O N W A R D | i S t A R F i N A N C i A L 2 0 1 0 A N N u A L R e p O R t iStar Financial 2010 Annual Report CONteNtS Letter from the Chairman Onward Results 1 3 15 t h g i r n o , 1 1 e g a p ; t h g i r m o t t o b , r e v o c k c a B ; t f e l p o t , r e v o c t n o r F – o y a M d e H e o c N i l l r e h p a r g o t o h p , i l u o p a W i i m o c . n o s d d a . w w w i n o s d d A i : n g s e D DiReCtORS AND OFFiCeRS DiReCtORS Jay Sugarman (3) Chairman & Chief Executive Officer, iStar Financial Inc. George R. Puskar (1) (3) Former Chairman & Chief Executive Officer, Equitable Real Estate Investment Management Glenn R. August President, Oak Hill Advisors, LP Robert W. Holman, Jr. (1) (2) Chairman & Chief Executive Officer, National Warehouse Investment Company Robin Josephs (1) (2) (4) Lead Independent Director, iStar Financial Inc. John G. McDonald (3) (4) Stanford Investors Professor, Stanford University Graduate School of Business Dale Anne Reiss (1) (3) Senior Consultant, Global Real Estate Center Global & Americas Director of Real Estate, Ernst & Young, LLP (Retired) Jeffrey A. Weber (2) (4) President, York Capital Management (1) Audit Committee (2) Compensation Committee (3) Investment & Asset Management Committee (4) Nominating & Governance Committee eXeCutiVe OFFiCeRS Jay Sugarman Chairman & Chief Executive Officer Nina B. Matis Chief Legal Officer & Chief Investment Officer David M. DiStaso Chief Financial Officer eXeCutiVe ViCe pReSiDeNtS Steven R. Blomquist Investments Chase S. Curtis Jr. Credit R. Michael Dorsch III Investments Barclay Jones III Investments Michelle MacKay Investments Steve Magee iStar Land Co. Barbara Rubin iStar Asset Services, Inc. Vernon B. Schwartz AutoStar CORpORAte iNFORMAtiON HeADQuARteRS iStar Financial Inc. 1114 Avenue of the Americas New York, NY 10036 tel: 212.930.9400 fax: 212.930.9494 ReGiONAL OFFiCeS 3480 Preston Ridge Road Suite 575 Alpharetta, GA 30005 tel: 678.297.0100 fax: 678.297.0101 800 Boylston Street 33rd Floor Boston, MA 02199 tel: 617.292.3333 fax: 617.423.3322 2727 East Imperial Highway Brea, CA 92821 tel: 714.961.4700 fax: 714.961.4701 525 West Monroe Street 20th Floor, Suite 1900 Chicago, IL 60661 tel: 312.577.8549 fax: 312.612.4162 One Galleria Tower 13355 Noel Road Suite 900 Dallas, TX 75240 tel: 972.506.3131 fax: 972.501.0078 180 Glastonbury Boulevard Suite 201 Glastonbury, CT 06033 tel: 860.815.5900 fax: 860.815.5901 5 Park Plaza Suite 1640 Irvine, CA 92614 tel: 949.567.2400 fax: 949.567.2411 One Sansome Street 30th Floor San Francisco, CA 94104 tel: 415.391.4300 fax: 415.391.6259 2425 Olympic Boulevard Suite 520E Santa Monica, CA 90404 tel: 310.315.7019 fax: 310.315.7017 eMpLOYeeS iNVeStOR iNFORMAtiON SeRViCeS As of April 1, 2011, the Company had 208 employees. iNDepeNDeNt ReGiSteReD puBLiC ACCOuNtiNG FiRM PricewaterhouseCoopers LLP New York, NY ReGiStRAR AND tRANSFeR AGeNt Computershare Trust Company, N.A. P.O. Box 43078 Providence, RI 02940-3078 tel: 800.756.8200 www.computershare.com ANNuAL MeetiNG OF SHAReHOLDeRS June 1, 2011, 9:00 a.m. ET Harvard Club of New York City 35 West 44th Street New York, NY 10036 iStar Financial is a listed company on the New York Stock Exchange and is traded under the ticker “SFI.” The Company has filed all required Annual Chief Executive Officer Certifications with the NYSE. In addition, the Company has filed with the SEC the certifications of the Chief Executive Officer and Chief Financial Officer required under Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002 as exhibits to our most recently filed Annual Report on Form 10-K. For help with questions about the Company, or to receive additional corporate information, please contact: iNVeStOR ReLAtiONS Jason Fooks Investor Relations & Marketing 1114 Avenue of the Americas New York, NY 10036 tel: 212.930.9484 e-mail: investors@istarfinancial.com iStar Financial Website: www.istarfinancial.com Letter from the Chairman To our valued invesTors, 2010 was a year of important progress for iStar. Letter from the Chairman After a period in which many major financial institutions failed or required government subsidies and support, markets finally began to heal and our hard work began to show results. Significant debt reduction, positive earnings and a more stabilized portfolio all reflected our conscious efforts to streamline our balance sheet and provided solid evidence of our ability to protect shareholder value while meeting all of our capital needs. With the refinancing of our bank facilities now complete, we will continue to work to reduce debt, align the maturities of our assets and liabilities and develop investment strategies that anticipate the future dynamics of the commercial real estate finance market. We will also seek to build skills and capabilities that give us a competitive advantage in areas we believe may offer the richest veins of opportunities. Like last year, we are providing key numbers that help tell the iStar story. The numbers show several things – a diversified and still significant $9 billion portfolio; a strengthening balance sheet with decreasing leverage; and a track record over the past 13 years of generating returns well above most benchmarks. Just as important, though, is something numbers alone won’t be able to show – the determination and effort of our employees to overcome whatever challenges have stood in our way. Your support during this period has been greatly appreciated. Onward. Jay Sugarman Chairman and Chief Executive Officer 2 - 3 WARD ON WARD TOTAL ASSETS at 12/31/10 $9,174,514,422 iStar’s large, diversified asset base gives us a unique view across the commercial real estate marketplace 4 - 5 TOTAL EQUITY at 12/31/10 $1,694,659,183 iStar’s equity base remains one of the largest in the industry TOTAL PROCEEDS FROM ASSET REPAYMENTS AND SALES 7/1/07 - 12/31/10 $15,324,072,049 iStar’s assets remained liquid throughout the credit crisis 6 - 7 TOTAL FUNDINGS ON FORWARD COMMITMENTS 7/1//07 - 12/31/10 $7,047,522,492 iStar has consistently met all of its funding obligations, leaving minimal forward commitments remaining TOTAL DEBT RETIRED 7/1//07 - 12/31/10 $9,681,300,153 iStar has progressively delevered to reduce risk 8 - 9 ANNUALIZED SHAREHOLDER RETURNS 3/18/98 - 12/31/10 14.2% S&P 500 returns over the same period were 2.9% TANGIBLE BOOK VALUE PER SHARE (Gross of general reserves) at 12/31/07 at 12/31/10 (1) $16.27 (2) $14.48 iStar has fought to protect shareholder value throughout the market crisis (1) Excludes $1.74 of common dividends paid during 1H’08. (2) Pro forma for 1Q’11 gain associated with redemption of 10% Secured Notes. LEVERAGE at 12/31/07 at 12/31/10 3.3x 2.3x (1) 10 - 11 (1) Pro forma for 1Q’11 gain associated with redemption of 10% Secured Notes. NUMBER OF PORTFOLIO ASSETS at 12/31/07 at 12/31/10 628 325 iStar has streamlined its portfolio and focused on maximizing the value of its assets asseT TYPe 5.7% Other Investments 6.5% Mezzanine / Subordinated Debt 8.3% Other Real Estate Owned 9.4% Real Estate Held for Investment 45.9% First Mortgages / Senior Loans 12 - 13 24.2% Net Lease Assets GeoGraPHY 4.1% Northwest 4.2% International 4.8% Central 22.7% West 8.6% Mid-Atlantic 9.6% Various 10.2% Southwest 20.7% Northeast 15.1% Southeast ProPerTY TYPe 8.3% Other 5.6% Mixed Use / Mixed Collateral 7.4% Hotel 8.4% Entertainment / Leisure 8.7% Industrial / R&D 23.2% Apartment / Residential 16.3% Land 14 - 15 10.0% Office 12.1% Retail RESULTS Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures about Market Risk Management’s Report on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Changes in Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Common Stock Price and Dividends (unaudited) Directors and Officers Corporate Information 16 18 31 32 33 34 35 36 38 40 72 73 73 selected financial data The following table sets forth selected financial data on a consolidated historical basis for the Company. This information should be read in conjunction with the discussions 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 2010 presentation. For the Years Ended December 31, (In thousands, except per share data and ratios) Operating Data: Interest income Operating lease income Other income Total revenue Interest expense Operating costs – net lease assets Operating costs – REHI and OREO Depreciation and amortization General and administrative Provision for loan losses Impairment of assets Other expense Total costs and expenses Income (loss) before earnings from equity method investments and other items Gain on early extinguishment of debt, net Gain on sale of joint venture interest Earnings from equity method investments Income (loss) from continuing operations Income from discontinued operations Gain from discontinued operations Net income (loss) Net (income) loss attributable to noncontrolling interests Gain attributable to noncontrolling interests Net income (loss) attributable to iStar Financial Inc. Preferred dividends Net income (loss) attributable to iStar Financial Inc. and allocable to common shareholders, HPU holders and Participating Security holders (1) Per common share data (2): Income (loss) attributable to iStar Financial Inc. Basic from continuing operations: Net income (loss) attributable to iStar Financial Inc.: Per HPU share data (2): Diluted (3) Basic Diluted (3) Income (loss) attributable to iStar Financial Inc. Basic from continuing operations: Net income (loss) attributable to iStar Financial Inc.: Diluted (3) Basic Diluted (3) 16 - 17 Dividends declared per common share (4) Supplemental Data: Adjusted earnings (loss) attributable to iStar Financial, Inc. and allocable to common shareholders and HPU holders (5)(6) Adjusted EBITDA (6)(7) Ratio of Adjusted EBITDA to interest expense and preferred dividends (6)(7) Ratio of earnings to fixed charges (8)(9) Ratio of earnings to fixed charges and preferred dividends (9) Weighted average common shares outstanding – basic Weighted average common shares outstanding – diluted Weighted average HPU shares outstanding – basic and diluted Cash flows from: 2010 2009 2008 2007 2006 $ 364,094 170,213 40,944 575,251 315,985 15,072 64,694 63,244 109,526 331,487 20,521 23,078 943,607 (368,356) 108,923 – 51,908 (207,525) 17,349 270,382 80,206 (523) – 79,683 (42,320) $ 557,809 177,960 30,429 766,198 414,240 15,942 40,866 63,259 124,152 1,255,357 126,588 66,470 2,106,874 (1,340,676) 547,349 – 5,298 (788,029) 5,756 12,426 (769,847) 1,071 – (768,776) (42,320) $ 947,661 183,641 97,742 1,229,044 618,711 15,320 9,288 60,632 138,164 1,029,322 334,534 24,758 2,230,729 (1,001,685) 393,131 280,219 6,535 (321,800) 48,575 91,458 (181,767) 991 (22,249) (203,025) (42,320) $ 998,008 180,476 99,680 1,278,164 610,718 18,176 445 50,807 146,678 185,000 143,887 18,324 1,174,035 $ 575,598 159,787 70,508 805,893 410,480 13,126 – 35,534 94,679 14,000 5,386 1,523 574,728 104,129 225 – 29,626 133,980 94,790 7,832 236,602 816 – 237,418 (42,320) 231,165 – – 12,391 243,556 108,251 24,227 376,034 (1,207) – 374,827 (42,320) $ 37,363 $ (811,096) $ (245,345) $ 195,098 $ 332,507 $ (2.60) $ (2.60) $ 0.39 $ 0.39 $ (8.06) $ (8.06) $ (7.88) $ (7.88) $ (2.87) $ (2.87) $ (1.85) $ (1.85) $ 0.69 $ 0.68 $ 1.48 $ 1.47 $ 1.68 $ 1.67 $ 2.81 $ 2.78 $ (494.33) $ (494.33) $ 72.27 $ 72.27 $ – $ (223,471) $ 777,803 2.0x – – 93,244 93,244 15 $ (1,535.20) $ (1,535.20) $ (1,501.73) $ (1,501.73) $ – $ (542.40) $ (542.40) $ (349.87) $ (349.87) $ 1.74 $ 129.80 $ 129.20 $ 279.53 $ 278.07 $ 3.60 $ 318.26 $ 315.67 $ 530.94 $ 526.47 $ 3.08 $ (708,595) $ 704,257 1.4x – – 100,071 100,071 15 $ (359,295) $ 1,606,888 2.3x – – 131,153 131,153 15 $ 355,707 $ 1,359,659 2.0x 1.2x 1.2x 126,801 127,542 15 $ 429,922 $ 935,849 2.0x 1.6x 1.4x 115,023 116,057 15 Operating activities Investing activities Financing activities $ (47,396) $ 3,738,823 $(3,411,194) $ 77,795 $ 724,702 $(1,074,402) $ 418,529 $ (27,943) $ 1,444 $ 561,337 $(4,745,080) $ 4,182,299 $ 431,224 $(2,529,260) $ 2,088,617 As of December 31, (In thousands) Balance Sheet Data: Loans and other lending investments, net Net lease assets, net Real estate held-for-investment, net Other real estate owned Total assets Debt obligations, net Total equity Explanatory Notes: 2010 2009 2008 2007 2006 $4,587,352 $1,784,509 $ 833,060 $ 746,081 $9,174,514 $7,345,433 $1,694,659 $ 7,661,562 $ 2,885,896 $ 422,664 $ 839,141 $12,810,575 $10,894,903 $ 1,656,118 $10,586,644 $ 3,044,811 $ – $ 242,505 $15,296,748 $12,486,404 $ 2,446,662 $10,949,354 $ 3,309,866 $ – $ – $15,848,298 $12,363,044 $ 2,972,170 $ 6,799,850 $ 3,084,794 $ – $ – $11,059,995 $ 7,833,437 $ 3,016,372 (1) HPU holders are current and former Company employees who purchased high performance common stock units under the Company’s High Performance Unit Program. Participating Security holders are Company employees and directors who hold unvested restricted stock units and common stock equivalents granted under the Company’s Long-Term Incentive Plans. (2) See Note 14 of the Notes to Consolidated Financial Statements. (3) (4) For the years ended December 31, 2007 and 2006, net income used to calculate earnings per diluted common share and HPU share includes joint venture income of $85 and $115, respectively. The Company generally declares common dividends in the month subsequent to the end of the quarter. During 2010 and 2009, no common dividends were declared. During 2008, no common dividends were declared for the three month periods ended September 30, 2008 and December 31, 2008. In December of 2007, the Company declared a special $0.25 divi- dend due to higher taxable income generated as a result of the Company’s acquisition of Fremont CRE. Adjusted earnings represents net income attributable to the Company and allocable to common shareholders, HPU holders and Participating Security holders computed in accordance with GAAP, before depreciation, depletion, amortization, gain from discontinued operations, impairments of goodwill and intangible assets and extraordinary items. (See “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for a reconciliation of adjusted earnings to net income). Both Adjusted earnings and Adjusted EBITDA should be examined in conjunction with net income (loss) as shown in the Company’s Consolidated Statements of Operations. Neither Adjusted earnings nor Adjusted EBITDA should be considered as an alternative to net income (loss) (determined in accordance with GAAP) as an indicator of the Company’s perfor- mance, 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. Rather, Adjusted earnings and Adjusted EBITDA are additional measures the Company uses to ana- lyze how its business is performing. As a commercial finance company that focuses on real estate lending, net leasing and real estate investment, the Company records significant depreciation on its real estate assets and amortization of deferred financing costs associated with its borrowings. In addition, in calculating its ratio of Adjusted EBITDA to interest expense and preferred stock dividends, the Company makes adjustments for impairments of assets and provisions for loan losses because they are significant non-cash items and the Company believes that investors may find it useful to consider the Company’s coverage of its interest and preferred dividend payments without the effect of these non-cash items, as an additional measure to earnings to fixed charges. It should be noted that the Company’s manner of calculating Adjusted earnings and Adjusted EBITDA may differ from the calcu- lations of similarly titled measures by other companies. Adjusted EBITDA is calculated as net income (loss) plus the sum of interest expense, depreciation, depletion and amortization, income taxes, provision for loan losses, impairment of assets, stock-based compensation expense and less the gain on early extinguishment of debt, net. (5) (6) (7) For the Years Ended December 31, 2010 2009 2008 2007 2006 (In thousands) Net Income (loss) Add: Interest expense(1) Add: Depreciation, depletion and amortization(2) Add: Joint venture depreciation and amortization Add: Income taxes Add: Provision for loan losses Add: Impairment of assets(3) Add: Stock-based compensation expense Less: Gain on early extinguishment of debt, net Adjusted EBITDA $ 80,206 346,500 69,916 9,858 7,023 331,487 22,381 19,355 $(108,923) $ 777,803 $ (769,847) 481,116 98,238 17,990 4,141 1,255,357 141,018 23,593 (547,349) $ 704,257 $ (181,767) 666,706 102,745 14,466 10,175 1,029,322 334,830 23,542 (393,131) $1,606,888 $ 236,602 629,272 99,427 40,826 6,972 185,000 144,184 17,601 (225) $1,359,659 $376,034 429,807 83,058 14,941 891 14,000 5,683 11,435 – $935,849 Explanatory Notes: (1) (2) (3) For the years ended December 31, 2010, 2009, 2008, 2007 and 2006, interest expense includes $30,515, $66,876, $47,995, $18,554 and $19,327, respectively, of interest expense reclassified to discontinued operations. For the years ended December 31, 2010, 2009, 2008, 2007 and 2006, depreciation, depletion and amortization includes $7,541, $36,029, $40,811, $43,560 and $43,291, respec- tively, of depreciation, depletion and amortization reclassified to discontinued operations. For the years ended December 31, 2010, 2009, 2008, 2007 and 2006, impairment of assets includes $1,860, $14,430, $296, $297 and $297, respectively, of impairment of assets reclassified to discontinued operations. (8) (9) This ratio of earnings to fixed charges is calculated in accordance with GAAP. The Company’s unsecured debt securities have a fixed charge coverage covenant which is calculated differently in accordance with the terms of the agreements. For the years ended December 31, 2010, 2009 and 2008, earnings were not sufficient to cover fixed charges by $227,249, $756,824 and $282,640, respectively, and earnings were not sufficient to cover fixed charges and preferred dividends by $269,569, $799,144 and $324,960, respectively. management’s discussion and analysis of financial condition and results of operations Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives and expected operating results, and the assumptions upon which those statements are based, are “forward- looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements are included with respect to, among other things, the Company’s current business plan, business strategy, portfolio management, prospects and liquidity. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties which may cause actual results or outcomes to differ materially from those contained in the forward-looking state- ments. Important factors that the Company believes might cause such differences are discussed in the section entitled, “Risk Factors” in Part I, Item 1a of iStar Financial’s Form 10-K or otherwise accom- pany the forward-looking statements contained in this Annual Report. We undertake no obligation to update or revise publicly any forward- looking statements, whether as a result of new information, future events or otherwise. In assessing all forward-looking statements, readers are urged to read carefully all cautionary statements contained in this Annual Report. For purposes of Management’s Discussion and Analysis of Financial Condition and Results of Operations, the terms “we,” “our” and “us” refer to iStar Financial Inc. and its consolidated sub- sidiaries, unless the context indicates otherwise. This discussion summarizes the significant factors affecting our consolidated operating results, financial condition and liquidity dur- ing the three-year period ended December 31, 2010. This discussion should be read in conjunction with our consolidated financial state- ments and related notes for the three-year period ended December 31, 2010 included elsewhere in this Annual Report. These historical finan- cial statements may not be indicative of our future performance. We reclassified certain items in our consolidated financial statements of prior years to conform to our current year’s presentation. Overview iStar Financial Inc. is a fully-integrated finance and investment company focused on the commercial real estate industry. We provide custom tailored investment capital to high-end private and corporate owners of real estate and invest directly across a range of real estate sectors. We are taxed as a real estate investment trust, or “REIT,” and have invested more than $35 billion over the past two decades. Our three primary business segments are lending, net leasing and real estate investment. Our primary sources of revenues are interest income, which is the interest that borrowers pay on loans, and operating lease income, which is the rent that corporate customers pay to lease our properties. We primarily generate income through the “spread” or “margin,” which is the difference between the revenues generated from loans and leases and interest expense and the cost of net lease operations. Going forward, we also expect to earn income from our other real estate investments. Income from real estate investments may include operat- ing revenues as well as income from sales of properties either in bulk or through unit sales. This income will be reduced by holding costs while the real estate investments are redeveloped, repositioned and eventually sold. The economic recession and tightening of capital markets adversely affected our business. We experienced significant provisions for loan losses and impairments resulting from high levels of non- performing loans and increasing amounts of real estate owned as we took title to assets of defaulting borrowers. The economic conditions and their effect on our operations resulted in increases in our financing costs and an inability to access the unsecured debt markets. Since the beginning of the crisis, we have focused primarily on resolving problem assets, generating liquidity, retiring debt, decreasing leverage and pre- serving shareholder value. We saw early signs of an economic recovery during 2010, including some improvements in the commercial real estate market and greater stability in the capital markets. This was evidenced in our own portfolio by increased liquidity from loan repayments and asset sales, better pricing for commercial real estate assets, improved risk ratings and reductions in non-performing and watch list assets as com- pared to 2008 and 2009. In addition, the trends of increases in loan loss provisions and performing loans becoming non-performing reversed course in 2010. Many of the improving trends in our financial condition and operating results are dependent on a sustained recovery; however, there can be no assurance that the recent improvement in conditions will continue in the future. For the year ended December 31, 2010, we recorded net income of $79.7 million. This was an improvement from net losses of $768.8 million and $203.0 million in 2009 and 2008, respectively, and was primarily due to reduced provisions for loan losses and impair- ments of $352.0 million in 2010, compared to approximately $1.40 bil- lion in each of the prior two years. Results for the year also benefited from $270.4 million in gains, primarily resulting from the disposition of a $1.05 billion portfolio of 32 net lease assets, as well as $108.9 million of gains from early extinguishment of debt. In addition to gains recorded in the current year, we recorded gains on early extinguishment of debt of $547.3 million and $393.1 million during 2009 and 2008, respectively, resulting from retirements that contributed to a $5.02 billion reduction of debt during the past three years. The market values of our debt have recovered significantly from their depressed values in previous years. Aside from the redemption of our senior secured notes discussed below, we do not expect to record significant gains from early extin- guishments of debt for the foreseeable future while prices for our debt remain at or above their current levels. During 2010, we reduced our net exposure to non-performing loans to $1.35 billion as of December 31, 2010, compared to $2.99 billion at December 31, 2009. In some cases these loans were sold or modified 18 - 19 and in many cases we took possession of properties serving as collat- eral for these loans through foreclosure or deed-in-lieu of foreclosure. These foreclosed assets were classified as real estate held-for-invest- ment (“REHI”) or other real estate owned (“OREO”) based on our strat- egy to either hold the properties over a longer period or to market them for sale in the near term. Together, these properties constitute our real estate investment portfolio, which has increased to $1.58 billion as of December 31, 2010, from $1.26 billion at the end of 2009. The overall increase in this portfolio was driven by new REHI assets that we took title to during the year, offset by net reductions in OREO as we made progress in monetizing assets through disposition. We generally seek to reposition the distressed assets within this portfolio through the infu- sion of capital and/or intensive asset management, with the objective of maximizing our recovery with respect to the investments. Further, we believe that impairments recognized on many of these assets prior to being transferred into this portfolio create an attractive below-cost investment basis, which, combined with our repositioning and develop- ment efforts, should enable us to create value from this portfolio. While we work on repositioning these assets, we expect to continue to incur elevated carrying costs. These costs totaled $64.6 million in 2010 and $40.9 million in 2009. During the year ended December 31, 2010, we generated a total of $4.91 billion in proceeds from our portfolio, comprised of $2.27 billion in gross loan principal repayments, $700.1 million in loan sales, $460.2 million from sales of OREO assets and $1.47 billion from sales of net lease assets. These proceeds were used in part to reduce the Company’s debt obligations by $3.55 billion and fully retire the remaining $473.3 million A-Participation associated with the acquisition of the Fremont portfolio. Additionally, we funded a total of $630.5 million in new and pre-existing investments. The new investments we made in 2010 were primarily sourced from our existing portfolio. We believe that making additional investments in assets within our portfolio may present more attractive risk-adjusted return opportunities than are otherwise available in the market, because of our existing relationships with the customers and knowledge of the assets. In March 2011, we entered into a $2.95 billion senior secured credit facility and used the proceeds to repay approximately $2.62 bil- lion of outstanding borrowings under our existing secured credit facili- ties, which were due to mature in June 2011 and June 2012. Proceeds were also used to repay $175.0 million of our unsecured credit facilities due in June 2011. We expect to use the remaining proceeds to repay unsecured debt maturing in the first half of 2011 as well as other cor- porate purposes. In addition, during the first quarter of 2011, we repaid the remaining $107.8 million principal amount of unsecured senior notes due March 2011 and completed the redemption of our remain- ing $312.3 million principal amount of 10% senior secured notes due June 2014. In connection with the redemption, we expect to record a gain of approximately $109 million on early extinguishment of debt dur- ing the first quarter of 2011 (see Subsequent Events below). After giving effect to the new secured credit Facility and repayments noted above, we will have approximately $882 million of debt maturing and minimum required amortization payments due on or before December 31, 2011. We expect that liquidity in the coming year will primarily be provided by loan repayments as well as strategic asset sales and proceeds from planned OREO sales. We believe that proceeds from these activities will be sufficient to meet our obligations during the remainder of the year; however, the timing and amounts of proceeds from expected asset repayments and sales are subject to factors outside of our control and cannot be predicted with certainty. Results of Operations for the Year Ended December 31, 2010 compared to the Year Ended December 31, 2009 (In thousands) Interest income Operating lease income Other income Total revenue Interest expense Operating costs – net lease assets Operating costs – REHI and OREO Depreciation and amortization General and administrative Provision for loan losses Impairment of assets Other expense Total costs and expenses Gain on early extinguishment of debt, net Earnings from equity method investments Income from discontinued operations Gain from discontinued operations Net income (loss) 2010 2009 $ Change % Change $364,094 170,213 40,944 575,251 315,985 15,072 64,694 63,244 109,526 331,487 20,521 23,078 943,607 108,923 51,908 17,349 270,382 $ 80,206 $ 557,809 177,960 30,429 766,198 414,240 15,942 40,866 63,259 124,152 1,255,357 126,588 66,470 2,106,874 547,349 5,298 5,756 12,426 $ (769,847) $ (193,715) (7,747) 10,515 (190,947) (98,255) (870) 23,828 (15) (14,626) (923,870) (106,067) (43,392) (1,163,267) (438,426) 46,610 11,593 257,956 $ 850,053 (35)% (4)% 35% (25)% (24)% (5)% 58% 0% (12)% (74)% (84)% (65)% (55)% (80)% >100% >100% >100% >100% Revenue – The decrease in interest income is primarily a result of a decline in the balance of performing loans to $3.37 billion at December 31, 2010 from $4.91 billion at December 31, 2009. The decline in performing loans was primarily driven by loan repayments and note sales as well as loans moving to non-performing status. (See Risk Management below). Operating lease income from net lease assets decreased primarily due to a slight decrease in tenant occupancy rates and lower rent received as a result of lease restructurings. Offsetting these declines in revenue was an increase in other income primarily driven by an increase in operating revenue from REHI assets and loan prepayment penalties received. Revenue from REHI assets increased to $23.1 million in 2010 from $5.8 million in 2009 due to the increase in real estate assets held-for-investment. Costs and expenses – Total costs and expenses decreased primarily due to lower provisions for loan losses, fewer impairments of assets and reduced interest expense. The decline in our provision for loan losses was primarily due to fewer loans moving to non-performing status during the year ended December 31, 2010 as compared to the same period in 2009. The decrease in loans moving to non-performing status during the year can be attributed to a smaller overall loan portfolio and improving economic conditions and credit environment. Additionally, loan repayments and sales have led to a smaller perform- ing loan asset base, which has resulted in a reduction in the required general loan loss reserve. (See Risk Management below.) Impairment of assets for the year ended December 31, 2010 primarily consisted of $19.1 million of impairments on OREO assets. Asset impairments in 2009 were significantly higher due to declining real estate values and distressed economic conditions. These impair- ments included $78.6 million of impairments on REHI and OREO assets, $19.1 million on net lease assets, $12.6 million on investment securi- ties, $12.2 million on equity investments and $4.2 million on goodwill. Interest expense decreased primarily due to the repay- ment and retirement of debt during the last 12 months as well as the exchange of senior unsecured notes for new second-lien senior secured notes completed in May 2009. The carrying value of our debt declined to $7.35 billion at December 31, 2010 from $10.89 billion at December 31, 2009. In addition, the weighted average interest rate on outstanding debt decreased to 3.87% for the year ended December 31, 2010 from 4.14% during the same period in 2009 primarily due to the repayment of higher rate debt obligations. Other expense was lower primarily due to a $42.4 million charge incurred in 2009 pursuant to a settlement agreement under which we terminated a long-term lease for new headquarters space and settled all disputes with the landlord. The decrease in general and administrative expense was primarily due to $5.9 million of rent expense incurred during the year ended December 31, 2009 relating to a lease for new headquarters space which was terminated in May 2009. Stock-based compensa- tion expense also declined by $4.2 million primarily due to amortiza- tion of newer stock awards with lower values than those granted in prior years. The increase in operating costs for REHI and OREO was pri- marily due to the increase in the number of assets held during 2010 as compared to in 2009. Gain on early extinguishment of debt, net – During 2010, we retired $633.0 million par value of our senior secured and unsecured notes through open market repurchases and we redeemed $282.3 mil- lion of senior secured notes. Together, these transactions resulted in an aggregate gain on early extinguishment of debt of $131.0 million. Notes repurchased in 2010 yielded lower gains than in the prior year primar- ily because they were trading closer to par. These gains were offset by $22.1 million associated with expensing the unamortized deferred financing costs and other costs incurred in connection with the prepay- ments of our $1.0 billion First Priority Credit Agreement, which was due to mature in June 2012, and our $947.9 million non-recourse secured term loan and another secured term loan that were each collateralized by net lease assets we sold during the period. During 2009, we retired $1.31 billion par value of our senior unsecured notes through open market repurchases at discounts to par and recognized $439.4 million in gain on early extinguishment of debt. Additionally, we completed our secured note exchange transactions and purchased $12.5 million of our outstanding senior floating rates notes in a cash tender offer, which resulted in an aggregate net gain on early extinguishment of debt of $107.9 million. Earnings from equity method investments – The increase in earn- ings from equity method investments was primarily attributable to bet- ter overall market performance that affected our strategic investments in 2010 as compared to 2009. In addition, during 2009 we recorded a $9.4 million non-cash out of period charge to recognize losses from an equity method investment as a result of additional depreciation expense that should have been recorded at the equity method entity in prior periods. Discontinued operations – During the year ended December 31, 2010, we sold a portfolio of 32 net lease assets and nine other net lease assets and recognized aggregate gains of $270.4 million. Income from discontinued operations in 2010 included the net income from those net lease assets sold during the period. During the year ended December 31, 2009, we sold four net lease assets and recognized aggregate gains of $12.4 million. Income from discontinued operations in 2009 included the net income from net lease assets sold in the past 12 months offset by $14.4 million of impairments on those sold assets. 20 - 21 Results of Operations for the Year Ended December 31, 2009 compared to the Year Ended December 31, 2008 (In thousands) Interest income Operating lease income Other income Total revenue Interest expense Operating costs – net lease assets Operating costs – REHI and OREO Depreciation and amortization General and administrative Provision for loan losses Impairment of assets Other expense Total costs and expenses Gain on early extinguishment of debt Gain on sale of joint venture interest Earnings from equity method investments Income from discontinued operations Gain from discontinued operations Net income (loss) 2009 2008 $ Change % Change $ 557,809 177,960 30,429 766,198 414,240 15,942 40,866 63,259 124,152 1,255,357 126,588 66,470 2,106,874 547,349 – 5,298 5,756 12,426 $ (769,847) $ 947,661 183,641 97,742 1,229,044 618,711 15,320 9,288 60,632 138,164 1,029,322 334,534 24,758 2,230,729 393,131 280,219 6,535 48,575 91,458 $ (181,767) $(389,852) (5,681) (67,313) (462,846) (204,471) 622 31,578 2,627 (14,012) 226,035 (207,946) 41,712 (123,855) 154,218 (280,219) (1,237) (42,819) (79,032) $(588,080) (41)% (3)% (69)% (38)% (33)% 4% >100% 4% (10)% 22% (62)% >100% (6)% 39% (100)% (19)% (88)% (86)% >(100)% Revenue – The decline in interest income year over year pri- marily resulted from a decrease in the carrying value of performing loans to $4.91 billion at the end of 2009 from $8.18 billion at the end of 2008. This decrease in performing loans was primarily due to assets moving from performing to non-performing status, as well as loan repayments and note sales that contributed to the decline in income generating loans. Lower interest rates also contributed to the decline in interest income with one-month LIBOR averaging 0.33% in 2009 versus 2.68% in 2008. However, the impact to overall rates from the decline in LIBOR rates was tempered by interest rate floors, resulting in a weighted average interest rate of 3.86% in effect on approximately $1.87 billion of loans at December 31, 2009. The year over year change in other income was primarily driven by certain one-time transactions in 2008 including $44.2 million of income recognized from the redemption of a participation interest in a lending investment and $12.0 million of income recognized when we exchanged a cost method equity investment for a loan receivable. Additionally, other loan related income, such as prepayment penal- ties, declined by $27.5 million from 2009 to 2008. Slightly offsetting this increase were $15.0 million of realized and unrealized gains on trading securities held in our other investment portfolio. Operating lease income from net lease assets decreased pri- marily due to a slight decrease in tenant occupancy rates. Costs and expenses – Total costs and expenses decreased pri- marily due to decreases in impairment of assets and interest expense partially offset by an increase in provision for loan losses. Impairment of assets in 2009 included $78.6 million of impairments on OREO and REHI assets, $24.8 million of impairments on securities and equity investments, $19.1 million of impairments on net lease assets and $4.2 million of impairments on goodwill. Impairments in 2008 were significantly higher and included $207.0 million of impairments on secu- rities and equity investments, $60.6 million of impairments on goodwill and intangible assets, $55.6 million of impairments on OREO assets, and $11.3 million of impairments on net lease assets. The decline in interest expense year over year is primarily a result of reducing outstanding debt balances from repurchases and repayments. In an effort to generate gains on certain of our debt securi- ties which have traded at discounts to par, as discussed further below, we repurchased $1.31 billion par value of our senior unsecured notes during 2009 and we also repaid an additional $628.3 million at maturity. In addition, we completed an exchange of senior unsecured notes for new second-lien senior secured notes in May 2009. This exchange resulted in a $262.7 million deferred gain reflected as a premium to the new notes which is being amortized as a reduction to interest expense over the terms of the new notes. In 2009, we recognized $35.1 million in amortization of this premium as a reduction to interest expense. Lower LIBOR rates also contributed to our decrease in interest expense, with our average borrowing rates decreasing to 4.14% in 2009 from 5.02% in 2008. General and administrative expenses decreased primar- ily due to lower payroll and employee related costs from reductions in headcount. The increase in our provision for loan losses in 2009 was caused by the continued deterioration in the commercial real estate market and weakened economic conditions that negatively impacted our borrowers’ ability to service their debt and refinance their loans at maturity. This resulted in additional asset-specific reserves due to the increasing level of non-performing loans within the portfolio along with declining values of real estate collateral that secure such loans. Other expense was higher primarily due to a $42.4 million charge incurred during 2009 pursuant to a settlement agreement under which we terminated a long-term lease for new headquarters space and settled all disputes with a landlord. The increase in operating costs for OREO and REHI was pri- marily due to the increase in the number of assets held during 2009 as compared to during 2008. Gain on early extinguishment of debt – In 2009, we retired $1.31 billion par value of our senior unsecured notes through open market repurchases at discounts to par and recognized $439.4 mil- lion in gain on early extinguishment of debt. Additionally, we completed our secured note exchange transactions and purchased $12.5 million of our outstanding senior floating rate notes in a cash tender offer which resulted in an aggregate gain on early extinguishment of debt of $107.9 million. During 2008, we retired $900.7 million par value of our senior unsecured notes through open market repurchases at discounts to par which resulted in an aggregate gain on early extinguishment of debt of $393.1 million. Gain on sale of joint venture interest – In April 2008, we closed on the sale of our TimberStar Southwest joint venture for a gross sales price of $1.71 billion, including the assumption of debt. We received net proceeds of $417.0 million for our interest in the venture and recorded a gain of $280.2 million. Discontinued operations – During 2009, we sold four net lease assets and recognized gains of $12.4 million while income from discon- tinued operations in 2009 included impairment charges of $14.4 million on net lease assets sold during the year or held-for-sale at the end of the year. During 2008, we sold several net lease assets and our Maine timber property for gains of $91.5 million, while income from discontin- ued operations included higher operating results for those properties sold or classified as held-for-sale in 2008 and 2009. Adjusted Earnings We measure our performance using adjusted earnings in addition to net income. Adjusted earnings represents net income attrib- utable to us and allocable to our common shareholders, HPU hold- ers and Participating Security holders computed in accordance with GAAP, before depreciation, depletion, amortization, gain from discon- tinued operations, impairments of goodwill and intangible assets and extraordinary items. Adjustments for joint ventures reflect our share of adjusted earnings calculated on the same basis. We believe that adjusted earnings has historically been a help- ful measure to consider, in addition to net income (loss), because this measure has helped us to evaluate how our commercial real estate finance business is performing compared to other commercial finance companies, without the effects of certain GAAP adjustments that are not necessarily indicative of current operating performance. The most significant GAAP adjustments that we exclude in determining adjusted earnings are depreciation and amortization which are typically non-cash charges as well as gain from discontin- ued operations. As a commercial finance company that focuses on real estate lending and net leasing, we record significant depreciation on our real estate assets, and deferred financing amortization associ- ated with our borrowings. Depreciation and amortization do not affect our daily operations, but they do impact financial results under GAAP. Adjusted earnings is not an alternative or substitute for net income (loss) in accordance with GAAP as a measure of our performance. Rather, we believe that adjusted earnings is an additional measure that helps us analyze how our business is performing. Adjusted earnings should not be viewed as an alternative measure of either our operating liquidity or funds available for our cash needs or for distribution to our shareholders. In addition, we may not calculate adjusted earnings in the same manner as other companies that use a similarly titled measure. For the Years Ended December 31, 2010 2009 2008 2007 2006 (In thousands) Adjusted earnings: Net income (loss) Add: Depreciation, depletion and amortization Add: Joint venture depreciation, depletion and amortization Add: Net (income) loss attributable to noncontrolling interests Add: Impairment of intangible assets and goodwill Add: Hedge ineffectiveness, net Add: Joint venture income Less: Gain from discontinued operations Less: Gain on sale of joint venture interest Less: Deferred financing amortization Less: Preferred dividends $ 80,206 69,916 9,858 $(769,847) 98,238 17,990 $(181,767) 102,745 14,466 $236,602 99,427 40,826 $376,034 83,058 14,941 (523) – – – (270,382) – (70,226) (42,320) 1,071 4,186 – – (12,426) – (5,487) (42,320) 991 60,618 7,427 – (91,458) (280,219) 50,222 (42,320) 816 – (239) 92 (7,832) (1,572) 29,907 (42,320) (1,207) – – 123 (24,227) – 23,520 (42,320) Adjusted earnings (loss) attributable to iStar Financial, Inc. and allocable to common shareholders, HPU holders and Participating Security holders $(223,471) $(708,595) $(359,295) $355,707 $429,922 22 - 23 Risk Management Loan Credit Statistics – The table below summarizes our non- performing loans, watch list loans and the reserves for loan losses associated with our loans ($ in thousands): As of December 31, 2010 2009 Non-performing loans Carrying value(1)(2) As a percentage of total carrying value of loans Watch list loans Carrying value(1) As a percentage of total carrying value of loans Reserve for loan losses Total reserve for loan losses As a percentage of total loans before loan loss reserves Non-performing loan asset-specific reserves for loan losses As a percentage of gross carrying value of non-performing loans $1,351,410 $2,993,158 29.6% 38.0% $ 190,553 $ 703,173 4.2% 8.9% $ 814,625 $1,417,949 15.1% 15.3% $ 667,779 $1,216,097 33.1% 28.9% Explanatory Notes: (1) (2) As of December 31, 2009, carrying values of loans included the remaining outstanding participation interest on loans in the Fremont CRE portfolio, which was $298.3 million for non-performing loans, $20.6 million for watch list loans and $473.3 million for total loans. The participation was fully repaid in October 2010 and therefore is not reflected in the values as of December 31, 2010. As of December 31, 2010 and 2009, carrying values of non-performing loans are net of asset-specific reserves for loan losses of $667.8 million and $1.22 billion, respectively. Non-Performing Loans – We designate loans as non-performing at such time as: (1) the loan becomes 90 days delinquent; (2) the loan has a maturity default; or (3) management determines it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan. All non-performing loans are placed on non-accrual status and income is only recognized in certain cases upon actual cash receipt. As of December 31, 2010, we had non-performing loans with an aggregate carrying value of $1.35 billion, or 29.6% of the total carrying value of loans. Our non-performing loans decreased during the year ended December 31, 2010, primarily due to transfers of non-performing loans to REHI and OREO as well as sales and repayments. Watch List Loans – During our quarterly loan portfolio assess- ments, loans are put on the watch list if deteriorating performance indicates they warrant a higher degree of monitoring and senior management attention. As of December 31, 2010, we had loans on the watch list (excluding non-performing loans) with an aggregate carrying value of $190.6 million, or 4.2% of the total carrying value of loans. Reserve for Loan Losses – The reserve for loan losses was $814.6 million as of December 31, 2010, or 15.1% of the gross carrying value of total loans, down from $1.42 billion or 15.3% at December 31, 2009. The change in the balance of the reserve was the result of $331.5 million of provisioning for loan losses, reduced by $934.8 million of charge-offs during the year ended December 31, 2010. The reserve is increased through the provision for loan losses, which reduces income in the period recorded and the reserve is reduced through charge-offs. Due to the continued volatility of the commercial real estate market, the process of estimating collateral values and reserves continues to require us to use significant judgment. We currently believe there is ade- quate collateral and reserves to support the carrying values of the loans. The reserve for loan losses includes an asset-specific com- ponent and a formula-based component. An asset-specific reserve is established for an impaired loan when the estimated fair value of the loan’s collateral less costs to sell is lower than the carrying value of the loan. As of December 31, 2010, we had asset-specific reserves of $694.4 million compared to $1.24 billion at December 31, 2009. The decrease in the amount of asset-specific reserves during the year ended December 31, 2010 was primarily due to the lower balance of non-performing loans as discussed above. The formula-based general reserve is derived from estimated principal default probabilities and loss severities applied to groups of performing loans based upon risk ratings assigned to loans with similar risk characteristics during our quarterly loan portfolio assessment. During this assessment we perform a comprehensive analysis of our loan portfolio and assign risk ratings to loans that incorporate manage- ment’s current judgments about their credit quality based on all known and relevant internal and external factors that may affect collectability. We consider, among other things, payment status, lien position, bor- rower financial resources and investment in collateral, collateral type, project economics and geographical location as well as national and regional economic factors. This methodology results in loans being segmented by risk classification into risk rating categories that are associated with estimated probabilities of default and principal loss. We estimate loss rates based on historical realized losses experienced within our portfolio and take into account current economic conditions affecting the commercial real estate market when establishing appro- priate time frames to evaluate loss experience. The general reserve was $120.2 million or 3.6% of the gross carrying value of performing loans as of December 31, 2010, compared to $174.9 million or 3.4% of the gross carrying value of performing loans at December 31, 2009. The decrease in the balance of the general reserve resulted from the decrease in performing loans outstand- ing from $5.08 billion as of December 31, 2009 to $3.37 billion as of December 31, 2010, as well as a slight improvement of the weighted average risk ratings of performing loans outstanding during that same period. Real Estate Held-for-Investment, net and Other Real Estate Owned – REHI and OREO consist of properties acquired through foreclosure or by deed-in-lieu of foreclosure in full or partial satisfaction of non-perform- ing loans. Properties are designated as REHI or OREO depending on our strategic plan to realize the maximum value from the collateral received. When we intend to hold, operate or develop the property for a period of at least 12 months, assets are classified as REHI, and when we intend to market these properties for sale in the near term, assets are classi- fied as OREO. As of December 31, 2010 we had $833.1 million of assets classified as REHI and $746.1 million as OREO. During the year ended December 31, 2010, we recorded impairment charges of $19.1 million on OREO assets due to changing market conditions. The continued volatil- ity of the commercial real estate market requires us to use significant judgment in estimating fair values of REHI and OREO properties at the time of transfer and thereafter when events or circumstances indicate there may be a potential impairment. Additionally, we will continue to incur holding and operating costs related to REHI and OREO assets while they are being marketed for sale or redeveloped and repositioned. The aggregate net operating and holding costs for REHI and OREO assets was $64.7 million for the year ended December 31, 2010. Risk concentrations – As of December 31, 2010, our total investment portfolio was comprised of the following property/collateral types ($ in thousands)(1): Property/Collateral Types Apartment/Residential Land Retail Office Industrial/R&D Entertainment/Leisure Hotel Mixed Use/Mixed Collateral Other(2) Total Explanatory Notes: Performing Loans and Other $1,009,817 379,105 596,344 212,771 98,721 193,353 399,262 267,623 715,376 $3,872,372 Non- performing Loans $ 588,918 268,536 214,873 53,007 21,330 77,801 20,847 93,658 12,440 $1,351,410 Net Lease Assets (3) $ – 58,788 183,820 600,618 603,537 483,173 183,805 40,589 20,641 $2,174,971 REHI $ 11,500 637,977 50,641 17,337 50,520 – 44,556 28,383 – $840,914 OREO $476,658 114,162 44,204 16,422 6,300 1,200 15,000 72,135 – $746,081 Total $2,086,893 1,458,568 1,089,882 900,155 780,408 755,527 663,470 502,388 748,457 $8,985,748 % of Total 23.2% 16.3% 12.1% 10.0% 8.7% 8.4% 7.4% 5.6% 8.3% 100.0% (1) Based on the carrying value of our total investment portfolio, net of asset-specific loan loss reserves and gross of general loan loss reserves and accumulated depreciation. (2) (3) Includes $516.2 million of other investments. Includes $16.1 million of other investments. As of December 31, 2010, our total investment portfolio had the following characteristics by geographical region ($ in thousands): Geographic Region Carrying Value (1) West Northeast Southeast Southwest Mid-Atlantic Central International Northwest Various Total Explanatory Note: $2,041,466 1,862,021 1,356,366 918,772 773,903 427,817 376,829 367,094 861,480 $8,985,748 % of Total 22.7% 20.7% 15.1% 10.2% 8.6% 4.8% 4.2% 4.1% 9.6% 100.0% (1) Based on the carrying value of our total investment portfolio, net of asset-specific loan loss reserves but gross of general loan loss reserves and accumulated depreciation. Concentrations of credit risks arise when a number of bor- rowers or customers related to our investments are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet con- tractual obligations, including those to us, to be similarly affected by changes in economic conditions. We monitor various segments of our portfolio to assess potential concentrations of credit risks. We believe the current portfolio is reasonably well diversified and does not contain any significant concentration of credit risks. 24 - 25 Substantially all of our net lease, REHI and OREO assets, as well as assets collateralizing our loans and other lending investments are located in the United States, with California 13.0%, New York 11.4%, and Florida 10.6% representing the only significant concentra- tions (greater than 10.0%) as of December 31, 2010. Our portfolio contains significant concentrations in the following asset types as of December 31, 2010: apartment/residential 23.2%, land 16.3%, retail 12.1% and office 10.0%. We underwrite the credit of prospective borrowers and cus- tomers and often require them to provide some form of credit support such as corporate guarantees, letters of credit and/or cash security deposits. Although our loans and other lending investments, net lease, REHI and OREO assets are geographically diverse and the borrowers and customers operate in a variety of industries, to the extent we have a significant concentration of interest or operating lease revenues from any single borrower or customer, the inability of that borrower or cus- tomer to make its payment could have an adverse effect on us. As of December 31, 2010, our five largest borrowers or tenants of net lease assets collectively accounted for approximately 23.7% of our aggregate annualized interest and operating lease revenue, of which no single customer accounts for more than 6.0%. Liquidity and Capital Resources In March 2011, we entered into a $2.95 billion senior secured credit facility and used the proceeds to repay $2.62 billion of outstand- ing borrowings under our existing secured credit facilities, which were due to mature in June 2011 and June 2012. Proceeds were also used to repay $175.0 million of our unsecured credit facilities due in June 2011. We expect to use the remaining proceeds to repay unse- cured debt maturing in the first half of 2011 as well as for other corpo- rate purposes. In addition, during the first quarter of 2011, we repaid the remaining $107.8 million principal amount of unsecured senior notes due March 2011 and completed the redemption of our remaining $312.3 million principal amount of 10% senior secured notes due June 2014. After giving effect to these transactions, we will have approxi- mately $882 million of debt maturing and minimum required amortiza- tion payments due on or before December 31, 2011 (see Subsequent Events below). As of December 31, 2010, we had $504.9 million of unre- stricted cash. Our capital sources in the coming year will primarily include loan repayments and proceeds from strategic asset sales and planned OREO sales. During 2011, we expect to use these proceeds to supplement operating revenues in order to repay our debt obligations and to fund loan commitments, investment activities and operating expenses, including costs to reposition our OREO and REHI assets. We believe that our available cash and expected proceeds from asset repayments and sales will be sufficient to meet our obli- gations during the remainder of the year. However, the timing and amounts of proceeds from asset repayments and sales are subject to factors outside our control and cannot be predicted with certainty. Other capital sources which may be available to us in today’s financing environment include secured and unsecured financings and possibly other capital raising transactions. We actively manage our liquidity and continually work on initiatives to address both our liquidity needs and compliance with the covenants in our debt instruments. Our plans are dynamic and we may adjust our plans in response to changes in our expectations and changes in market conditions. We would be materially adversely affected if we were unable to repay or refinance our debt as it comes due. Since the beginning of 2008, we have simplified our capital structure through reductions in debt of $5.02 billion and through the retirement of the $4.20 billion A-Participation associated with the acquisition of the Fremont portfolio. During the past three years we funded $4.86 billion in loan commitments related to our portfolio. We experienced reductions in available liquidity throughout 2008 and 2009 while economic conditions impacted our borrowers’ ability to repay their loans to us and our access to the unsecured debt markets was limited. As a result, our sources of capital were derived primarily from asset sales and financings that were collateralized by the diverse assets in our portfolio. As real estate market conditions improved dur- ing 2010, loan repayments and asset monetizations increased, provid- ing us with the additional liquidity to prepay outstanding indebtedness and reduce leverage. During 2010, we generated a total of $4.91 billion in proceeds from our portfolio. This included $2.27 billion in gross loan principal repayments, $700.1 million in loan sales and $460.2 million from sales of OREO. We also generated proceeds from sales of net lease assets of $1.47 billion, including from the sale of a portfolio of 32 net lease assets during the second quarter of 2010, which resulted in a gain of $250.3 million. These proceeds were used in part to reduce our debt obligations by $3.55 billion and also to fully retire the remaining $473.3 million A-Participation associated with the acquisition of the Fremont portfolio. Additionally, we funded a total of $630.5 million in new and pre-existing investments, including $356.3 million in loan fund- ings and our $100.0 million investment in LNR. We also paid preferred dividends totaling $42.3 million during the year. Contractual Obligations – The following table outlines the contractual obligations related to our long-term debt agreements and operating lease obligations as of December 31, 2010, before giving effect to the new secured credit Facility and repayments of debt disclosed in Subsequent Events below: (In thousands) Long-Term Debt Obligations: Unsecured notes Secured notes Convertible notes Unsecured revolving credit facilities Secured term loans Secured revolving credit facilities Trust preferred Total principal maturities Interest Payable (1) Operating Lease Obligations Total (2) Explanatory Notes: Principal And Interest Payments Due By Period Total Less Than 1 Year 2–3 Years 4–5 Years 6–10 Years $2,510,326 312,329 787,750 745,224 1,857,445 953,063 100,000 7,266,137 696,974 40,994 $8,004,105 $ 401,275 – – 501,405 1,117,350 618,883 – 2,638,913 237,651 5,945 $2,882,509 $1,441,560 – 787,750 243,819 667,145 334,180 – 3,474,454 308,126 9,710 $3,792,290 $306,366 312,329 – – – – – 618,695 84,763 8,046 $711,504 $361,125 – – – 20,417 – – 381,542 36,883 16,841 $435,266 After 10 Years $ – – – – 52,533 – 100,000 152,533 29,551 452 $182,536 (1) All variable-rate debt assumes a 30-day LIBOR rate of 0.26% (the 30-day LIBOR rate at December 31, 2010). (2) We also have issued letters of credit totaling $14.4 million in connection with eight of our investments. See Unfunded Commitments below, for a discussion of certain unfunded commitments related to our lending and net lease businesses. Pro Forma Contractual Obligations – The following table outlines the contractual obligations related to our long-term debt agreements and operating lease obligations as of December 31, 2010 after giving pro forma effect to the new secured credit Facility and repayments of debt dis- closed in Subsequent Events below: (In thousands) Long-Term Debt Obligations: Unsecured notes Convertible notes Unsecured revolving credit facilities Secured term loans Secured credit facilities Trust preferred Total principal maturities Interest Payable Operating Lease Obligations Total Principal And Interest Payments Due By Period Total Less Than 1 Year 2–3 Years (1) 4–5 Years 6–10 Years $2,402,560 787,750 570,224 190,223 2,950,000 100,000 7,000,757 1,022,559 40,994 $8,064,310 $ 293,509 – 326,405 62,350 200,000 – 882,264 316,891 5,945 $1,205,100 $1,441,560 787,750 243,819 54,923 1,450,000 – 3,978,052 524,334 9,710 $4,512,096 $ 306,366 – – – 1,300,000 – 1,606,366 114,900 8,046 $1,729,312 $361,125 – – 20,417 – – 381,542 36,883 16,841 $435,266 After 10 Years $ – – – 52,533 – 100,000 152,533 29,551 452 $182,536 Explanatory Note: (1) Future long-term debt obligations due during the years ending December 31, 2012 and 2013 are $2.00 billion and $1.97 billion, respectively. Credit Facilities – In March 2011, we entered into a new $2.95 billion senior secured credit agreement and used a portion of the proceeds to fully repay $2.62 billion outstanding under our existing secured credit facilities, described below, which were due to mature in June 2011 and June 2012. See Subsequent Events below. Prior to the repayment of the secured credit facilities, as of December 31, 2010, we had outstanding borrowings of $618.9 mil- lion and $334.2 million of revolving loans maturing in June 2011 and June 2012, respectively, as well as $1.06 billion and $612.2 million of term loans maturing in June 2011 and June 2012, respectively. Borrowings under the secured credit facilities bore interest at the rate of LIBOR + 1.50% per year, subject to adjustment based upon our cor- porate credit ratings (see Ratings Triggers below). As of December 31, 2010, the total carrying value of assets pledged as collateral under the secured credit facilities was $3.95 billion. These assets also served as collateral for $312.3 million principal amount of 10% senior secured notes due 2014, which we redeemed in January 2011 (see Subsequent Events below). As of December 31, 2010, we had two unsecured revolving credit facilities, with outstanding balances of $501.4 million maturing in June 2011 and $243.8 million maturing in June 2012. Borrowings under our unsecured revolving credit facilities bear interest at a rate of LIBOR + 0.85% per year, subject to adjustment based upon our corporate credit ratings (see Ratings Triggers below). We intend to use the remain- ing proceeds from the new secured credit Facility and other cash on hand to repay the unsecured facility maturing in June 2011. In November 2010, we fully repaid a $1.00 billion First Priority Credit Agreement, which was due to mature in June 2012, and termi- nated all commitments thereunder. Other Secured Term Loans – Also during 2010, we repaid other secured term loans, including a $947.9 million non-recourse loan that was collateralized by the portfolio of 32 net lease assets that was sold, as well as $153.3 million of other term loans with various maturities. In connection with these repayments, we expensed un amortized deferred financing costs and incurred other expenses total- ing $22.1 million, which reduced our net gain on early extinguishment of debt during the year ended December 31, 2010. Secured Notes – Also during 2010, we redeemed or repur- chased $155.3 million of our 8% second priority senior secured notes due 2011 and $167.2 million of our 10% second priority senior secured notes due 2014, generating $71.3 million of gains on early extinguish- ment of debt, primarily related to the recognition of the deferred gain premiums that resulted from our note exchanges completed in May 2009. Subsequent to year-end, we fully redeemed our $312.3 mil- lion remaining principal amount of 10% senior secured notes due June 2014 (see Subsequent Events). Unsecured Notes – During the year ended December 31, 2010, we repurchased $592.8 million par value of our senior unsecured notes with various maturities ranging from March 2010 to March 2014 through open market repurchases, generating $59.7 million in gains 26 - 27 on early extinguishment of debt. We also repaid $375.7 million of unse- cured notes at maturity during the year ended December 31, 2010. Debt Covenants – Our outstanding unsecured debt securities contain covenants that include fixed charge coverage and unencum- bered assets to unsecured indebtedness ratios. The fixed charge coverage ratio in our debt securities is an incurrence test. While we expect that our ability to incur new indebtedness under the coverage ratio will be limited for the foreseeable future, we will continue to be permitted to incur indebtedness for the purpose of refinancing existing indebtedness and for other permitted purposes under the indentures. The unencumbered assets to unsecured indebtedness covenant is a maintenance covenant. If any of our covenants is breached and not cured within applicable cure periods, the breach could result in accel- eration of our debt securities unless a waiver or modification is agreed upon with the requisite percentage of the bondholders. Based on our unsecured credit ratings, the financial covenants in our debt securities, including the fixed charge coverage ratio and maintenance of unencum- bered assets to unsecured indebtedness ratio, are currently operative. Our new secured credit Facility (see Subsequent Events below) contains certain covenants, including covenants relating to the delivery of information to the lenders, collateral coverage, dividend payments, restrictions on fundamental changes, transactions with affil- iates and matters relating to the liens granted to the lenders. In particu- lar, we are required to maintain collateral coverage of 1.25x outstanding borrowings. In addition, for so long as we maintain our qualification as a REIT, the new Facility permits us to distribute 100% of our REIT taxable income on an annual basis. We may not pay common dividends if we cease to qualify as a REIT. Our new secured credit Facility contains cross default provi- sions that would allow the lenders to declare an event of default and accelerate our indebtedness to them if we fail to pay amounts due in respect of our other recourse indebtedness in excess of specified thresholds or if the lenders under such other indebtedness are other- wise permitted to accelerate such indebtedness for any reason. The indentures governing our unsecured public debt securities permit the lenders and bondholders to declare an event of default and accel- erate our indebtedness to them if we fail to pay amounts due at matu- rity in respect of other recourse indebtedness in excess of specified thresholds or if such indebtedness is accelerated. Our unsecured credit facilities permit the lenders to accelerate our indebtedness to them if our other recourse indebtedness in excess of specified thresh- olds is accelerated. We believe we are in full compliance with all the covenants in our debt instruments as of December 31, 2010. Ratings Triggers – Borrowings under our secured and unse- cured credit facilities bear interest at LIBOR based rates plus an appli- cable margin which varies between the facilities and is determined based on our corporate credit ratings. Our ability to borrow under our credit facilities is not dependent on the level of our credit ratings. Based on our current credit ratings, further downgrades in our credit ratings will have no effect on our borrowing rates under these facilities. Off-Balance Sheet Transactions – We are not dependent on the use of any off-balance sheet financing arrangements for liquidity. We have issued letters of credit totaling $14.4 million in connection with eight of our investments. Unfunded Commitments – We generally fund construction and development loans and build-outs of space in net lease assets over a period of time if and when the borrowers and tenants meet established milestones and other performance criteria. We refer to these arrangements as Performance-Based Commitments. In addition, we sometimes establish a maximum amount of additional funding which we will make available to a borrower or tenant for an expansion or addition to a project if we approve of the expansion or addition in our sole discretion. We refer to these arrangements as Discretionary Fundings. Finally, we have committed to invest capital in several real estate funds and other ventures. These arrangements are referred to as Strategic Investments. As of December 31, 2010, the maximum amounts of the fundings we may make under each category, assuming all performance hurdles and milestones are met under the Performance-Based Commitments, that we approve all Discretionary Fundings and that 100% of our capital committed to Strategic Investments is drawn down, are as follows (in thousands): Performance-Based Commitments Discretionary Fundings Other Total Loans $138,353 158,683 – $297,036 Net Lease Assets $8,143 – – $8,143 Strategic Investments $ – – 52,370 $52,370 Total $146,496 158,683 52,370 $357,549 Transactions with Related Parties – We have substantial invest- ments in non-controlling interests of Oak Hill Advisors, L.P. and 13 related entities. In relation to our investment in these entities, we appointed to our Board of Directors a member that holds a substantial investment in these same entities. As of December 31, 2010, the car- rying value of our investments in these entities was $221.8 million. We recorded equity in earnings from these investments of $34.1 million for the year ended December 31, 2010. We have an equity interest of approximately 24% in LNR Property Corporation (“LNR”). During the three months ended December 31, 2010, we executed the discounted payoff of a $25.0 mil- lion principal value loan with LNR for which we received proceeds of $24.5 million in full repayment. Stock Repurchase Program – On March 13, 2009, our Board of Directors authorized the repurchase of up to $50 million of Common Stock from time to time in open market and privately negotiated pur- chases, including pursuant to one or more trading plans. During the year ended December 31, 2010, we repurchased 2.2 million shares of our outstanding Common Stock for approximately $7.5 million, at an average cost of $3.40 per share, and the repurchases were recorded at cost. As of December 31, 2010, we had $14.1 million of Common Stock available to repurchase under Board authorized stock repurchase programs. Subsequent Events – In January 2011, we fully redeemed our $312.3 million remaining principal amount of 10% senior secured notes due June 2014. This redemption fully retired the remaining senior secured notes issued in our May 2009 exchange offer. In connec- tion with this redemption, we expect to record a gain on early extin- guishment of debt of approximately $109 million in our Consolidated Statement of Operations for the quarter ending March 31, 2011. In addi- tion, we repaid the $107.8 million outstanding principal balance of our senior unsecured notes due in March 2011 upon maturity. In March 2011, we entered into a new $2.95 billion senior secured credit agreement comprised of a $1.50 billion term loan facility bearing interest at a rate of LIBOR plus 3.75% and maturing in June 2013 (the “Tranche A-1 Facility”) and a $1.45 billion term loan facil- ity bearing interest at a rate of LIBOR plus 5.75% maturing in June 2014 (the “Tranche A-2 Facility”), together the “Facility.” Both tranches include a LIBOR floor of 1.25%. Proceeds from the new secured credit Facility were used to fully repay the $1.67 billion and $0.9 billion outstanding under our existing secured credit facilities, which were due to mature in June 2011 and June 2012, respectively. Proceeds were also used to repay $175.0 million of our unsecured credit facilities due in June 2011. We expect to use the remaining proceeds to repay unsecured debt maturing in the first half of 2011 as well as for other corporate purposes. The new secured credit Facility is collateralized by a first lien on a fixed pool of assets consisting of loans, net lease assets and OREO assets with a designated aggregate value of approximately $3.69 billion at the time of closing. We are required to maintain collateral coverage of 1.25x outstanding borrowings until the final maturity of the new Facility. Proceeds from principal repayments and sales of collateral will be applied to amortize the new Facility. Proceeds in respect of additional investment amounts and interest, rent, lease payments and fee income will be retained by us. The Tranche A-1 Facility requires that aggregate cumulative amortization payments of not less than $200.0 million shall be made on or before December 30, 2011, not less than $450.0 million on or before June 30, 2012, not less than $750.0 million on or before December 31, 2012 and not less than $1.50 billion on or before June 28, 2013. The Tranche A-2 Facility will begin amortizing six months after the repay- ment in full of the Tranche A-1 Facility, such that the not less than $150.0 million of cumulative amortization payments shall be made on or before the six month anniversary of repayment of the Tranche A-1 Facility, with additional cumulative amortization payments of $150 mil- lion due on or before each six month anniversary thereafter until the Tranche A-2 Facility is fully repaid. Critical Accounting Estimates The preparation of financial statements in accordance with GAAP requires management to make estimates and judgments in certain circumstances that affect amounts reported as assets, liabili- ties, revenues and expenses. We have established detailed policies and control procedures intended to ensure that valuation methods, including any judgments made as part of such methods, are well con- trolled, reviewed and applied consistently from period to period. We base our estimates on historical corporate and industry experience and various other assumptions that we believe to be appropriate under the circumstances. For all of these estimates, we caution that future events rarely develop exactly as forecasted, and, therefore, routinely require adjustment. During 2010, management reviewed and evaluated these critical accounting estimates and believes they are appropriate. Our significant accounting policies are described in Note 3 of the Notes to Consolidated Financial Statements. The following is a summary of accounting policies that require more significant management esti- mates and judgments: Reserve for Loan Losses – The reserve for loan losses reflects management’s estimate of loan losses inherent in the loan port- folio as of the balance sheet date. The reserve is increased through the “Provision for loan losses” on our Consolidated Statements of Operations and is decreased by charge-offs when losses are con- firmed through the receipt of assets such as cash in a pre-foreclosure sale or via ownership control of the underlying collateral in full satisfac- tion of the loan upon foreclosure or when significant collection efforts have ceased. We have determined we have one portfolio segment, represented by commercial real estate lending, whereby we utilize a uniform process for determining our reserves for loan losses. The reserve for loan losses includes a general, formula-based component and an asset-specific component. 28 - 29 The general reserve component covers performing loans and reserves for loan losses are recorded when (i) available information as of each balance sheet date indicates that it is probable a loss has occurred in the portfolio and (ii) the amount of the loss can be reason- ably estimated. The formula-based general reserve is derived from estimated principal default probabilities and loss severities applied to groups of loans based upon risk ratings assigned to loans with similar risk characteristics during our quarterly loan portfolio assessment. During this assessment, we perform a comprehensive analysis of our loan portfolio and assign risk ratings to loans that incorporate manage- ment’s current judgments about their credit quality based on all known and relevant internal and external factors that may affect collectability. We consider, among other things, payment status, lien position, bor- rower financial resources and investment in collateral, collateral type, project economics and geographical location as well as national and regional economic factors. This methodology results in loans being segmented by risk classification into risk rating categories that are associated with estimated probabilities of default and principal loss. Ratings range from “1” to “5” with “1” representing the lowest risk of loss and “5” representing the highest risk of loss. We estimate loss rates based on historical realized losses experienced within our portfolio and take into account current economic conditions affecting the commer- cial real estate market when establishing appropriate time frames to evaluate loss experience. The asset-specific reserve component relates to reserves for losses on impaired loans. We consider a loan to be impaired when, based upon current information and events, we believe that it is prob- able that we will be unable to collect all amounts due under the con- tractual terms of the loan agreement. This assessment is made on a loan-by-loan basis each quarter based on such factors as payment sta- tus, lien position, borrower financial resources and investment in col- lateral, collateral type, project economics and geographical location as well as national and regional economic factors. A reserve is established for an impaired loan when the present value of payments expected to be received, observable market prices, or the estimated fair value of the collateral (for loans that are dependent on the collateral for repayment) is lower than the carrying value of that loan. Substantially all of our impaired loans are collateral dependent and impairment is measured using the estimated fair value of collateral, less costs to sell. We generally use the income approach through inter- nally developed valuation models to estimate the fair value of the col- lateral for such loans. In more limited cases, we obtain external “as is” appraisals for loan collateral, generally when third party participations exist. Valuations are performed or obtained at the time a loan is deter- mined to be impaired and designated non-performing, and they are updated if circumstances indicate that a significant change in value has occurred. In limited cases, appraised values may be discounted when real estate markets rapidly deteriorate. A loan is also considered impaired if its terms are modified in a troubled debt restructuring (“TDR”). A TDR occurs when the Company grants a concession to a borrower in financial difficulty by modifying the original terms of the loan. Impairments on TDR loans are generally measured based on the present value of expected future cash flows discounted at the effective interest rate of the original loan. The provisions for loan losses for the years ended December 31, 2010, 2009 and 2008 were $331.5 million, $1.26 bil- lion and $1.03 billion, respectively. The total reserve for loan losses at December 31, 2010 and 2009, included asset specific reserves of $694.4 million and $1.24 billion, respectively, and general reserves of $120.2 million and $174.9 million, respectively. Impairment of Available-for-Sale and Held-to-Maturity Debt Securities – For held-to-maturity and available-for-sale debt securities held in “Loans and other lending investments,” management evalu- ates whether the asset is other-than-temporarily impaired when the fair market value is below carrying value. We consider debt securities other-than-temporarily impaired if (1) we have the intent to sell the security, (2) it is more likely than not that we will be required to sell the security before recovery, or (3) we do not expect to recover the entire amortized cost basis of the security. If it is determined that an other-than-temporary impairment exists, the portion related to credit losses, where we do not expect to recover our entire amortized cost basis, will be recognized as an “Impairment of assets” on our Consolidated Statements of Operations. If we do not intend to sell the security and it is more likely than not that we will not be required to sell the security, but the security has suffered a credit loss, the impairment charge will be separated. The credit loss component of the impairment will be recorded as an “Impairment of assets” on our Consolidated Statements of Operations, and the remainder will be recorded in “Accumulated other comprehensive income” on our Consolidated Balance Sheets. During the years ended December 31, 2009 and 2008, we determined that unrealized credit related losses on certain held- to-maturity and available-for-sale debt securities were other-than- temporary and recorded impairment charges totaling $11.7 million and $120.0 million, respectively, in “Impairment of assets” on the Consolidated Statements of Operations. Real Estate Held-for-Investment, Net and Other Real Estate Owned – REHI and OREO consist of properties acquired through foreclosure or by deed-in-lieu of foreclosure in full or partial satisfaction of non- performing loans. Properties are designated as REHI or OREO depend- ing on our strategic plan to realize the maximum value from the collat- eral received. When we intend to hold, operate or develop the property for a period of at least 12 months, assets are classified as REHI, and when we intend to market these properties for sale in the near term, assets are classified as OREO. REHI assets are initially recorded at their estimated fair value. The excess of the carrying value of the loan over the fair value of the property is charged-off against the reserve for loan losses when title to the property is obtained. Upon acquisition, tangible and intangible assets and liabilities acquired are recorded at their estimated fair val- ues. We consider REHI assets to be long-lived and periodically review them for impairment in value whenever events or changes in circum- stances indicate that the carrying amount of such assets may not be recoverable. Impairment of REHI assets is measured in the same man- ner as long-lived assets as described below. During the years ended December 31, 2010, 2009 and 2008, we recorded impairment charges on net lease assets of $4.2 mil- lion, $19.1 million and $11.3 million, respectively, due to changes in market conditions. OREO assets are recorded at the estimated fair value less costs to sell. The excess of the carrying value of the loan over the fair value of the property less estimated costs to sell is charged-off against the reserve for loan losses when title to the property is obtained. We review the recoverability of an OREO asset’s carrying value when events or circumstances indicate a potential impairment of a property’s value. If impairment exists a loss is recorded to the extent that the carrying value exceeds the estimated fair value of the property less cost to sell. During the years ended December 31, 2010, 2009 and 2008, we received titles to properties in satisfaction of senior mortgage loans with cumulative gross carrying values of $1.41 billion, $1.88 billion and $419.1 million, respectively, for which those properties had served as collateral, and recorded charge-offs totaling $631.9 million, $573.6 mil- lion and $102.4 million, respectively, related to these loans. Subsequent to taking title to the properties, we determined certain OREO assets were impaired due to changing market conditions, and recorded impairment charges of $19.1 million, $78.6 million and $55.6 million dur- ing the years ended December 31, 2010, 2009 and 2008, respectively. Long-Lived Assets Impairment Test – Net lease assets to be disposed of are reported at the lower of their carrying amount or estimated fair value less costs to sell and are included in “Assets held- for-sale” on our Consolidated Balance Sheets. The difference between the estimated fair value less costs to sell and the carrying value will be recorded as an impairment charge and included in “Income from dis- continued operations” on the Consolidated Statements of Operations. Once the asset is classified as held-for-sale, depreciation expense is no longer recorded and historical operating results are reclassi- fied to “Income from discontinued operations” on the Consolidated Statements of Operations. We periodically review long-lived assets to be held and used for impairment in value whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recover- able. A held for use long-lived asset’s value is impaired only if manage- ment’s estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the asset (taking into account the anticipated holding period of the asset) is less than the carrying value. Such estimate of cash flows considers factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other economic factors. To the extent impairment has occurred, the loss will be measured as the excess of the carrying amount of the property over the fair value of the asset and reflected as an adjustment to the basis of the asset. Impairments of net lease and REHI assets are recorded in “Impairment of other assets,” on our Consolidated Statements of Operations. Identified Intangible Assets and Goodwill –We record intangible assets acquired at their estimated fair values separate and apart from goodwill. We determine whether such intangible assets have finite or indefinite lives. As of December 31, 2010, all such acquired intangible assets have finite lives. We amortize finite lived intangible assets based on the period over which the assets are expected to contribute directly or indirectly to the future cash flows of the business acquired. We review finite lived intangible assets for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. If we determine the carrying value of an intangible asset is not recoverable we will record an impairment charge to the extent its carrying value exceeds its estimated fair value. Impairments of intangibles are recorded in “Impairment of assets” on our Consolidated Statements of Operations. The excess of the cost of an acquired entity over the net of the amounts assigned to assets acquired (including identified intangible assets) and liabilities assumed is recorded as goodwill. Goodwill is not amortized but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test is done at a level of reporting referred to as a reporting unit. If the fair value of the reporting unit is less than its carrying value, an impairment charge is recorded to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value. Due to an overall deterioration in conditions within the commercial real estate market, we recorded impairment charges of $4.2 million during 2009 and $39.1 million during 2008 to write-off the goodwill allocated to the net leasing and Real Estate Lending reporting segments, respectively. These charges were recorded in “Impairment of assets” on our Consolidated Statements of Operations. During the year ended December 31, 2008, we also recorded non-cash charges of $21.5 million to reduce the carrying value of certain intangible assets related to the Fremont CRE acquisition and other acquisitions, based on their revised estimated fair values. These charges were recorded in “Impairment of assets” on our Consolidated Statements of Operations. Consolidation – Variable Interest Entities – We evaluate our investments and other contractual arrangements to determine if our interests constitute variable interests in a variable interest entity (“VIE”) and if we are the primary beneficiary. There is a significant amount of judgment required to determine if an entity is considered a VIE and if we are the primary beneficiary. We first perform a qualitative analysis, which requires certain subjective decisions regarding our assessment, including, but not limited to, which interests create or absorb variabil- ity, contractual terms, the key decision making powers, either impact on the VIE’s economic performance and related party relationships. 30 - 31 An iterative quantitative analysis is required if our qualitative analysis proves inconclusive as to whether the entity is a VIE or we are the pri- mary beneficiary and consolidation is required. Fair Value of Assets and Liabilities – The degree of management judgment involved in determining the fair value of assets and liabilities is dependent upon the availability of quoted market prices or observable market parameters. For financial and non-financial assets and liabili- ties that trade actively and have quoted market prices or observable market parameters, there is minimal subjectivity involved in measuring fair value. When observable market prices and parameters are not fully available, management judgment is necessary to estimate fair value. In addition, changes in market conditions may reduce the availability of quoted prices or observable data. For example, reduced liquidity in the capital markets or changes in secondary market activities could result in observable market inputs becoming unavailable. Therefore, when market data is not available, we would use valuation techniques requiring more management judgment to estimate the appropriate fair value measurement. See Note 16 of the Notes to Consolidated Financial Statements for a complete discussion on how we determine fair value of financial and non-financial assets and financial liabilities and the related mea- surement techniques and estimates involved. New Accounting Pronouncements For a discussion of the impact of new accounting pronounce- ments on our financial condition or results of operations, see Note 3 of the Notes to Consolidated Financial Statements. 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 our business plan, the primary market risk to which we are exposed is interest rate risk. Our operating results will depend in part on the difference between the interest and related income earned on our assets and the interest expense incurred in con- nection with our interest-bearing liabilities. Changes in the general level of interest rates prevailing in the financial markets will affect the spread between our interest-earning assets and interest-bearing liabilities. Any significant compression of the spreads between interest-earning assets and interest-bearing liabilities could have a material adverse effect on us. In the event of a significant rising interest rate environment or further economic downturn, defaults could increase and cause us to incur additional credit losses which would adversely affect our liquidity and operating results. Such delinquencies or defaults would likely have an adverse effect on the spreads between interest-earning assets and interest-bearing liabilities. In addition, an increase in inter- est rates could, among other things, reduce the value of our fixed-rate interest-bearing assets and our ability to realize gains from the sale of such assets. 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 our con- trol. We monitor the spreads between our interest-earning assets and interest-bearing liabilities and may implement hedging strategies to limit the effects of changes in interest rates on our operations, including engaging in interest rate swaps and other interest rate-related deriva- tive contracts. Such strategies are designed to reduce our exposure, on specific transactions or on a portfolio basis, to changes in cash flows as a result of interest rate movements in the market. We do not enter into derivative contracts for speculative purposes or as a hedge against changes in our credit risk or the credit risk of our borrowers. While a REIT may utilize derivative instruments to hedge inter- est rate risk on its liabilities incurred to acquire or carry real estate assets without generating non-qualifying income, use of derivatives for other purposes will generate non-qualified income for REIT income test purposes. This includes hedging asset related risks such as credit, foreign exchange and prepayment or interest rate exposure on our loan assets. As a result our ability to hedge these types of risks is limited. There can be no assurance that our profitability will not be adversely affected during any period as a result of changing interest rates. The following table quantifies the potential changes in net investment income should interest rates increase by 50 or 100 basis points and decrease by 10 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 invest- ments and operating leases and earnings from equity method investments, less interest expense and operating costs on net lease assets for the year ended December 31, 2010. The base interest rate scenario assumes the one-month LIBOR rate of 0.26% as of December 31, 2010. Actual results could differ significantly from those estimated in the table. Estimated Percentage Change In Net Investment Income Change in Interest Rates –10 Basis Points (1) Base Interest Rate +50 Basis Points +100 Basis Points Explanatory Note: Net Investment Income(1) 1.05% – (5.27)% (10.39)% (1) We have a net variable-rate debt exposure resulting in an increase in net invest- ment income when rates decrease and a decrease in net investment income when rates increase. In addition, interest rate floors on certain of our loan assets fur- ther increase net investment income as rates decrease and decrease net invest- ment income when rates increase. As of December 31, 2010, $823.5 million of our floating rate loans have a weighted average interest rate floor of 3.55%. management’s report on internal control over financial reporting Management is responsible for establishing and maintain- ing adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of the disclosure committee and other members of management, including the Chief Executive Officer and Chief Financial Officer, management carried out its evaluation of the effectiveness of the Company’s internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on management’s assessment under the framework in Internal Control – Integrated Framework, management has concluded that its internal control over financial reporting was effective as of December 31, 2010. The Company’s internal control over financial reporting as of December 31, 2010, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears on page 33. 32 - 33 report of independent registered public accounting firm 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 equity and of cash flows present fairly, in all material respects, the financial position of iStar Financial Inc. and its subsidiaries (collectively, the ‘Company’) at December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effec- tive internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included 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 over- all financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of inter- nal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial state- ments for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detec- tion of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over finan- cial reporting may not prevent or detect misstatements. Also, projec- tions of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or proce- dures may deteriorate. New York, New York March 23, 2011 consolidated balance sheets As of December 31, (In thousands, except per share data) Assets Loans and other lending investments, net Net lease assets, net Real estate held-for-investment, net Other real estate owned Other investments Assets held-for-sale Cash and cash equivalents Restricted cash Accrued interest and operating lease income receivable, net Deferred operating lease income receivable Deferred expenses and other assets, net Total assets Liabilities and Equity Liabilities: Accounts payable, accrued expenses and other liabilities Debt obligations, net Total liabilities Commitments and contingencies Redeemable noncontrolling interests Equity: iStar Financial Inc. shareholders’ equity: Preferred Stock Series D, E, F, G, and I, liquidation preference $25.00 per share (see Note 11) High Performance Units Common Stock, $0.001 par value, 200,000 shares authorized, 138,189 issued and 92,336 outstanding at December 31, 2010 and 137,868 issued and 94,216 outstanding at December 31, 2009 Additional paid-in capital Retained earnings (deficit) Accumulated other comprehensive income (see Note 15) Treasury stock, at cost, $0.001 par value, 45,853 shares at December 31, 2010 and 43,652 shares at December 31, 2009 Total iStar Financial Inc. shareholders’ equity Noncontrolling interests Total equity Total liabilities and equity The accompanying notes are an integral part of the consolidated financial statements. 2010 2009 $ 4,587,352 1,784,509 833,060 746,081 532,358 – 504,865 13,784 24,408 62,569 85,528 $ 9,174,514 $ 7,661,562 2,885,896 422,664 839,141 384,379 17,282 224,632 39,654 54,780 122,628 157,957 $12,810,575 $ 133,060 7,345,433 7,478,493 – 1,362 $ 252,110 10,894,903 11,147,013 – 7,444 22 9,800 22 9,800 138 3,809,071 (2,014,013) 1,609 (158,492) 1,648,135 46,524 1,694,659 $ 9,174,514 138 3,791,972 (2,051,376) 6,145 (151,016) 1,605,685 50,433 1,656,118 $12,810,575 34 - 35 consolidated statements of operations For the Years Ended December 31, (In thousands, except per share data) Revenue: Interest income Operating lease income Other income Total revenue Costs and expenses: Interest expense Operating costs – net lease assets Operating costs – REHI and OREO Depreciation and amortization General and administrative Provision for loan losses Impairment of assets Other expense Total costs and expenses Income (loss) before earnings from equity method investments and other items Gain on early extinguishment of debt, net Gain on sale of joint venture interest Earnings from equity method investments Income (loss) from continuing operations Income from discontinued operations Gain from discontinued operations Net income (loss) Net (income) loss attributable to noncontrolling interests Gain attributable to noncontrolling interests Net income (loss) attributable to iStar Financial Inc. Preferred dividends 2010 2009 2008 $ 364,094 170,213 40,944 575,251 $ 557,809 177,960 30,429 766,198 $ 947,661 183,641 97,742 1,229,044 315,985 15,072 64,694 63,244 109,526 331,487 20,521 23,078 943,607 (368,356) 108,923 – 51,908 (207,525) 17,349 270,382 80,206 (523) – 79,683 (42,320) 414,240 15,942 40,866 63,259 124,152 1,255,357 126,588 66,470 2,106,874 (1,340,676) 547,349 – 5,298 (788,029) 5,756 12,426 (769,847) 1,071 – (768,776) (42,320) 618,711 15,320 9,288 60,632 138,164 1,029,322 334,534 24,758 2,230,729 (1,001,685) 393,131 280,219 6,535 (321,800) 48,575 91,458 (181,767) 991 (22,249) (203,025) (42,320) Net income (loss) attributable to iStar Financial Inc. and allocable to common shareholders, HPU holders and Participating Security holders (1)(2)(3) $ 37,363 $ (811,096) $ (245,345) Per common share data(3): Income (loss) attributable to iStar Financial Inc. from continuing operations: Basic and diluted Net income (loss) attributable to iStar Financial Inc.: Basic and diluted Weighted average number of common shares – basic and diluted Per HPU share data(1)(3): Income (loss) attributable to iStar Financial Inc. from continuing operations: Basic and diluted Net income (loss) attributable to iStar Financial Inc.: Basic and diluted Weighted average number of HPU shares – basic and diluted Explanatory Notes: $ (2.60) $ (8.06) $ (2.87) $ 0.39 93,244 $ (7.88) 100,071 $ (1.85) 131,153 $ (494.33) $ (1,535.20) $ (542.40) $ 72.27 15 $ (1,501.73) 15 $ (349.87) 15 (1) HPU holders are current and former Company employees who purchased high performance common stock units under the Company’s High Performance Unit Program (see Note 11). (2) Participating Security holders are Company employees and directors who hold unvested restricted stock units and common stock equivalents granted under the Company’s Long Term Incentive Plans (see Notes 13 and 14). See Note 14 for amounts attributable to iStar Financial Inc. for income (loss) from continuing operations and further details on the calculation of earnings per share. (3) The accompanying notes are an integral part of the consolidated financial statements. consolidated statements of changes in equity iStar Financial Inc. Shareholders’ Equity For the Years Ended December 31, 2010, 2009 and 2008 (In thousands) Balance at December 31, 2007 Exercise of options Dividends declared – preferred Dividends declared – common Dividends declared – HPU Repurchase of stock Restricted stock unit amortization, net Issuance of stock – DRIP/stock purchase plan Redemption of HPUs Net loss for the period (2) Convertible Note repurchase Gain attributable to noncontrolling interests Contributions from noncontrolling interests Distributions to noncontrolling interests Sale/purchase of certain noncontrolling interests Change in accumulated other comprehensive income (loss) Balance at December 31, 2008 Dividends declared – preferred Repurchase of stock Restricted stock unit amortization, net Net loss for the period (2) Contributions from noncontrolling interests Distributions to noncontrolling interests Change in accumulated other Preferred Stock(1) HPUs Common Stock at Par Additional Paid-In Capital Accumulated Retained Other Earnings Comprehensive Income (Loss) (Deficit) Treasury Noncon- trolling Stock at cost Interests Total Equity $22 – – – – – – $9,800 – – – – – – $135 $3,739,532 $ (753,980) – (42,320) (236,052) (4,903) – – 5,868 – – – – 20,746 – – – – – 1 $(2,295) $ (57,219) $ 36,175 $2,972,170 5,868 (42,320) (236,052) (4,903) (63,940) 20,747 – – – – (63,940) – – – – – – – – – – – – – – – – – – – – – – $22 – – – – – – – – – – – – – – – $9,800 – – – – 1 – – – – – – – 1,887 1,400 – (661) – – (203,025) – – – – – – – – – – – – – – – – – – – – – – – (1,707) 1,888 1,400 (204,732) (661) – 22,249 22,249 – 171 171 – (25,048) (25,048) – (4,177) (4,177) – – – $137 $3,768,772 $(1,240,280) (42,320) – – – 23,200 – (768,776) – – – 1 – – – 4,002 4,002 $ 1,707 $(121,159) $ 27,663 $2,446,662 (42,320) (29,857) 23,201 (769,841) – (29,857) – – – – – (1,065) – – – – – – – – – – – – – – – 26,487 26,487 – (2,652) (2,652) comprehensive income (loss) Balance at December 31, 2009 – $22 – $9,800 – – – $138 $3,791,972 $(2,051,376) The accompanying notes are an integral part of the consolidated financial statements. 36 - 37 4,438 4,438 $ 6,145 $(151,016) $ 50,433 $1,656,118 – – consolidated statements of changes in equity (continued) iStar Financial Inc. Shareholders’ Equity For the Years Ended December 31, 2010, 2009 and 2008 (In thousands) Balance at December 31, 2009 Dividends declared – preferred Repurchase of stock Restricted stock unit amortization, net Net income for the period (2) Contributions from noncontrolling interests Distributions to noncontrolling interests Change in accumulated other Preferred Stock(1) HPUs Common Stock at Par Additional Paid-In Capital Accumulated Retained Other Earnings Comprehensive Income (Loss) (Deficit) Treasury Noncon- trolling Stock at cost Interests Total Equity $22 – – – – $9,800 – – – – $138 $3,791,972 $(2,051,376) (42,320) – – – 17,099 – 79,683 – – – – – $ 6,145 $(151,016) $50,433 $1,656,118 (42,320) (7,476) 17,099 80,217 – (7,476) – – – – – 534 – – – – – – – – – – – – – – – – – 159 159 – (4,602) (4,602) comprehensive income (loss) Balance at December 31, 2010 – $22 – $9,800 – – – $138 $3,809,071 $(2,014,013) (4,536) (4,536) $ 1,609 $(158,492) $46,524 $1,694,659 – – Explanatory Notes: (1) See Note 11 for details on the Company’s Cumulative Redeemable Preferred Stock. (2) For the years ended December 31, 2010, 2009 and 2008, net income (loss) included $(11), $(6) and $716, respectively, of net income (loss) attributable to redeemable noncontrolling interests. The accompanying notes are an integral part of the consolidated financial statements. consolidated statements of cash flows For the Years Ended December 31, (In thousands) Cash flows from operating activities: Net income (loss) Adjustments to reconcile net income (loss) to cash flows from operating activities: Provision for loan losses Non-cash expense for stock-based compensation Impairment of assets Depreciation and amortization Amortization of discounts/premiums and deferred financing costs on debt Amortization of discounts/premiums, deferred interest and costs on lending investments Discounts, loan fees and deferred interest received Earnings from equity method investments Distributions from operations of equity method investments Deferred operating lease income Gain from discontinued operations Gain on early extinguishment of debt, net Gain on sale of joint venture interest Other non-cash adjustments Changes in assets and liabilities: Changes in accrued interest and operating lease income receivable, net Changes in deferred expenses and other assets, net Changes in accounts payable, accrued expenses and other liabilities Cash flows from operating activities Cash flows from investing activities: New investment originations Add-on fundings under existing loan commitments Repayments of and principal collections on loans Purchase of securities Net proceeds from sales of loans Net proceeds from sales of net lease assets Net proceeds from sales of other real estate owned Net proceeds from sale of joint venture interest Net proceeds from repayments and sales of securities Contributions to unconsolidated entities Distributions from unconsolidated entities Capital expenditures for build-to-suit facilities Capital expenditures on net lease assets Capital expenditures on REHI and OREO Other investing activities, net Cash flows from investing activities 2010 2009 2008 $ 80,206 $ (769,847) $ (181,767) 331,487 19,355 22,382 70,770 (18,926) (102,261) 9,587 (51,908) 32,651 (9,976) (270,382) (110,075) – 1,043 14,259 (1,781) (63,827) (47,396) (100,000) (356,329) 1,519,653 (349) 700,098 1,362,983 460,198 – 213,344 (23,520) 11,441 – (14,031) (28,832) (5,833) 3,738,823 1,255,357 23,592 141,018 99,287 (12,025) (117,527) 11,921 (5,298) 27,973 (13,926) (12,426) (547,349) – (1,156) 31,767 7,659 (41,225) 77,795 – (1,224,593) 951,202 (31,535) 720,770 64,566 270,621 – 27,060 (34,272) 9,459 (7,152) (7,739) (11,056) (2,629) 724,702 1,029,322 23,079 334,830 104,453 44,326 (196,519) 29,403 (6,535) 48,197 (20,043) (91,458) (393,131) (280,219) (1,345) 36,528 (18,599) (41,993) 418,529 (32,044) (3,276,502) 1,822,587 (29) 394,293 576,857 169,600 416,970 51,407 (50,636) 27,292 (79,090) (23,802) (20,646) (4,200) (27,943) The accompanying notes are an integral part of the consolidated financial statements. (continued) 38 - 39 consolidated statements of cash flows (continued) For the Years Ended December 31, (In thousands) Cash flows from financing activities: Borrowings under revolving credit facilities Repayments under revolving credit facilities Repayments under interim financing Borrowings under secured term loans Repayments under secured term loans Borrowings under unsecured notes Repayments under unsecured notes Repurchases and redemptions of secured and unsecured notes Net distributions to noncontrolling interests Changes in restricted cash held in connection with debt obligations Payments for deferred financing costs Common dividends paid Preferred dividends paid Purchase of treasury stock Other financing activity Cash flows from financing activities Changes 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: Cash paid during the period for interest, net of amount capitalized The accompanying notes are an integral part of the consolidated financial statements. 2010 2009 2008 $ 36,793 (36,812) – – (2,132,899) – (374,249) (855,833) (10,462) 12,064 – – (42,320) (7,476) – (3,411,194) 280,233 224,632 $ 504,865 $ 134,741 (371,798) – 1,000,000 (318,431) – (628,366) (885,055) (2,630) 121,116 (51,801) – (42,320) (29,858) – (1,074,402) (271,905) 496,537 $ 224,632 $ 11,451,167 (10,464,322) (1,289,811) 1,307,776 (109,262) 740,506 (620,331) (501,518) (31,029) (118,762) 11,221 (269,827) (42,320) (63,940) 1,896 1,444 392,030 104,507 $ 496,537 $ 376,473 $ 531,858 $ 645,413 Notes to CoNsolidated FiNaNCial statemeNts Note 3 – Summary of Significant Accounting Policies Note 1 – Business and Organization Business – iStar Financial Inc., or the “Company,” is a fully- integrated finance and investment company focused on the com- mercial real estate industry. The Company provides custom-tailored investment capital to high-end private and corporate owners of real estateandinvestsdirectlyacrossarangeofrealestatesectors.The Company, which is taxed as a real estate investment trust, or “REIT,” has invested more than $35 billion over the past two decades. The Company’sthreeprimarybusinesssegmentsarelending,netleasing andrealestateinvestment.SeeNote10fordiscussionoftheimpact of recent economic conditions on the Company and business risks anduncertainties. Organization – The Company began its business in 1993 throughprivateinvestmentfundsandbecamepubliclytradedin1998. Sincethattime,theCompanyhasgrownthroughtheoriginationofnew lendingandleasingtransactions,aswellasthroughcorporateacquisi- tions,includingtheacquisitionofTriNetCorporateRealtyTrust,Inc.in 1999,theacquisitionsofFalconFinancialInvestmentTrustandofasig- nificantnon-controllinginterestinOakHillAdvisors,L.P.andaffiliates in2005,andtheacquisitionofthecommercialrealestatelendingbusi- nessandloanportfoliowhichtheCompanyreferstoas“FremontCRE,” ofFremontInvestmentandLoan,or“Fremont,”adivisionofFremont GeneralCorporation,in2007. Note 2 – Basis of Presentation and Principles of Consolidation Basis of Presentation – TheaccompanyingauditedConsolidated Financial Statements have been prepared in conformity with gener- ally accepted accounting principles in the United States of America (“GAAP”)forcompletefinancialstatements.Thepreparationoffinancial statements in conformity with GAAP requires management to make estimatesandassumptionsthataffectthereportedamountsofassets, liabilities,disclosureofcontingentassetsandliabilitiesatthedatesof the financial statements and the reported amounts of revenues and expensesduringthereportingperiods.Actualresultscoulddifferfrom thoseestimates. Certain prior year amounts have been reclassified in the ConsolidatedFinancialStatementsandtherelatednotestoconformto thecurrentperiodpresentation. Principles of Consolidation – The Consolidated Financial StatementsincludethefinancialstatementsoftheCompany,itswholly owned subsidiaries, controlled partnerships and variable interest entities (“VIEs”) for which the Company is the primary beneficiary. Consolidated VIEs included OHA Strategic Credit Fund Parallel I, LP (“OHA SCF”) and Madison Deutsche Andau Holdings, LP (“Madison DA”)(seeNote3).Allsignificantintercompanybalancesandtransac- tionshavebeeneliminatedinconsolidation. Loans and other lending investments, net – Loansandotherlend- inginvestments,netincludesthefollowinginvestments:seniormort- gages,subordinatemortgages,corporate/partnershiploansandother lendinginvestments-securities.Managementconsidersnearlyallofits loansanddebtsecuritiestobeheld-for-investmentorheld-to-maturity, although certain investments may be classified as held-for-sale or available-for-sale. Loansandotherlendinginvestmentsdesignatedforsaleare classifiedasheld-for-saleandarecarriedatlowerofamortizedhistori- calcostorfairvalue.Theamountbywhichcarryingvalueexceedsfair valueisrecordedasavaluationallowance.Subsequentchangesinthe valuation allowance are included in the determination of net income (loss)intheperiodinwhichthechangeoccurs. Loans classified as held-for-investment or held-to-maturity arereportedattheiroutstandingunpaidprincipalbalance,andinclude unamortized acquisition premiums or discounts and unamortized deferredloancostsorfees.Theseloansalsoincludeaccruedandpaid- in-kindinterestandaccruedexitfeesthattheCompanydeterminesare probableofbeingcollected.Debtsecuritiesclassifiedasavailable-for- salearereportedatfairvaluewithunrealizedgainsandlossesincluded in “Accumulated other comprehensive income” on the Company’s ConsolidatedBalanceSheets. For held-to-maturity and available-for-sale debt securities heldin“Loansandotherlendinginvestments,net,”managementevalu- ates whether the asset is other-than-temporarily impaired when the fair market value is below carrying value. The Company considers debtsecuritiesother-than-temporarilyimpairedif(1)theCompanyhas theintenttosellthesecurity,(2)itismorelikelythannotthatitwillbe requiredtosellthesecuritybeforerecovery,or(3)itdoesnotexpect torecovertheentireamortizedcostbasisofthesecurity.Ifitisdeter- mined that an other-than-temporary impairment exists, the portion relatedtocreditlosses,wheretheCompanydoesnotexpecttorecover itsentireamortizedcostbasis,willberecognizedasan“Impairment ofassets”ontheCompany’sConsolidatedStatementsofOperations. IftheCompanydoesnotintendtosellthesecurityanditismorelikely thannotthattheentitywillnotberequiredtosellthesecurity,butthe securityhassufferedacreditloss,theimpairmentchargewillbesepa- rated.Thecreditlosscomponentoftheimpairmentwillberecordedas an“Impairmentofassets”ontheCompany’sConsolidatedStatements of Operations, and the remainder will be recorded in “Accumulated other comprehensive income” on the Company’s Consolidated BalanceSheets. Net lease assets and depreciation – Net lease assets are recordedatcostlessaccumulateddepreciation.Certainimprovements and replacements are capitalized when they extend the useful life, increasecapacityorimprovetheefficiencyoftheasset.Repairsand maintenance items are expensed as incurred. Depreciation is com- putedusingthestraight-linemethodofcostrecoveryovertheshorter 40 - 41 ofestimatedusefullivesor40yearsforfacilities,fiveyearsforfurniture andequipment,theshorteroftheremainingleasetermorexpectedlife fortenantimprovementsandtheremainingusefullifeofthefacilityfor facilityimprovements. Netleaseassetstobedisposedofarereportedatthelower oftheircarryingamountorestimatedfairvaluelesscoststoselland areincludedin“Assetsheld-for-sale”ontheCompany’sConsolidated BalanceSheets.Iftheestimatedfairvaluelesscoststosellislessthan the carrying value, the difference will be recorded as an impairment chargeandincludedin“Incomefromdiscontinuedoperations”onthe Company’sConsolidatedStatementsofOperations.Onceanassetis classifiedasheld-for-sale,depreciationexpenseisnolongerrecorded and historical operating results are reclassified to “Income from dis- continuedoperations”ontheCompany’sConsolidatedStatementsof Operations.AsofDecember31,2009,thereweretwonetleaseassets withanaggregatebookvalueof$17.3millionclassifiedas“Assetsheld- for-sale”ontheCompany’sConsolidatedBalanceSheets. TheCompanyperiodicallyreviewslong-livedassetstobeheld andusedforimpairmentinvaluewhenevereventsorchangesincir- cumstancesindicatethatthecarryingamountofsuchassetsmaynot berecoverable.Thevalueofalong-livedassetheldforuseisimpaired only if management’s estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the asset(takingintoaccounttheanticipatedholdingperiodoftheasset)is lessthanthecarryingvalue.Suchestimateofcashflowsconsidersfac- torssuchasexpectedfutureoperatingincome,trendsandprospects, aswellastheeffectsofdemand,competitionandothereconomicfac- tors.Totheextentimpairmenthasoccurred,thelosswillbemeasured astheexcessofthecarryingamountofthepropertyoverthefairvalue oftheassetandreflectedasanadjustmenttothebasisoftheasset. Impairmentsofnetleaseassetsthatarenotheld-for-salearerecorded in“Impairmentofassets,”ontheCompany’sConsolidatedStatements ofOperations. The Company accounts for its acquisition of facilities by allocatingthepurchasepricetothetangibleandintangibleassetsand liabilitiesacquiredbasedontheirestimatedfairvalues.Thevalueofthe tangible assets, consisting of land, buildings, building improvements andtenantimprovementsisdeterminedasiftheseassetsarevacant. Intangibleassetsmayincludethevalueofabove-marketorbelow-mar- ket,in-placeleasesandthevalueofcustomerrelationships,whichare eachrecordedattheirrelativeestimatedfairvalues. Thecapitalizedabove-market(orbelow-market)leasevalue isamortizedasareductionof(or,increaseto)operatingleaseincome overtheremainingnon-cancelabletermofeachleaseplusanyrenewal periodswithfixedrentaltermsthatareconsideredtobebelow-market. The Company also generally engages in sale/leaseback transac- tionsandtypicallyexecutesleaseswiththeoccupantsimultaneously with the purchase of the net lease asset at market-rate rents. As such, no above-market or below-market lease value is ascribed to thesetransactions. Real estate held-for-investment, net – Real estate held-for- investment, net (“REHI”) consists of properties acquired through foreclosure or through deed-in-lieu of foreclosure in full or partial satisfactionofnon-performingloansthattheCompanyintendstohold, operateordevelopforaperiodofatleast12months.REHIassetsare initiallyrecordedattheirestimatedfairvalue.Theexcessofthecarrying valueoftheloanovertheestimatedfairvalueofthepropertyacquired ischarged-offagainstthereserveforloanlosseswhentitletotheprop- ertyisobtained.Additionally,uponacquisitionofaproperty,tangibleand intangibleassetsandliabilitiesacquiredarerecordedattheirestimated fairvaluesanddepreciationiscomputed,allinthesamemannersas describedin“Netleaseassetsanddepreciation”above.Subsequentto acquisition,qualifieddevelopmentandconstructioncostsarecapital- ized.RevenuesandexpensesrelatedtoREHIassetsarerecordedas “Otherincome”and“Operatingcosts–REHIandOREO,”respectively,on theCompany’sConsolidatedStatementsofOperations. The Company considers REHI assets to be long-lived and periodicallyreviewsthemforimpairmentinvaluewhenevereventsor changes in circumstances indicate that the carrying amount of such assetsmaynotberecoverable.TheCompanymeasuresimpairments forREHIassetsinthesamemannerasnetleaseassets,asdescribedin “Netleaseassetsanddepreciation”above.ImpairmentsofREHIassets arerecordedin“Impairmentofassets,”ontheCompany’sConsolidated StatementsofOperations. Other real estate owned – OREOconsistsofpropertiesacquired throughforeclosureorbydeed-in-lieuofforeclosureinfullorpartial satisfaction of non-performing loans that the Company intends to marketforsaleinthenearterm.OREOisrecordedattheestimatedfair valuelesscoststosell.Theexcessofthecarryingvalueoftheloanover theestimatedfairvalueofthepropertylesscoststosellischarged- off against the reserve for loan losses when title to the property is obtained.Netrevenuesandcostsofholdingthepropertyarerecorded as“Operatingcosts–REHIandOREO”intheCompany’sConsolidated StatementsofOperations.Significantpropertyimprovementsmaybe capitalizedtotheextentthatthecarryingvalueofthepropertydoesnot exceeditsestimatedfairvaluelesscoststosell. TheCompanyreviewstherecoverabilityofanOREOasset’s carrying value when events or circumstances indicate a poten- tial impairment of a property’s value. If impairment exists, a loss is recordedtotheextentthatthecarryingvalueexceedstheestimated fair value of the property less costs to sell. These impairments are recorded in “Impairment of assets” on the Company’s Consolidated StatementsofOperations. Equity and cost method investments – Purchased equity inter- ests that are not publicly traded and/or do not have a readily deter- minable fair value are accounted for pursuant to the equity method ofaccountingiftheCompanycansignificantlyinfluencetheoperating andfinancialpoliciesofaninvestee.Thisisgenerallypresumedtoexist whenownershipinterestisbetween20%and50%ofacorporation, orgreaterthan5%ofalimitedpartnershiporlimitedliabilitycompany. TheCompany’speriodicshareofearningsandlossesinequitymethod investeesisincludedin“Earningsfromequitymethodinvestments”on theConsolidatedStatementsofOperations.WhentheCompany’sown- ershippositionistoosmalltoprovidesuchinfluence,thecostmethod is used to account for the equity interest. Equity and cost method investments are included in “Other investments” on the Company’s ConsolidatedBalanceSheets. The Company periodically reviews equity method invest- mentsforimpairmentinvaluewhenevereventsorchangesincircum- stancesindicatethatthecarryingamountofsuchinvestmentsmaynot berecoverable.TheCompanywillrecordanimpairmentchargetothe extentthattheestimatedfairvalueofaninvestmentislessthanitscar- ryingvalueandtheCompanydeterminestheimpairmentisother-than- temporary.Impairmentchargesarerecordedin“Impairmentofassets” ontheCompany’sConsolidatedStatementsofOperations. TheCompanyreassessesitsevaluationoftheprimarybeneficiaryofa VIEonanongoingbasisandassessesitsevaluationofanentityasaVIE uponcertainreconsiderationevents. TheCompanyhasinvestmentsincertainfundsthatmeetthe deferralcriteriainASU2010-10andwillcontinuetoassessconsolida- tionoftheseentitiesundertheoverallguidanceontheconsolidation of VIEs in Accounting Standards Codification (“ASC”) 810-10. The consolidationevaluationissimilartotheprocessnotedabove,except thattheprimarybeneficiaryisthepartythatwillreceiveamajorityof theVIE’santicipatedlosses,amajorityoftheVIE’sexpectedresidual returns,orboth.Inaddition,forentitiesthatmeetthedeferralcriteria, the Company reassesses its initial evaluation of the primary ben- eficiaryandwhetheranentityisaVIEupontheoccurrenceofcertain reconsiderationevents. Timber and timberlands – In January 2005, TimberStar Operating Partnership, L.P. (“TimberStar”) was created to acquire and manage a diversified portfolio of timberlands. During 2008, the Companysoldallofitstimberlandinvestments.TheCompanyconsoli- datedthispartnershipforfinancialstatementpurposes.TimberStar’s operating results for 2008 have been reclassified and are presented in “Income (loss) from discontinued operations” on its Consolidated StatementsofOperations. TimberStarpreviouslyowneda46.7%interestinTimberStar SouthwestHoldcoLLC(“TimberStarSouthwest”),whichtheCompany accounted for under the equity method. In April 2008, the Company solditsjointventureinterestandrecordedagainin“Gainonsaleofjoint ventureinterest”and“Gainattributabletononcontrollinginterests”on itsConsolidatedStatementsofOperations(seeNote7). Cash and cash equivalents – Cashandcashequivalentsinclude cash held in banks or invested in money market funds with original maturitytermsoflessthan90days. Restricted cash – Restrictedcashrepresentsamountsrequired tobemaintainedundercertainoftheCompany’sdebtobligationsand OREO,leasingandderivativetransactions. Consolidation – Variable interest entities – TheCompanyadopted AccountingStandardsUpdate(“ASU”)2009-17onJanuary1,2010.In accordancewiththestandard,theCompanyevaluateditsinvestments and other contractual arrangements to determine if they constitute variableinterestsinaVIE.AVIEisanentitywhereacontrollingfinancial interestisachievedthroughmeansotherthanvotingrights.AVIEis consolidatedbytheprimarybeneficiary,whichisthepartythathasthe powertodirectmattersthatmostsignificantlyimpacttheactivitiesof theVIEandhastheobligationtoabsorblossesortherighttoreceive benefitsoftheVIEthatcouldpotentiallybesignificanttotheVIE.This overall consolidation assessment includes a review of, among other factors,whichinterestscreateorabsorbvariability,contractualterms, thekeydecisionmakingpowers,theirimpactontheVIE’seconomic performance,andrelatedpartyrelationships.Wherequalitativeassess- mentisnotconclusive,theCompanyperformsaquantitativeanalysis. Consolidated VIEs – TheCompanydidnotconsolidateanynew entities as the result of the adoption of ASU 2009-17. The Company continues to consolidate OHA Strategic Credit Fund Parallel I, L.P. (“OHASCF”),whichwascreatedtoinvestindistressedandunderval- uedloans,bonds,equitiesandotherinvestments.AsofDecember31, 2010and2009,OHASCFhad$45.7millionand$40.3million,respec- tively,oftotalassets,nodebt,and$0.1millionofnoncontrollinginter- ests. The investments held by this entity are presented in “Other investments” on the Company’s Consolidated Balance Sheets. As of December31,2010,theCompanyhadatotalunfundedcommitmentof $26.8milliontothisentity. The Company also continues to consolidate Madison Deutsche Andau Holdings, LP (“Madison DA”), which was created to invest in mortgage loans secured by real estate in Europe. As of December 31, 2010 and 2009, Madison DA had $58.0 million and $63.2million,respectively,oftotalassets,nodebt,and$8.6millionand $9.5millionofnoncontrollinginterests,respectively.Theinvestments held by this entity are presented in “Loans and other lending invest- ments,net”ontheCompany’sConsolidatedBalanceSheets. Unconsolidated VIEs – OnJanuary1,2010,theCompanydecon- solidatedMoorParkRealEstatePartnersII,L.P.Incorporated(“Moor Park”) as a result of the adoption of ASU 2009-17. Moor Park is a third-party managed fund that was created to make investments in Europeanrealestateasa33%investoralong-sideasisterfund.The Companydetermineditdidnothavethepowertodirectmattersthat mostsignificantlyimpacttheactivitiesoftheVIEduetoitsinterestas alimitedpartner.Therewasnocumulativeeffectadjustmentresulting fromthedeconsolidationandtheinvestmentcontinuestobeclassified in“Otherinvestments”ontheCompany’sConsolidatedBalanceSheets. AsofDecember31,2010,theCompany’scarryingvalueinMoorPark was$12.7million.TheCompany’smaximumexposuretolossfromthis investmentwouldnotexceedthecarryingvalueofitsinvestment. In addition, the Company determined 26 of its other invest- mentswereVIEswhereitisnottheprimarybeneficiaryandaccordingly the VIEs have not been consolidated in the Company’s Consolidated Financial Statements. As of December 31, 2010, the Company’s 42 - 43 maximumexposuretolossfromtheseinvestmentswouldnotexceed the sum of the $203.9 million carrying value of the investments and $24.9millionofrelatedunfundedcommitments. Deferred expenses – Deferredexpensesincludeleasingcosts and financing fees. Leasing costs include brokerage, legal and other costs which are amortized over the life of the respective leases. External fees and costs incurred to obtain long-term financing have beendeferredandareamortizedoverthetermoftherespectivebor- rowingusingtheeffectiveinterestmethodorthestraight-linemethod, as appropriate. Amortization of leasing costs and deferred financing fees are included in the Company’s “Depreciation and amortization” and “Interest expense,” respectively, on the Company’s Consolidated StatementsofOperations. Identified intangible assets and goodwill – Upon the acquisition ofabusiness,theCompanyrecordsintangibleassetsacquiredattheir estimatedfairvaluesseparateandapartfromgoodwill.TheCompany determines whether such intangible assets have finite or indefinite lives.AsofDecember31,2010,allsuchintangibleassetsacquiredby theCompanyhavefinitelives.TheCompanyamortizesfinitelivedintan- gibleassetsbasedontheperiodoverwhichtheassetsareexpectedto contributedirectlyorindirectlytothefuturecashflowsofthebusiness acquired.TheCompanyreviewsfinitelivedintangibleassetsforimpair- mentwhenevereventsorchangesincircumstancesindicatethattheir carryingamountmaynotberecoverable.IftheCompanydetermines thecarryingvalueofanintangibleassetisnotrecoverableitwillrecord an impairment charge to the extent its carrying value exceeds its estimatedfairvalue.Impairmentsofintangibleassetsarerecordedin “Impairment of assets” on the Company’s Consolidated Statements ofOperations. During the year ended December 31, 2008, the Company recordednon-cashchargesof$21.5milliontoreducethecarryingvalue ofcertainintangibleassetsrelatedtotheFremontCREacquisitionand otheracquisitions,basedontheirupdatedestimatedfairvalues. As of December 31, 2010 and 2009, the Company had $42.8millionand$55.9million,respectively,ofunamortizedfinitelived intangibleassetsprimarilyrelatedtotheprioracquisitionofnetlease assetsandREHI.Thetotalamortizationexpensefortheseintangible assets was $9.0 million, $12.2 million and $13.7 million for the years endedDecember31,2010,2009and2008,respectively.Theestimated aggregate amortization costs for each of the five succeeding fiscal yearsareasfollows($inthousands): 2011 2012 2013 2014 2015 Total $ 7,824 4,140 2,730 2,339 2,193 $19,226 Theexcessofthecostofanacquiredentityoverthenetof the amounts assigned to assets acquired (including identified intan- gibleassets)andliabilitiesassumedisrecordedasgoodwill.Goodwill is not amortized but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that theassetmightbeimpaired.Theimpairmenttestisdoneatalevelof reportingreferredtoasareportingunit.Ifthefairvalueofthereporting unitislessthanitscarryingvalue,animpairmentlossisrecordedto theextentthatthefairvalueofthegoodwillwithinthereportingunitis lessthanitscarryingvalue.Fairvaluesforgoodwillandotherfinitelived intangibleassetsaredeterminedusingthemarketapproach,income approachorcostapproach,asappropriate. Duetoanoveralldeteriorationinconditionswithinthecom- mercialrealestatemarket,theCompanyrecordedimpairmentcharges of$4.2millionduring2009and$39.1millionduring2008towrite-offthe goodwillallocatedtotheNetLeasingandRealEstateLendingreporting segments,respectively.Thesechargeswererecordedin“Impairment ofassets”ontheCompany’sConsolidatedStatementsofOperations. Revenue recognition – The Company’s revenue recognition policiesareasfollows: Loans and other lending investments: Interestincomeonloansand otherlendinginvestmentsisrecognizedonanaccrualbasisusingthe interestmethod. Onoccasion,theCompanymayacquireloansatpremiumsor discounts.Thesediscountsandpremiumsinadditiontoanydeferred costsorfees,aretypicallyamortizedoverthecontractualtermofthe loanusingtheinterestmethod.Exitfeesarealsorecognizedoverthe livesoftherelatedloansasayieldadjustment,ifmanagementbelievesit isprobablethatsuchamountswillbereceived.Ifloanswithpremiums, discounts,loanoriginationorexitfeesareprepaid,theCompanyimme- diatelyrecognizestheunamortizedportion,whichisincludedin“Other income”ontheCompany’sConsolidatedStatementsofOperations. The Company considers a loan to be non-performing and places loans on non-accrual status at such time as: (1) the loan becomes 90 days delinquent; (2) the loan has a maturity default; or (3)managementdeterminesitisprobablethatitwillbeunabletocollect allamountsdueaccordingtothecontractualtermsoftheloan.Whileon non-accrualstatus,basedontheCompany’sjudgmentastocollectabil- ityofprincipal,loansareeitheraccountedforonacashbasis,where interestincomeisrecognizedonlyuponactualreceiptofcash,orona cost-recoverybasis,whereallcashreceiptsreducealoan’scarrying value.Non-accrualloansarereturnedtoaccrualstatuswhenaloan hasbecomecontractuallycurrent. CertainoftheCompany’sloansprovideforaccrualofinterest at specified rates that differ from current payment terms. Interest is recognizedonsuchloansattheaccrualratesubjecttomanagement’s determinationthataccruedinterestandoutstandingprincipalareulti- matelycollectible,basedontheunderlyingcollateralandoperationsof theborrower. Prepayment penalties or yield maintenance payments from borrowersarerecognizedasadditionalincomewhenreceived.Certain oftheCompany’sloaninvestmentsprovideforadditionalinterestbased ontheborrower’soperatingcashfloworappreciationoftheunderlying collateral. Such amounts are considered contingent interest and are reflectedasinterestincomeonlyuponreceiptofcash. Leasing investments: Operating lease revenue is recognized on the straight-line method of accounting, generally from the later of the date the lessee takes possession of the space and it is ready foritsintendeduseorthedateofacquisitionofthefacilitysubjectto existingleases.Accordingly,contractualleasepaymentincreasesare recognizedevenlyoverthetermofthelease.Theperiodicdifference betweenleaserevenuerecognizedunderthismethodandcontractual leasepaymenttermsisrecordedas“Deferredoperatingleaseincome receivable,”ontheCompany’sConsolidatedBalanceSheets. Reserve for loan losses – Thereserveforloanlossesreflects management’s estimate of loan losses inherent in the loan portfolio as of the balance sheet date. The reserve is increased through the “Provisionforloanlosses”ontheCompany’sConsolidatedStatements ofOperationsandisdecreasedbycharge-offswhenlossesarecon- firmedthroughthereceiptofassetssuchascashinapre-foreclosure saleorviaownershipcontroloftheunderlyingcollateralinfullsatisfac- tionoftheloanuponforeclosureorwhensignificantcollectionefforts haveceased.TheCompanyhasdeterminedithasoneportfolioseg- ment,representedbycommercialrealestatelending,wherebyituti- lizesauniformprocessfordeterminingitsreserveforloanlosses.The reserveforloanlossesincludesageneral,formula-basedcomponent andanasset-specificcomponent. Thegeneralreservecomponentcoversperformingloansand reserves for loan losses are recorded when (i) available information asofeachbalancesheetdateindicatesthatitisprobablealosshas occurredintheportfolioand(ii)theamountofthelosscanbereason- ably estimated. The formula-based general reserve is derived from estimatedprincipaldefaultprobabilitiesandlossseveritiesappliedto groupsofloansbaseduponriskratingsassignedtoloanswithsimi- larriskcharacteristicsduringtheCompany’squarterlyloanportfolio assessment.Duringthisassessment,theCompanyperformsacom- prehensiveanalysisofitsloanportfolioandassignsriskratingstoloans that incorporate management’s current judgments about their credit qualitybasedonallknownandrelevantinternalandexternalfactors that may affect collectability. The Company considers, among other things, payment status, lien position, borrower financial resources and investment in collateral, collateral type, project economics and geographical location as well as national and regional economic fac- tors.Thismethodologyresultsinloansbeingsegmentedbyriskclas- sificationintoriskratingcategoriesthatareassociatedwithestimated probabilitiesofdefaultandprincipalloss.Ratingsrangefrom“1”to“5” with“1”representingthelowestriskoflossand“5”representingthe highestriskofloss.TheCompanyestimateslossratesbasedonhis- torical realized losses experienced within its portfolio and takes into account current economic conditions affecting the commercial real estatemarketwhenestablishingappropriatetimeframestoevaluate lossexperience. Theasset-specificreservecomponentrelatestoreservesfor lossesonimpairedloans.TheCompanyconsidersaloantobeimpaired when,baseduponcurrentinformationandevents,itbelievesthatitis probablethattheCompanywillbeunabletocollectallamountsdue underthecontractualtermsoftheloanagreement.Thisassessment ismadeonaloan-by-loanbasiseachquarterbasedonsuchfactorsas paymentstatus,lienposition,borrowerfinancialresourcesandinvest- mentincollateral,collateraltype,projecteconomicsandgeographical locationaswellasnationalandregionaleconomicfactors.Areserveis establishedforanimpairedloanwhenthepresentvalueofpayments expectedtobereceived,observablemarketprices,ortheestimated fairvalueofthecollateral(forloansthataredependentonthecollateral forrepayment)islowerthanthecarryingvalueofthatloan. SubstantiallyalloftheCompany’simpairedloansarecollateral dependentandimpairmentismeasuredusingtheestimatedfairvalue ofcollateral,lesscoststosell.TheCompanygenerallyusestheincome approach through internally developed valuation models to estimate thefairvalueofthecollateralforsuchloans.Inmorelimitedcases,the Companyobtainsexternal“asis”appraisalsforloancollateral,gener- allywhenthirdpartyparticipationsexist.Valuationsareperformedor obtainedatthetimealoanisdeterminedtobeimpairedanddesignated non-performing, and they are updated if circumstances indicate that asignificantchangeinvaluehasoccurred.Inlimitedcases,appraised valuesmaybediscountedwhenrealestatemarketsrapidlydeteriorate. Aloanisalsoconsideredimpairedifitstermsaremodifiedina troubleddebtrestructuring(“TDR”).ATDRoccurswhentheCompany grantsaconcessiontoaborrowerinfinancialdifficultybymodifying theoriginaltermsoftheloan.ImpairmentsonTDRloansaregenerally measuredbasedonthepresentvalueofexpectedfuturecashflows discountedattheeffectiveinterestrateoftheoriginalloan. Allowance for doubtful accounts – The allowance for doubtful accounts reflects management’s estimate of losses inherent in the accrued operating lease income receivable and deferred operating lease income receivable balances as of the balance sheet date and incorporates an asset-specific component, as well as a general, for- mula-basedreservebasedonmanagement’sevaluationofthecredit risks associated with these receivables. At December 31, 2010 and 2009, the total allowance for doubtful accounts was $1.4 million and $2.8million,respectively. 44 - 45 Derivative instruments and hedging activity – The Company recognizesderivativesaseitherassetsorliabilitiesontheCompany’s ConsolidatedBalanceSheetsatfairvalue.Ifcertainconditionsaremet, aderivativemaybespecificallydesignatedasahedgeoftheexposure tochangesinthefairvalueofarecognizedassetorliability,ahedgeofa forecastedtransactionorthevariabilityofcashflowstobereceivedor paidrelatedtoarecognizedassetorliability. Derivatives,suchasforeigncurrencyhedgesandinterestrate caps,thatarenotdesignatedhedgesareconsideredeconomichedges, with changes in fair value reported in current earnings in “Other expense” on the Company’s Consolidated Statements of Operations. TheCompanydoesnotenterintoderivativesfortradingpurposes. Stock-based compensation – Compensation cost for stock-basedawardsismeasuredonthegrantdateandadjustedover the period of the employees’ services to reflect (i) actual forfeitures and (ii) the outcome of awards with performance or service condi- tions through the requisite service period. The Company recognizes compensation cost for performance-based awards if and when the Company concludes that it is probable that the performance condi- tionwillbeachieved.Compensationcostformarketcondition-based awardsisdeterminedusingaMonteCarlomodeltosimulatearangeof possiblefuturestockpricesfortheCompany’sCommonStock,which isreflectedinthegrantdatefairvalue.Allcompensationcostformarket condition-based awards in which the service conditions are met is recognized regardless of whether the market condition is satisfied. Compensationcostsarerecognizedratablyovertheapplicablevest- ing/serviceperiodandrecordedin“Generalandadministrative”onthe Company’sConsolidatedStatementsofOperations. Disposal of long-lived assets – Theresultsofoperationsfrom netleaseandtimberassetsthatweresoldorheld-for-saleinthecur- rent and prior periods are classified as “Income from discontinued operations”ontheCompany’sConsolidatedStatementsofOperations even though such income was actually recognized by the Company prior to the asset sale. Gains from the sale of net lease and timber assetsareclassifiedas“Gainfromdiscontinuedoperations”and“Gain fromdiscontinuedoperationsattributabletononcontrollinginterests” ontheCompany’sConsolidatedStatementsofOperations. Income taxes – TheCompanyhaselectedtobequalifiedand taxedasaREITundersection856through860oftheInternalRevenue Code of 1986, as amended (the “Code”). The Company is subject to federalincometaxationatcorporateratesonitsREITtaxableincome, however,theCompanyisallowedadeductionfortheamountofdivi- dendspaidtoitsshareholders,therebysubjectingthedistributednet income of the Company to taxation at the shareholder level only. In addition,theCompanyisallowedseveralotherdeductionsincomput- ingitsREITtaxableincome,includingnon-cashitemssuchasdeprecia- tionexpenseandcertainspecificreserveamountsthattheCompany deems to be uncollectable. These deductions allow the Company to shelter a portion of its operating cash flow from its dividend payout requirementunderfederaltaxlaws.TheCompanyintendstooperate in a manner consistent with and to elect to be treated as a REIT for taxpurposes. TheCompanycanparticipateincertainactivitiesfromwhich itwaspreviouslyprecludedinordertomaintainitsqualificationasa REIT,aslongastheseactivitiesareconductedinentitieswhichelect tobetreatedastaxablesubsidiariesundertheCode,subjecttocertain limitations.Assuch,theCompany,throughitstaxableREITsubsidiar- ies (“TRSs”), is engaged in various real estate related opportunities, including but not limited to: (1) managing corporate credit-oriented investment strategies; (2) certain activities related to the purchase andsaleoftimberandtimberlands;(3)servicingcertainloanportfo- lios; and (4) managing activities related to certain foreclosed assets. The Company will consider other investments through TRS entities if suitable opportunities arise. The Company’s TRS entities 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 TRS entities. For the years ended December 31, 2010, 2009 and 2008, the Company recorded totalincometaxexpenseof$7.0million,$4.1millionand$10.2million, respectively,whichwasincludedin“Otherexpense”ontheCompany’s Consolidated Statements of Operations. Total cash paid for taxes for theyearsendedDecember31,2010,2009and2008,was$7.3million, $2.9millionand$9.0million,respectively.TheCompanyalsorecognizes interestexpenseandpenaltiesrelatedtouncertaintaxpositions,ifany, asincometaxexpense,includedin“Otherexpense”ontheCompany’s ConsolidatedStatementsofOperations. Deferredincometaxesreflectthenettaxeffectsoftempo- rarydifferencesbetweenthecarryingamountofassetsandliabilities forfinancialreportingpurposesandtheamountsusedforincometax purposes, as well as operating loss and tax credit carryforwards. At December31,2010and2009,theCompanyhadnetdeferredtaxliabili- tiesof$13.7millionand$9.3million,respectively,includedin“Accounts payable, accrued expenses and other liabilities” on the Company’s ConsolidatedBalanceSheets.Thesedeferredtaxliabilitiesareprimar- ilyduetotimingdifferencesrelatingtoequitymethodinvestments.At December31,2010and2009,theCompanyhaddeferredtaxassetsof $29.9millionand$19.0million,respectively,thatwereeachfullyoffset byvaluationallowances.Theseamountsconsistprimarilyofnetoper- atinglosscarryforwardsandexpensesnotcurrentlydeductiblerelated toTRSentitieswhichwillexpirethrough2030.Thesevaluationallow- anceswereestablishedbasedontheCompany’sconclusionthatitis morelikelythannotthatthedeductionsandcarryforwardswillnotbe utilizedduringthecarryforwardperiods. As of December 31, 2010, the Company had approximately $148.1millionofnetoperatinglosscarryforwardsatthecorporateREIT level,whichcangenerallybeusedtooffsetordinarytaxableincomein futureyearsandwillexpirethrough2030ifunused.Theamountofnet operatinglosscarryforwardswillbesubjecttofinalizationofthe2010 taxreturnsandcouldbemateriallydifferentfromsuchamountsasof December31,2010. Earnings per share – TheCompanyusesthetwo-classmethod incalculatingEPSwhenitissuessecuritiesotherthancommonstock that contractually entitle the holder to participate in dividends and earningsoftheCompanywhen,andif,theCompanydeclaresdividends onitscommonstock.VestedHPUsharesareentitledtodividendsof theCompanywhendividendsaredeclared.Basicearningspershare (“BasicEPS”)fortheCompany’sCommonStockandHPUsharesare computed by dividing net income allocable to common sharehold- ers and HPU holders by the weighted average number of shares of Common Stock and HPU shares outstanding for the period, respec- tively.Dilutedearningspershare(“DilutedEPS”)iscalculatedsimilarly, however,itreflectsthepotentialdilutionthatcouldoccurifsecuritiesor othercontractstoissuecommonstockwereexercisedorconverted intocommonstock,wheresuchexerciseorconversionwouldresultin alowerearningspershareamount. Unvested share-based payment awards that contain non- forfeitablerightstodividendsordividendequivalents(whetherpaidor unpaid)aredeemeda(“ParticipatingSecurity”)andareincludedinthe computationofearningspersharepursuanttothetwo-classmethod. TheCompany’sunvestedrestrictedstockunitswithrightstodividends andcommonstockequivalentsissuedunderitsLongTermIncentive Plansareconsideredparticipatingsecuritiesandhavebeenincludedin thetwo-classmethodwhencalculatingEPS. New Accounting Pronouncements InJuly2010,FinancialAccountingStandardsBoard(“FASB”) issuedASU2010-20,“DisclosuresabouttheCreditQualityofFinancing Receivables and the Allowance for Credit Losses,” (“ASU 2010-20”), which outlined specific disclosures that are required for the allow- anceforcreditlossesandallfinancereceivables.Financereceivables includes loans and other arrangements with a contractual right to receive money on demand or on fixed or determinable dates that is recognizedasanassetonanentity’sstatementoffinancialposition. ASU 2010-20 requires companies to provide disaggregated levels of disclosure by portfolio segment and class to enable users of the financial statement to understand the nature of credit risk, how the riskisanalyzedindeterminingtherelatedallowanceforcreditlosses and changes to the allowance during the reporting period. Required disclosures under ASU 2010-20 as of the end of a reporting period wereeffectivefortheCompany’sDecember31,2010reportingperiod and disclosures regarding activities during a reporting period are effective for the Company’s March 31, 2011 interim reporting period. TheCompanyadoptedthisstandardforitsyearendedDecember31, 2010reportingperiod,asrequired,anddeterminedithasoneportfolio segment: commercial real estate lending, with three classes: senior mortgages that are collateralized by real estate assets, subordinate mortgages that are collateralized by subordinated interests in real estate assets, and corporate/partnership loans which are typically unsecuredandmaybeseniororsubordinateandcorporatedebtsecu- rities.SeeNote4foradditionaldisclosuresrequiredbytheadoptionof thisstandard. InJune2009,theFASBissuedSFASNo.167,“Amendments to FASB Interpretation No. 46(R)” (“ASU 2009-17”), which eliminated the exemption for qualifying special purpose entities, created a new approachfordeterminingwhoshouldconsolidateaVIE,andrequired anongoingreassessmenttodetermineifacompanyshouldconsolidate aVIE.Thisstandardwaseffectiveforinterimandannualperiodsbegin- ningafterNovember15,2009.TheCompanyadoptedASU2009-17on January1,2010,asrequired.Inaddition,inFebruary2010,theFASB issued ASU 2010-10, “Consolidation (Topic 810): Amendments for CertainInvestmentsFunds”(“ASU2010-10”),whichamendedcertain provisions of ASC 810-10. ASU 2010-10 deferred the effective date of ASU 2009-17 for reporting enterprises’ interest in certain entities andforcertainmoneymarketmutualfunds.Anentitythatqualifiesfor the deferral will continue to be assessed under the overall guidance ontheconsolidationofvariableinterestentitiesinASC810-10(previ- ouslyStatementofFinancialAccountingStandards(“SFAS”)No.167) or other applicable consolidation guidance. In addition, ASU 2010-10 amendedcertainprovisionstochangehowadecisionmakerorser- viceproviderdeterminedwhetheritscontractrepresentedavariable interest.TheCompanyadoptedASU2010-10onJanuary1,2010,as required,andasaresult,deferredtheeffectivedateofASC810-10for certainentitiesthatmetthecriteria.SeeConsolidation–Variableinter- estentitiesaboveforfurtherdetailsontheadoptionofbothASU2009- 17andASU2010-10. In June 2009, the FASB issued SFAS No. 166, “Accounting forTransfersofFinancialAssets–anamendmentofFASBStatement No.140”(“ASU2009-16”),whicheliminatedthequalifyingspecial-pur- poseentityconcept,createdanewunitofaccountdefinitionthatmust be met for transfers of portions of financial assets to be eligible for sale accounting, clarified and changed the de-recognition criteria for atransfertobeaccountedforasasale,changedtheamountofrec- ognizedgainorlossonatransferoffinancialassetsaccountedforas asalewhenbeneficialinterestswerereceivedbythetransferorand required new disclosures. The Company adopted ASU 2009-16 on January1,2010,asrequired,anditdidnothaveasignificantimpacton theCompany’sConsolidatedFinancialStatements. Note 4 – Loans and Other Lending Investments, net ThefollowingisasummaryoftheCompany’sloansandother lendinginvestmentsbyclass($inthousands): As of December 31, 2010 2009 Type of Investment (1) Senior mortgages Subordinate mortgages Corporate/Partnership loans Managed Loan Value (2) Participated portion of loans (2) Total gross carrying value of loans Reserves for loan losses Total carrying value of loans Other lending investments – securities Total loans and other lending investments, net $4,390,770 305,245 689,535 5,385,550 – 5,385,550 (814,625) 4,570,925 16,427 $ 7,840,933 491,413 957,629 9,289,975 (473,269) 8,816,706 (1,417,949) 7,398,757 262,805 $4,587,352 $ 7,661,562 Explanatory Notes: (1) (2) Loans and other lending investments are presented net of unearned income, unamortized discounts and premiums and net unamortized deferred fees and costs. In total, these amounts represented a net discount of $62.7 million and $97.0 million as of December 31, 2010 and 2009, respectively. Managed Loan Value represents the Company’s carrying value of a loan, gross of reserves for loan losses and the outstanding participation interest on loans in the Fremont CRE portfolio. 46 - 47 During the year ended December 31, 2010, the Company funded$356.3millionunderexistingloancommitmentsandreceived grossprincipalrepaymentsof$2.06billion,ofwhichaportionofthese repayments were allocable to the Fremont Participation (as defined below).Duringthesameperiod,theCompanysoldloanswithatotal carryingvalueof$808.8million,forwhichitrecognizedcharge-offsof $109.1million. In addition, during the year ended December 31, 2010, the Company received title to properties in full or partial satisfaction of non-performingmortgageloanswithagrosscarryingvalue(grossof asset-specific reserves) of $1.41 billion, for which the properties had served as collateral, and recorded charge-offs totaling $631.9 million related to these loans. These properties were recorded as REHI or OREOontheCompany’sConsolidatedBalanceSheets(seeNote5). Reserve for Loan Losses – ChangesintheCompany’sreserve forloanlosseswereasfollows($inthousands): Reserve for loan losses, December 31, 2008 Provision for loan losses Charge-offs Reserve for loan losses, December 31, 2009 Provision for loan losses Charge-offs Reserve for loan losses, December 31, 2010 $ 976,788 1,255,357 (814,196) 1,417,949 331,487 (934,811) $ 814,625 As of December 31, 2010, the Company’s recorded investment in loans and the associated reserve for loan losses were as follows ($inthousands): Loans Less: Reserve for loan losses Total Individually Evaluated for Impairment $2,296,599 (692,610) $1,603,989 Collectively Evaluated for Impairment $3,034,310 (120,200) $2,914,110 Loans Acquired with Deteriorated Credit Quality $75,907 (1,815) $74,092 Total $5,406,816 (814,625) $4,592,191 Credit Characteristics – AspartoftheCompany’sprocessformonitoringthecreditqualityofitsloans,itperformsaquarterlyloanport- folioassessmentandassignsriskratingstoeachofitsloans.Thisprocessisdiscussedinmoredetailin“Reserveforloanlosses”inNote3.Asof December31,2010,theCompany’srecordedinvestmentinloans,presentedbyclassandbycreditquality,asindicatedbyriskrating,wasasfol- lows($inthousands): Senior mortgages Subordinate mortgages Corporate/Partnership loans Total Explanatory Note: Performing Loans $2,394,270 307,509 685,848 $3,387,627 Weighted Average Non-performing Risk Ratings 3.48 3.20 3.76 Loans (1) $2,007,895 – 11,294 $2,019,189 (1) Weighted Average Risk Ratings 4.78 – 4.50 (1) Risk ratings are assigned to loans based on the risk of loss relative to principal outstanding. The Company also assigns risk ratings to non-performing loans based on risk of loss rela- tive to carrying value, which is net of asset-specific reserves. As of December 31, 2010, non-performing loans net of asset-specific reserves were $1.35 billion, with weighted average net risk ratings of 3.55 and 4.50 for senior mortgages and corporate/partnership loans, respectively. AsofDecember31,2010,theCompany’srecordedinvestmentinloans,agedbypaymentstatusandpresentedbyclass,wereasfollows ($inthousands): Senior mortgages Subordinate mortgages Corporate/Partnership loans Total Explanatory Note: Current $2,473,031 282,744 685,848 $3,441,623 Less Than and Equal to 90 Days $209,714 24,765 – $234,479 Greater Than 90 Days (1) $1,719,420 – 11,294 $1,730,714 Total Past Due $1,929,134 24,765 11,294 $1,965,193 Total $4,402,165 307,509 697,142 $5,406,816 (1) All loans with payments more than 90 days past due are classified as non-performing and are on non-accrual status. Impaired Loans – AsofDecember31,2010,theCompany’srecordedinvestmentinimpairedloans,presentedbyclass,wereasfollows ($inthousands)(1): With no related allowance recorded: Senior mortgages Subordinate mortgages Corporate/Partnership loans Subtotal With an allowance recorded: Senior mortgages Subordinate mortgages Corporate/Partnership loans Subtotal Total: Senior mortgages Subordinate mortgages Corporate/Partnership loans Total Explanatory Notes: Recorded Investment (2) $ 404,861 – 10,110 $ 414,971 $1,834,008 – 64,465 $1,898,473 $2,238,869 – 74,575 $2,313,444 Unpaid Principal Balance $ 404,126 – 10,160 $ 414,286 $1,825,150 – 64,919 $1,890,069 $2,229,276 – 75,079 $2,304,355 Related Allowance $ – – – $ – $(683,948) – (10,477) $(694,425) $(683,948) – (10,477) $(694,425) Average Recorded Investment Interest Income Recognized (3) $ 659,150 1,404 27,526 $ 688,080 $2,411,735 77,125 65,118 $2,553,978 $3,070,885 78,529 92,644 $3,242,058 $20,472 87 1,868 $22,427 $ 5,183 107 – $ 5,290 $25,655 194 1,868 $27,717 (1) (2) (3) All of the Company’s non-accrual loans are impaired and included in the table above. In addition, certain loans modified through troubled debt restructurings with a recorded invest- ment of $294.3 million are also included as impaired loans although they are considered performing and on accrual status. Includes $16.8 million of impaired loans acquired with deteriorated credit quality. Represents the Company’s recorded interest income on cash payments from impaired loans. For the years ended December 31, 2009 and 2008, such amounts were $14.3 million and $5.3 million, respectively. Fremont Par ticipation – On July 2, 2007, the Company sold a $4.20 billion participation interest (“Fremont Participation”) in the $6.27 billion Fremont CRE portfolio. During the year ended December31,2010,theCompanyrepaidtheparticipationinterestinfull. WhiletheFremontParticipationinterestwasoutstanding,theholderof theparticipationreceivedfloatinginterestatLIBOR+1.50%and70%of allprincipalcollectedfromtheFremontCREportfolio,includingprin- cipalcollectedfromamountsfundedontheloanssubsequenttothe acquisitionoftheportfolioandproceedsreceivedfromassetsales.As aresultoftherepayment,theCompanynowretains100%ofproceeds fromsalesandrepaymentsofassetsassociatedwiththeFremontCRE portfolio,andtheassetsincludedintheportfolioareeligibleforselec- tionbytheCompany’slenderstoserveascollateralfortheCompany’s borrowingsunderitssecuredcreditfacilitiesandsecurednotes. Changes in the outstanding Fremont Participation balance wereasfollows($inthousands): Loan participation, December 31, 2008 Principal repayments Loan participation, December 31, 2009 Principal repayments Loan participation, December 31, 2010 $1,297,944 (824,675) 473,269 (473,269) $ – 48 - 49 Securities – Otherlendinginvestments-securitiesincludedthefollowing($inthousands): As of December 31, 2010: Held-to-Maturity Securities Commercial mortgage-backed securities Total As of December 31, 2009: Available-for-Sale Securities Face Value Amortized Cost Basis Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Net Carrying Value $ 23,209 $ 23,209 $ 16,427 $ 16,427 $1,514 $1,514 $ – $ – $ 17,941 $ 17,941 $ 16,427 $ 16,427 Corporate debt securities $ 10,000 $ 2,594 $4,206 $ – $ 6,800 $ 6,800 Held-to-Maturity Securities Corporate debt securities Commercial mortgage-backed securities Total 238,671 24,098 $272,769 238,103 17,902 $258,599 – – $4,206 (3,473) (575) $(4,048) 234,630 17,327 $258,757 238,103 17,902 $262,805 DuringtheyearendedDecember31,2010,theCompanyrecognized$9.0millioninnetgainsresultingfroma$205.0millionprepaymentof held-to-maturitydebtsecuritiesandsalesofitsremainingavailable-for-saledebtsecurities. DuringtheyearsendedDecember31,2009and2008,theCompanydeterminedthatunrealizedcreditrelatedlossesoncertainheld-to- maturityandavailable-for-saledebtsecuritieswereother-than-temporaryandrecordedimpairmentchargestotaling$11.7millionand$120.0mil- lion, respectively, in “Impairment of assets” on the Company’s Consolidated Statements of Operations. There are no other-than-temporary impairmentsrecordedin“Accumulatedothercomprehensiveincome”ontheCompany’sConsolidatedBalanceSheetasofDecember31,2010 and2009. As of December 31, 2010, the contractual maturities of the Company’ssecuritieswereasfollows($inthousands): Maturities 1 through 5 years 5 through 10 years 10 years and thereafter Total Held-to-Maturity Securities Amortized Cost $15,591 720 116 $16,427 Estimated Fair Value $17,105 720 116 $17,941 Encumbered Loans – AsofDecember31,2010and2009,loans and other lending investments with a carrying value of $2.92 billion and $4.39 billion, respectively, were pledged as collateral under the Company’ssecuredindebtedness. $349.1millionand$904.2million,respectively,wereclassifiedasOREO, basedonmanagement’scurrentintentiontoeitherholdtheproperties overalongerperiodortomarketthemforsale. Real Estate Held-for-Investment, net – REHIconsistedofthefol- lowing($inthousands): As of December 31, 2010 Land held-for-investment and development $606,083 Operating property Land Building Improvements Less: accumulated depreciation and amortization Real estate held-for-investment, net 69,807 151,471 13,554 (7,855) $833,060 2009 $290,283 31,162 98,669 5,450 (2,900) $422,664 Note 5 – Real Estate Held-for-Investment, net and Other Real Estate Owned During the years ended December 31, 2010 and 2009, the Company received title to properties with an aggregate estimated fairvalueatthetimeofforeclosureof$773.3millionand$1.30billion, respectively,infullorpartialsatisfactionofnon-performingmortgage loansforwhichthosepropertieshadservedascollateral.Oftheprop- ertiesreceivedin2010and2009,propertieswithavalueof$424.2mil- lion and $399.6 million, respectively, were classified as REHI and The Company records REHI operating income in “Other income”andREHIoperatingexpensesin“Operatingcosts–REHIand OREO,”ontheCompany’sConsolidatedStatementsofOperations,as follows($inthousands): For the Years Ended December 31, REHI operating income REHI operating expenses 2010 $23,103 $31,646 2009 $ 5,822 $12,455 2008 $– $– Other Real Estate Owned – TheCompany’sOREOconsistedof thefollowingpropertytypes($inthousands): As of December 31, Apartment/Residential Land Mixed Use/Mixed Collateral Retail Office Other Carrying value 2010 $476,658 114,162 72,135 44,204 16,422 22,500 $746,081 2009 $670,585 111,969 – 41,587 – 15,000 $839,141 During the years ended December 31, 2010 and 2009, the Company sold OREO assets with a carrying value of $455.4 million and $280.2 million, respectively. For the years ended December 31, 2010,2009and2008,theCompanyrecordednetimpairmentcharges toOREOpropertiestotaling$19.1million,$78.6millionand$55.6mil- lion,respectively,andrecordednetexpensesrelatedtoholdingcosts for OREO properties of $33.0 million, $28.4 million and $9.3 million, respectively. Encumbered REHI and OREO – As of December 31, 2010 and 2009,REHIassetswithacarryingvalueof$28.4millionand$27.1million, respectively, and OREO assets with a carrying value of $232.1 mil- lionand$232.7million,respectively,werepledgedascollateralforthe Company’ssecuredindebtedness. Note 6 – Net Lease Assets, net TheCompany’sinvestmentsinnetleaseassets,atcost,were asfollows($inthousands): As of December 31, Facilities and improvements Land and land improvements Less: accumulated depreciation Net lease assets, net 2010 $1,651,998 454,925 (322,414) $1,784,509 2009 $2,761,083 639,581 (514,768) $2,885,896 OnJune25,2010,theCompanycompletedthesaleofaport- folioof32netleaseassetstoasinglepurchaserforagrosspurchase priceof$1.35billionthatresultedinanetgainof$250.3million.The aggregatecarryingvalueoftheportfolioofassetswas$1.05billion.In relationtothistransaction,theCompanyreduceditsgainonsaleand recordedaliabilityof$30.0millionbaseduponcertaincontingentobli- gationspotentiallyowingtothepurchaser.Proceedsfromthistransac- tionwereusedtorepaya$947.9milliontermloancollateralizedbythe propertiesbeingsoldthatwasscheduledtomatureinApril2011,as wellasforgeneralcorporatepurposes.SeeNote9foradditionaldetails ontherepaymentofthedebtcollateralizedbytheseassets.Aspartof the purchaser’s financing for the transaction, the Company provided thepurchaserwith$105.6millionofmezzanineloans,whichweresub- sequentlypaiddownto$26.8millionasofDecember31,2010. Summarized financial information for discontinued opera- tionsrelatedtothesaleoftheportfolioof32netleaseassetsisasfol- lows($inthousands): For the Years Ended December 31, Total revenues Income from discontinued operations 2010 $55,559 2009 $114,575 2008 $114,546 $15,580 $ 9,966 $ 20,893 Inadditiontothesaleoftheportfolioofassetsnotedabove, duringtheyearendedDecember31,2010,theCompanysoldnetlease assetswithacarryingvalueof$119.7million,whichresultedingains of$20.1million.FortheyearendedDecember31,2010,theCompany recorded impairment charges on net lease assets of $6.1 million, of which$1.9millionwasincludedin“Incomefromdiscontinuedopera- tions”ontheCompany’sConsolidatedStatementsofOperations. DuringtheyearendedDecember31,2009theCompanysold netleaseassetswithcarryingvaluesof$52.1million,whichresultedin gainsof$12.4million.Duringthesameperiod,theCompanyrecorded impairment charges on net lease assets of $33.5 million of which $14.4millionwasincludedin“Incomefromdiscontinuedoperations”on theCompany’sConsolidatedStatementsofOperations.Duringtheyear ended December 31, 2008, the Company sold net lease assets with carryingvaluesof$359.7million,whichresultedingainsof$64.5mil- lion. During the same period, the Company recorded impairment chargesonnetleaseassetsof$11.3million. The Company receives reimbursements from customers for certain facility operating expenses including common area costs, insuranceandrealestatetaxes.Customerexpensereimbursements fortheyearsendedDecember31,2010,2009and2008were$29.8mil- lion, $36.4 million and $38.8 million, respectively. Of these amounts, $24.0million,$24.7millionand$24.7million,respectively,wereincluded asareductionof“Operatingcosts–netleaseassets,”andtheremain- der was included in “Income from discontinued operations” on the Company’sConsolidatedStatementsofOperations. 50 - 51 Note 7 – Other Investments Other investments consist of the following items ($ in thousands): As of December 31, Equity method investments Cost method investments Other Other investments 2010 $522,223 8,028 2,107 $532,358 2009 $339,002 6,923 38,454 $384,379 Future Minimum Operating Lease Payments – Future minimum operatingleasepaymentsundernon-cancelableleases,excludingcus- tomer reimbursements of expenses, in effect at December 31, 2010, areasfollows($inthousands): Year 2011 2012 2013 2014 2015 Thereafter $ 154,130 147,715 144,472 145,922 146,150 1,380,447 Encumbered Net Lease Assets – As of December 31, 2010 and2009,netleaseassetswithanetbookvalueof$1.02billionand $2.59 billion, respectively, were encumbered with mortgages or pledgedascollateralfortheCompany’ssecuredindebtedness. EquityMethodInvestments TheCompany’sequitymethodinvestmentsanditsproportionateshareoftheirresultswereasfollows($inthousands): Oak Hill LNR Madison Funds TimberStar Southwest Other Total Carrying value at December 31, Equity in earnings for the years ended December 31, 2010 $176,364 122,176 92,265 4 131,414 $522,223 2009 $180,372 – 75,096 93 83,441 $339,002 2010 $23,048 1,797 9,717 (1) 17,347 $51,908 2009 $ 21,745 – (5,620) (255) (10,572) $ 5,298 2008 $20,644 – (7,392) (3,499) (3,218) $ 6,535 Oak Hill – As of December 31, 2010, the Company owned 46.22% interests in Oak Hill Advisors, L.P., Oak Hill Credit Alpha MGP, LLC, Oak Hill Credit Opportunities MGP, LLC, OHA Strategic CreditFund,LLC,OHALeveragedLoanPortfolioGenPar,LLC,OakHill CreditOPPFund,LP,OHAStructuredProductsMGP,LLC,47.5%inter- estinOHAFinanceMGP,LLC,OHACapitalSolutionsMGP,LLC,and 48.1%interestsinOHSFGPPartnersII,LLCandOHSFGPPartners (Investors), LLC, (collectively, “Oak Hill”). The Company appointed to itsBoardofDirectorsamemberthatholdsasubstantialinvestment inOakHill.AssuchOakHillisarelatedpartyoftheCompany.OakHill engagesininvestmentandassetmanagementservices.Uponacquisi- tionoftheoriginalinterestsinOakHill,therewasadifferencebetween theCompany’scarryingvalueofitsequityinvestmentsandtheunder- lyingequityinthenetassetsofOakHillof$200.2million.TheCompany allocatedthisvaluetoidentifiableintangibleassetsof$81.8millionand goodwillof$118.4million.Theunamortizedbalancerelatedtointangible assetsfortheseinvestmentswas$39.5millionand$45.3millionasof December31,2010and2009,respectively. LNR – OnJuly29,2010,theCompanyacquiredanownership interest of approximately 24% in LNR Property Corporation (“LNR”). LNRisaservicerandspecialservicerofcommercialmortgageloans andCMBSandadiversifiedrealestateinvestment,financeandman- agement company. In the transaction, the Company and a group of investors,includingothercreditorsofLNR,acquired100%ofthecom- monstockofLNRinexchangeforcashandtheextinguishmentofexist- ingseniornotesofLNR’sparentholdingcompany(the“HoldcoNotes”). The Company contributed $100.0 million aggregate principal amount ofHoldcoNotesand$100.0millionincashinexchangeforanequity interestof$120.0million.DuringthethreemonthsendedDecember31, 2010, the Company executed the discounted payoff of a $25.0 mil- lion principal value loan with LNR for which it received proceeds of $24.5millioninfullrepayment. TheCompanyrecordsitsinvestmentinLNRonaone-quarter lag.Therefore,theequityinearningsfortheyearendedDecember31, 2010representstheCompany’sshareofLNR’sresultsofoperations fromthedateofacquisitionthroughSeptember30,2010.Duringthe quarter ended December 31, 2010, LNR settled a deferred liability, ofwhichitexpectsapproximately$8.2millionwillbeallocabletothe Company. This amount, along with the Company’s share of LNR’s other operating results for the fourth quarter ended December 31, 2010,willberecognizedintheCompany’sConsolidatedStatementsof OperationsduringthethreemonthsendingMarch31,2011. LNR consolidates certain commercial mortgage-backed securities and collateralized debt obligation trusts for which it is the primarybeneficiary.Theassetsofthesetrusts(primarilycommercial mortgage loans), which aggregate approximately $142.4 billion as of September30,2010,arethesolesourceofrepaymentoftherelatedlia- bilities,whicharenon-recoursetoLNRanditsequityholders,including theCompany.Changesinthefairvalueoftheseassetseachperiodare offsetbychangesinthefairvalueoftherelatedliabilitiesthroughLNR’s consolidatedincomestatement.AsofDecember31,2010,thecarrying amountoftheCompany’sinvestmentinLNRdoesnotmateriallydiffer fromitsshareofLNR’sequity. BelowisasummaryofLNR’slatestavailablefinancialinfor- mation($inthousands)(1): Income Statement Total revenue Net income Net income attributable to LNR Balance Sheet Total assets Debt Total liabilities Noncontrolling interests LNR Property Corporation equity For the Period July 29, 2010 to September 30, 2010 $1,613,036 $ 11,623 $ 7,539 As of September 30, 2010 $143,266,730 $142,508,930 $142,717,746 $ 39,474 $ 509,510 Explanatory Note: (1) Results and balances include amounts from consolidated VIEs. Madison Funds – As of December 31, 2010, the Company owneda29.52%interestinMadisonInternationalRealEstateFundII, LP,a32.92%interestinMadisonInternationalRealEstateFundIII,LP and a 29.52% interest in Madison GP1 Investors, LP (collectively, the “MadisonFunds”).TheMadisonFundsinvestinilliquidownershipposi- tionsofentitiesthatownrealestateassets.TheCompanyhasdeter- minedthatalloftheseentitiesarevariableinterestentitiesandthatan externalmemberistheprimarybeneficiary. TimberStar Southwest – Prior to selling its interest, the Companyowneda46.7%interestinTimberStarSouthwestHoldcoLLC (“TimberStar Southwest”), through its majority owned subsidiary TimberStar. The Company accounted for this investment under the equity method due to the venture’s external partners having certain participating rights giving them shared control. In April 2008, the CompanyclosedonthesaleofTimberStarSouthwestforagrosssales priceof$1.71billion,includingtheassumptionofdebt.TheCompany receivednetproceedsof$417.0millionforitsinterestintheventureand recordedagainof$280.2million,whichincludes$18.6millionattribut- abletononcontrollinginterests.Theseamountswererecordedin“Gain onsaleofjointventureinterest”and“Gainattributabletononcontrolling interests”ontheCompany’sConsolidatedStatementsofOperations. Other Equity Method Investments – The Company also had smallerinvestmentsinseveralotherentitiesthatwereaccountedfor undertheequitymethodwheretheCompanyhasownershipinterests up to 50.0%. Several of these investments are in real estate-related fundsorotherstrategicinvestmentopportunitieswithinnichemarkets. During the years ended December 31, 2010 and 2009, the Company recognized impairment charges on certain of its equity methodinvestmentsof$1.2millionand$4.7million,respectively. During the year ended December 31, 2009, the Company recordedanon-cashout-of-periodchargeof$9.4milliontorecognize additional losses from an equity method investment as a result of additionaldepreciationexpensethatshouldhavebeenrecordedatthe equitymethodentity.Thisadjustmentwasrecordedasareductionto “Other investments” on the Company’s Consolidated Balance Sheets andadecreaseto“Earningsfromequitymethodinvestments”onthe Company’s Consolidated Statements of Operations. The Company concludedthattheamountoflossesthatshouldhavebeenrecorded inperiodsbeginninginJuly2007werenotmaterialtoanyofitsprevi- ously issued financial statements. The Company also concluded that thecumulativeout-of-periodchargewasnotmaterialtothefiscalyear inwhichithasbeenrecorded.Assuch,thechargewasrecordedinthe Company’sConsolidatedStatementsofOperationsfortheyearended December31,2009,ratherthanrestatingpriorperiods. 52 - 53 Summarized Financial Information – The following table presents the investee level summarized financial information of the Company’sequitymethodinvestments,excludingLNR($inthousands): tononcontrollinginterests”ontheCompany’sConsolidatedStatements ofOperations.TheCompanyreflectednetincomefromtheoperations ofitsMainetimberpropertyof$2.3millionin“Incomefromdiscontin- uedoperations”fortheyearendedDecember31,2008. 2010 2009 2008 Note 8 – Other Assets and Other Liabilities $590,265 $402,174 $129,814 $ (7,823) $159,385 $ (56,450) Deferredexpensesandotherassets,net,consistofthefol- lowingitems($inthousands): For the Years Ended December 31, Income Statements Revenues Net income (loss) Net income (loss) attributable to parent entities As of December 31, Balance Sheets Total assets Debt Total liabilities Noncontrolling interests Total equity CostMethodInvestments $342,661 $ (12,237) $ (59,945) 2010 2009 $4,486,974 $1,100,561 $1,236,116 $ 107,422 $3,143,436 $3,269,313 $ 322,997 $ 574,591 $ 4,856 $2,689,866 TheCompanyhasinvestmentsinseveralrealestate-related fundsorotherstrategicinvestmentopportunitiesthatareaccounted forunderthecostmethod.DuringtheyearsendedDecember31,2009 and2008,theCompanydeterminedthatunrealizedlossesoncertainof itscostmethodinvestmentswereother-than-temporaryandrecorded impairmentchargesof$7.5millionand$87.0million,respectively. During the year ended December 31, 2008, the Company redeemed its interest in a profits participation that was originally received as part of a prior lending investment and carried as a cost methodinvestmentpriortoredemption.Asaresultofthetransaction, the Company received cash of $44.2 million and recorded an equal amountofincomein“Otherincome”ontheCompany’sConsolidated StatementsofOperations.Inaddition,during2008,theCompanyalso exchanged an investment with a carrying value of $97.4 million, net of noncontrolling interest, for a $109.0 million loan receivable, which resultedinanetgainof$12.0million.Thegainwasrecordedin“Other income”ontheConsolidatedStatementsofOperations. Timberandtimberlands On June 30, 2008, the Company closed on the sale of its Mainetimberpropertyfornetproceedsof$152.7million,resultingin atotalgainof$27.0million,whichincludes$3.7millionattributableto noncontrollinginterests.Thesegainsareincludedin“Gainfromdiscon- tinuedoperations”and“Gainfromdiscontinuedoperationsattributable As of December 31, Net lease in-place lease intangibles, net (1) Other receivables Corporate furniture, fixtures and equipment, net (2) Leasing costs, net (3) Deferred financing fees, net (4) Prepaid expenses Other assets Deferred expenses and other assets, net 2010 $24,469 13,521 11,016 8,267 5,527 5,265 17,463 $85,528 2009 $ 48,751 15,235 14,550 14,830 41,959 6,045 16,587 $157,957 Explanatory Notes: (1) (2) (3) (4) Represents unamortized finite-lived intangible assets primarily related to the prior acquisition of net lease assets. Accumulated amortization on net lease intangibles was $26.6 million and $33.1 million as of December 31, 2010 and 2009, respectively. Amortization expense related to these assets was $6.4 million, $9.6 million and $8.9 million for the years ended December 31, 2010, 2009 and 2008, respectively. Accumulated depreciation on corporate furniture, fixture and equipment was $7.2 million and $9.4 million as of December 31, 2010 and 2009, respectively. Accumulated amortization on leasing costs was $5.3 million and $11.2 million as of December 31, 2010 and 2009, respectively. During the year ended December 31, 2010, in connection with certain prepayments of debt obligations, the Company expensed unamortized deferred financing fees of $21.1 million which reduced net gain on early extinguishment of debt (see Note 9). Accumulated amortization on deferred financing fees was $21.1 million and $30.3 mil- lion as of December 31, 2010 and 2009, respectively. Accountspayable,accruedexpensesandotherliabilitiescon- sistofthefollowingitems($inthousands): As of December 31, Accrued interest payable Accrued expenses Deferred tax liabilities Unearned operating lease income Property taxes payable Security deposits from customers Fremont Participation payable (see Note 4) Other liabilities Accounts payable, accrued expenses and other liabilities 2010 $ 38,143 19,800 13,729 10,423 5,880 2,874 – 42,211 2009 $ 49,697 37,388 9,336 17,153 5,211 24,763 67,711 40,851 $133,060 $252,110 Note 9 – Debt Obligations, net AsofDecember31,2010and2009,theCompany’sdebtobligationswereasfollows($inthousands): Carrying Value as of 2010 2009 Stated Interest Rates Scheduled Maturity Date Secured revolving credit facilities: Line of credit (1) Line of credit (1) Unsecured revolving credit facilities: Line of credit (1) Line of credit Total revolving credit facilities Secured term loans: Collateralized by net lease assets Collateralized by loans, net lease, REHI and OREO assets (1) Collateralized by loans, net lease, REHI and OREO assets (1) Collateralized by loans, net lease, REHI and OREO assets Collateralized by net lease assets Collateralized by net lease and OREO assets Total secured term loans Secured notes: 8.0% senior notes (2) 10.0% senior notes (1)(2)(3) Total secured notes Unsecured notes: LIBOR + 0.35% senior notes 5.375% senior notes 6.0% senior notes 5.80% senior notes (1) 5.125% senior notes 5.65% senior notes 5.15% senior notes 5.50% senior notes LIBOR + 0.50% senior convertible notes (4) 8.625% senior notes 5.95% senior notes 6.5% senior notes 5.70% senior notes 6.05% senior notes 5.875% senior notes 5.85% senior notes Total unsecured notes Other debt obligations Total debt obligations Debt premiums/(discounts), net (3)(4) Total debt obligations, net Explanatory Notes: $ 618,883 $ 625,247 334,180 334,180 501,405 243,819 1,698,287 – 1,055,000 612,222 – – 190,223 504,305 244,295 1,708,027 947,862 1,055,000 621,221 1,000,000 114,279 260,980 1,857,445 3,999,342 – 312,329 312,329 155,253 479,548 634,801 – – – 107,766 96,916 196,593 322,006 102,345 787,750 501,701 448,453 67,055 200,601 105,765 261,403 99,722 3,298,076 100,000 7,266,137 79,296 158,699 143,509 251,086 192,890 175,168 286,787 406,996 146,470 787,750 508,701 459,453 75,635 206,601 105,765 261,403 99,722 4,266,635 100,000 10,708,805 186,098 $7,345,433 $10,894,903 LIBOR + 1.50% LIBOR + 1.50% LIBOR + 0.85% LIBOR + 0.85% 6.25% LIBOR + 1.50% LIBOR + 1.50% LIBOR + 2.50% 11.438% LIBOR + 1.65% June 2011 June 2012 June 2011 June 2012 April 2011 June 2011 June 2012 June 2012 December 2020 6.4%–8.4% Various through 2029 8.0% 10.0% March 2011 June 2014 LIBOR + 0.35% 5.375% 6.0% 5.80% 5.125% 5.65% 5.15% 5.50% LIBOR + 0.50% 8.625% 5.95% 6.5% 5.70% 6.05% 5.875% 5.85% March 2010 April 2010 December 2010 March 2011 April 2011 September 2011 March 2012 June 2012 October 2012 June 2013 October 2013 December 2013 March 2014 April 2015 March 2016 March 2017 LIBOR + 1.5% October 2035 54 - 55 Principal balances have been fully or partially repaid subsequent to year-end (see Note 19). (1) (2) Represents the Company’s Secured Exchange Notes. (3) (4) As of December 31, 2010, net debt premiums/(discounts) includes unamortized debt premiums of $109.5 million associated with the Secured Exchange Notes, which resulted from the unsecured/secured note exchange transactions completed in May 2009. The Company’s convertible senior floating rate notes due October 2012 (“Convertible Notes”) are convertible at the option of the holders, into 22.2 shares per $1,000 principal amount of Convertible Notes, on or after August 15, 2012, or prior to that date if (1) the price of the Company’s Common Stock trades above 130% of the conversion price for a specified dura- tion, (2) the trading price of the Convertible Notes is below a certain threshold, subject to specified exceptions, (3) the Convertible Notes have been called for redemption, or (4) speci- fied corporate transactions have occurred. None of the conversion triggers have been met as of December 31, 2010. As of December 31, 2010, the outstanding principal balance of the Company’s senior convertible notes was $787.8 million, the unamortized discount was $21.9 million and the net carrying amount of the liability was $765.9 million. As of December 31, 2010, the carrying value of the additional paid-in capital, or equity component of the convertible notes, was $37.4 million. For the years ended December 31, 2010, 2009 and 2008, the Company recognized interest expense on the convertible notes of $17.5 million, $21.0 million and $42.3 million, respectively, of which $10.8 million, $10.0 million and $9.5 million, respectively, related to the amortization of the debt discount. Future Scheduled Maturities – AsofDecember31,2010,future scheduledmaturitiesofoutstandinglong-termdebtobligations,netare asfollows($inthousands)(1): Subsequent to year-end, the Company fully repaid borrow- ingsoutstandingunderitssecuredbankcreditfacilitieswithproceeds fromthenewsecuredcreditFacility(seeNote19). 2011 2012 2013 2014 2015 Thereafter Total principal maturities Unamortized debt premiums, net Total long-term debt obligations, net $2,638,914 2,402,322 1,072,132 512,930 105,765 534,074 7,266,137 79,296 $7,345,433 Explanatory Note: (1) See Note 19 for pro forma disclosure of future scheduled maturities after giving effect to the new secured credit Facility and debt repayments that occurred subsequent to year-end. Credit Facilities – As of December 31, 2010, the Company hadtwosecuredbankcreditfacilitieswithoutstandingborrowingsof $618.9 million and $334.2 million of revolving loans maturing in June 2011andJune2012,respectively,aswellas$1.06billionand$612.2mil- lionoftermloansmaturinginJune2011andJune2012,respectively. Borrowings under the secured credit facilities bear interest at the rateofLIBOR+1.50%peryear,subjecttoadjustmentbaseduponthe Company’s corporate credit ratings (see Ratings Triggers below). As ofDecember31,2010,therewas$11.4millionimmediatelyavailableto drawunderthesecuredcreditfacilities.Outstandingborrowingsare securedbyalienonacollateralpoolwhichmustbemaintainedat1.3x outstandingborrowings.AsofDecember31,2010,thetotalcarrying valueofassetspledgedascollateralunderthesecuredcreditfacilities andthesecuredexchangenoteswas$3.95billion. AsofDecember31,2010,theCompany’sunsecuredrevolving creditfacilitieshaveoutstandingbalancesof$501.4millionmaturingin June2011and$243.8millionmaturinginJune2012.Borrowingsmade undertheunsecuredrevolvingcreditfacilitiesbearinterestatarateof LIBOR+0.85%peryear,subjecttoadjustmentbaseduponourcorpo- ratecreditratings(seeRatingsTriggersbelow),andmaynotberepaid priortomaturitywhilethesecuredcreditfacilitiesremainoutstanding. In November 2010, the Company fully repaid a $1.00 billion FirstPriorityCreditAgreement,whichwasduetomatureinJune2012, andterminatedallcommitmentsthereunder.Therepaymentincreased the aggregate limitation contained in the Company’s secured credit facilitiesonitsrepurchasesofitsseniorunsecurednotesmaturingafter June26,2012anditsCommonStockfrom$350.0millionto$750.0mil- lion;provided,however,thatnomorethan$50.0millionmaybeusedfor CommonStockrepurchasespriortoDecember31,2010andnomore than$100.0millionmaybeusedforallCommonStockrepurchases. Other Secured Term Loans – Also during 2010, the Company repaid other secured term loans, including a $947.9 million non- recourseloanthatwascollateralizedbytheportfolioof32netlease assetssoldduringtheperiod,aswellas$153.3millionofotherterm loanswithvariousmaturities. Inconnectionwiththeserepayments,theCompanyexpensed unamortized deferred financing costs and incurred other expenses totaling$22.1million,whichreducednetgainonearlyextinguishment ofdebtduringtheyearendedDecember31,2010. Secured Notes – During2009,theCompanycompletedaseries ofprivateoffersinwhichtheCompanyissued$155.3millionaggregate principalamountofits8.0%secondpriorityseniorsecuredguaranteed notes due 2011 (“2011 Notes”) and $479.5 million aggregate principal amountsofits10.0%secondpriorityseniorsecuredguaranteednotes due2014(“2014Notes”andtogetherwiththe2011Notes,the“Secured Exchange Notes”) in exchange for $1.01 billion aggregate principal amountofitsseniorunsecurednotesofvariousseries.TheSecured ExchangeNotesarecollateralizedbyalienonthesamepoolofcollat- eralpledgedundertheCompany’ssecuredcreditfacilities.Inconjunc- tionwiththeexchange,theCompanyalsopurchased$12.5millionpar valueofitsoutstandingseniorfloatingratenotesdueSeptember2009 inacashtenderoffer. TheCompanyaccountedfortheissuanceofthe2014Notes inexchangeforvariousseriesofseniorunsecurednotesasatroubled debt restructuring. As such, the Company recognized a gain on the exchangetotheextentthatthepriorcarryingvalueoftheseniorunse- cured notes exceeded the total future contractual cash payments of the2014Notes,consistingofbothprincipalandinterest.Theissuance ofthe2011Notesinexchangeforseniorunsecurednoteswascon- sideredamodificationoftheoriginaldebtresultinginadjustmentsto thecarryingamountsforanynewpremiumsordiscounts.Asaresult of these transactions, the Company recognized a $107.9 million gain on early extinguishment of debt, net of closing costs of $11.8 million, andrecordedadeferredgainof$262.7millionwhichwasreflectedas premiumstotheparvalueofthenewdebt.Inaddition,inconnection withtheexchangeforthe2011Notes,theCompanyincurred$4.3mil- lion of direct costs which were recorded in “Other expense” on its Consolidated Statements of Operations. These premiums are being amortizedoverthetermsofthe2011Notesandthe2014Notesasa reductiontointerestexpense. During 2010, the Company redeemed or repurchased $155.3millionparvalueof2011Notesand$167.2millionparvalueof 2014Notes,generating$71.3millionofgainsonearlyextinguishment ofdebt,primarilyrelatedtotherecognitionofthedeferredgainpremi- umsthatresultedfromtheMay2009exchange.AsofDecember31, 2010, the remaining unamortized premium for the 2014 Notes was $109.5million.Subsequenttoyear-end,theCompanyfullyredeemed its$312.3millionremainingprincipalamountof2014Notes(seeNote19). Unsecured Notes – DuringtheyearendedDecember31,2010, theCompanyrepurchased$592.8millionparvalueofitsseniorunse- curednoteswithvariousmaturitiesrangingfromMarch2010toMarch 2014 through open market repurchases generating $59.7 million in gainsonearlyextinguishmentofdebt.Inaddition,theCompanyalso repaid $375.7 million of unsecured notes at maturity during the year endedDecember31,2010. During the year ended December 31, 2009, the Company repurchased,throughopenmarketandprivatetransactions,$1.31bil- lion par value of its senior unsecured notes with various maturi- ties ranging from January 2009 to March 2017. In connection with these repurchases, the Company recorded an aggregate net gain on early extinguishment of debt of $439.4 million for the year ended December31,2009. DebtCovenants TheCompany’soutstandingunsecureddebtsecuritiescon- taincovenantsthatincludefixedchargecoverageandunencumbered assets to unsecured indebtedness ratios. The fixed charge coverage ratiointheCompany’sdebtsecuritiesisanincurrencetest.Whilethe Companyexpectsthatitsabilitytoincurnewindebtednessunderthe coverageratiowillbelimitedfortheforeseeablefuture,itwillcontinue tobepermittedtoincurindebtednessforthepurposeofrefinancing existing indebtedness and for other permitted purposes under the indentures. The unencumbered assets to unsecured indebtedness covenantisamaintenancecovenant.IfanyoftheCompany’scovenants isbreachedandnotcuredwithinapplicablecureperiods,thebreach could result in acceleration of its debt securities unless a waiver or modificationisagreeduponwiththerequisitepercentageofthebond- holders.BasedontheCompany’sunsecuredcreditratings,thefinan- cialcovenantsinitsdebtsecurities,includingthefixedchargecoverage ratioandmaintenanceofunencumberedassetstounsecuredindebt- ednessratio,arecurrentlyoperative. The Company’s new secured credit Facility (see Note 19) containscertaincovenants,includingcovenantsrelatingtothedelivery ofinformationtothelenders,collateralcoverage,dividendpayments, restrictions on fundamental changes, transactions with affiliates and matters relating to the liens granted to the lenders. In particular, the Companyisrequiredtomaintaincollateralcoverageof1.25xoutstand- ingborrowings.Inaddition,forsolongastheCompanymaintainsits qualificationasaREIT,thenewFacilitypermitsittodistribute100%of itsREITtaxableincomeonanannualbasis.TheCompanymaynotpay commondividendsifitceasestoqualifyasaREIT. The Company’s new secured credit Facility contains cross defaultprovisionsthatwouldallowthelenderstodeclareaneventof defaultandaccelerateitsindebtednesstothemifitfailstopayamounts dueinrespectofitsotherrecourseindebtednessinexcessofspecified thresholdsorifthelendersundersuchotherindebtednessareother- wise permitted to accelerate such indebtedness for any reason. The indenturesgoverningtheCompany’sunsecuredpublicdebtsecurities permitthelendersandbondholderstodeclareaneventofdefaultand accelerateitsindebtednesstothemiftheCompany’sotherrecourse indebtednessinexcessofspecifiedthresholdsorifsuchindebtedness is accelerated. The Company’s unsecured credit facilities permit the lenderstoaccelerateitsindebtednesstothemifotherrecourseindebt- ednessoftheCompanyinexcessofspecifiedthresholdsisaccelerated. TheCompanybelievesitisinfullcompliancewithallthecovenantsinits debtinstrumentsasofDecember31,2010. RatingsTriggers Borrowings under the Company’s secured and unsecured credit facilities bear interest at LIBOR based rates plus an applicable margin which varies between the facilities and is determined based on the Company’s corporate credit ratings. The Company’s ability to borrow under its credit facilities is not dependent on the level of its creditratings.BasedontheCompany’scurrentcreditratings,further downgradesintheCompany’screditratingswillhavenoeffectonits borrowingratesunderthesefacilities. Note 10 – Commitments and Contingencies Business Risks and Uncertainties – The economic recession andtighteningofcapitalmarketsadverselyaffectedourbusiness.The Companyexperiencedsignificantprovisionsforloanlossesandimpair- mentsresultingfromhighlevelsofnon-performingloansandincreas- ingamountsofrealestateownedastheCompanytooktitletoassets ofdefaultingborrowers.Theeconomicconditionsandtheireffecton the Company’s operations also resulted in increases in its financing costsandaninabilitytoaccesstheunsecureddebtmarkets.Sincethe beginning of the crisis, the Company has significantly curtailed asset originations and has focused primarily on resolving problem assets, generatingliquidity,retiringdebt,decreasingleverageandpreserving shareholdervalue. TheCompanysawearlysignsofaneconomicrecoverydur- ing2010,includingsomeimprovementsinthecommercialrealestate market and greater stability in the capital markets. These conditions resulted in reduced additions to non-performing loans, reductions in provisions for loan losses and increased levels of liquidity to fund operations. Despite the improvements, the impact of the economic recession continues to have an effect on the Company’s operations, primarily evidenced by still elevated levels of non-performing assets. Additionally,manyoftheimprovingtrendsintheCompany’sfinancial conditionandoperatingresultsaredependentonasustainedrecovery andtherecanbenoassurancethattherecentimprovementincondi- tionswillcontinueinthefuture. 56 - 57 Other Commitments – Total operating lease expense for the years ended December 31, 2010, 2009 and 2008 were $7.3 million, $13.3 million and $7.9 million, respectively. Future minimum lease obligations under non-cancelable operating leases are as follows ($inthousands): 2011 2012 2013 2014 2015 Thereafter $ 5,945 5,152 4,558 4,186 3,860 17,293 AsaresultoftheCompany’sdecisiontoremaininitscurrent spacethatisleasedthrough2021,theCompanyenteredintoasettle- mentagreementwithalandlordregardingaseparatelong-termlease for new headquarters space dated May 22, 2007 (as amended and restated,the“Lease”).Underthesettlement,theCompanyagreedto paythelandlorda$42.4millionsettlementpaymentinordertosettleall disputesbetweentheCompanyandthelandlordrelatingtotheLease andthelandlordagreedamongotherthings,toterminatetheLease. For the year ended December 31, 2009, the Company recognized a $42.4 million lease termination expense in “Other expense” on the Company’sConsolidatedStatementsofOperations. The Company also has issued letters of credit totaling $14.4millioninconnectionwitheightofitsinvestments. After giving effect to the new secured credit Facility and repaymentsofdebtsubsequenttoyear-end(seeNote19),theCompany hasapproximately$882millionofdebtmaturingandminimumrequired amortization payments due on or before December 31, 2011. The Companybelievesthatitsavailablecashandexpectedproceedsfrom asset repayments and sales will be sufficient to meet its obligations andtoremainincompliancewiththecovenantsinitsdebtinstruments duringtheremainderoftheyear.However,thetimingandamountsof expected proceeds from expected asset repayments and sales are subject to factors outside of the Company’s control and cannot be predictedwithcertainty.TheCompany’splansaredynamicanditmay adjustitsplansinresponsetochangesinitsexpectationsandchanges in market conditions. The Company would be materially adversely affectedifitisunabletorepayorrefinanceitsdebtasitcomesdue. Unfunded Commitments – TheCompanyhascertainoff-balance sheetunfundedcommitments.TheCompanygenerallyfundsconstruc- tionanddevelopmentloansandbuild-outsofspaceinnetleaseassets over a period of time if and when the borrowers and tenants meet establishedmilestonesandotherperformancecriteria.TheCompany referstothesearrangementsasPerformance-BasedCommitments.In addition,theCompanywillsometimesestablishamaximumamountof additionalfundingswhichitwillmakeavailabletoaborrowerortenant foranexpansionoradditiontoaprojectifitapprovesoftheexpan- sion or addition at its sole discretion. The Company refers to these arrangements as Discretionary Fundings. Finally, the Company has committedtoinvestcapitalinseveralrealestatefundsandotherven- tures.ThesearrangementsarereferredtoasStrategicInvestments. AsofDecember31,2010,themaximumamountsofthefundingsthe Companymaymakeundereachcategory,assumingallperformance hurdles and milestones are met under the Performance-Based Commitments,thatitwillapproveallDiscretionaryFundingsandthat 100%ofitscapitalcommittedtoStrategicInvestmentsisdrawndown, areasfollows($inthousands): Net Lease Assets Loans Strategic Investments Total Performance-Based Commitments Discretionary Fundings Other Total $138,353 158,683 – $297,036 $8,143 – – $8,143 $ – – 52,370 $52,370 $146,496 158,683 52,370 $357,549 Note 11 – 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 30.0millionsharesofpreferredstock.AsofDecember31,2010,138.2millioncommonshareswereissuedand92.3millioncommonshares wereoutstanding. TheCompanyhadthefollowingseriesofCumulativeRedeemablePreferredStockoutstandingasofDecember31,2010and2009: Shares Authorized, Issued and Outstanding (in thousands) 4,000 5,600 4,000 3,200 5,000 21,800 Cumulative Preferential Cash Dividends (1)(2) Rate per Annum of the $25.00 Liquidation Preference 8.000% 7.875% 7.8% 7.65% 7.50% Equivalent to Fixed Annual Rate (per share) $2.00 $1.97 $1.95 $1.91 $1.88 Par Value $0.001 $0.001 $0.001 $0.001 $0.001 Series D E F G I Explanatory Notes: (1) (2) Holders of shares of the Series D, E, F, G, and I preferred stock are entitled to receive dividends, when and as declared by the Board of Directors, out of funds legally available for the payment of dividends. 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 succeeding business day. Any dividend payable on the 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 appli- cable 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. The Company declared and paid dividends aggregating $8.0 million, $11.0 million, $7.8 million, $6.1 million and $9.4 million on its Series D, E, F, G, and I preferred stock, respectively, during each of the years ended December 31, 2010 and 2009. There are no dividend arrearages on any of the preferred shares currently outstanding. TheSeriesD,E,F,G,andICumulativeRedeemablePreferred StockareredeemablewithoutpremiumattheoptionoftheCompany at their respective liquidation preferences beginning on October 8, 2002, July 18, 2008, September 29, 2008, December 19, 2008 and March1,2009,respectively. HighPerformanceUnitProgram In May 2002, the Company’s shareholders approved the iStarFinancialHighPerformanceUnit(“HPU”)Program.Theprogram entitledemployeeparticipants(“HPUHolders”)toreceivedistributions ifthetotalrateofreturnontheCompany’sCommonStock(shareprice appreciationplusdividends)exceededcertainperformancethresholds over a specified valuation period. The Company established seven HPUplansthathadvaluationperiodsendingbetween2002and2008 andtheCompanyhasnotestablishedanynewHPUplanssince2005. HPUHolderspurchasedtheirinterestsinHighPerformanceCommon Stockforaggregateinitialpurchasepricesofapproximately$2.8mil- lion,$1.8million,$1.4million,$0.6million,$0.7million,$0.6millionand $0.8millionforthe2002,2003,2004,2005,2006,2007and2008plans, respectively. The 2002, 2003 and 2004 plans all exceeded their perfor- mancethresholdsandareentitledtoreceivedistributionsequivalentto theamountofdividendspayableon819,254shares,987,149sharesand 1,031,875shares,respectively,oftheCompany’sCommonStockasand whensuchdividendsarepaidontheCompany’sCommonStock.Each ofthesethreeplanshas5,000sharesofHighPerformanceCommon Stockassociatedwithit,whichisrecordedasaseparateclassofstock within shareholders’ equity on the Company’s Consolidated Balance Sheets. High Performance Common Stock carries 0.25 votes per share.Netincomeallocabletocommonshareholdersisreducedbythe HPUholders’shareofearnings. The remaining four plans that had valuation periods which ended in 2005, 2006, 2007 and 2008, did not meet their required performance thresholds and none of the plans were funded. As a result, the Company redeemed the participants’ units for approxi- mately $1,700 resulting in the unit holders losing $2.4 million of aggregatecontributions. Inadditiontotheseplans,ahighperformanceunitprogram for executive officers was established with plans having three-year valuation periods which ended December 31, 2005, 2006, 2007 and 2008.Theprovisionsoftheseplansweresubstantiallythesameasthe highperformanceunitprogramsforemployees.TheChiefExecutive Officer and former President collectively purchased 100% interests intheCompany’s2005,2006,2007and2008highperformanceunit programforseniorexecutiveofficersforanaggregatepurchaseprice 58 - 59 of $1.5 million. These plans did not meet the required performance thresholdsandwerenotfunded,resultingintheChiefExecutiveOfficer andformerPresidentlosing$0.9millionand$0.6millionintotalcontri- butions,respectively. Dividends – In order to maintain its election to qualify as a REIT,theCompanymustcurrentlydistribute,ataminimum,anamount equal to 90% of its taxable income, excluding net capital gains, and mustdistribute100%ofitstaxableincome(includingnetcapitalgains) to avoid paying corporate federal income taxes. The Company has recordednetoperatinglossesandmayrecordnetoperatinglossesin thefuture,whichmayreduceitstaxableincomeinfutureperiodsand loweroreliminateentirelytheCompany’sobligationtopaydividends for such periods in order to maintain its REIT qualification. Because taxableincomediffersfromcashflowfromoperationsduetonon-cash revenuesandexpenses(suchasdepreciationandcertainassetimpair- ments),incertaincircumstances,theCompanymaygenerateoperating cashflowinexcessofitsdividendsor,alternatively,mayberequired toborrowtomakesufficientdividendpayments.TheCompany’snew securedcreditFacilitypermitstheCompanytodistribute100%ofits REITtaxableincomeonanannualbasis,forsolongastheCompany maintains its qualification as a REIT. The new Facility restricts the Companyfrompayinganycommondividendsifitceasestoqualifyas aREIT.TheCompanydidnotdeclareorpayanyCommonStockdivi- dendsfortheyearsendedDecember31,2010and2009. Fortaxreportingpurposes: Ordinary Dividend 15% Capital Gain Total dividends declared (in thousands) (1) $ – $ – $236,052 Dividends per share $ – $ – $1.74 Percentage of dividends per share – – 10.8% Per share $ – $ – $0.1886 Percentage of dividends per share – – 76.1% Per share $ – $ – $1.3244 25% Section 1250 Capital Gains Percentage of dividends per share – – 13.1% Per share $ – $ – $0.2270 Year 2010 2009 2008 Explanatory Note: (1) For the year ended December 31, 2008, 25.6% ($0.0483) of the ordinary dividend qualifies as a qualifying dividend for those shareholders who held shares of the Company for the entire year. Stock Repurchase Program – OnMarch13,2009,theCompany’s BoardofDirectorsauthorizedtherepurchaseofupto$50millionof CommonStockfromtimetotimeinopenmarketandprivatelynegoti- atedpurchases,includingpursuanttooneormoretradingplans. During the year ended December 31, 2010, the Company repurchased2.2millionsharesofitsoutstandingCommonStockfor approximately$7.5million,atanaveragecostof$3.40pershare,and therepurchaseswererecordedatcost.AsofDecember31,2010,the Companyhad$14.1millionofCommonStockavailabletorepurchase undertheBoardauthorizedstockrepurchaseprograms. Noncontrolling Interest – ThefollowingtablepresentsamountsattributabletoiStarFinancialInc.andallocabletocommonshareholders, HPUholdersandParticipatingSecurityholdersandexcludesamountsallocabletononcontrollinginterests($inthousands): For the Years Ended December 31, 2010 2009 2008 Amounts attributable to iStar Financial Inc. and allocable to common shareholders, HPU holders and Participating Security holders: Income (loss) from continuing operations Income from discontinued operations Gain from discontinued operations Net income (loss) Preferred dividends Net income (loss) allocable to common shareholders, HPU holders and Participating Security holders $(208,048) 17,349 270,382 79,683 (42,320) $(786,958) 5,756 12,426 (768,776) (42,320) $(320,809) 30,015 87,769 (203,025) (42,320) $ 37,363 $(811,096) $(245,345) Note 12 – Risk Management and Derivatives Riskmanagement Inthenormalcourseofitson-goingbusinessoperations,theCompanyencounterseconomicrisk.Therearethreemaincomponentsof economicrisk:interestraterisk,creditriskandmarketrisk.TheCompanyissubjecttointerestraterisktothedegreethatitsinterest-bearinglia- bilitiesmatureorrepriceatdifferentpointsintimeandpotentiallyatdifferentbases,thanitsinterest-earningassets.Creditriskistheriskofdefault ontheCompany’slendinginvestmentsorleasesthatresultfromaborrower’sortenant’sinabilityorunwillingnesstomakecontractuallyrequired payments.Marketriskreflectschangesinthevalueofloansandotherlendinginvestmentsduetochangesininterestratesorothermarketfactors, includingtherateofprepaymentsofprincipalandthevalueofthecollateralunderlyingloans,thevaluationofnetlease,REHIandOREOassetsby theCompanyaswellaschangesinforeigncurrencyexchangerates. Risk concentrations – AsofDecember31,2010,theCompany’stotalinvestmentportfoliowascomprisedofthefollowingproperty/collat- eraltypes($inthousands)(1): Property/Collateral Type Apartment/Residential Land Retail Office Industrial/R&D Entertainment/Leisure Hotel Mixed Use/Mixed Collateral Other (2) Total Explanatory Notes: Performing Loans and Non-performing Loans $ 588,918 268,536 214,873 53,007 21,330 77,801 20,847 93,658 12,440 $1,351,410 Other $1,009,817 379,105 596,344 212,771 98,721 193,353 399,262 267,623 715,376 $3,872,372 Net Lease Assets (3) $ – 58,788 183,820 600,618 603,537 483,173 183,805 40,589 20,641 $2,174,971 REHI $ 11,500 637,977 50,641 17,337 50,520 – 44,556 28,383 – $840,914 OREO $476,658 114,162 44,204 16,422 6,300 1,200 15,000 72,135 – $746,081 Total $2,086,893 1,458,568 1,089,882 900,155 780,408 755,527 663,470 502,388 748,457 $8,985,748 % of Total 23.2% 16.3% 12.1% 10.0% 8.7% 8.4% 7.4% 5.6% 8.3% 100.0% (1) Based on the carrying value of our total investment portfolio net of asset-specific loan loss reserves and gross of general loan loss reserves and accumulated depreciation. (2) (3) Includes $516.2 million of other investments. Includes $16.1 million of other investments. As of December 31, 2010, the Company’s total investment portfolio had the following characteristics by geographical region ($inthousands): Geographic Region West Northeast Southeast Southwest Mid-Atlantic Central International Northwest Various Total Explanatory Note: Carrying Value (1) $2,041,466 1,862,021 1,356,366 918,772 773,903 427,817 376,829 367,094 861,480 $8,985,748 % of Total 22.7% 20.7% 15.1% 10.2% 8.6% 4.8% 4.2% 4.1% 9.6% 100.0% (1) Based on the carrying value of our total investment portfolio net of asset-specific loan loss reserves but gross of general loan loss reserves and accumulated depreciation. Concentrationsofcreditrisksarisewhenanumberofbor- rowers or customers related to the Company’s investments are engaged in similar business activities, or activities in the same geo- graphic region, or have similar economic features that would cause their ability to meet contractual obligations, including those to the Company,tobesimilarlyaffectedbychangesineconomicconditions. The Company monitors various segments of its portfolio to assess potentialconcentrationsofcreditrisks.Managementbelievesthecur- rentportfolioisreasonablywelldiversifiedanddoesnotcontainany significantconcentrationofcreditrisks. SubstantiallyalloftheCompany’snetlease,REHIandOREO assets as well as assets collateralizing its loans and other lending investments are located in the United States, with California 13.0%, New York 11.4%, and Florida 10.6% representing the only significant concentrations (greater than 10.0%) as of December 31, 2010. The Company’sportfoliocontainssignificantconcentrationsinthefollowing assettypesasofDecember31,2010:apartment/residential23.2%,land 16.3%,retail12.1%andoffice10.0%. 60 - 61 TheCompanyunderwritesthecreditofprospectiveborrow- ers and customers and often requires them to provide some form of credit support such as corporate guarantees, letters of credit and/or cashsecuritydeposits.AlthoughtheCompany’sloansandotherlending investmentsandnetleaseassetsaregeographicallydiverseandthebor- rowersandcustomersoperateinavarietyofindustries,totheextentthe Companyhasasignificantconcentrationofinterestoroperatinglease revenuesfromanysingleborrowerorcustomer,theinabilityofthatbor- rowerorcustomertomakeitspaymentcouldhaveanadverseeffecton theCompany.AsofDecember31,2010,theCompany’sfivelargestbor- rowersortenantscollectivelyaccountedforapproximately23.7%ofthe Company’saggregateannualizedinterestandoperatingleaserevenue,of whichnosinglecustomeraccountsformorethan6.0%. Derivatives The Company’s use of derivative financial instruments is primarily limited to the utilization of interest rate hedges and foreign exchangehedges.Theprincipalobjectiveofsuchhedgesaretomini- mizetherisksand/orcostsassociatedwiththeCompany’soperating andfinancialstructureandtomanageitsexposuretoforeignexchange ratemovements.Derivativesnotdesignatedashedgesarenotspecu- lativeandareusedtomanagetheCompany’sexposuretointerestrate movements, foreign exchange rate movements, and other identified risks,butmaynotmeetthestricthedgeaccountingrequirements. AsofDecember31,2010,derivativeliabilitieswithafairvalue of$0.2millionwereincludedin“Accountspayable,accruedexpenses andotherliabilities”ontheCompany’sConsolidatedBalanceSheet.As ofDecember31,2009,derivativeassetswithafairvalueof$0.8million wereincludedin“Deferredexpensesandotherassets,net”andderiva- tiveliabilitieswithafairvalueof$0.3millionwereincludedin“Accounts payable, accrued expenses and other liabilities” on the Company’s ConsolidatedBalanceSheet. 2010 and 2009 Hedging Activity – During the years ended December31,2010and2009,theCompanydidnothaveanysignificant hedgingactivity. 2008 Hedging Activity – DuringtheyearendedDecember31, 2008,theCompanyhadthefollowingsignificanthedgingactivity: TheCompanypaid$11.1milliontoterminateforwardstart- ingswapagreementswithanotionalamountof$250.0mil- lion.TheCompanydeterminedtheforecastedtransaction wasnotprobableofoccurringandrecorded$8.2million of losses that are recorded in “Other expense” on the Company’sConsolidatedStatementsofOperationsforthe yearendedDecember31,2008. – – endedDecember31,2008,theCompanyrecordedanet lossof$16.7million,relatedtoineffectivenessoninterest rateswaps.Inaddition,fortheyearendedDecember31, 2008, the Company recognized a net loss of $1.4 million for interest rate swaps not designated as hedges. All of theseamountswererecordedin“Otherexpense”onthe Company’sConsolidatedStatementsofOperations. Note 13 – Stock-Based Compensation Plans and Employee Benefits OnMay27,2009,theCompany’sshareholdersapprovedthe Company’s2009LongTermIncentivePlan(the“2009LTIP”)whichis designedtoprovideincentivecompensationforofficers,keyemploy- ees,directorsandadvisorsoftheCompany.The2009LTIPprovidesfor awardsofstockoptions,sharesofrestrictedstock,phantomshares, restrictedstockunits,dividendequivalentrightsandothershare-based performance awards. A maximum of 8,000,000 shares of Common Stockmaybeawardedunderthe2009LTIP,plusuptoanadditional 500,000sharestotheextentthatacorrespondingnumberofequity awards previously granted under the Company’s 1996 Long Term Incentive Plan expire or are cancelled or forfeited. All awards under the2009LTIParemadeatthediscretionoftheBoardofDirectorsora committeeoftheBoardofDirectors. The Company’s 2006 Long Term Incentive Plan (the “2006 LTIP”) is designed to provide equity-based incentive compensation forofficers,keyemployees,directors,consultantsandadvisersofthe Company.The2006LTIPprovidesforawardsofstockoptions,shares of restricted stock, phantom shares, dividend equivalent rights and other share-based performance awards. A maximum of 4,550,000 sharesofCommonStockmaybesubjecttoawardsunderthe2006 LTIPprovidedthatthenumberofsharesofCommonStockreserved forgrantsofoptionsdesignatedasincentivestockoptionsis1.0million, subjecttocertainanti-dilutionprovisionsinthe2006LTIP.Allawards underthisPlanareatthediscretionoftheBoardofDirectorsoracom- mitteeoftheBoardofDirectors. TheCompany’s2007IncentiveCompensationPlan(“Incentive Plan”)wasapprovedandadoptedbytheBoardofDirectorsin2007in order to establish performance goals for selected officers and other keyemployeesandtodeterminebonusesthatwillbeawardedtothose officersandotherkeyemployeesbasedontheextenttowhichthey achievethoseperformancegoals.Equity-basedawardsmaybemade undertheIncentivePlan,subjecttothetermsoftheCompany’sequity incentiveplans. AsofDecember31,2010,anaggregateof3.6millionshares remainavailableforawardsundertheCompany’s2006and2009LTIP. The Company terminated $1.76 billion of pay floating interest rate swaps that were designated as fair value hedges of certain unsecured notes. As a result of the terminations,theCompanyreceived$51.1millionofcash, recorded a receivable of $19.0 million and recorded pre- miumstotherespectiveunsecurednotesof$65.7million. The premiums amortize over the lives of the respective debtasanoffsetto“Interestexpense”ontheCompany’s Consolidated Statements of Operations. During the year Stock- Based Compensation – The Company recorded stock-based compensation expense of $19.4 million, $23.6 million and $23.4 million for the years ended December 31, 2010, 2009 and 2008, respectively in “General and administrative” on the Company’s Consolidated Statements of Operations. As of December 31, 2010, there was $14.6 million of total unrecognized compensation cost relatedtoallunvestedrestrictedstockunits.Thatcostisexpectedtobe recognizedoveraweightedaverageremainingvesting/serviceperiod of0.96years. Stock Options – ChangesinoptionsoutstandingduringtheyearendedDecember31,2010,areasfollows(amountsinthousands,except forweightedaveragestrikeprice): Options Outstanding, December 31, 2009 Forfeited in 2010 Options Outstanding, December 31, 2010 Number of Shares Employees 392 (333) 59 Non-Employee Directors 84 (20) 64 Weighted Average Strike Price $ 19.08 $ 16.89 $24.87 Aggregate Intrinsic Value $– Other 44 (24) 20 Thefollowingtablesummarizesinformationconcerningout- standingandexercisableoptionsasofDecember31,2010(optionsin thousands): Exercise Price $19.69 $24.94 $27.00 $29.82 Options Outstanding and Exercisable 48 40 11 44 143 Remaining Contractual Life (Years) 0.01 0.38 0.48 1.41 0.58 TheCompanyhasnotissuedanyoptionssince2003.During the years ended December 31, 2010 and December 31, 2009, no options were exercised. Cash received from option exercises during theyearendedDecember31,2008was$5.2million.Theintrinsicvalue of options exercised during the year ended December 31, 2008 was $2.0million. Restricted Stock Units – Changes in non-vested restricted stockunitsduringtheyearendedDecember31,2010wereasfollows ($inthousands,exceptpershareamounts): Non-Vested Shares Non-vested at December 31, 2009 Granted Vested Forfeited Non-vested at December 31, 2010 Weighted Average Grant Date Fair Value Per Share $ 3.62 $ 3.37 $24.31 $ 3.05 Number of Shares 14,071 2,324 (521) (1,541) Aggregate Intrinsic Value 14,333 $ 2.89 $112,084 2010 Activity – On February 17, 2010, the Company granted 1,516,074 service-based restricted stock units to employees that representtherighttoreceiveanequivalentnumberofsharesofthe Company’s Common Stock (after deducting shares for minimum required statutory withholdings) if and when the units vest. These unitswillcliffvestonFebruary17,2012iftheemployeeisemployed by the Company on that date and carry dividend equivalent rights that entitle the holder to receive dividend payments prior to vesting, ifandwhendividendsarepaidonsharesoftheCompany’sCommon Stock.Thegrantdatefairvalueoftheseawardswas$4.7million.Asof December31,2010,1,359,024oftheseawardsremainedoutstanding. On March 2, 2010, the Company granted 806,518 perfor- mance-basedrestrictedstockunitstoitsChairmanandChiefExecutive Officer.Theseunitsrepresenttherighttoreceiveanequivalentnumber ofsharesoftheCompany’sCommonStock(afterdeductingsharesfor minimumrequiredstatutorywithholdings)ifandwhentheunitsvest. Theperformance-basedunitswillcliffvestonMarch2,2012ifcertain performance and service conditions have been achieved, relating to reductions in the Company’s general and administrative expenses, retirementofdebtandcontinuedemployment.Theperformancecondi- tionsweresatisfiedduringtheyearendedDecember31,2010,there- fore, vesting is now based solely on continued employment through March2,2012.Sincetheperformanceconditionshavebeenachieved, theseunitsnowcarrydividendequivalentrightsthatentitletheholder toreceivedividendpayments,ifandwhendividendsarepaidonshares of the Company’s Common Stock. The grant date fair value of these performancebasedunitswas$3.2millionwhichisbeingrecognized ratablyovertheserviceperiod.AsofDecember31,2010,allofthese awardsremainedoutstanding. On December 31, 2010, 341,199 market-condition based restrictedstockunitsthatweregrantedtoemployeesonJanuary18, 2008 were forfeited as the market vesting condition was not met. TheseawardsweretocliffvestonDecember31,2010onlyifthetotal shareholderreturnontheCompany’sCommonStockwasatleast20% (compoundedannually,includingdividends)fromthedateoftheaward through the end of the vesting period. Total shareholder return was basedontheaverageNYSEclosingpricesfortheCompany’sCommon Stockforthe20dayspriorto(a)thedateoftheawardonJanuary18, 62 - 63 2008(whichwas$25.04)and(b)December31,2010.Sinceshareholder returnduringthatperiodwaslessthantheestablishedtarget,these awardswerecanceled. Other Outstanding Awards – Inadditiontotheawardsgrantedin 2010, noted above, the following awards remained outstanding as of December31,2010: – – 8,340,000 market-condition based restricted stock units grantedtoexecutivesandotherofficersoftheCompanyon December19,2008.Theseunitswillvestinoneinstallment onJanuary1,2012onlyiftheCommonStockachievesa priceof$10.00ormore(averageNYSEclosingpriceover 20consecutivetradingdays)priortoDecember19,2011 and the employee is thereafter employed on the vesting date.Theseawardsestablished$4.00and$7.00pricetar- getsforthefirstandsecondmeasurementperiodsended December19,2009andDecember19,2010,respectively, whichwerenotachieved,thereforeonlythe$10.00price target remains applicable. If this price target is achieved, the units will thereafter be entitled to dividend equiva- lent payments as dividends are paid on the Company’s CommonStock.Uponvestingoftheseunits,holderswill receive shares of the Company’s Common Stock in the amountofthevestedunits,netofstatutoryminimumtax withholdings.OnMay27,2009,theCompany’ssharehold- ers approved the 2009 LTIP, which authorized additional shares of the Company’s Common Stock to be available for awards under the Company’s equity compensation plansincludingforsettlementoftheseunits.Theapproval converted the Company’s accounting for the units from liability-basedtoequity-based. 2,000,000 market-condition based restricted stock units contingently awarded to the Company’s Chairman and ChiefExecutiveOfficeronOctober9,2008andapproved by shareholders on May 27, 2009. These units will cliff vestinoneinstallmentonOctober9,2011onlyifthetotal shareholder return on the Company’s Common Stock is atleast25%peryear(compoundedattheendofthethree yearvestingperiod,includingdividends).Totalshareholder returnwillbebasedontheaverageNYSEclosingprices fortheCompany’sCommonStockforthe20dayspriorto: (a)thedateoftheawardonOctober9,2008(whichwas $3.38); and (b) the vesting date (which must be at least $6.58ifnodividendsarepaid).Nodividendswillbepaidon theseunitspriortovesting.Theseunitsarerequiredtobe settledonanet,after-taxbasis(afterdeductingsharesfor minimum required statutory withholdings); therefore the actualnumberofsharesissuedwillbelessthanthegross amountoftheaward. – 1,575,000 restricted stock units awarded to certain offi- cers on October 9, 2008, as special retention incentive, whichwillcliffvestinoneinstallmentonOctober9,2011, if the holders are employed on the vesting date. The unvested units are entitled to receive dividend equiva- lent payments as dividends are paid on shares of the Company’sCommonStock. – 252,477service-basedrestrictedstockunitswithoriginal vestingtermsrangingfromthreetofiveyearsthatareenti- tledtobepaiddividendsasdividendsarepaidonsharesof theCompany’sCommonStock. Thefairvaluesofthemarket-conditionbasedrestrictedstock units, were determined by utilizing a Monte Carlo model to simulate a range of possible future stock prices for the Company’s Common Stock.Thefollowingassumptionswereusedtoestimatethefairvalue ofmarket-conditionbasedawards: Valued as of January 18, 2008 Risk-free interest rate 2.39% Expected stock price volatility 27.46% – Expected annual dividend May 27, 2009 (1) 1.16% 152.03% – (2) May 27, 2009 1.28% 145.45% – Explanatory Notes: (1) (2) Contingent equity-based restricted stock units awarded on October 9, 2008 were measured on May 27, 2009, the date the Company’s shareholders approved the grant of the award. The units granted on December 19, 2008 were re-measured on May 27, 2009 when they became equity-based awards in accordance with ASC 718-20-55-135 to 138. The total fair value of restricted stock units vested during theyearsendedDecember31,2010,2009and2008was$1.7million, $1.4millionand$10.1million,respectively. Common Stock Equivalents – Non-employee directors are awarded common stock equivalents (“CSEs”) at the time of the annual shareholders’ meeting in consideration for their services on the Company’s Board of Directors. The CSEs generally vest at the time of the next annual shareholders meeting and pay dividends in an amount equal to the dividends paid on an equivalent number of shares of the Company’s Common Stock from the date of grant, as andwhendividendsarepaidontheCommonStock.Duringtheyear endedDecember31,2010,theCompanyawardedtoDirectors84,573 CSEsatafairvaluepershareof$5.91atthetimeofgrant.TheCSE awardsareclassifiedasliability-basedawardsduetothefactthatthey canbesettledinsharesofstockorcashattheDirectors’option.Asof December31,2010,281,958CSEs,withanaggregateintrinsicvalueof $2.2millionwereoutstanding. 401(k)Plan Note 14 – Earnings Per Share TheCompanyhasasavingsandretirementplan(the“401(k) Plan”),whichisavoluntary,definedcontributionplan.Allemployeesare eligibletoparticipateinthe401(k)Planfollowingcompletionofthree monthsofcontinuousservicewiththeCompany.Eachparticipantmay contributeonapretaxbasisuptothemaximumpercentageofcom- pensationanddollaramountpermissibleunderSection402(g)ofthe InternalRevenueCodenottoexceedthelimitsofCodeSections401(k), 404and415.AtthediscretionoftheBoardofDirectors,theCompany maymakematchingcontributionsontheparticipant’sbehalfofupto 50% of the first 10% of the participant’s annual compensation. The Company made gross contributions of approximately $1.1 million, $1.3 million and $1.5 million for the years ended December 31, 2010, 2009and2008,respectively. EPS is calculated using the two-class method, which allo- cates earnings among common stock and participating securities to calculate EPS when an entity’s capital structure includes either two ormoreclassesofcommonstockorcommonstockandparticipating securities.HPUholdersarecurrentandformerCompanyemployees who purchased high performance common stock units under the Company’sHighPerformanceUnit(HPU)Program(seeNote11).These HPUunitshavebeentreatedasaseparateclassofcommonstock. Thefollowingtablepresentsareconciliationofincome(loss)fromcontinuingoperationsusedinthebasicanddilutedEPScalculations ($inthousands,exceptforpersharedata): For the Years Ended December 31, Income (loss) from continuing operations Net (income) loss attributable to noncontrolling interests Gain on sale of joint venture interest attributable to noncontrolling interests Preferred dividends Dividends paid to Participating Security holders (1) Income (loss) from continuing operations attributable to iStar Financial Inc. and allocable to common shareholders and HPU holders 2010 $(207,525) (523) – (42,320) – 2009 $(788,029) 1,071 – (42,320) – 2008 $(321,800) 991 (18,560) (42,320) (2,393) $(250,368) $(829,278) $(384,082) Explanatory Note: (1) In accordance with ASC 260-10-65-1, “Application of the Two-Class Method under FASB Statement No. 128 to Master Limited Partnerships,” (“ASC 260-10-65-1”) the total dividends paid to Participating Security holders during the period have been deducted from income (loss) from continuing operations. 64 - 65 For the Years Ended December 31, 2010 2009 2008 Earnings allocable to common shares: Numerator for basic and diluted earnings per share: Income (loss) from continuing operations attributable to iStar Financial Inc. and allocable to common shareholders (1) Income from discontinued operations Gain from discontinued operations, net of noncontrolling interests Net income (loss) attributable to iStar Financial Inc. and allocable to common shareholders Denominator for basic and diluted earnings per share: Weighted average common shares outstanding for basic and diluted earnings per common share Basic and Diluted earnings per common share: Income (loss) from continuing operations attributable to iStar Financial Inc. and allocable to common shareholders (1) Income from discontinued operations Gain from discontinued operations, net of noncontrolling interests Net income (loss) attributable to iStar Financial Inc. and allocable to common shareholders Earnings allocable to High Performance Units: Numerator for basic and diluted earnings per HPU share: Income (loss) from continuing operations attributable to iStar Financial Inc. and allocable to HPU holders (1) Income from discontinued operations Gain from discontinued operations, net of noncontrolling interests Net income (loss) attributable to iStar Financial Inc. and allocable to HPU holders Denominator for basic and diluted earnings per HPU share: Weighted average High Performance Units outstanding for basic and diluted earnings per share Basic and Diluted earnings per HPU share: Income (loss) from continuing operations attributable to iStar Financial Inc. and allocable to HPU holders (1) Income from discontinued operations Gain from discontinued operations, net of noncontrolling interests Net income (loss) attributable to iStar Financial Inc. and allocable to HPU holders $(242,953) 16,837 262,395 $ 36,279 $ (806,250) 5,597 12,083 $ (788,570) $(375,946) 47,546 85,910 $(242,490) 93,244 100,071 131,153 $ (2.60) 0.18 2.81 $ 0.39 $ (8.06) 0.06 0.12 $ (7.88) $ (2.87) 0.36 0.66 $ (1.85) $ (7,415) 512 7,987 $ 1,084 $ (23,028) 159 343 $ (22,526) $ (8,136) 1,029 1,859 $ (5,248) 15 15 15 $ (494.33) 34.13 532.47 $ 72.27 $(1,535.20) 10.60 22.87 $(1,501.73) $ (542.40) 68.60 123.93 $ (349.87) Explanatory Note: (1) Income (loss) from continuing operations attributable to iStar Financial Inc. and allocable to common shareholders has been adjusted for net (income) loss attributable to noncontrol- ling interests and preferred dividends. In addition, for the year ended December 31, 2008, income (loss) from continuing operations attributable to iStar Financial Inc. and allocable to common shareholders has been adjusted to exclude dividends paid to Participating Security holders (see preceding table). FortheyearsendedDecember31,2010,2009and2008,the followingshareswereanti-dilutive($inthousands): For the Years Ended December 31, Joint venture shares Stock options Restricted stock units (1) 2010 298 143 11,147 2009 298 520 11,548 2008 298 529 10,633 Explanatory Note: (1) For the periods ended December 31, 2010, 2009 and 2008, anti-dilutive restricted stock units exclude 3.2 million, 2.5 million and 4.4 million, respectively, of unvested restricted stock units that have dividend equivalent rights as they are considered Participating Securities. Note 15 – Comprehensive Income (Loss) Thestatementofcomprehensiveincome(loss)attributableto iStarFinancial,Inc.isasfollows($inthousands): Unrealized gains/(losses) on available-for-sale securities, cash flow hedges and foreign currency translation adjustments are recordedasadjustmentstoshareholders’equitythrough“Accumulated othercomprehensiveincome”ontheCompany’sConsolidatedBalance Sheets and are not included in net income unless realized. As of December 31, 2010 and 2009, accumulated other comprehensive incomereflectedintheCompany’sshareholders’equityiscomprised ofthefollowing($inthousands): As of December 31, 2010 2009 Unrealized gains on available-for-sale securities Unrealized gains on cash flow hedges Unrealized losses on cumulative translation adjustment Accumulated other comprehensive income $ 198 3,357 (1,946) $ 1,609 $ 3,959 4,156 (1,970) $ 6,145 For the Years Ended December 31, Net income (loss) Other comprehensive income: Reclassification of (gains)/losses on available-for-sale securities into earnings upon realization Reclassification of (gains)/losses on cash flow hedges into earnings upon realization Unrealized gains/(losses) on available-for-sale securities Unrealized gains/(losses) on cash flow hedges Unrealized gains/(losses) on cumulative translation adjustment Comprehensive income (loss) Net (income) loss attributable to noncontrolling interests Gain attributable to noncontrolling interests Comprehensive income (loss) attributable to iStar Financial Inc. 2010 $80,206 2009 2008 $(769,847) $(181,767) (4,206) 2,727 4,967 (799) (4,357) 3,401 445 6,515 (5,797) – (30) 2,986 Note 16 – Fair Values Fairvaluerepresentsthepricethatwouldbereceivedtosell anassetorpaidtotransferaliabilityinanorderlytransactionbetween marketparticipantsatthemeasurementdate.Thefollowingfairvalue hierarchyprioritizestheinputstobeusedinvaluationtechniquesto measurefairvalue: Level1:Unadjustedquotedpricesinactivemarketsthatare accessibleatthemeasurementdateforidentical,unrestrictedassets orliabilities; Level2:Quotedpricesinmarketsthatarenotactive,orinputs whichareobservable,eitherdirectlyorindirectly,forsubstantiallythe fulltermoftheassetorliability; 24 $75,670 (416) (1,554) $(765,408) $(177,764) Level3:Pricesorvaluationtechniquesthatrequireinputsthat arebothsignificanttothefairvaluemeasurementandunobservable (i.e.,supportedbylittleornomarketactivity). (523) 1,071 991 – – (22,249) $75,147 $(764,337) $(199,022) CertainoftheCompany’sassetsandliabilitiesarerecordedat fairvalueeitheronarecurringornon-recurringbasis.Assetsrequired to be marked-to-market and reported at fair value every reporting periodareclassifiedasbeingvaluedonarecurringbasis.Otherassets notrequiredtoberecordedatfairvalueeveryperiodmayberecorded at fair value if a specific provision or other impairment is recorded withintheperiodtomarkthecarryingvalueoftheassettomarketas ofthereportingdate.Suchassetsareclassifiedasbeingvaluedona non-recurringbasis. 66 - 67 ThefollowingtablesummarizestheCompany’sassetsandliabilitiesrecordedatfairvalueonarecurringandnon-recurringbasisbythe abovecategories($inthousands): As of December 31, 2010: Recurring basis: Financial Assets: Marketable securities – equity securities Financial Liabilities: Derivative liabilities Non-recurring basis: Financial Assets: Impaired loans Impaired equity method investment Non-financial Assets: Impaired OREO As of December 31, 2009: Recurring basis: Financial Assets: Derivative assets Other lending investments – available-for-sale debt securities Marketable securities – trading debt and equity securities Financial Liabilities: Derivative liabilities Non-recurring basis: Financial Assets: Impaired loans Non-financial Assets: Impaired OREO Impaired net lease assets held-for-sale Impaired net lease assets Fair Value Using Quoted market prices in active markets (Level 1) Total Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) $ 699 $ 699 $ – $ – $ 223 $ – $ 223 $ – $ 616,070 $ 1,535 $ – $ – $ – $ – $ 616,070 $ 1,535 $ 54,141 $ – $ – $ 54,141 $ 800 $ 6,800 $ 38,454 $ – $6,800 $ 254 $ 800 $ – $38,200 $ – $ – $ – $ 254 $ – $ 254 $ – $1,167,498 $ – $ – $1,167,498 $ 181,540 $ 17,282 $ 48,000 $ – $ – $ – $ – $ – $ – $ 181,540 $ 17,282 $ 48,000 InadditiontotheCompany’sdisclosuresregardingassetsandliabilitiesrecordedatfairvalueinthefinancialstatements,itisalsorequired todisclosetheestimatedfairvaluesofallfinancialinstruments,regardlessofwhethertheyarerecordedatfairvalueinthefinancialstatements. Thebookandestimatedfairvaluesoffinancialinstrumentswereasfollows($inthousands)(1): Financial assets: Loans and other lending investments, net $4,587,352 $4,256,663 $ 7,661,562 $6,638,840 As of December 31, 2010 As of December 31, 2009 Book Value Fair Value Book Value Fair Value Financial liabilities: Debt obligations, net Explanatory Note: $7,345,433 $6,767,968 $10,894,903 $8,115,023 (1) The carrying values of other financial instruments including cash and cash equivalents, restricted cash, accrued interest receivable and accounts payable, approximate the fair values of the instruments. The fair value of other financial instruments, including derivative assets and liabilities and marketable securities are included in the previous table. Given the nature of certain assets and liabilities, clearly determinable market based valuation inputs are often not available, therefore,theseassetsandliabilitiesarevaluedusinginternalvaluation techniques.Subjectivityexistswithrespecttotheseinternalvaluation techniques,therefore,thefairvaluesdisclosedmaynotultimatelybe realizedbytheCompanyiftheassetsweresoldortheliabilitieswere settledwiththirdparties.ThemethodstheCompanyusedtoestimate the fair values presented in the two tables are described more fully belowforeachtypeofassetandliability. Derivatives – TheCompanyusesinterestrateswaps,interest ratecapsandforeigncurrencyderivativestomanageitsinterestrate andforeigncurrencyrisk.Thevaluationoftheseinstrumentsisdeter- minedusingdiscountedcashflowanalysisontheexpectedcashflows ofeachderivative.Thisanalysisreflectsthecontractualtermsofthe derivatives,includingtheperiodtomaturity,andusesobservablemar- ket-basedinputs,includinginterestratecurves,foreignexchangerates, and implied volatilities. The Company incorporates credit valuation adjustments to appropriately reflect both its own non-performance riskandtherespectivecounterparty’snon-performanceriskinthefair value measurements. In adjusting the fair value of its derivative con- tractsfortheeffectofnon-performancerisk,theCompanyhascon- sideredtheimpactofnettingandanyapplicablecreditenhancements, such as collateral postings, thresholds, mutual puts, and guarantees. TheCompanyhasdeterminedthatthesignificantinputsusedtovalue itsderivativesfallwithinLevel2ofthefairvaluehierarchy. Securities – All of the Company’s available-for-sale and impairedheld-to-maturitydebtandequitysecuritiesareactivelytraded and have been valued using quoted market prices. The Company’s traded marketable securities are valued using market quotes, to the extenttheyareavailable,orbrokerquotesthatfallwithinLevel2ofthe fairvaluehierarchy. Impaired loans – The Company’s loans identified as being impairedarenearlyallcollateraldependentloansandareevaluatedfor impairmentbycomparingtheestimatedfairvalueoftheunderlyingcollat- eral,lesscoststosell,tothecarryingvalueofeachloan.Duetothenature of the individual properties collateralizing the Company’s loans, the Companygenerallyusesadiscountedcashflowmethodologythrough internally developed valuation models to estimate the fair value of the collateral.ThisapproachrequirestheCompanytomakesignificantjudg- mentsinrespecttodiscountrates,capitalizationratesandthetimingand amountsofestimatedfuturecashflowsthatareallconsideredLevel3 inputs.Thesecashflowsgenerallyincludepropertyrevenues,lotandunit salepricesandvelocity,operatingcosts,andcostsofcompletion.Inmore limited cases, the Company obtains external “as is” appraisals for loan collateral,generallywhenthirdpartyparticipationsexist,andappraised valuesmaybediscountedwhenrealestatemarketsrapidlydeteriorate. Impaired equity method investments – If the Company deter- minesanequitymethodinvestmentisotherthantemporarilyimpaired it records an impairment charge to adjust the investment to its esti- matedfairmarketvalue.Toestimatethefairvalueofaninvestmentin afundthatinvestsinrealestate,theCompanyestimatesthefairvalue of the individual properties held within the fund using a discounted cashflowmethodologythroughinternallydevelopedvaluationmodels. This approach requires the Company to make significant judgments withrespecttodiscountrates,capitalizationratesandthetimingand amountsofestimatedfuturecashflowsthatareallconsideredLevel3 inputs.Thesecashflowsareprimarilybasedonexpectedfutureleas- ingratesandoperatingcosts. Impaired OREO assets – IftheCompanydeterminesanOREO assetisimpaireditrecordsanimpairmentchargetoadjusttheassetto itsestimatedfairmarketvalue.Duetothenatureoftheindividualprop- ertiesintheOREOportfolio,theCompanyusesadiscountedcashflow methodology through internally developed valuation models to esti- matethefairvalueoftheassets.ThisapproachrequirestheCompany to make significant judgments with respect to discount rates, capi- talizationratesandthetimingandamountsofestimatedfuturecash flowsthatareallconsideredLevel3inputs.Thesecashflowsgenerally includepropertyrevenues,lotandunitsalepricesandvelocity,operat- ingcosts,andcostsofcompletion. Impaired net lease assets held-for-sale – The estimated fair value of impaired net lease assets held-for-sale is determined using observable market information, typically including contracted prices withprospectivepurchasers. Impaired net lease assets – If the Company determines a net lease asset is impaired it records an impairment charge to adjust the assettoitsestimatedfairmarketvalue.Duetothenatureoftheindividual propertiesinthenetleaseportfolio,theCompanygenerallyusesadis- countedcashflowmethodologythroughinternallydevelopedvaluation modelstoestimatethefairvalueoftheassets.Thisapproachrequires the Company to make significant judgments with respect to discount rates,capitalizationratesandthetimingandamountsofestimatedfuture cashflowsthatareallconsideredLevel3inputs.Thesecashflowsare primarilybasedonexpectedfutureleasingratesandoperatingcosts. Loans and other lending investments – TheCompanyestimates the fair value of its performing loans and other lending investments using a discounted cash flow methodology. This method discounts estimatedfuturecashflowsusingratesmanagementdeterminesbest reflect current market interest rates that would be offered for loans withsimilarcharacteristicsandcreditquality. Debt obligations, net – Fordebtobligationstradedinsecond- ary markets, the Company uses market quotes, to the extent they are available to determine fair value. For debt obligations not traded insecondarymarkets,theCompanydeterminesfairvalueusingadis- countedcashflowmethodology,wherebycontractualcashflowsare discountedatratesthatmanagementdeterminesbestreflectcurrent marketinterestratesthatwouldbechargedfordebtwithsimilarchar- acteristicsandcreditquality. Note 17 – Segment Reporting The Company has determined that it has three reportable segmentsbasedonhowmanagementreviewsandmanagesitsbusi- ness. These reportable segments include: Real Estate Lending, Net LeasingandRealEstateInvestment.TheRealEstateLendingsegment includesalloftheCompany’sactivitiesrelatedtoseniorandmezzanine real estate debt and corporate capital investments. The Net Leasing segment includes all of the Company’s activities related to the own- ership and leasing of corporate facilities. The Real Estate Investment segmentincludesalloftheCompany’sactivitiesrelatedtotheopera- tions, repositioning and ultimate disposition of distressed REHI and OREOproperties. 68 - 69 TheCompanyevaluatesperformancebasedonthefollowingfinancialmeasuresforeachsegment($inthousands): 2010 Total revenue (2) Earnings from equity method investments Operating costs Interest expense General and administrative (3) Segment profit (loss) (4) Other significant non-cash items: Provision for loan losses Impairment of assets Depreciation and amortization Capitalized expenditures Total assets (5) 2009 (6) Total revenue (2) Earnings from equity method investments Operating costs Interest expense General and administrative (3) Segment profit (loss) (4) Other significant non-cash items: Provision for loan losses Impairment of assets Depreciation and amortization Capitalized expenditures Total assets (5) 2008 (6) Total revenue (2) Earnings from equity method investments Operating costs Interest expense General and administrative (3) Segment profit (loss) (4) Other significant non-cash items: Provision for loan losses Impairment of assets Depreciation and amortization Capitalized expenditures Total assets (5)(7) Real Estate Lending Net Leasing Real Estate Investment Corporate/ Other (1) Company Total $ 377,844 – (10,107) (192,010) (28,340) $ 147,387 $ 331,487 $ – $ – $ – $ 4,636,777 $ 563,849 – (9,734) (324,558) (37,406) $ 192,151 $ 1,255,357 $ – $ – $ – $ 7,723,280 $ 1,024,907 – (5,219) (464,801) (44,067) $ 510,820 $ 1,029,322 $ 175,257 $ – $ – $10,792,559 $ 171,363 2,522 (15,072) (45,019) (11,149) $ 102,645 $ – $ 4,202 $ 54,216 $ 14,031 $1,915,164 $ 179,317 2,500 (15,942) (44,033) (12,782) $ 109,060 $ – $ 23,259 $ 55,912 $ 14,891 $3,149,783 $ 187,154 2,520 (15,320) (99,874) (14,019) $ 60,461 $ – $ 11,261 $ 52,702 $ 102,892 $3,330,907 $ 23,103 – (64,694) (45,574) (6,727) $ (93,892) $ – $ 19,089 $ 5,378 $ 28,832 $1,594,859 $ 5,822 – (40,866) (18,706) (2,156) $ (55,906) $ – $ 78,564 $ 2,955 $ 11,056 $1,271,506 $ – – (9,288) (11,450) (1,086) $ (21,824) $ – $ 55,633 $ – $ 20,646 $ 245,067 $ 2,941 49,386 (12,971) (33,382) (43,955) $ (37,981) $ 575,251 51,908 (102,844) (315,985) (90,171) $ 118,159 $ – $ (2,770) $ 3,650 $ 18 $1,027,714 $ 331,487 $ 20,521 $ 63,244 $ 42,881 $ 9,174,514 $ 17,210 2,798 (56,736) (26,943) (48,216) $ (111,887) $ 766,198 5,298 (123,278) (414,240) (100,560) $ 133,418 $ – $ 24,765 $ 4,392 $ 703 $ 666,006 $ 1,255,357 $ 126,588 $ 63,259 $ 26,650 $12,810,575 $ 16,983 4,015 (19,539) (42,586) (55,450) $ (96,577) $ 1,229,044 6,535 (49,366) (618,711) (114,622) $ 452,880 $ – $ 92,383 $ 7,930 $ 4,885 $ 928,215 $ 1,029,322 $ 334,534 $ 60,632 $ 128,423 $15,296,748 Explanatory Notes: (1) (2) (3) (4) Corporate/Other represents all corporate level and unallocated items including any intercompany eliminations necessary to reconcile to consolidated Company totals. This caption also includes the Company’s joint venture investments and strategic investments that are not related to any reporting segment, as well as the Company’s timber operations, none of which are considered material separate segments. Total revenue represents all revenue earned during the period related to the assets in each segment. Revenue from the Real Estate Lending segment primarily represents interest income, revenue from the Net Leasing segment primarily represents operating lease income and revenue from Real Estate Investment primarily represents operating revenues from REHI properties. General and administrative excludes stock-based compensation expense of $19.4 million, $23.6 million and $23.5 million for the years ended December 31, 2010, 2009 and 2008, respectively. The following is a reconciliation of segment profit (loss) to income (loss) from continuing operations ($ in thousands): For the years ended December 31, Segment profit (loss) Less: Provision for loan losses Less: Impairment of assets Less: Stock-based compensation expense Less: Depreciation and amortization Add: Gain on early extinguishment of debt, net Add: Gain on sale of joint venture interest Income (loss) from continuing operations 2010 $ 118,159 (331,487) (20,521) (19,355) (63,244) 108,923 – $(207,525) 2009 $ 133,418 (1,255,357) (126,588) (23,592) (63,259) 547,349 – $ (788,029) 2008 $ 452,880 (1,029,322) (334,534) (23,542) (60,632) 393,131 280,219 $ (321,800) (5) (6) (7) Intangible assets included in Net Leasing at December 31, 2010, 2009 and 2008 were $24.5 million, $48.8 million and $58.5 million, respectively. Intangible assets included in Corporate/Other at December 31, 2009 and 2008 were $1.1 million and $2.7 million, respectively. Prior period presentation has been restated to conform with current period presentation. Goodwill included in Net Leasing at December 31, 2008 was $4.2 million. Note 18 – Quarterly Financial Information (Unaudited) ThefollowingtablesetsforththeselectedquarterlyfinancialdatafortheCompany($inthousands,exceptpershareamounts): For the Quarters Ended 2010 (1): Revenue Net income (loss) Earnings per common share data: Net income (loss) attributable to iStar Financial Inc. Basic and diluted earnings per share Weighted average number of common shares–basic and diluted Earnings per HPU share data: Net income (loss) attributable to iStar Financial Inc. Basic and diluted earnings per share Weighted average number of HPU shares–basic and diluted 2009 (2): Revenue Net loss Earnings per common share data: Net loss attributable to iStar Financial Inc. Basic and diluted earnings per share Weighted average number of common shares–basic and diluted Earnings per HPU share data: Net loss attributable to iStar Financial Inc. Basic and diluted earnings per share Weighted average number of HPU shares–basic and diluted December 31, September 30, June 30, March 31, $ 137,107 $ (58,865) $ 134,371 $ (74,632) $ 135,404 $ 229,851 $168,369 $ (16,142) $ (67,050) $ (0.73) 92,319 $ (2,061) $ (137.40) 15 $ (83,531) $ (0.89) 93,370 $ (2,539) $ (169.27) 15 $ 212,275 $ 2.27 93,382 $ 6,452 $ 430.13 15 $ (25,408) $ (0.27) 93,923 $ (768) $ (51.20) 15 $ 168,058 $(153,359) $ 178,214 $(247,442) $ 192,564 $(281,973) $227,362 $ (87,072) $(159,177) $ (1.65) 96,354 $ (4,689) $ (312.60) 15 $(251,308) $ (2.55) 98,674 $ (7,229) $ (481.93) 15 $(284,197) $ (2.85) 99,769 $ (8,085) $ (539.00) 15 $ (93,886) $ (0.89) 105,606 $ (2,523) $ (168.20) 15 Explanatory Notes: (1) (2) During the quarter ended June 30, 2010, the Company recorded gains from discontinued operations of $250.3 million for the sale of a portfolio of 32 net lease assets (see Note 6). During the quarter ended December 31, 2010, the Company recorded provision for loan losses of $54.2 million. During the quarter ended December 31, 2009, the Company recorded provision for loan losses of $216.4 million, impairment of assets of $61.8 million and a net gain on early extin- guishment of debt of $100.4 million. 70 - 71 AftergivingeffecttothenewFacilityandotherrepayments/ redemptions described above, the Company’s future scheduled maturitiesofoutstandinglong-termdebtobligations,netareasfollows ($inthousands): 2011 2012 2013 2014 2015 Thereafter Total principal maturities Performance Graph $ 882,264 2,005,920 1,972,132 1,500,601 105,765 534,075 $7,000,757 The following graph compares the total cumulative share- holder returns on our Common Stock from December 31, 2005 to December 31, 2010 to that of: (1) the Standard & Poor’s 500 Index (the“S&P500”);and(2)theStandard&Poor’s500FinancialsIndex(the “S&P500Financials”). PERFORMANCE GRAPH $144.4 $119.2 $115.8 $122.2 $97.1 $87.0 $100.0 $97.3 $51.0 $77.0 $43.5 $8.5 $9.8 $112.0 $57.1 $29.8 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09 12/31/10 iStar Financial S&P 500 S&P 500 Financials Note 19 – Subsequent Events InJanuary2011,theCompanyfullyredeemedits$312.3mil- lionremainingprincipalamountof10%seniorsecurednotesdueJune 2014.Thisredemptionfullyretiredtheremainingseniorsecurednotes issuedintheCompany’sMay2009exchangeoffer.Inconnectionwith thisredemption,theCompanyexpectstorecordagainonearlyextin- guishment of debt of approximately $109 million in its Consolidated Statement of Operations for the quarter ending March 31, 2011. In addition,theCompanyrepaidthe$107.8millionoutstandingprincipal balanceofitsseniorunsecurednotesdueinMarch2011uponmaturity. InMarch2011,theCompanyenteredintoanew$2.95billion seniorsecuredcreditagreementcomprisedofa$1.50billiontermloan facilitybearinginterestatarateofLIBORplus3.75%andmaturingin June2013(the“TrancheA-1Facility”)anda$1.45billiontermloanfacil- itybearinginterestatarateofLIBORplus5.75%maturinginJune2014 (the“TrancheA-2Facility”),togetherthe“Facility.”Bothtranchesinclude aLIBORfloorof1.25%.ProceedsfromthenewsecuredcreditFacility were used to fully repay the $1.67 billion and $0.9 billion outstanding undertheCompany’sexistingsecuredcreditfacilities,whichweredue tomatureinJune2011andJune2012,respectively.Proceedswere alsousedtorepay$175.0millionoftheCompany’sunsecuredcredit facilitiesdueinJune2011.TheCompanyexpectstousetheremaining proceedstorepayunsecureddebtmaturinginthefirsthalfof2011as wellasforothercorporatepurposes. ThenewsecuredcreditFacilityiscollateralizedbyafirstlien onafixedpoolofassetsconsistingofloans,netleaseassetsandOREO assetswithadesignatedaggregatevalueofapproximately$3.69billion atthetimeofclosing.TheCompanyisrequiredtomaintaincollateral coverageof1.25xoutstandingborrowingsuntilthefinalmaturityofthe newFacility.Proceedsfromprincipalrepaymentsandsalesofcollat- eralwillbeappliedtoamortizethenewFacility.Proceedsinrespectto additionalinvestmentamountsandinterest,rent,leasepaymentsand feeincomewillberetainedbytheCompany. TheTrancheA-1Facilityrequiresthataggregatecumulative amortizationpaymentsofnotlessthan$200.0millionshallbemadeon orbeforeDecember30,2011,notlessthan$450.0milliononorbefore June30,2012,notlessthan$750.0milliononorbeforeDecember31, 2012andnotlessthan$1.50billiononorbeforeJune28,2013.The TrancheA-2Facilitywillbeginamortizingsixmonthsaftertherepay- ment in full of the Tranche A-1 Facility, such that the not less than $150.0millionofcumulativeamortizationpaymentsshallbemadeon orbeforethesixmonthanniversaryofrepaymentoftheTrancheA-1 Facility,withadditionalcumulativeamortizationpaymentsof$150mil- liondueonorbeforeeachsixmonthanniversarythereafteruntilthe TrancheA-2Facilityisfullyrepaid. CommoN stoCk priCe aNd divideNds (uNaudited) TheCompany’sCommonStocktradesontheNewYorkStock Exchange(“NYSE”)underthesymbol“SFI.” ThehighandlowclosingpricespershareofCommonStock aresetforthbelowfortheperiodsindicated. Quarter Ended High Low 2010 December 31, 2010 September 30, 2010 June 30, 2010 March 31, 2010 2009 December 31, 2009 September 30, 2009 June 30, 2009 March 31, 2009 $7.82 $5.22 $7.43 $5.06 $3.08 $3.37 $3.98 $2.99 $3.06 $2.95 $4.46 $2.53 $2.09 $2.04 $2.51 $0.76 OnMarch11,2011,theclosingsalepriceoftheCommonStock asreportedbytheNYSEwas$9.83.TheCompanyhad2,772holdersof recordofCommonStockasofMarch11,2011. At December 31, 2010, the Company had five series of preferred stock outstanding: 8.000% Series D Preferred Stock, 7.875%SeriesEPreferredStock,7.8%SeriesFPreferredStock,7.65% SeriesGPreferredStockand7.50%SeriesIPreferredStock.Eachof theSeriesD,E,F,G,andIpreferredstockispubliclytraded. Dividends The Board of Directors has not established any minimum distribution level. In order to maintain its qualification as a REIT, the Company intends to pay dividends to its shareholders that, on an annualbasis,willrepresentatleast90%ofitstaxableincome(which maynotnecessarilyequalnetincomeascalculatedinaccordancewith GAAP),determinedwithoutregardtothedeductionfordividendspaid and excluding any net capital gains. The Company has recorded net operating losses and may record net operating losses in the future, which may reduce its taxable income in future periods and lower or eliminateentirelytheCompany’sobligationtopaydividendsforsuch periodsinordertomaintainitsREITqualification. Holders of Common Stock, vested High Performance Units andcertainunvestedrestrictedstockunitsandcommonshareequiva- lentswillbeentitledtoreceivedistributionsif,asandwhentheBoard ofDirectorsauthorizesanddeclaresdistributions.However,rightsto distributionsmaybesubordinatedtotherightsofholdersofpreferred stock,whenpreferredstockisissuedandoutstanding.Inaddition,the Company’s new secured credit Facility (see Note 19 of the Notes to ConsolidatedFinancialStatements)permitstheCompanytodistribute 100%ofitsREITtaxableincomeonanannualbasis,forsolongasthe CompanymaintainsitsqualificationasaREIT.Thenewsecuredcredit FacilityrestrictstheCompanyfrompayinganycommondividendsifit ceasestoqualifyasaREIT.Inanyliquidation,dissolutionorwindingup oftheCompany,eachoutstandingshareofCommonStockandHPU shareequivalentwillentitleitsholdertoaproportionateshareofthe assetsthatremainaftertheCompanypaysitsliabilitiesandanyprefer- entialdistributionsowedtopreferredshareholders. TheCompanydidnotdeclareorpaydividendsonitsCommon StockfortheyearsendedDecember31,2010and2009.TheCompany declared and paid dividends aggregating $8.0 million, $11.0 million, $7.8million,$6.1millionand$9.4milliononitsSeriesD,E,F,G,andI preferredstock,respectively,foreachoftheyearsendedDecember31, 2010and2009.Therearenodividendarrearagesonanyofthepre- ferredsharescurrentlyoutstanding. Distributions to shareholders will generally be taxable as ordinary income, although all or a portion of such distributions may bedesignatedbytheCompanyascapitalgainormayconstituteatax- freereturnofcapital.TheCompanyannuallyfurnishestoeachofits shareholdersastatementsettingforththedistributionspaidduringthe precedingyearandtheircharacterizationasordinaryincome,capital gainorreturnofcapital. No assurance can be given as to the amounts or timing of futuredistributions,assuchdistributionsaresubjecttotheCompany’s taxable income after giving effect to its net operating loss carryfor- wards, financial condition, capital requirements, debt covenants, any change in the Company’s intention to maintain its REIT qualification and such other factors as the Company’s Board of Directors deems relevant. In addition, based upon recent guidance announced by the InternalRevenueService,theCompanymayelecttosatisfysomeof its2011REITdistributionrequirements,ifany,throughstockdividends. 72 - 73 CONteNtS Letter from the Chairman Onward Results 1 3 15 t h g i r n o , 1 1 e g a p ; t h g i r m o t t o b , r e v o c k c a B ; t f e l p o t , r e v o c t n o r F – o y a M d e H e o c N i l l r e h p a r g o t o h p , i l u o p a W i i m o c . n o s d d a . w w w i n o s d d A i : n g s e D DiReCtORS AND OFFiCeRS DiReCtORS Jay Sugarman (3) Chairman & Chief Executive Officer, iStar Financial Inc. George R. Puskar (1) (3) Former Chairman & Chief Executive Officer, Equitable Real Estate Investment Management Glenn R. August President, Oak Hill Advisors, LP Robert W. Holman, Jr. (1) (2) Chairman & Chief Executive Officer, National Warehouse Investment Company Robin Josephs (1) (2) (4) Lead Independent Director, iStar Financial Inc. John G. McDonald (3) (4) Stanford Investors Professor, Stanford University Graduate School of Business Dale Anne Reiss (1) (3) Senior Consultant, Global Real Estate Center Global & Americas Director of Real Estate, Ernst & Young, LLP (Retired) Jeffrey A. Weber (2) (4) President, York Capital Management (1) Audit Committee (2) Compensation Committee (3) Investment & Asset Management Committee (4) Nominating & Governance Committee eXeCutiVe OFFiCeRS Jay Sugarman Chairman & Chief Executive Officer Nina B. Matis Chief Legal Officer & Chief Investment Officer David M. DiStaso Chief Financial Officer eXeCutiVe ViCe pReSiDeNtS Steven R. Blomquist Investments Chase S. Curtis Jr. Credit R. Michael Dorsch III Investments Barclay Jones III Investments Michelle MacKay Investments Steve Magee iStar Land Co. Barbara Rubin iStar Asset Services, Inc. Vernon B. Schwartz AutoStar CORpORAte iNFORMAtiON HeADQuARteRS iStar Financial Inc. 1114 Avenue of the Americas New York, NY 10036 tel: 212.930.9400 fax: 212.930.9494 ReGiONAL OFFiCeS 3480 Preston Ridge Road Suite 575 Alpharetta, GA 30005 tel: 678.297.0100 fax: 678.297.0101 800 Boylston Street 33rd Floor Boston, MA 02199 tel: 617.292.3333 fax: 617.423.3322 2727 East Imperial Highway Brea, CA 92821 tel: 714.961.4700 fax: 714.961.4701 525 West Monroe Street 20th Floor, Suite 1900 Chicago, IL 60661 tel: 312.577.8549 fax: 312.612.4162 One Galleria Tower 13355 Noel Road Suite 900 Dallas, TX 75240 tel: 972.506.3131 fax: 972.501.0078 180 Glastonbury Boulevard Suite 201 Glastonbury, CT 06033 tel: 860.815.5900 fax: 860.815.5901 5 Park Plaza Suite 1640 Irvine, CA 92614 tel: 949.567.2400 fax: 949.567.2411 One Sansome Street 30th Floor San Francisco, CA 94104 tel: 415.391.4300 fax: 415.391.6259 2425 Olympic Boulevard Suite 520E Santa Monica, CA 90404 tel: 310.315.7019 fax: 310.315.7017 eMpLOYeeS iNVeStOR iNFORMAtiON SeRViCeS As of April 1, 2011, the Company had 208 employees. iNDepeNDeNt ReGiSteReD puBLiC ACCOuNtiNG FiRM PricewaterhouseCoopers LLP New York, NY ReGiStRAR AND tRANSFeR AGeNt Computershare Trust Company, N.A. P.O. Box 43078 Providence, RI 02940-3078 tel: 800.756.8200 www.computershare.com ANNuAL MeetiNG OF SHAReHOLDeRS June 1, 2011, 9:00 a.m. ET Harvard Club of New York City 35 West 44th Street New York, NY 10036 iStar Financial is a listed company on the New York Stock Exchange and is traded under the ticker “SFI.” The Company has filed all required Annual Chief Executive Officer Certifications with the NYSE. In addition, the Company has filed with the SEC the certifications of the Chief Executive Officer and Chief Financial Officer required under Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002 as exhibits to our most recently filed Annual Report on Form 10-K. For help with questions about the Company, or to receive additional corporate information, please contact: iNVeStOR ReLAtiONS Jason Fooks Investor Relations & Marketing 1114 Avenue of the Americas New York, NY 10036 tel: 212.930.9484 e-mail: investors@istarfinancial.com iStar Financial Website: www.istarfinancial.com O N W A R D | i S t A R F i N A N C i A L 2 0 1 0 A N N u A L R e p O R t iStar Financial 2010 Annual Report