UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 Form 10-K
 
 (Mark
One)
 
 x
              ANNUAL REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 For
the fiscal year ended December 31, 2009
 or
 o
              TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
 For the transition period from
          to
 Commission
file number: 333-139704
 
 CORNERSTONE
HEALTHCARE PLUS REIT, INC.
 (Exact
name of registrant as specified in its charter)
 Maryland
              20-5721212(State
      or other jurisdiction of incorporation or organization)
              (I.R.S.
      Employer Identification No.)
 1920 Main 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) of the Act:
 Title of Each Class:None
 Securities
registered pursuant to Section 12(g) of the Act:
 None
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
 Yes o     No x
 
 Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
 Yes o     No x
 
 Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.  Yes x     No o
 
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.   x
 
 Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filed, or a smaller reporting company.   See definitions of
“large accelerated filer”, “accelerated filer” and “smaller reporting company”
in Rule 12b-2 of the Exchange Act. (Check one):
 Large
      accelerated filer
              
              Accelerated
      filer
              
              Non-accelerated
      filer
              
              Smaller
      reporting companyo
              
              o
              
              o
              
              x
 
 As of June 30, 2009 (the last
business day of the registrant’s second fiscal quarter), therewere 2,325,944
sharesof common stock
held by non-affiliates of the registrant having an aggregate market value of
$23,217,450.
 
 As of
March 12, 2010, there were approximately 5,957,167 shares of common stock
of Cornerstone Healthcare Plus REIT, Inc. outstanding. The Registrant
incorporates by reference portions of its Definitive Proxy Statement for the
2010 Annual Meeting of Stockholders, which is expected to be filed no later than
April 30, 2010, into Part III of this Form 10-K to the extent
stated herein.
  1
  CORNERSTONE
HEALTHCARE PLUS REIT, INC.
 (A
Maryland Corporation)
 
 TABLE
OF CONTENTS
 
 PART IItem
      1
                Business
                3Item
      1A
                Risk
      Factors
                9Item
      1B
                Unresolved
      Staff Comments
                27Item
      2
                Properties
                27Item
      3
                Legal
      Proceedings
                27Item
      4
                Reserved
                27PART IIItem
      5
                Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                28Item
      6
                Selected
      Financial Data
                32Item
      7
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                33Item
      7A
                Quantitative
      and Qualitative Disclosures About Market Risk
                40Item
      8
                Financial
      Statements and Supplementary Data
                40Item
      9
                Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                41Item
      9A(T)
                Controls
      and Procedures
                41Item
      9B
                Other
      Information
                41PART IIIItem
      10
                Directors,
      Executive Officers and Corporate Governance
                42Item
      11
                Executive
      Compensation
                42Item
      12
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                42Item
      13
                Certain
      Relationships and Related Transactions, and Director
      Independence
                42Item
      14
                Principal
      Accounting Fees and Services
                42PART IVItem
      15.
                Exhibits
      and Financial Statement Schedules
                43
 
 2
 
 PART I
 
 SPECIAL
NOTE ABOUT FORWARD-LOOKING STATEMENTS
 
 Certain
statements in this report, other than purely historical information, including
estimates, projections, statements relating to our business plans, objectives
and expected operating results, and the assumptions upon which those statements
are based, are “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934. These
forward-looking statements generally are identified by the words “believes,”
“project,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,”
“may,” “will,” “would,” “will be,” “will continue,” “will likely result,” and
similar expressions. Forward-looking statements are based on current
expectations and assumptions that are subject to risks and uncertainties which
may cause actual results to differ materially from the forward-looking
statements.A
detailed discussion of the risks and uncertainties that could cause actual
results and events to differ materially from such forward-looking statements is
included in the section entitled “Risk Factors” in Item 1A of this report. We
undertake no obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
Accordingly, there can be no assurance that our expectations will be
realized.
 
 ITEM 1.  BUSINESS
 
 Our
Company
 
 Cornerstone
Healthcare Plus REIT, Inc., (formerly Cornerstone Growth & Income REIT,
Inc.) a Maryland corporation (the “Company”), was formed on October 16,
2006 under the General Corporation Law of Maryland for the purpose of engaging
in the business of investing in and owning commercial real estate.  As
used in this report, the “Company”, “we”, “us” and “our” refer to Cornerstone
Healthcare Plus REIT, Inc. and its consolidated subsidiaries, except where
context otherwise requires. We have qualified, and intend to continue to
qualify, as a real estate investment trust (REIT) for federal tax
purposes.
 
 We are
structured as an umbrella partnership REIT, referred to as an “UPREIT,” under
which substantially all of our current and future business is, and will be,
conducted through a majority owned subsidiary, Cornerstone Healthcare Plus
Operating Partnership, L.P., a Delaware limited partnership, formed on October
17, 2006.  We are the sole general partner of the operating partnership and
have control over its affairs.
 
 Our
external advisor, Cornerstone Leveraged Realty Advisors, LLC, a Delaware limited
liability company (our “Advisor”), was formed on October 16, 2006 for the
purpose of acting as our Advisor. The Advisor is responsible for managing our
affairs on a day-to-day basis and for identifying and making acquisitions and
investments on our behalf under the terms of an advisory
agreement.  Our Advisor has contractual and fiduciary responsibilities
to us and our stockholders. Under the terms of the advisory agreement, our
Advisor will use commercially reasonable efforts to present to us investment
opportunities and to provide a continuing and suitable investment program
consistent with the investment policies and objectives adopted by our board of
directors.  Currently, we have no direct employees and all management
and administrative personnel responsible for conducting our business are
employed by our Advisor and its affiliates.
 
 Our
Advisor has entered into agreements with Servant Investments, LLC and Servant
Healthcare Investments, LLC, (collectively “Servant”) two Florida based real
estate operating companies. Under the terms of these agreements Servant will
provide real estate acquisition and portfolio management services to our Advisor
in connection with healthcare and net-leased retail properties acquired by the
Company in specified geographic areas.
  We began
accepting subscriptions in our offering on June 20, 2008. As of December 31,
2009, a total of approximately 4.9 million shares of our common stock had been
sold for aggregate gross proceeds of approximately $49.1
million.  This excludes shares issued under the distribution
reinvestment plan. Effective as of January 8, 2010, we amended our charter to
change our name from “Cornerstone Growth & Income REIT, Inc.” to
“Cornerstone Healthcare Plus REIT, Inc.”
  Investment
Objectives
 
 Our
investment objectives are to:
 
 ·preserve stockholder capital by acquiring and operating real
      estate;
 
 ·realize growth in the value of your investment
  by:
 
 ·purchasing stabilized, income-producing properties with the
      potential for capital appreciation
and
 
 ·profiting from the purchase and development or repositioning of
      other properties;
  3
  
 ·
                provide
      stockholders with current income from the operations of the properties we
      acquire, including the income from properties we develop or reposition
      (redevelop or employ other asset-management strategies to enhance existing
      cash flow) once they are stabilized (no longer in the lease-up stage
      following development or redevelopment and substantially leased);
      and
 
 ·
                provide
      long-term liquidity to our stockholders within seven years of the
      termination of our initial public offering after accomplishing the above
      objectives by:
   ·
              liquidating
      our assets,
  ·
              listing
      our shares on a national securities
exchange,
  ·
              another
      liquidity event such as a merger with another company
  or
  ·
                expanding
      our proposed stock repurchase program to redeem upon stockholder request
      up to 10% of our prior-year outstanding shares utilizing proceeds from the
      sale of our properties or other sources of funds irrespective of the
      amount of proceeds raised under our distribution reinvestment
      plan.
 
 We intend
to use the net proceeds of our offering to primarily invest in existing leased
properties as well as other properties where we believe there are opportunities
to enhance cash flow and value. We cannot assure you that we will attain these
objectives or that our capital will not decrease. We may not change our
investment policies or the investment restrictions described below except upon
approval of the independent directors committee. Decisions relating to the
purchase or sale of properties will be made by our Advisor, subject to approval
by our board of directors.
 
 We may
own properties through joint ventures. This is one of the ways we anticipate
diversifying the portfolio of properties we own in terms of geographic region,
property type and tenant industry group. Joint ventures will also allow us to
acquire an interest in a property without requiring that we fund the entire
purchase price. In determining whether to recommend a particular joint venture
investment, our Advisor will evaluate the real property that the joint venture
owns or will acquire using the same criteria for the selection of our other real
estate investments.
 
 Investment
Strategy
 
 Our
independent directors committee will review our investment policies at least
annually to determine whether these policies continue to be in the best interest
of our stockholders.  We may change our investment policies without
stockholder approval.  Our Advisor will recommend property acquisitions to
our investment committee, which will approve or reject proposed
acquisitions.
  Our
objective is to acquire a long-term stabilized portfolio of real estate
properties from the proceeds of our offering that consists of at least 50% core
plus properties. We may acquire value-added and opportunistic properties. 
We may utilize our initial offering proceeds to acquire more value-added and
opportunistic properties than core plus properties, with a view to achieving a
more balanced portfolio of properties through a combination of development
efforts, refinancings and subsequent acquisitions.
 
 We intend
for our investments in real estate assets to be primarily concentrated in the
healthcare, industrial and net-leased retail sectors.
 
 Healthcare
real estate includes a variety of property types, including senior housing
facilities, medical office buildings, hospital facilities, skilled nursing
facilities and outpatient centers. According to The National Coalition on
Healthcare, by 2016 nearly $1 in every $5 in the U.S. will be spent on
healthcare, and the aging US population is expected to continue to fuel the need
for healthcare services. The over age 65 population of the United States is
projected to grow 36% between 2010 and 2020, compared with 9% for the general
population, according to the US Census Bureau. Presently, the healthcare real
estate market is fragmented, with a local or regional focus, offering
opportunities for consolidation and market dominance.  A diversified
portfolio of healthcare property types, minimizes risks associated with
third-party payors, such as Medicare and Medicaid.
  Multi-tenant
industrial properties generally offer a combination of both warehouse and office
space adaptable to a broad range of tenants and uses, and typically cater to
local and regional businesses. Multi-tenant industrial properties comprise one
of the major segments of the commercial real estate market and tenants in these
properties come from a broad spectrum of industries including light
manufacturing, assembly, distribution, import/export, general contractors,
telecommunications, general office/warehouse, wholesale, service, high-tech and
other fields. These properties diversify revenue by generating rental income
from multiple businesses in a variety of industries.
  Net-leased
retail real estate includes restaurant and retail petroleum properties. These
real estate investments offer attractive returns while mitigating investor risk
by targeting established brands, seasoned operators and locations priced at or
below replacement costs. Extensive pre-acquisition due diligence focuses on
strong unit-level economics and in-depth market studies to categorize default
risk. Credit enhancements, combined with aggressive risk and asset management,
further mitigate investment risk.
  4
  Our
Advisor believes that investment opportunities in healthcare, multi-tenant
industrial and net-leased retail properties are ordinarily not readily available
to investors other than large institutional investors and experienced real
estate operators with specialized knowledge, experience in specific geographic
areas, industry expertise and established relationships with operators of these
property types.
  Although
we intend to focus on acquiring and developing a portfolio of healthcare,
industrial and net-leased retail properties, we may also invest in other real
estate-related assets that we believe may assist us in meeting our investment
objectives.  Our charter limits our investments in unimproved real property
or mortgage loans on unimproved real property to 10% of our total assets, but we
are not otherwise restricted in the proportion of net proceeds from this
offering that we must allocate to investment in any specific type of
property.  We do not expect to engage in the underwriting of securities of
other issuers.
 
 Acquisition
Policies
 
 Core
Plus Properties
 
 We expect
to use a significant portion of the net proceeds from our offering to invest in
“core plus” investment grade properties that are:
  ·
                owned
      and operated with a low to moderate level of permanent mortgage
      financing;
 
 ·
                of
      a high-quality and currently producing
income;
 
 ·
                located
      in U.S real estate markets with barriers to entry for new competitive
      product;
 
 ·
                leased
      to a diversified tenant base, though we are not restricted from investing
      in properties occupied by a single tenant if the property meets other key
      investment criteria or to a single tenant/operator for certain healthcare
      and net-leased retail properties;
and
 
 ·
                leased
      on terms that generally allow for annual rental
  increases.
 
 Value-Added
and Opportunistic Properties
 
 Value-Added
Properties
 
 We may
acquire “value-added” properties, which include properties that are currently
under construction and/or have existing building structures in need of
redevelopment, re-leasing or repositioning.  We may acquire properties with
low occupancy rates or vacant properties when we believe our leasing or
development efforts could add significant value.  We expect most of our
value-added properties will be located in in-fill locations within our target
markets with high barriers to entry.  We may seek to acquire a portion of
our value-added properties through joint ventures with large institutional
partners, but we are not obligated to do so.  Our value-added properties
will employ moderate to high levels of indebtedness, which will be determined on
a property-by-property basis.  Our long-term investment objective for
investment in value-added properties is to develop and transform these
properties into the same type of core plus property investments with low to
moderate levels of permanent mortgage indebtedness as described
above.
 
 Opportunistic
Properties
 
 We also
may acquire opportunistic properties. We define “opportunistic” properties
primarily as unimproved land that we will develop. We will construct or develop
the property through the use of third-parties or through developers affiliated
with our Advisor.  If an affiliated developer is used, we may coinvest with
institutional investors. However, we have no agreements with institutional
investors to acquire any opportunistic properties at this time. We will invest
in opportunistic properties with a view of developing a core plus property.
Similar to our value-added properties, we expect to incur a moderate to high
level of indebtedness when acquiring opportunistic properties, but with the
long-term goal of developing the property into a core plus property with a low
to moderate level of permanent mortgage indebtedness.  The development
of properties is subject to risks relating to a builder’s ability to control
construction costs or to build in conformity with plans, specifications and
timetables. We may help ensure performance by the builders of properties that
are under construction at the price contracted by obtaining either a performance
bond or completion bond.  As an alternative to a performance bond or
completion bond, we may rely upon the substantial net worth of the contractor or
developer or a personal guarantee provided by a high net worth affiliate of the
person entering into the construction or development contract. Our opportunistic
property acquisitions will generally be located in growth areas within our
target markets.
  5
  Target
Market Criteria
 
 We intend
to acquire properties located in markets with strong fundamentals and strong
supply and demand dynamics throughout the United States.  Among the most
important criteria we expect to use in evaluating the markets in which we
purchase properties are:
  ·
                historic
      and projected population
growth;
 
 ·
                historically
      high levels of tenant demand and lower historic investment volatility for
      the type of property being
acquired;
 
 ·
                markets
      with historic and growing numbers of qualified and affordable
      workforce;
 
 ·
                historic
      and projected employment
growth;
 
 ·
                historic
      market liquidity for buying and selling of commercial real
      estate;
 
 ·
                markets
      with high levels of insured
populations;
 
 ·
                stable
      household income and economic conditions;
and
 
 ·
                sound
      real estate fundamentals, such as high occupancy rates and potential for
      increasing rental rates.
 
 Leases
and Tenant Improvements
 
 We expect
that a portion of any tenant improvements to be funded by us for newly acquired
properties will be funded from the net proceeds of the offering or through
borrowings.  Additionally, when a tenant at one of our properties vacates
its space, it is likely that we will be required to expend funds for tenant
improvements and refurbishments to the vacated space in order to attract new
tenants.  If we do not have adequate cash on hand to fund tenant
improvements and refurbishments, we may use debt financing in order to fulfill
our obligations under lease agreements with new tenants.
 
 Mortgages,
Debt Securities and Other Real Estate-Related Investments
 
 Although
we expect that substantially all of our acquisitions will be of the types of
properties described above, we may acquire other investments, including
mortgages and other illiquid real estate-related securities. To the extent that
our Advisor determines that it is advantageous for us to make or acquire
mortgage loans or other real estate-related investments, we will seek to obtain
fixed income through the receipt of payments from these investments. If we
invest in mortgages and other real estate-related investments, we do not expect
that we would invest more than 20% of our long-term stabilized asset portfolio
in such investments.
 
 Our
charter does not limit the amount of gross offering proceeds that we may apply
to mortgage loans or other real estate-related investments and during the early
stages of this offering, the percentage of our assets invested in these
investments may exceed 20% of our total assets.  While we have no intention
of becoming a mortgage REIT, we may acquire or make the following:
 
 ·
              first and second
      mortgages;
 ·
              convertible
      mortgages;
 ·
              construction loans on real
      estate;
 ·
              mortgage loan participation
      investments;
 ·
              common, preferred and convertible
      preferred equity securities issued by real estate
      companies;
 ·
              mezzanine and bridge loans;
      and
 ·
              other illiquid real
      estate-related securities.
 
 Joint
Ventures and Other Arrangements
 
 We may
acquire interests in properties through joint ventures, including ventures with
affiliates of our Advisor. Among other reasons, we anticipate acquiring
properties through joint ventures in order to diversify our portfolio of
properties in terms of geographic region, property type and tenant industry
group.  Joint ventures may also allow us to acquire an interest in a
property without requiring that we fund the entire purchase price.  In
addition, certain properties may be available to us only through joint
ventures.  In determining whether to recommend a particular joint venture,
the Advisor will evaluate the real property that such joint venture owns or is
being formed to own under the same criteria described elsewhere in this
report.  These entities may employ debt financing consistent with our
borrowing policies. See “Borrowing Policies” below.
  6
  We may
enter into joint ventures with affiliates of our Advisor for the acquisition of
properties, but only if the independent directors committee (by majority vote)
approves the transaction as being fair and reasonable to us and on substantially
the same terms and conditions as those received by the affiliated equity joint
venturers.  If such a joint venture also involves a third party that
negotiated the terms of its participation on an arms-length basis, then our
investment must be either on terms and conditions no worse than those received
by the affiliate or on terms and conditions no worse than those received by a
third-party equity joint venturer that negotiated the terms of its participation
on an arms-length basis.
 
 Borrowing
Policies
 
 Debt
Financing
 
 When we
refer to debt financing, we are referring to all types of debt financing at
fixed or variable interest rates or some combination of both.  For our
stabilized core plus properties, our long-term goal will be to use low to
moderate levels of debt financing with leverage ranging from 40% to 50% of the
cost of the asset.  For the value-added and opportunistic properties, our
goal will be to acquire and develop or redevelop these properties using moderate
to high levels of debt financing with leverage ranging from 65% to 75% of the
cost of the asset.  We may exceed these debt levels on an individual
property basis.  Once these value-added and opportunistic properties are
developed, redeveloped and stabilized with tenants, we plan to reduce the levels
of debt to fall within target debt ranges appropriate for core plus
properties.While
we seek to fall within the outlined targets on a portfolio basis,for any specific
property 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 tangible assets), upon the vote of a majority of our
independent directors, we will be able to temporarily exceed this debt
limitation. It is likely that our debt financing will be secured by the
underlying property, but it will not necessarily be the case each time. We may
enter into interest rate protection agreements to mitigate interest rate
fluctuation exposure if we believe the benefit of such contracts outweigh the
costs of purchasing these instruments.
 
 Other
Indebtedness
 
 We may
also incur indebtedness for working capital requirements, tenant improvements,
capital improvements, leasing commissions and, if necessary, to make
distributions, including those necessary to maintain our qualification as a REIT
for federal income tax purposes.  We will endeavor to borrow such funds on
an unsecured basis but we may secure indebtedness with properties if our
independent directors committee determines that it is in our best
interests.
 
 Our
Advisor may also create an affiliated entity that will purchase properties using
debt financing and hold them for us pending our ability to acquire the
properties at a low to moderate level of indebtedness.  Any properties that
we purchase from the affiliated acquisition holding company will meet our core
plus investment criteria and be approved by our independent directors
committee.  Our purchase price for the property would reflect the costs
associated with holding the property.  In no event will we acquire the
property at an amount in excess of its current appraised value as determined by
an independent expert selected by our independent directors not otherwise
interested in the transaction.
 
 Competition
 
 We
compete with a considerable number of other real estate companies seeking to
acquire and lease space, most of which may have greater marketing and financial
resources than we do. Principal factors of competition in our business are the
quality of properties (including the design and condition of improvements),
leasing terms (including rent and other charges and allowances for tenant
improvements), attractiveness and convenience of location, the quality and
breadth of tenant services provided and reputation as an owner and operator of
quality properties in the relevant market. Our ability to compete also depends
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
hold interests in properties located in the same geographic locations as other
entities managed by our Advisor or our Advisor’s affiliates. Our properties may
face competition in these geographic regions from such other properties owned,
operated or managed by other entities managed by our Advisor or our Advisor’s
affiliates. Our Advisor or its affiliates have interests that may vary from
those we may have in such geographic markets.
 
 Government
Regulations
 
 We and
the properties we expect to own are subject to federal, state and local laws and
regulations relating to environmental protection and human health and safety.
Federal laws such as the National Environmental Policy Act, the Comprehensive
Environmental Response, Compensation, and Liability Act, the Resource
Conservation and Recovery Act, the Federal Water Pollution Control Act, the
Federal Clean Air Act, the Toxic Substances Control Act, the Emergency Planning
and Community Right to Know Act and the Hazard Communication Act govern such
matters as wastewater discharges, air emissions, the operation and removal of
underground and above-ground storage tanks, the use, storage, treatment,
transportation and disposal of solid and hazardous materials and the remediation
of contamination associated with disposals. Some of these laws and regulations
impose joint and several liabilities on tenants, owners or operators for the
costs to investigate or remediate contaminated properties, regardless of fault
or whether the acts causing the contamination were legal. Compliance with these
laws and any new or more stringent laws or regulations may require us to incur
material expenditures. Future laws, ordinances or regulations may impose
material environmental liability. In addition, there are various federal, state
and local fire, health, life-safety and similar regulations with which we may be
required to comply, and which may subject us to liability in the form of fines
or damages for noncompliance.
  7
  Our
properties may be affected by our tenants’ operations, the existing condition of
land when we buy it, operations in the vicinity of our properties, such as the
presence of underground storage tanks, or activities of unrelated third parties.
The presence of hazardous substances, or the failure to properly remediate these
substances, may make it difficult or impossible to sell or rent such
property.
 
 Under
various federal, state and local environmental laws, ordinances and regulations,
a current or previous real property owner or operator may be liable for the cost
to remove or remediate hazardous or toxic substances on, under or in such
property. These costs could be substantial. Such laws often impose liability
whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. Environmental laws also may
impose restrictions on the manner in which property may be used or businesses
may be operated, and these restrictions may require substantial expenditures or
prevent us from entering into leases with prospective tenants that may be
impacted by such laws. Environmental laws provide for sanctions for
noncompliance and may be enforced by governmental agencies or, in certain
circumstances, by private parties. Certain environmental laws and common law
principles could be used to impose liability for release of and exposure to
hazardous substances, including asbestos-containing materials into the air.
Third parties may seek recovery from real property owners or operators for
personal injury or property damage associated with exposure to released
hazardous substances. The cost of defending against claims of liability, of
complying with environmental regulatory requirements, of remediating any
contaminated property, or of paying personal injury claims could be
substantial.
 
 The healthcare industry is highly
regulated by federal, state and local licensing requirements, facility
inspections, reimbursement policies, regulations concerning capital and other
expenditures, certification requirements and other laws, regulations and rules.
 In addition, regulators require compliance with a variety of safety,
health, staffing and other requirements relating to the design and conditions of
the licensed facility and quality of care provided.  Additional laws and
regulations may be enacted or adopted that could require changes in the design
of properties and certain operations of our tenants and third-party operators.
 The failure of any tenant or operator to comply with such laws,
requirements and regulations could affect a tenant’s or operator’s ability to
operate the facilities that we own.
 
 One of
our properties is a skilled nursing facility where the property
operator  receives most of its revenues from Medicare and Medicaid,
with the balance representing private pay, including private insurance.
Consequently, changes in federal or state reimbursement policies may also
adversely affect an operator’s ability to cover its expenses, including our rent
or debt service. Skilled nursing facilities and hospitals are subject to
periodic pre- and post-payment reviews and other audits by federal and state
authorities. A review or audit of claims of a property operator could result in
recoupments, denials or delays of payments in the future, which could have a
material adverse effect on the operator’s ability to meet its obligations to
us.
 
 Acquisition Activity
 
 At
December 31, 2009, we owned four properties.  All of these properties
are consolidated into our accompanying consolidated financials statements and
included in the properties summary as provided under “Item 2 Properties”
referenced below.
 
 We have
acquired our properties to date with a combination of the proceeds from our
ongoing initial public offering and debt incurred upon the acquisition of such
properties.
 
 Employees
 
 We have
no employees and our executive officers are all employees of our Advisor’s
affiliates. Substantially all of our work is performed by employees of our
Advisor’s affiliates. We are dependent on our Advisor and Pacific Cornerstone
Capital, Inc., our dealer manager,  for certain services that are
essential to us, including the sale of shares in our ongoing initial public
offering; the identification, evaluation, negotiation, purchase and disposition
of properties; the management of the daily operations of our real estate
portfolio; and other general and administrative responsibilities. In the event
that these companies are unable to provide the respective services, we will be
required to obtain such services from other sources.
 
 Available
Information
 
 Information
about us 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, and amendments to those reports filed pursuant to
Section 13(a) or 15(d) of the Exchange Act as soon as reasonably
practicable after we electronically file such material with the SEC. These
materials are also available at no cost in print to any person who requests it
by contacting our Investor Services Department at 1920 Main Street,
Suite 400, Irvine, California 92614; telephone (877) 805-3333. Our
filings with the SEC are available to the public over the Internet at the SEC’s
website at http://www.sec.gov. You may read and copy any filed document at the
SEC’s public reference room in Washington, D.C. at 100 F Street, N.E.,
Room 1580, Washington D.C. Please call the SEC at (800) SEC-0330
for further information about the public reference rooms.
  8
  ITEM
1A.  RISK FACTORS
 
 The risks
and uncertainties described below can adversely affect our business, operating
results, prospects and financial condition.  These risks and
uncertainties could cause our actual results to differ materially from those
presented in our forward looking statement.
 
 General
 
 Recent
disruptions in the financial markets and continuing poor economic conditions
could adversely affect the values of our investments and our ongoing results
operations.
  Disruptions
in the capital markets during the past two years have constrained equity and
debt capital available for investment in commercial real estate, resulting in
fewer buyers seeking to acquire commercial properties and consequent reductions
in property values.  Furthermore, the current state of the economy and
the implications of future potential weakening may negatively impact commercial
real estate fundamentals and result in lower occupancy, lower rental rates and
declining values in our future portfolio.  The current downturn
may impact our future tenants’ ability to pay base rent, percentage rent or
other charges due to us.
  Liquidity
in the global credit market has been significantly contracted by market
disruptions, making it costly to finance acquisitions, obtain lines of credit or
refinance existing debt, when debt financing is available at all.  We
rely on debt financing to acquire our properties and we expect to continue to
use debt to acquire properties and other real estate-related
investments.
  The
occurrence of these events could have the following negative effects on
us:
 
 ·
              the values of our investments in
      commercial properties could decrease below the amounts we pay for the
      investments;
 
 ·
              revenues from our properties
      could decrease due to lower occupancy rates, reduced rental rates and
      potential increases in uncollectible
  receivables;
 
 ·
              we may not be able to refinance
      our indebtedness or to obtain additional debt financing on attractive
      terms.
 
 These
factors could impair our ability to make distributions to and decrease the
value of our stockholders' investment in us.
 
 Financial
markets are still recovering from a period of disruption and recession, and we
are unable to predict if and when the economy will stabilize or
improve.
 
 The
financial markets are still recovering from a recession, which created volatile
market conditions, resulted in a decrease in availability of business credit and
led to the insolvency, closure or acquisition of a number of financial
institutions. While the markets showed signs of stabilizing in the end of 2009,
it remains unclear when the economy will fully recover to pre-recession levels.
Continued economic weakness in the U.S. economy generally or a new recession
would likely adversely affect our financial condition and that of our tenants
and could impact the ability of our tenants to pay rent to us.
  Our tenants may
be affected by the financial deterioration, insolvency and/or bankruptcy of
other significant operators in the healthcare industry.
   Certain
companies in the healthcare industry, including some key senior housing
operators, none of which are currently our tenants, are experiencing
considerable financial, legal and/or regulatory difficulties which have resulted
or may result in financial deterioration and, in some cases, insolvency and/or
bankruptcy. The adverse effects on these companies could have a significant
impact on the industry as a whole, including but not limited to negative public
perception by investors, lenders and consumers. As a result, our tenants could
experience the damaging financial effects of a weakened industry driven by
negative industry headlines, ultimately making them unable to meet their
obligations to us, and our business could be adversely
affected.
 
 Our
limited operating history makes it difficult for you to evaluate us.  In
addition, as a company in its early stages of operations we have incurred losses
in the past and may continue to incur losses.
  9
  We have a
limited operating history. As a consequence, our past performance and the past
performance of other real estate investment programs sponsored by affiliates of
our advisor may not be indicative of the performance we will achieve. We were
formed on October 16, 2006 in order to invest primarily in healthcare,
industrial and net-leased retail real estate. We have acquired five properties
as of the date of this report and generated limited income, cash flow, funds
from operations or funds from which to make distributions to our
shareholders.  In addition, as a company in its early stages of operations,
we have incurred losses since our inception and we may continue to incur
losses.
 
 Because
there is no public trading market for our stock, it will be difficult for our
stockholders to sell their stock.  If our stockholders are able to
sell their stock, it may be at a substantial discount.
 
 There is
no current public market for our stock and there is no assurance that a public
market will ever exist for our stock. Our charter contains restrictions on the
ownership and transfer of our stock, and these restrictions may inhibit the
ability of our stockholders to sell their stock. Our charter prevents any one
person from owning more than 9.8% in number of shares or value, whichever is
more restrictive, of the outstanding shares of any class or series of our stock
unless exempted by our board of directors. Our charter also limits the ability
or our stockholders to transfer the stock to prospective stockholders unless
(i) they meet suitability standards regarding income or net worth, and
(ii) the transfer 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 redeemed
annually.  Our board of directors may also limit, suspend or terminate
our stock repurchase program at any time. We have no obligations to repurchase
our stockholders' stock if redemption would violate restrictions on cash
distribution under Maryland law.
 
 It may be
difficult for our stockholders to sell their stock promptly or at all. If our
stockholders are able to sell shares of stock, they may only be able to sell
them at a substantial 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 be reduced by sales commissions, dealer manager fees, organization
and offering expenses, and acquisition fees and expenses. If our offering
expenses are higher than we anticipate, we will have a smaller amount available
for investment.Unless our aggregate
investments increase in value to compensate for these up-front fees and
expenses, it is unlikely that our stockholders will be able to sell their stock,
whether pursuant to our stock repurchase program or otherwise, without incurring
a substantial loss.
 
 Competition
with third parties for properties and other investments may result in our paying
higher prices for properties which could reduce our profitability and the return
on investment.
 
 We
compete with many other entities engaged in real estate investment activities,
including individuals, corporations, banks, insurance companies, other REITs,
and real estate limited partnerships, many of which have greater resources than
we do. Some of these investors may enjoy significant competitive advantages that
result from, among other things, a lower cost of capital and enhanced operating
efficiencies. In addition, the number of entities and the amount of funds
competing for suitable investments may increase. Any such increase would result
in increased demand for these assets and increased prices. If competitive
pressures cause us to pay higher prices for properties, our ultimate
profitability may be reduced and the value of our properties may not appreciate
or may decrease significantly below the amount paid for such properties. At the
time we elect to dispose of one or more of our properties, we will be in
competition with sellers of similar properties to locate suitable purchasers,
which may result in us receiving lower proceeds from the disposal or result in
us not being able to dispose of the property due to the lack of an acceptable
return.  This may cause our stockholders to experience a lower return
on their investments in us.
 
 If
we are unable to find or experience delays in finding suitable investments, we
may experience a delay in the commencement of distributions and a lower rate of
return to investors.
 
 Our
ability to achieve our investment objectives and to make distributions depends
upon the performance of our Advisor in the acquisition and operation of our
investments, and upon the performance of property managers and leasing agents in
the management of our properties and the identification of prospective tenants.
We may be delayed in making investments in properties due to delays in the sale
of our stock, delays in negotiating or obtaining the necessary purchase
documentation for properties, delays in locating suitable investments or other
factors. We cannot be sure that our Advisor will be successful in obtaining
suitable investments on financially attractive terms or that our investment
objectives will be achieved. We may also make other real estate investments,
such as investments in public and private real estate companies which own real
estate properties and make real estate investments.  Until we make real
estate investments, we will hold the proceeds from this offering in an
interest-bearing account or invest the proceeds in short-term, investment-grade
securities. We expect the rates of return on these short-term investments to be
substantially less than the returns we make on real estate investments. If we
are unable to invest the proceeds from this offering in properties or other real
estate investments for an extended period of time, distributions to our
stockholders may be delayed and may be lower and the value of our
stockholders' investment could be reduced.
 
 If
we do not raise substantial funds in our initial public offering, we will be
limited in the number and type of investments we may make, and the value of our
stockholders’ investment in us will fluctuate with the performance of the
specific properties we acquire.
 
 Our
offering is being made on a “best efforts” basis and no individual, firm or
corporation has agreed to purchase any of our stock. The amount of proceeds we
raise in the Offering may be substantially less than the amount we would need to
achieve a broadly diversified property portfolio. If we raise substantially less
than the maximum offering amount, we will make fewer investments resulting in
less diversification in terms of the number of investments owned and the
geographic regions in which our investments are located. In that case, the
likelihood that any single property’s performance would materially reduce our
overall profitability will increase. We are not limited in the number or size of
our investments or the percentage of net proceeds we may dedicate to a single
investment. In addition, any inability to raise substantial funds would increase
our fixed operating expenses as a percentage of gross income, and our net income
and the distributions we make to stockholders would be reduced.
  10
  The
cash distributions our stockholders receive may be less frequent or lower in
amount than expected.
 
 We
currently expect to make distributions to our stockholders quarterly, if not
more frequently. All expenses we incur in our operations are deducted from cash
funds generated by operations prior to computing the amount of cash available to
be paid as distributions to our stockholders. Our directors will determine the
amount and timing of distributions. Our directors will consider all relevant
factors, including the amount of cash available for distribution, capital
expenditure and reserve requirements and general operational requirements. We
cannot determine with certainty how long it may take to generate sufficient
available cash flow to make distributions or that sufficient cash will be
available to make distributions to our stockholders. We may borrow funds, return
capital or sell assets to make distributions. With no prior operations, we
cannot predict the amount of distributions our stockholders may receive. We
may be unable to pay or maintain cash distributions or increase distributions
over time.
 
 We
have, and may in the future, pay distributions from sources other than cash
provided from operations.
  Until
proceeds from our offering are invested and generating operating cash flow
sufficient to support distributions to stockholders, we intend to pay a
substantial portion of our distributions from the proceeds of our offerings or
from borrowings in anticipation of future cash flow. To the extent that we use
offering proceeds to fund distributions to stockholders, the amount of cash
available for investment in properties will be reduced.  For the four
quarters ended December 31, 2009 our cumulative funds from operations (FFO)
amounted to a loss of approximately $2.8 million.  During that period we
paid distributions to investors of approximately $1.7 million, of which
approximately $0.9 million was reinvested pursuant to our distribution
reinvestment plan and approximately $0.8 million was paid to investors in cash
from our offering proceeds.
 
 Our
investments will be concentrated in the healthcare, industrial and net-leased
retail sectors and our business would be adversely affected by an economic
downturn affecting one or more of these sectors.
  We intend
for our investments in real estate assets to be primarily concentrated in the
healthcare, industrial and net-leased retail sectors.  This may expose us
to the risk of economic downturns in these sectors to a greater extent than if
our business activities included a more significant portion of other sectors of
the real estate industry.
 
 We
may be unable to complete development and re-development projects on
advantageous terms.
 
 As part
of our investment plan, we intend to develop new and re-develop existing
properties.  Such activities involve significant risks that could adversely
affect our financial condition, results of operations, cash flow and ability to
make distributions on our common stock, which include:
 
 ·
              we may not be able to obtain, or
      may experience delays in obtaining, all necessary zoning, land-use,
      building, occupancy and other governmental permits and
      authorizations;
 
 ·
              we may not be able to obtain
      financing for development projects on favorable terms and complete
      construction on schedule or within budget, resulting in increased debt
      service expense and construction costs and delays in leasing the
      properties and generating cash flow;
and
 
 ·
              the properties may perform below
      anticipated levels, producing cash flow below budgeted amounts and
      limiting our ability to sell such properties to third parties or
      affiliates.
 
 Newly
developed and acquired properties may not produce the cash flow that we expect,
which could adversely affect our overall financial performance.
 
 We intend
to acquire and develop real estate properties.  In deciding whether to
acquire or develop a particular property, we make assumptions regarding the
expected future performance of that property.  If our estimated return on
investment proves to be inaccurate, it may fail to perform as we expected. With
certain properties we plan to acquire, our business plan contemplates
repositioning or redeveloping that property with the goal of increasing its cash
flow, value or both.  Our estimate of the costs of repositioning or
redeveloping an acquired property may prove to be inaccurate, which may result
in our failure to meet our profitability goals.  Additionally, we may
acquire new properties not fully leased, and the cash flow from existing
operations may be insufficient to pay the operating expenses and debt service
associated with that property until the property is more fully leased.  If
one or more of these new properties do not perform as expected or we are unable
to successfully integrate new properties into our existing operations, our
financial performance and our ability to make distributions may be adversely
affected.
  11
  If
we borrow money to meet the REIT minimum distribution requirement or for other
working capital needs, our expenses will increase, our net income will be
reduced by the amount of interest we pay on the money we borrow and we will be
obligated to repay the money we borrow from future earnings or by selling
assets, which will decrease future distributions to stockholders.
 
 If we
fail for any reason to distribute at least 90% of our REIT taxable income
(excluding net capital gains), then we would not qualify for the favorable tax
treatment accorded to REITs (unless we were able to avail ourselves of certain
relief provisions). It is possible that such 90% of our income would exceed the
cash we have available for distributions due to, among other things, differences
in timing between the actual receipt of income and actual payment of deductible
expenses and the inclusion/deduction of such income/expenses when determining
our taxable income, nondeductible capital expenditures, the creation of
reserves, the use of cash to purchase stock under our stock repurchase program,
and required debt amortization payments. We may decide to borrow funds in order
to meet the REIT minimum distribution requirements even if our management
believes that the then prevailing market conditions generally are not favorable
for such borrowings or that such borrowings would not be advisable in the
absence of such tax considerations. Distributions made in excess of our net
income will generally constitute a return of capital to
stockholders.
 
 The
healthcare properties we own may derive a substantial portion of their income
from third-party payors.
  Most of
our healthcare facilities will be directly affected by risks associated with the
healthcare industry.  Many of our lessees and mortgagors will derive a
substantial portion of their net operating revenues from third-party payors,
including the Medicare and Medicaid programs.  These programs are highly
regulated by federal, state and local laws, rules and regulations and are
subject to frequent and substantial change.  There are no assurances that
payments from governmental payors will remain at levels comparable to present
levels or will, in the future, be sufficient to cover the costs allocable to
patients eligible for reimbursement under these programs.
 
 Failure
to comply with government regulations could adversely affect our healthcare
tenants, operators and borrowers.
  The
healthcare industry is highly regulated by federal, state and local licensing
requirements, facility inspections, reimbursement policies, regulations
concerning capital and other expenditures, certification requirements and other
laws, regulations and rules.  In addition, regulators require compliance
with a variety of safety, health, staffing and other requirements relating to
the design and conditions of the licensed facility and quality of care provided.
 Additional laws and regulations may be enacted or adopted that could
require changes in the design of properties and certain operations of our
tenants and third-party operators.  The failure of any tenant or operator
to comply with such laws, requirements and regulations could affect a tenant’s
or operator’s ability to operate the facilities that we own.
  In some
states, advocacy groups have been created to monitor the quality of care at
health care facilities, and these groups have brought litigation against
operators.  Additionally, in some instances, private litigation by patients
has succeeded in winning large demand awards for alleged abuses.  The
effect of this litigation and potential litigation has increased the costs of
monitoring and reporting quality of care compliance incurred by our tenants.
 In addition, the cost of liability and medical malpractice insurance has
increased and may continue to increase as long as the present litigation
environment affecting the operations of health care facilities continues.
 Continued cost increases could cause our tenants to be unable to pay their
lease payments, decreasing our cash flow available for
distribution.
 
 The
inability of our Advisor to retain or obtain key personnel, property managers
and leasing agents could delay or hinder implementation of our investment
strategies, which could impair our ability to make distributions and could
reduce the value of our stockholders' investment.
 
 Our
success depends to a significant degree upon the contributions of Terry G.
Roussel, the President and Chief Executive Officer of our Advisor. Neither we
nor our Advisor have an employment agreement with Mr. Roussel or with any
of the other executive officers. If Mr. Roussel was to cease his
affiliation with our Advisor, our Advisor may be unable to find a suitable
replacement, and our operating results could suffer. We believe that our future
success depends, in large part, upon our Advisor’s, property managers’ and
leasing agents’ ability to hire and retain highly skilled managerial,
operational and marketing personnel. Competition for highly skilled personnel is
intense, and our Advisor and any property managers we retain may be unsuccessful
in attracting and retaining such skilled personnel. If we lose or are unable to
obtain the services of highly skilled personnel, property managers or leasing
agents, our ability to implement our investment strategies could be delayed or
hindered, and the value of our stockholders’ investments may
decline.
 
 12
 
 We are dependent
upon our Advisor, its affiliates and Servant to conduct our
operations.  Any adverse changes in the financial health of our
Advisor,its
affiliatesor
Servant,or our
relationship withany of
themthem could hinder
our operating performance and the return on your investment.  If our
Advisor became unable toconductorganization and
offeringactivities on our
behalf, we may sell
fewer shares inouroffering, we may
be unable to acquire a diversified portfolio of properties, our operating
expenses may be a larger percentage of our revenue and our net income may be
lower.
 
 We are
dependent on Cornerstone Leveraged Realty Advisors to manage our operations and
our portfolio of real estate assets.  Our
Advisor has limited operating history and it will depend upon the fees and other
compensation that it will receive from us in connection with the purchase,
management and sale of our properties to conduct its operations.  To date,
the fees we pay to our Advisor have been inadequate to cover its operating
expenses.  To cover its operational shortfalls, our Advisor has relied
on cash raised in private offerings of its sole member.  A recent
FINRA inquiry, which relates to such private offerings, could adversely affect
the success of such private offerings or future private capital-raising
efforts.  If our Advisor is unable to secure additional capital, it
may become unable to meet its obligations and we might be required to find
alternative service providers, which could result in a significant disruption of
our business and may adversely affect the value of our stockholders’ investments
in us.We also rely upon Servant, which provides certain portfolio
management services on our behalf pursuant to a strategic alliance with our
sponsor.  An adverse change in our relationship with our sponsor could
hinder our ability to obtain such services from Servant.  Furthermore,
to the extent that our Advisor is unable to raise adequate funds to support our
organization and offering activities, our ability to raise money in this
offering could be adversely affected.  If we sell fewer shares in this
offering, we may be unable to acquire a diversified portfolio of properties, our
operating expenses may be a larger percentage of our revenue and our net income
may be lower.
  We
are dependent on our affiliated dealer manager to raise funds in our initial
public offering.  Events that prevent our dealer manager from serving in
that capacity would jeopardize the success of our offering and could reduce the
value of our stockholders’ investments in us.
  The
success of our initial public offering depends to a large degree on the
capital-raising efforts of our affiliated dealer manager.  If we were
unable to raise significant capital in our offering, our general and
administrative costs would be likely to continue to represent a larger portion
of our revenues than would otherwise be the case, which would likely adversely
affect the value of our stockholders’ investments in us.  In addition,
lower offering proceeds would limit the diversification of our portfolio, which
would cause the value of investments in us to be more dependent on the
performance of any one of our properties.  Therefore, the value of our
stockholders’ investments in us could depend on the success of our
offering.
  We
believe that it could be difficult to secure the services of another dealer
manager for a public offering of our shares should our affiliated dealer manager
be unable to serve in that capacity. Therefore, any event that hinders the
ability of our dealer manager to conduct offerings on our behalf would
jeopardize the success of our offering and, as described above, could adversely
affect the value of investments in us. A number of outcomes could impair our
dealer manager’s ability to successfully serve in that capacity.
 
 Our
dealer manager has limited capital. In order to conduct its operations, our
dealer manager depends on transaction-based compensation that it earns in
connection with offerings in which it participates. If our dealer manager does
not earn sufficient revenues from the offerings that it manages, it may not have
sufficient resources to retain the personnel necessary to market and sell large
amounts of shares on our behalf. In addition, our dealer manager has also relied
on our affiliates in order to fund its operations, and our affiliates have
relied on private offerings in order to make such equity investments in our
dealer manager.  Should our affiliates become unable or unwilling to
make further equity investments in our dealer manager, our dealer manager’s
operations and its ability to conduct a successful public offering for us could
suffer.
  Our
dealer manager operates in a highly regulated area and must comply with a
complex scheme of federal and state securities laws and regulations as well as
the rules imposed by FINRA. In some cases, there may not be clear authority
regarding the interpretation of regulations applicable to our dealer manager. In
such an environment, the risk of sanctions by regulatory authorities is
heightened. Although these risks are also shared by other dealer managers of
public offerings, the risks may be greater for our dealer manager because of the
limited financial resources of our dealer manager and its affiliates. Limited
financial resources may make it more difficult for our dealer manager to endure
regulatory sanctions and to continue to serve effectively as the dealer manager
of our offering.
 
 Risks
Related to Conflicts of Interest
 
 Our
Advisor will face conflicts of interest relating to the purchase and leasing of
properties, and such conflicts may not be resolved in our favor, which could
limit our investment opportunities, impair our ability to make distributions and
reduce the value of our stockholders’ investments in us.
 
 We rely
on our Advisor to identify suitable investment opportunities. We may be buying
properties at the same time as other entities that are affiliated with or
sponsored by our Advisor. Other programs sponsored by our Advisor or its
affiliates also rely on our Advisor for investment opportunities. Many
investment opportunities would be suitable for us as well as other programs. Our
Advisor could direct attractive investment opportunities or tenants to other
entities. Such events could result in our investing in properties that provide
less attractive returns, thus reducing the level of distributions which we may
be able to pay to stockholders and the value of their investments in
us.
  13
  If
we acquire properties from affiliates of our Advisor, the price may be higher
than we would pay if the transaction was the result of arm’s-length
negotiations.
 
 The
prices we pay to affiliates of our Advisor for our properties will be equal to
the prices paid by them, plus the costs incurred by them relating to the
acquisition and financing 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 be reasonable and consistent with current market conditions as
determined by a majority of our independent directors. Substantial justification
for a higher price could result from improvements to a property by the affiliate
of our Advisor or increases in market value of the property during the period of
time the property is owned by the affiliates of our Advisor as evidenced by an
appraisal of the property. These prices will not be the subject of arm’s-length
negotiations, which could mean that the acquisitions may be on terms less
favorable to us than those negotiated in an arm’s-length transaction. Even
though we will use an independent third-party appraiser to determine fair market
value when acquiring properties from our Advisor and its affiliates, we may pay
more for particular properties than we would have in an arm’s-length
transaction, which would reduce our cash available for investment in other
properties or distribution to our stockholders.
 
 We
may purchase properties from persons with whom our Advisor or its affiliates
have prior business relationships and our Advisor’s interest in preserving its
relationship with these persons could result in us paying a higher price for the
properties than we would otherwise pay.
  We may
have the opportunity to purchase properties from third parties, including
affiliates of our directors who have prior business relationships with our
Advisor or its affiliates. If we purchase properties from such third parties,
our Advisor may experience a conflict between our interests and its interest in
preserving any ongoing business relationship with these sellers.
 
 Our
Advisor will face conflicts of interest relating to joint ventures that we may
form with affiliates of our Advisor, which conflicts could result in a
disproportionate benefit to the other venture partners at our
expense.
 
 We may
enter into joint venture agreements with third parties (including entities that
are affiliated with our Advisor or our independent directors) for the
acquisition or improvement of properties. Our Advisor may have conflicts of
interest in determining which program should enter into any particular joint
venture agreement. The co-venturer may have economic or business interests or
goals that are or may become inconsistent with our business interests or goals.
In addition, our Advisor may face a conflict in structuring the terms of the
relationship between our interests and the interest of the affiliated
co-venturer and in managing the joint venture. Since our Advisor and its
affiliates will control both the affiliated co-venturer and, to a certain
extent, us, agreements and transactions between the co-venturers with respect to
any such joint venture will not have the benefit of arm’s-length negotiation of
the type normally conducted between unrelated co-venturers. Co-venturers may
thus benefit to our and our stockholders’ detriment.
 
 Our
Advisor and its affiliates receive commissions, fees and other compensation
based upon the sale of our stock, our property acquisitions, the property we own
and the sale of our properties and therefore our Advisor and its affiliates may
make recommendations to us that we buy, hold or sell property in order to
increase their compensation. Our Advisor will have considerable discretion with
respect to the terms and timing of our acquisition, disposition and leasing
transactions.
 
 Our
Advisor and its affiliates receive commissions, fees and other compensation
based upon the sale of our stock and based on our investments. Therefore, our
Advisor may recommend that we purchase properties that generate fees for our
Advisor, but are not necessarily the most suitable investment for our portfolio.
In some instances our Advisor and its affiliates may benefit by us retaining
ownership of our assets, while our stockholders may be better served by
sale or disposition. In other instances they may benefit by us selling the
properties which may entitle our Advisor to disposition fees and possible
success-based sales fees. In addition, our Advisor’s ability to receive asset
management fees and reimbursements depends on our continued investment in
properties and in other assets which generate fees to them. Therefore, the
interest of our Advisor and its affiliates in receiving fees may conflict with
our interests.
 
 Our
Advisor and its affiliates, including our officers, one of whom is also a
director, will face conflicts of interest caused by compensation arrangements
with us and other Cornerstone-sponsored programs, which could result in actions
that are not in the long-term best interests of our stockholders.
 
 Our
Advisorand
its affiliates will receive substantial fees from us that are partially tied to
the performance of our stockholders' investment.  These fees could
influence our Advisor’s advice to us, as well as the judgment of the affiliates
of our Advisor who serve as our officers, one of whom is also a director. 
Among other matters, the compensation arrangements could affect their judgment
with respect to:
  ·
              property acquisitions from other
      Advisor-sponsored programs, which might entitle our Advisor to disposition
      fees and possible success-based sale fees in connection with its services
      for the seller;
  14
  ·
              whether and 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 but could also
      adversely affect its sales efforts for other programs if the price at
      which our stock trades is lower than the price at which we offered stock
      to the public; and
 
 ·
              whether
      and when we seek to sell the company or its assets, which sale could
      entitle our Advisor to success-based fees but could also adversely affect
      its sales efforts for other programs if the sales price for the company or
      its assets resulted in proceeds less than the amount needed to preserve
      our stockholders’ capital.
 
 Considerations
relating to their compensation from other programs could result in decisions
that are not in the best interests of our stockholders, which could hurt our
ability to make distributions to our stockholders or result in a decline in the
value of their investments in us.
 
 If
the competing demands for the time of our Advisor, its affiliates and our
officers result in them spending insufficient time on our business, we may miss
investment opportunities or have less efficient operations, which could reduce
our profitability and result in lower distributions to our
stockholders.
 
 We do not
have any employees. We rely on the employees of our Advisor and its affiliates
for the day-to-day operation of our business. We estimate that over the life of
the company, our Advisor and its affiliates will dedicate, on average, less than
half of their time to our operations. The amount of time that our Advisor and
its affiliates spend on our business will vary from time to time and is expected
to be more while we are raising money and acquiring properties. Our Advisor and
its affiliates, including our officers, have interests in other programs and
engage in other business activities. As a result, they will have conflicts of
interest in allocating their time between us and other programs and activities
in which they are involved. Because these persons have competing interests on
their time and resources, they may have conflicts of interest in allocating
their time between our business and these other activities. During times of
intense activity in other programs and ventures, they may devote less time and
fewer resources to our business than are necessary or appropriate to manage our
business. We expect that as our real estate activities expand, our Advisor will
attempt to hire additional employees who would devote substantially all of their
time to our business. There is no assurance that our Advisor will devote
adequate time to our business. If our Advisor suffers or is distracted by
adverse financial or operational problems in connection with its operations
unrelated to us, it may allocate less time and resources to our operations. If
any of these things occur, the returns on our investments, our ability to make
distributions to stockholders and the value of their investments in us may
suffer.
 
 Our
officers, one of whom is also a director, face conflicts of interest related to
the positions they hold with our Advisor and its affiliates, which could hinder
our ability to successfully implement our business strategy and to generate
returns to our stockholders.
 
 Our
officers, one of whom is also a director, are also officers of our Advisor, our
dealer manager and other affiliated entities. As a result, they owe fiduciary
duties to these various entities and their stockholders and members, which
fiduciary duties may from time to time conflict with the fiduciary duties that
they owe to us and our stockholders. Their loyalties to these other entities
could result in actions or inactions that are detrimental to our business, which
could harm the implementation of our business strategy and our investment,
property management and leasing opportunities. If we do not successfully
implement our business strategy, we may be unable to generate cash needed to
make distributions our stockholders and to maintain or increase the value of our
assets.
 
 Our
board’s possible loyalties to existing Advisor-sponsored programs (and possibly
to future Advisor-sponsored programs) could result in our board approving
transactions that are not in our best interest and that reduce our net income
and lower our distributions to stockholders.
 
 Our
officers, one of whom is also a director, are also officers of our Advisor,
which is an affiliate of the managing member of another affiliate-sponsored
program. The loyalties of these officers to the other affiliate-sponsored
program may influence the judgment of our board when considering issues for us
that may affect the other affiliate-sponsored program, such as the
following:
 
 ·
              We could enter into transactions
      with the other program, such as property sales or acquisitions, joint
      ventures or financing arrangements. Decisions of our board regarding the
      terms of those transactions may be influenced by our board’s loyalties to
      the other program.
 
 ·
              A decision of our board regarding
      the timing of a debt or equity offering could be influenced by concerns
      that the offering would compete with an offering of the other
      program.
 
 ·
              A decision of our board regarding
      the timing of property sales could be influenced by concerns that the
      sales would compete with those of the other
  program.
  15
  ·
              We could also face similar
      conflicts and some additional conflicts if our Advisor or its affiliates
      sponsor additional REITs, assuming some of our directors are also
      directors of the additional
REITs.
 
 ·
              Our
      independent directors must evaluate the performance of our Advisor with
      respect to whether our Advisor is presenting to us our fair share of
      investment opportunities. If our Advisor is not presenting a sufficient
      number of investment opportunities to us because it is presenting many
      opportunities to other Advisor-sponsored entities or if our Advisor is
      giving preferential treatment to other Advisor-sponsored entities in this
      regard, our independent directors may not be well suited to enforce our
      rights under the terms of the Advisory agreement or to seek a new
      Advisor.
 
 Risks
Related to the Offering and Our Corporate Structure
 
 A
limit on the percentage of our securities a person may own may discourage a
takeover or business combination, which could prevent our stockholders from
realizing a premium price for their stock.
 
 In order
for us to qualify as a REIT, no more than 50% of our outstanding stock may be
beneficially owned, directly or indirectly, by five or fewer individuals
(including certain types of entities) at any time during the last half of each
taxable year beginning after our first taxable year. To assure that we do not
fail to qualify as a REIT under this test, our charter restricts direct or
indirect ownership by one person or entity to no more than 9.8% in number of
shares or value, whichever is more restrictive, of the outstanding shares of any
class or series of our stock unless exempted by our board of directors. This
restriction may have the effect of delaying, deferring or preventing a change in
control of us, including an extraordinary transaction (such as a merger, tender
offer or sale of all or substantially all of our assets) that might provide a
premium price to our stockholders.
 
 Our
charter permits our board of directors to issue stock with terms that may
subordinate the rights of our common stockholders or discourage a third party
from acquiring us in a manner that could result in a premium price to our
stockholders.
 
 Our board
of directors may increase or decrease the aggregate number of shares of stock or
the number of shares of stock of any class or series that we have authority to
issue and classify or reclassify any unissued common stock or preferred stock
and establish the preferences, conversion or other rights, voting powers,
restrictions, limitations as to distributions, qualifications and terms or
conditions of redemption of any such stock. Our board of directors could
authorize the issuance of preferred stock with terms and conditions that could
have priority as to distributions and amounts payable upon liquidation over the
rights of the holders of our common stock. Such preferred stock could also have
the effect of delaying, deferring or preventing a change in control of us,
including an extraordinary transaction (such as a merger, tender offer or sale
of all or substantially all of our assets) that might provide a premium price to
holders of our common stock.
 
 The
payment of the subordinated performance fee due upon termination of the Advisor,
and the purchase of interests in the operating partnership held by our Advisor
and its affiliates as required in our Advisory agreement, may discourage a
takeover attempt that could have resulted in a premium price to our
stockholders.
 
 If we
engage in a merger in which we are not the surviving entity and our Advisory
agreement is terminated, our Advisor and its affiliates may be entitled to the
subordinated performance fee due upon termination and to require that we
purchase all or a portion of the operating partnership units they hold at any
time thereafter for cash, or our stock, as determined by the seller. The
subordinated performance fee is a cumulative fee due upon termination and
provides for payments based on the excess of enterprise value plus distributions
we have made to the date of termination over the sum of invested capital plus an
amount necessary for stockholders to reach one of three threshold returns. 
The three threshold returns are 6%, 8%, and 10%.  At each threshold return
level, subordinated performance fee due upon termination would be either 5%,
10%, or 15% of that excess enterprise value plus distributions over the sum of
invested capital plus the threshold return.  The existence of this fee may
deter a prospective acquirer from bidding on our company, which may limit the
opportunity for stockholders to receive a premium for their stock that might
otherwise exist if an investor attempted to acquire us through a
merger.
 
 Our
stockholders will have limited control over changes in our policies and
operations, which increases the uncertainty and risks of an investment in
us.
 
 Our board
of directors determines our major policies, including our policies regarding
financing, growth, debt capitalization, REIT qualification and distributions.
Our board of directors may amend or revise these and other policies without a
vote of the stockholders. Under Maryland General Corporation Law and our
charter, our stockholders have a right to vote only on limited matters. Our
board’s broad discretion in setting policies and our stockholders’ inability to
exert control over those policies increases the uncertainty and risks of an
investment on us.
 
 A
stockholder’s interest in us may be diluted if we issue additional
stock.
 
 Our
stockholders do not have preemptive rights to any stock we issue in the future.
Therefore, in the event that we (1) sell stock in the future, including
stock issued pursuant to our distribution reinvestment plan, (2) sell
securities that are convertible into stock, (3) issue stock in a private
offering, (4) issue stock upon the exercise of the options granted to our
independent directors, employees of our Advisor or others, or (5) issue
stock to sellers of properties acquired by us in connection with an exchange of
limited partnership interests in our operating partnership, investors purchasing
stock in this offering 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
value of our properties, investors in this offering might also experience a
dilution in the book value per share of their stock.
  16
  A
stockholder’s interest in us may be diluted if we acquire properties for units
in our operating partnership.
 
 Holders
of units of our operating partnership will receive distributions per unit in the
same amount as the distributions we pay per share to our stockholders and will
generally have the right to exchange their units of our operating partnership
for cash or shares of our stock (at our option). In the event we issue units in
our operating partnership in exchange for properties, investors purchasing stock
in the Offering will experience potential dilution in their percentage ownership
interest in us. Depending on the terms of such transactions, most notably the
price per unit, which may be less than the price paid per share in the Offering,
the value of our properties and the value of the properties we acquire through
the issuance of units of limited partnership interests in our operating
partnership, investors in this offering might also experience a dilution in the
book value per share of their stock.
 
 Although
we are not currently afforded the protection of the Maryland General Corporation
Law relating to business combinations our board of directors could opt into
these provisions of Maryland law in the future, which may discourage others from
trying to acquire control of us and may prevent our stockholders from receiving
a premium price for their stock in connection with a business
combination.
 
 Under
Maryland law, “business combinations” between a Maryland corporation and certain
interested stockholders or affiliates of interested stockholders are prohibited
for five years after the most recent date on which the interested stockholder
becomes an interested 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 a
control share acquisition have no voting rights except to the extent approved by
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 of
the corporation are not entitled to vote on the matter. Should our board opt
into these provisions of Maryland law, it may discourage others from trying to
acquire control of us and increase the difficulty of consummating any offer.
Similarly, provisions of Title 3, Subtitle 8 of the Maryland General Corporation
Law could provide similar anti-takeover protection.
 
 If
we sell substantially less than all of the shares we are offering, the costs we
incur to comply with the rules of the Securities and Exchange Commission
regarding internal control over financial reporting will be a larger percentage
of our net income and will reduce the return on our stockholders’ investments in
us.
 
 We expect
to incur significant costs in establishing and maintaining adequate internal
control over our financial reporting for the company and that our management
will spend a significant amount of time assessing the effectiveness of our
internal control over financial reporting. We do not anticipate that these costs
or the amount of time our management will be required to spend will be
significantly less if we sell substantially less than all of the shares we are
offering.
 
 Our
stockholder’s and our rights to recover claims against our independent directors
are limited, which could reduce our stockholders’ and our recovery against our
independent directors if they negligently cause us to incur losses.
 
 Our
charter provides that no independent director shall be liable to us or our
stockholders for monetary damages and that we will generally indemnify them for
losses unless they are grossly negligent or engage in willful misconduct. As a
result, our stockholders and we may have more limited rights against our
independent directors than might otherwise exist under common law, which could
reduce our stockholders' and our recovery from these persons if they act in
a negligent manner. In addition, we may be obligated to fund the defense costs
incurred by our independent directors (as well as by our other directors,
officers, employees and agents) in some cases, which would decrease the cash
otherwise available for distributions to our stockholders.
 
 Stockholders
may not be able to sell their stock under our stock repurchase
program.
 
 Our board
of directors could choose to amend the terms of our stock repurchase program
without stockholder approval. Our board is also free to terminate the program at
any time upon 30 days written notice to our stockholders.  In
addition, the stock repurchase program includes numerous restrictions that would
limit our stockholders ability to sell stock.
 
 The
offering price was not established on an independent basis and stockholders may
be paying more for our stock than its value or the amount our stockholders would
receive upon liquidation.
  The
offering price of our shares of stock bears no relationship to our book or asset
value or to any other established criteria for valuing stock.  The
board of directors considered the following factors in determining the offering
price for our common stock:
  17
  ·
              the
      offering prices of comparable non-traded REITs;
  and
  ·
              the
      recommendation of the dealer
manager.
  However,
the offering price is likely to be higher than the price at which our
stockholders could resell their shares because (1) our public offering involves
the payment of underwriting compensation and other directed selling efforts,
which payments and efforts are likely to produce a higher sales price than could
otherwise be obtained, and (2) there is no public market for our shares.
Moreover, the offering price is likely to be higher than the amount our
stockholders would receive per share if we were to liquidate at this time
because of the up-front fees that we pay in connection with the issuance of our
shares as well as the recent reduction in the demand for real estate as a result
of the recent credit market disruptions and economic slowdown.
  Because
the dealer manager is one of our affiliates, investors in our stock will not
have the benefit of an independent review of us or our prospectus customarily
undertaken in underwritten offerings.
  The
dealer manager of our offering, Pacific Cornerstone Capital, Inc., is an
affiliate of our advisor and will not make an independent review of us or the
offering.  Accordingly, investors in our stock do not have the benefit
of an independent review of the terms of our offering.  Further, the
due diligence investigation of us by the dealer manager cannot be considered to
be an independent review and, therefore, may not be as meaningful as a review
conducted by an unaffiliated broker-dealer or investment banker.
  Payment
of fees to our Advisor and its affiliates will reduce cash available for
investment and distribution.
 
 Our
Advisor and its affiliates will perform services for us in connection with the
offer and sale of our stock, the selection and acquisition of our properties,
and possibly the management and leasing of our properties. They will be paid
significant fees for these services, which will reduce the amount of cash
available for investment in properties and distribution to stockholders. The
fees to be paid to 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 be willing to provide such services to us at a lower
price.
 
 We may
also pay significant fees during our listing/liquidation stage.  Although
most of the fees payable during our listing/liquidation stage are contingent on
our investors first enjoying agreed-upon investment returns, affiliates of our
Advisor could also receive significant payments even without our reaching the
investment-return thresholds should we seek to become self-managed.  Due to
the apparent preference of the public markets for self-managed companies, a
decision to list our shares on a national securities exchange might well be
preceded by a decision to become self-managed.  And given our Advisor’s
familiarity with our assets and operations, we might prefer to become
self-managed by acquiring entities affiliated with our Advisor.  Such an
internalization transaction could result in significant payments to affiliates
of our Advisor irrespective of whether our stockholders enjoyed the returns
on which we have conditioned other performance-based compensation.
 
 These
fees increase the risk that the amount available for payment of distributions to
our stockholders upon a liquidation of our portfolio would be less than the
purchase price of the shares of stock in the offering.  Substantial
up-front fees also increase the risk that our stockholders will not be able to
resell their shares of stock at a profit, even if our stock is 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 our investments could
decline.
 
 If we
need additional capital in the future to improve or maintain our properties or
for any other reason, we will have to obtain financing from other sources, such
as cash flow from operations, borrowings, property sales or future equity
offerings. These sources of funding may not be available on attractive terms or
at all. If we cannot procure additional funding for capital improvements, our
investments may generate lower cash flows or decline in value, or
both.
 
 Our
Advisor does not have as strong an economic incentive to avoid losses as do
sponsors who have made significant equity investments in the companies they
sponsor.
 
 Our
Advisor has invested $200,000 in our operating partnership.  Therefore, if
we are successful in raising enough proceeds to be able to reimburse our Advisor
for our significant organization and offering expenses, our Advisor has little
exposure to losses in the value of our stock. Without this exposure, our
investors may be at a greater risk of loss because our Advisor and its
affiliates do not have as much to lose from a decrease in the value of our stock
as do those sponsors who make more significant equity investments in the
companies they sponsor.
 
 General
Risks Related to Investments in Real Estate and Real-Estate Related
Investments
 
 Economic
and regulatory changes that impact the real estate market may reduce our net
income and the value of our properties.
  18
  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, risks related to the ownership and operation of real estate, including
but not limited to:
 
 ·
              worsening general or local
      economic conditions and financial markets could cause lower demand, tenant
      defaults, and reduced occupancy and rental rates, some or all of which
      would cause an overall decrease in revenue from
    rents;
 
 ·
              increases in competing properties
      in an area which could require increased concessions to tenants and
      reduced rental rates;
 
 ·
              increases
      in interest rates or unavailability of permanent mortgage funds which may
      render the sale of a property difficult or unattractive;
    and
 
 ·
              changes
      in laws and government regulations, including those governing real estate
      usage, zoning and taxes.
  Some or
all of the foregoing factors may affect our properties, which would reduce our
net income, and our ability to make distributions to our
stockholders.
 
 Lease
terminations could reduce our revenues from rents and our distributions to our
stockholders and cause the value of our stockholders’ investment in us to
decline
 
 The
success of our investments depends upon the occupancy levels, rental income and
operating expenses of our properties and our company. In the event of tenant
default or bankruptcy, we may experience delays in enforcing our rights as
landlord and may incur costs in protecting our investment and re-leasing our
property. We may be unable to re-lease the property for the rent previously
received. We may be unable to sell a property with low occupancy without
incurring a loss. These events and others could cause us to reduce the amount of
distributions we make to stockholders and the value of our stockholders’
investment in us to decline.
 
 Rising
expenses at both the property and the company level could reduce our net income
and our cash available for distribution to stockholders.
 
 Our
properties are subject to operating risks common to real estate in general, any
or all of which may reduce our net income. If any property is not substantially
occupied or if rents are being paid in an amount that is insufficient to cover
operating expenses, we could be required to expend funds with respect to that
property for operating expenses. The properties are subject to increases in tax
rates, utility costs, operating expenses, insurance costs, repairs and
maintenance and administrative expenses. If we are unable to lease properties on
a basis requiring the tenants to pay such expenses, we would be required to pay
some or all of those costs which would reduce our income and cash available for
distribution to stockholders.
 
 Costs
incurred in complying with governmental laws and regulations may reduce our net
income and the cash available for distributions.
 
 Our
company and the properties we own are subject to federal, state and local laws
and regulations relating to environmental protection and human health and
safety. Federal laws such as the National Environmental Policy Act, the
Comprehensive Environmental Response, Compensation, and Liability Act, the
Resource Conservation and Recovery Act, the Federal Water Pollution Control Act,
the Federal Clean Air Act, the Toxic Substances Control Act, the Emergency
Planning and Community Right to Know Act and the Hazard Communication Act govern
such matters as wastewater discharges, air emissions, the operation and removal
of underground and above-ground storage tanks, the use, storage, treatment,
transportation and disposal of solid and hazardous materials and the remediation
of contamination associated with disposals. The properties we own and those we
expect to acquire are subject to the Americans with Disabilities Act of 1990
which generally requires that certain types of buildings and services be made
accessible and available to people with disabilities. These laws may require us
to make modifications to our properties. Some of these laws and regulations
impose joint and several liability on tenants, owners or operators for the costs
to investigate or remediate contaminated properties, regardless of fault or
whether the acts causing the contamination were legal.  Compliance with
these laws and any new or more stringent laws or regulations may require us to
incur material expenditures.  Future laws, ordinances or regulations may
impose material environmental liability.  In addition, there are various
federal, state and local fire, health, life-safety and similar regulations with
which we may be required to comply, and which may subject us to liability in the
form of fines or damages for noncompliance.
 
 Our
properties may be affected by our tenants’ operations, the existing condition of
land when we buy it, operations in the vicinity of our properties, such as the
presence of underground storage tanks, or activities of unrelated third parties.
The presence of hazardous substances, or the failure to properly remediate these
substances, may make it difficult or impossible to sell or rent such property.
Any material expenditures, fines, or damages we must pay will reduce our ability
to make distributions and may reduce the value of our stockholders’ investments
in us.
  19
  Discovery
of environmentally hazardous conditions may reduce our cash available for
distribution to our stockholders.
 
 Under
various federal, state and local environmental laws, ordinances and regulations,
a current or previous real property owner or operator may be liable for the cost
to remove or remediate hazardous or toxic substances on, under or in such
property. These costs could be substantial. Such laws often impose liability
whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. Environmental laws also may
impose restrictions on the manner in which property may be used or businesses
may be operated, and these restrictions may require substantial expenditures or
prevent us from entering into leases with prospective tenants that may be
impacted by such laws. Environmental laws provide for sanctions for
noncompliance and may be enforced by governmental agencies or, in certain
circumstances, by private parties. Certain environmental laws and common law
principles could be used to impose liability for release of and exposure to
hazardous substances, including asbestos-containing materials into the air.
Third parties may seek recovery from real property owners or operators for
personal injury or property damage associated with exposure to released
hazardous substances. The cost of defending against claims of liability, of
complying with environmental regulatory requirements, of remediating any
contaminated property, or of paying personal injury claims could be substantial
and reduce our ability to make distributions and the value of our stockholders’
investments in us.
 
 Any
uninsured losses or high insurance premiums will reduce our net income and the
amount of our cash distributions to stockholders.
 
 Our
Advisor will attempt to obtain adequate insurance to cover significant areas of
risk to us as a company and to our properties. However, there are types of
losses at the property level, generally catastrophic in nature, such as losses
due to wars, acts of terrorism, earthquakes, floods, hurricanes, pollution or
environmental matters, which are uninsurable or not economically insurable, or
may be insured subject to limitations, such as large deductibles or co-payments.
We may not have adequate coverage for such losses. If any of our properties
incurs a casualty loss that is not fully insured, the value of our assets will
be reduced by any such uninsured loss. In addition, other than any working
capital reserve or other reserves we may establish, we have no source of funding
to repair or reconstruct any uninsured damaged property. Also, to the extent we
must pay unexpectedly large amounts for insurance, we could suffer reduced
earnings that would result in lower distributions to stockholders.
 
 We
may have difficulty selling real estate investments, and our ability to
distribute all or a portion of the net proceeds from such sale to our
stockholders may be limited.
 
 Equity
real estate investments are relatively illiquid. Therefore, we will have a
limited ability to vary our portfolio in response to changes in economic or
other conditions. In addition, the liquidity of real estate investments has been
further reduced by the recent turmoil in the capital markets, which has
constrained equity and debt capital available for investment in commercial real
estate, resulting in fewer buyers seeking to acquire commercial properties and
consequent reductions in property values.  As a result of these factors we
will also have a limited ability to sell assets in order to fund working capital
and similar capital needs. When we sell any of our properties, we may not
realize a gain on such sale. We may not elect to distribute any proceeds from
the sale of properties to our stockholders; for example, we may use such
proceeds to:
 
 ·
              purchase
      additional properties;
 
 ·
              repay
      debt, if any;
 
 ·
              buy
      out interests of any co-venturers or other partners in any joint venture
      in which we are a party;
 
 ·
              create
      working capital reserves; or
 
 ·
                make
      repairs, maintenance, tenant improvements or other capital improvements or
      expenditures to our remaining
properties.
 
 Our
ability to sell our properties may also be limited by our need to avoid a 100%
penalty tax that is imposed on gain recognized by a REIT from the sale of
property characterized as dealer property. In order to ensure that we avoid such
characterization, we may be required to hold our properties for a minimum period
of time, generally two years, and comply with certain other requirements in the
Internal Revenue Code.
 
 Real
estate market conditions at the time we decide to dispose of a property may be
unfavorable which could reduce the price we receive for a property and lower the
return on our stockholders’ investments in us.
 
 We intend
to hold the properties in which we invest until we determine that selling or
otherwise disposing of properties would help us to achieve our investment
objectives. General economic conditions, availability of financing, interest
rates and other factors, including supply and demand, all of which are beyond
our control, affect the real estate market. We may be unable to sell a property
for the price, on the terms, or within the time frame we want. Accordingly, the
gain or loss on our stockholders’ investments in us could be affected by
fluctuating market conditions.
  20
  As
part of otherwise attractive portfolios of properties, we may acquire some
properties with existing lock-out provisions, which may inhibit us from selling
a property, or may require us to maintain specified debt levels for a period of
years on some properties.
 
 Loan
provisions could materially restrict us from selling or otherwise disposing of
or refinancing properties. These provisions would affect our ability to turn our
investments into cash and thus affect cash available for distributions to our
stockholders. Loan provisions may prohibit us from reducing the outstanding
indebtedness with respect to properties, refinancing such indebtedness on a
non-recourse basis at maturity, or increasing the amount of indebtedness with
respect to such properties.
 
 Loan
provisions could impair our ability to take actions that would otherwise be in
the best interests of our stockholders and, therefore, may have an adverse
impact on the value of our stock, relative to the value that would result if the
loan provisions did not exist. In particular, loan provisions could preclude us
from participating in major transactions that could result in a disposition of
our assets or a change in control even though that disposition or change in
control might be in the best interests of our stockholders.
 
 If
we sell properties by providing financing to purchasers of our properties,
distribution of net sales proceeds to our stockholders would be delayed and
defaults by the purchasers could reduce our cash available for distribution to
stockholders.
 
 If we
provide financing to purchasers, we will bear the risk that the purchaser may
default. Purchaser defaults could reduce our cash distributions to our
stockholders. Even in the absence of a purchaser default, the distribution of
the proceeds of sales to our stockholders, or their reinvestment in other
assets, will be delayed until the promissory notes or other property we may
accept upon a sale are actually paid, sold, refinanced or otherwise disposed of
or completion of foreclosure proceedings.
 
 Actions
of our joint venture partners could subject us to liabilities in excess of those
contemplated or prevent us from taking actions which are in the best interests
of our stockholders which could result in lower investment returns to our
stockholders.
 
 We are
likely to enter into joint ventures with affiliates and other third parties to
acquire or improve properties. We may also purchase properties in partnerships,
co-tenancies or other co-ownership arrangements. Such investments may involve
risks not otherwise present when acquiring real estate directly, including, for
example:
 
 ·
              joint venturers 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 or goals
      which are or which become inconsistent with our business interests or
      goals, including inconsistent goals relating to the sale of properties
      held in the joint venture or the timing of termination or liquidation of
      the joint venture;
 
 ·
              the possibility that our
      co-venturer, co-owner or partner in an investment might become insolvent
      or bankrupt;
 
 ·
              the possibility that we may incur
      liabilities as a result of an action taken by our co-venturer, co-owner or
      partner;
 
 ·
              that such co-venturer, co-owner
      or partner may be in a position to take action contrary to our
      instructions or requests or contrary to our policies or objectives,
      including our policy with respect to qualifying and maintaining our
      qualification as a REIT;
 
 ·
              disputes between us and our joint
      venturers may result in litigation or arbitration that would increase our
      expenses and prevent its officers and directors from focusing their time
      and effort on our business and result in subjecting the properties owned
      by the applicable joint venture to additional risk;
    or
 
 ·
              that under certain joint venture
      arrangements, neither venture partner may have the power to control the
      venture, and an impasse could be reached which might have a negative
      influence on the joint
venture.
 
 These
events might subject us to liabilities in excess of those contemplated and thus
reduce our stockholders' investment returns. If we have a right of
first refusal or buy/sell right to buy out a co-venturer, co-owner or partner,
we may be unable to finance such a buy-out if it becomes exercisable or we may
be required to purchase such interest at a time when it would not otherwise be
in our best interest to do so. If our interest is subject to a buy/sell right,
we may not have sufficient cash, available borrowing capacity or other capital
resources to allow us to elect to purchase an interest of a co-venturer subject
to the buy/sell right, in which case we may be forced to sell our interest as
the result of the exercise of such right when we would otherwise prefer to keep
our interest. Finally, we may not be able to sell our interest in a joint
venture if we desire to exit the venture.
 
 If
we make or invest in mortgage loans as part of our plan to acquire the
underlying property, our mortgage loans may be affected by unfavorable real
estate market conditions, including interest rate fluctuations, which could
decrease the value of those loans and the return on our stockholders’
investments in us.
  21
  If we
make or invest in mortgage loans, we will be at risk of defaults by the
borrowers on those mortgage loans as well as interest rate risks.  To the
extent we incur delays in liquidating such defaulted mortgage loans; we may not
be able to obtain sufficient proceeds to repay all amounts due to us under the
mortgage loan.  Further, we will not know whether the values of the
properties securing the mortgage loans will remain at the levels existing on the
dates of origination of those mortgage loans.  If the values of the
underlying properties fall, our risk will increase because of the lower value of
the security associated with such loans.  In addition, interest rate
fluctuations could reduce our returns as compared to market interest rates and
reduce the value of the mortgage loans in the event we sell them.
 
 Second
mortgage loan investments involve a greater risk of loss in the event of default
than traditional mortgage loans.
 
 If we decide to invest in second
mortgages, our subordinated priority to the senior lender or
lenders will place our investment at a greater risk of loss than a
traditional mortgage.  In the event of default, any recovery of our second
mortgage investment will be subordinate to the senior
lender.   Further, it is likely that any investments we make in second
mortgages will be placed with private entities and not insured by a government
sponsored entity, placing additional credit risk on the borrower which may
result in a loss to our portfolio.
 
 Construction
loan investments involve a greater risk of loss of investment and reduction of
return than traditional mortgage loans.
 
 If we
decide to invest in construction loans, the nature of these loans pose a greater
risk of loss than traditional mortgages. Since construction loans are made
generally for the express purpose of either the original development
or redevelopment of a property, the risk of loss is greater than
a traditional mortgage because the underlying properties subject to
construction loans are generally unable to generate income during the period of
the loan.  Construction loans may also be subordinate to the
first lien mortgages.  Any delays in completing the development or
redevelopment project may increase the risk of default or credit risk of the
borrower which may increase the risk of loss or risk of a lower than expected
return to our portfolio.
 
 Bridge
loan investments involve a greater risk of loss of investment and reduction of
return than traditional mortgage loans.
 
 If we
decide to acquire or make bridge loans secured by first lien mortgages on
properties to borrowers who are typically seeking short-term capital to be used
in an acquisition or renovation of real estate, these loans pose a greater risk
than traditional mortgages.  Borrowers usually identify undervalued assets
that have been under-managed or are located in recovering markets. If the
market in which the asset is located fails to recover according to the
borrower’s projections, or if the borrower fails to improve the quality of the
asset’s management or the value of the asset, the borrower may not receive a
sufficient return on the asset to satisfy the bridge loan, and we may not
recover some or all of our investment.
 
 In
addition, owners usually borrow funds under a conventional mortgage loan to
repay a bridge loan. We may therefore be dependent on a borrower’s ability to
obtain permanent financing to repay our bridge loan, which could depend on
market conditions and other factors. Bridge loans are also subject to risks of
borrower defaults, bankruptcies, fraud, losses and special hazard losses that
are not covered by standard hazard insurance. In the event of any default under
bridge loans held by us, we bear the risk of loss of principal and non-payment
of interest and fees to the extent of any deficiency between the value of the
mortgage collateral and the principal amount of the bridge loan. To the extent
we suffer such losses with respect to our investments in bridge loans; the value
of our company may be adversely affected.
 
 Mezzanine
loan investments involve a greater risk of loss of investment and reductions of
return than senior loans secured by income producing properties.
 
 If we
invest in mezzanine loans, they may take the form of subordinated loans secured
by second mortgages on the underlying real property or loans secured by a pledge
of the ownership interests of either the entity owning the real property or the
entity that owns the interest in the entity owning the real property. These
types of investments involve a higher degree of risk than long-term senior
mortgage lending secured by income-producing real property because the
investment may become unsecured as a result of foreclosure by the senior lender.
In the event of a bankruptcy of the entity providing the pledge of its ownership
interests as security, we may not have full recourse to the assets of such
entity, or the assets of the entity may not be sufficient to satisfy our
mezzanine loan. If a borrower defaults on our mezzanine loan or debt senior to
our loan, or in the event of a borrower bankruptcy, our mezzanine loan will be
satisfied only after the senior debt. As a result, we may not recover some or
all of our investment. In addition, mezzanine loans may have higher
loan-to-value ratios than conventional mortgage loans, resulting in less equity
in the real property and increasing the risk of loss of principal.
 
 Investments
in real estate-related securities may be illiquid, and we may not be able to
adjust our portfolio in response to changes in economic and other
conditions
 
 If we
invest in certain real estate-related securities that we may purchase in
connection with privately negotiated transactions, they will not be registered
under the relevant securities laws, resulting in a prohibition against their
transfer, sale, pledge or other disposition except in a transaction that is
exempt from the registration requirements of, or is otherwise in accordance
with, those laws. As a result, our ability to vary our long-term stabilized
portfolio in response to changes in economic and other conditions may be
relatively limited. The mezzanine and bridge loans we may purchase will be
particularly illiquid investments due to their short life. Moreover, in the
event of a borrower’s default on an illiquid real estate security, the
unsuitability for securitization and potential lack of recovery of our
investment could pose serious risks of loss to our investment
portfolio.
  22
  Delays
in restructuring or liquidating non-performing real estate-related securities
could reduce the return on our stockholders' investment.
 
 If we
invest in real estate-related securities, they may become non-performing after
acquisition for a wide variety of reasons. Such non-performing real estate
investments may require a substantial amount of workout negotiations and/or
restructuring, which may entail, among other things, a substantial reduction in
the interest rate and a substantial write-down of such loan or asset. However,
even if a restructuring is successfully accomplished, upon maturity of such real
estate security, replacement “takeout” financing may not be available. We may
find it necessary or desirable to foreclose on some of the collateral securing
one or more of our investments. Intercreditor provisions may substantially
interfere with our ability to do so. Even if foreclosure is an option, the
foreclosure process can be lengthy and expensive. Borrowers often resist
foreclosure actions by asserting numerous claims, counterclaims and defenses,
including, without limitation, lender liability claims and defenses, in an
effort to prolong the foreclosure action. In some states, foreclosure actions
can take up to several years or more to litigate. At any time during the
foreclosure proceedings, the borrower may file for bankruptcy, which would have
the effect of staying the foreclosure action and further delaying the
foreclosure process. Foreclosure litigation tends to create a negative public
image of the collateral property and may result in disrupting ongoing leasing
and management of the property. Foreclosure actions by senior lenders may
substantially affect the amount that we may receive from an
investment.
 
 If
a significant portion of our assets are deemed “investment securities,” we may
become subject to the Investment Company Act of 1940 which would restrict our
operations and we could not continue our business.
 
 If we
fail to qualify for an exemption or exception from the Investment Company Act of
1940, we would be required to comply with numerous additional regulatory
requirements and restrictions which could adversely restrict our operations and
force us to discontinue our business. Our intended investments in real estate
will represent the substantial majority of our total asset mix, which would not
subject us to the Investment Company Act.  If, however, in the future
we acquire mortgage loans, debt securities and investments in joint ventures
(not structured in compliance with the Investment Company Act) and other
investments assets that are deemed by the SEC or the courts to be “investment
securities” and these assets exceed 40% of the value of our total assets, we
could be deemed to be an investment company and subject to these additional
regulatory and operational restrictions.
 
 Even if
otherwise deemed an investment company, we may qualify for an exception or
exemption from the Investment Company Act. For example, under the real
estate/mortgage exception, entities that are primarily engaged in the business
of purchasing and otherwise acquiring mortgages and interests in real estate are
exempt from registration under the Investment Company Act. Under the real estate
mortgage exception, the SEC Staff has provided guidance that would require us to
maintain 55% of our assets in qualifying real estate interests. In order for an
asset to constitute a qualifying real estate interest or qualifying asset, the
interest must meet various criteria. Fee interests in real estate and whole
mortgage loans are generally considered qualifying assets. If we were required
to register as an investment company but failed to do so, we would be prohibited
from engaging in our business, and criminal and civil actions could be brought
against us.  In addition, our contracts would be unenforceable unless a
court required enforcement, and a court could appoint a receiver to take control
of us and liquidate our business.
 
 Risks
Associated with Debt Financing
 
 We
will use debt financing to acquire properties and otherwise incur other
indebtedness, which will increase our expenses and could subject us to the risk
of losing properties in foreclosure if our cash flow is insufficient to make
loan payments.
 
 We have
and expect to continue to acquire properties using debt financing. We intend to
incur indebtedness up to 300% of our net assets (equivalent to 75% of the cost
of our tangible assets),but upon a vote of the
majority of our independent directors we may exceed this level of indebtedness.
We may borrow funds for working capital requirements, tenant improvements,
capital improvements, and leasing commissions. We may also borrow funds to make
distributions including but not limited to funds to satisfy the REIT tax
qualification requirement that we distribute at least 90% of our annual REIT
taxable income (excluding net capital gains) to our stockholders. We may also
borrow if we otherwise deem it necessary or advisable to ensure that we maintain
our qualification as a REIT for federal income tax purposes or to avoid taxation
on undistributed income or gain. To the extent we borrow funds; we may raise
additional equity capital or sell properties to pay such debt.
 
 If there
is a shortfall between the cash flow from a property and the cash flow needed to
service acquisition financing on that property, then the amount available for
distributions to stockholders may be reduced. In addition, incurring mortgage
debt increases the risk of loss since defaults on indebtedness secured by a
property may result in lenders initiating foreclosure actions. In that case, we
could lose the property securing the loan that is in default, thus reducing the
value of our stockholders' investment. For tax purposes, a foreclosure of
any of our properties would be treated as a sale of the property for a purchase
price equal to the outstanding balance of the debt secured by the mortgage. If
the outstanding balance of the debt secured by the mortgage exceeds our tax
basis in the property, we would recognize taxable income on foreclosure, but we
would not receive any cash proceeds. We may give full or partial guarantees to
lenders of mortgage debt to the entities that own our properties. When we give a
guaranty on behalf of an entity that owns one of our properties, we will be
responsible to the lender for satisfaction of the debt if it is not paid by such
entity. If any mortgages contain cross-collateralization or cross-default
provisions, a default on a single property could affect multiple properties. If
any of our properties are foreclosed upon due to a default, the value of our
stockholders’ investments in us will be reduced.
  23
  Liquidity
in the global credit markets has been significantly contracted by market
disruptions during the past two years, making it costly to obtain new debt
financing, when debt financing is available at all. To the extent that market
conditions prevent us from obtaining temporary acquisition financing on
financially attractive terms, our ability to make suitable investments in
commercial real estate could be delayed or limited.  If we are unable to
invest the proceeds from this offering in suitable real estate investments for
an extended period of time, distributions to our stockholders may be suspended
and may be lower and the value of investments in our shares could be
reduced.
 
 Lenders
may require us to enter into restrictive covenants relating to our operations,
which could limit our ability to make distributions to our
stockholders.
 
 When
providing financing, a lender may impose restrictions on us that affect our
distribution and operating policies and our ability to incur additional debt.
Loan documents we enter into may contain covenants that limit our ability to
further mortgage the property, discontinue insurance coverage, or replace our
Advisor. These or other limitations may limit our flexibility and prevent us
from achieving our operating plans.
 
 High
levels of debt or increases in interest rates could increase the amount of our
loan payments, reduce the cash available for distribution to stockholders and
subject us to the risk of losing properties in foreclosure if our cash flow is
insufficient to make loan payments.
 
 Our
policies do not limit us from incurring debt. High debt levels would cause us to
incur higher interest charges, would result in higher debt service payments, and
could be accompanied by restrictive covenants. Interest we pay could reduce cash
available for distribution to stockholders. Additionally, if we incur variable
rate debt, increases in interest rates would increase our interest costs, which
would reduce our cash flows and our ability to make distributions to our
stockholders. In addition, if we need to repay existing debt during periods of
rising interest rates, we could be required to liquidate one or more of our
investments in properties at times which may not permit realization of the
maximum return on such investments and could result in a loss.
  High
mortgage rates may make it difficult for us to finance or refinance properties,
which could reduce the number of properties we can acquire, our cash flows from
operations and the amount of cash distributions we can make
  If
mortgage debt is unavailable at reasonable rates, we may not be able to finance
the purchase of properties.  If we place mortgage debt on properties, we
run the risk of being unable to refinance the properties when the debt becomes
due or of being unable to refinance on favorable terms.  If interest rates
are higher when we refinance the properties, our income could be reduced. 
We may be unable to refinance properties.  If any of these events occurs,
our cash flow would be reduced.  This, in turn, would reduce cash available
for distribution to you and may hinder our ability to raise capital by issuing
more stock or borrowing more money.
  Federal
Income Tax Risks
 
 If
we fail to qualify as a REIT, we will be subjected to tax on our income and the
amount of distributions we make to our stockholders will be less.
 
 We have elected to be taxed as a REIT
under the Internal Revenue Code of 1986, as amended, commencing with the year
ended December 31, 2008.  Under the Internal Revenue Code, we are not
subject to federal income tax on income that we distribute to our
stockholders. Qualification as a REIT involves the
application of highly technical and complex rules for which there are only
limited judicial or administrative interpretations. The determination of various
factual matters and circumstances not entirely within our control may affect our
ability to continue to qualify as a REIT. In addition, new legislation,
regulations, administrative interpretations or court decisions could
significantly change the tax laws with respect to qualification as a REIT or the
federal income tax consequences of such qualification.
 
 If we
fail to qualify as a REIT in any taxable year:
 
 ·
              we would not be allowed to deduct
      our distributions to our stockholders when computing our taxable
      income;
 
 ·
              we would be subject to federal
      income tax (including any applicable alternative minimum tax) on our
      taxable income at regular corporate
  rates;
 
 ·
              we would be disqualified from
      being taxed as a REIT for the four taxable years following the year during
      which qualification was lost, unless entitled to relief under certain
      statutory provisions;
 
 ·
              we would have less cash to make
      distributions to our stockholders;
and
 
 ·
              we might be required to borrow
      additional funds or sell some of our assets in order to pay corporate tax
      obligations we may incur as a result of our
      disqualification.
  24
  Even
if maintain our status as a REIT, we may be subject to federal and
state  income and excise taxes in certain events, which would reduce
our cash available for distribution to our stockholders.
 
 Net
income from a “prohibited transaction” will be subject to a 100%
tax.  We may not be able to pay sufficient distributions to avoid
excise taxes applicable to REITs. We may also decide to retain income we earn
from the sale or other disposition of our property and pay income tax directly
on such income. In that event, our stockholders would be treated as if they
earned that income and paid the tax on it directly. However, stockholders that
are tax-exempt, such as charities or qualified pension plans, would have no
benefit from their deemed payment of such tax liability. We may also be subject
to state and local taxes on our income or property, either directly or at the
level of our operating partnership or at the 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 make distributions to our
stockholders.
  To
maintain our REIT status, we may be forced to forego otherwise attractive
opportunities, which may delay or hinder our ability to meet our investment
objectives and reduce the overall return to our stockholders.
 
 To
qualify as a REIT, we must satisfy certain tests on an ongoing basis concerning,
among other things, the sources of our income, nature of our assets and the
amounts we distribute to our stockholders. We may be required to make
distributions to stockholders at times when it would be more advantageous to
reinvest cash in our business or when we do not have funds readily available for
distribution. Compliance with the REIT requirements may hinder our ability to
operate solely on the basis of maximizing profits and the value of our
stockholders’ investments in us.
 
 If
our operating partnership is classified as a “publicly-traded partnership” under
the Internal Revenue Code, it could be subjected to tax on its income and the
amount of distributions we make to our stockholders will be less.
 
 We
structured the operating partnership so that it would be classified as a
partnership for federal income tax purposes. In this regard, the Internal
Revenue Code generally classifies “publicly traded partnerships” (as defined in
Section 7704 of the Internal Revenue Code) as associations taxable as
corporations (rather than as partnerships), unless substantially all of their
taxable income consists of specified types of passive income. In order to
minimize the risk that the Internal Revenue Code would classify the operating
partnership as a “publicly traded partnership” for tax purposes, we placed
certain restrictions on the transfer and/or redemption of partnership units in
our operating partnership. If the Internal Revenue Service were to assert
successfully that our operating partnership is a “publicly traded partnership,”
and substantially all of the operating partnership’s gross income did not
consist of the specified types of passive income, the Internal Revenue Code
would treat our operating partnership as an association taxable as a
corporation. In such event, the character of our assets and items of gross
income would change and would likely prevent us from qualifying and maintaining
our status as a REIT. In addition, the imposition of a corporate tax on our
operating partnership would reduce the amount of cash distributable to us from
our operating partnership and therefore would reduce our amount of cash
available to make distributions to our stockholders.
 
 Distributions
payable by REITs do not qualify for the reduced tax rates under recently enacted
tax legislation.
 
 Recently
enacted tax legislation generally reduces the maximum tax rate for dividend
distributions payable by corporations to individuals meeting certain
requirements to 15% through 2010. Distributions payable by REITs, however,
generally continue to be taxed at the normal rate applicable to the individual
recipient, rather than the 15% preferential rate. Although this legislation does
not adversely affect the taxation of REITs or distributions paid by REITs, the
more favorable rates applicable to regular corporate distributions could cause
investors who are individuals to perceive investments in REITs to be relatively
less attractive than investments in the stocks of non-REIT corporations that
make distributions, which could reduce the value of the stock of REITs,
including our stock.
 
 Distributions
to tax-exempt investors may be classified as unrelated business taxable income
and tax-exempt investors would be required to pay tax on the unrelated business
taxable income and to file income tax returns.
 
 Neither
ordinary nor capital gain distributions with respect to our common stock nor
gain from the sale of stock should generally constitute unrelated business
taxable income to a tax-exempt investor. However, there are certain exceptions
to this rule. In particular:
 
 ·
              under certain circumstances, part
      of the income and gain recognized by certain qualified employee pension
      trusts with respect to our stock may be treated as unrelated business
      taxable income if our stock is predominately held by qualified employee
      pension trusts, such that we are a “pension-held” REIT (which we do not
      expect to be the case);
 
 ·
              part of the income and gain
      recognized by a tax exempt investor with respect to our stock would
      constitute unrelated business taxable income if such investor incurs debt
      in order to acquire the common stock;
and
 
 ·
              part or all of the income or gain
      recognized with respect to our stock held by social clubs, voluntary
      employee benefit associations, supplemental unemployment benefit trusts
      and qualified group legal services plans which are exempt from federal
      income taxation under Sections 501(c)(7), (9), (17), or (20) of the Code
      may be treated as unrelated business taxable
  income.
  25
  Foreign
investors may be subject to FIRPTA tax on the sale of our stock if we are unable
to qualify as a “domestically controlled” REIT.
 
 A foreign
person disposing of a U.S. real property interest, including stock of a U.S.
corporation whose assets consist principally of U.S. real property interests is
generally subject to a tax, known as FIRPTA tax, on the gain recognized on the
disposition. Such FIRPTA tax does not apply, however, to the disposition of
stock in a REIT if the REIT is “domestically controlled.” A REIT is
“domestically controlled” if less than 50% of the REIT’s capital stock, by
value, has been owned directly or indirectly by persons who are not qualifying
U.S. persons during a continuous five-year period ending on the date of
disposition or, if shorter, during the entire period of the REIT’s
existence.
 
 We cannot
be sure that we will qualify as a “domestically controlled” REIT. If we were to
fail to so qualify, gain realized by foreign investors on a sale of our stock
would be subject to FIRPTA tax, unless our stock were traded on an established
securities market and the foreign investor did not at any time during a
specified testing period directly or indirectly own more than 5% of the value of
our outstanding common stock.
  26
  ITEM
1B.  UNRESOLVED STAFF COMMENTS
 
 None
 
 ITEM 2.  PROPERTIES
 
 As of
December 31, 2009, our portfolio consists of four healthcare
facilities.  The following table provides summary information
regarding our facilities.
 
 Property
              
              Location
              
              Date Purchased
              
              Gross
      Square Feet
              
              
              Purchase
                Price
              
              
              Debt
              
              
              December
      31, 2009
                % OccupancyCaruth
      Haven Court
              
              Highland
      Park, TX
              
              January 22,
      2009
              
              
              74,647
              
              
              $
              20,500,000
              
              
              $
              10,000,000
              
              
              
              94.5
              %The
      Oaks Bradenton
              
              Bradenton,
      FL
              
              May
      1, 2009
              
              
              18,172
              
              
              
              4,500,000
              
              
              
              2,760,000
              
              
              
              100.0
              %GreenTree
      at Westwood
              
              Columbus,
      IN
              
              December 30,
      2009
              
              
              50,249
              
              
              
              5,150,000
              
              
              
              —
              
              
              
              93.1
              %143,068
              
              
              $
              30,150,000
              
              
              $
              12,760,000
              
              
              
              94.7
              %Mesa Vista Inn Health Center
              
              San
      Antonio, TX
              
              December 31,
      2009
              
              
              55,525
              
              
              
              13,000,000
              
              
              
              7,500,000
              
              
              
              (1)
 
 (1) Mesa
Vista Inn Health Center is 100% net-leased to a
single tenant
 
 ITEM 3.  LEGAL
PROCEEDINGS
 
 From time
to time in the ordinary course of business, we may become subject to legal
proceeding, claims, or disputes.  As of the date hereof, we are not a
party to any pending legal proceedings.
 
 ITEM 4.
RESERVED
  27
  PART II
 
 ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
 
 Market
Information
 
 During
the period covered by this report, there was no established public trading
market for our shares of common stock.
 
 In order
for FINRA members to participate in the offering and sale of shares of common
stock pursuant to our ongoing public offering, we are required to disclose in
each annual report 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 develop the estimated value. In addition, we prepare annual statements of
estimated share values to assist fiduciaries of retirement plans subject to the
annual reporting requirements of ERISA in the preparation of their reports
relating to an investment in our shares. For these purposes, the deemed value of
a share of our common stock is $10.00 per share as of December 31,
2009.
  The basis
for this valuation is that the current public offering price of a share of our
common stock is $10.00 per share (ignoring purchase price discounts for certain
categories of purchasers).  However, this estimated value is likely to
be higher than the price at which our stockholders could
resell our stockholders' shares because (1) our public offering involves
the payment of underwriting compensation and other directed selling efforts,
which payments and efforts are likely to produce a higher sales price than could
otherwise be obtained, and (2) there is no public market for our
shares.  Moreover, this estimated value is likely to be higher than
the amount our stockholders would receive per share if we were to liquidate
at this time because of the up-front fees that we pay in connection with the
issuance of our shares as well as the recent reduction in the demand for real
estate as a result of the recent credit market disruptions and economic
slowdown.  We expect to continue to use the most recent public
offering price for a share of our common stock as the estimated per share value
reported in our annual reports on Form 10-K until 18 months have passed since
the last sale of a share of common stock in a public offering, excluding public
offerings conducted on behalf of selling stockholders or offerings related to a
dividend reinvestment plan, employee benefit plan, or the redemption of
interests in our operating partnership.
  After the
18-month period described above, we expect the estimated share values reported
in our annual reports will be based on estimates of the values of our assets net
of our liabilities.  We do not currently anticipate that our Advisor
will obtain new or updated appraisals for our properties in connection with such
estimates, and accordingly, these estimated share values should not be viewed as
estimates of the amount of net proceeds that would result from a sale of our
properties at that time.  We expect that any estimates of the value of
our properties will be performed by our Advisor; however, our board of directors
could direct our Advisor to engage one or more third-party valuation firms in
connection with such estimates.
 
 Stock
Repurchase Program
 
 Our board
of directors has adopted a stock repurchase program that enables our
stockholders to sell their stock to us in limited circumstances.
 
 As long
as our common stock is not listed on a national securities exchange, our
stockholders who have held their stock for at least one year 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 described below, redeem the shares of
stock presented for redemption for cash to the extent 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 forth in the following table
which is based upon the number of years the stock is held:
 
 Number
      Years Held
              
              Redemption
      PriceLess
      than 1
              
              No
      Redemption Allowed1
      or more but less than 2
              
              90%
      of purchase price2
      or more but less than 3
              
              95%
      of purchase priceLess
      than 3 in the event of death
              
              100%
      of purchase price3
      or more but less than 5
              
              100%
      of purchase price5
      or more
              
              Estimated
      liquidation value
 
 The
estimated liquidation value for the repurchase of shares of stock held for 5 or
more years will be determined by our Advisor or another person selected for such
purpose and will be approved by our board of directors. The stock repurchase
price is subject to adjustment as determined from time to time by our board of
directors. At no time will the stock repurchase price exceed the price at which
we are offering our common stock for sale at the time of the
repurchase.
 
 28
 
 Our board
of directors intends to waive the one-year holding period in the event of the
death of a stockholder and adjust the redemption price to 100% of such
stockholders purchase price if the stockholder held the shares for less than
three years. Our board of directors reserves the right in its sole discretion at
any time and from time to time, upon 30 days prior notice to our stockholders,
to adjust the redemption price for our shares of stock, or suspend or terminate
our stock repurchase program.  We would notify our stockholders of such
developments (i) in the annual or quarterly reports or (ii) by means
of a separate mailing to our stockholders, accompanied by disclosure in a
current or periodic report under the Securities Exchange Act of 1934. During the
Offering, we would also include this information in a prospectus supplement or
post-effective amendment to the registration statement, as then required under
federal securities laws.
  During
our initial public offering and each of the first seven years following the
closing of the offering, we do not intend to redeem more than the lesser of
(i) the number of shares that could be redeemed using the proceeds from our
reinvestment plan in the prior calendar year, and or (ii) 5% of the number
of shares outstanding at the end of the prior calendar year.
 
 During
the twelve months ended December 31, 2009, we redeemed shares pursuant to our
stock repurchase program as follows (in thousands, except per-share
amounts):
 
 Period
              
              Total Number of
                Shares Redeemed(1)
              
              
              Average Price Paid
                per Share
              
              
              Approximate Dollar Value of Shares
                Available That May Yet Be
                Redeemed Under the Program
      (1)January
              
              
              —
              
              
              $
              —
              
              
              $
              63,000February
              
              
              —
              
              
              $
              —
              
              
              $
              63,000March
              
              
              —
              
              
              $
              —
              
              
              $
              63,000April
              
              
              —
              
              
              $
              —
              
              
              $
              63,000May
              
              
              —
              
              
              $
              —
              
              
              $
              63,000June
              
              
              17,245
              
              
              $
              9.99
              
              
              $
              —July
              
              
              —
              
              
              $
              —
              
              
              $
              —August
              
              
              —
              
              
              $
              —
              
              
              $
              —September
              
              
              —
              
              
              $
              —
              
              
              $
              —October
              
              
              —
              
              
              $
              —
              
              
              $
              —November
              
              
              1,000
              
              
              $
              9.95
              
              
              $
              —December
              
              
              —
              
              
              $
              —
              
              
              $
              —18,245
 
 1)           As
long as our common stock is not listed on a national securities exchange or
traded on an over-the-counter market, our stockholders who have held their stock
for at least one year may be able to have all or any portion of their shares
redeemed in accordance with the procedures outlined in the prospectus relating
to the shares they purchased.  Under our current stock repurchase
program, the repurchase price will vary depending on the purchase price paid by
the stockholder and the number of years these shares were
held.  During this offering and each of the first seven years
following the closing of this offering, (i) we will have no obligation to
redeem shares if the redemption would cause total redemptions to exceed the
proceeds from our distribution reinvestment program in the prior calendar year,
and (ii) we may not, except to repurchase the shares of a deceased
shareholder, redeem more than 5% of the number of shares outstanding at the end
of the prior calendar year. With respect to redemptions requested within two
years of the death of a stockholder, we may, but will not be obligated to,
redeem shares even if such redemption causes the number of shares redeemed to
exceed 5% of the number of shares outstanding at the end of the prior calendar
year.  Beginning seven years after termination of this primary offering,
unless we have commenced another liquidity event, such as an orderly liquidation
or listing of our shares on a national securities exchange, we will modify our
stock repurchase program to permit us to redeem up to 10% of the number of
shares outstanding at the end of the prior year, using proceeds from any source,
including the sale of assets.
 
 Our board
of directors may modify our stock repurchase program so that we can redeem stock
using the proceeds from the sale of our real estate investments or other
sources.
 
 Stockholders
 
 As of
March 12, 2010, we had approximately 6.0 million shares of common
stock outstanding held by approximately 1,825 stockholders of
record.
 
 Distributions
 
 In order
to meet the requirements for being treated as a REIT under the Internal Revenue
Code, we must pay distributions to our shareholders each taxable year equal to
at least 90% of our net ordinary taxable income.  Until proceeds from our
offerings are invested and generating operating cash flow sufficient to make
distributions to stockholders, we intend to pay all or a substantial portion of
our distributions from the proceeds of our offering and or from borrowings in
anticipation of future cash flow.  Our board generally declares
distributions on a quarterly basis, which is paid on a monthly basis. 
Monthly distributions are paid based on daily record and distribution
declaration dates so our investor will be entitled to be paid distributions
beginning on the day that they purchase shares.
  29
  During
the years ended December 31, 2009 and 2008, we paid distributions, including any
distributions reinvested, aggregating approximately $1.7 million and $124,000,
respectively to our stockholders.  The following table shows the
distributions declared on daily record dates for each day during the period from
January 1, 2008 through December 31, 2009, aggregated by quarter as
follows:
 
 Distribution Declared (1)Period
              
              Cash
              
              
              Reinvested
              
              
              Total
              
              
              Funds
      from Operations
              
              
              Cash
      flows from  operating activitiesFirst
      quarter 2008
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              (89,000
              )
              $
              (77,000
              )Second
      quarter 2008
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (158,000
              )
              
              (3,000
              )Third
      quarter 2008
              
              
              14,000
              
              
              
              18,000
              
              
              
              32,000
              
              
              
              (390,000
              )
              
              (600,000
              )Fourth
      quarter 2008
              
              
              77,000
              
              
              
              76,000
              
              
              
              153,000
              
              
              
              (469,000
              )
              
              (590,000
              )$
              91,000
              
              
              $
              94,000
              
              
              $
              185,000
              
              
              $
              (1,106,000
              )
              $
              (1,270,000
              )First
      quarter 2009
              
              $
              116,000
              
              
              $
              122,000
              
              
              $
              238,000
              
              
              $
              (907,000
              )
              $
              (601,000
              )Second
      quarter 2009
              
              
              170,000
              
              
              
              190,000
              
              
              
              360,000
              
              
              
              (583,000
              )
              
              (461,000
              )Third
      quarter 2009
              
              
              266,000
              
              
              
              284,000
              
              
              
              550,000
              
              
              
              (415,000
              )
              
              (321,000
              )Fourth
      quarter 2009
              
              
              414,000
              
              
              
              401,000
              
              
              
              815,000
              
              
              
              (892,000
              )
              
              (1,540,000
              )$
              966,000
              
              
              $
              997,000
              
              
              $
              1,963,000
              
              
              $
              (2,797,000
              )
              $
              (2,923,000
              )
 
 (1)
              100% of the distributions
      declared during 2009 and 2008 represented a return of capital
      for federal income tax purposes.  Of the distributions declared,
      $305,000 was unpaid at December 31,
      2009.
 
 The
declaration of distributions is at the discretion of our board of directors and
our board will determine the amount of distributions on a regular
basis.  The amount of distributions will depend on our funds from
operations, financial condition, capital requirements, annual distribution
requirements under the REIT provisions of the Internal Revenue Code and other
factors our board of directors deems relevant. We may amend or terminate the
distribution reinvestment plan for any reason at any time upon 10 days prior
written notice to participants.
 
 Funds
from Operations
  Funds
from operations (“FFO”) is a non-GAAP financial measure that is widely
recognized as a measure of REIT operating performance.  We compute FFO in
accordance with the definition outlined by the National Association of Real
Estate Investment Trusts (“NAREIT”).  NAREIT defines FFO as net income
(loss), computed in accordance with GAAP, excluding extraordinary items, as
defined by GAAP, and gains (or losses) from sales of property, plus depreciation
and amortization on real estate assets, and after adjustments for unconsolidated
partnerships, joint ventures and subsidiaries.  Our FFO may not be
comparable to FFO reported by other REITs that do not define the term in
accordance with the current NAREIT definition or that interpret the current
NAREIT definition differently than we do.  We believe that FFO is helpful
to investors and our management as a measure of operating performance because it
excludes depreciation and amortization, gains and losses from property
dispositions, and extraordinary items, and as a result, when compared year to
year, reflects the impact on operations from trends in occupancy rates, rental
rates, operating costs, development activities, general and administrative
expenses, and interest costs, which is not immediately apparent from net
income.  Historical cost accounting for real estate assets in accordance
with GAAP implicitly assumes that the value of real estate diminishes
predictably over time.  Since real estate values have historically risen or
fallen with market conditions, many industry investors and analysts have
considered the presentation of operating results for real estate companies that
use historical cost accounting alone to be insufficient.  As a result, our
management believes that the use of FFO, together with the required GAAP
presentations, provide a more complete understanding of our performance. 
Factors that impact FFO include start-up costs, fixed costs, delay in buying
assets, lower yields on cash held in accounts pending investment, income from
portfolio properties and other portfolio assets, interest rates on acquisition
financing and operating expenses.  FFO should not be considered as an
alternative to net income (loss), as an indication of our performance, nor is it
indicative of funds available to fund our cash needs, including our ability to
make distributions.  FFO may be used to fund all or a portion of certain
capitalizable items that are excluded from FFO, such as capital expenditures
and payments of principal on debt, each of which may impact the amount
of cash available for distribution to our stockholders. Our calculation of FFO
for each of the last four quarters is presented below:
 
 30
  Three months endedDecember
      31,
              
              
              September
      30,
              
              
              June
       30,
              
              
              March
       31,2009
              
              
              2009
              
              
              2009
              
              
              2009Net
      loss
              
              
              (1,244,000
              )
              
              
              (829,000
              )
              
              $
              (958,000
              )
              
              $
              (1,118,000
              )Adjustments:Net
      (income) loss attributable to noncontrolling
    interests
              
              
              (57,000
              )
              
              
              8,000
              
              
              
              24,000
              
              
              
              10,000Real
      estate depreciation & amortization
              
              
              409,000
              
              
              
              406,000
              
              
              
              351,000
              
              
              
              201,000Funds
      from operations (FFO)
              
              $
              (892,000
              )
              
              $
              (415,000
              )
              
              $
              (583,000
              )
              
              $
              (907,000
              )Weighted
      average shares
              
              
              4,160,842
              
              
              
              2,775,594
              
              
              
              1,838,828
              
              
              
              1,240,370FFO
      per weighted average shares
              
              $
              (0.21
              )
              
              $
              (0.15
              )
              
              $
              (0.32
              )
              
              $
              (0.73
              )
  Three months endedDecember
      31,
              
              
              September
      30,
              
              
              June
       30,
              
              
              March
       31,2008
              
              
              2008
              
              
              2008
              
              
              2008Net
      loss
              
              $
              (466,000
              )
              
              $
              (387,000
              )
              
              $
              (177,000
              )
              
              $
              (197,000
              )Adjustments:Net
      (income) loss attributable to noncontrolling
    interests
              
              
              (3,000
              )
              
              
              (3,000
              )
              
              
              19,000
              
              
              
              108,000Funds
      from operations (FFO)
              
              $
              (469,000
              )
              
              $
              (390,000
              )
              
              $
              (158,000
              )
              
              $
              (89,000
              )Weighted
      average shares
              
              
              748,006
              
              
              
              107,743
              
              
              
              100
              
              
              
              100FFO
      per weighted average shares
              
              $
              (0.63
              )
              
              $
              (3.62
              )
              
              $
              (1,580.00
              )
              
              $
              (890.00
              )
 
 Use
of Proceeds from Registered Securities
 
 Our
registration statement (SEC File No. 333-139704) for our initial public
offering of up to 40,000,000 shares of our common stock at $10.00 per
share and up to 10,000,000 additional shares at $9.50 per share pursuant to our
distribution reinvestment plan was declared effective on August 10,
2007.  On June 20, 2008, we filed a post-effective amendment to
the registration statement. Upon the effective date of the post-effective
amendment, we began accepting subscriptions for shares of our common stock into
escrow.
 
 The
Offering is ongoing and as of December 31, 2009, we had sold approximately 4.9
million shares of common stock raising gross proceeds of approximately $49.1
million.  In addition, as of December 31, 2009, we have issued
approximately 99,000 shares under our distribution reinvestment
plan.   From inception to December 31, 2009, we incurred
approximately $4.8 million in selling commissions and dealer manager fees
payable to our dealer manager and approximately $1.3 million in acquisition fees
payable to our Advisor.  From inception to December 31, 2009, we
incurred approximately $3.3 million in organization and offering expenses,
including approximately $0.1 million of organizational costs that have been
expensed.  We used approximately $22.9 million of the net offering
proceeds to acquire properties and reduce outstanding indebtedness as of
December 31, 2009.
 
 Equity
Compensation Plans
 
 Information
about securities authorized for issuance under our equity compensation plans
required for this item is incorporated by reference from our definitive Proxy
Statement to be filed in connection with our 2010 annual meeting of
stockholders.
  31
  ITEM
6. SELECTED FINANCIAL DATA
 
 The
following should be read with the sections titled “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and the consolidated
financial statements and the notes thereto.
 
 December
      31, 2009
              
              
              December
      31, 2008
              
              December
      31, 2007
              
              October 16
                (date
      of inception to
                December
      31, 2006)Balance
      Sheet Data:Total
      assets
              
              $
              58,340,000
              
              
              $
              7,972,000
              
              $
              158,000
              
              $
              201,000Investments
      in real estate, net
              
              $
              40,888,000
              
              
              $
              —
              
              $
              —
              
              $
              —Notes
      payable
              
              $
              20,260,000
              
              
              $
              —
              
              $
              —
              
              $
              —Stockholders’
      equity (deficit)(3)
              
              $
              34,198,000
              
              
              $
              5,369,000
              
              $
              (5,000
              )
              $
              201,000
 
 December
      31, 2009
              
              
              December
      31, 2008
              
              December
      31, 2007
              
              October 16
                (date
      of inception to
                December
      31, 2006)Operating
      Data:Revenues
              
              $
              6,661,000
              
              
              $
              —
              
              $
              —
              
              $
              —Property
      operating and maintenance
              
              $
              5,172,000
              
              
              $
              —
              
              $
              —
              
              $
              —General
      and administrative expense
              
              $
              1,206,000
              
              
              $
              875,000
              
              $
              209,000
              
              $
              —Net
      Loss
              
              $
              (4,149,000
              )
              
              $
              (1,227,000
              )
              $
              (206,000
              )
              $
              —Noncontrolling
      interest
              
              $
              15,000
              
              
              $
              (121,000
              )
              $
              (73,000
              )
              $
              —Net
      loss attributable to common stockholders
              
              $
              (4,164,000
              )
              
              $
              (1,106,000
              )
              $
              (133,000
              )
              $
              —Net
      loss per common share attributable to common stockholders, basic and
      diluted (1)
              
              $
              (2.08
              )
              
              $
              (12.90
              )
              $
              (1,330.00
              )
              $
              —Dividends
      declared
              
              $
              1,963,000
              
              
              $
              185,000
              
              $
              —
              
              $
              —Dividends
      per common share (2)
              
              $
              0.75
              
              
              $
              0.29
              
              $
              —
              
              $
              —Weighted
      average number of shares outstanding (1):Basic
      and diluted
              
              
              1,999,747
              
              
              
              85,743
              
              
              100
              
              100Other
      Data:Cash
      flows used in operating activities
              
              $
              (2,923,000
              )
              
              $
              (1,270,000
              )
              $
              (116,000
              )
              $
              —Cash
      flows used in investing activities
              
              $
              (34,348,000
              )
              
              $
              (385,000
              )
              $
              —
              
              $
              —Cash
      flows provided by financing activities
              
              $
              44,722,000
              
              
              $
              9,019,000
              
              $
              —
              
              $
              201,000
 
 (1)
              Net loss and dividends per share
      are based upon the weighted average number of shares of common stock
      outstanding.
 (2)
              Dividend
      per common share for 2008 is calculated based on days outstanding
      during the year.
 (3)
                  Excludes
      noncontrolling
interest.
  32
  ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 
 The
following discussion should be read in conjunction with our consolidated
financial statements and notes appearing elsewhere in this Form 10-K. See
also “Special Note about Forward Looking Statements” preceding Item 1 of this
report.
 
 Overview
 
 We were
incorporated on October 16, 2006 for the purpose of engaging in the business of
investing in and owning commercial real estate.  We intend to invest
the net proceeds from the Offering primarily in investment real estate including
health care, multi-tenant industrial, net-leased retail properties and other
real estate related assets located in major metropolitan markets in the United
States.   As of December 31, 2009, we raised approximately $49.1
million of gross proceeds from the sale of approximately 4.9 million shares of
our common stock, and we had acquired four real estate properties.
 
 Our
revenues, which are comprised largely of rental income, include rents reported
on a straight-line basis over the initial term of the lease. Our growth depends,
in part, on our ability to (i) increase rental income and other earned
income from leases by increasing rental rates and occupancy levels;
(ii) maximize tenant recoveries given the underlying lease structures; and
(iii) control operating and other expenses. Our operations are impacted by
property specific, market specific, general economic and other
conditions.
 
 Our
results of operations for the years ended December 31, 2009 and 2008 reflect
growing operational revenues and expenses resulting from the acquisition of
properties and interest expense resulting from the use of acquisition
financing.
 
 2009
Transaction Overview
 
 Caruth
Haven Court, Highland Park, Texas
 
 On
January 22, 2009, we purchased an existing assisted–living facility, Caruth
Haven Court, from SHP II Caruth, LP, a non-related party, for a purchase price
of approximately $20.5 million.  Caruth Haven Court consists of 91
assisted living units in a 74,647 square foot building built in 1999, located on
approximately 2.2 acres of land in the Highland Park area north of Dallas,
Texas.
 
 The
acquisition was funded with net proceeds raised from our ongoing public offering
and a $14.0 million secured bridge loan obtained from Cornerstone Operating
Partnership, L.P., a wholly owned subsidiary of Cornerstone Core Properties
REIT, Inc., a publicly offered, non-traded REIT sponsored by affiliates of our
sponsor.  The $14.0 million loan was repaid on December 16, 2009
without incurring any prepayment penalty, with the proceeds from our offering
and a new $10.0 million first mortgage loan. The $10.0 million loan bears a
fixed rate of 6.43% per annum and amortized on a 30-year basis.
 
 The
Oaks Bradenton, Bradenton, Florida
 
 On May 1,
2009, we purchased an existing assisted–living facility, The Oaks Bradenton,
from Oaks Holding LLC, a non-related party, for a purchase price of
approximately $4.5 million.  The Oaks Bradenton consists of 36-unit
assisted living units in two buildings with a total of approximately 18,172
square foot, both built in 1996, located on approximately 2.0 acres of land in
Bradenton, Florida.
 
 The
acquisition was funded with net proceeds raised from our ongoing public offering
and a $2.8 million loan. The loan matures on May 1, 2014 with no option to
extend and bears interest at a fixed rate of 6.25% per annum.  We may
repay the loan, in whole or in part, on or before May 1, 2014, subject to
prepayment premiums.
 
 GreenTree,
Columbus, Indiana
 
 On
December 30, 2009, we purchased an existing assisted–living facility, GreenTree
at Westwood, from GreenTree at Westwood, LLC, an unaffiliated party, for a
purchase price of approximately $5.2 million.  GreenTree at Westwood
consists of 58 assisted living units in a 50,249 square foot building built in
1998, located on approximately 4.0 acres of land in Columbus,
Indiana.
 
 The
acquisition was funded with net proceeds raised from our ongoing public offering
but we may later place mortgage debt on the property. Under the purchase
and sale agreement executed in connection with the acquisition, a portion of the
purchase price for the property is to be calculated and paid to the seller as
earnout payments based upon the net operating income, as defined, of the
property during each of the three-years following our acquisition of the
property.  The maximum aggregate amount that the seller may receive
under the earnout provision is $1.0 million.
 
 33
 
 Mesa
Vista Inn Health Center, San Antonio, TX
 
 On
December 31, 2009, we purchased a skilled nursing facility, Mesa Vista Inn
Health Center from SNF Mesa Vista, LLC, an unaffiliated party, for a purchase
price of approximately $13.0 million.  Mesa Vista Inn Health Center is
a 96-unit, 144-bed, skilled nursing facility situated on approximately 6.4 acres
of land in San Antonio, TX.  The approximately 55,525 square-foot
facility, which was built in 2008, is 100% net-leased to PM Management – Babcock
NC, LLC, an affiliate of Harden Healthcare, LLC.
 
 The
acquisition was funded with net proceeds of approximately $5.5 million raised
from our ongoing public offering and the assumption of $7.5 million of existing
debt financing on the property.  The loan matures on January 5, 2015
and bears interest at a fixed rate of 6.50% per annum.   We may repay
the loan, in whole or in part, on or before January 5, 2015 without incurring
any prepayment penalty.
  Results
of Operations
 
 We began
accepting subscriptions for shares under our initial public offering on June 20,
2008.  Operating results in future periods will depend on the results
of the operation of the real estate properties that we acquire. As of December
31, 2009, we owned four properties.  One property was acquired in
January 2009, one was acquired in May 2009 and two were acquired in December
2009.  In 2008 and 2007, our operating results consisted primarily of
general and administrative expenses associated with insurance and third party
professional, legal and accounting fees related to our periodic reporting
requirements under the Securities Act of 1934.  Accordingly, the
results of our operations for the years ended December 31, 2009, 2008 and 2007
are not directly comparable.
 
 Year
Ended December 31, 2009 Compared to Year Ended December 31, 2008
 
 As a
result of the acquisitions in 2009, total revenues increased to $6.7 million,
property operating and maintenance expenses increased to $5.2 million, asset
management fees increased to $0.2 million and depreciation and amortization
increased to $1.4 million. There were no comparable revenue and expenses in the
year ended December 31, 2008.
 
 For the
years ended December 31, 2009 and 2008 real estate acquisition costs, consisting
of fees and expenses, were $1.8 million and $0.4 million,
respectively.   A portion of acquisition fees due to our Advisor
are paid upon receipt of offering proceeds and the balance is paid at the time
of acquisition.  The 2009 increase in acquisition fees are due to a
full year of offering activity and four acquisitions in 2009 compared to a half
of year of fund raising and no acquisitions in 2008.
 
 General
and administrative expenses increased to $1.2 million for the year ended
December 31, 2009 from $0.9 million for the 2008 year, primarily due to
increased tax and accounting fees, higher board of director fees associated with
increased operating activity in 2009 and reimbursement of operating costs to the
advisor related to the services on our behalf.
 
 Interest
expense for the years ended December 31, 2009 increased to $1.1 million from
$1,000 for the comparable period of 2008 due to financing of three real estate
acquisitions in 2009.
 
 Interest
and other income is comparable for year ended December 31, 2009 and
2008.
 
 Year
Ended December 31, 2008 Compared to Year Ended December 31,
2007
 
 General
and administrative expenses for the year ended December 31, 2008 increased to
$0.9 million from $0.2 million for the 2007 year.  The increase is due
to higher professional, legal and accounting fees and increased expense
reimbursements to our Advisor associated with the commencement of our
operations.   Real estate acquisition costs for the year
ended December 31, 2008 increased to $0.4 million from $0 for the 2007
year.  The increase is due to acquisition fees paid to our Advisor,
based on proceeds from our public offering raised in 2008. We did not raise any
offering proceeds in our public offerings during 2007.
 
 Liquidity
and Capital Resources
 
 We expect
that primary sources of capital over the long term will include net proceeds
from the sale of our common stock and net cash flows from
operations.  We expect that our primary uses of capital will be for
property acquisitions, for the payment of tenant improvements, for the payment
of operating expenses, including interest expense on any outstanding
indebtedness, reducing outstanding indebtedness and for the payment of
distributions.
 
 As of
December 31, 2009, we had approximately $14.9 million in cash and cash
equivalents on hand.  Our liquidity will increase as additional
subscriptions for shares are accepted in our initial public offering and
decrease as net offering proceeds are expended in connection with the
acquisition, operation of properties and distributions made in excess of cash
available from operating cash flows.
  34
  As of
December 31, 2009, our Advisor had incurred approximately $3.3 million in
organization and offering expenses, including approximately $0.1 million of
organizational costs that has been expensed.  Of this amount, we have
reimbursed $1.9 million to our Advisor.  Our Advisor has advanced us
money for these organization and offering expenses or pays these expenses on our
behalf.  Our Advisor does not charge us interest on these
advances.   At times during our offering stage, before the maximum
amount of gross proceeds has been raised, the amount of organization and
offering expenses that we incur, or that our advisor and its affiliates incur on
our behalf, may exceed 3.5% of the gross offering proceeds then raised. However,
our advisor has agreed to reimburse us to the extent that our organization and
offering expenses exceed 3.5% of aggregate gross offering proceeds at the
conclusion of our offering.   Our Advisor will pay all of our
organization and offering expenses described above that are in excess
of this 3.5% limitation.  At December 31, 2009, organization and
offering costs reimbursed to our Advisor are approximately 3.8% of the
gross proceeds of our primary offering.  In addition, our Advisor will
pay all of our organization and offering expenses that, when combined with the
sales commissions and dealer manager fees that we incur exceed 13.5% of the
gross proceeds from our initial public offering.
  We will
not rely on advances from our Advisor to acquire properties but our Advisor and
its affiliates may loan funds to special purposes entities that may acquire
properties on our behalf pending our raising sufficient proceeds from our
initial public offering to purchase the properties from the special purpose
entity.
 
 As of
December 31, 2009, a total of approximately 4.9 million shares of our common
stock had been sold in our initial public offering for aggregate gross proceeds
of approximately $49.1 million.
 
 We intend
to own our core plus properties with low to moderate levels of debt financing.
We will incur moderate to high levels of indebtedness when acquiring our
value-added and opportunistic properties and possibly other real estate
investments. The debt levels on core plus properties during the offering period
may exceed the long-term target range of debt percentages on these types of
properties.  However, we intend to reduce the percentage to fall within the
40% to 50% range no later than the end of our offering stage. To the extent
sufficient proceeds from our public offering, debt financing, or a combination
of the two are unavailable to repay acquisition debt financing down to the
target ranges within a reasonable time as determined by our board of directors,
we will endeavor to raise additional equity or sell properties to repay such
debt so that we will own our properties with low to moderate levels of permanent
financing. In the event that our public offering is not fully sold, our ability
to diversify our investments may be diminished.
 
 There may
be a delay between the sale of our shares and the purchase of
properties.  During this period, our public offering net offering
proceeds will be temporarily invested in short-term, liquid investments that
could yield lower returns than investments in real estate.
 
 Until
proceeds from our public offering are invested and generating operating cash
flow sufficient to fully fund distributions to stockholders, we intend to pay a
portion of our distributions from the proceeds of our offering or from
borrowings in anticipation of future cash flow.  For the twelve months
ended December 31, 2009, distributions to stockholders were paid from proceeds
of our offering in anticipation of future cash flow.
 
 Potential
future sources of capital include proceeds from future equity offerings,
proceeds from secured or unsecured financings from banks or other lenders,
proceeds from the sale of properties and undistributed funds from
operations.
 
 Financial
markets have recently experienced unusual volatility and
uncertainty. Liquidity has tightened in all financial markets, including
the debt and equity markets.  Our ability to fund property
acquisitions or development projects, as well as our ability to repay or
refinance debt maturities could be adversely affected by an inability to secure
financing at reasonable terms, if at all.
 
 Election
as a REIT
 
 For federal income tax
purposes, we have elected to be taxed as a REIT,
under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended
(the “Code) beginning with our  taxable year ending December 31,
2008.Under the Internal
Revenue Code of 1986, we are not subject to federal income tax on income that we
distribute to our stockholders.  REITs are subject to numerous
organizational and operational requirements in order to avoid taxation as a
regular corporation, including a requirement that they generally distribute at
least 90% of their annual taxable income to their stockholders.  If we
fail to qualify for taxation as a REIT in any year, our income will be taxed at
regular corporate rates, and we may be precluded from qualifying for treatment
as a REIT for the four-year period following our failure to
qualify.  Our failure to qualify as a REIT could result in us having a
significant liability for taxes.
 
 REIT
status imposes limitations related to operating assisted-living
properties.   Generally, to qualify as a REIT, we cannot directly
operate assisted-living facilities.  However, such facilities may
generally be operated by a taxable REIT subsidiary (“TRS”) pursuant to a lease
with the REIT.  Therefore, we have formed Master HC TRS, LLC (“Master
TRS”), a wholly owned subsidiary of CGI Healthcare Operating Partnership, LP, to
lease any assisted-living properties we acquire and to operate the
assisted-living properties pursuant to contracts with unaffiliated management
companies.  Master TRS and the REIT have made the applicable election
for Master TRS to qualify as a TRS.  Under the management contracts,
the management companies will have direct control of the daily operations of
these assisted-living properties.
 
 35
 Other
Liquidity Needs
 
 Property
Acquisitions
 
 We expect
to purchase properties and have expenditures for capital improvements and tenant
improvements in the next twelve months; however, those amounts cannot be
estimated at this time. We cannot be certain however, that we will have
sufficient funds to make any acquisitions or related capital
expenditures.
 
 Debt
Service Requirements
 
 On
December 16, 2009 we entered into $10.0 million first mortgage loan secured by
our interest in the Caruth Haven Court property. The loan has a 10-year term,
maturing on December 16, 2019.  The effective interest rate on the
loan is fixed at 6.43% per annum, with fixed monthly payments of approximately
$63,000 based on a 30-year amortization schedule.  If we prepay the
loan prior to June 16, 2019 we would be required to pay a variable yield
maintenance prepayment fee. The new loan is secured by a deed of trust on Caruth
Haven Court, and by an assignment of the leases and rents payable to the
borrower.
 
 On May 1,
2009, in connection with the acquisition of The Oaks Bradenton, we borrowed a
total of $2.76 million pursuant to two loan agreements. Of the total loan
amount, $2.4 million matures on May 1, 2014 with no option to extend and bears
interest at a fixed rate of 6.25% per annum.  The remaining $360,000
matures on May 1, 2014 and bears interest at a variable rate equivalent to
prevailing market certificate deposits rate plus a 1.5% margin. We may
repay the loan, in whole or in part, on or before May 1, 2014, subject to
prepayment premiums. Monthly payments for the first twelve months will be
interest only. Monthly payments beginning the thirteenth month will include
interest and principal based on a 25-year amortization period.
 
 On
December 31, 2009, in connection with the acquisition of the Mesa Vista Inn
Health Center, we entered into an assumption and amendment of an existing
mortgage loan.  Pursuant to the assumption agreement, we assumed the
outstanding principal balance of $7.5 million.  The loan matures on January
5, 2015 and bears interest at a fixed rate of 6.50% per annum with fixed monthly
payments of approximately $56,000 based on a 20 year amortization
schedule.
 
 Contractual
Obligations
 
 The
following table reflects our contractual obligations as of December 31, 2009,
specifically our obligations under long-term debt agreements and purchase
obligations:
 
 Payment due by periodContractual Obligations
              Total
              
              Less than
                1 year
              
              
              1-3 years
              
              
              3-5 years
              
              
              More than
                5 yearsNotes
      Payable (1)
              
              $
              20,260,000
              
              
              $
              288,000
              
              
              $
              725,000
              
              
              $
              3,373,000
              
              
              $
              15,874,000Interest
      Expense related to long term debt (2)
              
              $
              9,116,000
              
              
              $
              1,211,000
              
              
              $
              2,539,000
              
              
              $
              2,335,000
              
              
              $
              3,031,000Payable
      to related parties (3)
              
              $
              1,629,000
              
              
              $
              1,629,000
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
 
 (1)  These
obligations represent four loans outstanding as of December 31,
2009:    (1) a $10.0 million first mortgage loan related to
Caruth Haven Court (2) a $2.4 million mortgage loan related to The Oaks
Bradenton (3) a $0.36 million loan related to The Oaks Bradenton and (4) a $7.5
million mortgage loan related to Mesa Vista Inn Health
Center.
 
 (2)   Interest
expense related to the $10.0 million first mortgage loan bears a fixed rate of
6.43% per annum calculated based on an actual over 360 schedule multiplied by
the loan balances outstanding. Interest expense related to $2.4 million
mortgage loan agreement bears a fixed rate of 6.25% per
annum.   Monthly payments for the first twelve months are
interest-only. Monthly payments beginning the thirteenth month will include
interest and principal based on a 25-year amortization
period.  Interest expense for the $0.36 million loan is calculated
based on a variable interest rate equivalent to prevailing market certificate
deposits rate of 1.45% at December 31, 2009 plus margin of
1.5%.  Interest expense for the $7.5 million mortgage loan is
calculated based on a fixed rate of 6.50% per annum.
 
 (3) Payable
to related parties consists of offering costs, acquisition fees, expense
reimbursement payable, sales commissions and dealer manager fees to our Advisor
and PCC.
 
 36
 Off-Balance
Sheet Arrangements
 
 There are
no off-balance sheet transactions, arrangements or obligations (including
contingent obligations) that have, or are reasonably likely to have, a current
or future material effect on our financial condition, changes in the financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.
 
 Inflation
 
 Although
the real estate market has not been affected significantly by inflation in the
recent past due to the relatively low inflation rate, we expect that the
majority of our tenant leases will include provisions that would protect us to
some extent from the impact of inflation. Where possible, our leases will
include provisions for rent escalations and partial reimbursement to us of
expenses. Our ability to include provisions in the leases that protect us
against inflation is subject to competitive conditions that vary from market to
market.
 
 Subsequent
Events
 
 Property
Acquisition and Related Financing
 
 On
January 12, 2010, through a wholly-owned indirect subsidiary, the
Company contributed into an investment in a joint venture along with
Cornerstone Private Equity Fund Operating Partnership, L.P. (the “Cornerstone
Co-Investor”), an affiliate of the Company’s advisor that is also advised by
Cornerstone Leveraged Realty Advisors, LLC, and affiliates of The Cirrus Group,
an unaffiliated entity, to develop a $16.3 million long-term acute care medical
facility on the campus of the Floyd Medical Center in Rome,
Georgia.
 
 We
invested approximately $2.7 million to acquire an 83.3% equity interest in
Cornerstone Rome LTH Partners LLC (the “Cornerstone JV Entity”) through a
wholly-owned subsidiary of our operating partnership.  The Cornerstone
Co-Investor invested approximately $532,000 to acquire the remaining 16.7%
interest in the Cornerstone JV Entity. The aggregate budgeted development cost
for the proposed development of the long-term acute care medical facility is
approximately $16.3 million.  The Cornerstone JV Entity contributed
approximately $3.2 million of capital to acquire a 90% limited partnership
interest in Rome LTH Partners, LP (the “Rome Joint Venture”).  The
development cost will be funded with approximately $3.54 million of initial
capital from the Rome Joint Venture and a $12.75 million construction loan. We
expect to fund our portion of any future required capital contributions using
proceeds raised in our ongoing public offering.
  In
connection with this development, the Rome Joint Venture entered into a $12.75
million construction loan.  The loan will mature on December 18, 2012,
with two 1-year extension options dependent on certain financial
covenants.  The loan bears a variable interest rate with a spread of
300 basis points over 1-month LIBOR with a floor of 6.15%.  Monthly
payments for the first twelve months will be interest-only.  Monthly
payments beginning the thirteenth month will include interest and principal
based on a 25-year amortization period.
 
 Sale
of Shares of Common Stock
 
 As
of March 12, 2010, we had raised approximately $58.4 million through the
issuance of approximately 5.9 million shares of our common stock under our
Offering, excluding, approximately 132,000 shares that were issued pursuant to
our distribution reinvestment plan reduced by approximately 28,000 shares
pursuant to our stock repurchase program.
 
 Critical
Accounting Policies
 
 The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America, or GAAP, requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. We believe that our critical accounting policies are those that
require significant judgments and estimates such as those related to fair value,
real estate purchase price allocation, evaluation of possible impairment of real
property assets, revenue recognition and valuation of receivables,  income
taxes, and uncertain tax positions. These estimates are made and evaluated on an
on-going basis using information that is currently available as well as various
other assumptions believed to be reasonable under the circumstances. Actual
results could vary from those estimates, perhaps in material adverse ways, and
those estimates could be different under different assumptions or
conditions.
 
 Investments
in Real Estate
 
 Upon
acquisition of a property, we allocate the purchase price of the property based
upon the fair value of the assets acquired, which generally consist of land,
buildings, site improvements, furniture fixtures and equipment and intangible
lease assets or liabilities including in-place leases, above market and below
market leases, tenant relationships and goodwill.  We allocated the
purchase price to the fair value of the tangible assets of an acquired property
by valuing the property as if it were vacant. The value of the building is
depreciated over an estimated useful life of 39 years.
 
 37
  Tenant
relationships and in-place lease values are calculated based on management’s
evaluation of the specific characteristics of each tenant’s lease and our
overall relationship with the respective tenant.  The value of tenant
relationships and in-place lease intangibles, which are included as a component
of investments in real estate, is amortized to expense over the average expected
lease term.
 
 Acquired
above and below market leases is valued based on the present value of the
difference between prevailing market rates and the in-place rates over the
remaining lease term. The value of acquired above and below market leases is
amortized over the remaining non-cancelable terms of the respective leases as an
adjustment to rental revenue on our consolidated statements of
operations.
 
 Goodwill
represents the excess of acquisition cost over the fair value of identifiable
net assets of the business acquired.
 
 Fair
Value of Financial Instruments
 
 On
January 1, 2008, we adopted Financial Accounting Standards Board Accounting
Standard Codification (“ASC”) 820-10, Fair Value Measurements and
Disclosures. ASC 820-10 defines fair value, establishes a framework for
measuring fair value in GAAP and provides for expanded disclosure about fair
value measurements. ASC 820-10 applies prospectively to all other accounting
pronouncements that require or permit fair value
measurements.
  The ASC
825-10, Financial
Instruments,requires the disclosure
of fair value information about financial instruments whether or not recognized
on the face of the balance sheet, for which it is practical to estimate that
value.
 
 We
generally determine or calculate the fair value of financial instruments using
quoted market prices in active markets when such information is available or
using appropriate present value or other valuation techniques, such as
discounted cash flow analyses, incorporating available market discount rate
information for similar types of instruments and our estimates for
non-performance and liquidity risk. These techniques are significantly affected
by the assumptions used, including the discount rate, credit spreads, and
estimates of future cash flow.
 
 Our
consolidated balance sheets include the following financial instruments: cash
and cash equivalents, tenant and other receivables, deferred costs and other
assets payable to related parties, prepaid rent, security deposits, accounts
payable and accrued liabilities, restricted cash and notes payable. We consider
the carrying values of cash and cash equivalents, restricted cash, tenant and
other receivables, deferred costs and other assets, payable to related parties,
prepaid rent, security deposits, accounts payable and accrued liabilities to
approximate fair value for these financial instruments because of the short
period of time between origination of the instruments and their expected
payment.
 
 The fair
value of notes payable is estimated using lending rates available to
us for financial instruments with similar terms and maturities and had been
calculated to approximate the carrying value at December 31,
2009.
 
 Impairment
of Real Estate Assets and Goodwill
  Real
Estate Assets
 
 Rental
properties, properties undergoing development and redevelopment, land held for
development and intangibles are individually evaluated for impairment in
accordance with ASC 360-10, Property, Plant &
Equipment, when conditions exist which may indicate that it is probable
that the sum of expected future undiscounted cash flows is less than the
carrying amount.  Impairment indicators for our rental properties,
properties undergoing development and redevelopment, and land held for
development is assessed by project and include, but is not limited to,
significant fluctuations in estimated net operating income, occupancy changes,
construction costs, estimated completion dates, rental rates and other market
factors.  We assess the expected undiscounted cash flows based upon
numerous factors, including, but not limited to, appropriate capitalization
rates, construction costs, available market information, historical operating
results, known trends and market/economic conditions that may affect the
property and our assumptions about the use of the asset, including, if
necessary, a probability-weighted approach if multiple outcomes are under
consideration.  Upon determination that impairment has occurred and
that the future undiscounted cash flows are less than the carrying amount, a
write-down will be recorded to reduce the carrying amount to its estimated fair
value.
 
 Goodwill
  Goodwill
and intangibles with infinite lives must be tested for impairment annually or
more frequently if events or changes in circumstances indicate that the related
asset might be impaired.  Management uses all available information to
make these fair value determinations, including the present values of expected
future cash flows using discount rates commensurate with the risks involved in
the assets.  Impairment testing entails estimating future net cash
flows relating to the asset, based on management's estimate of market conditions
including market capitalization rate, future rental revenue, future operating
expenses and future occupancy percentages.  Determining the fair value
of goodwill involves management judgment and is ultimately based on management's
assessment of the value of the assets and, to the extent available, third party
assessments.  We perform our annual impairment test as of December 31
of each year. We completed the required annual impairment test and no impairment
was recognized and none of our reporting units are at risk based on the
results of the annual goodwill impairment test.
  38
  Revenue
Recognition
 
 Revenue
is recorded in accordance with ASC 840-10, Leases, and SEC Staff
Accounting Bulletin No. 104, “Revenue Recognition in Financial
Statements, as amended” (“SAB 104”).  Revenue is recognized
when four basic criteria are met: persuasive evidence of an arrangement, the
rendering of service, fixed and determinable income and reasonably assured
collectability. Leases with fixed annual rental escalators are generally
recognized on a straight-line basis over the initial lease period, subject to a
collectability assessment.  Rental income related to leases with
contingent rental escalators is generally recorded based on the contractual cash
rental payments due for the period. Because our leases may provide for free
rent, lease incentives, or other rental increases at specified intervals, we
straight-line the recognition of revenue, which results in the recording of a
receivable for rent not yet due under the lease terms. Our revenues are
comprised largely of rental income and other income collected from
tenants.
 
 Consolidation
Considerations for Our Investments in Joint Ventures
 
 ASC
810-10, Consolidation,
which addresses how a business enterprise should evaluate whether it has a
controlling interest in an entity through means other than voting rights and
accordingly should consolidate the entity.  Before concluding that it
is appropriate to apply the voting interest consolidation model to an entity, an
enterprise must first determine that the entity is not a variable interest
entity.  We evaluate, as appropriate, our interests, if any, in joint
ventures and other arrangements to determine if consolidation is
appropriate.
 
 Income
Taxes
 
 For
federal income tax purposes, we have elected to be taxed as a REIT, under
Sections 856 through 860 of the Code beginning with our taxable year ending
December 31, 2008. To qualify as a REIT, we must meet certain organizational and
operational requirements, including a requirement to currently distribute at
least 90% of the REIT’s ordinary taxable income to stockholders. As a REIT, we
generally will not be subject to federal income tax on taxable income that we
distribute to our stockholders.  If we fail to qualify as a REIT in
any taxable year, we will then be subject to federal income taxes on our taxable
income at regular corporate rates and will not be permitted to qualify for
treatment as a REIT for federal income tax purposes for four years following the
year during which qualification is lost unless the Internal Revenue Service
grants us relief under certain statutory provisions. Such an event could
materially adversely affect 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 as to qualify for treatment as a REIT and intend to
operate in the foreseeable future in such a manner so that we will remain
qualified as a REIT for federal income tax purposes. Although we had net
operating loss carryovers from years prior to our electing REIT status for the
current year, the deferred tax asset associated with such net operating loss
carryovers may not be utilized by us as a REIT.  As a result, a
valuation allowance for 100% of the deferred tax asset generated has been
recorded as of December 31, 2009.
 
 We have
formed Master HC TRS, LLC (“Master TRS”), and Master TRS has made the applicable
election to be subject to state and federal income tax as a C
corporation. The operating results from Master TRS are included in the
consolidated results of operations.  With respect to Master TRS, we
account for income taxes under the asset and liability method, which requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been included in the financial
statements.  Under this method, deferred tax assets and liabilities
are determined based on the differences between the financial statements and tax
basis of assets and liabilities using enacted tax rates in effect for the year
in which the difference are expected to reverse. The effect of a change in
tax rates on deferred tax assets and liabilities is recognized in income in the
period that includes the enactment date.
 
 We record
net deferred tax assets to the extent we believe these assets will more likely
than not be realized.  In making such determination, we consider all
available positive and negative evidence, including future reversals of existing
taxable temporary differences, projected future taxable income, tax planning
strategies and recent financial operations.  In the event we were to
determine that we would be able to realize our deferred income tax assets in the
future in excess of their net recorded amount, we would make an adjustment to
the valuation allowance which would reduce the provision for income
taxes.
 
 A net
operating loss in the amount of approximately $293,000 was generated by Master
TRS as of December 31, 2009.  Since the realization of the benefit of
this net operating loss cannot be reasonably assured, we have provided a
valuation allowance in the full amount of the deferred tax asset associated with
such loss.  If our assumptions change and we determine we will be able to
realize the tax benefit relating to such loss, the tax benefit associated with
such loss will be recognized as a reduction of income tax expense at such time.
We have no deferred tax liabilities.
 
 Recently
Issued Accounting Pronouncements
 
 Reference
is made to Notes to our Consolidated Financial Statements, which begin on page
F-1 of this Form 10-K.
  39
  ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 Market
risk includes risks that arise from changes in interest rates, foreign currency
exchange rates, commodity prices, equity prices and other market changes that
affect market sensitive instruments.    We invest our cash
and cash equivalents in government backed securities and FDIC insured savings
account which, by its nature, are subject to interest rate
fluctuations.  However, we believe that the primary market risk to
which we will be exposed is interest rate risk relating the variable portion of
the loan related to The Oaks Bradenton.
 
 The Oaks
Bradenton loans are comprised of a $2.4 million fixed rate portion and a $0.36
million variable rate portion.  The variable rate portion bears a variable
interest rate equivalent to prevailing market certificate deposits rate plus a
1.5% margin.
 
 An
increase in the variable interest rate constitutes a market risk. Based on
the outstanding balance as of the date of this filing, a 1.0% change in
certificate of deposit rates would result in a change in annual interest expense
of approximately $4,000 per year.
  Our
interest rate risk management objectives will be to monitor and manage the
impact of interest rate changes on earnings and cash flows by using certain
derivative financial instruments such as interest rate swaps and caps in order
to mitigate our interest rate risk on variable rate debt.  We will not
enter into derivative or interest rate transactions for speculative
purposes.
  In
addition to changes in interest rates, the fair value of our real estate is
subject to fluctuations based on changes in the real estate capital markets,
market rental rates for office space, local, regional and national economic
conditions and changes in the credit worthiness of tenants.  All of
these factors may also affect our ability to refinance our debt if
necessary.
 
 ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 See the
index included at Item 15. Exhibits, Financial Statement
Schedules.
  40
  ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
 
 None.
 
 ITEM 9A(T).
CONTROLS AND PROCEDURES
 
 We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports we file or submit under the
Securities and Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms, and
that such information is accumulated and communicated to our senior management,
including our chief executive officer and chief financial officer, as
appropriate, to allow timely decisions regarding required
disclosure.  Our Chief Executive Officer and our Chief Financial
Officer have reviewed the effectiveness of our disclosure controls and
procedures and have concluded that the disclosure controls and procedures were
effective as of the end of the period covered by this report.
 
 In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
 
 Our Chief
Executive Officer and Chief Financial Officer are responsible for establishing
and maintaining adequate internal control over financial reporting, as such term
is defined in Rules 13a-15(f) under the Securities and Exchange Act of
1934.  Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on
their evaluation as of the end of the period covered by this report, our Chief
Executive Officer and Chief Financial Officer have concluded that we maintained
effective internal control over financial reporting as of December 31,
2009.
 
 There
have been no changes in our internal control over financial reporting during our
most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
 
 This
annual report does not include an attestation report of the company’s
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by the
company’s independent registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the company to
provide only management’s report in this annual report.
 
 ITEM
9B. OTHER INFORMATION
 
 None.
 
 41
 
 PART III
  ITEM
10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
  The information required by this
item  is incorporated by reference from our definitive proxy statement
to be filed with the SEC no later than April 30, 2010.
 
 ITEM
11.   EXECUTIVE COMPENSATION
  The information required by this item
is incorporated by reference from our definitive proxy statement to be filed
with the SEC no later than April 30, 2010.
 
 ITEM
12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
  The
information required by this item is incorporated by reference from our
definitive proxy statement to be filed with the SEC no later than April 30,
2010.
  ITEM 13.  
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
  The
information required by this item is incorporated by reference from our
definitive proxy statement to be filed with the SEC no later than April 30,
2010.
  ITEM
14.   PRINCIPAL ACCOUNTING FEES AND SERVICES
 
 The
information required by this item is incorporated by reference from our
definitive proxy statement to be filed with the SEC no later than April 30,
2010.
 
 42
 
 PART IV
 
 ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
 (a) (1)
              
              Financial
      StatementsThe
      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 FirmConsolidated
      Balance Sheets as of December 31, 2009 and December 31,
    2008Consolidated
      Statements of Operations for the Years Ended December 31, 2009, 2008 and
      2007Consolidated
      Statements of Equity (Deficit) for the Years Ended December 31, 2009,
      2008, and 2007Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2009, 2008
      and 2007Notes
      to Consolidated Financial Statements(2)
              
              Financial
      Statement SchedulesSchedule
      II – Valuation and Qualifying AccountsSchedule
      III – Real Estate and Accumulated Depreciation(3)
              
              Exhibits
 
 The
exhibits listed on the Exhibit Index (following the signatures section of
this report) are included, or incorporated by reference, in this annual
report
 
 43
 
 INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 Report
      of Independent Registered Public Accounting Firm
              F-2Consolidated
      Balance Sheets
              F-3Consolidated
      Statements of Operations
              F-4Consolidated
      Statements of Equity (Deficit)
              F-5Consolidated
      Statements of Cash Flows
              F-6Notes
      to Consolidated Financial Statements
              F-7
 
 F-1
 
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the
Board of Directors and Stockholders
 Cornerstone
Healthcare Plus REIT, Inc.
 
 We have
audited the accompanying consolidated balance sheets of Cornerstone Healthcare
Plus REIT, Inc. and subsidiaries (the “Company”) as of December 31, 2009
and 2008, and the related consolidated statements of operations, equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 2009. Our audit also included the financial statement schedules
listed in the index at Item 15. These financial statements and financial
statement schedules are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Cornerstone Healthcare Plus REIT, Inc.
and subsidiaries as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2009, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects, the
information set forth therein.
 
 As
discussed in Note 3 to the consolidated financial statements, on January 1,
2009, the Company adopted a new accounting provision with respect to
noncontrolling interests and retrospectively adjusted all periods presented in
the financial statements.
 
 /s/
DELOITTE & TOUCHE LLP
 
 Costa
Mesa, California
 March 17,
2010
 
 F-2
  CORNERSTONE
HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
 CONSOLIDATED
BALANCE SHEETS
 December
31, 2009 and 2008
 
 December 31,2009
              
              
              2008ASSETSCash
      and cash equivalents
              
              $
              14,900,000
              
              
              $
              7,449,000Investments
      in real estateLand
              
              
              7,370,000
              
              
              
              —Buildings
      and improvements, net
              
              
              30,640,000
              
              
              
              —Furniture,
      fixtures and equipment, net
              
              
              1,009,000
              
              
              
              —Intangible
      lease assets, net
              
              
              1,869,000
              
              
              
              —40,888,000
              
              
              
              —Deferred
      financing costs, net
              
              
              228,000
              
              
              
              41,000Tenant
      and other receivable
              
              
              481,000
              
              
              
              10,000Deferred
      costs and other assets
              
              
              338,000
              
              
              
              472,000Restricted
      cash
              
              
              364,000
              
              
              
              —Goodwill
              
              
              1,141,000
              
              
              
              —Total
      assets
              
              $
              58,340,000
              
              
              $
              7,972,000LIABILITIES
      AND EQUITYLiabilities:Notes
      payable
              
              $
              20,260,000
              
              
              $
              —Accounts
      payable and accrued liabilities
              
              
              932,000
              
              
              
              64,000Payable
      to related parties
              
              
              1,734,000
              
              
              
              2,478,000Prepaid
      rent and security deposits
              
              
              911,000
              
              
              
              —Distributions
      payable
              
              
              305,000
              
              
              
              61,000Total
      liabilities
              
              
              24,142,000
              
              
              
              2,603,000Commitments
      and contingencies (Note 9)Equity:Preferred
      stock, $0.01 par value; 20,000,000 shares authorized; no shares were
      issued or outstanding at December 31, 2009 and 2008
              
              
              —
              
              
              
              —Common
      stock, $0.01 par value; 580,000,000 shares authorized; 4,993,751 shares
      and 1,058,252  shares issued and outstanding at December 31,
      2009 and 2008, respectively
              
              
              50,000
              
              
              
              11,000Additional
      paid-in capital
              
              
              39,551,000
              
              
              
              6,597,000Accumulated
      deficit
              
              
              (5,403,000
              )
              
              
              (1,239,000
              )Total
      stockholders’ equity
              
              
              34,198,000
              
              
              
              5,369,000Noncontrolling
      interests
              
              
              —
              
              
              
              —Total
      equity
              
              
              34,198,000
              
              
              
              5,369,000Total
      liabilities and equity
              
              $
              58,340,000
              
              
              $
              7,972,000
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  F-3
 CORNERSTONE
HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 For
the Years Ended December 31, 2009, 2008 and 2007
 
 Year
      ended December 312009
                
                
                2008
                
                
                2007Revenues:Rental
      revenues
                
                $
                4,964,000
                
                
                $
                —
                
                
                $
                —Tenant
      reimbursements and other income
                
                
                1,697,000
                
                
                
                —
                
                
                
                —6,661,000
                
                
                
                —
                
                
                
                —Expenses:Property
      operating and maintenance
                
                
                5,172,000
                
                
                
                —
                
                
                
                —General
      and administrative
                
                
                1,206,000
                
                
                
                875,000
                
                
                
                209,000Asset
      management fees
                
                
                211,000
                
                
                
                —
                
                
                
                —Real
      estate acquisition costs
                
                
                1,814,000
                
                
                
                358,000
                
                
                
                —Depreciation
      and amortization
                
                
                1,367,000
                
                
                
                —
                
                
                
                —9,770,000
                
                
                
                1,233,000
                
                
                
                209,000Loss
      from operations
                
                
                (3,109,000
                )
                
                
                (1,233,000
                )
                
                
                (209,000
                )Other
      income (expense):Interest
      and other income
                
                
                13,000
                
                
                
                7,000
                
                
                
                6,000Interest
      expense
                
                
                (1,053,000
                )
                
                
                (1,000
                )
                
                
                (3,000
                )Net
      loss
                
                
                (4,149,000
                )
                
                
                (1,227,000
                )
                
                
                (206,000
                )Net
      income (loss) attributable to the noncontrolling interests
                
                
                15,000
                
                
                
                (121,000
                )
                
                
                (73,000
                )Net
      loss attributable to common stockholders
                
                $
                (4,164,000
                )
                
                $
                (1,106,000
                )
                
                $
                (133,000
                )Basic
      and diluted net loss per common share attributable to common
      stockholders
                
                $
                (2.08
                )
                
                $
                (12.90
                )
                
                $
                (1,330.00
                )Weighted
      average number of common shares
                
                
                1,999,747
                
                
                
                85,743
                
                
                
                100
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
 
 F-4
 
 CORNERSTONE
HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF EQUITY (DEFICIT)
 For
the Years Ended December 31, 2009, 2008 and 2007
  Common
      StockNumber of Shares
              
              
              Common Stock Par Value
              
              
              Additional
      Paid-In Capital
              
              
              AccumulatedDeficit
              
              
              Total
      Stockholders’ Equity
              
              
              Noncontrolling
      Interests
              
              
              Total
      EquityBalance
      - December 31, 2006
              
              
              100
              
              
              $
              —
              
              
              $
              1,000
              
              
              $
              —
              
              
              $
              1,000
              
              
              $
              200,000
              
              
              $
              201,000Net
      loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (133,000
              )
              
              
              (133,000
              )
              
              
              (73,000
              )
              
              
              (206,000
              )Balance
      – December 31, 2007
              
              
              100
              
              
              
              —
              
              
              
              1,000
              
              
              
              (133,000
              )
              
              
              (132,000
              )
              
              
              127,000
              
              
              
              (5,000
              )Issuance
      of common stock
              
              
              1,058,152
              
              
              
              11,000
              
              
              
              10,568,000
              
              
              
              —
              
              
              
              10,579,000
              
              
              
              —
              
              
              
              10,579,000Redeemed
      shares
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Offering
      costs
              
              
              —
              
              
              
              —
              
              
              
              (3,787,000
              )
              
              
              —
              
              
              
              (3,787,000
              )
              
              
              —
              
              
              
              (3,787,000
              )Distributions
              
              
              —
              
              
              
              —
              
              
              
              (185,000
              )
              
              
              —
              
              
              
              (185,000
              )
              
              
              (6,000
              )
              
              
              (191,000
              )Net
      loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (1,106,000
              )
              
              
              (1,106,000
              )
              
              
              (121,000
              )
              
              
              (1,227,000
              )Balance
      – December 31, 2008
              
              
              1,058,252
              
              
              
              11,000
              
              
              
              6,597,000
              
              
              
              (1,239,000
              )
              
              
              5,369,000
              
              
              
              —
              
              
              
              5,369,000Issuance
      of common stock
              
              
              3,953,744
              
              
              
              39,000
              
              
              
              39,451,000
              
              
              
              —
              
              
              
              39,490,000
              
              
              
              —
              
              
              
              39,490,000Redeemed
      shares
              
              
              (18,245
              )
              
              
              —
              
              
              
              (182,000
              )
              
              
              —
              
              
              
              (182,000
              )
              
              
              —
              
              
              
              (182,000
              )Offering
      costs
              
              
              —
              
              
              
              —
              
              
              
              (4,352,000
              )
              
              
              —
              
              
              
              (4,352,000
              )
              
              
              —
              
              
              
              (4,352,000
              )Distributions
              
              
              —
              
              
              
              —
              
              
              
              (1,963,000
              )
              
              
              —
              
              
              
              (1,963,000
              )
              
              
              (15,000
              )
              
              
              (1,978,000
              )Net
      loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (4,164,000
              )
              
              
              (4,164,000
              )
              
              
              15,000
              
              
              
              (4,149,000
              )Balance
      – December 31, 2009
              
              
              4,993,751
              
              
              $
              50,000
              
              
              $
              39,551,000
              
              
              $
              (5,403,000
              )
              
              $
              34,198,000
              
              
              $
              —
              
              
              $
              34,198,000
  The
accompanying notes are an integral part of these consolidated financial
statements.
 
 F-5
 
 CORNERSTONE
HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 For
the Years Ended December 31, 2009, 2008 and 2007
 
 Year
      ended December 31,2009
                
                
                2008
                
                
                2007Cash
      flows from operating activities:Net
      loss
                
                $
                (4,149,000
                )
                
                $
                (1,227,000
                )
                
                $
                (206,000
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Amortization
      of deferred financing costs
                
                
                111,000
                
                
                
                —
                
                
                
                —Depreciation
      and amortization
                
                
                1,367,000
                
                
                
                —
                
                
                
                —Provision
      for bad debt
                
                
                11,000
                
                
                
                —
                
                
                
                —Changes
      in operating assets and liabilities:Tenant
      and other receivables
                
                
                (492,000
                )
                
                
                —
                
                
                
                —Deferred
      costs and deposits
                
                
                (127,000
                )
                
                
                —
                
                
                
                —Prepaid
      expenses and other assets
                
                
                (14,000
                )
                
                
                (24,000
                )
                
                
                (73,000
                )Prepaid
      rent and tenant security deposits
                
                
                78,000
                
                
                
                —
                
                
                
                —Payable
      to related parties
                
                
                239,000
                
                
                
                32,000
                
                
                
                48,000Accounts
      payable and accrued expenses
                
                
                53,000
                
                
                
                (51,000
                )
                
                
                115,000Net
      cash used in operating activities
                
                
                (2,923,000
                )
                
                
                (1,270,000
                )
                
                
                (116,000
                )Cash
      flows from investing activities:Real
      estate acquisitions
                
                
                (34,278,000
                )
                
                
                —
                
                
                
                —Additions
      to real estate
                
                
                (91,000
                )
                
                
                —
                
                
                
                —Restricted
      cash
                
                
                (364,000
                )
                
                
                —
                
                
                
                —Acquisition
      deposits
                
                
                385,000
                
                
                
                (385,000
                )
                
                
                —Net
      cash used in investing activities
                
                
                (34,348,000
                )
                
                
                (385,000
                )
                
                
                —Cash
      flows from financing activities:Proceeds
      from issuance of common stock
                
                
                38,621,000
                
                
                
                10,516,000
                
                
                
                —Redeemed
      shares
                
                
                (182,000
                )
                
                
                —
                
                
                
                —Proceeds
      from note payable to related party
                
                
                14,000,000
                
                
                
                —
                
                
                
                —Repayment
      of note payable to related party
                
                
                (14,000,000
                )
                
                
                —
                
                
                
                —Proceeds
      from notes payable
                
                
                12,760,000
                
                
                
                —
                
                
                
                —Offering
      costs
                
                
                (5,283,000
                )
                
                
                (1,389,000
                )
                
                
                —Deferred
      financing costs
                
                
                (339,000
                )
                
                
                (41,000
                )
                
                
                —Distributions
      paid
                
                
                (840,000
                )
                
                
                (61,000
                )
                
                
                —Distributions
      paid to noncontrolling interest
                
                
                (15,000
                )
                
                
                (6,000
                )
                
                
                —Net
      cash provided by financing activities
                
                
                44,722,000
                
                
                
                9,019,000
                
                
                
                —Net
      increase (decrease) in cash and cash equivalents
                
                
                7,451,000
                
                
                
                7,364,000
                
                
                
                (116,000
                )Cash
      and cash equivalents - beginning of period
                
                
                7,449,000
                
                
                
                85,000
                
                
                
                201,000Cash
      and cash equivalents - end of period
                
                $
                14,900,000
                
                
                $
                7,449,000
                
                
                $
                85,000Supplemental
      disclosure of cash flow information:Cash
      paid for interest
                
                $
                941,000
                
                
                $
                —
                
                
                $
                —Supplemental
      disclosure of non-cash financing and investing activities:Distributions
      declared not paid
                
                $
                305,000
                
                
                $
                61,000
                
                
                $
                —Distributions
      reinvested
                
                $
                879,000
                
                
                $
                63,000
                
                
                $
                —Offering
      costs payable to related parties
                
                $
                82,000
                
                
                $
                2,398,000
                
                
                $
                —Accrued
      real estate addition
                
                $
                2,000
                
                
                $
                —
                
                
                $
                —Note
      payable assumed at property acquisition
                
                $
                7,500,000
                
                
                $
                —
                
                
                $
                —Assets
      acquired at property acquisition
                
                $
                71,000
                
                
                $
                —
                
                
                $
                —Liabilities
      assumed at property acquisition
                
                $
                1,594,000
                
                
                $
                —
                
                
                $
                —
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
 
 F-6
 
 CORNERSTONE
HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 For
the Years Ended December 31, 2009, 2008 and 2007
 
 1.
              Organization
 
 Cornerstone
Healthcare Plus REIT, Inc. (formerly known as Cornerstone Growth & Income
REIT, Inc.), a Maryland corporation, was formed on October 16, 2006 under the
General Corporation Law of Maryland for the purpose of engaging in the business
of investing in and owning commercial real estate.  As used in this
report, the “Company”, “we”, “us” and “our” refer to Cornerstone Healthcare Plus
REIT, Inc. and its consolidated subsidiaries, except where context otherwise
requires. We are newly formed and are subject to the general risks associated
with a start-up enterprise, including the risk of business
failure.  Subject to certain restrictions and limitations, our
business is managed by an affiliate, Cornerstone Leveraged Realty Advisors, LLC,
a Delaware limited liability company that was formed on October 16, 2006 (the
“Advisor”), pursuant to an advisory agreement.
 
 Cornerstone
Healthcare Plus Operating Partnership, L.P., a Delaware limited partnership (the
“Operating Partnership”) was formed on October 17, 2006.  At December
31, 2009, we owned approximately a 99.6% general partner interest in the
Operating Partnership while the Advisor owned approximately a 0.4% limited
partnership interest.  In addition, the Advisor owned approximately a
0.9% limited partnership interest in CGI Healthcare Operating Partnership,
L.P., a subsidiary of the Operating Partnership. We anticipate that we will
conduct all or a portion of our operations through the Operating Partnership.
Our financial statements and the financial statements of the Operating
Partnership are consolidated in the accompanying condensed consolidated
financial statements.  All intercompany accounts and transactions have
been eliminated in consolidation.
 
 For
federal income tax purposes, we have elected to be taxed as a real estate
investment trust, (“REIT”), under Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended (the “Code) beginning with our taxable
year ending December 31, 2008.  REIT status imposes limitations
related to operating assisted-living properties. Generally, to qualify as a
REIT, we cannot directly operate assisted-living facilities. However, such
facilities may generally be operated by a taxable REIT subsidiary (“TRS”)
pursuant to a lease with the REIT. Therefore, we have formed Master HC TRS,
LLC (“Master TRS”), a wholly owned subsidiary of CGI Healthcare Operating
Partnership, LP, to lease any assisted-living properties we acquire and to
operate the assisted-living properties pursuant to contracts with unaffiliated
management companies.  Master TRS and the REIT have made the
applicable election for Master TRS to qualify as a TRS. Under the
management contracts, the management companies will have direct control of the
daily operations of these assisted-living properties.
 
 2.
              Public
      Offering
 
 On
November 14, 2006, Terry G. Roussel, our President and CEO, purchased 100 shares
of common stock for $1,000 and became our initial stockholder. Our articles of
incorporation 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. We are
offering 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 distribution reinvestment plan (collectively,
the “Offering”).
 
 On June
20, 2008, the Securities and Exchange Commission (the "SEC") declared our
amended registration statement (SEC Registration No. 333-139704) effective, and
we began accepting subscriptions for shares under our Primary
Offering.
 
 As of
December 31, 2009, we had sold a total of approximately 4.9 million shares of
our common stock for aggregate gross proceeds of approximately $49.1 million. We
intend to use the net proceeds of the Offering to invest in real estate
including healthcare, multi-tenant industrial, net-leased retail properties and
other real estate investments where we believe there are opportunities to
enhance cash flow and value. Effective as of January 8, 2010, we amended our
charter to change our name from “Cornerstone Growth & Income REIT,
Inc.” to “Cornerstone Healthcare Plus REIT, Inc.”
 
 We
retained Pacific Cornerstone Capital, Inc. (“PCC”), an affiliate of the Advisor,
to serve as our dealer manager for the Offering. PCC is responsible for
marketing our shares being offered pursuant to the Offering. PCC and Terry G.
Roussel, the majority owner of our dealer manager and one of our officers and
directors, has been the subject of a non-public inquiry by FINRA focused on
private placements conducted by our dealer manager during the period from
January 1, 2004 through May 30, 2009.  We are not the issuer of any of
the securities offered in the private placements that are the subject of FINRA’s
investigation.  One such issuer is, however, the managing member of
our Advisor.  Without admitting or denying the findings, our dealer
manager and Terry Roussel have settled  the FINRA inquiry, which
alleged that they violated NASD rules relating to communications with the public
(Rule 2210); supervision (Rule 3010) and standards of commercial honor and
principles of trade (Rule 2110).  FINRA’s allegations, in sum, focus
on claimed material misstatements and omissions with respect to certain
performance targets.  Our dealer manager consented to a censure and
fine of $700,000.  Mr. Roussel consented to a fine of $50,000,
suspension from association with a FINRA member in all capacities for 20
business days, and suspension from association with a FINRA member firm in a
principal capacity for an additional three months.  Terry Roussel
served as our dealer manager’s president and chief compliance officer until
October 1, 2009, when he resigned as president. In January 2010, Terry Roussel
transferred his chief compliance officer responsibilities to a qualified
registered principal. He presently serves as one of our dealer manager’s two
directors.  Our dealer manager has also provided additional
disclosures, satisfactory to FINRA, to investors in the private
offerings.
  F-7
  3.
              Summary of Significant Accounting
      Policies
 
 The
summary of significant accounting policies presented below is designed to assist
in understanding our consolidated financial statements. Such financial
statements and accompanying notes are the representations of our management, who
is responsible for their integrity and objectivity. These accounting policies
conform to accounting principles generally accepted in the United States of
America, or GAAP, in all material respects, and have been consistently applied
in preparing the accompanying consolidated financial statements.
 
 Cash
and Cash Equivalents
 
 We
consider all short-term, highly liquid investments that are readily convertible
to cash with a maturity of three months or less at the time of purchase to be
cash equivalents.  Cash is generally invested in government backed
securities and investment-grade short-term instruments and the amount of credit
exposure to any one commercial issuer is limited.
 
 Restricted
Cash
 
 Restricted
cash represents cash held in an interest bearing certificate of deposit account
as required under the terms of a mortgage loan.
 
 Real
Estate Purchase Price Allocation
 
 In
December 2007, the Financial Accounting Standards Board (the “FASB”) issued
Accounting Standard Codification (the “ASC”) ASC 805-10, Business
Combinations.  In summary, ASC 805-10 requires the acquirer of
a business combination to measure at fair value the assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree at the
acquisition date, with limited exceptions.  In addition, this standard
requires acquisition costs to be expensed as incurred. The standard is effective
for fiscal years beginning after December 15, 2008, and is to be applied
prospectively, with no earlier adoption permitted. We adopted this standard
on January 1, 2009 and have expensed acquisition costs accordingly.
 
 We
allocate the purchase price of our properties in accordance with ASC 805-10.
Upon acquisition of a property, we allocate the purchase price of the property
based upon the fair value of the assets acquired, which generally consist of
land, buildings, site improvements, furniture fixtures and equipment and
intangible lease assets or liabilities including in-place leases, above market
and below market leases, tenant relationships and goodwill. We allocated
the purchase price to the fair value of the tangible assets of an acquired
property by valuing the property as if it were vacant. The value of the building
is depreciated over an estimated useful life of 39 years.
 
 Tenant
relationships and in-place lease values are calculated based on management’s
evaluation of the specific characteristics of each tenant’s lease and our
overall relationship with the respective tenant. The value of tenant
relationships and in-place lease intangibles, which are included as a component
of investments in real estate, is amortized to expense over the weighted average
expected lease term.
 
 Acquired
above and below market leases is valued based on the present value of the
difference between prevailing market rates and the in-place rates over the
remaining lease term. The value of acquired above and below market leases is
amortized over the remaining non-cancelable terms of the respective leases as an
adjustment to rental revenue on our consolidated statements of
operations.
 
 Goodwill
represents the excess of acquisition cost over the fair value of identifiable
net assets of the business acquired.
 
 Amortization
associated with the intangible assets for the year ended December 31, 2009, 2008
and 2007 were $0.9 million, $0 and $0, respectively.
 
 Anticipated
amortization for each of the five following years ended December 31 is as
follows:
 
 Intangibleassets2010
              
              $
              1,255,0002011
              
              $
              531,0002012
              
              $
              83,0002013
              
              $
              —2014
              
              $
              —
  The
estimated useful lives for intangible assets range from approximately one to 2.5
years. As of December 31, 2009, the weighted-average amortization period for
intangible assets was 2.1 years.
 F-8
  As of
December 31, 2009, cost and accumulated depreciation and amortization related to
real estate assets and related lease intangibles were as follows:
 
 Buildings
      and Improvements
              
              
              Site
      Improvements
              
              
              Furniture,
      Fixtures & Vehicles
              
              
              Identified
      Intangible AssetsCost
              
              $
              30,630,000
              
              
              $
              415,000
              
              
              $
              1,076,000
              
              
              $
              2,764,000Accumulated
      depreciation and amortization
              
              
              (394,000
              )
              
              
              (11,000
              )
              
              
              (67,000
              )
              
              
              (895,000
              )Net
              
              $
              30,236,000
              
              
              $
              404,000
              
              
              $
              1,009,000
              
              
              $
              1,869,000
 
 Depreciation
expense associated with buildings and improvements, site improvements and
furniture and fixtures for the year ended December 31, 2009 was approximately
$472,000.
  As of
December 31, 2008, no cost and accumulated depreciation and amortization related
to real estate assets and related lease intangibles was recorded.
 
 Impairment
of Real Estate Assets and Goodwill
  Real
Estate Assets
 
 Rental
properties, properties undergoing development and redevelopment, land held for
development and intangibles are individually evaluated for impairment in
accordance with ASC 360-10, Property, Plant &
Equipment, when conditions exist which may indicate that it is probable
that the sum of expected future undiscounted cash flows is less than the
carrying amount.  Impairment indicators for our rental properties,
properties undergoing development and redevelopment, and land held for
development is assessed by project and include, but is not limited to,
significant fluctuations in estimated net operating income, occupancy changes,
construction costs, estimated completion dates, rental rates and other market
factors.  We assess the expected undiscounted cash flows based upon
numerous factors, including, but not limited to, appropriate capitalization
rates, construction costs, available market information, historical operating
results, known trends and market/economic conditions that may affect the
property and our assumptions about the use of the asset, including, if
necessary, a probability-weighted approach if multiple outcomes are under
consideration.  Upon determination that impairment has occurred and
that the future undiscounted cash flows are less than the carrying amount, a
write-down will be recorded to reduce the carrying amount to its estimated fair
value.
 
 Goodwill
  Goodwill
and intangibles with infinite lives must be tested for impairment annually or
more frequently if events or changes in circumstances indicate that the related
asset might be impaired. Management uses all available information to make these
fair value determinations, including the present values of expected future cash
flows using discount rates commensurate with the risks involved in the assets.
Impairment testing entails estimating future net cash flows relating to the
asset, based on management's estimate of market conditions including market
capitalization rate, future rental revenue, future operating expenses and future
occupancy percentages.  Determining the fair value of goodwill
involves management judgment and is ultimately based on management's assessment
of the value of the assets and, to the extent available, third party
assessments.  We perform our annual impairment
testas of December 31 of each
year. We completed the required annual impairment test and none of
our reporting units are at risk and no impairment was recognized based on the
results of the annual goodwill impairment test.
 
 Income
Taxes
 
 For
federal income tax purposes, we have elected to be taxed as a REIT, under
Sections 856 through 860 of the Code beginning with our taxable year ending
December 31, 2008. To qualify as a REIT, we must meet certain organizational and
operational requirements, including a requirement to currently distribute at
least 90% of the REIT’s ordinary taxable income to stockholders.  As a
REIT, we generally will not be subject to federal income tax on taxable income
that we distribute to our stockholders.  If we fail to qualify as a
REIT in any taxable year, we will then be subject to federal income taxes on our
taxable income at regular corporate rates and will not be permitted to qualify
for treatment as a REIT for federal income tax purposes for four years following
the year during which qualification is lost unless the Internal Revenue Service
grants us relief under certain statutory provisions.  Such an event
could materially adversely affect 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 as to qualify for treatment as a REIT and
intend to operate in the foreseeable future in such a manner so that we will
remain qualified as a REIT for federal income tax purposes. Although we had net
operating loss carryovers from years prior to our election as a REIT the
deferred tax asset associated with such net operating loss carryovers may not be
utilized by us as a REIT.  As a result, a valuation allowance for 100%
of the deferred tax asset generated has been recorded as of December 31,
2009.
  We have
formed Master TRS, and Master TRS has made the applicable election to be subject
to state and federal income tax as a C corporation. The operating results
from Master TRS are included in the consolidated results of
operations. With respect to Master TRS, we account for income taxes under
the asset and liability method, which requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events that
have been included in the financial statements. Under this method, deferred
tax assets and liabilities are determined based on the differences between the
financial statements and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the difference are expected to
reverse. The effect of a change in tax rates on deferred tax assets and
liabilities is recognized in income in the period that includes the enactment
date.
 F-9
 We record
net deferred tax assets to the extent we believe these assets will more likely
than not be realized.  In making such determination, we consider all
available positive and negative evidence, including future reversals of existing
taxable temporary differences, projected future taxable income, tax planning
strategies and recent financial operations.  In the event we were to
determine that we would be able to realize our deferred income tax assets in the
future in excess of their net recorded amount, we would make an adjustment to
the valuation allowance which would reduce the provision for income
taxes.
 
 A net
operating loss in the amount of approximately $293,000 was generated by Master
TRS as of December 31, 2009.  Since the realization of the benefit of
this net operating loss cannot be reasonably assured, we have provided a
valuation allowance in the full amount of the deferred tax asset associated with
such loss.  If our assumptions change and we determine we will be able to
realize the tax benefit relating to such loss, the tax benefit associated with
such loss will be recognized as a reduction of income tax expense at such time.
We have no deferred tax liabilities.
 
 Uncertain
Tax Positions
  In
accordance with the requirements of ASC 740-10, Income Taxes, favorable
tax positions are included in the calculation of tax liabilities if it is more
likely than not that the Company’s adopted tax position will prevail if
challenged by tax authorities. As a result of our REIT status, we are able to
claim a dividends-paid deduction on our tax return to deduct the full amount of
common dividends paid to stockholders when computing our annual taxable income,
which results in our taxable income being passed through to our stockholders. A
REIT is subject to a 100% tax on the net income from prohibited transactions. A
“prohibited transaction” is the sale or other disposition of property held
primarily for sale to customers in the ordinary course of a trade or business.
There is a safe harbor which, if met, expressly prevents the IRS from asserting
the prohibited transaction test. We have not had any sales of properties to
date. We have no income tax expense, deferred tax assets or deferred tax
liabilities associated with any such uncertain tax positions for the operations
of any entity included in the consolidated results of operations.
 
 Tenant
and Other Receivables
 
 Tenant
and other receivables are comprised of rental and reimbursement billings due
from tenants. Tenant receivables are recorded at the original amount earned,
less an allowance for any doubtful accounts.  Management assesses the
realizability of tenant receivables on an ongoing basis and provides for
allowances as such balances, or portions thereof, become
uncollectible.  For the year ended December 31, 2009 provisions for
bad debts amounted to approximately $11,000 which is included in property
operating and maintenance expenses in the accompanying consolidated statements
of operations.  No bad debt expense was recorded during the years
ended December 31, 2008 or 2007.
 
 Deferred
Costs and Other Assets
 
 Other
assets consist primarily of prepaid expenses, real estate deposits and
utility deposits.
 
 Deferred
Financing Costs
 
 Costs
incurred in connection with debt financing are recorded as deferred financing
costs. Deferred financing costs are amortized using the straight-line basis
which approximates the effective interest rate method, over the contractual
terms of the respective financings.
 
 Consolidation
Considerations for Our Investments in Joint Ventures
 
 ASC
810-10, Consolidation,
which addresses how a business enterprise should evaluate whether it has a
controlling interest in an entity through means other than voting rights and
accordingly should consolidate the entity.  Before concluding that it
is appropriate to apply the voting interest consolidation model to an entity, an
enterprise must first determine that the entity is not a variable interest
entity. We evaluate, as appropriate, our interests, if any, in joint
ventures and other arrangements to determine if consolidation is
appropriate.
 
 Revenue
Recognition
 
 Revenue
is recorded in accordance with ASC 840-10, Leases, and SEC Staff
Accounting Bulletin No. 104, “Revenue Recognition in Financial
Statements, as amended” (“SAB 104”). Revenue is recognized when four
basic criteria are met: persuasive evidence of an arrangement, the rendering of
service, fixed and determinable income and reasonably assured collectability.
Leases with fixed annual rental escalators are generally recognized on a
straight-line basis over the initial lease period, subject to a collectability
assessment.  Rental income related to leases with contingent rental
escalators is generally recorded based on the contractual cash rental payments
due for the period. Because our leases may provide for free rent, lease
incentives, or other rental increases at specified intervals, we straight-line
the recognition of revenue, which results in the recording of a receivable for
rent not yet due under the lease terms. Our revenues are comprised largely of
rental income and other income collected from tenants.
  Future
Minimum Lease Payments
 Our
leases are on a month to month basis except for the net lease held with the
single tenant. The future minimum lease payments to be received under the single
tenant as of December 31, 2009 are as follows:
  Years
      ending December 31,2010
                
                $
                1,495,0002011
                
                1,532,0002012
                
                1,571,0002013
                
                1,610,0002014
                
                1,650,0002015
      and thereafter
                
                $
      30,331,000
 F-10
  Organizational
and Offering Costs
 
 The
Advisor funds organization and offering costs on our behalf.  We are
required to reimburse the Advisor for such organization and offering costs up to
3.5% of the cumulative capital raised in the Primary Offering. Organization
and offering costs include items such as legal and accounting fees, marketing,
due diligence, promotional and printing costs and amounts to reimburse our
Advisor for all costs and expenses such as salaries and direct expenses of
employees of the Advisor and its affiliates in connection with registering and
marketing our shares. All offering costs are recorded as an offset to
additional paid-in capital, and all organization costs are recorded as an
expense at the time we become liable for the payment of these amounts. At times
during our offering stage, the amount of organization and offering expenses that
we incur, or that the Advisor and its affiliates incur on our behalf, may exceed
3.5% of the gross offering proceeds then raised, but the Advisor has agreed to
reimburse us to the extent that our organization and offering expenses exceed
3.5% of aggregate gross offering proceeds at the conclusion of the Offering. In
addition, the Advisor will also pay any organization and offering expenses to
the extent that such expenses, plus sales commissions and the dealer manager fee
(but not the acquisition fees or expenses) are in excess of 13.5% of gross
offering proceeds.
 
 Noncontrolling
Interest in Consolidated Subsidiaries
 
 Noncontrolling
interests relate to the interests in the consolidated entities that are not
wholly-owned by us.
 
 On
January 1, 2009, we adopted ASC 810-10-65, Consolidation, which
clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. ASC 810-10-65 also requires consolidated
net income to be reported at amounts that include the amounts attributable to
both the parent and the noncontrolling interest and requires disclosure, on the
face of the consolidated statement of income, of the amounts of consolidated net
income attributable to the parent and to the noncontrolling
interest.
 
 ASC
810-10-65 was required to be applied prospectively after adoption, with the
exception of the presentation and disclosure requirements, which were applied
retrospectively for all periods presented. As a result of the adoption of ASC
810-10-65, we reclassified noncontrolling interests to permanent equity in the
accompanying consolidated balance sheets as of December 31, 2009 and
2008.   We will periodically evaluate individual noncontrolling
interests for the ability to continue to recognize the noncontrolling interest
as permanent equity in the consolidated balance sheets. Any noncontrolling
interest that fails to qualify as permanent equity will be reclassified as
temporary equity and adjusted to the greater of (a) the carrying amount, or (b)
its redemption value as of the end of the period in which the determination is
made.
 
 Concentration
of Credit Risk
 
 Financial
instruments that potentially subject the Company to a concentration of credit
risk are primarily cash investments; cash is generally invested in
investment-grade short-term instruments. Currently, the Federal Deposit
Insurance Corporation, or FDIC, generally insures amounts up to $250,000 per
depositor per insured bank. This amount is scheduled to be reduced to $100,000
after December 31, 2013.  As of December 31, 2009 we had cash accounts
in excess of FDIC insured limits.
 
 Fair
Value of Financial Instruments
  On
January 1, 2008, we adopted ASC 820-10, Fair Value Measurements and
Disclosures. ASC 820-10 defines fair value, establishes a framework for
measuring fair value in GAAP and provides for expanded disclosure about fair
value measurements. ASC 820-10 applies prospectively to all other accounting
pronouncements that require or permit fair value measurements.
 
 We
adopted ASC 820-10 with respect to our non-financial assets and non-financial
liabilities on January 1, 2009. The adoption of ASC 820-10 with respect to our
non-financial assets and liabilities did not have a material impact on our
consolidated financial statements.
  The ASC
825-10, Financial
Instruments,requires the disclosure
of fair value information about financial instruments whether or not recognized
on the face of the balance sheet, for which it is practical to estimate that
value.
 
 We
generally determine or calculate the fair value of financial instruments using
quoted market prices in active markets when such information is available or
using appropriate present value or other valuation techniques, such as
discounted cash flow analyses, incorporating available market discount rate
information for similar types of instruments and our estimates for
non-performance and liquidity risk. These techniques are significantly affected
by the assumptions used, including the discount rate, credit spreads, and
estimates of future cash flow.
 
 Our
consolidated balance sheets include the following financial instruments: cash
and cash equivalents, tenant and other receivables, deferred costs and other
assets, payable to related parties, prepaid rent, security deposits, accounts
payable and accrued liabilities, restricted cash and notes payable. We consider
the carrying values of cash and cash equivalents, restricted cash, tenant and
other receivables, deferred costs and other assets, payable to related parties,
prepaid rent, security deposits, accounts payable and accrued liabilities to
approximate fair value for these financial instruments because of the short
period of time between origination of the instruments and their expected
payment.
 
 F-11
 The fair
value of notes payable is estimated using lending rates available to
us for financial instruments with similar terms and maturities and had been
estimated to approximate the carrying value at December 31,
2009.
  Basic
and Diluted Net Loss per Common Share Attributable to Common Stockholders
  Basic and
diluted net loss per common share attributable to common stockholders per share
is computed by dividing net loss attributable to common stockholder by the
weighted-average number of common shares outstanding for the period. For the
years ended December 31, 2009, 2008 and 2007, there were no potential dilutive
common shares.
 
 Basic and
diluted net loss per share is calculated as follows:
 
 Year Ended
                December
      31, 2009
              
              
              Year Ended
                December
      31, 2008
              
              
              Year Ended
                December
      31, 2007Net
      loss attributable to common stockholders
              
              $
              (4,164,000
              )
              
              $
              (1,106,000
              )
              
              $
              (133,000
              )Net
      loss per common share attributable to common stockholders — basic and
      diluted
              
              $
              (2.08
              )
              
              $
              (12.90
              )
              
              $
              (1,330.00
              )Weighted
      average number of shares outstanding — basic and
    diluted
              
              
              1,999,747
              
              
              
              85,743
              
              
              
              100
 
 Use
of Estimates
 
 The
preparation of our consolidated financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported
amounts of the assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses for the reporting period. Actual results could
materially differ from those estimates.
  Recently
Issued Accounting Pronouncements
  In
June 2009, the FASB established the FASB Accounting Standards Codification
(the “Codification”) as the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in the
preparation of financial statements in conformity with GAAP. 
Rules and interpretive releases of the Securities and Exchange Commission
(“SEC”) under authority of federal securities laws are also sources of
authoritative GAAP for SEC registrants.  All guidance contained in the
Codification carries an equal level of authority.  The Codification became
effective for interim or annual financial periods ending after
September 15, 2009.  The adoption of the Codification did not have a
material impact on our consolidated financial statements.
  In
June 2009, the FASB issued new accounting literature with respect to the
consolidation of VIEs. The new guidance impacts the consolidation guidance
applicable to VIEs and among other things require a qualitative rather than a
quantitative analysis to determine the primary beneficiary of a VIE, continuous
assessments of whether a company is the primary beneficiary of a VIE and
enhanced disclosures about a company’s involvement with a VIE.  The new
guidance applies to our fiscal year beginning on January 1, 2010 and early
adoption is prohibited.  The adoption of the new guidance is not expected
to have a material impact on our consolidated financial statements.
 
 In
January 2010, the FASB issued an Accounting Standard Update to address
implementation issues associated with the accounting for decreases in the
ownership of a subsidiary. The new guidance clarified the scope of the entities
covered by the guidance related to accounting for decreases in the ownership of
a subsidiary and specifically excluded in-substance real estate or conveyances
of oil and gas mineral rights from the scope.  Additionally, the new
guidance expands the disclosures required for a business combination achieved in
stages and deconsolidation of a business or nonprofit activity. The new guidance
became effective for interim and annual periods ending on or after
December 31, 2009 and must be applied on a retrospective basis to the first
period that an entity adopted the new guidance related to noncontrolling
interests.  The adoption of this new guidance did not have an impact on our
consolidated financial statements.
  F-12
  4.
              Investments in Real
      Estate
 
 On
January 22, 2009, we purchased an existing assisted-living facility, Caruth
Haven Court, for a purchase price of approximately $20.5 million. The
acquisition was funded with net proceeds raised from our ongoing public offering
and a bridge loan obtained from Cornerstone Operating Partnership, L.P., a
wholly owned subsidiary of Cornerstone Core Properties REIT, Inc., a publicly
offered, non-traded REIT sponsored by affiliates of our sponsor.  We
repaid the bridge loan on December 16, 2009 with the proceeds from a $10.0
million loan obtained from an unaffiliated entity and proceeds from our
offering.
 
 On May 1,
2009, we purchased an existing assisted-living facility, Oaks Bradenton, for a
purchase price of $4.5 million.  The acquisition was funded with net
proceeds of approximately $1.7 million raised from our ongoing public offering
and financing of $2.8 million.
 
 On
December 30, 2009, we purchased an existing assisted-living facility, GreenTree
at Westwood, for a purchase price of approximately $5.2 million.  The
acquisition was funded with net proceeds raised from our ongoing public
offering.  The property was purchased with no debt financing; however,
we may later elect to place mortgage debt on the property.
 
 On
December 31, 2009, we purchased a skilled nursing facility, Mesa Vista Inn
Health Center, for a purchase price of $13.0 million.  The acquisition
was funded with net proceeds of approximately $5.5 million raised from our
ongoing public offering and the assumption of $7.5 million of debt financing
under the existing mortgage loan on the property.
 
 Mesa
Vista Inn Health Center is leased to a single tenant, PM Management – Babcock
NC, LLC, which is an affiliate of Harden Healthcare Inc., on a long-term basis
under a net lease that transfers substantially all of the operating costs
obligations to the tenant.
 
 5.           Payable to Related
Parties
 
 Payable
to related parties at December 31, 2009 and December 31, 2008 was $1.7 million
and $2.5 million, respectively, which consists of offering costs, acquisition
fees, expense reimbursement payable, sales commissions and dealer manager fees
to our Advisor and PCC.
 
 6.
              Equity
 
 Common
Stock
 
 Our
articles of incorporation 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.  As of December 31, 2009, we had cumulatively issued approximately
4.9 million shares of common stock for a total of approximately $49.1 million of
gross proceeds.  As of December 31, 2008, we had cumulatively issued
approximately 1.1 million shares of common stock for a total of approximately
$10.5 million of gross proceeds.  This excludes shares issued under
the distribution reinvestment plan.
 
 Distribution
Reinvestment Plan
 
 We have
adopted a distribution reinvestment plan that allows our stockholders to have
dividends and other distributions otherwise distributable to them invested in
additional shares of our common stock.  We have registered 10,000,000
shares of our common stock for sale pursuant to the distribution reinvestment
plan.  The purchase price per share is 95% of the price paid by the
purchaser for our common stock, but not less than $9.50 per share.  As of
December 31, 2009, we have issued approximately 99,000 shares under the
distribution reinvestment plan.  We may amend or terminate the distribution
reinvestment plan for any reason at any time upon 10 days prior written notice
to participants.
 
 Stock
Repurchase Program
 
 We have
adopted a share redemption program for investors who have held their shares for
at least one year, unless the shares are being redeemed in connection with a
stockholder’s death. Under our current stock repurchase program, the repurchase
price will vary depending on the purchase price paid by the stockholder and the
number of years the shares were held.   Our board of directors may
amend, suspend or terminate the program at anytime upon thirty (30) days prior
notice to our stockholders.
 
 During
the years ended 2008 and 2007, we did not redeem any shares pursuant to our
stock repurchase program.  During the year ended December 31,
2009, we redeemed shares pursuant to our stock repurchase program as
follows (in thousands, except per-share amounts):
  F-13
 
 Period
              
              Total
                Number of
      Shares
                Redeemed
                (1)
              
              
              Average Price
      Paid per Share
              
              
              Approximate
                Dollar
                Value of Shares
      Available That
                May Yet Be
                Redeemed
                Under the
                Program
      (1)
 
 January
      2009
              
              
              —
              
              
              $
              —
              
              
              $
              63,000February
      2009
              
              
              —
              
              
              $
              —
              
              
              $
              63,000March
      2009
              
              
              —
              
              
              $
              —
              
              
              $
              63,000April
      2009
              
              
              —
              
              
              $
              —
              
              
              $
              63,000May
      2009
              
              
              —
              
              
              $
              —
              
              
              $
              63,000June
      2009
              
              
              17,245
              
              
              $
              9.99
              
              
              $
              —July
      2009
              
              
              —
              
              
              $
              —
              
              
              $
              —August
      2009
              
              
              —
              
              
              $
              —
              
              
              $
              —September
      2009
              
              
              —
              
              
              $
              —
              
              
              $
              —October 2009
              
              
              —
              
              
              $
              —
              
              
              $
              —November 2009
              
              
              1,000
              
              
              $
              9.95
              
              
              $
              —December 2009
              
              
              —
              
              
              $
              —
              
              
              $
              —18,245
 
 (1)           As
long as our common stock is not listed on a national securities exchange or
traded on an over-the-counter market, our stockholders who have held their stock
for at least one year may be able to have all or any portion of their shares
redeemed in accordance with the procedures outlined in the prospectus relating
to the shares they purchased.  Under our current stock repurchase
program, the repurchase price will vary depending on the purchase price paid by
the stockholder and the number of years these shares were
held.  During this offering and each of the first seven years
following the closing of this offering, (i) we will have no obligation to
redeem shares if the redemption would cause total redemptions to exceed the
proceeds from our distribution reinvestment program in the prior year, and
(ii) we may not, except to repurchase the shares of a deceased shareholder,
redeem more than 5% of the number of shares outstanding at the end of the prior
calendar year. With respect to redemptions requested within two years of the
death of a stockholder, we may, but will not be obligated to, redeem shares even
if such redemption causes the number of shares redeemed to exceed 5% of the
number of shares outstanding at the end of the prior calendar year. 
Beginning seven years after termination of this primary offering, unless we have
commenced another liquidity event, such as an orderly liquidation or listing of
our shares on a national securities exchange, we will modify our stock
repurchase program to permit us to redeem up to 10% of the number of shares
outstanding at the end of the prior year, using proceeds from any source,
including the sale of assets.
 
 Our board
of directors may modify our stock repurchase program so that we can redeem stock
using the proceeds from the sale of our real estate investments or other
sources.
 
 Employee
and Director Incentive Stock Plan
 
 We have
adopted an Employee and Director Incentive Stock Plan (“the Plan”) which
provides for the grant of awards to our directors and full-time employees, as
well as other eligible participants that provide services to us. We have no
employees, and we do not intend to grant awards under the Plan to persons who
are not directors of ours. Awards granted under the Plan may consist of
nonqualified stock options, incentive stock options, restricted stock, share
appreciation rights, and dividend equivalent rights. The term of the Plan is 10
years. The total number of shares of common stock reserved for issuance under
the Plan is equal to 10% of our outstanding shares of stock at any time. As of
December 31, 2009 we have not granted any awards under the Plan.
  Tax
Treatment of Distributions
  The
income tax treatment for the distributions per share to common stockholders
reportable for the years ended December 31, 2009, 2008, and 2007 as
follows:
 
 
 Per
      Common Shares
              
              2009
              
              
              2008
      (1)
              
              
              2007Return
      of capital
              
              $
              0.75
              
              
              
              100.00
              %
              
              $
              0.29
              
              
              
              100.00
              %
              
              $
              -
              
              
              
              -
              %
 
 (1)
              Dividend per common share for
      2008 is calculated based on 139 days outstanding during the
      year.
  F-14
  7.
              Related Party
      Transactions
 
 Our
company has no employees.  Our Advisor is primarily responsible for
managing our business affairs and carrying out the directives of our board of
directors.  We have an Advisory agreement with the Advisor and a
dealer manager agreement with PCC which entitle the Advisor and PCC to specified
fees upon the provision of certain services with regard to the Offering and
investment of funds in real estate projects, among other services, as well as
reimbursement for organizational and offering costs incurred by the Advisor and
PCC on our behalf and reimbursement of certain costs and expenses incurred by
the Advisor in providing services to us.
 
 Advisory
Agreement
 
 Under the
terms of the Advisory agreement, our Advisor will use commercially reasonable
efforts to present to us investment opportunities to provide a continuing and
suitable investment program consistent with the investment policies and
objectives adopted by our board of directors. The Advisory agreement calls for
our Advisor to provide for our day-to-day management and to retain property
managers and leasing agents, subject to the authority of our board of directors,
and to perform other duties.
 
 The fees
and expense reimbursements payable to our Advisor under the Advisory agreement
are described below.
 
 Organizational and Offering
Costs.  Costs of the Offering have been paid by the Advisor on
our behalf and will be reimbursed to the Advisor from the proceeds of the
Offering.  Organizational and offering costs consist of all expenses (other
than sales commissions and the dealer manager fee) to be paid by us in
connection with the offering, 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 for all marketing related costs and expenses such as salaries and direct
expenses of employees of our Advisor and its affiliates in connection with
registering and marketing our shares (ii) technology costs associated with
the offering of our shares; (iii) our costs of conducting training and
education meetings; (iv) our costs of attending retail seminars conducted
by participating broker-dealers; and (v) payment or reimbursement of bona
fide due diligence expenses.   In no event will we have any
obligation to reimburse the Advisor for organizational and offering costs
totaling in excess of 3.5% of the gross proceeds from the Primary Offering. As
of December 31, 2009, the Advisor and its affiliates had incurred on our
behalf organizational and offering costs totaling approximately $3.3 million in
organization and offering expenses, including approximately $0.1 million of
organizational costs that have been expensed, of which, approximately $1.9
million had been reimbursed to the Advisor.   As of December 31, 2008,
the Advisor and its affiliates had incurred on our behalf organizational and
offering costs totaling approximately $2.8 million, of which, $0.4 million had
been reimbursed to the Advisor.  As of December 31, 2009,
approximately 3.8% of organizational and offerings costs had been reimbursed to
the Advisor.  As of December 31, 2008, approximately 4.1% of
organizational and offerings costs had been reimbursed to the
Advisor.
 
 Acquisition Fees and
Expenses.  The Advisory Agreement requires us to pay the
Advisor acquisition fees in an amount equal to 2% of the investments acquired,
including any debt attributable to such investments.  A portion of the
acquisition fees will be paid upon receipt 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 return acquisition fees not yet allocated to one
of our investments.   In addition, we are required to reimburse
the Advisor for direct costs the Advisor incurs and amounts the Advisor pays to
third parties in connection with the selection and acquisition of a property,
whether or not ultimately acquired. For the years ended December 31, 2009 and
2008, the Advisor earned approximately $1.1 million and $0.2 million in
acquisition fees, respectively. No acquisition fees were earned in
2007.
 
 Management
Fees.  The Advisory agreement requires us to pay the Advisor a
monthly asset management fee of one-twelfth of 1.0% of the sum of the aggregate
basis book carrying values of our assets invested, directly or indirectly, in
equity interests in and loans secured by real estate before reserves for
depreciation or bad debts or other similar non-cash reserves, calculated in
accordance with GAAP.  In addition, we will reimburse the Advisor for the
direct costs and expenses incurred by the Advisor in providing asset management
services to us, including personnel and related employment costs related to
providing asset management services on our behalf and amounts paid by our
Advisor to Servant Investments, LLC and Servant Healthcare Investments, LLC for
portfolio management services provided on our behalf.  These fees and
expenses are in addition to management fees that we expect to pay to third party
property managers.  For the year ended 2009, the Advisor earned
approximately $211,000 of asset management fees which were
expensed.  In addition, we reimbursed our Advisor for approximately
$0.1 million of direct and indirect costs incurred by our Advisor in providing
asset management services. No such costs were incurred in 2008 or
2007.
 
 Operating Expenses.
The Advisory agreement provides for reimbursement of our Advisor’s direct and
indirect costs of providing administrative and management services to
us.  For years ended December 31, 2009, 2008 and 2007, $585,000,
$448,000 and $41,000 of such costs were incurred, respectively. Four fiscal
quarters after the acquisition of our first real estate asset, and every fiscal
quarter thereafter, our advisor must reimburse us the amount by which our total
operating expenses for the prior 12 months exceed the greater of 2% of our
average invested assets or 25% of our net income unless our independent
directors committee determines that such excess expenses were justified based on
unusual and non-recurring factors.
 
 Disposition
Fee.  The Advisory agreement provides that if the Advisor or
its affiliate provides a substantial amount of the services (as determined by a
majority of our directors, including a majority of our independent directors) in
connection with the sale of one or more properties, we will pay the Advisor or
such affiliate shall receive at closing a disposition fee up to 3% of the sales
price of such property or properties.  This disposition fee may be paid in
addition to real estate commissions paid to non-affiliates, provided that the
total real estate commissions (including such disposition fee) paid to all
persons by us for each property shall not exceed an amount equal to the lesser
of (i) 6% of the aggregate contract sales price of each property or
(ii) the competitive real estate commission for each property.  We
will pay the disposition fees for a property at the time the property is sold.
No such costs were incurred in 2009, 2008 and 2007.
  F-15
  Subordinated Participation
Provisions.  The Advisor is entitled to receive a subordinated
participation upon the sale of our properties, listing of our common stock or
termination of the Advisor, as follows:
 
 ·
              After we pay stockholders
      cumulative distributions equal to their invested capital plus a 6%
      cumulative, non-compounded return, the Advisor will be paid a subordinated
      participation in net sale proceeds ranging from a low of 5% of net sales
      provided investors have earned annualized return of 6% to a high of 15% of
      net sales proceeds if investors have earned annualized returns of 10% or
      more.
 
 ·
              Upon termination of the advisory
      agreement, the Advisor will receive the subordinated performance fee due
      upon termination.  This fee ranges from a low of 5% of the
      amount by which the sum of the appraised value of our assets minus our
      liabilities on the date the advisory agreement is terminated plus total
      distributions (other than stock distributions) paid prior to termination
      of the advisory agreement exceeds the amount of invested capital plus
      annualized returns of 6%, to a high of 15% of the amount by which the sum
      of the appraised value of our assets minus its liabilities plus all prior
      distributions (other than stock distributions) exceeds the amount of
      invested capital plus annualized returns of 10% or
      more.
 
 ·
              In the event we list our stock
      for trading, the Advisor will receive a subordinated incentive listing fee
      instead of a subordinated participation in net sales
      proceeds.  This fee ranges from a low of 5% of the amount by
      which the market value of our common stock plus all prior distributions
      (other than stock distributions) exceeds the amount of invested capital
      plus annualized returns of 6%, to a high of 15% of the amount by which the
      sum of the market value of our stock plus all prior distributions (other
      than stock distributions) exceeds the amount of invested capital plus
      annualized returns of 10% or
more.
 
 No such
costs were incurred in 2009, 2008 and 2007.
 
 Dealer
Manager Agreement
 
 PCC, as
Dealer Manager, is entitled to receive a sales commission of up to 7% of gross
proceeds from sales in the Primary Offering.  PCC, as Dealer Manager, is
also entitled to receive a dealer manager fee equal to up to 3% of gross
proceeds from sales in the Primary Offering.  The Dealer Manager is also
entitled to receive a reimbursement of bona fide due diligence expenses up to
0.5% of the gross proceeds from sales in the Primary Offering.  The
Advisory agreement requires the Advisor to reimburse us to the extent that
offering expenses including sales commissions, dealer manager fees and
organization and offering expenses (but excluding acquisition fees and
acquisition expenses discussed above) to the extent are in excess of 13.5% of
gross proceeds from the Offering.  For the years ended December 31,
2009, 2008 and 2007, we incurred approximately $3.8 million, $1.0 million and
$0, respectively, payable to PCC for dealer manager fees and sales
commissions.
 
 8.
              Notes
      Payable
 
 Caruth
Haven Court
 
 On
January 22, 2009, in connection with the acquisition of the Caruth Haven
Court, we entered into a $14.0 million acquisition bridge loan with Cornerstone
Operating Partnership, L.P.  Cornerstone OperatingPartnership, L.P. is a
wholly owned subsidiary of Cornerstone Core Properties REIT, Inc., a publicly
offered, non-traded REIT sponsored by affiliates of our sponsor.  The
loan which bore interest at a variable rate of 300 basis points over prime rate
was repaid on December 16, 2009 using cash from our ongoing offering and
proceeds from a new $10.0 million first mortgage loan.
  The $10.0
million first mortgage loan has a 10-year term, maturing on December 16, 2019
and bears interest at a fixed rate of 6.43% per annum, with fixed monthly
payments of approximately $62,747 based on a 30-year amortization
schedule.  The loan is secured by a deed of trust on Caruth Haven
Court, and by an assignment of the leases and rents payable to the
borrower.
 
 During
the years ended December 31, 2009, 2008 and 2007, we incurred approximately
$29,000, $0 and $0 of interest expense, respectively, related to this
loan.  During the years ended December 31, 2009, 2008 and 2007, we
incurred approximately $802,000, $0 and $0 of interest expense, respectively,
related to the bridge loan. As of December 31, 2009 and December 31, 2008, the
loan had a balance of approximately $10.0 million and $0,
respectively.
 
 F-16
 The
Oaks Bradenton
 
 On May 1,
2009, in connection with the acquisition of The Oaks Bradenton, we borrowed a
total of $2.76 million pursuant to two loan agreements. Of the total loan
amount, $2.4 million matures on May 1, 2014 with no option to extend and bears
interest at a fixed rate of 6.25% per annum.  The remaining $360,000
matures on May 1, 2014 and bears interest at a variable rate equivalent to
prevailing market certificate deposits rate plus a 1.5% margin. We may
repay the loan, in whole or in part, on or before May 1, 2014, subject to
prepayment premiums. Monthly payments for the first twelve months will be
interest only. Monthly payments beginning the thirteenth month will include
interest and principal based on a 25-year amortization period. The loan
agreement contains various covenants including financial covenants with respect
to debt service coverage ratios, fixed charge coverage ratio and tenant rent
coverage ratio.  As of December 31, 2009, we were in compliance with
all these financial covenants.
 
 During
the years ended December 31, 2009, 2008 and 2007, we incurred approximately
$111,000, $0 and $0 of interest expense, respectively, related to the loan
agreements.  As of December 31, 2009 and December 31, 2008, the fixed
rate loan agreement had a balance of approximately $2.4 million and $0,
respectively and the variable rate loan agreement had a balance of $360,000 and
$0, respectively.
 
 Mesa
Vista Inn Health Center
 
 On
December 31, 2009, in connection with the acquisition of the Mesa Vista Inn
Health Center, we entered into an assumption and amendment of an existing
mortgage loan. Pursuant to the assumption agreement, we assumed the outstanding
principal balance of $7.5 million.  The loan matures on January 5, 2015 and
bears interest at a fixed rate of 6.50% per annum.   We may repay
the loan, in whole or in part, on or before January 5, 2015 without incurring
any prepayment penalty.  Principal and interest on the loan are due
and payable in monthly installments of $56,335 until the maturity date, when the
entire remaining balance of principal and accrued interest is due, assuming no
prior principal prepayment.
 
 During
the years ended December 31, 2009, 2008 and 2007, we incurred approximately
$1,000, $0 and $0 of interest expense, respectively, related to this loan
agreement.  As of December 31, 2009 and December 31, 2008, the loan
agreement had a balance of approximately $7.5 million and $0,
respectively.
 
 In
connection with our notes payable, we had incurred financing costs totaling
approximately $339,000 and $41,000, as of December 31, 2009 and 2008,
respectively.  These financing costs have been capitalized and are
being amortized over the life of the agreements.  For the years ended
December 31, 2009, 2008 and 2007, approximately $111,000, $0 and $0,
respectively, of deferred financing costs were amortized and included in
interest expense in the consolidated statements of
operations.
 
 The
principal payments due on our notes payable as of December 31, 2009 for each of
the next five years are as follows:
 
 Year
              
              Principal
      amount2010
              
              $
              288,0002011
              
              $
              352,0002012
              
              $
              373,0002013
              
              $
              401,0002014
              
              $
              2,972,0002015
      and thereafter
              
              $
              15,874,000
 
 9.
              Commitments and
      Contingencies
 
 Commitments
 
 Under the
purchase and sale agreement executed in connection with the GreenTree at
Westwood acquisition, a portion of the purchase price for the property is to be
calculated and paid to the seller as earnout payments based upon the net
operating income, as defined, of the property during each of the three-years
following our acquisition of the property. The maximum aggregate amount that the
seller may receive under the earnout provision is $1.0 million. As of December
31, 2009, we had accrued approximately $394,000, which represents the present
value of our estimated liability under this earnout provision.
 
 We
monitor our property for the presence of hazardous or toxic
substances.  While there can be no assurance that a material
environment liability does not exist, we are not currently aware of any
environmental liability with respect to the properties that would have a
material effect on our financial condition, results of operations and cash
flows.  Further, we are not aware of any environmental liability or
any unasserted claim or assessment with respect to an environmental liability
that we believe would require additional disclosure or the recording of a loss
contingency.
 
 Our
commitments and contingencies include the usual obligations of real estate
owners and operators in the normal course of business.  In the opinion
of management, these matters are not expected to have a material impact on our
consolidated financial position, cash flows and results of
operations.  We are not presently subject to any material litigation
nor, to our knowledge, are any material litigation threatened against the
Company which if determined unfavorably to us would have a material adverse
effect on our cash flows, financial condition or results of
operations.
  F-17
 
 Litigation
 
 We are
not presently subject to any material litigation nor, to our knowledge, any
material litigation threatened against us which if determined unfavorably to us
would have a material adverse effect on our consolidated cash flows, financial
condition or results of operations.
 
 10.           Selected Quarterly Data
(unaudited)
 
 Set forth
below is certain unaudited quarterly financial information. We believe that all
necessary adjustments, consisting only of normal recurring adjustments, have
been included in the amounts stated below to present fairly, and in accordance
with generally accepted accounting principles, the selected quarterly
information when read in conjunction with the consolidated financial
statements.
 
 Quarters EndedDecember 31,
                2009
              
              
              September 30,
                2009
              
              
              June 30,
                2009
              
              
              March 31,
                2009Revenues
              
              $
              2,072,000
              
              
              $
              1,889,000
              
              
              $
              1,645,000
              
              
              $
              1,055,000Expenses
              
              
              3,030,000
              
              
              
              2,428,000
              
              
              
              2,329,000
              
              
              
              1,983,000Loss
      from operations
              
              $
              (958,000
              )
              
              $
              (539,000
              )
              
              $
              (684,000
              )
              
              $
              (928,000
              )Net
      loss
              
              $
              (1,244,000
              )
              
              $
              (829,000
              )
              
              $
              (958,000
              )
              
              $
              (1,118,000
              )Noncontrolling
      interest
              
              $
              (57,000
              )
              
              $
              8,000
              
              
              $
              24,000
              
              
              $
              10,000Net
      loss attributable to common stockholders
              
              $
              (1,301,000
              )
              
              $
              (821,000
              )
              
              $
              (934,000
              )
              
              $
              (1,108,000
              )Net
      loss per common share attributable to common stockholders — basic and
      diluted
              
              $
              (0.31
              )
              
              $
              (0.30
              )
              
              $
              (0.51
              )
              
              $
              (0.89
              )Weighted
      average shares
              
              
              4,160,842
              
              
              
              2,775,594
              
              
              
              1,838,828
              
              
              
              1,240,370
  Quarters EndedDecember 31,
                    2008
                  
                  
                  September 30,
                    2008
                  
                  
                  June 30,
                    2008
                  
                  
                  March 31,
                    2008Revenues
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —
                  
                  
                  $
                  —Expenses
                  
                  
                  471,000
                  
                  
                  
                  389,000
                  
                  
                  
                  177,000
                  
                  
                  
                  196,000Loss
      from operations
                  
                  $
                  (471,000
                  )
                  
                  $
                  (389,000
                  )
                  
                  $
                  (177,000
                  )
                  
                  $
                  (196,000
                  )Net
      loss
                  
                  $
                  (466,000
                  )
                  
                  $
                  (387,000
                  )
                  
                  $
                  (177,000
                  )
                  
                  $
                  (197,000
                  )Noncontrolling
      interest
                  
                  $
                  (3,000
                  )
                  
                  $
                  (3,000
                  )
                  
                  $
                  19,000
                  
                  
                  $
                  108,000Net
      loss attributable to common stockholders
                  
                  $
                  (469,000
                  )
                  
                  $
                  (390,000
                  )
                  
                  $
                  (158,000
                  )
                  
                  $
                  (89,000
                  )Net
      loss per common share attributable to common stockholders — basic and
      diluted
                  
                  $
                  (0.63
                  )
                  
                  $
                  (3.62
                  )
                  
                  $
                  (1,580.00
                  )
                  
                  $
                  (890.00
                  )Weighted
      average shares
                  
                  
                  748,006
                  
                  
                  
                  107,743
                  
                  
                  
                  100
                  
                  
                  
                  100
  11.
              Business
      Combinations
 
 We
completed four properties acquisitions during 2009.  The following summary
provides the allocation of the acquired assets and liabilities of Caruth Haven
Court, The Oaks Bradenton, GreenTree at Westwood and Mesa Vista Inn Health
Center (the “2009 Acquisitions”) as of the respective dates of
acquisitions.    We have accounted for the acquisitions as a
business combination under U.S. GAAP. Under business combination accounting, the
assets and liabilities of acquired properties were recorded as of the
acquisition date, at their respective fair values, and consolidated in our
financial statements. The break down of the purchase price of the four acquired
properties:
 
 F-18
 
 Caruth
      Haven Court
                
                
                The
      Oaks Bradenton
                
                
                GreenTree
      at Westwood
                
                
                Mesa Vista InnHealth Center
                
                
                TotalLand
                
                $
                4,256,000
                
                
                $
                390,000
                
                
                $
                714,000
                
                
                $
                2,010,000
                
                
                $
                7,370,000Buildings
      & improvements
                
                
                13,871,000
                
                
                
                2,733,000
                
                
                
                3,670,000
                
                
                
                10,264,000
                
                
                
                30,538,000Site
      improvements
                
                
                115,000
                
                
                
                86,000
                
                
                
                47,000
                
                
                
                166,000
                
                
                
                414,000Furniture
      & fixtures
                
                
                273,000
                
                
                
                112,000
                
                
                
                131,000
                
                
                
                559,000
                
                
                
                1,075,000Intangible
      assets
                
                
                1,370,000
                
                
                
                773,000
                
                
                
                619,000
                
                
                
                -
                
                
                
                2,762,000Other
      assets
                
                
                42,000
                
                
                
                -
                
                
                
                18,000
                
                
                
                11,000
                
                
                
                71,000Note
      payable
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (7,500,000
                )
                
                
                (7,500,000
                )Security
      deposits and other liabilities
                
                
                (237,000
                )
                
                
                (12,000
                )
                
                
                (597,000
                )
                
                
                (747,000
                )
                
                
                (1,593,000
                )Goodwill
                
                
                363,000
                
                
                
                406,000
                
                
                
                372,000
                
                
                
                -
                
                
                
                1,141,000Real
      estate acquisitions
                
                $
                20,053,000
                
                
                $
                4,488,000
                
                
                $
                4,974,000
                
                
                $
                4,763,000
                
                
                $
                34,278,000Acquisition
      Expenses
                
                $
                845,000
                
                
                $
                271,000
                
                
                $
                163,000
                
                
                $
                434,000
                
                
                $
                1,713,000
  The
Company recorded revenues and net losses for the year ended December 31, 2009 of
approximately $6.7 million and $1.7 million, respectively, related to the 2009
Acquisitions. The following unaudited pro forma information for the years ended
December 31, 2009 and 2008 has been prepared to reflect the incremental effect
of the 2009 Acquisitions as if such acquisitions had occurred on January 1, 2009
and 2008.
 
 Year
      ended December 31, 2009
              
              
              Year
      ended December 31, 2008Revenues
              
              $
              10,724,000
              
              
              $
              10,909,000Net
      loss
              
              $
              (4,071,000
              )
              
              $
              (2,499,000
              )Basic
      and diluted net loss per common share attributable to common
      stockholders
              
              $
              (0.91
              )
              
              $
              (1.28
              )
 
 12.           Subsequent
Event
 
 On
January 12, 2010, through a wholly-owned indirect subsidiary,
we contributed into a joint venture along with Cornerstone
Private Equity Fund Operating Partnership, L.P., an affiliate of the Company’s
sponsor that is also advised by Cornerstone Leveraged Realty Advisors, LLC, and
affiliates of The Cirrus Group, an unaffiliated entity, to develop a $16.3
million free-standing medical facility on the campus of the Floyd Medical Center
in Rome, Georgia.
 
 We
invested approximately $2.7 million to acquire an 83.3% equity interest in
Cornerstone Rome LTH Partners LLC (the “Cornerstone JV Entity”) through a
wholly-owned subsidiary of our operating partnership, Cornerstone Healthcare
Plus Operating Partnership, L.P.  The Cornerstone Co-Investor invested
approximately $532,000 to acquire the remaining 16.7% interest in the
Cornerstone JV Entity. The aggregate budgeted development cost for the proposed
development of the long-term acute care medical facility is approximately $16.3
million.  The Cornerstone JV Entity contributed approximately $3.2
million of capital to acquire a 90% limited partnership interest in Rome LTH
Partners, LP (the “Rome Joint Venture”).  The development cost will be
funded with approximately $3.54 million of initial capital from the Rome Joint
Venture and a $12.75 million construction loan. We expect to fund our portion of
any future required capital contributions using proceeds raised in our ongoing
public offering.
  In
connection with this development, the Rome Joint Venture entered into a $12.75
million construction loan.  The loan will mature on December 18, 2012,
with two 1-year extension options dependent on certain financial
covenants.  The loan bears a variable interest rate with a spread of
300 basis points over 1-month LIBOR with a floor of 6.15%.  Monthly
payments for the first twelve months will be interest-only.  Monthly
payments beginning the thirteenth month will include interest and principal
based on a 25-year amortization period.
 
 Sale
of Shares of Common Stock
 
 As
of March 12, 2010, we had raised approximately $58.4 million through the
issuance of approximately 5.9 million shares of our common stock under our
Offering, excluding, approximately132,000 shares that were issued pursuant to
our distribution reinvestment plan reduced by approximately 28,000 shares
pursuant to our stock repurchase program.
 
 F-19
  CORNERSTONE
HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
 
 SCHEDULE
II
 
 VALUATION
AND QUALIFYING ACCOUNTS
 
 December 31,
2009
 
 
 Description
              Balance
      at
                Beginning
      of
                Period
              
              Charged
      to
                Costs
      and
                Expenses
              
              Deductions
              
              Balance
      at
                End
      of
                PeriodYear
      Ended December 31, 2007:Allowance
      for doubtful accounts
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —Year
      Ended December 31, 2008:Allowance
      for doubtful accounts
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —Year
      Ended December 31, 2009:Allowance
      for doubtful accounts
              
              $
              —
              
              
              $
              11,000
              
              
              $
              (11,000
              )
              
              $
              —
  F-20
 
 CORNERSTONE
HEALTHCARE PLUS REIT, INC. AND SUBSIDIARIES
 
 Schedule III
 
 REAL
ESTATE AND ACCUMULATED DEPRECIATION
 
 December
31, 2009
  Initial Cost
              
              
              Costs
                Captialized
              
              
              Gross Amount Invested
              
              
              
              
              
              
              
              
              Life on which
                Depreciation in
                Latest IncomeBuilding &
              
              
              Subsequent to
              
              
              
              
              
              Building and
              
              
              
              
              
              Accumulated
              
              Date of
              
              Date
              
              Statement isDescription
              
              Encumbrances
              
              
              Land
              
              
              Improv.
              
              
              Acquisition
              
              
              Land
              
              
              Improv.
              
              
              Total
              
              
              Depreciation
              
              Construct
              
              Acquired
              
              ComputedCaruth
      Haven Court Highland Park, TX
              
              $
              10,000,000
              
              
              $
              4,256,000
              
              
              $
              13,986,000
              
              
              $
              91,000
              
              
              $
              4,256,000
              
              
              $
              14,077,000
              
              
              $
              18,333,000
              
              
              $
              354,000
              
              1999
              
              01/22/09
              
              39
      yearsThe
      Oaks Bradenton Bradenton, FL
              
              $
              2,760,000
              
              
              
              390,000
              
              
              
              2,819,000
              
              
              
              2,000
              
              
              
              390,000
              
              
              
              2,820,000
              
              
              
              3,210,000
              
              
              
              51,000
              
              1996
              
              05/01/09
              
              39
      yearsGreenTree
      Columbus, IN
              
              
              —
              
              
              
              714,000
              
              
              
              3,717,000
              
              
              
              —
              
              
              
              714,000
              
              
              
              3,717,000
              
              
              
              4,431,000
              
              
              
              —
              
              1998
              
              12/30/09
              
              39
      yearsMesa Vista Inn Health Center San
      Antonio, TX
              
              $
              7,500,000
              
              
              
              2,010,000
              
              
              
              10,430,000
              
              
              
              —
              
              
              
              2,010,000
              
              
              
              10,431,000
              
              
              
              12,441,000
              
              
              
              —
              
              2008
              
              12/31/09
              
              39
      yearsTotals
              
              $
              20,260,000
              
              
              $
              7,370,000
              
              
              $
              30,952,000
              
              
              $
              93,000
              
              
              $
              7,370,000
              
              
              $
              31,045,000
              
              
              $
              38,415,000
              
              
              $
              405,000
  (a) The
changes in total real estate for the years ended December 31, 2009 are as
follows.
  Cost
              
              
              Accumulated
                DepreciationBalance
      at December 31, 2008
              
              $
              —
              
              
              $
              —2009
      Acquisitions
              
              
              30,952,000
              
              
              
              399,0002009
      Additions
              
              
              93,000
              
              
              
              6,000Balance
      at December 31, 2009
              
              $
              31,035,000
              
              
              $
              405,000
  (b) For
federal income tax purposes, the aggregate cost of our four properties is
approximately $43.2 million.
  F-21
  SIGNATURES
 
 Pursuant
to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
 
 CORNERSTONE
      HEALTHCARE PLUS REIT, INC.By:
              /s/
      TERRY G. ROUSSELTERRY
      G. ROUSSELChief
      Executive Officer, President andChairman
      of the Board of DirectorsDate:
      March 17, 2010
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities indicated on March 17, 2010.
 
 Name
              
              TitleChief
      Executive Officer and Director/s/
      Terry G. Roussel
              
              (Principal
      Executive Officer)Terry
      G. RousselChief
      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/
      William Bloomer
              
              Director/s/
      Romeo Cefalo
              
              Director/s/
      William Sinton
              
              Director/s/
      Ronald Shuck
              
              Director
  
  EXHIBIT INDEX
 
 Ex.
              
              Description1.1
              
              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 (filed
      herewith).3.2
              
              Articles
      of Amendment of the Registrant, dated as of December 29, 2009 (filed
      herewith).3.3
              
              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. 210.4
              
              Purchase
      and Sale Agreement, as amended, by and between Cornerstone Growth and
      Income Operating Partnership, L.P. and SHP II Caruth, LP, a Texas limited
      partnership. (incorporated by reference to the Registrant’s current report
      on Form 8-K filed November 13, 2008).10.5
              
              Multifamily
      Deed of Trust, Assignment of Rents and Security Agreement and Fixture
      Filing by and between by and between Caruth Haven L.P, a Delaware limited
      partnership as trustor, Peter S. Graf, as trustee, and KeyCorp Real Estate
      Capital Markets, Inc., an Ohio Corporation as beneficiary, dated as of
      December 16, 2009 (filed herewith).10.6
              
              Multifamily
      Note by and between Caruth Haven L.P, a Delaware limited partnership as
      borrower, and KeyCorp Real Estate Capital Markets, Inc., an Ohio
      Corporation , dated as of December 16, 2009 (filed
    herewith).10.7
              
              Purchase
      and Sale Agreement, by and between Greentree Acquisition, LLC, a Delaware
      limited liability company and Greentree at Westwood, LLC, an Indiana
      limited liability company, dated December 30, 2009, incorporated by
      reference to the Company’s current report on Form 8-K filed Janaury 6,
      201010.8
              
              Purchase
      and Sale Agreement, by and between MVI Health Center, LP, a Delaware
      limited partnership and SNF Mesa Vista, LLC, an Texas limited liability
      company, dated December 31,  2009, incorporated by reference to
      the Company’s current report on Form 8-K filed Janaury 6,
    201010.9
              
              Deed
      of Trust (Security Agreement and Financing Statement) by and between HHC
      San Antonio Northwest NC, LP, as Grantor, PlainsCapital Bank, as
      Beneficiary, and Frank Jackel, as Trustee, dated as of  March
      23, 2007 (filed herewith).10.10
              
              Promissory
      Note by and between HHC San Antonio Northwest NC, LP, as Borrower, and
      PlainsCapital Bank, as Lender, dated as of  March 23, 2007(filed
      herewith).10.11
              
              Assumption
      Agreement by and between SNF Mesa Vista, LLC, a Texas limited liability
      company and MVI Health Center, LP, a Delaware limited partnership, dated
      as of December 31, 2009 (filed
      herewith).
  
  10.12
              
              Amended
      and Restated Lease Agreement by and between MVI Health Center, LP, a
      Delaware limited partnership as Lessor and PM Management – Babcock NC,
      LLC, a Texas limited liability company as Lessee, dated as of December
      31, 2009(filed
      herewith).14.1
              
              Code
      of Business Conduct and Ethics (incorporated by reference to Exhibit 14.1
      to the Registrant’s annual report on Form 10-k for the year ended December
      31, 2009).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).