** **

**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C.  20549**

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**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 September 30, 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** |
|                                                                                                                                                                                                                                           |                                                                                               |  |  |

 

**Commission File Number  ****000-51868**

**CORNERSTONEREALTY FUND, LLC**(Exact name of registrantas 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 September 30, 2007 (unaudited) and December 31, 2006                                                        |
|              |       |                                                                                                                                        |
|              |       | Condensed  Statements of Operations for the Three and Nine months ended September 30,  2007  (unaudited) and September 30, 2006 (unaudited) |
|              |       |                                                                                                                                        |
|              |       | Condensed  Statements of Members’ Capital for the Nine months ended September 30, 2007  (unaudited)                                    |
|              |       |                                                                                                                                        |
|              |       | Condensed  Statements of Cash Flows for the Nine months ended September 30, 2007  (unaudited)and September 30, 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**
| ** **                                                                                                                    | ** ** | **September 30, 2007** | ** ** | **December 31, 2006 (a)** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                                    | ** ** | **(unaudited)**                  | ** ** | ** **                               | ** ** |
| **ASSETS**                                                                                                                    | ** ** | ** **                       | ** ** | ** **                               | ** ** |
|                                                                                                                          |       |                             |       |                                     |       |
| Cash and cash  equivalents                                                                                                    |       | $                                | 4,762,000  |                                     | $          | 2,249,000 |   |
| Investments in  real estate                                                                                                   |       |                             |       |                                     |       |
| Land                                                                                                                          |       | 11,779,000                       |       | 11,779,000                               |       |
| Buildings and  improvements, net                                                                                              |       | 21,873,000                       |       | 22,258,000                               |       |
| Intangible lease  assets, net                                                                                                 |       | 435,000                          |       | 466,000                                  |       |
| Intangible  in-place lease asset, net                                                                                         |       | 229,000                          |       | 337,000                                  |       |
| Investment in  real estate assets held for sale, net                                                                          |       | —                           |       | 2,619,000                                |       |
|                                                                                                                          |       | 34,316,000                       |       | 37,459,000                               |       |
| Other assets                                                                                                                  |       |                             |       |                                     |       |
| Assets  associated with property held for sale                                                                                |       | —                           |       | 112,000                                  |       |
| Tenant and other  receivables, net                                                                                            |       | 245,000                          |       | 233,000                                  |       |
| Prepaid expenses  and other assets                                                                                            |       | 30,000                           |       | 15,000                                   |       |
| Leasing  commissions, less accumulated amortization of $237,000 in September 30,  2007 and $131,000 in December 31, 2006 |       | 199,000                          |       | 201,000                                  |       |
|                                                                                                                          |       |                             |       |                                     |       |
| Total assets                                                                                                                  |       | $                                | 39,552,000 |                                     | $          | 40,269,000 |   |
|                                                                                                                          |       |                             |       |                                     |       |
| **LIABILITIES AND MEMBERS’ CAPITAL**                                                                                     | ** ** | ** **                       | ** ** | ** **                               | ** ** |
|                                                                                                                          |       |                             |       |                                     |       |
| Liabilities                                                                                                                   |       |                             |       |                                     |       |
| Accounts  payable, accrued liabilities and other liabilities                                                                  |       | $                                | 314,000    |                                     | $          | 362,000 |   |
| Real estate  taxes payable                                                                                                    |       | 336,000                          |       | 194,000                                  |       |
| Tenant security  deposits                                                                                                     |       | 315,000                          |       | 302,000                                  |       |
| Liabilities  associated with property held for sale                                                                           |       | —                           |       | 166,000                                  |       |
| Intangible lease  liability, net                                                                                              |       | 71,000                           |       | 110,000                                  |       |
| Total  liabilities                                                                                                            |       | 1,036,000                        |       | 1,134,000                                |       |
|                                                                                                                          |       |                             |       |                                     |       |
| Members’ capital  (100,000 units authorized and outstanding at September 30, 2007 and  December 31, 2006)           |       | 38,516,000                       |       | 39,135,000                               |       |
|                                                                                                                          |       |                             |       |                                     |       |
| Total  liabilities and members’ capital                                                                                  |       | $                                | 39,552,000 |                                     | $          | 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.

 

3

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**CORNERSTONEREALTY FUND, LLC**

**(A California limited Liability Company)**

**CONDENSED STATEMENTS OF OPERATIONS**

**(Unaudited)**
| ** **                                                                          | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                                          | ** ** | **2007**                                             | ** ** | **2006**                                       | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                                |       |                                                 |       |                                           |       |   |   |   |   |
| Revenues                                                                            |       |                                                 |       |                                           |       |   |   |   |   |
| Rental revenues                                                                     |       | $                                                    | 841,000    |                                           | $          | 748,000 |   | $ | 2,409,000 |   | $ | 1,862,000 |   |
| Tenant  reimbursements and other income                                             |       | 181,000                                              |       | 204,000                                        |       | 581,000 |   | 478,000 |   |
|                                                                                |       | 1,022,000                                            |       | 952,000                                        |       | 2,990,000 |   | 2,340,000 |   |
| Expenses                                                                            |       |                                                 |       |                                           |       |   |   |   |   |
| Property  operating and maintenance                                                 |       | 238,000                                              |       | 210,000                                        |       | 644,000 |   | 612,000 |   |
| Property taxes                                                                      |       | 152,000                                              |       | 184,000                                        |       | 443,000 |   | 430,000 |   |
| General and  administrative                                                         |       | 97,000                                               |       | 94,000                                         |       | 331,000 |   | 378,000 |   |
| Depreciation and  amortization                                                      |       | 259,000                                              |       | 255,000                                        |       | 788,000 |   | 663,000 |   |
|                                                                                |       | 746,000                                              |       | 743,000                                        |       | 2,206,000 |   | 2,083,000 |   |
|                                                                                |       |                                                 |       |                                           |       |   |   |   |   |
| Interest,  dividends and other income                                               |       | 45,000                                               |       | 18,000                                         |       | 102,000 |   | 286,000 |   |
|                                                                                |       |                                                 |       |                                           |       |   |   |   |   |
| Income from  continuing operations                                                  |       | 321,000                                              |       | 227,000                                        |       | 886,000 |   | 543,000 |   |
|                                                                                |       |                                                 |       |                                           |       |   |   |   |   |
| Discontinued  operations                                                            |       |                                                 |       |                                           |       |   |   |   |   |
| Income from  discontinued operations                                                |       | —                                               |       | 31,000                                         |       | 45,000 |   | 28,000 |   |
| Gain on sale of  real estate                                                        |       | —                                               |       | —                                         |       | 320,000 |   | — |   |
|                                                                                |       |                                                 |       |                                           |       |   |   |   |   |
| Net income                                                                          |       | $                                                    | 321,000    |                                           | $          | 258,000 |   | $ | 1,251,000 |   | $ | 571,000 |   |
|                                                                                |       |                                                 |       |                                           |       |   |   |   |   |
| Net income  allocable to managing member                                            |       | $                                                    | 32,000     |                                           | $          | 26,000 |   | $ | 125,000 |   | $ | 57,000 |   |
|                                                                                |       |                                                 |       |                                           |       |   |   |   |   |
| Net income  allocable to unit holders                                               |       |                                                 |       |                                           |       |   |   |   |   |
| Continuing  operations                                                              |       | $                                                    | 289,000    |                                           | $          | 204,000 |   | $ | 798,000 |   | $ | 489,000 |   |
| Discontinued  operations                                                            |       | —                                               |       | 28,000                                         |       | 328,000 |   | 25,000 |   |
|                                                                                |       | $                                                    | 289,000    |                                           | $          | 232,000 |   | $ | 1,126,000 |   | $ | 514,000 |   |
| Per unit amounts                                                                    |       |                                                 |       |                                           |       |   |   |   |   |
| Basic and  diluted income from continuing operations allocable to unit holders |       | $                                                    | 2.89       |                                           | $          | 2.04 |   | $ | 7.98 |   | $ | 4.89 |   |
| Basic and  diluted income from discontinued operations allocable to unit holders    |       | —                                               |       | 0.28                                           |       | 3.28 |   | 0.25 |   |
| Basic and  diluted income allocable to unit holders                                 |       | $                                                    | 2.89       |                                           | $          | 2.32 |   | $ | 11.26 |   | $ | 5.14 |   |
|                                                                                |       |                                                 |       |                                           |       |   |   |   |   |
| Basic and  diluted weighted average units outstanding                               |       | 100,000                                              |       | 100,000                                        |       | 100,000 |   | 100,000 |   |

 

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

4

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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 |   | (1,870,000) |
| Net income                         |   | 1,251,000   |
|                               |   |        |
| Balance, September 30, 2007        |   | $           | 38,516,000 |

 

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

5

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**CORNERSTONE REALTY FUND, LLC**

**(A California limited Liability Company)**

**CONDENSED STATEMENTS OF CASH FLOWS**

**(Unaudited)**
| ** **                                                                        | ** ** | **Nine months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                                        | ** ** | **2007**                                  | ** ** | **2006** | ** ** |
| OPERATING  ACTIVITIES                                                             |       |                                      |       |   |   |
| Net income                                                                        |       | $                                         | 1,251,000  |   | $ | 571,000 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities |       |                                      |       |   |   |
| Gain on sale of  real estate                                                      |       | (320,000                                  | )          | — |   |
| Depreciation and  amortization                                                    |       | 788,000                                   |       | 734,000 |   |
| Amortization of  intangible lease liabilities                                     |       | (39,000                                   | )          | (27,000 | ) |
| Changes in  operating assets and liabilities                                      |       |                                      |       |   |   |
| Other assets                                                                      |       | (19,000                                   | )          | (130,000 | ) |
| Accounts  payable, accrued liabilities and other liabilities                      |       | (59,000                                   | )          | 221,000 |   |
| Net cash  provided by operating activities                                        |       | 1,602,000                                 |       | 1,369,000 |   |
|                                                                              |       |                                      |       |   |   |
| INVESTING  ACTIVITIES                                                             |       |                                      |       |   |   |
| Real estate  additions                                                            |       | (158,000                                  | )          | (10,341,000 | ) |
| Net proceeds  received from sale of real estate                                   |       | 2,939,000                                 |       | — |   |
| Net cash  provided by (used in) investing activities                              |       | 2,781,000                                 |       | (10,341,000 | ) |
|                                                                              |       |                                      |       |   |   |
| FINANCING  ACTIVITIES                                                             |       |                                      |       |   |   |
| Cash  distributions to unit holders                                               |       | (1,870,000                                | )          | (1,870,000 | ) |
| Net cash used in  financing activities                                            |       | (1,870,000                                | )          | (1,870,000 | ) |
|                                                                              |       |                                      |       |   |   |
| Net increase  (decrease) in cash                                                  |       | 2,513,000                                 |       | (10,842,000 | ) |
|                                                                              |       |                                      |       |   |   |
| Cash and cash equivalents  at beginning of period                                 |       | 2,249,000                                 |       | 13,489,000 |   |
|                                                                              |       |                                      |       |   |   |
| Cash and cash  equivalents at end of period                                       |       | $                                         | 4,762,000  |   | $ | 2,647,000 |   |

 

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

 

6

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**CORNERSTONE REALTY FUND, LLC**

**(ACalifornia Limited Liability Company)**

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**(Unaudited)**

**1.****           ****Organization and Business**

Cornerstone Realty Fund,LLC is a California limited liability company that invests in multi-tenantindustrial 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 own sixproperties as of the date of this report. As used in this report, “we,” “us” and “our” refer to Cornerstone RealtyFund, LLC except where the context otherwise requires.

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 unit holders for gross offering proceeds of $50,000,000, before discounts of$39,780.

Our interim unauditedcondensed financial statements have been prepared in accordance with accountingprinciples generally accepted in the United States for interim financialinformation and in accordance with the rules and regulations of the Securitiesand Exchange Commission.  As permitted bythe Securities and Exchange Commission filing requirements for Form 10-Q, thecondensed financial statements do not include all of the information andfootnotes required by accounting principles generally accepted in the UnitedStates for complete financial statements. The condensed financial statements included herein should be read inconjunction with our Annual Report on Form 10-K for the year ended December 31,2006.

The interim unauditedcondensed financial statements have been prepared in accordance with ourcustomary accounting practices.  In theopinion of management, all adjustments (consisting of normal recurringaccruals) considered necessary for a presentation in accordance with accountingprinciples generally accepted in the United States have been included.  Operating results for the nine months endedSeptember 30, 2007 are not necessarily indicative of the results that may beexpected for the year ending December 31, 2007.

Each member’s liabilityis limited pursuant to the provisions of the Beverly-Killea Limited LiabilityCompany Act.  The term of the Fund shallcontinue until December 31, 2010, unless terminated sooner pursuant to theoperating agreement.

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

•                  CIP generally has complete and exclusivediscretion in the management and control of our operations; however, unitholders holding the majority of all outstanding and issued units have certainspecified voting rights which include the removal and replacement of theManaging Member.

•                  Net Cash Flow from Operations, asdefined, will be distributed 90% to the unit holders and 10% to the ManagingMember until the unit holders have received either an 8% or 12% cumulative,non-compounded annual return on their Invested Capital Contributions, asdefined. The 12% return applies to specified early investors for thetwelve-month period subsequent to the date of their Invested CapitalContributions and is in lieu of the 8% return during that period. Distributionsmay be made only if the Managing Member determines in its reasonable judgementthat we have sufficient cash exceeding those needed to fulfill our buinesspurpose. To date, no distributions have been made to the Managing Member, basedon the  determination of our cashrequirements. However, based on the current statabilzed status of ourportfolio, we expect to begin making distributions to the Managing Member inthe fourth quarter of 2007.

7

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•                  Net Sales Proceeds, as defined, will bedistributed first, 100% to the unit holders in an amount equal to their InvestedCapital Contributions; then, 90% to the unit holders and 10% to the ManagingMember until the unit holders have received an amount equal to the unpaidbalance of their aggregate cumulative, non-compounded annual return on theirInvested Capital Contributions; and thereafter, 50% to the unit holders and 50%to the Managing Member.

•                  Net Income, as defined, is allocatedfirst, 10% to the Managing Member and 90% to the unit holders until Net Incomeallocated equals cumulative Net Losses, as defined, previously allocated insuch proportions; second, in proportion to and to the extent of Net Cash Flowfrom Operations and Net Sales Proceeds previously distributed to the members,exclusive of distributions representing a return of Invested CapitalContributions; and then 50% to the Managing Member and 50% to the unit holders.

•                  Net Loss is allocated first, 50% to theManaging Member and 50% to the unit holders, until Net Loss allocated equalscumulative Net Income previously allocated in such proportions; then remainingNet Loss is allocated 10% to the Managing Member and 90% to the unit holders.

•                  All allocations and distributions to theunit holders are to be pro rata in proportion 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 AccountingPolicies**

*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 revenues 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 which improveor 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 impairmentwrite-down.  When an impairmentwrite-down is required, the related assets are adjusted to their estimated fairvalue. No assets were deemed to be impaired at September 30, 2007.

TheFund records acquisitions in accordance with FASB Statement of FinancialAccounting Standard (“SFAS”) No. 141, *Business Combinations*and SFAS No. 142, *Goodwill and Other Intangible Assets*.

 

8

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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 revenues on our statement of operations.

The amount allocated to acquired in-place leases isdetermined based on management’s assessment of lost revenues 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** | ** ** |
|---------------------------------------|------------|------------------------|------------|
| October 1, 2007  to December 31, 2007 |       | $                      | 24,000     |   |
| 2008                                  |       | 81,000                 |       |
| 2009                                  |       | 49,000                 |       |
| 2010                                  |       | 4,000                  |       |
| 2011                                  |       | —                 |       |
|                                       |            |                        |            |  |

 

As of September 30, 2007, accumulated depreciation andamortization related to investments in real estate and related leaseintangibles were as follows:
| ** **                                       | ** ** | **Land** | ** ** | **Buildings and  Improvements** | ** ** | **Intangible  Lease Asset** | ** ** | **In-Place Lease  Asset** | ** ** | **Intangible  Lease  Liability** | ** ** |
|--------------------------------------------------|------------|----------|------------|--------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| Investments in  Real Estate                      |       | $        | 11,779,000 |                                 | $          | 23,537,000                       |       | $                              | 550,000    |                             | $          | 894,000 |   | $ | (154,000 | ) |
| Less:  accumulated depreciation and amortization |       | —   |       | (1,664,000                           | )          | (115,000                         | )          | (665,000                       | )          | 83,000                           |       |
| Net investments  in Real Estate                  |       | $        | 11,779,000 |                                 | $          | 21,873,000                       |       | $                              | 435,000    |                             | $          | 229,000 |   | $ | (71,000 | ) |

 

                Depreciation and amortization related to investmentin real estate and related lease intangibles for the three and nine months endedSeptember 30, 2007 were $218,000 and $643,000 respectively.  Depreciation and amortization related toinvestment in real estate and related lease intangibles for the three and ninemonths ended September 30, 2006 were $233,000 and $596,000 respectively.

*Discontinued Operation*

Sky Harbor Business Park- Northbrook, IL

On April 16, 2007, wesold our 41,422 square foot property located in Northbrook, IL commonly knownas “Sky Harbor Business Park”, for $3.2 million to an unaffiliated thirdparty.  Net cash proceeds were $2.9million after payment of related closing costs and other transaction expenses.A property disposition fee of $32,000 or 1% of the sales price was paid to CIP,in accordance with the terms of operating agreement.

We classified the assetsand liabilities for this property at December 31, 2006 in our consolidatedbalance sheet as held for sale. In addition, we have classified its results ofoperations, for all periods presented, and gains from its sale, as discontinuedoperations on our consolidated statements of income.

9

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*LeasingCommissions*

Leasing commissions arestated at cost and amortized on a straight-line basis over the related leaseterm.  Included in depreciation andamortization on the statement of operations is amortization of leasingcommissions for the three and nine months ended September 30, 2007 was $30,000and $106,000, respectively.  Amortizationof leasing commissions for the three and nine months ended September 30, 2006was $18,000 and $59,000, respectively.

*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*

Webelieve that the recorded values of all financial instruments approximate theircurrent values.

*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 marketaccounts.  No losses have beenexperienced related to such 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, theFASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which definesfair 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 and Liabilities from discontinued operations**

SFASNo. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”requires that long-lived assets that are to be disposed of by sale be measuredat the lower of book value or fair value less costs to sell. At December 31,2006, one of our properties was 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.

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As of September 30, 2007and December 31, 2006, the assets related to the properties held for sale andrelated liabilities were as follows: 
| ** **                                                  | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| Real estate  assets from discontinued operations:           |       |                    |       |                   |       |
| Land                                                        |       | $                       | —     |                   | $          | 419,000 |   |
| Building and  improvements, net of accumulated depreciation |       | —                  |       | 2,200,000              |       |
|                                                        |       | $                       | —     |                   | $          | 2,619,000 |   |
|                                                        |       |                    |       |                   |       |
| Other assets  held for sale                                 |       | $                       | —     |                   | $          | 112,000 |   |
| Liabilities  associated with discontinued operation         |       | $                       | —     |                   | $          | 166,000 |   |
|                                                             |            |                         |            |                        |            |  |  |  |

 

**4.             DiscontinuedOperations**

In accordance with SFASNo. 144, we report results of operations from real estate assets that meet thedefinition 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 notrecorded for the period of October 1, 2006 to April 16, 2007, the dispositiondate, in accordance with SFAS No. 144.  We included all results of these discontinued operations in a separatecomponent of income on the statements of operations under the headingDiscontinued Operations. This treatment resulted in certain reclassificationsof 2006 financial statement amounts.

The following is asummary of the components of income from discontinued operations for the ninemonth periods ended September 30, 2007 and 2006. 
| ** **                                                                     | ** ** | **September 30,  2007** | ** ** | **September 30,  2006** | ** ** |
|--------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| Total revenues                                                                 |       | $                       | 120,000    |                    | $          | 242,000 |   |
| Property  operating and maintenance, general administrative and property taxes |       | 75,000                  |       | 149,000                 |       |
| Depreciation and  amortization                                                 |       | —                  |       | 65,000                  |       |
|                                                                           |       |                    |       |                    |       |
| Income from  discontinued operations                                           |       | $                       | 45,000     |                    | $          | 28,000 |   |
|                                                                           |       |                    |       |                    |       |
| Gain on sale of  real estate                                                   |       | $                       | 320,000    |                    | —     |   |
|                                                                           |       |                    |       |                    |       |
| Income from  discontinued operations allocable to managing member              |       | $                       | 5,000      |                    | $          | 3,000 |   |
| Income from  discontinued operations allocable to unit holders                 |       | 40,000                  |       | 25,000                  |       |
|                                                                           |       | $                       | 45,000     |                    | $          | 28,000 |   |

 

**5.             Commitments and Contingencies**

Our managing member has informed us that the Financial IndustryRegulatory Authority (“FINRA”, formerly, NASD) is conducting a non-publicinvestigation of Pacific Cornerstone Capital, Inc. (“PCC”), an affiliate of ourmanaging member, that is, we understand, focused on the private placementsconducted by PCC during the period from January 1, 2004 through October 31,2007.  The investigation is in thepreliminary stage.  FINRA’scorrespondence requesting document production states, “This inquiry should notbe construed as an indication that the Enforcement Department or its staff hasdetermined that any violations of federal securities laws or NASD, NYSE or MSRBrules have occurred.”  We have beenadvised that PCC is responding to FINRA’s request for information and willcontinue to cooperate in the investigation. We cannot, at this time, assess the duration or likely outcome orconsequences of this investigation. Although the FINRA investigation will be a distraction, specific resourcesof PCC and its affiliates are being assigned to the response effort that willallow our organization to move forward with our business plans.

**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 their financialobligations; (iii) rental revenues from the properties may not be sufficient tomeet our cash requirements for operations, capital requirements anddistributions; and (iv) adverse changes to the general economy may disruptoperations.

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# **Resultsof Operations**

*Three months ended September 30,2007 and 2006*

As of September 30, 2007,we owned six multi-tenant industrial properties in three major metropolitanmarkets. Five of these properties were purchased before 2006, and one propertywas purchased in June 2006. In the fourth quarter of 2006, we determined thatthe sale of Sky Harbor Business Park was probable, and we reported operatingresults for this property as discontinued operations in accordance with SFASNo. 144. The sale was completed in April 2007. The results of continuing operations reflect a full three months ofoperations for six properties in 2007 and 2006.

Total revenues for thethird quarter of 2007 increased to $1,022,000 from $952,000 for the comparableperiod of 2006.  The increase wasprimarily due to overall higher occupancy rates and rent escalations.

Property operating andmaintenance expenses increased to $238,000 in the third quarter of 2007  from $210,000 in the comparable quarter of2006 primarily due to higher repair and maintenance costs. The third quarter2007 property taxes decreased to $152,000 from $184,000 in the third quarter of2006 as the result of a successful property tax appeal on one property,partially offset by higher assessments for other properties.

General andadministrative costs increased to $97,000 in the third quarter of 2007 from$94,000 in the comparable quarter of 2006 due to higher Sarbanes-Oxley Act 2002compliance expenses.

Interest and other incomeincreased to $45,000 in the third quarter of 2007  from $18,000 for the sameperiod of 2006 due to higher invested cash resulting from the sale of SkyHarbor Business Park in the second quarter of 2007.

*Nine months ended September 30,2007 and 2006*

Total revenues for thefirst nine months of 2007 increased to $2,990,000 from $2,340,000 for thecomparable period of 2006.  The increasewas due to higher overall occupancy rates and rent escalations and a full ninemonths of revenues in 2007 from the property acquired in June 2006 compared tothree months of revenue from this property in 2006.  In addition to higher overall occupancy ratesand rent escalations.

Property operating andmaintenance expenses increased to $644,000 in the first nine months of 2007from $612,000 in the first nine months of 2006 due to higher maintenance andrepair costs in the 2007 period. Property taxes increased to $443,000 in the first nine months of 2007from $430,000 in the first nine months of 2006. The increase was due to theproperty purchased in 2006 and increases to tax rates on other  properties in 2007.

General andadministrative costs decreased to $331,000 in the first nine months of 2007from $378,000 in the comparable period of 2006. The decrease was due primarily to non-recurring consulting fees incurredin 2006. Depreciation and amortization increased to $788,000 in the first ninemonths of 2007 from $663,000 in the comparable period of 2006 as a result ofthe addition of one property during 2006.

**Liquidity and Capital Resources**

Ourplanned $50,000,000 equity offering is complete and we do not expect to raiseany additional funds. On April 16, 2007, we sold Sky Harbor Business Park for agross sale price of $3.2 million.  Weintend to use the existing cash balance for capital improvements to theproperties and for operating expenses and reserves.  Cash in excess of these needs will beavailable for our recently approved unit repurchase program and fordistribution to unit holders.

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

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

We invest our cash andcash 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 disclosure controlsand procedures are designed to ensure that information required to be disclosedin reports we file or submit under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time periods specifiedin the rules and forms of the Securities and Exchange Commission and thatsuch 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 the process ofdeveloping and implementing a formal set of internal controls and procedures forfinancial reporting as required by the Sarbanes-Oxley Act of 2002, the efficacyof the steps we have taken to date and steps we are still in the process ofcompleting is subject to continued management review supported by confirmationand testing by management and by our auditors.  We anticipate thatadditional changes may be made to our internal controls and procedures. Other than the foregoing initiatives, no change in our internal control overfinancial reporting occurred during the period covered by this report that hasmaterially affected, or is reasonably likely to affect, our internal controlover financial reporting.

It should be noted thatany system of controls, however well designed and operated, can provide onlyreasonable, and not absolute, assurance that the objectives of the system aremet.  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**

**Item5.         Other Information**

 

Our managing member has informed us that the FinancialIndustry Regulatory Authority (“FINRA”, formerly, NASD) is conducting anon-public investigation of Pacific Cornerstone Capital, Inc. (“PCC”), anaffiliate of our managing member, that is, we understand, focused on theprivate placements conducted by PCC during the period from January 1, 2004through October 31, 2007.  Theinvestigation is in the preliminary stage. FINRA’s correspondence requesting document production states, “Thisinquiry should not be construed as an indication that the EnforcementDepartment or its staff has determined that any violations of federalsecurities laws or NASD, NYSE or MSRB rules have occurred.”  We have been advised that PCC is respondingto FINRA’s request for information and will continue to cooperate in the investigation.  We cannot, at this time, assess the durationor likely outcome or consequences of this investigation.  Although the FINRA investigation will be adistraction, specific resources of PCC and its affiliates are being assigned tothe response effort that will allow our organization to move forward with ourbusiness plans.

 

**Item6.         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 12th day ofNovember, 2007.
| 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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