**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 
| **ý**                                                                                                                                                       | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------|
|                                                                                                                                                             |       |                                                                                                    |
| **For the quarterly period ended March 31,  2006**                                                                                                          |
| **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 itscharter)

 

| **CALIFORNIA**                                                  |   | **33-0827161**                        |
|-----------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |   | (I.R.S. Employer  Identification No.) |

 

| **1920 MAIN, SUITE 400,  IRVINE, CA** |   | **92614**  |
|--------------------------------------------|--------|------------|
| (Address of principal  executive offices)  |   | (Zip Code) |

 

**949-852-1007**

(Registrant’s telephone number, includingarea code)

 

**Not Applicable**

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

 

Indicate by check mark whether the issuer (1) filedall reports required to be filed by section 13 or 15(d) of theExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

ý  Yes    o  No

 

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

 

Large accelerated filer  o   Accelerated filer  o   Non-accelerated filer  ý

 

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

o  YES    ý  NO

 

 

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**PART I- FINANCIAL INFORMATION**

 

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

 

**CornerstoneRealty Fund, LLC**

 
| Condensed Balance Sheets at March 31,  2006 (unaudited) and December 31, 2005 |   |
|-----------------------------------------------------------------------------------------|--------|
|                                                                                    |   |
| Condensed  Statements of Operations for the Three Months ended                          |   |
| March 31, 2006  (unaudited) and March 31, 2005 (unaudited)                    |   |
|                                                                                    |   |
| Condensed  Statements of Members’ Capital for the Three Months ended               |   |
| March 31, 2006  (unaudited)                                                        |   |
|                                                                                    |   |
| Condensed Statements  of Cash Flows for the Three Months ended                          |   |
| March 31, 2006 (unaudited)  and March 31, 2005 (unaudited)                    |   |
|                                                                                    |   |
| Notes to  Condensed Financial Statements (unaudited)                                    |   |

 

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**CORNERSTONEREALTY FUND, LLC**

**(aCalifornia limited liability company)**

**CONDENSED BALANCE SHEETS**

 
| ** **                                                                                                        | ** ** | **March 31, 2006** | ** ** | **December 31, 2005 (****a)** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------------------|------------|
| ** **                                                                                                        | ** ** | **(unaudited)**         | ** ** | ** **                         | ** ** |
| **ASSETS**                                                                                                        |       |                    |       |                               |       |
| Assets                                                                                                            |       |                    |       |                               |       |
| Cash and  cash equivalents                                                                                        |       | $                       | 13,092,067 |                               | $          | 13,488,985 |   |
|                                                                                                              |       |                    |       |                               |       |
| Investments in real estate                                                                                        |       |                    |       |                               |       |
| Land                                                                                                              |       | 8,297,490               |       | 8,297,490                          |       |
| Buildings  and improvements, less accumulated depreciation of $852,145 in 2006 and  $717,262 in 2005              |       | 18,244,393              |       | 18,317,939                         |       |
| Intangible  lease value, less accumulated amortization of $52,390 in 2006 and $41,912 in  2005                    |       | 497,610                 |       | 508,088                            |       |
| Intangible  asset – in place leases, less accumulated amortization of $419,551 in 2006  and $359,683 in 2005 |       | 501,297                 |       | 561,165                            |       |
|                                                                                                              |       | 27,540,790              |       | 27,684,682                         |       |
| Other assets                                                                                                      |       |                    |       |                               |       |
| Escrow  deposit and other costs                                                                                   |       | 13,066                  |       | 11,836                             |       |
| Tenant and  other receivables                                                                                     |       | 101,896                 |       | 205,792                            |       |
| Prepaid  expenses                                                                                                 |       | 55,919                  |       | 14,371                             |       |
| Leasing  commissions, less accumulated amortization of $77,428 in 2006 and $55,113 in  2005                       |       | 165,042                 |       | 99,895                             |       |
|                                                                                                              |       |                    |       |                               |       |
| Total assets                                                                                                      |       | $                       | 40,968,780 |                               | $          | 41,505,561 |   |
| ** **                                                                                                        |       |                    |       |                               |       |
| **LIABILITIES  AND MEMBERS’ CAPITAL**                                                                        |       |                    |       |                               |       |
| Liabilities                                                                                                       |       |                    |       |                               |       |
| Accounts  payable and accrued liabilities                                                                         |       | $                       | 205,583    |                               | $          | 232,071 |   |
| Real estate  taxes payable                                                                                        |       | 280,041                 |       | 273,030                            |       |
| Tenant  security deposits                                                                                         |       | 235,211                 |       | 239,385                            |       |
| Total liabilities                                                                                                 |       | 720,835                 |       | 744,486                            |       |
|                                                                                                              |       |                    |       |                               |       |
| Members’  capital (100,000 units authorized, 100,000 units issued and outstanding at 2006  and 2005          |       | 40,247,945              |       | 40,761,075                         |       |
| Total liabilities and members’ capital                                                                       |       | $                       | 40,968,780 |                               | $          | 41,505,561 |   |

 

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(a) Derived from the audited financial statements as of December 31, 2005.

 

The accompanying notes are an integral part ofthese interim financial statements.

 

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**CORNERSTONEREALTY FUND, LLC**

**(aCalifornia limited liability company)**

 

**CONDENSED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                            | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|
| ** **                                            | ** ** | **March 31 ,**    | ** ** |
| ** **                                            | ** ** | **2006**               | ** ** | **2005** | ** ** |
| ** **                                            | ** ** | ** **             | ** ** | ** ** | ** ** |
| Revenues                                              |       |                   |       |   |   |
| Rental  revenues                                      |       | $                      | 588,820    |   | $ | 417,215 |   |
| Amortization  of in-place leases                      |       | (59,868                | )          | (44,882 | ) |
| Tenant  reimbursements and other income               |       | 141,776                |       | 60,735 |   |
|                                                  |       | 670,728                |       | 433,068 |   |
|                                                  |       |                   |       |   |   |
| Expenses                                              |       |                   |       |   |   |
| Property  operating and maintenance                   |       | 207,125                |       | 94,421 |   |
| Property  taxes                                       |       | 158,392                |       | 80,105 |   |
| General and  administrative                           |       | 151,429                |       | 34,765 |   |
| Depreciation  and amortization                        |       | 167,676                |       | 94,628 |   |
|                                                  |       | 684,622                |       | 303,919 |   |
|                                                  |       |                   |       |   |   |
| Operating (loss) income                               |       | (13,894                | )          | 129,149 |   |
|                                                  |       |                   |       |   |   |
| Interest,  dividends and other income                 |       | 130,652                |       | 32,650 |   |
|                                                  |       |                   |       |   |   |
| Net income                                            |       | $                      | 116,758    |   | $ | 161,799 |   |
|                                                  |       |                   |       |   |   |
| Net income allocable to managing member               |       | $                      | 11,676     |   | $ | 16,180 |   |
|                                                  |       |                   |       |   |   |
| Net income allocable to unitholders                   |       | $                      | 105,082    |   | $ | 145,619 |   |
|                                                  |       |                   |       |   |   |
| Per unit amounts:                                     |       |                   |       |   |   |
| Basic and diluted income allocable to  unitholders    |       | $                      | 1.05       |   | $ | 2.29 |   |
|                                                  |       |                   |       |   |   |
| Basic and diluted weighted average units  outstanding |       | 100,000                |       | 63,617 |   |

 

The accompanying notes are an integral part ofthese interim financial statements.

 

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**CORNERSTONEREALTY FUND, LLC**

**(aCalifornia limited liability company)**

 

**CONDENSED STATEMENT OF MEMBERS’ CAPITAL**

**(Unaudited)**

 
| Balance, December 31,  2005 |   | $        | 40,761,075 |   |
|----------------------------------|--------|----------|------------|--------|
|                             |   |     |       |
| Distribution to unit holders     |   | (629,888 | )          |
| Net income                       |   | 116,758  |       |
|                             |   |     |       |
| Balance, March 31, 2006     |   | $        | 40,247,945 |   |

 

The accompanying notes are an integral part ofthese interim financial statements.

 

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**CORNERSTONEREALTY FUND, LLC**

**(aCalifornia limited liability company)**

 

**CONDENSED STATEMENTS OF CASH FLOWS**

**(Unaudited)**

 
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **March 31,**     | ** ** |
| ** **                                                                         | ** ** | **2006**               | ** ** | **2005** | ** ** |
| ** **                                                                         | ** ** | ** **             | ** ** | ** ** | ** ** |
| OPERATING ACTIVITIES                                                               |       |                   |       |   |   |
| Net income                                                                         |       | $                      | 116,758    |   | $ | 161,799 |   |
| Adjustments to reconcile net income to net  cash Provided by operating activities: |       |                   |       |   |   |
| Depreciation  and amortization                                                     |       | 227,544                |       | 139,510 |   |
| Changes in  operating assets and liabilities:                                      |       |                   |       |   |   |
| Other assets                                                                       |       | (26,344                | )          | 69,511 |   |
| Accounts  payable, accrued liabilities and security deposits                       |       | (23,651                | )          | 150,138 |   |
|                                                                               |       |                   |       |   |   |
| Net cash provided by operating activities                                          |       | 294,307                |       | 520,958 |   |
|                                                                               |       |                   |       |   |   |
| INVESTING ACTIVITIES                                                               |       |                   |       |   |   |
| Real estate additions                                                              |       | (61,337                | )          | (5,255,172 | ) |
|                                                                               |       |                   |       |   |   |
| Net cash used in investing activities                                              |       | (61,337                | )          | (5,255,172 | ) |
|                                                                               |       |                   |       |   |   |
| FINANCING ACTIVITIES                                                               |       |                   |       |   |   |
| Contribution from managing member                                                  |       | —                 |       | 200,980 |   |
| Net proceeds from offering                                                         |       | —                 |       | 4,614,172 |   |
| Distributions to members                                                           |       | (629,888               | )          | (339,439 | ) |
| Deferred offering costs repaid to managing  member                                 |       | —                 |       | (206,220 | ) |
|                                                                               |       |                   |       |   |   |
| Net cash provided by (used by) financing  activities                               |       | (629,888               | )          | 4,269,493 |   |
|                                                                               |       |                   |       |   |   |
| Net decrease in cash                                                               |       | (396,918               | )          | (464,721 | ) |
|                                                                               |       |                   |       |   |   |
| Cash and cash equivalents at beginning of  period                                  |       | 13,488,985             |       | 11,793,822 |   |
|                                                                               |       |                   |       |   |   |
| Cash and cash equivalents at end of period                                         |       | $                      | 13,092,067 |   | $ | 11,329,101 |   |

 

The accompanying notes are an integral part ofthese interim financial statements.

 

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**CORNERSTONEREALTY FUND, LLC**

**(aCalifornia Limited Liability Company)**

 

**NOTES TO CONDENSED FINANCIAL STATEMENTS**

**(Unaudited)**

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

 

Cornerstone Realty Fund, LLC is a California limitedliability company that invests in multi-tenant business parks catering to smallbusiness tenants. We purchase existing, leased properties located in majormetropolitan areas in the United States on an all cash basis without debtfinancing. We have purchased six properties as of the date of this report. Asused in this report, “we,” “us” and “our” refer to Cornerstone Realty Fund, LLCexcept where the context otherwise requires.

 

Our managing member is Cornerstone IndustrialProperties, LLC (CIP), a California limited liability company. CornerstoneVentures, Inc manages CIP. Cornerstone Ventures, Inc. is anexperienced real estate operating company specializing in the acquisition,operation and repositioning of multi-tenant industrial business parks cateringto small business tenants.

 

On August 7, 2001, we commenced a publicoffering of units of our membership interest pursuant to a RegistrationStatement filed on Form S-11 under the Securities Act of 1933. On August 18,2005, we completed our public offering of these units. As of that date, we hadissued 100,000 units to unitholders for gross offering proceeds of $50,000,000,before discounts of $39,780.

 

Our interim unaudited condensed financial statementshave been prepared in accordance with accounting principles generally acceptedin the United States for interim financial information and in accordance withthe rules and regulations of the Securities and Exchange Commission. Aspermitted by the Securities and Exchange Commission filing requirements for Form 10-Q,the condensed financial statements do not include all of the information andfootnotes required by accounting principles generally accepted in the UnitedStates for complete financial statements. The condensed financial statementsincluded herein should be read in conjunction with our Annual Report on Form 10-Kfor the year ended December 31, 2005.

 

The interim unaudited condensed financial statementshave been prepared in accordance with the Fund’s customary accounting practices.In the opinion of management, all adjustments (consisting of normal recurringaccruals) considered necessary for a presentation in accordance with accountingprinciples generally accepted in the United States have been included. Operatingresults for the three months ended March 31, 2006 are not necessarilyindicative of the results that may be expected for the year ending December 31,2006.

 

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

 

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

 

CIP generally has complete and exclusive discretionin the management and control of our operations; however, unitholders holdingthe majority of all outstanding and issued units have certain specified votingrights which include the removal and replacement of the Managing 

 

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Member.

 

Net Cash Flow from Operations, as defined, will bedistributed 90% to the unitholders and 10% to the Managing Member until theunitholders have received either an 8% or 12% cumulative, non-compounded annualreturn on their Invested Capital Contributions, as defined. The 12% returnapplies to specified early investors for the twelve-month period subsequent tothe 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 unitholders in an amount equal to their Invested CapitalContributions; then, 90% to the unitholders and 10% to the Managing Memberuntil the unitholders have received an amount equal to the unpaid balance oftheir aggregate cumulative, non-compounded annual return on their InvestedCapital Contributions; and thereafter, 50% to the unitholders and 50% to theManaging Member.

 

Net Income, as defined, is allocated first, 10% tothe Managing Member and 90% to the unitholders until Net Income allocatedequals cumulative Net Losses, as defined, previously allocated in suchproportions; second, in proportion to and to the extent of Net Cash Flow fromOperations and Net Sales Proceeds previously distributed to the members,exclusive of distributions representing a return of Invested CapitalContributions; and then 50% to the Managing Member and 50% to the unitholders.

 

Net Loss is allocated first, 50% to the ManagingMember and 50% to the unitholders, until Net Loss allocated equals cumulativeNet Income previously allocated in such proportions; then remaining Net Loss isallocated 10% to the Managing Member and 90% to the unitholders.

 

All allocations and distributions to the unitholdersare to be pro rata in proportion to their ownership shares.

 

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

 

*Use of Estimates*

 

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

 

*Cash and Cash Equivalents*

 

Cash and cash equivalents consist primarily ofinterest-bearing investments with original maturities of 90 days or less at thedate of purchase. Included in cash and cash equivalents at March 31, 2006is $235,211 related to tenant security deposits. The Company places its cashwith major financial institutions. At times, cash balances may be inexcess of amounts insured by Federal agencies. Approximately $12,717,000 incash balances was in excess of federal deposit insurance at March 31,2006.

 

*Investments in Real Estate*

 

Investments in real estate are stated at cost andinclude land, buildings and building improvements. Expenditures for ordinarymaintenance and repairs are expensed to operations as

 

8

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incurred. Significant replacements, betterments and tenant improvementsimproving or extending the useful lives of the buildings are capitalized. Generally,depreciation of the buildings and building improvements is computed on astraight-line basis over their estimated useful lives of 39 years and tenantimprovements are depreciated over the related lease term.

 

We evaluate the carrying value for investments inreal estate in accordance with Financial Accounting Standards Board (“FASB”)Statement No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets*(“FAS 144”). FAS 144requires that when events or changes in circumstances indicate that thecarrying amount of the assets might not be recoverable, companies shouldevaluate the need for an impairment write-down. When an impairment write-downis required, the related assets are adjusted to their estimated fair value. Noassets were deemed to be impaired at March 31, 2006.

 

In accordance with Statements of FinancialAccounting Standard (“SFAS”) No. 141, *BusinessCombinations* and SFAS No. 142, *Goodwilland Other Intangible Assets*, we record at acquisition an intangibleasset or liability for the value attributable to in-place leases. As of March 31,2006, we had recorded $920,848 as an intangible asset attributable to the valueof the leases in place as of the date of acquisition. The unamortized portionof this asset was $501,297 at March 31, 2006. As of March 31, 2006,we had recorded $550,000 as an intangible asset attributable to the value ofbillboard and cell site leases as of the date of acquisition. The unamortizedportion of this asset was $497,610 as of March 31, 2006.

 

*Leasing Commissions*

 

Leasing commissions are stated at cost and amortizedon a straight-line basis over the related lease term. As of March 31,2006, we had recorded $242,470 in leasing commissions. The unamortized portionof this asset was $165,042 at March 31, 2006.

 

*Revenue Recognition*

 

Rental revenues are recorded on an accrual basis asthey are earned over the lives of the respective tenant leases on astraight-line basis. Included in this calculation are contractual rentincreases and amounts paid to tenants as tenant improvement allowances. Rentalreceivables are periodically evaluated for collectibility.

 

*Fair Value of Financial Instruments*

 

We believe that the recorded values of all financialinstruments approximate their current values.

 

*Income Tax Matters*

 

It is our intent we be treated as a partnership forincome tax purposes. As a limited liability company, we are subject to certainminimal taxes and fees, including California state income taxes on limitedliability companies; however, income taxes on the income or losses we realizeare generally the obligation of the members.

 

*Concentration of Credit Risk*

 

We maintain some of our cash in money marketaccounts which, at times, exceeds federally insured limits. No losses have beenexperienced related to such amounts.

 

9

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

 

On September 27, 2002, we acquired an existingmulti-tenant industrial business park known as Normandie Business Center,located in Torrance, California for $3,901,696. Normandie Business Centerconsists of two single-story buildings containing a total of 48,711 leasablesquare feet.

 

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

 

On December 10, 2003, we acquired an existingmulti-tenant industrial park known as Arrow Business Center located inIrwindale, California for $5,910,579. The property consists of threesingle-story buildings containing a total of 69,592 leasable square feet.

 

On January 25, 2005, the Fund purchased anexisting multi-tenant industrial park known as Zenith Drive Centre located inGlenview, Illinois for an investment of $5,327,256. The property is asingle-story, three building property consisting of approximately 37,900(unaudited) leasable square feet. Included in the acquisition and purchaseprice of Zenith Drive Centre were a billboard sign and cellular relay antennalocated on the property leased to a large media company and communicationscompany, respectively. Management separately valued these leases and theresulting amounts are included in intangible lease value. The value of theseleases is amortized over the remaining respective terms.

 

On April 28, 2005, the Fund purchased anexisting multi-tenant industrial park known as Paramount Business Centerlocated in Paramount, California, for an investment of $3,149,410. ParamountBusiness Center is a single-story two building property of approximately 30,157(unaudited) square feet.

 

On September 30, 2005, the Fund purchased amulti-tenant industrial park in Tempe, Arizona, near the Phoenix airport, foran investment of $7,518,714. This property consists of four buildings totaling83,205 (unaudited) square feet of leasable space.

 

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

 

**4.****                                      RelatedParty Transactions**

 

We reimbursed our Managing Member specificincremental costs incurred in connection with the offering of our membershipunits, limited to 4% of the gross proceeds of our offering. During the threemonths ended March 31, 2005, we reimbursed our Managing Member for$206,220 of these costs. At December 31, 2005, we had fully repaid alloffering costs incurred by Managing Member.

 

During the three months ended March 31, 2005,the Managing Member funded $200,980 to subsidize our distribution of $339,439to the unit holders. We will not reimburse our Managing Member for this fundingcontribution.

 

Our Managing Member and/or its affiliates wereentitled to receive various fees, compensation and reimbursements in connectionwith the offering of our membership units, including commissions of 7%,marketing fees of 2% of gross proceeds from the offering of units, and expenseallowances of 1.5% of gross proceeds from the offering of units. During thethree months ended March 31, 2006 and 2005, 

 

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thetotal fees, compensation and reimbursements were $0 and $541,328, respectively.

 

**5.****                                     ****Commitments andContingencies**

 

In accordance with the terms of the CornerstoneRealty Fund Operating Agreement, any of the funds raised in our public offeringthat have not been invested in properties or desginated for specific reserveswithin one year of the completion of the offering will be distributed to ourunitholders.

 

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

 

The following “Management’s Discussion and Analysisof Financial Condition and Results of Operations” should be read in conjunctionwith the Fund’s financial statements and notes thereto contained elsewhere inthis report. Certain statements in this section and elsewhere containforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995. Such forward-looking statements may relateto risks and other factors that may cause our future results of operationsto be materially different than those expressed or implied herein. Some ofthese risks and other factors include, but are not limited to:  (i) no assurance that our propertieswill continue to experience the current level of occupancy; (ii) tenants may notbe able to meet their financial obligations; (iii) rental revenues fromthe properties may not be sufficient to meet our cash requirements foroperations, capital requirements and distributions; (iv) suitableinvestment properties may not continue to be available; and (v) adversechanges to the general economy may disrupt operations.

 

# **CriticalAccounting Policies**

 

Our financial statements have been prepared inaccordance with accounting principles generally accepted in the United States. Thepreparation of these financial statements requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities asof the date of the financial statements and the reported amount of revenue andexpenses during the reporting period. Actual results could differ materiallyfrom the estimates in the near term.

 

## *RevenueRecognition*

 

Rental revenues are recorded on an accrual basis asthey are earned over the lives of the respective tenant leases on astraight-line basis. Included in this calculation are contractual rentincreases and amounts paid to tenants as tenant improvement allowances. Rentalreceivables are periodically evaluated for collectibility.

 

## *Investmentsin Real Estate*

 

Investments in real estate are stated at cost andinclude land, buildings and building improvements. Expenditures for ordinarymaintenance and repairs are expensed to operations as incurred. Significantreplacements, betterments and tenant improvements, which improve or extend theuseful lives of the buildings, are capitalized. Depreciation of the buildingsand building improvements is computed on a straight-line basis over theirestimated useful lives of either 10 or 39 years. Tenant improvements aredepreciated over the shorter of the useful asset life or the related leaseterm.

 

We evaluate the carrying value for investments inreal estate in accordance with Financial Accounting Standards Board (“FASB”)Statement No. 144, *Accounting for theImpairment or Disposal of Long-Lived Assets* (“FAS 144”). FAS 144requires that when events or changes in circumstances indicate that thecarrying amount of the assets might not be recoverable, companies shouldevaluate the need for an impairment write-down. When an impairment write-downis required, the related assets are adjusted

 

11

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to their estimated fair value. No assets were deemed to be impaired at March 31,2006.

 

In accordance with FASB issued Statements ofFinancial Accounting Standard (“SFAS”) No. 141, *Business Combinations*and SFAS No. 142, *Goodwill and Other Intangible Assets*, we record at acquisition anintangible asset or liability for the value attributable to in-place leases. Asof March 31, 2006, we have recorded $920,848 as an intangible assetattributable to the value of the leases in place as of the date of acquisition.The unamortized portion of this asset was $501,297 at March 31, 2006. Asof March 31, 2006, we have recorded $550,000 as an intangible assetattributable to the value of billboard and cell site leases as of the date ofacquisition. The unamortized portion of this asset was $497,610 as of March 31,2006.

 

**Results of Operations**

 

As of March 31, 2006, we had purchased sixmulti-tenant industrial business park properties in three major metropolitan areas.The properties were purchased in September 2002, December 2002, December 2003,and January, April and September 2005. The 2006 results reflect afull quarter of operations for all six properties. Results for 2005 reflect afull quarter of operations from only three properties.

 

*Three months ended March 31, 2006 and 2005*

 

Revenue for the first quarter of 2006 increased to$670,728 from $433,068 for the comparable period of 2005. The increase was dueprimarily to the contribution of the two new properties purchased after March 31,2005.

 

Property operating and maintenance expensesincreased to $207,125 in 2006 from $94,421 in 2005. This increase was theresult of the addition of the new properties as well as non recurring repairsand maintenance at two properties in the 2006 quarter. Property taxes increasedto $158,392 in 2006 from $80,105 in 2005 due to the addition of the newproperties.

 

General and administrative costs increased to$151,429 in the first quarter of 2006 from $34,765 in the first quarter of 2005.The increase was due to higher professional fees including tax, auditing, legaland non-recurring consulting fees. Depreciation and amortization increased to$167,676 in the 2006 quarter from $94,628 in the 2005 quarter as a result ofthe addition of properties.

 

Interest and other income increased to $130,652 forthe three months ended March 31, 2006 from $32,650 for the same period of2005 due to higher the short-term interest rates earned on invested cash.

 

**Liquidity and Capital Resources**

 

Our planned $50,000,000 equity offering is nowcomplete and we do not expect to raise any additional funds. We intend to usethe existing cash balance for the acquisition of additional multi-tenantindustrial business park properties, capital improvements to the properties,and for operating expenses and reserves.

 

We expect to meet our short-term liquidityrequirements from net cash generated by operations, which we believe will beadequate to meet operating costs, and allow for cash distributions to the unitholders.However, because offering proceeds are not yet fully invested, current net cashgenerated by operations is not expected to be sufficient to fund distributionsto unitholders at an annual rate of 5%.

 

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**Contractual Obligations**

 

As of March 31, 2006, we had no significantcontractual obligations or commercial commitments, other than our operatingleases with tenants in our commercial properties.

 

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

 

We invest our cash and cash equivalents in FDICinsured savings and money market accounts, which, by their nature, are subjectto interest rate fluctuations.

 

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

 

Our disclosure controls and procedures are designedto ensure that information required to be disclosed in reports we file orsubmit under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in the rules andforms of the Securities and Exchange Commission and that such information isaccumulated and communicated to our management, as appropriate, to allow timelydecisions regarding required disclosure. The Chief Executive Officer and the ChiefFinancial Officer of Cornerstone Ventures, Inc., the manager of ourManaging Member, have reviewed the effectiveness of our disclosure controls andprocedures and have concluded that the disclosure controls and procedures wereeffective as of the end of the period covered by this report.

 

We are in the process of developing and implementinga formal set of internal controls and procedures for financial reporting asrequired by the Sarbanes-Oxley Act of 2002, the efficacy of the steps we havetaken to date and steps we are still in the process of completing is subject tocontinued management review supported by confirmation and testing by managementand by our auditors. We anticipate that additional changes may be made toour internal controls and procedures. Other than the foregoing initiatives, nochange in our internal control over financial reporting occurred during theperiod covered by this report that has materially affected, or is reasonablylikely to affect, our internal control over financial reporting.

 

It should be noted that any system of controls,however well designed and operated, can provide only reasonable, and notabsolute, assurance that the objectives of the system are met. In addition, thedesign of any control system is based in part upon certain assumptionsabout the likelihood of future events. Because of these and other inherentlimitations of control systems, there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions.

 

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**PART II - OTHER INFORMATION**

 

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

 

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

 

31.2                    Certification of Chief Financial Officer pursuantto Section 302 of the Sarbanes-Oxley Act of 2002.

 

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

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this quarterly report to be signed on its behalf by the undersigned,thereunto duly authorized this 12th day of May 2006.

 
|   | CORNERSTONE REALTY FUND, LLC |
|--------|------------------------------|
|   |                         |
|   | By:                          | CORNERSTONE INDUSTRIAL PROPERTIES, LLC |
|   |                         | its Managing Member |
|   |                         |   |
|   |                         | By: | CORNERSTONE VENTURES, INC. |
|   |                         |   | its Manager |
|   |                         |   |   |
|   |                         |   | By: | /s/ TERRY G. ROUSSEL |
|   |                         |   |   | Terry G. Roussel, President |
|   |                         |   |   | (Principal Executive Officer) |
|   |                         |   |   |   |
|   |                         |   | By: | /s/ SHARON C. KAISER |
|   |                         |   |   | Sharon C. Kaiser, |
|   |                         |   |   | Chief Financial Officer |
|   |                         |   |   | (Principal Financial Officer and |
|   |                         |   |   | Principal Accounting Officer) |

 

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