1273801--2/26/2010--NORTHSTAR

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Risks Related to Our Businesses The commercial real estate finance industry has been and may 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 environment. The WA Secured Term Loan that we use to finance our investments may require us to pay down a portion of the funds advanced, which could significantly impact our liquidity position. Wells Fargo may choose to not fund future commitments. The WA Secured Term Loan contains restrictive covenants relating to our operations. If we are unable to extend or renew the WA Secured Term Loan, our results of operations, financial condition and business could be significantly harmed. Our WA Secured Term Loan and exchangeable senior notes are recourse obligations to us. Our WA Secured Term Loan and exchangeable senior notes contain cross-default provisions. In addition to risks associated with the United States economy generally, we are subject to risks associated with economic conditions in Germany with respect to one of our loans which is financed on our WA Secured Term Loan. Our CDOs 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. The reinvestment period for certain of our CDOs will expire in 2010. We retain the subordinate classes of bonds and equity notes in the CDOs that we have issued, which entails certain risks, including that subordinate classes of bonds and equity notes in the CDOs receive distributions only if the CDO generates enough income to pay all of the other bond classes. A payment default on bonds underlying one of our CDOs could have a compounding affect on our other CDOs. We are unable to complete additional CDOs 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. Loan restructurings may reduce our net interest income. Our borrowers are increasingly unable to achieve their business plans due to the economic environment and strain on commercial real estate, which has caused 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, including subordinate securities, which entail certain risks. The mortgage-backed securities in which we may invest are subject to the risks of the mortgage securities market as a whole and risks of the securitization process. Interest shortfalls on the CMBS that we own could have an adverse impact on the cash flow in our securities CDOs. We may not control the special servicing of the mortgage loans included in the CMBS in which we invest and, in such cases, the special servicer may take actions that could adversely affect our interests. 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. Market conditions in 2008 and early 2009, 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. We are named as a defendant in a lawsuit and the adverse resolution of this matter could have a material adverse effect on our financial condition and results of operations. 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. Our joint venture partners could take actions that decrease the value of an investment to us and lower our overall return. We are subject to risks associated with owning 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 The senior living industry is highly competitive and we expect it to become more competitive. Our failure or the failure of our operators to comply with licensing and certification requirements, the requirements of governmental reimbursement programs such as Medicare or Medicaid, fraud and abuse regulations or new legislative developments may materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders. 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. A substantial portion of our business is dependent upon our operators successfully operating their businesses and their failure to do so could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders. 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. Events could occur that could adversely affect the ability of seniors to afford the monthly resident fees or entrance fees (including downturns in the economy, housing market, consumer confidence or the equity markets) and, in turn, materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders. The inability of seniors to sell real estate may delay their moving into our residences which could materially adversely affect our occupancy rates and our business, financial condition and results of operations and our ability to make distributions to our stockholders. Decisions by residents to terminate their residency agreements could adversely affect occupancy at our facilities which, in turn, could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders. Reimbursement rates from third-party payors could be reduced, which would materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders. Government budget deficits could lead to a reduction in Medicaid and Medicare reimbursement. Possible changes in the acuity profile of our residents as well as payor mix and payment methodologies may materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders. We may become responsible for capital improvements. To the extent such capital improvements are not undertaken, the ability of our operators to manage our facilities effectively and on favorable terms may be affected, which in turn could materially adversely affect our business, financial conditions and results of operations and our ability to make distributions to our stockholders. The geographic concentration of our senior housing facilities could leave us vulnerable to an economic downturn, regulatory or reimbursement changes or acts of nature in those areas, which could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders. Certain operators will account for a significant percentage of our contractual rental revenue, and the failure of any of these operators to meet their obligations to us could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders. Because of the unique and specific improvements required for our healthcare properties, including our life sciences campus, we may be required to incur substantial renovation costs to make certain of our properties suitable for other operators, which could materially adversely affect our business, financial condition and results of operations and our ability to pay distributions to our stockholders. We are subject to risks associated with debt financing, which could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders. If our operators fail to cultivate new or maintain existing relationships with residents in the markets in which they operate, our occupancy percentage, payor mix and resident rates may deteriorate which could have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders. We may not be able to compete effectively in those markets where overbuilding exists and our inability to compete in those markets may have a material adverse effect on our business, financial condition and results of operations and our ability to make distributions to our stockholders. We may obtain only limited warranties when we purchase a property, which will increase the risk that we may lose some or all of our invested capital in the property or rental income from the property which, in turn, could materially adversely affect our business, financial condition and results from operations and our ability to pay distributions to our stockholders. Our operators may be subject to significant legal actions that could subject them to increased operating costs and substantial uninsured liabilities, which may affect their ability to meet their obligations to us. Delays in our operator's collection of their accounts receivable could adversely affect their cash flows and financial condition and their ability to meet their obligations to us. The bankruptcy, insolvency or financial deterioration of any of our operators could delay or prevent our ability to collect unpaid rents or require us to find new operators. Compliance with the Americans with Disabilities Act, Fair Housing Act, and fire, safety and other regulations may require us to make unanticipated expenditures which could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders. We are facing increasing competition for the acquisition of senior housing facilities and other healthcare properties which may impede our ability to make future acquisitions or may increase the cost of these acquisitions which, in turn, could materially adversely affect our business, financial condition and results of operations and our ability to make distributions to our stockholders. Risks Related to the Investment Management Business The organization and management of our nonlisted REIT, REG D REIT and Securities Fund, and any future funds that we raise, may create conflicts of interest. Our ability to raise capital and attract investors in our Sponsored REITs is critical to their success and our ability to grow depends on our ability to attract a motivated sales force in our licensed broker dealer. Our failure to obtain a broker-dealer license in the various jurisdictions in which we will do business could have a material adverse effect on our business, financial condition, liquidity and results of operations. There is no assurance we will be able to enter into third-party selling agreement, and declines in asset value and reductions in distributions in our Sponsored REITs could cause the loss of such third-party selling agreements and limit our ability to sign future third-party selling agreements. Misconduct by third-party selling broker-dealers or our sales force, could have a material adverse effect on our business. Our organization and management of the Sponsored REITs could distract our management and have a negative effect on our business. 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. Termination of management arrangements with one or more of our Funds could harm our business. 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. Investors in our Securities Fund may redeem their investments or elect to remove us as manager of our Securities Fund at any time without cause upon approval of 50% of the limited partners of our Securities Fund. 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. Government intervention may limit our ability to continue to implement certain strategies or manage certain risks. Risks Related to Our Company Our ability to operate our business successfully would be harmed if key personnel 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. AFFO includes realized gains on items such as extinguishment of debt and sales of real estate securities, which we may not be able to replicate in the future. GAAP requirements and our mark-to-market adjustments of our liabilities 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. Under recently issued IRS guidance, we may pay taxable dividends of our common stock and cash, in which case stockholders may sell shares of our common stock to pay tax on such dividends, placing downward pressure on the market price of our common stock. We could fail to qualify as a REIT if the IRS 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. Modifications of the terms of our mortgage loans, mezzanine loans and B-Notes and loans supporting our mortgage-backed securities in conjunction with reductions in the value of the real property securing such loans could cause us to fail to qualify as a REIT. Complying with REIT requirements may limit our ability to hedge effectively. We may fail to qualify as a REIT as a result of our fee income from managing certain structured finance and investment vehicles and our income from active businesses. Liquidation of assets may jeopardize our REIT status. Adverse legislative or regulatory tax changes could reduce the market price of our common stock. The prohibited transactions tax may limit our ability to engage in transactions, including dispositions of assets and 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 for federal income tax purposes, 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. 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.

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1273801--2/26/2010--NORTHSTAR_REALTY