**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**Form 10-K**

** **

**(MarkOne)**

 
|                                                       | **x**      | **ANNUAL REPORT PURSUANT  TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**      |
|-------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
| ** **                                            | ** ** | ** **                                                                                               |
| **For the fiscal year ended  December 31, 2007** |
|                                                  |       |                                                                                                     |
| **or**                                                |
|                                                  |       |                                                                                                     |
| ** **                                            | **o**      | **TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF  1934** |

 

**For thetransition period from**          **to**          

 

**Commission file number: 333-139704**

 

**CORNERSTONE******GROWTH & INCOME REIT, INC.****

 (Exactname of registrant as specified in its charter)

 

| **Maryland**                                                     | ** ** | **20-5721212**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction  of incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**1920Main Street, Suite 400, Irvine, California****92614**

(Address of Principal Executive Offices)

 

**949-852-1007**

(Registrant’s Telephone Number, Including Area Code)

 

**Securities registered pursuant to Section 12(b) ofthe Act:**

 

| **Title of Each Class:** | ** ** |
|-----------------------------------------|------------|
| None                                    | ** ** |

 

**Securitiesregistered pursuant to Section 12(g) of the Act:**

**None**

 

Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.  

Yes o     No x

 

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.  

Yes o     No x

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySections 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes x     No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.   x

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filed, or a smaller reporting company.   See definitions of “large accelerated filer”,“accelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange Act. (Check one):

 
| Large accelerated filer |   | Accelerated  filer |   | Non-accelerated  filer |   | Smaller  reporting company |
|-------------------------|--------|--------------------|--------|------------------------|--------|----------------------------|
| o                       |   | o                  |   | x                      |   | o                          |

 

As of June 30,2007 (the last business day of the registrant’s second fiscal quarter), theaggregate market value of the registrants common stock held by non-affiliateswas $0.

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct): Yes o  No x

 

As of March 16,2008, there were 100 shares of common stock of Cornerstone Growth & IncomeREIT, Inc. outstanding.

 

 

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**CORNERSTONE GROWTH & INCOMEREIT, INC.**

**(AMaryland Corporation)**

 

**TABLE OF CONTENTS**

 
| **PART I**   |
|-------------------|
|              | ** ** |   |
| Item 1            | Business | 3 |
|              |   |   |
| Item  1A          | Risk  Factors | 9 |
|              |   |   |
| Item 1B           | Unresolved  Staff Comments | 27 |
|              |   |   |
| Item  2           | Properties | 27 |
|              |   |   |
| Item 3            | Legal Proceedings | 27 |
|              |   |   |
| Item 4            | Submission  of Matters to a Vote of Security Holders | 27 |
|              |   |   |
| **PART II**  |
|              | ** ** |   |
| Item 5            | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 28 |
|              |   |   |
| Item 6            | Selected Financial  Data | 30 |
|              |   |   |
| Item 7            | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 31 |
|              |   |   |
| Item 7A           | Quantitative  and Qualitative Disclosures About Market Risk | 35 |
|              |   |   |
| Item 8            | Financial  Statements and Supplementary Data | 35 |
|              |   |   |
| Item 9            | Changes in  and Disagreements With Accountants on Accounting and Financial Disclosure | 35 |
|              |   |   |
| Item 9A           | Controls and  Procedures | 35 |
|              |   |   |
| Item 9B           | Other Information | 36 |
|              |   |   |
| **PART III** |
|              | ** ** |   |
| Item 10           | Directors,  Executive Officers and Corporate Governance | 36 |
|              |   |   |
| Item 11           | Executive  Compensation | 39 |
|              |   |   |
| Item 12           | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters | 41 |
|              |   |   |
| Item 13           | Certain  Relationships and Related Transactions, and Director Independence | 41 |
|              |   |   |
| Item 14           | Principal  Accounting Fees and Services | 44 |
|              |   |   |
| **PART IV**  |
|              | ** ** |   |
| Item 15.          | Exhibits and  Financial Statement Schedules | 45 |

 

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**PART I**

 

**SPECIAL NOTE ABOUT FORWARD-LOOKINGSTATEMENTS**

 

Certain statementsin this report, other than purely historical information, including estimates,projections, statements relating to our business plans, objectives and expectedoperating results, and the assumptions upon which those statements are based,are “forward-looking statements” within the meaning of the Private SecuritiesLitigation Reform Act of 1995, Section 27A of the Securities Act of 1933and Section 21E of the Securities Exchange Act of 1934. Theseforward-looking statements generally are identified by the words “believes,” “project,”“expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,” “may,” “will,”“would,” “will be,” “will continue,” “will likely result,” and similarexpressions. Forward-looking statements are based on current expectations andassumptions that are subject to risks and uncertainties which may cause actualresults to differ materially from the forward-looking statements. A detaileddiscussion of these and other risks and uncertainties that could cause actualresults and events to differ materially from such forward-looking statements isincluded in the section entitled “Risk Factors” in Item 1A of this report. Weundertake no obligation to update or revise publicly any forward-lookingstatements, whether as a result of new information, future events or otherwise.

 

**ITEM 1.  BUSINESS**

 

**OurCompany**

 

Cornerstone Growth &Income REIT, Inc. (formerly known as Cornerstone Institutional Growth REIT, Inc.),a Maryland corporation (the “Company”), was formed on October 16, 2006under the General Corporation Law of Maryland for the purpose of engaging inthe business of investing in and owning commercial real estate.  We intend to qualify as a real estateinvestment trust (REIT) for federal tax purposes.  We are newly formed and are subject to thegeneral risks associated with a start-up enterprise, including the risk ofbusiness failure. Our year end is December 31.  On May 1, 2007, our board of directorsapproved a change in our name to Cornerstone Growth and Income REIT, Inc.and on July 13, 2007 approved a change in our name to Cornerstone Growth &Income REIT, Inc.

 

On November 14,2006, Terry G. Roussel, our President and CEO, purchased 100 shares of commonstock for $1,000 and became our initial stockholder. Our articles ofincorporation authorize 580,000,000 shares of common stock with a par value of$0.01 and 20,000,000 shares of preferred stock with a par value of $0.01. Inour ongoing initial public offering, we are offering a minimum of 100,000 (the “MinimumNumber of Shares”) and a maximum of 50,000,000 shares of common stock,consisting of 40,000,000 shares for sale to the public (the “Primary Offering”)and 10,000,000 shares for sale pursuant to the our distribution reinvestmentplan (collectively, the “Offering”).

 

We are structuredas an umbrella partnership REIT, referred to as an “UPREIT,” under whichsubstantially all of our current and future business is, and will be, conductedthrough a majority owned subsidiary, Cornerstone Growth & IncomeOperating Partnership, L.P., a Delaware limited partnership, formed on November 30,2004.  We are the sole general partner ofthe operating partnership and have control over its affairs.  As used in this report, “we,” “us” and “our”refer to Cornerstone Growth & Income REIT, Inc. and itsconsolidated subsidiary except where the context otherwise requires.

 

Our Advisor isCornerstone Leveraged Realty Advisors, LLC, (formerly known as CIPLFA Advisors,LLC), a Delaware limited liability company (the “Advisor”), formed on October 16,2006, and an affiliate of us. The Advisor is responsible for managing ouraffairs on a day-to-day basis and for identifying and making acquisitions andinvestments on our behalf under the terms of an Advisory Agreement.  Our Advisor has contractual and fiduciaryresponsibilities to us and our stockholders. Under the terms of the Advisoryagreement, our Advisor will use commercially reasonable efforts to present tous investment opportunities and to provide a continuing and suitable investmentprogram consistent with the investment policies and objectives adopted by ourboard of directors.  Currently, we haveno direct employees.  All management andadministrative personnel responsible for conducting our business are employedby our Advisor and its affiliates.

 

From our formationthrough the end of the year ended December 31, 2007, our activitiesconsisted solely of organizational activities, including preparing for andlaunching our Offering.  We retainedPacific Cornerstone Capital, Inc. (“PCC”), an affiliate of the Advisor, toserve as the dealer manager for the Offering.  As of December 31,2007, no shares had been sold in the Offering.

 

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**InvestmentObjectives**

 

Our investment objectivesare to:

 

·      preserve stockholder capitalby acquiring and operating real estate;

 

·      realize capital appreciationfor our stockholders by:

 

·      purchasing stabilized,income-producing properties with the potential for capital appreciation and

 

·      profitingfrom the purchase and development or repositioning of other properties;

 

·      providestockholders with current income from the operations of the properties weacquire, including the income from properties we develop or reposition oncethey are stabilized; and

 

·      providelong-term liquidity to our stockholders within five years of the termination ofthe Offering after accomplishing the above objectives by:

 

·      liquidating our assets,

·      listing our shares on anational securities exchange,

·      another liquidity event suchas a merger with another company or

·      expandingour proposed stock repurchase program to redeem upon stockholder request up to10% of our prior-year outstanding shares utilizing proceeds from the sale ofour properties or other sources of funds irrespective of the amount of proceedsraised under our distribution reinvestment plan.

 

We define “stabilized”properties as those that are no longer in the lease-up stage followingdevelopment or redevelopment and that are substantially leased. When we “reposition”a property, we redevelop or employ other asset-management strategies to enhanceexisting cash flow. Management is not limited by its investment objectives toacquire properties only within the limits described above and these policiesmay change at any time.

 

We intend to usethe net proceeds of the Offering to primarily invest in existing leasedindustrial properties as well as other industrial properties where we believethere are opportunities to enhance cash flow and value. There is no assurancethat we will attain these objectives or that our capital will not decrease. Wemay not change our investment strategies described below except upon approvalof the independent directors committee. Decisions relating to the purchase orsale of properties will be made by our Advisor, subject to approval by ourboard of directors.

 

We may ownproperties through joint ventures. This is one of the ways we anticipatediversifying the portfolio of properties we own in terms of geographic region,property type and tenant industry group. Joint ventures will also allow us toacquire an interest in a property without requiring that we fund the entirepurchase price. In determining whether to recommend a particular joint ventureinvestment, our Advisor will evaluate the real property that the joint ventureowns or will acquire using the same criteria for the selection of our otherreal estate investments.

 

Within five yearsfrom the closing of the Offering, our board of directors will take one or moreof the following actions to provide enhanced liquidity for our stockholders:

 

·      modify ourstock repurchase program to redeem each calendar year up to 10% of ourprior-year outstanding shares utilizing proceeds from the sale of ourproperties or other sources of funds;

 

·      seekstockholder approval to begin an orderly liquidation of our assets anddistribute the available proceeds of such sales to our stockholders;

 

·      list our stock for tradingon a national securities exchange; or

 

·      seek stockholder approval ofanother liquidity event such as a merger with another entity.

 

**InvestmentStrategy**

 

Our independentdirectors committee will review our investment policies at least annually todetermine whether these policies continue to be in the best interest of ourstockholders.  We may change our investment policies without stockholderapproval.  Our Advisor will recommend property acquisitions to ourinvestment committee, which will approve or reject all proposed acquisitions.

 

4

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Our objective isto acquire a long-term stabilized asset portfolio of industrial real estatefrom the proceeds of this offering that consists of at least 50% in core plusproperties and we may acquire value-added and opportunistic properties. We may initially utilize proceeds from the Offering to acquire more value-addedand opportunistic properties than core plus properties, with a view toachieving a more balanced portfolio of multi-tenant industrial propertiesthrough a combination of development efforts, refinancings and subsequentacquisitions.

 

Although we intendto focus on acquiring and developing a portfolio of industrial properties, wemay also invest in other real estate-related assets that we believe may assistus meet our investment objectives.  Our charter limits our investments inunimproved real property or mortgage loans on unimproved real property to 10%of our total assets, but we are not otherwise restricted in the proportion ofnet proceeds from the Offering that we must allocate to investment in anyspecific type of property.

 

**Acquisition Policies**

 

***Core Plus Properties***

 

We expect to use asignificant portion of the net proceeds from the Offering to invest at least50% of our long-term stabilized asset portfolio in “core plus,” investmentgrade multi-tenant industrial properties that are:

 

·      owned and operated with alow to moderate level of permanent mortgage financing;

 

·      of a high-quality andcurrently producing income;

 

·      located in thelargest, most liquid industrial real estate markets of the U.S.; located inmarkets with high barriers to entry for new competitive product;

 

·      leased to adiversified tenant base, though we are not restricted from investing inproperties occupied by a single tenant if the property meets other keyinvestment criteria; and

 

·      leased onterms that generally allow for annual rental increases, including short-termleases offering the potential for significant increases in rental revenue.

 

***Value-Added and Opportunistic Properties***

 

***Value-Added Properties***

 

We may acquire “value-added”industrial properties, which include properties that are currently underconstruction and/or have existing building structures in need of redevelopment,re-leasing or repositioning.  We may acquire properties with low occupancyrates or vacant properties when we believe our leasing or development effortscould add significant value.  We expect most of our value-added propertieswill be located in in-fill locations within our target markets with highbarriers to entry.  We may seek to acquire a portion of our value-addedproperties through joint ventures with large institutional partners, but we arenot obligated to do so.  Our value-added properties will employ moderateto high levels of indebtedness, which will be determined on aproperty-by-property basis.  Our long-term investment objective forinvestment in value-added properties is to develop and transform theseproperties into the same type of core plus property investments with low tomoderate levels of permanent mortgage indebtedness as described above.

 

***Opportunistic Properties***

 

We also may acquireopportunistic properties. We define “opportunistic” properties primarily asunimproved land that we will develop. We will construct or develop the propertythrough the use of third-parties or through developers affiliated with ourAdvisor.  If an affiliated developer is used, we may co invest withinstitutional investors. However, we have no agreements with institutionalinvestors to acquire any opportunistic properties at this time. We will investin opportunistic properties with a view of developing a core plus property.Similar to our value-added properties, we expect to incur a moderate to highlevel of indebtedness when acquiring opportunistic properties, but with thelong-term goal of developing the property into a core plus property with a lowto moderate level of permanent mortgage indebtedness. Our opportunisticproperty acquisitions will generally be located in growth areas within ourtarget markets.

 

5

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***Target Market Criteria***

 

We intend to acquire properties located in majormetropolitan markets throughout the United States.  Among the mostimportant criteria we expect to use in evaluating the markets in which wepurchase properties are:

 

·      large-existing populationand projected population growth;

 

·      historically high levels oftenant demand and lower historic investment volatility for the type of propertybeing acquired;

 

·      historic and projectedemployment growth;

 

·      historic market liquidityfor buying and selling of commercial real estate;

 

·      stable household income andeconomic conditions; and

 

·      sound real estatefundamentals, such as high occupancy rates and potential for increasing rentalrates.

 

***Leases and Tenant Improvements***

 

We expect that aportion of any tenant improvements to be funded by us for newly acquiredproperties will be funded from the net proceeds of the Offering or throughborrowings.  Additionally, when a tenant at one of our properties vacatesits space, it is likely that we will be required to expend funds for tenantimprovements and refurbishments to the vacated space in order to attract newtenants.  If we do not have adequate cash on hand to fund tenantimprovements and refurbishments, we may use debt financing in order to fulfillour obligations under lease agreements with new tenants.  We believeindustrial re-tenanting costs will be lower than any other commercial propertyclass (such as office or retail).  We further believe that the low capitalintensity of industrial real estate has contributed to superior risk-adjustedreturns in this property sector.

 

***Mortgages, Debt Securities and Other Real Estate-RelatedInvestments***

 

Although we expect thatsubstantially all of our acquisitions will be of the types of industrialproperties described above, we may acquire other investments, includingmortgages and other illiquid real estate-related securities. To the extent thatour Advisor determines that it is advantageous for us to make or acquiremortgage loans or other real estate-related investments, we will seek to obtainfixed income through the receipt of payments from these investments. If weinvest in mortgages and other real estate-related investments, we do not expectthat we would invest more than 20% of our long-term stabilized asset portfolioin such investments.

 

Our charter does notlimit the amount of gross offering proceeds that we may apply to mortgage loansor other real estate-related investments and during the early stages of thisoffering, the percentage of our assets invested in these investments may exceed20% of our total assets.  While we have no intention of becoming amortgage REIT, we may acquire or make the following:

 

·      firstand second mortgages,

·      convertiblemortgages;

·      constructionloans on real estate;

·      mortgageloan participation investments;

·      common,preferred and convertible preferred equity securities issued by real estatecompanies;

·      mezzanineand bridge loans; and

·      otherilliquid real estate-related securities.

 

***Joint Ventures and Other Arrangements***

 

We may acquire interestsin properties through joint ventures, including ventures with affiliates of ourAdvisor.  Among other reasons, we anticipate acquiring properties throughjoint ventures in order to diversify our portfolio of properties in terms ofgeographic region, property type and tenant industry group.  Jointventures may also allow us to acquire an interest in a property withoutrequiring that we fund the entire purchase price.  In addition, certainproperties may be available to us only through joint ventures.  Indetermining whether to recommend a particular joint venture, the Advisor willevaluate the real property that such joint venture owns or is being formed toown under the same criteria described elsewhere in this report.  Theseentities may employ debt financing consistent with our borrowing policies. See “BorrowingPolicies” below.

 

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We may enter into jointventures with affiliates of our Advisor for the acquisition of properties, butonly if the independent directors committee (by majority vote) approves thetransaction as being fair and reasonable to us and on substantially the sameterms and conditions as those received by the affiliated equity jointventures.  If such a joint venture also involves a third party thatnegotiated the terms of its participation on an arms-length basis, then ourinvestment must be either on terms and conditions no worse than those receivedby the affiliate or on terms and conditions no worse than those received by athird-party equity joint venture that negotiated the terms of its participationon an arms-length basis.

 

**BorrowingPolicies**

 

***Debt Financing***

 

When we refer to debtfinancing, we are referring to all types of debt financing at fixed or variableinterest rates or some combination of both.  For our stabilized core plusproperties, our long-term goal will be to use low to moderate levels of debt financingwith leverage ranging from 25% to 50% of the cost of the asset.  For thevalue-added and opportunistic properties, our goal will be to acquire anddevelop or redevelop these properties using moderate to high levels of debtfinancing with leverage ranging from 50% to 75% of the cost of the asset. We may exceed these debt levels on an individual property basis.  Oncethese value-added and opportunistic properties are developed, redeveloped andstabilized with tenants, we plan to reduce the levels of debt to fall withintarget debt ranges appropriate for core plus properties.  While we seek tofall within the outlined targets on a portfolio basis, for any specificproperty we may exceed these estimates.** **While we do not expect to utilize debt financing in excess of 300%of our net assets (equivalent to 75% of the cost of our assets)**,** upon the vote of a majority of ourindependent directors, we will be able to temporarily exceed this debtlimitation. It is likely that our debt financing will be secured by theunderlying property, but it will not necessarily be the case each time. We mayenter into interest rate protection agreements to mitigate interest ratefluctuation exposure if we believe the benefit of such contracts outweigh thecosts of purchasing these instruments.

 

***Other Indebtedness***

 

We may also incurindebtedness for working capital requirements, tenant improvements, capitalimprovements, leasing commissions and, if necessary, to makedistributions, including those necessary to maintain our qualification as aREIT for federal income tax purposes.  We will endeavor to borrow suchfunds on an unsecured basis but we may secure indebtedness with properties ifour independent directors committee determines that it is in our bestinterests.

 

Our Advisor may alsocreate an affiliated entity that will purchase properties using debt financingand hold them for us pending our ability to acquire the properties at a low tomoderate level of indebtedness.  Any properties that we purchase from theaffiliated acquisition holding company will meet our core plus investmentcriteria and be approved by our independent directors committee.  Ourpurchase price for the property would reflect the costs associated with holdingthe property.  In no event will we acquire the property at an amount inexcess of its current appraised value as determined by an independent expertselected by our independent directors not otherwise interested in thetransaction.

 

**Competition**

 

We compete with aconsiderable number of other real estate companies seeking to acquire and leaseindustrial space, most of which may have greater marketing and financialresources than we do. Principal factors of competition in our business are thequality of properties (including the design and condition of improvements),leasing terms (including rent and other charges and allowances for tenantimprovements), attractiveness and convenience of location, the quality andbreadth of tenant services provided and reputation as an owner and operator ofquality office properties in the relevant market. Our ability to compete alsodepends on, among other factors, trends in the national and local economies,financial condition and operating results of current and prospective tenants,availability and cost of capital, construction and renovation costs, taxes,governmental regulations, legislation and population trends.

 

We may holdinterests in properties located in the same geographic locations as otherentities managed by our Advisor or our Advisor’s affiliates. Our properties mayface competition in these geographic regions from such other properties owned,operated or managed by other entities managed our Advisor or our Advisor’saffiliates. Our Advisor or its affiliates have interests that may vary fromthose we may have in such geographic markets.

 

7

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**GovernmentRegulations**

 

We andthe properties we expect to own are subject to federal, state and local lawsand regulations relating to environmental protection and human health andsafety. Federal laws such as the National Environmental Policy Act, theComprehensive Environmental Response, Compensation, and Liability Act, theResource Conservation and Recovery Act, the Federal Water Pollution ControlAct, the Federal Clean Air Act, the Toxic Substances Control Act, the EmergencyPlanning and Community Right to Know Act and the Hazard Communication Actgovern such matters as wastewater discharges, air emissions, the operation andremoval of underground and above-ground storage tanks, the use, storage,treatment, transportation and disposal of solid and hazardous materials and theremediation of contamination associated with disposals. Some of these laws andregulations impose joint and several liabilities on tenants, owners or operatorsfor the costs to investigate or remediate contaminated properties, regardlessof fault or whether the acts causing the contamination were legal. Compliancewith these laws and any new or more stringent laws or regulations may requireus to incur material expenditures. Future laws, ordinances or regulations mayimpose material environmental liability. In addition, there are variousfederal, state and local fire, health, life-safety and similar regulations withwhich we may be required to comply, and which may subject us to liability inthe form of fines or damages for noncompliance.

 

Ourproperties may be affected by our tenants’ operations, the existing conditionof land when we buy it, operations in the vicinity of our properties, such asthe presence of underground storage tanks, or activities of unrelated thirdparties. The presence of hazardous substances, or the failure to properlyremediate these substances, may make it difficult or impossible to sell or rentsuch property.

 

Under various federal,state and local environmental laws, ordinances and regulations, a current orprevious real property owner or operator may be liable for the cost to removeor remediate hazardous or toxic substances on, under or in such property. Thesecosts could be substantial. Such laws often impose liability whether or not theowner or operator knew of, or was responsible for, the presence of suchhazardous or toxic substances. Environmental laws also may impose restrictionson the manner in which property may be used or businesses may be operated, andthese restrictions may require substantial expenditures or prevent us fromentering into leases with prospective tenants that may be impacted by suchlaws. Environmental laws provide for sanctions for noncompliance and may be enforcedby governmental agencies or, in certain circumstances, by private parties.Certain environmental laws and common law principles could be used to imposeliability for release of and exposure to hazardous substances, includingasbestos-containing materials into the air. Third parties may seek recoveryfrom real property owners or operators for personal injury or property damageassociated with exposure to released hazardous substances. The cost ofdefending against claims of liability, of complying with environmentalregulatory requirements, of remediating any contaminated property, or of payingpersonal injury claims could be substantial.

 

**Acquisition Activity**

 

From our inceptionthrough December 31, 2007, we did not acquire any properties.

 

**Employees**

 

We have noemployees and our executive officers are all employees of our Advisor’saffiliates. Substantially all of our work is performed by employees of ourAdvisor’s affiliates.

 

**Available Information**

 

Information aboutus is available on our website (http:// www.crefunds.com). We make available,free of charge, on our Internet website, our annual reports on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K, andamendments to those reports filed pursuant to Section 13(a) or 15(d) ofthe Exchange Act as soon as reasonably practicable after we electronically filesuch material with the SEC. These materials are also available at no cost inprint to any person who requests it by contacting our Investor ServicesDepartment at 1920 Main Street, Suite 400, Irvine, California 92614;telephone (877) 805-3333. Our filings with the SEC will be available to thepublic over the Internet at the SEC’s website at http://www.sec.gov. You mayread and copy any filed document at the SEC’s public reference room inWashington, D.C. at 100 F Street, N.E., Room 1580, WashingtonD.C. Please call the SEC at (800) SEC-0330 for further information aboutthe public reference rooms.

 

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**ITEM 1A. RISK FACTORS**

 

The risks anduncertainties described below are not the only ones we face but do representthose risks and uncertainties that we believe are material to our business,operating results, prospects and financial condition.  Additional risks and uncertainties notpresently known to us or that we currently deem immaterial may also harm ourbusiness.

 

**General**

 

***Our lack of prior operating history makes it difficult toevaluate us.***

 

We have no operatinghistory. The past performance of other real estate investment programssponsored by affiliates of our Advisor may not be indicative of the performancewe will achieve.  We were formed on October 16,2006 in order to invest primarily in industrial real estate.  We have no income, cash flow, funds fromoperations or funds from which we can make distributions to ourshareholders.  We have not acquired anyproperties.  We may not be able toconduct business as we intend to.

 

***Because there is no public trading market for our stock, itwill be difficult for our stockholders to sell their stock.  If our stockholders are able to sell theirstock, it may be at a substantial discount.***

 

There is no currentpublic market for our stock and there is no assurance that a public market willever exist for our stock. Our charter contains restrictions on the ownershipand transfer of our stock, and these restrictions may inhibit the ability ofour stockholders to sell their stock. Our charter prevents any one person fromowning more than 9.8% in number of shares or value, whichever is morerestrictive, of the outstanding shares of any class or series of our stockunless exempted by our board of directors. Our charter also limits the abilityor our stockholders to transfer the stock to prospective stockholders unless (i) theymeet suitability standards regarding income or net worth, and (ii) thetransfer complies with minimum purchase requirements.  We have adopted a stock repurchase program,but it is limited in terms of the number of shares of stock which may be redeemedannually.  Our board of directors mayalso limit, suspend or terminate our stock repurchase program at any time.

 

It may be difficult forour stockholders to sell their stock promptly or at all. If our stockholdersare able to sell shares of stock, they may only be able to sell them at asubstantial discount from the price they paid. This may be the result, in part,of the fact that the amount of funds available for investment is expected to bereduced by sales commissions, dealer manager fees, organization and offeringexpenses, and acquisition fees and expenses. If our offering expenses arehigher than we anticipate, we will have a smaller amount available forinvestment.

 

***Competition with third parties for properties and otherinvestments may result in our paying higher prices for properties which couldreduce our profitability and the return on investment.***

 

We compete with manyentities engaged in real estate investment activities, including individuals,corporations, banks, insurance companies, other REITs, and real estate limitedpartnerships, many of which have greater resources than we do. Some of theseinvestors may enjoy significant competitive advantages that result from, amongother things, a lower cost of capital and enhanced operating efficiencies. Inaddition, the number of entities and the amount of funds competing for suitableinvestments may increase. Any such increase would result in increased demandfor these assets and increased prices. If competitive pressures cause us to payhigher prices for properties, our ultimate profitability may be reduced and thevalue of our properties may not appreciate or may decrease significantly belowthe amount paid for such properties. This may cause our stockholders toexperience a lower return on their investments in us.

 

***If we are unable to find or experience delays in findingsuitable investments, we may experience a delay in the commencement ofdistributions and a lower rate of return to investors.***

 

Our ability to achieveour investment objectives and to make distributions depends upon theperformance of our Advisor in the acquisition and operation of our investments,the performance of property managers and leasing agents in the management ofour properties and the identification of prospective tenants. We may be delayedin making investments in properties due to delays in the sale of our stock,delays in negotiating or obtaining the necessary purchase documentation forproperties, delays in locating suitable investments or other factors. We cannotbe sure that our Advisor will be successful in obtaining suitable investmentson financially attractive terms or that our investment objectives will beachieved. We may also make other real estate investments, such as investmentsin public and private real estate companies which own industrial 

 

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properties and make realestate investments. Until we make real estate investments, we will hold theproceeds from this offering in an interest-bearing account or invest theproceeds in short-term, investment-grade securities. We expect the rates ofreturn on these short-term investments to be substantially less than thereturns we make on real estate investments. If we are unable to invest theproceeds from this offering in properties or other real estate investments foran extended period of time, distributions to you may be delayed and may belower and the value of your investment could be reduced.

 

***If we do not raise substantial funds, we will be limited inthe number and type of investments we may make, and the value of ourstockholders’ investment in us will fluctuate with the performance of thespecific properties we acquire.***

 

Our Offering is beingmade on a “best efforts” basis and no individual, firm or corporation hasagreed to purchase any of our stock. The amount of proceeds we raise in theOffering may be substantially less than the amount we would need to achieve abroadly diversified property portfolio. If we are unable to raise substantiallymore than the minimum offering amount, we will make fewer investments resultingin less diversification in terms of the number of investments owned and thegeographic regions in which our investments are located. In that case, thelikelihood that any single property’s performance would materially reduce ouroverall profitability will increase. We are not limited in the number or sizeof our investments or the percentage of net proceeds we may dedicate to asingle investment. In addition, any inability to raise substantial funds wouldincrease our fixed operating expenses as a percentage of gross income, and ournet income and the distributions we make to stockholders would be reduced.

 

***The cash distributions our stockholders receive may be lessfrequent or lower in amount than expected.***

 

We expect to makedistributions to our stockholders quarterly, if not more frequently. Allexpenses we incur in our operations are deducted from cash funds generated byoperations prior to computing the amount of cash available to be paid asdistributions to our stockholders. Our directors will determine the amount andtiming of distributions. Our directors will consider all relevant factors,including the amount of cash available for distribution, capital expenditureand reserve requirements and general operational requirements. We cannotdetermine with certainty how long it may take to generate sufficient availablecash flow to make distributions or that sufficient cash will be available tomake distributions to our stockholders. We may borrow funds, return capital orsell assets to make distributions. With no prior operations, we cannot predictthe amount of distributions you may receive. We may be unable to pay ormaintain cash distributions or increase distributions over time.

 

***If we make distributions from sources other than our cashflow from operations, we will have fewer funds available for the acquisition ofproperties and our stockholders’ overall return may be reduced.***

 

Our organizationaldocuments permit us to make distributions from any source. If we funddistributions from borrowings, sales of properties or the net proceeds fromthis offering, we will have fewer funds available for the acquisition ofproperties and our stockholders’ overall return may be reduced. Further, to theextent distributions exceed cash flow from operations, a stockholder’s basis inour stock will be reduced and, to the extent distributions exceed a stockholder’sbasis, the stockholder may recognize capital gain.

 

***Our investments will be concentrated in the industrialsector and our business would be adversely affected by an economic downturnaffecting that sector.***

 

We intend for ourinvestments in real estate assets to be primarily concentrated in theindustrial sector. This concentration may expose us to the risk of economicdownturns in this sector to a greater extent than if our business activitiesincluded a more significant portion of other sectors of the real estateindustry.

 

***We may be unable to complete development and re-developmentprojects on advantageous terms.***

 

As part of our investmentplan, we intend to develop new and re-develop existing properties.  Suchactivities involve significant risks that could adversely affect our financialcondition, results of operations, cash flow and ability to make distributionson our common stock, which include:

 

·      we may not be able to obtain, or mayexperience delays in obtaining, all necessary zoning, land-use, building,occupancy and other governmental permits and authorizations;

 

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·      wemay not be able to obtain financing for development projects on favorable termsand complete construction on schedule or within budget, resulting in increaseddebt service expense and construction costs and delays in leasing theproperties and generating cash flow; and

 

·      theproperties may perform below anticipated levels, producing cash flow belowbudgeted amounts and limiting our ability to sell such properties to thirdparties or affiliates.

 

***Newly developed and acquired properties may not produce thecash flow that we expect, which could adversely affect our overall financialperformance.***

 

We intend to acquire anddevelop industrial properties.  In deciding whether to acquire or developa particular property, we make assumptions regarding the expected futureperformance of that property.  If our estimated return on investmentproves to be inaccurate, it may fail to perform as we expected. With certainproperties we plan to acquire, our business plan contemplates repositioning orredeveloping that property with the goal of increasing its cash flow, value orboth.  Our estimate of the costs of repositioning or redeveloping anacquired property may prove to be inaccurate, which may result in our failureto meet our profitability goals.  Additionally, we may acquire newproperties not fully leased, and the cash flow from existing operations may beinsufficient to pay the operating expenses and debt service associated withthat property until the property is more fully leased.  If one or more ofthese new properties do not perform as expected or we are unable tosuccessfully integrate new properties into our existing operations, ourfinancial performance and our ability to make distributions may be adverselyaffected.

 

***If we borrow money to meet the REIT minimum distributionrequirement or for other working capital needs, our expenses will increase, ournet income will be reduced by the amount of interest we pay on the money weborrow and we will be obligated to repay the money we borrow from futureearnings or by selling assets, which will decrease future distributions tostockholders.***

 

If we fail for any reasonto distribute at least 90% of our REIT taxable income (excluding net capitalgains), then we would not qualify for the favorable tax treatment accorded toREITs (unless we were able to avail ourselves of certain relief provisions). Itis possible that such 90% of our income would exceed the cash we have availablefor distributions due to, among other things, differences in timing between theactual receipt of income and actual payment of deductible expenses and theinclusion/deduction of such income/expenses when determining our taxableincome, nondeductible capital expenditures, the creation of reserves, the useof cash to purchase stock under our stock repurchase program, and required debtamortization payments. We may decide to borrow funds in order to meet the REITminimum distribution requirements even if our management believes that the thenprevailing market conditions generally are not favorable for such borrowings orthat such borrowings would not be advisable in the absence of such taxconsiderations. Distributions made in excess of our net income will generallyconstitute a return of capital to stockholders.

 

***The inability of our Advisor to retain or obtain keypersonnel, property managers and leasing agents could delay or hinderimplementation of our investment strategies, which could impair our ability tomake distributions and could reduce the value of your investment.***

 

Our success depends to asignificant degree upon the contributions of Terry G. Roussel, the Presidentand Chief Executive Officer of our Advisor. Neither we nor our Advisor have anemployment agreement with Mr. Roussel or with any of the other executiveofficers. If Mr. Roussel was to cease his affiliation with our Advisor,our Advisor may be unable to find a suitable replacement, and our operatingresults could suffer. We believe that our future success depends, in largepart, upon our Advisor’s, property managers’ and leasing agents’ ability tohire and retain highly skilled managerial, operational and marketing personnel.Competition for highly skilled personnel is intense, and our Advisor and anyproperty managers we retain may be unsuccessful in attracting and retainingsuch skilled personnel. If we lose or are unable to obtain the services ofhighly skilled personnel, property managers or leasing agents, our ability toimplement our investment strategies could be delayed or hindered, and the valueof our stockholders’ investments may decline.

 

***FINRA has commenced an investigation of our dealer managerwhich is in the preliminary stage. We cannot predict the outcome of theinvestigation. Some potential outcomes could adversely affect our ability toraise proceeds in the Offering and the investigation itself could distract ourmanagement or the management of our Advisor, either of which could increase therisk that our stockholders would suffer a loss on their investment.***

 

Our Advisor has informedus that the Financial Industry Regulatory Authority (“FINRA”) (formerly, theNASD) is conducting a non-public investigation of our affiliated dealer managerthat is, we understand, focused on the private placements conducted by ourdealer manager during the period from January 1, 2004 through October 31,2007. The investigation is in the preliminary stage. FINRA’s correspondencerequesting document production states, “This inquiry should not be construed asan indication that the Enforcement Department or its staff has determined thatany violations of federal securities laws or NASD, NYSE or MSRB rules haveoccurred.”  We have been advised that our dealer manager is responding toFINRA’s request for information and intends to continue to cooperate in theinvestigation.

 

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Although we cannot, atthis time, assess either the duration or the likely outcome or consequences ofthis investigation, FINRA has the authority to impose sanctions on our dealermanager that could adversely affect its effectiveness in that capacity. Due toour dependence on our dealer manager to raise funds in this offering, and dueto the importance of substantial fundraising in order to invest in adiversified portfolio of assets and to reduce our fixed operating expenses as apercentage of gross income, any FINRA action that adversely affects our dealermanager’s ability to raise funds in this offering could also adversely affectthe value of our stockholders’ investments. In addition, to the extent that theFINRA investigation distracts our management or the management of our Advisorfrom pursuing our business plan, our results and the value of our stockholders’investments could be adversely affected.

 

**RisksRelated to Conflicts of Interest**

 

***Our Advisor will face conflicts of interest relating to thepurchase and leasing of properties, and such conflicts may not be resolved inour favor, which could limit our investment opportunities, impair our abilityto make distributions and reduce the value of our stockholders’ investments inus.***

 

We rely on our Advisor toidentify suitable investment opportunities. We may be buying properties at thesame time as other entities that are affiliated with or sponsored by ourAdvisor. Other programs sponsored by our Advisor or its affiliates also rely onour Advisor for investment opportunities. Many investment opportunities wouldbe suitable for us as well as other programs. Our Advisor could directattractive investment opportunities or tenants to other entities. Such eventscould result in our investing in properties that provide less attractivereturns, thus reducing the level of distributions which we may be able to payto stockholders and the value of their investments in us.

 

***If we acquire properties from affiliates of our Advisor, theprice may be higher than we would pay if the transaction was the result of arm’s-lengthnegotiations.***

 

The prices we pay toaffiliates of our Advisor for our properties will be equal to the prices paidby them, plus the costs incurred by them relating to the acquisition andfinancing of the properties or if the price to us is in excess of such cost,substantial justification for such excess will exist and such excess will bereasonable and consistent with current market conditions as determined by amajority of our independent directors. Substantial justification for a higherprice could result from improvements to a property by the affiliate of ourAdvisor or increases in market value of the property during the period of timethe property is owned by the affiliates of our Advisor as evidenced by anappraisal of the property. These prices will not be the subject of arm’s-lengthnegotiations, which could mean that the acquisitions may be on terms lessfavorable to us than those negotiated in an arm’s-length transaction. Eventhough we will use an independent third-party appraiser to determine fairmarket value when acquiring properties from our Advisor and its affiliates, wemay pay more for particular properties than we would have in an arm’s-lengthtransaction, which would reduce our cash available for investment in otherproperties or distribution to our stockholders.

 

***Our Advisor will face conflicts of interest relating tojoint ventures that we may form with affiliates of our Advisor, which conflictscould result in a disproportionate benefit to the other venture partners at ourexpense.***

 

We may enter into jointventure agreements with third parties (including entities that are affiliatedwith our Advisor or our independent directors) for the acquisition orimprovement of properties. Our Advisor may have conflicts of interest indetermining which program should enter into any particular joint ventureagreement. The co-venturer may have economic or business interests or goalsthat are or may become inconsistent with our business interests or goals. Inaddition, our Advisor may face a conflict in structuring the terms of therelationship between our interests and the interest of the affiliatedco-venturer and in managing the joint venture. Since our Advisor and itsaffiliates will control both the affiliated co-venturer and, to a certainextent, us, agreements and transactions between the co-venturers with respectto any such joint venture will not have the benefit of arm’s-length negotiationof the type normally conducted between unrelated co-venturers. Co-venturers maythus benefit to our and our stockholders’ detriment.

 

***Our Advisor and its affiliates receive commissions, fees andother compensation based upon the sale of our stock, our property acquisitions,the property we own and the sale of our properties and therefore our Advisorand its affiliates may make recommendations to us that we buy, hold or sellproperty in order to increase their compensation. Our Advisor will haveconsiderable discretion with respect to the terms and timing of ouracquisition, disposition and leasing transactions.***

 

Our Advisor and itsaffiliates receive commissions, fees and other compensation based upon the saleof our stock and based on our investments. Therefore, our Advisor may recommendthat we purchase properties that generate fees for our Advisor, but are notnecessarily the most suitable investment for our portfolio. In some instancesour Advisor and its affiliates may benefit by us retaining ownership of ourassets, while you may be better served by sale or disposition. In otherinstances they may benefit by us selling the properties which may entitle ourAdvisor to disposition fees and possible success-based sales fees. In addition,our Advisor’s ability to receive asset management fees and reimbursementsdepends on our continued investment in properties and in other assets whichgenerate fees to them. Therefore, the interest of our Advisor and itsaffiliates in receiving fees may conflict with our interests.

 

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***Our Advisor and its affiliates, including our officers, oneof whom is also a director, will face conflicts of interest caused bycompensation arrangements with us and other Cornerstone-sponsored programs,which could result in actions that are not in the long-term best interests ofour stockholders.***

 

Our Advisor and itsaffiliates will receive substantial fees from us that are partially tied to theperformance of your investment. These fees could influence our Advisor’s adviceto us, as well as the judgment of the affiliates of our Advisor who serve asour officers, one of whom is also a director. Among other matters, thecompensation arrangements could affect their judgment with respect to:

 

·      propertyacquisitions from other Advisor-sponsored programs, which might entitle ourAdvisor to disposition fees and possible success-based sale fees in connectionwith its services for the seller;

 

·      whetherand when we seek to list our common stock on a national securities exchange,which listing could entitle our Advisor to a success-based listing fee butcould also adversely affect its sales efforts for other programs if the priceat which our stock trades is lower than the price at which we offered stock tothe public; and

 

·      whetherand when we seek to sell the company or its assets, which sale could entitleour Advisor to success-based fees but could also adversely affect its salesefforts for other programs if the sales price for the company or its assetsresulted in proceeds less than the amount needed to preserve our stockholders’capital. Considerations relating to their compensation from other programscould result in decisions that are not in the best interests of ourstockholders, which could hurt our ability to make distributions to ourstockholders or result in a decline in the value of their investments in us.

 

***If the competing demands for the time of our Advisor, itsaffiliates and our officers result in them spending insufficient time on ourbusiness, we may miss investment opportunities or have less efficientoperations, which could reduce our profitability and result in lowerdistributions to our stockholders.***

 

We do not have anyemployees. We rely on the employees of our Advisor and its affiliates for theday-to-day operation of our business. We estimate that over the life of thecompany, our Advisor and its affiliates will dedicate, on average, less thanhalf of their time to our operations. The amount of time that our Advisor andits affiliates spend on our business will vary from time to time and isexpected to be more while we are raising money and acquiring properties. OurAdvisor and its affiliates, including our officers, have interests in otherprograms and engage in other business activities. As a result, they will haveconflicts of interest in allocating their time between us and other programsand activities in which they are involved. Because these persons have competinginterests on their time and resources, they may have conflicts of interest inallocating their time between our business and these other activities. Duringtimes of intense activity in other programs and ventures, they may devote lesstime and fewer resources to our business than are necessary or appropriate tomanage our business. We expect that as our real estate activities expand, ourAdvisor will attempt to hire additional employees who would devotesubstantially all of their time to our business. There is no assurance that ourAdvisor will devote adequate time to our business. If our Advisor suffers or isdistracted by adverse financial or operational problems in connection with itsoperations unrelated to us, it may allocate less time and resources to ouroperations. If any of these things occur, the returns on our investments, ourability to make distributions to stockholders and the value of our stockholders’investments in us may suffer.

 

***Our officers, one of whom is also a director, face conflictsof interest related to the positions they hold with our Advisor and itsaffiliates, which could hinder our ability to successfully implement ourbusiness strategy and to generate returns to our stockholders.***

 

Our officers, one of whomis also a director, are also officers of our Advisor, our dealer manager andother affiliated entities. As a result, they owe fiduciary duties to thesevarious entities and their stockholders and members, which fiduciary duties mayfrom time to time conflict with the fiduciary duties that they owe to us andour stockholders. Their loyalties to these other entities could result inactions or inactions that are detrimental to our business, which could harm theimplementation of our business strategy and our investment, property managementand leasing opportunities. If we do not successfully implement our businessstrategy, we may be unable to generate cash needed to make distributions to ourstockholders and to maintain or increase the value of our assets.

 

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***Our board’s possible loyalties to existing Advisor-sponsoredprograms (and possibly to future Advisor-sponsored programs) could result inour board approving transactions that are not in our best interest and thatreduce our net income and lower our distributions to stockholders.***

 

Our officers, one of whomis also a director, are also officers of our Advisor, which is an affiliate ofthe managing member of another affiliate-sponsored program. The loyalties ofthese officers to the other affiliate-sponsored program may influence thejudgment of our board when considering issues for us that may affect the otheraffiliate-sponsored program, such as the following:

 

·      Wecould enter into transactions with the other program, such as property sales oracquisitions, joint ventures or financing arrangements. Decisions of our boardregarding the terms of those transactions may be influenced by our board’sloyalties to the other program.

 

·      Adecision of our board regarding the timing of a debt or equity offering couldbe influenced by concerns that the offering would compete with an offering ofthe other program.

 

·      Adecision of our board regarding the timing of property sales could beinfluenced by concerns that the sales would compete with those of the otherprogram.

 

·      Wecould also face similar conflicts and some additional conflicts if our Advisoror its affiliates sponsor additional REITs, assuming some of our directors arealso directors of the additional REITs.

 

·      Ourindependent directors must evaluate the performance of our Advisor with respectto whether our Advisor is presenting to us our fair share of investmentopportunities. If our Advisor is not presenting a sufficient number ofinvestment opportunities to us because it is presenting many opportunities toother Advisor-sponsored entities or if our Advisor is giving preferentialtreatment to other Advisor-sponsored entities in this regard, our independentdirectors may not be well suited to enforce our rights under the terms of theAdvisory agreement or to seek a new Advisor.

 

***If our Advisor is unable to adequately fund our organizationand offering activities, we may sell fewer shares in this offering, we may beunable to acquire a diversified portfolio of properties, our operating expensesmay be a larger percentage of our revenue and our net income may be lower.***

 

Our Advisor is newlyformed, has limited capitalization, has incurred losses since its inception andis continuing to incur losses. Our Advisor must raise funds through the sale ofits own debt or equity securities, or obtain financial support from itsaffiliates or its sole member, to obtain the cash necessary to provide theseadvances. Our Advisor’s sole member is also dependent on raising funds toprovide financial support to our Advisor. There can be no assurance as to theamount or timing of our Advisor’s receipt of funds. If our Advisor’s financialcircumstances reduce the amount of funds available to us for organization andoffering activities, we may not be able to raise as much money in thisoffering. CIP Leveraged Fund Advisors, LLC, the sole member of our Advisor, haslimited capitalization, has incurred significant losses since its inception andis continuing to incur significant losses.

 

***Because we are dependent upon our Advisor and its affiliatesto conduct our operations, any adverse changes in the financial health of ourAdvisor or its affiliates or our relationship with them could hinder ouroperating performance and the return on your investment.***

 

We are dependent on ourAdvisor to manage our operations and our portfolio of real estate assets. OurAdvisor has no operating history and it will depend upon the fees and othercompensation that it will receive from us in connection with the purchase,management and sale of our properties to conduct its operations. Any adversechanges in the financial condition of our Advisor or our relationship with ourAdvisor could hinder its ability to successfully manage our operations and ourportfolio of investments.

 

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**RisksRelated to the Offering and Our Corporate Structure**

 

***A limit on the percentage of our securities a person may ownmay discourage a takeover or business combination, which could prevent ourstockholders from realizing a premium price for their stock.***

 

In order for us toqualify as a REIT, no more than 50% of our outstanding stock may bebeneficially owned, directly or indirectly, by five or fewer individuals(including certain types of entities) at any time during the last half of eachtaxable year beginning after our first taxable year. To assure that we do notfail to qualify as a REIT under this test, our charter restricts direct orindirect ownership by one person or entity to no more than 9.8% in number ofshares or value, whichever is more restrictive, of the outstanding shares ofany class or series of our stock unless exempted by our board of directors.This restriction may have the effect of delaying, deferring or preventing achange in control of us, including an extraordinary transaction (such as amerger, tender offer or sale of all or substantially all of our assets) thatmight provide a premium price to our stockholders.

 

***Our charter permits our board of directors to issue stockwith terms that may subordinate the rights of our common stockholders ordiscourage a third party from acquiring us in a manner that could result in apremium price to our stockholders.***

 

Our board of directorsmay increase or decrease the aggregate number of shares of stock or the numberof shares of stock of any class or series that we have authority to issue andclassify or reclassify any unissued common stock or preferred stock andestablish the preferences, conversion or other rights, voting powers,restrictions, limitations as to distributions, qualifications and terms orconditions of redemption of any such stock. Our board of directors couldauthorize the issuance of preferred stock with terms and conditions that couldhave priority as to distributions and amounts payable upon liquidation over therights of the holders of our common stock. Such preferred stock could also havethe effect of delaying, deferring or preventing a change in control of us,including an extraordinary transaction (such as a merger, tender offer or saleof all or substantially all of our assets) that might provide a premium priceto holders of our common stock.

 

***The payment of the subordinated performance fee due upontermination of the Advisor, and the purchase of interests in the operatingpartnership held by our Advisor and its affiliates as required in our Advisoryagreement, may discourage a takeover attempt that could have resulted in apremium price to our stockholders.***

 

If we engage in a mergerin which we are not the surviving entity and our Advisory agreement isterminated, our Advisor and its affiliates may be entitled to the subordinatedperformance fee due upon termination and to require that we purchase all or aportion of the operating partnership units they hold at any time thereafter forcash, or our stock, as determined by the seller. The subordinated performancefee is a cumulative fee due upon termination and provides for payments based onthe excess of enterprise value plus distributions we have made to the date oftermination over the sum of invested capital plus an amount necessary forstockholders to reach one of three threshold returns.  The three thresholdreturns are 6%, 8%, and 10%.  At each threshold return level, subordinatedperformance fee due upon termination would be either 5%, 10%, or 15% of thatexcess enterprise value plus distributions over the sum of invested capitalplus the threshold return.  The existence of this fee may deter aprospective acquirer from bidding on our company, which may limit theopportunity for stockholders to receive a premium for their stock that mightotherwise exist if an investor attempted to acquire us through a merger.

 

***Our stockholders will have limited control over changes inour policies and operations, which increases the uncertainty and risks of aninvestment in us.***

 

Our board of directorsdetermines our major policies, including our policies regarding financing,growth, debt capitalization, REIT qualification and distributions. Our board ofdirectors may amend or revise these and other policies without a vote of thestockholders. Under Maryland General Corporation Law and our charter, ourstockholders have a right to vote only on limited matters. Our board’s broaddiscretion in setting policies and our stockholders’ inability to exert controlover those policies increases the uncertainty and risks of an investment on us.

 

***A stockholder’s interest in us may be diluted if we issueadditional stock.***

 

Our stockholders do nothave preemptive rights to any stock we issue in the future. Therefore, in theevent that we (1) sell stock in the future, including stock issuedpursuant to our distribution reinvestment plan, (2) sell securities thatare convertible into stock, (3) issue stock in a private offering, (4) issuestock upon the exercise of the options granted to our independent directors,employees of our Advisor or others, or (5) issue stock to sellers ofproperties acquired by us in connection with an exchange of limited partnershipinterests in our operating partnership, investors purchasing stock in thisoffering will experience dilution of their percentage ownership in us.Depending on the terms of such transactions, most notably the price per share,which may be less than the price paid per share in the Offering, and the valueof our properties, investors in this offering might also experience a dilutionin the book value per share of their stock.

 

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***A stockholder’s interest in us may be diluted if we acquireproperties for units in our operating partnership.***

 

Holders of units of ouroperating partnership will receive distributions per unit in the same amount asthe distributions we pay per share to our stockholders and will generally havethe right to exchange their units of our operating partnership for cash orshares of our stock (at our option). In the event we issue units in ouroperating partnership in exchange for properties, investors purchasing stock inthe Offering will experience potential dilution in their percentage ownershipinterest in us. Depending on the terms of such transactions, most notably theprice per unit, which may be less than the price paid per share in theOffering, the value of our properties and the value of the properties weacquire through the issuance of units of limited partnership interests in ouroperating partnership, investors in this offering might also experience adilution in the book value per share of their stock.

 

***Although we are not currently afforded the protection of theMaryland General Corporation Law relating to deterring or defending hostiletakeovers, our board of directors could opt into these provisions of Marylandlaw in the future, which may discourage others from trying to acquire controlof us and may prevent our stockholders from receiving a premium price for theirstock in connection with a business combination.***

 

Under Maryland law, “businesscombinations” between a Maryland corporation and certain interestedstockholders or affiliates of interested stockholders are prohibited for fiveyears after the most recent date on which the interested stockholder becomes aninterested stockholder. These business combinations include a merger,consolidation, share exchange, or, in circumstances specified in the statute,an asset transfer or issuance or reclassification of equity securities. Also under Maryland law, control shares of a Maryland corporation acquired in acontrol share acquisition have no voting rights except to the extent approvedby a vote of two-thirds of the votes entitled to be cast on the matter. Shares owned by the acquirer, by officers or by directors who are employees ofthe corporation are not entitled to vote on the matter. Should our board optinto these provisions of Maryland law, it may discourage others from trying toacquire control of us and increase the difficulty of consummating any offer.Similarly, provisions of Title 3, Subtitle 8 of the Maryland GeneralCorporation Law could provide similar anti-takeover protection.

 

***If we sell substantially less than all of the shares we areoffering, the costs we incur to comply with the rules of the Securitiesand Exchange Commission regarding internal control over financial reportingwill be a larger percentage of our net income and will reduce the return on ourstockholders’ investments in us.***

 

We expect to incursignificant costs in establishing and maintaining adequate internal controlover our financial reporting for the company and that our management will spenda significant amount of time assessing the effectiveness of our internalcontrol over financial reporting. We do not anticipate that these costs or theamount of time our management will be required to spend will be significantlyless if we sell substantially less than all of the shares we are offering.

 

***Our stockholders and our rights to recover claims againstour independent directors are limited, which could reduce our stockholders’ andour recovery against our independent directors if they negligently cause us toincur losses.***

 

Our charter provides thatno independent director shall be liable to us or our stockholders for monetarydamages and that we will generally indemnify them for losses unless they aregrossly negligent or engage in willful misconduct. As a result, you and we mayhave more limited rights against our independent directors than might otherwiseexist under common law, which could reduce your and our recovery from thesepersons if they act in a negligent manner. In addition, we may be obligated tofund the defense costs incurred by our independent directors (as well as by ourother directors, officers, employees and agents) in some cases, which woulddecrease the cash otherwise available for distributions to our stockholders.

 

***Stockholders may not be able to sell their stock under theproposed stock repurchase program.***

 

Our board of directorscould choose to amend the terms of our stock repurchase program withoutstockholder approval. Our board is also free to terminate the program at anytime upon 30 days written notice to our stockholders.  In addition, the stock repurchase program includesnumerous restrictions that would limit our stockholders ability to sell stock.

 

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***Payment of fees to our Advisor and its affiliates willreduce cash available for investment and distribution.***

 

Our Advisor and itsaffiliates will perform services for us in connection with the offer and saleof our stock, the selection and acquisition of our properties, and possibly themanagement and leasing of our properties. They will be paid significant feesfor these services, which will reduce the amount of cash available forinvestment in properties and distribution to stockholders. The fees to be paidto our Advisor and its affiliates were not determined on an arm’s-length basis.We cannot be sure that a third-party unaffiliated with our Advisor would not bewilling to provide such services to us at a lower price.

 

We may also paysignificant fees during our listing/liquidation stage.  Although most ofthe fees payable during our listing/liquidation stage are contingent on ourinvestors first enjoying agreed-upon investment returns, affiliates of ourAdvisor could also receive significant payments even without our reaching theinvestment-return thresholds should we seek to become self-managed.  Dueto the apparent preference of the public markets for self-managed companies, adecision to list our shares on a national securities exchange might well bepreceded by a decision to become self-managed.  And given our Advisor’sfamiliarity with our assets and operations, we might prefer to becomeself-managed by acquiring entities affiliated with our Advisor.  Such aninternalization transaction could result in significant payments to affiliatesof our Advisor irrespective of whether you enjoyed the returns on which we haveconditioned other performance-based compensation.

 

These fees increase therisk that the amount available for payment of distributions to our stockholdersupon a liquidation of our portfolio would be less than the purchase price ofthe shares of stock in the offering. Substantial up-front fees also increase the risk that our stockholderswill not be able to resell their shares of stock at a profit, even if our stockis listed on a national securities exchange.

 

***If we are unable to obtain funding for future capital needs,cash distributions to our stockholders could be reduced and the value of ourinvestments could decline.***

 

If we need additionalcapital in the future to improve or maintain our properties or for any otherreason, we will have to obtain financing from other sources, such as cash flowfrom operations, borrowings, property sales or future equity offerings. Thesesources of funding may not be available on attractive terms or at all. If wecannot procure additional funding for capital improvements, our investments maygenerate lower cash flows or decline in value, or both.

 

***Our Advisor does not have as strong an economic incentive toavoid losses as do sponsors who have made significant equity investments in thecompanies they sponsor.***

 

Our Advisor has invested$200,000 in our operating partnership.  Therefore, if we are successful inraising enough proceeds to be able to reimburse our Advisor for our significantorganization and offering expenses, our Advisor has little exposure to losses inthe value of our stock. Without this exposure, our investors may be at agreater risk of loss because our Advisor and its affiliates do not have as muchto lose from a decrease in the value of our stock as do those sponsors who makemore significant equity investments in the companies they sponsor.

 

**GeneralRisks Related to Investments in Real Estate and Real-Estate Related Investments**

 

***Economic and regulatory changes that impact the real estatemarket may reduce our net income and the value of our properties.***

 

By owning our stock,stockholders will be subjected to the risks associated with owning real estate.The performance of an investment in us is subject to, among other things, risksrelated to the ownership and operation of real estate, including but not limitedto:

 

·      worseninggeneral or local economic conditions and financial markets could cause lowerdemand, tenant defaults, and reduced occupancy and rental rates, some or all ofwhich would cause an overall decrease in revenue from rents;

 

·      increasesin competing properties in an area which could require increased concessions totenants and reduced rental rates; and

 

·      increasesin interest rates or unavailability of permanent mortgage funds which mayrender the sale of a property difficult or unattractive.

 

Some or all of theforegoing factors may affect our properties, which would reduce our net income,and our ability to make distributions to our stockholders.

 

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***Lease terminations could reduce our revenues from rents andour distributions to our stockholders and cause the value of our stockholders’investment in us to decline.***

 

The success of ourinvestments depends upon the occupancy levels, rental income and operatingexpenses of our properties and our company. In the event of a tenant default orbankruptcy, we may experience delays in enforcing our rights as landlord andmay incur costs in protecting our investment and re-leasing our property. Wemay be unable to re-lease the property for the rent previously received. We maybe unable to sell a property with low occupancy without incurring a loss. Theseevents and others could cause us to reduce the amount of distributions we maketo stockholders and the value of our stockholders’ investment in us to decline.

 

***Our operating results and distributable cash flow willdepend on our ability to generate revenue from leasing our properties totenants on terms favorable to us.***

 

Our financial resultswill depend, in part, on revenues derived from leasing space in ourproperties.  We are subject to the credit risk of our tenants, and to theextent our tenants default on their leases or fail to make rental payments wemay suffer a decrease in our revenue.  In addition, if a tenant does notpay its rent, we may not be able to enforce our rights as landlord withoutdelays and we may incur substantial legal costs.  We are also subject tothe risk that we will not be able to lease space in our value-added oropportunistic properties or that, upon the expiration of leases for spacelocated in our core properties, leases may not be renewed, the space may not bere-leased or the terms of renewal or re-leasing (including the cost of requiredrenovations or concessions to customers) may be less favorable to us thancurrent lease terms.  Further, costs associated with real estateinvestment, such as real estate taxes and maintenance costs, generally are notreduced when circumstances cause a reduction in income from theinvestment.  These events would cause a significant decrease in revenuesand could cause us to reduce the amount of distributions to our stockholders.

 

***Rising expenses at both the property and the company levelcould reduce our net income and our cash available for distribution tostockholders.***

 

Our properties will besubject to operating risks common to real estate in general, any or all ofwhich may reduce our net income. If any property is not substantially occupiedor if rents are being paid in an amount that is insufficient to cover operatingexpenses, we could be required to expend funds with respect to that propertyfor operating expenses. The properties will be subject to increases in taxrates, utility costs, operating expenses, insurance costs, repairs andmaintenance and administrative expenses. If we are unable to lease propertieson a basis requiring the tenants to pay such expenses, we would be required topay some or all of those costs which would reduce our income and cash availablefor distribution to stockholders.

 

***Costs incurred in complying with governmental laws andregulations may reduce our net income and the cash available for distributions.***

 

Our company and theproperties we expect to own are subject to federal, state and local laws andregulations relating to environmental protection and human health and safety.Federal laws such as the National Environmental Policy Act, the ComprehensiveEnvironmental Response, Compensation, and Liability Act, the ResourceConservation and Recovery Act, the Federal Water Pollution Control Act, theFederal Clean Air Act, the Toxic Substances Control Act, the Emergency Planningand Community Right to Know Act and the Hazard Communication Act govern suchmatters as wastewater discharges, air emissions, the operation and removal ofunderground and above-ground storage tanks, the use, storage, treatment,transportation and disposal of solid and hazardous materials and theremediation of contamination associated with disposals. The properties weacquire will be subject to the Americans with Disabilities Act of 1990 whichgenerally requires that certain types of buildings and services be madeaccessible and available to people with disabilities. These laws may require usto make modifications to our properties. Some of these laws and regulationsimpose joint and several liability on tenants, owners or operators for thecosts to investigate or remediate contaminated properties, regardless of faultor whether the acts causing the contamination were legal. Compliance with theselaws and any new or more stringent laws or regulations may require us to incurmaterial expenditures. Future laws, ordinances or regulations may imposematerial environmental liability. In addition, there are various federal, stateand local fire, health, life-safety and similar regulations with which we maybe required to comply, and which may subject us to liability in the form offines or damages for noncompliance.

 

Our properties may beaffected by our tenants’ operations, the existing condition of land when we buyit, operations in the vicinity of our properties, such as the presence ofunderground storage tanks, or activities of unrelated third parties. Thepresence of hazardous substances, or the failure to properly remediate thesesubstances, may make it difficult or impossible to sell or rent such property.Any material expenditures, fines, or damages we must pay will reduce ourability to make distributions and may reduce the value of our stockholders’investments in us.

 

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***Discovery of environmentally hazardous conditions may reduceour cash available for distribution to our stockholders.***

 

Under various federal,state and local environmental laws, ordinances and regulations, a current orprevious real property owner or operator may be liable for the cost to removeor remediate hazardous or toxic substances on, under or in such property. Thesecosts could be substantial. Such laws often impose liability whether or not theowner or operator knew of, or was responsible for, the presence of such hazardousor toxic substances. Environmental laws also may impose restrictions on themanner in which property may be used or businesses may be operated, and theserestrictions may require substantial expenditures or prevent us from enteringinto leases with prospective tenants that may be impacted by such laws.Environmental laws provide for sanctions for noncompliance and may be enforcedby governmental agencies or, in certain circumstances, by private parties.Certain environmental laws and common law principles could be used to imposeliability for release of and exposure to hazardous substances, includingasbestos-containing materials into the air. Third parties may seek recoveryfrom real property owners or operators for personal injury or property damageassociated with exposure to released hazardous substances. The cost ofdefending against claims of liability, of complying with environmentalregulatory requirements, of remediating any contaminated property, or of payingpersonal injury claims could be substantial and reduce our ability to makedistributions and the value of our stockholders’ investments in us.

 

***Any uninsured losses or high insurance premiums will reduceour net income and the amount of our cash distributions to stockholders.***

 

Our Advisor will attemptto obtain adequate insurance to cover significant areas of risk to us as acompany and to our properties. However, there are types of losses at theproperty level, generally catastrophic in nature, such as losses due to wars,acts of terrorism, earthquakes, floods, hurricanes, pollution or environmentalmatters, which are uninsurable or not economically insurable, or may be insuredsubject to limitations, such as large deductibles or co-payments. We may nothave adequate coverage for such losses. If any of our properties incurs acasualty loss that is not fully insured, the value of our assets will bereduced by any such uninsured loss. In addition, other than any working capitalreserve or other reserves we may establish, we have no source of funding torepair or reconstruct any uninsured damaged property. Also, to the extent wemust pay unexpectedly large amounts for insurance, we could suffer reducedearnings that would result in lower distributions to stockholders.

 

***We may have difficulty selling real estate investments, andour ability to distribute all or a portion of the net proceeds from such saleto our stockholders may be limited.***

 

Equity real estateinvestments are relatively illiquid. We will have a limited ability to vary ourportfolio in response to changes in economic or other conditions. We will alsohave a limited ability to sell assets in order to fund working capital andsimilar capital needs. When we sell any of our properties, we may not realize again on such sale. We may not elect to distribute any proceeds from the sale ofproperties to our stockholders; for example, we may use such proceeds to:

 

·      purchaseadditional properties;

 

·      repaydebt, if any;

 

·      buyout interests of any co-venturers or other partners in any joint venture inwhich we are a party;

 

·      createworking capital reserves; or

 

·      makerepairs, maintenance, tenant improvements or other capital improvements orexpenditures to our remaining properties.

 

Our ability to sell ourproperties may also be limited by our need to avoid a 100% penalty tax that isimposed on gain recognized by a REIT from the sale of property characterized asdealer property. In order to ensure that we avoid such characterization, we maybe required to hold our properties for a minimum period of time, generally fouryears, and comply with certain other requirements in the Internal Revenue Code.

 

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***Real estate market conditions at the time we decide todispose of a property may be unfavorable which could reduce the price wereceive for a property and lower the return on our stockholders’ investments inus.***

 

We intend to hold theproperties in which we invest until we determine that selling or otherwisedisposing of properties would help us to achieve our investment objectives.General economic conditions, availability of financing, interest rates andother factors, including supply and demand, all of which are beyond ourcontrol, affect the real estate market. We may be unable to sell a property forthe price, on the terms, or within the time frame we want. Accordingly, thegain or loss on our stockholders’ investments in us could be affected by fluctuatingmarket conditions.

 

***As part of otherwise attractive portfolios ofproperties, we may acquire some properties with existing lock-outprovisions, which may inhibit us from selling a property, or may require us tomaintain specified debt levels for a period of years on some properties.***

 

Loan provisions couldmaterially restrict us from selling or otherwise disposing of or refinancingproperties. These provisions would affect our ability to turn our investmentsinto cash and thus affect cash available for distributions to our stockholders.Loan provisions may prohibit us from reducing the outstanding indebtedness withrespect to properties, refinancing such indebtedness on a non-recourse basis atmaturity, or increasing the amount of indebtedness with respect to suchproperties.

 

Loan provisions couldimpair our ability to take actions that would otherwise be in the bestinterests of our stockholders and, therefore, may have an adverse impact on thevalue of our stock, relative to the value that would result if the loanprovisions did not exist. In particular, loan provisions could preclude us fromparticipating in major transactions that could result in a disposition of ourassets or a change in control even though that disposition or change in controlmight be in the best interests of our stockholders.

 

***If we sell properties by providing financing to purchasersof our properties, distribution of net sales proceeds to our stockholders wouldbe delayed and defaults by the purchasers could reduce our cash available fordistribution to stockholders.***

 

If we provide financingto purchasers, we will bear the risk that the purchaser may default. Purchaserdefaults could reduce our cash distributions to you. Even in the absence of apurchaser default, the distribution of the proceeds of sales to ourstockholders, or their reinvestment in other assets, will be delayed until thepromissory notes or other property we may accept upon a sale are actually paid,sold, refinanced or otherwise disposed of or completion of foreclosureproceedings.

 

***Actions of our joint venture partners could subject us toliabilities in excess of those contemplated or prevent us from taking actionswhich are in the best interests of our stockholders which could result in lowerinvestment returns to our stockholders.***

 

We are likely to enterinto joint ventures with affiliates and other third parties to acquire orimprove properties. We may also purchase properties in partnerships,co-tenancies or other co-ownership arrangements. Such investments may involverisks not otherwise present when acquiring real estate directly, including, forexample:

 

·      jointventurers may share certain approval rights over major decisions;

 

·      that such co-venturer,co-owner or partner may at any time have economic or business interests orgoals which are or which become inconsistent with our business interests orgoals, including inconsistent goals relating to the sale of properties held inthe joint venture or the timing of termination or liquidation of the jointventure;

 

·      the possibility that ourco-venturer, co-owner or partner in an investment might become insolvent orbankrupt;

 

·      the possibility that we mayincur liabilities as a result of an action taken by our co-venturer, co-owneror partner;

 

·      that such co-venturer,co-owner or partner may be in a position to take action contrary to ourinstructions or requests or contrary to our policies or objectives, includingour policy with respect to qualifying and maintaining our qualification as aREIT;

 

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·      disputes between us and ourjoint venturers may result in litigation or arbitration that would increase ourexpenses and prevent its officers and directors from focusing their time andeffort on our business and result in subjecting the properties owned by theapplicable joint venture to additional risk; or

 

·      that under certain jointventure arrangements, neither venture partner may have the power to control theventure, and an impasse could be reached which might have a negative influenceon the joint venture.

 

These events mightsubject us to liabilities in excess of those contemplated and thus reduce yourinvestment returns. If we have a right of first refusal or buy/sell right tobuy out a co-venturer, co-owner or partner, we may be unable to finance such abuy-out if it becomes exercisable or we may be required to purchase suchinterest at a time when it would not otherwise be in our best interest to doso. If our interest is subject to a buy/sell right, we may not have sufficientcash, available borrowing capacity or other capital resources to allow us to electto purchase an interest of a co-venturer subject to the buy/sell right, inwhich case we may be forced to sell our interest as the result of the exerciseof such right when we would otherwise prefer to keep our interest. Finally, wemay not be able to sell our interest in a joint venture if we desire to exitthe venture.

 

***If we make or invest in mortgage loans as part of our planto acquire the underlying property, our mortgage loans may be affected byunfavorable real estate market conditions, including interest ratefluctuations, which could decrease the value of those loans and the return onour stockholders’ investments in us.***

 

If we make or invest inmortgage loans, we will be at risk of defaults by the borrowers on thosemortgage loans as well as interest rate risks.  To the extent we incurdelays in liquidating such defaulted mortgage loans; we may not be able toobtain sufficient proceeds to repay all amounts due to us under the mortgageloan.  Further, we will not know whetherthe values of the properties securing the mortgage loans will remain at thelevels existing on the dates of origination of those mortgage loans.  Ifthe values of the underlying properties fall, our risk will increase because ofthe lower value of the security associated with such loans.  In addition,interest rate fluctuations could reduce our returns as compared to marketinterest rates and reduce the value of the mortgage loans in the event we sellthem.

 

***High mortgage rates may make it difficult for us to financeor refinance properties, which could reduce the number of properties we canacquire, our cash flows from operations and the amount of cash distributions wecan make.***

 

If mortgage debt isunavailable at reasonable rates, we may not be able to finance the purchase ofproperties. If we place mortgage debt on properties, we run the risk of beingunable to refinance the properties when the debt becomes due or of being unableto refinance on favorable terms. If interest rates are higher when we refinancethe properties, our income could be reduced. We may be unable to refinanceproperties. If any of these events occurs, our cash flow would be reduced.This, in turn, would reduce cash available for distribution to our stockholdersand may hinder our ability to raise capital by issuing more stock or borrowingmore money.

 

***Second mortgage loan investments involve a greater risk ofloss in the event of default than traditional mortgage loans.***

 

If we decide to invest insecond mortgages, our subordinated priority to the senior lender orlenders will place our investment at a greater risk of loss than atraditional mortgage.  In the event of default, any recovery of our secondmortgage investment will be subordinate to the seniorlender.   Further, it is likely that any investments we make insecond mortgages will be placed with private entities and not insured by agovernment sponsored entity, placing additional credit risk on the borrowerwhich may result in a loss to our portfolio.

 

***Construction loan investments involve a greater risk of lossof investment and reduction of return than traditional mortgage loans.***

 

If we decide to invest inconstruction loans, the nature of these loans pose a greater risk of loss thantraditional mortgages. Since construction loans are made generally for theexpress purpose of either the original development or redevelopmentof a property, the risk of loss is greater than a traditionalmortgage because the underlying properties subject to construction loans aregenerally unable to generate income during the period of the loan. Construction loans may also be subordinate to the first lienmortgages.  Any delays in completing the development or redevelopmentproject may increase the risk of default or credit risk of the borrower whichmay increase the risk of loss or risk of a lower than expected return to ourportfolio.

 

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***Bridge loan investments involve a greater risk of loss ofinvestment and reduction of return than traditional mortgage loans.***

 

If we decide toacquire or make bridge loans secured by first lien mortgages on propertiesto borrowers who are typically seeking short-term capital to be used in anacquisition or renovation of real estate, these loans pose a greater risk thantraditional mortgages.  Borrowers usually identify undervalued assets thathave been under-managed or are located in recovering markets. If themarket in which the asset is located fails to recover according to the borrower’sprojections, or if the borrower fails to improve the quality of the asset’smanagement or the value of the asset, the borrower may not receive a sufficientreturn on the asset to satisfy the bridge loan, and we may not recover some orall of our investment.

 

In addition, ownersusually borrow funds under a conventional mortgage loan to repay a bridge loan.We may therefore be dependent on a borrower’s ability to obtain permanentfinancing to repay our bridge loan, which could depend on market conditions andother factors. Bridge loans are also subject to risks of borrower defaults,bankruptcies, fraud, losses and special hazard losses that are not covered bystandard hazard insurance. In the event of any default under bridge loans heldby us, we bear the risk of loss of principal and non-payment of interest andfees to the extent of any deficiency between the value of the mortgagecollateral and the principal amount of the bridge loan. To the extent we suffersuch losses with respect to our investments in bridge loans; the value of ourcompany may be adversely affected.

 

***Mezzanine loan investments involve a greater risk of loss ofinvestment and reductions of return than senior loans secured by incomeproducing properties.***

 

If we invest in mezzanineloans, they may take the form of subordinated loans secured by second mortgageson the underlying real property or loans secured by a pledge of the ownershipinterests of either the entity owning the real property or the entity that ownsthe interest in the entity owning the real property. These types of investmentsinvolve a higher degree of risk than long-term senior mortgage lending securedby income-producing real property because the investment may become unsecuredas a result of foreclosure by the senior lender. In the event of a bankruptcyof the entity providing the pledge of its ownership interests as security, wemay not have full recourse to the assets of such entity, or the assets of theentity may not be sufficient to satisfy our mezzanine loan. If a borrowerdefaults on our mezzanine loan or debt senior to our loan, or in the event of aborrower bankruptcy, our mezzanine loan will be satisfied only after the seniordebt. As a result, we may not recover some or all of our investment. Inaddition, mezzanine loans may have higher loan-to-value ratios thanconventional mortgage loans, resulting in less equity in the real property andincreasing the risk of loss of principal.

 

***Investments in real estate-related securities may beilliquid, and we may not be able to adjust our portfolio in response to changesin economic and other conditions.***

 

If we invest in certainreal estate-related securities that we may purchase in connection withprivately negotiated transactions, they will not be registered under therelevant securities laws, resulting in a prohibition against their transfer,sale, pledge or other disposition except in a transaction that is exempt fromthe registration requirements of, or is otherwise in accordance with, thoselaws. As a result, our ability to vary our long-term stabilized portfolio inresponse to changes in economic and other conditions may be relatively limited.The mezzanine and bridge loans we may purchase will be particularly illiquidinvestments due to their short life. Moreover, in the event of a borrower’sdefault on an illiquid real estate security, the unsuitability forsecuritization and potential lack of recovery of our investment could poseserious risks of loss to our investment portfolio.

 

***Delays in restructuring or liquidating non-performing realestate-related securities could reduce the return on your investment.***

 

If we invest in realestate-related securities, they may become non-performing after acquisition fora wide variety of reasons. Such non-performing real estate investments mayrequire a substantial amount of workout negotiations and/or restructuring,which may entail, among other things, a substantial reduction in the interestrate and a substantial write-down of such loan or asset. However, even if arestructuring is successfully accomplished, upon maturity of such real estatesecurity, replacement “takeout” financing may not be available. We may find itnecessary or desirable to foreclose on some of the collateral securing one ormore of our investments. Intercreditor provisions may substantially interferewith our ability to do so. Even if foreclosure is an option, the foreclosureprocess can be lengthy and expensive. Borrowers often resist foreclosureactions by asserting numerous claims, counterclaims and defenses, including,without limitation, lender liability claims and defenses, in an effort toprolong the foreclosure action. In some states, foreclosure actions can take upto several years or more to litigate. At any time during the foreclosureproceedings, the borrower may file for bankruptcy, which would have the effectof staying the foreclosure action and further delaying the foreclosure process.Foreclosure litigation tends to create a negative public image of thecollateral property and may result in disrupting ongoing leasing and managementof the property. Foreclosure actions by senior lenders may substantially affectthe amount that we may receive from an investment.

 

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***If a significant portion of our assets are deemed “investmentsecurities,” we may become subject to the Investment Company Act of 1940 whichwould restrict our operations and we could not continue our business.***

 

If we fail to qualify foran exemption or exception from the Investment Company Act of 1940, we would berequired to comply with numerous additional regulatory requirements andrestrictions which could adversely restrict our operations and force us todiscontinue our business. Currently, we have no assets, and our intendedinvestments in real estate will represent the substantial majority of our totalasset mix, which would not subject us to the Investment Company Act. If,however, in the future we acquire mortgage loans, debt securities andinvestments in joint ventures (not structured in compliance with the InvestmentCompany Act) and other investments assets that are deemed by the SEC or thecourts to be “investment securities” and these assets exceed 40% of the valueof our total assets, we could be deemed to be an investment company and subjectto these additional regulatory and operational restrictions.

 

Even if otherwise deemedan investment company, we may qualify for an exception or exemption from theInvestment Company Act. For example, under the real estate/mortgage exception,entities that are primarily engaged in the business of purchasing and otherwiseacquiring mortgages and interests in real estate are exempt from registrationunder the Investment Company Act. Under the real estate exception, the SECStaff has provided guidance that would require us to maintain 55% of our assetsin qualifying real estate interests. In order for an asset to constitute aqualifying real estate interest or qualifying asset, the interest must meetvarious criteria. Fee interests in real estate and whole mortgage loans aregenerally considered qualifying assets. If we were required to register as aninvestment company but failed to do so, we would be prohibited from engaging inour business, and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court requiredenforcement, and a court could appoint a receiver to take control of us andliquidate our business.

 

**RisksAssociated with Debt Financing**

 

***We may use debt financing to acquire properties andotherwise incur other indebtedness, which will increase our expenses and couldsubject us to the risk of losing properties in foreclosure if our cash flow isinsufficient to make loan payments.***

 

We may acquire propertiesusing debt financing. We intend to incur indebtedness up to 300% of our netassets (equivalent to 75% of the cost of our assets),****but upon a vote of the majority of our independent directorswe may exceed this level of indebtedness. We may borrow funds for workingcapital requirements, tenant improvements, capital improvements, and leasingcommissions. We may also borrow funds to make distributions including but notlimited to funds to satisfy the REIT tax qualification requirement that wedistribute at least 90% of our annual REIT taxable income (excluding net capitalgains) to our stockholders. We may also borrow if we otherwise deem itnecessary or advisable to ensure that we maintain our qualification as a REITfor federal income tax purposes or to avoid taxation on undistributed income orgain. To the extent we borrow funds; we may raise additional equity capital orsell properties to pay such debt.

 

If there is a shortfallbetween the cash flow from a property and the cash flow needed to serviceacquisition financing on that property, then the amount available for distributionsto stockholders may be reduced. In addition, incurring mortgage debt increasesthe risk of loss since defaults on indebtedness secured by a property mayresult in lenders initiating foreclosure actions. In that case, we could losethe property securing the loan that is in default, thus reducing the value ofyour investment. For tax purposes, a foreclosure of any of our properties wouldbe treated as a sale of the property for a purchase price equal to theoutstanding balance of the debt secured by the mortgage. If the outstandingbalance of the debt secured by the mortgage exceeds our tax basis in theproperty, we would recognize taxable income on foreclosure, but we would notreceive any cash proceeds. We may give full or partial guarantees to lenders ofmortgage debt to the entities that own our properties. When we give a guarantyon behalf of an entity that owns one of our properties, we will be responsibleto the lender for satisfaction of the debt if it is not paid by such entity. Ifany mortgages contain cross-collateralization or cross-default provisions, adefault on a single property could affect multiple properties. If any of ourproperties are foreclosed upon due to a default, the value of our stockholders’investments in us will be reduced.

 

***Lenders may require us to enter into restrictive covenantsrelating to our operations, which could limit our ability to make distributionsto our stockholders.***

 

When providing financing,a lender may impose restrictions on us that affect our distribution andoperating policies and our ability to incur additional debt. Loan documents weenter into may contain covenants that limit our ability to further mortgage theproperty, discontinue insurance coverage, or replace our Advisor. These orother limitations may limit our flexibility and prevent us from achieving ouroperating plans.

 

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***High levels of debt or increases in interest rates couldincrease the amount of our loan payments, reduce the cash available fordistribution to stockholders and subject us to the risk of losing properties inforeclosure if our cash flow is insufficient to make loan payments.***

 

Our policies do not limitus from incurring debt. High debt levels would cause us to incur higher interestcharges, would result in higher debt service payments, and could be accompaniedby restrictive covenants. Interest we pay could reduce cash available fordistribution to stockholders. Additionally, if we incur variable rate debt,increases in interest rates would increase our interest costs, which wouldreduce our cash flows and our ability to make distributions to you. Inaddition, if we need to repay existing debt during periods of rising interestrates, we could be required to liquidate one or more of our investments inproperties at times which may not permit realization of the maximum return onsuch investments and could result in a loss.

 

**FederalIncome Tax Risks**

 

***If we fail to qualify as a REIT, we will be subjected to taxon our income and the amount of distributions we make to our stockholders willbe less.***

 

We intend to qualify as aREIT under the Internal Revenue Code. A REIT generally is not taxed at thecorporate level on income and gains it currently distributes to itsstockholders. Qualification as a REIT involves the application of highlytechnical and complex rules for which there are only limited judicial oradministrative interpretations. The determination of various factual mattersand circumstances not entirely within our control may affect our ability tocontinue to qualify as a REIT. In addition, new legislation, regulations,administrative interpretations or court decisions could significantly changethe tax laws with respect to qualification as a REIT or the federal income tax consequencesof such qualification.

 

If we elect to be taxedas a REIT and then were to fail to qualify as a REIT in any taxable year:

 

·      we would notbe allowed to deduct our distributions to our stockholders when computing ourtaxable income;

 

·      wewould be subject to federal income tax (including any applicable alternativeminimum tax) on our taxable income at regular corporate rates;

 

·      wewould be disqualified from being taxed as a REIT for the four taxable yearsfollowing the year during which qualification was lost, unless entitled torelief under certain statutory provisions;

 

·      we would haveless cash to make distributions to our stockholders; and

 

·      wemight be required to borrow additional funds or sell some of our assets inorder to pay corporate tax obligations we may incur as a result of ourdisqualification.

 

***Even if we qualify and maintain our status as a REIT, we maybe subject to income and excise taxes in certain events, which would reduce ourcash available for distribution to our stockholders.***

 

Net income from a “prohibitedtransaction” will be subject to a 100% tax. We may not be able to paysufficient distributions to avoid excise taxes applicable to REITs. We may alsodecide to retain all or a portion of capital gain we earn from the sale orother disposition of our property and pay federal income tax directly on suchincome.  We may also be subject to state and local taxes on our income orproperty, either directly or at the level of our operating partnership or atthe level of the other companies through which we indirectly own our assets.Any federal or state taxes we pay will reduce the cash available to makedistributions to our stockholders.

 

***To maintain our REIT status, we may be forced to foregootherwise attractive opportunities, which may delay or hinder our ability tomeet our investment objectives and reduce the overall return to ourstockholders.***

 

To qualify as a REIT, wemust satisfy certain tests on an ongoing basis concerning, among other things,the sources of our income, nature of our assets and the amounts we distributeto our stockholders. We may be required to make distributions to stockholdersat times when it would be more advantageous to reinvest cash in our business orwhen we do not have funds readily available for distribution. Compliance withthe REIT requirements may hinder our ability to operate solely on the basis ofmaximizing profits and the value of our stockholders’ investments in us.

 

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***If our operating partnership is classified as a “publicly-tradedpartnership” under the Internal Revenue Code, it could be subjected to tax onits income and the amount of distributions we make to our stockholders will beless.***

 

We structured theoperating partnership so that it would be classified as a partnership forfederal income tax purposes. In this regard, the Internal Revenue Codegenerally classifies “publicly traded partnerships” (as defined in Section 7704of the Internal Revenue Code) as associations taxable as corporations (ratherthan as partnerships), unless substantially all of their taxable incomeconsists of specified types of passive income. In order to minimize the riskthat the Internal Revenue Code would classify the operating partnership as a “publiclytraded partnership” for tax purposes, we placed certain restrictions on thetransfer and/or redemption of partnership units in our operating partnership.If the Internal Revenue Service were to assert successfully that our operatingpartnership is a “publicly traded partnership,” and substantially all of theoperating partnership’s gross income did not consist of the specified types ofpassive income, the Internal Revenue Code would treat our operating partnershipas an association taxable as a corporation. In such event, the character of ourassets and items of gross income would change and would likely prevent us fromqualifying and maintaining our status as a REIT. In addition, the imposition ofa corporate tax on our operating partnership would reduce the amount of cashdistributable to us from our operating partnership and therefore would reduceour amount of cash available to make distributions toourstockholders.

 

***Distributions payable by REITs do not qualify for thereduced tax rates under recently enacted tax legislation.***

 

Recently enacted taxlegislation generally reduces the maximum tax rate for dividend distributionspayable by corporations to individuals meeting certain requirements to 15%through 2010. Distributions payable by REITs, however, generally continue to betaxed at the normal rate applicable to the individual recipient, rather thanthe 15% preferential rate. Although this legislation does not adversely affectthe taxation of REITs or distributions paid by REITs, the more favorable rates applicableto regular corporate distributions could cause investors who are individuals toperceive investments in REITs to be relatively less attractive than investmentsin the stocks of non-REIT corporations that make distributions, which couldreduce the value of the stock of REITs, including our stock.

 

***Distributions to tax-exempt investors may be classified asunrelated business taxable income and tax-exempt investors would be required topay tax on the unrelated business taxable income and to file income taxreturns.***

 

Neither ordinary norcapital gain distributions with respect to our common stock nor gain from thesale of stock should generally constitute unrelated business taxable income toa tax-exempt investor. However, there are certain exceptions to this rule. Inparticular:

 

·      undercertain circumstances, part of the income and gain recognized by certainqualified employee pension trusts with respect to our stock may be treated asunrelated business taxable income if our stock is predominately held byqualified employee pension trusts, such that we are a “pension-held” REIT(which we do not expect to be the case);

 

·      partof the income and gain recognized by a tax exempt investor with respect to ourstock would constitute unrelated business taxable income if such investorincurs debt in order to acquire the common stock; and

 

·      partor all of the income or gain recognized with respect to our stock held bysocial clubs, voluntary employee benefit associations, supplementalunemployment benefit trusts and qualified group legal services plans which areexempt from federal income taxation under Sections 501(c)(7), (9), (17), or(20) of the Code may be treated as unrelated business taxable income.

 

***Foreign investors may be subject to FIRPTA tax on the saleof our stock if we are unable to qualify as a “domestically controlled” REIT.***

 

A foreign persondisposing of a U.S. real property interest, including stock of a U.S.corporation whose assets consist principally of U.S. real property interests isgenerally subject to a tax, known as FIRPTA tax, on the gain recognized on thedisposition. Such FIRPTA tax does not apply, however, to the disposition ofstock in a REIT if the REIT is “domestically controlled.” A REIT is “domesticallycontrolled” if less than 50% of the REIT’s capital stock, by value, has beenowned directly or indirectly by persons who are not qualifying U.S. personsduring a continuous five-year period ending on the date of disposition or, ifshorter, during the entire period of the REIT’s existence.

 

We cannot be sure that wewill qualify as a “domestically controlled” REIT. If we were to fail to soqualify, gain realized by foreign investors on a sale of our stock would besubject to FIRPTA tax, unless our stock were traded on an established securitiesmarket and the foreign investor did not at any time during a specified testingperiod directly or indirectly own more than 5% of the value of our outstandingcommon stock.

 

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**RetirementPlan Risks**

 

***If you fail to meet the fiduciary and other standards underERISA or the Internal Revenue Code as a result of an investment in our stock,you could be subject to criminal and civil penalties.***

 

There are specialconsiderations that apply to certain pension or profit sharing trusts and IRAsinvesting in stock. Prospective investors who are considering investing theassets of any pension, profit sharing, 401(k), Keogh or other qualifiedretirement plan that is subject to the fiduciary rules imposed by ERISA orthe prohibited transaction rules imposed by Section 4975 of the Codeor the assets of an IRA in our stock should satisfy themselves that:

 

·      the investmentis consistent with such investors’ fiduciary obligations under ERISA and theInternal Revenue Code;

 

·      theinvestment is made in accordance with the documents and instruments governingthe plan or IRA, including the plan’s investment policy;

 

·      theinvestment satisfies the prudence and diversification requirements of Sections404(a) (1) (B) and 404(a) (1) (C) of ERISA andother applicable provisions of ERISA and the Internal Revenue Code;

 

·      the investmentwill not impair the liquidity of the plan or IRA;

 

·      the investmentwill not produce “unrelated business taxable income” for the plan or IRA;

 

·      theywill be able to value the assets of the plan annually in accordance with ERISArequirements and applicable provisions of the plan or IRA; and

 

·      theinvestment will not constitute a prohibited transaction under Section 406of ERISA or Section 4975 of the Internal Revenue Code.

 

Failure to satisfy thefiduciary standards of conduct and other applicable requirements of ERISA andthe Internal Revenue Code may result in imposition of civil and criminalpenalties, and can subject the fiduciary to equitable remedies. In addition, ifan investment in our stock constitutes a prohibited transaction under ERISA orthe Internal Revenue Code, the fiduciary of the plan who authorized or directedthe investment may be subject to imposition of excise taxes with respect to theamount invested and an IRA investing in the stock may lose its tax exemptstatus.

 

***An investment in our stock may not be suitable for everyemployee benefit plan, and may result in the plan fiduciary breaching its dutyto the plan.***

 

When considering aninvestment in our stock, an individual with investment discretion over assetsof any pension plan, profit-sharing plan, retirement plan, IRA or otheremployee benefit plan covered by ERISA should consider whether the investmentsatisfies the fiduciary requirements of ERISA and other applicable laws. Inparticular, attention should be paid to the diversification requirements of Section 404(a) (1) (C) ofERISA in light of all the facts and circumstances, including the portion of theplan’s portfolio of which the investment will be a part. All plan investorsshould also consider whether the investment is prudent and meets plan liquidityrequirements as there may be only a limited market in which to sell orotherwise dispose of our stock, and whether the investment is permissible underthe plan’s governing instrument. We have not, and will not, evaluate whether aninvestment in our stock is suitable for any particular plan. Rather, we willaccept entities as stockholders if an entity otherwise meets the suitabilitystandards set forth in the “Suitability Standards” section in our prospectus.

 

***ERISA fiduciaries are required to determine annually thefair market value of each asset in the ERISA plan based on liquidation value.The annual statement of value that we will be sending to stockholders subjectto ERISA and to certain other plan stockholders is only an estimate and may notcomply with any reporting and disclosure or annual valuation requirements underERISA or other applicable law.***

 

The annual statement ofvalue will report the value of each share of our stock based as of the close ofour fiscal year. No independent appraisals will be obtained and the value willbe based upon an estimated amount we determine would be 

 

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received if ourproperties and other assets were sold as of the close of our fiscal year and ifsuch proceeds, together with our other funds, were distributed pursuant to aliquidation. However, the net asset value of each share of stock will be deemedto be $10.00 during this offering and for the first three years following thetermination of this offering, unless our board of directors otherwisedetermines. Because this is only an estimate, we may subsequently revise anyannual valuation that is provided. We cannot be certain that:

 

·      a valueincluded in the annual statement could actually be realized by us or by ourstockholders upon liquidation;

 

·      stockholderscould realize that value if they were to attempt to sell their stock; or

 

·      anannual statement of value would comply with any reporting and disclosure orannual valuation requirements under ERISA or other applicable law.

 

We will stop providingannual statements of value if our stock becomes listed for trading on anational stock exchange.

 

**ITEM 1B. UNRESOLVED STAFF COMMENTS**

 

None Applicable.

 

**ITEM 2.  PROPERTIES**

 

As of December 31,2007, we have not purchased any properties.

 

**ITEM 3.  LEGALPROCEEDINGS**

 

From time to timein the ordinary course of business, we may become subject to legal proceeding,claims, or disputes.  As of the datehereof, we are not a party to any pending legal proceedings.

 

**ITEM 4.  SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS**

 

No matters were submittedto a vote of our stockholder during the fourth quarter of 2007.

 

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** **

**PART II**

 

**ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY,RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

 

**MarketInformation**

 

During the periodcovered by this report, there was no established public trading market for ourshares of common stock.

 

In order for FINRAmembers and their associated persons to participate in the offering and sale ofshares of common stock pursuant to our ongoing public offering, we are requiredpursuant to Rule 2710(f) (2) (M) to disclose in each annualreport distributed to stockholders a per share estimated value of the shares,the method by which it was developed and the date of the data used to developthe estimated value. In addition, we prepare annual statements of estimatedshare values to assist fiduciaries of retirement plans subject to the annualreporting requirements of ERISA in the preparation of their reports relating toan investment in our shares. For these purposes, the deemed value is $10.00 pershare as of December 31, 2007. There is no public trading market for theshares at this time, and there can be no assurance that stockholders wouldreceive $10.00 per share if such a market did exist and they sold their sharesor that they will be able to receive such amount for their shares in the future.Nor does this deemed value reflect the distributions that stockholders would beentitled to receive upon liquidation of our company. Such a distribution uponliquidation is likely to be less than $10.00 per share primarily due to thefact that the funds initially available for investment in properties will bereduced from the gross offering proceeds in order to pay selling commissionsand dealer manager fees, organization and offering expenses, and acquisitionsand Advisory fees. We do not currently anticipate obtaining appraisals for theproperties we acquire, and accordingly, the deemed values should not be viewedas an accurate reflection of the fair market value of those properties, nor dothey represent the amount of net proceeds that would result from an immediatesale of those properties.

 

**StockRepurchase Program**

 

Our board ofdirectors has adopted a stock repurchase program that enables our stockholdersto sell their stock to us in limited circumstances. Our board of directors mayamend, suspend or terminate the program at any time upon thirty (30) days priornotice to our stockholders.

 

As long as ourcommon stock is not listed on a national securities exchange or the NASDAQNational Market, our stockholders who have held their stock for at least oneyear may be able to have all or any portion of their shares of stock redeemed.At that time, we may, subject to the conditions and limitations describedbelow, redeem the shares of stock presented for redemption for cash to theextent that we have sufficient funds available to us to fund such redemption. Currently,amount that we may pay to redeem stock will be the redemption price set forthin the following table which is based upon the number of years the stock isheld:

 
| **Number Years  Held**            | ** ** | **Redemption Price**        |
|-----------------------------------|------------|-----------------------------|
| Less than 1                       |       | No Redemption Allowed       |
| 1 or more but less than 2         |       | 90% of your purchase price  |
| 2 or more but less than 3         |       | 95% of your purchase price  |
| Less than 3 in the event of death |       | 100% of your purchase price |
| 3 or more but less than 5         |       | 100% of your purchase price |
| 5 or more                         |       | Estimated liquidation value |

 

The estimated liquidationvalue for the repurchase of shares of stock held for 5 or more years will bedetermined by our Advisor or another person selected for such purpose and willbe approved by our board of directors. The stock repurchase price is subject toadjustment as determined from time to time by our board of directors. At notime will the stock repurchase price exceed the price at which we are offeringour common stock for sale at the time of the repurchase.

 

During our initial publicoffering and each of the first five years following the closing of theoffering, we do not intend to redeem more than the lesser of (i) thenumber of shares that could be redeemed using the proceeds from ourdistribution reinvestment plan or (ii) 5% of the number of sharesoutstanding at the end of the prior calendar year.

 

**Stockholders**

 

As of March 7,2008, we had 100 shares of common stock outstanding owned of record by a singleholder.

 

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**Distributions**

 

On November 6,2007, our board of directors declared a daily dividend on our common stock thatwas to commence on the date that we accepted subscriptions for the purchase ofthe minimum offering amount of 100,000 shares of our common stock in theOffering, if such date were to occur prior to January 31, 2008. Thedividends were to be calculated based on stockholders of record each day duringthe period from the initial subscription acceptance date through January 31,2008 at a rate of $0.0016438 per share per day. Such daily dividends, if paideach day for a 365-day period, would equate to a 6.0% annualized rate based ona purchase price of $10.00 per share. However, because we did not acceptsubscriptions for the purchase of the minimum offering amount in our Offeringprior to January 31, 2008 the amount of the distribution was zero.

 

Declaration of distributions is at the discretion ofour board of directors and our board will determine the amount of distributionson a regular basis. The amount of distributions will depend on our funds fromoperations, financial condition, capital requirements, annual distributionrequirements under the REIT provisions of the Internal Revenue Code and otherfactors our board of directors deems relevant.

 

Following our election of REIT status for federalincome tax purposes beginning for the tax year ending December 31, 2008,we will be required to distribute 90% of our REIT taxable income on an annualbasis.

 

**RecentSales of Unregistered Securities**

 

In connection with our incorporation, on November 14,2006 we issued 100 shares of our common stock to Terry G. Roussel, anaffiliate of our Advisor, for $1,000 cash in a private offering exempt from theregistration requirements pursuant to Section 4(2) of the SecuritiesAct of 1933, as amended.

 

**Use ofProceeds from Registered Securities**

 

Our registrationstatement (SEC File No. 333-139704)for our initial public offering of up to 40,000,000 shares of our commonstock at $10.00 per share and up to 10,000,000 additional shares at $9.50per share pursuant to our distribution reinvestment plan was declared effectiveon August 10, 2006. The aggregate offering amount of the shares registeredfor sale in our initial public offering, assuming the maximum number of sharesis sold, is $400,000,000.We had not raised the minimum offering amount of$1,000,000 as of December 31, 2007. The offering is ongoing. As of December 31,2007 the Advisor and its affiliates had incurred approximately $2.4 million inorganization and offering costs in connection with the offering., Until weraise the minimum offering amount of $1,000,000 we have no obligation toreimburse our Advisor for these costs. In no event will we have obligation toreimburse our Advisor for organization and offering costs (excluding salescommission, dealer manager fees and due diligence expense allowance) totalingin excess of 3.5% of the gross proceeds from the primary offering.

 

**EquityCompensation Plans**

 

Wehave adopted an Employee and Director Long-Term Incentive Plan to (i) provideincentives to individuals chosen to receive share-based awards because of theirability to improve operations and increase our profits; (ii) encourageselected persons to accept or continue employment with us or our Advisor or oneof our other affiliates; and (iii) increase the interest of ourindependent directors in our welfare through their participation in the growthin the value of our common stock. The total number of shares of common stock wehave reserved for issuance under the Employee and Director Long-Term IncentivePlan is equal to 10% of our outstanding shares at any time. No awards have beengranted under the plan. In connection with the registration of our Offering, wehave undertaken not to issue options to our independent directors, eitherpursuant to the Employee and Director Long-Term Incentive Plan or any successorplan, unless we also make options available to the public on the same terms. Wehave no timetable for the grant of any awards under the Employee and DirectorLong-Term Incentive Plan. Our Employee and Director Long-Term Incentive Planwas approved prior to the commencement of our ongoing Offering by our board ofdirectors and initial stockholder, Terry Roussel.

 

**IssuerPurchases of Equity Securities**

 

There were noshares eligible for repurchase under our stock repurchase program during 2007and, accordingly, no shares were purchased during 2007.

 

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**ITEM 6. SELECTED FINANCIAL DATA**

 

The following should be read with the sections titled “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andthe consolidated financial statements and the notes thereto.

 
| ** **                           | ** ** | **December 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|--------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| **Balance  Sheet Data:**             | ** ** | ** **                 | ** ** | ** **                 | ** ** |
| Total assets                         |       | $                          | 158,000    |                       | $          | 201,000 |   |
| Investments in  real estate, net     |       | —                     |       | —                     |       |
| Stockholders’  equity (deficit) |       | (132,000                   | )          | 1,000                      |       |
|                                      |            |                            |            |                            |            |  |  |

 
| ** **                                          | ** ** | **December 31, 2007** | ** ** | **October 16 (date of inception to December 31, 2006** | ** ** |
|-----------------------------------------------------|------------|----------------------------|------------|-----------------------------------------------------------------------|------------|
| **Operating  Data:**                                | ** ** | ** **                 | ** ** | ** **                                                            | ** ** |
| Revenues                                            |       | $                          | —     |                                                                  | $          | — |   |
| General and  administrative expense                 |       | 209,000                    |       | —                                                                |       |
| Interest income,  net                               |       | 3,000                      |       | —                                                                |       |
| Minority  interest                                  |       | (73,000                    | )          | —                                                                |       |
| Net loss                                            |       | $                          | (133,000   | )                                                                     | $          | — |   |
|                                                |       |                       |       |                                                                  |       |
| Loss per common  share, basic and diluted (1)  |       | $                          | (1,330     | )                                                                     | $          | — |   |
|                                                |       |                       |       |                                                                  |       |
| Dividends  declared                                 |       | $                          | —     |                                                                  | $          | — |   |
| Dividends per  common share (1)                     |       | $                          | —     |                                                                  | $          | — |   |
| Weighted average  number of shares outstanding (1): |       |                       |       |                                                                  |       |
| Basic and  diluted                                  |       | 100                        |       | 100                                                                   |       |
|                                                |       |                       |       |                                                                  |       |
| **Other  Data:**                                    | ** ** | ** **                 | ** ** | ** **                                                            | ** ** |
| Cash flows used  in operating activities            |       | $                          | (116,000   | )                                                                     | $          | — |   |

 

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(1)          Net loss and dividends pershare are based upon the weighted average number of shares of common stockoutstanding.

 

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**ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussionshould be read in conjunction with our consolidated financial statements andnotes appearing elsewhere in this Form 10-K.

 

**Overview**

 

We wereincorporated on October 16, 2006 for the purpose of engaging in thebusiness of investing in and owning commercial real estate.

 

As of December 31,2007, we had not received any proceeds from the initial public offering of ourcommon stock and had not acquired any real estate assets. Accordingly, theresults of operations for the years ended December 31, 2007 and the periodfrom October 16, 2006 (date of inception) through December 31, 2006are indicative of an early-stage enterprise. We have no paid employees and areexternally advised and managed by Cornerstone Leveraged Realty Advisors, LLC.

 

**Resultsof Operations**

 

We did notcommence real estate operations during the period from inception (October 16,2006) to December 31, 2007, as we had not received and accepted theminimum subscription of $1,000,000 before the end of the period. Our operatingresults for the twelve months ended December 31, 2007 consisted primarilyof general and administrative expenses associated with insurance and thirdparty professional, legal and accounting fees related to our periodic reportingrequirements under the Securities Act of 1934. General and administrativeexpenses were $209,000 during the year ended December 31, 2007 andconsisted primarily of insurance and professional and directors fees associatedwith activities of our board of directors.

 

Interest incomenet of interest expense was $3,000 during the year ended December 31,2007, which is primarily attributable to the cash in an interest bearingaccount resulting from the investment in our operating partnership by ourAdvisor during 2006.

 

As a result of theabove items, net loss for the year ended December 31, 2007 was ($133,000)or ($1,330) per basic and diluted share.

 

**Liquidityand Capital Resources**

 

We are dependenton our Advisor to fund our organization and offering activities. As of the dateof this report, we are relying on our Advisor because we have not raisedsufficient capital to pay these expenses and because the amount we can spend onorganization and offering expenses (including sales commissions, dealer managerfee and due diligence expense allowance) is limited to 13.5% of the grossproceeds from this Offering. Our Advisor will pay those expenses on ourbehalf.  We will reimburse our Advisor for expenses paid on our behalfusing the gross proceeds of this offering subject to the 13.5% limitation describedabove. Our Advisor will pay all of our organization and offering expenses whichare in excess of the 13.5% limitation.

 

We will not relyon advances from our Advisor to acquire properties but our Advisor and itsaffiliates may loan funds to special purpose entities which may acquireproperties on our behalf pending our raising sufficient proceeds from thisoffering to purchase the properties from the special purpose entity.

 

Our Advisor isnewly formed, has limited capitalization, has incurred losses since itsinception and is continuing to incur significant losses. Our Advisor must raisefunds through the sale of its own debt or equity securities, or obtainfinancial support from its affiliates or sole member, to obtain the cashnecessary to provide these advances. There can be no assurance as to the amountor timing of our Advisor’s receipt of funds. Adverse changes in the financialcondition of our Advisor could adversely affect us. If our Advisor’s financialcondition affects the amount of funds available to us for organization andoffering activities, our ability to raise funds in this Offering could beadversely affected. CIP Leveraged Fund Advisors, LLC, the sole and managingmember of our Advisor, has limited capitalization, has incurred significant lossessince its inception and is continuing to incur significant losses.

 

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We will requirefunds for property acquisitions, either directly or through investmentinterests, for paying operating expenses and distributions, and for payinginterest on our outstanding indebtedness, if any. Generally, cash fromoperations will be used to pay for items other than property acquisitions, andthe proceeds from the public offerings of our stock and debt financings, if any,will be used to fund property acquisitions.

 

We intend to ownour core plus properties with low to moderate levels of debt financing. We willincur moderate to high levels of indebtedness when acquiring our value-addedand opportunistic properties and possibly other real estate investments. Duringthe offering period, we intend to use debt financing to facilitate ouracquisitions of properties in anticipation of receipt of offeringproceeds.  The debt levels on core plus properties during the offering periodmay exceed the long-term target range of debt percentages on these types ofproperties.  However, we intend to reduce the percentage to fall withinthe 25% to 50% range no later than the end of this Offering.  Currently,we have no credit facilities in place, but intend to locate adequate debtfinancing as appropriate in conjunction with our investment policies. To theextent sufficient proceeds from this Offering, debt financing, or a combinationof the two are unavailable to repay acquisition debt financing down to thetarget ranges within a reasonable time as determined by our board of directors,we will endeavor to raise additional equity or sell properties to repay suchdebt so that we will own our properties with low to moderate levels of permanentfinancing. In the event that this Offering is not fully sold, our ability todiversify our investments may be diminished.

 

During the periodbetween the execution of the purchase contract and the satisfaction of anyclosing conditions, such as completion of financing arrangements, if any,review of the title insurance commitment, an appraisal, an environmentalanalysis and other due diligence, we may decide to temporarily invest anyunused proceeds from the offering in certain investments that could yield lowerreturns than the properties. These lower returns may affect our ability to makedistributions.

 

Potential futuresources of capital include proceeds from future equity offerings, proceeds fromsecured or unsecured financings from banks or other lenders, proceeds from thesale of properties and undistributed funds from operations. If necessary, wemay use financings or other sources of capital at the discretion of our boardof directors

 

**Election as a REIT**

 

We intend to electto be taxed as a REIT under the Internal Revenue Code of 1986, as amended, forthe year ended December 31, 2008. Under the Internal Revenue Code of 1986,we will not be subject to federal income tax on income that we distribute toour stockholders. REITs are subject to numerous organizational and operationalrequirements in order to avoid taxation as a regular corporation, including arequirement that they generally distribute at least 90% of their annual taxableincome to their stockholders. If we fail to qualify for taxation as a REIT inany year, our income will be taxed at regular corporate rates, and we may beprecluded from qualifying for treatment as a REIT for the four-year periodfollowing our failure to qualify. Our failure to qualify as a REIT could resultin us having a significant liability for taxes.

 

**OtherLiquidity Needs**

 

***Property Acquisitions***

 

We expect topurchase properties and have expenditures for capital improvements, tenantimprovements and lease commissions in the next twelve months; however, thoseamounts cannot be estimated at this time. We cannot be certain however, that wewill have sufficient funds to make any acquisitions or related capitalexpenditures.

 

***Debt Service Requirements***

 

As of December 31,2007, we were not subject to any long term debt arrangements nor did we havecommitments from any financial institutions to provide debt financing to us.

 

***Contractual Obligations***

 

As of December 31,2007, we had no contractual obligations.

 

***Off-Balance Sheet Arrangements***

 

There are nooff-balance sheet transactions, arrangements or obligations (includingcontingent obligations) that have, or are reasonably likely to have, a currentor future material effect on our financial condition, changes in the financialcondition, revenues or expenses, results of operations, liquidity, capitalexpenditures or capital resources.

 

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**Inflation**

 

Although the realestate market has not been affected significantly by inflation in the recentpast due to the relatively low inflation rate, we expect that the majority ofour tenant leases will include provisions that would protect us to some extentfrom the impact of inflation. Where possible, our leases will includeprovisions for rent escalations and partial reimbursement to us of expenses.Our ability to include provisions in the leases that protect us againstinflation is subject to competitive conditions that vary from market to market.

 

**PotentialProperty Acquisitions**

 

We are notcurrently considering any specific potential property acquisitions.

 

**CriticalAccounting Policies**

 

The preparation offinancial statements in accordance with accounting principles generallyaccepted in the United States of America, or GAAP, requires us to makeestimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities. We believe that our critical accounting policies are thosethat require significant judgments and estimates such as those related to realestate purchase price allocation, evaluation of possible impairment of realproperty assets, revenue recognition and valuation of receivables, and incometaxes. These estimates are made and evaluated on an on-going basis usinginformation that is currently available as well as various other assumptionsbelieved to be reasonable under the circumstances. Actual results could varyfrom those estimates, perhaps in material adverse ways, and those estimatescould be different under different assumptions or conditions.

 

***Real Estate Purchase Price Allocation***

 

We account for allacquisitions in accordance with Financial Accounting Standards Board’s (“FASB”)Statement of Financial Accounting Standard (“SFAS”) No. 141, “BusinessCombinations” (“FAS 141”).  Upon acquisition of a property, weallocate the purchase price of the property based upon the fair value of theassets acquired, which generally consist of land, buildings, site improvements,tenant improvements, leasing commissions and intangible assets includingin-place leases and above market and below market leases.  We allocate thepurchase price to the fair value of the tangible assets of an acquired propertyby valuing the property as if it were vacant. The value of the building isdepreciated over an estimated useful life of 39 years.

 

The purchase price isfurther allocated to in-place lease values based on management’s evaluation ofthe specific characteristics of each tenant’s lease and our overallrelationship with the respective tenant.  The value of in-place leaseintangibles, which is included as a component of investments in real estate, isamortized to expense over the remaining lease term.

 

Acquired above and belowmarket leases are valued based on the present value of the difference betweenprevailing market rates and the in-place rates over the remaining lease term.The value of acquired above and below market leases is amortized over theremaining non-cancelable terms of the respective leases as an adjustment torental revenue on our condensed consolidated statements of operations.

 

We amortize the value ofin-place leases and above and below market leases over the initial term of therespective leases. Should a tenant terminate its lease, the unamortized portionof the above or below market lease value will be charged to revenue.  If a lease is terminated prior to itsexpiration, the unamortized portion of the tenant improvements, leasingcommissions, intangible lease assets or liabilities and the in-place leasevalue will be immediately charged to expense.

 

***Evaluation of Possible Impairment of Real Property Assets***

 

Managementwill continually monitor events and changes in circumstances that couldindicate that the carrying amounts of the our real estate assets, includingthose held through joint ventures, may not be recoverable. When indicators ofpotential impairment are present that indicate that the carrying amounts ofreal estate assets may not be recoverable, we will assess the recoverability ofthe real estate assets by determining whether the carrying value of the realestate assets will be recovered through the undiscounted future operating cashflows expected from the use of the asset and its eventual disposition. In theevent that such expected undiscounted future cash flows do not exceed thecarrying value, we will adjust the real estate assets to the fair value andrecognize an impairment loss.

 

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Projectionsof expected future cash flows require us to estimate future market rentalincome amounts subsequent to the expiration of current lease agreements,property operating expenses, discount rates, the number of months it takes tore-lease the property and the number of years the property is held forinvestment. The use of certain assumptions in the future cash flows analysiswould result in an incorrect assessment of the property’s future cash flows andfair value and could result in the overstatement of the carrying value of ourreal estate assets and net income if those assumptions ultimately prove to beincorrect.

 

***Revenue Recognition and Valuation of Receivables***

 

Our revenues, which willbe comprised largely of rental income, will include rents reported on astraight-line basis over the initial term of the lease. Since our leasesmay provide for free rent, lease incentives, or other rental increases atspecified intervals, we will be required to straight-line the recognition ofrevenue, which will result in the recording of a receivable for rent not yetdue under the lease terms. Accordingly, our management will be required todetermine, in its judgment, to what extent the unbilled rent receivableapplicable to each specific tenant is collectible. Management will reviewunbilled rent receivable on a quarterly basis and take into consideration thetenant’s payment history, the financial condition of the tenant, businessconditions in the industry in which the tenant operates and economic conditionsin the area in which the property is located. In the event that thecollectability of unbilled rent with respect to any given tenant is in doubt,we will record an increase in our allowance for doubtful accounts or record adirect write-off of the specific rent receivable.

 

***Income Taxes***

 

Weexpect to make an election to be taxed as a REIT for federal income taxpurposes beginning with its taxable year ending December 31, 2008. Toqualify as a REIT, we must meet certain organizational and operationalrequirements, including a requirement to currently distribute at least 90% ofthe REIT’s ordinary taxable income to stockholders. As a REIT, we generallywill not be subject to federal income tax on taxable income that it distributesto its stockholders. If we fail to qualify as a REIT in any taxable year, wewill then be subject to federal income taxes on our taxable income at regularcorporate rates and will not be permitted to qualify for treatment as a REITfor federal income tax purposes for four years following the year during whichqualification is lost unless the Internal Revenue Service granted us reliefunder certain statutory provisions. Such an event could materially adverselyaffect our net income and net cash available for distribution to stockholders.However, we believe that we will be organized and operate in such a manner asto qualify for treatment as a REIT, beginning with our taxable year ending December 31,2008, and intend to operate in the foreseeable future in such a manner so thatwe will remain qualified as a REIT in subsequent tax years for federal incometax purposes.

 

**Recently Issued Accounting Pronouncements**

 

In July 2006,the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48,Accounting for Uncertainty in Income Taxes, an interpretation of FASB StatementNo. 109, (“FIN 48”), which clarifies the relevant criteria andapproach for the recognition, derecognition, and measurement of uncertain taxpositions. FIN 48 is effective for fiscal years beginning after December 15,2006.  We adopted FIN 48 as of January 1, 2007 and concluded thatthere was no material impact on our consolidated financial statements.

 

In September 2006, theFASB issued SFAS No.  157, “Fair ValueMeasurements” (“SFAS 157”), which defines fair value, establishes a frameworkfor measuring fair value in generally accepted accounting principles andexpands disclosures about fair value measurements to increase consistency andcomparability of fair value measurements. In February 2008, the FASB issued FASB Staff Position SFAS 157-1, *Application of FASB Statement No. 157 to FASB Statement No. 13 andOther Accounting Pronouncements That Address Fair Value Measurements forPurposes of Lease Classification or Measurement under Statement 13*(“FSP FAS 157-1”).  FSP FAS 157-1 defersthe effective date of SFAS 157 for all non-financial assets and non-financialliabilities, except those that are recognized or disclosed at fair value in thefinancial statements on a recurring basis. FSP FAS 157-1 also excludes from thescope of SFAS 157 certain leasing transactions accounted for under Statement ofFinancial Accounting Standards No. 13, *Accounting for Leases.*  The Company adopted SFAS 157 and FSP FAS157-1 on a prospective basis effective January 1, 2008. The adoption of SFAS157 and FSP FAS 157-1 is not expected to have a material impact on ourconsolidated financial statements.

 

In February 2007,the FASB issued SFAS No. 159, “*Fair Value Option forFinancial Assets and Financial Liabilities*” (“SFAS 159”). ThisStatement permits entities to choose to measure many financial instruments andcertain other items at fair value. The objective is to improve financialreporting by providing entities with the opportunity to mitigate volatility inreported earnings caused by measuring related assets and liabilitiesdifferently without having to apply complex hedge accounting provisions. SFAS159 is effective for fiscal years beginning after November 15, 2007 (ourfiscal year beginning January 1, 2008). The adoption of this standard isnot expected to have a material effect on our consolidated financialstatements.

 

In December 2007,the FASB issued SFAS No. 141 (R), “*BusinessCombinations*” (“SFAS141(R)”).  In summary, SFAS 141(R) requires the acquirer of abusiness combination to measure at fair value the assets acquired, theliabilities assumed, and any noncontrolling interest in the acquiree at theacquisition date, with limited exceptions.  The standard is effectivefor fiscal years beginning after December 15, 2008, and is to be appliedprospectively, with no earlier adoption permitted.  The adoptionof this standard may have an impact on the accounting for certain costs relatedto our future acquisitions.

 

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In December 2007,FASB issued Statements No. 160, “*Noncontrolling Interestsin Consolidated Financial Statements*” (“SFAS 160”), an amendment toAccounting Research Board No. 51 SFAS 160 objective is to improve therelevance, comparability and transparency of financial information that areporting entity provides in its consolidated financial statements. The key aspectsof SFAS 160 are (i) the minority interests in subsidiaries should bepresented in the consolidated balance sheet within equity of the consolidatedgroup, separate from the parent’s shareholders’ equity, (ii) acquisitionsor dispositions of noncontrolling interests in a subsidiary that do not resultin a change of control should be accounted for as equity transactions, (iii) aparent recognizes a gain or loss in net income when a subsidiary isdeconsolidated, measured using the fair value of the non-controlling equityinvestment, (iv) the acquirer should attribute net income and eachcomponent of other comprehensive income between controlling and noncontrollinginterests based on any contractual arrangements or relative ownershipinterests, and (v) a reconciliation of beginning to ending total equity isrequired for both controlling and noncontrolling interests. SFAS 160 iseffective for fiscal years beginning on or after December 15, 2008 andshould be applied prospectively. We are currently evaluating the provisions forSFAS 160 to determine the potential impact, if any; the adoption will have onour financial position or results of operations.

 

**ITEM 7A. QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Market riskincludes risks that arise from changes in interest rates, foreign currencyexchange rates, commodity prices, equity prices and other market changes thataffect market sensitive instruments. We invest our cash and cash equivalents ingovernment backed securities and FDIC insured savings account which, by itsnature, is subject to interest rate fluctuations.

 

**ITEM 8. FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

See the indexincluded at Item 15. Exhibits, Financial Statement Schedules.

 

**ITEM 9. CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None

 

**ITEM 9A.CONTROLS AND PROCEDURES**

 

We maintaindisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in our Exchange Act reports is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms, and that such information is accumulated and communicated to our seniormanagement, including our chief executive officer and chief financial officer,as appropriate, to allow timely decisions regarding required disclosure. Indesigning and evaluating the disclosure controls and procedures, managementrecognizes that any controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredcontrol objectives, and management is required to apply its judgment inevaluating the cost-benefit relationship of possible controls and procedures.

 

We arein the process of developing and implementing a formal set of internal controlsand procedures for financial reporting as required by the Sarbanes-Oxley Act of2002. The efficacy of the steps we have taken to date and steps we are still inthe process of completing is subject to continued management review supportedby confirmation and testing by management and by our auditors. We anticipatethat additional changes may be made to our internal controls and procedures. Otherthan the foregoing initiatives, no change in our internal control overfinancial reporting occurred during the quarter ended December 31,2007that has materially affected, or is reasonably likely to affect, our internalcontrol over financial reporting.

 

Subjectto the limitations notes above, our management, with the participation of ourchief executive officer and chief financial officer, has evaluated theeffectiveness of the design and operation of our disclosure controls andprocedures (as defined in Rules 13a-15(e) under the Securities Exchange Act of1934) as of the end of the fiscal year covered by this Annual Report on Form 10-K.Based on this evaluation, the chief executive officer and chief financialofficer have concluded that, as of such date, our disclosure controls andprocedures were effective to meet the objectives for which they were designed andoperate at a reasonable assurance level.

 

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Itshould be noted that any system of controls, however well designed andoperated, can provide only reasonable, and not absolute, assurance that theobjectives of the system are met. In addition, the design of any control systemis based in part upon certain assumptions about the likelihood of futureevents. Because of these and other inherent limitations of control systems,there can be no assurance that any design will succeed in achieving its statedgoals under all potential future conditions.

 

Thisannual report does not include a report of management’s assessment regardinginternal control over financial reporting or an attestation report of thecompany’s registered public accounting firm due to a transition periodestablished by the rules of the Securities and Exchange Commission fornewly public companies.

 

**ITEM 9B. OTHER INFORMATION**

 

None.

 

**PART III**

 

**ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**

 

We have provided belowcertain information about our executive officers, directors and directornominees. Our directors serve for a term of one year or until their successorsare duly elected and qualified. Our executive officers serve at the pleasure ofour board of directors and have no fixed term of office.  We intend topurchase key man life insurance to cover transition and replacement costs forour key executive officers.

 
| **Name**            | ** ** | **Age*** | ** ** | **Positions**                                    |
|---------------------|------------|----------|------------|--------------------------------------------------|
| Terry G. Roussel    |       | 54       |       | President, Chief  Executive Officer and Director |
| Sharon C. Kaiser    |       | 63       |       | Chief Financial Officer                          |
| Dominic J. Petrucci |       | 43       |       | Chief Operating Officer                          |
| Robert C. Peterson  |       | 48       |       | Chief Investment  Officer                        |
| Alfred J. Pizzurro  |       | 51       |       | Senior Vice President  and Secretary             |
| Barry A. Chase      |       | 52       |       | Director                                         |
| Steven M. Pearson   |       | 59       |       | Director                                         |
| James M. Skorheim   |       | 56       |       | Director                                         |
| Vince T. Evans      |       | 52       |       | Director                                         |

 

***Terry G. Roussel*** is one of thefounding stockholders of the Cornerstone-related entities that commencedoperations in 1989. Mr. Roussel has been our President and Chief ExecutiveOfficer and a director since October 2006 and is the promoter of thecompany by initiating the founding and organizing of our business. Mr. Rousselis also the Chief Executive Officer and President of Cornerstone CoreProperties REIT, Inc. and of Cornerstone Leveraged Realty Advisors, LLC,our Advisor. Since 1989, Mr. Roussel has served as the President, ChiefExecutive Officer, a Director and the majority shareholder of CornerstoneVentures, Inc., an affiliate of our Advisor. Mr. Roussel is also aprincipal and the majority shareholder of Pacific Cornerstone Capital, Inc.,the dealer-manager for this offering. He is responsible for strategic planningand policy. Under Mr. Roussel’s direction, Cornerstone and its affiliatesformed ten separate real estate investment funds and joint ventures. In 1993,Cornerstone and its affiliates became managing joint venture partner with KollCapital Markets Group, Inc., a wholly owned subsidiary of Koll ManagementServices, Inc. (now owned by CB Richard Ellis).

 

As managing partner ofthe above-described funds and joint ventures, Cornerstone and its affiliateswere responsible for the acquisition, operation, leasing, and disposition ofall jointly owned properties between Cornerstone and Koll. In connection withacquiring properties for the account of these joint ventures, Mr. Rousselpersonally supervised the acquisition of each property, initiated and directedthe business plan for each property, and arranged debt and equity financing forthe acquisition of each property.

 

In 1985, Mr. Rousselstarted the Special Investments Group, a new division within Bank of America’sCapital Markets Group which provided real estate investment opportunities tothe bank’s wealthiest private banking clients. Between 1980 and 1985, Mr. Rousselwas employed by Bateman Eichler, Hill Richards, Inc., a regionalsecurities firm headquartered in Los Angeles, California. In this capacity, Mr. Rousselwas promoted to First Vice President and Manager of the partnership financedepartment where he was responsible for the due diligence and marketing of allpublicly registered real estate funds offered by the firm.

 

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Mr. Rousselgraduated with honors from California State University at Fullerton in 1976with a B.A. in Business Administration with a concentration in Accounting.Subsequent to graduation, Mr. Roussel joined the accounting firm of ArthurAndersen & Co. as an auditor and later transferred to the taxdepartment of Arthur Young & Co., the predecessor firm to Ernst &Young. Mr. Roussel became a Certified Public Accountant in 1979.

 

***Sharon C. Kaiser*****joined us in October 2006 as ourChief Financial Officer. She is also the Chief Financial Officer of the Advisorto Cornerstone Core Properties REIT, Inc. and in December 2006, shebecame the Chief Financial Officer of Cornerstone Leveraged Realty Advisors,LLC.  Ms. Kaiser is responsible for our finance and accounting.

 

Prior to joining theCornerstone-related entities in July 2005, Ms. Kaiser was Director ofFinancial Operations for Westfield America, Inc., an owner, manager anddeveloper of regional shopping centers and the American subsidiary of thelargest retail property group in the world by equity marketcapitalization.  From 1999 to 2002, Ms. Kaiser served as ChiefFinancial Officer of The StayWell Company, a subsidiary of Vivendi Universal,and from 1995 to 1999; she served as Chief Financial Officer and Senior VicePresident of HemaCare Corporation, a publicly traded biomedical company. Herresponsibilities included financial accounting and reporting, informationtechnology, investor relations and human resources, as well as strategicplanning and acquisition due diligence and integration.

 

Before joining HemaCareCorporation, Ms. Kaiser served as the Chief Financial Officer of apublicly-traded (AMEX) REIT sponsored by The Koll Company. She started hercareer with Arthur Andersen and Co., leaving as a senior manager.

 

Ms. Kaiser holds aBachelor of Science degree in Business Administration from the University ofSouthern California and has been a Certified Public Accountant since 1981.

 

***Dominic J. Petrucci*** became our ChiefOperating Officer in October 2006 and is also the Chief Operating Officerof Cornerstone Core Properties REIT, Inc., our Advisor and CornerstoneVentures, Inc. Mr. Petrucci is responsible for overseeing all ouroperations.

 

Prior to joiningCornerstone Ventures in 2002, Mr. Petrucci served since 1998 as DivisionPresident of Koll Development Company. In this capacity he managed thecommercial real estate development activities for a 2,800,000 square footportfolio. Mr. Petrucci’s responsibilities included business development,divisional oversight of operations and administration, and participation on KollDevelopment Company’s Executive Committee and Investment Committee.

 

Mr. Petrucci was aVice President for Kitchell Development Company and Kitchell Corporation from1996 to 1998. As Vice President for Kitchell Development Company, he oversawKitchell’s real estate development operations throughout the western UnitedStates. As Vice President — Finance for Kitchell Corporation, Mr. Petrucciprovided total financial oversight of their domestic and internationalconstruction activities and managed the property management, financialservices, human resources, and risk management departments for Kitchell($300,000,000 annual revenues).

 

From 1990 until early1996, Mr. Petrucci worked with the Koll organization in variouscapacities. He was Chief Financial Officer and Corporate Secretary for KollConstruction, Vice President — Finance for Koll International, and GroupController for Koll Development. In his capacities with Kitchell and Koll, Mr. Petrucciwas involved in the origination and restructuring of nearly $1,000,000,000 indebt and equity investments in addition to participation in the marketing andselling of nearly $300,000,000 of property.

 

Mr. Petrucci beganhis career in the real estate group at KPMG Peat Marwick in Los Angeles wherehe earned a Certified Public Accountant designation. Mr. Petrucci earnedhis Bachelor of Science degree in Commerce, with an accounting major from RiderUniversity in Lawrenceville, New Jersey.

 

***Robert C. Peterson*** has been our ChiefInvestment Officer and Chief Investment Officer of our Advisor since December 2006. Since 2004, Mr. Peterson has also served as the Chief Investment Officerof Cornerstone Core Properties REIT, Inc. and of the Advisor ofCornerstone Core Properties REIT, Inc. In September 2005, Mr. Petersonjoined Cornerstone Ventures, Inc. as a full-time employee.  Prior tojoining Cornerstone Ventures, Inc. on a full-time basis, Mr. Petersonserved as a consultant to Cornerstone Ventures, Inc. beginning in November 2004and as a director of Cornerstone Ventures, Inc. since 1998.

 

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Mr. Peterson isresponsible for overseeing Cornerstone’s real estate activities includingacquisitions, asset management and asset disposition.  In addition to Mr. Peterson’semployment with Cornerstone, from November 2003 through September 2005,Mr. Peterson was a principal with RCP Realty Advisors, a private realestate investment firm which acquired properties on behalf of high net worthindividuals.  Mr. Peterson was previously Executive Vice President ofAcquisitions and Dispositions for Koll Bren Schreiber Realty Advisors (“KBS”).In his capacity with KBS, Mr. Peterson was the individual responsible foridentifying, underwriting, acquiring and disposing of real estate opportunitiesin the western half of the United States for KBS. Mr. Peterson was withKBS since its inception in 1992 until 2003.

 

From 1990 to 1992, he wasan officer of Koll Management Services, Inc. (“Koll”), one of the largestmanagers and operators of commercial real estate in the United States. Mr. Petersonwas instrumental in the formation of both the first joint venture between Kolland Cornerstone in 1993 and the second joint venture between Koll andCornerstone in 1995.

 

Mr. Peterson has 24years of real estate investment experience, including a diverse background inacquisitions, financing, and leasing through previous affiliations with KollManagement Services, Meyer Real Estate Advisors, VMS Realty, Inc. and PeatMarwick in Chicago.

 

Mr. Peterson earneda Certified Public Accountant (CPA) designation and is a Certified CommercialInvestment Member (CCIM), Certified Property Manager (CPM) and a licensed RealEstate Broker in the state of California. Mr. Peterson also holds aBachelor’s Degree in Accounting from the University of Illinois.

 

***Alfred J. Pizzurro*** has been our SeniorVice President and Secretary since December 2006. Mr. Pizzurro isalso a Senior Vice President of Cornerstone Core Properties REIT, Inc. andour Advisor as well as a Senior Vice President, a Director and a principal ofCornerstone Ventures, Inc. and Pacific Cornerstone Capital, Inc., thedealer manager for this offering. Mr. Pizzurro joined Cornerstone Ventures, Inc.in April 1998 and has been the individual primarily responsible for CornerstoneVenture’s marketing and new business development activities since that time.

 

Between 1993 and 1998, Mr. Pizzurrowas responsible for business development both domestically and internationallyfor The Joseph Company, a research and development company. From 1986 to 1992,he was the Director of Marketing for a regional real estate company. Mr. Pizzurroserved as a helicopter pilot in the United States Marine Corps between 1979 and1986 where he attained the rank of Captain.

 

Mr. Pizzurroreceived his Bachelor of Science Degree in Communications from ClarionUniversity in 1978.

 

***Barry A. Chase*** is one of ourindependent directors. He has been actively involved in the real estateindustry since 1980.  Mr. Chase is the Co-Founder and ManagingPrincipal of AVP advisors, a real estate investment management firm forinstitutional investors. From 2004 to present, Mr. Chase has worked forAVP advisors. From 2002 to 2003, Mr. Chase was a Principal of PlatinumCapital advisors, and from 1998 to 2002, he was the Executive Vice Presidentand the President of Koll Development Company’s Western Division, where hedeveloped more than nine million square feet of office, industrial, retail andmixed-use projects.

 

Prior to joining the KollDevelopment Company, Mr. Chase held executive level positions with severalnationally recognized real estate companies.  He served as the Presidentof Cushman Investment and Development Company, and the Executive VicePresident, General Counsel and member of the Board of Directors of CushmanRealty Corporation and as the Executive Vice President — Acquisitions ofCT Realty Corporation.  Mr. Chase began his real estate career withSunrise Investment, Inc.  As Executive Vice President and GeneralCounsel of Sunrise, Mr. Chase was in charge of propertyacquisitions/dispositions and capital raising for the firm’s real estateprivate placements.  Mr. Chase attended California State University,Northridge and received his J.D. Degree from the University of San Fernando. Heis an inactive member of the California State Bar.

 

***Steven M. Pearson*** is one of ourindependent directors. He is the Executive Vice President and Chief StrategyOfficer for DAUM Commercial Real Estate.  Mr. Pearson has been withDAUM since 1997 and serves as a key executive responsible for the planning andexecution of the company’s growth initiatives.  Prior to his affiliationwith DAUM, from July 1991 through May 1997, Mr. Pearson servedas Senior Vice President of Coldwell Banker Commercial Affiliates, where heoversaw the design, development, and delivery of all commercial resources forColdwell Banker.

 

Mr. Pearson’sbackground includes 15 years with CB Commercial in Denver, San Francisco andNewport Beach. During his tenure in Denver he was active in the local chapter ofthe National Association of Industrial and Office Parks (NAIOP) and served as amarket expert for several Urban Land Institute (ULI) functions. In SanFrancisco, Mr. Pearson was a vice president for Coldwell Banker InvestmentBanking Services.  In this capacity, he focused on the analysis ofrecapitalization or disposition of larger real estate assets or assetportfolios of institutional owners - primarily industrial and office portfoliosin Denver and Southern California. In Newport Beach, Mr. Pearson worked asan investment specialist focusing primarily on the analysis and sale ofmid-sized institutional property for insurance companies, Savings and Loans,and the RTC.

 

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***James M. Skorheim*** is one of our independentdirectors. He is a CPA, an attorney at law, a Certified Valuation Analyst, aCertified Fraud Examiner and a Certified Forensic Accountant. Since 2005, hehas served as a Principal of the firm Skorheim & Associates, anaccountancy corporation specializing in financial analysis and valuationrelation to commercial damages and losses.  From 2000 to 2005, Mr. Skorheimwas a partner in the certified public accounting and business consulting firmof Moss Adams. LLP. Prior to that, he was a partner of Coleman & Grantand Deloitte & Touche LLP.

 

Mr. Skorheim hastestified in over one hundred business litigation cases at both the federal andstate levels on a variety of business and financial issues. He has also servedas a mediator, arbitrator and accounting neutral in numerous matters. Hisprofessional background and experience includes the handling of accounting,tax, financial and estate planning, business consulting, business valuation,risk management and commercial insurance claims services for both small andfortune 500 companies and their owners and executives. Mr. Skorheim is afrequent lecturer on commercial damages and other financial topics. Mr. Skorheimalso services as of Chairman of our Audit Committee.

 

***VinceT. Evans***is one of our independent directors. He isPresident of Inside Quarters Enterprises an organization providing professionaldevelopment for urban consumers. From 1998 to 2003, Mr. Evans was anindependent consultant to Majestic Realty Company’s development group focusingon urban inner-city projects.

 

Prior to his experiencein commercial real estate development, Mr. Evans spent 16 years with theNational Football League, including working with Commissioner Paul Tagliabue tobring National League Football to Los Angeles. Mr. Evans graduate from theUniversity of Southern California where he was captain of the football team and1977 Rose Bowl Most Valuable Player.

 

**AuditCommittee Financial Expert**

 

Themembers of the Audit Committee are Barry A. Chase, Steven M. Pearson, James M.Skorheim, and Vince T. Evans, all of whom are independent directors. James M.Skorheim is our audit committee financial expert.

 

**Codeof Business Conduct and Ethics**

 

Our board of directors has adopted a Code of BusinessConduct and Ethics, which applies to all of our directors and officers. We havefiled the Code of Business Conduct and Ethics as an exhibit to thisreport.

 

All directors willreceive reimbursement of reasonable out of pocket expenses incurred inconnection with attendance at meetings of the board of directors andcommittees.

 

**ITEM 11. EXECUTIVE COMPENSATION**

 

**Compensationof Executive Officers**

 

Ourexecutive officers do not receive compensation directly from us for servicesrendered to us. Our executive officers are employees of our Advisor and itsaffiliates and are compensated by these entities, in part, for their servicesto us. See Item 13 for a discussion of the fees paid our Advisor and itsaffiliates.

 

**Compensationof Directors**

 

If a director is also oneof our executive officers, we do not pay any compensation for services renderedas a director. The amount and form of compensation payable to our independentdirectors for their service to us is determined by our board of directors,based upon recommendations from our Advisor. Our chief executive officer, Mr. Roussel,manages and controls our Advisor, and through the Advisor, he is involved inrecommending and setting the compensation to be paid to our independentdirectors.

 

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We have provided belowcertain information regarding compensation paid to our directors during fiscalyear 2007.

 
| **Name**           | ** ** | **Fees Earned or Paid in Cash ($)** | ** ** | **All Other Compensation ($)** | ** ** | **Total ($)** | ** ** |
|--------------------|------------|--------------------------------------------------------------|------------|--------------------------------|------------|---------------|------------|
| Terry Roussel (1)  |       | $                                                            | —     |                           | $          | —        |       | $ | — |   |
| Barry A. Chase     |       | 7,000                                                        |       | —                         |       | 7,000         |       |
| Steven M.  Pearson |       | 8,000                                                        |       | —                         |       | 8,000         |       |
| James M.  Skorheim |       | 8,000                                                        |       | —                         |       | 8,000         |       |
| Vince T. Evans     |       | 4,000                                                        |       | —                         |       | 4,000         |       |
|               |       | $                                                            | 27,000     |                           | —     |          | $          | 27,000 |   |
|                    |            |                                                              |            |                                |            |               |            |  |  |  |

 

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(1)     Directors who are also our executiveofficers do not receive compensation for services rendered as a director. 

 

***Cash Compensation***

 

We pay each of ourdirectors who are not employees of our Advisor or its affiliates for attendingboard and committee meetings as follows:

 

·                  $3,000per regularly scheduled board meeting attended in person or by teleconference;

·                  $1,000per regularly scheduled committee meeting attended in person or byteleconference ($1,500 for the audit committee chairperson and $1,250 for othercommittee chairpersons); and

·                  $750per special board meeting attended, whether held in person or byteleconference.

 

All directors receivereimbursement of reasonable out-of-pocket expenses incurred in connection withattendance at meetings of the board of directors and committees.

 

***Equity-BasedCompensation***

 

We have adopted anEmployee and Director Long-Term Incentive Plan pursuant to which we may makeshare-based awards to our independent directors. To date, we have not issuedany awards pursuant to this plan and we have no timetable for the grant of anyawards under the plan. A description of the plan is set forth under Item 5above.

 

**CompensationCommittee Interlocks and Insider Participation**

 

Our compensationcommittee discharges the board’s responsibilities relating to compensation ofour executives and directors, which are limited to administering grants ofstock-based awards in accordance with the Employee and Director Long-TermIncentive Plan. The members of our compensation committee are Barry A. Chase,Steven M. Pearson, James M. Skorheim, and Vince T. Evans, all of whom areindependent directors. To date, no stock-based awards have been issued and wehave no current plan to issue any stock-based awards.

 

We have no compensationcommittee interlocks. A compensation committee interlock would occur if (i) oneour executive officers served as a member of the compensation committee (orother board committee performing equivalent functions) of another entity, oneof whose executive officers served on our compensation committee; (ii) oneof our executive officers served as a director of another entity, one of whoseexecutive officers served on our compensation committee; or (iii) one ofour executive officers served as a member of the compensation committee (orother board committee performing equivalent functions) of another entity, oneof whose executive officers served as one of our directors.

 

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** **

**ITEM 12. SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS**

 

The following table setsforth the beneficial ownership of our stock as of the date of this prospectus.To our knowledge, the sole stockholder beneficially owns our stock, has solevoting power and sole power to convey the stock.

 
| **Name of Beneficial Owner(1)**                      | ** ** | **Number of Shares  Beneficially Owned** | ** ** | **Percent of All  Shares (%)** | ** ** |
|---------------------------------------------------------------------|------------|---------------------------------------------------------|------------|-----------------------------------------------|------------|
| Terry G.  Roussel, President, Chief Executive Officer and Director  |       | 100                                                     |       | 100.0                                         |       |
| Sharon C.  Kaiser, Chief Financial Officer                          |       | —                                                  |       | —                                        |       |
| Dominic J.  Petrucci, Chief Operating Officer                       |       | —                                                  |       | —                                        |       |
| Robert C.  Peterson, Chief Investment Officer                       |       | —                                                  |       | —                                        |       |
| Alfred J.  Pizzurro, Senior Vice President and Secretary            |       | —                                                  |       | —                                        |       |
| Barry A. Chase,  Director                                           |       | —                                                  |       | —                                        |       |
| Steven M.  Pearson, Director                                        |       | —                                                  |       | —                                        |       |
| James M.  Skorheim, Director                                        |       | —                                                  |       | —                                        |       |
| Vince T. Evans,  Director                                           |       | —                                                  |       | —                                        |       |
| All directors,  director nominees and executive officers as a group |       | 100                                                     |       | 100.0                                         | %          |

 

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(1) Theaddress of the beneficial owner is 1920 Main Street, Suite 400, Irvine,California 92614.

 

Thefollowing table provides summary information about securities issuable underour equity compensation plan as of December 31, 2007.

 
| **Plan category**                                           | ** ** | **Number of securities  to be issued upon  exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available  for future issuance  under equity  compensation plans****(1)** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|------------|
|                                                        |       |                                                                                                          |       |                                                                                         |       |                                                                                                                  |       |
| Equity  compensation plans approved by security holders     |       | —                                                                                                        |       | —                                                                                       |       | 5                                                                                                                     |       |
|                                                        |       |                                                                                                          |       |                                                                                         |       |                                                                                                                  |       |
| Equity  compensation plans not approved by security holders |       |                                                                                                          |       |                                                                                         |       |                                                                                                                  |       |
|                                                        |       |                                                                                                          |       |                                                                                         |       |                                                                                                                  |       |
| Total                                                       |       | —                                                                                                        |       | —                                                                                       |       | 5                                                                                                                     |       |

 

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(1)          The number shares authorized for issuancepursuant to the Employee and Director Long-Term Incentive Plan is equal to 5%of our outstanding shares at any time. 

 

**ITEM 13.CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS, AND DIRECTOR INDEPENDENCE.**

 

**OurAdvisor**

 

Our Advisor isCornerstone Leveraged Realty Advisors, LLC. Cornerstone Leveraged RealtyAdvisors, LLC is a recently organized limited liability company that was formedin the State of Delaware on October 17, 2006. Our Advisor has no operatinghistory. Our Advisor has contractual and fiduciary responsibilities to us andour stockholders. At present, there is no affiliate of the Advisor thatperforms redevelopment or new development services. Affiliates of our Advisor,however, employ personnel with such relevant development experience.  Inthe future, affiliates of the Advisor may form a development entity to performthese services for us or we may hire third-party developers.

 

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The executive officers ofCornerstone Leveraged Realty Advisors, LLC are as follows:

 
| **Name**            | ** ** | **Age** | ** ** | **Positions**                          |
|---------------------|------------|---------|------------|----------------------------------------|
| Terry G. Roussel    |       | 54      |       | President and Chief  Executive Officer |
| Sharon C. Kaiser    |       | 63      |       | Chief Financial Officer                |
| Dominic J. Petrucci |       | 43      |       | Chief Operating Officer                |
| Robert C. Peterson  |       | 48      |       | Chief Investment  Officer              |
| Alfred J. Pizzurro  |       | 51      |       | Senior Vice President                  |

 

**Policy Regarding RelatedTransactions**

 

In order to reduceor eliminate certain potential conflicts of interest, a majority of the membersof our independent directors committee, approves all transactions between usand our Advisor or its affiliates.  Prior to entering into a transactionwith an affiliate a majority of the independent directors committee mustconclude that transaction is fair and reasonable to us and on terms andconditions not less favorable to us than those available from unaffiliatedthird parties. Our independent directors committee is authorized to retain itsown legal and financial Advisors at our expense and is empowered to act on anymatter permitted under Maryland law provided that a majority of our independentdirectors first determine that the matter at issue is such that the exercise ofindependent judgment by our Advisor could reasonably be compromised.  Anyconflict-of-interest matters that cannot be delegated to a committee underMaryland law must be acted upon by both the board of directors and a majorityof our independent directors.

 

**CertainRelationships**

 

We will incursubstantial fees and expenses in our organization and offering stage, ouracquisition and operating stage and our property disposition stage. In mostcases, these fees and expenses will be paid to our Advisor or its affiliates,including the dealer manager for our initial public offering.

 

All of themembership interests in our Advisor, Cornerstone Leveraged Realty Advisors,LLC, are owned by Cornerstone Industrial Properties, LLC, which also serves asthe managing member of our Advisor. Cornerstone Ventures, Inc. is themanaging member of Cornerstone Industrial Properties, LLC. Terry G. Roussel,our Chairman, Chief Executive Officer and President, is the Chief ExecutiveOfficer and a Director of our Advisor, as well as the President, ChiefExecutive Officer, a Director and the majority shareholder of CornerstoneVentures, Inc. Mr. Roussel is also a principal and the majorityshareholder of Pacific Cornerstone Capital, Inc., the dealer-manager forour initial public offering. Alfred J. Pizzurro, our Senior Vice President andSecretary is also a shareholder of Pacific Cornerstone Capital, Inc. andCornerstone Ventures, Inc. We will pay fees to our Advisor for servicesprovided to us pursuant to an Advisory agreement and will pay fees andcommissions to Pacific Cornerstone Capital, Inc. the dealer-manager forour initial public offering pursuant to a Dealer Manager Agreement. TheAdvisory agreement and dealer manager agreement are included as exhibits tothis report. The fees that we will pay to our Advisory and dealer manager aresummarized below.

 

*OfferingStage*

 

·                  Sales commissions (payable to ourdealer manager) up to 7% of gross offering proceeds from our primary offering,some or all of which may be re-allowed to participating brokers.

 

·                  Dealer manager fees (payable to ourdealer manager) up to 3% of gross offering proceeds from our primary offering,some or all of which may be re-allowed to participating brokers.

 

·                  Reimbursements to our Advisor or itsaffiliates for organization and offering expenses (including bona fide duediligence expenses) expected to average between 2.5% and 3.5% of grossoffering proceeds from our initial public offering.

 

*Acquisitionand Operating Stage*

 

·                  Property acquisition fees (payable toour Advisor or its affiliates) equal to 2% of the cost of investments foracquisition, including any debt attributable to such investments.

 

·                  Reimbursement of acquisition expensesto our Advisor and its affiliates.

 

42

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·                  Monthly asset management fees(payable to our Advisor) equal to one-twelfth of 1% of the book values of ourassets invested, directly or indirectly, in real estate before non-cashreserves, plus direct and indirect costs and expenses incurred by our Advisorin providing asset management services.

 

·                  Development or Redevelopment fee(payable to our Advisor or its affiliates) in an amount that is usual andcustomary for comparable services rendered to similar projects in thegeographic market of the project, however this fee will not be payable if ourAdvisor or any of its affiliates elects to receive an acquisition fee based onthe cost of such development.

 

·                  Reimbursement of operating expensesincluding our Advisor’s direct and indirect cost of providing administrativeservices.

 

*Listing/Liquidation Stage*

 

·                  Property disposition fees (payable toour Advisor or its affiliates), if our Advisor or its affiliatesperform substantial services in connection with property sales, up to 3%of the price of the properties sold.

 

·                  After stockholders have receivedcumulative distributions equal to $10 per share (less any returns ofcapital) plus cumulative, non-compounded annual returns on net investedcapital, our Advisor will be paid a subordinated participation in net saleproceeds ranging from a low of 5% of net sales provided investors have earnedannualized returns of 6% to a high of 15% of net sales proceeds if investorshave earned annualized returns of 10% or more.

 

·                  Upon termination of the Advisoryagreement, our Advisor will receive the subordinated performance fee due upontermination. This fee ranges from a low of 5% of the amount by which the sum ofthe appraised value of our assets minus our liabilities on the date theAdvisory agreement is terminated plus total dividends (other than stockdividends) paid prior to termination of the Advisory agreement exceeds theamount of invested capital plus annualized returns of 6%, to a high of 15% ofthe amount by which the sum of the appraised value of our assets minus ourliabilities plus all prior dividends (other than stock dividends) exceeds theamount of invested capital plus annualized returns of 10% or more.

 

·                  In the event we list our stock fortrading on a national securities exchange, our Advisor will receive asubordinated incentive listing fee instead of a subordinated participation innet sales proceeds. This fee ranges from a low of 5% of the amount by which themarket value of our common stock plus all prior dividends (other than stockdividends) exceeds the amount of invested capital plus annualized returns of6%, to a high of 15% of the amount by which the sum of the market value of ourstock plus all prior dividends (other than stock dividends) exceeds the amountof invested capital plus annualized returns of 10% or more.

 

**Director Independence**

 

Although our shares arenot listed for trading on any national securities exchange, a majority of themembers of our board of directors, and all of the members of our AuditCommittee and the Independent Directors Committee are “independent” as definedby the New York Stock Exchange. The New York Stock Exchange standards providethat to qualify as an independent director, in addition to satisfying certainbright-line criteria, the board of directors must affirmatively determine thata director has no material relationship with us (either directly or as apartner, shareholder or officer of an organization that has a relationship withus). The board of directors has determined that Barry A. Chase, Steven M.Pearson, James M. Skorheim, and Vince T. Evans each satisfies the bright-linecriteria and that none has a relationship with us that would interfere withsuch person’s ability to exercise independent judgment as a member of theboard. None of these directors has ever served as (or is related to) anemployee of our company or any of our predecessors or acquired companies orreceived any compensation from us or any such other entities except forcompensation directly related to service as a director. Therefore, we believethat all of these directors are independent directors.

 

43

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**ITEM 14. PRINCIPALACCOUNTING FEES AND SERVICES**

 

**Auditand Non-Audit Fees**

 

Deloitte andTouche LLP, the member firms of Deloitte Touche Tohmatsu, and their respectiveaffiliates (collectively, “Deloitte & Touche”),  has served asour independent registered public accounting firm from October 16, 2006(date of inception) and has audited our financial statements for the years endedDecember 31, 2007 and 2006.

 

The following table liststhe fees for services rendered by the independent registered public accountingfirms for 2007 and 2006:

 
| **Services Provided** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
| Audit Fees (1)             |       | $        | 32,000     |     | $          | — |   |
| Audit Related  Fees (2)    |       | —   |       | —   |       |
| Tax Fees (3)               |       | —   |       | —   |       |
| All Other Fees             |       | —   |       | —   |       |
| Total                      |       | $        | 32,000     |     | $          | — |   |

 

----

(1) Audit feesbilled in 2007 consisted of the audit of our annual consolidated financialstatements, a review of our quarterly consolidated financial statements, andstatutory and regulatory audits, consents and other services related to filingswith the SEC.

 

(2) Audit-relatedfees consist of financial accounting and reporting consultations. 

(3) Taxservices consist of tax compliance and tax planning and advice.

 

The Audit Committeepreapproves all auditing services and permitted non-audit services (includingthe fees and terms thereof) to be performed for us by our independent auditor,subject to the de minims exceptions for non-audit services described in Section 10A(i) (1) (B) of the Exchange Act and the rules andregulations of the SEC which are approved by the Audit Committee prior to thecompletion of the audit.

 

44

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**PART IV**

 

**ITEM 15. EXHIBITS ANDFINANCIAL STATEMENT SCHEDULES**

 
| (a) (1) | Financial Statements |
|--------------|----------------------|
|         |                 |
|              |                 | The following financial statements are included in a  separate section of this Annual Report on Form 10-K commencing on  the page numbers specified below: |
|         |                 |   |
|         |                 | Report of  Independent Registered Public Accounting Firm |
|         |                 |   |
|         |                 | Consolidated  Balance Sheets as of December 31, 2007 and December 31, 2006 |
|         |                 |   |
|         |                 | Consolidated  Statements of Operations for the Year Ended December 31, 2007 and Period  from October 16, 2006 (date of inception) to December 31, 2006 |
|         |                 |   |
|         |                 | Consolidated  Statements of Stockholder’s Equity (Deficit) for the Year Ended  December 31, 2007 and Period from October 16, 2006 (date of  inception) to December 31, 2006 |
|         |                 |   |
|         |                 | Consolidated  Statements of Cash Flows for the Year Ended December 31, 2007 and Period  from October 16, 2006 (date of inception) to December 31, 2006 |
|         |                 |   |
|         |                 | Notes to  Financial Statements |
|         |                 |   |
| (2)     | Exhibits             |
|              |                      |  |  |  |

 

The exhibitslisted on the Exhibit Index (following the signatures section of thisreport) are included, or incorporated by reference, in this annual report

 

45

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**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS**

 
| Report of Independent  Registered Public Accounting Firm        | F-2    |
|-----------------------------------------------------------------|--------|
|                                                            |   |
| Consolidated  Balance Sheets                                    | F-3    |
|                                                            |   |
| Consolidated  Statements of Operations                          | F-4    |
|                                                            |   |
| Consolidated  Statements of Stockholder’s Equity (Deficit) | F-5    |
|                                                            |   |
| Consolidated  Statements of Cash Flows                          | F-6    |
|                                                            |   |
| Notes to  Consolidated Financial Statements                     | F-7    |

 

F-1

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

To the Board of Directorsand Stockholders

Cornerstone Growth &Income REIT, Inc.

 

We have auditedthe accompanying consolidated balance sheets of Cornerstone Growth &Income REIT, Inc. and subsidiary (the “Company”) as of December 31,2007 and 2006, and the related consolidated statements of operations,stockholder’s equity (deficit) and cash flows for the year ended December 31,2007 and for the period from October 16, 2006 (date of inception) through December 31,2006. These financial statements are the responsibility of the Company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted ouraudits in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. The Company is not required tohave, nor were we engaged to perform, an audit of its internal control overfinancial reporting. Our audits included consideration of internal control overfinancial reporting as a basis for designing audit procedures that areappropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion,such consolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Cornerstone Growth &Income REIT, Inc. and subsidiary as of December 31, 2007 and 2006,and the results of their operations and their cash flows for the year ended December 31,2007 and for the period from October 16, 2006 (date of inception) through December 31,2006, in conformity with accounting principles generally accepted in the UnitedStates of America.

 

/s/ DELOITTE &TOUCHE LLP

 

Costa Mesa, California

March 14, 2008

 

F-2

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**CORNERSTONE GROWTH & INCOMEREIT, INC. AND SUBSIDIARY**

**CONSOLIDATED BALANCE SHEETS**

**December 31,2007 and 2006**

 
| ** **                                                                                                                                         | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                         | ** ** | **2007**              | ** ** | **2006** | ** ** |
| **ASSETS**                                                                                                                                         |
| Cash and cash  equivalents                                                                                                                         |       | $                     | 85,000     |   | $ | 201,000 |   |
| Prepaid expenses                                                                                                                                   |       | 73,000                |       | — |   |
| Total assets                                                                                                                                       |       | $                     | 158,000    |   | $ | 201,000 |   |
|                                                                                                                                               |       |                  |       |   |   |
| **LIABILITIES,  MINORITY INTEREST AND STOCKHOLDER’S EQUITY (DEFICIT)**                                                                        |
| Liabilities:                                                                                                                                       |       |                  |       |   |   |
| Accounts payable  and accrued expenses                                                                                                             |       | $                     | 115,000    |   | $ | — |   |
| Payable to  related parties                                                                                                                        |       | 48,000                |       | — |   |
| Total  liabilities                                                                                                                                 |       | 163,000               |       | — |   |
|                                                                                                                                               |       |                  |       |   |   |
| Minority  interest                                                                                                                                 |       | 127,000               |       | 200,000 |   |
|                                                                                                                                               |       |                  |       |   |   |
| Commitments and  contingencies (Note 8)                                                                                                            |       |                  |       |   |   |
|                                                                                                                                               |       |                  |       |   |   |
| Stockholder’s  equity (deficit):                                                                                                              |       |                  |       |   |   |
| Preferred stock,  $0.01 par value; 20,000,000 shares authorized; no shares were issued  or outstanding at December 31, 2007 and 2006     |       | —                |       | — |   |
| Common stock,  $0.01 par value; 580,000,000 shares authorized; 100 shares issued and  outstanding at December 31, 2007 and 2006, respectively |       |                  |       |   |   |
| Additional  paid-in capital                                                                                                                        |       | 1,000                 |       | 1,000 |   |
| Accumulated  deficit                                                                                                                               |       | (133,000              | )          | — |   |
| Total  stockholder’s equity (deficit)                                                                                                         |       | (132,000              | )          | 1,000 |   |
| Total  liabilities, minority interest and stockholder’s equity (deficit)                                                                      |       | $                     | 158,000    |   | $ | 201,000 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

F-3

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**CORNERSTONE GROWTH & INCOMEREIT, INC. AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**For the Year Ended December 31,2007 and Period From October 16, 2006 (date of inception) to December 31, 2006**

 
| ** **                                | ** ** | **Year ended December 31,** | ** ** | **October 16, 2006   (date of inception)** | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                                | ** ** | **2007**                                   | ** ** | **to December 31,2006**                         | ** ** |
| Revenues:                                 |       |                                       |       |                                                      |       |
| Rental revenues                           |       | $                                          | —     |                                                      | $          | — |   |
|                                      |       |                                       |       |                                                      |       |
| Expenses:                                 |       |                                       |       |                                                      |       |
| General and  administrative               |       | 209,000                                    |       | —                                                    |       |
|                                      |       | 209,000                                    |       | —                                                    |       |
|                                      |       |                                       |       |                                                      |       |
| Operating loss                            |       | (209,000                                   | )          | —                                                    |       |
|                                      |       |                                       |       |                                                      |       |
| Interest income                           |       | 6,000                                      |       | —                                                    |       |
| Interest expense                          |       | (3,000                                     | )          | —                                                    |       |
| Loss before  minority interest            |       | (206,000                                   | )          | —                                                    |       |
|                                      |       |                                       |       |                                                      |       |
| Minority  interest                        |       | (73,000                                    | )          | —                                                    |       |
| Net loss                                  |       | $                                          | (133,000   | )                                                         | $          | — |   |
|                                      |       |                                       |       |                                                      |       |
| Loss per share -  basic and diluted       |       | $                                          | (1,330     | )                                                         | $          | — |   |
| Weighted average  number of common shares |       | 100                                        |       | 100                                                       |       |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

F-4

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**CORNERSTONE GROWTH & INCOMEREIT, INC. AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OFSTOCKHOLDER’S EQUITY (DEFICIT)**

**Forthe Year Ended December 31, 2007 and Period From October 16, 2006(date of inception) to December 31, 2006**

 
| ** **                                                | ** ** | **Preferred Stock** | ** ** | **Common Stock** | ** ** | ** **         | ** ** | ** **         | ** ** |
|-----------------------------------------------------------|------------|--------------------------|------------|-----------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                                | ** ** | ** **               | ** ** | **Preferred**         | ** ** | ** **         | ** ** | **Common**         | ** ** | **Additional** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | **Number of**       | ** ** | **Stock**             | ** ** | **Number of** | ** ** | **Stock**          | ** ** | **Paid-In** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                                                | ** ** | **Shares**               | ** ** | **Par Value**    | ** ** | **Shares**         | ** ** | **Par Value** | ** ** | **Capital** | ** ** | **Deficit** | ** ** | **Total** | ** ** |
| BALANCE —  October 16, 2006 (date of inception) |       | —                   |       | $                     | —     |               | —     |               | $          | — |   | $ | — |   | $ | — |   | $ | — |   |
| Issuance of  common stock                                 |       | —                   |       | —                |       | 100                |       | —             |       | 1,000 |   | — |   | 1,000 |   |
|                                                      |       |                     |       |                  |       |               |       |               |       |   |   |   |   |   |   |
| BALANCE —  December 31, 2006                    |       | —                   |       | —                |       | 100                |       | —             |       | 1,000 |   | — |   | 1,000 |   |
| Net loss                                                  |       | —                   |       | —                |       | —             |       | —             |       | — |   | (133,000 | ) | (133,000 | ) |
| BALANCE —  December 31, 2007                    |       | —                   |       | $                     | —     |               | 100        |               | $          | — |   | $ | 1,000 |   | $ | (133,000 | ) | $ | (132,000 | ) |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

F-5

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**CORNERSTONE GROWTH & INCOMEREIT, INC. AND SUBSIDIARY**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**For the YearEnded December 31, 2007 and Period From October 16, 2006 (date ofinception) to December 31, 2006**

 
| ** **                                                                   | ** ** | ** **                                 | ** ** | **October 16, 2006**         | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                   | ** ** | ** **                                 | ** ** | **(date of inception)** | ** ** |
| ** **                                                                   | ** ** | **Year Ended December 31,** | ** ** | **to December 31,**     | ** ** |
| ** **                                                                   | ** ** | **2007**                                   | ** ** | **2006**                          | ** ** |
| **Cash  flows from operating activities:**                                   | ** ** | ** **                                 | ** ** | ** **                        | ** ** |
| Net loss                                                                     |       | $                                          | (133,000   | )                                 | $          | — |   |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                       |       |                              |       |
| Minority  interest                                                           |       | (73,000                                    | )          | —                            |       |
| Change in  operating assets and liabilities:                                 |       |                                       |       |                              |       |
| Prepaid expenses                                                             |       | (73,000                                    | )          | —                            |       |
| Payable to  related parties                                                  |       | 48,000                                     |       | —                            |       |
| Accounts payable  and accrued expenses                                       |       | 115,000                                    |       | —                            |       |
| **Net  cash used in operating activities**                                   |       | (116,000                                   | )          | —                            |       |
|                                                                         |       |                                       |       |                              |       |
| **Cash  flows from financing activities:**                                   | ** ** | ** **                                 | ** ** | ** **                        | ** ** |
| Proceeds from  issuance of common stock                                      |       | —                                     |       | 1,000                             |       |
| Minority  interest contribution                                              |       | —                                     |       | 200,000                           |       |
| **Net  cash provided by financing activities**                               |       | —                                     |       | 201,000                           |       |
|                                                                         |       |                                       |       |                              |       |
| Net (decrease)  increase in cash and cash equivalents                        |       | (116,000                                   | )          | 201,000                           |       |
| Cash and cash  equivalents - beginning of period                             |       | 201,000                                    |       | —                            |       |
| Cash and cash  equivalents - end of period                                   |       | $                                          | 85,000     |                              | $          | 201,000 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

F-6

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**CORNERSTONE GROWTH & INCOMEREIT, INC. AND SUBSIDIARY**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**Forthe Year Ended December 31, 2007 and Period From October 16, 2006(date of inception)—December 31, 2006**

 

**1.****              Organization**

 

CornerstoneGrowth & Income REIT, Inc., a Maryland corporation, was formed onOctober 16, 2006 under the General Corporation Law of Maryland for thepurpose of engaging in the business of investing in and owning commercial realestate.  We are newly formed and are subject to the general risksassociated with a start-up enterprise, including the risk of businessfailure.  Subject to certain restrictions and limitations, our business ismanaged by an affiliate, Cornerstone Leveraged Realty Advisors, LLC, a Delawarelimited liability company that was formed on October 16, 2006 (the “Advisor”),pursuant to an Advisory agreement.

 

On November 14,2006, Terry G. Roussel, our President and CEO, purchased 100 shares of commonstock for $1,000 and became our initial stockholder. Our articles of incorporationauthorize 580,000,000 shares of common stock with a par value of $0.01 and20,000,000 shares of preferred stock with a par value of $0.01. We will offer aminimum of 100,000 (the “Minimum Number of Shares”) and a maximum of 50,000,000shares of common stock, consisting of 40,000,000 shares for sale to the public(the “Primary Offering”) and 10,000,000 shares for sale pursuant to the ourdistribution reinvestment plan (collectively, the “Offering”).

 

CornerstoneGrowth & Income Operating Partnership, L.P., a Delaware limitedpartnership (the “Operating Partnership”) was formed on October 17,2006.  At December 31, 2007, we owned 0.50% general partner interestin the Operating Partnership while the Advisor owned a 99.50% limitedpartnership interest.  We anticipate that we will conduct all or a portionof our operations through the Operating Partnership. Our financial statementsand the financial statements of the Operating Partnership are consolidated inthe accompanying condensed consolidated financial statements.  Allsignificant intercompany accounts and transactions have been eliminated inconsolidation.

 

**2.****              Public****Offering**

 

On August 10, 2007,the Securities and Exchange Commission (“SEC”) declared our registrationstatement effective.  We retained Pacific Cornerstone Capital, Inc.(“PCC”), an affiliate of the Advisor, to serve as the dealer manager for theOffering.  PCC is responsible for marketing our shares being offeredpursuant to the Offering.  As of December 31, 2007, we had notexceeded the $1,000,000 offering minimum and, therefore, had not accepted anysubscriptions for shares in the offering.

 

We intend to invest thenet proceeds from the Offering primarily in investment real estate includingmulti-tenant industrial real estate located in major metropolitan markets inthe United States.  As of December 31, 2007, we have not purchasedany properties.

 

**3.****              Summary ofSignificant Accounting Policies**

 

The summary ofsignificant accounting policies presented below is designed to assist in understandingour consolidated financial statements. Such financial statements andaccompanying notes are the representations of our management, who isresponsible for their integrity and objectivity. These accounting policiesconform to accounting principles generally accepted in the United States ofAmerica, or GAAP, in all material respects, and have been consistently appliedin preparing the accompanying consolidated financial statements.

 

***Cash and Cash Equivalents***

 

We consider allshort-term, highly liquid investments that are readily convertible to cash witha maturity of three months or less at the time of purchase to be cashequivalents.

 

***Real Estate***

 

We will account for all acquisitions inaccordance with Financial Accounting Standards Board’s (“FASB”) Statement ofFinancial Accounting Standard (“SFAS”) No.  141, “Business Combinations” (“FAS 141”).   The results of operations of acquiredproperties will be included in our Consolidated Statements of Operation afterthe date of acquisition.  Upon 

 

F-7

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acquisitionof a property, we will allocate the purchase price of the property based uponthe fair value of the assets acquired and liabilities assumed, which generallyconsist of land, buildings, site improvements, tenant improvements, leasingcommissions and intangible assets including in-place leases and above marketand below market leases.  We willallocate the purchase price to the fair value of the tangible assets of anacquired property by valuing the property as if it were vacant.  The value of the building will be depreciatedover an estimated useful life of 39 years. The value of site improvements will be depreciated over an estimateduseful life of 15-20 years.  The value oftenants improvements will be depreciated generally the shorter of lease term oruseful life.

 

The purchase price will be further allocated toin-place lease values based on management’s evaluation of the specificcharacteristics of each tenant’s lease and our overall relationship with therespective tenant.  The value of in-place lease intangibles, which will beincluded as a component of investments in real estate, will be amortized toexpense over the remaining lease term.

 

Acquired above and below market leases will be valued based on thepresent value of the difference between prevailing market rates and thein-place rates over the remaining lease term. The value of acquired above andbelow market leases will be amortized over the remaining non-cancelable termsof the respective leases as an adjustment to rental revenue on our condensedconsolidated statements of operations. Should a tenant terminate its lease, theunamortized portion of the above or below market lease value will be charged torevenue.   If a lease is terminated priorto its expiration, the unamortized portion of the tenant improvements, leasingcommissions, intangible lease assets or liabilities and the in-place leasevalue will be immediately charged to expense.

 

***Impairment of Real Estate Assets***

 

Management continuallymonitors events and changes in circumstances that could indicate that thecarrying amounts of our real estate assets, including those held through jointventures may not be recoverable. When indicators of potential impairment arepresent that indicate that the carrying amounts of real estate assets may notbe recoverable, we will assess the recoverability of the real estate assets bydetermining whether the carrying value of the real estate assets will berecovered through the undiscounted future operating cash flows expected fromthe use of the asset and its eventual disposition.  In the event that such expected undiscountedfuture cash flows do not exceed the carrying value, we will adjust the realestate assets to the fair value and recognize an impairment loss.

 

#### Projectionsof expected future cash flows require us to estimate future market rentalincome amounts subsequent to the expiration of current lease agreements,property operating expenses, discount rates, the number of months it takes tore-lease the property and the number of years the property is held forinvestment.  The use of certainassumptions in the future cash flows analysis would result in an incorrectassessment of the property’s future cash flows and fair value and could resultin the overstatement of the carrying value of our real estate assets and netincome if those assumptions ultimately prove to be incorrect.

####  

***ConsolidationConsiderations for Our Investments in Joint Ventures***

 

TheFASB issued Interpretation No. 46 (“FIN 46R”) (revised December 2003),“Consolidation of Variable Interest Entities, an Interpretation of AccountingResearch Bulletin No. 51” (“ARB 51”), which addresses how a businessenterprise should evaluate whether it has a controlling interest in an entity throughmeans other than voting rights and accordingly should consolidate theentity.  Before concluding that it is appropriate to apply the ARB 51voting interest consolidation model to an entity, an enterprise must firstdetermine that the entity is not a variable interest entity (VIE).  Weevaluate, as appropriate, our interests, if any, in joint ventures and otherarrangements to determine if consolidation is appropriate.

 

***RevenueRecognition and Valuation of Receivables***

 

Our revenues, which willbe comprised largely of rental income, will include rents reported on astraight-line basis over the initial term of the lease. Since our leasesmay provide for free rent, lease incentives, or other rental increases atspecified intervals, we will be required to straight-line the recognition ofrevenue, which will result in the recording of a receivable for rent not yetdue under the lease terms.

 

***Depreciation ofReal Property Assets***

 

We will be required tomake subjective assessments as to the useful lives of depreciable assets. Wewill consider the period of future benefit of the asset to determine theappropriate useful lives.

 

Depreciation of ourassets is expected to be charged to expense on a straight-line basis over theassigned useful lives.

 

F-8

----

 

***Minority Interestin Consolidated Subsidiary***

 

Due to our control through our general partnershipinterest in the Operating Partnership, the Operating Partnership isconsolidated with us and the limited partner interest is reflected as minorityinterest in the accompanying balance sheets.

 

***Income Taxes***

 

Wewill be taxed as a REIT, under Sections 856 through 860 of the Internal RevenueCode of 1986, as amended (the “Code) beginning with our taxable year ending December 31,2008.  To qualify as a REIT, we must meet certain organizational andoperational requirements, including a requirement to currently distribute atleast 90% of the REIT’s ordinary taxable income to stockholders.  As aREIT, we generally will not be subject to federal income tax on taxable incomethat we distribute to our stockholders.  If we fail to qualify as a REITin any taxable year, we will then be subject to federal income taxes on ourtaxable income at regular corporate rates and will not be permitted to qualifyfor treatment as a REIT for federal income tax purposes for four yearsfollowing the year during which qualification is lost unless the InternalRevenue Service granted us relief under certain statutory provisions. Such an event could materially adversely affect our net income and net cashavailable for distribution to stockholders.  However, we believe that wewill be organized and operate in such a manner as to qualify for treatment as aREIT and intend to operate in the foreseeable future in such a manner so thatwe will remain qualified as a REIT for federal income tax purposes.

 

During the year ended December 31,2007, we generated a deferred tax asset of approximately $64,000. Because weintend to qualify as a REIT in 2008, which would not allow for the realizationof the deferred tax asset, a valuation allowance of a like amount was recorded.

 

***Concentration of Credit Risk***

 

Financialinstruments that potentially subject the Company to a concentration of creditrisk are primarily cash investments; cash is generally invested ininvestment-grade short-term instruments. We have cash in financial institutions which is insured by the FederalDeposit Insurance Corporation, or FDIC, up to $100,000 per institution.

 

***Fair Value of Financial Instruments***

 

The SFAS No. 107,*Disclosures About Fair Value of FinancialInstruments,* requires the disclosure of fair value information aboutfinancial instruments whether or not recognized on the face of the balancesheet, for which it is practical to estimate that value. SFAS 107 definesfair value as the quoted market prices for those instruments that are activelytraded in financial markets. In cases where quoted market prices are notavailable, fair values are estimated using present value or other valuationtechniques such as discounted cash flow analysis. The fair value estimates aremade at the end of each year based on available market information andjudgments about the financial instrument, such as estimates of timing andamount of expected future cash flows. Such estimates do not reflect any premiumor discount that could result from offering for sale at one time our entireholdings of a particular financial instrument, nor do they consider that taximpact of the realization of unrealized gains or losses. In many cases, thefair value estimates cannot be substantiated by comparison to independentmarkets, nor can the disclosed value be realized in immediate settlement of theinstrument.

 

Our consolidatedbalance sheets include the following financial instruments: cash and cashequivalents, prepaid expenses, amounts due to related parties, accounts payableand accrued expenses. We consider the carrying values of cash and cashequivalents, prepaid expenses, amounts due to related parties, accounts payableand accrued expenses to approximate fair value for these financial instrumentsbecause of the short period of time between origination of the instruments andtheir expected.

 

***Per Share Data***

 

We report earningsper share pursuant to SFAS No. 128, “Earnings Per Share.” Basicearnings per share attributable for all periods presented are computed bydividing the net loss by the weighted average number of shares outstandingduring the period. Diluted earnings per share are computed based on theweighted average number of shares and all potentially dilutive securities, ifany.

 

F-9

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Net loss per shareis calculated as follows:

 
| ** **                                                                   | ** ** | **Year Ended  December 31, 2007** | ** ** | **October 16, 2006  (Inception date) to  December 31, 2006** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| Net loss                                                                     |       | $                                                | (133,000   | )                                                                           | $          | — |   |
| Net loss per  share — basic and diluted                            |       | $                                                | (1,330     | )                                                                           | $          | — |   |
| Weighted average  number of shares outstanding — basic and diluted |       | 100                                              |       | 100                                                                         |       |

 

We follow SFAS No. 123(R),*Share-Based Payment*, to account for ourstock compensation pursuant to our 2007 Employee and Director Incentive StockPlan. See Note 6, Stockholder’s Equity.

 

***Use of Estimates***

 

The preparation ofour financial statements in conformity with GAAP requires management to makeestimates and assumptions that affect the reported amounts of the assets andliabilities and the disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesfor the reporting period. Actual results could materially differ from thoseestimates.

 

***Recently Issued Accounting Pronouncements***

 

In September 2006, theFASB issued SFAS No.  157, “Fair Value Measurements” (“SFAS 157”), whichdefines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles and expands disclosures about fairvalue measurements to increase consistency and comparability of fair valuemeasurements.  In February 2008, the FASB issued FASB Staff Position SFAS157-1,*Application of FASB Statement No. 157to FASB Statement No. 13 and Other Accounting Pronouncements That Address FairValue Measurements for Purposes of Lease Classification or Measurement underStatement 13* (“FSP FAS 157-1”).  FSP FAS 157-1 defers theeffective date of SFAS 157 for all non-financial assets and non-financialliabilities, except those that are recognized or disclosed at fair value in thefinancial statements on a recurring basis. FSP FAS 157-1 also excludes from thescope of SFAS 157 certain leasing transactions accounted for under Statement ofFinancial Accounting Standards No. 13,*Accounting for Leases*.  The Company adopted SFAS 157 and FSPFAS 157-1 on a prospective basis effective January 1, 2008. The adoption ofSFAS 157 and FSP FAS 157-1 is not expected to have a material impact on our consolidatedfinancial statements. 

 

In February 2007,the FASB issued SFAS No. 159, “*Fair Value Option forFinancial Assets and Financial Liabilities*” (“SFAS 159”). ThisStatement permits entities to choose to measure many financial instruments andcertain other items at fair value. The objective is to improve financialreporting by providing entities with the opportunity to mitigate volatility inreported earnings caused by measuring related assets and liabilitiesdifferently without having to apply complex hedge accounting provisions. SFAS159 is effective for fiscal years beginning after November 15, 2007(ourfiscal year beginning January 1, 2008). The adoption of this standard is not expected to have a material effecton our consolidated financial statements.

 

In December 2007,the FASB issued SFAS No. 141 (R), “*BusinessCombinations*” (*SFAS 141(R)*).  Insummary, SFAS 141(R) requires the acquirer of a business combination tomeasure at fair value the assets acquired, the liabilities assumed, and anynoncontrolling interest in the acquiree at the acquisition date, with limitedexceptions.  The standard is effective for fiscal years beginningafter December 15, 2008, and is to be applied prospectively, with noearlier adoption permitted.  The adoption of this standard mayhave an impact on the accounting for certain costs related to our futureacquisitions.

 

In December 2007,FASB issued Statements No. 160, “*Noncontrolling Interestsin Consolidated Financial Statements*” (“SFAS 160”), an amendment toAccounting Research Board No. 51 SFAS 160 objective is to improve therelevance, comparability and transparency of financial information that areporting entity provides in its consolidated financial statements. The keyaspects of SFAS 160 are (i) the minority interests in subsidiaries shouldbe presented in the consolidated balance sheet within equity of theconsolidated group, separate from the parent’s shareholders’ equity, (ii) acquisitionsor dispositions of noncontrolling interests in a subsidiary that do not resultin a change of control should be accounted for as equity transactions, (iii) aparent recognizes a gain or loss in net income when a subsidiary isdeconsolidated, measured using the fair value of the non-controlling equityinvestment, (iv) the acquirer should attribute net income and eachcomponent of other comprehensive income between controlling and noncontrollinginterests based on any contractual arrangements or relative ownershipinterests, and (v) a reconciliation of beginning to ending total equity isrequired for both controlling and noncontrolling interests. SFAS 160 iseffective for fiscal years beginning on or after December 15, 2008 andshould be applied prospectively.  We arecurrently evaluating the provisions for SFAS 160 to determine the potentialimpact, if any; the adoption will have on our financial position or results ofoperations.

 

F-10

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**4.****             ****Payable to Related Parties**

 

Payable to relatedparties represents amounts incurred by the Advisor for services provided to theCompany of approximately $48,000 as of December 31, 2007.

 

**5.****             ****Minority Interest**

 

Minority interestrelates to our Advisor’s equity interest in the earnings/losses of theOperating Partnership.

 

**6.****             ****Stockholder’s Equity**

 

***Common Stock***

 

Our articles of incorporation authorize 580,000,000additional shares of common stock with a par value of $0.01 and 20,000,000shares of preferred stock with a par value of $0.01.  As of December 31,2007, we have issued 100 shares of common stocks for a total of $1,000to Terry G. Roussel, an affiliate of the Advisor.

 

***DistributionReinvestment Plan***

 

We have adopted a distribution reinvestment plan thatallow our stockholders to have dividends and other distributions otherwisedistributable to them invested in additional shares of our commonstock.   We have registered10,000,000 shares of our common stock for sale pursuant to the distributionreinvestment plan.  The purchase price per share is 95% of the price paidby the purchaser for our common stock, but not less than $9.50 per share. At December 31, 2007, we have issued no shares under the distributionreinvestment plan.   We may amend orterminate the distribution reinvestment plan for any reason at any time upon 10days prior written notice to participants.

 

***Employee and Director IncentiveStock Plan***

 

Wehave adopted an Employee and Director Incentive Stock Plan (“the Plan”) whichprovides for the grant of awards to our directors and full-time employees, aswell as other eligible participants that provide services to us. We have noemployees, and we do not intend to grant awards under the Plan to persons whoare not directors of ours. Awards granted under the Plan may consist ofnonqualified stock options, incentive stock options, restricted stock, shareappreciation rights, and dividend equivalent rights. The term of the Plan is 10years. The total number of shares of common stock reserved for issuance underthe Plan is equal to 10% of our outstanding shares of stock at any time.

 

Uponour inception, we adopted the provisions of Statement of Financial AccountingStandards No. 123R (“SFAS 123R”), “Share-Based Payment,” which requiresthe measurement and recognition of compensation expense for all share-basedpayment awards to employees and directors based on estimated fair values.   There had been none issued as of December 31,2007.

 

***Equity Compensation PlanInformation***

 

As of December 31,2007, we had awarded no equity compensation.

 

7**.****               Related PartyTransactions**

 

Our company has no employees.  Our Advisor is primarily responsible formanaging our business affairs and carrying out the directives of our board ofdirectors.  We have an Advisory agreementwith the Advisor and a dealer manager agreement with PCC which entitle theAdvisor and PCC to specified fees upon the provision of certain services withregard to the Offering and investment of funds in real estate projects, amongother services, as well as reimbursement for organizational and offering costsincurred by the Advisor and PCC on our behalf and reimbursement of certaincosts and expenses incurred by the Advisor in providing services to us.

 

F-11

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***AdvisoryAgreement***

 

Under the terms of the Advisory agreement, our Advisorwill use commercially reasonable efforts to present to us investmentopportunities to provide a continuing and suitable investment programconsistent with the investment policies and objectives adopted by our board ofdirectors. The Advisory agreement calls for our Advisor to provide for ourday-to-day management and to retain property managers and leasing agents,subject to the authority of our board of directors, and to perform otherduties.

 

The fees and expense reimbursements payable to ourAdvisor under the Advisory agreement are described below.

 

Organizationaland Offering Costs.  Organizationaland offering costs of the Offering are being paid by the rAdvisor on our behalfand will be reimbursed to the Advisor from the proceeds of the Offering. Organizational and offering costs consist of all expenses (other than salescommissions and the dealer manager fee) to be paid by us in connection with theoffering, including our legal, accounting, printing, mailing and filing fees,charges of our escrow holder and other accountable offering expenses,including, but not limited to, (i) amounts to reimburse our Advisor forall marketing related costs and expenses such as salaries and direct expensesof employees of or Advisor and its affiliates in connection with registering andmarketing our shares (ii) technology costs associated with the offering ofour shares; (iii) our costs of conducting our training and educationmeetings; (iv) our costs of attending retail seminars conducted byparticipating broker-dealers; and (v) payment or reimbursement of bonafide due diligence expenses.   In noevent will we have any obligation to reimburse the Advisor for organizationaland offering costs totaling in excess of 3.5% of the gross proceeds from thePrimary Offering. As of December 31, 2007, the Advisor and itsaffiliates had incurred on our behalf organizational and offering coststotaling approximately $2.4 million (unaudited).

 

AcquisitionFees and Expenses.  TheAdvisory Agreement requires us to pay the Advisor acquisition fees in an amountequal to 2% of the investments acquired, including any debt attributable tosuch investments.  A portion of the acquisition fees will be paid uponreceipt of the offering proceeds after reaching the minimum offering amount,and the balance will be paid at the time we acquire a property.  However,if the Advisory Agreement is terminated or not renewed, the Advisor must returnacquisition fees not yet allocated to one of ourinvestments.   In addition, we are required to reimburse theAdvisor for direct costs the Advisor incurs and amounts the Advisor pays tothird parties in connection with the selection and acquisition of a property,whether or not ultimately acquired.

 

ManagementFees.  The Advisoryagreement requires us to pay the Advisor a monthly asset management fee ofone-twelfth of 1.0% of the sum of the aggregate basis book carrying values ofour assets invested, directly or indirectly, in equity interests in and loanssecured by real estate before reserves for depreciation or bad debts or othersimilar non-cash reserves, calculated in accordance with generally acceptedaccounting principals in the United States of America (GAAP).  Inaddition, we will reimburse the Advisor for the direct costs and expensesincurred by the Advisor in providing asset management services to us. These fees and expenses are in addition to management fees that we expect topay to third party property managers.  No asset management fees wereincurred or paid to the Advisor in 2007 or 2006.

 

Operating Expenses. The Advisory agreement provides forreimbursement of our Advisor’s direct and indirect costs of providingadministrative and management services to us. For year ended December 31, 2007 $41,000 of such costs wereincurred.  No such costs were incurred in2006.  The Advisor must pay or reimburseus the amount by which our aggregate annual operating expenses exceed thegreater of 2% of our average invested assets or 25% of our net income unless amajority of our independent directors determine that such excess expenses werejustified based on unusual and non-recurring factors.

 

DispositionFee.  The Advisoryagreement provides that if the Advisor or its affiliate provides a substantialamount of the services (as determined by a majority of our directors, includinga majority of our independent directors) in connection with the sale of one ormore properties, we will pay the Advisor or such affiliate shall receive atclosing a disposition fee up to 3% of the sales price of such property orproperties.  This disposition fee may be paid in addition to real estatecommissions paid to non-affiliates, provided that the total real estatecommissions (including such disposition fee) paid to all persons by us for eachproperty shall not exceed an amount equal to the lesser of (i) 6% of theaggregate contract sales price of each property or (ii) the competitivereal estate commission for each property.  We will pay the dispositionfees for a property at the time the property is sold.

 

F-12

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SubordinatedParticipation Provisions. The Advisor is entitled to receive a subordinated participation upon thesale of our properties, listing of our common stock or termination of theAdvisor, as follows:

 

·                  After we pay stockholders cumulativedistributions equal to their invested capital plus a 6% cumulative,non-compounded return, we will pay our Advisor a subordinated participation feeequal to a percentage of net cash flows.  The subordinated participationfee schedule is cumulative and set-up in a three-tier format.  We will payour Advisor an amount equal to the following:

 

·                  5% of net cash flows remaining afterwe have paid our stockholders distributions equal to invested capital and aninvestor return of 6% or more but less than 8%; plus

 

·                  10% of net cash flows remaining afterwe have paid our stockholders distributions equal to invested capital andan   investor return of 8% or more butless than 10%; plus

 

·                  15% of net cash flows remaining afterwe have paid our stockholders distributions equal to invested capital and aninvestor return of 10%.

 

If we terminatethe Advisory agreement for any reason other than a material, uncured breach bythe Advisor or we fail to offer a renewal to the Advisor on substantiallysimilar terms as the year prior, or the Advisor terminates the Advisoryagreement because of a material, uncured breach by us, the Advisor will beentitled to an incentive fee in accordance with the schedule below. Thesubordinated performance fee is based on the excess of the appraised value ofour assets less liabilities secured by our assets plus the amount of all priordistributions we have paid through the termination date over the sum ofstockholders’ invested capital plus total distributions required to be made tothe stockholders in order to pay the stockholders a certain percentage (asdefined below) cumulative, non-compounded annual return from inception throughthe termination date. We will pay our Advisor an amount equal to the following:

 

·                  5% of the amount, if any, by which (a) theappraised value of our assets, less all debt secured by our assets, plus totaldistributions through the termination date exceeds (b) the sum ofcapital invested by our stockholders plus total distributions required to bemade to our stockholders in order to pay our stockholders an investor return of6% but does not surpass (c) the sum of capital invested by ourstockholders plus total distributions required to be made to our stockholdersin order to pay our stockholders an investor return of 8%; plus

 

·                  10% of the amount, if any, by which (a) theappraised value of our assets, less all debt secured by our assets, plus totaldistributions through the termination date exceeds (b) the sum of capitalinvested by our stockholders plus total distributions required to be made toour stockholders in order to pay an investor return of 8% but does not surpass (c) thesum of capital invested by our stockholders plus total distributions requiredto be made to our stockholders in order to pay our stockholders an investorreturn of 10%; plus

 

·                  15% of the amount, if any, by which (a) theappraised value of our assets, less all debt secured by our assets, plus totaldistributions through the termination date exceeds (b) the sum of capitalinvested by our stockholders plus total distributions required to be made toour stockholders in order to pay an investor return of 10%; less

 

·                  Any prior payment to the Advisor of asubordinated share of cash flows.

 

This subordinatedperformance fee will be paid in the form of a promissory note.  Payment ofthis note will be deferred until we receive net proceeds from the sale ofproperties held at the termination date. If the promissory note has not beenpaid in full within five years from the termination date, then the Advisor mayelect to convert the balance of the fee into shares of our common stock.

 

In the event we list ourstock for trading, we are required to pay our Advisor a subordinated incentivelisting fee. This fee equals a percentage of the amount by which the average “MarketValue” of the shares issued and outstanding at listing over the 30 trading daysbeginning 180 days after the shares are first listed on a stock exchange plusall distributions we made before listing exceeds the sum of the total amount ofcapital raised from investors and the amount of distributions necessary togenerate a specified percentage cumulative, non-compounded annual return toinvestors. We will pay our Advisor an amount equal to the following:

 

·                  5%of the amount, if any, by which (a) our Market Value plus totaldistributions through the listing date exceeds (b) the sum of capitalinvested by our stockholders plus total distributions required to be made toour stockholders in order to pay an investor return of 6% but does not surpass (c) thesum of capital invested by our stockholders plus total distributions requiredto be made to our stockholders in order to pay an investor return of 8% plus;

 

F-13

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·                  10%of the amount, if any, by which (a) our Market Value plus totaldistributions through the listing date exceeds (b) the sum of capitalinvested by our stockholders plus total distributions required to be made toour stockholders in order to pay an investor return of 8% but does not surpass (c) thesum of capital invested by our stockholders plus total distributions requiredto be made to our stockholders in order to pay an investor return of 10%; plus

 

·                  15%of the amount, if any, by which (a) our Market Value plus totaldistributions through the listing date exceeds (b) the sum of capitalinvested by our stockholders plus total distributions required to be made toour stockholders in order to pay an investor return of 10%.

 

***Dealer Manager Agreement***

 

PCC,as dealer manager, is entitled to receive a sales commission of up to 7% ofgross proceeds from sales in the Primary Offering.  PCC, as DealerManager, is also entitled to receive a dealer manager fee equal to up to 3% ofgross proceeds from sales in the Primary Offering.  The Dealer Manager isalso entitled to receive a reimbursement of bona fide due diligence expenses upto 0.5% of the gross proceeds from sales in the Primary Offering.  TheAdvisory agreement requires the Advisor to reimburse us to the extent thatoffering expenses including sales commissions, dealer manager fees andorganization and offering expenses (but excluding acquisition fees andacquisition expenses discussed above) to the extent are in excess of 13.5% ofgross proceeds from the Offering.  As of December 31,2007 and 2006, no dealer manager fees and no sales commissions were incurred.

 

**8.****              Commitments andContingencies**

 

***Litigation***

 

We are notpresently subject to any material litigation nor, to our knowledge, is anymaterial litigation threatened against us which if determined unfavorably to uswould have a material adverse effect on our consolidated cash flows, financialcondition or results of operations.

 

**9.****              SelectedQuarterly Data (unaudited)**

 

Set forth below iscertain unaudited quarterly financial information. We believe that allnecessary adjustments, consisting only of normal recurring adjustments, havebeen included in the amounts stated below to present fairly, and in accordancewith generally accepted accounting principles, the selected quarterlyinformation when read in conjunction with the consolidated financialstatements.

 
| ** **                                            | ** ** | **Quarters Ended**     | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                            | ** ** | **December 31,  2007** | ** ** | **September 30,  2007** | ** ** | **June 30,  2007** | ** ** | **March 31,  2007** | ** ** |
| Revenues                                              |       | $                           | —     |   | $ | — |   | $ | — |   | $ | — |   |
| Expenses                                              |       | 115,000                     |       | 94,000 |   | — |   | — |   |
| Operating loss                                        |       | (115,000                    | )          | (94,000 | ) | — |   | — |   |
|                                                  |       |                        |       |   |   |   |   |   |   |
| Minority  interest                                    |       | 29,000                      |       | 44,000 |   | — |   | — |   |
|                                                  |       |                        |       |   |   |   |   |   |   |
| Net (loss)  income                                    |       | $                           | (86,000    | ) | $ | (51,000 | ) | $ | 2,000 |   | $ | 2,000 |   |
|                                                  |       |                        |       |   |   |   |   |   |   |
| Net (loss)  income per share — basic and diluted |       | $                           | (860.00    | ) | $ | (510.00 | ) | $ | 20.00 |   | $ | 20.00 |   |
|                                                  |       |                        |       |   |   |   |   |   |   |
| Weighted average  shares                              |       | 100                         |       | 100 |   | 100 |   | 100 |   |

 

The Company had nooperations in 2006.

 

F-14

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**SIGNATURES**

 

Pursuant to therequirements of the Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
|          | CORNERSTONE GROWTH & INCOME REIT, INC. |
|----------|-------------------------------------------------|
|     |                                            |   |
|     | By:                                             | /s/ TERRY G.  ROUSSEL |
|     |                                            | TERRY G. ROUSSEL |
| * * | * *                                        | *Chief  Executive Officer, President and* |
| * * | * *                                        | *Chairman  of the Board of Directors* |
| * * | * *                                        | * * |
|     | Date: March 14, 2008                       |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities indicated on March 14, 2008.

 
| Name                  | ** ** | **Title**                             |
|-----------------------|------------|---------------------------------------|
|                  |       | Chief Executive  Officer and Director |
| /s/ Terry G. Roussel  |       | (Principal  Executive Officer)        |
| Terry G. Roussel      |       |                                  |
|                  |       | Chief Financial  Officer (Principal   |
| /s/ Sharon C. Kaiser  |       | Financial and  Accounting Officer)    |
| Sharon C. Kaiser      |       |                                  |
|                  |       |                                  |
| /s/ Steven M Pearson  |       | Director                              |
|                  |       |                                  |
|                  |       |                                  |
| /s/ Barry A. Chase    |       | Director                              |
|                  |       |                                  |
|                  |       |                                  |
| /s/ James M. Skorheim |       | Director                              |
|                  |       |                                  |
|                  |       |                                  |
| /s/ Vince T. Evans    |       | Director                              |
|                  |       |                                  |

 

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**EXHIBIT INDEX**

 
| Ex.    | ** ** | **Description**                                                                                                                                                                                                                                                                                         |
|--------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 1.1    |       | Form of Dealer Manager Agreement (incorporated  by reference to Exhibit 1.1 to Pre-Effective Amendment No. 3 to the  Registration Statement on Form S-11 (No. 333-139704) filed on  July 16, 2007 (“Pre-Effective Amendment No. 3”)).                      |
|   |       |                                                                                                                                                                                                                                                                                                    |
| 1.2    |       | Form of Participating Broker Agreement  (incorporated by reference to Exhibit 1.2 to Pre-Effective Amendment  No. 2 to the Registration Statement on Form S-11  (No. 333-139704) filed on June 15, 2007 (Pre-Effective Amendment No. 2”)).                      |
|   |       |                                                                                                                                                                                                                                                                                                    |
| 3.1    |       | Articles of Amendment and Restatement of the  Registrant (incorporated by reference to Exhibit 3.1 to Pre-Effective  Amendment No. 3).                                                                                                                                                        |
|   |       |                                                                                                                                                                                                                                                                                                    |
| 3.2    |       | Amended and Restated Bylaws (incorporated by  reference to Exhibit 3.2 to Pre-Effective Amendment No. 1 to the  Registration Statement on Form S-11 (No. 333-139704), filed on  March 21, 2007).                                                                               |
|   |       |                                                                                                                                                                                                                                                                                                    |
| 4.1    |       | Subscription Agreement (incorporated by reference to  Appendix A to the Registrant’s prospectus filed on October  5, 2007)                                                                                                                                                                    |
|   |       |                                                                                                                                                                                                                                                                                                    |
| 4.2    |       | Statement regarding restrictions on transferability  of shares of common stock (to appear on stock certificate or to be sent upon  request and without charge to stockholders issued shares without  certificates) (incorporated by reference to Exhibit 4.2 Pre-Effective  Amendment No. 2). |
|   |       |                                                                                                                                                                                                                                                                                                    |
| 4.3    |       | Distribution Reinvestment Plan (incorporated by  reference to Appendix B to the Registrant’s prospectus filed on  October 5, 2007).                                                                                                                                                           |
|   |       |                                                                                                                                                                                                                                                                                                    |
| 4.4    |       | Escrow Agreement between the Registrant and U.S.  Bank National Association (incorporated by reference to Exhibit 4.5 to  Pre-Effective Amendment No 2).                                                                                                                                           |
|   |       |                                                                                                                                                                                                                                                                                                    |
| 10.1   |       | Advisory Agreement (incorporated by reference to  Exhibit 10.1 to Pre-Effective Amendment No.3).                                                                                                                                                                                                   |
|   |       |                                                                                                                                                                                                                                                                                                    |
| 10.2   |       | Form of Employee and Director Long-term  Incentive Plan (incorporated by reference to Exhibit 10.3 to  Pre-Effective Amendment No. 3).                                                                                                                                                   |
|   |       |                                                                                                                                                                                                                                                                                                    |
| 10.3   |       | Agreement of Limited Partnership of Cornerstone  Operating Partnership, L.P. (incorporated by reference to Exhibit 10.3  to Pre-Effective Amendment No. 2                                                                                                                                     |
|   |       |                                                                                                                                                                                                                                                                                                    |
| 14.1   |       | Code of Business Conduct and Ethics (filed  herewith).                                                                                                                                                                                                                                                  |
|   |       |                                                                                                                                                                                                                                                                                                    |
| 21.1   |       | List of  Subsidiaries (filed herewith).                                                                                                                                                                                                                                                                 |
|   |       |                                                                                                                                                                                                                                                                                                    |
| 31.1   |       | Certification of Chief Executive Officer, pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                             |
|   |       |                                                                                                                                                                                                                                                                                                    |
| 31.2   |       | Certification of Interim Chief Financial Officer, pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                                                                                     |
|   |       |                                                                                                                                                                                                                                                                                                    |
| 32.1   |       | Certification of Chief Executive Officer and Chief  Financial Officer, pursuant to 18 U.S.C. Section 1350, as created by  Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).                                                                                                     |

 

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