UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549





FORM
10-Q





(Mark
One)





x
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934




For
the quarterly period ended June 30, 2010


or


o
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





Commission
File Number   000-52566





CORNERSTONE
CORE PROPERTIES REIT, INC.


(Exact
name of registrant as specified in its charter)





MARYLAND
            73-1721791(State
      or other jurisdiction of incorporation or organization)
            (I.R.S.
      Employer Identification No.)1920
      MAIN STREET, SUITE 400, IRVINE, CA
            92614(Address
      of principal executive offices)
            (Zip
      Code)





949-852-1007


(Registrant’s
telephone number, including area code)





Not
Applicable


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





Indicate
by check mark whether the issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the 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.


x  Yes  o  No





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Sec.232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


o  Yes  o  No





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, a smaller reporting
company.  See definition of “accelerated filer and large accelerated
filer” in Rule 12b-2 of the Exchange Act.





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






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


o Yes  x  No





As
of August 13, 2010, we had 22,932,181 shares of common stock issued and
outstanding.









PART
I - FINANCIAL INFORMATION


FORM
10-Q


Cornerstone
Core Properties REIT, Inc.


TABLE
OF CONTENTS





PART
      I.
                FINANCIAL
      INFORMATIONItem
      1.
                Financial
      Statements:Condensed
      Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009
      (unaudited)
                3Condensed
      Consolidated Statements of Operations for the Three Months and Six Months
      Ended June 30, 2010 and 2009 (unaudited)
                4Condensed
      Consolidated Statements of Equity for the Six Months Ended June 30, 2010
      and 2009 (unaudited)
                5Condensed
      Consolidated Statements of Cash Flows for the Six Months Ended June 30,
      2010 and 2009 (unaudited)
                6Notes
      to Condensed Consolidated Financial Statements (unaudited)
                7Item
      2.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                18Item
      3.
                Quantitative
      and Qualitative Disclosures About Market Risk
                24Item
      4.
                Controls
      and Procedures
                25PART
      II.
                OTHER
      INFORMATIONItem
      1A.
                Risk
      Factors
                25Item
      2.
                Unregistered
      Sales of Equity Securities and Use of Proceeds
                26Item
      6.
                Exhibits
                27SIGNATURES
                28








2







CORNERSTONE
CORE PROPERTIES REIT, INC. AND SUBSIDIARIES




CONDENSED
CONSOLIDATED BALANCE SHEETS (Unaudited)




June
      30, 2010
                                
                                
                                December
      31, 2009ASSETSCash
      and cash equivalents
                                
                                $
                                10,353,000
                                
                                
                                $
                                18,673,000Investments
      in real estate:Land
                                
                                
                                38,604,000
                                
                                
                                
                                38,604,000Buildings
      and improvements, net
                                
                                
                                86,312,000
                                
                                
                                
                                87,671,000Intangible
      lease assets, net
                                
                                
                                593,000
                                
                                
                                
                                804,000125,509,000
                                
                                
                                
                                127,079,000Notes
      receivable, net
                                
                                
                                3,375,000
                                
                                
                                
                                2,875,000Note
      receivable from related party
                                
                                
                                7,920,000
                                
                                
                                
                                6,911,000Deferred
      costs and deposits
                                
                                
                                80,000
                                
                                
                                
                                29,000Deferred
      financing costs, net
                                
                                
                                68,000
                                
                                
                                
                                174,000Tenant
      and other receivables, net
                                
                                
                                1,142,000
                                
                                
                                
                                863,000Other
      assets, net
                                
                                
                                463,000
                                
                                
                                
                                648,000Total
      assets
                                
                                $
                                148,910,000
                                
                                
                                $
                                157,252,000LIABILITIES
      AND EQUITYLiabilities:Notes
      payable
                                
                                $
                                38,789,000
                                
                                
                                $
                                38,884,000Accounts
      payable and accrued liabilities
                                
                                
                                976,000
                                
                                
                                
                                698,000Payable
      to related parties
                                
                                
                                2,000
                                
                                
                                
                                347,000Prepaid
      rent, security deposits and deferred revenue
                                
                                
                                886,000
                                
                                
                                
                                1,010,000Intangible
      lease liability, net
                                
                                
                                171,000
                                
                                
                                
                                217,000Distributions
      payable
                                
                                
                                899,000
                                
                                
                                
                                941,000Total
      liabilities
                                
                                
                                41,723,000
                                
                                
                                
                                42,097,000Commitments
      and contingencies (Note 13)Equity:Stockholders’ Equity:Preferred
      stock, $0.001 par value; 10,000,000 shares authorized; no shares were
                                  issued
      or outstanding at June 30, 2010 and December 31, 2009
                                
                                
                                —
                                
                                
                                
                                —Common
      stock, $0.001 par value; 290,000,000 shares
      authorized;  22,810,701
                                  and 23,114,201
      shares issued and outstanding at June 30, 2010 and
                                  December
      31, 2009, respectively
                                
                                
                                25,000
                                
                                
                                
                                24,000Additional
      paid-in capital
                                
                                
                                120,469,000
                                
                                
                                
                                128,559,000Accumulated
      deficit
                                
                                
                                (13,432,000
                                )
                                
                                
                                (13,559,000
                                )Total
      stockholders’ equity
                                
                                
                                107,062,000
                                
                                
                                
                                115,024,000Noncontrolling
      interest
                                
                                
                                125,000
                                
                                
                                
                                131,000Total
      equity
                                
                                
                                107,187,000
                                
                                
                                
                                115,155,000Total
      liabilities and  equity
                                
                                $
                                148,910,000
                                
                                
                                $
                                157,252,000




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





3




CORNERSTONE
CORE PROPERTIES REIT, INC. AND SUBSIDIARIES




CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)




Three Months Ended June 30,
                
                
                Six Months Ended June 30,2010
                
                
                2009
                
                
                2010
                
                
                2009RevenuesRental
      revenues
                
                $
                1,853,000
                
                
                $
                2,021,000
                
                
                $
                3,813,000
                
                
                $
                4,131,000Tenant
      reimbursements and other income
                
                
                547,000
                
                
                
                500,000
                
                
                
                1,028,000
                
                
                
                1,039,000Interest
      income from notes receivable
                
                
                364,000
                
                
                
                382,000
                
                
                
                788,000
                
                
                
                679,0002,764,000
                
                
                
                2,903,000
                
                
                
                5,629,000
                
                
                
                5,849,000ExpensesProperty
      operating and maintenance
                
                
                652,000
                
                
                
                836,000
                
                
                
                1,338,000
                
                
                
                1,701,000General
      and administrative
                
                
                483,000
                
                
                
                347,000
                
                
                
                1,130,000
                
                
                
                810,000Asset
      management fees
                
                
                366,000
                
                
                
                382,000
                
                
                
                748,000
                
                
                
                757,000Real
      estate acquisition costs
                
                
                22,000
                
                
                
                160,000
                
                
                
                28,000
                
                
                
                332,000Depreciation
      and amortization
                
                
                826,000
                
                
                
                866,000
                
                
                
                1,650,000
                
                
                
                1,797,0002,349,000
                
                
                
                2,591,000
                
                
                
                4,894,000
                
                
                
                5,397,000Operating
      income
                
                
                415,000
                
                
                
                312,000
                
                
                
                735,000
                
                
                
                452,000Interest
      income
                
                
                2,000
                
                
                
                2,000
                
                
                
                3,000
                
                
                
                4,000Interest
      expense
                
                
                (310,000
                )
                
                
                (361,000
                )
                
                
                (611,000
                )
                
                
                (728,000
                )Net
      income (loss)
                
                
                107,000
                
                
                
                (47,000
                )
                
                
                127,000
                
                
                
                (272,000
                )Less:
      Net income (loss) attributable to the noncontrolling
      interest
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Net
      income (loss) attributable to common stockholders
                
                $
                107,000
                
                
                $
                (47,000
                )
                
                $
                127,000
                
                
                $
                (272,000
                )Basic
      and diluted net income (loss) per common share
                  attributable
      to common stockholders
                
                $
                0.00
                
                
                $
                (0.00
                )
                
                $
                0.01
                
                
                $
                (0.01
                )Weighted
      average number of common shares
                
                
                23,003,752
                
                
                
                22,020,217
                
                
                
                22,943,713
                
                
                
                21,289,203Dividend
      declared per common share
                
                $
                0.12
                
                
                $
                0.13
                
                
                $
                0.24
                
                
                $
                0.24




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





4




CORNERSTONE
CORE PROPERTIES REIT, INC. AND SUBSIDIARIES




CONDENSED
CONSOLIDATED STATEMENTS OF EQUITY


For
the Six Months Ended June 30, 2010 and 2009


(Unaudited)







Common
      StockNumber
      of
                          Shares
                        
                        
                        Common
                          Stock
      Par
                          Value
                        
                        
                        Additional
                          Paid-In
                          Capital
                        
                        
                        Accumulated
                          Deficit
                        
                        
                        Total
                          Stockholders’
                          Equity
                        
                        
                        Noncontrolling
                          Interest
                        
                        
                        Total
      EquityBalance
      - December 31, 2009
                        
                        
                        23,114,201
                        
                        
                        $
                        24,000
                        
                        
                        
                        128,559,000
                        
                        
                        $
                        (13,559,000
                        )
                        
                        $
                        115,024,000
                        
                        
                        $
                        131,000
                        
                        
                        $
                        115,155,000Issuance
      of common stock
                        
                        
                        530,863
                        
                        
                        
                        1,000
                        
                        
                        
                        4,090,000
                        
                        
                        
                        —
                        
                        
                        
                        4,091,000
                        
                        
                        
                        —
                        
                        
                        
                        4,091,000Redeemed
      shares
                        
                        
                        (834,363
                        )
                        
                        
                        —
                        
                        
                        
                        (6,391,000
                        )
                        
                        
                        —
                        
                        
                        
                        (6,391,000
                        )
                        
                        
                        —
                        
                        
                        
                        (6,391,000
                        )Offering
      costs
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (354,000
                        )
                        
                        
                        —
                        
                        
                        
                        (354,000
                        )
                        
                        
                        —
                        
                        
                        
                        (354,000
                        )Dividends
      declared
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        (5,435,000
                        )
                        
                        
                        —
                        
                        
                        
                        (5,435,000
                        )
                        
                        
                        (6,000
                        )
                        
                        
                        (5,441,000
                        )Net
      income
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        127,000
                        
                        
                        
                        127,000
                        
                        
                        
                        —
                        
                        
                        
                        127,000Balance
      – June 30, 2010
                        
                        
                        22,810,701
                        
                        
                        $
                        25,000
                        
                        
                        $
                        120,469,000
                        
                        
                        $
                        (13,432,000
                        )
                        
                        $
                        107,062,000
                        
                        
                        $
                        125,000
                        
                        
                        $
                        107,187,000





Common
      StockNumber
      of
                        Shares
                      
                      
                      Common
                        Stock
      Par
                        Value
                      
                      
                      Additional
                        Paid-In
                        Capital
                      
                      
                      Accumulated
                        Deficit
                      
                      
                      Total
                        Stockholders’
                        Equity
                      
                      
                      Noncontrolling
                        Interest
                      
                      
                      Total
      EquityBalance
      - December 31, 2008
                      
                      
                      20,570,120
                      
                      
                      $
                      21,000
                      
                      
                      
                      121,768,000
                      
                      
                      $
                      (5,456,000
                      )
                      
                      $
                      116,333,000
                      
                      
                      $
                      151,000
                      
                      
                      $
                      116,484,000Issuance
      of common stock
                      
                      
                      2,435,467
                      
                      
                      
                      2,000
                      
                      
                      
                      19,327,000
                      
                      
                      
                      —
                      
                      
                      
                      19,329,000
                      
                      
                      
                      —
                      
                      
                      
                      19,329,000Redeemed
      shares
                      
                      
                      (523,046
                      )
                      
                      
                      —
                      
                      
                      
                      (3,992,000
                      )
                      
                      
                      —
                      
                      
                      
                      (3,992,000
                      )
                      
                      
                      —
                      
                      
                      
                      (3,992,000
                      )Offering
      costs
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (2,483,000
                      )
                      
                      
                      —
                      
                      
                      
                      (2,483,000
                      )
                      
                      
                      —
                      
                      
                      
                      (2,483,000
                      )Dividends
      declared
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (5,132,000
                      )
                      
                      
                      —
                      
                      
                      
                      (5,132,000
                      )
                      
                      
                      (6,000
                      )
                      
                      
                      (5,138,000
                      )Net
      loss
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      (272,000
                      )
                      
                      
                      (272,000
                      )
                      
                      
                      —
                      
                      
                      
                      (272,000
                      )Balance
      – June 30, 2009
                      
                      
                      22,482,541
                      
                      
                      $
                      23,000
                      
                      
                      $
                      129,488,000
                      
                      
                      $
                      (5,728,000
                      )
                      
                      $
                      123,783,000
                      
                      
                      $
                      145,000
                      
                      
                      $
                      123,928,000





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




5




CORNERSTONE
CORE PROPERTIES REIT, INC. AND SUBSIDIARIES




CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)





Six
      Months Ended June 30,2010
                            
                            
                            2009Cash
      flows from operating activitiesNet
      income (loss)
                            
                            $
                            127,000
                            
                            
                            $
                            (272,000
                            )Adjustments
      to reconcile net income (loss) to net cash provided by operating
      activities:Amortization
      of deferred financing costs
                            
                            
                            105,000
                            
                            
                            
                            128,000Depreciation
      and amortization
                            
                            
                            1,650,000
                            
                            
                            
                            1,797,000Straight-line
      rents and amortization of acquired above (below) market leases,
      net
                            
                            
                            (168,000
                            )
                            
                            
                            (74,000
                            )Provision
      for bad debt
                            
                            
                            (100,000
                            )
                            
                            
                            254,000Change
      in operating assets and liabilities:Tenant
      and other receivables, net
                            
                            
                            23,000
                            
                            
                            
                            (304,000
                            )Other
      assets, net
                            
                            
                            129,000
                            
                            
                            
                            124,000Accounts
      payable and accrued liabilities
                            
                            
                            278,000
                            
                            
                            
                            397,000Payable
      to related parties
                            
                            
                            (356,000
                            )
                            
                            
                            (116,000
                            )Prepaid
      rent, security deposit and deferred revenue
                            
                            
                            (124,000
                            )
                            
                            
                            (111,000
                            )Net
      cash provided by operating activities
                            
                            
                            1,564,000
                            
                            
                            
                            1,823,000Cash
      flows from investing activitiesReal
      estate additions
                            
                            
                            (97,000
                            )
                            
                            
                            (127,000
                            )Escrow
      deposits
                            
                            
                            (50,0000
                            )
                            
                            
                            —Notes
      receivable
                            
                            
                            (500,000
                            )
                            
                            
                            (16,000,000
                            )Notes
      receivable from related party
                            
                            
                            (1,009,000
                            )
                            
                            
                            —Net
      cash used in investing activities
                            
                            
                            (1,656,000
                            )
                            
                            
                            (16,127,000
                            )Cash
      flows from financing activitiesIssuance
      of common stock
                            
                            
                            1,091,000
                            
                            
                            
                            16,367,000Redeemed
      shares
                            
                            
                            (6,391,000
                            )
                            
                            
                            (3,992,000
                            )Repayment
      of notes payable
                            
                            
                            (95,000
                            )
                            
                            
                            (90,000
                            )Offering
      costs
                            
                            
                            (350,000
                            )
                            
                            
                            (2,191,000
                            )Distributions
      paid to stockholders
                            
                            
                            (2,477,000
                            )
                            
                            
                            (2,109,000
                            )Distributions
      paid to noncontrolling interest
                            
                            
                            (6,000
                            )
                            
                            
                            (6,000
                            )Deferred
      financing costs
                            
                            
                            —
                            
                            
                            
                            (134,000
                            )Net
      cash (used in) provided by financing activities
                            
                            
                            (8,228,000
                            )
                            
                            
                            7,845,000Net
      decrease in cash and cash equivalents
                            
                            
                            (8,320,000
                            )
                            
                            
                            (6,459,000
                            )Cash
      and cash equivalents - beginning of period
                            
                            
                            18,673,000
                            
                            
                            
                            26,281,000Cash
      and cash equivalents - end of period
                            
                            $
                            10,353,000
                            
                            
                            $
                            19,822,000Supplemental
      disclosure of cash flow information:Cash
      paid for interest
                            
                            $
                            452,000
                            
                            
                            $
                            632,000Supplemental
      disclosure of non-cash financing and investing activities:Distribution
      declared not paid
                            
                            $
                            898,000
                            
                            
                            $
                            885,000Payable
      to related party
                            
                            $
                            4,000
                            
                            
                            $
                            1,000Distribution
      reinvested
                            
                            $
                            3,000,000
                            
                            
                            $
                            2,965,000





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




6




CORNERSTONE
CORE PROPERTIES REIT, INC. AND SUBSIDIARIES




NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


JUNE
30, 2010





UNAUDITED




1.
            Organization





Cornerstone
Core Properties REIT, Inc., a Maryland Corporation, was formed on October 22,
2004 under the General Corporation Law of Maryland for the purpose of engaging
in the business of investing in and owning commercial real estate.  As
used in this report, the “Company”, “we”, “us” and “our” refer to Cornerstone
Core Properties REIT, Inc. and its consolidated subsidiaries except where the
context otherwise requires. Subject to certain restrictions and limitations, our
business is managed pursuant to an advisory agreement by an affiliate,
Cornerstone Realty Advisors, LLC, a Delaware limited liability company that was
formed on November 30, 2004 (the “Advisor”).





Cornerstone
Operating Partnership, L.P., a Delaware limited partnership (the “Operating
Partnership”) was formed on November 30, 2004.  At June 30, 2010, we
owned a 99.88% general partner interest in the Operating Partnership while the
Advisor owned a 0.12% 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
      Offerings





On
January 6, 2006, we commenced an initial public offering of up to 55,400,000
shares of our common stock, consisting of 44,400,000 shares for sale pursuant to
a primary offering and 11,000,000 shares for sale pursuant to our distribution
reinvestment plan.  We stopped making offers under our initial public
offering on June 1, 2009 upon raising gross offering proceeds of approximately
$172.7 million from the sale of approximately 21.7 million shares, including
shares sold under the distribution reinvestment plan.  On June 10,
2009, the Securities and Exchange Commission (“SEC”) declared our follow-on
offering effective and we commenced a follow-on offering of up to 77,350,000
shares of our common stock, consisting of 56,250,000 shares for sale pursuant to
a primary offering and 21,100,000 shares for sale pursuant to our dividend
reinvestment plan.





We
retained Pacific Cornerstone Capital, Inc. (“PCC”), an affiliate of the Advisor,
to serve as our dealer manager for our offerings.  PCC is responsible
for marketing our shares being offered pursuant to the offerings. We used the
net proceeds from our initial public offering to invest primarily in investment
real estate including multi-tenant industrial real estate located in major
metropolitan markets in the United States.  We intend to use the net
proceeds from our follow-on offering to pay down temporary acquisition financing
on our existing assets and to acquire additional real estate investments. As
of June 30, 2010, a total of 20.9 million shares of our common
stock had been sold in both offerings for aggregate gross proceeds of
approximately $167.0 million, excluding approximately 2.0 million shares that
were issued pursuant to our distribution reinvestment plan and approximately 1.6
million shares issued in connection with the special 10% stock dividend related
to our initial public offering, reduced by approximately 1.7 million shares
pursuant to our stock repurchase program.





3.
            Summary
      of Significant Accounting Policies





The
preparation of our financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. We base these estimates on various assumptions that we believe to be
reasonable under the circumstances, and these estimates form the basis for our
judgments concerning the carrying values of assets and liabilities that are not
readily apparent from other sources. We periodically evaluate these estimates
and judgments based on available information and experience. Actual results
could differ from our estimates under different assumptions and conditions. If
actual results significantly differ from our estimates, our financial condition
and results of operations could be materially impacted. For more
information regarding our critical accounting policies and estimates please
refer to "Summary of Significant Accounting Policies” contained in our Annual
Report on Form 10-K for the year ended December 31, 2009. There have been no
material changes to the critical accounting policies previously disclosed in
that report except as discussed below.




7




Interim
Financial Information





The
accompanying interim condensed consolidated financial statements have been
prepared by our management in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) and in conjunction with the
rules and regulations of the SEC. Certain information and footnote disclosures
required for annual financial statements have been condensed or excluded
pursuant to SEC rules and regulations. Accordingly, the interim condensed
consolidated financial statements do not include all of the information and
footnotes required by GAAP for complete financial statements. The accompanying
financial information reflects all adjustments which are, in the opinion of our
management, of a normal recurring nature and necessary for a fair presentation
of our financial position, results of operations and cash flows for the interim
periods. Interim results of operations are not necessarily indicative of the
results to be expected for the full year. The accompanying condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and the notes thereto included in the Annual
Report on Form 10-K for the year ended December 31, 2009 as filed with the SEC.
Operating results for the six months ended June 30, 2010 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2010.
  The
accompanying interim condensed consolidated financial statements have been
prepared by our management in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) and in conjunction with the
rules and regulations of the SEC. Certain information and footnote disclosures
required for annual financial statements have been condensed or excluded
pursuant to SEC rules and regulations. Accordingly, the interim condensed
consolidated financial statements do not include all of the information and
footnotes required by GAAP for complete financial statements.
The accompanying financial information reflects all adjustments which are,
in the opinion of our management, of a normal recurring nature and necessary for
a fair presentation of our financial position, results of operations and cash
flows for the interim periods. Interim results of operations are not necessarily
indicative of the results to be expected for the full year. The accompanying
condensed consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and the notes thereto included in
the Annual Report on Form 10-K for the year ended December 31, 2009 as filed
with the SEC. Operating results for the six months ended June 30, 2010 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2010.


Fair
Value of Financial Instruments




Financial
Accounting Standards Board Accounting Standards Codification (“ASC”) 825-10,
Financial
Instruments,requires the disclosure
of fair value information about financial instruments whether or not recognized
on the face of the balance sheet, for which it is practical to estimate that
value.




We
generally determine or calculate the fair value of financial instruments using
quoted market prices in active markets when such information is available or
using appropriate present value or other valuation techniques, such as
discounted cash flow analyses, incorporating available market discount rate
information for similar types of instruments and our estimates for
non-performance and liquidity risk. These techniques are significantly affected
by the assumptions used, including the discount rate, credit spreads, and
estimates of future cash flow.




Our
condensed consolidated balance sheets include the following financial
instruments: cash and cash equivalents, note receivable from related party,
tenant and other receivables, other assets, deferred costs and deposits,
deferred financing costs, payable to related parties, prepaid rent, security
deposits and deferred revenue, accounts payable and accrued liabilities, and
distributions payable.  We consider the carrying values to approximate
fair value for these financial instruments because of the short period of time
between origination of the instruments and their expected payment. The fair
value of the note payable to related party is not determinable due to the
related party nature of the note payable.




The fair
value of notes payable is estimated using lending rates available to us for
financial instruments with similar terms and maturities. As of June 30, 2010 and
December 31, 2009, the fair value of notes payable was approximately $38.9
million, compared to the carrying value of approximately $38.8 million and $38.9
million, respectively.





The fair
value of note receivable is estimated using current rates at which management
believes similar loans would be made with similar terms and maturities. As of
June 30, 2010 and December 31, 2009, the fair value of notes payable was
approximately $3.4 million and $3.0 million, compared to the carrying value of
approximately $3.4 million and $2.9 million, respectively.





Recently
Issued Accounting Pronouncements





In
June 2009, the FASB issued Statement of Financial Accounting Standard
(“SFAS”) No. 167, Amendments
to FASB Interpretation No. 46(R), which was primarily codified into
ASC Topic 810 Consolidations.  The new guidance impacts the
consolidation guidance applicable to variable interest entities (“VIEs”) and
among other things requires a qualitative rather than a quantitative analysis to
determine the primary beneficiary of a VIE, continuous assessments of whether a
company is the primary beneficiary of a VIE and enhanced disclosures about a
company’s involvement with a VIE. We adopted this guidance on January 1,
2010 and it did not have a material impact on our condensed consolidated
financial statements and disclosures.




In
January 2010, the FASB issued an Accounting Standards Update (“ASU”)
2010-02, Consolidation –
Accounting and Reporting for Decreases in Ownership of a Subsidiary – A Scope
Clarification, to address implementation issues associated with the
accounting for decreases in the ownership of a subsidiary.  The new
guidance clarified the scope of the entities covered by the guidance related to
accounting for decreases in the ownership of a subsidiary and specifically
excluded in-substance real estate or conveyances of oil and gas mineral rights
from the scope.  Additionally, the new guidance expands the disclosures
required for a business combination achieved in stages and deconsolidation of a
business or nonprofit activity.  The new guidance became effective for
interim and annual periods ending on or after December 31, 2009 and must be
applied on a retrospective basis to the first period that an entity adopted the
new guidance related to noncontrolling interests.  We adopted this guidance
on January 1, 2010 and it did not have a material impact on our condensed
consolidated financial statements and disclosures.




8




In
January 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair
Value Measurements. ASU2010-06 amends ASC Topic 820 to require additional disclosure
and clarify existing disclosure requirements about fair value measurements. ASU2010-06 requires entities to provide fair value
disclosures for each class of assets and liabilities, which may be a subset of
assets and liabilities within a line item in the statement of financial
position. The additional requirements also include disclosure regarding the
amounts and reasons for significant transfers in and out of Level 1 and 2 of the
fair value hierarchy and separate presentation of purchases, sales, issuances
and settlements of items within Level 3 of the fair value hierarchy. The
guidance clarifies existing disclosure requirements regarding the inputs and
valuation techniques used to measure fair value for measurements that fall in
either Level 2 or Level 3 of the hierarchy. ASU2010-06
is effective for interim and annual reporting periods beginning after
December 15, 2009 except for the disclosures about purchases, sales,
issuances and settlements which is effective for fiscal years beginning after
December 15, 2010 and for interim periods within those fiscal years. We
adopted ASU2010-06 on January 1, 2010, which only
applies to our disclosures on the fair value of financial instruments. The
adoption of ASU2010-06 did not have a material impact on
our footnote disclosures.




In
February 2010, the FASB issued ASU 2010-09, Subsequent Events: Amendments to Certain
Recognition and Disclosure Requirements (amendments to ASC Topic 855,
Subsequent
Events).  ASU 2010-09 clarifies that subsequent events should
be evaluated through the date the financial statements are issued. In addition,
this update no longer requires a filer to disclose the date through which
subsequent events have been evaluated. This guidance is effective for
financial statements issued subsequent to February 24, 2010. We adopted this
guidance on February 24, 2010 and it did not have a material impact on our
condensed consolidated financial statements and disclosures.




In July
2010, the FASB issued ASU 2010-20, Disclosures about the Credit Quality
of Financing Receivables and the Allowance for Credit Losses. The new
disclosure guidance will significantly expand the existing requirements and will
lead to greater transparency into a company’s exposure to credit losses from
lending arrangements. The extensive new disclosures of information as of the end
of a reporting period will become effective for both interim and annual
reporting periods ending at December 31, 2010. Specific items regarding
activity that occurred before the issuance of the ASU, such as the allowance
rollforward and modification disclosures, will be required for periods beginning
after December 31, 2010. The Company is currently assessing the impact that
ASU 2010-20 will have on its condensed consolidated financial
statements.





4.
            Investments
      in Real Estate





As of
June 30, 2010, our portfolio consists of twelve properties which were
approximately 79.72% leased.  The following table provides summary
information regarding our properties.





Property
              
              
              Location
              
              
              Date
      Purchased
              
              
              Square
                Footage
              
              
              Purchase
                Price
              
              
              Associated
      Debt
              
              
              June
      30, 2010
                %
      Leased2111
      South Industrial Park
              
              
              North
      Tempe, AZ
              
              
              June
      1, 2006
              
              
              
              26,800
              
              
              $
              1,975,000
              
              
              $
              —
              
              
              
              73.13
              %Shoemaker
      Industrial Buildings
              
              
              Santa
      Fe Springs, CA
              
              
              June
      30, 2006
              
              
              
              18,921
              
              
              
              2,400,000
              
              
              
              —
              
              
              
              100.00
              %15172
      Goldenwest Circle
              
              
              Westminster,
      CA
              
              
              December
      1, 2006
              
              
              
              102,200
              
              
              
              11,200,000
              
              
              
              2,824,000
              
              
              
              100.00
              %20100
      Western Avenue
              
              
              Torrance,
      CA
              
              
              December
      1, 2006
              
              
              
              116,433
              
              
              
              19,650,000
              
              
              
              4,701,000
              
              
              
              74.23
              %Mack Deer Valley
              
              
              Phoenix,
      AZ
              
              
              January
      21, 2007
              
              
              
              180,985
              
              
              
              23,150,000
              
              
              
              3,868,000
              
              
              
              100.00
              %Marathon Center
              
              
              Tampa
      Bay, FL
              
              
              April
      2, 2007
              
              
              
              52,020
              
              
              
              4,450,000
              
              
              
              —
              
              
              
              24.00
              %Pinnacle Park Business Center
              
              
              Phoenix,
      AZ
              
              
              October
      2, 2007
              
              
              
              159,661
              
              
              
              20,050,000
              
              
              
              4,553,000
              
              
              
              100.00
              %Orlando Small Bay
      PortfolioCarter
              
              
              Winter
      Garden, FL
              
              
              November
      15, 2007
              
              
              
              49,125
              
              
              
              4,624,000
              
              
              
              
              
              
              
              73.28
              %Goldenrod
              
              
              Orlando,
      FL
              
              
              November
      15, 2007
              
              
              
              78,646
              
              
              
              7,402,000
              
              
              
              
              
              
              
              66.15
              %Hanging
      Moss
              
              
              Orlando,
      FL
              
              
              November
      15, 2007
              
              
              
              94,200
              
              
              
              8,866,000
              
              
              
              
              
              
              
              93.42
              %Monroe
      South
              
              
              Sanford,
      FL
              
              
              November
      15, 2007
              
              
              
              172,500
              
              
              
              16,236,000
              
              
              
              
              
              
              
              69.18
              %394,471
              
              
              
              37,128,000
              
              
              
              15,860,000
              
              
              
              74.90
              %Monroe North
      CommerCenter
              
              
              Sanford,
      FL
              
              
              April
      17, 2008
              
              
              
              181,348
              
              
              
              14,275,000
              
              
              
              6,983,000
              
              
              
              59.14
              %1,232,839
              
              
              $
              134,278,000
              
              
              $
              38,789,000
              
              
              
              79.72
              %





9





As of
June 30, 2010, cost and accumulated depreciation and amortization related to
real estate assets and related lease intangibles were as follows:


Land
                  
                  
                  Buildings
      and
                    Improvements
                  
                  
                  Acquired
                    Above-
                    Market
                    Leases
                  
                  
                  In-Place
                    Lease
      Value
                  
                  
                  Acquired
                    Below-
                    Market
                    LeasesInvestment
      in real estate
                  
                  $
                  38,604,000
                  
                  
                  $
                  94,610,000
                  
                  
                  $
                  1,666,000
                  
                  
                  $
                  1,971,000
                  
                  
                  $
                  (824,000
                  )Less:
      accumulated depreciation and amortization
                  
                  
                  —
                  
                  
                  
                  (8,298,000
                  )
                  
                  
                  (1,492,000
                  )
                  
                  
                  (1,552,000
                  )
                  
                  
                  653,000Net
      investments in real estate and related lease intangibles
                  
                  $
                  38,604,000
                  
                  
                  $
                  86,312,000
                  
                  
                  $
                  174,000
                  
                  
                  $
                  419,000
                  
                  
                  $
                  (171,000
                  )








As of
December 31, 2009, cost and accumulated depreciation and amortization related to
real estate assets and related lease intangibles were as follows:


Land
                
                
                Buildings
      and
                  Improvements
                
                
                Acquired
                  Above-
                  Market
                  Leases
                
                
                In-Place
                  Lease
      Value
                
                
                Acquired
                  Below-
                  Market
                  LeasesInvestment
      in real estate
                
                $
                38,604,000
                
                
                $
                94,513,000
                
                
                $
                1,666,000
                
                
                $
                1,971,000
                
                
                $
                (824,000
                )Less:
      accumulated depreciation and amortization
                
                
                —
                
                
                
                (6,842,000
                )
                
                
                (1,419,000
                )
                
                
                (1,414,000
                )
                
                
                607,000Net
      investments in real estate and related lease intangibles
                
                $
                38,604,000
                
                
                $
                87,671,000
                
                
                $
                247,000
                
                
                $
                557,000
                
                
                $
                (217,000
                )




Depreciation
expense associated with buildings and improvements and site improvements for the
three months ended June 30, 2010 and 2009 was $730,000 and $740,000,
respectively.  Depreciation expense associated with buildings and
improvements and site improvements for the six months ended June 30, 2010 and
2009 was $1,456,000 and $1,478,000 respectively.





Net
amortization expense associated with the lease intangible assets and liabilities
for the three months ended June 30, 2010 and 2009 was $79,000 and
$110,000, respectively.  Net amortization expense associated with the
lease intangible assets and liabilities for the six months ended June 30, 2010
and 2009 was $165,000 and $276,000, respectively.  Estimated
net amortization expense for July 1, 2010 through December 31, 2010 and each of
the  subsequent years is as follows:





Lease
      Intangibles AmortizationJuly
      1, 2010 to December 31, 2010
                  
                  $
                  131,0002011
                  
                  $
                  164,0002012
                  
                  $
                  65,0002013
                  
                  $
                  41,0002014
                  
                  $
                  12,0002015
      and thereafter
                  
                  $
                  10,000





The
estimated useful lives for lease intangibles range from approximately one month
to nine years.  As of June 30, 2010, the weighted-average amortization
period for in-place leases, acquired above market leases and acquired below
market leases were 4.1 years, 4.8 years and 3.5 years,
respectively.





Leasing
Commissions





Leasing
commissions are stated at cost and amortized on a straight-line basis over the
related lease term.  As of June 30, 2010 and December 31, 2009, we had
recorded approximately $492,000 and $466,000 in leasing commissions,
respectively. Amortization expense for the three months ended June 30, 2010 and
2009 was approximately $29,000 and $32,000,
respectively.  Amortization expense for the six months ended June 30,
2010 and 2009 was approximately $56,000 and $70,000, respectively.





10





5.
            Allowance
      for Doubtful Accounts





Our
allowance for doubtful accounts was $390,000 and $491,000 as of June 30, 2010
and December 31, 2009, respectively.





6.
            Concentration
      of Credit Risk





Financial
instruments that potentially subject us to a concentration of credit risk are
primarily cash investments.  Cash is generally invested in government
backed securities and investment-grade short-term instruments and the amount of
credit exposure to any one commercial issuer is limited.  Currently,
the Federal Deposit Insurance Corporation, or FDIC, generally insures amounts up
to $250,000 per depositor per insured bank, which is scheduled to be reduced to
$100,000 after December 31, 2013.  As of June 30, 2010, we had cash
accounts in excess of FDIC insured limits.





As of
June 30, 2010, we owned three properties in the state of California, three
properties in the state of Arizona and six properties in the state of
Florida.  Accordingly, there is a geographic concentration of risk
subject to fluctuations in each State’s economy.





7.
            Notes
      Receivable





In May
2008, we agreed to loan up to $10.0 million at a rate of 10% per year to two
real estate operating companies, Servant Investments, LLC and Servant Healthcare
Investments, LLC (collectively, “Servant”). In May 2010, the loan
commitments were reduced to $8.75 million.  The loans mature on May
19, 2013.  Servant is party to an alliance with the managing member of
our Advisor.  As of June 30, 2010, our aggregate advances to Servant
under the loan commitment were approximately $8.1 million.  On a
quarterly basis, we evaluate the collectability of our notes
receivable.  Our evaluation of collectability involves judgment,
estimates and a review of the Servant business plans and their operating
projections.  During the quarter ended September 30, 2009, we
concluded that the collectability of one note cannot be reasonably assured and
therefore, we recorded a note receivable reserve of approximately $4.6 million
against the balance of that note. The amount of this reserve has been included
in our consolidated statements of operations under impairment of note
receivable, which was recorded for the quarter ended September 30,
2009.  As of June 30, 2010 and December 31, 2009, the impaired notes
receivable had a zero balance.  It is our policy to recognize interest
income on reserved loan advances on a cash basis.  For the three
months ended June 30, 2010 and 2009, interest income related to the impaired
note receivable was $121,000 and $86,000, respectively.  For the six
months ended June 30, 2010 and 2009, interest income related to the impaired
note receivable was $322,000 and $152,000, respectively.  As of June
30, 2010 and December 31, 2009, the other note receivable had a balance of $3.4
million and $2.9 million, respectively.  Interest income related to
the other note receivable for the three months ended June 30, 2010 and 2009, was
$82,000 and $49,000, respectively.  Interest income related to the
other note receivable for the six months ended June 30, 2010 and 2009, was
$157,000 and $88,000, respectively.





8.
            Note
      Receivable from Related Party





On
January 22, 2009, we made a $14.0 million acquisition bridge loan to Caruth
Haven L.P, a Delaware limited partnership that is a wholly-owned subsidiary of
Cornerstone Healthcare Plus REIT, Inc., a publicly offered, non-traded REIT
sponsored by affiliates of our sponsor, Cornerstone Realty Advisors, LLC. The
loan was to mature on January 21, 2010 subject to the borrower's right to
repay the loan, in whole or in part, on or before January 21, 2010 without
incurring any prepayment penalty.  On December 16, 2009, Caruth Haven
L.P. repaid the full loan amount.  For the three months ended June 30,
2010 and 2009 interest income from this note receivable was approximately $0
million and $221,000, respectively.  For the six months ended June 30,
2010 and 2009 interest income from this note receivable was approximately $0
million and $391,000, respectively.





On
December 14, 2009, we made a participating first mortgage loan commitment of
$8.0 million to Nantucket Acquisition LLC, a Delaware limited liability company
managed by Cornerstone Ventures Inc., an affiliate of our Advisor, in connection
with Nantucket Acquisition’s purchase of a 60-unit senior living community known
as Sherburne Commons located on the island of Nantucket, MA.  The loan
matures on January 1, 2015, with no option to extend and bears interest at a
fixed rate of 8.0% for the term of the loan.  Interest is to be paid
monthly with principal due at maturity.  Under the terms of the loan,
we are entitled to receive additional interest in the form of a 40%
participation in the "shared appreciation" of the property, at loan maturity,
calculated based on the net sales proceeds if the property is sold, or the
property's appraised value, less ordinary disposition costs, if the property has
not been sold by the time the loan matures. Prepayment of the loan is not
permitted without our consent and the loan is not assumable. As of June 30,
2010, the loan balance was approximately $7.9 million. For the three months
ended June 30, 2010 and 2009, interest income from this mortgage loan commitment
was approximately $156,000 and $0 million, respectively.  For the six
months ended June 30, 2010 and 2009, interest income from this mortgage loan
commitment was approximately $300,000 and $0 million, respectively.




11




Nantucket
Acquisition LLC is considered a variable interest entity because the equity
owners of the Nantucket Acquisition LLC do not have sufficient equity at risk,
and our mortgage loan commitment was determined to be a variable
interest.  We have determined that we are not the primary beneficiary
of this VIE since we do not have the power to direct the activities of this VIE.




9.
            Payable
      to Related Parties





Payable
to related parties at June 30, 2010 and December 31, 2009 consists of offering
costs, acquisition fees, and expense reimbursement payable and sales commissions
and dealer manager fees incurred to the Advisor and PCC.




10.
            Stockholders’
      Equity





Common
Stock




Our
articles of incorporation authorize the issuance of 290,000,000 shares of common
stock with a par value of $0.001.  As of June 30, 2010, we had sold
approximately 20.9 million shares of common stock for total gross proceeds of
approximately $167.0 million.  As of December 31, 2009, we had sold
approximately 20.8 million shares of common stock for a total of approximately
$165.9 million of gross proceeds.





Distributions





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 21,100,000
shares of our common stock for sale pursuant to the distribution reinvestment
plan in connection with our follow-on offering.  The purchase price
per share is 95% of the price paid by the purchaser for our common stock, but
not less than $7.60 per share.  As of June 30, 2010 and December 31,
2009, approximately 2.0 million and 1.6 million shares, respectively, had been
issued under the distribution reinvestment plan.





The
following are the distributions declared during the six months ended June 30,
2010 and 2009:





Distribution
      DeclaredPeriod
                          
                          Cash
                          
                          Reinvested
                          
                          TotalFirst
      quarter 2009 (1)
                          
                          
                          $
                          1,021,000
                          
                          
                          $
                          1,463,000
                          
                          
                          $
                          2,484,000Second
      quarter 2009 (1)
                          
                          
                          $
                          1,125,000
                          
                          
                          $
                          1,523,000
                          
                          
                          $
                          2,648,000First
      quarter 2010
                          
                          
                          $
                          1,221,000
                          
                          
                          $
                          1,490,000
                          
                          
                          $
                          2,711,000Second
      quarter 2010
                          
                          
                          $
                          1,256,000
                          
                          
                          $
                          1,468,000
                          
                          
                          $
                          2,724,000





(1)
            Distributions
      declared represented a return of capital for tax purposes. 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.  Some of our distributions have been paid from sources
      other than operating cash flow, such as offering
      proceeds.  Until proceeds from our offering are fully invested
      and generating operating cash flow sufficient to fully cover 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.





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.





Special
10% Stock Distribution





Our board
of directors authorized a special 10% stock distribution to be paid to the
stockholders of record on the date that we raised the first $125.0 million in
our initial public offering, which was achieved on July 23, 2008. All
stockholders of record on July 23, 2008 received one additional share of stock
for every 10 shares of stock they owned as of that date.  For the
purpose of calculating the stock repurchase price for shares received as part of
the special 10% stock distribution declared in July 2008, the purchase price of
such shares will be deemed to be equal to the purchase price paid by the
stockholder for shares held by the stockholder immediately prior to the special
10% stock distribution.




12




Stock
Repurchase Program





We have
adopted a stock repurchase program for investors who have held their shares for
at least one year, unless the shares are being redeemed in connection with a
stockholder’s death.  Under our current stock repurchase program, the
repurchase price will vary depending on the purchase price paid by the
stockholder and the number of years the shares are held.  Our
board of directors may amend, suspend or terminate the program at any time on 30
days prior notice to stockholders. We have no obligation to repurchase our
stockholders’ shares.  Until September 21, 2012 our stock repurchase
program limits the number of shares of stock we can redeem (other than
redemptions due to death of a stockholder) to those that we can purchase with
net proceeds from the sale of stock under our distribution reinvestment plan in
the prior calendar year. Until September 21, 2012 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 in the prior calendar year
or (ii) 5% of the number of shares outstanding at the end of the prior calendar
year.





During
the six months ended June 30, 2010, we redeemed shares pursuant to our stock
repurchase program as follows:





Period
                    
                    Total
      Number of
                      Shares
      Redeemed (1)
                    
                    
                    Average
      Price
                      Paid
      per ShareJanuary
                    
                    
                    249,146
                    
                    
                    $
                    7.46February
                    
                    
                    100,999
                    
                    
                    $
                    7.63March
                    
                    
                    159,479
                    
                    
                    $
                    7.76April
                    
                    
                    161,356
                    
                    
                    $
                    7.82May
                    
                    
                    123,561
                    
                    
                    $
                    7.64June
      (2)
                    
                    
                    39,822
                    
                    
                    $
                    7.98834,363





During
the six months ended June 30, 2009, we redeemed shares pursuant to our stock
repurchase program as follows:





Period
                  
                  Total
      Number of
                    Shares
      Redeemed (1)
                  
                  
                  Average
      Price
                    Paid
      per ShareJanuary
                  
                  
                  40,873
                  
                  
                  $
                  6.77February
                  
                  
                  137,395
                  
                  
                  $
                  7.51March
                  
                  
                  152,984
                  
                  
                  $
                  7.61April
                  
                  
                  83,284
                  
                  
                  $
                  7.55May
                  
                  
                  43,057
                  
                  
                  $
                  7.51June
                  
                  
                  65,453
                  
                  
                  $
                  7.67523,046




_________________________


(1)
            As
      long as our common stock is not listed on a national securities exchange
      or traded on an over -the-counter market, our stockholders who have held
      their stock for at least one year may be able to have all or any portion
      of their shares redeemed in accordance with the procedures outlined in the
      prospectus relating to the shares they purchased.(2)
            As
      of June 30, 2010, we have met the threshold of available distribution
      reinvestment plan proceeds, accordingly, we do not expect to make further
      ordinary redemptions for the remainder of
2010.





Our board
of directors may modify our stock repurchase program so that we can redeem stock
using the proceeds from the sale of our real estate investments or other
sources.




13




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 distribution 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.





Effective
January 1, 2006, we adopted the provisions of, FASB ASC 718-10, Compensation – Stock
Compensation, which requires the measurement and recognition of
compensation expense for all share-based payment awards to employees and
directors based on estimated fair values. On August 6, 2008 and August 8, 2007,
we granted our non-employee directors nonqualified stock options to purchase an
aggregate of 20,000 and 20,000 shares of common stock, respectively, at an
exercise price of $8.00 per share.  Of these options, 15,000 lapsed on
November 8, 2008 due to the resignation of one director from the board of
directors on August 6, 2008.  Outstanding stock options became
immediately exercisable in full on the grant date, expire in ten years after the
grant date, and have no intrinsic value as of June 30, 2010.  For the
three and six months ended June 30, 2010 and 2009, we did not incur any non-cash
compensation expenses.  No stock options were exercised or canceled
during the three and six months ended June 30, 2010. In connection with the
registration of the shares in our follow-on offering, we have suspended the
issuance of options to our independent directors under the Plan, and we do not
expect to issue additional options to our independent directors until we cease
offering shares pursuant to our offering.





11.
            Related
      Party Transactions




Our
Company has no employees. The 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 our offerings 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, the 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 the 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 the Advisor under the advisory agreement
are described below.





Organizational and Offering
Costs.  Organizational and offering costs of our offerings are
being paid by the Advisor on our behalf and will be reimbursed to the Advisor
from the proceeds of our offerings. 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 our offerings, 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 the Advisor for all marketing related costs and expenses such as
salaries and direct expenses of employees of the Advisor and its affiliates in
connection with registering and marketing our shares (ii) technology costs
associated with our 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 our initial public
offering and follow-on offering.





As of
June 30, 2010, the Advisor and its affiliates had incurred on our behalf
organizational and offering costs totaling approximately $5.4 million, including
approximately $0.1 million of organizational costs that was expensed and
approximately $5.3 million of offering costs which reduce net proceeds of our
offerings.  Of this amount, $4.5 million reduced the net proceeds of
our initial public offering and $0.9 million reduced the net proceeds of our
follow-on offering. As of December 31, 2009, the Advisor and its affiliates
had incurred on our behalf organizational and offering costs totaling
approximately $5.2 million, including approximately $0.1 million of
organizational costs that have been expensed and approximately $5.1 million of
offering costs which reduced net proceeds of our offerings. Of this amount,
$4.4 million reduced the net proceeds of our initial public offering and $0.7
million reduced the net proceeds of our follow-on offering.




14




Acquisition Fees and
Expenses.  The advisory agreement requires us to pay the
Advisor acquisition fees in an amount equal to 2% of the gross proceeds of our
primary offering.  We will pay the acquisition fees upon receipt of
the gross proceeds from our primary offering.  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 three months ended June 30, 2010 and 2009, the
Advisor earned approximately $8,000 and $0.2 million of acquisition fees,
respectively, which had been expensed as incurred in accordance with our
adoption of FASB ASC 805-10 effective January 1, 2009.   For the six
months ended June 30, 2010 and 2009, the Advisor earned approximately $21,000
and $0.3 million of acquisition fees, respectively, which had been expensed
as incurred in accordance with our adoption of FASB ASC 805-10 effective January
1, 2009.





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
book basis carrying values of our assets invested, directly or indirectly, in
equity interests in and loans secured by real estate before reserves for
depreciation or bad debts or other similar non-cash reserves, calculated in
accordance with GAAP.  For the three months ended June 30, 2010 and 2009,
the Advisor earned $0.4 million and $0.4 million, respectively of asset
management fees, which were expensed and included in asset management fees in
our condensed consolidated statement of operations.  For the six
months ended June 30, 2010 and 2009, the Advisor earned $0.7 million and $0.8
million, respectively of asset management fees, which were expensed and
included in asset management fees in our condensed consolidated statement of
operations.  In addition, we reimburse the Advisor for the direct and
indirect costs and expenses incurred by the Advisor in providing asset
management services to us, including personnel and related employment costs
related to providing asset management services on our behalf.  These
fees and expenses are in addition to management fees that we pay to third party
property managers.  For the three months ended June 30, 2010 and 2009, the
Advisor was reimbursed $42,000 and $0, respectively, of such direct and indirect
costs and expenses incurred on our behalf, which are included in general and
administrative expenses in the condensed consolidated statement of
operations.   For the six months ended June 30, 2010 and 2009,
the Advisor was reimbursed $80,000 and $0, respectively, of such direct and
indirect costs and expenses incurred on our behalf, which are included in
general and administrative expenses in the condensed consolidated statement of
operations.





Operating Expenses.
The advisory agreement provides for reimbursement of the Advisor’s direct and
indirect costs of providing administrative and management services to
us.   For the three months ended June 30, 2010 and 2009, $0.3
million and $0.1 million of such costs, respectively, were reimbursed and
included in general and administrative expenses in our condensed consolidated
statement of operations.   For the six months ended June 30, 2010
and 2009, $0.5 million and $0.3 million of such costs, respectively, were
reimbursed and included in general and administrative expenses in our condensed
consolidated statement of operations.  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.  For the three and six months ended June 30, 2010 and 2009, we
did not incur any of such fees.





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
      stockholders have received cumulative distributions equal to $8.00 per
      share (less any returns of capital) plus cumulative, non-compounded annual
      returns on net invested capital, 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 returns of 6% to a high of 15%
      of net sales proceeds if investors have earned annualized returns of 10%
      or more.




15




·
            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 our primary offerings.  PCC, as dealer manager,
is also entitled to receive a dealer manager fee equal to up to 3% of gross
proceeds from sales in our primary offerings.  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 our primary
offerings.  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) in excess of 13.5% of gross
proceeds from our offerings.  For the three months ended June 30,
2010 and 2009, our dealer manager earned sales commissions and dealer manager
fees of approximately $40,000 and $0.8 million, respectively.  For the six
months ended June 30, 2010 and 2009, our dealer manager earned sales commissions
and dealer manager fees of approximately $93,000 and $1.6 million,
respectively. Dealer manager fees and sales commissions paid to PCC are a
cost of capital raised and, as such, are included as a reduction of additional
paid in capital in the accompanying condensed consolidated balance
sheets.





12.
            Notes
      Payable





On June
30, 2006, we entered into a credit agreement with HSH Nordbank AG, New York
Branch, for a temporary credit facility that we will use during our offering
period to facilitate our acquisitions of properties in anticipation of the
receipt of offering proceeds.  As of June 30, 2010 and December 31,
2009, we had net borrowings of approximately $15.9 million, under the credit
agreement.





On June
30, 2010, we amended the June 30, 2006 credit agreement with HSH Nordbank AG,
New York Branch, which extended the credit facility maturity date to August 31,
2010.





The
credit agreement, as amended, permits us to borrow up to $15.9 million secured
by real properties at a borrowing rate based on 30-day LIBOR plus a margin
ranging from 115 to 135 basis points and requires payment of a usage premium of
up to 15 basis points and an annual administrative fee.   We are
entitled to prepay the borrowings under the credit facility at any time without
penalty.  This credit agreement will mature on August 31, 2010. The
repayment of obligations under the credit agreement may be accelerated in the
event of a default, as defined in the credit agreement. The facility contains
various covenants including financial covenants with respect to consolidated
interest and fixed charge coverage and secured debt to secured asset
value.  As of June 30, 2010, we were in compliance with all financial
covenants.  During the three months ended June 30, 2010 and 2009, we
incurred $57,000 and $63, 000 of interest expense, respectively, related to the
credit agreement.   During the six months ended June 30, 2010 and
2009, we incurred $111,000 and $127,000  of interest expense,
respectively, related to the credit agreement.





On
November 13, 2007, we entered into a loan agreement with Wachovia Bank, National
Association to facilitate the acquisition of properties during our offering
period.  Pursuant to the terms of the loan agreement, we may borrow
$22.4 million at an interest rate of 140 basis points over 30-day LIBOR, secured
by specified real estate properties.  The loan agreement has a
maturity date of November 13, 2010, and may be prepaid without
penalty.  The entire $22.4 million available under the terms of the
loan was used to finance an acquisition of properties that closed on November
15, 2007.  During the three months ended June 30, 2010 and 2009, we
incurred $69,000 and $100,000 of interest expense, respectively, related to the
loan agreement.   During the six months ended June 30, 2010 and
2009, we incurred $133,000 and $205,000 of interest expense, respectively,
related to the loan agreement.   As of June 30, 2010 and December
31, 2009, we had net borrowings of approximately $15.9 million, under the credit
agreement.




16




Our HSH
Nordbank credit facility will mature on August 31, 2010 and our loan from
Wachovia Bank will mature on November 13, 2010. We anticipate repaying our
existing debt obligations with cash on hand and the proceeds from (1) new credit
facilities, (2) asset financing and/or (3) sale of real estate assets. We have
received a term sheet from a financial institution to refinance the current loan
from HSH Nordbank, and anticipate extending the HSH Nordbank loan until the
refinancing closes.  In addition, we are implementing a plan to repay
the Wachovia loan that matures in November 2010, from proceeds of refinancing,
the sale of real estate assets, or a combination of the
both.   Management believes that there is sufficient liquidity
available to the Company to be able to meet all debt obligations and continue to
fund ongoing operations. However, given the continued weakness of the retail and
credit markets, there can be no assurance that we can obtain such refinancing or
additional capital on satisfactory terms, and we could be required to consider
additional assets sales or less attractive sources of capital for
refinancing.




In
connection with our acquisition of Monroe North CommerCenter, on April 17, 2008,
we entered into an assumption and amendment of note, mortgage and other loan
documents (the “Loan Assumption Agreement”) with Transamerica Life Insurance
Company (“Transamerica”).  Pursuant to the Loan Assumption Agreement,
we assumed the outstanding principal balance of approximately $7.4 million on
the Transamerica mortgage loan.  The loan matures on November 1, 2014
and bears interest at a fixed rate of 5.89% per annum.  During the
three months ended June 30, 2010 and 2009, we incurred $103,000 and $106,000 of
interest expense, respectively, related to this loan agreement.  During the
six months ended June 30, 2010 and 2009, we incurred $207,000 and $212,000 of
interest expense, respectively, related to this loan agreement.  As of June
30, 2010 and December 31, 2009, we had net borrowings of approximately $7.0
million and $7.1 million, respectively, under the Loan Assumption
Agreement.




The
principal payments due on Monroe North CommerCenter mortgage loan for July
1, 2010 to December 31, 2010 and each of the subsequent years is as
follows:





Year
                  
                  Principal
                    amountJuly
      1, 2010 to December 31, 2010
                  
                  $
                  98,0002011
                  
                  $
                  204,0002012
                  
                  $
                  217,0002013
                  
                  $
                  230,0002014
      and thereafter
                  
                  $
                  6,234,000




In
connection with our notes payable, we had incurred financing costs totaling
approximately $1.6 million and $1.6 million as of June 30, 2010 and December 31,
2009, respectively.  These financing costs have been capitalized and
are being amortized over the life of the agreements.  For the three
months ended June 30, 2010 and 2009, $53,000 and $64,000, respectively, of
deferred financing costs were amortized and included in interest expense in the
condensed consolidated statements of operations.   For the six
months ended June 30, 2010 and 2009, $105, 000 and $128,000, respectively, of
deferred financing costs were amortized and included in interest expense in the
condensed consolidated statements of operations.  Consistent with our
borrowing policies, during our offering period, we will borrow periodically to
acquire properties and for working capital.  We will determine whether
to use the proceeds of our offerings to repay amounts borrowed under the credit
agreement and loan agreements depending on a number of factors, including the
investments that are available to us for purchase at the time and the cost of
the credit facility.  Following the closing of our offering period, we
will endeavor to repay all amounts owing under the credit agreement and loan
agreements or that are secured by our properties and which have not previously
been paid.  To the extent sufficient proceeds from our
offering are unavailable to repay the indebtedness secured by properties
within a reasonable time following the closing of our offering period as
determined by our board of directors, we may sell properties or raise equity
capital to repay the secured debt, so that we will own our properties with no
permanent acquisition financing.





13.
            Commitments
      and Contingencies





In May
2008, we committed to fund up to $5.0 million to Servant Healthcare Investments
LLC and Servant Investments LLC, two entities that are parties to an alliance
agreement with the managing member of our Advisor.  On January 22,
2009, our board of directors increased our commitment to loan funds up to $10.0
million. On May 10, 2010, this commitment was reduced to $8.75 million. As of
June 30, 2010, we had funded approximately $8.1 million pursuant to this
commitment.





On
December 14, 2009, we made a participating first mortgage loan commitment of
$8.0 million to Nantucket Acquisition LLC, a Delaware limited liability company
managed by Cornerstone Ventures Inc., an affiliate of our Advisor, in connection
with Nantucket Acquisition’s purchase of a 60-unit senior living community known
as Sherburne Commons located on the exclusive island of Nantucket,
MA.  As of June 30, 2010, we had funded approximately $7.9 million
pursuant to this commitment.




17




We
monitor our properties for the presence of hazardous or toxic
substances.  While there can be no assurance that a material
environment liability does not exist, we are not currently aware of any
environmental liability with respect to the properties that would have a
material effect on our financial condition, results of operations and cash
flows.  Further, we are not aware of any environmental liability or
any unasserted claim or assessment with respect to an environmental liability
that we believe would require additional disclosure or the recording of a loss
contingency.




Our
commitments and contingencies include the usual obligations of real estate
owners and operators in the normal course of business.  In the opinion
of management, these matters are not expected to have a material impact on our
consolidated financial position, results of operations, and cash flows. 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 cash flows, financial condition or
results of operations.





14.
            Subsequent
      Event





Real
Estate Acquisition





On
August 5, 2010, we purchased 1830 Santa Fe, a 13,200 square foot
industrial property located in Santa Ana, CA from Mr. Charles F. Pribus and
Suffolk Holding Company, two non-related parties for a purchase price of
approximately $1.3 million, plus closing costs which are not fully determinable
at this time.  The building is 100% leased and located in a planned
industrial area of Santa Ana, CA. The acquisition was purchased with no debt
financing.





Sale
of Shares of Common Stock





As of
August 13, 2010, we had raised approximately $167.0 million through the issuance
of approximately 20.9 million shares of our common stock under our initial
public offering and follow-on offering, excluding approximately 2.1 million
shares that were issued pursuant to our distribution reinvestment plan and
approximately 1.6 million shares issued in connection with the special 10% stock
dividend related to our initial public offering, reduced by approximately 1.7
million shares redeemed pursuant to our stock repurchase program.





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





The
following “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” should be read in conjunction with our financial
statements and notes thereto contained elsewhere in this report.





This
section contains forward-looking statements, including estimates, projections,
statements relating to our business plans, objectives and expected operating
results, and the assumptions upon which those statements are
based.  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.  Forward-looking statements that were true at the time
made may ultimately prove to be incorrect or false.  We undertake no
obligation to update or revise publicly any forward-looking statements, whether
as a result of new information, future events or otherwise.  All
forward-looking statements should be read in light of the risks identified in
Part II, Item 1A herein and Part I, Item 1A of our annual report on Form 10-K
for the year ended December 31, 2009 filed with the Securities and Exchange
Commission (the “SEC”).





Overview





Cornerstone
Core Properties REIT, Inc., a Maryland corporation, was formed on October 22,
2004 under the General Corporation Law of Maryland for the purpose of engaging
in the business of investing in and owning commercial real estate.  As
used in this report, the “Company”, “we”, “us” and “our” refer to Cornerstone
Core Properties REIT, Inc. and its consolidated subsidiaries except where the
context otherwise requires. We have no paid employees and are externally managed
pursuant to an advisory agreement by an affiliate, Cornerstone Realty Advisors,
LLC, a Delaware limited liability company that was formed on November 30, 2004
(the “Advisor”).




18




Cornerstone
Operating Partnership, L.P., a Delaware limited partnership (the “Operating
Partnership”) was formed on November 30, 2004.  At June 30, 2010, we
owned 99.88% general partner interest in the Operating Partnership while the
Advisor owned a 0.12 % 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.





On
January 6, 2006, we commenced an initial public offering of up to 55,400,000
shares of our common stock, consisting of 44,400,000 shares for sale pursuant to
a primary offering and 11,000,000 shares for sale pursuant to our distribution
reinvestment plan.  We stopped making offers under our initial public
offering on June 1, 2009 upon raising gross offering proceeds of approximately
$172.7 million from the sale of approximately 21.7 million shares, including
shares sold under the distribution reinvestment plan.  On June 10,
2009, we commenced a follow-on offering of up to 77,350,000 shares of our
common stock, consisting of 56,250,000 shares for sale pursuant to a primary
offering and 21,100,000 shares for sale pursuant to our dividend reinvestment
plan.  We retained Pacific Cornerstone Capital, Inc. (“PCC”), an
affiliate of the Advisor, to serve as the dealer manager for our
offerings.  PCC is responsible for marketing our shares currently
being offered pursuant to the follow-on offering.





We used
the net proceeds from our initial public offering to invest primarily in
investment real estate including multi-tenant industrial real estate located in
major metropolitan markets in the United States.  We intend to use the
net proceeds from our follow-on offering to pay down temporary acquisition
financing on our existing assets and to acquire additional real estate
investments.





As of
June 30, 2010, we had raised approximately $167.0 million of gross proceeds from
the sale of approximately 20.9 million shares of our common stock in our initial
public offering and follow-on offering and had acquired twelve
properties.





Our
revenues, which are comprised largely of rental income, include rents reported
on a straight-line basis over the initial term of the lease. Our growth depends,
in part, on our ability to increase rental income and other earned income from
leases by increasing rental rates and occupancy levels and control operating and
other expenses. Our operations are impacted by property specific, market
specific, general economic and other conditions.




Market
Outlook – Real Estate and Real Estate Finance Markets





In recent
years, both the national and most global economies have experienced
substantially increased unemployment and a downturn in economic activity.
Despite certain recent positive economic indicators and improved stock market
performance, the aforementioned conditions, combined with low consumer
confidence, have resulted in an unprecedented global recession and continue to
contribute to a challenging economic environment that may delay the
implementation of our business strategy or force us to modify it.




As a
result of the decline in general economic conditions, the U.S. commercial real
estate industry has also experienced deteriorating fundamentals across all major
property types and most geographic markets. Tenant defaults have risen, while
demand for commercial real estate space is contracting, resulting in a highly
competitive leasing environment, downward pressure on both occupancy and rental
rates, and an increase in leasing incentives. Mortgage delinquencies and
defaults have trended upward, with many industry analysts predicting the
continuation of significant credit defaults, foreclosures and principal
losses.




From a
financing perspective, the severe dislocations and liquidity disruptions in the
credit markets have impacted both the cost and availability of commercial real
estate debt. The commercial mortgage-backed securities market, formerly a
significant source of liquidity and debt capital, has become inactive and has
left a void in the market for long-term, affordable, fixed-rate debt. This void
has been partially filled by portfolio lenders such as insurance companies, but
at very different terms than were available in the past five years. These
remaining lenders have generally increased credit spreads, lowered the amount of
available proceeds, required recourse security and credit enhancements, and
otherwise tightened underwriting standards considerably, while simultaneously
generally limiting lending to existing relationships with borrowers that invest
in high quality assets in top tier markets. In addition, lenders have limited
the amount of financing available to existing relationships in an effort to
manage and mitigate the risk of overconcentration in certain
borrowers.





The
factors discussed above have translated into declining real estate values and a
corresponding rise in required investment returns and capitalization rates.
Overall transaction activity has slowly increased during the last two quarters
as the gap between “ask” and “bid” has contracted; however, the volume is well
below that of two years ago.





Currently,
benchmark interest rates, such as LIBOR, are at historic lows, allowing some
borrowers with variable rate real estate loans to continue making debt service
payments even as the properties securing these loans experience decreased
occupancy and lower rental rates. These low rates have benefitted borrowers with
floating rate debt who have experienced lower revenues due to decreased
occupancy or lower rental rates. Low short-term rates have allowed them to meet
their debt obligations but the borrowers would not meet the current underwriting
requirements needed to refinance this debt today. As these loans near maturity,
borrowers will find it increasingly difficult to refinance these loans in the
current underwriting environment.




19




The
market conditions that have and will likely continue to have a significant
impact on our real estate investments have also negatively impacted our
tenants’ businesses. As a result, our tenants are finding it more difficult to
meet current lease obligations and forcing them to negotiate favorable lease
terms upon renewal in order for their businesses to remain viable. Lower lease
rates, increased rent concessions and higher occupancy have resulted in lower
current cash flow. Additional declines in rental rates, slower or potentially
negative net absorption of leased space and additional rental concessions,
including free rent, would result in additional decreases in cash
flows.




Based on
these market outlooks, we may limit capital expenditures during 2010 compared to
prior years by focusing on those capital expenditures that preserve value.
However, if we experience an increase in vacancies, we may incur costs to
re-lease properties and pay leasing commissions.




Critical
Accounting Policies




There
have been no material changes to our critical accounting policies as previously
disclosed in our Annual Report on Form 10-K for the year ended December 31,
2009, as filed with the SEC other than as described under Note 2 to the
accompanying condensed financial statements.





Results
of Operations





Our
results of operations are not indicative of those expected in future periods as
we expect that rental income, tenant reimbursements, operating expenses, asset
management fees, depreciation, amortization, and net income will each increase
in future periods as a result of assets acquired since inception and
anticipation of future acquisition of real estate assets.





As of
June 30, 2010, we owned twelve properties.  These properties were
acquired from June of 2006 through April 2008.





Three
months ended June 30, 2010 and 2009





Rental
revenues and tenant reimbursements decreased to $2.4 million for the second
quarter of 2010 from $2.5 million for the second quarter of 2009. The decrease
is primarily due to lower occupancy rates, lower lease rental rates and longer
lease up periods for vacant units as a result of the current economic
environment partially offset by termination payments from former
tenants.





Interest
income from notes receivable was comparable for the second quarter of 2010 and
2009.  Interest income from second quarter of 2010 consists of the
$8.0 million participating first mortgage loan commitment which bears a fixed
rate of 8%  to Nantucket Acquisition LLC while interest income from
second quarter of 2009 consists of the $14.0 million mortgage loan to Caruth
Haven L.P. which bears a fixed rate of 10%.




Property
operating and maintenance expense decreased to $0.7 million for the second
quarter of 2010 from $0.8 million for the second quarter of 2009. The decrease
is primarily due to lower bad debt expense resulting from recovery of prior year
delinquencies.





General
and administrative expense increased to $0.5 million for the second quarter
of 2010 from $0.3 million for the second quarter of 2009. The increase is
primarily due to increased accounting and audit fees, reimbursement of
administrative and management services provided by the Advisor and board of
director expenses.





Asset
management fees were comparable for the second quarter of 2010 and
2009.





Real
estate acquisition costs decreased to $22,000 for the second quarter of 2010
from $160,000 for the second quarter of 2009.  The decrease is due to
a reduction in the amount of equity raised in our public offering, resulting in
reduced acquisition fee reimbursement to the Advisor.




20




Depreciation
and amortization decreased to $0.8 million for the second quarter of
2010 from $0.9 million for the second quarter of 2009.  The
decrease is due to prior year acceleration of in-place lease amortization
due to early lease terminations and prior year end real estate impairment
resulting in a lower depreciation cost basis.





Interest
expense decreased to $0.3 million for the second quarter of 2010 from $0.4
million for the second quarter of 2009.  The decrease is primarily due
to a lower debt balance as a result of a $6.6 million principal reduction in the
fourth quarter of 2009.





Six
months ended June 30, 2010 and 2009





Rental
revenues and tenant reimbursements decreased to $4.8 million in the first half
of 2010 from $5.2 million in the first half of 2009. The decrease is primarily
due to lower occupancy rates, lower lease rental rates and longer lease up
periods for vacant units as a result of the current economic environment
partially offset by termination payments from former tenants.





Interest
income from notes receivable was comparable for the second quarter of 2010 and
2009.  Interest income in the first half of 2010 consists of the $8.0
million participating first mortgage loan commitment which bears a fixed rate of
8%  to Nantucket Acquisition LLC while interest income in the first
half of 2009 consists of the $14.0 million mortgage loan to Caruth Haven L.P.
which bears a fixed rate of 10%.





Property
operating and maintenance expenses decreased to $1.3 million in the first half
of 2010 from $1.7 million in the first half of 2009.  The decrease is
primarily due to lower bad debt expense in 2010 resulting from recovery of prior
year delinquencies and lower legal expenses associated with tenant
turnover.





General
and administrative expenses increased to $1.1 million in the first half of 2010
from $0.8 million for the comparable period of 2009.  The increase is
primarily due to increased accounting and audit fees, reimbursement of
administrative and management services provided by the Advisor and board of
director expenses.





Asset
management fees were comparable for six months ended June 30, 2010 and
2009.





Real
estate acquisition costs decreased to $28,000 in the first half of 2010 from
$332,000 in the first half of 2009.  The decrease is due to a
reduction in the amount of equity raised in our public offering, resulting in
reduced acquisition fee reimbursement to the Advisor.





Depreciation
and amortization decreased to $1.7 million from $1.8 million from the comparable
period primarily due to prior year acceleration of in-place lease amortization
due to early lease terminations and prior year end real estate impairment
resulting in a lower depreciation cost basis.





Interest
expense decreased to $0.6 million from $0.7 million for the comparable period of
2009 primarily due to lower principal debt balances on our credit agreement with
HSH Nordbank and Wachovia Bank.





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, operating expenses, interest expense on any outstanding
indebtedness, cash distributions, and for the repayment of notes payable.
In addition, we will continue to use temporary debt financing to facilitate our
acquisitions of properties in anticipation of receipt of offering
proceeds.




On
January 6, 2006, we commenced an initial public offering of up to 55,400,000
shares of our common stock, consisting of 44,400,000 shares for sale pursuant to
a primary offering and 11,000,000 shares for sale pursuant to our distribution
reinvestment plan.  We stopped making offers under our initial public
offering on June 1, 2009.  On June 10, 2009, we commenced a follow-on
offering of up to 77,350,000 shares of our common stock, consisting of
56,250,000 shares for sale pursuant to a primary offering and 21,100,000 shares
for sale pursuant to our dividend reinvestment plan.  As of June 30,
2010, a total of approximately 20.9 million shares of our common stock had been
sold in our combined offerings for aggregate gross proceeds of
approximately $167.0 million.





As of
June 30, 2010, we had approximately $10.4 million in cash and cash equivalents
on hand.




21




We
anticipate repaying our existing debt obligations with cash on hand and the
proceeds from (1) new credit facilities, (2) asset financing and/or (3) sale of
real estate assets. We have received a term sheet from a financial institution
to refinance the current loan from HSH Nordbank, and anticipate extending the
HSH Nordbank loan until the refinancing closes.  In addition, we are
implementing a plan to repay the Wachovia loan that matures in November 2010,
from proceeds of refinancing, the sale of real estate assets, or a combination
of the both.   Management believes that there is sufficient
liquidity available to the Company to be able to meet all debt obligations and
continue to fund ongoing operations. However, given the continued weakness of
the retail and credit markets, there can be no assurance that we can obtain such
refinancing or additional capital on satisfactory terms, and we could be
required to consider additional assets sales or less attractive sources of
capital for refinancing.





There may
be a delay between the sale of our shares and the purchase of
properties.  During this period, 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 offerings are invested and generating operating cash flow
sufficient to make 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 three and six
months ended June 30, 2010, cash distributions to stockholders were paid from a
combination of cash flow from operations and net proceeds raised from our
offerings.





Distributions
paid to stockholders for the three months ended June 30, 2010 were approximately
$2.8 million. Of this amount, approximately $1.5 million was reinvested through
our dividend reinvestment plan and approximately $1.3 million was paid in
cash to stockholders. Of the total cash distributions paid for the three months
ended June 30, 2010, 36.6% was funded from cash flow from operations and 63.4%
of the total cash amount distributed was funded from proceeds from our
offerings.  Distributions paid for the six months ended June 30, 2010
were approximately $5.5 million. Of this amount, approximately $3.0 million was
reinvested through our dividend reinvestment plan and approximately $2.5 million
was paid in cash to stockholders.  Of the total cash distributions
paid for the six months ended June 30, 2010, 63.1% was funded from cash flow
from operations and 36.9% of the total cash amount distributed was funded from
proceeds from our offerings.





As of
June 30, 2010, the Advisor and its affiliates had incurred on our behalf
organizational and offering costs totaling approximately $5.4 million, including
approximately $0.1 million of organizational costs that was expensed and
approximately $5.3 million of offering costs which reduce net proceeds of our
offerings.  Of this amount, $4.5 million reduced the net proceeds of
our initial public offering and $0.9 million reduced the net proceeds of our
follow-on offering.





In no
event will we have any obligation to reimburse the Advisor for these costs
totaling in excess of 3.5% of the gross proceeds from our initial public
offering and follow-on public offering.  As of June 30, 2010, we had
reimbursed to the Advisor a total of $4.5 million for our initial public
offering and $0.9 million for our follow-on offering.




At times
during our offering stage, the amount of organization and offering expenses that
we incur, or that the Advisor and its affiliates incur on our behalf, may exceed
3.5% of the gross offering proceeds then raised, but our Advisor has agreed to
reimburse us to the extent that our organization and offering expenses exceed
this 3.5% limitation at the conclusion of our offerings. In addition, the
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 public offerings.




We will
not rely on advances from the Advisor to acquire properties but the Advisor and
its affiliates may loan funds to special purpose entities that may acquire
properties on our behalf pending our raising sufficient proceeds from our public
offerings to purchase the properties from the special purpose
entity.





We will
endeavor to repay any temporary acquisition debt financing promptly upon receipt
of proceeds in our offerings.  To the extent sufficient proceeds from
our offerings are unavailable to repay such debt financing 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 no permanent financing. Other than the market conditions
discussed above under the caption “Market Outlook—Real Estate and Real Estate
Finance Markets”, we are not aware of any material trends or uncertainties,
favorable or unfavorable, affecting real estate generally, which we anticipate
may have a material impact on either capital resources or the revenues or income
to be derived from the operation of real estate properties.





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.




22




Funds
from Operations and Modified Funds from Operations





A fund
from operations (“FFO”) is a non-GAAP financial measure that is widely
recognized as a measure of REIT operating performance.  We compute FFO
in accordance with the definition outlined by the National Association of Real
Estate Investment Trusts (“NAREIT”).  NAREIT defines FFO as net income
(loss), computed in accordance with GAAP, excluding extraordinary items, as
defined by the accounting principles generally accepted in the United States of
America (“GAAP”) , and gains (or losses) from sales of property, plus
depreciation and amortization on real estate assets, and after adjustments for
unconsolidated partnerships, joint ventures, noncontrolling interests and
subsidiaries.  Our FFO may not be comparable to FFO reported by other
REITs that do not define the term in accordance with the current NAREIT
definition or that interpret the current NAREIT definition differently than we
do.  We believe that FFO is helpful to investors and our management as
a measure of operating performance because it excludes depreciation and
amortization, gains and losses from property dispositions, and extraordinary
items, and as a result, when compared year to year, reflects the impact on
operations from trends in occupancy rates, rental rates, operating costs,
development activities, general and administrative expenses, and interest costs,
which is not immediately apparent from net income.  Historical cost
accounting for real estate assets in accordance with GAAP implicitly assumes
that the value of real estate diminishes predictably over time.  Since
real estate values have historically risen or fallen with market conditions,
many industry investors and analysts have considered the presentation of
operating results for real estate companies that use historical cost accounting
alone to be insufficient.  As a result, our management believes that
the use of FFO, together with the required GAAP presentations, provide a more
complete understanding of our performance.  Factors that impact FFO
include start-up costs, fixed costs, delay in buying assets, lower yields on
cash held in accounts pending investment, income from portfolio properties and
other portfolio assets, interest rates on acquisition financing and operating
expenses.  FFO should not be considered as an alternative to net
income (loss), as an indication of our performance, nor is it indicative of
funds available to fund our cash needs, including our ability to make
distributions.





Changes
in the accounting and reporting rules under GAAP have prompted a significant
increase in the amount of non-cash and non-operating items included in FFO, as
defined. Therefore, we use modified funds from operations (“MFFO”), which
excludes from FFO acquisition expenses to further evaluate our operating
performance. We believe that MFFO, like those already included in FFO, are
helpful as a measure of operating performance because it excludes costs that
management considers more reflective of investing activities or non-operating
changes. We believe that MFFO reflects the overall operating performance of our
real estate portfolio, which is not immediately apparent from reported net loss.
As such, we believe MFFO, in addition to net loss and cash flows from operating
activities, each as defined by GAAP, is a meaningful supplemental performance
measure and is useful in understanding how our management evaluates our ongoing
operating performance.




Our
calculations of FFO and MFFO for the three and six months ended June 30, 2010
and 2009 are presented below:





Three
      months ended
                                                                                                      
                                                                                                      
                                                                                                      Six
      months endedJune
      30,
                                                                                                      
                                                                                                      
                                                                                                      June
      30,2010
                                                                                                      
                                                                                                      
                                                                                                      2009
                                                                                                      
                                                                                                      
                                                                                                      2010
                                                                                                      
                                                                                                      
                                                                                                      2009Net
      income (loss)
                                                                                                      
                                                                                                      $
                                                                                                      107,000
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      (47,000
                                                                                                      )
                                                                                                      
                                                                                                      $
                                                                                                      127,000
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      (272,000
                                                                                                      )Adjustments:Real
      estate assets depreciation and amortization
                                                                                                      
                                                                                                      
                                                                                                      826,000
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      866,000
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      1,650,000
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      1,797,000Funds
      from operations (FFO) (1)
                                                                                                      
                                                                                                      $
                                                                                                      933,000
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      819,000
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      1,777,000
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      1,525,000Adjustments:Real
      estate acquisition costs
                                                                                                      
                                                                                                      
                                                                                                      22,000
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      160,000
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      28,000
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      332,000Modified
      funds from operations (MFFO) (1)
                                                                                                      
                                                                                                      $
                                                                                                      955,000
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      979,000
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      1,805,000
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      1,857,000Weighted
      average common shares outstanding
                                                                                                      
                                                                                                      
                                                                                                      23,003,752
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      22,020,217
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      22,943,713
                                                                                                      
                                                                                                      
                                                                                                      
                                                                                                      21,289,203Modified
      funds from operation per weighted average common shares
      outstanding
                                                                                                      
                                                                                                      $
                                                                                                      0.04
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      0.04
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      0.08
                                                                                                      
                                                                                                      
                                                                                                      $
                                                                                                      0.09





(1)
            Reported
      amounts are attributable to our common
  stockholders




23




In
addition, FFO and MFFO may be used to fund all or a portion of certain
capitalizable items that are excluded from these measures, such as capital
expenditures and payments of principal on debt, each of which may impact the
amount of cash available for distribution to our stockholders.





Our
directors have authorized distributions to our stockholders at an annualized
rate of 6.0% based on an $8.00 per share purchase price. Some or all of our
distributions have been paid from sources other than operating cash flow, such
as offering proceeds, cash advanced to us or reimbursements of expenses from the
Advisor and proceeds from loans including those secured by our
assets.  Given the uncertainty arising from numerous factors,
including both the raising and investing of capital in the current financing
environment, ultimate FFO and MFFO performance cannot be predicted with
certainty.  Currently, a portion of our distributions are being paid
from capital in anticipation of future cash flow from our investments. Until
proceeds from our offering are invested and generating operating cash flow
sufficient to make distributions to stockholders, we intend to continue to pay a
portion of our distributions from the proceeds of our offering or from
borrowings in anticipation of future cash flow, reducing the amount of funds
that would otherwise be available for investment.





Distributions
      Declared
                                                                
                                                                
                                                                Cash
      Flow fromPeriod
                                                                
                                                                Cash
                                                                
                                                                
                                                                Reinvested
                                                                
                                                                
                                                                Total
                                                                
                                                                
                                                                Operations
                                                                
                                                                
                                                                FFO
                                                                
                                                                
                                                                MFFOFirst
      quarter 2009
                                                                
                                                                $
                                                                1,021,000
                                                                
                                                                
                                                                $
                                                                1,463,000
                                                                
                                                                
                                                                $
                                                                2,484,000
                                                                
                                                                
                                                                $
                                                                1,090,000
                                                                
                                                                
                                                                $
                                                                706,000
                                                                
                                                                
                                                                $
                                                                878,000Second
      quarter 2009
                                                                
                                                                $
                                                                1,124,000
                                                                
                                                                
                                                                $
                                                                1,524,000
                                                                
                                                                
                                                                $
                                                                2,648,000
                                                                
                                                                
                                                                $
                                                                733,000
                                                                
                                                                
                                                                $
                                                                819,000
                                                                
                                                                
                                                                $
                                                                979,000First
      quarter 2010
                                                                
                                                                $
                                                                1,221,000
                                                                
                                                                
                                                                $
                                                                1,490,000
                                                                
                                                                
                                                                $
                                                                2,711,000
                                                                
                                                                
                                                                $
                                                                1,103,000
                                                                
                                                                
                                                                $
                                                                844,000
                                                                
                                                                
                                                                $
                                                                850,000Second
      quarter 2010
                                                                
                                                                $
                                                                1,256,000
                                                                
                                                                
                                                                $
                                                                1,468,000
                                                                
                                                                
                                                                $
                                                                2,724,000
                                                                
                                                                
                                                                $
                                                                461,000
                                                                
                                                                
                                                                $
                                                                933,000
                                                                
                                                                
                                                                $
                                                                955,000





Contractual
Obligations





The
following table reflects our contractual obligations as of June 30, 2010,
specifically our obligations under long-term debt agreements and notes
receivable:


Payment
      due by periodContractual
      Obligations
                  
                  Total
                  
                  Less
      than 1 year
                  
                  
                  1-3
      years
                  
                  
                  3-5
      years
                  
                  More
      than 5 yearsLong-Term
      Debt Obligations (1)
                  
                  $
                  38,789,000
                  
                  
                  $
                  32,004,000
                  
                  
                  $
                  434,000
                  
                  
                  $
                  6,351,000
                  
                  
                  $
                  -Interest
      expense related to long term debt (2)
                  
                  $
                  1,871,000
                  
                  
                  $
                  579,000
                  
                  
                  $
                  775,000
                  
                  
                  $
                  517,000
                  
                  
                  $
                  -Note
      receivable (3)
                  
                  $
                  625,000
                  
                  
                  $
                  625,000
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -Note
      receivable from related party (4)
                  
                  $
                  100,000
                  
                  
                  $
                  100,000
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  -


_________________________





(1) This
represents the sum of a credit agreement with HSH Nordbank, AG and loan
agreements with Wachovia Bank National Association and Transamerica Life
Insurance Company.




(2)
Interest expense related to the credit agreement with HSH Nordbank, AG and loan
agreement with Wachovia Bank National Association are calculated based on the
loan balances outstanding at June 30, 2010, one month LIBOR at June 30, 2010
plus appropriate margin ranging from 1.15% and 1.40%.  Interest
expense related to loan agreement with Transamerica Life Insurance Company is
based on a fixed rate of 5.89% per annum.





(3) We
have committed to funding $8.75 million to entities that are parties to an
alliance with the managing member of the Advisor.  As of June 30,
2010, we had funded approximately $8.125 million of this
commitment.





(4) On
December 14, 2009, we committed to fund an $8.0 million first mortgage to a
related party, an affiliate of our Advisor.  As of June 30, 2010, we
had funded approximately $7.9 million of this commitment.








Item
      3.
              Quantitative
      and Qualitative Disclosures about Market
Risk





Market
risk includes risks that arise from changes in interest rates, foreign currency
exchange rates, commodity prices, equity prices and other market changes that
affect market sensitive instruments.  We invest our cash and cash
equivalents in government backed securities and FDIC insured savings account
which, by its nature, are subject to interest rate
fluctuations.  However, we believe that the primary market risk to
which we will be exposed is interest rate risk relating to our credit
facilities.




24





Our loan
agreement entered with Wachovia Bank, National Association permits us to borrow
$22.4 million at an interest rate 140 basis points over 30-day LIBOR, secured by
specified real estate properties.  The loan agreement will mature on
November 13, 2010. As of June 30, 2010, we had a balance of
approximately $15.9 million outstanding under this loan agreement. The loan
may be prepaid without penalty.





As of
June 30, 2010, we had borrowed approximately $31.8 million under our variable
rate credit facility and loan agreement.  An increase in the variable
interest rate on the facilities constitutes a market risk as a change in rates
would increase or decrease interest incurred and therefore cash flows available
for distribution to shareholders.  Based on the debt outstanding as of
June 30, 2010, a 1% change in interest rates would result in a change in
interest expense of approximately $318,000 per year.





In
addition to changes in interest rates, the value of our real estate is subject
to fluctuations based on changes in the real estate capital markets, market
rental rates for office space, local, regional and national economic conditions
and changes in the credit worthiness of tenants.  All of these factors
may also affect our ability to refinance our debt if necessary.





Item
      4.
              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 evaluated 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.





There
have been no changes in our internal control over financial reporting during our
most recent fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.





PART
II - OTHER INFORMATION





Item
      1A.
                Risk
Factors





The
following risk supplements the risks disclosed in our annual report on Form 10-K
for the fiscal year ended December 31, 2009.




We
have, and may in the future, pay distributions from sources other than cash
provided from operations.




Until
proceeds from our offering are invested and generating operating cash flow
sufficient to make distributions to stockholders, we intend to pay a substantial
portion of our distributions from the proceeds of our offerings or from
borrowings in anticipation of future cash flow. To the extent that we use
offering proceeds to fund distributions to stockholders, the amount of cash
available for investment in properties will be reduced. The distributions paid
for the four quarters ended June 30, 2010 were approximately $10.9
million.  Of this amount approximately $6.1 million was reinvested
through our dividend reinvestment plan and approximately $4.8 million was paid
in cash to stockholders. For the four quarters ended June 30, 2010 cash flow
from operations and FFO were approximately $2.6 million and a loss of $4.3
million, respectively.  Accordingly, during the four quarters ended
June 30, 2010, total distributions paid in cash exceeded cash flow from
operations and FFO for the same period. We used offering proceeds to pay cash
distributions in excess of cash flow from operations during the fourth quarters
ended June 30, 2010.





We
may not be able to refinance, extend or repay our substantial indebtedness,
which could have a materially adverse affect on our business, financial
condition and results of operations


As ofJune 30, 2010, we had an aggregate consolidated
indebtedness outstanding
of $38.8 million(Note12)which aresecured by our
properties.




25




There can
be no assurance that we will be able to refinance or extend our debt on
acceptable terms or otherwise. Our ability to refinance our debt is negatively
affected by the current condition of the credit markets, which have
significantly reduced levels of commercial lending.  We may not be able to
refinance, extend or repay our substantial indebtedness, which could have a
materially adverse affect on our business, financial condition and results of
operations. In the event that we are unable to refinance our debt on a timely
basis and on acceptable terms, we will be required to take further steps to
acquire the funds necessary to satisfy our short term cash needs, including
additional assets sales or considering less attractive sources of capital for
refinancing.






Item
      2.
                Unregistered Sales of Equity Securities and Use of
      Proceeds





(a ) We
did not sell any equity securities that were not registered under the Securities
Act of 1933 during the period covered by this Form 10-Q.





(b) Not
applicable





(c)
During the three months ended June 30, 2010, we redeemed shares pursuant to our
stock repurchase program as follows:





Period
                  
                  Total
      Number of Shares
                    Redeemed
      (1)
                  
                  
                  Average
      Price Paid per
                    Share
                  
                  
                  Approximate
      Dollar Value of
                    Shares
      Available That May Yet
                    Be
      Redeemed Under the ProgramApril
      2010
                  
                  
                  161,356
                  
                  
                  $
                  7.82
                  
                  
                  $
                  927,972May
      2010
                  
                  
                  123,561
                  
                  
                  $
                  7.64
                  
                  
                  $
                  0June
      2010 (2)
                  
                  
                  39,822
                  
                  
                  $
                  7.98
                  
                  
                  $
                  0324,739







(1)
            As
      long as our common stock is not listed on a national securities exchange
      or traded on an over –the-counter market, our stockholders who have held
      their stock for at least one year may be able to have all or any portion
      of their shares redeemed in accordance with the procedures outlined in the
      prospectus relating to the shares they purchased.(2)
            As
      of June 30, 2010, we have met the threshold of available distribution
      reinvestment plan proceeds, accordingly, we do not expect to make further
      ordinary redemptions for the remainder of
2010.





Until
September 21, 2012 our stock repurchase program limits the number of shares of
stock we can redeem (other than redemptions due to death of a stockholder) to
those that we can purchase with net proceeds from the sale of stock under our
distribution reinvestment plan in the prior calendar year. Until September 21,
2012 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 in the prior calendar year or (ii) 5% of the number of shares outstanding
at the end of the prior calendar year.





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Item
      6.
              Exhibits




Ex.
            
            Description3.1
            
            Articles
      of Amendment and Restatement of Articles of Incorporation (incorporated by
      reference to Exhibit 3.2 to the Registrant’s Annual Report on Form 10-K
      for the year ended December 31, 2005)3.2
            
            Amended
      and Restated Bylaws (incorporated by reference to Exhibit 3.3 to
      Post-Effective Amendment No. 1 to the Registration Statement on Form S-11
      (No. 333-121238) filed on December 23, 2005)4.1
            
            Form
      of Subscription Agreement (incorporated by reference to Appendix A to the
      prospectus dated April 16, 2010)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 to the Registration Statement on Form S-11 (No.
      333-121238) filed on December 14, 2004)4.3
            
            Distribution
      Reinvestment Plan (incorporated by reference to Appendix B to the
      prospectus dated April 16, 2010)10.1
            
            Amendment
      No. 4 to Credit Agreement with HSH Nordbank AG, New York Branch dated as
      of June 30, 201031.1
            
            Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.31.2
            
            Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002.32
            
            Certification
      of Chief Executive Officer and Chief Financial Officer Pursuant to 18
      U.S.C. §1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
      of 2002.








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SIGNATURES







Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this quarterly report to be signed on its
behalf by the undersigned, thereunto duly authorized this 16th day of August,
2010.





CORNERSTONE
      CORE PROPERTIES REIT, INC.By:
            /s/
      Terry G. RousselTerry
      G. Roussel,Chief
      Executive OfficerBy:
            /s/
      Sharon C. KaiserSharon
      C. Kaiser,Chief
      Financial Officer(Principal
      Financial Officer andPrincipal
      Accounting Officer)







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