**U.S. SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

| **ý**                                            |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**  |
|-------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------|
|                                                  |   |                                                                                                |
| **FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004** |
|                                                  |   |                                                                                                |
| **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   333-63656**

 

**CORNERSTONE REALTY FUND, LLC**

(EXACTNAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 
| **California**                                                  |   | **33-0827161**                     |
|-----------------------------------------------------------------|--------|------------------------------------|
| (State or other jurisdiction  of incorporation or organization) |   | (IRS Employer  Identification No.) |

 

**4590 MACARTHUR BLVD., SUITE 610, NEWPORT BEACH, CALIFORNIA92660**

(ADDRESSOF PRINCIPAL EXECUTIVE OFFICES)

 

**949-852-1007**

(ISSUER’STELEPHONE NUMBER)

 

**Not Applicable**

(FORMERNAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT)

 

Check whether the issuer(1) filed all reports required to be filed by Section 13 or 15(d) ofthe Exchange Act of 1934 during the past 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

 

YES  ý      NO  o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inRule 12b-2 of the Act).  o  Yes ý  No

 

As ofAugust 2, 2004, the Fund had 45,724 units of membership interest issuedand outstanding.

 

 

----

 

**PART I - FINANCIAL INFORMATION**

 
| **Item 1.**                                                                                                                                      | **Financial Statements** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------|--------|
|                                                                                                                                             |                     |
|                                                                                                                                             |                     |
| **Cornerstone  Realty Fund, LLC**                                                                                                                |                     |
|                                                                                                                                             |                     |
| Condensed  Balance Sheets at June 30, 2004 (unaudited) and December 31, 2003                                                           |                     |
|                                                                                                                                             |                     |
| Condensed Statements  of Operations for the Three Months and Six Months ended  June 30, 2004 (unaudited) and June 30, 2003 (unaudited) |                     |
|                                                                                                                                             |                     |
| Condensed  Statements of Members’ Capital for the Six Months ended  June 30, 2004 (unaudited)                                          |                     |
|                                                                                                                                             |                     |
| Condensed Statements  of Cash Flows for the Six Months ended  June 30, 2004 (unaudited) and June 30, 2003 (unaudited)                  |                     |
|                                                                                                                                             |                     |
| Notes to Condensed Financial Statements  (unaudited)                                                                                             |                     |

 

2

----

 

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

**(a California limited liability company)**

**CONDENSED BALANCE SHEETS**

 
|                                                                                                                                            |   | **June 30,  2004** |       | **December 31,  2003(A)** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|--------------------------------|--------|
|                                                                                                                                            |   | **(unaudited)**         |       |                           |   |
| **ASSETS**                                                                                                                                      |   |                    |       |                           |   |
| Assets                                                                                                                                          |   |                    |       |                           |   |
| Cash and cash equivalents                                                                                                                       |   | $                       | 5,514,351  |                           | $      | 1,464,206 |   |
|                                                                                                                                            |   |                    |       |                           |   |
| Investments in real estate                                                                                                                      |   |                    |       |                           |   |
| Land                                                                                                                                            |   | 4,539,400               |       | 4,539,400                      |   |
| Buildings and improvements, less  accumulated depreciation of $228,048 in 2004 and $128,674 in 2003                                             |   | 7,632,357               |       | 7,605,000                      |   |
| Intangible asset – in place leases, less  accumulated amortization of $70,404 in 2004 and $0 in 2003                                       |   | 97,010                  |       | 167,414                        |   |
|                                                                                                                                            |   | 12,268,767              |       | 12,311,814                     |   |
| Other assets                                                                                                                                    |   |                    |       |                           |   |
| Tenant and other receivables                                                                                                                    |   | 45,702                  |       | 27,297                         |   |
| Receivable from managing member                                                                                                                 |   | 59,839                  |       | 59,839                         |   |
| Prepaid insurance                                                                                                                               |   | 18,227                  |       | —                         |   |
| Leasing commissions, less accumulated  amortization of $5,378 in 2004 and $1,974 in 2003                                                        |   | 25,857                  |       | 6,912                          |   |
| Office equipment, less accumulated  depreciation of $2,854 in 2004 and $2,732 in 2003                                                           |   | —                  |       | 122                            |   |
| Total assets                                                                                                                                    |   | $                       | 17,932,743 |                           | $      | 13,870,190 |   |
|                                                                                                                                            |   |                    |       |                           |   |
| **LIABILITIES AND MEMBERS’ CAPITAL**                                                                                                       |   |                    |       |                           |   |
| Liabilities                                                                                                                                     |   |                    |       |                           |   |
| Accounts payable and accrued liabilities                                                                                                        |   | $                       | 81,679     |                           | $      | 89,173 |   |
| Real estate taxes payable                                                                                                                       |   | 122,430                 |       | 115,325                        |   |
| Tenant security deposits                                                                                                                        |   | 138,550                 |       | 145,629                        |   |
| Total liabilities                                                                                                                               |   | 342,659                 |       | 350,127                        |   |
|                                                                                                                                            |   |                    |       |                           |   |
| Members’ capital (100,000 units authorized,  43,039 units issued and outstanding in 2004 and 33,012 units issued and  outstanding in 2003) |   | 17,590,084              |       | 13,520,063                     |   |
|                                                                                                                                            |   | $                       | 17,932,743 |                           | $      | 13,870,190 |   |

 

----

(A)                              Derived from the audited financial statementsas of December 31, 2003.

 

The accompanying notes are an integral partof these interim financial statements.

 

3

----

 

**CORNERSTONE REALTY FUND, LLC**

**(a California limited liability company)**

 

**CONDENSED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
|                                                  |   | **Three  Months Ended  June 30,** |    | **Six Months  Ended  June 30,** |   |
|-------------------------------------------------------|--------|----------------------------------------|---------|--------------------------------------|--------|
|                                                  |   | **2004**                               |    | **2003**                             |   | **2004** |   | **2003** |   |
|                                                  |   |                                   |    | **(restated)**                       |   |   |   | **(restated)** |   |
| Revenues                                              |   |                                   |    |                                 |   |   |   |   |   |
| Rental revenues                                       |   | $                                      | 285,583 |                                 | $      | 201,943 |   | $ | 587,375 |   | $ | 396,310 |   |
| Amortization of in-place leases                       |   | (32,852                                | )       | —                               |   | (70,404 | ) | — |   |
| Tenant reimbursements and other income                |   | 85,814                                 |    | 43,701                               |   | 123,076 |   | 73,505 |   |
| Interest, dividends and other income                  |   | 1,863                                  |    | 1,343                                |   | 2,206 |   | 4,267 |   |
|                                                  |   | 340,408                                |    | 246,987                              |   | 642,253 |   | 474,082 |   |
|                                                  |   |                                   |    |                                 |   |   |   |   |   |
| Expenses                                              |   |                                   |    |                                 |   |   |   |   |   |
| Property operating and maintenance                    |   | 80,604                                 |    | 30,917                               |   | 151,262 |   | 59,893 |   |
| Property taxes                                        |   | 61,284                                 |    | 38,436                               |   | 120,576 |   | 76,126 |   |
| General and administrative                            |   | 84,212                                 |    | 23,462                               |   | 117,751 |   | 68,789 |   |
| Interest on advances payable to managing  member      |   | —                                 |    | 1,470                                |   | — |   | 2,911 |   |
| Depreciation and amortization                         |   | 51,389                                 |    | 27,617                               |   | 102,900 |   | 55,316 |   |
|                                                  |   | 277,489                                |    | 121,902                              |   | 492,489 |   | 263,035 |   |
|                                                  |   |                                   |    |                                 |   |   |   |   |   |
| Net income                                            |   | $                                      | 62,919  |                                 | $      | 125,085 |   | $ | 149,764 |   | $ | 211,047 |   |
|                                                  |   |                                   |    |                                 |   |   |   |   |   |
| Net income allocable to managing member               |   | $                                      | 6,292   |                                 | $      | 12,508 |   | $ | 14,976 |   | $ | 21,105 |   |
|                                                  |   |                                   |    |                                 |   |   |   |   |   |
| Net income allocable to unitholders                   |   | $                                      | 56,627  |                                 | $      | 112,577 |   | $ | 134,788 |   | $ | 189,942 |   |
|                                                  |   |                                   |    |                                 |   |   |   |   |   |
| Per unit amounts:                                     |   |                                   |    |                                 |   |   |   |   |   |
| Basic and diluted income allocable to  unitholders    |   | $                                      | 1.40    |                                 | $      | 4.97 |   | $ | 3.58 |   | $ | 9.09 |   |
|                                                  |   |                                   |    |                                 |   |   |   |   |   |
| Basic and diluted weighted average units  outstanding |   | 40,399                                 |    | 22,650                               |   | 37,606 |   | 20,902 |   |

 

The accompanying notes are an integral partof these interim financial statements.

 

4

----

 

**CORNERSTONE REALTY FUND, LLC**

**(a California limited liability company)**

 

**CONDENSED STATEMENT OF MEMBERS’ CAPITAL**

**(Unaudited)**

 
| Balance, December 31, 2003                    |   | $         | 13,520,063 |   |
|----------------------------------------------------|--------|-----------|------------|--------|
|                                               |   |      |       |
| Net proceeds from offering                         |   | 4,527,670 |       |
| Distributions to unitholders                       |   | (404,873  | )          |
| Deferred offering costs repaid to managing  member |   | (202,540  | )          |
| Net income                                         |   | 149,764   |       |
|                                               |   |      |       |
| Balance, June 30, 2004                        |   | $         | 17,590,084 |   |

 

The accompanying notes are an integral partof these interim financial statements.

 

5

----

 

**CORNERSTONE REALTY FUND, LLC**

**(a California limited liability company)**

 

**CONDENSED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
|                                                                               |   | **Six Months  Ended  June 30,** |      |
|------------------------------------------------------------------------------------|--------|--------------------------------------|-----------|
|                                                                               |   | **2004**                             |      | **2003** |   |
|                                                                               |   |                                 |      | **(restated)** |   |
| OPERATING ACTIVITIES                                                               |   |                                 |      |   |   |
| Net Income                                                                         |   | $                                    | 149,764   |   | $ | 211,047 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                                 |      |   |   |
| Depreciation and amortization                                                      |   | 173,304                              |      | 55,316 |   |
| Changes in operating assets and  liabilities:                                      |   |                                 |      |   |   |
| Other assets                                                                       |   | (58,981                              | )         | (34,122 | ) |
| Accounts payable, accrued liabilities and  security deposits                       |   | (14,573                              | )         | (99,333 | ) |
| Real estate taxes payable                                                          |   | 7,105                                |      | 2,336 |   |
|                                                                               |   |                                 |      |   |   |
| Net cash provided by operating activities                                          |   | 256,619                              |      | 135,244 |   |
|                                                                               |   |                                 |      |   |   |
| INVESTING ACTIVITIES                                                               |   |                                 |      |   |   |
| Additions to buildings                                                             |   | (126,731                             | )         | (26,987 | ) |
|                                                                               |   |                                 |      |   |   |
| Net cash used in investing activities                                              |   | (126,731                             | )         | (26,987 | ) |
|                                                                               |   |                                 |      |   |   |
| FINANCING ACTIVITIES                                                               |   |                                 |      |   |   |
| Advances from managing member                                                      |   | —                               |      | 3,056 |   |
| Net proceeds from offering                                                         |   | 4,527,670                            |      | 2,834,465 |   |
| Distributions to members                                                           |   | (404,873                             | )         | (59,302 | ) |
| Deferred offering costs repaid to managing  member                                 |   | (202,540                             | )         | (126,680 | ) |
|                                                                               |   |                                 |      |   |   |
| Net cash provided by financing activities                                          |   | 3,920,257                            |      | 2,651,539 |   |
|                                                                               |   |                                 |      |   |   |
| Net increase in cash                                                               |   | 4,050,145                            |      | 2,759,796 |   |
|                                                                               |   |                                 |      |   |   |
| Cash and cash equivalents at beginning of  period                                  |   | 1,464,206                            |      | 1,062,947 |   |
|                                                                               |   |                                 |      |   |   |
| Cash and cash equivalents at end of period                                         |   | $                                    | 5,514,351 |   | $ | 3,822,743 |   |

 

The accompanying notes are an integral partof these interim financial statements.

 

6

----

 

**CORNERSTONE REALTY FUND, LLC**

**(a California Limited Liability Company)**

 

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.**                                      Organization and Business

** **

CornerstoneRealty Fund, LLC, a California limited liability company (the “Fund”) (formerlyCornerstone Multi-Tenant Industrial Business Parks Fund, LLC and CornerstoneIndustrial Properties Income and Growth Fund I, LLC), was formed onOctober 28, 1998.  The members ofthe Fund are Cornerstone Industrial Properties, LLC, a California limitedliability company, as the Managing Member (“Managing Member”), Terry G.Roussel, an individual, and other various unitholders as described below.  The purpose of the Fund is to acquire,operate and sell multi-tenant industrial properties.  The Fund currently is issuing and selling in a public offeringequity interests (“units”) in the Fund, and is admitting the new unitholders asmembers of the Fund.  As of August 2,2004, the Fund has issued 45,724 units to unitholders for gross offeringproceeds of $22,862,000.

 

Theunaudited condensed financial statements of the Fund have been prepared inaccordance 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.  The condensed financial statements do notinclude all of the information and footnotes required by accounting principlesgenerally accepted in the United States for complete financial statements.  The condensed financial statements includedherein should be read in conjunction with the Fund’s Annual Report on Form 10-Kfor the year ended December 31, 2003.

 

Theinterim condensed financial statements have been prepared in accordance withthe Fund’s customary accounting practices. In the opinion of management, all adjustments (consisting of normalrecurring accruals) considered necessary for a presentation in accordance withaccounting principles generally accepted in the United States have beenincluded.  Operating results for thethree and six months ended June 30, 2004 are not necessarily indicative ofthe results that may be expected for the year ending December 31, 2004.

 

Eachmember’s liability is limited pursuant to the provisions of the Beverly-KilleaLimited Liability Company Act.  The termof the Fund shall continue until December 31, 2010, unless terminatedsooner pursuant to the operating agreement.

 

Theoperating agreement, as amended and restated, provides, among other things, forthe following:

 

TheManaging Member generally has complete and exclusive discretion in themanagement and control of the Fund; however, unitholders holding the majorityof all outstanding and issued units have certain specified voting rights whichinclude the removal and 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.

 

7

----

 

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 share of the allocations and distributions.

 

**2.****                                     ****Restatement**

 

Duringthe fourth quarter of 2003, the Managing Member reevaluated its practice ofcharging the Fund interest on unreimbursed offering costs.  Accordingly, the Fund has restated itspreviously issued financial statements.

 

Asa result of the restatement, at June 30, 2004 and December 31, 2003,the Fund has recorded a receivable from the Managing Member of $59,839.  The following summarizes the impact of thisrestatement on net income from amounts previously reported for the three monthsended June 30, 2003:

 

| Net income, as previously reported |   | $     | 117,661 |   |
|------------------------------------|--------|-------|---------|--------|
| Adjustment                         |   | 7,424 |    |
| Net income, as restated            |   | $     | 125,085 |   |

 

**3.****                                     ****Summary of SignificantAccounting Policies**

 

*Use of 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 materially differ materially from the estimates inthe near term.

 

*Cash and 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 atJune 30, 2004 is $138,550 related to tenant security deposits.

 

8

----

 

*Investments in Real Estate*

 

Investmentsin real estate are stated at cost and include land, buildings and building improvements.  Expenditures for ordinary maintenance andrepairs are expensed to operations as incurred.  Significant replacements, betterments and tenant improvementswhich improve or extend the useful lives of the buildings are capitalized.  Depreciation of the buildings and buildingimprovements is computed on a straight-line basis over their estimated usefullives of 39 years.  Tenant improvementsare depreciated over the shorter of the useful asset life or the related leaseterm.

 

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

 

InJune 2001 the FASB issued Statement of Financial Accounting Standard(“SFAS”) No. 141, *Business Combinations*and SFAS No. 142, *Goodwill and Other Intangible Assets*.  SFAS No. 141 and No. 142 require the Fund torecord at acquisition an intangible asset or liability for the valueattributable to in-place leases.  Therequirements are applicable to all acquisitions subsequent to July 1,2001.  As of June 30, 2004, theFund has recorded $97,010, net of $70,404 of amortization, as an intangibleasset attributable to the value of the leases in place as of the date ofacquisition.

 

*Office Equipment and Leasing Commissions*

 

Officeequipment is stated at cost and is depreciated on a straight-line basis overthe estimated useful lives of the related assets, typically five years.  Leasing commissions are stated at cost andamortized on a straight-line basis over the related lease term.

 

*Revenue Recognition*

 

Rentalrevenues are recorded on an accrual basis as they are earned over the lives ofthe respective tenant leases on a straight-line basis.  Rental receivables are periodicallyevaluated for collectibility.

 

*Fair Value of Financial Instruments*

 

TheFund believes that the recorded values of all financial instruments approximatetheir current values.

 

*Income Tax Matters*

 

Itis the intent of the Fund and its members that the Fund be treated as apartnership for income tax purposes.  Asa limited liability company, the Fund is subject to certain minimal taxes andfees; however, income taxes on the income or losses realized by the Fund aregenerally the obligation of the members.

 

*Concentration of Credit Risk*

 

TheFund maintains its cash at banks with federally insured accounts and uninsuredmoney market funds.  The amounts aresubstantially uninsured.  No losses havebeen experienced related to such amounts.

 

9

----

 

*Impact of New Accounting Pronouncements*

 

InJanuary 2003, the FASB issued Interpretation No. 46, *Consolidation of Variable InterestEntities*, as amended in December 2003 (“Interpretation No.46R”), which applies immediately to arrangements created after January 31,2003.  Interpretation No. 46R applies toarrangements created before February 1, 2003 beginning no later thanMarch 31, 2004.  The initialadoption of Interpretation No. 46R did not have a material impact on the Fund’sfinancial position or results of operations.

 

**4.****                                     ****Investments in Real Estate**

 

OnSeptember 27, 2002, the Fund acquired an existing multi-tenant industrialbusiness park known as Normandie Business Center, located in Torrance,California for an investment of $3,901,696. Normandie Business Center consists of two single-story buildingscontaining a total of 48,711 leasable square feet.

 

OnDecember 27, 2002, the Fund acquired an existing multi-tenant industrialbusiness park known as the Sky Harbor Business Park, located in Northbrook,Illinois for an investment of $2,553,996. Sky Harbor Business Park consists of a single-story building containinga total of 41,422 leasable square feet.

 

OnDecember 10, 2003, the Fund acquired an existing multi-tenant industrialpark known as Arrow Business Center located in Irwindale, California for aninvestment of $5,910,579.  The propertyconsists of three single-story buildings containing a total of 69,592 leasablesquare feet.

 

Industrialspace in the properties is generally leased to tenants under lease terms thatprovide for the tenants to pay increases in operating expenses in excess ofspecified amounts.

 

**5.****                                     ****Deferred Offering Costs Advanced by Managing Member**

 

Unrecoveredoffering costs incurred by the Managing Member for the six months endedJune 30, 2004 are as follows:

 
| Balance, December 31, 2003 |   | $        | 595,528 |   |
|---------------------------------|--------|----------|---------|--------|
| Costs incurred                  |   | 184,140  |    |
| Costs paid                      |   | (202,540 | )       |
|                            |   |     |    |
| Balance, June 30, 2004     |   | $        | 577,128 |   |

 

Specificincremental costs in connection with the offering of membership units areincurred by the Managing Member. Reimbursement of such offering costs is limited to 4% of the grossproceeds of the related offerings. Offering costs incurred by the Managing Member in excess of the 4%limitation are deferred, and will be reimbursed from future offeringproceeds.  Any offering costs incurredby the Managing Member that are not reimbursed by the Fund will be reflected asa capital contribution to the Fund by the Managing Member, with an offsettingexpense recognized in the Fund’s statement of operations.  Through June 30, 2004, the ManagingMember has incurred $577,128 of unrecovered offering costs.

 

10

----

 

**6.****                                     ****Related Party Transactions**

 

Inorder to fund its initial operating costs, the Fund has received, from itsManaging Member, cumulative unsecured advances and related interest totaling$476,227 through December 31, 2003. Through December 31, 2003, the Fund has fully repaid this $476,227.

 

Duringthe six months ended June 30, 2003, the Managing Member funded $101,079 tothe Fund’s unitholders related to a 5% annual return on their Invested CapitalContributions, which will not be reimbursed to the Managing Member by the Fund.

 

TheManaging Member and/or its affiliates are entitled to receive various fees,compensation and reimbursements as specified in the Fund’s operating agreement,including commissions of 9% of the first $3,000,000 of gross proceeds from theoffering of units and 7% thereafter, marketing fees of 2% of gross proceedsfrom the offering of units less $60,000, and expense allowances of 1.5% ofgross proceeds from the offering of units. During the six months ended June 30, 2004 and 2003, the total fees,compensation and reimbursements were $535,483 and $332,535, respectively.

 

TheFund is to reimburse the Managing Member for deferred offering costs incurredby its Managing Member in the amount of 4% of the gross proceeds from theoffering of units.  During the sixmonths ended June 30, 2004 and 2003, the Fund reimbursed $202,540 and$126,680, respectively, of these costs to the Managing Member.

 

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

 

Thefollowing “Management’s Discussion and Analysis of Financial Condition andResults of Operations” should be read in conjunction with the Fund’s financialstatements 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 the Fund’s future results of operations to be materiallydifferent than those expressed or implied herein.  Some of these risks and other factors include, but are notlimited to:  (i) no assurance that Fundproperties will continue to experience minimal or no vacancy; (ii) tenants maynot be able to meet their financial obligations; (iii) rental revenues from theproperties may not be sufficient to meet the Fund’s cash requirements foroperations, capital requirements and distributions; (iv) suitable investmentproperties may not continue to be available; and (v) adverse changes to thegeneral economy may disrupt operations.

 

# **Critical Accounting Policies**

#  

TheFund’s financial statements have been prepared in accordance with accountingprinciples generally accepted in the United States.  The preparation of these financial statements requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities as of the date of the financial statements and the reportedamount of revenue and expenses during the reporting period.  Actual results could differ materially fromthe estimates in the near term.

 

## *Revenue Recognition*

## * *

Rentalrevenues are recorded on an accrual basis as they are earned over the lives ofthe respective tenant leases on a straight-line basis.  Rental receivables are periodicallyevaluated for collectibility.

 

## *Investments in RealEstate*

## * *

TheFund evaluates the carrying value for investments in real estate in accordancewith Financial

 

11

----

 

AccountingStandards 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.

 

InJune 2001 the FASB issued Statement of Financial Accounting Standard(“SFAS”) No. 141, *Business Combinations* and SFAS No. 142, *Goodwill and Other Intangible Assets*.  SFAS No. 141 and No. 142 require the Fund torecord at acquisition an intangible asset or liability for the valueattributable to in-place leases.  Therequirements are applicable to all acquisitions subsequent to July 1,2001.  As of June 30, 2004, theFund has recorded $97,010 net of $70,404 of amortization as an intangible assetattributable to the value of the leases in place as of the date of acquisition.

 

*Off-balanceSheet Financings and Liabilities*

 

Otherthan lease commitments and legal contingencies incurred in the normal course ofbusiness, the Fund does not have any off-balance sheet financing arrangementsor liabilities.  The Fund does not have any majority-owned subsidiaries orany interests in, or relationships with, any special-purpose entities.

 

# **Impact of New Accounting Pronouncements**

#  

InJanuary 2003, the FASB issued Interpretation No. 46, *Consolidation of Variable Interest**Entities*,as amended in December 2003 (“Interpretation No. 46R”), which appliesimmediately to arrangements created after January 31, 2003.  Interpretation No. 46R applies toarrangements created before February 1, 2003 beginning no later than March 31,2004.  The initial adoption ofInterpretation No. 46R did not have a material impact on the Fund’s financialposition or results of operations.

 

# **Results of Operations**

#  

Asof June 30, 2004, the Fund has purchased three multi-tenant industrialbusiness park properties in two different major metropolitan areas.  The properties were purchased from theproceeds from the sale of membership units, without debt financing. Theproperties were purchased in the latter parts of September 2002,December 2002 and December 2003, respectively. As a result of the datesof purchase, Fund operations for 2003 reflect the net income from only twoproperties.  For the three months andsix months ended June 30, 2004, Fund operations reflect operations for thethree properties purchased.

 

*Three months ended June 30,2004 and 2003*

 

TheFund’s net income for the three months ended June 30, 2004 and 2003 was$62,919 and $125,085, respectively. Revenue increased from $246,987 to $340,408 .  This increase primarily reflects the addition of Arrow BusinessCenter, partially offset by a reduction in occupancy at Sky Harbor BusinessPark in July of 2003.  Propertyoperating and maintenance expenses, and property taxes increased from $69,353in 2003 to $141,888 in 2004 due to the addition of Arrow Business Center,additional HVAC repair costs and legal expenses regarding tenant rentcollection matters at Normandie Business Center. The rent receivable relatingto these two tenants is fully reserved at June 30, 2004. Depreciation andamortization increased from $27,617 to $51,389 due to the addition of ArrowBusiness Center.  General andadministrative costs increased from $23,462 to $84,212.  The majority of this increase isattributable to the additional legal and accounting effort related to therestatement of the Fund’s financial statements included the December 31,2003 10-K.  Most of these costs are notconsidered recurring.

 

12

----

 

*Six months ended June 30,2004 and 2003*

 

TheFund’s net income for the six months ended June 30, 2004 and 2003 was$149,764 and $211,047, respectively. Revenue increased from $474,082 to $642,253 . This increase primarilyreflects the addition of Arrow Business Center, partially offset by a reductionin occupancy at Sky Harbor Business Park in July of 2003.  Property operating and maintenance expenses,and property taxes increased from $136,019 in 2003 to $271,838 in 2004 due tothe addition of Arrow Business Center, additional HVAC repair costs and legalexpenses regarding tenant rent collection matters at Normandie Business Centerincurred in the second quarter. Depreciation and amortization increased from $55,316 to $102,900 due tothe addition of Arrow Business Center. General and administrative costs increased from $68,789 to$117,751.  The majority of thisincrease, incurred in the second quarter, is attributable to the additionallegal and accounting effort related to the restatement of the Fund’s financialstatements included the December 31, 2003 10-K.  Most of these costs are not considered recurring.

 

**Liquidity and Capital Resources**

 

Asof June 30, 2004, the Fund has received $21,659,500 ($22,862,000 as ofAugust 2, 2004) of gross proceeds from the sale of membership units, and$109,979 as a capital contribution from the Managing Member.  As of June 30, 2004, the Fund has$5,514,351 ($6,589,905 at August 2, 2004) in cash and cash equivalents.

 

TheFund intends to continue offering membership units for sale and use theexisting cash balance and net proceeds from the sale of units for theacquisition of additional multi-tenant industrial business park properties,capital improvements to the properties, and for operating expenses andreserves.

 

TheFund expects to meet its short-term liquidity requirements from net cashgenerated by operations, which we believe will be adequate to meet operatingcosts of the properties and the Fund, and allow for cash distributions to theunitholders.

 

TheFund’s offering and organizational activities have been financed by theManaging Member.  A portion of thosecosts have been reimbursed to the Managing Member at the rate of 4% of grossproceeds of the Fund’s unit sales pursuant to the prospectus for theoffering.  The Fund will continue toincur organizational and offering expenses and the Managing Member, althoughnot obligated, intends to continue providing advances for offering andorganizational expenses until the sale of membership units is completed.  The Managing Member must raise funds throughthe sale of its own debt or equity securities to obtain the cash necessary toprovide these advances.  There can be noassurance as to the amount or timing of the Managing Member’s receipt offunds.  The Fund will not reimburse theManaging Member for any amounts advanced by it for offering and organizationalexpenses which exceed the amounts and percentages set forth in the prospectusfor the offering.  Any such expensesincurred by the Managing Member on behalf of the Fund that are not reimbursedby the Fund will be reflected as a capital contribution to the Fund by the ManagingMember with an offsetting expense recognized in the Fund’s statement ofoperations.

 

**Contractual Obligations**

 

Asof June 30, 2004, the Fund had no significant contractual obligations orcommercial commitments.

 

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

 

TheFund invests its cash and cash equivalents in FDIC insured savings accountswhich, by their nature, are not subject to interest rate fluctuations.

 

13

----

 

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

 

TheFund’s disclosure controls and procedures are designed to ensure thatinformation required to be disclosed in reports that the Fund files or submitsunder the Securities Exchange Act of 1934 is recorded, processed, summarizedand reported within the time periods specified in the rules and forms of theSecurities and Exchange Commission. The Chief Executive Officer and the ChiefFinancial Officer of Cornerstone Ventures, Inc., the manager of the managingmember of the Fund, have reviewed the effectiveness of the Fund’s disclosurecontrols and procedures as of the end of the period covered by this report andhave concluded that the disclosure controls and procedures are effective. Therewere no significant changes in our internal controls or in other factors thatcould significantly affect these controls subsequent to the last day they wereevaluated.

 

Itshould be noted that any system of controls, however well designed andoperated, 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 inherent limitations of controlsystems, there can be no assurance that any design will succeed in achievingits stated goals under all potential future conditions.

 

14

----

 

**PART II - OTHER INFORMATION**

 

**Item 6.****          ****Exhibits and Reports on Form8-K**

 

**(a)****         ****Exhibits**

 
| 31.1   |   | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                           |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                 |
| 31.2   |   | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                           |
|   |   |                                                                                                                                                                                 |
| 32     |   | Certification  of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C.  §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. |

 

**(b)****         ****Reports on Form 8-K**

 

None.

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the registrant has duly causedthis quarterly report to be signed on its behalf by the undersigned, thereuntoduly authorized this 11th day of August 2004.

 
|   | 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/  Gary W. Nielson |   |
|   |                          |   |   | Gary  W. Nielson, |
|   |                          |   |   | Chief  Financial Officer |
|   |                          |   |   | (Principal  Financial Officer and  Principal Accounting Officer) |

 

15

----