004; and (iii) March 30, 2005 with respect to the financial statements and schedule of NorthStar Funding LLC as of December 31, 2004 and for each of the two years in the period ended December 31, 2004 , which reports are included in the Annual Report (Form 10-K) for the year ended December 31, 2005.

/s/ Ernst & Young LLP

New York, New York

March 16, 2006

Exhibit 31.1

CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER PURSUANT TO

17 CFR 240.13a-14(a)/15(d)-14(a),

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, David T. Hamamoto, Chief Executive Officer of NorthStar Realty Finance Corp., certify that:

1. I have reviewed this annual report on Form 10-K of NorthStar Realty Finance Corp. for the fiscal year ended December 31, 2005;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

/s/ David T. Hamamoto

David T. Hamamoto

Chief Executive Officer

Date: March 16, 2006

Exhibit 31.2

CERTIFICATION BY THE CHIEF FINANCIAL OFFICER PURSUANT TO

17 CFR 240.13a-14(a)/15(d)-14(a),

AS ADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Mark E. Chertok, Chief Financial Officer of NorthStar Realty Finance Corp., certify that:

1. I have reviewed this annual report on Form 10-K of NorthStar Realty Finance Corp. for the fiscal year ended December 31, 2005;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

/s/ Mark E. Chertok

Mark E. Chertok

Chief Financial Officer

Date: March 16, 2006

Exhibit 32.1

CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER PURSUANT TO

RULE 13a-14(b) UNDER THE SECURITIES EXCHANGE ACT OF 1934

AND 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of NorthStar Realty Finance Corp. (the “Company”) for the annual period ended December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), David T. Hamamoto, as Chief Executive Officer of the Company hereby certifies, pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:

1) 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of the Company.

Dated: March 16, 2006 /s/ David T. Hamamoto

David T. Hamamoto

Chief Executive Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 32.2

CERTIFICATION BY THE CHIEF FINANCIAL OFFICER PURSUANT TO

RULE 13a-14(b) UNDER THE SECURITIES EXCHANGE ACT OF 1934

AND 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of NorthStar Realty Finance Corp. (the “Company”) for the annual period ended December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Mark E. Chertok, as Chief Financial Officer of the Company hereby certifies, pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:

1) 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of the Company.

Dated: March 16, 2006 /s/ Mark E. Chertok

Mark E. Chertok

Chief Financial Officer