**UNITEDSTATES**

**SECURITIESAND 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 September 30, 2007** |
| ** **                                             | ** ** |
| **Or**                                                 |
| ** **                                             | ** ** |
| **o**                                                  | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition period from                          to**

**Commission File Number  000-52566**

**CORNERSTONECORE PROPERTIES REIT, INC.**

(Exact name of registrant as specified in its charter)

| **MARYLAND**                                                    | **73-172191**                         |
|-----------------------------------------------------------------|---------------------------------------|
| (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) |

 

Indicateby check mark whether the issuer (1) filed all reports required to befiled by section 13 or 15(d) of the Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.
| x Yes o No |
|---------------------------|

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act.

Large accelerated filer o Accelerated filer o Non-accelerated filer x

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act).
| o Yes x No |
|---------------------------|

 

As of November 02, 2007, we had 8,975,141 sharesissued and outstanding.

 

----

 

 

**FORM 10-Q**

**CornerstoneCore Properties REIT, Inc.**

**TABLE OF CONTENTS**
| **PART I.**  | **FINANCIAL  INFORMATION**                                                                                                                  |   |
|-------------------|---------------------------------------------------------------------------------------------------------------------------------------------|--------|
|              |                                                                                                                                        |   |
| Item 1.      | Financial Statements:                                                                                                                       |   |
|              | Condensed Consolidated Balance Sheets as of September  30, 2007 and December 31, 2006 (unaudited)                                           |   |
|              |                                                                                                                                        |   |
|              | Condensed  Consolidated Statements of Operations for the Three and Nine months ended  September 30, 2007 and September 30, 2006 (unaudited) |   |
|              |                                                                                                                                        |   |
|              | Condensed Consolidated Statement of Stockholders’  Equity for the Nine months ended September 30, 2007 (unaudited)                     |   |
|              |                                                                                                                                        |   |
|              | Condensed Consolidated Statements of Cash Flows for  the Nine months ended September 30, 2007 and September 30, 2006 (unaudited)            |   |
|              |                                                                                                                                        |   |
|              | Notes to Condensed Consolidated Financial Statements  (unaudited)                                                                           |   |
|              |                                                                                                                                        |   |
| Item 2.      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                 |   |
| Item 3.      | Quantitative  and Qualitative Disclosure About Market Risk                                                                                  |   |
| Item 4.      | Controls and  Procedures                                                                                                                    |   |
|              |                                                                                                                                        |   |
| **PART II.** | **OTHER  INFORMATION**                                                                                                                      |   |
| Item  1A.         | Risk  Factors                                                                                                                               |   |
| Item 2.           | Unregistered Sales of Equity Securities and Use of Proceeds                                                                                 |   |
| Item 6.      | Exhibits                                                                                                                                    |   |
|              |                                                                                                                                        |   |
| SIGNATURES        |                                                                                                                                        |   |
|                   |                                                                                                                                             |        |  |

 

 

2

----

 

 

 

 

**PART I**

**FINANCIAL INFORMATION**

**Item 1.            Financial Information**

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

**CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)**
| ** **                                                                                                                                                                                 | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |       |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|------------|
| **ASSETS**                                                                                                                                                                                 | ** ** | ** **              | ** ** | ** **                  | ** ** |       |
| Cash and cash equivalents                                                                                                                                                                  |       | $                       | 15,883,000 |                        | $          | 11,041,000 |   |   |
| Investments in real estate                                                                                                                                                                 |       |                    |       |                        |       |       |
| Land                                                                                                                                                                                       |       | 23,491,000              |       | 16,310,000                  |       |       |
| Buildings and improvements, net                                                                                                                                                            |       | 37,989,000              |       | 18,416,000                  |       |       |
| Intangible lease assets, net                                                                                                                                                               |       | 1,799,000               |       | 1,331,000                   |       |       |
|                                                                                                                                                                                       |       | 63,279,000              |       | 36,057,000                  |       |       |
| Deferred acquisition costs and deposits                                                                                                                                                    |       | 10,748,000              |       | 1,599,000                   |       |       |
| Deferred financing costs, net                                                                                                                                                              |       | 398,000                 |       | 697,000                     |       |       |
| Tenant and other receivables, net                                                                                                                                                          |       | 489,000                 |       | 206,000                     |       |       |
| Other assets, net                                                                                                                                                                          |       | 311,000                 |       | 412,000                     |       |       |
| Total assets                                                                                                                                                                               |       | $                       | 91,108,000 |                        | $          | 50,012,000 |   |   |
|                                                                                                                                                                                       |       |                    |       |                        |       |       |
| **LIABILITIES, MINORITY INTEREST  AND STOCKHOLDERS’ EQUITY**                                                                                                                          | ** ** | ** **              | ** ** | ** **                  | ** ** |       |
| Liabilities                                                                                                                                                                                |       |                    |       |                        |       |       |
| Notes payable                                                                                                                                                                              |       | $                       | 33,790,000 |                        | $          | 20,180,000 |   |
| Accounts payable and accrued liabilities                                                                                                                                                   |       | 707,000                 |       | 505,000                     |       |       |
| Payable to related parties                                                                                                                                                                 |       | 1,023,000               |       | 1,955,000                   |       |       |
| Prepaid rent and security deposits                                                                                                                                                         |       | 360,000                 |       | 202,000                     |       |       |
| Property taxes payable                                                                                                                                                                     |       | 343,000                 |       | 13,000                      |       |       |
| Intangible lease liability, net                                                                                                                                                            |       | 317,000                 |       | 111,000                     |       |       |
| Distribution payable                                                                                                                                                                       |       | 308,000                 |       | 146,000                     |       |       |
| Total liabilities                                                                                                                                                                          |       | 36,848,000              |       | 23,112,000                  |       |       |
|                                                                                                                                                                                       |       |                    |       |                        |       |       |
| Minority interests                                                                                                                                                                         |       | 316,000                 |       | 181,000                     |       |       |
|                                                                                                                                                                                       |       |                    |       |                        |       |       |
| Commitments and contingencies                                                                                                                                                              |       | —                  |       | —                      |       |       |
|                                                                                                                                                                                       |       |                    |       |                        |       |       |
| Stockholders’ equity                                                                                                                                                                  |       |                    |       |                        |       |       |
| Preferred stock, $0.001 par value; 10,000,000 shares authorized; no  shares were issued or outstanding at September 30, 2007 and December 31,  2006                                   |       | —                  |       | —                      |       |       |
| Common stock, $0.001 par value; 290,000,000 shares authorized; 8,695,016  and 4,328,186 shares issued and outstanding at September 30, 2007  and December 31, 2006, respectively |       | 9,000                   |       | 4,000                       |       |       |
| Additional paid-in capital                                                                                                                                                                 |       | 56,772,000              |       | 28,115,000                  |       |       |
| Accumulated deficit                                                                                                                                                                        |       | (2,837,000              | )          | (1,400,000                  | )          |       |
| Total stockholders’ equity                                                                                                                                                            |       | 53,944,000              |       | 26,719,000                  |       |       |
| Total liabilities, minority interests and stockholders’ equity                                                                                                                        |       | $                       | 91,108,000 |                        | $          | 50,012,000 |   |   |
|                                                                                                                                                                                            |            |                         |            |                             |            |            |  |  |  |  |

 

The accompanyingnotes are an integral part of these condensed consolidated interim financialstatements.

 

3

----

**CORNERSTONECORE PROPERTIES REIT, INC. AND SUBSIDIARIES**

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS (Unaudited)**
| ** **                               | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------------------|------------|-----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                               | ** ** | **2007**                                            | ** ** | **2006**                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues                                 |       |                                                |       |                                               |       |   |   |   |   |
| Rental revenues                          |       | $                                                   | 1,071,000  |                                               | $          | 91,000 |   | $ | 3,011,000 |   | $ | 107,000 |   |
| Tenant reimbursements and other income   |       | 305,000                                             |       | 5,000                                              |       | 671,000 |   | 5,000 |   |
|                                     |       | 1,376,000                                           |       | 96,000                                             |       | 3,682,000 |   | 112,000 |   |
| Expenses                                 |       |                                                |       |                                               |       |   |   |   |   |
| Property operating and maintenance       |       | 335,000                                             |       | 26,000                                             |       | 891,000 |   | 30,000 |   |
| General and administrative               |       | 411,000                                             |       | 328,000                                            |       | 1,265,000 |   | 938,000 |   |
| Asset management fees                    |       | 158,000                                             |       | 13,000                                             |       | 457,000 |   | 15,000 |   |
| Depreciation and amortization            |       | 329,000                                             |       | 24,000                                             |       | 906,000 |   | 28,000 |   |
|                                     |       | 1,233,000                                           |       | 391,000                                            |       | 3,519,000 |   | 1,011,000 |   |
| Operating income (loss)                  |       | 143,000                                             |       | (295,000                                           | )          | 163,000 |   | (899,000 | ) |
|                                     |       |                                                |       |                                               |       |   |   |   |   |
| Interest income                          |       | 238,000                                             |       | 50,000                                             |       | 508,000 |   | 89,000 |   |
| Interest expense                         |       | (711,000                                            | )          | (119,000                                           | )          | (2,109,000 | ) | (122,000 | ) |
| Loss before minority interests           |       | (330,000                                            | )          | (364,000                                           | )          | (1,438,000 | ) | (932,000 | ) |
| Minority interests                       |       | —                                              |       | (4,000                                             | )          | (1,000 | ) | (11,000 | ) |
| Net loss                                 |       | $                                                   | (330,000   | )                                                  | $          | (360,000 | ) | $ | (1,437,000 | ) | $ | (921,000 | ) |
|                                     |       |                                                |       |                                               |       |   |   |   |   |
| Loss per share — basic and diluted  |       | $                                                   | (0.04      | )                                                  | $          | (0.23 | ) | $ | (0.24 | ) | $ | (1.76 | ) |
|                                     |       |                                                |       |                                               |       |   |   |   |   |
| Weighted average number of common shares |       | 8,057,934                                           |       | 1,556,451                                          |       | 5,932,556 |   | 522,319 |   |
|                                     |       |                                                |       |                                               |       |   |   |   |   |

 

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

 

4

----

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

**CONDENSED CONSOLIDATED STATEMENT OFSTOCKHOLDERS’ EQUITY**

**For the Nine Months Ended September30, 2007**

**(Unaudited)**
| ** **                             | ** ** | **Common Stock**      | ** ** | ** **                       | ** ** | ** **                           | ** ** |
|----------------------------------------|------------|----------------------------|------------|----------------------------------|------------|--------------------------------------|------------|
| ** **                             | ** ** | **Number of  Shares** | ** ** | **Common  Stock Par Value** | ** ** | **Additional  Paid-In Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Total** | ** ** |
| **Balance  — December 31, 2006**  |       | **4,328,186**              | ** ** | **$**                            | **4,000**  | ** **                           | **$**      | **28,115,000** | ** ** | **$** | **(1,400,000** | **)** | **$** | **26,719,000** | ** ** |
| Issuance of  common stock              |       | 4,381,830                  |       | 5,000                            |       | 34,991,000                           |       | — |   | 34,996,000 |   |
| Offering costs                         |       | —                     |       | —                           |       | (4,066,000                           | )          | — |   | (4,066,000 | ) |
| Redeemed shares                        |       | (15,000                    | )          | —                           |       | (110,000                             | )          | — |   | (110,000 | ) |
| Distributions  declared                |       | —                     |       | —                           |       | (2,158,000                           | )          | — |   | (2,158,000 | ) |
| Net loss                               |       | —                     |       | —                           |       | —                               |       | (1,437,000 | ) | (1,437,000 | ) |
| **Balance  — September 30, 2007** | ** ** | **8,695,016**              | ** ** | **$**                            | **9,000**  | ** **                           | **$**      | **56,772,000** | ** ** | **$** | **(2,837,000** | **)** | **$** | **53,944,000** | ** ** |
|                                        |            |                            |            |                                  |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |

 

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

5

----

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

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

**(Unaudited)**
| ** **                                                                   | ** ** | **Nine Months Ended September  30,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| **Cash flows from operating activities**                                     |       |                                                |       |   |   |
| Net loss                                                                     |       | $                                                   | (1,437,000 | ) | $ | (921,000 | ) |
| Adjustments to reconcile net loss to net cash used in operating  activities: |       |                                                |       |   |   |
| Amortization of deferred financing costs                                     |       | 361,000                                             |       | 119,000 |   |
| Depreciation and amortization                                                |       | 906,000                                             |       | 29,000 |   |
| Amortization of acquired above (below) market leases                         |       | 89,000                                              |       | (2,000 | ) |
| Stockbased compensation expense                                              |       | —                                              |       | 2,000 |   |
| Minority interests                                                           |       | (1,000                                              | )          | (11,000 | ) |
| Change in operating assets and liabilities:                                  |       |                                                |       |   |   |
| Tenant and other receivables                                                 |       | (307,000                                            | )          | (12,000 | ) |
| Other assets                                                                 |       | (143,000                                            | )          | 82,000 |   |
| Accounts payable, accrued liabilities and property tax payable               |       | 532,000                                             |       | 99,000 |   |
| Payable to related parties                                                   |       | (517,000                                            | )          | 2,000 |   |
| Prepaid rents and security deposits                                          |       | 13,000                                              | ** ** | **—** | ** ** |
| **Net cash used in operating activities**                                    | ** ** | **(504,000**                                        | **)**      | **(613,000** | **)** |
| ** **                                                                   | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| **Cash flows from investing activities**                                     |       |                                                |       |   |   |
| Net cash used in real estate acquisitions                                    |       | (26,424,000                                         | )          | (4,576,000 | ) |
| Deferred acquisition costs and deposits                                      |       | (694,000                                            | )          | (277,000 | ) |
| Escrow deposits                                                              |       | (9,962,000                                          | )          | (1,150,000 | ) |
| **Net cash used investing activities**                                       | ** ** | **(37,080,000**                                     | **)**      | **(6,003,000** | **)** |
| ** **                                                                   | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| **Cash flows from financing activities**                                     |       |                                                |       |   |   |
| Issuance of common stock                                                     |       | 33,872,000                                          |       | 16,926,000 |   |
| Redeemed shares                                                              |       | (110,000                                            | )          | — |   |
| Net proceeds from notes payable                                              |       | 13,740,000                                          |       | — |   |
| Offering costs                                                               |       | (4,488,000                                          | )          | (1,717,000 | ) |
| Deferred financing costs                                                     |       | (63,000                                             | )          | (707,000 | ) |
| Minority interest contribution                                               |       | 145,000                                             |       | — |   |
| Other receivable                                                             |       | 211,000                                             |       | — |   |
| Distributions paid to stockholders                                           |       | (872,000                                            | )          | (107,000 | ) |
| Distributions paid to minority interests                                     |       | (9,000                                              | )          | — |   |
| **Net cash provided by financing activities**                                | ** ** | **42,426,000**                                      | ** ** | **14,395,000** | ** ** |
| Net increase in cash and cash equivalents                                    |       | 4,842,000                                           |       | 7,779,000 |   |
| Cash and cash equivalents — beginning of period                         |       | 11,041,000                                          |       | 117,000 |   |
| Cash and cash equivalents — end of period                               |       | $                                                   | 15,883,000 |   | $ | 7,896,000 |   |
|                                                                         |       |                                                |       |   |   |
| **Supplemental disclosure of cash flow  information:**                       | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Cash paid for interest                                                       |       | $                                                   | 1,556,000  |   | $ | — |   |
| **Supplemental disclosure of non-cash financing  and investing activities:** | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Distribution declared not paid                                               |       | $                                                   | 308,000    |   | $ | 69,000 |   |
| Deferred financing costs payable                                             |       | $                                                   | —     |   | $ | 219,000 |   |
| Distribution reinvested                                                      |       | $                                                   | 1,123,000  |   | $ | 89,000 |   |
| Payable to related party                                                     |       | $                                                   | 814,000    |   | $ | 2,056,000 |   |
| Security deposits assumed upon acquisition of real estate                    |       | $                                                   | 145,000    |   | $ | — |   |
|                                                                              |            |                                                     |            |  |  |  |  |  |  |  |  |  |  |

 

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

6

----

** **

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

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

**SEPTEMBER 30, 2007**

**UNAUDITED**

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

CornerstoneCore Properties REIT, Inc., a Maryland corporation, was formed onOctober 22, 2004 under the General Corporation Law of Maryland for thepurpose of engaging in the business of investing in and owning commercial realestate.  As used in thisreport, “we” “us” and “our” refer to Cornerstone Core Properties REIT,Inc.  Subject to certain restrictions andlimitations, our business is managed by an affiliate, Cornerstone RealtyAdvisors, LLC, a Delaware limited liability company that was formed onNovember 30, 2004 (the “advisor”), pursuant to an advisory agreement.

On November 9,2004, Terry G. Roussel, an affiliate of the advisor, purchased 125 shares ofcommon stock for $1,000 and became our initial stockholder.  Our articlesof incorporation authorize 290,000,000 shares of common stock with a par valueof $0.001 and 10,000,000 shares of preferred stock with a par value of $0.001.

Cornerstone OperatingPartnership, L.P., a Delaware limited partnership (the “Operating Partnership”)was formed on November 30, 2004.  At September 30, 2007, we owned a99.71% general partner interest in the Operating Partnership while the advisorowned a 0.29% limited partnership interest.  We anticipate that we willconduct all or a portion of our operations through the OperatingPartnership.  Our financial statementsand the financial statements of the Operating Partnership are consolidated inthe accompanying condensed consolidated financial statements.  Allsignificant intercompany accounts and transactions have been eliminated inconsolidation.

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

On January 6, 2006, we commenced a publicoffering of a minimum of 125,000 shares and a maximum of 55,400,000 shares ofour common stock, consisting of 44,400,000 shares for sale to the public (the “PrimaryOffering”) and 11,000,000 shares for sale pursuant to our distributionreinvestment plan (collectively, the “Offering”).  We retained PacificCornerstone Capital, Inc. (“PCC”), an affiliate of the advisor, to serveas the dealer manager for the Offering.  PCC is responsible for marketingour shares being offered pursuant to the Offering.  On February 28, 2006,offering proceeds exceeded the $1,000,000 offering minimum and proceeds werereleased to us from escrow.

We intend to invest thenet proceeds from the Offering primarily in investment real estate includingmulti-tenant industrial real estate located in major metropolitan markets inthe United States.  As of September 30, 2007, a total of approximately 8.5million shares of our common stock had been sold for aggregate gross proceedsof approximately $68.2 million.

**3.****                             ****Summary of Significant AccountingPolicies**

The summary of significant accounting policiespresented below is designed to assist in understanding our consolidatedfinancial statements.  These accountingpolicies conform to accounting principles generally accepted in the UnitedStates of America, or GAAP, in all material respects, and have beenconsistently applied in preparing the accompanying consolidated financialstatements.  Such financial statementsand accompanying notes are the representations of our management, who isresponsible for their integrity and objectivity.

***Interim FinancialInformation***

Theaccompanying interim condensed financial statements have been prepared by ourmanagement in accordance with accounting principles generally accepted in theUnited States of America (“GAAP”) and in conjunction with the rules andregulations of the Securities and Exchange Commission (“SEC”). Certaininformation and footnote disclosures required for annual financial statementshave been condensed or excluded pursuant to SEC rules and regulations.Accordingly, the interim condensed financial statements do not include all ofthe information and footnotes require by GAAP for complete financialstatements. The accompanying financial information reflects all adjustments,which are, in the opinion of our management, of a normal recurring nature andnecessary for a fair presentation of our financial position, results ofoperations and cash flows for the interim periods. Interim results ofoperations are not necessarily indicative of the results to be expected for thefull 

 

7

----

 

year. Theaccompanying condensed consolidated financial statements should be read inconjunction with the audited consolidated financial statements and the notesthereto included in the 2006 Annual Report on Form 10-K as filed with theSecurities and Exchange Commission. Operating results for the three and ninemonths ended September 30, 2007 are not necessarily indicative of the resultsthat may be expected for the year ending December 31, 2007.

***Cash and Cash Equivalents***

Weconsider all short-term, highly liquid investments that are readily convertibleto cash with a maturity of three months or less at the time of purchase to becash equivalents.

***Real Estate Purchase PriceAllocation***

We account for allacquisitions in accordance with Financial Accounting Standards Board’s (“FASB”)Statement of Financial Accounting Standard (“SFAS”) No. 141, “BusinessCombinations” (“FAS 141”).  The results of operations of acquiredproperties are included in our Consolidated Statements of Operation after thedate of acquisition.  Upon acquisition ofa property, we allocate the purchase price of the property based upon the fairvalue of the assets acquired, which generally consist of land, buildings, tenantimprovements, leasing commissions and intangible assets including in-placeleases and above market and below market leases.  We allocate the purchaseprice to the fair value of the tangible assets of an acquired property byvaluing the property as if it were vacant. The value of the building isdepreciated over an estimated useful life of 39 years.

Thepurchase price is further allocated to in-place lease values based onmanagement’s evaluation of the specific characteristics of each tenant’s leaseand our overall relationship with the respective tenant.  The value ofin-place lease intangibles, which is included as a component of investments inreal estate, is amortized to expense over the remaining lease term.

Acquiredabove and below market leases are valued based on the present value of thedifference between prevailing market rates and the in-place rates over theremaining lease term. The value of acquired above and below market leases isamortized over the remaining non-cancelable terms of the respective leases asan adjustment to rental revenue on our condensed consolidated statements ofoperations. Should a tenant terminate its lease, the unamortized portion of theabove or below market lease value will be charged to revenue.   If a lease is terminated prior to itsexpiration, the unamortized portion of the tenant improvements, leasingcommissions, intangible lease assets or liabilities and the in-place leasevalue will be immediately charged to expense.

The estimated usefullives for lease intangibles range from 1 month to 10 years.

Amortizationassociated with the lease intangible assets and liabilities for the three andnine months ended September 30, 2007 were $97,000 and $281,000respectively.   Amortization associatedwith the lease intangible assets and liabilities for three and nine monthsended September 30, 2006 were $3,000 and $3,000 respectively.

Anticipated net amortization of in-place and netmarket lease intangibles from October 1, 2007 through December 31, 2007 and foreach of the four following years after December 31, 2007 is as follows:

| ** **                           | ** ** | **Lease  Intangibles** | ** **   |
|--------------------------------------|------------|------------------------|--------------|
| October 1, 2007 to December 31, 2007 |       | $                      |  96,000 |   |
| 2008                                 |       | 347,000                |         |
| 2009                                 |       | 332,000                |         |
| 2010                                 |       | 330,000                |         |
| 2011                                 |       | 290,000                |         |
|                                      |            |                        |              |  |

 

As of September 30, 2007, cost and accumulateddepreciation and amortization related to real estate assets and related leaseintangibles were as follows:  
| ** **                                | ** ** | **Buildings and  Improvements** | ** **       | **In-Place  Lease Value** | ** ** | **Acquired Above-  Market Leases** | ** ** | **Acquired  Below-Market  Leases** | ** **      |
|-------------------------------------------|------------|--------------------------------------|------------------|--------------------------------|------------|----------------------------------------------|------------|------------------------------------|-----------------|
| Cost                                      |       | $                                    |  38,764,000 |                           | $          |  994,000                                |       | $                                  |  1,198,000 |   | $ |  (408,000 | ) |
| Accumulated depreciation and amortization |       | (775,000                             | )                | (205,000                       | )          | (188,000                                     | )          | 91,000                             |            |
| Net                                       |       | $                                    |  37,989,000 |                           | $          |  789,000                                |       | $                                  |  1,010,000 |   | $ |  (317,000 | ) |

 

 

8

----

 

As ofDecember 31, 2006, cost and accumulated depreciation and amortization relatedto real estate assets and related lease intangibles were as follows: 
| ** **                                | ** ** | **Buildings and  Improvements** | ** **       | **In-Place Lease** | ** **     | **Acquired Above  Market Leases** | ** **     | **Acquired Below  Market Leases** | ** **      |
|-------------------------------------------|------------|--------------------------------------|------------------|-------------------------|----------------|---------------------------------------------|----------------|---------------------------------------------|-----------------|
| Cost                                      |       | $                                    |  18,492,000 |                    | $ 397,000 |                                        | $ 971,000 |                                        | $ (121,000 | ) |
| Accumulated depreciation and amortization |       | (76,000                              | )                | (20,000                 | )              | (17,000                                     | )              | 10,000                                      |            |
| Net                                       |       | $ 18,416,000                    |             | $ 377,000          |           | $ 954,000                              |           | $ (111,000                             | )               |
|                                           |            |                                      |                  |                         |                |                                             |                |                                             |                 |  |

 

***Impairment ofReal Estate Assets***

Managementcontinually monitors events and changes in circumstances that could indicatethat the carrying amounts of our real estate assets, including those heldthrough joint ventures may not be recoverable. When indicators of potentialimpairment are present that indicate that the carrying amounts of real estateassets may not be recoverable, we will assess the recoverability of the realestate assets by determining whether the carrying value of the real estateassets will be recovered through the undiscounted future operating cash flowsexpected from the use of the asset and its eventual disposition.  In the event that such expected undiscountedfuture cash flows do not exceed the carrying value, we will adjust the realestate assets to the fair value and recognize an impairment loss.

#### Projections ofexpected future cash flows require us to estimate future market rental incomeamounts subsequent to the expiration of current lease agreements, propertyoperating expenses, discount rates, the number of months it takes to re-leasethe property and the number of years the property is held for investment.  The use of certain assumptions in the futurecash flows analysis would result in an incorrect assessment of the property’sfuture cash flows and fair value and could result in the overstatement of thecarrying value of our real estate assets and net income if those assumptionsultimately prove to be incorrect. As of September 30, 2007, we have notrecorded any impairment losses.

***Other Assets***

As of December 31, 2006, other assets consistedprimarily of amounts receivable from a lender in connection with the financingof three properties.  As of September 30,2007, other assets include net leasing commissions, prepaid insurance andinterest receivable.

***Deferred Financing Costs***

Deferredfinancing costs consist of direct costs incurred in connection with a creditagreement. At September 30, 2007 and December 31, 2006, deferred financingcosts amounted to approximately $997,000 and $934,000, respectively. Such costsare amortized over the term of the credit facility.  For the three and nine months ended September30, 2007, approximately $123,000 and $361,000 was amortized to interest expenserespectively.

***Consolidation Considerations forthe Company’s Investments in Joint Ventures***

The FASB issuedInterpretation No. 46 (“FIN 46R”) (revised December 2003), “Consolidationof Variable Interest Entities, an Interpretation of Accounting ResearchBulletin No. 51” (“ARB 51”), which addresses how a business enterpriseshould evaluate whether it has a controlling interest in an entity throughmeans other than voting rights and accordingly should consolidate theentity.  Before concluding that it is appropriate to apply the ARB 51voting interest consolidation model to an entity, an enterprise must firstdetermine that the entity is not a variable interest entity (VIE).  Weevaluate, as appropriate, our interests, if any, in joint ventures and otherarrangements to determine if consolidation is appropriate. If consolidation isnot appropriate, we will account for our interests using the equity method ofaccounting.

***Revenue Recognition and Valuation ofReceivables***

Ourrevenues, which comprised largely of rental income, include rents reported on astraight-line basis over the initial term of the lease.  When our leasesprovide for free rent, lease incentives or other rental increases at specifiedintervals, we are required to straight-line the recognition of revenue, whichresults in the recording of a receivable for rent not yet due under the leaseterms.

 

9

----

 

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

Weare required to make subjective assessments as to the useful lives of ourdepreciable assets.  We consider the period of future benefit of the assetto determine the appropriate useful lives. Depreciation of our assets is expected to be charged to expense on astraight-line basis over the assigned useful lives.

***Organizational and Offering Costs***

Theadvisor funds organization and offering costs on our behalf.  We are required to reimburse the advisor forsuch organization and offering costs up to 3.5% of the cumulative capitalraised in the Primary Offering. Organization and offering costs include items such as legal andaccounting fees, marketing, due diligence, promotional and printing costs andamounts to reimburse our advisor for all costs and expenses such as salariesand direct expenses of employees of our advisor and its affiliates inconnection with registering and marketing our shares. All offering costs arerecorded as an offset to additional paid-in capital, and all organization costswere recorded as an expense at the time we become liable for the payment ofthese amounts.

***Minority Interests***

Minorityinterests relate to the interest in the consolidated entities that are notwholly-owned by us.

***Income Taxes***

We have elected to betaxed as a REIT, under Sections 856 through 860 of the Internal Revenue Code of1986, as amended (the “Code”) beginning with our taxable year endingDecember 31, 2006.  To qualify as a REIT, we must continue to meetcertain organizational and operational requirements, including a requirement tocurrently distribute at least 90% of the REIT’s ordinary taxable income tostockholders.  As a REIT, we generally are not subject to federal incometax on taxable income that we distribute to our stockholders.  If we failto qualify as a REIT in any taxable year, we will then be subject to federalincome taxes on our taxable income at regular corporate rates and will not bepermitted to qualify for treatment as a REIT for federal income tax purposesfor four years following the year during which qualification is lost unless theInternal Revenue Service granted us relief under certain statutoryprovisions.  Such an event could materially adversely affect our netincome and net cash available for distribution to stockholders.  However,we believe that we will be organized and operate in such a manner as to qualifyfor treatment as a REIT and intend to operate in the foreseeable future in sucha manner so that we will remain qualified as a REIT for federal income taxpurposes. In May 2007, we filed our 2006 tax return and qualified for REITstatus.

***Concentration of Credit Risk***

Financial instruments that potentially subject us to aconcentration of credit risk are primarily cash investments. Cash is generallyinvested in government backed securities and investment-grade short-terminstruments and the amount of credit exposure to any one commercial issuer islimited. We have cash in financial institutions which is insured by the FederalDeposit Insurance Corporation, or FDIC, up to $100,000 per institution. AtSeptember 30, 2007, we had cash accounts in excess of FDIC insured limits.

As of September 30, 2007, we have two tenants each ofwhom accounted more than 10% of annualized rental revenue.  One tenant accounted for 12.1% of annualizedrental revenue while the other tenant accounted for 17.4% of annualized rentalrevenue.

As of September 30, 2007, we owned three properties inthe State of California (Southern California), two properties in the State ofArizona (North Tempe) and one property in the State of Florida (TampaBay).  Accordingly, there is a geographicconcentration of risk subject to fluctuations in each State’s economy.

10

----

 

***Fair Value ofFinancial Instruments***

The SFAS No. 107, *Disclosures About Fair Value of Financial Instruments,*requires the disclosure of fair value information about financial instruments,whether or not recognized in the balance sheet, forwhich it is practicable to estimate that value.SFAS No.107 defines fair value as the quoted market prices for thoseinstruments that are actively traded in financial markets. In cases wherequoted market prices are not available, fair values are estimated using presentvalue or other valuation techniques such as discounted cash flow analysis. Thefair value estimates are made at the end of each year based on available marketinformation and judgments about the financial instrument, such as estimates oftiming and amount of expected future cash flows. Such estimates do not reflectany premium or discount that could result from offering for sale at one timeour entire holdings of a particular financial instrument, nor do they considerthat tax impact of the realization of unrealized gains or losses. In manycases, the fair value estimates cannot be substantiated by comparison toindependent markets, nor can the disclosed value be realized in immediatesettlement of the instrument.

Our condensed consolidated balance sheets include thefollowing financial instruments: cash and cash equivalents, deferredacquisition costs and deposits, other assets, prepaid rent and securitydeposits, amounts payable to related parties, accounts payable and accruedliabilities, property taxes payable and notes payable. We consider the carryingvalues of cash and cash equivalents, deferred acquisition costs and deposits,other assets, payable to related parties, accounts payable and accruedliabilities, prepaid rent and security deposits, and notes payable toapproximate fair value for these financial instruments because of the shortperiod of time between origination of the instruments and their expectedrealization as well as the variable interest rate for notes payable.

***PerShare Data***

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

***StockBased Compensation***

We follow SFAS No. 123(R),*Share-Based Payment*, to account for ourstock compensation pursuant to our 2006 Employee and Director Incentive StockPlan. See Note 7, Stockholders’ Equity.

***Use of Estimates***

The preparation of our financial statements inconformity with GAAP requires management to make estimates and assumptions thataffect the reported amounts of the assets and liabilities and the disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses for the reporting period.  Actual results could materially differ fromthose estimates.

***Segment Disclosure***

We internally evaluate all of our properties as oneindustry segment and, accordingly, do not report segment information.

***Recently Issued AccountingPronouncements***

InJune 2007, the American Institute of Certified Public Accountants  (AICPA) issued Statement of Position (SOP)07-1, *Clarification of the Scope of the Audit andAccounting Guide* Investment Companies *andAccounting for Parent Companies and Equity Method Investors for Investments inInvestment Companies.*This SOP provides guidance for determiningwhether an entity is within the scope of the AICPA Audit and Accounting Guide *Investment Companies*(the Guide).  Entities that are within the scope of theGuide are required, among other things, to carry their investments at fairvalue, with changes in fair value included in earnings. The effective date ofthis SOP has been deferred. 

In July 2006, the Financial Accounting Standards Board(“FASB”) issued Interpretation No. 48, *Accounting for Uncertaintyin Income Taxes, an interpretation of FASB Statement No. 109,* (“FIN 48”),which clarifies the relevant criteria and approach for the recognition,derecognition, and measurement of uncertain tax positions. FIN 48 iseffective for fiscal years beginning after December 15, 2006.  Theadoption of this interpretation in the first quarter of 2007 did not have a materialimpact on our consolidated financial statements.

 

11

----

 

InSeptember 2006, the FASB issued SFAS No. 157, *Fair ValueMeasurements*, which defines fair value, establishes a framework formeasuring fair value in generally accepted accounting principles and expandsdisclosures about fair value measurements. In February 2007, the FASB issuedSFAS No. 159, *The Fair Value Options for Financial Assetsand Financial Liabilities*. This Statement permits entities to chooseto measure many financial instruments and certain other items at fair value.The objective is to improve financial reporting by providing entities with theopportunity to mitigate volatility in reported earnings caused by measuringrelated assets and liabilities differently without having to apply complexhedge accounting provisions. SFAS No. 157 and No. 159 are effective forfinancial statements issued for fiscal periods beginning after November 15,2007 (our fiscal year beginning January 1, 2008), and interim periods withinthose fiscal years. Management is currently evaluating the impact of adoptingSFAS No. 157 and SFAS No. 159 will have on the consolidated financialstatements.

**4.****                                    ****Investments in RealEstate**

OnJanuary 22, 2007, we purchased Mack Deer Valley, a multi-tenant industrialproperty located in Phoenix, Arizona, for approximately $23.2 million,including estimated closing costs The purchase price of the property was fundedwith net proceeds raised from our public offering and $16.4 million ofborrowings under our credit agreement with HSH Nordbank AG, New York Branch.

OnApril 2, 2007, we acquired an existing multi-tenant industrial property knownas Marathon Center located near Tampa Bay, Florida for a purchase price of $4.5million.  We acquired the property in a joint venture with JBK Capital,LLC.  We are the managing partner of the venture and own a 97%interest in the venture.  The property was purchased with no debt financing.

**5.            Payableto Related Parties**

The payable to related parties at September 30, 2007and December 31, 2006 consists of organizational and offering costs andacquisition fees and expense reimbursements payable to the advisor and brokerdealer fees payable to PCC.

**6.****                                    ****Minority Interests**

As of September 30, 2007, minority interests relate tothe advisor’s equity interest of 0.29% in the earnings/losses of the OperatingPartnership and JBK Capital, LLC’s equity interest of 3% in the earnings/lossesof Marathon Center.

**7.****                                    ****Stockholders’ Equity**

***Common Stock***

Ourarticles of incorporation authorize the issuance of 290 million shares ofcommon stock with a par value of $0.001 and 10 million shares of preferredstock with a par value of $0.001.  As of September 30, 2007, we have issuedapproximately 8.7 million shares of common stock for a total gross value ofapproximately $69.5 million.

***Distribution Reinvestment Plan***

Wehave adopted a distribution reinvestment plan (the “DRIP”) that allows ourstockholders to have distributions and other distributions otherwisedistributable to them invested in additional shares of our commonstock.   We have registered 11million shares of our common stock for sale pursuant to the distributionreinvestment plan.  The purchase price per share is 95% of the price paidby the purchaser for our common stock, but not less than $7.60 per share. At September 30, 2007, approximately 177,000 shares had been issued under thedistribution reinvestment plan.  We mayamend or terminate the distribution reinvestment plan for any reason at anytime upon 10 days prior written notice to participants.

***Stock Repurchase Program***

We haveadopted a share redemption program for investors who have held theirs sharesfor at lease one year, unless the shares are being redeemed in connection witha stockholder’s death. Under our current stock repurchase program, therepurchase price will vary depending on the purchase price paid by thestockholder and the number of years the shares were held. During our offeringand each

 

12

----

 

of the first five yearsfollowing the closing of our offering, we do not intend to redeem more than thelesser of (i) the number of shares that could be redeemed using theproceeds from our distribution reinvestment plan or (ii) 5% of the numberof shares outstanding at the end of the prior calendar year. Beginning fiveyears after termination of the Offering, the number of shares that we redeemunder the stock repurchase program is not expected to exceed 10% of the numberoutstanding at the end of the prior year. Our board of directors may modify ourstock repurchase program so that we can redeem stock using the proceeds fromthe sale of our real estate investments or other sources. At September 30,2007, 15,000 shares had been redeemed under the stock repurchase program.  

***Employee and Director IncentiveStock Plan***

We have adopted an Employee and Director IncentiveStock Plan (“the Plan”) which provides for the grant of awards to our directorsand full-time employees, as well as other eligible participants that provideservices to us. We have no employees, and we do not intend to grant awardsunder the Plan to persons who are not directors of ours. Awards granted underthe Plan may consist of nonqualified stock options, incentive stock options,restricted stock, share appreciation rights, and distribution equivalentrights. The term of the Plan is 10 years. The total number of shares of commonstock reserved for issuance under the Plan is equal to 10% of our outstandingshares of stock at any time.

Effective January 1, 2006, we adopted theprovisions of Statement of Financial Accounting Standards No. 123R (“SFAS123R”), “Share-Based Payment,” which requires the measurement and recognitionof compensation expense for all share-based payment awards to employees anddirectors based on estimated fair values. On May 10, 2006 and August 8, 2007, we granted our nonemployee directorsnonqualified stock options to purchase an aggregate of 40,000 and 20,000 sharesof common stock, respectively, at an exercise price of $8.00 per share.  Outstanding stock options became immediatelyexercisable in full on the grant date, expire in ten years after the grantdate, and have no intrinsic value as of September 30, 2007.  For the three and nine months ended September30, 2007, we did not incur any non-cash compensation expenses.  For the three and nine months ended September30, 2006, we incurred $2,000 of non-cash compensation expenses.

We record compensationexpense for nonemployee stock options based on the estimated fair value of theoptions on the date of grant using the Black-Scholes option-pricing model.These assumptions include the risk-free interest rate, the expected life of theoptions, the expected stock price volatility over the expected life of theoptions, and the expected distribution yield. Compensation expense for employeestock options is recognized ratably over the vesting term. The assumptions usedto estimate the fair value of options granted during the year ended December31, 2006 using the Black-Scholes option-pricing model were 5% distributionyield, a 4.99% risk-free interest rate based on the 10-year U.S. TreasuryBond, an expected life of 5 years, and a volatility rate of 1.02%. The assumptionsused to estimate the fair value of options granted during the nine months endedSeptember 30, 2007 using the Black-Scholes option-pricing model were 5.5%distribution yield, a 4.86% risk-free interest rate based on the 10-year U.S.Treasury Bond, an expected life of 5 years and a volatility rate of 1.02%.  No stock options were exercised or canceledduring the nine months September 30, 2007.

Theexpected life of the options is based on evaluations of expected futureexercise behavior. The risk free interest rate is based on the U.S.Treasury yield curve at the date of grant with maturity dates approximatelyequal to the expected term of the options at the date of thegrant. Volatility is based on historical volatility of our stock. Thevaluation model applied in this calculation utilizes highly subjectiveassumptions that could potentially change over time, including the expectedstock price volatility and the expected life of an option. Therefore, theestimated fair value of an option does not necessarily represent the value thatwill ultimately be realized by a nonemployee director.

**8.****                                    ****Related Party Transactions**

We have no employees.Our advisor is primarily responsible for managing our business affairs andcarrying out the directives of our board of directors.  We have an advisory agreement with theadvisor and a dealer manager agreement with PCC which entitle the advisor andPCC to specified fees upon the provision of certain services with regard to theOffering and investment of funds in real estate projects, among other services,as well as reimbursement for organizational and offering costs incurred by theadvisor and PCC on our behalf and reimbursement of certain costs and expensesincurred by the advisor in providing services to us.

***Advisory Agreement***

Underthe terms of the advisory agreement, our advisor will use commerciallyreasonable efforts to present to us investment opportunities to provide acontinuing and suitable investment program consistent with the investmentpolicies and objectives adopted by our board of directors.  The advisory agreement calls for our advisorto provide for our day-to-day management and to retain property managers andleasing agents, subject to the authority of our board of directors, and toperform other duties.

 

13

----

 

The fees and expensereimbursements payable to our advisor under the advisory agreement aredescribed below.

Organizational andOffering Costs.  Organizationaland offering costs of the Offering are being paid by the advisor on our behalfand will be reimbursed to the advisor from the proceeds of the Offering. Organizational and offering costs consist of all expenses (other than salescommissions and the dealer manager fee) to be paid by us in connection with theOffering, including our legal, accounting, printing, mailing and filing fees,charges of our escrow holder and other accountable offering expenses,including, but not limited to, (i) amounts to reimburse our advisor for allmarketing related costs and expenses such as salaries and direct expenses ofemployees of the advisor and its affiliates in connection with registering andmarketing our shares (ii) technology costs associated with the offering ofour shares; (iii) our costs of conducting our training and educationmeetings; (iv) our costs of attending retail seminars conducted byparticipating broker-dealers; and (v) payment or reimbursement of bonafide due diligence expenses.   In noevent will we have any obligation to reimburse the advisor for organizationaland offering costs totaling in excess of 3.5% of the gross proceeds from thePrimary Offering. As of September 30, 2007 and December 31, 2006, the advisorand its affiliates had incurred on our behalf offering costs of approximately$3.2 million and $2.5 million respectively, which we have recorded as an offsetto additional paid in capital.  For thethree and nine months ended September 30, 2007 and 2006, we did not expense anyorganization costs.

Acquisition Fees andExpenses.  The advisory agreement requires us to pay theadvisor acquisition fees in an amount equal to 2% of the gross proceeds of thePrimary Offering.  We will pay the acquisition fees upon receipt of thegross proceeds from the Offering.  However, if the advisory agreement isterminated or not renewed, the advisor must return acquisition fees not yetallocated to one of our investments.  In addition, we are required toreimburse the advisor for direct costs the advisor incurs and amounts theadvisor pays to third parties in connection with the selection and acquisitionof a property, whether or not ultimately acquired.  As of September 30,2007 and December 31, 2006, the advisor earned approximately $1.4 million and $0.7million respectively, of acquisition fees, which have been or are to becapitalized as part of the cost of real estate investment.

Management Fees.  The advisory agreement requires us to pay theadvisor a monthly asset management fee of one-twelfth of 1.0% of the sum of theaggregate basis book carrying values of our assets invested, directly orindirectly, in equity interests in and loans secured by real estate beforereserves for depreciation or bad debts or other similar non-cash reserves,calculated in accordance with generally accepted accounting principals in theUnited States of America (GAAP).  In addition, we will reimburse theadvisor for the direct costs and expenses incurred by the advisor in providingasset management services to us.  These fees and expenses are in additionto management fees that we expect to pay to third party propertymanagers.  For the three and nine months ended September 30, 2007, theadvisor earned approximately $158,000 and $457,000 respectively of assetmanagement fees, which were expensed. For three and nine months ended September 30, 2006, $13,000 of assetmanagement fees were expensed.  

Operating Expenses.The advisory agreement provides for reimbursement of our advisor’s direct andindirect costs of providing administrative and management services to us.  For three and nine months ended September 30,2007, approximately $90,000 and $443,000 of such costs respectively, werereimbursed. For three and nine months ended September 30, 2006 approximately$175,000 and $371,000 of such costs respectively, were reimbursed.  The advisor must pay or reimburse us theamount by which our aggregate annual operating expenses exceed the greater of2% of our average invested assets or 25% of our net income unless a majority ofour independent directors determine that such excess expenses were justifiedbased on unusual and non-recurring factors.

Disposition Fee.  The advisory agreement provides that if theadvisor or its affiliate provides a substantial amount of the services (asdetermined by a majority of our directors, including a majority of ourindependent directors) in connection with the sale of one or more properties,we will pay the advisor or such affiliate shall receive at closing adisposition fee up to 3% of the sales price of such property orproperties.  This disposition fee may be paid in addition to real estatecommissions paid to non-affiliates, provided that the total real estatecommissions (including such disposition fee) paid to all persons by us for eachproperty shall not exceed an amount equal to the lesser of (i) 6% of theaggregate contract sales price of each property or (ii) the competitivereal estate commission for each property.  We will pay the dispositionfees for a property at the time the property is sold.

 

14

----

 

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

•                  After stockholders have receivedcumulative distributions equal to $8 per share (less any returns ofcapital) plus cumulative, non-compounded annual returns on net investedcapital, the advisor will be paid a subordinated participation in net saleproceeds ranging from a low of 5% of net sales provided investors have earnedannualized returns of 6% to a high of 15% of net sales proceeds if investorshave earned annualized returns of 10% or more.

•                  Upon termination of the advisoryagreement, the advisor will receive the subordinated performance fee due upontermination. This fee ranges from a low of 5% of the amount by which the sum ofthe appraised value of our assets minus our liabilities on the date theadvisory agreement is terminated plus total distributions (other than stockdistributions) paid prior to termination of the advisory agreement exceeds theamount of invested capital plus annualized returns of 6%, to a high of 15% ofthe amount by which the sum of the appraised value of our assets minus itsliabilities 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 fortrading, the advisor will receive a subordinated incentive listing fee insteadof a subordinated participation in net sales proceeds. This fee ranges from alow of 5% of the amount by which the market value of our common stock plus allprior distributions (other than stock distributions) exceeds the amount ofinvested capital plus annualized returns of6%, to a high of 15% of the amount by which the sum ofthe market value of our stock plus all prior distributions (other than stockdistributions) exceeds the amount of invested capital plus annualized returnsof 10% or more.

***DealerManager Agreement***

PCC, as dealer manager,is entitled to receive a sales commission of up to 7% of gross proceeds fromsales in the Primary Offering.  PCC, as Dealer Manager, is also entitledto receive a dealer manager fee equal to up to 3% of gross proceeds from salesin the Primary Offering.  The Dealer Manager is also entitled to receive areimbursement of bona fide due diligence expenses up to 0.5% of the grossproceeds from sales in the Primary Offering.  The advisory agreementrequires the advisor to reimburse us to the extent that offering expensesincluding sales commissions, dealer manager fees and organization and offeringexpenses (but excluding acquisition fees and acquisition expenses discussedabove) to the extent are in excess of 13.5% of gross proceeds from theOffering. As of September 30, 2007 and December 31, 2006, we had incurredapproximately $6.7 million and $3.4 million respectively, to PCC for dealermanager fees and sales commissions, respectively. Much of this amount wasreallowed by PCC to third party broker dealers. Dealer manager fees and salescommissions paid to PCC are a cost of capital raised and, as such, are includedas a reduction of additional paid in capital in the accompanying condensedconsolidated balance sheets.

**9.****                               ****Credit Facility**

OnJune 30, 2006, we entered into a Credit Agreement with HSH Nordbank AG, NewYork Branch, for a temporary credit facility that we will use during theOffering period to facilitate our acquisitions of properties in anticipation ofthe receipt of Offering proceeds.  As ofSeptember 30, 2007 and December 31, 2006, we had borrowed $33.8 million and$20.2 million respectively, under the credit agreement.

TheCredit Agreement permits us to borrow up to $50 million secured by realproperty at a borrowing rate based on LIBOR plus a margin ranging from 1.15% to1.35% and requires payment of a usage premium of up to 0.15% and an annualadministrative fee.  We may use theentire credit facility to acquire real estate investments and we may use up to10% of the credit facility for working capital. We are entitled to prepay the borrowings under the credit facility atany time without penalty.  The principalbalance is due on June 30, 2008.  Therepayment of obligations under the Credit Agreement may be accelerated in theevent of a default, as defined in the Credit Agreement. The facility containsvarious covenants including financial covenants with respect to consolidatedinterest and fixed charge coverage and secured debt to secured assetvalue.  As of September 30, 2007, we are in compliance with all thesecovenants.

Duringthe three and nine months ended September 30, 2007, we incurred and paidapproximately $0.7 million and $2.1 million of interest expense related to theCredit Agreement.

Consistentwith our borrowing policies, during our Primary Offering, we will borrowperiodically to acquire properties and for working capital.  We willdetermine whether to use the proceeds of our Offering to repay amounts borrowedunder the Credit Agreement depending on a number of factors, including theinvestments that are available to us for purchase at the time and the cost ofthe credit facility.  Following the closing of our Primary Offering, wewill endeavor to repay all amounts owing under the Credit Agreement or that aresecured by our properties and which have not previously been paid.  To theextent sufficient proceeds from our Offering are unavailable to repay theindebtedness secured by properties within a reasonable time following theclosing of our Primary Offering as determined by our board of directors, we maysell properties or raise equity capital to repay the secured debt, so that wewill own our properties with no permanent acquisition financing.

 

15

----

 

**10.****                             ****Commitments and Contingencies**

***Commitments***

On March 16, 2007, we entered into a definitive agreement topurchase a newly constructed multi-tenant industrial property known ClassicBusiness Park from CP215 Business Park, LLC, a non-related party, for apurchase price of $9.8 million.  As of May 1, 2007, our right to terminatethe agreement without penalty expired and our initial deposits of $500,000became non-refundable. The property will consist of approximately 79,042 squarefeet of leasable space in two single-story buildings located on approximately4.9 acres of land in Perris, California.  The property is currently underdevelopment and expected to be completed and ready for occupancy in the firstquarter of 2008, at which time the purchase is expected to close.

On May2, 2007, we entered into a different definitive agreement to purchase newlyconstructed industrial show room building and three free-standing industrialbuildings in Classic Pacific Business Park from CP215 Business Park, LLC, anon-related party, for a purchase price of $10.2 million.  As of May 18,2007, our right to terminate the Agreement without penalty expired and ourdeposits of $250,000 became non-refundable.  The property is currentlyunder development and expected to be completed and ready for occupancy by the secondquarter of 2008, at which time the purchase is expected to close.

***Environment Matters***

Wefollow the policy of monitoring our properties for the presence of hazardous ortoxic substances.  While there can be noassurance that a material environment liability does not exist, we are notcurrently aware of any environmental liability with respect to the propertiesthat would have a material effect on our financial condition, results ofoperations and cash flows.  Further, weare not aware of any environmental liability or any unasserted claim orassessment with respect to an environmental liability that we believe wouldrequire additional disclosure or the recording of a loss contingency.

***Other***

OurAdvisor has informed us that the Financial Industry Regulatory Authority(“FINRA”, formerly, NASD) is conducting a non-public investigation of PacificCornerstone Capital, Inc. (“PCC”), our affiliated dealer manager, that is, weunderstand, focused on the private placements conducted by PCC during theperiod from January 1, 2004 through October 31, 2007.  The investigation is in the preliminarystage.  FINRA’s correspondence requestingdocument production states, “This inquiry should not be construed as anindication that the Enforcement Department or its staff has determined that anyviolations of federal securities laws or NASD, NYSE or MSRB rules haveoccurred.”  We have been advised that PCCis responding to FINRA’s request for information and intends to continue tocooperate in the investigation.  Althoughwe cannot, at this time, assess either the duration or the likely outcome orconsequences of this investigation, FINRA has the authority to impose sanctionson PCC that could adversely affect its effectiveness and ability to raise fundsin this offering.

Othercommitments and contingencies include the usual obligations of real estateowners and operators in the normal course of business.  In the opinion of management, these mattersare not expected to have a material impact on our consolidated financial positionand results of operations.

**11.****                             ****Subsequent Events**

***Status of ourOffering***

As of November 2, 2007, we had received and acceptedsubscriptions in our Offering for 8,997,069 shares of our common stock, orapproximately $71.9  million, excludingshares issued under the DRIP.

On October 2, 2007, we purchased an existingmulti-tenant industrial property known as Pinnacle Park Business Center locatedin Phoenix, Arizona, for a purchase price of approximately $20.1 million,including closing costs (which are not fully determinable at this time).   The purchase price of the Property wasfunded with net proceeds raised from our public offering and $11.0 million ofborrowings under our credit facility. 

16

----

**Item 2.            Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

Thefollowing “Management’s Discussion and Analysis of Financial Condition andResults of Operations” should be read in conjunction with our financialstatements 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 thosestatements are based. These forward-looking statements generally are identifiedby the words “believes,” “project,” “expects,” “anticipates,” “estimates,” “intends,”“strategy,” “plan,” “may,” “will,” “would,” “will be,” “will continue,” “willlikely result,” and similar expressions. Forward-looking statements are based on current expectations andassumptions that are subject to risks and uncertainties which may cause actualresults to differ materially from the forward-looking statements.  Forward-looking statements that were true atthe time made may ultimately prove to be incorrect or false.  We undertake no obligation to update orrevise publicly any forward-looking statements, whether as a result of newinformation, future events or otherwise.

**Overview**

We were incorporatedon October 22, 2004 for the purpose of engaging in the business ofinvesting in and owning commercial real estate. Prior to commencing our initial public offering on January 6, 2006, wehad approximately $200,000 in assets and no real estate operations. In February2006, we received the minimum offering amount of $1,000,000 and in June 2006,we began acquiring real estate assets.  

At September 30,2007, we raised approximately $68.2 million of gross proceeds from the sale ofapproximately 8.5 million shares of our common stock and had acquired sixproperties. We acquired two properties in June 2006, two properties in December2006, one property at the end of January 2007 and one property in April2007.  Accordingly, our results ofoperations for the quarters and nine months ended September 30, 2007 andSeptember 30, 2006 are not comparable.

Ourresults of operations for the three and nine months ended September 30, 2007and 2006 are not indicative of those expected in future periods as we expectthat rental income, tenant reimbursements, operating expenses, asset managementfees, depreciation, amortization, and net income will each increase in futureperiods as a result of anticipated future acquisitions of real estate assets.

We have no paid employees and are externally advisedand managed by Cornerstone Realty Advisors, LLC.

**CriticalAccounting Policies**

Thecomplete listing of our Critical Accounting Policies was previously disclosedin our 2006 Annual Report on Form 10-K, as filed with the SEC.

# **Results of Operations**

***Three months ended September 30, 2007 and 2006***

 

We owned six properties for the three months endedSeptember 30, 2007 and two properties for the comparable period of 2006. As aresult of the acquisitions, total revenues increased to $1,376,000 million from$96,000, property operating and maintenance expenses increased to $335,000 from$26,000, asset management fees increased to $158,000 from $13,000 anddepreciation and amortization increased to $329,000 from $24,000 from the comparable2006 period.

General and administrative expenses increased to$411,000 for the three months ended September 30, 2007 from $328,000 for thecomparable period of 2006.  The increaseis due primarily to additional professional fees and advisor administrationexpense reimbursements resulting from a higher level of activity in 2007quarter.

Interest income of $238,000 in the third quarter of2007 compares to $50,000 in the third quarter of 2006.  The increase is due to higher cash balancesavailable for investment from net proceeds of our Offering. Interest expenseincreased to $711,000 in the third quarter of 2007 from $119,000 in thecomparable period of 2006.  The increaseis due to higher borrowing on our credit facility arrangement as the result ofacquisitions financed in late 2006 and early 2007.

***Ninemonths ended September 30, 2007 and 2006***

As aresult of the four properties acquired in the fourth quarter of 2006 and thefirst half of 2007, operations increased during the nine months ended September30, 2007 versus the comparable period in 2006. As such, total revenues increased to $3,682,000 from $112,000, propertyoperating and maintenance expenses increased to $891,000 from $30,000, assetmanagement fees increased to $457,000 from $15,000 and depreciation andamortization increased to $906,000 from $28,000, from the comparable period of2006. General and administrative expenses increased to $1,265,000 in the firstnine months of 2007 from $938,000 in the comparable 2006 period. The increaseis due primarily to additional professional fees, advisor administrativeexpense reimbursements and abandoned project costs associated with the increasein operating of activity during 2007. The increase in general andadministrative expense was partially offset by organization cost incurred inthe 2006 that did not recur in the 2007 period.

 

17

----

 

Interest income of $508,000 in the first nine months of 2007 compares to$89,000 in the comparable period of 2006. The increase is due to higher cash balances available for investmentfrom net proceeds of our Offering in the 2007 period. Interest expenseincreased to $2,109,000 in the first nine months of 2007 from $122,000 in thecomparable period of 2006.  The increasein expense is due to higher credit facility borrowing as the result ofacquisitions financed in late 2006 and early 2007.

**Liquidityand Capital Resources**

Weexpect that primary sources of capital over the long term will include netproceeds from the sale of our common stock and net cash flows fromoperations.  We expect that our primaryuses of capital will be for property acquisitions, for the payment of tenantimprovements and leasing commissions, for the payment of operating expenses,including interest expense on any outstanding indebtedness, for the payment ofdistributions and for the repayment of notes payable.

As ofSeptember 30, 2007 a total of approximately 8.5 million shares of our commonstock had been sold in our Offering for aggregate gross proceeds ofapproximately $68.2 million.  Because we did not raise the maximum offering proceeds of $355.2 millionin our initial public offering prior to the previously scheduled September 21,2007 offering termination date, we have extended the offering period until theearlier of September 21, 2008 or until the maximum primary offering amount israised, and we reserve the right to further extend the offering for anadditional period of up to one year. 

As ofSeptember 30, 2007, we had approximately $15.9 million in cash and cashequivalents on hand and approximately $16.2 million available under ouracquisition credit facility with HSH Nordbank. Our liquidity will increase as additional subscriptions are accepted anddecrease as net offering proceeds are expended in connection with theacquisition and operation of properties.

There may be a delaybetween the sale of our shares and the purchase of properties.  During this period, net offering proceedswill be temporarily invested in short-term, liquid investments that could yieldlower returns than investment in real estate.

Generally,cash needs for items other than property acquisitions will be met fromoperations, and cash needs for property acquisitions will be met from publicofferings of our shares or from borrowings on our credit facility.

Untilproceeds from our Offering are invested and generating operating cash flowsufficient to make distributions to stockholders, we intend to pay all or asubstantial portion of our distributions from the proceeds of our offering orfrom borrowings in anticipation of future cash flow.

We arecurrently dependent on our advisor to fund a portion of our organization andoffering activities because the amount we can spend on organization andoffering expenses is limited by our charter. At September 30, 2007, our advisor had incurred $3.2 million oforganization and offering costs on our behalf. Of this amount, $2.4 million had been reimbursed to our advisor.  Our advisor advances us money for theseorganization and offering expenses or pays these expenses on our behalf.  Our advisor will not charge us interest onthese advances.  We will repay theseadvances and reimburse our advisor for expenses paid on our behalf using thegross proceeds of our initial public offering, but in no event will we have anyobligation to reimburse our advisor for these costs totaling in excess of 3.5%of the gross proceeds from our primary offering. Our advisor will pay all ofour organization and offering expenses described above that are in excess this3.5% limitation.  In addition, ouradvisor will pay all of our organization and offering expenses that, whencombined with the sales commissions and dealer manager fees that we incurexceed 13.5% of the gross proceeds from our initial public offering.

Wewill not rely on advances from our advisor to acquire properties but ouradvisor and its affiliates may loan funds to special purposes entities that mayacquire properties on our behalf pending our raising sufficient proceeds fromour initial public offering to purchase the properties from the special purposeentity.

Ouradvisor is newly formed, has limited capitalization, has incurred losses sinceits inception and is continuing to incur losses. Our advisor must obtainfinancial support from its affiliates or sole member or raise funds through thesale of its own debt or equity securities to obtain the cash necessary toprovide these advances. There can be no assurance as to the amount or timing ofour advisor’s receipt of funds. If our advisor’s financial condition affectsthe amount of funds available to us for offering and organizational activities,our ability to raise funds in our initial public offering could be adverselyaffected. Cornerstone Industrial Properties, LLC, the sole member of our advisor,has limited capitalization, has incurred significant losses since its inceptionand is continuing to incur significant losses.

 

 

18

----

 

Wewill endeavor to repay any temporary acquisition debt financing promptly uponreceipt of proceeds in our initial public offering.  To the extent sufficient proceeds from ouroffering are unavailable to repay such debt financing within a reasonable timeas determined by our board of directors, we will endeavor to raise additionalequity or sell properties to repay such debt so that we will own our propertiesall-cash with no permanent financing.  Inthe event that our initial public offering is not fully sold, our ability todiversify our investments may be diminished.

We are not awareof any material trends or uncertainties, favorable or unfavorable, other thannational economic conditions affecting real estate generally, which itanticipates may have a material impact on either capital resources or therevenues or income to be derived from the operation of real estate properties.

**Contractual Obligations**

Thefollowing table reflects our contractual obligations as of September 30, 2007,specifically our obligations under long-term debt agreements and purchaseobligations:  
| ** **                                            | ** ** | **Payment due by period** | ** **       |
|-------------------------------------------------------|------------|------------------------------------------|------------------|
| **Contractual Obligations**                      | ** ** | **Total**                                | ** **       | **Less than  1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than  5 years** | ** ** |
| Long-Term Debt Obligations                            |       | $                                        |  33,790,000 |   | $ |  33,790,000 |   | $ |  — |   | $ |  — |   | $ |  — |   |
| Purchase Obligations (1), (2) and (3)                 |       | $                                        |  40,100,000 |   | $ |  40,100,000 |   | $ |  — |   | $ |  — |   | $ |  — |   |
| Interest Expense related to long term   debt (4) |       | $                                        |  1,600,000  |   | $ |  1,600,000 |   | $ |  — |   | $ |  — |   | $ |  — |   |

----

(1) Asof May 1, 2007, we had an agreement to purchase a newly constructedmulti-tenant industrial property known Classic Business Park from CP215Business Park, LLC for a purchase price of $9.8 million.  The acquisition is expected to close duringfirst quarter of 2008.

(2) Asof May 18, 2007. we had an agreement to purchase a newly constructed industrialshow room building and three free-standing industrial buildings in ClassicPacific Business Park from CP215 Business Park, LLC, a non-related party, for apurchase price of $10.2 million. The acquisition is expected to close duringthe second quarter of 2008.

(3)  As of September 11, 2007, we had an agreementto purchase an existing multi-tenant industrial property known as the PinnaclePark Business Center for a purchase price of approximately $20.1 million.  The acquisition closed in October 2007.

(4)Interest expense is calculated based on the loan balance outstanding atSeptember 30, 2007, one month LIBOR at September 30, 2007 plus margin of 1.15%.

 

**Item 3.            Quantitativeand Qualitative Disclosures About Market Risk**

We invest our cash and cash equivalents in short-term,highly liquid investments including government obligations, bank certificatesof deposit and interest-bearing accounts which, by their nature, are subject tointerest rate fluctuations.  As ofSeptember 30, 2007, we had borrowed approximately $33.8 million under ourcredit facility. This and future borrowing on the credit facility is subject toa variable rate through its maturity date of June 30, 2008. An increase in thevariable interest rate on the facility constitutes a market risk as a change inrates would increase or decrease interest incurred and therefore cash flowsavailable for distribution to shareholders. During the periodfrom January 1, 2007 through September 30, 2007, 30-day LIBOR hasremained flat. However, there can be no assurance that this rate will notincrease. Based on the debt outstanding as of September 30, 2007, a 1% changein interest rates would result in a change in interest expense of approximately$338,000 per year.

 

**Item 4.            Controlsand Procedures**

Wemaintain disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in our Exchange Act reports is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms, and that such information is accumulated and communicated toour senior management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure.  In 

 

19

----

 

designing andevaluating the disclosure controls and procedures, management recognizes thatany controls and procedures, no matter how well designed and operated, canprovide only reasonable assurance of achieving the desired control objectives,and management is required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.  Our Chief Executive Officer and the ChiefFinancial Officer have reviewed the effectiveness of our disclosure controlsand procedures and have concluded that the disclosure controls and procedureswere effective as of the end of the period covered by this report.

We arein the process of developing and implementing a formal set of internal controlsand procedures for financial reporting as required by the Sarbanes-Oxley Act of2002.  The efficacy of the steps we havetaken to date and steps we are still in the process of completing are subjectto continued management review supported by confirmation and testing bymanagement.  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 ended September 30, 2007 that has materially affected, or is reasonablylikely to affect, our internal control over financial reporting.

 

**PART II**

**OTHER INFORMATION**

 

**Item 1A.         RiskFactors**

***FINRA has commenced an investigation of our dealer manager which is inthe preliminary stage.  We cannot predictthe outcome of the investigation.  Somepotential outcomes could adversely affect our ability to raise proceeds in thisoffering and the investigation itself could distract our management or themanagement of our advisor, either of which could increase the risk that youwould suffer a loss on your investment.***

 

Our advisor has informed us that the FinancialIndustry Regulatory Authority (“FINRA”) (formerly, NASD) is conducting anon-public investigation of our affiliated dealer manager that is, weunderstand, focused on the private placements conducted by our dealer managerduring the period from January 1, 2004 through October 31, 2007.  The investigation is in the preliminarystage.  FINRA’s correspondence requestingdocument production states, “This inquiry should not be construed as anindication that the Enforcement Department or its staff has determined that anyviolations of federal securities laws or NASD, NYSE or MSRB rules haveoccurred.”  We have been advised that ourdealer manager is responding to FINRA’s request for information and intends tocontinue to cooperate in the investigation. 

 

Although we cannot, at this time, assess either theduration or the likely outcome or consequences of this investigation, FINRA hasthe authority to impose sanctions on our dealer manager that could adverselyaffect its effectiveness in that capacity. Due to our dependence on our dealer manager to raise funds in thisoffering, and due to the importance of substantial fundraising in order toinvest in a diversified portfolio of assets and to reduce our fixed operatingexpenses as a percentage of gross income, any FINRA action that adverselyaffects our dealer manager’s ability to raise funds in this offering could alsoadversely affect the value of your investment. In addition, to the extent that the FINRA investigation distracts ourmanagement or the management of our advisor from pursuing our business plan,our results and the value of your investment could be adversely affected.

 

**Item 2.            UnregisteredSales of Equity Securities and Use of Proceeds**

a)              On August 8, 2007, we granted ournon-employee directors nonqualified stock options to purchase an aggregate of20,000 shares of common stock at an exercise price of $8.00 per share under ourEmployee and Director Incentive Stock Plan pursuant to an exemption fromregistration under Section 4(2) of the Securities Act of 1933.  Other than these option grants, , we did notsell any equity securities that were not registered under the Securities Act of1933 during the period covered by this Form 10-Q.

b)             The registration statement relating toour initial public offering (No. 333-121238) was declared effective onSeptember 22, 2005.  As of September 30,2007, we sold a total of approximately 8.5 million shares of our common stockfor aggregate gross proceeds of approximately $68.2 million.  From this amount, we incurred approximately$6.7 million in selling commissions and dealer manager fees payable to ourdealer manager and approximately $1.4 million in acquisition fees payable toour advisor.  With the net offering proceeds and indebtedness, we acquiredapproximately $63.3 million in real estate and related assets.

c)              We have adopted a share redemptionprogram for investors who have held theirs shares for at lease one year, unlessthe shares are being redeemed in connection with a stockholder’s death.

20

----

During the three months ended September 30, 2007, we redeemed sharespursuant to our stock repurchase program as follows:

 
| **Month**      | ** ** | **Total Number of Shares  Redeemed** | ** ** | **Average Price  Paid Per Share** | ** **   | **Approximate Dollar Value of Shares  Available That May Yet Be Redeemed  Under the Program** | ** ** |
|----------------|------------|-----------------------------------------------------|------------|--------------------------------------------------|--------------|--------------------------------------------------------------------------------------------------------------------------------------------|------------|
| July 2007      |       | —                                              |       | $                                                |  — |                                                                                                                                       | —     |   |
| August 2007    |       | 12,500                                              |       |                                             | 7.20         |                                                                                                                                       | (1)        |   |
| September 2007 |       | —                                              |       | $                                                |  — |                                                                                                                                       | —     |   |

----

(1)          As long as our common stock is not listed on a national securitiesexchange or traded on another-the-counter market, our stockholders who have held their stock for atleast one year may be able to have all or any portion of their shares redeemedin accordance with the procedures outlined in the prospectus relating to theshares they purchased. Under our current stock repurchase program, therepurchase price will vary depending on the purchase price paid by thestockholder and the number of years the shares were held. During our offeringand each of the first five years following the closing of our offering, we donot intend to redeem more than the lesser of (i) the number of shares thatcould be redeemed using the proceeds from our distribution reinvestment plan or(ii) 5% of the number of shares outstanding at the end of the priorcalendar year. Beginning five years after termination of this offering, thenumber of shares that we redeem under the stock repurchase program is notexpected to exceed 10% of the number outstanding at the end of the prior year.Our board of directors may modify our stock repurchase program so that we canredeem stock using the proceeds from the sale of our real estate investments orother sources.

**Item 6.            Exhibits**
|   |   | 10.1   |   | Purchase and Sale Agreement, as amended, by and  between Cornerstone Operating Partnership, L.P. and LaPour Deer Valley North,  LLC, an Arizona limited Liability company, dated August 10, 2007  (incorporated by reference to Exhibit 99.1 to the Registrant’s Current Report  on Form 8-K filed on September 14, 2007) |
|--------|--------|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |   |                                                                                                                                                                                                                                                                                                                           |
|   |   | 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.                                                                                                                                                 |

 

21

----

**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this quarterly report to be signed on itsbehalf by the undersigned, thereunto duly authorized this 12th day of  November 2007.
|   | 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)* |
|        |                                        |  |  |  |  |  |  |

 

22

----