**U.S. SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C.  20549**

 

**FORM 10-Q**

** **

**(MarkOne)**

** **

**ý****        QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003**

** **

**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   333-63656**

** **

**CORNERSTONE REALTY FUND, LLC**

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITSCHARTER)

 

| **California**                                                        |   | **33-0827161**                     |
|-----------------------------------------------------------------------|--------|------------------------------------|
| (State or other jurisdiction  of incorporation or organization)       |   | (IRS Employer  Identification No.) |
|                                                                  |   |                               |
| **4590 MACARTHUR  BLVD., SUITE 610, NEWPORT BEACH, CALIFORNIA 92660** |
| (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                              |
|                                                                  |   |                               |
| **949-852-1007**                                                      |
| (ISSUER’S TELEPHONE NUMBER)                                      |

 

**Not Applicable**

(FORMER NAME, FORMER ADDRESS AND FORMERFISCAL YEAR, IF CHANGED SINCE LAST REPORT)

 

Check whether the issuer (1) filed allreports required to be filed by Section 13 or 15(d) of the Exchange Act of1934 during the past 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.

 

YES  ý    NO   ̈

 

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

 

As of April 25, 2003, theFund had 21,962 units of membership interest issued and outstanding.

 

 

----

 

**PARTI - FINANCIAL INFORMATION**

 

**Item 1.    Financial Statements**

 

**CornerstoneRealty Fund, LLC**

 
| Condensed  Balance Sheets at March 31, 2003 and December 31, 2002                                                                  |   |
|------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                               |   |
| Condensed Statements  of Operations for the Three Months ended  March 31, 2003 and March 31, 2002                                  |   |
|                                                                                                                               |   |
| Condensed  Statements of Members’ Capital for the Three Months ended  March 31, 2003 and for the year ended December 31, 2002 |   |
|                                                                                                                               |   |
| Condensed Statements  of Cash Flows for the Three Months ended  March 31, 2003 and March 31, 2002                                  |   |
|                                                                                                                               |   |
| Notes to Condensed Financial  Statements                                                                                           |   |

 

2

----

 

**CORNERSTONE REALTY FUND, LLC**

**(a California Limited Liability Company)**

 

**CONDENSEDBALANCE SHEETS**

 

**ASSETS**

 
|                                                                                  |   | **March 31,  2003** |      | **December 31,  2002** |   |
|---------------------------------------------------------------------------------------|--------|---------------------|-----------|------------------------|--------|
|                                                                                  |   | **(Unaudited)**     |      |                   |   |
| Assets                                                                                |   |                |      |                   |   |
| Cash and cash equivalents                                                             |   | $                   | 2,113,156 |                   | $      | 1,062,947 |   |
|                                                                                  |   |                |      |                   |   |
| Investments in real estate                                                            |   |                |      |                   |   |
| Land                                                                                  |   | 2,201,930           |      | 2,201,930              |   |
| Buildings, less accumulated depreciation of $43,136 in 2003 and  $15,868 in 2002      |   | 4,210,626           |      | 4,237,894              |   |
|                                                                                  |   | 6,412,556           |      | 6,439,824              |   |
| Other assets                                                                          |   |                |      |                   |   |
| Tenant and other receivables                                                          |   | 14,875              |      | 11,197                 |   |
| Prepaid insurance                                                                     |   | 10,796              |      | 14,877                 |   |
| Leasing commissions, less accumulated amortization of $272 in 2003  and $136 in 2002  |   | 2,063               |      | 1,497                  |   |
| Office equipment, less accumulated depreciation of $2,608 in 2003 and  $2,313 in 2002 |   | 246                 |      | 541                    |   |
| Total assets                                                                          |   | $                   | 8,553,692 |                   | $      | 7,530,883 |   |

 

**LIABILITIES AND MEMBERS’ CAPITAL**

 
| Liabilities                                                                                                                                    |   |      |      |      |   |
|------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------|-----------|-----------|--------|
| Accounts payable and accrued liabilities                                                                                                       |   | $         | 57,734    |      | $      | 101,038 |   |
| Real estate taxes payable                                                                                                                      |   | 99,020    |      | 113,657   |   |
| Tenant security deposits                                                                                                                       |   | 82,622    |      | 82,622    |   |
| Advances payable to managing member                                                                                                            |   | 114,115   |      | 111,059   |   |
| Total liabilities                                                                                                                              |   | 353,491   |      | 408,376   |   |
|                                                                                                                                           |   |      |      |      |   |
| Members’ capital (100,000 units authorized, 20,399 units issued and  outstanding in 2003 and 18,061 units issued and outstanding in 2002) |   | 8,200,201 |      | 7,122,507 |   |
| Total liabilities and members’ capital                                                                                                    |   | $         | 8,553,692 |      | $      | 7,530,883 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

3

----

 

**CORNERSTONE REALTY FUND, LLC**

**(a California Limited Liability Company)**

 

**CONDENSED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
|                                                      |   | **Three Months Ended  March 31,** |    |
|-----------------------------------------------------------|--------|-----------------------------------|---------|
|                                                      |   | **2003**                          |    | **2002** |   |
|                                                      |   |                              |    |   |   |
| Revenues                                                  |   |                              |    |   |   |
| Rental revenues                                           |   | $                                 | 194,367 |   | $ | — |   |
| Tenant reimbursements                                     |   | 29,804                            |    | — |   |
| Interest, dividends and other income                      |   | 2,924                             |    | 11,798 |   |
|                                                      |   | 227,095                           |    | 11,798 |   |
|                                                      |   |                              |    |   |   |
| Expenses                                                  |   |                              |    |   |   |
| Property operating and maintenance                        |   | 28,976                            |    | — |   |
| Property taxes                                            |   | 37,690                            |    | — |   |
| General and administrative expenses                       |   | 45,327                            |    | 32,169 |   |
| Interest expense on advances payable to  managing member  |   | 9,204                             |    | 12,794 |   |
| Depreciation and amortization                             |   | 27,699                            |    | 142 |   |
|                                                      |   | 148,896                           |    | 45,105 |   |
|                                                      |   |                              |    |   |   |
| Net income (loss)                                         |   | $                                 | 78,199  |   | $ | (33,307 | ) |
|                                                      |   |                              |    |   |   |
| Net income (loss) allocable to managing  member           |   | $                                 | 7,820   |   | $ | (3,331 | ) |
|                                                      |   |                              |    |   |   |
| Net income (loss) allocable to unitholders                |   | $                                 | 70,379  |   | $ | (29,976 | ) |
|                                                      |   |                              |    |   |   |
| Per unit amounts:                                         |   |                              |    |   |   |
| Basic and diluted income (loss) allocable  to unitholders |   | $                                 | 3.68    |   | $ | (4.21 | ) |
|                                                      |   |                              |    |   |   |
| Basic and diluted weighted average units  outstanding     |   | 19,135                            |    | 7,121 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

4

----

 

**CORNERSTONE REALTY FUND, LLC**

**(a California Limited Liability Company)**

 

**CONDENSED STATEMENTS OF MEMBERS’ CAPITAL**

 
| Balance, December 31, 2001                                    |   | $         | 2,173,278 |   |
|---------------------------------------------------------------|--------|-----------|-----------|--------|
|                                                          |   |      |      |
| Net proceeds from offering                                    |   | 5,313,958 |      |
| Deferred offering costs repaid to managing member             |   | (237,500  | )         |
| Net loss                                                      |   | (127,229  | )         |
|                                                          |   |      |      |
| Balance, December 31, 2002                                    |   | 7,122,507 |      |
|                                                          |   |      |      |
| Net proceeds from offering (unaudited)                        |   | 1,046,255 |      |
| Deferred offering costs repaid to managing member (unaudited) |   | (46,760   | )         |
| Net income (unaudited)                                        |   | 78,199    |      |
|                                                          |   |      |      |
| Balance, March 31, 2003 (unaudited)                           |   | $         | 8,200,201 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

5

----

 

**CORNERSTONE REALTY FUND, LLC**

**(a California Limited Liability Company)**

 

**CONDENSEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
|                                                                                                |   | **Three Months Ended  March 31,** |      |
|-----------------------------------------------------------------------------------------------------|--------|-----------------------------------|-----------|
|                                                                                                |   | **2003**                          |      | **2002** |   |
|                                                                                                |   |                              |      |   |   |
| OPERATING ACTIVITIES                                                                                |   |                              |      |   |   |
| Net income (loss)                                                                                   |   | $                                 | 78,199    |   | $ | (33,307 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in) operating activities: |   |                              |      |   |   |
| Depreciation and amortization                                                                       |   | 27,699                            |      | 142 |   |
| Changes in operating assets and  liabilities:                                                       |   |                              |      |   |   |
| Other assets                                                                                        |   | (299                              | )         | — |   |
| Accounts payable and accrued liabilities                                                            |   | (43,304                           | )         | (13,467 | ) |
| Real estate taxes payable                                                                           |   | (14,637                           | )         | — |   |
|                                                                                                |   |                              |      |   |   |
| Net cash provided by (used in) operating  activities                                                |   | 47,658                            |      | (46,632 | ) |
|                                                                                                |   |                              |      |   |   |
| FINANCING ACTIVITIES                                                                                |   |                              |      |   |   |
| Advances from managing member                                                                       |   | 3,056                             |      | 21,909 |   |
| Repayment of managing member advances                                                               |   | —                            |      | (168,751 | ) |
| Net proceeds from offering                                                                          |   | 1,046,255                         |      | 1,021,639 |   |
| Deferred offering costs repaid to managing  member                                                  |   | (46,760                           | )         | (45,660 | ) |
|                                                                                                |   |                              |      |   |   |
| Net cash provided by financing activities                                                           |   | 1,002,551                         |      | 829,137 |   |
|                                                                                                |   |                              |      |   |   |
| Net increase in cash                                                                                |   | 1,050,209                         |      | 782,505 |   |
|                                                                                                |   |                              |      |   |   |
| Cash and cash equivalents at beginning of  period                                                   |   | 1,062,947                         |      | 2,493,073 |   |
|                                                                                                |   |                              |      |   |   |
| Cash and cash equivalents at end of period                                                          |   | $                                 | 2,113,156 |   | $ | 3,275,578 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

6

----

 

### **CORNERSTONE REALTY FUND, LLC**

**(a California Limited Liability Company)**

 

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.             Organizationand Business**

 

Cornerstone Realty Fund, LLC, a Californialimited liability company (the “Fund”) (formerly Cornerstone Multi-TenantIndustrial Business Parks Fund, LLC and Cornerstone Industrial PropertiesIncome and Growth Fund I, LLC), was formed on October 28, 1998.  The members of the Fund are CornerstoneIndustrial Properties, LLC, a California limited liability company, as themanaging member (“Managing Member”), Terry G. Roussel, an individual, and othervarious unitholders as described below. The purpose of the Fund is to acquire, operate and sell multi-tenantindustrial properties.  The Fundcurrently is issuing and selling equity interests (“units”) in a publicoffering in the Fund, and is admitting the new unitholders as members of theFund.

 

The Fund is generating sufficient net cashfrom operations to meet its obligations as they come due.  The Fund is still in its offering andorganizational stage, and is dependent on the Managing Member to provideadvances for costs incurred in connection with the offering of units.  The Managing Member must raise funds throughthe sale of debt or equity securities to obtain the cash necessary to providethese advances.  There can be noassurance as to the amount or timing of the Managing Member’s receipt offunds.  The Fund is to reimburse theManaging Member for the offering costs advanced by the Managing Member in theamount of 4% of the gross proceeds from the offering of units.  During December 2001, the Fund raised theminimum offering requirement of 6,000 units. As of April 25, 2003, the Fund has issued 21,962 units primarily to newunitholders for gross offering proceeds of $10,981,000.

 

Each member’s liability is limited pursuantto the provisions of the Beverly-Killea Limited Liability Company Act.  The term of the Fund shall continue untilDecember 31, 2010, unless terminated sooner pursuant to the operatingagreement.

 

**2.             Summaryof Significant Accounting Policies**

 

## *InterimFinancial Information*

 

The accompanying unaudited condensedfinancial statements have been prepared in accordance with accountingprinciples generally accepted in the United States for interim financialinformation and with the instructions to Form 10-Q and Article 10 of RegulationS-X.  Accordingly, they do not includeall of the information and footnotes required by accounting principlesgenerally accepted in the United States for complete financial statementpresentation.  In the opinion ofmanagement, all adjustments, consisting of normal recurring accruals, considerednecessary for a fair presentation, have been included.  Operating results for the three-month periodended March 31, 2003 are not necessarily indicative of the results that may beexpected for the year ending December 31, 2003.

 

7

----

 

For further information, refer to the auditedfinancial statements and footnotes thereto included in the Fund’s Annual Reporton Form 10-K for the year ended December 31, 2002.

 

*Use of Estimates*

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities as of the date of the financial statementsand the reported amount of revenue and expenses during the reportingperiod.  Actual results could differmaterially from the estimates in the near term.

 

*Cash and Cash Equivalents*

 

Cash and cash equivalents consist primarilyof interest-bearing investments with original maturities of 90 days or less atthe date of purchase.  Included in cashand cash equivalents is $82,622 that the Fund has designated as tenant securitydeposits.

 

*Investments in Real Estate*

 

Investments in real estate are stated at costand include land, buildings and building improvements.  Expenditures for ordinary maintenance andrepairs are expensed to operations as incurred.  Significant replacements, betterments and tenant improvementswhich improve 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 respective tenant’s lease term.

 

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

 

*Office Equipment and Leasing Commissions*

 

Office equipment is stated at cost.  Depreciation is computed on a straight-linebasis over the estimated useful lives of the related assets.  The estimated useful life of the officeequipment is five years.  Leasingcommissions are stated at cost. Amortization is computed on a straight-line basis over the related leaseterm.

 

8

----

 

*Revenue Recognition*

 

Rental revenues are recorded on an accrualbasis as they are earned over the lives of the respective tenant leases on astraight-line basis.  Rental receivablesare periodically evaluated for collectibility.

 

*Fair Value of Financial Instruments*

 

The Fund believes that the recorded value ofall financial instruments approximates their current values.

 

*Income Tax Matters*

 

It is the intent of the Fund that the Fund betreated as a partnership for income tax purposes.  As a limited liability company, the Fund is subject to certainminimal taxes and fees; however, income taxes on the income or losses realizedby the Fund are generally reported on the separate returns of the members.

 

*Concentration of Credit Risk*

 

The Fund maintains some of its cash in moneymarket accounts which, at times, exceeds federally insured limits.  No losses have been experienced related tosuch amounts.

 

*Reclassifications*

 

Certain reclassifications have been made tothe 2002 financial statement account balances to conform to the 2003presentation.

 

9

----

 

*Computation of Net Income (Loss) per Unit*

 

The basic and diluted income (loss) allocableto unitholders is computed by dividing net income (loss) by the weightedaverage number of units outstanding for the period.

 

**3.             Investmentsin Real Estate**

 

On September 27, 2002, the Fund acquired anexisting multi-tenant industrial business park known as Normandie BusinessCenter, located in Torrance, California for an investment of $3,901,696.  Normandie Business Center consists of twosingle-story buildings containing a total of 48,979 leasable square feet.

 

On December 27, 2002, the Fund acquired anexisting multi-tenant industrial business park known as the Sky Harbor BusinessPark, located in Northbrook, Illinois for an investment of $2,553,996.  Sky Harbor Business Park consists of asingle-story building containing a total of 41,422 leasable square feet.

 

Industrial space in the properties isgenerally leased to tenants under lease terms that provide for the tenants topay a portion of operating expenses in addition to minimum rent.

 

**4.             DeferredOffering Costs Advanced by Managing Member**

 

Deferred offering costs advanced by theManaging Member for the three months ended March 31, 2003 (unaudited) and forthe year ended December 31, 2002 are as follows:

 
|                       |   | **Deferred Offering  Costs** |    |
|----------------------------|--------|------------------------------|---------|
| Balance, December 31, 2001 |   | $                            | 501,043 |   |
| Costs advanced             |   | 200,071                      |    |
| Costs repaid               |   | (237,500                     | )       |
|                       |   |                         |    |
| Balance, December 31, 2002 |   | 463,614                      |    |
|                       |   |                         |    |
| Costs advanced             |   | 45,663                       |    |
| Costs repaid               |   | (46,760                      | )       |
|                       |   |                         |    |
| Balance, March 31, 2003    |   | $                            | 462,517 |   |

 

Specific incremental costs incurred inconnection with the offering of membership units are advanced by the ManagingMember.  These advances bear simpleinterest at the prevailing prime commercial lending rate (4.25% at March 31,2003) plus two percentage points.

 

10

----

 

Reimbursement of such offering costs is limited to 4% of the grossproceeds of the related offerings. Offering costs incurred by the Managing Member in excess of the 4%limitation are deferred, and will be reimbursed from future offeringproceeds.  Any offering costs incurredby the Managing Member on behalf of the Fund that are not reimbursed by theFund will be reflected as a capital contribution to the Fund by the ManagingMember, with an offsetting expense recognized in the Fund’s statement ofoperations.  Through March 31, 2003, theFund has received, from its Managing Member, cumulative unsecured advances fordeferred offering costs in the amount of $870,497, and has repaid the ManagingMember $407,980 of those deferred offering costs.

 

**5.             RelatedParty Transactions**

 

The Fund is to reimburse its Managing Memberfor deferred offering costs advanced by its Managing Member to the Fund in theamount of 4% of the gross proceeds from the offering of units.  The Fund is to reimburse its Managing Memberfor 100% of initial operating costs advanced to the Fund.  Deferred offering and initial operatingcosts advanced to the Fund by its Managing Member bear interest at theprevailing prime commercial lending rate plus two percentage points.

 

In order to fund its initial operating costs,the Fund has received, from its Managing Member, unsecured advances and hasincurred interest for a cumulative total of $479,283.  Through March 31, 2003, the Fund has repaid the Managing Member$365,168 of initial operating costs and interest. The initial operating costadvances bear simple interest at the prevailing prime commercial lending rate(4.25% at March 31, 2003) plus two percentage points.  Interest expense totaling $9,204 and $12,794 for the three monthsended March 31, 2003 and 2002, respectively, was incurred on theseadvances.  At March 31, 2003, thebalance of initial operating cost advances payable to the Managing Member was$114,115.

 

An affiliate of the Managing Member, PacificCornerstone Capital, Inc., is entitled to receive various fees, compensationand reimbursements as specified in the Fund’s operating agreement, includingcommissions of 9% of the first $3,000,000 of gross proceeds from the offeringof units and 7% thereafter, marketing fees of 2% of gross proceeds from theoffering of units less $60,000, and expense allowances of 1.5% of grossproceeds from the offering of units.   During the three months ended March 31, 2003 and 2002, the total fees,compensation and reimbursements were $122,745 and $119,861, respectively, ofwhich a substantial portion is paid out to other broker-dealers.

 

11

----

 

**Item2.****                              Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

The following “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” should be read inconjunction with the Fund’s unaudited condensed financial statements and notesthereto contained 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-lookingstatements may relate to risks and other factors that may cause the Fund’s futureresults of operations to be materially different than those expressed orimplied herein.  Some of these risks andother factors include, but are not limited to: (i) no assurance that Fund properties will continue to experienceminimal or no vacancy; (ii) tenants may not be able to meet their financialobligations; (iii) rental revenues from the properties may not be sufficient tomeet the Fund’s cash requirements for operations, capital requirements anddistributions; (iv) suitable investment properties may not continue to beavailable; and (v) adverse changes to the general economy may disruptoperations.

 

**Critical Accounting Policies**

 

The Fund’s financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States.  The preparation of thesefinancial statements requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities as of the date of thefinancial statements and the reported amount of revenue and expenses during thereporting period.  Actual results coulddiffer materially from the estimates in the near term.

 

*Revenue Recognition*

 

Rental revenues are recorded on an accrualbasis as they are earned over the lives of the respective tenant leases on astraight-line basis.  Rental receivablesare periodically evaluated for collectibility.

 

*Investments in Real Estate*

 

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

 

**Impact of New Accounting Pronouncement**

 

In November 2002, the Financial AccountingStandards Board issued Interpretation No. 45, *Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Indirect Guarantees of Indebtedness ofOthers* (“Interpretation No. 45”). The disclosure

 

12

----

 

requirements of Interpretation No. 45 are effective as of December 31,2002.  The initial recognition andmeasurement requirements of Interpretation No. 45 are effective on aprospective basis to guarantees issued or modified after December 31,2002.  Management is currentlyevaluating the impact of the required accounting treatment under InterpretationNo. 45 for guarantees issued or modified after December 31, 2002.  Interpretation No. 45 could require therecording of a guarantee liability equal to its estimated fair value based onthe expected present value of the estimated probability-weighted range ofcontingent payments under the guarantee arrangement.

 

**Results of Operations**

 

As of March 31, 2003, the Fund has purchasedtwo multi-tenant industrial business park properties containing a total of 36tenant spaces, in two different major metropolitan areas.  The properties were purchased from theproceeds from the sale of membership units, without debt financing. Theproperties were purchased in the latter parts of September 2002 and December2002, respectively.

 

The Fund generated net income for the threemonths ended March 31, 2003 of $78,199 compared to a net loss of $33,307 forthe same period of 2002, for an overall increase in net income of$111,506.  This increase was primarilydue to rental revenues of $224,171 generated by the properties we purchased.This revenue increase was offset by reduced interest income on proceeds fromunit sales of $8,874, property and related expenses of $94,223, increasedgeneral and administrative expenses of $13,158 and decreased interest expenseon advances payable to managing member of $3,590.

 

The Fund is still in its offering andorganizational stage. Additional general and administrative expenses areexpected to continue until the capitalization and organization of the Fund iscomplete.  Although the offering is scheduledto end on August 6, 2003, the managing member intends to take the stepsnecessary to continue offering units for sale for up to an additional two yearsto complete the capitalization of the Fund.

 

**Liquidity and Capital Resources**

 

During the three months ended March 31, 2003the Fund’s cash and cash equivalents increased by $1,050,209.  This is primarily the result of net proceedsfrom the sale of units during the quarter of $1,046,255.

 

As of April 25, 2003, the Fund has received$10,981,000 of gross proceeds from the sale of membership units, $109,979 as acapital contribution from the managing member, and paid out $1,591,983 foroffering costs.  Of the net proceeds of$9,498,996, the Fund purchased two properties for $6,455,693, used $285,457 in cumulativeoperating expenses of the Fund and $4,868 in distributions to unitholders. TheFund has $2,752,978 in cash and cash equivalents.

 

The Fund intends to continue offeringmembership units for sale and use the net proceeds from the sale of units forthe acquisition of additional multi-tenant industrial business park properties,capital improvements to the properties, and for operating expenses andreserves.

 

The Fund expects to meet its short-termliquidity requirements from net cash

 

13

----

 

generated by operations, which we believe will be adequate to meetoperating costs of the properties and the Fund, and allow for cashdistributions to the unitholders.

 

The Fund’s offering and organizationalactivities have been financed through advances from the managing member.  A portion of those advances have beenreimbursed to the managing member at the rate of 4% of gross proceeds of theFund’s unit sales pursuant to the prospectus for the offering.  The Fund will continue to incurorganizational and offering expenses and the managing member, although notobligated, intends to continue providing advances for offering andorganizational expenses until the sale of membership units is completed.  The managing member must raise funds throughthe sale of debt or equity securities to obtain the cash necessary to providethese advances.  There can be noassurance as to the amount or timing of the managing member’s receipt of funds.  The Fund will not reimburse the managingmember for any amounts advanced by it for offering and organizational expenseswhich exceed the amounts and percentages set forth in the prospectus for theoffering.  Any such expenses incurred bythe managing member on behalf of the Fund that are not reimbursed by the Fundwill be reflected as a capital contribution to the Fund by the managing memberwith an offsetting expense recognized in the Fund’s statement of operations.

 

**Item 3.    Quantitativeand Qualitative Disclosures About Market Risk**

 

The Fund invests its cash and cashequivalents in FDIC insured savings accounts which, by their nature, are notsubject to interest rate fluctuations.

 

As of March 31, 2003, the Fund had $114,115in advances payable to its managing member. The advances are related to loans from affiliates which, by theirnature, are not subject to interest rate fluctuations.

 

**Item 4.    Controlsand Procedures**

 

The Fund’s disclosure controls and proceduresare designed to ensure that information required to be disclosed in reportsthat the Fund files or submits 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. The ChiefExecutive Officer and the Chief Financial Officer of Cornerstone Ventures,Inc., the manager of the managing member of the Fund, have reviewed theeffectiveness of the Fund’s disclosure controls and procedures within the lastninety days and have concluded that the disclosure controls and procedures areeffective. There were no significant changes in our internal controls or inother factors that could significantly affect these controls subsequent to thelast day they were evaluated.

 

14

----

 

**PARTII - OTHER INFORMATION**

 
| **Item 6.** | **Exhibits and Reports on Form 8-K.** |
|-------------|---------------------------------------|
|        |                                  |   |
|        | **(a)**                               | **Exhibits** |
|        |                                  |   |
|        |                                  | 99.1 | Certification  of Terry G. Roussel Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |
|        |                                  |   |   |
|        |                                  | 99.2 | Certification  of Tracy A. Thomson Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002. |
|        |                                  |   |
|        | **(b)**                               | **Reports on Form 8-K** |
|        |                                  |   |
|        |                                  | The  Registrant filed a Current Report on Form 8-K on January 9, 2003, to report, under Item 2., the  acquisition of the Sky Harbor Business Park in Northbrook, Illinois on  December 27, 2002. |
|        |                                  |   |
|        |                                  | On March 7, 2003, the Registrant filed an  amendment to the aforementioned Current Report on Form 8-K to include, under  Item 7., the required financial statements and pro forma financial  information. |

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the registrant has duly causedthis quarterly report to be signed on its behalf by the undersigned, thereuntoduly authorized this 15th day of May 2003.

 
|   | 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/ Tracy A. Thomson |
|   |                          |   |   | Tracy A.  Thomson, |
|   |                          |   |   | Chief  Financial Officer |
|   |                          |   |   | (Principal  Financial Officer and |
|   |                          |   |   |   Principal  Accounting Officer) |
|        |                               |  |  |  |  |  |

 

15

----

 

**CERTIFICATIONS**

 

I, Terry G. Roussel, certifythat:

 

1.             I have reviewed this quarterly report on Form 10-Q ofCornerstone Realty Fund, LLC;

 

2.             Based on my knowledge, this quarterly report does notcontain any untrue statement of a material fact or omit to state a materialfact necessary to make the statements made, in light of the circumstances underwhich such statements were made, not misleading with respect to the periodcovered by this quarterly report; and

 

3.             Based on my knowledge, the financial statements, andother financial information included in this quarterly report, fairly presentin all material respects the financial condition, results of operations andcash flows of the registrant as of, and for, the periods presented in thisquarterly report.

 

4.             The registrant’s other certifyingofficer and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and we have:

 

(a)           designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

(b)           evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

(c)           presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on my evaluation as of the Evaluation Date;

 

5.             The registrant’s other certifyingofficer and I have disclosed, based on our most recent evaluation, to theregistrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

(a)           all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)           any fraud, whetheror not material, that involves management or other employees who have a significantrole in the registrant’s internal controls; and

 

6.             The registrant’s other certifyingofficer and I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of my most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 

16

----

 

 
|                     | /s/ Terry G. Roussel                                                                                                                                                                                                 |
|--------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Date:  May 15, 2003 | Terry G. Roussel  Chief Executive Officer (Principal Executive Officer)  of Cornerstone Ventures, Inc., the Manager of  Cornerstone Industrial Properties, LLC, the Managing  Member of Cornerstone Realty Fund, LLC |

 

17

----

 

I, Tracy A. Thomson, certifythat:

 

1.             I have reviewed thisquarterly report on Form 10-Q of Cornerstone Realty Fund, LLC;

 

2.             Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report; and

 

3.             Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report.

 

4.             The registrant’s other certifyingofficer and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and we have:

 

(a)           designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

(b)           evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

(c)           presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on my evaluation as of the EvaluationDate;

 

5.             The registrant’s other certifying officer and Ihave disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

(a)           allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)           anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.             The registrant’s other certifying officer and Ihave indicated in this quarterly report whether or not there were significantchanges in internal controls or in other factors that could significantlyaffect internal controls subsequent to the date of my most recent evaluation,including any corrective actions with regard to significant deficiencies andmaterial weaknesses.

 

18

----

 

 
|                     | /s/ Tracy A. Thomson                                                                                                                                                                                                 |
|--------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Date:  May 15, 2003 | Tracy A. Thomson  Chief Financial Officer (Principal Financial Officer)  of Cornerstone Ventures, Inc., the Manager of  Cornerstone Industrial Properties, LLC, the Managing  Member of Cornerstone Realty Fund, LLC |

 

19

----