**U.S. SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

| **(Mark One)** |   |                                                                                                                                                                                                                                                                           |   |   |
|----------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|           |   |                                                                                                                                                                                                                                                                           |   |   |
| **ý**     |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934**                                                                                                                                                                             |   |   |
|           |   |                                                                                                                                                                                                                                                                           |   |   |
|           |   | **FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003**                                                                                                                                                                                                                     |   |   |
|           |   |                                                                                                                                                                                                                                                                           |   |   |
| **o**          |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF  1934**                                                                                                                                                                            |   |   |
|           |   |                                                                                                                                                                                                                                                                           |   |   |
|           |   | **FOR THE TRANSITION PERIOD FROM                       TO                     ** |   |   |

 

**CommissionFile Number   333-63656**

 

| **CORNERSTONE REALTY FUND, LLC**                                                    |
|-------------------------------------------------------------------------------------|
| (EXACT NAME OF REGISTRANT AS SPECIFIED IN  ITS CHARTER)                             |
|                                                                                |
| **California**                                                                      |   | **33-0827161** |
| (State or other jurisdiction  of incorporation or organization)                     |   | (IRS Employer  Identification No.) |
|                                                                                |
| **4590 MACARTHUR  BLVD., SUITE 610, NEWPORT BEACH, CALIFORNIA 92660**               |
| (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                                            |
|                                                                                |
| **949-852-1007**                                                                    |
| (ISSUER’S TELEPHONE NUMBER)                                                    |
|                                                                                |
| **Not Applicable**                                                                  |
| (FORMER NAME, FORMER ADDRESS AND FORMER  FISCAL YEAR, IF CHANGED SINCE LAST REPORT) |

 

Check whether the issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act of 1934during the past 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

YES  ý     NO  o

 

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

 

As of November 4, 2003, the Fund had 28,744 units of membershipinterest issued and outstanding.

 

 

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**PARTI - FINANCIAL INFORMATION**

 
| **Item 1.**                                                                                                                                      | **Financial  Statements** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|---------------------------|
|                                                                                                                                             |
| **Cornerstone Realty Fund,  LLC**                                                                                                                |
|                                                                                                                                             |
| Condensed  Balance Sheets at September 30, 2003 (Unaudited) and December 31,  2002                                                     |
|                                                                                                                                             |
| Condensed Statements  of Operations for the Three Months and Nine Months ended   September 30, 2003 and September 30, 2002 (Unaudited) |
|                                                                                                                                             |
| Condensed  Statements of Members’ Capital for the Nine Months ended   September 30, 2003 (Unaudited)                                   |
|                                                                                                                                             |
| Condensed Statements  of Cash Flows for the Nine Months ended  September 30, 2003 and September 30, 2002 (Unaudited)                   |
|                                                                                                                                             |
| Notes to  Condensed Financial Statements                                                                                                         |

 

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**CORNERSTONEREALTY FUND, LLC**

**(a California Limited Liability Company)**

 

**CONDENSEDBALANCE SHEETS**

**(Unaudited)**

 
|                                                                                                                                            |   | **September 30, 2003** |       | **December 31, 2002** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|------------|----------------------------|--------|
| **ASSETS**                                                                                                                                      |   |                        |       |                       |   |
|                                                                                                                                            |   |                        |       |                       |   |
| Assets                                                                                                                                          |   |                        |       |                       |   |
| Cash and cash equivalents                                                                                                                       |   | $                           | 4,334,254  |                       | $      | 1,062,947 |   |
|                                                                                                                                            |   |                        |       |                       |   |
| Investments in real estate                                                                                                                      |   |                        |       |                       |   |
| Land                                                                                                                                            |   | 2,201,930                   |       | 2,201,930                  |   |
| Buildings and improvements, less  accumulated depreciation of $97,916 in 2003 and $15,868 in 2002                                               |   | 4,215,778                   |       | 4,237,894                  |   |
|                                                                                                                                            |   | 6,417,708                   |       | 6,439,824                  |   |
|                                                                                                                                            |   |                        |       |                       |   |
| Other assets                                                                                                                                    |   |                        |       |                       |   |
| Tenant and other receivables                                                                                                                    |   | 41,956                      |       | 11,197                     |   |
| Prepaid insurance                                                                                                                               |   | 3,536                       |       | 14,877                     |   |
| Leasing commissions, less accumulated  amortization of $674 in 2003 and $136 in 2002                                                            |   | 5,666                       |       | 1,497                      |   |
| Office equipment, less accumulated  depreciation of $2,720 in 2003 and $2,313 in 2002                                                           |   | 134                         |       | 541                        |   |
| Total assets                                                                                                                                    |   | $                           | 10,803,254 |                       | $      | 7,530,833 |   |
|                                                                                                                                            |   |                        |       |                       |   |
| **LIABILITIES AND MEMBERS’ CAPITAL**                                                                                                       |   |                        |       |                       |   |
|                                                                                                                                            |   |                        |       |                       |   |
| Liabilities                                                                                                                                     |   |                        |       |                       |   |
| Accounts payable and accrued liabilities                                                                                                        |   | $                           | 32,551     |                       | $      | 101,038 |   |
| Real estate taxes payable                                                                                                                       |   | 88,376                      |       | 113,657                    |   |
| Tenant security deposits                                                                                                                        |   | 70,744                      |       | 82,622                     |   |
| Advances payable to managing member                                                                                                             |   | —                      |       | 111,059                    |   |
| Total liabilities                                                                                                                               |   | 191,671                     |       | 408,376                    |   |
|                                                                                                                                            |   |                        |       |                       |   |
| Members’ capital (100,000 units authorized,  26,171 units issued and outstanding in 2003 and 18,061 units issued and  outstanding in 2002) |   | 10,611,583                  |       | 7,122,507                  |   |
| Total liabilities and members’ capital                                                                                                     |   | $                           | 10,803,254 |                       | $      | 7,530,883 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

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**CORNERSTONE REALTY FUND, LLC**

**(a California Limited Liability Company)**

 

**CONDENSED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
|                                                     |   | **Three  Months Ended********September 30,** |    | **Nine  Months Ended********September 30,** |   |
|----------------------------------------------------------|--------|---------------------------------------------------|---------|--------------------------------------------------|--------|
|                                                     |   | **2003**                                          |    | **2002**                                         |   | **2003** |   | **2002** |   |
|                                                     |   |                                              |    |                                             |   |   |   |   |   |
| Revenues                                                 |   |                                              |    |                                             |   |   |   |   |   |
| Rental revenues                                          |   | $                                                 | 163,967 |                                             | $      | 4,353 |   | $ | 560,277 |   | $ | 4,353 |   |
| Tenant reimbursements and other income                   |   | 41,037                                            |    | —                                           |   | 108,883 |   | — |   |
| Interest, dividends and other income                     |   | 6,781                                             |    | 18,602                                           |   | 16,708 |   | 45,022 |   |
|                                                     |   | 211,785                                           |    | 22,955                                           |   | 685,868 |   | 49,375 |   |
|                                                     |   |                                              |    |                                             |   |   |   |   |   |
| Expenses                                                 |   |                                              |    |                                             |   |   |   |   |   |
| Property operating and maintenance                       |   | 34,238                                            |    | —                                           |   | 94,131 |   | — |   |
| Property taxes                                           |   | 39,948                                            |    | 391                                              |   | 116,074 |   | 391 |   |
| General and administrative                               |   | 32,241                                            |    | 31,404                                           |   | 101,030 |   | 132,454 |   |
| Interest on advances payable to managing member          |   | 8,876                                             |    | 9,254                                            |   | 26,974 |   | 32,192 |   |
| Depreciation and amortization                            |   | 27,677                                            |    | 142                                              |   | 82,993 |   | 426 |   |
|                                                     |   | 142,980                                           |    | 41,191                                           |   | 421,202 |   | 165,463 |   |
|                                                     |   |                                              |    |                                             |   |   |   |   |   |
| Net income (loss)                                        |   | $                                                 | 68,805  |                                             | $      | (18,236 | ) | $ | 264,666 |   | $ | (116,088 | ) |
|                                                     |   |                                              |    |                                             |   |   |   |   |   |
| Net income (loss) allocable to managing member           |   | $                                                 | 6,881   |                                             | $      | (1,824 | ) | $ | 26,467 |   | $ | (11,609 | ) |
|                                                     |   |                                              |    |                                             |   |   |   |   |   |
| Net income (loss) allocable to unitholders               |   | $                                                 | 61,924  |                                             | $      | (16,412 | ) | $ | 238,199 |   | $ | (104,479 | ) |
|                                                     |   |                                              |    |                                             |   |   |   |   |   |
| Per unit amounts:                                        |   |                                              |    |                                             |   |   |   |   |   |
| Basic and diluted income (loss) allocable to unitholders |   | $                                                 | 2.43    |                                             | $      | (1.24 | ) | $ | 10.61 |   | $ | (10.32 | ) |
|                                                     |   |                                              |    |                                             |   |   |   |   |   |
| Basic and diluted weighted average units outstanding     |   | 25,521                                            |    | 13,237                                           |   | 22,459 |   | 10,125 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

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**CORNERSTONE REALTY FUND, LLC**

**(a California Limited Liability Company)**

 

**CONDENSEDSTATEMENTS OF MEMBERS’ CAPITAL**

**(Unaudited)**

 
| Balance, December 31, 2002                   |   | $         | 7,122,507  |   |
|---------------------------------------------------|--------|-----------|------------|--------|
|                                              |   |      |       |
| Net proceeds from offering                        |   | 3,630,394 |       |
| Distributions to members                          |   | (243,784  | )          |
| Deferred offering costs repaid to managing member |   | (162,200  | )          |
| Net income                                        |   | 264,666   |       |
|                                              |   |      |       |
| Balance, September 30, 2003                  |   | $         | 10,611,583 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

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**CORNERSTONE REALTY FUND, LLC**

**(a California Limited Liability Company)**

 

**CONDENSEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

 

 
|                                                                                                |   | **Nine Months Ended********September 30,** |      |
|-----------------------------------------------------------------------------------------------------|--------|-------------------------------------------------|-----------|
|                                                                                                |   | **2003**                                        |      | **2002** |   |
| OPERATING ACTIVITIES                                                                                |   |                                            |      |   |   |
| Net income (loss)                                                                                   |   | $                                               | 264,666   |   | $ | (116,088 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in) operating activities: |   |                                            |      |   |   |
| Depreciation and amortization                                                                       |   | 82,993                                          |      | 426 |   |
| Changes in operating assets and  liabilities:                                                       |   |                                            |      |   |   |
| Other assets                                                                                        |   | (24,125                                         | )         | (3,208 | ) |
| Accounts payable, accrued liabilities and  security deposits                                        |   | (80,365                                         | )         | 33,005 |   |
| Real estate taxes payable                                                                           |   | (25,281                                         | )         | — |   |
|                                                                                                |   |                                            |      |   |   |
| Net cash provided by (used in) operating  activities                                                |   | 217,888                                         |      | (85,865 | ) |
|                                                                                                |   |                                            |      |   |   |
| INVESTING ACTIVITIES                                                                                |   |                                            |      |   |   |
| Purchase of real estate                                                                             |   | —                                          |      | (3,901,696 | ) |
| Additions to buildings                                                                              |   | (59,932                                         | )         | — |   |
|                                                                                                |   |                                            |      |   |   |
| Net cash used in investing activities                                                               |   | (59,932                                         | )         | (3,901,696 | ) |
|                                                                                                |   |                                            |      |   |   |
| FINANCING ACTIVITIES                                                                                |   |                                            |      |   |   |
| Advances from managing member                                                                       |   | —                                          |      | 38,227 |   |
| Repayment of managing member advances                                                               |   | (111,059                                        | )         | (196,453 | ) |
| Net proceeds from offering                                                                          |   | 3,630,394                                       |      | 3,791,110 |   |
| Distributions to members                                                                            |   | (243,784                                        | )         | (38,157 | ) |
| Deferred offering costs repaid to managing  member                                                  |   | (162,200                                        | )         | (169,100 | ) |
|                                                                                                |   |                                            |      |   |   |
| Net cash provided by financing activities                                                           |   | 3,113,351                                       |      | 3,425,627 |   |
|                                                                                                |   |                                            |      |   |   |
| Net increase (decrease) in cash                                                                     |   | 3,271,307                                       |      | (561,934 | ) |
|                                                                                                |   |                                            |      |   |   |
| Cash and cash equivalents at beginning of  period                                                   |   | 1,062,947                                       |      | 2,493,073 |   |
|                                                                                                |   |                                            |      |   |   |
| Cash and cash equivalents at end of period                                                          |   | $                                               | 4,334,254 |   | $ | 1,931,139 |   |

 

Theaccompanying notes are an integral part of these financial statements.

 

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**CORNERSTONE REALTY FUND, LLC**

**(a California Limited Liability Company)**

 

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**1.****                                      Organizationand Business**

 

CornerstoneRealty Fund, LLC, a California limited liability company (the “Fund”) (formerlyCornerstone Multi-Tenant Industrial Business Parks Fund, LLC and CornerstoneIndustrial Properties Income and Growth Fund I, LLC), was formed onOctober 28, 1998.  The members ofthe Fund are Cornerstone Industrial Properties, LLC, a California limitedliability company (“CIP”), as the managing member (“Managing Member”), Terry G.Roussel, an individual, and other various unitholders as described below.  An affiliate, Cornerstone Ventures, Inc., aCalifornia corporation (“CVI”), is the managing member of CIP.  Terry G. Roussel is the principalshareholder of CVI.  The purpose of theFund is to acquire, operate and sell multi-tenant industrial properties.  The Fund currently is issuing and sellingequity interests (“units”) in a public offering in the Fund, and is admittingthe new unitholders as members of the Fund.

 

The Fund isstill in its offering and organizational stage, and is dependent on theManaging Member to provide advances for costs incurred in connection with theoffering of units. The Managing Member must raise funds through the sale ofdebt or equity securities to obtain the cash necessary to provide theseadvances.  There can be no assurance asto the amount or timing of the Managing Member’s receipt of funds.  The Fund is to reimburse the Managing Memberfor the offering costs advanced by the Managing Member in the amount of 4% ofthe gross proceeds from the offering of units. As of November 4, 2003, the Fund has issued 28,744 units for grossoffering proceeds of $14,372,000.

 

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.

 

**2.****                                      Summaryof Significant Accounting Policies**

 

*Interim Financial Information*

 

Theaccompanying unaudited condensed financial statements have been prepared inaccordance with accounting principles generally accepted in the United Statesfor interim financial information and with the instructions to Form 10-Q andArticle 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotesrequired by accounting principles generally accepted in the United States forcomplete financial statement presentation. In the opinion of management, all adjustments, consisting of normalrecurring accruals, considered necessary for a fair presentation, have beenincluded.  Operating results for the three-monthand nine-month periods ended September 30, 2003 are not necessarilyindicative of the results that may be expected for the year endingDecember 31, 2003.

 

For furtherinformation, refer to the audited financial statements and footnotes thereto includedin the Fund’s Annual Report on Form 10-K for the year endedDecember 31, 2002.

 

*Use of Estimates*

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States requires management to make estimatesand assumptions that affect the

 

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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.

 

# *Cashand Cash Equivalents*

 

Cash and cashequivalents consist primarily of interest-bearing investments with originalmaturities of 90 days or less at the date of purchase.  Included in cash and cash equivalents atSeptember 30, 2003 is $200,000 that the Fund deposited in escrow regardingthe potential acquisition of a property.

 

# *Investmentsin Real Estate*

 

Investments inreal estate are stated at cost and include land, buildings and buildingimprovements.  Expenditures for ordinarymaintenance and repairs are expensed to operations as incurred.  Significant replacements, betterments andtenant improvements 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 39 years. Tenant improvements are depreciated over the respective tenant’s leaseterm.

 

The Fundevaluates the carrying value for investments in real estate in accordance withFASB 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.

 

# *OfficeEquipment and Leasing Commissions*

 

Office equipmentis stated at cost.  Depreciation iscomputed on a straight-line basis over the estimated useful lives of therelated assets.  The estimated usefullife of the office equipment is five years. Leasing commissions are stated at cost. Amortization is computed on a straight-line basis over the related leaseterm.

 

# *RevenueRecognition*

 

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

 

# *FairValue of Financial Instruments*

 

The Fundbelieves that the recorded value of all financial instruments approximatestheir current values.

 

# *IncomeTax Matters*

 

It is theintent of the Fund that the Fund be treated as a partnership for income taxpurposes.  As a limited liabilitycompany, the Fund is subject to certain minimal taxes and fees; however, incometaxes on the income or losses realized by the Fund are generally reported onthe separate returns of the members.

 

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*Concentration of Credit Risk*

 

The Fundmaintains some of its cash in money market accounts which, at times, exceedsfederally insured limits.  No losseshave been experienced related to such amounts.

 

# *Reclassifications*

 

Certainreclassifications have been made to the 2002 financial statement accountbalances to conform to the 2003 presentation.

 

# *Computationof Net Income (Loss) per Unit*

 

The basic anddiluted income (loss) allocable to unitholders is computed by dividing netincome (loss) by the weighted average number of units outstanding for theperiod.

 

*Impact ofNew Accounting Pronouncements*

 

In November 2002, theFinancial Accounting Standards Board issued Interpretation No. 45, *Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others*(“Interpretation No. 45”).  Thedisclosure requirements of Interpretation No. 45 are effective as ofDecember 31, 2002.  The initialrecognition and measurement requirements of Interpretation No. 45 are effectiveon a prospective basis to guarantees issued or modified after December 31,2002.  Interpretation No. 45 requiresthe recording of a guarantee liability equal to its estimated fair value basedon the expected present value of the estimated probability-weighted range ofcontingent payments under the guarantee arrangement.  Management has evaluated the impact of the required accountingtreatment under Interpretation No. 45 for guarantees issued or modified afterDecember 31, 2002, and as of September 30, 2003 and believes that theprovisions of this pronouncement have no effect on the Company’s financialstatements.

 

In January 2003, theFinancial Accounting Standards Board issued Interpretation No. 46, *Consolidation of Variable Interest Entities*(“InterpretationNo. 46”), which applies immediately to arrangements created afterJanuary 31, 2003.  InterpretationNo. 46 applies to arrangements created before February 1, 2003 beginningon October 1, 2003.  Theinitial adoption of Interpretation No. 46 for arrangements created afterFebruary 1, 2003 did not have a material impact on the Company’s financialposition or results of operations.  Wedo not anticipate that the impact of arrangements entered into prior toFebruary 1, 2003 will have a material effect on our financial position orresults of operations.

 

In May 2003, theFinancial Accounting Standards Board issued Statement No. 150, *Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity* (“SFAS 150”)*.* SFAS 150 establishes standards for how an issuer classifies and measurescertain financial instruments with characteristics of both liabilities andequity.  SFAS 150 is effective forfinancial instruments entered into or modified after May 31, 2003, andotherwise effective at the beginning of the first interim period beginningafter June 15, 2003.  The Company’sadoption of SFAS No. 150 did not have a material impact on the Company’sfinancial statements.

 

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

 

OnSeptember 27, 2002, the Fund acquired an existing multi-tenant industrialbusiness park known as Normandie Business Center, located in Torrance,California for an investment of $3,901,696. Normandie Business Center consists of two single-story buildingscontaining a total of 48,979 leasable square feet.

 

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

 

Industrialspace in the properties is generally leased to tenants under lease terms thatprovide for the tenants to pay a portion of operating expenses in addition tominimum rent.

 

**4.****                                      DeferredOffering Costs Advanced by Managing Member**

 

The ManagingMember pays specific incremental costs incurred in connection with the offeringof membership units.  These accumulatedcosts incurred in excess of amounts repaid by the Fund bear simple interest atthe prevailing prime commercial lending rate (4.00% at September 30, 2003)plus two percentage points. Reimbursement by the Fund of such offering costs is limited to 4% of thegross proceeds of the related offerings.  Any offering costs 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 inthe Fund’s statement of operations. Through September 30, 2003, the cumulative costs incurred by theManaging Member for offering costs total $1,231,690, and the Fund has repaidthe Managing Member $523,420 of those offering costs.

 

**5.****                                      RelatedParty Transactions**

 

In addition tothe offering costs incurred by its Managing Member, the Fund is to reimburseits Managing Member for 100% of initial operating costs advanced on behalf ofthe Fund.  Deferred offering and initialoperating costs incurred on behalf of the Fund by its Managing Member bearinterest at the prevailing prime commercial lending rate plus two percentagepoints.  As of September 30, 2003, theFund has fully repaid the Managing Member the initial operating costs andinterest.

 

An affiliateof the Managing Member, Pacific Cornerstone Capital, Inc., is entitled toreceive various fees, compensation and reimbursements as specified in theFund’s operating agreement, including commissions of 7% of the gross proceedsfrom the offering of the units, marketing fees of 2% of gross proceeds from theoffering of units, and expense allowances of 1.5% of gross proceeds from theoffering of units.  During the ninemonths ended September 30, 2003 and 2002, the total fees, compensation andreimbursements were $425,775 and $436,391, respectively, of which a substantialportion was paid out to other broker-dealers.

 

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

 

The following “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” should be read inconjunction with the Fund’s unaudited condensed financial statements and notes theretocontained elsewhere in this prospectus. Certain statements in this section and elsewhere containforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995.  Suchforward-looking statements may relate to risks and other factors that may causethe Fund’s future results of operations to be materially different than thoseexpressed or implied herein.  Some ofthese risks and other factors include, but are not limited to:  (i) no assurance that Fund properties willcontinue to experience minimal or no vacancy; (ii) tenants may not be able tomeet their financial obligations; (iii) rental revenues from the properties maynot be sufficient to meet the Fund’s cash requirements for operations, capitalrequirements and distributions; (iv) suitable investment properties may notcontinue to be available; and (v) adverse changes to the general economy maydisrupt operations.

 

**Critical Accounting Policies**

 

The Fund’s financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States. The preparation of these financial statements requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities as of the date of the financial statements and the reported amountof revenue and expenses during the reporting period.  Actual results could differ materially from the estimates in thenear term.

 

*Revenue Recognition*

 

Rental revenues are recordedon an accrual basis as they are earned over the lives of the respective tenantleases on a straight-line basis.  Rentalreceivables are periodically evaluated for collectibility.

 

*Investments in Real Estate*

 

The Fund evaluates thecarrying value for investments in real estate in accordance with FASB StatementNo. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets* (“FAS144”).  FAS 144 requires that whenevents or changes in circumstances indicate that the carrying amount of theassets might not be recoverable, companies should evaluate the need for animpairment write-down.  When animpairment write-down is required, the related assets are adjusted to theirestimated fair value.

 

**Impact ofNew Accounting Pronouncements**

 

In November 2002, theFinancial Accounting Standards Board issued Interpretation No. 45, *Guarantor’s Accounting and Disclosure Requirementsfor Guarantees, Including Indirect Guarantees of Indebtedness of Others*(“Interpretation No. 45”).  Thedisclosure requirements of Interpretation No. 45 are effective as of December 31,2002.  The initial recognition andmeasurement requirements of Interpretation No. 45 are effective on aprospective basis to guarantees issued or modified after December 31,2002.  Interpretation No. 45 requiresthe recording of a guarantee liability equal to its estimated fair value basedon the expected present value of the estimated probability-weighted range ofcontingent payments under the guarantee arrangement.  Management has evaluated the impact of the required accountingtreatment under Interpretation No. 45 for guarantees issued or modified afterDecember 31, 2002, and as of September 30, 2003 and believes that theprovisions of this pronouncement have no effect on our financial statements.

 

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In January 2003, theFinancial Accounting Standards Board issued Interpretation No. 46, *Consolidation of Variable Interest Entities*(“InterpretationNo. 46”), which applies immediately to arrangements created afterJanuary 31, 2003.  InterpretationNo. 46 applies to arrangements created before February 1, 2003 beginningon October 1, 2003.  Theinitial adoption of Interpretation No. 46 for arrangements created afterFebruary 1, 2003 did not have a material impact on the Company’s financialposition or results of operations.  Wedo not anticipate that the impact of arrangements entered into prior toFebruary 1, 2003 will have a material effect on our financial position orresults of operations.

 

In May 2003, theFinancial Accounting Standards Board issued Statement No. 150, *Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity*(“SFAS 150”)*.* SFAS 150 establishes standards for how an issuer classifies and measurescertain financial instruments with characteristics of both liabilities andequity.  SFAS 150 is effective forfinancial instruments entered into or modified after May 31, 2003, andotherwise effective at the beginning of the first interim period beginning afterJune 15, 2003.  The Company’sadoption of SFAS No. 150 did not have a material impact on our financialstatements.

 

**Results of Operations**

 

As of September 30,2003, we have purchased two multi-tenant industrial business park propertiescontaining a total of 36 tenant spaces, in two different major metropolitanareas.  The properties were purchasedfrom the proceeds from the sale of membership units, without debt financing.

 

Normandie Business Center,acquired in September 2002, is operating as expected. Lease renewals andnew leases have been signed at rental rates slightly higher than ouracquisition pro-forma budget. The new leases also include 5% annual increases,which is higher than the 3% increases we assumed during our acquisitionforecasting. The property is currently 96% occupied.

 

Sky Harbor Business Park,acquired in December 2002, has also performed as expected.  During the acquisition review, we confirmedthat one tenant who occupied 12,002 square feet was planning to vacate whentheir lease expired on June 30, 2003. This knowledge allowed us tonegotiate a reduced purchase price and forecast a number of months for thevacancy and costs to locate a replacement tenant.  According to plan, we are actively marketing the space andanticipate having the space leased by the fourth quarter of 2003.

 

We recently identifiedanother property for acquisition and opened an escrow account with a refundabledeposit of $200,000. The property, Arrow Business Center (“ABC”), is located inIrwindale, California, a sub-market of metropolitan Los Angeles. The propertyis situated in a high tenant demand market and is currently 96% occupied.  We have commenced the standard due diligencereview, and anticipate a closing of the transaction at the end ofNovember 2003, pending satisfactory results of our formal review.

 

In the prior quarter, wedisclosed that escrow had been opened on IRSCO Business Park (“IRSCO”).  Based upon our formal due diligence analysisof IRSCO, we determined that the property did not meet the Fund investmentcriteria and we subsequently terminated escrow.  The Fund incurred $22,820 of unrecoverable due diligence costsassociated with the termination of the escrow for IRSCO.  These costs are included in general andadministrative expenses.

 

The Fund generated netincome for the nine months ended September 30, 2003 of $264,666 comparedto a net loss of $116,088 for the same period of 2002, for an overall increasein net income of $380,754.  Thisincrease was primarily due to $376,907 of net income generated by the twoproperties we purchased in the fourth quarter of 2002.  Revenue from the Fund’s industrial propertyinvestments totaled

 

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$669,160and expenses including depreciation were $292,253.  With the use of cash to invest in the properties, interest incomedecreased by $28,314 from $45,022 to $16,708. General and administrative expenses declined by $31,424, nearlyoffsetting the reduction of interest income.

 

Net incomeincreased $87,041 from a loss of $18,236 for the three months endedSeptember 30, 2002 to a net profit of $68,805 for the three-month periodended September 30, 2003.  Theproperty operations accounted for $103,041 of the increase in the quarter’s netincome.  During the three month periodended September 30, 2003, the Fund’s properties generated rental andtenant reimbursement revenues of $205,004 offset by property operating expensesand depreciation totaling $101,863. With the use of cash investment for the acquisition of the twoindustrial properties, the revenue from interest, dividends and other incomedeclined from $18,602 for the three months ended September 30, 2002 to$6,781 for the three months ended September 30, 2003.

 

**Liquidity and Capital Resources**

 

During the nine months endedSeptember 30, 2003 the Fund’s cash and cash equivalents increased by$3,271,307.  This is primarily theresult of net proceeds from the sale of units during the nine-month periodended September 30, 2003 of $3,630,394.

 

As of September 30,2003 the Fund has $4,334,254 in cash and cash equivalents.

 

The Fund has entered escrowwith a refundable deposit of $200,000 to purchase ABC for approximately$6,000,000.  We expect to close thepurchase of this property during the last week of November, subject to the resultsof our due diligence efforts.  Thispurchase price obligation exceeds our cash available at September 30, 2003by approximately $1,666,000.

 

Through November 4,2003, we have received an additional $1,100,000 of net unit sales, reducing theshortfall described in the paragraph above to less than $566,000.  Although there is no assurance, we arehighly confident that sufficient proceeds will be available prior toclosing.  Lack of funds may cause us toforfeit the $200,000 deposit.  Our duediligence efforts may uncover characteristics of ABC that may cause thecancellation of the escrow and result in the return of our $200,000 deposit.

 

The Fund intends to continueoffering membership units for sale and use the net proceeds from the sale ofunits for the acquisition of additional multi-tenant industrial business parkproperties, capital improvements to the properties, and for operating expensesand reserves.

 

The Fund expects to meet itsshort-term liquidity requirements from net cash generated by operations and thenet proceeds generated by the sale of membership units, which we believe willbe adequate to meet operating costs of the properties and the Fund, to fund theclose of escrow of ABC, and allow for cash distributions to the unitholders.

 

The Fund’s offering andorganizational activities have been financed through advances from the managingmember.  A portion of those advanceshave been reimbursed to the managing member at the rate of 4% of gross proceedsof the Fund’s unit sales pursuant to the prospectus for the offering.  The Fund will continue to incurorganizational and offering expenses and the managing member, although notobligated, intends to continue providing advances for offering andorganizational expenses until the sale of membership units is completed.  The managing member must raise funds throughthe sale of debt or equity securities to obtain the cash necessary to providethese advances.  There can be noassurance as to the amount or timing of the managing member’s receipt offunds.  The Fund will not reimburse themanaging member for any amounts advanced by it for offering and organizationalexpenses which exceed the amounts and percentages set forth in the prospectusfor the offering.  Any such expensesincurred by

 

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themanaging member on behalf of the Fund that are not reimbursed by the Fund willbe reflected as a capital contribution to the Fund by the managing member withan offsetting expense recognized in the Fund’s statement of operations.

 

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

 

The Fund invests its cashand cash equivalents in FDIC insured savings accounts which, by their nature,are not subject to interest rate fluctuations.

 

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

 

The Fund’s disclosurecontrols and procedures are designed to ensure that information required to bedisclosed in reports that the Fund files or submits under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported within thetime periods specified in the rules and forms of the Securities and ExchangeCommission. The Chief Executive Officer and the Chief Financial Officer ofCornerstone Ventures, Inc., the manager of the managing member of the Fund,have reviewed the effectiveness of the Fund’s disclosure controls andprocedures as of the end of the period covered by this report and haveconcluded that the disclosure controls and procedures are effective. There wereno significant changes in our internal controls or in other factors that couldsignificantly affect these controls subsequent to the last day they wereevaluated.

 

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**PART II -OTHER INFORMATION**

 

**Item 6.****                    ****Exhibits and Reports on Form10-Q****.**

 

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

 

31.1                     Certification of Chief Executive Officerpursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2                     Certification of Chief Financial Officerpursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1                     Certification of Chief Executive OfficerPursuant to 18 U.S.C.§ 1350, as Adopted Pursuant to Section 906 ofthe Sarbanes-Oxley Act of 2002.

 

32.2                     Certification of Chief Financial OfficerPursuant to 18 U.S.C. § 1350, as Adopted Pursuant to Section 906 ofthe Sarbanes-Oxley Act of 2002.

 

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the registrant has duly caused this quarterlyreport to be signed on its behalf by the undersigned, thereunto duly authorizedthis 7th day of November, 2003.

 
|   | 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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