**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

**FORM 10-Q**

**(Mark One)**

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

**For the quarterly period ended****June 30, 2006**

**or**

**o****  TRANSITION REPORT PURSUANT TOSECTION 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**

(Exactname of registrant as specified in its charter)

| **CALIFORNIA**                                                  | ** ** | **33-0827161**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                            |       |                                  |
| **1920 MAIN STREET, SUITE 400,  IRVINE, CA**                    | ** ** | **92614**                             |
| (Address of principal executive offices)                        |       | (Zip Code)                            |

 

**949-852-1007**

(Registrant’stelephone number, including area code)

**Not Applicable**

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

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

x  Yes  o  No

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

Large accelerated filer o  Accelerated filer o  Non-accelerated filer x

 

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

x  Yes  o  No

 

 

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**PART I - FINANCIAL INFORMATION**
| **Item 1.      Financial Statements**                                                             | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                      | ** ** |
| **Cornerstone Realty Fund, LLC**                                                                                                |       |
| ** **                                                                                                                      |       |
| Condensed Balance Sheets  at June 30, 2006 (unaudited) and December 31, 2005                                                    |       |
|                                                                                                                            |       |
| Condensed  Statements of Operations for the Three and Six Months ended  June 30, 2006 (unaudited) and June 30, 2005 (unaudited) |       |
|                                                                                                                            |       |
| Condensed  Statements of Members’ Capital for the Six Months  ended June 30, 2006 (unaudited)                              |       |
|                                                                                                                            |       |
| Condensed  Statements of Cash Flows for the Six Months ended  June 30, 2006 (unaudited) and June 30, 2005 (unaudited)           |       |
|                                                                                                                            |       |
| Notes to  Condensed Financial Statements (unaudited)                                                                            |       |

 

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**CORNERSTONE REALTY FUND, LLC**

**(a California limited liability company)**

 

**CONDENSED BALANCE SHEETS**

 
| ** **                                                                                                                | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                | ** ** | **(unaudited)**             | ** ** | ** **                      | ** ** |
| **ASSETS**                                                                                                                |       |                        |       |                            |       |
|                                                                                                                      |       |                        |       |                            |       |
| Cash and cash  equivalents                                                                                                |       | $                           | 2,831,489  |                            | $          | 13,488,985 |   |
| Investments in real  estate                                                                                               |       |                        |       |                            |       |
| Land                                                                                                                      |       | 12,197,491                  |       | 8,297,490                       |       |
| Buildings, less  accumulated depreciation of $998,876 in 2006 and $717,262 in 2005.                                       |       | 24,579,885                  |       | 18,317,939                      |       |
| Intangible lease  value, less accumulated amortization of $62,868 in 2006 and $41,912 in 2005                             |       | 487,132                     |       | 508,088                         |       |
| Intangible  assets - in place lease value, less accumulated amortization of $465,215 in  2006 and $ $359,683 in 2005 |       | 428,926                     |       | 561,165                         |       |
|                                                                                                                      |       | 37,693,434                  |       | 27,684,682                      |       |
| Other assets                                                                                                              |       |                        |       |                            |       |
| Escrow deposits  and other costs                                                                                          |       | 8,720                       |       | 11,836                          |       |
| Tenant and other  receivables                                                                                             |       | 125,059                     |       | 205,792                         |       |
| Prepaid expenses                                                                                                          |       | 24,987                      |       | 14,371                          |       |
| Leasing  commissions, less accumulated amortization of $100,474 in 2006 and $55,113 in  2005                              |       | 176,779                     |       | 99,895                          |       |
| Total assets                                                                                                              |       | $                           | 40,860,468 |                            | $          | 41,505,561 |   |
|                                                                                                                      |       |                        |       |                            |       |
| **LIABILITIES  AND MEMBERS’ CAPITAL**                                                                                |       |                        |       |                            |       |
|                                                                                                                      |       |                        |       |                            |       |
| Liabilities                                                                                                               |       |                        |       |                            |       |
| Accounts payable  and accrued liabilities                                                                                 |       | $                           | 287,305    |                            | $          | 232,071 |   |
| Real estate  taxes payable                                                                                                |       | 282,603                     |       | 273,030                         |       |
| Tenant security  deposits                                                                                                 |       | 314,239                     |       | 239,385                         |       |
| Intangible lease  liability, less accumulated amortization of $5,588 in 2006                                              |       | 148,625                     |       | —                          |       |
| Total liabilities                                                                                                         |       | 1,032,772                   |       | 744,486                         |       |
|                                                                                                                      |       |                        |       |                            |       |
| Members’ capital  (100,000 units authorized and outstanding at 2006 and 2005)                                        |       | 39,827,696                  |       | 40,761,075                      |       |
| Total liabilities and members’ capital                                                                               |       | $                           | 40,860,468 |                            | $          | 41,505,561 |   |

 

Theaccompanying notes are an integral part of these interim financial statements.

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**CORNERSTONE REALTY FUND, LLC**

**(a California limited liability company)**

 

**CONDENSED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                            | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                            | ** ** | **2006**                         | ** ** | **2005**                       | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| Revenue                                               |       |                             |       |                           |       |   |   |   |   |
| Rental revenue                                        |       | $                                | 633,305    |                           | $          | 505,780 |   | $ | 1,222,126 |   | $ | 922,995 |   |
| Amortization of in-place leases                       |       | (40,075                          | )          | (60,416                        | )          | (99,944 | ) | (105,298 | ) |
| Tenant reimbursements and other income                |       | 168,740                          |       | 82,536                         |       | 310,516 |   | 143,271 |   |
|                                                  |       | 761,970                          |       | 527,901                        |       | 1,432,698 |   | 960,968 |   |
| Expenses                                              |       |                             |       |                           |       |   |   |   |   |
| Property operating and maintenance                    |       | 250,909                          |       | 131,031                        |       | 458,033 |   | 225,452 |   |
| Property taxes                                        |       | 135,853                          |       | 96,997                         |       | 294,245 |   | 177,101 |   |
| General and administrative                            |       | 136,403                          |       | 120,171                        |       | 287,833 |   | 154,936 |   |
| Depreciation and amortization                         |       | 180,254                          |       | 106,114                        |       | 347,930 |   | 200,742 |   |
|                                                  |       | 703,420                          |       | 454,313                        |       | 1,388,041 |   | 758,231 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| Operating income                                      |       | 58,550                           |       | 73,588                         |       | 44,657 |   | 202,737 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| Interest, dividends and other income                  |       | 137,639                          |       | 48,300                         |       | 268,290 |   | 80,950 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| Net income                                            |       | $                                | 196,189    |                           | $          | 121,888 |   | $ | 312,947 |   | $ | 283,687 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| Net income  allocable to managing member              |       | $                                | 19,619     |                           | $          | 12,189 |   | $ | 31,295 |   | $ | 28,369 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| Net income  allocable to unitholders                  |       | $                                | 176,570    |                           | $          | 109,699 |   | $ | 281,652 |   | $ | 255,318 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| Per unit  amounts:                                    |       |                             |       |                           |       |   |   |   |   |
| Basic and  diluted income allocable to unitholders    |       | $                                | 1.77       |                           | $          | 1.45 |   | $ | 2.82 |   | $ | 3.66 |   |
|                                                  |       |                             |       |                           |       |   |   |   |   |
| Basic and diluted  weighted average units outstanding |       | 100,000                          |       | 75,745                         |       | 100,000 |   | 69,714 |   |

 

Theaccompanying notes are an integral part of these interim financial statements.

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**CORNERSTONE REALTY FUND, LLC**

**(a California limited liabilitycompany)**

 

**CONDENSEDSTATEMENT OF MEMBERS’ CAPITAL**

**(Unaudited)**

 
| Balance,  December 31, 2005    |   | $          | 40,761,075 |   |
|--------------------------------|--------|------------|------------|--------|
|                           |   |       |       |
| Distributions to  unit holders |   | (1,246,326 | )          |
| Net Income                     |   | 312,947    |       |
|                           |   |       |       |
| Balance, June 30, 2006         |   | $          | 39,827,696 |   |

 

The accompanying notes are an integral part of theseinterim financial statements.

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**CORNERSTONE REALTY FUND, LLC**

**(a California limited liabilitycompany)**

 

**CONDENSEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                        | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                        | ** ** | **June 30,**              | ** ** |
| ** **                                                                        | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| OPERATING  ACTIVITIES                                                             |       |                           |       |   |   |
| Net Income                                                                        |       | $                              | 312,947    |   | $ | 283,687 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities |       |                           |       |   |   |
| Depreciation and amortization                                                     |       | 447,874                        |       | 306,039 |   |
| Changes in operating assets and liabilities                                       |       |                           |       | 184,067 |   |
| Other assets                                                                      |       | (49,014                        | )          |   |   |
| Accounts payable, accrued liabilities and security  deposits                      |       | 139,662                        |       | 177,040 |   |
|                                                                              |       |                           |       |   |   |
| Net cash  provided by operating activities                                        |       | 851,469                        |       | 950,833 |   |
|                                                                              |       |                           |       |   |   |
| INVESTING  ACTIVITIES                                                             |       |                           |       |   |   |
| Real estate  additions                                                            |       | (10,262,639                    | )          | (8,454,879 | ) |
|                                                                              |       |                           |       |   |   |
| Net cash used in  investing activities                                            |       | (10,262,639                    | )          | (8,454,879 | ) |
|                                                                              |       |                           |       |   |   |
| FINANCING  ACTIVITIES                                                             |       |                           |       |   |   |
| Contribution  from managing member                                                |       | —                         |       | 216,711 |   |
| Net proceeds from  offering                                                       |       | —                         |       | 12,289,145 |   |
| Distributions to  members                                                         |       | (1,246,326                     | )          | (731,635 | ) |
| Deferred  offering cost repaid to managing member                                 |       | —                         |       | (549,040 | ) |
|                                                                              |       |                           |       |   |   |
| Net cash  provided by (used in) financing activities                              |       | (1,246,326                     | )          | 11,225,181 |   |
|                                                                              |       |                           |       |   |   |
| Net increase  (decrease) in cash                                                  |       | (10,657,496                    | )          | 3,721,135 |   |
|                                                                              |       |                           |       |   |   |
| Cash and cash  equivalents at beginning of period                                 |       | 13,488,985                     |       | 11,793,822 |   |
| Cash and cash  equivalents at end of period                                       |       | $                              | 2,831,489  |   | $ | 15,514,957 |   |

 

The accompanying notes are an integral part of theseinterim financial statements.

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**CORNERSTONEREALTY FUND, LLC**

**(aCalifornia Limited Liability Company)**

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**(Unaudited)**

**1.**             Organization and Business

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

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

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

Our interim unaudited condensed financial statements have been preparedin accordance with accounting principles generally accepted in the United Statesfor interim financial information and in accordance with the rules andregulations of the Securities and Exchange Commission.  As permitted by the Securities and ExchangeCommission filing requirements for Form 10-Q, the condensed financialstatements do not include all of the information and footnotes required byaccounting principles generally accepted in the United States for completefinancial statements.  The condensedfinancial statements included herein should be read in conjunction with ourAnnual Report on Form 10-K for the year ended December 31, 2005.

The interim unaudited condensed financial statements have been preparedin accordance with  our customaryaccounting practices.  In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a presentation in accordance with accountingprinciples generally accepted in the United States have been included.  Operating results for the three and sixmonths ended June 30, 2006 are not necessarily indicative of the results thatmay be expected for the year ending December 31, 2006.

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

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

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

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

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

·                  NetIncome, as defined, is allocated first, 10% to the Managing Member and 90% tothe unitholders until Net Income allocated equals cumulative Net Losses, asdefined, previously allocated in such proportions; second, in proportion to andto the extent of Net Cash Flow from Operations and Net Sales Proceedspreviously distributed to the members, exclusive of distributions representinga return of Invested Capital Contributions; and then 50% to the Managing Memberand 50% to the unitholders.

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

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

**2.           ****Summary of SignificantAccounting Policies**

*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 reportingperiods.  Actual results could differmaterially from the estimates in the near term.

*Cash and Cash Equivalents*

Cash and cash equivalents consist primarily ofinterest-bearing investments with original maturities of 90 days or less at thedate of purchase.  Included in cash andcash equivalents at June 30, 2006 is $314,239 related to tenant securitydeposits.  The Company places its cashwith major financial institutions.  Attimes, cash balances may be in excess of amounts insured by Federalagencies.  Approximately $2,174,000 incash balances was in excess of federal deposit insurance at June 30, 2006.

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*Investmentsin Real Estate*

Investments in real estate are stated at cost andinclude land, buildings and building improvements.  Expenditures for ordinary maintenance andrepairs are expensed to operations as incurred. Significant replacements, betterments and tenant improvements improvingor extending the useful lives of the buildings are capitalized.  Generally, depreciation of the buildings andbuilding improvements is computed on a straight-line basis over their estimateduseful lives of 39 years and tenant improvements are depreciated over therelated lease term.

We evaluate the carrying value for investments inreal estate in accordance with Financial Accounting Standards Board (“FASB”)Statement No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets*(“FAS 144”).  FAS 144 requires that when events or changesin circumstances indicate that the carrying amount of the assets might not berecoverable, companies should evaluate the need for an impairmentwrite-down.  When an impairmentwrite-down is required, the related assets are adjusted to their estimated fairvalue.  No assets were deemed to beimpaired at June 30, 2006.

Inaccordance with Statements of Financial Accounting Standard (“SFAS”) No. 141, *Business Combinations* and SFAS No. 142, *Goodwill andOther Intangible Assets*, we record at acquisition an intangibleasset or liability for the value attributable to in-place leases.  We amortize the value attributable toin-place leases over the initial term of the respective leases. The estimateduseful life of the leases ranges from one month to five years. The accumulatedamortization associated with the lease intangibles of our properties was$533,671 at June 30, 2006.

Anticipated amortization for the periodfrom July 1 through December 31, 2006 and for each of the four following yearsended December 31 is as follows:

|                     | ** **         | **Lease  Intangibles** | ** ** |
|---------------------|--------------------|------------------------|------------|
| July 1, 2006 – | December 31,  2006 |                   | $          | 53,115 |   |
|                | 2007               |                   | 92,898     |   |
|                | 2008               |                   | 81,583     |   |
|                | 2009               |                   | 49,117     |   |
|                | 2010               |                   | 3,588      |   |
|                     |                    |                        |            |  |  |

 

As of June 30, 2006,accumulated depreciation and amortization related to real estate assets andrelated lease intangibles were as follows:
| ** **                           | ** ** | **Buildings and  Improvements** | ** ** | **Intangible  Lease Value** | ** ** | **In-Place Lease  Value** | ** ** | **Acquired  Below-Market  Leases** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|------------------------------------|------------|
| Cost                                 |       | $                                    | 25,578,761 |                             | $          | 550,000                        |       | $                                  | 894,141    |   | $ | 154,213 |   |
|                                 |       |                                 |       |                             |       |                           |       |                               |       |
| Less: depreciation  and amortization |       | (998,876                             | )          | (62,868                          | )          | (465,215                       | )          | (5,588                             | )          |
| Net                                  |       | $                                    | 24,579,885 |                             | $          | 487,132                        |       | $                                  | 428,926    |   | $ | 148,625 |   |

 

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*LeasingCommissions*

Leasing commissions are stated at cost and amortizedon a straight-line basis over the related lease term.  As of June 30, 2006, we had recorded $277,253in leasing commissions.  The unamortizedportion of this asset was $176,779 at June 30, 2006.

*Revenue Recognition*

Rental revenues are recorded on an accrual basis asthey are earned over the lives of the respective tenant leases on astraight-line basis.  Included in thiscalculation are contractual rent increases and amounts paid to tenants astenant improvement allowances.  Rentalreceivables are periodically evaluated for collectibility.

*Fair Valueof Financial Instruments*

We believe that the recorded values of all financialinstruments approximate their current values.

*Income Tax Matters*

It is our intent we be treated as a partnership forincome tax purposes.  As a limitedliability company, we are subject to certain minimal taxes and fees, includingstate income taxes on limited liability companies; however, income taxes on theincome or losses we realize are generally the obligation of the members.

*Concentrationof Credit Risk*

We maintain some of our cashin money market accounts.  No losses havebeen experienced related to such amounts.

**3.             Investments in Real Estate**

On September 27,2002, we acquired an existing multi-tenant industrial business park known asNormandie Business Center, located in Torrance, California for $3,901,696.  Normandie Business Center consists of twosingle-story buildings containing a total of approximately 48,711 leasablesquare feet.

On December 27,2002, we acquired an existing multi-tenant industrial business park known asthe Sky Harbor Business Park, located in Northbrook, Illinois for$2,553,996.  Sky Harbor Business Parkconsists of a single-story building containing a total of approximately 41,422leasable square feet.

On December 10, 2003, we acquired an existing multi-tenant industrialpark known as Arrow Business Center located in Irwindale, California for$5,910,579.  The property consists ofthree single-story buildings containing a total of approximately 69,592leasable square feet.

On January 25, 2005, we purchased an existing multi-tenantindustrial park known as Zenith Drive Centre located in Glenview, Illinois foran investment of $5,327,256.  Theproperty is a single-story, three building property consisting of approximately37,900 leasable square feet.  Included inthe acquisition and purchase price of Zenith Drive Centre were a billboard signand cellular relay antenna located on the property leased to a large mediacompany and communications company, respectively.  We separately valued these leases and theresulting amounts are included in intangible lease value.  The value of these leases is amortized overtheir remaining respective terms.

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On April 28, 2005, we purchased an existing multi-tenant industrialpark known as Paramount Business Center located in Paramount, California, foran investment of $3,149,410.  ParamountBusiness Center is a single-story two building property of approximately 30,157(unaudited) square feet.

On September 30, 2005, we purchased an existing multi-tenant industrialpark in Tempe, Arizona, near the Phoenix airport, for an investment of$7,518,714.  This property consists offour buildings totaling approximately 83,205 square feet of leasable space.

On June 30, 2006,we purchased an existing multi-tenant industrial park known as Shoemaker IndustrialPark located in Santa Fe Springs, California for an investment of$9,946,433.  The property consists ofapproximately 86,084 square feet of leasable space in three single-storybuildings.

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

**4.****                                     ****Related Party Transactions**

We reimbursed our Managing Member specificincremental costs incurred in connection with the offering of our membershipunits, limited to 4% of the gross proceeds of our offering.  During the six months ended June 30, 2005, wereimbursed our Managing Member for $549,040 of these costs.  At December 31, 2005, we had fullyrepaid all offering costs incurred by Managing Member.

During the six months ended June 30, 2005, our Managing Member funded$216,711 to subsidize our distribution of $731,635 to the unit holders.  We are not obligated to reimburse ourManaging Member for this funding contribution.

Our Managing Member and/or its affiliates were entitled to receivevarious fees, compensation and reimbursements in connection with the offeringof our membership units, including commissions of 7%, marketing fees of 2% ofgross proceeds from the offering of units, and expense allowances of 1.5% ofgross proceeds from the offering of units. During the six months ended June 30,2006 and 2005, the total fees, compensation and reimbursements were $0 and$1,441,755, respectively.

**5.****                                      Commitmentsand Contingencies**

In accordance with the terms of the our OperatingAgreement, any of the funds raised in our public offering that have not beeninvested in properties or designated for specific reserves within one year ofthe completion of the offering would be distributed to our unitholders. At June30, 2006, all available funds have been invested or reserved for specificproperty improvements.

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

The following “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” should be read in conjunction with ourfinancial statements and notes thereto contained elsewhere in this report.  Certain statements in this section andelsewhere contain forward-looking statements within the meaning of the PrivateSecurities Litigation Reform Act of 1995. Such forward-looking statements may relate to risks and other factorsthat may cause our future results of operations to be materially different thanthose expressed or implied herein.  Someof these risks and other factors include, but are not limited to:  (i) no assurance that our properties will continueto experience the current

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level of occupancy; (ii) tenants may not be able tomeet their financial obligations; (iii) rental revenues from the properties maynot be sufficient to meet our cash requirements for operations, capitalrequirements and distributions; and (iv) adverse changes to the general economymay disrupt operations.

# **Results of Operations**

As of June 30 2006, we had purchased seven multi-tenant industrialbusiness park properties in three major metropolitan areas.  The properties were purchased in September2002, December 2002, December 2003, January, April and September 2005 and June2006. The 2006 results reflect a full six months of operations for all sixproperties purchased before 2006. Results for 2005 reflect a full six months of operations from only threeproperties.

*Threemonths ended June 30, 2006 and 2005*

Revenue for the second quarter of 2006 increased to $761,970 from$527,901 for the comparable period of 2005. The increase was due primarily to the properties purchased during thefirst half of 2005.

Property operating and maintenance expenses increased to $250,909 in2006 from $131,031 in 2005.  Thisincrease was the result of the addition of properties as well as refurbishmentat several properties in the 2006 quarter. Property taxes increased to $135,853 in 2006 from $96,997 in 2005 due tothe addition of the new properties.

General and administrative costs increased to $136,403 in the secondquarter of 2006 from $120,171 in the comparable quarter of 2005.  The increase was due to non-recurringconsulting fees. Depreciation and amortization increased to $180,254 in the2006 quarter from $106,114 in the 2005 quarter as a result of the addition ofproperties.

Interest and other income increased to $137,639 for the three monthsended June 30, 2006 from $48,300 for the same period of 2005 due to higher theshort-term interest rates earned on invested cash.

*Six months ended June 30, 2006 and 2005*

Revenue for the second half of 2006 increased to $1,432,698 from$960,968 for the comparable period of 2005. The increase was due primarily to the properties purchased during thefirst half of 2005.

Property operating and maintenance expenses increased to $458,033 in2006 from $225,452 in 2005.  Thisincrease was the result of the addition of the new properties as well as nonrecurring repairs and maintenance and refurbishment at several properties inthe 2006 period.  Property taxesincreased to $294,245 in 2006 from $177,101 in 2005 due to the addition of thenew properties and a re-assessment of one property acquired in 2005.

General and administrative costs increased to $287,833 in the firsthalf of 2006 from $154,936 in the comparable period of 2005.  The increase was due to higher professionalfees including tax, auditing, legal and non-recurring consulting fees.  Depreciation and amortization increased to$347,930 in the first half of 2006 from $200,742 in the first half of 2005 as aresult of the addition of properties.

Interest and other income increased to $268,920 for the six monthsended June 30, 2006 from $80,950 for the same period of 2005 due to higher theshort-term interest rates earned on invested cash.

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**Liquidityand Capital Resources**

Our planned $50,000,000 equity offering is nowcomplete and we do not expect to raise any additional funds. We intend to usethe existing cash balance for, capital improvements to the properties and foroperating expenses and reserves.

We expect to meet our short-term liquidity requirements from net cashgenerated by operations, which we believe will be adequate to meet operatingcosts, and allow for cash distributions to the unitholders.  However, current net cash generated byoperations is not expected to be sufficient to fund distributions tounitholders at an annual rate of 5%.

**Item 3.    Quantitative and Qualitative Disclosures About Market Risk**

We invest our cash and cash equivalents in FDIC insured savings andmoney market accounts, which, by their nature, are subject to interest ratefluctuations.

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**Item 4.     Controls andProcedures**

Our disclosure controls and procedures are designed to ensure thatinformation required to be disclosed in reports we file or submit under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in the rules and forms of the Securitiesand Exchange Commission and that such information is accumulated andcommunicated to our management, as appropriate, to allow timely decisionsregarding required disclosure.  The ChiefExecutive Officer and the Chief Financial Officer of CornerstoneVentures, Inc., the manager of our Managing Member, have reviewed theeffectiveness of our disclosure controls and procedures and have concluded thatthe disclosure controls and procedures were effective as of the end of theperiod covered by this report.

We are in the process of developing and implementing a formal set ofinternal controls and procedures for financial reporting as required by theSarbanes-Oxley Act of 2002, the efficacy of the steps we have taken to date andsteps we are still in the process of completing is subject to continuedmanagement review supported by confirmation and testing by management and byour auditors.  We anticipate that additional changes may be made to ourinternal controls and procedures.  Other than the foregoing initiatives,no change in our internal control over financial reporting occurred during theperiod covered by this report that has materially affected, or is reasonablylikely to affect, our internal control over financial reporting.

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

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**PART II - OTHER INFORMATION**

**Item 6.              Exhibits**

31.1                    Certification of Chief Executive Officer pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

31.2                    Certification of Chief Financial Officer pursuant to Section 302 of theSarbanes-Oxley Act of 2002.

32                             Certification of Chief Executive Officer andChief Financial Officer Pursuant to 18 U.S.C. §1350, as Adopted Pursuant toSection 906 of the Sarbanes-Oxley Act of 2002.

**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this quarterly report to be signed on itsbehalf by the undersigned, thereunto duly authorized this.11th day of August.
|   | CORNERSTONE REALTY FUND, LLC |
|--------|------------------------------|
|   |                         |   |
|   | By:                          | CORNERSTONE INDUSTRIAL PROPERTIES, LLC |
|   |                         | its Managing  Member |
|   |                         |   |
|   |                         | By: | CORNERSTONE VENTURES, INC. |
|   |                         |   | its Manager |
|   |                         |   |   |
|   |                         |   | By: | /s/ TERRY G.  ROUSSEL |   |
|   |                         |   |   | Terry G.  Roussel, President |
|   |                         |   |   | (Principal  Executive Officer) |
|   |                         |   |   |   |
|   |                         |   | By: | /s/ SHARON C. KAISER |   |
|   |                         |   |   | Sharon C.  Kaiser, |
|   |                         |   |   | Chief Financial  Officer |
|   |                         |   |   | (Principal Financial  Officer and |
|   |                         |   |   | Principal  Accounting Officer) |

 

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