UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





(Mark
One)





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





For
the quarterly period ended September 30, 2010





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





CORNERSTONE
REALTY FUND, LLC


(Exact
name of registrant as specified in its charter)





CALIFORNIA
            
            33-0827161(State
      or other jurisdiction of incorporation or organization)
            
            (I.R.S.
      Employer Identification No.)1920
      MAIN STREET, SUITE 400, IRVINE, CA
            
            92614(ADDRESS
      OF PRINCIPAL EXECUTIVE OFFICES)
            
            (ZIP
      CODE)




949-852-1007


(Registrant’s
telephone number, including area code)





Not
Applicable


(Former
name, former address and former fiscal year, if changed since last
report)





Indicate
by check mark whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.





x
Yes    o No





Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).





o
Yes    o No





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





Large
accelerated filer o  Accelerated
filer o  Non-accelerated
filer o  Smaller
Reporting Company x





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





o
Yes    x
No







PART
      I.
                
                FINANCIAL
      INFORMATIONItem
      1.
                
                Financial
      Statements:Condensed
      Balance Sheets as of September 30, 2010 and December 31, 2009
      (unaudited)
                
                3Condensed Statements
      of Operations for the Three and  Nine Months Ended September 30,
      2010 and September 30, 2009 (unaudited)
                
                4Condensed Statement
      of Members’ Capital for the Nine Months Ended September 30, 2010
      (unaudited)
                
                5Condensed
      Statements of Cash Flows for the Nine Months Ended September 30, 2010 and
      September 30, 2009 (unaudited)
                
                6Notes
      to Condensed Financial Statements (unaudited)
                
                7Item
      2.
                
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                
                13Item
      3.
                
                Quantitative
      and Qualitative Disclosures About Market Risk
                
                15Item
      4.
                
                Controls
      and Procedures
                
                15PART
      II.
                
                OTHER
      INFORMATIONItem
      6.
                
                Exhibits
                
                16SIGNATURES
                
                17


2





CORNERSTONE
REALTY FUND, LLC


(a
California Limited Liability Company)





CONDENSED
BALANCE SHEETS


(UNAUDITED)




September 30, 2010
                
                
                December 31, 2009ASSETSCash
      and cash equivalents
                
                $
                1,050,000
                
                
                $
                761,000Investments
      in real estateLand
                
                
                9,870,000
                
                
                
                10,088,000Buildings
      and improvements, net
                
                
                15,397,000
                
                
                
                16,110,000Intangible
      asset - in-place leases, net
                
                
                —
                
                
                
                9,000Property
      held for sale, net
                
                
                1,721,000
                
                
                
                1,726,00026,988,000
                
                
                
                27,933,000Other
      assetsNon-real
      estate assets associated with property held for sale
                
                
                80,000
                
                
                
                74,000Tenant
      and other receivables, net
                
                
                251,000
                
                
                
                263,000Prepaid
      expenses and other assets
                
                
                22,000
                
                
                
                50,000Leasing
      commissions, net
                
                
                173,000
                
                
                
                158,000Deferred
      financing costs
                
                
                16,000
                
                
                
                —Total
      assets
                
                $
                28,580,000
                
                
                $
                29,239,000LIABILITIES
      AND MEMBERS’ CAPITALLiabilitiesAccounts
      payable, accrued liabilities and prepaid rent
                
                $
                122,000
                
                
                $
                161,000Real
      estate taxes payable
                
                
                188,000
                
                
                
                76,000Tenant
      security deposits
                
                
                187,000
                
                
                
                194,000Intangible
      lease liability, net
                
                
                —
                
                
                
                5,000Liabilities
      associated with property held for sale
                
                
                295,000
                
                
                
                262,000Total
      liabilities
                
                
                792,000
                
                
                
                698,000Members’
      capital (100,000 units authorized and issued as of September 30, 2010 and
      December 31, 2009; 98,670 and 98,814 units outstanding as of September 30,
      2010 and December 31, 2009, respectively)
                
                
                27,788,000
                
                
                
                28,541,000Total
      liabilities and members’ capital
                
                $
                28,580,000
                
                
                $
                29,239,000





The
accompanying notes are an integral part of these interim financial
statements.


3





CORNERSTONE
REALTY FUND, LLC


(a
California Limited Liability Company)





CONDENSED
STATEMENTS OF OPERATIONS


(Unaudited)





Three Months Ended
                  September 30,
                
                
                Nine Months Ended
                  September 30,2010
                
                
                2009
                
                
                2010
                
                
                2009RevenuesRental
      revenues
                
                $
                579,000
                
                
                $
                669,000
                
                
                $
                1,785,000
                
                
                $
                2,029,000Tenant
      reimbursements and other income
                
                
                128,000
                
                
                
                131,000
                
                
                
                364,000
                
                
                
                386,000707,000
                
                
                
                800,000
                
                
                
                2,149,000
                
                
                
                2,415,000ExpensesProperty
      operating and maintenance
                
                
                213,000
                
                
                
                171,000
                
                
                
                642,000
                
                
                
                473,000Property
      taxes
                
                
                112,000
                
                
                
                115,000
                
                
                
                334,000
                
                
                
                329,000General
      and administrative
                
                
                59,000
                
                
                
                30,000
                
                
                
                246,000
                
                
                
                197,000Depreciation
      and amortization
                
                
                202,000
                
                
                
                209,000
                
                
                
                589,000
                
                
                
                620,000Impairment
      of real estate
                
                
                —
                
                
                
                —
                
                
                
                560,000
                
                
                
                —586,000
                
                
                
                525,000
                
                
                
                2,371,000
                
                
                
                1,619,000Interest
      income
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,000Net
      income (loss) from continuing operations
                
                
                121,000
                
                
                
                275,000
                
                
                
                (222,000
                )
                
                
                797,000Net
      income (loss) from discontinued operation
                
                
                56,000
                
                
                
                (1,224,000
                )
                
                
                141,000
                
                
                
                (1,210,000
                )Net
      income (loss)
                
                $
                177,000
                
                
                $
                (949,000
                )
                
                $
                (81,000
                )
                
                $
                (413,000
                )Net
      income (loss) allocable to managing member:From
      continuing operations
                
                $
                12,000
                
                
                $
                27,000
                
                
                $
                (22,000
                )
                
                $
                80,000From
      discontinued operation
                
                
                6,000
                
                
                
                (122,000
                )
                
                
                14,000
                
                
                
                (121,000
                )$
                18,000
                
                
                $
                (95,000
                )
                
                $
                (8,000
                )
                
                $
                (41,000
                )Net
      income (loss) allocable to unit holders:From
      continuing operations
                
                $
                109,000
                
                
                $
                247,000
                
                
                $
                (200,000
                )
                
                $
                717,000From
      discontinued operation
                
                
                50,000
                
                
                
                (1,102,000
                )
                
                
                127,000
                
                
                
                (1,089,000
                )$
                159,000
                
                
                $
                (855,000
                )
                
                $
                (73,000
                )
                
                $
                (372,000
                )Per
      unit amounts:Basic
      and diluted net income (loss) from continuing operations allocable to unit
      holders
                
                $
                1.10
                
                
                $
                2.49
                
                
                $
                (2.03
                )
                
                $
                7.22Basic
      and diluted net income (loss) from discontinued operation allocable to
      unit holders
                
                $
                0.51
                
                
                $
                (11.11
                )
                
                $
                1.29
                
                
                $
                (10.97
                )Basic
      and diluted weighted average number of units outstanding
                
                
                98,670
                
                
                
                99,127
                
                
                
                98,725
                
                
                
                99,261





The
accompanying notes are an integral part of these interim financial
statements.


4




CORNERSTONE
REALTY FUND, LLC


(a
California Limited Liability Company)





CONDENSED
STATEMENT OF MEMBERS’ CAPITAL


(Unaudited)





Balance,
      December 31, 2009
                
                $
                28,541,000Cash
      distributions to unit holders
                
                
                (623,000
                )Units
      repurchased and retired
                
                
                (49,000
                )Net
      loss
                
                
                (81,000
                )Balance,
      September 30, 2010
                
                $
                27,788,000





The
accompanying notes are an integral part of these interim financial
statements.


5





CORNERSTONE
REALTY FUND, LLC


(a
California Limited Liability Company)





CONDENSED
STATEMENTS OF CASH FLOWS


(Unaudited)





Nine Months Ended September 30,2010
                            
                            
                            2009OPERATING
      ACTIVITIESNet
      loss
                            
                            $
                            (81,000
                            )
                            
                            $
                            (413,000
                            )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Impairment
      of real estate
                            
                            
                            560,000
                            
                            
                            
                            1,216,000Depreciation
      and amortization
                            
                            
                            604,000
                            
                            
                            
                            715,000Provision
      for bad debt
                            
                            
                            148,000
                            
                            
                            
                            41,000Straight-line
      rent and amortization of acquired above/below market
leases
                            
                            
                            (34,000
                            )
                            
                            
                            (6,000
                            )Changes
      in operating assets and liabilities:Tenant
      and other receivables
                            
                            
                            (104,000
                            )
                            
                            
                            (77,000
                            )Prepaid
      expenses and other assets
                            
                            
                            (84,000
                            )
                            
                            
                            (93,000
                            )Accounts
      payable, accrued liabilities and prepaid rent
                            
                            
                            (41,000
                            )
                            
                            
                            (13,000
                            )Real
      estate taxes payable
                            
                            
                            146,000
                            
                            
                            
                            168,000Tenant
      security deposits
                            
                            
                            (10,000
                            )
                            
                            
                            (18,000
                            )Net
      cash provided by operating activities
                            
                            
                            1,104,000
                            
                            
                            
                            1,520,000INVESTING
      ACTIVITIESInvestments
      in real estate
                            
                            
                            (127,000
                            )
                            
                            
                            (157,000
                            )Net
      cash used in investing activities
                            
                            
                            (127,000
                            )
                            
                            
                            (157,000
                            )FINANCING
      ACTIVITIESCash
      distributions to unit holders
                            
                            
                            (623,000
                            )
                            
                            
                            (1,856,000
                            )Cash
      distributions to managing member
                            
                            
                            —
                            
                            
                            
                            (192,000
                            )Units
      repurchased and retired
                            
                            
                            (49,000
                            )
                            
                            
                            (136,000
                            )Deferred
      financing costs
                            
                            
                            (16,000
                            )
                            
                            
                            —Net
      cash used in financing activities
                            
                            
                            (688,000
                            )
                            
                            
                            (2,184,000
                            )Net
      increase (decrease) in cash
                            
                            
                            289,000
                            
                            
                            
                            (821,000
                            )Cash
      and cash equivalents at beginning of period
                            
                            
                            761,000
                            
                            
                            
                            2,289,000Cash
      and cash equivalents at end of period
                            
                            $
                            1,050,000
                            
                            
                            $
                            1,468,000Supplemental
      disclosure of non-cash financing and investing activities:Accrued
      additions to real estate
                            
                            $
                            (5,000
                            )
                            
                            $
                            —





The
accompanying notes are an integral part of these interim financial
statements.


6





CORNERSTONE
REALTY FUND, LLC


(a
California Limited Liability Company)





NOTES
TO CONDENSED FINANCIAL STATEMENTS


SEPTEMBER
30, 2010


(Unaudited)





1.
            Organization
      and Business





Cornerstone
Realty Fund, LLC, a California limited liability company (the “Fund”), was
formed in October of 1998 to invest in multi-tenant business parks catering to
small business tenants. As used in this report, “Fund”, “we,” “us” and “our”
refer to Cornerstone Realty Fund, LLC except where the context otherwise
requires.




Our
managing member is Cornerstone Industrial Properties, LLC (“CIP”), a California
limited liability company. Cornerstone Ventures, Inc. is the managing member of
CIP. Cornerstone Ventures, Inc. is an experienced real estate operating company
specializing in the acquisition, operation and repositioning of multi-tenant
industrial business parks catering to small business tenants.





On August
7, 2001, we commenced a public offering of units of our membership interest
pursuant to a registration statement on Form S-11 filed with the Securities and
Exchange Commission (“SEC”) pursuant to the Securities Act of 1933. On August
18, 2005, we completed a public offering of these units. As of that date, we had
issued 100,000 units to unit holders for gross offering proceeds of $50,000,000,
before discounts of $39,780.





Our
interim unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America (“GAAP”) for interim financial information and in accordance with the
rules and regulations of the Securities and Exchange Commission. As permitted by
the SEC filing requirements for Form 10-Q, the condensed financial statements do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. The condensed financial statements included herein should be read in
conjunction with our Annual Report on Form 10-K for the year ended December 31,
2009.





Each
member’s liability is limited pursuant to the provisions of the Beverly-Killea
Limited Liability Company Act.




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





—
            CIP
      generally has complete and exclusive discretion in the management and
      control of our operations; however, unit holders holding the majority of
      all outstanding and issued units have certain specified voting rights
      which include the removal and replacement of the Managing
      Member.





—
            Net
      Cash Flow from Operations, as defined, will be distributed 90% to the unit
      holders and 10% to the Managing Member until the unit holders have
      received either an 8% or 12% cumulative, non-compounded annual return on
      their Invested Capital Contributions, as defined. The 12% return applies
      to specified early investors for the twelve-month period subsequent to the
      date of their Invested Capital Contributions and is in lieu of the 8%
      return during that period.





—
            Net
      Sales Proceeds, as defined, will be distributed first, 100% to the unit
      holders in an amount equal to their Invested Capital Contributions; then,
      90% to the unit holders and 10% to the Managing Member until the unit
      holders have received an amount equal to the unpaid balance of their
      aggregate cumulative, non-compounded annual return on their Invested
      Capital Contributions; and thereafter, 50% to the unit holders and 50% to
      the Managing Member.





—
            Net
      Income, as defined, is allocated first, 10% to the Managing Member and 90%
      to the unit holders until Net Income allocated equals cumulative Net
      Losses, as defined, previously allocated in such proportions; second, in
      proportion to and to the extent of Net Cash Flow from Operations and Net
      Sales Proceeds previously distributed to the members, exclusive of
      distributions representing a return of Invested Capital Contributions; and
      then 50% to the Managing Member and 50% to the unit
    holders.





—
            Net
      Loss is allocated first, 50% to the Managing Member and 50% to the unit
      holders, until Net Loss allocated equals cumulative Net Income previously
      allocated in such proportions; then remaining Net Loss is allocated 10% to
      the Managing Member and 90% to the unit
holders.





—
            All
      allocations and distributions to the unit holders are to be pro rata in
      proportion to their ownership
shares.


7





—
            Effective
      February 22, 2007, our operating agreement was amended to permit
      repurchase of units on such terms and conditions as the Managing Member
      may determine.





—
            Effective
      June 2, 2009, our operating agreement was amended and the dissolution date
      in Section 11.1 (a) was extended from December 31, 2010 to December 31,
      2012.





—
            Effective
      April 27, 2010, our operating agreement was amended and allows the
      Managing Member to cause us to incur debt financing not to exceed ten
      percent of the capital contributions of all unit holders to meet the
      Fund’s operating expenses or to fund cash distributions declared and paid
      to members.





2.
            Summary
      of Significant Accounting Policies





Use
of Estimates





The
preparation of our financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. We base these estimates on various assumptions that we believe to be
reasonable under the circumstances, and these estimates form the basis for our
judgments concerning the carrying values of assets and liabilities that are not
readily apparent from other sources. We periodically evaluate these estimates
and judgments based on available information and experience. Actual results
could differ from our estimates under different assumptions and conditions. If
actual results significantly differ from our estimates, our financial condition
and results of operations could be materially impacted. For more information
regarding our critical accounting policies and estimates please refer to
"Summary of Significant Accounting Policies" contained in our Annual Report on
Form 10-K for the year ended December 31, 2009. There have been no material
changes to the critical accounting policies previously disclosed in that report
except as discussed below.





Interim
Financial Information





The
accompanying interim condensed financial statements have been prepared by our
management in accordance with GAAP and in conjunction with the rules and
regulations of the SEC. Certain information and note disclosures required for
annual financial statements have been condensed or excluded pursuant to SEC
rules and regulations. Accordingly, the interim condensed financial statements
do not include all of the information and notes required by GAAP for complete
financial statements. The accompanying financial information reflects all
adjustments which are, in the opinion of our management, of a normal recurring
nature and necessary for a fair presentation of our financial position, results
of operations and cash flows for the interim periods. Operating results for the
three and nine months ended September 30, 2010 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2010. Our
accompanying interim condensed financial statements should be read in
conjunction with our audited financial statements and the notes thereto included
on our Annual Report on Form 10-K for the year ended December 31, 2010, as filed
with the SEC.





Fair
Value of Financial Instruments




Financial
Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”)
825-10, Financial
Instruments,requires the disclosure of fair value information about financial
instruments whether or not recognized on the face of the balance sheet, for
which it is practical to estimate that value.




We
generally determine or calculate the fair value of financial instruments using
quoted market prices in active markets when such information is available or
using appropriate present value or other valuation techniques, such as
discounted cash flow analyses, incorporating available market discount rate
information for similar types of instruments and our estimates for
non-performance and liquidity risk. These techniques are significantly affected
by the assumptions used, including the discount rate, credit spreads, and
estimates of future cash flow.




Our
condensed balance sheets include the following financial instruments: cash and
cash equivalents and accounts payable, which we consider the carrying values
approximate fair value for these financial instruments because of the short
period of time between origination of the instruments and their expected
payment.





Recently
Issued Accounting Pronouncements




In
February 2010, FASB issued Accounting Standard Update (“ASU”) 2010-09, Subsequent Events: Amendments to Certain
recognition and Disclosure Requirements (amendments to ASC Topic 855,
Subsequent Events). ASU 2010-09 clarifies that subsequent events should be
evaluated through the date the financial statements are issued. In addition,
this update no longer requires a filer to disclose the date through which
subsequent events have been evaluated. This guidance is effective for financial
statements issued subsequent to February 24, 2010. We adopted this guidance on
February 24, 2010.


8





In
January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures -
Improving Disclosures about Fair Value Measurements(amendments to ASC
Topic 820, Fair Value Measurements and Disclosures). ASU 2010-06 amends the
disclosure requirements related to recurring and nonrecurring measurements. The
guidance requires new disclosures on the transfer of assets and liabilities
between Level 1 (quoted prices in active market for identical assets or
liabilities) and Level 2 (significant other observable inputs) of the fair value
measurement hierarchy, including the reasons and the timing of the transfers.
Additionally, the guidance requires a roll forward of activities on purchases,
sales, issuance, and settlements of the assets and liabilities measured using
significant unobservable inputs (Level 3 fair value measurements). The guidance
is effective for interim and annual periods beginning after December 15, 2009.
We adopted this guidance on January 1, 2010.





In June
2009, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No.
167, Amendments to FASB
Interpretation No. 46(R),which was primarily codified into ASC Topic 810
Consolidation. The new
guidance impacts the consolidation guidance applicable to a variable interest
entity (“VIE”) and among other things require a qualitative rather than a
quantitative analysis to determine the primary beneficiary of a VIE, continuous
assessments of whether a company is the primary beneficiary of a VIE and
enhanced disclosures about a company’s involvement with a VIE. We adopted this
guidance on January 1, 2010 and it did not have a material impact on our
condensed financial statements.





We have
considered all other pronouncements that have been issued but are not yet
effective which were not listed above. The Fund believes that these other
pronouncements will not have any future impact on the Fund’s financial
statements.





Investments
in Real Estate Assets Held for Sale





The Fund
evaluates the held for sale classification of its owned real estate each
quarter. Assets that are classified as held for sale are recorded at the lower
of their carrying amount or fair value less cost to sell. Assets are classified
as held for sale once management commits to a plan to sell the properties and
has initiated an active program to market them for sale. The results of
operations of these real estate properties are reflected as discontinued
operations in all periods reported. During the first quarter of 2010, management
committed a plan to sell Zenith Drive Centre to a third party and classified the
property as held for sale. This property has not been sold as of September 30,
2010 and accordingly, is classified as held for sale. See Note 7 for additional
information.





3.
            Investment
      in Real Estate





In
accordance with ASC Topic 360, Accounting for the Impairment or
Disposal of Long-lived Assets, the Fund assesses whether there has been
impairment in the value of its investments in real estate whenever events or
changes in circumstances indicate the carrying amount of an asset may not be
recoverable. Its portfolio is evaluated for impairment on a property-by-property
basis. Indicators of potential impairment include the following:





• Change in strategy resulting in a
decreased holding period;


•
Decreased occupancy levels;


•
Deterioration of the rental market as evidenced by rent decreases over numerous
quarters;


•
Properties adjacent to or located in the same submarket as those with recent
impairment issues;


•
Significant decrease in market price; and/or


• Tenant
financial problems.





In the
second quarter of 2010, we reviewed the impairment indicators as described in
FASB ASC 360-10-35-21. We noted a longer lease up period than anticipated for
one of our properties, which resulted in comparing the expected future
undiscounted cash flows for the property against its carrying amount. As the
estimated undiscounted cash flows were less than its carrying amount we recorded
an impairment loss of $560,000 based on the property’s estimated fair value.
During the evaluation process, we used Level 3 fair value estimates. The
assessment as to whether our investments in real estate are impaired is highly
subjective. The calculations, which are primarily based on discounted cash flow
analysis, involve projections of expected future cash flows and require us to
estimate (1) future market rental income amounts subsequent to the expiration of
current lease agreements, (2) property operating expenses, (3) risk-adjusted
rate of return and capitalization rates, (4) the number of months it takes to
re-lease the property and (5) the number of years the property is held for
investment. A change in any one or more of these factors could materially impact
whether a property is impaired as of any given valuation date.





FASB ASC
820-10, Fair Value
Measurements and Disclosures, defines fair value, establishes a framework
for measuring fair value in GAAP and provides for expanded disclosure about fair
value measurements. ASC 820-10 applies prospectively to all other accounting
pronouncements that require or permit fair value measurements. The adoption of
ASC 820-10 did not have a material impact on the Fund’s financial statements
since it does not record its financial assets and liabilities in its financial
statements at fair value. The Fund adopted ASC 820-10 with respect to its
non-financial assets and non-financial liabilities on January 1, 2009. The
adoption of ASC 820-10 with respect to its non-financial assets and liabilities
did not have a material impact on its financial statements.


9





Fair
value represents the estimate of the proceeds to be received, or paid in the
case of a liability, in a current transaction between willing parties. ASC 820
establishes a fair value hierarchy to categorize the inputs used in valuation
techniques to measure fair value. Inputs are either observable or unobservable
in the marketplace. Observable inputs are based on market data from independent
sources and unobservable inputs reflect the reporting entity’s assumptions about
market participant assumptions used to value an asset or liability. Level 1
includes quoted prices in active markets for identical instruments. Level 2
includes quoted prices for similar instruments in active markets; quoted prices
for identical or similar instruments in inactive markets; and model-derived
valuations using observable market information for significant inputs. Level 3
includes valuation techniques where one or more significant inputs are
unobservable. Financial instruments are classified according to the lowest level
input that is significant to their valuation. A financial instrument that has a
significant unobservable input along with significant observable inputs may
still be classified Level
3.





Certain
assets and liabilities were measured at fair value on a nonrecurring basis. This
category included the impairment of real estate. For the nine months ended
September 30, 2010, we recorded an impairment charge of $560,000 to reduce
certain investments in real estate assets to estimated fair value. The fair
values of investments in real estate included inputs based on management’s
estimate of net operating income, expected occupancy changes, expected rental
rates, capitalization rates and discount rates based on available market
information using a discounted cash flow analysis. Because one or more of
significant inputs are unobservable, the fair values of investments in real
estate are classified as Level 3.





The
following table summarizes the property that was measured at fair value on a
nonrecurring basis:




Total Fair Value
                          Measurement
                        
                        
                        Quoted Prices in
                          Active Markets
                          for Identical
                          Assets (Level 1)
                        
                        
                        Significant
                          Other
                          Observable
                          Inputs
                          (Level 2)
                        
                        
                        Significant
                          Unobservable
                          Inputs
                          (Level 3)
                        
                        
                        Total Losses
                          Three Months
                          Ended
                          September 30, 2010
                        
                        
                        Total Losses
                          Nine Months
                          Ended
                          September 30, 2010Investments
      in real estate
                        
                        $
                        2,268,000
                        
                        
                        $
                        —
                        
                        
                        $
                        —
                        
                        
                        $
                        2,268,000
                        
                        
                        $
                        —
                        
                        
                        $
                        (560,000
                        )





As of
September 30, 2010, accumulated depreciation and amortization related to
investments in real estate and related lease intangibles were as
follows:





Land
                
                
                Buildings and
                  Improvements
                
                
                Intangible
                  Lease Value
                
                
                In-Place
                  Lease Value
                
                
                Acquired Below-
                  Market LeasesInvestments
      in real estate
                
                $
                9,870,000
                
                
                $
                17,915,000
                
                
                $
                —
                
                
                $
                770,000
                
                
                $
                (154,000
                )Less:
      accumulated depreciation and amortization from continuing
      operations
                
                
                —
                
                
                
                (2,518,000
                )
                
                
                —
                
                
                
                (770,000
                )
                
                
                154,000Net
      investments in real estate and related lease intangibles from continuing
      operations
                
                
                9,870,000
                
                
                
                15,397,000
                
                
                
                —
                
                
                
                —
                
                
                
                —Net
      investments in real estate and related lease intangibles held for
      sale
                
                
                355,000
                
                
                
                1,262,000
                
                
                
                104,000
                
                
                
                —
                
                
                
                —$
                10,225,000
                
                
                $
                16,659,000
                
                
                $
                104,000
                
                
                $
                —
                
                
                $
                —


10


As of
December 31, 2009, accumulated depreciation and amortization related to
investments in real estate and related lease intangibles were as
follows:





Land
                
                
                Buildings and
                  Improvements
                
                
                Intangible
                  Lease Value
                
                
                In-Place
                  Lease Value
                
                
                Acquired Below-
                  Market LeasesInvestments
      in real estate
                
                $
                10,088,000
                
                
                $
                18,411,000
                
                
                $
                —
                
                
                $
                770,000
                
                
                $
                (154,000
                )Less:
      accumulated depreciation and amortization from continuing
      operations
                
                
                —
                
                
                
                (2,301,000
                )
                
                
                —
                
                
                
                (761,000
                )
                
                
                149,000Net
      investments in real estate and related lease intangibles from continuing
      operations
                
                
                10,088,000
                
                
                
                16,110,000
                
                
                
                —
                
                
                
                9,000
                
                
                
                (5,000
                )Net
      investments in real estate and related lease intangibles held for
      sale
                
                
                355,000
                
                
                
                1,265,000
                
                
                
                106,000
                
                
                
                —
                
                
                
                —$
                10,443,000
                
                
                $
                17,375,000
                
                
                $
                106,000
                
                
                $
                9,000
                
                
                $
                (5,000
                )





Depreciation
and amortization related to investments in real estate and related lease
intangibles for the three months ended September 30, 2010 and 2009 were $167,000
and $206,000, respectively. Depreciation and amortization related to investments
in real estate, real estate investment held for sale and related lease
intangibles for the nine months ended September 30, 2010 and 2009 were $511,000
and $614,000, respectively.





4.
            Allowance
      for Doubtful Accounts





Our
allowance for doubtful accounts was $319,000 and $190,000 as of September 30,
2010 and December 31, 2009, respectively.





5.
            Concentration
      of Credit Risks





Financial
instruments that potentially subject the Company to a concentration of credit
risk are primarily cash investments; cash is generally invested in
investment-grade short-term instruments. On July 21, 2010, President Obama
signed into law the sweeping financial regulatory reform act entitled the
“Dodd-Frank Wall Street Reform and Consumer Protection Act” that implements
far-reaching changes to the regulation of the financial services industry,
including provisions that made permanent the $250,000 limit for federal deposit
insurance and increase the cash limit of Securities Investor Protection
Corporation protection from $100,000 to $250,000, and provide unlimited federal
deposit insurance until January 1, 2013, for non-interest bearing demand
transaction accounts at all insured depository institutions. As of September 30,
2010 we had cash accounts in excess of FDIC insured limits. We believe this risk
is not significant.





As of
September 30, 2010, we owned four properties in the state of California, one
property in the state of Arizona and one property in the state of Illinois.
Accordingly, there is a geographic concentration of risk subject to fluctuations
in the states’ economy.





6.
            Commitments
      and Contingencies





We
monitor our properties for the presence of hazardous or toxic substances. While
there can be no assurance that a material environmental liability does not
exist, we are not currently aware of any environmental liability with respect to
the properties that would have a material effect on our financial condition,
results of operations and cash flows. Further, we are not aware of any
environmental liability or any unasserted claim or assessment with respect to an
environmental liability that we believe would require additional disclosure or
the recording of a loss contingency.





Our
commitments and contingencies include the usual obligations of real estate
owners and operators in the normal course of business. In the opinion of
management, these matters are not expected to have a material impact on our
condensed financial position, cash flows and results of operations. We are not
presently subject to any material litigation nor, to our knowledge, any material
litigation threatened against us which if determined unfavorably to us would
have a material adverse effect on our cash flows, financial condition or results
of operations.


11





7.
            Discontinued
      Operations




In
accordance with FASB ASC 360-10, Property, Plant &
Equipment, we report results of operations from real estate assets that
meet the definition of a component of an entity that have been sold, or meet the
criteria to be classified as held for sale, as discontinued operations. As of
March 1, 2010, we determined that the potential sale of Zenith Drive Centre to a
third party was probable, and accordingly, classified the property as held for
sale. Depreciation and amortization of Zenith Drive was not recorded for the
period of March 1, 2010 to September 30, 2010 in accordance with ASC 360-10. No
properties were sold during the three and nine months ended September 30, 2010
and 2009. We included all results of the discontinued operations in a separate
component of income on the Statements of Operations under the heading Net income
(loss) from discontinued operations. This treatment resulted in certain
reclassifications of 2009 financial statement amounts.




The
following is a summary of the components of income from discontinued operations
for the three and nine months ended September 30, 2010 and 2009:




Three Months Ended
                              September 30,
                            
                            
                            Nine Months Ended
                              September 30,2010
                            
                            
                            2009
                            
                            
                            2010
                            
                            
                            2009Rental
      revenues, tenant reimbursements and other income
                            
                            $
                            131,000
                            
                            
                            $
                            118,000
                            
                            
                            $
                            429,000
                            
                            
                            $
                            355,000Operating
      expenses and real estate taxes
                            
                            
                            75,000
                            
                            
                            
                            94,000
                            
                            
                            
                            273,000
                            
                            
                            
                            254,000Depreciation
      and amortization
                            
                            
                            —
                            
                            
                            
                            32,000
                            
                            
                            
                            15,000
                            
                            
                            
                            95,000Impairment
      of real estate
                            
                            
                            —
                            
                            
                            
                            1,216,000
                            
                            
                            
                            —
                            
                            
                            
                            1,216,000Net
      income (loss) from discontinued operation
                            
                            $
                            56,000
                            
                            
                            $
                            (1,224,000
                            )
                            
                            $
                            141,000
                            
                            
                            $
                            (1,210,000
                            )Net
      income (loss) from discontinued operation allocable to managing
      member
                            
                            $
                            6,000
                            
                            
                            $
                            (122,000
                            )
                            
                            $
                            14,000
                            
                            
                            $
                            (121,000
                            )Net
      income (loss) from discontinued operation allocable to unit
      holders
                            
                            $
                            50,000
                            
                            
                            $
                            (1,102,000
                            )
                            
                            $
                            127,000
                            
                            
                            $
                            (1,089,0000
                            )




A summary
of the property held for sale balance sheet information is as
follows:




September 30, 2010
                
                
                December 31, 2009Investments
      in real estateLand
                
                $
                355,000
                
                
                $
                355,000Buildings
      and improvements, net
                
                
                1,262,000
                
                
                
                1,265,000Intangible
      lease assets, net
                
                
                104,000
                
                
                
                106,000Property
      held for sale, net
                
                
                1,721,000
                
                
                
                1,726,000Other
      assetsTenant
      and other receivables, net
                
                
                47,000
                
                
                
                50,000Prepaid
      expenses and other assets
                
                
                5,000
                
                
                
                2,000Leasing
      commissions, net
                
                
                28,000
                
                
                
                22,000Non-real
      estate assets associated with property held for sale
                
                
                80,000
                
                
                
                74,000Total
      assets
                
                $
                1,801,000
                
                
                $
                1,800,000LiabilitiesAccounts
      payable, accrued liabilities and prepaid rent
                
                $
                45,000
                
                
                $
                42,000Real
      estate taxes payable
                
                
                190,000
                
                
                
                157,000Tenant
      security deposits
                
                
                60,000
                
                
                
                63,000Liabilities
      associated with property held for sale
                
                $
                295,000
                
                
                $
                262,000


12


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





The
following “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” should be read in conjunction with our financial
statements and notes thereto contained elsewhere in this report. This section
contains forward-looking statements, including estimates, projections,
statements relating to our business plans, objectives and expected operating
results, and the assumptions upon which those statements are based. These
forward-looking statements generally are identified by the words “believes,”
“project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,”
“may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and
similar expressions. Forward-looking statements are based on current
expectations and assumptions that are subject to risks and uncertainties which
may cause actual results to differ materially from the forward-looking
statements. Forward-looking statements that were true at the time made may
ultimately prove to be incorrect or false. We undertake no obligation to update
or revise publicly any forward–looking statements, whether as a result of new
information, future events or otherwise. All forward-looking statements should
be read in light of the risks identified in Part I, Item 1A of our annual report
on Form 10-K for the year ended December 31, 2009 as filed with the Securities
and Exchange Commission (“SEC”).





Overview




Our
revenues, which are comprised largely of rental income, include rents reported
on a straight-line basis over the initial term of the lease. Our growth depends,
in part, on our ability to (i) increase rental income and other earned income
from leases by increasing rental rates and occupancy levels; (ii) maximize
tenant recoveries given the underlying lease structures; and (iii) control
operating and other expenses. Our operations are impacted by property specific,
market specific, general economic and other conditions.




Market
Outlook – Real Estate and Real Estate Finance Markets




In recent
years, both the national and most global economies have experienced
substantially increased unemployment and a downturn in economic activity.
Despite certain recent positive economic indicators and improved stock market
performance, the aforementioned conditions, combined with low consumer
confidence, have resulted in an unprecedented global recession and continue to
contribute to a challenging economic environment that may delay the
implementation of our business strategy or force us to modify it.




As a
result of the decline in general economic conditions, the U.S. commercial real
estate industry has also experienced deteriorating fundamentals across all major
property types and most geographic markets. Tenant defaults have risen, while
demand for commercial real estate space is contracting, resulting in a highly
competitive leasing environment, downward pressure on both occupancy and rental
rates, and an increase in leasing incentives. Mortgage delinquencies and
defaults have trended upward, with many industry analysts predicting significant
credit defaults, foreclosures and principal losses.





From a
financing perspective, the severe dislocations and liquidity disruptions in the
credit markets have impacted both the cost and availability of commercial real
estate debt. The commercial mortgage-backed securities market, formerly a
significant source of liquidity and debt capital, was inactive during 2009 and
early 2010 that had left a void in the market for long-term, affordable,
fixed-rate debt. Though, recently there has been a gradual improvement in
capital market conditions, including new issuance of commercial mortgage-backed
securities debt. During that time the void in the commercial mortgage-backed
securities debt market was partially filled by portfolio lenders such as
insurance companies, but at very different terms than were available in the past
five years. These remaining lenders have generally increased credit spreads,
lowered the amount of available proceeds, required recourse security and credit
enhancements, and otherwise tightened underwriting standards considerably, while
simultaneously generally limiting lending to existing relationships with
borrowers that invest in high quality assets in top tier markets. In addition,
lenders have limited the amount of financing available to existing relationships
in an effort to manage and mitigate the risk of overconcentration in certain
borrowers.




The
factors discussed above have translated into declining real estate values and a
corresponding rise in required investment returns and capitalization rates.
Overall transaction activity has slowly increased during the last three quarters
as the gap between “ask” and “bid” has contracted; however, the volume is well
below that of two years ago.





The
market conditions that have and will likely continue to have a significant
impact on our real estate investments have also negatively impacted our tenants’
businesses. As a result, our tenants are finding it more difficult to meet
current lease obligations, forcing them to negotiate reduced rental rates upon
renewal in order for their businesses to remain viable. Lower lease rates and
increased rent concessions have resulted in lower current cash flow as compared
to the first nine months of 2009. Additional declines in rental rates, slower or
potentially negative net absorption of leased space and additional rental
concessions, including free rent, would result in additional future decreases in
cash flows.


13





Critical
Accounting Policies





Our
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”). The preparation of
these financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
financial statements and the reported amount of revenue and expenses during the
reporting period. Actual results could differ materially from those
estimates.





There
have been no material changes to our critical accounting policies as previously
disclosed in our Annual Report on Form 10-K for the year ended December 31,
2009, as filed with the SEC other than as described under Note 2 to the
accompanying condensed financial statements.





Results
of Operations





Results
of continuing operations for the three months and nine months ended September
30, 2010 and 2009 comprise five multi-tenant industrial business park properties
in two major metropolitan areas. On March 1, 2010, we determined that the
potential sale of Zenith Drive Centre to a third party was probable and
classified the property as held for sale. We have included all operating results
of the Zenith Drive Centre in a separate component of income on the Statements
of Operations under the heading net income (loss) from discontinued operations
for the three and nine months ended September 30, 2010 and 2009.





The
results of continuing operations for the three months and nine months ended
September 30, 2010 and 2009 are discussed below.





Three
months ended September 30, 2010 and 2009





Rental
revenues, tenant reimbursements and other income from continuing operations
decreased to approximately $707,000 for the three months ended September 30,
2010 from approximately $800,000 for the comparable period of 2009, primarily
due to higher vacancy, lower market lease rates and higher concessions to
attract and retain tenants as a result of the current economic environment.
These factors were partially offset by rental escalations for existing
tenants.





Property
operating and maintenance expenses from continuing operations increased to
approximately $213,000 for the three month period ended September 30, 2010 from
approximately $171,000 for the comparable period of 2009. The increase is
primarily due to increases in uncollectible accounts and repairs and maintenance
expenses.





Property
taxes from continuing operations for the three months ended September 30, 2010
were comparable to the corresponding period of 2009.





General
and administrative expenses from continuing operations increased to
approximately $59,000 for the three months ended from approximately $30,000 for
the comparable period of 2009. The increase is primarily due to timing of audit
and tax services partially offset by decreases in professional services
expenses.





Depreciation
and amortization expense for the three months ended September 30, 2010 was
comparable to the corresponding period of 2009.





Nine
months ended September 30, 2010 and 2009





Rental
revenues, tenant reimbursements and other income from continuing operations
decreased to approximately $2,149,000 for the nine months ended September 30,
2010 from approximately $2,415,000 for the comparable period of 2009, primarily
due to higher vacancy, lower market lease rates and higher concessions to
attract and retain tenants as a result of the current economic environment.
These factors were partially offset by rental escalations for existing
tenants.





Property
operating and maintenance expenses from continuing operations increased to
approximately $642,000 for the nine month period ended September 30, 2010 from
approximately $473,000 for the comparable period of 2009. The increase is
primarily due to increases in uncollectible accounts, refurbishment of vacant
space, and repairs and maintenance expenses.





Property
taxes from continuing operations for the nine months ended September 30, 2010
were comparable to the same period of 2009.





General
and administrative expenses increased to approximately $246,000 for the nine
months ended September 30, 2010 from approximately $197,000 for the comparable
period of 2009. The increase is primarily due to timing of audit and tax fee
services obligations offset by a decrease in other professional service fees.


14





Impairment
of real estate charges increased to approximately $560,000 for the nine months
ended September 30, 2010 from $0 in the comparable period in 2009 as a result of
a decline in the fair market value of one real estate property.





Depreciation
and amortization expenses from continuing operations decreased to approximately
$589,000 for the nine months ended September 30, 2010 from approximately
$620,000 for the comparable period of 2009. The decrease is due to a real estate
impairment loss recognized in December 31, 2009 and June 30, 2010, reducing the
depreciable basis, and the full amortization of intangible assets at two or our
properties.





Discontinued
Operations





During
the first quarter of 2010, we determined that the potential sale of Zenith Drive
Center to a third party was probable and classified the property as held for
sale in accordance with ASC 360-10, Property, Plant and Equipment.For the three months ended September 30, 2010, net income from
discontinued operations increased to approximately $56,000 from a net loss of
$1,224,000 for the comparable period of 2009. The increase is primarily due
toan impairment charge
of $1.2 million recognized during the third quarter of 2009, reducing
depreciable basis, and the full amortization of intangible assets of the
property. For the nine months ended September 30, 2010, net income increased to
$141,000 from a net loss of $1,210,000 for the comparable period of 2009. The
increase is primarily due toan impairment charge of $1.2 million recognized during the third quarter
of 2009, reducing depreciable basis, and the full amortization of intangible
assets of the property.





Liquidity
and Capital Resources





As of
September 30, 2010, we had approximately $1,050,000 in cash and cash
equivalents. We intend to use the existing cash balance for capital improvements
to the properties and to provide for operating reserves. Cash in excess of these
needs, if any, will be available for distribution to unit holders and to
repurchase units from unit holders.





Effective
April 27, 2010, our operating agreement was amended to allow the managing member
to cause us to incur debt financing, not to exceed ten percent of the capital
contributions of all unit holders, to meet our operating expenses or to fund
cash distributions declared and paid to members. To the extent that net cash
generated by the properties is not sufficient to meet operating costs and pay
cash distributions to our unit holders, we will endeavor to obtain financing or
sell selected properties so that we can continue to operate the remaining
properties and pay cash distributions. As of September 30, 2010, we had not
incurred any debt financings.





Item
3. Quantitative
and Qualitative Disclosures About Market Risk





We invest
our cash and cash equivalents in government-backed securities and money market
accounts, which, by their nature, are subject to interest rate fluctuations. As
of September 30, 2010, a 1% increase or decrease in interest rates would not
have a material effect on our interest income.





Item
4. Controls and Procedures





Disclosure
Controls and Procedures





We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and that such information is accumulated and communicated
to our senior management, as appropriate, to allow timely decisions regarding
required disclosure. The Chief Executive Officer and the Chief Financial Officer
at Cornerstone Ventures, Inc., the manager of our Managing Member, have
evaluated the effectiveness of our disclosure controls and procedures and have
concluded that the disclosure controls and procedures were effective as of the
end of the period covered by this report.  In designing and evaluating
the disclosure controls and procedures, management recognizes that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.





There
have been no changes in our internal control over financial reporting during our
most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.


15





PART
II - OTHER INFORMATION





Item
6. Exhibits





31.1
                    Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.31.2
                    Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.32
                    Certification
      of Chief Executive Officer and Chief Financial Officer Pursuant to 18
      U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
      of
2002.


16





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this quarterly report to be signed on its
behalf by the undersigned, thereunto duly authorized this 12th day of November
2010.





CORNERSTONE
      REALTY FUND, LLCBy:
            CORNERSTONE
      INDUSTRIAL PROPERTIES, LLCits
      Managing MemberBy:
            CORNERSTONE
      VENTURES, INC.its
      ManagerBy:
            /s/ TERRY G. ROUSSELTerry
      G. Roussel, President(Principal
      Executive Officer)By:
            /s/ SHARON C. KAISERSharon
      C. Kaiser,Chief
      Financial Officer(Principal
      Financial Officer andPrincipal
      Accounting Officer)


17