**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

**FORM 10-Q**
| **(Mark One)**                                                                                                                                                                                                               |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                   |
| **x**                                                                                                                                                                                                                        | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                   | ** ** | ** ** |
| **For the quarterly period ended March 31, 2007**                                                                                                                                                                            |
| ** **                                                                                                                                                                                                                   | ** ** | ** ** |
| ** **                                                                                                                                                                                                                   |   | **or** |
| ** **                                                                                                                                                                                                                   |   |   |
| **o**                                                                                                                                                                                                                        | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                   | ** ** | ** ** |
| **For the transition period from                                  to** |

 

**CommissionFile Number   ****000-51868**

**CORNERSTONE REALTY FUND, LLC**

(Exactname 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’stelephone 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 reportsrequired to be filed by section 13 or 15(d) of the Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

x  Yes  o  No

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

Large accelerated filer o  Accelerated filer o  Non-acceleratedfiler x

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

o  Yes  x  No

 

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| **PART I.**  | **FINANCIAL INFORMATION**                                                                                                 | ** ** |
|-------------------|---------------------------------------------------------------------------------------------------------------------------|------------|
|              |                                                                                                                      |       |
| Item 1.      | Financial Statements:                                                                                                     |       |
|              | Condensed  Balance Sheets as of March 31, 2007 (unaudited) and December 31, 2006                                          |       |
|              |                                                                                                                      |       |
|              | Condensed  Statements of Operations for the Three Months ended  March 31, 2007 (unaudited) and March 31, 2006 (unaudited) |       |
|              |                                                                                                                      |       |
|              | Condensed  Statements of Members’ Capital for the Three Months  ended March 31, 2007 (unaudited)                     |       |
|              |                                                                                                                      |       |
|              | Condensed  Statements of Cash Flows for the Three Months ended  March 31, 2007 (unaudited) and March 31, 2006 (unaudited) |       |
|              |                                                                                                                      |       |
|              | Notes  to Condensed Financial Statements (unaudited)                                                                      |       |
|              |                                                                                                                      |       |
| Item 2.      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                               |       |
| Item 3.      | Quantitative  and Qualitative Disclosure About Market Risk                                                                |       |
| Item 4.      | Controls  and Procedures                                                                                                  |       |
|              |                                                                                                                      |       |
| **PART II.** | **OTHER  INFORMATION**                                                                                                    | ** ** |
|              |                                                                                                                      |       |
| Item 6.      | Exhibits                                                                                                                  |       |
|              |                                                                                                                      |       |
| SIGNATURES        |                                                                                                                      |       |

 

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**CORNERSTONEREALTY FUND, LLC**

**(a California limited liability company)**

**CONDENSED BALANCE SHEETS**
| ** **                                                                                                 | ** ** | **March 31, 2007** | ** ** | **December 31, 2006 (a)** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                 | ** ** | **(unaudited)**              | ** ** | ** **                               | ** ** |
| **ASSETS**                                                                                                 | ** ** | ** **                   | ** ** | ** **                               | ** ** |
|                                                                                                       |       |                         |       |                                     |       |
| Cash and cash  equivalents                                                                                 |       | $                            | 1,950,000  |                                     | $          | 2,249,000 |   |
| Investments in real  estate                                                                                |       |                         |       |                                     |       |
| Land                                                                                                       |       | 11,779,000                   |       | 11,779,000                               |       |
| Buildings and  improvements, net                                                                           |       | 22,148,000                   |       | 22,258,000                               |       |
| Intangible lease  assets, net                                                                              |       | 456,000                      |       | 466,000                                  |       |
| Intangible in  place lease asset, net                                                                      |       | 299,000                      |       | 337,000                                  |       |
| Investment in  real estate assets held for sale, net                                                       |       | 2,619,000                    |       | 2,619,000                                |       |
|                                                                                                       |       | 37,301,000                   |       | 37,459,000                               |       |
| Other assets                                                                                               |       |                         |       |                                     |       |
| Non-real estate  assets associated with property held for sale                                             |       | 95,000                       |       | 112,000                                  |       |
| Utility deposits                                                                                           |       | 8,000                        |       | 8,000                                    |       |
| Tenant and other  receivables                                                                              |       | 237,000                      |       | 233,000                                  |       |
| Prepaid expenses                                                                                           |       | 63,000                       |       | 7,000                                    |       |
| Leasing  commissions, less accumulated amortization of $162,000 in 2007 and $131,000  in 2006              |       | 224,000                      |       | 201,000                                  |       |
|                                                                                                       |       |                         |       |                                     |       |
| Total assets                                                                                               |       | $                            | 39,878,000 |                                     | $          | 40,269,000 |   |
|                                                                                                       |       |                         |       |                                     |       |
| **LIABILITIES  AND MEMBERS’ CAPITAL**                                                                 | ** ** | ** **                   | ** ** | ** **                               | ** ** |
|                                                                                                       |       |                         |       |                                     |       |
| Liabilities                                                                                                |       |                         |       |                                     |       |
| Accounts  payable, accrued liabilities and other liabilities                                               |       | $                            | 277,000    |                                     | $          | 362,000 |   |
| Real estate  taxes payable                                                                                 |       | 217,000                      |       | 194,000                                  |       |
| Tenant security  deposits                                                                                  |       | 306,000                      |       | 302,000                                  |       |
| Liabilities  associated with property held for sale                                                        |       | 155,000                      |       | 166,000                                  |       |
| Intangible lease  liability, net                                                                           |       | 94,000                       |       | 110,000                                  |       |
| Total liabilities                                                                                          |       | 1,049,000                    |       | 1,134,000                                |       |
|                                                                                                       |       |                         |       |                                     |       |
| Members’ capital  (100,000 units authorized and outstanding at March 31, 2007 and December 31,  2006) |       | 38,829,000                   |       | 39,135,000                               |       |
|                                                                                                       |       |                         |       |                                     |       |
| Total liabilities and members’ capital                                                                |       | $                            | 39,878,000 |                                     | $          | 40,269,000 |   |

 

The accompanyingnotes are an integral part of these interim financial statements.

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(a) Derived from the audited financial statements asof December 31 2006.

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**CORNERSTONEREALTY FUND, LLC**

**(a California limited liability company)**

**CONDENSED STATEMENTS OF OPERATIONS**

**(Unaudited)**
| ** **                                                                       | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                       | ** ** | **March 31,**               | ** ** |
| ** **                                                                       | ** ** | **2007**                         | ** ** | **2006** | ** ** |
|                                                                             |       |                             |       |   |   |
| Revenues                                                                         |       |                             |       |   |   |
| Rental revenues                                                                  |       | $                                | 802,000    |   | $ | 537,000 |   |
| Tenant  reimbursements and other income                                          |       | 160,000                          |       | 132,000 |   |
|                                                                             |       | 962,000                          |       | 669,000 |   |
| Expenses                                                                         |       |                             |       |   |   |
| Property  operating and maintenance                                              |       | 173,000                          |       | 168,000 |   |
| Property taxes                                                                   |       | 136,000                          |       | 134,000 |   |
| General and  administrative                                                      |       | 116,000                          |       | 150,000 |   |
| Depreciation and  amortization                                                   |       | 258,000                          |       | 211,000 |   |
|                                                                             |       | 683,000                          |       | 663,000 |   |
|                                                                             |       |                             |       |   |   |
| Interest,  dividends and other income                                            |       | 16,000                           |       | 131,000 |   |
|                                                                             |       |                             |       |   |   |
| Income from continuing operations                                                |       | 295,000                          |       | 137,000 |   |
|                                                                             |       |                             |       |   |   |
| Income (loss) from  discontinued operation                                       |       | 29,000                           |       | (20,000 | ) |
|                                                                             |       |                             |       |   |   |
| Net income                                                                       |       | $                                | 324,000    |   | $ | 117,000 |   |
|                                                                             |       |                             |       |   |   |
| Net income allocable to  managing member                                         |       | $                                | 32,000     |   | $ | 12,000 |   |
|                                                                             |       |                             |       |   |   |
| Net income allocable to  unitholders                                             |       |                             |       |   |   |
| From continuing  operations                                                      |       | 265,000                          |       | 123,000 |   |
| From  discontinued operations                                                    |       | 27,000                           |       | (18,000 | ) |
|                                                                             |       | 292,000                          |       | 105,000 |   |
| Per unit amounts:                                                                |       |                             |       |   |   |
| Basic and diluted  income from continuing operations allocable to unit holders   |       | $                                | 2.65       |   | $ | 1.23 |   |
| Basic and diluted  income from discontinued operations allocable to unit holders |       | $                                | 0.27       |   | $ | (0.18 | ) |
| Basic and dilulted  income allocable to unit holders                             |       | $                                | 2.92       |   | $ | 1.05 |   |
|                                                                             |       |                             |       |   |   |
| Basic and diluted weighted average units outstanding                             |       | 100,000                          |       | 100,000 |   |

 

The accompanyingnotes are an integral part of these interim financial statements.

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**CORNERSTONE REALTY FUND, LLC**

**(a California limited liability company)**

**CONDENSED STATEMENT OF MEMBERS’CAPITAL**

**(Unaudited)**
| Balance, December 31, 2006          |   | $        | 39,135,000 |   |
|-------------------------------------|--------|----------|------------|--------|
|                                |   |     |       |
| Cash distributions to  unit holders |   | (630,000 | )          |
| Net income                          |   | 324,000  |       |
|                                |   |     |       |
| Balance, March 31, 2007             |   | $        | 38,829,000 |   |

 

The accompanyingnotes are an integral part of these interim financial statements.

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**CORNERSTONE REALTY FUND, LLC**

**(a California limited liability company)**

**CONDENSEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**
| ** **                                                                        | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                        | ** ** | **March 31,**               | ** ** |
| ** **                                                                        | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| OPERATING ACTIVITIES                                                              |       |                             |       |   |   |
| Net income                                                                        |       | $                                | 324,000    |   | $ | 117,000 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities |       |                             |       |   |   |
| Depreciation and  amortization                                                    |       | 258,000                          |       | 228,000 |   |
| Changes in  operating assets and liabilities                                      |       |                             |       |   |   |
| Other assets                                                                      |       | (98,000                          | )          | (26,000 | ) |
| Accounts payable  and accrued liabilities                                         |       | (85,000                          | )          | (24,000 | ) |
|                                                                              |       |                             |       |   |   |
| Net cash provided by  operating activities                                        |       | 399,000                          |       | 295,000 |   |
|                                                                              |       |                             |       |   |   |
| INVESTING ACTIVITIES                                                              |       |                             |       |   |   |
| Real estate  improvements                                                         |       | (68,000                          | )          | (61,000 | ) |
|                                                                              |       |                             |       |   |   |
| Net cash used in  investing activities                                            |       | (68,000                          | )          | (61,000 | ) |
|                                                                              |       |                             |       |   |   |
| FINANCING ACTIVITIES                                                              |       |                             |       |   |   |
| Distributions to  members                                                         |       | (630,000                         | )          | (630,000 | ) |
|                                                                              |       |                             |       |   |   |
| Net cash used in  financing activities                                            |       | (630,000                         | )          | (630,000 | ) |
|                                                                              |       |                             |       |   |   |
| Net decrease in cash                                                              |       | (299,000                         | )          | (396,000 | ) |
|                                                                              |       |                             |       |   |   |
| Cash and cash  equivalents at beginning of period                                 |       | 2,249,000                        |       | 13,489,000 |   |
|                                                                              |       |                             |       |   |   |
| Cash and cash equivalents at end of period                                        |       | $                                | 1,950,000  |   | $ | 13,093,000 |   |

 

The accompanyingnotes are an integral part of these interim financial statements.

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**CORNERSTONEREALTY FUND, LLC**

**(aCalifornia Limited Liability Company)**

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**(Unaudited)**

**1.****                                     Organization andBusiness**

Cornerstone RealtyFund, LLC is a California limited liability company that invests inmulti-tenant business parks catering to small business tenants.  We purchase existing, leased propertieslocated in major metropolitan areas in the United States on an all cash basiswithout debt financing.  We havepurchased seven properties as of the date of this report.  As used in this report, “we,” “us” and “our”refer to Cornerstone Realty Fund, LLC except where the context otherwiserequires.

Ourmanaging member is Cornerstone Industrial Properties, LLC (CIP), a Californialimited liability company.  CornerstoneVentures, Inc manages CIP. Cornerstone Ventures, Inc. is an experienced real estate operatingcompany specializing in the acquisition, operation and repositioning ofmulti-tenant industrial business parks catering to small business tenants.

OnAugust 7, 2001, we commenced a public offering of units of our membershipinterests pursuant to a Registration Statement filed on Form S-11 underthe Securities Act of 1933.  On August18, 2005, we completed our public offering of these units.  As of that date, we had issued 100,000 unitsto unitholders for gross offering proceeds of $50,000,000, before discounts of$39,780.

Our interimunaudited condensed financial statements have been prepared in accordance withaccounting principles generally accepted in the United States for interimfinancial information and in accordance with the rules and regulations of theSecurities and Exchange Commission.  Aspermitted by the Securities and Exchange Commission filing requirements forForm 10-Q, the condensed financial statements do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.  The condensed financial statements includedherein should be read in conjunction with our Annual Report on Form 10-K forthe year ended December 31, 2006.

The interimunaudited condensed financial statements have been prepared in accordancewith  our customary accountingpractices.  In the opinion of management,all adjustments (consisting of normal recurring accruals) considered necessaryfor a presentation in accordance with accounting principles generally acceptedin the United States have been included. Operating results for the three months ended March 31, 2007 are notnecessarily indicative of the results that may be expected for the year endingDecember 31, 2007.

Each member’sliability is limited pursuant to the provisions of the Beverly-Killea LimitedLiability Company Act.  The term of theFund shall continue until December 31, 2010, unless terminated soonerpursuant to the operating agreement.

The operatingagreement, as amended and restated, provides, among other things, for thefollowing:

·                  CIPgenerally has complete and exclusive discretion in the management and controlof our operations; however, unitholders holding the majority of all outstandingand issued units have certain specified voting rights which include the removaland replacement of the Managing Member.

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

·                  NetSales Proceeds, as defined, will be distributed first, 100% to the unitholdersin an amount equal to their Invested Capital Contributions; then, 90% to theunitholders and 10% to the Managing Member until the unitholders have receivedan amount equal to the unpaid balance of their aggregate cumulative,non-compounded annual return on their Invested Capital Contributions; andthereafter, 50% to the unitholders and 50% to the Managing Member.

·                  NetIncome, as defined, is allocated first, 10% to the Managing Member and 90% tothe unitholders until Net Income allocated equals cumulative Net Losses, asdefined, previously allocated in such proportions;

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second, in proportion to and to the extent of Net CashFlow from Operations and Net Sales Proceeds previously distributed to themembers, exclusive of distributions representing a return of Invested CapitalContributions; and then 50% to the Managing Member and 50% to the unitholders.

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

·                  Allallocations and distributions to the unitholders are to be pro rata inproportion to their ownership shares.

·                  EffectiveFebruary 22, 2007, our Operating Agreement was amended to permit repurchase ofunits on such terms and conditions as the managing member may determine.

**2.****            Summary of Significant Accounting Policies**

*Useof Estimates*

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

*Cashand Cash Equivalents*

Cashand cash equivalents consist primarily of interest-bearing investments withoriginal maturities of 90 days or less at the date of purchase.  We place our cash with major financialinstitutions.  At times, cash balancesmay be in excess of amounts insured by Federal agencies.

*Investmentsin Real Estate*

Investments in real estate are stated at cost andinclude land, buildings and building improvements.  Expenditures for ordinary maintenance andrepairs are expensed to operations as incurred. Significant replacements, betterments and tenant improvements whichimprove or extend the useful lives of the buildings are capitalized.  Depreciation of the buildings and buildingimprovements is computed on a straight-line basis over their estimated usefullives of 39 years.  Tenant improvementsare depreciated over the lesser of their useful life or the related lease term.

We evaluate the carrying value for investments inreal estate 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 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. No assets weredeemed to be impaired at March 31, 2007.

InJune 2001 the FASB issued Statement of Financial Accounting Standard (“SFAS”)No. 141, *Business Combinations* and SFAS No. 142, *Goodwill and Other Intangible Assets*.  SFAS No. 141 and No. 142 require the Fund torecord at acquisition an intangible asset or liability for the valueattributable to in-place leases.  Therequirements are applicable to all acquisitions subsequent to July 1,2001.

The fair value of the tangible assets of the acquiredproperties considers the value of the properties as if vacant as of theacquisition date. Management must make significant assumptions in determiningthe value of assets and liabilities acquired. Amounts allocated to land are derived from comparable sales of landwithin the same region. Amounts allocated to buildings and improvements, tenantimprovements and unamortized leasing commissions are based on current marketreplacement costs and other market rate information.

Acquired above and below market leases are valued based onthe present value of the difference between prevailing market rates and thein-place rates over the remaining lease term. The value of acquired above and below market leases is amortized overthe remaining non-cancelable terms of the respective leases as an adjustment torental revenue on our statement of operations.

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The amount allocated to acquired in-place leases isdetermined based on management’s assessment of lost revenue and costs incurredfor the period required to lease the “assumed vacant” property to the occupancylevel when purchased. The amount allocated to acquired in-place leases isincluded in intangible assets — in-place leases in the balance sheet andamortized to expense over the remaining non-cancelable term of the respectiveleases.

Anticipatedamortization of in-place and below market lease intangibles is as follows:
|                                     | ** ** | **Lease  Intangibles** | ** ** |
|-------------------------------------|------------|------------------------|------------|
| April 1, 2007 to December  31, 2007 |       | $                      | 70,000     |   |
| 2008                                |       | 82,000                 |       |
| 2009                                |       | 49,000                 |       |
| 2010                                |       | 4,000                  |       |
| 2011                                |       | —                 |       |
|                                     |            |                        |            |  |

 

As of March 31, 2007, accumulateddepreciation and amortization related to investments in real estate,investments in real estate assets held-for-sale, and related lease intangibleswere as follows:
| ** **                                                                                            | ** ** | **Land**   | ** ** | **Buildings and  Improvements** | ** ** | **Intangible  Lease Value** | ** ** | **In-Place Lease  Value** | ** ** | **Acquired  Below-Market  Leases** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------|------------|--------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|------------------------------------|------------|
| Investments in Real  Estate                                                                           |       | $          | 11,779,000 |                                 | $          | 23,446,000                       |       | $                              | 550,000    |                               | $          | 894,000 |   | $ | (154,000 | ) |
|                                                                                                  |       |       |       |                                 |       |                             |       |                           |       |                               |       |
| Less: accumulated  depreciation and amortization from continuing operations                           |       | —     |       | (1,298,000                           | )          | (94,000                          | )          | (595,000                       | )          | 60,000                             |       |
|                                                                                                  |       | 11,799,000 |       | 22,148,000                           |       | 456,000                          |       | 299,000                        |       | (94,000                            | )          |
|                                                                                                  |       |       |       |                                 |       |                             |       |                           |       |                               |       |
|  Investments in  Real estate assets held for sale                                                |       | 419,000    |       | 2,448,000                            |       | —                           |       | —                         |       | —                             |       |
| Less: accumulated  depreciation from assets held for sale                                             |       | —     |       | (248,000                             | )          | —                           |       | —                         |       | —                             |       |
|                                                                                                  |       | 419,000    |       | 2,200,000                            |       | —                           |       | —                         |       | —                             |       |
| Net Investments in Real Estate, Real estate assets held-for  sale, and related lease intangibles |       | $          | 12,198,000 |                                 | $          | 24,348,000                       |       | $                              | 456,000    |                               | $          | 299,000 |   | $ | (94,000 | ) |

 

Depreciationand amortization related to investment in real estate, investments in realestate held for sale and related lease intangibles for the three months endedMarch 31, 2007 and 2006 were $258,000 and $228,000 respectively.

*Investmentsin Real Estate Assets Held-for- Sale*

We evaluate theheld-for-sale classification of our owned real estate each quarter. Assets thatare classified as held-for-sale are recorded at the lower of their carryingamount or fair value less cost to sell. Assets are generally classified asheld-for-sale once management commits to a plan to sell the Properties and hasinitiated an active program to market them for sale. The results of operationsof these real estate properties are reflected as discontinued operations in allperiods reported. As of December 31, 2006, we determined that the potentialsale of Sky Harbor Business Park to a third party was probable and classifiedit as held for sale in accordance with SFAS No. 144.  On April 16, 2007, we sold Sky Habor BusinessPark for $3.2 million to Lizzadro Properties, Inc., an unaffiliated party.

*Leasing Commissions*

Leasingcommissions are stated at cost and amortized on a straight-line basis over therelated lease term.  As of March 31,2007, we had recorded approximately $385,000 in leasing commissions.  The unamortized portion of this asset was$224,000 at March 31, 2007.

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*RevenueRecognition*

Rentalrevenues are recorded on an accrual basis as they are earned over the lives ofthe respective tenant leases on a straight-line basis.  Included in this calculation are contractualrent increases and amounts paid to tenants as tenant improvementallowances.  Rental receivables areperiodically evaluated for collectibility.

*Fair Value of Financial Instruments*

We believethat the recorded values of all financial instruments approximate their currentvalues.

*IncomeTax Matters*

It isour intent we be treated as a partnership for income tax purposes.  As a limited liability company, we aresubject to certain minimal taxes and fees, including state income taxes onlimited liability companies; however, income taxes on the income or losses werealize are generally the obligation of the members.

*Concentration of Credit Risk*

We maintain some of our cash in money market accounts.  No losses have been experienced related tosuch amounts.

*Impact of New Accounting Pronouncements*

InJuly 2006, the Financial Accounting Standards Board (“FASB”) issuedInterpretation No. 48, Accounting for Uncertainty in Income Taxes, aninterpretation of FASB Statement No. 109, (“FIN 48”), which clarifiesthe relevant criteria and approach for the recognition, derecognition, andmeasurement of uncertain tax positions. FIN 48 is effective for fiscalyears beginning after December 15, 2006.  The adoption of FIN 48 did nothave a material impact on our consolidated financial statements.

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), whichdefines fair value, establishes a framework for measuring fair value in generallyaccepted accounting principles and expands disclosures about fair valuemeasurements. In February 2007, the FASB issued SFAS No. 159, “The Fair ValueOptions for Financial Assets and Financial Liabilities”. SFAS 157 and 159 areeffective for financial statements issued for fiscal periods beginning afterNovember 15, 2007 (our fiscal year beginning January 1, 2008), and interimperiods within those fiscal years. Management is currently evaluating theimpact of adopting SFAS No. 157 on the consolidated financial statements.

*Reclassification*

Certainpreviously reported amounts have been reclassified to conform to the currentperiod presentation.

**3.****                                    ****Real Estate Assets andLiabilities Held-for-Sale**

SFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets” requires that long-lived assets that are to be disposed of by sale bemeasured at the lower of book value or fair value less costs to sell. AtDecember 31, 2006, one of our properties were classified as held-for-sale.  In addition to classifying the property asheld-for-sale, the financial results are reported as discontinued operations inour Statements of Operations.  The tablebelow provides information on our held-for-sale assets and liabilities.

As of March 31,2007 and December 31, 2006, the assets related to the properties held for saleand related liabilities were as follows: 
| ** **                                                  | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Real estate assets  held-for-sale                           |       |                     |       |                        |       |
| Land                                                        |       | $                        | 419,000    |                        | $          | 419,000 |   |
| Building and  improvements, net of accumulated depreciation |       | 2,200,000                |       | 2,200,000                   |       |
|                                                        |       | $                        | 2,619,000  |                        | $          | 2,619,000 |   |
|                                                        |       |                     |       |                        |       |
| Other assets held for  sale                                 |       | $                        | 95,000     |                        | $          | 112,000 |   |
| Liabilities associated with property held for sale          |       | 155,000                  |       | 166,000                     |       |

 

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**4.****                                      DiscontinuedOperations**

In accordance withSFAS No. 144, we report results of operations from real estate assets that meetthe definition of a component of an entity that have been sold, or meet thecriteria to be classified as held for sale, as discontinued operations. As ofSeptember 30, 2006, we determined that the potential sale of Sky HarborBusiness Park to a third party was probable and classified it as held for salein accordance with SFAS No. 144. Depreciation and amortization of Sky Harbor Business Park was not recordedfor the period of October 1, 2006 to March 31, 2007 in accordance with SFAS No.144.   We included all results of thesediscontinued operations in a separate component of income on the statements ofoperations under the heading Income from Discontinued Operations. Thistreatment resulted in certain reclassifications of 2006 financial statementamounts.

The following is asummary of the components of income from discontinued operations for the periodending March 31, 2007 and year ended December 31, 2006. 
| ** **                                                               | ** ** | **March 31, 2007** | ** ** | **March 31, 2006** | ** ** |
|--------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| Total revenues                                                           |       | $                            | 95,000     |                         | $          | 62,000 |   |
| Property operating and  maintenance and property taxes                   |       | 66,000                       |       | 66,000                       |       |
| Depreciation and  amortization                                           |       | —                       |       | 16,000                       |       |
|                                                                     |       |                         |       |                         |       |
| Income (loss) from  discontinued operations                              |       | $                            | 29,000     |                         | $          | (20,000 | ) |
|                                                                     |       |                         |       |                         |       |
| Income (loss) from  discontinued operations allocable to managing member |       | $                            | 2,000      |                         | $          | (2,000 | ) |
| Income (loss)from discontinued operations allocable to unit holders      |       | 27,000                       |       | (18,000                      | )          |

 

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

The following “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”should be read in conjunction with our financial statements and notes theretocontained elsewhere in this report. Certain statements in this section and elsewhere contain forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995.  Such forward-looking statementsmay relate to risks and other factors that may cause our future results ofoperations to be materially different than those expressed or impliedherein.  Some of these risks and otherfactors include, but are not limited to: (i) no assurance that our properties will continue to experience thecurrent level of occupancy; (ii) tenants may not be able to meet theirfinancial obligations; (iii) rental revenues from the properties may not besufficient to meet our cash requirements for operations, capital requirementsand distributions; and (iv) adverse changes to the general economy may disruptoperations.

# **Results ofOperations**

As of March 31,2007, we had purchased seven multi-tenant industrial business park propertiesin three major metropolitan areas and one of which was held for sale.   Six of these properties were purchasedbefore 2006 and one property was purchased in June 2006.  The results of continuing operations reflecta full three months of operations for six properties in 2007 and fiveproperties in 2006.   The results ofcontinuing operations for the three months ended March 31, 2007 and 2006 arediscussed below.

Revenue for thefirst quarter of 2007 increased to $962,000 from $669,000 for the comparableperiod of 2006.  The increase was due tothe property purchased during 2006 and higher overall occupancy during thefirst three months in 2007.

Property operatingand maintenance expenses increased to $173,000 in 2007 from $168,000 in 2006due to the property purchased during 2006, offset by lower maintenance costsduring the first three months of 2007. During 2006, we incurred move out costs that did not recur thisyear.    Property taxes increased to$136,000 in 2007 from $134,000 in 2006. This increase is due to the property we purchased during 2006, offset byadjustments to property rates on existing properties .

General andadministrative costs decreased to $116,000 in the first quarter of 2007 from$150,000 in the comparable quarter of 2006. The decrease was due primarily to lower consulting fees in 2007.  Depreciation and amortization increased to$258,000 in the the first quarter of 2007 from $211,000 in the comparablequarter of 2006 as a result of the addition of one property during 2006.

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Interest and otherincome decreased to $16,000 for the three months ended March 31, 2007 from$131,000 for the same period of 2006 due to lower cash available for investmentafter June 2006.

**Liquidity and Capital Resources**

Ourplanned $50,000,000 equity offering is now complete and we do not expect toraise any additional funds. On April 16, 2007, we sold Sky Harbor Business Parkfor a gross sale price of $3.2 million, before selling costs of approximately$170,000 (which are not completely determinable at this time).  We intend to use the existing cash balancefor capital improvements to the properties and for operating expenses andreserves.  Cash in excess of these needswill be available for our recently approved unit repurchase program and fordistribution to unit holders.

We expect to meetour short-term liquidity requirements from net cash generated by operations,which we believe will be adequate to meet operating costs, and allow for cashdistributions to the unitholders. However, current net cash generated by operations is not expected to besufficient to fund distributions to unitholders at an annual rate of 5%.

**Item 3.****          Quantitative andQualitative Disclosures About Market Risk**

We invest our cashand cash equivalents in government backed securities and money market accounts,which, by their nature, are subject to interest rate fluctuations.

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

Our disclosurecontrols and procedures are designed to ensure that information required to bedisclosed in reports we file or submit under the Securities Exchange Act of1934 is recorded, processed, summarized and reported within the time periodsspecified in the rules and forms of the Securities and Exchange Commissionand that such information is accumulated and communicated to our management, asappropriate, to allow timely decisions regarding required disclosure.  The Chief Executive Officer and the ChiefFinancial Officer of Cornerstone Ventures, Inc., the manager of ourManaging Member, have reviewed the effectiveness of our disclosure controls andprocedures and have concluded that the disclosure controls and procedures wereeffective as of the end of the period covered by this report.

We are in theprocess of developing and implementing a formal set of internal controls andprocedures for financial reporting as required by the Sarbanes-Oxley Act of2002, the efficacy of the steps we have taken to date and steps we are still inthe process of completing is subject to continued management review supportedby confirmation and testing by management and by our auditors.  Weanticipate that additional changes may be made to our internal controls andprocedures.  Other than the foregoing initiatives, no change in ourinternal control over financial reporting occurred during the period covered bythis report that has materially affected, or is reasonably likely to affect,our internal control over financial reporting.

It should be notedthat any system of controls, however well designed and operated, can provideonly reasonable, and not absolute, assurance that the objectives of the systemare met.  In addition, the design of anycontrol system is based in part upon certain assumptions about the likelihoodof future events.  Because of these andother inherent limitations of control systems, there can be no assurance thatany design will succeed in achieving its stated goals under all potentialfuture conditions.

**PART II - OTHER INFORMATION**

**Item 4.              Submission of Matters to a Vote of Security Holders**

InJanuary 2007, we commenced a solicition of written consent and approval fromthe holders of the our units to approve an amendment to our operatingagreement, without the necessity of holding a special meeting of the members,to:

(i)                eliminate theprohibition on repurchases of units by the company; and

(ii)    add a provision to our operating agreementspecifically permitting the managing member to cause us to repurchase units atany time, and from time to time, on such terms and conditions as the managingmember may determine in its sole discretion; provided that such repurchases donot jeopardize our status as a partnership for federal income tax purposes orcause us to be treated as a publicly-traded partnership.

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The affirmativeconsent of a majority of the outstanding percentage interests was required toapprove the amendment to the operating agreement. As of February 22, 2007,we received affirmative consents from holders of a majority of the percentageinterests represented by outstanding units and therefore concluded the consentprocess and caused our operating agreement to be amended as of such date.

**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**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this quarterly report to be signed on its behalf bythe undersigned, thereunto duly authorized this 11 day of May.
|        | 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/ SHARON C. KAISER |   |
|   |                         |   |   | Sharon C. Kaiser, |
|   |                         |   |   | Chief Financial Officer |
|   |                         |   |   | (Principal Financial Officer and |
|   |                         |   |   | Principal Accounting Officer) |
|        |                              |  |  |  |  |  |  |  |

 

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