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

**WASHINGTON, D.C.  20549**

 

**FORM 10-Q**

 

| **(Mark One)**                        |
|---------------------------------------|
|                                  |   |   |
| **ý**                            |   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                  |   |   |
|                                  |   | **FOR THE QUARTERLY PERIOD ENDED  MARCH 31, 2004** |
|                                  |   |   |
| **o**                                 |   | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                  |   |   |
|                                  |   | **FOR THE TRANSITION PERIOD  FROM             TO              ** |
|                                  |   |   |
| **Commission File  Number 333-63656** |

 

**CORNERSTONEREALTY FUND, LLC**

(EXACTNAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

| **California**                                                  |   | **33-0827161**                     |
|-----------------------------------------------------------------|--------|------------------------------------|
| (State or other jurisdiction  of incorporation or organization) |   | (IRS Employer  Identification No.) |

 

**4590 MACARTHUR BLVD., SUITE 610, NEWPORTBEACH, CALIFORNIA 92660**

(ADDRESSOF PRINCIPAL EXECUTIVE OFFICES)

 

**949-852-1007**

(ISSUER’STELEPHONE NUMBER)

 

**Not Applicable**

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

 

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

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Act).  o  Yes   ý  No

 

 

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**PART I - FINANCIAL INFORMATION**

 

**Item 1.****                                                          ****Financial Statements**

 

**Cornerstone Realty Fund, LLC**

 
| Condensed  Balance Sheets at March 31, 2004 (unaudited) and December 31, 2003                                             |   |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                |   |
| Condensed Statements  of Operations for the Three Months ended  March 31, 2004 (unaudited) and March 31, 2003 (unaudited) |   |
|                                                                                                                                |   |
| Condensed  Statement of Members’ Capital for the Three Months ended  March 31, 2004 (unaudited)                           |   |
|                                                                                                                                |   |
| Condensed Statements  of Cash Flows for the Three Months ended  March 31, 2004 (unaudited) and March 31, 2003 (unaudited) |   |
|                                                                                                                                |   |
| Notes to Condensed Financial Statements  (unaudited)                                                                                |   |

 

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**CORNERSTONE REALTY FUND, LLC**

**(a California Limited Liability Company)**

 

**CONDENSED BALANCE SHEETS**

 

**ASSETS**

 
|                                                                                                                                            |   |                     |       |                        |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|------------|-----------------------------|--------|
|                                                                                                                                            |   |                     |       |                        |   |
|                                                                                                                                            |   |                     |       |                        |   |
|                                                                                                                                            |   | **March 31,  2004** |       | **December 31,  2003** |   |
|                                                                                                                                            |   | **(unaudited)**          |       |                        |   |
| Assets                                                                                                                                          |   |                     |       |                        |   |
| Cash and cash equivalents                                                                                                                       |   | $                        | 3,342,706  |                        | $      | 1,464,206 |   |
|                                                                                                                                            |   |                     |       |                        |   |
| Investments in real estate                                                                                                                      |   |                     |       |                        |   |
| Land                                                                                                                                            |   | 4,539,400                |       | 4,539,400                   |   |
| Buildings and improvements, less  accumulated depreciation of $178,361 in 2004 and $128,674 in 2003                                             |   | 7,579,166                |       | 7,605,000                   |   |
| Intangible asset – in place leases net of  $37,552 of amortization in 2004                                                                 |   | 129,862                  |       | 167,414                     |   |
|                                                                                                                                            |   | 12,248,428               |       | 12,311,814                  |   |
|                                                                                                                                            |   |                     |       |                        |   |
| Other assets                                                                                                                                    |   |                     |       |                        |   |
| Tenant and other receivables                                                                                                                    |   | 20,556                   |       | 27,297                      |   |
| Receivable from Managing Member                                                                                                                 |   | 59,839                   |       | 59,839                      |   |
| Prepaid insurance                                                                                                                               |   | 26,638                   |       | —                      |   |
| Leasing commissions, less accumulated  amortization of $3,676 in 2004 and $1,974 in 2003                                                        |   | 13,343                   |       | 6,912                       |   |
| Office equipment, less accumulated  depreciation of $2,854 in 2004 and $2,732 in 2003                                                           |   | —                   |       | 122                         |   |
| Total assets                                                                                                                                    |   | $ 15,711,510             |       | $ 13,870,190                |   |
|                                                                                                                                            |   |                     |       |                        |   |
|                                                                                                                                            |   |                     |       |                        |   |
| **LIABILITIES AND MEMBERS’ CAPITAL**                                                                                                       |   |
|                                                                                                                                            |   |                     |       |                        |   |
| Liabilities                                                                                                                                     |   |                     |       |                        |   |
| Accounts payable and accrued liabilities                                                                                                        |   | $                        | 112,459    |                        | $      | 89,173 |   |
| Real estate taxes payable                                                                                                                       |   | 117,275                  |       | 115,325                     |   |
| Tenant security deposits                                                                                                                        |   | 146,845                  |       | 145,629                     |   |
| Total liabilities                                                                                                                               |   | 376,579                  |       | 350,127                     |   |
|                                                                                                                                            |   |                     |       |                        |   |
| Members’  capital (100,000 units authorized, 37,394 units issued and outstanding in  2004 and 33,012 units issued and outstanding in 2003) |   | 15,334,931               |       | 13,520,063                  |   |
| Total liabilities and members’ capital                                                                                                     |   | $                        | 15,711,510 |                        | $      | 13,870,190 |   |
|                                                                                                                                                 |        |                          |            |                             |        |  |  |  |  |  |  |  |  |  |

 

The accompanying notes are an integral part ofthese financial statements.

 

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**CORNERSTONE REALTY FUND, LLC**

**(a California Limited Liability Company)**

 

**CONDENSED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
|                                                                    |   | **Three  Months Ended  March 31,** |    |
|-------------------------------------------------------------------------|--------|-----------------------------------------|---------|
|                                                                    |   | **2004**                                |    | **2003** |   |
|                                                                    |   |                                    |    | **(restated)** |   |
|                                                                    |   |                                    |    |   |   |
| Revenues                                                                |   |                                    |    |   |   |
| Rental revenues, net of $37,552 of in-place  lease amortization in 2004 |   | $                                       | 264,240 |   | $ | 194,367 |   |
| Tenant reimbursements and other income                                  |   | 37,263                                  |    | 29,804 |   |
| Interest, dividends and other income                                    |   | 343                                     |    | 2,924 |   |
|                                                                    |   | 301,846                                 |    | 227,095 |   |
|                                                                    |   |                                    |    |   |   |
| Expenses                                                                |   |                                    |    |   |   |
| Property operating and maintenance                                      |   | 70,659                                  |    | 28,976 |   |
| Property taxes                                                          |   | 59,292                                  |    | 37,690 |   |
| General and administrative                                              |   | 33,539                                  |    | 45,327 |   |
| Interest on advances payable to managing  member                        |   | —                                  |    | 1,442 |   |
| Depreciation and amortization                                           |   | 51,511                                  |    | 27,699 |   |
|                                                                    |   | 215,001                                 |    | 141,134 |   |
|                                                                    |   |                                    |    |   |   |
| Net income                                                              |   | $                                       | 86,845  |   | $ | 85,961 |   |
|                                                                    |   |                                    |    |   |   |
| Net income allocable to managing member                                 |   | $                                       | 8,685   |   | $ | 8,596 |   |
|                                                                    |   |                                    |    |   |   |
| Net income allocable to unitholders                                     |   | $                                       | 78,160  |   | $ | 77,365 |   |
|                                                                    |   |                                    |    |   |   |
| Per unit amounts:                                                       |   |                                    |    |   |   |
| Basic and diluted income allocable to  unitholders                      |   | $                                       | 2.25    |   | $ | 4.04 |   |
|                                                                    |   |                                    |    |   |   |
| Basic and diluted weighted average units  outstanding                   |   | 34,813                                  |    | 19,135 |   |

 

The accompanying notes are an integral part ofthese financial statements.

 

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**CORNERSTONE REALTY FUND, LLC**

**(a California Limited Liability Company)**

 

**CONDENSED STATEMENT OF MEMBERS’ CAPITAL**

**(Unaudited)**

 
| Balance, December 31, 2003                    |   | $         | 13,520,063 |   |
|----------------------------------------------------|--------|-----------|------------|--------|
|                                               |   |      |       |
| Net proceeds from offering                         |   | 2,005,033 |       |
| Deferred offering costs repaid to managing  member |   | (89,640   | )          |
| Distributions to unitholders                       |   | (187,370  | )          |
| Net income                                         |   | 86,845    |       |
|                                               |   |      |       |
| Balance, March 31, 2004                       |   | $         | 15,334,931 |   |

 

The accompanying notes are an integral part ofthese financial statements.

 

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**CORNERSTONE REALTY FUND, LLC**

**(a California Limited Liability Company)**

 

**CONDENSED STATEMENTS OF CASH FLOWS**

**(Unaudited)**
|                                                                               |   | **Three  Months Ended  March 31,** |      |
|------------------------------------------------------------------------------------|--------|-----------------------------------------|-----------|
|                                                                               |   | **2004**                                |      | **2003** |   |
|                                                                               |   |                                    |      | **(restated)** |   |
| OPERATING ACTIVITIES                                                               |   |                                    |      |   |   |
| Net income                                                                         |   | $                                       | 86,845    |   | $ | 85,961 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                                    |      |   |   |
| Depreciation and amortization                                                      |   | 89,063                                  |      | 27,699 |   |
| Changes in operating assets and  liabilities:                                      |   |                                    |      |   |   |
| Other assets                                                                       |   | (28,030                                 | )         | (8,061 | ) |
| Accounts payable, accrued liabilities and  security deposits                       |   | 23,286                                  |      | (43,304 | ) |
| Real estate taxes payable                                                          |   | 1,950                                   |      | (14,637 | ) |
| Tenant security deposits                                                           |   | 1,216                                   |      | — |   |
|                                                                               |   |                                    |      |   |   |
| Net cash provided by operating activities                                          |   | 174,330                                 |      | 47,658 |   |
|                                                                               |   |                                    |      |   |   |
| INVESTING ACTIVITIES                                                               |   |                                    |      |   |   |
| Investments in real estate                                                         |   | (23,853                                 | )         | — |   |
|                                                                               |   |                                    |      |   |   |
| FINANCING ACTIVITIES                                                               |   |                                    |      |   |   |
| Advances from managing member                                                      |   | —                                  |      | 3,056 |   |
| Net proceeds from offering                                                         |   | 2,005,033                               |      | 1,046,255 |   |
| Deferred offering costs repaid to managing  member                                 |   | (89,640                                 | )         | (46,760 | ) |
| Distributions to unitholders                                                       |   | (187,370                                | )         | — |   |
|                                                                               |   |                                    |      |   |   |
| Net cash provided by financing activities                                          |   | 1,728,023                               |      | 1,002,551 |   |
|                                                                               |   |                                    |      |   |   |
| Net increase in cash                                                               |   | 1,878,500                               |      | 1,050,209 |   |
|                                                                               |   |                                    |      |   |   |
| Cash and cash equivalents – beginning of  period                              |   | 1,464,206                               |      | 1,062,947 |   |
|                                                                               |   |                                    |      |   |   |
| Cash and cash equivalents – end of period                                     |   | $                                       | 3,342,706 |   | $ | 2,113,156 |   |

 

The accompanying notes are an integral part ofthese financial statements.

 

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**CORNERSTONE REALTY FUND, LLC**

**(a California limited liability company)**

 

**NOTES TOFINANCIAL STATEMENTS**

**(unaudited)**

 

**1.**                                      Organization and Business

** **

CornerstoneRealty Fund, LLC, a California limited liability company (the “Fund”) (formerlyCornerstone Multi-Tenant Industrial Business Parks Fund, LLC and CornerstoneIndustrial Properties Income and Growth Fund I, LLC), was formed onOctober 28, 1998.  The members ofthe Fund are Cornerstone Industrial Properties, LLC, a California limitedliability company, as the Managing Member (“Managing Member”), Terry G. Roussel,an individual, and other various unitholders as described below.  The purpose of the Fund is to acquire,operate and sell multi-tenant industrial properties.  The Fund currently is issuing and selling in a public offeringequity interests (“units”) in the Fund, and is admitting the new unitholders asmembers of the Fund.  As ofApril 21, 2004, the Fund has issued 39,173 units to unitholders for grossoffering proceeds of $19,586,500.

 

Theunaudited condensed financial statements of the Fund have been prepared inaccordance with accounting principles generally accepted in the United Statesfor interim financial information and in accordance with the rules andregulations of the Securities and Exchange Commission.  The condensed financial statements do notinclude all of the information and footnotes required by accounting principlesgenerally accepted in the United States for complete financial statements.  The condensed financial statements includedherein should be read in conjunction with the Fund’s Annual Report on Form 10-Kfor the year ended December 31, 2003.

 

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

 

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

 

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

 

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

 

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

 

NetSales Proceeds, as defined, will be distributed first, 100% to the unitholdersin an amount equal to their Invested Capital Contributions; then, 90% to theunitholders and 10% to the Managing Member until the unitholders have receivedan amount equal to the unpaid balance of

 

7

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theiraggregate cumulative, non-compounded annual return on their Invested CapitalContributions; and thereafter, 50% to the unitholders and 50% to the ManagingMember.

 

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

 

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

 

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

 

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

 

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

 

Asa result of the restatement, at March 31, 2004 and December 31, 2003,the Fund has recorded a receivable from the Managing Member of $59,839.  The following summarizes the impact of thisrestatement on net income from amounts previously reported for the three monthsended March 31, 2003:

 
| Net income, as previously reported |   | $     | 78,199 |   |
|------------------------------------|--------|-------|--------|--------|
| Adjustment                         |   | 7,762 |   |
| Net income, as restated            |   | $     | 85,961 |   |

 

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

 

*Use of Estimates*

 

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

 

*Cash and Cash Equivalents*

 

Cashand cash equivalents consist primarily of interest-bearing investments withoriginal maturities of 90 days or less at the date of purchase.  Included in cash and cash equivalents atMarch 31, 2004 is $146,845 related to tenant security deposits.

 

8

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*Investments in Real Estate*

 

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

 

TheFund evaluates the carrying value for investments in real estate in accordancewith Financial Accounting Standards Board (“FASB”) Statement No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets* (“FAS144”).  FAS 144 requires that whenevents or changes in circumstances indicate that the carrying amount of theassets might not be recoverable, companies should evaluate the need for animpairment write-down.  When animpairment write-down is required, the related assets are adjusted to theirestimated fair value.

 

InJune 2001 the FASB issued Statement of Financial Accounting Standard(“SFAS”) No. 141, *Business Combinations*and SFAS No. 142, *Goodwill and Other Intangible Assets*.  SFAS No. 141 and No. 142 require the Fund torecord at acquisition an intangible asset or liability for the valueattributable to in-place leases.  Therequirements are applicable to all acquisitions subsequent to July 1,2001.  As of March 31, 2004, theFund has recorded $129,862, net of $37,552 of amortization, as an intangibleasset attributable to the value of the leases in place as of the date ofacquisition.

 

*Office Equipment and Leasing Commissions*

 

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

 

*Revenue Recognition*

 

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

 

*Fair Value of Financial Instruments*

 

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

 

*Income Tax Matters*

 

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

 

9

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*Concentration of Credit Risk*

 

TheFund maintains some of its cash in money market accounts which, at times,exceeds federally insured limits.  Nolosses have been experienced related to such amounts.

 

*Impact of New Accounting Pronouncements*

 

InJanuary 2003, the FASB issued Interpretation No. 46, *Consolidation of Variable InterestEntities*, as amended in December 2003 (“Interpretation No.46”), which applies immediately to arrangements created after January 31,2003.  Interpretation No. 46 applies toarrangements created before February 1, 2003 beginning no later thanMarch 31, 2004.  The initialadoption of Interpretation No. 46 did not have a material impact on the Fund’sfinancial position or results of operations.

 

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

 

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

 

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

 

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

 

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

 

**5.****                                     ****Deferred Offering Costs Advanced by Managing Member**

 

Unrecoveredoffering costs incurred by the Managing Member for the three months endedMarch 31, 2004 are as follows:

 
| Balance, December 31, 2003 |   | $       | 595,528 |   |
|---------------------------------|--------|---------|---------|--------|
| Costs incurred                  |   | 15,753  |    |
| Costs paid                      |   | (89,640 | )       |
|                            |   |    |    |
| Balance, March 31, 2004    |   | $       | 521,641 |   |

 

Specificincremental costs in connection with the offering of membership units areincurred by the Managing Member. Reimbursement of such offering costs is limited to 4% of the grossproceeds 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

 

10

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Managing Member that are not reimbursed by the Fund will be reflectedas a capital contribution to the Fund by the Managing Member, with anoffsetting expense recognized in the Fund’s statement of operations.  Through March 31, 2004, the ManagingMember has incurred $521,641 of unrecovered offering costs.

 

**6.****                                     ****Related Party Transactions**

 

Inorder to fund its initial operating costs, the Fund has received, from itsManaging Member, cumulative unsecured advances and related interest totaling$476,227 through December 31, 2003. Through December 31, 2003, the Fund has fully repaid this $476,227.

 

Duringthe three months ended March 31, 2003, the Managing Member funded $101,079to the Fund’s unitholders related to a 5% annual return on their InvestedCapital Contributions, which will not be reimbursed to the Managing Member bythe Fund.

 

TheManaging Member and/or its affiliates are entitled to receive various fees,compensation and reimbursements as specified in the Fund’s operating agreement,including commissions of 9% of the first $3,000,000 of gross proceeds from theoffering of units and 7% thereafter, marketing fees of 2% of gross proceedsfrom the offering of units less $60,000, and expense allowances of 1.5% ofgross proceeds from the offering of units. During the three months ended March 31, 2004 and 2003, the totalfees, compensation and reimbursements were $235,620 and $122,745, respectively.

 

TheFund is to reimburse the Managing Member for deferred offering costs incurredby its Managing Member in the amount of 4% of the gross proceeds from theoffering of units.  During the threemonths ended March 31, 2004 and 2003, the Fund reimbursed $89,640 and$46,760, respectively, of these costs to the Managing Member.

 

TheFund paid the Managing Member $2,890 in property management fees during thethree months ended March 31, 2003.

 

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

 

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

 

# **Critical Accounting Policies**

#  

TheFund’s financial statements have been prepared in accordance with accountingprinciples generally accepted in the United States.  The preparation of these financial statements requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities as of the date of the financial statements and the reportedamount of revenue and expenses during the reporting period.  Actual results could differ materially fromthe estimates in the near term.

 

## *Revenue Recognition*

## * *

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

 

## *Investments in Real Estate*

## * *

TheFund evaluates the carrying value for investments in real estate in accordancewith Financial Accounting Standards Board (“FASB”) Statement No. 144, *Accountingfor the Impairment or**Disposal of Long-Lived Assets* (“FAS144”).  FAS 144 requires that whenevents or changes in circumstances indicate that the carrying amount of theassets might not be recoverable, companies should evaluate the need for animpairment write-down.  When animpairment write-down is required, the related assets are adjusted to theirestimated fair value.

 

InJune 2001 the FASB issued Statement of Financial Accounting Standard(“SFAS”) No. 141, *Business Combinations* and SFAS No. 142, *Goodwill and Other Intangible Assets*.  SFAS No. 141 and No. 142 require the Fund torecord at acquisition an intangible asset or liability for the valueattributable to in-place leases.  Therequirements are applicable to all acquisitions subsequent to July 1,2001.  As of March 31, 2004, theFund has recorded $129,862 net of $37,552 of amortization as an intangibleasset attributable to the value of the leases in place as of the date ofacquisition.

 

*Off-balanceSheet Financings and Liabilities*

 

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

 

12

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# **Impact of New Accounting Pronouncements**

#  

InJanuary 2003, the FASB issued Interpretation No. 46, *Consolidation of Variable Interest**Entities*,as amended in December 2003 (“Interpretation No. 46”), which appliesimmediately to arrangements created after January 31, 2003.  Interpretation No. 46 applies toarrangements created before February 1, 2003 beginning no later thanMarch 31, 2004.  The initialadoption of Interpretation No. 46 did not have a material impact on the Fund’sfinancial position or results of operations.

 

# **Results of Operations**

#  

Asof March 31, 2004, the Fund has purchased three multi-tenant industrialbusiness park properties in two different major metropolitan areas.  The properties were purchased from theproceeds from the sale of membership units, without debt financing. Theproperties were purchased in the latter parts of September 2002,December 2002 and December 2003, respectively. As a result of thedates of purchase, Fund operations for 2003 reflect the net income from onlytwo properties.  For the three monthsended March 31, 2004, Fund operations reflect operations for the threeproperties purchased.

 

TheFund’s net income for the three months ended March 31, 2004 and 2003 was$86,845 and $85,961, respectively.  Theincreases in the operating results from the properties by the addition of ArrowBusiness Center was an offset by the amortization of the intangible assetattributed to in-place leases and the loss of a significant tenant at SkyHarbor Business Park in July 2003.

 

Withgreater deployment of the Fund’s assets in real estate, rental revenues andtenant reimbursements increased from a combined $224,171 in 2003 to $339,005 in2004.  For financial statementpresentation, the $339,005 in 2004 was reduced by the $37,552 amortization ofthe value of in-place leases to $301,503.

 

Withthe significantly greater level of real estate operations in 2004, relatedproperty operating expenses, including property taxes and depreciation,increased from $95,807 in 2003 to $181,462 in 2004.

 

TheFund’s general and administrative expenses declined from $45,327 in 2003 to$33,539 in 2004, primarily due to lower legal and accounting fees as operationsmoved further from the initial organization and start-up phase.  Additional general and administrativeexpenses are expected to continue until the capitalization and organization ofthe Fund is complete.  Interest expenseon costs incurred by the Managing Member reflect the reduction of the amountthe Fund owed in 2003.

 

**Liquidity and Capital Resources**

 

Asof April 21, 2004, the Fund has received $19,586,500 of gross proceedsfrom the sale of membership units, $109,979 as a capital contribution from theManaging Member, and paid out $2,832,918 for offering costs.  The Fund has $4,057,517 in cash and cashequivalents as of April 24, 2004.

 

TheFund intends to continue offering membership units for sale and use the netproceeds from the sale of units for the acquisition of additional multi-tenantindustrial business park properties, capital improvements to the properties,and for operating expenses and reserves.

 

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

 

TheFund’s offering and organizational activities have been financed by theManaging Member.  A portion of thosecosts have been reimbursed to the Managing Member at the rate of 4% of gross

 

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proceeds of the Fund’s unit sales pursuant to the prospectus for theoffering.  The Fund will continue toincur organizational and offering expenses and the Managing Member, althoughnot obligated, intends to continue providing advances for offering andorganizational expenses until the sale of membership units is completed.  The Managing Member must raise funds throughthe sale of its own debt or equity securities to obtain the cash necessary toprovide these advances.  There can be noassurance as to the amount or timing of the Managing Member’s receipt offunds.  The Fund will not reimburse theManaging Member for any amounts advanced by it for offering and organizationalexpenses which exceed the amounts and percentages set forth in the prospectusfor the offering.  Any such expensesincurred by the Managing Member on behalf of the Fund that are not reimbursedby the Fund will be reflected as a capital contribution to the Fund by theManaging Member with an offsetting expense recognized in the Fund’s statementof operations.

 

**Contractual Obligations**

 

Asof March 31, 2004, the Fund had no significant contractual obligations orcommercial commitments.

 

**Item 3.****                    ****Quantitative and Qualitative Disclosures 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.

 

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

 

TheFund’s disclosure controls and procedures are designed to ensure thatinformation required to be disclosed in reports that the Fund files or submitsunder the Securities Exchange Act of 1934 is recorded, processed, summarizedand reported within the time periods specified in the rules and forms of theSecurities and Exchange Commission. The Chief Executive Officer and the ChiefFinancial Officer of Cornerstone Ventures, Inc., the manager of the managingmember of the Fund, have reviewed the effectiveness of the Fund’s disclosurecontrols and procedures as of the end of the period covered by this report andhave concluded that the disclosure controls and procedures are effective. Therewere no significant changes in our internal controls or in other factors thatcould significantly affect these controls subsequent to the last day they wereevaluated.

 

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

 

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**PART II - OTHER INFORMATION**

 
| **Item 6.** | **Exhibits and Reports on Form 8-K****.** |
|-------------|-------------------------------------------|
|        |                                      |   |
|        | **(a)**                                   | **Exhibits** |
|        |                                      |   |
|        |                                      | 31.1 | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002. |
|        |                                      |   |   |
|        |                                      | 31.2 | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002. |
|        |                                      |   |   |
|        |                                      | 32 | Certification  of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C.  §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. |
|        |                                      |   |
|        | **(b)**                                   | **Reports on Form 8-K** |
|        |                                      |   |
|        |                                      | None. |

 

**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Actof 1934, the registrant has duly caused this quarterly report to be signed onits behalf by the undersigned, thereunto duly authorized this 11thday of May 2004.

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

 

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