1273801--2/29/2008--NORTHSTAR

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{loan, real, estate}

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Risks Related to Our Businesses The recent downturn in the credit markets has increased the cost of borrowing and has made financing difficult to obtain, which has negatively impacted our business, and may have a material adverse effect on us. Liquidity in the capital markets is essential to our businesses and future growth and we rely on external sources to finance a significant portion of our operations. Our liquidity position could be adversely affected if we were unable to complete additional term debt transactions on favorable terms or at all. If we are unable to generate sufficient funds or obtain financing for future capital commitments, we may not be able to repay indebtedness or fund our other liquidity needs, which could have a material adverse effect on us. We retain the subordinate classes of bonds in the term debt transactions that we have issued, which entails certain risks. If we are unable to extend or renew our existing warehouse and secured facilities, our results of operations, financial condition and business could be significantly harmed. The repurchase agreements and bank credit facilities and warehouse lines that we use to finance our investments may require us to provide additional collateral. Lenders may require us to enter into restrictive covenants relating to our operations. Our warehouse and secured facilities may limit our ability to make investments. 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 originate and 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 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 invest in CMBS securities, including "first loss" and other subordinate securities, which entail certain risks. 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 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. Interest rate fluctuations may reduce the spread we earn on our interest-earning investments and may reduce our net income. Our investments in real estate securities, mortgage notes, mezzanine loans, participation interests in mortgage and mezzanine loans and preferred equity investments are subject to changes in credit spreads and if spreads widen, the value of our loan and securities portfolios would decline, as had happened during 2007. Our hedging transactions may limit our gains and could result in losses. Our portfolio is leveraged, which may adversely affect our return on our investments and may reduce cash available for distribution on our securities. We may change our investment strategy without stockholder consent and make riskier investments. 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. We are 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. 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 Funds may create conflicts of interest. Difficult market conditions can adversely affect our Funds in many ways, including by reducing the ability of our Funds to raise or deploy capital and by reducing the value or performance of the investments made by our Funds, and could materially reduce our revenue and results of operations. The creation and management of investment vehicles will 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 may use capital to preserve the existence of our Funds. Our results of operations may be dependent on the performance of our Funds and the performance of our Funds will impact our ability to raise capital for future funds. Risks Related to Middle-Market Corporate Lending In addition to the risks associated with investing in real estate debt and real estate securities, through our joint venture with Monroe Capital, we have made middle-market loans to borrowers outside of the real estate industry, including highly leveraged borrowers. Monroe Capital uses credit facilities to finance its investments. If Monroe Capital is unable to securitize its loans or is required to post additional collateral to support its credit facilities, it could have a material adverse effect on our results of operations. Monroe Capital's liquidity position could be adversely affected if it is unable to complete additional collateralized loan transactions on favorable terms, or at all, which could have a material adverse effect on our results of operations. Risks Related to Residential Land Investments In addition to the risks associated with investing in real estate debt and real estate securities, we have recently formed a joint venture with Whitehall Street Global Real Estate Limited Partnership 2007 that may make residential land investments in strategic markets throughout the United States, including loans to homebuilders secured by first priority liens and short term mezzanine financing and land option contracts. Risks Related to International Investments Any non-U.S. investments we may make would be subject to various risks associated with investments and operations in foreign countries, which could adversely impact our results. Difficulty of enforcing legal rights may negatively affect the results of our non-U.S. investments. The inability to successfully defend claims from taxing authorities related to our current or acquired properties could adversely affect our operating results and financial position. Investing internationally will mean that we may make investments in non-U.S. dollar denominated investments, 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. 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. 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 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 result in higher taxes and reduced 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 loss. 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--2/29/2008--NORTHSTAR_REALTY