**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

**FORM 10-Q**
| **(Mark One)**                                                                                                                                                                                                               |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                   |
| **x**                                                                                                                                                                                                                        | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                   | ** ** | ** ** |
| **For the quarterly period ended September****30, 2006**                                                                                                                                                                     |
| ** **                                                                                                                                                                                                                   |
| **or**                                                                                                                                                                                                                       |
| ** **                                                                                                                                                                                                                   |   |   |
| **o**                                                                                                                                                                                                                        | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                   | ** ** | ** ** |
| **For the transition period from                                  to** |

 

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

**CORNERSTONEREALTY FUND, LLC******(Exact name of registrant asspecified 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, ifchanged since last report)

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

x  Yes  o  No

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

Large accelerated filer o  Accelerated filer o  Non-acceleratedfiler x

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

o  Yes  x  No

 

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| **PART I.**  | ** ** | **FINANCIAL INFORMATION**                                                                   | ** ** | ** ** |
|-------------------|------------|---------------------------------------------------------------------------------------------|------------|------------|
|              |       |                                                                                        |       |       |
| Item 1.      |       | Financial Statements:                                                                       |       |       |
|              |       | Condensed Balance  Sheets at September 30, 2006 (unaudited) and December 31, 2005           |       |       |
|              |       |                                                                                        |       |       |
|              |       | Condensed  Statements of Operations for the Three and Nine Months ended                     |       |       |
|              |       | September 30,  2006 (unaudited) and September 30, 2005 (unaudited)                          |       |       |
|              |       |                                                                                        |       |       |
|              |       | Condensed  Statements of Members’ Capital for the Nine Months                          |       |       |
|              |       | ended  September 30, 2006 (unaudited)                                                       |       |       |
|              |       |                                                                                        |       |       |
|              |       | Condensed  Statements of Cash Flows for the Nine Months ended                               |       |       |
|              |       | September 30,  2006 (unaudited) and September 30, 2005 (unaudited)                          |       |       |
|              |       |                                                                                        |       |       |
|              |       | Notes to Condensed Financial Statements (unaudited)                                         |       |       |
|              |       |                                                                                        |       |       |
| Item 2.      |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations |       |       |
| Item 3.      |       | Quantitative and Qualitative Disclosure About Market  Risk                                  |       |       |
| Item 4.      |       | Controls and Procedures                                                                     |       |       |
|              |       |                                                                                        |       |       |
| **PART II.** | ** ** | **OTHER  INFORMATION**                                                                      | ** ** | ** ** |
|              |       |                                                                                        |       |       |
| Item 6.      |       | Exhibits                                                                                    |       |       |
|              |       |                                                                                        |       |       |
| SIGNATURES        |       |                                                                                        |       |       |

 

2

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**CORNERSTONE REALTY FUND,LLC**

**(a California limited liability company)**

**CONDENSED BALANCE SHEETS**

**(Unaudited)**
| ** **                                                                                                         | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
|                                                                                                               |       |                             |       |                            |       |
| **ASSETS**                                                                                                         |       |                             |       |                            |       |
|                                                                                                               |       |                             |       |                            |       |
| Cash and cash  equivalents Investments in real estate                                                              |       | $                                | 2,646,577  |                            | $          | 13,488,985 |   |
| Land                                                                                                               |       | 12,197,490                       |       | 8,297,490                       |       |
| Buildings, less  accumulated depreciation of $1,196,518 in 2006 and $717,262 in 2005.                              |       | 24,460,944                       |       | 18,317,939                      |       |
| Intangible lease  value, less accumulated amortization of $73,346 in 2006 and $41,912 in 2005                      |       | 476,654                          |       | 508,088                         |       |
| Intangible  assets - in place lease value, less accumulated amortization of $515,175 in  2006 and $359,683 in 2005 |       | 378,966                          |       | 561,165                         |       |
|                                                                                                               |       | 37,514,054                       |       | 27,684,682                      |       |
| Other assets                                                                                                       |       |                             |       |                            |       |
| Deposits and  other costs                                                                                          |       | 9,499                            |       | 11,836                          |       |
| Tenant and other  receivables                                                                                      |       | 154,217                          |       | 205,792                         |       |
| Prepaid expenses                                                                                                   |       | 16,940                           |       | 14,371                          |       |
| Leasing  commissions, less accumulated amortization of $122,728 in 2006 and $55,113 in  2005                       |       | 213,784                          |       | 99,895                          |       |
|                                                                                                               |       |                             |       |                            |       |
| Total assets                                                                                                       |       | $                                | 40,555,071 |                            | $          | 41,505,561 |   |
|                                                                                                               |       |                             |       |                            |       |
| **LIABILITIES  AND MEMBERS’ CAPITAL**                                                                         |       |                             |       |                            |       |
|                                                                                                               |       |                             |       |                            |       |
| Liabilities                                                                                                        |       |                             |       |                            |       |
| Accounts payable  and accrued liabilities                                                                          |       | $                                | 291,476    |                            | $          | 232,071 |   |
| Real estate  taxes payable                                                                                         |       | 345,564                          |       | 273,030                         |       |
| Tenant security  deposits                                                                                          |       | 328,859                          |       | 239,385                         |       |
| Intangible lease  liability, less accumulated amortization of $27,011 in 2006                                      |       | 127,202                          |       | —                          |       |
| Total liabilities                                                                                                  |       | 1,093,101                        |       | 744,486                         |       |
|                                                                                                               |       |                             |       |                            |       |
| Members’ capital  (100,000 units authorized and and outstanding at 2006 and 2005)                             |       | 39,461,970                       |       | 40,761,075                      |       |
|                                                                                                               |       |                             |       |                            |       |
| Total liabilities and  members’ capital                                                                       |       | $                                | 40,555,071 |                            | $          | 41,505,561 |   |

 

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

3

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**CORNERSTONE REALTY FUND,LLC**

**(a California limited liability company)**

**CONDENSED STATEMENTS OF OPERATIONS**

**(Unaudited)**
| ** **                                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                            | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                            | ** ** | **2006**                         | ** ** | **2005**                        | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Revenue                                               |       |                             |       |                            |       |   |   |   |   |
| Rental revenue                                        |       | $                                | 891,558    |                            | $          | 522,740 |   | $ | 2,113,684 |   | $ | 1,445,735 |   |
| Amortization of in-place leases                       |       | (49,960                          | )          | (52,980                         | )          | (149,904 | ) | (158,278 | ) |
| Tenant reimbursements and other income                |       | 157,571                          |       | 64,980                          |       | 468,086 |   | 208,251 |   |
|                                                  |       | 999,168                          |       | 534,740                         |       | 2,431,866 |   | 1,495,708 |   |
| Expenses                                              |       |                             |       |                            |       |   |   |   |   |
| Property operating and maintenance                    |       | 217,257                          |       | 124,583                         |       | 675,290 |   | 350,035 |   |
| Property taxes                                        |       | 225,945                          |       | 88,624                          |       | 520,190 |   | 265,725 |   |
| General and administrative                            |       | 86,180                           |       | 94,101                          |       | 374,013 |   | 249,037 |   |
| Depreciation and amortization                         |       | 230,375                          |       | 121,672                         |       | 578,305 |   | 322,414 |   |
|                                                  |       | 759,757                          |       | 428,980                         |       | 2,147,798 |   | 1,187,211 |   |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Operating income                                      |       | 239,411                          |       | 105,760                         |       | 284,068 |   | 308,497 |   |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Interest, dividends and other income                  |       | 18,150                           |       | 92,170                          |       | 286,440 |   | 173,120 |   |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Net income                                            |       | $                                | 257,561    |                            | $          | 197,930 |   | $ | 570,508 |   | $ | 481,617 |   |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Net income  allocable to managing member              |       | $                                | 25,756     |                            | $          | 19,793 |   | $ | 57,051 |   | $ | 48,162 |   |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Net income  allocable to unitholders                  |       | $                                | 231,805    |                            | $          | 178,137 |   | $ | 513,457 |   | $ | 433,455 |   |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Per unit  amounts:                                    |       |                             |       |                            |       |   |   |   |   |
| Basic and  diluted income allocable to unitholders    |       | $                                | 2.32       |                            | $          | 1.84 |   | $ | 5.13 |   | $ | 5.50 |   |
|                                                  |       |                             |       |                            |       |   |   |   |   |
| Basic and diluted  weighted average units outstanding |       | 100,000                          |       | 96,609                          |       | 100,000 |   | 78,778 |   |

 

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

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**CORNERSTONE REALTY FUND, LLC**

**(a California limited liability company)**

**CONDENSED STATEMENT OF MEMBERS’ CAPITAL**

**(Unaudited)**
| Balance,  December 31, 2005    |   | $          | 40,761,075 |   |
|--------------------------------|--------|------------|------------|--------|
|                           |   |       |       |
| Distributions to  unit holders |   | (1,869,613 | )          |
| Net Income                     |   | 570,508    |       |
|                           |   |       |       |
| Balance, September 30,  2006   |   | $          | 39,461,970 |   |

 

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

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**CORNERSTONE REALTY FUND,LLC**

**(a California limited liability company)**

**CONDENSED STATEMENTS OF CASH FLOWS**

**(Unaudited)**
| ** **                                                                        | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                        | ** ** | **September 30,**          | ** ** |
| ** **                                                                        | ** ** | **2006**                        | ** ** | **2005** | ** ** |
| OPERATING  ACTIVITIES                                                             |       |                            |       |   |   |
| Net income                                                                        |       | $                               | 570,508    |   | $ | 481,617 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities |       |                            |       |   |   |
| Depreciation and amortization                                                     |       | 706,786                         |       | 480,692 |   |
| Changes in operating assets and liabilities                                       |       |                            |       |   |   |
| Other assets                                                                      |       | (130,162                        | )          | 76,789 |   |
| Accounts payable, accrued liabilities and security  deposits                      |       | 221,413                         |       | 406,682 |   |
|                                                                              |       |                            |       |   |   |
| Net cash  provided by operating activities                                        |       | 1,368,545                       |       | 1,445,780 |   |
|                                                                              |       |                            |       |   |   |
| INVESTING  ACTIVITIES                                                             |       |                            |       |   |   |
| Real estate  acquisitions                                                         |       | (10,341,340                     | )          | (16,063,609 | ) |
|                                                                              |       |                            |       |   |   |
| Net cash used in  investing activities                                            |       | (10,341,340                     | )          | (16,063,609 | ) |
|                                                                              |       |                            |       |   |   |
| FINANCING  ACTIVITIES                                                             |       |                            |       |   |   |
| Contribution  from managing member                                                |       | —                          |       | 412,035 |   |
| Net proceeds  from offering                                                       |       | —                          |       | 18,286,508 |   |
| Distributions to  members                                                         |       | (1,869,613                      | )          | (1,204,376 | ) |
| Deferred  offering cost repaid to managing member                                 |       | —                          |       | (819,580 | ) |
|                                                                              |       |                            |       |   |   |
| Net cash  provided by (used in) financing activities                              |       | (1,869,613                      | )          | 16,674,587 |   |
|                                                                              |       |                            |       |   |   |
| Net increase  (decrease) in cash                                                  |       | (10,842,408                     | )          | 2,056,758 |   |
|                                                                              |       |                            |       |   |   |
| Cash and cash  equivalents at beginning of period                                 |       | 13,488,985                      |       | 11,793,822 |   |
|                                                                              |       |                            |       |   |   |
| Cash and cash  equivalents at end of period                                       |       | $                               | 2,646,577  |   | $ | 13,850,580 |   |

 

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

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**CORNERSTONEREALTY FUND, LLC**

**(aCalifornia Limited Liability Company)**

**NOTES TOCONDENSED FINANCIAL STATEMENTS**

**(Unaudited)**

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

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

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

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

Our interimunaudited condensed financial statements have been prepared in accordance withaccounting principles generally accepted in the United States for interimfinancial information and in accordance with the rules and regulations of theSecurities and Exchange Commission.  Aspermitted by the Securities and Exchange Commission filing requirements forForm 10-Q, the condensed financial statements do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.  The condensed financial statements includedherein should be read in conjunction with our Annual Report on Form 10-K forthe year ended December 31, 2005.

The interimunaudited condensed financial statements have been prepared in accordancewith  our customary accountingpractices.  In the opinion of management,all adjustments (consisting of normal recurring accruals) considered necessaryfor a presentation in accordance with accounting principles generally acceptedin the United States have been included. Operating results for the three and nine months ended Septermber 30,2006 are not necessarily indicative of the results that may be expected for theyear ending December 31, 2006.

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

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

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

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

·                  NetSales Proceeds, as defined, will be distributed first, 100% to the unitholdersin an amount equal to their Invested Capital Contributions; then, 90% to theunitholders and 10% to the Managing Member until the

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unitholders have received an amount equal to theunpaid balance of their aggregate cumulative, non-compounded annual return ontheir Invested Capital Contributions; and thereafter, 50% to the unitholdersand 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 ofSignificant Accounting Policies**

*Useof Estimates*

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

*Cashand Cash Equivalents*

Cashand cash equivalents consist primarily of interest-bearing investments withoriginal maturities of 90 days or less at the date of purchase.  Included in cash and cash equivalents atSeptember 30, 2006 is $328,859 related to tenant security deposits.  The Company places its cash with majorfinancial institutions.  At times, cashbalances may be in excess of amounts insured by Federal agencies.  Approximately $343,542 in cash balances wasin excess of federal deposit insurance at September 30, 2006.

*Investmentsin Real Estate*

Investmentsin real estate are stated at cost and include land, buildings and buildingimprovements.  Expenditures for ordinarymaintenance and repairs are expensed to operations as incurred.  Significant replacements, betterments andtenant improvements improving or extending the useful lives of the buildingsare capitalized.  Generally, depreciationof the buildings and building improvements is computed on a straight-line basisover their estimated useful lives of 39 years and tenant improvements aredepreciated over the shorter of the useful life or the  related lease term.

Weevaluate the carrying value for investments in real estate in accordance withFinancial Accounting Standards Board (“FASB”) Statement No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets*(“FAS 144”). FAS 144 requires that when events or changes in circumstances indicatethat the carrying amount of the assets might not be recoverable, companiesshould evaluate the need for an impairment write-down.  When an impairment write-down is required,the related assets are adjusted to their estimated fair value.  No assets were deemed to be impaired atSeptember 30, 2006.

Inaccordance with Statements of Financial Accounting Standard (“SFAS”) No. 141, *Business Combinations* and SFAS No. 142, *Goodwill and Other Intangible Assets*, werecord at acquisition an intangible asset or liability for the valueattributable to in-place leases.  Weamortize the value attributable to in-place leases over the initial term of therespective leases. The estimated useful life of the leases ranges from onemonth to five years. The accumulated amortization associated with the leaseintangibles of our properties was $488,164 at September 30, 2006.

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Anticipated amortization for the period from October 1through December 31, 2006 and for each of the four following years endedDecember 31 is as follows:

|                    | ** ** | ** **         | ** ** | **Lease**       | ** ** |
|--------------------|------------|--------------------|------------|-----------------|------------|
| ** **         | ** ** | ** **         | ** ** | **Intangibles** | ** ** |
| Oct 1, 2006 – |       | December  31, 2006 |       | $               | 24,588     |   |
|               |       | 2007               |       | 92,898          |       |
|               |       | 2008               |       | 81,583          |       |
|               |       | 2009               |       | 49,117          |       |
|               |       | 2010               |       | 3,588           |       |
|                    |            |                    |            |                 |            |  |

 

As of September30, 2006, accumulated depreciation and amortization related to real estate assetsand related lease intangibles were as follows:

|                                      | ** ** | **Buildings and  Improvements** | ** ** | **Intangible  Lease Value** | ** ** | **In-Place Lease  Value** | ** ** | **Acquired  Below-Market  Leases** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|------------------------------------|------------|
| Cost                                 |       | $                                    | 25,657,462 |                             | $          | 550,000                        |       | $                                  | 894,141    |   | $ | 154,213 |   |
|                                 |       |                                 |       |                             |       |                           |       |                               |       |
| Less:  depreciation and amortization |       | (1,196,518                           | )          | (73,346                          | )          | (515,175                       | )          | (27,011                            | )          |
| Net                                  |       | $                                    | 24,460,944 |                             | $          | 476,654                        |       | $                                  | 378,966    |   | $ | 127,202 |   |

 

*Leasing Commissions*

Leasingcommissions are stated at cost and amortized on a straight-line basis over therelated lease term.  As of September 30,2006, we had recorded $336,512 in leasing commissions.  The unamortized portion of this asset was$213,784 at September 30, 2006.

*RevenueRecognition*

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

*Fair Value of Financial Instruments*

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

*IncomeTax Matters*

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

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*Concentration of Credit Risk*

We maintain some of our cash in money marketaccounts.  No losses have beenexperienced related to such amounts.

**3.****                                      Investmentsin Real Estate**

OnJanuary 25, 2005, we purchased an existing multi-tenant industrial parkknown as Zenith Drive Centre located in Glenview, Illinois for an investment of$5,327,256.  The property is asingle-story, three building property consisting of approximately 37,900leasable square feet.  Included in theacquisition and purchase price of Zenith Drive Centre were a billboard sign andcellular relay antenna located on the property leased to a large media companyand communications company, respectively. We separately valued these leases and the resulting amounts are includedin intangible lease value.  The value ofthese leases is amortized over their remaining respective terms.

On April 28, 2005,we purchased an existing multi-tenant industrial park known as ParamountBusiness Center located in Paramount, California, for an investment of$3,149,410.  Paramount Business Center isa single-story two building property of approximately 30,157 (unaudited) squarefeet.

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

On June 30, 2006,we purchased an existing multi-tenant industrial park known as ShoemakerIndustrial Park 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 spacein the properties is generally leased to tenants under lease terms that providefor the tenants to pay increases in operating expenses in excess of specifiedamounts.

**4.****                                      Related PartyTransactions**

Wereimbursed our Managing Member specific incremental costs incurred inconnection with the offering of our membership units, limited to 4% of thegross proceeds of our offering.  During thenine months ended September 30, 2005, we reimbursed our Managing Member for$819,580 of these costs.  AtDecember 31, 2005, we had fully repaid all offering costs incurred byManaging Member.

During the ninemonths ended September  30, 2005, ourManaging Member funded $412,035 to subsidize our distribution of 1,204,376 tothe unit holders.  We are not obligatedto reimburse our Managing Member for this funding contribution.

Our ManagingMember and/or its affiliates were entitled to receive various fees, compensationand reimbursements in connection with the offering of our membership units,including commissions of 7%, marketing fees of 2% of gross proceeds from theoffering of units, and expense allowances of 1.5% of gross proceeds from theoffering of units. During the nine months ended September 30, 2006 and 2005,the total fees, compensation and reimbursements were $0 and $2,164,993,respectively.

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

Inaccordance with the terms of the our Operating Agreement, any of the fundsraised in our public offering that have not been invested in properties ordesignated for specific reserves within one year of the completion of theoffering would be distributed to our unitholders. At September 30, 2006, allavailable funds have been invested or reserved for specific propertyimprovements.

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

The following “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” shouldbe read in conjunction with our financial statements and notes theretocontained elsewhere in this report. Certain statements in this section and elsewhere contain forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995.  Such forward-looking statementsmay relate to risks and other factors that may cause our future results ofoperations to be materially different than those expressed or implied herein.  Some of these risks and other factorsinclude, but are not limited to:  (i) noassurance that our properties will continue to experience the current level ofoccupancy; (ii) tenants may not be able to meet their financial obligations;(iii) rental revenues from the properties may not be sufficient to meet ourcash requirements for operations, capital requirements and distributions; and(iv) adverse changes to the general economy may disrupt operations.

# **Resultsof Operations**

As of September30, 2006, we had purchased seven multi-tenant industrial business parkproperties in three major metropolitan areas. Three of these properties were purchased before 2005, three propertieswere purchased in January, April and September 2005 and one property waspurchased in June 2006. The 2006 results reflect a full nine months ofoperations for all properties purchased before 2006.  Results for 2005 reflect a full nine monthsof operations from only three properties.

*Threemonths ended September 30, 2006 and 2005*

Revenue for thethird quarter of 2006 increased to $999,168 from $534,740 for the comparableperiod of 2005.  The increase was dueprimarily to the properties purchased during 2005.

Property operatingand maintenance expenses increased to $217,257 in 2006 from $124,583 in2005.  This increase was the result ofthe addition of properties as well as refurbishment at several properties inthe 2006 quarter.  Property taxesincreased to $225,945 in 2006 from $88,624 in 2005 due to the addition ofproperties.

General andadministrative costs decreased to $86,180 in the third quarter of 2006 from$94,101 in the comparable quarter of 2005. The decrease was due to lower professional fees. Depreciation and amortization increased to $230,375in the the third quarter of 2006 from $121,672 in the comparable quarter of2005 as a result of the addition of properties.

Interest and otherincome decreased to $18,150 for the three months ended September 30, 2006 from$92,170 for the same period of 2005 due to lower cash available for investmentafter the  purchase of Shoemaker propertyin June 2006.

*Ninemonths ended September 30, 2006 and 2005*

Revenue for thenine months ended September 30,  2006increased to $2,431,866 from $1,495,708 for the comparable period of 2005.  The increase was due primarily to the propertiespurchased during  2005.

Property operatingand maintenance expenses increased to $675,290 in 2006 from $350,035 in2005.  This increase was the result ofthe addition of properties as well as non recurring repairs and maintenance andrefurbishment at several properties in the 2006 period.  Property taxes increased to $520,190 in 2006from $265,725 in 2005 due to the addition of properties and a re-assessment ofone property acquired in 2005.

General andadministrative costs increased to $374,013 in 2006 from $249,037 in 2005.  The increase was due to higher professionalfees including tax, auditing, legal and non-recurring consulting fees.  Depreciation and amortization increased to $578,305in 2006 from $322,414 in 2005 as a result of the addition of properties.

Interest and otherincome increased to $286,440 for the nine months ended September 30, 2006 from$173,120 for the same period of 2005 due to higher the short-term interestrates earned on invested cash, partially offset by lower invested cash in thethird quarter of 2006.

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**Liquidity and Capital Resources**

Ourplanned $50,000,000 equity offering is now complete and we do not expect toraise any additional funds. We intend to use the existing cash balance for,capital improvements to the properties and for operating expenses and reserves.

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

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

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

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

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

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

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

**PARTII - OTHER INFORMATION**

**Item 6.              Exhibits**

31.1                          Certificationof Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

31.2                           Certificationof Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of2002.

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

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this quarterly report to be signed on its behalf bythe undersigned, thereunto duly authorized this 13th day of November.
|        |   | 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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