**U.S.SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

 

**FORM10-Q**

 
| **(Mark One)**

** ** | ** **                                                                                    |
|----------------------------|-----------------------------------------------------------------------------------------------|
| **ý**                 | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |

 

**FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004**

 
| **o** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|-----------------------------------------------------------------------------------------------|

** **

**FOR THE TRANSITION PERIOD FROM                         TO                        **

 

**Commission File Number   333-76609**

 

**CORNERSTONEREALTY FUND, LLC**

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 
| **California**                                                                       | ** ** | **33-0827161**                     |
|--------------------------------------------------------------------------------------|------------|------------------------------------|
| (State or other jurisdiction  of incorporation or organization)                      |       | (IRS Employer  Identification No.) |
|                                                                                 |       |                               |
| **4590 MACARTHUR BLVD., SUITE  610, NEWPORT BEACH, CALIFORNIA 92660**                |
| (ADDRESS OF PRINCIPAL  EXECUTIVE OFFICES)                                            |
|                                                                                 |
| **949-852-1007**                                                                     |
| (REGISTRANT’S TELEPHONE NUMBER, INCLUDING  AREA CODE)                           |
|                                                                                 |
| **Not Applicable**                                                                   |
| (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE  LAST  REPORT) |

 

Check whether theissuer (1) filed all reports required to be filed by Section 13 or15(d) of the Exchange Act of 1934 during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days.

 

YES  ý      NO o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Act).  o  Yes   ý  No

 

 

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| **PART I - FINANCIAL INFORMATION**                                                                                                                |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| ** **                                                                                                                                        |   |
| **Item 1.        Financial  Statements**                                                                  |   |
|                                                                                                                                              |   |
| **Cornerstone Realty Fund, LLC**                                                                                                                  |   |
|                                                                                                                                              |   |
| Condensed  Balance Sheets at September 30, 2004 (unaudited) and December 31, 2003                                                                 |   |
|                                                                                                                                              |   |
| Condensed Statements  of Operations for the Three Months and Nine Months ended  September 30, 2004 (unaudited) and September 30, 2003 (unaudited) |   |
|                                                                                                                                              |   |
| Condensed  Statement of Members’ Capital for the Nine Months ended  September 30, 2004 (unaudited)                                           |   |
|                                                                                                                                              |   |
| Condensed Statements  of Cash Flows for the Nine Months ended  September 30, 2004 (unaudited) and September 30, 2003 (unaudited)                  |   |
|                                                                                                                                              |   |
| Notes to Condensed Financial Statements  (unaudited)                                                                                              |   |

 

2

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**CORNERSTONE REALTY FUND, LLC**

**(a California limited liability company)**

**CONDENSED BALANCE SHEETS**

 
| ** **                                                                                                                                      | ** ** | **September 30, 2004** | ** ** | **December 31, 2003****(A)** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|------------------------------|------------|
| ** **                                                                                                                                      | ** ** | **(unaudited)**        | ** ** | ** **                   | ** ** |
| **ASSETS**                                                                                                                                      |       |                   |       |                         |       |
|                                                                                                                                            |       |                   |       |                         |       |
| Assets                                                                                                                                          |       |                   |       |                         |       |
| Cash and cash equivalents                                                                                                                       |       | $                      | 7,873,682  |                         | $          | 1,464,206 |   |
|                                                                                                                                            |       |                   |       |                         |       |
| Investments in real estate                                                                                                                      |       |                   |       |                         |       |
| Land                                                                                                                                            |       | 4,539,400              |       | 4,539,400                    |       |
| Buildings and improvements, less  accumulated depreciation of $277,734 in 2004 and $128,674 in 2003                                             |       | 7,636,970              |       | 7,605,000                    |       |
| Intangible asset – in place leases, less  accumulated amortization of $95,957 in 2004 and $0 in 2003                                       |       | 71,457                 |       | 167,414                      |       |
|                                                                                                                                            |       | 12,247,827             |       | 12,311,814                   |       |
| Other assets                                                                                                                                    |       |                   |       |                         |       |
| Tenant and other receivables                                                                                                                    |       | 69,321                 |       | 27,297                       |       |
| Receivable from managing member                                                                                                                 |       | —                 |       | 59,839                       |       |
| Prepaid insurance                                                                                                                               |       | 8,817                  |       | —                       |       |
| Leasing commissions, less accumulated  amortization of $9,580 in 2004 and $1,974 in 2003                                                        |       | 39,338                 |       | 6,912                        |       |
| Office equipment, less accumulated  depreciation of $2,854 in 2004 and $2,732 in 2003                                                           |       | —                 |       | 122                          |       |
| Total assets                                                                                                                                    |       | $                      | 20,238,985 |                         | $          | 13,870,190 |   |
|                                                                                                                                            |       |                   |       |                         |       |
| **LIABILITIES AND MEMBERS’ CAPITAL**                                                                                                       |       |                   |       |                         |       |
|                                                                                                                                            |       |                   |       |                         |       |
| Liabilities                                                                                                                                     |       |                   |       |                         |       |
| Accounts payable and accrued liabilities                                                                                                        |       | $                      | 53,139     |                         | $          | 89,173 |   |
| Real estate taxes payable                                                                                                                       |       | 140,030                |       | 115,325                      |       |
| Tenant security deposits                                                                                                                        |       | 141,264                |       | 145,629                      |       |
| Total liabilities                                                                                                                               |       | 334,433                |       | 350,127                      |       |
|                                                                                                                                            |       |                   |       |                         |       |
| Members’ capital (100,000 units authorized,  48,728 units issued and outstanding in 2004 and 33,012 units issued and  outstanding in 2003) |       | 19,904,552             |       | 13,520,063                   |       |
|                                                                                                                                            |       | $                      | 20,238,985 |                         | $          | 13,870,190 |   |

 

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(A)  Derivedfrom the audited financial statements as of December 31, 2003.

 

The accompanying notes are an integral partof these interim financial statements.

 

3

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**CORNERSTONE REALTY FUND, LLC**

**(a California limited liability company)**

 

**CONDENSED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                            | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                            | ** ** | ** **                            | ** ** | **(restated)**                       | ** ** | ** ** | ** ** | **(restated)** | ** ** |
| Revenues                                              |       |                                  |       |                                 |       |   |   |   |   |
| Rental revenues                                       |       | $                                     | 316,985    |                                 | $          | 163,967 |   | $ | 904,360 |   | $ | 560,277 |   |
| Amortization of in-place leases                       |       | (25,553                               | )          | —                               |       | (95,957 | ) | — |   |
| Tenant reimbursements and other income                |       | 46,547                                |       | 41,037                               |       | 169,623 |   | 108,883 |   |
| Interest, dividends and other Income                  |       | 7,968                                 |       | 6,781                                |       | 10,174 |   | 16,708 |   |
|                                                  |       | 345,947                               |       | 211,785                              |       | 988,200 |   | 685,868 |   |
|                                                  |       |                                  |       |                                 |       |   |   |   |   |
| Expenses                                              |       |                                  |       |                                 |       |   |   |   |   |
| Property operating and Maintenance                    |       | 55,423                                |       | 34,238                               |       | 206,685 |   | 94,131 |   |
| Property taxes                                        |       | 30,331                                |       | 39,948                               |       | 150,907 |   | 116,074 |   |
| General and administrative                            |       | 24,220                                |       | 32,241                               |       | 141,971 |   | 101,030 |   |
| Interest on advances payable to managing  member      |       | —                                |       | 1,082                                |       | — |   | 3,993 |   |
| Depreciation and amortization                         |       | 53,888                                |       | 27,677                               |       | 156,788 |   | 82,993 |   |
|                                                  |       | 163,862                               |       | 135,186                              |       | 656,351 |   | 398,221 |   |
|                                                  |       |                                  |       |                                 |       |   |   |   |   |
| Net income                                            |       | $                                     | 182,085    |                                 | $          | 76,599 |   | $ | 331,849 |   | $ | 287,647 |   |
|                                                  |       |                                  |       |                                 |       |   |   |   |   |
| Net income allocable to managing member               |       | $                                     | 18,209     |                                 | $          | 7,660 |   | $ | 33,185 |   | $ | 28,765 |   |
|                                                  |       |                                  |       |                                 |       |   |   |   |   |
| Net income allocable to unitholders                   |       | $                                     | 163,876    |                                 | $          | 68,939 |   | $ | 298,664 |   | $ | 258,882 |   |
|                                                  |       |                                  |       |                                 |       |   |   |   |   |
| Per unit amounts:                                     |       |                                  |       |                                 |       |   |   |   |   |
| Basic and diluted income allocable to  unitholders    |       | $                                     | 3.55       |                                 | $          | 2.70 |   | $ | 7.37 |   | $ | 11.53 |   |
|                                                  |       |                                  |       |                                 |       |   |   |   |   |
| Basic and diluted weighted average units  outstanding |       | 46,143                                |       | 25,521                               |       | 40,532 |   | 22,459 |   |
|                                                       |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral partof these interim financial statements.

 

4

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**CORNERSTONE REALTY FUND, LLC**

**(a California limited liability company)**

 

**CONDENSED STATEMENT OF MEMBERS’ CAPITAL**

**(Unaudited)**

 
| Balance, December 31, 2003                         |   | $         | 13,520,063 |   |
|----------------------------------------------------|--------|-----------|------------|--------|
|                                               |   |      |       |
| Net proceeds from offering                         |   | 7,025,230 |       |
| Distributions to unitholders                       |   | (656,930  | )          |
| Deferred offering costs repaid to managing  member |   | (315,660  | )          |
| Net income                                         |   | 331,849   |       |
|                                               |   |      |       |
| Balance, September 30, 2004                        |   | $         | 19,904,552 |   |

 

The accompanying notes are an integral partof these interim financial statements.

 

5

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**CORNERSTONE REALTY FUND, LLC**

**(a California limited liability company)**

 

**CONDENSED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| ** **                                                                         | ** ** | ** **                           | ** ** | **(restated)** | ** ** |
| OPERATING ACTIVITIES                                                               |       |                                 |       |   |   |
| Net Income                                                                         |       | $                                    | 331,849    |   | $ | 287,647 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                 |       |   |   |
| Depreciation and amortization                                                      |       | 252,745                              |       | 82,993 |   |
| Changes in operating assets and  liabilities:                                      |       |                                 |       |   |   |
| Other assets                                                                       |       | (31,034                              | )          | (47,106 | ) |
| Accounts payable, accrued liabilities and  security deposits                       |       | (40,399                              | )          | (80,365 | ) |
| Real estate taxes payable                                                          |       | 24,705                               |       | (25,281 | ) |
|                                                                               |       |                                 |       |   |   |
| Net cash provided by operating activities                                          |       | 537,866                              |       | 217,888 |   |
|                                                                               |       |                                 |       |   |   |
| INVESTING ACTIVITIES                                                               |       |                                 |       |   |   |
| Additions to buildings and improvements                                            |       | (181,030                             | )          | (59,932 | ) |
|                                                                               |       |                                 |       |   |   |
| Net cash used in investing activities                                              |       | (181,030                             | )          | (59,932 | ) |
|                                                                               |       |                                 |       |   |   |
| FINANCING ACTIVITIES                                                               |       |                                 |       |   |   |
| Repayment of advances from managing member                                         |       | —                               |       | (111,059 | ) |
| Net proceeds from offering                                                         |       | 7,025,230                            |       | 3,630,394 |   |
| Distributions to members                                                           |       | (656,930                             | )          | (243,784 | ) |
| Deferred offering costs repaid to managing  member                                 |       | (315,660                             | )          | (162,200 | ) |
|                                                                               |       |                                 |       |   |   |
| Net cash provided by financing activities                                          |       | 6,052,640                            |       | 3,113,351 |   |
|                                                                               |       |                                 |       |   |   |
| Net increase in cash and cash equivalents                                          |       | 6,409,476                            |       | 3,271,307 |   |
|                                                                               |       |                                 |       |   |   |
| Cash and cash equivalents at beginning of  period                                  |       | 1,464,206                            |       | 1,062,947 |   |
|                                                                               |       |                                 |       |   |   |
| Cash and cash equivalents at end of period                                         |       | $                                    | 7,873,682  |   | $ | 4,334,254 |   |

 

The accompanying notes are an integral partof these interim financial statements.

 

6

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**CORNERSTONE REALTY FUND, LLC**

**(a California Limited Liability Company)**

 

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.**             Organization and Business

 

CornerstoneRealty Fund, LLC, a California limited liability company (the “Fund”) (formerlyCornerstone Multi-Tenant Industrial Business Parks Fund, LLC and CornerstoneIndustrial Properties Income and Growth Fund I, LLC), was formed onOctober 28, 1998.  The members of theFund are Cornerstone Industrial Properties, LLC, a California limited liabilitycompany, as the Managing Member (“Managing Member”), Terry G. Roussel, anindividual, and other various unitholders as described below.  The purpose of the Fund is to acquire,operate and sell multi-tenant industrial properties.  The Fund currently is issuing and selling ina public offering equity interests (“units”) in the Fund, and is admitting thenew unitholders as members of the Fund. As of November 1, 2004, the Fund has issued 52,328 units to unitholdersfor gross offering proceeds of $26,164,000.

 

Theunaudited condensed financial statements of the Fund have been prepared inaccordance with accounting principles generally accepted in the United Statesfor interim financial information and in accordance with the rules andregulations of the Securities and Exchange Commission.  As permitted by the Securities and ExchangeCommission filing requirements for Form 10-Q, the condensed financialstatements do not include all of the information and footnotes required byaccounting principles generally accepted in the United States for completefinancial statements.  The condensedfinancial statements included herein should be read in conjunction with theFund’s Annual Report on Form 10-K for the year ended December 31, 2003.

 

Theinterim condensed financial statements have been prepared in accordance withthe Fund’s customary accounting practices. In the opinion of management, all adjustments (consisting of normalrecurring accruals) considered necessary for a presentation in accordance withaccounting principles generally accepted in the United States have beenincluded.  Operating results for thethree and nine months ended September 30, 2004 are not necessarily indicativeof the results that may be expected for the year ending December 31, 2004.

 

Eachmember’s liability is limited pursuant to the provisions of the Beverly-KilleaLimited Liability Company Act.  The termof the Fund shall continue until December 31, 2010, unless terminatedsooner pursuant to the operating agreement.

 

Theoperating agreement, as amended and restated, provides, among other things, forthe following:

 

TheManaging Member generally has complete and exclusive discretion in themanagement and control of the Fund; however, unitholders holding the majorityof all outstanding and issued units have certain specified voting rights whichinclude the removal and replacement of the Managing Member.

 

NetCash Flow from Operations, as defined, will be distributed 90% to theunitholders and 10% to the Managing Member until the unitholders have receivedeither an 8% or 12% cumulative, non-compounded annual return on their InvestedCapital Contributions, as defined. The 12% return applies to specified earlyinvestors for the twelve-month period subsequent to the date of their InvestedCapital Contributions and is in lieu of the 8% return during that period.

 

7

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NetSales Proceeds, as defined, will be distributed first, 100% to the unitholdersin an amount equal to their Invested Capital Contributions; then, 90% to theunitholders and 10% to the Managing Member until the unitholders have receivedan amount equal to the unpaid balance of their aggregate cumulative,non-compounded annual return on their Invested Capital Contributions; andthereafter, 50% to the unitholders and 50% to the Managing Member.

 

NetIncome, as defined, is allocated first, 10% to the Managing Member and 90% tothe unitholders until Net Income allocated equals cumulative Net Losses, asdefined, previously allocated in such proportions; second, in proportion to andto the extent of Net Cash Flow from Operations and Net Sales Proceeds previouslydistributed to the members, exclusive of distributions representing a return ofInvested Capital Contributions; and then 50% to the Managing Member and 50% tothe unitholders.

 

NetLoss is allocated first, 50% to the Managing Member and 50% to the unitholders,until Net Loss allocated equals cumulative Net Income previously allocated insuch proportions; then remaining Net Loss is allocated 10% to the ManagingMember and 90% to the unitholders.

 

Allallocations and distributions to the unitholders are to be pro rata inproportion to their share of the allocations and distributions.

 

**2.****            ****Restatement**

 

Duringthe fourth quarter of 2003, the Managing Member reevaluated its practice ofcharging the Fund interest on unreimbursed offering costs.  Accordingly, the Fund has restated itspreviously issued financial statements.

 

Asa result of the restatement, the Fund has recorded a receivable from theManaging Member of $59,839 at December 31, 2003.  In August 2004, the Managing Member repaidthis amount in full.  The followingsummarizes the impact of this restatement on net income from amounts previouslyreported for the three months ended September 30, 2003:

 
| ** **                         | ** ** | **Three months ended  September 30, 2003** | ** ** | **Nine months ended  September 30, 2003** | ** ** |
|------------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| Net income, as previously reported |       | $                                          | 68,805     |                                      | $          | 264,666 |   |
|                               |       |                                       |       |                                      |       |
| Adjustment                         |       | 7,794                                      |       | 22,981                                    |       |
|                               |       |                                       |       |                                      |       |
| Net income, as restated            |       | $                                          | 76,599     |                                      | $          | 287,647 |   |

 

**3.****            ****Summary of SignificantAccounting Policies**

 

*Use of Estimates*

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities asof the date of the financial statements and the reported amount of revenue and expensesduring the reporting periods.  Actualresults could materially differ materially from the estimates in the near term.

 

*Cash and Cash Equivalents*

 

Cashand cash equivalents consist primarily of interest-bearing money marketinvestments with original maturities of 90 days or less at the date ofpurchase.  Included in cash and cashequivalents at September 30, 2004 is $141,264 related to tenant securitydeposits.

 

8

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*Investments in Real Estate*

 

Investmentsin real estate are stated at cost and include land, buildings and buildingimprovements.  Expenditures for ordinarymaintenance and repairs are expensed to operations as incurred.  Significant replacements, betterments andtenant improvements which improve or extend the useful lives of the buildingsare capitalized.  Depreciation of thebuildings and building improvements is computed on a straight-line basis overtheir estimated useful lives of 39 years. Tenant improvements are depreciated over the shorter of the useful assetlife or the related lease term.

 

TheFund evaluates the carrying value for investments in real estate in accordancewith Financial Accounting Standards Board (“FASB”) Statement No. 144, *Accounting for the Impairment or Disposal of Long-Lived Assets*(“FAS 144”).  FAS 144 requires that whenevents or changes in circumstances indicate that the carrying amount of theassets might not be recoverable, companies should evaluate the need for animpairment write-down.  When animpairment write-down is required, the related assets are adjusted to theirestimated fair value.

 

InJune 2001 the FASB issued Statement of Financial Accounting Standard (“SFAS”)No. 141, *Business Combinations*and SFAS No. 142, *Goodwill and Other Intangible Assets*.  SFAS No. 141 and No. 142 require the Fund torecord at acquisition an intangible asset or liability for the valueattributable to in-place leases.  Therequirements are applicable to all acquisitions subsequent to July 1,2001.  As of September 30, 2004, the Fundhas recorded $71,457, net of $95,957 of amortization, as an intangible assetattributable to the value of the leases in place as of the date of acquisition.

 

*Office Equipment and Leasing Commissions*

 

Officeequipment is stated at cost and is depreciated on a straight-line basis overthe estimated useful lives of the related assets, typically five years.  Leasing commissions are stated at cost andamortized on a straight-line basis over the related lease term.

 

*Revenue Recognition*

 

Rentalrevenues are recorded on an accrual basis as they are earned over the lives ofthe respective tenant leases on a straight-line basis.  Rental receivables are periodically evaluatedfor collectibility.

 

*Fair Value of Financial Instruments*

 

TheFund believes that the recorded values of all financial instruments approximatetheir current values.

 

*Income Tax Matters*

 

Itis the intent of the Fund and its members that the Fund be treated as apartnership for income tax purposes.  Asa limited liability company, the Fund is subject to certain minimal taxes andfees; however, income taxes on the income or losses realized by the Fund aregenerally the obligation of the members.

 

9

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*Concentration of Credit Risk*

 

TheFund maintains its cash at banks with federally insured accounts and uninsuredmoney market funds.  The amounts aresubstantially uninsured.  No losses havebeen experienced related to such amounts.

 

*Impact of New Accounting Pronouncements*

 

InJanuary 2003, the FASB issued Interpretation No. 46, *Consolidationof Variable Interest Entities*, as amended in December 2003 (“InterpretationNo. 46R”), which applies immediately to arrangements created after January 31,2003.  Interpretation No. 46R applies toarrangements created before February 1, 2003 beginning no later than March 31,2004.  The initial adoption ofInterpretation No. 46R did not have a material impact on the Fund’s financialposition or results of operations.

 

**4.****            ****Investments in Real Estate**

 

OnSeptember 27, 2002, the Fund acquired an existing multi-tenant industrialbusiness park known as Normandie Business Center, located in Torrance,California for an investment of $3,901,696. Normandie Business Center consists of two single-story buildingscontaining a total of 48,711 leasable square feet.

 

OnDecember 27, 2002, the Fund acquired an existing multi-tenant industrialbusiness park known as the Sky Harbor Business Park, located in Northbrook,Illinois for an investment of $2,553,996. Sky Harbor Business Park consists of a single-story building containinga total of 41,422 leasable square feet.

 

OnDecember 10, 2003, the Fund acquired an existing multi-tenant industrial parkknown as Arrow Business Center located in Irwindale, California for aninvestment of $5,910,579.  The propertyconsists of three single-story buildings containing a total of 69,592 leasablesquare feet.

 

Industrialspace in the properties is generally leased to tenants under lease terms thatprovide for the tenants to pay increases in operating expenses in excess ofspecified amounts.

 

**5.****            ****Related Party Transactions**

 

Specificincremental costs in connection with the offering of membership units areincurred by the Managing Member. Reimbursement of such offering costs is limited to 4% of the gross proceedsof the related offerings.  Offering costsincurred by the Managing Member in excess of the 4% limitation are deferred,and will be reimbursed from future offering proceeds.  Any offering costs incurred by the ManagingMember that are not reimbursed by the Fund will be reflected as a capitalcontribution to the Fund by the Managing Member, with an offsetting expenserecognized in the Fund’s statement of operations.

 

Unrecoveredoffering costs incurred by the Managing Member for the nine months ended September30, 2004 are as follows:

 
| Balance, December 31, 2003  |   | $        | 595,528 |   |
|-----------------------------|--------|----------|---------|--------|
| Costs incurred              |   | 257,604  |    |
| Costs paid                  |   | (315,660 | )       |
|                        |   |     |    |
| Balance, September 30, 2004 |   | $        | 537,472 |   |

 

10

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Currentlythe Fund is distributing a 5% annual return paid quarterly.  During the nine months ended September 30,2003, the Managing Member funded $122,351 to subsidize the Fund’s distributionsto the unitholders .These fundings by the Managing Member will not bereimbursed to the Managing Member by the Fund.

 

TheManaging Member and/or its affiliates are entitled to receive various fees,compensation and reimbursements as specified in the Fund’s operating agreement,including commissions of 7%, marketing fees of 2% of gross proceeds from theoffering of units, and expense allowances of 1.5% of gross proceeds from theoffering of units.    During the ninemonths ended September 30, 2004 and 2003, the total fees, compensation andreimbursements were $832,422 and $425,775, respectively.

 

**Item 2.****         ****Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

Thefollowing “Management’s Discussion and Analysis of Financial Condition andResults of Operations” should be read in conjunction with the Fund’s financialstatements and notes thereto contained elsewhere in this report.  Certain statements in this section andelsewhere contain forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. Such forward-looking statements may relate to risks and other factorsthat may cause the Fund’s future results of operations to be materiallydifferent than those expressed or implied herein.  Some of these risks and other factorsinclude, but are not limited to:  (i) no assurancethat Fund properties will experience minimal or no vacancy; (ii) tenants maynot be able to meet their financial obligations; (iii) rental revenues from theproperties may not be sufficient to meet the Fund’s cash requirements foroperations, capital requirements and distributions; (iv) suitable investmentproperties may not continue to be available; and (v) adverse changes to thegeneral economy may disrupt operations.

 

**CriticalAccounting Policies**

 

TheFund’s financial statements have been prepared in accordance with accountingprinciples generally accepted in the United States.  The preparation of these financial statementsrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities as of the date of the financial statementsand the reported amount of revenue and expenses during the reportingperiod.  Actual results could differmaterially from the estimates in the near term.

 

## *Revenue Recognition*

## * *

Rentalrevenues are recorded on an accrual basis as they are earned over the lives ofthe respective tenant leases on a straight-line basis.  Rental receivables are periodically evaluatedfor collectibility.

 

## *Investments in RealEstate*

## * *

TheFund evaluates the carrying value for investments in real estate in accordancewith Financial Accounting Standards Board (“FASB”) Statement No. 144, *Accounting for the Impairment or**Disposal ofLong-Lived Assets* (“FAS 144”). FAS 144 requires that when events or changes in circumstances indicatethat the carrying amount of the assets might not be recoverable, companiesshould evaluate the need for an impairment write-down.  When an impairment write-down is required,the related assets are adjusted to their estimated fair value.

 

InJune 2001 the FASB issued Statement of Financial Accounting Standard (“SFAS”)No. 141, *Business Combinations* and SFAS No. 142, *Goodwill and Other Intangible Assets*.  SFAS No. 141 and No. 142 require the Fund torecord at acquisition an intangible asset or liability for the valueattributable to in-place leases.  Therequirements are applicable to all acquisitions subsequent to July 1,2001.  As of

 

11

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September30, 2004, the Fund has recorded $71,457 net of $95,957 of amortization as anintangible asset attributable to the value of the leases in place as of thedate of acquisition.

 

*Off-balance Sheet Financings and Liabilities*

 

Otherthan lease commitments and legal contingencies incurred in the normal course ofbusiness, the Fund does not have any off-balance sheet financing arrangementsor liabilities.  The Fund does not haveany majority-owned subsidiaries or any interests in, or relationships with, anyspecial-purpose entities.

 

**Impactof New Accounting Pronouncements**

 

InJanuary 2003, the FASB issued Interpretation No. 46, *Consolidationof Variable Interest**Entities*, asamended in December 2003 (“Interpretation No. 46R”), which applies immediatelyto arrangements created after January 31, 2003. Interpretation No. 46R applies to arrangements created before February1, 2003 beginning no later than March 31, 2004. The initial adoption of Interpretation No. 46R did not have a materialimpact on the Fund’s financial position or results of operations.

 

**Resultsof Operations**

 

Asof September 30, 2004, the Fund has purchased three multi-tenant industrialbusiness park properties in two different major metropolitan areas.  The properties were purchased from theproceeds from the sale of membership units, without debt financing. Theproperties were purchased in the latter parts of September 2002, December 2002and December 2003, respectively. As a result of the dates of purchase, Fundoperations for 2003 reflect the net income from only two properties.  For the three months and nine months endedSeptember 30, 2004, Fund operations reflect operations for the three propertiespurchased.

 

*Threemonths ended September 30, 2004 and 2003*

 

TheFund’s net income for the three months ended September 30, 2004 and 2003 was$182,216 and $76,599, respectively. Revenue increased from $211,785 to $345,947.  These increases primarily reflect theaddition of Arrow Business Center, purchased in December 2003.  Property operating and maintenance expenses, andproperty taxes increased from $74,186 in 2003 to $85,754 in 2004 due to theaddition of Arrow Business Center. Depreciation and amortization increased from $27,677 to $79,441 due tothe addition of Arrow Business Center. General and administrative costs decreased from $32,241 to $24,220.  These expenses for the three months endedSeptember 30, 2003 included a nonrecurring charge of $12,040 for costsassociated with due diligence for a property purchase not consummated.

 

*Ninemonths ended September 30, 2004 and 2003*

 

TheFund’s net income for the nine months ended September 30, 2004 and 2003 was$331,849 and $287,647, respectively. Revenue increased from $685,868 to $988,200. This increase primarilyreflects the addition of Arrow Business Center, partially offset by a reductionin occupancy at Sky Harbor Business Park in July of 2003.  Property operating and maintenance expenses,and property taxes increased from $210,205 in 2003 to $357,592 in 2004 due tothe addition of Arrow Business Center, additional HVAC repair costs and legalexpenses regarding tenant rent collection matters at Normandie Business Centerincurred in the second quarter of 2004. Depreciation and amortization increased from $82,993 to $252,745 due tothe addition of Arrow Business Center. General and administrative costs increased from $101,030 to$141,971.  The majority of this increase,incurred in the second quarter of 2004, is attributable to the additional legaland accounting effort related to the restatement of the Fund’s

 

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financialstatements included the December 31, 2003 Annual Report on Form 10-K.  Most of these costs are not consideredrecurring.

 

**Liquidityand Capital Resources**

 

Asof September 30, 2004, the Fund has received $24,364,000 ($26,164,000 as ofNovember 1, 2004) of gross proceeds from the sale of membership units, and$109,979 as a capital contribution from the Managing Member.  As of September 30, 2004, the Fund has$7,873,682 ($9,382,254 at November 1, 2004) in cash and cash equivalents.

 

TheFund intends to continue offering membership units for sale and use theexisting cash balance and net proceeds from the sale of units for theacquisition of additional multi-tenant industrial business park properties,capital improvements to the properties, and for operating expenses and reserves.

 

TheFund expects to meet its short-term liquidity requirements from net cashgenerated by operations, which we believe will be adequate to meet operatingcosts of the properties and the Fund, and allow for cash distributions to theunitholders.

 

TheFund’s offering and organizational activities have been financed by theManaging Member.  A portion of thosecosts have been reimbursed to the Managing Member at the rate of 4% of grossproceeds of the Fund’s unit sales pursuant to the prospectus for the offering.  The Fund will continue to incurorganizational and offering expenses and the Managing Member, although notobligated, intends to continue providing advances for offering andorganizational expenses until the sale of membership units is completed.  The Managing Member must raise funds throughthe sale of its own debt or equity securities to obtain the cash necessary toprovide these advances.  There can be noassurance as to the amount or timing of the Managing Member’s receipt offunds.  The Fund will not reimburse theManaging Member for any amounts advanced by it for offering and organizationalexpenses which exceed the amounts and percentages set forth in the prospectusfor the offering.  Any such expenses incurredby the Managing Member on behalf of the Fund that are not reimbursed by theFund will be reflected as a capital contribution to the Fund by the ManagingMember with an offsetting expense recognized in the Fund’s statement ofoperations.

 

**ContractualObligations**

 

Asof September 30, 2004, the Fund had no significant contractual obligations orcommercial commitments, other than leases with the tenants which occupy ourcommercial buildings.

 

**Item 3.****         ****Quantitative and QualitativeDisclosures about Market Risk**

 

TheFund invests its cash and cash equivalents in short term money market accountswhich, by their nature, are not subject to significant interest ratefluctuations.

 

**Item 4.****         ****Controls and Procedures**

 

TheFund’s disclosure controls and procedures are designed to ensure that informationrequired to be disclosed in reports that the Fund files or submits under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in the rules and forms of the Securities andExchange Commission. The Chief Executive Officer and the Chief FinancialOfficer of Cornerstone Ventures, Inc., the manager of the managing member ofthe Fund, have reviewed the effectiveness of the Fund’s disclosure controls andprocedures as of the end of the period covered by this report and haveconcluded that the disclosure controls and procedures are effective. There wereno

 

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significantchanges in our internal controls or in other factors that could significantly affectthese controls subsequent to the last day they were evaluated.  The fund is currently working to implementSection 404 of the Sarbanes–Oxley Act of 2002 for which the Fund expects to bein compliance by December 31, 2005, as required

 

Itshould be noted that any system of controls, however well designed andoperated, can provide only reasonable, and not absolute, assurance that theobjectives of the system are met.  Inaddition, the design of any control system is based in part upon certainassumptions about the likelihood of future events.  Because of these and other inherentlimitations of control systems, there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions.

 

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**PART II - OTHER INFORMATION**

 
| **Item 6.** | ** ** | **Exhibits** |   |
|-------------|------------|--------------|--------|
|        |       |         |   |
|        |       |         | 31.1   | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002. |
|        |       |         |   |   |
|        |       |         | 31.2   | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002. |
|        |       |         |   |   |
|        |       |         | 32     | Certification  of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C.  §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the registrant has duly caused this quarterly report tobe signed on its behalf by the undersigned, thereunto duly authorized this 5thday of November 2004.

 
|   | CORNERSTONE  REALTY FUND, LLC |
|--------|-------------------------------|
|   |                          |   |
|   | By:                           | CORNERSTONE  INDUSTRIAL PROPERTIES, LLC |
|   |                          | its  Managing Member |
|   |                          |   |   |
|   |                          | By: | CORNERSTONE  VENTURES, INC. |
|   |                          |   | its  Manager |
|   |                          |   |   |   |
|   |                          |   | By: | /s/ TERRY G. ROUSSEL |   |
|   |                          |   |   |  Terry G. Roussel, President |
|   |                          |   |   | (Principal  Executive Officer) |
|   |                          |   |   |   |
|   |                          |   |   |   |
|   |                          |   | By: | /s/ GARY W. NIELSON |   |
|   |                          |   |   | Gary W. Nielson, |
|   |                          |   |   | Chief  Financial Officer |
|   |                          |   |   | (Principal  Financial Officer and Principal Accounting Officer) |

 

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