**U.S. SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C.  20549**

 

**FORM 10-Q**

 

**(Mark One)**

**ý****                     QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)OF THESECURITIES EXCHANGE ACT OF 1934**

**FOR THE QUARTERLY PERIOD ENDEDMARCH 31, 2005**

**o****                     TRANSITIONREPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**FOR THE TRANSITION PERIOD FROM                     TO                     **

**Commission File Number  333-76609**

**CORNERSTONE REALTY FUND, LLC**

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

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

 

**4590 MACARTHUR BLVD., SUITE 610, NEWPORT BEACH,CALIFORNIA 92660**

(ADDRESSOF PRINCIPAL EXECUTIVE OFFICES)

**949-852-1007**

(REGISTRANT’STELEPHONE NUMBER, INCLUDING AREA CODE)

**Not Applicable**

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

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

YES  ý  NO  o

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

 

 

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**PART I - FINANCIAL INFORMATION**

 

**Item 1.****                 Financial Statements**
| **Cornerstone Realty Fund, LLC**                                              |   |
|-------------------------------------------------------------------------------|--------|
| ** **                                                                    |   |
| Condensed Balance Sheets at  March 31, 2005 (unaudited) and December 31, 2004 |   |
|                                                                          |   |
| Condensed Statements  of Operations for the Three Months ended                |   |
| March 31, 2005  (unaudited) and March 31, 2004 (unaudited)                    |   |
|                                                                          |   |
|                                                                          |   |
| Condensed  Statement of Members’ Capital for the Three Months ended      |   |
| March 31, 2005  (unaudited)                                                   |   |
|                                                                          |   |
| Condensed Statements  of Cash Flows for the Three Months ended                |   |
| March 31, 2005  (unaudited) and March 31, 2004 (unaudited)                    |   |
|                                                                          |   |
| Notes to Condensed Financial Statements  (unaudited)                          |   |

 

2

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**CORNERSTONE REALTY FUND, LLC**

**(a California limitedliability company)**

**CONDENSED BALANCE SHEETS**

 

 

**ASSETS**

 

** **
| ** **                                                                                                        | ** ** | **March 31, 2005** | ** ** | **December 31, 2004(A)** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|--------------------------|------------|
| ** **                                                                                                        | ** ** | **(unaudited)**    | ** ** | ** **               | ** ** |
| Assets                                                                                                            |       |               |       |                     |       |
| Cash and cash equivalents                                                                                         |       | $                  | 11,329,101 |                     | $          | 11,793,822 |   |
|                                                                                                              |       |               |       |                     |       |
| Investments in real estate                                                                                        |       |               |       |                     |       |
| Land                                                                                                              |       | 5,447,490          |       | 4,539,400                |       |
| Buildings and  improvements, less accumulated depreciation of $417,697 in 2005 and $342,697  in 2004              |       | 11,226,651         |       | 7,628,745                |       |
| Intangible lease value,  less accumulated amortization of $10,478 in 2005                                         |       | 539,522            |       | —                   |       |
| Intangible asset — in  place leases, less accumulated amortization of $163,793 in 2005 and $118,911  in 2004 |       | 127,797            |       | 48,503                   |       |
|                                                                                                              |       | 17,341,460         |       | 12,216,648               |       |
| Other assets                                                                                                      |       |               |       |                     |       |
| Escrow deposit and other  costs                                                                                   |       | 160,415            |       | 275,052                  |       |
| Tenant and other  receivables                                                                                     |       | 58,692             |       | 31,876                   |       |
| Prepaid insurance                                                                                                 |       | 27,583             |       | 30,737                   |       |
| Leasing commissions, less  accumulated amortization of $24,432 in 2005 and $15,282 in 2004                        |       | 59,791             |       | 47,477                   |       |
|                                                                                                              |       |               |       |                     |       |
| Total assets                                                                                                      |       | $                  | 28,977,042 |                     | $          | 24,395,612 |   |

 

 

**LIABILITIES AND MEMBERS’ CAPITAL**

 
| Liabilities                                                                                                                                     |   |       |       |       |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|------------|------------|--------|
| Accounts payable and  accrued liabilities                                                                                                       |   | $          | 274,369    |       | $      | 173,535 |   |
| Tenant security deposits                                                                                                                        |   | 184,598    |       | 135,294    |   |
| Total liabilities                                                                                                                               |   | 458,967    |       | 308,829    |   |
|                                                                                                                                            |   |       |       |       |   |
| Members’ capital (100,000  units authorized, 69,408 units issued and outstanding in 2005 and 59,097  units issued and outstanding in 2004) |   | 28,518,075 |       | 24,086,783 |   |
| Total liabilities and  members’ capital                                                                                                    |   | $          | 28,977,042 |       | $      | 24,395,612 |   |

----

(A)    Derived from the auditedfinancial statements as of December 31, 2004.

 

The accompanying notes are an integral part of these interim financialstatements.

 

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**CORNERSTONE REALTY FUND, LLC**

**(a California limitedliability company)**

 

**CONDENSED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 

 
| ** **                                            | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|
| ** **                                            | ** ** | **March 31,**          | ** ** |
| ** **                                            | ** ** | **2005**               | ** ** | **2004** | ** ** |
| ** **                                            | ** ** | ** **             | ** ** | ** ** | ** ** |
| Revenues                                              |       |                   |       |   |   |
| Rental revenues                                       |       | $                      | 417,215    |   | $ | 301,792 |   |
| Amortization of in-place  leases                      |       | (44,882                | )          | (37,552 | ) |
| Tenant reimbursements and  other income               |       | 60,735                 |       | 37,263 |   |
|                                                  |       | 433,068                |       | 301,503 |   |
|                                                  |       |                   |       |   |   |
| Expenses                                              |       |                   |       |   |   |
| Property operating and  maintenance                   |       | 94,421                 |       | 70,659 |   |
| Property taxes                                        |       | 80,105                 |       | 59,292 |   |
| General and administrative                            |       | 34,765                 |       | 33,539 |   |
| Depreciation and  amortization                        |       | 94,628                 |       | 51,511 |   |
|                                                  |       | 303,919                |       | 215,001 |   |
|                                                  |       |                   |       |   |   |
| Interest, dividends, and  other income                |       | 32,650                 |       | 343 |   |
|                                                  |       |                   |       |   |   |
| Net income                                            |       | $                      | 161,799    |   | $ | 86,845 |   |
|                                                  |       |                   |       |   |   |
| Net income allocable to  managing member              |       | $                      | 16,180     |   | $ | 8,685 |   |
|                                                  |       |                   |       |   |   |
| Net income allocable to  unitholders                  |       | $                      | 145,619    |   | $ | 78,160 |   |
|                                                  |       |                   |       |   |   |
| Per unit amounts:                                     |       |                   |       |   |   |
| Basic and diluted income  allocable to unitholders    |       | $                      | 2.29       |   | $ | 2.25 |   |
|                                                  |       |                   |       |   |   |
| Basic and diluted weighted  average units outstanding |       | 63,617                 |       | 34,813 |   |
|                                                  |       |                   |       |   |   |

 

The accompanying notes are an integral part of these interim financialstatements.

 

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**CORNERSTONE REALTY FUND, LLC**

**(a California limitedliability company)**

 

**CONDENSED STATEMENT OF MEMBERS’ CAPITAL**

**(Unaudited)**

 

 
| Balance, December 31, 2004                         |   | $         | 24,086,783 |   |
|----------------------------------------------------|--------|-----------|------------|--------|
|                                               |   |      |       |
| Net proceeds from offering                         |   | 4,614,172 |       |
| Contribution from managing  member                 |   | 200,980   |       |
| Distributions to  unitholders                      |   | (339,439  | )          |
| Deferred offering costs  repaid to managing member |   | (206,220  | )          |
| Net income                                         |   | 161,799   |       |
|                                               |   |      |       |
| Balance, March 31, 2005                            |   | $         | 28,518,075 |   |
|                                                    |        |           |            |        |  |

 

The accompanying notes are an integral part of these interim financialstatements.

 

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**CORNERSTONE REALTY FUND, LLC**

**(a California limitedliability company)**

 

**CONDENSED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 

 
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **March 31,**          | ** ** |
| ** **                                                                         | ** ** | **2005**               | ** ** | **2004** | ** ** |
| ** **                                                                         | ** ** | ** **             | ** ** | ** ** | ** ** |
| OPERATING ACTIVITIES                                                               |       |                   |       |   |   |
| Net Income                                                                         |       | $                      | 161,799    |   | $ | 86,845 |   |
| Adjustments to reconcile  net income to net cash provided by operating activities: |       |                   |       |   |   |
| Depreciation and  amortization                                                     |       | 139,510                |       | 89,063 |   |
| Changes in operating  assets and liabilities:                                      |       |                   |       |   |   |
| Other assets                                                                       |       | 69,511                 |       | (28,030 | ) |
| Accounts payable, accrued  liabilities and security deposits                       |       | 150,138                |       | 26,452 |   |
|                                                                               |       |                   |       |   |   |
| Net cash provided by  operating activities                                         |       | 520,958                |       | 174,330 |   |
|                                                                               |       |                   |       |   |   |
| INVESTING ACTIVITIES                                                               |       |                   |       |   |   |
| Additional investment in  real estate                                              |       | (5,255,172             | )          | (23,853 | ) |
|                                                                               |       |                   |       |   |   |
| Net cash used in investing  activities                                             |       | (5,255,172             | )          | (23,853 | ) |
|                                                                               |       |                   |       |   |   |
| FINANCING ACTIVITIES                                                               |       |                   |       |   |   |
| Net proceeds from offering                                                         |       | 4,614,172              |       | 2,005,033 |   |
| Contribution from managing  member                                                 |       | 200,980                |       | — |   |
| Distributions to members                                                           |       | (339,439               | )          | (187,370 | ) |
| Deferred offering costs  repaid to managing member                                 |       | (206,220               | )          | (89,640 | ) |
|                                                                               |       |                   |       |   |   |
| Net cash provided by  financing activities                                         |       | 4,269,493              |       | 1,728,023 |   |
|                                                                               |       |                   |       |   |   |
| Net (decrease) increase in  cash and cash equivalents                              |       | (464,721               | )          | 1,878,500 |   |
|                                                                               |       |                   |       |   |   |
| Cash and cash equivalents  at beginning of period                                  |       | 11,793,822             |       | 1,464,206 |   |
|                                                                               |       |                   |       |   |   |
| Cash and cash equivalents  at end of period                                        |       | $                      | 11,329,101 |   | $ | 3,342,706 |   |
|                                                                               |       |                   |       |   |   |

 

The accompanying notes are an integral part of these interim financialstatements.

 

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**CORNERSTONE REALTY FUND, LLC**

**(a California LimitedLiability Company)**

 

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**(Unaudited)**

 

 

**1.             Organizationand Business**

 

Cornerstone Realty Fund, LLC, a California limited liability company(the “Fund”) (formerly Cornerstone Multi-Tenant Industrial Business Parks Fund,LLC and Cornerstone Industrial Properties Income and Growth Fund I, LLC),was formed on October 28, 1998.  Themembers of the Fund are Cornerstone Industrial Properties, LLC, a Californialimited liability 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 ina public offering equity interests (“units”) in the Fund, and is admitting thenew unitholders as members of the Fund. As of May 9, 2005, the Fund has issued  74,150 units to unitholders for grossoffering proceeds of $37,075,000.

 

The unaudited condensed financial statements of the Fund have beenprepared in accordance with accounting principles generally accepted in theUnited States for interim financial information and in accordance with therules and regulations of the Securities and Exchange Commission.  As permitted by the Securities and ExchangeCommission filing requirements for Form 10-Q, the condensed financialstatements do not include all of the information and footnotes required byaccounting principles generally accepted in the United States for completefinancial statements.  The condensedfinancial statements included herein should be read in conjunction with theFund’s Annual Report on Form 10-K for the year ended December 31, 2004.

 

The interim condensed financial statements have been prepared inaccordance with the Fund’s customary accounting practices.  In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for apresentation in accordance with accounting principles generally accepted in theUnited States have been included. Operating results for the three months ended March 31, 2005 are notnecessarily indicative of the results that may be expected for the year endingDecember 31, 2005.

 

Each member’s liability is limited pursuant to the provisions of theBeverly-Killea Limited Liability Company Act. The term of the Fund shall continue until December 31, 2010, unlessterminated sooner pursuant to the operating agreement.

 

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

 

The Managing Member generally has complete and exclusive discretion inthe management and control of the Fund; however, unitholders holding themajority of all outstanding and issued units have certain specified votingrights which include the removal and replacement of the Managing Member.

 

Net Cash Flow from Operations, as defined, will be distributed 90% tothe unitholders and 10% to the Managing Member until the unitholders havereceived either an 8% or 12% cumulative, non-compounded annual return on theirInvested Capital Contributions, as defined. The 12% return applies to specifiedearly investors for the twelve-month period subsequent to the date of theirInvested Capital Contributions and is in lieu of the 8% return during thatperiod.

 

7

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Net Sales Proceeds, as defined, will be distributed first, 100% to theunitholders in an amount equal to their Invested Capital Contributions; then,90% to the unitholders and 10% to the Managing Member until the unitholdershave received an amount equal to the unpaid balance of their aggregatecumulative, non-compounded annual return on their Invested CapitalContributions; and thereafter, 50% to the unitholders and 50% to the ManagingMember.

 

Net Income, as defined, is allocated first, 10% to the Managing Memberand 90% to the unitholders until Net Income allocated equals cumulative NetLosses, as defined, previously allocated in such proportions; second, inproportion to and to the extent of Net Cash Flow from Operations and Net SalesProceeds previously distributed to the members, exclusive of distributionsrepresenting a return of Invested Capital Contributions; and then 50% to theManaging Member and 50% to the unitholders.

 

Net Loss is allocated first, 50% to the Managing Member and 50% to theunitholders, until Net Loss allocated equals cumulative Net Income previouslyallocated in such proportions; then remaining Net Loss is allocated 10% to theManaging Member and 90% to the unitholders.

 

All allocations and distributions to the unitholders are to be pro ratain proportion to their share of the allocations and distributions.

 

**2.             Summaryof Significant Accounting Policies**

 

*Use of Estimates*

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities as of the date of the financial statements and the reported amountof revenue and expenses during the reporting periods.  Actual results could differ materially fromthe estimates in the near term.

 

*Cash and Cash Equivalents*

 

Cash and cash equivalents consist primarily of interest-bearing moneymarket investments with original maturities of 90 days or less at the date ofpurchase.  Included in cash and cashequivalents at March 31, 2005 is $184,598 related to tenant securitydeposits.  The Fund places its cash withmajor financial institutions.  At times,cash balances may be in excess of amounts insured by Federal agencies.  Approximately $11,000,000 in cash balanceswas in excess of Federal insurance limits as of March 31, 2005.

 

*Investmentsin 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 buildings,are capitalized.  Depreciation of thebuildings and building improvements is computed on a straight-line basis overtheir estimated useful lives of 39 years. Tenant improvements are depreciated over the shorter of the useful assetlife or the related lease term.

 

The Fund evaluates the carrying value for investments in real estatefor impairment in accordance with Financial Accounting Standards Board (“FASB”)Statement No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets* (“FAS 144”).  FAS 144 requires that when events or changesin circumstances indicate that the carrying amount of the assets might not berecoverable, companies should

 

8

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evaluate the need for an impairment write-down.  When an impairment write-down is required,the related assets are adjusted to their estimated fair value.

 

In June 2001 the FASB issued Statement of Financial Accounting Standard(“SFAS”) No. 141, *Business Combinations*and SFASNo. 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 2005, the Fund has recorded$291,590 as an intangible asset attributable to the value of the leases inplace as of the date of acquisition. Amortization as of March 31, 2005 was $163,793.

 

* LeasingCommissions*

 

Leasing commissions are stated at cost and amortized on a straight-linebasis over the related lease term.

 

*Revenue Recognition*

 

Rental revenues are recorded on an accrual basis as they are earnedover the lives of the respective tenant leases on a straight-line basis.  Included in this calculation are contractualrent increases and amounts paid to tenants as tenant improvement allowances.Rental receivables are periodically evaluated for collectibility.

 

*Fair Value of Financial Instruments*

 

The Fund believes that the recorded values of all financial instrumentsapproximate their current values.

 

*Income TaxMatters*

 

It is the intent of the Fund and its members that the Fund be treatedas a partnership for income tax purposes. As a limited liability company, the Fund is subject to certain minimaltaxes and fees; however, income taxes on the income or losses realized by theFund are generally the obligation of the members.

 

*Concentration of Credit Risk*

 

The Fund maintains its cash at banks with federally insured accountsand uninsured money market funds.  Theamounts are substantially uninsured.  Nolosses have been experienced related to such amounts.

 

 

**3.             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 (unaudited) leasable square feet.

 

On December 27, 2002, the Fund acquired an existing multi-tenantindustrial business park known as the Sky Harbor Business Park, located inNorthbrook, Illinois for an investment of $2,553,996.  Sky Harbor Business Park consists of asingle-story building containing a total of 41,422 (unaudited) leasable squarefeet.

 

9

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On December 10, 2003, the Fund acquired an existing multi-tenantindustrial park known as Arrow Business Center located in Irwindale, Californiafor an investment of $5,910,579.  Theproperty consists of three single-story buildings containing a total of 69,592(unaudited) leasable square feet.

 

On January 25, 2005, the Fund acquired an existing multi-tenantbusiness park in Glenview, Illinois known as Zenith Drive Centre from anindependent third party.  Zenith DriveCentre is a single story three building property built in 1978 of approximately38,088 (unaudited) square feet on approximately 2.54 (unaudited) acres ofland.  The acquisition price was$5,200,000 plus $43,732 of closing costs.

 

Included in the acquisition and purchase price of Zenith Drive Centrewere a billboard sign and cellular relay antenna located on the property leasedto a large media company and communications company, respectively.  Management separately valued these leases andthe resulting amounts are included in intangible lease value.  The value of these leases is amortized overthe remaining respective terms.

 

Industrial space in the properties is generally leased to tenants underlease terms that provide for the tenants to pay increases in operating expensesin excess of specified amounts.

 

**4.             Related PartyTransactions**

 

The Managing Member incurs specific incremental costs in connectionwith the offering of membership units. 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 offering proceeds.  Any offering costs incurred by the ManagingMember that are not reimbursed by the Fund will be reflected as a capitalcontribution to the Fund by the Managing Member, with an offsetting expenserecognized in the Fund’s statement of operations.

 

Unrecovered offering costs incurred by the Managing Member for thethree months ending March 31, 2005 are as follows:

 
| Balance, December 31, 2004 |   | $        | 443,690 |   |
|----------------------------|--------|----------|---------|--------|
| Costs incurred             |   | 45,354   |    |
| Costs paid                 |   | (206,220 | )       |
| Balance, March 31, 2005    |   | $        | 282,824 |   |

 

Currently the Fund is distributing a 5% annual return paidquarterly.  During the three months endedMarch 31 2005, the Managing Member funded $200,980 to subsidize the Fund’sdistributions to the unitholders.  Thisfunding by the Managing Member will not be reimbursed to the Managing Member bythe Fund.

 

The Managing Member and/or its affiliates are entitled to receivevarious fees, compensation and reimbursements as specified in the Fund’soperating agreement, including commissions of 7%, marketing fees of 2% of grossproceeds from the offering of units, and expense allowances of 1.5% of grossproceeds from the offering of units. During the three months ended March 31,2005 and 2004, the total fees, compensation and reimbursements were $541,328and $235,620, respectively.

 

**5.      Subsequent Event**

 

On April 28, 2005, the Fund purchased an existing multi-tenantindustrial park known as Paramount Business Center, a single-story two buildingproperty of approximately 30,157 square feet of

 

10

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leasable space on approximately 1.66 acres of land in Paramount,California.  The acquisition price was$3,100,000 plus approximately $55,000 of closing costs (which are not fullydetermined as of the date of this report), which equates to approximately $105per square foot of leasable space.  As ofMarch 31, 2005, the Fund had deposited $150,000 in escrow, which wasnon-refundable except for certain seller defaults.  The Fund purchased this property for allcash, without debt financing.

 

 

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

 

The following “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” should be read in conjunction with theFund’s financial statements and notes thereto contained elsewhere in thisreport.  Certain statements in thissection and elsewhere contain forward-looking statements within the meaning ofthe Private Securities Litigation Reform Act of 1995.  Such forward-looking statements may relate torisks and other factors that may cause the Fund’s future results of operationsto be materially different than those expressed or implied herein.  Some of these risks and other factorsinclude, but are not limited to:  (i) noassurance that Fund properties will experience minimal or no vacancy; (ii)tenants may not be able to meet their financial obligations; (iii) rentalrevenues from the properties may not be sufficient to meet the Fund’s cashrequirements for operations, capital requirements and distributions; (iv)suitable investment properties may not continue to be available; and (v)adverse changes to the general economy may disrupt operations.

 

**Critical Accounting Policies**

 

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

 

## *Revenue Recognition*

 

Rental revenues are recorded on an accrual basis as they are earnedover the lives of the respective tenant leases on a straight-line basis.  Rental receivables are periodically evaluatedfor collectibility.

 

## *Investments in Real Estate*

 

The Fund evaluates the carrying value for investments in real estate inaccordance with Financial Accounting Standards Board (“FASB”) Statement No.144, *Accounting for the Impairment or**Disposal of Long-Lived Assets* (“FAS 144”).  FAS 144 requiresthat when events or changes in circumstances indicate that the carrying amountof the assets might not be recoverable, companies should evaluate the need foran impairment write-down.  When animpairment write-down is required, the related assets are adjusted to theirestimated fair value.

 

In June 2001 the FASB issued Statement of Financial Accounting Standard(“SFAS”) No. 141, *Business Combinations* and SFASNo. 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, 2005, the Fund hasrecorded $291,590 as an intangible asset attributable to the value of theleases in place as of the date of acquisition. Amortization as of March 31, 2005 totaled $163,793.

 

11

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*Off-balance Sheet Financings and Liabilities*

 

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

 

 

**Results of Operations**

 

As of March 31, 2005, the Fund has purchased four multi-tenantindustrial business park properties in two different major metropolitanareas.  The properties were purchasedfrom the proceeds from the sale of membership units, without debt financing.The properties were purchased in the latter parts of September 2002, December2002, December 2003 and January 2005.  Asa result of the dates of purchase, Fund operations for 2005 reflect the netincome from four properties for two of the three months.  For the three months ended March 31, 2004,Fund operations reflect operations for three properties.

 

*Threemonths ended March 31, 2005 and 2004*

 

   The Fund’s net income for thethree months ended March 31, 2005 and 2004 was $161,799 and $86,845,respectively.  Revenue increased from$301,503 to $433,068.  These increasesprimarily reflect the addition of Zenith Drive Centre, purchased in January2005 and the rent increases from the other properties.  Property operating and maintenance expenses,and property taxes increased from $129,951 in 2004 to $174,526 in 2005 due tothe addition of the new property. Depreciation and amortization increased from $51,511 to $94,628 due tothe purchase of Zenith Drive Centre.

 

Interest income increased to $32,650 for the three months ended March31, 2005, from $343 for the same period in 2004.  The increase was primarily due to asignificant increase in invested cash balances and the rise in short-terminterest rates.

 

 

**Liquidity and Capital Resources**

 

As of March 31, 2005, the Fund has received $34,704,000 ($37,075,000 asof May 9, 2005) of gross proceeds from the sale of membership units, and$685,419 as a capital contribution from the Managing Member.  As of March 31, 2005, the Fund has$11,329,101 ($10,408,387 at May 9, 2005) in cash and cash equivalents.

 

The Fund intends to continue offering membership units for sale and usethe existing cash balance and net proceeds from the sale of units for theacquisition of additional multi-tenant industrial business park properties,capital improvements to the properties, and for operating expenses andreserves.

 

The Fund expects to meet its short-term liquidity requirements from netcash generated by operations, which we believe will be adequate to meetoperating costs of the properties and the Fund, and allow for cashdistributions to the unitholders.

 

The Managing Member has financed the Fund’s offering and organizationalactivities.  A portion of those costshave been reimbursed to the Managing Member at the rate of 4% of gross proceedsof the Fund’s unit sales pursuant to the prospectus for the offering.  The Fund will continue to incur organizationaland offering expenses and the Managing Member, although not obligated, intendsto continue providing advances for offering and organizational expenses untilthe sale of membership units is completed. The Managing Member must raise funds through the sale of its own debt orequity

 

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securities to obtain the cash necessary to providethese 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**

 

As of March 31, 2005, the Fund had a contractual commitment, subject tocertain closing conditions, to purchase the Paramount Business Center for apurchase price of $3,100,000.  Thistransaction was completed on April 28, 2005.  There were no other significant contractualobligations or commercial commitments as of March 31, 2005, other than leaseswith the tenants that occupy our commercial buildings.

 

 

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

 

The Fund invests its cash and cash equivalents in short term moneymarket accounts, which, by their nature, are not subject to significantinterest rate fluctuations.

 

 

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

 

On March l7, 2005, the Fund’s independent registered public accountingfirm notified the Fund’s Audit Committee that they had identified two materialweaknesses regarding the Fund’s internal controls.  The weaknesses notedwere the lack of sufficient management oversight over and the propersegregation of duties of the accounting department with respect to accounting,financial reporting and disclosure. Management of the Fund has informed theAudit Committee that it is in process of hiring appropriate personnel andmaking changes in assigned roles and responsibilities to correct for suchweaknesses.

 

The Fund’s disclosure controls and procedures are designed to ensurethat information required to be disclosed in reports that the Fund files orsubmits under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in the rules andforms of the Securities and Exchange Commission and that such information isaccumulated and communicated to the Fund’s management, as appropriate, to allowtimely decisions regarding required disclosure. The Chief Executive Officer andthe Chief Financial Officer of Cornerstone Ventures, Inc., the manager ofthe Managing Member of the Fund, have reviewed the effectiveness of the Fund’sdisclosure controls and procedures and have concluded that the disclosurecontrols and procedures were not effective as of the end of the period coveredby this report.  Based on our evaluation, we do not believe that thecontrol weaknesses noted above led to any material misstatements in thefinancial statements included in this report.  As noted above, we are inthe process of hiring appropriate personnel and making changes in assignedroles and responsibilities which we believe will correct the control weaknesseswe have identified.

 

While we are in the process of taking the foregoing steps and developingand implementing a formal set of internal controls and procedures for financialreporting as required by the Sarbanes-Oxley Act of 2002, the efficacy of thesteps we have taken to date and steps we are still in the process of completingis subject to continued management review supported by confirmation and testingby management and by our auditors.  As a result, we anticipate thatadditional changes will be made to our internal controls and procedures. Other than the foregoing initiatives, no change in our internal control

 

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over financial reporting occurred during the periodcovered by this report that has materially affected, or is reasonably likely toaffect, our internal control over financial reporting.

 

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

 

**PART II - OTHER INFORMATION**

 

**Item 6.****                 Exhibits**

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

 

 

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**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this quarterly report to be signed on itsbehalf by the undersigned, thereunto duly authorized this  12th day of May 2005.
|   |   | 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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