**U.S. SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON, D.C.  20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

**ý****    QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30,2005**

 

**o****    TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(D)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**FOR THE TRANSITION PERIOD FROM                        TO                        **

 

**Commission File Number   333-121238**

 

**CORNERSTONE CORE PROPERTIES REIT,INC.**

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITSCHARTER)

 
| **Maryland**                                                    |   | **73-1721791**                     |
|-----------------------------------------------------------------|--------|------------------------------------|
| (State or other jurisdiction  of incorporation or organization) |   | (IRS Employer  Identification No.) |

 

**4590 MACARTHUR BLVD., SUITE 610,NEWPORT BEACH, CALIFORNIA 92660**

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

 

**949-852-1007**

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREACODE)

 

**Not Applicable**

(FORMER NAME, FORMER ADDRESS AND FORMER FISCALYEAR, IF CHANGED SINCE LAST REPORT)

 

Check whether the issuer (1) filed all reports required to befiled by Section 13 or 15(d) of the Exchange Act of 1934 during thepast 12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.

 

YES ý          NO o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Act).  o  Yes ý  No

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Act).  o  Yes ý  No

 

As of November 11, 2005, the Company had 125shares issued and outstanding.

 

 

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| **PART I - FINANCIAL INFORMATION**                                                                                                                         |       |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                                                                                                                            |       |
| **Item 1.****                    ****Financial Statements** | ** ** |
|                                                                                                                                                            |       |
|                                                                                                                                                            |       |
| **Cornerstone Core Properties REIT, Inc.**                                                                                                                 |       |
|                                                                                                                                                            |       |
| Condensed  Consolidated Balance Sheets at September 30, 2005 (unaudited) and December 31,  2004                                                       |       |
|                                                                                                                                                            |       |
| Condensed  Consolidated Statements of Operations for the Three Months and Nine Months  ended September 30, 2005 (unaudited)                                |       |
|                                                                                                                                                            |       |
| Condensed  Consolidated Statement of Stockholder’s Equity for the Nine Months ended September 30,  2005 (unaudited)                                   |       |
|                                                                                                                                                            |       |
| Condensed Consolidated  Statement of Cash Flows for the Nine Months ended September 30, 2005  (unaudited)                                                  |       |
|                                                                                                                                                            |       |
| Notes to Condensed Consolidated Financial  Statements (unaudited)                                                                                               |       |

 

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**CORNERSTONE CORE PROPERTIES REIT, INC. AND SUBSIDIARY**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                 | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                 | ** ** | **2005**               | ** ** | **2004 (A)**          | ** ** |
| ** **                                                                                 | ** ** | **(Unaudited)**        | ** ** | ** **            | ** ** |
| ASSETS                                                                                     |       |                   |       |                  |       |
|                                                                                       |       |                   |       |                  |       |
| Cash                                                                                       |       | $                      | 201,327    |                  | $          | 1,000 |   |
| Other assets                                                                               |       | 125,224                |       |                  |       |
|                                                                                       |       |                   |       |                  |       |
| Total Assets                                                                               |       | $                      | 326,551    |                  | $          | 1,000 |   |
|                                                                                       |       |                   |       |                  |       |
| LIABILITIES AND STOCKHOLDER’S EQUITY                                                  |       |                   |       |                  |       |
|                                                                                       |       |                   |       |                  |       |
| Accounts payable                                                                           |       | $                      | 37,081     |                  | $          | — |   |
| Other current liabilities                                                                  |       | 93,587                 |       | —                |       |
| Total  Liabilities                                                                         |       | 130,668                |       | —                |       |
|                                                                                       |       |                   |       |                  |       |
| Minority interest                                                                          |       | 200,000                |       | —                |       |
|                                                                                       |       |                   |       |                  |       |
| Common stock, $.001 par value; 1,000 shares  authorized, 125 shares issued and outstanding |       | —                 |       | —                |       |
| Additional paid-in capital                                                                 |       | 1,000                  |       | 1,000                 |       |
| Retained deficit                                                                           |       | (5,117                 | )          | —                |       |
| Total Stockholder’s Equity                                                            |       | 195,883                |       | 1,000                 |       |
|                                                                                       |       |                   |       |                  |       |
| Total  Liabilities and Stockholder’s Equity                                           |       | $                      | 326,551    |                  | $          | 1,000 |   |

 

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(A)           Derived from the audited financial statementsas of December 31, 2004.

 

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

 

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**CORNERSTONE CORE PROPERTIES REIT, INC. AND SUBSIDIARY**

 

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| ** **                                             | ** ** | **Three months ended** | ** ** | **Nine months ended**  | ** ** |
|--------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                             | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                             | ** ** | **2005**               | ** ** | **2005**               | ** ** |
| ** **                                             | ** ** | ** **             | ** ** | ** **             | ** ** |
| Revenues                                               |       | $                      | —     |                   | $          | — |   |
|                                                   |       |                   |       |                   |       |
| Expenses                                               |       |                   |       |                   |       |
| General and  administrative                            |       | 5,455                  |       | 5,455                  |       |
| Operating loss                                         |       | (5,455                 | )          | (5,455                 | )          |
|                                                   |       |                   |       |                   |       |
| Interest  income                                       |       | 338                    |       | 338                    |       |
|                                                   |       |                   |       |                   |       |
| Net Loss                                               |       | $                      | (5,117     | )                      | $          | (5,117 | ) |
|                                                   |       |                   |       |                   |       |
| Per share amounts:                                     |       |                   |       |                   |       |
| Basic and diluted loss allocable to  stockholder       |       | $                      | (40.94     | )                      | $          | (40.94 | ) |
|                                                   |       |                   |       |                   |       |
| Basic and diluted weighted average shares  outstanding |       | 125                    |       | 125                    |       |

 

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

 

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**CORNERSTONE CORE PROPERTIES REIT, INC. AND SUBSIDIARY**

 

**CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDER’SEQUITY**

**(Unaudited)**

 
| ** **                              | ** ** | **Nine months ended**  | ** ** |
|-----------------------------------------|------------|------------------------|------------|
| ** **                              | ** ** | **September 30,** | ** ** |
| ** **                              | ** ** | **2005**               | ** ** |
| Balance, December 31, 2004         |       | $                      | 1,000      |   |
|                                    |       |                   |       |
| Issuance of Operating Partnership units |       | 200,000                |       |
| Net loss                                |       | (5,117                 | )          |
|                                    |       |                   |       |
| Balance, September 30, 2005        |       | $                      | 195,883    |   |

 

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

 

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**CORNERSTONE CORE PROPERTIES REIT, INC. AND SUBSIDIARY**

 

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005**

**(Unaudited)**

 
| OPERATING  ACTIVITIES                                                            |   |     |    |
|----------------------------------------------------------------------------------|--------|----------|---------|
| Net loss                                                                         |   | $        | (5,117  | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |   |     |    |
| Other assets                                                                     |   | (125,224 | )       |
| Accounts  payable and accrued liabilities                                        |   | 130,668  |    |
|                                                                             |   |     |    |
| Net cash provided by operating activities                                        |   | 327      |    |
|                                                                             |   |     |    |
| FINANCING ACTIVITIES                                                             |   |     |    |
| Issuance of Operating Partnership units                                          |   | 200,000  |    |
|                                                                             |   |     |    |
| Net cash provided by financing activities                                        |   | 200,000  |    |
|                                                                             |   |     |    |
| Net increase in cash                                                             |   | 200,327  |    |
|                                                                             |   |     |    |
| Cash and cash equivalents at beginning of  period                                |   | 1,000    |    |
|                                                                             |   |     |    |
| Cash and cash equivalents at end of period                                       |   | $        | 201,327 |   |

 

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

 

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**CORNERSTONE CORE PROPERTIES REIT, INC. AND SUBSIDIARY**

 

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2005**

 

**1.****                  ****Organization**

 

Cornerstone Core Properties REIT, Inc., a Maryland corporation (the “Company”), 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.  The Company is newly formed and is subject to the general risks associated with a start-up enterprise, including the risk of business failure.  Subject to certain restrictions and limitations, the business of the Company will be managed by Cornerstone Realty Advisors, LLC, a Delaware limited liability company that was formed on November 30, 2004 (the “Advisor”) pursuant to an Advisory Agreement.  The Advisor is an affiliate of the Company.

 

On November 9, 2004, the sole stockholder, Terry G. Roussel, an affiliate of the Advisor, purchased 125 shares of common stock for $1,000 and became the initial stockholder of the Company.  The Company’s articles of incorporation authorize 289,000,000 additional shares of common stock with a par value of $.001 and 10,000,000 shares of preferred stock with a par value of $.001.  The Company will offer a minimum of 125,000 (the “Minimum Number of Shares”) and a maximum of 55,400,000 shares of common stock, consisting of 44,400,000 shares for sale to the public (the Primary Offering”) and 11,000,000 shares for sale pursuant to the Company’s dividend reinvestment plan (collectively, the “Offering”).  As of November 4, 2005, the Company had engaged only in organizational and offering activities, and no shares had been sold in the offering. The Company has retained Pacific Cornerstone Capital, Inc. (“PCC”), an affiliate of the Advisor, to serve as the dealer manager for the Offering.  PCC is responsible for marketing the Company’s shares being offered pursuant to the Offering.  The Company intends to invest the net proceeds from the Offering primarily in investment real estate including multi-tenant industrial real estate located in major metropolitan markets in the United States.  As of September 30, 2005, the Company has neither purchased nor contracted to purchase any properties, nor has the Advisor identified any properties in which there is a reasonable probability that the Company will invest.

 

Cornerstone OperatingPartnership, L.P., a Delaware limited partnership (the “Operating Partnership”)was formed on November 30, 2004.  OnJuly 15, 2005, the Advisor purchased a 99% limited partnership interest inthe Operating Partnership for $200,000 and the Company purchased a 1% generalpartner interest for $1,000.  The Companyanticipates that it will conduct all or a portion of its operations through theOperating Partnership. The Company’s financial statements and the financialstatements of the Operating Partnership are consolidated in the accompanyingcondensed consolidated financial statements.  All significant intercompany accounts andtransactions have been eliminated in consolidation.

 

The Company’s Articles require, within fiveyears from the closing of the Offering, the Company’s board of directors totake one or more of the following actions to provide enhanced liquidity for theCompany’s stockholders:

 

•                  modify the Company’s stock repurchase programto allow us to use proceeds from the sale of the Company’s properties to redeemshares;

 

•                  seek stockholder approval to begin an orderlyliquidation of the Company’s assets and distribute the available proceeds ofsuch sales to the Company’s stockholders;

 

•                  list the Company’s stock for trading on anational securities exchange, the Nasdaq National Market or otherover-the-counter market; or

 

•                  seek stockholder approval of anotherliquidity event such as a sale of the Company’s assets or a merger with anotherentity.

 

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**2.****                  ****Summary of Significant Accounting Policies**

 

***Interim Financial Information***

 

The interim condensed consolidated financialstatements have been prepared in accordance with the Company’s customaryaccounting practices.  In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a presentation in accordance with accountingprinciples generally accepted in the United States of America have beenincluded.  Operating results for thethree and nine months ended September 30, 2005 are not necessarilyindicative of the results that may be expected for the year ending December 31,2005.

 

***Cash and Cash Equivalents***

 

The Company considers all short-term, highly liquid investments that are readily convertible to cash with a maturity of three months or less at the time of purchase to be cash equivalents.

 

***Real Estate Purchase Price Allocation.***

 

The Company will account forall acquisitions in accordance with Financial Accounting Standards Board’s (“FASB”)Statement of Financial Accounting Standard No. 141, “Business Combinations”(“FAS 141”).  Upon acquisition of aproperty, the Company will allocate the purchase price of the property basedupon the fair value of the assets acquired, which generally consist of land,buildings, tenant improvements, leasing commissions and intangible assetsincluding in-place leases and above market and below market leases.  The Company will allocate the purchase priceto the fair value of the tangible assets of an acquired property by valuing theproperty as if it were vacant.  Acquiredabove and below market leases will be valued based on the present value of thedifference between prevailing market rates and the in-place rates over theremaining lease term.

 

The purchase price will befurther allocated to in-place lease values based on management’s evaluation ofthe specific characteristics of each tenant’s lease and the Company’s overallrelationship with the respective tenant.  The value of acquired above and below marketleases will be amortized over the remaining non-cancelable terms of therespective leases as an adjustment to rental revenue on the Company’sconsolidated statements of operations.  Thevalue of in-place lease intangibles, which will be included as a component ofOther Assets, will be amortized to expense over the remaining lease term andexpected renewal periods of the respective lease.  If a lease is terminated prior to itsexpiration, the unamortized portion of the tenant improvements, leasingcommissions, above and below market leases and the in-place lease value will beimmediately charged to expense.

 

#### ***Evaluation of Possible Impairment of Real PropertyAssets***

 

Management will continually monitor eventsand changes in circumstances that could indicate that the carrying amounts ofthe Company’s real estate assets, including those held through joint ventures,may not be recoverable.  When indicatorsof potential impairment are present that indicate that the carrying amounts ofreal estate assets may not be recoverable, the Company will assess therecoverability of the real estate assets by determining whether the carryingvalue of the real estate assets will be recovered through the undiscountedfuture operating cash flows expected from the use of the asset and its eventualdisposition.  In the event that suchexpected undiscounted future cash flows do not exceed the carrying value, theCompany will adjust the real estate assets to the fair value and recognize animpairment loss. Projections of expected future cash flows require us toestimate future market rental income amounts subsequent to the expiration ofcurrent lease agreements, property operating expenses, discount rates, thenumber of months it takes to re-lease the property and the number of years theproperty is held for investment.  The useof certain assumptions in the future cash flows analysis would result in an incorrectassessment of the property’s future cash flows and fair value and could resultin the overstatement of the carrying value of the Company’s real estate assetsand net income if those assumptions ultimately prove to be incorrect.

 

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### ***ConsolidationConsiderations for the Company’s Investments in Joint Ventures***

 

The FASB issued Interpretation No. 46 (“FIN 46R”) (revised December 2003), “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51” (“ARB 51”), which addresses how a business enterprise should evaluate whether it has a controlling interest in an entity through means other than voting rights and accordingly should consolidate the entity.  Before concluding that it is appropriate to apply the ARB 51 voting interest consolidation model to an entity, an enterprise must first determine that the entity is not a variable interest entity (VIE).  The Company will evaluate, as appropriate, its interests, if any, in joint ventures and other arrangements to determine if consolidation is appropriate.

 

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

 

The Company’s revenues, which will becomprised largely of rental income, will include rents reported on astraight-line basis over the initial term of the lease.  Since the Company’s leases may provide forrental increases at specified intervals, the Company will be required tostraight-line the recognition of revenue, which will result in the recording ofa receivable for rent not yet due under the lease terms.  Accordingly, the Company’s management will berequired to determine, in its judgment, to what extent the unbilled rentreceivable applicable to each specific tenant is collectible.  Management of the Company will reviewunbilled rent receivable on a quarterly basis and take into consideration thetenant’s payment history, the financial condition of the tenant, businessconditions in the industry in which the tenant operates and economic conditionsin the area in which the property is located. In the event that the collectability of unbilled rent with respect toany given tenant is in doubt, the Company will record an increase in theCompany’s allowance for doubtful accounts or record a direct write-off of thespecific rent receivable.

 

#### ***Depreciation of Real Property Assets***

####  

The Company will be required to makesubjective assessments as to the useful lives of the Company’s depreciableassets.  The Company will consider theperiod of future benefit of the asset to determine the appropriate usefullives.  These assessments have a directimpact on net income.  The Companyanticipates the estimated useful lives of its assets by class to be as follows:

 
| Building              |   | 39 years    |
|-----------------------|--------|-------------|
| Building improvements |   | 10-25 years |
| Tenant improvements   |   | Lease term  |

 

Depreciation of the Company’s assets isexpected to be charged to expense on a straight-line basis over the assigneduseful lives.

 

***Organizational and Offering Costs***

 

Organizational and offering costs of the Company will be paid by the Advisor on behalf of the Company.  Organizational and offering costs are any and all costs and expenses incurred by the Company, the Advisor or any affiliate of either in connection with and in preparing the Company for registration of and subsequently offering and distributing its common stock to the public, which may

 

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include but are not limited to total underwriting and brokerage discounts and commissions (including fees of the underwriters’ attorneys), legal, accounting and escrow fees, expenses for printing, engraving, amending, supplementing and mailing, distribution costs, compensation to employees while engaged in registering, marketing and wholesaling the common stock, telegraph and telephone costs, all advertising and marketing expenses (including the costs related to investor and broker-dealer sales meetings), charges of transfer agents, registrars, trustees, escrow holders, depositories, experts, and fees, expenses and taxes related to the filing, registration and qualification of the sale of the securities under Federal and state laws, including accountants’ and attorneys’ fees and other accountable offering expenses.  In no event will the Company have any obligation to reimburse the Advisor or PCC for organizational and offering costs (not including sales commissions, the dealer manager fee or non-accountable due diligence expense allowance) totaling in excess of 3.5% of the gross proceeds from the Primary Offering.  In the event that the Minimum Number of Shares of the Company’s common stock is not sold to the public, the Company will terminate the Offering and will have no obligation to reimburse the Advisor or PCC for any organizational and offering costs.  As of  September 30, 2005 and December 31, 2004, the Advisor had incurred on behalf of the Company organizational and offering costs of approximately $2.1 million (unaudited) and $1.0 million (unaudited), respectively.  These costs are not recorded in the accompanying balance sheets of the Company as of September 30, 2005 and December 31, 2004 because such costs are not a liability of the Company until the Minimum Number of Shares are sold.  When recorded by the Company, organizational costs will be expensed as incurred and offering costs will be deferred and charged to stockholders’ equity as such amounts are reimbursed to the Advisor or PCC from the gross proceeds of the Offering.

 

PCC, as Dealer Manager, is entitled to receive a sales commission of up to 7% of gross proceeds from sales in the Primary Offering.  PCC, as Dealer Manager, is also entitled to receive a dealer manager fee equal to up to 3% of gross proceeds from sales in the Primary Offering.  The Dealer Manager is also entitled to receive a non-accountable due diligence expense reimbursement allowance of up to 0.5% of the gross proceeds from sales in the Primary Offering.  In addition, the Advisory Agreement requires the Advisor to pay any organization and offering expenses (including sales commissions, dealer manager fee and non-accountable due diligence expense allowance but not the acquisition fees and acquisition expenses discussed below) to the extent that they are in excess of 13.5% of gross proceeds from the Offering.

 

***Acquisition Fees and Expenses***

 

The Advisory Agreement requires the Company to pay the Advisor acquisition fees in an amount equal to 2% of the gross proceeds of the Primary Offering.  The Company will pay the acquisition fees upon receipt of the gross proceeds from the Offering.  However, if the Advisory Agreement is terminated or not renewed, the Advisor must return acquisition fees not yet allocated to one of the Company’s investments.  In addition, the Company is 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.  The Company’s charter provides that a majority of the Company’s independent directors would have to approve any increase in the acquisition fees payable to the Advisor above 2% of gross proceeds from the Primary Offering.  The Company’s charter also limits the Company’s ability to purchase a property if the total of all acquisition fees and expenses relating to the purchase exceeds 6% of the contract purchase price.

 

***Management Fees***

 

The Advisory Agreement requires the Companyto pay the Advisor a monthly asset management fee of one-twelfth of 1.0% of thesum of the aggregate basis book carrying values of the Company’s assetsinvested, directly or indirectly, in equity interests in and loans secured byreal estate before reserves for depreciation or bad debts or other similarnon-cash reserves, calculated in accordance with generally

 

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accepted accounting principals in the United States of America (GAAP).  In addition, the Company will reimburse theAdvisor for the direct costs and expenses incurred by the Advisor in providingasset management services to the Company. These fees and expenses are in addition to management fees that weexpect to pay to third party property managers. The Advisor must reimburse the Company the amount by which the Company’saggregate annual operating expenses exceed the greater of 2% of Company’saverage invested assets or 25% of the Company’s net income unless a majority ofthe Company’s independent directors determine that such excess expenses werejustified based on unusual and non-recurring factors.  “Average invested assets” means, for aspecified period, the average of the aggregate book value of the Company’sassets invested, directly or indirectly, in equity interests in and loanssecured by real estate before reserves for depreciation or bad debts or othersimilar non-cash reserves, computed by taking the average of such values at theend of each month during such period.  “Operatingexpenses” means all costs and expenses incurred by the Company, as determinedunder GAAP, which in any way are related to the Company’s operation of itsbusiness, including advisory fees, but excluding (i) the expenses ofraising capital such as organizational and offering expenses, legal, audit,accounting, underwriting, brokerage, listing, registration, and other fees,printing and other such expenses and taxes incurred in connection with theissuance, distribution, transfer, registration and listing of the Company’sstock, (ii) interest payments, (iii) taxes, (iv) non-cash expendituressuch as depreciation, amortization and bad debt reserves, (v) acquisitionfees and acquisition expenses, (vi) real estate commissions on the sale ofproperty, and other expenses connected with the acquisition and ownership ofreal estate interests, mortgage loans, or other property (such as the costs offoreclosure, insurance premiums, legal services, maintenance, repair, andimprovement of property) and (vii) any subordinated participation in netsale proceeds, subordinated performance fee due upon termination orsubordinated incentive fee due upon listing which may be paid by the Company.

 

***Minority Interest in ConsolidatedSubsidiary***

 

Due to the Company’s control through itsgeneral partnership interest in the Operating Partnership and the limited rightsof the limited partners, the Operating Partnership is consolidated with theCompany and the limited partner interest is reflected as minority interest inthe accompanying balance sheets.

 

***Income Taxes***

 

For the year ending December 31, 2005, the Company expects to make an election to be taxed as a REIT, under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”) and expects to be taxed as such beginning with its taxable year ending December 31, 2005.  To qualify as a REIT, the Company must meet certain organizational and operational requirements, including a requirement to currently distribute at least 90% of the REIT’s ordinary taxable income to stockholders.  As a REIT, the Company generally will not be subject to federal income tax on taxable income that it distributes to its stockholders.  If the Company fails to qualify as a REIT in any taxable year, it will then be subject to federal income taxes on its taxable income at regular corporate rates and will not be permitted to qualify for treatment as a REIT for federal income tax purposes for four years following the year during which qualification is lost unless the Internal Revenue Service granted the Company relief under certain statutory provisions.  Such an event could materially adversely affect the Company’s net income and net cash available for distribution to stockholders.  However, the Company believes that it will be organized and operate in such a manner as to qualify for treatment as a REIT and intends to operate in the foreseeable future in such a manner so that the Company will remain qualified as a REIT for federal income tax purposes.

 

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***Use of Estimates***

 

The preparation of the balance sheets in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the balance sheets and accompanying notes.  Actual results could materially differ from those estimates.

 

**3.****                  ****Related Party Transactions**

 

***Advisory and Dealer Manager Agreements***

 

The Company has an Advisory Agreement with the Advisor and a Dealer Manager Agreement with PCC which entitle the Advisor and PCC to specified fees upon the provision of certain services with regard to the Offering and investment of funds in real estate projects, among other services, as well as reimbursement for organizational and offering costs incurred by the Advisor and PCC on behalf of the Company (as discussed in Note 2) and certain costs incurred by the Advisor in providing services to the Company.

 

The Company expects to also incur various fees and reimburse expenses, such as property management, leasing and others, that will be paid to the Advisor or its affiliates.  A discussion of these proposed fees and expense reimbursements follows.

 

***Disposition Fee***

 

The Advisory Agreementprovides that if the Advisor or its affiliate provides a substantial amount ofthe services (as determined by a majority of the directors of the Company,including a majority of the independent directors of the Company) in connectionwith the sale of one or more properties, the Company will pay the Advisor orsuch affiliate shall receive at closing a disposition fee up to 3% of the salesprice of such property or properties. This disposition fee may be paid in addition to real estate commissionspaid to non-affiliates, provided that the total real estate commissions(including such disposition fee) paid to all persons by the company for eachproperty shall not exceed an amount equal to the lesser of (i) 6% of theaggregate contract sales price of each property or (ii) the competitivereal estate commission for each property. The Company will pay the disposition fees for a property at the time theproperty is sold.

 

***Subordinated Participation in NetSale Proceeds***

 

The Advisory Agreementrequires the Company to pay the Advisor a subordinated share of net sale proceeds equal to the percentageset forth below of the balance of net sale proceeds, if any, remaining afterstockholders of the Company have received cumulative dividends anddistributions equal to 100% of their invested capital, plus an amount equal toa cumulative, non-compounded per annum return on the invested capital,calculated on an aggregate weighted average daily basis.  The subordinated share of net sale proceeds willbe (i) 5% of remaining net sale proceeds if stockholders have receivedcumulative dividends and distributions equal to 100% of the Invested Capitalplus a 6% cumulative, non-compounded per annum return on their invested capital,(ii) 10% of remaining net sale proceeds if stockholders have receivedcumulative dividends and distributions equal to 100% of their invested capitalplus an 8% cumulative, non-compounded per annum return on their invested capital,or (iii) 15% of remaining net sale proceeds if stockholders have receivedcumulative dividends and distributions equal to 100% of their invested capitalplus a 10% cumulative, non-compounded per annum return on their invested capital.  Invested capital for investors in the

 

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Offering is expected to be $8.00 per shareless any return of capital.  Investedcapital in any subsequent public offering is expected to be the maximum offeringprice per share less any return of capital. Invested capital for other investors such as persons who exchanged theirOperating Partnership units for shares of the Company’s stock is expected to bethe issue price per share less any return of capital.  The subordinated participation in net saleproceeds payable at the time the Company determines that the subordinatedparticipation in net sale proceeds has been earned by the Advisor.

 

***SubordinatedPerformance Fee Due Upon Termination***

 

The Advisory Agreementrequires the Company to pay the Advisor a subordinated performance fee due upon termination equal to (i) 5%of the excess value if stockholders have received cumulative dividends and distributionsequal to 100% of their invested capital plus a 6% cumulative, non-compoundedper annum return on the invested capital, calculated on an aggregate weightedaverage daily basis, (ii) 10% of the excess value if stockholders havereceived cumulative dividends and distributions equal to 100% of their investedcapital plus an 8% cumulative, non-compounded per annum return on the invested capital,calculated on an aggregate weighted average daily basis, or (iii) 15% ofthe excess value if stockholders have received cumulative dividends anddistributions equal to 100% of their invested capital plus a 10% cumulative,non-compounded per annum return on their invested capital calculated on anaggregate weighted average daily basis. Excess value is expected to be the amount by which the net appraisedvalue of the Company’s real estate investments exceeds the 100% of invested capitalplus the specified return less all prior dividends (other than the special 10%stock dividend) and other distributions. The subordinated participation in netsale proceeds is payable upon termination of the Advisory Agreement.

 

***SubordinatedIncentive Fee Due Upon Listing***

 

The Advisory Agreementrequires the Company to pay the Advisor a subordinated incentive fee due upon listing under certaincircumstances if the Company’s common stock is listed on a national securitiesexchange, or traded on the Nasdaq/NMS or other over-the-counter market. Thisfee ranges from a low of 5% of the amount by which the market value of ourstock, plus all prior dividends (other than stock dividends) exceeds the amountof invested capital plus cumulative, non-compounded annual returns on investedcapital of 6%, to a high of 15% the amount by which the market value of ourstock, plus all prior dividends (other than stock dividends) exceeds the amountof invested capital plus cumulative, non-compounded annual returns on investedcapital of 10% or more on invested capital. Invested capital for investors inthe Offering is expected to be $8.00 per share less any return of capital.  Invested capital in any subsequent publicoffering is expected to be the maximum offering price per share less any returnof capital.  Invested capital for otherinvestors such as persons who exchanged their Operating Partnership units forshares of the Company’s stock is expected to be the issue price per share lessany return of capital.

 

The excess market value isexpected to be the amount by which the market value of the Company’soutstanding common stock plus all dividends (other than the special 10% stockdividend) and other distributions paid to stockholders from the Company’sinception exceeds the 100% of Invested Capital plus the specified return.  The market value of the Company’s outstandingstock for purposes of calculating the incentive fee due upon listing isexpected to be measured by taking the average closing price or average of bidand asked price, as the case may be, during the consecutive 30-day periodcommencing twelve (12) months following listing and ending eighteen (18) monthsfollowing listing during which the average closing price or average of bid andasked price of the Stock is the highest. The incentive fee due upon listing is payable by the Company during thethirty (30) day period following eighteen (18) months after listing.

 

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The Company has the option to pay thesubordinated incentive listing fee in the form of stock, cash, a promissorynote or any combination thereof.  Theform of payment will be determined by the board of directors of theCompany.  In the event the Company paysthe subordinated incentive listing fee to the Advisor as a result of thelisting of the Company’s stock, the Company will not be required to pay theAdvisor any further subordinated participation in net sale proceeds orsubordinated fee upon termination of Advisory Agreement.

 

***Employee and Director IncentiveStock Plan***

 

TheCompany has adopted an Employee and Director Incentive Stock Plan (“the Plan”) whichprovides for the grant of awards to the Company’s directors and full-timeemployees, directors and full-time employees of the Advisor, entities and full-timeemployees of entities that provide services to the Company, and certainconsultants to the Company and to the Advisor or to entities that provideservices to the Company.  Awards grantedunder the Plan may consist of nonqualified stock options, incentive stockoptions, restricted stock, share appreciation rights, and dividend equivalentrights.  The term of the Plan is 10years.  The total number of shares ofcommon stock reserved for issuance under the Plan is equal to 10% of theCompany’s outstanding shares of stock at any time.  No awards have been granted under theEmployee and Director Incentive Stock Plan.

 

**4.****                  ****Commitments and Contingencies**

 

***DividendReinvestment Plan***

 

The Company plans to adopt a dividendreinvestment plan that will allow its stockholders to have dividends and otherdistributions otherwise distributable to them invested in additional shares ofthe Company’s common stock.  The Company hasregistered 11,000,000 shares of its common stock for sale pursuant to thedividend reinvestment plan.  The purchaseprice per share is to be 95% of the price paid by the purchaser for the Company’scommon stock, but not less than $7.05 per share.  The Company may amend or terminate thedividend reinvestment plan for any reason at any time upon 10 days priorwritten notice to participants.

 

***Proposed StockRepurchase Program***

 

The Company expects to adopt a stockrepurchase program that would enable the Company’s stockholders to sell theirstock to the Company in limited circumstances. The Company could choose not to adopt the proposed stock repurchaseprogram or to amend its provisions without stockholder approval.  As long as the Company’s common stock is notlisted on a national securities exchange, the Nasdaq National Market or otherover-the-counter market, the Company’s stockholders who have held their stockfor at least one year may be able to have all or any portion of their shares ofstock redeemed by the Company.  TheCompany may redeem the shares of stock presented for redemption for cash to theextent that the Company has sufficient funds available to fund such redemption. The amount that the Company may pay toredeem stock is expected to be the redemption price set forth in the followingtable which is based upon the number of years the stock is held:

 

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

 

The estimated liquidation value for the repurchase of shares of stockheld for five or more years is expected to be determined by the Advisor oranother person selected for such purpose and will be approved by the Company’sboard of directors.  The stock repurchaseprice is subject to adjustment as determined from time to time by the Company’sboard of directors.  During this offeringand each of the first five years following the closing of this offering, theCompany is not expected to redeem more than the lesser of (i) the numberof shares that could be redeemed using the proceeds from our distributionreinvestment plan or (ii) 5% of the number of shares outstanding at theend of the prior calendar year.

 

***Special 10% Stock Dividend ForEarly Investors***

 

The Company plans to declare a one-time 10%stock dividend to be paid to the stockholders of record on the date that theCompany raises $125,000,000 in the Offering.

 

***Exchange Rights***

 

The limited partners of the Company’s OperatingPartnership will have the right to cause the Company’s Operating Partnership toredeem their limited partnership units for cash equal to the value of anequivalent number of the Company’s shares, or, at the Company’s option, theCompany may purchase their limited partnership units by issuing one share ofits common stock for each limited partnership unit redeemed.  These exchange rights may not be exercisedunder certain circumstances which could cause the Company to lose its REITelection.  Furthermore, limited partners mayexercise their exchange rights only after their limited partnership units havebeen outstanding for one year.  Limitedpartners exchange their limited partnership units for the Company’s sharesbased on the conversion ratio that is set forth in the Operating Partnershipagreement.  The initial conversion ratiois one to one but is adjusted based on certain events including the Companydeclaration or payment of a dividend in stock (other than the special 10% stockdividend), the Company’s subdivision of its outstanding stock; or the Company’scombining its outstanding stock into a smaller number of shares.

 

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

 

The following “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” should be read inconjunction with the Company’s financial statements and notes thereto containedelsewhere in this report.  Certainstatements in this section and elsewhere contain forward-lookingstatements within the meaning of the Private Securities Litigation Reform Actof 1995.  Such forward-looking statementsmay relate to risks and other factors that may cause the Company’s futureresults of operations to be materially different than those expressed orimplied herein.  Some of these risks andother factors include, but are not limited to: (i) the Company may be unable to sell the minimum number of sharesto commence operations (125,000); (ii) suitable investment properties maynot be available and (iii) adverse changes to the general economy maydisrupt operations.

 

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# **Overview**

#  

Cornerstone Core Properties REIT, Inc., a Maryland corporation (the “Company”), 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.  The Company is newly formed and is subject to the general risks associated with a start-up enterprise, including the risk of business failure.  The company intends to qualify as a real estate  investment trust for federal tax purposes  commencing with its year ending December 31, 2005.

 

The Company filed a Form S-11 Registration Statement with the Securities and Exchange Commission covering a public offering of its common stock.  The Registration  Statement was declared effective on September 22, 2005.  The shares of common stock are being  offered at a price of $8 per share on a 125,000  share minimum, 44,400,000 share maximum, best efforts basis.  Net proceeds from the offering will be used primarily to acquire real estate properties, pay organizational and offering expenses, and pay various fees and expenses.

 

As of the date of this report, the Company had engaged only in organizational and offering activities and no shares had been sold in the offering.

 

# **CriticalAccounting Policies**

#  

The Company’s condensed consolidated financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States of America.  The preparation of these financial statementsrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities as of the date of the financial statementsand the reported amount of revenue and expenses during the reporting period.  Actual results could differ materially fromthe estimates in the near term.

 

Please refer to our critical accountingpolicies as filed on Form S-11 dated September 20, 2005.

 

# **Results ofOperations**

#  

The Company has not commenced activeoperations as of the date of this report.  Operating results in future periods will be afunction of the results of the operation of the real estate properties that areacquired by the Company.

 

**Liquidityand Capital Resources**

 

On July 15, 2005, the Advisor purchased a 99% limited partnership interest in the Operating Partnership for $200,000 and the Company purchased a 1% general partner interest for $1,000.

 

The Advisor has agreed to pay all of the Company’s organization and offering costs, subject  to its right to be reimbursed for such costs by the Company in an amount up to 3.5% of gross offering proceeds.

 

The Company will not commence active operations until it receives and accepts subscriptions for a minimum of 125,000 shares for gross offering proceeds of $1,000,000.  At that time, subscription proceeds may be released to the Company from escrow and applied to the payment or reimbursement of the dealer manager fee, selling commissions and other organization and offering expenses.  Until required for such purposes, net offering proceeds will be held in short-term, liquid investments.  The Company’s liquidity will increase as additional subscriptions are accepted and decrease as net offering proceeds are expended in connection with the acquisition and operation of properties.

 

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As of the date of this report, the Company had not entered  into any arrangements creating a reasonable probability that we will acquire any specific property.  The number of properties that the Company is able to acquire will depend primarily on the amount of funds raised in this offering.  The Company may also use acquisition financing to fund the purchase price of real estate properties.  Any acquisition financing will be repaid from offering proceeds.

 

The Company is not aware of any material trends or uncertainties, favorable or unfavorable, other than national economic conditions affecting real estate generally, which it anticipates may have a material impact on either capital resources or the revenues or income to be derived from the operation of real estate properties.

 

**Contractual Obligations**

 

As of September 30, 2005, the Companyhad no significant contractual obligations or commercial commitments.

 

**Item 3.****                    ****Quantitative and QualitativeDisclosures About Market Risk**

 

The Company invests its cash and cashequivalents in an FDIC insured savings account which, by its nature, is subjectto interest rate fluctuations.

 

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

 

The Company’s disclosure controls and procedures are designed to ensurethat information required to be disclosed in reports that the Company files orsubmits under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in the rules andforms of the Securities and Exchange Commission and that such information isaccumulated and communicated to the Company’s management, as appropriate, toallow timely decisions regarding required disclosure.  The Chief Executive Officer and the ChiefFinancial Officer of Cornerstone Ventures, Inc., the manager of the ownerof the Advisor, have reviewed the effectiveness of the Company’s disclosurecontrols and procedures and have concluded that the disclosure controls andprocedures were effective as of the end of the period covered by this report.

 

We are in the process of developing and implementing a formal set ofinternal controls and procedures for financial reporting as required by theSarbanes-Oxley Act of 2002, the efficacy of the steps we have taken to date andsteps we are still in the process of completing is subject to continuedmanagement review supported by confirmation and testing by management and byour auditors.  We anticipate that additional changes may be made to ourinternal controls and procedures.  Other than the foregoing initiatives,no change in our internal control over financial reporting occurred during theperiod covered by this report that has materially affected, or is reasonablylikely to affect, our internal control over financial reporting.

 

It should be noted that any system ofcontrols, however well designed and operated, can provide only reasonable, andnot absolute, assurance that the objectives of the system are met.  In addition, the design of any control systemis based in part upon certain assumptions about the likelihood of futureevents.  Because of these and otherinherent limitations of control systems, there can be no assurance that anydesign will succeed in achieving its stated goals under all potential futureconditions.

 

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**PART II - OTHER INFORMATION**

 
| **Item 6.** |   | **Exhibits** |
|-------------|--------|--------------|
|        |   |         |
|        |   | 31.1         | 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. |

 

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13or 15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this quarterly report to be signed on its behalf by the undersigned,thereunto duly authorized this 11th day of November 2005.

 
|   | CORNERSTONE CORE PROPERTIES REIT, INC. |
|--------|----------------------------------------|
|   |                                   |   |
|   | By:                                    | /s/ Terry G. Roussel |   |
|   |                                   | Terry G. Roussel, *Chief Executive Officer* |
|   |                                   |   |
|   |                                   |   |
|   | By:                                    | /s/ Sharon C. Kaiser |   |
|   |                                   |  Sharon C. Kaiser, *Chief  Financial Officer* |
|   |                                   | *(Principal Financial  Officer and* |
|   |                                   | *  Principal Accounting Officer)* |

 

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