**U.S.SECURITIES AND EXCHANGE COMMISSION**

**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 30,2005**

 
| ** ** | **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**

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 
| **California**                                                                      | ** ** | **33-0827161**      |
|-------------------------------------------------------------------------------------|------------|---------------------|
| (State or other jurisdiction                                                        |       | (IRS Employer       |
| of incorporation or organization)                                                   |       | Identification No.) |
|                                                                                |       |                |
| **4590 MACARTHUR BLVD., SUITE  610, NEWPORT BEACH, CALIFORNIA 92660**               |
| (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                                            |
|                                                                                |       |                |
| **949-852-1007**                                                                    |
| (REGISTRANT’S TELEPHONE NUMBER, INCLUDING  AREA CODE)                          |
|                                                                                |       |                |
| **Not Applicable**                                                                  |
| (FORMER NAME, FORMER ADDRESS AND FORMER  FISCAL YEAR, IF CHANGED SINCE LAST REPORT) |

 

Check whether the issuer (1) filed all reports required to befiled by Section 13 or 15(d) of the Exchange Act of 1934 during thepast 12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.

 

YES  ý     NO  o

 

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

 

As of August 4, 2005, the Fund had 96,518 unitsof membership interest issued and outstanding.

 

 

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**PART I - FINANCIAL INFORMATION**

 

**Item 1.****                    ****Financial Statements**

 

**Cornerstone Realty Fund, LLC**

 
| Condensed Balance Sheets at  June 30, 2005 (unaudited) and December 31, 2004                                                           |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                             |   |
| Condensed Statements of Operations  for the Three Months and Six Months ended  June 30, 2005 (unaudited) and June 30, 2004 (unaudited) |   |
|                                                                                                                                             |   |
| Condensed Statements of  Members’ Capital for the Six Months ended  June 30, 2005 (unaudited)                                          |   |
|                                                                                                                                             |   |
| Condensed Statements of Cash  Flows for the Six Months ended  June 30, 2005 (unaudited) and June 30, 2004 (unaudited)                  |   |
|                                                                                                                                             |   |
| Notes to Condensed Financial Statements  (unaudited)                                                                                             |   |

 

2

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**CORNERSTONE REALTY FUND, LLC**

**(a California limited liability company)**

**CONDENSED BALANCE SHEETS**

 
| ** **                                                                                                                                            | ** ** | **June 30, 2005** | ** ** | **December 31, 2004****(A)** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------------------|------------|
| ** **                                                                                                                                            | ** ** | **(unaudited)**        | ** ** | ** **                        | ** ** |
| **ASSETS**                                                                                                                                            |       |                   |       |                              |       |
|                                                                                                                                                  |       |                   |       |                              |       |
| Assets                                                                                                                                                |       |                   |       |                              |       |
| Cash and  cash equivalents                                                                                                                            |       | $                      | 15,514,957 |                              | $          | 11,793,822 |   |
|                                                                                                                                                  |       |                   |       |                              |       |
| Investments  in real estate                                                                                                                           |       |                   |       |                              |       |
| Land                                                                                                                                                  |       | 6,547,490              |       | 4,539,400                         |       |
| Buildings  and improvements, less accumulated depreciation of $509,621 in 2005 and $342,697  in 2004                                                  |       | 13,106,715             |       | 7,628,745                         |       |
| Intangible  lease value, less accumulated amortization of $20,956 in 2005                                                                             |       | 529,044                |       | —                            |       |
| Intangible  asset – in place leases, less accumulated amortization of  $224,209 in 2005 and $118,911 in 2004                                |       | 196,575                |       | 48,503                            |       |
|                                                                                                                                                  |       | 20,379,824             |       | 12,216,648                        |       |
| Other assets                                                                                                                                          |       |                   |       |                              |       |
| Escrow  deposit and other costs                                                                                                                       |       | 7,581                  |       | 275,052                           |       |
| Tenant and  other receivables                                                                                                                         |       | 72,981                 |       | 31,876                            |       |
| Prepaid  insurance                                                                                                                                    |       | 23,274                 |       | 30,737                            |       |
| Leasing  commissions, less accumulated amortization of $29,618 in 2005 and  $15,282 in 2004                                                      |       | 82,903                 |       | 47,477                            |       |
|                                                                                                                                                  |       |                   |       |                              |       |
| Total assets                                                                                                                                          |       | $                      | 36,081,520 |                              | $          | 24,395,612 |   |
|                                                                                                                                                  |       |                   |       |                              |       |
| **LIABILITIES  AND MEMBERS’ CAPITAL**                                                                                                            |       |                   |       |                              |       |
|                                                                                                                                                  |       |                   |       |                              |       |
| Liabilities                                                                                                                                           |       |                   |       |                              |       |
| Accounts  payable and accrued liabilities                                                                                                             |       | $                      | 254,798    |                              | $          | 173,535 |   |
| Tenant  security deposits                                                                                                                             |       | 231,071                |       | 135,294                           |       |
| Total  liabilities                                                                                                                                    |       | 485,869                |       | 308,829                           |       |
|                                                                                                                                                  |       |                   |       |                              |       |
| Members’  capital (100,000 units authorized, 86,587 units issued and outstanding at  2005 and 59,097 units issued and outstanding  at 2004) |       | 35,595,651             |       | 24,086,783                        |       |
| Total liabilities  and members’ capital                                                                                                          |       | $                      | 36,081,520 |                              | $          | 24,395,612 |   |

 

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(A)           Derived from the audited financial statementsas of December 31, 2004.

 

The accompanying notes are an integral part of these interim financialstatements.

 

3

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**CORNERSTONE REALTY FUND, LLC**

**(a California limited liability company)**

 

**CONDENSED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                            | ** ** | **June 30,**      | ** ** | **June 30,**    | ** ** |
| ** **                                            | ** ** | **2005**               | ** ** | **2004**             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                            | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                              |       |                   |       |                 |       |   |   |   |   |
| Rental  revenues                                      |       | $                      | 505,780    |                 | $          | 285,583 |   | $ | 922,995 |   | $ | 587,375 |   |
| Amortization  of in-place leases                      |       | (60,415                | )          | (32,852              | )          | (105,298 | ) | (70,404 | ) |
| Tenant  reimbursements and other income               |       | 82,536                 |       | 85,814               |       | 143,271 |   | 123,076 |   |
|                                                  |       | 527,901                |       | 338,545              |       | 960,968 |   | 640,047 |   |
|                                                  |       |                   |       |                 |       |   |   |   |   |
| Expenses                                              |       |                   |       |                 |       |   |   |   |   |
| Property  operating and maintenance                   |       | 131,031                |       | 80,604               |       | 225,452 |   | 151,262 |   |
| Property  taxes                                       |       | 96,997                 |       | 61,284               |       | 177,101 |   | 120,576 |   |
| General and  administrative                           |       | 120,171                |       | 84,212               |       | 154,936 |   | 117,751 |   |
| Depreciation  and amortization                        |       | 106,114                |       | 51,389               |       | 200,742 |   | 102,900 |   |
|                                                  |       | 454,313                |       | 277,489              |       | 758,231 |   | 492,489 |   |
|                                                  |       |                   |       |                 |       |   |   |   |   |
| Operating  income                                     |       | 73,588                 |       | 61,056               |       | 202,737 |   | 147,558 |   |
|                                                  |       |                   |       |                 |       |   |   |   |   |
| Interest,  dividends and other income                 |       | 48,300                 |       | 1,863                |       | 80,950 |   | 2,206 |   |
|                                                  |       |                   |       |                 |       |   |   |   |   |
| Net income                                            |       | $                      | 121,888    |                 | $          | 62,919 |   | $ | 283,687 |   | $ | 149,764 |   |
|                                                  |       |                   |       |                 |       |   |   |   |   |
| Net income  allocable to managing member              |       | $                      | 12,189     |                 | $          | 6,292 |   | $ | 28,369 |   | $ | 14,976 |   |
|                                                  |       |                   |       |                 |       |   |   |   |   |
| Net income  allocable to unitholders                  |       | $                      | 109,699    |                 | $          | 56,627 |   | $ | 255,318 |   | $ | 134,788 |   |
|                                                  |       |                   |       |                 |       |   |   |   |   |
| Per unit  amounts:                                    |       |                   |       |                 |       |   |   |   |   |
| Basic and  diluted income allocable to unitholders    |       | $                      | 1.45       |                 | $          | 1.40 |   | $ | 3.66 |   | $ | 3.58 |   |
|                                                  |       |                   |       |                 |       |   |   |   |   |
| Basic and  diluted weighted average units outstanding |       | 75,745                 |       | 40,399               |       | 69,714 |   | 37,606 |   |

 

The accompanying notes are an integral part of these interim financialstatements.

 

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**CORNERSTONE REALTY FUND, LLC**

**(a California limited liability company)**

 

**CONDENSED STATEMENT OF MEMBERS’ CAPITAL**

**(Unaudited)**

 
| Balance,  December 31, 2004                   |   | $          | 24,086,783 |   |
|----------------------------------------------------|--------|------------|------------|--------|
|                                               |   |       |       |
| Net proceeds  from offering                        |   | 12,289,145 |       |
| Contribution  from managing member                 |   | 216,711    |       |
| Distributions  to unitholders                      |   | (731,635   | )          |
| Deferred  offering costs repaid to managing member |   | (549,040   | )          |
| Net income                                         |   | 283,687    |       |
|                                               |   |       |       |
| Balance,  June 30, 2005                       |   | $          | 35,595,651 |   |

 

The accompanying notes are an integral part of these interim financialstatements.

 

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**CORNERSTONE REALTY FUND, LLC**

**(a California limited liability company)**

 

**CONDENSED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                         | ** ** | **June 30,**    | ** ** |
| ** **                                                                         | ** ** | **2005**             | ** ** | **2004** | ** ** |
| ** **                                                                         | ** ** | ** **           | ** ** | ** ** | ** ** |
| OPERATING  ACTIVITIES                                                              |       |                 |       |   |   |
| Net income                                                                         |       | $                    | 283,687    |   | $ | 149,764 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                 |       |   |   |
| Depreciation  and amortization                                                     |       | 306,039              |       | 173,304 |   |
| Changes in  operating assets and liabilities:                                      |       |                 |       |   |   |
| Other assets                                                                       |       | 184,067              |       | (58,981 | ) |
| Accounts  payable, accrued liabilities and security deposits                       |       | 177,040              |       | (7,468 | ) |
|                                                                               |       |                 |       |   |   |
| Net cash  provided by operating activities                                         |       | 950,833              |       | 256,619 |   |
|                                                                               |       |                 |       |   |   |
| INVESTING  ACTIVITIES                                                              |       |                 |       |   |   |
| Real estate  additions                                                             |       | (8,454,879           | )          | (126,731 | ) |
|                                                                               |       |                 |       |   |   |
| Net cash  used in investing activities                                             |       | (8,454,879           | )          | (126,731 | ) |
|                                                                               |       |                 |       |   |   |
| FINANCING  ACTIVITIES                                                              |       |                 |       |   |   |
| Advances  from managing member                                                     |       | 216,711              |       | — |   |
| Net proceeds  from offering                                                        |       | 12,289,145           |       | 4,527,670 |   |
| Distributions  to members                                                          |       | (731,635             | )          | (404,873 | ) |
| Deferred  offering costs repaid to managing member                                 |       | (549,040             | )          | (202,540 | ) |
|                                                                               |       |                 |       |   |   |
| Net cash provided  by financing activities                                         |       | 11,225,181           |       | 3,920,257 |   |
|                                                                               |       |                 |       |   |   |
| Net increase  in cash                                                              |       | 3,721,135            |       | 4,050,145 |   |
|                                                                               |       |                 |       |   |   |
| Cash and  cash equivalents at beginning of period                                  |       | 11,793,822           |       | 1,464,206 |   |
|                                                                               |       |                 |       |   |   |
| Cash and  cash equivalents at end of period                                        |       | $                    | 15,514,957 |   | $ | 5,514,351 |   |

 

The accompanying notes are an integral part of these interim financialstatements.

 

6

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**CORNERSTONE REALTY FUND, LLC**

**(a California Limited Liability Company)**

 

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.**                                      Organization and Business

 

Cornerstone Realty Fund, LLC, a Californialimited liability company (the “Fund”) (formerly Cornerstone Multi-TenantIndustrial Business Parks Fund, LLC and Cornerstone Industrial PropertiesIncome and Growth Fund I, LLC), was formed on October 28, 1998.  The members of the Fund are CornerstoneIndustrial Properties, LLC, a California limited liability company, as theManaging Member (“Managing Member”), Terry G. Roussel, an individual, and othervarious unitholders as described below. The purpose of the Fund is to acquire, operate and sell multi-tenantindustrial properties.  The Fundcurrently is issuing and selling in a public offering equity interests (“units”)in the Fund, and is admitting the new unitholders as members of the Fund.  As of August 4, 2005, the Fund hasissued 96,518 units to unitholders for gross offering proceeds of $48,244,900.

 

The interim unaudited condensed financialstatements of the Fund have been prepared in accordance with accountingprinciples generally accepted in the United States for interim financialinformation and in accordance with the rules and regulations of theSecurities and Exchange Commission.  Aspermitted by the Securities and Exchange Commission filing requirements for Form 10-Q,the condensed financial statements do not include all of the information andfootnotes required by accounting principles generally accepted in the UnitedStates for complete financial statements. The condensed financial statements included herein should be read inconjunction with the Fund’s Annual Report on Form 10-K for the year ended December 31,2004.

 

The interim unaudited condensed financialstatements have been prepared in accordance with the Fund’s customaryaccounting practices.  In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a presentation in accordance with accountingprinciples generally accepted in the United States have been included.  Operating results for the three and six monthsended June 30, 2005 are not necessarily indicative of the results that maybe expected for the year ending December 31, 2005.

 

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

 

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

 

The Managing Member generally has completeand exclusive discretion in the management and control of the Fund; however,unitholders holding the majority of all outstanding and issued units havecertain specified voting rights which include the removal and replacement of theManaging Member.

 

Net Cash Flow from Operations, as defined,will be distributed 90% to the unitholders and 10% to the Managing Member untilthe unitholders have received either an 8% or 12% cumulative, non-compoundedannual return on their Invested Capital Contributions, as defined. The 12%return applies to specified early investors for the twelve-month periodsubsequent to the date of their Invested Capital Contributions and is in lieuof the 8% return during that period.

 

7

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Net Sales Proceeds, as defined, will bedistributed first, 100% to the unitholders in an amount equal to their InvestedCapital Contributions; then, 90% to the unitholders and 10% to the ManagingMember until the unitholders have received an amount equal to the unpaidbalance of their aggregate cumulative, non-compounded annual return on theirInvested Capital Contributions; and thereafter, 50% to the unitholders and 50%to the Managing Member.

 

Net Income, as defined, is allocated first,10% to the Managing Member and 90% to the unitholders until Net Incomeallocated equals cumulative Net Losses, as defined, previously allocated insuch proportions; second, in proportion to and to the extent of Net Cash Flowfrom Operations and Net Sales Proceeds previously distributed to the members,exclusive of distributions representing a return of Invested CapitalContributions; and then 50% to the Managing Member and 50% to the unitholders.

 

Net Loss is allocated first, 50% to theManaging Member and 50% to the unitholders, until Net Loss allocated equalscumulative Net Income previously allocated in such proportions; then remainingNet Loss is allocated 10% to the Managing Member and 90% to the unitholders.

 

All allocations and distributions to theunitholders are to be pro rata in proportion to their share of the allocationsand distributions.

 

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

 

*Use of Estimates*

 

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

 

*Cash and Cash Equivalents*

 

Cash and cash equivalents consist primarilyof interest-bearing investments with original maturities of 90 days or less atthe date of purchase.  Included in cashand cash equivalents at June 30, 2005 is $231,071 related to tenantsecurity deposits.  The Fund places itscash with major financial institutions.  Approximately$14.9 million in cash balances was in excess of federally insured limits as of June 30,2005.

 

*Investments in Real Estate*

 

Investments in real estate are stated at costand include land, buildings and building improvements.  Expenditures for ordinary maintenance andrepairs are expensed to operations as incurred.  Significant replacements, betterments andtenant improvements which improve or extend the useful lives of the buildingsare capitalized.  Depreciation of thebuildings and building improvements is computed on a straight-line basis overtheir estimated useful lives of either 10 or 39 years.  Tenant improvements are depreciated over the shorterof the useful asset life or the related lease term.

 

The Fund evaluates the carrying value for investments in real estate inaccordance with Financial 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.

 

8

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In June 2001 the FASB issued Statementof Financial Accounting Standard (“SFAS”) No. 141, *BusinessCombinations*and SFAS No. 142, *Goodwill andOther Intangible Assets*.  SFASNo. 141 and No. 142 require the Fund to record at acquisition anintangible asset or liability for the value attributable to in-placeleases.  The requirements are applicableto all acquisitions subsequent to July 1, 2001.  As of June 30, 2005, the Fund hasrecorded $420,784, as an intangible asset attributable to the value of theleases in place as of the date of acquisition. Accumulated amortization was$224,209 as of June 30, 2005. As of June 30, 2005, the Fund hasrecorded $550,000 as an intangible asset attributable to the current value ofbillboard and cell site leases as of the date of acquisition. Accumulated amortizationwas $20,956 as of June 30, 2005.

 

*Leasing Commissions*

 

Leasing commissions are stated at cost andamortized on a straight-line basis over the related lease term.

 

*Revenue Recognition*

 

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

 

*Fair Value of Financial Instruments*

 

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

 

*Income Tax Matters*

 

It is the intent of the Fund and its membersthat the Fund be treated as a partnership for income tax purposes.  As a limited liability company, the Fund issubject to certain minimal taxes and fees; however, income taxes on the incomeor losses realized by the Fund are generally the obligation of the members.

 

*Concentration of Credit Risk*

 

The Fund maintains its cash at banks withfederally insured accounts and uninsured money market funds.  The amounts are substantially uninsured.  No losses have been experienced related tosuch amounts.

 

9

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**3.****                                     ****Investments in Real Estate**

 

On September 27, 2002, the Fund acquiredan existing multi-tenant industrial business park known as Normandie BusinessCenter, located in Torrance, California for an investment of $3,901,696.  Normandie Business Center consists of twosingle-story buildings containing a total of 48,711 leasable square feet.

 

On December 27, 2002, the Fund acquiredan existing multi-tenant industrial business park known as the Sky HarborBusiness Park, located in Northbrook, Illinois for an investment of$2,553,996.  Sky Harbor Business Parkconsists of a single-story building containing a total of 41,422 leasablesquare feet.

 

On December 10, 2003, the Fund acquiredan existing multi-tenant industrial park known as Arrow Business Center locatedin Irwindale, California for an investment of $5,910,579.  The property consists of three single-storybuildings containing a total of 69,592 leasable square feet.

 

On January 25, 2005, the Fund acquiredan existing multi-tenant business park in Glenview, Illinois known as ZenithDrive Centre from an independent third party for an investment of $5,243,732.  Zenith Drive Centre is a single-story threebuilding property built in 1978 of approximately 38,088 square feet onapproximately 2.54 acres of land.

 

Included in the acquisition and purchaseprice of Zenith Drive Centre were a billboard sign and cellular relay antennalocated on the property leased to a large media company and communicationscompany, respectively.  Managementseparately valued these leases and the resulting amounts are included inintangible lease value.  The value ofthese leases is amortized over the remaining respective terms.

 

On April 28, 2005, the Fund purchased anexisting multi-tenant industrial park known as Paramount Business Center for aninvestment of $3,143,733. Paramount Business Center is a single-story twobuilding property of approximately 30,157 square feet on approximately 1.66acres of land located in Paramount, California.

 

Industrial space in the properties is generallyleased to tenants under lease terms that provide for the tenants to payincreases in operating expenses in excess of specified amounts.

 

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

 

The Managing Member incurs specificincremental costs in connection with the offering of membership units.  Reimbursement of such offering costs islimited to 4% of the gross proceeds of the related offerings.  Offering costs incurred by the Managing Memberin excess of the 4% limitation are deferred, and will be reimbursed from futureoffering proceeds.  Any offering costsincurred by the Managing Member that are not reimbursed by the Fund will bereflected as a capital contribution to the Fund by the Managing Member, with anoffsetting expense recognized in the Fund’s statement of operations.

 

10

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Unrecovered offering costs incurred by theManaging Member for the six months ending June 30, 2005 are as follows:

 

 
| Balance,  December 31, 2004 |   | $        | 443,690 |   |
|----------------------------------|--------|----------|---------|--------|
| Costs  incurred                  |   | 348,330  |    |
| Costs paid                       |   | (549,040 | )       |
|                             |   |     |    |
| Balance,  June 30, 2005     |   | $        | 242,980 |   |

 

Currently the Fund is distributing a 5%annual return paid quarterly.  During thesix months ended June 30, 2005, the Managing Member funded $216,711 tosubsidize the Fund’s distributions of $731,635 to the unitholders.  This funding by the Managing Member will notbe reimbursed to the Managing Member by the Fund.

 

The Managing Member and/or its affiliates areentitled to receive various fees, compensation and reimbursements as specifiedin the Fund’s operating agreement, including commissions of 7%, marketing feesof 2% of gross proceeds from the offering of units, and expense allowances of1.5% of gross proceeds from the offering of units. During the six months ended June 30,2005 and 2004, the total fees, compensation and reimbursements were $1,441,755and $535,483, respectively.

 

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

 

The following “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” should be read inconjunction with the Fund’s financial statements and notes thereto containedelsewhere in this report.  Certainstatements 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 the Fund’s future resultsof operations to be materially different than those expressed or impliedherein.  Some of these risks and otherfactors include, but are not limited to: (i) no assurance that Fund properties will continue to experience thecurrent level of occupancy; (ii) tenants may not be able to meet theirfinancial obligations; (iii) rental revenues from the properties may notbe sufficient to meet the Fund’s cash requirements for operations, capitalrequirements and distributions; (iv) suitable investment properties maynot continue to be available; and (v) adverse changes to the generaleconomy may disrupt operations.

 

# **CriticalAccounting Policies**

#  

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

 

## *RevenueRecognition*

## * *

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

 

## *Investmentsin Real Estate*

## * *

Investments in real estate are stated at costand include land, buildings and building improvements.  Expenditures for ordinary maintenance andrepairs are expensed to operations as incurred. Significant replacements, betterments and tenant improvements whichimprove or extend the useful lives of the buildings are capitalized.  Depreciation of the buildings and buildingimprovements is

 

11

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computed on a straight-line basis over their estimated useful lives ofeither 10 or 39 years.  Tenantimprovements are depreciated over the shorter of the useful asset life or therelated lease term.

 

The Fund evaluates the carrying value forinvestments in real estate in accordance with Financial Accounting StandardsBoard (“FASB”) Statement No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets* (“FAS 144”).  FAS 144 requires that when events or changesin circumstances indicate that the carrying amount of the assets might not berecoverable, companies should evaluate the need for an impairmentwrite-down.  When an impairmentwrite-down is required, the related assets are adjusted to their estimated fairvalue.

 

In June 2001 the FASB issued Statementof Financial Accounting Standard (“SFAS”) No. 141, *BusinessCombinations*and SFAS No. 142, *Goodwill andOther Intangible Assets*.  SFASNo. 141 and No. 142 require the Fund to record at acquisition anintangible asset or liability for the value attributable to in-placeleases.  The requirements are applicableto all acquisitions subsequent to July 1, 2001.  As of June 30, 2005, the Fund hasrecorded $420,784, as an intangible asset attributable to the value of theleases in place as of the date of acquisition. Accumulated amortization was$224,209 as of June 30, 2005.  As ofJune 30, 2005, the Fund has recorded $550,000 as an intangible assetattributable to the current value of billboard and cell site leases as of thedate of acquisition. Accumulated amortization was $20,956 as of June 30,2005.

 

*Off-balanceSheet Financings and Liabilities*

 

Other than lease commitments and legalcontingencies incurred in the normal course of business, the Fund does not haveany off-balance sheet financing arrangements or liabilities.  The Funddoes not have any majority-owned subsidiaries or any interests in, orrelationships with, any special-purpose entities.

 

# **Results ofOperations**

#  

As of June 30, 2005, the Fund haspurchased five multi-tenant industrial business park properties in two majormetropolitan areas.  The properties werepurchased from the proceeds from the sale of membership units, without debtfinancing. The properties were purchased in September 2002, December 2002,December 2003, January 2005, and April 2005. As a result of thedates of purchase, Fund operations for 2004 reflect the net income from only threeproperties for all six months of the prior period.

 

For the three months ended June 30, 2005,Fund operations reflect operations for the five properties purchased for allthree months except for the property that was recently purchased in April 2005.  The results of operations for this property areincluded from the acquisition date of April 28, 2005.

 

For the six months ended June 30, 2005,Fund operations reflect operations for the four properties purchased prior to April 1,2005 for all three months except for the property that was purchased in January 2005.  The results of operations for this property areincluded from the acquisition date of January 25, 2005.

 

*Three months ended June 30, 2005 and 2004*

 

The Fund’s net income for the three monthsended June 30, 2005 and 2004 was $121,888 and $62,919, respectively.  Revenue increased from $338,545 to $527,901.  This increase primarily reflects the additionsof Zenith Centre Drive and Paramount Business Center.  Property operating and maintenance expenses,and property taxes increased from $141,888 in 2004 to $228,028 in 2005 due tothe addition of the aforementioned two properties. Depreciation andamortization increased from $51,389 to $106,114 due to the addition of properties.  General and administrative costs increasedfrom $84,212 to $120,171.  The majorityof this increase is attributable to the additional accounting effort related tothe Sarbanes-Oxley Act of 2002.  Most ofthese costs are considered recurring as the Fund will be performing a formalassessment of its internal control structure in preparation for an audit ofinternal control over financial reporting for the year ended December 31,2006.

 

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Interest and other income increased to$48,300 for the three months ended June 30, 2005 from $1,863 for the sameperiod in 2004.  The increase wasprimarily due to a significant increase in invested cash balances and the risein short-term interest rates.

 

*Six months ended June 30, 2005 and 2004*

 

The Fund’s net income for the six monthsended June 30, 2005 and 2004 was $283,687 and $149,764, respectively.  Revenue increased from $640,047 to $960,968. Thisincrease primarily reflects the additions of Zenith Center Drive and ParamountBusiness Park.  Property operating andmaintenance expenses, and property taxes increased from $271,838 in 2004 to $402,553in 2005 due to the addition of the aforementioned two properties.  Depreciation and amortization increased from$102,900 to $200,742 due to the addition of properties.  General and administrative costs increasedfrom $117,751 to $154,936.  The majorityof this increase is attributable to the additional accounting effort related tothe Sarbanes-Oxley Act of 2002.  Most ofthese costs are considered recurring as the Fund will be performing a formalassessment of its internal control structure in preparation for an audit ofinternal control over financial reporting for the year ended December 31,2006.

 

Interest and other income increased to$80,950 for the six months ended June 30, 2005 from $2,206 for the sameperiod in 2004.  The increase wasprimarily due to a significant increase in invested cash balances and the risein short-term interest rates.

 

**Liquidityand Capital Resources**

 

As of June 30, 2005, the Fund hasreceived $43,279,400 ($48,244,900 as of August 4, 2005) of gross proceedsfrom the sale of membership units, and $701,150 as a capital contribution fromthe Managing Member.  As of June 30,2005, the Fund has $15.5 million ($19.8 at August 4, 2005) in cash andcash equivalents.

 

The Fund intends to continue offeringmembership units for sale and use the existing cash balance and net proceedsfrom the sale of units for the acquisition of additional multi-tenantindustrial business park properties, capital improvements to the properties,and for operating expenses and reserves.

 

The Fund expects to meet its short-termliquidity requirements from net cash generated by operations exclusive of anyexpected distributions.

 

The Managing Member has financed the Fund’soffering and organizational activities. A portion of those costs have been reimbursed to the Managing Member atthe rate of 4% of gross proceeds of the Fund’s unit sales pursuant to theprospectus for the offering.  The Fundwill continue to incur organizational and offering expenses and the ManagingMember, although not obligated, intends to continue providing advances foroffering and organizational expenses until the sale of membership units iscompleted.  The Managing Member mustraise funds through the sale of its own debt or equity securities to obtain thecash necessary to provide these advances. There can be no assurance as to the amount or timing of the ManagingMember’s receipt of funds.  The Fund willnot reimburse the Managing Member for any amounts advanced by it for offeringand organizational expenses, which exceed the amounts and percentages, setforth in the prospectus for the offering. Any such expenses incurred by the Managing Member on behalf of the Fundthat are not reimbursed by the Fund will be reflected as a capital contributionto the Fund by the Managing Member with an offsetting expense recognized in theFund’s statement of operations.

 

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**Contractual Obligations**

 

As of June 30, 2005, the Fund had nosignificant contractual obligations or commercial commitments, other than itsoperating leases with tenants in its commercial properties.

 

**Item 3.****                    ****Quantitative and QualitativeDisclosures About Market Risk**

 

The Fund invests its cash and cashequivalents in FDIC insured savings and money market accounts which, by theirnature, are subject to interest rate fluctuations.

 

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

 

Since March 2005, the Company has hired additional accountingpersonnel and believes that due to the increased number of personnel and the implementationof several new procedures, that the previously identified material weaknesseshave been substantially mitigated to a lower risk level.  The Fund has not undergone an audit of itsinternal control over financial reporting as it is not an accelerated filer,however, expects to undergo an examination for the year ended December 31,2006, or the expected due date of compliance with the Sarbanes-Oxley Act of2002.

 

The Fund’s disclosure controls and procedures are designed to ensurethat information required to be disclosed in reports that the Fund files orsubmits under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in the rules andforms of the Securities and Exchange Commission and that such information isaccumulated and communicated to the Fund’s management, as appropriate, to allowtimely decisions regarding required disclosure. The Chief Executive Officer andthe Chief Financial Officer of Cornerstone Ventures, Inc., the manager ofthe Managing Member of the Fund, have reviewed the effectiveness of the Fund’sdisclosure controls and procedures and have concluded that the disclosurecontrols and procedures were effective as of the end of the period covered bythis report.

 

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

 

It should be noted that any system ofcontrols, however well designed and operated, can provide only reasonable, andnot absolute, assurance that the objectives of the system are met.  In addition, the design of any control systemis based in part upon certain assumptions about the likelihood of futureevents.  Because of these and otherinherent limitations of control systems, there can be no assurance that anydesign will succeed in achieving its stated goals under all potential futureconditions.

 

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**PART II - OTHER INFORMATION**

 

**Item 6.****                    ****Exhibits**

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

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13or 15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this quarterly report to be signed on its behalf by the undersigned,thereunto duly authorized this 12th day of August 2005.

 
|   | 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) |

 

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