**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C.  20549**

**FORM 10-Q**

| **(Mark One)**                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                          |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                          | ** ** |
| **x**                                                                                                                                                                                                                                                                                                                                                                                                                                    | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934**  |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                          | ** ** |
| **For the quarterly period ended June 30, 2007**                                                                                                                                                                                                                                                                                                                                                                                         |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                               |
| **or**                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                          | ** ** |
| **o**                                                                                                                                                                                                                                                                                                                                                                                                                                    | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                          | ** ** |
| **For the transition period from                                    to                                ** |
|                                                                                                                                                                                                                                                                                                                                                                                                                                          |                                                                                               |  |  |

 

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

**CORNERSTONEREALTY FUND, LLC**(Exact name of registrantas specified in its charter)

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

 

**949-852-1007**

(Registrant’stelephone number, including area code)

**Not Applicable**

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

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

x  Yes  o  No

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

Large accelerated filer o  Accelerated filer o  Non-acceleratedfiler x

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

o  Yes  x  No

 

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| **PART I.**  | ** ** | **FINANCIAL INFORMATION**                                                                                                       | ** ** |
|-------------------|------------|---------------------------------------------------------------------------------------------------------------------------------|------------|
|              |       |                                                                                                                            |       |
| Item 1.      |       | Financial Statements:                                                                                                           |       |
|              |       | Condensed Balance Sheets as of June 30, 2007  (unaudited) and December 31, 2006                                                 |       |
|              |       |                                                                                                                            |       |
|              |       | Condensed Statements of Operations for the Three and  Six Months ended June 30, 2007  (unaudited) and June 30, 2006 (unaudited) |       |
|              |       |                                                                                                                            |       |
|              |       | Condensed Statements of Members’ Capital for the Six  Months ended June 30, 2007  (unaudited)                              |       |
|              |       |                                                                                                                            |       |
|              |       | Condensed Statements of Cash Flows for the Six Months  ended June 30, 2007 (unaudited)  and June 30, 2006 (unaudited)           |       |
|              |       |                                                                                                                            |       |
|              |       | Notes to Condensed Financial Statements (unaudited)                                                                             |       |
|              |       |                                                                                                                            |       |
| Item 2.      |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                     |       |
| Item 3.      |       | Quantitative  and Qualitative Disclosure About Market Risk                                                                      |       |
| Item 4.      |       | Controls and  Procedures                                                                                                        |       |
|              |       |                                                                                                                            |       |
| **PART II.** | ** ** | **OTHER INFORMATION**                                                                                                           | ** ** |
|              |       |                                                                                                                            |       |
| Item 6.      |       | Exhibits                                                                                                                        |       |
|              |       |                                                                                                                            |       |
| SIGNATURES        |       |                                                                                                                            |       |

 

2

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**CORNERSTONEREALTY FUND, LLC**

**(a California limited liability company)**

**CONDENSED BALANCE SHEETS**
| ** **                                                                                               | ** ** | **June 30, 2007** | ** ** | **December 31, 2006 (a)** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|------------------------------------------|------------|
| ** **                                                                                               | ** ** | **(unaudited)**             | ** ** | ** **                               | ** ** |
| **ASSETS**                                                                                               | ** ** | ** **                  | ** ** | ** **                               | ** ** |
|                                                                                                     |       |                        |       |                                     |       |
| Cash and cash equivalents                                                                                |       | $                           | 4,714,000  |                                     | $          | 2,249,000 |   |
| Investments in real estate                                                                               |       |                        |       |                                     |       |
| Land                                                                                                     |       | 11,779,000                  |       | 11,779,000                               |       |
| Buildings and  improvements, net                                                                         |       | 21,978,000                  |       | 22,258,000                               |       |
| Intangible lease  assets, net                                                                            |       | 445,000                     |       | 466,000                                  |       |
| Intangible in-place  lease asset, net                                                                    |       | 263,000                     |       | 337,000                                  |       |
| Investment in real  estate assets held for sale, net                                                     |       | —                      |       | 2,619,000                                |       |
|                                                                                                     |       | 34,465,000                  |       | 37,459,000                               |       |
| Other assets                                                                                             |       |                        |       |                                     |       |
| Assets associated with  property held for sale                                                           |       | —                      |       | 112,000                                  |       |
| Utility deposits                                                                                         |       | 8,000                       |       | 8,000                                    |       |
| Tenant and other  receivables, net                                                                       |       | 214,000                     |       | 233,000                                  |       |
| Prepaid expenses                                                                                         |       | 42,000                      |       | 7,000                                    |       |
| Leasing commissions,  less accumulated amortization of $207,000 in 2007 and $131,000 in 2006             |       | 208,000                     |       | 201,000                                  |       |
|                                                                                                     |       |                        |       |                                     |       |
| Total assets                                                                                             |       | $                           | 39,651,000 |                                     | $          | 40,269,000 |   |
|                                                                                                     |       |                        |       |                                     |       |
| **LIABILITIES AND MEMBERS’  CAPITAL**                                                               | ** ** | ** **                  | ** ** | ** **                               | ** ** |
|                                                                                                     |       |                        |       |                                     |       |
| Liabilities                                                                                              |       |                        |       |                                     |       |
| Accounts payable,  accrued liabilities and other liabilities                                             |       | $                           | 209,000    |                                     | $          | 362,000 |   |
| Real estate taxes  payable                                                                               |       | 185,000                     |       | 194,000                                  |       |
| Tenant security  deposits                                                                                |       | 325,000                     |       | 302,000                                  |       |
| Liabilities associated  with property held for sale                                                      |       | —                      |       | 166,000                                  |       |
| Liabilities associated  with disposed property                                                           |       | 32,000                      |       | —                                   |       |
| Intangible lease  liability, net                                                                         |       | 81,000                      |       | 110,000                                  |       |
| Total liabilities                                                                                        |       | 832,000                     |       | 1,134,000                                |       |
|                                                                                                     |       |                        |       |                                     |       |
| Members’ capital (100,000 units authorized and outstanding at June  30, 2007 and December 31, 2006) |       | 38,819,000                  |       | 39,135,000                               |       |
|                                                                                                     |       |                        |       |                                     |       |
| Total liabilities and members’ capital                                                              |       | $                           | 39,651,000 |                                     | $          | 40,269,000 |   |

 

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

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(a) Derived from the audited financial statements asof December 31 2006.

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**CORNERSTONEREALTY FUND, LLC**

**(a California limited liability company)**

**CONDENSED STATEMENTS OF OPERATIONS**

**(Unaudited)**
| ** **                                                                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended   June 30,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                              | ** ** | **2007**                                        | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                                    |       |                                            |       |                                                |       |   |   |   |   |
| Revenues                                                                                |       |                                            |       |                                                |       |   |   |   |   |
| Rental revenues                                                                         |       | $                                               | 766,000    |                                                | $          | 577,000 |   | $ | 1,568,000 |   | $ | 1,114,000 |   |
| Tenant  reimbursements and other income                                                 |       | 240,000                                         |       | 142,000                                             |       | 400,000 |   | 274,000 |   |
|                                                                                    |       | 1,006,000                                       |       | 719,000                                             |       | 1,968,000 |   | 1,388,000 |   |
| Expenses                                                                                |       |                                            |       |                                                |       |   |   |   |   |
| Property  operating and maintenance                                                     |       | 233,000                                         |       | 233,000                                             |       | 406,000 |   | 402,000 |   |
| Property taxes                                                                          |       | 156,000                                         |       | 112,000                                             |       | 291,000 |   | 246,000 |   |
| General and  administrative                                                             |       | 115,000                                         |       | 135,000                                             |       | 233,000 |   | 284,000 |   |
| Depreciation and  amortization                                                          |       | 272,000                                         |       | 197,000                                             |       | 530,000 |   | 408,000 |   |
|                                                                                    |       | 776,000                                         |       | 677,000                                             |       | 1,460,000 |   | 1,340,000 |   |
|                                                                                    |       |                                            |       |                                                |       |   |   |   |   |
| Interest,  dividends and other income                                                   |       | 41,000                                          |       | 137,000                                             |       | 57,000 |   | 268,000 |   |
|                                                                                    |       |                                            |       |                                                |       |   |   |   |   |
| Income from continuing  operations                                                      |       | 271,000                                         |       | 179,000                                             |       | 565,000 |   | 316,000 |   |
|                                                                                    |       |                                            |       |                                                |       |   |   |   |   |
| Discontinued operations                                                                 |       |                                            |       |                                                |       |   |   |   |   |
| Income (loss)  from discontinued operations                                             |       | 15,000                                          |       | 17,000                                              |       | 45,000 |   | (3,000 | ) |
| Gain on sale of  real estate                                                            |       | 320,000                                         |       | —                                              |       | 320,000 |   | — |   |
|                                                                                    |       |                                            |       |                                                |       |   |   |   |   |
| Net income                                                                              |       | $                                               | 606,000    |                                                | $          | 196,000 |   | $ | 930,000 |   | $ | 313,000 |   |
|                                                                                    |       |                                            |       |                                                |       |   |   |   |   |
| Net income allocable to  managing member                                                |       | $                                               | 61,000     |                                                | $          | 20,000 |   | $ | 93,000 |   | $ | 31,000 |   |
|                                                                                    |       |                                            |       |                                                |       |   |   |   |   |
| Net income (loss)  allocable to unitholders                                             |       |                                            |       |                                                |       |   |   |   |   |
| Continuing  operations                                                                  |       | $                                               | 244,000    |                                                | $          | 161,000 |   | $ | 509,000 |   | $ | 285,000 |   |
| Discontinued  operations                                                                |       | 301,000                                         |       | 15,000                                              |       | 328,000 |   | (3,000 | ) |
|                                                                                    |       | $                                               | 545,000    |                                                | $          | 176,000 |   | $ | 837,000 |   | $ | 282,000 |   |
| Per unit amounts                                                                        |       |                                            |       |                                                |       |   |   |   |   |
| Basic and diluted  income from continuing operations allocable to unit holders          |       | $                                               | 2.44       |                                                | $          | 1.61 |   | $ | 5.09 |   | $ | 2.85 |   |
| Basic and diluted  income (loss) from discontinued operations allocable to unit holders |       | 3.01                                            |       | 0.15                                                |       | 3.28 |   | (0.03 | ) |
| Basic and dilulted  income allocable to unit holders                                    |       | $                                               | 5.45       |                                                | $          | 1.76 |   | $ | 8.37 |   | $ | 2.82 |   |
|                                                                                    |       |                                            |       |                                                |       |   |   |   |   |
| Basic and diluted  weighted average units outstanding                                   |       | 100,000                                         |       | 100,000                                             |       | 100,000 |   | 100,000 |   |

 

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

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**CORNERSTONE REALTY FUND, LLC**

**(a California limited liability company)**

**CONDENSED STATEMENT OF MEMBERS’ CAPITAL**

**(Unaudited)**
| Balance, December 31,  2006         |   | $          | 39,135,000 |   |
|-------------------------------------|--------|------------|------------|--------|
|                                |   |       |       |
| Cash distributions to  unit holders |   | (1,246,000 | )          |
| Net income                          |   | 930,000    |       |
|                                |   |       |       |
| Balance, June 30, 2007              |   | $          | 38,819,000 |   |

 

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

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**CORNERSTONE REALTY FUND,LLC**

**(a California limited liability company)**

**CONDENSED STATEMENTS OF CASH FLOWS**

**(Unaudited)**
| ** **                                                                        | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                        | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| OPERATING  ACTIVITIES                                                             |       |                                          |       |   |   |
| Net income                                                                        |       | $                                             | 930,000    |   | $ | 313,000 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities |       |                                          |       |   |   |
| Net gain on sale of real estate                                                   |       | (320,000                                      | )          | — |   |
| Depreciation and amortization                                                     |       | 530,000                                       |       | 454,000 |   |
| Amortization of intangible lease liabilities                                      |       | (29,000                                       | )          | (6,000 | ) |
| Changes in operating assets and liabilities                                       |       |                                          |       |   |   |
| Other assets                                                                      |       | 14,000                                        |       | (50,000 | ) |
| Accounts payable, accrued liabilities and other  liabilities                      |       | (273,000                                      | )          | 140,000 |   |
| Net cash  provided by operating activities                                        |       | 852,000                                       |       | 851,000 |   |
|                                                                              |       |                                          |       |   |   |
| INVESTING  ACTIVITIES                                                             |       |                                          |       |   |   |
| Real estate addition                                                              |       | (80,000                                       | )          | (10,263,000 | ) |
| Net proceeds received from sale of real estate                                    |       | 2,939,000                                     |       | — |   |
| Net cash  provided (used in) investing activities                                 |       | 2,859,000                                     |       | (10,263,000 | ) |
|                                                                              |       |                                          |       |   |   |
| FINANCING  ACTIVITIES                                                             |       |                                          |       |   |   |
| Cash distributions to unit holders                                                |       | (1,246,000                                    | )          | (1,246,000 | ) |
| Net cash used in  financing activities                                            |       | (1,246,000                                    | )          | (1,246,000 | ) |
|                                                                              |       |                                          |       |   |   |
| Net increase  (decrease) in cash                                                  |       | 2,465,000                                     |       | (10,658,000 | ) |
|                                                                              |       |                                          |       |   |   |
| Cash and cash  equivalents at beginning of period                                 |       | 2,249,000                                     |       | 13,489,000 |   |
|                                                                              |       |                                          |       |   |   |
| Cash and cash  equivalents at end of period                                       |       | $                                             | 4,714,000  |   | $ | 2,831,000 |   |

 

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

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**CORNERSTONEREALTY FUND, LLC**

**(aCalifornia Limited Liability Company)**

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**(Unaudited)**

**1.****            Organization and Business**

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

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

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

Our interimunaudited condensed financial statements have been prepared in accordance withaccounting principles generally accepted in the United States for interimfinancial information and in accordance with the rules and regulations of theSecurities and Exchange Commission.  Aspermitted by the Securities and Exchange Commission filing requirements forForm 10-Q, the condensed financial statements do not include all of theinformation and footnotes required by accounting principles generally acceptedin the United States for complete financial statements.  The condensed financial statements includedherein should be read in conjunction with our Annual Report on Form 10-K forthe year ended December 31, 2006.

The interimunaudited condensed financial statements have been prepared in accordancewith  our customary accountingpractices.  In the opinion of management,all adjustments (consisting of normal recurring accruals) considered necessaryfor a presentation in accordance with accounting principles generally acceptedin the United States have been included. Operating results for the six months ended June 30, 2007 are notnecessarily indicative of the results that may be expected for the year endingDecember 31, 2007.

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

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

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

·                  NetCash Flow from Operations, as defined, will be distributed 90% to the unitholdersand 10% to the Managing Member until the unitholders have received either an 8%or 12% cumulative, non-compounded annual return on their Invested CapitalContributions, as defined. The 12% return applies to specified early investorsfor the twelve-month period subsequent to the date of their Invested CapitalContributions and is in lieu of the 8% return during that period.

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

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

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

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

EffectiveFebruary 22, 2007, our Operating Agreement was amended to permit repurchase ofunits on such terms and conditions as the managing member may determine.

**2.****            Summary of Significant Accounting Policies**

*Useof Estimates*

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

*Cashand Cash Equivalents*

Cashand cash equivalents consist primarily of interest-bearing investments withoriginal maturities of 90 days or less at the date of purchase.  We place our cash with major financialinstitutions.  At times, cash balancesmay be in excess of amounts insured by Federal agencies.

*Investmentsin Real Estate*

Investments in real estate are stated at cost andinclude land, buildings and building improvements.  Expenditures for ordinary maintenance andrepairs are expensed to operations as incurred. Significant replacements, betterments and tenant improvements whichimprove 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 lesser of their useful life or the related lease term.

We evaluate the carrying value for investments inreal estate in accordance with Financial Accounting Standards Board (“FASB”)Statement No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets*(“FAS 144”).  FAS 144 requires that when events or changesin circumstances indicate that the carrying amount of the assets might not berecoverable, companies should evaluate the need for an impairmentwrite-down.  When an impairmentwrite-down is required, the related assets are adjusted to their estimated fairvalue. No assets were deemed to be impaired at June 30, 2007.

TheFund records acquisitions in accordance with FASB Statement of FinancialAccounting Standard (“SFAS”) No. 141, *Business Combinations*and SFAS No. 142, *Goodwill and Other Intangible Assets*.

The fair value of the tangible assets of the acquiredproperties considers the value of the properties as if vacant as of theacquisition date. Management must make significant assumptions in determiningthe value of assets and liabilities acquired. Amounts allocated to land are derived from comparable sales of landwithin the same region. Amounts allocated to buildings and improvements, tenantimprovements and unamortized leasing commissions are based on current marketreplacement costs and other market rate information.

Acquired above and below market leases are valued based onthe present value of the difference between prevailing market rates and thein-place rates over the remaining lease term. The value of acquired above and below market leases is amortized overthe remaining non-cancelable terms of the respective leases as an adjustment torental revenues on our statement of operations.

The amount allocated to acquired in-place leases isdetermined based on management’s assessment of lost revenues and costs incurredfor the period required to lease the “assumed vacant” property to the occupancylevel when purchased.The 

amountallocated to acquired in-place leases is included in intangible assets —in-place leases in the balance sheet and amortized to expense over theremaining non-cancelable term of the respective leases.

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Anticipatedamortization of in-place and below market lease intangibles is as follows:
|                                    | ** ** | **Lease  Intangibles** | ** ** |
|------------------------------------|------------|------------------------|------------|
| July 1, 2007 to  December 31, 2007 |       | $                      | 48,000     |   |
| 2008                               |       | 81,000                 |       |
| 2009                               |       | 49,000                 |       |
| 2010                               |       | 4,000                  |       |
| 2011                               |       | -                      |       |
|                                    |            |                        |            |  |

 

As of June 30, 2007, accumulateddepreciation and amortization related to investments in real estate and relatedlease intangibles were as follows:
| ** **                                       | ** ** | **Land** | ** ** | **Buildings and  Improvements** | ** ** | **Intangible  Lease Asset** | ** ** | **In lace Lease  Asset** | ** ** | **Intangible  Lease  Liability** | ** ** |
|--------------------------------------------------|------------|----------|------------|--------------------------------------|------------|----------------------------------|------------|------------------------------------|------------|----------------------------------|------------|
| Investments in  Real Estate                      |       | $        | 11,779,000 |                                 | $          | 23,458,000                       |       | $                                  | 550,000    |                             | $          | 894,000 |   | $ | (154,000 | ) |
| Less:  accumulated depreciation and amortization |       | -        |       | (1,480,000                           | )          | (105,000                         | )          | (631,000                           | )          | 73,000                           |       |
| Net investments  in Real Estate                  |       | $        | 11,779,000 |                                 | $          | 21,978,000                       |       | $                                  | 445,000    |                             | $          | 263,000 |   | $ | (81,000 | ) |

 

                Depreciation and amortization related to investmentin real estate and related lease intangibles for the three and six months endedJune 30, 2007 were $214,000 and $425,000 respectively.  Depreciation and amortization related toinvestment in real estate and related lease intangibles for the three and sixmonths ended June 30, 2006 were $174,000 and $363,000 respectively.

*Discontinued Operation*

Sky HarborBusiness Park - Northbrook, IL

On April 16, 2007,we sold our 41,422 square foot property located in Northbrook, IL commonlyknown as “Sky Harbor Business Park”, for $3.2 million to an unaffiliated thirdparty.  Net cash proceeds were $2.9million after payment of related closing costs and other transaction expenses.A property disposition fee of $32,000 or 1% of the sales price was paid to CIP,in accordance with the terms of operating agreement.

We classified theassets and liabilities for this property at December 31, 2006 in ourconsolidated balance sheet as held for sale. In addition, we have classifiedits results of operations, for all periods presented, and gains from its sale,as discontinued operations on our consolidated statements of income.

*LeasingCommissions*

Leasingcommissions are stated at cost and amortized on a straight-line basis over therelated lease term.  Included indepreciation and amortization on the statement of operations is amortization ofleasing commissions for the three and six months ended June 30, 2007 was$45,000 and $76,000, respectively. Amortization of leasing commissions for the three and six months endedJune 30, 2006 was $23,000 and $45,000, respectively.

*RevenueRecognition*

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

*Fair Value of Financial Instruments*

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

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*IncomeTax Matters*

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

*Concentration of Credit Risk*

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

*Impact of New Accounting Pronouncements*

InJuly 2006, the Financial Accounting Standards Board (“FASB”) issuedInterpretation No. 48, Accounting for Uncertainty in Income Taxes, aninterpretation of FASB Statement No. 109, (“FIN 48”), which clarifiesthe relevant criteria and approach for the recognition, derecognition, andmeasurement of uncertain tax positions. FIN 48 is effective for fiscalyears beginning after December 15, 2006.  The adoption of FIN 48 did nothave a material impact on our consolidated financial statements.

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), whichdefines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles and expands disclosures about fairvalue measurements. In February 2007, the FASB issued SFAS No. 159, “The FairValue Options for Financial Assets and Financial Liabilities”. SFAS 157 and 159are effective for financial statements issued for fiscal periods beginningafter November 15, 2007 (our fiscal year beginning January 1, 2008), andinterim periods within those fiscal years. Management is currently evaluatingthe impact of adopting SFAS No. 157 on the consolidated financial statements.

*Reclassification*

Certainpreviously reported amounts have been reclassified to conform to the currentperiod presentation.

**3.****                                    ****Real Estate Assets andLiabilities from discontinued operations**

SFAS No. 144, “Accounting for the Impairment or Disposal of Long-LivedAssets” requires that long-lived assets that are to be disposed of by sale bemeasured at the lower of book value or fair value less costs to sell. AtDecember 31, 2006, one of our properties were classified as held-for-sale.  In addition to classifying the property asheld-for-sale, the financial results are reported as discontinued operations inour Statements of Operations.  The tablebelow provides information on our held-for-sale assets and liabilities.

As of June 30,2007 and December 31, 2006, the assets related to the properties held for saleand related liabilities were as follows: 
| ** **                                                  | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Real estate  assets from discontinued operations :          |       |                    |       |                        |       |
| Land                                                        |       | $                       | –     |                        | $          | 419,000 |   |
| Building and improvements, net of accumulated  depreciation |       | –                  |       | 2,200,000                   |       |
|                                                        |       | $                       | –     |                        | $          | 2,619,000 |   |
|                                                        |       |                    |       |                        |       |
| Other assets  held for sale                                 |       | $                       | –     |                        | $          | 112,000 |   |
| Liabilities associated  with discontinued operation         |       | $                       | 32,000     |                        | $          | 166,000 |   |

 

**4.             DiscontinuedOperations**

In accordance withSFAS No. 144, we report results of operations from real estate assets that meetthe definition of a component of an entity that have been sold, or meet thecriteria to be classified as held for sale, as discontinued operations. As ofSeptember 30, 2006, we determined that the potential sale of Sky HarborBusiness Park to a third party was probable and classified it as held for salein accordance with SFAS No. 144. Depreciation and amortization of Sky Harbor Business Park was notrecorded for the period of October 1, 2006 to April 16, 2007, the dispositiondate, in accordance with SFAS No. 144.  We included all results of these discontinued operations in a separatecomponent of income on the statements of operations under the heading DiscontinuedOperations. This treatment resulted in certain reclassifications of 2006financial statement amounts.

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The following is asummary of the components of income from discontinued operations for the periodended June 30, 2007 and 2006. 
| ** **                                                               | ** ** | **June 30 2007** | ** ** | **June 30, 2006** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------|------------|-----------------------------|------------|
| Total revenues                                                           |       | $                          | 120,000    |                        | $          | 144,000 |   |
| Property  operating and maintenance and property taxes                   |       | 75,000                     |       | 107,000                     |       |
| Depreciation and  amortization                                           |       | –                     |       | 40,000                      |       |
|                                                                     |       |                       |       |                        |       |
| Income (loss)  from discontinued operations                              |       | $                          | 45,000     |                        | $          | (3,000 | ) |
|                                                                     |       |                       |       |                        |       |
| Gain on sale of  real estate                                             |       | 320,000                    |       | –                      |       |
|                                                                     |       |                       |       |                        |       |
| Income (loss)  from discontinued operations allocable to managing member |       | $                          | 5,000      |                        | $          | – |   |
| Income  (loss)from discontinued operations allocable to unit holders     |       | $                          | 40,000     |                        | $          | (3,000 | ) |
|                                                                     |       | $                          | 45,000     |                        | $          | (3,000 | ) |

 

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

The following “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”should be read in conjunction with our financial statements and notes theretocontained elsewhere in this report. Certain statements in this section and elsewhere contain forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995.  Such forward-looking statementsmay relate to risks and other factors that may cause our future results ofoperations to be materially different than those expressed or impliedherein.  Some of these risks and otherfactors include, but are not limited to: (i) no assurance that our 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 not besufficient to meet our cash requirements for operations, capital requirementsand distributions; and (iv) adverse changes to the general economy may disruptoperations.

# **Resultsof Operations**

*Three months ended June 30, 2007and 2006*

As of June 30,2007, we owned six multi-tenant industrial properties in three majormetropolitan markets. Five of these properties were purchased before 2006, andone property was purchased in June  2006.In the fourth quarter of 2006, we determined that the sale of Sky HarborBusiness Park was probable, and we reported operating results for this propertyas discontinued operations in accordance with SFAS No. 144. The sale wascompleted in April 2007.  The results ofcontinuing operations reflect a full three months of operations for sixproperties in 2007 and five properties in 2006.

Revenues for thesecond  quarter of 2007 increased to$1,006,000 from $719,000 for the comparable period of 2006.  The increase was primarily due to theproperty purchased in June 2006 and higher overall occupancy rates.

Property operatingand maintenance expenses in the second quarter of 2007 were comparable to the2006 quarter, as a result of an overall decrease  in mainenance costs  for properties owned in the 2006 quarter,offset by expenses incurred for the property purchased in June 2006.  Property taxes increased to $156,000 in 2007from $112,000 in 2006.  This increase isdue to the property purchased during 2006 and increased property tax rates onexisting properties in 2007.

General andadministrative costs decreased to $115,000 in the second quarter of 2007 from$135,000 in the comparable quarter of 2006. The decrease is due primarily to non-recurring consulting fees incurredin 2006.  Depreciation and amortizationincreased to $272,000 in the the first quarter of 2007 from $197,000 in thecomparable quarter of 2006 as a result of the property purchased in 2006.

Interest and otherincome decreased to $41,000 for the three months ended June 30, 2007 from$137,000 for the same period of 2006 due to lower cash available for investmentafter June 2006.

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* Six months ended June 30, 2007 and 2006*

Revenues for thefirst six months of 2007 increased to $1,968,000 from $1,388,000 for thecomparable period of 2006.  The increasewas due to the property purchased during 2006 and higher overall occupancyrates.

Property operatingand maintenance expenses increased to $406,000 in the firs six months of 2007from $402,000 in the first six months of 2006 due to the property purchasedduring 2006, offset by lower maintenance costs during the first half  of 2007.  Property taxes increased to$291,000 in the first six months of  2007from $246,000 in the first six months of 2006.  The increase was due to theproperty purchased in 2006 and increases to property tax rates on existingproperties in 2007.

General andadministrative costs decreased to $233,000 in the first six months of 2007 from$284,000 in the comparable period of 2006. The decrease was due primarily to non-recurring consulting fees incurredin 2006.  Depreciation and amortizationincreased to $530,000 in the the first six months of 2007 from $408,000 in thecomparable period of 2006 as a result of the addition of one property during2006.

**Liquidity and Capital Resources**

Ourplanned $50,000,000 equity offering is complete and we do not expect to raiseany additional funds. On April 16, 2007, we sold Sky Harbor Business Park for agross sale price of $3.2 million.   Weintend to use the existing cash balance for capital improvements to theproperties and for operating expenses and reserves.  Cash in excess of these needs will beavailable for our recently approved unit repurchase program and fordistribution to unit holders.

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

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

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

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

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

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

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

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**PART II - OTHER INFORMATION**

**Item 6.              Exhibits**

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

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

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

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this quarterly report to be signed on its behalf bythe undersigned, thereunto duly authorized this 8th day of August.
|        | CORNERSTONE REALTY FUND, LLC |
|--------|------------------------------|
|   |                         |   |   |
|   | By:                          | CORNERSTONE INDUSTRIAL PROPERTIES, LLC |
|   |                         | its Managing Member |
|   |                         |   |   |
|   |                         | By: | CORNERSTONE VENTURES, INC.

its Manager |
|   |                         |   |
|   |                         |   |   |
|   |                         |   | By: | /s/ TERRY G. ROUSSEL |
|   |                         |   |   | Terry G. Roussel, President |
|   |                         |   |   | (Principal Executive Officer) |
|   |                         |   |   |   |
|   |                         |   | By: | /s/ SHARON C. KAISER |
|   |                         |   |   | Sharon C. Kaiser, |
|   |                         |   |   | Chief Financial Officer |
|   |                         |   |   | (Principal Financial Officer and |
|   |                         |   |   | Principal Accounting Officer) |
|        |                              |  |  |  |  |  |  |

 

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