UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549





FORM
10-Q





(Mark
One)





x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the quarterly period ended March 31, 2010





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





CORNERSTONE
REALTY FUND, LLC


(Exact
name of registrant as 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’s
telephone 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 reports required to be filed by
section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.




x
Yes    o
No





Indicate
by check mark whether the Registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).





o Yes    o No





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





Large
accelerated filer o  Accelerated filer
o 
Non-accelerated filer o  Smaller Reporting
Company x





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





o Yes    x
No









PART
      I.
                    
                    FINANCIAL
      INFORMATIONItem
      1.
                    
                    Financial
      Statements:Condensed
      Balance Sheets as of March 31, 2010 and December 31, 2009
      (unaudited)
                    
                    3Condensed
      Statements of Operations for the Three months ended March 31, 2010 and
      March 31, 2009 (unaudited)
                    
                    4Condensed
      Statement of Members’ Capital for the Three months ended March 31, 2010
      (unaudited)
                    
                    5Condensed
      Statements of Cash Flows for the Three months ended March 31, 2010 and
      March 31, 2009 (unaudited)
                    
                    6Notes
      to Condensed Financial Statements (unaudited)
                    
                    7Item
      2.
                    
                    Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                    
                    12Item
      3.
                    
                    Quantitative
      and Qualitative Disclosures About Market Risk
                    
                    13Item
      4(T).
                    
                    Controls
      and Procedures
                    
                    13PART
      II.
                    
                    OTHER
      INFORMATIONItem
      6.
                    
                    Exhibits
                    
                    14SIGNATURES
                    
                    15




2




CORNERSTONE
REALTY FUND, LLC


(a
California Limited Liability Company)





CONDENSED
BALANCE SHEETS


(UNAUDITED)




March 31, 2010
                
                
                December 31, 2009ASSETSCash
      and cash equivalents
                
                $
                349,000
                
                
                $
                761,000Investments
      in real estateLand
                
                
                10,088,000
                
                
                
                10,088,000Buildings
      and improvements, net
                
                
                15,966,000
                
                
                
                16,110,000Intangible
      asset — in-place leases, net
                
                
                2,000
                
                
                
                9,000Property
      held for sale, net
                
                
                1,715,000
                
                
                
                1,726,00027,771,000
                
                
                
                27,933,000Other
      assetsNon-real
      estate assets associated with property held for sale
                
                
                74,000
                
                
                
                74,000Tenant
      and other receivables, net
                
                
                280,000
                
                
                
                263,000Prepaid
      expenses and other assets
                
                
                82,000
                
                
                
                50,000Leasing
      commissions, net
                
                
                174,000
                
                
                
                158,000Total
      assets
                
                $
                28,730,000
                
                
                $
                29,239,000LIABILITIES
      AND MEMBERS’ CAPITALLiabilitiesAccounts
      payable, accrued liabilities and prepaid rent
                
                $
                157,000
                
                
                $
                161,000Real
      estate taxes payable
                
                
                143,000
                
                
                
                76,000Tenant
      security deposits
                
                
                197,000
                
                
                
                194,000Intangible
      lease liability, net
                
                
                1,000
                
                
                
                5,000Liabilities
      associated with property held for sale
                
                
                203,000
                
                
                
                262,000Total
      liabilities
                
                
                701,000
                
                
                
                698,000Members’
      capital (100,000 units authorized and issued as of March 31, 2010 and
      December 31, 2009; 98,670 and 98,814 units outstanding as of March 31,
      2010 and December 31, 2009, respectively)
                
                
                28,029,000
                
                
                
                28,541,000Total
      liabilities and members’ capital
                
                $
                28,730,000
                
                
                $
                29,239,000





The
accompanying notes are an integral part of these interim financial
statements.




3




CORNERSTONE
REALTY FUND, LLC


(a
California Limited Liability Company)





CONDENSED
STATEMENTS OF OPERATIONS


(Unaudited)





Three Months Ended
                  March 31,2010
                
                
                2009RevenuesRental
      revenues
                
                $
                607,000
                
                
                $
                685,000Tenant
      reimbursements and other income
                
                
                115,000
                
                
                
                124,000722,000
                
                
                
                809,000ExpensesProperty
      operating and maintenance
                
                
                214,000
                
                
                
                156,000Property
      taxes
                
                
                111,000
                
                
                
                107,000General
      and administrative
                
                
                109,000
                
                
                
                79,000Depreciation
      and amortization
                
                
                199,000
                
                
                
                207,000633,000
                
                
                
                549,000Interest
      income
                
                
                —
                
                
                
                1,000Net
      income from continuing operations
                
                
                89,000
                
                
                
                261,000Net
      income from discontinued operation
                
                
                70,000
                
                
                
                1,000Net
      income
                
                $
                159,000
                
                
                $
                262,000Net
      income allocable to managing member:From
      continuing operations
                
                $
                9,000
                
                
                $
                26,000From
      discontinued operation
                
                
                7,000
                
                
                
                —$
                16,000
                
                
                $
                26,000Net
      income allocation to unit holders:From
      continuing operations
                
                $
                80,000
                
                
                $
                235,000From discontinued operation
                
                
                63,000
                
                
                
                1,000$
                143,000
                
                
                $
                236,000Per
      unit amounts:Basic
      and diluted income from continuing operations allocable to unit
      holders
                
                $
                0.81
                
                
                $
                2.37Basic
      and diluted income from discontinued operation allocable to unit
      holders
                
                $
                0.64
                
                
                $
                0.01Basic
      and diluted weighted average units outstanding
                
                
                98,790
                
                
                
                99,333





The
accompanying notes are an integral part of these interim financial
statements.




4




CORNERSTONE
REALTY FUND, LLC


(a
California Limited Liability Company)





CONDENSED
STATEMENT OF MEMBERS’ CAPITAL


(Unaudited)





Balance,
      December 31, 2009
                
                $
                28,541,000Cash
      distributions to unit holders
                
                
                (622,000
                )Units
      repurchased and retired
                
                
                (49,000
                )Net
      income
                
                
                159,000Balance,
      March 31, 2010
                
                $
                28,029,000





The
accompanying notes are an integral part of these interim financial
statements.




5




CORNERSTONE
REALTY FUND, LLC


(a
California Limited Liability Company)





CONDENSED
STATEMENTS OF CASH FLOWS


(Unaudited)





Three Months Ended
                  March 31,2010
                
                
                2009OPERATING
      ACTIVITIESNet
      income
                
                $
                159,000
                
                
                $
                262,000Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                
                
                214,000
                
                
                
                238,000Provision
      for bad debt
                
                
                41,000
                
                
                
                15,000Straight-line
      rent and amortization of acquired above/below market leases,
      net
                
                
                (29,000
                )
                
                
                1,000Changes
      in operating assets and liabilities:Other
      assets, net
                
                
                (112,000
                )
                
                
                (84,000
                )Accounts
      payable, accrued liabilities and prepaid rent
                
                
                (16,000
                )
                
                
                (86,000
                )Real
      estate taxes payable
                
                
                22,000
                
                
                
                27,000Tenant
      security deposits
                
                
                2,000
                
                
                
                (19,000
                )Net
      cash provided by operating activities
                
                
                281,000
                
                
                
                354,000INVESTING
      ACTIVITIESInvestments
      in real estate
                
                
                (22,000
                )
                
                
                (6,000
                )Net
      cash used in investing activities
                
                
                (22,000
                )
                
                
                (6,000
                )FINANCING
      ACTIVITIESCash
      distributions to unit holders
                
                
                (622,000
                )
                
                
                (626,000
                )Cash
      distributions to managing member
                
                
                —
                
                
                
                (81,000
                )Units
      repurchased and retired
                
                
                (49,000
                )
                
                
                (36,000
                )Net
      cash used in financing activities
                
                
                (671,000
                )
                
                
                (743,000
                )Net
      decrease in cash
                
                
                (412,000
                )
                
                
                (395,000
                )Cash
      and cash equivalents at beginning of period
                
                
                761,000
                
                
                
                2,289,000Cash
      and cash equivalents at end of period
                
                $
                349,000
                
                
                $
                1,894,000





The
accompanying notes are an integral part of these interim financial
statements.




6





CORNERSTONE
REALTY FUND, LLC


(a
California Limited Liability Company)





NOTES
TO CONDENSED FINANCIAL STATEMENTS


MARCH 31,
2010


(Unaudited)





1.
            Organization
      and Business





Cornerstone
Realty Fund, LLC, a California limited liability company (the “Fund”), was
formed in October of 1998 to invest in multi-tenant business parks catering to
small business tenants.  As used in this report, “Fund”, “we,” “us” and
“our” refer to Cornerstone Realty Fund, LLC except where the context otherwise
requires.




Our
managing member is Cornerstone Industrial Properties, LLC (“CIP”), a California
limited liability company.  Cornerstone Ventures, Inc. is the managing
member of CIP.  Cornerstone Ventures, Inc. is an experienced real estate
operating company specializing in the acquisition, operation and repositioning
of multi-tenant industrial business parks catering to small business
tenants.





On August
7, 2001, we commenced a public offering of units of our membership interest
pursuant to a registration statement on Form S-11 filed with the Securities and
Exchange Commission pursuant to the Securities Act of 1933.  On August 18,
2005, we completed a public offering of these units.  As of that date, we
had issued 100,000 units to unit holders for gross offering proceeds of
$50,000,000, before discounts of $39,780.





Our
interim unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and in accordance with the rules and
regulations of the Securities and Exchange Commission.  As permitted by the
Securities and Exchange Commission filing requirements for Form 10-Q, the
condensed financial statements do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements.  The condensed financial
statements included herein should be read in conjunction with our Annual Report
on Form 10-K for the year ended December 31, 2009.





In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a presentation in accordance with accounting principles
generally accepted in the United States have been included.  Operating
results for the three months ended March 31, 2010 are not necessarily indicative
of the results that may be expected for the year ending December 31,
2010.





Each
member’s liability is limited pursuant to the provisions of the Beverly-Killea
Limited Liability Company Act.




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





—
            CIP
      generally has complete and exclusive discretion in the management and
      control of our operations; however, unit holders holding the majority of
      all outstanding and issued units have certain specified voting rights
      which include the removal and replacement of the Managing
      Member.





—
            Net
      Cash Flow from Operations, as defined, will be distributed 90% to the unit
      holders and 10% to the Managing Member until the unit holders have
      received either an 8% or 12% cumulative, non-compounded annual return on
      their Invested Capital Contributions, as defined.  The 12% return
      applies to specified early investors for the twelve-month period
      subsequent to the date of their Invested Capital Contributions and is in
      lieu of the 8% return during that
period.





—
            Net
      Sales Proceeds, as defined, will be distributed first, 100% to the unit
      holders in an amount equal to their Invested Capital Contributions; then,
      90% to the unit holders and 10% to the Managing Member until the unit
      holders have received an amount equal to the unpaid balance of their
      aggregate cumulative, non-compounded annual return on their Invested
      Capital Contributions; and thereafter, 50% to the unit holders and 50% to
      the Managing Member.





—
            Net
      Income, as defined, is allocated first, 10% to the Managing Member and 90%
      to the unit holders until Net Income allocated equals cumulative Net
      Losses, as defined, previously allocated in such proportions; second, in
      proportion to and to the extent of Net Cash Flow from Operations and Net
      Sales Proceeds previously distributed to the members, exclusive of
      distributions representing a return of Invested Capital Contributions; and
      then 50% to the Managing Member and 50% to the unit
    holders.




7





—
            Net
      Loss is allocated first, 50% to the Managing Member and 50% to the unit
      holders, until Net Loss allocated equals cumulative Net Income previously
      allocated in such proportions; then remaining Net Loss is allocated 10% to
      the Managing Member and 90% to the unit
holders.





—
            All
      allocations and distributions to the unit holders are to be pro rata in
      proportion to their ownership
shares.





—
            Effective
      February 22, 2007, our operating agreement was amended to permit
      repurchase of units on such terms and conditions as the Managing Member
      may determine.





—
            Effective
      June 2, 2009, our operating agreement was amended and the dissolution date
      in Section 11.1 (a) was extended from December 31, 2010 to December 31,
      2012.





—
            Effective
      April 27, 2010, our operating agreement was amended and allows the
      Managing Member to cause us to incur debt financing not to exceed ten
      percent of the capital contributions of all unit holders to meet the
      Fund’s operating expenses or to fund cash distributions declared and paid
      to members.





2.
            Summary
      of Significant Accounting Policies





Use
of Estimates





The
preparation of our financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses.  We base these estimates on various assumptions that we believe
to be reasonable under the circumstances, and these estimates form the basis for
our judgments concerning the carrying values of assets and liabilities that are
not readily apparent from other sources.  We periodically evaluate these
estimates and judgments based on available information and experience. Actual
results could differ from our estimates under different assumptions and
conditions.  If actual results significantly differ from our estimates, our
financial condition and results of operations could be materially
impacted.  For more information regarding our critical accounting policies
and estimates please refer to "Summary of Significant Accounting Policies"
contained in our Annual Report on Form 10-K for the year ended December 31,
2009.  There have been no material changes to the critical accounting
policies previously disclosed in that report except as discussed
below.





Interim
Financial Information





The
accompanying interim condensed financial statements have been prepared by our
management in accordance with accounting principles generally accepted in the
United States of America (“GAAP”) and in conjunction with the rules and
regulations of the SEC.  Certain information and note disclosures required
for annual financial statements have been condensed or excluded pursuant to SEC
rules and regulations.  Accordingly, the interim condensed financial
statements do not include all of the information and notes required by GAAP for
complete financial statements.  The accompanying financial information
reflects all adjustments which are, in the opinion of our management, of a
normal recurring nature and necessary for a fair presentation of our financial
position, results of operations and cash flows for the interim periods. 
Operating results for the three months ended March 31, 2010 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2010.  Our accompanying interim condensed financial statements should be
read in conjunction with our audited financial statements and the notes thereto
included on our 2009 Annual Report on Form 10-K, as filed with the
SEC.





Recently
Issued Accounting Pronouncements




In
February 2010, the Financial Accounting Standard Board (“FASB”) issued
Accounting Standard Codification (“ASU”) 2010-09, Subsequent Events: Amendments to Certain
recognition and Disclosure Requirements (amendments to ASC Topic 855,
Subsequent Events).  ASU 2010-09 clarifies that subsequent events should be
evaluated through the date the financial statements are issued. In addition,
this update no longer requires a filer to disclose the date through which
subsequent events have been evaluated. This guidance is effective for financial
statements issued subsequent to February 24, 2010. We adopted this guidance on
February 24, 2010 and it did not have a material impact on our condensed
financial statements.





In
January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures -
Improving Disclosures about Fair Value Measurements(amendments to ASC
Topic 820, Fair Value Measurements and Disclosures). ASU 2010-06 amends the
disclosure requirements related to recurring and nonrecurring measurements. The
guidance requires new disclosures on the transfer of assets and liabilities
between Level 1 (quoted prices in active market for identical assets or
liabilities) and Level 2 (significant other observable inputs) of the fair value
measurement  hierarchy,  including the reasons and the timing of the
transfers.  Additionally, the guidance requires a roll forward of
activities on purchases, sales, issuance, and settlements of the assets and
liabilities measured using significant unobservable inputs (Level 3 fair value
measurements). The guidance is effective for interim and annual periods
beginning after December 15, 2009. We adopted this guidance on January 1, 2010
and it did not have a material impact on our condensed financial
statements.





8


In
June 2009, the FASB issued Statement of Financial Accounting Standard
(“SFAS”) No. 167, “Amendments to FASB Interpretation No. 46(R),” which was
primarily codified into Topic 810 – “Consolidation” in the ASC.  The new
guidance impacts the consolidation guidance applicable to VIEs and among other
things require a qualitative rather than a quantitative analysis to determine
the primary beneficiary of a VIE, continuous assessments of whether a company is
the primary beneficiary of a VIE and enhanced disclosures about a company’s
involvement with a VIE. We adopted this guidance on January 1, 2010 and it
did not have a material impact on our condensed financial
statements.





Investments
in Real Estate Assets Held-for-Sale





The Fund
evaluates the held-for-sale classification of its owned real estate each
quarter.  Assets that are classified as held-for-sale are recorded at the
lower of their carrying amount or fair value less cost to sell.  Assets are
classified as held-for-sale once management commits to a plan to sell the
properties and has initiated an active program to market them for sale. 
The results of operations of these real estate properties are reflected as
discontinued operations in all periods reported.  During the first quarter
of 2010, management committed a plan to sell  Zenith Drive Centre to a
third party and classified the property as held-for-sale. See Note 7 for
additional information.





3.
            Investment
      in Real Estate





As of
March 31, 2010, accumulated depreciation and amortization related to investments
in real estate and related lease intangibles were as follows:





Land
                    
                    
                    Buildings and
                      Improvements
                    
                    
                    Intangible
                      Lease Value
                    
                    
                    In-Place
                      Lease Value
                    
                    
                    Acquired Below-Market LeasesInvestments
      in real estate
                    
                    $
                    10,088,000
                    
                    
                    $
                    18,433,000
                    
                    
                    $
                    —
                    
                    
                    $
                    770,000
                    
                    
                    $
                    (154,000
                    )Less:
      accumulated depreciation and amortization from continuing
      operations
                    
                    
                    —
                    
                    
                    
                    (2,467,000
                    )
                    
                    
                    —
                    
                    
                    
                    (768,000
                    )
                    
                    
                    153,000Net
      investments in real estate and related lease intangibles from continuing
      operations
                    
                    
                    10,088,000
                    
                    
                    
                    15,966,000
                    
                    
                    
                    —
                    
                    
                    
                    2,000
                    
                    
                    
                    (1,000
                    )Net
      investments in real estate and related lease intangibles
      held-for-sale
                    
                    
                    355,000
                    
                    
                    
                    1,256,000
                    
                    
                    
                    104,000
                    
                    
                    
                    —
                    
                    
                    
                    —$
                    10,443,000
                    
                    
                    $
                    17,222,000
                    
                    
                    $
                    104,000
                    
                    
                    $
                    2,000
                    
                    
                    $
                    (1,000
                    )





As of
December 31, 2009, accumulated depreciation and amortization related to
investments in real estate and related lease intangibles were as
follows:





Land
                  
                  
                  Buildings and
                    Improvements
                  
                  
                  Intangible
                    Lease Value
                  
                  
                  In-Place
                    Lease Value
                  
                  
                  Acquired Below-Market LeasesInvestments
      in real estate
                  
                  $
                  10,088,000
                  
                  
                  $
                  18,411,000
                  
                  
                  $
                  —
                  
                  
                  $
                  770,000
                  
                  
                  $
                  (154,000
                  )Less:
      accumulated depreciation and amortization from continuing
      operations
                  
                  
                  —
                  
                  
                  
                  (2,301,000
                  )
                  
                  
                  —
                  
                  
                  
                  (761,000
                  )
                  
                  
                  149,000Net
      investments in real estate and related lease intangibles from continuing
      operations
                  
                  
                  10,088,000
                  
                  
                  
                  16,110,000
                  
                  
                  
                  —
                  
                  
                  
                  9,000
                  
                  
                  
                  (5,000
                  )Net
      investments in real estate and related lease intangibles
      held-for-sale
                  
                  
                  355,000
                  
                  
                  
                  1,265,000
                  
                  
                  
                  106,000
                  
                  
                  
                  —
                  
                  
                  
                  —$
                  10,443,000
                  
                  
                  $
                  17,375,000
                  
                  
                  $
                  106,000
                  
                  
                  $
                  9,000
                  
                  
                  $
                  (5,000
                  )





Depreciation
and amortization related to investments in real estate, real estate investment
held-for-sale and related lease intangibles for the three months ended March 31,
2010 and 2009 were $177,000 and $189,000, respectively.


9





Estimated
amortization associated with the intangible lease assets, in-place lease assets
and intangible lease liability for April 1, 2010 through December 31, 2010 and
each of the four subsequent years is as follows:





Lease
      IntangiblesApril
      1, 2010 to December 31, 2010
                  
                  $
                  1,0002011
                  
                  
                  —2012
                  
                  
                  —2013
                  
                  
                  —2014
                  
                  
                  —Total
                  
                  $
                  1,000




4.
            Allowance for Doubtful
      Accounts





Our
allowance for doubtful accounts was $223,000 and $190,000 as of March 31, 2010
and December 31, 2009, respectively.





5.
            Concentration
      of Credit Risks





Financial
instruments that potentially subject the Company to a concentration of credit
risk are primarily cash investments; cash is generally invested in
investment-grade short-term instruments. Currently, the Federal Deposit
Insurance Corporation, or FDIC, generally insures amounts up to $250,000 per
depositor per insured bank. This amount is scheduled to be reduced to $100,000
after December 31, 2013.  As of March 31, 2010, none of our cash accounts
were in excess of FDIC insured limits.





As of
March 31, 2010, we owned four properties in the state of California, one
property in the state of Arizona and one property in the state of
Illinois.  Accordingly, there is a geographic concentration of risk subject
to fluctuations in the California economy.





6.
            Commitments
      and Contingencies





We
monitor our properties for the presence of hazardous or toxic substances. 
While there can be no assurance that a material environmental liability does not
exist, we are not currently aware of any environmental liability with respect to
the properties that would have a material effect on our financial condition,
results of operations and cash flows.  Further, we are not aware of any
environmental liability or any unasserted claim or assessment with respect to an
environmental liability that we believe would require additional disclosure or
the recording of a loss contingency.





Our
commitments and contingencies include the usual obligations of real estate
owners and operators in the normal course of business.  In the opinion of
management, these matters are not expected to have a material impact on our
condensed financial position, cash flows and results of operations.  We are
not presently subject to any material litigation nor, to our knowledge, any
material litigation threatened against us which if determined unfavorably to us
would have a material adverse effect on our cash flows, financial condition or
results of operations.





7.
            Discontinued
      Operations




In
accordance with FASB ASC 360-10, Property, Plant &
Equipment, we report results of operations from real estate assets that
meet the definition of a component of an entity that have been sold, or meet the
criteria to be classified as held for sale, as discontinued operations. As of
March 1, 2010, we determined that the potential sale of Zenith Drive Centre to a
third party was probable, and accordingly, classified the property as held for
sale.  The decision was based on our evaluation of Chicago real estate
market dynamics which we believe indicated that the value of the asset has been
maximized. Depreciation and amortization of Zenith Drive was not recorded for
the period of March 1, 2010 to March 31, 2010 in accordance with ASC
360-10.  No properties were sold during the quarters ended March 31, 2010
and 2009. We included all results of the discontinued operations in a separate
component of income on the statements of operations under the heading Income
from Discontinued Operations. This treatment resulted in certain
reclassifications of 2009 financial statement amounts.




The
following is a summary of the components of income from discontinued operations
for the three months ended March 31, 2010 and 2009:


10




March 31, 2010
                
                
                March 31, 2009Total
      revenues and other income
                
                $
                176,000
                
                
                $
                114,000Operating
      expenses and real estate taxes
                
                
                91,000
                
                
                
                82,000Depreciation
      and amortization
                
                
                15,000
                
                
                
                31,000Net
      income from discontinued operation
                
                $
                70,000
                
                
                $
                1,000Net
      income from discontinued operation allocable to managing
      member
                
                $
                7,000
                
                
                $
                —Net
      income from discontinued operation allocable to unit
    holders
                
                $
                63,000
                
                
                $
                1,000






A summary
of the property held-for-sale balance sheet information is as
follows:
 
 March
       31,
                2010
              
              
              December
      31,
                2009Investments
      in real estateLand
              
              $
              355,000
              
              
              $
              355,000Buildings
      and improvements, net
              
              
              1,256,000
              
              
              
              1,265,000Intangible
      lease assets, net
              
              
              104,000
              
              
              
              106,000Property
      held for sale, net
              
              
              1,715,000
              
              
              
              1,726,000Other
      assetsTenant
      and other receivables, net
              
              
              46,000
              
              
              
              50,000Prepaid
      expenses and other assets
              
              
              6,000
              
              
              
              2,000Leasing
      commissions, net
              
              
              22,000
              
              
              
              22,000Non-real
      estate assets associated with property held for sale
              
              
              74,000
              
              
              
              74,000Total
      assets
              
              $
              1,789,000
              
              
              $
              1,800,000LiabilitiesAccounts
      payable, accrued liabilities and prepaid rent
              
              $
              30,000
              
              
              $
              42,000Real
      estate taxes payable
              
              
              112,000
              
              
              
              157,000Tenant
      security deposits
              
              
              61,000
              
              
              
              63,000Liabilities
      associated with property held for sale
              
              $
              203,000
              
              
              $
              262,000






8.
            Subsequent
      Event





On March
5, 2010, we commenced a solicitation of written consent from our unitholders to
approve an amendment to our operating agreement, without the necessity of
holding a special meeting of the holders.  The purpose of the proposed
amendment was to allow the Managing Member to cause the Fund to incur debt not
to exceed ten percent of the capital contributions of all unit holders to meet
the Fund’s operating expenses or to fund cash distributions declared and paid to
members.




On April
9, 2010, our Managing Member elected to extend the period for receipt of signed
consents from April 9, 2010 to April 23, 2010.  The affirmative consent of
a majority of the outstanding percentage interests was required to approve the
amendment to the operating agreement. As of April 23, 2010, we had received
affirmative consents from holders of a majority of the outstanding percentage
interests approving the proposed amendment to our operating agreement and
concluded the consent process and we amended our operating agreement effective
as of April 27, 2010.




11





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





The
following “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” should be read in conjunction with our financial
statements and notes thereto contained elsewhere in this report.  This
section contains forward-looking statements, including estimates, projections,
statements relating to our business plans, objectives and expected operating
results, and the assumptions upon which those statements are based. 
 These forward-looking statements generally are identified by the words
“believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,”
“strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “will
likely result,” and similar expressions.    Forward-looking statements
are based on current expectations and assumptions that are subject to risks and
uncertainties which may cause actual results to differ materially from the
forward-looking statements.   Forward-looking statements were true at
the time made may ultimately prove to be incorrect or false.  We undertake
no obligation to update or revise publicly any forward–looking statements,
whether as a result of new information, future events or otherwise. All
forward-looking statements should be read in light of the risks identified in
Part I, Item 1A of our annual report on Form 10-K for the year ended December
31, 2009 as filed with the SEC.





Overview




Our
revenues, which are comprised largely of rental income, include rents reported
on a straight-line basis over the initial term of the lease. Our growth depends,
in part, on our ability to (i) increase rental income and other earned
income from leases by increasing rental rates and occupancy levels;
(ii) maximize tenant recoveries given the underlying lease structures; and
(iii) control operating and other expenses. Our operations are impacted by
property specific, market specific, general economic and other
conditions.




Market
Outlook – Real Estate and Real Estate Finance Markets




In recent
years, both the national and most global economies have experienced
substantially increased unemployment and a downturn in economic activity.
Despite certain recent positive economic indicators and improved stock market
performance, the aforementioned conditions, combined with low consumer
confidence, have resulted in an unprecedented global recession and continue to
contribute to a challenging economic environment that may delay the
implementation of our business strategy or force us to modify it.




As a
result of the decline in general economic conditions, the U.S. commercial real
estate industry has also experienced deteriorating fundamentals across all major
property types and most geographic markets. Tenant defaults are on the rise,
while demand for commercial real estate space is contracting, resulting in a
highly competitive leasing environment, downward pressure on both occupancy and
rental rates, and an increase in leasing incentives.  Mortgage
delinquencies and defaults have trended upward, with many industry analysts
predicting significant credit defaults, foreclosures and principal
losses.




The
market conditions that have and will likely continue to have a significant
impact on our real estate investments have also negatively impacted our tenants’
businesses. As a result, our tenants are finding it more difficult to meet
current lease obligations and forcing them to negotiate reduced rental rates
upon renewal in order for their businesses to remain viable. Lower lease rates
and  increased rent concessions have resulted in lower current cash flow as
compared to the first quarter of 2009. Additional declines in rental rates,
slower or potentially negative net absorption of leased space and additional
rental concessions, including free rent, would result in additional future
decreases in cash flows.





Critical
Accounting Policies





Our
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”).  The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the financial statements and the reported amount of revenue and
expenses during the reporting period.  Actual results could differ
materially from those estimates.





There
have been no material changes to our critical accounting policies as previously
disclosed in our Annual Report on Form 10-K for the year ended December 31,
2009, as filed with the SEC other than as described under Note 2 to the
accompanying condensed financial statements.





Results
of Operations





Results
of continuing operations for the three months ended March 31, 2010 and 2009
comprise five multi-tenant industrial business park properties in two major
metropolitan areas. On March 1, 2010, we determined that the potential sale of
Zenith Drive Centre to a third party was probable and classified the property as
held for sale.  We have included all operating results of the Zenith Drive
Centre in a separate component of income on the Statements of Operations under
the heading net income from discontinued operations.


12





The
results of continuing operations for the three months ended March 31, 2010 and
2009 are discussed below.





Three
months ended March 31, 2010 and 2009





Rental
revenues, tenant reimbursements and other income from continuing operations
decreased to approximately $722,000 for the three months ended March 31, 2010
from approximately $809,000 for the comparable period of 2009, primarily due to
higher vacancy, lower market lease rates and higher concessions to attract and
retain tenants as a result of the national economic crisis. These factors were
partially offset by rental escalations for existing tenants.





Property
operating and maintenance expenses from continuing operations increased to
approximately $214,000 for the three month period ended March 31, 2010 from
approximately $156,000 for the comparable period of 2009.  The increase is
primarily due to increases in uncollectible accounts and in repairs and
maintenance.





Property
taxes from continuing operations for the three months ended March 31, 2010 were
comparable to the corresponding period of 2009.





General
and administrative expenses from continuing operations increased to
approximately $109,000 for the three months ended March 31, 2010 from
approximately $79,000 for the comparable period of 2009.  The increase is
primarily due to increase in accounting and audit fee
obligations.





Depreciation
and amortization expenses from continuing operations decreased to approximately
$199,000 for the three months ended March 31, 2010 from approximately $207,000
for the comparable period of 2009.  The decrease is due to a real estate
impairment loss recognized on December 31, 2009, reducing depreciable basis, and
the full amortization of intangible assets at two or our
properties.





Interest
and other income for the three months ended March 31, 2010 were comparable to
the corresponding period of 2009.





Discontinued
Operations




During
the first quarter of 2010, we determined that the potential sale of Zenith Drive
Centre to a third party was probable and classified the property as
held for sale in accordance with ASC 360-10, Property, Plant, and
Equipment.   Net income from discontinued operations was
approximately $70,000 and $1,000 for the three months ended March 31, 2010 and
2009, respectively.




Liquidity
and Capital Resources





As of
April 30, 2010, we had approximately $0.4 million in cash and cash equivalents.
We intend to use the existing cash balance for capital improvements to the
properties and to provide for operating reserves. Cash in excess of these needs,
if any, will be available for distribution to unit holders and to
repurchase units from unit holders.





Effective
April 27, 2010, our operating agreement was amended to allow the managing
member to cause us to incur debt financing, not to exceed ten percent of the
capital contributions of all unit holders, to meet our operating expenses or to
fund cash distributions declared and paid to members. To the extent that net
cash generated by the properties is not sufficient to meet operating costs
and pay cash distributions to our unit holders, we will endeavor to obtain
financing or sell selected properties so that we can continue to operate the
remaining properties and pay cash distributions.





Item
3. Quantitative
and Qualitative Disclosures About Market Risk





We invest
our cash and cash equivalents in government backed securities and money market
accounts, which, by their nature, are subject to interest rate fluctuations. As
of March 31, 2010, a 1% increase or decrease in interest rates would not have a
material effect on our interest income.





Item
4(T).          Controls and Procedures





Disclosure
Controls and Procedures





We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and that such information is accumulated and communicated
to our senior management, as appropriate, to allow timely decisions regarding
required disclosure.  The Chief Executive Officer and the Chief Financial
Officer at Cornerstone Ventures, Inc., the manager of our Managing Member, have
evaluated the effectiveness of our disclosure controls and procedures and have
concluded that the disclosure controls and procedures were effective as of the
end of the period covered by this report.  In designing and evaluating
the disclosure controls and procedures, management recognizes that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management
is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.





There
have been no changes in our internal control over financial reporting during our
most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.




13


PART
II - OTHER INFORMATION





Item 6.
            Exhibits





3.1
                        Amended
      and Restated Operating Agreement of Cornerstone Realty Fund, LLC dated as
      of June 30, 2003 (as amended on February 22, 200, June 2, 2009 and
      April 27, 2010).31.1
                        Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.31.2
                        Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.32
                        Certification
      of Chief Executive Officer and Chief Financial Officer Pursuant to 18
      U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
      of
2002.




14





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this quarterly report to be signed on its
behalf by the undersigned, thereunto duly authorized this 13th day of May
2010.





CORNERSTONE
      REALTY FUND, LLCBy:
              CORNERSTONE
      INDUSTRIAL PROPERTIES, LLCits
      Managing MemberBy:
              CORNERSTONE
      VENTURES, INC.its
      ManagerBy:
              /s/ TERRY G. ROUSSELTerry
      G. Roussel, President(Principal
      Executive Officer)By:
              /s/ SHARON C. KAISERSharon
      C. Kaiser,Chief
      Financial Officer(Principal
      Financial Officer andPrincipal
      Accounting Officer)




15