iStar Annual Report 2002

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FY2002 Annual Report · iStar

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Directors
––

(3)

Jay Sugarman
Chairman and Chief Executive Officer,
iStar Financial Inc.

(1)

Willis Andersen, Jr.
Principal,
REIT Consulting Services

(3)

Jeffrey G. Dishner
Senior Managing Director,
Starwood Capital Group

Andrew L. Farkas
Chairman and Chief Executive Officer,
Insignia Financial Group, Inc.

(4)

Madison F. Grose
Senior Managing Director,
Starwood Capital Group

(4)

Robert W. Holman, Jr.
Chairman and Chief Executive Officer,
National Warehouse Investment Company

Merrick R. Kleeman
Senior Managing Director,
Starwood Capital Group

(1) (2)

Robin Josephs
President, Ropasada, LLC

H. Cabot Lodge III
Executive Vice President – Investments,
iStar Financial Inc.

(1) (2)

Matthew J. Lustig
Managing Director, Lazard Frères
Real Estate Investors, LLC

William M. Matthes
Managing Partner, Behrman Capital

(2) (4)

John G. McDonald
Professor of Finance, Stanford University
Graduate School of Business

Stephen B. Oresman
President, Saltash, Ltd.

(2)

(3)

George R. Puskar
Former Chairman, Lend Lease
Real Estate Investments

(3)

Barry S. Sternlicht
Chairman and Chief Executive Officer,
Starwood Hotels and Resorts

(1)
(2)
(3)
(4)

Audit Committee
Compensation Committee
Investment Committee
Nominating and
Governance Committee

iStar is lighting up the real estate finance sector

As we celebrate ten years in business and five as a public company, our future is brighter

than ever. With a $6.6 billion enterprise value, iStar Financial has solidified its position

as the leading finance company focused on the commercial real estate industry. Now more

than ever, our customers recognize the high level of knowledge, service, flexibility and

creativity with which we fulfill their unique financing requirements. Our performance for

shareholders is also getting noticed: consistently delivered double-digit returns, even in

difficult times, and one of the best credit track records in the finance industry. It is the

kind of performance that is getting hard to keep quiet.

Wow!

~ intro

milestones

iStar Financial annual report

2002

Officers
––

Jay Sugarman
Chairman and Chief Executive Officer

Catherine D. Rice
Chief Financial Officer

Timothy J. O’Connor
Executive Vice President and
Chief Operating Officer

Nina B. Matis
Executive Vice President and
General Counsel

Spencer B. Haber
President – iStar Strategic Capital

Barbara Rubin
President – iStar Asset Services

Executive Vice Presidents

––

Daniel S. Abrams
Steven R. Blomquist
Roger M. Cozzi
Jeffrey R. Digel
R. Michael Dorsch III
Barclay G. Jones III
H. Cabot Lodge III
Michelle M. MacKay
Diane Olmstead
Andrew C. Richardson

Senior Vice Presidents

––

Jeffrey N. Brown
Chase S. Curtis, Jr.
Geoffrey M. Dugan
John F. Kubicko
Steven B. Sinnett
Elizabeth B. Smith
Colette J. Tretola

Headquarters

––

iStar Financial Inc.
1114 Avenue of the Americas
New York, NY 10036
tel: (212) 930-9400
fax: (212) 930-9494

Super-Regional Offices

––

One Embarcadero Center, 33rd Floor
San Francisco, CA 94111
tel: (415) 391-4300
fax: (415) 391-6529

3480 Preston Ridge Road, Suite 575
Alpharetta, GA 30005
tel: (678) 297-0100
fax: (678) 297-0101

100 Great Meadow Road, Suite 603
Wethersfield, CT 06109
tel: (860) 258-2202
fax: (860) 258-2268

Regional Offices

––

175 Federal Street, 8th Floor
Boston, MA 02110
tel: (617) 292-3333
fax: (617) 423-3322

304 Inverness Way South, Suite 195
Englewood, CO 80112
tel: (303) 790-4656
fax: (303) 790-4680

6565 North MacArthur Blvd., Suite 410
Irving, TX 75039
tel: (972) 506-3131
fax: (972) 501-0078

Employees
––

At March 14, 2003, the Company had
143 employees.

Independent Auditors

––

PricewaterhouseCoopers LLP
New York, NY

Registrar and Transfer Agent

––

EquiServe Trust Company, N.A.
525 Washington Boulevard
Jersey City, NJ 07310
(800) 756-8200

Dividend Reinvestment Plan

––

Registered shareholders may reinvest dividends
through the Company’s dividend reinvestment
plan. For more information, please call the
Transfer Agent or the Company’s Headquarters.

Annual Meeting of Shareholders

––

June 3, 2003, 8:30 a.m. EST
Sofitel Hotel
45 West 44th Street,
New York, NY 10036

Investor Information Services

––

For help with questions about the Company, and
to receive additional corporate information,
please contact:

Investor Relations Department
iStar Financial Inc.
1114 Avenue of the Americas
New York, NY 10036
tel: (212) 930-9400
fax: (212) 930-9455
e-mail: investors@istarfinancial.com

iStar Financial Web site

––

http://www.istarfinancial.com

2002

page .1

We’ve grown to be the largest independent finance
company in an attractive $100–$150 billion market
niche of a $2+ trillion market

For a decade, iStar Financial has focused exclusively on providing creative capital solutions

to sophisticated private and corporate owners of high-quality real estate. During this

period, we have completed over $7 billion of transactions. Our management team is known

for its expertise in each of the key disciplines required to serve these high-end customers:

investment negotiations, capital markets pricing, risk management, credit analysis and legal

structuring. We compensate our people with long-term equity incentives tied directly to

shareholder returns, not with short-term, volume-driven “quotas.” These people and our

reputation for fairness and integrity are our most valuable assets.

Leadership

~ 0.2

milestones

iStar Financial annual report

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page .3

Our credit track record is unparalleled

iStar Financial’s superior credit track record is the best in the finance industry. Since

beginning our business in 1993, our loan losses and loans on non-accrual status have

always been minimal. Our credit performance results from a proven and disciplined

approach to investing capital and a pro-active risk management strategy. Our goal is to

create a low volatility, high-quality income stream for shareholders with enough

reserves in place to ensure our dividend is safe and secure under all market conditions.

Safety

~ 0.4

milestones

iStar Financial annual report

Our investment approach focuses on capital preservation and risk mitigation. We underwrite

our investments to zero-loss standards, and only invest capital in transactions that we

believe will deliver excellent risk-adjusted returns to our shareholders. We bring a “principal”

mentality to investing capital, and all of our senior management professionals have a

significant portion of their net worths invested in the company’s equity. This disciplined

approach has served us particularly well during the weaker economic and commercial

real estate environment over the past two years, and has kept our asset quality strong.

Our risk management strategy emphasizes frequent, ongoing dialogue with our customers

and real-time information dissemination throughout the company that drives real-time

risk mitigation strategies. During weekly company-wide meetings, we identify and address

potential credit issues before they become problems, and we draw upon the wide range

of in-house intellectual capital and real estate expertise, with on-staff loan servicers, asset

managers, credit analysts, licensed engineers, architects and lawyers. This intensive,

hands-on and multi-disciplined approach to risk management protects our capital even when

assets underperform our initial expectations.

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page .5

Our broadly diversified asset base produces
stable cash flow

With over 120 diversified corporate credits operating in more than 38 industries, a majority

of which are investment grade or have implied investment grade ratings, and over

nine years of remaining term, our sale/leaseback business produces long-term, highly stable

cash flow. This business is complemented by our lending product lines, which are

backed by more than 500 underlying properties broadly diversified across property type,

geography and borrower. With an average loan-to-value of 68% and actual 2002 debt

service coverage of 2.2x, our loan businesses provide a safe, stable source of cash flow that

complements our leasing business.

Stability

~ 0.6

milestones

iStar Financial annual report

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page .7

We have positive momentum in our credit ratings

During 2002, we received our first investment grade senior unsecured credit rating

and were placed on “positive outlook” for a move to investment grade by the two other

rating agencies. These moves follow upgrades by all three rating agencies in 2001.

We are proud of our positive credit momentum, especially in the face of deteriorating

economic conditions, and believe our progress is a testament to our asset quality

and risk management discipline. Investment grade status from all three rating agencies

will provide us with lower borrowing costs and allow us to redeploy resources to

support increased business with our customers.

Momentum

~ 0.8

milestones

iStar Financial annual report

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page .9

We have generated solid growth

We have consistently grown earnings and dividends every year since going public five

years ago. Our customer franchise, scale and unique business model continue to provide

us with a competitive advantage over commodity capital providers and multiple

opportunities to generate asset, earnings and dividend growth in both “up” and “down”

markets. The quality of our customer relationships is evident in the $3.1 billion of

transactions completed with customers who have worked with us on more than one

transaction, and provides us with an ongoing source of future business.

Consistency

~ 0.10

milestones

iStar Financial annual report

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page .11

We have produced strong total rates of return
for shareholders

iStar Financial continues to build on its long-term track record of delivering strong risk-

adjusted returns to its shareholders. In addition to growing earnings, we provide

shareholders with an attractive current dividend, which is well supported by cash flow.

Since going public, our total rate of return (dividends plus stock price appreciation) has

averaged 28.7% annually, and we have increased quarterly dividends by 80.0%.

Results

~ 0.12

milestones

iStar Financial annual report

In 2002, we delivered a 23.0% total rate of return to our shareholders, solidly beating

other financial services companies and major market indices in a time of economic and

geopolitical turbulence. Moreover, we delivered these strong returns while operating

at a fraction of the leverage of most other financial services companies, averaging just

1.7x debt/tangible book equity during 2002.

Over the past three years, from 2000 to 2002, when almost every sector of the financial

markets has delivered subpar returns to shareholders, iStar Financial has generated

average annual returns of over 30% per year, and over 125% in total shareholder returns

for the period.

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page .13

We see many opportunities ahead

In our ten years in business and our five years as a public company, iStar Financial has

emerged to become the leading provider of creative capital solutions to the commercial real

estate industry. We have consistently delivered a premium service to our customers in

exchange for a premium return, and have passed that premium on to our shareholders in

the form of substantial dividends and stock price appreciation. This track record is under-

scored by a highly disciplined approach to managing risk and preserving capital, enabling

us to become one of the best capitalized companies in the sector. Most importantly,

throughout our corporate development, we have preserved the core values of fairness and

integrity that remain the hallmark of our company. Now we will begin taking advantage

of those strengths to build a truly great company.

Blossoming

~ 0.14

milestones

iStar Financial annual report

total enterprise value 2002

$6,600,000,000

2001

2000

$5,100,000,000

$4,200,000,000

1999

$3,700,000,000

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iStar Financial annual report

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(1)

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(1)

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company, 1998 represents dividends for the second quarter through the
fourth quarter of 1998, annualized.

2002

page .17

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Excludes a $15.0 million non-cash charge related to performance-based vesting
of restricted shares granted under our long-term incentive plan.

iStar Financial annual report

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Value as of 12/31/02 of $1,000 invested at 12/31/01
Value as of 12/31/02 of $1,000 invested at 12/31/01

~
Value as of 12/31/02 of $1,000 invested at 12/31/99
Value as of 12/31/02 of $1,000 invested at 12/31/99

2002

page .19

~ 0.20

proof

Portfolio Finance

Customer:

Southwest Value Partners

Financing Product: Senior, expandable floating-rate mortgage and junior participating,

fixed-rate mortgage financing

Collateral:

1.1 million square foot downtown office portfolio and 436 room,

four-star hotel located in San Diego, CA

Investment Size:

$132.8 million

Southwest Value Partners was one of the first opportunistic investors to target the recovering

San Diego central business district. Having assembled a dominant position in the market,

SVP began actively negotiating various loan and joint venture structures with three of the

leading private investment funds in the country. Recognizing the opportunity to

provide a superior financial solution for the partners, iStar Financial made an unsolicited

offer to provide a creative three-part financing, allowing the partners to not only capture

much of the upside on a tax-deferred basis, but also to lock-up future tenant improvement

capital for improving property cash flow. Using iStar Financial’s flexible structure

and signing two of the largest leases in San Diego history, Southwest Value Partners has

significantly increased portfolio cash flow and enhanced returns for its partners.

Case Studies

iStar Financial annual report
iStar Financial annual report

Corporate Tenant Leasing

Customer:

Northrop Grumman Corporation (NYSE: NOC) / West Group

Financing Product: Credit tenant lease

Collateral:

574,588 square foot Class A+ office facility located in Tyson’s Corner,

MacLean, VA

Investment Size:

$143.6 million

The facility is the corporate headquarters for Northrop Grumman’s IT Division. Northrop

Grumman has a multi-billion dollar market capitalization and is a leading U.S. defense

contractor, with a highly diversified base of contracts including the largest shipbuilding

program in the U.S. When the owner of the facility sought to monetize its investment,

iStar Financial developed an innovative purchase structure that helped the seller to bridge

competing objectives among the seller’s partners, while also restructuring the Northrop

lease to create a more stable and more valuable income stream. The end result for iStar was

a long-term investment supported by an investment grade corporate tenant on a newly-

constructed office facility.

2002
2002

page .21
page .21

~ 0.22

proof

Corporate Finance

Customer:

The Mills Corporation (NYSE: MLS)

Financing Product: Term preferred equity investment

Collateral:

Diversified portfolio of 14 super-regional malls located in major

metropolitan markets throughout the U.S.

Investment Size:

$76.5 million

Mills, a leading developer of malls in the U.S., was in the process of seeking a sizable

corporate financing commitment to accelerate its corporate growth strategy. iStar

Financial worked closely with Mills to understand its complicated organization structure

and capital needs, then committed to the entire transaction using a customized funding

structure that allowed Mills flexible funding timing to meet its requirements while

providing significant protection to iStar. By working with iStar Financial, Mills was able

to quickly strengthen its capital structure, more efficiently finance its development

pipeline and meet its cash flow objectives. Since iStar’s investment, Mills has consistently

increased earnings and cash flow and generated significant returns for its shareholders.

Case Studies

iStar Financial annual report
iStar Financial annual report

Structured Finance

Customer:

Washington Center / Quadrangle Development Corporation

Financing Product: Senior and junior fixed-rate second mortgage financing

Collateral:

352,566 square foot downtown office building and a connected

889 room Grand Hyatt hotel located in Washington, D.C.

Investment Size:

$48.7 million

Quadrangle developed and owned the premier mixed-use property located in the East

End sub-market of Washington D.C. With more than 10 banks involved in its original

capital structure, the owner sought refinancing alternatives with a capital provider that

could provide all its capital needs and meet its unique structuring needs. iStar Financial

quickly committed to provide the junior portion of the financing and helped place a

senior mortgage with a life company lender that iStar helped to understand the project.

As a result of the simplified capital structure, the owner was able to focus on the

operations of the project, substantially increasing both cash flow and value over time.

2002
2002

page .23
page .23

Dear Shareholders,

~ 0.24

chairman’s letter

iStar Financial annual report

I am pleased to report that 2002 was another very strong

As we have always said, there is a very large difference

year for iStar Financial and its shareholders. Our success this past year

between companies focused on the equity side of the commercial real

capped a three-year period in which our company has grown into the

estate markets and iStar’s focus on the lower-risk financing side of

leading player in the high-end commercial real estate finance market-

the market – our portfolio is built to perform even when more equity-

place, capturing market share, extending customer relationships and

oriented companies are seeing falling earnings and difficult market

building on our reputation for delivering capital tailored specifically to

conditions. Our strong and growing dividend is built on a foundation

the individual needs of our customers.

of both well-structured loans on high quality property around the

During 2002, we also continued to deliver exceptional results

country and long-term corporate tenant lease transactions with a

for our shareholders, generating a total shareholder rate of return in

wide range of mostly credit-rated companies. The safety and stability

excess of 20% for the third consecutive year and outperforming major

of these complementary portfolios will continue to enable us to

stock market averages by over 30% for the third consecutive year.

deliver strong current returns on our capital and strong dividend

These superior returns are the direct result of a highly refined business

returns to our shareholders.

strategy, a top-notch team of highly motivated employees and a recog-

So what’s next? As we expand the reach of our business, we

nized ability to stay ahead of the curve in each of the three markets on

have set out some very concrete goals for the future. First, we will seek

which we focus – the real estate finance markets, the capital markets

to raise our dividend 5% per year while maintaining our dividend pay-

and the corporate finance markets.

out ratio as a percentage of earnings at no more than 80% on an annual

Despite very challenging market conditions for our cus-

basis. Second, we will grow our assets and our customer relationships

tomers in both the corporate world and in the real estate world, iStar

by moving swiftly to capture the best market opportunities as they

was able to complete over $1.8 billion in new investments this past

become available. Third, we will seek to expand our management team

year, a new record for the company and a strong indicator of our abil-

to include the highest caliber people we can find in order to continue

ity to take advantage of market turmoil and turn it to our advantage.

delivering superior service to our customer base. Fourth, we will con-

In times like these, our customers depend on our ability to provide

tinue to try to find places in the capital markets that are not well served

capital to them in a creative, timely and experienced manner, and our

and to identify attractive areas to provide capital on a non-competitive

growing proportion of repeat customers suggests we are meeting their

basis. And fifth, we will work to help the market understand that the

needs and earning their trust.

strength and safety of our income stream and business model deserve

The growing strength of our business is also apparent in the

a far higher valuation than our current share price suggests.

growing strength of our financial results. We finished 2002 with over

$5 billion in assets, over $2 billion in tangible equity capital, and

We expect that our success, our shareholders’ success, and

among commercial finance companies, one of the lowest leverage

perhaps this annual report, will help draw attention to our company

ratios and one of the best credit track records, with no non-performing

and enable us to continue demonstrating that, at iStar, doing things the

assets at year-end. Our total revenue grew to $526 million, another

right way has always been the right thing to do.

record for our company and our return on equity reached 18.4%, also a

record. Our loss ratios remain the best in the industry and we continue

I, and all our employees, thank you for your support.

to be pleased by our portfolio even as many markets continue to strug-

gle. Those strengths were recognized by the rating agencies this past

year as all three raised iStar’s credit ratings, with Fitch moving iStar to

investment grade by giving us the only upgrade in their entire com-

mercial finance and leasing sector.

Jay Sugarman

Chairman and

Chief Executive Officer

2002

page .25

iStar Financial annual report

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64

2002

selected ﬁnancial data

management’s discussion and analysis of ﬁnancial condition

quantitative and qualitative disclosures about market risk

report of independent accountants

consolidated balance sheets

consolidated statements of operations

consolidated statements of cash ﬂows

consolidated statements of changes in shareholders’ equity

notes to consolidated ﬁnancial statements

common stock price and dividends

Financial Report

~ 0.27

ﬁnancials

selected ﬁnancial data

The following table sets forth selected ﬁnancial data on a
consolidated historical basis for iStar Financial Inc. (“the Company”).
However, prior to March 1998, the Company’s structured ﬁnance opera-
tions were conducted by two private investment partnerships which
contributed substantially all their structured finance assets to the
Company in exchange for cash and shares of the Company.

Further, on November 4, 1999, the Company acquired TriNet
Corporate Realty Trust, Inc. (“TriNet”), which increased the size of the
Company’s operations, and also acquired its former external advisor.
Operating results for the year ended December 31, 1999 reﬂect only the
effects of these transactions subsequent to their consummation.

Accordingly, the historical balance sheet information as of
December 31, 1998, as well as the results of operations for the Company
for all periods prior to and including the year ended December 31,
1999, do not reﬂect the current operations of the Company as a well
capitalized, internally-managed ﬁnance company operating in the com-
mercial real estate industry. For these reasons, the Company believes
that the information should be read in conjunction with the discus-
sions set forth in “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” Certain prior year amounts have
been reclassiﬁed to conform to the 2002 presentation.

For the Year Ended December 31,

Operating Data:
Interest income
Operating lease income
Other income

Total revenue

Interest expense
Operating costs – corporate tenant lease assets
Depreciation and amortization
General and administrative
General and administrative – stock-based compensation
Provision for loan losses
Advisory fees
Costs incurred in acquiring former external advisor(1)

Total costs and expenses

Income before equity in earnings from joint ventures and unconsolidated subsidiaries,

minority interest and other items

Equity in earnings from joint ventures and unconsolidated subsidiaries
Minority interest in consolidated entities
Extraordinary loss on early extinguishment of debt
Cumulative effect of change in accounting principle(2)
Net income before discontinued operations
Income from discontinued operations
Gain from discontinued operations
Net income
Preferred dividend requirements
Net income allocable to common shareholders
Basic earnings per common share(3)
Diluted earnings per common share
Dividends declared per common share(4)
Supplemental Data:
Adjusted earnings allocable to common shareholders(5)(7)
EBITDA(6)(7)
Ratio of EBITDA to interest expense(8)
Ratio of EBITDA to combined ﬁxed charges(9)
Ratio of earnings to ﬁxed charges(10)
Ratio of earnings to ﬁxed charges and preferred stock dividends(10)
Weighted average common shares outstanding – basic(11)
Weighted average common shares outstanding – diluted(11)
Cash ﬂows from:

Operating activities
Investing activities
Financing activities

Balance Sheet Data:
Loans and other lending investments, net
Corporate tenant lease assets, net
Total assets
Debt obligations
Minority interest in consolidated entities
Shareholders’ equity
Supplemental Data:
Total debt to shareholders’ equity

2002

2001

2000

1999

1998

(In thousands, except per share data and ratios)

$ 255,631
242,100
27,993
525,724
185,375
13,755
47,821
30,449
17,998
8,250
–
–
303,648

222,076
1,222
(162)
(12,166)
–
210,970
3,583
717
$ 215,270
(36,908)
$ 178,362
1.98
$
1.93
$
2.52
$

$ 281,686
$ 471,444
2.54x
2.12x
2.25x
1.88x
89,886
92,649

$ 254,119
185,943
31,057
471,119
169,974
12,782
35,411
24,151
3,574
7,000
–
–
252,892

218,227
7,361
(218)
(1,620)
(282)
223,468
5,299
1,145
$ 229,912
(36,908)
$ 193,004
2.24
$
2.19
$
2.45
$

$ 255,132
$ 430,973
2.54x
2.08x
2.34x
1.93x
86,349
88,234

$ 268,011
177,581
17,927
463,519
173,741
12,737
34,384
25,706
2,864
6,500
–
–
255,932

207,587
4,796
(195)
(705)
–
211,483
3,155
2,948
$ 217,586
(36,908)
$ 180,678
2.11
$
2.10
$
2.40
$

$ 230,688
$ 420,508
2.42x
2.00x
2.25x
1.86x
85,441
86,151

$ 209,848
41,665
12,900
264,413
91,159
2,245
10,324
6,269
412
4,750
16,193
94,476
225,828

38,585
235
(41)
–
–
38,779
107
–
38,886
(23,843)
15,043
0.25
0.25
1.86

$
$
$
$

$ 112,914
12,378
2,708
128,000
44,697
_
4,287
2,583
5,985
2,750
7,837
–
68,139

59,861
96
(54)
–
–
59,903
_
–
59,903
(944)
58,959
1.40
1.36
1.14

$
$
$
$

$ 127,798
$ 234,779
2.58x
2.04x
1.43x
1.13x
57,749
60,393

65,949
$
$ 116,778
2.61x
1.70x
2.33x
2.28x
41,607
43,460

$ 348,793
(1,149,070)
800,541

$ 293,260
(349,525)
49,183

$ 219,868
(193,805)
(37,719)

$ 119,625
(143,911)
48,584

54,915
$
(1,271,309)
1,226,208

$ 3,050,342
2,291,805
5,611,697
3,461,590
2,581
2,025,300

$2,377,763
1,781,565
4,380,640
2,495,369
2,650
1,787,778

$2,227,083
1,592,087
4,034,775
2,131,967
6,224
1,787,885

$2,003,506
1,654,300
3,813,552
1,901,204
2,565
1,801,343

$ 1,823,761
189,942
2,059,616
1,055,719
–
970,728

1.7x

1.4x

1.2x

1.1x

iStar Financial annual report

Explanatory Notes:

(1)

(2)

(3)

(4)

(5)

This amount represents a non-recurring, non-cash charge of approximately $94.5 million relating to the acquisition of the Company’s formal external advisor in November 1999.

Represents one-time effect of adoption of Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” as of January 1, 2001.

Prior to November 1999, earnings per common share excludes 1.00% of net income allocable to the Company’s former class B shares. The former class B shares were exchanged for

Common Stock in connection with the acquisition of TriNet and other related transactions on November 4, 1999. As a result, the Company now has a single class of Common Stock

outstanding.

The Company generally declares common and preferred dividends in the month subsequent to the end of the quarter.

Adjusted earnings represents net income to common shareholders computed in accordance with GAAP, before depreciation, amortization, gain (loss) from discontinued operations,

extraordinary items and cumulative effect of change in accounting principle. For the year ended December 31, 2002, adjusted earnings excludes the $15.0 million non-cash charge related

to the performance based vesting of restricted shares granted under the Company’s long-term incentive plan. For the year ended December 31, 1999, adjusted earnings excludes the non-

recurring, non-cash cost incurred in acquiring the Company’s former external advisor. (See reconciliation in “Management’s Discussion and Analysis of Financial Condition and Results

of Operations”).

(6)

EBITDA is calculated as total revenue plus equity in earnings from joint ventures and unconsolidated subsidiaries minus the sum of general and administrative expenses, general and

administrative – stock-based compensation (excluding the non-cash charge related to the performance based vesting of restricted shares granted under the Company’s long-term

incentive plan for the year ended December 31, 2002), provision for loan losses, operating costs on corporate tenant lease assets and advisory fees.

For the Year Ended December 31,

Total Revenue

Plus: Equity in earnings from joint ventures and unconsolidated subsidiaries

Less: General and administrative

Less: General and administrative – stock-based compensation

Less: Provision for loan losses

Less: Operating costs – corporate tenant lease assets

Less: Advisory fees

EBITDA

2002

2001

2000

1999

1998

(In thousands)

$525,724

$471,119

$463,519

$264,413

$128,000

1,222

(30,449)

(3,048)

(8,250)

(13,755)
–

7,361

(24,151)

(3,574)

(7,000)

4,796

(25,706)

(2,864)

(6,500)

(12,782)

(12,737)

235

(6,269)

(412)

(4,750)

(2,245)

–

(16,193)

(2,583)

(5,985)

(2,750)

–

$471,444

$430,973

$420,508

$234,779

$116,778

(7)

Each of adjusted earnings and EBITDA should be examined in conjunction with net income as shown in the Consolidated Statements of Operations. Neither adjusted earnings nor

EBITDA should be considered as an alternative to net income (determined in accordance with GAAP) as an indicator of the Company’s performance, or to cash ﬂows from operating

activities (determined in accordance with GAAP) as a measure of the Company’s liquidity, nor is either measure indicative of funds available to fund the Company’s cash needs or

available for distribution to shareholders. The Company’s management believes that adjusted earnings and EBITDA more closely approximate operating cash ﬂow and are useful

measures for investors to consider, in conjunction with net income and other GAAP measures, in evaluating the commercial ﬁnance company that focuses on real estate lending and

corporate tenant leasing; therefore, the Company’s net income (determined in accordance with GAAP) reﬂects signiﬁcant non-cash depreciation expense on corporate tenant lease assets.

It should be noted that the Company’s manner of calculating adjusted earnings and EBITDA may differ from the calculations of similarly-titled measures by other companies.

The 1999 and 1998 EBITDA to interest expense ratios on a pro forma basis would have been 2.83x and 2.84x, respectively.

Combined ﬁxed charges are comprised of interest expense, capitalized interest, amortization of loan costs and preferred stock dividend requirements. The 1999 and 1998 EBITDA to

combined ﬁxed charges ratios on a pro forma basis would have been 2.23x and 2.44x, respectively.

For the purposes of calculating the ratio of earnings to ﬁxed charges, “earnings” consist of income from continuing operations before income taxes and cumulative effect of changes in

accounting principles plus “ﬁxed charges” and certain other adjustments. “Fixed charges” consist of interest incurred on all indebtedness related to continuing operations (including

amortization of original issue discount) and the implied interest component of the Company’s rent obligations in the years presented. For 1999, these ratios include the effect of a non-

recurring, non-cash charge in the amount of approximately $94.5 million relating to the November 1999 acquisition of the former external advisor to the Company. Excluding the effect

of this non-recurring, non-cash charge, the ratio of earnings to ﬁxed charges for that period would have been 2.5x and the Company’s ratio of earnings to ﬁxed charges and preferred stock

dividends would have been 2.0x.

As adjusted for one-for-six reverse stock split effected by the Company on June 19, 1998.

(8)

(9)

(10)

(11)

2002

page .29

management’s discussion and analysis of
ﬁnancial condition and results of operations

General

The Company began its business in 1993 through private
investment funds formed to take advantage of the lack of well-capitalized
lenders capable of servicing the needs of high-end customers in its
markets. In March 1998, the private investment funds contributed their
approximately $1.1 billion of assets to the Company’s predecessor
in exchange for a controlling interest in that public company. In
November 1999, the Company acquired its leasing subsidiary, TriNet
Corporate Realty Trust, Inc. (“TriNet” or the “Leasing Subsidiary”),
which was then the largest publicly-traded company specializing in cor-
porate sale/leaseback for ofﬁce and industrial facilities (the “TriNet
Acquisition”). Concurrent with the TriNet Acquisition, the Company
also acquired its former external advisor in exchange for shares of its
Common Stock and converted its organizational form to a Maryland
corporation. The Company’s Common Stock began trading on the
New York Stock Exchange under the symbol “SFI” in November 1999.

Results of Operations
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Interest income – Interest income increased by $1.5 million to
$255.6 million for the 12 months ended December 31, 2002 from
$254.1 million for the same period in 2001. This increase was primarily
due to $72.5 million of interest income on new originations or addi-
tional fundings, net of a $50.5 million decrease from the repayment of
loans and other lending investments. This increase was partially offset
by a decrease in interest income on the Company’s variable-rate lend-
ing investments as the result of lower average one-month LIBOR rates
of 1.77% in 2002, compared to 3.88% in 2001.

Operating lease income – Operating lease income increased by
$56.2 million to $242.1 million for the 12 months ended December 31,
2002 from $185.9 million for the same period in 2001. Of this increase,
$59.5 million was attributable to new corporate tenant lease invest-
ments. This increase was partially offset by corporate tenant lease dis-
positions and lower operating lease income on certain corporate tenant
lease assets.

Other income – Other income generally consists of prepayment
penalties and realized gains from the early repayment of loans and
other lending investments, ﬁnancial advisory and asset management
fees, lease termination fees, mortgage servicing fees, loan participation
payments and dividends on certain investments. During the 12 months
ended December 31, 2002, other income included prepayment penal-
ties and realized gains on loan repayments of $12.6 million, asset man-
agement, mortgage servicing and other fees of approximately
$9.0 million, lease termination fees of $2.9 million, loan participation
payments of $3.3 million, and other miscellaneous income such as divi-
dend payments and insurance claims of $994,000.

During the 12 months ended December 30, 2001, other
income included loan participation payments of $13.1 million, prepay-
ment penalties and gains on loan repayments of $13.0 million and
ﬁnancial advisory, lease termination, asset management and mortgage
servicing fees of $5.3 million.

Interest expense – For the 12 months ended December 31, 2002,
interest expense increased by $15.4 million to $185.4 million from
$170.0 million for the same period in 2001. This increase was primarily
due to the higher average borrowings on the Company’s debt obliga-
tions, term loans and secured notes, and by approximately $2.7 million
due to additional amortization of deferred financing costs on the
Company’s debt obligations in 2002 compared to the same period in
2001. This increase was partially offset by lower average one-month
LIBOR rates on the Company’s variable-rate debt of 1.77% in 2002,
compared to 3.88% in 2001.

Operating costs – corporate tenant lease assets – For the 12 months
ended December 31, 2002, operating costs increased by $1.0 million
from $12.8 million to $13.8 million for the same period in 2001. This
increase is primarily related to new corporate tenant lease investments
and higher operating costs on certain corporate tenant lease assets, par-
tially offset by corporate tenant lease dispositions.

Depreciation and amortization – Depreciation and amortization
increased by $12.4 million to $47.8 million for the 12 months ended
December 31, 2002 from $35.4 million for the same period in 2001. This
increase is primarily due to new corporate tenant lease investments.

General and administrative – For the 12 months ended December 31,
2002, general and administrative expenses increased by $6.2 million to
$30.4 million, compared to $24.2 million for the same period in 2001.
This increase is primarily the result of an increase in personnel and
related costs.

General and administrative – stock-based compensation – General and
administrative-stock-based compensation increased by $14.4 million
primarily due to a non-cash charge related to the performance-based
vesting of 500,000 restricted shares granted under the Company’s long-
term incentive plan and tied to overall shareholder performance (see
Note 10 to the Company’s Consolidated Financial Statements).

Provision for loan losses – The Company’s charge for provision
for loan losses increased to $8.3 million for the 12 months ended
December 31, 2002 as compared to $7.0 million for the same period in
2001. As more fully discussed in Note 4 to the Company’s Consolidated
Financial Statements, the Company has experienced minimal actual
losses on its loan investments to date. The Company considers it pru-
dent to reﬂect provisions for loan losses on a portfolio basis based
upon the Company’s assessment of general market conditions, the
Company’s internal risk management policies and credit risk rating
system, industry loss experience, the Company’s assessment of the like-
lihood of delinquencies or defaults, and the value of the collateral
underlying its investments. Accordingly, since its ﬁrst full quarter oper-
ating its current business as a public company (the quarter ended
June 30, 1998), management has reﬂected quarterly provisions for loan
losses in its operating results.

Equity in earnings from joint ventures and unconsolidated subsidiaries –
During the 12 months ended December 31, 2002, equity in earnings
from joint ventures and unconsolidated subsidiaries decreased
by approximately $6.2 million to $1.2 million from $7.4 million
for the same period in 2001. This decrease is primarily due to
the consolidation of one of the Company’s corporate tenant lease
joint venture investments (see Note 6 to the Company’s Consolidated
Financial Statements).

Income from discontinued operations – For the 12-month periods
ended December 31, 2002 and 2001, operating income earned by the
Company on corporate tenant lease assets sold (prior to their sale) and
assets held for sale of approximately $3.6 million and $5.3 million,
respectively, is classiﬁed as “Income from discontinued operations,”
even though such income was earned by the Company prior to the
assets’ disposition or classiﬁcation as “Assets held for sale.”

Gain from discontinued operations – During 2002, the Company
disposed of one corporate tenant lease asset for total proceeds of
$3.7 million and recognized a gain of approximately $595,000. In addi-
tion, one of the Company’s customers exercised an option to terminate
its lease on 50.00% of the land leased from the Company. In connection
with this termination, the Company realized $17.5 million in cash lease
termination payments, offset by a $17.4 million impairment change in
connection with the termination, resulting in a net gain of approxi-
mately $123,000.

During 2001, the Company disposed of four corporate tenant
lease assets for total proceeds of $26.3 million and recognized net gains
of $1.1 million.

Extraordinary loss on early extinguishment of debt – During the
12 months ended December 31, 2002, the Company fully repaid the
then remaining $446.2 million of bonds outstanding under its STARs

iStar Financial annual report

Series 2000-1 ﬁnancing. This prepayment resulted in an extraordinary
loss of $12.2 million, which represented approximately $8.2 million in
unamortized deferred ﬁnancing costs and approximately $4.0 million
in prepayment penalties.

During the 12 months ended December 31, 2001, the
Company repaid a secured term loan, which had an original maturity
date of December 2004. In addition, the Company prepaid an unse-
cured revolving credit facility, which had an original maturity date of
May 2002. In connection with these prepayments, the Company
expensed the remaining unamortized deferred ﬁnancing costs and
incurred certain prepayment penalties, which resulted in an extraordi-
nary loss of approximately $1.6 million.

Year Ended December 31, 2001 Compared to Year Ended December 31, 2000

Interest income – Interest income decreased by $13.9 million
to $254.1 million for the 12 months ended December 31, 2001 from
$268.0 million for the same period in 2000. Approximately $12.7 mil-
lion of this decrease is the result of lower average LIBOR rates on the
Company’s variable-rate lending investments of 3.88% in 2001, com-
pared to 6.41% in 2000. This decrease was partially offset by $55.1 mil-
lion of interest income on new originations or additional fundings, net
of $51.6 million from the repayment of loans and other lending invest-
ments, in addition to a decrease of $1.5 million from income earned on
cash and cash equivalents.

Operating lease income – Operating lease income increased by
$8.3 million to $185.9 million for the 12 months ended December 31,
2001 from $177.6 million for the same period in 2000. Of this increase,
$11.8 million was attributable to new corporate tenant lease invest-
ments. This increase was partially offset by corporate tenant lease dis-
positions and lower operating lease income on certain corporate tenant
lease assets.

Other income – Other income consists primarily of prepayment
penalties and gains from the early repayment of loans and other lend-
ing investments, ﬁnancial advisory and asset management fees, lease
termination fees, mortgage servicing fees, loan participation payments
and dividends on certain investments. During the year ended
December 31, 2001, other income included loan participation payments
of $13.1 million, prepayment penalties and gains on loan repayments
of $13.0 million and ﬁnancial advisory, lease termination, asset man-
agement and mortgage servicing fees of $5.3 million.

During the year ended December 31, 2000, other income
included prepayment penalties and gains on loan repayments of
$10.5 million, $2.1 million in connection with a loan defeasance, loan
participation payments of $1.9 million, ﬁnancial advisory, asset man-
agement and mortgage servicing fees of $2.6 million and lease termina-
tion fees of $770,000.

Interest expense – For the 12 months ended December 31, 2001,
interest expense decreased by $3.7 million to $170.0 million from
$173.7 million for the same period in 2000. This decrease was primarily
due to the lower average LIBOR rates on the Company’s variable-rate
debt of 3.88% in 2001, compared to 6.41% in 2000. This decrease was
partially offset by the higher average borrowings on the Company’s
credit facilities, term loans and unsecured notes and $7.6 million addi-
tional amortization of deferred ﬁnancing costs on the Company’s debt
obligations in 2001 compared to 2000.

Operating costs – corporate tenant lease assets – For the 12 months
ended December 31, 2001, operating costs were substantially
unchanged as compared to the same period in 2000. Such operating
costs represent unreimbursed operating expenses associated with cor-
porate tenant lease assets.

Depreciation and amortization – Depreciation and amortization
increased by $1.0 million to $35.4 million for the 12 months ended
December 31, 2001 from $34.4 million for the same period in 2000.
This increase is due to new corporate tenant lease investments and
additional facility improvements, partially offset by corporate tenant
lease dispositions in 2000.

General and administrative – For the 12 months ended December 31,
2001, general and administrative expenses decreased by $1.5 million to
$24.2 million, compared to $25.7 million for the same period in 2000.
This decrease is primarily the result of a reduction in ofﬁce and related
costs and professional fees, partially offset by an increase in personnel
and related costs.

General and administrative – stock-based compensation expense – General
and administrative – stock-based compensation expense increased by
approximately $710,000 as a result of charges relating to grants of stock
options and restricted shares.

Provision for loan losses – The Company’s charge for provision
for loan losses increased to $7.0 million for the 12 months ended
December 31, 2001 from $6.5 million for the same period in 2000 as a
result of the continued expansion of the Company’s lending operations
as well as additional seasoning of its existing lending portfolio. As more
fully discussed in Note 4 to the Company’s Consolidated Financial
Statements, the Company has experienced minimal actual losses on its
loan investments to date. The Company considers it prudent to reﬂect
provisions for loan losses on a portfolio basis based upon the
Company’s assessment of general market conditions, the Company’s
internal risk management policies and credit risk rating system, indus-
try loss experience, the Company’s assessment of the likelihood of
delinquencies or defaults, and the values of the collateral underlying its
investments. Accordingly, since its ﬁrst full quarter operating its cur-
rent business as a public company (the quarter ended June 30, 1998),
management has reﬂected quarterly provisions for loan losses in its
operating results.

Equity in earnings from joint ventures and unconsolidated subsidiaries –
During the 12 months ended December 31, 2001, equity in earnings
from joint ventures and unconsolidated subsidiaries increased by
approximately $2.6 million to $7.4 million from $4.8 million for the
same period in 2001. This increase is primarily due to new leases com-
mencing in 2001, in addition to a lease termination payment received
at one of the joint ventures (see Note 6 to the Company’s Consolidated
Financial Statements).

Income from discontinued operations – For the 12-month periods
ended December 31, 2001 and 2000, operating income earned by the
Company on corporate tenant lease assets sold (prior to their sale) and
assets held for sale of approximately $5.3 million and $3.2 million,
respectively, is classiﬁed as “Income from discontinued operations,”
even though such income was earned by the Company prior to the
assets’ disposition or classiﬁcation as “Assets held for sale.”

Gain from discontinued operations – During 2001, the Company
disposed of four corporate tenant lease assets for total proceeds of
$26.3 million and recognized net gains of $1.1 million.

During 2000, the Company disposed of 14 corporate tenant
lease assets, including six assets held in joint venture partnerships, for
total proceeds of $256.7 million, and recognized net gains of $2.9 million.
Extraordinary loss on early extinguishment of debt – During the
12 months ended December 31, 2001 and 2000, the Company or its
joint ventures prepaid debt obligations of $133.0 million and $24.5 mil-
lion, respectively. These transactions resulted in an extraordinary loss
on early extinguishment of debt from prepayment penalties and the
expense associated with remaining unamortized deferred ﬁnancing
costs in the amount of $1.6 million and $705,000 for the 12 months
ended December 31, 2001 and 2000, respectively.

Adjusted Earnings

Adjusted earnings represents net income to common share-
holders computed in accordance with GAAP, before depreciation, amor-
tization, gain (loss) from discontinued operations, extraordinary items
and cumulative effect of change in accounting principle. Adjustments
for unconsolidated partnerships and joint ventures reflect the
Company’s share of adjusted earnings calculated on the same basis.

The Company believes that to facilitate a clear understanding
of the historical operating results of the Company, adjusted earnings

2002

page .31

should be examined in conjunction with net income as shown in the
Company’s Consolidated Statements of Operations. Adjusted earnings
should not be considered as an alternative to net income (determined
in accordance with GAAP) as an indicator of the Company’s perform-
ance, or to cash ﬂows from operating activities (determined in accor-
dance with GAAP) as a measure of the Company’s liquidity, nor is it
indicative of funds available to fund the Company’s cash needs or avail-
able for distribution to the Company’s shareholders. The Company’s
management believes that adjusted earnings more closely approxi-
mates operating cash ﬂow and is a useful measure for investors to

consider, in conjunction with net income and other GAAP measures, in
evaluating the Company’s financial performance. This is primarily
because the Company is a commercial ﬁnance company that focuses on
real estate lending and corporate tenant leasing; therefore, the
Company’s net income (determined in accordance with GAAP) reﬂects
signiﬁcant non-cash depreciation expense on corporate tenant lease
assets. It should be noted that the Company’s manner of calculating
adjusted earnings may differ from the calculation of similarly-titled
measures by other companies.

For the Year Ended December 31,

2002

2001

2000

1999

1998

Adjusted earnings:

Net income allocable to common shareholders
Add: Joint venture income
Add: Depreciation
Add: Joint venture depreciation and amortization
Add: Amortization of deferred ﬁnancing costs
Less: Gains from discontinued operations
Add: Extraordinary loss – early extinguishment of debt
Add: Cumulative effect of change in accounting principle(1)
Less: Net income allocable to class B shares(2)
Add: Cost incurred in acquiring former external advisor

Adjusted diluted earnings allocable to common shareholders:

Before non-cash incentive compensation charge(3)
After non-cash incentive compensation charge
Weighted average diluted common shares outstanding

Explanatory Notes:

(In thousands)

(Unaudited)

$180,678
937
34,514
3,662
13,140
(2,948)
705
–
–
–

$15,043
1,603
11,016
365
6,121
–
–
–
(826)
94,476

$178,362
991
48,041
4,433
23,460
(717)
12,166
–
–
–

$193,004
965
35,642
4,044
20,720
(1,145)
1,620
282
–
–

$281,686
$266,736
93,020

$255,132
$255,132
88,606

$230,688
$230,688
86,523

$127,798
$127,798
61,750

$58,959
_
4,302
_
3,354
–
–
–
(666)
–

$65,949
$65,949
43,460

Represents one-time effect of adoption of Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” as of January 1, 2001.

Prior to November 1999, adjusted earnings per common share excludes 1.00% of net income allocable to the Company’s former class B shares. The former class B shares were exchanged

for Common Stock in connection with the acquisition of TriNet and other related transactions on November 4, 1999. As a result, the Company now has a single class of Common

Stock outstanding.

Excludes a $15.0 million non-cash charge related to performance-based vesting of restricted shares granted under the Company’s long-term incentive plan for the 12 months ended

December 31, 2002.

(1)

(2)

(3)

Risk Management

First Dollar and Last Dollar Exposure – One component of the
Company’s risk management assessment is an analysis of the Company’s
first and last dollar loan-to-value percentage with respect to the proper-
ties or companies the Company ﬁnances. First dollar loan-to-value rep-
resents the average beginning point for the Company’s lending
exposure in the aggregate capitalization of the underlying properties or
companies it ﬁnances. Last dollar loan-to-value represents the average
ending point for the Company’s lending exposure in the aggregate cap-
italization of the underlying properties or companies it ﬁnances.

Non-Accrual Loans – The Company transfers loans to non-
accrual status at such time as: (1) management believes that the poten-
tial risk exists that scheduled debt service payments will not be met
within the coming 12 months; (2) the loans become 90 days delin-
quent; (3) management determines the borrower is incapable of, or
ceased efforts toward, curing the cause of an impairment; or (4) the net
realizable value of the loan’s underlying collateral approximates the
Company’s carrying value of such loan. Interest income is recognized
only upon actual cash receipt for loans on non-accrual status. As of
December 31, 2002, the Company had three assets on non-accrual sta-
tus with an aggregate gross book value of $11.1 million, or 0.20% of the
gross book value of the Company’s investments. The Company is cur-
rently comfortable that it has adequate collateral to support the book
values of the assets.

One of the three non-accrual loans is a $3.5 million partnership
loan on two shopping malls located in the suburbs of Washington, D.C.
This investment was part of a larger loan originally made by afﬁliates of
Lazard Freres prior to the Company’s acquisition of Lazard’s structured
ﬁnance portfolio in 1998. The loan matures in September 2003 and
bears interest at 12.00%. The Company received cash payments equal to
the interest due on the loan during the 12 months ended December 31,
2002, and the borrower remains current on its obligations to the
Company. However, the Company anticipates that this loan will remain
on non-accrual status for the foreseeable future.

The second non-accrual loan is a partnership loan with a bal-
ance of $5.7 million as of December 31, 2002. The loan is presently
secured by partnership interests in two partnerships owning facilities
in Colorado leased to the U.S. Government. The Company made the
loan in anticipation of buying the facilities upon their completion. The
loan matures on March 29, 2003 and bears interest at LIBOR + 3.50%,
with a LIBOR ﬂoor of 3.00%. In February 2003 the borrower breached
certain technical provisions of the loan documents, constituting a tech-
nical event of default. The borrower remains current on its regular
interest obligations to the Company and the Company is currently dis-
cussing a possible extension of the loan with the borrower. However,
as a result of the technical default and the uncertainty surrounding
the extension and the timing of the completion of the facilities for the
Company’s purchase, the loan has been been placed on non-accrual status.

iStar Financial annual report

The third non-accrual loan is a $1.9 million investment in
debt securities of a real estate company which trades on the Mexican
Stock Exchange. This investment was made by TriNet prior to its acqui-
sition by the Company in 1999. The securities bear interest at 12.00%
per annum payable in arrears in December of each year. In January
2003, the Company received cash payments equal to the interest due on
the investment through December 31, 2002, and the borrower remains
current on its obligations to the Company. However, the Company
anticipates that this investment will remain on non-accrual status for
the foreseeable future.

Watch List Assets – The Company conducts a quarterly compre-
hensive credit review, resulting in an individual risk rating being
assigned to each asset. This review is designed to enable management
to evaluate and proactively manage asset-speciﬁc credit issues and
identify credit trends on a portfolio-wide basis as an “early warning
system.” As of December 31, 2002, the Company has four loans and
two CTL investments that are on its credit watch list.

In addition to the $5.7 million partnership loan mentioned
above, the Company had three other loans on its credit watch list. The
second watch list loan is a $40.8 million ﬁrst mortgage secured by a
hotel property in New York, New York. This mortgage matures on
April 30, 2005 and bears interest at LIBOR + 4.50%. The borrower
remains current on all of its debt service payments to the Company,
and the Company is currently comfortable that it has adequate collat-
eral to support the book value of the asset. However, due to poor oper-
ating performance exacerbated by the decline in the hotel market in the
New York metropolitan area, this loan remains on the watch list.

The third watch list loan is a $12.9 million junior participation
in a first mortgage loan secured by a hotel property in New York,
New York. This loan bears interest at a ﬁxed rate of 7.91% and matures
in June 2006. The borrower remains current on all of its debt service
payments to the Company and has continued to invest additional
equity to fund on-going capital improvements at the property. The
Company is comfortable that it has adequate collateral to support the
book value of the asset. However, due to poor operating performance
exacerbated by the decline in the hotel market in the New York metro-
politan area, this loan remains on the watch list.

The fourth watch list loan is a $35.8 million junior interest in
a $104.5 million ﬁrst mortgage loan secured by a retail shopping mall
in Chicago, IL. The whole loan bears interest at 8.88% and matures
January 1, 2004. The mall’s cash ﬂow has been negatively impacted by
the departure of one of four anchor tenants. The borrower is currently
negotiating with one of the anchor tenants to occupy the vacant space.
In addition, the borrower has a signiﬁcant equity investment in the
property (including approximately $15.0 million of additional equity
invested in 2001), and remains current on all of its debt service pay-
ments to the Company. The Company is currently comfortable that it
has adequate collateral to support the book value of the asset.

The Company also has two CTL investments on its credit
watch list. In January 2002, a customer occupying two ofﬁce facilities
owned by the Company ﬁled a voluntary petition for reorganization
under Chapter 11 of the U.S. Bankruptcy Code. The customer utilizes
these facilities as the U.S. headquarters for one of its major business
lines. Since its bankruptcy ﬁling, the customer has been consolidating
its space needs into the larger of the two facilities, including approxi-
mately 150 of its employees from other area locations. The customer
has also invested approximately $3.0 million of its own capital in the
facilities. In December 2002, the bankruptcy court approved a plan of
reorganization. As part of the reorganization, the customer has
attempted to afﬁrm the lease on the larger facility and terminate the
lease on the smaller facility. Since the two leases are cross-defaulted, the
Company believes the the customer’s afﬁrmation of the larger facility

lease is also an affirmation of the smaller facility. The customer
remains current on the larger facility’s lease payment to the Company,
but has withheld its March payment on the smaller facility pending a
potential negotiated settlement with the Company regarding termina-
tion of the lease on the smaller facility. Therefore, the smaller facility
(with a net carrying value of $3.6 million at December 31, 2002)
remains on the Company’s watch list.

The Company also placed on the watch list its investment in a
corporate tenant lease asset held in joint venture due to the ﬁnancial
uncertainty surrounding one of the facility’s primary tenants. As of
December 31, 2002, the Company’s equity investment in the venture
was $12.4 million and the Company’s share of income from this equity
investment for the year ended December 31, 2002 was $1.4 million.

Other Loans – As of December 31, 2002, the Company also has a
$15.3 million second mortgage on a Class A office building in
Washington, D.C. which has paid debt service two months in arrears
since December 2002. The loan matures in October 2005 and, but for a
small working capital deﬁcit resulting in the two-month arrearage, con-
tinues to otherwise pay as agreed. Inclusive of the senior debt on the
property, the Company’s last-dollar risk exposure on this asset on a per
square foot basis is signiﬁcantly less than neighboring buildings have
sold for. As a result, the Company currently believes that it has ade-
quate collateral to support the book value of the asset.

Liquidity and Capital Resources

The Company requires capital to fund its investment activi-
ties and operating expenses. The Company has signiﬁcant access to
capital resources to fund its existing business plan, which includes the
expansion of its real estate lending and corporate tenant leasing busi-
nesses. The Company’s capital sources include cash ﬂow from opera-
tions, borrowings under lines of credit, additional term borrowings,
long-term financing secured by the Company’s assets, unsecured
ﬁnancing and the issuance of common, convertible and/or preferred
equity securities. Further, the Company may acquire other businesses
or assets using its capital stock, cash or a combination thereof.

The distribution requirements under the REIT provisions of
the Code limit the Company’s ability to retain earnings and thereby
replenish or increase capital committed to its operations. However, the
Company believes that its signiﬁcant capital resources and access to
ﬁnancing will provide it with ﬁnancial ﬂexibility and market respon-
siveness at levels sufﬁcient to meet current and anticipated capital
requirements, including expected new lending and corporate tenant
leasing transactions.

The Company believes that its existing sources of funds will
be adequate for purposes of meeting its short- and long-term liquidity
needs. The Company’s ability to meet its long-term (i.e., beyond one
year) liquidity requirements is subject to obtaining additional debt and
equity ﬁnancing. Any decision by the Company’s lenders and investors
to enter into such transactions with the Company will depend upon a
number of factors, such as compliance with the terms of its existing
credit arrangements, the Company’s ﬁnancial performance, industry or
market trends, the general availability of and rates applicable to ﬁnanc-
ing transactions, such lenders’ and investors’ resources and policies
concerning the terms under which they make such capital commit-
ments and the relative attractiveness of alternative investment or lend-
ing opportunities.

The Company’s longstanding policy is to limit its book debt-
to-equity ratio to approximately 2.0x. As the Company’s leverage
approaches this level, the Company will consider equity and other alter-
natives to reduce leverage. The exact timing and nature of any equity
issuance would be subject to market conditions.

2002

page .33

The following table outlines the contractual obligations related to the Company’s long-term debt agreements and operating lease obliga-

tions. There are no other long-term liabilities of the Company that would constitute a contractual obligation.

Long-Term Debt Obligations:
Secured revolving credit facilities
Unsecured revolving credit facilities
Secured term loans
iStar Asset Receivables secured notes(2)
Unsecured notes
Other debt obligations
Total

Operating Lease Obligations:(3)

Total

Explanatory Notes:

Principal Payments Due By Period (1)

Total

Less Than
1 Year

2–3
Years

4–5
Years

6–10
Years

After 10
Years

(In thousands)

$1,273,754
–
682,851
876,368
625,000
15,961
3,473,934
17,608
$3,491,542

–
–
–
–
–
15,961
15,961
2,908
$18,869

$1,273,754
–
142,211
236,694
–
–
1,652,659
5,467
$1,658,126

–
–
245,975
–
50,000
–
295,975
5,353
$301,328

–
–
180,292
639,674
350,000
–
1,169,966
3,880
$1,173,846

–
–
114,373
–
225,000
–
339,373
–
$339,373

Assumes exercise of extensions on the Company’s long-term debt obligations to the extent such extensions are at the Company’s option.

Based on expected proceeds from principal payments received on loan assets collateralizing such notes.

The Company also has a $1.0 million letter of credit outstanding as security for its primary corporate ofﬁce lease.

(1)

(2)

(3)

The Company has four LIBOR-based secured revolving credit
facilities with an aggregate maximum availability of $2.4 billion, of
which $1.3 billion was drawn as of December 31, 2002 (see Note 7 to
the Company’s Consolidated Financial Statements). Availability under
these facilities is based on collateral provided under a borrowing base
calculation. At December 31, 2002, the Company also had an unsecured
credit facility totaling $300.0 million which bears interest at LIBOR +
2.125% and matures in July 2004, including a one-year extension at the
Company’s option. At December 31, 2002, the Company had not drawn
any amounts under this facility.

Recent Financing Activities – On May 17, 2000, the Company
closed the inaugural offering under its proprietary matched funding
program, STARs, Series 2000-1. In the initial transaction, a wholly-
owned subsidiary of the Company issued $896.5 million of investment-
grade bonds secured by the subsidiary’s assets, which had an aggregate
outstanding principal balance of approximately $1.2 billion at incep-
tion. Principal payments received on the assets were utilized to repay
the most senior class of the bonds then outstanding. The maturity of
the bonds match funded the maturity of the underlying assets ﬁnanced
under the program. Of the assets of the subsidiary secured by this
ﬁnancing, 73.96% (by gross carrying value) consisted of ﬁrst mortgages
and subsequent lien positions and the remaining 26.04% consisted of
junior loans. For accounting purposes, this transaction was treated as
a secured financing: the underlying assets and STARs liabilities
remained on the Company’s Consolidated Balance Sheets and no gain
on sale was recognized. On May 28, 2002, the Company fully repaid
these bonds.

On January 11, 2001, the Company closed a new $700.0 mil-
lion secured revolving credit facility which is led by a major commer-
cial bank. The new facility has a three-year primary term and one-year
“term-out” extension option, and bears interest at LIBOR + 1.40% to
2.15%, depending upon the collateral contributed to the borrowing
base. The new facility accepts a broad range of structured ﬁnance assets
and has a ﬁnal maturity of January 2005. Subsequent to December 31,
2002, the Company extended the final maturity on this facility to
January 2007.

On February 22, 2001, the Company extended the maturity of
its $350.0 million unsecured revolving credit facility to May 2002. On
July 27, 2001, the Company repaid this facility and replaced it with a
new $300.0 million unsecured revolving credit facility.

On June 14, 2001, the Company closed $193.0 million of term
loan ﬁnancing secured by 15 corporate tenant lease assets. The variable-
rate loan bears interest at LIBOR + 1.85% (not to exceed 10.00% in
aggregate) and has two one-year extensions at the Company’s option.
The Company used these proceeds to repay a $77.8 million secured
term loan maturing in June 2001 and to pay down a portion of its
revolving credit facilities. In addition, the Company extended the
maturity of its $500.0 million secured revolving credit facility to
August 2003. On March 29, 2002, the Company again extended the ﬁnal
maturity of this facility to August 2005, which includes a one-year
“term-out” extension at the Company’s option.

On July 6, 2001, the Company ﬁnanced a $75.0 million struc-
tured ﬁnance asset with a $50.0 million term loan bearing interest at
LIBOR + 2.50%. The loan has a maturity of July 2006, including a one-
year extension at the Company’s option. This investment is a $75.0 mil-
lion term preferred investment in a publicly-traded real estate
customer. The Company’s investment carries an initial current yield of
10.50%, with annual increases of 0.50% in each of the next two years.
In addition, the Company’s investment is convertible into the cus-
tomer’s common stock at a strike price of $25.00 per share. The invest-
ment is callable by the customer between months 13 and 30 of the term
at a yield maintenance premium, and after month 30, at a premium suf-
ﬁcient to generate a 14.62% internal rate of return on the Company’s
investment. The investment is putable by the Company to the customer
for cash after ﬁve years.

On July 27, 2001, the Company completed a $300.0 million
unsecured revolving credit facility with a group of leading ﬁnancial
institutions. The new facility has an initial maturity of July 2003, with
a one-year extension at the Company’s option and another one-year
extension at the lenders’ option. The new facility replaces two prior
credit facilities maturing in 2002 and 2003, and bears interest at
LIBOR + 2.125%.

On August 9, 2001, the Company issued $350.0 million of
8.75% senior notes due in 2008. The notes are unsecured senior obliga-
tions of the Company. The Company used the net proceeds to partially
repay outstanding borrowings under its secured credit facilities.

On March 29, 2002, the Company extended the maturity of its
$500.0 million secured facility to August 2005, which includes a one-
year “term-out” extension at the Company’s option.

On May 28, 2002, the Company repaid the then remaining
$446.2 million of bonds outstanding under its STARs, Series 2000-1
ﬁnancing. Simultaneously, a wholly-owned subsidiary of the Company
issued STARs, Series 2002-1, consisting of $885.1 million of investment-
grade bonds secured by the subsidiary’s structured ﬁnance and corporate

iStar Financial annual report

tenant lease assets, which had an aggregate outstanding principal bal-
ance of approximately $1.1 billion at inception. Principal payments
received on the assets will be utilized to repay the most senior class of
the bonds then outstanding. The maturity of the bonds match funds
the maturity of the underlying assets ﬁnanced under the program. The
weighted average interest rate on the bonds, on an all-ﬂoating rate
basis, is approximately LIBOR + 0.56% at inception. For accounting pur-
poses, this transaction was treated as a secured ﬁnancing: the underlying
assets and STARs liabilities remained on the Company’s Consolidated
Balance Sheets, and no gain on sale was recognized.

On July 2, 2002, the Company purchased the remaining inter-
est in the Milpitas joint venture from the former Milpitas external
member for $27.9 million. Upon purchase of the interest, the Milpitas
joint venture became fully consolidated for accounting purposes and
approximately $79.1 million of secured term debt is reﬂected on the
Company’s Consolidated Balance Sheets.

On September 30, 2002, the Company closed a new $500.0 mil-
lion secured revolving credit facility with a leading ﬁnancial institution.
The new facility has a three-year term and bears interest at LIBOR +
1.50% to 2.25%, depending upon the collateral contributed to the bor-
rowing base. The new facility accepts a broad range of structured
ﬁnance and corporate tenant assets and has a ﬁnal maturity date of
September 2005.

On December 11, 2002, the Company closed a $61.5 million
term loan ﬁnancing with a leading ﬁnancial institution. The proceeds
were used to fund a portion of an $82.1 million CTL investment. The
non-recourse loan is ﬁxed rate and bears interest at 6.412%, has a matu-
rity date of December 2012 and amortizes over a 30-year schedule.

Hedging Activities – The Company has variable-rate lending
assets and variable-rate debt obligations. These assets and liabilities cre-
ate a natural hedge against changes in variable interest rates. This

means that as interest rates increase, the Company earns more on its
variable-rate lending assets and pays more on its variable-rate debt obli-
gations and, conversely, as interest rates decrease, the Company earns
less on its variable-rate lending assets and pays less on its variable-rate
debt obligations. When the amount of the Company’s variable-rate debt
obligations exceeds the amount of its variable-rate lending assets, the
Company utilizes derivative instruments to limit the impact of changing
interest rates on its net income. The Company does not use derivative
instruments to hedge assets or for speculative purposes. The deriva-
tives instruments the Company uses are typically in the form of inter-
est rate swaps and interest rate caps. Interest rate swaps effectively
change variable-rate debt obligations to ﬁxed-rate debt obligations.
Interest rate caps effectively limit the maximum interest rate on vari-
able-rate debt obligations.

In addition, when appropriate the Company may occasionally
enter into interest rate swaps that convert ﬁxed-rate debt to variable
rate in order to mitigate the risk of changes in fair value of the ﬁxed-
rate debt obligations.

The primary risks from the Company’s use of derivative
instruments is the risk that a counterparty to a hedging arrangement
could default on its obligation and the risk that the Company may have
to pay certain costs, such as transaction fees or breakage costs, if a hedg-
ing arrangement is terminated by the Company. As a matter of policy,
the Company enters into hedging arrangements with counterparties
that are large, creditworthy ﬁnancial institutions typically rated at least
“A” by Standard & Poor’s (“S&P”) and “A2” by Moody’s Investors Service
(“Moody’s”). The Company’s hedging strategy is approved and moni-
tored by the Company’s Audit Committee on behalf of its Board of
Directors and may be changed by the Board of Directors without stock-
holder approval.

The Company has entered into the following cash ﬂow and fair value hedges that are outstanding as of December 31, 2002. The net value

associated with these hedges is reﬂected on the Company’s Consolidated Balance Sheets (in thousands).

Type of Hedge
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Floating Swap
Pay-Floating Swap
LIBOR Cap
LIBOR Cap
LIBOR Cap

Total Estimated Value

Explanatory Note:

Notional
Amount

$125,000
125,000
75,000
100,000
50,000
345,000
75,000
35,000

Strike Price
or Swap Rate

7.058%
7.055%
5.580%
3.878%
3.810%
8.000%
7.750%
7.750%

Trade
Date

6/15/00
6/15/00
11/4/99(1)
11/27/02
11/27/02
5/22/02
11/4/99(1)
11/4/99(1)

Maturity
Date

6/25/03
6/25/03
12/1/04
8/15/08
8/15/08
5/28/14
12/1/04
12/1/04

Estimated Value at
December 31, 2002

$(3,598)
(3,596)
(5,743)
2,761
1,203
12,088
21
9
$ 3,145

Acquired in connection with the TriNet Acquisition (see Note 1 to the Company’s Consolidated Financial Statements).

(1)

Between January 1, 2001 and December 31, 2002, the Company also had outstanding the following cash ﬂow hedges that have expired or

been settled (in thousands):

Type of Hedge
LIBOR Cap
Pay-Fixed Swap
LIBOR Cap
LIBOR Cap

Notional
Amount

$300,000
92,000
75,000
38,336

Strike Price
or Swap Rate

9.000%
5.714%
7.500%
7.500%

Trade
Date

3/16/98
8/10/98
7/16/98
4/30/98

Maturity
Date

3/16/01
3/1/01
6/19/01
6/1/01

In connection with STARs, Series 2002-1 in May 2002, the
Company entered into a LIBOR interest rate cap struck at 8.00% in
the notional amount of $345.0 million. The Company utilizes the provi-
sions of Statement of Financial Accounting Standards No. 133 (“SFAS
No. 133), “Accounting for Derivative Instruments and Hedging Activities,”
with respect to such instruments. SFAS No. 133 provides that the up-
front fees paid on option-based products such as caps should be expensed

into earnings based on the allocation of the premium to the affected
periods as if the agreement were a series of “caplets.” These allocated
premiums are then reﬂected as a charge to income (as part of interest
expense) in the affected period.

On May 28, 2002, in connection with the STARs, Series 2002-1
transaction, the Company paid a premium of $13.7 million for an interest
rate cap. Using the “caplet” methodology discussed above, amortization

2002

page .35

of the cap premium is dependent upon the actual value of the caplets
at inception.

In connection with STARs, Series 2000-1 in May 2000, the
Company entered into a LIBOR interest rate cap struck at 10.00% in the
notional amount of $312.0 million, and simultaneously sold a LIBOR
interest rate cap with the same terms. Since these instruments did not
change the Company’s net interest rate risk exposure, they did not qual-
ify as hedges and changes in their respective values were charged to
earnings. As the terms of these arrangements were substantially the
same, the effects of a revaluation of these two instruments substan-
tially offset one another. On May 28, 2002, these instruments were set-
tled and are no longer outstanding.

In connection with a portion of the Company’s ﬁxed-rate cor-
porate bonds, the Company entered into two pay-ﬂoating interest rate
swaps struck at 3.8775% and 3.81% and in the notional amounts of
$100.0 million and $50.0 million, respectively. The Company pays one-
month LIBOR and receives the stated ﬁxed rate in return. These swaps
mitigate the risk of changes in the fair value of $150.0 million of the
Company’s fixed-rate corporate bonds attributable to changes in
LIBOR. For accounting purposes, the difference between the ﬁxed rate
received and the LIBOR rate paid on the notional amount of the swap is
recorded as “Interest expense” in the Company’s Consolidated
Statements of Operations. In addition, the Company adjusts the value
of the swap to its fair value and adjusts the carrying amount of the
hedged liability by an offsetting amount on a quarterly basis.

Certain of the Company’s CTL joint ventures, have hedging
activities which are more fully described in Note 6 to the Company’s
Consolidated Financial Statements.

Off-Balance Sheet Transactions – The Company is not dependent
on the use of any off-balance sheet ﬁnancing arrangements for liquid-
ity. As of December 31, 2002, the Company had investments in three
corporate tenant lease joint ventures accounted for under the equity
method, which had total debt obligations outstanding of approximately
$178.7 million. The Company’s pro rata share of the ventures’ third-
party debt was approximately $77.4 million (see Note 6 to the
Company’s Consolidated Financial Statements). These ventures were
formed for the purpose of operating, acquiring and in certain cases,
developing corporate tenant lease facilities. The debt obligations of
these joint ventures are non-recourse to the ventures and the Company
and mature between ﬁscal years 2004 and 2011. As of December 31,
2002, the debt obligations consisted of six term loans bearing ﬁxed
rates per annum ranging from 7.61% to 8.43% and one variable-rate
term loan with a rate of LIBOR + 1.25% per annum.

The Company has certain discretionary and non-discretionary
unfunded commitments related to its loans and other lending invest-
ments that it may need to, or choose to, fund in the future. Discre-
tionary commitments are those under which the Company has sole
discretion with respect to future funding. Non-discretionary commit-
ments are those under which the Company is generally obligated to
fund at the request of the borrower or upon the occurrence of events
outside of the Company’s direct control. As of December 31, 2002, the
Company had nine loans with unfunded commitments totaling
$97.7 million, of which $22.2 million was discretionary and $75.5 mil-
lion was non-discretionary.

Ratings Triggers – On July 27, 2001, the Company completed a
$300.0 million unsecured revolving credit facility with a group of lead-
ing ﬁnancial institutions. The new facility has an initial maturity of
July 2003 with a one-year extension at the Company’s option and
another one-year extension at the lenders’ option. The new facility
replaces two prior credit facilities maturing in 2002 and 2003, and
bears interest at LIBOR + 2.125% based on the Company’s senior unse-
cured credit ratings of BB+ from S&P, Ba1 from Moody’s and BBB- from
Fitch Ratings. If the Company achieves a higher rating from either S&P
or Moody’s, the facility’s interest rate will improve to LIBOR + 2.00%.
If the Company’s credit rating is downgraded by any of the rating agen-
cies (regardless of how far), the facility’s interest rate will increase to

LIBOR + 2.25%. In the event the Company receives two credit ratings
that are not equivalent, the spread over LIBOR shall be determined by
the lower of the two such ratings. As of December 31, 2002, no amounts
are outstanding on this facility. Accordingly, management does not
believe any rating changes would have a material adverse impact on the
Company’s results of operations. There are no other ratings triggers in
any of the Company’s debt instruments or other operating or ﬁnan-
cial agreements.

During the 12 months ended December 31, 2002, the
Company’s senior unsecured credit rating was upgraded to an invest-
ment grade rating of BBB- from BB+ by Fitch Ratings. In addition,
Moody’s and S&P raised their ratings outlook for the Company’s senior
unsecured credit rating to “positive.”

Transactions with Related Parties – The Company has an invest-
ment in iStar Operating Inc. (“iStar Operating”), a taxable subsidiary
that, through a wholly-owned subsidiary, services the Company’s loans
and certain loan portfolios owned by third parties. The Company owns
all of the non-voting preferred stock and a 95.00% economic interest in
iStar Operating. An afﬁliate of the Company’s largest shareholder is the
owner of all the voting common stock and a 5.00% economic interest in
iStar Operating. As of December 31, 2002, there have never been any
distributions to the common shareholder, nor does the Company
expect to make any in the future. At any time, the Company has the
right to acquire all of the common stock of iStar Operating at fair mar-
ket value, which the Company believes to be nominal. In addition to the
direct general and administrative costs of iStar Operating, the Company
allocates a portion of its general overhead expenses to iStar Operating
based on the number of employees at iStar Operating as a percentage
of the Company’s total employees.

In addition, the Company has an investment in TMOC, a tax-
able noncontrolled subsidiary that has a $2.0 million investment in a
real estate company based in Mexico. The Company owns 95.00% of
the outstanding voting and non-voting common stock (representing
1.00% voting power and 95.00% of the economic interest) in TMOC.
The other two owners of TMOC stock are executives of the Company,
who own a combined 5.00% of the outstanding voting and non-voting
common stock (representing 99.00% voting power and 5.00% eco-
nomic interest) in TMOC. As of December 31, 2002, there have never
been any distributions to the common shareholders, nor does the
Company expect to make any in the future. At any time, the Company
has the right to acquire all of the common stock of TMOC at fair market
value, which the Company believes to be nominal.

Both iStar Operating and TMOC have elected to be treated
as taxable REIT subsidiaries for purposes of maintaining compliance
with the REIT provisions of the Code and are accounted for under the
equity method for ﬁnancial statement reporting purposes and are pre-
sented in “Investments in and advances to joint ventures and unconsol-
idated subsidiaries” on the Company’s Consolidated Balance Sheets.
If they were consolidated with the Company for ﬁnancial statement
purposes, they would not have a material impact on the Company’s
operations. As of December 31, 2002, iStar Operating and TMOC have
no debt obligations.

The Company entered into an employment agreement with
its Chief Executive Ofﬁcer as of March 31, 2001. In addition to the
salary and bonus provisions of the agreement, the agreement provides
for an award of 2.0 million phantom units to the executive, each of
which notionally represents one share of the Company’s Common
Stock. Portions of these phantom units will vest on a contingent basis if
the average closing price of the Company’s Common Stock achieves
certain levels (ranging from $25.00 to $37.00 per share) for 60 consecu-
tive calendar days. Contingently vested units will become fully vested,
meaning that they are no longer subject to forfeiture, if the executive
remains employed through March 30, 2004, or earlier upon certain
change of control and termination events. When and if contingently
vested phantom units become fully vested units, the Company must
deliver to the executive either a number of shares of Common Stock

iStar Financial annual report

equal to the number of fully vested units or an amount of cash equal to
the then fair market value of that number of shares of Common Stock.
If shares were unavailable under the Company’s then long-term incen-
tive plans, this obligation could require the Company to make a sub-
stantial cash payment to the executive.

DRIP Program – The Company maintains a dividend reinvest-
ment and direct stock purchase plan. Under the dividend reinvestment
component of the plan, the Company’s shareholders may purchase
additional shares of Common Stock without payment of brokerage
commissions or service charges by automatically reinvesting all or a
portion of their Common Stock cash dividends. Under the direct stock
purchase component of the plan, the Company’s shareholders and new
investors may purchase shares of Common Stock directly from the
Company without payment of brokerage commissions or service
charges. All purchases of shares in excess of $10,000 per month pur-
suant to the direct purchase component are at the Company’s sole dis-
cretion. Shares issued under the plan may reﬂect a discount of up to
3.00% from the prevailing market price of the Company’s Common
Stock. The Company is authorized to issue up to 8.0 million shares of
Common Stock pursuant to the dividend reinvestment and direct stock
purchase plan. During the 12-month periods ended December 31, 2002
and 2001, the Company issued a total of 1.6 million and approximately
195,000 shares of its Common Stock, respectively, through the direct
stock purchase component of the plan. Net proceeds during the
12-month periods ended December 31, 2002 and 2001 were approxi-
mately $44.4 million and $4.7 million, respectively.

Stock Repurchase Program – The Board of Directors approved,
and the Company has implemented, a stock repurchase program under
which the Company is authorized to repurchase up to 5.0 million
shares of its Common Stock from time to time, primarily using pro-
ceeds from the disposition of assets or loan repayments and excess cash
ﬂow from operations, but also using borrowings under its credit facili-
ties if the Company determines that it is advantageous to do so. As of
December 31, 2001, the Company had repurchased a total of approxi-
mately 2.3 million shares, at an aggregate cost of approximately
$40.7 million. The Company did not repurchase any shares under the
stock repurchase program in 2002.

Critical Accounting Policies

The Company’s Consolidated Financial Statements include
the accounts of the Company and all majority-owned and controlled
subsidiaries. The preparation of ﬁnancial statements in accordance
with GAAP requires management to make estimates and assumptions
in certain circumstances that affect amounts reported in the accompa-
nying consolidated ﬁnancial statements. In preparing these ﬁnancial
statements, management has made its best estimates and judgments of
certain amounts included in the ﬁnancial statements, giving due con-
sideration to materiality. The Company does not believe that there is a
great likelihood that materially different amounts would be reported
related to the accounting policies described below. However, applica-
tion of these accounting policies involves the exercise of judgment and
use of assumptions as to future uncertainties and, as a result, actual
results could differ from these estimates.

Management has the obligation to ensure that its policies and
methodologies are in accordance with GAAP. During 2002, manage-
ment reviewed and evaluated its critical accounting policies and
believes them to be appropriate. The Company’s accounting policies
are described in Note 3 to the Company’s Consolidated Financial
Statements. Management believes the more signiﬁcant of these to be
as follows:

Revenue Recognition – The most significant sources of the
Company’s revenue come from its lending operations and its corporate
tenant lease operations. For its lending operations, the Company
reﬂects income using the effective yield method, which recognizes peri-
odic income over the expected term of the investment on a constant
yield basis. For corporate tenant lease assets, the Company recognizes

income on the straight-line method, which effectively recognizes con-
tractual lease payments to be received by the Company evenly over the
term of the lease. Management believes the Company’s revenue recog-
nition policies are appropriate to reﬂect the substance of the underly-
ing transactions.

Provision for Loan Losses – The Company’s accounting policies
require that an allowance for estimated credit losses be reﬂected in the
ﬁnancial statements based upon an evaluation of known and inherent
risks in its private lending assets. While the Company and its private
predecessors have experienced minimal actual losses on their lending
investments, management considers it prudent to reﬂect provisions for
loan losses on a portfolio basis based upon the Company’s assessment
of general market conditions, the Company’s internal risk management
policies and credit risk rating system, industry loss experience, the
Company’s assessment of the likelihood of delinquencies or defaults,
and the value of the collateral underlying its investments. Actual losses,
if any, could ultimately differ from these estimates.

Impairment of Long-Lived Assets – Corporate tenant lease assets
represent “long-lived” assets for accounting purposes. The Company
periodically reviews long-lived assets to be held and used in its leasing
operations for impairment in value whenever any events or changes in
circumstances indicate that the carrying amount of the assets may not
be recoverable. In management’s opinion, based on this analysis, corpo-
rate tenant assets to be held and used are not carried at amounts in
excess of their estimated recoverable amounts.

Risk Management and Financial Instruments – The Company has
historically utilized derivative ﬁnancial instruments only as a means to
help to manage its interest rate risk exposure on a portion of its variable-
rate debt obligations (i.e., as cash ﬂow hedges). The instruments uti-
lized are generally either pay-ﬁxed swaps or LIBOR-based interest rate
caps which are widely used in the industry and typically with major
ﬁnancial institutions. The Company’s accounting policies generally
reﬂect these instruments at their fair value with unrealized changes in
fair value reﬂected in “Accumulated other comprehensive income” on
the Company’s Consolidated Balance Sheets. Realized effects on the
Company’s cash ﬂows are generally recognized currently in income.

However, when appropriate the Company may occasionally
enter into interest rate swaps that convert ﬁxed-rate debt to variable
rate in order to mitigate the risk of changes in fair value of its ﬁxed-rate
debt obligations. The Company reﬂects these instruments at their fair
value and adjusts the carrying amount of the hedged liability by an off-
setting amount.

Income Taxes – The Company’s ﬁnancial results generally do
not reﬂect provisions for current or deferred income taxes. Manage-
ment believes that the Company has and intends to continue to operate
in a manner that will continue to allow it to be taxed as a REIT and, as a
result, does not expect to pay substantial corporate-level taxes. Many of
these requirements, however, are highly technical and complex. If the
Company were to fail to meet these requirements, the Company would
be subject to Federal income tax.

Executive Compensation – The Company’s accounting policies
generally provide cash compensation to be estimated and recognized
over the period of service. With respect to stock-based compensation
arrangements, as of July 1, 2002 (with retroactive application to the
beginning of the calendar year), the Company has adopted the fair
value method allowed under SFAS No. 123, which values options on
the date of grant and recognizes an expense equal to the fair value of
the option multiplied by the number of options granted over the
related service period. Prior to the third quarter 2002, the Company
elected to use APB 25 accounting, which measured the compensation
charges based on the intrinsic value of such securities when they
become ﬁxed and determinable, and recognized such expense over the
related service period. These arrangements are often complex and gen-
erally structured to align the interests of management with those of the
Company’s shareholders. See Note 10 to the Company’s Consolidated

2002

page .37

Financial Statements for a detailed discussion of such arrangements
and the related accounting effects.

During 2001, the Company entered into new three-year
employment agreements with its Chief Executive Officer and its
President. In addition, during 2002 the Company entered into a three-
year employment agreement with its new Chief Financial Officer.
See Note 10 to the Company’s Consolidated Financial Statements for a
more detailed description of these employment agreements.

The following is a hypothetical illustration of the effects on
the Company’s net income and adjusted earnings of the full vesting of
phantom units under the employment agreement with the Chief
Executive Ofﬁcer. During the 12 months ended December 31, 2002,
1.0 million of the phantom shares awarded to the Chief Executive
Ofﬁcer were contingently vested. Absent an earlier change of control or
termination of employment, these 1,000,000 shares will not become
fully vested until March 31, 2004. Assuming that the market price of
the Common Stock on March 31, 2004 is $28.05 (which was the market
price of the Common Stock on December 31, 2002), the Company
would incur a one-time charge to both net income and earnings at that
time equal to $28.0 million (the fair market value of the 1,000,000
shares at $28.05 per share).

On April 29, 2002, the 500,000 unvested restricted shares
awarded to the President became contingently vested as the total
shareholder return exceeded 60.00% and became fully vested on
September 30, 2002 as all employment contingencies were met. The
Company incurred a non-cash charge of approximately $15.0 million
related to these vested shares, recognized ratably over the service
period from the date of contingent vesting through September 30,
2002. Accordingly, the non-cash charge recognized for the 12 months
ended December 31, 2002 was approximately $15.0 million.

New Accounting Standards

In June 1998, the FASB issued Statement of Financial
Accounting Standards No. 133 (“SFAS No. 133”), “Accounting for
Derivative Instruments and Hedging Activities.” SFAS No. 133 estab-
lishes accounting and reporting standards for derivative financial
instruments and hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of ﬁnancial
position and measure those instruments at fair value. If certain condi-
tions are met, a derivative may be speciﬁcally designated as: (1) a hedge
of the exposure to changes in the fair value of a recognized asset or lia-
bility or an unrecognized ﬁrm commitment; (2) a hedge of the expo-
sure to variable cash ﬂows of a forecasted transaction; or (3) in certain
circumstances a hedge of a foreign currency exposure. On January 1,
2001, the Company adopted this pronouncement, as amended by
Statement of Financial Accounting Standards No. 137 “Accounting for
Derivative Instruments and Hedging Activities – Deferral of the
Effective Date of FASB Statement No. 133” and Statement of Financial
Accounting Standards No. 138 “Accounting for Certain Hedging
Activities – an Amendment of FASB No. 133.” Because the Company
has primarily used derivatives as cash ﬂow hedges of interest rate risk
only, the adoption of SFAS No. 133 did not have a material ﬁnancial
impact on the financial position and results of operations of the
Company. However, should the Company change its current use of such
derivatives, the adoption of SFAS No. 133 could have a more signiﬁcant
effect on the Company prospectively.

In December 1999, the Securities and Exchange Commission
(“SEC”) issued Staff Accounting Bulletin No. 101 (“SAB 101”), “Revenue
Recognition in Financial Statements.” In June 2000, the SEC staff
amended SAB 101 to provide registrants with additional time to imple-
ment SAB 101. The Company adopted SAB 101, as required, in the
fourth quarter of ﬁscal 2000. The adoption of SAB 101 did not have a
material ﬁnancial impact on the ﬁnancial position or results of opera-
tions of the Company.

awards, exchanges of awards in a business combination, modiﬁcations
to outstanding awards, and changes in grantee status that occur on or
after that date. FIN 44 addresses practice issues related to the applica-
tion of Accounting Practice Bulletin Opinion No. 25, “Accounting for
Stock Issued to Employees.” The initial adoption of FIN 44 did not have
a signiﬁcant impact on the Company.

In September 2000, the FASB issued Statement of Financial
Accounting Standards No. 140 (“SFAS No. 140”), “Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities.” This statement is applicable for transfers of assets and
extinguishments of liabilities occurring after June 30, 2001. The
Company adopted the provisions of this statement as required for all
transactions entered into on or after April 1, 2001. The adoption of
SFAS No. 140 did not have a signiﬁcant impact on the Company.

In July 2001, the SEC released Staff Accounting Bulletin
No. 102 (“SAB 102”), “Selected Loan Loss Allowance and Documentation
Issues.” SAB 102 summarizes certain of the SEC’s views on the develop-
ment, documentation and application of a systematic methodology for
determining allowances for loan and lease losses. Adoption of SAB 102
by the Company did not have a signiﬁcant impact on the Company.

In July 2001, the FASB issued Statement of Financial
Accounting Standards No. 141 (“SFAS No. 141”),“Business Combinations”
and Statement of Financial Accounting Standards No. 142 (“SFAS
No. 142”), “Goodwill and Other Intangible Assets.” SFAS No. 141
requires the purchase method of accounting to be used for all business
combinations initiated after June 30, 2001. SFAS No. 141 also addresses
the initial recognition and measurement of goodwill and other intangi-
ble assets acquired in business combinations and requires intangible
assets to be recognized apart from goodwill if certain tests are met.
SFAS No. 142 requires that goodwill not be amortized but instead be
measured for impairment at least annually, or when events indicate
that there may be an impairment. The Company adopted the provi-
sions of both statements, as required, on January 1, 2002 and the adop-
tion did not have a signiﬁcant impact on the Company.

In October 2001, the FASB issued Statement of Financial
Accounting Standards No. 144 (“SFAS No. 144”), “Accounting for the
Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 provides
new guidance on the recognition of impairment losses on long-lived
assets to be held and used or to be disposed of, and also broadens the
deﬁnition of what constitutes a discontinued operation and how the
results of a discontinued operation are to be measured and presented.
SFAS No. 144 requires that current operations prior to the disposition
of corporate tenant lease assets and prior period results of such opera-
tions be presented in discontinued operations in the Company’s
Consolidated Statements of Operations. The provisions of SFAS
No. 144 are effective for ﬁnancial statements issued for ﬁscal years
beginning after December 15, 2001, and must be applied at the begin-
ning of a ﬁscal year. The Company adopted the provisions of this state-
ment on January 1, 2002, as required, and it did not have a signiﬁcant
ﬁnancial impact on the Company.

iStar Financial annual report

may not be available to the Company. Any gains or losses on extin-
guishments of debt that were previously classiﬁed as extraordinary
items in prior periods presented that do not meet the criteria in APB 30
for classiﬁcation as an extraordinary item will be reclassiﬁed to income
from continuing operations. The provisions of SFAS No. 145 are effec-
tive for ﬁnancial statements issued for ﬁscal years beginning after
May 15, 2002. The Company will adopt the provisions of this state-
ment, as required, on January 1, 2003, at which time ($12.2) million
and ($1.6) million will be reclassiﬁed to continuing operations for 2002
and 2001, respectively.

In June 2002, the FASB issued Statement of Financial
Accounting Standards No. 146 (“SFAS No. 146”), “Accounting for Exit
or Disposal Activities,” to address signiﬁcant issues regarding the recog-
nition, measurement, and reporting of costs that are associated with
exit and disposal activities, including restructuring activities that are
currently accounted for pursuant to the guidance that the Emerging
Issues Task Force (“EITF”) has set forth in EITF Issue No. 94-3, “Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring).” The scope of SFAS No. 146 also includes: (1) costs
related to terminating a contract that is not a capital lease; and (2) ter-
mination benefits received by employees involuntarily terminated
under the terms of a one-time beneﬁt arrangement that is not an on-
going beneﬁt arrangement or an individual deferred-compensation
contract. The provisions of SFAS No. 146 are effective for exit or dis-
posal activities that are initiated after December 31, 2002. The
Company does not expect SFAS No. 146 to have a material effect on the
Company’s Consolidated Financial Statements.

In September 2002, the FASB issued Statement of Financial
Accounting Standards No. 147 (“SFAS No. 147”), “Acquisitions of
Certain Financial Institutions,” an amendment of FASB Statements
No. 72 and 144 and FASB Interpretation No. 9. SFAS No. 147 provides
guidance on the accounting for the acquisitions of ﬁnancial institu-
tions, except those acquisitions between two or more mutual enter-
prises. SFAS No. 147 removes acquisitions of financial institu-
tions from the scope of both FASB No. 72, “Accounting for Certain
Acquisitions of Banking or Thrift Institutions,” and FASB
Interpretation No. 9, Applying APB Opinions No. 16 and 17, “When a
Savings and Loan Association or a Similar Institution is Acquired in a
Business Combination Accounted for by the Purchase Method,” and
requires that those transactions be accounted for in accordance with
SFAS No. 141 and SFAS No. 142. SFAS No. 147 also amends SFAS
No. 144 to include in its scope long-term, customer-relationship intangi-
ble assets of ﬁnancial institutions such as depositor-relationship and
borrower-relationship intangible assets and credit cardholder intangi-
ble assets. The Company adopted the provisions of this statement, as
required, on October 1, 2002, and it did not have a signiﬁcant ﬁnancial
impact on the Company’s Consolidated Financial Statements.

In November 2002, the FASB issued FASB Interpretation
No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others,” an interpretation of FASB Statement of Financial Accounting
Standards No. 5 (“SFAS No. 5”), “Accounting for Contingencies,”
Statement of Financial Accounting Standards No. 57, “Related Party
Disclosures,” Statement of Financial Accounting Standards No. 107,
“Disclosures about Fair Value of Financial Instruments” and rescinds
FASB Interpretation No. 34, “Disclosure of Indirect Guarantees of
Indebtedness of Others, an Interpretation of SFAS No. 5.” It requires
that upon issuance of a guarantee, the guarantor must recognize a
liability for the fair value of the obligation it assumes under that guar-
antee regardless if the Company receives separately identiﬁable consid-
eration (i.e., a premium). The new disclosure requirements are effective
December 31, 2002. The adoption of FIN 45 did not have a material
impact on the Company’s Consolidated Financial Statements, nor is it
expected to have a material impact in the future.

alternative transition methods for a voluntary change to the fair value
basis of accounting for stock-based employee compensation. However,
this Statement does not permit the use of the original SFAS No. 123
prospective method of transition for changes to the fair value based
method made in ﬁscal years beginning after December 15, 2003. In
addition, this Statement amends the disclosure requirements of SFAS
No. 123 to require prominent disclosures in both annual and interim
ﬁnancial statements about the method of accounting for stock-based
employee compensation, description of transition method utilized and
the effect of the method used on reported results. The transition and
annual disclosure provisions of SFAS No. 148 shall be applied for ﬁscal
years ending after December 15, 2002. The new interim disclosure pro-
visions are effective for the first interim period beginning after
December 15, 2002. The Company adopted SFAS No. 148 with retroac-
tive application to January 1, 2002 with no material effect on the
Company’s Consolidated Financial Statements.

In January 2003, the FASB issued FASB Interpretation No. 46
(“FIN 46”), “Consolidation of Variable Interest Entities,” an interpreta-
tion of ARB 51. FIN 46 provides guidance on identifying entities for
which control is achieved through means other than through voting
rights (a “variable interest entity” or “VIE”), and how to determine when
and which business enterprise should consolidate a VIE. In addition,
FIN 46 requires that both the primary beneﬁciary and all other enter-
prises with a signiﬁcant variable interest in a VIE make additional dis-
closures. The transitional disclosure requirements will take effect
almost immediately and are required for all ﬁnancial statements ini-
tially issued after January 31, 2003. The adoption of FIN 46 is not
expected to have a material impact on the Company.

quantitative and qualitative disclosures about market risk

Market Risks

Market risk is the exposure to loss resulting from changes
in interest rates, foreign currency exchange rates, commodity prices
and equity prices. In pursuing its business plan, the primary market
risk to which the Company is exposed is interest rate risk. Consistent
with its liability management objectives, the Company has imple-
mented an interest rate risk management policy based on match fund-
ing, with the objective that variable-rate assets be primarily ﬁnanced
by variable-rate liabilities and ﬁxed-rate assets be primarily ﬁnanced by
ﬁxed-rate liabilities.

The Company’s operating results will depend in part on the
difference between the interest and related income earned on its assets
and the interest expense incurred in connection with its interest-bearing
liabilities. Competition from other providers of real estate ﬁnancing
may lead to a decrease in the interest rate earned on the Company’s
interest-bearing assets, which the Company may not be able to offset by
obtaining lower interest costs on its borrowings. Changes in the gen-
eral level of interest rates prevailing in the ﬁnancial markets may affect
the spread (the difference in the principal amount outstanding)
between the Company’s interest-earning assets and interest-bearing lia-
bilities. Any signiﬁcant compression of the spreads between interest-
earning assets and interest-bearing liabilities could have a material
adverse effect on the Company. In addition, an increase in interest rates
could, among other things, reduce the value of the Company’s interest-
bearing assets and its ability to realize gains from the sale of such
assets, and a decrease in interest rates could reduce the average life of
the Company’s interest-earning assets.

A substantial portion of the Company’s loan investments are
subject to signiﬁcant prepayment protection in the form of lock-outs,
yield maintenance provisions or other prepayment premiums which
provide substantial yield protection to the Company. Those assets gen-
erally not subject to prepayment penalties include: (1) variable-rate
loans based on LIBOR, originated or acquired at par, which would not
result in any gain or loss upon repayment; and (2) discount loans and
loan participations acquired at discounts to face values, which would
result in gains upon repayment. Further, while the Company generally
seeks to enter into loan investments which provide for substantial

2002

page .39

prepayment protection, in the event of declining interest rates, the
Company could receive such prepayments and may not be able to rein-
vest such proceeds at favorable returns. Such prepayments could have
an adverse effect on the spreads between interest-earning assets and
interest-bearing liabilities.

While the Company has not experienced any significant
credit losses, in the event of a signiﬁcant rising interest rate environ-
ment and/or economic downturn, defaults could increase and result in
credit losses to the Company which adversely affect its liquidity and
operating results. Further, such delinquencies or defaults could have
an adverse effect on the spreads between interest-earning assets and
interest-bearing liabilities.

Interest rates are highly sensitive to many factors, including
governmental monetary and tax policies, domestic and international
economic and political conditions, and other factors beyond the control
of the Company. As more fully discussed in Note 9 to the Company’s
Consolidated Financial Statements, the Company employs match
funding-based hedging strategies to limit the effects of changes in
interest rates on its operations, including engaging in interest rate caps,
ﬂoors, swaps, futures and other interest rate-related derivative con-
tracts. These strategies are specifically designed to reduce the
Company’s exposure, on speciﬁc transactions or on a portfolio basis, to
changes in cash ﬂows as a result of interest rate movements in the mar-
ket. The Company does not enter into derivative contracts for specula-
tive purposes nor as a hedge against changes in credit risk of its
borrowers or of the Company itself.

Each interest rate cap or ﬂoor agreement is a legal contract
between the Company and a third party (the “counterparty”). When the
Company purchases a cap or ﬂoor contract, the Company makes an up-
front payment to the counterparty and the counterparty agrees to make
payments to the Company in the future should the reference rate (typi-
cally one- or three-month LIBOR) rise above (cap agreements) or fall
below (ﬂoor agreements) the “strike” rate speciﬁed in the contract. Each
contract has a notional face amount. Should the reference rate rise
above the contractual strike rate in a cap, the Company will earn cap
income. Should the reference rate fall below the contractual strike rate
in a ﬂoor, the Company will earn ﬂoor income. Payments on an annual-
ized basis will equal the contractual notional face amount multiplied by
the difference between the actual reference rate and the contracted
strike rate. The Company utilizes the provisions of SFAS No. 133 with
respect to such instruments. SFAS No. 133 provides that the up-front
fees paid on option-based products such as caps should be expensed
into earnings based on the allocation of the premium to the affected
periods as if the agreement were a series of “caplets.” These allocated
premiums are then reﬂected as a charge to income and are included in
“Interest expense” on the Company’s Consolidated Statements of
Operations in the affected period.

Interest rate swaps are agreements in which a series of inter-
est rate ﬂows are exchanged over a prescribed period. The notional
amount on which swaps are based is not exchanged. In general, the
Company’s swaps are “pay ﬁxed” swaps involving the exchange of variable-
rate interest payments from the counterparty for ﬁxed interest pay-
ments from the Company. However, when appropriate the Company
may occasionally enter into “pay ﬂoating” swaps involving the exchange
of ﬁxed-rate interest payments from the counterparty for variable-rate
interest payments from the Company, which mitigates the risk of
changes in fair value of the Company’s ﬁxed-rate debt obligations.

Interest rate futures are contracts, generally settled in cash,
in which the seller agrees to deliver on a speciﬁed future date the
cash equivalent of the difference between the speciﬁed price or yield
indicated in the contract and the value of the speciﬁed instrument
(i.e., U.S. Treasury securities) upon settlement. Under these agreements,
the Company would generally receive additional cash ﬂow at settle-
ment if interest rates rise and pay cash if interest rates fall. The effects
of such receipts or payments would be deferred and amortized over the
term of the speciﬁc related ﬁxed-rate borrowings. In the event that, in
the opinion of management, it is no longer probable that a forecasted
transaction will occur under terms substantially equivalent to those

projected, the Company would cease recognizing such transactions as
hedges and immediately recognize related gains or losses based on
actual settlement or estimated settlement value.

While a REIT may freely utilize the types of derivative instru-
ments discussed above to hedge interest rate risk on its liabilities, the
use of derivatives for other purposes, including hedging asset-related
risks such as credit, prepayment or interest rate exposure on the
Company’s loan assets, could generate income which is not qualiﬁed
income for purposes of maintaining REIT status. As a consequence, the
Company may only engage in such instruments to hedge such risks on
a limited basis.

There can be no assurance that the Company’s proﬁtability
will not be adversely affected during any period as a result of changing
interest rates. In addition, hedging transactions using derivative instru-
ments involve certain additional risks such as counterparty credit risk,
legal enforceability of hedging contracts and the risk that unantici-
pated and signiﬁcant changes in interest rates will cause a signiﬁcant
loss of basis in the contract. With regard to loss of basis in a hedging
contract, indices upon which contracts are based may be more or less
variable than the indices upon which the hedged assets or liabilities are
based, thereby making the hedge less effective. The counterparties to
these contractual arrangements are major ﬁnancial institutions with
which the Company and its afﬁliates may also have other ﬁnancial rela-
tionships. The Company is potentially exposed to credit loss in the
event of nonperformance by these counterparties. However, because of
their high credit ratings, the Company does not anticipate that any of
the counterparties will fail to meet their obligations. There can be no
assurance that the Company will be able to adequately protect against
the foregoing risks and that the Company will ultimately realize an eco-
nomic beneﬁt from any hedging contract it enters into which exceeds
the related costs incurred in connection with engaging in such hedges.
The following table quantiﬁes the potential changes in net
investment income and net fair value of ﬁnancial instruments should
interest rates increase or decrease 100 or 200 basis points, assuming
no change in the shape of the yield curve (i.e., relative interest rates).
Net investment income is calculated as revenue from loans and other
lending investments and operating leases (as of December 31, 2002),
less related interest expense and operating costs on corporate tenant
lease assets, for the year ended December 31, 2002. Net fair value of
ﬁnancial instruments is calculated as the sum of the value of derivative
instruments and the present value of cash in-ﬂows generated from
interest-earning assets, less cash out-ﬂows in respect of interest-bearing
liabilities as of December 31, 2002. The cash ﬂows associated with the
Company’s assets are calculated based on management’s best estimate
of expected payments for each loan based on loan characteristics such
as loan-to-value ratio, interest rate, credit history, prepayment penalty,
term and collateral type. Most of the Company’s loans are protected
from prepayment as a result of prepayment penalties and contractual
terms which prohibit prepayments during speciﬁed periods. However,
for those loans where prepayments are not currently precluded by con-
tract, declines in interest rates may increase prepayment speeds. The
base interest rate scenario assumes the one-month LIBOR rate of 1.38%
as of December 31, 2002. Actual results could differ signiﬁcantly from
those estimated in the table.

Change in Interest Rates
–100 Basis Points
–50 Basis Points
Base Interest Rate
+100 Basis Points
+200 Basis Points

Explanatory Note:

Estimated Percentage Change In

Net
Investment
Income

Net Fair Value
of Financial
Instruments(1)

1.44%
0.72%
0.00%
(1.44)%
(2.88)%

5.00%
2.38%
0.00%
(3.23)%
(1.52)%

Amounts exclude fair values of non-ﬁnancial investments, primarily CTL assets and

certain forms of corporate ﬁnance investments.

(1)

iStar Financial annual report

report of independent accountants

To the Board of Directors and Shareholders
of iStar Financial, Inc.

In our opinion, the accompanying consolidated balance
sheets and the related consolidated statements of operations, of
changes in shareholders’ equity and of cash ﬂows present fairly, in all
material respects, the ﬁnancial position of iStar Financial, Inc. and its
subsidiaries at December 31, 2002 and 2001, and the results of their
operations and their cash ﬂows for each of the three years in the period
ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. 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 of these statements in
accordance with auditing standards generally accepted in the United
States of America, which 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, 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 reason-
able basis for our opinion.

PricewaterhouseCoopers LLP
New York, NY
February 14, 2003, except for Note 17,
which is as of March 11, 2003

2002

page .41

consolidated balance sheets

As of December 31,

Assets
Loans and other lending investments, net
Corporate tenant lease assets, net
Investments in and advances to joint ventures and unconsolidated subsidiaries
Assets held for sale
Cash and cash equivalents
Restricted cash
Accrued interest and operating lease income receivable
Deferred operating lease income receivable
Deferred expenses and other assets

Total assets

Liabilities and Shareholders’ Equity
Liabilities:
Accounts payable, accrued expenses and other liabilities
Dividends payable
Debt obligations

Total liabilities
Commitments and contingencies
Minority interest in consolidated entities
Shareholders’ equity:
Series A Preferred Stock, $0.001 par value, liquidation preference $50.00 per share, 4,400 shares issued and

outstanding at December 31, 2002 and December 31, 2001

Series B Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 2,000 shares issued and

outstanding at December 31, 2002 and December 31, 2001

Series C Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 1,300 shares issued and

outstanding at December 31, 2002 and December 31, 2001

Series D Preferred Stock, $0.001 par value, liquidation preference $25.00 per share, 4,000 shares issued and

outstanding at December 31, 2002 and December 31, 2001

High Performance Units
Common Stock, $0.001 par value, 200,000 shares authorized, 98,114 and 87,387 shares issued and

outstanding at December 31, 2002 and December 31, 2001, respectively

Warrants and options
Additional paid-in capital
Retained earnings (deﬁcit)
Accumulated other comprehensive income (losses) (See Note 12)
Treasury stock (at cost)

Total shareholders’ equity
Total liabilities and shareholders’ equity

Reclassiﬁed to conform to 2002 presentation.

The accompanying notes are an integral part of the ﬁnancial statements.

2002

2001*

(In thousands, except per share data)

$3,050,342
2,291,805
30,611
28,501
15,934
40,211
26,804
36,739
90,750
$5,611,697

$2,377,763
1,781,565
60,794
–
15,670
17,852
31,797
21,195
74,004
$4,380,640

$ 117,001
5,225
3,461,590
3,583,816
–
2,581

89,618
5,225
2,495,369
2,590,212
–
2,650

4
1,359

4
–

98
20,322
2,281,636
(227,769)
(2,301)
(48,056)
2,025,300
$5,611,697

87
20,456
1,997,931
(174,874)
(15,092)
(40,741)
1,787,778
$4,380,640

iStar Financial annual report

consolidated statements of operations

For the Year Ended December 31,

Revenue:
Interest income
Operating lease income
Other income

Total revenue

Costs and expenses:
Interest expense
Operating costs – corporate tenant lease assets
Depreciation and amortization
General and administrative
General and administrative – stock-based compensation expense
Provision for loan losses

Total costs and expenses

Net income before equity in earnings from joint ventures and unconsolidated subsidiaries,

minority interest and other items

Reclassiﬁed to conform to 2002 presentation.

The accompanying notes are an integral part of the ﬁnancial statements.

2002

2001*

2000*

(In thousands, except per share data)

$255,631
242,100
27,993
525,724

185,375
13,755
47,821
30,449
17,998
8,250
303,648

222,076
1,222
(162)
(12,166)
–
210,970
3,583
717
$215,270
(36,908)
$178,362
1.98
$
1.93
$

$254,119
185,943
31,057
471,119

169,974
12,782
35,411
24,151
3,574
7,000
252,892

218,227
7,361
(218)
(1,620)
(282)
223,468
5,299
1,145
$229,912
(36,908)
$193,004
2.24
$
2.19
$

$268,011
177,581
17,927
463,519

173,741
12,737
34,384
25,706
2,864
6,500
255,932

207,587
4,796
(195)
(705)
–
211,483
3,155
2,948
$217,586
(36,908)
$180,678
2.11
$
2.10
$

2002

page .43

consolidated statements of cash ﬂows

For the Year Ended December 31,

Cash ﬂows from operating activities:
Net income
Adjustments to reconcile net income to cash ﬂows provided by operating activities:

Minority interest in consolidated entities
Non-cash expense for stock-based compensation
Depreciation and amortization
Depreciation and amortization from discontinued operations
Amortization of discounts/premiums, deferred interest and costs on lending investments
Discounts, loan fees and deferred interest received
Equity in earnings from joint ventures and unconsolidated subsidiaries
Distributions from operations of joint ventures
Deferred operating lease income receivable
Realized (gains)/losses on sale of securities
Gain from discontinued operations
Extraordinary loss on early extinguishment of debt
Cumulative effect of change in accounting principle
Provision for loan losses
Change in investments in and advances to joint ventures and unconsolidated subsidiaries
Changes in assets and liabilities:

Decrease (increase) in accrued interest and operating lease income receivable
Decrease (increase) in deferred expenses and other assets
Increase (decrease) in accounts payable, accrued expenses and other liabilities
Cash ﬂows provided by operating activities

Cash ﬂows from investing activities:
New investment originations
Add-on fundings under existing loan commitments
Net proceeds from sale of corporate tenant lease assets
Net proceeds from lease termination payments
Proceeds from sale of investment securities
Repayments of and principal collections on loans and other lending investments
Investments in and advances to joint ventures and unconsolidated subsidiaries
Distributions from unconsolidated joint ventures
Capital improvements for build-to-suit projects
Capital improvement projects on corporate tenant lease assets
Other capital expenditures on corporate tenant lease assets

Cash ﬂows used in investing activities

Cash ﬂows from ﬁnancing activities:

Borrowings under revolving credit facilities
Repayments under revolving credit facilities
Borrowings under term loans
Repayments under term loans
Borrowings under secured bond offerings
Repayments under secured bond offerings
Borrowings under unsecured bond offerings
Repayments under unsecured notes
Borrowings under other debt obligations
Repayments under other debt obligations
(Increase) decrease in restricted cash held in connection with debt obligations
Payments on early extinguishment of debt
Payments for deferred ﬁnancing costs
Distributions to minority interest in consolidated entities
Common dividends paid(1)
Preferred dividends paid
Proceeds from equity offering
Purchase of treasury stock
Contribution from signiﬁcant shareholder
Proceeds from exercise of options and issuance of DRIP shares
Proceeds from high performance units issued to employees
Cash ﬂows provided by (used in) ﬁnancing activities

Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Supplemental disclosure of cash ﬂow information:

2002

2001*

2000*

(In thousands)

$ 215,270

$ 229,912

$ 217,586

162
18,059
71,287
219
(33,086)
36,714
(1,222)
5,802
(15,265)
–
(717)
12,166
–
8,250
(6,598)

3,809
1,758
32,185
348,793

(1,812,993)
(21,619)
3,702
17,500
–
671,965
(127)
–
(1,064)
(2,277)
(4,157)
(1,149,070)

2,496,200
(2,122,994)
115,099
(18,279)
885,079
(475,679)
–
–
1,094
(1,668)
(22,359)
(3,950)
(45,702)
(231)
(231,257)
(36,578)
202,899
(6,981)
506
63,983
1,359
800,541
264
15,670
15,934

218
3,574
55,831
213
(41,067)
28,425
(7,358)
4,802
(10,923)
–
(1,145)
1,620
282
7,000
(2,568)

5,083
(204)
19,565
293,260

(924,455)
(99,626)
26,306
–
–
650,970
(1,601)
24,265
(14,266)
(6,629)
(4,489)
(349,525)

195
2,864
47,290
112
(27,059)
17,153
(4,753)
4,511
(9,130)
233
(2,948)
705
–
6,500
(447)

(5,401)
(25,841)
(1,702)
219,868

(850,144)
(56,039)
146,265
–
30
571,846
(27,490)
34,759
(5,022)
(6,831)
(1,179)
(193,805)

2,420,638
(2,285,892)
277,664
(120,333)
–
(125,962)
350,000
(100,000)
279
(56,008)
2,590
(1,037)
(30,382)
(3,794)
(264,527)
(36,578)
–
–
–
22,525
–
49,183
(7,082)
22,752
15,670

2,304,099
(2,487,936)
90,000
(300,799)
863,254
(274,919)
–
–
65,067
(31,564)
(10,246)
(317)
(21,048)
(164)
(202,397)
(36,576)
–
(302)
–
6,129
–
(37,719)
(11,656)
34,408
22,752

Cash paid during the period for interest, net of amount capitalized

$ 157,618

$ 1 41,271

$ 141,632

Reclassiﬁed to conform to 2002 presentation.

Explanatory Note:

(1)

For the year ended December 31, 2001, the $264.5 million of common dividends shown in the table represents ﬁve quarters of dividends, of which $51.4 million relates to the fourth

quarter 2000 dividend (paid in January 2001).

The accompanying notes are an integral part of the ﬁnancial statements.

iStar Financial annual report

consolidated statements of changes in shareholders’ equity

Series B

Series A

Series D
Preferred Preferred Preferred Preferred
Stock

Series C

Stock

High

Accumulated

Other Com-

Perfor- Common Warrants
and
Stock
mance
Options
at Par
Units

Additional
Paid-In
Capital

Retained prehensive
Income
Earnings
(Losses)
(Deficit)

Treasury
Stock

Total

$4
–
–
–
–

–

–
–
–
–

–
$4
–
–
–
–

–

–
–
–
–

–

–
$4
–
–
–
–

–
–

–

–
–
–
–

–
–
–
–
–

–

–
–
–
–

–
–
–
–
–
–

–

–
–
–
–

–

–
–
–
–
–
–

–
–

1,359

–
–
–
–

–

–
–
–
–

–
$85
2
–
–
–

–

–
–
–
–

–

–
$87
2
8
–
–

–
–

–

–
1
–
–

(In thousands)

$85
–
–
–
–

$17,935 $ 1,953,972 $ (129,992)
–
7,089
(36,906)
330
(205,477)
–
–
3,637

(992)
–
–
–

–

–
–
–
–

1,125

–

212
31
–
–

–
–
–
217,586

–

–
$16,943 $ 1,966,396 $ (154,789)
–
22,550
(36,908)
330
(213,089)
–
–
1,219

(835)
–
–
–

(229) $ (40,439) $ 1,801,343
–
6,097
(36,576)
–
(205,477)
–
3,637
–

–
–
–
–

–

–
–
–
–

–

1,125

–
–
(302)
–

212
31
(302)
217,586

209
–
209
(20) $ (40,741) $ 1,787,885
21,717
–
(36,578)
–
(213,089)
–
1,219
–

–
–
–
–

–

1,478

–

–
4,348
–
–

1,250
–
4,708
–

–
–
–
229,912

–

–
–
–
–

–

(9,445)

–

–
–
–
–

–

1,478

1,250
4,348
4,708
229,912

(9,445)

–

–
$20,456 $ 1,997,931 $ (174,874)
–
16,170
–
202,891
(36,908)
330
(231,257)
–

(443)
–
–
–

–

(5,627)

(5,627)
$ (15,092) $ (40,741) $ 1,787,778
15,729
202,899
(36,578)
(231,257)

–
–
–
–

–
309

19,048
–

–

–
–
–
–

–

506
44,426
334
–

–
–

–

–
–
–
215,270

–
–

–

–
–
–
–

–
–

–

19,048
309

1,359

–
–
(7,315)
–

506
44,427
(6,981)
215,270

–
$4

–
$1,359

–
$98

–

–
$20,322 $2,281,636 $(227,769)

–

12,791

12,791
$ (2,301) $(48,056) $2,025,300

–

Balance at January 1, 2000
Exercise of options
Dividends declared – preferred
Dividends declared – common
Acquisition of ACRE Partners
Restricted stock units issued to

employees in lieu of cash bonuses

Restricted stock units granted

to employees

Issuance of stock – DRIP plan
Purchase of treasury shares
Net income for the period
Change in accumulated other
comprehensive income
Balance at December 31, 2000
Exercise of options
Dividends declared – preferred
Dividends declared – common
Acquisition of ACRE Partners
Restricted stock units issued to

employees in lieu of cash bonuses

Restricted stock units granted

to employees

Options granted to employees
Issuance of stock – DRIP plan
Net income for the period
Cumulative effect of change in

accounting principle
Change in accumulated other
comprehensive income
Balance at December 31, 2001
Exercise of options
Proceeds from equity offering
Dividends declared – preferred
Dividends declared – common
Restricted stock units granted

to employees

Options granted to employees
High performance units sold

to employees
Contributions from

signiﬁcant shareholder
Issuance of stock – DRIP plan
Purchase of treasury shares
Net income for the period
Change in accumulated other
comprehensive income
Balance at December 31, 2002

$4
–
–
–
–

–

–
–
–
–

–
$4
–
–
–
–

–

–
–
–
–

–

–
$4
–
–
–
–

–
–

–

–
–
–
–

–
$4

$2
–
–
–
–

–

–
–
–
–

–
$2
–
–
–
–

–

–
–
–
–

–

–
$2
–
–
–
–

–
–

–

–
–
–
–

–
$2

$1
–
–
–
–

–

–
–
–
–

–
$1
–
–
–
–

–

–
–
–
–

–

–
$1
–
–
–
–

–
–

–

–
–
–
–

–
$1

The accompanying notes are an integral part of the ﬁnancial statements.
~

2002

page .45

notes to consolidated ﬁnancial statements

Note 1 – Business and Organization

Business – iStar Financial Inc. (the “Company”) is the leading
publicly-traded ﬁnance company focused on the commercial real estate
industry. The Company provides structured ﬁnancing to private and
corporate owners of real estate nationwide, including senior and junior
mortgage debt, corporate mezzanine and subordinated capital, and cor-
porate net lease ﬁnancing. The Company, which is taxed as a real estate
investment trust (“REIT”), seeks to deliver strong dividends and supe-
rior risk-adjusted returns on equity to shareholders by providing inno-
vative and value-added ﬁnancing solutions to its customers.

The Company’s primary product lines include:
Structured Finance. The Company provides senior and subordi-
nated loans that typically range in size from $20 million to $100 mil-
lion to borrowers holding high-quality real estate. These loans may be
either ﬁxed or variable rate and are structured to meet the speciﬁc
ﬁnancing needs of the borrowers, including the acquisition or ﬁnanc-
ing of large, high-quality real estate. The Company offers borrowers a
wide range of structured ﬁnance options, including ﬁrst mortgages, sec-
ond mortgages, partnership loans, participating debt and interim facili-
ties. The Company’s structured ﬁnance transactions have maturities
generally ranging from three to ten years. As of December 31, 2002,
based on gross carrying values, the Company’s structured finance
assets represented 27.02% of its assets.

Portfolio Finance. The Company provides funding to regional
and national borrowers who own multiple facilities in geographically
diverse portfolios. Loans are cross-collateralized to give the Company
the beneﬁt of all available collateral and underwritten to recognize
inherent portfolio diversiﬁcation. Property types include multifamily,
suburban office, hotels and other property types where individual
property values are less than $20 million on average. Loan terms are
structured to meet the speciﬁc requirements of the borrower and typi-
cally range in size from $25 million to $150 million. The Company’s
portfolio ﬁnance transactions have maturities generally ranging from
three to ten years. As of December 31, 2002, based on gross carrying
values, the Company’s portfolio ﬁnance assets represented 7.08% of
its assets.

Corporate Finance. The Company provides senior and subordi-
nated capital to corporations engaged in real estate or real estate-related
businesses. Financings may be either secured or unsecured and typi-
cally range in size from $20 million to $150 million. The Company’s
corporate ﬁnance transactions have maturities generally ranging from
ﬁve to ten years. As of December 31, 2002, based on gross carrying
values, the Company’s corporate ﬁnance assets represented 12.18% of
its assets.

Loan Acquisition. The Company acquires whole loans and loan
participations which present attractive risk-reward opportunities.
Loans are generally acquired at a small discount to the principal bal-
ance outstanding. Loan acquisitions typically range in size from $5 mil-
lion to $100 million and are collateralized by all major property types.
The Company’s loan acquisition transactions have maturities generally
ranging from three to ten years. As of December 31, 2002, based on
gross carrying values, the Company’s loan acquisition assets repre-
sented 8.60% of its assets.

Corporate Tenant Leasing. The Company provides capital to
corporations and borrowers who control facilities leased to single credit-
worthy tenants. The Company’s net leased assets are generally mission-
critical headquarters or distribution facilities that are subject to
long-term leases with rated corporate credit tenants, and which provide
for all expenses at the property to be paid by the corporate tenant on a
triple net lease basis. Corporate tenant lease transactions have terms
generally ranging from ten to 20 years and typically range in size from
$20 million to $150 million. As of December 31, 2002, based on gross
carrying values, the Company’s corporate tenant lease assets repre-
sented 43.64% of its assets.

Servicing. Through its iStar Asset Services division, the
Company provides rated loan servicing to third-party institutional loan
portfolios, as well as to the Company’s own assets. The servicing busi-
ness did not represent a meaningful percentage of the gross carrying
value of the Company’s assets as of December 31, 2002.

The Company’s investment strategy targets speciﬁc sectors of
the real estate credit markets in which it believes it can deliver value-
added, ﬂexible ﬁnancial solutions to its customers, thereby differentiat-
ing its ﬁnancial products from those offered by other capital providers.

The Company has implemented its investment strategy by:
• Focusing on the origination of large, structured mortgage,
corporate and lease ﬁnancings where customers require ﬂexible ﬁnan-
cial solutions.

• Avoiding commodity businesses in which there is signiﬁcant
direct competition from other providers of capital such as conduit lending
and investment in commercial or residential mortgage-backed securities.
• Developing direct relationships with borrowers and corpo-
rate customers as opposed to sourcing transactions solely through
intermediaries.

• Adding value beyond simply providing capital by offering
borrowers and corporate customers speciﬁc lending expertise, ﬂexibil-
ity, certainty and continuing relationships beyond the closing of a par-
ticular ﬁnancing transaction.

• Taking advantage of market anomalies in the real estate
ﬁnancing markets when the Company believes credit is mispriced by
other providers of capital, such as the spread between lease yields and
the yields on corporate customers’ underlying credit obligations.

Organization – The Company began its business in 1993
through private investment funds formed to capitalize on inefﬁciencies
in the real estate ﬁnance market. In March 1998, these funds con-
tributed their approximately $1.1 billion of assets to the Company’s
predecessor in exchange for a controlling interest in that company.
Since that time, the Company has grown by originating new lending
and leasing transactions, as well as through corporate acquisitions.

Speciﬁcally, in September 1998, the Company acquired the
loan origination and servicing business of a major insurance company,
and in December 1998, the Company acquired the mortgage and mez-
zanine loan portfolio of its largest private competitor. Additionally, in
November 1999, the Company acquired TriNet Corporate Realty Trust,
Inc. (“TriNet” or the “Leasing Subsidiary”), then the largest publicly-
traded company specializing in corporate sale/leaseback transactions
for ofﬁce and industrial facilities (the “TriNet Acquisition”). The TriNet
Acquisition was structured as a stock-for-stock merger of TriNet with a
subsidiary of the Company.

Concurrent with the TriNet Acquisition, the Company also
acquired its former external advisor in exchange for shares of the
Company’s common stock (“Common Stock”) and converted its organi-
zational form to a Maryland corporation. As part of the conversion to a
Maryland corporation, the Company replaced its former dual class
common share structure with a single class of Common Stock. The
Company’s Common Stock began trading on the New York Stock
Exchange on November 4, 1999. Prior to this date, the Company’s com-
mon shares were traded on the American Stock Exchange.

Note 2 – Basis of Presentation

The accompanying audited Consolidated Financial Statements
have been prepared in conformity with generally accepted accounting
principles in the United States of America (“GAAP”) for complete ﬁnan-
cial statements. The Consolidated Financial Statements include the
accounts of the Company, its qualiﬁed REIT subsidiaries, and its majority-
owned and controlled partnerships.

Certain other investments in partnerships or joint ventures
which the Company does not control are also accounted for under the
equity method (see Note 5 and 6). All signiﬁcant intercompany bal-
ances and transactions have been eliminated in consolidation.

iStar Financial annual report

Note 3 – Summary of Signiﬁcant Accounting Policies

Loans and other lending investments, net – As described in Note 4,
“Loans and Other Lending Investments” includes the following invest-
ments: senior mortgages, subordinate mortgages, corporate/partnership
loans, other lending investments-loans and other lending investments-
securities. Management considers nearly all of its loan and other lend-
ing investments to be held-to-maturity, although a small number of
investments may be classiﬁed as available-for-sale. Items classiﬁed
as held-to-maturity are reﬂected at amortized historical cost, while
items classified as available-for-sale are reported at fair values.
Unrealized gains and losses on available-for-sale investments are
included in “Accumulated other comprehensive income” on the
Company’s Consolidated Balance Sheets, and are not included in the
Company’s net income.

Corporate tenant lease assets and depreciation – Corporate tenant
lease assets are generally recorded at cost less accumulated deprecia-
tion. Certain improvements and replacements are capitalized when
they extend the useful life, increase capacity or improve the efﬁciency
of the asset. Repairs and maintenance items are expensed as incurred.
Depreciation is computed using the straight-line method of cost recov-
ery over estimated useful lives of 40.0 years for facilities, ﬁve years for
furniture and equipment, the shorter of the remaining lease term or
expected life for tenant improvements and the remaining life of the
facility for facility improvements.

Corporate tenant lease assets to be disposed of are reported at
the lower of their carrying amount or fair value less costs to sell. The
Company also periodically reviews long-lived assets to be held and
used for an impairment in value whenever events or changes in cir-
cumstances indicate that the carrying amount of such assets may not
be recoverable. In management’s opinion, corporate tenant lease assets
to be held and used are not carried at amounts in excess of their esti-
mated recoverable amounts.

Capitalized interest – The Company capitalizes interest costs
incurred during the construction period on qualiﬁed build-to-suit proj-
ects for corporate tenants, including investments in joint ventures
accounted for under the equity method. Interest capitalized was
approximately $70,000 and $1.0 million during the 12-month periods
ended December 31, 2002 and 2001, respectively.

Cash and cash equivalents – Cash and cash equivalents include
cash held in banks or invested in money market funds with original
maturity terms of less than 90 days.

Restricted cash – Restricted cash represents amounts required
to be maintained in escrow under certain of the Company’s debt obliga-
tions and leasing transactions.

Revenue recognition – The Company’s revenue recognition poli-

cies are as follows:

Loans and other lending investments: Management considers
nearly all of its loans and other lending investments to be held-to-
maturity, although a small number of investments may be classiﬁed as
available-for-sale. The Company reﬂects held-to-maturity investments
at amortized cost less allowance for loan losses, acquisition premiums
or discounts, deferred loan fees and undisbursed loan funds. Unreal-
ized gains and losses on available-for-sale investments are included
in “Accumulated other comprehensive income” on the Company’s
Consolidated Balance Sheets and are not included in the Company’s net
income. On occasion, the Company may acquire loans at small premi-
ums or discounts based on the credit characteristics of such loans.
These premiums or discounts are recognized as yield adjustments over
the lives of the related loans. If loans that were acquired at a premium
or discount are prepaid, the Company immediately recognizes the
unamortized premium or discount as a decrease or increase, respec-
tively, in the prepayment gain or loss. Loan origination or exit fees, as
well as direct loan origination costs, are also deferred and recognized
over the lives of the related loans as a yield adjustment. Interest income
is recognized using the effective interest method applied on a loan-
by-loan basis.

A small number of the Company’s loans provide for accrual of
interest at speciﬁed rates which differ from current payment terms.
Interest is recognized on such loans at the accrual rate subject to man-
agement’s determination that accrued interest and outstanding prin-
cipal are ultimately collectible, based on the underlying collateral and
operations of the borrower.

Prepayment penalties or yield maintenance payments from
borrowers are recognized as additional income when received. Certain
of the Company’s loan investments provide for additional interest
based on the borrower’s operating cash ﬂow or appreciation of the
underlying collateral. Such amounts are considered contingent interest
and are reﬂected as income only upon certainty of collection.

Leasing investments: Operating lease revenue is recognized on
the straight-line method of accounting from the later of the date of the
origination of the lease or the date of acquisition of the facility subject
to existing leases. Accordingly, contractual lease payment increases are
recognized evenly over the term of the lease. The cumulative difference
between lease revenue recognized under this method and contractual
lease payment terms is recorded as “Deferred operating lease income
receivable” on the Company’s Consolidated Balance Sheets.

Provision for loan losses – The Company’s accounting policies
require that an allowance for estimated loan losses be maintained at a
level that management, based upon an evaluation of known and inher-
ent risks in the portfolio, considers adequate to provide for loan losses.
In establishing loan loss provisions, management periodically evalu-
ates and analyzes the Company’s assets, historical and industry loss
experience, economic conditions and trends, collateral values and qual-
ity, and other relevant factors. Speciﬁc valuation allowances are estab-
lished for impaired loans in the amount by which the carrying value,
before allowance for estimated losses, exceeds the fair value of collat-
eral less disposition costs on an individual loan basis. Management
considers a loan to be impaired when, based upon current information
and events, it believes that it is probable that the Company will be
unable to collect all amounts due according to the contractual terms of
the loan agreement on a timely basis. Management measures these
impaired loans at the fair value of the loans’ underlying collateral less
estimated disposition costs. Impaired loans may be left on accrual sta-
tus during the period the Company is pursuing repayment of the loan;
however, these loans are placed on non-accrual status at such time as:
(1) management believes that the potential risk exists that scheduled
debt service payments will not be met within the coming 12 months;
(2) the loans become 90 days delinquent; (3) management determines
the borrower is incapable of, or has ceased efforts toward, curing the
cause of the impairment; or (4) the net realizable value of the loan’s
underlying collateral approximates the Company’s carrying value of
such loan. While on non-accrual status, interest income is recognized
only upon actual receipt. Impairment losses are recognized as direct
write-downs of the related loan with a corresponding charge to the pro-
vision for loan losses. Charge-offs occur when loans, or a portion
thereof, are considered uncollectible and of such little value that further
pursuit of collection is not warranted. Management also provides a
loan portfolio reserve based upon its periodic evaluation and analysis
of the portfolio, historical and industry loss experience, economic con-
ditions and trends, collateral values and quality, and other relevant factors.
The Company’s loans are generally secured by real estate
assets or are corporate lending arrangements to entities with signiﬁ-
cant rental real estate operations (i.e., an unsecured loan to a company
which operates residential apartments or retail, industrial or ofﬁce
facilities as rental real estate). While the underlying real estate assets
for the corporate lending instruments may not serve as collateral for
the Company’s investments in all cases, the Company evaluates the
underlying real estate assets when estimating loan loss exposure
because the Company’s loans generally have preclusions as to how
much senior and/or secured debt the customer may borrow ahead of
the Company’s position.

2002

page .47

Income taxes – The Company is subject to federal income taxa-
tion at corporate rates on its “REIT taxable income”; however, the
Company is allowed a deduction for the amount of dividends paid to
its shareholders, thereby subjecting the distributed net income of
the Company to taxation at the shareholder level only. In addition, the
Company is allowed several other deductions in computing its “REIT
taxable income,” including non-cash items such as depreciation
expense. These deductions allow the Company to shelter a portion of
its operating cash ﬂow from its dividend payout requirement under
federal tax laws. The Company intends to operate in a manner consis-
tent with and to elect to be treated as a REIT for tax purposes. iStar
Operating Inc. (“iStar Operating”) and TriNet Management Operating
Company, Inc. (“TMOC”), the Company’s REIT taxable subsidiaries, are
not consolidated for federal income tax purposes and are taxed as cor-
porations. For ﬁnancial reporting purposes, current and deferred taxes
are provided for in the portion of earnings recognized by the Company
with respect to its interest in iStar Operating and TMOC. Accordingly,
except for the Company’s taxable subsidiaries, no current or deferred
taxes are provided for in the Consolidated Financial Statements. See
Note 6 for a detailed discussion on the ownership structure and opera-
tions of iStar Operating and TMOC.

Earnings (loss) per common share – In accordance with the
Statement of Financial Accounting Standards No. 128 (“SFAS No. 128”),
the Company presents both basic and diluted earnings per share
(“EPS”). Basic earnings per share (“Basic EPS”) excludes dilution and is
computed by dividing net income available to common shareholders
by the weighted average number of shares outstanding for the period.
Diluted earnings per share (“Diluted EPS”) reﬂects the potential dilu-
tion that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock, where such exer-
cise or conversion would result in a lower earnings per share amount.
Reclassiﬁcations – Certain prior year amounts have been reclas-
siﬁed in the Consolidated Financial Statements and the related notes to
conform to the 2002 presentation.

Use of estimates – The preparation of ﬁnancial statements in
conformity with GAAP 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 dates of the
financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from
those estimates.

Change in accounting principle – In June 1998, the FASB issued
Statement of Financial Accounting Standards No. 133 (“SFAS No. 133”),
“Accounting for Derivative Instruments and Hedging Activities.” SFAS
No. 133 establishes accounting and reporting standards for derivative
ﬁnancial instruments and hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
ﬁnancial position and measure those instruments at fair value. If cer-
tain conditions are met, a derivative may be speciﬁcally designated as:
(1) a hedge of the exposure to changes in the fair value of a recognized
asset or liability or an unrecognized ﬁrm commitment; (2) a hedge
of the exposure to variable cash ﬂows of a forecasted transaction; or
(3) in certain circumstances, a hedge of a foreign currency exposure. On
January 1, 2001, the Company adopted this pronouncement, as amended
by Statement of Financial Accounting Standards No. 137 “Accounting
for Derivative Instruments and Hedging Activities – Deferral of the
Effective Date of FASB Statement No. 133” and Statement of Financial
Accounting Standards No. 138 “Accounting for Certain Derivative
Instruments and Certain Hedging Activities – an Amendment of FASB
Statement No. 133.” Because the Company has primarily used deriva-
tives as cash ﬂow hedges of interest rate risk only, the adoption of SFAS
No. 133 did not have a material financial impact on the financial
position and results of operations of the Company. However, should
the Company change its current use of such derivatives, the adop-
tion of SFAS No. 133 could have a more significant effect on the
Company prospectively.

Upon adoption, the Company recognized a charge to net
income of approximately $282,000 and an additional charge of
$9.4 million to “Accumulated other comprehensive income,” represent-
ing the cumulative effect of the change in accounting principle.

Other new accounting standards – In December 1999, the
Securities and Exchange Commission (“SEC”) issued Staff Accounting
Bulletin No. 101 (“SAB 101”), “Revenue Recognition in Financial
Statements.” In June 2000, the SEC staff amended SAB 101 to provide
registrants with additional time to implement SAB 101. The Company
adopted SAB 101, as required, in the fourth quarter of ﬁscal 2000.
The adoption of SAB 101 did not have a material ﬁnancial impact
on the ﬁnancial position or the results of operations of the Company.

In March 2000, the FASB issued FASB Interpretation No. 44
(“FIN 44”), “Accounting for Certain Transactions Involving Stock
Compensation.” The Company was required to adopt FIN 44 effective
July 1, 2000 with respect to certain provisions applicable to new
awards, exchanges of awards in a business combination, modiﬁcations
to outstanding awards, and changes in grantee status that occur on or
after that date. FIN 44 addresses practice issues related to the applica-
tion of Accounting Practice Bulletin Opinion No. 25, “Accounting
for Stock Issued to Employees.” The initial adoption of FIN 44 by the
Company did not have a signiﬁcant impact on the Company.

In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 141 (“SFAS No. 141”), “Business Combinations” and
Statement of Financial Accounting Standards No. 142 (“SFAS No. 142”),
“Goodwill and Other Intangible Assets.” SFAS No. 141 requires the pur-
chase method of accounting to be used for all business combinations
initiated after June 30, 2001. SFAS No. 141 also addresses the initial
recognition and measurement of goodwill and other intangible assets
acquired in business combinations and requires intangible assets to be
recognized apart from goodwill if certain tests are met. SFAS No. 142
requires that goodwill not be amortized but instead be measured for
impairment at least annually, or when events indicate that there may
be an impairment. The Company adopted the provisions of both state-
ments on January 1, 2002, as required, and the adoption did not have a
signiﬁcant impact on the Company.

iStar Financial annual report

In November 2002, the FASB issued FASB Interpretation
No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others,” an interpretation of FASB Statement of
Financial Accounting Standards No. 5 (“SFAS No. 5”), “Accounting for
Contingencies,” Statement of Financial Accounting Standards No. 57,
“Related Party Disclosures,” Statement of Financial Accounting Standards
No. 107, “Disclosures about Fair Value of Financial Instruments” and
rescinds FASB Interpretation No. 34, “Disclosure of Indirect Guarantees
of Indebtedness of Others, an Interpretation of SFAS No. 5.” It requires
that upon issuance of a guarantee, the guarantor must recognize a liabil-
ity for the fair value of the obligation it assumes under that guarantee
regardless if the Company receives separately identiﬁable consideration
(i.e., a premium). The new disclosure requirements are effective
December 31, 2002. The adoption of FIN 45 did not have a material
impact on the Company’s Consolidated Financial Statements, nor is it
expected to have a material impact in the future.

In December 2002, the FASB issued Statement of Financial
Accounting Standards No. 148 (“SFAS No. 148”), “Accounting for Stock-
Based Compensation – Transition and Disclosure,” an amendment of
FASB Statement No. 123 (“SFAS No. 123”). This statement provides
alternative transition methods for a voluntary change to the fair value
basis of accounting for stock-based employee compensation. However,
this Statement does not permit the use of the original SFAS No. 123
prospective method of transition for changes to the fair value based
method made in ﬁscal years beginning after December 15, 2003. In
addition, this Statement amends the disclosure requirements of SFAS
No. 123 to require prominent disclosures in both annual and interim
ﬁnancial statements about the method of accounting for stock-based
employee compensation, description of transition method utilized
and the effect of the method used on reported results. The transition
and annual disclosure provisions of SFAS No. 148 shall be applied for
ﬁscal years ending after December 15, 2002. The new interim disclo-
sure provisions are effective for the ﬁrst interim period beginning after
December 15, 2002. The Company adopted SFAS No. 148 with retro-
active application to January 1, 2002 with no material effect on the
Company’s Consolidated Financial Statements.

SFAS No. 148 disclosure requirements, including the effect on
net income and earnings per share if the fair value-based method had
been applied to all outstanding and unvested stock awards in each
period, are presented below (in thousands except per share amounts):

For the Year Ended December 31,
Net income allocable to common
shareholders, as reported
Total stock-based compensation expense

2002

2001

2000

$178,362 $193,004 $180,678

determined under fair value-based
method for all awards, net of
related tax effects
Pro forma net income

Earnings per share:

Basic – as reported
Basic – pro forma
Diluted – as reported
Diluted – pro forma

(565)

(275)
$177,797 $192,299 $180,403

(705)

1.98 $
1.98
1.93 $
1.92

2.24 $
2.23
2.19 $
2.18

2.11
2.11
2.10
2.09

In April 2002, the FASB issued Statement of Financial
Accounting Standards No. 145 (“SFAS No. 145”), “Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections.” SFAS No. 145 rescinds both FASB Statements
No. 4 (“SFAS No. 4”), “Reporting Gains and Losses from Extinguishment
of Debt,” and the amendment to SFAS No. 4, FASB Statement No. 64
(“SFAS No. 64”), “Extinguishments of Debt Made to Satisfy Sinking-
Fund Requirements.” Through this rescission, SFAS No. 145 eliminates
the requirement (in both SFAS No. 4 and SFAS No. 64) that gains and
losses from the extinguishment of debt be aggregated and, if material,
classiﬁed as an extraordinary item, net of the related income tax effect.
An entity is not prohibited from classifying such gains and losses as
extraordinary items, so long as they meet the criteria in paragraph 20 of
Accounting Principles Board Opinion No. 30 (“APB 30”), “Reporting the
Results of Operations – Reporting the Effects of Disposal of a Segment
of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions”; however, due to the nature of the Company’s
operations, such treatment may not be available to the Company. Any
gains or losses on extinguishments of debt that were previously classi-
ﬁed as extraordinary items in prior periods presented that do not meet
the criteria in APB 30 for classiﬁcation as an extraordinary item will be
reclassiﬁed to income from continuing operations. The provisions of
SFAS No. 145 are effective for ﬁnancial statements issued for ﬁscal
years beginning after May 15, 2002. The Company will adopt the provi-
sions of this statement, as required, on January 1, 2003, at which time
($12.2) million and ($1.6) million will be reclassiﬁed to continuing
operations for 2002 and 2001, respectively.

In June 2002, the FASB issued Statement of Financial
Accounting Standards No. 146 (“SFAS No. 146”), “Accounting for Exit
or Disposal Activities,” to address signiﬁcant issues regarding the recog-
nition, measurement, and reporting of costs that are associated with
exit and disposal activities, including restructuring activities that are
currently accounted for pursuant to the guidance that the Emerging
Issues Task Force (“EITF”) has set forth in EITF Issue No. 94-3, “Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring).” The scope of SFAS No. 146 also includes: (1) costs
related to terminating a contract that is not a capital lease; and (2) ter-
mination benefits received by employees involuntarily terminated
under the terms of a one-time beneﬁt arrangement that is not an on-
going beneﬁt arrangement or an individual deferred-compensation
contract. The provisions of SFAS No. 146 are effective for exit or
disposal activities that are initiated after December 31, 2002. The
Company does not expect SFAS No. 146 to have a material effect on
the Company’s Consolidated Financial Statements.

In September 2002, the FASB issued Statement of Financial
Accounting Standards No. 147 (“SFAS No. 147”), “Acquisitions of
Certain Financial Institutions,” an amendment of FASB Statements
No. 72 and 144 and FASB Interpretation No. 9. SFAS No. 147 provides
guidance on the accounting for the acquisitions of ﬁnancial institu-
tions, except those acquisitions between two or more mutual enter-
prises. SFAS No. 147 removes acquisitions of ﬁnancial institutions
from the scope of both FASB No. 72, “Accounting for Certain Acquisitions
of Banking or Thrift Institutions,” and FASB Interpretation No. 9,
Applying APB Opinions No. 16 and 17, “When a Savings and Loan
Association or a Similar Institution is Acquired in a Business
Combination Accounted for by the Purchase Method,” and requires
that those transactions be accounted for in accordance with SFAS
No. 141 and SFAS No. 142. SFAS No. 147 also amends SFAS No. 144 to
include in its scope long-term, customer-relationship intangible assets
of ﬁnancial institutions such as depositor-relationship and borrower-
relationship intangible assets and credit cardholder intangible assets.
The Company adopted the provisions of this statement, as required,
on October 1, 2002, and it did not have a signiﬁcant ﬁnancial impact on
the Company’s Consolidated Financial Statements.

2002

page .49

FIN 46 requires that both the primary beneﬁciary and all other enter-
prises with a signiﬁcant variable interest in a VIE make additional dis-
closures. The transitional disclosure requirements will take effect

almost immediately and are required for all ﬁnancial statements ini-
tially issued after January 31, 2003. The adoption of FIN 46 is not
expected to have a material impact on the Company.

Note 4 – Loans and Other Lending Investments

The following is a summary description of the Company’s loans and other lending investments (in thousands)(1):

Number of
Borrowers
In Class

Principal
Balances
Outstanding

Carrying Value as of

December 31, December 31,

2002

2001

$1,712,967

$1,675,797

$1,158,669

Type of Investment
Senior
Mortgages

Underlying
Property Type
Ofﬁce/Residential/
Retail/Industrial/
Conference Center/
Mixed Use/Hotel/
Entertainment

Subordinate
Mortgages(4)

Ofﬁce/Residential/
Retail/Mixed Use/Hotel

630,683

629,486

585,698

Corporate/
Partnership Loans

Ofﬁce/Residential/
Retail/Mixed Use/
Hotel/Entertainment

463,507

441,028

395,083

Other Lending
Investments –
Loans(6)

Other Lending
Investments –
Securities(7)

Ofﬁce/Mixed Use

29,411

23,167

10,818

322,305

310,114

248,495

Ofﬁce/Residential/
Retail/Industrial/
Mixed Use/
Entertainment

Gross Carrying Value
Provision for Loan Losses
Total, Net

Explanatory Notes:

$3,079,592
(29,250)
$3,050,342

$2,398,763
(21,000)
$2,377,763

Effective
Maturity
Dates

Contractual
Interest

2003 to 2011

2003 to 2019

to 15.00%
Variable:
LIBOR
+1.50% to
to 6.50%
Fixed: 7.00%
to 15.00%
Variable:
LIBOR
+ 1.79%
to 5.80%
Fixed: 7.33%
to 15.00%
Variable:
LIBOR
+ 3.50%
to 6.50%

Payment Rates(2) Accrual Rates(2)
Fixed: 7.03% Fixed: 7.03%
to 15.00%
Variable:
LIBOR
+ 1.50%
to 6.50%
Fixed: 7.32%
to 17.00%
Variable:
LIBOR
+ 1.79%
to 5.80%
Fixed: 7.33%
to 17.50%
Variable:
LIBOR
+ 3.50%
to 6.50%
2006 to 2008 Fixed: 10.00% Fixed: 10.00%
Variable:
LIBOR
+ 4.75%
Fixed: 6.75%
to 12.50%
Variable:
LIBOR
+ 5.00%

Variable:
LIBOR
+ 4.75%
Fixed: 6.75%
to 12.50%
Variable:
LIBOR
+ 5.00%

2003 to 2013

Prin-
cipal
Amorti-
zation
Yes(3)

Partici-
pation
Features
No

Yes(3)

Yes(5)

Yes(3)

Amounts and details are for loans outstanding as of December 31, 2002.

Substantially all variable-rate loans are based on 30-day LIBOR and reprice monthly. The 30-day LIBOR on December 31, 2002 was 1.38%. As of December 31, 2002, three loans with a

combined carrying value of $72.4 million have a stated accrual rate that exceeds the stated pay rate.

The loans require ﬁxed payments of principal and interest resulting in partial principal amortization over the term of the loan with the remaining principal due at maturity.

Includes a participation interest in a second mortgage and a subordinate interest in a private REMIC whose sole asset is a single ﬁrst mortgage loan.

Under some of these loans, the lender receives additional payments representing additional interest from participation in available cash ﬂow from operations of the property.

Includes one unsecured loan with a carrying value of $403 as of December 31, 2001 which was subsequently repaid in October 2002.

Generally consists of term preferred stock or debt interests that are speciﬁcally originated or structured to meet customer ﬁnancing requirements and the Company’s investment criteria.

These investments do not typically consist of securities purchased in the open market or as part of broadly-distributed offerings. In addition, one of these securities is classiﬁed as

available-for-sale and is reﬂected at fair value with a corresponding entry to “Accumulated other comprehensive income” on the Company’s Consolidated Balance Sheets.

(1)

(2)

(3)

(4)

(5)

(6)

(7)

During the 12-month periods ended December 31, 2002 and
2001, respectively, the Company and its afﬁliated ventures originated
or acquired an aggregate of approximately $1,403.8 million and
$700.6 million in loans and other lending investments, funded
$21.6 million and $99.6 million under existing loan commitments, and
received principal repayments of $672.0 million and $651.0 million.

As of December 31, 2002, the Company had nine loans with
unfunded commitments. The total unfunded commitment amount was
approximately $97.7 million, of which $22.2 million was discretionary
and $75.5 million was non-discretionary.

The Company’s loans and other lending investments are
predominantly pledged as collateral under either the iStar Asset
Receivables secured notes, the secured revolving credit facilities or
secured term loans (see Note 7).

The Company has reflected provisions for loan losses of
approximately $8.3 million, $7.0 million and $6.5 million during the
years ended December 31, 2002, 2001 and 2000, respectively. These pro-
visions represent loan portfolio reserves based on management’s evalu-
ation of general market conditions, the Company’s internal risk
management policies and credit risk ratings system, industry loss

iStar Financial annual report

experience, the likelihood of delinquencies or defaults, and the credit
quality of the underlying collateral. No direct impairment reserves on
speciﬁc loans were considered necessary.

Note 5 – Corporate Tenant Lease Assets

During the 12-month periods ended December 31, 2002 and
2001, respectively, the Company acquired an aggregate of approxi-
mately $409.1 million and $223.9 million in corporate tenant lease
assets and disposed of corporate tenant lease assets for net proceeds of
approximately $3.7 million and $26.3 million.

The Company’s investments in corporate tenant lease assets,

at cost, were as follows (in thousands):

December 31,
Facilities and improvements
Land and land improvements
Direct ﬁnancing lease
Less: accumulated depreciation
Corporate tenant lease assets, net

2002

2001

$1,959,309
428,365
32,640
(128,509)
$2,291,805

$1,504,956
356,830
–
(80,221)
$1,781,565

The Company’s CTL assets are leased to customers with initial
term expiration dates from 2003 to 2023. Future operating lease pay-
ments under non-cancelable leases, excluding customer reimburse-
ments of expenses, in effect at December 31, 2002, are approximately as
follows (in thousands):

Year
2003
2004
2005
2006
2007
Thereafter

Amount

$ 245,462
231,605
218,209
200,433
177,352
1,481,235

Under certain leases, the Company receives additional partici-
pating lease payments to the extent gross revenues of the corporate
tenant exceed a base amount. The Company earned $0, $0.4 million
and $0.6 million of such additional participating lease payments
in the years ended December 31, 2002, 2001 and 2000, respectively.

In addition, the Company also receives reimbursements from customers
for certain facility operating expenses including common area costs,
insurance and real estate taxes. Customer expense reimbursements for
the 12 months ended December 31, 2002, 2001 and 2000 were approxi-
mately $30.3 million, $25.8 million and $25.3 million, respectively, and
are included as a reduction of “Operating costs – corporate tenant lease
assets” on the Company’s Consolidated Statements of Operations.

The Company is subject to expansion option agreements with
two existing customers which could require the Company to fund and
to construct up to 161,000 square feet of additional adjacent space on
which the Company would receive additional operating lease income
under the terms of the option agreements. In addition, upon exercise of
such expansion option agreements, the corporate tenants would be
required to simultaneously extend their existing lease terms for addi-
tional periods ranging from six to ten years.

On September 30, 2002, one of the Company’s customers
exercised an option to terminate its lease on 50.00% of the land leased
from the Company. In connection with this termination, the Company
realized $17.5 million in cash lease termination payments, offset by a
$17.4 million impairment charge in connection with the termination,
resulting in net gain of approximately $123,000. In the fourth quarter
of 2002, the customer completed a recapitalization transaction that
signiﬁcantly enhanced its credit. In connection with this recapitaliza-
tion, the Company agreed to amend the customer’s lease, effective
October 1, 2002. In the lease amendment, the Company received
$12.5 million in cash as prepaid lease payments and the customer
agreed to fixed minimum increases on future lease payments. In
exchange, the Company agreed to reduce the customer’s lease obliga-
tions for a period not to exceed nine quarters. Following the reduction
period, the customer is required to make additional lease payments
over a 10-year period sufﬁcient to reimburse the Company for a portion
of the temporary reduction in lease payments.

In addition, on May 30, 2002, the Company sold one tenant
lease asset for net proceeds of $3.7 million, and realized a gain of
approximately $595,000. As of December 31, 2002, there were two cor-
porate tenant lease assets with a combined book value of $28.5 million
classified as “Assets held for sale” on the Company’s Consolidated
Balance Sheets. The results of operations from corporate tenant lease
assets sold or held for sale in the current period are classiﬁed as “Income
from discontinued operations” even though such income was actually
received by the Company prior to the asset sale. Gains on sale from cor-
porate tenant lease assets are also classiﬁed as “Gain from discontinued
operations” on the Company’s Consolidated Statements of Operations.

Note 6 – Joint Ventures and Unconsolidated Subsidiaries

The Company’s ownership percentages, its investments in and advances to unconsolidated joint ventures and subsidiaries, its respective
income (loss) and the Company’s pro rata share of its ventures’ third-party, non-recourse debt as of December 31, 2002 are presented below
(in thousands):

Unconsolidated Joint
Ventures and Subsidiaries
Unconsolidated Joint Ventures:

Ownership %

Equity
Investment

Sunnyvale
CTC I
ACRE Simon
Milpitas
Sierra

Unconsolidated Subsidiaries:

iStar Operating
TMOC
Total

Explanatory Notes:

44.70%
50.00%
20.00%
N/A
N/A

95.00%
95.00%

$12,323
12,407
5,147
N/A
N/A

599
135
$30,611

JV Income
(Loss) for the
Year Ended
December 31,
2002

$2,144
1,429
32
1,512
(36)

(3,859)
–
$1,222

Pro Rata
Share of
Third-Party
Non-Recourse

Debt(1)

Interest Rate

$10,728
60,115
6,511
N/A
N/A

–
–
$77,354

LIBOR + 1.25%
7.66% – 7.87%
7.61% – 8.43%
N/A
N/A

N/A
N/A

Third-Party Debt

Scheduled
Maturity Date

November 2004(2)
Various through 2011
Various through 2011
N/A
N/A

N/A
N/A

The Company reﬂects its pro rata share of third-party, non-recourse debt, rather than the total amount of the joint venture debt, because the third-party, non-recourse debt held by the

joint ventures is not guaranteed by the Company nor does the Company have any additional commitments to fund such debt obligations.

Maturity date reﬂects a one-year extension at the venture’s option.

(1)

(2)

2002

page .51

Investments in and advances to unconsolidated joint ventures: At
December 31, 2002, the Company had investments in three joint ven-
tures: (1) TriNet Sunnyvale Partners L.P. (“Sunnyvale”), whose external
partners are John D. O’Donnell, Trustee, John W. Hopkins, and Donald
S. Grant, Trustee; (2) Corporate Technology Centre Associates, LLC
(“CTC I”), whose external member is Corporate Technology Centre
Partners, LLC; and (3) ACRE Simon, LLC (“ACRE”), whose external part-
ner is William E. Simon & Sons Realty Investments, LLC. These ven-
tures were formed for the purpose of operating, acquiring and, in
certain cases, developing corporate tenant lease facilities.

At December 31, 2002, the ventures comprised 12 net leased
facilities. The Company’s combined investment in these joint ventures
at December 31, 2002 was $30.6 million. The joint ventures’ carrying
value for the 12 facilities owned at December 31, 2002 was $196.2 mil-
lion. In aggregate, the joint ventures had total assets of $236.2 million
and total liabilities of $186.4 million as of December 31, 2002, and net
income of $7.0 million for the 12 months ended December 31, 2002.
The Company accounts for these investments under the equity method
because the Company’s joint venture partners have certain participat-
ing rights giving them shared control over the ventures.

Effective September 29, 2000, iStar Sunnyvale Partners, LP,
which is wholly owned by Sunnyvale, entered into an interest rate cap
agreement limiting the venture’s exposure to interest rate movements
on its $24.0 million LIBOR-based mortgage loan to an interest rate
of 9.00% through November 9, 2003. Currently, the limited partners of
Sunnyvale have the option to convert their partnership interest into
cash; however, the Company may elect to deliver 297,728 shares of
Common Stock in lieu of cash.

On April 1, 2002, the former Sierra Land Ventures (“Sierra”)
joint venture partner assigned its 50.00% ownership interest in Sierra
to a wholly owned subsidiary of the Company. There was no cash or
shares exchanged in this transaction. As of April 1, 2002, the Company
owns 100.00% of the corporate tenant lease asset previously held by
Sierra and therefore consolidates this asset for accounting purposes.

On July 2, 2002, the Company paid approximately $27.9 mil-
lion in cash to the former member of TriNet Milpitas Associates
(“Milpitas”) joint venture in exchange for its 50.00% ownership
interest. Pursuant to the terms of the joint venture agreement, the
former external member had the right to convert its interest into
984,476 shares of Common Stock of the Company at any time during
the period February 1, 2002 through January 31, 2003. On May 2, 2002,
the former Milpitas external member exercised this right. Upon the
external member’s exercise of its conversion right, the Company had
the option to acquire the partner’s interest for cash, instead of shares, for
a payment equal to the value of 984,476 shares of Common Stock multi-
plied by the ten-day average closing stock price as of the transaction date.

The Company made such election and, as of July 2, 2002, owns 100.00%
of Milpitas, and therefore consolidates these assets for accounting pur-
poses. The Company accounted for the acquisition of the external inter-
est using the purchase method.

Income generated from the Company’s joint venture invest-
ments and unconsolidated subsidiaries is included in “Equity in earn-
ings from joint ventures and unconsolidated subsidiaries” on the
Company’s Consolidated Statements of Operations.

Investments in and advances to unconsolidated subsidiaries: The
Company has an investment in iStar Operating, a taxable subsidiary
that, through a wholly-owned subsidiary, services the Company’s loans
and certain loan portfolios owned by third parties. The Company owns
all of the non-voting preferred stock and a 95.00% economic interest in
iStar Operating. An afﬁliate of the Company’s largest shareholder is the
owner of all the voting common stock and a 5.00% economic interest in
iStar Operating. As of December 31, 2002, there have never been any
distributions to the common shareholder, nor does the Company
expect to make any in the future. At any time, the Company has the
right to acquire all of the common stock of iStar Operating at fair mar-
ket value, which the Company believes to be nominal. In addition to the
direct general and administrative costs of iStar Operating, the Company
allocates a portion of its general overhead expenses to iStar Operating
based on the number of employees at iStar Operating as a percentage
of the Company’s total employees.

Both iStar Operating and TMOC have elected to be treated as
taxable REIT subsidiaries for purposes of maintaining compliance
with the REIT provisions of the Code and are accounted for under the
equity method for ﬁnancial statement reporting purposes and are pre-
sented in “Investments in and advances to joint ventures and uncon-
solidated subsidiaries” on the Company’s Consolidated Balance Sheets.
If they were consolidated with the Company for ﬁnancial statement
purposes, they would not have a material impact on the Company’s
operations. As of December 31, 2002, iStar Operating and TMOC have
no debt obligations.

iStar Financial annual report

Note 7 – Debt Obligations

As of December 31, 2002 and 2001, the Company has debt obligations under various arrangements with ﬁnancial institutions as follows

(in thousands):

Secured revolving credit facilities:

Line of credit
Line of credit
Line of credit
Line of credit

Unsecured revolving credit facilities:

Line of credit
Total revolving credit facilities

Secured term loans:

Secured by corporate tenant lease assets
Secured by corporate tenant lease assets
Secured by corporate tenant lease assets
Secured by corporate lending investments
Secured by corporate lending investments
Secured by corporate lending investments
Secured by corporate lending investments
Total term loans
Less: debt (discount) premium
Total secured term loans

iStar Asset Receivables secured notes:
STARs Series 2000-1:

Class A
Class B
Class C
Class D
Class E
Class F

STARs Series 2002-1:

Class A1
Class A2
Class B
Class C
Class D
Class E
Class F
Class G
Class H
Class J
Class K

Total iStar Asset Receivables secured notes
Less: debt discount
Total iStar Asset Receivables secured notes

Unsecured notes:

6.75% Dealer Remarketable Securities(6)(7)(8)
7.70% Notes(6)(8)
7.95% Notes(6)(8)
8.75% Notes
Total unsecured notes
Less: debt discount
Plus: impact of pay-ﬂoating swap agreements(9)
Total unsecured notes

Other debt obligations
Total debt obligations

Maximum
Amount
Available

$ 700,000
700,000
500,000
500,000

Carrying Value as of

December 31,
2002

December 31,
2001

Stated Interest Rates(1)

$ 412,550
462,920
283,884
114,400

$ 312,300
439,309
148,937
–

LIBOR + 1.75% – 2.25%
LIBOR + 1.40% – 2.15%
LIBOR + 1.50% – 1.75%
LIBOR + 1.50% – 2.25%

Scheduled
Maturity Date

March 2005(2)
January 2005(2)
August 2005(2)
September 2005

300,000
$2,700,000

–
$1,273,754

193,000
144,114
95,074
79,126
61,537
60,000
50,000
682,851
(236)
682,615

–
–
–
–
–
–

236,694
381,296
39,955
26,637
21,310
42,619
26,637
21,309
26,637
26,637
26,637
876,368
(4,425)
871,943

LIBOR + 2.125%

July 2004(3)

LIBOR + 1.85%
7.44%
6.00% – 11.38%
6.55%
6.41%
LIBOR + 2.50%
LIBOR + 2.50%

July 2006(4)
March 2009
Various through 2022
November 2005
December 2012
June 2004(3)
July 2006(3)

LIBOR + 0.30%
LIBOR + 0.50%
LIBOR + 1.00%
LIBOR + 1.45%
LIBOR + 2.75%
LIBOR + 3.15%

LIBOR + 0.26%
LIBOR + 0.38%
LIBOR + 0.65%
LIBOR + 0.75%
LIBOR + 0.85%
LIBOR + 1.235%
LIBOR + 1.335%
LIBOR + 1.435%
6.35%
6.35%
6.35%

August 2003
October 2003
January 2004
June 2004
January 2005
January 2005

June 2004(5)
December 2009(5)
April 2011(5)
May 2011(5)
January 2012(5)
January 2012(5)
January 2012(5)
January 2012(5)
January 2012(5)
May 2012(5)
May 2012(5)

–
900,546

193,000
147,520
55,819
–
–
60,000
50,000
506,339
274
506,613

81,152
94,055
105,813
52,906
123,447
5,000

–
–
–
–
–
–
–
–
–
–
–
462,373
–
462,373

125,000
100,000
50,000
350,000
625,000
(11,603)
3,920
617,317
15,961
$3,461,590

125,000
100,000
50,000
350,000
625,000
(15,698)
–
609,302
16,535
$2,495,369

6.75%
7.70%
7.95%
8.75%

March 2013
July 2017
May 2006
August 2008

Various

Explanatory Notes:
(1)
(2)

(3)
(4)
(5)

(6)
(7)

(8)

(9)

Substantially all variable-rate debt obligations are based on 30-day LIBOR and reprice monthly. The 30-day LIBOR rate on December 31, 2002 was 1.38%.
Maturity date reﬂects a one-year “term-out” extension at the Company’s option. Subsequent to December 31, 2002, the Company extended the ﬁnal maturity date on the $700.0 million
facility maturing January 2005 to January 2007.
Maturity date reﬂects a one-year extension at the Company’s option.
Maturity date reﬂects two one-year extensions at the Company’s option.
Principal payments on these bonds are a function of the principal repayments on loan or corporate tenant lease assets which collateralize these obligations. The dates indicated above
represent the expected date on which the ﬁnal payment would occur for such class based on the assumptions that the loans which collateralize the obligations are not voluntarily prepaid,
the loans are paid on their effective maturity dates and no extensions of the effective maturity dates of any of the loans are granted. The ﬁnal maturity date for the underlying indenture
on class A1 is May 28, 2017 and the ﬁnal maturity date for classes A2, B, C, D, E, F, G, H, J and K is May 28, 2020.
The notes are callable by the Company at any time for an amount equal to the total of principal outstanding, accrued interest and the applicable make-whole prepayment premium.
Subject to mandatory tender on March 1, 2003, to either the dealer or the Company. The initial coupon of 6.75% applies to the ﬁrst ﬁve-year term through the mandatory tender date.
If tendered to the dealer, the notes must be remarketed. The rates reset to then-prevailing market rates upon remarketing. Subsequent to December 31, 2002, the Company modiﬁed the
terms of these notes (see Note 17).
These obligations were assumed as part of the acquisition of TriNet. As part of the accounting for the purchase, these ﬁxed-rate obligations were considered to have stated interest rates
which were below the then-prevailing market rates at which the Leasing Subsidiary could issue new debt obligations and, accordingly, the Company ascribed a market discount to each
obligation. Such discounts are amortized as an adjustment to interest expense using the effective interest method over the related term of the obligations. As adjusted, the effective
annual interest rates on these obligations were 8.81%, 9.51% and 9.04% for the 6.75% Dealer Remarketable Securities, 7.70% Notes and 7.95% Notes, respectively.
On November 27, 2002, the Company entered into two pay-ﬂoating interest rate swaps struck at 3.8775% and 3.81% and in the notional amounts of $100.0 million and $50.0 million,
respectively. These swaps mitigate the risk of changes in the fair value of $150.0 million of the Company’s 8.75% Notes attributable to changes in LIBOR. For accounting purposes,
quarterly the Company adjusts the value of the swap to its fair value and adjusts the carrying amount of the hedged liability by an offsetting amount.

2002

page .53

Availability of amounts under the secured revolving credit
facilities are based on percentage borrowing base calculations. In addi-
tion, certain of the Company’s debt obligations contain covenants.
These covenants are both financial and non-financial in nature.
Signiﬁcant ﬁnancial covenants include limitations on the Company’s
ability to incur indebtedness beyond speciﬁed levels, restrictions on
the Company’s ability to incur liens on assets and limitations on the
amount and type of restricted payments, such as repurchases of its own
equity securities, that the Company makes. Signiﬁcant non-ﬁnancial
covenants include a requirement in its publicly-held debt securities
that the Company offer to repurchase those securities at a premium if
the Company undergoes a change of control. As of December 31, 2002,
the Company believes it is in compliance with both ﬁnancial and non-
ﬁnancial covenants on its debt obligations.

On May 17, 2000, the Company closed the inaugural offering
under its proprietary matched funding program, STARs, Series 2000-1.
In the initial transaction, a wholly-owned subsidiary of the Company
issued $896.5 million of investment-grade bonds secured by the sub-
sidiary’s assets, which had an aggregate outstanding principal balance
of approximately $1.2 billion at inception. Principal payments received
on the assets were utilized to repay the most senior class of the bonds
then outstanding. The maturity of the bonds match funded the matu-
rity of the underlying assets ﬁnanced under the program. Of the assets
of the subsidiary secured by this ﬁnancing, 73.96% (by gross carrying
value) consisted of ﬁrst mortgages and subsequent lien positions and
the remaining 26.04% consisted of junior loans. For accounting
purposes, this transaction was treated as a secured financing: the
underlying assets and STARs liabilities remained on the Company’s
Consolidated Balance Sheets and no gain on sale was recognized. On
May 28, 2002, the Company fully repaid these bonds.

On February 22, 2001, the Company extended the maturity
of its $350.0 million unsecured revolving credit facility to May 2002.
On July 27, 2001, the Company repaid this facility and replaced it with
a new $300.0 million unsecured revolving credit facility.

On May 15, 2001, the Company repaid its $100.0 million
7.30% unsecured notes. These notes were senior unsecured obligations
of the Leasing Subsidiary and ranked equally with the Leasing
Subsidiary’s other senior unsecured and unsubordinated indebtedness.
On June 14, 2001, the Company closed $193.0 million of term
loan ﬁnancing secured by 15 corporate tenant lease assets. The variable-
rate loan bears interest at LIBOR + 1.85% (not to exceed 10.00% in
aggregate) and has two one-year extensions at the Company’s option.
The Company used these proceeds to repay a $77.8 million secured
term loan maturing in June 2001 and to pay down a portion of its
revolving credit facilities. In addition, the Company extended the matu-
rity of its $500.0 million secured revolving credit facility to August 2003.
On March 29, 2002, the Company again extended the ﬁnal maturity of
this facility to August 2005, which includes a one-year “term-out” exten-
sion at the Company’s option.

10.50%, with annual increases of 0.50% in each of the next two years.
In addition, the Company’s investment is convertible into the cus-
tomer’s common stock at a strike price of $25.00 per share. The invest-
ment is callable by the customer between months 13 and 30 of the term
at a yield maintenance premium, and after month 30, at a premium
sufficient to generate a 14.62% internal rate of return on the
Company’s investment. The investment is putable by the Company to
the customer for cash after ﬁve years.

On July 27, 2001, the Company completed a $300.0 million
unsecured revolving credit facility with a group of leading ﬁnancial
institutions. The new facility has an initial maturity of July 2003, with
a one-year extension at the Company’s option and another one-
year extension at the lenders’ option. The new facility replaces
two prior credit facilities maturing in 2002 and 2003, and bears inter-
est at LIBOR + 2.125%.

On August 9, 2001, the Company issued $350.0 million of
8.75% senior notes due in 2008. The notes are unsecured senior obliga-
tions of the Company. The Company used the net proceeds to repay
outstanding borrowings under its secured credit facilities.

On March 29, 2002, the Company extended the maturity of its
$500.0 million secured facility to August 2005, which includes a one-
year “term-out” extension at the Company’s option.

On May 28, 2002, the Company fully repaid the then remain-
ing $446.2 million of bonds outstanding under its STARs, Series
2000-1 ﬁnancing. Simultaneously, a wholly-owned subsidiary of the
Company issued STARs, Series 2002-1, consisting of $885.1 million of
investment-grade bonds secured by the subsidiary’s structured
ﬁnance and corporate tenant lease assets, which had an aggregate out-
standing principal balance of approximately $1.1 billion at inception.
Principal payments received on the assets will be utilized to repay the
most senior class of the bonds then outstanding. The maturity of
the bonds match funds the maturity of the underlying assets ﬁnanced
under the program. The weighted average interest rate on the bonds,
on an all-ﬂoating rate basis, was approximately LIBOR + 0.56% at
inception. For accounting purposes, this transaction was treated as
a secured financing: the underlying assets and STARs liabilities
remained on the Company’s Consolidated Balance Sheets, and no
gain on sale was recognized.

On September 30, 2002, the Company closed a new
$500.0 million secured revolving credit facility with a leading ﬁnancial
institution. The new facility has a three-year term and bears interest at
LIBOR + 1.50% to 2.25%, depending upon the collateral contributed to
the borrowing base. The new facility accepts a broad range of struc-
tured ﬁnance and corporate tenant assets and has a ﬁnal maturity date
of September 2005.

During the years ended December 31, 2002 and 2001, the
Company incurred an extraordinary loss of approximately $12.2 mil-
lion and $1.6 million, respectively, as a result of the early retirement of
certain debt obligations.

Subsequent to December 31, 2002, the Company modiﬁed the

terms of the 6.75% Dealer Remarketable Securities (see Note 17).

iStar Financial annual report

As of December 31, 2002, future expected/scheduled maturities
of outstanding long-term debt obligations are as follows (in thousands):(1)

2003
2004
2005
2006
2007
Thereafter
Total principal maturities
Net unamortized debt discounts
Impact of pay-ﬂoating swap agreement
Total debt obligations

Explanatory Note:

15,961
296,694
1,355,965
293,000
2,975
1,509,339
3,473,934
(16,264)
3,920
$3,461,590

Assumes exercise of extensions to the extent such extensions are at the

Company’s option.

(1)

Note 8 – Shareholders’ Equity

The Company’s charter provides for the issuance of up to
200.0 million shares of Common Stock, par value $0.001 per share, and
30.0 million shares of preferred stock. The Company has 4.4 million
shares of 9.50% Series A Cumulative Redeemable Preferred Stock,
2.3 million shares of 9.375% Series B Cumulative Redeemable
Preferred Stock, 1.5 million shares of 9.20% Series C Cumulative
Redeemable Preferred Stock, and 4.6 million shares of 8.00% Series D
Cumulative Redeemable Preferred Stock. The Series A, B, C and D
Cumulative Redeemable Preferred Stock are redeemable without pre-
mium at the option of the Company at their respective liquidation pref-
erences beginning on December 15, 2003, June 15, 2001, August 15,
2001 and October 8, 2002, respectively.

On December 15, 1998, the Company issued warrants to
acquire 6.1 million shares of Common Stock, as adjusted for dilution,
at $34.35 per share. The warrants are exercisable on or after December 15,
1999 at a price of $34.35 per share and expire on December 15, 2005.

Concentration of Shareholder Ownership – On October 30, 2001,
SOF IV SMT Holdings, L.P. (“SOF IV”) and certain of its afﬁliates sold
18.975 million shares of Common Stock owned by them (including the
subsequently-exercised 2.475 million share over-allotment option
granted to the underwriters). In addition, on May 15, 2002, SOF IV sold
10.808 million shares of Common Stock owned by them (including the
subsequently-exercised 808,200 share over-allotment option granted to
the underwriters). Further, on November 14, 2002, SOF IV sold 3.5 mil-
lion shares of Common Stock owned by them (including the subse-
quently-exercised 1.5 million over-allotment option granted to the
underwriters). The Company did not sell any shares in the ﬁrst two
offerings. In the November 2002 offering, the Company sold 8.0 mil-
lion primary shares and received net proceeds of approximately
$202.9 million. As a result of the secondary offerings, SOF IV currently
owns approximately 19.84% of the Company’s Common Stock (based
on the diluted sharecount as of December 31, 2002).

commissions or service charges by automatically reinvesting all or a
portion of their Common Stock cash dividends. Under the direct stock
purchase component of the plan, the Company’s shareholders and new
investors may purchase shares of Common Stock directly from the
Company without payment of brokerage commissions or service
charges. All purchases of shares in excess of $10,000 per month pur-
suant to the direct purchase component are at the Company’s sole dis-
cretion. Shares issued under the plan may reﬂect a discount of up to
3.00% from the prevailing market price of the Company’s Common
Stock. The Company is authorized to issue up to 8.0 million shares of
Common Stock pursuant to the dividend reinvestment and direct stock
purchase plan. During the 12-month periods ended December 31, 2002
and 2001, the Company issued a total of 1.6 million and approximately
195,000 shares of its Common Stock, respectively, through the direct
stock purchase component of the plan. Net proceeds during the
12-month periods ended December 31, 2002 and 2001 were approxi-
mately $44.4 million and $4.7 million, respectively.

Stock Repurchase Program – The Board of Directors approved,
and the Company has implemented, a stock repurchase program under
which the Company is authorized to repurchase up to 5.0 million
shares of its Common Stock from time to time, primarily using pro-
ceeds from the disposition of assets or loan repayments and excess cash
ﬂow from operations, but also using borrowings under its credit facili-
ties if the Company determines that it is advantageous to do so. As of
December 31, 2001, the Company had repurchased a total of approxi-
mately 2.3 million shares at an aggregate cost of approximately
$40.7 million. The Company did not repurchase any shares under the
stock repurchase program in 2002.

Note 9 – Risk Management and Use of Financial Instruments

Risk management – In the normal course of its on-going busi-
ness operations, the Company encounters economic risk. There are
three main components of economic risk: interest rate risk, credit risk
and market risk. The Company is subject to interest rate risk to the
degree that its interest-bearing liabilities mature or reprice at different
speeds, or different bases, than its interest-earning assets. Credit risk is
the risk of default on the Company’s lending investments that results
from a property’s, borrower’s or corporate tenant’s inability or unwill-
ingness to make contractually required payments. Market risk reﬂects
changes in the value of loans due to changes in interest rates or other
market factors, including the rate of prepayments of principal and the
value of the collateral underlying loans and the valuation of corporate
tenant lease facilities held by the Company.

Use of derivative ﬁnancial instruments – The Company’s use of
derivative ﬁnancial instruments is primarily limited to the utilization
of interest rate agreements or other instruments to manage interest
rate risk exposure. The principal objective of such arrangements is to
minimize the risks and/or costs associated with the Company’s operat-
ing and ﬁnancial structure as well as to hedge speciﬁc anticipated
transactions. The counterparties to these contractual arrangements are
major ﬁnancial institutions with which the Company and its afﬁliates
may also have other ﬁnancial relationships. The Company is poten-
tially exposed to credit loss in the event of nonperformance by these
counterparties. However, because of their high credit ratings, the
Company does not anticipate that any of the counterparties will fail to
meet their obligations.

2002

page .55

The Company has entered into the following cash ﬂow and fair value hedges that are outstanding as of December 31, 2002. The net value

associated with these hedges is reﬂected on the Company’s Consolidated Balance Sheets (in thousands).

Type of Hedge
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Fixed Swap
Pay-Floating Swap
Pay-Floating Swap
LIBOR Cap
LIBOR Cap
LIBOR Cap
Total Estimated Value

Explanatory Note:

Notional
Amount

$125,000
125,000
75,000
100,000
50,000
345,000
75,000
35,000

Strike
Price or
Swap Rate

7.058%
7.055%
5.580%
3.878%
3.810%
8.000%
7.750%
7.750%

Trade
Date

Maturity
Date

Estimated
Value at
December 31, 2002

6/15/00
6/15/00
11/4/99(1)
11/27/02
11/27/02
5/22/02
11/4/99(1)
11/4/99(1)

6/25/03
6/25/03
12/1/04
8/15/08
8/15/08
5/28/14
12/1/04
12/1/04

$(3,598)
(3,596)
(5,743)
2,761
1,203
12,088
21
9
$ 3,145

Acquired in connection with the TriNet Acquisition (see Note 1 to the Company’s Consolidated Financial Statements).

(1)

Between January 1, 2001 and December 31, 2002, the Company also had outstanding the following cash ﬂow hedges that have expired or

been settled (in thousands):

Type of Hedge
LIBOR Cap
Pay-Fixed Swap
LIBOR Cap
LIBOR Cap

Notional
Amount

$300,000
92,000
75,000
38,336

Strike
Price or
Swap Rate

9.000%
5.714%
7.500%
7.500%

Trade
Date

3/16/98
8/10/98
7/16/98
4/30/98

Maturity
Date

3/16/01
3/1/01
6/19/01
6/1/01

In connection with STARs, Series 2002-1 in May 2002, the
Company entered into a LIBOR interest rate cap struck at 8.00% in the
notional amount of $345.0 million. The Company utilizes the provi-
sions of SFAS No. 133 with respect to such instruments. SFAS No. 133
provides that the up-front fees paid on option-based products such as
caps should be expensed into earnings based on the allocation of the
premium to the affected periods as if the agreement were a series of
“caplets.” These allocated premiums are then reﬂected as a charge to
income (as part of interest expense) in the affected period.

In connection with STARs, Series 2000-1 in May 2000, the
Company entered into a LIBOR interest rate cap struck at 10.00% in
the notional amount of $312.0 million, and simultaneously sold a
LIBOR interest rate cap with the same terms. Since these instruments
did not change the Company’s net interest rate risk exposure, they did
not qualify as hedges and changes in their respective values were
charged to earnings. As the terms of these arrangements were sub-
stantially the same, the effects of a revaluation of these two instru-
ments substantially offset one another. On May 28, 2002, these
instruments were settled and are no longer outstanding.

In connection with the Company’s $350.0 million of ﬁxed-rate
corporate bonds, the Company entered into two pay-ﬂoating interest
rate swaps struck at 3.8775% and 3.81% and in the notional amounts of
$100.0 million and $50.0 million, respectively. The Company pays
one-month LIBOR and receives the ﬁxed rate in return. These swaps
mitigate the risk of changes in the fair value of $150.0 million of the
Company’s ﬁxed-rate corporate bonds attributable to changes in LIBOR.
For accounting purposes, the difference between the ﬁxed rate received

and the LIBOR rate paid on the notional amount of the swap is recorded
as “Interest expense” in the Company’s Consolidated Statements of
Operations. In addition, quarterly the Company adjusts the value of the
swap to its fair value and adjusts the carrying amount of the hedged
liability by an offsetting amount.

During the year ended December 31, 1999, the Company set-
tled an aggregate notional amount of approximately $63.0 million that
was outstanding under certain hedging agreements which the
Company had entered into in order to hedge the potential effects of
interest rate movements on anticipated ﬁxed-rate borrowings. The set-
tlement of such agreements resulted in a receipt of approximately
$0.6 million which had been deferred pending completion of the
planned ﬁxed-rate ﬁnancing transaction. Subsequently, the transaction
was modiﬁed and was actually consummated as a variable-rate ﬁnanc-
ing transaction. As a result, the previously deferred receipt no longer
qualiﬁed for hedge accounting treatment and the $0.6 million was
recognized as a gain included in “Other income” in the Company’s
Consolidated Statements of Operations for the year ended December 31,
2000 in connection with the closing of STARs, Series 2000-1 in May 2000.
During the year ended December 31, 1999, the Company reﬁ-
nanced its $125.0 million term loan maturing March 15, 1999 with a
$155.4 million term loan maturing March 5, 2009. The new term loan
bears interest at 7.44% per annum, payable monthly, and amortizes
over an approximately 22-year schedule. The new term loan repre-
sented forecasted transactions for which the Company had previ-
ously entered into U.S. Treasury-based hedging transactions. The net
$3.4 million cost of the settlement of such hedges has been deferred
and is being amortized as an increase to the effective ﬁnancing cost of
the new term loan over its effective ten-year term.

Credit risk concentrations – Concentrations of credit risks arise
when a number of borrowers or customers related to the Company’s
investments are engaged in similar business activities, or activities in

iStar Financial annual report

the same geographic region, or have similar economic features that
would cause their ability to meet contractual obligations, including
those to the Company, to be similarly affected by changes in economic
conditions. The Company regularly monitors various segments of its
portfolio to assess potential concentrations of credit risks. Management
believes the current credit risk portfolio is reasonably well diversiﬁed
and does not contain any unusual concentration of credit risks.

Substantially all of the Company’s corporate tenant lease
assets (including those held by joint ventures) and loans and other
lending investments are collateralized by facilities located in the
United States, with significant concentrations (i.e., greater than
10.00%) as of December 31, 2002 in California (22.72%) and Texas
(10.32%). As of December 31, 2002, the Company’s investments also
contain greater than 10.00% concentrations in the following asset
types: ofﬁce-CTL (27.42%), ofﬁce-lending (19.67%), industrial (15.00%)
and hotel-lending (11.99%).

The Company underwrites the credit of prospective borrow-
ers and customers and often requires them to provide some form of
credit support such as corporate guarantees, letters of credit and/or
cash security deposits. Although the Company’s loans and other lend-
ing investments and corporate customer lease assets are geographically
diverse and the borrowers and customers operate in a variety of indus-
tries, to the extent the Company has a signiﬁcant concentration of
interest or operating lease revenues from any single borrower or cus-
tomer, the inability of that borrower or customer to make its payment
could have an adverse effect on the Company. As of December 31, 2002,
the Company’s ﬁve largest borrowers or corporate tenants collectively
accounted for approximately 15.67% of the Company’s aggregate annu-
alized interest and operating lease revenue.

Note 10 – Stock-Based Compensation Plans and Employee Beneﬁts

The Company’s 1996 Long-Term Incentive Plan (the “Plan”) is
designed to provide incentive compensation for ofﬁcers, other key
employees and directors of the Company. The Plan provides for awards
of stock options and shares of restricted stock and other performance
awards. The maximum number of shares of Common Stock available
for awards under the Plan is 9.00% of the outstanding shares of
Common Stock, calculated on a fully diluted basis, from time to time;
provided that the number of shares of Common Stock reserved for
grants of options designated as incentive stock options is 5.0 million,
subject to certain antidilution provisions in the Plan. All awards under
the Plan, other than automatic awards to non-employee directors,
are at the discretion of the Board or a committee of the Board. At
December 31, 2002, a total of approximately 9.1 million shares of
Common Stock were available for awards under the Plan, of which
options to purchase approximately 4.3 million shares of Common
Stock were outstanding and approximately 330,000 shares of restricted
stock were outstanding.

In March 1998, the Company issued approximately 2.5 mil-
lion (as adjusted) fully vested and immediately exercisable options to
purchase shares of Common Stock at $14.72 per share (as adjusted) to
its former advisor with a term of ten years. The former advisor granted
a portion of these options to its employees and the remainder was allo-
cated to an afﬁliate. Upon the Company’s acquisition of its former advi-
sor, these individuals became employees of the Company. In general,
the grants to these employees provided for scheduled vesting over a
predeﬁned service period of three to ﬁve years and, under certain con-
ditions, provide for accelerated vesting. These options expire on
March 15, 2008.

Changes in options outstanding during each of ﬁscal 2000, 2001 and 2002 are as follows:

Number of Shares

Non-Employee
Directors

146,379
80,000
–
–
226,379
90,000
(20,000)
–
296,379
90,000
(190,650)
(4,600)
191,129

Employees

2,778,252
1,852,059
(412,734)
(682,005)
3,535,572
1,618,400
(1,262,811)
(107,939)
3,783,222
–
(488,674)
(17,406)
3,277,142

Other

881,163
80,000
–
–
961,163
100,000
(25,000)
–
1,036,163
–
(164,683)
–
871,480

Average
Strike
Price

$19.03
$17.34
$15.67
$25.47
$18.97
$20.31
$16.48
$27.27
$18.98
$27.83
$18.63
$24.87

Options outstanding, December 31, 1999
Granted in 2000
Exercised in 2000
Forfeited in 2000

Options outstanding, December 31, 2000
Granted in 2001
Exercised in 2001
Forfeited in 2001

Options outstanding, December 31, 2001
Granted in 2002
Exercised in 2002
Forfeited in 2002

Options outstanding, December 31, 2002

2002

page .57

The following table summarizes information concerning outstanding and exercisable options as of December 31, 2002:

Exercise Price Range
$14.72–$15.00(1)
$16.69–$16.88
$17.38–$17.56
$19.63–$19.69
$20.00–$21.44
$22.44
$23.32–$23.64
$24.13–$24.94
$25.10–$26.09
$26.30–$26.97
$27.00
$28.54–$29.82
$30.33
$33.70
$55.39

Explanatory Note:

Options outstanding
Weighted
Average
Remaining
Contractual
Life

Weighted
Average
Exercise
Price

5.62
7.02
7.22
8.08
7.28
7.75
1.37
5.05
3.74
1.60
8.48
8.94
0.40
0.01
6.42
6.79

$14.72
$16.86
$17.39
$19.69
$20.91
$22.44
$23.53
$24.54
$26.02
$26.80
$27.00
$29.68
$30.33
$33.70
$55.39
$18.77

Options
Outstanding

1,000,213
716,207
422,490
1,536,584
138,466
13,333
43,901
183,700
14,800
77,900
25,000
90,188
67,275
4,600
5,094
4,339,751

Options exercisable

Weighted
Average
Exercise
Price

$14.72
$16.87
$17.40
$19.69
$20.92
$22.44
$23.52
$24.54
$26.06
$26.80
$27.00
$29.68
$30.33
$33.70
$55.39
$19.00

Currently
Exercisable

751,618
350,586
256,658
426,763
82,984
6,667
31,316
183,034
14,134
76,567
8,334
90,188
67,275
4,600
5,094
2,355,818

(1)

Includes approximately 764,000 options which were granted, on a fully exercisable basis, in March 1998, and which are now held by an afﬁliate of SOF IV. Beneﬁcial interests in these

options were subsequently regranted by that afﬁliate to employees of it and its afﬁliates, subject to vesting requirements. In the event that these employees forfeit such options, they

revert to an afﬁliate of SOF IV, which may regrant them at its discretion. As of December 31, 2002, approximately 468,000 of these options have become exercisable by the beneﬁcial

owners. Of this total, approximately 288,000 have been exercised as of December 31, 2002.

In the third quarter 2002 (with retroactive application to the
beginning of the calendar year), the Company adopted the fair value
method for accounting for options issued to employees or directors, as
allowed under Statement of Financial Accounting Standards No. 123
(“SFAS No. 123”), “Accounting for Stock-Based Compensation.”
Accordingly, the Company recognizes a charge equal to the fair value
of these options at the date of grant multiplied by the number of
options issued. This charge will be amortized over the related remain-
ing vesting terms to individual employees as additional compensation.
The impact for options issued since January 1, 2002 is approximately
$110,000, which is reflected under “General and administrative –
stock-based compensation” on the Company’s Consolidated Statements
of Operations.

Prior to the third quarter 2002, the Company had elected to
use the intrinsic method for accounting for options issued to employ-
ees or directors, as allowed under SFAS No. 123 and, accordingly, recog-
nized no expense in connection with these options to the extent that
the options’ exercise prices equaled or exceeded the quoted prices of
the Company’s shares of Common Stock on the grant or investment
dates. However, in connection with the acquisition of the Company’s
former external advisor, the Company recognized a deferred stock-
based compensation charge of approximately $5.1 million. This
deferred charge represents the difference between the Company’s clos-
ing stock price on the date it acquired its former external advisor
(which was $20.25), and the strike price of $14.72 per share (as
adjusted) for the unvested portion of the options granted to the former
external advisor’s employees, who are now employees of the Company.
This deferred charge is being amortized over the related remaining
vesting terms to the individual employees as an additional expense
under “General and administrative – stock-based compensation” on the
Company’s Consolidated Statements of Operations.

If the Company’s compensation costs had been determined
using the fair value method of accounting for stock options issued
under the Plan to employees and directors prescribed by SFAS No. 123
prior to 2002, the Company’s net income for the ﬁscal years ended

December 31, 2002, 2001 and 2000 would have been reduced on a pro
forma basis by approximately $565,000, $705,000 and $275,000 respec-
tively. This would not have signiﬁcantly impacted the Company’s earn-
ings per share.

The fair value of each signiﬁcant option grant is estimated on
the date of grant (May 29, 2002 for the 2002 options) using the Black-
Scholes model. For the above SFAS No. 123 calculation, the following
assumptions were used for the Company’s fair value calculations of
stock options:

Expected life (in years)
Risk-free interest rate
Volatility
Dividend yield
Weighted average grant date fair value

2002

2001

2000

5
4.38%

5
5
5.30%
4.96%
16.23% 20.83% 26.80%
8.45% 12.00% 13.50%
$0.46
$0.76
$1.38

Future charges may be taken to the extent of additional option

grants, which are at the discretion of the Board of Directors.

During the 12 months ended December 31, 2002, the Company
granted 194,558 restricted shares to employees. Of these shares, 39,558
will vest proportionately over three years on the anniversary date of the
initial grant. The balance of 155,000 restricted shares will vest on
March 31, 2004 if: (1) the employee remains employed until that date;
and (2) the 60-day average closing price of the Company’s Common
Stock equals or exceeds a set ﬂoor price as of such date. Dividends will
be paid on the restricted shares as dividends are paid on shares of the
Company’s Common Stock. Assuming the shares become fully vested
on March 31, 2004 and the market price of the stock is $28.05 (which
was the market price of the Common Stock on December 31, 2002),
the Company would incur a one-time charge to both net income and
earning at that time equal to $4.3 million (the fair market value of the
155,000 shares at $28.05 per share). During the 12 months ended

iStar Financial annual report

December 31, 2002, the Company also granted 208,980 restricted shares
to its Chief Financial Ofﬁcer (see detailed information below).

During the year ended December 31, 2001, the Company
granted 94,943 restricted shares to employees in lieu of cash bonuses
for the year ended December 31, 2000 at the employees’ election. These
restricted shares were immediately vested on the date of grant and
were not transferable for a period of one year following vesting.

During the year ended December 31, 2000, the Company
granted 140,402 restricted shares to employees. Of this total,
71,752 restricted shares were granted in lieu of cash bonuses at the
employees’ election, were immediately vested on the date of grant,
and were not transferable for a period of one year following vesting.
An additional 68,650 of such restricted shares vest over periods ranging
from one to three years following the date of grant and are transferable
upon vesting.

For accounting purposes, the Company measures compensa-
tion costs for these shares, not including the contingently issuable
shares, as of the date of the grant and expenses such amounts against
earnings, either at the grant date (if no vesting period exists) or ratably
over the respective vesting period. Such amounts appear on the
Company’s Consolidated Statements of Operations under “General and
administrative – stock-based compensation expense.”

During the year ended December 31, 2002, the Company
entered into a three-year employment agreement with its new Chief
Financial Ofﬁcer. Under the agreement, the Chief Financial Ofﬁcer
receives an annual base salary of $225,000. She may also receive a bonus,
which is targeted to be $325,000, subject to an annual review for upward
or downward adjustment. In addition, the Company granted the Chief
Financial Ofﬁcer 108,980 contingently vested restricted stock awards.
These awards become vested on December 31, 2005 if the executive’s
employment with the Company has not terminated before such date.
Dividends will be paid on the restricted shares as dividends are paid on
shares of the Company’s Common Stock. For accounting purposes, the
Company will take a total charge of approximately $3.0 million related to
the restricted stock awards, which will be amortized over the period from
November 6, 2002 through December 31, 2005. This charge is reﬂected
on the Company’s Consolidated Statements of Operations under
“General and administrative – stock-based compensation.”

Further, the Company granted the Chief Financial Officer
100,000 restricted shares which vest in whole or in part if the
Company’s shareholders realize total rates of shareholder return (divi-
dends plus share price appreciation) of between 0.00% and 20.00%,
achieved by the Company between January 2, 2003 and January 31,
2004. Vested shares would be subject to forfeiture if the executive’s
employment with the Company terminated under certain circum-
stances. Assuming the shares became fully vested on January 31, 2004
and the market price of the stock is $28.05 (which was the market price
of the Common Stock on December 31, 2002), the Company would
incur a one-time charge to both net income and earnings at that time
equal to $2.8 million (the fair market value of the 100,000 shares at
$28.05 per share). For accounting purposes, the employment arrange-
ment described above is treated as a contingent, variable plan until
January 31, 2004.

During the year ended December 31, 2001, the Company
entered into a new three-year employment agreement with its Chief
Executive Ofﬁcer. Under the agreement, the Chief Executive Ofﬁcer
receives an annual base salary of $1.0 million. He may also receive
a bonus, which is targeted to be an amount equal to his base salary,
if the Company achieves certain performance targets set by the
Compensation Committee. The bonus award may be increased or
reduced from the target depending upon the degree to which the per-
formance goals are exceeded or are not met, and may not exceed
200.00% of his base salary. The bonus is reduced by the amount of any
dividends paid to the Chief Executive Ofﬁcer in respect of phantom
shares (described below) which are awarded to him and have contin-
gently vested. The Chief Executive Officer received approximately

$2.1 million in such dividends in 2002. As such, no additional bonus
was paid. As part of this agreement, the Company conﬁrmed a prior
grant of 750,000 stock options made to the executive on March 2, 2001
with an exercise price of $19.69, which represented the market price at
the date of the original contingent grant. However, because the grant
required further approval by the Compensation Committee and the
Board of Directors, no measurement date occurred for accounting pur-
poses until such approvals were made, at which point the market price
of the Company’s Common Stock was $24.90. Accordingly, an aggre-
gate charge of approximately $3.9 million is being recognized with
respect to these options over the term of this agreement and is reﬂected
on the Company’s Consolidated Statements of Operations under
“General and administrative – stock-based compensation.” These
options will vest in three equal installments of 250,000 shares in each
January beginning in January 2002.

The Company also granted the executive 2.0 million unvested
phantom shares, each of which represents one share of the Company’s
Common Stock. These shares will vest in installments of 350,000 shares,
650,000 shares, 600,000 shares and 400,000 shares on a contingent
basis if the 60-day average closing price of the Company’s Common
Stock achieves thresholds of $25.00, $30.00, $34.00 and $37.00, respec-
tively. As of December 31, 2002, the $25.00 and $30.00 thresholds have
been attained, and a total of 1.0 million of these shares have contin-
gently vested. Assuming that the market price of the Common Stock on
March 31, 2004, is $28.05 (which was the market price of the Common
Stock on December 31, 2002), the Company would incur a one-time
charge to both net income and earnings at that time equal to $28.0 mil-
lion (the fair market value of the 1.0 million shares at $28.05 per share).
Shares that have contingently vested generally will not become fully
vested until the end of the three-year term of the agreement, except
upon certain termination or change of control events. Further, if the
average stock price drops below certain speciﬁed levels for a 60-day
period prior to such date, such phantom shares would not fully vest and
would be forfeited. If the Company is not authorized to issue shares to
the executive upon full vesting of the phantom shares, then the vesting
will be settled through a cash payment based upon the market price of
the Common Stock during a recent trading period. The executive will
receive dividends on shares that have contingently or fully vested and
have not been forfeited under the terms of the agreement, if and when
the Company declares and pays dividends on its Common Stock.
Because no shares have been issued, dividends received on these phan-
tom shares, if any, will be reﬂected as compensation expense by the
Company. For accounting purposes, this arrangement will be treated as
a contingent, variable plan and no additional compensation expense
will be recognized until the shares, in whole or in part, become irrevo-
cably vested, whereupon the Company will reﬂect a charge equal to the
then fair value of the phantom shares irrevocably vested.

In addition, during the year ended December 31, 2001, the
Company entered into a three-year employment agreement with its for-
mer President. Under the agreement, in lieu of salary and bonus, the
Company granted the executive 500,000 restricted shares. These shares
became fully-vested on September 30, 2002 as a result of the Company
achieving a 60.00% total shareholder rate of return (dividends plus
share price appreciation) since January 1, 2001. Upon the restricted
shares becoming fully vested, the Company withheld 250,000 of such
shares from the executive to cover the tax obligations associated with
the vesting of such shares. These shares are reflected as “Treasury
stock” on the Company’s Consolidated Statements of Changes in
Shareholders’ Equity. For accounting purposes, the employment arrange-
ment described above was treated as a contingent, variable plan until
the April 29, 2002 contingent vesting date. The Company incurred a
total non-cash charge of approximately $15.0 million related to the
vesting of the shares, recognized ratably over the period from April 29,
2002 through September 30, 2002. Accordingly, the non-cash charge
recognized for the 12 months ended December 31, 2002 was approxi-
mately $15.0 million.

2002

page .59

The executive received dividends on the share grant from the
date of the agreement as and when the Company declared and paid
dividends on its Common Stock. For ﬁnancial statement purposes, such
dividends were accounted for in a manner consistent with the Company’s
normal Common Stock dividends as a reduction to retained earnings.

Certain affiliates of SOF IV and the Company’s Chief
Executive Ofﬁcer have agreed to reimburse the Company for the value
of restricted shares awarded to the President in excess of 350,000
shares, net of tax beneﬁts realized by the Company or its shareholders
on account of compensation expense deductions. The reimbursement
obligation arose once the restricted share award became fully vested on
September 30, 2002. In the case of the SOF IV afﬁliates, the reimburse-
ment payment must be made through the delivery of approximately
$2.4 million in cash or 131,250 shares of Common Stock. As of
December 31, 2002, the SOF IV afﬁliates have paid approximately
$506,000 in cash, which is reﬂected as “Additional paid-in capital” on
the Company’s Consolidated Balance Sheets. In the case of the Chief
Executive Ofﬁcer, the reimbursement payment was made through the
delivery of 12,343 vested shares of Common Stock as of December 31,
2002. These reimbursement payments are reﬂected as “Additional paid-
in capital” on the Company’s Consolidated Balance Sheets, and not as
an offset to the non-cash charge referenced above.

On July 28, 2000, the Company granted to its employees prof-
its interests in a wholly-owned subsidiary of the Company called iStar
Venture Direct Holdings, LLC. At December 31, 2002, iStar Venture
Direct Holdings, LLC had a net investment of approximately $606,000
in the preferred stock of a real estate-related software company. The
proﬁts interests have three-year vesting schedules, and are subject to
forfeiture in the event of termination of employment for cause or a vol-
untary resignation. The Company currently estimates that the proﬁts
interests have minimal or no value.

High Performance Unit Program

In May 2002, the Company’s shareholders approved the iStar
Financial High Performance Unit Program. The program, as more fully
described in the Company’s annual proxy statement dated April 8, 2002,
is a performance-based employee compensation plan that only has
material value to the participants if the Company provides superior
returns to its shareholders. The program entitles the employee partici-
pants to receive cash distributions in the nature of common stock divi-
dends if the total rate of return on the Company’s Common Stock (share
price appreciation plus dividends) exceeds certain performance levels.
Initially, there were three plans within the program: the 2002
plan, the 2003 plan, and the 2004 plan. Each plan has 5,000 shares
of High Performance Common Stock associated with it. Each share of
High Performance Common Stock carries 0.25 votes per share.

For these three plans, the Company’s performance is meas-
ured over a one-, two-, or three-year valuation period, beginning on
January 1, 2002 and ending on December 31, 2002, December 31, 2003
and December 31, 2004, respectively. The end of the valuation period
(i.e., the “valuation date”) will be accelerated if there is a change in con-
trol of the Company. The High Performance Common Stock has a nom-
inal value unless the total rate of shareholder return for the relevant
valuation period exceeds the greater of: (1) 10.00%, 20.00%, or 30.00%
for the 2002 plan, the 2003 plan and the 2004 plan, respectively; and
(2) a weighted industry index total rate of return consisting of equal
weightings of the Russell 1000 Financial Index and the Morgan Stanley
REIT Index for the relevant period.

If the total rate of return on the Company’s Common Stock
exceeds the threshold performance levels for a particular plan, then dis-
tributions will be paid on the shares of High Performance Common
Stock related to that plan in the same amounts and at the same times as
distributions are paid on a number of shares of the Company’s
Common Stock equal to the following: 7.50% of the Company’s excess
total rate of return (over the higher of the two threshold performance
levels) multiplied by the weighted average market value of the
Company’s common equity capitalization during the measurement

period, all as divided by the average closing price of a share of the
Company’s Common Stock for the 20 trading days immediately preced-
ing the applicable valuation date.

If the total rate of return on the Company’s Common Stock
does not exceed the threshold performance levels for a particular
plan, then the shares of High Performance Common Stock related to
that plan will have only nominal value. In this event, each of the
5,000 shares will be entitled to dividends equal to 0.01 times the divi-
dend paid on a share of Common Stock, if and when dividends are
declared on the common stock.

Regardless of how much the Company’s total rate of return
exceeds the threshold performance levels, the dilutive impact to
the Company’s shareholders resulting from distributions on High
Performance Common Stock in each plan is limited to 1.00% of the
number of shares of the Company’s Common Stock outstanding, on
a fully diluted basis, on the valuation date for each plan.

The employee participants have purchased their interests in
High Performance Common Stock through a limited liability company
at purchase prices approved by the Company’s Board of Directors. The
Company’s Board has established the prices of the High Performance
Common Stock based upon, among other things, an independent valua-
tion from a major securities ﬁrm. The aggregate initial purchase prices
were set on June 25, 2002 and were approximately $2.8 million,
$1.8 million and $1.3 million for the 2002, 2003 and 2004 plans, respec-
tively. No employee is permitted to exchange his or her interest in the
LLC for shares of High Performance Common Stock prior to the appli-
cable valuation date.

The total shareholder return for the valuation period under
the 2002 plan was 21.94%, which exceeded both the ﬁxed performance
threshold of 10.00% and the industry index return of (5.83%). As a
result of this superior performance, the participants in the 2002 plan
are entitled to receive cash distributions equivalent to the amount of
cash dividends payable on 819,254 shares of the Company’s Common
Stock, as and when such dividends are paid. Such dividend payments
begin with the ﬁrst quarter 2003 dividend and will reduce net income
allocable to common shareholders when paid. The Company will pay
dividends on the 2002 plan shares in the same amount per share and
on the same distribution dates that shares of the Company’s Common
Stock are paid. The Company has the right, but not the obligation, to
repurchase at cost 50.00% of the interests earned by an employee in the
2002 plan if the employee breaches certain non-competition, non-
solicitation and conﬁdentiality covenants through January 1, 2005.

A new 2005 plan has been established with a three-year valua-
tion period ending December 31, 2005. Awards under the 2005 plan
were approved on January 14, 2003. The 2005 plan has 5,000 shares of
High Performance Common Stock with an aggregate initial purchase
price of $573,000. The provisions of the 2005 plan are substantially the
same as the prior plans.

The additional equity from the issuance of the High Performance
Common Stock is recorded as a separate class of stock and included
within shareholders’ equity. Future distributions, if any, will be
deducted from net income available for common shareholders.

401(k) Plan

Effective November 4, 1999, the Company implemented a sav-
ings and retirement plan (the “401(k) Plan”), which is a voluntary,
deﬁned contribution plan. All employees are eligible to participate in
the 401(k) Plan following completion of three months of continuous
service with the Company. Each participant may contribute on a pretax
basis between 2.00% and 15.00% of such participant’s compensation.
At the discretion of the Board of Directors, the Company may make
matching contributions on the participant’s behalf of up to 50.00%
of the first 10.00% of the participant’s annual compensation. The
Company made gross contributions of approximately $356,000,
$319,000 and $320,000 to the 401(k) Plan for the years ended
December 31, 2002, 2001 and 2000, respectively.

iStar Financial annual report

Note 11 – Earnings Per Share

The following table presents a reconciliation of the numera-
tors and denominators of the basic and diluted EPS calculations for the
years ended December 31, 2002, 2001 and 2000, respectively (in thou-
sands, except per share data):

In addition, there were approximately 167,000, 261,000 and
632,000 stock options, 6.1 million, 6.1 million and 6.1 million warrants
and 371,000, 373,000 and 373,000 joint venture shares that were anti-
dilutive for the 12-month periods ended December 31, 2002, 2001 and
2000, respectively.

2002

2001

2000

Note 12 – Comprehensive Income

In June 1997, the FASB issued Statement of Financial
Accounting Standards No. 130 (“SFAS No. 130”), “Reporting
Comprehensive Income” effective for fiscal years beginning after
December 15, 1997. The statement changes the reporting of certain
items currently reported as changes in the shareholders’ equity section
of the balance sheet and establishes standards for the reporting and
display of comprehensive income and its components in a full set of
general-purpose ﬁnancial statements. SFAS No. 130 requires that all
components of comprehensive income shall be reported in the ﬁnan-
cial statements in the period in which they are recognized. Further-
more, a total amount for comprehensive income shall be displayed in
the ﬁnancial statements. The Company has adopted this standard effec-
tive January 1, 1998. Total comprehensive income was $228.1 million,
$214.8 million and $217.8 million for the years ended December 31,
2002, 2001 and 2000, respectively. The primary components of com-
prehensive income other than net income consist of amounts attrib-
utable to the adoption and continued application of SFAS No. 133 to
the Company’s cash ﬂow hedges and changes in the fair value of the
Company’s available-for-sale investments.

For the years ended December 31, 2002 and 2001, the change
in fair market value of the Company’s cash ﬂow hedges and fair value
hedges was an increase of $5.2 million and a decrease of $11.3 million,
respectively, and was recorded as an adjustment to other comprehen-
sive income. The reconciliation to other comprehensive income is as
follows (in thousands):

For the Year Ended December 31,
Net income
Other comprehensive income:
Unrealized gains on available-for-
sale investments

Cumulative effect of change in accounting
principle (SFAS No. 133) on other
comprehensive income
Unrealized gains (losses) on cash ﬂow and

2002

2001

2000

$215,270

$229,912

$217,586

7,601

5,709

209

–

(9,445)

–

fair value hedges

Comprehensive income

5,190
$228,061

(11,336)
$214,840

–
$217,795

Unrealized gains on available-for-sale investments are recorded
as adjustments to shareholders’ equity (through “Accumulated other com-
prehensive income” on the Company’s Consolidated Balance Sheets), and
are not included in adjusted earnings or net income unless realized.

As of December 31, 2002 and 2001, accumulated other com-
prehensive income reﬂected in the Company’s shareholders’ equity is
comprised of the following (in thousands):

As of December 31,
Unrealized gains on available-for-sale investments
Unrealized losses on cash ﬂow and fair value hedges
Accumulated other comprehensive income (loss)

2002

2001

$ 13,290
(15,591)
$ (2,301)

$ 5,689
(20,781)
$(15,092)

accounting principle

–
Net income allocable to common shareholders $178,362 $193,004 $180,678
Denominator:
Weighted average common shares

(282)

–

For the Year Ended December 31,
Numerator:
Net income before income from discontinued

operations, gain from discontinued
operations, extraordinary loss and
cumulative effect of change in
accounting principle

Preferred dividend requirements
Net income allocable to common shareholders

before income from discontinued
operations, gain from discontinued
operations, extraordinary loss and
cumulative effect of change in
accounting principle
Income from discontinued operations
Gain from discontinued operations
Extraordinary loss on early extinguishment

of debt

Cumulative effect of change in

outstanding for basic earnings
per common share

Add: effect of assumed shares issued under

treasury stock method for stock
options and restricted shares

Add: effect of contingent shares
Weighted average common shares

outstanding for diluted earnings
per common share

Basic earnings per common share:
Net income allocable to common shareholders

of debt

Cumulative effect of change in

accounting principle

Net income allocable to common shareholders $
Diluted earnings per common share:
Net income allocable to common shareholders

$223,136 $225,370 $212,188
(36,908)

(36,908)

186,228
3,583
717

188,462
5,299
1,145

175,280
3,155
2,948

(12,166)

(1,620)

(705)

89,886

86,349

85,441

1,645
1,118

1,680
205

710
–

92,649

88,234

86,151

2.07 $
0.04
0.01

2.18 $
0.06
0.02

2.05
0.04
0.03

(0.14)

(0.02)

(0.01)

–
1.98 $

(0.00)
2.24 $

–
2.11

of debt

Cumulative effect of change in

accounting principle

Net income allocable to

2.01 $
0.04
0.01

2.14 $
0.06
0.01

2.04
0.04
0.03

(0.13)

(0.02)

(0.01)

–

(0.00)

–

common shareholders

1.93 $

2.19 $

2.10

2002

page .61

Note 13 – Dividends

In order to maintain its election to qualify as a REIT, the
Company must currently distribute, at a minimum, an amount equal to
90.00% of its taxable income and must distribute 100.00% of its tax-
able income to avoid paying corporate federal income taxes. The
Company anticipates it will distribute all of its taxable income to its
shareholders. Because taxable income differs from cash ﬂow from oper-
ations due to non-cash revenues or expenses (such as depreciation), in
certain circumstances, the Company may generate operating cash ﬂow
in excess of its dividends or, alternatively, may be required to borrow to
make sufﬁcient dividend payments.

For the year ended December 31, 2002, total dividends
declared by the Company aggregated $231.3 million, or $2.52 per com-
mon share, consisting of quarterly dividends of $0.63 per share which
were declared on April 1, 2002, July 1, 2002, October 1, 2002 and
December 2, 2002. The Company also declared dividends aggregating
$20.9 million, $4.7 million, $3.0 million and $8.0 million, respectively,
on its Series A, B, C and D preferred stock, respectively, for the year
ended December 31, 2002. There are no divided arrearages on any of
the preferred shares currently outstanding.

The Series A preferred stock has a liquidation preference of
$50.00 per share and carries an initial dividend yield of 9.50% per
annum. The dividend rate on the preferred shares will increase to 9.75%
on December 15, 2005, to 10.00% on December 15, 2006 and to 10.25%
on December 15, 2007 and thereafter. Dividends on the Series A pre-
ferred shares are payable quarterly in arrears and are cumulative.

Holders of shares of the Series B preferred stock are entitled
to receive, when and as declared by the Board of Directors, out of funds
legally available for the payment of dividends, cumulative preferential
cash dividends at the rate of 9.375% per annum of the $25.00 liquida-
tion preference, equivalent to a ﬁxed annual rate of $2.34 per share.
Dividends are cumulative from the date of original issue and are
payable quarterly in arrears on or before the 15th day of each March,
June, September and December or, if not a business day, the next suc-
ceeding business day. Any dividend payable on the Series B preferred
stock for any partial dividend period will be computed on the basis of a
360-day year consisting of twelve 30-day months. Dividends will be
payable to holders of record as of the close of business on the ﬁrst day
of the calendar month in which the applicable dividend payment date
falls or on another date designated by the Board of Directors of the
Company for the payment of dividends that is not more than 30 nor
less than ten days prior to the dividend payment date.

Holders of shares of the Series C preferred stock are entitled
to receive, when and as declared by the Board of Directors, out of funds
legally available for the payment of dividends, cumulative preferential
cash dividends at the rate of 9.20% per annum of the $25.00 liquida-
tion preference, equivalent to a ﬁxed annual rate of $2.30 per share.
The remaining terms relating to dividends of the Series C pre-
ferred stock are substantially identical to the terms of the Series B
preferred stock described above.

Holders of shares of the Series D preferred stock are entitled
to receive, when and as declared by the Board of Directors, out of funds
legally available for the payment of dividends, cumulative preferential
cash dividends at the rate of 8.00% per annum of the $25.00 liquida-
tion preference, equivalent to a ﬁxed annual rate of $2.00 per share.
The remaining terms relating to dividends of the Series D preferred
stock are substantially identical to the terms of the Series B pre-
ferred stock described above.

The 2002 High Performance Common Stock plan reached its
valuation date on December 31, 2002 and shares of High Performance
Common Stock, equivalent to 819,254 shares of Common Stock
became vested. The Company will pay dividends on these units in the
same amount per share and on the same distribution dates as shares of
the Company’s Common Stock. Such dividends payments begin with
the ﬁrst quarter 2003 dividend and will reduce net income allocable to
common shareholders when paid.

The exact amount of future quarterly dividends to common
shareholders will be determined by the Board of Directors based on
the Company’s actual and expected operations for the ﬁscal year and the
Company’s overall liquidity position.

Note 14 – Fair Values of Financial Instruments

SFAS No. 107, “Disclosures About Fair Value of Financial
Instruments” (“SFAS No. 107”), requires the disclosure of the estimated
fair values of ﬁnancial instruments. The fair value of a ﬁnancial instru-
ment is the amount at which the instrument could be exchanged in a
current transaction between willing parties, other than in a forced or
liquidation sale. Quoted market prices, if available, are utilized as esti-
mates of the fair values of ﬁnancial instruments. Because no quoted
market prices exist for a signiﬁcant part of the Company’s ﬁnancial
instruments, the fair values of such instruments have been derived
based on management’s assumptions, the amount and timing of future
cash ﬂows and estimated discount rates. The estimation methods for
individual classiﬁcations of ﬁnancial instruments are described more
fully below. Different assumptions could signiﬁcantly affect these esti-
mates. Accordingly, the net realizable values could be materially differ-
ent from the estimates presented below. The provisions of SFAS
No. 107 do not require the disclosure of the fair value of non-ﬁnancial
instruments, including intangible assets or the Company’s corporate
tenant lease assets.

In addition, the estimates are only indicative of the value of
individual ﬁnancial instruments and should not be considered an indi-
cation of the fair value of the Company as an operating business.

Short-term ﬁnancial instruments – The carrying values of short-
term ﬁnancial instruments including cash and cash equivalents and
short-term investments approximate the fair values of these instru-
ments. These ﬁnancial instruments generally expose the Company to
limited credit risk and have no stated maturities, or have an average
maturity of less than 90 days and carry interest rates which approxi-
mate market.

Loans and other lending investments – For the Company’s interests
in loans and other lending investments, the fair values were estimated
by discounting the future contractual cash ﬂows (excluding participa-
tion interests in the sale or reﬁnancing proceeds of the underlying col-
lateral) using estimated current market rates at which similar loans
would be made to borrowers with similar credit ratings for the same
remaining maturities.

Marketable securities – Securities held for investment, securities
available for sale, loans held for sale, trading account instruments, long-
term debt and trust preferred securities traded actively in the second-
ary market have been valued using quoted market prices.

Other ﬁnancial instruments – The carrying value of other ﬁnan-
cial instruments including, restricted cash, accrued interest receivable,
accounts payable, accrued expenses and other liabilities approximate
the fair values of the instruments.

Debt obligations – A substantial portion of the Company’s exist-
ing debt obligations bear interest at ﬁxed margins over LIBOR. Such
margins may be higher or lower than those at which the Company
could currently replace the related ﬁnancing arrangements. Other obli-
gations of the Company bear interest at ﬁxed rates, which may differ
from prevailing market interest rates. As a result, the fair values of the
Company’s debt obligations were estimated by discounting current
debt balances from December 31, 2002 and 2001 to maturity using esti-
mated current market rates at which the Company could enter into sim-
ilar ﬁnancing arrangements.

Interest rate protection agreements – The fair value of interest
rate protection agreements such as interest rate caps, ﬂoors, collars and
swaps used for hedging purposes (see Note 9) is the estimated amount
the Company would receive or pay to terminate these agreements at
the reporting date, taking into account current interest rates and cur-
rent creditworthiness of the respective counterparties.

iStar Financial annual report

The book and fair values of ﬁnancial instruments as of December 31, 2002 and 2001 were (in thousands):

Financial assets:
Loans and other lending investments
Marketable securities
Provision for loan losses
Financial liabilities:
Debt obligations
Interest rate protection agreements

Note 15 – Segment Reporting

2002

2001

Book Value

Fair Value

Book Value

Fair Value

$3,079,592
35
(29,250)

$3,301,452
35
(29,250)

$2,398,763
285
(21,000)

$2,508,119
285
(21,000)

3,461,590
3,145

$3,500,927
3,145

2,495,369
(18,925)

2,506,046
(18,925)

Statement of Financial Accounting Standard No. 131 (“SFAS
No. 131”) establishes standards for the way that public business
enterprises report information about operating segments in annual
ﬁnancial statements and requires that those enterprises report selected
ﬁnancial information about operating segments in interim ﬁnancial
reports issued to shareholders.

The Company has two reportable segments: Real Estate
Lending and Corporate Tenant Leasing. The Company does not have
substantial foreign operations. The accounting policies of the segments
are the same as those described in Note 3. The Company has no single
customer that accounts for more than 4.03% of revenues (see Note 9
for other information regarding concentrations of credit risk).

The Company evaluates performance based on the following ﬁnancial measures for each segment:

Real Estate
Lending

Corporate
Tenant
Leasing

Corporate
and Other(1)

Company
Total

(In thousands)

2002
Total revenues(2)
Equity in earnings from joint ventures and unconsolidated subsidiaries
Total operating and interest expense(3)
Net operating income before minority interests(4)
Total long-lived assets(5)
Total assets
2001
Total revenues(2)
Equity in earnings from joint ventures and unconsolidated subsidiaries
Total operating and interest expense(3)
Net operating income before minority interests(4)
Total long-lived assets(5)
Total assets
2000
Total revenues(2)
Equity in earnings from joint ventures and unconsolidated subsidiaries
Total operating and interest expense(3)
Net operating income before minority interests(4)
Total long-lived assets(5)
Total assets

Explanatory Notes:

$ 279,158
–
94,274
184,884
3,050,342
3,126,219

$ 246,890
5,081
105,607
146,364
2,291,805
2,442,087

$ 282,802
–
109,568
173,234
2,377,763
2,448,493

$ 280,474
–
115,906
164,568
2,227,083
2,285,506

$ 188,688
9,617
77,481
120,824
1,781,565
1,889,879

$ 179,412
5,058
79,662
104,808
1,592,087
1,706,949

(324) $ 525,724
1,222
303,648
223,298
5,342,147
5,611,697

(3,859)
103,767
(107,950)
N/A
43,391

(371)
(2,256)
65,843
(68,470)
N/A
42,268

3,633
(262)
60,364
(56,993)
N/A
42,320

$ 471,119
7,361
252,892
225,588
4,159,328
4,380,640

$ 463,519
4,796
255,932
212,383
3,819,170
4,034,775

Corporate and Other represents all corporate level items, including general and administrative expenses and any intercompany eliminations necessary to reconcile to the consolidated

Company totals. This caption also includes the Company’s servicing business, which is not considered a material separate segment.

Total revenues represents all revenues earned during the period from the assets in each segment. Revenue from the Real Estate Lending business primarily represents interest income

and revenue from the Corporate Tenant Leasing business primarily represents operating lease income.

Total operating and interest expense represents provision for loan losses for the Real Estate Lending business and operating costs on corporate tenant lease assets for the Corporate

Tenant Leasing business, as well as interest expense speciﬁcally related to each segment. Interest expense on unsecured notes, general and administrative expense and general and

administrative – stock-based compensation is included in Corporate and Other for all periods. Depreciation and amortization of $47,821, $35,411 and $34,384 in 2002, 2001 and 2000,

respectively, are included in the amounts presented above.

Net operating income represents net operating income before minority interest, income from discontinued operations, gain (loss) from discontinued operations, extraordinary loss on

early extinguishment of debt and cumulative effect of change in accounting principle. Net operating income excludes income from discontinued operations of $3,583, $5,299 and $3,155

for the years ended December 31, 2002, 2001 and 2000, respectively.

Total long-lived assets is comprised of Loans and Other Lending Investments, net and Corporate Tenant Lease Assets, net, for each respective segment.

(1)

(2)

(3)

(4)

(5)

2002

page .63

Note 16 – Quarterly Financial Information (Unaudited)

The following table sets forth the selected quarterly ﬁnancial data for the Company (in thousands, except per share amounts).

2002
Revenue
Net income
Net income allocable to common shares
Net income per common share – basic
Weighted average common shares outstanding – basic
2001
Revenue
Net income
Net income allocable to common shares
Net income per common share – basic
Weighted average common shares outstanding – basic

Note 17 – Subsequent Events

Quarter Ended

December 31, September 30,

June 30,

March 31,

$140,321
62,976
53,749
0.57
93,671

$116,757
58,755
49,528
0.57
86,969

$135,035
52,670
43,443
0.49
89,431

$117,430
57,553
48,326
0.56
86,470

$130,790
42,513
33,286
0.38
88,656

$118,497
58,960
49,733
0.58
86,081

$119,578
57,111
47,884
0.55
87,724

$118,435
54,644
45,417
0.53
85,833

Subsequent to December 31, 2002, the Company modiﬁed
the terms of the 6.75% Dealer Remarketable Securities, increased the
principal amount and sold additional notes in an amount totaling
$150.0 million. The notes were modiﬁed to become obligations of the

Company (as opposed to the Leasing Subsidiary), the covenants were
modiﬁed to reﬂect the covenants contained in the Company’s other
unsecured notes, and the maturity date was modiﬁed to be March 2008.
The new interest rate on the modiﬁed notes is set at 7.00%.

common stock price and dividends (unaudited)

The high and low sales prices per share of Common Stock are

The following table sets forth the dividends paid or declared

set forth below for the periods indicated.

by the Company on its Common Stock:

Quarter Ended
2001
March 31, 2001
June 30, 2001
September 30, 2001
December 31, 2001
2002
March 31, 2002
June 30, 2002
September 30, 2002
December 31, 2002

High

Low

$25.25
$28.20
$28.46
$26.05

$28.90
$31.45
$29.55
$28.40

$19.19
$22.85
$22.49
$23.01

$24.59
$28.50
$25.30
$25.90

Quarter Ended
2001(1)
March 31, 2001
June 30, 2001
September 30, 2001
December 31, 2001
2002(2)
March 31, 2002
June 30, 2002
September 30, 2002
December 31, 2002

~
Explanatory Notes:

Shareholder Record Date

Dividend/Share

April 16, 2001
July 16, 2001
October 15, 2001
December 17, 2001

April 15, 2002
July 15, 2002
October 15, 2002
December 16, 2002

$0.6125
$0.6125
$0.6125
$0.6125

$0.6300
$0.6300
$0.6300
$0.6300

On March 14, 2003, the closing sale price of the Common
Stock as reported by the NYSE was $28.50. The Company had approxi-
mately 2,619 holders of record of Common Stock as of March 14, 2003.

(1)

(2)

For tax reporting purposes, the 2001 dividends were classiﬁed as 90.55% ($2.2206)

ordinary income and 9.45% ($0.2318) return of capital for those shareholders who

held shares of the Company for the entire year.

For tax reporting purposes, the 2002 dividends were classiﬁed as 87.61% ($2.2078)

ordinary income, 1.80% ($0.0454) 20.00% capital gain and 10.59% ($0.2668) return

of capital for those shareholders who held shares of the Company for the entire year.

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n
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iStar Financial annual report

Directors
––

(3)

Jay Sugarman
Chairman and Chief Executive Officer,
iStar Financial Inc.

(1)

Willis Andersen, Jr.
Principal,
REIT Consulting Services

(3)

Jeffrey G. Dishner
Senior Managing Director,
Starwood Capital Group

Andrew L. Farkas
Chairman and Chief Executive Officer,
Insignia Financial Group, Inc.

(4)

Madison F. Grose
Senior Managing Director,
Starwood Capital Group

(4)

Robert W. Holman, Jr.
Chairman and Chief Executive Officer,
National Warehouse Investment Company

Merrick R. Kleeman
Senior Managing Director,
Starwood Capital Group

(1) (2)

Robin Josephs
President, Ropasada, LLC

H. Cabot Lodge III
Executive Vice President – Investments,
iStar Financial Inc.

(1) (2)

Matthew J. Lustig
Managing Director, Lazard Frères
Real Estate Investors, LLC

William M. Matthes
Managing Partner, Behrman Capital

(2) (4)

John G. McDonald
Professor of Finance, Stanford University
Graduate School of Business

Stephen B. Oresman
President, Saltash, Ltd.

(2)

(3)

George R. Puskar
Former Chairman, Lend Lease
Real Estate Investments

(3)

Barry S. Sternlicht
Chairman and Chief Executive Officer,
Starwood Hotels and Resorts

(1)
(2)
(3)
(4)

Audit Committee
Compensation Committee
Investment Committee
Nominating and
Governance Committee

iStar is lighting up the real estate finance sector

As we celebrate ten years in business and five as a public company, our future is brighter

than ever. With a $6.6 billion enterprise value, iStar Financial has solidified its position

as the leading finance company focused on the commercial real estate industry. Now more

than ever, our customers recognize the high level of knowledge, service, flexibility and

creativity with which we fulfill their unique financing requirements. Our performance for

shareholders is also getting noticed: consistently delivered double-digit returns, even in

difficult times, and one of the best credit track records in the finance industry. It is the

kind of performance that is getting hard to keep quiet.

Wow!

~ intro

milestones

iStar Financial annual report

2002

Officers
––

Jay Sugarman
Chairman and Chief Executive Officer

Catherine D. Rice
Chief Financial Officer

Timothy J. O’Connor
Executive Vice President and
Chief Operating Officer

Nina B. Matis
Executive Vice President and
General Counsel

Spencer B. Haber
President – iStar Strategic Capital

Barbara Rubin
President – iStar Asset Services

Executive Vice Presidents

––

Daniel S. Abrams
Steven R. Blomquist
Roger M. Cozzi
Jeffrey R. Digel
R. Michael Dorsch III
Barclay G. Jones III
H. Cabot Lodge III
Michelle M. MacKay
Diane Olmstead
Andrew C. Richardson

Senior Vice Presidents

––

Jeffrey N. Brown
Chase S. Curtis, Jr.
Geoffrey M. Dugan
John F. Kubicko
Steven B. Sinnett
Elizabeth B. Smith
Colette J. Tretola

Headquarters

––

iStar Financial Inc.
1114 Avenue of the Americas
New York, NY 10036
tel: (212) 930-9400
fax: (212) 930-9494

Super-Regional Offices

––

One Embarcadero Center, 33rd Floor
San Francisco, CA 94111
tel: (415) 391-4300
fax: (415) 391-6529

3480 Preston Ridge Road, Suite 575
Alpharetta, GA 30005
tel: (678) 297-0100
fax: (678) 297-0101

100 Great Meadow Road, Suite 603
Wethersfield, CT 06109
tel: (860) 258-2202
fax: (860) 258-2268

Regional Offices

––

175 Federal Street, 8th Floor
Boston, MA 02110
tel: (617) 292-3333
fax: (617) 423-3322

304 Inverness Way South, Suite 195
Englewood, CO 80112
tel: (303) 790-4656
fax: (303) 790-4680

6565 North MacArthur Blvd., Suite 410
Irving, TX 75039
tel: (972) 506-3131
fax: (972) 501-0078

Employees
––

At March 14, 2003, the Company had
143 employees.

Independent Auditors

––

PricewaterhouseCoopers LLP
New York, NY

Registrar and Transfer Agent

––

EquiServe Trust Company, N.A.
525 Washington Boulevard
Jersey City, NJ 07310
(800) 756-8200

Dividend Reinvestment Plan

––

Registered shareholders may reinvest dividends
through the Company’s dividend reinvestment
plan. For more information, please call the
Transfer Agent or the Company’s Headquarters.

Annual Meeting of Shareholders

––

June 3, 2003, 8:30 a.m. EST
Sofitel Hotel
45 West 44th Street,
New York, NY 10036

Investor Information Services

––

For help with questions about the Company, and
to receive additional corporate information,
please contact:

Investor Relations Department
iStar Financial Inc.
1114 Avenue of the Americas
New York, NY 10036
tel: (212) 930-9400
fax: (212) 930-9455
e-mail: investors@istarfinancial.com

iStar Financial Web site

––

http://www.istarfinancial.com

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