Safehold - 10-Q quarterly report FY

iStar Financial Inc.
Consolidated Statement of Changes in Shareholders’ Equity
(In thousands)
(unaudited)

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

5

iStar Financial Inc.
Consolidated Statements of Cash Flows
(In thousands)
(unaudited)

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

6

iStar Financial Inc.
Notes to Consolidated Financial Statements

Note 1—Business and Organization

Business—iStar Financial Inc. (the “Company”) is a leading publicly-traded finance company focused on the commercial real estate industry. The Company provides custom-tailored financing to high-end private and corporate owners of real estate, including senior and mezzanine real estate debt, senior and mezzanine corporate capital, corporate net lease financing and equity. The Company, which is taxed as a real estate investment trust (“REIT”), seeks to deliver strong dividends and superior risk-adjusted returns on equity to shareholders by providing innovative and value added financing solutions to its customers. The Company’s two primary lines of business are lending and corporate tenant leasing.

The lending business is primarily comprised of senior and mezzanine real estate loans that typically range in size from $20 million to $150 million and have maturities generally ranging from three to ten years. These loans may be either fixed rate (based on the U.S. Treasury rate plus a spread) or variable rate (based on LIBOR plus a spread) and are structured to meet the specific financing needs of the borrowers. The Company also provides senior and mezzanine capital to corporations, particularly those engaged in real estate or real estate related businesses. These financings may be either secured or unsecured, typically range in size from $20 million to $150 million and have maturities generally ranging from three to ten years. As part of the lending business, the Company also acquires whole loans and loan participations which present attractive risk-reward opportunities.

The Company’s corporate tenant leasing business provides capital to corporations and other owners who control facilities leased primarily to single creditworthy customers. The Company’s net leased assets are generally mission critical headquarters or distribution facilities that are subject to long-term leases with public companies, many of which are rated corporate credits, and many of which provide for most expenses at the facility to be paid by the corporate customer on a triple net lease basis. Corporate tenant lease, or CTL, transactions have initial terms generally ranging from 15 to 20 years and typically range in size from $20 million to $150 million.

Organization—The Company began its business in 1993 through private investment funds formed to capitalize on inefficiencies in the real estate finance market. In March 1998, these funds contributed their assets to the Company’s predecessor in exchange for a controlling interest in that company. The Company later acquired its former external advisor in exchange for shares of the Company’s common stock (‘‘Common Stock’’) and converted its organizational form to a Maryland corporation. As part of the conversion to a Maryland corporation, the Company replaced its former dual class common share structure with a single class of Common Stock. The Company’s Common Stock began trading on the New York Stock Exchange on November 4, 1999. Prior to this date, the Company’s Common Stock was traded on the American Stock Exchange. Since that time, the Company has grown through the origination of new lending and leasing transactions, as well as through corporate acquisitions, including the acquisition in 1999 of TriNet Corporate Realty Trust, Inc., the acquisition in 2005 of Falcon Financial Investment Trust and the acquisition in 2005 of a significant non-controlling interest in Oak Hill Advisors, L.P. and affiliates.

Note 2—Basis of Presentation

The accompanying unaudited Consolidated Financial Statements have been prepared in conformity with the instructions to Form 10-Q and Article 10-01 of Regulation S-X for interim financial statements. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles in the United States of America (“GAAP”) for complete financial statements. These unaudited Consolidated Financial Statements and related Notes should be read in conjunction with the Consolidated Financial Statements and related Notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. The Consolidated Financial Statements include the

7

iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)

Note 2—Basis of Presentation(Continued)

accounts of the Company, its qualified REIT subsidiaries, its majority-owned and controlled partnerships and other entities that are consolidated under the provisions of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities,” an interpretation of ARB 51 (“FIN 46R”) (see Note 6). All significant intercompany balances and transactions have been eliminated in consolidation. Certain investments in joint ventures or other entities which the Company does not control are accounted for under the equity method (see Note 6 and Note 7).

In the opinion of management, the accompanying Consolidated Financial Statements contain all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the Company’s consolidated financial position at June 30, 2007 and December 31, 2006 and the results of its operations for the three and six months ended June 30, 2007 and 2006, respectively, and its changes in shareholders’ equity and its cash flows for the six months ended June 30, 2007. Such operating results may not be indicative of the expected results for any other interim periods or the entire year.

As of June 30, 2007, the Company’s significant accounting policies, which are detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, have not changed materially.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Certain prior year amounts have been reclassified in the Consolidated Financial Statements and the related notes to conform to the 2007 presentation.

Note 3—Recent Accounting Pronouncements

In February 2007, the FASB released Statement of Financial Accounting Standards No. 159 (“SFAS No. 159”), “The Fair Value Option for Financial Assets and Liabilities Including an Amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure certain financial assets and liabilities at fair value and is effective for the first fiscal year beginning after November 15, 2007. The Company will adopt SFAS No. 159 on January 1, 2008, as required, and management is still evaluating the impact on the Company’s Consolidated Financial Statements.

In September 2006, the FASB released Statement of Financial Accounting Standards No. 157 (“SFAS No. 157”), “Fair Value Measurements.” This statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 clarifies the exchange price notion in the fair value definition to mean the price that would be received to sell the asset or paid to transfer the liability (an exit price), not the price that would be paid to acquire the asset or received to assume the liability (an entry price). This statement also clarifies that market participant assumptions should include assumptions about risk, should include assumptions about the effect of a restriction on the sale or use of an asset and should reflect its nonperformance risk (the risk that the obligation will not be fulfilled). Nonperformance risk should include the reporting entity’s credit risk. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company will adopt SFAS No. 157 on January 1, 2008, as required, and management is still evaluating the impact on the Company’s Consolidated Financial Statements.

In July 2006, the FASB released Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement 109.” FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax

8

iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)

Note 3—Recent Accounting Pronouncements (Continued)

positions that the company has taken or expects to take on a tax return. A tax benefit from an uncertain position may be recognized only if it is “more likely than not” that the position is sustainable, based on its technical merits. The tax benefit is the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 on January 1, 2007, as required. As a result of the implementation of FIN 48, the Company did not have any unrecognized tax benefits or any additional tax liabilities as of January 1, 2007 or as of June 30, 2007. The Company’s policy is to recognize interest expense and penalties related to uncertain tax positions, if any, as income tax expense, which is included in “General and administrative” costs on the Company’s Consolidated Statements of Operations.

In March 2006, the FASB released Statement of Financial Accounting Standards No. 156 (“SFAS No. 156”), “Accounting for Servicing of Financial Assets.” SFAS No. 156 was issued to simplify the accounting for servicing rights and to reduce the volatility that results from the use of different measurement attributes for servicing rights and the related financial instruments used to economically hedge risks associated with those servicing rights. SFAS No. 156 modifies the accounting for servicing rights by: (1) clarifying when a separate asset or servicing liability should be recognized; (2) requiring a separately recognized servicing asset or servicing liability to be measured at fair value; (3) allowing entities to subsequently measure servicing rights either at fair value or under the amortization method for each class of a separately recognized servicing asset or servicing liability; (4) permitting a one-time reclassification of available-for-sale securities to trading securities; and (5) requiring separate presentation of servicing assets and servicing liabilities subsequently measured at fair value. SFAS No. 156 is effective in annual periods beginning after September 15, 2006. The Company adopted SFAS No. 156 on January 1, 2007, as required, and it did not have a significant impact on the Company’s Consolidated Financial Statements.

In February 2006, the FASB released Statement of Financial Accounting Standards No. 155 (“SFAS No. 155”), “Accounting for Certain Hybrid Financial Instruments.” The key provisions of SFAS No. 155 include: (1) a fair value measurement option for certain hybrid financial instruments that contain an embedded derivative that would otherwise require bifurcation; (2) clarification that only the simplest separations of interest payments and principal payments qualify for the exception afforded to interest-only strips (IOs) and principal-only strips (POs) from derivative accounting under paragraph 14 of Statement of Financial Accounting Standards No. 133 (“SFAS No. 133”), “Accounting for Derivative Instruments and Hedging Activities,” (thereby narrowing such exception); (3) a requirement that beneficial interests in securitized financial assets be analyzed to determine whether they are freestanding derivatives or whether they are hybrid instruments that contain embedded derivatives requiring bifurcation; (4) clarification that concentrations of credit risk in the form of subordination are not embedded derivatives; and (5) elimination of the prohibition on a qualifying special-purpose entity (QSPE) holding passive derivative financial instruments that pertain to beneficial interests that are or contain a derivative financial instrument. SFAS No. 155 is effective for annual periods beginning after September 15, 2006. The Company adopted SFAS No. 155 on January 1, 2007, as required, and it did not have a significant impact on the Company’s Consolidated Financial Statements.

9

iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)

Note 4—Loans and Other Lending Investments (Continued)

During the six months ended June 30, 2007 and 2006, respectively, the Company originated or acquired an aggregate of approximately $1.65 billion and $1.32 billion in loans and other lending investments, funded $765.3 million and $317.0 million under existing loan commitments, and received principal repayments of $1.39 billion and $971.1 million.

As of June 30, 2007, the Company had 97 loans with unfunded commitments. The total unfunded commitment amount was approximately $3.43 billion, of which $3.41 billion was non-discretionary.

The Company reflected provisions for loan losses of $5.0 million and $2.0 million in its results of operations during the three months ended June 30, 2007 and 2006, respectively, and $10.0 million and $3.0 million during the six months ended June 30, 2007 and 2006. These provisions represent increases in loan loss reserves based on management’s evaluation of general market conditions, the Company’s internal risk management policies and credit risk ratings system, industry loss experience, the likelihood of delinquencies or defaults, the credit quality of the underlying collateral and changes in the size of the loan portfolio. The Company does not have any specific reserves identified in accordance with Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan.” During the year ended December 31, 2006, the Company recorded total charge-offs of $8.7 million, related to three separate loans. No additional charge-offs have been recorded as of June 30, 2007.

In April 2007, under a consensual agreement with the borrower, the Company received title to property that served as collateral for a senior mortgage loan with a carrying value of $5.6 million. The loan was placed on NPL status in the fourth quarter of 2006, at which time, the Company assessed the loan for impairment and took a $3.0 million charge-off to write the loan down to the estimated fair value of the collateral. Upon receiving title to the property, the Company determined that the carrying value of the loan approximated the net recoverable value of the property and no further impairment or gain was recorded as a result of the transaction. The Company determined it will dispose of the property and has recorded its carrying value in “Assets held for sale,” in the Company’s Consolidated Balance Sheets.

In March 2007, under a consensual agreement with the borrower, the Company received title to property that served as the sole collateral for a senior mortgage loan with a carrying value of $157.0 million. The Company intends to hold the asset for use and has recorded the fair value of the property in “Corporate tenant lease assets, net” on the Company’s Consolidated Balance Sheet (see Note 5 for further detail). The Company determined that the fair value of the property and other net assets received approximated the net carrying value of the loan and no impairment or gain was recorded as a result of the transaction. In addition, the Company determined that a portion of the fair value of the building was attributable to intangible assets that were separately recorded in “Other investments,” on the Company’s Consolidated Balance Sheet (see Note 7 for further detail).

Changes in the Company’s reserve for loan losses were as follows (in thousands):

11

iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)

Note 4—Loans and Other Lending Investments (Continued)

The carrying value of Other Lending Investment-Securities, as of June 30, 2007 includes $586.9 million of held to maturity investments with an aggregate fair value of $576.6 million and gross unrealized gains and losses of $27.2 million and $37.5 million, respectively. The carrying value also includes $3.4 million of available-for-sale securities recorded at fair value with an unrealized loss of $0.1 million recorded in accumulated other comprehensive income.

Note 5—Corporate Tenant Lease Assets

During the six months ended June 30, 2007 and 2006, respectively, the Company acquired an aggregate of approximately $168.7 million and $17.2 million in CTL assets and disposed of CTL assets for net proceeds of approximately $64.7 million and $21.9 million. In addition, in March 2007, the Company received title to property with a fair value of $156.8 million that served as collateral for a senior mortgage loan. The Company allocated $120.4 million of this fair value to CTL assets and the remainder was allocated to CTL intangibles (see Note 4 and Note 7 for further discussion). As of June 30, 2007 and December 31, 2006, the Company had unamortized intangible assets related to CTL purchases of approximately $74.8 million and $41.4 million, respectively, and included these in “Other investments” on the Company’s Consolidated Balance Sheets.

During the three months ended June 30, 2007, the Company sold four CTL assets for net proceeds of approximately $29.8 million and realized gains of approximately $5.4 million. During the three months ended June 30, 2006, the Company sold one CTL asset for net proceeds of $12.8 million and realized a gain of approximately $2.4 million. During the six months ended June 30, 2007, the Company disposed of six CTL assets for net proceeds of $64.7 million and recognized gains of approximately $6.8 million. During the six months ended June 30, 2006, the Company disposed of three CTL assets for net proceeds of $21.9 million and recognized gains of approximately $4.5 million.

The Company’s investments in CTL assets, at cost, were as follows (in thousands):

Under certain leases, the Company receives reimbursements from customers for certain facility operating expenses including common area costs, insurance and real estate taxes. Customer expense reimbursements for the three months ended June 30, 2007 and 2006 were approximately $9.4 million and $6.5 million, respectively, and $16.3 million and $13.2 million for the six months ended June 30, 2007 and 2006, respectively, and are included as a reduction of “Operating costs—corporate tenant lease assets” on the Company’s Consolidated Statements of Operations.

The Company is subject to expansion option agreements with three existing customers which could require the Company to fund and to construct up to 171,000 square feet of additional adjacent space on which the Company would receive additional operating lease income under the terms of the option agreements. In addition, upon exercise of such expansion option agreements, the corporate customers

12

iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)

Note 5—Corporate Tenant Lease Assets (Continued)

would be required to simultaneously extend their existing lease terms for additional periods ranging from six to ten years.

As of June 30, 2007, the Company had $36.8 million of non-discretionary unfunded commitments related to seven CTL investments. These commitments generally fall into two categories: (1) pre-approved capital improvement projects; and (2) new or additional construction costs. Upon completion of the improvements or construction, the Company will receive additional operating lease income from the customers. In addition, the Company had $15.6 million of non-discretionary unfunded commitments related to 15 existing customers in the form of tenant improvements which were negotiated between the Company and the customers at the commencement of the leases.

The Company capitalized interest on build-to-suit CTL assets of approximately $0.5 million for the three months ended June 30, 2007 and 2006, and $1.2 million and $0.8 million for the six months ended June 30, 2007 and 2006, respectively.

As of June 30, 2007, there were four CTL assets with an aggregate book value of $10.4 million classified as “Assets held for sale” on the Company’s Consolidated Balance Sheet. The Company sold one facility with a book value of $1.7 million on July 9, 2007 for net proceeds of approximately $2.8 million and realized a gain of approximately $1.1 million.

On April 13, 2006, the Company signed a lease termination agreement with a customer that occupied 12 facilities that were subject to separate cross-defaulted leases. Due to the termination, the Company cashed a $20.0 million letter of credit from the tenant and allocated it among each of the leases as a lease termination fee. Upon termination, the Company initially determined it would sell six of the facilities with terminated leases and designated those facilities as “Assets held for sale” on the Company’s Consolidated Balance Sheets as of June 30, 2006. In addition, the Company determined that the six facilities held for sale were impaired and recorded a $7.6 million charge.

The Company subsequently reclassified three of the facilities to “Corporate tenant lease assets, net” on the Company’s Consolidated Balance Sheets after it was determined they would not be sold. The operating results of the three facilities subsequently moved out of held for sale are presented within income from continuing operations, including an impairment charge of $4.9 million in “Operating costs—corporate tenant lease assets,” and termination fees of $4.0 million in “Other income,” on the Company’s Consolidated Statements of Operations for the three and six months ended June 30, 2006.

The operating results of three facilities still held for sale and one facility that was sold, including an impairment charge of $2.7 million and a net termination fee of $4.7 million, are included in “Income from discontinued operations” on the Company’s Consolidated Statements of Operations for the three and six months ended June 30, 2006.

Note 6—Joint Ventures and Minority Interest

Investments in unconsolidated joint ventures—Income or loss generated from the Company’s joint venture investments is included in “Equity in (loss) earnings from joint ventures” on the Company’s Consolidated Statements of Operations.

The Company has a 50% investment in Corporate Technology Centre Associates, LLC (“CTC”), whose external member is Corporate Technology Centre Partners, LLC. The Company’s carrying value in

13

iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)

Note 6—Joint Ventures and Minority Interest (Continued)

this joint venture at June 30, 2007 was $4.5 million. The Company accounts for this investment under the equity method because the Company’s joint venture partner has certain participating rights that give it shared control over the joint venture.

The Company has 47.5% investments in Oak Hill Advisors, L.P. and Oak Hill Credit Alpha MGP, 48.1% investments in OHSF GP Partners II LLC and OHSF GP Partners, LLC, and a 45.5% investment in Oak Hill Credit Opportunities MGP, LLC (collectively, “Oak Hill”). The Company’s carrying value in these ventures at June 30, 2007 was $186.9 million. The Company has determined that all of these entities are variable interest entities and that an external member is the primary beneficiary. As such, the Company accounts for these ventures under the equity method. Upon acquisition of the interests in Oak Hill there was a difference between the Company’s book value of the equity investments and the underlying equity in the net assets of Oak Hill of approximately $200.2 million. The Company allocated this value to identifiable intangible assets of approximately $81.8 million and goodwill of $118.4 million. As of June 30, 2007, the unamortized balance related to intangible assets for these investments was approximately $61.5 million.

The Company, through its majority owned subsidiary TimberStar Operating Partnership, L.P. (“TimberStar”), has a 46.7% investment in TimberStar Southwest Holdco LLC (“TimberStar Southwest”). The Company’s carrying value in this joint venture at June 30, 2007 was $164.8 million. The joint venture’s carrying value for the timberlands owned at June 30, 2007 was $1.09 billion. The joint venture had total assets of $1.96 billion and total liabilities of $1.62 billion as of June 30, 2007 and a net loss of $18.1 million for the period ended June 30, 2007. Included in the liabilities is $1.60 billion of debt that is non-recourse to the Company. The Company accounts for this investment under the equity method because the Company’s joint venture partners have certain participating rights giving them shared control over the venture.

In June of 2007, the Company, through its Moor Park consolidated subsidiary (see minority interest below), closed on a 33% investment in Moor Park Newday Holdings Luxembourg S.a.r.l. (“Newday”). The Company’s carrying value in this venture at June 30, 2007 was $0.5 million. In addition to the equity, the Company made two loans to the joint venture totaling $36.2 million. These loans are recorded in “Other Investments” on the Company’s Consolidated Balance Sheets. The joint venture was created for a sale-leaseback acquisition of hotels in Germany and Holland. The Company has determined that this entity is a variable interest entity and that an external member is the primary beneficiary. As such, the Company accounts for this investment under the equity method.

During the three months ended June 30, 2007, the Company also invested in two new joint ventures which it accounts for under the equity method. The Company’s carrying value in these ventures is $35.2 million as of June 30, 2007. In connection with one of these ventures, the Company has committed to funding an additional $85.0 million as of June 30, 2007.

Minority Interest—Income or loss allocable to external partners in consolidated entities is included in “Minority interest in consolidated entities” on the Company’s Consolidated Statements of Operations.

In April 2007, the Company closed on a €100 million commitment in Moor Park Real Estate Partners II, L.P. Incorporated (“Moor Park”). Moor Park is a fund, managed by Moor Park Capital Partners LLP, that was created to invest in pan-European sale-leaseback, property company/operating company and other structured real estate transactions as a 33% owner along-side another fund. The Company determined that Moor Park is a variable interest entity and that the Company is the primary beneficiary,

14

iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)

Note 6—Joint Ventures and Minority Interest (Continued)

due to it owning 94% of the fund as of June 30, 2007. As such, the Company consolidates this entity for financial statement purposes and records the minority interest of the external partner in “Minority interest in consolidated entities” on the Company’s Consolidated Balance Sheets.

As of June 30, 2007, the Company consolidates nine entities in which it either holds a majority interest or where it is a primary beneficiary under FIN 46R, and records the minority interest of the external partner(s) in “Minority interest in consolidated entities” on the Company’s Consolidated Balance Sheets.

Note 7—Other Investments

Other investments consist of the following items (in thousands):

In March 2007, the Company received title to property that served as collateral for a senior mortgage loan and recorded CTL intangibles of approximately $36.4 million related to this property (see Note 4 for further detail).

As of June 30, 2007, the Company has $269.5 million invested in 32 separate real estate related funds or other strategic investment opportunities within niche markets. Of these 32 investments, 17 or $143.9 million, are accounted for under the cost method. The remaining 15 investments, totaling $125.6 million, are accounted for under the equity method. As of June 30, 2007, the Company had $43.2 million of non-discretionary unfunded commitments related to eight strategic investments.

Note 8—Other Assets and Other Liabilities

Deferred expenses and other assets consist of the following items (in thousands):

15

iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)

Note 8—Other Assets and Other Liabilities (Continued)

Accounts payable, accrued expenses and other liabilities consist of the following items (in thousands):

16

iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)

Note 9—Debt Obligations (Continued)

As of June 30, 2007 and December 31, 2006, the Company has debt obligations under various arrangements with financial institutions as follows (in thousands):

17

iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)

Note 9—Debt Obligations (Continued)

Explanatory Notes:

(1)              All interest rates and maturity dates are for debt outstanding as of June 30, 2007. Some variable-rate debt obligations are based on 30-day LIBOR and reprice monthly. Foreign variable-rate debt obligations are based on 30-day UK LIBOR for British pound borrowing, 30-day EURIBOR for euro borrowing and 30-day Canadian LIBOR for Canadian dollar borrowing. The 30-day LIBOR rate on June 30, 2007 was 5.32%. The 30-day UK LIBOR, EURIBOR and Canadian LIBOR rates on June 30, 2007 were 5.92%, 4.12% and 4.48%, respectively. Other variable-rate debt obligations are based on 90-day LIBOR and reprice every three months. The 90-day LIBOR rate on June 30, 2007 was 5.36%.

(2)              This facility has an unused commitment fee of 0.25% on any undrawn amounts.

(3)              Maturity date reflects one-year “term-out” extension at the Company’s option.

(4)              As of June 30, 2007, the line of credit included foreign borrowings of £126.5 million, €309.5 million, and CAD 24.2 million. Amounts in the table have been converted to U.S. dollars based on exchange rates in effect at June 30, 2007.

(5)              This facility has an annual commitment fee of 0.125%.

(6)              On June 26, 2007, the Company closed on an additional unsecured revolving credit facility with a maximum capacity of $1.20 billion.

(7)              On March 9, 2007, the Company issued $300 million of 5.5% Senior Notes due 2012, $250 million of 5.85% Senior Notes due 2017 and $500 million of three-month LIBOR + 0.35% Senior Notes due 2010.

The Company’s primary source of short-term funds is an aggregate of $3.40 billion of available credit under its two committed unsecured revolving credit facilities, which includes the existing $2.20 billion facility, maturing in June 2011, as well as the new $1.20 billion facility, maturing in June 2012, entered into during the second quarter, as described further below.  As of June 30, 2007, there was approximately $2.05 billion which was immediately available to draw under these facilities at the Company’s discretion.  Both facilities remain fully available throughout their respective terms so long as the Company complies with certain financial covenants, all of which the Company was in compliance with as of June 30, 2007.  In addition, the company has one $500.0 million secured revolving credit facility for which availability is based on percentage borrowing base calculations.

On June 26, 2007, the Company completed an unsecured revolving credit facility with leading financial institutions having a maximum capacity of $1.20 billion. Commitments under this facility will mature on June 26, 2012. Borrowings under this credit agreement, which may be made in multiple currencies, will bear interest at a floating rate based upon one of several base rates which will vary depending upon the currency of the borrowing, plus a margin which adjusts upward or downward based upon the Company’s corporate credit rating. Non-US dollar borrowings under the facility will be initially guaranteed by subsidiaries of the Company that hold exclusively foreign assets. As of June 30, 2007, there were no outstanding borrowings under this facility and all $1.20 billion was immediately available to be drawn at the Company’s discretion.

On June 26, 2007, the Company also amended and restated its $2.20 billion revolving credit agreement to conform various covenants and provisions to those in the new $1.20 billion revolving credit agreement. Non-US dollar borrowings under the amended and restated $2.20 billion revolving credit agreement will be initially guaranteed by subsidiaries of the Company that hold exclusively foreign assets.

Also on June 26, 2007, the Company closed on a $2.0 billion short-term interim financing facility which will be used to fund a portion of the costs for the Company’s acquisition of the commercial real estate lending business and existing portfolio of Fremont General Corporation (see Note 17 for further detail). The company had no borrowings under this facility as of June 30, 2007.

The Company’s debt obligations contain covenants that are both financial and non-financial in nature. Significant financial covenants include limitations on the Company’s ability to incur indebtedness beyond specified levels and a requirement to maintain specified ratios of unsecured indebtedness compared to

18

iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)

Note 9—Debt Obligations (Continued)

unencumbered assets. Based on the Company’s current credit ratings, the financial covenants in some series of the Company’s publicly held debt securities are not operative.

On January 9, 2007, in connection with a consent solicitation of the holders of the respective notes, the Company amended certain covenants in its 7% Senior Notes due 2008, 4.875% Senior Notes due 2009, 6% Senior Notes due 2010, 5.125% Senior Notes due 2011, 6.5% Senior Notes due 2013, and 5.7% Senior Notes due 2014 (collectively, the “Modified Notes”). Holders of approximately 95.43% of the aggregate principal amount of the Modified Notes consented to the solicitation. The purpose of the amendments was to conform most of the covenants to the covenants contained in the indentures governing the senior notes issued by the Company since it achieved an investment grade rating from S&P, Moody’s and Fitch. In connection with the consent solicitation the Company paid an aggregate fee of $6.5 million to the consenting note holders, which will be amortized into interest expense over the remaining term of the Modified Notes. In addition, the Company incurred advisory and professional fees aggregating $2.4 million, which were recorded as expenses and included in “General and administrative” on the Company’s Consolidated Statement of Operations for the six months ended June 30, 2007.

Significant non-financial covenants include a requirement in some series of its publicly-held debt securities that the Company offer to repurchase those securities at a premium if the Company undergoes a change of control. As of June 30, 2007, the Company believes it is in compliance with all financial and non-financial covenants on its debt obligations.

Capital Markets Activity—During the six months ended June 30, 2007, the Company issued $300 million and $250 million aggregate principal amounts of fixed-rate Senior Notes bearing interest at annual rates of 5.5% and 5.85% and maturing in 2012 and 2017, respectively, and $500 million of variable-rate Senior Notes bearing interest at three-month LIBOR + 0.35% maturing in 2010. The Company primarily used the proceeds from the issuance of these securities to repay outstanding indebtedness under its unsecured revolving credit facility. In connection with this issuance, the Company settled forward starting interest rate swap agreements with notional amounts totaling $200 million and ten-year terms matching that of the $250 million Senior Notes due in 2017. The Company also entered into interest rate swap agreements to swap the fixed interest rate on the $300 million Senior Notes due in 2012 for a variable interest rate (see Note 11 for further detail on all hedging activity). In addition, the Company’s $200 million of LIBOR + 1.25% Senior Notes matured in March 2007.

Other Financing Activity—On August 1, 2007, the Company’s term financing that was collateralized by corporate bonds matured and was extended for one month to September 4, 2007 and the rate on the loan was increased to LIBOR + 0.55% to 0.85% from LIBOR + 0.22% to 0.65%. The carrying value of corporate bonds securing the borrowing totaled $139.8 million on August 1, 2007.

19

iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)

Note 9—Debt Obligations (Continued)

As of June 30, 2007, future scheduled maturities of outstanding long-term debt obligations are as follows (in thousands)(1):

Explanatory Note:

(1)    Assumes exercise of extensions to the extent such extensions are at the Company’s option.

Note 10—Shareholders’ Equity

DRIP/Stock Purchase Plan—During the three months ended June 30, 2007 and 2006, the Company issued a total of approximately 12,400 and 19,000 shares of its Common Stock, respectively, and during the six months ended June 30, 2007 and 2006, the Company issued a total of approximately 19,800 and 31,000 shares of its Common Stock, respectively, through the dividend reinvestment and direct stock purchase plans. Net proceeds during the three months ended June 30, 2007 and 2006 were approximately $0.6 million and $0.7 million, respectively, and $0.9 million and $1.2 million during the six months ended June 30, 2007 and 2006, respectively. There are approximately 2.1 million shares available for issuance under the plan as of June 30, 2007.

Stock Repurchase Program—The Company did not repurchase any shares under the stock repurchase program during the six months ended June 30, 2007 and 2006. Subsequent to June 30, 2007, the Company repurchased 300,000 of its outstanding Common stock for $10.0 million at an average cost per share of $33.47.

Note 11—Risk Management and Derivatives

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

20

iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)

Note 11—Risk Management and Derivatives (Continued)

Use of derivative financial instruments—As of June 30, 2007, the Company has forward-starting interest rate swaps to hedge variability in cash flows on $250.0 million of debt forecasted to be issued in 2008.  The Company also has interest rate swaps that hedge the change in fair value associated with $1.25 billion of existing fixed-rate debt.  The effect of these hedges is reflected on the Company’s Consolidated Balance Sheet as a $34.3 million adjustment to the hedged debt obligations.  The Company also has a foreign currency derivative to hedge the exposure to foreign exchange rate movements related to a loan originated in Swedish Krona.  This derivative was not designated as a hedge under SFAS No. 133, therefore, changes in fair value are recorded in the Company’s Consolidated Statements of Operations.

The following table represents the notional principal amounts and fair values of interest rate swaps by class (in thousands):

The following table presents the Company’s foreign currency derivatives outstanding as of June 30, 2007 (in thousands):

During the six months ended June 30, 2007, the Company settled three forward starting interest rate swap agreements, which were designated as cash-flow hedges, with notional amounts totaling $200 million, ten-year terms and rates from 4.740% to 4.745% in connection with the Company’s issuance of $250 million of Senior Notes due in 2017. The $4.5 million settlement value received for these forward starting swaps is being amortized as a reduction to “Interest expense” on the Company’s Consolidated Statements of Operations through the maturity of the Senior Notes due in 2017. Additionally, the Company entered into interest rate swap agreements, designated as fair-value hedges, with notional amounts totaling $300 million and variable interest rates that reset quarterly based on three-month LIBOR. These swap agreements exchanged the 5.5% fixed-rate interest payments on the Company’s $300 million Senior Notes due in 2012 for variable-rate interest payments based on three-month LIBOR + 0.5365%.

At June 30, 2007, derivatives with a fair value of $12.3 million were included in other assets and derivatives with a fair value of $34.3 million were included in other liabilities.

Credit risk concentrations—Concentrations of credit risks arise when a number of borrowers or customers related to the Company’s investments are engaged in similar business activities, or activities in the same geographic region, or have similar economic features that would cause their ability to meet

21

iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)

Note 11—Risk Management and Derivatives (Continued)

contractual obligations, including those to the Company, to be similarly affected by changes in economic conditions. The Company regularly monitors various segments of its portfolio to assess potential concentrations of credit risks. Management believes the current portfolio is reasonably well diversified and does not contain any unusual concentration of credit risks.

Substantially all of the Company’s CTL assets (including those held by joint ventures) and loans and other lending investments are collateralized by facilities located in the United States, with California (14.4%) and Florida (10.4%) representing the only significant concentration (greater than 10.0%) as of June 30, 2007. The Company’s investments also contain significant concentrations in the following asset types as of June 30, 2007: apartment/residential (21.7%), office-CTL (14.5%), retail (13.0%) and industrial/R&D (11.1%).

The Company underwrites the credit of prospective borrowers and customers and often requires them to provide some form of credit support such as corporate guarantees, letters of credit and/or cash security deposits. Although the Company’s loans and other lending investments and corporate customer lease assets are geographically diverse and the borrowers and customers operate in a variety of industries, to the extent the Company has a significant concentration of interest or operating lease revenues from any single borrower or customer, the inability of that borrower or customer to make its payment could have an adverse effect on the Company.

Note 12—Stock-Based Compensation Plans and Employee Benefits

The Company’s 2006 Long-Term Incentive Plan (the “Plan”) is designed to provide equity-based incentive compensation for officers, key employees, directors, consultants and advisers of the Company. This Plan was effective May 31, 2006 and replaces the original 1996 Long-Term Incentive Plan. At June 30, 2007, options to purchase approximately 1.0 million shares of Common Stock were outstanding and approximately 774,000 shares of restricted stock were outstanding. Many of these options and restricted stock units were issued under the original 1996 Long-Term Incentive Plan and, therefore, a total of approximately 4.0 million shares remain available for awards under the Plan as of June 30, 2007. The Company recorded $3.9 million and $1.7 million of stock based compensation expense in “General and administrative” costs on the Company’s Consolidated Statements of Operations for the three months ended June 30, 2007 and 2006, respectively, and $8.3 million and $3.0 million for the six months ended June 30, 2007 and 2006, respectively.

Changes in options outstanding during the six months ended June 30, 2007, are as follows (shares and aggregate intrinsic value in thousands, except for weighted average strike price):

22

iStar Financial Inc.
Notes to Consolidated Financial Statements (Continued)

Note 12—Stock-Based Compensation Plans and Employee Benefits (Continued)

The following table summarizes information concerning outstanding and exercisable options as of June 30, 2007 (in thousands):