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, 2008





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
GROWTH & INCOME REIT, INC.


(Exact
name of registrant as specified in its charter)





Maryland
                20-5721212(State
      or other jurisdictionof
      incorporation or organization)
                (I.R.S.
      EmployerIdentification
      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, 2008 (the last business day of the registrant’s second fiscal
quarter), the aggregate market value of the registrants common stock held by
non-affiliates was $0.





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





As of
March 6, 2009, there were approximately 1,369,922 shares of common stock of
Cornerstone Growth & Income REIT, Inc. outstanding. The Registrant
incorporates by reference portions of its Definitive Proxy Statement for the
2009 Annual Meeting of Stockholders, which is expected to be filed no later than
April 30, 2009, into Part III of this Form 10-K to the extent
stated herein.













CORNERSTONEGROWTH & INCOME 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
                28Item
      4
                Submission of Matters to a Vote of Security
      Holders
                28PART IIItem
      5
                Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
                29Item
      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
                38Item
      8
                Financial Statements and Supplementary Data
                38Item
      9
                Changes in and Disagreements With Accountants on Accounting and
      Financial Disclosure
                38Item
      9A(T)
                Controls and Procedures
                38Item
      9B
                Other Information
                39PART IIIItem
      10
                Directors, Executive Officers and Corporate
      Governance
                40Item
      11
                Executive Compensation
                40Item
      12
                Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
                40Item
      13
                Certain Relationships and Related Transactions, and Director
      Independence
                40Item
      14
                Principal Accounting Fees and Services
                40PART IVItem
      15.
                Exhibits and Financial Statement Schedules
                41





2
 Table of Contents





PARTI





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.





Accordingly,
there can be no assurance that our expectations will be realized.





Factors
which may cause actual results to differ materially from current expectations
include, but are not limited to:


·
            Continuation of theeconomic andcredit
    crisis;


·
            National and local economic and
      business conditions;


·
            General and local real estate
      conditions;


·
            The impairment in the value of
      real property due to general and local real estate
      conditions;


·
            Changes in federal, state and
      local governmental laws and regulations
  and


·
            The availability of and costs
      associated with sources of
liquidity.





A
detailed discussion of these and other 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.





ITEM 1.  BUSINESS





Our
Company





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.  We intend to qualify as a real estate
investment trust (REIT) for federal tax purposes.  As used in this
report, “we” “us” and “our” refer to Cornerstone Growth & Income REIT, Inc
and its consolidated subsidiary, 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. Our year end is
December 31.





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. In our ongoing initial public offering, we are offering a minimum of
100,000 (the “Minimum Number of Shares”) and a maximum of 50,000,000 shares of
common stock, consisting of 40,000,000 shares for sale to the public (the
“Primary Offering”) and 10,000,000 shares for sale pursuant to the our
distribution reinvestment plan (collectively, the “Offering”). We have retained
Pacific Cornerstone Capital, Inc, an affiliate of our external advisor, to serve
as the dealer manager for the Offering.





We began
accepting subscriptions in our Offering on June 20, 2008. As of August 10, 2008,
we had sold approximately $1.0 million of stock to the public, which was
sufficient to satisfy the minimum offering amount in all states except
Minnesota, New York and Pennsylvania. On August 19, 2008, we broke escrow with
respect to subscriptions received from all states except Minnesota, New York,
which have minimum offering amounts of $2.5 million, and Pennsylvania, which has
a minimum offering amount of $20.0 million. On August 29, 2008, after selling
more than $2.5 million of stock to the public, we broke escrow with respect to
Minnesota and New York subscriptions.  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.





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 Growth &
Income Operating Partnership, L.P., a Delaware limited partnership, formed on
November 30, 2004.  We are the sole general partner of the
operating partnership and have control over its
affairs.


3
 Table of Contents





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 and is an affiliate of ours. 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, Florida based real estate operating companies.
Under the terms of these agreements Servant Investments and Servant Healthcare
Investments (collectively “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.




As of
December 31, 2008, a total of approximately 1.1 million shares of our common
stock had been sold for aggregate gross proceeds of approximately $10.5
million.  This excludes shares issued under the distribution
reinvestment plan.





Investment
Objectives





Our
investment objectives are to:





·
              preserve
      stockholder capital by acquiring and operating real
  estate;





·
                realize
      capital appreciation for our stockholders
by:





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





·
              profiting
      from the purchase and development or repositioning of other
      properties;





·
                provide
      stockholders with current income from the operations of the properties we
      acquire, including the income from properties we develop or reposition
      once they are stabilized;
and





·
                provide
      long-term liquidity to our stockholders within five years of the
      termination of the 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 define
“stabilized” properties as those that are no longer in the lease-up stage
following development or redevelopment and that are substantially leased. When
we “reposition” a property, we redevelop or employ other asset-management
strategies to enhance existing cash flow. Management is not limited by its
investment objectives to acquire properties only within the limits described
above and these policies may change at any time.





We intend
to use the net proceeds of the 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. There is no assurance that we will attain these
objectives or that our capital will not decrease. We may not change our
investment strategies 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.





4
 Table of Contents





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 all proposed
acquisitions.





Our
objective is to acquire a long-term stabilized portfolio of real estate
properties from the proceeds of this offering that consists of at least 50% core
plus properties. We may acquire value-added and opportunistic properties. 
During the early part of our acquisition phase, we may utilize 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.





Healthcare
real estate includes a variety of products, including senior housing facilities,
medical office buildings, hospital facilities, skilled nursing facilities and
outpatient centers. In 2007, 18% of the GDP of the United States, was spent on
healthcare needs, according to the National Coalition 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.




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 the Offering to invest at
least 50% of our long-term stabilized asset portfolio 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 high barriers to entry for new competitive
      product;





5
 Table of Contents





·
              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.





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:





·
              large-existing
      population and projected population
growth;





·
              historically
      high levels of tenant demand and lower historic investment volatility for
      the type of property being
acquired;





·
              historic
      and projected employment
growth;





·
              historic
      market liquidity for buying and selling of commercial real
      estate;





·
              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.





6
 Table of Contents





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.





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.





7
 Table of Contents





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 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.





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.





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Health
care 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.




Acquisition
Activity





From our
inception through December 31, 2008, we have not acquired any
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.





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.





ITEM1A.  RISK FACTORS





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





General





Recent
disruptions in the financial markets and deteriorating economic conditions could
adversely affect the values of our investments and our ongoing results
operations.




Turmoil
in the capital markets 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.  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’ business operations directly, reducing
their 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 obtain new lines of credit or refinance
existing debt, when debt financing is available at all.  We rely on
debt financing to finance 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.





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These
factors could impair our ability to make distributions to and decrease the
value of our stockholders' investment in us.





Current
levels of market volatility are unprecedented.




The
capital and credit markets have been experiencing volatility and disruption for
more than 12 months.  In some cases, the markets have produced downward
pressure on stock prices and credit capacity for certain issuers without regard
to those issuers’ underlying financial and/or operating strength.  If
current levels of market disruption and volatility continue or worsen, there can
be no assurance that we will not experience an adverse effect, which may be
material, on our business, financial condition, and results of operations. 
Disruptions, uncertainty or volatility in the capital markets may also limit our
access to capital from financial institutions on favorable terms, or at all, and
our ability to raise capital through the issuance of equity securities could be
adversely affected by causes beyond our control through ongoing extraordinary
disruptions in the global economy and financial systems or other
events.





There
can be no assurance that actions of the United States Government, Federal
Reserve, and other government and regulatory bodies for the purpose of
stabilizing the financial markets will achieve the intended effect.




In an
unprecedented response to the financial and economic crises affecting the
banking system and financial markets and going concern threats to investment
banks and other financial institutions, on October 3, 2008, former
President Bush signed the Emergency Economic Stabilization Act of 2008 (“EESA”)
into law.  Pursuant to the EESA, the United States Treasury has the
authority to, among other things, purchase up to $700 billion of mortgage-backed
and other securities from financial institutions for the purpose of stabilizing
the financial markets.  The federal government, the Federal Reserve Board,
and other government and regulatory bodies have taken or are considering other
actions to address the financial crisis.  There can be no assurance as to
what impact such actions will have on the financial markets, including the
extreme levels of volatility currently being experienced.  Such continued
volatility could materially and adversely affect our business, financial
condition, and results of operations, or the trading price of our common
stock.





Our
lack of prior operating history makes it difficult to evaluate us.





We have
no operating history.  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 no income, cash flow, funds from operations or funds from
which we can make distributions to our stockholders.  As of December 31,
2008, we had not acquired any properties and had identified only one property
for purchase.  We may not be able to conduct our business as described in
our plan of operation.  This lack of operating history increases the risk
and uncertainty prospective investors face in making an investment in our
stock.





We
are conducting a blind pool offering, therefore, prospective investors will not
have the opportunity to evaluate our investments before we make them and we may
make real estate investments that would have changed their decision as to
whether or not to invest in our stock.




Because
we have not yet specified many of the investments that we may make with the
proceeds of our initial public offering, we are not able to provide our
stockholders with information to evaluate our investments prior to
acquisition.  We will seek to invest substantially all of the offering
proceeds available for investment, after the payment of fees and expenses, in
the acquisition of real estate including healthcare, industrial and net-leased
retail real estate.  We have established criteria for evaluating real
estate properties.  However, our stockholders will be unable to evaluate
the transaction terms, location, and financial or operational data concerning
the properties before we invest in them.  Except for the investments
described in one or more supplements to our prospectus, our stockholders
will have no opportunity to evaluate the terms of transactions or other economic
or financial data concerning our investments. Our stockholders will be
relying entirely on the ability of our advisor to identify properties and
propose transactions and on our board of directors to oversee and approve such
investments.





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.





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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.





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 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. 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, 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 are unable to raise
substantially more than the minimum 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.





The
cash distributions our stockholders receive may be less frequent or lower in
amount than expected.





We 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.





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





Our
organizational documents permit us to make distributions from any source. We
have and expect to continue to fund all or a substantial portion of our
distributions from offering proceeds or borrowings, in anticipation of future
operating cash flow. If we fund distributions from borrowings, sales of
properties or the net proceeds from this offering, we will have fewer funds
available for the acquisition of properties and our stockholders’ overall return
may be reduced. Further, to the extent distributions exceed cash flow from
operations, a stockholder’s basis in our stock will be reduced and, to the
extent distributions exceed a stockholder’s basis, the stockholder may recognize
capital gain.





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.





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.





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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.  Some of our lessees and mortgagors
may  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
health care 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.





If
our involvement in a November 2008 newsletter article was held to be in
violation of the Securities Act of 1933, we could be subject to potential
liability.




On
November 13, 2008, a commercial real estate research service published an
article on its website and in a newsletter regarding our potential acquisition
of an assisted living facility in Dallas, Texas.  In addition to describing
details of the proposed acquisition, the article included statements attributed
to our chief executive officer regarding our current public offering.  The
article was not approved for publication by our executive officers prior to its
publication, nor were they aware of the publication of the article prior to
December 8, 2008.  If our involvement with the article were held by a
court to be in violation of Section 5 of the Securities Act of 1933, we
could be required to repurchase the shares sold to those purchasing shares from
us who received the article before receiving a written prospectus for a period
of one year following the date of any violation determined by the court to have
occurred. The repurchase price would be the original purchase price, plus
statutory interest from the date of purchase.




We would
contest vigorously any claim that a Section 5 violation occurred;
nevertheless, we cannot be assured that a court would agree with
us.  Given the largely professional and institutional subscriber-base of
the newsletter, we do not expect that material investment proceeds have been
raised from those who received the article or viewed it online. However, because
we do not know the amount of shares purchased from us, if any, from those who
received the article before receiving a prospectus, we cannot know the amount of
our potential liability should a court hold that a Section 5 violation
occurred. Therefore, we cannot be assured that the ultimate outcome
with respect to any such Section 5 claim would not materially adversely
affect our operating results, financial position, or cash flows.





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We
are dependent on our affiliated dealer manager to raise funds in our
public  offering.  Events that prevent our dealer manager from
serving in that capacity would jeopardize the success of this offering and could
reduce the value of our stockholders' investment.




The
success of our 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 this 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' investment.  In addition, lower offering proceeds would limit
the diversification of our portfolio, which would cause the value of our
stockholders' investment to be more dependent on the performance of any one
of our properties.  Therefore, the value of an investment in our shares
could depend on the success of our public 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 the offerings on our behalf could
adversely affect the value of an investment in our shares.  A number of
outcomes, including the FINRA proceeding and risks discussed below, 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 equity investments from our affiliates in order to fund its
operations, and our affiliates have relied on private offering proceeds 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 is ability to conduct a
successful public offering for us could suffer.




Our
dealer manager 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 October 31, 2007.  FINRA recently
informed our dealer manager that it has concluded its inquiry.  FINRA has
verbally indicated their intention to allege that the dealer manager violated
FINRA conduct rules 2210 (Communications with the Public), 3010 (Supervision)
and 2110 (Standards of Commercial Honor and Principles of Trade) and has
proposed significant sanctions.  It does not, however, propose to seek to
limit our dealer manager from continuing to conduct its business. Our dealer
manager believes that it has complied within the conduct requirements of these
rules and intends to challenge these findings under FINRA’s dispute
resolution protocol before an independent hearing panel.  If the hearing
panel finds against the dealer manager and imposes sanctions against our dealer
manager, its business could be materially adversely impacted, which could impact
our offering.




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 this offering.  If our dealer manager
cannot effectively serve as the dealer manager of this offering, this offering
may be less successful and the value of our stockholders' investment may be
adversely affected.





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.





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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.





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;





·
            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.





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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.





·
            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.





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If
our Advisor is unable to adequately fund our organization and offering
activities, we may sell fewer shares in our 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.





Our
Advisor is newly formed, has limited capitalization, has incurred losses since
its inception and is continuing to incur losses. Our Advisor must raise funds
through the sale of its own debt or equity securities, or obtain financial
support from its affiliates or its sole member, to obtain the cash necessary to
provide these advances. Our Advisor’s sole member is also dependent on raising
funds to provide financial support to our Advisor. There can be no assurance as
to the amount or timing of our Advisor’s receipt of funds. If our Advisor’s
financial circumstances reduce the amount of funds available to us for
organization and offering activities, we may not be able to raise as much money
in this offering. CIP Leveraged Fund Advisors, LLC, the sole member of our
Advisor, has limited capitalization, has incurred significant losses since its
inception and is continuing to incur significant losses.





Because
we are dependent upon our Advisor and its affiliates to conduct our operations,
any adverse changes in the financial health of our Advisor or its affiliates or
our relationship with them could hinder our operating performance and the return
on our stockholders' investment.





We are
dependent on our Advisor to manage our operations and our portfolio of real
estate assets. Our Advisor has no 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. Any
adverse changes in the financial condition of our Advisor or our relationship
with our Advisor could hinder its ability to successfully manage our operations
and our portfolio of investments.





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.





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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.





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 deterring or defending hostile takeovers, 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.





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Our
stockholders 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 the proposed 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.





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.





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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.





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;
  and





·
            increases
      in interest rates or unavailability of permanent mortgage funds which may
      render the sale of a property difficult or
  unattractive.





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 a 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.





Our
operating results and distributable cash flow will depend on our ability to
generate revenue from leasing our properties to tenants on terms favorable to
us.





Our
financial results will depend, in part, on revenues derived from leasing space
in our properties.  We are subject to the credit risk of our tenants, and
to the extent our tenants default on their leases or fail to make rental
payments we may suffer a decrease in our revenue.  In addition, if a tenant
does not pay its rent, we may not be able to enforce our rights as landlord
without delays and we may incur substantial legal costs.  We are also
subject to the risk that we will not be able to lease space in our value-added
or opportunistic properties or that, upon the expiration of leases for space
located in our core properties, leases may not be renewed, the space may not be
re-leased or the terms of renewal or re-leasing (including the cost of required
renovations or concessions to customers) may be less favorable to us than
current lease terms.  Further, costs associated with real estate
investment, such as real estate taxes and maintenance costs, generally are not
reduced when circumstances cause a reduction in income from the
investment.  These events would cause a significant decrease in revenues
and could cause us to reduce the amount of distributions to our
stockholders.





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 will be 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 will be
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 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. The properties we acquire will be
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.





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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.





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. We will have a limited ability
to vary our portfolio in response to changes in economic or other conditions. 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.





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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.





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.





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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.





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.





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 our
stockholders and may hinder our ability to raise capital by issuing more stock
or borrowing more money.





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.





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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.





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. Currently, we have no assets, and 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.





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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
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
may 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 may
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 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.





Liquidity
in the global credit market has been significantly contracted by market
disruptions, 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 entered 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.





25
 Table of Contents





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 intend
to qualify as a REIT under the Internal Revenue Code. A REIT generally is not
taxed at the corporate level on income and gains it currently distributes to its
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
elect to be taxed as a REIT and then were to 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.





Even
if we qualify and maintain our status as a REIT, we may be subject to 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 all or a portion of capital gain we earn
from the sale or other disposition of our property and pay federal income tax
directly on such income.  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.





26
 Table of Contents





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.





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.





ITEM1B.  UNRESOLVED STAFF COMMENTS





None





ITEM2.  PROPERTIES





As of
December 31, 2008, we had not purchased any properties.




ITEM3.  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.
 
 ITEM4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
 
 No
matters were submitted to a vote of our stockholders during the fourth quarter
of 2008.


27
 Table of Contents




PART II





ITEM5. 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,
2008.




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 or the
NASDAQ National 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 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.





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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 five 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
distribution reinvestment plan or (ii) 5% of the number of shares
outstanding at the end of the prior calendar year.





Stockholders





As of
March 6, 2009, we had approximately 1.4 million shares of common stock
outstanding held by approximately 377 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, portions of which are 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.





During
the years ended December 31, 2008 and 2007, we paid distributions,
including any distributions reinvested, aggregating approximately $124,000 and
$0 , respectively to our stockholders.  Because we had not yet acquired any
real estate assets and had no cash flow from operations, all of these
distributions were paid from proceeds of our public offering.  The
following table shows the distributions paid based on daily record dates for
each day during the period from January 1, 2007 through December 31, 2008,
aggregated by quarter as follows:





Distribution Declared (1)Period
                                                                                
                                                                                Cash
                                                                                
                                                                                
                                                                                Reinvested
                                                                                
                                                                                
                                                                                TotalFirst
      quarter 2007
                                                                                
                                                                                $
                                                                                -
                                                                                
                                                                                
                                                                                $
                                                                                -
                                                                                
                                                                                
                                                                                $
                                                                                -Second
      quarter 2007
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -Third
      quarter 2007
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -Fourth
      quarter 2007
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -$
                                                                                -
                                                                                
                                                                                
                                                                                $
                                                                                -
                                                                                
                                                                                
                                                                                $
                                                                                -First
      quarter 2008
                                                                                
                                                                                $
                                                                                -
                                                                                
                                                                                
                                                                                $
                                                                                -
                                                                                
                                                                                
                                                                                $
                                                                                -Second
      quarter 2008
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                -Third
      quarter 2008
                                                                                
                                                                                
                                                                                14,000
                                                                                
                                                                                
                                                                                
                                                                                18,000
                                                                                
                                                                                
                                                                                
                                                                                32,000Fourth
      quarter 2008
                                                                                
                                                                                
                                                                                77,000
                                                                                
                                                                                
                                                                                
                                                                                76,000
                                                                                
                                                                                
                                                                                
                                                                                153,000$
                                                                                91,000
                                                                                
                                                                                
                                                                                $
                                                                                94,000
                                                                                
                                                                                
                                                                                $
                                                                                185,000





(1)
            100%
      of the distributions declared during 2008 represented a return of capital
      for federal income tax purposes.  Of the distributions declared,
      $61,000 was unpaid at December 31,
2008.





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.





29
 Table of Contents





Recent
Sales of Unregistered Securities





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





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. As of August 10, 2008, we had sold approximately
$1 million of stock to the public, which was sufficient to satisfy the minimum
offering amount in all states except Minnesota, New York and Pennsylvania.
Accordingly, on August 19, 2008, we broke escrow with respect to subscriptions
received from all states except Minnesota and New York, which have minimum
offering amounts of $2.5 million, and Pennsylvania, which has a minimum offering
amount of $20 million. On August 29, 2008, after selling more than $2.5 million
of stock to the public, we broke escrow with respect to Minnesota and New York
subscriptions.





The
Offering is ongoing. As of December 31, 2008, we had sold approximately 1.1
million shares of common stock raising gross proceeds of approximately $10.5
million.  In addition, as of December 31, 2008, we have issued
approximately 6,644 shares under our distribution reinvestment
plan.   From inception to December 31, 2008, we incurred
approximately $1.0 million in selling commissions and dealer manager fees
payable to our dealer manager and approximately $0.2 million in acquisition fees
payable to our advisor.  From inception to December 31, 2008, we
incurred approximately $2.8 million in organization and offering expenses,
including approximately $0.1 million of organizational costs that have been
expensed.  As of December 31, 2008, we had not purchased any
properties.





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 2008 annual meeting of
stockholders.





Issuer
Purchases of Equity Securities





There
were no shares eligible for repurchase under our stock repurchase program during
2008 and, accordingly, no shares were repurchased during
2008.





30
 Table of Contents





ITEM6. 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,
      2008
                      
                      
                      December 31,
      2007
                      
                      
                      October 16
                        (date
      of inception to
                        December
      31, 2006Balance
      Sheet Data:Total
      assets
                      
                      $
                      7,972,000
                      
                      
                      $
                      158,000
                      
                      
                      $
                      201,000Stockholders’
      equity (deficit)
                      
                      $
                      5,369,000
                      
                      
                      $
                      (132,000
                      )
                      
                      $
                      1,000





December 31,
      2008
                      
                      
                      December
      31, 2007
                      
                      
                      October 16
      (date of
                        inception
      to
                        December
      31, 2006Operating
      Data:General
      and administrative expense
                      
                      $
                      875,000
                      
                      
                      $
                      209,000
                      
                      
                      $
                      —Net
      loss
                      
                      $
                      (1,106,000
                      )
                      
                      $
                      (133,000
                      )
                      
                      $
                      —Loss
      per common share, basic and diluted (1)
                      
                      $
                      (12.90
                      )
                      
                      $
                      (1,330.00
                      )
                      
                      $
                      —Dividends
      declared
                      
                      $
                      185,000
                      
                      
                      $
                      —
                      
                      
                      $
                      —Dividends
      per common share
                      
                      $
                      0.06
                      
                      
                      $
                      —
                      
                      
                      $
                      —Weighted
      average number of shares outstanding (1):Basic
      and diluted
                      
                      
                      85,743
                      
                      
                      
                      100
                      
                      
                      
                      100Other
      Data:Cash
      flows used in operating activities
                      
                      $
                      (1,270,000
                      )
                      
                      $
                      (116,000
                      )
                      
                      $
                      —Cash
      flows used in investing activities
                      
                      $
                      (385,000
                      )
                      
                      $
                      —
                      
                      
                      $
                      —Cash
      flows provided by financing activities
                      
                      $
                      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.





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ITEM7. 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.





As of
December 31, 2008, we raised approximately $10.5 million of gross proceeds from
the sale of approximately 1.1 million shares of our common stock.  We
had not acquired any real estate properties.





Accordingly,
the results of operations for the years ended December 31, 2008 and 2007
and the period from October 16, 2006 (date of inception) through
December 31, 2006 are indicative of an early-stage enterprise. We have no
paid employees and are externally advised and managed by Cornerstone Leveraged
Realty Advisors, LLC.





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, 2008, we had not purchased any properties.  We did not engage in
any real estate operations and, accordingly, had no income nor property
expenses.





Year
Ended December 31, 2008 Compared to Year Ended December 31, 2007





General
and administrative expenses increased to $875,000 from $209,000 for the
comparable period of 2007.  The increase is due to expenses associated
with third party professional, legal, accounting and expense reimbursements to
our Advisor.   Real estate acquisition costs increased to
$358,000 from $0 for the comparable period of 2007.  The increase is
due primarily to acquisition-related fees incurred by our Advisor
subsequent to us reaching the minimum offering amount on August 10, 2008 that
have been expensed in the anticipation of our adoption of Statement of Financial
Accounting Standard No. 141(R), "Business Combinations" on January 1,
2009.





Year
Ended December 31, 2007 Compared to Year Ended December 31,
2006





General
and administrative expenses increased to $209,000 from $0 for the comparable
period of 2006.  The increase is due to the early state of our
Offering where most of these expenses were paid to third party professionals,
legal and accounting.





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 and leasing
commissions, for the payment of operating expenses, including interest expense
on any outstanding indebtedness, and for the payment of
distributions.





As of
December 31, 2008, we had approximately $7.4 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 and operation of properties.





As of
December 31, 2008, our advisor had incurred approximately $2.8 million in
organization and offering expenses, including approximately $0.1 million of
organizational costs that have been expensed.  Of this amount, we have
reimbursed $0.4 million to our advisor.  Our advisor advances 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.  We will repay these advances and reimburse our advisor for
expenses paid on our behalf using the gross proceeds of our initial public
offering, but in no event will we have any obligation to reimburse our advisor
for these costs totaling in excess of 3.5% of the gross proceeds from our
primary 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, 2008, organization and offering
costs reimbursed to our advisor are approximately 3.5% 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.





32
 Table of Contents





As of
December 31, 2008, a total of approximately 1.1 million shares of our common
stock had been sold in our initial public offering for aggregate gross proceeds
of approximately $10.5 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.  Currently,
we have no credit facilities in place, but intend to locate adequate debt
financing as appropriate in conjunction with our investment policies. 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, 2008, 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. If
necessary, we may use financings or other sources of capital at the discretion
of our board of directors.





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





We expect
to elect to be taxed as a REIT under the Internal Revenue Code of 1986, as
amended, for the year ended 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.





Other
Liquidity Needs





Property
Acquisitions





We expect
to purchase properties and have expenditures for capital improvements, tenant
improvements and lease commissions 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





As of
December 31, 2008, we were not subject to any long term debt arrangements
nor did we have commitments from any financial institutions to provide debt
financing to us.





33
 Table of Contents





Contractual
Obligations





On
November 11, 2008, we entered into a definitive agreement to purchase 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.  The acquisition closed in January 2009.





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
November 11, 2008, we entered into a definitive agreement to purchase 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.   We completed the purchase on January 22,
2009.  The acquisition was funded with net proceeds raised from our
ongoing public offering and a secured bridge loan obtained from Cornerstone
Operating Partnership, L.P.





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 Operating Partnership, 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 is
secured by our interest in the property, matures on January 21, 2010, with no
option to extend and bears interest at a variable rate of 300 basis points over
prime rate for the term of the loan.  We may repay the loan, in whole
or in part, on or before January 21, 2010 without incurring any prepayment
penalty.  Monthly installments on the loan are interest-only and the
entire principal amount is due on the maturity date, assuming no prior principal
prepayment.





Sale
of Shares of Common Stock





From
January 1, 2009 through March 6, 2009, we raised approximately $3.0 million
through the issuance of approximately 0.3 million shares of our common stock
under our initial public offering.





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.





Fair
Value





On
January 1, 2008, we adopted Statement of Financial Accounting Standards
No. 157, “Fair Value Measurements” (“SFAS 157”).  SFAS 157 defines
fair value, establishes a framework for measuring fair value, and expands
disclosures about fair value measurements.  SFAS 157 applies to reported
balances that are required or permitted to be measured at fair value under
existing accounting pronouncements.  SFAS 157 establishes and requires
disclosure of fair value hierarchy that distinguishes between data obtained from
sources independent of the reporting entity and the reporting entity’s own
assumptions about market participant assumptions. The three levels of hierarchy
are: 1) using quoted prices in active markets for identical assets or
liabilities; 2) “significant other observable inputs”; and 3) “significant
unobservable inputs”.  “Significant other observable inputs” can include
quoted prices for similar assets or liabilities in active markets, as well as
inputs that are observable for the asset or liability, such as interest rates,
foreign exchange rates and yield curves that are observable at commonly quoted
intervals.  “Significant unobservable inputs” are typically based on an
entity’s own assumptions, as there is little, if any, related market activity.
In instances where the determination of the fair value measurement is based on
inputs from different levels of the fair value hierarchy, the level in the fair
value hierarchy within which the entire fair value measurement falls is based on
the lowest level input that is significant to the fair value measurement in its
entirety. Our assessment of the significance of a particular input to the fair
value measurement in its entirety requires judgment and considers factors
specific to the asset or liability.





34
 Table of Contents





Real
Estate Purchase Price Allocation





We
account for all acquisitions in accordance with Financial Accounting Standards
Board’s (“FASB”) Statement of Financial Accounting Standard (“SFAS”)
No. 141, “Business Combinations” (“FAS 141”), as amended by Statement
of Financial Accounting Standard SFAS No 141 (R), “Business
Combinations”.  Please see Recently Issued Accounting Pronouncements
on the following page. Upon acquisition of a property, we will allocate the
purchase price of the property based upon the fair value of the assets acquired,
which generally consist of land, buildings, site improvements, tenant
improvements, leasing commissions and intangible assets including in-place
leases and above market and below market leases.  We will allocate 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.





The
purchase price will be further allocated to in-place lease values
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 in-place lease intangibles, which will be included
as a component of investments in real estate, is amortized to expense over the
remaining lease term.





Acquired
above and below market leases are 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 will be amortized over the remaining non-cancelable terms of
the respective leases as an adjustment to rental revenue on our condensed
consolidated statements of operations.





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


Evaluation
of Possible Impairment of Real Property Assets


Rental
properties, properties undergoing development and redevelopment, land held for
development and intangibles will be individually evaluated for
impairment in accordance with Statement of Financial Accounting Standards
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”
(“SFAS 144”), 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 will be assessed by project and include, but will not
be limited to, significant fluctuations in estimated net operating income,
occupancy changes, construction costs, estimated completion dates, rental rates
and other market factors.  We will 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 an 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.





Revenue
Recognition and Valuation of Receivables





Our
revenues, which will be comprised largely of rental income, will include rents
reported on a straight-line basis over the initial term of the lease. Since our
leases may provide for free rent, lease incentives, or other rental
increases at specified intervals, we will be required to straight-line the
recognition of revenue, which will result in the recording of a receivable for
rent not yet due under the lease terms. Accordingly, our management will be
required to determine, in its judgment, to what extent the unbilled rent
receivable applicable to each specific tenant is collectible. Management will
review unbilled rent receivable on a quarterly basis and take into consideration
the tenant’s payment history, the financial condition of the tenant, business
conditions in the industry in which the tenant operates and economic conditions
in the area in which the property is located. In the event that the
collectability of unbilled rent with respect to any given tenant is in doubt, we
will record an increase in our allowance for doubtful accounts or record a
direct write-off of the specific rent receivable.





35
 Table of Contents





Income
Taxes





We will
be electing 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.  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 granted 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.




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.


For the
year ended December 31, 2008, we generated a deferred tax asset of approximately
$326,000.  Because we intend to qualify as a REIT in 2008, which would
not allow for the realization of the deferred tax asset, a valuation allowance
of a like amount was recorded.


Uncertain
Tax Positions
  In
accordance with the requirements of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109 (“FIN
48”), 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. Since this dividends-paid deduction has historically exceeded our
taxable income, we have historically had significant return of capital to our
stockholders. In order for us to be required to record any unrecognized tax
benefits or additional tax liabilities in accordance with FIN 48, any adjustment
for potential uncertain tax positions would need to exceed the return of
capital.




Recently
Issued Accounting Pronouncements




In
December 2007, the FASB issued SFAS No. 141 (R), “Business
Combinations” (“SFAS 141(R)”).  In summary, SFAS 141(R)
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.  The
standard is effective for fiscal years beginning after December 15, 2008,
and is to be applied prospectively, with no earlier
adoption permitted.  The adoption of this standard required us to
expense approximately $398,000 of acquisition related costs in 2008 that related
to our 2009 future real estate acquisitions. We have not yet determined the
impact to our consolidated 2009 financial statements in adopting this
standard.





In
December 2007, FASB issued Statements No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS 160”), an amendment to
Accounting Research Board No. 51 SFAS 160 objective is to improve the
relevance, comparability and transparency of financial information that a
reporting entity provides in its consolidated financial statements. The key
aspects of SFAS 160 are (i) the minority interests in subsidiaries should
be presented in the consolidated balance sheet within equity of the consolidated
group, separate from the parent’s shareholders’ equity, (ii) acquisitions
or dispositions of noncontrolling interests in a subsidiary that do not result
in a change of control should be accounted for as equity transactions,
(iii) a parent recognizes a gain or loss in net income when a subsidiary is
deconsolidated, measured using the fair value of the non-controlling equity
investment, (iv) the acquirer should attribute net income and each
component of other comprehensive income between controlling and noncontrolling
interests based on any contractual arrangements or relative ownership interests,
and (v) a reconciliation of beginning to ending total equity is required
for both controlling and noncontrolling interests. SFAS 160 is effective for
fiscal years beginning on or after December 15, 2008 and should be applied
prospectively. We are currently evaluating the provisions for SFAS 160 to
determine the potential impact, if any; the adoption will have on our
consolidated financial statements.





36
 Table of Contents





In April
2008, the FASB issued FASB Staff Position SFAS No. 142-3, “Determination of the
Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 intends to
improve the consistency between the useful life of recognized intangible assets
under SFAS No. 142, Goodwill and Other Intangible Assets, and the period of
expected cash flows used to measure the fair value of the assets under SFAS No.
141(R). FSP FAS 142-3 amends the factors an entity should consider in developing
renewal or extension assumptions in determining the useful life of recognized
intangible assets.  It requires an entity to consider its own
historical experience in renewing or extending similar arrangements, or to
consider market participant assumptions consistent with the highest and best use
of the assets if relevant historical experience does not exist.  In
addition to the required disclosures under SFAS No. 142, FSP FAS 142-3 requires
disclosure of the entity’s accounting policy regarding costs incurred to renew
or extend the term of recognized intangible assets, the weighted average period
to the next renewal or extension, and the total amount of capitalized costs
incurred to renew or extend the term of recognized intangible
assets.  FSP FAS 142-3 is effective for financial statements issued
for fiscal years and interim periods beginning after December 15,
2008.  While the standard for determining the useful life of
recognized intangible assets is to be applied prospectively only to intangible
assets acquired after the effective date, the disclosure requirements shall be
applied prospectively to all recognized intangible assets as of, and subsequent
to, the effective date.  Early adoption is prohibited.  The
adoption of FSP FAS 142-3 is not expected to have a material impact on our
consolidated financial statements.





ITEM7A. 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, is subject to interest rate fluctuations.





ITEM8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA





See the
index included at Item 15. Exhibits, Financial Statement
Schedules.





ITEM9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE





None





ITEM9A(T). CONTROLS AND PROCEDURES





We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and that such information is accumulated and
communicated to our senior management, 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 internal control over financial reporting, as such term is
defined in Exchange Act Rules 13a-15(f).  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).  Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies and procedures may deteriorate.





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,
2008.





37
 Table of Contents





There
have been no changes in our internal control over financial reporting during our
last 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.





ITEM9B. OTHER INFORMATION





None.





38
 Table of Contents





PART III





ITEM10.   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 Securities and Exchange
Commission no later than April 30, 2009.





ITEM11.   EXECUTIVE COMPENSATION





The
information required by this Item is incorporated by reference from our
definitive Proxy Statement to be filed with the Securities and Exchange
Commission no later than April 30, 2009.





ITEM12.   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 Securities and Exchange
Commission no later than April 30, 2009.





ITEM13.   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 Securities and Exchange
Commission no later than April 30, 2009.





ITEM14.   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 Securities and Exchange
Commission no later than April 30, 2009.





39
 Table of Contents





PARTIV





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, 2008 and December 31,
      2007Consolidated
      Statements of Operations for the Years Ended December 31, 2008
      and 2007 and for the Period from October 16, 2006 (date of
      inception) to December 31, 2006Consolidated
      Statements of Stockholders’ Equity (Deficit) for the Years Ended December
      31, 2008, 2007, and Period from October 16, 2006 (date of inception)
      to December 31, 2006Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2008
      and 2007 and for the Period from October 16, 2006 (date of
      inception) to December 31, 2006Notes
      to Consolidated Financial Statements(2)
                  
                  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





40
 Table of Contents





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 Stockholders’ Equity (Deficit)
                F-5Consolidated
      Statements of Cash Flows
                F-6Notes
      to Consolidated Financial Statements
                F-7





F-1
 Table of Contents





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors and Stockholders


Cornerstone
Growth & Income REIT, Inc.





We have
audited the accompanying consolidated balance sheets of Cornerstone
Growth & Income REIT, Inc. and subsidiary (the “Company”) as of
December 31, 2008 and 2007, and the related consolidated statements of
operations, stockholders’ equity (deficit) and cash flows for the years ended
December 31, 2008, and 2007 and for the period from October 16, 2006
(date of inception) through December 31, 2006. These financial statements
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements 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 Growth & Income
REIT, Inc. and subsidiary as of December 31, 2008 and 2007, and the
results of their operations and their cash flows for the years ended
December 31, 2008 and 2007 and for the period from October 16, 2006
(date of inception) through December 31, 2006, in conformity with
accounting principles generally accepted in the United States of
America.





/s/
DELOITTE & TOUCHE LLP





Costa
Mesa, California


March 17,
2009





F-2
 Table of Contents








CORNERSTONE
GROWTH & INCOME REIT, INC. AND SUBSIDIARY


CONSOLIDATED
BALANCE SHEETS


December 31,
2008 and 2007





December 31,2008
                                              
                                              
                                              2007ASSETSCash
      and cash equivalents
                                              
                                              $
                                              7,449,000
                                              
                                              
                                              $
                                              85,000Prepaid
      expenses and other assets
                                              
                                              
                                              97,000
                                              
                                              
                                              
                                              73,000Acquisition
      deposits and deferred financing costs
                                              
                                              
                                              426,000
                                              
                                              
                                              
                                              —Total
      assets
                                              
                                              $
                                              7,972,000
                                              
                                              
                                              $
                                              158,000LIABILITIES,
      MINORITY INTEREST AND STOCKHOLDERS’ EQUITY (DEFICIT)Liabilities:Accounts
      payable and accrued expenses
                                              
                                              $
                                              64,000
                                              
                                              
                                              $
                                              115,000Payable
      to related parties
                                              
                                              
                                              2,478,000
                                              
                                              
                                              
                                              48,000Distributions
      payable
                                              
                                              
                                              61,000
                                              
                                              
                                              
                                              —Total
      liabilities
                                              
                                              
                                              2,603,000
                                              
                                              
                                              
                                              163,000Minority
      interest
                                              
                                              
                                              —
                                              
                                              
                                              
                                              127,000Commitments
      and contingencies (Note 7)Stockholders’
      equity (deficit):Preferred
      stock, $0.01 par value; 20,000,000 shares authorized; no shares were
      issued or outstanding at December 31, 2008 and
    2007
                                              
                                              
                                              —
                                              
                                              
                                              
                                              —Common
      stock, $0.01 par value; 580,000,000 shares authorized; 1,058,252 shares
      and 100  shares issued and outstanding at December 31, 2008
      and 2007, respectively
                                              
                                              
                                              11,000
                                              
                                              
                                              
                                              —Additional
      paid-in capital
                                              
                                              
                                              6,597,000
                                              
                                              
                                              
                                              1,000Accumulated
      deficit
                                              
                                              
                                              (1,239,000
                                              )
                                              
                                              
                                              (133,000
                                              )Total
      stockholders’ equity (deficit)
                                              
                                              
                                              5,369,000
                                              
                                              
                                              
                                              (132,000
                                              )Total
      liabilities, minority interest and stockholders’ equity
      (deficit)
                                              
                                              $
                                              7,972,000
                                              
                                              
                                              $
                                              158,000





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





F-3
 Table of Contents




CORNERSTONE
GROWTH & INCOME REIT, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF OPERATIONS


For
the Years Ended December 31, 2008 and 2007 and for the Period From October
16, 2006 (date of inception) to December 31, 2006





Year
      ended
                                                                                                                                                                December
      31, 2008
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              Year
      ended
                                                                                                                                                                December
      31, 2007
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              October
      16, 2006
                                                                                                                                                                (date
      of inception) to December 31, 2006Expenses:Real
      estate acquisition costs
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              358,000
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              —
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              —General
      and administrative
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              875,000
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              209,000
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              —1,233,000
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              209,000
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              —Operating
      loss
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (1,233,000
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (209,000
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              —Interest
      income
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              7,000
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              6,000
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              —Interest
      Expense
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              (1,000
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              (3,000
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              —Net
      loss before minority interest
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (1,227,000
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (206,000
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              —Minority
      interest
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (121,000
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              (73,000
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              —Net
      loss
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              (1,106,000
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              (133,000
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              —Per
      share amount:Basic
      and diluted loss allocable to common stockholders
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              (12.90
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              (1,330.00
                                                                                                                                                              )
                                                                                                                                                              
                                                                                                                                                              $
                                                                                                                                                              —Weighted
      average number of common shares
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              85,743
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              100
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              
                                                                                                                                                              100





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





F-4
 Table of Contents





CORNERSTONE
GROWTH & INCOME REIT, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)


For
the Years Ended December 31, 2008 and 2007 and for the Period From
October 16, 2006 (date of inception) to December 31, 2006





Preferred Stock
                                                                  
                                                                  
                                                                  Common StockPreferred
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  Common
                                                                  
                                                                  
                                                                  AdditionalNumber of
                                                                  
                                                                  
                                                                  Stock
                                                                  
                                                                  
                                                                  Number of
                                                                  
                                                                  
                                                                  Stock
                                                                  
                                                                  
                                                                  Paid-In
                                                                  
                                                                  
                                                                  AccumulatedShares
                                                                  
                                                                  
                                                                  Par Value
                                                                  
                                                                  
                                                                  Shares
                                                                  
                                                                  
                                                                  Par Value
                                                                  
                                                                  
                                                                  Capital
                                                                  
                                                                  
                                                                  Deficit
                                                                  
                                                                  
                                                                  TotalBALANCE
      — October 16, 2006 (date of inception)
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  $
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  $
                                                                  —
                                                                  
                                                                  
                                                                  $
                                                                  —
                                                                  
                                                                  
                                                                  $
                                                                  —
                                                                  
                                                                  
                                                                  $
                                                                  —Issuance
      of common stock
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  100
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  1,000
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  1,000BALANCE
      — December 31, 2006
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  100
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  1,000
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  1,000Net
      loss
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  (133,000
                                                                  )
                                                                  
                                                                  
                                                                  (133,000
                                                                  )BALANCE
      — December 31, 2007
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  100
                                                                  
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  1,000
                                                                  
                                                                  
                                                                  
                                                                  (133,000
                                                                  )
                                                                  
                                                                  
                                                                  (132,000
                                                                  )Issuance
      of common stock
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  1,058,152
                                                                  
                                                                  
                                                                  
                                                                  11,000
                                                                  
                                                                  
                                                                  
                                                                  10,568,000
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  10,579,000Offering
      costs
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  (3,787,000
                                                                  )
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  (3,787,000
                                                                  )Distributions
      declared
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  (185,000
                                                                  )
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  (185,000
                                                                  )Net
      loss
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  
                                                                  (1,106,000
                                                                  )
                                                                  
                                                                  
                                                                  (1,106,000
                                                                  )BALANCE
      — December 31, 2008
                                                                  
                                                                  
                                                                  —
                                                                  
                                                                  
                                                                  $
                                                                  —
                                                                  
                                                                  
                                                                  
                                                                  1,058,252
                                                                  
                                                                  
                                                                  $
                                                                  11,000
                                                                  
                                                                  
                                                                  $
                                                                  6,597,000
                                                                  
                                                                  
                                                                  $
                                                                  (1,239,000
                                                                  )
                                                                  
                                                                  $
                                                                  5,369,000





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





F-5
 Table of Contents





CORNERSTONE
GROWTH & INCOME REIT, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF CASH FLOWS


For
the Years Ended December 31, 2008 and 2007 and for the Period From
October 16, 2006 (date of inception) to December 31, 2006





2008
                                      
                                      
                                      2007
                                      
                                      
                                      October
      16, 2006
                                        (date
      of inception) to December 31, 2006Cash
      flows from operating activities:Net
      loss
                                      
                                      $
                                      (1,106,000
                                      )
                                      
                                      $
                                      (133,000
                                      )
                                      
                                      $
                                      —Adjustments
      to reconcile net loss to net cash used in operating
      activities:Minority
      interest
                                      
                                      
                                      (121,000
                                      )
                                      
                                      
                                      (73,000
                                      )
                                      
                                      
                                      —Change
      in operating assets and liabilities:Prepaid
      expenses and other
                                      
                                      
                                      (24,000
                                      )
                                      
                                      
                                      (73,000
                                      )
                                      
                                      
                                      —Payable
      to related parties
                                      
                                      
                                      32,000
                                      
                                      
                                      
                                      48,000
                                      
                                      
                                      
                                      —Accounts
      payable and accrued expenses
                                      
                                      
                                      (51,000
                                      )
                                      
                                      
                                      115,000
                                      
                                      
                                      
                                      —Net
      cash used in operating activities
                                      
                                      
                                      (1,270,000
                                      )
                                      
                                      
                                      (116,000
                                      )
                                      
                                      
                                      —Cash
      flows from investing activities:Acquisition
      deposits
                                      
                                      
                                      (385,000
                                      )
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Net
      cash used in investing activities
                                      
                                      
                                      (385,000
                                      )
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Cash
      flows from financing activities:Proceeds
      from issuance of common stock
                                      
                                      
                                      10,516,000
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      1,000Offering
      costs
                                      
                                      
                                      (1,389,000
                                      )
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Deferred
      financing costs
                                      
                                      
                                      (41,000
                                      )
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Distributions
      paid
                                      
                                      
                                      (61,000
                                      )
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Distributions
      paid to minority interest
                                      
                                      
                                      (6,000
                                      )
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —Minority
      interest contribution
                                      
                                      
                                      —
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      200,000Net
      cash provided by financing activities
                                      
                                      
                                      9,019,000
                                      
                                      
                                      
                                      —
                                      
                                      
                                      
                                      201,000Net
      increase (decrease) in cash and cash equivalents
                                      
                                      
                                      7,364,000
                                      
                                      
                                      
                                      (116,000
                                      )
                                      
                                      
                                      201,000Cash
      and cash equivalents - beginning of period
                                      
                                      
                                      85,000
                                      
                                      
                                      
                                      201,000
                                      
                                      
                                      
                                      —Cash
      and cash equivalents - end of period
                                      
                                      $
                                      7,449,000
                                      
                                      
                                      $
                                      85,000
                                      
                                      
                                      $
                                      201,000Supplemental
      disclosure of non-cash financing and investing activities:Distributions
      declared not paid
                                      
                                      $
                                      61,000
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      —Distributions
      reinvested
                                      
                                      $
                                      63,000
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      —Offering
      costs payable to related parties
                                      
                                      $
                                      2,398,000
                                      
                                      
                                      $
                                      —
                                      
                                      
                                      $
                                      —





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





F-6
 Table of Contents





CORNERSTONE
GROWTH & INCOME REIT, INC. AND SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


For
the Years Ended December 31, 2008, 2007 and Period From October 16, 2006
(date of inception) to December 31, 2006





1.
              Organization





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, “we” “us” and “our” refer to Cornerstone
Growth & Income REIT, Inc and its consolidated subsidiary, 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.





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 will offer a minimum of 100,000 (the “Minimum Number of Shares”) and a
maximum of 50,000,000 shares of common stock, consisting of 40,000,000 shares
for sale to the public (the “Primary Offering”) and 10,000,000 shares for sale
pursuant to the our distribution reinvestment plan (collectively, the
“Offering”).





Cornerstone
Growth & Income Operating Partnership, L.P., a Delaware limited
partnership (the “Operating Partnership”) was formed on October 17,
2006.  At December 31, 2008, we owned approximately 97.96% general
partner interest in the Operating Partnership while the Advisor owned
approximately 2.04% limited partnership interest.  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.





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
$.01 and 20,000,000 shares of preferred stock with a par value of $.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 August
10, 2007, the Securities and Exchange Commission (“SEC”) declared our
registration statement effective.  We retained Pacific Cornerstone
Capital, Inc. (“PCC”), an affiliate of the Advisor, to serve as the dealer
manager for the Offering.  PCC is responsible for marketing our shares
being offered pursuant to the Offering.





Our
dealer manager 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 October 31, 2007.  FINRA recently
informed our dealer manager that it has concluded its inquiry.  FINRA has
verbally indicated their intention to allege that the dealer manager violated
FINRA conduct rules 2210 (Communications with the Public), 3010 (Supervision)
and 2110 (Standards of Commercial Honor and Principles of Trade) and has
proposed significant sanctions.  It does not, however, propose to seek to
limit our dealer manager from continuing to conduct its business. Our dealer
manager believes that it has complied within the conduct requirements of these
rules and intends to challenge these findings under FINRA’s dispute
resolution protocol before an independent hearing panel.  If the hearing
panel finds against the dealer manager and imposes sanctions against our dealer
manager, its business could be materially adversely impacted, which could impact
our offering.





On June
20, 2008, we filed a post-effective amendment to the registration statement
relating to our initial public offering in order to expand our investment
strategy to include, in addition to multi-tenant industrial properties,
investments in healthcare and net-leased retail properties. Upon the effective
date of the post-effective amendment, we began accepting subscriptions into
escrow. As of August 10, 2008, we had sold approximately $1.0 million of stock
to the public, which was sufficient to satisfy the minimum offering amount in
all states except Minnesota, New York and Pennsylvania. On August 19, 2008, we
broke escrow with respect to subscriptions received from all states except
Minnesota, New York, which have minimum offering amounts of $2.5 million, and
Pennsylvania, which has a minimum offering amount of $20.0 million. As of August
29, 2008, we had sold more than $2.5 million of stock to the public and broke
escrow with respect to Minnesota and New York.  We intend to invest
the net proceeds from the Offering primarily in real estate including health
care, multi-tenant industrial, net-leased retail properties and other real
estate related assets in the United States.





F-7
 Table of Contents





As of
December 31, 2008, a total of approximately 1.1 million shares of our
common stock had been sold for aggregate gross proceeds of approximately $10.5
million.





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.





Investments
in Real Estate





We
account for all acquisitions in accordance with Financial Accounting Standards
Board’s (“FASB”) Statement of Financial Accounting Standard (“SFAS”)
No. 141, “Business Combinations” (“FAS 141”) as amended by SFAS No 141
(R), “Business Combinations”.  Please see Recently Issued Accounting
Pronouncements below. Upon acquisition of a property, we will allocate the
purchase price of the property based upon the fair value of the assets acquired,
which generally consist of land, buildings, site improvements, tenant
improvements, leasing commissions and intangible assets including in-place
leases and above market and below market leases.  We will allocate 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 will be
depreciated over an estimated useful life of 39 years.





The
purchase price will be further allocated to in-place lease values 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
in-place lease intangibles, which will be included as a component of investments
in real estate, is amortized to expense over the remaining lease
term.





Acquired
above and below market leases will be 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 will be amortized over the remaining non-cancelable terms of the
respective leases as an adjustment to rental revenue on our condensed
consolidated statements of operations.





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


Impairment
of Real Estate Assets


Rental
properties, properties undergoing development and redevelopment, land held for
development and intangibles will be individually evaluated for impairment in
accordance with Statement of Financial Accounting Standards No. 144,
“Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”),
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 will be assessed by
project and include, but will not be limited to, significant fluctuations
in estimated net operating income, occupancy changes, construction costs,
estimated completion dates, rental rates and other market factors.  We will
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 an 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.




Uncertain
Tax Positions
  In
accordance with the requirements of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109 (“FIN
48”), 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. Since this dividends-paid deduction has historically exceeded our
taxable income, we have historically had significant return of capital to our
stockholders. In order for us to be required to record any unrecognized tax
benefits or additional tax liabilities in accordance with FIN 48, any adjustment
for potential uncertain tax positions would need to exceed the return of
capital.
  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.


F-8
 Table of Contents





Consolidation
Considerations for Our Investments in Joint Ventures





The FASB
issued Interpretation No. 46 (“FIN 46R”) (revised December 2003),
“Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51” (“ARB 51”), 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 ARB 51
voting interest consolidation model to an entity, an enterprise must first
determine that the entity is not a variable interest entity (VIE).  We
evaluate, as appropriate, our interests, if any, in joint ventures and other
arrangements to determine if consolidation is appropriate.





Revenue
Recognition and Valuation of Receivables





Our
revenues, which will be comprised largely of rental income, will include rents
reported on a straight-line basis over the initial term of the lease. Since our
leases may provide for free rent, lease incentives, or other rental
increases at specified intervals, we will be required to straight-line the
recognition of revenue, which will result in the recording of a receivable for
rent not yet due under the lease terms.





Depreciation
of Real Property Assets





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





Depreciation
of our assets is expected to be charged to expense on a straight-line basis over
the assigned useful lives.





Minority
Interest in Consolidated Subsidiary





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





As of
December 31, 2008, the limited partner’s share of Operating Partnership losses
exceeded its investments.  The limited partner has no obligation to
fund Operating Partnership losses.





Income
Taxes





We will
be electing 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.  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 granted 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.




During
the year ended December 31, 2008, we generated a deferred tax asset of
approximately $326,000. Because we intend to qualify as a REIT in 2008, which
would not allow for the realization of the deferred tax asset, a valuation
allowance of a like amount was recorded.




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, only insures amounts up to
$250,000 per depositor per insured bank. This amount is scheduled to be
reduced to $100,000 after December 31, 2009.  As of December 31, 2008
we had cash accounts in excess of FDIC insured limits.





Fair
Value of Financial Instruments


Effective
January 1, 2008, we adopted Statement of Financial Accounting Standards No. 157,
“Fair Value Measurements” (“SFAS 157”), on a prospective basis, as amended by
FASB Staff Position SFAS 157-1, “Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That Address Fair Value
Measurements for Purposes of Lease Classification or Measurement under Statement
13” (“FSP FAS 157-1”) and FASB Staff Position SFAS 157-2, “Effective Date of
FASB Statement No. 157” (“FSP FAS 157-2”). SFAS 157 defines fair value,
establishes a framework for measuring fair value in GAAP and provides for
expanded disclosure about fair value measurements. SFAS 157 applies
prospectively to all other accounting pronouncements that require or permit fair
value measurements. FSP FAS 157-1 amends SFAS 157 to exclude from the scope of
SFAS 157 certain leasing transactions accounted for under Statement of Financial
Accounting Standards No. 13, “Accounting for Leases.” FSP FAS 157-2 amends SFAS
157 to defer the effective date of SFAS 157 for all non-financial assets and
non-financial liabilities except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis to fiscal years beginning
after November 15, 2008. The adoption of SFAS 157 did not have a material impact
on the our consolidated financial statements since we generally do not record
our financial assets and liabilities in its consolidated financial statements at
fair value.
  Effective
January 1, 2008, we also adopted, on a prospective basis, Statement of Financial
Accounting Standards No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose to
measure many financial instruments and certain other items at fair value. The
adoption of SFAS 159 did not have a material impact on our consolidated
financial statements since we elected not to apply the fair value option for any
of our eligible financial instruments or other items.
  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.
  We will
adopt SFAS 157 to its non-financial assets and non-financial liabilities on
January 1, 2009 in accordance with FSP FAS 157-2. Management believes the
adoption of SFAS 157 to our non-financial assets and liabilities will not have a
material impact to our consolidated financial
statements.


The
SFAS No. 107, Disclosures About Fair Value of
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.


F-9
 Table of Contents





Our
consolidated balance sheets include the following financial instruments: cash
and cash equivalents, prepaid expenses and other assets, acquisition deposits
and deferred financing costs, accounts payable and accrued expenses, payable to
related parties, and distribution payable. We consider the carrying values of
cash and cash equivalents, prepaid expenses and other assets, acquisition
deposits and deferred financing costs, accounts payable and accrued expenses,
payable to related parties, and distribution payable to approximate fair value
for these financial instruments because of the short period of time between
origination of the instruments and their expected payment.





Per
Share Data





We report
earnings per share pursuant to SFAS No. 128, “Earnings Per Share.”
Basic earnings per share attributable for all periods presented are computed by
dividing the net loss by the weighted average number of shares outstanding
during the period. Diluted earnings per share are computed based on the weighted
average number of shares and all potentially dilutive securities, if
any.





Net
loss per share is calculated as follows:





Year Ended
                  December
      31, 2008
                
                
                Year Ended
                  December
      31, 2007
                
                
                October
      16, 2006
                  (date
      of inception) to December 31, 2006Net
      loss
                
                $
                (1,106,000
                )
                
                $
                (133,000
                )
                
                $
                -Net
      loss per share — basic and diluted
                
                $
                (12.90
                )
                
                $
                (1,330.00
                )
                
                $
                -Weighted
      average number of shares outstanding — basic and
    diluted
                
                
                85,743
                
                
                
                100
                
                
                
                100





We follow
SFAS No. 123(R),Share-Based Payment, to account for our stock compensation pursuant to
our 2008 Employee and Director Incentive Stock Plan. See Note 5,
Stockholders’ Equity.





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.





F-10
 Table of Contents




Recently
Issued Accounting Pronouncements


In
December 2007, the FASB issued SFAS No. 141 (R), “Business
Combinations” (SFAS 141(R)).  In
summary, SFAS 141(R) 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.  The standard is effective for fiscal years beginning
after December 15, 2008, and is to be applied prospectively, with no
earlier adoption permitted.  The adoption of this standard
required us to expense approximately $398,000 of acquistion related costs in
2008 that related to our 2009 future real estate acquisitions. We have not yet
determined the impact to our consolidated 2009 financial statements in adopting
this standard.




In
December 2007, FASB issued Statements No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS 160”), an amendment to
Accounting Research Board No. 51 SFAS 160 objective is to improve the
relevance, comparability and transparency of financial information that a
reporting entity provides in its consolidated financial statements. The key
aspects of SFAS 160 are (i) the minority interests in subsidiaries should
be presented in the consolidated balance sheet within equity of the consolidated
group, separate from the parent’s shareholders’ equity, (ii) acquisitions
or dispositions of noncontrolling interests in a subsidiary that do not result
in a change of control should be accounted for as equity transactions,
(iii) a parent recognizes a gain or loss in net income when a subsidiary is
deconsolidated, measured using the fair value of the non-controlling equity
investment, (iv) the acquirer should attribute net income and each
component of other comprehensive income between controlling and noncontrolling
interests based on any contractual arrangements or relative ownership interests,
and (v) a reconciliation of beginning to ending total equity is required
for both controlling and noncontrolling interests. SFAS 160 is effective for
fiscal years beginning on or after December 15, 2008 and should be applied
prospectively.  We are currently evaluating the provisions for SFAS
160 to determine the potential impact, if any; the adoption will have on our
consolidated financial statements.





In April
2008, the FASB issued FASB Staff Position SFAS No. 142-3, “Determination of the
Useful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 intends to
improve the consistency between the useful life of recognized intangible assets
under SFAS No. 142, Goodwill and Other Intangible Assets, and the period of
expected cash flows used to measure the fair value of the assets under SFAS No.
141(R). FSP FAS 142-3 amends the factors an entity should consider in developing
renewal or extension assumptions in determining the useful life of recognized
intangible assets.  It requires an entity to consider its own
historical experience in renewing or extending similar arrangements, or to
consider market participant assumptions consistent with the highest and best use
of the assets if relevant historical experience does not exist.  In
addition to the required disclosures under SFAS No. 142, FSP FAS 142-3 requires
disclosure of the entity’s accounting policy regarding costs incurred to renew
or extend the term of recognized intangible assets, the weighted average period
to the next renewal or extension, and the total amount of capitalized costs
incurred to renew or extend the term of recognized intangible
assets.  FSP FAS 142-3 is effective for financial statements issued
for fiscal years and interim periods beginning after December 15,
2008.  While the standard for determining the useful life of
recognized intangible assets is to be applied prospectively only to intangible
assets acquired after the effective date, the disclosure requirements shall be
applied prospectively to all recognized intangible assets as of, and subsequent
to, the effective date.  Early adoption is prohibited.  The
adoption of FSP FAS 142-3 is not expected to have a material impact on our
consolidated financial statements.





4.
              Payable
      to Related Parties





Payable
to related parties represents amounts incurred by the Advisor for services
provided to the Company of approximately $2.5 million as of December 31,
2008 in connection with the Offering.





5.
              Stockholders’
      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, 2008, we had issued approximately 1.1
million shares of common stock.  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, 2008, we have issued approximately 6,644 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.





F-11
 Table of Contents





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.





Upon our
inception, we adopted the provisions of Statement of Financial Accounting
Standards No. 123R (“SFAS 123R”), “Share-Based Payment,” which requires the
measurement and recognition of compensation expense for all share-based payment
awards to employees and directors based on estimated fair
values.   There had been no share-based awards issued as of
December 31, 2008.





6.
            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.  Organizational and offering costs of the Offering are
being 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 our 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, 2008,
the advisor and its affiliates had incurred on our behalf organizational and
offering costs totaling approximately $2.8 million in organization and offering
expenses, including approximately $0.1 million of organizational costs that have
been expensed, of which, approximately $0.4 million had been reimbursed to the
Advisor.   As of December 31, 2007, the advisor and its
affiliates had incurred on our behalf organizational and offering costs totaling
approximately $2.4 million, of which, none 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 year ended December 31, 2008 and
2007, the advisor earned approximately $210,000 and $0 in acquisition fees,
respectively, which had been expensed as incurred in anticipation of our
adoption of SFAS 141 (R) effective January 1, 2009.   No
acquisition fees were earned in 2006.





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 generally accepted accounting principles in the United States of
America (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.  These fees and expenses are in addition to management fees
that we expect to pay to third party property managers.  No asset
management fees were incurred or paid to the Advisor in 2008, 2007 or
2006.





F-12
 Table of Contents





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, 2008 and 2007, $448,000 and
$41,000 of such costs were incurred, respectively.  No such costs were
incurred in 2006. The Advisor must pay or reimburse us the amount by which our
aggregate annual operating expenses exceed the greater of 2% of our average
invested assets or 25% of our net income unless a majority of our independent
directors determine 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 2008, 2007 and 2006.





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.





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 periods ended
December 31, 2008, 2007 and 2006, we incurred approximately $1.0 million,
$0 and $0 million, respectively, payable to PCC for dealer manager fees and
sales commissions.





7.
              Commitments
      and Contingencies





Commitments





On
November 11, 2008, we entered into a definitive agreement to purchase 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.   We completed the purchase on January 22,
2009.  The acquisition was funded with net proceeds raised from our
ongoing public offering and a secured bridge loan obtained from Cornerstone
Operating Partnership, L.P.





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.





8.
              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,
                              2008
                            
                            
                            September 30,
                              2008
                            
                            
                            June 30,
                              2008
                            
                            
                            March 31,
                              2008Expenses
                            
                            $
                            471,000
                            
                            
                            $
                            389,000
                            
                            
                            $
                            177,000
                            
                            
                            $
                            196,000Operating
      loss
                            
                            
                            (471,000
                            )
                            
                            
                            (389,000
                            )
                            
                            
                            (177,000
                            )
                            
                            
                            (196,000
                            )Minority
      interest
                            
                            $
                            3,000
                            
                            
                            $
                            3,000
                            
                            
                            $
                            (19,000
                            )
                            
                            $
                            (108,000
                            )Net
      loss
                            
                            $
                            (469,000
                            )
                            
                            $
                            (390,000
                            )
                            
                            $
                            (158,000
                            )
                            
                            $
                            (89,000
                            )Net
      loss per share — basic and diluted
                            
                            $
                            (0.63
                            )
                            
                            $
                            (3.62
                            )
                            
                            $
                            (1,580.00
                            )
                            
                            $
                            (890.00
                            )Weighted
      average shares
                            
                            
                            748,006
                            
                            
                            
                            107,743
                            
                            
                            
                            100
                            
                            
                            
                            100





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





9.
              Subsequent
      Event





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.  The acquisition was funded with net proceeds raised from our
ongoing public offering and a secured bridge loan obtained from Cornerstone
Operating Partnership, L.P.





In connection
with the acquisition of the Caruth Haven Court, we entered into a $14 million
acquisition bridge loan secured by the property with 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.  All of our officers are also officers of Cornerstone Core
Properties REIT and one of our directors is also a director of Cornerstone Core
Properties REIT.  The terms of the acquisition bridge loan were
approved by our independent directors, deemed competitive and commercially
reasonable and on terms no less favorable to us than loans between unaffiliated
parties under the same circumstances. We paid a loan origination fee of 0.75% to
the lender upon closing.





F-13
 Table of Contents





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
      GROWTH & INCOME REIT, INC.By:
              /s/
      TERRY G. ROUSSELTERRY
      G. ROUSSELChief
      Executive Officer, President andChairman
      of the Board of DirectorsDate:
      March 17, 2009





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, 2009.





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





Table of Contents





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 (incorporated by reference
      to Exhibit 3.1 to Pre-Effective Amendment
  No. 3).3.2
                    
                    Amended
      and Restated Bylaws (incorporated by reference to Exhibit 3.2 to
      Pre-Effective Amendment No. 1 to the Registration Statement on
      Form S-11 (No. 333-139704), filed on March 21,
      2007).4.1
                    
                    Subscription
      Agreement (incorporated by reference to Appendix A to the Registrant’s
      prospectus filed on October  5, 2007)4.2
                    
                    Statement
      regarding restrictions on transferability of shares of common stock (to
      appear on stock certificate or to be sent upon request and without charge
      to stockholders issued shares without certificates) (incorporated by
      reference to Exhibit 4.2 Pre-Effective Amendment
      No. 2).4.3
                    
                    Distribution
      Reinvestment Plan (incorporated by reference to Appendix B to the
      Registrant’s prospectus filed on October 5, 2007).4.4
                    
                    Escrow
      Agreement between the Registrant and U.S. Bank National Association
      (incorporated by reference to Exhibit 4.5 to Pre-Effective Amendment
      No 2).10.1
                    
                    Advisory
      Agreement (incorporated by reference to Exhibit 10.1 to Pre-Effective
      Amendment No.3).10.2
                    
                    Form of
      Employee and Director Long-term Incentive Plan (incorporated by reference
      to Exhibit 10.3 to Pre-Effective Amendment
    No. 3).10.3
                    
                    Agreement
      of Limited Partnership of Cornerstone Operating Partnership, L.P.
      (incorporated by reference to Exhibit 10.3 to Pre-Effective Amendment
      No. 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
                    
                    Promissory
      Note made as of January 22, 2009  by CARUTH HAVEN,
      L.P.,  to and in favor of CORNERSTONE OPERATING PARTNERSHIP, LP.
      (incorporated by reference to the Registrant’s current report on Form 8-K
      filed January 28, 2009).10.6
                    
                    Deed
      of Trust, Assignment of Leases and Rents, Security Agreement and Fixture
      Filing made as of January 22, 2009, by CARUTH HAVEN, L.P., as grantor, for
      the benefit of Cornerstone Operating Partnership, LP., as lender.
      (incorporated by reference to the Registrant’s current report on Form 8-K
      filed January 28, 2009).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, 2008).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).