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

**WASHINGTON, D.C. 20549**

**FORM 10-Q**

**(Mark One)**

**ý      QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

**FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002**

**o      TRANSITIONREPORT PURSUANT TO SECTION 13**

**OR 15(D) OF THE SECURITIES EXCHANGE ACTOF 1934**

**FOR THE TRANSITION PERIOD FROM                          TO                          **

**CommissionFile Number  ** **333-63656**  

 

**CORNERSTONEREALTY FUND, LLC**

(EXACT NAME OF REGISTRANT ASSPECIFIED 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**

(ADDRESSOF PRINCIPAL EXECUTIVE OFFICES)

**949-852-1007**

(ISSUER’STELEPHONE NUMBER)

**NotApplicable**

(FORMERNAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT)

Check whether the issuer(1) filed all reports required to be filed by Section 13 or 15(d) ofthe Exchange Act of 1934 during the past 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

YES ý          NO **o**     

As of October 31, 2002,the Fund had 15,559 units of membership interest issued and outstanding.

 

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**PART I - FINANCIAL INFORMATION**

 
| **Item 1.      Financial  Statements**                                                                                |   |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                           |   |
|                                                                                                                                           |   |
| **Cornerstone Realty Fund, LLC**                                                                                                               |   |
|                                                                                                                                           |   |
| Condensed Balance Sheets at  September 30, 2002 and December 31, 2001                                                                          |   |
|                                                                                                                                           |   |
| Condensed  Statements of Operations for the Three Months and Nine Months ended September 30, 2002 and September 30,  2001                      |   |
|                                                                                                                                           |   |
| Condensed Statements of Members’  Capital (Deficit) for the Nine Months ended September 30, 2002 and for the year ended December 31, 2001 |   |
|                                                                                                                                           |   |
| Condensed Statements of Cash Flows for the  Nine Months ended September  30, 2002 and September 30, 2001                                       |   |
|                                                                                                                                           |   |
| Notes to Condensed  Financial Statements                                                                                                       |   |

** **

 

2

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**CORNERSTONE REALTY FUND, LLC**

**(a California Limited Liability Company)**

 

**CONDENSEDBALANCE SHEETS**

 

 

**ASSETS**

 

 
|                                                                                                                                           |   | **September  30,** |      | **December  31,** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|-----------|-------------------|--------|
|                                                                                                                                           |   | **2002**           |      | **2001**          |   |
|                                                                                                                                           |   | **(Unaudited)**    |      |              |   |
| Assets                                                                                                                                         |   |               |      |              |   |
| Cash and cash equivalents                                                                                                                      |   | $                  | 1,931,139 |              | $      | 2,493,073 |   |
|                                                                                                                                           |   |               |      |              |   |
| Investments in real estate                                                                                                                     |   |               |      |              |   |
| Land                                                                                                                                           |   | 1,783,075          |      | —            |   |
| Buildings                                                                                                                                      |   | 2,118,621          |      | —            |   |
|                                                                                                                                           |   | 3,901,696          |      | —            |   |
| Other assets                                                                                                                                   |   |               |      |              |   |
| Prepaid insurance                                                                                                                              |   | 1,575              |      | —            |   |
| Leasing commissions                                                                                                                            |   | 1,633              |      | —            |   |
| Office equipment, less  accumulated depreciation of $2,410 in 2002 and $1,984 in 2001                                                          |   | 444                |      | 870               |   |
| Total assets                                                                                                                                   |   | $                  | 5,836,487 |              | $      | 2,493,943 |   |
|                                                                                                                                           |   |               |      |              |   |
| **LIABILITIES AND MEMBERS’ CAPITAL**                                                                                                      |
|                                                                                                                                           |   |               |      |              |   |
| Liabilities                                                                                                                                    |   |               |      |              |   |
| Accounts payable and  accrued liabilities                                                                                                      |   | $                  | 39,957    |              | $      | 55,559 |   |
| Tenant security deposits                                                                                                                       |   | 48,607             |      | —            |   |
| Advances payable to  managing member                                                                                                           |   | 106,880            |      | 265,106           |   |
| Total liabilities                                                                                                                              |   | 195,444            |      | 320,665           |   |
|                                                                                                                                           |   |               |      |              |   |
| Members’ capital (100,000  units authorized, 14,641 units issued and outstanding in 2002 and 6,186 units  issued and outstanding in 2001) |   | 5,641,043          |      | 2,173,278         |   |
| Total liabilities and  members’ capital                                                                                                   |   | $                  | 5,836,487 |              | $      | 2,493,943 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

3

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**CORNERSTONE REALTY FUND, LLC**

**(a California Limited Liability Company)**

 

**CONDENSEDSTATEMENTS OF OPERATIONS (Unaudited)**

 

 

 
|                                                     |   | **Three  Months Ended** |    | **Nine  Months Ended** |   |
|----------------------------------------------------------|--------|-------------------------|---------|------------------------|--------|
|                                                     |   | **September  30,**      |    | **September  30,**     |   |
|                                                     |   | **2002**                |    | **2001**               |   | **2002** |   | **2001** |   |
| Revenues                                                 |   |                    |    |                   |   |   |   |   |   |
| Rental revenues                                          |   | $                       | 4,353   |                   | $      | — |   | $ | 4,353 |   | $ | — |   |
| Interest and dividends                                   |   | 18,602                  |    | —                 |   | 45,022 |   | — |   |
|                                                     |   |                    | 22,955  |                   |   | — |   |   | 49,375 |   |   | — |   |
|                                                     |   |                    |    |                   |   |   |   |   |   |
| Expenses                                                 |   |                    |    |                   |   |   |   |   |   |
| Property taxes                                           |   | (391                    | )       | —                 |   | (391 | ) | — |   |
| General and administrative  expenses                     |   | (31,404                 | )       | (69,869                | )      | (132,454 | ) | (84,167 | ) |
| Interest expense on  advances payable to managing member |   | (9,254                  | )       | (18,641                | )      | (32,192 | ) | (52,691 | ) |
| Depreciation                                             |   | (142                    | )       | (142                   | )      | (426 | ) | (426 | ) |
|                                                     |   | (41,191                 | )       | (88,652                | )      | (165,463 | ) | (137,284 | ) |
|                                                     |   |                    |    |                   |   |   |   |   |   |
| Net loss                                                 |   | $                       | (18,236 | )                      | $      | (88,652 | ) | $ | (116,088 | ) | $ | (137,284 | ) |
|                                                     |   |                    |    |                   |   |   |   |   |   |   |   |   |   |
| Net loss allocable to  managing member                   |   | $                       | (1,824  | )                      | $      | (88,652 | ) | $ | (11,609 | ) | $ | (137,284 | ) |
|                                                     |   |                    |    |                   |   |   |   |   |   |   |   |   |   |
| Net loss allocable to  unitholders                       |   | $                       | (16,412 | )                      | $      | — |   | $ | (104,479 | ) | $ | — |   |
|                                                     |   |                    |    |                   |   |   |   |   |   |   |   |   |   |
|                                                     |   |                    |    |                   |   |   |   |   |   |   |   |   |   |
| Per share amounts:                                       |   |                    |    |                   |   |   |   |   |   |
| Basic and diluted loss  allocable to unitholders         |   | $                       | (1.24   | )                      | $      | — |   | $ | (10.32 | ) | $ | — |   |
| Basic and diluted weighted  average units outstanding    |   | 13,237                  |    | —                 |   | 10,125 |   | — |   |

 

The accompanying notes are an integral part of these financialstatements.

 

4

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**CORNERSTONE REALTY FUND, LLC**

**(a California Limited Liability Company)**

 

**CONDENSEDSTATEMENTS OF MEMBERS’ CAPITAL (DEFICIT)**

 

 

 

 
| Balance, December 31, 2000                                     |   | $         | (337,188  | )      |
|----------------------------------------------------------------|--------|-----------|-----------|--------|
| Capital contributions                                          |   | 56,532    |      |
| Net proceeds from offering                                     |   | 2,768,602 |      |
| Deferred offering costs  repaid to managing member             |   | (123,720  | )         |
| Distributions to  unitholders                                  |   | (4,868    | )         |
| Net loss                                                       |   | (186,080  | )         |
|                                                           |   |      |      |
| Balance, December 31, 2001                                     |   | $         | 2,173,278 |   |
| Net proceeds from offering  (unaudited)                        |   | 3,791,110 |      |
| Deferred offering costs  repaid to managing member (unaudited) |   | (169,100  | )         |
| Distributions to  unitholders (unaudited)                      |   | (38,157   | )         |
| Net loss (unaudited)                                           |   | (116,088  | )         |
|                                                           |   |      |      |
| Balance, September 30,  2002 (unaudited)                       |   | $         | 5,641,043 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

5

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**CORNERSTONE REALTY FUND, LLC**

**(a California Limited Liability Company)**

 

**CONDENSEDSTATEMENTS OF CASH FLOWS (Unaudited)**

 

 

 
|                                                                         |   | **Nine  Months Ended** |      |
|------------------------------------------------------------------------------|--------|------------------------|-----------|
|                                                                         |   | **September  30,**     |      |
|                                                                         |   | **2002**               |      | **2001** |   |
| OPERATING ACTIVITIES                                                         |   |                   |      |   |   |
| Net Loss                                                                     |   | $                      | (116,088  | ) | $ | (137,284 | ) |
| Adjustments to reconcile  net loss to net cash used in operating activities: |   |                   |      |   |   |
| Depreciation                                                                 |   | 426                    |      | 426 |   |
| Changes in operating  assets and liabilities:                                |   |                   |      |   |   |
| Other assets                                                                 |   | (3,208                 | )         | — |   |
| Accounts payable and  accrued liabilities                                    |   | (15,602                | )    | 29,309 |   |
| Tenant security deposits                                                     |   | 48,607                 |      | — |   |
| Net cash used in operating  activities                                       |   | (85,865                | )         | (107,549 | ) |
|                                                                         |   |                   |      |   |   |
| INVESTING ACTIVITIES                                                         |   |                   |      |   |   |
| Purchase of real estate                                                      |   | (3,901,696             | )         | — |   |
|                                                                         |   | (3,901,696             | )         | — |   |
|                                                                         |   |                   |      |   |   |
| FINANCING ACTIVITIES                                                         |   |                   |      |   |   |
| Advances from managing  member                                               |   | 38,227                 |      | 280,207 |   |
| Repayment of managing  member advances                                       |   | (196,453               | )         | — |   |
| Net proceeds from offering                                                   |   | 3,791,110              |      | — |   |
| Deferred offering costs  repaid to managing member                           |   | (169,100               | )         | (177,158 | ) |
| Distributions to  unitholders                                                |   | (38,157                | )         | — |   |
| Net cash provided by  financing activities                                   |   | 3,425,627              |      | 103,049 |   |
|                                                                         |   |                   |      |   |   |
| Net decrease in cash                                                         |   | (561,934               | )         | (4,500 | ) |
|                                                                         |   |                   |      |   |   |
| Cash at beginning of  period                                                 |   | 2,493,073              |      | 4,500 |   |
|                                                                         |   |                   |      |   |   |
| Cash at end of period                                                        |   | $                      | 1,931,139 |   | $ | — |   |

 

The accompanying notes are an integral part of these financialstatements.

 

6

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**CORNERSTONE REALTY FUND, LLC**

**(a California Limited Liability Company)**

 

**NOTES TOCONDENSED FINANCIAL STATEMENTS (Unaudited)**

 

 

**1.      Organizationand Business**

 

          Cornerstone Realty Fund,LLC, a California limited liability company (the “Fund”) (formerly CornerstoneMulti-Tenant Industrial Business Parks Fund, LLC and Cornerstone IndustrialProperties Income and Growth Fund I, LLC), was formed on October 28,1998.  The members of the Fund areCornerstone Industrial Properties, LLC, a California limited liability company(“CIP” or “managing member”), as the managing member, Terry G. Roussel, an individual,and other various unitholders as described below.  The purpose of the Fund is to acquire, operate and sellmulti-tenant industrial properties.  TheFund currently is issuing and selling in a public offering equity interests(“units”) in the Fund, and is admitting the new unitholders as members of theFund.

 

          The Fund has beendependent on the managing member providing capital contributions and advancesin order for it to meet its obligations as they have come due.  The managing member intends to continueproviding such capital contributions and advances until the proceeds from theFund’s public offering are sufficient for the Fund to meet its obligations asthey come due.  During December 2001,the Fund raised the minimum offering requirement of 6,000 units.  As of October 31, 2002, the Fund has issued15,559 units primarily to new unitholders for gross offering proceeds of$7,779,500.

 

          Each member’s liabilityis limited pursuant to the provisions of the Beverly-Killea Limited LiabilityCompany Act.  The term of the Fund shallcontinue until December 31, 2010, unless terminated sooner pursuant to theoperating agreement.

 

 

**2.      Summaryof Significant Accounting Policies**

## * *

## *Interim FinancialInformation*

 

          The accompanyingunaudited condensed financial statements have been prepared in accordance withaccounting principles generally accepted in the United States for interimfinancial information and with the instructions to Form 10-Q and Article 10 ofRegulation S-X.  Accordingly, they donot include all of the information and footnotes required by accountingprinciples generally accepted in the United States for complete financialstatement presentation.  In the opinionof management, all adjustments, consisting of normal recurring accruals,considered necessary for a fair presentation, have been included.  Operating results for the nine-month periodended September 30, 2002 are not necessarily indicative of the results that maybe expected for the year ending December 31, 2002.

 

          For further information,refer to the audited financial statements and footnotes thereto included in theFund’s Annual Report on Form 10-K for the year ended December 31, 2001.

## * *

## *Use of Estimates*

 

          The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities as ofthe date of the financial statements and the reported amount of 

 

7

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revenue and expenses during the reporting period.  Actual results could differ materially fromthe estimates in the near term.

 

*Cash & Cash Equivalents*

 

          Cash and cashequivalents consist primarily of interest-bearing investments with originalmaturities of 90 days or less at the date of purchase. Included in cash andcash equivalents is $48,607 that the Fund has appropriated to refund tenantsecurity deposits.

## * *

*Investments in Real Estate*

## * *

          Investments in realestate are stated at cost and include land, buildings and buildingimprovements. Expenditures for ordinary maintenance and repairs are expensed tooperations as incurred.  Significantreplacements and improvements which improve or extend the useful lives of thebuildings, are capitalized. Depreciation of the buildings and buildingimprovements is computed on a straight-line basis over their estimated usefullives of 39 years.

 

          The Company evaluatesthe carrying value for investments in real estate in accordance with FASBStatement No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets* ("FAS 144").FAS 144 requires that when events or changes in circumstances indicate that thecarrying amount of the assets might not be recoverable, companies shouldevaluate the need for an impairment write-down. When an impairment write-downis required, the related assets are adjusted to their estimated fair value.

 

## *Office Equipment*

 

          Office equipment isstated at cost.  Depreciation iscomputed on a straight-line basis over the estimated useful lives of therelated assets.  The estimated usefullife of the office equipment is five years.

 

## *Revenue Recognition*

 

          Rental revenues arerecorded on an accrual basis as they are earned over the lives of therespective tenant leases on a straight-line basis.  Rental receivables are periodically evaluated for collectibility.

 

*Income Tax Matters*

 

          It is the intent of theFund and its members that the Fund be treated as a partnership for income taxpurposes.  As a limited liabilitycompany, the Fund is subject to certain minimal taxes and fees; however, incometaxes on the income or losses realized by the Fund are generally the obligationof the members.

## * *

## *Reclassifications*

 

          Certainreclassifications have been made to the 2001 financial statement accountbalances to conform to the 2002 presentation.

 

**3.      Investmentsin Real Estate**

 

          On September 27, 2002,the Fund acquired an existing multi-tenant industrial park known as NormandieBusiness Center, located in Torrance, California for an investment of $3,901,696.  Normandie Business Center consists of twosingle-story buildings containing a total of 48,979 leasable square feet.

 

## ***4.      DeferredOffering Costs Advanced by Managing Member***

 

          Deferredoffering costs advanced by the managing member for the nine months endedSeptember 30, 2002 (unaudited) and for the year ended December 31, 2001 are asfollows:

 

8

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|                         |   | **Deferred Offering Costs** |    |
|------------------------------|--------|-----------------------------|---------|
| Balance, December 31, 2000   |   | $                           | 399,166 |   |
| Costs advanced               |   | 225,597                     |    |
| Costs repaid                 |   | (123,720                    | )       |
|                         |   |                        |    |
| Balance, December 31, 2001   |   | 501,043                     |    |
|                         |   |                        |    |
| Costs advanced               |   | 114,396                     |    |
| Costs repaid                 |   | (169,100                    | )       |
|                         |   |                        |    |
| Balance, September 30,  2002 |   | $                           | 446,339 |   |

 

 

          Specific incrementalcosts incurred in connection with the offering of membership units are advancedby the managing member.  These advancesbear simple interest at the prevailing prime commercial lending rate (4.75% atSeptember 30, 2002) plus two percentage points.  Reimbursement of such offering costs is limited to 4% of thegross proceeds of the related offerings. Offering costs incurred by the managing member in excess of the 4%limitation are deferred, and will be reimbursed from future offeringproceeds.  Any offering costs 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.  Through September 30, 2002,the Fund has received cumulative unsecured advances from CIP of deferredoffering costs in the amount of $739,159. Through September 30, 2002, the Fund has repaid CIP $292,820 in deferredoffering costs.

 

 

## ***5.      RelatedParty Transactions***

## * *

## ***         ***Inorder to fund its initial operating costs, the Fund has received unsecuredadvances, including accrued interest, from CIP.  Through September 30, 2002, the Fund repaid $350,534 of theseunsecured advances.  The advances bearsimple interest at the prevailing prime commercial lending rate plus twopercentage points.

## * *

## *          The managing member and/or itsaffiliates are entitled to receive various fees, compensation andreimbursements as specified in the Fund’s operating agreement, includingcommissions of 9% of the first $3,000,000 of gross proceeds from the offeringof units and 7% thereafter, marketing fees of 2% of gross proceeds from theoffering of units less $60,000, and expense allowances of 1.5% of grossproceeds from the offering of units.  Inaddition, the Fund is to reimburse CIP for deferred offering costs advanced byCIP to the Fund in the amount of 4% of the gross proceeds from the offering ofunits.  The Fund also reimburses CIP for100% of initial operating costs advanced to the Fund.  Deferred offering and initial operating costs advanced to theFund by CIP bear interest at the prevailing prime commercial lending rate plustwo percentage points.*

 

9

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**Item 2.****                                                ****Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

**Recent Developments**

 

          On September 27, 2002,Cornerstone Realty Fund, LLC acquired an existing multi-tenant industrialbusiness park known as the Normandie Business Center.  This property is located in Torrance, California which is part ofthe larger South Bay industrial sub-market of Los Angeles County.  The South Bay is one of the largest andstrongest industrial sub-markets in Los Angeles County accounting for 26% ofall industrial sales and leasing activity in Los Angeles County as reported forthe second quarter of 2002 and is considered to be an established, infillmarket where there is very little land available for the development of newcompetitive multi-tenant industrial projects. This market characteristic has historically enabled landlords to obtainsignificant rental increases from tenants.

** **

          The South Bay industrialmarket enjoys a very low overall vacancy rate of only 3.8% as reported for thesecond quarter of 2002.  The overall LosAngeles industrial market is considered to be one of the three leadingindustrial markets in the United States.

 

          The Normandie BusinessCenter contains a total of 29 individual tenant spaces.  Individual tenant spaces at the propertyrange in size from approximately 1,200 square feet up to approximately 3,358square feet.  The average tenant spaceis 1,682 square feet in size and consists of approximately 1,382 square feet ofwarehouse space and approximately 300 square feet of office space.

 

          As of the date of ouracquisition, the property was 96.3% leased. Substantially all of the tenantshave modified industrial gross leases at an average monthly rental rate of$0.85 per leasable square foot.  Monthlyoperating expenses at the property, excluding leasing commissions, tenantimprovements and reserves for future improvements are estimated at $0.20 perleasable square foot of space at the property.

 

          The occupancy raterequired at the property for a break-even cash flow, based on property leveloperating expenses as described above, is estimated at approximately23.5%.  This will vary based on futuremarket conditions, rental rates and property level operating expenses.

 

          Our total acquisition cost was $3,901,696 which equates toapproximately $80 per square foot of leasable space.  The current estimated cost to replace the land, buildings andimprovements at the Normandie Business Center as of our date of acquisition iscalculated at approximately $5,600,000. This estimated replacement cost equates to approximately $115 per squarefoot.  Our acquisition price for theNormandie Business Center equates to an approximate 30% discount from theestimated cost of building this property new.

 

          Including the NormandieBusiness Center, there are approximately thirteen multi-tenant industrialprojects in the immediate local area of the South Bay marketplace which arebelieved to be the most competitive in attracting tenants similar to those atthe Normandie Business Center.  As ofthe date of the most recent competitive market analysis, the average vacancy ratefor the thirteen projects deemed to be most competitive totaled approximately5.5%.  With a 3.7% vacancy rate as ofthe date of our acquisition, the Normandie Business Center had a lower overallvacancy rate than eight of the thirteen projects deemed to be most directlycompetitive in the market.

 

          The property was builtin 1989, and is in good physical condition. The business plan for the NormandieBusiness Center is to make modest repairs and improvements over the next fewyears for which we have budgeted approximately $150,000, and aggressivelyre-mix the tenant type as the leases expire to increase the overall value ofthe property.

** **

10

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**Material Changes in FinancialResources**

 

          As ofOctober 31, 2002, the Fund has received $7,779,500 of gross proceeds from thesale of membership units, which have been registered for sale under theSecurities Act of 1933, as amended, and under various state securitieslaws.  Prior to the closing of the saleof the minimum offering of 6,000 units in December 2001, the Fund’sorganizational activities were financed through advances from the managingmember.  A portion of those advances hasbeen reimbursed from the proceeds received by the Fund from the offering.  The Fund will continue to incurorganizational and offering expenses until it has completed the sales of itsmembership units.

 

          The Fund has been dependent on the managing memberproviding capital contributions and advances in order for it to meet itsobligations as they have come due.  Themanaging member intends to continue providing such capital contributions andadvances until the proceeds from the Fund’s public offering are sufficient forthe Fund to meet its obligations as they come due.  If necessary, the terms of the managing member’s operating agreementindicate that its members may be asked to make additional contributions;however, its members are not committed by any contract to make such additionalcontributions or provide any other financial assistance.  In the event its members choose not to makesuch additional contributions, its managing member would be entitled to look toa third party to fund any shortfall and may reduce the percentage interest ofits non-contributing members.

 

          The Fund will not reimburse the managing member for anyamounts advanced for organizational expenses which exceed the amounts andpercentages set forth in the prospectus for the offering.  Any such expenses incurred by the managingmember on behalf of the Fund, that are not reimbursed by the Fund, will bereflected as a capital contribution to the Fund by the managing member with anoffsetting expense recognized in the Fund’s statement of operations.

 

          The Fund intends to use the net proceeds from the sale ofits units to acquire additional multi-tenant industrial properties and forcapital improvement, operating and other reserves.  As of September 30, 2002, the Fund has made its initial propertypurchase, the Normandie Business Center property.  The Fund expects togenerate revenue from rents from the Normandie Business Center property, whichis expected to exceed the cost of property operations.  These excess funds are expected to providean additional source of liquidity for the Fund.

** **

**Material Changes in Results of Operations**

 

          The Fund is in the organizational stage even with thepurchase of the first property on September 27, 2002. The Fund's net loss forthe nine months ended September 30, 2002 decreased $21,196 from the same periodof 2001 primarily because the Fund had not yet sold the minimum number of unitsby September 2001, had incurred expenses including interest on advances of$137,284, and had no operating revenues. For the nine months ended September30, 2002, the Fund's operating expenses totaled $165,463 including interest onadvances, which represents an increase of $28,179 over 2001, offset by rentalrevenues of $4,353 due to the acquisition of its first investment property and$45,022 of interest earned on the proceeds from the sale of its units.Organizational and other start-up expenses and associated losses are expectedto continue until the organization of the Fund is completed.  The Fund will continue to have losses untilrental revenues from properties acquired exceed operating and other expenses ofthe Fund.

 

**Forward LookingStatements**

 

          ThePrivate Securities Litigation Reform Act provides a “safe harbor” for certainforward-looking statements.  Certainmatters discussed in this filing could be characterized as forward-lookingstatements such as statements relating to plans for future expansion, as wellas other capital spending, financing sources and effects of regulation andcompetition.  Such forward-lookingstatements involve important 

 

11

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risks and uncertainties that could cause actualresults to differ materially from those expressed in such forward-lookingstatements.

 

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

 

          TheFund invests its cash and cash equivalents in FDIC insured savings accountswhich, by their nature, are not subject to interest rate fluctuations.

 

          Asof September 30, 2002, the Fund had $106,880 in advances payable to itsmanaging member.  The advances arerelated to loans from affiliates which, by their nature, are not subject tointerest rate fluctuations.

 

**Item 4.                 Controls and Procedures**

 

          As of November 11, 2002, an evaluation of theeffectiveness of the design and operation of the Fund’s disclosure controls andprocedures was performed under the supervision and with the participation ofthe Fund’s management, including the Chief Executive Officer and ChiefFinancial Officer of Cornerstone Ventures, Inc., the managing member of theFund’s managing member.  Based on thatevaluation, the Fund’s management, including the Chief Executive Officer and ChiefFinancial Officer of Cornerstone Ventures, Inc., the managing member of theFund’s managing member, concluded that the Fund’s disclosure controls andprocedures were effective as of the date of the evaluation.  There were no significant changes in theFund’s internal controls or in other factors that could significantly affectthe internal controls subsequent to the date of the evaluation.

 

 

**PART II - OTHER INFORMATION**

 
| **Item 1.** | **Legal Proceedings****.**                                   |
|-------------|--------------------------------------------------------------|
|        |                                                         |   |
|        | Not applicable.                                              |
|        |                                                         |   |
| **Item 2.** | **Changes in Securities and Use of Proceeds****.**           |
|        |                                                         |   |
|        | Not applicable.                                              |
|        |                                                         |   |
| **Item 3.** | **Defaults Upon Senior Securities****.**                     |
|        |                                                         |   |
|        | Not applicable.                                              |
|        |                                                         |   |
| **Item 4.** | **Submission of Matters to a Vote of Security Holders****.** |
|        |                                                         |   |
|        | Not applicable.                                              |
|        |                                                         |   |
| **Item 5.** | **Other Information****.**                                   |
|        |                                                         |   |
|        | Not applicable.                                              |

 

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|        |                                       |
|-------------|--------------------------------------------|
| **Item 6.** | **Exhibits  and Reports on Form 8-K****.** |
|        |                                       |
|        | **(a)**                                    | **Exhibits** |
|        |                                       |   |
|        |                                       | None. |
|        |                                       |   |
|        | **(b)**                                    | **Reports on Form 8-K** |
|        |                                       |   |
|        |                                       | The Registrant filed Form 8-K on October 12, 2002, to report the acquisition of its initial multi-tenant industrial  property on September 27, 2002. |

 

 

 

**SIGNATURES**

 

          In accordance with the requirements of the Exchange Act,the Registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
| November 14, 2002 | 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/ TRACY  A. THOMSON** |
|              |                         |   |   | Tracy A. Thomson, Chief Financial Officer |
|              |                         |   |   | (Principal Financial Officer and Principal Accounting Officer) |
|                   |                              |  |  |  |  |  |

 

 

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CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANTTO

RULE13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934

ASADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Terry G. Roussel, certifythat

1.       I have reviewed thisquarterly report of Cornerstone Realty Fund, LLC;

2.       Based on my knowledge, thisquarterly report does not contain any untrue statement of a materialfact or omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, not misleadingwith respect to the period covered by thisquarterly report;

3.       Based on my knowledge, the financial statements, and otherfinancial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in thisquarterly report;

4.       The registrant’s other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant andhave:

a)          designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known tothem by others within those entities, particularly during the period in whichthis Report is being prepared;

b)         evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c)          presented in this quarterly report our conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

5.       The registrant’s other certifying officers and I  have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons fulfilling the equivalentfunction):

a)          all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

b)         any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

6.       The registrant’s other certifying officers and I haveindicated in this quarterly reportwhether or not there were significant changes in internal controls or in otherfactors that could significantly affect 

 

14

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internal controls subsequentto the date of their most recent evaluation, including any corrective actionswith regard to significant deficiencies and material weaknesses.
| Date:  November 14, 2002 |   |   /s/ TERRY  G. ROUSSEL                                                                              |
|--------------------------|--------|-----------------------------------------------------------------------------------------------------------|
|                     |   | Terry  G. Roussel                                                                                         |
|                     |   | Chief  Executive Officer (Principal Executive Officer)

of Cornerstone Venture, Inc., Managing  Member of |
|                     |   | Cornerstone  Industrial Properties, LLC, the Managing                                                     |
|                     |   | Member  of Cornerstone Realty Fund, LLC                                                                   |

 

 

15

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CERTIFICATIONOF PRINCIPAL FINANCIAL OFFICER

PURSUANTTO

RULE13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934

ASADOPTED PURSUANT TO

SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Tracy A. Thomson, certify that

1.       I have reviewed thisquarterly report of Cornerstone Realty Fund, LLC;

2.       Based on my knowledge, thisquarterly report does not contain any untrue statement of a materialfact or omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

3.       Based on my knowledge, the financial statements, and otherfinancial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in thisquarterly report;

4.       The registrant’s other certifying officers and I areresponsible for establishing and maintaining disclosure controls and procedures(as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant andhave:

a)          designed such disclosurecontrols and procedures to ensure that material information relating to theregistrant, including its consolidated subsidiaries, is made known to them byothers within those entities, particularly during the period in which thisReport is being prepared;

b)         evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c)          presented in this quarterly report our conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

5.       The registrant’s other certifying officers and I  have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors (or persons fulfilling the equivalentfunction):

a)          all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

b)         any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

6.       The registrant’s other certifying officers and I haveindicated in this quarterly reportwhether or not there were significant changes in internal controls or in otherfactors that could significantly affect 

 

16

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internal controls subsequentto the date of their most recent evaluation, including any corrective actionswith regard to significant deficiencies and material weaknesses.
| Date:  November 14, 2002 |   | **  /s/ TRACY A.  THOMSON**                          |
|--------------------------|--------|-----------------------------------------------------------|
|                     |   | Tracy A. Thomson                                          |
|                     |   | Chief  Financial Officer (Principal Financial Officer) of |
|                     |   | Cornerstone  Venture, Inc., Managing Member of            |
|                     |   | Cornerstone  Industrial Properties, LLC, the Managing     |
|                     |   | Member  of Cornerstone Realty Fund, LLC                   |

 

 

17

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CERTIFICATIONOF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANTTO

18U.S.C. SECTION 1350,

ASADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Terry G. Roussel,certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge theQuarterly Report of Cornerstone Realty Fund, LLC on Form 10-Q for the quarterlyperiod ended September 30, 2002 fully complies with the requirements of Section13(a) or 15(d) of the Securities Exchange Act of 1934 and that informationcontained in such Form 10-Q fairly presents in all material respects thefinancial condition and results of operations of Cornerstone Realty Fund, LLC.
| Date: November  14, 2002 |   |   /s/ Terry   G. Roussel                        |
|-------------------------------|--------|-----------------------------------------------------------|
|                          |   | Terry  G. Roussel                                    |
|                          |   | Chief  Executive Officer (Principal Executive Officer) of |
|                          |   | Cornerstone  Venture, Inc., Managing Member of            |
|                          |   | Cornerstone  Industrial Properties, LLC, the Managing     |
|                          |   | Member  of Cornerstone Realty Fund, LLC                   |

 

 

I, Tracy A. Thomson, certify, pursuant to 18U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-OxleyAct of 2002, that to the best of my knowledge the Quarterly Report ofCornerstone Realty Fund, LLC on Form 10-Q for the quarterly period endedSeptember 30, 2002 fully complies with the requirements of Section 13(a) or15(d) of the Securities Exchange Act of 1934 and that information contained insuch Form 10-Q fairly presents in all material respects the financial conditionand results of operations of Cornerstone Realty Fund, LLC.
| Date: November  14, 2002 |   |   /s/ Tracy A. Thomson                               |
|-------------------------------|--------|-----------------------------------------------------------|
|                          |   | Tracy  A. Thomson                                         |
|                          |   | Chief  Financial Officer (Principal Financial Officer) of |
|                          |   | Cornerstone  Venture, Inc., Managing Member of            |
|                          |   | Cornerstone  Industrial Properties, LLC, the Managing     |
|                          |   | Member  of Cornerstone Realty Fund, LLC                   |

 

 

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