Edgar Filing: ISTAR FINANCIAL INC

The information in this prospectus supplement and the accompanying prospectus is
not complete and may be changed. This prospectus supplement and the accompanying
prospectus are not an offer to sell these securities and are not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.

As Filed Pursuant to Rule 424(b)(3)
Reg No. 333-32946
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED SEPTEMBER 6, 2001

P R O S P E C T U S____S U P P L E M E N T
(TO PROSPECTUS DATED SEPTEMBER 6, 2001)

15,000,000 SHARES

[LOGO]

COMMON STOCK
-------------

All of the shares of iStar Financial common stock are being offered by the
selling stockholders identified in this prospectus supplement. iStar Financial
will not receive any of the proceeds from the offering.

Our common stock trades on the New York Stock Exchange under the symbol
"SFI." The last reported sale price of our common stock on September 5, 2001 was
$26.99 per share.

INVESTING IN OUR COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE RISK
FACTORS SECTION BEGINNING ON PAGE S-8 OF THIS PROSPECTUS SUPPLEMENT AND
PAGE FOUR OF THE ACCOMPANYING PROSPECTUS.

----------------

PER SHARE TOTAL
--------- -----

Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds to selling stockholders............................ $ $

The underwriters may also purchase up to an additional 2,250,000 shares from
the selling stockholders at the public offering price, less the underwriting
discount, within 30 days from the date of this prospectus supplement to cover
overallotments.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus supplement or the accompanying
prospectus. Any representation to the contrary is a criminal offense.

The common stock will be ready for delivery on or about September , 2001.

------------------

JOINT LEAD MANAGERS

MERRILL LYNCH & CO. LEHMAN BROTHERS
SOLE BOOK-RUNNING MANAGER

------------------

BANC OF AMERICA SECURITIES LLC

BEAR, STEARNS & CO. INC.

SALOMON SMITH BARNEY

UBS WARBURG

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The date of this prospectus supplement is September , 2001.

TABLE OF CONTENTS

PAGE
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PROSPECTUS SUPPLEMENT

Forward-Looking Statements............ ii
Summary............................... S-1
Risk Factors.......................... S-8
Use of Proceeds....................... S-9
Selected Financial Data............... S-10
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... S-12
iStar Financial Inc................... S-22
Our Strategy.......................... S-31
Common Stock Price and Dividend
Performance......................... S-39
Management............................ S-40
Selling Stockholders.................. S-46
Federal Income Tax Consequences....... S-47
Underwriting.......................... S-49
Legal Matters......................... S-51
Experts............................... S-51
Financial Information................. F-1

PAGE
--------

PROSPECTUS

Where You Can Find More Information... 2
Incorporation of Certain Documents by
Reference........................... 2
Forward-Looking Statements............ 3
The Company........................... 4
Risk Factors.......................... 4
Use of Proceeds....................... 8
Price Range of Shares and
Distributions....................... 9
Participating Securityholders......... 10
Certain Relationships Between the
Company and the Participating
Securityholders..................... 13
Plan of Distribution.................. 14
Description of Securities to be
Registered.......................... 15
Federal Income Tax Considerations..... 17
Legal Matters......................... 31
Experts............................... 31

------------------------

You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not, and the underwriters have not, authorized any other person to provide you
with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus supplement, the accompanying
prospectus and the documents incorporated by reference is accurate only as of
their respective dates. Our business, financial condition, results of operations
and prospects may have changed since those dates.

FORWARD-LOOKING STATEMENTS

We make statements in this prospectus supplement, the accompanying
prospectus and the documents we incorporate by reference that are considered
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, which are
usually identified by the use of words such as "will," "anticipates,"
"believes," "estimates," "expects," "projects," "plans," "intends," "should" or
similar expressions. We intend these forward-looking statements to be covered by
the safe harbor provisions for forward-looking statements contained in the
Private Securities Reform Act of 1995 and are including this statement for
purposes of complying with those safe harbor provisions. These forward-looking
statements reflect our current views about our plans, strategies and prospects,
which are based on the information currently available to us and on assumptions
we have made. Although we believe that our plans, intentions and expectations as
reflected in or suggested by those forward-looking statements are reasonable, we
can give no assurance that the plans, intentions or expectations will be
achieved. We have discussed in this prospectus supplement and the accompanying
prospectus some important risks, uncertainties and contingencies which could
cause our actual results, performance or achievements to be materially different
from the forward-looking statements we make in these documents.

We assume no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise. In
evaluating forward-looking statements, you should consider these risks and
uncertainties, together with the other risks described from time to time in our
reports and documents filed with the SEC, and you should not place undue
reliance on those statements.

SUMMARY

THIS SUMMARY MAY NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO
YOU. YOU SHOULD READ THE ENTIRE PROSPECTUS SUPPLEMENT AND ACCOMPANYING
PROSPECTUS, AS WELL AS THE DOCUMENTS INCORPORATED BY REFERENCE IN THEM, BEFORE
MAKING AN INVESTMENT DECISION. ALL REFERENCES TO "WE" OR "US" IN THIS PROSPECTUS
SUPPLEMENT REFER TO ISTAR FINANCIAL INC. AND ITS CONSOLIDATED SUBSIDIARIES,
UNLESS THE CONTEXT OTHERWISE REQUIRES.

ISTAR FINANCIAL INC.

OVERVIEW

We are the largest publicly-traded finance company focused exclusively on
the commercial real estate industry. We provide structured financing to private
and corporate owners of high-quality real estate nationwide, including senior
and junior mortgage debt, corporate net lease financing and corporate mezzanine
and subordinated capital. Our objective is to deliver superior risk-adjusted
returns on equity to our stockholders by providing innovative and value-added
financing solutions to our customers. We deliver customized financial products
to sophisticated real estate borrowers and corporate customers who require a
high level of creativity and service. Our ability to provide value-added
financial solutions has consistently enabled us to realize margins and returns
on capital that are more attractive than those earned by many other commercial
finance companies. As of June 30, 2001, our total enterprise value (market value
of equity plus book value of preferred stock and debt, less cash balances) was
$4.9 billion, and our annualized revenue and adjusted earnings for the quarter
ended June 30, 2001 were $483.3 million and $254.2 million, respectively.

We began our business in 1993 through private investment funds formed to
take advantage of the lack of well-capitalized lenders capable of servicing the
needs of high-end customers in our markets. During our eight-year history, we
have structured or originated nearly $5 billion of financing commitments. During
this period, we have generated a realized internal rate of return of 28.3% on
the approximately $1.6 billion of investments that we have funded and which have
since been repaid. We have never realized a loss of principal or interest on any
loan investment we have funded.

Since becoming a public company in March 1998, we have expanded our platform
by making a limited number of strategic corporate acquisitions. In
September 1998, we acquired the loan origination and servicing business of
Phoenix Home Life Insurance Company. In December 1998, we acquired the
structured finance portfolio of our largest private competitor, an affiliate of
Lazard Freres & Co. LLC. In November 1999, we acquired TriNet Corporate Realty
Trust, Inc., the then largest publicly-traded company specializing in corporate
tenant leasing for owners of office and industrial facilities. In March 2000, we
acquired American Corporate Real Estate, Inc., a leading privately-held
investment firm whose senior management team had extensive experience in the
corporate tenant leasing industry.

By capitalizing on our competitive strengths, we have delivered consistent
financial performance, developed a high-quality, diversified asset base and
established ourselves as a reliable provider of financial solutions for our
customers. We have consistently grown our adjusted earnings and dividends since
June 1998, our first quarter as a public company. Between that quarter and the
quarter ended June 30, 2001, we grew our adjusted earnings on a diluted basis by
75.6%, from approximately $0.41 to $0.72 per share, and increased our common
stock dividend by 75.0%, from $0.35 to $0.6125. Based on the last reported sale
price of our common stock on September 5, 2001, our current annualized dividend
yield is 9.1%.

The graph below shows our quarterly adjusted earnings per share since our
first full quarter as a public company.

S-1

QUARTERLY ADJUSTED EARNINGS PER SHARE(1)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

6/30/98 $0.41

9/30/98 $0.43
12/31/98 $0.45
3/31/99 $0.46
6/30/99 $0.49
9/30/99 $0.52
12/31/99 $0.60
3/31/00 $0.64
6/30/00 $0.66
9/30/00 $0.68
12/31/00 $0.69
3/31/01 $0.71
6/30/01 $0.72

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(1) We generally define "adjusted earnings" as GAAP net income before
depreciation and amortization. For a further discussion of our adjusted
earnings, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Adjusted Earnings."

COMPETITIVE STRENGTHS

We believe the following competitive strengths distinguish our business
model from other commercial finance enterprises and contribute to our ability to
generate attractive risk-adjusted returns to our common stockholders.

CREATIVE CAPITAL SOLUTIONS

We target markets where customers require a knowledgeable provider of
capital which is capable of originating customized and flexible financial
products. We provide our customers with a level of service and creativity
generally unavailable from other lenders. We do not participate in distribution-
based commercial finance businesses, which are typically characterized by
intense price competition and lower profit margins, such as conduit lending and
mortgage-backed securities.

We believe that we have a reputation in the marketplace for delivering
unique financing solutions and a high level of service to our customers in a
reliable and credible fashion. Since beginning our business in 1993, we have
provided more than $1.6 billion in financing to customers who have sought our
expertise more than once.

As a result of our focus, we have generated consistent and attractive
returns on our asset base. The graph below shows our returns on average book
assets, after interest expense, since June 1998, our first full quarter as a
public company.

RETURN ON AVERAGE BOOK ASSETS(1)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

6/30/98 7.2%

9/30/98 6.0%
12/31/98 5.3%
3/31/99 5.9%
6/30/99 6.0%
9/30/99 6.4%
12/31/99 6.5%
3/31/00 6.6%
6/30/00 6.7%
9/30/00 6.7%
12/31/00 6.8%
3/31/01 7.0%
6/30/01 7.2%

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(1) We define "return on average book assets" as the sum of annualized
quarterly adjusted earnings and preferred dividends divided by the
average book value of assets outstanding during the quarter.

S-2

EXPERIENCED MANAGEMENT

The ten members of our executive management team have an average of more
than 20 years of experience in the fields of real estate finance, private
investment, capital markets, transaction structuring, risk management and loan
servicing, providing us with significant expertise in the key disciplines
required for success in our business. We emphasize long-term, incentive-based
compensation, such as stock options and grants of restricted common stock,
rather than cash compensation, and none of our employees is compensated based on
the volume of investment originations. Our directors and employees directly own
approximately 7% of our outstanding common stock on a diluted basis, which had a
market value of $162 million based upon the last reported sale price of our
common stock on September 5, 2001. Our executive management team is supported by
approximately 125 employees operating from six primary offices nationwide.

SIGNIFICANT EQUITY BASE

We had approximately $1.8 billion of tangible book equity and a consolidated
debt-to-book equity ratio of 1.2x as of June 30, 2001. We believe that we are
one of the most strongly capitalized asset-based finance companies. We target a
maximum consolidated debt-to-book equity ratio of 1.5x to 2.0x, which is
significantly lower than most other commercial finance companies. We believe
that operating within this targeted range enables us to maintain a
well-balanced, conservative and flexible capital structure. Our tax-advantaged
structure as a real estate investment trust and our ability to operate with less
overhead, as a percentage of revenues, than many other commercial finance
companies enhance risk-adjusted returns on equity for our common stockholders.

TAX-ADVANTAGED CORPORATE STRUCTURE

Because of our focus on commercial real estate finance, we are able to
qualify as a real estate investment trust, or "REIT," under the Internal Revenue
Code. Since we are taxed as a REIT, we do not pay corporate-level taxes in most
circumstances. This tax-advantaged structure enables us to produce superior
returns on equity for our stockholders compared to taxable finance companies,
while utilizing significantly less leverage than most taxable finance companies.
The graphs below show our returns on average common book equity and our
debt-to-equity ratios since our first full quarter as a public company.

RETURN ON AVERAGE COMMON BOOK EQUITY(1)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

6/30/98 11.7%

9/30/98 12.3%
12/31/98 13.0%
3/31/99 13.6%
6/30/99 14.1%
9/30/99 14.7%
12/31/99 14.8%
3/31/00 15.1%
6/30/00 15.5%
9/30/00 16.1%
12/31/00 16.7%
3/31/01 17.3%
6/30/01 17.5%

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(1) We define "return on average common book equity" as annualized quarterly
adjusted earnings divided by the average common book value of equity
outstanding during the quarter.

S-3

DEBT-TO-BOOK EQUITY

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

6/30/98 0.7X

9/30/98 1.3x
12/31/98 1.1x
3/31/99 1.2x
6/30/99 1.2x
9/30/99 1.1x
12/31/99 1.1x
3/31/00 1.1x
6/30/00 1.2x
9/30/00 1.2x
12/31/00 1.2x
3/31/01 1.2x
6/30/01 1.2x

ASSET QUALITY AND DIVERSIFICATION

Throughout our operating history, we have focused on maintaining
diversification of our asset base by product line, asset type, obligor, property
type and geographic region. Asset diversification is a key part of our risk
management strategy. The graphs below depict the diversification of our asset
base based upon the total gross book value of our assets of approximately $4.0
billion as of June 30, 2001.

ASSET TYPE DIVERSIFICATION PROPERTY TYPE DIVERSIFICATION GEOGRAPHIC DIVERSIFICATION

Pie Chart Pie Chart Pie Chart

Secured first mortgages and corporate tenant lease assets together comprise
approximately 70% of our asset base. The weighted average "first dollar" and
"last dollar" loan-to-value ratios on our loan assets were 31.8% and 71.4%,
respectively, as of June 30, 2001. "First dollar" and "last dollar"
loan-to-value ratios represent the average beginning and ending points of our
lending exposure in the aggregate capitalization of the underlying assets or
companies that we finance.

In addition, as of June 30, 2001, 52% of our corporate tenants, based on
GAAP annual lease payments, had actual or implied investment grade credit
ratings. Our corporate tenants include leading companies such as FedEx
Corporation, Hilton Hotels Corporation, International Business Machines
Corporation, Nike, Inc., Verizon Communications, Inc. and Wells Fargo Bank.

MATCH FUNDING DISCIPLINE

Our objective is to match fund our liabilities and assets with respect to
maturities and interest rates. This means that we seek to match the maturities
of our financial obligations with the maturities of our investments. Match
funding allows us to reduce the risk of having to refinance our liabilities
prior to the maturities of our assets. In addition, we match fund interest rates
with like-kind debt (i.e., fixed-rate assets are financed with fixed-rate debt,
and floating-rate assets are financed with floating-rate debt), through the use
of hedges such as interest rate swaps, or through a combination of these
strategies. This allows us to reduce the impact of changing interest rates on
our earnings. Our objective is to limit volatility from a 100 basis point move
in short-term interest rates to no more than 2.5% of annual adjusted earnings
per share. As of June 30, 2001, a 100 basis point change in short-term interest
rates would have impacted our second quarter adjusted earnings per share of
$0.72 by approximately 1.4%.

OUR TARGET MARKETS AND PRODUCT LINES

S-4

Our primary product lines include structured finance, portfolio finance,
corporate tenant leasing, corporate finance and loan acquisition. Our real
estate lending assets consist of mortgages secured by real estate collateral,
loans secured by equity interests in real estate assets, and secured and
unsecured loans to corporations engaged in real estate or real estate-related
businesses. Our corporate tenant lease assets consist of office and industrial
facilities that we typically purchase from, and lease back to, a diversified
group of creditworthy corporate tenants as a form of financing for their
businesses. Our leases are generally long-term, and typically provide for all
expenses at the facility to be paid by the corporate tenant on a "triple net"
basis. Under a typical net lease agreement, the corporate customer agrees to pay
a base monthly operating lease payment and all facility operating expenses,
including taxes, maintenance and insurance.

The graph below shows the composition of our asset base by product line,
based on the total gross book value of our assets of approximately $4.0 billion
as of June 30, 2001.

PRODUCT LINE DIVERSIFICATION

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

CORPORATE TENANT LEASING 44%

Loan Acquisition 9%
Corporate Finance 13%
Structured Finance 25%
Portfolio Finance 9%

INVESTMENT STRATEGY

Our investment strategy focuses on the origination of structured mortgage,
corporate and lease financings backed by high-quality commercial real estate
assets located in major U.S. metropolitan markets. Because we deliver the
intensive structuring expertise required by our customers, we are able to avoid
significant direct competition from other capital providers. We focus on
developing direct relationships with borrowers and corporate tenants, as opposed
to sourcing transactions through intermediaries, and offer our customers added
value in the form of specific lending expertise, flexibility, certainty and
post-closing support. We also take advantage of market anomalies in the real
estate financing markets when we believe credit is mispriced by other providers
of capital, such as the spread between lease yields and the yields on corporate
tenants' underlying credit obligations. In addition, we have developed a
disciplined process for screening potential investments prior to beginning our
formal underwriting and commitment process called the "Six Point
Methodology(SM)." We also have an intensive underwriting process in place for
all potential investments.

RISK MANAGEMENT

We have comprehensive, pro-active and hands-on risk management systems
centered around a fully-integrated risk management team of over 50
professionals, including dedicated expertise in asset management, corporate
credit, loan servicing, project management and engineering. We manage our risk
exposure by diversifying our asset base and using conservative assumptions
during our underwriting of potential investments. We utilize information
received from our risk management professionals on a real-time basis to monitor
the performance of our asset base and to quickly identify and address potential
credit issues. In addition, although we have not realized any losses of
principal or interest on

S-5

any loan investments we have funded since our inception, we nonetheless maintain
and regularly evaluate financial reserves to protect against potential future
losses.

FINANCING STRATEGY

Our financing strategy revolves around three primary principles. First, we
maintain significantly lower leverage than other commercial finance companies
and a large tangible equity capital base. We target a consolidated debt-to-book
equity ratio of 1.5x to 2.0x, which is significantly lower than most other
commercial finance companies. Second, we maintain access to a broad array of
capital resources from a diverse group of lending sources, such as committed
secured and unsecured credit facilities, term loans, corporate bonds and our own
proprietary matched funding program, iStar Asset Receivables, or "STARs." In
doing so, we seek to insulate our business from potential fluctuations in the
availability of capital. Third, we seek to match fund our liabilities and assets
to minimize the risk that we have to refinance our liabilities prior to the
maturities of our assets, and to reduce the impact of changing interest rates on
our earnings.

RECENT DEVELOPMENTS

Subsequent to the end of the second quarter 2001, we completed a
$350.0 million public offering of seven-year unsecured senior notes bearing
interest at 8.75%. The net proceeds of this offering were used to repay our
secured revolving credit facilities. Subsequent to the quarter end, we also
completed a $300.0 million revolving credit facility with a group of leading
financial institutions. This new facility matures in 2004, including a one-year
extension at our option, and replaces two prior credit facilities maturing in
2002. For a further discussion of this new facility, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

------------------------

Our principal executive offices are located at 1114 Avenue of the Americas,
New York, New York 10036, and our telephone number is (212) 930-9400. Our
website is www.istarfinancial.com. Our six primary regional offices are located
in Atlanta, Boston, Dallas, Denver, Hartford and San Francisco. iStar Asset
Services, our loan servicing subsidiary, is located in Hartford, and iStar Real
Estate Services, our corporate facilities management division, is headquartered
in Atlanta.

S-6

THE OFFERING

Common stock offered by the selling
stockholders............................ 15,000,000 shares

Shares outstanding before and after the
offering................................ 86,485,250 shares

Use of proceeds........................... We will not receive any proceeds from the sale of shares
by the selling stockholders.

Risk factors.............................. See "Risk Factors" and other information contained in
this prospectus supplement and in the accompanying
prospectus for a discussion of the factors you should
carefully consider before purchasing our common stock in
the offering.

NYSE symbol............................... SFI

The number of shares outstanding before and after the offering excludes
7,898,939 shares reserved for issuance under our stock option plans, of which
options to purchase 5,875,874 shares at an average option price of $18.22 have
been issued. The number of shares outstanding before and after the offering also
excludes 6,113,167 shares reserved for issuance upon exercise of warrants held
by affiliates of Lazard Freres & Co. LLC that have an exercise price of $34.35
per share. After the offering, assuming that the underwriters' overallotment
option is exercised, Starwood Mezzanine Investors, L.P., SOFI-IV SMT Holdings,
L.L.C. and B Holdings, LLC, the selling stockholders, will collectively own
36,113,338 shares of common stock, which will represent approximately 41.1% of
our shares of common stock on a diluted basis, or 41.8% based on our outstanding
shares of common stock. If the overallotment option is not exercised, Starwood
Mezzanine Investors, L.P., SOFI-IV SMT Holdings, L.L.C. and B Holdings, LLC will
collectively own 38,363,338 shares of common stock, which will represent
approximately 43.7% of our shares of common stock on a diluted basis, or 44.4%
based on our outstanding shares of common stock.

S-7

RISK FACTORS

THIS SECTION DESCRIBES SOME, BUT NOT ALL, OF THE RISKS OF PURCHASING OUR
COMMON STOCK IN THE OFFERING. YOU SHOULD CAREFULLY CONSIDER THESE RISKS, AND THE
RISK DESCRIBED UNDER THE CORRESPONDING HEADING BEGINNING ON PAGE FOUR OF THE
ACCOMPANYING PROSPECTUS, BEFORE PURCHASING OUR COMMON STOCK IN THE OFFERING. IN
CONNECTION WITH THE FORWARD-LOOKING STATEMENTS THAT APPEAR IN THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, YOU SHOULD ALSO CAREFULLY REVIEW THE
CAUTIONARY STATEMENTS REFERRED TO IN "FORWARD-LOOKING STATEMENTS."

OUR OWNERSHIP IS CONCENTRATED

The selling stockholders will hold approximately 41.1%, on a diluted basis,
or 41.8% on an outstanding basis, of our shares of common stock (or 43.7% and
44.4%, respectively, if the overallotment option is not exercised) after the
offering. The selling stockholders are under common control, and four of the 16
members of our Board of Directors are employed by an affiliate of the selling
stockholders. As a result of their ownership interests, the selling stockholders
may have significant influence over our business and affairs, including
decisions regarding:

- Mergers or other business combinations.

- Issuance of equity securities, including additional shares of our common
stock.

- Payment of dividends.

The influence held by these affiliated entities may result in various
conflicts of interest between them and us or between them and the holders of our
common stock. Certain individuals who own interests (direct or indirect) in
these affiliated entities, including Jay Sugarman, who serves as our Chairman
and Chief Executive Officer; and Barry Sternlicht, Jeffrey Dishner, Madison
Grose and Merrick Kleeman, each of whom is a director of our Company, own
directly an aggregate of 2.5% of our common stock and hold options to purchase
an additional 0.7% of our common stock, assuming cashless option exercises, in
addition to their interests in the selling stockholders and their affiliates.
These people may be faced with decisions that have different implications for
the selling stockholders and their affiliates, on the one hand, and us or the
holders of our common stock, on the other hand, which could create, or appear to
create, potential conflicts of interest.

FUTURE SALES OF OUR COMMON STOCK BY THE SELLING STOCKHOLDERS COULD ADVERSELY
AFFECT OUR STOCK PRICE

If the selling stockholders were to sell a substantial number of the shares
of our common stock which they will own after this offering, the prevailing
market prices for our common stock could be adversely affected. Each of the
selling stockholders has agreed not to sell or transfer any shares of common
stock or to engage in certain hedging transactions with respect to the common
stock for a period of 180 days after the date of this prospectus supplement,
except in certain circumstances. The selling stockholders are permitted to
include shares for sale in a public primary equity offering by us, subject to
certain limitations. SOFI-IV SMT Holdings, L.L.C. has pledged 22,500,000 shares
of common stock owned by it under a $150.0 million margin loan that is fully
recourse to SOFI-IV SMT Holdings, L.L.C. In the event that SOFI-IV SMT Holdings,
L.L.C. were to default in the performance of its obligations under that loan,
the lender could foreclose upon those pledged shares and sell them in the open
market at any time. In addition, unless Starwood Mezzanine Investors, L.P. and
Starwood Opportunity Fund IV, L.P. (the entity which owns SOFI-IV SMT Holdings,
L.L.C.), are able to extend their terms, they will have to begin, on
November 1, 2002 and February 27, 2005, respectively, distributing their
investments to their investors, selling their investments to third parties, or a
combination of the two. Any such sales or distributions could adversely affect
the prevailing market prices for our common stock. See "Selling Stockholders."

S-8

WE ARE SUBJECT TO RISKS RELATING TO OUR ASSET CONCENTRATION

As of June 30, 2001, the average size of our lending and leasing investments
was $22.1 million. No single investment represented more than 4.0% of our total
revenues for the fiscal quarter ended June 30, 2001. While our asset base is
diversified by product line, asset type, obligor, property type and geographic
location, it is possible that if we suffer losses on a portion of our larger
assets, our financial performance could be adversely impacted. See "iStar
Financial Inc.--Competitive Strengths--Asset Quality and Diversification."

BECAUSE WE MUST DISTRIBUTE A PORTION OF OUR INCOME, WE WILL CONTINUE TO NEED
ADDITIONAL DEBT AND/OR EQUITY CAPITAL TO GROW

We must distribute at least 90% of our taxable net income to our
stockholders to maintain our REIT status. As a result, those earnings will not
be available to fund investment activities. We have historically funded our
investments by borrowing from financial institutions and raising capital in the
public and private capital markets. We expect to continue to fund our
investments this way. If we fail to obtain funds from these sources, it could
limit our ability to grow, which could have a material adverse effect on the
value of our common stock. Our taxable net income has historically been lower
than the cash flow generated by our business activities, primarily because our
taxable net income is reduced by non-cash expenses, such as depreciation and
amortization. As a result, our dividend payout ratio as a percentage of free
cash flow has generally been lower than our payout ratio as a percentage of
taxable net income. Our common stock dividends for the quarter ended June 30,
2001 represented approximately 83.3% of our adjusted earnings for that quarter.

QUARTERLY RESULTS MAY FLUCTUATE AND MAY NOT BE INDICATIVE OF FUTURE QUARTERLY
PERFORMANCE

Our quarterly operating results could fluctuate; therefore, you should not
rely on past quarterly results to be indicative of our performance in future
quarters. Factors that could cause quarterly operating results to fluctuate
include, among others, variations in our investment origination volume,
variations in the timing of prepayments, the degree to which we encounter
competition in our markets and general economic conditions.

USE OF PROCEEDS

The selling stockholders will receive all of the proceeds from selling the
common stock offered hereby. See "Selling Stockholders." We will not receive any
of the proceeds from this offering.

S-9

SELECTED FINANCIAL DATA

The following table sets forth our selected financial data on a consolidated
historical basis as of and for the six months ended June 30, 2001 and 2000, and
as of and for the years ended December 31, 2000, 1999 and 1998.

In November 1999, we completed a number of significant corporate
transactions which increased the size of our operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Operating results for the year ended December 31, 1999 reflect the effects of
these transactions subsequent to their consummation.

SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
----------------------- ------------------------------------
2001 2000 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

OPERATING DATA:
Interest income....................................... $130,816 $126,947 $268,011 $209,848 $112,914
Operating lease income................................ 98,767 93,495 185,956 42,186 12,378
Other income.......................................... 13,861 8,360 17,855 12,763 2,804
---------- ---------- ---------- ---------- ----------
Total revenue..................................... 243,444 228,802 471,822 264,797 128,096
---------- ---------- ---------- ---------- ----------
Interest expense...................................... 87,728 80,559 173,891 91,184 44,697
Operating costs-corporate tenant lease assets......... 6,510 6,284 12,809 2,246 --
Depreciation and amortization......................... 17,586 17,871 34,514 10,340 4,287
General and administrative............................ 12,600 14,711 25,706 6,269 2,583
Provision for possible credit losses.................. 3,500 3,000 6,500 4,750 2,750
Stock-based compensation expense...................... 2,060 1,134 2,864 412 5,985
Advisory fees......................................... -- -- -- 16,193 7,837
Costs incurred in acquiring external advisor(1)....... -- -- -- 94,476 --
---------- ---------- ---------- ---------- ----------
Total expenses.................................... 129,984 123,559 256,284 225,870 68,139
---------- ---------- ---------- ---------- ----------

Income before minority interest....................... 113,460 105,243 215,538 38,927 59,957
Minority interest in consolidated entities............ (136) (82) (195) (41) (54)
Gain on sale of corporate tenant lease assets......... 1,599 974 2,948 -- --
One-time effect of change in accounting principle..... (282) -- -- -- --
Extraordinary loss on early extinguishment of debt.... (1,037) (317) (705) -- --
---------- ---------- ---------- ---------- ----------
Net income............................................ $113,604 $105,818 $217,586 $38,886 $59,903
Preferred dividend requirements....................... (18,454) (18,454) (36,908) (23,843) (944)
---------- ---------- ---------- ---------- ----------
Net income allocable to common shareholders........... $95,150 $87,364 $180,678 $15,043 $58,959
========== ========== ========== ========== ==========
Basic earnings per common share(2).................... $1.11 $1.03 $2.11 $0.25 $1.40
========== ========== ========== ========== ==========
Diluted earnings per common share..................... $1.09 $1.02 $2.10 $0.25 $1.36
========== ========== ========== ========== ==========
Dividends declared per common share................... $0.6125 $0.6000 $2.40 $1.86 $1.14
========== ========== ========== ========== ==========

S-10

SUPPLEMENTAL DATA:
Dividends declared on preferred shares................ $9,144 $9,144 $36,576 $24,819 $929
Dividends declared on common shares................... 104,087 99,611 205,477 116,813 60,343
Adjusted earnings allocable to common
shareholders(3)..................................... 125,267 111,779 230,688 127,798 66,615
Adjusted earnings per common share--basic............. $1.45 $1.31 $2.69 $2.19 $1.59
Adjusted earnings per common share--diluted........... $1.42 $1.30 $2.67 $2.07 $1.53
Cash flows from:
Operating activities.............................. 115,937 99,788 192,469 122,549 54,915
Investing activities.............................. 10,604 (186,540) (176,652) (143,911) (1,271,309)
Financing activities.............................. (122,992) 85,062 (27,473) 45,660 1,226,208
EBITDA(4)............................................. 218,774 203,673 423,943 234,927 108,941
Ratio of EBITDA to interest expense................... 2.5x 2.5x 2.4x 2.6x(5) 2.4x
Ratio of EBITDA to combined fixed charges(6).......... 2.1x 2.1x 2.0x 2.0x(5) 2.4x
Weighted average common shares
outstanding--basic(7)............................... 85,958 85,184 85,441 57,749 41,607
Weighted average common shares
outstanding--diluted(7)............................. 87,584 85,725 86,151 60,393 43,460
Efficiency ratio(8)................................... 6.0% 6.9% 6.1% 8.6% 12.8%
Total debt to shareholders' equity(9)................. 1.2x 1.2x 1.2x 1.1x 1.1x

BALANCE SHEET DATA:
Loans and other lending investments, net.............. $2,252,255 $2,253,339 $2,225,183 $2,003,506 $1,823,761
Real estate subject to operating leases, net.......... 1,634,524 1,653,512 1,670,169 1,714,284 189,942
Total assets.......................................... 4,053,350 4,041,269 4,034,775 3,813,552 2,059,616
Debt obligations...................................... 2,153,031 2,138,060 2,131,967 1,901,204 1,055,719
Minority interest in consolidated entities............ 2,649 2,565 6,224 2,565 --
Shareholders' equity.................................. 1,831,125 1,842,883 1,787,885 1,801,343 970,728

------------------------------

(1) This amount represents a non-recurring, non-cash charge of approximately
$94.5 million relating to the acquisition of our external advisor.

(2) Earnings per common share excludes 1% of net income allocable to our
class B shares prior to November 4, 1999. The class B shares were exchanged
for common stock on November 4, 1999. As a result, we have a single class of
common stock outstanding. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

(3) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Adjusted Earnings."

(4) EBITDA is calculated as total revenue minus the sum of general and
administrative expenses, provision for possible credit losses, stock-based
compensation expense, operating costs on corporate tenant lease assets and,
prior to November 1, 1999, advisory fees.

(5) Excludes a non-recurring, non-cash charge of approximately $94.5 million
relating to the acquisition of our external advisor.

(6) Combined fixed charges are comprised of interest expense, amortization of
loan costs and preferred stock dividend requirements.

(7) As adjusted for the one-for-six reverse stock split we effected on
June 19, 1998.

(8) Efficiency ratio reflects: (a) the sum of general administrative expense,
stock option compensation expense and, for the period prior to November 4,
1999, advisory fees; divided by (b) total revenue for the period.

(9) Total shareholders' equity is defined as the sum of the book value of
common equity and preferred equity.

S-11

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

We began our business in 1993 through private investment funds formed to
take advantage of the lack of well-capitalized lenders capable of servicing the
needs of high-end customers in our markets. In March 1998, our private
investment funds contributed their approximately $1.1 billion of assets to our
predecessor, Starwood Financial Trust, in exchange for a controlling interest in
that public company. In November 1999, we acquired TriNet Corporate Realty
Trust, Inc., our leasing subsidiary, which was then the largest publicly-traded
company specializing in the net leasing of corporate office and industrial
facilities. Concurrent with the acquisition of our leasing subsidiary, we also
acquired our external advisor in exchange for shares of our common stock and
converted our organizational form to a Maryland corporation. As part of the
conversion to a Maryland corporation, we replaced our dual-class common stock
structure with a single class of common stock. This single class of common stock
began trading on the New York Stock Exchange under the symbol "SFI" in
November 1999.

RESULTS OF OPERATIONS

THREE-MONTH PERIOD ENDED JUNE 30, 2001 COMPARED TO THE THREE-MONTH PERIOD ENDED
JUNE 30, 2000

INTEREST INCOME. Interest income decreased to approximately $63.9 million
for the three months ended June 30, 2001 from approximately $66.9 million for
the same period in 2000. This decrease in interest income is primarily a result
of the decrease in average LIBOR rates on our variable-rate lending investments,
which was partially offset by the increase in the average balance of loans and
other lending investments.

OPERATING LEASE INCOME. Operating lease income increased to $49.2 million
for the three months ended June 30, 2001 from $47.2 million for the same period
in 2000. Of this increase, $1.3 million was attributable to new corporate tenant
lease investments and $3.6 million to additional operating lease income from
existing corporate tenant lease investments owned in both quarters. These
increases in operating lease income from assets owned were partially offset by a
$2.9 million decrease in operating lease income resulting from asset
dispositions made in 2000 and 2001.

OTHER INCOME. Other income for the three-month period ended June 30, 2001
is primarily comprised of approximately $8.5 million in realized gains and
prepayment penalties from the early repayment of senior mortgages, subordinate
mortgages and corporate/partnership loans. Other income was offset by
approximately $1.2 million in losses from iStar Operating, Inc. Other income for
the three-month period ended June 30, 2000 included a prepayment penalty of
approximately $2.1 million resulting from a partial repayment of a senior
mortgage.

INTEREST EXPENSE. Our interest expense decreased by $1.4 million for the
three months ended June 30, 2001 over the same period in the prior year. The
decrease was primarily due to lower average LIBOR rates on our outstanding
floating-rate debt obligations.

OPERATING COSTS-CORPORATE TENANT LEASE ASSETS. For the three months ended
June 30, 2001, operating costs associated with corporate tenant lease assets
increased by approximately $315,000 to approximately $3.3 million, from
$3.0 million for the same period in 2000. This increase is primarily due to an
increase in unreimbursed operating expenses associated with corporate tenant
lease assets.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased by
approximately $84,000 to $8.8 million for the three months ended June 30, 2001
over the same period in the prior year. This decrease is primarily the result of
corporate tenant lease dispositions in 2000 and 2001, partially offset by
additional depreciation on capital investments.

S-12

GENERAL AND ADMINISTRATIVE. Our general and administrative expenses during
the three months ended June 30, 2001 decreased by approximately $1.3 million to
$6.5 million compared to the same period in 2000.

PROVISION FOR POSSIBLE CREDIT LOSSES. Our charge for provision for possible
credit losses increased to $1.8 million from $1.5 million as a result of
expanded lending operations as well as additional seasoning of our existing
lending portfolio. We have not realized any actual losses on any loan
investments we have funded to date. However, we have considered it prudent to
establish a policy of providing reserves for potential losses in the current
portfolio which may occur in the future. Accordingly, since our first full
quarter as a public company (the quarter ended June 30, 1998), management has
reflected quarterly provisions for possible credit losses in its operating
results.

STOCK-BASED COMPENSATION EXPENSE. Stock-based compensation expense
increased by approximately $614,000 as a result of charges relating to grants of
stock options, including amortization of the deferred charge related to options
granted to employees of our former external advisor subsequent to such personnel
becoming our direct employees as of November 4, 1999.

GAIN ON SALE OF CORPORATE TENANT LEASE ASSETS. On April 18, 2001, we
disposed of one corporate tenant lease asset for total proceeds of $4.5 million,
and recognized a gain of approximately $1.0 million. During the second quarter
of 2000, we disposed of three assets for total proceeds of $102.3 million, and
recognized gains of approximately $440,000.

SIX-MONTH PERIOD ENDED JUNE 30, 2001 COMPARED TO THE SIX-MONTH PERIOD ENDED
JUNE 30, 2000

INTEREST INCOME. Interest income increased to approximately $130.8 million
for the six months ended June 30, 2001 from approximately $126.9 million for the
same period in 2000. This increase in interest income is a result of a higher
average balance of loans and other lending investments.

OPERATING LEASE INCOME. Operating lease income increased to $98.8 million
for the six months ended June 30, 2001 from $93.5 million for the same period in
2000. Of this increase, $2.7 million was attributable to new corporate tenant
lease investments and $7.4 million to additional operating lease income from
existing corporate tenant lease investments owned in both quarters. In addition,
joint venture income contributed $1.8 million to the increase. These increases
in operating lease income from assets owned were partially offset by a
$6.7 million decrease in operating lease income resulting from asset
dispositions made in 2000 and 2001.

OTHER INCOME. Other income for the six-month period ended June 30, 2001 is
primarily comprised of approximately $9.2 million in realized gains and
prepayment penalties from the early repayment of senior mortgages, subordinate
mortgages and corporate/partnership loans, $3.0 million in participation
payments and advisory fees of approximately $868,000. Other income was offset by
approximately $842,000 in losses from iStar Operating. Other income for the
six-month period ended June 30, 2000 included prepayment fees of approximately
$5.4 million resulting from the full or partial repayments of three loans and a
fee of $1.1 million resulting from the purchase of a sub-performing loan and
subsequent restructuring of such loan to fully-performing status.

INTEREST EXPENSE. Our interest expense increased by $7.2 million for the
six months ended June 30, 2001 over the same period in the prior year. The
increase was primarily due to higher average borrowings on our credit
facilities, other term loans and unsecured notes, in addition to the
amortization of deferred financing costs on our credit facilities. This increase
was partially offset by the lower average LIBOR rates on our floating rate debt
obligations.

S-13

OPERATING COSTS--CORPORATE TENANT LEASE ASSETS. For the six months ended
June 30, 2001, operating costs increased by approximately $226,000 to
$6.5 million, from $6.3 million for the same period in 2000. This increase is
primarily due to an increase in unreimbursed operating expenses associated with
corporate tenant lease assets. The increase is offset by a reduction of general
and administrative costs related to the facilities.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased by
approximately $285,000 to $17.6 million for the six months ended June 30, 2001
over the same period in the prior year. This decrease is primarily the result of
corporate tenant lease dispositions in 2000 and 2001, partially offset by
additional depreciation on capital investments.

GENERAL AND ADMINISTRATIVE. Our general and administrative expenses during
the six months ended June 30, 2001 decreased by approximately $2.1 million to
$12.6 million compared to the same period in 2000.

PROVISION FOR POSSIBLE CREDIT LOSSES. Our charge for provision for possible
credit losses increased to $3.5 million from $3.0 million as a result of
expanded lending operations as well as additional seasoning of our existing
lending portfolio.

STOCK-BASED COMPENSATION EXPENSE. Stock-based compensation expense
increased by approximately $926,000 as a result of charges relating to grants of
stock options, including amortization of the deferred charge related to options
granted to employees of our former external advisor subsequent to such personnel
becoming our direct employees as of November 4, 1999.

GAIN ON SALE OF CORPORATE TENANT LEASE ASSETS. During the six months ended
June 30, 2001, we disposed of two corporate tenant lease assets for total
proceeds of $8.4 million, and recognized gains of approximately $1.6 million.
During the first six months of 2000, we disposed of five assets for total
proceeds of $148.3 million, and recognized gains of approximately $973,000.

EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT. During the six months
ended June 30, 2001, we repaid a secured term loan which had an original
maturity date of December 2004. In connection with this early repayment, we
incurred certain prepayment penalties, which resulted in an extraordinary loss
on early extinguishment of debt of approximately $1.0 million during the first
quarter of 2001. During the first quarter of 2000, certain of the proceeds from
an asset disposition were used to partially repay $8.1 million of a secured term
loan. In connection with this partial paydown, we incurred certain prepayment
penalties, which resulted in an extraordinary loss on early extinguishment of
debt of $317,000.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

INTEREST INCOME. Interest income increased to approximately $268.0 million
for the year ended December 31, 2000 from approximately $209.8 million for the
same period in 1999. This increase is a result of the interest generated by
$721.2 million of newly-originated loan investments during fiscal 2000 and an
additional $56.0 million funded under existing loan commitments. The increase
was partially offset by a reduction in interest earned as a result of principal
repayments of approximately $584.5 million made to us on our loan investments
during the year ended December 31, 2000. In addition, the increase was in part
due to higher average interest rates on our variable-rate loans and other
lending investments.

OPERATING LEASE INCOME. Operating lease income increased to approximately
$186.0 million for the year ended December 31, 2000 from approximately
$42.2 million for the same period in 1999. Approximately $134.2 million of this
increase is attributable to operating lease income generated from

S-14

corporate tenant lease assets acquired in the acquisition of our leasing
subsidiary, which were included in operations for the entire year in fiscal 2000
as compared to only approximately two months in fiscal 1999. In addition,
approximately $5.4 million resulted from income generated by $128.4 million of
new corporate tenant lease investments.

OTHER INCOME. Included in other income for fiscal year 2000 are prepayment
fees of approximately $7.9 million resulting from the full or partial repayments
of several loans, recognition of $2.1 million in connection with loan
defeasances, a forbearance fee of $1.1 million resulting from the purchase of a
sub-performing loan and subsequent restructuring of such loan to fully
performing status, a prepayment penalty of approximately $1.2 million resulting
from the refinancing of a senior mortgage and corporate loan, and approximately
$1.4 million resulting from the repayment of a senior loan held at a discount
upon the conversion of such loan to a corporate tenant lease holding pursuant to
a purchase option granted to us in connection with our original investment in
the asset.

INTEREST EXPENSE. Our interest expense increased by $82.7 million for the
year ended December 31, 2000 over the same period in the prior year.
Approximately $44.1 million of this increase is attributable to interest expense
incurred by our leasing subsidiary subsequent to its acquisition, which was
included in operations for the entire year in fiscal 2000 as compared to only
approximately two months in 1999. In addition, the increase was in part due to
higher average aggregate borrowings under our credit facilities, other term
loans and secured notes, the proceeds of which were used to fund additional
investments. The increase was also attributable to higher average interest rates
on our variable-rate debt obligations.

OPERATING COSTS--CORPORATE TENANT LEASE ASSETS. For the year ended
December 31, 2000, operating costs associated with corporate tenant lease assets
increased by approximately $10.6 million to approximately $12.8 million, net of
recoveries from corporate tenants. Such operating costs represent unreimbursed
operating expenses associated with corporate tenant lease assets. This increase
is primarily attributable to operating costs generated from corporate tenant
lease assets acquired in the acquisition of our leasing subsidiary, which were
included in operations for the entire year in fiscal 2000 as compared to only
approximately two months in 1999.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
approximately $24.2 million to $34.5 million for the year ended December 31,
2000 over the same period in the prior year. Approximately $24.0 million of this
increase is attributable to depreciation and amortization relating to the
corporate tenant lease assets acquired in the acquisition of our leasing
subsidiary, which were included in operations for the entire year in fiscal 2000
as compared to only approximately two months in 1999.

GENERAL AND ADMINISTRATIVE. Our general and administrative expenses during
the year ended December 31, 2000 increased by approximately $19.4 million to
$25.7 million compared to the same period in 1999. These increases were
generally the result of the increased scope of our operations associated with
the acquisition of our leasing subsidiary and the direct overhead costs
associated with our former external advisor, which impacted operations for the
entire year in fiscal 2000 as compared to only approximately two months in 1999.

PROVISION FOR POSSIBLE CREDIT LOSSES. Our charge for provision for possible
credit losses increased to $6.5 million from $4.8 million as a result of
expanded lending operations as well as additional seasoning of our existing
lending portfolio.

STOCK-BASED COMPENSATION EXPENSE. Stock-based compensation expense
increased by approximately $2.5 million as a result of charges relating to
grants of stock options to our employees,

S-15

including amortization of the deferred charge related to options granted to
employees of our former external advisor subsequent to such personnel becoming
our direct employees as of November 4, 1999.

ADVISORY FEES. There were no advisory fees during the year ended
December 31, 2000 because, as a result of our acquisition of our external
advisor, we became internally-managed. No further advisory fees will be
incurred.

COSTS INCURRED IN ACQUIRING EXTERNAL ADVISOR. Included in fiscal 1999 costs
and expenses is a non-recurring, non-cash charge of approximately $94.5 million
relating to the acquisition of our external advisor.

GAIN ON SALE OF CORPORATE TENANT LEASE ASSETS. During the year ended 2000,
we disposed of 14 corporate tenant lease assets, including six assets held in
joint venture partnerships, for a total of $256.7 million in proceeds, and
recognized total gains of $2.9 million.

EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT. Certain of the proceeds
from an asset disposition were used to partially repay $8.1 million of a
mortgage loan. In connection with this partial paydown, we incurred prepayment
penalties, which resulted in an extraordinary loss of $317,000 during the first
quarter of 2000. Additionally, proceeds from a joint venture asset disposition
were used to repay $16.4 million of the third-party debt of the joint venture.
In connection with this paydown, the venture incurred certain prepayment
penalties, which resulted in an extraordinary loss of $388,000 during the third
quarter of 2000. There were no comparable early extinguishments of debt during
the year ended December 31, 1999, including by our leasing subsidiary subsequent
to its acquisition on November 4, 1999.

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

INTEREST INCOME. During fiscal year 1999, interest income increased by
approximately $96.9 million over interest income for fiscal year 1998. This
increase is a result of the interest generated by the loans and other
investments contributed in the 1998 recapitalization, as well as approximately
$663.4 million of loans and other lending investments newly-originated or
acquired by us during 1999 and an additional $46.4 million funded under existing
commitments. The increase was partially offset by principal repayments of
approximately $561.9 million made to us during fiscal year 1999.

OPERATING LEASE INCOME. Operating lease income increased by $29.8 million
from fiscal year 1998 to fiscal year 1999 due to approximately $26.8 million in
operating lease income generated from corporate tenant lease assets acquired in
the acquisition of our leasing subsidiary.

OTHER INCOME. Included in other income for fiscal year 1999 is a fee
associated with the repayment of a construction loan of approximately
$1.9 million, yield maintenance payments of approximately $8.1 million resulting
from the repayment of three loans, and approximately $1.0 million in additional
revenue from certain cash flow participation features on five of our loan
investments.

S-16

INTEREST EXPENSE. Our interest expense increased by $46.5 million as a
result of higher average borrowings by us on our credit facilities and other
term loans, the proceeds of which were used to fund additional loan origination
and acquisition activities. The increase was also attributable to higher average
interest rates on our variable-rate debt obligations. Further, interest expense
includes interest incurred by our leasing subsidiary subsequent to its
acquisition.

OPERATING COSTS--CORPORATE TENANT LEASE ASSETS. These operating costs
represent unreimbursed operating expenses incurred by our leasing subsidiary
subsequent to its acquisition.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased as a
result of a full year's depreciation on our pre-existing corporate tenant
leasing portfolio, as well as depreciation on our leasing subsidiary's corporate
tenant lease assets subsequent to its acquisition.

GENERAL AND ADMINISTRATIVE. General and administrative costs increased by
approximately $3.7 million as a result of the direct overhead costs associated
with our former external advisor, as well as additional administrative expenses
associated with our leasing subsidiary subsequent to its acquisition.

PROVISION FOR POSSIBLE CREDIT LOSSES. Our charge for provision for possible
credit losses increased by approximately $2.0 million as a result of expanded
lending operations as well as additional seasoning of our existing lending
portfolio.

STOCK-BASED COMPENSATION EXPENSE. Stock-based compensation expense declined
by approximately $5.6 million as a result of the non-recurring charge relating
to the original grant of stock options to our former external advisor in fiscal
1998 concurrently with the merger of our private business into a public company
in March 1998.

ADVISORY FEES. Advisory fees increased by approximately $8.4 million as a
result of fees being incurred from June 16, 1998 through year end in the prior
year and through November 4, 1999 in fiscal 1999, as well as a result of our
expanded operations. As a result of the acquisition of our external advisor, we
became internally-managed. No further advisory fees will be incurred.

LIQUIDITY AND CAPITAL RESOURCES

We require capital to fund our investment activities and operating expenses.
We have significant access to capital resources to fund our existing business
plan, which includes the expansion of our real estate lending and corporate
tenant leasing businesses. Our capital sources include cash flow from
operations, borrowings under lines of credit, additional term borrowings,
long-term financing secured by our assets, unsecured financing and the issuance
of common, convertible and/or preferred equity securities. Further, we may
acquire other businesses or assets using our capital stock, cash or a
combination of the two.

The distribution requirements under the REIT provisions of the Internal
Revenue Code limit our ability to retain earnings and thereby replenish capital
committed to our operations. However, we believe that our significant capital
resources and access to financing will provide us with financial flexibility and
market responsiveness at levels sufficient to meet current and anticipated
capital requirements, including expected new lending and leasing transactions.

We believe that our existing sources of funds will be adequate for purposes
of meeting our short-and long-term liquidity needs. Our ability to meet
long-term (i.e., beyond one year) liquidity requirements is subject to the
renewal of our credit lines and/or obtaining other sources of financing,

S-17

including issuing additional debt or equity from time to time. Any decision by
our lenders and investors to enter into such transactions with us will depend
upon a number of factors, such as compliance with the terms of our existing
credit arrangements, our financial performance, industry or market trends, the
general availability of and rates applicable to financing transactions, such
lenders' and investors' resources and policies concerning the terms under which
they make such capital commitments and the relative attractiveness of
alternative investment or lending opportunities.

In July 2001, we completed a $300.0 million revolving credit facility with a
group of leading financial institutions. The new facility has an initial
maturity of July 2003, with a one-year extension at our option and another
one-year extension at the lenders' option, and replaces two prior credit
facilities maturing in 2002. The facility bears interest at LIBOR plus 2.125%
based on our current credit ratings. In August 2001, we completed a
$350.0 million public offering of unsecured seven-year senior notes bearing
interest at 8.75%. The net proceeds of this offering were used to repay our
secured revolving credit facilities.

The table below reflects our debt obligations under various arrangements
with financial institutions as of June 30, 2001. All of our indebtedness shown
below which has not subsequently been repaid is non-recourse to us, except for
the $60.0 million term loan due January 2004 and the $16.6 million of "Other
debt obligations," which are fully recourse to us.

CARRYING
MAXIMUM VALUE AS OF
AMOUNT JUNE 30,
AVAILABLE 2001 STATED INTEREST RATES SCHEDULED MATURITY DATE
------------ ------------ ---------------------- -----------------------

(IN THOUSANDS, UNAUDITED)
SECURED REVOLVING CREDIT
FACILITIES(1):
Line of credit.................... $700,000 $194,100 LIBOR + 1.75%-2.25% March 2005(2)
Line of credit.................... 700,000 514,503 LIBOR + 1.40%-2.15% January 2005(2)
Line of credit.................... 500,000 81,248 LIBOR + 1.50%-1.75% August 2003(2)

UNSECURED REVOLVING CREDIT
FACILITIES:
Line of credit.................... 350,000 153,000 LIBOR + 1.55% May 2002(3)
Line of credit.................... 100,000 6,000 LIBOR + 2.25% January 2002(3)
---------- ----------
Total revolving credit
facilities...................... $2,350,000 $948,851
==========

SECURED TERM LOANS:
Secured by real estate under operating leases... $149,113 7.44% March 2009
Secured by corporate lending investments........ 60,000 LIBOR + 2.50% January 2004(4)
Secured by real estate under operating leases... 40,720 Fixed: 6.00%-11.38% Various through 2011
Secured by real estate under operating leases... 193,000 LIBOR + 1.85% July 2006
----------
Total principal of term loans................... 442,833
Add: debt premiums.............................. 379
----------
Total secured term loans........................ 443,212

iStar Asset Receivables secured notes:
Class A......................................... 105,216 LIBOR + 0.30% August 2003(5)
Class B......................................... 94,055 LIBOR + 0.50% October 2003(5)
Class C......................................... 105,813 LIBOR + 1.00% January 2004(5)
Class D......................................... 52,906 LIBOR + 1.45% June 2004(5)
Class E......................................... 123,447 LIBOR + 2.75% January 2005(5)
Class F......................................... 5,000 LIBOR + 3.15% January 2005(5)
----------
Total iStar Asset Receivables secured notes..... 486,437

S-18

CARRYING
MAXIMUM VALUE AS OF
AMOUNT JUNE 30,
AVAILABLE 2001 STATED INTEREST RATES SCHEDULED MATURITY DATE
------------ ------------ ---------------------- -----------------------

(IN THOUSANDS, UNAUDITED)
UNSECURED NOTES(6):
6.75% Dealer Remarketable Securities(7)......... 125,000 6.75% March 2013
7.70% Notes..................................... 100,000 7.70% July 2017
7.95% Notes..................................... 50,000 7.95% May 2006
----------
Total principal of unsecured notes(1)........... 275,000
Less: debt discount(8).......................... (17,091)
----------
Total unsecured notes........................... 257,909
OTHER DEBT OBLIGATIONS: 16,622 Various Various
----------
TOTAL DEBT OBLIGATIONS: $2,153,031
==========

------------------------------

(1) Subsequent to June 30, 2001, we completed a $350.0 million public offering
of unsecured seven-year senior notes bearing interest at 8.75%. The net
proceeds of this offering were used to repay borrowings under our secured
revolving credit facilities that had a weighted average interest rate of
5.93% and a weighted average maturity of 3.6 years.

(2) Includes a one-year "term-out" extension at our option.

(3) Subsequent to June 30, 2001, we replaced both of these facilities with a
new $300.0 million revolving credit facility bearing interest at
LIBOR + 2.125% (based on our current credit ratings). The new facility has
an initial maturity of July 2003 with a one-year extension at our option and
another one-year extension at the lenders' option.

(4) Includes a one-year extension at our option.

(5) Principal payments on these bonds are a function of the principal
repayments on loan assets which collateralize these obligations. The dates
indicated above represent the expected date on which the final payment would
occur for such class based on the assumptions that the loans which
collateralize the obligations are not voluntarily prepaid, the loans are
paid on their effective maturity dates and no extensions of the effective
maturity dates of any of the loans are granted. The final maturity date for
the underlying indenture on Classes A, B, C, D, E and F is September 25,
2022.

(6) The notes are callable by us at any time for an amount equal to the total
of principal outstanding, accrued interest and the applicable make-whole
prepayment premium.

(7) Subject to mandatory tender on March 1, 2003, to either the dealer or our
leasing subsidiary. The initial coupon of 6.75% applies to the first
five-year term through the mandatory tender date. If tendered to the dealer,
the notes must be remarketed. The rates reset upon remarketing.

(8) These obligations were assumed as part of our acquisition of our leasing
subsidiary. As part of the accounting for the purchase, these fixed-rate
obligations were considered to have stated interest rates which were below
the then-prevailing market rates at which our leasing subsidiary could issue
new debt obligations and, accordingly, we ascribed a market discount to each
obligation. Such discounts will be amortized as an adjustment to interest
expense using the effective interest method over the related term of the
obligations. As adjusted, the effective annual interest rates on these
obligations were 8.81%, 9.51% and 9.04%, for the 6.75% Dealer Remarketable
Securities, 7.70% Notes and 7.95% Notes, respectively.

S-19

At June 30, 2001, we had pay-fixed interest rate swaps with a total notional
amount of $325.0 million and a fair value (liability) of ($12.8) million. Our
pay-fixed interest rate swaps have rates ranging from 5.58% to 7.06%, and have
maturities ranging from June 2003 to December 2004. Interest rate swaps allow us
to effectively fix the rate on a portion of our outstanding floating-rate debt.
At June 30, 2001, we also had interest rate caps with a net notional amount of
$110.0 million and a fair value of $399,875. Our interest rate caps have strike
prices ranging from 7.75% to 10.00%, and have maturities ranging from
December 2004 to May 2007. Interest rate caps enable us to limit our exposure to
rising interest rates.

On May 17, 2000, we closed the inaugural offering under our proprietary
matched funding program, STARs(SM), Series 2000-1. In the initial transaction,
one of our wholly-owned subsidiaries issued $896.5 million of investment grade
bonds secured by the subsidiary's assets, which had an aggregate outstanding
principal balance of approximately $1.2 billion at inception. Principal payments
received on the assets will be utilized to repay the most senior class of the
bonds then outstanding. The maturity of the bonds match funds the maturity of
the underlying assets financed under the program. We initially purchased the
Class F bonds at a par value of $38.2 million, which we financed with a
$27.8 million repurchase agreement maturing in May 2001. This repurchase
agreement was repaid in April 2001. On July 17, 2000, we sold, at par,
$5.0 million of the Class F bonds to an institutional investor. For accounting
purposes, these transactions were treated as secured financings.

Moody's Investors Service, Inc., Fitch Inc. and Standard & Poor's Ratings
Services have each upgraded the ratings of the STARs(SM) bonds. The STARs(SM)
Class B bonds were upgraded to "Aaa," "AAA" and "AAA" from "Aa2," "AA" and "AA"
by Moody's, Fitch and Standard & Poor's, respectively. The STARs(SM) Class C
bonds were upgraded to "Aa3" and "AA-" from "A2" and "A+" by Moody's and Fitch,
respectively. In addition, Fitch also upgraded the STARs(SM) Class D, E and F
bonds by one notch to "A+," "BBB+" and "BBB," respectively.

In January 2001, Moody's upgraded our corporate senior unsecured credit
rating to "Ba1" from "Ba2," and the credit ratings on our perpetual preferred
stock to "Ba3" from "B1." In addition, in April 2001, Standard & Poor's upgraded
our corporate senior unsecured credit rating to "BB+" from "BB," and the credit
ratings on our perpetual preferred stock to "B+" from "B."

On July 2, 2001, we declared a regular quarterly cash dividend of $0.6125
per common share for the quarter ended June 30, 2001. The second quarter 2001
dividend, which was paid on July 30, 2001 to holders of record as of July 16,
2001, represented approximately 83.3% of basic adjusted earnings per share for
the second quarter.

STOCK REPURCHASE PROGRAM: The Board of Directors approved, and we have
implemented, a stock repurchase program under which we are authorized to
repurchase up to 5.0 million shares of our common stock from time to time,
primarily using proceeds from the disposition of assets and excess cash flow
from operations, but also using borrowings under our credit facilities if we
determine that it is advantageous to do so. As of both June 30, 2001 and
December 31, 2000, we had repurchased approximately 2.3 million shares at an
aggregate cost of approximately $40.7 million.

S-20

ADJUSTED EARNINGS

Adjusted earnings represents net income computed in accordance with GAAP,
before gains (losses) on sales of corporate tenant lease assets, extraordinary
items and cumulative effect of change in accounting principle, plus depreciation
and amortization, less preferred stock dividends, and after adjustments for
unconsolidated partnerships and joint ventures. Adjustments for unconsolidated
partnerships and joint ventures are calculated to reflect adjusted earnings on
the same basis.

We believe that to facilitate a clear understanding of our historical
operating results, adjusted earnings should be examined in conjunction with net
income as shown in our consolidated statements of operations. Adjusted earnings
should not be considered as an alternative to GAAP net income as an indicator of
our performance, or to cash flows from operating activities, as determined in
accordance with GAAP, as a measure of our liquidity, nor is it indicative of
funds available to fund our cash needs.

FOR THE FOR THE
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
------------------- -------------------
2001 2000 2000 1999
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

Adjusted earnings:
Net income...................................... $113,604 $105,818 $217,586 $38,886
Add: Depreciation............................... 17,586 17,871 34,514 11,016
Add: Allocated share of joint venture
depreciation.................................. 1,905 1,442 3,662 365
Add: Amortization of deferred financing costs... 10,432 5,288 13,140 6,121
Add: Costs incurred in acquiring external
advisor....................................... -- -- -- 94,476
Less: Preferred dividends....................... (18,454) (18,454) (36,908) (23,843)
Less: Net income allocable to class B
shares(1)..................................... -- -- -- (826)
Add: Cumulative effect of change in accounting
principle(2).................................. 282 -- -- --
Less: Gain on sale of corporate tenant lease
assets........................................ (1,599) (974) (2,948) --
Add: Extraordinary loss -- early extinguishment
of debt....................................... 1,037 317 705 --
-------- -------- -------- --------
Adjusted earnings allocable to common shareholders:
Basic........................................... $124,793 $111,308 $229,751 $126,195
======== ======== ======== ========
Diluted......................................... $125,267 $111,779 $230,688 $127,798
======== ======== ======== ========
Adjusted earnings per common share:
Basic........................................... $1.45 $1.31 $2.69 $2.19
======== ======== ======== ========
Diluted......................................... $1.42 $1.30 $2.67 $2.07
======== ======== ======== ========

------------------------------

(1) For the year ended December 31, 1999, net income allocable to class B
shares represents 1% of net income allocable to our class B shares. On
November 4, 1999, the class B shares were exchanged for common shares in
connection with our acquisition of our leasing subsidiary and related
transactions. As a result, we now have a single class of common shares
outstanding.

(2) Represents one-time effect of adoption of Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Investments and Hedging
Activities" as of January 1, 2001.

S-21

ISTAR FINANCIAL INC.

OVERVIEW

We began our business in 1993 through private investment funds formed to
take advantage of the lack of well-capitalized lenders capable of servicing the
needs of high-end customers in our markets. During our eight-year history, we
have structured or originated nearly $5 billion of financing commitments. During
this period, we have generated a realized internal rate of return of 28.3% on
the approximately $1.6 billion of investments that we have funded and which have
since been repaid. We have never realized a loss of principal or interest on any
loan investment we have funded.

Since becoming a public company in March 1998, we have also expanded our
platform by making a limited number of strategic corporate acquisitions. In
September 1998, we acquired the loan origination and servicing business of
Phoenix Home Life Insurance Company. In December 1998, we acquired the
structured finance portfolio of our largest private competitor, an affiliate of
Lazard Freres & Co. LLC. In November 1999, we acquired TriNet Corporate Realty
Trust, Inc., the then largest publicly-traded company specializing in corporate
tenant leasing for owners of office and industrial facilities. In March 2000, we
acquired American Corporate Real Estate, Inc., a leading privately-held
investment firm whose senior management team had extensive experience in the
corporate tenant leasing industry.

By capitalizing on our competitive strengths, we have delivered consistent
financial performance, developed a high-quality, diversified asset base and
established ourselves as a reliable provider of financing solutions for our
customers. We have consistently grown our adjusted earnings and dividends since
June 1998, our first quarter as a public company. Between that quarter and the
quarter ended June 30, 2001, we grew our adjusted earnings on a diluted basis by
75.6%, from approximately $0.41 to $0.72 per share, and increased our common
stock dividend by 75.0%, from $0.35 to $0.6125.

S-22

The graph below shows our quarterly adjusted earnings per share since our
first full quarter as a public company.

QUARTERLY ADJUSTED EARNINGS PER SHARE(1)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

6/30/98 $0.41

9/30/98 $0.43
12/31/98 $0.45
3/31/99 $0.46
6/30/99 $0.49
9/30/99 $0.52
12/31/99 $0.60
3/31/00 $0.64
6/30/00 $0.66
9/30/00 $0.68
12/31/00 $0.69
3/31/01 $0.71
6/30/01 $0.72

------------------------

COMPETITIVE STRENGTHS

CREATIVE CAPITAL SOLUTIONS

As a result of our focus, we have generated consistent and attractive
returns on our asset base. The graph below shows our return on average book
assets, after interest expenses, since June 1998, our first full quarter as a
public company.

S-23

RETURN ON AVERAGE BOOK ASSETS(1)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

6/30/98 7.2%

9/30/98 6.0%
12/31/98 5.3%
3/31/99 5.9%
6/30/99 6.0%
9/30/99 6.4%
12/31/99 6.5%
3/31/00 6.6%
6/30/00 6.7%
9/30/00 6.7%
12/31/00 6.8%
3/31/01 7.0%
6/30/01 7.2%

------------------------

(1) We define "return on average book assets" as the sum of annualized
quarterly adjusted earnings and preferred dividends divided by the
average book value of assets outstanding during the quarter.

EXPERIENCED MANAGEMENT

The ten members of our executive management team have an average of more
than 20 years of experience in the fields of real estate finance, private
investment, capital markets, transaction structuring, risk management and loan
servicing, providing us with significant expertise in the key disciplines
required for success in our business. Our culture is also highly-focused toward
on-going asset risk management. We emphasize long-term, incentive-based
compensation, such as stock options and grants of restricted common stock,
rather than cash compensation, and none of our employees is compensated based on
the volume of investment originations. Our directors and employees directly own
approximately 7% of our outstanding common stock on a diluted basis, which had a
market value of $162 million based upon the last reported sales price of our
common stock on September 5, 2001. Our executive management team is supported by
approximately 125 employees operating from six primary offices nationwide.

SIGNIFICANT EQUITY BASE

We had approximately $1.8 billion of tangible book equity and a consolidated
debt-to-book equity ratio of 1.2x as of June 30, 2001. We believe that we are
one of the most strongly capitalized asset-based finance companies. Our business
model is premised on maintaining significantly lower leverage than other
traditional commercial finance companies. We target a maximum consolidated
debt-to-book equity ratio of 1.5x to 2.0x, which is significantly lower than
most other commercial finance companies. We believe that operating within this
targeted range enables us to maintain a well-balanced, conservative and flexible
capital structure. In addition, our tax-advantaged structure as a REIT and our
ability to operate with less overhead, as a percentage of revenues, than many
other commercial finance companies enhance risk-adjusted returns on equity for
our common stockholders.

TAX-ADVANTAGED CORPORATE STRUCTURE

Because of our focus on commercial real estate finance, we are able to
qualify as a REIT under the Internal Revenue Code. Since we are taxed as a REIT,
we do not pay corporate-level taxes in most circumstances. This tax-advantaged
structure enables us to produce superior returns on equity for our stockholders
compared to taxable finance companies while utilizing significantly less
leverage than most taxable finance companies. The graphs below show our returns
on average common book equity and our debt-to-equity ratios since our first full
quarter as a public company.

S-24

RETURN ON AVERAGE COMMON BOOK EQUITY(1)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

6/30/98 11.7%

9/30/98 12.3%
12/31/98 13.0%
3/31/99 13.6%
6/30/99 14.1%
9/30/99 14.7%
12/31/99 14.8%
3/31/00 15.1%
6/30/00 15.5%
9/30/00 16.1%
12/31/00 16.7%
3/31/01 17.3%
6/30/01 17.5%

------------------------

(1) We define "return on average common book equity" as annualized quarterly
adjusted earnings divided by the average common book value of equity
outstanding during the quarter.

DEBT-TO-BOOK EQUITY

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

6/30/98 0.7X

9/30/98 1.3x
12/31/98 1.1x
3/31/99 1.2x
6/30/99 1.2x
9/30/99 1.1x
12/31/99 1.1x
3/31/00 1.1x
6/30/00 1.2x
9/30/00 1.2x
12/31/00 1.2x
3/31/01 1.2x
6/30/01 1.2x

ASSET QUALITY AND DIVERSIFICATION

Throughout our operating history, we have focused on maintaining
diversification of our asset base by product line, asset type, obligor, property
type and geographic region. Asset diversification is a key part of our risk
management strategy. Our borrower and corporate tenant base includes more than
170 customers in a wide range of industries, and our assets are backed by over
580 underlying properties of varying types located throughout the U.S. The
graphs below depict the diversification of our asset base, based upon the total
gross book value of our assets of approximately $4.0 billion as of June 30,
2001.

ASSET TYPE DIVERSIFICATION PROPERTY TYPE DIVERSIFICATION GEOGRAPHIC DIVERSIFICATION
PIE CHART PIE CHART PIE CHART

S-25

The table below reflects the diversification of our asset base as
represented by our 25 largest assets. The table shows the percentage these
assets represent of the total carrying value of our assets as of June 30, 2001,
and the percentage these assets represent of our total revenues for the three
months ended June 30, 2001.

TOP 25 ASSETS
--------------------
% ASSETS % REVENUE
-------- ---------

PROPERTY TYPE
Office...................................................... 18% 15%
Hotel....................................................... 15% 11%
Mixed Use................................................... 3% 2%
Retail...................................................... 5% 4%
Residential................................................. 4% 5%
Other....................................................... 6% 5%

ASSET TYPE
First Mortgages............................................. 21% 15%
Second Mortgages............................................ 5% 4%
Corporate Tenant Leases..................................... 12% 11%
Corporate/Partnership Loans................................. 12% 12%

GEOGRAPHIC REGION
West........................................................ 15% 12%
South....................................................... 11% 12%
Northeast................................................... 9% 7%
Southeast................................................... 3% 3%
Mid-Atlantic................................................ 2% 2%
Northwest................................................... 4% 3%
Other....................................................... 5% 4%

In addition, as of June 30, 2001, 52% of our corporate tenants, based on
GAAP annual lease payments, had actual or implied investment grade credit
ratings. Our corporate tenants include leading companies such as Federal
Express, Hilton Hotels, IBM, Nike, Verizon and Wells Fargo Bank.

We employ an in-depth review process and grading system to monitor the
credit quality of our asset base over time. We assign to each asset a risk
rating ranging from "one," which indicates superior credit quality, to "five,"
which indicates inferior credit quality. Each newly-originated asset is
typically assigned an initial rating of "three," or average. Based upon our
second quarter 2001 review, the weighted average risk rating of our loan assets
and corporate tenant lease assets was 2.68 and 2.79, respectively.

MATCH FUNDING DISCIPLINE

S-26

floating-rate debt), through the use of hedges such as interest rate swaps, or
through a combination of these strategies. This allows us to reduce the impact
of changing interest rates on our earnings.

Our objective is to limit volatility from a 100 basis point move in
short-term interest rates to no more than 2.5% of annual adjusted earnings per
share. As of June 30, 2001, a 100 basis point change in short-term interest
rates would have impacted our second quarter adjusted earnings per share by
approximately ($0.01), or approximately 1.4% of our second quarter adjusted
earnings per share of $0.72.

ASSET BASE

The table below sets forth certain financial characteristics of our asset
base as of June 30, 2001.

FINANCIAL CHARACTERISTICS OF OUR ASSET BASE

LOANS LEASES
------------- --------------
($ IN MILLIONS)

Gross Carrying Value................................... $2,274 $1,698
Total Financing Commitments............................ $2,401 Not applicable
Number of Investments.................................. 61 116
Number of Underlying Properties........................ 426 161
Average Asset Size per Investment...................... $37.3 $14.6
Average Asset Size per Property........................ $5.3 $10.5
Weighted Average Maturity/Lease Term................... 4.1 years 8.6 years
Average First Dollar Loan-to-Value(1).................. 31.8% Not applicable
Average Last Dollar Loan-to-Value(2)................... 71.4% Not applicable
Percentage Investment Grade Credits(3)................. Not available 52%

------------------------------

(1) "Average First Dollar Loan-to-Value" means the weighted average beginning
point of our lending exposure in the aggregate capitalization of the
underlying properties or companies we finance.

(2) "Average Last Dollar Loan-to-Value" means the weighted average ending point
of our lending exposure in the aggregate capitalization of the underlying
properties or companies we finance.

(3) Includes customers with implied investment grade ratings such as Accenture,
Alcatel USA, Cisco Systems and Volkswagen of America.

OUR TARGET MARKETS AND PRODUCT LINES

We believe we are the largest dedicated participant in a $100-$150 billion
niche of the approximately $2.1 trillion commercial real estate market,
consisting of the $1.5 trillion commercial mortgage market and the $600 billion
single-user market for corporate office and industrial facilities. Our primary
product lines include structured finance, portfolio finance, corporate tenant
leasing, corporate finance and loan acquisition. Our real estate lending assets
consist of mortgages secured by real estate collateral, loans secured by equity
interests in real estate assets, and secured and unsecured loans to corporations
engaged in real estate or real estate-related businesses. Our corporate tenant
lease assets consist of office and industrial facilities that we typically
purchase from, and lease-back to, a diversified group of creditworthy corporate
tenants as a form of financing for their businesses. Our leases are generally
long-term, and typically provide for all expenses at the facility to be paid by
the corporate tenant on a "triple net" basis. Under a typical net lease
agreement, the corporate customer agrees to pay a base monthly operating lease
payment and all facility operating expenses, including taxes, maintenance and
insurance.

S-27

The graph below shows the composition of our asset base by product line,
based on the total gross book value of our assets of approximately $4.0 billion
as of June 30, 2001.

PRODUCT LINE DIVERSIFICATION

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

CORPORATE TENANT LEASING 44%

Loan Acquisition 9%
Corporate Finance 13%
Structured Finance 25%
Portfolio Finance 9%

STRUCTURED FINANCE

We provide custom-tailored senior and subordinated loans ranging in size
from $20 million to $100 million to borrowers controlling institutional-quality
real estate. These loans are collateralized by single assets that are
strategically positioned within their respective market. Structured finance
loans may be either fixed- or floating-rate and are structured to meet the
specific financing needs of the borrowers, including financing related to the
acquisition, refinancing, repositioning or construction of large, high-quality
real estate. We offer borrowers a wide range of structured finance options,
including first mortgages, second mortgages, partnership loans, participating
debt and interim/bridge facilities.

PORTFOLIO FINANCE

We provide funding to regional and national borrowers who own a
geographically diverse portfolio of properties. Portfolio finance loans are
cross-collateralized to give borrowers the benefit of all available collateral
and underwritten to recognize the inherent diversification provided by multiple
assets. Property types generally include multifamily, suburban office,
all-suite, extended stay and limited service hotels. We structure loan terms to
meet the specific requirements of the borrower. These loans typically range in
size from $25 million to $150 million.

CORPORATE TENANT LEASING

We provide capital to corporate owners of office and industrial facilities.
Net leased facilities are generally subject to long-term leases to creditworthy
corporate tenants, and typically provide for all property expenses to be paid by
the tenant on a "triple-net" basis. Corporate tenant lease transactions
typically range in size from $20 million to $200 million.

We pursue the origination of corporate tenant lease transactions by
structuring purchase/ leasebacks and by acquiring facilities subject to existing
long-term net leases. In a purchase/leaseback transaction, we purchase the
property from the corporate tenant and lease it back to the tenant on a
triple-net basis. The purchase/ leaseback structure allows the corporate
customer to reinvest the proceeds from the sale of its facilities into its core
business, while we capitalize on our structured financing expertise.

Our corporate tenant lease investments primarily represent a diversified
portfolio of strategic office and industrial facilities subject to net lease
agreements with creditworthy corporate tenants. The corporate tenant lease
investments we target generally involve: (1) high-quality, general-purpose real
estate with residual values that represent a discount to current market values
and replacement costs;

S-28

and (2) corporate tenants that are established companies with stable core
businesses or market leaders in growing industries with investment-grade credit
strength or appropriate credit enhancements if corporate credit strength is not
sufficient.

Since acquiring our leasing subsidiary in November 1999, we have increased
the weighted average lease term of our corporate tenant lease assets from 5.6 to
8.6 years. During that time we have also executed over 7.2 million square feet
of new and renewal leases in 86 total transactions with a weighted average lease
term of 9.9 years. Throughout this leasing activity, we have emphasized early
lease renewals. Of the 2.4 million square feet of leases renewed since
June 1999, approximately 1.1 million square feet (44%) represented early
renewals where there were more than 12 months left on the primary lease term. As
of June 30, 2001, our corporate tenant lease portfolio was 96.7% leased.

As of June 30, 2001, we had more than 170 corporate customers operating in
more than ten major industry sectors, including aerospace, energy, financial
services, healthcare, hospitality, technology, manufacturing and
telecommunications. These customers include well-recognized national and
international companies, such as Accenture Ltd., Federal Express, Hilton Hotels,
IBM, Nike, Nokia Corporation, Verizon, Volkswagen of America and Wells Fargo
Bank.

The table below summarizes our corporate tenant lease assets as of June 30,
2001.

% ANNUALIZED
SECOND QUARTER
2001
TOTAL REVENUE SIGNIFICANT CUSTOMERS
-------------- --------------------------------------

Technology............................ 16.6% IBM, Cisco, Mitsubishi Electronics,
Hewlett-Packard, Unisys, Microsoft.
Telecommunications.................... 8.0% Nokia, Verizon, Avaya, Alcatel
Networks, Nortel Networks, AT&T
Wireless.
Transportation Services............... 1.0% Federal Express, ABX Logistics (USA).

Energy & Utilities.................... 2.5% Entergy Services, Exxon-Mobil, Bay
State Gas.
Hospitality........................... 3.1% Hilton Hotels.

Food & Related Services............... 2.9% Caterair, Ralphs Grocery, Unified,
Western Grocers, Welch Foods.
Financial Services.................... 2.7% Wellpoint Health Networks, Arbella
Capital Corp., Blue Cross & Blue
Shield, Wells Fargo Bank.
Manufacturing......................... 1.9% Nike, adidas America, Mast Industries.

Automotive, Aerospace &
Defense............................. 1.9% Volkswagen of America, Unison
Industries, Honeywell, TRW Space
Communications.
Professional Services................. 1.8% Accenture, PricewaterhouseCoopers,
Parsons Infrastructure & Technology,
The Mitre Corp.
Healthcare............................ 1.0% Avitar, Fresenius USA, Haemonetics.

Government Services................... 0.3% Massachusetts Lottery, State of CA
Dept. of Transportation.
Consumer Goods........................ 0.6% Sears Logistics, Rex Stores, Dunham's
Athleisure, Lever Brothers.

S-29

% ANNUALIZED
SECOND QUARTER
2001
TOTAL REVENUE SIGNIFICANT CUSTOMERS
-------------- --------------------------------------

Other Industry Sectors................ 0.9% Central Parking System, Modern
Graphics Arts, Universal Technical
Institute.
----
Total................................. 45.3%
====

The table below illustrates our corporate tenant lease expirations as of
June 30, 2001.

LEASE EXPIRATIONS

ANNUALIZED SECOND
QUARTER 2001
EXPIRING % OF ANNUALIZED
OPERATING LEASE SECOND QUARTER
YEAR OF LEASE NUMBER OF LEASES REVENUES 2001
EXPIRATION EXPIRING ($ IN THOUSANDS) TOTAL REVENUE
------------- ---------------- ----------------- ---------------

2001............................... 6 $2,627 0.5%
2002............................... 28 11,143 2.3%
2003............................... 20 15,276 3.2%
2004............................... 27 24,276 5.0%
2005............................... 16 13,984 2.9%
2006............................... 27 27,547 5.7%
2007............................... 15 18,562 3.8%
2008............................... 6 7,086 1.5%
2009............................... 11 13,703 2.8%
2010............................... 5 7,268 1.5%
2011 and thereafter................ 24 77,380 16.0%
--- ----------- ----
Total.............................. 185 $218,852 45.3%
=== =========== ====

CORPORATE FINANCE

We provide senior and subordinated capital to corporations engaged in real
estate or real estate-related businesses. Corporate finance loans may be either
secured or unsecured and typically range in size from $20 million to
$150 million. These corporate loans are typically backed by real estate
collateral and/or corporate guaranty.

LOAN ACQUISITION

We acquire whole loans and loan participations which we believe present
attractive risk-reward opportunities. These loans are generally acquired at a
discount to the principal balance outstanding and may be acquired with financing
provided by the seller. We restructure many of these loans on favorable terms.
In other cases, we negotiate a payoff at a price above our basis in the loan.
Loan acquisitions typically range from $5 million to $100 million and are
collateralized by a variety of property types.

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OUR STRATEGY

Our objective is to deliver superior risk-adjusted returns on equity to our
stockholders by providing innovative and value-added financing solutions to our
customers. We believe we have established a market leadership position for
highly structured mortgage, corporate and mezzanine financing backed by
high-quality commercial real estate nationwide. We deliver customized financial
products to sophisticated real estate borrowers and corporate customers who
require a high level of creativity and service. Our ability to provide
value-added financial solutions has consistently enabled us to realize margins
and returns on capital that are more attractive than those earned by many other
commercial real estate lenders.

INVESTMENT STRATEGY

In order to accomplish our objective, we have implemented the following
investment strategy:

- We focus on the origination of structured mortgage, corporate and lease
financings backed by high-quality commercial real estate assets located in
major U.S. metropolitan markets.

- We offer sophisticated borrowers and corporate customers added value in
the form of specific lending expertise, flexibility, certainty and
post-closing support.

- We seek to develop direct relationships with borrowers and corporate
tenants as opposed to sourcing transactions through intermediaries.

- We avoid businesses in which there is significant direct competition from
other providers of capital.

- We take advantage of market anomalies in the real estate financing markets
when we believe credit is mispriced by other providers of capital, such as
the spread between lease yields and the yields on corporate tenants'
underlying credit obligations.

- We stress test potential investments for adverse economic and real estate
market conditions.

We source our investment transactions from our existing relationships with
real estate owners, through other direct relationships within the real estate
and corporate finance communities, and from other capital providers and advisors
who refer customers to us. We also utilize information obtained from our risk
management group to generate leads on potential investment opportunities. We
have completed over $1.6 billion of financing transactions with borrowers who
have sought our expertise more than once.

We discuss and analyze investment opportunities during regular weekly
meetings which are attended by all of our investment professionals, as well as
representatives from our legal, risk management and capital markets areas. We
have developed a process for screening potential investments called the Six
Point Methodology(SM). The Six Point Methodology(SM) reflects the six
fundamental criteria by which we evaluate an investment opportunity prior to
beginning our formal underwriting and commitment process.

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THE SIX POINT METHODOLOGY(SM)

- First, we evaluate the source of the opportunity. We prefer opportunities
where we have a direct relationship with the customer or an intermediary
who has worked with us before, because we believe that such relationships
enable us to add more value to a transaction.

- Second, we evaluate the quality of the collateral or corporate credit, as
well as its market or industry dynamics.

- Third, we evaluate the equity or corporate sponsor, including factors such
as its reputation, financial strength and commitment to the collateral.

- Fourth, we determine whether we can implement an appropriate legal and
financial structure for the transaction given its risk profile, including
our ability to control the collateral under various circumstances.

- Fifth, we perform an alternative investment test. If we believe that we
can earn a better risk-adjusted return in a comparable asset class or
different part of the customer's capital structure, then the proposed
investment will score poorly in this category.

- Sixth, we evaluate the liquidity of the investment and our ability to
match fund the asset. A security that is too highly structured is less
desirable because it may limit our ability to obtain appropriately priced
financing for the asset, or our ability to sell it if we ever so desire.

We have an intensive underwriting process in place for all potential
investments. This process provides for comprehensive feedback and review by all
the disciplines within our Company, including investments, credit, risk
management, legal/structuring and capital markets. Participation is encouraged
from all professionals throughout the entire origination process, from the
initial consideration of the opportunity, through the Six Point Methodology(SM)
and into the preparation and distribution of a comprehensive memorandum for our
internal and Board of Directors investment committees.

Commitments of less than $30 million require the unanimous consent of our
internal investment committee, consisting of senior management representatives
from each of our key disciplines. For commitments between $30 million and
$50 million, the further approval of our Board of Directors' investment
committee is also required. All commitments of $50 million or more must be
approved by our full Board of Directors.

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The following flow chart illustrates our formal investment origination
process, beginning with the identification of an investment opportunity through
the closing and on-going servicing of the asset:

[LOGO]

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RISK MANAGEMENT

In addition to mitigating risk through the careful underwriting and
structuring of our investments, we further pro-actively manage risk by:
(1) generating, analyzing and distributing information on-line to all our
employees about our collateral and our customers on a continuous, real-time
basis; (2) holding weekly Company-wide meetings to identify and address risk
management issues; (3) applying a comprehensive risk rating process;
(4) establishing loan loss reserves and asset impairment procedures; and
(5) managing our assets and liabilities through match funding. We believe these
risk management measures enable us to effectively manage our asset base and
minimize our risk of loss. More than 50 of our approximately 135 employees are
dedicated to our risk management platform.

COLLATERAL AND CUSTOMER MONITORING

We have comprehensive real-time risk management systems that enable us to
pro-actively monitor the performance of our asset base and to quickly identify
and address potential issues with any of our assets. Risk management
information, which is generated from numerous collateral-level controls,
extensive customer reporting requirements and on-site asset monitoring programs,
is accessible to all our employees nationwide via computer.

Our comprehensive risk management systems require the active participation
of each of our senior professionals and other employees within our regional
office infrastructure. Every employee nationwide has access, via our computer
network, to various risk management reports which provide real-time information
regarding the performance of our asset base. These reports, which are
continually updated as new customer information is received, are based on
information that is: (1) required to be provided by our customers;
(2) generated by our risk management professionals; and (3) obtained from the
public domain. Examples of risk management reports include daily payment
reports, monthly covenant reviews, monthly reserve balance reports, monthly
budget-versus-actual analyses of collateral and corporate customer performance,
leasing activity reports and quarterly risk ratings reviews. This process
ensures that risk management issues are quickly identified and that decisions
are based on the most current information available.

iStar Asset Services, or "iSAS," our rated loan servicing subsidiary, and
iStar Real Estate Services, or "iRES," our corporate tenant lease asset
management division, are critical to our asset and customer monitoring efforts.
Together, they are principally responsible for managing our asset base,
including monitoring our customers' compliance with their respective loan and
leasing agreements, collecting customer payments, and efficiently analyzing and
distributing customer performance information throughout our Company on a
real-time basis. iSAS and iRES provide daily information on the performance and
condition of our asset base. iSAS is currently rated "above average" by
Standard & Poor's and is "approved" by Fitch as a master servicer. In addition
to servicing our asset base, iSAS also provides loan servicing to third-party
institutional owners of loan portfolios.

Our loan customers are required to comply with periodic covenant tests, and
typically must submit extensive collateral performance information such as
monthly operating statements and operating budgets. We also may require
customers to deposit cash into escrow accounts to cover major capital
expenditures, such as expected re-tenanting costs, and we typically require
approval rights over major decisions impacting collateral cash flows. In many
cases, collateral cash receipts must be deposited into lock-box bank accounts
that we control. We then distribute the net cash, after our debt service, to our
customers.

We furnish on-site asset management services for most of our corporate
tenant lease customers, providing us with daily information regarding the
condition of our assets. In addition, we have a formal annual inspection program
that ensures that our corporate tenant lease customers are complying with their
lease terms. Customer lease payments are deposited directly into lock-box
accounts managed by

S-34

our treasury group, and corporate customers are required to submit financial
statements on a regular basis to our corporate credit professionals. In
addition, our risk management group monitors the wire services for important
news on our customers, including press releases, earnings announcements, credit
ratings changes, research reports relating to our corporate customers and local
market conditions, and distributes this information via email to all of our
employees. All new corporate tenant leases must be approved by our Chief
Operating Officer who evaluates, with the assistance of our credit
professionals, the creditworthiness and appropriate security, if any, required
by us.

WEEKLY RISK MANAGEMENT MEETINGS

We hold weekly Company-wide meetings to identify current issues, and conduct
monthly meetings to review actual collateral performance compared to our
customers' budgets. During the weekly meetings, our regional offices connect via
videoconference with our headquarters and we review asset-specific issues in
detail. At these meetings, we develop an action plan to resolve any issues which
arise. We also conduct systematic, asset-specific reviews of both our loan and
corporate tenant lease assets on a quarterly basis, as discussed below.

RISK RATING PROCESS

We have a comprehensive risk rating process that enables us to evaluate,
monitor and pro-actively manage asset-specific credit issues and identify credit
trends on a portfolio-wide basis. We conduct a detailed credit review of each
asset on a quarterly basis, and we assign individual risk ratings to each asset
ranging from "one" to "five." Attendance is mandatory for all of our
professionals, including those in our regional offices. A "one" indicates
superior credit quality, a "two" signifies better than average credit quality, a
"three" serves as an average rating, a "four" indicates that management time and
attention is required for the asset, and a "five" denotes a problem asset with
potential principal risk to us. In addition to the ratings system, we maintain a
"watch list" of assets which are generally rated "four," but which require
highly pro-active asset management to preserve their current ratings. Each
newly-originated asset is typically assigned an initial rating of "three," or
average.

Risk ratings provide a common language and uniform framework by which we can
discuss and evaluate risk and relative levels of risk across our asset base.
This is our primary early warning system and provides us with a means of
identifying assets that warrant a greater degree of monitoring and senior
management attention. In addition, this process provides a useful forum to
identify assets or markets that may offer opportunities for new business.
Lastly, the risk ratings process serves as a basis for determining our quarterly
loan loss provision and evaluating the adequacy of our reserves.

Based upon our second quarter 2001 review, the weighted average risk rating
of our loan assets and corporate tenant lease assets was 2.68 and 2.79,
respectively.

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WEIGHTED AVERAGE LOAN ASSET RISK RATINGS

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

DEC-98 2.7

Mar-99 2.6
Jun-99 2.6
Sep-99 2.6
Dec-99 2.5
Mar-00 2.6
Jun-00 2.6
Sep-00 2.6
Dec-00 2.5
Mar-01 2.5
Jun-01 2.7

1=LOWEST RISK 5=HIGHEST RISK

We consider several primary variables in determining which rating to assign
to an asset. For our loans, the seven primary risk attributes are:

- Trailing and projected collateral operating performance and debt service
coverage ratios.

- Current and estimated loan-to-value ratios.

- Local and regional economic and real estate market trends.

- Loan structure.

- Collateral condition, location and marketability.

- Borrower's source of repayment funds or ability to refinance or sell the
collateral.

- Borrower financial strength, quality of sponsorship and capital commitment
to the collateral.

For our corporate tenant leases, the five primary risk attributes are:

- Corporate tenant credit and industry dynamics.

- Remaining lease term.

- Property condition, location and marketability.

- Local and regional economic and real estate market trends.

- Our book basis in the asset.

CREDIT LOSS RESERVE POLICY AND ASSET IMPAIRMENT PROCEDURES

Our policy for establishing loan loss reserves and our asset impairment
procedures are consistent with established accounting standards. We have never
realized a loss of principal or interest on any loan investment we have funded,
and do not currently believe that the book value of any of our assets is
impaired.

Our reserve levels reflect our judgment of loss potential and are evaluated
based upon the quarterly risk rating review process. The overall factors in this
evaluation include:

- General economic conditions.

- General loss trends in the industry, including comprehensive, long-term
data on commercial mortgage delinquencies and loss severities tracked by
the American Council of Life Insurers.

- The size, diversity and geographic concentration of our asset base.

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At June 30, 2001, loan loss reserves and accumulated depreciation on
corporate tenant lease assets collectively represented 205 basis points of the
book value of owned receivables, which includes loans and corporate tenant lease
assets.

ASSET/LIABILITY MANAGEMENT

Our objective is to match fund our liabilities and assets with respect to
maturities and interest rates. This means that we seek to match the maturities
of our financial obligations with the maturities of our investments. Match
funding allows us to reduce the risk of having to refinance our liabilities
prior to the maturity of our assets. In addition, we match fund interest rates
with like-kind debt (i.e., fixed-rate assets are financed with fixed-rate debt,
and floating-rate assets are financed with floating-rate debt), through the use
of hedges such as interest rate swaps, or through a combination of these
strategies. This allows us to reduce the impact of changing interest rates on
our earnings. Our objective is to limit volatility from a 100 basis point move
in short-term interest rates to no more than 2.5% of annual adjusted earnings
per share. As of June 30, 2001, a 100 basis point change in short-term interest
rates would have impacted our second quarter adjusted earnings per share by
approximately ($0.01), or approximately 1.4% of our second quarter adjusted
earnings per share of $0.72.

FINANCING STRATEGY

Our financing strategy revolves around three primary principles that are key
to our business model:

- Maintain significantly lower leverage than other commercial finance
companies and a large tangible equity capital base.

- Develop a deep and broad array of capital sources from a diversified group
of debt and equity providers in order to insulate our business from
potential fluctuations in the availability of capital.

- Match fund our liabilities and assets to minimize the risk that we have to
refinance our liabilities prior to the maturities of our assets and to
reduce the impact of changing interest rates on our earnings.

LOWER LEVERAGE AND A LARGE TANGIBLE EQUITY CAPITAL BASE.

Our business model is premised on operating at significantly lower leverage
and maintaining a larger tangible equity capital base than many other commercial
finance companies. At June 30, 2001, our consolidated debt-to-book equity ratio
was 1.2x. We target a maximum consolidated debt-to-book equity ratio of 1.5x to
2.0x, and believe that this is the appropriate leverage level for our business
model.

ACCESS TO A DEEP AND BROAD ARRAY OF RELIABLE CAPITAL SOURCES.

We seek to develop a deep and broad array of reliable debt and equity
capital sources to fund our business. Accordingly, we maintain a diverse range
of short- and long-term financing sources from both the secured and unsecured
lending and capital markets. We also believe that our track record as a private
and public company and our investor base, comprised of leading institutional
investors and high net worth individuals, will enable us to continue to access
the public and private equity capital markets.

As of June 30, 2001, we had $1.9 billion of committed total capacity under
our secured credit facilities. We primarily use our secured facilities to
initially fund our investments prior to seeking match funded, long-term
financing sources. Our secured facilities bear interest rates ranging from LIBOR
plus

S-37

1.40% to LIBOR plus 2.25%, and have final maturities, including extension
options, ranging from August 2003 to March 2005.

At June 30, 2001, we maintained unsecured lending relationships with 13
leading commercial banks and had $450.0 million of committed total capacity
under our unsecured facilities. We primarily use our unsecured facilities for
working capital purposes. We also had $275.0 million of long-term corporate
unsecured debt outstanding.

MATCH FUNDING

We primarily execute our match funding strategy through our own proprietary
matched funding program, iStar Asset Receivables or "STARs(SM)," as well as
through term lending relationships with approximately 12 large financial
institutions. Using STARs(SM), we can access the securitized debt markets by
issuing investment-grade rated securities collateralized by pools of our
structured finance and corporate tenant lease assets. The STARs(SM) bond
maturities match the maturities of the underlying collateral, thereby
eliminating refinancing risk. We continue to service the assets in the
collateral pool through our loan servicing subsidiary, iStar Asset Services.
Because STARs(SM) is an on-balance sheet financing program, we recognize no gain
on sale in our financial statements when utilizing this vehicle.

We completed our first STARs(SM) transaction in May 2000, and issued
approximately $900 million of investment-grade rated bonds backed by
approximately $1.2 billion of collateral. Since that time, Fitch, Moody's and
Standard & Poor's have upgraded by one notch from their initial ratings each
class of investment grade bonds rated by them, except for the Class A bonds,
which initially received the maximum ratings from each rating agency and
continue to bear such ratings.

We believe that the STARs(SM) program provides us significantly more
flexibility in managing our collateral and match funding our liabilities and
assets than other securitization structures, and that the strong performance of
our initial STARs(SM) transaction should positively impact future debt issuances
under this program. In addition, we view the securitized debt markets as a very
reliable source of debt capital, even when macroeconomic conditions make other
lending markets unavailable or unattractive.

We also use term debt to match fund our investments, and we maintain term
lending relationships with approximately 12 major commercial banks and insurance
companies. As part of these term lending relationships, we have developed an
innovative debt facility with a commercial bank that match funds certain of our
corporate finance investments. We believe that the STARs(SM) program and our
relationships with various term lenders provide us with a reliable,
cost-effective and diverse source of capital for match funding our liabilities
and assets.

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COMMON STOCK PRICE AND DIVIDEND PERFORMANCE

On June 12, 1998, the Frank Russell Company announced that our common stock
would be included in the Russell 1000 and Russell 3000 equity indices. From the
time of our inclusion in the Russell indices through June 16, 1999, when we
announced our acquisition of TriNet Corporate Realty Trust, Inc., our reported
stock price was highly volatile, and our trading volume was relatively low due
to the very limited number of shares available for trading at that time. During
this period, we believe that index funds that were required to mirror the
Russell indices' performance purchased a large number of the shares of our
common stock available in the public float. Those purchases, combined with the
limited availability of the shares at that time, resulted in a dramatic increase
in the "market" price for the common stock shortly after the June 12, 1998
announcement.

The high and low sales prices per share and the dividends paid or declared
by us on our common stock are each set forth below for the quarters indicated.

PRICE RANGE OF OUR
COMMON STOCK
-------------------
QUARTERLY PERIOD ENDED HIGH LOW DIVIDEND/SHARE
---------------------- -------- -------- --------------

1998:

June 30, 1998.............................................. $56.0000 $26.2500 $ 0.35

September 30, 1998......................................... $59.2500 $35.5000 $ 0.38

December 31, 1998.......................................... $80.2500 $45.2500 $ 0.41

1999:

March 31, 1999............................................. $63.0000 $42.5000 $ 0.42

June 30, 1999.............................................. $66.5000 $31.6250 $ 0.43

September 30, 1999......................................... $76.0000 $27.8750 $ 0.44

December 31, 1999.......................................... $27.6250 $16.6875 $ 0.57

2000:

March 31, 2000............................................. $18.7500 $16.6250 $ 0.60

June 30, 2000.............................................. $20.9375 $17.3750 $ 0.60

September 30, 2000......................................... $22.4375 $20.2500 $ 0.60

December 31, 2000.......................................... $21.6250 $19.0625 $ 0.60

2001:

March 31, 2001............................................. $25.7000 $19.1875 $ 0.6125

June 30, 2001.............................................. $28.2000 $22.7400 $ 0.6125

Through September 5, 2001.................................. $28.4600 $26.8200

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MANAGEMENT

The following table sets forth the names and the positions of our senior
officers:

NAME TITLE
---- ------------------------------------------------

Jay Sugarman.............................. Chairman and Chief Executive Officer

Spencer B. Haber.......................... President, Chief Financial Officer and Director

H. Cabot Lodge, III....................... Executive Vice President--Investments and
Director

Jeffrey R. Digel.......................... Executive Vice President--Investments

R. Michael Dorsch, III.................... Executive Vice President--Investments

Barclay G. Jones, III..................... Executive Vice President--Investments

Nina B. Matis............................. Executive Vice President and General Counsel

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

Diane Olmstead............................ Executive Vice President--Investments

Barbara Rubin............................. President--iStar Asset Services, Inc.

Steven R. Blomquist....................... Senior Vice President--Investments

Jeffrey N. Brown.......................... Senior Vice President--Asset Management

Roger M. Cozzi............................ Senior Vice President--Investments

Chase S. Curtis, Jr....................... Senior Vice President--Credit

Geoffrey M. Dugan......................... Senior Vice President--Human Resources and
Assistant General Counsel

Andrew C. Richardson...................... Senior Vice President--Capital Markets

Steven B. Sinnett......................... Senior Vice President--Project Finance

Elizabeth B. Smith........................ Senior Vice President--Asset Management

SENIOR MANAGEMENT

JAY SUGARMAN is Chairman of the Board and Chief Executive Officer of iStar
Financial. Mr. Sugarman has served as a director of iStar Financial (and its
predecessor) since 1996 and Chief Executive Officer since 1997. Under
Mr. Sugarman's leadership, iStar Financial has become a leading provider of
structured financial solutions to high-end private and corporate owners of real
estate in the United States. Previously, Mr. Sugarman was president of Starwood
Mezzanine Investors, L.P., a private investment partnership specializing in
structured real estate finance. Prior to forming Starwood Mezzanine,
Mr. Sugarman managed diversified investment funds on behalf of the Burden
family, a branch of the Vanderbilt family, and the Ziff family. While in that
position, he was jointly responsible for the formation of Starwood Capital
Group, L.L.C., a large private investment fund, and the formation of HBK
Investments, one of the nation's largest convertible arbitrage trading
operations. He received his undergraduate degree SUMMA CUM LAUDE from Princeton
University, where he was nominated for valedictorian and received the Paul
Volcker Award in Economics, and his M.B.A. with high distinction from Harvard
Business School, graduating as a Baker Scholar and recipient of the school's
academic prizes for both finance and marketing. Mr. Sugarman is a director of
WCI Communities, Inc., a residential developer in South Florida, and a member of
the Board of Directors of NAREIT.

SPENCER B. HABER is President, Chief Financial Officer and a director of
iStar Financial. Mr. Haber has served as a director of iStar Financial (and its
predecessor) since June 1999, its Chief Financial Officer since 1998 and its
President since June 2001. Mr. Haber maintains primary responsibility for all of
iStar Financial's capital-raising initiatives and external communications.
Mr. Haber also sits on iStar

S-40

Financial's internal and Board Investment Committees and oversees all finance,
hedging, treasury and accounting functions. Prior to joining iStar Financial,
Mr. Haber was a senior vice president in Lehman Brothers' global real estate
group and was responsible for that firm's real estate mergers and acquisitions
business. In addition to his M&A role, Mr. Haber maintained primary client
coverage responsibilities in raising equity and debt capital for a wide range of
public and private companies, participating in more than $10 billion of
transactions. Before Lehman Brothers, Mr. Haber was a member of Salomon
Brothers' real estate investment banking unit. At Salomon Brothers, Mr. Haber
participated in that firm's principal and advisory real estate activities. Prior
to Salomon Brothers, Mr. Haber worked for MIG Capital Management, a joint
venture of MIG Companies, a domestic real estate pension fund advisor, and
Charterhouse Inc., a British merchant bank. Mr. Haber holds a B.S. degree in
economics SUMMA CUM LAUDE and an M.B.A. from the Wharton School, where he
graduated a Palmer Scholar. He is a member of the National Association of Real
Estate Investment Trusts and the Urban Land Institute. Mr. Haber also sits on
the board of directors of Capital Thinking Inc., an application services
provider to financial institutions.

H. CABOT LODGE, III has served as a director and an Executive Vice
President--Investments of iStar Financial since March 2000 and oversees iStar
Financial's corporate tenant lease investment activity. Prior to joining iStar
Financial, Mr. Lodge was a founder and principal of ACRE Partners LLC, a
privately held firm focused on providing public and private corporations with
highly structured, value-added financing for their corporate real estate
facilities. Mr. Lodge served as chairman of Superconducting Core
Technologies, Inc., a wireless communications company from 1995 to 1997, and
prior to that was managing director and co-head of investments for W.P. Carey &
Co., Inc. from 1983 to 1995. Mr. Lodge is a director of Meristar Hospitality
Corporation, High Voltage Engineering Corporation and TelAmerica Media, Inc.
Mr. Lodge graduated with honors from Harvard College and received his M.B.A.
from Harvard Business School.

JEFFREY R. DIGEL has served as an Executive Vice President--Investments of
iStar Financial since March 2000 and is co-head of our internal Investment
Committee. Prior to that, he was Senior Vice President--Investments since
May 1998. Mr. Digel is responsible for the origination of new structured
financing transactions, focusing on iStar Financial's financial institution and
loan correspondent relationships. Previously, Mr. Digel was a vice
president-mortgage finance at Aetna Life Insurance Company responsible for
commercial mortgage securitizations, management of Aetna's mortgage
correspondent network, management of a $750 million real estate equity portfolio
for Aetna's pension clients and origination of new equity investments. Prior to
joining Aetna, Mr. Digel was a member of Hart Advisors, responsible for the
development and supervision of the portfolio, asset management and client
communications functions for Hart's real estate pension advisory business. In
addition, Mr. Digel is a member of the Mortgage Bankers Association and the
International Council of Shopping Centers. Mr. Digel received a B.A. degree from
Middlebury College and an M.M. from Northwestern University.

R. MICHAEL DORSCH, III has served as an Executive Vice
President--Investments of iStar Financial since March 2000, focusing on our
corporate tenant leasing business. Prior to joining iStar Financial, Mr. Dorsch
was a principal of ACRE Partners LLC, a privately held firm focused on providing
public and private corporations with highly-structured, value-added financing
solutions for their corporate real estate facilities. Mr. Dorsch was a founder
and managing partner of Corporate Realty Capital, a Boston-based real estate
investment bank from 1990 to 1997. CRC was formed as an affiliate of Corporate
Property Investors and focused on originating, structuring and financing net
lease transactions. Prior to the formation of CRC, Mr. Dorsch was a partner in a
Boston-based real estate development, ownership and management concern. From
1984 to 1986, Mr. Dorsch was a vice president of Winthrop Financial Associates,
private real estate syndication, where he structured and placed equity interests
in transactions capitalized at over $1 billion. Mr. Dorsch graduated with a
Sc.B.

S-41

in Mechanical Engineering from Brown University and earned honors while
receiving an M.B.A. from Harvard Business School.

BARCLAY G. JONES, III has served as an Executive Vice President--Investments
of iStar Financial since March 2000, focusing on our corporate tenant leasing
business. Prior to joining iStar Financial, Mr. Jones was a principal of ACRE
Partners LLC, a privately held firm focused on providing public and private
corporations with highly-structured, value-added financing solutions for their
corporate real estate facilities. Prior to that, Mr. Jones served in a variety
of capacities, including vice chairman and chief acquisitions officer, for W.P.
Carey & Co., Inc. from 1982 to 1998. During that period, Mr. Jones was
responsible for originating in excess of $2 billion of sale-leaseback financings
and over $1 billion of mortgage placements. During his tenure at W.P. Carey, the
firm grew from fewer than ten employees to over 70, and from approximately
$100 million in assets to over $2.5 billion. Mr. Jones holds a B.S. degree in
economics from the Wharton School.

NINA B. MATIS has served as General Counsel of iStar Financial (and its
predecessor) since 1996 and Executive Vice President since November 1999.
Ms. Matis is responsible for legal, tax, structuring and regulatory aspects of
iStar Financial's operations and investment and financing transactions. From
1984 through 1987, Ms. Matis was an adjunct professor at Northwestern University
School of Law where she taught real estate transactions. Ms. Matis is a director
for Burnham Pacific, Inc. and a member of the American College of Real Estate
Lawyers, Ely Chapter of Lambda Alpha International, the Chicago Finance
Exchange, the Urban Land Institute, REFF, the Chicago Real Estate Executive
Women, The Chicago Network and The Economic Club of Chicago, and she is listed
in both The Best Lawyers of America and Sterling's Who's Who. Ms. Matis received
a B.A. degree, with honors, from Smith College and a J.D. degree from New York
University School of Law.

TIMOTHY J. O'CONNOR has served as Chief Operating Officer of iStar Financial
(and its predecessor) since March 1998 and Executive Vice President since
March 2000. Mr. O'Connor is responsible for developing and managing iStar
Financial's risk management and due diligence operations, participating in the
evaluation and approval of new investments and coordinating iStar Financial's
information systems. Previously, Mr. O'Connor was a vice president of Morgan
Stanley & Co. responsible for the performance of more than $2 billion of assets
acquired by the Morgan Stanley Real Estate Funds. Prior to joining Morgan
Stanley, Mr. O'Connor was a vice president of Greystone Realty Corporation
involved in the firm's acquisition and asset management operations. Previously,
Mr. O'Connor was employed by Exxon Co. USA in its real estate and engineering
group. Mr. O'Connor is a member of the International Council of Shopping
Centers, the Institute of Real Estate Management and the Buildings Owners and
Managers Association, and is a former vice president of the New York City/
Fairfield County chapter of the National Association of Industrial and Office
Parks. Mr. O'Connor received a B.S. degree from the United States Military
Academy at West Point and an M.B.A. from the Wharton School.

DIANE OLMSTEAD has served as an Executive Vice President--Investments of
iStar Financial in our San Francisco office since September 2000, and is
responsible for the origination of new financing transactions. Prior to joining
us, Ms. Olmstead was executive vice president of institutional ventures for
Redbricks.com, an Internet start-up focused on the commercial real estate
market. Previously, Ms. Olmstead was a partner at Arthur Andersen where she
founded and ran the real estate capital markets (RECM) group for the western
region. The RECM group executed private equity and debt placements, portfolio
and company sales, REIT IPO advisory and M&A transactions in excess of
$4.7 billion. Ms. Olmstead is a graduate of SUNY at Buffalo with a B.A. in
English. She is a member of Urban Land Institute and National Association of
Industrial and Office Park Owners, Fisher Center For Real Estate and Urban
Economics Policy Advisory Board, Lambda Alpha and Mortgage Bankers Association.

S-42

BARBARA RUBIN has served as President of iStar Asset Services, Inc., our
Hartford-based loan asset management and servicing operation, since
September 1998 and as Senior Vice President of iStar Financial since
January 1999. She has more than 20 years of real estate investment experience,
including loan and real estate equity origination, portfolio management, loan
servicing, and capital markets activities. Prior to joining iStar Financial,
Ms. Rubin was president and chief operating officer of Phoenix Realty
Securities, Inc., a real estate advisory operation which managed portfolios of
real estate securities (including mortgage loan investments and real estate
equity securities). She is currently Chair of the Connecticut Health and
Education Facilities Authority, a member of the Board of Governors of the
Mortgage Bankers Association and a member of the Board of Commercial Mortgage
Securities Association. Ms. Rubin received a B.A. from Williams College and an
M.B.A. from the University of Connecticut.

STEVEN R. BLOMQUIST has served as Senior Vice President--Investments of
iStar Financial since September 1998. Mr. Blomquist is responsible for the
origination and acquisition of new financings with borrowers in the Phoenix Home
Life-serviced mortgage loan portfolio and related loan correspondents. He also
shares responsibility in managing several of iStar Financial's relationships
with financial institutions and other loan correspondents. Mr. Blomquist has
over 16 years of loan origination and investment management experience.
Previously, Mr. Blomquist was executive vice president and chief investment
officer of Phoenix Realty Securities, a Phoenix Home Life subsidiary
specializing in providing real estate securities investment advisory services.
Mr. Blomquist directed the origination of over $1.5 billion of mortgage loans
and maintains strong correspondent and borrower relations. Prior to his current
position, Mr. Blomquist was responsible for the debt and equity management of a
$750 million Phoenix Home Life portfolio in the Western United States.
Mr. Blomquist is a member of the Mortgage Bankers Association, the Urban Land
Institute and the International Council of Shopping Centers. He received both
his bachelors degree and an M.B.A. from the University of Connecticut.

JEFFREY N. BROWN has served as Senior Vice President--Asset Management of
iStar Financial since October 2000. Prior to that, he was Vice President--Asset
Management since November 1999. Previously, he served as a vice president at
TriNet. Mr. Brown is responsible for our East Region corporate tenant lease
assets, including lease negotiations, corporate-level customer relations, lease
compliance, portfolio-level analysis and reporting and market research
activities. Mr. Brown's prior professional experience includes director of
property management for Insignia Commercial Group (San Francisco), regional
director (West Coast) with PM Realty Group and various project/property
management positions with Eastover Corporation. Mr. Brown holds a B.S. degree
from Millsaps College, Jackson, Mississippi.

ROGER M. COZZI has served as Senior Vice President--Investments of iStar
Financial (and its predecessor) since January 1999. Prior to that he was Vice
President--Investments since 1997. Mr. Cozzi is responsible for the origination,
structuring and underwriting of new financing transactions at iStar Financial.
Previously, Mr. Cozzi was an assistant vice president at Starwood Capital Group
directly involved with the origination of Starwood Capital's debt investments in
Starwood Mezzanine Investors and Starwood Opportunity Fund IV. Prior to joining
Starwood Capital, Mr. Cozzi worked at Goldman Sachs & Co. in its real estate
department and mutual fund industry resource group. Mr. Cozzi received a B.S.
degree, MAGNA CUM LAUDE, from the Wharton School.

CHASE S. CURTIS, JR. has served as a Senior Vice President--Credit of iStar
Financial since June 2001, and is responsible for coordinating the initial and
on-going underwriting of corporate credit, with a particular emphasis on
corporate tenant risk assessment. He joined iStar Financial from Bank of America
following a 16-year career in credit risk management and structured corporate
finance. Immediately prior to joining iStar Financial, he was senior vice
president and chief credit officer of Bank of America Commercial Finance
responsible for its credit approvals, risk policy and risk process controls.
Prior to that, he spent three years in Hong Kong as an executive credit risk
review officer

S-43

overseeing portfolio and transactional risk assessments across Asia. Mr. Curtis
holds an M.S. from the University of Arizona and he received a B.S. degree (with
high honors) from Bates College. He is a Chartered Financial Analyst.

GEOFFREY M. DUGAN has served as Senior Vice President of iStar Financial
since January 2001, and as Assistant General Counsel and Assistant Secretary
since November 1999. Previously, he served as vice president, administration and
general counsel of TriNet, and in that capacity was responsible for corporate
and securities laws compliance matters, corporate governance matters, and legal
issues associated with administrative, human resources and employee benefit
functions, including the oversight of outside legal counsel. Prior to joining
us, Mr. Dugan was in private law practice for over 20 years, where his practice
emphasized corporate finance, securities and commercial transactions for real
estate investment trusts and other business entities. Mr. Dugan received a J.D.
from Georgetown University Law Center and a B.A. from Harvard College.
Mr. Dugan is a Member of the New York Bar and the State Bar of California.

ANDREW C. RICHARDSON has served as Senior Vice President--Capital Markets
since March 2000. He joined iStar Financial from Salomon Smith Barney, where he
was a vice president in the global real estate and lodging investment banking
group, providing merger and acquisition advisory services and raising debt and
equity capital for public and private real estate companies. Mr. Richardson's
experience at Salomon Smith Barney also included working in its mergers and
acquisitions group, advising clients in a wide range of industries. Prior to
joining Salomon Smith Barney, Mr. Richardson worked for Ernst & Young and was a
certified public accountant. Mr. Richardson holds an M.B.A. from the University
of Chicago, and a B.B.A. in accountancy from the University of Notre Dame.

STEVEN B. SINNETT has served as Senior Vice President--Project Finance of
iStar Financial since January 2001, and prior to that served as Vice President
and Controller since November 1999. Mr. Sinnett is responsible for project
finance activities for iStar Financial and its subsidiaries. He previously
served as vice president, controller of TriNet, and in that capacity was
responsible for planning and executing all aspects of financial reporting,
accounting and information technology activities. Prior to joining TriNet, he
was associated with AMB Institutional Realty Advisors Inc., Meridian Point
Properties, Inc. (a real estate investment trust) and its predecessor, and the
accounting firm of Arthur Young & Co. Mr. Sinnett received a Masters of
Professional Accounting from Georgia State University and a B.S. from the
University of Florida. Mr. Sinnett is a certified public accountant in the State
of California.

ELIZABETH B. SMITH has served as Senior Vice President--Asset Management of
iStar Financial since August 1999. Ms. Smith manages our Dallas office and is
directly responsible for our Central Region corporate tenant lease assets. Prior
to joining iStar Financial, Ms. Smith was a vice president for MBL Life
Assurance Corporation, managing the rehabilitation and disposition of a
$3 billion debt and equity portfolio located throughout the United States.
Previously, Ms. Smith worked at J.E. Robert Companies, Inc., and for Sunbelt
Savings, FSB, specializing in debt and equity portfolio management. Ms. Smith
holds a B.B.A. degree from the University of Mississippi in Oxford, Mississippi.

S-44

NON-EMPLOYEE DIRECTORS

The following table sets forth the names and current affiliations of our
non-employee directors:

NAME AFFILIATION
---- --------------------------------------------------------

Willis Andersen, Jr....................... Real estate industry consultant

Jeffrey G. Dishner........................ Starwood Capital Group, L.L.C.--Senior Managing Director

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

Madison F. Grose.......................... Starwood Capital Group, L.L.C.--Senior Managing Director
and Co-General Counsel

Robert W. Holman, Jr...................... Pebble Beach Institute--Managing Director

Robin Josephs............................. Ropasada, LLC--Managing Director

Merrick R. Kleeman........................ Starwood Capital Group, L.L.C.--Senior Managing Director

William M. Matthes........................ Behrman Capital--Managing Partner

John G. McDonald.......................... Stanford University--IBJ Professor of Finance in the
Graduate School of Business

Michael G. Medzigian...................... Lazard Freres Real Estate Investors L.L.C.--President
and Chief Executive Officer

Stephen B. Oresman........................ Saltash, Ltd.--Owner and President

George R. Puskar.......................... Lend Lease Real Estate Investments--Former Chairman of
the Board

Barry S. Sternlicht....................... Starwood Capital Group, L.L.C.--Founder, General
Manager, President and Chief Executive Officer

Starwood Hotels & Resorts Worldwide, Inc.--Chairman and
Chief Executive Officer

S-45

SELLING STOCKHOLDERS

This prospectus supplement relates to the offer and sale for the account of
the selling stockholders described below of an aggregate of 15,000,000 shares of
common stock. The following chart shows, according to our records as of
July 31, 2001, the number of shares of common stock beneficially owned by the
selling stockholders and the number of shares of common stock being offered
hereby:

SHARES OF COMMON STOCK SHARES OF COMMON STOCK
OWNED PRIOR TO THE OFFERING OWNED AFTER THE OFFERING(1)
--------------------------- SHARES ---------------------------
NUMBER OF PERCENTAGE BEING NUMBER OF PERCENTAGE
SELLING STOCKHOLDER SHARES OF CLASS OFFERED SHARES OF CLASS
------------------- ------------ ------------ --------- ------------ ------------

SOFI-IV SMT Holdings, L.L.C........ 41,854,934 48.4% 7,227,241 34,627,693 40.0%
Starwood Mezzanine Investors,
L.P.............................. 10,962,886 12.7% 7,227,241 3,735,645 4.3%
B Holdings, LLC.................... 545,518 0.6% 545,518 0 0%

------------------------

(1) If the underwriters exercise their overallotment option, Starwood Mezzanine
Investors, L.P. will sell up to an additional 2,250,000 shares.

SOFI-IV SMT Holdings, L.L.C. is an entity owned by Starwood Opportunity Fund
IV, L.P. Starwood Opportunity Fund IV, L.P. is an investment fund formed on
July 3, 1996. SOFI IV Management, L.L.C. is its general partner. Starwood
Opportunity Fund IV, L.P.'s initial term expires on February 27, 2005, but may
be extended by the general partner with the consent of its advisory committee
for up to two additional one-year periods.

Starwood Mezzanine Investors, L.P. is an investment fund formed on
February 15, 1994. Starwood Capital Group I, L.P. is its managing general
partner and Starwood Mezzanine Holdings, L.P. is a general partner. The fund's
term expires on November 1, 2002, but may be extended for up to two additional
one-year periods upon majority approval of its limited partners.

Starwood Opportunity Fund II, L.P., Starwood Mezzanine Investors, L.P.,
Starwood Opportunity Fund IV, L.P. and Starwood Capital Group, L.L.C. each has
an economic interest in the shares of iStar Financial common stock held by
B Holdings, LLC, an investment entity.

Each of the selling stockholders is controlled by entities which are
controlled by Barry S. Sternlicht, one of our directors. Jay Sugarman, our
Chairman and Chief Executive Officer, and Jeffrey G. Dishner, Madison F. Grose
and Merrick R. Kleeman, each of whom is a director of iStar Financial, also have
interests in the selling stockholders or entities that control the selling
stockholders. Additional information regarding the selling stockholders may be
found in "Participating Securityholders" and "Certain Relationships Between the
Company and the Participating Securityholders" contained in the accompanying
prospectus.

The selling stockholders may determine, prior to the completion of this
offering, to sell a different aggregate number of shares or apportion
differently between them the shares sold in this offering. The actual number of
shares sold by each selling stockholder will be shown in the final prospectus
supplement.

S-46

FEDERAL INCOME TAX CONSEQUENCES

The following supplements the discussion contained in the accompanying
prospectus under the heading "Federal Income Tax Considerations," which
discussion (to the extent not inconsistent with the following) is incorporated
in its entirety in this prospectus supplement. The discussions contained under
the headings herein are intended to supplement the discussions contained in the
corresponding headings of the accompanying prospectus.

THE FOLLOWING IS A SUMMARY OF THE FEDERAL INCOME TAX CONSEQUENCES
ANTICIPATED TO BE MATERIAL TO AN INVESTOR IN iSTAR FINANCIAL. THIS SUMMARY IS
BASED ON CURRENT LAW, IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE.
YOUR TAX CONSEQUENCES RELATED TO AN INVESTMENT IN iSTAR FINANCIAL MAY VARY
DEPENDING ON YOUR PARTICULAR SITUATION AND THIS DISCUSSION DOES NOT PURPORT TO
DISCUSS ALL ASPECTS OF TAXATION THAT MAY BE RELEVANT TO A HOLDER OF OUR
SECURITIES IN LIGHT OF HIS OR HER PERSONAL INVESTMENT OR TAX CIRCUMSTANCES, OR
TO HOLDERS OF OUR SECURITIES SUBJECT TO SPECIAL TREATMENT UNDER THE FEDERAL
INCOME TAX LAWS EXCEPT TO THE EXTENT DISCUSSED UNDER THE HEADINGS "--TAXATION OF
TAX-EXEMPT STOCKHOLDERS" AND "--TAXATION OF FOREIGN STOCKHOLDERS." INVESTORS
SUBJECT TO SPECIAL TREATMENT INCLUDE, WITHOUT LIMITATION, INSURANCE COMPANIES,
FINANCIAL INSTITUTIONS, BROKER-DEALERS, TAX-EXEMPT ORGANIZATIONS, INVESTORS
HOLDING SECURITIES AS PART OF A CONVERSION TRANSACTION, OR A HEDGE OR HEDGING
TRANSACTION OR AS A POSITION IN A STRADDLE FOR TAX PURPOSES, FOREIGN
CORPORATIONS OR PARTNERSHIPS, AND PERSONS WHO ARE NOT CITIZENS OR RESIDENTS OF
THE UNITED STATES. IN ADDITION, THE SUMMARY BELOW DOES NOT CONSIDER THE EFFECT
OF ANY FOREIGN, STATE, LOCAL OR OTHER TAX LAWS THAT MAY BE APPLICABLE TO YOU AS
A HOLDER OF OUR SECURITIES.

The information in this summary is based on the Internal Revenue Code of
1986, as amended, current, temporary and proposed Treasury regulations
promulgated under the Internal Revenue Code, the legislative history of the
Internal Revenue Code, current administrative interpretations and practices of
the Internal Revenue Service, and court decisions, all as of the date of this
prospectus. The administrative interpretations and practices of the Internal
Revenue Service upon which this summary is based include its practices and
policies as expressed in private letter rulings which are not binding on the
Internal Revenue Service, except with respect to the taxpayers who requested and
received such rulings. Future legislation, Treasury regulations, administrative
interpretations and practices, and court decisions may affect the tax
consequences contained in this summary, possibly on a retroactive basis. We have
not requested, and do not plan to request, any rulings from the Internal Revenue
Service concerning our tax treatment or the tax consequences contained in this
summary, and the statements in this prospectus are not binding on the Internal
Revenue Service or a court. Thus, we can provide no assurance that the tax
consequences contained in this summary will not be challenged by the Internal
Revenue Service or sustained by a court if challenged by the Internal Revenue
Service.

YOU ARE URGED TO CONSULT YOUR TAX ADVISOR REGARDING THE SPECIFIC TAX
CONSEQUENCES TO YOU OF: (1) THE ACQUISITION, OWNERSHIP AND SALE OR OTHER
DISPOSITION OF OUR SECURITIES, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND
OTHER TAX CONSEQUENCES; (2) OUR ELECTION TO BE TAXED AS A REAL ESTATE INVESTMENT
TRUST FOR FEDERAL INCOME TAX PURPOSES; AND (3) POTENTIAL CHANGES IN APPLICABLE
TAX LAWS.

S-47

TAXATION OF THE COMPANY

ASSET TESTS:

As discussed in the accompanying prospectus under the heading "--Other Tax
Considerations--Possible Legislative or Other Actions Affecting Tax
Consequences," subject to certain "grandfather" rules, we may generally not own
more than 10% of the value of the outstanding securities of any issuer, other
than securities of a "qualified REIT subsidiary," another REIT, or a "taxable
REIT subsidiary." We have taken appropriate steps to ensure that, since
January 1, 2001 (and will take appropriate steps to ensure that in the future),
with respect to any issuer, other than a qualified REIT subsidiary or another
REIT, either: (1) we have owned 10% or less of the value of the outstanding
securities of such issuer; (2) such issuer has qualified as a "taxable REIT
subsidiary," or (3) the securities we own of such issuer are exempted under the
aforementioned "grandfather" rules. Additionally, we believe that not more than
20% of the total value of our gross assets was or is represented by the
securities of one or more taxable REIT subsidiaries, and we will monitor our
assets to ensure that we will continue to meet this test at all applicable times
in the future. However, there can be no assurance that the Internal Revenue
Service will not contend that the value of the securities of taxable REIT
subsidiaries represents more than 20% of the total value of our gross assets.

TAXATION OF SECURITYHOLDERS

EXCESS INCLUSION INCOME

A portion of our net income attributable to assets financed through our
STARs(SM) program (and, therefore, a portion of the dividends payable by us) may
be treated as Excess Inclusion income from a REMIC residual interest. See
"--Taxation of Securityholders--Taxation of Tax-Exempt Stockholders" in the
accompanying prospectus. These amounts have historically been immaterial and we
expect that they will be immaterial in the future. Prospective stockholders
should consult their own tax advisors regarding the federal income tax
consequences to them of incurring Excess Inclusion income.

BACKUP WITHHOLDING:

Effective for dividend payments made after August 6, 2001 (or as soon as
possible thereafter), the backup withholding rate will be reduced from 31% to
30.5%, and will further decrease as federal ordinary income tax rates decrease.

S-48

UNDERWRITING

Merrill Lynch, Pierce, Fenner & Smith Incorporated, Lehman Brothers Inc.,
Banc of America Securities LLC, Bear, Stearns & Co. Inc., Salomon Smith Barney
Inc. and UBS Warburg LLC are acting as the representatives of the underwriters
named below. Subject to the terms and conditions set forth in the underwriting
agreement among the underwriters, the selling stockholders and us, the selling
stockholders have agreed to sell to the underwriters, and the underwriters
severally have agreed to purchase from the selling stockholders, the number of
shares listed opposite their names below.

NUMBER OF
UNDERWRITER SHARES

Merrill Lynch, Pierce, Fenner & Smith
Incorporated......................................
Lehman Brothers Inc.........................................
Banc of America Securities LLC..............................
Bear, Stearns & Co. Inc.....................................
Salomon Smith Barney Inc....................................
UBS Warburg LLC.............................................

-------
Total............................................
=======

In the underwriting agreement, the underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase the shares of common stock
being sold pursuant thereto at a price per share equal to the public offering
price less the underwriting discount specified on the cover page of this
prospectus supplement. According to the terms of the underwriting agreement, the
underwriters will either purchase all of the shares or none of them.

COMMISSIONS AND DISCOUNTS

The underwriters will offer the shares subject to prior sale and subject to
receipt and acceptance of the shares by the underwriters. The underwriters may
reject any order to purchase shares in whole or in part. After the commencement
of the public offering, the public offering price, concession and discount may
be changed. The underwriters have advised us that they will offer the shares of
common stock to the public initially at the public offering price specified on
the cover page of this prospectus supplement. The underwriters may also offer
the shares to certain dealers at the public offering price less a concession not
in excess of $ per share. The underwriters may allow, and these dealers may
reallow, a concession not in excess of $ per share to certain other brokers
and dealers.

The following table shows the public offering price, underwriting discounts
and proceeds before expenses to the selling stockholders. The information
assumes either no exercise or full exercise by the underwriters of their
overallotment option.

PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------

Public offering price............................. $ $ $
Underwriting discount............................. $ $ $
Proceeds, before expenses, to the selling
stockholders.................................... $ $ $

S-49

The selling stockholders estimate the expenses of this offering payable by
them (excluding underwriting discount) to be $600,000. We will not bear any
expenses associated with this offering.

We and the selling stockholders have agreed to indemnify the underwriters
and their controlling persons against certain liabilities, including liabilities
under the Securities Act.

OVERALLOTMENT OPTION

The underwriters have the option to purchase up to an aggregate of 2,250,000
additional shares of common stock from the selling stockholders at the same
price they are paying for the 15,000,000 shares offered hereby. The underwriters
may purchase additional shares only to cover overallotments made in connection
with this offering and only within 30 days after the date of this prospectus
supplement. The underwriters will offer any additional shares that they purchase
on the terms described in the preceding paragraph.

NO SALES OF SIMILAR SECURITIES

We and the selling stockholders have agreed not to sell or transfer any
shares of common stock or to engage in certain hedging transactions with respect
to the common stock for a period of 90 and 180 days after the date of this
prospectus supplement, respectively, without first obtaining the written consent
of Merrill Lynch, Pierce, Fenner & Smith Incorporated, except in certain
circumstances. The selling stockholders are permitted to include shares for sale
in a public primary equity offering by us, subject to certain limitations.
SOFI-IV SMT Holdings, L.L.C. has pledged 22,500,000 shares of common stock owned
by it under a $150.0 million margin loan that is fully recourse to SOFI-IV SMT
Holdings, L.L.C. In the event that SOFI-IV SMT Holdings, L.L.C. were to default
in the performance of its obligations under the loan, the lender could foreclose
upon those pledged shares and sell them in the open market at any time.

PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS

Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters to
bid for and purchase shares of common stock. As an exception to these rules, the
underwriters are permitted to engage in certain transactions that stabilize the
price of the common stock. Such transactions consist of bids or purchases for
the purpose of pegging, fixing or maintaining the price of the common stock.

If the underwriters create a short position in the common stock in
connection with this offering, i.e., they sell more shares of common stock than
are set forth on the cover page of this prospectus supplement, the underwriters
may reduce that short position by purchasing shares of common stock in the open
market. The underwriters may also elect to reduce any short position through the
exercise of all or part of the overallotment option described above.

In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of these purchases.

Neither we nor the underwriters make any representation or prediction as to
the direction or magnitude of any effect that the transactions described above
may have on the price of the common stock. In addition, neither we nor the
underwriters make any representation that the underwriters will engage in these
transactions or that these transactions, once commenced, will not be
discontinued without notice.

OTHER RELATIONSHIPS

Some of the underwriters and their affiliates have engaged in, and may in
the future engage in, investment banking and other commercial dealings in the
ordinary course of business with us and the selling stockholders and their
affiliates. In addition, affiliates of some of the underwriters, including
affiliates of Banc of America Securities LLC, Bear, Stearns & Co. Inc., Lehman
Brothers Inc. and UBS Warburg LLC, are lenders under some of our credit
facilities. In each case, they have received customary fees for these
transactions.

S-50

LEGAL MATTERS

The legality of the common stock offered by this prospectus supplement and
the accompanying prospectus will be passed upon for us by Clifford Chance
Rogers & Wells LLP, New York, New York, and for the underwriters by Skadden,
Arps, Slate, Meagher & Flom LLP, New York, New York. Clifford Chance Rogers &
Wells LLP will rely upon the opinion of Ballard Spahr Andrews & Ingersoll, LLP
with respect to matters of Maryland law.

EXPERTS

The financial statements as of December 31, 2000 and 1999 and for each of
the three years in the period ended December 31, 2000, included in this
prospectus supplement, have been included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.

S-51

FINANCIAL INFORMATION

INDEX TO FINANCIAL STATEMENTS

PAGE
--------

UNAUDITED QUARTERLY FINANCIAL STATEMENTS:

Consolidated Balance Sheets of the Company as of June 30,
2001 and December 31, 2000................................ F-2

Consolidated Statements of Operations of the Company for the
three months and six months ended June 30, 2001 and
2000...................................................... F-3

Consolidated Statement of Changes in Shareholders' Equity of
the Company for the six months ended June 30, 2001........ F-4

Consolidated Statements of Cash Flows of the Company for the
three months and six months ended June 30, 2001 and
2000...................................................... F-5

Notes to Consolidated Financial Statements of the Company... F-6

AUDITED ANNUAL FINANCIAL STATEMENTS:

Report of Independent Accountants........................... F-29

Consolidated Balance Sheets of the Company as of December
31, 2000 and December 31, 1999............................ F-30

Consolidated Statements of Operations of the Company for the
years ended December 31, 2000, 1999 and 1998.............. F-31

Consolidated Statements of Changes in Shareholders' Equity
of the Company for the years ended December 31, 2000, 1999
and 1998.................................................. F-32

Consolidated Statements of Cash Flows of the Company for the
years ended December 31, 2000, 1999 and 1998.............. F-33

Notes to Consolidated Financial Statements of Company....... F-34

F-1

ISTAR FINANCIAL INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

AS OF AS OF
JUNE 30, DECEMBER 31,
2001 2000
---------- ------------

ASSETS
Loans and other lending investments, net.................... $2,252,255 $2,225,183
Real estate subject to operating leases, net................ 1,634,524 1,670,169
Cash and cash equivalents................................... 26,301 22,752
Restricted cash............................................. 27,800 20,441
Marketable securities....................................... 41 41
Accrued interest and operating lease income receivable...... 17,353 20,167
Deferred operating lease income receivable.................. 15,220 10,236
Deferred expenses and other assets.......................... 77,135 62,224
Investment in iStar Operating............................... 2,721 3,562
---------- ----------
Total assets.............................................. $4,053,350 $4,034,775
========== ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued expenses and other liabilities.... $ 61,320 $ 52,038
Dividends payable........................................... 5,225 56,661
Debt obligations............................................ 2,153,031 2,131,967
---------- ----------
Total liabilities......................................... 2,219,576 2,240,666
---------- ----------
Commitments and contingencies............................... -- --
Minority interest in consolidated entities.................. 2,649 6,224
Shareholders' equity:
Series A Preferred Stock, $0.001 par value, liquidation
preference $50.00 per share, 4,400 shares issued and
outstanding at June 30, 2001 and December 31, 2000,
respectively.............................................. 4 4
Series B Preferred Stock, $0.001 par value, liquidation
preference $25.00 per share, 2,000 shares issued and
outstanding at June 30, 2001 and December 31, 2000,
respectively.............................................. 2 2
Series C Preferred Stock, $0.001 par value, liquidation
preference $25.00 per share, 1,300 shares issued and
outstanding at June 30, 2001 and December 31, 2000,
respectively.............................................. 1 1
Series D Preferred Stock, $0.001 par value, liquidation
preference $25.00 per share, 4,000 shares issued and
outstanding at June 30, 2001 and December 31, 2000,
respectively.............................................. 4 4
Common Stock, $0.001 par value, 200,000 shares authorized,
86,288 and 85,726 shares issued and outstanding at June
30, 2001 and December 31, 2000, respectively.............. 86 85
Warrants and options........................................ 20,953 16,943
Additional paid in capital.................................. 1,977,645 1,966,396
Retained earnings (deficit)................................. (112,290) (154,789)
Accumulated other comprehensive income (losses) (See Note
12)....................................................... (14,539) (20)
Treasury stock (at cost).................................... (40,741) (40,741)
---------- ----------
Total shareholders' equity................................ 1,831,125 1,787,885
---------- ----------
Total liabilities and shareholders' equity................ $4,053,350 $4,034,775
========== ==========

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

F-2

ISTAR FINANCIAL INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------

REVENUE:
Interest income................................... $ 63,903 $ 66,864 $130,816 $126,947
Operating lease income............................ 49,244 47,223 98,767 93,495
Other income...................................... 7,678 3,827 13,861 8,360
-------- -------- -------- --------
Total revenue................................... 120,825 117,914 243,444 228,802
-------- -------- -------- --------

COSTS AND EXPENSES:
Interest expense.................................. 41,368 42,770 87,728 80,559
Operating costs-corporate tenant lease assets..... 3,274 2,959 6,510 6,284
Depreciation and amortization..................... 8,778 8,862 17,586 17,871
General and administrative........................ 6,498 7,808 12,600 14,711
Provision for possible credit losses.............. 1,750 1,500 3,500 3,000
Stock-based compensation expense.................. 1,200 586 2,060 1,134
-------- -------- -------- --------
Total costs and expenses........................ 62,868 64,485 129,984 123,559
-------- -------- -------- --------
Net income before minority interest, gain on sale of
corporate tenant lease assets, extraordinary loss
and cumulative effect of change in accounting
principle......................................... 57,957 53,429 113,460 105,243
Minority interest in consolidated entities.......... (41) (41) (136) (82)
Gain on sale of corporate tenant lease assets....... 1,044 441 1,599 974
-------- -------- -------- --------
Net income before extraordinary loss and cumulative
effect of change in accounting principle.......... 58,960 53,829 114,923 106,135
Extraordinary loss on early extinguishment of
debt.............................................. -- -- (1,037) (317)
Cumulative effect of change in accounting principle
(See Note 3)...................................... -- -- (282) --
-------- -------- -------- --------
Net income.......................................... 58,960 53,829 113,604 105,818
Preferred dividend requirements..................... (9,227) (9,227) (18,454) (18,454)
-------- -------- -------- --------
Net income allocable to common shareholders......... $ 49,733 $ 44,602 $ 95,150 $ 87,364
======== ======== ======== ========
Basic earnings per common share..................... $ 0.58 $ 0.52 $ 1.11 $ 1.03
======== ======== ======== ========
Diluted earnings per common share................... $ 0.56 $ 0.52 $ 1.09 $ 1.02
======== ======== ======== ========

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

F-3

ISTAR FINANCIAL INC.

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2001

(IN THOUSANDS)
(UNAUDITED)

SERIES A SERIES B SERIES C SERIES D COMMON WARRANTS ADDITIONAL
PREFERRED PREFERRED PREFERRED PREFERRED STOCK AND PAID-IN
STOCK STOCK STOCK STOCK AT PAR OPTIONS CAPITAL
--------- --------- --------- --------- -------- --------- ----------

Balance at December 31, 2000.............. $ 4 $ 2 $ 1 $ 4 $ 85 $16,943 $1,966,396
Exercise of options....................... -- -- -- -- 1 -- 8,428
Dividends declared-preferred stock........ -- -- -- -- -- -- 166
Dividends declared-common stock........... -- -- -- -- -- -- --
Restricted stock units issued to employees
in lieu of cash bonuses................. -- -- -- -- -- -- 1,478
Restricted stock units granted to
employees............................... -- -- -- -- -- -- 1,021
Options granted to employees.............. -- -- -- -- -- 4,010 --
Issuance of stock under DRIP plan......... -- -- -- -- -- -- 156
Cumulative effect of change in accounting
principle............................... -- -- -- -- -- -- --
Change in accumulated other comprehensive
income.................................. -- -- -- -- -- -- --
Net income for the period................. -- -- -- -- -- -- --
---- ---- ---- ---- ---- ------- ----------
Balance at June 30, 2001.................. $ 4 $ 2 $ 1 $ 4 $ 86 $20,953 $1,977,645
==== ==== ==== ==== ==== ======= ==========

ACCUMULATED
RETAINED OTHER
EARNINGS COMPREHENSIVE TREASURY TOTAL
(DEFICIT) INCOME STOCK EQUITY
--------- -------------- -------- ----------

Balance at December 31, 2000.............. $(154,789) $ (20) $(40,741) $1,787,885
Exercise of options....................... -- -- -- 8,429
Dividends declared-preferred stock........ (18,454) -- -- (18,288)
Dividends declared-common stock........... (52,651) -- -- (52,651)
Restricted stock units issued to employees
in lieu of cash bonuses................. -- -- -- 1,478
Restricted stock units granted to
employees............................... -- -- -- 1,021
Options granted to employees.............. -- -- -- 4,010
Issuance of stock under DRIP plan......... -- -- -- 156
Cumulative effect of change in accounting
principle............................... -- (9,445) -- (9,445)
Change in accumulated other comprehensive
income.................................. -- (5,074) -- (5,074)
Net income for the period................. 113,604 -- -- 113,604
--------- -------- -------- ----------
Balance at June 30, 2001.................. $(112,290) $(14,539) $(40,741) $1,831,125
========= ======== ======== ==========

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

F-4

ISTAR FINANCIAL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)
(UNAUDITED)

FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2001 2000* 2001 2000*
--------- --------- --------- ---------

Cash flows from operating activities:
Net income.................................................. $ 58,960 $ 53,829 $ 113,604 $ 105,818
Adjustments to reconcile net income to cash flows provided
by operating activities:
Minority interest......................................... 41 41 136 82
Non-cash expense for options issued....................... 1,200 586 2,060 1,134
Depreciation and amortization............................. 13,488 11,846 27,797 22,980
Amortization of discounts/premiums, deferred interest and
costs on lending investments............................ (14,429) (4,683) (19,301) (11,750)
Equity in earnings of unconsolidated joint ventures and
subsidiaries............................................ (887) (2,087) (3,689) (2,411)
Distributions from operating joint ventures............... 1,818 1,426 2,916 2,378
Deferred operating lease income adjustments............... (2,407) (2,249) (4,983) (4,531)
Realized (gains) losses on sales of securities............ -- -- -- 229
Gain on sale of corporate tenant lease assets............. (1,044) (441) (1,599) (974)
Extraordinary loss on early extinguishment of debt........ -- -- 1,037 317
Cumulative effect of change in accounting principle....... -- -- 282 --
Provision for possible credit losses...................... 1,750 1,500 3,500 3,000
Changes in assets and liabilities:
(Increase) decrease in accrued interest and operating
lease income receivable............................... 1,786 (768) 3,152 (2,181)
Increase in deferred expenses and other assets.......... (5,384) (6,526) (6,230) (9,967)
Increase (decrease) in accounts payable, accrued
expenses and other liabilities........................ (150) 421 (2,745) (4,336)
--------- --------- --------- ---------
Cash flows provided by operating activities............... 54,742 52,895 115,937 99,788
--------- --------- --------- ---------
Cash flows from investing activities:
New investment originations............................... (300,182) (231,248) (543,471) (443,173)
Principal fundings on existing loan commitments........... (13,327) (21,267) (24,442) (37,809)
Net proceeds from sale of corporate tenant lease assets... 4,079 100,974 7,834 146,265
Repayments of and principal collections from loans and
other lending investments............................... 309,588 41,429 556,980 163,232
Investments in and advances to unconsolidated joint
ventures................................................ (169) (11,305) (488) (11,973)
Distributions from unconsolidated joint ventures.......... -- -- 24,265 --
Capital expenditures for build-to-suit activities......... (4,772) -- (6,419) --
Capital improvement projects on real estate subject to
operating leases........................................ (2,083) -- (2,083) --
Other capital expenditures on real estate subject to
operating leases........................................ (813) (1,224) (1,572) (3,082)
--------- --------- --------- ---------
Cash flows provided by (used in) investing activities..... (7,679) (122,641) 10,604 (186,540)
--------- --------- --------- ---------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit
facilities.............................................. 141,893 (562,304) 183,052 (497,127)
Borrowings under term loans............................... 193,000 60,000 210,040 90,000
Repayments under term loans............................... (78,883) (230,629) (116,215) (240,355)
Repayments under unsecured notes.......................... (100,000) -- (100,000) --
Borrowings under repurchase agreements.................... -- 27,981 367 27,981
Repayments under repurchase agreements.................... (24,683) (2,273) (56,008) (2,392)
Repayments under bond offerings........................... (99,908) 857,015 (101,897) 857,015
Common dividends paid..................................... (52,651) (51,170) (104,087) (99,611)
Preferred dividends paid.................................. (9,145) (9,144) (18,288) (18,288)
Increase in restricted cash held in connection with debt
obligations............................................. (14,575) (4,882) (7,358) (5,943)
Distributions to minority interest in consolidated
entities................................................ (41) (41) (3,711) (82)
Extraordinary loss on early extinguishment of debt........ -- -- (1,037) (317)
Payments for deferred financing costs..................... (5,032) (23,858) (16,459) (25,771)
Increase in loan costs.................................... -- (25) -- (131)
Proceeds from exercise of options and issuance of DRIP
shares.................................................. 6,962 83 8,609 83
--------- --------- --------- ---------
Cash flows provided by (used in) financing activities..... (43,063) 60,753 (122,992) 85,062
--------- --------- --------- ---------
Increase (decrease) in cash and cash equivalents............ 4,000 (8,993) 3,549 (1,690)
Cash and cash equivalents at beginning of period............ 22,301 41,711 22,752 34,408
--------- --------- --------- ---------
Cash and cash equivalents at end of period.................. $ 26,301 $ 32,718 $ 26,301 $ 32,718
========= ========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest, net of amounts
capitalized............................................. $ 38,147 $ 34,595 $ 80,970 $ 71,445
========= ========= ========= =========

----------------------------------

* RECLASSIFED TO CONFORM TO 2001 PRESENTATION.

The accompanying notes are an integral part of the financial statements

F-5

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--ORGANIZATION AND BUSINESS

ORGANIZATION--iStar Financial Inc. (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
approximately $1.1 billion of assets to the Company's predecessor, Starwood
Financial Trust, in exchange for a controlling interest in that company
(collectively, the "Recapitalization Transactions"). Since that time, the
Company has grown by originating new lending and leasing transactions, as well
as through corporate acquisitions. Specifically, in September 1998, the Company
acquired the loan origination and servicing business of a major insurance
company, and in December 1998, the Company acquired the mortgage and mezzanine
loan portfolio of its largest private competitor. Additionally, in
November 1999, the Company acquired TriNet Corporate Realty Trust, Inc.
("TriNet" or the "Leasing Subsidiary"), which was then the largest publicly
traded company specializing in the net leasing of corporate office and
industrial facilities (the "TriNet Acquisition"). The TriNet Acquisition was
structured as a stock-for-stock merger of TriNet with a subsidiary of the
Company. Concurrent with the TriNet Acquisition, the Company also acquired its
external advisor (the "Advisor Transaction") in exchange for shares of common
stock of the Company ("Common Stock") and converted its organizational form to a
Maryland corporation (the "Incorporation Merger"). As part of the conversion to
a Maryland corporation, the Company replaced its 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 under the symbol "SFI" in November 1999.

During 1993 through 1997, the Company did not qualify as a real estate
investment trust ("REIT") under the Internal Revenue Code of 1986, as amended
(the "Code"). However, pursuant to a closing agreement with the Internal Revenue
Service (the "IRS") obtained in March 1998, the Company was eligible and elected
to be taxed as a REIT for the taxable year beginning January 1, 1998.

BUSINESS--The Company is the leading publicly traded finance company focused
on the commercial real estate industry. The Company provides structured
financing to private and corporate owners of real estate nationwide, including
senior and junior mortgage debt, corporate mezzanine and subordinated capital,
and corporate net lease financing. The Company seeks to deliver superior
risk-adjusted returns on equity for shareholders by providing innovative and
value-added financing solutions to its customers.

The Company has implemented its investment strategy by: (1) focusing on the
origination of large, highly structured mortgage, corporate and lease financings
where customers require flexible financial solutions, and avoiding commodity
businesses in which there is significant direct competition from other providers
of capital; (2) developing direct relationships with borrowers and corporate
tenants as opposed to sourcing transactions through intermediaries; (3) adding
value beyond simply providing capital by offering borrowers and corporate
tenants specific lending expertise, flexibility, certainty and continuing
relationships beyond the closing of a particular financing transaction; and
(4) taking advantage of market anomalies in the real estate financing markets
when the Company believes credit is mispriced by other providers of capital,
such as the spread between lease yields and the yields on corporate tenants'
underlying credit obligations.

The Company intends to continue to emphasize a mix of portfolio financing
transactions to create built-in diversification and single-asset financings for
properties with strong, long-term competitive market positions.

F-6

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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,
Rule 10-01 of Regulation S-X for interim financial statements. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles ("GAAP"). The Consolidated Financial Statements
include the accounts of the Company, its qualified REIT subsidiaries, and its
majority-owned and controlled partnerships. Certain third-party mortgage
servicing operations are conducted through iStar Operating, Inc. ("iStar
Operating"), a taxable corporation which is not consolidated with the Company
for financial reporting or income tax purposes. The Company owns all of the
non-voting preferred stock and a 95% economic interest in iStar Operating, which
is accounted for under the equity method for financial reporting purposes. The
Company does not own any of the outstanding voting stock of iStar Operating. In
addition, the Company has an investment in TriNet Management Operating
Company, Inc. ("TMOC"), a taxable noncontrolled subsidiary of the Company, which
is also accounted for under the equity method. Further, certain other
investments in partnerships or joint ventures which the Company does not control
are also accounted for under the equity method. All significant intercompany
balances and transactions have been eliminated in consolidation.

In the opinion of management, the accompanying Consolidated Financial
Statements contain all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the Company's consolidated financial
position at June 30, 2001 and December 31, 2000 and the results of its
operations, changes in shareholders' equity and its cash flows for the three-
and six-month periods ended June 30, 2001 and 2000, respectively. Such operating
results are not necessarily indicative of the results that may be expected for
any other interim periods or the entire year.

NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

LOANS AND OTHER LENDING INVESTMENTS, NET--As described in Note 4, "Loans and
Other Lending Investments," includes the following investments: senior
mortgages, subordinate mortgages, corporate/ partnership loans/unsecured notes,
loan participations and other lending or similar investments. In general,
management considers its investments in this category as held-to-maturity and,
accordingly, reflects such items at amortized historical cost.

REAL ESTATE SUBJECT TO OPERATING LEASES AND DEPRECIATION--Real estate
subject to operating leases is generally recorded at cost. Certain improvements
and replacements are capitalized when they extend the useful life, increase
capacity or improve the efficiency of the asset. Repairs and maintenance items
are expensed as incurred. The Company capitalizes interest costs incurred during
the land development or construction period on qualified development projects,
including investments in joint ventures accounted for under the equity method.
Depreciation is computed using the straight line method of cost recovery over
estimated useful lives of 40.0 years for buildings, five years for furniture and
equipment, the shorter of the remaining lease term or expected life for tenant
improvements, and the remaining life of the building for building improvements.

Real estate assets to be disposed of are reported at the lower of their
carrying amount or fair value less costs to sell. The Company also periodically
reviews long-lived assets to be held and used for an impairment in value
whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. In management's opinion, real estate assets
to be held and used are not carried at amounts in excess of their estimated
recoverable amounts.

F-7

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CAPITALIZED INTEREST--The Company capitalizes interest costs incurred during
the land development or construction period on qualified development projects,
including investments in joint ventures accounted for under the equity method.
Interest capitalized was approximately $487,000 and $338,000 during the
six-month periods ended June 31, 2001 and 2000, respectively, and was
approximately $286,000 and $0 during the three-month periods ended June 31, 2001
and 2000, respectively.

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

RESTRICTED CASH--Restricted cash represents amounts required to be
maintained in escrow under certain of the Company's debt obligations.

MARKETABLE SECURITIES--From time to time, the Company invests excess working
capital in short-term marketable securities such as those issued by the
Government National Mortgage Association ("GNMA"), Federal National Mortgage
Association ("FNMA"), and Federal Home Loan Mortgage Corporation ("FHLMC").
Although the Company generally intends to hold such investments for investment
purposes, it may, from time to time, sell any of its investments in these
securities as part of its management of liquidity. Accordingly, the Company
considers such investments as "available-for-sale" and reflects such investments
at fair market value with changes in fair market value reflected as a component
of shareholders' equity.

REPURCHASE AGREEMENTS--The Company may enter into sales of securities or
loans under agreements to repurchase the same security or loan. The amounts
borrowed under repurchase agreements are carried on the balance sheet as part of
debt obligations at the amount advanced plus accrued interest. Interest incurred
on the repurchase agreements is reported as interest expense.

REVENUE RECOGNITION--The Company's revenue recognition policies are as
follows:

LOANS AND OTHER LENDING INVESTMENTS: The Company generally intends to hold
all of its loans and other lending investments to maturity. Accordingly, it
reflects all of these investments at amortized cost less allowance for loan
losses, acquisition premiums or discounts, deferred loan fees and undisbursed
loan funds. On occasion, the Company may acquire loans at either premiums or
discounts based on the credit characteristics of such loans. These premiums or
discounts are recognized as yield adjustments over the lives of the related
loans. If loans that were acquired at a premium or discount are prepaid, the
Company immediately recognizes the unamortized premium or discount as a decrease
or increase in the prepayment gain or loss, respectively. Loan origination or
exit fees, as well as direct loan origination costs, are also deferred and
recognized over the lives of the related loans as a yield adjustment. Interest
income is recognized using the effective interest method applied on a
loan-by-loan basis.

Certain of the Company's loans provide for accrual of interest at specified
rates which differ from current payment terms. Interest is recognized on such
loans at the accrual rate subject to management's determination that accrued
interest and outstanding principal are ultimately collectible, based on the
underlying collateral and operations of the borrower.

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

F-8

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LEASING INVESTMENTS: Operating lease revenue is recognized on the
straight-line method of accounting from the later of the date of the origination
of the lease or the date of acquisition of the facility subject to existing
leases. Accordingly, contractual lease payment increases are recognized evenly
over the term of the lease. The cumulative difference between lease revenue
recognized under this method and contractual lease payment terms is recorded as
a deferred operating lease income receivable on the balance sheet.

PROVISION FOR POSSIBLE CREDIT LOSSES--The Company's accounting policies
require that an allowance for estimated credit losses be maintained at a level
that management, based upon an evaluation of known and inherent risks in the
portfolio, considers adequate to provide for possible credit losses. Specific
valuation allowances are established for impaired loans in the amount by which
the carrying value, before allowance for estimated losses, exceeds the fair
value of collateral less disposition costs on an individual loan basis.
Management considers a loan to be impaired when, based upon current information
and events, it believes that it is probable that the Company will be unable to
collect all amounts due according to the contractual terms of the loan agreement
on a timely basis. Management measures these impaired loans at the fair value of
the loans' underlying collateral less estimated disposition costs. Impaired
loans may be left on accrual status during the period the Company is pursuing
repayment of the loan; however, these loans are placed on non-accrual status at
such time as either: (1) the loans become 90 days delinquent; or (2) management
determines the borrower is incapable of, or has ceased efforts toward, curing
the cause of the impairment. While on non-accrual status, interest income is
recognized only upon actual receipt. Impairment losses are recognized as direct
write-downs of the related loan with a corresponding charge to the provision for
possible credit losses. Charge-offs occur when loans, or a portion thereof, are
considered uncollectible and of such little value that further pursuit of
collection is not warranted. Management also provides a portfolio reserve based
upon its periodic evaluation and analysis of the portfolio, historical and
industry loss experience, economic conditions and trends, collateral values and
quality, and other relevant factors.

INCOME TAXES--The Company intends to operate in a manner consistent with and
to elect to be treated as a REIT. As a REIT, the Company is subject to federal
income taxation at corporate rates on its REIT taxable income; however, the
Company is allowed a deduction for the amount of dividends paid to its
shareholders, thereby subjecting the distributed net income of the Company to
taxation at the shareholder level only. iStar Operating and TMOC are not
consolidated for federal income tax purposes and are taxed as corporations. For
financial reporting purposes, current and deferred taxes are provided for in the
portion of earnings recognized by the Company with respect to its interest in
iStar Operating and TMOC.

EARNINGS (LOSS) PER COMMON SHARES--In accordance with the Statement of
Financial Accounting Standards No. 128 ("FASB No. 128"), the Company presents
both basic and diluted earnings per share ("EPS"). Basic earnings per share
("Basic EPS") excludes dilution and is computed by dividing net income available
to common shareholders by the weighted average number of shares outstanding for
the period. Diluted earnings per share ("Diluted EPS") reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock, where such exercise or conversion
would result in a lower earnings per share amount.

F-9

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.

CHANGE IN ACCOUNTING PRINCIPLE--In June 1998, the FASB issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). On June 23, 1999, the FASB voted to
defer the effectiveness of SFAS No. 133 for one year. SFAS No. 133 is now
effective for fiscal years beginning after June 15, 2000, but earlier
application is permitted as of the beginning of any fiscal quarter subsequent to
June 15, 1998. SFAS No. 133 establishes accounting and reporting standards for
derivative financial instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as:
(1) a hedge of the exposure to changes in the fair value of a recognized asset
or liability or an unrecognized firm commitment; (2) a hedge of the exposure to
variable cash flows of a forecasted transaction; or (3) in certain
circumstances, a hedge of a foreign currency exposure. The Company adopted this
pronouncement, as amended by Statement of Financial Accounting Standards
No. 137 "Accounting for Derivative Instruments and Hedging Activities--deferral
of the Effective Date of FASB Statement No. 133" and Statement of Financial
Accounting Standards No. 138 "Accounting for Certain Derivative Instruments and
Certain Hedging Activities--an Amendment of FASB Statement No. 133," on
January 1, 2001. Because the Company has primarily used derivatives as cash flow
hedges of interest rate risk only, the adoption of SFAS No. 133 did not have a
material financial impact on the financial position and results of operations of
the Company. However, should the Company change its current use of such
derivatives (see Note 8), the adoption of SFAS No. 133 could have a more
significant effect on the Company prospectively.

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

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

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

F-10

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4--LOANS AND OTHER LENDING INVESTMENTS

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

CARRYING VALUE AS OF
# OF ORIGINAL PRINCIPAL -------------------------
TYPE OF BORROWERS COMMITMENT BALANCES JUNE 30, DECEMBER 31,
INVESTMENT UNDERLYING PROPERTY TYPE IN CLASS(1) AMOUNT(1) OUTSTANDING(1) 2001 2000
------------------------ ------------------------ ----------- ----------- -------------- ---------- ------------

Senior Mortgages Office/Hotel/Mixed Use/ 16 $1,135,143 $1,032,868 $1,016,547 $1,210,992
Apartment/Retail/Resort/
Entertainment

Subordinated Mortgages Office/Hotel/Mixed Use 13 405,120 352,690 349,563 325,558

Corporate Loans/ Office/Hotel/Residential/ 19 610,046 587,922 557,759 398,978
Partnership Loans/ Entertainment
Unsecured Notes

Loan Participations Office/Retail 3 127,497 111,364 111,232 111,251

Other Lending Resort/Office/Mixed Use/ N/A N/A N/A 234,654 192,404
Investments Residential/Industrial
---------- ----------
Gross Carrying Value $2,269,755 $2,239,183
Provision for Possible
Credit Losses (17,500) (14,000)
---------- ----------
Total, Net $2,252,255 $2,225,183
========== ==========

EFFECTIVE
TYPE OF MATURITY CONTRACTUAL INTEREST CONTRACTUAL INTEREST PRINCIPAL PARTICIPATION
INVESTMENT DATES PAYMENT RATES(2) ACCRUAL RATES(2) AMORTIZATION FEATURES
------------------------ ------------- ----------------------- ----------------------- ------------ -------------

Senior Mortgages 2001 to 2019 Fixed: 6.13% to 14.25% Fixed: 6.13% to 18.25% Yes (3) No
Variable: LIBOR + 1.50% Variable: LIBOR + 1.50%
to 4.50% to 4.50%
Subordinated Mortgages 2002 to 2011 Fixed: 7.00% to 15.25% Fixed: 7.32% to 17.00% Yes (3) Yes (4)
Variable: LIBOR + 5.80% Variable: LIBOR + 5.80%
Corporate Loans/ 2001 to 2011 Fixed: 6.13% to 15.00% Fixed: 6.13% to 17.50% Yes Yes (4)
Partnership Loans/ Variable: LIBOR + 2.78% Variable: LIBOR + 2.78%
Unsecured Notes to 7.50% to 7.50%
Loan Participations 2003 to 2005 Fixed: 10.00% to 13.60% Fixed: 13.60% to 14.00% No Yes (4)
Variable: LIBOR + 4.50% Variable: LIBOR + 4.50%
Other Lending 2002 to 2013 Fixed: 6.75% to 12.75% Fixed: 6.75% to 12.75% No Yes (4)
Investments Variable: LIBOR + 7.56% Variable: LIBOR + 7.56%
to 9.36% to 9.36%
Gross Carrying Value
Provision for Possible
Credit Losses
Total, Net

EXPLANATORY NOTES:
----------------------------------------

(1) Amounts and details are for loans outstanding as of June 30, 2001.

(2) Substantially all variable-rate loans are based on 30-day LIBOR and reprice
monthly. The 30-day LIBOR rate on June 30, 2001 was 3.86%.

(3) The loans require fixed payments of principal and interest resulting in
partial principal amortization over the term of the loan with the remaining
principal due at maturity. In addition, one of the loans permits additional
annual prepayments of principal of up to $1.3 million without penalty at the
borrower's option.

(4) Under some of these loans, the lender receives additional payments
representing additional interest from participation in available cash flow
from operations of the property and the proceeds, in excess of a base
amount, arising from a sale or refinancing of the property.

F-11

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4--LOANS AND OTHER LENDING INVESTMENTS

During the six-month periods ended June 30, 2001 and 2000, respectively, the
Company and its affiliated ventures originated or acquired an aggregate of
approximately $543.5 million and $443.2 million in loans and other lending
investments, funded $24.4 million and $37.8 million under existing loan
commitments, and received principal repayments of $557.0 million and
$163.2 million.

As of June 30, 2001, the Company had nine loans with unfunded commitments.
The total unfunded commitment amount was approximately $127.4 million, of which
$53.4 million was discretionary (i.e., at the Company's option) and
$74.0 million was non-discretionary.

The Company's loans and other lending investments are predominantly pledged
as collateral under either the iStar Asset Receivables secured notes, the
secured revolving facilities or secured term loans (see Note 6).

The Company has reflected provisions for possible credit losses of
approximately $1.8 million and $1.5 million in its results of operations during
the three months ended June 30, 2001 and 2000, respectively, and $3.5 million
and $3.0 million during the six months ended June 30, 2001 and 2000,
respectively. These provisions represent portfolio 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, and the underlying
collateral. No direct impairment reserves on specific loans were considered
necessary. Management may transfer reserves between general and specific
reserves as considered necessary.

NOTE 5--REAL ESTATE SUBJECT TO OPERATING LEASES

The Company's investments in real estate subject to operating leases, at
cost, were as follows (in thousands) (unaudited):

JUNE 30, DECEMBER 31,
2001 2000
---------- ------------

Buildings and improvements.................................. $1,299,223 $1,294,572
Land and land improvements.................................. 343,458 344,490
Less: accumulated depreciation.............................. (63,740) (46,975)
---------- ----------
1,578,941 1,592,087
Investments in unconsolidated joint ventures................ 55,583 78,082
---------- ----------
Real estate subject to operating leases, net.............. $1,634,524 $1,670,169
========== ==========

Under certain leases, the Company receives additional participating lease
payments to the extent gross revenues of the tenant exceed a base amount. The
Company earned no such additional participating lease payments in the three- and
six-month periods ended June 31, 2001 and 2000, respectively. In addition, the
Company also receives reimbursements from tenants for certain facility operating
expenses.

INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED JOINT VENTURES--At June 30,
2001, the Company had investments in five joint ventures: (1) TriNet Sunnyvale
Partners L.P. ("Sunnyvale"), whose external partners are John D. O'Donnell,
Trustee, John W. Hopkins, and Donald S. Grant; (2) Corporate Technology
Associates LLC ("CTC I"), whose external member is Corporate Technology Centre
Partners LLC; (3) Sierra Land Ventures ("Sierra"), whose external joint venture
partner is Sierra-LC Land, Ltd.; (4) TriNet Milpitas Associates, LLC
("Milpitas"), whose external member is The Prudential Insurance Company of
America; and (5) ACRE Simon, L.L.C. ("ACRE"), whose external partner is William
E. Simon & Sons Realty Investments, L.L.C. These ventures were formed for the
purpose of operating, acquiring and in certain cases, developing corporate
tenant lease facilities. At June 30, 2001, all facilities held by CTC II and
TN-CP had been sold. The Company previously had an equity investment in CTC II,
which was sold for approximately $66.0 million in September 2000. In connection
with this sale, the note receivable from the venture was modified to mature on
December 31, 2001. The note receivable and related accrued interest are included
in Loans and Other Lending Investments at June 30, 2001 and December 31, 2000.

At June 30, 2001, the ventures comprised 23 net leased facilities.
Additionally, 17.7 acres of land are held for sale. The Company's combined
investment in these joint ventures at June 30, 2001 was $55.6 million. The joint
ventures' purchase price for the 23 facilities

F-12

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5--REAL ESTATE SUBJECT TO OPERATING LEASES (CONTINUED)
owned at June 30, 2001 was $344.5 million. The purchase price of the land held
for sale was $6.8 million. In the aggregate, the joint ventures had total assets
of $383.6 million and total liabilities of $280.7 million as of June 30, 2001,
and net income of $4.4 million and $8.0 million for the three and six months
ended June 30, 2001. The Company accounts for these investments under the equity
method because the Company's joint venture partners have certain participating
rights which limit the Company's control. The Company's investments in and
advances to unconsolidated joint ventures, its percentage ownership interests,
its respective income and the Company's pro rata share of its ventures'
third-party debt as of June 30, 2001 are presented below (in thousands)
(unaudited):

PRO RATA
JOINT SHARE OF
UNCONSOLIDATED OWNERSHIP EQUITY VENTURE THIRD-PARTY
JOINT VENTURE % INVESTMENT INCOME DEBT
-------------- --------- ---------- -------- -----------

Operating:
Sunnyvale................................................. 44.7% $12,208 $ 218 $ 10,728
CTC I..................................................... 50.0% 10,226 2,051 60,838
Milpitas.................................................. 50.0% 24,398 2,021 40,385
ACRE Simon................................................ 20.0% 4,972 92 6,675
Development:
Sierra.................................................... 50.0% 3,779 148 724
------- ------ --------
Total................................................. $55,583 $4,530 $119,350
======= ====== ========

Effective September 29, 2000, iStar Sunnyvale Partners, LP (the entity which
is controlled by Sunnyvale) entered into an interest rate cap agreement with
Bear Stearns Financial Products, limiting the venture's exposure to interest
rate movements on its $24.0 million LIBOR-based mortgage loan to an interest
rate cap of 9.0% through November 9, 2003.

Currently, the limited partners of Sunnyvale have the option to convert
their partnership interest into cash; however, the Company may elect to deliver
297,728 shares of Common Stock in lieu of cash. Additionally, commencing in
February 2002, subject to acceleration under certain circumstances, the venture
interest held by the external member of Milpitas may be converted into 984,476
shares of Common Stock.

Income generated from the above joint venture investments is included in
Operating Lease Income in the Consolidated Statements of Operations.

F-13

ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--DEBT OBLIGATIONS

As of June 30, 2001 and December 31, 2000, the Company has debt obligations
under various arrangements with financial institutions as follows (in thousands)
(unaudited):

CARRYING VALUE AS OF
MAXIMUM --------------------------- STATED SCHEDULED
AMOUNT JUNE 30, DECEMBER 31, INTEREST MATURITY
AVAILABLE 2001 2000 RATES DATE
---------- ------------ ------------ -------------------------- ----------------------

SECURED REVOLVING CREDIT
FACILITIES (1):
Line of credit............... $ 700,000 $ 194,100 $ 284,371 LIBOR + 1.75% - 2.25% March 2005 (2)
Line of credit............... 700,000 514,503 -- LIBOR + 1.40% - 2.15% January 2005 (2)
Line of credit............... 500,000 81,248 307,978 LIBOR + 1.50% - 1.75% August 2003 (2)
UNSECURED REVOLVING CREDIT
FACILITIES:
Line of credit............... 350,000 153,000 173,450 LIBOR + 1.55% May 2002 (3)
Line of credit............... 100,000 6,000 -- LIBOR + 2.25% January 2003 (3)
---------- ---------- ----------
Total revolving credit $2,350,000 948,851 765,799
facilities.................
==========
SECURED TERM LOANS:
Secured by real estate under operating 149,113 150,678 7.44% March 2009
leases.................................
Secured by corporate lending 60,000 60,000 LIBOR + 2.50% June 2004 (4)
investments............................
Secured by real estate under operating -- 77,860 LIBOR + 1.38% June 2001
leases.................................
Secured by real estate under operating 40,720 60,471 Fixed: 6.00%-11.38% Various through 2011
leases.................................
Secured by real estate under operating 193,000 -- LIBOR + 1.85% (5) July 2006 (5)
leases.................................
---------- ----------
Total term loans......................... 442,833 349,009
Debt premiums............................ 379 51
---------- ----------
Total secured term loans................. 443,212 349,060

iStar Asset Receivables secured notes:
Class A.................................. 105,216 207,114 LIBOR + 0.30% August 2003 (6)
Class B.................................. 94,055 94,055 LIBOR + 0.50% October 2003 (6)
Class C.................................. 105,813 105,813 LIBOR + 1.00% January 2004 (6)
Class D.................................. 52,906 52,906 LIBOR + 1.45% June 2004 (6)
Class E.................................. 123,447 123,447 LIBOR + 2.75% January 2005 (6)
Class F.................................. 5,000 5,000 LIBOR + 3.15% January 2005 (6)
---------- ----------
Total iStar Asset Receivables secured 486,437 588,335
notes..................................

UNSECURED NOTES (7):
6.75% Dealer Remarketable Securities 125,000 125,000 6.75% March 2013
(8)....................................
7.30% Notes.............................. -- 100,000 7.30% May 2001
7.70% Notes.............................. 100,000 100,000 7.70% July 2017
7.95% Notes.............................. 50,000 50,000 7.95% May 2006
---------- ----------
Total unsecured notes (1)................ 275,000 375,000
Less: debt discount (9).................. (17,091) (18,490)
---------- ----------
Total unsecured notes.................... 257,909 356,510
OTHER DEBT OBLIGATIONS....................... 16,622 72,263 Various Various
---------- ----------
TOTAL DEBT OBLIGATIONS....................... $2,153,031 $2,131,967
========== ==========

F-14

ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--DEBT OBLIGATIONS (CONTINUED)

EXPLANATORY NOTES:

------------------------

(1) Subsequent to June 30, 2001, we completed a $350.0 million public offering
of unsecured seven-year senior notes bearing interest at 8.75%. The net
proceeds of this offering were used to repay borrowings under our secured
revolving credit facilities that had a weighted average interest rate at
5.93% and a weighted average maturity of 3.6 years.

(2) Maturity date reflects a one-year "term-out" extension at the Company's
option.

(3) Subsequent to June 30, 2001, the Company replaced both of these facilities
with a new $300.0 million revolving credit facility bearing interest at
LIBOR + 2.125%. The new facility has an initial maturity of July 2003 with a
one-year extension at the Company's option and another one-year extension at
the lenders' option.

(4) Maturity date reflects a one-year extension at the Company's option.

(5) On June 14, 2001, the Company closed $193.0 million of financing secured by
15 corporate tenant lease assets. The three-year floating-rate loan bears
interest at LIBOR plus 1.85% (not to exceed 10.00%) and has two one-year
extensions at the Company's option (maturity date reflects extensions).

(6) Principal payments on these bonds are a function of the principal repayments
on loan assets which collateralize these obligations. The dates indicated
above represent the expected date on which the final payment would occur for
such class based on the assumptions that the loans which collateralize the
obligations are not voluntarily prepaid, the loans are paid on their
effective maturity dates and no extensions of the effective maturity dates
of any of the loans are granted. The final maturity date for the underlying
indenture on classes A, B, C, D, E and F is September 25, 2022.

(7) The notes are callable by the Company at any time for an amount equal to the
total of principal outstanding, accrued interest and the applicable
make-whole prepayment premium.

(8) Subject to mandatory tender on March 1, 2003, to either the dealer or the
Leasing Subsidiary. The initial coupon of 6.75% applies to the first
five-year term through the mandatory tender date. If tendered to the dealer,
the notes must be remarketed. The rates reset upon remarketing.

(9) These obligations were assumed as part of the TriNet Acquisition. As part of
the accounting for the purchase, these fixed rate obligations were
considered to have stated interest rates which were below the
then-prevailing market rates at which the Leasing Subsidiary could issue new
debt obligations and, accordingly, the Company ascribed a market discount to
each obligation. Such discounts will be amortized as an adjustment to
interest expense using the effective interest method over the related term
of the obligations. As adjusted, the effective annual interest rates on
these obligations were 8.81%, 8.75%, 9.51% and 9.04%, for the 6.75% Dealer
Remarketable Securities, 7.30% Notes, 7.70% Notes and 7.95% Notes,
respectively.

F-15

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--DEBT OBLIGATIONS (CONTINUED)

Availability of amounts under the secured revolving credit facilities are
based on percentage borrowing base calculations. Certain of the Leasing
Subsidiary's debt obligations contain financial covenants pertaining to the
subsidiary.

On January 31, 2000, the Company closed a new unsecured revolving credit
facility. The facility is led by a major commercial bank, which committed
$50.0 million of the facility amount. On July 7, 2000, the Company increased the
facility amount to $100.0 million through syndication. The new facility has a
two-year primary term and a one-year extension, at the Company's option, and
bears interest at LIBOR plus 2.25%.

On February 4, 2000, the Company extended the term of its existing
$500.0 million secured credit facility. The Company extended the original
August 2000 maturity date to August 2002, through a one-year extension to the
facility's draw period and an additional one-year "term out" period during which
outstanding principal amortizes 25% per quarter. In connection with the
extension, the Company and the facility lender also expanded the range of assets
that the lender would accept as collateral under the facility. In exchange for
the extension and expansion, the Company agreed to increase the facility's
interest rate from LIBOR plus 1.25% to 1.50%, to a revised rate of LIBOR plus
1.50% to 1.75%, depending upon certain conditions.

On May 17, 2000, the Company closed the inaugural offering under its
proprietary matched funding program, iStar Asset Receivables ("STARs"),
Series 2000-1. In the initial transaction, a wholly-owned subsidiary of the
Company issued $896.5 million of investment grade bonds secured by the
subsidiary's assets, which had an aggregate outstanding principal balance of
approximately $1.2 billion at inception. Principal payments received on the
assets will be utilized to repay the most senior class of the bonds then
outstanding. The maturity of the bonds match funds the maturity of the
underlying assets financed under the program. The Company initially purchased
the Class F bonds at a par value of $38.2 million, which the Company financed
with a $27.8 million repurchase agreement maturing in May 2001 (this repurchase
agreement was repaid in April 2001). On July 17, 2000, the Company sold, at par,
$5.0 million of the Class F bonds to an institutional investor. For accounting
purposes, these transactions were treated as secured financings.

On June 20, 2000, the Company closed a $60.0 million term loan secured by a
corporate lending investment it originated in the first quarter of 2000. The new
loan replaced a $30.0 million interim facility, and effectively match funds the
expected weighted average maturity of the underlying corporate loan asset. The
loan has a three-year primary term and a one-year extension, at the Company's
option, and bears interest at LIBOR plus 2.50%.

On December 28, 2000, the Company expanded its existing $675.0 million
secured warehouse facility to $700.0 million. The Company extended the original
March 2001 maturity date to March 2005, including a one-year "term-out"
extension option to the facility's maturity during which the interest rate
spread will increase 0.25%, no additional draws under the facility will be
permitted, and the outstanding principal must amortize 25% per quarter. In
connection with the extension, the Company and the facility lender also
increased the range of collateral eligible for inclusion in the facility. Also
in connection with the extension, the Company agreed to increase the facility's
interest rate from LIBOR plus 1.50% to a revised rate of LIBOR plus 1.75% to
2.25%, depending upon certain conditions.

On January 11, 2001, the Company closed a new $700.0 million secured
revolving credit facility which is led by a major commercial bank. The new
facility has a three-year primary term and one-year

F-16

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--DEBT OBLIGATIONS (CONTINUED)
"term-out" extension option, and bears interest at LIBOR plus 1.40% to 2.15%,
depending upon the collateral contributed to the borrowing base. The new
facility accepts a broad range of structured finance assets and has a final
maturity of January 2005. In addition, on February 22, 2001, the Company
extended the maturity of its $350.0 million unsecured revolving credit facility
to May 2002.

On May 15, 2001, the Company repaid its $100.0 million 7.30% unsecured
notes. These notes were senior unsecured obligations of the Company and ranked
equally with the Company's other senior unsecured and unsubordinated
indebtedness.

On June 14, 2001, the Company closed $193.0 million of financing secured by
15 corporate tenant lease assets. The three-year floating-rate loan bears
interest at LIBOR plus 1.85% (not to exceed 10.00%) and has two one-year
extensions at the Company's option. The Company used these proceeds to repay a
$77.8 million secured term loan maturing in June 2001 and to pay down a portion
of its revolving credit facilities. In addition, the Company extended the final
maturity of its $500.0 million secured revolving credit facility to August 12,
2003.

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

During the six-month period ended June 30, 2001, the Company incurred an
extraordinary loss of approximately $1.0 million as a result of the early
retirement of certain secured debt obligations of its Leasing Subsidiary.

As of June 30, 2001, future expected/scheduled maturities of outstanding
long-term debt obligations are as follows (in thousands) (unaudited) (1):

2001 (remaining six months)................................. $ 16,622
2002........................................................ 167,807
2003........................................................ 286,520
2004........................................................ 218,719
2005........................................................ 840,675
Thereafter.................................................. 639,400
----------
Total principal maturities.................................. 2,169,743
Net unamortized debt discounts.............................. (16,712)
----------
Total debt obligations...................................... $2,153,031
==========

EXPLANATORY NOTE:
------------

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

F-17

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--SHAREHOLDERS' EQUITY

As described in Note 1, the Company consummated a series of transactions on
November 4, 1999 in which its class A and class B shares were exchanged into a
single class of Common Stock. The Company's charter now provides for the
issuance of up to 200.0 million shares of Common Stock, par value $0.001 per
share, and 30.0 million shares of preferred stock. As part of these
transactions, the Company adopted articles supplementary creating four series of
preferred stock designated as 9.5% Series A Cumulative Redeemable Preferred
Stock, consisting of 4.4 million shares, 9.375% Series B Cumulative Redeemable
Preferred Stock, consisting of 2.3 million shares, 9.20% Series C Cumulative
Redeemable Preferred Stock, consisting of approximately 1.5 million shares, and
8.0% Series D Cumulative Redeemable Preferred Stock, consisting of 4.6 million
shares. The Series B, C and D Cumulative Redeemable Preferred Stock were issued
in the TriNet Acquisition in exchange for similar issuances of TriNet stock then
outstanding. The Series A, B, C and D Cumulative Redeemable Preferred Stock are
redeemable without premium at the option of the Company at their respective
liquidation preferences beginning on December 15, 2003, June 15, 2001,
August 15, 2001 and October 8, 2002, respectively.

STOCK REPURCHASE PROGRAM: The Board of Directors approved, and the Company
has implemented, a stock repurchase program under which the Company is
authorized to repurchase up to 5.0 million shares of its Common Stock from time
to time, primarily using proceeds from the disposition of assets and excess cash
flow from operations, but also using borrowings under its credit facilities if
the Company determines that it is advantageous to do so. As of both June 30,
2001 and December 31, 2000, the Company had repurchased approximately
2.3 million shares at an aggregate cost of approximately $40.7 million.

NOTE 8--RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS

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 speeds, or different bases, than its
interest-earning assets. Credit risk is the risk of default on the Company's
loan assets that results from a property's, borrower's or tenant's inability or
unwillingness to make contractually required payments. Market risk reflects
changes in the value of loans due to changes in interest rates or other market
factors, including the rate of prepayments of principal and the value of the
collateral underlying loans and the valuation of corporate tenant lease
facilities held by the Company.

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

In connection with the TriNet Acquisition, the Company acquired LIBOR
interest rate caps currently struck at 7.75%, and 7.75% in notional amounts of
$75.0 million and $35.0 million,

F-18

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8--RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS (CONTINUED)
respectively, which both expire in December 2004. In June 2001, an interest rate
cap acquired in the TriNet Acquisition, with a notional amount of $75.0 million,
matured. In connection with the closing of STARs, Series 2000-1 in May 2000, the
Company entered into a LIBOR interest rate cap struck at 10.00% in the notional
amount of $312.0 million, and simultaneously sold a LIBOR interest rate cap with
the same terms. Since these instruments do not reduce the Company's net interest
rate risk exposure, they do not qualify as hedges and changes in their
respective values are charged to earnings. As the significant terms of these
arrangements are substantially the same, the effects of a revaluation of these
two instruments are expected to substantially offset one another. In
January 2001, March 2001 and June 2001 three interest rate caps with notional
amounts of $40.4 million, $300.0 million and $38.3 million respectively,
matured. At June 30, 2001 and December 31, 2000, the net fair value of the
Company's interest rate caps were $0.4 million and $0.4 million, respectively.

The Company has entered into LIBOR interest rate swaps struck at 7.055% and
7.058%, both with notional amounts of $125.0 million that expire in June 2003.
These swaps effectively fix the interest rate on a portion of the Company's
floating-rate term loan obligations. In connection with the TriNet Acquisition,
the Company acquired an interest rate swap which, together with certain existing
interest rate cap agreements, effectively fix the interest rate on
$75.0 million of the Leasing Subsidiary's LIBOR-based borrowings at 5.58% plus
the applicable margin through December 1, 2004. Management expects that it will
have aggregate LIBOR-based borrowings at the Leasing Subsidiary in excess of the
notional amount for the duration of the swap. The actual borrowing cost to the
Company with respect to indebtedness covered by the swap will depend upon the
applicable margin over LIBOR for such indebtedness, which will be determined by
the terms of the relevant debt instruments. In January 2001 and June 2000,
interest rate swaps with notional amounts of approximately $92.0 million and
$112.0 million, respectively, matured. At June 30, 2001 and December 31, 2000,
the fair value (liability) of the Company's interest rate swaps was ($12.8)
million and ($7.7) million, respectively.

During the year ended December 31, 1999, the Company settled an aggregate
notional amount of approximately $63.0 million that was outstanding under
certain hedging agreements which the Company had entered into in order to hedge
the potential effects of interest rate movements on anticipated fixed-rate
borrowings. The settlement of such agreements resulted in a receipt of
approximately $0.6 million which had been deferred pending completion of the
planned fixed-rate financing transaction. Subsequently, the transaction was
modified and was actually consummated as a variable-rate financing transaction.
As a result, the previously deferred receipt no longer qualified for hedge
accounting treatment and the $0.6 million was recognized as a gain included in
other income in the consolidated statement of operations for the year ended
December 31, 2000 in connection with the closing of STARs, Series 2000-1 in
May 2000.

During the year ended December 31, 1999, the Company refinanced its
$125.0 million term loan maturing March 15, 1999 with a $155.4 million term loan
maturing March 5, 2009. The new term loan bears interest at 7.44% per annum,
payable monthly, and amortizes over an approximately 22-year schedule. The new
term loan represented forecasted transactions for which the Company had
previously entered into U.S. Treasury-based hedging transactions. The net
$3.4 million cost of the settlement of such hedges has been deferred and is
being amortized as an increase to the effective financing cost of the new term
loan over its effective ten-year term.

CREDIT RISK CONCENTRATIONS--Concentrations of credit risks arise when a
number of borrowers or customers related to the Company's investments are
engaged in similar business activities, or activities

F-19

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8--RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS (CONTINUED)
in the same geographic region, or have similar economic features that would
cause their ability to meet contractual obligations, including those to the
Company, to be similarly affected by changes in economic conditions. The Company
regularly monitors various segments of its portfolio to assess potential
concentrations of credit risks. Management believes the current credit risk
portfolio is reasonably well diversified and does not contain any unusual
concentration of credit risks.

Substantially all of the Company's real estate subject to operating leases
(including those held by joint ventures) and loans and other lending
investments, are collateralized by facilities located in the United States, with
significant concentrations (i.e., greater than 10.0%) as of June 30, 2001 in
California (24.9%), Texas (14.1%) and New York (11.3%). As of June 30, 2001, the
Company's investments also contain significant concentrations in the following
asset/collateral types: office (47.9%) and hotel/resorts (20.1%).

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 or letters of credit. 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 9--INCOME TAXES

Although originally formed to qualify as a REIT under the Code for the
purpose of making and acquiring various types of mortgage and other loans,
during 1993 through 1997, the Company failed to qualify as a REIT. As confirmed
by a closing agreement with the IRS obtained in March 1998, the Company was
eligible, elected to be taxed as a REIT and qualified for REIT status for the
tax years commencing on January 1, 1998. The Company did not incur any material
tax liabilities as a result of its operations during such years.

NOTE 10--STOCK OPTION PLANS AND EMPLOYEE BENEFITS

The Company's 1996 Long-Term Incentive Plan (the "Plan") is designed to
provide incentive compensation for officers, other key employees and directors
of the Company. The Plan provides for awards of stock options and shares of
restricted stock and other performance awards. The maximum number of shares of
Common Stock available for awards under the Plan is 9.0% of the outstanding
shares of Common Stock, calculated on a diluted basis, from time to time;
provided that the number of shares of Common Stock reserved for grants of
options designated as incentive stock options is 5.0 million, subject to certain
antidilution provisions in the Plan. All awards under the Plan, other than
automatic awards to non-employee directors, are at the discretion of the Board
or a committee of the Board. At June 30, 2001, a total of approximately
7.9 million shares of Common Stock were available for awards under the Plan, of
which options to purchase approximately 6.0 million shares of Common Stock were
outstanding and approximately 650,000 shares of restricted stock were
outstanding.

F-20

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10--STOCK OPTION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
consummation of the Advisor Transaction, these individuals became employees of
the Company. In general, the grants to these employees provided for scheduled
vesting over a predefined service period of three to five years and, under
certain conditions, provide for accelerated vesting. These options expire on
March 15, 2008.

In connection with the TriNet Acquisition, outstanding options to purchase
TriNet stock under TriNet's stock option plans were converted into options to
purchase shares of Common Stock on substantially the same terms, except that
both the exercise price and number of shares issuable upon exercise of the
TriNet options were adjusted to give effect to the merger exchange ratio of 1.15
shares of Common Stock for each share of TriNet common stock. In addition,
options held by the former directors of TriNet and certain executive officers
became fully vested as a result of the transaction.

Also, as a result of the TriNet Acquisition, TriNet terminated its dividend
equivalent rights program. The program called for immediate vesting and cash
redemption of all dividend equivalent rights upon a change of control of 50.0%
or more of the voting common stock of TriNet. Concurrent with the TriNet
Acquisition, all dividend equivalent rights were vested and amounts due to
former TriNet employees of approximately $8.3 million were paid by the Company.
Such payments were included as part of the purchase price paid by the Company to
acquire TriNet for financial reporting purposes.

Changes in options outstanding during the six months ended June 30, 2001 are
as follows:

NUMBER OF SHARES
------------------------------------ AVERAGE
NON-EMPLOYEE STRIKE
EMPLOYEES DIRECTORS OTHER PRICE
--------- ------------ --------- --------

OPTIONS OUTSTANDING, DECEMBER 31, 2000
(UNAUDITED)...................................... 3,535,572 226,379 961,163 $18.97
Granted in 2001.................................. 1,618,400 -- 100,000 $19.81
Exercised in 2001................................ (425,494) (10,000) -- $18.09
Forfeited in 2001................................ (51,122) -- -- $28.13
--------- ------- ---------
OPTIONS OUTSTANDING, JUNE 30, 2001 (UNAUDITED)..... 4,677,356 216,379 1,061,163
========= ======= =========

F-21

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10--STOCK OPTION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
The following table summarizes information concerning outstanding and
exercisable options as of June 30, 2001 (unaudited):

OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------ ----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
OPTIONS CONTRACTUAL EXERCISE CURRENTLY EXERCISE
EXERCISE PRICE RANGE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------------------- ----------- ----------- -------- ----------- --------

$14.72 - $15.00(1) 1,809,792 6.71 $14.73 1,261,530 $14.72
$16.69 - $16.88 1,107,939 8.52 $16.86 370,282 $16.88
$17.38 - $17.56 690,000 8.72 $17.39 223,335 $17.38
$19.50 - $19.75 1,695,400 9.62 $19.69 2,083 $19.54
$20.63 - $21.44 108,050 2.48 $21.12 100,050 $21.13
$22.44 - $22.45 20,000 9.26 $22.44 -- $ --
$23.32 - $23.64 72,335 2.88 $23.57 52,850 $23.55
$24.13 - $24.71 127,500 4.28 $24.28 126,500 $24.27
$25.10 - $26.09 21,700 5.15 $26.04 20,700 $26.09
$26.30 - $26.85 110,100 3.05 $26.75 108,100 $26.74
$27.00 25,000 9.99 $27.00 -- $ --
$28.26 - $28.54 55,613 3.29 $28.37 55,613 $28.37
$30.33 96,025 3.40 $30.33 85,967 $30.33
$33.15 - $33.70 10,350 1.47 $33.39 8,913 $33.43
$55.39 5,094 7.92 $55.39 3,396 $55.39
--------- ----- ------ --------- ------
5,954,898 7.78 $18.06 2,419,319 $17.89
========= ===== ====== ========= ======

EXPLANATORY NOTE:
------------

(1) Includes 764,266 options which were granted, on a fully exercisable basis,
in connection with the Recapitalization Transactions, and which are now held
by a privately owned affiliate of Starwood Capital Group. Beneficial
interests in these options were subsequently regranted by that affiliate to
employees of Starwood Capital Group and its affiliates subject to vesting
requirements. In the event that these employees forfeit such options, they
will revert to this affiliate, which may regrant them at its discretion.

The Company has elected to use the intrinsic method for accounting for
options issued to employees or directors, as allowed under Statement of
Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation"
("SFAS No. 123") and, accordingly, recognizes no compensation charge in
connection with these options to the extent that the options exercise price
equals or exceeds the quoted price of the Company's common shares at the date of
grant or measurement date. In connection with the Advisor Transaction, as part
of the computation of the one-time charge to earnings, the Company calculated a
deferred compensation charge of approximately $5.1 million. This deferred charge
represents the difference of the closing sales price of the shares of Common
Stock on the date of the Advisor Transaction of $20.25 over the strike price of
the options of $14.72 per share (as adjusted) for the unvested portion of the
options granted to former employees of the Advisor who are now employees of the
Company. This deferred charge will be amortized over the related remaining
vesting terms to the individual employees as additional compensation expense.

In connection with the original grant of options in March 1998 to its
external advisor, the Company utilized the option value method as required by
SFAS No. 123. An independent financial

F-22

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10--STOCK OPTION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
advisory firm estimated the value of these options at date of grant to be
approximately $2.40 per share using a Black-Scholes valuation model. In the
absence of comparable historical market information for the Company, the
advisory firm utilized assumptions consistent with activity of a comparable peer
group of companies, including an estimated option life of five years, a 27.5%
volatility rate and an estimated annual dividend rate of 8.5%. The resulting
charge to earnings was calculated as the number of options allocated to the
Advisor multiplied by the estimated value at consummation. A charge of
approximately $6.0 million was reflected in the Company's first quarter 1998
financial results for this original grant.

Future charges may be taken to the extent of additional option grants, which
are at the discretion of the Board of Directors.

During the six-month period ended June 30, 2001, the Company granted 94,859
restricted shares to employees in lieu of cash bonuses for the year ended
December 31, 2000 at the employees' election. These restricted shares were
immediately vested on the date of grant and are not transferable for a period of
one year following vesting. In addition, during the three months ended June 30,
2001, the Company entered into a three-year employment agreement with an
executive in connection with his appointment as president of the Company. Under
the agreement, in lieu of salary and bonus, the Company granted the executive
500,000 unvested restricted shares. The vesting of these shares is a function of
the total rate of return (dividends and price appreciation) on the Company's
Common Stock, although none of the shares vest (regardless of the total return
to shareholders) if the executive voluntarily terminates his employment without
good reason prior to September 30, 2002. Until shares under the agreement are
otherwise vested or forfeited, the executive will receive dividends on the share
grant during the term of the agreement if and when the Company declares and pays
dividends on its Common Stock. None of these restricted shares were vested at
June 30, 2001.

During the three months ended June 30, 2001, the Company also entered into a
new three-year employment agreement with its chief executive officer. As part of
this agreement, the Company confirmed a prior grant of 750,000 stock options
made to the executive on March 2, 2001. The options will vest in equal
installments of 250,000 shares in each January beginning with January 2002. The
Company also granted the executive 2,000,000 unvested phantom shares, each of
which represents one share of the Company's Common Stock. These shares will vest
in installments on a contingent basis if the average closing price of the
Company's Common Stock achieves certain levels ($25.00 to $37.00 per share) over
specified periods of time. Shares that have contingently vested generally will
not become fully vested until the end of the three-year term of the agreement,
except upon certain termination or change of control events. Further, if the
stock price drops below certain specified levels for the 60-day average before
such date, they would also not fully vest and be forfeited. The executive will
receive dividends on shares that have contingently or fully vested and have not
been forfeited under the terms of the agreement, if and when the Company
declares and pays dividends on its Common Stock.

During the year ended December 31, 2000, the Company granted 143,646
restricted shares to employees. Of this total, 74,996 restricted shares were
granted in lieu of cash bonuses at the employees' election, were immediately
vested on the date of grant, and were not transferable for a period of one year
following vesting. An additional 68,650 of such restricted shares vest over
periods ranging from one to three years following the date of grant and are
transferable upon vesting.

Effective November 4, 1999, the Company implemented a savings and retirement
plan (the "401(k) Plan"), which is a voluntary, defined contribution plan. All
employees are eligible to participate

F-23

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10--STOCK OPTION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
in the 401(k) Plan following completion of six months of continuous service with
the Company. Each participant may contribute on a pretax basis between 2% and
15% of such participant's compensation. At the discretion of the Board of
Directors, the Company may make matching contributions on the participant's
behalf up to 50% of the first 10% of the participant's annual contribution. The
Company made contributions of approximately $65,000 and $45,000 to the 401(k)
Plan for the three-month periods ended June 30, 2001 and 2000, respectively and
approximately $178,000 and $175,000 to the 401(k) Plan for the six-month periods
ended June 30, 2001 and 2000, respectively.

NOTE 11--EARNINGS PER SHARE

Prior to November 4, 1999, Basic EPS was computed based on the income
allocable to class A shares (net income reduced by accrued dividends on
preferred shares and by 1% allocated to class B shares), divided by the weighted
average number of class A shares outstanding during the period. Diluted EPS was
based on the net earnings allocable to class A shares plus dividends on class B
shares which were convertible into class A shares, divided by the weighted
average number of class A shares and dilutive potential class A shares that were
outstanding during the period. Dilutive potential class A shares included the
class B shares, which were convertible into class A shares at a rate of 49
class B shares for one class A share, and potentially dilutive options to
purchase class A shares issued to the Advisor and the Company's directors and
warrants to acquire class A shares.

As described in Note 1, in the Incorporation Merger, the class B shares were
converted into shares of Common Stock on a 49-for-one basis (the same ratio at
which class B shares were previously convertible into class A shares), and the
class A shares were converted into shares of Common Stock on a one-for-one
basis. As a result, the Company no longer has multiple classes of common shares.
Basic and diluted earnings per share are based upon the following weighted
average shares outstanding during the three- and six-month periods ended
June 30, 2001 and 2000, respectively (in thousands):

FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -----------------------
2001 2000 2001 2000
-------- -------- -------- --------
(UNAUDITED)

Weighted average common shares outstanding for basic
earnings per common share.......................... 86,081 85,281 85,958 85,184
Add: effect of assumed shares issued under treasury
stock method for stock options and restricted
shares............................................. 1,871 709 1,568 541
Add: effect of contingent shares..................... 115 -- 58 --
Add: effect of joint venture shares.................. 75 -- -- --
------ ------ ------ ------
Weighted average common shares outstanding for
diluted earnings per common share.................. 88,142 85,990 87,584 85,725
====== ====== ====== ======

NOTE 12--COMPREHENSIVE INCOME

F-24

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 12--COMPREHENSIVE INCOME (CONTINUED)
of comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 130 requires that all components of comprehensive
income shall be reported in the financial statements in the period in which they
are recognized. Furthermore, a total amount for comprehensive income shall be
displayed in the financial statements. The Company has adopted this standard
effective January 1, 1998. Total comprehensive income was $80.6 million and
$87.1 million for the six-month periods ended June 30, 2001 and 2000,
respectively, and $51.0 million and $44.6 million for the three-month period
ended June 2001 and 2000, respectively. The primary component of comprehensive
income other than net income was the adoption of SFAS No. 133.

For the three and six months ended June 30, 2001, the change in fair market
value of the Company's interest rate swaps was $1.3 million and $(5.1) million
and was recorded in other comprehensive income. The reconciliation to other
comprehensive income is as follows (in thousands) (unaudited):

FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2001 2000 2001 2000
-------- -------- -------- --------

Net income.............................................. $49,733 $44,602 $95,150 $87,364
Other comprehensive income (loss):
Unrealized gains (losses) on securities for the
period.............................................. -- -- -- (229)
Cumulative effect of change in accounting principle
(SFAS No. 133) on other comprehensive income........ -- -- (9,445) --
Unrealized derivative gains (losses) on cash flow
hedges.............................................. 1,280 -- (5,074) --
------- ------- ------- -------
Comprehensive income.................................... $51,013 $44,602 $80,631 $87,135
======= ======= ======= =======

NOTE 13--DIVIDENDS

In order to maintain its election to qualify as a REIT, the Company must
distribute, at a minimum, an amount equal to 90% of its taxable income and must
distribute 100% of its taxable income to avoid paying corporate federal income
taxes. The distribution rate was modified to 90% from 95% by the REIT
Modernization Act beginning in fiscal 2001. The Company anticipates it will
distribute all of its taxable income to its shareholders. Because taxable income
differs from cash flow from operations due to non-cash revenues or expenses, in
certain circumstances, the Company may be required to borrow to make sufficient
dividend payments to meet this anticipated dividend threshold.

On November 4, 1999, the class A shares were converted into shares of Common
Stock on a one-for-one basis. In November 1999, the Company declared and paid a
dividend of a total of one million shares of Common Stock pro rata to all
holders of record of Common Stock as of the close of business on November 3,
1999. For the year ended December 31, 2000, total dividends declared by the
Company aggregated $205.5 million, or $2.40 per common share. Total common
dividends declared by the Company aggregated $52.6 million or $0.6125 per share
of Common Stock for the three-and six-months ended June 30, 2001. This dividend,
paid on April 2, 2001, was applicable to the three-month period ended March 31,
2001 and payable to shareholders of record on April 16, 2001. On July 2, 2001,
the Company declared a dividend of approximately $53.2 million, or $0.6125 per
share of Common Stock, applicable to the second quarter and payable to
shareholders of record on July 16,

F-25

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 13--DIVIDENDS (CONTINUED)
2001. The Company also declared dividends aggregating $10.4 million,
$2.4 million, $1.4 million and $4.0 million, respectively, on its Series A, B, C
and D preferred stock, respectively, for the six-month period ended June 30,
2001 and $5.2 million, $1.2 million, $0.7 million and $2.0 million,
respectively, on its Series A, B, C and D preferred stock, respectively, for the
three-month period ended June 30, 2001. There are no divided arrearages on any
of the preferred shares currently outstanding.

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

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

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

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

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

NOTE 14--SEGMENT REPORTING

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

F-26

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 14--SEGMENT REPORTING (CONTINUED)
The Company has two reportable segments: Real Estate Lending and Corporate
Tenant Leasing. The Company does not have substantial foreign operations. The
accounting policies of the segments are the same as those described in Note 3.
The Company has no single customer that accounts for 10% or more of revenues
(see Note 8 for other information regarding concentrations of credit risk).

The Company evaluates performance based on the following financial measures
for each segment. Selected results of operations for the three- and six-month
periods ended June 30, 2001 and 2000 and selected asset information as of
June 30, 2001 and December 31, 2000 regarding the Company's operating segments
are as follows (in thousands):

CREDIT
REAL ESTATE TENANT CORPORATE/ COMPANY
LENDING LEASING(1) OTHER(2) TOTAL
----------- ---------- ---------- ----------
(UNAUDITED)

Total revenues(3):
Three months ended:
June 30, 2001................................. $ 72,592 $ 49,353 $ (1,120) $ 120,825
June 30, 2000................................. 69,468 47,930 516 117,914
Six months ended:
June 30, 2001................................. $ 144,925 $ 98,981 $ (462) $ 243,444
June 30, 2000................................. 134,225 94,330 247 228,802
Total operating and interest expense(4):
Three months ended:
June 30, 2001................................. $ 29,264 $ 25,906 $ 7,698 $ 62,868
June 30, 2000................................. 28,295 18,933 17,257 64,485
Six months ended:
June 30, 2001................................. $ 63,390 $ 51,934 $ 14,660 $ 129,984
June 30, 2000................................. 50,813 39,004 33,742 123,559
Net operating income before minority interest
and gain on sale of net lease assets(5):
Three months ended:
June 30, 2001................................. $ 43,328 $ 23,447 $ (8,818) $ 57,957
June 30, 2000................................. 41,173 28,997 (16,741) 53,429
Six months ended:
June 30, 2001................................. $ 81,535 $ 47,047 $(15,122) $ 113,460
June 30, 2000................................. 83,412 55,326 (33,495) 105,243
Total long-lived assets(6):
June 30, 2001................................. $2,252,255 $1,634,524 N/A $3,886,779
December 31, 2000............................. 2,225,183 1,670,169 N/A 3,895,352
Total assets:
June 30, 2001................................. $2,252,255 $1,634,524 $166,571 $4,053,350
December 31, 2000............................. 2,225,183 1,670,169 139,423 4,034,775

EXPLANATORY NOTES:
------------

(1) Includes the Company's pre-existing Corporate Tenant Leasing investments
since March 18, 1998 and the Corporate Tenant Leasing business acquired in
the TriNet Acquisition since November 4, 1999.

F-27

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 14--SEGMENT REPORTING (CONTINUED)
(2) Corporate and Other represents all corporate level items, including general
and administrative expenses and any intercompany eliminations necessary to
reconcile to the consolidated Company totals. This caption also includes the
Company's servicing business, which is not considered a material separate
segment.

(3) Total revenues represents all revenues earned during the period from the
assets in each segment. Revenue from the Real Estate Lending business
primarily represents interest income and revenue from the Corporate Tenant
Leasing business primarily represents operating lease income.

(4) Total operating and interest expense represents provision for possible
credit losses for the Real Estate Lending business and operating costs on
corporate tenant lease assets for the Corporate Tenant Leasing business, as
well as interest expense specifically related to each segment. General and
administrative expense, advisory fees (prior to November 4, 1999) and
stock-based compensation expense is included in Corporate and Other for all
periods. Depreciation and amortization of $8.8 million and $8.9 million for
the three-month periods ended June 30, 2001 and 2000, respectively, and
$17.6 million and $17.9 million for the six-month periods ended June 30,
2001 and 2000, respectively, are included in the amounts presented above.

(5) Net operating income before minority interests represents net operating
income before minority interest, gain on sale of corporate tenant lease
assets and extraordinary loss as defined in note (3) above, less total
operating and interest expense, as defined in note (4) above.

(6) Total long-lived assets is comprised of Loans and Other Lending Investments,
net and Real Estate Subject to Operating Leases, net, for each respective
segment.

NOTE 15--SUBSEQUENT EVENTS

F-28

REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of iStar
Financial Inc. and its subsidiaries at December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedules listed in the accompanying index present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedules are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedules based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
New York, NY
March 2, 2001

F-29

ISTAR FINANCIAL INC.

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

AS OF DECEMBER 31,
-----------------------
2000 1999*
---------- ----------

ASSETS
Loans and other lending investments, net.................... $2,225,183 $2,003,506
Real estate subject to operating leases, net................ 1,670,169 1,714,284
Cash and cash equivalents................................... 22,752 34,408
Restricted cash............................................. 20,441 10,195
Marketable securities....................................... 41 4,344
Accrued interest and operating lease income receivable...... 20,167 16,211
Deferred operating lease income receivable.................. 10,236 1,147
Deferred expenses and other assets.......................... 62,224 29,074
Investment in iStar Operating, Inc.......................... 3,562 383
---------- ----------
Total assets.............................................. $4,034,775 $3,813,552
========== ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable, accrued expenses and other liabilities.... $ 52,038 $ 54,773
Dividends payable........................................... 56,661 53,667
Debt obligations............................................ 2,131,967 1,901,204
---------- ----------
Total liabilities......................................... 2,240,666 2,009,644
---------- ----------
Commitments and contingencies............................... -- --

Minority interests in consolidated entities................. 6,224 2,565

Shareholders' equity:
Series A Preferred Stock, $0.001 par value, liquidation
preference $220,000, 4,400 shares issued and outstanding
at December 31, 2000 and December 31, 1999................ 4 4
Series B Preferred Stock, $0.001 par value, liquidation
preference $50,000, 2,000 shares issued and outstanding at
December 31, 2000 and December 31, 1999................... 2 2
Series C Preferred Stock, $0.001 par value, liquidation
preference $32,500, 1,300 shares issued and outstanding at
December 31, 2000 and December 31, 1999................... 1 1
Series D Preferred Stock, $0.001 par value, liquidation
preference $100,000, 4,000 shares issued and outstanding
at December 31, 2000 and December 31, 1999................ 4 4
Common Stock, $0.001 par value, 200,000 shares authorized,
85,726 and 84,985 shares issued and outstanding at
December 31, 2000 and December 31, 1999, respectively..... 85 85
Warrants and options........................................ 16,943 17,935
Additional paid in capital.................................. 1,966,396 1,953,972
Retained earnings (deficit)................................. (154,789) (129,992)
Accumulated other comprehensive income (losses)............. (20) (229)
Treasury stock (at cost).................................... (40,741) (40,439)
---------- ----------
Total shareholders' equity................................ 1,787,885 1,801,343
---------- ----------
Total liabilities and shareholders' equity................ $4,034,775 $3,813,552
========== ==========

--------------------------

* RECLASSIFIED TO CONFORM TO 2000 PRESENTATION.

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

F-30

ISTAR FINANCIAL INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

YEAR ENDED
DECEMBER 31,
------------------------------
2000 1999* 1998*
-------- -------- --------

REVENUE:
Interest income........................................... $268,011 $209,848 $112,914
Operating lease income.................................... 185,956 42,186 12,378
Other income.............................................. 17,855 12,763 2,804
-------- -------- --------
Total revenue........................................... 471,822 264,797 128,096
-------- -------- --------

COSTS AND EXPENSES:
Interest expense.......................................... 173,891 91,184 44,697
Operating costs-corporate tenant lease assets............. 12,809 2,246 --
Depreciation and amortization............................. 34,514 10,340 4,287
General and administrative................................ 25,706 6,269 2,583
Provision for possible credit losses...................... 6,500 4,750 2,750
Stock option compensation expense......................... 2,864 412 5,985
Advisory fees............................................. -- 16,193 7,837
Costs incurred in acquiring external advisor.............. -- 94,476 --
-------- -------- --------
Total costs and expenses................................ 256,284 225,870 68,139
-------- -------- --------
Net income before minority interest, gain on sale of
corporate tenant lease assets and extraordinary loss...... 215,538 38,927 59,957
Minority interest in consolidated entities.................. (195) (41) (54)
Gain on sale of corporate tenant lease assets............... 2,948 -- --
-------- -------- --------
Net income before extraordinary loss........................ 218,291 38,886 59,903
Extraordinary loss on early extinguishments of debt......... (705) -- --
-------- -------- --------
Net income.................................................. $217,586 $ 38,886 $ 59,903
Preferred dividend requirements............................. (36,908) (23,843) (944)
-------- -------- --------
Net income allocable to common shareholders................. $180,678 $ 15,043 $ 58,959
======== ======== ========
Basic earnings per common share(1).......................... $ 2.11 $ 0.25 $ 1.40
======== ======== ========
Diluted earnings per common share(1)........................ $ 2.10 $ 0.25 $ 1.36
======== ======== ========
EXPLANATORY NOTES:

------------------------

* RECLASSIFIED TO CONFORM TO 2000 PRESENTATION.

(1) Net income per basic common share excludes 1% of net income allocable to
the Company's class B shares prior to November 4, 1999. These shares were
exchanged for Common Stock in connection with the TriNet Acquisition and
related transactions on November 4, 1999. As a result, the Company now has a
single class of Common Stock outstanding.

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

F-31

ISTAR FINANCIAL INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(IN THOUSANDS)

COMMON STOCK
SERIES A SERIES B SERIES C SERIES D COMMON AT PAR
PREFERRED PREFERRED PREFERRED PREFERRED STOCK --------------------
STOCK STOCK STOCK STOCK AT PAR CLASS A CLASS B
--------- --------- --------- --------- -------- --------- --------

Balance at January 1, 1998............. $ -- $ -- $ -- $ -- $ -- $ 7,550 $ 38
Recapitalization Transactions.......... -- -- -- -- -- 306,796 1,534
Issuance of options to Advisor......... -- -- -- -- -- -- --
Effects of reorganization(1)........... -- -- -- -- -- (261,956) (1,310)
Exercise of options.................... -- -- -- -- -- 18 --
Issuance of preferred shares and
warrants............................. 44 -- -- -- -- -- --
Dividends declared-preferred........... -- -- -- -- -- -- --
Dividends declared-common.............. -- -- -- -- -- -- --
Net Income for the period.............. -- -- -- -- -- -- --
Change in accumulated other
comprehensive income................. -- -- -- -- -- -- --
---- ---- ---- ---- ---- --------- -------
Balance at December 31, 1998*.......... $ 44 $ -- $ -- $ -- $ -- $ 52,408 $ 262
Exercise of options.................... -- -- -- -- -- 63 --
Dividends declared-preferred........... -- -- -- -- -- -- --
Dividends declared-common.............. -- -- -- -- -- -- --
Effects of Incorporation Merger........ (40) -- -- -- 53 (52,471) (262)
Acquisition of TriNet.................. -- 2 1 4 29 -- --
Issuance of shares of Common Stock
through conversion of joint venture
partners interest.................... -- -- -- -- -- -- --
Advisor Transaction.................... -- -- -- -- 4 -- --
Special stock dividend................. -- -- -- -- 1 -- --
Purchase of treasury stock............. -- -- -- -- (2) -- --
Net income for the period.............. -- -- -- -- -- -- --
Change in accumulated other
comprehensive income................. -- -- -- -- -- -- --
---- ---- ---- ---- ---- --------- -------
Balance at December 31, 1999........... $ 4 $ 2 $ 1 $ 4 $ 85 $ -- $ --
Exercise of options.................... -- -- -- -- -- -- --
Dividends declared-preferred........... -- -- -- -- -- -- --
Dividends declared-common.............. -- -- -- -- -- -- --
Acquisition of ACRE Partners........... -- -- -- -- -- -- --
Restricted stock units issued to
employees in lieu of cash bonuses.... -- -- -- -- -- -- --
Restricted stock units granted to
employees............................ -- -- -- -- -- -- --
Issuance of stock through DRIP plan.... -- -- -- -- -- -- --
Purchase of treasury stock............. -- -- -- -- -- -- --
Net income for the period.............. -- -- -- -- -- -- --
Change in accumulated other
comprehensive income................. -- -- -- -- -- -- --
---- ---- ---- ---- ---- --------- -------
Balance at December 31, 2000........... $ 4 $ 2 $ 1 $ 4 $ 85 $ -- $ --
==== ==== ==== ==== ==== ========= =======
EXPLANATORY NOTE:

ACCUMULATED
WARRANTS ADDITIONAL RETAINED OTHER
AND PAID-IN EARNINGS COMPREHENSIVE TREASURY
OPTIONS CAPITAL (DEFICIT) INCOME STOCK TOTAL
--------- ---------- --------- -------------- -------- ----------

Balance at January 1, 1998............. $ -- $ -- $ (1,075) $(162) $ -- $ 6,351
Recapitalization Transactions.......... -- 432,084 -- -- -- 740,414
Issuance of options to Advisor......... 5,985 -- -- -- -- 5,985
Effects of reorganization(1)........... -- 262,786 -- -- -- (480)
Exercise of options.................... (270) 537 -- -- -- 285
Issuance of preferred shares and
warrants............................. 13,189 206,170 -- -- -- 219,403
Dividends declared-preferred........... -- 15 (944) -- -- (929)
Dividends declared-common.............. -- -- (60,343) -- -- (60,343)
Net Income for the period.............. -- -- 59,903 -- -- 59,903
Change in accumulated other
comprehensive income................. -- -- -- 139 -- 139
-------- ---------- --------- ----- -------- ----------
Balance at December 31, 1998*.......... $ 18,904 $ 901,592 $ (2,459) $ (23) $ -- $ 970,728
Exercise of options.................... (969) 1,853 -- -- -- 947
Dividends declared-preferred........... -- 330 (25,149) -- -- (24,819)
Dividends declared-common.............. -- -- (116,813) -- -- (116,813)
Effects of Incorporation Merger........ -- 52,720 -- -- -- --
Acquisition of TriNet.................. -- 868,933 -- -- -- 868,969
Issuance of shares of Common Stock
through conversion of joint venture
partners interest.................... -- 6,226 -- -- -- 6,226
Advisor Transaction.................... -- 97,862 -- -- -- 97,866
Special stock dividend................. -- 24,456 (24,457) -- -- --
Purchase of treasury stock............. -- -- -- -- (40,439) (40,441)
Net income for the period.............. -- -- 38,886 -- -- 38,886
Change in accumulated other
comprehensive income................. -- -- -- (206) -- (206)
-------- ---------- --------- ----- -------- ----------
Balance at December 31, 1999........... $ 17,935 $1,953,972 $(129,992) $(229) $(40,439) $1,801,343
Exercise of options.................... (992) 7,089 -- -- -- 6,097
Dividends declared-preferred........... -- 330 (36,906) -- -- (36,576)
Dividends declared-common.............. -- -- (205,477) -- -- (205,477)
Acquisition of ACRE Partners........... -- 3,637 -- -- -- 3,637
Restricted stock units issued to
employees in lieu of cash bonuses.... -- 1,125 -- -- -- 1,125
Restricted stock units granted to
employees............................ -- 212 -- -- -- 212
Issuance of stock through DRIP plan.... -- 31 -- -- -- 31
Purchase of treasury stock............. -- -- -- -- (302) (302)
Net income for the period.............. -- -- 217,586 217,586
Change in accumulated other
comprehensive income................. -- -- -- 209 -- 209
-------- ---------- --------- ----- -------- ----------
Balance at December 31, 2000........... $ 16,943 $1,966,396 $(154,789) $ (20) $(40,741) $1,787,885
======== ========== ========= ===== ======== ==========
EXPLANATORY NOTE:

----------------------------------------

* RECLASSIFIED TO CONFORM TO 2000 PRESENTATION.

(1) As adjusted for one-for-six reverse stock split effective June 19, 1998.

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

F-32

ISTAR FINANCIAL INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

YEAR ENDED
DECEMBER 31,
-------------------------------------
2000 1999* 1998*
--------- ----------- -----------

Cash flows from operating activities:
Net income.................................................. $ 217,586 $ 38,886 $ 59,903
Adjustments to reconcile net income to cash flows provided
by operating activities:
Minority interest......................................... 195 41 54
Non-cash expense for options issued to Advisor............ 1,700 412 5,985
Non-cash expense for Advisor Transaction.................. -- 94,476 --
Equity in earnings of unconsolidated joint ventures and
subsidiaries............................................ (4,753) (234) (96)
Depreciation and amortization............................. 47,402 15,932 7,662
Amortization of discounts/premiums and deferred
interest................................................ (27,059) (25,493) (17,750)
Distributions from operating joint venture................ 4,511 470 --
Deferred operating lease income adjustments............... (9,130) (1,597) --
Realized (gain)/loss on sale of securities................ 233 (11) --
Gain on sale of corporate tenant lease assets............. (2,948) -- --
Extraordinary loss on early extinguishment of debt........ 705 -- --
Provision for possible credit losses...................... 6,500 4,750 2,750
Changes in assets and liabilities:
(Increase) decrease in restricted cash.................. (10,246) 2,924 (5,699)
Increase in accrued interest and operating lease income
receivable............................................. (3,761) (3,089) (5,613)
Decrease in deferred expenses and other assets.......... (26,764) (1,212) (902)
Increase (decrease) in accounts payable, accrued
expenses and other liabilities......................... (1,702) (3,706) 8,621
--------- ----------- -----------
Cash flows provided by operating activities............... 192,469 122,549 54,915
--------- ----------- -----------
Cash flows from investing activities:
Net cash outflow for the Recapitalization Transactions
(Note 3)................................................ -- -- (334,964)
Net cash outflow for TriNet Acquisition (Note 3).......... -- (23,723) --
Proceeds from sale of corporate tenant lease assets....... 146,265 -- --
New investment originations/acquisitions.................. (849,618) (640,757) (975,670)
Principal fundings on existing loan commitments........... (56,039) (45,916) (16,500)
Investment in iStar Operating, Inc........................ (3,443) -- (426)
Proceeds from sale of investment securities............... 30 -- --
Repayments of and principal collections from loans and
other investments....................................... 584,452 520,768 103,926
Investments (in) and advances to unconsolidated joint
ventures................................................ (24,047) (377) (47,675)
Distributions from unconsolidated joint ventures.......... 34,759 47,365 --
Other capital expenditures on real estate subject to
operating leases........................................ (9,011) (1,271) --
--------- ----------- -----------
Cash flows used in investing activities................. (176,652) (143,911) (1,271,309)
--------- ----------- -----------
Cash flows from financing activities:
Net borrowings (repayments) under revolving credit
facilities.............................................. (183,837) 168,592 640,945
Borrowings under term loans............................... 90,000 39,234 368,683
Repayments under term loans............................... (300,799) -- --
Borrowings under repurchase agreements.................... 65,067 (7,331) 46,091
Repayments under repurchase agreements.................... (31,564) -- --
Mortgage note repayments.................................. -- (150) --
Borrowings under bond offerings........................... 863,254 -- --
Repayments under bond offerings........................... (274,919) -- --
Common dividends paid..................................... (202,397) (90,076) (38,638)
Preferred dividends paid.................................. (36,576) (20,524) --
Minority interest......................................... (164) -- --
Extraordinary loss on early extinguishment of debt........ (317) -- --
Payment for deferred financing costs...................... (21,048) (4,593) (11,615)
Proceeds from issuance of class B shares.................. -- -- 1,534
Costs incurred in reorganization.......................... -- -- (480)
Purchase of treasury stock................................ (302) (40,439) --
Proceeds from exercise of options......................... 6,129 947 285
Proceeds from issuance of preferred stock and warrants.... -- -- 219,403
--------- ----------- -----------
Cash flows (used in) provided by financing activities... (27,473) 45,660 1,226,208
--------- ----------- -----------
Increase (decrease) in cash and cash equivalents............ (11,656) 24,298 9,814
Cash and cash equivalents at beginning of period............ 34,408 10,110 296
--------- ----------- -----------
Cash and cash equivalents at end of period.................. $ 22,752 $ 34,408 $ 10,110
========= =========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................. $ 142,145 $ 85,835 $ 38,006
========= =========== ===========

----------------------------------
* RECLASSIFIED TO CONFORM TO 2000 PRESENTATION.

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

F-33

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--ORGANIZATION AND BUSINESS

ORGANIZATION--iStar Financial Inc.(1) (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
approximately $1.1 billion of assets to the Company's predecessor, Starwood
Financial Trust, in exchange for a controlling interest in that company. Since
that time, the Company has grown by originating new lending and leasing
transactions, as well as through corporate acquisitions. Specifically, in
September 1998, the Company acquired the loan origination and servicing business
of a major insurance company, and in December 1998, the Company acquired the
mortgage and mezzanine loan portfolio of its largest private competitor.
Additionally, in November 1999, the Company acquired TriNet Corporate Realty
Trust, Inc. ("TriNet"), which was then the largest publicly traded company
specializing in the net leasing of corporate office and industrial facilities
(the "TriNet Acquisition"). The TriNet Acquisition was structured as a
stock-for-stock merger of TriNet with a subsidiary of the Company. Concurrent
with the TriNet Acquisition, the Company also acquired its external advisor (the
"Advisor Transaction") in exchange for shares of common stock of the Company
("Common Stock") and converted its organizational form to a Maryland corporation
(the "Incorporation Merger"). As part of the conversion to a Maryland
corporation, the Company replaced its 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 under the symbol "SFI" in November 1999.

BUSINESS--The Company is the leading publicly traded finance company focused
on the commercial real estate industry. The Company provides structured
financing to private and corporate owners of real estate nationwide, including
senior and junior mortgage debt, corporate mezzanine and subordinated capital,
and corporate net lease financing. The Company, which has elected to be taxed as
a real estate investment trust ("REIT"), seeks to deliver superior risk-adjusted
returns on equity for shareholders by providing innovative and value-added
financing solutions to its customers.

EXPLANATORY NOTE:
------------

(1) As more fully discussed in Note 4, on November 4, 1999, the Company changed
its form and became a corporation under Maryland law and changed its name
from Starwood Financial Trust to Starwood Financial Inc. Further, effective
April 30, 2000, the registrant changed its name to iStar Financial Inc.

F-34

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2--BASIS OF PRESENTATION

The accompanying audited Consolidated Financial Statements have been
prepared in conformity with generally accepted accounting principles ("GAAP")
for complete financial statements. The Consolidated Financial Statements include
the accounts of the Company, its qualified REIT subsidiaries, and its
majority-owned and controlled partnerships. Certain third-party mortgage
servicing operations are conducted through iStar Operating, Inc. ("iStar
Operating"), a taxable corporation which is not consolidated with the Company
for financial reporting or income tax purposes. The Company owns all of the
non-voting preferred stock and a 95% economic interest in iStar Operating, which
is accounted for under the equity method for financial reporting purposes. The
Company does not own any of the outstanding voting stock of iStar Operating. In
addition, the Company has an investment in TriNet Management Operating
Company, Inc. ("TMOC"), a taxable noncontrolled subsidiary of the Company, which
is also accounted for under the equity method. Further, certain other
investments in partnerships or joint ventures which the Company does not control
are also accounted for under the equity method. All significant intercompany
balances and transactions have been eliminated in consolidation.

In the opinion of management, the accompanying Consolidated Financial
Statements contain all adjustments, consisting of normal recurring adjustments,
necessary for a fair presentation of the Company's consolidated financial
position at December 31, 2000 and December 31, 1999 and the results of its
operations, changes in shareholders' equity and its cash flows for the years
ended December 31, 2000, 1999 and 1998. Such operating results are not
necessarily indicative of the results that may be expected for any other interim
periods or the entire year.

NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

LOANS AND OTHER LENDING INVESTMENTS, NET--As described in Note 5, "Loans and
Other Lending Investments," includes the following investments: senior
mortgages, subordinate mortgages, corporate/ partnership loans/unsecured notes,
loan participations and other lending investments. In general, management
considers its investments in this category as held-to-maturity and, accordingly,
reflects such items at amortized historical cost.

CAPITALIZED INTEREST--The Company capitalizes interest costs incurred during
the land development or construction period on qualified development projects,
including investments in joint ventures

F-35

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
accounted for under the equity method. Interest capitalized was approximately
$513,000 and $377,000 during the years ended December 31, 2000 and 1999,
respectively.

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

RESTRICTED CASH--Restricted cash represents amounts required to be
maintained in escrow under certain of the Company's debt obligations and leasing
cost obligations.

NON-CASH ACTIVITY--During the year ended December 31, 1998, the Company had
significant non-cash activity including: (1) conversion of units in APMT Limited
Partnership (shown as "minority interest" in the consolidated financial
statements) to class A shares of the Company (see Note 4); (2) issuance of
options to Starwood Financial Advisors, L.L.C. (the "Advisor") to acquire
class A shares of the Company (see Note 11); and (3) issuance of new class A
shares in exchange for a portion of the acquisition of loans and related
investments as part of the Recapitalization Transactions (see Note 4).

The cash portion of the Recapitalization Transactions is summarized as
follows (in thousands):

Acquisition of loans and other investments.................. $(1,061,006)
Acquired accrued interest and operating lease income
receivable................................................ (7,451)
Conversion of minority interest............................. (5,387)
Par value of class A shares issued.......................... 306,796
Additional paid in capital on class A shares issued......... 432,084
-----------
Net cash outflow for the Recapitalization Transactions...... $ (334,964)
===========

During 1999, the Company acquired TriNet (see Note 4). The following is a
summary of the effects of this transaction on the Company's consolidated
financial position (in thousands):

ACQUISITION OF
TRINET
--------------

Fair value of:
Assets acquired........................................... $(1,589,714)
Liabilities assumed....................................... 676,936
Minority interest......................................... 2,524
Stock issued.............................................. 875,195
-----------
Cash paid................................................. (35,059)
Less cash acquired........................................ 11,336
-----------
Net cash outflow for TriNet Acquisition................... $ (23,723)
===========

There was no non-cash activity during the year ended December 31, 2000.

F-36

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
"available-for-sale" and reflects such investments at fair market value with
changes in fair market value reflected as a component of shareholders' equity.

REVENUE RECOGNITION--The Company's revenue recognition policies are as
follows:

LEASING INVESTMENTS: Operating lease revenue is recognized on the
straight-line method of accounting from the later of the date of the origination
of the lease or the date of acquisition of the facility subject to existing
leases. Accordingly, contractual lease payment increases are recognized evenly
over the term of the lease. The cumulative difference between lease revenue
recognized under this method and contractual lease payment terms is recorded as
a deferred operating lease income receivable on the balance sheet.

F-37

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
that the loans either: (1) become 90 days delinquent; or (2) management
determines the borrower is incapable of, or has ceased efforts toward, curing
the cause of the impairment. While on non-accrual status, interest income is
recognized only upon actual receipt. Impairment losses are recognized as direct
write-downs of the related loan with a corresponding charge to the provision for
possible credit losses. Charge-offs occur when loans, or a portion thereof, are
considered uncollectible and of such little value that further pursuit of
collection is not warranted. Management also provides a portfolio reserve based
upon its periodic evaluation and analysis of the portfolio, historical and
industry loss experience, economic conditions and trends, collateral values and
quality, and other relevant factors.

INCOME TAXES--The Company did not qualify as a REIT from 1993 through 1997;
however, it did not incur any material tax liabilities as a result of its
operations. See Note 10 to the Consolidated Financial Statements for more
information.

As confirmed in a closing agreement with the IRS obtained in March 1998, the
Company was eligible and has elected to be taxed as a REIT for its tax year
beginning January 1, 1998. As a REIT, the Company is subject to federal income
taxation at corporate rates on its REIT taxable income; however, the Company is
allowed a deduction for the amount of dividends paid to its shareholders,
thereby subjecting the distributed net income of the Company to taxation at the
shareholder level only. iStar Operating and TMOC are not consolidated for
federal income tax purposes and are taxed as corporations. For financial
reporting purposes, current and deferred taxes are provided for in the portion
of earnings recognized by the Company with respect to its interest in iStar
Operating and TMOC.

NET INCOME ALLOCABLE TO COMMON SHARES--Net income allocable to common shares
excludes 1% of net income allocable to the class B shares prior to November 4,
1999. The class A and class B shares were exchanged for Common Stock in
connection with the TriNet Acquisition, as more fully described in Note 4.

USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles 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.

NEW ACCOUNTING STANDARDS--In June 1998, the FASB issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). On June 23, 1999, the FASB voted to
defer the effectiveness of SFAS No. 133 for one year. SFAS No. 133 is now
effective for fiscal years beginning after June 15, 2000, but earlier
application is permitted as of the beginning of any fiscal quarter subsequent to
June 15, 1998. SFAS No. 133 establishes accounting and reporting standards for
derivative financial instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are

F-38

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
met, a derivative may be specifically designated as: (1) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment; (2) a hedge of the exposure to variable cash flows
of a forecasted transaction; or (3) in certain circumstances, a hedge of a
foreign currency exposure. The Company adopted this pronouncement, as amended by
Statement of Financial Accounting Standards No. 137 "Accounting for Derivative
Instruments and Hedging Activities--deferral of the Effective Date of FASB
Statement No. 133" and Statement of Financial Accounting Standards No. 138
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities--an Amendment of FASB Statement No. 133," on January 1, 2001. Because
the Company has primarily used derivatives as cash flow hedges of interest rate
risk only, the adoption of SFAS No. 133 did not have a material financial impact
on the financial position and results of operations of the Company. However,
should the Company change its current use of such derivatives (see Note 9), the
adoption of SFAS No. 133 could have a more significant effect on the Company
prospectively.

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

NOTE 4--CAPITAL TRANSACTIONS

PRIOR TRANSACTIONS WITH AFFILIATES--Through a series of transactions
beginning in November 1993 and through March 18, 1998, the date of the
Recapitalization Transactions described in the following section, Starwood
Mezzanine Investors, L.P. ("Starwood Mezzanine") and certain other affiliates
(collectively, the "Starwood Investors") had acquired controlling interests in
the Company represented by an aggregate of 874,016 class A shares, or 69.46% of
the then total class A shares outstanding, and 629,167 class B shares,
representing 100% of the then total class B shares outstanding. Together, the
class A and class B shares held by the Starwood Investors represented 79.64% of
the voting interests of the Company.

During the quarter ended March 31, 1998, the Company consummated certain
transactions and entered into agreements which significantly recapitalized and
expanded its capital resources, as well as modified future operations, including
those described herein below in "Recapitalization Transactions" and "Advisor
Agreement."

RECAPITALIZATION TRANSACTIONS--As more fully discussed above, pursuant to a
series of transactions beginning in March 1994 and including the exercise of the
class A and class B warrants in January 1997, the Starwood Investors acquired
joint ownership of 69.46% and 100% of the outstanding class A shares and
class B shares of the Company, respectively, through which they controlled

F-39

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4--CAPITAL TRANSACTIONS (CONTINUED)
approximately 79.64% of the voting interests in the Company as of December 31,
1997. Prior to the consummation of these transactions on March 18, 1998
(collectively, the "Recapitalization Transactions"), Starwood Mezzanine also
owned 761,491 units which represented the remaining 91.95% of APMT Limited
Partnership not held by the Company. Those units were convertible into cash, an
additional 761,491 class A shares of the Company, or a combination of the two,
as determined by the Company.

On March 18, 1998, each outstanding unit held by Starwood Mezzanine was
exchanged for one class A share of the Company and, concurrently, the
partnership was liquidated through a distribution of its net assets to the
Company, its then sole partner.

Simultaneously, Starwood Mezzanine contributed various real estate loan
investments to the Company in exchange for 9,191,333 class A shares and
$25.5 million in cash, as adjusted. Starwood Opportunity Fund IV, L.P. ("SOF
IV"), one of the Starwood Investors, contributed loans and other lending
investments, $17.9 million in cash and certain letters of intent in exchange for
41,179,133 class A shares of the Company and a cash payment of $324.3 million.
Concurrently, the holders of the class B shares who were affiliates of the
Starwood Investors acquired 25,565,979 additional class B shares sufficient to
maintain existing voting preferences pursuant to the Company's Amended and
Restated Declaration of Trust. Immediately after these transactions, the
Starwood Investors owned approximately 99.27% of the outstanding class A shares
of the Company and 100% of the class B shares. Assets acquired from Starwood
Mezzanine were reflected using step acquisition accounting at predecessor basis
adjusted to fair value to the extent of post-transaction, third-party ownership.
Assets acquired from SOF IV were reflected at their fair market value.

ADVISORY AGREEMENT--In connection with the Recapitalization Transactions,
the Company and its former external advisor (the "Advisor"), an affiliate of the
Starwood Investors, entered into an Advisory Agreement (the "Advisory
Agreement") pursuant to which the Advisor managed the affairs of the Company,
subject to the Company's purpose and investment policy, the investment
restrictions and the directives of the Board of Directors.

The Company paid the Advisor a quarterly base management fee of 0.3125%
(1.25% per annum) of the "Book Equity Value" of the Company. "Book Equity Value"
was generally defined as the excess of the book value of the assets of the
Company over all liabilities of the Company.

In addition, the Company paid the Advisor a quarterly incentive fee of 5.00%
of the Company's "Adjusted Net Income" during each quarter that the Adjusted Net
Income for such quarter (restated and annualized as a rate of return on the
Company's Book Equity Value for such quarter) equaled or exceeded the "Benchmark
BB Rate." "Adjusted Net Income" was generally defined as the Company's gross
income less the Company's expenses for the applicable quarter (including the
base fee for such quarter but not the incentive fee for such quarter). The
Advisor was also reimbursed for certain expenses it incurred on behalf of the
Company.

Prior to the transactions described below through which, among other things,
the Company became internally-managed, the Company was dependent on the services
of the Advisor and its officers and employees for the successful execution of
its business strategy.

1999 TRANSACTIONS--On November 3, 1999, consistent with previously announced
terms, the Company's shareholders approved a series of transactions including:
(1) the acquisition, through a merger, of TriNet; (2) the acquisition, through a
merger and a contribution of interests, of 100% of the ownership interests in
the Advisor; and (3) the change in form, through a merger, of the Company's
organization to a Maryland corporation. TriNet shareholders also approved the
TriNet Acquisition on

F-40

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4--CAPITAL TRANSACTIONS (CONTINUED)
November 3, 1999. These transactions were consummated on November 4, 1999. As
part of these transactions, the Company also replaced its dual class common
share structure with a single class of Common Stock.

TRINET ACQUISITION--TriNet merged with and into a subsidiary of the Company,
with TriNet surviving as a wholly-owned subsidiary of the Company (the "Leasing
Subsidiary"). In the TriNet Acquisition, each share of TriNet common stock was
converted into 1.15 shares of Common Stock, resulting in an aggregate issuance
of 28.9 million shares of Common Stock. Each share of TriNet Series A, Series B
and Series C Cumulative Redeemable Preferred Stock was converted into a share of
Series B, Series C or Series D (respectively) Cumulative Redeemable Preferred
Stock of the Company. The Company's preferred stock issued to the former TriNet
preferred shareholders has substantially the same terms as the TriNet preferred
stock, except that the new Series B, C and D preferred stock has additional
voting rights not associated with the TriNet preferred stock. The holders of the
Company's Series A preferred stock retained the same rights and preferences as
existed prior to the TriNet Acquisition.

The TriNet Acquisition was accounted for as a purchase. Because the
Company's stock prior to the transaction was largely held by the Starwood
Investors, and, as a result, the stock was not widely traded relative to the
amount of shares outstanding, the pro forma financial information presented
below was prepared utilizing a stock price of $28.14 per TriNet share, which was
the average stock price of TriNet during the five-day period before and after
the TriNet Acquisition was agreed to and announced.

ADVISOR TRANSACTION--Contemporaneously with the consummation of the TriNet
Acquisition, the Company acquired 100% of the interests in the Advisor in
exchange for total consideration of four million shares of Common Stock. For
accounting purposes, the Advisor Transaction was not considered the acquisition
of a "business" in applying Accounting Principles Board Opinion No. 16,
"Business Combinations" and, therefore, the market value of the Common Stock
issued in excess of the fair value of the net tangible assets acquired of
approximately $94.5 million was charged to operating income as a non-recurring,
non-cash item in the fourth quarter of 1999, rather than capitalized as
goodwill.

INCORPORATION MERGER--Prior to the consummation of the TriNet Acquisition
and the Advisor Transaction, the Company changed its form from a Maryland trust
to a Maryland corporation in the Incorporation Merger, which technically
involved a merger of the Company with a wholly-owned subsidiary formed solely to
effect such merger. In the Incorporation Merger, the class B shares were
converted into shares of Common Stock on a 49-for-one basis (the same ratio at
which class B shares were previously convertible into class A shares), and the
class A shares were converted into shares of Common Stock on a one-for-one
basis. As a result, the Company no longer has multiple classes of common shares.
The Incorporation Merger was treated as a transfer of assets and liabilities
under common control. Accordingly, the assets and liabilities transferred from
the Maryland trust to the Maryland corporation were reflected at their
predecessor basis and no gain or loss was recognized.

The Company declared and paid a special dividend of one million shares of
its Common Stock payable pro rata to all holders of record of its Common Stock
following completion of the Incorporation Merger, but prior to the effective
time of the TriNet Acquisition and the Advisor Transaction.

PRO FORMA INFORMATION--The summary unaudited pro forma consolidated
statements of operations for the years ended December 31, 1999 and 1998 are
presented as if the following transactions, consummated in November 1999, had
occurred on January 1, 1998: (1) the TriNet Acquisition; (2) the Advisor
Transaction; and (3) the borrowings necessary to consummate the aforementioned
transactions,

F-41

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4--CAPITAL TRANSACTIONS (CONTINUED)
and as if the following transactions consummated in March 1998 had occurred on
January 1, 1998: (1) the Recapitalization Transactions; (2) the exchange of each
outstanding unit in the APMT Limited Partnership held by holders other than the
Company for one class A share; (3) the liquidation and termination of the
partnership; and (4) the borrowings necessary to consummate the aforementioned
transactions. The unaudited pro forma information is based upon the historical
consolidated results of operations of the Company and TriNet for the years ended
December 31, 1999 and 1998, after giving effect to the events described above.

PRO FORMA
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

FOR THE YEAR ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
(UNAUDITED)

REVENUE:
Interest income........................................... $218,359 $140,261
Operating lease income.................................... 186,776 169,196
Other income.............................................. 21,000 9,776
-------- --------
Total revenue........................................... 426,135 319,233
-------- --------
EXPENSES:
Interest expense.......................................... 135,795 99,138
Operating costs-corporate tenant lease assets............. 12,601 7,651
Depreciation and amortization............................. 36,423 35,053
General and administrative................................ 21,716 20,770
Provision for possible credit losses...................... 4,750 2,750
Stock option compensation expense......................... 2,474 5,985
-------- --------
Total costs and expenses................................ 213,759 171,347
-------- --------
Income before minority interest........................... $212,376 $147,886
Minority interest......................................... (164) (128)
-------- --------
Net income................................................ $212,212 $147,758
Preferred dividend requirements........................... (36,906) (16,622)
-------- --------
Net income allocable to common shareholders............... $175,306 $131,136
======== ========
BASIC EARNINGS PER SHARE:
Basic earnings per common share........................... $ 2.01 $ 1.50
======== ========
Weighted average number of common shares outstanding...... 87,073 87,193
======== ========

Investments and dispositions are assumed to have taken place as of
January 1, 1998; however, loan originations and acquisitions are not reflected
in these pro forma numbers until the actual origination or acquisition date by
the Company. The pro forma information above excludes the charge of
approximately $94.5 million taken by the Company in fiscal 1999 to reflect the
costs incurred in acquiring the Advisor as such charge is non-recurring. The pro
forma information also excludes certain non-recurring historical charges
recorded by TriNet of $3.4 million in 1999 for a provision for a real estate
write-down and $3.0 million in 1998 for a special charge for an expected
reduction in TriNet's

F-42

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4--CAPITAL TRANSACTIONS (CONTINUED)
investment activity. General and administrative costs represent estimated
expense levels as an internally-managed Company.

The pro forma financial information is not necessarily indicative of what
the consolidated results of operations of the Company would have been as of and
for the periods indicated, nor does it purport to represent the results of
operations for future periods.

F-43

ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5--LOANS AND OTHER LENDING INVESTMENTS

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

CARRYING VALUE
# OF ORIGINAL PRINCIPAL AS OF DECEMBER 31,
BORROWERS COMMITMENT BALANCES -----------------------
TYPE OF INVESTMENT UNDERLYING PROPERTY TYPE(1) IN CLASS(1) AMOUNT(1) OUTSTANDING(1) 2000 1999
--------------------------- --------------------------- ----------- ------------ -------------- ---------- ----------

Senior Mortgages(5) Office/Hotel/Mixed Use/ 21 $1,337,717 $1,232,307 $1,210,992 $1,039,052
Apartment/Retail/Resort

Subordinated Mortgages Office/Hotel/Mixed Use 13 372,136 340,088 325,558 464,105

Corporate Loans/Partnership Office/Hotel/Residential/ 14 413,946 401,795 398,978 309,768
Loans/Unsecured Notes Apartment

Loan Participations Office/Retail 3 127,497 111,388 111,251 128,105

Other Lending Investments Resort/Office/Mixed Use/ N/A N/A N/A 192,404 69,976
Residential/Homebuilder
---------- ----------
Gross Carrying Value $2,239,183 $2,011,006
Provision for Possible
Credit Losses (14,000) (7,500)
---------- ----------
Total, Net $2,225,183 $2,003,506
========== ==========

EFFECTIVE PRINCIPAL PARTICI-
MATURITY CONTRACTUAL INTEREST CONTRACTUAL INTEREST AMORTIZ- PATION
TYPE OF INVESTMENT DATES PAYMENT RATES(2) ACCRUAL RATES(3) ATION FEATURES
--------------------------- ------------- ----------------------- ----------------------- --------- --------

Senior Mortgages(5) 2001 to 2019 Fixed: 6.13% to 20.00% Fixed: 6.13% to 24.00% Yes (4) Yes (3)
Variable: LIBOR + 1.50% Variable: LIBOR + 1.50%
to 6.00% to 6.00%
Subordinated Mortgages 2002 to 2007 Fixed: 7.00% to 15.25% Fixed: 10.07% to 17.00% Yes (4) Yes (3)
Variable: LIBOR + 5.80% Variable: LIBOR + 5.80%
Corporate Loans/Partnership 2001 to 2008 Fixed: 6.13% to 14.50% Fixed: 6.13% to 17.50% Yes Yes (3)
Loans/Unsecured Notes Variable: LIBOR + 2.78% Variable: LIBOR + 2.78%
to 7.50% to 7.50%
Loan Participations 2003 to 2005 Fixed: 10.00% to 13.60% Fixed: 13.60% to 14.00% No Yes (3)
Variable: LIBOR + 4.50% Variable: LIBOR + 4.50%
Other Lending Investments 2002 and 2013 Fixed: 6.75% to 12.75% Fixed: 6.75% to 12.75% No No
Gross Carrying Value
Provision for Possible
Credit Losses
Total, Net

EXPLANATORY NOTES:
----------------------------------

(1) Amounts and details are for loans outstanding as of December 31, 2000.

(2) Substantially all variable-rate loans are based on 30-day LIBOR and reprice
monthly. The 30-day LIBOR rate on December 29, 2000 was 6.56%.

(3) Under some of these loans, the lender receives additional payments
representing additional interest from participation in available cash flow
from operations of the property and the proceeds, in excess of a base
amount, arising from a sale or refinancing of the property.

(4) The loans require fixed payments of principal and interest resulting in
partial principal amortization over the term of the loan with the remaining
principal due at maturity. In addition, one of the loans permits additional
annual prepayments of principal of up to $1.3 million without penalty at the
borrower's option.

(5) The unfunded commitment amount on one of the Company's construction loans,
included in senior mortgages, was $16.2 million as of December 31, 1999. As
of December 31, 2000, the construction loan was fully funded.

F-44

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5--LOANS AND OTHER LENDING INVESTMENTS (CONTINUED)

During the years ended December 31, 2000 and 1999, respectively, the Company
and its affiliated ventures originated or acquired an aggregate of approximately
$721.2 million and $663.4 million in loans and other lending investments, funded
$56.0 million and $46.4 million under existing loan commitments and received
principal repayments of $584.5 million and $561.9 million.

As of December 31, 2000, the Company had nine loans with unfunded
commitments. The total unfunded commitment amount was approximately
$151.1 million, of which $83.5 million was discretionary (i.e., at the Company's
option) and $67.6 million was non-discretionary.

The Company has reflected provisions for possible credit losses of
approximately $6.5 million, $4.8 million and $2.8 million in its results of
operations during the years ended December 31, 2000, 1999 and 1998,
respectively. These provisions represent portfolio 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, and the underlying
collateral. No direct impairment reserves on specific loans were considered
necessary. Management may transfer reserves between general and specific
reserves as considered necessary.

NOTE 6--REAL ESTATE SUBJECT TO OPERATING LEASES

During 2000, the Company acquired one corporate tenant lease facility for a
purchase price of $22.8 million and exercised an option to purchase another
facility for $16.4 million by funding an additional $474,000 on an existing
convertible mortgage loan. Construction was completed on five facilities under
development in one of the Company's joint venture partnerships for a total
development cost of $65.2 million. In addition, the TN-CP joint venture acquired
one facility for a purchase price of $36.8 million. The Company also purchased
78.4 acres of land for approximately $80.7 million subject to a 20-year ground
lease to a corporate customer, with the first year of operating lease payments
equal to a return on cost of approximately 11.6%. In addition, the Company
purchased 32.4 acres of land for approximately $2.3 million on which it is
constructing a build-to-suit distribution facility for a corporate customer
under a 15-year tenant lease.

The Company's investments in real estate subject to operating leases, at
cost, were as follows (in thousands):

DECEMBER 31,
-----------------------
2000 1999
---------- ----------

Buildings and improvements........................... $1,294,572 $1,390,933
Land and land improvements........................... 344,490 277,872
Less: accumulated depreciation....................... (46,975) (14,627)
---------- ----------
1,592,087 1,654,178
Investments in unconsolidated joint ventures......... 78,082 60,106
---------- ----------
Real estate subject to operating leases, net... $1,670,169 $1,714,284
========== ==========

F-45

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--REAL ESTATE SUBJECT TO OPERATING LEASES (CONTINUED)
The Company's net lease facilities are leased to customers with initial term
expiration dates from 2001 to 2020. Future operating lease payments under
non-cancelable leases, excluding customer reimbursements of expenses, in effect
at December 31, 2000, are approximately as follows (in thousands):

YEAR AMOUNT
---- ----------

2001........................................................ $ 176,429
2002........................................................ 172,811
2003........................................................ 164,401
2004........................................................ 146,279
2005........................................................ 127,867
Thereafter.................................................. 751,177
----------
$1,538,964
==========

Under certain leases, the Company receives additional participating lease
payments to the extent gross revenues of the tenant exceed a base amount. The
Company earned $0.6 million and $0.5 million of such additional participating
lease payments in the years ended December 31, 2000 and 1999, respectively. In
addition, the Company also receives reimbursements from tenants for certain
facility operating expenses.

At December 31, 2000, the Company had investments in five joint ventures:
(1) TriNet Sunnyvale Partners L.P. ("Sunnyvale"), whose external partners are
John D. O'Donnell, Trustee, John W. Hopkins, and Donald S. Grant; (2) Corporate
Technology Associates LLC ("CTC I"), whose external member is Corporate
Technology Centre Partners LLC; (3) Sierra Land Ventures ("Sierra"), whose
external joint venture partner is Sierra-LC Land, Ltd.; (4) TriNet Milpitas
Associates, LLC ("Milpitas"), whose external member is The Prudential Insurance
Company of America; and (5) ACRE Simon, L.L.C. ("ACRE"), whose external partner
is William E. Simon & Sons Realty Investments, L.L.C. These ventures were formed
for the purpose of operating, acquiring and in certain cases, developing
corporate tenant lease facilities. At December 31, 2000, all facilities held by
CTC II and TN-CP had been sold. The Company previously had an equity investment
in CTC II which was sold for approximately $66.0 million in September, 2000. In
connection with this sale, the note receivable from the venture was modified to
mature on December 31, 2001. The note receivable and related accrued interest
are included in Loans and Other Lending Investments at December 31, 2000.

Through the TriNet Acquisition, the Company also acquired a 50% interest in
W9/TriNet Poydras LLC ("Poydras"). Effective November 22, 1999, the joint
venture partners, who are affiliates of Whitehall Street Real Estate Limited
Partnership, IX and The Goldman Sachs Group L.P. (the "Whitehall Group"),
elected to exercise their right under the partnership agreement, which was
accelerated as a result of the TriNet Acquisition, to exchange all of their
membership units for 350,746 shares of Common Stock of the Company and a
$767,000 distribution of available cash. As a consequence, Poydras is now wholly
owned and is reflected on a consolidated basis in these financial statements.

At December 31, 2000, the ventures comprised 23 net leased facilities, three
of which were under development (these three facilities became fully operational
with lease payments commencing as of January 2001). Additionally, 17.7 acres of
land are held for sale. The Company's combined investment in these joint
ventures at December 31, 2000 was $78.1 million. The joint ventures' purchase
price for

F-46

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6--REAL ESTATE SUBJECT TO OPERATING LEASES (CONTINUED)
the 23 facilities owned at December 31, 2000 was $295.7 million. The purchase
price of the land held for sale was $6.8 million. In the aggregate, the joint
ventures had total assets of $366.8 million and total liabilities of
$267.8 million as of December 31, 2000, and net income of $7.1 million for the
year ended December 31, 2000. The Company accounts for these investments under
the equity method because the Company's joint venture partners have certain
participating rights which limit the Company's control. The Company's
investments in and advances to unconsolidated joint ventures, its percentage
ownership interests, its respective income and the Company's pro rata share of
its ventures' third-party debt as of December 31, 2000 are presented below (in
thousands):

PRO RATA
ACCRUED JOINT SHARE OF
UNCONSOLIDATED OWNERSHIP EQUITY NOTE INTEREST TOTAL VENTURE INTEREST THIRD-PARTY
JOINT VENTURE % INVESTMENT RECEIVABLE RECEIVABLE INVESTMENT INCOME INCOME DEBT
-------------- --------- ---------- ---------- ---------- ---------- -------- -------- -----------

Operating:
Sunnyvale.............. 44.7% $12,772 $ -- $ -- $ 12,772 $1,163 $ -- $ 10,728
CTC I.................. 50.0% 32,440 -- -- 32,440 1,053 43,789
CTC II................. 50.0% -- 24,874 6,222 31,096 (755) 5,371 --
Milpitas............... 50.0% 24,289 -- -- 24,289 2,941 -- 40,641
TN-CP.................. 50.0% -- -- -- -- 397 -- --
ACRE Simon............. 20.0% 5,099 -- -- 5,099 42 -- 6,009
Development:
Sierra................. 50.0% 3,482 -- -- 3,482 217 -- 724
------- ------- ------ -------- ------ ------ --------
Total.............. $78,082 $24,874 $6,222 $109,178 $5,058 $5,371 $101,891
======= ======= ====== ======== ====== ====== ========

Effective September 29, 2000, iStar Sunnyvale Partners, LP entered into an
interest rate cap agreement with Bear Stearns Financial Products, limiting the
venture's exposure to interest rate movements on its $24.0 million LIBOR-based
mortgage loan to an interest rate cap of 9.0% through November 9, 2003.

Currently, the limited partners of the Sunnyvale partnership have the option
to convert their partnership interest into cash; however, the Company may elect
to deliver 297,728 shares of Common Stock in lieu of cash. Additionally,
commencing in February 2002, subject to acceleration under certain
circumstances, partnership units held by certain partners of Milpitas may be
converted into 984,476 shares of Common Stock.

Income generated from the above joint venture investments is included in
Operating Lease Income in the Consolidated Statements of Operations.

F-47

ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--DEBT OBLIGATIONS

As of December 31, 2000 and 1999, the Company has debt obligations under
various arrangements with financial institutions as follows (in thousands):

CARRYING VALUE AS OF
MAXIMUM --------------------------- STATED SCHEDULED
AMOUNT DECEMBER 31, DECEMBER 31, INTEREST MATURITY
AVAILABLE 2000 1999 RATES DATE
---------- ------------ ------------ -------------------------- ----------------------

SECURED REVOLVING CREDIT
FACILITIES:
Line of credit............... $ 700,000(1) $ 284,371 $ 592,984 LIBOR + 1.75% - 2.25% (1) March 2005 (1)
Line of credit............... 500,000 307,978 169,952 LIBOR + 1.50% - 1.75% (2) August 2002 (2)
UNSECURED REVOLVING CREDIT
FACILITIES:
Line of credit............... 350,000 173,450 186,700 LIBOR + 1.55% May 2001 (3)
Line of credit............... 100,000 -- -- LIBOR + 2.25% January 2002
---------- ---------- ----------
Total revolving credit $1,650,000 765,799 949,636
facilities.................
==========
SECURED TERM LOANS:
Secured by real estate under operating 150,678 153,618 7.44% March 2009
leases.................................
Secured by senior and subordinate -- 109,398 LIBOR + 1.00% August 2000 (4)
mortgage investments...................
Secured by senior mortgage investment.... -- 90,902 LIBOR + 1.00% August 2000 (4)
Secured by corporate lending 60,000 -- LIBOR + 2.50% June 2003 (5)
investments............................
Secured by real estate under operating 77,860 78,610 LIBOR + 1.38% June 2001
leases(6)..............................
Secured by real estate under operating 60,471 73,279 Fixed: 6.00%-11.38% (7)
leases................................. Variable: LIBOR + 1.00%
Secured by senior mortgage investment.... -- 54,000 LIBOR+ 1.75% (8) November 2000
---------- ----------
Total principal of term loans............ 349,009 559,807
Add: debt premiums (discounts)........... 51 (521)
---------- ----------
Total secured term loans................. 349,060 559,286
iStar Asset Receivables secured
notes:
Class A.................................. 207,114 -- LIBOR + 0.30% August 2003 (9)
Class B.................................. 94,055 -- LIBOR + 0.50% October 2003 (9)
Class C.................................. 105,813 -- LIBOR + 1.00% January 2004 (9)
Class D.................................. 52,906 -- LIBOR + 1.45% June 2004 (9)
Class E.................................. 123,447 -- LIBOR + 2.75% January 2005 (9)
Class F.................................. 5,000 -- LIBOR + 3.15% January 2005 (9)
---------- ----------
Total iStar Asset Receivables secured 588,335 --
notes..................................
UNSECURED NOTES(10):
6.75% Dealer Remarketable Securities 125,000 125,000 6.75% March 2013
(11)...................................
7.30% Notes.............................. 100,000 100,000 7.30% May 2001
7.70% Notes.............................. 100,000 100,000 7.70% July 2017
7.95% Notes.............................. 50,000 50,000 7.95% May 2006
---------- ----------
Total principal of unsecured notes....... 375,000 375,000
Less: debt discount (12)................. (18,490) (21,481)
---------- ----------
Total unsecured notes.................... 356,510 353,519
OTHER DEBT OBLIGATIONS....................... 72,263 38,763 Various Various
---------- ----------
TOTAL DEBT OBLIGATIONS....................... $2,131,967 $1,901,204
========== ==========

EXPLANATORY NOTES:
------------
(1) On December 28, 2000, the Company expanded the facility to $700.0 million,
increased the range of collateral eligible for inclusion in the facility,
increased pricing to LIBOR +1.75% to 2.25%, and extended its final maturity
to March 2005 (including an option to extend for an additional year).

F-48

ISTAR FINANCIAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--DEBT OBLIGATIONS (CONTINUED)

(2) On February 4, 2000, the Company extended the term of its $500.0 million
facility to August 2002 and increased pricing under the facility to
LIBOR + 1.50% to 1.75%.

(3) Subsequent to year end, the Company extended the maturity of this credit
facility to May 2002.

(4) On May 17, 2000, the Company repaid these secured term loan obligations.

(5) The Company has a one-year extension option in June 2003.

(6) The Company provides a guarantee for 25% of the principal balance
outstanding.

(7) These mortgage loans mature at various dates through 2010.

(8) On November 30, 2000, the Company repaid this secured loan obligation.

(9) Principal payments on these bonds are a function of the principal
repayments on loan assets which collateralize these obligations. The dates
indicated above represent the expected date on which the final payment
would occur for such class based on the assumptions that the loans which
collateralize the obligations are not voluntarily prepaid, the loans are
paid on their effective maturity dates and no extensions of the effective
maturity dates of any of the loans are granted. The final maturity date for
the underlying indenture on classes A, B, C, D, E and F is September 25,
2022.

(10) The notes are callable by the Company at any time for an amount equal to
the total of principal outstanding, accrued interest and the applicable
make-whole prepayment premium.

(11) Subject to mandatory tender on March 1, 2003, to either the dealer or the
Leasing Subsidiary. The initial coupon of 6.75% applies to first five-year
term through the mandatory tender date. If tendered to the dealer, the
notes must be remarketed. The rates reset upon remarketing.

(12) These obligations were assumed as part of the TriNet Acquisition. As part
of the accounting for the purchase, these fixed rate obligations were
considered to have stated interest rates which were below the then
prevailing market rates at which the Leasing Subsidiary could issue new debt
obligations and, accordingly, the Company ascribed a market discount to each
obligation. Such discounts will be amortized as an adjustment to interest
expense using the effective interest method over the related term of the
obligations. As adjusted, the effective annual interest rates on these
obligations were 8.81%, 8.75%, 9.51% and 9.04%, for the 6.75% Dealer
Remarketable Securities, 7.30% Notes, 7.70% Notes and 7.95% Notes,
respectively.

F-49

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--DEBT OBLIGATIONS (CONTINUED)

Availability of amounts under the secured revolving credit facilities are
based on percentage borrowing base calculations.

Certain of the Leasing Subsidiary's debt obligations contain financial
covenants pertaining to the subsidiary. Such obligations also establish
restrictions on certain intercompany transactions between the Leasing Subsidiary
and other Company affiliates. Further, such obligations also provide for a limit
on distributions from the Leasing Subsidiary at 85% of cash flow from operations
on a rolling four-quarter basis.

On May 17, 2000, the Company closed the inaugural offering under its
proprietary matched funding program, iStar Asset Receivables ("STARS"),
Series 2000-1. In the initial transaction, a wholly-owned subsidiary of the
Company issued $896.5 million of investment grade bonds secured by the
subsidiary's assets, which had an aggregate outstanding principal balance of
approximately $1.2 billion at inception. Principal payments received on the
assets will be utilized to repay the most senior class of the bonds then
outstanding. The maturity of the bonds match funds the maturity of the
underlying assets financed under the program. The Company initially purchased
the class F bonds at a par value of $38.2 million, which the Company financed
with a $27.8 million repurchase agreement maturing in May 2001, which has a
balance of $24.2 million at December 31, 2000 and is included in other debt
obligations in the preceding table. On July 17, 2000, the Company sold, at par,
$5.0 million of the class F bonds to an institutional investor. For accounting
purposes, these transactions were treated as secured financings.

F-50

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7--DEBT OBLIGATIONS (CONTINUED)
and the facility lender also increased the range of collateral eligible for
inclusion in the facility. Also in connection with the extension, the Company
agreed to increase the facility's interest rate from LIBOR plus 1.50% to a
revised rate of LIBOR plus 1.75% to 2.25%, depending upon certain conditions.

See also Note 17--Subsequent Events for information on a new $700.0 million
secured revolving credit facility entered into on January 11, 2001 and the
extension of the Company's $350.0 million unsecured revolving credit facility.

During the year ended December 31, 2000, the Company incurred an
extraordinary loss of approximately $0.7 million as a result of the early
retirement of certain secured debt obligations of its Leasing Subsidiary.

Future expected/scheduled maturities of outstanding long-term debt
obligations are as follows (in thousands):

2001(1)..................................................... $ 280,917
2002(2)..................................................... 496,420
2003........................................................ 361,169
2004........................................................ 158,719
2005(3)..................................................... 416,557
Thereafter.................................................. 436,624
----------
Total principal maturities.................................. 2,150,406
Net unamortized debt (discounts)/premiums................... (18,439)
----------
Total debt obligations...................................... $2,131,967
==========

EXPLANATORY NOTE:
------------
(1) Includes the 1994 mortgage loan balance of $36.3 million which had an
original maturity date in 2004 and was repaid on March 1, 2001.

(2) Reflects the one-year extension on the $350.0 million unsecured revolving
credit facility to mature in 2002.

(3) Assumes exercise of one-year extension option on secured revolving facility.

NOTE 8--SHAREHOLDERS' EQUITY

Prior to November 4, 1999, the Company was authorized to issue 105.0 million
shares, representing 70.0 million class A shares and 35.0 million class B
shares, with a par value of $1.00 and $0.01 per share, respectively. Class B
shares were required to be issued by the Company in an amount equal to one half
of the number of class A shares outstanding. Class A and class B shares were
each entitled to one vote per share with respect to the election of directors
and other matters. Pursuant to the Declaration of Trust, the class B shares were
convertible at the option of the class B shareholders into class A shares on the
basis of 49 class B shares for one class A share. However, the holder of
class B shares had agreed with the Company that it would not convert the
class B shares into class A shares without the approval of a majority of
directors that were not affiliated with such holder. All distributions of cash
were made 99% to the holders of class A shares and 1% to the holders of class B
shares.

On December 15, 1998, for an aggregate purchase price of $220.0 million, the
Company issued 4.4 million shares of Series A Preferred Stock and warrants to
acquire 6.1 million common shares of

F-51

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8--SHAREHOLDERS' EQUITY (CONTINUED)
Common Stock, as adjusted for dilution, at $34.35 per share. The warrants are
exercisable on or after December 15, 1999 at a price of $34.35 per share and
expire on December 15, 2005. The proceeds were allocated between the two
securities issued based on estimated relative fair values.

As more fully described in Note 4, the Company consummated a series of
transactions on November 4, 1999 in which its class A and class B shares were
exchanged into a single class of Common Stock. The Company's charter now
provides for the issuance of up to 200.0 million shares of Common Stock, par
value $0.001 per share, and 30.0 million shares of preferred stock. As part of
these transactions, the Company adopted articles supplementary creating four
series of preferred stock designated as 9.5% Series A Cumulative Redeemable
Preferred Stock, consisting of 4.4 million shares, 9.375% Series B Cumulative
Redeemable Preferred Stock, consisting of 2.3 million shares, 9.20% Series C
Cumulative Redeemable Preferred Stock, consisting of approximately 1.5 million
shares, and 8.0% Series D Cumulative Redeemable Preferred Stock, consisting of
4.6 million shares. The Series B, C and D Cumulative Redeemable Preferred Stock
were issued in the TriNet Acquisition in exchange for similar issuances of
TriNet stock then outstanding. The Series A, B, C and D Cumulative Redeemable
Preferred Stock are redeemable without premium at the option of the Company at
their respective liquidation preferences beginning on December 15, 2003,
June 15, 2001, August 15, 2001 and October 8, 2002, respectively.

STOCK REPURCHASE PROGRAM: The Board of Directors approved, and the Company
has implemented, a stock repurchase program under which the Company is
authorized to repurchase up to 5.0 million shares of its Common Stock from time
to time, primarily using proceeds from the disposition of assets and excess cash
flow from operations, but also using borrowings under its credit facilities if
the Company determines that it is advantageous to do so. As of December 31, 2000
and December 31, 1999, the Company had repurchased approximately 2.3 million
shares at an aggregate cost of approximately $40.7 million and $40.4 million,
respectively.

NOTE 9--RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS

F-52

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9--RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS (CONTINUED)
because of their high credit ratings, the Company does not anticipate that any
of the counterparties will fail to meet their obligations.

The Company has entered into LIBOR interest rate caps struck at 9.00%, 7.50%
and 7.50% in notional amounts of $300.0 million, $40.4 million and
$38.3 million, respectively, which expire in March 2001, January 2001 and
June 2001, respectively. In addition, in connection with the TriNet Acquisition,
the Company acquired LIBOR interest rate caps currently struck at 7.75%, 7.75%
and 7.50% in notional amounts of $75.0 million, $35.0 million and
$75.0 million, respectively, which expire in December 2004, December 2004 and
August 2001, respectively. In connection with the closing of STARS,
Series 2000-1 in May 2000, the Company entered into a LIBOR interest rate cap
struck at 10.00% in the notional amount of $312.0 million, and simultaneously
sold a LIBOR interest rate cap with the same terms. Since these instruments do
not reduce the Company's net interest rate risk exposure, they do not qualify as
hedges and changes in their respective values are charged to earnings. As the
significant terms of these arrangements are substantially the same, the effects
of a revaluation of these two instruments are expected to substantially offset
one another. At December 31, 2000 and 1999, the net fair value of the Company's
interest rate caps were $0.4 million and $2.2 million, respectively.

The Company has entered into LIBOR interest rate swaps struck at 5.714%,
7.055%, and 7.058% in notional amounts of $92.0 million, $125.0 million and
$125.0 million, respectively, which expire in March 2001, June 2003 and
June 2003, respectively. These swaps effectively fix the interest rate on a
portion of the Company's floating-rate term loan obligations. In connection with
the TriNet Acquisition, the Company acquired an interest rate swap which,
together with certain existing interest rate cap agreements, effectively fix the
interest rate on $75.0 million of the Leasing Subsidiary's LIBOR-based
borrowings at 5.58% plus the applicable margin through December 1, 2004.
Management expects that it will have aggregate LIBOR-based borrowings at the
Leasing Subsidiary in excess of the notional amount for the duration of the
swap. The actual borrowing cost to the Company with respect to indebtedness
covered by the swap will depend upon the applicable margin over LIBOR for such
indebtedness, which will be determined by the terms of the relevant debt
instruments. In June 2000, an interest rate swap with a notional amount of
approximately $112.0 million matured. At December 31, 2000 and 1999, the fair
value (liability) of the Company's interest rate swaps were ($7.7) million and
$3.4 million, respectively.

F-53

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9--RISK MANAGEMENT AND USE OF FINANCIAL INSTRUMENTS (CONTINUED)
previously entered into U.S. Treasury-based hedging transactions. The net
$3.4 million cost of the settlement of such hedges has been deferred and is
being amortized as an increase to the effective financing cost of the new term
loan over its effective ten-year term.

CREDIT RISK CONCENTRATIONS--Concentrations of credit risks arise when a
number of borrowers or tenants 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
contractual obligations, including those to the Company, to be similarly
affected by changes in economic conditions. The Company regularly monitors
various segments of its portfolio to assess potential concentrations of credit
risks. Management believes the current credit risk portfolio is reasonably well
diversified and does not contain any unusual concentration of credit risks.

Substantially all of the Company's real estate subject to operating leases
(including those held by joint ventures) and loans and other lending
investments, are collateralized by facilities located in the United States, with
significant concentrations (i.e., greater than 10%) as of December 31, 2000 in
California (23.7%) and Texas (14.7%). As of December 31, 2000, the Company's
investments also contain significant concentrations in the following
asset/collateral types: office (48.5%) and hotel/resorts (20.2%).

The Company underwrites the credit of prospective borrowers and tenants and
often requires them to provide some form of credit support such as corporate
guarantees or letters of credit. Although the Company's loans and other lending
investments and corporate tenant lease assets are geographically diverse and the
borrowers and tenants 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 tenant, the inability of that borrower or tenant to
make its payment could have an adverse effect on the Company. As of
December 31, 2000, the Company's five largest borrowers or tenants collectively
accounted for approximately 18.6% of the Company's aggregate annualized interest
and operating lease revenue.

NOTE 10--INCOME TAXES

Although originally formed to qualify as a REIT under the Code for the
purpose of making and acquiring various types of mortgage and other loans,
during 1993 through 1997, the Company failed to qualify as a REIT. As confirmed
by a closing agreement with the Internal Revenue Service (the "IRS") obtained in
March 1998, the Company was eligible, elected to be taxed as a REIT and
qualified for REIT status for the tax years commencing on January 1, 1998. The
Company did not incur any material tax liabilities as a result of its operations
during such years.

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and income tax purposes, as well as operating loss and tax credit carry
forwards. A valuation allowance is recorded if, based on the weight of available
evidence, it is more likely than not that some portion or all of the deferred
income tax asset will not be realized. Given the limited nature of the Company's
operations and assets and liabilities from 1993 through 1997, the only deferred
tax assets are net operating loss carry forwards ("NOL's") of approximately $4.0
million, which arose during such periods. Since the Company has elected to be
treated as a REIT for its tax years beginning January 1, 1998, the NOL's will
expire unutilized. Accordingly, no net deferred tax asset value, after
consideration of a 100% valuation

F-54

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10--INCOME TAXES (CONTINUED)
allowance, has been reflected in these financial statements as of December 31,
2000 and 1999, nor has any net tax provision for the fiscal years ended
December 31, 2000, 1999 or 1998.

NOTE 11--STOCK OPTION PLANS AND EMPLOYEE BENEFITS

The Company's 1996 Long-Term Incentive Plan (the "Plan") is designed to
provide incentive compensation for officers, other key employees and directors
of the Company. The Plan provides for awards of stock options and restricted
stock and other performance awards. The maximum number of shares of Common Stock
available for awards under the Plan is 9% of the outstanding shares of Common
Stock, calculated on a fully diluted basis, from time to time; provided that the
number of shares of Common Stock reserved for grants of options designated as
incentive stock options is 5.0 million, subject to certain antidilution
provisions in the Plan. All awards under the Plan, other than automatic awards
to non-employee directors, are at the discretion of the Board or a committee of
the Board. At December 31, 2000, a total of approximately 7.7 million shares of
Common Stock were available for awards under the Plan, of which options to
purchase approximately 4.7 million shares of Common Stock were outstanding and
approximately 56,000 shares of restricted stock were outstanding.

Concurrently with the Recapitalization Transactions, the Company issued
approximately 2.5 million (as adjusted) fully vested and immediately exercisable
options to purchase class A shares at $14.72 per share (as adjusted) to the
Advisor with a term of ten years. The Advisor granted a portion of these options
to its employees and the remainder were allocated to an affiliate. Upon
consummation of the Advisor Transaction, these individuals became employees of
the Company. In general, the grants to these employees provided for scheduled
vesting over a predefined service period of three to five years and, under
certain conditions, provide for accelerated vesting. These options expire on
March 13, 2008.

Also, as a result of the TriNet Acquisition, TriNet terminated its dividend
equivalent rights program. The program called for immediate vesting and cash
redemption of all dividend equivalent rights upon a change of control of 50% or
more of the voting common stock. Concurrent with the TriNet Acquisition, all
dividend equivalent rights were vested and amounts due to former TriNet
employees of approximately $8.3 million were paid by the Company. Such payments
were included as part of the purchase price paid by the Company to acquire
TriNet for financial reporting purposes.

F-55

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11--STOCK OPTION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
Changes in options outstanding during each of fiscal 1998, 1999 and 2000 are
as follows:

NUMBER OF SHARES
------------------------------------- AVERAGE
NON-EMPLOYEE STRIKE
EMPLOYEES DIRECTORS OTHER PRICE
--------- ------------ ---------- --------

OPTIONS OUTSTANDING, DECEMBER 31, 1997............ -- 1,333 -- $13.32
Granted in 1998................................. -- 9,996 2,402,476 $ --
Exercised in 1998............................... -- (687) (18,000) $15.00
Forfeited in 1998............................... -- (646) -- $15.00
--------- ------- ----------
OPTIONS OUTSTANDING, DECEMBER 31, 1998............ -- 9,996 2,384,476 $15.00
Granted in 1999................................. -- 4,998 -- $57.50
Exercised in 1999............................... -- -- (68,233) $15.00
Forfeited in 1999............................... (23,690) -- (4,166) $24.94
Assumed in TriNet Acquisition................... 1,321,322 131,100 -- $25.62
Reclassification for Advisor Transaction(1)..... 1,447,083 -- (1,447,083) $15.00
Adjustment for dilution......................... 33,537 285 16,169 $14.72
--------- ------- ----------
OPTIONS OUTSTANDING, DECEMBER 31, 1999............ 2,778,252 146,379 881,163 $19.03
Granted in 2000................................. 1,852,059 80,000 80,000 $17.34
Exercised in 2000............................... (412,734) -- -- $15.67
Forfeited in 2000............................... (682,005) -- -- $25.47
--------- ------- ----------
OPTIONS OUTSTANDING, DECEMBER 31, 2000............ 3,535,572 226,379 961,163 $18.97
========= ======= ==========

EXPLANATORY NOTE:
---------
(1) Represents the reclassification of stock options originally granted to the
Advisor and regranted to its employees who became employees of the Company
upon consummation of the Advisor Transaction (see Note 4).

F-56

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11--STOCK OPTION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
The following table summarizes information concerning outstanding and
exercisable options as of December 31, 2000:

$14.72 - $15.00(1) 1,992,668 7.20 $14.73 947,168 $14.72
$16.69 - $16.88 1,212,109 8.09 $16.86 81,533 $16.88
$17.38 - $17.56 550,000 9.21 $17.39 -- $ --
$19.50 - $19.69 6,250 9.39 $19.54 -- $ --
$20.63 - $21.44 258,050 6.87 $21.01 100,050 $21.13
$22.44 - $22.45 54,500 3.82 $22.44 34,500 $22.45
$23.32 - $23.64 130,842 2.12 $23.46 101,351 $23.41
$24.13 - $24.57 173,650 3.63 $24.31 173,650 $24.31
$25.22 - $26.09 34,500 3.40 $25.74 34,500 $25.74
$26.30 - $26.85 108,100 2.95 $26.74 108,100 $26.74
$28.26 - $28.54 67,113 1.97 $28.37 60,842 $28.36
$30.33 119,888 1.60 $30.33 99,769 $30.33
$33.15 - $33.70 10,350 1.97 $33.39 8,913 $33.43
$55.39 5,094 8.42 $55.39 1,698 $55.39
--------- ----- ------ --------- ------
4,723,114 7.18 $17.65 1,752,074 $19.25
========= ===== ====== ========= ======

EXPLANATORY NOTE:
------------

(1) Includes 764,000 options which were granted, on a fully exercisable basis,
in connection with the Recapitalization Transactions to Starwood Capital
Group, and were subsequently regranted by that entity to its employees
subject to vesting requirements. As a result of those vesting requirements,
less than 2,000 of these options are currently exercisable by the beneficial
owners. In the event that these employees forfeit such options, they revert
to Starwood Capital Group, who may regrant them at its discretion.

In connection with the original grant of options in March 1998 to the
Advisor, the Company utilized the option value method as required by SFAS
No. 123. An independent financial advisory firm estimated the value of these
options at date of grant to be approximately $2.40 per share using a Black-
Scholes valuation model. In the absence of comparable historical market
information for the Company,

F-57

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11--STOCK OPTION PLANS AND EMPLOYEE BENEFITS (CONTINUED)
the advisory firm utilized assumptions consistent with activity of a comparable
peer group of companies, including an estimated option life of five years, a
27.5% volatility rate and an estimated annual dividend rate of 8.5%. The
resulting charge to earnings was calculated as the number of options allocated
to the Advisor multiplied by the estimated value at consummation. A charge of
approximately $6.0 million was reflected in the Company's first quarter 1998
financial results for this original grant.

Had the Company's compensation costs been determined using the fair value
method of accounting for stock options issued under the Plan to employees and
directors prescribed by SFAS No. 123, the Company's net income and earnings per
share for the fiscal years ended December 31, 2000 and 1999 would have been
reduced on a pro forma basis by approximately $275,000 and $141,000,
respectively. This would not have significantly impacted earnings per share. As
the Company had no employees prior to the consummation of the Advisor
Transaction, no pro forma adjustment is necessary to reflect in the results of
operations for fiscal 1998 as if the option value were utilized.

For the above SFAS No. 123 calculation, the Company utilized the following
assumptions: a 26.8% volatility rate (historical volatility for the Company's
Common Stock at December 31, 2000), a risk free rate of 5.3% and an estimated
annual dividend rate of 13.5%.

Future charges may be taken to the extent of additional option grants, which
are at the discretion of the Board of Directors.

During the year ended December 31, 2000, the Company granted 76,585
restricted stock units ("RSU's") to new employees. The RSU's vest over a
three-year period, with the exception of 12,500 RSU's, which were immediately
vested on the date of grant. The RSU's are valued at the date of grant and are
reflected as compensation expense over the vesting period.

On July 28, 2000, the Company granted to its employees profits interests in
a wholly-owned subsidiary of the Company called iStar Venture Direct Holdings,
LLC. iStar Venture Direct Holdings, LLC has invested $2.4 million in the
aggregate in the preferred stock of three real estate-related technology
companies. The profits interests have a three-year vesting schedules, and are
subject to forfeiture in the event of termination of employment for cause or a
voluntary resignation.

Effective November 4, 1999, the Company implemented a savings and retirement
plan (the "401(k) Plan"), which is a voluntary, defined contribution plan. All
employees are eligible to participate in the 401 (k) Plan following completion
of six months of continuous service with the Company. Each participant may
contribute on a pretax basis between 2% and 15% of such participant's
compensation. At the discretion of the Board of Directors, the Company may make
matching contributions on the participant's behalf up to 50% of the first 10% of
the participant's annual contribution. The Company made contributions of
approximately $320,000 to the 401 (k) Plan for the year ended December 31, 2000.

NOTE 12--EARNINGS PER SHARE

F-58

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 12--EARNINGS PER SHARE (CONTINUED)
shares included the class B shares, which were convertible into class A shares
at a rate of 49 class B shares for one class A share, and potentially dilutive
options to purchase class A shares issued to the Advisor and the Company's
directors and warrants to acquire class A shares.

As more fully described in Note 4, in the Incorporation Merger, the class A
shares and class B shares were converted into shares of Common Stock and, as a
result, the Company no longer has multiple classes of common shares. Basic and
diluted earnings per share are based upon the following weighted average shares
outstanding during during the years ended December 31, 2000, 1999 and 1998,
respectively:

YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)

Weighted average common shares outstanding for basic
earnings per common share................................. 85,441 57,749 41,607
Add effect of assumed shares issued under treasury stock
method for stock options and restricted stock units....... 710 1,500 1,311
Add effects of conversion of class B shares (49-for-one).... -- 450 445
Add effects of assumed warrants exercised under treasury
stock method for stock options............................ -- 694 97
------ ------ ------
Weighted average common shares outstanding for diluted
earnings per common share................................. 86,151 60,393 43,460
====== ====== ======

As previously indicated, effective June 19, 1998, the Company consummated a
one-for-six reverse stock split for its shares. Historical earnings per share
have been retroactively restated to reflect the reverse split for comparative
purposes.

NOTE 13--COMPREHENSIVE INCOME

In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130") effective for fiscal
years beginning after December 15, 1997. The statement changes the reporting of
certain items currently reported as changes in the shareholders' equity section
of the balance sheet and establishes standards for the reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. SFAS No. 130 requires that all components of comprehensive
income shall be reported in the financial statements in the period in which they
are recognized. Furthermore, a total amount for comprehensive income shall be
displayed in the financial statements. The Company has adopted this standard
effective January 1, 1998. Total comprehensive income was $217.8 million,
$38.7 million and $59.9 million for the years ended December 31, 2000, 1999 and
1998 respectively. The primary component of comprehensive income other than net
income was the change in value of certain investments in marketable securities
classified as available-for-sale. Upon adoption of SFAS 133/SFAS 137 effective
January 1, 2001 (see Note 3), other comprehensive income will also be affected
by the mark-to-market on the effective portion of hedge instruments.

F-59

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 14--DIVIDENDS

In order to maintain its election to qualify as a REIT, the Company must
distribute, at a minimum, an amount equal to 95% of its taxable income and must
distribute 100% of its taxable income to avoid paying corporate federal income
taxes. The distribution rate was modified to 90% by the REIT Modernization Act
beginning in fiscal 2001. Accordingly, the Company anticipates it will
distribute all of its taxable income to its shareholders. Because taxable income
differs from cash flow from operations due to non-cash revenues or expenses, in
certain circumstances, the Company may be required to borrow to make sufficient
dividend payments to meet this anticipated dividend threshold.

On November 4, 1999, the class A shares were converted into shares of Common
Stock on a one-for-one basis. Total dividends declared by the Company aggregated
$116.1 million, or $1.86 per common share, for the year ended December 31, 1999.
For the year ended December 31, 2000, total dividends declared by the Company
aggregated $205.5 million, or $2.40 per common share. The Company also declared
dividends aggregating $20.9 million, $4.7 million, $3.0 million and
$8.0 million, respectively, on its Series A, B, C and D preferred stock,
respectively, for the year ended December 31, 2000.

In November 1999, the Company declared and paid a dividend of a total of one
million shares of Common Stock pro rata to all holders of record of Common Stock
as of the close of business on November 3, 1999.

F-60

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 14--DIVIDENDS (CONTINUED)

NOTE 15--FAIR VALUES OF FINANCIAL INSTRUMENTS

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

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

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

LOANS AND OTHER LENDING INVESTMENTS--For the Company's interests in loans
and other lending investments, the fair values were estimated by discounting the
future contractual cash flows (excluding participation interests in the sale or
refinancing proceeds of the underlying collateral) using estimated current
market rates at which similar loans would be made to borrowers with similar
credit ratings for the same remaining maturities.

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

F-61

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 15--FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
OTHER FINANCIAL INSTRUMENTS--The carrying value of other financial
instruments including, restricted cash, accrued interest receivable, accounts
payable, accrued expenses and other liabilities approximate the fair values of
the instruments.

DEBT OBLIGATIONS--A substantial portion of the Company's existing debt
obligations bear interest at fixed margins over LIBOR. Such margins may be
higher or lower than those at which the Company could currently replace the
related financing arrangements. Other obligations of the Company bear interest
at fixed rates, which may differ from prevailing market interest rates. As a
result, the fair values of the Company's debt obligations were estimated by
discounting current debt balances from December 31, 2000 or 1999 to maturity
using estimated current market rates at which the Company could enter into
similar financing arrangements.

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

The book and fair values of financial instruments as of December 31, 2000
and 1999 were (in thousands):

2000 1999
----------------------- -----------------------
BOOK FAIR BOOK FAIR
VALUE VALUE VALUE VALUE
---------- ---------- ---------- ----------

FINANCIAL ASSETS:
Loans and other lending
investments............... $2,239,183 $2,333,112 $2,011,006 $2,031,065
Marketable securities....... 41 41 4,344 4,344
Allowance for credit
losses.................... (14,000) (14,000) (7,500) (7,500)
FINANCIAL LIABILITIES:
Debt obligations............ 2,131,967 2,135,574 1,901,204 1,885,797
Interest rate protection
agreements................ 2,495 (7,261) 3,139 5,556

NOTE 16--SEGMENT REPORTING

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

The Company has two reportable segments: Real Estate Lending and Corporate
Tenant Leasing. The Company does not have substantial foreign operations. The
accounting policies of the segments are the same as those described in Note 3.
The Company has no single customer that accounts for 10% or more of revenues
(see Note 9 for other information regarding concentrations of credit risk).

F-62

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 16--SEGMENT REPORTING (CONTINUED)
The Company evaluates performance based on the following financial measures
for each segment:

CORPORATE
REAL ESTATE TENANT CORPORATE/ COMPANY
LENDING LEASING(1) OTHER(2) TOTAL
----------- ---------- ---------- ----------
(IN THOUSANDS)

2000:
Total revenues(3): $ 279,680 $ 191,821 $ 321 $ 471,822
Total operating and interest expense(4): 115,906 111,808 28,570 256,284
Net operating income before minority
interests(5): 163,774 80,013 (28,249) 215,538
Total long-lived assets(6): 2,225,183 1,670,169 N/A 3,895,352
Total assets: 2,225,183 1,670,169 139,423 4,034,775

1999:
Total revenues(3): 209,848 42,186 12,763 264,797
Total operating and interest expense(4): 70,778 36,749 118,343 225,870
Net operating income before minority
interests(5): 139,070 5,437 (105,580) 38,927
Total long-lived assets(6): 2,003,506 1,714,284 N/A 3,717,790
Total assets: 2,003,506 1,714,284 95,762 3,813,552

1998:
Total revenues(3): 112,914 12,378 2,804 128,096
Total operating and interest expense(4): 36,998 12,554 18,587 68,139
Net operating income before minority
interests(5): 75,916 (176) (15,783) 59,957
Total long-lived assets(6): 1,823,761 189,942 N/A 2,013,703
Total assets: 1,823,761 189,942 45,913 2,059,616

EXPLANATORY NOTE:
---------
(1) Includes the Company's pre-existing Corporate Tenant Leasing investments
since March 18, 1998 and the Corporate Tenant Leasing business acquired in
the TriNet Acquisition since November 4, 1999.

(2) Corporate and Other represents all corporate-level items, including general
and administrative expenses and any intercompany eliminations necessary to
reconcile to the consolidated Company totals. This caption also includes the
Company's servicing business, which is not considered a material separate
segment. In addition, as more fully discussed in Note 4, Corporate and Other
for the year ended December 31, 1999 includes a non-recurring charge,
non-cash of approximately $94.5 million relating to the Advisor Transaction.

(4) Total operating and interest expense represents provision for possible
credit losses for the Real Estate Lending business and operating costs on
corporate tenant lease assets for the Corporate Tenant Leasing business, as
well as interest expense specifically related to each segment. General and
administrative expense, advisory fees (prior to November 4, 1999) and stock
option compensation expense is included in Corporate and Other for all
periods. Depreciation and amortization of $34,514, $10,340 and $4,287 in
2000, 1999 and 1998, respectively, are included in the amounts presented
above.

(6) Total long-lived assets is comprised of Loans and Other Lending Investments,
net and Real Estate Subject to Operating Leases, net, for each respective
segment.

F-63

ISTAR FINANCIAL INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 17--SUBSEQUENT EVENTS

On January 11, 2001 the Company closed a new $700.0 million secured revolving
credit facility which is led by a major commercial bank. The new facility has a
three-year primary term and one-year "term-out" extension option, and bears
interest at LIBOR plus 1.40% to 2.15%, depending upon the collateral contributed
to the borrowing base. The new facility accepts a broad range of structured
finance assets and has a final maturity of January 2005. In addition, subsequent
to year end, the Company extended the maturity of its $350.0 million unsecured
revolving credit facility to May 2002.

NOTE 18--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

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

QUARTER ENDED
---------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
------------ ------------- -------- ---------

2000:
Revenue......................................... $122,337 $120,683 $117,914 $110,888
Net income...................................... 56,177 55,591 53,829 51,989
Net income allocable to common shares........... 46,950 46,364 44,602 42,762
Net income per common share..................... $ 0.55 $ 0.54 $ 0.52 $ 0.50
Weighted average common shares
outstanding--basic............................ 85,731 85,662 85,281 85,087

1999:
Revenue......................................... $ 89,483 $ 60,635 $ 59,255 $ 55,424
Net income (loss)(1)............................ (50,485) 31,271 29,883 28,217
Net income (loss) allocable to common
shares(2)..................................... (58,405) 25,963 24,575 22,909
Net income (loss) per common shares............. $ (0.80) $ 0.49 $ 0.46 $ 0.43
Weighted average common shares
outstanding--basic............................ 73,427 52,471 52,471 52,447

EXPLANATORY NOTE:
---------
(1) As more fully discussed in Note 4, the quarter ended December 31, 1999
includes a non-recurring, non cash charge of approximately $94.5 million
relating to the Advisor Transaction. Excluding such charge, net income for
the quarter would have been approximately $44.0 million and net income per
common share for the quarter would have been $0.49.

(2) On November 4, 1999, through the Incorporation Merger, the class B shares
were effectively converted into shares of Common Stock on a 49-for-one basis
and the class A shares were converted into shares of Common Stock on a
one-for-one basis.

F-64

P R O S P E C T U S

ISTAR FINANCIAL INC.

66,295,152 SHARES OF COMMON STOCK
6,000,000 WARRANTS

This prospectus relates to the offer and sale of up to 66,295,152 shares of
our common stock (of which 8,546,646 are issuable upon exercise of warrants and
options) and 6,000,000 warrants. These securities may be offered and sold from
time to time by the securityholders specified in this prospectus or their
successors in interest, subject to compliance with agreements restricting sales
by some of the securityholders. See "Participating Securityholders." The Company
will not receive any of the proceeds from the sale of the securities.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.

An investment in the securities entails certain material risks and
uncertainties that should be considered. See "RISK FACTORS" on page four of this
prospectus.

September 6, 2001

WHERE YOU CAN FIND MORE INFORMATION

We file annual, quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy such reports, proxy or
information statements and other information at the public reference facilities
maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Regional Offices of the SEC at Seven World Trade Center, Suite 1300, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. You may also obtain copies of such materials from the
Public Reference Section of the SEC, 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference room. The SEC maintains a site on the World
Wide Web at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC. You can also inspect and copy reports, proxy or information
statements and other information about us at the offices of the New York Stock
Exchange, Public Reference Section, 20 Broad Street, New York, New York 10005.

We have filed with the SEC a registration statement on Form S-3 under the
Securities Act of 1933, as amended, with respect to the securities offered
hereby. This prospectus does not contain all the information set forth in the
registration statement, certain portions of which have been omitted as permitted
by the rules and regulations of the SEC. Statements contained in this prospectus
as to the contents of any contract or other document filed as an exhibit to the
registration statement are not necessarily complete, and in each instance,
reference is made to the copy of such contract or document so filed, each such
statement being qualified in all respects by such reference. For further
information about us and the securities, please see the registration statement
and exhibits thereto.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The SEC allows us to "incorporate by reference" the information we file with
it, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is considered
to be a part of this prospectus, and information that we file later with the SEC
will automatically update and supersede this information. We incorporate by
reference the documents listed below, which were filed by Starwood Financial
Trust, our predecessor, and any future filings made with the SEC under Sections
13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of 1934 until the
Participating Securityholders sell all the securities being offered or this
offering is otherwise terminated:

1. Annual Report on Form 10-K for the fiscal year ended December 31, 1998,
as amended.

2. Current Reports on Form 8-K dated June 22, 1999, July 15, 1999 and
November 9, 1999.

3. Quarterly Reports on Form 10-Q for the quarters ended March 31, 1999,
June 30, 1999 and September 30, 1999.

4. The description of the shares of common stock contained in the
Registration Statement on Form 8-A filed on October 5, 1999.

You may request a copy of these filings, at no cost, by writing to us at
Starwood Financial Inc., 1114 Avenue of the Americas, 27th Floor, New York, NY
10036; Attention: Investor Relations, telephone number 212-930-9400.

You should rely only on the information incorporated by reference or
provided in this prospectus or any prospectus supplement. We have not authorized
anyone else to provide you with different information. No one is making an offer
of the securities in any state where the offer is not permitted. You should not
assume that the information in this prospectus or any prospectus supplement is
accurate as of any date other than the date on the front of those documents.

Except as the context may otherwise require, when we refer to "SFI," "the
Company," "we," "us" or "our" in this prospectus, we mean Starwood
Financial Inc. and its predecessors, consolidated subsidiaries and joint
ventures.

FORWARD-LOOKING STATEMENTS

We make statements in this prospectus and the documents we incorporate by
reference that are considered "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, which are usually identified by the use of words such as
"will," "anticipates," "believes," "estimates," "expects," "projects," "plans,"
"intends," "should" or similar expressions. We intend those forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Reform Act of 1995 and are
including this statement for purposes of complying with these safe harbor
provisions. These forward-looking statements reflect our current views about the
company's plans, strategies and prospects, which are based on the information
currently available to us and on assumptions we have made. Although we believe
that our plans, intentions and expectations as reflected in or suggested by
those forward-looking statements are reasonable, we can give no assurance that
the plans, intentions or expectations will be achieved. We have listed below and
have discussed elsewhere in this prospectus some important risks, uncertainties
and contingencies which could cause the company's actual results, performances
or achievements to be materially different from the forward- looking statements
we make in this prospectus. These risks, uncertainties and contingencies
include, but are not limited to, the following:

1. The success or failure of our efforts to implement our current business
strategy.

2. Economic conditions generally and in the commercial real estate and
finance markets specifically.

3. The performance and financial condition of borrowers and tenants.

4. The actions of our competitors and our ability to respond to those
actions.

5. The cost of our capital, which depends in part on our asset quality, the
nature of our relationships with our lenders and other capital providers,
our business prospects and outlook, and general market conditions.

6. Changes in governmental regulations, tax rates and similar matters.

7. Legislative and regulatory changes (including changes to laws governing
the taxation of REITs).

8. Other factors discussed under the heading "Risk Factors" and elsewhere
in this prospectus.

THE COMPANY

We are the largest publicly traded finance company focused exclusively on
the commercial real estate industry. We provide structured financing to private
and corporate owners of real estate nationwide, including senior and junior
mortgage debt, corporate mezzanine and subordinated capital and corporate net
lease financing. We seek to deliver superior risk-adjusted returns on equity to
our stockholders by providing innovative and value-added financing solutions to
our customers. We are taxed as a real estate investment trust.

RISK FACTORS

THIS SECTION DESCRIBES SOME, BUT NOT ALL, OF THE RISKS OF PURCHASING OUR
COMMON STOCK AND WARRANTS. YOU SHOULD CAREFULLY CONSIDER THESE RISKS, IN
ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS OR INCORPORATED
BY REFERENCE, BEFORE PURCHASING ANY OF THE SECURITIES OFFERED HEREBY. IN
CONNECTION WITH THE FORWARD-LOOKING STATEMENTS THAT APPEAR IN THIS PROSPECTUS,
YOU SHOULD CAREFULLY REVIEW THE FACTORS DISCUSSED BELOW AND THE CAUTIONARY
STATEMENTS REFERRED TO IN "FORWARD-LOOKING STATEMENTS."

WE ARE SUBJECT TO REAL ESTATE INVESTMENT RISKS

Our real estate finance business is subject to risks, including the
following:

1. Defaults by borrowers on non-recourse loans where underlying property
values fall below the loan amount.

2. Costs and delays associated with the foreclosure process.

3. Borrower bankruptcies.

4. Possible unenforceability of loan terms, such as prepayment provisions.

5. Acts or omissions by owners or managers of the underlying real estate.

6. Borrower defaults on debt senior to our loans, if any.

7. Where debt senior to our loans exists, the presence of intercreditor
arrangements limiting our ability to amend our loan documents, assign our
loans, accept prepayments, exercise our remedies (through "standstill"
periods) and control decisions made in bankruptcy proceedings relating to
borrowers.

8. Lack of control over the underlying asset prior to a default.

The risks described above could impact our ability to realize on our
collateral or collect expected amounts on account of our portfolio. Where
applicable, these risks could also require us to expend funds in order to
protect our position as a subordinated lender. For example, we may determine
that it is in our interests to expend funds to keep a more senior lender current
on our obligations or to purchase a senior lender's position. Unanticipated
costs may also be incurred by us after a foreclosure. Bankruptcy and borrower
litigation can significantly increase the time needed for us to acquire
underlying collateral in the event of a default, during which time the
collateral may decline in value.

WE ARE SUBJECT TO RISKS RELATING TO OUR CREDIT TENANT LEASE BUSINESS

Our credit tenant lease business is subject to risks, including the
following:

1. Lease expirations may result in reduced revenues if prevailing market
rents at the time of such expirations are less than the contractual rents
under the expiring leases. In addition, if tenants under expiring leases
elect not to renew their leases, we could experience long vacancy periods
and incur substantial capital expenditures in order to obtain replacement
tenants. As of June 30, 2001, the percentage of our revenues (based on
total revenues for the quarter

ended June 30, 2001, annualized) that are subject to expiring leases
during each year from 2001 through 2005 is as follows:

2001........................................................ 0.5%
2002........................................................ 2.3%
2003........................................................ 3.2%
2004........................................................ 5.0%
2005........................................................ 2.9%

2. Lease defaults by one or more significant tenants or lease terminations
by tenants following events of casualty or takings by eminent domain
could result in long vacancy periods and require us to incur substantial
capital expenditures in order to obtain replacement tenants. In addition,
there can be no assurance that the rents received from replacement
tenants will be equal to the rents received from the defaulting or
terminating tenants. As of June 30, 2001, 12.0% of our annualized total
revenues for the quarter ended June 30, 2001, were derived from our five
largest tenants.

3. Illiquidity of ownership interests in real property.

4. Risks associated with joint ventures, such as lack of full management
control over venture activities and risk of non-performance by venture
partners.

5. Possible need for significant tenant improvements, including conversions
of single tenant buildings to multi-tenant buildings.

6. Competition from newer, more updated buildings.

Factors 1, 2, 5 and 6 would likely have negative impacts on our net income.
Factors 3, 4 and 5 may decrease our flexibility to vary our portfolio and
investment strategy promptly to respond to changes in market conditions.

OUR GROWTH IS DEPENDENT ON LEVERAGE, WHICH MAY CREATE OTHER RISKS

Our success is dependent, in part, upon our ability to grow our portfolio of
invested assets through the use of leverage. We currently intend to leverage our
portfolio primarily through secured and unsecured borrowings. Our ability to
obtain the leverage necessary for execution of our business plan will ultimately
depend upon our ability to maintain interest coverage ratios meeting market
underwriting standards that will vary according to lenders' assessments of our
creditworthiness and the terms of the borrowings.

The percentage of leverage used will vary depending on our estimate of the
stability of the portfolio's cash flow. To the extent that changes in market
conditions cause the cost of such financing to increase relative to the income
that can be derived from the assets acquired, we may reduce the amount of our
leverage.

Leverage creates an opportunity for increased net income, but at the same
time creates risks. For example, leveraging magnifies changes in our net worth.
We will leverage assets only when there is an expectation that it will enhance
returns, although there can be no assurance that our use of leverage will prove
to be beneficial. Moreover, there can be no assurance that we will be able to
meet our debt service obligations and, to the extent that we cannot, we risk the
loss of some or all of our assets or a financial loss if we are required to
liquidate assets at a commercially inopportune time.

We and our subsidiaries are parties to agreements and debt instruments that
restrict future indebtedness and the payment of dividends, including indirect
restrictions (through, for example, covenants requiring the maintenance of
specified levels of net worth and earnings to debt service ratios) and direct
restrictions. As a result, in the event of a deterioration in our financial
condition, these agreements or debt instruments could restrict our ability to
pay dividends. Moreover, if we fail to pay dividends as required by the Internal
Revenue Code, whether as a result of restrictive covenants in

our debt instruments or otherwise, we may lose our status as a REIT. For more
information regarding the consequences of loss of REIT status, please read the
risk factor entitled "We May Be Subject to Adverse Consequences if We Fail to
Qualify as a Real Estate Investment Trust."

WE FACE A RISK OF LIABILITY UNDER ENVIRONMENTAL LAWS

Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner of real estate (including, in certain
circumstances, a secured lender that succeeds to ownership or control of a
property) may become liable for the costs of removal or remediation of certain
hazardous or toxic substances at, on, under or in its property. Those laws
typically impose cleanup responsibility and liability without regard to whether
the owner or control party knew of or was responsible for the release or
presence of such hazardous or toxic substances. The costs of investigation,
remediation or removal of those substances may be substantial. The owner or
control party of a site may be subject to common law claims by third parties
based on damages and costs resulting from environmental contamination emanating
from a site. Certain environmental laws also impose liability in connection with
the handling of or exposure to asbestos-containing materials, pursuant to which
third parties may seek recovery from owners of real properties for personal
injuries associated with asbestos-containing materials. Absent succeeding to
ownership or control of real property, a secured lender is not likely to be
subject to any of these forms of environmental liability.

CERTAIN PROVISIONS IN OUR CHARTER MAY INHIBIT A CHANGE IN CONTROL

Generally, to maintain our qualification as a REIT under the Internal
Revenue Code, not more than 50% in value of our outstanding shares of stock may
be owned, directly or indirectly, by five or fewer individuals at any time
during the last half of our taxable year. The Internal Revenue Code defines
"individuals" for purposes of the requirement described in the preceding
sentence to include some types of entities. Under our charter, no person may own
more than 9.8% of the outstanding shares of stock, with some exceptions. The
restrictions on transferability and ownership may delay, deter or prevent a
change in control or other transaction that might involve a premium price or
otherwise be in the best interest of the securityholders.

Our Board of Directors is divided into two classes. Directors of each class
are chosen for two-year staggered terms. Staggered terms of directors may reduce
the possibility of a tender offer or an attempt to change control, even though a
tender offer or change in control might be in the best interest of our
securityholders. Our charter authorizes our Board of Directors:

1. To cause us to issue additional authorized but unissued shares of common
or preferred stock.

2. To classify or reclassify, in one or more series, any of our unissued
preferred shares.

3. To set the preferences, rights and other terms of any classified or
reclassified securities that we issue.

ADVERSE CHANGES IN GENERAL ECONOMIC CONDITIONS CAN ADVERSELY AFFECT OUR BUSINESS

Our success is dependent upon the general economic conditions in the
geographic areas in which a substantial number of our investments are located.
Adverse changes in national economic conditions or in the economic conditions of
the regions in which we conduct substantial business likely would have an
adverse effect on real estate values, interest rates and, accordingly, our
business.

WE MAY BE SUBJECT TO ADVERSE CONSEQUENCES IF WE FAIL TO QUALIFY AS A REAL ESTATE
INVESTMENT TRUST

We intend to operate so as to qualify as a real estate investment trust for
federal income tax purposes. We have received an opinion of our legal counsel
that, based on certain assumptions, representations and an opinion of another
law firm delivered to us last year described in "Federal

Income Tax Consequences," our existing legal organization and our actual and
proposed method of operation described in this prospectus, as set forth in our
organizational documents and as represented by us to our counsel, enable us to
satisfy the requirements for qualification as a real estate investment trust
under the Internal Revenue Code in the ordinary course of our actual and
proposed operations. Investors should be aware, however, that opinions of
counsel are not binding on the Internal Revenue Service or any court. The real
estate investment trust qualification opinion only represents the view of our
counsel based on such counsel's review and analysis of existing law, which
includes no controlling precedent. Furthermore, both the validity of the opinion
and our qualification as a real estate investment trust will depend on our
continuing ability to meet various requirements concerning, among other things,
the ownership of our outstanding stock, the nature of our assets, the sources of
our income and the amount of our distributions to our stockholders. See "Federal
Income Tax Consequences--Taxation of the Company."

If we were to fail to qualify as a real estate investment trust for any
taxable year, we would not be allowed a deduction for distributions to our
stockholders in computing our taxable income and would be subject to federal
income tax, including any applicable minimum tax, on our taxable income at
regular corporate rates. Unless entitled to relief under certain Internal
Revenue Code provisions, we also would be disqualified from treatment as a real
estate investment trust for the four subsequent taxable years following the year
during which qualification was lost. As a result, cash available for
distribution would be reduced for each of the years involved. Furthermore, it is
possible that future economic, market, legal, tax or other considerations may
cause the Board of Directors to revoke the real estate investment trust
election. See "Federal Income Tax Consequences."

Even if we qualify as a real estate investment trust for federal income tax
purpose, we may be subject to certain state and local taxes on our income and
property, and may be subject to certain federal taxes. See "Federal Income Tax
Consequences--Taxation of the Company."

TAX-EXEMPT STOCKHOLDERS MAY BE SUBJECT TO TAXATION

The Internal Revenue Service (the "IRS") has issued a revenue ruling in
which it held that amounts distributed by a REIT to a tax-exempt employees'
pension trust do not constitute unrelated business taxable income ("UBTI"). In
general, subject to the discussion below regarding a "pension-held REIT" and
subject to the following sentence, based upon such ruling and the statutory
framework of the Internal Revenue Code, distributions to a stockholder of a real
estate investment trust that is a tax-exempt entity should not constitute UBTI,
provided that:

1. The tax-exempt entity has not financed the acquisition of its shares of
common stock with "acquisition indebtedness" within the meaning of the
Internal Revenue Code.

2. The shares of common stock are not otherwise used in an unrelated trade
or business of the tax-exempt entity.

3. The real estate investment trust does not hold a residual interest in a
real estate mortgage investment conduit ("REMIC") that is an entity or
arrangement that satisfies the standards set forth in Section 860D of the
Internal Revenue Code.

However, because we may invest in certain classes of REMICs that are
designated as the residual interest in the related REMIC (a "REMIC residual
interest"), any dividends received by a stockholder that is a tax-exempt entity
that are allocable to Excess Inclusion income (as defined below) will be treated
as UBTI. Certain taxable income produced by REMIC residual interests may cause
our stockholders to suffer certain adverse tax consequences. See "Federal Income
Tax Consequences."

pension trust by such REIT may constitute UBTI. For these purposes, a
"pension-held REIT" is defined as a REIT: (1) that would not have qualified as a
REIT but for the provisions of the Internal Revenue Code which look through such
a qualified pension trust in determining ownership of securities of the REIT;
and (2) as to which at least one qualified pension trust holds more than 25% by
value of the interests of such REIT or one or more qualified pension trusts
(each owning more than a 10% interest by value in the REIT) hold in the
aggregate more than 50% by value of the interests in such REIT.

We do not expect that we will be a "pension-held REIT." However,
notwithstanding our current belief that we will not be a "pension-held REIT," no
assurance can be given that we will not become a "pension-held REIT" in the
future.

If we were to become a "pension-held REIT" in the future and were to acquire
investments using debt, or otherwise were to engage in a transaction resulting
in UBTI, determined as though we were a qualified pension plan, any qualified
pension plan owning 10% or more of our shares, by value, would have a portion of
its dividend income from us taxed as UBTI. Even if we were not a "pension-held
REIT," certain amounts received by a stockholder that is a tax-exempt entity may
be treated as UBTI. See "Federal Income Tax Consequences."

WE ARE PROHIBITED FROM MAKING CERTAIN INVESTMENTS

We are prohibited from making certain types of investments as a result of
restrictions and potential conflicts involving Starwood Capital and its
affiliates. These restrictions may limit our flexibility in implementing our
investment policy. Specifically, without the amendment, termination or waiver of
provisions of certain non-competition agreements between Starwood Capital and
Starwood Hotels & Resorts Worldwide, Inc., we are prohibited from:

1. Making investments in loans collateralized by hotel assets where it is
anticipated that the underlying equity will be acquired by the debt
holder within one year from the acquisition of such debt.

2. Acquiring equity interests in hotels (other than acquisitions of
warrants, equity participations or similar rights incidental to a debt
investment or that are acquired as a result of the exercise of remedies
in respect of a loan in which we have an interest).

3. Selling or contributing to or acquiring any interests in Starwood
Hotels & Resorts Worldwide, Inc., including debt positions or equity
interests obtained by us under, pursuant to or by reason of the holding
of debt positions.

USE OF PROCEEDS

The Participating Securityholders shall receive all of the proceeds from
selling the Securities offered hereby. See "Participating Securityholders." The
Company will not receive any of the proceeds.

PRICE RANGE OF SHARES AND DISTRIBUTIONS

The shares of common stock are listed on the New York Stock Exchange under
the symbol "SFI." The following table sets forth, for the fiscal periods
indicated, the high and low sales prices per share for our common stock, which
is listed on the NYSE and for Class A Shares of SFT, which were listed on the
American Stock Exchange. The table also sets forth distributions to holders of
such shares during the same period.

PRICE
-------------------
PERIOD HIGH LOW DISTRIBUTIONS
------ -------- -------- -------------

1999

Fourth Quarter............................................ $27.625 $16.6875 $0.57
Third Quarter............................................. $ 76.00 $ 27.875 $0.44
Second Quarter............................................ $ 66.50 $ 31.625 $0.43
First Quarter............................................. $ 63.50 $ 42.50 $0.42

1998

Fourth Quarter............................................ $ 80.25 $ 45.25 $0.41
Third Quarter............................................. $ 59.25 $ 35.25 $0.38
Second Quarter............................................ $ 56.00 $ 26.25 $0.35
First Quarter............................................. $ 36.75 $ 27.375 $0.00

During the fourth quarter of 1999, we issued a dividend of 999,758 shares of
common stock to our stockholders on a pro rata basis. During the second quarter
of 1998, we declared a one-for-six reverse stock split. The high and low prices
set forth in the table have been adjusted to reflect the reverse stock split.

The warrants are not listed for trading and holders are not entitled to
receive distributions.

In order to remain qualified as a REIT, we must make annual distributions to
our stockholders of at least 95%, or 90% for taxable years beginning after
December 31, 2000, of our taxable income (which does not include net capital
gains). Thus, we intend to continue to pay regular quarterly dividends. Under
certain circumstances, we may be required to make distributions in excess of
cash available for distribution in order to meet such distribution requirements.
In such event, we would seek to borrow the amount of the deficiency or sell
assets to obtain the cash necessary to make the distributions necessary to
retain our qualification as a REIT for federal income tax purposes.
Distributions will be determined by our Board of Directors and will depend on a
number of factors, including the amount of cash flow from operations, the annual
distribution requirements under the REIT provisions of the Code and such other
factors as the Board of Directors deems relevant. Under the terms of the Leasing
Subsidiary's current credit facilities, the Leasing Subsidiary is generally
permitted to make cash distributions to us on an annual basis in an amount equal
to 85% of the cash flow from operations (as defined) in any rolling four
quarter-period.

PARTICIPATING SECURITYHOLDERS

This prospectus relates to the offer and sale for the account of the
Participating Securityholders from time to time of an aggregate of up to
66,295,152 shares of common stock and up to 6,000,000 warrants, as adjusted.
There is no assurance that the Participating Securityholders will sell any or
all of the shares of common stock, warrants or options.

Some of the Participating Securityholders are parties to agreements that
restrict their ability to sell shares of common stock even though those shares
of common stock have been registered with the SEC. In connection with the
acquisition of the Leasing Subsidiary, each of SOFI-IV SMT, Mezzanine and BLLC
executed lock-up agreements in which they agreed, subject to customary
exceptions (including pledges to lenders):

1. Not to transfer or encumber any shares of common stock during the first
six months after November 4, 1999 (the closing date of the acquisition),
other than 5% of such holdings that may be transferred in any manner, 20%
that may be transferred in connection with public offerings by us and 30%
that may be transferred in off-market transactions (all shares of common
stock transferred under any exemption also counting against the amount
transferable under the other two exemptions).

2. Not to transfer or encumber any shares of common stock during the second
six months after the closing of the acquisition, other than one third of
the shares of common stock such stockholder held as of the six-month
anniversary of the closing of the acquisition.

3. Not to transfer or encumber any of our shares of common stock during the
third six months after the closing of the acquisition, other than two
thirds of the shares of common stock such stockholder held as of the
six-month anniversary of the closing of the acquisition.

4. Not to liquidate, dissolve or make distributions of the shares of common
stock in respect of such stockholder's equity interest unless all persons
or entities receiving the shares of common stock execute deeds of
adherence to its lock-up agreement.

The following charts show, according to our records as of February 29, 2000,
the number of shares of common stock and warrants beneficially owned by the
Participating Securityholders and the number of shares of common stock and
warrants being offered hereby:

SHARES OF COMMON STOCK
OWNED PRIOR TO THE
OFFERING
-------------------------
NUMBER OF PERCENTAGE SHARES BEING
PARTICIPATING SECURITYHOLDER SHARES OF CLASS (1) OFFERED
---------------------------- ---------- ------------ ------------

SOFI-IV SMT Holdings, L.L.C. and its direct and
indirect partners............................... 41,854,934 47.9% 41,854,934
Starwood Mezzanine Investors, L.P. and its direct
and indirect partners........................... 10,962,886 12.6% 10,962,886
Lazard Freres Real Estate Fund II, L.P.(2)........ 3,031,519 3.4% 3,031,519
Lazard Freres Real Estate Offshore Fund II,
L.P.(2)......................................... 1,916,999 2.1% 1,916,999
Starwood Financial Advisors, L.L.C. and its
transferees (3)................................. 1,556,870 1.8% 1,556,870
Barry S. Sternlicht............................... 1,536,887 1.8% 1,536,887
Jay Sugarman (4).................................. 1,284,632 1.5% 1,284,632
LF Offshore Investment L.P. (2)................... 1,164,647 1.3% 1,164,647
New York Financial Advisors, L.L.C. and its
transferees (3)................................. 764,145 * 764,145
Jonathan Eilian (5)............................... 559,577 * 559,577
B Holdings, L.L.C. and its direct and indirect
partners........................................ 545,518 * 545,518
Merrick R. Kleeman (6)............................ 484,033 * 484,033
Spencer B. Haber (7).............................. 547,248 * 547,248
Jeffrey G. Dishner (8)............................ 388,179 * 388,179
W9/Reit Holdings Two, Inc. and its direct and
indirect partners and shareholders.............. 350,746 * 350,746
Madison F. Grose (9).............................. 276,362 * 276,362
Jerome C. Silvey (10)............................. 160,071 * 160,071
Roger M. Cozzi (11)............................... 122,292 * 122,292
James Babb (12)................................... 79,209 * 79,209
Ellis Rinaldi (13)................................ 78,012 * 78,012
Jeffrey Rosenthal (14)............................ 71,218 * 71,218
Starwood Capital Group, L.L.C. and its direct and
indirect partners............................... 8,000 * 8,000
* Less than one percent.

------------------------

(1) Based on 87,336,421 shares of common stock outstanding on February 29, 2000
(including shares that may have been repurchased).

(2) The shares owned by these securityholders are issuable upon the exercise of
the warrants at an original exercise price of $35.00 per share, subject to
anti-dilution adjustments. The warrants expire on December 15, 2005.

(3) The shares owned by this securityholder and its transferees are issuable
upon the exercise of options at an original exercise price of $15.00 per
share, subject to antidilution adjustments. The options expire on March 13,
2008.

(4) Includes shares issuable upon the exercise of options to purchase 509,430
shares of common stock.

(5) Includes shares issuable upon the exercise of options to purchase 127,357
shares of common stock.

(6) Includes shares issuable upon the exercise of options to purchase 127,357
shares of common stock.

(7) Includes shares issuable upon the exercise of options to purchase 254,715
shares of common stock.

(8) Includes shares issuable upon the exercise of options to purchase 127,357
shares of common stock.

(9) Includes shares issuable upon the exercise of options to purchase 84,581
shares of common stock.

(10) Includes shares issuable upon the exercise of options to purchase 50,943
shares of common stock.

(11) Includes shares issuable upon the exercise of options to purchase 42,452
shares of common stock.

(12) Includes shares issuable upon the exercise of options to purchase 41,943
shares of common stock.

(13) Includes shares issuable upon the exercise of options to purchase 40,754
shares of common stock.

(14) Includes shares issuable upon the exercise of options to purchase 41,943
shares of common stock.

WARRANTS OWNED
PRIOR TO THE OFFERING
-----------------------
NUMBER OF PERCENTAGE WARRANTS BEING
PARTICIPATING SECURITYHOLDER WARRANTS OF CLASS OFFERED
---------------------------- ---------- ---------- --------------

Lazard Freres Real Estate Fund II, L.P............ 2,975,400 49.6% 2,975,400
Lazard Freres Real Estate Offshore Fund II,
L.P............................................. 1,881,512 31.4% 1,881,512
LF Offshore Investment L.P........................ 1,143,088 19.1% 1,143,088

Because each of the Participating Securityholders may offer all or some of
the securities pursuant to the offering made hereby, no estimate can be given as
to the number of the securities that will be held by the Participating
Securityholders after completion of the offering.

We have prepared this prospectus to meet our obligations under certain
agreements with the Participating Securityholders.

On December 15, 1998, SFT sold 4,400,000 Series A Preferred Shares of
beneficial interest and warrants to purchase 6,000,000 Class A Shares of
beneficial interest pursuant to a Securities Purchase Agreement, dated as of
December 15, 1998, by and among the Company, Lazard Freres Real Estate Fund II,
L.P., a Delaware limited partnership ("Fund II"), Lazard Freres Real Estate
Offshore Fund II, L.P., a Delaware limited partnership (the "Offshore Fund"),
and LF Mortgage REIT, a Maryland real estate investment trust (the "Lazard
Transaction"). Effective as of March 30, 1999, the Offshore Fund assigned
warrants to purchase 1,143,088 Class A Shares of beneficial interest to LF
Offshore Investment ("LF Offshore", and together with Fund II and the Offshore
Fund, the "Lazard Investors"). The warrants, which were assumed by the Company
in its merger with SFT, and are now exercisable for a total of 6,113,165 shares
of common stock at an aggregate price of $210 million, became exercisable on
December 15, 1999 subject to anti-dilution adjustments, and expire on
December 15, 2005.

Pursuant to an Investor Rights Agreement dated December 15, 1998 with the
Lazard Investors and other parties named therein (the "Lazard Rights
Agreement"), we are required to use our best efforts to file a registration
statement covering the warrants and the shares of common stock issuable upon
exercise of the warrants.

On May 29, 1998, TriNet entered into the Amended and Restated Limited
Liability Company Operating Agreement of W/9 TriNet Poydras, LLC with W9/Reit
Holdings Two, Inc., Stone Street W9/TriNet Corp., Stone Street Real Estate Fund
1998, L.P. and Bridge Street Real Estate Fund 1998, L.P. (the "Whitehall
Parties") in connection with a venture that owns real property in New Orleans,
Louisiana. Pursuant to the agreement, the Whitehall Parties were given the
option to exchange their interests in the venture for common stock of TriNet
upon any change of control of TriNet. This option became exercisable upon our
merger with TriNet and the Whitehall Parties delivered notice of their desire to
exchange on November 12, 1999. We issued 350,746 shares of common stock to the
Whitehall Parties pursuant to the notice.

Pursuant to a Registration Rights Agreement, dated March 16, 1998 between
TriNet and the Whitehall Parties (the "Whitehall Rights Agreement"), which we
assumed in the TriNet merger, we are required to file a registration statement
on Form S-3 with respect to the shares of common stock held by the Whitehall
Parties.

The shares of common stock held by the Starwood Affiliates were acquired in
a contribution transaction in March 1998 (the "Recapitalization"). The Starwood
Affiliates are parties to a

Registration Rights Agreement, dated March 13, 1998 (the "Affiliate Rights
Agreement"), pursuant to which we are required to register the shares of common
stock for resale by the Starwood Affiliates and their limited partners on a
registration statement maintained with the SEC until such time as the Starwood
Affiliates and their limited partners no longer own any shares of common stock.

The shares of common stock held by the directors and officers and Starwood
Capital were acquired: (1) through the Advisor Transaction; (2) through open
market purchases; (3) through option grants; and (4) from distributions of the
Starwood Affiliates and other affiliates. We are required to register the shares
of common stock acquired pursuant to the Advisor Transaction pursuant to an
Agreement and Plan of Merger and Interest Contribution Agreement, dated as of
June 15, 1999 (the "Advisor Agreement").

In addition, in each of the Lazard Rights Agreement, the Whitehall Rights
Agreement, the Affiliate Rights Agreement and the Advisor Agreement, we have
agreed to indemnify the Participating Securityholders and any broker or dealer
to or through whom any of the securities are sold against certain civil
liabilities, including liabilities under the Securities Act, or to contribute to
payments a Selling Securityholder may be required to make in respect thereof.

CERTAIN RELATIONSHIPS BETWEEN THE COMPANY AND
THE PARTICIPATING SECURITYHOLDERS

We have not had any material relationship with any of the Participating
Securityholders since January 1, 1997, other than as set forth in this Section
or under "Participating Securityholders."

Messrs. Sternlicht, Sugarman, Haber, Dishner, Eilian, Grose, Kleeman, each
of whom is a director and/or executive officer of the Company, received shares
of common stock in the Advisor Transaction in exchange for their interests in
our external advisor.

Each of Messrs. Sternlicht, Sugarman, Dishner, Eilian, Grose and Kleeman has
a direct or indirect economic interest in each of the Starwood Affiliates.

On December 15, 1998, we purchased $248.5 million in mortgage and mezzanine
loans from affiliates of the Lazard Investors. Pursuant to the Lazard Rights
Agreement, the Lazard Investors are entitled to appoint one director to our
Board of Directors as long as the Lazard Investors and certain of their
affiliates are not "Competitors" (as defined in the Lazard Rights Agreement).

On June 18, 1998, SFT granted options to purchase 2,493,842 Class A Shares
of beneficial interest to Starwood Financial Advisors, L.L.C. (the "Advisor"),
which we assumed in the merger with SFT. Pursuant to the Advisor Transaction,
the Advisor became our subsidiary. Because of certain distributions by the
Advisor and New York Financial Advisors, L.L.C. ("NYFA") and anti-dilution
adjustments resulting from the share dividend issued in November 1999, the
Advisor and its grantees currently possess options to purchase 1,689,723 shares
of common stock and NYFA and its grantees possess options to purchase 764,145
shares of common stock.

Mezzanine acquired 83,333 Class A Shares of beneficial interest of SFT for
$6.00 a share on January 22, 1997 upon exercise of its rights under a warrant
SFT had previously granted. In addition, SFT paid Mezzanine $25.5 million in
cash and issued 25,857,999 Class A Shares of beneficial interest of SFT at a
price of $15.00 per share in exchange for certain assets and issued Mezzanine
761,490 Class A Shares of beneficial interest of SFT in exchange for 4,568,944
units in APMT Limited Partnership on March 18, 1998.

On March 18, 1998, Starwood Opportunity Fund IV, L.P., the sole member of
SOFI-IV SMT was paid $324.3 million in cash and SOFI-IV SMT was issued
41,179,131 Class A Shares of beneficial interest of SFT at a price of $15.00 per
share in exchange for certain assets.

PLAN OF DISTRIBUTION

We are registering the securities on behalf of the Participating
Securityholders and we will bear all costs, expenses and fees in connection with
the registration of the securities. As used herein, "Participating
Securityholder" includes donees and pledgees selling securities received from a
named Participating Securityholder after the date of this prospectus. Brokerage
commissions and similar selling expenses, if any, attributable to the sale of
securities will be borne by the Participating Securityholders. Except as may be
set forth in any prospectus supplement, the Participating Securityholders have
advised us that they have not entered into any agreements, understandings or
arrangements with any underwriters or broker-dealers regarding the sale of their
securities, nor is there an underwriter or coordinating broker acting in
connection with the proposed sale of securities by the Participating
Securityholders.

The Participating Securityholders may effect such transactions by selling
securities directly to purchasers or to or through broker-dealers, which may act
as agents or principals. Such broker-dealers may receive compensation in the
form of discounts, concessions, or commissions from the Participating
Securityholders and/or the purchasers of securities for whom such broker-dealers
may act as agents or to whom they sell as principals, or both (which
compensation as to a particular broker-dealer might be in excess of customary
commissions).

The Participating Securityholders and any broker-dealers that act in
connection with the sale of securities might be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act, and any commissions
received by such broker-dealers and any profit on the resale of the securities
sold by them while acting as principals might be deemed to be underwriting
discounts or commissions under the Securities Act. We have agreed to indemnify
each Participating Securityholder against certain liabilities, including
liabilities arising under the Securities Act. The Participating Securityholders
may agree to indemnify any agent, dealer or broker-dealer that participates in
transactions involving sales of the securities against certain liabilities,
including liabilities arising under the Securities Act. Brokers' commissions and
dealers' discounts, taxes and other selling expenses to be borne by the
Participating Securityholders are not expected to exceed normal selling
expenses.

Because Participating Securityholders may be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act, the Participating
Securityholders will be subject to the prospectus delivery requirements of the
Securities Act, which may include delivery through the facilities of the NYSE
pursuant to Rule 153 under the Securities Act. We have informed the
Participating Securityholders that the anti-manipulative provisions of
Regulation M promulgated under the Exchange Act may apply to their sales in the
market. The registration of the securities under the Securities Act shall not be
deemed an admission by the Participating Securityholders or the Company that the
Participating Securityholders are underwriters for purposes of the Securities
Act of any securities offered pursuant to this Prospectus.

Upon the Company being notified by a Participating Securityholder that any
material arrangement has been entered into with a broker-dealer for the sale of
securities through a block trade, special offering, exchange distribution or
secondary distribution or a purchase by a broker or dealer, a supplement to this
prospectus will be filed, if required, pursuant to Rule 424(b) under the Act,
disclosing: (1) the name of each such participating securityholder and of the
participating broker-dealer(s); (2) the number of securities involved; (3) the
price at which such securities were sold; (4) the commissions paid or discounts
or concessions allowed to such broker-dealer(s), where applicable; (5) that such
broker-dealer(s) did not conduct any investigation to verify the information set
out or incorporated by reference in this prospectus; and (6) other facts
material to the transaction. In addition, upon the Company being notified by a
Participating Securityholder that a donee or pledgee intends to sell more than
500 shares of common stock or warrants, a supplement to this prospectus will be
filed.

The securities may be sold or distributed in a variety of ways, including:

1. Block trades (which may involve crosses) in which the broker or dealer
so engaged will attempt to sell the securities as agent but may position
and resell a portion of the block as principal to facilitate the
transaction.

2. Purchases by a broker or dealer as principal and resale by such broker
or dealer for its account pursuant to this Prospectus.

3. Exchange distributions and/or secondary distributions in accordance with
the rules of the NYSE.

4. Ordinary brokerage transactions and transactions in which the broker
solicits purchasers.

5. Sales in the over-the-counter market.

6. Through short sales of securities.

7. Pro rata distributions in the ordinary course of business or as part of
the liquidation and winding up of the affairs of the Participating
Securityholders.

8. Privately negotiated transactions.

The Participating Securityholders may from time to time deliver all or a
portion of the securities to cover a short sale or sales or upon the exercise,
settlement or closing of a call equivalent position or a put equivalent
position.

Under the Exchange Act and the regulations thereunder, any person engaged in
a distribution of the securities offered by this Prospectus may not
simultaneously engage in market making activities with respect to the securities
during any applicable "cooling off" periods prior to the commencement of such
distribution. In addition, and without limiting the foregoing, the Participating
Securityholders will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder including, without limitation, Rules 101,
102, 103 and 104, which provisions may limit the timing of purchases and sales
of securities by the Participating Securityholders.

Securities that qualify for sale pursuant to Rule 144 may be sold under
Rule 144 rather than pursuant to this prospectus. In addition, a Participating
Securityholder may devise, gift or otherwise transfer the securities by means
not described herein, in which event such transfer will not be pursuant to this
prospectus.

DESCRIPTION OF SECURITIES TO BE REGISTERED

COMMON STOCK

We have 200,000,000 authorized shares of common stock, 86,485,250 of which
(including shares that may have been repurchased) were issued and outstanding on
July 31, 2001. All shares of our common stock currently outstanding are validly
issued, fully paid and non-assessable. All shares of common stock issuable upon
the exercise of warrants and options, when issued and paid for upon such
exercise, will be validly issued, fully paid and non-assessable.

VOTING RIGHTS

Each share of common stock entitles the holder thereof to one vote, either
in person or by proxy, at meetings of the stockholders. Our board of directors
consists of two classes, each of which serves for a term of two years. At each
annual meeting of the stockholders the directors in only one class will be
elected. The holders are not permitted to vote their shares of common stock
cumulatively. Accordingly, the holders of more than 50% of the outstanding
shares of common stock can elect all of the directors standing for election at a
stockholders' meeting.

DIVIDEND POLICY

All shares of our common stock are entitled to participate ratably in
dividends when and as declared by our board of directors out of the funds
legally available therefor. Any such dividends may be paid in cash, additional
shares of our common stock or shares of another class of our stock. We have paid
dividends to our stockholders in each of the last seven quarters. See "Price
Range of Shares and Distributions."

MISCELLANEOUS RIGHTS AND PROVISIONS

Holders of our common stock have no preemptive or other subscription rights,
conversion rights, redemption or sinking fund provisions. In the event of the
liquidation or dissolution, whether voluntary or involuntary, each share of
common stock is entitled to share ratably in any assets available for
distribution to holders of our equity after satisfaction of all liabilities.

DESCRIPTION OF WARRANTS

The following is a brief summary of certain provisions of the warrants. This
summary is not complete and is qualified in all respects by reference to the
warrants. Copies of the warrants have been filed as exhibits to the registration
statement. We have 6,000,000 warrants issued and outstanding. The warrants
expire December 15, 2005 and are not redeemable, in whole or in part.

EXERCISE PRICE AND TERMS

The warrants entitle the registered holders thereof to purchase an aggregate
of 6,113,165 shares of common stock at an aggregate exercise price of
$210 million subject to adjustment in accordance with the anti-dilution and
other provisions referred to below. The holder of any warrant may exercise such
warrant by surrendering the certificate representing the warrant to our
Secretary, with the subscription form on the warrant properly completed and
executed, together with payment of the exercise price. The warrants may be
exercised at any time in whole or in part at the exercise price then in effect
until expiration of the warrants. The warrants expire December 15, 2005. No
fractional shares of common stock will be issued upon the exercise of the
warrants. The exercise price of the warrants bears no relationship to any
objective criteria of future value. Accordingly, such exercise price should in
no event be regarded as an indication of any future trading price.

ADJUSTMENTS

The exercise price and the number of shares of common stock purchasable upon
the exercise of the warrants are subject to adjustment upon the occurrence of
certain events, including:

1. Stock dividends.

2. Stock splits.

3. Combinations or reclassifications of the common stock.

4. Mergers or reorganizations.

Pursuant to a one million share dividend issued to our stockholders on
November 3, 1999, the warrants have been adjusted and are now exercisable for
6,113,165 shares of common stock. There have been no other events requiring an
adjustment to the warrants.

TRANSFER, EXCHANGE AND EXERCISE

The warrants are in registered form and may be presented to us for transfer,
exchange or exercise at any time on or prior to their expiration date, at which
time the warrants become wholly void and of

no value. If a market for the warrants develops, the holder may sell the
warrants instead of exercising them. There can be no assurance, however, that a
market for the warrants will develop or continue.

WARRANT HOLDER NOT A STOCKHOLDER

The warrants do not confer upon holders any voting, dividend or other rights
as stockholders.

FEDERAL INCOME TAX CONSIDERATIONS

We intend to operate in a manner that permits us to satisfy the requirements
for taxation as a real estate investment trust under the applicable provisions
of the Internal Revenue Code. No assurance can be given, however, that such
requirements will be met. The following is a summary of the federal income tax
consequences for the Company and our stockholders with respect to our treatment
as a real estate investment trust. The information set forth below, to the
extent that it constitutes matters of law or legal conclusions, is based on the
opinion of Mayer, Brown & Platt, our counsel.

Based upon the matters described below, including an Internal Revenue
Service closing agreement dated March 10, 1998, discussed below, in the opinion
of Mayer, Brown & Platt, our counsel, our existing legal organization and our
actual and proposed method of operation described in this Prospectus, as set
forth in our organizational documents and as represented by us to Mayer,
Brown & Platt, enable us to satisfy the requirements for qualification as a real
estate investment trust under the Internal Revenue Code in the ordinary course
of our operations. This opinion of our counsel is based on certain assumptions
relating to our organization and our operation, including that we will be
operated in the manner described in our applicable organizational documents and
in this Prospectus and that all terms and provisions of such documents will be
complied with by all parties thereto. Our counsel's opinion is also based upon,
and to that extent limited, the opinion of another law firm delivered to us last
year. That law firm's opinion stated that our proposed method of operation from
and after the earlier of the date of the merger with SFT and the TriNet merger,
taking into account the effects of the merger with SFT and the TriNet merger,
will enable us to continue to meet the requirements for qualification and
taxation as a real estate investment trust under the Internal Revenue Code. We
note that such law firm's opinion relies on, among other items, the opinion of
another law firm regarding the qualification and taxation of TriNet as a REIT
through the effective time of the TriNet merger. We have received the consent of
the law firm opining on the Company's ability, taking into account the effects
of the merger with SFT and the TriNet merger, to continue to meet the
requirements for qualification and taxation as a REIT under the Internal Revenue
Code, and have assumed that the opinion of the other law firm regarding the
qualification and taxation of TriNet as a REIT through the effective time of the
TriNet merger remains in effect as of the date such opinion was rendered. Our
counsel's opinion is also conditioned upon certain representations made by us as
to certain factual matters relating to our organization and intended or expected
manner of operation. In addition, our counsel's opinion is based on the law
existing and in effect on the date hereof and our qualification and taxation as
a real estate investment trust will depend on compliance with such law existing
and in effect on the date hereof and as the same may be hereafter amended. Our
qualification and taxation as a real estate investment trust will further depend
upon our ability to meet, on a continuing basis through actual operating
results, asset composition, distribution levels diversity of share ownership and
the various qualification tests imposed under the Internal Revenue Code
discussed below. Counsel will not review compliance with these tests on a
continuing basis, and thus, no assurance can be given that we will satisfy such
tests on a continuing basis.

In brief, a corporation that invests primarily in real estate interests,
including interests in mortgages on real property, and that otherwise would be
treated for federal income tax purposes as a corporation can, if it meets the
real estate investment trust provisions of the Internal Revenue Code described
below, claim a tax deduction for the dividends it pays to its stockholders.
Consequently, such a corporation is generally not taxed on its "real estate
investment trust taxable income" to the extent it

is currently distributed to stockholders, thereby substantially eliminating the
"double taxation," at both the corporate and stockholder levels, that otherwise
generally results from an investment in a corporation. However, as discussed in
greater detail below, such an entity remains subject to tax in certain
circumstances even if it qualifies as a real estate investment trust. Further,
if the entity were to fail to qualify as a real estate investment trust in any
year, it would not be able to deduct any portion of the dividends paid to its
stockholders and would be subject to full federal income taxation on its
earnings, thereby significantly reducing or eliminating the cash available for
distribution to its stockholders. See "--Taxation of the Company--General" and
"--Taxation of the Company--Failure to Qualify."

Our Board of Directors believes that we have operated in a manner that
permitted us to elect, and that we timely and effectively elected, real estate
investment trust status for our taxable year ending December 31, 1998, and in
each taxable year thereafter. As noted, there can be no assurance, however, that
this belief or expectation will be fulfilled, since qualification as a real
estate investment trust depends on our continuing ability to satisfy the
numerous asset, income and distribution tests, as described below, which in turn
will be dependent in part on our operating results.

The following summary, based on existing law, is not exhaustive of all
possible tax considerations and does not give a detailed discussion of any
state, local or foreign tax considerations, nor does it discuss all of the
aspects of federal income taxation that may be relevant to a stockholder in
light of his or her particular circumstances or to certain types of
stockholders, including insurance companies, financial institutions and
broker-dealers, foreign corporations and persons who are not the citizens or
residents of the United States, who are subject to special treatment under the
federal income taxation laws.

TAXATION OF THE COMPANY

CLOSING AGREEMENT

On March 10, 1998, we received an Internal Revenue Service closing
agreement, a written agreement from the Internal Revenue Service confirming its
agreement on a material issue, under which we were eligible to make an election
under Section 856(c)(1) of the Internal Revenue Code to be taxed as a real
estate investment trust for our taxable year ending December 31, 1998. After
determining that we may have violated certain real estate investment trust asset
requirements in the years prior to 1998, we sought the March 10, 1998 Internal
Revenue Service Closing Agreement by voluntarily disclosing to the Commissioner
of Internal Revenue that we may have violated certain real estate investment
trust asset requirements set forth in Section 856(c) of the Internal Revenue
Code for our taxable years 1993 through 1996.

While it is a condition of real estate investment trust status that prior
non-REIT corporate earnings and profits must be eliminated, the Board of
Directors believes that we did not generate significant earnings and profits in
taxable years during which we may not have qualified as a real estate investment
trust. In addition, if we had any net unrealized built-in gain with respect to
any asset held by us on January 1, 1998, and we were to recognize gain on the
disposition of such asset during the ensuing 10-year period, then the built-in
gain on January 1, 1998 will be subject to tax at the corporate tax rate.

GENERAL

In any year in which we qualify as a real estate investment trust, in
general we will not be subject to federal income tax on that portion of our real
estate investment trust taxable income or capital gain which is distributed to
stockholders. We may, however, be subject to tax at normal corporate rates on
any taxable income or capital gain that is not so distributed. To the extent
that we elect to retain and pay income tax on our net long-term capital gain,
stockholders are required to include their

proportionate share of our undistributed long-term capital gain in income but
will receive a credit for their share of any pro-rata taxes paid by us on such
gain.

Notwithstanding our qualification as a real estate investment trust, we may
also be subject to taxation in certain other circumstances. If we fail to
satisfy either the 75% or the 95% gross income test, each as discussed below,
and nonetheless maintain our qualification as a real estate investment trust
because certain other requirements are met, we will be subject to a 100% tax on
the greater of the amount by which we fail either the 75% or the 95% test,
multiplied by a fraction intended to reflect our profitability. We will also be
subject to a tax of 100% on net income from any "prohibited transaction," as
described below. If we have: (1) net income from the sale or other disposition
of "foreclosure property" which is held primarily for sale to customers in the
ordinary course of business; or (2) other non-qualifying income from foreclosure
property, we will also be subject to tax on such income from foreclosure
property at the highest corporate tax rate. In addition, if we fail to
distribute during each calendar year at least the sum of:

(1) 85% of our real estate investment trust ordinary income for such year;

(2) 95% of our real estate investment trust capital gain net income for such
year; and

(3) any undistributed taxable income from prior years,

we will be subject to a 4% excise tax on the excess of such sum over the amounts
actually distributed. To the extent that we elect to retain and pay income tax
on our long-term capital gain, such retained amounts will be treated as having
been distributed for purposes of the 4% excise tax. We also may be subject to
the corporate alternative minimum tax, as well as to tax in certain situations
not presently contemplated. We use the calendar year both for federal income tax
purposes and for financial reporting purposes.

We may also recognize other taxable income, as described below, in excess of
cash flow from REMIC residual interests or our retained interests from non-REMIC
securitization transactions. In addition, we may have income without the receipt
of cash to the extent of the market discount attributable to debt securities
held by a REMIC in which we hold a residual interest. We will be subject to tax
at the highest marginal corporate rate on the portion of any Excess Inclusion
income derived by us from a REMIC residual interest that is allocable to our
stock held by "Disqualified Organizations," as defined below. See "--Taxation of
the Stockholders--Taxation of Tax-Exempt Stockholders" below. Any such tax on
the portion of any Excess Inclusion allocable to our stock held by Disqualified
Organizations will reduce the cash available for distribution to our
stockholders.

In order to qualify as a real estate investment trust, we must meet, among
others, the following requirements:

SHARE OWNERSHIP TESTS

Our shares must be held by a minimum of 100 persons for at least 335 days in
each taxable year, or a proportional number of days in any short taxable year.
In addition, at all times during the second half of each taxable year, no more
than 50% in value of our outstanding shares may be owned, directly or indirectly
and including the effects of certain constructive ownership rules, by five or
fewer individuals, which for this purpose includes certain tax-exempt entities.
However, for purposes of this test, any shares held by a qualified domestic
pension or other retirement trust will be treated as held directly by its
beneficiaries in proportion to their actuarial interest in such trust rather
than by such trust. These share ownership requirements need not be met until our
second taxable year for which a real estate investment trust election is made.
As we have represented to our counsel, we have satisfied and will continue to
satisfy these requirements.

In order to comply with the foregoing share ownership tests, we have placed
certain restrictions on the transfer of our stock to prevent additional
concentration of stock ownership. Moreover, to evidence compliance with these
requirements, Treasury regulations require that we maintain records which
disclose the actual ownership of our outstanding stock. In fulfilling our
obligations to maintain records, we must and will demand written statements each
year from the record holders of designated percentages of our stock disclosing
the actual owners of such stock, as prescribed by Treasury regulations. A list
of those persons failing or refusing to comply with such demand must be
maintained as part of our records. A stockholder failing or refusing to comply
with our written demand must submit with his tax return a similar statement
disclosing the actual ownership of our stock and certain other information. In
addition, our Amended and Restated Charter provides restrictions regarding the
ownership and transfer of our stock that are intended to assist us in continuing
to satisfy the share ownership requirements.

ASSET TESTS

At the close of each quarter of our taxable year, we must satisfy two tests
relating to the nature of our assets, with "assets" being determined in
accordance with generally accepted accounting principles. First, at least 75% of
the value of our total assets must be represented by interests in real property,
interests in mortgages on real property, shares in other real estate investment
trusts, cash, cash items, government securities, qualified temporary investments
and regular or residual interests in a REMIC, except that, if less than 95% of
the assets of a REMIC are "real estate assets" as determined under the Internal
Revenue Code, we shall be treated as holding directly our proportionate share of
the assets of the REMIC. Second, although the remaining 25% of our assets
generally may be invested without restriction, securities in this class may not
exceed: (1) in the case of securities of any one non-government issuer, 5% of
the value of our total assets; and (2) 10% of the outstanding voting securities
of any one such issuer. Based on existing facts, the Board of Directors intends
that we will meet these tests at the applicable times in the future. If,
however, we were unable to satisfy the foregoing asset tests at the applicable
time, we would be required to take preventive steps by disposing of certain
assets or otherwise risk a loss of real estate investment trust status.

Currently, we own approximately 96% of the non-voting shares of TriNet
Management Operating Company, Inc., 100% of the non-voting shares of Starwood
Operating, Inc. and Starwood Financial Preferred, Inc., and not more than 10% of
the voting shares of these corporations. Therefore, we believe that we do not
own more than 10% of the voting securities of these corporations and that any of
these corporations' shares do not represent more that 5% of the total value of
our gross assets. However, there can be no assurance that the Internal Revenue
Service will not contend that the value of the shares of any of these
corporations exceeds the 5% limitations. In rendering its opinion, our counsel
will rely on our conclusions with regard to the value of TriNet Management
Operating Company, Inc., Starwood Operating, Inc. and Starwood Financial
Preferred, Inc. In addition, for taxable years beginning after December 31,
2000, unless we and any of these corporations jointly elect to treat each of
these corporations as taxable REIT subsidiaries, such corporations' future
activities and growth may be limited. "--Possible Legislative or Other Actions
Affecting Tax Consequences."

GROSS INCOME TESTS

There are three separate percentage tests relating to the sources of our
gross income which must have been satisfied for our 1997 taxable year and two
separate percentage tests thereafter. For taxable years beginning on January 1,
1998, the 30% gross income test has been repealed. For the purposes of these
tests, where we invest in a partnership, we will be treated as receiving our
share of the income

and loss of the partnership, and the gross income of the partnership will retain
the same character in our hands as it has in the hands of the partnership. The
two tests are separately described below:

The 75% Test. At least 75% of our gross income for the taxable year must be
"qualifying income." Qualifying income generally includes:

1. Rents from real property, except as modified below.

2. Interest on obligations secured by mortgages on, or interests in, real
property including amounts included in gross income with respect to a
regular or residual interest in a REMIC, except that, if less than 95% of
the assets of a REMIC are "real estate assets" as determined under the
Internal Revenue Code, we will be treated as holding directly our
proportionate share of assets of such REMIC.

3. Gains from the sale or other disposition of interests in real property
and real estate mortgages, other than gain from property held primarily
for sale to customers in the ordinary course of our trade or business
("dealer property").

4. Dividends or other distributions on shares in other real estate
investment trusts, as well as gain from the sale of such shares.

5. Abatements and refunds of real property taxes.

6. Income from the operation, and gain from the sale, of property acquired
at or in lieu of a foreclosure of the mortgage secured by such property
("foreclosure property").

7. Commitment fees received for agreeing to make loans secured by mortgages
on real property or to purchase or lease real property.

8. Certain qualified temporary investment income attributable to the
investment of new capital received by us in exchange for our stock or
specified debt securities during the one-year period following the
receipt of such capital.

Rents received from a tenant will not, however, qualify as rents from real
property in satisfying the 75% gross income test or the 95% gross income test
described below if we own, directly or constructively, 10% or more of the
tenant. If the portion of any rent attributable to personal property leased in
connection with a lease of real property is greater than 15% of the total rent
received under the lease, the portion of the rent will not qualify as rents from
real property. Moreover, an amount received or accrued will not qualify as rents
from real property or as interest income, as discussed below, for the 75% and
95% gross income tests, if based, in whole or in part, on the income or profits
of any person. However, an amount received or accrued generally will not be
excluded from "rents from real property" solely by reason of being based on a
fixed percentage, or percentages, of gross receipts or gross sales. Finally, for
rents received to qualify as rents from real property for the 75% and 95% gross
income tests, we generally must not operate or manage the property, or furnish
or render services to customers other than through an "independent contractor"
from whom we derive no income, except that the "independent contractor"
requirement does not apply to the extent that the services provided by us are
"usually or customarily rendered" in connection with the rental of space for
occupancy only, or are not otherwise considered "rendered to the occupant for
his convenience," or the amounts received with respect to the services do not
exceed 1% of all amounts received or accrued, directly or indirectly, by us
during the taxable year with respect to the property.

We monitor our operations in the context of these standards so as to satisfy
the 75% and 95% gross income tests and have represented to our counsel that we
have and will satisfy these tests for the applicable periods.

The 95% Test. In addition to deriving 75% of our gross income from the
sources listed above, at least 95% of our gross income for the taxable year must
be derived from the above described qualifying

income, or from dividends, interests, or gains from the sale or other
disposition of stock or other securities that are not dealer property. Dividends
and interest on any obligations not collateralized by an interest in real
property, including a mortgage, are included for purposes of the 95% gross
income test, but not for the purposes of the 75% gross income test. In addition,
payments to a real estate investment trust under an interest rate swap, cap
agreement, option, futures contract, forward rate agreement or any similar
financial instrument entered into by the real estate investment trust to hedge
its indebtedness incurred or to be incurred, and any gain from the sale or other
disposition of these instruments, are treated as qualifying income for purposes
of the 95% gross income test, but not for purposes of the 75% gross income test.
We closely monitor our non-qualifying income and anticipate that non-qualifying
income from other activities will not result in our failing to satisfy either
the 75% or 95% gross income test.

For purposes of determining whether we comply with the 75% and the 95% gross
income tests, gross income does not include income from prohibited transactions.
A "prohibited transaction" is a sale of dealer property, excluding foreclosure
property; however, it does not include a sale of our investments if such
investments are held by us for at least four years and certain other
requirements, relating to the number of investments sold in a year, their tax
bases, and the cost of improvements made thereto, are satisfied. See "--Taxation
of the Company--General."

In order to comply with the 75% and 95% gross income tests described above,
the Board of Directors will monitor the investments made by us with the intent
of maintaining our status as a real estate investment trust. As a result, the
Board of Directors may limit and/or closely scrutinize certain types of
investments made by us, including, among others, loans that provide for interest
amounts that are dependent in whole or in part on the income or profits of a
borrower, loans that contain interest payment provisions relating to
appreciation of the underlying property, loans that are secured by assets other
than mortgages on real property or interests in real property, and certain
hedging transactions.

Under the real estate investment trust rules, any amount received or
accrued, directly or indirectly, with respect to any obligation is generally not
includible as qualifying "interest" for purposes of the 75% and 95% gross income
tests if the determination of the amount depends in whole or in part on the
income or profits of any person, whether or not derived from property secured by
the obligation. However, an amount received or accrued generally will not fail
to qualify as "interest" solely by reason of being based on a fixed percentage
or percentages of gross receipts or gross sales. In addition, an amount received
or accrued generally not will fail to qualify as "interest" solely by reason of
being based on the income or profits of a debtor if the debtor derives
substantially all of its gross income from the related property through the
leasing of substantially all of its interests in the property, to the extent the
amounts received from the debtor are attributable to amounts that would be
characterized as qualified rents from real property under the real estate
investment trust rules. Furthermore, to the extent interest under a loan is
based on the cash proceeds realized upon the sale of the property securing the
loan and constitutes a "shared appreciation provision," as described below,
income attributable to such participation feature will be treated as gain from
sale of the secured property, which generally is treated as qualifying income
for purposes of the 75% and 95% gross income tests, except as noted below.

In addition, at the time of loan acquisition or origination it might be
determined in certain cases that our investment in a loan may exceed at the time
of loan acquisition or origination the value of the real property securing the
loan or may not be secured by a mortgage on real property, e.g., a loan secured
by a partnership interest, which would result in part or all of the interest
income from such loan constituting qualifying income for purposes of the 95%
gross income test, but not for purposes of the 75% gross income test. It is also
possible that, in some instances, the interest income from a loan may be based
in part on the borrower's profits or net income, which generally will disqualify
the income from the loan for purposes of both the 75% and 95% gross income
tests, except as noted above.

Certain of our investments may contain the right to receive interest based
on appreciation of the underlying real property. In addition, we may acquire or
originate loans in the future that have similar rights. Under the Internal
Revenue Code, a shared appreciation provision in a mortgage is any provision
which is in connection with an obligation held by us and secured by an interest
in real property (the "secured property"), and which entitles us to receive a
specified portion of any gain realized on the sale or exchange of such property,
or of any gain which would be realized if the property were deemed sold on a
specified date.

For purposes of determining whether we meet the 75% income test and 95%
income text and whether we derive any income from prohibited transactions, any
income derived from a shared appreciation mortgage shall be treated as gain
recognized on the sale of the secured property. For purposes of this rule:
(1) we are treated as holding the secured property for the period during which
we held the shared appreciation provision or, if shorter, for the period during
which the secured property was held by the person holding such property; and
(2) the secured property is treated as "dealer property" as defined in
Section 1221(1) of the Internal Revenue Code, if it would be treated as "dealer
property" in the hands of the person holding the secured property, or it would
be treated as "dealer property" if held by us.

For our taxable years after 1997, if the secured property is treated as
dealer property, gain from the sale of such property could give rise to the 100%
tax on gain from prohibited transactions. Since substantially all of the loans
previously contributed to us were acquired by purchase or contribution rather
than originated by us, there is no built-in safeguard in the loan documents to
protect us from the risk that the secured property may be treated as "dealer
property." Similarly, in the case of loans that are acquired in the future
rather than originated by us, the same issue arises. However, we have and intend
to include built-in safeguards in the loans we originate to minimize any risk
that any secured property will be treated as "dealer property."

We may acquire investments that do not generate qualifying income for
purposes of the 75% and 95% gross income tests because such assets, for example,
generate income dependent in whole or in part on the income or profits of the
applicable borrower. However, based on the Board of Directors' review of all of
our investments, the Board of Directors believes that, for purposes of both the
75% and 95% gross income tests, our investments will permit us to satisfy the
requirements for qualification as a real estate investment trust.

We intend to enter into various hedging transactions with respect to one or
more of our assets or liabilities. While such hedging transactions could take a
variety of forms, only those payments to a real estate investment trust under
the interest rate swap, cap agreement, option, futures contract, forward rate
agreement or any similar financial instrument entered into by the real estate
investment trust to hedge our indebtedness incurred or to be incurred, and any
gain from the sale or other disposition of these instruments are treated as
qualifying income for purposes of the 95% gross income test, but not for
purposes of the 75% gross income test. The provisions of the Internal Revenue
Code regarding our qualification as a real estate investment trust may thus
restrict our ability to enter into certain types of hedging transactions. The
Board of Directors will monitor our compliance with the various real estate
investment trust qualification tests imposed under the Internal Revenue Code
with respect to our various hedging strategies on a continuing basis. However,
no assurance can be given that hedging transactions, together with our other
operations, would permit us to satisfy these tests on an ongoing basis.

Even if we fail to satisfy one or both of the 75% or 95% gross income tests
for any taxable year, we may still qualify as a real estate investment trust for
such year if we are entitled to relief under certain provisions of the Internal
Revenue Code. These relief provisions will generally be available if:

1. Our failure to comply were due to reasonable cause and not to willful
neglect.

2. We report the nature and amount of each item of our income included in
the tests on a schedule attached to our tax returns.

3. Any incorrect information on the schedule is not due to fraud with
intent to evade tax.

If these relief provisions apply, however, we will nonetheless be subject to a
100% tax on the greater of the amount by which we fail either the 75% or 95%
gross income test, multiplied by a fraction intended to reflect our
profitability.

The 30% Test. The 30% gross income test has been repealed and we have not
been required to comply with this test beginning January 1, 1998.

Foreclosure Property Rules. Real estate investment trusts generally are
subject to tax at the maximum corporate rate on any income from foreclosure
property, other than income that would generally be qualifying income for
purposes of the 75% gross income test, less expenses directly connected with the
production of such income. "Foreclosure property" is defined as any real
property, including interests in real property, and any personal property
incident to such real property:

1. That is acquired by a real estate investment trust as the result of such
real estate investment trust having bid on such property at foreclosure,
or having otherwise reduced such property to ownership or possession by
agreement or process of law, after there was a default, or default was
imminent, on a lease of such property or on an indebtedness owed to the
real estate investment trust that such property secured.

2. As to which the related loan was made or acquired by the real estate
investment trust at a time when default was not imminent or anticipated.

3. For which such real estate investment trust makes a proper election to
treat such property as foreclosure property.

Except as provided in the following paragraph, property shall cease to be
foreclosure property as of the close of the third taxable year following the
taxable year in which we acquired such property in foreclosure. If property is
not eligible for the election to be treated as foreclosure property ("ineligible
property") because, for example, the related loan was acquired by us at the time
when default was imminent or anticipated, income received with respect to such
ineligible property may not be qualifying income for purposes of the 75% or 95%
gross income tests.

Any foreclosure property shall cease to be foreclosure property on the first
day, occurring on or after the day on which we acquired the property in
foreclosure, on which:

1. A lease is entered into with respect to such property which, by its
terms, will not give rise to qualifying income for purposes of the 75%
gross income test or any amount is received or accrued, directly or
indirectly, pursuant to a lease entered into on or after such day which
does not generate qualifying income for purposes of the 75% gross income
test.

2. Any construction takes place on such property, other than completion of
a building, or completion of any other improvement, where more than
10 percent of the construction of such building or other improvement was
completed before default became imminent.

3. If such day is more than 90 days after the day on which such property
was acquired by us and the property is used in a trade or business which
is conducted by us, other than through an independent contractor, within
the meaning of Section 856(d)(3) of the Internal Revenue Code, from whom
we do not derive or receive any income.

For example, if we were to acquire a hotel as foreclosure property and operate
the hotel for more than 90 days, we would be required to operate the hotel
through an independent contractor after the 90th day, within the meaning of the
Internal Revenue Code, from whom we did not derive or receive any income, which
might include income from the hotel. Otherwise, after such 90th day, the
property would cease to be foreclosure property.

In the event that a foreclosure with respect to any of our mortgage
investments were to occur, or were anticipated to occur, we intend to manage the
actual or anticipated foreclosure with the intent of assuring qualification
under the real estate investment trust asset and gross income tests including,
if appropriate, the election to treat a foreclosed-upon property as foreclosure
property and to pursue the continued treatment of such property under the
foreclosure property rules.

ANNUAL DISTRIBUTION REQUIREMENTS

In order to qualify as a real estate investment trust, we are required to
distribute dividends to our stockholders each year in an amount at least equal
to:

1. The sum of (a) 95%, or 90% for taxable years beginning after
December 31, 2000, of our real estate investment trust taxable income,
computed without regard to the dividends paid deduction and our net
capital gain, and (b) 95%, or 90% for taxable years beginning after
December 31, 2000, of the after-tax net income, if any, from foreclosure
property; minus

2. The sum of certain items of excess non-cash income.

Such distributions must be paid in the taxable year to which they relate, or
in the following taxable year if declared before we timely file our tax return
for such year and if paid on or before the first regular dividend payment after
the declaration. To the extent that we do not distribute all of our net capital
gain or distribute at least 95%, or 90% for taxable years beginning after
December 31, 2000, but less than 100%, of our real estate investment trust
taxable income, as adjusted, we will be subject to tax on the undistributed
amount at regular capital gain or ordinary corporate tax rates, as the case may
be.

We intend to make timely distributions sufficient to satisfy the annual
distribution requirements described in the first sentence of the preceding
paragraph. It is possible that we may not have sufficient cash or other liquid
assets to meet the 95%, or 90% for taxable years beginning after December 31,
2000, distribution requirement, due to timing differences between the actual
receipt of income and actual payment of expenses on the one hand, and the
inclusion of such income and deduction of such expense in computing our real
estate investment trust taxable income on the other hand; or for other reasons.
We will closely monitor the relationship between our real estate investment
trust taxable income and cash flow and, if necessary, intend to borrow funds in
order to satisfy the distribution requirement. However, there can be no
assurance that such borrowing would be available at such time.

If we fail to meet the 95%, or 90% for taxable years beginning after
December 31, 2000, distribution requirement as a result of an adjustment to our
tax return by the Internal Revenue Service, we may retroactively cure the
failure by paying a "deficiency dividend," plus applicable penalties and
interest, within a specified period.

FAILURE TO QUALIFY

If we fail to qualify for taxation as a real estate investment trust in any
taxable year and the relief provisions do not apply, we will be subject to tax,
including any applicable alternative minimum tax, on our taxable income at
regular corporate rates. Distributions to stockholders in any year in which we
fail to qualify as a real estate investment trust will not be deductible by us,
and generally they will not be required to be made under the Internal Revenue
Code. In such event, to the extent of current and accumulated earnings and
profits, all distributions to stockholders will be taxable as ordinary income,
and subject to certain limitations in the Internal Revenue Code, corporate
distributees may be eligible for the dividends received deduction. Unless
entitled to relief under specific statutory provisions, we also will be
disqualified from re-electing taxation as a real estate investment trust for the
four taxable years following the year during which qualification was lost.

TAXATION OF SECURITYHOLDERS

TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS. As long as we qualify as a real
estate investment trust, distributions made to our taxable domestic stockholders
out of current or accumulated earnings and profits, and not designated as
capital gain dividends, generally will be taxed to such stockholders as ordinary
dividend income and will not be eligible for the dividends received deduction
for corporations. Distributions of net capital gain designated by us as capital
gain dividends will be taxed to such stockholders as long-term capital gain, to
the extent they do not exceed our actual net capital gain for

the fiscal year, without regard to the period in which the stockholder has held
our shares. However, corporate stockholders may be required to treat up to 20%
of capital gain dividends as ordinary income. To the extent that we make
distributions in excess of current and accumulated earnings and profits, such
distributions will be treated first as a tax-free return of capital to the
stockholder, reducing the tax basis of a stockholder's shares by the amount of
such excess distribution, but not below zero, with distributions in excess of
the stockholder's tax basis being taxed as capital gains, if the shares are held
by the stockholder as a capital asset. In addition, any dividend declared by us
in October, November or December of any year that is payable to a stockholder of
record on a specific date in any such month shall be treated as both paid by us
and received by the stockholder on December 31 of such year, provided that the
dividend is actually paid by us during January of the following calendar year.
Stockholders may not include in their individual income tax returns any of our
net operating losses we may have. Federal income tax rules may also require that
certain minimum tax adjustments and preferences be apportioned to our
stockholders.

We are permitted under the Internal Revenue Code to elect to retain and pay
income tax on our net capital gain for any taxable year. If we so elect, a
stockholder must include in income such stockholder's proportionate share of our
undistributed capital gain for the taxable year, and will be deemed to have paid
such stockholder's proportionate share of the income tax paid by us with respect
to such undistributed capital gain. Such tax would be credited against the
stockholder's tax liability and subject to normal refund procedures. In
addition, each stockholder's basis in such stockholder's shares would be
increased by the amount of undistributed capital gain, less the tax paid by us,
included in the stockholder's income.

The Internal Revenue Service Restructuring and Reform Act of 1998 provides
that gain from the sale or exchange of some investments held by individuals for
more than one year is taxed at a maximum capital gain rate of 20%. Pursuant to
Internal Revenue Service guidance, we may classify portions of our capital gain
dividends as eligible for the 20% capital gain rule discussed above or as
unrecaptured Internal Revenue Code Section 1250 gain taxable at a maximum rate
of 25%.

In general, any loss upon a sale or exchange of shares by a stockholder who
has held such shares for six months or less, after applying certain holding
period rules, will be treated as a long-term capital loss, to the extent of
distributions from us required to be treated by such stockholders as long-term
capital gains.

BACKUP WITHHOLDING. We will report to our domestic stockholders and to the
Internal Revenue Service the amount of dividends paid for each calendar year,
and the amount of tax withheld, if any, with respect thereto. Under the backup
withholding rules, a stockholder may be subject to backup withholding at a rate
of 31% with respect to dividends paid unless such stockholder: (1) is a
corporation or comes within certain other exempt categories and, when required,
demonstrates this fact and, when required; (2) provides a taxpayer
identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with applicable requirements of the backup
withholding rules. A stockholder that does not provide us with a correct
taxpayer identification number may also be subject to penalties imposed by the
Internal Revenue Service. Any amount paid as backup withholding is available as
a credit against the stockholder's income tax liability. In addition, we may be
required to enforce withholding of a portion of capital gain distributions made
to any stockholders who fail to certify their non-foreign status to us. See
"--Taxation of the Stockholders--Taxation of Foreign Stockholders" below.

TAXATION OF HOLDERS OF WARRANTS. The following discussion assumes that the
form of the warrants will be respected for U.S. Federal income tax purposes.
Upon the exercise of the warrant, a holder generally will receive the underlying
shares of our common stock after payment of the exercise price. Upon exercise, a
holder generally should not recognize gain or loss as a result of such holder's
receipt of underlying shares, except with respect to any cash received in lieu
of fractional shares. Upon

exercise, a holder's adjusted tax basis in the underlying shares will be an
amount equal to the holder's adjusted tax basis in the warrants, described
below, plus the amount paid to us as the exercise price for the warrants.

Generally, the holding period of stock acquired upon exercise of a warrant
will not include the period during which the warrant was held. Rather, the
holding period of such stock begins the day the warrant is exercised. A holder's
initial tax basis in a warrant will equal the portion of the price allocated to
such warrant upon the issuance. A holder's tax basis in a warrant will be
increased by the amount, if any, of any constructive distribution with respect
to such warrant, as described below, and decreased by the portion of any
constructive distribution that is treated as a tax-free recovery of basis, as
described below.

Upon a sale, exchange or other disposition, but not including a repurchase
by us, of a warrant, a holder generally will recognize gain or loss for Federal
income tax purposes in an amount equal to the difference between the sum of the
amount of cash and the fair market value of any property received upon such
sale, exchange or other disposition and the holder's adjusted tax basis in the
warrant being disposed of. Gain or loss recognized upon a sale, exchange or
other disposition of a warrant generally will be capital gain or loss if the
underlying shares would be a capital asset in the hands of the holder. Such
capital gain will be taxed at a maximum rate of 20 percent for a holder who is
not a corporation and who held the warrant for more than one year.

Notwithstanding the foregoing, if we repurchase a warrant, any gain realized
by a holder may not qualify for capital gain or loss treatment because such a
repurchase might be tested under the rules generally applicable to redemptions
of stock. Holders of warrants should consult their own tax advisors regarding
the potential application of the stock redemption rules to the repurchase of a
warrant. Upon the lapse of a warrant, a holder will recognize a capital loss
equal to such holder's adjusted tax basis in the warrant. Such capital loss will
be long-term capital loss if the warrant had been held by a holder for more than
one year at the time of lapse, and short-term capital loss if held for less than
one year.

The exercise ratio of the warrants may be subject to adjustment under
certain circumstances. In that case, under Section 305 of the Internal Revenue
Code and the Treasury regulations issued thereunder, holders of the warrants may
be treated as having received a constructive distribution if, and to the extent
that, an adjustment in the exercise price (an "Adjustment"), including an
adjustment to reflect a taxable dividend to holders of our common stock,
increases the proportionate interest of a holder of a warrant in the fully
diluted common stock, whether or not the holder ever exercises the warrant. The
amount of any such constructive distribution would be the fair market value on
the date of the Adjustment of the number of shares of our common stock which, if
actually distributed to holders of warrants, would produce the same increase in
the proportionate interests of such holders in our assets or our earnings and
profits as that produced by the Adjustment.

TAXATION OF TAX-EXEMPT STOCKHOLDERS. The Internal Revenue Service has
issued a revenue ruling in which it held that amounts distributed by a real
estate investment trust to a tax-exempt employees' pension trust do not
constitute unrelated business taxable income ("UBTI"). In general, subject to
the discussion below regarding a "pension-held REIT" and subject to the
following sentence, based upon such ruling and the statutory framework of the
Internal Revenue Code, distributions by a real estate investment trust to a
stockholder that is a tax-exempt entity should not constitute UBTI, provided
that the tax-exempt entity has not financed the acquisition of its shares with
"acquisition indebtedness" within the meaning of the Internal Revenue Code, that
the shares are not otherwise used in an unrelated trade or business of the
tax-exempt entity, and that the real estate investment trust does do not hold a
residual interest in a REMIC that is an entity or arrangement that satisfies the
standards set forth in Section 860D of the Internal Revenue Code. However,
because we may invest in REMIC residual interests, any dividends received by a
stockholder that is a tax-exempt entity that are allocable to Excess Inclusion
income will be treated as UBTI.

If any pension or other retirement trust that qualifies under
Section 401(a) of the Internal Revenue Code (a "qualified pension trust") holds
more than 10% by value of the interests in a "pension-held REIT" at any time
during a taxable year, a portion of the dividends paid to the qualified pension
trust by such real estate investment trust may constitute UBTI. For these
purposes, a "pension-held REIT" is defined as a real estate investment trust:
(1) which would not have qualified as a real estate investment trust but for the
provisions of the Internal Revenue Code which look through such a qualified
pension trust in determining ownership of shares of the real estate investment
trust; and (2) as to which at least one qualified pension trust holds more than
25% by value of the interests of such real estate investment trust or one or
more qualified pension trusts, each owning more than a 10% interest by value in
the real estate investment trust, hold in the aggregate more than 50% by value
of the interests in such real estate investment trust. The Board of Directors
believes that we currently do not constitute a "pension-held REIT." However,
because our shares are "publicly traded," no assurance can be given that we will
not become a "pension-held REIT" in the future.

Any dividends received by a stockholder that is a tax-exempt entity that are
allocable to Excess Inclusion income from a REMIC residual interest will be
treated as UBTI. Excess Inclusion income for any calendar quarter will equal the
excess of our income from REMIC residual interests over our "daily accruals"
with respect to such REMIC residual interests for the calendar quarter. Daily
accruals for a calendar quarter are computed by allocating to each day on which
we own a REMIC residual interest a ratable portion of the product of: (1) the
"adjusted issue price" of the REMIC residual interest at the beginning of the
quarter; and (2) 120% of the long-term federal interest rate, adjusted for
quarterly compounding, on the date of issuance of the REMIC residual interest.
The adjusted issue price of a REMIC residual interest at the beginning of a
calendar quarter equals the original issue price of the REMIC residual interest,
increased by the amount of daily accruals for prior quarters and decreased by
all prior distributions to us with respect to the REMIC residual interest. We
will be subject to tax at the highest marginal corporate rate on the portion of
any Excess Inclusion income derived by us from a REMIC residual interest that is
allocable to our stock held by the United States, any state or political
subdivision thereof, any foreign government, any international organization, any
agency or instrumentality of any of the foregoing, any other tax-exempt
organization, other than a farmer's cooperative described in Section 521 of the
Internal Revenue Code, that is exempt from taxation under the UBTI provisions of
the Internal Revenue Code, or any rural, electrical or telephone cooperative
(each, a "Disqualified Organization"), unless such Disqualified Organization is
subject to the tax under Section 511 of the Internal Revenue Code. Any such tax
would be deductible by us against our income that is not Excess Inclusion
income.

If we derive Excess Inclusion income from REMIC residual interests, a tax
similar to the tax on us described in the preceding paragraph may be imposed on
stockholders who are: (1) pass-through entities, i.e., partnerships, estates,
trusts, regulated investment companies, real estate investment trusts, common
trust funds, and certain types of cooperatives, including farmers' cooperatives
described in section 521 of the Internal Revenue Code, in which a Disqualified
Organization is a record holder of shares or interests; and (2) nominees who
hold shares on behalf of Disqualified Organizations. Consequently, a brokerage
firm that holds shares in a "street name" account for a Disqualified
Organization may be subject to federal income tax on the income derived from
those shares.

TAXATION OF FOREIGN STOCKHOLDERS. The rules governing United States federal
income taxation of nonresident alien individuals, foreign corporations, foreign
partnerships and other foreign stockholders (collectively, "Foreign
Stockholders") are highly complex and the following is only a summary of such
rules. The following discussion assumes that you are not subject to United
States federal income taxation because, for example, you do not have a U.S.
trade or business generating effectively connected income, or in the case of an
individual, that you were not present in the United States for more than
182 days. Prospective Foreign Stockholders should consult with their own tax
advisors to

determine the impact of federal, state and local income tax laws with regard to
an investment in our shares, including any reporting requirements.

If you are a Foreign Stockholder and you sell our shares, any gain you
realize will generally be subject to federal income tax under the Foreign
Investment in Real Property Tax Act of 1980 ("FIRPTA") even if you are otherwise
not subject to United States federal income taxation. Under FIRPTA, however, any
such gain your realize would not be subject to federal income tax if we were a
"domestically-controlled REIT" or if you owned less than 5% of our publicly
traded shares you disposed. We believe that currently we are a
"domestically-controlled REIT" because less than 50%, measured by value, of our
shares is held by Foreign Stockholders. Under these circumstances, any gain you
realize as a Foreign Stockholder from the sale of our shares generally should
not be subject to federal income tax. Because our shares are publicly traded no
assurance can be given that we will continue to qualify a
"domestically-controlled REIT." A 10% FIRPTA withholding tax may be imposed on
the proceeds from the disposition of our shares, unless you establish that such
withholding should not apply.

Any distributions to Foreign Stockholders that are attributable to a sale or
exchange of any United States real property interests by us, will be subject to
income and withholding taxes under FIRPTA, and may also be subject to branch
profits tax of 30% in the hands of a corporate Foreign Stockholder not entitled
to treaty relief or exemption. For purposes of the FIRPTA rules, the term
"United States real property interest" is broadly defined as any interest, other
than an interest solely as a creditor, in real property located in the United
States, including any right to share in the appreciation in the value or in the
gross or net proceeds or profits generated by the real property. In addition, a
loan to an individual or entity under the terms of which a holder of the
indebtedness has any direct or indirect right to share in the appreciation in
value of, or the gross or net proceeds or profits generated by, an interest in
real property of the debtor or of a related person is, in its entirety, an
interest in real property. As a result, certain of our real estate-related
assets, including, mezzanine loans, opportunistic loans and participations,
triple net leases, subordinated interests and any foreclosure property, may be
treated as United States real property interests for FIRPTA purposes. Under the
FIRPTA rules, we are required to withhold 35% of any distribution to a Foreign
Stockholder that could be designated by us as a capital gain dividend. This
amount is creditable against the Foreign Stockholder's federal income tax.

Distributions of cash derived from our real estate operations, not
designated by us as a capital gain dividend, that we pay to Foreign Stockholders
will be treated as ordinary dividends. Such ordinary dividends will generally be
subject to United States withholding tax at a rate of 30%, unless reduced by an
applicable tax treaty. To establish eligibility for reduced withholding rates
under an applicable income tax treaty, you must file with us an appropriate
Internal Revenue Service form.

The federal income taxation of foreign persons is a highly complex matter
that may be affected by other considerations. Accordingly, Foreign Stockholders
should consult their own tax advisor regarding the income and withholding tax
considerations with respect to their investments in the Company.

OTHER TAX CONSIDERATIONS

POSSIBLE LEGISLATIVE OR OTHER ACTIONS AFFECTING TAX
CONSEQUENCES. Prospective securityholders should recognize that the present
federal income tax treatment of an investment in the Company may be modified by
legislative, judicial or administrative action at any time and that any such
action may affect investments and commitments previously made. The rules dealing
with federal income taxation are constantly in review by persons involved in the
legislative process and by the Internal Revenue Service and the Treasury
Department resulting in revisions of regulations and revised interpretations of
established concepts as well as statutory changes. No assurance can be given as
to the form or content, including with respect to effective dates, of any tax
legislation which may be enacted. Revisions in

federal tax laws and interpretations thereof can adversely affect the tax
consequences of an investment in the Company.

In this connection, Congress has recently passed and the President has
signed the Tax Relief Extension Act of 1999 (the "1999 Act") which contains
several provisions affecting real estate investment trusts. One provision under
the 1999 Act will prohibit a real estate investment trust from holding
securities representing more than 10% of the vote or value of the outstanding
securities of any corporation other than:

1. A qualified REIT subsidiary.

2. Another real estate investment trust.

3. Certain corporations known as "taxable REIT subsidiaries" (the "taxable
REIT subsidiary provision").

In addition, under the 1999 Act, not more than 20% of the value of a real
estate investment trust's total assets may be represented by shares of one or
more taxable REIT subsidiaries. Taxable REIT subsidiaries will be subject to
full corporate level taxation on their earnings, but will be permitted to engage
in certain types of activities which cannot currently be performed by real
estate investment trusts or their controlled subsidiaries without jeopardizing
real estate investment trust status. Taxable REIT subsidiaries will be subject
to certain limitations on the deductibility of certain payments made to the
associated real estate investment trust which could materially increase the
taxable income of the taxable REIT subsidiary. Similarly, to ensure that taxable
REIT subsidiaries pay market rates for rents, interest and services, a 100%
excise tax will be imposed on a REIT to the extent a taxable REIT subsidiary
pays rent, interest or services to it in excess of a market rate. Moreover,
rents paid by a taxable REIT subsidiary to the associated real estate investment
trust may be excluded from qualification as rents from real property under
certain circumstances.

Under the taxable REIT subsidiary provision, we would be allowed to jointly
elect with corporate subsidiaries to treat such subsidiaries as "taxable REIT
subsidiaries" for taxable years beginning after December 31, 2000, subject to
certain transition rules. Further, although we indirectly own more than 10% of
the value of the outstanding securities of certain subsidiaries which, absent a
taxable REIT subsidiary election, would violate the provisions of the 1999 Act,
the taxable REIT subsidiary provision contains certain "grandfather" rules which
would make the limitations on stock ownership described above inapplicable to
our indirect ownership of such subsidiaries, even in the absence of an election
to treat such subsidiaries as "taxable REIT subsidiaries." In such case,
however, the taxable REIT subsidiary provision would terminate our ability to
rely on the grandfather rule if such subsidiaries were either to engage in new
trades or businesses or acquire substantial new assets. Accordingly, in the
absence of such election, the taxable REIT subsidiary provision may limit the
future activities and growth of such subsidiaries.

As noted in "--Taxation of the Company--Annual Distribution Requirements,"
another provision under the 1999 Act amends certain real estate investment trust
distribution requirements by reducing the amount required to be distributed to
90%. These amendments are also effective for taxable years beginning after
December 31, 2000.

STATE AND LOCAL TAXES. We and our stockholders may be subject to state or
local taxation, and we may be subject to state or local tax withholding
requirements in various jurisdictions, including those in which we or they
transact business or reside. The state and local tax treatment of the Company
and our stockholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective stockholders should consult their own
tax advisors regarding the effect of state and local tax laws on an investment
in shares in the Company.

IT IS STRONGLY ADVISED THAT EACH PROSPECTIVE PURCHASER CONSULT WITH SUCH
PURCHASER'S TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO SUCH
PURCHASER OF THE PURCHASE, OWNERSHIP AND SALE OF SHARES IN AN ENTITY ELECTING TO
BE TAXED AS A REAL ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL,
FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND
ELECTION OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.

LEGAL MATTERS

Ballard Spahr Andrews & Ingersoll, LLP will pass upon the validity of the
shares.

EXPERTS

The financial statements incorporated in this Registration Statement by
reference to the Annual Report on Form 10-K of Starwood Financial Inc. for the
year ended December 31, 1998 have been so incorporated in reliance on the report
of PricewaterhouseCoopers LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.

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15,000,000 SHARES

[LOGO]

COMMON STOCK

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PROSPECTUS SUPPLEMENT
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MERRILL LYNCH & CO.
LEHMAN BROTHERS
BANC OF AMERICA SECURITIES LLC
BEAR, STEARNS & CO. INC.
SALOMON SMITH BARNEY
UBS WARBURG

SEPTEMBER , 2001

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