"We continue to seek opportunities in the underserved segments of the real estate market that can benefit from our flexible capital solutions and unmatched customer service approach to lending," says Jay Sugarman, chairman and CEO of iStar Financial.

According to Fitch Ratings, iStar provided substantially all of Falcon's on-balance sheet financing. In fact, the company has underwritten most of the loans originated by Falcon over the past year.

"Having been Falcon Financial's sole source of warehouse financing for most of the last year, we fully appreciate the considerable challenges the company has encountered due to its size and reliance on the less-flexible securitization market for long-term financing," Sugarman continues.

"Loan originations is one of the key drivers of our business and volume is a necessary ingredient," Vernon Schwartz, chairman and CEO of Falcon Financial, said in a conference call. "In 2004 our loan originations were below expectations. ... We do not believe our company would grow as fast and as large as we desire to be. ... We came to the conclusion that the sale of the company was in the best interest of the shareholders."

Fitch expects no change to iStar's rating and outlook as a result of this transaction. Fitch's view is that the acquisition of Falcon, which had $230 million of assets as of Sept. 30, is small and will not materially impact iStar's credit metrics.

However, Fitch notes that strong competition in both the leasing and mortgage loan businesses have created "meaningful challenges for iStar's asset origination business." In Fitch's view, this is leading the company to explore new and different growth strategies distinct from its traditional organic growth model. "While this is not a distinct positive or negative, it will require continued evaluation of the company's evolving asset base and capitalization," Fitch officials note.

Following the completion of iStar's tender offer, any remaining Falcon shares will be acquired in a cash merger at the same price. The transaction is subject to customary conditions including the tender of at least the majority of the outstanding shares of Falcon. Lehman Brothers advised the Stamford, CT-based Falcon Financial.