**U.S. SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

| **ý** |   | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934** |
|------------|--------|---------------------------------------------------------------------------------------------|

 

**FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003**

 

| **o** |   | **TRANSITION REPORT PURSUANT TO  SECTION 13   OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------|-------------------------------------------------------------------------------------------------|

 

**FOR THE TRANSITION PERIOD FROM                 TO                 **

 

**Commission File Number   333-63656**

 

**CORNERSTONE REALTY FUND, LLC**

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

| **California**                                                                       |   | **33-0827161**                     |
|--------------------------------------------------------------------------------------|--------|------------------------------------|
| (State or other jurisdiction  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 theissuer (1) filed all reports required to be filed by Section 13 or15(d) of the Exchange Act of 1934 during the past 12 months (or for suchshorter period that the registrant was required to file such reports), and(2) has been subject to such filing requirements for the past 90 days.

 

YES  ý      NO  o

 

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

 

As of August 1, 2003, the Fund had 25,219 units of membershipinterest issued and outstanding.

 

 

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| **PART I - FINANCIAL INFORMATION**                                                                                                                    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                  |
| **Item 1.**                                                                                                                                           | **Financial  Statements** |
|                                                                                                                                                  |
| **Cornerstone  Realty Fund, LLC**                                                                                                                     |
|                                                                                                                                                  |
| Condensed Balance Sheets at  June 30, 2003 (unaudited) and December 31, 2002                                                                |
|                                                                                                                                                  |
| Condensed  Statements of Operations for the Three Months and Six Months ended  June 30, 2003 and June 30, 2002 (unaudited)                  |
|                                                                                                                                                  |
| Condensed  Statements of Members’ Capital for the Six Months ended  June 30, 2003 (unaudited) and for the year ended December 31, 2002 |
|                                                                                                                                                  |
| Condensed Statements of Cash Flows for the  Six Months ended  June 30, 2003 and June 30, 2002 (unaudited)                                   |
|                                                                                                                                                  |
| Notes to  Condensed Financial Statements                                                                                                              |

 

2

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**CONDENSED BALANCE SHEETS**

 

 
|                                                                                                                                                        |   | **June 30, 2003**

**(Unaudited)** |       | **December 31, 2002** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|------------|----------------------------|--------|
| **ASSETS**                                                                                                                                                  |   |                                    |       |                       |   |
|                                                                                                                                                        |   |                                    |       |                       |   |
| Assets                                                                                                                                                      |   |                                    |       |                       |   |
| Cash and cash equivalents                                                                                                                                   |   | $                                       | 3,822,743  |                       | $      | 1,062,947 |   |
|                                                                                                                                                        |   |                                    |       |                       |   |
| Investments in real estate                                                                                                                                  |   |                                    |       |                       |   |
| Land                                                                                                                                                        |   | 2,201,930                               |       | 2,201,930                  |   |
| Buildings and improvements, less accumulated depreciation  of $70,517 in 2003 (unaudited)  and $15,868 in 2002                                              |   | 4,210,232                               |       | 4,237,894                  |   |
|                                                                                                                                                        |   | 6,412,162                               |       | 6,439,824                  |   |
|                                                                                                                                                        |   |                                    |       |                       |   |
| Other assets                                                                                                                                                |   |                                    |       |                       |   |
| Tenant and other receivables                                                                                                                                |   | 37,142                                  |       | 11,197                     |   |
| Prepaid insurance                                                                                                                                           |   | 7,166                                   |       | 14,877                     |   |
| Leasing commissions, less accumulated amortization  of $408 in 2003 (unaudited) and $136 in 2002                                                            |   | 1,926                                   |       | 1,497                      |   |
| Office equipment, less accumulated depreciation of  $2,708 in 2003 (unaudited) and $2,313 in 2002                                                           |   | 146                                     |       | 541                        |   |
| Total assets                                                                                                                                                |   | $                                       | 10,281,285 |                       | $      | 7,530,883 |   |
|                                                                                                                                                        |   |                                    |       |                       |   |
| **LIABILITIES AND MEMBERS’ CAPITAL**                                                                                                                   |   |                                    |       |                       |   |
|                                                                                                                                                        |   |                                    |       |                       |   |
| Liabilities                                                                                                                                                 |   |                                    |       |                       |   |
| Accounts payable and accrued liabilities                                                                                                                    |   | $                                       | 11,831     |                       | $      | 101,038 |   |
| Real estate taxes payable                                                                                                                                   |   | 115,993                                 |       | 113,657                    |   |
| Tenant security deposits                                                                                                                                    |   | 72,496                                  |       | 82,622                     |   |
| Advances payable to managing member                                                                                                                         |   | 114,115                                 |       | 111,059                    |   |
| Total liabilities                                                                                                                                           |   | 314,435                                 |       | 408,376                    |   |
|                                                                                                                                                        |   |                                    |       |                       |   |
| Members’ capital (100,000 units authorized, 20,497  units issued and outstanding in 2003 (unaudited) and 18,061 units issued and  outstanding in 2002) |   | 9,966,850                               |       | 7,122,507                  |   |
| Total liabilities and members’ capital                                                                                                                 |   | $                                       | 10,281,285 |                       | $      | 7,530,883 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

3

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**CORNERSTONE REALTY FUND, LLC**

**(a California Limited Liability Company)**

 

**CONDENSED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
|                                                      |   | **Three Months Ended  June 30,** |    | **Six Months Ended  June 30,** |   |
|-----------------------------------------------------------|--------|---------------------------------------|---------|-------------------------------------|--------|
|                                                      |   | **2003**                              |    | **2002**                            |   | **2003** |   | **2002** |   |
|                                                      |   |                                  |    |                                |   |   |   |   |   |
| Revenues                                                  |   |                                  |    |                                |   |   |   |   |   |
| Rental revenues                                           |   | $                                     | 201,943 |                                | $      | — |   | $ | 396,310 |   | $ | — |   |
| Tenant reimbursements and other income                    |   | 43,701                                |    | —                              |   | 73,505 |   | — |   |
| Interest, dividends and other income                      |   | 1,343                                 |    | 14,622                              |   | 4,267 |   | 26,420 |   |
|                                                      |   | 246,987                               |    | 14,622                              |   | 474,082 |   | 26,420 |   |
|                                                      |   |                                  |    |                                |   |   |   |   |   |
| Expenses                                                  |   |                                  |    |                                |   |   |   |   |   |
| Property operating and maintenance                        |   | 30,917                                |    | —                              |   | 59,893 |   | — |   |
| Property taxes                                            |   | 38,436                                |    | —                              |   | 76,126 |   | — |   |
| General and administrative                                |   | 23,462                                |    | 68,882                              |   | 68,789 |   | 101,050 |   |
| Interest on advances payable to managing member           |   | 8,894                                 |    | 10,143                              |   | 18,098 |   | 22,938 |   |
| Depreciation and amortization                             |   | 27,617                                |    | 142                                 |   | 55,316 |   | 284 |   |
|                                                      |   | 129,326                               |    | 79,167                              |   | 278,222 |   | 124,272 |   |
|                                                      |   |                                  |    |                                |   |   |   |   |   |
| Net income (loss)                                         |   | $                                     | 117,661 |                                | $      | (64,545 | ) | $ | 195,860 |   | $ | (97,852 | ) |
|                                                      |   |                                  |    |                                |   |   |   |   |   |
| Net income (loss) allocable to managing member            |   | $                                     | 11,766  |                                | $      | (6,454 | ) | $ | 19,586 |   | $ | (9,785 | ) |
|                                                      |   |                                  |    |                                |   |   |   |   |   |
| Net income (loss) allocable to unitholders                |   | $                                     | 105,895 |                                | $      | (58,091 | ) | $ | 176,274 |   | $ | (88,067 | ) |
|                                                      |   |                                  |    |                                |   |   |   |   |   |
| Per unit amounts:                                         |   |                                  |    |                                |   |   |   |   |   |
| Basic and diluted income (loss) allocable to  unitholders |   | $                                     | 4.68    |                                | $      | (5.84 | ) | $ | 8.43 |   | $ | (10.33 | ) |
|                                                      |   |                                  |    |                                |   |   |   |   |   |
| Basic and diluted weighted average units  outstanding     |   | 22,650                                |    | 9,945                               |   | 20,902 |   | 8,527 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

4

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**CORNERSTONE REALTY FUND, LLC**

**(a California Limited Liability Company)**

 

**CONDENSED STATEMENTS OF MEMBERS’ CAPITAL**

**(Unaudited)**

 
| Balance, December 31, 2002                   |   | 7,122,507 |      |
|---------------------------------------------------|--------|-----------|-----------|
|                                              |   |      |      |
| Net proceeds from offering                        |   | 2,834,465 |      |
| Distributions to members                          |   | (59,302   | )         |
| Deferred offering costs repaid to managing member |   | (126,680  | )         |
| Net income                                        |   | 195,860   |      |
|                                              |   |      |      |
| Balance, June 30, 2003                       |   | $         | 9,966,850 |   |
|                                                   |        |           |           |  |

 

The accompanying notes are an integral part of these financialstatements.

 

5

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**CORNERSTONE REALTY FUND, LLC**

**(a California Limited Liability Company)**

 

**CONDENSEDSTATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
|                                                                                                |   | **Six Months Ended  June 30,** |      |
|-----------------------------------------------------------------------------------------------------|--------|-------------------------------------|-----------|
|                                                                                                |   | **2003**                            |      | **2002** |   |
|                                                                                                |   |                                |      |   |   |
| OPERATING ACTIVITIES                                                                                |   |                                |      |   |   |
| Net income (loss)                                                                                   |   | $                                   | 195,860   |   | $ | (97,852 | ) |
| Adjustments to reconcile net income (loss) to net  cash provided by (used in) operating activities: |   |                                |      |   |   |
| Depreciation and amortization                                                                       |   | 55,316                              |      | 284 |   |
| Changes in operating assets and liabilities:                                                        |   |                                |      |   |   |
| Other assets                                                                                        |   | (18,935                             | )         | — |   |
| Accounts payable, accrued liabilities and security  deposits                                        |   | (99,333                             | )         | (33,355 | ) |
| Real estate taxes payable                                                                           |   | 2,336                               |      | — |   |
|                                                                                                |   |                                |      |   |   |
| Net cash provided by (used in) operating  activities                                                |   | 135,244                             |      | (130,923 | ) |
|                                                                                                |   |                                |      |   |   |
| INVESTING ACTIVITIES                                                                                |   |                                |      |   |   |
| Additions to buildings                                                                              |   | (26,987                             | )         | — |   |
|                                                                                                |   |                                |      |   |   |
| Net cash used in investing activities                                                               |   | (26,987                             | )         | — |   |
|                                                                                                |   |                                |      |   |   |
| FINANCING ACTIVITIES                                                                                |   |                                |      |   |   |
| Advances from managing member                                                                       |   | 3,056                               |      | 11,168 |   |
| Repayment of managing member advances                                                               |   | —                              |      | (189,055 | ) |
| Net proceeds from offering                                                                          |   | 2,834,465                           |      | 2,744,369 |   |
| Distributions to members                                                                            |   | (59,302                             | )         | — |   |
| Deferred offering costs repaid to managing member                                                   |   | (126,680                            | )         | (120,620 | ) |
|                                                                                                |   |                                |      |   |   |
| Net cash provided by financing activities                                                           |   | 2,651,539                           |      | 2,445,862 |   |
|                                                                                                |   |                                |      |   |   |
| Net increase in cash                                                                                |   | 2,759,796                           |      | 2,314,939 |   |
|                                                                                                |   |                                |      |   |   |
| Cash and cash equivalents at beginning of period                                                    |   | 1,062,947                           |      | 2,493,073 |   |
|                                                                                                |   |                                |      |   |   |
| Cash and cash equivalents at end of period                                                          |   | $                                   | 3,822,743 |   | $ | 4,808,012 |   |

 

The accompanying notes are an integral part of these financialstatements.

 

6

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**CORNERSTONE REALTY FUND, LLC**

**(a California Limited Liability Company)**

 

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 

Cornerstone Realty Fund, LLC, a California limited liability company(the “Fund”) (formerly Cornerstone Multi-Tenant Industrial Business Parks Fund,LLC and Cornerstone Industrial Properties Income and Growth Fund I, LLC), wasformed on October 28, 1998.  Themembers of the Fund are Cornerstone Industrial Properties, LLC, a Californialimited liability company, as the managing member (“Managing Member”), Terry G.Roussel, an individual, and other various unitholders as described below.  The purpose of the Fund is to acquire, operateand sell multi-tenant industrial properties. The Fund currently is issuing and selling equity interests (“units”) ina public offering in the Fund, and is admitting the new unitholders as membersof the Fund.

 

The Fund is generating sufficient net cash from operations to meet itsobligations as they come due.  The Fundis still 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. During December 2001, theFund raised the minimum offering requirement of 6,000 units.  As of July 24, 2003, the Fund hasissued 25,153 units primarily to new unitholders for gross offering proceeds of$12,576,500.

 

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

 

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

 

# *Interim Financial Information*

#  

The accompanying unaudited condensed financial statements have beenprepared in accordance with accounting principles generally accepted in theUnited States for interim financial information and with the instructions toForm 10-Q and Article 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 thethree-month and six-month periods ended June 30, 2003 are not necessarilyindicative of the results that may be expected for the year endingDecember 31, 2003.

 

For further information, refer to the audited financial statements andfootnotes thereto included in the Fund’s Annual Report on Form 10-K for theyear ended December 31, 2002.

 

7

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*Use of Estimates*

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates 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.

 

# *Cash and Cash Equivalents*

#  

Cash and cash equivalents consist primarily of interest-bearinginvestments with original maturities of 90 days or less at the date ofpurchase.  Included in cash and cashequivalents is $72,496 that the Fund has designated as tenant securitydeposits.

 

# *Investments in Real Estate*

#  

Investments in real estate are stated at cost and include land,buildings and building improvements.  Expenditures for ordinary maintenance and repairs are expensed tooperations as incurred.  Significantreplacements, betterments and tenant improvements which improve or extend theuseful lives of the buildings are capitalized. Depreciation of the buildings and building improvements is computed on astraight-line basis over their estimated useful lives of 39 years.  Tenant improvements are depreciated over therespective tenant’s lease term.

 

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

 

# *Office Equipment and Leasing Commissions*

#  

Office equipment is stated at cost. Depreciation is computed on a straight-line basis over the estimateduseful lives of the related assets.  Theestimated useful life of the office equipment is five years.  Leasing commissions are stated at cost.  Amortization is computed on a straight-linebasis over the related lease term.

 

# *Revenue Recognition*

#  

Rental revenues are recorded on an accrual basis as they are earnedover the lives of the respective tenant leases on a straight-line basis.  Rental receivables are periodicallyevaluated for collectibility.

 

# *Fair Value of Financial Instruments*

#  

The Fund believes that the recorded value of all financial instrumentsapproximates their current values.

 

# *Income Tax Matters*

#  

It is the intent of the Fund that the Fund be treated as a partnershipfor income tax purposes.  As a limitedliability company, the Fund is subject to certain minimal taxes and fees;however, income taxes on the income or losses realized by the Fund aregenerally reported on the separate returns of the members.

 

8

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# *Concentration of Credit Risk*

#  

The Fund maintains some of its cash in money market accounts which, attimes, exceeds federally insured limits. No losses have been experienced related to such amounts.

 

# *Reclassifications*

#  

Certain reclassifications have been made to the 2002 financialstatement account balances to conform to the 2003 presentation.

 

# *Computation of Net Income (Loss) per Unit*

#  

The basic and diluted income (loss) allocable to unitholders iscomputed by dividing net income (loss) by the weighted average number of unitsoutstanding for the period.

 

*Impact of New Accounting Pronouncements*

 

InNovember 2002, the Financial Accounting Standards Board issuedInterpretation No. 45, *Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others* (“Interpretation No. 45”).  The disclosure requirements ofInterpretation No. 45 are effective as of December 31, 2002.  The initial recognition and measurementrequirements of Interpretation No. 45 are effective on a prospective basis toguarantees issued or modified after December 31, 2002.  Interpretation No. 45 requires the recordingof a guarantee liability equal to its estimated fair value based on theexpected 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 June 30, 2003 and believes that theprovisions of this pronouncement have no effect on the Company’s financialstatements.

 

InJanuary 2003, the Financial Accounting Standards Board issuedInterpretation No. 46, *Consolidation ofVariable Interest Entities*(*“*InterpretationNo. 46”), which applies immediately to arrangements created afterJanuary 31, 2003.  InterpretationNo. 46 applies to arrangements created before February 1, 2003 beginningon July 1, 2003.  Theinitial adoption of Interpretation No. 46 for arrangements created afterFebruary 1, 2003 did not have a material impact on our financial positionor results of operations.  We do notanticipate that the impact of arrangements entered into prior toFebruary 1, 2003 will have a material effect on our financial position orresults of operations.

 

InMay 2003, the Financial Accounting Standards Board issued Statement No.150, *Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity*(“SFAS 150”)*.*  SFAS 150 establishes standards for how anissuer classifies and measures certain financial instruments withcharacteristics of both liabilities and equity.  SFAS 150 is effective for financial instruments entered into ormodified after May 31, 2003, and otherwise effective at the beginning ofthe first interim period beginning after June 15, 2003.  The Company believes that the adoption ofSFAS No. 150 does not have a material impact on the Company’s financial statements.

 

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

 

On September 27, 2002, the Fund acquired an existing multi-tenantindustrial business park known as Normandie Business Center, located inTorrance, California for an investment of $3,901,696.  Normandie Business Center consists of two single-story buildings containinga total of 48,979 leasable square feet.

 

9

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On December 27, 2002, the Fund acquired an existing multi-tenantindustrial business park known as the Sky Harbor Business Park, located inNorthbrook, Illinois for an investment of $2,553,996.  Sky Harbor Business Park consists of a single-story buildingcontaining a total of 41,422 leasable square feet.

 

Industrial space in the properties is generally leased to tenants underlease terms that provide for the tenants to pay a portion of operating expensesin addition to minimum rent.

 

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

 

Deferred offering costs advanced by the Managing Member for the sixmonths ended June 30, 2003 (unaudited) are as follows:

 
|                            |   | **Deferred Offering  Costs** |    |
|---------------------------------|--------|------------------------------|---------|
|                            |   |                         |    |
| Balance, December 31, 2002 |   | 463,614                      |    |
|                            |   |                         |    |
| Costs  advanced                 |   | 106,083                      |    |
| Costs  repaid                   |   | (126,680                     | )       |
|                            |   |                         |    |
| Balance,  June 30, 2003    |   | $                            | 443,017 |   |
|                                 |        |                              |         |  |

 

Specific incremental costs incurred in connection with the offering ofmembership units are advanced by the Managing Member.  These advances bear simple interest at the prevailing primecommercial lending rate (4.00% at June 30, 2003) plus two percentagepoints.  Reimbursement of such offeringcosts is limited to 4% of the gross proceeds of the related offerings.  Offering costs incurred by the ManagingMember in excess of the 4% limitation are deferred, and will be reimbursed fromfuture offering proceeds.  Any offeringcosts incurred by the Managing Member on behalf of the Fund that are notreimbursed by the Fund will be reflected as a capital contribution to the Fundby the Managing Member, with an offsetting expense recognized in the Fund’sstatement of operations.  ThroughJune 30, 2003, the Fund has received, from its Managing Member, cumulativeunsecured advances for deferred offering costs in the amount of $930,917(unaudited), and has repaid the Managing Member $487,900 (unaudited) of thosedeferred offering costs.

 

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

 

The Fund is to reimburse its Managing Member for deferred offeringcosts advanced by its Managing Member to the Fund in the amount of 4% of thegross proceeds from the offering of units. The Fund is to reimburse its Managing Member for 100% of initialoperating costs advanced to the Fund. Deferred offering and initial operating costs advanced to the Fund byits Managing Member bear interest at the prevailing prime commercial lendingrate plus two percentage points.

 

In order to fund its initial operating costs, the Fund has received,from its Managing Member, unsecured advances and has incurred interest for acumulative total of $479,283 (unaudited). Through June 30, 2003, the Fund has repaid the Managing Member$365,168 (unaudited) of initial operating costs and interest. The initialoperating cost advances bear simple interest at the prevailing prime commerciallending rate (4.00% at June 30, 2003) plus two percentage points.  Interest expense totaling $18,098(unaudited) and $22,938 (unaudited) for the six months ended June 30, 2003and 2002, respectively, was incurred on these advances.  At June 30, 2003, the balance ofinitial operating cost advances payable to the Managing Member was $114,115(unaudited).

 

10

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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 9% of the first $3,000,000of gross proceeds from the offering of units and 7% thereafter, marketing feesof 2% of gross proceeds from the offering of units less $60,000, and expenseallowances of 1.5% of gross proceeds from the offering of units.  During the six months ended June 30,2003 and 2002, the total fees, compensation and reimbursements were $332,535(unaudited) and $312,631 (unaudited), respectively, of which a substantialportion is paid out to other broker-dealers.

 

11

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

 

Thefollowing “Management’s Discussion and Analysis of Financial Condition andResults of Operations” should be read in conjunction with the Fund’s unauditedcondensed financial statements and notes thereto contained elsewhere in thisprospectus.  Certain statements in thissection and elsewhere contain forward-looking statements within the meaning ofthe Private Securities Litigation Reform Act of 1995.  Such forward-looking statements may relate to risks and otherfactors that may cause the Fund’s future results of operations to be materiallydifferent than those expressed or implied herein.  Some of these risks and other factors include, but are notlimited to:  (i) no assurance that Fundproperties will continue to experience minimal or no vacancy; (ii) tenants maynot be able to meet their financial obligations; (iii) rental revenues from theproperties may not be sufficient to meet the Fund’s cash requirements foroperations, capital requirements and distributions; (iv) suitable investmentproperties may not continue to be available; and (v) adverse changes to thegeneral economy may disrupt operations.

 

**Critical Accounting Policies**

 

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

 

*Revenue Recognition*

 

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

 

*Investments in Real Estate*

 

TheFund evaluates the carrying value for investments in real estate in accordancewith FASB Statement No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets* (“FAS 144”). FAS 144 requires that when events or changes in circumstances indicatethat the carrying amount of the assets might not be recoverable, companiesshould evaluate the need for an impairment write-down.  When an impairment write-down is required,the related assets are adjusted to their estimated fair value.

 

**Impact of New Accounting Pronouncements**

 

InNovember 2002, the Financial Accounting Standards Board issuedInterpretation No. 45, *Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others* (“Interpretation No. 45”).  The disclosure requirements ofInterpretation No. 45 are effective as of December 31, 2002.  The initial recognition and measurementrequirements of Interpretation No. 45 are effective on a prospective basis toguarantees issued or modified after December 31, 2002.  Interpretation No. 45 requires the recordingof a guarantee liability equal to its estimated fair value based on theexpected 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 after 

 

12

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December 31, 2002, and as ofJune 30, 2003 and believes that the provisions of this pronouncement haveno effect on our financial statements.

 

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.  Interpretation No.46 applies to arrangements created before February 1, 2003 beginning onJuly 1, 2003.  The initialadoption of Interpretation No. 46 for arrangements created afterFebruary 1, 2003 did not have a material impact on our financial positionor results of operations.  We do notanticipate 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.  We believethat the adoption of SFAS No. 150 does not have a material impact on ourfinancial statements.

 

**Results of Operations**

 

As of June 30, 2003,the Fund has 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 94% occupied.

 

SkyHarbor Business Park, acquired in December 2002, has also performed asexpected.  During the acquisitionreview, we confirmed that one tenant who occupied 12,002 square feet wasplanning to vacate when their lease expired on June 30, 2003. Thisknowledge allowed us to negotiate a reduced purchase price and forecast anumber of months for the vacancy and costs to locate a replacement tenant.  According to plan, we are actively marketingthe space and anticipate having the space leased by the fourth quarter of 2003.

 

We recently identifiedanother property for acquisition and on July 10, 2003, we opened an escrowaccount with a refundable deposit of $250,000. The property, IRSCO BusinessPark, is located in Irwindale, California, a sub-market of metropolitan Los Angeles.The property is situated in a high tenant demand market and is currently 95%occupied.  We have commenced thestandard preliminary pre-acquisition review, and formalized the negotiations,with a closing of the transaction expected at the end of August 2003,pending satisfactory results of our formal review.

 

The Fund generated netincome for the six months ended June 30, 2003 of $195,860 compared to anet loss of $97,852 for the same period of 2002, for an overall increase in netincome of $293,712.  This increase wasprimarily due to rental revenues of $469,815 generated by the properties wepurchased, and a decrease in general and administrative expenses of $32,261 andinterest expense on advances payable to managing member of $4,840. This revenueincrease of $506,916 was offset by reduced interest income on proceeds fromunit sales of $22,153, and property and related expenses of $191,051.

 

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Net incomeincreased $182,206 from a loss of $64,545 for the three months endedJune 30, 2002 to a net profit of $117, 661 for the three month periodended June 30, 2003.  During thethree month period ended June 30, 2003, the Fund generated rental andtenant reimbursement revenues of $245,644 offset by property operating expensesand depreciation totaling $96,970 from the Fund’s industrial propertyinvestments.  These property operationsaccounted for $148,674 of the $182,206 increase in net income. With the use ofcash investment for the acquisition of the two industrial properties, therevenue from interest, dividends and other income declined from $14,622 for thethree months ended June 30, 2002 to $1,343 for the three months endedJune 30, 2003.  General and administrativeexpenses also declined from $68,882 to $23,462 for the three months endedJune 30, 2002 and June 30, 2003, respectively.

 

TheFund is still in its offering and organizational stage. Additional general andadministrative expenses are expected to continue until the capitalization andorganization of the Fund is complete.

 

**Liquidity and Capital Resources**

 

During the six months endedJune 30, 2003 the Fund’s cash and cash equivalents increased by$2,759,796.  This is primarily theresult of net proceeds from the sale of units during the six month period endedJune 30, 2003 of $2,834,465.

 

As of August 1, 2003,the Fund has received $12,609,500 of gross proceeds from the sale of membershipunits, $109,979 as a capital contribution from the managing member, and paidout $1,913,216 for offering costs.  Of thenet proceeds of $10,806,263, the Fund purchased two properties for $6,455,693and has disbursed $26,987 for additional building costs and improvements, used$308,756 in cumulative operating expenses of the Fund and $64,170 indistributions to unitholders.  The Fundhas $3,950,657 in cash and cash equivalents, and a refundable deposit on aproposed property purchase of $250,000.

 

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.

 

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

 

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 incur organizationaland offering expenses and the managing member, although not 

 

14

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obligated, intends to continue providingadvances for offering and organizational expenses until the sale of membershipunits is completed.  The managing membermust raise funds through the sale of debt or equity securities to obtain thecash necessary to provide these advances. There can be no assurance as to the amount or timing of the managingmember’s receipt of funds.  The Fundwill not reimburse the managing member for any amounts advanced by it foroffering and organizational expenses which exceed the amounts and percentagesset forth in the prospectus for the offering. Any such expenses incurred by the managing member on behalf of the Fundthat are not reimbursed by the Fund will be reflected as a capital contributionto the Fund by the managing member with an offsetting expense recognized in theFund’s statement of operations.

 

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

 

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

 

Asof June 30, 2003, the Fund had $114,115 in advances payable to itsmanaging member.  The advances arerelated to loans from affiliates which, by their nature, are not subject tointerest rate fluctuations.

 

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

 

TheFund’s disclosure controls and procedures are designed to ensure thatinformation required to be disclosed in reports that the Fund files or submitsunder the Securities Exchange Act of 1934 is recorded, processed, summarizedand reported within the time periods specified in the rules and forms of theSecurities and Exchange Commission. The Chief Executive Officer and the ChiefFinancial Officer of Cornerstone Ventures, Inc., the manager of the managingmember of the Fund, have reviewed the effectiveness of the Fund’s disclosurecontrols and procedures within the last ninety days and have concluded that thedisclosure controls and procedures are effective. There were no significantchanges in our internal controls or in other factors that could significantlyaffect these controls subsequent to the last day they were evaluated.

 

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**PART II - OTHER INFORMATION**

 

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

 
| **(a)** | **Exhibits**            |
|---------|-------------------------|
|    |                    |   |
|    | 31.1                    | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002. |
|    |                    |   |
|    | 31.2                    | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002. |
|    |                    |   |
|    | 32.1                    | Certification  of Chief Executive Officer Pursuant to 18 U.S.C .§ 1350, as Adopted Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002. |
|    |                    |   |
|    | 32.2                    | Certification  of Chief Financial Officer Pursuant to 18 U.S.C. § 1350, as Adopted Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002. |
|    |                    |   |
| **(b)** | **Reports on Form 8-K** |
|    |                    |
|    | None.                   |

 

**SIGNATURES**

 

Pursuant to the requirementsof Section 13 or 15(d) of the Securities Exchange Act of 1934, the registranthas duly caused this quarterly report to be signed on its behalf by theundersigned, thereunto duly authorized this 13th day ofAugust 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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