1273801--2/25/2009--NORTHSTAR

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{investment, property, distribution}

{loan, real, estate}

{tax, income, asset}

{loss, insurance, financial}

{debt, indebtedness, cash}

{condition, economic, financial}

{provision, law, control}

{interest, director, officer}

{system, service, information}

{competitive, industry, competition}

{regulation, change, law}

{capital, credit, financial}

{regulation, government, change}

{personnel, key, retain}

{cost, contract, operation}

Risks Related to Our Businesses The commercial real estate finance industry has been and will continue to be adversely affected by conditions in the global financial markets and economic conditions in the United States generally. Liquidity is essential to our businesses and we rely on outside sources of capital that have been severely impacted by the current economic crisis. The credit facilities that we use to finance our investments may require us to provide additional collateral, which could significantly impact our liquidity position. If we are unable to extend or renew our existing secured credit facilities, our results of operations, financial condition and business could be significantly harmed. Our lenders under our credit facilities may choose to not fund future commitments. Our credit facilities contain restrictive covenants relating to our operations. Our credit facilities and exchangeable senior notes contain cross-default provisions. Our term debt transactions have certain coverage tests that are required to be met in order for payments to be made to our subordinate bonds and equity notes. Failing coverage tests could significantly impact our cash flow and overall liquidity position. We retain the subordinate classes of bonds and equity notes in the term debt transactions that we have issued, which entails certain risks, including that subordinate classes of bonds and equity notes in the term debt transactions receive distributions only if the term debt transaction generates enough income to pay all of the other bond classes. We are unable to complete additional term debt transactions due to the collapse of the credit markets and the severe economic recession. Continued disruptions in the financial markets and deteriorating economic conditions could adversely affect the values of investments we made. Adverse economic conditions could significantly reduce the amount of income we earn on our commercial real estate loans. Our borrowers may increasingly be unable to achieve their business plans due to the economic environment and strain on commercial real estate, which may cause stress in our commercial real estate loan portfolio. Many of our commercial real estate loans are funded with interest reserves and our borrowers may be unable to replenish those interest reserves once they run out. Our mortgage loans, mezzanine loans, participation interests in mortgage and mezzanine loans, real estate securities and preferred equity investments have been and may continue to be adversely affected by widening credit spreads, and if spreads continue to widen, the value of our loan and securities portfolios would decline further. Loan repayments are unlikely in the current market environment. Higher loan loss reserves are expected if economic conditions do not improve. Loan loss reserves are particularly difficult to estimate in a turbulent economic environment. The mortgage loans we originate and invest in and the commercial 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. The subordinate mortgage notes, participation interests in mortgage notes, mezzanine loans and preferred equity investments we have originated and invested 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 investments, which may result in losses to us. We are subject to risks associated with construction lending, such as declining real estate values, cost over-runs and delays in completion. We have and may continue to invest in CMBS securities, including subordinate securities, which entail certain risks. The CMBS market has been severely impacted by the current economic turbulence, which has had a negative impact on the CMBS that we own. 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. Recent market conditions and the risk of continued market deterioration have caused and may continue to cause uncertainty in valuing our real estate securities. 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. Investments in net lease properties may generate losses. We may not be able to relet or renew leases at the properties held by us on terms favorable to us. Lease defaults or terminations or landlord-tenant disputes may adversely reduce our income from our net lease property portfolio. Environmental compliance costs and liabilities associated with our properties or our real estate related investments may materially impair the value of our investments. Uninsured losses or losses in excess of our insurance coverage could adversely affect our financial condition and our cash flows. Many of our investments are illiquid, and we may not be able to vary our portfolio in response to further changes in economic and other conditions, which may result in losses to us. We may make investments in assets with lower credit quality, which will increase our risk of losses. 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. Our portfolio is highly leveraged, which may adversely affect our return on our investments and may reduce cash available for distribution on our securities. We are subject to risks associated with managing residential land investments in our LandCap joint venture. Interest rate fluctuations may reduce the spread we earn on our interest-earning investments and may reduce our net income. Our hedging transactions may limit our gains and could result in losses. We may change our investment strategy without stockholder consent and make riskier investments. We have been, and may in the future be, subject to significant competition, and we may not be able to compete successfully for investments. Risks Relating to Investments in Healthcare Assets We have limited experience with owning and operating senior housing and healthcare facilities. The senior living industry is highly competitive and we expect it to become more competitive. Operators of independent care, assisted living and memory care facilities must comply with the rules and regulations of governmental reimbursement programs such as Medicare or Medicaid, licensing and certification requirements, fraud and abuse regulations and are subject to new legislative developments. A significant portion of our leases expire in the same year. State law may limit the availability of certain types of healthcare facilities for our acquisition or development and may limit our ability to replace obsolete properties. The bankruptcy, insolvency or financial deterioration of our facility operators could significantly delay our ability to collect unpaid rents or require us to find new operators. Our operators are faced with increased litigation and rising insurance costs that may affect their ability to make their lease or mortgage payments. Risks Related to the Investment Management Business The organization and management of our Securities Fund, and any future funds that we raise, may create conflicts of interest. Difficult market conditions and the collapse of the CMBS market have adversely affected our Securities Fund, which may impact our ability to raise capital for future Funds and may cause investor redemptions. The creation and management of Funds and other investment vehicles could require us to register with the SEC as an investment adviser under the Investment Advisers Act and subject us to costs and constraints that we are not currently subject to. We have used, and may in the future use, capital to preserve the existence of our Securities Fund and any future third party funds we manage. Investors in our Securities Fund and, likely, any new third party funds, may redeem their investments after a stated lock-up period or elect to remove us as manager of the Funds at any time without cause upon approval of 50% of the limited partners of our Funds. Valuation methodologies for certain assets in our Funds may be subject to significant subjectivity and the values of assets established pursuant to such methodologies may never be realized, which could result in significant losses for our Funds. There are risks in using prime brokers and custodians. We are subject to certain counterparty risks in our Securities Fund. Risks Related to Our Company Our ability to operate our business successfully would be harmed if key personnel with long-standing business relationships terminate their employment with us. Our ability to issue equity awards to employees as compensation could be impacted, which will require greater cash compensation in relation to previous levels of cash compensations. If our risk management systems are ineffective, we may be exposed to material unanticipated losses. The use of estimates and valuations may be different from actual results, which could have a material effect on our consolidated financial statements. We believe AFFO is an appropriate measure of our operating performance; however, in certain instances AFFO may not be reflective of actual economic results. GAAP requirements and our mark-to-market adjustments of our liabilities under SFAS 159 in particular, do not necessarily provide a precise economic reflection of our shareholders' equity. Our dividend policy is subject to change. We are highly dependent on information systems, and systems failures could significantly disrupt our business. Maintenance of our Investment Company Act exemption imposes limits on our operations. Maryland takeover statutes may prevent a change of our control. This could depress our stock price. Our authorized but unissued common and preferred stock and other provisions of our charter and bylaws may prevent a change in our control. Risks Related to Our REIT Tax Status Our failure to qualify as a REIT would subject us to federal income tax and reduce cash available for distribution to our stockholders. 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. We could fail to qualify as a REIT if the Internal Revenue Service successfully challenges our treatment of our mezzanine loans and repurchase agreements. Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow. Complying with REIT requirements may cause us to forego otherwise attractive opportunities or liquidate otherwise attractive investments. Complying with REIT requirements may limit our ability to hedge effectively. Liquidation of assets may jeopardize our REIT status. We may be subject to adverse legislative or regulatory tax changes that could reduce the market price 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. Our dividends that are attributable to excess inclusion income will likely increase the tax liability of our tax-exempt stockholders, foreign stockholders, and stockholders with net operating losses. The prohibited transactions tax may limit our ability to engage in transactions, including certain methods of securitizing loans, that would be treated as sales for federal income tax purposes. Because of the inability to offset capital losses against ordinary income, we may have REIT taxable income, which we would be required to distribute to our stockholders, in a year in which we are not profitable under GAAP principles or other economic measures. We may lose our REIT status if the IRS successfully challenges our characterization of our income from our foreign taxable REIT subsidiaries. If our foreign taxable REIT subsidiaries are subject to U.S. federal income tax at the entity level, it would greatly reduce the amounts those entities would have available to distribute to us and that they would have available to pay their creditors.

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1273801--2/25/2009--NORTHSTAR_REALTY