UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549





FORM
10-Q





(Mark
One)





x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the quarterly period ended June 30, 2010





or





 ̈
            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   000-51868





CORNERSTONE
REALTY FUND, LLC


(Exact
name of registrant as specified in its charter)





CALIFORNIA
            
            33-0827161(State or other jurisdiction of incorporation or organization)
            
            (I.R.S. Employer Identification No.)1920 MAIN STREET, SUITE 400, IRVINE, CA
            
            92614(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
            
            (ZIP CODE)




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)





Indicate
by check mark whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.





x
Yes     ̈ No





Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).





 ̈ Yes     ̈ No





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.  See definition of
“accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.





Large
accelerated filer  ̈  Accelerated
filer  ̈  Non-accelerated filer o  Smaller Reporting Company x





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).





 ̈ Yes    x No








PART
      I.
                        
                        FINANCIAL
      INFORMATIONItem
      1.
                        
                        Financial
      Statements:Condensed
      Balance Sheets as of June 30, 2010 and December 31, 2009
      (unaudited)
                        
                        3Condensed
      Statements of Operations for the Three and  Six Months Ended
      June 30, 2010 and June 30, 2009 (unaudited)
                        
                        4Condensed
      Statement of Members’ Capital for the Six Months Ended June 30, 2010
      (unaudited)
                        
                        5Condensed
      Statements of Cash Flows for the Six Months Ended June 30, 2010 and June
      30, 2009 (unaudited)
                        
                        6Notes
      to Condensed Financial Statements (unaudited)
                        
                        7Item
      2.
                        
                        Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                        
                        13Item
      3.
                        
                        Quantitative
      and Qualitative Disclosures About Market Risk
                        
                        15Item
      4.
                        
                        Controls
      and Procedures
                        
                        15PART
      II.
                        
                        OTHER
      INFORMATIONItem
      6.
                        
                        Exhibits
                        
                        16SIGNATURES
                        
                        17


2





CORNERSTONE
REALTY FUND, LLC


(a
California Limited Liability Company)





CONDENSED
BALANCE SHEETS


(UNAUDITED)




June  30, 2010
                
                
                December 31, 2009ASSETSCash
      and cash equivalents
                
                $
                579,000
                
                
                $
                761,000Investments
      in real estateLand
                
                
                9,870,000
                
                
                
                10,088,000Buildings
      and improvements, net
                
                
                15,509,000
                
                
                
                16,110,000Intangible
      asset — in-place leases, net
                
                
                -
                
                
                
                9,000Property
      held for sale, net
                
                
                1,716,000
                
                
                
                1,726,00027,095,000
                
                
                
                27,933,000Other assetsNon-real
      estate assets associated with property held for sale
                
                
                81,000
                
                
                
                74,000Tenant
      and other receivables, net
                
                
                301,000
                
                
                
                263,000Prepaid
      expenses and other assets
                
                
                34,000
                
                
                
                50,000Leasing
      commissions, net
                
                
                194,000
                
                
                
                158,000Total
      assets
                
                $
                28,284,000
                
                
                $
                29,239,000LIABILITIES
      AND MEMBERS’ CAPITALLiabilitiesAccounts
      payable, accrued liabilities and prepaid rent
                
                $
                165,000
                
                
                $
                161,000Real
      estate taxes payable
                
                
                76,000
                
                
                
                76,000Tenant
      security deposits
                
                
                199,000
                
                
                
                194,000Intangible
      lease liability, net
                
                
                -
                
                
                
                5,000Liabilities
      associated with property held for sale
                
                
                232,000
                
                
                
                262,000Total
      liabilities
                
                
                672,000
                
                
                
                698,000Members’
      capital (100,000 units authorized and issued as of June 30, 2010 and
      December 31, 2009; 98,670 and 98,814 units outstanding as of June 30, 2010
      and December 31, 2009, respectively)
                
                
                27,612,000
                
                
                
                28,541,000Total
      liabilities and members’ capital
                
                $
                28,284,000
                
                
                $
                29,239,000





The
accompanying notes are an integral part of these interim financial
statements.


3





CORNERSTONE
REALTY FUND, LLC


(a
California Limited Liability Company)





CONDENSED
STATEMENTS OF OPERATIONS


(Unaudited)





ThreeMonthsEndedJune30,
                    
                    
                    SixMonthsEndedJune30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009RevenuesRental
      revenues
                    
                    $
                    599,000
                    
                    
                    $
                    675,000
                    
                    
                    $
                    1,206,000
                    
                    
                    $
                    1,360,000Tenant
      reimbursements and other income
                    
                    
                    121,000
                    
                    
                    
                    131,000
                    
                    
                    
                    236,000
                    
                    
                    
                    255,000720,000
                    
                    
                    
                    806,000
                    
                    
                    
                    1,442,000
                    
                    
                    
                    1,615,000ExpensesProperty
      operating and maintenance
                    
                    
                    215,000
                    
                    
                    
                    146,000
                    
                    
                    
                    429,000
                    
                    
                    
                    302,000Property
      taxes
                    
                    
                    111,000
                    
                    
                    
                    107,000
                    
                    
                    
                    222,000
                    
                    
                    
                    214,000General
      and administrative
                    
                    
                    78,000
                    
                    
                    
                    88,000
                    
                    
                    
                    187,000
                    
                    
                    
                    167,000Depreciation
      and amortization
                    
                    
                    188,000
                    
                    
                    
                    204,000
                    
                    
                    
                    387,000
                    
                    
                    
                    411,000Impairment
      of real estate
                    
                    
                    560,000
                    
                    
                    
                    —
                    
                    
                    
                    560,000
                    
                    
                    
                    —1,152,000
                    
                    
                    
                    545,000
                    
                    
                    
                    1,785,000
                    
                    
                    
                    1,094,000Interest
      income
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,000Net
      (loss) income from continuing operations
                    
                    
                    (432,000
                    )
                    
                    
                    261,000
                    
                    
                    
                    (343,000
                    )
                    
                    
                    522,000Net
      income from discontinued operation
                    
                    
                    14,000
                    
                    
                    
                    13,000
                    
                    
                    
                    85,000
                    
                    
                    
                    14,000Net
      (loss) income
                    
                    $
                    (418,000
                    )
                    
                    $
                    274,000
                    
                    
                    $
                    (258,000
                    )
                    
                    $
                    536,000Net
      (loss) income  allocable to managing member:From
      continuing operations
                    
                    $
                    (43,000
                    )
                    
                    $
                    26,000
                    
                    
                    $
                    (34,000
                    )
                    
                    $
                    52,000From
      discontinued operation
                    
                    
                    1,000
                    
                    
                    
                    1,000
                    
                    
                    
                    8,000
                    
                    
                    
                    2,000$
                    (42,000
                    )
                    
                    $
                    27,000
                    
                    
                    $
                    (26,000
                    )
                    
                    $
                    54,000Net
      (loss) income allocable to unit holders:From
      continuing operations
                    
                    $
                    (389,000
                    )
                    
                    $
                    235,000
                    
                    
                    $
                    (309,000
                    )
                    
                    $
                    470,000From
      discontinued operation
                    
                    
                    13,000
                    
                    
                    
                    12,000
                    
                    
                    
                    77,000
                    
                    
                    
                    12,000$
                    (376,000
                    )
                    
                    $
                    247,000
                    
                    
                    $
                    (232,000
                    )
                    
                    $
                    482,000Per
      unit amounts:Basic
      and diluted net (loss) income from continuing operations allocable to unit
      holders
                    
                    $
                    (3.94
                    )
                    
                    $
                    2.37
                    
                    
                    $
                    (3.13
                    )
                    
                    $
                    4.73Basic
      and diluted net income from discontinued operation allocable to unit
      holders
                    
                    $
                    0.13
                    
                    
                    $
                    0.12
                    
                    
                    $
                    0.78
                    
                    
                    $
                    0.12Basic
      and diluted weighted average number of units outstanding
                    
                    
                    98,670
                    
                    
                    
                    99,231
                    
                    
                    
                    98,746
                    
                    
                    
                    99,296





The
accompanying notes are an integral part of these interim financial
statements.


4





CORNERSTONE
REALTY FUND, LLC


(a
California Limited Liability Company)





CONDENSED
STATEMENT OF MEMBERS’ CAPITAL


(Unaudited)





Balance,
      December 31, 2009
                
                $
                28,541,000Cash
      distributions to unit holders
                
                
                (622,000
                )Units
      repurchased and retired
                
                
                (49,000
                )Net
      loss
                
                
                (258,000
                )Balance,
      June 30, 2010
                
                $
                27,612,000





The
accompanying notes are an integral part of these interim financial
statements.


5





CORNERSTONE
REALTY FUND, LLC


(a
California Limited Liability Company)





CONDENSED
STATEMENTS OF CASH FLOWS


(Unaudited)





Six Months Ended June 30,2010
                
                
                2009OPERATING
      ACTIVITIESNet
      (loss) income
                
                $
                (258,000
                )
                
                $
                536,000Adjustments
      to reconcile net (loss) income to net cash provided by operating
      activities:Impairment
      of real estate
                
                
                560,000
                
                
                
                —Depreciation
      and amortization
                
                
                402,000
                
                
                
                474,000Provision
      for bad debt
                
                
                90,000
                
                
                
                9,000Straight-line
      rent and amortization of acquired below market leases
                
                
                (64,000
                )
                
                
                (13,000
                )Changes
      in operating assets and liabilities:Other
      assets, net
                
                
                (149,000
                )
                
                
                (101,000
                )Accounts
      payable, accrued liabilities and prepaid rent
                
                
                (18,000
                )
                
                
                (50,000
                )Real
      estate taxes payable
                
                
                (6,000
                )
                
                
                (1,000
                )Tenant
      security deposits
                
                
                4,000
                
                
                
                (19,000
                )Net
      cash provided by operating activities
                
                
                561,000
                
                
                
                835,000INVESTING
      ACTIVITIESInvestments
      in real estate
                
                
                (72,000
                )
                
                
                (26,000
                )Net
      cash used in investing activities
                
                
                (72,000
                )
                
                
                (26,000
                )FINANCING
      ACTIVITIESCash
      distributions to unit holders
                
                
                (622,000
                )
                
                
                (1,238,000
                )Cash
      distributions to managing member
                
                
                —
                
                
                
                (125,000
                )Units
      repurchased and retired
                
                
                (49,000
                )
                
                
                (66,000
                )Net
      cash used in financing activities
                
                
                (671,000
                )
                
                
                (1,429,000
                )Net
      decrease in cash
                
                
                (182,000
                )
                
                
                (620,000
                )Cash
      and cash equivalents at beginning of period
                
                
                761,000
                
                
                
                2,289,000Cash
      and cash equivalents at end of period
                
                $
                579,000
                
                
                $
                1,669,000





The
accompanying notes are an integral part of these interim financial
statements.


6





CORNERSTONE
REALTY FUND, LLC


(a
California Limited Liability Company)





NOTES
TO CONDENSED FINANCIAL STATEMENTS


JUNE 30,
2010


(Unaudited)





1.
            Organization
      and Business





Cornerstone
Realty Fund, LLC, a California limited liability company (the “Fund”), was
formed in October of 1998 to invest in multi-tenant business parks catering to
small business tenants.  As used in this report, “Fund”, “we,” “us”
and “our” refer to Cornerstone Realty Fund, LLC except where the context
otherwise requires.




Our
managing member is Cornerstone Industrial Properties, LLC (“CIP”), a California
limited liability company.  Cornerstone Ventures, Inc. is the managing
member of CIP.  Cornerstone Ventures, Inc. is an experienced real
estate operating company specializing in the acquisition, operation and
repositioning of multi-tenant industrial business parks catering to small
business tenants.





On August
7, 2001, we commenced a public offering of units of our membership interest
pursuant to a registration statement on Form S-11 filed with the Securities and
Exchange Commission (“SEC”) pursuant to the Securities Act of
1933.  On August 18, 2005, we completed a public offering of these
units.  As of that date, we had issued 100,000 units to unit holders
for gross offering proceeds of $50,000,000, before discounts of
$39,780.





Our
interim unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and in accordance with the rules and
regulations of the Securities and Exchange Commission.  As permitted
by the SEC filing requirements for Form 10-Q, the condensed financial statements
do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements.   The condensed financial statements included herein
should be read in conjunction with our Annual Report on Form 10-K for the year
ended December 31, 2009.





In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a presentation in accordance with accounting principles
generally accepted in the United States have been included.  Operating
results for the six months ended June 30, 2010 are not necessarily indicative of
the results that may be expected for the year ending December 31,
2010.





Each
member’s liability is limited pursuant to the provisions of the Beverly-Killea
Limited Liability Company Act.




The
operating agreement, as amended and restated, provides, among other things, for
the following:





—
            CIP
      generally has complete and exclusive discretion in the management and
      control of our operations; however, unit holders holding the majority of
      all outstanding and issued units have certain specified voting rights
      which include the removal and replacement of the Managing
      Member.





—
            Net
      Cash Flow from Operations, as defined, will be distributed 90% to the unit
      holders and 10% to the Managing Member until the unit holders have
      received either an 8% or 12% cumulative, non-compounded annual return on
      their Invested Capital Contributions, as defined.  The 12%
      return applies to specified early investors for the twelve-month period
      subsequent to the date of their Invested Capital Contributions and is in
      lieu of the 8% return during that
period.





—
            Net
      Sales Proceeds, as defined, will be distributed first, 100% to the unit
      holders in an amount equal to their Invested Capital Contributions; then,
      90% to the unit holders and 10% to the Managing Member until the unit
      holders have received an amount equal to the unpaid balance of their
      aggregate cumulative, non-compounded annual return on their Invested
      Capital Contributions; and thereafter, 50% to the unit holders and 50% to
      the Managing Member.





—
            Net
      Income, as defined, is allocated first, 10% to the Managing Member and 90%
      to the unit holders until Net Income allocated equals cumulative Net
      Losses, as defined, previously allocated in such proportions; second, in
      proportion to and to the extent of Net Cash Flow from Operations and Net
      Sales Proceeds previously distributed to the members, exclusive of
      distributions representing a return of Invested Capital Contributions; and
      then 50% to the Managing Member and 50% to the unit
    holders.


7





—
            Net
      Loss is allocated first, 50% to the Managing Member and 50% to the unit
      holders, until Net Loss allocated equals cumulative Net Income previously
      allocated in such proportions; then remaining Net Loss is allocated 10% to
      the Managing Member and 90% to the unit
holders.





—
            All
      allocations and distributions to the unit holders are to be pro rata in
      proportion to their ownership
shares.





—
            Effective
      February 22, 2007, our operating agreement was amended to permit
      repurchase of units on such terms and conditions as the Managing Member
      may determine.





—
            Effective
      June 2, 2009, our operating agreement was amended and the dissolution date
      in Section 11.1 (a) was extended from December 31, 2010 to December 31,
      2012.





—
            Effective
      April 27, 2010, our operating agreement was amended and allows the
      Managing Member to cause us to incur debt financing not to exceed ten
      percent of the capital contributions of all unit holders to meet the
      Fund’s operating expenses or to fund cash distributions declared and paid
      to members.





2.
            Summary
      of Significant Accounting Policies





Use
of Estimates





The
preparation of our financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses.  We base these estimates on various assumptions that we
believe to be reasonable under the circumstances, and these estimates form the
basis for our judgments concerning the carrying values of assets and liabilities
that are not readily apparent from other sources.  We periodically
evaluate these estimates and judgments based on available information and
experience. Actual results could differ from our estimates under different
assumptions and conditions.  If actual results significantly differ
from our estimates, our financial condition and results of operations could be
materially impacted.  For more information regarding our critical
accounting policies and estimates please refer to "Summary of Significant
Accounting Policies" contained in our Annual Report on Form 10-K for the year
ended December 31, 2009.  There have been no material changes to the
critical accounting policies previously disclosed in that report except as
discussed below.





Interim
Financial Information





The
accompanying interim condensed financial statements have been prepared by our
management in accordance with accounting principles generally accepted in the
United States of America (“GAAP”) and in conjunction with the rules and
regulations of the SEC.  Certain information and note disclosures
required for annual financial statements have been condensed or excluded
pursuant to SEC rules and regulations.  Accordingly, the interim
condensed financial statements do not include all of the information and notes
required by GAAP for complete financial statements.  The accompanying
financial information reflects all adjustments which are, in the opinion of our
management, of a normal recurring nature and necessary for a fair presentation
of our financial position, results of operations and cash flows for the interim
periods.  Operating results for the six months ended June 30, 2010 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 2010.  Our accompanying interim condensed
financial statements should be read in conjunction with our audited financial
statements and the notes thereto included on our 2009 Annual Report on Form
10-K, as filed with the SEC.





Fair
Value of Financial Instruments




Financial
Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”)
825-10, Financial
Instruments,requires the disclosure
of fair value information about financial instruments whether or not recognized
on the face of the balance sheet, for which it is practical to estimate that
value.




We
generally determine or calculate the fair value of financial instruments using
quoted market prices in active markets when such information is available or
using appropriate present value or other valuation techniques, such as
discounted cash flow analyses, incorporating available market discount rate
information for similar types of instruments and our estimates for
non-performance and liquidity risk. These techniques are significantly affected
by the assumptions used, including the discount rate, credit spreads, and
estimates of future cash flow.




Our
condensed balance sheets include the following financial instruments: cash and
cash equivalents, tenant and other receivables, prepaid expenses and other
assets, accounts payable, accrued liabilities and prepaid rent, real estate
taxes payable and tenant security deposits, which we consider the carrying
values approximate fair value for these financial instruments because of the
short period of time between origination of the instruments and their expected
payment.


8





Recently
Issued Accounting Pronouncements




In
February 2010, FASB issued Accounting Standard Update (“ASU”) 2010-09, Subsequent Events: Amendments to Certain
recognition and Disclosure Requirements (amendments to ASC Topic 855,
Subsequent Events).  ASU 2010-09 clarifies that subsequent events
should be evaluated through the date the financial statements are issued. In
addition, this update no longer requires a filer to disclose the date through
which subsequent events have been evaluated. This guidance is effective for
financial statements issued subsequent to February 24, 2010. We adopted this
guidance on February 24, 2010.





In
January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures -
Improving Disclosures about Fair Value Measurements(amendments to ASC
Topic 820, Fair Value Measurements and Disclosures).  ASU 2010-06
amends the disclosure requirements related to recurring and nonrecurring
measurements.  The guidance requires new disclosures on the transfer
of assets and liabilities between Level 1 (quoted prices in active market for
identical assets or liabilities) and Level 2 (significant other observable
inputs) of the fair value measurement hierarchy, including the reasons and the
timing of the transfers.  Additionally, the guidance requires a roll
forward of activities on purchases, sales, issuance, and settlements of the
assets and liabilities measured using significant unobservable inputs (Level 3
fair value measurements). The guidance is effective for interim and annual
periods beginning after December 15, 2009. We adopted this guidance on January
1, 2010.





In
June 2009, the FASB issued Statement of Financial Accounting Standard
(“SFAS”) No. 167, Amendments
to FASB Interpretation No. 46(R),which was primarily codified into
ASC Topic 810 Consolidation.  The new
guidance impacts the consolidation guidance applicable to variable interest
entity (“VIE”) and among other things require a qualitative rather than a
quantitative analysis to determine the primary beneficiary of a VIE, continuous
assessments of whether a company is the primary beneficiary of a VIE and
enhanced disclosures about a company’s involvement with a VIE. We adopted
this guidance on January 1, 2010 and it did not have a material impact on our
condensed financial statements.





We have
considered all other pronouncements that have been issued but are not yet
effective which were not listed above. The Fund believes that these other
pronouncements will not have any future impact on the Fund’s financial
statements.





Investments
in Real Estate Assets Held for Sale





The Fund
evaluates the held for sale classification of its owned real estate
each quarter.  Assets that are classified as held for sale
are recorded at the lower of their carrying amount or fair value less cost to
sell.  Assets are classified as held for sale once
management commits to a plan to sell the properties and has initiated an active
program to market them for sale.  The results of operations of these
real estate properties are reflected as discontinued operations in all periods
reported.  During the first quarter of 2010, management committed a
plan to sell Zenith Drive Centre to a third party and classified the property as
held for sale.  This property has not been sold as of June 30, 2010
and accordingly, is classified as held for sale.  See Note 7 for
additional information.





3.
            Investment
      in Real Estate





In
accordance with ASC 360, Accounting for the Impairment or
Disposal of Long-lived Assets, the Fund assesses whether there has been
impairment in the value of its investments in real estate whenever events or
changes in circumstances indicate the carrying amount of an asset may not be
recoverable. Its portfolio is evaluated for impairment on a property-by-property
basis. Indicators of potential impairment include the following:





• Change in strategy resulting in a
decreased holding period;


•
Decreased occupancy levels;


•
Deterioration of the rental market as evidenced by rent decreases over numerous
quarters;


•
Properties adjacent to or located in the same submarket as those with recent
impairment issues;


•
Significant decrease in market price; and/or


• Tenant
financial problems.





In the
second quarter of 2010, we reviewed the impairment indicators as described in
FASB ASC 360-10-35-21.  We noted a longer lease up period than
anticipated for one of our properties, which resulted in comparing the expected
future undiscounted cash flows for the property against its carrying
amount.  As the estimated undiscounted cash flows were less than its
carrying amount we recorded an impairment loss of $560,000 based on the
property’s estimated fair value. During the evaluation process, we used Level 3
- fair value estimates.  The assessment as to whether our investments
in real estate are impaired is highly subjective. The calculations, which are
primarily based on discounted cash flow analysis, involve projections of
expected future cash flows and require us to estimate (1) future market rental
income amounts subsequent to the expiration of current lease agreements, (2)
property operating expenses, (3) risk-adjusted rate of return and capitalization
rates, (4) the number of months it takes to re-lease the property and (5) the
number of years the property is held for investment. A change in any one or more
of these factors could materially impact whether a property is impaired as
of any given valuation date.


9





FASB ASC
820-10, Fair Value
Measurements and Disclosures, defines fair value, establishes a
framework for measuring fair value in GAAP and provides for expanded disclosure
about fair value measurements. ASC 820-10 applies prospectively to all other
accounting pronouncements that require or permit fair value measurements. The
adoption of ASC 820-10 did not have a material impact on the Fund’s financial
statements since it does not record its financial assets and liabilities in its
financial statements at fair value. The Fund adopted ASC 820-10 with respect to
its non-financial assets and non-financial liabilities on January 1, 2009. The
adoption of ASC 820-10 with respect to its non-financial assets and liabilities
did not have a material impact on its financial statements.





Fair
value represents the estimate of the proceeds to be received, or paid in the
case of a liability, in a current transaction between willing parties. ASC 820
establishes a fair value hierarchy to categorize the inputs used in valuation
techniques to measure fair value. Inputs are either observable
or unobservable in the marketplace. Observable inputs are based on market
data from independent sources and unobservable inputs reflect the reporting
entity’s assumptions about market participant assumptions used to value an asset
or liability. Level 1 includes quoted prices in active markets for identical
instruments. Level 2 includes quoted prices for similar instruments in active
markets; quoted prices for identical or similar instruments in inactive markets;
and model-derived valuations using observable market information for significant
inputs. Level 3 includes valuation techniques where one or more significant
inputs are unobservable. Financial instruments are classified according to the
lowest level input that is significant to their valuation. A financial
instrument that has a significant unobservable input along with significant
observable inputs may still be classified Level 3.





Certain
assets and liabilities were measured at fair value on a nonrecurring basis. This
category included the impairment of real estate. For the six months ended June
30, 2010, we recorded impairment charges to reduce certain investments in real
estate assets to estimated fair value. No impairment of real estate was recorded
for the six months ended June 30, 2009. The fair values of investment in real
estate included inputs based on management’s estimate of net operating income,
expected occupancy changes, expected rental rates, capitalization rates and
discount rates based on available market information using a discounted cash
flow analysis. Because one or more of significant inputs are unobservable, the
fair values of investment in real estate are classified as Level 3.





For the
three and six months ended June 30, 2010, we recognized an impairment charge of
$560,000 and $0.  There were no impairment charges recorded for the
three and six months of June 30, 2009.





The
following table summarizes the property that was measured at fair value on a
nonrecurring basis:




Total Fair Value
                  Measurement
                
                
                Quoted Prices in
                  Active Markets
                  for Identical
                  Assets (Level 1)
                
                
                Significant
                  Other
                  Observable
                  Inputs
                  (Level 2)
                
                
                Significant
                  Unobservable
                  Inputs
                  (Level 3)
                
                
                Total Losses
                  Three Months
                  Ended
                  June 30, 2010
                
                
                Total Losses
                  Six Months
                  Ended
                  June 30, 2010Investment
      in real estate
                
                $
                2,268,000
                
                
                $
                —
                
                
                $
                —
                
                
                $
                2,268,000
                
                
                $
                (560,000
                )
                
                $
                (560,000
                )





As of
June 30, 2010, accumulated depreciation and amortization related to investments
in real estate and related lease intangibles were as follows:





Land
                
                
                Buildingsand
                  Improvements
                
                
                Intangible
                  LeaseValue
                
                
                In-Place
                  LeaseValue
                
                
                AcquiredBelow-
                  MarketLeasesInvestments
      in real estate
                
                $
                9,870,000
                
                
                $
                17,860,000
                
                
                $
                —
                
                
                $
                770,000
                
                
                $
                (154,000
                )Less:
      accumulated depreciation and amortization from continuing
      operations
                
                
                —
                
                
                
                (2,351,000
                )
                
                
                —
                
                
                
                (770,000
                )
                
                
                154,000Net
      investments in real estate and related lease intangibles from continuing
      operations
                
                
                9,870,000
                
                
                
                15,509,000
                
                
                
                —
                
                
                
                —
                
                
                
                —Net
      investments in real estate and related lease intangibles held for
      sale
                
                
                355,000
                
                
                
                1,257,000
                
                
                
                104,000
                
                
                
                —
                
                
                
                —$
                10,225,000
                
                
                $
                16,766,000
                
                
                $
                104,000
                
                
                $
                —
                
                
                $
                —




10




As of
December 31, 2009, accumulated depreciation and amortization related to
investments in real estate and related lease intangibles were as
follows:





Land
                
                
                Buildingsand
                  Improvements
                
                
                Intangible
                  LeaseValue
                
                
                In-Place
                  LeaseValue
                
                
                AcquiredBelow-
                  MarketLeasesInvestments
      in real estate
                
                $
                10,088,000
                
                
                $
                18,411,000
                
                
                $
                —
                
                
                $
                770,000
                
                
                $
                (154,000
                )Less:
      accumulated depreciation and amortization from continuing
      operations
                
                
                —
                
                
                
                (2,301,000
                )
                
                
                —
                
                
                
                (761,000
                )
                
                
                149,000Net
      investments in real estate and related lease intangibles from continuing
      operations
                
                
                10,088,000
                
                
                
                16,110,000
                
                
                
                —
                
                
                
                9,000
                
                
                
                (5,000
                )Net
      investments in real estate and related lease intangibles held for
      sale
                
                
                355,000
                
                
                
                1,265,000
                
                
                
                106,000
                
                
                
                —
                
                
                
                —$
                10,443,000
                
                
                $
                17,375,000
                
                
                $
                106,000
                
                
                $
                9,000
                
                
                $
                (5,000
                )





Depreciation
and amortization related to investments in real estate and related lease
intangibles for the three months ended June 30, 2010 and 2009 were $166,000 and
$209,000, respectively.  Depreciation and amortization related to
investments in real estate, real estate investment held for sale and related
lease intangibles for the six months ended June 30, 2010 and 2009 were $349,000
and $422,000, respectively.





4.
            Allowance
      for Doubtful Accounts





Our
allowance for doubtful accounts was $271,000 and $190,000 as of June 30, 2010
and December 31, 2009, respectively.





5.
            Concentration
      of Credit Risks





Financial
instruments that potentially subject the Fund to a concentration of credit risk
are primarily cash investments; cash is generally invested in investment-grade
short-term instruments. Currently, the Federal Deposit Insurance
Corporation, or FDIC, generally insures amounts up to $250,000 per depositor per
insured bank. This amount is scheduled to be reduced to $100,000 after December
31, 2013.  As of June 30, 2010, one of our cash accounts were in
excess of FDIC insured limits.





As of
June 30, 2010, we owned four properties in the state of California, one property
in the state of Arizona and one property in the state of Illinois. 
Accordingly, there is a geographic concentration of risk subject to fluctuations
in the states’ economy.





6.
            Commitments
      and Contingencies





We
monitor our properties for the presence of hazardous or toxic
substances.  While there can be no assurance that a material
environmental liability does not exist, we are not currently aware of any
environmental liability with respect to the properties that would have a
material effect on our financial condition, results of operations and cash
flows.  Further, we are not aware of any environmental liability or
any unasserted claim or assessment with respect to an environmental liability
that we believe would require additional disclosure or the recording of a loss
contingency.





Our
commitments and contingencies include the usual obligations of real estate
owners and operators in the normal course of business.  In the opinion
of management, these matters are not expected to have a material impact on our
condensed financial position, cash flows and results of
operations.  We are not presently subject to any material litigation
nor, to our knowledge, any material litigation threatened against us which
if determined unfavorably to us would have a material adverse effect on our cash
flows, financial condition or results of operations.





7.           Discontinued
Operations




In
accordance with FASB ASC 360-10, Property, Plant &
Equipment, we report results of operations from real estate assets that
meet the definition of a component of an entity that have been sold, or meet the
criteria to be classified as held for sale, as discontinued operations. As of
March 1, 2010, we determined that the potential sale of Zenith Drive Centre to a
third party was probable, and accordingly, classified the property as held for
sale.  Depreciation and amortization of Zenith Drive was not recorded
for the period of March 1, 2010 to June 30, 2010 in accordance with ASC
360-10.  No properties were sold during the quarters ended June 30, 2010
and 2009. We included all results of the discontinued operations in a separate
component of income on the statements of operations under the heading Net income
from Discontinued Operations. This treatment resulted in certain
reclassifications of 2009 financial statement amounts.




11




The
following is a summary of the components of income from discontinued operations
for the three and six months ended June 30, 2010 and 2009:




ThreeMonthsEnded
                          June30,
                        
                        
                        SixMonthsEnded
                          June30,2010
                        
                        
                        2009
                        
                        
                        2010
                        
                        
                        2009Rental
      revenues, tenant reimbursements and other income
                        
                        $
                        122,000
                        
                        
                        $
                        123,000
                        
                        
                        $
                        298,000
                        
                        
                        $
                        237,000Operating
      expenses and real estate taxes
                        
                        
                        108,000
                        
                        
                        
                        78,000
                        
                        
                        
                        198,000
                        
                        
                        
                        160,000Depreciation
      and amortization
                        
                        
                        -
                        
                        
                        
                        32,000
                        
                        
                        
                        15,000
                        
                        
                        
                        63,000Net
      income from discontinued operation
                        
                        $
                        14,000
                        
                        
                        $
                        13,000
                        
                        
                        $
                        85,000
                        
                        
                        $
                        14,000Net
      income from discontinued operation allocable to managing
      member
                        
                        $
                        1,000
                        
                        
                        $
                        1,000
                        
                        
                        $
                        8,000
                        
                        
                        $
                        2,000Net
      income from discontinued operation allocable to unit
    holders
                        
                        $
                        13,000
                        
                        
                        $
                        12,000
                        
                        
                        $
                        77,000
                        
                        
                        $
                        12,000





A summary
of the property held for sale balance sheet information is as
follows:





June30,2010
                
                
                December31,2009Investments
      in real estateLand
                
                $
                355,000
                
                
                $
                355,000Buildings
      and improvements, net
                
                
                1,257,000
                
                
                
                1,265,000Intangible
      lease assets, net
                
                
                104,000
                
                
                
                106,000Property
      held for sale, net
                
                
                1,716,000
                
                
                
                1,726,000Other
      assetsTenant
      and other receivables, net
                
                
                49,000
                
                
                
                50,000Prepaid
      expenses and other assets
                
                
                4,000
                
                
                
                2,000Leasing
      commissions, net
                
                
                28,000
                
                
                
                22,000Non-real
      estate assets associated with property held for sale
                
                
                81,000
                
                
                
                74,000Total
      assets
                
                $
                1,797,000
                
                
                $
                1,800,000LiabilitiesAccounts
      payable, accrued liabilities and prepaid rent
                
                $
                20,000
                
                
                $
                42,000Real
      estate taxes payable
                
                
                151,000
                
                
                
                157,000Tenant
      security deposits
                
                
                61,000
                
                
                
                63,000Liabilities
      associated with property held for sale
                
                $
                232,000
                
                
                $
                262,000


12





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





The
following “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” should be read in conjunction with our financial
statements and notes thereto contained elsewhere in this report.  This
section contains forward-looking statements, including estimates, projections,
statements relating to our business plans, objectives and expected operating
results, and the assumptions upon which those statements are
based.   These forward-looking statements generally are
identified by the words “believes,” “project,” “expects,” “anticipates,”
“estimates,” “intends,” “strategy,” “plan,” “may,” “will,” “would,” “will be,”
“will continue,” “will likely result,” and similar
expressions.    Forward-looking statements are based on
current expectations and assumptions that are subject to risks and uncertainties
which may cause actual results to differ materially from the forward-looking
statements.   Forward-looking statements were true at the time
made may ultimately prove to be incorrect or false.  We undertake no
obligation to update or revise publicly any forward–looking statements, whether
as a result of new information, future events or otherwise. All
forward-looking statements should be read in light of the risks identified in
Part I, Item 1A of our annual report on Form 10-K for the year ended December
31, 2009 as filed with the Securities and Exchange Commission
(“SEC”).





Overview




Our
revenues, which are comprised largely of rental income, include rents reported
on a straight-line basis over the initial term of the lease. Our growth depends,
in part, on our ability to (i) increase rental income and other earned
income from leases by increasing rental rates and occupancy levels;
(ii) maximize tenant recoveries given the underlying lease structures; and
(iii) control operating and other expenses. Our operations are impacted by
property specific, market specific, general economic and other
conditions.




Market
Outlook – Real Estate and Real Estate Finance Markets




In recent
years, both the national and most global economies have experienced
substantially increased unemployment and a downturn in economic
activity.  Despite certain recent positive economic indicators and
improved stock market performance, the aforementioned conditions, combined with
low consumer confidence, have resulted in an unprecedented global recession and
continue to contribute to a challenging economic environment that may delay the
implementation of our business strategy or force us to modify it.




As a
result of the decline in general economic conditions, the U.S. commercial real
estate industry has also experienced deteriorating fundamentals across all major
property types and most geographic markets. Tenant defaults have risen, while
demand for commercial real estate space is contracting, resulting in a highly
competitive leasing environment, downward pressure on both occupancy and rental
rates, and an increase in leasing incentives.  Mortgage delinquencies
and defaults have trended upward, with many industry analysts predicting
significant credit defaults, foreclosures and principal losses.





From a
financing perspective, the severe dislocations and liquidity disruptions in the
credit markets have impacted both the cost and availability of commercial real
estate debt. The commercial mortgage-backed securities market, formerly a
significant source of liquidity and debt capital, has become inactive and has
left a void in the market for long-term, affordable, fixed-rate debt. This void
has been partially filled by portfolio lenders such as insurance companies, but
at very different terms than were available in the past five years. These
remaining lenders have generally increased credit spreads, lowered the amount of
available proceeds, required recourse security and credit enhancements, and
otherwise tightened underwriting standards considerably, while simultaneously
generally limiting lending to existing relationships with borrowers that invest
in high quality assets in top tier markets. In addition, lenders have limited
the amount of financing available to existing relationships in an effort to
manage and mitigate the risk of overconcentration in certain
borrowers.





The
factors discussed above have translated into declining real estate values and a
corresponding rise in required investment returns and capitalization rates.
Overall transaction activity has slowly increased during the last two quarters
as the gap between “ask” and “bid” has contracted; however, the volume is well
below that of two years ago.





The
market conditions that have and will likely continue to have a significant
impact on our real estate investments have also negatively impacted our tenants’
businesses. As a result, our tenants are finding it more difficult to meet
current lease obligations, forcing them to negotiate reduced rental rates upon
renewal in order for their businesses to remain viable. Lower lease rates and
increased rent concessions have resulted in lower current cash flow as compared
to the first six months of 2009. Additional declines in rental rates, slower or
potentially negative net absorption of leased space and additional rental
concessions, including free rent, would result in additional future decreases in
cash flows.


13





Critical
Accounting Policies





Our
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”).  The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the financial statements and the reported amount of revenue and
expenses during the reporting period.  Actual results could differ
materially from those estimates.





There
have been no material changes to our critical accounting policies as previously
disclosed in our Annual Report on Form 10-K for the year ended December 31,
2009, as filed with the SEC other than as described under Note 2 to the
accompanying condensed financial statements.





Results
of Operations





Results
of continuing operations for the three months and six months ended June 30, 2010
and 2009 comprise five multi-tenant industrial business park properties in two
major metropolitan areas. On March 1, 2010, we determined that the potential
sale of Zenith Drive Centre to a third party was probable and classified the
property as held for sale.  We have included all operating results of
the Zenith Drive Centre in a separate component of income on the Statements of
Operations under the heading net income from discontinued operations for the
three and six months ended June 30, 2010 and 2009.





The
results of continuing operations for the three months and six months ended June
30, 2010 and 2009 are discussed below.





Three
months ended June 30, 2010 and 2009





Rental
revenues, tenant reimbursements and other income from continuing operations
decreased to approximately $720,000 for the three months ended June 30, 2010
from approximately $806,000 for the comparable period of 2009, primarily due to
higher vacancy, lower market lease rates and from higher concessions to attract
and retain tenants as a result of the current economic environment. These
factors were partially offset by rental escalations from existing
tenants.





Property
operating and maintenance expenses from continuing operations increased to
approximately $215,000 for the three month period ended June 30, 2010 from
approximately $146,000 for the comparable period of 2009.  The
increase is primarily due to increases in uncollectible accounts, and
related collection and legal fees.





Property
taxes from continuing operations for the three months ended June 30, 2010 were
comparable to the corresponding period of 2009.





General
and administrative expenses from continuing operations decreased to
approximately $78,000 for the three months ended from approximately $88,000 for
the comparable period of 2009. The decrease is primarily due to timing of
incurring audit and tax services partially offset by increases in professional
expenses.




Depreciation
and amortization expenses decreased to approximately $188,000 for the three
months ended June 30, 2010 from approximately $204,000 for the comparable period
of 2009.  The decrease is due to one impairment of real
estate recognized on September 30, 2009 and another impairment of real
estate recognized on December 31, 2009, reducing depreciable basis, and the
full amortization of intangible assets at two of our properties.


Impairment
of real estate charges increased to $560,000 for the three months ended June 30,
2010 from $0 in the comparable period in 2009.  This nonrecurring
impairment charge is based on the results of our evaluations as discussed in
note 3.


Six
months ended June 30, 2010 and 2009





Rental
revenues, tenant reimbursements and other income from continuing operations
decreased to approximately $1,442,000 for the six months ended June 30, 2010
from approximately $1,615,000 for the comparable period of 2009, primarily due
to higher vacancy, lower market lease rates and higher concessions to attract
and retain tenants as a result of the current economic environment. These
factors were partially offset by rental escalations for existing
tenants.





Property
operating and maintenance expenses from continuing operations increased to
approximately $429,000 for the six month period ended June 30, 2010 from
approximately $302,000 for the comparable period of 2009.  The
increase is primarily due to increases in uncollectible accounts,
collection fees and repairs and maintenance expenses.


14





Property
taxes from continuing operations for the six months ended June 30, 2010 were
comparable to the same period of 2009.





General
and administrative expenses increased to approximately $187,000 for the six
months ended June 30, 2010 from approximately $167,000 for the comparable period
of 2009.  The increase is primarily due to timing of tax and legal fee
obligations offset by a decrease in state taxes.




Depreciation
and amortization expenses from continuing operations decreased to approximately
$387,000 for the six months ended June 30, 2010 from approximately $411,000 for
the comparable period of 2009.  The
decrease is due to one impairment of real estate recognized on September 30,
2009 and another impairment of real estate recognized on December 31,
2009 ,
reducing depreciable basis, and the full amortization of intangible assets at
two or our properties.








Discontinued
Operations





During
the first quarter of 2010, we determined that the potential sale of Zenith Drive
Center to a third party was probable and classified the property as held for
sale in accordance with ASC 360-10, Property, Plant and
Equipment.Net income from discontinued operations was
approximately $14,000 and $13,000 for the three months ended June 30, 2010 and
2009, respectively.  Net income from discontinued operations was
approximately $85,000 and $14,000 for the six months ended June 30, 2010 and
2009, respectively. The increase is primarily due to a property tax refund
received in 2010 from a prior year’s tax appeal and higher revenue due to
higher occupancy in 2010 offset by lower depreciation expenses.





Liquidity
and Capital Resources





As of
June 30, 2010, we had approximately $579,000 in cash and cash equivalents. We
intend to use the existing cash balance for capital improvements to the
properties and to provide for operating reserves. Cash in excess of these needs,
if any, will be available for distribution to unit holders and to
repurchase units from unit holders.





Effective
April 27, 2010, our operating agreement was amended to allow the managing member
to cause us to incur debt financing, not to exceed ten percent of the capital
contributions of all unit holders, to meet our operating expenses or to fund
cash distributions declared and paid to members. To the extent that net cash
generated by the properties is not sufficient to meet operating costs and pay
cash distributions to our unit holders, we will endeavor to obtain financing or
sell selected properties so that we can continue to operate the remaining
properties and pay cash distributions. As of June 30, 2010, we had not incurred
any debt financings.





Item
      3.
            Quantitative
      and Qualitative Disclosures About Market
Risk





We invest
our cash and cash equivalents in government-backed securities and money market
accounts, which, by their nature, are subject to interest rate
fluctuations.  As of June 30, 2010, a 1% increase or decrease in
interest rates would not have a material effect on our interest
income.





Item
      4.
            Controls
      and Procedures





Disclosure
Controls and Procedures





We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and that such information is accumulated and communicated
to our senior management, as appropriate, to allow timely decisions regarding
required disclosure.  The Chief Executive Officer and the Chief
Financial Officer at Cornerstone Ventures, Inc., the manager of our Managing
Member, have evaluated the effectiveness of our disclosure controls and
procedures and have concluded that the disclosure controls and procedures were
effective as of the end of the period covered by this report.  In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.





There
have been no changes in our internal control over financial reporting during our
most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.


15





PART
II - OTHER INFORMATION





Item
      6.
            Exhibits





3.1
            Amended
      and Restated Operating Agreement of Cornerstone Realty Fund, LLC dated as
      of June 30, 2003 (as amended on February 22, 2007, June 2, 2009 and April
      27, 2010) (Incorporated by reference to the Company’s quarterly report on
      form 10-Q for the quarter ended March 31, 2010, as filed with the
      Securities and Exchange Commission on May 14,
  2010).





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.


16





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this quarterly report to be signed on its
behalf by the undersigned, thereunto duly authorized this 16th day of August
2010.





CORNERSTONE
      REALTY FUND, LLCBy:
            CORNERSTONE
      INDUSTRIAL PROPERTIES, LLCits
      Managing MemberBy:
            CORNERSTONE
      VENTURES, INC.its
      ManagerBy:
            /s/
      TERRY G. ROUSSELTerry
      G. Roussel, President(Principal
      Executive Officer)By:
            /s/
      SHARON C. KAISERSharon
      C. Kaiser,Chief
      Financial Officer(Principal
      Financial Officer andPrincipal
      Accounting Officer)


17