UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C.  20549
 
 FORM
10-Q
 
 (Mark
One)
 
 T
              QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 
 For
the quarterly period ended September 30, 2009
 
 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.
 
 T  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).
 
 o
Yes    o 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 £  Smaller
Reporting Company T
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
 
 £  Yes  T  No
 
 
 
  PARTI.
              
              FINANCIAL
      INFORMATIONItem
      1.
              
              Financial
      Statements:Condensed
      Balance Sheets as of September 30, 2009 and December 31, 2008(unaudited)
              
              3Condensed
      Statements of Operations for the Three and Nine months ended September 30,
      2009 and September 30, 2008 (unaudited)
              
              4Condensed
      Statement of Members’ Capital for the Nine months ended September 30, 2009
      (unaudited)
              
              5Condensed
      Statements of Cash Flows for the Nine months ended September 30, 2009 and
      September 30, 2008 (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
              
              16Item
      4.
              
              Controls and
      Procedures
              
              16PART
      II.
              
              OTHER
      INFORMATIONItem
      6.
              
              Exhibits
              
              17SISIGNATURES
              
              18
  2
 Table of Contents
 
 CORNERSTONEREALTY FUND, LLC
 (a
California Limited Liability Company)
 
 CONDENSED
BALANCE SHEETS
 (UNAUDITED)
 
 September
       30, 2009
              
              
              December 31,
      2008ASSETSCash
      and cash equivalents
              
              $
              1,468,000
              
              
              $
              2,289,000Investments
      in real estateLand
              
              
              11,226,000
              
              
              
              11,474,000Buildings
      and improvements, net
              
              
              18,592,000
              
              
              
              19,885,000Intangible
      lease assets, net
              
              
              108,000
              
              
              
              198,000Intangible
      in-place lease assets, net
              
              
              20,000
              
              
              
              84,00029,946,000
              
              
              
              31,641,000Tenant
      and other receivables, net
              
              
              293,000
              
              
              
              274,000Prepaid
      expenses and other assets
              
              
              29,000
              
              
              
              36,000Leasing
      commissions, less accumulated amortization of $143,000 as of September 30,
      2009 and $128,000 as of December 31, 2008
              
              
              183,000
              
              
              
              161,000Total
      assets
              
              $
              31,919,000
              
              
              $
              34,401,000LIABILITIES
      AND MEMBERS’ CAPITALLiabilitiesAccounts
      payable, accrued liabilities and prepaid rent
              
              $
              303,000
              
              
              $
              316,000Real
      estate taxes payable
              
              
              387,000
              
              
              
              219,000Tenant
      security deposits
              
              
              277,000
              
              
              
              295,000Intangible
      lease liability, net
              
              
              10,000
              
              
              
              32,000Total
      liabilities
              
              
              977,000
              
              
              
              862,000Members’
      capital (100,000 units authorized and issued as of September 30, 2009 and
      December 31, 2008; 98,958 and 99,350 units outstanding as of September 30,
      2009 and December 31, 2008, respectively)
              
              
              30,942,000
              
              
              
              33,539,000Total
      liabilities and members’ capital
              
              $
              31,919,000
              
              
              $
              34,401,000
 
 The
accompanying notes are an integral part of these interim financial
statements.
  3
 Table of Contents
 
 CORNERSTONEREALTY FUND, LLC
 (a
California Limited Liability Company)
 
 CONDENSED
STATEMENTS OF OPERATIONS
 (Unaudited)
 
 Three
      Months Ended
                September
       30,
              
              
              Nine
      Months Ended
                September
      30,2009
              
              
              2008
              
              
              2009
              
              
              2008RevenuesRental
      revenues
              
              $
              754,000
              
              
              $
              837,000
              
              
              $
              2,292,000
              
              
              $
              2,541,000Tenant
      reimbursements and other income
              
              
              165,000
              
              
              
              169,000
              
              
              
              479,000
              
              
              
              519,000919,000
              
              
              
              1,006,000
              
              
              
              2,771,000
              
              
              
              3,060,000ExpensesProperty
      operating and maintenance
              
              
              213,000
              
              
              
              245,000
              
              
              
              602,000
              
              
              
              759,000Property
      taxes
              
              
              168,000
              
              
              
              130,000
              
              
              
              455,000
              
              
              
              419,000General
      and administrative
              
              
              30,000
              
              
              
              65,000
              
              
              
              197,000
              
              
              
              218,000Depreciation
      and amortization
              
              
              241,000
              
              
              
              262,000
              
              
              
              715,000
              
              
              
              792,000Impairment
      of real estate
              
              
              1,216,000
              
              
              
              -
              
              
              
              1,216,000
              
              
              
              -1,868,000
              
              
              
              702,000
              
              
              
              3,185,000
              
              
              
              2,188,000Interest
      income
              
              
              -
              
              
              
              54,000
              
              
              
              1,000
              
              
              
              87,000Net
      (loss) income
              
              $
              (949,000
              )
              
              $
              358,000
              
              
              $
              (413,000
              )
              
              $
              959,000Basic
      and diluted (loss) income per weighted average units
      outstanding
              
              $
              (9.57
              )
              
              $
              3.60
              
              
              $
              (4.16
              )
              
              $
              9.63Basic
      and diluted weighted average units outstanding
              
              
              99,127
              
              
              
              99,498
              
              
              
              99,261
              
              
              
              99,583
 
 The
accompanying notes are an integral part of these interim financial
statements.
  4
 Table of Contents
  CORNERSTONEREALTY FUND, LLC
 (a
California Limited Liability Company)
 
 CONDENSED
STATEMENT OF MEMBERS’ CAPITAL
 (Unaudited)
 
 Balance,
      December 31, 2008
              
              $
              33,539,000Cash
      distributions to unit holders
              
              
              (1,856,000
              )Cash
      distributions to managing member
              
              
              (192,000
              )Units
      repurchased and retired
              
              
              (136,000
              )Net
      loss
              
              
              (413,000
              )Balance,
      September 30, 2009
              
              $
              30,942,000
 
 The
accompanying notes are an integral part of these interim financial
statements.
  5
 Table of Contents
 
 CORNERSTONEREALTY FUND, LLC
 (a
California Limited Liability Company)
 
 CONDENSED
STATEMENTS OF CASH FLOWS
 (Unaudited)
 
 Nine
      Months Ended September 30,2009
              
              
              2008OPERATING
      ACTIVITIESNet
      (loss) income
              
              $
              (413,000
              )
              
              $
              959,000Adjustments
      to reconcile net income to net cash provided by operating
      activities:Provision
      for bad debt
              
              
              41,000
              
              
              
              87,000Impairment
      of real estate
              
              
              1,216,000
              
              
              
              -Depreciation
      and amortization
              
              
              715,000
              
              
              
              792,000Straight-line
      rents and amortization of acquired above (below) market leases,
      net
              
              
              (6,000
              )
              
              
              (40,000
              )Changes
      in operating assets and liabilitiesOther
      assets
              
              
              (170,000
              )
              
              
              (95,000
              )Accounts
      payable and accrued liabilities
              
              
              137,000
              
              
              
              44,000Net
      cash provided by operating activities
              
              
              1,520,000
              
              
              
              1,747,000INVESTING
      ACTIVITIESInvestments
      in real estate
              
              
              (157,000
              )
              
              
              (185,000
              )Net
      cash used in investing activities
              
              
              (157,000
              )
              
              
              (185,000
              )FINANCING
      ACTIVITIESCash
      distributions to unit holders
              
              
              (1,856,000
              )
              
              
              (2,866,000
              )Cash
      distributions to managing member
              
              
              (192,000
              )
              
              
              (141,000
              )Units
      repurchased and retired
              
              
              (136,000
              )
              
              
              (119,000
              )Net
      cash used in financing activities
              
              
              (2,184,000
              )
              
              
              (3,126,000
              )Net
      decrease in cash
              
              
              (821,000
              )
              
              
              (1,564,000
              )Cash
      and cash equivalents at beginning of period
              
              
              2,289,000
              
              
              
              4,201,000Cash
      and cash equivalents at end of period
              
              $
              1,468,000
              
              
              $
              2,637,000
 
 The
accompanying notes are an integral part of these interim financial
statements.
  6
 Table of Contents
  CORNERSTONEREALTY FUND, LLC
 (a
California Limited Liability Company)
 
 NOTES
TO CONDENSED FINANCIAL STATEMENTS
 SEPTEMBER
30, 2009
 (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, “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 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 Securities and Exchange Commission 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.  In preparing the
accompanying interim financial statements, we have evaluated the potential
occurrence of subsequent events through November 13, 2009, the date at which the
financial statements were issued. 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, 2008.
 
 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 nine months ended September 30, 2009 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2009.
 
 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
 Table of Contents
  —
              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.
  2.
              Summary
      of Significant Accounting Policies
 
 Use
of Estimates
 
 The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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 periods.  Actual results could differ
materially from the estimates in the near term.
 
 Cash
and Cash Equivalents
 
 Cash and
cash equivalents consist primarily of interest-bearing investments with original
maturities of 90 days or less at the date of purchase.  We place our
cash with major financial institutions.  At times, cash balances may
be in excess of amounts insured by Federal agencies. The carrying amounts
approximate fair value.
 
 Investments
in Real Estate
 
 Investments
in real estate are stated at cost and include land, buildings and building
improvements.  Expenditures for ordinary maintenance and repairs are
expensed to operations as incurred.  Significant replacements,
betterments and tenant improvements which improve or extend the useful lives of
the buildings are capitalized and depreciated over their estimated useful
lives.   Depreciation of the buildings and building improvements
is computed on a straight-line basis over their estimated useful lives of 39
years.  Tenant improvements are depreciated over shorter of related
lease term or expected useful life.
 
 We
evaluate the carrying value for investments in real estate in accordance with
Financial Accounting Standards Board Accounting Standard Codification (“FASB
ASC”) 360-10, Property, Plant
& Equipment.  We periodically evaluate our investments in
real estate for impairment indicators. The judgments regarding the existence of
impairment indicators are based on factors such as operational performance,
market conditions, expected holding period of each asset and legal and
environmental concerns. If indicators exist, we compare the expected future
undiscounted cash flows for the long-lived asset against the carrying amount of
that asset. If the sum of the estimated undiscounted cash flows is less than the
carrying amount of the asset, an impairment loss is recorded for the difference
between the estimated fair value and the carrying amount of the
asset.
 
 In the
third quarter of 2009, we reviewed the impairment indicators as described in
FASB ASC 360-10-35-21.  We compared the expected future undiscounted
cash flows for one of our properties against the carrying amount of that
property.  We concluded that the sum of the estimated undiscounted
cash flows is less than the carrying amount of that property. Accordingly, the
fair value of the property was determined based on management’s
expectation of future cash flows expected from the property.  For
the nine months ended September 30, 2009, we recognized an impairment charge of
approximately $1.2 million.
 
 In
accordance with FASB ASC 805-10, Business Combinations, we
allocated the purchase price of acquired properties to land, buildings and
improvements and identified tangible and intangible assets and liabilities
associated with in-place leases (including tenant improvements, unamortized
leasing commissions, value of above and below-market leases, acquired in-place
lease values, and tenant relationships, if any) based on their respective
estimated fair values.
 
 The fair
value of the tangible assets of the acquired properties considers the value of
the properties as if vacant as of the acquisition date.  Management
must make significant assumptions in determining the value of assets and
liabilities acquired.  Amounts allocated to land are derived from
comparable sales of land within the same region.  Amounts allocated to
buildings and improvements, tenant improvements and unamortized leasing
commissions are based on current market replacement costs and other market rate
information.
 
 Acquired
above and below market leases are valued based on the present value of the
difference between prevailing market rates and the in-place rates over the
remaining lease term.  The value of acquired above and below market
leases is amortized over the remaining non-cancelable terms of the respective
leases as an adjustment to rental revenue on our statement of
operations.
  8
 Table of Contents
  The
amount allocated to acquired in-place leases is determined based on management’s
assessment of lost revenue and costs incurred for the period required to lease
the “assumed vacant” property to the occupancy level when
purchased.  The amount allocated to acquired in-place leases is
included in intangible assets — in-place lease assets in the condensed balance
sheet and amortized to expense over the remaining non-cancelable term of the
respective leases.
 
 Estimated
amortization associated with the intangible lease assets, in-place lease assets
and intangible lease liability for October 1, 2009 through December 31, 2009 and
each of the four subsequent years is as follows:
 
 Lease
      IntangiblesOctober
      1, 2009 to December 31, 2009
              
              $
              9,0002010
              
              
              14,0002011
              
              
              11,0002012
              
              
              11,0002013
              
              
              7,000Thereafter
              
              
              66,000Total
              
              $
              118,000
  As of
September 30, 2009, accumulated depreciation and amortization related to
investments in real estate and related lease intangibles were as
follows:
 
 Land
              
              
              Buildings
      and Improvements
              
              
              Intangible
      Lease Assets
              
              
              In-Place
      Lease Assets
              
              
              Intangible
      Lease LiabilityInvestments
      in real estate and related lease intangibles
              
              $
              11,226,000
              
              
              $
              21,289,000
              
              
              $
              108,000
              
              
              $
              770,000
              
              
              $
              (154,000
              )Less:
      accumulated depreciation and amortization
              
              
              —
              
              
              
              (2,697,000
              )
              
              
              —
              
              
              
              (750,000
              )
              
              
              144,000Net
      investments in real estate and related lease intangibles
              
              $
              11,226,000
              
              
              $
              18,592,000
              
              
              $
              108,000
              
              
              $
              20,000
              
              
              $
              (10,000
              )
  As of
December 31, 2008, accumulated depreciation and amortization related to
investments in real estate and related lease intangibles were as
follows:
 
 Land
              
              
              Buildings
      and Improvements
              
              
              Intangible
      Lease Assets
              
              
              In-Place
      Lease Assets
              
              
              Intangible
      Lease LiabilityInvestments
      in real estate and related lease intangibles
              
              $
              11,474,000
              
              
              $
              22,511,000
              
              
              $
              365,000
              
              
              $
              894,000
              
              
              $
              (155,000
              )Less:
      accumulated depreciation and amortization
              
              
              —
              
              
              
              (2,626,000
              )
              
              
              (167,000
              )
              
              
              (810,000
              )
              
              
              123,000
              )Net
      investments in real estate and related lease intangibles
              
              $
              11,474,000
              
              
              $
              19,885,000
              
              
              $
              198,000
              
              
              $
              84,000
              
              
              $
              (32,000
              )
  Depreciation
and amortization related to investments in real estate and related lease
intangibles for the three months ended September 30, 2009 and 2008 were $206,000
and $224,000, respectively.  Depreciation and amortization related to
investments in real estate and related lease intangibles for the nine months
ended September 30, 2009 and 2008 were $614,000 and $672,000,
respectively.
 
 Leasing
Commissions
 
 Leasing
commissions are stated at cost and amortized on a straight-line basis over the
related lease term.  As of September 30, 2009 and December 31, 2008,
we had recorded approximately $326,000 and $289,000 in leasing commissions,
respectively. Amortization expense for the three months ended September 30, 2009
and 2008 was approximately $27,000 and $31,000, respectively. Amortization
expense for the nine months ended September 30, 2009 and 2008 was approximately
$79,000 and $98,000, respectively.
  9
 Table of Contents
  Revenue
Recognition
 
 Rental
revenues are recorded on an accrual basis as they are earned over the lives of
the respective tenant leases on a straight-line basis.  Included in
this calculation are contractual rent increases and amounts paid to tenants as
tenant improvement allowances.  Rental receivables are periodically
evaluated for collectability.
 
 Accounts
Receivable
 
 We
periodically evaluate the collectability of amounts due from tenants and
maintain an allowance for doubtful accounts for estimated losses resulting from
the inability of tenants to make required payments under lease
agreements.  The Fund exercises judgment in establishing these
allowances and considers payment history and current credit status of its
tenants in developing these estimates.
 
 Our
allowance for doubtful accounts was $125,000 and $106,000 as of September 30,
2009 and December 31, 2008, respectively.
 
 Fair
Value of Financial Instruments
 
 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. FASB ASC 820-10 applies prospectively to all other
accounting pronouncements that require or permit fair value
measurements.  The adoption of FASB ASC 820-10 did not have a material
impact on our consolidated financial statements since we do not record our
financial assets and liabilities in our consolidated financial statements at
fair value.  We adopted FASB ASC 820-10 to our non-financial assets
and non-financial liabilities on January 1, 2009. The adoption of FASB ASC
820-10 to our non-financial assets and liabilities did not have a material
impact on our consolidated financial statements.
 
 The
following table summarizes the one 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
                September 30,
      2009
              
              
              Total
      Losses Nine
                Months
      Ended
                September 30,
                2009Investment
      in real estate
              
              $
              1,742,000
              
              
              $
              —
              
              
              $
              —
              
              
              $
              1,742,000
              
              
              $
              (1,216,000
              )
              
              $
              (1,216,000
              )
 
 The FASB
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
consolidated balance sheets include the following financial instruments: cash
and cash equivalents, tenant and other receivables, prepaid rent, tenant
security deposits, real estate tax payable, accounts payable and accrued
liabilities.  We consider the carrying values of cash and cash
equivalents, tenant and other receivables,  prepaid rent, tenant
security deposits, accounts payable, real estate tax payable and accrued
liabilities to approximate fair value for these financial instruments because of
the short period of time between origination of the instruments and their
expected payment.
 
 Income
Tax Matters
 
 It is our
intent we be treated as a partnership for income tax purposes.  As a
limited liability company, we are subject to certain taxes and fees, including
state income taxes on limited liability companies; however, income taxes on the
income or losses we realize are generally the obligation of the
members.
 
 Concentration
of Credit Risk
 
 Financial
instruments that potentially subject us to a concentration of credit risk are
primarily cash investments.  Cash is generally invested in government
backed securities and the amount of credit exposure to any one commercial issuer
is limited.  Currently, the Federal Deposit Insurance Corporation, or
FDIC, generally insures amounts up to $250,000 per depositor per insured bank,
which is scheduled to be reduced to $100,000 after December 31,
2009.  As of September 30, 2009, we had cash accounts in excess of
FDIC insured limits.
  10
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  As of
September 30, 2009, 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 each State’s economy.
 
 Impact
of New Accounting Pronouncements
 
 On
January 1, 2009, we adopted FASB ASC 810-10-65, Consolidation, which
establishes accounting and reporting standards that require the ownership
interests in subsidiaries held by parties other than the parent be clearly
identified, labeled and presented in the consolidated statement of financial
position within equity, but separate from the parent’s equity; the amount of
consolidated net income attributable to the parent and to the noncontrolling
interest be clearly identified and presented on the face of the consolidated
statement of income; changes in a parent’s ownership interest while the parent
retains its controlling financial interest in its subsidiary be accounted for
consistently; when a subsidiary is deconsolidated, any retained noncontrolling
equity investment in the former subsidiary be initially measured at fair value;
and entities provide sufficient disclosures that clearly identify and
distinguish between the interests of the parent and the interests of the
noncontrolling owners. The objective of the guidance is to improve the
relevance, comparability, and transparency of the financial information that a
reporting entity provides in its consolidated financial statements. FASB ASC
810-10-65 is effective for fiscal years beginning on or after December 15,
2008.  We adopted FASB ASC 810-10-65 and it did not have a material
impact to our financial position or results of operations.
 
 On April
9, 2009, the FASB issued three FASB Staff Positions (“FSP”) to provide
additional application guidance and enhance disclosures regarding fair value
measurements and impairments of securities.
 
 FASB ASC
820-10-65-4, Determining Fair
Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not
Orderly, provides additional guidance for estimating fair value in
accordance with FASB ASC 820-10 when the volume and level of activity for the
asset or liability have significantly decreased in relation to normal market
activity. This FSP states a reporting entity shall evaluate circumstances to
determine whether the transaction is orderly based on the weight of the
evidence. Additional disclosures required by this FSP include the inputs and
valuation techniques used to measure fair values and any changes in
such.
 
 FASB ASC
825-10-65-1, Interim
Disclosures about Fair Value of Financial Instruments, requires
disclosures about fair value of financial instruments for interim reporting
periods as well as in annual financial statements.
 
 FASB ASC
320-10-65-1, Recognition and
Presentation of Other-Than-Temporary Impairments, intends to bring
greater consistency to the timing of impairment recognition, and provide greater
clarity to investors about the credit and noncredit components of impaired debt
securities that are not expected to be sold.  The FSP also requires
increased and timely disclosures regarding expected cash flows, credit losses,
and an aging of securities with unrealized losses.
 
 The FSPs
are effective for interim and annual periods ending after June 15, 2009, with
early adoption permitted for periods ending after March 15,
2009.   On April 1, 2009, we adopted the FSPs to enhance
disclosures regarding fair value measurements.  The adoption of these
FSPs did not have a significant impact on our condensed consolidated financial
statements.
 
 On April
13, 2009, SEC Office of the Chief Accountant and Division of Corporation Finance
issued SEC Staff Accounting Bulletin 111 ("SAB 111"). SAB 111 amends and
replaces FASB ASC 320-10-S99-1, Miscellaneous Accounting – Other
Than Temporary Impairment of Certain Investments in Equity Securities, to
reflect FASB ASC 320-10-65-1. This FSP provides guidance for assessing whether
an impairment of a debt security is other than temporary, as well as how such
impairments are presented and disclosed in the financial statements. The amended
FASB ASC 320-10-S99-1 maintains the prior staff views related to equity
securities but has been amended to exclude debt securities from its scope. SAB
111 is effective upon the adoption of FASB ASC 320-10-65-1. The adoption of SAB
111 on April 1, 2009 did not have a material effect on our condensed
consolidated financial statements.
 
 In June
2009, the FASB issued FASB ASC 855-10, Subsequent Events, which
establishes general standards of accounting for and disclosures of events that
occur after the balance sheet date but before the financial statements are
issued or available to be issued. It is effective for interim and annual periods
ending after June 15, 2009. We have adopted this standard as of June 30,
2009.  The adoption of this standard did not have a material effect on
our condensed consolidated financial statements.
 
 In June
2009, the FASB issued FASB ASC 105-10, Generally Accepted Accounting
Principles, which will become the source of authoritative US GAAP
recognized by the FASB to be applied to nongovernmental entities. It is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. We have adopted this standard as of September 30,
2009.  The adoption of this standard did not have a material effect on
our condensed consolidated financial statements.
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  Recently Issued Accounting
Pronouncements
 
 In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation
No. 46(R)” (“SFAS 167”), (SFAS 167 shall remain authoritative until
integrated in the ASC), which amends the consolidation guidance applicable to
variable interest entities. The amendments to the consolidation guidance affect
all entities currently within the scope of FIN 46(R), as well as qualifying
special-purpose entities that are currently excluded from the scope of FIN
46(R). SFAS 167 is effective as of the beginning of the first fiscal year that
begins after November 15, 2009.  We will adopt this standard on
January 1, 2010.   We are in the process of evaluating the impact of
this standard.
 
 In June
2009, the FASB issued SFAS No. 166, “Accounting for Transfers of
Financial Assets”(“SFAS 166”), (SFAS 166 shall remain authoritative
until integrated in the ASC). SFAS 166 removes the concept of a qualifying
special-purpose entity from SFAS No. 140, “Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities”(“SFAS
140”) and removes the exception from applying FIN 46R. This statement also
clarifies the requirements for isolation and limitations on portions of
financial assets that are eligible for sale accounting. This statement is
effective for fiscal years beginning after November 15, 2009. We will adopt this
standard on January 1, 2010.   We do not believe that the
adoption of this standard will have a material effect on our condensed
consolidated financial statements.
 
 In August
2009, the FASB issued Accounting Standards Update, or ASU, 2009-05, Measuring Liabilities at Fair
Value, ASU 2009-05 provides guidance on measuring the fair value of
liabilities under FASB Codification Topic 820, Fair Value Measurements and
Disclosure. Specifically, the guidance reaffirms that fair value
measurement of a liability assumes the transfer of a liability to a market
participant as of the measurement date, and presumes that the liability is to
continue and is not settled with a counterparty. Further, nonperformance risk
does not change after transfer of the liability. ASU 2009-05 also provides
guidance on the valuation techniques to estimate fair value of a liability in an
active and inactive market. ASU 2009-05 is effective for the first interim or
annual reporting period beginning after issuance. We will adopt ASU 2009-05 on
October 1, 2009, which will only apply to the disclosures fair value of
financial instruments. The adoption of ASU 2009-05 is not expected to have a
material impact on our footnote disclosures.
 
 3.
              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 consolidated 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 the
Fund which if determined unfavorably to us would have a material adverse effect
on our cash flows, financial condition or results of operations.
 
 4.
              Subsequent
      Event
 
 During
the period between October 1, 2009 and November 13, 2009, we repurchased and
retired 144 units for approximately $50,000.
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  Item2.
              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.  Certain statements in this section and elsewhere contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995.  Such forward-looking statements may
relate to risks and other factors that may cause our future results of
operations to be materially different than those expressed or implied
herein.  Some of these risks and other factors include, but are not
limited to: (i) no assurance that our properties will continue to experience the
current level of occupancy; (ii) tenants may not be able to meet their financial
obligations; (iii) rental revenues from the properties may not be sufficient to
meet our cash requirements for operations, capital requirements and
distributions; and (iv) adverse changes to the general economy may disrupt
operations.  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, 2008 and in Part II, Item 1A of our quarterly report
on form 10-Q for the quarterly period ended March 31, 2009.
 
 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
  During
2008 and 2009, significant and widespread concerns about credit risk and access
to capital have been present in the global capital markets. Both the national
and most global economies have experienced substantially increased unemployment
and a downturn in economic activity. In addition, the failure or near failure of
several large financial institutions early in this period and the continued
failures of smaller financial institutions and businesses, together with
government interventions in the financial system, including interventions in
bankruptcy proceedings and restrictions on businesses, have led to increased
market uncertainty and volatility. Despite certain recent positive economic
indicators and improved stock market performance, the aforementioned conditions,
combined with stagnant business activity and low consumer confidence, have
resulted in an unprecedented global recession and continue to contribute to a
challenging macro-economic environment that may interfere with 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 been experiencing deteriorating fundamentals across all
major property types and most geographic markets. Tenant defaults are on the
rise, while demand for commercial real estate space is contracting. It is
expected that this will create a highly competitive leasing environment that
should result in downward pressure on both occupancy and rental rates, resulting
in leasing incentives becoming more common. Mortgage delinquencies and defaults
have trended upward, with many industry analysts predicting significant credit
defaults, foreclosures and principal losses, in particular for subordinate
securitized debt instruments.
 
 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.
 
 Currently,
benchmark interest rates, such as LIBOR, are at historic lows, allowing some
borrowers with variable rate real estate loans to continue making debt service
payments even as the properties securing these loans experience decreased
occupancy and lower rental rates. These low rates have benefitted borrowers with
floating rate debt who have experienced lower revenues due to decreased
occupancy or lower rental rates. Low short-term rates have allowed them to meet
their debt obligations but the borrowers would not meet the current underwriting
requirements needed to refinance this debt today. As these loans near maturity,
borrowers will find it increasingly difficult to refinance these loans in the
current underwriting environment.
 
 These
market conditions have and will likely continue to have a significant impact on
our real estate investments. In addition, these market conditions have impacted
our tenants’ businesses, which makes it more difficult for them to meet current
lease obligations and places pressure on them to negotiate favorable lease terms
upon renewal in order for their businesses to remain viable. Increases in rental
concessions given to retain tenants and maintain our occupancy level, which is
vital to the continued success of our portfolio, has resulted in lower current
cash flow. Projected future declines in rental rates, slower or potentially
negative net absorption of leased space and expectations of future rental
concessions, including free rent to retain tenants who are up for renewal or to
sign new tenants, are expected to result in additional decreases in cash
flows.
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 Table of Contents
  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,
2008, as filed with the SEC.
 
 Results
of Operations
 
 Continuing
operations for the three and nine months ended September 30, 2009 and 2008
consists of six multi-tenant industrial business park properties in three major
metropolitan areas.  The results of operations for the three and nine
months ended September 30, 2009 and 2008 are discussed below.
 
 Results
of operations for the three and nine months ended September 30, 2009 and 2008
includes six multi-tenant industrial business park properties in three major
metropolitan areas.
 
 Three
months ended September 30, 2009 and 2008
 
 Rental
revenues, tenant reimbursements and other income decreased to approximately
$919,000 for the three months ended September 30, 2009 from approximately
$1,006,000 for the comparable period of 2008 primarily due to lower occupancy,
partially as a result of longer lease up periods for vacant units.
 
 Property
operating and maintenance expenses decreased to approximately $213,000 for the
three months period ended September 30, 2009 from approximately $245,000 for the
comparable period of 2008.  The decrease is primarily due to a
lower bad debt expense.
 
 Property
taxes increased to approximately $168,000 for the three months ended September
30, 2009 from approximately $130,000 for the comparable period of
2008.  The increase is primarily due to an increase in the property
tax basis on two of our properties which management plans to
appeal.
 
 General
and administrative expenses decreased to approximately $30,000 for the
three months ended September 30, 2009 from approximately $65,000 for the
comparable period of 2008.  The decrease is primarily due to the
timing of audit and accounting fee obligations.  Depreciation and
amortization expenses for the three months ended September 30, 2009 was
$241,000, a decrease of $21,000, from $262,000 for the comparable period of
2008.  The decrease is due to a real estate impairment loss recognized
in December 31, 2008, reducing depreciable basis, and full amortization of
intangible assets at two properties.
 
 Impairment
of real estate charges increased to approximately $1,216,000 for the three
months ended September 30, 2009 from $0 in the comparable period in 2008 due
to adjustments to reflect a decline in the market value of one of our real
estate property.
 
 Interest
and other income for the three months ended September 30, 2009 decreased to $0
from $54,000 for the comparable period of 2008.  The decrease was due
to the lower average cash balance available for short term investment and the
low investment rates during the three months ended September 30,
2009.
 
 Nine
months ended September 30, 2009 and 2008
 
 Rental
revenues, tenant reimbursements and other income decreased to $2,771,000 for the
nine months ended September 30, 2009 from approximately $3,060,000 for the
comparable period of 2008 primarily due to lower occupancy, partially resulting
from longer lease up periods for vacant units.
 
 Property
operating and maintenance expenses decreased to $602,000 for the nine months
ended September 30, 2009 from approximately $759,000 for the comparable period
of 2008.  The decrease is primarily due to lower bad debt,
refurbishment costs and administrative and professional
expenses.
  14
 Table of Contents
  Property
taxes increased to approximately $455,000 for the nine months ended September
30, 2009 from approximately $419,000 for the comparable period of
2008.  The increase is primarily due to an increase in the property
tax basis of two of our properties which management plans to
appeal.
 
 General
and administrative expenses decreased to approximately $197,000 for the
nine months ended September 30, 2009 from approximately $218,000 for the
comparable period of 2008.  The decrease is primarily due to the
timing of accounting and audit fees obligations.  Depreciation and
amortization for the nine months ended September 30, 2009 was $715,000, a
decrease of $77,000, from $792,000 for the comparable period of
2008.  The decrease is due to the real estate impairment loss
recognized in December 31, 2008 reducing depreciation basis and full
amortization of intangible assets at two properties.
 
 Impairment
of real estate charges increased to approximately $1,216,000 for the nine months
ended September 30, 2009 from $0 in the comparable period in 2008 due
to adjustments to reflect a decline in the market value of one of our real
estate property.
 
 Interest
and other income for the nine months ended September 30, 2009 was $1,000,
compared to $87,000 in the comparable period of 2008.  The decrease is
due primarily to the lower average cash balances available for short term
investment combined with lower investment rates during the first nine months of
2009.
 
 Liquidity
and Capital Resources
 
 As of
October 31, 2009, we had approximately $0.8 million in cash and cash
equivalents. We intend to use the existing cash balance for capital improvements
to the properties, to provide for operating reserves, to pay cash distributions
and to repurchase units from unit holders. Cash in excess of these needs will be
available for distribution to unit holders.
 
 Our
management believes the cash on hand and the net cash generated by the
properties in our portfolio will be adequate to meet operating costs of the
properties and the Fund, and allow for cash distributions to our unit
holders.  To the extent that net cash generated by the properties is
not enough to meet operating costs and pay cash distributions to our unit
holders, we will endeavor to sell selected properties such that we can continue
to operate the remaining properties and pay cash distributions.
  15
 Table of Contents
  Item3.
              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 September 30, 2009, a 1% increase or decrease in interest rates would not
have a material effect on our interest income.
 
 Item4.
              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.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies and procedures may deteriorate.
 
 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.
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  PART
II - OTHER INFORMATION
 
 Item6.
              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 and June 2, 2009, Incorporated by reference
      to Exhibit 3.1 to the Registrant’s quarterly report on Form 10-Q for the
      period ended June 30, 2009).
 
 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.
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  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 13th day of November
2009.
 
 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)







18